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EXHIBIT A Off-Site Facilities (1)An Air-Monitoring Station (No.7H1)located on the roof of the North Building of the Pennsylvania Power 5 Light Company General Office at Two North Ninth Street, Allen-town, Pennsylvania, Lehigh County.(2)An Air-Monitoring Station (No.12El)located on land leased from the Berwick Hospital, Briar Creek Township, Columbia County, Pennsylvania, at 701 East 16th Street, Berwick, Pennsylvania 18603.(3)An Air-Monitoring Station (No.3D1)located at R.D.t2, Wapwallopen, Pennsylvania, on land leased from the Pond Hill Lily Lake Fire Company, Village of Pond Hill, Luzerne County, Pennsylvania. | EXHIBIT A Off-Site Facilities (1)An Air-Monitoring Station (No.7H1)located on the roof of the North Building of the Pennsylvania Power 5 Light Company General Office at Two North Ninth Street, Allen-town, Pennsylvania, Lehigh County.(2)An Air-Monitoring Station (No.12El)located on land leased from the Berwick Hospital, Briar Creek Township, Columbia County, Pennsylvania, at 701 East 16th Street, Berwick, Pennsylvania 18603.(3)An Air-Monitoring Station (No.3D1)located at R.D.t2, Wapwallopen, Pennsylvania, on land leased from the Pond Hill Lily Lake Fire Company, Village of Pond Hill, Luzerne County, Pennsylvania. | ||
(4)An Air-Monitoring Station (No.4Sl)at the Icthyological Associates Company located at R.D.81, Berwick, Pennsylvania 18603.(5)An Air-Monitoring Station (No.1Dl)located at Mocanaqua, Pennsylvania, at the following coordinates: | (4)An Air-Monitoring Station (No.4Sl)at the Icthyological Associates Company located at R.D.81, Berwick, Pennsylvania 18603.(5)An Air-Monitoring Station (No.1Dl)located at Mocanaqua, Pennsylvania, at the following coordinates: | ||
N 1'0'E, 45 ft.'88'26', 25 ft.;N 1 34', 225 ft~~N 4 4', 110 ft.;N 88'6'W, 25 ft.more or less;S 69'9', 120 ft.(6)Equipment, supplies and materials currently being constructed by various entities in various places, which equip-ment, supplies and materials will be used on the Susquehanna plant site. | N 1'0'E, 45 ft.'88'26', 25 ft.;N 1 34', 225 ft~~N 4 4', 110 ft.;N 88'6'W, 25 ft.more or less;S 69'9', 120 ft.(6)Equipment, supplies and materials currently being constructed by various entities in various places, which equip-ment, supplies and materials will be used on the Susquehanna plant site. | ||
(7)Uranium Oxide and Uranium Hexa floride owned by PL located in the custody of Lucius Pitkin, Inc.and Allied Chemical Nuclear Products Division, both at Metropolis, Illinois.(8)Uranium Hexafloride owned by PL located at U.S.Energy Research and Development Administration at Oak Ridge, Tennessee. | (7)Uranium Oxide and Uranium Hexa floride owned by PL located in the custody of Lucius Pitkin, Inc.and Allied Chemical Nuclear Products Division, both at Metropolis, Illinois.(8)Uranium Hexafloride owned by PL located at U.S.Energy Research and Development Administration at Oak Ridge, Tennessee. | ||
EXHIBIT B OPERATING COSTS Operating Costs shall mean all costs and expenses, direct and indirect, incurred by or on behalf of PL properly assignable to AE's undivided ownership interest in Susquehanna and 100: of all costs and expenses, direct or indirect, incurred by AE, or on behalf of AE other than the Operating Costs incurred by or on behalf of PL, properly assignable to Susquehanna. | EXHIBIT B OPERATING COSTS Operating Costs shall mean all costs and expenses, direct and indirect, incurred by or on behalf of PL properly assignable to AE's undivided ownership interest in Susquehanna and 100: of all costs and expenses, direct or indirect, incurred by AE, or on behalf of AE other than the Operating Costs incurred by or on behalf of PL, properly assignable to Susquehanna. | ||
Such costs and expenses'hall be determined and allocated, in accor-dance with'generally accepted accounting principles, consistently applied, and shall include, but shall not be limited to the following, provided that if any payment made or cost incurred is for the benefit of Susquehanna, and is also for the benefit of some other PL facility, then Operating Costs shall include only that portion of such payment or cost which is equitably allocable to Susquehanna and which is not otherwise paid for: l.All costs of labor and services performed which shall include, but shall not be limited to: wages'to hourly employees, wages to salaried employees, shift differential and pay for time not worked such as vacations, sickness, and other time off in accordance with PL policies and union contracts, costs of social security taxes, unemployment insurance expenses, and all other payroll taxes, group life insurance, group hos-pitalization, medical insurance, pension and other employee benefit plan contributions, Workmen's Compensation, public liability insurance, accidental death and dismemberment insurance, long-term disability insurance, h alth insurance and all other fringe benefits accruing to PL's employees; 2.All costs of materials and supplies and utilities services for plant operation and maintenance; 2 3.All costs of tools, machinery and equipment; 4.All costs for rental of tools, machinery and equipment leased for plant operation and maintenance; S.-All costs of licenses, fees, assessments, fines, penalties, and charges imposed by governmental regulatory, administrative or supervisory bodies or entities, or by law;6.All costs of work by outside contractors, consultants, and specialists such as lawyers, engineers, accoun-tants and others as deemed necessary by PL in the operation, maintenance and management of Susquehanna; 7.All insurance costs;8.All taxes, provided,'however, that PL and AE shall separately bear the costs of taxes which are either imposed on PL or AE as separate entities or are imposed on the separate undivided ownership interests of PL or AE in Susquehanna; 9.All costs associated with maintaining the security of Susquehanna; 10.All costs associated with low river flow'augmentation; 11.All costs of any nature whatsoever associated with any shutdown, entombment, termination or removal of Susque-hanna, to be shared by the Parties hereto as Operating Costs;12.All fuel costs not paid for by AE pursuant to other agreements; 13.All administrative and general expenses incurred which enure to the benefit of Susquehanna shall be equitably allocated to Susquehanna and shall include but shall not be limited to the general services and costs of all PL's operations, such as: safety, accounting, payroll, computer services, legal, personnel, training, information services, claims work, general supervision, general supplies and expenses, auditing, communication expenses, research and development, studies and investigations relative to Susquehanna (including but not limited to nuclear production and development), and costs of operating all office buildings in which such services and general costs are incurred;to Susquehanna; 14.Overheads incurred shall be equitably allocated 3 15.Expenses incurred and applicable to generating stations owned and operated by PL which cannot be charged directly ,to specific generating stations shall be equitably allocated to each of such generating stations including Susquehanna. | Such costs and expenses'hall be determined and allocated, in accor-dance with'generally accepted accounting principles, consistently applied, and shall include, but shall not be limited to the following, provided that if any payment made or cost incurred is for the benefit of Susquehanna, and is also for the benefit of some other PL facility, then Operating Costs shall include only that portion of such payment or cost which is equitably allocable to Susquehanna and which is not otherwise paid for: l.All costs of labor and services performed which shall include, but shall not be limited to: wages'to hourly employees, wages to salaried employees, shift differential and pay for time not worked such as vacations, sickness, and other time off in accordance with PL policies and union contracts, costs of social security taxes, unemployment insurance expenses, and all other payroll taxes, group life insurance, group hos-pitalization, medical insurance, pension and other employee benefit plan contributions, Workmen's Compensation, public liability insurance, accidental death and dismemberment insurance, long-term disability insurance, h alth insurance and all other fringe benefits accruing to PL's employees; 2.All costs of materials and supplies and utilities services for plant operation and maintenance; 2 3.All costs of tools, machinery and equipment; 4.All costs for rental of tools, machinery and equipment leased for plant operation and maintenance; S.-All costs of licenses, fees, assessments, fines, penalties, and charges imposed by governmental regulatory, administrative or supervisory bodies or entities, or by law;6.All costs of work by outside contractors, consultants, and specialists such as lawyers, engineers, accoun-tants and others as deemed necessary by PL in the operation, maintenance and management of Susquehanna; 7.All insurance costs;8.All taxes, provided,'however, that PL and AE shall separately bear the costs of taxes which are either imposed on PL or AE as separate entities or are imposed on the separate undivided ownership interests of PL or AE in Susquehanna; 9.All costs associated with maintaining the security of Susquehanna; 10.All costs associated with low river flow'augmentation; 11.All costs of any nature whatsoever associated with any shutdown, entombment, termination or removal of Susque-hanna, to be shared by the Parties hereto as Operating Costs;12.All fuel costs not paid for by AE pursuant to other agreements; 13.All administrative and general expenses incurred which enure to the benefit of Susquehanna shall be equitably allocated to Susquehanna and shall include but shall not be limited to the general services and costs of all PL's operations, such as: safety, accounting, payroll, computer services, legal, personnel, training, information services, claims work, general supervision, general supplies and expenses, auditing, communication expenses, research and development, studies and investigations relative to Susquehanna (including but not limited to nuclear production and development), and costs of operating all office buildings in which such services and general costs are incurred;to Susquehanna; 14.Overheads incurred shall be equitably allocated 3 15.Expenses incurred and applicable to generating stations owned and operated by PL which cannot be charged directly ,to specific generating stations shall be equitably allocated to each of such generating stations including Susquehanna. | ||
Such costs and expenses include but are not limited to wages and other expenses of the Manager of Power Production or PL and his staff, consultants fees, and other expenses of a general nature related to generating stations;16..All costs of load dispatching and System Control;17.All costs of owning (including depreciation) and operating auxiliary or supporting facilities of PL which enure to the benefits of Susquehanna shall be equitably allocated to Susquehanna.}} | Such costs and expenses include but are not limited to wages and other expenses of the Manager of Power Production or PL and his staff, consultants fees, and other expenses of a general nature related to generating stations;16..All costs of load dispatching and System Control;17.All costs of owning (including depreciation) and operating auxiliary or supporting facilities of PL which enure to the benefits of Susquehanna shall be equitably allocated to Susquehanna.}} | ||
Revision as of 17:40, 26 April 2019
| ML17138A784 | |
| Person / Time | |
|---|---|
| Site: | Susquehanna  |
| Issue date: | 12/31/1978 |
| From: | CURTIS N W PENNSYLVANIA POWER & LIGHT CO. |
| To: | |
| Shared Package | |
| ML17138A785 | List: |
| References | |
| NUDOCS 7909140327 | |
| Download: ML17138A784 (455) | |
Text
{{#Wiki_filter:Qo o Qog]f LECTRIC COOPERATIVE, INC.'3i ggo)i'F 909>40 ZZ7 SUSQUEHANNA UP-DATE On January 10,<<1978, Allegheny Electric Cooperative, Inc.became 10%owners of PP&L's Susquehanna Nuclear plant near Berwick.Construction of the plant is about two-thirds complete.However, commercial operations of the two 1,050,000 kilowatt units will be delayed for approximately six months, mainly due to the work load of the Nuclear Regulatory Commission {NRC)as a result of the TMI incident.The new target date for Unit I is July, 1981.'ork on the outer shell of the cooling tower for Unit 1 has resumed.Construction stopped April 27, 1978, after a scaffold collapsed on a similar tower in West Virginia killing 51 workers from another company.The Susquehanna cooling tower was only 20 feet short of its final height of 540 feet when this occurred.A 15 volume Final Safety Analysis Report and a three volume Environmental Report was filed with the NRC as part of the license application to operate the Susquehanna plant.This took 90,000 hours of preparation time and included hundreds of items, such as the plant's impact on employment, housing, taxes, zoning, agriculture, recreation, transportation, water, air, vegetation, animals, soil and the reaction of plant neighbors to the sounds of construction. As part of the Susquehanna project, a 340-acre natural park, Susquehanna Riverlands, is being built near the plant site as a wildlife preserve, with observation areas to enable visitors to view wildlife close at hand.In June, 1978, the Susquehanna Energy Information Center, which is also built near the plant site, was opened to the public.The Information Center explains, in layman's language, how nuclear fission is used to create steam which, in turn, is used to power the turbine-generator. The center includes many interesting energy exhibits with emphasis on nuclear power. PR ESI IDENT'S REPORY An adequate supply of energy is extremely important for all of us to continue to live as we do.A total lack of all forms of energy is not a realistic prospect.There is a realistic prospect of diminishing supply that will create real problems in some areas.It is Allegheny's responsibility to see that all its members have an adequate supply of electricity for the future at the lowest possible cost to the consumer.To accomplish this, Allegheny is working toward owning a largpr percentage of their own generation and transmission facilities along with the utilization of one of the area's renewable resource... our falling waters...to generate electricity. To do this, we are presently trying to get authorization for the U.S.Army Corps of Engineers hydro project at Raystown Dam near Huntingdon. Raystownwouldhelp cut the cost of purchasing expensive peaking power which is currently generated by very expensive natural gas and oil-fired generators. We have also completed studies on the feasibility of building a low-head hydro project at an existing dam site which is now under consideration at REA.Along with this, Allegheny is studying the possibility of joint ownership of two 400 MW anthracite-fired generating units.This hard coal, low in pollutants is found in sufficient quantities in the northeast area of Pennsylvania. If these coal-fired units are developed, they would help stimulate the local economy as well as provide generation for our future needs.At the same time, it makes good sense that we make every effort possible to increase our efficiency of operations and stretch out what resources we have today so that they will meet our needs just as long as possible through"load management." Load management is not a pipe dream.It is a tested, tried and proven means of improving the efficiency of electric systems which we will be utilizing soon.Utilities must build facilities to meet peak demand of all of their consumers and it makes good sense that if we can reduce that peak by spreading it out over more hours of the day, everyone will gain.These are trying times and'each year our work becomes more complex and difficult. Only by working together in the true cooperative spirit, can we bring our consumers an adequate supply of electric energy for the future at the lowest possible cost.With the members understanding and support, we can be assured of success. AILLEG HENY BOoD~IRDo QF DolllREC70oBS PRESIDENT Jim Henderson Sussex VICE PRESIDENT SECRETARY TREASURER Myron Ludwick Warren John Anstadt Sullivan Robert Sterrett Central BOARD MEMBERS Harris Horn Adams Dennis Shaffer Bedford John Drake Claverack Benjamin Slick New Enterprise A.D.Stainbrook Northwestern Hiram Walker Somerset Clair D.Buterbaugh Southwest Central~l/Uoyd Dugan, Sr.Tri-County ,J Robert E Leonard United Don Hill Valley My report this year is devoted to the"leadership" responsibilities that have been thrust upon all Power Supply Cooperatives as a result of our nation's crisis.The largest problem facing the average family today is the constantly increasing cost of energy.I am referring to all forms of energy including gasoline, other petroleum fuels, coal, uranium and, of course, electricity. With long lines at the gas pump, the public is finally convinced of an energy crisis.If new generation is delayed and we have brownouts, I'm sure all doubts will vanish.The recent 30%increase in gasoline prices proves that energy is the largest budget item.Energy conservation, therefore, becomes of greater importance. A very important addition to Allegheny's staff was the recent employment of an Energy Advisor to direct our Energy Conservation Program.Our energy conservation van is on the road helping Allegheny's Member Systems perform informational and educational programs on how to conserve energy.I am happy to report that Allegheny has demonstrated its leadership position in promising full and complete cooperation with REA Administrator, Robert Feragen's request for all power supply cooperatives to participate in research and development of"alternate" sources of energy.We are actively participating in wind energy development and generation using methane gas from coal mines.The amount of methane gas from coal mines that is being wasted staggers your imagination. Allegheny continues to study the development of hydro-electric projects.Another leadership area is"joint-action". Allegheny, in cooperation with the Pennsylvania Municipal Electric Association (PMEA), will soon introduce what is called"Joint-Action/Joint-Agency Legislation" in the General Assembly.This will allow municipal utilities to join together with other utilities to achieve economy of scale in power supply programs.A source of fuel for generation now appears to be Pennsylvania's anthracite coal reserves.The recent action by the Environmental Protection Agency to eliminate scrubber requirements on anthracite-fueled plants is a tremendous step in using this fuel to generate electricity. We are presently studying this possibility. In conclusion, I express my most sincere thanks and appreciation to all Allegheny Directors, Managers and employees for making 1978 a year of progress and giving us the support to continue our"leadership" responsibilities as we look at the future. The Allegheny Electric Cooperative, Inc.still faces the most serious crisis of its history by the potential loss of its only low-cost power source from the Niagara Power Project of the Power Authority of the State of New York.In 1977, a new tax on out-of-state. utilities was enacted.It adds a 4.5%Gross Receipts Tax on export electricity. The New York State legislature reactedby adopting a resolution memorializing Governor Carey of New York to not renew the Allegheny contract until the Pennsylvania legislature took action to repeal this tax.At present time, Allegheny is operating on a day-to-day supply contract extension. The loss of this PASNY power to our fourteen rural electric cooperatives, would have a staggering effect on our rural consumers adding S100-$200 per year to their electric bills.Increases in electric costs for people who are least able to afford them.State Representative David S.Hayes, has introduced legislation (House Bill 852), that asks for the repeal of this Gross Receipts Tax.Staff members from Allegheny and the member-cooperatives are working day and night with the State legislature to effectuate the successful repeal of this discriminatory tax.A September vote is expected, on the bill. REVIEW OF POWER COSTS As of December 31, 1978, Allegheny's average purchased power cost from our five power suppliers reached 20.12 Mills/KWH or 2.012C/KWH. Last year, Allegheny's average cost reached 20.11 Mills/KWH. At first glance, it appears that average costs remained constant for the 12 month period of 1978.However, that is not entirely the case.Total cost dollars'ose from$31,124,700.43 in 1977 to$32,497,504.81 in 1978.This represents an increase of$1,372,804.38 or 4.4%in purchased power costs.Coupled with this increase in cost, Allegheny's total systems power requirements increased from 1,547,343,211 KWH in 1977 to 1,615,219,722 KWH in 1978-an increase of 67,876,511 KWH or 4.4%.Mathematically, even though purchased power costs rose, average costs remained relatively constant for the year.In conjunction with Allegheny's average cost of purchased power, the cost of wholesale power purchased by each of our member cooperatives from Allegheny increased from 20.93 Mills/KWH in 1977 to an average of 21.95 Mills/KWH in 1978-an increase of 1.02 Mills.In total dollars, the member cooperatives paid a total of$35,459,816.11 as compared to$32,383,249.22 in 1977.This represents an increase of$3,076,566.89 or 9.5%during the year.Of this total increase, 44.6%was a direct result of increased power costs incurred by Allegheny and the remaining 55.4%was due to increased revenue requirements which Allegheny needed to fund a number of future power supply projects, mainly URADCO which is the fuel for the Susquehanna Steam Electric Station, increased engineering and legal fees, and other board-approved, budget-related items such as the hydro studies, etc.During 1978, Allegheny's total purchased power cost represented 91.6%of our total operating revenue.Fortunately for Allegheny and each of our member cooperatives, the 130 megawatts of firm hydro power and associated energy which we purchase from the Power Authority of the State of New York was still available for the entire year.This purchase of clean, dependable, low-cost hydro power from the Power Authority, saved Allegheny a total of$14,109,247.93 during the year.Any loss or reduction of this valuable energy resource would be disastrous for the rural electric cooperatives throughout Pennsylvania and New Jersey.Turning to current rate-related matters, Allegheny's policy is and has always been, that any cash refund received from one of our power suppliers as a result of rate cases before the Federal Energy Regulatory Commission (FERC), will be refunded in its entirety, plus any interest, to the member cooperatives. In 1978, Allegheny refunded$109,065.19 to the members as a result of a settlement agreement reached with Jersey Central Power 5 Light Co.Also, Allegheny had planned to refund an additional $1,446,103.17 because of an FERC decision relating to cases dealing with Pennsylvania Electric Company and Metropolitan Edison.This money was not refunded to the member cooperatives because both of these companies appealed the FERC decision in the United States Court ot Appeals.Fortunately, Allegheny was able to winboth cases before the court and this rather large refund will now be made to the member cooperatives at the 1979 Summer Meeting.Aside from purchases made from the Power Authority of the State of New York, each of Allegheny's four wholesale power suppliers filed wholesale rate increases before the FERC in 1978.Present estimates are that the Penelec increase amounts to approximately $5.6 million or 24.7%and increases our average cost from Penelec from 33.4 Mills/KWH to an estimated 41.3 Mills/KWH. The Met-Ed increase amounts to approximately $1.1 million or 31%and increases average cost from Met-Ed from 36.2 Mills/KWH to an estimated 45.8 Mills/KWH. Small in comparison, the West Penn increase amounts to only$42,000 or 1.2%and increases West Penn's cost from 22.41 Mills/KWH to approximately 22.69 Mills/KWH. The Jersey Central increase amounts to approximately $548,000 or 22.1%and increases average Jersey Central costs from 28.08 Mills/KWH to approximately 38.0 Mills/KWH. In total, the result of these four major rate increases will cause Allegheny's total purchased power costs to increase some$7.2 million or by approximately 20%.Average cost is expected to increase from 20.12 Mills/KWH to approximately 25 Mills/KWH. It appears that the days of cheap electrical energy are gone.Fortunately, through the efforts of Allegheny's special counsel William C.Wise, Southern Engineering Company of Georgia, and the Allegheny staff;each of these major rate increases were contested before the Federal Energy Regulatory Commission and a full five-month suspension was ordered in all cases.In fact, the minimal West Penn increase was settled with no increase whatsoever to Allegheny. Hopefully, once the Pennsylvania Electric Company, Metropolitan Edison Company and Jersey Central Power&Light Company cases come before the Commission for further review and debate, Allegheny will succeed in reducing the increases considerably. We are convinced that the unfortunate incident at the Three Mile Island Nuclear Generating Facility will play a major role in these rate case discussions. Next year's Annual Report will hopefully, once again, announce additional refunds to our member cooperatives. Keeping the price of electricity (our most dependable and economical resource)reasonable, has always been one of Allegheny's primary functions for the ultimate member-consumers throughout Pennsylvania and New Jersey. William F.Matson Executive Vice President and General Manager Paul N.Tetherow Assistant General Manager C.Donald Blackburn Office Manager William E.Mowatt General Counsel lf[~[)~~, l!II IIII%~lijl I>>'l!IIIIII!II'obert Horn Coordinator Job Training and Safety William Logan Administrative Assistant and Legislative Representative STP~,IFIF Anthony Adonizio Research Assistant Assistant General Counsel!!!Ifll!!!II IllllHllllllllllUlllllllllllIll ~h~iaia IIIIIIIIIIIIIIII<" I Wl~!!!!!!!!!!~ gl!Illll!JII1I!llfllllllllllll,'", ,,~.@~ll!!IIIIIIIIIIIIIIIIIIIIII " III<(Charleen Beachler Typist George Black Printing Specialist Mary Jane Branigan Central File Clerk and Typist Elizabeth Brown Graphic Artist Teanna Byerts Production Assistant Pat Gift Executive Secretary Jan Ivanoff Engineering Aide Roberta IVlitchell Phototypesetter Thu Huong Nguyen Bookkeeper Richard Osborne Staff Engineer Pat Potteiger Secretary Stella Roadcap Bookkeeper William Sarantakas Job Training and Safety Instructor Ed Stevens Accountant II"'atricia Stevens PENN LINES Editorial Assistant and Secretary Ginny Swainston Secretary Gary Wobler Energy Advisor Joseph Zullo Staff Engineer 8 Fil 8 I2ll C[]Go Vatell CGDPer8tive St8@stics-'8 978 Member Co-op Adams Bedford Central Claverack New Enterprise Northwestein Somerset Southwest Central Sullivan Sussex Tri-County: United Valley Warren TOTAL Total Sales of Electric Energy s 7,598,710.20 2,645,441.19 6,284,197.00 5,1 59,503.00 1,065,233.00 6,773,057.00 4,815,313.64 7,066,408.00 1,437,733;16 2,838.423.00 4,647,792.00 5,1 53,236.00 5,620,742.00 1,851,577.00 $62,957,366.1 9 Total Cost of Electric Service s 7,073,452.75 2,509,251.60 5,953,551.00 4,829,388.00 1,038,882.00 6,269,1 10.00 4,403,008.37 6,392,528.00 1,338,698.07 3,110,544.00 4,447,837.00 4,944,890.00 5,300,776.00 1,695,377.00 $59,307,293.79 Total Cost of Purchased Power s 4,299,792.54 1,630,044.24 3,41 2,779.13 2,900,847.73 679,850.02 3,845,061 00 3,028,280.22 4,321,954.69 820,758.33 1,608,605.1 7 2,41 2,767.88 2,494,753.09 3,145,237.85 859,084.22 $35,459,81 6.1 1 Total Utility Plant s 20,446,658.31 6,790,351.36 14,194,819.00 14,1 50,280.00 1,645,979.00 1 6,357,390.00 11,847,655.60 14344~.00 3,646,476.67 7,947,149.05 1 5,919,638.00 1 6,643,91 5.00 15,763,613.00 6,307,380.00 $166,393,242.99 Member Cooperative Adams Bedford Central Claverack New Enterprise .Northwestern Somerset Southwest Central Sullivan Sussex Tri-County United Valley Warren TOTAL Number of Consumers 14,710 6,236 19,051 11,390 2,278 13,883 8,766 15,820 4,082 6,866 13,027 13,766 13,384 7,478 1 50,737, Miles of Line 2,097 1,009 2,717 2,151 250 2,150 1,712 2,026 711 382 2,484 2,476 1,979 941 23,085 Consumers Per Mile of Line 7.0 6.2 7.0 5.3 9.1 6.5 5,1 7.8 5.7 18.0 5.2 5.6 6.8 7.9 6.5 Total KWH Purchased 195,161,300 74,893,200 156,797.000 1 31,81 6,005 30,758,000 176,572,768 134,808,600 1 99,41 2,550 37,448,044 73,420,000 108,488,978 113,516,150 143,546,030 38,581,033 1,61 5,21 9,658 Annual Peak Demand 53,211 18,678 33,947 30,621 7,870 40,505 34,205 45,299 9,954 17,280 31,492 28,263 35,464 11,281 398,070 ALLEGHENY ELECTRIC COOPERATIVE, INC., 3'1 DECEMBER 1978 AND 1977 Assets Total Utility Plant in Service.Communication Equipment Transmission Station Equipment.Laboratory Equipment Construction Work in Progress Total Utility Plant Accumulated Provision for Depreciation .Net Utility Plant.Investments in Associated Organizations .Cash-General Funds.Cash-Construction Funds Temporary Cash Investments .Specia I Deposits Receivables .Total Current and Accrued Assets.Deferred Debits.TOTAL ASSETS Liabilities Memberships Patronage Capital Donated Capital-Members.Donated Capital-Non-Members .Total Margins and Equities Long-Term Debt-REA Long-Term Debt-NRUCFC NRUCFC-Subscriptions .Accounts Payable..Deferred Credits TOTAL LIABILITIES ......Member-Revenues Adams Electric Cooperative, Inc............... Bedford Rural Electric Cooperative, Inc.Central Electric Cooperative, Inc............... Claverack Rural Electric Cooperative, Inc......New Enterprise Rural Electric Co-op, Inc..Northwestern Rural Electric Co-op, Assn., Inc..Somerset Rural Electric Cooperative, Inc..Southwest Central Rural Electric Co-op, Corp...Sullivan County Rural Electric Co-op, Inc.Sussex Rural Electric Cooperative .Tri-County Rural Electric Co-op, Inc.United Electric Cooperative, Inc.Valley Rural Electric Cooperative, Inc..Warren Electric Cooperative, Inc TOTAL 1978 S 138,793 57,069 26,989 551 128,442,220 S128,665,622 23.376 S1 28,642,246 .....S 4.745,509 275,372 2,400,289 1,141,000 1,115,000 3,445,466 S 8,377,127 1,025.557 S142,790,439 1978 2,800 6,388,731 29,316 349 6,421,196 1 23,91 6,000 52,971 10,865,070 S 1,535,202..~.....S142,790,439 1978 S 429979254 1 630044 24 3,41 2.779.1 3 2,900,847.73 679,850.02 3,845,061.00 3,028,280.22 4,321,954.69 820,758.33 1,608,605.17 2,41 2,767.88 2,494,753.09 3,145,237.85 859,084.22 S35.459,816.11 19771 137,675 26,989 88,824,311 S 88,988,975 11.289 S88,977,686 S 3,273.735 13,742 1,845,380 5,099,472 4 6,958,594 454,351 S 99.664,366 1977 S 2800 3,220,119 29,316 349 S 3,252,584 86,013,668 8,933,313 S 1,464.801 S99,664,366 1977 S 3,611,651.76 1,500,1 29.62 3,1 30,459.00 2,686,046.00 623,565.96 3,283,533.00 2,693,288.95 3,859,708.00 750,480.44 1,456,118.17 2,1 47,021.00 2,1 38,026.00 2,895.057.00 797,585.07 S31,572,669.98 t t'il 978-OPetretring ENPerIse Allegheny Electric Cooperative, Inc.Wholesale Power Cost Power Authority State of New York (PASNY)West Penn JCP&L Met.Edison Penelec COST IN DOLLARS 3,680,527.35 3,417,733.44 2,019,974.95 2,780,143.96 1 7,031,265.1 7 COST IN MILLS/KWH 5.03 M/KWH 25.24 M/KWH 27.51 M/KWH 30.46 M/KWH 29.20 M/KWH PERCENTAGE OF TOTAL COS1 11.12%10.33%6.10%8.40%61 46%Sub-Total$28,929,644.87 17.91 M/KWH.87.41%Transmission Costs (Wheeling for PASNY Power)New York Companies G.P.U.Companies. Sub-Total.Total Power Supply Expense Other Expenses Customer Accts.Admin.&General Depreciation &Amortization 624,000.00 2,943,859.94 .S 3,567,859.94 .$32,497,504.81 $601,640.1 9 0.39 M/KWH 1.82 M/KWH 2.21 M/KWH 20.12 M/KWH 0.37 M/KWH 1.89%8.89%1 0.78%98.19%1.81%Total Operating Expense.$33,099,145.00 20.49 IVI/KWH 100.00%PURCHASED POWER SOURCES BY PERCENTAGE -31 DECEMBER 1978 TOTAL KWH-1,615,219,722 -1978-COST OF OPERATIONS DOLLAR DISTRIBUTION MET-ED 5.7%WEST JCP&L PENN 4.5%84%PASNY 12C JCP&L 6C ADMINISTRATION &GENERAL 2C WEST PENN 10C PASNY WHEELING 2C PASNY 45.3%MET-EDISON 8C GPU WHEELING 9C PENELEC 36.1%PENELEC 51C 35 AVERAGE MONTHLY WHOLESALE POWER COST 30'0 0 hC 25 20 1977-0/HOLESALE POWER COST AVERAGE ANNUAL'1976 )5 10 JAN MAR:~MAY JUL SEPT NOV JAN MAR MAY JUL SEPT.NOV FEB-APRŽJUN AUG.OCT DEC FEB APR JUN AUG.OCT DEC 1700 Yearly Kilowatt Hours Percentage of Increase 400 Monthly Megawatt Demand 1600 4.39%350 1500 lh 1400 Z c 0.'1300 1200 6.88%6 77%8.75%300 250~~~i 4 o i 0 4 OP 1100 14 39%200 a~~e4 1000 900 1971" 1972 1973 1974 1975 1976 1977~1978 150 1978 1977 1976 JAN.FEB MAR APR MAY JUN'JUI.AUG SEPT OCT tl6V OEC ALYERNAYE ENERGY SOURCES-Every day, millions of cubic feet of methane gas are exhausted into the air to rid coal mines of dangerous methane gas.program.Allegheny Electric has held meetings on this with Westinghouse Electric and coal companies to develop this source of energy.In most other nations ot the world, this methane gas is captured and used to generate power.Under the direction of REA Administrator Feragen's request to pursue the development of the use of"alternate" sources of energy, Allegheny Electric is cooperating with Westinghouse in studying pilot projects in western Pennsylvania. Westinghouse Electric received a federal grant to obtain some first-hand operating experience and data.There are coal companies interested in cooperating with this These pilot projects will be small.When the technology is fully developed, the benefits from this generation should improve.With the crisis this nation faces in solving its energy problems, Allegheny Electric is devoted to do its share in supporting the efforts of the Department of Energy.We also will cooperate as an REA borrower in its"alternate energy" programs, which in turn can be a benefit to the member-owners of Allegheny Electric Cooperative. ANYIHIRACQT.E~ COAIL-IFIIR ED GE NERAYIION Pennsylvania State Univegsi yy undeg.Fgr~t A yote~tiagly'ignificant tu bling block from the United State~sDepartme~t++E~erg, wffichpa~sthe Go/ernogs~Ene gy C, neil and studied large~yateeinthracite mipnilg.~dring a Qer+syrtte(ested'-iq this project-N be ver periodŽfrom 1976 through party~1978. This coyceg4ed~s<the pp~e tjapor unreasonabl study identified sjtes viipe~r~a thracite vjlhygyI'ng,chai ges ijjlp~ol~'d,in g)ttjttg the power production, suffigidnt t6 fFet a mo e n-yiz inyveg~d to ultima d~o d centers.Tj1e rol)-generating ~st tfopvtrvoutdljre ppssjbte a~~re atep~w fgayjibv-b en e pens'rve~btjjj~te b the stucjy yves to&evaluate ~~oorgjc w+t~t pQrur I electtj qoperativespq stimujatiprt in area g Yr~og'pe~~e5s vagina+y-rtow'~~jaus] pro~[[)p s)o~"~'"~','de elo~pentj"open-pit" type frtinjng wpfch~otge~rco stimers and thosd<intert}ate+i ould Jff~oirfg benefits~to~ffJMdepressed ev'Pig e c mmbnit es'n the 8jtp aci e nt racitecoalminina teoionofPennsyfvania. n>garea.Until the consumer has m~lea right to expect eneratiag efectrfcisg~vta&~tge gece~delivery of energy from one~r a tognother, announcem~6tWbp~t e~<Fnvi ontn~fa this country cannot solve its e ergy.crisis. The Pr tact on>Agency to pgerrlp~f t$e~+se~of national grid is the primary ample of-a long-pfjtr-.'(ifs'vn gi dion't r fitrPfscoatfsverploujdn sutp1\ur ndtjta~tegfslation that nbtys receive early s cfCscruftjrarshweeeo~tjus1ffi~d~T ~~eonsfderadon by tho e'interested in the future ea aterj'prfcgafngthracfteduato1gg+etc st o ogr na'on.mining made it%~use aq a fidel.~os a drea nisse scSbgbers could be etfgrinated~ tn ia o has~i'oneness.ofyoday's energy Wsttegheny Eibctric hasvcvorkeke with the hotagesatnd thb fact that other fuels for Gorfernor's Energy Gouncil on~he Ese sneratron-ate~re e toudprobtems, it could be anthracite at every opportunity apl we th t~-perhaps the day of anthracite continue 1o study the prospects~t using sneralto has tndee.a rived.f Snthracite. Due to the deepening energy crisis, Allegheny and it'distribution cooperatives have strengthened their conservation program in an effort to avoid unnecessary waste of energy and find new alternatives that would be beneficial for both the cooperative and the consumer.In this spirit of cooperation, Allegheny has adopted a policy for wind energy conversion systems.The policy is one that will allow a member-consumer to use the energy from the wind to the fullest extent including the sale of excess energy that can be produced and supplied into the.power system.There is an Increasing interest in the use of wind energy to generate electricity andit is necessary that it's benefits be explored.. Allegheny-is researching the possibility of having conservation taught in all Pennsylvania schools.It would~be beneficial for all if students were taught the benefits for-All Americans to be energy efficient. A week in October had previously been set aside and designated's Environmental Week.Allegheny feels, because of the energy crisis that conservation should also be'aught.New alternatives in ways to conserve energy are continuously being'revealed, To enable Allegheny and the distribution cooperatives to evaluate the effectiveness of these new alternatives, testing programs are constantly proceeding. A solar water heater, which'has been under tests this past year, seems very effective, although it still requires a heating element as,a back-'up." Since heat pumps are popular in the milder climates, a heat pump water heater has been developed. In most cases, they can be installed almost anyplace, although the basement seems to be the most effective, as it does offer a certain amount of dehumidification when it runs.It also requires a heating element as a back-up.Allegheny has filed with the Department of Energy, an application for a grant to help develop a waste-type water heater.The experiment would use waste heat from two different areas, the chimney and the attic, to assist in the conditioning of water.This is still pending.It was reported in the 1977 Annual Report that an energy van was purchased. It's purpose was to assist the distribution cooperatives in their endeavors to encourage conservation. It will be used'at co-op meetings, fairs,.schools and other events.It contains different techniques,.which can be followed, that makes the home more comfortable and energy efficient. To ensure the energy van's effectiveness, Allegheny, it'distribution cooperatives and REA are producing video tapes to illustrate these techniques. The'se tapes will be made available through REA to any cooperative in the nation.They will also be reproduced as slide presentations. One of the video tape programs being produced is to illustrate the retrofitting of a fuel,oil furnace.This procedure may save as'much as 13%on fuel oil consumption. This tape also can be viewed on the energy van. llll0 t t ennsy vania ectric ooperatives Ura Providing Low Cost Dependable Electricity 150 Directors-700 Employees 1.6 Billion Kilowatt-Hours Purchased Annually$166 Million Invested in Plant Serving in 47 Counties 23,085 Miles of Line 1 50,737 Member-Owners GIRARD SUSQUEHANNA CLAVERACK RURAL ELECTRIC COOPERATIVE WARREN WARREN ELECTRIC COOPERATIVE TIOGA TRI-COUIIITY RURAL NORTHWESTERN RURAL l ELECTRIC COOPERATIVE CRAWFORD I McKEAN ELECTRIC COOPERATIVE BRADFORD WAYNE POTTER SULLIVAN+X SULLIVAN COUNTY LYCOMING RURAL ELECTRIC COOPERATIVE~ WYOMING/BIAKELY ELK I CAME RON VENANGO PIKE MERCER SUSSEX SUSSEX RURAL MQFIRQE~ELECTRIC COOPERATIVE JEFFERSON CLARION CLINTON LUZERNE CENTRAL ELECTRIC UNITFD FLFCTRIC COLUMBIA COOPERATIVE BUTLER LAWRENCE COOPERATIVE MONTOUR CLEARFIELD 7 CENTRE CARBON NORTHAMPTON NORTHUMBERLAND SNYDER SCHUYLKILL MIF FLIN JUNIATA BLAIR VALLEY RURAL ELECTRIC COOPERATIVE DAUPHIN ARMSTRONG INDIANA SOUTHWEST CENTRAL BEAVER LEHIGH RURAL ELECTRIC COOPERATIVE wCAMBRIA WESTMORELAND NEW JERSEY ALLEGHENY BERKS BUCKS PERRY LEBANON HUNTINGTON NEW ENTERPRISE RURAL ELECTRIC MONTGOMERY WASHINGTON CUMBERLAND SOMERSET LANCASTER BEDFORD COOPERATIVE ~>/.FUITOM REOPORO RORAL ELECTRIC COOPERATIVE PHILADELPHIA FAYETTE SOMERSET RURAL ELECTRIC COOPERATIVE CHESTER AOAMS ELECTRIC COOPERATIVE DELAWARE GREENE ADAMS WE%I VIRIINIA MAR YLNI PEMMSYLVAMIA RURAL ELECTRIC COOPERATIVE'S ENERGY VAM S I Ij IL I I W v~=-ME~f I t-NOTICE-DEADLINE RETURN DATE~~7 Conti;)g~~Fd P~IWVr.vouS A~lib CA~I'~7 LAPP DQ PMVDSyP g I'ECORDS FACILITY BRANCH S THE ATTACHED FILES ARE OFFICIAL RECORDS OF THE DIVISION OF DOCUMENT.CONTROL.THEY HAVE BEEN CHARGED TO YOU FOR A LIMITED TIME PERIOD AND MUST BE RETURNED TO THE RECORDS FACILITY SEARCH 0'IS.PLEASE OO NOT SEND DOCUMENTS CHARGED OUT THROUGH THE MAIL.REMOVAL OF ANY PAGE(S)FROM DOCUMENT FOR REPRODUCTION MUST BE REFERRED TO FILE PERSONNEL. ALLEGHENY ELECTRIC COOPERATIVE, INC.212 LOCUST ST.P.O.1266~HARRISBURG. PENNSYLVANIA 17108~PHONE 717 233-5704 PENNSYLVANIA POWER 8 LIGHT COMPANY Reyi~latorg THE ATTACHED FILES ARE OFFICIAL RECORDS OF THE DIVISION OF DOCUMENT CONTROL.THEY HAVE BEEN CHARGED TO YOU FOR A LIMITED TIME PERIOD AND MUST BE RETURNED TO THE RECORDS FACILITY BRANCH 016.PLEASE DO NOT SEND DOCUMENTS CHARGED OUT THROUGH THE MAIL.REMOVAL OF ANY PAGE(S)FROM DOCUMENT FOR REPRODUCTION MUST BE REFERRED TO FILE PERSONNEL. DEADLINE RETURN DATE a-sE 0-.9g~j'RECORDS FACILITY BRANCH Highlights Customers, at End of Period............ ~..Kilowatt-hours of Electricity Generated Operating Revenues.Capital Provided by Investors, at End of Period Return on Average Capital Provided by Investors.Fixed Cost Rate of Long-Term Debt and Preferred and Preference Stock, at End of Period.Common Stock Data: Return on Average Common Equity......Earnings Per Share Dividends Declared Per Share........... Times Interest Earned Before Income Taxes 1976 936 Thousand 28.5 Billion$644 Million$2.4 Billion 8.83%7.91%11.61%$2.68$1.80 2.62 1975 918 Thousand 27.5 Billion$544 Million$2.1 Billion 8 76%7.76%12.52%$2.87$1.80 2.80 Pennsylvania Power&Light Company is an electric utility providing service to 936,000,homes and businesses over a 10,000-square-mile area in 29 counties of central eastern Pennsylvania. Principal cities in the PPBL service area are Allentown, Bethlehem, Harrisburg, Hazleton, Lancaster, Scranton, Williamsport and Wilkes-Barre. So'cRet+," Coiitrol4'l 'ate of Dociment'EGULATORY DOCKET FllE Contents Chairman's Comments 1 The Year in Review 3 Analysis of Statement of Income 13 Flnancials 17 Notes to Financial Statements 22 Statistical Summary 30 Dividends and Stock Prices 31 Officers and Directors 32 PP8 L's New President-Inside back cover Chairman's Comments After years of unheeded warnings, severe shortages of natural gas finally occurred, gpgyig.~i.precipitated by the prolonged winter cold.One more signal that we r.have a serious long-term energy supply problem in this country.It is now beyond debate that when energy shortages hit, our society is crippled.The harsh evidence of lost employment I~>and lost production is indisputable. The winter weather conditions also created a large number of operating difficulties for generating units.Even j~so, electric loads were generally met, though capacity margins were tight.The so-called excess generating capacity of some utilities-criticized here and there a few months ago-totally disappeared in the winter cold.One bright spot was the good performance of nuclear power plants, reflecting their freedom from the limitations of conventional fuel supply and delivery.If it had not been for industrial plant shutdowns because of natural gas curtailments, which reduced electrical loads that would otherwise have been on line, there would have been critical shortages of electricity. This is a reminder that the basic issue of building ahead to have adequate generating capacity and fuel to meet tomorrow's electrical needs is very much with us.Lead times for power plant siting approvals and construction are lengthening. PP&L's most recent look indicates that, as things now are, we have to allow about 13 years to bring a new coal-burning power plant on line at a new site.The implications are scary.This means that, apart from capacity now in service plus capacity under construction, there is nothing that can be done to add more coal/nuclear-based power supply for 1984/1985. Indeed, we are practically at 1990.Every day is increasing the hazard of future shortages of electric power supply.Yet (Ij)//p t!':,~~-'~~~'j.- action is inhibited and constricted by a complex amalgam of uncertainties and risks.The need for clarifying and supportive governmental energy aj policies is overwhelming. The adoption of effective new energy fj." policies depends on whether Americans have the will to do what is required.The geologic and economic realities underscore the need for more ,r u/investment for facilities, fuel and advanced research, as well as more investment for conservation; It is going to be an expensive process, with quick payoffs being unlikely.For the time being at least, all signs point to continuing higher prices for energy.This is not the answer people are looking for.It seems they would prefer to hear that higher prices for energy are caused by some kind of energy fraud or fix, or by the heedless actions of uncaring managements, notions which carry the comforting thought that if"the scoundrels" can be identified and properly dealt with, consumer energy problems will disappear. So, all too often this is what people are told, frequently coupled with a few rousing denunciations of"obscene profits." Although, such talk has an unmistakable popular appeal, it is pernicious nonsense.It obscures reality and promotes cop-out attitudes. It discourages new investment and frustrates the development and implementation of the basic long-term energy decisions that are necessary. We want our investors and customers to know that while we think it is misleading to give people false hope that some way can be found to protect them from the reality of higher costs of energy, we recognize that it is our job in PP&L to run a taut ship and to exert every effort to hold down costs and to improve our performance. We appreciate that we are living in an everchanging world where new opportunities for better performance regularly occur.r We understand that it is our responsibility to seek them out and put them to good use.We realize that we cannot see ourselves as others see us.Therefore, we believe in the concept of outside audits to monitor management effectiveness and operating efficiency. While no one is perfect, and no one likes to be criticized, our aim is to have a constructive attitude about the outside audit process in which we welcome suggestions and advice on where and how we can do better.We also want our investors and customers to know that outside forces, over which we have little or no control, are the main causes for the higher costs and prices of energy.For example, we do not have control over the fact that the exploration and development of energy resources in more remote and more difficult locations, and at greater depths, is bound to be more costly.We do not consider that we are responsible for the national policies and decisions that have caused inflation with all its consequent cost increases. Nor did we establish the host of new and costly environmental standards that now have to be met, with inevitable reflections in higher prices for electric service.Our ability to get things done promptly and at low cost has not been helped by the endless stream of new governmental requirements which have proliferated reports, hearings, investigations and all kinds of technical studies.The saving grace in this outside-imposed cost situation is that it does not arise from any intention to increase costs.On the contrary, the difficulty rather stems from an excess zeal to do good things for people without sufficiently considering the cost consequences beforehand. This is really a problem of inadequate systems management. Over time, energy has become afflicted by too many laws, regulations and programs which have different purposes and priorities, and which are nonconnected and unrelated even though they exist side by side.We have now come to the point where we are bogged down in an unacceptable mishmash of crosscurrents and conflicts. Some government management housecleaning is in order.It is most encouraging that President Carter has proposed to establish a comprehensive, restructured federal energy department headed by Dr.James Schlesinger. We urge investors and customers of PP8 L to support action to this end.We take this position because we are convinced that a central obstacle to the nation's working its way out of the energy crunch is the present fragmentation of energy jurisdictions within federal departments and agencies and within the Congressional committee structure. The proposed federal energy department could be a most significant first step towards establishing an adequate management system for energy.Other counterpart housecleaning steps involving the Congress and federal-state relationships in energy could then be pursued with some reasonable chance of success.Without further delay we must face the fact that our patchwork quilt of piecemeal energy management is not working.Certainly we need natural gas, but natural gas cannot meet all our energy needs.The same is true for our other major fuel sources-oil and coal and uranium.All form intermeshed parts of the nation's overall energy supply.The unavailability of any one is disruptive of the whole.That wasn't always so, but it is now.The management of energy as a total system is the only safe escape route that still remains open to us.We close these comments with the good news that Robert K.Campbell, a former executive of Western Electric's New York-based Manufacturing Division, has joined us as president, effective February 1.This decision, made by the board of directors after many months of consideration, is a major step in the process of providing for the continuing strong management of the Company.Bob Campbell is 47.He brings to PPLL a fine combination of experience and"young blood." The inside back cover of this report provides an in-depth look at our new president. I have become chairman of the board and will continue as chief executive officer.Respectfully submitted, Jack K.Busby, Chairman March 1, 1977 The Year In Review 1976 Earnings Although earnings available for common stock~rose nearly 8 per cent to$78.7 million, PP&L's per share earnings were 6.6 per cent lower for 1976 than a year ago-$2.68 per share versus$2.87 for 1975.Contributing factors in the decline were the delay in approval of higher rates to offset the higher costs of doing business and the diluting effect of an increase of 15.3 per cent in outstanding shares.Higher Rates Allowed Some help in reversing the downward trend of earnings came in April and August when the Pennsylvania Public Utility Commission (PUC)allowed higher rates to go into effect.However, during the 17 months the rate case was pending, additional substantial investment was made by the Company in facilities to serve our customers. Likewise our operating costs increased substantially during this period.The result is that our income, based on rates formulated generally on 1975 cost levels, is lagging substantially behind present costs.This"lag" was a significant factor in our 1976 earnings picture.If, back at the original March 1976 deadline, we had received the amount we were finally allowed, our earnings per share for 1976 would have exceeded the 1975 level.It appears that during 1977 we will again have to petition the PUC for higher rates to adjust for the higher costs of providing service and to compensate investors for the funds they have provided for new facilities. The Company had originally requested an overall two-step 15 per cent increase back in March of 1975 because the rates in effect at that time were not adequately covering the cost of providing electric service.The first step proposed an increase of about 4 per cent and the second step requested an additional 11 per cent.After public hearings in three cities both steps were suspended because of concern over"lifeline" provisions in the request.We had filed the lifeline proposais, which would have exempted from any increase the first 200 kilowatt-hours of use per month, to recognize some of the inflation problems faced by smail users, low income people and the elderly.The suspension order also initiated the usual investigation of the rate request.After denial of interim relief because of the lifeline provisions PP&L filed a substitute request which deleted the lifeline portion.The substitute 4 per cent was allowed to become effective September 13, 1975, subject to refund, and hearings on both steps began.On December 9, 1975, the PUC suspended the second stage of the Company's request until March 19, 1976, to permit further investigation. More than 20 public hearings were held between September 1975 and the end of January 1976.As the March 19,1976 statutory deadline drew near it was apparent that a backlog of rate cases would prevent the PUC from reaching a final decision.In late February we voluntarily extended the effective date to June 1, 1976.By this action the Company waived its rights to recoup any money it might later be allowed by law because of the delay in the decision.Because collecting make-up or"back" revenues had become such a volatile issue, we wanted to remove recoupment as an issue so the rate case could be decided on its own merits.Additionally we asked the PUC to allow us to collect on a temporary basis, subject to refund, about 4 per cent of the 11 per cent still to be decided on.That additional amount was allowed to go into effect on April 14.Because of the heavy workload at the PUC, no decision was made by June 1 and PP&L voluntarily extended the effective date and waived recoupment to July 1, then again to August 5.The PUC on August 4 announced it still needed more time and ordered rates then in effect to become temporary rates.Under law, a recoupment period started with that date.On August 26, 1976, the PUC rendered a final decision allowing the remaining 7 per cent increase to take effect.PP&L again waived the collection of retroactive charges as being in the best interests of both customers and the Company.This action allowed us the full 15 per cent we originally requested. PUC Law Revised During 1976, lawmakers enacted legislation which, when fully implemented, should allow the PUC to be more responsive to both utility and consumer concerns.The most important change in the new law calls for full-time commissioners with higher and more realistic salaries.In turn, the five commissioners are given more leeway in setting higher staff salaries, making it easier to retain and attract an adequate, highly qualified staff and to support a broad-based expansion of operations. New key positions will be added to the commission staff.The Office of Administrative Law Judge will have full authority to preside over evidentiary hearings.The Bureau of Conservation, Economic and Energy Planning will monitor progress on energy conservation and long-range energy planning.Other legislation created an Office of Consumer Advocate, separate from the PUC.This advocate will represent consumers in rate cases before the PUC.Rate case procedure is also being changed effective October 1977.The current practice of allow-ing prompt and partial rate relief pending comple-tion of full rate case proceedings is eliminated. Such relief is now made subject to demonstrating an emergency need.The retroactive surcharge, now mandatory in cases where the PUC allows an increase after a delay beyond nine months, has been repealed.However, if major rate cases are not decided within nine months from the date a request is filed, the rates that were asked for go into effect automatically, subject to refund.Another major reform is that utilities are now permitted to base their rate requests on a future test year, backed up by appropriate, substantive estimates. In the past, all applications for rate relief had to be based on a prior test year.PP&L is convinced that strong, capable and independent regulation, which has the public's confidence, is essential to the interests of consumers and utilities. We feel that the total reform package enacted last year provides a good step in the right-direction. However, there should be periodic review to test whether, in practice, the reform procedures are working satisfactorily. Economic Recovery Nudges Energy Use Up Reflecting an improving economy, our customers'ilowatt-hour use of electricity increased 6.5 per cent during 1976.This followed a 1 per cent growth rate in kilowatt-hour usage for 1975 and a half per cent a year earlier.This growth is attributable mostly to the improving economy after two depressed years.While it is true that colder-than-normal fall-winter weather increased fourth quarter sales, and customer bills, significantly, warmer-than-normal weather during the early 1976 heating season practically offset the later increases. We consider some growth to be inevitable because of increasing population and upgraded standards of living but we are sensitive to the high costs of growth and are thoroughly committed to moderating growth through conservation and wise energy management. We are basing our long-range planning on a forecast of a compound annual growth rate of about 4.5 per cent.However, wiser and more efficient energy use could hold that rate down even lower.1977 Construction Budget PP&L's construction budget for 1977 is$390 million (including $14 million for nuclear fuel), down about$18 million from last year's expenditures. Slightly over$248 million of that is budgeted for our Susquehanna nuclear plant.The total construction figure for the next five years is almost$2.2 billion.Hershey Electric Purchased PP&L acquired all the outstanding capital stock of Hershey Electric Co.(HEC)on December 31,1976 from Herco, Inc.(formerly Hershey Estates).Terms of the purchase had been approved earlier in the year by the PUC and the Securities and Exchange Commission. HEC is a power distribution company only and has no generating plants.HEC purchases power from another electric utility to serve the 5,500 homes and businesses in its 28-square-mile service area, and will continue to do so for the two years or more it takes to integrate HEC's operations into the PPBL system.Susquehanna Nuclear Project Construction of the twin 1,050,000-kilowatt boiling water reactor generating units near Berwick continued to progress toward startup in 1980 and 1982.Unit 1 was 37 per cent complete at the end of 1976 and Unit 2 progress stood at 25 per cent.Construction milestones for 1976 included the start of the massive cooling towers for both units, enclosing the turbine generator building, completion of the concrete pedestal for Unit 1 turbine-generator and putting in place the reactor pressure vessel for Unit 1.Significant events in planning for plant operation included union agreement on staffing procedures and the beginning of selection and training of personnel. A computerized $8-million training simulator will provide a full-sized working replica of the actual plant control room.The simulator will be used for both initial training of plant operators and for required ongoing refresher training.The Company expects to complete negotiations and sign contracts during the first quarter of 1977 for Allegheny Electric Cooperative Inc., to acquire a 10 per cent ownership in the Susquehanna plant.Martins Creek Oil Units PP8 L's large 820,000-kilowatt Martins Creek Unit 3 completed its first full year of service in October.It worked exceptionally well as a"cycling" unit to meet peak electric demand on our system and on the Pennsylvania-New Jersey-Maryland Interconnection. The unit burns residual, or heavy, oil and was designed with operating characteristics that allow it to move its output quickly up or down to meet*fluctuating use patterns throughout the day.This is one of the oil unit's main operating differences from our coal units which have a much slower up/down cycle.~*'EgP Mr Construction moves ahead at g~plant.Illustrated in the'+-'kL~.<<<>>~foreground are the boiling water reactor pressure vessels.~~ Using Unit 3 in this way greatly lessens the need to use the expensive-to-operate, smaller, stand-by combustion turbines which burn number two oil, which is the same as that burned in home heating systems.Unit 4 at Martins Creek, a twin of the one already in service, was synchronized with the PP&L system in December 1976 and, after a shakedown period, will be put into commercial operation. Pipeline to Martins Creek The much-delayed 84-mile pipeline from Marcus Hook, below Philadelphia, to our Martins Creek plant, on the Delaware River above Easton, is finally in service.The project required more than three years for governmental clearances and less than six months for construction. Although the original schedule allowed two years for approval and construction of the line, which then appeared to be more than adequate, Unit 3 was completed and ready for operation before construction of the pipeline was even begun.The delay made it necessary to construct a$2.3 million alternate rail-unloading facility to assure fuel for initial operation of Unit 3.Arrangements for tanker unloading and storage terminal facilities at Marcus Hook were completed in early 1976 and oil has been flowing through the pipeline since August 1976.During the cold weather of January 1977, both of the Martins Creek oil units were used extensively to help produce the huge amounts of electricity needed both for our customers and for regional electric supply.During that period, unaffected by extreme weather conditions, the pipeline more than proved its value.Well over 56.6 million gallons of oil were delivered through the pipeline to Martins Creek during January.If we had still been using the rail facilities we relied on earlier, it would have taken nearly three months to deliver the same amount of oil under optimum conditions. We just could not have gotten that amount of oil to those units and a tight electric supply situation would have been worsened.Fuels PP&L generating facilities are at the heart of our electric supply system.Without fuels, though, our generating plants would be just so much idle machinery. The past year was marked by particularly significant developments in the area of fuel supply.Anthracite Some preliminary results were announced in October 1976, of a year-long study into the feasibility of building an anthracite-burning generating station near anthracite fields located in the Company's service area.The study showed that enough coal is available to fuel at least four 400,000-kilowatt generating units for 30 to 40 years.The study also outlined the following factors:~Anthracite is a low sulfur fuel as compared with most eastern bituminous coal, thus an anthracite plant has the potential for meeting emission standards without the cumbersome and expensive sulfur dioxide control equipment needed by today's bituminous-coal-burning plants.However, the final answer will depend on the application of the Clean Air Act and related regulations. ~Surface, or open-pit, mining is the only practical way to obtain the coal at this time.~The open-pit mining would be larger than any seen in the hard coal regions to date.It would be subject to approval under strip-mining laws and regulations. We expect approvals would require a reclamation effort which must be planned before the first shovel of earth is dug, and which would leave the land in better condition than before the mining took place.~The magnitude of the concepts under consideration involves apitofaboutone-quarterof a square mile in area and 400 to 800 feet deep.The pit would"move" over a total site of about two to three square miles with constant backfilling and reclamation continuing in the mined-out sections as the pit advances.During 1977 the Company will be confirming ownership of mineral rights on the most favorable sites indicated by the study and doing additional core drilling to further refine the information on how much coal is available and where it is.This additional information is required before a final decision is made on whether anthracite would indeed be an economical fuel.This fuel decision would be only a part of an overall decision on the economics and feasibility of an anthracite power plant project.Bituminous Coal Since the early 1960s PP&L has been acquiring coal land and developing mining operations to the point where about 40 per cent of the nine million tons of bituminous coal we need each year is mined at our affiliated sources.Our mines are operated on a zero;profit basis.Coal produced by these mines is supplemented by outside local purchases which enable us to broaden the use of our coal-cleaning plants and our unit trains.The result has been a reasonably sure and stable system of long-term supply and delivery of about three to four million tons of bituminous coal a year.Over the years this has meant substantial savings for our customers. In the past two years, however, there have been serious production problems at our Greenwich and Oneida mines.These production problems have been greatly escalating our costs at the same time the open coal market, where we purchase the balance of our requirements, has been"soft." As a result there has been a widening cost gap between our affiliated mine coal costs and market coal costs.We are aware that the price advantages of market coal are real today but may be gone tomorrow since most of it is strip-mine, nonunion coal produced from limited life reserves.We have undertaken an intensive review of the entire situation. While the final evaluation will not be'&An open-pit mine using shovel and truck excavation and haulage is one of the methods suggested for use In mining anthracite in a year-long feasibility study. in hand for several months, our preliminary judgment, subject to change, is that the possible short-term advantages of a swing to all market coal purchasing would be more than offset by the long-term cost/supply disadvantages. Greene County Reserves In 1974 and 1975 we acquired coal rights in Greene County in southwest Pennsylvania which added about 325 million tons to PP&L's estimated recoverable coal reserves.In the rate case decision by the PUC last year, the investment in these reserves ($51 million)was excluded from the property base on which allowable earnings were calculated. Because of this and the uncertainties now affecting both electric load growth and financing of new mining facilities, we are reexamining our prior plans for development of the Greene County Reserves.Ninth Unit Train The Company's ninth unit coal train was put into service during the summer of 1976.The 105-car train, along with the eight other coal trains already in service, yielded total savings in 1976 of about$17 million over costs of transporting the same amount of coal in railroad-owned cars.The Company has used unit coal trains since 1964 when we recognized that savings in transporting coal could reduce overall costs of electricity. The Company fleet now consists of nearly 1,000 cars.Oil PP&L has contracts with two major suppliers for all of the projected oil needs of our Martins Creek units.Each of the suppliers gets its oil from different parts of the world.This gives us a more diverse supply and lessens our dependence on only one supplier or country for our oil needs.Uranium With delivery arrangements for the first fuel loads in 1980 at our Susquehanna nuclear plant already taken care of, we took a number of additional steps in 1976 to assure adequate short-and long-term uranium supplies for the plant.Short-term steps included locating and buying an additional 650,000 pounds of uranium for delivery in the early1980s. For the intermediateandlonger term, we are investigating the economic feasibility of getting into the uranium mining business.We have secured options on up to 22,000 acres of Utah properties and will continue exploration and drilling on the land during 1977.We have the option to buy the mineral rights if good supplies of quality ore are found.We are also investigating the possibility of joining with several neighboring utilities, which also have nuclear plants built or planned, in joint-venture uranium mining activities. These moves are being considered because of the uncertain long-term market in processed uranium.Research The Company continues to be firmly committed to participating in a wide variety of research projects to investigate new ways to provide our customers with quality electric service at the lowest practicable price.During 1976, nearly$1.7 million of our$2.7 million research budget went toward funding various industry-wide electric research projects through EPRI (Electric Power Research Institute). Several EPRI projects are of particular interest to PP&L.One of the most important is research into fluidized-bed coal combustion that could be an alternative to costly sulfur dioxide flue gas scrubbers. This method burns coal in the presence of limestone which traps the sulfur before it can escape with other boiler gases.Other EPRI projects include the study of coal gasification and liquefaction and the improvement of power plant reliability. About$360,000 of our research budget went toward the funding of the liquid metal fast breeder reactor project at Oak Ridge, Tennessee. The remainder was divided among other projects including the study of alternative energy sources-the sun, wind, fusion and solid waste-and methods to improve the performance of various power plant equipment. Our total research budget for 1977 is almost$3.5 million. Service Area Economy Even though, on a national basis, 1976 was a year of gearing up from the bottom of the 1975 recession, the unemployment rate in our service area rose to 8.6 per cerit from 1975's 7.4 per cent.This rise was attributed primarily to layoffs due to sluggish local economies. Another economic indicator did show positive signs.Within our 10,000-square mile area, we had a net gain of 1,921 industry jobs during 1976 compared to a net loss of 1,885 in 1975.However, there was still a substantial amount of unoccupied industrial space available at year-end.More than 100 marketable buildings with a total of almost 5.5 million square feet are available but unoccupied. Because of these circumstances, we see no contradiction in urging conservation and effective energy use on the one hand, and actively supporting area development programs which will help bring in needed jobs on the other hand-even though some increased use of energy will result.Conservation should be an integral part of all use of energy.But minimizing the use of energy at the price of undercutting the employment upon which the socio/economic viability of our society depends would be solving a problem by creating a worse one.Audit Results Final results of a year-long, in-depth study of the Company's operational effectiveness, conducted by the management consulting firm McKinsey&Co., were completed and made public in March 1976.The voluntary study was undertaken to identify opportunities to reduce costs without decreasing the quality of electric service and to recommend aspects of Company operations that need improvement. The study produced 14 key recommendations that can be grouped into four major categories: strengthening PP&L's financial position;intensifying planning in critical resource areas;tightening management control;and improving productivity. By February 1977, detailed responses and action plans for 13 of the 14 key recommendations have been approved by management. Action plans have also been developed for many of the other McKinsey recommendations. Corporate Energy Planning Council As one result of the operational audit, the Company formed a Corporate Energy Planning Council to respond more effectively to the planning and decision-making challenges facing PP&L today.The questions which must be answered as part of the planning process are becoming more complex and difficult to deal with: What will be the demand for future electric service?What kinds and sizes of generating units should be built'?Where can necessary facilities be sited'?What rate levels will be needed to raise the capital needed to build the facilities? How much can load management and energy conservation programs offset the need for new facilities and capital?We have been able to deal effectively with these questions through planning groups which are a part of the various individual Company departments. However, as the pace of change has quickened and the complexity of planning and decision-making has grown, the need for coordination among planning groups has increased. Such coordination, which has been largely informal, will now be expanded and formalized by the council to provide a sounder basis for decision-making. Energy Conservation Last year, we realized an estimated 88,000-kilowatt reduction in demand growth as a result of customer energy conservation efforts aided by PP&L-sponsored programs.For our residential customers, conservation programs centered around techniques developed at our experimental, solar-supplemented energy conservation home that was built in 1973 northwest of Allentown. For existing homes, we are advising that the installation of additional attic insulation, storm windows and doors and weather-stripping offers the best opportunity for savings.For a relatively small initial investment, customers can make their home environment more comfortable while lowering heating and cooling costs over the life of the dwelling.The Company is also involved in energy-conservation programs for new home construction. We cooperated with builders in each of our five divisions in a Bicentennial Homes Project.The five homes, which included the latest energy-saving construction methods, heating and cooling systems and building materials, were open for public inspection last summer and were visited by more than 30,000 people.Realizing the cost savings to the customer and the related energy savings, PP&L has adopted higher thermal standards for residential construction. These new standards, including the use of tongue-and-groove styrofoam sheathing, plus energy-saving requirements for ventilation, water heating and space heating and cooling systems, became the foundation for our Energy-Efficient Home Award Program.This program is designed to encourage home builders and their subcontractors to use energy-efficient equipment and construction techniques. So far, 52 new homes have been built under the guidelines of this program.Efficient use of energy by our commercial and industrial customers was encouraged through our energy management program.Since the program began in 1975, PP8 L has encouraged and helped more than 900 industrial and commercial customers organize energy management teams to improve their energy efficiency. Of these, 33 businesses have received Company energy management awards which recognize that significant changes and investments have been made to reduce electrical demand and energy use.Some of the energy-saving measures incorpor-ated by area businesses include the installation of additional insulation, the use of more efficient controls for heating, ventilating and air condi-tioning systems, the addition of heat recovery equipment and switching to higher efficiency lighting systems.Consumer Affairs Programs 1976 was a year when PP8 L took some further bridge-building steps to close the adversary gap between utilities and consumer advocates. Our first tentative steps toward an evolving consumer-interest program were taken in 1972 when we discontinued our marketing program and established our Consumer 8 Community Affairs Department. Energy conservation and energy management, along with an increased emphasis on consumer affairs, became primary objectives. But PP8 L did not jump directly from marketing into a neatly packaged consumer affairs program.About two years were spent mainly listening to consumers, trying to find out what their frustrations and their needs were.Our consumer affairs representatives attended meetings of organized consumer groups and we experimented with localized programs trying to find where we could be most helpful.10 The door to better communication opened a bit more in January 1976 when six representatives of COCO (the national Conference of Consumer Organizations) and two from the local POWER (People Outraged With Electric Rates)group accepted PP&L's invitation to sit down with our consumer affairs people and with Jack Busby to discuss areas of mutual interest.Some tough questions were asked and discussion was frank and straightforward. It was a good experience for the Company and both sides got to know each other better.From those meetings grew the first Pennsylvania Utility-Consumer Energy Conference held in Hershey, Pa., in September. The three-day conference was co-sponsored by COCO and PP&L and was significant because, possibly for the first time in the nation, a consumer group and an electric utility were organizing a large, formal, joint communication effort.More than 275 persons attended from 12 states, the District of Columbia and Canada.There were consumer group representatives, government and regulatory representatives and people from 30 other gas, telephone and electric utilities. Through debate, discussion and forums both sides were able to present their views on such diverse topics as rate making, profits, pollution, energy sources, regulation and taxes.Most importantly, though, both utilities and the consumerists involved in the conference expressed confidencethat theirinvolvementwasasignificantstep in initiating and encouraging closer discussion and understanding of the issues which have so greatly polarized differences between electric utilities and their customers countrywide. Providing our customers with satisfactory service is our main business at PP&L.This montage illustrates (at left)the first Pennsylvania Utility-Consumer Energy Conference, co-sponsored by PPB L and the Conference of Consumer Organizations. 1 The state-of-the-art Customer Interruption Analysis system illustrated on the far right, is the backbone for efficient handling of trouble calls and for precise analysis of the seriousness of problems.r pit/(P fj~4 v,~.rP~,./(~f@@)pi'Q'h 11 Financing 1976 was the second largest financing year in the Company's history with$308 million of securities sold.That figure included PP8 L's largest single offering ever undertaken in the form of$150 million of first mortgage bonds.We anticipate our 1977 security sales to be around$235 million.This figure is lower than last year because our construction expenditures have somewhat moderated, and our cash needs areexpected to be helped by a one-time, catch-up payment from Allegheny Electric Cooperative for its 10 per cent interest in our Susquehanna nuclear plant.However, large financing programs are, for the time being, an unavoidable way of life for PP8 L, and financing programs for 1978 and 1979 are expected to increase.We are very pleased with the acceptance of the Dividend Reinvestment Plan which last year resulted in our issuing more than 700,000 shares of common stock.The plan allows investment of dividends from all classes of PP&L stock in our common stock at a 5 per cent discount with no brokerage fee.During 1976, about$14.3 million was invested through the plan,$7.8 million in reinvested dividends and$6.5 million in optional cash payments.This amounted to 17 per cent of the money we raised by selling common stock.Labor Relations By majority vote, about 4,500 PP&L employees chose to be represented by a new union and ratified a new three-year labor contract with the Company during 1976.The prior two-year labor contract between the Company and the Employees Independent Association had an expiration date of July 25.Under provisions of U.S.labor law the IBEW (International Brotherhood of Electrical Workers)was allowed to file a petition with the NLRB (National Labor Relations Board)for a representation election.The UWUA (Utility Workers Union of America), as well as a no-union option, were also allowed to appear on the ballot in an NLRB supervised election.In a run-off election after an indecisive first vote, Local 1600-IBEW was certified as the new bargaining unit for the 4,500 employees. Another 270 employees in the Scranton area were already represented by Local 1520-IBEW so that now all of PP&L's nonsupervisory employees are represented by local units of one national union.After the election was certified in late July, negotiations for a new contract were begun and both sides agreed to work on a day-to-day basis under the old contract which expired on July 25.An agreement was reached on September 8 and ratified by the unionmembership on September24. The Scranton local had earlier agreed to essentially the same contract as the new local.Terms of the three-year contract called for an 8.5 per cent wage increase for 1976, an 8 per cent increase for 1977 and a specially designed wage reopener in 1978.Fringe benefits spread over the three years add another 3.4 per cent to the contract.The third year wage reopener and a"meet-and-discuss" provision are considered innovations in electric utility contracts. The wage reopener calls for an"either/or" decision by an arbitrator if an agreement cannot be reached through the normal bargaining process within a specified time period.If an impasse were reached, both the union and management would submit their proposals to an arbitrator who must choose one or the other proposal in its entirety.However, negotiations between the Company and union may continue until the arbitrator reaches a decision.In any event, continuation of the contract for a third year is assured.The meet-and-discuss provision puts a contractual obligation on both union and management to meet at the request of the other to resolve any contract issues that arise or other subjects of mutual interest.If agreements are reached, they can be put into effect by mutual consent.The Company and the union locals seethe meet-and-discuss provision as an opportunity to work out better ways of doing things as well as a means of settling disputes in a spirit of cooperation. 12 Analysis of Statement of Income The following analysis highlights changes in the financial results of the Company as reflected on the Statement of Income shown on page 17.The periods compared are the years 1975 to 1974 and 1976 to 1975.Return for Common Shareowner During 1975 and 1976, common shareowners increased their investment in the Company by$190 million or 36 per cent through reinvested earnings and proceeds of$140million from the issuance of 7.6 million shares of new Common Stock.Earnings applicable to common stock increased$9.4 million and$5.7 million in 1975 and 1976, respectively. Earnings per share of common stock were$2.87 in 1975 and$2.68 in 1976.53.10 2.80 2.70 2.50 Earnings Per Share 12 Months Ended Each Quarter Dollars Per Share 3.10 2.70 Cost of Fixed Income Securities The increase in long-term debt interest charges and dividends on Preferred and Preference Stock was due to issuance of securities principally to finance the construction of new facilities and the refinancing of maturing debt with securities bearing higher interest rates.During 1975 and 1976, outstanding long-term debt increased by$268 million and Preferred and Preference Stock by$145 million.The annual interest and dividend requirements on long-term debt and Preferred and Preference Stock outstanding at December 31, 1976were$91.6million and$36.6million, respectively. 2.40 1972 1973 1974 1975 1976 The Company's 1975 and 1976 earnings have been adversely affected by the higher costs of providing electric sewice and the lack of timely rate relief.Times Interest Charges Earned 12 Months Ended Each Quarter Times Earned (Pre Tax)Interest and Dividend Cost The change from the prior year in interest charges and dividends on Preferred and Preference Stock were: 1975 1976 Millions of Dollars Interest charges Long-term debt.......... Short-term debt.......... Other Dividends on preferred and preference stock.........$16.8 11.9 (3.3)0.9 (0.2)0.1 4.9 8.9 The Company presently has a middle-of-the-road bond rating by electric industry standards (Rated Double A by Moody's and Fitch's and A Plus by Standard 8 Poor's).One of the most important measures in determining a company's bond rating and credit standing is its ability to cover interest payments (See adjacent chart).1972 1973 1974 1975 1976 Interest charges have been Increasing more rapidly than the earnings available to cover these charges resulting In a deterioration of the Times Earned Ratio.13 Electric revenues Quantity of sales to: Ultimate customers..Others for resale....Rate increases.......... Fuel adjustment clauses.Other (including tax surcharge) ............ Steam revenues.Total.....$12.8 19.3 (6.0)0.3 7.4 40.4 55.3 33.8 1.6 7.3 71.1 101.1 1.0 (1.1)$72.1 100.0 3.5 Average Price Of Electricity All Customers Cents Por Kwh 3.5 3.0 2.5 2.0 Fuel Adjustment Tax Surcharge 3.0 2.5 2.0 1.5 1.0 Base Rate 1.5 1.0 1972 1973 1974 1975 1976 The above chart shows that the Increase In tho cost of fuel has boon tho main factor In the recent price rise of electricity. The 1976 average base rate for ail customers Is about the sama as It was In the early 1960s.Operating Revenues The change in operating revenues from the prior year is attributable to the following: 1975 1976 Millions of Dollars Bank loans and commercial paper notes are used to provide working capital and interim construction financing. Interest on such debt varies from year to year due to the amount of short-term debt outstanding and the interest rates in effect.For more information on short-term debt see Note 4 to Financial Statements on page 25.Energy Sales and Operating Revenues The Company derives about 99%of its operating revenues from supplying electric service and the balance from supplying steam for heating and other purposes in the city of Harrisburg. Rates applicable to sales to ultimate customers are regulated by the Pennsylvania Public Utility Commission (PUC)and accounted for 98%of the Company's revenue from energy sales in 1976.The Federal Power Commission (FPC)regulates sales to others for resale.The Company's total electric energy sales increased approximately 0.8%in 1975.Contractual sales to a neighboring utility, which had resulted in revenues of$6.1 million in 1974, were discontinued in 1975.Excluding sales to this utility, the Company's growth in energy sales was 2.6%in 1975, with residential sales up 5.0%, commercial sales up 7.0%and industrial sales down 2.1%.The reduction in sales to industrial customers was moderated by the addition of a major industrial customer in mid-1974.Excluding sales to this customer, industrial sales would have decreased 7.3%in 1975, reflecting the decline in industrial economic activity.Energy sales increased 6.5%in1976with increases in residential sales of 6.6%, commercial sales of 6.5%and industrial sales of 6.6%.The increase in industrial sales during 1976 reflects an improvement in the economy and industrial activity within the Company's service area.For more information on energy sales see the discussion under"Economic Recovery Nudges Energy Use Up" on page 4.Rate increases affecting ultimate customers became effective in January 1974 ($19.1 million annually), September 1975 ($21.0 million annually), April 1976 ($20.0 million annually)and August 1976 ($37.3 million annually). The increase in revenues during 1976 due to rate 14 increases reflects a carryover into 1976 of approximately $16.0 million applicable to the September 1975 increase,$24.3 million applicable to the April and August 1976 increases and$0.1 million from a rate increase affecting resale customers that became effective in November 1976.For more information on rate filings see the discussion under"Higher Rates Allowed" on page 3.The Company's tariffs include fuel adjustment clauses which adjust prices for electric service for variations in the cost of fuel used to generate electricity. Revenues from the fuel adjustment clauses totaled$134.5 million in 1975 and$168.3 million in 1976, reflecting the increased level of fuel costs and additional energy sales.Net Cost of Energy The net cost of energy includes fuel expense plus power purchases less power sold to other utilities. Included in power purchases is the value of electricity generated during the test period for the Company's new generating units.Fuel The cost of fuel consumed increased during 1975 and 1976 as a result of greater generation of energy and increases in the costoffuelspurchased. Thequantityof energy generated during 1975 increased due to greater availability of coal-fired generating units and the Martins Creek No.3 oil-fired generating unit which began commercial operation in October 1975.Increased generation during 1976 resulted primarily from a full year's operation of the Martins Creek unit.The average cost of fuels consumed increased during 1975 and 1976 due to the combined effects of higher coal prices and the cost of oil consumed at Martins Creek Unit No.3, which has a cost per kwh generated approximately twice that of the Company's coal-fired units.The average cost of fuel consumed per kwh generated was 0.88 cents in 1974, 1.04 cents in 1975 and 1.17 cents in 1976.The cost of fuel consumed which is recoverable through fuel adjustment clauses is deferred until the period in which such costs are billed to customers. Interchange Power Sales The total electric energy available for sale includes energy generated by the Company's plants and power Fuel Expense Fuel expense is comprised of the following: 1974 1975 1976 Millions of Dollars Cost of fuel consumed Electric............... Steam heat............ Total cost of fuel consumed........219.0 273.2 326.3 Less increase in fuel costs deferred to match revenues from fuel adjustment clauses....26.6 1.6 Total fuel expense...$192.4 271.6$215.2 269.2 323.1 3.8 4.0 3.2 4.5 321.8 Cost of Fuel Consumed The change from the prior year in the total cost of fuel consumed is attributable to the following: 1975 1976 Millions of Dollars Electric Quantity of electricity generated Average cost of fuels burned............ $13.3 17.9 40.7 36.0 54.0 53.9 0.2 (0.8)$54.2 53.1 Steam heat Total Quantity of energy sold......Average price of energy sold.Other Total.$47.2 (7.9)18.4 (5.7)(1.5)0.9$64.1~(12.7 Interchange Sales The change in Interchange power sales from the prior year is attributable to the following: 1975 1976 Millions of Dollars 15 purchased from others, after deducting Company uses and line losses.During 1975 and 1976, approximately 31%and 29%, respectively, of the total energy available was sold to other utilities under interconnection arrangements. As required by both the PUC and the FPC, such sales are not recorded as Operating Revenues but are credited to Operating Expenses on the Statement of Income.The quantity of interchange power sold increased during 1975 due to greater availability of generating units, the addition of Martins Creek Unit No.3, the absence of contractual sales to a neighboring utility and the Company's relatively favorable generating costs compared, to those of other interconnected companies. During 1976, increased sales to customers reduced the quantity of economic power available for sale to interconnected companies. During 1976 there was a narrowing of the differential between the Company's cost of generating electricity and the price received for power sold on the interchange, which price reflects a splitting of the difference between the buyer's and the seller's costs of generation. The average price the Company received for interchange power sales was 1.76 cents per kwh in 1974, 1.97 cents per kwh in 1975 and 1.90 cents per kwh in 1976.These amounts were substantially in excess of the Company's average fuel costs.Expenditures For Electric Facilities 6lt lions Of Dollars$3.0 3.0 2.5 2.5 the"Depreciation" section in Note 1 to Financial Statements on page 23.Allowance for Funds used During Construction The Allowance for funds used during construction has increased substantially during the past twoyears as a result of the Company's extensive construction program and the related carrying costs of securities issued to finance the construction expenditures. During 1975 and 1976 the average rates used to compute the allowance were equivalent to 8.3%and 7.9%, respectively. Taxes See Note 9 to Financial Statements on page 26 for information relating to income taxes and other taxes.2.0 1.5 2.0 1.5 Wages and Employee Benefits and Other Operating Costs The increases in wages and employee benefits and other operating costs such as materials and supplies, rents and insurance principally reflect the effects of inflation and increases associated with operation and maintenance of new facilities placed in service.Depreciation Increased depreciation expense is due to new facilities placedin service, including Martins Creek Unit No.3 which began commercial operation in 1975.For additional information concerning a reduction in the Company's composite depreciation rate for 1976, see 1.0 1976'77'78'79'80'81 Total'77-'81 D Cost of Electric Facilities at End of 1976 0 Expenditures to Construct New Electric Facilities and Acquire Nuclear Fuel Financial health of the Company is necessary to raise the large amounts of money required to finance the construction of electric facilities. Planned construction expenditures in the next five years are expected to be$2.2 billion compared to$2.8 billion of facilities at the end of 1976, after being In business for 56 years.1.0 16 Statement of income 1976 1975 1974 1973 Thousands of Dollars 1972 Operating Revenues (Note 2)$644,147 544,129 472,036 384,814 345,792 Operating Expenses Net cost of energy Fuel Power purchases Interchange power sales Wages and employee benefits Other operating costs.Depreciation Income taxes (Note 9)Taxes, other than income (Note 9)Operating Income Other Income and Deductions Allowance for funds used during construction Income tax credits (Note 9).Other-net Income Before Interest Charges Interest Charges Long-term debt Short-term debt and other.Income Before Nonrecurring Credit.Nonrecurring Credit Related to Accounting Change, Net of Income Taxes ($4,831)(Note 3)321,783 29,657 (160,163)191,277 82,583 76,121 62,478 43,828 49.526 505,813 138,334 45,192 14,457 1,381 61,030 199,364 79,783 7,470 87,253 112,111 271,636 37,698 (172,823)136,511 71,773 68,369 58,540 47,298 40,669 423,160 120,969 36,605 11,201 3,154 50,960 171,929 67,932 6,456 74,388 97,541 192,353 24,176 (108,723)107,806 67,374 54,489 52,399 39,211 35,571 356,850 115,186 20,732 5,076 3,418 29,226 144,412 51,149 9,946 61,095 83,317 4,162 125,577 15,299 (70,175)70,701 57,421 45,234 48,837 33,943 30,005 286,141 98,673 14,967 91 1,300 16,358 115,031 43,203 4,916 48,119 66,912 95,220 13,514 (34,569)74,165 55,220 39,512 41,446 26,086 25,658 262,087 83,705 14,647 334 (305)14,676 98,381 36,507 3,953 40,460 57,921 Net Income-Before Dividends on Preferred and Preference Stock.Dividends on Preferred and Preference Stock.......Earnings Applicable to Common Stock (Note 3)112,111 97,541 87,479 66,912 57,921 33,368 24,509 19,656 17.191 14,526 3 78,743 73,032 67,823 49,721 43,395 Earnings Per Share of Common Stock (Note 3)(a)Before Nonrecurring Credit Nonrecurring Credit$2.68$2.68 2.87 2.87 2.88.19 3.07 2.57 2.48 2.57 2.48 I Average Number of Shares Outstanding (thousands) .Dividends Declared Per Share of Common Stock 29,367$1.80 25,459 1.80 22,067 1.77 19,359 1.68 17,513 1.64 (a)Based on average number of shares outstanding. See accompanying Notes to Financial Statements. 17 Balance Sheet Assets December 31 1976 1975 Thousands of Dollars Utility Plant Plant in service-at original cost Electric Steam heat Less accumulated depreciation Construction work in progress-at cost Nuclear fuel in process-at cost........$2,090,282 7,896 2,098,178 458,697 1,639,481 720,544 20,084 2,380,109 1,992,673 7,805 2,000,478 406,313 1,594,165 430,533 6,529 2,031,227 Investments Associated companies-at equity........................ Nonutility property and other investments-at cost or less 15,327 7,548 22,875 32,221 7,165 39,386 Current Assets Cash (Note 4)Accounts receivable (less reserve: 1976,$1,925;1975,$1,346)Customers Other Notes receivable (principally from associated company)Recoverable fuel costs.Coal and fuel oil-at average cost Materials and supplies-at average cost Other 14,955 49,205 22,857 29,570 41,670 74,885 19,068 7,219 259,429 14,832 36,243 16,817 32,178 37,154 68,318 22,616 5,995 234,153 Deferred Debits 4,884$2,667,297 7,118 2,311,884 See accompanying Notes to Financial Statements. 18 Liabilities December 31 1976 1975 Thousands of Dollars Capitalization (a)Shareowners investment (Note 5)Preferred stock Preference stock Common stock Capital stock expense (deduction) Earnings reinvested (Notes 6 and 7)$231,375 210,000 495,008 (10,220)237,967 1,164,130 156,3?5 210,000 412,303 (8,801)212,550 982,427 Long-term debt 1,161,319 2,325,449 1,032,980 2,015,407 Current Liabilities Long-term debt due within one year.Commercial paper notes (Note 4).Accounts payable Taxes accrued.Deferred income taxes applicable to recoverable fuel costs.Dividends payable Interest accrued Other 20,675 60,012 60,342 12,564 22,060 23,002 22,589 11,257 232,501 10,966 73,630 51,281 20,199 19,669 19,362 21,617 9,719 226,443 Deferred and Other Credits Deferred investment tax credits Deferred income taxes Other.56,526 36,860 15,961 109,347$2,667,297 31,849 22,713 15,472 70,034 2,311,884 (a)See Schedule of Capital Stock and Long-Term Debt on page 20.See accompanying Notes to Financial Statements. 19 Schedule of Capital Stock and Long-Term Debt December 31, 1976 4,178 22,878 6,300 40,000 22,237 7,763 75,000(a)$231,375 Preference Stock-no par, cumulative, authorized 5,000,000 shares$8.00 series, outstanding 350,000 shares.................. $8.40 series, outstanding 400,000 shares.................. $8.70 series, outstanding 400,000 shares.................. $9.25 series, outstanding 200,000 shares.................. $11.00 series, outstanding 500,000 shares.................. $13.00 series, outstanding 250,000 shares$35,000 40,000 40,000 20,000(b)50,000(b)25,000$210,000 Capital Stock (Thousands of Dollars)(Note 5)Preferred Stock-$100 par, cumulative 4M'/o, authorized 629,936 shares, outstanding 530,189 shares.......$53,019 Series, authorized 5,000,000 shares 3.35'/0, outstanding 41,783 shares...4.40'/0, outstanding 228,773 shares..4.600/o, outstanding 63,000 shares...7.40'/o, outstanding 400,000 shares..8.600/o, outstanding 222,370 shares..9.000/o, outstanding 77,630 shares...9.24'/o, outstanding 750,000 shares..Long-Term Debt (Thousands of Dollars)First Mortgage Bonds 2/4~lo series due 1977............. 3/s'/o series due 1978............. 2%lo series due 1980............. 3/e'/0 series due 1982............. 10i%%d'/o series due 1982............. 3N'/0 series due 1983............. 3%'/o series due 1985............. 4/s'/o series due 1991............. 4~/s'/o series due 1994............. 5%'/0 series due 1996............. 6%'/0 series due 1997............. 7/o series due 1999............. 8~/e'/0 series due 1999............. 9'lo series due 2000............. 7/i'/o series due 2001............. 7/s/0 series due 2002............. 7h'/o series due 2003............. 9~/"lo series due 2004............. 93/4'/0 series due 2005............. 9'/"/o series due 2005............. .8~/"/o series due 2006............. 4A'/0 to 5/o pollution control series A due annually$500, 1977-1983; $900, 1984-2002; $7,400, 2003 Notes 7'lo due 1980 Other Unamortized discount and premium-net .Less amount due within one year........$20,000 3,000 37,000 7,500 100,000 25,000 25,000 30,000 30,000 30,000 30,000 40,000 40,000 50,000 60,000 75,000 80,000 80,000 125,000(b) 100,000(b) 150,000(a) 28,000 1,165,500 20,000 550 1,186,050 (4,056)1,181,994 20,675$1,161,319 Common Stock-no par, authorized 50,000,000 shares, outstanding 30,803,318 shares.............. $495,008(c)(a)Issued in 1976.(b)Issued in 1975.(c)Common Stock issued during 1976 and 1975 was as follows (shares and amount in thousands): 1976 1975 Shares Amount Shares Amount Public offering..................... 3,500$67,935 3,000$51,450 Dividend reinvestment plan.........716 14,268 301 5,595 Employee stock ownership plan....35 755~4251~82 958 3~301~57 045 The amounts shown above for the dividend reinvestment plan exclude installments received at year-end for shares issued in January of the following year (thousands of dollars): 1976,$464;1975,$718.See accompanying Notes Io Financial Statements. 20 Statement of Changes In Financial Position Source of Funds Operations Net income (1974 includes$4,162 nonrecurring credit).Charges (credits)against income not involving working capital Depreciation Noncurrent deferred income taxes and investment tax credits-net'............ Allowance for funds used during construction Other.1976 1975 1974 1973 Thousands of Dollars 1972 66,912 57,921 62,478 31,789 (45,192)4,669 165,855 58,540 15,701 (36,605)7,464 142,641 52,399 8,790 (20,732)520 128,456 48,837 11,282 (14,967)220 112,284 41,446 7,984 (14,647)220 92,924$112,111 97,541 87,479 Outside financing Common stock Preferred stock Preference stock First mortgage bonds.Other long-term debt.Short-term debt-net increase Working capital-decrease (a)Investment in associated companies-decrease Other-net.82,705 75,000 150,000 253 307,958 16,894 6,424$497,131 57,763 35,156 70,000 225,000 208 352,971 15,166(b)25,000 180,000 360 45,658 286,174 685 510,778 415,315 40,900 40,000 108,000 20,024 208,924 3,156 2,672 327,036 46,940 35,000 75,000 8,342 20,231 185,513 83 598 279,118 Application of Funds Construction expenditures .Nuclear fuel in process Allowance for funds used during construction $394,238 13,555 (45,192)362,601 342,496 2,793 (36,605)308,684 267,724 3,736 (20,732)250,728 (14,967)209,529 (14,647)204,107 224,496 218,754 Securities retired First mortgage bonds Other long-term debt Short-term debt-net decrease 8,000 3,054 13,618 24,672 93,000 112 11,879 104,991 18,632 18,632 10,041 56,631 66,672 15,000 10,057 25,057 Dividends on preferred, preference and common stock Working capital-increase (a)Acquisition of Hershey Electric Company......Investment in associated companies-increase.Other-net 86,694 15,309(b)7,855 70,686 58,897 82,753 50,037 43,330 6,624 23,990 2,427 4,305 3497,131 510.778 415.315 327,036 279,118 (a)Excludes short-term debt and long-term debt due within one year.(b)The net changes in workinp capital resulted principally from the following: 1976, increases in accounts receivable, accounts payable, and fuel inventory, and a decrease in accrued taxes;1975, increases in notes receivable, accounts payable, accrued taxes, dividends payable and accrued interest.See accompanying Notes to FinanciaiStatements. 21 Statement of Earnings ReinvestecI 1976 1975 1974 Thousands of Dollars 1973 1972 Balance, January 1.Net Income...... Dividends Declared Preferred stock Preference stock.Common stock Balance, December 31 (Notes 6and 7)..$212,550 112,111 324,661 13,128 20,240 53,326 86,694$237,967 185,695 97,541 283,236 9,393 15,116 46,177 70,686 212,550 157,113 87,479 244,592 9,393 10,263 39,241 58,897 185,695 140,238 66,912 207,150 7,551 9,640 32,846 50,037 157,113 125,647 57,921 183,568 6,433 8,093 28,804 43,330 140,238 Notes To Financial Statements December 31, 1976 and 1975 1.Summary of Accounting Policies Accounting System Accounting records are maintained in accordance with the Uniform System of Accounts prescribed by the Federal Power Commission (FPC)and adopted by the Pennsylvania Public Utility Commission (PUC).Prlnclples of Consolldaf Ion The Balance Sheet at December 31, 1976 includes the consolidated accounts of the Company and its wholly-owned electric distribution subsidiary, Hershey Electric Company, which was acquired December 31,1976.All significant intercompany transactions have been eliminated. See Note 11 to Financial Statements. Associated Companies Investments in unconsolidated subsidiaries (all wholly-owned) and in Safe Harbor Water Power Corporation (representing one-half of that company's voting securities) are recorded using the equity method of accounting. The Company's unconsolidated subsidiaries are engaged in coal mining operations, holding coal reserves, oil pipeline operations and real estate.The Company believes that its financial position and results of operations are best reflected without consolidation of these subsidiaries since they are not engaged in the business of generating and distributing electricity. If all the unconsolidated subsidiaries were considered in the agg'regate as a single subsidiary, they would not constitute a"significant subsidiary" as that term is defined by the Securities and Exchange Commission. Utlllty Plant Additions to utility plant and replacements of units of property are capitalized at cost.Costs of depreciable property retired or replaced are removed from utility plant and such costs, plus removal costs, less salvage, are charged to accumulated depreciation. Costs of land retired or sold are removed from utility plant and any gains or 22 losses are reflected on the Statement of Income.All expenditures for maintenance and repairs of property and the cost of replacement of items determined to be less than units of property are charged to operating expenses.Allowance for Funds used During Construction As provided in the Uniform System of Accounts, the cost of funds used to finance construction work in progress is capitalized as part of construction cost.The Allowance for funds used during construction (Allowance), shown on the Statement of Income under Other Incomeand Deductions, isa noncash item equal to the amount so capitalized and serves to offset the actual cost of financing construction work in progress.Since February 1, 1974, in accordance with procedures prescribed by the PUC, the Company has computed the Allowance rate semiannually on an"after-tax" basis using a specified rate for common equity and the cost of debt and preferred and preference stock securities issuedin the twelve months preceding the semiannual computation. In February 1977, the FPC issued an order which established a specific formula to be used in computing the maximum Allowance rate, effective January 1, 1977.The Company does not anticipate that adoption of the new FPC method will significantly effect the amount of Allowance the Company would otherwise record in 1977.De preclatlon For financial statement purposes, the straight-line method of depreciation is used to accumulate an amount equal to the cost of utility plant and removal costs, less salvage, over the estimated useful lives of property.Provisions for depreciation resulted in an annual composite rate of 3.2'/0 in 1976 and 3.3'/o in 1975.The lower composite rate for1976 reflects changes made as of January 1, 1976 in estimated useful lives of certain facilities in accordance with the PUC's August 1976 rate order.Revenues Revenues, are based on cycle billings rendered to certain customers monthly and others bimonthly. The Company does not accrue revenues related to energy delivered but not billed.Fuel Costs Recoverable Under Fuel Ad/ustment Clauses The Company's tariffs include fuel adjustment clauses under which fuel costs varying from the levels allowed in approved rate schedules are reflected in customers'ills after the fuel costs are incurred.The charge to expense for fuel costs recoverable in the future through application of fuel adjustment clauses is deferred to the periods in which these costs are billed to customers. See Note 3 to Financial Statements. Income Taxes The Company and its subsidiaries file a consolidated Federal income tax return.Income taxes are allocated to the individual companies based on their respective taxable income or loss.Income taxes are allocated to Operating Expenses and Other Income and Deductions on the Statement of Income.Income tax credits recorded under Other Income and Deductions result principally from the tax deductions related to interest expense associated with financing construction work in progress.Deferred tax accounting is followed for items where similar treatment in rate determinations has been or is expected to be permitted by the PUG.The principal items are accelerated amortization of certified defense facilities and pollution control equipment, deduction of costs of removing retired depreciable property, that portion of tax depreciation arising from shortening depreciable lives by 20'/o under the class life depreciation system, fuel costs recoverable under fuel adjustment clauses, the forced outage reserve and the cost of fuel consumed during the test period of new generating facilities. Tax reductions arising principally from the use of the declining balance depreciation method, guideline lives and certain income and expenses being treated differently for tax computation than for book purposes are accounted for under the flow-through method.23 Investment tax credits, which result in a reduction of Federal income taxes payable, are deferred and amortized over the average lives of the related property.During 1976 the Company adopted an Employee Stock Ownership Plan (ESOP)which permits the Company to claim an additional 1'/o investment tax credit.An amount equal to this additional credit is paid to the trustee for the ESOP to acquire Common Stock of the Company for employees. See Note 9 to Financial Statements. Retirement Plan The Company has a Retirement Plan composed of two parts: (1)a noncontributory portion which provides benefits for all eligible active employees with the full cost absorbed by the Company,and (2)a voluntary portion in which contributions are made by both employees and the Company, but the full cost of past service and Plan improvements is borne by the Company.Approximately 95'/o of eligible active employees are members of the voluntary portion of the Plan.Company contributions to the Plan include amounts required to fund current service costs and to amortize unfunded past service costs over periods of not more than 20 years.See Note 8 to Financial Statements. Forced Outage Reserve A self-insurance reserve is provided to cover the increased level of power costs which are experienced when any of the Company's major generating units are forced out of service due to damage caused by accident or other unforeseen insurable occurrences. Increased power costs resulting from purchasing or generating replacement power at higher costs or loss of interchange sales in excess of$0.5 million through 1975 and$1.0 million effective January 1,1976 for each accident or occurrence are charged to the reserve.As to certain of the Company's large generating units, costs chargeable to the reserve are limited to$10 million since outside insurance is carried to cover costs in excess of that amount.The reserve is established on the basis of historical experience and has been recognized inratemaking procedures by the PUC.At December 31,1976 and December 31, 1975 the reserve balance was$13.9 million and$11.9 million, respectively. Reclasslllcatlons Certain reclassifications have been made in prior years'mounts to make them comparable to the classification of such items in 1976.2.Rate Filings In March 1975, the Company filed with the PUC for a general increase in electric revenues.A summary of the rate increases resulting from this filing, based on annualized revenues as of July 31, 1975, is as follows (millions of dollars): Effective Oate of Increase September 13, 1975 (interim).April 14, 1976 (Interim).......August 26, 1976 (final).......Annual Increase$21.0 20.0 37.3$76.3 The total increase granted ($78.3 million or 14.6'/o)represents the entire amount requested by the Company.Revenues for 1976 increased approximately $40.3 million over 1975 as a result of the above rate increases. The FPC permitted a rate increase affecting resale customers, amounting to approximately $1 million annually, to become effective in November 1976, subject to refund.Revenues for 1976 include approximately $0.1 million applicable to this increase.3.Nonrecurring Credit Related to Accounting Change The Nonrecurring Credit shown on the Statement of Income for 1974 represents the cumulative effect to December 31, 1973of a change in accounting for fuel costs, net of related income taxes.The accounting change related to deferring the charge to expense for a portion of fuel costs to the periods in which such costs are billed to customers through application of fuel adjustment clauses.24 In the following summary, earnings"As Reported" includes the Nonrecurring Credit recorded in 1974, and earnings"Restated" reflects the effect of retroactive allocation to prior years of the Nonrecurring Credit related to the change in accounting for fuel costs: 1974 1973 1972 Earnings Applicable to Common Stock (a)As Reported.........$67,823 49,721 43,395 Restated............ 63,661 51,066 43,161 Earnings Per Share of Common Stock (b)As Reported.........$3.07 2.57 2.48 Restated............. 2.88 2.64 2.46 (a)Thousands of dollars.(b)Based on average number of shares outstanding. 4.Compensating Balances and Short-Term Debt In order to provide loans forinterimfinancing and provide back-up financing capability for commercial paper notes the Company had lines of credit with various banks aggregating $200million at December 31, 1976.Use of these lines of credit was restricted at December 31, 1976 to the extent of$4 million by short-term bank loans to certain companies involved in fuel supplyoperations. Bank borrowings are generally for one year and may be prepaid at any time without penalty.No bank loans were outstanding at December 31, 1976 or December 31, 1975.Of the Company's lines of credit,$144 million was maintained by compensating bank balance requirements (not legally restricted as to withdrawal) and$56 million by payment of commitment fees.Compensating bank balance requirements are on an average annual basis which approximated $13.9 million at December 31, 1976.Commitment fees on an annualized basis approximated $0.3 million at December 31, 1976.Commercial paper notes are generally sold for periods ranging from 30 to 60 days.The weighted average discount rates applicable to commercial paper notes outstanding at December 31, 1976 and 1975 were 4.7o/o and 5.6/o, respectively. The maximum aggregate amount of short-term debt outstanding at the end of any month during 1976 was$194.6 million and during 1975 was$1 42.6 million with an average aggregate daily amount outstanding during these years of$129.6 million and$85.2 million, respectively. The approximate weighted average interest rate of short-term debt during 1976 was 5.5o/o and during 1975 was 7.3'/o, calculated by dividing the total short-term debt interest expense for the year by the average aggregate daily amount of short-term debt outstanding during the year.5.Capital Stock Common Stock of$495,008,000at December 31, 1976 includes$464,000 cash installments received under a dividend reinvestment plan as consideration for 20,852 shares of Common Stock which were issued in January 1977.Each of the following series of.stock contains sinking fund provisions designed to retire theseries at a redemption price of$100 per share: Shares to be Redemption Redeemed Annually Period Preferred Stock 7.40'/o Series 16,000 1979-2003 9.24/o Series (a)30,000 1981-2005 Preference Stock$9.25 Series (b)40,000 1977-1981$11.00 Series (a)25,000 1981-2000$13.00 Series (a)12,500 1980-1999 (a)The Company has the right to redeem on each sinking fund redemption date additional shares up to the number of shares of this Series required to be redeemed annually.(b)ln January 1977, the Company redeemed 40,000 shares of the Preference Stock,$9.25 Series.Capital stock expense represents commissions and expenses incurred in connection with the issuance and sale of capital stock.Of the capital stock expense balance at December 31, 1976, approximately $3.0 million applicable to the preferred and preference stock series which are to 25 be redeemed through sinking fund provisions will be amortized to Earnings Reinvested as the respective series of stock are redeemed.No amortization plan is in effect for capital stock expense applicable to other issues of capital stock.6.Dividend Restrictions The Company's charter and mortgage indentures restrict the payment of cash dividends on Common Stock under certain conditions. Under the charter provisions, which are the more limiting, no restrictions are effective on the payment of such dividends out of current earnings.The amount of earnings reinvested free of restrictions under the charter at December 31, 1976 was$193.4 million.7.Hydroelectric Projects The Company operates two hydroelectric projects under licenses issued by the FPC.Certain reserves required to be provided under the Federal Power Act have not been recorded pending approval of the amounts by the FPC.The Company estimates that such reserves applicable to the years from 1946 would not exceed$3.0 million at December 31, 1976.9.Taxes Income tax expense for the years 1976 and 1975 is recorded on the Statement of Income as shown below: 1976 1975 Thousands of Dollars Included in Operating Expenses Provision Federal........... State.~........... Deferred income taxes.....Investment tax credits, net..Included in Other Income and Deductions Reduction in provision.....Total income tax expense$656 6,766 7,422 8,745 27,661 43,828~14.457)$29,371 22,547 8,221 30,768 3,542 12,988 47,298 (11,201)36,097 contributions and certain other minor changes to comply with the Employee Retirement Income Security Act of 1974.These amendments increased the unfunded past service cost and vested benefits by about$3.6 million, and the Company's annual cost by about$1.0 million commencing in 1977, including amortization of the increased past service cost over 20 years.8.Retirement Plan Obligations of the Company's Retirement Plan are currently funded through a Trust Fund.At June 30, 1976, the end of the Fund's most recent fiscal year, the Fund's assets at market were$92.3 million and at cost were$94.5 million.Pension costs for the years 1976 and 1975 were$9.8 million and$8.8 million, respectively. Based on the Fund's assets at cost, at June 30, 1976 the actuarially computed unfunded past service cost was$28.6 million.As of the same date vested benefits exceeded the cost basis of the Fund's assets by$20.0 million.Plan amendments effective as of July 1, 1976, subject to Internal Revenue Service approval, provide for increased benefits, reduced employee Investment tax credits of$29.5 million and$14.5 million for 1976 and 1975, respectively, have been reflected as reductions of the provision for Federal income taxes with equivalent amounts included in investment tax credits, net.Investment tax credits eliminated the Company's Federal income tax liability for 1976 and resulted in a credit to the provision for income taxes of approximately $5.9 million related to a carryback of investment tax credits to prior years.Total income tax expense for 1976 has been credited by approximately $5.0 million representing adjustments of prior years'ax liabilities. The principal adjustment, related to adoption of the modified half-year convention method of computing tax depreciation in the Company's 1975 Federal income tax return filed in 26 September1976, reduced totalincometaxexpense by approximately $2.8 million.Taxes other than income taxes charged to operating expense were: Portion of tax depreciation under the class life depreciation system.....Forced outage reserve.....Other.$6,463 (1,041)3 323$8,745 4,540 (3,726)2,728 3,542 Deferred income taxes result from the following items: 1976 1975 Thousands of Dollars State gross receipts State capital stock........State utility real estate....Social security and other..Total.............. 1976 1975 Thousands of Dollars$28 320 23 756 8,860 7,284 8,052 5,980 4,294 3,649$49,526 40,669 Income tax expense differed from the amount computed by applying the combined Federal and State corporate income tax rate (52.94'/o in both 1976 and 1975)to pre-tax income as follows: Net'income ................ Income tax expense........Pre-tax income.......Indicated income tax expense at combined tax rate................... Reductions due to: Allowance for funds used during construction .....Tax deduction in excess of book expense: Depreciation .......... Tax and pension cost..Other.Total................. Incometaxexpense .........Effective income tax rates....1976 1975 Thousands of Dollars$112,111 97,541 29,371 36,097$141,482 133,638$74.901 70,748 23,925 19,379 15,067 3,354 3,184 45,530$29,371 20 8o/o 9,131 2,998 3,143 34,651 36,097 27.0o/o During 1976, approximately $6.8 million of the amount provided for 1975 income taxes was transferred on the Balance Sheet from Taxes accrued to Deferred income taxes.Such amount represents the income taxes applicable to a deduction claimed on the Company's1975 income tax return for fuel expenses related to the testing of the Martins Creek No.3 Unit in excess of expenses recorded on the books.10.Rentals and Noncancelable Lease Commitments Total rentals charged to operating expense for the years 1976 and 1975 amounted to$10.5 million and$9.5 million, respectively. At December 31, 1976 the Company was committed for minimum rentals totaling$59.3 million under noncancelable leases expiring at various dates to 1996.The minimum rentals are as follows (millions of dollars): 1977,$5.6;1978,$5.4;1979,$5.1;1980,$4.9;1981,$4.5;1982 through 1986,$14.8;1987through1991,$11.3;1992through 1996,$7.7.These rentals are applicable to the following categories of property: combustion turbine generating equipment,$16.6 million;railroad coal cars,$27.8 million;computer equipment,$11.1 million;and construction cranes,$3.8 million.Generally the leases contain renewal options and obligate the Company to pay maintenance, insurance and other related costs.The impact upon net income in each of the years 1976 and 1975 would be less than 1'/o if all non-capitalized financing leases were capitalized and amortized on a straight-line basis with interest accrued on the basis of the outstanding lease liability. In December 1976, the Company entered into a commitment to lease certain oil storage facilities in 1977.It is expected that the final lease agreement will result in the Company paying lease rentals of approximately $2.8 million annually for a period of 20 years commencing in 1977.27 11.Acquisition On December 31, 1976 the Company acquired all of the outstanding capital stock of Hershey Electric Company (HEC), an electric distribution company.The acquisition cost of the capital stock and the repayment of all debt owed by HEC approximated $7.9 million.The assets of HEC at December 31, 1976 were$8.8 million and the revenues and net income for the year 1976 were$11.9 million and$0.4 million, respectively. 12.Commitments and Contingent Liabilities The Company estimates that about$1.51 billion will be required to complete construction projects in progress at the end of 1976.Of this amount, approximately $1.15 billion is related to completion of the Company's two nuclear generating units at the Susquehanna Power Plant.The Company's estimated construction program for 1977 is$390 million, including$14 million for nuclear fuel and$28 million related to environmental protection facilities. In connection with providing for its future bituminous coal supply, the Company at December 31, 1976 had guaranteed capital and other obligations of certain coal suppliers (including owned coal companies) aggregating $162.2 million.13.Replacement Cost Data (Unaudited) The impact of the rate of inflation experienced in recent years has resulted in replacement costs of productive capacity that are significantly greater than the historical costs of such assets reported in the Company's financial statements. In compliance with reporting requirements, estimated replacement cost information is disclosed in the Company's annual report to the Securities and Exchange Commission on Form 10-K.14.Summary of Quarterly Results of Operations (Unaudited) Quarter Ended Operating Revenues Earnings Operating Net Applicable to Income Income Common Stock Thousands of Dollars Earnings Per Share of Common Stock (a)1976 March 31........June 30 September 30....December 31 (b).$166,269 149,281 149,580 179,017$34,360 28,006 35,241 40,727$25,189 21,281 30,423 35,218$17,781 13,603 21,282 26,077$0.67 0.46 0.70 0.85 1975 March 31.......... June 30.September 30..~...December 31 150,106 128,984 125,917 139,122 29,833 26,742 30,168 34,226 23,673 18,224 0.78 22,248 16,677 0.65 25,542 19,461 0.74 26,078 18,670 0.70 (a)Quarterly earnings per share are based on the average number of shares outstanding during the quarter.(b)Results for the fourth quarter of 1976 include a reduction inincome tax expense of$2 4 million due to increased tax depreciation applicable to Martins Creek Unit No.4 which began test operation in December 1976 and a$2.1 million charge to expense (net of income taxes)to adjust the amortization of deferred fuel costs for the years1970-1 975 to the actual fuel adjustment revenues billed during those years.28 Auditors'pinion Haskins 8 Sells Certified Pubtic Accountants Auditors'pinion Two Broadway New York 10004 The Shareowners and Board of Directors of Pennsylvania Power&Light Company: We have examined the balance sheet of Pennsylvania Power&Light Company as of December 31, 1976 and 1975, the related statements of income, earnings reinvested, and changes in financial position for the years then ended and the schedule of capital stock and long-term debt as of December 31, 1976.Our examination was made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. ln our opinion, such financial statements and schedule present fairly the financial position of the Company at December 31, 1976 and 1975 and the results of its operations and changes in its financial position for the years then ended, in conformity with generally accepted accounting principles consistently applied during the periods and on a basis consistent with the preceding year.February 3, 1977 FISCAL AGENTS SECURITIES LISTED ON EXCHANGES TRANSFER AGENTS FOR PREFERRED, PREFERENCE AND COMMON STOCK Industrial Valley Bank and Trust Company 634 Hamilton Mall Allentown, Pennsylvania-18101 Irving Trust Company One Wall Street New York, New York-10015 Pennsylvania Power&Light Company Two North Ninth Street Allentown, Pennsylvania -18101 REGISTRARS FOR PREFERRED, PREFERENCE AND COMMON STOCK The First National Bank of Allentown Hamilton Mall at Seventh Allentown, Pennsylvania -18101 Morgan Guaranty Trust Company of New York 23 Wall Street New York, New York-10015 DIVIDEND DISBURSING OFFICE FOR PREFERRED, PREFERENCE AND COMMON STOCK Treasurer Pennsylvania Power&Light Company Two hforth Ninth Street Allentown, Pennsylvania -18101 NEW YORK STOCK EXCHANGE First Mortgage Bonds, 10N%Series due 1982 4%%Preferred Stock (Code: PPLPRB)4.40%Series Preferred Stock (Code: PPLPRA)8.60%Series Preferred Stock (Code: PPLPRG)9.24%Series Preferred Stock (Code: PPLPRM)Preference Stock,$8.00 Series Code: PPLPRJ)Preference Stock,$8.40 Series Code: PPLPRH)Preference Stock,$8.70 Series Code: PPLPRI)Preference Stock,$11.00 Series (Code: PPLPRL)Preference Stock,$13.00 Series (Code: PPLPRK)Common Stock (Code: PPL)PHILADELPHIA STOCK EXCHANGE 4yr%Preferred Stock 3.35%Series Preferred Stock 4.40%Series Preferred Stock 4.60%Series Preferred Stock 8.60%Series Preferred Stock 9%Series Preferred Stock 9.24%Series Preferred Stock Preference Stock,$8.00 Series Preference Stock,$8.40 Series Preference Stock,$8.70 Series Preference Stock,$11.00 Series Preference Stock,$13.00 Series Common Stock 29 Statistical Summary 1976 1975 1974 1973 1972 Financial Data Capital provided by investors-thousands (a)(b)Return on average capital provided by investors-%(c).Return on average common equity-%(c)....Fixed cost rate on long-term debt and preferred and preference stock-%(a).....Common stock data Book value (a)(c)Dividend payout rate-%(c)........... ~...Dividend yield-%(d)Price earnings ratio (c)(d)Times interest earned before income taxes (c).Number of shareowners -preferred, preference and common (a)............... Sales Data Electric customers (a)Electric energy sales-millions of kwh Residential Commercial Industrial Other.8.83 11.61 8.76 12.52 8.49 12.65 7.90 11.89 7.53 11.60 7.91 7.76 6.82 6.17 5.99$23.45 68 8.1 8.3 2.62 184,841 936,219 7,267 4,874 7,481 732 20,354 23.17 63 9.1 6.9 2.80 171,766 917,920 6,818 4,575 7.020 700 19,113 22.91 62 11.5 5.3 2.92 154,126 902,148 6,494 4,275 7,170 1,024 18,963 22.51 64 8.4 7.6 3.15 142,235 886,378 6,324 4,262 6,881 1,398 18,865 21.78 67 6.5 10.3 3.05 135,399 864,439 5,985 3,933 6,458 637 17,013$2,406,136 2,100,003 1,828,888 1,533,861 1,375,031 Sources of energy sold-millions of kwh Generated Coal-fired steam stations Oil-fired steam station (e)........... Combustion turbines and diesels....Hydroelectric stations.............. 25,751 1,947 40 809 25,384 1,149 84 859 27,476 2,241 (8,757)(1,847)19,113 8,528 2.78 28,547 2,126 (8,358)(1,961)8,931 3.10 5,717,000 4,122,000 92.4 4.5 3.1 79.0 75.4 70.1 31.4 1.04 Power purchases Interchange power sales.................. Company uses and line losses............. Total electric energy sales 20,354 Average annual residential kwh use.......... Average price per kwh for all customers-cents Generation Data Generating capability -kilowatts (a).........5,717,000 Peak demand-kilowatts (f)................. 4,514,000 Generation by fuel sources-%Coal~.90.2 Oil (e)7.0 Hydro 2.8 Steam station availability-% Coal-fired ~~~~~~~~~~~~~"~"~78.1 Oil-fired (e)68.8 Steam station utilization -%Coal-fired ........~70.6 Oil-fired (e)26.4 Fuel cost-cents per kwh 1.17 (a)Yearwnd.(b)Includes short-term debt.long-term debt, preferred and preference stock and common equity 24,186 247 772 25,205 1,570 (6,079)(1,733)18,963 8,287 2.44 4,901,000 3,772,000 96.0 1.0 3.0 72.3 66.7 0.88 24,782 273 816 25,871 1,968 (7,237)(1,737)18,865 8.253 2.00 4,903,000 3,662,000 95.8 1.1 3.1 80.6 71.6 0.50 19,097 601 824 20,522 1,784 (3,586)(1,707)17,013 8,032 1.99 4,108,000 3,598,000 93.1 2.9 4.0 76.7 64.3 0.49 (c)Reflects retroactive allocation to prior years of Nonrecurring Credit recorded In 1974 related to change In accounting for fuel costs.(d)Based on year-end market price.(e)First oil-fired steam station unit began commercial operation In 1975 and the second unit began test operation In December 1976.(I)Winter peak shown was reached early in subsequent year.In 1976, peak Is that whIch would have occurred If a 50A)voltage reduction had not been In effect.Actual 1976 peak was 4,425.000 kilowatts. 30 Quarterly Dividends and Market Price of Voting Securities for 1976 and 1975 Reported Market Price-Dollars per Share 1976 Common Stock.......... Preferred Stock 4th%Series 3.35%4A0 4.60%7.40%(a)............ 86P 9.00'lo 9.24%Quarterly Dividends Declared$0.45 1.125 0.8375 1.10 1.15 1.85 2.15 2.25 (b)1st Quarter High Low 21%191/s 53 47 37'h 34 51 th 44'/s 50 48'h 98 87 97 92 2nd Quarter High Low 20'/i 19'h 51~h 47~/4 36 33 50 46 48'h 46 95 90 96 89 3rd Quarter High Low 21/4 20 52'h 48 36'/4 34 51'ls 47'ls 49y4 47'h 98 92'/s 97'/4 94 104ih 99'/4 4th Quarter High Low 22@20%54'h 50'h 38 36~h 53th 48 52 49 99'h 95 101 98 106'h 103 Preference Stock$8.00.................. $8.40................ ~.$8.70.................. $9.25(a)$11.00........~.~......$13.00................. 2.00 2.10 2.175 2.3125 2.75 3.25 86 77 87 81%88 83'h 89 80'/4 89 82'h 92 87'h 94 82 94 87'/i 94 88 111'h 102'h 112 107 112r/s 109M 125'h 117'h 124 119 130 120'h 90@82t/4 95'h 91 99 91'h 114th 109rh 130'h 125 1975 Common Stock.......$0.45 20 15Ys 19r/s 17 ls 19r/s 17s/s 19/s 17%Preferred Stock 4'%eries 3.35%4.4p 46p 7.40%(a)...8.60%9.PP Preference Stock$8.00.............. $8 40.............. $8.70.............. $9.25 (a)$11.00............. $13.00............. 1.125 0.8375 1.10 1.15 1.85 2.15 2.25 2.00 2.10 2.175 (c)(d)3.25 52 44%35 31'h 50'h 41'h 50 44 93 79'h 95 80 85 69 89 73 92 79 120 105 49'h 45'h 49 45'h 49 44 h 88'h 84 88'h 81 90 82 90 88 91 88 95 88 82 75 81 76 79 74 85 78'h 84'h 77'/4 84 78 88'/s 82 88'h 80'/s 87'h 80'h 118 111 103 100'h 106'h 100'/4 118 110'h 119'h 112 34 33 35 32 35 32'h 47'h 43 48 44 46'h 43'h 47'h 45'h 47 45 49 45 The principal trading market for all classes of stock is the New York Stock Exchange except for the 3 35%, 4 60%and 9 00%Series Preferred Stocks whIch are listed on the Philadelphia Stock Exchange but are traded principally over the counter.Price ranges for the 3.35%, 4.60%and 9.00%Series Preferred Stocks are based on the best available high and low bid prices during the periods and should be viewed ss reasonable approximations.(a)Stock was a private placement and Is not publicly traded.(b)Stock issued June 1976, tho third quarter dividend was$2.67 and tho fourth quarter dividend wss$2.31.(c)Stock issued In September 1975, fourth quarter dividend was$2.3362.(d)Stock issued August 1975, the third quarter dividend was$1.01 and the fourth quarter dividend was$2,75.31 Officers Dlfectol s JACK K.BUSBY, Chairman ol the Board and Chief Executive Oflicer ROBERT K.CAMPBELL, President ROBERT R.FORTUNE, Executive Vice President, Financial BROOKE R.HARTMAN, Executive Vice President, Operations JOHN T.KAUFFMAN, Vice President, System Power&Engineering EMMET M.MOLLOY, Vice Presldont, Human Resource&Development LEON L.NONEMAKER, Vice President, Division Operations CHESTER R.COLLYER, Treasurer NORMAN W.CURTIS, Vice President, Engineering &Construction JOSEPH L.DONNELLY, Vice President, Finance LOUISE A.EARP, Assistant Secretary CHARLES E.FUQUA, Vice President, Susquehanna Division CHARLES J.GREEN, Vice President, Harrisburg Division RICHARD H.LICHTENWALNER, Vice President, information Services CARL R.MAIO, Vice President, Lehigh Division JAMES J.McBREARTY, Vice President, Northeast Division EDWARD M.NAGEL, Vice President, General Counsel and Secretary HERBERT D.NASH JR., Vice President, Consumer&Community Services EDWIN H.SEIDLER, Vice President, Distribution BRENT S.SHUNK, Vice President, Lancaster Division JEAN A.SMOLICK, Assistant Secretary DONALD J.TREGO, Assistant Treasurer GEORGE F.VANDERSLICE, Vice President and Comptroller PAULINE L.VETOVITZ, Assistant Secretary HELEN J.WOLFER, Assistant Secretary Corporate Managomont Commluoo: Jack K.Busby, chairman;Messrs.Campbell, Fortune, Horlman, Kauffmon, Molloy, Ncnomakor ond Fred Kornot Jr.~manager-corporate Administration sorving as lho commlttoo's oxocutivo secretary. The executive organization chart ct the Company ls included in the PP&L Profile.JACK K.BUSBY, Allentown Chairman of the Board and Chief Executive Oflicer ROBERT K.CAMPBELL, Allentown President RALPH R.CRANMER, Williamsport Member ol Board of Directors-Grit Publishing Company EDGAR L.DESSEN, Hazleton Physician-Radiologist ROBERT R.FORTUNE, Allentown Executive Vice President, Financial BROOKE R.HARTMAN, Allentown Executive Vice President, Oporations HARRY A.JENSEN, Lancaster Executive Vice President, Armstrong Cork Company, Manufacturer of interior furnishings and specialty products VIRGINIA H.KNAUER, Philadelphia" Lecturer on Consumer Affairs W.DEMING LEWIS, Bethlehem President ol Lehigh University JOHN A.NOBLE, Scranton Chairman ol the Board and Chlel Executive Oflicer ol Cleland Simpson Company, Department stores RUTH PATRICK, Philadelphia Chief Curator of the Limnology Department, Academy of Natural Sciences NORMAN ROBERTSON, Pittsburgh Senior Vice President and Chief Economist ol Mellon Bank, N.A.JOSEPH T.SIMPSON, Harrisburg Chairman of the Board of Harsco Corporation, Diversified manufacturer of fabricated metal products CHARLES H.WATTS II, Vienna, Va.President and Chief Executive Oflicer of The Wolf Trap Foundation for the Performing Arts Executive Committoo: Jack K.Busby, chairman;Messrs.Campbell, Cranmor, Harfman, Jensen and Simpson.Audit Commluoo: Mr.Jensen, Dr.Patrick and Mr.Watts.'Mr.Hartman will nof be nomlnatod to the board of directors at tho1977 annuol mooting of sharoownors in view of his rotiromonf on June 1, 1977."Virginia Knauor, forrnor spoclal assistant for consumer affairs fo Prosldont Ford, was oloclod a PP&L dlroclor offoclivo March 1, 1977.Subsequent to Mrs.Knauor's selection. Clifford L.Aloxandor Jr., who was a director during all of 1976, roslgnod from the board when ho became Secretary of the Army in the Carter administration. The Company files Form 10-K annually with the Securities and Exchange Comrnlsllo. Form 10-K Is composed of this Annual Report to sharoownors and additional Information concernIng the Company and Its operations. ThIs additional Information will be available without charge after April 1, 1977 by writing to Pennsylvania Power&Light Company, Two North Ninth Street, Allentown, Pa.18101, attention: Mr.George I.Kllne, Investor Services Manager.32 PAL's New President<xm4', Robert K.Campbell, 47, is PPLL's new president. Jack K.Busby, Company president since 1957, moved up to chairman of the board while remaining as chief executive officer.PP&L's board of directors elected the two to their respective positions at the January 26, 1977 board meeting.'Campbell had been general manager-4, administration for Western Electric, the nationwide manufacturing arm of the Bell System.The Campbell decision was made by a special committee of the board which was made up of Messrs.Busby, Cranmer, Jensen, Lewis and Simpson.The selection followed many months of consideration on whether the future needs of the Company would best be served by bringing in from outside an executive at the top level.Campbell is a Chicago native, an Army veteran, and since 1967 has been an Allentown resident very active in civic affairs.His advanced education spans three professions. In engineering, he has a bachelor's degree from the Illinois Institute of Technology and a master's degree in mechanical engineering from the University of illinois.In busi-ness administration, he has a master's degree from the University of Chicago.And in law, he holds a doctorate of jurisprudence from Loyola University. Campbell joined Western Electric in 1957 as a development engineer at the Hawthorne Works in Chicago, advancing to department chief in 1961.He was promoted to assistant manager in 1963 and was assigned to the Public Rela-I tions Division at Western Electric's headquarters in New York City.In 1965, he was transferred to Western's new plant in Shreveport, La., as assistant manager of engineer-ing and was named manager the following year.Campbell moved to Allentown in June 1967 after he was promoted to manager-development and manufacturing engineer of the Western Electric Allentown Works.He was advanced to director of man-ufacturing in 1969 and was named general manager of the Reading, Pa., Works in 1971.In 1972, he was named general manager of the Allentown Works, serving until his appoint-ment in June 1976 as general manager-admin-istration for Western Electric's Manufacturing Division at corporate headquarters in New York.Campbell is a registered professional engineer and holds membership in the American Society of Mechanical Engineers. He also is a member of the illinois Bar Association. Campbell has already begun an intensive pro-gram of visiting throughout the Company's service area to get to know as many employees as possible and to become familiar with the complexities of the business.He sees a basic challenge in the increasingly difficult task of balancing the often-conflicting needs of the customers PPLL serves, the employees who provide the service and the investors who put up the money to make the service possible. PPaL PENNSYLVANIA POWER 8 LIGHT COMPANY Two North Ninth Street, Allentown, Pa.18101 Telephone: Area Code 215 821-5151 LITHO IH U.S.A. PENNSYLVAN(A POWER 8c LlGHT COMPANY~1973 annual report HIGHLIGHTS Revenues-thousands Net Income-thousands.Earnings Applicable to Common Stock Amount-thousands.................,..As a%of Average Common Equity.......Earnings Per Share-based on average number of shares outstanding Dividends Per Share.Common Stock Data Reported market price per share High.Low.Book value at year end Dividend payout rate-%Dividend yield-%(a)Price earnings ratio (a)Utility Plant-thousands (a)Based on year-end market price.1973$384,814~$66,912$49,721 11.7$2.57$1.68$26$19$22.31 65 8.4 7.8$1,846,332 Wg~1972 345,792 57,921 43,395 11.7 2.48 1.64 27 22s/4 21.63 66 6.5 10.2 1,637,040 1971 300,707 48,572 37,180 11.8 2.37 1.60 26'/4 21s/s 20.60 68 6.4 10.5 1,458,707 1970 255,313 34,935 28,509 10.2 1.97 1.60 27'/s 20'/s 19.62 81 6.8 12.0 1,275,866 1969 223,388 34,609 30,787 12.5 2.32 1.60 34'/2 23'/4 19.10 69 6.5 10.6 1,120,022 Contents The Year in Review The Fuel Situation Service Area Map Financlals Notes to Financial Statements Directors and Principal Officers 2-9 10-12 13 14-20 20-23 24 Cover Photos: Fronl: PP&L's new Power Control Center in Allentown will be the nerve center of the Company's electric generation and distribution system when it becomes fully operational in May 1974.It features the newest, most up-to-date computer and electronic equipment available. When completed it will be In constant computer communication with the Pennsylvania-New Jersey-Maryland (PJM)'nterconnection control center at Valley Forge.Back: PP&L's newest power plant, Montour Steam Electric Station at Washingtonville, Pa, north of Danville.Unit No.2 went into commercial operation in April 1973.Both units ran extremely well throughout the year and played an important part in the Company's improved 1973 earnings.~((((((DON RCC(Cl(O tA(II PP&L: ENERGY IN PERSPECTIVE g)l(">>"~j f,'jii,,',",'Il.'l',,',i','"",l'lg'('j""jest.(IW'l, Despite longstanding predictions of im-pending domestic short'ages of oil and natural gas, the severe consequences of the Arab oil embargo have generally come as a surprise.The impact has been so substantial and so abrupt that there have been widespread feelings of shock, anger and disbelief. And considerable scapegoating. In any event, the recent Mideast events emphasize that the nation was long overdue in facing up to the complex and costly requirements of es-tablishing a reasonable self-sufficiency of energy.Inescapably, we now have before us a huge and multifaceted task.Where does PP&L stand in terms of the new energy scenario'? Here are some points that we particularly want to bring to your attention. PP&L has a favorable generating ca-pacity and fuel position at this time.Gen-erating equipment performance is good.We have adequate capacity reserves.And no"old" power plants.About 96 per cent of our power generation in 1973 came from coal-burning generating units.In early March, we had an average of 55 days of coal stocks at our power plants.However, the supply situation is becom-ing very tight.More than half our coal is being produced by mines that are en-tirely committed to PP&L's needs on a long-term basis.Our fleet of unit coal trains integrates these mines with our main power plants.One reservation should be mentioned. PP&L does not and cannot operate as if it were a separate electrical island.We are part of a very large regional power supply network.Critical regional short-ages of fuels for electric generation might require us to operate our facilities in whatever ways are determined to be necessary from the standpoint of the overall regional/national public interest.In 1974, conservation efforts will probably result in less than anticipated use of electricity. For the current year, kilowatt-hour sales are forecast to be 19.7 billion instead of 20.7 billion.Never-theless the revised and lower forecast projects a 4.2 per cent increase over kilowatt-hour sales in 1973.The most noticeable effects of the conservation ef-fort have come from reduced lighting and adjustment of thermostats. We rec-ognize that there are limits to how much reduction can be accomplished by changing our living habits.Additional conservation results will probably de-velop more slowly because their realiza-tion will largely depend upon the willing-ness of customers to invest in new and more efficient equipment designed to conserve electricity. It's too early to predict all the effects reductions in the use of electricity will have on our earnings.Since our generat-ing plants are coal-fired we believe those plants will continue to run at full capacity.Any electricity not needed by our cus-tomers can be sold to other utilities. However, bulk sales to other utilities are generally at a lower price than received from retail customers. Beyond 1974, we expect a resump-tion of yearly growth rates of seven to nine per cent.For two main reasons-(1)normal growth arising from more peo-ple, more jobs, more homes, more goods and services, and the desire for a better standard of living, and (2)the throwover demand for electricity created by the shortages of oil and natural gas.Based upon our evaluation of growth trends, we are proceeding with our pres-ent construction program without ma-terial change.Estimated cost for the next five years is$2.1 billion.The program is geared to bringing on line 3.7 million kilowatts of new generating capacity-two 800,000-kilowatt oil-fired units at Martins Creek (in 1975 and 1977)and two 1,050,000-kilowatt nuclear units at our new Susquehanna Station (in 1979 and 1981).Beyond that, additional coal, nuclear and pumped storage capacity is in the planning and development stage.We have considered a program to con-vert the new Martins Creek units to coal.We have decided against such action at this time because the major reconstruc-tion involved would make both units to-tally unavailable for the next few years-a period when even their limited output may be most valuable and necessary from a customer service standpoint. Carrying out our construction pro-gram, which means building the new electric facilities that will help to alle-viate the energy crunch, ls interlocked with our ability to raise the money re-quired.Since our operations provide only about 25 per cent of our construction needs, 75 per cent of what we need to build and expand has to be financed by the sale of securities to investors. Raising new capital depends on in-vestor confidence. And such confidence, in turn, depends upon good financial performance by PP&L.In an era of steadily rising costs, peri-odic rate increases will be necessary. Hopefully, it is well understood that obtaining these increases, on a justified basis, of course, is what ultimately makes it possible to finance the new facilities which our customers depend upon for service.It may sound strange, but rea-sonable and timely rate increases are very much in the consumer interest.The nation can overcome the present energy problems.It will take time, at least a decade.Plus a great deal of pa-tience.Plus large new investments for oil, gas and uranium exploration, for con-struction of new pipelines, refineries, coal mines, rail facilities and manpower train-ing, in addition to new power plants and other electric supply facilities. It will also be essential to have a continuing and total commitment to conservation of energy.Our society depends on adequate sup-plies of energy.We can do the job that has to be done if all of us work at it to-gether.In PP&L we will do our best to do our part.Respectfully submitted, March 5, 1974 Jack K.Busby, President THE YEAR IN REVIEW In 1973 we recorded measurable progress in many areas of Company activity.Revenues reached the$385 million mark, up 11.3 per cent over 1972.Part of this rise, of course, came from the 2.7 per cent rate in-crease allowed by the Pennsylvania Public Utility Commission (PUC)ef-fective June 2, 1973.Also, after nine months of PUC in-vestigation, and 4,000 pages of testi-mony and exhibit material, additional rate relief averaging 5.7 per cent was granted effective Jan.10, 1974, for a total increase of 8.4 per cent or$28.5 million in new annual reve-nues.Kilowatt-hour usage increased 5.7 per cent over 1972 in the residential category, 8.4 per cent in the com-mercial area and 6.5 per cent in the industrial sector.The overall rate of growth was 10.9 per cent, including contracted sales to the Metropolitan Edison Company which accounted for 4.3 per cent of the overall growth.All this despite our intensive efforts since 1972 in urging energy con-servation measures by all of our customers. We did begin to see a reduction in the rate of growth toward the end of the year after President Nixon's call for a concerted nationwide effort to save energy.In November, PP&L began to notice a cutback in our customers'se of electricity. The downward trend continued through December when kilowatt-hour usage by our customers was down nine per cent below estimates. We were able to attribute two per cent of the reduction in December to warmer-than-normal weather.The remaining seven per cent represents the efforts of a great many people to use electricity sparingly. Especially obvious was widespread coopera-tion in not installing outdoor Christ-mas lighting.Effects on Construction Certainly we have asked ourselves what implications this decline in growth may have on our long-term construction program.We concluded that we cannot re-gard the decline as more than a tem-porary leveling-off of the long-term growth rate.People can only con-serve so much.For example, they can't go on setting thermostats back an additional five degrees every win-ter.We feel that demand will drop back to a new base and then con-tinue its traditional steady climb upward as we are expected to ac-commodate the normal growth of new homes and businesses in our service area.In 1973 alone, the number of customers we served in-creased by nearly 22,000.We are also beginning to experi-ence a"throwover" effect that has been occurring as some present customers switch from other energy sources to electricity and new cus-tomers select electricity instead of other energy sources to serve their needs.If we are to meet our mission of planning many years ahead to have sufficient generation and delivery facilities ready to meet our custom-ers'eeds decades from now, we obviously cannot afford a wait-and-see attitude.We must press on with our construction programs.A significant 1973 milestone in our construction program was the completion and start-up of the coal-fired No.2 unit at Montour Steam Electric Station which went into commercial operation in April of 1973 and added 750,000 kilowatts to our generating capacity.The Com-pany's total generating capacity at year-end was 4,903,000 kilowatts, nearly three times our capability at the end of 1963.Meanwhile, work continues on two 800,000-kilowatt oil-fired units at the Martins Creek site on the Delaware River where we already have two small coal-fired units.At the end of 1973 Unit No.3 was 68 per cent complete and No.4 was 11 per cent complete.The first of the big new units is expected to begin test oper-ations later.this year with an in-service date set for early 1975.Work on the pipeline which is the planned oil delivery system for the two units has not begun despite au-thorization by the PUC in February 1973.Additional required approvals must be obtained from the Delaware River Basin Commission and other appropriate agencies and authori-ties.In the meantime oil delivery by rail is being planned.A full discus-sion of the fuel situation follows on page 10. PP&L, in cooperation with the Western Precipitation Division of Joy Manufacturing Company, has installed a pilot sulfur dioxide removal system on Sunbury Steam Electric Station's Unit No.4, right.The one-year pilot program is testing a wet-limestone scrubber system's ability to remove sulfur dioxide (SO>)from a generating unit's stack gas before it canbe released into the atmosphere. During 1973, coal was king at PP&L.About 96 per cent of the nearly 26 billion kilowatt-hours of electricity generated by PP&L last year came from coal-fired units.More than 70 per cent of that total came from the Brunner Island generating plant, shown below, and the Montour plant, shown on the back cover.The fine performance from both plants contributed a large share to improved 1973 earnings. 'H le r'1 J~In Allentown, a seven-level Gen-eral Office addition was completed in June just north of and connected to the present 23-story headquarters building.The new building doubles the floor space of the original Gen-eral Office structure and allows the consolidation of personnel from sev-eral rented office annexes scattered in downtown Allentown. The main feature of the building is the Company's new Power Control Center shown on the front cover.It incorporates the newest computer and electronic equipment and is one of the most up-to-date facilities of its kind in the country.This equip-ment will allow monitoring and re-mote control of functions and opera-tions to an extent never before possible.For the Company and its customers it means greater reliabil-ity and higher operating efficiency. Two additional 800,000-kilowatt oil-fired units are moving along on schedule at Martins Creek.The first, Unit No.3, is expected to begin operation early in 197S.Although the pipeline, being built by Interstate Energy Company to supply crude and residual oil to the plant, is being held up pending approvals, stop-gap rail delivery of the oil has been arranged.P'.~,~Pc, I I rc'1 r f F LC I Pi Components of two reactor pressure vessels complete their 1,000-mile barge journey up three rivers and across eight states, from Memphis, Tenn.to Freeport, Pa.From there they were trucked to Montour Steam Electric Station for storage until extensive site preparation is completed at the Company's first nuclear station now being constructed near Berwick.Because of the long lead-time necessary in building a nuclear plant, the components had to be ordered in 1971 even before PP&L submitted its application to the Atomic Energy Commission for a construction permit.Delivery to the Montour site saved several hundred thousand dollars in out-of-state storage fees.Nuclear Plant Construction Under Way After 31 months of intensive review by the Atomic Energy Commission (AEC)and other federal, regional, state and local agencies of the safety and environmental aspects of our first nuclear plant, PPBL was given the go-ahead by the AEC on Nov.2 to begin construction of the Susquehanna Steam Electric Sta-tion.Earth-moving work began three days later at the 955-acre site north of Berwick.The first of the twin 1,050,000-kilowatt boiling water re-actor generating units is scheduled to be completed in 1979, the second in 1981.When completed it will rep-resent nearly one-quarter of the Company's installed capacity at that time.With a price tag of nearly$1.4 billion, the nuclear plant is the larg-est single construction project ever undertaken by the Company.Even with the very large capital costs, the Company expects to real-ize very significant savings over the 30-year operating lifetime of the plant.This is due to the lower and.more stable prices we expect for nuclear fuel compared to coal and oil.In a time of tight oil supplies and doubt over environmental restric-tions on the use of coal, nuclear generation provides an attractive al-ternative to provide an adequate supply of electric energy while be-ing both environmentally and eco-nomically attractive. Energy and the Environment In expanding our energy supply we are doing our best to find a balance between adequate energy and an acceptable environment. Our objective continues to be to minimize the impact of our opera-tions on the environment. Two of our ongoing environmental projects were focused on the Sun-bury Steam Electric Station where we have two anthracite and two bi-tuminous coal-fired generating units.Installation of a$5.5-million dust collecting system for the anthracite units was completed in June.The collection equipment is a bag filter-ing system which removes fly ash from stack emissions of the anthra-cite-fired boilers at the plant.Each of the four"baghouse" structures is 71 feet long, 40 feet wide and nine stories high.Fiberglass bags, 1,260 of them, were installed in each filter-ing unit.Each bag is 30 feet long and a foot in diameter.The bags, in series with the old mechanical collectors, are now re-moving better than 99 per cent of the fly ash from exhaust gases be-fore they reach the stacks.We had previously installed mechanical and electrostatic dust collecting devices on all units at the plant.However, the combination was found to be un-satisfactory on the anthracite boil-ers due to special fly ash entrapment problems associated with using hard coal.Various steps are under way to bring under acceptable control the particulate, or fly ash, emission from stacks on our other bituminous coal-burning generating units throughout the PP&L system.Also installed at Sunbury was a pilot sulfur dioxide (SO2)-removal system on Unit 4 which burns bitu-,minous coal.The project is the re-sult of a joint research agreement between PP&L and the Western Pre-cipitation Division of Joy Manufac-turing Company.The'wet scrubber" system, which uses a limestone water spray to remove SO2 from flue gas, is still in the research stage and we hope to gain experience here that will be useful when a design basis for larger bituminous units is developed in the years'ahead. Results so far are en-couraging and an extension of the test period for another year is being negotiated. The coal we burn contains both organic and pyritic sulfur.The or-ganic sulfur is inherent in the coal and extremely difficult to remove prior to burning.But a large per-centage of pyritic sulfur can be re-moved from bituminous coal.We are presently installing, at our mines, mechanical cleaning equipment de-signed to reduce the pyritic sulfur content sufficiently to provide coal with a total sulfur content of not more than 2.5 per cent.We appreciate, of course, that when technology to remove sulfur and nitrogen oxide from stack gases becomes a reality, we may have to install additional equipment to meet more stringent.air pollution stand-ards in the future.In Lancaster, the Company was praised for the environmental com-patibility of its new$1.1 million downtown Prince Substation. An at-tractive eight-foot-high brick wall screens the low-profile substation structure and equipment from the view of passersby. The wall has a colonial motif, plantings and other aesthetically pleasing features.In the Company's northeast area, demolition work was begun on the plant structures at our former Hauto and Stanton steam electric stations which ceased operations in 1969 and 1972 respectively. The plants will be razed and the land contoured and planted to restore it to a condi-tion environmentally compatible with the surrounding area.Financing About$225 million was spent for ex-pansion and improvement of our fa-cilities in 1973.For 1974, the figure is expected to rise to$305 million.And for the five years 1974 through 1978, the amount is$2.1 billion.Added to this will be$147 million we'l need to repay maturing debt in the next five years. -Only about one-fourth of the money we need to finance this con-struction can be generated internally from Company operations'. The rest must come trom new capital invest-ment in the Company.To finance in part our construc-tion program and to repay maturing debt obligations in 1973, the Com-, pany sold common and preferred stock, first mortgage bonds and an unsecured note.(See page 18 for a summary of our busiest year ever in the capital markets.)During 1974, we anticipate the need to issue about$250 million ot new securities. To maintain the abil-ity to raise this new capital for our expansion programs, PP&L must continue to be an attractive invest-ment and provide a fair return for in-vestors.Research America has a national dilemma to face up to.Whether we call it an energy crisis, or a crunch or a fuel problem, the fact is our energy de-mand is larger than our supply.For the short-term, Americans are combatting the problem by putting themselves into an emergency pos-ture, forsaking large growth gains and cutting back on energy use.That's part ot the long-range so-lution, too.But an equally important part is research.The federal govern-ment is allocating vast amounts ot money for research in the perfection of the breeder reactor and in the search for alternate sources ot en-ergy.The electric industry is doing the same thing.PP8L's research budget is about$2 million for 1974, of which some$360,000 will go into a liquid metal fast breeder reactor demonstration plant to be constructed near Oak Ridge, Tenn.Around 85 per cent of the country's utilities have pledged over$300 million for this demonstra-tion project being built by the Ten-nessee Valley Authority and Com-monwealth Edison Company.Nearly a million dollars of PP8L money will go to the Electric Power Research Institute (EPRI)under sponsorship of the Edison Electric Institute, the industry's trade asso-ciation, which is vastly expanding its research program..Such projects as coal gasifica-tion and liquefaction, the fuel cell, magnetohydrodynamics (MHD), nu-clear fusion and ultra-high voltage research are being given top priority.Closer to home, PP8L is building an"Energy Conservation Home" at Schnecksville, northwest of Allen-town.The home is primarily a re-search project designed to make optimum use of energy in every way possible in a single-family-home without changing people's lifestyle. The two-story, three-bedroom house will contain experimental equipment and systems which will be constantly monitored in an effort to find and document ways of reduc-ing energy use and cutting electrical demand.The unique heating system inte-grates solar collection panels and heat reclamation devices to recover waste heat from appliances such as dishwasher, washer, dryer and re-frigerator, as well as waste-water heat, fireplace flue gases and even the heat of decomposition in the septic tank.Basically, the house will be heated and cooled by a water-source heat punlp.New construction techniques in-clude the use of styrofoam sheath-ing and foamed-in-place urethane around doors and windows.The house should be fully tested.and evaluated by 1975 after a typi-cal family has lived in the home.PP8L will then make the results known and offer plans for the home to contractors, builders and the public.r Energy Conservation PP&L has been encouraging energy, conservation since early 1972 when we completed a dramatic turn-around in our marketing policy.We recognized in the late 60s that our society could not go on consuming energy resources at the ever in-creasing rate it had in the past, and that wasteful practices must be elim-inated.Our objective in the turn-around effort was to hold down the rate of rise in the demand for more and more electric energy to gain time to find solutions to the problems before us.We turned from promoting electric use to urging wise use of all forms of energy, including electricity. Members of our Consumer 8 Community Affairs Department have been working as consultants and helping our residential, commercial and industrial customers. find the most efficient and wisest ways of using electricity. An important part ot this group's efforts has been an information and educational program to convince the public of the need for conservation. Two presentations,"The Energy Crisis" and"Homecology," have been given to over 56,000 people. On an individual basis PPB L con-sultants have been advising residen-tial builders and developers on the latest techniques for improving the insulating qualities of homes and apartments and helping in the selec-tion of energy-efficient appliances and heating and cooling equipment. Our industrial and commercial consultants have been working with customers to set up energy man-agement teams to evaluate all energy consumption within their business operations. These teams then identify on a continuing basis those areas where waste can be eliminated. Additionally, PP&L-sponsored training sessions or energy man-agement forums were held with local and state government engineering and operating personnel, and school building maintenance engineers and administrators. Also included were architects and design engineers and top managers from the largest in-dustrial plants within the Company's service area.Within our own operations a top speed of 50 miles an hour was di-rected for all employees driving on Company business, and a similar re-striction urged in personal driving.This effort came on a Company-wide basis in June, several months before a nationwide plea was issued by the President. Decorative lighting was elimi-nated at all Company facilities in March 1973 and heating and light-ing levels were reduced in our build-ings systemwide during the ensuing months.Through December these efforts amounted to a demand re-duction of about 1,200 kilowatts. ~XP~+1)tx A 4 P A urethane plastic mixture which expands, in a few minutes, to 15 times its liquid volume is cutting by half the time it takes a PP&L crew to"set" large transmission poles.The liquid is pumped around the pole where it begins to"cure" and rise or expand like bread dough.The finished product is stronger than packing the hole with soil and the foam seals out moisture and air in addition to being insect, rot, water and corrosion-proof. The atomic absorption spectro-photometer now in use at the Company's Chemical Laboratory at Hazteton does, in a few hours, analytical work that used to take a full day.The instrument can detect quantities of 70 different metallic elements in solution with an accuracy down to parts per billion in a sample. Extensive analysis is continuing throughout the Company to see where further energy cuts can be made.People Significant to our employees'e-velopment in 1973 was the initiation of apprentice programs in the line-man, electricrepairman, transporta-tion and underground repairman job classifications. For the employee who enters any of the programs it will mean inten-sive, documented on-the-job and classroom training and the opportu-nity to become one of the most well-trained workers in the Company's history.While content does vary, of course, there will be three or four levels in each of the apprentice pro-grams spanning a'three-or four-year period.The on-the-job training portion of the programs is designed to insure that each person is given a wide range of tasks upon which to build experience, as well as prepare the employee for higher level training.The program will offer all who par-ticipate an equal opportunity for ad-vancement. No longer will supervisors have to rely solely on memory and judgment to decide whether an employee has the necessary skill and experience for advancement. Now there will be documented evidence of a trainee's experience and performance in nu-merous specific training areas.This is just one way we are trying to work smarter.Another way we are trying to work smarter and more effectively and to increase productivity involves the realignment of our Engineering and Nuclear Development departments. In the past, power plants were either coal-fired or hydro projects, built and designed on a one-at-a-time basis.An organization struc-tured by engineering discipline was able to cope with this challenge. Today, however, we find our-selves in a multi-plant, capital-in-tensive situation where long lead times and growing energy demands result in concurrent planning, design and construction of various types of power plants.It is essential, there-fore, that our organizational struc-ture allow optimum use of our human resources to complete projects on schedule, within budget and within specified quality limits.Accordingly, our Engineering and Nuclear Development departments were reorganized on a project basis for major power plant projects.For example, a self-contained engineer-ing project team including all engi-neering disciplines (mechanical, civil, electrical, etc.)will be assigned to each new power plant project rather than passing the plans from one functional department to an-other and trying to assign proper priorities. Some of the same procedures will be carried over into the design and engineering for large new transmis-sion lines, substation and related research and development projects.Besides better utilizing our human resources, we expect that the result-ing standardization in design, con-struction and operation of these projects will help us attain signifi-cant cost reductions without sacri-ficing quality control or construction schedules. The problems and challenges we face today are very different from those we faced only a few years ago.This is one way we are changing to meet these challenges.-In the area of union relations, this spring will mark the end of the three-year labor contract between the Company and the 5,000 members of the Employees Independent Asso-ciation (EIA)and the 330 members of the Scranton local of the Inter-national Brotherhood of Electrical Workers (IBEW).Negotiations for a new contract with the EIA and the IBEW are expected to get underway shortly.Management Changes A number of executive appointments were made during 1973.Edward M.Nagel, general coun-sel and secretary was appointed vice president, general counsel and secretary. Charles J.Green, director, Per-sonnel, was appointed to succeed Jack Hanckel as Harrisburg Division vice president when Hanckel retired on March 1, 1974 after 43 years with the Company.Brooke R.Hartman, vice presi-dent, Division Operations, was ap-pointed executive vice president, Operations effective March 1, 1974.He succeeded Executive Vice Presi-dent Austin Gavin who retired on that date after more than 37 years with PP&L.The appointment of an executive vice president of Operations will help in the more effective manage-ment of day-to-day operating prob-lems that are separate and distinct from long-range corporate planning-and decision-making. Leon L.Nonemaker, vice presi-dent, Consumer&Community Affairs, was named to succeed Hart-man as vice president, Division Op-erations.John T.Kauffman, assistant vice president, System Power&Engi-neering, was appointed vice presi-dent, System Power&Engineering to succeed Gavin who headed SP&E in addition to his duties as executive vice president. Both Nonernaker and Kauffman report to Hartman.Herbert D.Nash Jr., manager, Consumer&Community Services, was named vice president, Con-sumer&Community Services, suc-ceeding Nonemaker. Three new vice presidential posi-tions have been created.The ap-pointments, which were effective Jan.1, 1974, reflect the increasing demand on the resources of various corporate functions and the expand-ing responsibilities associated with challenges facing the Company.Norman W.Curtis, manager, Engineering &Construction, was named vice president, Engineering &Construction within SP&E.Richard H.Lichtenwalner, man-ager, Communication Services, was named vice president, Public Rela-tions within the Human Resource&Development Department. Edwin H.Seidler, manager, Distribution, was appointed vice president, Distribution, in Division Operations. Dr.Eugene S.Farjey, a director from 1962 to 1972, died on Sept.17 at his home near Beaumont, Pa.Dr.Farjey served as the first president of Wilkes College in Wilkes-Barre from 1947 to 1970 when he retired from that post.He was also chancel-lor of the college from 1970 to 1971.'j 4~PP8 L's Montour Preserve, built near the new Montour plant to provide an emergency back-up water supply, is becoming very popular as a four-season fishing, recreation and ecological-study area.The Company has sponsored several fishing clinics for area youngsters in cooperation with the Pennsylvania Fish Commission. Ij ti LI t,$JI$r)I r (r w In fncreasing numbers women are turning to physical-labor jobs traditionally hetd by men.This young woman sought and won a position as a laborer on a construction crew where she learned to use a power hack saw.PP&L has been encouraging women to broaden their interests and seek jobs that, until now, have been regarded as in the male domain.The Company feels that if a woman can do a job, she should have an equal opportunity to have it. THE FUEL SITUATION The energy crisis is no longer theoretical. In last year's annual report we discussed the growing-signs that we were headed for trouble.This year we have all been asked to lower our heat and cut back on our lighting.We can't buy gasoline on Sundays and the rest of the week we may en-.counter long lines, limited purchases and high prices.Few of us are so insulated from the real world that we haven't been affected in some way by the shortage of fuel.Although we would probably all agree that we do have a problem, it's hard to find a consensus on just how bad the situation really is.The prob-lem is compounded by a lack of hard data from well established sources on how much oil is avail-able, where it's coming from, where it's stored and where it's going.Origins of the Problem As a society, we helped bring the problem upon ourselves by trying to attain some lofty and lauda-ble goals.Oil imports came about because it was cheaper to produce a barrel of oil in the Mideast than in the U.S.-the aim was to do something good for the consumer, give him all the energy he could use at low prices.Coal declined as one of the primary fuels partly because mine health and safety laws made it more expensive to get the coal out of the ground and environmental standards were set that prevented much of the available supply from being burned.Again the objectives were good-safer working conditions for miners and a cleaner environment for all of us.An understandable goal of making sure the public is safe and free from manmade radiation hazards continues to contribute to delays in the use of nuclear power on a widespread basis." Society craved more cheap energy on the one hand while limiting supply on the other.And so our objectives are beginning to clash.We are at the receiving end of our conflicting goals.No Lack of Resources Just because we are short of energy supplies, primarily petroleum products, doesn't mean we lack energy resources. The U.S.Geological Survey estimates that the U.S.alone has:-Potential oil reserves of 450 billion barrels, or 80 times our consumption in 1971.-Potential natural gas reserves of 2,100 trillion cubic feet, equivalent to almost 100 times our 1971 consumption. -Potential coal reserves of about 390 billion tons, or about 800 times what we used in 1971.For decades we have been using the cheapest, most readily-available fuel supplies.But, as this energy supply becomes more restricted, the un-tapped potential begins to look more attractive Oil wells once considered marginal begin to show a profit as low petroleum prices begin to rise.More exploration to get at less-readily available supplies begins to be economically feasible.The Company believes that, for the long run, the best approach to having adequate energy supplies is a free and open market.No one can repeal the laws of supply and demand.Not all of that energy potential we mentioned is clean fuel~We are either going to have to be more tolerant about air pollution standards or we are going to have to find ways to use dirty fuels in a cleaner way...and that will cost even more.But society will have to make the choice.PP&L's Situation A full discussion of all the ramifications of the fuel crisis and how it affects all of us would take much more space than we have in this report.However, there are a few points that should be made about the situation at Pennsylvania Power&Light Company:~About 96 per cent of our electric generation came from coal in 1973.~Our coal reserves add up to 120 million tons through ownership or control of five mines in west-central Pennsylvania and through long-term contracts for open-market coal.We expect to substantially increase these coal re-serves in 1974, so we are assured of a stable supply of coal for many years to come.~Although the cost of open market coal has been increasing sharply in recent months, PPBL is able to recover these increased costs through a fuel adjustment surcharge written into our rate structure and approved by the Pennsyl-vania Public Utility Commission and the Fed-eral Power Commission in 1970.~PP8L's seventh unit coal train is expected on the rails at mid-year.Each of the trains in the fleet has between 105 and 131 cars, and carries more than 10,000 tons of coal each trip from mine to power plant.~The Penn Central Railroad, which last year was on the verge of liquidation, has been included in a sweeping overhaul of the faltering rail net-work serving most of the Northeast and parts of the Midwest.Since practically all of our coal comes to us over Penn Central tracks, the pos-sibility that the line would go out of business did cause us a great deal of concern last fall.Legislation pumping nearly$560 million into the reorganization of seven bankrupt railroads, including Penn Central, gives us some assur-ance of continued service.~By virtue of PP8L's high percentage of coal-fired capacity, and adequate reserves, the Com-pany in 1973 was able to provide seven billion kilowatt hours of electricity to companies which are more dependent on oil, mostly in the Penn-sylvania-New Jersey-Maryland (PJM)power pool.This coal-generated power is estimated to have saved about 300 million gallons of oil.Why Oil at Martin's Creek?With oil becoming scarce, PP8L's decisions over the years to depend heavily on coal begin to look better and better.Why, then, is PP&L building two new 800,000-kilowatt units at Martins Creek which will burn oil?That's a natural ques-tion and one we'e been hearing quite a bit lately.An explanation is in order.It takes eight to ten years to design and build a fossil-fuel generating plant.Long before con-struction begins it must be decided what type of fuel will be burned..When the decision was made in 1969 to fuel the two Martins Creek units with oil rather than coal, the following conditions prevailed: ~An increased emphasis on environmental pro-tection meant burning low-sulfur fuels or in-stalling equipment that would remove sulfur gases and particulate. ~The reliability of sulfur-dioxide removal tech-nology for coal-buining units wasn't proven then and still isn't proven.~Studies by consulting firms indicated that the price of low-sulfur coal would rise faster than oil.The studies also indicated adequate sup-plies of low-sulfur coal for a plant this size weren't available east of the Rocky Mountains. ~At the same time, the consultants'tudies con-cluded that plenty of low-sulfur oil would be available and would result in much less envi-ronmental impact from the standpoint. of both sulfur and ash.Is Conversion the Answer?Now with oil in short supply, PP8L is being asked why we don't change our plans in mid-stream and convert to coal.The answer is simple.We are past the point of no-return. It is neither practical nor feasible at this time to convert to coal.To undertake a con-version at this point would bring the project to a halt and mean that no energy whatsoever would be available from these units for a period of five or six years.Clearly, that is not acceptable. The new Martins Creek units will burn either crude or residual oil.When adequate supplies of crude oil are available the units can burn that fuel without going through the intermediate step of passing it through a refinery.This is particularly helpful during periods of tight refinery capacity, such as the country is now experiencing. Residual oil is what remains after refineries have extracted the gasoline and other distillates such as diesel fuel and home heating oil from the raw crude.Residual fuel has such a high vis-cosity that it becomes solid at room temperature and must be heated to make it liquid.It cannot be used for home heating purposes or conven-tional commercial applications. The main user is the utility industry.A major economic and conservation benefit of the Martins Creek units is that they can be used in lieu of generation by combustion turbines which burn only No.2 (home heating)oil and have an efficiency rate significantly lower than the big oil units.The new units are specially designed to be used for peaking purposes, with the capacity to pick up load or drop it quickly to meet fluctuating de-mand.They can be shut down overnight or over a weekend and be started up quickly.The Martins Creek units provide a unique combination of effi-ciency and flexibility of generating characteristics not found in coal-fired units.Since power loads rise and fall sharply during a twenty-four hour period, adequate electric service requires the use of equipment suited for peaking operation. Oil Supply Obviously under today's conditions there is un-certainty over the oil supply situation. Even though we do have commitments for all of the oil for Unit No.3 and 40 per cent for Unit No.4, the supply could be affected by conditions in the Middle East and by government allocation programs.Besides a source of oil, we need a way to get it from the terminal at Marcus Hook, Pa.to Mar-tins Creek.An 82-mile Interstate Energy Co.pipe-line is the planned delivery system for the oil.Even though extensive engineering and right-of-way acquisition have already been completed, construction of the pipeline had not begun at the end of February because of several pending decisions by regulatory agencies and the courts.Even now, though, it is too late to have the pipeline in operation in time for start-up of Unit No.3 in the fall of this year.As soon as this situa-tion became clear, PPP&L began making provi-sions for alternate emergency rail unloading facilities at Martins Creek and terminal facilities there and at Marcus Hook so we would have an assured oil delivery system when the plant is completed. All of these problems just emphasize the com-plexity of looking into the future and making sound business decisions for the years ahead based on conditions as they are today and as we think they will be tomorrow.Long-Range Plans Looking beyond the new Martins Creek units we see our Susquehanna nuclear units coming on the line in 1979 and 1981.Beyond that, we have firm plans for a pumped storage hydroelectric facility and tentative plans for three large new coal units for the mid 1980s.This will give us a good mix of fuels for the future.We won't have all of our generating eggs in one energy basket.However, for the short term, we cannot burn brightly while others sit in darkness.Even though we are heavily dependent on coal and feel we have adequate assured supplies for our needs, PP8L is just a part of the larger regional and na-tional energy supply picture.At this time there is just no way of knowing to what extent we will be required to use our energy resources in aiding others should that become necessary. In spite of the uncertainties that exist we have no doubt that this country can solve the problems that confront it.But, it will take time and money, and a lot of cooperation and understanding. PENNSYLVANIA N.Y.PA.SCRANT N~ALIKES.BARRE y L Walle aupack Plant ILLIAMSPORT ~Susquehann ~Plant~+ontour Plant A DANVILLE~BERWICK~HAZLETON Su bury Plant~~SUNBURY Martins Creek Plant*'OTTSVILLE ~~e&HLEHEu ALLENTOWN NewY r~AR ISBURG~Br nfter Island Plan~LANCASTER Safe Harbor Plant~Holtwood Plant A Philadelphia MD.N.J.~BaltimoPP&L supplies electric service lo a population of 2,309,000 people in a 10,000 square mile area in 29 counties of central eastern Pennsylvania. 'nder Construction " Units No.3 and 4 under construction 13 STATISTICAL
SUMMARY
1973 1972 1971 1970 1969 CAPITAL INVESTMENT -thousands Long-term debt................ Preferred and preference stock-..Common equity............... Short-term debt........Total capital investment .RETURN ON CAPITAL INVESTMENT -as a percentage of average" capital investment ............. NUMBER OF SHAREOWNERS-preferred, preference and common$753,027 271,375 469,608 635,044 231,375 412,130 f 576,760~514,371 196,375 156,375 351,299 303,117 1,494,010 39,851 1,278,549 96,482 1,124,434 76,251 973,863 97,878 7.83 7.56 7.34 6.83 142,235 135,399 123,598 111,909$1,533,861 1,375,031 1,200,685 1,071,741 474,182 86,375 268,233 828,790 98,500'27,290 7.13 98,450 OPERATIONS ELECTRIC CUSTOMERS.....ENERGY SALES-millions of kilowatt hours Residential Commercial Industrial Other 6,324 4,262 6,881 1,398 5,985 3,933 6,458 637 5,479 3,533 6,053 620 5,093 3,198 5,807 585 4,573 2,840 5,566 552 886,378 864,439 843,080 828,643 818,500 AVERAGE PRICE PER KWH to ultimate customers-cents....SOURCES OF ENERGY SOLD-millions of kilowatt hours Generating units Coal-fired Oil-fired Hydroelectric ................ Purchased power.............. ~Interchanged power Purchases.Sales.Company uses and losses....... Total energy sales............. FUEL COST-mills per kilowatt hour POWER CAPABILITY -kilowatts...PEAK DEMAND-kilowatts (a).....EMPLOYEES 18,865 2.06'24,782 273 816 384 1,584 (7,237)(1,737)18,865 5.0 4,903,000 3,662,000 7,139 17,013 2.02 19,097'01 824 418 1,366 (3,586)(1,707)17,013 4.9 4,108,000 3,598,000 6,790 15,685 1.90 15,847 642 684 304 1,467.(1,758)(1,501)15,685 4.8 3,496,000 3,294,000 6,514 14,683 1.71 13,702 786 739 339 1 732 (1,164)(1,451)14,683 4.2 3,256,000 3,238,000 , 6,372 13,531 1.62 13,514 437 621 253 1,709 (1,559)(1,444)13,531 3.2 3,124,000 2,850,000 6,238 (a)Winter peak shown was reached early In subsequent year.In 1969 and 1970, peaks are those which would have occurred Il load curtailment measures had not boon In otfoct.A more detailed review ot the Company's operations ls available. A postal card ls provided with this report to ald you in making this request.14 STATEMENT OF INCOME 1973 1972 1971 1970 1969 OPERATING REVENUES (Note 3)(99%electric)................. OPERATING EXPENSES (Notes 4 and 11)Wages and employee benefits...Fuel Power purchases.............. Interchange power sales........Other operating costs.......... Depreciation Income taxes (Note 9)Current Deferred.Investment tax credits Deferred Amortization of deferments-credit Taxes, other than income.......57,421 125,577 15,299 (70,175)45,234 48,837 55,220 95,220 13,514 (34,569)39512 41,446 48,198 79,499 18,963 (15,468)33,214 34,903 45,779 61,621 21,982 (9,356)24,009 32173 41,946 44,601 17,453 (8,865)21,865 28,981 22,661 5,737 7 233 (1,688)30,005 18,102 2,829 7,349 (2,194)25,658 12,672 (244)1,597 (2,480)22,146 4,986 (795)1,573 (2,539)18,197 14,400 (795)3,339 (2,540)8,167 Thousands of Dollars 3 384,814 345,782 300,707 255,313 223,388 OPERATING INCOME............ OTHER INCOME AND DEDUCTIONS Allowance for funds used during construction .......... Other-net INCOME BEFORE INTEREST CHARGES INTEREST CHARGES Long-term debt............ Short-term debt........... Other 286,141 98,673 14,967 1,391 16,358 115,031 43,203 4,790 126 262,087 83,705 14,647 29 14,676 98,381 36,507',846 107 233,000 67,707 16,242 113 16,355 84,062 30,895 4,109 486 197,630 57,683 9,723 192 9,915 67,598 25,381 7,1 94 88 168,552 54,836 6,369 197 6,566 61,402 20,813 5,935 45 NET INCOME.Dividends on preferred and preference stock........EARNINGS APPLICABLE TO COMMON STOCK.........48,119 66,912 17,191$49,721 40,460 57,921 14,526 43,395 48,572 11,392 37,180 34,935 6,426 28,509 35,490 32,663 26,793 34,609 3,822 30,787 COMMON STOCK Average number of shares outstanding ............... Earnings per share, based on average number of shares outstanding ............... Dividends per share.......... $2.57$1.68 2.48 1.64 2.37 1.60 1.97 1.60 2.32 1.60 19,358,947 17,512,793 15,690,490 14,472,076 13,277,365 See accompanying Notes to Financtal Statements. BALANCE SHEET ASSETS UTILITY PLANT'lant in service-at original cost Electric Steam heat.$1,619,327 7,728 1,386,223 8,110 December 31 1973 1972 Thousands of Dollars Less accumulated depreciation Construction work in progress-at cost 1,627,055 312,178 1,314,877 219,277 1,534,154 1,394,333 275,627 1,118,706 242,707 1,361,413 INVESTMENTS Subsidiaries -at equity (Note 2)Safe Harbor Water Power Corporation -at equity (Note 2)..Nonutility property-at cost, less accumulated depreciation .Other-at cost or less.5,320 3,596 2,749 7,354 19,019 3,1 29 3,315 2,552 5,540 14,536 CURRENT ASSETS Cash (Note 5).Construction fund for pollution control facilities (Note 6)..Accounts receivable, less reserve Customers Other Materials and supplies-at average cost Fuel Operating and construction .Other.............................. 14,903 9,073 22,656 10,929 26,884 17,006 5,598 107,049 13,729 23,510 3,330 31,601 12,847 9,488 94,505 DEFERRED DEBITS...6,624$1,666,846 4,650 1,475,104 16 See accompanying Notes to Financial Statements. LIABILITIES December 31 1973 1972 Thousands of Dollars CAPITALIZATION* Shareowners investment Preferred stock Preference stock Common stock Capital stock expense (deduction)(No amortization plan in ellect)Earnings reinvested (Notes 7 and 8)Long-Term Debt 156,375 115,000 319,384 (6,889)157,113 740,983 753,027 1,494,010 116,375 115,000 278,484 (6,592)140,238 643,505 635,044 1,278,549 CURRENT LIABILITIES Bank loans (Note 5).Commercial paper notes (Note 5).Accounts payable Taxes accrued Dividends payable and interest accrued Other 39,851 33,705 13,457 28,139 7,029 122,181 30,000 66,482 27,193 9,963 23,003 6,471 163,112 DEFERRED AND OTHER CREDITS Accumulated deferred investment tax credits.Accumulated deferred income taxes Contributions in aid of construction .Other 15,323 17,436 9,704 8,192 50,655$1,666,846 9,779 12,035 5,859 5,770 33,443 1,475,104'Seo Schoduto of Capital Stock and Long-Term Debt on pago 18.See accompanying Notes to Financial Statements. SCHEDULE OF CAPITAL STOCK AND LONG-TERM DEBT December 31, 1973 Thousands of Dollars CAPITAL STOCK'PREFERRED STOCK-$100 par, cumulative 4'/2/o, authorized 629,936 shares, outstanding 530,189 shares......$53,019 Series, authorized 2,000,000 shares 3.35/o, outstanding 41,783 shares.4,178 4.40 lo, outstanding 228,773 shares.22,878 4.60%%d, outstanding 63,000 shares.6,300 , 7.40/o, outstanding 400,000 shares (a)40,000 8.60/o, outstanding 222,370 shares 22,237 9/o, outstanding 77,630 shares...7,763$156,375 PREFERENCE STOCK-no par, cumulative, authorized 5,000,000 shares$8.00 series, outstanding 350,000 shares............... $35,000$8.40 series, outstanding 400,000 shares............... $8.70 series, outstanding 400,000 shares............... 40,000$115,000 COMMON STOCK-no par, authorized 30,000,000 shares, outstanding 21,051,255 shares................. $319,384'a) On July 1, 1979 and annually thoroaftor until tho 7.40/o Sorios Proforrod Stock Is rotlrod In full, 16,000 shares of 7.40'lo Sorlos must bo rodoomod through tho operation of'a sinking fund at a rodomptlon prlco of 9100 por share plus accruod and unpaid dividends to tho data of such redemption. LONG-TERM DEBT FIRST MORTGAGE BONDS 3/o series due 1975 27/s lo series due 1976................ 2s/4 lo series due 1977................ 3'/s%series due 1978................ 2s/4%%d series due 1980................ 3'/s'/o series due 1982................ 3t/a%%d series due 1983................ 3s/s'/o series due 1985...".:........... 4s/s/o series due 1991................ 4s/a/o series due 1994................ 5s/a/o series due 1996................ 6s/4'/o series due 1997................ 7o/o series due 1999 8t/a%%d series due 1999................ 9/o series due 2000.7t/4/o seriesdue 2001................ 7s/s/o series due 2002................ 7t/2/o series due 2003................ 4t/2/o to 56/s'/o pollution control series A due annually$500, 1977-1983; $900, 1984-2002; $7,400, 2003........NOTES 6t/4 10-8t/4%%d due 1974-to be refinanced 6t/a'/o-7'/o due 1976.7/0 due 1980 OTHER$93,000 8,000 20,000 3,000 37,000 7,500 25,000 25,000 30,000 30,000 30,000 30,000 40,000 40,000 50,000 60,000 75,000 80,000 28,000 711,500 18,550 2,800 20,000 41,350 177$753,027 SECURITIES SOLD IN 1972 AND 1973 1972 February February-March July October Security First Mortgage Bonds, 7%lo Series due 2002 Notes, 6t/4 lo-6t/a/o due in 1974 and 1976.Preference Stock,$8.00 Series.......... Common Stock Shares 350,000 2,000,000 Amount$75,000 8,300 35,000 46,940$165,240 1973 January May July August November First Mortgage Bonds, 7t/2/o Series due 2003..First Mortgage Bonds, 4t/2/o to 5s/s/o Pollution Control Series A due 1977-2003........... Note, 7%%d due 1980.Series Preferred Stock, 7.40/o.Common Stock.400,000 2,000,000$80,000 28,000 20,000 40,000 40,900$208,900 Soo accompanying Notos to Financial Stetomonts. 18 SOURCES OF FUNDS USED FOR NEW CONSTRUCTION 1973 1972 1971 1970 Thousands of Dollars 1969 OPERATIONS Net income Non-cash charges (credits)to income Depreciation Allowance for funds used during construction .Deferred extraordinary power costs.........Deferred income taxes and investment tax credits-net.Less cash dividends 48,837 (14,967)220 41,446 (14,647)220 34,903 (16,242)220 11,282 112,284 50,037 62,247 7,984 92,924 43,330 49,594 (1,127)66,326 36,746 29,580$66,912 57,921 48,572 34,935 32173 (9,723)(2,105)(1,762)53,518 29,456 24,062 34,609 r 28,981 (6,369)3 57,224 25,097 32,127 OUTSIDE FINANCING Securities sold Common stock.Preferred stock Preference stock First mortgage bonds Long-term notes Other long-term debt"Securities retired First mortgage bonds Long-term notes Other long-term debt Short-term debt-net increase (decrease) .40,900 40,000 108,000 20,000 24 46,940 37,120 35,000 75,000" 8,300 42 40,000 60,000 10,450 56 28,093 24,050 30,000 40,000 50,000'0,000 2,600 87 (15,000)(7,763)(10,000)(8,000)(1,000)(3,500)(57)(117)(236)'140)20,231 (21,627)(4,122)8,050 142,252 160,456 117,882 137,659 108,514 OTHER SOURCES AND (USES)Investments Refund of prior years Federal income taxes-net Working capital-net change (excluding short-term debt)Miscellaneous -net.(4,483)24 (253)3,156(a)(6,624)(a) 23,896 6,357 657 5,052 5,030 (5,943)28,695',5301,472 2,956 (14,824)(13,652)1,036 203 (6,302)(11,977)TOTAL FUNDS USED FOR NEW CONSTRUCTION (b)$209,529 204,107 176,157 155,419 128,664 (a)Tho net changes In working capital resulted principally from the following: 1973, Increases In othor accounts receivable, construc-tton fund, accounts payablo and dividends payable and accrued Interest;1972, Incroasos In accounts receivable and fuel inventory.(b)Excludes allowanco for funds used during construction. \See accompanying Notes to Flnanclat Statomonts. 19 STATEMENT OF EARNINGS REINVESTED BALANCE, JANUARY 1 NET INCOME 1972 1971 1970 Thousands of Dollars$1 40,238 125,647 113,821 108,342 66,912 57,921 48,572 34,935 207,150 183,568 162,393 143,277 1969 98,830 34,609 133,439 DIVIDENDS Preferred and preference stock Common stock (per share-1973,$1.68;1972,$1.64;1971-1969,$1.60).........BALANCE, DECEMBER 31 (Notes 7 and 8).........17,191 14,526 11,392 6,426 3,822'2,846 50,037 28,804 43,330 25,354 23,030 21,275 36,746 29,456 25,097$157,113 140,238 125,647.113,821 108,342 NOTES TO FINANCIAL STATEMENTS December 31, 1973 and 1972 1.
SUMMARY
OF ACCOUNTING POLICIES Accounting System Accounting records are maintained in conform-ity with the uniform system of accounts pre-scribed by the Federal Power Commission (FPC)and adopted by the Pennsylvania Public Utility Commission (PUC)~Utility Plant Costs of additions to utility plant and replace-ments of units of property are capitalized. Costs of depreciable property retired or replaced are eliminated from utility plant accounts and such costs, plus removal costs, less salvage, are charged to accumulated depreciation. Costs of land retired or sold are eliminated from utility plant accounts and any gains or losses are re-flected on the Statement of Income during the current year.All expenditures for maintenance and repairs of property and the cost of replace-ment of items determined to be less than units of property are charged to operating expenses.Allowance for Funds used During Construction As provided in the uniform system of accounts, the cost of funds (interest on borrowed money and a reasonable rate on other capital)used to.finance construction work in progress is capital-ized as Utility Plant.'An amount equal to the amount so capitalized is shown on the Statement of Income as an item of Other Income and serves to offset the actual cost of financing construc-tion work in progress." Depreciation For financial statement purposes, the straight-line method of depreciation is used to accumu-late an amount equal to the cost of utility plant and removal costs, less salvage, over the esti-mated useful lives of property.Subsidiaries Prior to 1973, the Company carried its invest-ments in subsidiaries and in Safe Harbor Water Power Corporation at cost, and did not record its equity in the earnings of these companies except to the extent received as dividends. In 1973, pur-suant to a revision of the uniform system of ac-counts, the Company adopted the equity method of accounting for these investments. Under this method, the Company carries these investments on its Balance Sheet at cost plus undistributed earnings since dates of acquisition, and reflects its equity in the earnings of these companies in Other Income on the Statement of Income.Revenues Revenues are based on cycle billings rendered to certain customers monthly and others 20 bi-monthly. The Company does not accrue reve-nues related to energy delivered but not billed.The Company's tariffs include fuel adjustment clauses under which fuel costs above or below the levels allowed in approved rate schedules are permitted to be billed or credited to custom-ers after the fuel costs are incurred.Income Taxes Deferred tax accounting is followed for items where similar treatment in rate determinations has been or is expected to be permitted by the PUC.The principal items are accelerated amor-tization of certified defense facilities and pollu-tion control equipment, deduction of costs of removing retired depreciable property and that portion of tax depreciation arising from shorten-ing depreciable lives by 20/0 as permitted by the class life depreciation system.Tax reductions"arising principally from the use of the declining balance depreciation method, guideline lives and certain income and expenses being treated differently for tax computation than for book purposes are accounted for under the flow-through method.These reductions in income tax provisions are also accorded flow-through treatment in rate determinations by the PUC and currently result in lower rates for customers than would otherwise be possible.Investment tax credits are deferred.Deferred amounts pertaining to the Job Development In-vestment Credit (Revenue Act of 1971)are being amortized over the average lives of the related property while amounts pertaining to the credits permitted under prior laws are being amortized over 5-year periods.Retirement Plan The Company has a Retirement Plan composed of two parts: (1)a non-contributory portion which provides benefits for all eligible active employees with the full cost absorbed by the Company, and (2)a voluntary portion in which contributions are made by both employees and the Company, but the full cost of past service and Plan improve-ments is borne by the Company.Approximately 95'/o of eligible active employees are members of the voluntary portion of the Plan.Company contributions to the Plan include amounts re-quired to fund current service costs and to amor-tize unfunded past service costs over periods of not more than 20 years, Research and Development Research and development costs are charged to expense.as incurred except for costs related to specific construction projects which are capi-talized.2.SUBSIDIARIES, CONTROLLED COMPANIES AND SAFE HARBOR The Company has six wholly-owned subsidiaries (including three coal companies) and has control over the operations of one other coal company.None of these companies is engaged in the busi-ness of generating and distributing electricity. The total combined assets of these companies at December 31, 1973 and December 31, 1972 was less than 5/o of the Company's assets and the total combined revenue of these companies in each of the years 1973 and 1972 (after inter-company eliminations) was less than 1/o of the Company's revenues.The Company also owns one-third of the outstanding capital stock of Safe Harbor Water Power Corporation representing one-half of that company's voting securities. As a result of the adoption of the equity method of accounting, the Company recorded as Other Income during 1973 approximately $812,000 (of which$250,000 was received as dividends) as equity in the earnings of subsidiary companies and Safe Harbor Water Power Corporation. Of the amount recorded, approximately $500,000 was applicable to undistributed earnings of these companies from their respective dates of acquisi-tion to December 31, 1972.3.RATE INCREASES Pursuant to a rate increase request filed in 1973, the PUC granted the Company, effective June 2, 1973, a 2.7'/o increase in electric rates (about$10 million annually). Operating revenues for the year 1973 include$4.8 million resulting from this in-crease.The final PUC order on the request au-thorized the Company to increase electric rates by an additional 5.7/o (about$19 million annu-ally)effective January 10, 1974.4.STORM DAMAGE During June 1972 severe flooding caused by Tropical Storm Agnes occurred in the Com-pany's service area.Effects of the flood increased operating expenses by approximately $1.6 mil-lion (10 cents per share)after giving effect to insurance recoveries, casualty reserves and re-lated tax reductions. 21 5.COMPENSATING BALANCES AND SHORT-TERM DEBT The Company has lines of credit aggregating $145 million with various banks which make available loans for interim financing and provide back-up financing capability for commercial paper notes.At December 31, 1973, use of these lines of credit was restricted to the extent of$11.5 million by short-term bank loans to certain owned and controlled fuel supply companies. In connec-tion with these lines of credit the Company main-tains compensating balances which, generally, are on the basis of 10/o of the line of credit or 20/o of the amount borrowed, whichever is higher, on an average annual basis.These bal-ances are not restricted as to withdrawal. Based on bank borrowings during 1973, the average compensating balance requirement was about$13.8 million, of which about$2.0 million was satisfied by"float" (checks issued but not cleared by the banks).Bank borrowings are generally for one year, may be prepaid at any time without penalty and are at the lending bank's prime interest rate in effect from time to time, which was 9~/4/o at December 31, 1973.The Company had no bank loans out-standing at December 31, 1973.Commercial paper notes are generally sold for periods rang-ing from 30 to 60 days;the weighted average discount rate applicable to the$39.9 million of commercial paper notes outstanding at Decem-ber 31, 1973 was 8.5/o.The maximum aggregate amount of short-term debt outstanding at the end of any month in 1973 was$85.2 million;the average aggregate daily amount outstanding during 1973 was$60.6 mil-lion.The approximate weighted average interest rate of short-term debt during 1973 was 7.9/o, calculated by dividing the total short-term debt-interest expense for the year by the average aggregate daily amount of short-term debt out-standing.6.POLLUTION CONTROL CONSTRUCTION FUND The unexpended proceeds from the sale of First Mortgage Bonds, Pollution Control Series A, amounting to$13.0 million at December 31, 1973, are held by a trustee in a Construction Fund which consists of cash and temporary cash in-vestments. Payments may be made from the Fund upon requisition by the Company for costs re-lated to the construction of certain pollution con-trol facilities. The amount expected to be requisi-tioned from the Fund in 1974 is classified as a Current Asset while the balance is included as part of Other Investments. 7.DIVIDEND RESTRICTIONS The Company's charter and mortgage indentures restrict the payment of cash dividends on Com-mon Stock under certain conditions. Under the charter provisions, which are the more limiting, no restrictions are effective on the payment of such dividends out of current earnings.The amount of earnings reinvested free of restrictions under the charter at December 31, 1973 was$135.1 million.8.PROPERTIES SUBJECT TO FEDERAL LICENSES The Company operates two hydroelectric proj-ects under licenses issued by the FPC.Certain reserves required to be provided under the Fed-eral Power Act have not been recorded pending approval of the amounts by the FPC.The Com-pany estimates that such reserves applicable to the years from 1946 would not exceed$2.5 mil-lion at December 31, 1973.9.INCOME TAXES Income tax expense for the years 1973 and 1972 is reflected on the Income Statement as follows: 1973 1972 (Thousands of Dollars)Utility Operations: Federal income tax...State income tax.....Deferred income tax..Other Income and Deductions $16,454 6,207 5,737 28,398 (91)$28,307 12,582 5,520 2,829 20,931 (334)20,597 Portion of tax depreciation ,.arising from shortening depreciable lives by 20/o under the class life depreciation system......Costs of removing retired depreciable property.....Accelerated amortization of pollution control facilities.. Abnormal loss on retirement of property.............. Accelerated amortization of emergency facilities ......$3,057 2,219 385 871 (795)$5,737 1,550 1,8?8 196 (795)2,829 Deferred income taxes result from differences between the time the following items are recog-nized as expenses for tax and financial statement purposes: 1973 1972 (Thousands of Dollars)22 1973'972 (Thousands of Dollars)Indicated income tax expense at combined Federal and State tax rates.......... Reductions in indicated tax due to: Investment tax credits....Allowance for funds used during construction-nontaxable Tax depreciation (excluding portion due to shortening depreclabIe lives by 20 lo under the class life system)in excess of book depreciation .....Tax and pension costs-tax deduction in excess of book expense.......Other Total reduction in indicated income tax...Actual income Iax expense..$54,131 7 233 8,041 7,531 2,687 332 25,824$28,307 45;166 7,349 7,906 6,145 2,554 615 24,569 20,597 10.RETIREMENT PLAN Obligations of the Company's Retirement Plan are currently funded through a Trust Fund.At June 30, 1973, the end of the Fund's most recent fiscal year, the Fund's assets at cost were$80.0 million;the actuarially computed unfunded past service cost was$13.6 million;and vested bene-fits exceeded the cost basis of the Fund's assets by$7.3 million.Pension costs for the years 1973 and 1972 were$6.8 million and$6.7 million, re-spectively, including in each year funding of the past service cost.11.RENTALS AND NONCANCELABLE LEASE COMMITMENTS Total rentals charged to operating expense for 1973 and 1972 amounted to$7.5 and$6.3 million, respectively. The combined current Federal and State corpo-rate income tax rates equal about 54/o for the Company, after considering the deductibility of the State income tax expense.However, the ef-fective income tax rate (income tax expense as a percentage of net income before income tax expense and net deferral'of investment tax credits)was 28'/o in 1973 and 25/o in 1972.The reasons for the lower effective tax rates are shown in the following summary: t At December 31, 1973 the Company was com-mitted under noncancelable leases expiring at various dates to 1996.The minimum rental com-mitments under these leases for future years are as follows (millions of dollars): 1974,$3.7;1975,$3.8;1976,$3.7;1977,$3.5;1978,$3.3;1979 through 1983,$12.5;1984 through 1988,$7.0;1989 through 1993,$5.6;after 1993,$2.0.Mini-mum rental commitments for future years total$45.1 million, applicable to the following cate-gories of properties: combustion turbine generat-ing equipment,$19.2 million;railroad coal cars,$11.8 million;computer equipment,$14.1 million.Generally the leases contain renewal options and obligate the Company to pay maintenance, insur-ance and other related costs.The impact upon net income in each of the years 1973 and 1972 would be less than 1'/o if all non-capitalized financing leases were capitalized and amortized on a straight-line basis with interest accrued on the basis of the outstanding lease liability. 12.COMMITMENTS AND CONTINGENT LIABILITIES The Company estimates that about$1.8 billion will be required to complete construction proj-ects in progress or authorized to be started in 1974.Of this amount, about$305 million is ap-plicable to the year 1974 with the balance to be expended through the year 1981.The Company is subject to certain present and developing laws and regulations with respect to air and water quality, land use and other envi-ronmental matters.The Company is unable to predict the ultimate effect of such laws and regu-lations upon its existing and proposed facilities and operations. It is possible that such laws and regulations may require the Company to modify, supplement, replace or cease operating certain of its equipment and facilities, delay or impede construction and operation of new facilities, and require substantial additional expenditures in amounts which are not now determinable. In connection with providing for its future bitu-minous coal supply, the Company has PUC ap-proval to guarantee the capital obligations of certain coal suppliers (including four owned or controlled coal companies) up to approximately $100 million outstanding at any one time.Obliga-tions actually guaranteed under these arrange-ments aggregated $91.0 million at December 31, 1973.23 PRINCIPAL OFFICERSD BOARD OF DIRECTORS JACK K.BUSBY, President AUSTIN GAVIN, Executive Vico Prosident JOHN T.KAUFFMAN, Assistant Vice President, System Power 8 Engineering NORMAN W.CURTIS, Vice President, Engineering &Construction ROBERT R.FORTUNE, Vice President, Financial GEORGE F.VANDERSLICE, Comptroller CHESTER R.COLLYER, Treasurer DONALD J.TREGO, Assistant Treasurer BROOKE R.HARTMAN, Vice President, Division Operations LEON L.NONEMAKER, Assistant Vico President, Division Operations CHARLES E.FUQUA, Vice President, Susquehanna Division JACK HANCKEL, Vice President, Harrisburg Division CARL R.MAIO, Vice President, Lehigh Division JAMES J.McBREARTY, Vice President, Northeast Division HERBERT D.NASH JR., Vice Presidonl, Consumer and Community Services EDWIN H.SEIDLER, Vico President, Distribution BRENT S.SHUNK, Vice President, Lancaster Division EMMET M.MOLLOY, Vice President, Human Resource and Development RICHARD H.LICHTENWALNER, Vice Presidenl, Public Relations EbWARD M.NAGEL, Vico President, General Counsel and Secretary'As of Jan.1, 1974 CLIFFORD L.ALEXANDER JR., Washington, D.C.Partner of Arnold&Porter, Counsellors at Law JACK K.BUSBY, Allentown President of the Company RALPH R.CRANMER, Williamsport President and General Manager of Grit Publishing Company EDGAR L.DESSEN, Hazleton Physician-Radiologist AUSTIN GAVIN, Allentown Executive Vice President ol the Company W.DEMING LEWIS, Bethlehem President ol Lehigh University JOHN A.NOBLE, Scranton President ol Cleland Simpson Company NORMAN ROBERTSON, Pittsburgh Senior Vice President and Chief Economist of Mellon Bank,, N.A.JOSEPH T.SIMPSON, Harrisburg Chairman of the Board ol Harsco Corporation M.J.WARNOCK, Lancaster Chairman ol the Board ol Armstrong Cork Company CHARLES H.WATTS II, Lewisburg President of Bucknell University S.HAYWARD WILLS, Miami, Florida Chairman ol the Board and President ol GAC Corporation Executive Committee: Jack K.Bushy, chairman: Messrs.Gavin, Simpson.Warnock and Wills.Audit Comminee: Charles H.Watts II, chairman: Messrs.Alexander and Warnock.SECURITIES LISTED ON EXCHANGES FISCAL AGENTS NEW YORK STOCK EXCHANGE First Mortgage Bonds, 3%Sorics duc 1875 4rh%Prolcrrcd Stock (Codo: PPLPRB)4.40%Scrios Prclorrcd Stock (Coda: PPLPRA)8.60%Series Prclorrcd Slack (Codo: PPLPRG)Prolcrcnco Stock,$8.00 Sorics (Codo: PPLPRJ)Prclcrcnco Stock,$8.40 Sorlcs (Codo: PPLPRH)Prclcrcnco Stock,$8.70 Scrios (Coda: PPLPRI)Common Stock (Coda: PPL)PBW STOCK EXCHANGE 4 ye%Preferred Stock 3.35%Series Preferred Slock 4.40%Series Preferred Stock 4.60%Series Preferred Stock 8.60%Series Preferred Stock 8%Series Prolcrrcd Stock Preference Stock,$8.00 Series Prolcrcncc Stock,$8.40 Series Preference Stock,$8.70 Series Common Stock TRANSFER AGENTS FOR PREFERRED, PREFERENCE AND COMMON STOCK Indusulal Valley Bank and Trust Company 634 Hamilton Mall Allentown, Pennsylvania -18 101 Irving Trust Company Ono Wall Street New York, Now York-10015 Pennsylvania Power&Light Company Two Noah Ninth Strccl Allentown, Pennsylvania -18 101 REGISTRARS FOR PREFERRED, PREFERENCE AND COMMON STOCK The First National Bank ol Allentown Hamilton Mall at Seventh Allentown, Pennsylvania -18101 Morgan Guaranty Trust Company ol Ncw York 23 Wall Street New York, New York-10015 DIVIDEND DISBURSING OFFICE FOR PREFERRED, PREFERENCE AND COMMON STOCK Treasurer Pennsylvania Power&Lighl Company Two North Ninth Street Allentown, Pennsylvania -f 8101 ACCOUNTANT'S OPINlON HASKINS&SELLS Certified Pubtlc Accountants Two Broadway New York 10004 To the Shareowners and Board of Directors of Pennsylvania Power&Light Company: We have examined the balance sheets of Penn-sylvania Power 8 Light Company as of December 31, 1973 and 1972, the related statements of in-come, earnings reinvested and sources of funds used for new construction for the years then ended and the schedule of capital stock and long-term debt as of December 31, 1973.Our examination was made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. In our opinion, such financial statements and schedule present fairly the financial position of the Company at December 31, 1973 and 1972 and the results of its operations and sources of funds used for new construction for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis.HASKINS&SELLS',gl g~P~o'i l I,;>jj"tIIJ)<<r/February S, 1974 In September 1973, PP&L's board of directors and key olficers visited Philadelphia Electric Company's Peach Bottom nuclear generating plant being constructed along the lower Susquehanna River near the Pennsylvania-Maryland border.The directors were able to see first-hand the intricate safeguards that are built into every nuclear generating facility.The Company files Form 10-K annually with the Securities and Exchange Commission. Form 10;K is composed of this Annual Report to shareowners and additional information concerning the Company and its operations. This additional information will be available after April 1~1974 by writing to Pennsylvania Power 8 Light Company, Two North Ninth Street, Allentown, Pa.18101~attention: Mr.George I.Kline, Investor Services Manager. PPaL PENNSYLVANIA POWER 8 LIGHT COMPANY Two North Ninth Street, Allentown, Pa.18101 Telephone: Area Code 215 821-5151 LITHO IN U.S.A.ry g~.~p'5'-<<.W-r*r L ((~-'>pl;';L(,I(T 4&v',~".%~"."-'>(~>r~~>.r~~~<<~r~i.><<<<>g~ >>>>g~<<.r..>1'Tk l~>'r~g.~~a<<I g'0,-<<r..".>r~.[>>, M~45~+~ a , I ,,g j ,i (j vECEks JUL11 1973m 5 U.S.ATO)A!C ENERGY K:*Yii::-!'.:8 Mail Sec!hn Q)0-38 V 0"388 I CPA F~w>y+~>g]($@j J pg (PEN 1972 annual report NSYLVANIA POWER A.LIGHT COMPANY 3 AS Contents The Year in Review The Energy Crisis Financials Notes to Financial Statements Directors and Principal Officers 2-10 11-14 16-22 22-23 24 HIGHLIGHTS Revenues Net Income..Earnings Per Share based on average number of shares of common stock outstanding ....,.......... Dividends per share of common stock..Total Utility Plant......... 2.48 2.37 1.64 1,637,040,000 1.60 1,458,707,000 1972 1971.$345,792,000 $300,707,000 57,921,000 48)572,000 Cover Photos (c/ockw/se /rom fop)Peggy Wilcox, consumer adviser in the newly formed Consumer&Community Affairs Department, listens while a PP&L customer comments on several aspects of the Company's operations. An aquatic biologist surveys part of a 50-mile stretch of the Susquehanna River as part of a 10-year environmental surveillance program for PP&L's proposed Susquehanna Steam Electric Station, the Company's first nuclear plant.Construction continues on the first of two 800,000-kilowatt, oil-fired generating units at the Martins Creek site on the Delaware River.The unit is scheduled to be in service early In 1975.At the height of Tropical Storm Agnes, Brunner Island generating station had 15 feet of water in the basement.Three weeks after this picture was taken, and in a remarkable display of teamwork and effort, the station was back in service. President's Message Even though increases in tensions and problems sometime seem to be a new norm, we consider that 1972 was a good year for the Company.A modest improve-ment in earnings per share was made possible by higher electric service rates effective last March and by the favorable performance of our major generating sta-tions.This performance was achieved despite the more than$1.6 million of spe.cial costs (equal to 10 cents a share)caused by Tropical Storm Agnes.We particularly call attention to the many PP&L employees who conducted them-selves with such outstanding skill and dedication in a variety of difficult and hazardous situations during Agnes.The havoc caused by the flood has been greatly mitigated by courageous self-help and massive relief and rehabilitation assis-tance.While much remains to be done, favorable prospects for Northeast Penn-sylvania have been re.established. The affected communities have, in just a few months, made a great deal of progress.Notwithstanding the disruption of Agnes, the overall pattern for the PP&L service area for the year was one of continued economic growth and rising demands for energy.We were able to meet in full these increased electrical requirements. We also expect to meet without difficulty the pre-dicted larger requirements for 1973.PP&L, along with the Pennsylvania. New Jersey-Maryland (PJM)Interconnection of which we are a part, is expanding its generating capacity.Early in 1972, our Montour No.1 generating unit went in service and its companion unit, Montour No.2, is nearing completion. This second unit is now in trial operation and should be in regular service this spring.These two coal-fired units total 1.5 million kilo-watts.They will increase PP&L generating capacity by over 40 per cent.Underlying the construction of these and other new facilities was the Company's successful financing program.The year 1972 marked an all.time high in raising new capital.A total of$165 million was obtained through the separate sales of bonds, long-term notes, preference stock and common stock.We emphasize again that our financing was possible only because the Company has maintained a record of good financial performance. Such performance includes three essential requirements: a sound balance in the capital structure between debt and equity securities, adequate earn.jngs coverage of interest charges and growth in earnings per share for the com-mon stock in line with the shareowner's increased investment. Otherwise we can-not maintain investor confidence and attract the needed new capital.Since new funds needed in the next five years are estimated to be$1.5 billion, we stress the paramount importance of safe-guarding and continuing PP&L's record of good financial performance. It becomes ever more essential that the public also understand and accept this fact because our financial health is necessary for a con-tinuation of quality electric service for our customers. As we now see the conditions that exist in the national and regional economies, the meeting of this financial responsibility means periodic rate increases. We are aware of the need for productivity gains.But such gains cannot meet the total needs of the situation. We expect to file in the near future a rate increase application with the Pennsylvania Public Utility Com.mission.A major thrust of the Company through-out the year has been to carry out our commitment to conservation of energy.During 1973 we expect to substantially extend our expertise in this field and greatly increase our marketing of practical/Qrg%3 ways and means by which our customers can take steps to conserve their require-ments for electricity, particularly during peak periods.Conservation during peak periods is especially important because it is the increases in peak period use that trigger new construction requirements, and related financing needs.Our policy of conservation of energy was the outgrowth of a variety of short and long-term considerations. Oneof the main reasons was th'e impending"energy crisis" (see separate section starting on page 11).Coal has been restricted by environmental limitations. In many parts of the country, natural gas is being rationed.Our domestic oil production is far short of meeting total petroleum needs.The overall result is an increasing demand for electricity as customers turn to this form of energy, where feasible, in order to offset scarcities in supplies of other fuels.The circumstances clearly point to in-creasing needs for nuclear power plants.It has become a matter of the highest priority for the country to develop new supplies of gas and oil.Also, it is critically important to encourage the prompt corn.pletion of electric power facilities now planned and under construction. The avoidance of delay in completing such electric facilities is one of the best ways now available to lessen the energy crunch that is so rapidly approaching. Of course, the key to setting necessary new governmental policies is public understanding of what the energy crisis is all about.To do our part in this process, we have instituted broad and intensive information programs, both with individual customers and the general public.Because of the long-range importance of these matters, we hope these discussions will be persuasive. Toward this end we ask for the active support of our shareowners in carrying forward this program.Respectfully submitted, Jack K.Busby, President March 1, 1973 YEAR IN REVIEW Revenues in 1972 were$346 million, the highest in the Company's history.This level was reached, of course, with the assistance of higher rates charged for electric service.This compares with revenues of$301 million in 1971.The kilowatt hour sales gain was 9.2 per cent over 1971 in the residential category, 11.3 per cent in the commer-cial sector and 6.7 per cent in the industrial area.In each case, these increases are above last year's and reflect the general improvement in the national economy.Overall, the rate of growth was 8.5 per cent.The real significance of this gain over the 1971 level was that even in the face of substantial and growing efforts by the Company to promote energy conservation, the use of electricity continued to rise.While it's still too early to tell whether intensified con-servation efforts will have a significant effect on future energy demands, presently we believe that rising demands for electric service will require a large and continuing con-struction program.Building to Meet the Demand Building the facilities to meet a predicted demand for elec-tricity is a big and growing job.In 1972 the Company's construction expenditures reached$219 million and are expected to rise steadily in the years ahead.This mas-sive amount of construction caused one person to suggest that PP8 L was actually a large construction company which happens to sell electricity as a sideline.This characteriza-tion, while facetious in nature, does emphasize the very substantial building task facing the Company as we strive to provide for our customers'nergy needs.One of the largest blocks of new generating capacity ever added to the PP8L system was welcomed aboard last March with the addition on schedule of the 720,000-kilowatt No.1 unit at the Montour Steam Electric Station in the northwest part of PP8 L's service territory. This unit has per-formed very well since its startup and continues to do well, certainly due in good part to the substantial efforts taken to learn from the problems associated with the construction and startup of the Brunner Island No.3 unit.The No.2 companion unit at the Montour site is nearing completion with an in-service date scheduled for the spring of this year. I n addition to the Montour project, there was very sub-I stantial progress made during 1972 on two 800,000-kilo-watt oil-fired units at the Martins Creek site on the Delaware River.At the end of 1972, the first of these units was 28 per cent complete and is scheduled to come in service early in 1975.The second unit was 2 per cent complete and is scheduled for service early in 1977.The Company is arranging with a pipeline company for the delivery of low-sulfur oil to the Martins Creek station by a proposed pipeline from a deep water terminal on the Delaware River.On February 8, 1973, the Pennsylvania Public Utility Commission (PUC)authorized -subject to a number of conditions -operation of the pipeline between a terminal south of Philadelphia and the Martins Creek plant.In a lengthy order following an extensive investigation during which environmental concerns were aired, the PUC found the pipeline company entitled to a permit for trans-mission of oil through the$45 million, five-county line.The company may not start construction until it gets required approvals from the Delaware River Basin Commission and other appropriate agencies.PPBL is investigating alternate temporary transportation i fo'r the oil necessary to operate the new Martins Creek units should construction of the pipeline be unduly delayed.The 300,000 kilowatts of coal-fired capacity at Martins Creek ran well most of the year but encountered some diffi-culties late in 1972.Unit No.1 was late in returning from a scheduled overhaul due to greater-than-expected repair requirements and was out of service for 82 days.While Unit No.1 was being repaired, Unit No.2 suffered a lubri-cation failure.As of February 1973, both units were back in service.Nuclear Plans Move Ahead Regulatory proceedings involving a construction permit for the Susquehanna nuclear station near Berwick continued during 1972.The Company originally announced its inten-tion to build the two 1.1-million-kilowatt units in September of 1970.Since that time, PP&L has been following the permit and licensing procedures required by the Atomic Energy Commission (AEC)for securing approval to con-struct the plant.These procedures are thorough and very detailed and cover every conceivable aspect of the plant's design and construction. A construction permit will be is-sued only after it has been established to the satisfaction of the AEC that the plant can be built and operated without risk to the health and safety of our employees or the general public and that it meets all environmental standards. In'4~Jl A, g h A revolutionary concept in service center design, the circular;Lancaster facility, above, allows efficient inventory control and speedy dispatch of service crews.With all the discussion about installing adequate supplies of electric generating capacity, we sometimes forget that stringing the lines to deliver generated power is a big part of our construction effort.In 1972, for example, PP&L crews strung 460 miles of transmission and distribution lines. April of 1972 the Company's application for a construction permit was favorably reviewed by the AEC's Directorate of Licensing and by the Advisory Committee on Reactor Safeguards. In July, the Company submitted a supple-mental and greatly expanded environmental report.The initial hearings were held at Berwick late in February of this year.Further hearings will be held during the summer and the Company hopes that by late 1973 ground can be broken and work can begin on the units./When one takes into account the approximately six years required to actually build a nuclear plant, it is easy to see that from start to finish, the placing in service ot a nuclear station requires about 10 years.This compares with the six to eight years required for a fossil-fueled station.Even though the length of time to build a nuclear plant is sub-stantial, and even though the capital cost for two nuclear units at the Susquehanna site is presently estimated to be$1.2 billion, nuclear power remains an essential economical component in meeting the Company's tuture energy re-quirements. We feel that this is particularly so in light of the obvious shortages in other fuels required to generate elec-tricity and in the face of mounting environmental require-ments.While it is true that no form of electrical generation is absolutely without environmental effect, we feel that nuclear power is the cleanest alternative available for the foreseeable future.The Company has made a great effort to discuss this issue with interested citizens at every oppor-tunity and to explain to them the relative merits of a nuclear-fueled generating facility.Not everyone we'e spoken to, of course, is satisfied with these explanations but we feel that most people see the need for such plants.Company management, from the Board of'Directors on down, has taken substantial steps to become aware of all of the environmental, safety and social factors associated with the construction of a nuclear facility.The Board of Directors for example, late in September, participated in a comprehensive program of independent expert briefing on nuclear power, including an informational trip to Gen-eral Electric's nuclear facilities on the West Coast.The management of your Company feels contident that it is acting in the best interests of the public and PP&L share-owners by proceeding to use nuclear power in a PP&L generating station.The Wise Use of Energy In this period of energy shortages-and impending energy crisis-building to meet surging demand must be coupled with a program to encourage the wise use of energy re-sources.As mentioned in the insert beginning on page 11 and discussed there in more detail, the Company in 1972 undertook a very significant shift in its marketing policy.This shift took form early in the year when the Marketing Department was restructured and redesignated the Con-sumer&Community Atfairs Department. Actually this sig-nificant'change had been developing for quite a number of years.In 1970 the Company eliminated its advertising expenditures for the promotion of electric heat and began to drastically cut down on the number of promotional allow-ances granted to various sales allies of the Company.The switch completed this past year thus formalizes a shift from a basic policy of promotion to one of conservation. The Company is also sponsoring forums for groups par-ticularly involved in energy utilization. For instance, the Company in September sponsored an energy conservation forum for architects and engineers, In years past, a gather-ing ot these people had been devoted to encouraging them to select electricity as the energy source in the buildings that they designed.However, in 1972, the Company de-voted its message to energy conservation in the design and construction of structures and sought to enlist the support of this influential group.The majority of the archi-tects and engineers in attendance felt that the effort was worthwhile and commended the Company for taking the initiative in speaking to the energy issue.The Company intends to continue holding such conferences, not only with architects and engineers, but also with industrial and busi-nessleaders. On a more philosophical level, the Company participated with Lehigh University in the sponsorship of a symposium on the question of economic growth.The symposium heard from many distinguished historians, sociologists, econo-mists, and industry representatives regarding the pros and cons of economic growth in light of the environmental and resource limitations present today.The conference was basically an informational one and as such came up with no specific recommendations. However, since economic growth is so intimately linked to the use and availability of energy, the Company felt that this discussion was a valu-able effort towards coming to grips with the problems of energy utilization in a society of changing values.Energy and the Environment Last year we stated in this report the Company's philosophy in coping with environmental matters.It was-and is-that PPBL is committed and determined to do whatever is re-quired of us and more, where practical, to minimize the effect of our operations on the environment. This is still the Company's basic position.However, the dimensions of the energy dilemma facing the United States are such that some hard questions must be asked about the formulation of environmental rules and regulations, a subject discussed in the energy crisis insert.There were many ongoing environmental projects in the works at PP8 L in 1972.The Montour Steam Electric Station, whose No.1 unit came on the line in the spring, features one of the most comprehensive environmental monitoring and control systems of any electric generating station of its size.For instance, the plant has one air and five water moni-toring stations tied to the plant computer to keep close tabs on changing conditions that may call for corrective action.Two other stations for monitoring air quality will be placed in service later after preliminary data now being gathered indicates where they should be located.Of course, the plant also has the major pieces of environmental equipment In-house training programs received added emphasis in 1972.The PP&L Training and Development Center, left, offered about 25 separate courses in Management Development and in Skills and Technical subjects, like this welding course.In another training effort, a PPB L Affirmative Action program assistant conducts an orientation for two young women employees hired through the National Alliance of Businessmen JOBS program. which are now common on all electrical generating stations of this size.These include a highly efficient dust removal system, high chimneys which carry gases to altitudes where they can be readily dispersed, and cooling towers which allow the cooling and recirculation of water used in the process of generating electricity rather than returning hot water to the river.In addition, it is anticipated that the Mon-tour Preserve, a public recreation and ecological study area associated with the reservoir which serves as an alternate supply for the plant's water system, will move toward com-pletion in 1973.Construction of bag filters for air pollution control of units No.1 and No.2 at Sunbury Steam Electric Station is pro-gressing.It is anticipated that this system, which has been designed to trap and remove more than 99 per cent of the dust before it reaches the chimneys, will be completed in the spring.In another potential environmental improve-ment at the Sunbury station, the Company will conduct a one-year pilot test of a wet limestone scrubber system which would remove sulfur dioxide gas (SOa)from a small test portion of the total boiler flue gas flow from the No.4 unit.The test is targeted for a June 1973 startup.The re-moval of sulfur dioxide from stack gases is a major, and as yet unsolved, environmental problem associated with the generation of electric power when using fossil fuels.The Company, of course, is subject to certain present and developing Federal, regional, state and local laws and regulations with respect to air and water quality, land use and other environmental matters.The Pennsylvania De-partment of Environmental Resources (DER)adopted ini-tial regulations as part of the implementation plan for Penn-sylvania required by the Federal Clean Air Act as enforced by the United States Environmental Protection Agency.Under the presently effective regulations of the DER, com-panies not in compliance with the emission regulations are permitted to apply for variances which, if granted, would allow up to three years in which to achieve compliance. The Company filed the necessary applications for vari-ances outlining its plans for achieving compliance. These plans include, among other things, installing additional dust collection equipment and the processing of coal to reduce the sulfur content prior to burning.These variances, if granted, will provide time during which we can get our equipment designed, ordered and installed. I Cl v rc i 4.The dedicated efforts of many people were the main reason why PP&L was able to restore electric service quickly to those customers affected by Tropical Storm Agnes.Workers, above, begin the tedious task of checking machinery flooded at the Brunner Island Station.At top right, the Company's emergency control center coordinates all service restoration efforts'round-the-clock. And at bottom right, a lineman opens a switch along a flooded street so that power can be routed around an affected area. For the future, the Company is unable to predict the ulti-mate effect of developing environmental regulation upon its existing and proposed facilities and operations. How-ever, it is possible that such regulation may require the Company to modify, supplement, replace or cease operat-ing certain of its equipment and facilities, delay or impede its construction and operation of new facilities and require it to make substantial additional expenditures in amounts not yet known.Because of the state of environmental technology, it is much easier to bring our large new plants into compliance with existing regulations than it is with the smaller older stations.For these reasons, plus those of high operating cost and general inefficiency, the Company, as planned, was able during the year to retire some old electric generat-ing units.With the permission of the Pennsylvania Public.T J Utility Commission, two generating units at the Company's Moltwood Steam Electric Station were retired on Oct.1.These two coal-fired units had been in service since 1925.Spare parts had become increasingly difficult to obtain, the units'ost of operation had been high and their output had been reduced to hold down stack emissions. In June, operations at PP&L's Stanton Steam Electric Station, be-tween Scranton and Wilkes-Barre, were discontinued. Orig-inally Stanton's shutdown was scheduled for Oct.1 along with the two Holtwood units but damage by Tropical Storm Agnes moved ahead the date for closing.This 106,000-kilowatt plant, like the two Holtwood units, was also old and suffered from high operating costs.Tropical Storm Agnes The early shutdown of the Stanton plant was only a small part of the overall effect on the Company of Tropical Storm Agnes.Actually, in terms of what could have happened to the Company as a result of the storm, the Company came through the experience in relatively good shape.Effects of the flood reduced earnings by$1.6 million or 10 cents per share.Financial losses would have been much greater if the Company had not had flood insurance and a reserve for the extraordinary power costs incurred during the flood period.The main impact of the storm was borne primarily by our customers in the Wilkes-Barre and Harrisburg areas.All told, about 110,000 PP8 L homes and businesses, or about 13 per cent of our customers, were out of service at one time or another due to damaged electric distribution sys-tems, the maximum at one time being 55,000.Throughout the emergency, a source of pride for the Company was the dedicated job done by so many PPBL men and women.Restoration of service for customers became a total Com-pany commitment. One of the most notable jobs was the restoration to active service within three weeks of all units at the Brunner Island plant.Another was the construction from scratch of a substation to serve the Wilkes-Barre area, a job done'round the clock and completed in just 78 hours.In addition, the Company cooperated in making land avail-able for the placement of temporary mobile homes.Revitalization of the areas affected by the flood continues to be a prime concern of your Company, particularly in the Wilkes-Barre region.As you may know, PP8L was in the forefront of efforts during the Fifties and Sixties to breathe new economic life into our northeast region.The people at that time responded with a great determination and made great strides at re-establishing the area's economic vitality.We have no doubt that, with the assistance of Federal and state funds, the hard working and determined people of that region will once again bring the area back from severe difficulties. As one local leader put it,"These are people, remember, who battled economic adversity before and won.And they'l win again." Higher Rates, Construction Financing The inevitability of higher rates for electricity is becoming more apparent.A quick look shows that the PP&L residen-tial price of electricity between 1960 and 1969 declined 8 per cent while the consumer price index rose a whopping 24 per cent.However, since 1969, things have changed.Im-proved technologies which long permitted efficiences are no longer available in the same abundance as years past.In addition, inflation has caused the overall cost of doing busi-ness to rise sharply.The result of all this is that the price of electricity must begin to reflect today's increasing cost of providing it.The following list shows the major changes made in rates for electric service in recent years.March 1970-Tax surcharge to recover the cost of in-creased state taxes.April 1970-General rate increase of 5 per cent.Dec.1970-Fuel adjustment clause to adjust the prices of electric service for variations in the cost of fuel used to generate electricity. May 1971-General rate increase of 4.4 per cent.1972 saw a continuation of this pattern of seeking rate relief to cover the increasing cost of providing electric service.A 6 per cent rate increase was granted by the Pennsylvania Public Utility Commission as of March 28, 1972.This increase ($17 million annually), in addition to the 4.4 per cent ($12 million annually)granted last year, was the PUC's allowance on our request filed in early 1971.Nowhere is the continuing need for adequate rates more clearly demonstrated than in the size and cost of the Com-pany's construction program.To meet the energy needs of our customers, the Company must build about$1'/~billion of electric facilities in the next five years alone.Since the normal operations of our business only generate about 25 per cent of the funds required for such construction pur-poses, three-quarters of the needed money must be raised by selling PP8 L securities in the open-market.This the Company has been doing with increasing frequency in the last few years.1972 was yet another very busy year in the capital markets, as indicated below:.~First Mortgage Bonds, 7'/e%Series due in the year 2002$75,000,000 ~Notes due 1974-1976, 6~/4%-6~h% 8,300,000~Preference Stock,$8.00 Series, 350,000 shares 35,000,000 ~Common stock, 2 million shares 46,940,000 TOTAL$165,240,000 The Company was also granted approval in 1972 to par-ticipate with the Lehigh County Industrial Development Authority in the financing of up to$44 million of tax-free industrial revenue bonds for pollution control purposes.This form of authority financing for pollution control was only recently made available to utility companies as a result of changes in Pennsylvania law.The Company's 1973 financing year has already begun with the January sale of$80,000,000 of 30-year,7~/s per cent First Mortgage Bonds.Plans for the remainder of the year call for the sale of additional debt, common and preferred or preference stock.Since the great bulk of the funds we need must be raised from investors like yourselves, we con-tinually emphasize to our customers and to regulatory offi-cials that it is essential that our rates be high enough to give us the financial performance which will attract this very large number of investor dollars.PP&L, of course, is committed to doing what it can through cost control and increased effectiveness to hold down the need for higher rates.But as mentioned in the President's Message, the increasing impact of higher costs far exceeds our opportunities to reduce them.Two-way Communication The Company places great emphasis on communicating with its various publics on matters such as rates, our con-struction program, environmental issues, nuclear power and a whole host of other subjects which will affect the Company's performance in the years ahead.That is why the Company in 1972 accelerated its efforts to bring the Company's message to a broader cross-section of people.The service area news conferences initiated in 1971 were continued this past year.These were candid, two-way discussions between management and our local media.No holds were barred and every subject raised received an airing.Our willingness to be available in this manner is part of a conscious effort to build credibility for the Com-pany.Certainly, not everyone agrees with us, but we feel 0 i r i~PP&L's participation in research programs is greatly expanding. Three sponsored by the Electric Power Research Institute and to which PP&L is contributing are shown here.Above, research by High Voltage Power Corp.on extra-high voltage underground transmission, uses compressed gas as an insulator. Magnetohydrodynamics (MHD), top right, is a developing concept for generating electricity whereby a gas flame is directed between curved electromagnets to produce electric current.It fs being conducted at the Avco Everett Research Laboratory. And work continues by General Electric Co.on ultra-high voltage overhead transmission, bottom right, in the 1.1-million-volt to 1.5-million-volt range.Presently 500,000 volts is the highest transmission voltage on the PP&L system. that PPBL benefits from this open policy of willingness to discuss all pertinent issues relating to electric energy.The Company's rolling communications medium,"The Energy of Man" exhibit, completed another successful year of touring the service area.The train, which contains much information about the Company and its future plans was visited this past year by more than 100,000 persons.This brings the train's 1~/2-year attendance to about 225,000.'Management Changes Clifford L.Alexander, Jr., partner in the Washington, D.C.law firm of Arnold 8 Porter, was elected to the Company's Board of Directors at the Annual Meeting on April 26, 1972.He fills the vacancy created by the retirement of Dr.Eugene Farley, chancellor of Wilkes College.J3r. Farley had served PPBL with distinction for 10 years.Mr.Alexander served as foreign affairs officer with the National Security Council under President Kennedy in 1963 and as a White House counsel on civil rights under Presi-dent Johnson.He was chairman of the U.S.Equal Employ-ment Opportunity Commission from 1967 to 1969.He is active with the Legal Defense Fund of the NAACP and was recently named secretary of the National Urban Coalition. Mr.Alexander is no stranger to PPBL having previously been retained as a consultant in the implementation of an affirmative action program to help assure equal employ-ment opportunities throughout the Company.Effective Dec.1, S.Fred Diffenderfer retired as vice president reporting to the president on special assign-ments.Mr.Diffenderfer had served the Company most ad-mirably for 42 years.On July 1, 1972 Leon L.Nonemaker was appointed vice president of the new Consumer 8 Community Affairs De-partment.He was formerly vice president-Marketing. Within the new organization which Mr.Nonemaker heads, there has been established a team of consultants who ad-vise and work with customers in adopting energy con-servation techniques. Smaller than the former marketing and sales organization, the Consumer 8 Community Affairs Department is staffed by some 125 consultants who offer advice on wise energy use.The team consists of consult-ants to service some 100,000 commercial and industrial customers. And there are residential, consumer education and agricultural consultants who work among 750,000 residential and farm customers. THE ENERGY CRISIS There has been a great deal of talk lately about an energy crisis in the United States.And for good reason.With supplies of needed, fuels in short supply or subject to limited use because of environmental reasons;there is concern that the energy demands of the near future-between now and 1985-may not be met.The chart below shows how the demand for various fuels will rise by that time.in many parts of the midwest this past winter.Denver, Colo.school children can attest to the fact.Their schedules had to be shortened be-cause of shortages of fuel needed to heat and light their schoolrooms. Industry in Wisconsin had to curtail operations. And in many other parts of the country-Pennsylvania included-natural gas users were told that their fuel was scarce.Indeed, many gas companies were ordered not to take on new customers because of the problems.68 1970 GAS IMPORTS OOM.NAT.GAS NYORO OIL IMPORTS 00MESTIC OIL 1985 U.S.ENERGY DEMAND 5 DISTRIBUTION (Quadrillion BTU's)125 NUCLEAR COAL WHY PP&L IS CONCERNED PP&L is concerned about the problem for two reasons.One, we are a user of key fuels.To operate our generating stations, we use about 7 million tons of-coal a year.We are presently building two oil-fired generating units at our Martins Creek site near the Delaware River which will require 15 million barrels of oil each year.The second reason we are concerned about the energy crisis flows naturally from the first.It is that we are an energy supplier in addition to being a user.It stands to reason that if our use of fuels to generate electricity is curtailed because of short supplies, our ability to supply electric energy will be severely hampered.And after all, supplying electricity is our No.1 job.What are the consequences of not having enough energy?Schools may have to close, or at the very least operate on a much shorter schedule.Factories will not be able to operate at full capacity.As a result, workers may be laid off.The use of electric devices in the home-re-frigerators, ranges,-teievisions -may have to be curtailed. These'are very real possibilities if energy supplies are allowed to run short.The signs that the'United States is already in the midst of a developing energy crunch are ap-parent.Severe shortages of fuel oil were evident SHORTAGE OF KEY FUELS The basic problem concerns shortages of fossil fuels-natural gas, oil and coal.Let's take a look at them one at a time.-The forecasted demand for natural gas is much greater than the supply, which has leveled off and is declining. This shortage is most unfortunate because natural gas is very clean burning and as such, is preferred for environmental reasons.Oil shortages represent an even greater prob-lem.This is so because of the extensive use made in America of oil-base products, most notably gasoline for automobiles. In addition, there is an extensive home heating market for oil.Also, oil has been recently sought out as a low-sulfur fuel for generating electricity in order to comply with environmental requirements. Even at today's level of use, the United States must import about 20 per cent of its oil needs.Based on the anticipated demands, the United States may have to be importing over 50 per cent of our oil supply by 1985.Considering the fact that much of this oil must come from sources'of questionable friendship to the U.S., there are substantial national security, as well as balance-of-payments problems, in relying on foreign oil imports.For these reasons, there is great em-phasis today on completing the Alaska oil pipe-line and getting on with the job of exploring the continental shelf as well as other domestic loca-tions for new oil sources.The problem is that these steps involve environmental problems.Un-til these are ironed out, domestic oil will be in short supply.Coal presents a perplexing problem.Everyone acknowledges that there are huge coal deposits available in the continental U.S.There are sev-eral problems with it, however.Much of the coal does not meet the environmental standards for sulfur content.There are substantial efforts under way to desulfurize coal but these research efforts have not yet produced an answer.Another prob-lem is that if America is to substanially rely on coal as a fuel, we will have to find a great many more coal miners than are presently available. This will not be an easy task because people are not easily attracted to this very difficult occu-pation.And finally, much of the coal available must be strip-mined. This, of course, represents the ultimate environmental degradation to many people.Indeed, the U.S.House of Representa-tives pressed in its last session for a ban on the practice.So for these several reasons, among others, the vast supplies of coal known to exist do not necessarily solve the fuel shortage.EFFECTS ON ELECTRIC SUPPLY Shortages of these key fuels can affect electric supplies in two ways.One, as mentioned earlier, is due to the fact that we use large quantities of these fuels to generate electricity. Thus, any shortage could adversely affect our ability to supply service.Secondly, gas and oil shortages in particular, could cause people to switch to elec-tricity for their power.Indeed, it is this potential for a large switch to electricity that could sub-stantially boost the need for our service.For these reasons, we are presently investigating all available alternatives for generating electricity. Uranium-nuclear fuel-is the most obvious alternative. There are supplies of uranium avail-able to fuel America's power needs through the end of this century, utilizing present technology. We consider nuclear power a logical addition to a balanced power supply system.We'e ex-plained many times the extraordinary design, construction and operating procedures devel-oped by the Atomic Energy Commission (AEC)for these plants.We point to the unmatched safety record of the nuclear power industry and the stringent protection afforded the general public in the area of the plant.But, some peo-ple do not agree with us.Thus, a dispute con-tinues and while it does, needed power plants are delayed and the pressure on the fossil fuels continues. There are power sources other than conven-tional nuclear development. Hopeful projects like the nuclear breeder reactor, fusion, magnetohy-drodynamics (MHD)and solar energy.But realis-tically, these developments are many years from commercial use.Thus, the problem of meeting 12 America's power needs for at least the next de-cade and a half falls to the beleagured fossil fuels and to nuclear power.A BALANCED POLICY IS NEEDED A reasonable balance between the need for more energy and the need for a cleaner environment would help the situation. Certainly, we support the need for a cleaner environment. But the facts are that the recent, and laudable, enthu-siasm in environmental matters has posed a rate of change for our operations that is very difficult to cope with.All we suggest is that we pause at least long enough to ask,"How quickly ought environ-mental rules be tightened-without also con-sidering the impact in terms of economic and social side effects?""What is the effect, for example, of imposing environmental regulations calling for costly equipment of questionable effectiveness?" We think that these are ques-tions which ought to be answered.We think that they are reasonable questions and we do not feel that they are inconsistent with environ-mental quality.We, as a Company, will continue to work for environmental improvement. All we ask is that now that the importance of environmental quality has been determined to be a primary part of each and every decision we make as a Company, that there be a total analysis of the effects-on peo-ple, on jobs, on costs to the consumer-of such environmental impact.ENERGY CONSERVATION In view of the shortage of key fuels and the po-tential effect on electrical supplies if homes and businesses switch to electricity as a result, it is in everyone's best interest to work hard at con-serving energy.We at PP8L are doing our part.As mentioned in the AnnI2al Report, the Company is building the generating capacity needed for the future, as shown in this chart.However, building is just part of the equation.10,000 WHERE WILL PPSL ELECTRICITY COME FROM?MEGAWATTS 8000 8000 SUSO.I SUSQ 2 J..4000 WINTER OEMANO MARTINS CREEK 4 MARTINS CREEK 3 MONTOUR 2 2000 AVARABEE VRNTER CAPACRV (leeeeled leee IIRI Reeene)70 71 72 73 74 75 78 77 78 78 80 81 82 The other part is to encourage where possible the wise use of our energy resources. In keeping with this thrust, the Company undertook in 1972 a very significant shift in its marketing policy.Employees formerly involved in marketing elec-tricity are now involved in consulting with energy users on the wisest and most economical uses for electricity. Residential consultants, for in-stance, are working with builders and developers to encourage the use of energy conservation techniques in home construction. Industrial rep-resentatives are making plant surveys to attempt to discover potential for energy conservation in industrial buildings and processes. PP8L people are giving chart briefings on the energy crisis situation to various citizens'roups and to indi-vidual customers. 13 The Company has also initiated advertising, shown below, which is oriented toward the ways a customer may conserve energy.A Homecology , l.zlIIr,.That'MoueJJ You'e Wast tnt:!...[I t la Coeror collsopvsuoh Pg Wo'ro anxious to hear what you think 5'VXI hhh~~is Nwl H Icttl~~IWL MT%lilt'~)e~l~I='i c KJQ'.".'..:>ACI I~'I i Program has been developed for home economics teachers in our service area for use in classrooms to encourage conservation in the home.The Company has also entered into a contract with the Franklin Institute in Philadelphia for the design and construction of an energy conserva-tion-oriented single family dwelling.This dwelling will contain experimental equipment and systems which will demonstrate ways of reducing energy use.The Company hopes to use this home as a springboard for efforts to spread more broadly the message of wise energy use throughout our service territory. THE BASIC PROBLEM IS TIME A final, overall look at the energy crisis situation suggests that PPBL, and other energy compa-nies, can continue to meet the nation's energy needs.Meet them without delaying people's as-pirations for a better life.Without refusing to serve new customers. And in the case of electric service, without rationing, and without having selected blackouts. But time is needed.Time to straighten out the fuel shortage prob-lem.Time to search for, discover and make avail-able the vast fuel supplies known to exist.Time is needed to come to grips with existing and developing environmental standards. This means new technologies, new processes and new equipment, much of it as yet unavailable. And finally, we must be allowed to build with-out more delay the facilities which will serve our customers in the years just ahead. STATISTICAL
SUMMARY
CAPITAL INVESTMENT CAPITAL PROVIDED BY INVESTORS-thousands Long-term debt................ Preferred and preference stock..Common equity................ Short-term debt 1972$635,044 231,375 412,130 1,278,549 96,482 1971 576,760 196,375 351,299 1,124,434 76,251 1970 514,371 156,375 303,117 973,863 97,878 1969 474,182 86,375 268,233 828,790 98,500 1968 394,268 86,375 234,957 715,600 93,950 Total capital provided$1,375,031 1,200,685 I,071,741 927,290 809,550 RETURN ON CAPITAL PROVIDED BY INVESTORS-as a percentage of average capital provided...... NUMBER OF SHAREOWNERS-preferred, preference and common 7.56 135,399 7.34 123,598 6.83 111,909 7.13 98,450 6.98 94,671 UTILITY PLANT-thousands TOTAL UTILITY PLANT.......... ACCUMULATED DEPRECIATION ..$1,637,040 275,627 1,458,707 1,275,866 274,911 249,551 1,120,022 1,010,048 225,205 220,117 UTILITY PLANT LESS DEPRECIATION $1,361,413 1,183,796 1,026,315 894,817 789,931 ANNUAL DEPRECIATION -as a percentage of average depreciable plant............ OPERATIONS 3.3 3.2 3.2.3.2 3.2 ELECTRIC CUSTOMERS.....ENERGY SALES-millions of kilowatt hours Residential -electrically heated homes.......... Residential -other........Commercial Industrial .Other 2,042 3,943 3,933 6,458 637 1,721 3,758 3,533 6,053 620 1,459 3,634 3,198 5,807 585 1,147 3,426 2,840 5;566 552 848 3,240 2,550 4,916 527 863,344 843,080 828,643 818,500 805,523 AVERAGE ANNUAL KWH USE-residential customers..... 17,013 8,032 15,685 7,510 14,683 7,086 13,531 6,458 12,081 5,871 AVERAGE PRICE OF ELECTRICITY -cents per kilowatt hour........ POWER CAPABILITY -kilowatts...PEAK DEMAND-kilowatts EMPLOYEES 1.99 4,108,000 3,598,000',790 1.87 3,496,000 3,294,000 e 6,514 1.70 1.61 1.66 3,256,000 3,124,000 2,465,000 3)238,000't 2,850)000't 2,5141000',372 6,238 6,225'Winter peak shown was reached early tn subsequent year.1 peaks are those which woutd have occurre'd if toad curtaitmont moasures had not been in offoct.16 A more detailod review ol the Company's operations is available. A postal caid is provided with this report to aid you in making this request. FINANCIAL SECTION STATEMENT OF INCOME 1972 1971 1970 1969 1968 Thousands of Dollars OPERATING REVENUES (99%electric)................. OPERATING EXPENSES (Note 3)Wages and employee benefits...Fuel Power purchases.............. Interchange power sales........Other operating costs........... Depreciation .Federal income taxes (Note 6)...State income taxes (Note 6)....., Deferred income taxes Provision Deferred in prior years-credit Investment tax credits Deferred Amortization of deferments-credit Taxes, other than income....... OPERATING INCOME............ OTHER INCOME AND DEDUCTIONS Allowance for funds used during construction .......... Other-net$345,792 55,220 95,220 13,514 (34,569)39,512 41,446 12,582 5,520 3,624 (795)7,349 (2,194)25,658 262,087 83,705 14,647 29 300,707 48,198 79,499 18,963 (15,468)33,214 34,903 9,416.3,256 551 (795)1,597 (2,480)22,146 233,000 67,707 16,242 113 255,313 45,779 61,621 21,982 (9,356)24,009 32 173 3,699 1,287 (795)1,573 (2,539)18,197 197,630 57,683 9,723 192 223,388 205,947 41,946 44,601 17,453 (8,865)21,865 28,981 11,113 3,287 40,731 34,813 14,846 (3,651)19,535 26,272 16,410 2,430 (795)3,339 (2,540)8,167 168,552 54,836 (795)1,955 (2,005)7,293 157,834 48,113 6,369 5,868 197~8)INCOME BEFORE INTEREST CHARGES INTEREST CHARGES Interest on long-term debt...Interest on short-term debt..Other interest charges...... 14,676 98,381 36,507 3,846 107 16,355 84,062 30,895 4,109 486 9,915 67,598 25,381 7,194 88 6,566 61,402 20,813 5,935 45 5,860 53,973 16,527 3,580 46 NET INCOME Dividends on preferred and preference stock......... EARNINGS APPLICABLE TO COMMON STOCK.......... COMMON STOCK Average number of shares outstanding ............... Earnings per share, based on average number of shares outstanding ............... Dividends per share......;... 40,460 57,921 35,490 48,572 32,663 34,935 26,793-20,153 33,820 34,609 14,52611,392 6,426 3,822 3,822$43,395 37,180 28,509 30,787 29,998$2.48$1.64 2.37 1.60 1.97 1.60 2.32 1.60 2.30 1.56 17,512,793 15,690,490 14,472,076 13,277,365 13,044,538 See accompanying Notes to Financial Statements, 17 BALANCE SHEET ASSETS December 31 1972 1971 Thousands of Dollars UTILITY PLANT-at original cost Electric Steam heat Construction work in progress....Less accumulated depreciation $1,386,223 8,110 242,707 1,637,040 275,627 1,361,413$1,189,818 5,661 263,228 1,458,707 274,911 1,183,796 INVESTMENTS -at cost or less Subsidiaries Safe Harbor Water Power Corporation (t/s interest)..Nonutility property, less accumulated depreciation ..Other.3,129 3,315 2,552 5,540 14,536 4,046 3,315 2,655 4,544 14,560 CURRENT ASSETS Cash Accounts receivable, less reserve Customers Other Materials and supplies (at average cost)Fuel.Operating and construction Other 13,729 23,510 3,330 31,601 12,847 9,488 94,505 14,197 18,755 2,824 28,103 10,265 6,124 80,268 DEFERRED DEBITS Extraordinary power costs Other 1,665 2,985 4,650$1,475,104 1,885 2,459 4 344$1,282,968 18 See accompanying Notes to Financial Statements. LIABILITIES December 31 1972 1971 Thousands of Dollars SHAREOWNERS INVESTMENT Preferred stock'reference stock4..........-. Common stock'apital stock expense (deduction) .(No amortization plan ln ellect)Earnings reinvested in business (Notes 4 and 5).116,375 115,000 278,484 (6,592)140,238 643,505 3 116,375 80,000 231,544 (5,892)125,647 547,674 LONG-TERM DEBT4 (Note 2)635,044 576,760 CURRENT LIABILITIES Bank loans.Commercial paper notes Accounts payabie Taxes accrued Dividends payable and interest accrued Other 30,000 66,482 27,193 9,963 23,003 6,471 163,112 17,000 59,251 22,876 11,739 18,772 5,631 135,269 DEFERRED AND OTHER CREDITS Accumulated deferred investment tax credits.Accumulated deferred income taxes.Contributions in aid of coristruction Other 9,779 12,035 5,859 5,770 33,443$1,475,104 4,624 9,206 4,056 5,379 23,265$1,282,968'See Schedule of Capital Stock and Long-Term Debt on page 20.See accompanying Notes to Flnanctat Statements. 19 SCHEDULE OF CAPITAL STOCK AND LONG-TERM DEBT December 31,1972 Thousands of Dollars$53,019 4,178 22,878 6,300 22,237 7,763$116,375 PREFERENCE STOCK-no par, cumulative, authorized 2,000,000 shares$8.00 series, outstanding 350,000 shares.$8.40 series, outstanding 400,000 shares.$8.70 series, outstanding 400,000 shares..F~$35,000 40,000 40,000$115,000 CAPITAL STOCK PREFERRED STOCK-$100 par, cumulative 4'/2%authorized 629,936 shares, outstanding 530,189 shares.......... Series, authorized 2,000,000 shares 3.35%, outstanding 41,783 shares....4.40%, outstanding 228,773 shares...4.60%, outstanding 63,000 shares....8.60%, outstanding 222,370 shares...9%, outstanding 77,630 shares....... LONG-TERM DEBT FIRST MORTGAGE BONDS 3%series due 1975.2r/a%series due 1976................ 2%%series due 1977.....,..... ,...3t/a%series due 1978 2s/4%series due 1980................ 3a/a%series due 1982 3t/a%series due 1983..............., 3'/a%series due 1985................ 4a/a%series due 1991................ 4a/a%series due 1994.......'......... 5a/a%series due 1996................ 6a/a%series due 1997................ 7%series due 1999 8'/a%series due 1999................ 9%series due 2000 7t/4%series due 2001................ 7a/a%series due 2002................ /$93,000 8,000 20,000 3,000 37,000 7,500 25,000 25,000 30,000 30,000 30,000 30,000 40,000 40,000 50,000 60,000 75,000 603,500 COMMON STOCK-no par, authorized 30,000,000 shares, outstanding 19,051,255 shares$278,484 NOTES 6t/a%maturing in 1973-to be refinanced 6t/4-8 t/4%maturing in 1974 and 1976..OTHER.10,000 2'i,350 31,350 194$635,044.SECURITIES SOLD IN 1971 AND 1972 issued 1971 February March-June July November Security First Mortgage Bonds, 7't/4%Series due 2001...Notes, 6i/4-7t/to% maturing in 1974 and 1976....Preference Stock,$8.70 Series.Common Stock.Shares 400,000 1,600,000 Amount$60,000 10,450 40,000 37,120$147,570 1972 February February-March July October First Mortgage Bonds, 7a/a%Series due 2002 Notes, 6i/4-6i/2% maturing in 1974 and 1976 Preference Stock,$8.00 Series.Common Stock.350,000 2,000,000$75,000 8,300 35,000 46,940$165,240 Soo accompanying Notes to Financial Statements. 20 SOURCES OF FUNDS USED FOR NEW CONSTRUCTION 1972 1971 1970 1969 Thousands of Dollars 1968 OPERATIONS Net income (a).Less cash dividends Current earnings reinvested in business..Depreciation .Deferred extraordinary power costs........ Deferred income taxes and investment tax credits-net 3 57,921 43,330 14,591 41,446 220 7,984 64,241 48,572 36,746 11,826 34,903 220 J1,127)45,822 34,935 29.456 5,479 32,173 (2,105)~1.762)33,785 34,609 25,097 9,512 28,981 3 38,496 33,820 24,173 9,647 26,272~846)35,073 OUTSIDE FINANCING Sales of securities Common stock.Preferred stock Preference stock First mortgage bonds Long-term notes Other long-term debt Securities retired First mortgage bonds Long-term notes.Other long-term debt Short-term debt-net increase (decrease) .35,000 75,000 8,300 42 40,000 60,000 10,450 56 ('i5,000)(10,000)(57)20,231 160,456 (8,000)(117)~21,627 117,882 46,940 37,120 28,093 30,000 40,000 50,000 2,600 87 (7,763)(1,000)(236)~4,122)137,659 24,050 80,000 54 (3,500)(140)8,050 108,514 (2,500)(238)63,100 60,362 OTHER SOURCES AND (USES)Investments Refund of prior years.Federal income taxes-net Working capital-net change (excluding short-term debt)Miscellaneous -net 24 (253)4,530 1,472 1,116 2,956 (6,624)(b) 23,896(b)(14,824)(13,652)1,235 657 5,052 1,036 203 174~5,943 26,695 (6,302)~11,977 2,525 TOTAL FUNDS USED FOR NEW CONSTRUCTION (a).$218,754 192,399 165,142 135,033 97,960 (a)Includes allowance for funds used during construction.(b)Tho not changes In working capital resulted principally from tho following: 1972, Increases In accounts receivablo and fuol Inventory; 1971, decreases in special deposits and accounts receivable. See accompanying Notes to Financial Statements. 21 STATEMENT OF EARNINGS REINVESTED IN BUSINESS 1972 1971 BALANCE, JANUARY 1 NET INCOME.Thousands of Dollars$125,647$113,821 57,821 48,572 183,558 162,393 DIVIDENDS Preferred and preference stock.Common stock (per share-1972,$1.64;1971,$1.60)BALANCE, DECEMBER 31, (Notes 4 and 5)14,526 28,804 43,330$140,238 11,392 25,354 36,746$125,647 NOTES TO FINANCIAL STATEMENTS December 31,1972 and1971 1.
SUMMARY
OF ACCOUNTING POLICIES Accounting System Accounting records are maintained in conformity with the uniform system of accounts prescribed by the Federal Power Commission and adopted by the Pennsylvania Public Utility Commission. Utility Plant Cost of additions to utility plant and replacements of units of property are capitalized. Costs of de-preciable property retired or replaced are elimi-nated from utility plant accounts and such costs, plus removal cost, less salvage, are charged to accumulated depreciation. Costs of land retired or sold are eliminated from utility plant accounts and any gains or losses are reflected on the Statement of Income during the current year.All expenditures for maintenance and repairs of property and the cost of replacement of items determined to be less than units of property are charged to operating expenses.Allowance for Funds used During Construction As provided in the uniform system of accounts, the net cost of funds (interest on borrowed money and a reasonable rate on other capital)used to finance construction work in progress is capital-ized.An amount equal to the amount so capital-ized is shown on the Statement of Income as an item of Other Income and serves to offset the actual net cost of financing construction work in progress.Depreciation For financial statement purposes, depreciation is computed using the straight-line method ap-plied on a group plan to accumulate an amount equal to the cost of utility plant, less net salvage, over the estimated useful lives of property.Subsidiaries The cost of the Company's investment in subsidi-aries and other affiliated companies is shown under Investments on the Balance Sheet.Interest and dividends received on these investments are reflected as Other Income on the Statement of Income.The assets, revenues, and earnings of subsidiaries are not significant in relation to those of the Company.Income Taxes Provisions for current taxes payable are set forth separately in the Statement of Income.Tax re-ductions arising from the use of the declining balance depreciation method, guideline lives and certain income and expenses being treated dif-ferently for tax computation than for book pur-poses are accounted for under the flow-through method.These reductions in income tax provi-sions are taken into account in rate determina-tions by regulatory authorities and currently result in lower rates for customers than would other-wise be possible.Deferred tax accounting is followed in connec-tion with the additional income tax reductions related to accelerated amortization of certified 22 defense facilities and pollution control equip-ment, use of the class life depreciation system and, beginning in 1972, deduction of costs of removing retired depreciable property.Investment tax credits are deferred.Deferred amounts pertaining to the Job Development In-vestment Credit (Revenue Act of 1971)are being amortized over the average lives of the related property while amounts pertaining to the credits permitted under prior laws are being amortized over 5-year periods.Retirement Plan The Company has a Retirement Plan covering substantially all employees. Contributions are made by both employees and the Company, but the full cost of past service and Plan improve-ments is borne by the Company.Pension costs are funded currently and include amortization of past service costs over periods of not more than 20 years.Research and Development Research and development costs are charged to expense as incurred except for costs re-lated to specific construction projects which are capitalized. 2.SALE OF FIRST MORTGAGE BONDS On January 8, 1973 the Company sold$80 million of First Mortgage Bonds, due 2003.The proceeds were used for general corporate purposes in-cluding the retirement of a portion of short-term debt incurred (a)to provide interim financing for construction expenditures and (b)to repay$25 million of long-term debt which matured Decem-ber 1, 1972.3.STORM DAMAGE During June 1972 severe flooding caused by Tropical Storm Agnes occurred in the Company's service area.Effects of the flood increased oper-ating expenses by approximately $1.6 million (10 cents per share)after giving effect to insur-ance recoveries, casualty reserves and related tax reductions. 4.DIVIDEND RESTRICTIONS The Company's charter and mortgage indentures restrict the payment of cash dividends on Com-mon Stock under certain conditions. Under the charter provisions, which are presently the more limiting, no restrictions are effective on the pay-ment of such dividends out of current earnings.The amount of earnings reinvested in business.free of restrictions under the charter at Decem-ber 31, 1972, after giving effect to the sale of$80 million of First Mortgage Bonds in January 1973, was$103.3 million 5.PROPERTIES SUBJECT TO FEDERAL LICENSES The Company operates two hydroelectric proj-ects under licenses issued by the Federal Power Commission (FPC).Certain reserves required to be provided under the Federal Power Act have not been recorded pending approval of the amounts thereof by the FPC.The Company estimates that such reserves applicable to the years from 1946 would not exceed$2.3 million at December 31, 1972.6.INCOME TAXES The excess of total tax depreciation over book depreciation resulted in lower provisions for cur-rent taxes payable of$7.7 million in 1972 and$7.0 million in 1971.7.RETIREMENT PLAN The Retirement Plan was amended July 1, 1971 and April 1, 1972 to provide for increased bene-fits and as of July 1, 1971 certain of the Plan's actuarial assumptions were changed.At June 30, 1972, including these changes, the actuarially computed unfunded past service cost was about$15 million and vested benefits exceeded the as-sets of the fund by about$10 million.Pension costs were$6.7 million in 1972 and$4.9 million in 1971, including in each period funding of the, past service cost.8.COMMITMENTS AND CONTINGENT LIABILITIES The Company's construction program is esti-mated to require expenditures of about$225 mil-lion for the year 1973.In connection with providing for its future bi-tuminous coal supply, the Company plans to guarantee the capital obligations of certain coal suppliers (including four owned or controlled coal companies) up to a currently estimated$90 million outstanding at any one time.Obligations actually guaranteed under these arrangements aggregated $63.0 million at December 31, 1972.Reference is made to pages 6 and 7 of this report for information concerning possible adverse ef-fects of environmental regulations on the Com-pany's operations. 23 PRINCIPAL OFFICERS BOARD OF DIRECTORS JACK K.BUSBY, President AUSTIN GAVIN, Executive Vice President ROBERT R.FORTUNE, Vice President, Financial GEORGE F.VANDERSLICE, Comptroller CHESTER R.COLLYER, Treasurer DONALD J.TREGO, Assistant Treasurer BROOKE R.HARTMAN, Vice President, Division Operations CHARLES E.FUQUA, Vice President, Susquehanna Division JACK HANCKEL, Vice President, Harrisburg Division CARL R.MAIO, Vice President, Lehigh Division JAMES J.McBREARTY, Vice President, Northeast Division LEON L.NONEMAKER, Vice President, Consumer and Community A/lairs BRENT SHUNK, Vice President, Lancaster Division EMMET M.MOLLOY, Vice President, Human Resource and Development EDWARD M.NAGEL, General Counsel and Secretary CLIFFORD L.ALEXANDER, JR., Washington, D.C.Partner ol Arnold 8 Porter, Counsellors at Law JACK K.BUSBY, Allentown President ol the Company RALPH R.CRANMER, Williamsport Presidenl and General Manager ol Grit Publishing Company EDGAR L.DESSEN, Hazleton Physician-Radiologist AUSTIN GAVIN, Allentown Executive Vice President ol the Company W.DEMING LEWIS, Bethlehem Presidenl ol Lehigh University JOHN A.NOBLE, Scranton President o/Cia/and Simpson Company NORMAN ROBERTSON, Pittsburgh Senior Vice Presldenl and Chio/Economist ol Mellon Bank, N.A.JOSEPH T.SIMPSON, Harrisburg Chairman o/the Board ot Harsco Corporation M.J.WARNOCK, Lancaster Chairman o/the Board ol Armstrong Cork Company CHARLES H.WATTS II, Lewisburg President o/Bucknell University S.HAYWARD WILLS, Miami, Florida Chairman ol the Board and President of GAC Corporation FISCAL AGENTS SECURITIES LISTED ON EXCHANGES TRANSFER AGENTS FOR PREFERRED, PREFERENCE AND COMMON STOCK Industrial Valley Bank and Trust Company 634 Hamlllon Street Allentown, Pennsylvania -18101 Irving Trusl Company Ono Wall Stmot New York, New York-10015 Pennsylvania Power 6 Light Company 901 Hamlllon Streel Allentown, Ponnsylvanla -18101 REGISTRARS FOR PREFERRED, PREFERENCE AND COMMON STOCK Tho Firsl National Bank el Allentown Seventh 6 Hamilton Streets Allentown, Ponnsylvanla -18101 Morgan Guaranty Trusl Company ol New York 23 Wall Street Now York, New York-10015 DIVIDEND DISBURSING OFFICE FOR PREFERRED, PREFERENCE AND COMMON ST'OCK Treasurer Pennsylvania Power 6 Light Company 901 Hamilton Slreel Allentown, Pennsylvania -18101 NEW YORK STOCK EXCHANGE First Mortgage Bonds, 3%Series due 1975 4Y~%Preferred Stock(Code: PPLPRB)4.40%Series Preferred Stock (Code: PPLPRA)8.60%Series Preferred Stock (Codo: PPLPRG)Prelerenco Stock,$8.00 Sorfes (Ceder PPLPRJ)Pmlerence Stock,$8.40 Ser!os (Code: PPLPRH)Preterence Stock,$8.70 Series (Code: PPLPRI)Common Stock (Code: PPL)PBW STOCK EXCHANGE 4'%referred Stock 3.35%Sorios Prolerred Stock 4.40%Series Pmlerred Stock 4.60%Sories Preferred Stock 8.60%Series Prelermd slack 9%Series Preferred Stock Preference Stock,$8.00 Series Preference Stock,$8.40 Series Preference Stock,$8.70 Set/os Common Stock ACCOUNTANT'S OPINION HASKINS&SELLS Corlitiod Pubtlc Accountants Two Broedwey Now York 10004 To the Shareowners and Board of Directors of Pennsylvania Power&Lfght Company: We have examined the balance sheets of Pennsylvania Power&Light Company as of December 31, 1972 and 1971, the related statements of Income, earnings relnvested in business and sources of funds used for new construction for the years then ended and the schedule of capital stock and long-term debt as of December 31, 1972.Our examina-tion was made In accordance with generally accepted audit-ing standards, and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary In the circumstances. In our opinion, such financial statements and schedule present fairly the financial position of the Company at De-cember 31, 1972 and 1971 and the results of its operations and sources of funds used for new construction for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis.HASKINS&SELLS February 5, 1973 In late September 1972, the Company's Board of Directors visited the nuclear facilities of General Electric Co.in California. Purpose of the trip was a detailed familiarization with the safety, environmental and operating patterns of a nuclear-fueled generating station. h PENNSYLVANIA POWER 8 LIGHT COMPANY 901 Hamilton Street Allentown, Pa.18101 Telephone: Area Code 215 821-5151 BULK RATE U.S.POSTAGE PA I D Allentown, Pa.Permit No.104 reulno oN eroYcrro rArrk Pennsylvania Power 8 Light Company Annual Report 3974 Wa HIGHLIGHTS 1974 1973 18,865 384,814 51,066 2.64 1.68 Energy Sales-millions of kwh........18,963 Revenues-thousands............... $472,036 Earnings Applicable to Common Stock-thousands (a).$63,661 Earnings Per Share-based on average number of shares outstanding (a)........... $2.88 ,Dividends Per Share................. $1.77 Reported Market Price per Share of Common Stock High$23 26 Low$13 19 Net Utility Plant-thousands.......... $1,744,901 1,534,154 (a)Reflects retroactive applfcatlon cf change In accounting for fuel costs.1972 17,013 345,792 1971 15,685 300,707 1970 14,683 255,313 43,161 38,488 30,252 2.46 1.64 2.45 1.60 2.09 1.60 27 26'/4 27'le 2274 21 Vs 20'ls 1,361,413 1,183,796 1,026,315 Pennsylvania Power&Light Company is an electric utility providing service to more than 900,000 homes and busi-nesses over a 10,000-square-mile area In 29 counties of central eastern Pennsylvania. Principal cities In the PP8L service area are Allentown, Bethlehem, Harrisburg, Hazleton, Lancaster, Scranton, Wllliamsport and Wilkes-Barre. Contents The Year in Review Management Analysis Financials Notes to Financial Statements Stock Prices Directors and Principal Officers 3-9 10-1 1 12-18 18-22 23 24 Cover Photos: Many people with many different skills are needed to keep a utility like PP&L running efficiently. From top: workmen lower turbine rotor blades into Unit Three at Martins Creek plant;answering one of the more than 891,000 customer calls to the Company in 1974;transmission construction workers labor high up on a 500,000-volt tower which will become an integral part of the Company's 3,000-mile transmission system;naturalist-director of the Montour Preserve near the Company's Montour generating station conducts a nature study program for area school children. To Our Shareowners: to provide ym w'he electric serv: " you want.Because there is nothing more important this year, in our opinion, than establishing an effective national energy program, this letter focuses only on this subject.The text of the report reviews our PPB L year which, all things considered, went well-in-cluding the fact that PP&L continues to have ample supplies of electric power to meet all customer needs.From an overall energy standpoint, 1974 was a tough year.It began and ended without any real determination of a national energy program.The oil embargo, the coal strike, and the drastic curtail-ments of natural gas supply were all forcible re-minders of the difficulties that can affect our three basic fossil fuels.Continuing high inflation, plus huge increases in costs of oil and coal, understandably precipitated consumer anger and protest.The natural response of consumers has been to pressure government to require that utilities hold the line on prices.In many cases, action was taken to postpone, minimize or deny rate increases. Investors in utility securities became concerned. Would adequate earnings be allowed'7 Would the quality rating of debt securities be down-graded' Would necessary rate increases be withheld'7 Would the investor become the victim of a cost/price squeeze?Reassuring answers were few and far between.The utility industry generally suffered a sharp de-cline in investor confidence. Some security sales were postponed. The money crunch was on.Add-ing to the financial problem was the lower-than-expected growth in revenues because of lower growth in electric usage.For most utility companies, the near-term situa-tion left no choice but to make major cutbacks in construction, particularly in planned additions to generating capacity.In the next several years, the cumulative effect of these cancellations and de-ferrals of coal and nuclear power plants will mean a reduction of approximately 60 million kilowatts in electric generating capacity.The reduction is compatible with the current wis-dom that projects electric load growth at rates of five/six per cent per year instead of the past pattern of seven/eight per cent.But these revised load projections may prove to be in error, on the low side, in the event that large throw-over demands for more electricity arise from shortages of other fuels.Accepting the lower load growth projections as real, the cutbacks could mean a lost opportunity to reduce the nation's dependency on oil and natural gas as fuels for electric generation. Presently, oil and gas are used to generate about 35 per cent of the nation's electric energy.This figure would be reduced to about 10 per cent by 1985 if additional coal and nuclear capacity were installed as origi-nally planned.No wonder Llewellyn King, of Weekly Energy Report, has editorialized that 1974 is likely to be looked back at as the year when the nation took the wrong turn in energy.A critical factor is the lead times that have to be dealt with.New deep coal mines take five or six years to get up to full production. The time span to develop new oil fields, related transport and re-fineries is even longer.New power plants and con-necting transmission lines require eight to ten years to be built.These lead time requirements in combination with non-starts, delays and cancellations of energy supply projects mean, in our judgement, that a real hazard exists that the nation could reach the end of its energy rope by the early 1980s or before. What it comes down to is that the things that can be done to improve energy supplies in the 1980s must be undertaken now.No lopsided viewpoint is intended or recom-mended.Commitment to research must be con-tinued and expanded.And the focus on energy conservation must be intensified until conservation becomes an accepted national ethic.Unfortunately, it is probably unrealistic to expect that the rate of change in research or conservation, or the two together, can move fast enough to pro-tect the nation from the energy bind that could materialize within the next decade.The near-term risks are very high.Recent indus-trial plant shutdowns due to shortages of natural gas and the prolonged British coal strike of 1972 have both provided bitter foretastes of what hap-pens to people when basic energy is in short supply.By speaking out today, we seek to avert the tragic consequences of a deficient electric power supply a few years hence.We urge prompt action in four basic areas:~For oil and natural gas-accelerate off-shore development of new supplies.~For coal-moderate sulfur content restrictions for five/ten years.Such action should (1)en-courage development of new coal mines in the eastern and midwest regions of the United States, (2)lessen the cost/price increase burden that has been created by the height-ened demand for coal that is"low" in sulfur content, and (3)provide additional time to de-velop practical methods of excess sulfur re-moval at reasonable cost.~For supplies of electricity adequate to protect the national interest-adopt regulatory poli-cies and incentives for investors that will enable utility companies to reactivate construc-tion of the nuclear and coal power plants that have been cancelled and deferred.~For rail transportation -provide the govern-mental funding necessary to rehabilitate and expand essential railroad facilities through a railway trust fund or other means.The pres-ent scenario of"freight embargo next week" is intolerable. For much of the nation, sever-ance of railroad service terminates supplies of coal and other fuels.The almost endless process of discussion, de-bates, studies and re-studies has become the crux of the nation's energy problem.The resources and the skills to do the job are available. What appears to be lacking is the will to break some eggs and make the omelet.To put the matter bluntly, there seems to be too much concern that someone will make some extra dollars as a part of providing the additional energy supplies that our country de-pends upon for survival.Sometimes overlooked is the fact that reinvestment of profits can be an im-portant source of funds for financing development of additional energy supplies.If there are windfall profits, the tax collector can take care of them.Our society can cope with human problems aris-ing from inadequate income, including inability to purchase basic energy requirements -if we have energy available. Without adequate energy, our society will not have the productive capability nec-essary to meet human needs.What we cannot afford is another year of less than all-out activity to rebuild and restructure our national energy base.The thing to do is to get on with the job.In this nation we can overcome the energy problem.What it takes is all of us working at it together.In PP&L we will do our best to do our part.Respectfully submitted, March 3, 1975 Jack K.Busby, President THE YEAR IN REVIEW Earnings for 1974 were$2.88 per share of common stock, up 24 cents or 9.1 per cent from the$2.64 earned in 1973.Both years reflect a change in 1974 in the method of accounting for fuel costs recoverable from customers through the operation of a fuel adjustment clause on electric bills.Our current method of accounting for fuel costs eliminates the average three-month lag between the time we recorded the cost of fuel burned and the time we recorded the recovery of the cost through customer billings.Without the change in accounting, our earnings would have been$2.31 per share for the year compared to$2.57 for 1973.Metropolitan Edison Co.This resulted in an overall sales increase of.5 per cent over 1973.When these usage figures are compared to an average overall growth rate of about nine per cent over the previous 10 years it is evident that there was a substantial cutback in electric use by just about every class of customer.With the downturn in the economy and the continuing effectiveness of our customers'nergy conservation measures, the long-range forecast of electric use has been revised downward.But we still recognize the possibility of people using more electric energy because of shortages of natural gas and the uncertainty of the oil market.Dividend Raised The board of directors on May 22 raised the quarterly dividend rate on PP&L common stock from 42 to 45 cents a share.The increase brings the annual dividend rate up to$1.80 per share.This is the point where we would have been if earnings problems had not forced us to suspend dividend increases in 1970 and 1971 after following a pattern of modest annual increases of four cents a share since the early'60s.Smaller Growth Rate The energy crisis, energy conservation efforts by our customers and the state of the economy combined to hold down the rate of growth in kilowatt-hour usage.Traditionally, we experienced growth in kilowatt-hour use principally because customers used more power than they had the year before.1974 was different. Overall residential usage went up only 2.7 per cent, compared to an average increase of 9.7 per cent in recent years.Commercial customers used.3 per cent more and industrial usage was up 4.2 per cent.The industrial figures include the addition on July 1 of the Steelton plant of Bethlehem Steel to our system.The plant used 366 million kilowatt-hours during 1974, about 5.1 per cent of the industrial total for the year.Other energy sales were down about 27 per cent, primarily because of reduced contractual sales to Revenues Up Revenues for 1974 were$472 million, up 22.7 per cent over 1973.Most of the increase came from recovery of rising coal costs which were billed to customers through the fuel adjustment clause explained later in this report, and from the 5.7 per cent rate increase which became effective Jan.10, 1974.Coal Costs Skyrocket The cost of fuel burned during 1974 amounted to$219 million compared to$126 million in 1973.However, in 1974 the Company changed the method of accounting for fuel to achieve a matching of fuel expense and related customer revenues by accounting periods.This accounting change resulted in recording only$1 92 million as fuel expense for the year 1974.At the end of1974 we were paying$25 a ton at the mine for bituminous coal on the open market versus$12 a ton at the end of 1973.Work Stoppage A strike called by the Employees Independent Association (EIA)on May 20, 1974 idled about 5,000 union members.The action was the first general strike in the Company's history.It ended with the employees returning to work on Aug.9, 1974. Extra expenses incurred by the Company as a result of the strike cost$2 million after taxes.A new two-year contract to run through July 24, 1976 provides for improvements in fringe benefits and for wage increases of 8.5 per cent the first year and 8 per cent the second year.Reductions in employee contributions to benefit plans and other benefit improve-ments add another 4.2 per cent over the two years.Construction Budget at$2.1 Billion PP&L's construction budget for the next five years is nearly$2.1 billion.For 1975 alone it's$340 million.This means we will be spending more in the next five years than has been invested in our Company since it was founded in 1920.Susquehanna Project More than half of the five-year construction budget,$1.2 billion, will be used for construction of the Company's first nuclear power plant near Berwick.Construction of the first of the twin 1,050,000-kilowatt boiling water reactor generating units, now scheduled for operation in 1980, progressed on schedule and at year-end was about eight per cent complete.Unit 2 construction was about six per cent complete.Longer material delivery times, labor shortages, work.stoppages and design changes can all create delays in getting nuclear plants on the line.One way PP&L has chosen to save time and expense is to adopt the"big-piece" construction concept at Susquehanna Steam Electric Station.The big-piece construction concept involves on-site construction of large parts of the reactor pressure vessel and containment liner, simultaneous with floor-by-floor completion of the reactor building.This contrasts with laborious sequential fabrication of each system, with its attendant high costs, delays and key elements piled up in assembly areas awaiting their turn to be worked upon.In comparison with sequential construction, the big-piece procedure being used at Susquehanna promises to save substantial sums of money.9~f'I//l~fl I Part of the steel reactor containment liner weighing more than 200 tons was inched into place in early October 1974 for the first of twin 1,050,000-kw nuclear generating units at PP&L's Susquehanna plant under construction near Borwick.Placed on a basemat of concrete reinforced with about 100 tons of steel bars, tho quarter-inch steel of the vessel will receive a six-foot-thick mantel of reinforced concrete as shielding for the reactor within tho liner.The unique crane pictured has a 350-foot reach with a lifting capacity of 280 tons-enough to lift a fully-loaded 747 let plane. Martins Creek Project Meanwhile, another large generating unit is nearing completion at our Martins Creek plant north of Easton.The first of two 800,000-kilowatt crude or residual oil-fired units is expected to come on the line in the spring of 1975.The other unit is scheduled for operation early in 1977.Some of the factors influencing the decision back in 1968 and 1969 to build oil-fired units at Martins Creek were:~The desirability of a diversified fuel mix among coal, oil and nuclear.~The special operating characteristics of the oil units which would allow us to pick up load or drop it quickly to meet fluctuating demand and enable us to use the units in place of smaller, expensive-to-operate combustion turbine generators. ~Studies in 1969 indicated that the price of low-sulfur coal would rise faster than oil and plenty of oil would be available. Unfortunately, conditions in the Middle East have changed all that.~Strict environmental standards then on the horizon made coal appear to be an unwise choice because it meant burning expensive low-sulfur coal or installing equipment that would remove sulfur gases and particulate. The reliability of sulfur-dioxide removal technology was not and still isn'fully proven.If we had to make the decision today it would be different, but the conditions affecting our decision didn'change until we were well beyond the point of turn-around in our construction. Conversion to coal is virtually out of the question because the cost would exceed$400 million.With the operation of the first big oil unit at Martins Creek about to begin, construction of the 82-mile pipeline that was to have been the delivery system for the oil has not yet been started.The problem is that, although PUC approval was obtained in February 1973, opponents of the project have challenged construction of the pipeline in the courts and before administrative agencies.Seeing this problem developing, the Company had to begin a$2.3 million project for alternate emergency rail-unloading facilities to insure oil delivery until the pipeline is completed. The Company has leased three 50-car unit oil trains at an annual cost of$527,000 to carry the oil from Philadelphia to Martins Creek until the pipeline can take over this operation. Construction of the pipeline will take about nine months.At this point we just don't know when that construction will begin.Oil is unloaded from railroad tank cars at Marlins Creek in preparation for start-up and testing of Unit 3 early in 1975.The temporary emergency unloading facilities were made necessary because construction of the pipeline which was to have been the oil delivery system for the plant has been chal-lenged in the courts and before administrative agencies, F FA' A tank farm has been built at Martins Creek by Interstate Energy Co.and 1.2 million barrels of crude oil are stored for initial operation of the first oil unit on the Company's system.Coal Is Still King Despite PP8 L's diversification into oil and nuclear generating units, coal, at this point, is still our major fuel.During 1974 about 96 per cent of the Company's energy generation came from coal.Through ownership or control of five operating mines in west-central Pennsylvania the Company is assured of over 100 million tons of coal reserves-enough to provide a stable supply for many years to come.Early in 1974, PP8 L formed another coal company which acquired another 114 million tons of reserves in the Pittsburgh coal seam in southwestern Pennsylvania. Additionally, in March 1974 the Company agreed to acquire all the interest of Manor Real Estate Co.in a portion of the Pittsburgh seam adjacent to the prior acquisition. This latest acquisition is contingent on drilling tests, scheduled for completion in mid-March 1975, to confirm that at least 150 million tons of coal exist"in place" in the seam.Based on present mining practice and technology, the Company believes that about 50 per cent of the in-place coal would be recoverable, giving us another 75 million tons of reserves.Besides owning or controlling the source for much of its coal, PP8 L also has more than half of the coal it uses delivered in its own unit trains.Each train in the fleet has at least 105 cars and carries more than 10,000 tons of coal each trip from mine to power plant.The seventh unit train joined the fleet in late'74.The eighth is expected later in 1975.Economies resulting from controlled coal sources and the unit trains resulted in savings for our customers of at least$20 million in 1974.As an interesting sidelight, Electrical World, one of the leading trade magazines of the electric utility industry, recently published an editorial titled,"We can depend on coal...or can we?" It discussed the utilities'ncreasing dependence on coal and the problems that would inevitably arise in the mining and transport of vast new amounts of coal.It concludes: "We strongly recommend, therefore, that utilities look very seriously into the acquisition of coal deposits, and into ownership of hopper cars sufficient to ensure at least minimum acceptable supply." The Company feels that its experience and statistics would support Electrical World's recommendation. This certainly doesn't mean, though, that PP8 L is immune to the economic factors that are pushing energy prices up so sharply.Even with the efficiencies we have, the price of delivered coal almost doubled in 1974.Unfortunately, this has resulted in higher customer charges through the fuel adjustment clause.,'~~i~f+yP", ,+~WN-ta.'I.s~.If~lI HAJJ Q ri ,~.~II*f.p S Coal is loaded into one of PP&L's seven 10,000-ton unit trains at the Company's Greenwich mine in west central Pennsylvania. Through ownership or control ot tive mines and the use of its tleet of unit trains to haul more than halt the coal we used last year, PP&L saved its cus-tomers at least$20 million in 1974. The fuel adjustment clause authorizes utilities to pass on to customers the increases or decreases in fuel costs.It adds nothing to PP8 L profits but allows the Company to recover most of its increasing costs from sharply rising fuel prices.Rising coal costs increased the fuel adjustment charge to our customers by about half-a-cent per kilowatt-hour in 1974.Financing The effects of inflation were felt sharply in the price PP&L had to pay to raise capital in 1974.When the Company talks about the hundreds of millions of dollars needed each year to build new facilities we must also look at where the money comes from.Only about one-fourth of the funds we need to finance our construction can be generated internally from Company operations. The rest must come from new capital investment in the Company.During 1974 we raised$240 million through outside financing. We sold$35 million of common stock and$25 million of preference stock along with two issues of first mortgage bonds totaling$180 million.The first issue of bonds ($80 million)was sold at 9'/4 per cent interest, the second ($100 million)at 10'/e per cent.The preference stock was sold at a dividend cost of 13 per cent.During 1975 we expect to issue$350 million of new securities. Of that figure$93 million will be needed to refund maturing debt.Construction Cutback Probably PP8 L's most momentous decision during 1974 came in early August, when the Company decided to cut back construction expenditures by$1.3 billion for the 10-year period 1974 through 1983 and to adopt a Company-wide program of general austerity. The cutback was made necessary by rapidly changing economic, social and political conditions regionally and nationally. The conditions, as we see them, are:~A slowdown in both the national and the regional economy with no quick turn-around expected.Slower economic growth, in fact, may well become a long-term trend.~A major"break" in the long and steady pattern of rising use of electricity with customer resistance to higher prices, conservation and slower economic growth all contributing factors.~Unfavorable financial conditions, including double-digit interest rates and impairment of investor confidence in utility securities, now limiting the amount of financing our industry can undertake. ~A general worsening of the political and regulatory climate with respect to utility rate increases and expansion programs.With these changing circumstances in mind, a revised forecast of electric demand through 1984 indicates that generating capacity needed to serve customers 10 years from now may be nearly two million kilowatts less than earlier estimates. This will greatly affect the long-range generating plant construction schedule.The two oil-fired units at Martins Creek will come on line as scheduled in 1975 and 1977.The nuclear units have been delayed one year each.and will come on line in 1980 and 1982.The six generating units planned for the mid to late'80s have been cut back to two units in the late'80s.For a time at least, these cutbacks can be restored if conditions begin to change dramatically from our forecasts. Even though the forecasted growth rates have been lowered significantly, they are still expected to be sizable-an average six per cent a year through 1985.Admittedly, however, we live in a time when the predictability of the economic/social events that affect electrical use has become particularly uncertain. We will be giving extra attention to early detection of indicators that point to the need for changes in our peak load forecast.Cutting Costs Inevitably, a lesser growth in volume of business leads to reductions in previously expected manpower needs for construction, operation and maintenance.,By the end of 1974, 82 employees with less than six months'ervice, primarily in the construction area, had been laid off.The layoffs, together with constraint in filling vacancies created by normal turnover has resulted in manpower reductions, by the end of the year, of 311 employees, or 4.3 per cent of the high for the year.Additionally, elimination or cutback of work performed by outside contractors has had the effect of eliminating the work of another 161 people.When this is added to the PP8 L workforce reduction the total comes to 472-or a drop of slightly more than six per cent.The Company is also re-examining fuel procurement practices, outside work contracts, transportation fleet requirements and material and supply inventories, all seeking ways to reduce expenses.Plans were also being firmed up at year-end to have independent reviews made of our coal mining operations and overall PP8 L operating effectiveness. But, expense and manpower cutbacks are not easily come by.There is really no way to substantially cut back on manpower and expenses without some attendant loss in the scope and quality of service provided by the Company.Operation Understanding The Company depends on public understanding and support for its very survival.The fact that the electric utility industry and PP8 L continue to face difficult times is no secret.One of the things the Company is doing to seek public support is a 15-month-long program in which our president visits and talks with the people we serve.The program is called Operation Understanding. President Busby has committed 25 per cent of his time from early October 1974 through 1975 to visiting in small group sessions with newsmen, service clubs, consumer action groups, students, business leaders, public officials, employees, minority groups, senior citizens, women's organizations, union leaders, shareowners and others throughout our service area.With no set presentation, he relies on informal discussion, and question and answer sessions to respond directly to the customers'eelings and needs.The program does not try to brainwash anyone.We want to listen to the problems that people have and we want to give them an opportunity to listen to us.As part of earning the public support that we depend on, we feel we must be accessible, open and credible in our operations and in our behavior and a good performer in all aspects of our business.Research Probably the most visible research project the Company engaged in during 1974 was the completion of our energy conservation home northwest of Allentown..l I (~ad%~l~PP8 L has been saving time and money by prefabricating major substation sections indoors and completing assembly at the sub-station site.With prefabrication, field construction time has dropped from 26 to 20 weeks.The method allows Indoor work in all kinds of weather and all work is done at ground level which is faster and safer than the on-site requirements of using ladders and bucket trucks.Estimated savings for each sub-station have been approximately $5,000 or more. The home uses a water-source heat pump for heating and cooling.The heating cycle is supplemented by solar energy collection panels and heat reclamation devices to recover waste heat from appliances, waste-water, fireplace flue gases and even the heat of decomposition in the septic tank.A PP8 L employee family was chosen to live in the home for a year to help provide actual in-use data for further evaluation of the energy conservation methods being tested.The objective in the experimental home project is to explore a number of energy conservation methods that have the potential to significantly reduce the electrical demand of an electrically-heated single-family home.After the results of the experiment are available they must be evaluated to determine which methods might be economically feasible for the consumer.In other areas, the Company either helped fund or participated in such research projects as sulfur dioxide removal from stack emissions, wind stress factors on cooling towers, fast breeder reactor, nuclear fusion and coal liquefaction and gasification. Additionally, through Electric Power Research Institute (EPRI)we are involved in a number of other projects to find new energy sources, to improve the utilization of present energy resources, and to improve the reliability and environmental acceptability of electric power generation. Directors Dr.Ruth Patrick, noted biologist and chairman of the Board of Trustees of the Academy of Natural Sciences in Philadelphia, was elected a director in September following an amendment to Company bylaws increasing the authorized number of directors from 12 to 13.The Company noted with regret the deaths during 1974 of three former directors. Everett L.Palmer, who was vice president of Public Relations and served as a director from 1960 until his retirement in 1966 after 42 years with the Company, died on April 25.Harry Ferguson, former operating vice president and a director at the time of his retirement in 1958, after 38 years with the Company, died on July 29.John S.Wise Jr., who was president and a board member for 17 years until his retirement in 1945 after 29 years with the Company, died on Aug.13.Wise was a pioneer in the electric utility industry and was instrumental in the formation of PP8 L in 1920.For the past several years PPft L's board of directors has held a two-day meeting in September enabling members to visit facilities essential to Company operations. In 1974 the board toured the Company's energy conservation home and the PP&L Training Center near Allentown, and the oil-fired units being built at the Martins Creek plant.gj',g'j',, I L MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE STATEMENT OF INCOME The following analysis of the Company's financial performance explains the reasons for changes in spe-cific items on the Statement of Income comparing the years 1974 to 1973 and 1973 to 1972.Electric revenues Increase in quantity of sales to: Ultimate customers Others for resale..Rate increases.......Fuel adjustment clauses Other..$7.8 18.0 (1.9)8.2 22.2 10.5 55.4 (0.4)1.9 2.3 85.4 38.6 Steam heat revenues.......... 1.8 0.4 Total$87.2 39.0 Rates applicable to sales to ultimate customers are regulated by the Pennsylvania Public Utility Commis-sion (PUC)and accounted for 97%of the Company's revenue from energy sales in 1974.The Federal Power Commission (FPC)regulates sales to others for resale.The Company's electric energy sales to ultimate cus-tomers increased 6.5%in1973 and 2.8%in1974.Most of the 1974 increase was due to sales to the Steel-ton Plant of Bethlehem Steel Corporation which was added as a customer in mid-year.The reduced growth rate in 1974 was due primarily to energy conservation measures by customers and a general decline in eco-nomic activity.Electric energy sales to others for resale during the two years remained relatively constant except for con-tracted sales to a neighboring utility, Metropolitan Edison Company (Met Ed).Sales to Met Ed are under an agreement to sell capacity and energy for the period June through September in each of the years 1973, 1974 and 1975 from the Company's generating units at Montour and the No.3 unit at Martins Creek (scheduled for service in April 1975).Revenues from Met Ed were$7.9 million in 1973 and$6.1 million in 1974.Rate increases affecting ultimate customers were granted in March 1972 ($17 million annually), June 1973 ($10 million annually)and January 1974 ($19 mil-lion annually, of which about$17.8 million is included Operating Revenues The Company derives about 99%of its operating revenues from supplying electric service and the bal-ance from supplying steam for heating and other purposes.The change in operating revenues from the prior year is attributable to the following: Increase (Decrease) 1974 1973 Millions of Dollars in revenues for the year 1974).Since 1972 there have been two rate increases affecting fifteen resale cus-tomers for a total of$1.6 million annually, with the most recent increase ($975,000 annually)being granted by the FPC in September 1974, subject to possible refund.The affected customers are opposing the rate increase and the FPC has scheduled a hearing for March 1975.The Company's tariffs include fuel adjustment clauses which adjust prices for electric service for variations in the cost of fuel used to generate elec-tricity.Revenues from the fuel adjustment clauses totaled$23.8 million in 1973 and$79.2 million in 1974.Increase (decrease) in energy sold........... Increase in average price.Other Total.$(11.0)=-34.0 49.3 l.3 0.2 0.3$38.5 35.6 The quantity of interchange power sold increased substantially during 1973 due to the availability of new and efficient coal-fired generating units at Montour Steam Electric Station placed in service during 1972 and 1973.The quantity sold during 1974 was some-what lower than 1973, but the prices received for such power were substantially higher.The price received for interchange power sales is to a great measure based on a relationship of the fuel costs of the selling and buying utilities. All the Com-pany's major generating stations are fired by coal while other interconnected utilities have significant amounts of oil-fired generating capacity.For the period begin-ning in late 1973 and continuing through 1974, oil prices increased much more rapidly than coal prices which caused an increase in the price received for interchanged power during 1974.The average price received for interchange power sales was 1.76 cents per kwh in 1974 and 0.95 cents per kwh in 1973.Both amounts were substantially in excess of the Company's fuel costs related to such sales.Interchange Power Sales During 1974 approximately 24%of the output of the Company's generating stations was sold to other util-ities under interconnection arrangements. This com-pares with 28%sold in 1973.However, as required by both the PUC and FPC, such sales are not recorded as Operating Revenues but are credited to Operating Expenses on the Statement of Income.An analysis of the change in interchange power sales from the prior year follows: Increase (Decrease) 1974 1973 Millions of Dollars Electric fuel expense Increase (decrease) in quantity of electricity generated.... Increase in average cost of fuels burned............. Effect of change in accounting for fuel costs............. Steam heat fuel expense Total$(0.9)26.3 92.3 3.6 (26.6)64.8 29.9 2.0 0.5$66.8 30.4 The increase in fuel costs during 1974 was caused by the escalating prices of fuels burned (principally coal).Increases in fuel expense related to sales to customers are billed to customers through fuel adjust-ment clauses.Under the clauses, fuel costs incurred in a month in excess of a base amount are reflected in customers'ills over a subsequent three-month pe-riod.Prior to October 1974 the fuel expense recorded by the Company each month was the cost of fuel burned to'generate electricity during that month.How-ever, due to the sharp rise in the cost of fuel during 1974 this procedure resulted in pronounced mis-matching of fuel costs and revenues by accounting periods.Therefore, the Company changed its account-ing treatment of fuel costs recoverable under fuel adjustment clauses as described in Note 2 to Financial Statements. The new accounting procedure does not affect the price of electricity charged customers nor the amount the Company pays for fuel.Wages and Employee Benefits and Other Operating Costs The increases in wages and employee benefits and other operating costs such as materials and supplies, rents and insurance reflect principally the effects of inflation. A three-month strike by approximately 5,000 union employees (about 70/o of the Company's total work force)increased 1974 operating expenses by approx-imately$2.0 million after giving effect to related in-come tax reductions. The final agreement, which resulted in a new two-year labor contract to run through July 1976, provides for improvements in fringe benefits and for wage increases of 8.5/o beginning in August 1974 and 8.0'/o beginning in July 1975.Fuel Approximately 98'/o of the fuel expense shown in the Statement of Income is related to generation of electricity with the balance applicable to the produc-tion of steam for heating and other purposes.The change in fuel expense from the prior year is attribut-able to the following: Increase (Decrease) 1974 1973 Millions of Dollars Depreciation Increased depreciation expense since 1972 is due to new facilities placed in service, including the addi-tion of two generating units at Montour Steam Electric Station.Taxes For a detailed analysis of income tax components and effective income tax rates see Note 6 to Financial Statements. Taxes other than income increased pri-marily because of higher State gross receipts taxes which are based on revenues and increased State capital stock tax resulting principally from the addi-tional Preferred, Preference and Common Stock sold during the periods.Cost of Financing Increases from the prior year in interest charges, dividends on Preferred and Preference Stock and the amount of the Allowance for funds used during con-struction are as follows: Increase 1974 1973 Millions of Dollars 7.9 4.8 0.2 Allowance for funds used during construction .........$5.8 0.3 Interest charges Long-term debt............. 6.7 Short-term debt............ 0.9 Other..Dividends on preferred and preference stock........... 2.5 2.7 The amount of the allowance for funds used during construction varies from year to year in relation to the amount of construction work in progress and the cost of capital.The increase in long-term debt interest charges and dividends on Preferred and Preference Stock is due to issuance of new securities to finance the construction of new facilities and the refinancing of maturing debt with securities bearing higher interest rates.During 1973 and 1974, new issues of securities included$308 million of long-term debt and$65 million of Preferred and Preference Stock.Short-term debt consists of bank loans and commer-cial paper notes used to provide working capital and for interim construction financing. Interest on such debt varies from year to year due to the amount of short-term debt outstanding and the interest rates in effect.For more information on short-term debt see Note 3 to Financial Statements. During 1973 and 1974 the Company sold 4.2 million shares of new Common Stock to finance construction. The average number of shares of Common Stock out-standing increased from 17.5 million in 1972 to 22.1 million in 1974, an increase of 26/o.The increase in the average number of shares outstanding diluted earnings per share by 11'/o in 1973 and 14/o in 1974. STATIST!GAL
SUMMARY
CAPITAL INVESTMENT -thousands Long-term debt Preferred and preference stock....Common equity Short-term debt Total capital investment ................. RETURN ON INVESTMENT (a)Return on average capital investment -%,.Return on average common equity-%....COMMON STOCK DATA Book value at year end (a)............... Dividend payout rate-%(a)............. Dividend yield-%(b).Price earnings ratio (a)(b)............... NUMBER OF SHAREOWNERS-preferred, preference and common.......OPERATIONS ELECTRIC CUSTOMERS ENERGY SALES-millions of kwh Residential Commercial Industrial Other AVERAGE PRICE PER KWH to ultimate customers-cents..SOURCES OF ENERGY SOLD-millions of kwh Generating units Coal-fired Oil-fired-combustion turbines 8 diesels Hydroelectric ........... Purchased power.Interchanged power Purchases Sales Company uses and losses.....Total energy sales FUEL COST-mills per kwh......POWER CAPABILITY -kilowatts..PEAK DEMAND-kilowatts (c)...EMPLOYEES 1974$914,349 296,375 532,655 1,743,379 85,509$1,828,888 8.5 12.6$22.91 62 11.5 5.3 164,126 902,148 6,494 4,275 7,170 1,024 18,963 2.47 24,186 247 772 352 1,218 (6,079)(1,733)18,963 8.8 4,901,000 3,772,000 6,930 1973 753,027 271,375 469,608 1,494,010 39,851 1,533,861 7.9 11.9 22.51 64 8.4 7.6 142,235 886,378 6,324 4,262 6,881 1,398 18,865 2.06 24,782 273 816 384 1,584 (7,237)(1,737)18,865 5.0 4,903,000 3,662,000 7,139 1972 635,044 231,375 41 2,130 1,278,549 96,482 1,375,031 7.5 11.6 21.78 67 6.5 10.3 135,399 864,439 5,985 3,933 6,458 637 17,013 2.02 19,097 601 824 418 1,366 (3,586)(1,707)17,013 4.9 4,108,000 3,598,000 6,790 1971 576,760 196,375 351,299 1,124,434 76,251 1,200,685 7.4 12.2 20.78 66 6.4 10.2 123,598 843,080 5,479 3,533 6,053 620 15,685 1.90 15,847 642 684 304 1,467 (1,758)(1,501)15,685 4.8 3,496,000 3,294,000 6,514 1970 514,371 156,375 303,117 973,863 97,878 1,071,741 7.0 10.8 19.75 76 6.8 11.3 111,909 828,643 5,093 3,198 5,807 685 14,683 1.71 13,702 786 739 339 1,732 (1,164)(1,45 I)14,683 4.2 3,256,000 3,238,000 6,372 (a)Reflects retroactive application of change In accounting for fuel costs.(b)Based on yoarwnd market price.(c)Winter peak shown was reached early In subsoquont year.In 1970 peak Is that which would have occurred if load curtailment measures had not been In effect.12 STATEMENT OF INCOME Operating Revenues 1974 1971 1970 1973 1972 Thousands of Dollars 3472,038 384,814 345,782 300,707 255,313 Operating Expenses Wages and employee benefits Fuel (Note 2).Power purchases.Interchange power sales.Other operating costs.Depreciation Income taxes (Note 6)Taxes, other than income.Operating Income Other Income and Deductions Allowance for funds used during construction .Income tax credits (Note 6)Other-net Income Before Interest Charges.Interest Charges Long-term debt Short-term debt and other.Income Before Cumulative Effect of Change in Accounting for Fuel Costs Nonrecurring Cumulative Effect to December 31, 1973 of Change in Accounting for Fuel Costs, Net of Related Income Taxes ($4,831)(Note 2).......... Net income Dividends on Preferred and Preference Stock.......Earnings Applicable to Common Stock............ 67,374 192,353 24,176 (108,723)54,489 52,399 39,211 35,571 356,850 115,186 20,732 5,076 3,4'i 8 29,226 144,412 51,149 9,946 61,095 83,317 4,162 87,479 19,656$67,823 57,421 125,577 15,299 (70,175)45,234 48,837 33,943 30,005 286,141 98,673 14,967 91 1,300 16,358 115,031 43,203 4,916 48,119 66,912 66,912 17,191 49,721 55,220 95,220'3,514 (34,569)39,512 41,446 26,086 25,658 262,087 83,705 14,647 334 (305)14,676 98,381 36,507 3,953 40,460 57,921 57,921 14,526 43,395 48,198 79,499 18,963 (15,468)33,214 34,903 11,545 22,146 233,000 67,707 16,242 176 (63)16,355 84,062 30,895 4,595 35,490 48,572 48,572 11,392 37,180 45,779 61,621 21,982 (9,356)24,009 32173 3,225 18,197 197,630 57,683 9,723 112 80 9,915 67,598 25,381 7,282 32,663 34,935 34,935 6,426 28,509 Earnings Per Share of Common Stock (a)Before cumulative effect of change in accounting for fuel costs Nonrecurring cumulative effect to December 31, 1973 of change in accounting for fuel costs.....$2.88$3.07 2.57 2.57 2.48 2.48 2.37 2.37 1.97 1.97 Pro Forma Amounts After Giving Effect to the Retroactive Application of Change in Accounting for Fuel Costs Earnings applicable to common stock.......... $63,661 51,066 43,161 38,488 30,252 Earnings per share of common stock (a)Average Number of Shares Outstanding (thousands) ..Dividends Declared Per Share of Common Stock....(a)Based on average number of shares outstanding. Seo accompanying Noles lo Ffnanclal Slalemenls. $2.88 22,067 1.77 2.64 19,359 1.68 2.46 17,513 1.64 2.45 15,690 1.60 2.09 14,472 1.60 13 BALANCE SHEET ASSETS December 31 1974 1973 Thousands of Dollars UTILITY PLANT Plant in service-at original cost Electric Steam heat Less accumulated depreciation Construction work in progress-at cost$1,687,740 7,703 1,695,443 354,249 1,341,194 403,707 1,744,901 1,619,327 7,728 1,627,055 312,178 1,314,877 219,277 1,534,154 INVESTMENTS Subsidiaries -at equity.Safe Harbor Water Power Corporation -at equity...... '.....Nonutility property-at cost, less accumulated depreciation ..Other-at cost or less.4,631 3,599 2,495 4,064 14,789 5,320 3,596 2,749 7,354 19,019 CURRENT ASSETS Cash (Note 3).Construction fund for pollution control facilities (Note 4)....Accounts receivable, less reserve Customers Other Recoverable fuel costs (Note 2)Materials and supplies-at average cost Fuel Operating and construction .Other.16,251 3,933 33,907 22,574 35,587 71,886 24,979 9,139 218,256 14,903 9,073 22,656 10,929 26,884 17,006 5,598 107,049 DEFERRED DEBITS 7,482$1,985,428 6,624 1,666,846 See accompanying Notes to Financial Statements. SCHEDULE OF CAPlTAL STOCK AND LONG-TERM DEBT December 31,1974 Thousands of Dollars PREFERENCE STOCK-no par, cumulative, authorized 5,000,000 shares$8.00 series, outstanding 350,000 shares............... $8.40 series, outstanding 400,000 shares............... $8.70 series, outstanding 400,000 shares............... $13.00 series: (a)outstanding 212,500 shares..... to be issued April 1, 1975 (b)....$35,000 40,000 40,000 21,250 3,750$140,000 COMMON STOCK-no par, authorized 30,000,000 shares, outstanding 23,251,255 shares............... $354,540 CAPITAL STOCK PREFERRED STOCK-$100 par, cumulative 4t/2/o authorized 629,936 shares, outstanding 530,189 shares......$53,019 Series, authorized 5,000,000 shares 3.35/o, outstanding 41,783 shares.4,178 4.40/o, outstanding 228,773 shares 22,878 4.60 lo, outstanding 63,000 shares..6,300 7.40/o, outstanding 400,000 shares (a)40,000 8.60/o, outstanding 222,370 shares 22,237 9%%d, outstanding 77,630 shares...7,763$156,375 LONG-TERM DEBT FIRST MORTGAGE BONDS 3'/o series due 1975-to be refinanced ..27/a/o series due 1976................ 2a/4/o series due 1977................ 31/a/o series due 1978................ 2a/4'/o series due 1980................ 3a/a/o series due 1982 10'/a/o series due 1982............... 3t/2!o series due 1983................ 3a/a'/o series due 1985................ 45/a lo series due 1991................ 45/8/o series due 1994................ 5/a/o series due 1996................ 6a/4'/o series due 1997................ 7/o series due 1999.81/a/o series due 1999................ 9/o series due 2000.71/4%%d series due 2001................ 75/8 lo series due 2002 7t/2%%d series due 2003................ 9t/4/o series due 2004................ 4t/2%%d to 5/o pollution control series A due annually$500, 1977-1983; $900, 1984-2002; $7,400, 2003....... NOTES 6'/2 lo-7/o due 1976 7/o due 1980 OTHER$93,000 8,000 20,000 3,000 37,000 7,500 100,000 25,000 25,000 30,000 30,000 30,000 30,000 40,000 40,000 50,000 60,000 75,000 80,000 80,000 28,000 891,500 2,800 20,000 22,800 49$914,349 SECURITIES SOLD IN 1973 AND 1974 1973 January May'uly August November Security First Mortgage Bonds, 7t/2 lo Series due 2003..First Mortgage Bonds, 4t/2%%d to 55/a/o Pollution Control Series A due 1977-2003........... Note, 7'/o due 1980.Series Preferred Stock, 7.40/o.Common Stock.Shares 400,000 2,000,000 Amount$80,000 28,000 20,000 40,000 40,900$208,900 1974 April July October October 2,200,000 250,000(b) $80,000 35,156 25,000 100,000$240,156 (a)Both tho 7.40/o Sorlos Proforrod Stock and tho Proforonco Stock,$13.00 Sorlos must bo rotirod In full through tho oporatlon of sinking funds at a rodomption price of$100 por sharo plus accrued and unpaid dividonds to tho data of such redemption. BegInning July 1, 1979 and annually thoroaftor through tho yoar 2003, 16,000 shares of tho 7.40'/o Sorlos Proforrod must bo rodoomod, and boglnning October 1, 1980 and annually thereafter through tho yoar 1999, 12,500 shares of tho Proforonco Stock,$13.00 Sorios must bo rodoomod.(b)37,500 shares to bo Issued and paid for April 1, 1975 under dolayod delivery contracts. 16 Soo accompanying Notes fo Financial Sfafomonfs. LIABILITIES CAPITALIZATION (a)Shareowners investment Preferred stock Preference stock Common stock.Capital stock expense (deduction) .(No amortization plan In ellect)Earnings reinvested (Notes 5 and 7)S 156,375 140,000 354,540 (7,580)185,695 156,375 115,000 319,384 (6,889)157,113 December 31 1974 1973 Thousands of Dollars 829,030 740,983 Long-term debt 914,349 1,743,379 753,027 1,494,010 CURRENT LIABILITIES Commercial paper notes (Note 3)Accounts payable.Taxes accrued Deferred income taxes on recoverable fuel costs (Note 2).Dividends payable and interest accrued Other.85,509 37,121 11,852 18,840 34,633 8,338 196,293 39,851 33,705 13,457 28,139 7,029 122,181 DEFERRED AND OTHER CREDITS Deferred investment tax credits.Deferred income taxes.Contributions in aid of construction (Note 10)..Other.18,860 22,689 4,207 45,756$1,985,428 15,323 17,436 9,704 8,192 50,655 1,666,846 (a)Seo Schedule of Capital Stock and Long-Tertn Debt on page 16.See accompanying Notes lo Financial Statements. STATEMENT OF CHANGES IN FINANCIAL POSITION 1974 1973 1972 1971 1970 Thousands of Dollars 66,912 57,92'I 48,572 34,935 48,837 41,446 34,903 32,173 11,282 7,984 (1,127)(1,762)(20,732)520 (14,967)220 112,284 (9,723)(2,105)53,518 (14,647)(16,242)220 220 92,924 66,326 128,456 35,156 Outside financing Common stock Preferred stock Preference stock.First mortgage bonds......... Other long-term debt.Short-term debt-net increase.28,093 30,000 40,000 50,000 2,687 46,940 37,120 40,900 40,000 25,000 180,000 360 45,658 35,000 75,000 8,342 20,231 185,513 40,000 60,000 10,506 108,000 20,024 286,174 208,924 147,626 150,780 SOURCE OF FUNDS Operations Net income (1974 includes$4,162 nonrecurring amount)$87,479 Charges (credits)against income not involving working capital Depreciation.................... 52,399 Noncurrent deferred income taxes and investment tax credits-net.......... 8,790 Allowance for funds used during construction Other Working capital (excluding short-term debt)-decrease Other-net$414,630 3,156(a)1,874 681 326,238 279,118 23,896 4,799 242,647 8,522 212,820 APPLICATlON OF FUNDS Construction expenditures Allowance for funds used during construction $271,460 (20,732)250,728 224,496 (14,967)209,529 218,754 192,399 (14,647)(16,242)204,107 176,157 165,142 (9,723)155,419 Securities retired First mortgage bonds Other long-term debt Short-term debt-net decrease 18,632 18,632 10,041 56,631 66,672 15,000 10,057 25,057 8,'117 21,627 29,744 7,763 1,236 4,122 13,121 Dividends on preferred, preference and common stock.Working capital (excluding short-term debt)-increase Other-net 58,897 50,037 43,330 36,746 29,456 82,753(a)3,620 14,824 6,624$414,630 326,238 279,118 242,647 212,820 ta)The net changes in working capital resulted principally from tho following: 1974, Increases in fuel invontory, accounts receivable and deferred fuel costs less related deferred income taxes;1973, increases in other accounts receivable, construction lund, accounts payable and dividonds payablo and accrued interest.Soe accompanying Notes fo Financial Sfatomenfs. Balance, January 1............. Net Income (1974 includes$4,162 nonrecurring amount).........$157,113 87,479 244,592 STATEMENT OF EARNINGS REINVESTED 1974 66,912 207,150 57,921 183,568 48,572 162,393 1971 1973 1972 Thousands of Dollars 140,238 125,647 113,821 1970 108,342 34,935 143,277 Dividends Preferred stock............... Preference stock.............. Common stock (per share-1974,$1.77;1973,$1.68;1972,$1.64;1971-1970,$1.60)..Balance, December 31 (Notes 5 and 7)......9,393 10,263 39,241 58,897$185,695 7,551 9,640 32,846 50,037 157,113 6,433 8,093 28,804 43,330 140,238 6,433 4,959 25,354 36,746 125,647 6,295 131 23,030 29,456 113,821 NOTES TO FINANCIAL STATEMENTS December 31, 1974 and 1973 1~
SUMMARY
OF ACCOUNTING POLICIES Accounting System Accounting records are maintained in conform-ity with the uniform system of accounts pre-scribed by the Federal Power Commission (FPC)and adopted by the Pennsylvania Public Utility Commission (PUC).Utility Plant Costs of additions to utility plant and replace-ments of units of property are capitalized. Costs of depreciable property retired or replaced are eliminated from utility plant accounts and such costs, plus removal costs, less salvage, are charged to accumulated depreciation. Costs of land retired or sold are eliminated from utility plant accounts and any gains or losses are re-flected on the Statement of Income.All expendi-tures for maintenance and repairs of property and the cost of replacement of items determined to be less than units of property are charged to operating expenses.Allowance for Funds used During Construction As provided in the uniform system of accounts, the cost of funds (interest on borrowed money and a reasonable rate on other capit'al)used to finance construction work in progress is capital-ized as part of construction cost.An amount equal to the amount so capitalized is shown on the Statement of Income under Other Income and Deductions and serves to offset the actual cost of financing construction work in progress.Prior to February 1, 1974 the interest component of the rate used to compute the allowance was treated on a"before-tax" basis and the rate was not reduced by any related income tax reduc-tions.To be consistent with the treatment ac-corded for rate-making purposes the rate used to compute the allowance was converted to an"after-tax" basis as of February 1, 1974.For the year 1974, Other Income and Deductions -In-come tax credits has been credited with$6.1 million of income tax reductions associated with this interest, with a corresponding increase in income taxes charged to Operating Expenses.Depreciation For financial statement purposes, the straight-line method of depreciation is used to accumu-late an amount equal to the cost of utility plant 18 and removal costs, less salvage, over the esti-mated useful lives of property.Subsidiaries and Safe Harbor The Company has seven wholly-owned subsid-iaries (including four coal companies) and also owns one-third of the outstanding capital stock of Safe Harbor Water Power Corporation represent-ing one-half of that company's voting securities. Investments in subsidiaries and in Safe Harbor Water Power Corporation are recorded using the equity method of accounting. Under this method, these investments are carried on the Balance Sheet at cost plus undistributed earnings since dates of acquisition, and equity in the current year earnings of these companies is reflected on the Statement of Income under Other Income and Deductions. Since the Company's subsidiaries are not en-gaged in the business of generating and distrib-uting electricity, the Company believes that its financial position and results of operations are best reflected without consolidation. If all the subsidiaries were considered in the aggregate as a single subsidiary, they would not constitute a significant subsidiary. Revenues Revenues are based on cycle billings rendered to certain customers monthly and others bi-monthly.The Company does not accrue revenues related to energy delivered but not billed.The Company's tariffs include fuel adjustment clauses under which fuel costs above or below the levels allowed in approved rate schedules are permitted to be billed or credited to customers after the fuel costs are incurred.Fuel Costs Recoverable Under Fuel Adjustment Clauses In October 1974, effective as of January 1, 1974, the Company changed its method of accounting for fuel costs recoverable under fuel adjustment clauses.See Note 2 for further information re-garding this accounting change.Income Taxes Deferred tax accounting is followed for items where similar treatment in rate determinations has been or is expected to be permitted by the PUC.The principal items are accelerated amorti-zation of certified defense facilities and pollution control equipment, deduction of costs of remov-ing retired depreciable property, that portion of tax depreciation arising from shortening depre-ciable lives by 20/o as permitted by the class life depreciation system and, beginning in 1974, fuel costs recoverable under fuel adjustment clauses.Tax reductions arising principally from the use of the declining balance depreciation method, guideline lives and certain income and expenses being treated differently for tax computation than for book purposes are accounted for under the flow-through method.These reductions in income tax provisions are also accorded flow-through treatment in rate determinations by the PUC and currently result in lower rates for customers than would otherwise be possible.Investment tax credits are deferred.Deferred amounts pertaining to the Job Development In-vestment Credit (Revenue Act of 1971)are being amortized over the average lives of the related property while amounts pertaining to the credits permitted under prior laws are being amortized over 5-year periods.Retirement Plan The Company has a Retirement Plan composed of two parts: (1)a non-contributory portion which provides benefits for all eligible active employees with the full cost absorbed by the Company, and (2)a voluntary portion in which contributions are made by both employees and the Company, but the full cost of past service and Plan improve-ments is borne by the Company.Approximately 95/o of eligible active employees are members of the voluntary portion of the Plan.Company contributions to the Plan include amounts re-quired to fund current service costs and to amor-tize unfunded past service costs over periods of not more than 20 years.2.FUEL COSTS RECOVERABLE UNDER FUEL ADJUSTMENT CLAUSES Under the fuel adjustment clauses, fuel costs in-curred in a month in excess of a base amount are reflected in customers'ills over a subsequent three-month period.Prior to October 1974 the fuel expense recorded by the Company each month was the cost of fuel burned to generate electricity during that month.However, due to the 19 sharp rise in the cost of fuel during 1974 this procedure resulted in pronounced mismatching of fuel costs and revenues by accounting periods.In October 1974, effective as of January 1, 1974, the Company, as authorized by the PUC, changed its method of accounting to record as fuel ex-pense an amount corresponding to the fuel costs being billed to customers during such month.This change results in matching fuel costs and reve-nues by deferring the charge to income of fuel costs recoverable in the future to the periods in which these costs are billed to customers through application of the fuel clauses.The changed ac-counting also conforms more closely to the treat-ment presently given fuel costs by regulatory bodies in setting electric rates.Following the new procedure,$35.6 million of the cost of fuel burned during 1974 was deferred at December 31, 1974 to be expensed in the periods the corresponding fuel adjustment revenues are recorded and$9.0 million of fuel costs represent-ing the retroactive deferral at December 31, 1973 of a portion of the cost of fuel burned in 1973 was charged to expense in 1974.For 1974, fuel costs were lower by a net amount of$26.6 million and, after income tax effects, earnings applicable to common stock were increased by$12.6 million ($0.57 per share).The recording of the$9.0 million deferral of re-coverable fuel costs at December 31, 1973 re-sulted in a nonrecurring credit to income in 1974 which, after income tax effects, amounted to$4.2 million ($0.19 per share).The pro forma amounts shown on the Statement of Income reflect the effect of retroactive application of deferred fuel cost accounting and related income tax effects had the new method been used since the princi-pal fuel adjustment clause became effective in 1970.3.COMPENSATING BALANCES AND SHORT-TERM DEBT In order to provide loans for interim financing and provide back-up financing capability for commer-cial paper notes the Company had lines of credit with various banks aggregating $197 million at December 31, 1974.Use of these lines of credit was restricted to the extent of$13.5 million by short-term bank loans to certain owned and con-trolled fuel supply companies. Compensating bank balances are required in connection with$145 million of these lines of credit.Compensat-ing bank balances are generally 10'/o of the line of credit or 20 k of the amount borrowed, which-ever is higher, on an average annual basis.These balances are not restricted as to withdrawal. Based on bank borrowings during 1974, the aver-age compensating bank balance requirement was about$13.8 million, of which about$2 million was satisfied by"float" (checks issued but not cleared by the banks).Lines of credit aggregating $52 million were maintained by payment of commitment fees which are based on either a percentage of the prime interest rate times the line of credit or a fixed percentage of the line.Commitment fees on an annualized basis approximated $0.4 million at December 31, 1974.Bank borrowings are generally for one year, and may be prepaid at any time without penalty.Bor-rowings under lines of credit requiring compen-sating bank balances are at the lending bank's prime interest rate in effect from time to time.Borrowings under lines for which commitment fees are paid are generally at 110/o of the lend-ing bank's prime interest rate in effect from time to time in addition to the continued payment of the commitment fee.The Company had no bank loans outstanding at December 31, 1974.Com-mercial paper notes are generally sold for pe-riods ranging from 30 to 60 days.At December 31, 1974 the Company had$85.5 million of com-mercial paper notes outstanding. The weighted average discount rate applicable to these notes was 9.4/o.The maximum aggregate amount of short-term debt outstanding at the end of any month in 1974 was$140.3 million;the average aggregate daily amount outstanding during 1974 was$95.6 mil-lion.The approximate weighted average'interest rate of short-term debt during 1974 was 10.0/0, calculated by dividing the total short-term debt in-terest expense for the year by the average aggre-gate daily amount of short-term debt outstanding. 4.POLLUTION CONTROL CONSTRUCTION FUND The unexpended proceeds from the sale of First Mortgage Bonds, Pollution Control Series A, amounting to$3.9 million at December 31, 1974, are held by a trustee in a Construction Fund which consists of cash and temporary cash in-vestments. Payments may be made from the Fund 20 upon requisition by the Company for costs related to the construction of certain pollution control facilities. 5.DIVIDEND RESTRICTIONS The Company's charter and mortgage indentures restrict the payment of cash dividends on Com-mon Stock under certain conditions. Under the charter provisions, which are the more limiting, no restrictions are effective on the payment of such dividends out of current earnings.The amount of earnings reinvested free of restrictions under the charter at December 31, 1974 was$136.7 million.Portion of tax depreciation arising from shortening depreciable lives by 20%under the class life depreciation system......Costs of removing retired depreciable property.....Accelerated amortization of pollution control facilities.. Recoverable fuel costs.....Abnormal loss on retirement of property.............. Accelerated amortization of emergency facilities...... $3,715 1,725 3,057 2,219 658 14,009(a)385 (87)871 (758)$19,262 (795)5,737 1974 1973 Thousands of Dollars 6.INCOME TAXES Income tax expense for the years 1974 and 1973 is reflected on the Statement of Income as follows: (a)Excludes$4,831 deferred income taxes related to nonrecurring cumulative effect to December 31, 1973 of change in accounting for fuel costs.Operating Expenses: Current Federal.........State........... Deferred Federal..State....1974 1973 Thousands of Dollars$1 2,554 16,454 3,858 6,207 16,41 2 22,661 15,991 4,557 3,271 1,180 19,262 5,737 Income tax expense differed from the amount computed by applying the combined Federal and State corporate income tax rates (1974, 52.94%;1973, 53.72%)to pre-tax income as follows: 1974 1973 Thousands of Dollars$87,479 66,912 38,966 33,852$126,445 100,764 Investment tax credits Deferred........... Amortization of deferments......... Other Income and Deductions: Federal State.......... Nonrecurring Cumulative Effect to December 31, 1973 of Change in Accounting for Fuel Costs: Federal............... State Total income tax expense.......4,753~1,216 3,537 39,211 (4,156)(920)~a,om)3,842 989 4,831$38,966 7 233~1,688 5,545 33,943 (46)(45)~91 33,852 Deferred income taxes result from differences between the time the following items are recog-nized as expenses for tax and financial statement purposes: Indicated income tax expense on the above at combined Federal and State tax rates......Reductions in indicated tax due to: Amortization of investment tax credit deferments ..Allowance for funds used during construction-nontaxable........... Tax depreciation in excess of book depreciation ..Tax and pension costs-tax deduction in excess of book expense......Other................. Total reduction in indicated income tax..Income tax expense.......Effective tax rate on pre-tax income.........1,216 1,688 10,976 8,041 8,799 7,531 2,491 4'492 2,687 332 27,974$38,966 30.8%20,279 33,852 33 6%$66,940 54,131 21 7.PROPERTIES SUBJECT TO FEDERAL LICENSES, The Company operates two hydroelectric proj-ects under licenses issued by the FPC.Certain reserves required to be provided under the Fed-eral Power Act have not been recorded pending approval of the amounts by the FPC.The Com-pany estimates that such reserves applicable to the years from 1946 would not exceed$2.7 mil-lion at December 31, 1974.8.RETIREMENT PLAN Obligations of the Company's Retirement Plan are currently funded through a Trust Fund.At June 30, 1974, the end of the Fund's most recent fiscal year, the Fund's assets at cost were$85.9 million.Pension costs were$6.7 million in the year 1974 and$6.8 million in 1973.Plan amendments effective in 1974 and 1975, sub-ject to Internal Revenue Service approval, pro-vide for increased benefits and reduced employee contributions. Including these changes, at June 30, 1974 the actuarially computed unfunded past service cost was$20.9 million and vested bene-fits exceeded the cost basis of the Fund's assets by$15.3 million.It is estimated that Plan amend-ments will increase annual pension costs by approximately $1.2 million in 1975.The Company does not currently anticipate any significant increase in pension costs as a result of the Employee Retirement Income Security Act of 1974.9.RENTALS AND NONCANCELABLE LEASE COMMITMENTS Total rentals charged to operating expense for 1974 and 1973 amounted to$8.9 and$7.5 million, respectively. At December 31, 1974 the Company was com-mitted under noncancelable leases expiring at various dates to 1996.The minimum rental com-mitments under these leases total$55.2 million due as follows (millions of dollars): 1975,$5.1;1976,$5.0;1977,$4.8;1978,$4.6;1979,$4.3;1980 through 1984,$15.6;1985 through 1989,$8.1;1990 through 1994,$6.5;after 1994,$1.2.These minimum rental commitments are applicable to the following categories of property: combus-, tion turbine generating equipment,$18.3 million;railroad coal cars,$16.4 million;computer equip-ment,$15.9 million;construction cranes,$4.6 mil-lion.Generally the leases contain renewal options and obligate the Company to pay maintenance, insurance and other related costs.The impact upon net income in each of the years 1974 and 1973 would be less than 1'/o if all non-capitalized financing leases were capitalized and amortized on a straight-line basis with interest accrued on the basis of.the outstanding lease liability. 10.CONTRIBUTIONS IN AID OF CONSTRUCTION In accordance with a revision of the uniform sys-tem of accounts, contributions in aid of construc-, tion, which is an accumulation of nonrefundable amounts received from customers for construc-tion, were reclassified as a credit to Utility Plant effective January 1, 1974.11.COMMITMENTS AND CONTINGENT LIABILITIES The Company estimates that about$2.2 billion will be required to complete construction proj-ects in progress or authorized to be started in 1975.Of this amount, about$340 million is ap-plicable to the year 1975 with the balance to be expended through the year 1987.The Company is subject to certain present and developing laws and regulations with respect to air and water quality, land use and other en-vironmental matters.The Company is unable to predict the ultimate effect of such laws and regu-lations upon its existing and proposed facilities and operations. It is possible that such laws and regulations may require the Company to modify, supplement, replace or cease operating certain of its equipment and facilities, delay or impede construction and operation of new facilities, and require substantial additional expenditures in amounts which are not now determinable. In connection with providing for its future bitu-minous coal supply, the Company at December 31, 1974 has guaranteed capital obligations of certain coal suppliers (including four owned and two controlled coal companies) aggregating $1 24.8 million.22 AUDITORS'PINION Two Broadway New York 10004 HASKINS&SELLS Cedified Public Accountants The Shareowners and Board of Directors of Pennsylvania Power&Light Company: We have examined the balance sheet of Pennsylvania Power&Light Company as of December 31, 1974 and 1973, the related statements of Income, earnings reinvested, and changes In financial posi-tion for the years then ended and the schedule of capital stock and long-term debt as of December 31, 1974.Our examination was made in accordance with generally accepted auditing standards, and accordingly Included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. In our opinion, such financial statements and schedule present fairly the financial position of the Company at December 31, 1974 and 1973 and the results of its operations and changes in its financial position for the years then ended, In conformity with generally accepted accounting principles consistently applied (except for the change, with which we concur, in the method of accounting for recoverable fuel costs as described in Note 2 of the Notes to Financial Statements) during the period and on a basis consistent with the preceding year.February 3, 1975 HASKINS&SELLS Quarterly Dividends and Market Price of Voting Securities for 1974 and 1973 Reported Market Price-Dollars per Share Quarterly Dividends Declared 2.00 2.I 0 2.175 2.93(b)1974 Common Stock....~.~...$0.45(a)Preferred Stock 4f/2/o.......... ~...~.1.125 Series 3.35o/o.............. 4.40o/o.............. 46Q/0 740/0 8.60'/o.............. 9.00'/o.............. Preference Stock$8.00................. $8.40................. $8.70................. $13.00................ 1st Quarter High Low$23 190/4 57'/2 52 40 39 560/4 52 55'/2 53 104 f/2 10'I 104 102 100'/2 96 1020/4 98 106 99'/2 2nd Quarter High Low 217/s 16 54'/2 487/0 38 35 52 46'/2 52 49 103'/2 90 100 94 95 78 99 80 1000/4 86 3rd Quarter High Low 18'/4 13 50'/2 43 33 29 48 417/s 48 46 89 82'ls 89 77 80 68 813/4 69 910/4 73 38 45 48 87 70 28'/2 41 45 70 75 80 67 81'/2 70 86'2 109f/2 100 4th Quarter High Low 170/0 147/e 48 43 20 220/4 19 65 60'/2 62 587/0 61 42 42 39'/2 53 58 51 60 56 53 102'/2 109 100 109 108 104 0.8375 1.10 1.15 (c)2.15 2.25 1973 Common Stock.......... 0.42 26 240/0 230/0 22 22'/2 Preferred Stock 4'/2 o/o................ 1.125 55 60 53 Series 3.35o/o.............. 43 42 43 42 42 4 40o/o.............. 63'/2 59'/2 61 57 58'/4 46Q/0 62 60 60 60 60 7.40'/o.............. 8.60/o.............. 114 109 112 f/2 108'/2 108'/4 9 00'/o 110 109 110 109 109 Preference Stock$8.00............ 2.00 106 102 104 f/2 100 103 96 101 f/2 943/4$8.40................. 2.10 1090/4 105 108'/2 104 105f/2 98f/2 105 98$8.70 2.175 113 107 112 106'/2 105 101 107'/2 97'/2 The principal trading market for ail classes of stock Is tho New York Stock Exchange oxcopt for the 3.35'/o~4.60/o and 9.00/o Series Preferred which aro Iistod on tho PBW Exchange but are traded principally over tho counter.Price ranges for tho 3.35/o, 4.60/o and 9.00/o Series Proforrod Stocks oro based on tho best avaiiabio high and Iow bid prices during tho periods ond should bo vlowed as reasonable approximations.(a)First quarter of 1974 was$0.42, remaining quarters$0.45.(b)Stock Issuod Octobor1974, fourth quartor dividend only.(c)Tho 7.40'/o Series Preferred was a private placement in August 1973 ond Is not publicly traded.Tho 1973 third quarter dividend was$0.9456 and subsequent quarterly dividends wore$1.85.23 PRINCIPAL OFFICERS BOARD OF DIRECTORS JACK K.BUSBY, President BROOKE R.HARTMAN, Executive Vice President, Operations ROBERT R.FORTUNE, Vice President, Financial GEORGE F.VANDERSLICE, Comptroller CHESTER R.COLLYER, Treasurer DONALD J.TREGO, Assistant Treasurer JOHN T.KAUFFMAN, Vice President, System Power&Engineering NORMAN W.CURTIS, Vice President, Engineering &Construclion EMMET M.MOLLOY, Vice President, Human Resource and Development RICHARD H.LICHTENWALNER, Vice President, Public Relations EDWARD M.NAGEL, Vice President, General Counsel and Secretary LEON L.NONEMAKER, Vice President, Division Operations CHARLES E.FUQUA, Vice President, Susquehanna Division CHARLES J.GREEN, Vice President, Harrisburg Division CARL R.MAIO, Vice President, Lehigh Division JAMES J.MCBREARTY, Vice President, Norlheast Division HERBERT D.NASH JR., Vice President, Consumer and Community Services EDWIN H.SEIDLER, Vice President, Distribution BRENT S.SHUNK, Vice President, Lancaster Division CLIFFORD L.ALEXANDER JR., Washington, D.C.Partner ol Arnold&Porter, Counsellors al Law JACK K.BUSBY, Allentown President of the Company RALPH R.CRANMER, Williamsport Member ol Board ol Directors-Grll Publishing Company EDGAR L.DESSEN, Hazleton Physician-Radiologist BROOKE R.HARTMAN, Allentown Executive Vice President, Operations W.DEMING LEWIS, Bethlehem President of Lehigh University JOHN A.NOBLE, Scranton President ol Cleland Simpson Company, Department stores RUTH PATRICK, Philadelphia Chief Curator ol the Limnology Department, Academy ol Natural Sciences NORMAN ROBERTSON, Pittsburgh Senior Vice President and Chief Economist ol Mellon Bank, N.A.JOSEPH T.SIMPSON, Harrisburg Chairman ol the Board ol Harsco Corporation, Diversified manufacturer of fabricated metal producls M.J.WARNOCK, Lancaster Chairman ol the Board ol Armstrong Cork Company, Manulacturer of interior furnishings and specialty products CHARLES H.WATTS II, Lewisburg President ol Bucknell University S.HAYWARD WILLS, Miami, Florida Chairman ol the Board and President ol GAC Corporatfon, Community development Executive Committee: Jack K.Busby, chairman;Messrs.Hartman, Simpson, Warnock and Wills.Audit Committee: Charles H.Watts 0, chairman;Messrs.Alexander and Warnock and Dr.Patrick The Company files Form 10-K annually with tho Securities and Exchange Commission. Form 10-K is composod of this Annual Report to shareowners and additional Informatton concerning the Company and its operattons. This additional Information will be availablo after April 1, 1975 by writing to Pennsylvania Power&Light Company, Two North Ninth Street, Allentown, Pa.18101, attention: Mr.Georgo I.Kllno, Investor Services Manager. FISCAL AGENTS TRANSFER AGENTS FOR PREFERRED, PREFERENCE AND COMMON STOCK Industrial Valley Bank and Trust Company 634 Hamilton Mall Allentown, Pennsylvania -18101 Irving Trust Company One Wall Street New York, New York-10015 Pennsylvania Power&Light Company Two North Ninth Streot Allentown, Pennsylvania -18 101 REGISTRARS FOR PREFERRED, PREFERENCE AND COMMON STOCK The First National Bank ol Allentown Hamilton Mall at Seventh Allentown, Pennsylvania -18101 Morgan Guaranty Trust Company ol Now York 23 Wall Street New York, New York-10015 DIVIDEND DISBURSING OFFICE FOR PREFERRED, PREFERENCE AND COMMON STOCK Treasurer Pennsylvania Power&Light Company Two North Ninth Street Allentown, Pennsylvania -18101 SECURITIES LISTED ON EXCHANGES NEW YORK STOCK EXCHANGE First Mortgage Bonds, 3%Series duo 1975 First Mortgage Bonds, 10Ye%Sorles duo 1982 4'Preterred Stock (Code: PPLPRB)4.40%Series Preferred Stock(Code: PPLPRA)8.60%Sorios Prelorred Stock (Codo: PPLPRG)Prelerenco Stock,$8.00 Serios (Codo: PPLPRJ)Prelerenco Stock,$8.40 Series (Code: PPLPRH)Prelerence Stock,$8.70 Sories (Codot PPLPRI)Prelerenco Stock,$13.00 Series (Code: PPLPRK)Common Stock (Code: PPL)PBW STOCK EXCHANGE 4~h%Preferred Stock 3.35%Series Pre!orred Stock 4.40%Series Prelerred Stock 4.60%Series Prelerred Stock 8.60%Series Prelorred Stock 9%Series Pre!orred Stock Prelerence Stock,$8.00 Series Prelerence Stock,$8.40 Series Prelerence Stock,$8.70 Series Prelerence Stock,$13.00 Series Common Stock The annual meeting of shareowners will be held at the Lehlgh Consistory Scottish Rite Auditorium, 1533 Hamilton St., Allentown, Pa., on Wednesday, April 23, 1975.Formal notice of the meeting, together with a reservation card for meeting attendance, will be mailed to shareowners of record March 10, 1975, on or about March 17, 1975. PpaL PENNSYLVANIA POWER 8 LIGHT COMPANY Two North Ninth Street, Allentown, Pa.18101 Teiephonet Area Code 215 821-5151 BULK RATE U.S.POSTAGE PA I D Allentown, Po.Permit No.104 LtZHO IN V.S.A. ~Pennsylvania Power&Light Company L A nnt tel I:Isn't't'1 Q7$THE ATTACHED FILES ARE OFFICIAL RECORDS OF THE OFFICE OF REGULATION. THEY HAVE BEEN CHARGED TO YOU FOR A LIMITED TIME PERIOD ANS MUST BE RETURNED TO THE CENTRAL RECORDS STATION 008.ANY PAGE(S}REMOVED FOR REPRODUCTION MUST BE RETURNED TO ITS/THEI R ORI GINAL ORDER.DEADLINE RETURN DATE V i',w O'Y.Ah c MARY JINKS, ClIIEF CENTRAL RECORDS STATION~~gag g',:f c. HIGHLIGHTS 1974 18,963 472,036 1975 19,113$544,129 63,661(a)$2.87$1.80$23.17 2.88(a)1.77 22.91 2.92(a)2.36(a)Electric Energy Sales-millions kwh.Operating Revenues-thousands...Earnings Applicable to Common Stock-thousands......$73,032 Earnings Per Share, based on average number of shares outstanding Dividends Declared Per Share......Book Value Per Share Times Interest Earned Before income tax expense 2.80 After income tax expense........2.31 Construction Expenditures-thousands.$345,289 271,460 Total Capital Investment-thousands.$2,100,003 1,828,888 (a)Excludes effect of$4,162,000 Nonrecurring Credit recorded In 1974.Per Cent Increase (Decrease) 0 8'/o 15.3 14.7 (0.3)1.7 1.1 (4.1)(2.1)27 2,.14.8 Pennsylvania Power&Light Company is an electric utility providing service to 918,000 homes and,businesses over a 10,000-square-mile area in 29 counties of central eastern Pennsylvania. Principal cities in the PP&L service area are Allen-town, Bethlehem, Harrisburg, Hazleton, Lancaster, Scranton, Williamsport and Wilkes-Barre. Contents President's Letter The Year In Review Statistical 'Summary Analysis of Statement of Income Supplementary Comments Fina ncials Notes to Financial Statements Dividends and Stock Prices Directors and Officers 1 3 11 12 Insert 15 20 27 26 Cover Photo: The PP&L lineman is probably more visible and typifies our Company more than any other individual. Today's lineman, with his up-to-date kit of tools and equipment is a lot more efficient than his predecessors back through PP&L's 55-year history.On the cover Lineman First Class Albert Molchan, of Catasauqua, Is working safely and comfortably at pole-top level from his electrically-Insulated bucket truck.He is using a hydraulic pressing tool on a new, de-energized line being built to increase capacity In a rural section of our territory. This modern-day lineman provides quite a contrast to the early lineman who worked primarily with climbing hooks and hand tools. To Our Shareowners: Recession and inflation were the principal focal points of public concern in 1975.It was also a year of non-progress in energy.Even though the Energy Policy and Conservation Act of 1975 became law at year-end, the lack of an effective energy policy continues to be our most critical long-term national problem.Accordingly, this letter is again directed to this subject, just as it was last year.The energy record of 1975 was a dismal one: imports of foreign oil increased-natural gas reserves decreased-major areas of energy-related environmental conflict were not resolved-there was no clear-cut decision on the issue of regulation/ deregulation of oil/natural gas pricing-additional development of coal and nuclear resources continued to lag-utilities announced more cutbacks and delays in installation of new generating facilities as their ability to finance large energy projects remained in doubt.Overall, an atmosphere of political ambivalence and expediency persisted, as many citizens focused so strongly on the problems of higher energy prices that the need to provide for future energy requirements was often shunted to one side.We cannot afford to continue in this style.Ominous signs are already present, for those willing to see them, that the nation is slipping towards an irreversible energy mess.We are confronted by the reality that it takes a decade or more to bring new electric energy facilities on line.1976 is the year when we should be starting to provide new facilities for 1985/1986. Otherwise, millions of people may be"surprised" when lights flicker and factories are required to cut back on work schedules, 10 years hence.Despite the growing urgency of the energy situation, there is not yet much indication that 1976 will depart from the holding pattern that marked 1974 and 1975.We abound in proposed remedies, technical advice and voluminous studies.But we are still on dead center.Why?Our interpretation is that the various social, economic, financial and political pressures and counter-pressures that underlie the energy problem have neutralized one another.For the moment at least, our national decision-making process seems to have been immobilized by a balance of power among conflicting forces and beliefs.This stalemate reflects the inchoate state of public understanding on energy matters.Small wonder that this situation exists.The public is randomly exposed to all kinds of information and pl r, E misinformation on energy.It has good reason, in this post-Watergate era, to be suspicious of both government and business pronouncements and to be unsettled by the conflicting assertions of scientific experts.The result is a mishmash of public uncertainty and confusion. Basic questions and doubts continue.It is essential that they be resolved because, until they are, the lack of direction of energy policy will continue. So, we think it is worthwhile to restate some energy fundamentals, as we see them-e The era of plentiful, low-cost energy is over.~We shall need more energy.Dealing only with people already born, we"know" that in 14 years there will be an additional 29 million people of age 20 and over in this country.Further, if we are going to achieve an unemployment rate of, say, 5.5 per cent, we will need 20 million more jobs.There is no way of feeding, housing, clothing, providing for the health care, employment and lifestyle-satisfactions of this many more millions of people without additional supplies of energy.~The diminishing supply and non-renewable nature of our oil and natural gas resources area reality.We have to become much more aggressive in preparing ourselves to live in a world of decreasing supplies of both forms of energy.~We shall have to make more use of the energy materials that are available, particularly our coal and uranium resources. These are the major energy materials that we must, for the time being, rely on to reshape the nation's energy base.~Further development of our domestic oil and natural gas resources is essential. Additional supplies could lessen our dependency on OPEC imports and provide more time in which to work out an orderly restructuring of the nation's energy supply mix.~We must intensify our energy conservation efforts.We should concede that we have been wasting energy in the past and should do much more to use energy wisely.We have to overhaul our utilization-technology, tighten building standards and moderate our energy consumption habits.It will be a step-by-step process.We cannot overnight rebuild all the existing homes, buildings, factories and transport systems that are now in place.Even the energy consumption levels of new facilities will reduce gradually, because of the momentum of past designs and practices. ~We must expand research efforts to develop new methods and sources of energy supply.Here, too, progress will be a step-by-step affair.Dramatic breakthroughs are not in sight.Many appraisais warn us not to expect too much, too fast.~In our complex and interdependent world, energy planning and decision-making require the very best kind of systems management that we are capable of.We need a thoughtful balancing of economic, social and environmental needs and values.And recognition that there are limits to the rate of change that can be tolerated when dealing with a core element, such as energy, which so fundamentally affects our lives.~Our society can cope with human problems arising from inadequate income, including inability to purchase basic energy requirements -if we have energy available. Without adequate energy, however, our society will not have the productive capability necessary to meet human needs.We appreciate that'beyond these"energy fundamentals," there are many complicated questions of ways and means that will have to be dealt with.But first things first.These fundamentals are not themselves accepted.If they were, we would not have the problems we do.We must continue intensive review, discussion, and analysis until public opinion recognizes that our nation's energy cost/supply crisis is real and long term.Only then will it be possible to come to grips with the many difficult changes that are involved, not the least of which is facing up to the heavy cost of supporting the required new investments in energy facilities. Very little will happen until people set aside the illusion that the complex energy problems that confront us can be painlessly overcome by some kind of quick fix.We ask for our shareowners'elp in supporting and facilitating the discussion and informational process necessary to create a climate for making the basic energy changeovers we need.With such help, and additional help from other interested and informed citizens, we can make the nation's Bicentennial the year when we finally got started out of the energy quagmire that now enmeshes us.Respectfully submitted,~cg/Jack K.Busby, President March 1, 1976 THE YEAR IN REVIEW PP&L's 1975 per share earnings were about level with 1974-even though about 15 per cent more shares were issued during the year, reflecting the increased shareowner investment in the Company.Earnings for 1975 were$2.87 per share of common stock, down one cent from the$2.88 earned in 1974.Electric Use Edging Up Last year, we reported a 1974 growth rate in kilowatt-hour usage of only a half per cent compared to an average 1963-73 annual growth rate of about nine per cent.This leveling off of use was attributed to the energy crisis, energy conservation efforts by our customers and the state of the economy.During 1974 and early'75 we were forecasting that this leveling off was only temporary as customers implemented energy conservation practices and adjusted to living with lower energy use.It was clear, though, that people could not go on lowering thermostats an additional five degrees every year.We expected that a new equilibrium would be reached at some point and growth would resume-although at a rate much tempered by the influence of higher energy prices.Some confirmation of these expectations was provided by residential and commercial customers whose 1975 kilowatt-hour use was higher than the previous year.Overall residential usage was up five per cent for the year, reflecting both the addition of 15,000 customers and higher individual electric consumption. About 11,000 electrically heated homes and apartments were added to our system in 1975, some of which, we feel, reflects the"throwover effect" of uncertainty in availability and price in the natural gas and oil market.Commercial usage showed the greatest gain of all our classifications with a seven per cent increase over 1974.Industrial use was more sensitive to the general slowdown of the economy and dropped two per cent.Held down by the decrease in the industrial classification, total use of electric energy increased by only 150 million kilowatt-hours in 1975-an overall increase of about one per cent.Although overall use was up slightly, the winter peak demand for electricity increased about nine per cent from 1974 to 1975.About a third of that growth was attributable to colder weather.The rest came from increased customer use.Revenues Up Revenues for 1975 were$544 million, an increase of 15.3 per cent from 1974.Although part of the increase in revenues came from higher residential and commercial use, most came from the recovery v)j Set,>jl'()r g)A welder Joins sections of stainless steel steam separators atop one of the reactor cores at the Company's Susquehanna nuclear plant under construction near Berwick.The separators remove water from steam leaving the reactor before the steam reaches the turbine-generator units. of increased fuel costs through the fuel adjustment charge.(Although the rate of increase in fuel costs moderated during 1975, the average cost of fuel consumed was higher than during 1974.This resulted in higher fuel adjustment revenues.Recovery of these higher fuel costs accounted for about 77 per cent of the increase in revenues.) A rate increase allowed to go into effect in September, provided about$5 million in additional revenues.Costs Up Also The rise in revenues was matched by increased costs.Total operating expenses were up$66 million over 1974, an increase of about 19 per cent.This figure would have been even higher without the$64 million increase over 1974 in interchange hk power sales which, in keeping with regulatory requirements, are classified as a reduction of expenses rather than as revenues.Much of the increase in expenses reflects the higher average cost for the fuel burned to generate electricity in 1975 compared to 1974.Our 1975 fuel bill amounted to$272 million versus$192 million the previous year.Rate Increase Proceedings A rate increase request filed by PPBL in March 1975 had still not come to a final decision by the date of this report.Still pending is our application to the Pennsylvania Public Utility Commission (PUC)for a two-step,$80-million increase in revenues.The first step of the request amounted to four per cent, or about$22 million annually.The second step was for an additional 11 per cent, or about$58 million a year.We had asked that the first step become effective in June while recognizing that the larger second step would probably be suspended for further study.In June, the PUC suspended both steps of the proposal because of concern about that part of the rate request which provided for no increase for the first 200 kilowatt hours of use by residential customers. This proposal, often referred to as"life line rates," was designed to recognize some of the inflation problems faced by low-income people and the elderly.We refiled the first step after removing the lifeline feature.Then, when the PUC did not suspend the revised filing, it became effective on Sept.13 subject to possible refund pending final PUC action.Extensive testimony was presented by the Company on both parts of the proposed increase at public hearings which concluded in January 1976.No final PUC action is expected before late March 1976.IU Many P P8 L women now hold positions traditionally held by men.Cynthia Williams, of Allentown, is one of several young women who have taken drafting courses and qualified for work as a draftsman In the Company's engineering department. PP&L also has women working as engineers, handymen and in other positions considered, until recently, in the male domaIn. Construction Dollars in Rates PP&L must pay interest and dividends on the securities it sells to finance the construction of facilities (construction work in progress). However, under present regulatory procedures in Pennsylvania, the Company cannot charge customers for these costs until the facilities are completed and are being used to provide service to customers. During the construction of a power plant, which now takes about 10 years, the Company has to pay millions of dollars in interest and dividends to investors who provide the major portion of funds necessary to finance the construction of the facility.Interest and dividend payments are a one-way street during the construction period since the Company must pay for these costs, but cannot begin to include them in the cost of service paid by customers until the plant is completed. This situation results in a cash drain on the Company at a time when it must raise unprecedented amounts of money to pay for the construction of facilities to provide for the increasing power needs of customers. It is for this reason that we have requested the PUC to allow$50 million of construction work in progress to be included in setting rates in our current rate filing.If approved, we expect to increase this amount in an orderly step-by-step process in future rate filings.This will enable the Company to strengthen its cash position which is essential to the financing of new customer service facilities. This approach should provide for a more gradual and even way of handling the increases in electric rates made necessary by the addition of such facilities. New Acquisition As a result of negotiations initiated by Hershey Estates, corporate parent of Hershey Electric Company (HEC), PP&L has agreed to acquire all of that utility's capital stock.The total acquisition cost, including the repayment of debt obligations, will be approximately $8 million.If we receive regulatory approval for the acquisition we plan to eventually merge HEC into our Company.HEC presently buys the energy to serve the 5,500 homes and businesses in its 28-square-mile territory from Metropolitan Edison Co.1976 Construction Budget The Company's construction budget for the next five years remains essentially unchanged from last year's figure at nearly$2.1 billion.For 1976 the figure is about$390 million compared to$345 million spent in 1975.The largest part of the 1976 budget,$242 million, goes toward construction of our nuclear plant.Another$39 million goes toward completion of the Martins Creek oil-fired Unit 4, and$20 million is allocated principally for work at existing generating stations.The budget for electric transmission facilities is$17 million and for distribution and other facilities it is$72 million.Susquehanna Nuclear Plant Progress on construction of PP&L's$1.7-billion nuclear plant near Berwick continued during 1975-although hampered by a six-week-long regional operating engineers'trike. Unit 1, scheduled for operation in late 1980, was 21 per cent complete at year-end.Unit 2 progress stood at six per cent of completion. Both will be boiling water reactor generating units and each will have a 1,050,000-kilowatt capacity.PP&L and Allegheny Electric Cooperative are currently engaged in negotiations which, if agreement is reached, would result in Allegheny acquiring a 10 per cent ownership of Susquehanna. Negotiations are also under way on a long-term agreement for UGI Corporation's Luzerne Electric Division to purchase a portion of the output of PP&L's Susquehanna plant and Martins Creek oil units.The total amount they purchase will increase gradually, reaching 3.8 per cent of Susquehanna and 4.9 percent of the Martins Creek units by 1983 (about 40,000-kilowatts from each of the four units)and will continue at that level until the units are retired.Martins Creek Oil Units PP&L's generating capability increased by 820,000 kilowatts when the large oil-fired Unit 3 at our Martins Creek plant went into commercial operation on Oct.15. This new addition is unlike any other PP&L generating unit.Instead of burning coal to make steam, as our other large generating units do, Unit 3 is designed to burn either crude or residual oil.The unit's design and operating characteristics allow it to be"cycled" much faster than a coal unit.That is, it can go from partial-load capacity to full-load capacity and back again relatively quickly, thus enabling it to pick up or drop load to meet fluctuating demand.In fact we have frequently been shutting the unit down'completely at night and bringing it back into use in the morning, as the need for power increased. The availability of this large, efficient load-following unit lessens our dependence on smaller, expensive-to-operate combustion turbines which burn a product very much like home-heating oil.Unit 4, a twin of Unit 3, is expected to be completed in late 1976 and in commercial use in 1977.Oil Pipeline The completion of the long-delayed pipeline to serve the Martins Creek oil units is at last in sight.Construction finally began on the pipeline in May after almost two years of costly delays.The multitude of hearings that were held on the pipeline had postponed construction several times.The original schedule called for the pipeline to be operating and ready for the start-up of Unit 3 last year.The delays forced the Company to turn to temporary rail transportation of oil for the units.Although the pipeline itself is in the ground, terminal arrangements at Marcus Hook, below Philadelphia, must be completed before oil can flow to Martins Creek.Bituminous Coal Despite our diversification into oil and nuclear units, coal is still PP&L's primary energy source and we continued acquisition of future supplies during 1975.During 1974 and 1975 PP&L formed two subsidiary coal companies, Greene Hill Coal Co.and Greene Manor Coal Co., which acquired about 65,000 acres of bituminous coal rights in Greene County in southwest Pennsylvania. This added about 325 million tons to PP&L's estimated recoverable reserves of coal.If developed, this would be enough, when added to the approximately 85 million tons of reserves we are already mining, to assure a stable bituminous coal supply for many decades to come.However, it's a long way between having the reserves and actually getting the coal out of the ground.Large capital investments are needed to open a new mine.We have asked the PUC to grant us rates that will cover the financial carrying costs of the reserves.We feel that our development of new mines in the Greene County area would be in the best long-term interest of our customers but the ultimate decision on whether we will have the financial capability to do it rests with the PUC.Besides owning the coal, we already have a cost-saving way to get it to the plants.PP&L has been a pioneer in operating its own coal trains since the early'60s.Our eighth unit train was put into service in July bringing our fleet up to a total of 892 railroad hopper cars.The ninth unit train is on order.Anthracite Study In October, after more than 20 years'ependence on bituminous coal as its primary fuel, the Company announced plans to explore the feasibility of building an anthracite-burning generating station near anthracite fields located in the Company's service area.Before and during World War li, PP&L was the world's largest user of anthracite when we burned the"fines" or"silt" coal that was left over in the process of preparing larger sizes for the home heating market.When home use of coal declined in the early 1950s, the volume of fines diminished and PP&L could not afford to buy expensive, fresh-mined anthracite for generating use.So, we turned to bituminous coal as our principal fuel.Now, however, sulfur-emission regulations can add many millions of dollars to the cost of new bituminous-coal-burning plants.Since anthracite is much lower in sulfur content than bituminous
- coal, we could possibly avoid the cost of sulfur-emission control equipment and the associated operating problems which can adversely affect the on-line time of future plants.This, combined with lower transportation costs, since we are literally on top of the country's major anthracite fields, possibly could make fresh-mined anthracite a practical and economic alternative.
The year-long study should give us the information we need before we make a fuel commitment for additional generating capacity that forecasts now show may be needed by the mid-80s.For study purposes, the Company visualizes a plant capacity of 1.6 million kilowatts made up of four units of 400,000 kilowatts each.This would mean a potential need for up to four million tons of anthracite a year.Big Financing Year 1975 was the largest financing year in the Company's history with$353 million of securities sold.Part of our 1975 borrowings were used to refund$93 million of maturing 30-year first mortgage bonds which had a three per cent interest rate.We had to replace them with 9%per cent bonds-a sharp example of the effects of inflation. It is noteworthy also that the$93 million bond issue was the entire secured debt of the Company in 1945.This compares with more than$1 billion of outstanding first mortgage bonds at the end of 1975.We anticipate that our financing needs for 1976 will be about$276 million to meet construction expenditures and to refund$11 million of maturing debt.We are encouraged by the acceptance of the Company-administered dividend reinvestment plan which began in April 1975.About$2.5 million of common, preferred and preference dividends was reinvested in new common stock and another$3 million of common was bought through optional cash payments and employee payroll deductions. A revised reinvestment plan was introduced in December with a five per cent discount on common stock bought with reinvested preferred, preference and common dividends. Capitalization Milestone The financing during 1975 brought total capital invested in the Company-funds provided by common, preferred and preference shareowners, earnings reinvested, short-term and long-term debt-past the$2-billion mark.We reached the$1 billion point in 1970, after 50 years in business.That second billion took five years.-.fg Marvin Wiegandt, of Allentown, a PP&L surveyor uses an electronic distance measuring device on a field assignment. The instrument records the time it takes for a light beam to travel to its target and back.It then converts this time to distance In a miniature computer that gives a digital read-out in 10 seconds.The device isespeciallyuseful across bodiesofwaterorfromhillto hill and Is just one of the ways we are seeking to"work smarter."~~((4, Operation Understanding President Jack K.Busby's 15-month-long Operation Understanding odyssey throughout the Company's 10,000-square-mile territory ended in December 1975.During that period, Busby spent about 25 per cent of his time gathering viewpoints, listening and speaking to employees, retirees, the news media, and diverse consumer, business, educational and citizen groups, most of whom are also customers. The travels covered well over 8,000 miles with audiences totaling over 10,000 people in more than 350 separate meetings.Year Of The Audit Nine major audits or studies of various aspects of our operations were undertaken in 1975.Most were initiated by PP8 L and centered around areas such as: coal mining efficiency; application of fuel adjustment charge;and our fuel procurement practices. The largest was a study of our overall operational effectiveness by McKinsey&Co., a management consulting firm.We were still awaiting final results at the date of this report.Siting Study A unique facilities siting project was launched near Harrisburg during 1975.The Company invited area residents to form a citizens'ask force to give us their suggestions and to give them a voice in deciding where vital substations and electrical transmission facilities will be located.The results of this experiment in citizen participation should help us in developing future siting and land-use policies.Energy Conservation Over the last two years we reported to you on the construction and operation of our experimental solar-supplement energy conservation home near Schnecksville, northwest of Allentown. Several valuable conclusions can be drawn from the experiment. The home proved there's a long way to go before homes with solar heating and cooling systems will be within reach of the average American family.The technology is available but the cost of buying and installing the necessary equipment is prohibitive. However, we found that with a rather modest additional new-home investment of$500-$1,000 for foamed insulation around doors and windows, polystyrene sheathing, extra-heavy insulation and triple-glazed windows it was possible to cut heat-loss by almost half compared with the traditional well-insulated home.As an outgrowth of the experimental home project the Company now is cooperating with home-building contractors in its five divisions in a special energy-saving Bicentennial Homes Project.The five homes, which will include the latest energy-saving heating and cooling systems, and better insulating qualities, are being built by local contractors at their expense with the Company providing funds for energy conservation equipment, including solar devices.The homes will be open for public inspection during the summer of 1976 and sold in the fall.Agreements call for the builders to maintain metering equipment in the home for one year after they are sold in order to determine the effectiveness of the equipment. The Company continued and expanded its formal programs to encourage energy conservation by our customers. Six day-long energy management seminars were held throughout the Company's service area bringing together business leaders, government officials and PP8L energy conservation specialists for an intensive information exchange.A two-day Energy Design Forum was held for more than 200 architects and engineers in September. It was an opportunity to exchange ideas on the latest ways to design buildings using heating, ventilating and air conditioning systems that require less energy while still remaining functional. Across our service area nearly 700 energy management teams have been set up with Company assistance in all types of industries and businesses. We are also taking a good look at our own operations. Energy management teams have been established to monitor and improve energy use in offices, crew quarters and generating stations., As an additional incentive, and to publicize particularly successful efforts, PP&L has presented a number of energy management awards to industrial and commercial customers who have made significant changes to reduce electrical demand and energy use.Area Business Down For the first time in recent history PP&L's service area lost more industry than it gained during the calendar year.This meant that in our 10,000-square-mile service area we had a net loss of 1,885 industry jobs in 1975 compared to a gain of 1,923 in 1974.The unemployment rate was up to 7.4 per cent compared to 4.7 per cent a year ago.At year-end, more than 100 buildings were available for industrial occupancy. Recognizing that PP8L's own future is tied closely with conditions in our service area, we will do what we can to restore area economic health.In addition to continuing its established program of industrial development, the Company will place special emphasis on a selective and intensive program of advertising and direct mail in 1976 in an effort to bring new jobs tq areas with particularly severe unemployment rates.Our goal is to help bring unemployment down to the national goal of five per cent.Research One of the more creative and interesting research projects PP&L engaged in during 1975 was the experimental burning of 50 tons of pelletized municipal solid waste (trash)at our Sunbury plant in May.The experiment centered around a clean, pelletized fuel made from the combustible products found in ordinary trash after the glass, metal and other unburnables have been removed.Results show that the waste can be burned satisfactorily when mixed with coal, even though the heating value is much lower.There are many problems to be ironed out before this fuel could be used on a regular basis.The biggest of the problems is that no large-scale municipal facilities are available to manufacture the pellets.Also, the cost of re-equipping power plants to handle this material could prove to be prohibitive. On a larger scale PP&L continues to help fund industry-wide electric research projects through EPRI (Electric Power Research Institute). For 1975 our dollar commitment to EPRI research was about$1.3 million.Another$360,000 went toward the liquid metal fast breeder reactor project, to be built in Tennessee, while$645,000 went to other research programs during 1975.For 1976 our total research budget, is$2.7 million.In just the three years of EPRI's operation the electric industry's commitment to the research organization has grown to$160 million in 1976.In many areas the EPRI programs are closely coordinated with those of the newly-formed federal Energy Research and Development Administration (ERDA)which now has a$3.6-billion-a-year budget.Cost Reduction Continues In response to the pressures of inflation, the Company has been involved in a major cost reduction program since mid-1974.Because of the downturn in the national economy, and the substantial slowdown in electric load growth, PP&L reduced its transmission and distribution construction activity in 1974 and 1975.Recent inflationary effects on costs of materials, supplies and wages have also led us to cut back in other areas of our operations. As far as personnel cutbacks are concerned, so far we'e been able to match our workforce with our workload mainly through attrition (resignations, retirements, etc.).In many cases this attrition approach was made possible by cooperative management/union programs to transfer employees to new work locations. Outside contracting has been restricted and used only where special skills make it necessary, and to tree trimming and building maintenance. We will continue to hold new hires to a minimum.At year-end the Company had fewer employees than in 1972 even though we generated 34 per cent more energy and served 53,000 more customers. Management Changes A number of management changes took place in 1975.Director Maurice Warnock, chairman of the board of Armstrong Cork Company in Lancaster, retired from the PP'&L board in April under the age-related guidelines set forth for all PP&L directors. He had served PP&L since January 1964.Named to succeed Warnock was Harry Jensen, an executive vice president and director of Armstrong Cork.Jensen was elected by the shareowners at the annual meeting.Brooke Hartman, PP&L's executive vice president-Operations, and a Company director, agreed to a board request to extend his Dec.1 retirement date until mid-1977.Robert Fortune, vice president-Financial, was promoted to executive vice president-Financial and named a Company director effective Dec.1.Both of these new moves were aimed at maintaining and strengthening PP&L's top management. Director Hayward Wills, chairman of the board and president of GAC Corp., Coral Gables, Fla., submitted his resignation from the PP&L board on Dec.17.Harry Jensen replaced Wills as a member of the executive committee of the board.Effective Dec.1 the board created a new Finance Division and appointed Joseph Donnelly to the position of vice president-Finance to head the unit.Comptroller George Vandersjice was named vice president and comptroller, also effective Dec.1.One of the final sections of pipe is welded into place In late October on the 84-mlle pipeline which will carry oil to our Martlns Creek plant.The line Is reputed to be the longest insulated pipeline In the country.The$55-million-dollar project was begun in May after several costly delays.The Company Is temporarily using railroad delivery until the pipeline is in operation. i,gpQ+W k 4 (4*Qy STATISTICAL
SUMMARY
CAPITAL INVESTMENT -thousands (a)Long-term debt (including amount due within one year)Preferred and preference stock.......... Common equity Short-term debt Total capital investment ................... FINANCIAL DATA Return on average capital investment -o/ot(b).Return on average common equity-/o (b)..Common stock data Book value (a)(b)Dividend payout rate-'/o (b)Dividend yield-'/o (c)................... Price earnings ratio (b)(c).............. Times interest earned (b)Before income tax expense After income tax expense............... NUMBER OF SHAREOWNERS-preferred, preference and common (a).....OPERATIONS ELECTRIC CUSTOMERS (a)................ ENERGY SALES-millions of kwh Residential .Commercial .Industrial Other 1975$1,043,946 366,375 616,052 2,026,373 73,630$2,100,003 8.8 12.5$23.17 63 9.1 6.9 2.80 2.31 171,766 917,920 6,818 4,575 7,020 700 19,113 1974 914,349 296,375 532,655 1,743,379 85,509 1,828,888 8.5 12.6 22.91 62 11.5 5.3 2.92 2.36 154,126 902,148 6,494 4,275 7,170 1,024 18,963 1973 753,027 271,375 469,608 1,494,010 39,851 1,533,861 7.9 11.9 22.51 64 8.4 7.6 3.15 2.42 142,235 886,378 6,324 4,262 6,881 1,398 18,865 1972 635,044 231,375 412,130 1,278,549 96,482 1,375,031 7.5 11.6 21.78 67 6.5 10.3 3.05 2.43 135,399 864,439 5,985 3,933 6,458 637 17,013 1971 576,760 196,375 351,299 1,124,434 76,251 1,200,685 7.4 12.2 20.78 66 6.4 10.2 2.77 2.41 123,598 843,080 5,479 3,533 6,053 620 15,685 AVERAGE PRICE PER KWH to all customers-cents................ SOURCES OF ENERGY-millions of kwh Generated Coal-fired steam stations Oil-fired steam station............... Combustion turbines and diesels.....Hydroelectric stations Power purchases.Total 2.78 25,384 1,149 84 859 2,241 29,717 2.44 24,186 247 772 1.570 26,775 2.00 24,782 273 816 1,968 27,839 1.99 1.87 601 824 1,784 22,306 642 684 1,771 18,944 19,097 15,847 DISPOSITION OF ENERGY-millions of kwh Energy sales to customers................ Interchange power sales.................. Company uses and line losses Total FUEL COST-mills per kwh................. POWER CAPABILITY -kilowatts (a).........PEAK DEMAND-kilowatts (d)EMPLOYEES (a)19,113 8,757 1,847 29,717 10.4 5,717,000 4,122,000 6,695 18,963 6,079 1,733 26,775 8.8 4,901,000 3,772,000 6,930 18,865 7,237 1,737 27,839 5.0 4,903,000 3,662,000 7,139 17,013 3,586 1,707 22,306 4.9 4,108,000 3,598,000 6,790 15,685 1,758 1,501 18,944 4.8 3,496,000 3,294,000 6,514 (a)Year-end.(b)Reflects retroactive allocation to prior years of Nonrecurring Credit recorded in 1974 related to change in accounting for fuel costs.(c)Based on year-end market price.(d)Winter peak shown was reached early in subsequent year. ANALYSIS OF STATEMENT OF INCOME The following analysis of the Company's financial performance explains the reasons for changes in spe-cific items on the Statement of Income comparing the years 1975 to 1974 and 1974 to 1973.Operating Revenues The increase or (decrease) in operating revenues from the prior year is attributable to the following: 1975 1974 Millions of Dollars Electric revenues Quantity of sales to: Ultimate customers...Others for resale Rate increases Fuel adjustment clauses Other Steam revenues Total......$12.8 7.8 (60)(1 9)7.4 22.2 55.3 55.4 1.6 1.9 71.1 85.4 1.0 1.8$72.1 87.2 Monthly Fuel Adjustment Charge 6 Cents Per Kwh 1973 1974 1975 The above shows the incremental cost of fuel over a base amount of about 0.36 cents per kwh, whichis billed to customers under the Company's principal fuel adjust-ment clause.Customer Sales and Operating Revenues The Company derives about 99%of its operating revenues from supplying electric service and the bal-ance from supplying steam for heating and other purposes in the city of Harrisburg, Pa.Rates applicable to sales to ultimate customers are regulated by the Pennsylvania Public Utility Commis-sion (PUC)and accounted for 98%of the Company's revenue from energy sales in 1975.The Federal Power Commission (FPC)regulates sales to others for resale.The Company's electric energy sales to ultimate customers increased 2.8%in 1974 and 2.6%in 1975.In 1975 there was an increase of 5.0%in residential sales and 7.0%in commercial sales while sales to industrial customers decreased 2.1%.The decrease in industrial sales was moderated by a full year of sales to the Steelton Plant of Bethlehem Steel Corporation which was added as a customer in mid-1974.Excluding sales to the Steelton Plant, the Company's overall sales growth to ultimate customers would have been 0.7%in both 1974 and 1975 and industrial sales would have decreased by 7.3%in 1975, reflecting the decline in industrial economic activity and a loss of 96 industrial customers. Electric energy sold to others for resale during the two years remained relatively constant except for contractual sales to a neighboring utility, Metropolitan Edison Company (Met Ed).During 1974, 340 million kwh were sold to Met Ed, resulting in revenues of$6.1 million.There were no sales to Met Ed in 1975.Rate increases affecting ultimate customers became effective in June 1973 ($10 million annually), January 1974 ($19 million annually), and September 1975 ($21.7 million annually, of which about$4.9 million is included in revenues for the year 1975).For more information concerning the Company's current rate increase filing see Note 2 to Financial Statements. The Company's tariffs include fuel adjustment clauses which adjust prices for electric service for variations in the cost of fuel used to generate elec-tricity.Revenues from the fuel adjustment clauses totaled$79 2 million in 1974 and$134 5 million in 1975, principally reflecting the increased level of fuel costs experienced by the Company.12 Interchange Power Sales-The total electric energy available for sales includes energy generated by PP&L plants and power pur-chased from others, after deducting Company uses and line losses.During 1975 and 1974, approximately 31%and 24%, respectively, of the total energy available was sold to other utilities under interconnection arrangements. As required by both the PUC and FPC, such sales are not recorded as Operating Revenues but are credited to Operating Expenses on the State-ment of Income.The quantity of interchange power sold increased during 1975 due to greater availability of generating units, including the addition of Martins Creek Unit No.3, the absence of contractual sales to Met Ed during 1975 and the relatively favorable price of PP&L's generating costs compared to that of other interconnected companies. The price received for interchange power sales is to a great measure based on a relationship of the fuel costs of the selling and buying utilities. Approximately 92%of the Company's generation during 1975 came from coal-fired units while other interconnected utilities had significant amounts of oil-fired generat-ing capacity.For the period beginning in late 1973 and continuing through 1974, oil prices increased much more rapidly than coal prices, which greatly increased the price the Company received fbr interchanged power during 1974.Interchange prices continued to rise in 1975 but at a more moderate rate.The average price the Company received for inter-change power sales was 1.97 cents per kwh in 1975, 1.76 cents per kwh in 1974 and 0.95 cents per kwh in 1973.These amounts were substantially in excess of the Company's average fuel costs.Fuel The cost of fuels burned per kwh generated increased during 1974 from 0.67 cents per kwh in January 1974,to 1.06 cents per kwh in December 1974.During 1975 the unit cost of fuels burned increased to 1.15 cents per kwh by December 1975 reflecting in part the higher cost of oil burned at the Martins Creek No.3 generating unit placed in service during October 1975.The average unit cost during 1975 was 1.04 cents per kwh compared to 0.88 cents per kwh in 1974, an increase of 18%.The cost of fuel burned which is recoverable through fuel adjustment clauses is deferred until the period in which such costs are billed to customers. Taxes For a detailed analysis of income tax components, effective income tax rates and components of taxes other than income see Note 6 to Financial Statements. Interchange Sales The increase or (decrease) in interchange power sales from the prior year is attributable to the following: 1975 1974 Millions of Dollars$47.2 (11.0)18.4 49.3 (1.5)0.2$64.1 38.5 Cost of fuel consumed Electric Steam heat........~..Total cost of fuel consumed........Increase in fuel costs deferred to match revenues from fuel adjustment clauses Total fuel expense..$269.2 215.2 123.8 4.0 3.8 1.8 273.2 219.0 125.6 (1.6)(26.6)$271.6 192.4 125.6 Cost of Fuel Consumed The increase or (decrease) from the prior year in the total cost of fuel consumed is attributable to the following: 1975 1974 Millions of Dollars Electric Quantity of electricity generated.......... Average cost of fuels burned............. Steam heat Total.$13.3 40.7 54.0 0.2$54.2 (0.9)92.3 91.4 2.0 93.4 Fuel Expense Fuel expense as shown on the Statement of Income includes the following: 1975 1974 1973 Millions of Dollars Wages and Employee Benefits and Other Operating Costs The increases in wages and employee benefits and other operating costs such as materials and supplies, rents and insurance reflect principally the effects of inflation. A three-month strike involving approximately 5,000 union employees (about 70%of the Company's total work force)increased 1974 operating expenses by approximately $2.0 million after giving effect to related income tax reductions. $2.0 Net Utility Plant-End Qf Year Billions of Dollars$2.0 Depreclatlon Increased depreciation expense in both 1974 and 1975 is due to new facilities placed in service, including the addition of the Company's Martins Creek No.3 generating unit in 1975.1.5 1.0 1.5 1.0 Allowance for Funds Used During Construction The allowance for funds used during construction has increased substantially during the past two years as a result of the Company's extensive construction program and the related carrying costs of securities issued to finance the construction expenditures. Dur-ing 1975 and 1974 the average rates used to compute the allowance were equivalent to effective rates.of 8.3%and 7.2%, respectively. Cost of Financing The increase in long-term debt interest charges and dividends on Preferred and Preference Stock is due to issuance of new securities to finance the construction of new facilities and the refinancing of maturing debt with securities bearing higher interest rates.During 1974 and 1975, new issues of securities included$405 million of long-term debt and$95 million of Preferred and Preference Stock.The annual interest and dividend requirements on long-term debt and Preferred and Preference Stock outstanding at December 31, 1975 were$79.6 million and$29.6 million, respectively. Bank loans and commercial paper notes are used to provide working capital and interim construction financing. Interest on such debt varies from year to year due to the amount of short-term debt outstanding and the interest rates in effect.For more information on short-term debt see Note 4 to Financial Statements. The Company sold 2.2 million shares of Common Stock during 1974 and 3.3 million shares in 1975.0.5 0.5 Interest and Dividend Cost The increase or (decrease) from the prior year in interest charges and dividends on Preferred and Preference Stock were: 1975 1974 Millions of Dollars Interest charges Long-term debt........... Short-term debt Other.Dividends on preferred and preference stock$16.8 7.9 (3.3)4.8 (0.2)0.2 4.9 2.5 1973 1974 1975~Net Plant1n Service-original cost of facilities serving customers less accumulated depreciation. Construction Work in Progress-cost of facilities under construction and not yet in service. SUPPLEMENTARY COMMENTS TO ANNUAL REPORT Many of the results shown in the Annual Report to Shareowners involve complex financial and legal concepts.Often the traditional language used is technical and unfamiliar. How then do you make the report more understandable while still complying with reporting requirements? These supplementary pages represent an effort to make the report more meaningful to the reader.Detail and precision have been sacrificed for the sake of brevity.We welcome your comments.The Annual Report What is it?Why is it published? What can you find in it?These are all natural and basic questions. First, the Company is legally required to provide its shareowners with an annual report on the operations of the Company, but it is more than just an accounting of financial stewardship for the year.It is an opportunity to look at performance, objectives, opportunities and, in general, the corporate personality of a company.The audience for the annual report is the world in which a company operates.In addition to shareowners, that world includes PP8L employees and retirees, customers, suppliers, government and regulatory officials, financial analysts, citizens of communities where the Company does business, potential investors and many others.Highlights Operating highlights (inside cover)give the reader a quick look at basic statistics about the Company.The President's Letter This year in his letter (pages 1 and 2), Jack Busby, the Company's chief executive officer, presents a broad review of national energy problems and cites the need for prompt action.The Year In Review This section (pages 3 through 10)discusses PP8 L operations for the year in some detail.Earnings, energy supply and use, generating projects, construction, financing, energy conservation and personnel changes are among the topics reviewed.Financial Section This section (pages 11 through 27)gives the detailed statistical and accounting facts and interpretive text that are necessary for a basic understanding of the financial aspects of the Company's business.Statistical Summary Included on page 11 are indicators measuring the financial health of the Company.Times interest earned is the number of times the Company's income covers the interest paid on the money the Company owes (mortgage bonds, notes and bank loans)to creditors. Return on average common equity is the rate of return earned on all the money invested in the business by the common shareowners, including the amount of their earnings reinvested in the business.Under the Operations heading are kilowatt-hour sales, average price of electricity, sources and disposition of energy, number of employees and other pertinent operating data. Analysis of Statement of Income This analysis of the Company's financial performance (pages 12-14)explains reasons for changes in specific items on the Statement of Income for the last two years.Detailed are the reasons for the slight rise in sales and increased revenues.Various cost components in running the business are reviewed, such as fuel and the cost of financing. Statement of Income The Statement of Income (page 15)shows the results of operating the business over the whole year.Figures for one year do not provide enough information to observe trends or patterns in the Company's operations. PP8L includes a Statement of Income for five years.The form of the Statement of Income used by most utilities is generally prescribed by regulatory commissions having jurisdiction over the utility rates of the Company.Operating revenues minus the operating expenses incurred in running the business is called Operating Income.This represents the results of the Company's utility operations (for PP&L the sale of electricity and steam).Under the caption Other Income and Deductions are items which relate to the construction of electric facilities which are not yet used in utility operations and other non-utility transactions of the Company.Interest charges and dividends on preferred and preference stock are amounts paid to creditors of the Company and owners of these classes of stock.The amount left over for the common shareowners after all expenses and costs are taken care of is called Earnings Applicable to Common Stock.Dividing this amount by the average number of common shares outstanding during the year gives earnings per share-an important indicator of the Company's financial performance. The following is a brief explanation of some of the captions appearing on PP8L's Statement of Income.Operating Revenues: Revenues are primarily amounts billed to customers for electricity. Operating Expenses: These are the costs involved in providing electric service.~Wages and employee benefits-Like employees of any other business, PP&L's workers received wages and employee benefits for work performed in providing electric service.~Fuel-The cost of coal and oil we burned in our generating units.~Power purchases and interchange power sales-PP8 L is a member of an 11-company power pool known as the Pennsylvania-New Jersey-Maryland (PJM)Interconnection. Interchange power is the electricity that is bought from or sold to these and other electric companies in order to have the most economic utilization of generating facilities. The price received for interchange power sales is mainly based on the relationship of fuel costs of the selling and buying utilities. Regulatory authorities require that we reduce expenses by the amount received from these sales rather than classifying it as revenue.Whether it's added on the top line as additional revenue or subtracted from expenses, the effect on income is the same.The parenthesis indicate it's a"credit" to expenses-that is, expenses are less by that amount than they would otherwise be.~Other operating costs-Includes services, supplies, rents, etc.-those goods and services PP&L needs to operate the business.This includes cost of tree-trimming to prevent service interruptions, fire and casualty insurance, research and development, rental of equipment, materials, postage, paper and many more items.~Depreciation -This is a term used to describe the cost to the Company of using up certain types of property over a period of time.Just like the new car you may buy, the plants we build and equipment we buy wear out over time or become obsolete and the value declines.It's the same as the older car you trade in on the new one-it's always worth a lot less than when it was new.When PP8L buys equipment that will be in use over a number of years, its full purchase cost is not shown in one lump sum as expense on the Statement of Income.Instead, we space out the cost over the period the equipment is expected to be in use-and during that time its value is declining or depreciating. o Income taxes-Just like the individual taxpayer, PPBL pays taxes to the federal and state governments based on the revenue it receives minus allowable deductible items.Income taxes appear in two places on the Statement of Income, under Operating Expenses and as a credit amount under Other Income and Deductions. There are three major components of Income Taxes-current, deferred and investment tax credits, which are detailed in Note 6 to Financial Statements on pages 23 and 24.The net of the current amounts shown represent the tax which is currently payable.Note 6 shows this amount, which is arrived at by subtracting the credit amount under Other Income and Deductions from the expense under Operating Expense.The current taxes payable have been reduced by investment tax credits.These credits are designed to encourage companies to keep plant equipment modern and efficient, and to expand facilities today to create more job opportunities and, in turn, promote a healthier economy.The credits are based on a percentage (4 per cent and 10 per cent)of the cost of new plant and equipment placed in service or, in certain circumstances, payments made on facilities under construction. Under the income tax law, utilities must reflect this tax savings as a credit on the Statement of Income over the life of the property.Note 6 shows the amount of current investment credit deferred and also the amount of prior year'credits amortized or reflected in income during 1974 and 1975.As a further incentive to strengthen the economy, businesses are permitted to defer a portion of their tax payments to a future date thereby making more cash available now for the expansion of facilities. The portion of tax expense identified as deferred represents the tax obligation applicable to the current year's income which will have to be paid in future years.~Taxes other than income-PP&L pays special real estate taxes, a gross receipts tax (which is only applicable to utilities), capital stock tax and other taxes such as the corporate matching of employees'ocial Security deductions. Other Income and Deductions: ~Allowance for funds used during construction (Allowance) -Is the biggest part of Other Income.A look at our rate-making mechanism is necessary to explain this item.Our electric (and steam)rates are based in part on the annual cost of securities used to finance all of our utility plant (generators, lines, cables, poles, etc.)that is being used to provide service to our customers. But, we can't include any of this property in the base used to establish rates until it's actually in use.A power plant takes 10 years or more to design, engineer and build.The people who do the designing, the engineering and the building, and all the firms who provide material can't wait 10 years to get paid.We pay for the plant as it's built.Most of the money needed to finance electric facilities under construction must be provided by investors. We must sell mortgage bonds and common, preferred and preference stocks as well as borrow from banks.We must pay interest and dividends for use of this money and these charges are reflected on the Statement of Income as a cost of doing business.The Allowance is a non-cash accounting credit that enables us to offset these financing costs on the Statement of Income and correspondingly include such financing charges as a cost of the facilities being constructed. At the time construction is completed and the property is being used to serve our customers, the total cost of the project, including financing charges for the construction period, can be included in the base used to establish electric rates.~Income tax credits-A portion of the construction-related financing charges are represented by interest which is deductible for.income tax purposes and serves to reduce the current payment due on such taxes.Since this tax savings does not relate to utility operations because the facilities are not yet in service it is shown as part of non-utility o perations under Other Income and Deductions. ~Other net-Includes minor amounts of income and expenses related to non-utility operations. Part of these expenses are corporate charitable contributions which are shareowner and not ratepayer expenses.Interest Charges: The interest we pay creditors for the use of money loaned under debt obligations of the Company, which are mortgage bonds, notes and bank borrowings. Nonrecurring Credit: This amount represents the effect on years prior to 1974 of an accounting change made in 1974 and was included as income on a once-and-done basis for that year.The accounting change was made to match the recording of fuel costs with related revenues billed under the Company's fuel adjustment clauses.Net Income-Before Preferred and Preference Stock Dividends: Many times Net Income is looked at as the profit line, but for most utility companies there is an additional cost of doing business-the cost of preferred and preference stock.We have a contractual obligation to pay set dividends on preferred and preference stock which we sell to raise funds, principally to finance construction projects. Earnings Applicable to Common Stock: This is what is left over for common shareowners. Some of this amount (about 63 per cent)is paid as dividends to common shareowners and the rest is reinvested in the business to help pay for the construction of new facilities, which reduces the need to sell more stocks and bonds.Earnings Per Share of Common Stock: After taking into account all the items on the Statement of Income, a key indicator in measuring the financial performance of a company is the amount it earned for.each share held by shareowners of common stock.This is the amount which is applicable to common stock divided by the average number of common shares outstanding. Other important measures on a per share basis are dividends and common equity.Dividends per share indicate the amount of dividends paid on one share of common stock during the year.Common equity (common stock plus earnings reinvested minus capital stock expense), which is shown on the Balance Sheet, represents the total investment by common shareowners. Dividing this amount by the total common shares outstanding is called common investment per share or book value.The Balance Sheet While the Statement of Income shows an investor how we did over the whole year, the Balance Sheet represents the financial picture as it stands on one particular day-in our case the figures are shown for December 31, 1974 and December 31, 1975.The Balance Sheet (pages 16 and 17)is divided into two sections, Assets and Liabilities, with both sections always in balance.Assets: Items of value owned by a business, such as:~Utility Plant-The facilities used to provide electric service for our customers. It includes that portion of projects under construction that we have paid for but which aren't yet complete enough to be used to provide service and put in our rate base.~Investments -Includes property, investments in coal and other companies and miscellaneous holdings.~Current Assets-Cash or assets that can generally be converted to cash or are expected to be used in the business during the following year.~Deferred Debits-Basically these are items which will be charges to expense or other accounts over a period of time.Liabilities: This includes what investors have put into PP8 L and amounts the Company owes to others.~Capitalization -The money all of our investors (common, preferred and preference shareowners and bondholders) have put into the business.It includes earnings reinvested which is the portion of common shareowner earnings which has gone back into the business.~Current Liabilities -Generally includes obligations of the Company which fall due within the coming year and items which have been billed by others, but not yet paid.~Deferred and Other Credits-We noted previously (in discussing income taxes shown on the Statement of Income)that income tax payments were deferred.Under this balance sheet caption are shown the tax obligations deferred in the current and prior years which will come due in the future.Also shown are the total investment tax credits which have been deferred and will be credited to income over future years.Schedule of Capital Stock and Long-Term Debt Page 18 details the various classes of stock, mortgage bonds and other long-term debt.Statement of Changes in Financial Position This statement (page 19)explains where the Company obtained its funds-such as from operations, borrowings and the sale of additional stock.Also what the Company did with those funds-such as constructing new facilities, retiring securities and paying dividends to stockholders. Statement of Earnings Reinvested The cumulative amount of earnings put back in the business is recapped (page 20)by showing the income available to pay dividends and the amount of dividends paid to shareowners. Notes to Financial Statements Each financial statement in the annual report is footnoted with the words"See accompanying Notes to Financial Statements." This refers to the six pages (20 through 25)of explanatory and supplemental information on the Company's operations. The pages provide accounting clarification and in-depth explanations of many items found in the financial statements. If this information were included in the financial statements, instead of footnoted and grouped together, the result would probably be an unintelligible jumble of words and numbers.The footnotes are designed to provide better insight for those who want more interpretive and technical information to support the financial statement. Auditors'pinion This (page 26)is the reader's assurance by an independent accounting firm that PPB L has applied accounting principles which are generally used in financial reporting. It is the auditors'eport that the financial statements have been examined and their opinion as to the fairness of data presented. Fiscal Agents and Securities Listed This information (page 26)lists transfer agents, registrars, disbursing office and stock exchange listings for all classes of PPB L stock.Dividends and Stock Prices This section (page 27)provides quarterly market price and dividend information of all classes of the Company's stock for the previous two years. STATEMENT OF INCOME Thousands of Dollars 1975 1974 1973 1972 1971 Operating Revenues (Note 2)$544,129 472,036 384,814 345,792 300,707 Operating Expenses=Wages and employee benefits Fuel (Note 3)Power purchases Interchange power sales Other operating costs.Depreciation Income taxes (Note 6)Taxes, other than income (Note 6)Operating Income Other Income and Deductions Allowance for funds used during construction Income tax credits (Note 6), Other-net Income Before Interest Charges Interest Charges Long-term debt.Short-term 'debt and other Income Before Nonrecurring Credit Nonrecurring Credit Related to Accounting Change, Net of Income Taxes ($4,831)(Note 3)............. Net Income-Before Preferred and Preference Stock Dividends.Dividends on Preferred and Preference Stock..Earnings Applicable to Common Stock Earnings Per Share of Common Stock (a)Before Nonrecurring Credit.Nonrecurring Credit Earnings on a Comparable Basis After Allocating Nonrecurring Credit to Appropriate Prior Period Earnings applicable to common stock Earnings per share of common stock (a)........Average Number of Shares Outstanding (thousands) ...Dividends Declared Per Share of Common Stock....... 71,773 271,636 37,698 (172,823)68,369 58,540 47,298 40,669 423,160 120,969 36,605 11,201 3,154 50,960 171,929 67,932 6,456 74,388 97,541 97,541 24,509$73,032$2.87$2.87$73,032 2.87 25,459$1.80 67,374 192,353 24,176 (108,723)54,489 52,399 39,211 35,571 356,850 115,186 20,732 5,076 3,418 29,226 144,412 51,149 9,946 61,095 83,317 4,162 87,479 19,656 67,823 2.88.19 3.07 63,661 2.88 22,067 1.77 57,421 125,577 15,299 (70,175)45,234 48,837 33,943 30,005 286,141 98,673 14,967 91 1,300 16,358 115,031 43,203 4,916 48,119 66,912 66,912 17,191 49,721 2.57 2.57 51,066 2.64 19,359 1.68 55,220 95,220 13,514 (34,569)39,512 41,446 26,086 25,658 262,087 83,705 14,647 334 (305)14,676 98,381 36,507 3,953 40,460 57,921 57,921 14,526 43,395 2.48 2.48 43,161 2.46 17,513 1.64 48,198 79,499 18,963 (15,468)33,214 34,903 11,545 22,146 233,000 67,707 16,242 176 (63)16,355 84,062 30,895 4,595 35,490 48,572 48,572 11,392 37,180 2.37 2.37 38,488 2.45 15,690 1.60 (a)Based on average number of shares outstanding. See accompanying Notes to Financial Statements. 15 BALANCE SHEET ASSETS Thousands of Dollars December 31 1975 1974 UTILITY PLANT Plant in service-at original cost Electric Steam heat Less accumulated depreciation Construction work in progress-at cost$1,992,673 7,805 2,000,478 406,313 1,594,165 437,062 2,031,227 1,687,740 7,703 1,695,443 354,249 1,341,194 403,707 1,744,901 INVESTMENTS Subsidiaries-at equity Safe Harbor Water Power Corporation -at equity Nonutility property-at cost (less accumulated depreciation: 1975,$1,069;1974,$554)Other-at cost or less 28,595 3,626 4,692 2,473 39,386 4,631 3,599 2,495 4,064 14,789 CURRENT ASSETS Cash (Note 4)Accounts receivable (less reserve: 1975,$1,346;1974,$1,031)Customers Other Notes receivable Recoverable fuel costs (Note 3)Materials and supplies-at average cost Fuel Operating and construction .Other 14,832 36,243 16,817 32,178 37,154 68,318 22,616 5,995 234,153 16,251 33,907 16,834 5,740 35,587 71,886 24,979 13,072 218,256 DEFERRED DEBITS 7,118$2,311,884 , 7,482 1,985,428 See accompanying Notes to Financial Statements. 16 LIABILITIES Thousands of Dollars December 31 1975 1974 CAPITALIZATION (a)Shareowners investment (Note 5)Preferred stock Preference stock Common stock Capital stock expense (deduction) Earnings reinvested (Notes 7 and 8)$156,375 210,000 412,303 (8,801)212,550 982,427 156,375 140,000 354,540 (7,580)185,695 829,030 Long-term debt........1,032,980 2,015,407 914,349 1,743,379 CURRENT LIABILITIES Long-term debt due within one year (a)Commercial paper notes (Note 4)Accounts payable Taxes accrued Deferred income taxes applicable to recoverable fuel costs.Dividends payable Interest accrued Other.10,966 73,630 51,281 20,199 19,669 19,362 21,617 9,719 226,443 85,509 37,121 11,852 18,840 15,844 18,789 8,338 196,293 DEFERRED AND OTHER CREDITS Deferred investment tax credits.Deferred income taxes Other 31,849 22,713 15,472 70,034$2,311,884 18,860 22,689 4,207 45,756 1,985,428 (a)See Schedule of Capital Stock and Long-Term Debt on page 18.First Mortgage Bonds of$93 million which matured and were refinanced In 1975 are included ln the long-term debt balance at December 31, 1974.Sca accompanying Notes to Financial Statements. SCHEDULE OF CAPITAL STOCK AND LONG-TERM DEBT December 31, 1975 Thousands of Dollars 4,178 22,878 6,300 40,000 22,237 7,763$156,375 PREFERENCE STOCK-no par, cumulative, authorized 5,000,000 shares$8.00 series, outstanding 350,000 shares$8.40 series, outstanding 400,000 shares$8.70 series, outstanding 400,000 shares$9.25 series, outstanding 200,000 shares$11.00 series, outstanding 500,000 shares$13.00 series, outstanding 250,000 shares$35,000 40,000 40,000 20,000(a)50,000(a)25,000$210,000 COMMON STOCK-no par, authorized 50,000,000 shares, outstanding 26,551,981 shares.......~......... $412,303 CAPITAL STOCK (Note 5)PREFERRED STOCK-$100 par, cumulative 4%%d'/o, authorized 629,936 shares, outstanding 530,189 shares.......$53,019 Series, authorized 5,000,000 shares 3.35'/o, outstanding 41,783 shares..4.40'lo, outstanding 228,773 shares.4.600/0, outstanding 63,000 shares..7.40'/0, outstanding 400,000 shares.8.60'/o, outstanding 222,370 shares.9%, outstanding 77,630 shares LONG-TERM DEBT FIRST MORTGAGE BONDS 2/s'/0 series due 1976............. 2/4olo series due 1977............. , 3i/s'/0 series due 1978............. 2/i/0 series due 1980............. 3Vso/o series due 1982....... '......10'/s'/0 series due 1982............. 3%i'/o series due 1983............. 3s%%d%series due 1985............. 4s/s%series due 1991............. 4'/s%series due 1994............. 55%%d%series due 1996............. 6N/o series due 1997.~...~.~~.~" 7%series due 1999............. 8~%%d%series due 1999.......... ~..9%series due 2000............. 7'/i/o series due 2001............. 7'Ye'/o series due 2002........... ~~7i%%d%series due 2003............. 9ilio/o series due 2004............. 9N lo series due 2005............. 9y4/o series due 2005............. 4AD/0 to 55/6'lo pollution control series A due annually$500, 1977-1983; $900, 1984-2002; $7,400, 2003$8,000 20,000 3,000 37,000 7,500 100,000 25,000 25,000 30,000 30,000 30,000 30,000 40,000 40,000 50,000 60,000 75,000 80,000 80,000 125,000(a) 100,000(a) 28,000 1,023,500 NOTES 6%/0-7/o due 1976 7'/0 due 1980 Other 2,800 20,000 551 23,351 Unamortized discount and premium-net. (2,905)1,043,946 Less amount due within one year........10,966$1,032,980 (a)Issued in 1975.See accompanying Notes to Financial Statements. 18 STATEMENT OF CHANGES IN FINANCIAL POSITION Thousands of Dollars 1975 1974 1973 1972 1971 SOURCE OF FUNDS Operations Net income (1974 includes$4,162 nonrecurring credit)Charges (credits)against income not involving working capital Depreciation Noncurrent deferred income taxes and investment tax credits-net Allowance for funds used during construction Other.58,540 52,399 48,837 41,446 34,903 15,701 8,790 11,282 7,984 (1,127)(36,605)7,464 (20,732)520 (14,967)220 (14,647)220 (16,242)220 142,641 128,456 112,284 92,924 66,326$97,541 87,479 66,912 57,921 48,572 Outside financing Common stock.Preferred stock.Preference stock First mortgage bonds............ Other long-term debt............. Short-term debt-net increase......Working capital-decrease (a)................... Investment in subsidiaries -decrease............ Other-net 57,763 35,156 70,000 225,000 208 25,000 180,000 360 45,658$510,778 415,319 352,971 286,174 15,166(b)689 40,900 40,000 108,000 20,024 208,924 3,156 4,065 328,429 35,000 75,000 8,342 20,231 185,513 917 279,354 40,000 60,000 10,506 147,626 23,896 123 4,676 242,647 46,940 37,120 APPLICATION OF FUNDS Construction expenditures $345,289 Allowance for funds used during construction ...(36,605)308,684 271,460 224,496 218,754 (20,732)(14,967)(14,647)250,728 209,529 204,107 192,399 (16,242)176,157 Securities retired First mortgage bonds.Other long-term debt Short-term debt-net decrease.93,000 112 18,632 11,879 15,000 10,041'0,057 56,631 8,117 21,627 Dividends on preferred, preference and common stock Working capital-increase (a)Investment in subsidiaries -increase....Other-net 104,991 18,632 66,672 25,057 29,744 70,686 58,897 50,037 43,330 36,746 82,753(b)6,624 23,964 2,191 2,453 4,309 236$510,778 415,319 328,429 279,354 242,647 (a)Excludes short-term debt and long-term debt due within one year.(b)The net changes In working capital resulted principally from the following: 1975, increases In notes receivable, accounts payable, accrued taxes, dividends payable and accrued interest;1974, increases in fuel inventory, accounts receivable and deferred fuel costs less related deferred income taxes.See accompanying Notes to Financiai Statements. STATEMENT OF EARNINGS REINVESTED Thousands of Dollars Balance, January 1 Net Income (1974 includes$4,162 nonrecurring credit)Dividends Preferred stock Preference stock................. Common stock (per share-1975,$1.80;1974,$1.77;1973,$1.68;1972,$1.64;1971,$1.60)1975$185,695 97,541 283,236 9,393 15,1 16 46,177 70,686 1974 157,113 87,479 244,592 9,393 10,263 39,241 58,897 1973 140,238 66,912 207,150 7,551 9,640 32,846 50,037 1972 125,647 57,921 183,568 6,433 8,093 28,804 43,330 1971 113,821 48,572 162,393 6,433 4,959 25,354 36,746 Balance, December 31 (Notes 7 and 8)$212,550 185,695 157,113 140,238 125,647 NOTES TO FINANCIAL STATEMENTS December 31, 1975 and 1974 1.
SUMMARY
OF ACCOUNTING POLICIES Accounting System Accounting records are maintained in accord-ance with the Uniform System of Accounts pre-scribed by the Federal Power Commission (FPC)and adopted by the Pennsylvania Public Utility Commission (PUC).Utility Plant Additions to utility plant and repIacements of units of property are capitalized at cost.Costs of depreciable property retired or replaced are removed from utility plant and such costs, plus removal costs, less salvage, are charged to accumulated depreciation. Costs of land retired or sold are removed from utility plant and any gains or losses are reflected on the Statement of Income.All expenditures for maintenance and repairs of property and the cost of replacement of items determined to be less than units of property are charged to operating expenses.Allowance for Funds used During Construction As provided in the Uniform System of Accounts, the Company capitalizes as part of construction cost an amount representing the net cost of funds (after-tax interest cost on borrowed money and a reasonable rate on other capital)used to finance construction work in progress.The allowance for funds used during construction (Allowance) as shown on the Statement of Income is a non-cash item equal to the amount capitalized and serves to offset the actual cost of financing construction work in progress.Since February 1, 1974 the Company has computed the Allowance rate on an"after-tax" basis and income tax reductions associated with the interest component of the Allowance have been reflected as Income tax credits under Other Income and Deductions with a corresponding increase in current income taxes charged to Operating Expenses.Depreciation For financial statement purposes, the straight-line method of depreciation is used to accumu-late an amount equal to the cost of utility plant and removal costs, less salvage, over the esti-mated useful lives of property.Provisions for depreciation resulted in an annual composite rate of 3.3'/0 in both 1975 and 1974.Subsidiaries and Safe Harbor Investments in subsidiaries (ail wholly-owned) and in Safe Harbor Water Power Corporation (representing one-half of that company's voting securities) are recorded using the equity method 20 of accounting. The Company's subsidiaries are engaged in coal mining operations, holding coal reserves and real estate.Since the subsidiaries are not engaged in the busi-ness of generating and distributing electricity, the Company believes that its financial position and results of operations are best reflected without consolidation. If'all the subsidiaries were con-sidered in the aggregate as a single subsidiary, they would not constitute a"significant subsidi-ary" as that term is defined by the Securities and Exchange Commission. Revenues Revenues are based on cycle billings rendered to certain customers monthly and others bi-monthly.The Company does not accrue revenues related to energy delivered but not billed.Fuel Costs Recoverable Under Fuel Adjustment Clauses The Company's tariffs include fuel adjustment clauses under which fuel costs varying from the levels allowed in approved rate schedules are reflected in customers'ills after the fuel costs are incurred.The charge to expense for fuel costs recoverable in the future through application of fuel adjustment clauses is deferred to the periods in which these costs are billed to customers. See Note 3 to Financial Statements. Income Taxes Deferred tax accounting is followed for items where similar treatment in rate determinations has been or is expected to be permitted by the PUC.The principal items are accelerated amorti-zation of certified defense facilities and pollution control equipment, deduction of costs of remov-ing retired depreciable property, that portion of tax depreciation arising from shortening depre-ciable lives by 20'/o under the class life deprecia-tion system, fuel costs recoverable under fuel adjustment clauses and beginning in 1975 the forced outage reserve.Tax reductions arising principally from the use of the declining balance depreciation method, guideline lives and certain income and expenses being treated differently for tax computation than for book purposes are accounted for under the flow-through method.Investment tax credits, which result in a reduction of current federal income taxes payable, are deferred and are being amortized over the average lives of the related property.Retirement Plan The Company has a Retirement Plan composed of two parts: (1)a non-contributory portion which provides benefits for all eligible active employees with the full cost absorbed by the Company, and (2)a voluntary portion in which contributions are made by both employees and the Company, but the full cost of past service and Plan improve-ments is borne by the Company.Approximately 95'/0 of eligible active employees are members of the voluntary portion of the Plan.Company contributions to the Plan include amounts re-quired to fund current service costs and to amor-tize unfunded past service costs over periods of not more than 20 years.Forced Outage Reserve A self-insurance reserve is provided to cover the increased level of power costs which are experi-enced when any of the Company's major generating units are forced out of service due to damage caused by accident or certain other unforeseen incidents. The reserve covers increased power costs resulting from purchasing or generating replacement power at higher costs or loss of interchange sales in excess of$0.5 million for each accident or incident.As to certain of the Company's large generating units, costs chargeable to the reserve are limited to$10 million since outside insurance is carried to cover costs in excess of that amount.The reserve is established on the basis of historical experience and has been recognized in ratemaking proce-dures by the PUC.At December 31, 1975 the reserve balance was$11.9 million.Prior to 1975 the annual provision charged to operating ex-pense was reduced by related income taxes. 2.RATE FILINGS In March 1975 the Company filed with the PUC a two-stage request for additional increases in electric revenues of about 15'/0 which totaled approximately $80 million annually.The PUC suspended both stages of this request.The Com-pany subsequently filed a revised first stage increase of about 4'/0 (approximately $21.7 million annually)which was not suspended and went into effect on September 13, 1975.The PUC concluded hearings on both stages in January 1976 but a final order is not expected before the latter part of March 1976.Revenues collected under the 4'/o increase totaled$4.9 mil-lion during 1975 and are subject to possible refund pending final action by the PUC.A rate increase of approximately $1 million annually, affecting 15 resale customers, was permitted to become effective in September 1974 by the FPC.The affected customers are opposing the rate increase and revenues collected are subject to possible refund.3.FUEL COSTS RECOVERABLE UNDER FUEL ADJUSTMENT CLAUSES Effective January 1, 1974, the Company, as authorized by the PUC, changed its method of accounting for fuel costs to achieve matching of fuel expense and revenues by accounting periods.This change resulted in the charge to income for fuel costs recoverable in the future being deferred to the periods in which these costs are billed to customers through application of fuel adjustment clauses.For 1974, fuel costs were lower by a net amount of$26.6 million and, after income tax effects, earnings applicable to common stock were increased by$12.6 million ($0.57 per share)as a result of this accounting change.The Nonrecurring Credit shown on the Statement of Income for 1974 represents the cumulative effect to December 31, 1973 of the change in accounting for fuel costs, net of related income taxes.Earnings restated on a comparable basis shown on the Statement of Income reflect the effect of retroactive application of the change in account-ing for fuel costs and related income tax effects had the new method been used since the princi-pal fuel adjustment clause became effective in 1970.4.COMPENSATING BALANCES AND SHORT-TERM DEBT In order to provide loans for interim financing and provide back-up financing capability for commercial paper notes the Company had lines of credit with various banks aggregating $200 million at December 31, 1975.Use of these lines of credit was restricted at December 31, 1975 to the extent of$9 million by short-term bank loans to certain companies involved in fuel supply opera-tions.Bank borrowings are generally for one year and may be prepaid at any time without penalty.No bank loans were outstanding at December 31, 1975 or December 31, 1974.Of the Company's lines of credit,$145 million was maintained by compensating bank balance requirements (not legally restricted as to with-drawal)and$55 million by payment of commit-ment fees.Compensating bank balance requirements are on an average annual basis which approximated $13.9 million at December 31, 1975.Commitment fees on an annualized basis approximated $0.4 million at December 31, 1975.Commercial paper notes are generally sold for periods ranging from 30 to 60 days.The weighted average discount rates applicable to commercial paper notes outstanding at December 31, 1975 and 1974 were 5.6'/0 and 9.4'/o, respectively. The maximum aggregate amount of short-term debt outstanding at the end of any month during 1975 was$142.6 million and during 1974 was$1,40.3 million with an average aggregate daily amount outstanding 'during these years of$85.2 million and$95.6 million,'espectively. The 22 approximate weighted average interest rate of shor'I-term debt during 1975 was 7.3'le and during 1974 was 10.0'/o, calculated by dividing the total short-term debt interest expense for the year by the average aggregate daily amount of short-term debt outstanding during the year.The Company does not amortize capital stock expense which represents commissions and expenses incurred in connection with the issu-ance and sale of capital stock.Sales of capital stock during 1975 and 1974 were as follows (shares and amount in thousands): 1975 Common Stock Public offering Dividend reinvestment and employee investment plans Preference Stock$11.00 Series.......... $9.25 Series~~....,,... Shares Amount 3,000$51,450 301 5,595 500 200 50,000 20,000 1974 Common Stock....Preference Stock$13.00 Series....2,200 250 35,156 25,000 Each of the following series of stock contains sinking fund provisions which are designed to retire the series at a redemption price of$100 per share: 5.CAPITAL STOCK On April 23, 1975 the authorized Common Stock of the Company was increased from 30,000,000 shares to 50,000,000 shares.Common Stock of$412,303,000 at December 31, 1975 includes$718,000 cash installments re-ceived under a dividend reinvestment plan for shareowners and employee investment plan for which 36,337 shares of Common Stock were issued in January 1976.Effective January 1, 1976 the Company replaced its two investment plans with'a single, new dividend reinvestment plan for which 900,000 shares of unissued Common Stock have been.authorized for issuance pursu-ant to the terms of the plan.6.TAXES Income tax expense for the years 1975 and 1974 is reflected on the Statement of Income as follows: 1975 1974 Thousands of Dollars Operating Expenses Current Federal State 12,554 3,858 16,412$22,547 8,221 30,768 Deferred Federal State 2,952 590 3,542 15,991 3,271 19,262'nvestment tax credits Deferred Amortization of deferments .......... Other Income and Deductions-Current Federal State.14,465 4,753 (1,477)(1,216)12,988 3,537 47,298 39,211 (9,164)(4,156)(2,037)(920)(11,201)(5,076)Total income tax expense............ $36,097 34,135(a)(a)Excludes$4,831 deferred income taxes related to Nonrecurring Credit.Total taxes currently payable is arrived at by subtracting the credit amount under Other Income and Deductions from the expense under Operating Expenses as follows: Operating Expenses Other Income and Deductions ........Total.......... 1975 1974 Thousands of Dollars$30,768 16,412 (11,201)(5,076)$19,567 11,336 Shares to be Redemption Redeemed Annually Period Preferred Stock 7.400/o Series 16,000 1979 thru 2003 Preference Stock$13.00 Series (a)12,500 1980 thru 1999$11.00 Series (a)25,000 1981 thru 2000$9.25 Series 40,000 1977 thru 1981 (a)The Company has the right to redeem on each sinking fund redemption date additional shares up to the number of shares of this Series required to be redeemed annually.23 Deferred income taxes result from the following items: 1975 1974 Thousands of Dollars Portion of tax depreciation under the class life depreciation system Recoverable fuel costs.....Forced outage reserve Other$4,540 3,715 829 14,009(a)(3,726)1,899 1,538$3,542 19,262 Net income Income tax expense Pre-tax income$133,638 126,445 (a)Excludes$4,831 deferred income taxes related to Nonrecurring Credit.Income tax expense differed from the amount computed by applying the combined Federal and State corporate income tax rates (52.94~/o in both 1975 and 1974)to pre-tax income as follows: 1975 1974 Thousands of Dollars$97,541 87,479 36,097 38,966 Taxes other than income taxes charged to operat-ing expense were: State gross receipts State capital stock.......State utility real estate...Social security and other Total 1975 1974 Thousands of Dollars$23,756 20,564 7,284 6,263 5,980 5,258 3,649 3,486$40,669 35,571 7.DIVIDEND RESTRICTIONS The Company's charter andmortgage indentures restrict the payment of cash dividends on Com-mon Stock under certain conditions. Under the charter provisions, which are the more limiting, no restrictions are effective on the payment of such dividends out of current earnings.The amount of earnings reinvested free of restrictions under the charter at December 31, 1975 was$154.1 million.Indicated income tax expense on the above at combined Federal and State tax rates Reductions in indicated iocome tax due to: Amortization of investment tax credit deferments ...Allowance for funds used during construction-nontaxable ............. Tax depreciation in excess of book depreciation ....Tax and pension costs-tax deduction in excess of book expenses.......Other Total reduction in indicated income tax Income tax expense Effective tax rate on pre-tax income...$70,748 66,940 1,477 1,216 19,379 10,976 9,131 8,799 2,998 2,491 1,666 4,492 34,651 27,974$36,097 38,966 27 Oo/o 30 8o/o 8.HYDROELECTRIC PROJECTS The Company operates two hydroelectric proj-ects under licenses issued by the FPC.Certain reserves required to be provided under the Fed-eral Power Act have not been recorded pending approval of the amounts by the FPC.The Com-pany estimates that such reserves applicable to the years from 1946 would not exceed$2.8 mil-lion at December 31, 1975.9.RETIREMENT PLAN Obligations of the Company's Retirement Plan are currently funded through a Trust Fund.At June 30, 1975, the end of the Fund's most recent fiscal year, the Fund's assets at cost were$86.6 million.Pension costs were$8.8 million in the year 1975 and$6.7 million in 1974.Based on the Fund's assets at cost, at June 30, 1975 the actuarially computed unfunded past service cost was$25.8 million.As of the same date vested benefits exceeded the cost basis of 24 the Fund's assets by$20.7 million and exceeded the market value of the Fund's assets by$27.0 million.accrued on the basis of the outstanding lease liability. The Company does not currently anticipate any significant increase in pension costs as a result of the Employee Retirement Income Security Act of 1974.10.RENTALS AND NONCANCELABLE LEASE COMMITMENTS Total rentals charged to operating expense for the years 1975 and 1974 amounted to$9.5 and$8.9 million, respectively. At December 31, 1975 the Company was com-mitted for minimum rentals totaling$59.4 million under noncancelable leases expiring at various dates to 1996.The minimum rentals are as follows (millions of dollars): 1976,$5.5;1977,$5.3;1978,$5.1;1979,$4.8;1980,$4.6;1981 through 1985,$15.7;1986 through 1990,$10.2;1991 through 1995,$7.9;after 1995,$0.3.These rentals are applicable to the following categories of prop-erty: combustion turbine generating equipment,$17.5 million;railroad coal cars,$23.9 million;computer equipment,$13.5 million;and con-struction cranes,$4.5 million.Generally the leases contain renewal options and obligate the Company to pay maintenance, insurance and other related costs.The impact upon net income in each of the years 1975 and 1974 would be less than 1%if all non-capitalized financing leases were capitalized and amortized on a straight-line basis with interest 11.PENDING ACQUISITION On December 1, 1975 the Company entered into a purchase.agreement to acquire all of the outstanding capital stock of Hershey Electric Company (HEC).The acquisition cost of the capital stock and the repayment of all debt owed by HEC will approximate $8 million.The reported revenues and net income of HEC for the year 1975 were$8.7 million and$0.4 million, respectively. The acquisition will not be consum-mated until all necessary regulatory approvals have been received.12.COMMITMENTS AND CONTINGENT LIABILITIES The Company estimates that about$1.43 billion will be required to complete construction proj-ects in progress at the end of 1975.Of this amount, approximately $1.28 billion is related to completion of the Company's two nuclear gener-ating units at its Susquehanna Power Plant.The Company's estimated construction program for 1976 is$390 million.In connection with providing for its future bitu-minous coal supply, the Company at December 31, 1975 has guaranteed capital and other obliga-tions of certain coal suppliers (including five owned and two controlled coal companies) aggregating $131.6 million.25 HASKINS&SELLS Certified Public Accountants AUDITORS'PINION Two Broadway New York 10004 The Shareowners and Board of Directors of Pennsylvania Power&Light Company: We have examined the balance sheet of Pennsylvania Power (t Light Company as of December 31, 1975 and 1974, the related statements of income, earnings reinvested, and changes in financial position for the years then ended and the schedule bf capital stock and long-term debt as of December 31,1975.Our examin-nation was made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. In our opinion, such financial statements and schedule present fairly the finan-cial position of the Company at December 31, 1975 and 1974 and the results of its operations and changes in its financial position for the years then ended, in con-formity with generally accepted accounting principles consistently applied during the period and on a basis consistent with the preceding year(except for the change in 1974, with which we concur, in the method of accounting for recover-able fuel costs as described in Note 3 of the Notes to Financial Statements). February 3, 1976 FISCAL AGENTS SECURITIES LISTED ON EXCHANGES TRANSFER AGENTS FOR PREFERRED, PREFERENCE AND COMMON STOCK Industrial Valley Bank and Trust Company 634 Hamilton Mall Allentown, Pennsylvania -18101 Irving Trust Company One Wall Street New York, New York-10015 Pennsylvania Power&Light Company Two North Ninth Street Allentown, Pennsylvania -18101 REGISTRARS FOR PREFERRED, PREFERENCE AND COMMON STOCK The First National Bank of Allentown Hamilton Mall at Seventh Allentown, Pennsylvania -18101 Morgan Guaranty Trust Company of New York 23 Wall Street New York, New York-10015 DIVIDEND DISBURSING OFFICE FOR PREFERRED, PREFERENCE AND COMMON STOCK Treasurer Pennsylvania Power&Light Company Two North Ninth Street Allentown, Pennsylvania -1 8101 NEW YORK STOCK EXCHANGE First Mortgage Bonds, 10%%Series due 1982 4%%Preferred Stock (Code: PPLPRB)4.40%Series Preferred Stock (Code: PPLPRA)8.60%Series Preferred Stock (Code: PPLPRG)Preference Stock,$8.00 Series Code: PPLPRJ)Preference Stock,$8.40 Series Code: PPLPRH)Preference Stock,$8.70 Series Code: PPLPRI)Preference Stock,$11.00 Series (Code: PPLPRL)Preference Stock,$13.00 Series (Code: PPLPRK)Common Stock (Code: PPL)PBW STOCK EXCHANGE 4~/to/o Preferred Stock 3.35%Series Preferred Stock 4.40%Series Preferred Stock 4.60%Series Preferred Stock 8.60%Series Preferred, Stock 94/o Series Preferred Stock Preference Stock,$8.00 Series Preference Stock,$8.40 Series Preference Stock,$8.70 Series Preference Stock,$11.00 Series Preference Stock,$13.00 Series Common Stock 26 Quarterly Dividends and Market Price of Voting Securities for 1975 and 1974 Reported Market Price-Dollars per Share Quarterly Dividends Declared 1st Quarter High Low 2nd Quarter High Low 3rd Quarter High Low 4th Quarter High Low 1975 Common Stock Preferred Stock 4'/to/o Series 3.35o/o 4.4po/o 4 6po/o 7 40o/o (a)8.60o/o 9 PPo/o$0.45 1.125 0.8375 1.10 1.15 1.85 2.15 2.25 20 15s/s 52 44'/s 49'/s 45'h 49 45'/s 49 44'/s 35 31r/s 34 33 35 32 50'/s 41'/s 47'/r 43 48 44 50 44 47'h 45'/s 47 45 35 32'/s 46'!i 43'/s 49 45 93 79'A 88'/s 84 88'/t 81 95 80 90 88 91 88 90 95 82 88 19r/s 17Ys 19r/s 17s/s 19'/s 17%Preference Stock$8.00$8.40$8.70.$9.25 (a)........$11.00$13.00 2.00 2.10 2.175 2.3382(c)(b)3.25 85 69 89 73 92 79 120 105 82 75 81 76 79 74 85 78'/t 84'A 77'ls 84 78 88'/s 82 88'/r 80'/s 87'/s 80'/s 103 100'A 106'h 100'/s 118 111 118 110M 119'h 112 1974 Common Stock Preferred Stock 4'Ao/o Series 3.35'/o 4 4po/o 4 60'/o 7.40'/o (a)......... 8.60o/o 9.PPo/o Preference Stock$8.00$8.40$8.70$13.00$0.45(d)1.125 0.8375 1.10 1.15 1.85 2.15 2.25 2.00 2.10 2.175 2.93(e)23 19'/s 21r/s 16 18'/>>13 17 ls 14r/s 57'/s 52 54th 48r/s 50'/s 43 48 43 40 39 56%52 55'fi 53 104'/s 101 104-=102 103'h 90 89 82'/s 87 70 100 94 89 77 75 70 100'A 96 95 78 102'/s 98 99 80 106 99'/r 100%86 80 68 81M 69 91'3 80 67 81'/r 70 86 72 109'/s 100 38 35 33 29 38 28'/t 52 46'/s 48 41r/s 45 41 52 49 48 46 48 45 The principal trading market for all classes of stock Is the New York Stock Exchange except for the 3.35%.4.60%and 9.00%Series Preferred Stocks which are listed on the PBW Exchange but are traded principally over the counter.Price ranges for the 3.35%, 4.60%and 9.00%Series Preferred Stocks are based on the best available high and low bid prices during the periods and should be viewed as reasonable approximations.(a)Stock was a private placement and is not publicly traded.(b)Stock Issued August 1975, the third quarter dividend was$1.01 and the fourth quarter dividend was$2.75.(c)Stock Issued In September 1975, fourth quarter dividend only.(d)First quarter of 1974 was$0.42, remaining quarters$0.45.(e)Stock issued October 1974, fourth quarter dividend only.27 OFFICERS BOARD OF DIRECTORS JACK K.BUSBY, President ROBERT R.FORTUNE, Executive Vice President, Financial BROOKE R.HARTMAN, Executive Vice President, Operations JOHN T.KAUFFMAN, Vice President, System Power&Engineering EMMET M.MOLLOY, Vice President, Human Resource&Development LEON L.NONEMAKER, Vice President, Dlv/sion Operations CHESTER R.COLLYER, Treasurer NORMAN W.CURTIS, Vice President, Engineering &Construction JOSEPH L.DONNELLY, Vice President, Finance LOUISE A.EARP, Assistant Secretary CHARLES E.FUQUA, Vice President, Susquehanna Division CHARLES J.GREEN, Vice President, Harr/sburg Division RICHARD H.LICHTENWALNER, Vice President, information Services CARL R.MAIO, Vice President, Lehlgh Division JAMES J.McBREARTY, Vice President, Northeast Division EDWARD M.NAGEL, Vice President, Gonoral Counsol and Secretary HERBERT D.NASH JR., Vice President, Consumer&Community Services EDWIN H.SEIDLER, Vice President, Distribution BRENT S.SHUNK, Vice President, Lancaster Division JEAN A.SMOLICK, Assistant Secretary DONALD J.TREGO, Assistant Treasurer GEORGE F.VANDERSLICE, Vice President and Comptroller PAULINE L.VETOVITZ, Assistant Secretary HELEN J.WOLFER, Assistant Secretary Corporate Management Committee: Jack K.Busby.chairman: Messrs.Fortune.Hartman, Ksuifman, Molloy, Nonemaker and Floyd Belsel.executive secretary. The executive organization chart of the Company ls Included in the PP&L Profile.CLIFFORD L.ALEXANDER JR., Washington, D.C.Partner o/Verner, Liiplert, Bernhard, McPherson and Alexander, Counsellors at Law JACK K.BUSBY, Allentown President of the Company RALPH R.CRANMER, Williamsport Member of Board o/Directors-Grit Publishing Company EDGAR L.DESSEN, Hazleton Physician-Radiologist ROBERT R.FORTUNE, Allentown Executive Vice President, Financial BROOKE R.HARTMAN, Allentown Executive Vice Pros/dent, Operations HARRY A.JENSEN, Lancaster Executive Vice President, Armstrong Cork Company, Manufacturer o/interior furnishings and specialty products W.DEMING LEWIS, Bethlehem President of Lehlgh University JOHN A.NOBLE, Scranton President o/Cia/and Simpson Company, Department stores RUTH PATRICK, Philadelphia Chief Curator of the Limnology Departmont, Academy of Natural Sciences NORMAN ROBERTSON, Pittsburgh Senior Vice President and Chio/Economist of Mellon Bank, N.A.JOSEPH T.SIMPSON, Harrisburg Chairman of the Board of Harsco Corporation, Diversified manufacturer of labrlcated metal products CHARLES H.WATTS II, Lewisburg President of Bucknell Univorsity Executive Committee: Jack K.Busby, chairman;Messrs.Cranmer.Hsrtman.Jensen and Simpson.Audit Committee: Clif lord L Alexander, chairman;Mr.Jensen.Dr.Patrick and Mr.Watts.The Company flies Form 10-K annually with the Securities and Exchange Commission. Form 10-K Is composed of this Annual Report to shareowners and additional Information concernIng the Company and Its operations. This additional Information will be available without charge after April 1, 1976 by writing to PennsylvanIa Power&Light Company, Two North Ninth Street, Allentown, Pa.18101, attention: Mr.George I.Kllne, Investor Services Manager.28 PP&L Directors SIMPSON BUSBY I>>Ml\I 1 C CRANMER FORTUNE DESSEN JENSEN t'LEWIS HARTMAN NOBLE WATTS I 0 trN RC I, PATRICK ROBERTSON ALEXANDER+;Ir..Many of the photos above were taken at the two-day September board meeting during which the directorstoured the Susquehannanuclearplantconstructlonsite. PpaL PENNSYLVANIA POWER 8 LIGHT COMPANY Two N'orth Ninth Street, Allentown, Pa.18101 Telephone: Area Code 215 821-5151 8ULK RATE U.S.POSTAGE PAID Allenlewn, Pa.Permit No.l04 LITHO IH U.S.A. Regulatory Docket.F~il ,)$,y.">>>>>>Va EXECUTIVE VICE PRESIDENT'S REPORT>>William F.Matson The business of Allegheny Electric Cooperative is very simple-that of power supply to the membership. From that point on, it becomes less simple-not only power supply but an abundance of power at the lowest possible costs.That helps to confuse the issue.In order to accomplish its single objective, Allegheny, during the coming year, will be spending a significant amount of time on four subjects: capital credits, load management, long-range future power supply, and the decision on the depth of our involvement in generation and transmission. Our long-range projections show that Allegheny's members will require 1,000 MW of firm capacity.Even today, our 137,000 members use nearly one and a half billion KWH.Of this, nearly twice as much is used in the winter as compared to the summer.This throws a disportionate share of our costs, load, and needs for the system into half of the year.Along with the many studies which we constantly keep current, several new studies of interest to the members are currently in progress.A detailed feasibility study is being conducted to determine whether or not economics dictate that we should get involved in self-generation and transmission ownership. Almost concurrently with this study, we are conducting a site selection and fuel supply availability study.Should this feasibility study show the desirability of building self-generation plants, as we suspect it very well may, we will already have some idea as to a general location and a potential source of fuel.Like a crossword puzzle, only one piece can be put in at a time;but when several people work on the crossword puzzle a number of different pieces can be spotted simultaneously. That is what we are trying to do with Allegheny. The business of a G&T revolves around people and figures.This annual report is replete with statistics and data in the form of tables, graphs, and charts in order for you to visualize the progress and growth of your power supply cooperative. In addition to the studies concurrently being made regarding coal fired generation, we are continuing full speed ahead on our studies for construction of additional hydro projects.Each of you recognize the importance of the blend of hydro which we have built into Allegheny's rate base to the membership. Each of you also recognizes the great amount of careful work that must be done by you and by Allegheny's staff in order to continue those ratios as closely as possible.We are proud of Allegheny's record and think that the 10 year results show an excellent stewardship. But truly the past is prologue and our thoughts must be constantly geared for the next 10 to 20 years.I believe that the reports of the officers, managers, and staff of this organization given at the annual meeting will give you a concise picture of the methods we plan to use in order to accomplish the goals and objectives outlined in previous annual budget and work plan reports to the membership. Paramount of course, in a rural electric G&T is the strong and enthusiastic support of its members.For that, we thank each of you. PRESIDENT'S REPORT Reuben Yoselson Although this is my first report as the President of Allegheny Electric Cooperative, as a past president of my local cooperative and as a member of Allegheny's board and an interested onlooker for more than 20 years, I have long shared the agony of defeat and the ecstacy of success with you.The role of the board of directors has changed significantly over the years.Most of this change is of course due to the increased sophistication of the times and of the operation of Allegheny. Still, the board must provide its primary function of being a policy making body and a sounding board for management to use in proposing the new programs, techniques and technologies necessary in order for us to accomplish our objectives. Many of us are concerned about the changing membership of our member cooperatives and the responsibility that Allegheny directors share in trying to accomplish the seemingly impossible objective of low-cost power to the members.Still, directors are remiss in their responsibility if they do not carefully and continuously inform themselves of the success that Allegheny has had in meeting this objective and in turn passing on the fantastic savings of wholesale power to the member cooperatives. You must be able to relate to your individual membership the successes which you have had and to translate those successes into the comparatively lower rates which rural electric members are currently enjoying.Most questions can only be answered with the question: compared to what?Yes, we must all agree electricity costs are high but compared to what, or compared to whose, or compared to what other source?When these questions are carefully explored and carefully answered to our membership, we should hope'that the answers will satisfy the questions of the members.These are indeed trying times and they take strong action to counteract the adversities which confront us.We must make no small plans-our plans must be strong, they must be adequate to meet the tests of the times and they must be sufficient to accomplish our objectives. As your president, I seek your advice, counsel, guidance and strong support of the attainment of these goals. Lelt to right: Myron Ludwick, Lloyd Dugan, Sr.~Robert E.Leonard, Harris Horn, Dennis Shaffer, John Anstadt.Reuben Yoselson, Benjamin Slick, Hiram W.Walker, Daniel A.Clark, Clair O.Bulerbaugh, A.D.Stainbrook. Missing from photo: James Henderson, William J.McDanel.CO-OP ADDRESSES AND DIRECTORS Adams Electric Cooperative', Inc.P.O.Box 130 Gettysburg, PA 17325 Harris S.Horn, Director Somerset Rural Electric Co-op, Inc.127 E.Fairview Street Somerset, PA 15501 Hiram W.Walker, Director Bedford Rural Electric Co-op, Inc.P.O.Box 335 Bedford, PA 15522 Dennis Shaller, Director Southwest Central REC, Inc.P.O.Box 70, Airport Rd.~R.D.4 Indiana, PA 15701 Clair O.Buterbaugh, Director Central Electric Cooperative, Inc.P.O.Box 329 Parker, PA 16049 William J.McDanel, Director Sullivan County REC, Inc.Forksville, Pennsylvania 18616 John Anstadt, Director Claverack Rural Electric Co-op, Inc.Towanda, PA 18848 Reuben Yoselson, Director Sussex Rural Electric Cooperative 22 E.Main Street Sussex, NJ 07461 James L.Henderson, Director New Enterprise Rural Electric Cooperative, Inc.New Enterprise, PA 16664 Benjamin Slick, Director Northwestern Rural Electric Cooperative Association, Inc.R.D.1 Cambridge Springs, PA 16403 A.D.Stainbrook, Director Tri-County REC, Inc.22 N.Main Street Mansfield, PA 16933 Lloyd Dugan, Sr., Director United Electric Cooperative, Inc.Box 477 DuBois, PA 15801 Robert E.Leonard, Director Valley Rural Electric Co-op, Inc.Box 477 Huntingdon, PA 16652 Daniel A.Clark, Director Warren Electric Co-op, Inc.320 E.Main Street Youngsville, PA 16371 Myron Ludwick, Director ALLEGHENY OFFICERS President--Reuben Yoselson Vice President-William J.Mcoanel Secretary-John Anstadt Treasurer-Myron Ludwick STATISTICS No.of members-14 No.of consumers,- 136,845 Total KWH purchased-1,355,237,657 Non-coincident demand-322,1 76 VITAL COOPERATIVE STATISTICS PA Co-op Adams Bedford Central Claverack New Enterprise Northwestern Somerset Southwest Central Sullivan Sussex Tri-County United Valley Warren tof Consumers 12,648 5,763 17,637 10,497 2,123 12,842 8,148 13,769 3,748 5,832 12,374 12,515 11,969 6,980 Miles of Line 1,976 958 2,620 2,121 265 2,038 1,668 1,977 681 359 2,333 2,429 1,865 912 Consumers Per Mile of Line 6.4 6.0 6.7 4.5 8.0 6.3 4.9 7.0 5.5 16.2 5.3 5.2 6.4 7.7 Total KWH Purchased 151,103,200 64,733,800 136,810,000 120,014,839 26,659,600 153,083,908 101,779,500 158,168,732 32,714,941 59,708,500 97,091,160 95, I 78,000 1 22,539,000 35,652,477 Annual Peak Demand 38,483 14,976 31,002 27,989 6,213 33 272 23,406 32.027 8,892 14.340 27,732 24,380 28,135 11.329 TOTAL Average 136,845 9,775 22,202 1,586 1,355,237,657 322.176 6,9 TREASURER'S REPORT ALLEGHENY ELECTRIC COOPERATIVE, INC.BALANCE SHEET-31 DECEMBER 1975 and 1974 ASSETS Total Utility Plant in Service Transmission Station Equipment Total Utility Plant Accumulated Provision for Depreciation Net Utility Plant Investments in Associated Organizations Cash-General Funds Temporary Cash Investments Receivables Total Current and Accrued Assets Total Assets 1975$10,368 26,989 37,357 4,603 32,754 1,757,687 3,477 1,030,000 2,066,778 4,857,942$4,890,696 1974,$8,706 26,989 35,695 2,630 33,065 1,010 302,841 200,000 2,335,152 2,837,993$2,872,068 LIABILITIES Memberships 'atronage Capital Donated Capital-Members Donated Capital-Non Members Deficit Margin Total Margins and Equities Long-Term Debt-NRUCFC Accounts Payable Total Liabilities 1975 2,800 1,600,107 29,316 349 8 1,632,572 1,070,060 2, I88,064$4,890,696 1974 2,800 990,221 29,316 349~22.203 1,000,483-1.871,585$2,872,068 TREASURER'S REPORT (CONT'D)MEMBER Adams Electric Cooperative, Inc.Bedford Rural Electric Cooperative, Inc.Central Electric Cooperative, Inc.Claverack Rural Electric Cooperative, Inc.New Enterprise Rural Electric Cooperative, Inc.Northwestern Rural Electric Coop.Assn., Inc.Somerset Rural Electric Cooperative, Inc.Southwest Central Rural Electric Cooperative Corp.Sullivan County Rural Electric Cooperative, Inc.Sussex Rural Electric Cooperative Tri-County Rural Electric Cooperative, Inc.United Electric Cooperative, Inc.Valley Rural Electric Cooperative, Inc.Warren Electric Cooperative, Inc.1975$2,239,700.31 924,101.49 1,943,324.94 1.743,370.66 388,314.67 2,197,618.66 1,490,125.57 2,243,091.20 469,767.07 856,103.99 1,424,850.38 1,373,438.00 1,766.102.36 528.526.07 $19,588,"435.37 974$1,808,333.04 790,212.09 1,643,603.73 1,524,959.90 320,010.44 1,906,421.25 1,221,326.78 1,826,916.88 413,220.36 675,834.56 1,234,845.17 $,161,517.96 1,488,658.48 460.336.42 $16,476,197.06 POWER PURCHASED BY ALLEGHENY Power Authority of the State of New York Pennsylvania Electric Company Metropolitan Edison Company West Penn Power Company New Jersey Power&Light Company Total Purchased Power$3,694,665.00 7,366,418.14 1,253,214.79 2;258,409.45 1.205.369.05 $15,778,076.43 $3,089,120.73 7,127,064.48 822,408.60 1'69,168.14 995.814.52 $13,203,576.47 Power Authority of the State of New York Pennsylvania Electric Company Metropolitan Edison Company West Penn Power Company New Jersey Power&Light Company Total Purchased Power 1975 5.02 19.41 22.67 18.20 20.19 11.64 MILLS/KWH 1974 5.03 16.54 16.36 10.29 19.03 10.47 TR EAS UR ER'S R E PORT (CON TD)TRANSMISSION CHARGES New York Companies G.P.U.Companies Total Transmission Expense Total Purchased Power Total Power Supply Expense Other Expenses Total Operating Expenses 1975$624,000.00 2,352,337.20 $2.976,337.20 15,778,077.00 18,754,414.20 273.131.00 $19,027,545.20 1974$494,149.08 1,952,468.48 $2,446,617.56 13,203,576.47 15,650,194.03 221,697.00 $15,871,891.03 24.0 23.0 22.0 21.0 20.0 19.0 18.0 17.0--AVERAGE COST PAID TO PASNY..AVERAGE SUPPLEMENTAL COST AVERAGE ALLEGHENY TOTAL COST e~~~~~~~f~'~~~~~~~~~~~,~~~~~~~~~~16.0 15.0 X Q 14.0 13.0 l2.0 11.0 10.0~~~~~~~0~~~~t~y~~~~8.0 7.0 6.0 5.0 40 3.0 2.0 1.0 0.0 AY JUL SEP NOV JAN MAR MAY JUL SEP NOV AUG OCT DEC FEB APR.JUN AUG OCT 1974 1975 1976 POWER PURCHASED 31 DECEMBER 1975 MET.EDISON 4.08%WEST PENN JCPL 9.16%4.40%PASNY 54.35%PENELEC 28.01%TOTAL KWH-1,355,237,659 ADMINISTRATIVE and GENERAL 1.44%COST OF OPERATIONS 31 DECEMBER 1975 WEST PENN 11.87%JCPL 6.33%MET EDISON 7orq<NEe rod 1g+g O~o+O PASNY 19.42%c5'PU WHEELING g g 12.36%NY WHEELING 3.28%~O 0 PENELEC 38.71%o~~st 51.63%' 340 320 1975 300 1974 280 1973 1972 o 260 240 1971 MONTHLY MW DEMAND 220 200 180 1970 160 140 120 100 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC YEARLY KILOWATT HOURS KWH (MILLIONS) 1500 1400 1300 1200 1100 1000 900 800 1970 5.57%INCREASE 1971 14 39%INCREASE 1972 6.88%INCREASE 1.11.".'i 1973 7.45%INCREASE~0~~~~~~0~~~~~~~~~~0~~~~~~~~~~~~~~~~~~~~~~~~~~~~'~~~~4~~~~~~~~~~~~~0~~~0 0~~~~~~~~~~~~~~~0~~~~~~~~~4~~~~~4~~0~~~~~~~~0~~4~~~~~~~~~~~~~~~~~4~~~~~~~~~~6.77%INCREASE~~~~~~~~~~~~~~~~t Yo~oV~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~\~~~~~~~~~~~~~~~~~~~~~~~~~~~~t~~~~~~~~~~~~~~~~t~~~~~oVt~0~~iV~~~~~~~IVY~~\~~~4 Yt~oV~~~~~~~~~~~~~~~~~~tVo Y~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Vt~~~~~~~YIVo~~~~~~~~~~~~~~~~~~~~~~~~~IVY~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Vt~~~~~~~~~~~~~~~~~~~~~~~~~~~~i~~~~~~~~~~~~~~~~~~\OVo~~~~~~~~~~~~~~~~~~~~~oVSVt IVY~~~~~~~~~~~~~~~~~~~~~~~~VoVo~~~~~~~VIVI~~~\~~~~~~~~~~~~~~~~~~~IVY~~~~~tVt~~~~~~~~~~110~~~~~tV4Vt~~~~~~~~~~~~~1Yo tVt~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~OIO~~~~~~1Vo~~~~~~~~~OV1 1974 1975 10 DEPARTMENT OF ENGINEERING AND POWER SUPPLY (L to R)Gary Fries, Richard Osborne, Harlan Saverson, Joseph Zuiio Harlan M.Severson-Director of Planning Joseph D.Zullo-Staff Engineer Richard Osborne-Staff Engineer Gary Fries-Statisti cian Southern Engineering Company of Georgia-Consulting Engineers The primary responsibility of the Engineering and Power Supply Department is to insure a reliable and adequate power supply for all of Allegheny's 14 member rural distribution coopera-tives.In order to meet this responsibility, the Department continually prepares and updates long range power requirement projections for each member and then focuses on the necessary future planning needed to insure these requirements. Power supply planning for Allegheny's members involves: (1)negotiations with power suppliers for the purchase and transmission of energy at reasonable rates approved by the Federal Power Commission, (2)joint ownership in a share of three new, efficient, nuclear generating units which are being constructed by major companies of the Pennsylvania, New Jersey, and Mary-land Interconnection, (3)emphasizing the urgent need for the development of all potential hydroelectric generating sites throughout Pennsylvania, and (4)preparing the initial feasibility studies needed to implement a consumer oriented load management and energy conservation program throughout the member cooperatives. Aside from power supply planning, the Engineering and Power Supply Department is also responsible for determining the wholesale power rate which Allegheny applies equally to each member cooperative. Also, the Department provides a number of additional services to the members.These services include cost of service and retail rate studies, rate cases before State Regulatory Commissions, and engineering coordination between Allegheny, its members and the private power companies. The energy situation facing this Nation and the World today dictates the need for sound system planning.The Engineering and Power Supply Department, in conjunction with Southern Engi-neering Company of Georgia, the member cooperatives and their consulting engineers, will continually strive to further Allegheny's main objective-a sufficient supply of low cost electrical energy to the rural consumer-owners of its member cooperatives, now and in the future. LEGAL SERVICES AND RESEARCH Marian Schwalm Furman James Murray Sue Vertolli Marian Schwalm Furman-General Counsel and Director of Research-Research Assistant-Secretary to Legal Department and Executive Vice President General Counsel represents Allegheny in legal aspects of its dealings with its members and with other entities.Review and interpretation ot Federal and State Statutes, regulatory directives and court decisions as well as advice on compliance are among the legal services.Research is conducted and testimony prepared for public agencies on proposed legislation, pending ad-ministrative actions, and other power supply problems affecting the cooperatives. Special Counsel, William C.Wise, is retained on a continuing basis for matters requiring special expertise in power supply negotiations, proceedings before regulatory agencies and litigation. ADMINISTRATIVE ASSISTANT AND DIRECTOR OF SPECIAL PROJECTS Harlan Severson Harlan Severson-Administrative Assistant&Director of Special Projects On May 1, Harlan Severson joined the staff of Allegheny, having worked previously for a generation and transmission cooperative in South Dakota for 18 years and as a Congressional and Senate aide for the past 5 years.He is now participating in the negotiating sessions with Pennsylvania Power and Light and has been assigned as Director of the Department of Engi-'neering and Power Supply, on a temporary basis.OFFICE SERVICES C.Donald Blackburn C.Donald Bfackburn Stella Roadcap Rita Martinez Darlene Jones Lee Sitton-Olfice Manager-Assistant Bookkeeper -General Office-General Secertary-Receptionist and Secretary The Office Services Department maintains the budget, books of account, payroll records and all bills and payments.All quarterly and annual tax returns, and other financial reports are pre-pared.Affairs of the Office Services Department are coordinated with activities of the other departments of the Cooperative in order to give maximum services to members.12 MEMBER SERVICES William Logan r~r'illiam Logan-Director Community Development and Member Services Mary Jo Keating-Associate Editor, PENN LINES Patti Stevens-Secretary This department is involved with the primary function of providing and exchanging information with the member systems and the general public.The many activities required in this informa-tion program are centered around the monthly publication of PENN LINES, newsletters, memos, news releases and the miscellaneous correspondence. The Member Services staff is responsi-ble for coordinating and extending activities conducted by local electric cooperatives including power use promotions, youth activities, women's programs, and a variety of meetings and conferences. Legislative responsibilities are shared with the legal department PENN LINES is the official monthly publication of Pennsylvania's Rural Electric Cooperatives. Since its inception in October, 1966, PENN LINES is the voice of over 137,000 rural electric members thoughtout the service area.PENN LINES is designed to keep members informed of their programs and progress.PENN LINES staff includes: Editor William F.Matson, Managing Editor William Logan and Associate Editor Mary Jo Keating.JOB TRAINING AND SAFETY Robert Horn Robert S.Horn-Director Robert Spangler-Instructor This program brings to all employees programs designed to help them accomplish their jobs in the safest, most efficient manner in order to prevent accidents and to bring to the membership the best possible service.Specific training programs are so designed as to appeal to and meet the needs of the employees of the cooperative. The use of protective equipment is demonstrated and encouraged on all those jobs where there is a need.Special information programs are used to instruct employees in the correct procedures to be used in caring for a victim in the event an accident should occur.One of the objectives of the safety program is to work with the co-ops to establish public educatiorl programs, such as the high voltage demonstration, to increase the public's awareness as to the hazards involved in electrical distribution lines and use in the home.This department is also responsible for keeping abreast of new developments in the field of electrical distribution, and for the coordination of other activities that will enhance the rural electrification program on a local level.13 TERRITORIAL INTEGRITY The year 1975 saw the passage of Senate Bill 719 by the General Assembly and its approval by Governor Milton J.Shapp which successfully concluded a fifteen year effort on the part of the Rural Electric Cooperatives to secure territorial integrity for their areas of service.A model for other states to copy, this legislation is a tribute to all rural electric leaders who worked long and hard for its passage and to the great democratic system of government under which we live and prosper.HEADQUARTERS BUILDING Allegheny's new corporate headquarters, a seven-story, 63,000 square foot commercial office building, will not only provide Allegheny with the space to function at peak efficiency but by renting our excess space, gives us the best economic package as well.The 3.5 million dollar construction, joining Harrisburg's urban renewal project, will be equipped to deal with the sophisticated problems of contemporary business, such as audio-visual communications, in-house meeting and conference space to save money and time, and a good, logical office system to upgrade the quality and quantity of productivity. NUCLEAR NEGOTIATIONS Negotiations for Allegheny's joint ownership in three nuclear generating units continued throughout 1975 with the Pennsylvania Power and Light Company and the General Public Utilities Corporation. Hopefully, agreements suitable to all parties can be concluded in 1976.HYDRO-POWER POTENTIAL The maximum development of hydro-power in Pennsylvania has long been one of Allegheny's major concerns.Developments in 1975 indicate that the long awaited installation of hydro generating facilities at Raystown Dam may become a reality in the not so distant future.However, hydro-power suffered a severe blow when construction of the multi-purpose Tocks Island Lake Project was deferred by the Delaware River Basin Commission. Only Governor Shapp of Pennsylvania continued to press for the immediate construction of Tocks Island.Now however, the City of Philadelphia and several New Jersey communities are seeing municipal water sho'rtages, so we may get Tocks back on top again, 14 PEOPLE 0 POWER<PROGRESS One of the ways Allegheny furthers its objective-obtaining low cost power for the rural consumer-owners of its member cooperatives -is by affiliation with state and national organizations whose interests parallel our own.We maintain close liaison with Pennsylvania Rural Electric Association, the service organization for Allegheny's members.PREA supports joint activities, such as group purchasing, that electric cooperatives in Pennsylvania and neighboring states can engage in more economically on a group basis.Acting as a trade association PREA furnishes a wide range of services helpful to Allegheny and its members.Allegheny is a member of National Rural Electric Cooperative Association, PREA's national counterpart. NRECA maintains programs for its membership in many fields such as safety and job training, retirement benefits, insurance, management training, personnel pay scales and organization, and wholesale power supply.NRECA also supports international cooperation and provides assistance to rural electric cooperatives in developing nations both through the U.S.AID program and through related contracts. Several managers and others from our member cooperatives and one of our stafr members have spent varying amounts of time working in foreign countries to help them develop their programs for providing electric service to the people through cooperative programs.We participate in the national activities of the American Public Power Association, with Allegheny staff members on its Rate Committee, Legislative Committee, Power Supply Planning Committee, and Management Advisory Committee. Through these activities as well as attendance at its national meetings, we keep in touch with the best informed opinion of outstanding leaders in the publicly owned and consumer oriented segment of the electric power industry.The traditional major source of financing for cooperative generating facilities has been The Rural Electrification Administration. Throughout its 40 year history, REA has made loans to 1,069 rural electric cooperatives and publicly owned systems, and also to 25 investor-owned private utilities, for the purpose of getting electricity into rural areas.Rural electric cooperatives have established an outstanding repayment record.No Allegheny member cooperative has ever been delinquent in payments on the total of almost$100 million they have borrowed.Allegheny has never borrowed from REA but is now in the process of preparing for a loan application as part of the financing of its part ownership in nuclear plants and transmission lines.The National Rural Utilities Cooperative Finance Corporation (CFC)has been established by rural electric cooperatives nationwide to meet part of their constantly increasing capital financing needs.Allegheny is a member of CFC and is engaged in preliminary discussions toward obtaining part of its near-future financing from this source.In recent years reliability councils have been established within the electric utility industry, pursuant to orders issued by the Federal Power Commission. Cooperatives and municipal utilities serve on boards or committees of these councils, thereby maintaining liaison with investor-owned bulk power suppliers on power planning and service reliability. Allegheny participates as an associate on the Mid-Atlantic Area Council Executive Board and as a member of the East Central Area Reliability Council Liaison Committee. An Allegheny staff member also represents Pennsylvania municipal utilities, under the aegis of the Pennsylvania Municipal Electric Association, on the reliability councils. PENIISVLSNIII RORIIL ELECIRIC COOPERRTIUES Providing Low-Cost Dependable Electricity to 137,000 Member.Consumers in pennsylvania and New Jersey e Serving In 47 Counties e 150 Directors-700 Employees e 22,000 Miles of Line e 1.4 Billion KWH's Purchased Annually e 137,000 Member-Owners e$128,000,000 Invested In Plant RETT YORK OHIO rs mroHvrrs)ClETEBACK BUBAl, GECTBIC r COOPEBATITE towakca'.-." r r-~---------P I SUGITAB COUBIY 0 le04L COOP EBATffE.GECTBIC COOPEBATIIE j vourrosvnra cLucarcos sprurros oeeetoeeee l wlelr]I r--~-y I I 4e, eee'~-~I~I/I CEIIIBAl QECTBIC B~I UBITED GEfBIC COOPER ATIYErS'OOPEBAIIYE P~S oIr eos~elelll i r~r./~NW4 o-~i/eeeeOCa~aW/'~/C W~/!~~gggg I e'e F t-"/OCUweec ornrvssvap WTN r RECf JERSEY e el 0olcel e tr QECTBjC COOPEBATITE /7>BUBAl QECIBIC'eajeeeo~s Jwceole r---g r'~o fi AtAIIS GECTBIC COOPEBITTE) SOREBSET BUBAl fBEDFOBD BUBAli~//i/////J~I Bllsll QEfBIC/-I rslal15.e~~/~vorwsvrLLs~-~r'r' l/V~'e/>GECIBICCOOPEBA ~sussa 1 ceeeeer y'e r gegfeeeeeie Weo~eoweeeeeoee CIARYEARD IRRIIIIA Registration No.2-SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C.20549 FORM S-7 REGISTRATION STATEMENT Under't: CURtyl:S l tg E'>:CHAhGE CQ!tl'it!SSlGti P~ECt:-IVED NQV]1 1977 THE SECURITIES ACT OF 1933 OFFICE OF RHPOPTS Jp~~~&t rp n T(p[c;p;<q" vppg Pennsylvania Power 8t Light Company (Exact name of registrant as specNed in its charter)Commonwealth of Pennsylvania (State or other jurisdiction of incorporation or organization) Two North Ninth Street, Allentown, Pennsylvania (Address of principal executive offices)23-0959590 (I.R.S.Employer Identification No.)18101 (Ztp Code)Registrant's telephone number, including area code: 215-821-5151 R;R.FORTUNE, Executive Vice President-Financial'wo North Ninth Street Allentown, Pennsylvania 18101 (Name and address of agent for service)Copy to: CHARLES A.READ, Esq.Reid&Priest 40 Wall Street New York, N.Y.10005 Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. CALCULATION OF REGISTRATION FEE Title of each class of securities to be registered Amount to be registered Proposed maximum offering price per unit'roposed maximum aggregate offering price'mount of registration fee First Mortgage Bonds,%Series due 2007$100,000,000 102%$102,000,000 $20,400 For the purpose of calculating the registration fee only.The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accord-ance with Section 8(a).of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. PENNSYLVANIA POWER&LIGHT COMPANY Form S-7 Item No.1~2 3 0~4..5..7 8..9..10 o~~~~1~~~~~~~i 0~~12 Cross Reference Sheet for Prospectus Heading In Prospectus Cover Page of Prospectus Purchasers Application of Proceeds Construction Program Financing Construction Program Financing Business.Electric Statistics Map Statement of Income Statement of Changes in Financial Position Statement of Earnings Relnvested
- Cover Page of Prospectus Description of Bonds Financial Statements Opinion of Independent Certified Public Accountants Inside Front Cover of Prospectus
- Omitted from Prospectus as Item is inapplicable or answer is in the negative.
J', C I ED~El EO~~LI EE L DC LI C Ol~LI EO OI~D EO EO ED EII ED ED EO~D L ED LI ED~~Ck DLOD~ea ED EDZ CL OI DL~~tl LI~Ell EO~D~D CC I Cl C-~%EO ED~ED PJ LI Cl I LI~'E EO EO P l EE CE ED CD~ma ED Cl'EEI EO.~D EII EII CD EO EII~EO LE ED ED I Cl ED CL lO ED DL ED~O E~n~II EII~Cl 40 EEI E~D EII ED~O LI L Etl~EO cn R=-EEI>El EO ED~~~LEI ED O ED ED.~~OI.ED ED EEI CC Cn g L CL EII LI CE LE~O~ED~OI~.C 3!I LI 4 CJ aJ AOI Ol LI E/I~~El~C-E D, LE ED~CC ED LE EO C l~ED ED,OI~C EO LI~D~C LI En EII PRELIMINARY PROSPECTUS DATED NOVEMBER 1 1E 1977$100,000,000 Pennsylvania Power&Light Company First Mortgage Bonds,%Series due 2007 Interest payable June 1 and December 1 Due December 1, 2007 The Bonds will be redeemable at any time at the applicable General and Special Redemption Prices set forth herein, with accrued interest to the date fixed for redemption, except that prior to December 1, 1982 no redemption may be made at the applicable General Redemption Price with or in anticipation of funds to be borrowed having an effective interest cost to the Company of less than%per annum.The initial General and Special Redemption Prices are%and%, respectively. See"Description of Bonds".THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMIS-SION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROS-PECTUS.ANY REPRESENTATION TO THE CONTRARY IS.A CRIMINAL OFFENSE.The date of this Prospectus is December, 1977.This Prospectus is to be used in connection with the Public Invitation for Bids for the purchase of the Bonds.The Invitation states that bids will be received by the Company at Morgan Guaranty Trust Company of New York, Morgan Guaranty Hall, 28th floor, 15 Broad Street, New York, New York, up to 11:00 A.M., New York Time, on December 13, 1977;or such other time and date as may be fixed by the Company as provided in the Statement of Terms and Conditions Relating to Bids, and that Company officers and counsel, representatives of independent certified public accountants and counsel for the prospective Purchasers will be available at Morgan Guaranty Trust Company of New York, Morgan Guaranty Hall, 28th floor, 15 Broad Street, New York, New York, on December 6, 1977 at 11:00 A.M., New York Time, to review with prospective bidders the information with respect to the Company contained in the Registration Statement and the matters set forth in the Statement of Terms and Conditions Relating to Bids. IN CONNECTION WITH THIS OFFERING, THE PURCHASERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAII.IN THE OPEN MARKET.SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.The Company is subject to the informational requirements of the Securities Exchange Act of 1934 and in accordance therewith files reports and other information with the Securities and Exchange Commission. Information concerning directors and officers, their remuneration and any material interest of such persons in transactions with the Company, as of particular dates, is disclosed in proxy statements distributed to stockholders of the Company and filed with the Commission. Such reports, proxy statements and other information can be inspected and copied at the offices of the Commission at Room 6101, 1100 L Street, N.W., Washington, D.C.;Room 1204, Everett McKinley Dirksen Building, 210 South
Dearborn Street,
Chicago, III.;Room 1100, Federal Building, 26 Federal Plaza, New York, N.Y.;and Suite 1710, 10960 Wilshire Boulevard, Los Angeles, Calif.Copies of this material can also be obtained at prescribed rates from the Public Reference Section of the Commission at its principal office at 500 North Capitol Street, N.W., Washington, D.C.20549.The Common Stock of the Company is listed on the New York and Philadelphia Stock Exchanges. Reports, proxy statements and other information concerning the Company can be inspected and copied at the respective offices of these exchanges at Room 401, 20 Broad Street, New York, N.Y., and at 17th Street and Stock Exchange Place, Philadelphia, Pennsylvania. In addition, reports, proxy statements and other information concerning the Company can be inspected at the offices of the Company, Two North Ninth Street,'llentown, Pennsylvania. No dealer, salesman or other person has been authorized to give any information or to make any representation not contained in this Prospectus in connection with the offer made by this Prospectus and, if given or made, such information or representation must not be relied upon as having been authorized by the Company.This Prospectus Is not an offer to sell or a solicitation of an offer to buy in any jurisdiction in which it is unlawful to make such an offer or solicitation. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the date hereof.TABLE OF CONTENTS Prospectus Summary The Company.Problems Affecting the Electric Utility Industry and the Company.................... Application of Proceeds............................ Construction Program.Financing. Rate Matters.Statement of Income.Management's Discussion and Analysis of the Statement of Income................... Capital Structure..Page 3 4 4 5 5 7 8 10 14 18 Business..Electric Statistics .Description of Bonds Experts.Legal Opinions.Opinion of Independent Certified Public Accountants. Financial Statements Purchasers Map.Page 19 30 31 35 35 35 36 55 Back Cover Service Area 81%17 2 100%PROSPECTUS
SUMMARY
The following material is qualified in its entirety by the detailed information and financial statements appearing elsewhere in this Prospectus. THE OFFERING Security Offered..............~............ First Mortgage Bonds Principal Amount............... $100,000,000 Interest Payment Dates....................... June 1 and December 1 Maturity.................................. December 1, 2007 Limitation on Redemption ................... Non-redeemable prior to December 1, 1982 through certain refunding operations Use of Proceeds............... General corporate purposes including the reduction of short-term debt incurred to (a)retire maturing long-term debt and (b)provide interim financing for construction expenditures THE COMPANY Business.The Company derives about 99%of its operating revenues from electric service Approximately 10,000 square miles in central east-ern Pennsylvania with a population of 2.4 million people Sources of Generation during Coal........................... the twelve months ended Oil September 30, 1977 Hydro........................ ~FINANCIAL INFORMATION Operating Revenues (thousands). Net income-Before Dividends on Preferred and Preference Stock (thousands). Earnings Applicable to Common Stock (thousands)............... Earnings Per Share..Ratio of Earnings to Fixed Charges Actual.Pro Forma.......~Utility Plant, Net-at end of period (thousands) ..................... Year Ended December 31, 1976$644,147$112,111~$78,743$2.68 2.53$2,380,109 Twelve Months Ended September 30, 1977$735,277$145,815$109,529$3.37 3.19 2.86$2,607,919 As of September 30, 1977 Actual As Adjusted(1) Capitalization (thousands) Long-Term Debt (including current matu-rities)..Preferred and Preference Stock.................... Common Equity.Total$1,161,532 437,375 839,388$'I,261,532 487,375 841,669$2,438,295$2,590,576 48 7%18.8 32.5 100 0%(1)As adjusted to give effect to (i)$2,528,000 of Common Stock issued ln October 1977 in accordance with the Company's Employee Stock Ownership Plan, (il)the sale of$50,000,000 of 8%Series Preferred Stock in October 1977 and (lii)the sale of the Bonds. l I THE COMPANY The Company is an operating utility, incorporated under the laws of the Commonwealth of Pennsylvania in 1920.The Company's general offices are located at Two North Ninth Street, Allentown, Pennsylvania 18101, and its telephone number is 215-821-5151. The property of the Company is located in Pennsylvania (see Map), is well maintained and is in good operating condition. The Company derives about 99/o of its operating revenues from supplying electric service, and the balance from supplying steam for heating and other purposes in the city of Harrisburg. The Company serves a 10,000 square mile territory in 29 counties of central eastern Pennsylvania (see Map), with a population of approximately 2,400,000 persons.This service area has a high percentage of open land as well as 111 communities with populations over 5,000, the largest of which are the cities of Allentown, Bethlehem, Harrisburg, Hazleton, Lancaster, Scranton, Wilkes-Barre and Williamsport. Important industrial, recreational and agricultural sections are linked to the eastern population centers by an extensive limited-access highway system.Hershey Electric Company, a subsidiary of the Company, provides electric distribution service to approximately 5,700 customers in Hershey, Pennsylvania. PROBLEMS AFFECTING THE ELECTRIC UTILITY INDUSTRY AND THE COMPANY The electric utility industry in general has been experiencing problems of (a)increasing costs of fuel, wages, materials and equipment, (b)substantially increased capital outlays and longer construction periods for larger and more complex new generating units, (c)uncertainties in predicting future load requirements, (d)increased financing requirements coupled with periodically uncertain availability of both equity and borrowed capital, (e)past and prospective sales of common stock below book value, (f)fuel availability, (g)increased construction costs and delays and operating restrictions due to environmental requirements, (h)the effectiveness of energy conservation efforts and the impact of fluctuating economic conditions, (i)litigation and proposed legislation which may have the effect of delaying or preventing construction of nuclear generating and other facilities or limiting the use of existing facilities,'nd (j)regulatory lag in granting needed rate increases and the inadequacy of such increases when granted.The Company also has been experiencing similar problems in varying degrees.For information regarding the effect on the Company of certain of these general problems, see"CONSTRUCTION PROGRAM","FINANCING","RATE MATTERS","STATEMENT OF INCOME","MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE STATEMENT OF INCOME","BUSINESS" and"ELECTRIC STATISTICS". Congress currently is considering legislation designed to achieve energy conservation through the application of various regulatory and tax measures and to encourage the development and use of relatively abundant domestic fuels-primarily coal.In addition, consideration is being given to provisions which would require state utility commissions to adopt and enforce Federal rate standards. The Company is unable to predict what measures, if any, will be enacted or what effects any measures enacted will have on the Company.Reference is made to"BUSINESS-Fuel Supply (Coal)" for information concerning (1)the write-off of certain development costs by The Oneida Mining Company, one of the Company's affiliated mines, and the pricing of coal produced by Oneida for fuel adjustment clause purposes, which reduced the Company's net income by approximately $6.6 million and$3.6 million, respectively, for the" twelve months ended September 30, 1977 and (2)the possibility of future losses if present mining plans for Oneida prove not to be economically feasible. APPLICATION OF PROCEEDS The net proceeds from the sale of the First Mortgage Bonds offered hereby (the Bonds)will be added to the Company's general funds and used for general corporate purposes including the reduction of short-term debt incurred to (a)retire$20.5 million of maturing long-term debt and (b)provide interim financing for construction expenditures. CONSTRUCTION PROGRAM The Company's construction program is under continuing review and is revised from time to time to reflect changes in customer.demand, business conditions, the cost and availability of capital and other factors.Actual construction expenditures and dates of completion for various construction projects may vary because of changes in the Company's plans, cost fluctuations, the availability of labor, materials and equipment, environmental regulations, licensing delays and other factors.The following tabulation shows actual construction and nuclear fuel expenditures for 1976 and the Company's current estimate of these expenditures for the three years 1977-1979 including provision for the Allowance for funds used during construction (Allowance). 1976 1977 1979 1979 Millions of Dollars Construction costs: New generating equipment................... Transmission and distribution facilities.. Other Total construction costs....Nuclear fuel in process..Total.$295 80 19 394 14$408$243$340 92 103 21 38 356 481 14 4$370$485$294 119 47 460 40$500*$280.7 million expended through September 30, 1977.Estimated construction costs for the three years 1977-1979 include$97 million for environmental protection. See"BUSINESS-Environmental Matters" for information concerning possible additional capital requirements. The Company's estimate of construction and nuclear fuel expenditures during the period 1977-1979 has been reduced to reflect the expected sale of a 10/o undivided'ownership interest in the Susquehanna nuclear units to Allegheny Electric Cooperative, Inc.(Allegheny). Pursuant to agreements with Allegheny, this sale is expected to be effected as soon as practicable following the receipt of necessary approvals from the Nuclear Regulatory Commission (NRC)and the Rural Electrification Administration (REA).The proposed sale was approved by the Pennsylvania Public Utility Commission (PUC)in August 1977. Pending the receipt of the required approvals, Allegheny made an initial payment to the Company of$65 million in March 1977 and became obligated to pay currently 10'/o of the subsequent construction and nuclear fuel expenditures for the Susquehanna units.Through September 30, 1977 Allegheny's payments to the Company approximated $79 million.In the event that the NRC and REA approvals are not obtained by March 16, 1978, Allegheny's investment in the Susquehanna units is required to be refunded.Construction of the Susquehanna units is proceeding under NRC construction permits issued in November 1973.At September 30, 1977, construction of Unit No.1 was about 53/o completed and Unit No.2 was about 36/o completed. An operating license from the NRC will be required prior to the start-up and testing of each unit.Changes in design necessary to meet NRC requirements, delays in delivery of material and equipment, scarcity of labor, environmental regulations and other factors have resulted in failures to meet certain construction schedule milestones and have created a high probability that the currently scheduled in-service dates for the Susquehanna units-1980 and 1982-will not be achieved.Unless construction progress improves significantly and the required licenses and regulatory approvals are obtained on a timely basis, the in-service dates for each of the units will be delayed.However, pending an evaluation of future construction progress, the Company is maintaining the current in-service schedule.The estimated total net capability of each of the Susquehanna units is 1,050,000 kilowatts. Giving effect to Allegheny's expected ownership of 10/o of the Susquehanna units, the Company's share of the estimated total net capability of each of the units will be 945,000 kilowatts and its share of the estimated construction expenditures for the units (excluding nuclear fuel)is currently estimated at$1.64 billion.The Company estimates that a one-year delay of the in-service dates of the Susquehanna units would increase the Company's share of the cost of these units by about$200 million.The United States District Court for the Western District of North Carolina has held that the provisions of the Price-Anderson Act limiting liability of the owners of nuclear power plants, and of the contractors and suppliers for such plants, to the amounts of available insurance and governmental indemnity are unconstitutional as violating the due process and equal protection clauses of the United.States Constitution. The United States Supreme Court has granted review of the District Court decision.If the Supreme Court affirms the decision, the limitation of liability would not be available to the Company.Although the full impact of a decision by the Supreme Court cannot be evaluated at this time, the Company does not expect to change its plans to complete the construction of and to operate the Susquehanna units.Recent amendments to the Price-Anderson Act, which are also the subject of this litigation, provide that all owners of nuclear reactors may be assessed up to$5 million per operating reactor for each nuclear incident occurring at any reactor in the United States with a limit of two assessments per year.Giving effect to the Company's expected 90/o ownership of the Susquehanna units, the Company's maximum exposure under the Price-Anderson Act when both Susquehanna units have been placed in commercial operation is not expected to exceed$18 million per year. FINANCING The financing of its construction program requires the Company to engage in frequent sales of securities, including debt and preferred, preference and common stocks.Interim financing is obtained from bank borrowings and the sale of commercial paper.The Company's 1977-1979 construction and nuclear fuel expenditures are currently estimated at$1.36 billion.Approximately two-thirds of this amount is expected to be obtained from outside financing with the balance to be provided from internal sources.The estimates of construction and nuclear fuel expenditures and internal funds sources both include the Allowance. In addition, about$25 million of maturing long-term debt obligations and$14 million of preferred and preference stock sinking fund requirements are planned-to be met during 1977-1979 by sales of securities. In addition to the$100 million expected to be raised by the sale of the Bonds, during 1977 the Company obtained$67 million through the sale of 3.2 million shares of Common Stock and$50 million through the sale of 500,000 shares of Series Preferred Stock.Through September 30, 1977 the Company has obtained$13.2 million through sales of Common Stock under its Dividend Reinvestment Plan.The exact amount, nature and timing of future sales of securities will of necessity'be determined In the light of market conditions and other factors.The mortgage indenture under which the Company's first mortgage bonds are issued contains certain provisions, principally earnings coverage and property additions tests, limiting the issuance of additional bonds.See"DESCRIPTION OF BONDS." The Company estimates that application of these restrictions, of which the availability of property additions is presently the most limiting, would have permitted the Company, as of September 30, 1977, after giving effect to the proposed sale of a 10/o undivided interest in Susquehanna to Allegheny and the sale of the Bonds, to issue about$396 million principal amount of bonds.This amount exceeds the principal amount of bonds that the Company expects to issue through 1979.The Com'pany's charter contains provisions limiting the issuance of additional shares of Preferred Stock.The more restrictive of these provisions requires Income Before Interest Charges (gross income)of not less than 1.5 times the sum of the annualized interest requirements on indebtedness to be outstanding and the dividend requirements on Preferred Stock to be outstanding. Effective January 1, 1977, the Federal Power Commission, now the Federal Energy Regulatory Commission (FERC), revised the accounting treatment for the Allowance. See Note (e)to the"STATEMENT OF INCOME." The change in the method of recording the Allowance may have the effect of reducing to an extent not now determined the amount of Preferred Stock which the Company can issue but, based on the Company's earnings for the twelve months ended September 30, 1977 and after giving effect to the sale of$50 million of Series Preferred Stock in October 1977 and the sale of the Bonds (8th/0 interest rate assumed), the method of recording the Allowance would not limit the amount of Preferred Stock which the Company plans to issue during 1978.There are no charter provisions limiting the issuance of Preference Stock. RATE MATTERS Sales to ultimate customers, which are regulated by the PUC, accounted for approximately 98'/o of the Company's revenues from electric sales over the past five years.The remaining 2/o of revenues from electric sales, represented by sales to others for resale, are regulated by FERC as are interchange power sales, which are classified as a credit to operating expenses.The Company's PUC and FERC tariffs include fuel adjustment clauses.See, however, the discussion of the Company's Oneida mine under"BUSINESS-Fuel Supply (Coal)" concerning the limited recovery of the cost of coal mined at Oneida.PUC tariffs also include a tax surcharge to recover the cost of increased Pennsylvania taxes.Since 1971 the Company has requested and the PUC has granted the following general increases in base rate charges for electric service expressed as percentages of annualized revenues ln the test year used for the final PUC order in each proceeding. Annualized revenues consist of revenues derived from base rates, fuel adjustment clauses and the tax surcharge. Increase Granted Request Filed March 1971 o/o Increase Requested 15.2 Test Year (Twelve Months Ended)Increase'ffective December 31, 1970 May 1971 March 1972 4-Millions 4/e$12.1 4.4 17.1 6.2$29.2 10.6 April 1973 11.4 April 30, 1973 June 1973 January 1974$9.4 2.6 19.1 5.2$28.5 7.8 March 1975 14.6 July 31, 1975 September 1975$21.0 3.9 April 1976 20.0 3.7 August 1976 37.3 7.0$78.3 14.6 A complainant in the Company's March 1975 rate proceeding appealed the August 1976 decision of the PUC granting the 14.6/0 increase requested by the Company.This appeal, which was denied by the Commonwealth Court of Pennsylvania, raised objections regarding, among other things, the existence and amount of differences in rates between certain of the classes of services provided by the Company.This appeal did not question the PUC's August 1976 decision with respect to measures of value, level of revenues or rate of return.The complainant has filed a petition with the Supreme Court of Pennsylvania requesting a review of the action taken by the Commonwealth Court.A rate increase aggregating approximately $1 million annually for the Company's fifteen resale customers was permitted by FERC to become effective, subject to refund, in November 1976.Certain of the affected customers who were opposing the increase have entered into a settlement agreement with the Company.A request for approval of this agreement is presently pending before FERC. In a proceeding affecting all Pennsylvania electric utilities, the PUC in May 1975 instituted an investigation into fuel adjustment clauses.At the commencement of this investigation the PUC proposed for consideration, among other things, (1)a limitation on the recovery of increased fuel costs to less than 100'lo, (2)the inclusion of nuclear fuel costs in the formula, (3)a revision in the method of calculating the fuel costs as they relate to interchange power purchases and sales and (4)the use of a 12-month period for determining the current cost of fuel.In a separate proceeding affecting all large Pennsylvania electric utilities, the PUC in October 1977 announced that although it was not"at this point opening a formal proposed rulemaking proceeding", it has begun consideration of a proposal to replace fuel adjustment clauses with a levelized energy cost rate.Under the PUC's proposal, each utility's energy cost rate would include all (1)fossil fuel costs, (2)purchased power energy costs, (3)net interchange energy sales and purchases and (4)nuclear fuel costs.A utility's energy cost rate would be set prospectively, utilizing adjusted historical data, and is intended to remain stable over a twelve month period approved by the PUC.In the event of unusual circumstances during a twelve month period, a utility would have an opportunity to petition the PUC to revise its energy cost rate.The proposal contemplates that if the energy costs actually incurred exceed costs specified in the utility's energy cost rate, the full amount of excess costs may not be recoverable by the utility.In the event of an over-recovery of energy costs, the utility would be required to refund a portion of the excess to customers. The proposal states that accumulated deferred fuel costs under the present fuel adjustment clauses would be recoverable over a period prescribed by the PUC.The Company is unable to predict the ultimate results of either of these proceedings. Amendments to the Pennsylvania Public Utility Law, generally effective in October 1977, have altered the PUC's rate-making procedures. Among other things, the amendments shorten the period during which the PUC must act on a filing of a general rate inciease from eleven months to nine months.Interim rate relief during the pendency of a general rate increase request will not be permitted except under conditions of financial emergency. The new provisions permit the use of future projected rather than historical test years as the basis for rate increases. The amendments also prescribe certain changes in PUC procedures for voting on rate increase applications, and create the office of Administrative Law Judge to conduct hearings and submit recommendations to the PUC. STATEMENT OF INCOME The following Statement of Income for the five years ended December 31, 1976 has been examined by Haskins 8 Sells, independent Certified Public Accountants, whose opinion appears elsewhere in this Prospectus. The Statement for the twelve months ended September 30, 1977 has not been audited but in the opinion of.the Company includes all adjustments (which comprise only normal recurring accruals except for the write-off of certain development costs by one of the Company's subsidiaries described in note (c))necessary for a fair presentation of the results of operations for that period.The Statement should be'onsidered in conjunction with its notes and the other financial statements and related notes appearing elsewhere in this Prospectus. Operating Revenues (99/0 Electric)(a).......................... Operating Expenses Cost of energy Fuel(bxc). Power purchases. Interchange power sales................................ Net cost of energy.................................. Other operation...............'................................... Maintenance.. Deprechtlon ..tncome taxes(d)..~Taxes, other than income(d)................................. Total operating expenses....................... Operating Income.Other Income and Deductions Allowance for funds used during construction(e) All funds(prior to January 1, 1977)................ Equity funds (since January 1, 1977)............. Income tax credits(d)(e) ..Other-net(c).Total other income and deductions ........Income Before Interest Charges................................... Interest Charges Long-term debt Short-term debt and other.................................... Allowance for borrowed funds used during con-struction (since January 1~1977)(e)................... Net Interest charges............................... Income Before Nonrecurring Credit............................. Nonrecurring Credit Related to Accounting Change, Net of Income Taxes ($4,831)(b).............................. Net Income-Before Dividends on Preferred and Preference Stock Dividends on Preferred and Preference Stock.............. Earnings Appllcab'le to Common Stock........................ Earnings Per Share of Common Stock Before Nonrecurring Credit................................... Nonrecurring Credit(b). Earnings Per Share of Common Stock........... Average Number of Common Shares Outstanding (Thousands). Dividends Declared Per Share of Common Stock........Ratio of Earnings to Fixed Charges(h) Actual............. Pro Forma..Supplemental Ratio of Earnings to Fixed Charges(h) Actual..Pro Forma 1972$345,792 12 Months Ended Sept.30, 1977 1978 (Unaudited) $644,147$735,277 95,220 , 13,514 (34,569)74,165 61,633 33,099 41,446 26,086 25,658 262,087 83,705 125.577 15,299 (70,175)70,701 69,007 33,648 48,837 33,943 30,005 286,141 98,673 192,353 24,176 (108,723)107,806 80,565 41,298 52,399 39,211 35.571 356,850 115,186 271,636 37,698 (172,823)136,511 92,186 47,956 58,540 47,298 40,669 423,160 120,969 321,783 29,657 (160,163)191,277 103,758 54,946 62,478 43,828 49,526 505,813 138,334 412,940 43,220 (279,618)176,542 109,382 59,074 66,390 85,345 57,974 554,707 180,570 14,647 334'305)14,676 98.381 36,507 3,953 40.460 57,921 57,921 14,526$43.395 14,967 91 1,300 16,358.115,031'3,203 4,916 48,119 66,912 66,912 17,191$49,721 20,732 5,076 3,418'29,226 144,412 51,149 9,946 61,095 83,317 4,162 87,479 19,656$67,823 36,605 11,201 3,154 50,960 171,929 67,932 6,456 74,388 97,541 97,541 24,509$73,032 45,192 14,457 1,381 61,030 199,364 79,783 7,470 87,253 112,111 112,111 33,368$78,743 13,839 16,404 14,579 (4,443)40,379 220,949 88,671(f)6,138 (19,675)75,134 145,815 145,815 36,286(g)$109,529$2.48$2.57$2.48$2.57$2.88 0.19$3.07$2.87$2.68$3.37$2.87$2.68$3.37 17,513$1.64 2.89 19,359$1.68 2.89 22,067$1.77 2.88 25,459$1.80 2.65 29,367$1.80 2.53 32,504$1.86 3.19 2.86 2.74 2.70 2.65 2.44 2.25 2.79 2.54 Year Ended December 31, 1973 1974 1975 Thousands of Dollars$384,814$472,036$544,129 10 (a)Reference is made to"RATE MATTERS" for additional information concerning fuel adjustment clauses, a Pennsylvania Public Utility Commission (PUC)order proposing to replace the fuel adjustment clause with a levelized energy cost rate and a summary of the Company's rate proceedings.(b)Effective January 1, 1974, the Company, as authorized by the PUC, changed its method of accounting for fuel costs to achieve matching of fuel expense and revenues by accounting periods.This change resulted in the charge to income for fuel costs recoverable in the future being deferred to the periods in which these costs are billed to customers through application of fuel adjustment clauses.For 1974, fuel costs were lower by a net amount of$26.6 million and, after income tax effects, Earnings Applicable to Common Stock were increased by$12.6 million ($0.57 per share)as a result of this accounting change.The Nonrecurring Credit shown on the Statement of Income represents the cumulative effect to December 31, 1973 of the change in accounting for fuel costs, net of related income taxes.In the following summary, earnings"As Reported" includes the Nonrecurring Credit recorded in 1974, and earnings"Restated" reflects the effect of retroactive application of the change in accounting for fuel costs and related income tax effects had the new method been used since the principal fuel adjustment clause became effective: 1972 1979 1974 Earnings Applicable to Common Stock (thousands of dollars)As Reported.Restated..Earnings Per Share of Common Stock ($)As Reported.Restated.$43,395 43,161$2.48 2.46$49,721 51,066$67,823 63,661$2.57$3.07 2.64'.88 (P)Based on average number of shares outstanding.(c)Reference is made to"BUSINESS-Fuel Supply (Coal)" for information concerning operations of one of the Company's subsidiaries, The Oneida Mining Company (Oneida), related to (1)the write-off of certain development costs reflected in Other income-net and the pricing of coal produced by Oneida for fuel adjustment clause purposes reflected in fuel costs;which reduced the Company's net income by approximately $6.6 million and$3.6 million, respectively, for the twelve months ended September 30, 1977 and (2)the possibility of future losses if present mining plans prove not to be economically feasible., (d)Reference is made to Note 10 to Financial Statements for information relating to taxes.(e)In accordance with applicable regulatory accounting procedures, the cost of funds used to finance construction work in progress is capitalized as part of construction cost and when the construction work is placed in service, the Company is permitted to include in rates charged for utility service a return on, and depreciation of, the cost of funds so capitalized. The components of Allowance for funds used during construction (Allowance) shown on the Statement of Income are non-cash items equal to the cost of funds capitalized during the period and serve to offset on the Statement of Income the effect of the cost of financing construction work in progress.Since February 1, 1974, in accordance with procedures prescribed by the PUC, the Allowance rate has been computed on an after-tax basis and income tax reductions associated with the interest (borrowed funds)component of the Allowance have been reflected in Income tax credits under Other 11 I 4 Income and Deductions with a corresponding increase in the provision for income taxes charged to Operating Expenses.During the period February 1, 1974 through December 31, 1976, the Allowance rate was computed semi-annually using a specified rate for common equity and the cost of fixed rate securities issued in the twelve months preceding the semi-annual computation. Effective as of January 1, 1977, the Company has used a rate of 7.4/o which was computed in accordance with a 1977 Federal Energy Regulatory Commission (FERC)order which (1)provides a formula for determining the maximum Allowance rate, (2)provides for semi-annual compounding and (3)provides for segregating the Allowance into two components, borrowed funds and other (equity)funds.The gross borrowed funds component recorded since January 1, 1977 is included as a credit in the Interest Charges section of the Statement of Income and the remainder of the total Allowance recorded is shown under Other Income and Deductions as Equity funds.The Company has not reclassified the Allowance into borrowed funds and equity funds components prior to January 1, 1977 since the allocation would not be comparable to that required under the FERC formula.Prior to January 1, 1977, the method used did not provide for direct compounding and the Company computed the Allowance by applying the rate to a construction work in progress base which did not include the accumulated Allowance which had previously been recorded.However, an equivalent rate can be calculated for the period 1972-1976 by relating the amount of Allowance recorded during the period to the balances of the construction work in progress including the related accumulated Allowance. The Company's Allowance rate and the equivalent rate for the period 1972-1976 are as follows: Allowance.Equivalent Rate Rate January 1, 1972-December 31, 1972....8.0/o 7.4/o January1,1973 -January31,1974....... 8.5 7.9 February 1, 1974-June 30, 1974........... 7.5 7.0 July 1, 1974-December 31, 1974.......... 8.0 7.3 January1,1975 -December31,1975.... 9.25 8.3 January 1, 1976-December 31, 1976....8.75 7.9 Based on the assumption that funds required for construction financing were provided substantially in the same proportion as the Company's average capitalization ratios over the five-year period ended December 31, 1976 (51/o debt, 18/o preferred and preference stock and 31'/0 common stock equity)and using an after-tax cost of debt since February 1, 1974, the portion of the Allowance attributable to funds provided by common equity as a percentage of Earnings Applicable to Common Stock for the years 1972-1976 would be approximately as follows: 1972 10/0 1973.i..11 1974.16 1975.21 1976.27 Based on these same assumptions, the Company estimates that the common equity component of the Allowance recorded in the period October-December 1976 would be approximately 25/o of the$26.1 million Earnings Applicable to Common Stock for the same period.12 ~J E The Company understands that an issue has been raised in litigation to which it is not a party relating'o the Allowance as reported by another public utility.In this litigation, it is alleged that actual earnings were not properly presented in that the Allowance was included as"Other Income" without an adequate explanation of this Item, and that the Allowance is not in fact income as generally understood, but rather a projection of future earnings not reflecting. any actual yield on assets or any revenue during any fiscal period and not in fact earned upon completion of'construction. The Allowance, which is not an item of current cash income, is included in the financial statements of the Company in accordance with the applicable regulatory system of accounts and in accordance with generally accepted accounting principles. The Company is unable to predict the outcome of this litigation or its effect, if any, upon the Company.(f)The annual interest requirements on long-term debt outstanding at September 30, 1977, including the amount due within one year, are$90,975,000 and on the Bonds will be$(g)The annual dividend requirements on Preferred and Preference Stock outstanding at September 30, 1977 are$20,323,000 and$19,870,000, respectively, including the annual dividend requirements on 500,000 shares of 8%Series Preferred Stock issued on October 19, 1977.(h)"Earnings" used to compute this ratio consist of net income (1974 includes$4,162,000 nonrecurring credit), excluding the undistributed income or loss of unconsolidated subsidiaries and other associated companies, pIus fixed charges and income taxes (including deferred income taxes and investment tax credits-net)."Fixed Charges" consist of interest charges (excluding the allowance for borrowed funds)and the estimated interest component of major lease rentais and one-third of ail other rents.The pro forma ratio of earnings to fixed charges for the twelve months ended September 30, 1977 reflects earnings as defined above and (1)annual interest charges on the long-term debt outstanding as of September 30, 1977 and the Bonds (8V~%interest rate assumed for the Bonds), (2)annual interest charges on$95 million of average short-term debt (commercial paper at an assumed rate of 67~%)assumed to be outstanding during the twelve months ended September 30, 1978, based on the average short-term debt outstanding during the twelve months ended September 30, 1977 (excluding short-term debt incurred on July 1, 1977 to retire$20 million of bonds, and to be repaid from the sale of the Bonds), and (3)the interest component of rentals for the twelve months ended September 30, 1977.A change of.10%in the interest rate of the Bonds would result in a change of approximately .003 in the pro forma ratio.The supplemental ratios of earnings to fixed charges include, in addition to the items defined above, the applicable undistributed income or loss and fixed charges of unconsolidated subsidiaries and other associated companies. Excluding the$4,162,000 nonrecurring credit from income, the 1974 ratio would be 2.75 and the supplemental ratio would be 2.53.13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE STATEMENT OF INCOME The Statement of Income reflects the results of past operations and is not Intended as any representation as to the results of operations for any future period.Future operating results will necessarily be affected by various and diverse factors and developments, including the obtaining of adequate and timely rate increases, business activity, customer demand, energy conservation, Inter-change power sales, taxes, labor contracts, fuel costs, availability of capital, governmental actions, environmental expenditures and other matters.The Company is unable to predict the combined effect of the above factors on its future operating results.The Company's earnings improvement for the twelve months ended September 30, 1977 was due principally to sharply increased electric sales at higher prices to interconnected utilities and to increased electric sales at higher rates to customers, as more fully discussed below.The following analysis of the Company's financial performance explains the reasons for changes in specific items on the Statement of Income comparing the years 1975 to 1974, 1976 to 1975 and the.twelve months ended September 30, 1977 to the year 1976.Energy Sales and Operating Revenues The change in operating revenues from the prior period is attributable to the following: Increase (Decrease) 1975 1978 INllllons of Dollars 1977(a)Electric revenues Quantity of sales to: Ultimate customers................ Others for resale.................... Rate increases. Fuel adjustment clauses............... Other (including tax surcharge)..... Steam revenues.. Total..$12.8$19.3$17.5 (6.0)0.3 0.2 7.4 40.4 36.2 55.3 33.8 29.1 1.6 7.3 8.1 71.1 101.1 91.1 1.0 (1.1)$72.1$100.0$91.1 (a)Twelve months ended September 30.The Company's total electric energy sales increased less than 1/o in 1975, principally reflecting the economic recession, energy conservation and the expiration of contract sales to a neighboring utility.Energy sales increased 6.5'/o in 1976 reflecting an improvement in the economy and industrial activity in the Company's service area.For the twelve months ended September 30, 1977, energy sales increased 4.4/o over 1976, which was partially attributable to the more extreme weather conditions in the first nine months of 1977 compared to the milder than normal weather experienced in the same period during 1976.Rate increases affecting ultimate customers became effective in January 1974 ($19.1 million annually), September 1975 ($21.0 million annually), April 1976 ($20.0 million annually)and August 1976, ($37.3 million annually). 14 II F P The Company's tariffs include fuel adjustment clauses which adjust prices for electric service for variations in the cost of fuel used to generate electricity. See, however, the discussion of the Company's Oneida mine under"BUSINESS-Fuel Supply (Coal)" concerning the limited recovery of increases in the cost of coal mined at Oneida.Revenues from the fuel adjustment clauses totaled$134.5 million in 1975,$168.3 million in 1976 and$197.4 million for the twelve months ended September 30, 1977, reflecting the increased level of fuel costs and additional energy sales.Reference is made to"RATE MATTERS" for information concerning general rate increases granted the Company and a Pennsylvania Public Utility Commission (PUC)order proposing to replace the fuel adjustment clause with a levelized energy cost rate.Cost of Energy The net cost of energy includes fuel expense plus power purchases less power sold to other utilities. Included in power purchases is the value of electricity generated during the test period of the Company's new generating units.Fuel.Fuel expense as shown on the Statement of Income includes the following: 1974 1975 197B 1977(a)Millions of Dollars Cost of fuel consumed Electric.$215.2 Steam heat.3.8 Total cost of fuel consumed................... 219.0 Less increase in fuel costs deferred to match revenues from fuel adjustment clauses.............. 26.6 Total fuel expense.$192.4$269.2$323.1$414.8 4.0 3.2 3.2 273.2 326.3 418.0 1.6 4.5 5.1$271.6$321.8$412.9 (a)Twelve months ended September 30.The change from the prior period in the total cost of fuel consumed, shown in the preceding schedule, is attributable to the following: Increase (Decrease) 1975 1975 1977(a)Millions of Dollars Electric Quantity of electricity generated.....Average cost of fuels burned.......... Steam heat.Total.$13.3$17.9$44.5 40.7 36.0 47.2 54.0 53.9 91.7 0.2 (0.8)$54.2$53.1$91.7 (a)Twelve months ended September 30.The cost of fuel consumed increased during the periods compared as a result of greater generation of energy and increases in the cost of fuels purchased. The quantity of energy generated during 1975 increased due to greater availability of coal-fired generating units and the Martins Creek No.3 oil-fired generating unit which began commercial operation in October 1975.Increased generation during 1976 15
resulted primarily from a full year's operation of the Martins Creek No.3 unit.In March 1977, the Martins Creek No.4 oil-fired unit began commerical operation providing additional generating capability. See"ELECTRIC STATISTICS" for the detail of generation by fuel source.The average cost of fuels consumed increased during 1975, 1976 and the twelve months ended September 30, 1977 due to the combined effects of higher coal prices and the cost of oil consumed at the Martins Creek Units which have a cost per, kwh generated approximately twice that of the Company's coal-fired units.The average cost of fuel consumed per kwh generated was 0.88 cents in 1974, 1.04 cents in 1975, 1.17 cents in 1976 and 1.32 cents in the twelve months ended September 30, 1977.The portion of the cost of fuel consumed which is recoverable through fuel adjustment clauses is deferred to the period in which such costs are billed to customers. Interchange Power Sa/es.The total electric energy available for sale includes energy generated by the Company's plants and power purchased from others, after deducting Company uses and line losses.During 1975, 1976 and the twelve months ended September 30, 1977, approximately 31/0, 29/o and 35/o, respectively, of the total electric energy available was sold to other utilities under interconnection arrangements. As required by both the PUC and FERC, such sales are not recorded as Operating Revenues but are credited to Operating Expenses on the Statement of Income.The change in interchange power sales from the prior period is attributable to the following: Increase (Decrease) 1975 1976 1977(a)Millions of Dollars Quantity of energy sold.$47.2$(7.9)$61.1 Average price of energy sold.18.4 (5.7)55.9 Other (1.5)0.9 2.5 Total.$64.1$(12.7)$119.5 (a)Twelve months ended September 30.The quantity of interchange power sold increased during.1975 due to greater availability of generating units, the addition of Martins Creek Unit No.3, the absence of contractual sales to a neighboring utility and the Company's relatively favorable generating costs compared to those of other interconnected companies. During 1976, increased sales to customers reduced the quantity of power available at an economic price for sale to interconnected companies. The addition of Martins Creek Unit No.4, extreme weather conditions and extended outages of m'ajor generating units of other inter-connected utilities resulted in sharply increased interchange sales during the twelve months ended September 30, 1977.During 1976 there was a narrowing of the differential between the Company's cost of generating electricity and the price received for power sold on the interchange, which price reflects a splitting of the difference between the buyer's and the seller's costs of generation. The average price the Company received per kwh of interchange power sales was 1.76 cents ln 1974, 1.97 cents in 1975, 1.90 cents in 1976 and 2.39 cents in the twelve months ended September 30, 1977.These amounts were substantially in excess of the Company's average fuel costs.Other Operation and Maintenance Expenses The increases in other operation and maintenance expenses such as wages and benefits, materials and supplies, rents and insurance principally reflect the effects of inflation and the costs of operation and maintenance of new facilities placed in service.16 Depreciation Increased depreciation expense is due to new facilities placed in service, including Martins Creek Units Nos.3 and 4 which began commercial operation in 1975 and 1977, respectively. For information concerning a reduction in the Company's composite depreciation rate as of January 1, 1976, see Note 5 to Financial Statements. Taxes For an analysis of taxes see Note 10 to Financial Statements. Allowance for Funds Used During Construction The Allowance for funds used during construction has increased substantially during the years being compared as a result of the Company's extensive construction program and the related carrying costs of securities issued to finance the construction expenditures. For additional information concerning the Allowance, see Note (e)to the"STATEMENT OF INCOME".Other Income-Net The reduction in Other income-net during the twelve months ended September 30, 1977 reflects a$6.6 million (net of income taxes)loss of a subsidiary, The Oneida Mining Company.For additional information see"BUSINESS-Fuel Supply (Coal)".Cost of Fixed Income Securities The changes from the prior period in interest charges on debt and in dividends on Preferred and Preference Stock were: Increase (Decrease) 1979 197B 1977(a)Millions of Dollars Interest Charges Long-term debt.Short-term debt.Other.Dividends on Preferred and Preference Stock$16.8$11.9$8.9 (3.3)0.9 (1.7)(0.2)0.1 0.4 4.9 8.9 2.9 (a)Twelve months ended September 30.The increases in long-term debt interest charges and dividends on Preferred and Preference Stock were due to issuance of securities principally to finance the Company's construction program and the refinancing of maturing debt with securities bearing higher interest rates.During the period January 1, 1975 through September 30, 1977, outstanding long-term debt increased by$247 million and Preferred and Preference Stock increased by$141 miilion.interest on bank loans and commercial paper notes varies from year to year due to the amount of short-term debt outstanding and the interest rates in effect.For additional information on short-term debt see Note 4 to Financial Statements. 17 CAPITAL STRUCTURE The capital structure of the Company at September 30, 1977 and as adjusted as of that date to give effect to (1)$2,528,000 of Common Stock issued on October 14, 1977 in accordance with the Company's Employee Stock Ownership Plan, (2)the sate of$50,000,000 of 8%Series Preferred Stock on October 19, 1977 and (3)the sale of the Bonds, is as follows (thousands of dollars): Actual Amount%of Total As Adjusted Amount,%of Total Long-Term Debt(a)First Mortgage Bonds 2/4%-10'/a% outstanding ........."............. Bonds to be outstanding ........................ Notes Unamortized Discount and Premium-Net....Total long-term debt........................ Shareowners Investment(c) Preferred and Series Preferred Stock (3.35%-9.24%).... Preference Stock{$8.00-$13.00).................. Total preferred and preference stock~~~oor~~ooor~oro~~oo~or~oo~~~~~~Common Stock.Capital Stock Expense.Earnings Reinvested .....Total common equity....................... Total shareowners investment .........$1,145,000 20,430 (3,898)1,'I 61,532 231,375 206,000 437,375 575,458 (10,428)274,358 839,388 1,276,763 9.5 8.5 34.4 281,375 10.9 206,000 7.9 487,375 577,986(d) (10,675)(e) 274,358 841,669 1,329,044 32.5$1,145,000 100,000 20,430 (3,898)(b) 1,261,532'8.7 Total capitalization ...$2,438,295 100.0$2,590,576 100.0 (a)See Notes 4 and 8 to Financial Statements for details concerning short-term and long-term debt.Long-term debt at September 30, 1977 includes$3,676,000 due within one year classified as a current liability on the Balance Sheet.At November 10, 1977 there were no bank loans outstanding and$86.6 million of commercial paper notes outstanding at a weighted average discount rate of 6.5%.See Notes 12 and 15 to Financial Statements for information concerning leases and commitments and contingent liabilities.(b)Based on assumed proceeds to the Company of 100%of the principal amount of the Bonds.{c)See Note 6 to Financial Statements for details concerning capital stock.(d)The adjusted amount does not include proceeds received subsequent to September 30, 1977 for Common Stock sold under the Company's dividend reinvestment plan.(e)After adding estimated issuance expenses and placement fees applicable to 8%Series Preferred Stock sold on October 19, 1977.18 k BUSINESS Revenues.During the twelve months ended September 30, 1977, about 40/0 of electric operating revenues came from residential customers, 28/0 from industrial customers, 27%from commercial customers and 5/0 from others.During the twelve months ended September 30, 1977, the Company's largest customer provided about 4.7/0 of electric operating revenues and the 26 largest industrial customers (each of whose billings exceeded$1 million)provided about 11.7%%d of such revenues.Industrial customers are broadly distributed among industrial classifications. Power Supply.During the twelve months ended September 30, 1977, the Company produced 32.5 billion kwh in plants owned by the Company and purchased 0.5 billion kwh under a firm purchase agreement. During this period the Company delivered 11.6 billion kwh and received 1.6 billion kwh as power pool interchange. The Company's Martins Creek oil-fired Unit No.4 (820,000 net kilowatt capability) was placed in service in March 1977.The Company's power capability (winter rating)at September 30, 1977 was as follows: Coal-Fired Montour Brunner Island.Sunbury.Martins Creek..Keystone.. Conemaugh..Holtwood.Plant Net Kilowatt Capability 1,515,000 1,454,000 390,000, 300,000 210,000(1) 194,000(2) 73,000 Total Coal-Fired ..Oil-Fired Martins Creek..Combustion Turbines and Dlesels.Hydro.Total Generating Capability..... Firm Purchases-Hydro Total Capability.. 4,136,000 1,640,000 539,000 146,000 6,461,000 76,000(3)6,537,000 (1)Company's 12.34/0 undivided interest.(2)Company's 11.39/0 undivided interest.(3)From Safe Harbor Water Power Corporation. See"BUSINESS-Hydroelectric Projects". Approximately 37/0 of the Company's generating capability at September 30, 1977 has been placed in service in the last five years and 69/o in the last ten years.The capability of generating units is based upon the operating experience and physical condition of the units and may be revised from time to time to reflect changed circumstances. 19
The maximum one-hour demand on the Company's system was 4,425,000 kw, which occurred on January 17, 1977.The Company estimates that it would have experienced a maximum one-hour demand of 4,514,000 kw on that date if a 5/0 voltage reduction had not been in effect to permit the Pennsylvania-New Jersey-Maryland Interconnection to supply emergency power to other power pools.The maximum one-hour summer demand was 3,545,000 kw, which occurred on August 29, 1977.For" information concerning interchange power sales, see"MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE STATEMENT OF INCOME" and"ELECTRIC STATISTICS". Fuel Supply.During the twelve months ended September 30, 1977, 81/0 of the Company's energy generation came from coal-fired stations, 17/o from oil-fired stations and 2/0 from hydroelectric stations.Coal.The following tabulation shows the amount of anthracite and bituminous coal burned by the Company's generating stations during the twelve months ended September 30, 1977, and the estimated requirements for coal over the remainder of the expected useful lives of the Company's generating stations.Type of Fuel Anthracite (including petroleum coke)..... Bituminous Coal (1)Total.Burned During TlNelve Months Estimated Ended Requirements September Over Plant 30, 1977 Lives Millions of Tons 1.2 20.0 10.0 225.0 11.2 245.0 (1)Includes the Company's share of the bituminous coal for the jointly-owned Keystone and Conemaugh generating stations.See"BUSINESS-Power Supply".The Company's policy generally is to maintain a 45 to 60 day coal supply at its generating stations.Since labor contracts between mine owners and the United Mine Workers of America expire on December 6, 1977, the Company, in anticipation of, possible strikes, is attempting to increase its coal inventory over normal levels.At September 30, 1977, based on estimated usage, the Company's coal inventory was sufficient for about 68 days of operations. During the twelve months ended September 30, 1977, 39/0 of the Company's coal supply was obtained from subsidiary mining companies (approximately one-third-of which was purchased by those companies in the open market), 10%under long-term contracts and 51/0 by short-term contracts and open market purchases. At September 30, 1977, the Company's inventory of anthracite was about 2.1 million tons.The balance of the Company's requirements for anthracite, as well as its requirements for petroleum coke, over the remainder of the expected useful lives of the Company's anthracite-fired generating stations is expected to be obtained by short-term contracts and open market purchases. The following tabulation lists the bituminous coal reserves owned or controlled at September 30, 1977 by the Company's subsidiary, Pennsylvania Mines Corporation. These reserves, all of which are located in Pennsylvania, are recoverable by deep mining operations. The information under the headings"Estimated Recoverable Reserves as of January 1, 1976" and"Average/0 Sulfur (By Weight)" was 20 provided by Paul Weir Company Incorporated on the basis of its independent studies and the Company has included such information herein in reliance upon such studies.The Company has not retained any other independent organization to review and report on its bituminous coal reserves.Estimated Recoverable Reserves 1977 Average as of Production '/o January 1, 1976 Through Sulfur (By 1976(1)Production September 30 Weight)(4)Thousands of Tons Assigned Reserves(2) Greenwich. Oneida.Rushton.Tunnelton. Total Assigned Reserves....... Unassigned Reserves(3) Greene Hill , Greene Manor.............................. Total Unassigned Reserves...Total........................... ~..66,649 21,638 7,694 10,187 106,168 159,877 162,682 322,559 428,727 1,585 265 556 403 2,809 2,809 1,382 173 386 305 2,246 2,246 2.7 3.3 4.5 1.7 2.9 3.3 (1)Includes only proven reserves for which tonnage is computed from dimensions revealed in outcrop data, mine workings and drill holes.(2)Assigned reserves represent coal which can be mined on the basis of current mining practices and techniques through the use of mine openings and plant facilities currently in existence or under construction. (3)Unassigned reserves represent undeveloped reserves or reserves that would require substantial additional mining facilities before operations could begin.(4)Raw coal, dry basis (prior to cleaning). Prior to 1976 the Company purchased a portion of its coal requirements from The Oneida Mining Company (Oneida), a subsidiary of The North American Coal Corporation (North American), under a long-term cost of production sales contract.In March 1976, in an effort to control the abnormally high cost of coal delivered to the Company from the Oneida mine, the Company asserted a contractual right to take over Oneida.Litigation with North American, which contested the Company's take-over, was settled in February 1977 on terms which gave the Company uncontested control over Oneida.With the conclusion of the litigation the Company was able to expand the scope of studies previously undertaken to determine what changes should be made in Oneida's mining operations. In September 1977, the Company adopted an interim plan which provides for the continuation of steam coal mining in certain sections of the Oneida mine and the write-off of a portion of the development costs incurred from 1970 through 1974 with respect to other sections of the Oneida mine which are being abandoned or bypassed because of poor mining conditions. This write-off, which will not be recovered through the application of the Company's fuel adjustment clauses, resulted in a$6.6 million reduction of the Company's net income ($.20 per share of Common Stock)for the twelve months ended September 30, 1977.21 Effective February 1, 1977 the Company began.to price Oneida coal for fuel adjustment clause calculation purposes at the average cost per ton of coal produced by the Company's other affiliated mines rather than at Oneida's higher cost.This action reduced the Company's net income by about$3.6 million ($.11 per share of Common Stock)during the period from February through September 30, 1977.The Company estimates that its net income will continue to be reduced by about$400,000 per month through mid-1978 when the Company expects to determine whether to continue to make additional investments for further development of the Oneida mine.In the event that the Company determines to make these investements, it is expected that the difference between the cost of Oneida coal and the average cost per ton of coal produced by the Company's other affiliated mines will be capitalized rather than being charged against the Company's current earnings.However, if adverse mining conditions prevent the further development of the Oneida mine, mining operations may be terminated and additional losses incurred.At September 30, 1977 and after giving effect to the September 1977 write-off, the aggregate capital investment in Oneida's facilities (including lease obligations) amounted to about$36 million, substantially all of which was guaranteed directly or indirectly by the Company.The Company has a long-term contract with a bituminous coal supplier (Lady Jane)under which the supplier is obligated to deep-mine its reserves to exhaustion. Production at the Lady Jane mine amounted to 200,000 tons during the twelve months ended September 30, 1977.Run-of-mine coal from the Lady Jane mine has an average sulfur content of about 3.5/o.The coal burned in the Company's generating stations contains both organic and pyritic sulfur.Mechanical cleaning processes installed at the mines are being utilized to reduce the pyritic sulfur content of the coal.The reduction of the pyritic sulfur content has lowered the total sulfur content of the coal burned to levels which permit compliance with current sulfur dioxide emission regulations established by the Pennsylvania Department of Environmental Resources (DER).See"BUSINESS-Environmental Matters".The regulations applicable to the Company's generating stations generally limit the total sulfur content of coal to not more than 2.5 lo.Coal obtained under short-term contracts and by open market purchases currently has an average sulfur content of about 2.2'/o.The Company owns a 12.34/o undivided interest in the Keystone station and an 11.39/o undivided interest in the Conemaugh station, both of which are mine-mouth generating stations located in western Pennsylvania. The owners of the Keystone station have a long-term contract, which may be extended through 2012, with a supplier for 90/o of the annual bituminous coal requirements of the Keystone station.The owners of the Conemaugh station have a long-term contract with another supplier for at least 80'/o of the annual bituminous coal requirements of the Conemaugh station for the life of the station.To the extent that the requirements of these plants are not covered by long-term contracts, the bituminous coal requirements are, with minor exceptions, obtained from local suppliers. The Company expects that assigned reserves and long-term contracts will provide 40/o to 50/o of its projected bituminous coal requirements during the next five years.The balance of these requirements will have to be obtained under short-term contracts or by open market purchases. The extent to which unassigned reserves may eventually be mined to meet the fuel requirements of future generating stations will depend upon future economic conditions and other factors which cannot now be predicted. Excluding mine-mouth plant requirements, about 84/o of the Company's bituminous coal purchased during the twelve months ended September 30, 1977 was delivered by the Company's unit trains, which at September 30, 1977 consisted of 980 hopper cars.Use of the Company's hopper cars for delivery of coal minimizes the Company's dependence upon railroad-supplied hopper cars which from time to time are in short supply.22
The average delivered cost of coal has increased substantially over the past several years from$10.66 per ton in 1972 to$25.79 per ton during the twelve months ended September 30, 1977.The average delivered cost of coal purchased during the twelve months ended September 30, 1977 was as follows: bituminous coal purchased from subsidiary companies (including coal purchased by those companies in the open market)and under long-term contracts,$30.44 per ton;bituminous coal purchased by the Company under short-term contracts and in the open market,$23.66 per ton;and anthracite, including petroleum coke,$11.92 per ton.Bituminous coal purchased in the open market by the Company and its subsidiaries is primarily surface-mined. Bituminous coal produced by subsidiary companies and purchased by the Company under long-term contracts is deep-mined. Oil.The two 820,000 kw oil-fired generating units at the Company's Martins Creek station are designed to burn either crude or residual oil and to follow significant load changes or operate as base load units.The Company has contracted with oil suppliers for the expected requirements of the Martins Creek oil units through 1979.An agreement with one of the suppliers, under which the Company can purchase up to three-quarters of its expected oil requirements for these units, provides for automatic annual renewals beyond 1979 unless terminated upon one year's prior written notice by either party.Oil for the Martins Creek station is delivered to a deep water terminal on the Delaware River at Marcus Hook, Pennsylvania. The Company has a long-term contract with an unaffiliated company to provide unloading and oil storage services at that terminal.The oil ls transported from Marcus Hook to storage facilities at the Martins Creek station by a pipeline which was constructed primarily for the use of the Company by its subsidiary, Interstate Energy Company (IEC).The pipeline and related facilities, substantially the only assets of IEC, were placed in service at a cost of approximately $55 million.Of that amount,$40.5 million was obtained from the Company and the balance was borrowed from banks.The Company expects to formalize its obligations for the operating expenses and annual carrying charges of the pipeline in connection with the permanent financing of these facilities in 1978.FERC and PUC tariffs are in effect for the delivery of oil by IEC from Marcus Hook to Martins Creek.The Company and IEC have arranged to provide pipeline delivery services to another utility beginning in mid-1978.Pipeline delivery services also will be available from the deep water terminal to other delivery points at locations and tariff rates which have not yet been established. Nuclear.The Company presently has under construction two nuclear-fueled generating units at its Susquehanna site.See"CONSTRUCTION PROGRAM".In anticipation of the commercial operation of these units, the Company has made commitments to meet certain of the nuclear fuel requirements for these units.The nuclear fuel cycle consists of the mining and milling of uranium ore to uranium concentrate; the conversion of uranium concentrate to uranium hexafluoride; the enrichment of uranium hexafluoride; the fabrication of fuel assemblies; the utilization of nuclear fuel in the reactor;temporary storage of spent fuel;and the reprocessing or permanent disposal of spent fuel.Based upon the presently scheduled In-service dates and planned fuel cycles for these units the following tabulation shows the year through which contracts are expected to provide the Susquehanna station's requirements for the various segments of the nuclear fuel cycle, assuming fulfillment by suppliers of their contractual commitments. 23 4 4*!'~4 4 III, I 4 I~!~ Susquehanna Unit 1.....Susquehanna Unit 2.....Uranium Concen-trate(1)(2)1983 1983 Conversion 1985 1985 2007 2009 1994 1994 Enrichment(3) Fabrication Reprocess-ing(3)1992 1992 (1)The Company has an option to purchase a portion of a supplier's production for the years 1984-1990 which, if exercised, will provide a portion of the Company's uranium concentrate requirements for that period.(2)The uranium concentrates scheduled to be delivered through 1983 are, expected to be sufficient to permit the operation of the Susquehanna units through 1985.Under the Company's enrichment contracts with the Department of Energy (formerly the Energy Research and Devel-opment Administration), the Department of Energy may make changes in enrichment sPecifications. Such changes may necessitate the acquisition by the Company of additional quantities of uranium concentrate during the periods indicated in the tabulation. (3)A rulemaking proceeding regarding the recycllng of spent fuel is currently pending before the NRC.The Company may be required to obtain additional enrichment services after 1987 if the NRC permits the recycling of plutonium and the Company is unable to have its spent fuel reprocessed. There are currently no commercially operating facilities in the United States for the reprocessing of spent fuel.Shipments from Susquehanna to the reprocessor were initially scheduled to begin in the early 1980s following the expansion of the reprocessor's facility.The reprocessor has informed the Company that because of the increased capital and operating costs expected to be incurred to comply with NRC criteria relating to the expansion, the reprocessor does not intend to continue in that business and is seeking to terminate the contract with respect to the Susquehanna units.The Company estimates that there will be sufficient storage capability in the spent fuel pools at Susquehanna to accommodate the fuel that is expected to be discharged through 1984.Because the Company does not currently'anticipate being able to ship spent fuel off-site by 1985 for storage or reprocessing, the Company is developing plans to install additional spent fuel storage capacity in the Susquehanna spent fuel pools.In April 1977 President Carter stated that he would defer indefinitely the commercial reprocessing and recycling of the plutonium produced in domestic and foreign nuclear power programs.In October 1977 the Department of Energy proposed to assume responsibility for storage and disposal of spent nuclear fuel produced in nuclear power plants while the question of ultimate disposal is being settled.Under the proposed policy, the Federal Government would take title to spent nuclear fuel from electric utilities on payment of a fee and store it in a retrievable fashion at a Government approved site.Additional arrangements, for which there is no present assurance, will be required to satisfy the fuel requirements of the Susquehanna units over their estimated useful lives.Power Pool.The Company operates its generation and transmission facilities as a part of the Pennsylvania-New Jersey-Maryland (PJM)Interconnection. The PJM Interconnection, one of the world'largest power pools, includes eleven companies serving about 21 million people in a 50,000 square mile 24 territory covering all or part of Pennsylvania, New Jersey, Maryland, Delaware, VIrginia and Washington, D.C.The PJM companies had approximately 44.4 million kw of installed generating capacity at September 30, 1977 and transmission line connections with neighboring power pools have the capability of supplying an additional
2.1 million
kw to P JM companies. Through September 30, 1977 the maximum one-hour demand on the power pool was approximately 32.2 million kw, which occurred on July 21, 1977.The Company is also a party to the Mid-Atlantic Area Coordination Agreement which provides for the coordinated planning of generation and transmission facilities by the companies included in the PJM Interconnection. Regulation. The Company is a public utility under the laws of the Commonwealth of Pennsylvania and is subject to regulation as such by the Pennsylvania Public Utility Commission. Until October 1, 1977 the Company was subject in certain of its activities to the jurisdiction of the Federal Power Commission under Parts I, II and III of the Federal Power Act.Effective October 1, 1977 these functions were transferred in accordance with the Department of Energy Organization Act to the Federal Energy Regulatory Commission, an independent regulatory commission within the newly created Department of Energy.The Act also transfers to the Secretary of Energy all of the functions of the Energy Research and Development Administration. See"BUSINESS-Fuel Supply (Nuclear)". The Company is a holding company under the Public Utility Holding Company Act of 1935 but has been exempted by the Securities and Exchange Commission from the provisions of that Act applicable to it as a holding company.The Company is subject to the jurisdiction of the Nuclear Regulatory Commission in connection with the construction of the Susquehanna units.See"CONSTRUCTION PROGRAM".The Company is also subject to the jurisdiction of certain Federal, regional, state and local regulatory agencies with respect to air and water quality, land use and other environmental matters.See"BUSINESS-Environmental Matters".The coal mining operations of the Company's subsidiaries are subject to the Federal Coal Mine Health and Safety Act of 1969.Environmental Matters.The Company is subject to certain present and developing Federal, regional, state and local laws and regulations with respect to air and water quality, land use and other environmental matters.Except as described below, the Company is presently in substantial compliance with applicable environmental laws and regulations and has all of the permits currently required to operate its facilities. Air.The Federal Clean Air Act Amendments of 1977 (1977 Amendments) include, among other things, provisions that: (a)require the prevention of significant deterioration of existing air quality in regions where air quality is better than applicable ambient standards;(b)restrict the construction of new emission sources, including coal and oil-fired generating stations, in areas which have not attained specified ambient air quality standards;(c)revise the standards of performance applicable to new emission sources and require that fossil fueled generating units achieve the revised standards by the application of the best available control technology which requirement, in effect, appears to prohibit the use of low sulfur coal at new emission sources without further treatment, such as the cleaning of coal or the use of scrubbers; and (d)require the United States Environmental Protection Agency (EPA)to impose substantial penalties for failure to comply with air pollution regulations after July 1, 1979 and provide for civil penalties of up to$25,000 per day for facilities found to be in violation of an applicable state implementation plan.25 Under procedures established by the Pennsylvania Department of Environmental Resources (DER)prior to the 1977 Amendments, companies not in compliance with emission regulations have been permitted to enter into consent orders with DER which allow continued operation during the time in which steps are being taken to achieve compliance. In this regard, the Company and the DER have entered into a consent order with respect to particulate emission regulations as follows: Unit Brunner Island No.1.Brunner Island No.3.Montour No.1......Montour No.2 Compliance Date December 31, 1980 June 30, 1981 June 30, 1981 December 31, 1980 Under the terms of the consent order, the Company is required to make certain payments to the Pennsylvania Clean Air Fund until compliance is achieved, with respect to any particular unit.While the Company is unable at this time to estimate the exact amount of the payments, it does not expect that such payments in the aggregate will be material in amount.As a result of the 1977 Amendments, the consent order may have to be revised to establish a new compliance date of not later than July 1, 1979.Since the Company has been proceeding on a schedule which was designed to achieve compliance by the dates shown in the tabulation, there is a liigh probability that a July 1, 1979 compliance date may not be met at the Brunner Island units.The Company currently expects that the installation of flue gas conditioning equipment at the Montour units will permit the Company to achieve compliance at those units by July 1, 1979.Estimated expenditures during the years 1977-1979 to achieve compliance at the Brunner Island and Montour units a'e included in the Company's estimate of construction expenditures for that period.See"CONSTRUCTION PROGRAM".The Company and DER are currently discussing a consent order for Units No.'3 and No.4 at the Company's Sunbury station.The Company expects that any consent order would permit the Company to continue to operate the units during the time in which the Company is taking steps to achieve compliance with DER particulate emission standards. The Company currently expects that the Units No.3 and No.4 at the Sunbury station can be in compliance with applicable DER standards by July 1, 1979.In July 1977 EPA notified the Company of an alleged violation at the Company's Holtwood steam station of opacity emission regulations established by DER.Pending resolution of this matter, which is currently the subject of appeals by the Company to the Environmental Hearing Board of DER, the Company is continuing to operate the Holtwood steam station even though DER has not issued an operating permit for that station.The continued operation of the Holtwood steam station may subject the Company to certain penalties which are not currently expected to be material in amount.The processing of coal to reduce the sulfur content prior to burning permits the Company to comply with current sulfur dioxide emission regulations. If, however, the sulfur dioxide emission regulations applicable to the Company's existing generating stations are amended to significantly reduce permissible discharges, the Company may be required to install equipment for the removal of sulfur dioxide from flue gases.26 Water.To meet the July 1, 1977 standard of"best practicable control technology currently available" established by the Federal Water Pollution Control Act (Water Act), the Company has installed waste water treatment facilities at its steam electric stations.The Company's coal mining subsidiaries are planning to install waste water treatment equipment at certain of their facilities and have filed the necessary applications with DER.The failure by the subsidiaries to meet the July 1, 1977 Water Act standard may subject the subsidiaries to fines and penalties which are not expected to be material ln amount.The Water Act requires the application of the"best available technology economically achievable" by July 1, 1983 with respect to effluent discharges from existing'facilities. With respect to"new" facilities, the Water Act authorizes EPA to establish standards of performance which will require the~application of the"best available demonstrated control technology" including, where practicable, a goal of no discharge of pollutants. The Water Act also requires that the location, design, construction and capacity of cooling water intake structures reflect the application of the"best technology available for minimizing adverse environmental impact".EPA has adopted effluent limitations, guidelines and standards. for steam electric stations and guidelines for existing coal mines.EPA limitations, guidelines and standards are enforced through the issuance of discharge permits which specify the applicable limitations on discharges. Compliance with applicable state and regional water quality standards is accomplished by requiring the appropriate state or interstate agency to issue a water quality certification with respect to each application. The terms and conditions of any such water quality certification must be incorporated in the discharge permit issued by EPA.EPA has Issued discharge permits for the operation of the Company's generating stations and for construction activities at the Company's Susquehanna station.Applications for discharge permits for the sewage treatment plant at the Montoursville service center and the coal mining operations of the Company's subsidiaries are pending before EPA.DER has issued the required water quality certification for the Pennsylvania Mines Corporation discharge permits.The Company believes that certain discharge limitations contained ln the DER certification for the Montour station are more stringent than those established by applicable guidelines and regulations and has requested a hearing before DER concerning these limitations. DER also administers state and certain regional laws and regulations with respect to effluent discharges and water quality.The Company and DER are also discussing the necessity of installing additional water treatment facilities at certain of the Company's plants.Delaware River Basin Commission approval of the Company's water withdrawal permit for the oil-fired units at the Martins Creek station requires the Company to provide make-up water at certain times or to curtail operation of these units during certain periods of low flow in the Delaware River.It is the 27 t C.r Company's intention to supply the required make-up water from its Lake Wallenpaupack hydroelectric project.See"BUSINESS-Hydroelectric Projects". In connection with the construction of the Susquehanna station, the Company is reviewing with the Susquehanna River Basin Commission the need to construct a reservoir to provide make-up water during certain low-flow periods in the Susquehanna River.The Company estimates that the cost of this reservoir would approximate $45 million.The Company's share of such cost during the years 1977-1979 is included in its estimate of construction expenditures for that period.See"CONSTRUCTION PROGRAM".In 1974 the Borough of Tremont, Pennsylvania, and several residents of the Borough of Tremont commenced a suit against ten defendants, including the Company, in the Court of Common Pleas, Schuylkill County, Pennsylvania. The complaint in this proceeding (which purports to be a class action on behalf of all residents of the Borough of Tremont)alleges, among other things, that the failure of the defendants to comply with the provisions of various Federal and state environmental laws in connection with the maintenance of certain culm and silt banks in the vicinity of the Borough of Tremont caused the plaintiffs named in the complaint to suffer damages of approximately $1.3 million during the floOding resulting from Tropical Storm Agnes.In July 1977 Gold Mills, Inc.commenced a quit against the same defendants containing similar allegations and claiming damages of$3.6 million.Plaintiffs in both proceedings are seeking to recover punitive damages in unspecified amounts.Nuclear.The U.S.Court of Appeals for the District of Columbia in July 1976 announced decisions in two cases to which the Company was not a party concerning the scope of the NRC environmental review of nuclear plants.In one decision the Court held that the NRC must give further consideration in all cases to the environmental impact of the reprocessing of spent fuel and the disposal of radioactive waste material.In October 1976 the NRC initiated rulemaking proceedings to evaluate further the environmental Impact of reprocessing and waste disposal and in March 1977 the NRC adopted an interim rule relating to these matters.In August 1977, in its decision terminating the show cause proceedings initiated by an environmental group to halt the construction or operation of 14 nuclear fuel units in Pennsylvania and New Jersey, including the Susquehanna units, the NRC Appeal Panel concluded that the application of the interim rule would have no operative significance on the cost benefit analysis for the Susquehanna units.It is expected that the results of the NRC rulemaking proceedings will serve as a basis for the cost benefit analysis required by the National Environmental Policy Act of 1969 ln connection with the issuance of operating licenses for nuclear plants including the Susquehanna units.In the other decision the Court held that the NRC must consider energy conservation as an alternative to the construction of nuclear plants in licensing proceedings where energy conservation (in addition to alternative means of generating power)is raised as an issue.The NRC has not initiated a rulemaking proceeding with respect to energy conservation matters.The Supreme Court has granted review of both Court of Appeals decisions. The action of the NRC in March 1977 in adopting the interim rule relating to the environmental impact of fuel reprocesslng and waste disposal has been appealed to the U.S.Court of Appeals for the District of Columbia.The Company is unable to predict what further actions may be taken by the NRC or the Courts with respect to any of these matters or the effect that such actions or actions by environmental agencies could have on the cost or in-service dates of the Susquehanna units.See"CONSTRUCTION PROGRAM".28 General.During the period 1972 through 1976, the Company's construction expenditures aggregated about$1.47 billion, of which the Company estimates that about$82 million was for compliance with Federal, state and local environmental laws and regulations. Approximately $97 million of capital expenditures for such compliance are included in the Company's 1977-1979 construction program and it may be that substantial additional expenditures for such purposes in an amount not now determinable will be required during such period and thereafter. From time to time the Company and its subsidiaries have been cited for violations of DER and EPA air and water quality regulations in connection with the operation of their facilities and, as a result, may be subject to certain penalties which are not expected to be material in amount.The Company is unable to predict the ultimate effect of developing environmental law and regulation upon its existing and proposed facilities and operations. However, it is possible that such law and regulation may require the Company to modify, supplement, replace or cease operating its equipment and facilities, delay or impede its construction and operation of new facilities, and require it to make substantial additional expenditures in amounts which are not now determinable. Hydroelectric Projects.The Company operates the Holtwood hydroelectric project (102,000 kw capability) and the Wallenpaupack hydroelectric project (44,000 kw capability), the original licenses for which expired in 1970 and 1974, respectively. Pending final action on the Company's applications for new long-term licenses for both projects, FERC has granted the Company interim annual licenses to operate the projects.The interim annual licenses incorporate the terms and conditions of the original long-term licenses.The Company's Holtwood application is being opposed by a municipal electric system.The Holtwood and Wallenpaupack projects represent current investments on a depreciated original cost basis of$9.6 million and$10.1 million, respectively. The Federal Power Act provides that if, upon expiration of a major project license, the United States takes over the project or a license for the project is issued to a new licensee, the original licensee shall be paid the"net investment" in the property, not to exceed fair value, plus severance damages, if any.Certain reserves which are required by the Act and which relate to the calculation of"net investment" have not been recorded pending approval of the amounts thereof by FERC.In April 1977, FERC issued a proposed rulemaking which, if adopted, would require a licensee'to record these reserves by an appropriation of earnings reinvested. The amount of earnings reinvested so appropriated would be restricted as to the payment of dividends. The Company estimates that such reserves applicable to the period 1946 through September 30, 1977 would not exceed$3.0 million for its two licensed projects.The Company also owns one-third of the capital stock of Safe Harbor Water Power Corporation (Safe Harbor)which holds a major project license for the operation of its hydroelectric plant (230,000 kw capability). The Company is entitled to one-third of the capacity (76,000 kw)of the Safe Harbor plant.The Safe Harbor license expires in 1980.In April 1977 Safe Harbor filed an application with FERC for a new long-term license and the proposed installation of five additional 37,500 kw units.The additional units will Increase the total capability of the Safe Harbor plant to 417,500 kw and the Company will be entitled to one-third of the total capacity (139,167 kw).29
ELECTRlC STATlST(CS 1972 1973 1974 1975 Year Ended December 31, 1976 Twelve Months Ended Septem-ber 30, 1977(a)Power Capability (thousands of kw)Coal-fired steam stations............................. Oil-fired steam station................................. Combustion turbines and diesels................. Hydroelectric stations.................................. Firm purchases{hydro)................................ Total.Peak Demand{thousands of kw)(b).................... Sources of Energy (millions of kwh)Generated Coal-fired steam stations...............,..... Oil-fired steam station.......................... Combustion turbines and diesefs.........Hydroelectric stations........................... Power purchases.. Total.Disposition of Energy (millions of kwh)Energy safes to customers........................... Interchange power sales(c).......................... Company uses and line losses.................... Total.Fuel Cost of Energy Generated (cents per kwh)..Cost of Coal Received, including freight and handling cost (per ton).................................... Energy Sales (millions of kwh)Residential. Commercial. Industrial.. Other.Total.Operating Revenues (thousands) Residential. Commercial. Industrial. Other.Total.Number of Customers (end of period)................. Average Use Per Residential Customer (kwh).....Average Revenue (cents per kwh)Residential. Commercial. Industrial ..All customers Total Operating Expenses per kwh of Energy Sales (cents per kwh)(c).................................. 3,345 541 146 76 4,108 3,598 4,140 541 146 76 4,903 3,662 4,140 539 146 76 4,901 3.772 4,136 820 539 146 76 5,717 4,122 4,136 820 539 146 76 5,717 4,425 4,136 1,640 539 146 76 6,537 4,425 19,097 24,782 601 273 824 816 1,784 1,968 22,306 27,839 24,186 247 772 1,570 26,775 25,384 1~149 84 859 2,241 29,717 25,751 1,947 40 809 2,126 30,673 26,332 5,398 129 685 2,108 34,652 17,013 3.586 1,707 22,306 0.49 18,865 7.237 1,737 27,839 0.50 18,963 6,079 1,733 26,775 0.88 19,113 8,757 1,847 29,717 1.04 20,354 8,358 1,961 30,673 1.17 21,250 11,566 1,836 34,652 1.32 5,985 3,933 6,458 637 17,013$142,585 92,555 92,201 26,226$343.667 864,439 8,032 2.38 2.35 1.43 1.99 6,324 4,262 6,881 1,398 18,865$154,681 101,670 99,928 25,868$382,147 886,378 8,253 2.45 2.39 1.45 2.00 6,494 4,275 7,170 1,024 16.663$187,265 121,314 131,452 27,539$467,570 902,148 8,287 2.88 2.84 1.83 2.44 6,818 4,575 7,020 700 19,1 13$218,904 143,673 150,365 25,686$538,628 917,920 8,528 3.21 3.14 2.14 2.78 7,267 4,874 7,481 732 20,354$257,828 170,990 180,957 29,949$639,724 936,219 8,931 3,55 3,51 2.42 3.10 7,607 5,195 7,698 750 21,250$294,063 198,158 205,610 33,002$730,833 946,986 9,197 3.87 3.81 2.67 3.40 1.54 1.52 1.88 2.21 2.49'.61$10.66$11.89$20.80$23.38$25.36$25.79(d)(a)Consolidated statistics of the Company and Hershey Electric Company since January 1, 1977.(b)Winter peak shown for the years 1972-1976 was reached early in subsequent year.The Company estimates that it would have experienced a peak for 1976 and the twelve months ended September 30, 1977 of 4,514,000 kw if a 5/o voltage reduction had not been in effect.(c)As provided in the applicable regulatory system of accounts, receipts from interchange power sales have been treated as reductions of operating expenses.(d)The cost of coal received, including freight and handling costs, was$26.06 per ton in the month of September 1977.30 DESCRIPTION OF BONDS General.The Bonds will mature December 1, 2007, will bear interest at the rate shown in their title payable June 1 and December 1, and will be issued only ln registered form in denominations of$1,000 and multiples thereof.The Bonds will be issued under a Mortgage and Deed of Trust, dated as of October 1, 1945, as supplemented (Mortgage), of which Morgan Guaranty Trust Company of New York is Trustee.Principal and interest will be payable in New York City at the office or agency of the Company, which initially will be the principal office of the Trustee.Interest also will be payable at the general offices of the Company in Allentown, Pennsylvania. Exchanges and transfers of the Bonds may be made at the principal office of the Trustee or at the offices of such other companies as the Company may designate from time to time.The Company does not presently plan to designate any other company for such purpose.There will be no charge by the Company for any exchange or transfer of the Bonds.Statements herein concerning the Bonds and the Mortgage are brief summaries and do not purport to be complete.They make use of terms defined in the Mortgage, and are qualified in their entirety by express references to the cited Sections and Articles.The Bonds do not have any sinking or improvement fund or other provision for amortization prior to maturity.However, all series of bonds created prior to 1973 do have sinking or improvement fund provisions. Redemption and Purchase of the Bonds.The Bonds will be redeemable, in whole or in part, on 30 days'otice (a)at the following special redemption prices for the maintenance and replacement fund, or with certain deposits and proceeds of property, and (b)at the following general redemption prices for all other redemptions: If Redeemed During Twelve Months Period Ending November 30 1 978................. 1 979................. 1 980................. 1 98 1................. 1 982................. 1 983................. 1 984................. 1 985..~.............. 1 986........... ~.....1 987................. 1 988................. 1 989................. 1 990................. 1 99 1................. 1992................. General Redemption Prices o/o Special Redemption Prices O/0 If Redoemed During Twelve Months Period Ending November 30 1 993................. 'I 994................. 1 995................. 1 996................. 1 997................. 1 998................. 1 999................. 2000................. 200 1................. 2002................. 2003................. 2004................. 2005................. 2006................. 2007................. O/0 o/o 100.00 100.00 General Special Redemption Redemption Prices Prices 31 I' in each case, together with accrued interest to the date fixed for redemption; provided that no Bonds shall be redeemable at the general redemption prices prior to December 1, 1982, with borrowed funds or in anticipation of funds to be borrowed, having an effective interest cost to the Company (calculated in accordance with acceptable financial practice)of less than lo per annum.The redemption may be made subject to receipt by the Trustee of the redemption moneys before the date fixed for redemption and the redemption notice shall be of no effect unless such moneys are so received.Cash deposited under any provisions in the Mortgage (with certain exceptions) may be applied to the purchase of bonds of any series.(Mortgage, Art.X and Twenty-third Supplemental, Sec.1.)Maintenance and Replacement Fund.Each year 15V~/o of adjusted gross operating revenues must be spent for maintenance and replacements of mortgaged electric, gas, steam and hot water property and certain automotive equipment. The Company now owns no gas or hot water property.Such requirements may be met by depositing cash with the Trustee;certifying expenditures for maintenance and repairs of such property, for gross property additions and for certain automotive equipment; or by taking credit for bonds and qualified prior lien bonds retired.Such cash may be withdrawn on similar bases.The Company has reserved the right (without any consent or other action by the holders of any series of bonds created after January 1973, including the Bonds)to make such amendments to the Mortgage as shall be necessary to delete the Maintenance and Replacement Fund.The Company has no present intention of requesting a bondhoiders meeting to delete the Maintenance and Replacement Fund.(Mortgage, Sec.39;Twenty-third Supplemental, Sec.3.)Special Provisions for Retirement of the Bonds.If, during any twelve-month period, mortgaged property is disposed of by order of or to any governmental authority, resulting in the receipt of$10 million or more as proceeds, the Company (subject to certain conditions) must apply such proceeds (less certain deductions) to the retirement of bonds of any series.The Bonds are redeemable at the special redemption prices in that event.(Mortgage, Sec.64.)Security.The Bonds, together with all other bonds now or hereafter issued under the Mortgage, will be secured by the Mortgage, which constitutes, in the opinion of Edward M.Nagel, Esq., General Counsel of the Company, a first mortgage lien on all of the Company's properties (except those referred to below), subJect to (1)leases of minor portions of the Company's property to others for uses which, in his opinion, do not interfere with its business, (2)leases of certain property of the Company not used in its electric utility business, (3)minor defects, irregularities and deficiencies in titles of properties and rights-of-way, which do not materially impair the use of such property and rights-of-way for the purposes of the Company, (4)other excepted encumbrances, and (5)as to certain property situated primarily in Lackawanna, Luzerne, Susquehanna, Wayne and Wyoming Counties, Pennsylvania, the prior lien of The Scranton Electric Company Mortgage and Deed of Trust, dated February 15, 1937, as supplemented. In general, there are excepted from the lien of the Mortgage all cash and securities; equipment, apparatus, materials or supplies held for sale or other disposition; aircraft, automobiles and other vehicles;timber, minerals, mineral rights and royalties; and receivables, contracts, leases and operating agreements. The Mortgage contains provisions for including after acquired property within the lien thereof, subject to any pre-existing liens and to certain limitations in the case of consolidation, merger or sale of substantially all of the Company's assets.(Mortgage, Sec.87.)32 AI i$ Issuance of Additional Bonds.Bonds of any series may be issued from time to time on the bases of: (1)60/o of property additions to electric, gas, steam or hot water property, acquired after June 30, 1945, but not including natural gas production property and after adjustments for retirements of funded property other than property for supplying water;(2)retirement of bonds or qualified prior lien bonds;and (3)deposit of cash.With certain exceptions in the case of (2)above, the issuance of bonds requires adjusted net earnings before income taxes for twelve out of the preceding fifteen months of at least twice the annual interest requirements on all bonds at the time outstanding, including those being issued, and on all indebtedness of prior rank.In computing adjusted net earnings, an amount equal to the maintenance and replacement fund requirements must be used in lieu of actual expenditures for maintenance and repairs and provisions for property retirement. The issuance of bonds on the basis of property additions subject to liens is restricted. It is expected that$20.5 million of Bonds will be issued against the retirement of a like principal amount of bonds which matured during 1977 and the remainder will be issued against unfunded property additions and that, after giving effect to, the proposed sale of a 10/o undivided ownership interest in the Susquehanna units (see"CONSTRUCTION PROGRAM")and the issuance of the Bonds, unfunded property additions remaining would have been approximately $660 million, as of September 30, 1977.In addition, when the bonds of all series issued piior to 1973 have been retired, property additions theretofore funded to satisfy sinking or improvement funds for such series will revert to unfunded status.The Company has reserved the right to amend the Mortgage without any consent or other action by holders of any series of bonds (including the Bonds)created (1)after February 28, 1970 to include Nuclear Fuel (and similar or analogous devices or substances) as Property Additions, and (2)after November 30, 1976 to make available as Property Additions various forms of space satellites, space stations and other analogous facilities, various fuel transportation facilities (primarily railroad cars and other railroad equipment, tankers and other vessels), and generally, electric, gas and energy or fuel property (including property for the development of electricity, gas and fuel or energy in any form)and water and steam heat property.Such property could be located anywhere if duly subject to the lien of the Mortgage and useful in connection with the energy, fuel or water business.Excepted property would continue to include property used principally for the production or gathering of natural gas.The amount of the obligations secured by prior liens on mortgaged property may be increased, provided that, if any property subject to such prior lien shall have been made the basis of a credit under the Mortgage, all the additional obligations are deposited with the Trustee or the trustee or other holder of a qualified lien.However, no additional Scranton bonds may be issued except to refund or replace those presently outstanding unless consented to by the holders of 70/o of the bonds.(Mortgage, Secs.4 to 7, 20 to 30, and 46, Thirteenth Supplemental, Sec.4, Twenty-second Supplemental, Sec.3 and Twenty-third Supplemental, Sec.7.)Release and Substitution of Property.Property may be released upon the bases of (1)the deposit of cash, or, to a limited extent, purchase money mortgages, (2)property additions, after adjustments in certain cases to offset retirements and after making adjustments for qualified prior lien bonds outstanding against property additions, and (3)waiver of the right to issue bonds without applying any earnings tests.Cash may be withdrawn upon the bases stated in (2)and (3)above.(Mortgage, Art.XI and Secs.5, 31, 32, 37, 46 to 50, 100 and 118.)33 /1 Dividend Covenant.No cash dividends on common stock may be paid unless after such payments the amount remaining in earned surplus (herein described as earnings reinvested) plus the provisions made subsequent to September 30, 1945 for depreciation and retirement of property shall equal the maintenance and replacement fund requirements of the Mortgage for such period, less maintenance expenditures.(Mortgage, Sec.39 and Twenty-third Supplemental, Sec.2.)Reference is also made to Note 7 to Financial Statements. Modification of Mortgage.Bondholders'ights may be modified with the consent of the holders of 70%of the bonds.If less than all series of bonds are affected, the consent of the holders of 70%of each series affected is also required.The Company has reserved the right (without any consent or other action by holders of any series of bonds created after 1970, including the Bonds)to substitute 66%%for 70%in the foregoing provisions. In general, no modification of the terms of payment of principal or interest and no modification affecting the lien or reducing the percentage required for modification is effective against any Bondholder without his consent.(Mortgage, Art.XIX, Fourteenth Supplemental, Sec.4.)Defaults and Notice Thereof.Defaults are: default in payment of principal; default for 60 days in payment of interest or of installments of funds for retirement of bonds;certain defaults with respect to qualified lien bonds;certain events in bankruptcy, insolvency or reorganization; and default for 90 days after notice in other covenants. The Trustee may withhold notice of default (except in payment of principal, interest or any fund for retirement of bonds), if it thinks it is in the interests of the Bondholders.(Mortgage, Secs.65 and 66.)Holders of 25%of the bonds may declare the principal and interest due on default, but a majority may annul such declaration If such default has been cured.No holder of bonds may enforce the lien of the Mortgage unless (1)he has given the Trustee written notice of a default;(2)holders of 25%of the bonds have requested the Trustee to act and offered it reasonable opportunity to act and indemnity satisfactory to the Trustee against the costs, expenses and liabilities to be incurred thereby;and (3)the Trustee has failed to act.The Trustee is not required to risk its funds or incur personal liability if there is reasonable ground for believing that the repayment is not reasonably assured.A majority of the bonds may direct the time, method, and place of conducting any proceedings for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee.(Mortgage, Secs.67, 71, 80 and 95.)Evidence to Be Furnished to the Trustee.Compliance with Mortgage provisions is evidenced by written statements of the Company's officers or persons selected or paid by the Company.In certain major matters, the accountant, appraiser, engineer or counsel must be independent. Various certificates and other papers are required to be filed annually and in certain events, including an annual certificate with reference to compliance with the terms of the Mortgage and absence of Defaults.Certain Tax Matters.In the opinion of Edward M.Nagel, Esq., General Counsel of the Company, Bonds owned by individuals residing in Pennsylvania are subject to the 4 mills Pennsylvania corporate loans tax.Such tax will be withheld from interest payments to such'individuals. Mr.Nagel is also of the opinion that the Bonds are exempt from existing personai property taxes in Pennsylvania. EXPERTS The balance sheet as of December 31, 1976 and the related statements of income, earnings reinvested and changes in financial position for each of the five years in the period ended December 31, 1976 included ln this Prospectus have been examined by Haskins&Sells, independent Certified Public Accountants, as stated in their opinion appearing herein, and have been so included in reliance upon such opinion given upon the authority of that firm as experts in accounting and auditing.Statements made herein as to matters of law and legal conclusions have been reviewed by Edward M.Nagel, Esq., General Counsel of the Company, and have been made in reliance on his authority as an expert.Information in the tabulation of the Assigned Reserves and Unassigned Reserves under the headings"Estimated Recoverable Reserves as of January 1, 1976" and"Average/o Sulfur (By Weight)" under the caption"BUSINESS-Fuel Supply (Coal)" was provided by Paul Weir Company Incorporated and is included herein in reliance on its authority as an expert.LEGAL OPINIONS The validity of the Bonds will be passed upon for the Company by Edward M.Nagel, Esq., General Counsel of the Company, and Messrs.Reid&Priest, New York, N.Y., and for the Purchasers by Messrs.Sullivan&Cromwell, New York, N.Y.However, all matters pertaining to the organization of the Company, titles and the lien of the Mortgage and all matters of law of the Commonwealth of Pennsylvania will be passed upon only by Mr.Nagel, who is a full-time employee of the Company.OPINION OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS PENNSYLVANIA POWER&LIGHT COMPANY: We have examined the balance sheet of Pennsylvania Power&.Light Company as of December 31, 1976 and the related statements of income, earnings reinvested, and changes in financial position for each of the five years in the period ended December 31, 1976.Our examination was made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circum-stances.In our opinion, such financial statements present fairly the financial position of the Company at December 31, 1976 and the results of its operations and the changes in its financial position for each of the five years in the period ended December 31, 1976, in conformity with generally accepted accounting principles applied (except for the change in 1974, with which we concur, in the method of accounting for recoverable fuel costs as described in Note (b)to the Statement of Income)on a consistent basis.HASKINS&SELLS New York, New York February 3, 1977 35 I' PENNSYLVANIA POWER&LIGHT COMPANY BALANCE SHEET ASSETS Thousands of Dollars September 30, December 31, 1977 1976 (Unaudited) UTILITY PLANT Plant ln service-at original cost Electric................................ Steam heat.Total plant fn service Less accumu'lated depreciation (Note 5).Net plant in service..Construction work in progress-et cost.Nuclear fuel in process-at cost..Net utility plant (Note 8).INVESTMENTS Associated companies-at equity.Nonutility property and other-at cost or less.Total investments.. CURRENT ASSETS Cash (Note 4).Accounts receivable (less reserve: 1976,$1,925;1977,$2,809)Customers.Other.Notes receivable (principally from associated company).. Recoverable fuel costs.Coal and fuel oil-at average cost.Materials and supplies-at average cost.Other.Total current assets..DEFERRED DEBITS.$2,090,282 7,896 2,098,178 458,697 1,639,481 720,544 20,084 2,380,109 15,327 7,548 22,875 14,955 49,205 22,857 29,570 41,670 74,885 19,068 7,219 259,429 4,884$2,303,547 7,908 2,311,455 495,876 1,815,579 758,927 33,413 2,607,919 16,344 7,469 23,813 13,442 45,237 38,553 29,500 47,296 102,117 19,659 10,917 306,721 6,454 Total..$2,667,297$2,944,907 See accompanying Notes to Financial Statements. 36 PENNSYLVANIA POWER&LIGHT COMPANY BALANCE SHEET L I A B IL IT I E S Thousands of Dollars September 30, December 31, 1977 1976.(Unaudited) CAPITALIZATION Shareowners investment (Notes 6, 7 and 9)Preferred stock.Preference stock..Common stock.Capital stock expense EarnIngs relnvested. Total shareowners Investment ..Long-term debt (Note 8).Total capitalization ..CURRENT LIABILITIES Long-term d ebt due within one year (Note 8).Commercial paper notes (Note 4).Accounts payable..Taxes accrued.Deferred Income taxes applicable to recoverable fuel costs.DMdends payable.Interest accrued.Deposits from Allegheny Electric Cooperative (Note 14).Other..Total current liabilities DEFERRED AND OTHER CREDITS Deferred investment tax credits.....Deferred income taxes.Other..Total deferred and other credits.COMMITMENTS AND CONTINGENT LIABILITIES (Note 15)$231,375 210,000 495,008 (10,220)237,967 1,164,130 1,161,319 2,325,449 20,675 60,012 60,342 12,564 22,060 23,002 22,589 11,257 232,501 56,526 36,860 15,961 109,347$231,375 206,000 575,458 (10,428)274,358 1,276,763 1,157,856 2,434,619 3,676 91,460 71,936 23,297 25,039 25,656 30,826 78,849 20,820 371,559 77,445 43,538 17,746 138,729 Total$2,667,297$2,944,907 See accompanying Notes to Financial Statements. 37 ill ,t PENNSYLVANIA POWER&LIGHT COMPANY STATEMENT OF CHANGES IN FINANCIAL POSITION 1972 1973 1974 1975 Thousands of Dollars Year Ended December 31, 1978 Twelve Months Ended September 30, 1977 (unaudited) SOURCE OF FUNDS Operations Net income (1974 includes$4,162 nonrecurring credit)..Charges (credits)against income not Involving working capital Depreciation ..Noncurrent deferred income taxes and Investment tax credits-net.......................... Allowance for funds used during construction.. Other.41,446 7,984 (14,647)220 92,924 48,837 11,282 (14,967)220 112,284 52,399 8,790 (20,732)520 128,456 58,540 15,701 (36,605)7,464 142,641 62,478 31,789 (45,192)4,669 165,855 66,390 42,338 (49,918)8,524 213,149$57,921$66,912$87,479$97,541$112,111$145,815 Outside Financing Common stock Preferred stock Preference stock.First mortgage bonds.Other long-term debt.Short-term debt-net increase.....Working Capital-decrease (a)Investments in Associated Companies-decrease..... Deposits from Allegheny Electric Cooperative ............ Other-net.Total Source of Funds.......................... APPLICATION OF FUNDS Construction Expenditures. Nuclear Fuel tn Pr'ocess.Allowance for Funds Used During Construction .........46,940 35,000 75,000 8,342 20,231 185,513 83 598$279,118 40,900 40,000 108,000 20,024 208.924 3,156 2,672$327,036 (14,647)204,107 (14,967)209,529$218,754$224,496 35,156 25,000 180,000 360 45,658 286,174 685 57,763 70,000 225,000 208 352,971 15,166$267,724 3,736 (20,732)250,728$342,496 2,793 (36,605)308,684$415,315$510,778 82,705 75,000 150,000 253 397.958 16,894 6,424$497,131$394,238 13,555 (45,192)362,601 84,994l150,000 196 235.190 78,849 4,351$531,539$365,737 16,464 (49,918)332,283 Securities Retired Preference stock..First mortgage bonds..Other long-term debt Short-term debt-net decrease...Dividends on Preferred, Preference and Common Stock Working Capital-tncrease (a).Acquisition of Hershey Electric Company....................... Investments in Associated Companie~ncrease.......... Other-net.Total Application of Funds........................ 15,000 10,057 25,057 43,330 6,624 10,041 56,631 66,672 50,037 798$279,118$327,036 18,632 18,632 58,897 82,753 4,305$415,315 93,000 112 11,879 104,991 70,686 23,990 2,427$510,778 8,000 3,054 13,618 24,672 86,694 15,309 7,855$497,131 4,000 28,500 248 41,820 74,568 97,203 13,056 7,855 6,574$531,539 Changes in Components of Working Capital (a)Cash, temporary cash investments and special funds....Accounts and notes receivabte. Fuel inventory. Recoverable fuel costs, less related deferred Income taxes.Accounts payable and accrued taxes............................. Dividends payable and interest accrued......................... Other-net Increase (Decrease).................................. $(468)5,261 3,498 (2,541)(4,231)5,105$6,624$10,247 6,745 (4,717)(10,006)(5,136)(289)$(3,156)$(3,792)22,896 45,002 16,747 (1,811)(6,494)10,205$82,753$(5,352)28,757 (3,568)738 (22,507)(6,346)(6,888)$(15,166)$123 16,394 6,567 2,125 (1,426)4,612)3,862)$15,309$(15)32,600 33,661 2,389 (40,281 (6,368)(8,930$13,056 (a)Excludes short-term debt, long-term debt due within one year and Allegheny deposits.See accompanying Notes to Financial Statements. 38 PENNSYLVANlA POlVER 85 LIGHT COMPANY STATEMENT OF EARNINGS REINVESTED 1972 Year Ended December 31, 1973 1974 1975 Thousands of Dollars 1976 Twelve Months Ended September 30, 1977 (Unaudited) BALANCE AT BEGINNING OF PERIOD............ ADD NET INCOME (1974 includes$4,162 nonrecurring credit).$125,647$140,238$157,113$185,695$212,550 57,921 66,912 87,479 97,541 112,111$225,752 145,815 Total.183568 ,207,150 244,592 283,236 324,661 371,557 DEDUCT Cash Dividends Declared Preferred stock (at specified annual rates)..Preference stock (at specified annual rates)..Common stock (per share-1972,$1.64;1973,$1.68;1974,$1.77;1975 and 1976,$1.80;twelve months ended September 30, 1977,$1.86)..Other (Note 6)6,433 8,093 28,804 7,551 9,640 32,846 9,393 10,263 39,241 9,393 15,116 46,177 13,128 20,240 53,326 16,323 19,963 60,917 6 Total BALANCE AT END OF PERIOD (Notes 7 and 9)43,330$140,238 50,037$157,113 58,897$185,695 70,686 86,694$212,550$237,967 97,209$274,358 See accompanying Notes to Financial Statements 39
PENNSYLVANIA POWER&LIGHT COMPANY NOTES TO FINANCIAL STATEMENTS (Information tor the Period Ended September 30, 1977 la unaudited) 1.
SUMMARY
OF ACCOUNTING POLICIES Accounting System~Accounting records are maintained in accordance with the Uniform System of Accounts prescribed by the Federal Energy Regulatory Commission (FERC)and adopted by the Pennsylvania Public Utility Commission (PUC).Reference is made to"BUSINESS-Regulation" for information regarding the transfer of the functions of the Federal Power Commission to FERC in accordance with the Department of Energy Organization Act.Principles of Consolidation The accounts of the Company and Hershey Electric Company, a wholly-owned electric distribution subsidiary acquired December 31, 1976, are consolidated in the accompanying financial statements as of the acquisition date.All significant intercompany transactions have been eliminated. The operations of Hershey Electric Company are not material compared to that of the Company.Reference is made to Note 13 to Financial Statements. Associated Companies Investments in unconsolidated subsidiaries (all wholly-owned) and in Safe Harbor Water Power Corporation (representing one-half of that company's voting securities) are recorded using the equity method of accounting. The Company's unconsolidated subsidiaries are engaged in coal mining operations, holding coal reserves and uranium mining claims, oil pipeline operations and real estate.The Company believes that its financial position and results of operations are best reflected without consolidation of these subsidiaries since they are not engaged in the business of generating and distributing electricity. If all the unconsolidated subsidiaries were considered in the aggregate as a single subsidiary, they would not constitute a"significant subsidiary" as that term is defined by the Securities and Exchange Commission. Utility Plant Additions to utility plant and replacements of units of property are capitalized at cost.Costs of depreciable property retired or replaced are removed from utility plant and such costs, plus removal costs, less salvage, are charged to accumulated depreciation. Costs of land retired or sold are removed from utility plant and any gains or losses are reflected on the Statement of Income.All expenditures for maintenance and repairs of property and the cost of replacement of items determined to be less than units of property are charged to operating expenses.40 PENNSYLVANIA POWER&LIGHT COMPANY NOTES TO FINANCIAL STATEMENTS -(Continued) Allowance for Funds Used During Construction As provided in the Uniform System of Accounts, the cost of funds used to finance construction work in progress is capitalized as part of construction cost.The components of Allowance for funds used during construction shown on the Statement of Income under Other Income and Deductions and Interest Charges are non-cash items equal to the amount so capitalized and serve to offset the actual cost of financing construction work in progress.Reference is made to Note (e)to the"STATEMENT OF INCOME".Depreciation For financial statement purposes, the straight-line method of depreciation Is used to accumulate an amount equal to the cost of utility plant and removal costs, less salvage, over the estimated useful lives of property.Reference is made to Note 5 to Financial Statements. Revenues Revenues are based on cycle billings rendered to certain customers monthly and others bi-monthly. The Company does not accrue revenues related to energy delivered but not billed.Fuel Costs Recoverable Under Fuel Adjustment Clauses The Company's tariffs filed with both the PUC and FERC include fuel adjustment clauses under which fuel costs varying from the levels allowed in approved rate schedules are reflected in customers'ills after the fuel costs are incurred.The charge to expense for fuel costs recoverable in the future through application of fuel adjustment clauses is deferred to the periods in which these costs are billed to customers. Reference is made to Notes (b)and (c)to the"STATEMENT OF INCOME" and to"RATE MATTERS" for further information regarding the fuel adjustment clauses and a PUC order proposing to replace the existing fuel adjustment clause with a levelized energy cost rate.Income Taxes The Company and its subsidiaries file a consolidated Federal income tax return.Income taxes.are allocated to the individual companies based on their respective taxable income or loss.Income taxes are allocated to Operating Expenses and Other Income and Deductions on the Statement of Income.Income tax credits recorded under Other Income and Deductions result principally from the tax deductions related to interest expense associated with financing construction work in progress.Deferred tax accounting is followed for items where similar treatment in rate determinations has been or is expected to be permitted by the PUC.The principal items are accelerated amortization of certified defense facilities and pollution control equipment, deduction of costs of removing retired depreciable property, that portion of tax depreciation arising from shortening depreciable lives by 20'lo under the class 41 PENNSYLVANIA POWER&LIGHT COMPANY NOTES TO FINANCIAL STATEMENTS -(Continued) life depreciation system, fuel costs recoverable under fuel adjustment clauses, the forced outage reserve and the cost of fuel consumed during the test period of new generating facilities. Tax reductions arising principally from the use of the declining balance depreciation method, guideline lives and certain income and expenses being treated differently for tax computation than for book purposes are accounted for under the flow-through method.Investment tax credits, which result in a reduction of Federal income taxes payable, are deferred and amortized over the average lives of the related property.The tax credits are generally equal to 10/o of (1)the cost of certain property placed in service and, in some instances, (2)partial payments of construction costs of other facilities. In 1976 the Company adopted an Employee Stock Ownership Plan (ESOP)which permits the Company to claim an additional 1/o investment tax credit.An amount equal to this additional credit is paid to the trustee for the ESOP to acquire Common Stock of the Company for employees. Reference is made to Note 10 to Financial Statements. Retirement Plan The Company has a Retirement Plan composed of two parts: (1)a non-contributory portion which provides benefits for all eligible active employees with the full cost absorbed by the Company, and (2)a voluntary portion In which contributions are made by both employees and the Company, but the full cost of past service and Plan improvements is borne by the Company.Approximately 95/o of eligible active employees are members of the voluntary portion of the Plan.Company contributions to the Plan include amounts required to fund current service costs and to amortize unfunded past service costs over periods of not more than 20 years.Reference is made to Note 11 to Financial Statements. Forced Outage Reserve~A self-insurance reserve is provided to cover the increased level of power costs which are experienced when any of the Company's major generating units are forced out of service due to damage caused by accident or other unforeseen insurable occurrences. Increased power costs resulting from purchasing or generating replacement power at higher costs or loss of interchange sales in excess of$0.5 million through 1975 and$1 million effective January 1, 1976 for each accident or occurrence are charged to the reserve.As to certain of the Company's large generating units, costs chargeable to the reserve are limited to$12.5 million since outside insurance is carried to cover costs in excess of that amount.The reserve ls established on the basis of historical experience and has been recognized in ratemaking procedures by the PUC.At December 31, 1976 and September 30, 1977 the reserve balance was$13.9 million and$13.8 million, respectively. 2.RATE FILINGS Reference is made to information appearing under"RATE MATTERS".3.FUEL COSTS RECOVERABLE UNDER FUEL ADJUSTMENT CLAUSES Reference is made to Notes (b)and (c)to the"STATEMENT OF INCOME".42 PENNSYLVANIA POWER&LIGHT COMPANY NOTES TO FINANCIAL STATEMENTS -(Continued) 4.COMPENSATING BALANCES AND SHORT-TERM DEBT Short-term debt of the Company consists of bank loans (generally borrowed for one year at the prime interest rate and prepayable at any time without penalty)and commercial paper notes (generally maturing within 30 to 60 days).In order to provide interim financing and back-up financing capability for commercial paper notes, the Company has lines of credit with various banks that are maintained by compensating bank balance requirements (not legally restricted as to withdrawal) or the payment of commitment fees.Information regarding such short-term debt and lines of credit is as follows (thousands of dollars): Short-term debt outstanding Weighted average short-term debt interest rate.............................. Maximum aggregate short-term debt outstanding at any month end (a).Average daily short-term debt outstanding (a)Aggregate amount.Weighted average interest rate (b).Lines of credit (c)Maintained by compensating bank balances........................... Maintained by payment of commitment fees........................... Average annual compensating bank balance requirement.............. Annual commitment fees..As of Oecember 31, 1979$60,012 4 7o/o As of September 30, 1977$91,460 6.2'lo$129,598 5 5o/o$100,188 5.4'lo$143,500$56,500$18,850$313$147,500$52,500$13,300$302$194,578$194,578 (a)During preceding twelve months.(b)Calculated by dividing short-term interest expense for the period by the average aggregate daily short-term debt outstanding during the period.(c)Use of these lines of credit was restricted at December 31, 1976 and September 30, 1977 to the extent of$4 million by short-term bank loans to certain companies involved in fuel supply operations. 5.DEPRECIATION Provisions for depreciation as a per cent of the average original cost of depreciable property have approximated 3.3/e for 1972, 3.4/o for 1973, 3.3/e for 1974 and 1975 and 3.2/o for 1976 and the twelve months ended September 30, 1977.The lower composite depreciation rate for 1976 and the twelve months ended September 30, 1977 reflects changes made as of January 1, 1976 in estimated useful lives of certain facilities in accordance with the PUC's August 1976 rate order.No provision is being made for depreciation or amortization of intangibles of approximately $1.3 million included in Utility Plant.43 PENNSYLVANIA POWER&LIGHT COMPANY NOTES TO FINANCIAL STATEMENTS -(Continued) 6.CAPITAL STOCK Common Stock-no par consists of 50,000,000 authorized shares of which 30,803,318 shares were outstanding at December 31, 1976 and 34,599,105 shares were outstanding at September 30, 1977.Common Stock of$575,458,000 at September 30, 1977 includes$640,000 cash installments received under a dividend reinvestment plan as consideration for 27,249 shares of Common Stock which were issued in October 1977.Preferred Stock ($100 par, cumulative) and Preference Stock (no par, cumulative) consisted of the following (thousands of dollars): Shares Amount Redemption Price Final December 31, September 30, September 30, Authorized Outstanding 1976 1977 1977 Price Year Preferred 4go/o............ Series.......... 3.35'/o......4.40'/o~,~~..4.60'/o......7.40'/o......8.60'/o......9 00'/o......9.24o/o......Total..... 629,936 5,000,000 530,189 41,783 228,773 63,000 400,000 222,370 77,630 750,000 4,178 22,878 6,300 40,000 22,237 7,763 75,000 4,178 22,878 6,300 40,000 22,237 7,763 75,000$231,375$231,375$53,019$53,019 103.50 102.00 103.00 112.00 110.00 110.00 115.00 103.50 102.00 103.00 100.00 1998 101.00 1990 101.00 1990 101.00 1991$110.00$110.00 Preference ......5,000,000$8.00........... $8.40........... $8.70........... $9.25........... $11.00......... $13.00......... Total..... 350,000 400,000 400,000 160,000 500,000 250,000$35,000 40,000 40,000 20,000 50,000 25,000$35,000 40,000 40,000 16,000 50,000 25,000$210,000$206,000-$105.50 110.00 109.00 109.90 111.70$101.00 1987 101.00 1986 101.00 1984 100.00 1981 100.00 1995 100.00 1994 The Preference Stock may not be refunded through certain refunding operations prior to the following dates:$8.70 series, 7/1/78;$13.00 series, 10/1/84;$11.00 series, 7/1/85.Otherwise, the Preferred and Preference Stock may be redeemed, in whole or in part, at the option of the Company at redemption prices ranging between the September 30, 1977 price and the final price shown above, with the exception that the Preference Stock,$9.25 Series, is not redeemable by the Company other than through the sinking fund requirement or voluntary liquidation. 44 PENNSYLVANIA POWER&LIGHT COMPANY NOTES TO FINANCIAL STATEMENTS -(Continued) The liquidation prices of all issues of Preferred Stock, which are payable on a parity with each other and in preference to the Preference Stock and the Common Stock, are as follows: involuntary liquidation $100 a share;voluntary liquidation $100 a share for the 4'~/o Preferred Stock and the redemption price in effect at the time for the Series Preferred Stock;plus in each case any unpaid dividends. The liquidation prices of Preference Stock, which are payable after satisfaction of the preferential rights of Preferred Stock and in preference to the Common Stock, are as follows: involuntary liquidation $100 a share;voluntary liquidation the redemption price in effect at the time, with the exception that the voluntary liquidation price of the Preference Stock,$9.25 Series, is$110 a share;plus in each case any unpaid dividends. Each of the following series of stock contains sinking fund provisions designed to retire the series at a redemption price of$100 a share plus accrued and unpaid dividends to the date of such redemption: Preferred Stock 7 40/o Series.9.24/s Series (a)................~....... Preference Stock$9.25 Series (b)......................... $11.00 Series (a)....................... $13.00 Series (a)....................... Shares to be Redeemed Annually 16,000 30,000 40,000 25,000 12,500 Redemption Period July 1, 1979-July 1, 2003 July 1, 1981-July 1, 2005 Jan.1, 1977-Jan.1, 1981 July 1, 1981-July 1, 2000 Oct.1, 1980-Oct.1, 1999 (a)The Company has the right to redeem on each sinking fund redemption date additional shares up to the number of shares of this Series required to be redeemed annually.(b)In January 1977, the Company redeemed 40,000 shares of the Preference Stock,$9.25 Series.Capital stock expense represents commissions and expenses incurred in connection with the issuance and sale of capital stock.Of the capital stock expense balance at September 30, 1977, approximately $3.0 million applicable to the preferred and preference stock series which are to be redeemed through sinking fund provisions will be amortized to Earnings Reinvested as the respective series of stock are redeemed.No amortization plan is in effect for capital stock expense applicable to other issues of capital stock.45 N q PENNSYLVANIA POWER&LIGHT COMPANY July 1972.......October 1972.......................... August 1973...................... November 1973.July 1 974 e~~~~~~~~~~~~~~~~~~~~~~~~October 1974 April 1975.August 1975.September 1975..1975..5 595 67,935 75,000 April 1976.June 1976.October 1976 1976 14,268 67,040 NOTES TO FINANCIAL STATEMENTS -(Continued) Sales of capital stock since January 1, 1972 are as follows (shares and amounts in thousands): Class Shares Amount Preference,$8.00 Series 350$35,000 Common 2,000 46,940 7.40/0 Series Preferred 400 40,000 Common 2,000 40,900 Common 2,200 35,156 Preference,$13.00 Series 250 25,000 Common 3,000 51,450 Preference,$11.00 Series 500 50,000 Preference,$9.25 Series 200 20,000 Common-dividend reinvestment and employee monthly investment plans 301 Common 3,500 9.24/o Series Preferred 750 Common-employee stock ownership plan 35 755 Common-dividend reinvestment plan 716 Common 3,200 Common-dividend reinvestment plan 596 13,234 On October 14, 1977, the Company issued$2,528,000 (107,573 shares)of Common Stock to the Trustee of the Company's Employee Stock Ownership Plan.On October 19, 1977, the Company sold 500,000 shares ($50 million)of 8/o Series Preferred Stock ($100 par)to three institutional investors. The terms of the 8/o Series Preferred Stock include a sinking fund provision designed to retire 25,000 shares ($2.5 million)of the stock annually during the years 1983 through 2002.7.DIVIDEND RESTRICTIONS The Company's charter and mortgage indentures restrict the payment of cash dividends on Common Stock under certain conditions. Under the charter provisions, which are the more limiting, no restrictions are effective on the payment of such dividends out of current earnings.The amount of earnings reinvested free of restrictions under the charter was$193.4 million at December 31, 1976 and$269.5 million at September 30, 1977, after giving effect to (1)the issue of$2,528,000 of Common Stock in October 1977, (2)the sale of$50,000,000 of 8/o Series Preferred Stock in October 1977 and (3)the sale of the Bonds.46 PENNSYLVANIA POWER 8a LIGHT COMPANY NOTES TO FINANClAL STATEMENTS -(Continued) 8.LONG-TERM DEBT Long-term debt outstanding consisted of the following (thousands of dollars): December 31, September 30, 1978 1977$1,165,500$1,145,000 First mortgage bonds..Notes: 7'/o due 1980.Other.Unamortized (discount) and premium-net....Total..Less amount due within one year.................... Total long-term debt.20,000 550 (4,056)1,181,994 20,675$1,161,319 20,000 430 (3,898)1,161,532 3,676$1,157,856 First mortgage bonds consisted of the following series at December 31, 1976 and September 30, 1977 (thousands of dollars): Series 2s/io/o 3Vso/o 2s/4o/o 3%o/o 1 0'!s'/o 3V2o/o 3%o/o 4%o/o 4%o/o 5%o/o 6s/4o/o Outstanding Due 1978 1977 1977$20,000 1978 3,000$3,000'1980 37,000 37,000 1982 7,500 7,500 1982 100,000 100,000 1983 25,000 25,000 1985 25,000 25,000 1991 30,000 30,000 1994 30,000 30,000 1996 30,000 30,000 1997 30,000 30,000 Series Due 7 o/o 1999 8t/so/o 1999 9 o/o 2000 7/4/o 2001 7%o/o 2002 7Vso/o 2003 9t/4o/o 2004 974o/o 2005 9/4'/o 2005 8'/4'lo 2006 (a)1978$40,000 40,000 50,000 60,000 75,000 80,000 80,000 125,000 100,000 150,000 28,000 1977$40,000 40,000 50,000 60,000 75,000 80,000 80,000 125,000 100,000 150,000 27,500 Outstanding (a)Pollution Control Series A due 1977-2003, 4Vs/o to 5%/o.The amount of long-term debt maturing in each calendar year through 1982 is (thousands of dollars): 1977 1978 1979 1980 1981 1982$20,762$3,686$574$57,568$553$108,006 The maximum aggregate annual sinking fund requirements through 1982 of the outstanding. mortgage bonds are (thousands of dollars): 1977 1978 1979 1980 1981 1982$1,575$2,740.$3,265$3,050$3,050$4,450 Lesser requirements will apply for the years 1978-1982 if long-term debt is 50/o or less of net property.The Company has the right to meet all of these requirements with property additions or bonds.Substantially all utility plant is subject to the liens of the Company's mortgages. 47 lf E g/ PENNSYLVANIA POWER&LIGHT COMPANY NOTES TO FINANCIAL STATEMENTS -(Continued) 9.HYDROELECTRIC PROJECTS Reference is made to the information appearing under"BUSINESS-Hydroelectric Projects". 10.TAXES Income tax expense is recorded on the Statement of Income as follows (thousands of dollars): 1972 1973 1974 1975 1976 1977(a)Operating Expenses Provision Federal;........ State............ $12,582 5,520$16,454 6,207\$12,554$22,547 3,858 8,221$656 6,766$22,030 13,880 18,102 22,661 16,412 30,768 7,422 35,910 Deferred Federal................~.... 2,176 State........................ 653 2,829 4,557 1,180 15,991 3,271 5,737 19,262 2,952 590 i 3,542 7,185 1,560 8,976 1,952 8,745 10,928 Investment tax credits Deferred................ ~..Amortization of defer-ments................... 7,349 7,233 4,753 14,465 29,496 40,887 (2,194)(1,688)(1,216)(1,477)(1,835)(2,380)5,155 5,545 3,537 12,988 27,661 38,507 26,086 33,943 39,211 47,298 43,828 85,345 Other Income and Deductions Reduction in provision Federal..................... State........................ Deferred investment tax credits......................... (263)(71)(46)(45)(4,156)(920)(9,164)(2,037)(11,859)(2,598)(11,288)(2,619)(672)(334)Total income tax expense......... $25,752 Federal and State Income Taxes Payable (Credit)........$17,768 (91)(5,076)(11,201)(14,457)(14,579)$33,852$34,135(b)$36,097$29,371$70,766$22,570$11,336$19,567$(7,035)$22,003 (a)Twelve months ended September 30.(b)Excludes$4,831,000 deferred income taxes related to Nonrecurring Credit.Investment tax credits eliminated the Company's Federal income tax liability for 1976 and resulted in a credit to the provision for income taxes of approximately $5.9 million related to a carry back of investment tax credits to prior years.Total income tax expense for 1976 has been credited by approximately $5.0 million representing adjustments of prior years'ax liabilities. The principal adjustment, related to adoption of the modified half-year convention method of computing tax 48 PENNSYLVANIA POWER&LIGHT COMPANY NOTES TO FINANClAL STATEMENTS -(Continued) $3,715$4,540 14,009(b)829 (3,726)1,538 1,899$19,262$3,542$6,425 2,688 (189)2,004$6,463 2,391 (1,041)932$8,745 2,680$5,737 11279$10,928$2,829 depreciation in the Company's 1975 Federal income tax return, reduced total income tax expense by approximately $2.8 million.Deferred income taxes result from the following items (thousands of dollars): 1972 1973 1974 1975 1976 1977(a)Portion of tax depreciation under the class life depreciation system.$1,550$3,057 Recoverable fuel costs.................... Forced outage reserve.................... Other (a)Twelve months ended September 30.(b)Excludes$4,831,000 deferred income taxes related to Nonrecurring Credit.The combined Federal and State corporate income tax rates for the Company, after giving effect to the deductibility of the State income tax expense, ranged from 52.9%to 54.0%during the periods shown on the Statement of Income.Income tax expense differed from the amount computed by applying the combined Federal and State corporate income tax rates to pre-tax income as follows (thousands of dollars): 1972 1973 1974 1975 1976 1977(a)Net income..$57,921$66,912$87,479$97,541$112,111$145,815 Income tax expense.............................. 25,752 33,852 38,966 36,097 29,371 70,766 Pre-tax income..~..$83,673$100,764$126,445$133,638$141,482$216,581 Indicated income tax expense at com-bined tax rates.$45,166$54,131$66,940$70,748$74,901$114,658 Reductions due to: Allowance for funds used during construction......... 7,906 8,041 10,976 19,379 23,925 26,426 Tax deduction in excess of book expense: Depreciation............................ 6,145 7,531 8,799 9,131 15,067 13,271 Tax and pension cost.............. 2,554 2,687 2,491 2,998 3,354 3,623 Other-net.2,809 2,020 5,708 3,143 3,184 572 Total.19,414 20,279 27,974 34,651 45,530 43,892 Income taxexpense..........................~... $25,752$33,852$38,966$36,097$29,371$70,766 Effective income tax rates...................... 30.8%33.6%30.8%27.0%20.8%32.7%(a)Twelve months ended September 30.49 PENNSYLVANIA POWER&LIGHT COMPANY NOTES TO FINANCIAL STATEMENTS -(Continued) l Taxes other than income taxes charged to 1972 State gross receipts............................. $15,194 State capital stock.4,428 State utility real estate.......................... 3,611 Social security and other................... ~.2,425 Total$25,658 operating expense were (thousands of dollars): 1973 1974 1975 197B 1977(a)$16,867$20,564$23,756$28,320$32,415 5,403 6,263 7,284 8,860 9,609 4,687 5,258 5,980 8,052 10,700 3,048 3,486 3,649 4,294 5,250$30,005$35,571$40,669$49,526$57,974 (a)Twelve months ended September 30.11.RETIREMENT PLAN Obligations of the Company's Retirement Plan are currently funded through a Trust Fund.At June 30, 1976, the date of the Plan's most recent actuarial examination, the Fund's assets at market were$92.3 million and at cost were$94.5 million.Pension costs were (thousands of dollars): 1972 1973 1974 1975 197B 1977(a)$6,733$6,761$6,661$8,830$9,755$10,936 (a)Twelve months ended September 30.Based on the Fund's assets at cost, at June 30, 1976 the actuarially computed unfunded past service cost was$28.6 million.As of the same date vested benefits exceeded the cost basis of the Fund's assets by$20.0 million.Plan amendments effective as of July 1, 1976, subject to Internal Revenue Service approvai, provide for increased benefits, reduced employee contributions and certain other minor changes to comply with the Employee Retirement Income Security Act of 1974.These amendments increased the unfunded past service cost and vested benefits by about$3.6 million, and the Company's annual cost by about$1.0 million commencing in 1977, including amortization of the increased past service cost over 20 years.12.RENTALS AND NONCANCELLABLE LEASE COMMITMENTS Rentals were charged to operating expense in the following amounts (thousands of dollars): 1972 1973 1974 1975 1979 1977(a)$6,279$7,515$8,911$9,477$10,502$11,002 (a)Twelve months ended September 30.50
PENNSYLVANIA POWER&LIGHT COMPANY NOTES TO FINANCIAL STATEMENTS -(Continued) At September 30, 1977, the Company was committed for minimum rentals totaling$113.2 million under noncancellable leases expiring at various dates to 1997.The minimum rentals are as follows~(thousands of dollars): After 1977 1978 1979 1989 1981 1982-1988 1987-1991 1992-1998 1998$6,586$8,083$7,754$7,554$7,208$28,188$24,681$21,156$2,039 These minimum rental commitments are applicable to the following categories of property: oil storage facilities,$54.7 million;railroad coal cars,$27.0 million;combustion turbine generating equipment,$16.6 million;computer equipment,$11.1 million;and construction cranes,$3.8 million.Generally the leases contain renewal options and obligate the Company to pay maintenance, insurance and other related costs.The present value of future minimum lease commitments at September 30, 1977 applicable to noncapitalized financing leases (as defined by the Securities and Exchange Commission) was less than 5/e of the Company's capitalization, and the impact on net income for the years 1975, 1976 and the twelve months ended September 30, 1977 if all noncapitalized financing leases were capitalized and amortized on a straight-line basis with interest accrued on the basis of the outstanding lease liability, is less than 3/e of the average net income of the latest three years.13.ACQUISITION On December 31, 1976 the Company acquired all of the outstanding capital stock of Hershey Electric Company (HEC), an electric distribution company.The acquisition cost of the capital stock and the repayment of all debt owed by HEC approximated $7.9 million.14.SALE OF 100/o OF SUSQUEHANNA PLANT Reference is made to information appearing under"CONSTRUCTION PROGRAM" regarding agreements between the Company and Allegheny Electric Cooperative, Inc.(Allegheny) for the sale of a 10/e undivided ownership interest in the Company's Susquehanna Nuclear Units and deposits received from Allegheny (amounting to$78.8 million at September 30, 1977)which are subject to refund if necessary regulatory approvals of the sale are not received by March 16, 1978.15.COMMITMENTS AND CONTINGENT LIABILITIES The Company estimates that about$1.51 billion will be required to complete construction projects in progress at the end of 1976.Of this amount, approximately $1.15 billion is related to completion of the Company's two nuclear generating units at Susquehanna. Reference is made to additional information appearing under"CONSTRUCTION PROGRAM","BUSINESS-Environmental Matters" and"BUSINESS-Fuel Supply (Oil)and (Nuclear)". 51 PENNSYLVANIA POWER&LIGHT COMPANY NOTES TO FINANCIAL STATEMENTS -(Continued) In connection with providing for its future bituminous coal supply, the Company at September 30, 1977 had guaranteed capital and other obligations of certain coal suppliers (including owned coal companies) aggregating $166.5 million.See"BUSINESS-Fuel Supply (Coal)".16.
SUMMARY
OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Quarterly earnings can be influenced by weather, timing of rate relief, performance of gene'rating stations, sales to other utilities and other factors such as those described under"MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE STATEMENT OF INCOME".The following is summary quarterly data for the years 1975 and 1976 and the first three quarters of 1977 (thousands of dollars): Earnings Per Share Of Common Stock(a)Earnings Applicable To Common Stock Operating Income Net Income$29,833 26,742 30,168 34,226$18,224 16,677 19,461 18,670 0.67 0.46 0.70 0.85 166,269 149,281~.....149,580 179,017 25,189 21,281 30,423 35,218 auarter Operating Ended Revenues 1975 March 31.$150,106$23,673$0.78, June 30.128,984 22,248 0.65 September 30.......................... 125,917 25,542 0.74 December 31........................... 139,122 26,078 0.70 1976 March 31.34,360 17,781 June 30..28,006 13,603.September 30.................... 35,241 21,282 December 31(b)................. 40,727 26,077 1977 March 31 208,894 47,017 40,114 31,066 1.00 June 30..173,299 43,912 35,547 26,498 0.79 September 30(c)...................... 174,067 48,913 34,936 25,888 0.75 (a)Quarterly earnings per share are based on the average number of shares outstanding during the quarter.(b)Results for the fourth quarter of 1976 include a reduction in income tax expense of$2.4 million due to increased tax depreciation applicable to Martins Creek Unit No.4 which began test operation December 11, 1976 and a$2.1 million charge to expense (net of income taxes)to adjust the amortization of deferred fuel costs for the years 1970-1975 to the actual fuel adjustment revenues billed during those years.(c)Net income for the third quarter of 1977 includes a$6.6 million (net of income taxes)loss ($.20 per share)of a subsidiary company.For additional information see"BUSINESS-Fuel Supply (Coal)". PENNSYLVANIA POWER&LIGHT COMPANY NOTES TO FINANCIAL STATEMENTS -(Continued) 17.REPLACEMENT COST DATA (UNAUDITED) In compliance with the rules of the Securities and Exchange Commission (SEC), the Company has estimated certain replacement cost information for utility plant in service and depreciation. The Company has not included replacement cost data for-materials and supplies inventory since the amount of the inventory is not significant. Replacement cost data relating to fuel inventories have not been included since changes in cost levels are recovered through the operation of fuel adjustment clauses.Although the replacement cost data disclosed herein have, in the Company's opinion, been reasonably estimated in accordance with rules and interpretations of such rules published by the SEC, the Company believes that investors should be aware of the imprecision and limitations of this information and of the many subjective judgments required In the replacement cost estimation. The replacement cost information is based on the hypothetical assumption that the Company would replace its entire productive capacity at December 31, 1976, whether or not the funds to do so were available or such"instant" replacement were physically or legally possible.This assumption requires that the Company contemplate actions at December 31, 1976 that ordinarily would not be addressed all at one time.Accordingly, the information should not be interpreted to indicate that the Company actually has present plans to replace its productive capacity or that actual replacement would or could take place in the manner assumed in estimating the information. In the normal course of business, the Company will replace its productive capacity over an extended period of time.Decisions concerning replacement will be made In light of the economics, availability of funds, fuel availability, equipment availability, customer demand and regulatory requirements existing when such determinations are made and could differ substantially from the assumptions on which the data included herein are based.The replacement cost data presented are not necessarily representative of the"current market value" of existing facilities or of the"fair value" of utility plant as that term is used in rate proceedings before the PUC.The replacement cost information presented does not reflect all of the effects of inflation on the Company's current costs of operating the business.The Company has not attempted to quantify the total impact of inflation, environmental and other governmental regulations (except as set forth below)and changes in other economic factors on the business because of the many unresolved conceptual problems and ratemaking considerations involved in doing so.Accordingly, it is the Company's view that the replacement cost data presented herein cannot be used alone to determine the total effect of inflation on reported net income.53
PENNSYLVANIA POWER&LIGHT COMPANY NOTES TO FINANCIAL STATEMENTS-(Concluded) The computed replacement cost of the Company's utility plant in service and related depreciation expense with comparative historical cost data are as follows (millions of dollars): Computed Replacement Cost Utility plant in service at December 31, 1976 Subject to replacement cost determination ........Land, plant held for future use and intangibles at original cost.Total plant in service..Less accumulated depreciation Net plant in service............................ Depreciation expense for the year 1976.................... $1,986 112 2,098 459$1,639$62$4,312 112 4,424 1,033$3,391$123 The replacement cost of coal-fired and oil-fired steam station capability was determined by trending the construction cost of the most recently installed units (800 mw capability range)and computing a replacement cost per kw capability of the units.This cost per kw was applied to the Company's respective coal-fired and oil-fired steam station capability to determine the gross replacement cost of such facilities. The original installed cost of hydroelectric, other power production, transmission, distribution, and other facilities was trended to determine replacement cost.The trend indices utilized were determined by the Company and are believed to be more representative of the changes in construction costs experienced by the Company than published indices.~The replacement cost of coal-fired steam stations was based on the assumption that such facilities would be replaced with bituminous coal-fired units.Accordingly, based on current technology, the gross replacement cost of utility plant at December 31, 1976 includes approximately $500 million which the Company estimates would have to be expended to enable such facilities to meet particulate and sulfur dioxide emission regulations existing at December 31, 1976.The accumulated depreciation related to the replacement cost of productive capacity was determined by applying the same percentage relationship that existed between gross utility plant and accumulated depreciation by functional groups on a historical basis at December 31, 1976 to the current replacement cost of the productive capacity.Replacement cost depreciation expense for the year 1976 was determined on a straight-line basis by applying the functional class depreciation accrual rates currently in use to the respective functional class average replacement cost amounts.Such amount has been calculated in accordance with SEC instructions and does not represent an actual expense.Within the context of utility ratemaking procedures, the purpose of book depreciation expense, as shown on the Statement of Income, ls to provide recovery of invested capital over the life of the related facilities, and is not intended to provide a fund equal to the amount necessary to replace such facilities at the cost level existing at the time of replacement. 54 PURCHASERS The Purchasers named below have severally agreed to purchase from the Company the following respective principal amounts of Bonds.Purchaser Principal Amount Purchaser Principal Amount Total.$100,000,000 55 HRVVVORS'. '" PBASYLVAMA '-'-~PENNSYLVANIA POWER 6 UGHT COMPANY SERVICE AREA PKO SBtiPVAIRS W.VRt WSIlf~A4StACK t 4 scaaanw*4 wsx~hl.p~IlsvsN hISR t;'t h am svaas ,,".sssssvowts ~s NkSStSSVSS h~g4 Nsswwv,'+-t t PENNSYI.VANA skNcsssss 8AvlshtKsI ~.GENERATING STATIONS V I' PART II.INFORMATION NOT REQUIRED IN PROSPECTUS. Item 13.Other Expenses of Issuance and Distribution of the Bonds.Securities and Exchange Commission registration fee............................ Printing and engraving..Fees and expenses of Trustee, including counsel and authentication fees................ ~................ Legal fees.Accounting fees..Postage.................................................................................................... Rating agency fees.Blue Sky fees and expenses.Recording fees Miscellaneous.. Total$20,400 65;000 30,000 27,500 5,000 20,000 22,000 4,500 2,500 3,100$200,000 All of the above except the Securities and Exchange Commission registration fee are estimated. Item 14.Relationship with Registrant of Experts named in Statement. Reference is made to the captions"Experts" and"Legal Opinions" in the Prospectus. Item 15.Indemnification of Directors and Officers.Article VII of the By-Laws of the Company reads as follows: "Indemnification of Directors, Officers, Etc.SzcrtoN 7.01.Directors and Ojgcers;Third Party Actions.The corporation shall indemnify any director or officer of the corporation who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was an authorized representative of the corporation (which, for the purposes of this Article, shall mean a director, officer, employee or agent of the corporation, or a person who is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise) against expenses (including attorneys'ees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful.The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in, or not opposed to, the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful.SEGTIoN 7.02.Directors and Ojfieers;Derivative Actions.The corporation shall indemnify any director or officer of thc corporation who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was an authorized representative of the corporation, against expcnscs (including attorneys'ees) actually and reasonably incurred by him in'onnection with the defense or settlement of such action or suit if he acted in good faith and in a gt 4 manner he reasonably believed to be in, or not opposed to, the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the corporation unless and only to the extent that the court of common pleas of the county in which the registered office of the corporation is located or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the court of common pleas or such other court shall deem proper.SECTIoN 7.03.Employees and Agents.To the extent that an authorized representative of the corporation who neither was nor is a director or officer of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 7.01 and 7.02 of this Article or in defense of any claim, issue or matter therein, he shall be indemnified by the corporation against expenses (including attorneys'ees) actually and reasonably incurred by him in connection therewith. Such an authorized representative may, at the discretion of the corporation, be indemnified by the corporation in any other circumstances to any extent if the corporation would be required by Sections 7.01 or 7.02 of this Article to indemnify such person in such circumstances to such extent if he were or had been a director or officer of the corporation. SEGTIoN 7.04.Procedure for Egecring Indemnification. Indemnification under Sections 7.01, 7.02 or 7.03 of this'Article shall be made when ordered by court (in which case the expenses, including attorneys'ees, of the authorized representative in enforcing such right of indemnification shall be added to and be included in the final judgment against the corporation) and may be made in a specific case upon a determination that indemnification of the authorized representative is required or proper in the circumstances because he has met the applicable standard of conduct set forth in Sections 7.01 or 7.02 of this Article.Such determination shall be made: (1)By the board of directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (2)If such a quorum is not obtainable, or, even if obtainable a majority vote of a quorum of disinterested directors so direct, by independent legal counsel in a written opinion, or (3)By the shareholders. SacTtoN 7.05.Advancing Expenses.Expenses (including attorneys'ees) incurred in defending a civil or criminal action, suit or proceeding shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding, upon receipt of an undertaking by or on behalf of a director or officer to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the corporation as required in this Article or as authorized by law and may be paid by the corporation in advance on behalf of any other authorized representative when authorized by the board of directors upon receipt of a similar undertaking. SEGTIQN 7.06.Scope of Article.Each person who shall act as an authorized representative of the corporation, shall be deemed to be doing so in reliance upon such rights of indemnification as are provided in this Article.The indemnification provided by this Article shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any agreement, vote of shareholders or disinterested directors, statute or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office or position, and shall continue as to a person who has ceased to be an authorized representative of the corporation and shall inure to the benefit of the heirs, executors and administrators of such a person." Directors and officers of the Company may also be indemnified in certain circumstances pursuant to the statutory provisions of general application contained in the Pennsylvania Business Corporation Law. ]t Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforc'cable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.Reference is also made to the Form of Bid, including Terms of Purchase, filed as Exhibit 1(b)hereto, which contains provisions for indemnification of the Company and its directors and officers by the several Purchasers. against certain civil liabilities for information furnished by the Purchasers.. The Company presently has an insurance policy which, among other things, includes liability insurance coverage for officers and directors, with a$20,000 deductible clause, under which officers and directors are covered against any"loss" by reason of payment of damages, judgments, settlements and costs, as well as charges and expenses incurred in the defense of actions, suits or proceedings."Loss" is specifically defined to exclude fines and penalties,'s well as matters deemed uninsurable under the law pursuant to which the insurance policy shall be construed. The policy also contains other specific exclusions, including illegally obtained personal profit or advantage, and dishonesty. The policy also provides for reimbursement to the Company for loss incurred by having indemnified officers or directors as authorized by state statute, company by-laws, or any other agreement. Item 16.Treatment of Proceedsfrom Stock to bc Registered. Inapplicable. Item 17.Other Documents Filed as a Part of rhe Registration Srafement.(a)Statements of eligibility and qualification of persons designated to act as trustee under an indenture to be qualified under the Trust Indenture Act of 1939.Statement on Form T-1 of Morgan Guaranty Trust Company of New York.(b)Exhibits.Incorporation by ReferenceExhibit No.1(a)1(b)l(c)2(a)-1-Public Invitation for Bids together with State-ment of Terms&, Conditions relating to Bids-Form of Bid, including Terms of Purchase-Form of Agreement Among Purchasers (To be filed by Post-Effective Amendment) -Form of First Mortgage Bond, due 2007 Previous Filing Previous Exhibit Designation 2(a)-2-Copy of Restated Articles of Incorporation, as amended I Y g~l1 Incorporation by Reference Exhibit No.2(a)-3 2(a)-4 2(a)-5-Copy of By-laws-Mortgage and Deed of Trust, dated as of October I, 1945, between the Company and Guaranty Trust Company of New York (now Morgan Guaranty Trust Company of New York), as Trustee-Supplement, dated as of July I, 1947, to said Mortgage and Deed of Trust Previous Filing Registration Statement (No.2-58290)Registration Statement (No.2;5872)Previous Exhibit Deslgnat ton 2(a)-3 7(c)2(a)-6-Supplement, dated as of December I, 1948, to said Mortgage and Deed of Trust 2(a)-7-Supplement, dated as of February I, 1950, to said Mortgage and Deed of Trust'2(a)-8-Supplement, dated as of March I, 1953, to said Mortgage and Deed of Trust.2(a)-9'2(a)-10-Supplement, dated July I, 1954, to said Mort-gage and Deed of Trust-Supplement, dated as of August I, 1955, to said Mortgage and Deed of Trust~Registration Statement (No.2-19255)2(b)-5'2(a)-11 2(a)-12 2(a)-13-Supplement, dated as of December I, 1961, to said Mortgage and Deed of Trust-Supplement, dated as of March I, 1964, to said Mortgage and Deed of Trust-Supplement, dated as of June I, 1966, to said Mortgage and Deed of Trust Registration Statement (No.2-19255)2(b)-7 2(a)-14-Supplement, dated as of November I, 1967, to said Mortgage and Deed of Trust 2(a)-15-Supplement, dated as of December I, 1967, to said Mortgage and Deed of Trust 2(a)-16-Supplement, dated as of January I, 1969, to said Mortgage and Deed of Trust 2(a)-17-Supplement, dated as of June I, 1969, to said Mortgage and Deed of Trust 2(a)-18-Supplement, dated as of March I, 1970, to said Mortgage and Deed of Trust 2(a)-19-Supplement, dated as of February I, 1971, to said Mortgage and Deed of Trust 2(a)-20-Supplement, dated as of February I, 1972, to said Mortgage and Deed of Trust w~l ll N lt y'l*ep f 1 1 x k Incorporation by Reference Exhibit No.2(a)-21-Supplement, dated as of January 1, 1973, to said Mortgage and Deed of Trust Previous Filing Previous Exhibit Designation 2(a)-22 l-Supplement, dated as of May 1, 1973, to said Mortgage and Deed of Trust 2(a)-23-Supplement, dated as of April 1, 1974, to said Mortgage.and Deed of Trust 2(a)-24-Supplement, dated as of October 1, 1974, to said Mortgage and Deed of Trust 2(a)-25-Supplement, dated as of May 1, 1975, to said Mortgage and Deed of Trust 2(a)-26 2(a)-27 2(a)-28 2(a)-29'2(a)-30,'2(a)-31 0(a)-32 2(a)-33-Supplement, dated as of November 1, 1975, to said Mortgage and Deed of Trust-Supplement, dated as of December 1, 1976, to said Mortgage and Deed of Trust-Proposed Supplement, to be dated as of December 1, 1977, to said Mortgage and Deed of Trust-Mortgage and Deed of Trust, dated as of.February 15, 1937, between The Scranton Elec-tric Company (to which company the Company is successor by merger)and Chemical Bank&Trust Company (now Chemical Bank)and Howard B.Smith (P.J.Gilkeson, successor), as Trustees-Supplement, dated as of November 1, 1946, to said Mortgage and Deed of Trust-Supplement, dated as of April 1, 1948, to said Mortgage and Deed of Trust-Supplement, dated as of May 15, 1952, to said Mortgage and Deed of Trust-Supplement, dated as of September 1, 1952, to said Mortgage'and Deed of Trust Registration Statement (No.2-54831)Registration Statement (No.2-57633)Registration Statement (No.2-6289)Form 1-MD, Registration Statement (No.2-6289)2(a)-26 2(a)-26 D B-1 2(a)-34-Supplement, dated as of January 31, 1956, to said Mortgage and Deed of Trust 2(a)-35 2(a)-36 2(a)-37-Supplement, dated January 31, 1956, to said Mortgage and Deed of Trust-Instrument providing for resignation of Individ-ual Trustee and appointment of successor Indi-vidual Trustee under said Mortgage and Deed of Trust-Instrument providing for resignation of Individ-ual Trustee and appointment of successor Indi-vidual Trustee under said Mortgage and Deed of Trust Registration Statement (No.2-19255)2(d)-6 Incorporation by Reference Exhibit No.2(a)-38 2(a)-39 2(a)-40 2(a)-41 2(a)-42 3(a)3(b)3(c)4(a)4(b)S(a)5(b)5(c)5(c)-1'5(c)-2 5(d)-Instrument providing for resignation of Individ-ual Trustee and appointment of successor Indi-vidual Trustee under said Mortgage and Deed of Trust-Loan Agreement dated February 9, 1973, be-tween the Company and The Chase Manhattan Bank, N.A.-Preferred Stock Purchase Agreement, dated July 11, 1973, between the Company and The Prudential Insurance Company of America-Preference Stock Purchase Agreement, dated September 22, 1975, between the Company and Alco Standard Corporation -Composite Conformed Copy of Preferred Stock Purchase Agreement, dated October 11, 1977, between the Company and the purchasers named therein-Opinion of Edward M.Nagel, Esq., with respect'o legality of securities being registered here-under-Opinion of Messrs.Reid&Priest with respect to legality of securities being registered hereunder-Consent of Paul Weir Company Incorporated -Article VII of the Company's By-Laws, relating to indemnification of directors and officers, is set forth in Item 15, to which reference is hereby made-Copy of Memorandum of Excess Liability In-surance, dated December 31, 1972, Covering Excess Public Liability&Property Damage, including Errors and Omissions, Employee Ben-efits and Directors and Officers Liabthty-Copy of Coal Sales Agreement, dated January 1, 1972, between the Company and Greenwich Collieries Company-Copy of Interconnection Agreement, dated February 23, 1965, between Public Service Electric&Gas Company and the Company-Copy of Interconnection Agreement, dated February 19, 1965, between Philadelphia Elec-tric Company and the Company-Copy of Supplemen'tal Agreement, dated Jan-uary 27, 1967, to said Interconnection Agree-ment-Copy of Supplemental Agreement, dated Octo-ber 20, f969, to said Interconnection Agreement-Copy of Interconnection Agreement, dated April 9, 1974, between New York Power Pool Group and Pennsylvania-New Jersey-Maryland Group Previous Filing Registration Statement (No.2-58290)Form 8-K, July 1973 (Docket No.1-905)Form 8-K, August 1973 (Docket No.1-905)Form 8-K, September 1975 (Docket No.1-905)Registration Statement (No.2-51907)Registration Statement (No.2-42777)Registration Statement (No.2-26170)Registration Statement (No.2-26170)Registration Statement (No.2-26170)Registration Statement (No.2-35654)Registration Statement'No. 2-51907)Previous Exhibit Designation 2(a)-37 A A 4(b)5(b)13(a)13(b)13(b)-1 5(c)-2 5(e) Incorporation by Reference Exhibit No.5(e)5(e)-1 5(e)-2 5(e)-3 5(e)-4 5(e)-5 5(f)'5(f)-1 5(f)-2 5(g)5(h)5(i)5(j)5(k)-Copy of Interconnection Agreement, dated September 26, 1956, among Public Service Electric&Gas Company, Philadelphia Electric Company, the Company, Baltimore Gas&Electric Company, Pennsylvania Electric Com-pany, Metropolitan Edison Company, New Jersey Power&Light Company and Jersey Central Power&Light Company-Copy of Supplemental Agreement, dated Jan-uary 28, 1965, to said Interconnection Agree-ment-Copy of Supplement entitled"Appendix A Me-ter Locations", dated July 28, 1972, to said Interconnection Agreement-Copy of Supplemental Agreement, dated April 1, 1974, to satd Interconnection Agreement-Copy of Schedule 5.03, effective for filing Au-gust 1, 1974, to said Interconnection Agreement-Copy of Supplemental Agreement, dated June 15, 1977, to said Interconnection Agreement-Copy of Conowingo Backwater Agreement, dated February 20, 1926, among Pennsylvania Water&Power Company (to which company the Company is successor by merger), the Susquehanna Power Company, the Susque-hanna Electric Company, and Philadelphia Electric Company-Copy of Supplemental Letter Agreement, dated March 1, 1976, to said Conowingo Backwater Agreement-Copy of Supplemental Letter Agreement, dated August 5, 1977, to said Conowingo Backwater Agreement-Copy of Power Supply Contract, dated as of June 1, 1955, among Baltimore Gas&Electric Company, the Company, and Safe Harbor Water Power Corporation -Copy of Agreement on the'scheduling and dispatching of Safe Harbor and Holtwood Proj-ects, dated as of June 1, 1955, among Safe Harbor Water Power Corporation, Baltimore Gas&Electric Company and the Company-Copy of Transmission Contract, dated as of July 20, 1960, among the Company, Safe Harbor Water Power Corporation and Baltimore Gas&Electric Company-Memorandum of Agreement regarding Key-stone Electric Geherating Station, dated December 7, 1964, between the Company and'tlantic City Electric Company et al.-Keystone Operating Agreement, dated Decem-ber 1, 1965, between Pennsylvania Electric Company and the Company et al.Previous Filing , Registration Statement~(No.2-26170)Registration Statement (No.2-51907)Registration Statement (No 2-51312)Registration Statement (No 2-52931)Registration Statement (No.2-4254)Registration Statement (No.2-57633)Registration Statement (No.2-14608)Registration Statement (No.2-14608)Registration Statement (No.2-26170)Previous Exhibit Designation 13(d)-1 5(f)-2 5(f)-4 5(e)-1 I-14 5(g)-1 13(o)13(I)13(h) Incorporation by Reference Exhibit No.5(1)5(m)5(m)-1 5(n)5(n)-1 5(o)5(p)-1 5(p)-2 5(p)-3'5(p)-4 5(p)-5 5(p)-6 5(p)-7 5(p)-8 5(q)5(q)-I 5(q)-2 5(q)-3 5(tl)-4-Memorandum of Owners'greement Regard-ing Conemaugh Steam Electric Station, dated August 1,'1966, between the Company and Atlantic City Electric Company et al.-Conemaugh Operating Agreement, dated December 1, 1967, between Pennsylvania Elec-tric Company and the Company et al.-Supplement No.1, dated June 4, 1969, to said Conemaugh Operating Agreement-Copy of Interconnection Agreement, dated May 31, 1968, between Pennsylvania Electric Com-pany and the Company'Copy of Appendix B, Revision 2, dated October 1, 1971, to said Interconnection Agreement-Copy of Interconnection Agreement, dated Au-gust 1, 1935, between Luzerne County Gas&Electric Corporation (now UGI Corporation) and the Company-Copy of Supplemental Agreement, dated June 1, 1960, to said Interconnection Agreement-Copy of Amendment to said Supplemental Agreement, dated January 31, 1968, to said Interconnection Agreement-Copy of Amendment to said, Supplemental Agreement, dated February 6, 1969, to said Interconnection Agreement-Copy of Amendment to said Supplemental Agreement, dated March 27, 1970, to said Interconnection Agreement-Copy of Amendment to said Supplemental Agreement, dated October 10, 1972, to said Interconnection Agreement-Copy of Amendment to said Supplemental Agreement, dated May 1, 1973, to said Inter-connection Agreement-Copy of Supplemental Agreement, dated December ll, 1974, to said Interconnection Agreement-Copy of Supplemental Agreementdated April 22, 1975, to said Interconnection Agreement-Copy of Interconnection Agreement, dated April 26, 1965, between West Penn Power Company et al.and the Company et al.-Copy of Schedule 7.01, issued May 4, 1967, to said Interconnection Agreement-Copy of Schedule 1.05, issued December 22, 1971, to said Interconnection Agreement-Copy of Schedules 1.06, 5.02, 6.02 and 9.01, dated November 14, 1974, to said Inter-connection Agreement--'Copy of Schedule 4.03, issued February', 1976, to said Interconnection Agreement P II-8 Previous Filing Registration Statement (No.2-30918)Registration Statement (No.2-42013)Registration Statement (No.2-26170)Registration Statement (No.2-26170)Registration Statement (No.2-33042)Registration Statement (No.2-33042)Registration Statement (No.2-38149)Registration Statement (No.2-46508)Registration St'atement (No.2-49227)Registration Statement (No.2-52693)Registration Statement (No.2-52931)Registration Statement (No.2-26170)Registration Statement (No.2-30918)Registration Statement (No.2-50488)'egistration Statement (No.2-52693)Regist'ration Statement (No.2-56389)Previous Exhibit Designation 4(j)5(k)-I 13(j)\13(j)-I 5(k)-2 5(k)-3 5(1()-4 5(1)-5 5(1)-7 13(k)'5(m)-2 5(m)-3 5(m)-4 -~J<<,<<" I'<<<<l<<1<<'r/<<//<</~<<I I<<<<1*1<<<v by the following persons in the capacities indicated on the 11th day of November, 1977.Signature/s/JAGK K.BvsBY Jack K.Busby, Chairman of thc Board and Chief Executive.OIIlccr Title~Principal Executive , Officer/s/R.R.FoRTUNE R.R.Fortune, Executive Vice President-Financial Principal Financial and Accounting OScer RALPH R.CRANMER, EDGAR L.DESSEN, R.R.FORTUNQ HARRY A.JENsEN, W.DEMING LEwis, JoltN A.NoBI.E, NORMAN ROBERTSON, JOSEPH T.SIMPSON AND CHARLES H.WATrs II Directors By/s/JACK K.BUsBY Jack K.Busby, Attorney-in-fact 9 V 4 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS PENNSYLVANIA POWER&LIGHT COMPANY: We hereby consent to the use in this Registration Statement of our opinion dated February 3, 1977 appearing in the Prospectus which is a part of such Registration Statement, and to the references to us under"Statement of Income" and"Experts" in such Prospectus. HASKINs&SELLS New York, New York November 11, 1977 (The consents of Edward M.Nagel, Esq., Messrs.Reid&Priest and Paul Weir Company Incorporated are filed as Exhibits 3(a), 3(b)and 3(c), respectively, to the Registration Statement.) II It EXHIBIT 6(a)PENNSYLVANIA POWER 4 LIGHT COMPANY COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES ACTUAL AND PRO FORMA (Thousands ol'ollars) Year Ended December 31, Twelve Months Ended September 30, 1977 1972 1973 1974 1975 1976 Actual Adjust-Pro ments Forma Fixed charges, as defined: Interest on long-term debt.............................. Interest on short-term debt............................. Other interest charges........,...,....,.........,..... Amortization of debt discount expense and prcmium-net.. Estimated interest component of rentals.......Total fixed charges.......................... Earnings, as defined: Net income..Undistributed (earnings) or losses of sub-'idiarycompanies......................................; Add (Deduct): Federal income taxes.............................. State income taxes................................... Deferred income taxes...................:........ Charge equal to investment tax credit, less amortizauon ................................. Income taxes on other income and de-ductions-net ......,..........,..........:--. Total fixed charges as above.................. Total earnings.................................. Ratio of earnings to fixed charges......................... Ratio of earnings to fixed charges excluding$4,162 Nonrecurring Credit and$4,831, re-lated deferred income taxes in 1974.................. $36,5Q?$43,2Q3$51,149$67,932$79,783$88,671 3,846',790 9,562 6,228 7,134 5,426 99 114 343 38 80 413$10,805(1)$99,476 986(2)6 412 413 8 12 41'90 3,702 4,956 6,054 6,354$44,162$53,075$67,149$80,742 256 299 6,45 9 7,565$93 672$102 374$11,791 299 7,565$114,165 (562)57,921 66,350 (30)(102)87,449 97,439 2,174 7,804 114,285 153,619 (5,549)7,804 148,070 12,582 5,520 2,829 16,454 6,207 5,737 12,554 22,547 3,858 8,221 24,093(a)3,542 656 6,766 8,745 22,030 13,880 10,928 (5,122)(1,120)16,908 12,760 10,928 5,155 5,545 3,537 12,988 27,661 38,507 38,507 (334)(91)44,162 53,075$127,835$153,277 2.89 2.89 (5,076)67,149$193,564 2.88 (11/01)80,742$214,278 2.65 (14,457)(14,579)93,672 102,374 11,791$237,328 2.53$326,759 3.19 (14,579)114,165$326,759 2.86 2.75$57,921$66,912$&7,479$97,541$112,111$145,815$(5,549)$140,266 (a)Includes$4,831 defeircd income taxes applicable to Nonrecurring Credit.Adjustments: (I)Annual interest requirement on$100,000,000 principal amount of Bonds (assumed interest rate 88/2%)........................................ Additional interest requirement on$150,000,000 principal amount of 88/4%Scrics Bonds due December I, 2006 issued December 21, 1976..Less accrued interest requirement on$8,000,000 principal amount of 2F6%First Mortgage Bonds retired November I, 1976.....Less accrued interest requirement on$500,000 principal amount of 45%Polluriion Conuol Series A Bonds retired May I, 1977 Less accrued interest requirements on$20,000,000 principal amount of 2'/4%First Mortgage Bonds retired July I, 1977............. $8,500 2,750 (19)(13)(413)$10,805 (2)Annual interest on$95,000,000 principal amount of commercial paper notes (assumed interest rate-6'4%) assumed to be outstanding during the twclvc months ended September 30, 1978.............................................. $6,412 Less actual interest on commercial paper notes and bank loans outstanding during period.................. (5,426)$986 EXHIBIT 6(b)PENNSYLVANIA POWER 4 LIGHT COMPANY SUPPLEMENTAL COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES ACIUAL AND PRO FORMA (Thousands of Dollars)Twelve Months Ended September 30, 1977 1972 1973 1974 1975 Year Ended December 31, 1976 Actual Adjust-Pro ments forma Fixed charges, as defined: Intcrcst on long-term debt.............................. Interest on short-term debt............................. Other interest charges..................................... Amortization of debt discount, expense and premium-net.Estimated interest cotnponent of rentals.......Fixed charges of owned or controlled com-panies applicable to total enterprise .......... Total fixed charges.......................... $36,507 3,846 99$43,203 4,790 114 8 3,702 12 4,956 3,873 6,310$48,035$59,385$51,149$67,932 9,562 6,228 343 38$79,783 7,134 80$88,671 5,426 413 41 190 6,054 6,354 256 6,419 299 7,565 9,600 12,002 19,284 18,307$76,749$92,744$112,956$120,881 299 7,565$11,791 18,507$132,672 0$10,805(1)$99,476 986(2)6,412 413 Earnings, as defined: Nct income.Add (Deduct): Federal income taxes,.......,....,......,............. State income taxes..Deferred income taxes.................................... Charge equal to investment tax credit, less amortization ..Income taxes on other income and deduc-tions-net. Total fixed charges as above.......................... Total earnings.... Ratio of earnings to fixed charges.....Ratio of earnings to hxed charges exduding$4,162 Nonrecurring Credit and$4,831 re-lated deferred income taxes in 1974.................. 12,582 5,520 2,829 16,454 6,207 5,737 12,554 22,547 3,858 8,221 24,093(a)3,542 656 6,766 8,745 22,030 13,880 10,928 (5,122)(1,120)16,908 129760 10,928 5,155 5,545 3,537 12,988 27,661 38,507 38,507 (334)48,035$131,708 2.74 (91)59,385$160,149 2.70 (5,076)76,749 8203.194 2.63 (11,201)92,744$226,382 2.44 (14,457)(14,579)112,956 120,881 11,791$254,438$337,462 2.25 2.79 (14,579)132,672$337,462 2.54 2.53$57,921$66,912$87,479$97,541$112,111$145,815$(5,549)$140,266 (a)Includes$4,831 deferred income taxes applicable to Nonrecurring Credit.Adjustments: (I)Annual interest requirement on$100,000,000 principal amount of Bonds (assumed interest rate-85).................................. Additional interest requirement on$150,000,000 principal amount of 88/0%Series Bonds due December I, 2006 issued December 21, 1976.Less accrued interest requirement on$8,000,000 principal amourit of 2V0%First Mortgage Bonds retired November I, 1976..Less accrued interest requirement on$500,000 principal amount of 48/2%Pollution Control Series A Bonds retired May I, 1977.Less accrued interest requirements on$20,000,000 principal amount of 2'/0%First Mortgage Bonds retired July I, 1977...... (2)Annual interest on$95,000,000 principal amount of commercial paper notes (assumed interest rate-6'/0%) assumed to be outstanding during the twelve months ended September 30, 1978.Less actual interest on commercial paper notes and bank loans outstanding during period.................................................. $8,500 2,750 (19)(13)(413)$10,805$6,412 (5,426)$986 EXHIBIT 7 PENNSYLVANIA POWER&LIGHT COMPANY ALLOCATION OF PORTION OF ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (ALLOWANCE) ATIIBUTABLE TO FUNDS PROVIDED BY COMMON STOCK EQUITY For Periods Prior to January 1, 1977 Included in the Statement of Income (Thousands of Dellars)Capitalization Incremental Ratios(a)Rate(b)Equivalent Allocation of'ate(c)'llowance Earnings Applicable to Common Stock Portion of Allowance Attributable to Common Stock Equity as a Percentage of Earnings Applicable to Common Stock Three months ended December 31, 1976 Long-Term Debt................................. Preferred and Preference Stock.......... Common Stock Equity........................ 51%18 31 4.64%2.37%9.99 1.80 3.71 7.88%$4,162 3,161 6,516$13,839$26,077 25%1976 Long-Term Debt,,....,....,...,.... Preferred and Preference Stock....Common Stock Equity.................. 51%18 31 4.65%2.37%$13,506 10.28 1.85 10,543 3.71 21,143 7.93%$45,192$78,743 27%1975 Long-Term Debt........................... Preferred and Preference Stock....Common Stock Equity.................. 51%18 31 4.67%2.38%13.31 2AO 3.56 8.34%$10,446 10,534 15,625$36,605$73,032 21%1974 Long-Term Debt........................... Preferred and Preference Stock....Common Stock Equity.................. 1973 Long-Tenn Debt............................. Preferred and Prcferencc Stock...... Common Stock Equity.................... 51%18 31 51%18 31 4.11%7.44 6.99%7.40 2.10%1.34 3.80 7.24%3.56%1.33 2.99 7.88%$6,013 3,837 10,882$20,732$6,762 2,526 5,679$14,967$67,823$49,721 16%11%1972 Long-Term Debt............................. Preferred and Preference Stock...... Common Stock Equity.................... 51%18 31 7.49%8.00 3.82%1.44 2.10 7.36%$7,602 2,866 4,179$14,647$43,395 10%(a)Assumes that funds used to finance construction during each period were provided in the same proportion as the Company's average capitalization ratios during the five years ended December 31, 1976.(b)For the years 1972 through 1973 incremental rates were determined on the basis that the cost of long-term debt and preferred and preference stock financing was equivalent to the cost of securities issued in each of the periods.No adjustment was made for income tax reductions resulting from interest expense attributable to the portion of Allowance provided by long-term debt.Since February 1, 1974, the Company has computed the Allowance rate on an"after-tax" basis to be consistent with the treatment accorded this item for rate-making purposes by the Pennsylvania Public Utility Commission (PUC).The incremental rates used in the above computation for 1974, 1975 and 1976 are consistent with the Allowance rate computation filed semi-annually with the PUC which were based on securities issued in the twelve months preceding the semi-annual computation. For the same reason, effective February 1, 1974, the incremental rate for the debt component was reduced by the related income tax reduction.(c)The equivalent rate for each period is calculated by dividing the amount of Allowance recorded during the period by the balances of the construction work in progress including the accumulated Allowance. Registration No.2-485 r-r Q WASHINGTONs D C 20549 cg;rs S'Crrr','t.FORM S-7 CPI~"',r, fi Fpg REGISTRATION STATE Ehg-/9/8 Under r 7'0p 0'1 p@2'g Vregs THE SECURITIES ACT OF 1933 SECURITIES AND EXCHANGE COMMISSION Pennsylvania Power 8 Light Company (Exact name of registrant as specified in its charter)Commonwealth of Pennsylvania (State or other jurisdiction of incorporation or organization) 23-0959590 (I.R.S.Employer Identification No.)Two North Ninth Street, Allentown, Pennsylvania (Address of principal executive offices)18101 (Zip Code)Registrant's telephone number, including area code: 215-821-5151 R.R.FORTUNE, Executive Vice President-Financial Two North Ninth Street Allentown, Pennsylvania 18101 (Name and address of agent for service)Copy to: RICHARD M.DICKE, Esq.Simpson Thacher&Bartlett One Battery Park Plaza New York, N.Y.10004 Approximate date of commencement of proposed sale to the public: As soon as practicable after.this Registration Statement becomes effective. CALCULATION OF REGISTRATION FEE Title of each class ofsecurities to be registered Common Stock (without nominal or par value)..Amount to be registered 3,000,000 shs.Proposed maximum offering price per unit'22%Proposed maximum aggregate offering prico*$67,125,000 Amount of registration fee$13,425*For the purpose of calculating the registration fee only.The price shown is based upon a sale price on the New York Stock Exchange on February 16, 1978 for securities of the same class as those to be offered in accordance with Rule 457(b).The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accord-ance with Section 8(a)of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. PENNSYLVANIA POWER&LIGHT COMPANY Form S-7 Item No.1..2..4..5..8..9..10..11 12..Cross Reference Sheet for Prospectus Heading In Prospectus Cover Page of Prospectus Underwriting Application of Proceeds Construction Program Financing Construction Program Financing Business Electric Statistics Management Map Statement of Income Statement of Changes in Financial Position Statement of Earnings Reinvested Cover Page of Prospectus Description of Common Stock Financial Statements Opinion of Independent Certified Public Accountants Inside Front Cover of Prospectus
- Omitted from Prospectus as Item is inapplicable or answer is in the negative.EXPLANATORY NOTE The form of prospectus filed as a part of this Registration Statement has two cover pages, the first of which makes provision for presenting the actual initial terms of offering of the Common Stock and the second of which describes the formula pursuant to which such terms will be determined.
Prospectuses bearing the first form of cover page, appropriately completed, will be distributed only in final form (i.e., after the Registration Statement becomes effective); prospectuses bearing the second form of cover page will be distributed only in preliminary form.Ten copies of the prospectus in the exact form in which it is to be used after the effective date of this Registration Statement will be filed with the Securities and Exchange Commission pursuant to Rule 424(b).~0cket8+y gyp<<ff'rfol e~QfQ@~l<~i Fa.E ggg gg~~,<~~OCIIPjlf,II f.. Pennsylvania Power 8 Light Company Common Stock (without nominal or par value)3,000,000 Shares Outstanding shares of Common Stock are, and the shares of Common Stock offered hereby will be, listed on the New York and Philadelphia Stock Exchanges. The reported last sale price of the Common Stock on the New York Stock Exchange on March 29, 1978 was$per share.ln the opinion of counsel for the Company, the Common Stock is exempt from existing personal property taxes in Pennsylvania. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION To THE CONTRARY IS A CRIMINAL OFFENSE.C Per Share Total$$Price to Public underwriting Discounts and Commissions (1)Proceeds to Company(2) (1)The Company has agreed to Indemnify the several Underwriters against certain civil liabilities, including liabilities under the Securities Act of 1933.(2)Before deduction of expenses payable by the Company estimated at$150,000.The shares of Common Stock are offered by the several Underwriters when, as and if issued by the Company and accepted by the Underwriters and subject to their right to reject orders in whole or ln part.It is expected that the Common Stock offered hereby will be ready for delivery in Philadelphia, Pennsylvania, on or about April 6, 1978.The First Boston Corporation Drexel Burnham Lambert Incorporated Bache Halsey Stuart Shields Incorporated Merrill Lynch, Pierce, Fenner&Smith Incorporated The date of this Prospectus is March, 1978. I 44'4'I 4 4 41 4~14~~, 4' ~D IO E I ID Z Zl B E CD 41 44 11~CJ IO cel~D 41 CIO ID e W W CD CO~6 I Cel~ID IO Cl CD 4J 1 III E CC CO~CC CD ID c Cl 41 Cel E~41 OI~41 In 41 Cn III 41 c E E C IO ce c 11 Iec Ol 41 41 CO IO Cel 11 CD cel CD 41 E 41 Iel CO 44 41 I CD Iel 41 cee~D 41~D Ill E 41 CD Cl IO C Cel I 41 41 CJ CO ID Zl CD 41 Cel~<c~D E.-CC CD cn Iel 41 Iec N Iel CO Cel~IC 41 Iel ID C 41 ID CO cc CO C DO~D CO C I ID IO~ec I CC1 Cel C Cel CD C1 Cel PRELIMINARY PROSPECTUS DATED FEBRUARY 24, 1978 e Pennsylvania Power 8 Light Company COmmOn StOCk (without nominal or par value)3,000,000 Shares Outstanding shares of Common Stock are, and the shares of Common Stock offered hereby will be, listed on the New York and Philadelphia Stock Exchanges. The reported last sale price of the Common Stock on the New York Stock Exchange on February 23, 1978 was$22%per share.In the opinion of counsel for the Company, the Common Stock is exempt from existing personal property taxes in Pennsylvania. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.The initial public offering price of the shares offered hereby will be a fixed price determined by agreement between the Company and the Representatives of the Underwriters within ten business days after the effective date of the registration statement. The initial public offering price per share will not be higher than the reported last sale (regular way)or the reported last asked price of the Common Stock of the Company on the New York Stock Exchange immediately prior to the determination of the initial public offering price, whichever is higher, plus cents.The underwriting discount will be an amount per share, not in excess of%of the initial public ,offering price, determined by agreement between the Company andthe Representatives of the" Underwriters. The Company has agreed to indemnify the several Underwriters against certain civil liabilities, including liabilities under the Securities Act of 1933.The proceeds to the Company will be an amount equal to the initial public offering price less (i)the underwriting discount and (ii)ex'penses payable by the Company estimated at$150,000.The shares of Common Stock will be offered by the several Underwriters when, as and if issued by the Company and accepted by the Underwriters and subject to their right to reject orders in whole or in part.The First Boston Corporation Drexel Burnham Lambert Incorporated Bache Halsey Stuart Shields Incorporated Merrill Lynch, Pierce, Fenner 8t Smith Incorporated The date of this Prospectus is March, 1978. <f i IN CONNECTION WITH THIS, OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, THE PHILADELPHIA STOCK EXCHANGE OR IN THE OVER-THE-COUNTER MARKET.SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.The Company is subject to the informational requirements of the Securities Exchange Act of 1934 and in accordance therewith files reports and other information with the Securities and Exchange Commission. Information concerning directors and officers, their remuneration and any material interest of such persons in transactions with the Company, as of particular dates, is disclosed in proxy statements distributed to stockholders of the Company and filed with the Commission. Such reports, proxy statements and other information can be inspected and copied at the public reference facilities maintained by the Commission at 1100 L Street, N.W., Washington, D.C.;219 South
Dearborn Street,
Chicago, III.;26 Federal Plaza, New York, N.Y.;and 10960 Wilshire Boulevard, Los Angeles, Calif.Copies of this material can also be obtained at prescribed rates from the Public Reference Section of the Commission at its principal office at 500 North Capitol Street, N.W., Washington, D.C.20549.The Common Stock of the Company is listed on the New York and Philadelphia Stock Exchanges. Reports, proxy statements and other information concerning the Company can be inspected and copied at the respective offices of these exchanges at Room 401, 20 Broad Street, New York, N.Y., and at 17th Street and Stock Exchange Place, Philadelphia, Pennsylvania. In addition, reports, proxy statements and other information concerning the Company can be inspected at the offices of the Company, Two North Ninth Street, Allentown, Pennsylvania. No dealer, salesman or other person has been authorized to give any Information or to make any representation not contained in this Prospectus in connection with the offer made by this Prospectus and, if given or made, such information or representation must not be relied upon as having been authorized by the Company.This Prospectus is not an offer to sell or a solicitation of an offer to buy in any jurisdiction in which it is unlawful to make such an offer or solicitation. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the date hereof.TABLE OF CONTENTS Prospectus Summary..The Company Problems Affecting the Electric Utility Industry and the Company.................... Application of Proceeds............................ Construction Program..Financing.. Rate Matters.Common Stock Dividends and Market Prices..Statement of Income.Management's Discussion and Analysis of the Statement of Income................... Page 3 4 4 4 5 6 7 9 10 Capital Structure Business.Electric Statistics Description of Common Stock...............~... Experts Legal Opinions.. Management. Financial Statements .......Opinion of Independent Certified Public Accountants.. Underwriting .M ap.k Page 18 19 31 32 33 33 34 35 53 54 Back Cover PROSPECTUS
SUMMARY
The following material is qualified in its entirety by the detailed information and financial statements appearing elsewhere in this Prospectus. THE OFFERING Security Offered........................... Common Stock Number of Shares........................ 3,000,000 Useof Proceeds........................... General corporate purposes including the reduction of short-term debt incurred to provide interim financing of construction and nuclear fuel expenditures Listed........................... New York and Philadelphia Stock Exchanges (Symbol: PPL)Price Range 1977........................ 25'/a-20'/4 1978 (Through February 22).....24'/4-22'/4 Closing Price February 23, 1978 (New York Stock Exchange).....22%THE COMPANY Business.The Company derives about 99/o of its operating revenues from electric service Service Area...Approximately 10,000 square miles in central eastern Pennsylvania with a population of 2.4 million persons Sources of Generation during 1977.................................. Coal 79o/o Oil 19 Hydro 2 100'/o FINANCIAL INFORMATION 1976 1977(a)Operating Revenues (thousands) .....$644,147$744,731 Net Income-Before Dividends on Preferred and Preference Stock (thousands) ..$112,111$149,763 Earnings Applicable to Common Stock(thousands) ...$78,743$112,770 Earnings Per Share...$2.68$3.37 Dividends Declared Per Share of Common Stock....... $1.80$1.89 Net Utility Plant-at year end (thousands) .................. $2,380,109$2,690,229 As of December 31, 1977 ActuaI As Adjusted(b) Capitalization (thousands) Long-Term Debt(including current maturities) ....$1,260,495 Preferred and Preference Stock.......................... 487,375 Common Equity.......................... 859,264 Total...................................................... $2,607,134$1,260,495 47.3/o 483,375 18.1 922,114 34.6$2,665,984 100.0/o (a)For factors affecting 1977 and current results, see the second paragraph under"Management's Discussion and Analysis of the Statement of Income".(b)As adjusted to give effect to (I)the redemption of 40,000 shares of Preference Stock in January 1976 and (ii)the estimated net proceeds from the sale of the Common Stock offered hereby. THE COMPANY The Company is an operating utility, incorporated under the laws of the Commonwealth of Pennsylvania in 1920.The Company's general offices are located at Two North Ninth Street, Allentown, Pennsylvania 18101, and its telephone number is 215-821-5151. The property of the Company is located in Pennsylvania (see Map), is well maintained and is in good operating condition. The Company derives about 99/o of its operating revenues from supplying electric service, and the balance from supplying steam in the city of Harrisburg. The Company serves a 10,000 square mile territory in 29 counties of central eastern Pennsylvania (see Map), with a population of approximately 2,400,000 persons.This service area has a high percentage of open land as well as 111 communities with populations over 5,000, the largest of which are the cities of Allentown, Bethlehem, Harrisburg, Hazleton, Lancaster, Scranton, Wilkes-Barre and Williamsport. Important industrial, recreational and agricultural sections are linked to the eastern population centers by an extensive limited-access highway system.Hershey Electric Company, a subsidiary of the Company, provides electric distribution service to approximately 6,300 customers in Hershey, Pennsylvania. PROBLEMS AFFECTING THE ELECTRIC UTILITY INDUSTRY AND THE COMPANY The electric utility industry in general has been experiencing problems of (a)increasing costs of fuel, wages, materials and equipment, (b)substantially increased capital outlays and longer construction periods for larger and more complex new generating units, (c)uncertainties in predicting future load requirements, (d)increased financing requirements coupled with periodically uncertain availability of both equity and borrowed capital, (e)past and prospective sales of common stock below book value, (f)fuel availability, (g)increased construction costs and delays and operating restrictions due to environmental requirements, (h)the effectiveness of energy conservation efforts and the impact of fluctuating economic conditions, (i)litigation and proposed legislation which may have the effect of delaying or preventing construction of nuclear generating and other facilities or limiting the use of existing-facilities=and (j)regulatory lag in granting needed rate increases and th'e inadequacy of such increases when granted.The Company also has been experiencing similar problems in varying degrees.For information regarding the effect on the Company of certain of these general problems, see"CONSTRUCTION PROGRAM","FINANCING","RATE MATTERS","STATEMENT OF INCOME","MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE STATEMENT OF INCOME","BUSINESS" and"ELECTRIC STATISTICS". Reference is made to"BUSINESS-'Fuel Supply (Coal)" for information concerning (1)the pricing of coal produced by The Oneida Mining Company, one of the Company's affiliated mines, for fuel adjustment clause purposes, which reduced the Company's net income by approximately $4.3 million during 1977 and (2)the possibility of future losses if present mining plans for Oneida prove not to be economically feasible.Reference is made to"BUSINESS-Fuel Supply (Coal)" for information concerning a strike by the United Mine Workers of America which is adversely affecting the Company's 1978 operations and earnings.APPLICATION OF PROCEEDS The net proceeds from the sale of the Common Stock offered hereby will be added to the Company's general funds and used for general corporate purposes including the reduction of short-term debt incurred to provide interim financing for construction and nuclear fuel expenditures. CONSTRUCTION PROGRAM The Company's construction program is under continuing review and is revised from time to time to reflect changes in customer demand, business conditions, the cost and availability of capital and other factors.Actual construction expenditures and dates of completion for various construction projects may vary because of changes in the Company's plans, cost fluctuations, the availability of labor, materials and equipment, environmental regulations, licensing delays and other factors.The Susquehanna station, which is the only generating facility that the Company currently has under construction, will consist of two nuclear-fueled generating units each having an estimated total net capability of 1,050,000 kilowatts. In March 1977 the Company agreed to sell a 10/o undivided ownership interest in the Susquehanna nuclear units to Allegheny Electric Cooperative, Inc.(Allegheny). Pending receipt of the regulatory approvals required to complete the sale, Allegheny made an initial payment to the Company of$65 million in March 1977 and became obligated to pay currently 10/o of subsequent construction and nuclear fuel expenditures for the Susquehanna units.Through December 31, 1977, Allegheny's payments to the Company approximated $84 million.In January 1978, following receipt of the necessary approvals from the Pennsylvania Public Utility Commission (PUC), the Nuclear Regulatory Commission (NRC)and the Rural Electrification Administration, the sale was completed, Construction of the Susquehanna units is proceeding under NRC construction permits issued..in November 1973.At December 31, 1977, construction of Unit No.1 was about 60'/o completed and Unit No.2 was about 40/o completed. An operating license from the NRC will be required prior to the start-up and testing of each unit.Changes in desigrt necessary to meet NRC requirements, delays in delivery of material and equipment, scarcity of labor and other factors have nearly exhausted schedule contin-gencies built into the project.As a result, and in recognition of the potential for delays in future construction as well as in obtaining the required licenses and regulatory approvals, on a timely basis, the Company has revised the estimated in-service date for Susquehanna Unit No.1 from November 1980 to February 1981.Subsequent evaluations may require the Company to further delay the estimated in-service date for Susquehanna Unit No.1 and to delay the currently estimated 1982 in-service date for Unit No.2.The following tabulation shows actual construction and nuclear fuel expenditures for 1977 and the Company's current estimate of these expenditures for the three years 1978-1980 including provision for the Allowance for funds used during construction (Allowance). The amounts shown in the tabulation, have been reduced to reflect Allegheny's contribution to the cost of the Susquehanna units and nuclear fuel.1977 1978 1979 1980 Millions of Dollars Construction expenditures: New generating facilities ....................... $237 Transmission and distribution facilities ..'8 Other 16 Total construction expenditures .....341 Nuclear fuel in process..16 Total.$357$330 103 38 471 4$475$324$264 114 123 52 86 490 473 40 57$530$530 Estimated construction expenditures for the three years 1978-1980 include$150 million for environmental protection. See"BUSINESS-Environmental Matters" for information concerning possible additional capital requirements. The Company's 90%share of the estimated total net capability of each of the Susquehanna units will be 945,000 kilowatts and its share of the estimated construction expenditures (based on the currently scheduled in-service dates, but excluding nuclear fuel)is estimated at$1.75 billion.The Company estimates that a delay of one year in the 1981 and 1982 in-service dates of the Susquehanna units would increase the Company's share of the cost of tliese units by about$175 million.The United States District Court for the Western District of North Carolina has held that the provisions of the Price-Anderson Act limiting liability of the owners of nuclear power plants, and of the contractors and suppliers for such plants, to the amounts of available insurance and governmental indemnity are unconstitutional as violating the due process and equal protection clauses of the United States Constitution. The United States Supreme Court has granted review of the District Court decision.If the Supreme Court affirms the decision, the limitation of liability would not be available to the Company.Although the full impact of a decision by the Supreme Court cannot be evaluated at this time, the Company does not expect to change its plans to complete the construction of and to operate-the Susquehanna units.Recent amendments to the Price-Anderson Act, which may be aftected by this litigation, provide that-all owners of nuclear reactors may be assessed up to$5 million per operating reactor for each nuclear incident occurring at any reactor in the United States with a limit of two assessments per year.Giving effect to the Company's 90%ownership of the Susquehanna units, the maximum assessment against the Company under the Price-Anderson Act when both Susquehanna units have been placed in commercial operation is not expected to exceed$18 million per year.FINANCING The tinancing of its construction program requires the Company to engage in frequent sales of securities, including debt and preterred, preterence and common stocks.Interim financing is obtained from bank borrowings and the sale of commercial paper.The Company's 1978-1980 construction and nuclear fuel expenditures are currently estimated at$'f.54 billion.Approximately two-thirds of this amount is expected to be obtained from outside financing with the balance to be provided from internal sources.The estimates of construction and nuclear fuel expenditures and internal funds sources both include the Allowance. In addition, about$62 million of maturing long-term debt obligations and$16.5 million of preferred and preference stock sinking fund requirements are planned to be met during 1978-1980 by sales of securities. In addition to the sale of the Common Stock offered hereby, the Company anticipates that other securities will be sold during 1978.The exact amount, nature and timing of future sales of securities will of necessity be determined in the light of market conditions and other factors.'he mortgage indenture under which the Company's first mortgage bonds are issued contains certain provisions, principally earnings coverage and property additions tests, limiting the issuance of additional bonds.The Company estimates that application of these restrictions, of which the availability of property additions is presently the most limiting, would have permitted the Company, as of December 31, 1977, after giving effect to the sale of a 10%undivided interest in Susquehanna to Allegheny, to issue f 6 about$443 million principal amount of bonds.This amount exceeds the principal amount of bonds that the Company currently expects to issue through 1979.Indenture tests, however, would have to be met at the time of issuance.The Company's charter contains provisions limiting the issuance of additional shares of Preferred Stock.The more restrictive of these provisions requires Income Before Interest Charges (gross income)of not less than 1.5 times the sum of the annualized interest requirements on indebtedness to be outstanding and the dividend requirements on Preferred Stock to be outstanding. In calculating gross income under the provisions of the Company's charter, the Company includes the borrowed and equity funds components of the Allowance as a part of gross income.Based on the Company'.s earnings for the year 1977, the gross income provisions would not limit the amount of Preferred Stock which the Company plans to issue during 1978.There are no charter provisions limiting the issuance of Preference Stock.RATE MATTERS Sales to ultimate customers, which are regulated by the PUC, accounted for approximately 98/0 of the Company's revenues from electric sales over the past five years.The remaining 2'/o of revenues from electric sales, represented by sales to others for resale, are regulated by the Federal Energy Regulatory Commission (FERC)as are interchange power sales, which are classified as a credit to operating expenses.The Company's PUC and FERC tariffs include fuel adjustment clauses.See, however, the discussion of the Company's Oneida mine under"BUSINESS-Fuel Supply (Coal)" concerning the limited recovery of the cost of coal mined at Oneida.PUC tariffs also include a tax surcharge to recover the cost of increased Pennsylvania taxes.Since 1973 the Company has requested and the PUC has granted the following general increases in base rate charges for electric service expressed as percentages of annualized revenues in the test year-used for the final PUC order in each proceeding. Annualized revenues consist of revenues derived from base rates, fuel adjustment clauses and the tax surcharge. Request Filed April 1973 o/o Increase Requested Test Year Increase (Twelve Months Ended)Effective 11.4 April 30, 1973 June 1973 January 1974 0-Millions $9.4 19.1$28.5 4/O 2.6 5.2 7.8 Increase Granted March 1975 14.6 July 31, 1975 September 1975 April 1976 August 1976$21.0 3.9 20.0 3.7 37.3 7.0$78.3.14.6 A complainant in the Company's March 1975 rate proceeding appealed the August 1976 decision of the PUC granting the 14.6/o increase.This appeal, which was denied by the Commonwealth Court of I Pennsylvania, raised objections regarding, among other things, the existence and amount of differences in rates between certain of the classes of services provided by the Company.This appeal did not question the PUC's August 1976 decision with respect to measures of value, level of revenues or rate of return.The Supreme Court of Pennsylvania has agreed to review the action taken by the Commonwealth Court in denying the complainant's appeal.A rate increase aggregating approximately $1 million annually for the Company's fifteen resale customers was permitted by FERC to become effective, subject to refund, in November 1976.Certain of the affected customers who were opposing the increase have entered into a settlement agreement with the Company.A request for approval of this agreement is presently pending before FERC.In a proceeding affecting ail Pennsylvania electric utilities, the PUC in May 1975 instituted an investigation into fuel adjustment clauses.At the commencement of this investigation the PUC proposed for consideration, among other things, (1)a limitation on the recovery of increased fuel costs to less than 100/o, (2)the inclusion of nuclear fuel costs in the formula, (3)a revision in the method of calculating the fuel costs as they relate to interchange power purchases and sales and (4)the use of a twelve month period for determining the current cost of fuel.In a separate proceeding affecting all major Pennsylvania electric utilities, the PUC in November 1977 issued proposed regulations to replace fuel adjustment clauses with a levelized energy cost rate.Under the PUC's proposed regulations, which would become operative on July 1, 1978, each utility's energy cost rate.would include all (1).fossil fuel costs, (2)nuclear fuel costs, (3)purchased power energy costs and (4)net interchange energy sales and purchases. Utilizing historical and projected data, a utility's energy cost rate would be set prospectively for a twelve month period determined by the PUC during which the rate is intended to remain stable.An upward or downward adjustment in the rate could be made during the twelve month period in the event that actual costs were significantly greater or less than the energy cost rate.The proposed regulations contemplate that if the costs actually incurred exceed costs specified in the utility's energy cost rate, the full amount of excess costs may not be recoverable by the utility.In the event of an over-recovery of energy costs, the utility would be required to refund either a portion or all of the excess to customers, depending'upon the amount of such excess.In addition, provisions are made for penalties under certain circumstances. The proposed regulations provide that deferred fuel costs accumulated under the present fuel adjustment clauses would be recoverable pursuant to a reasonable plan filed by a utility.The Pennsylvania legislature is currently considering several proposals which would eliminate automatic adjustment clauses for fuel and purchased power costs incurred by major Pennsylvania electric utilities and would permit the recovery of these costs only through base rates.The Company is unable to predict the ultimate outcome of the foregoing administrative and legislative proceedings. Amendments to the Pennsylvania Public Utility Law, generally effective in October 1977, have altered the PUC's rate-making procedures. Among other things, the amendments shorten the period during which the PUC must act on a filing of a general rate increase from eleven months to nine months.Interim rate relief during the pendency of a general r'ate increase request will not be permitted except under conditions of financial emergency. The new provisions permit the use of future projected rather than historical test years as the basis for rate filings.The amendments also prescribe certain changes in PUC procedures for voting on rate increase applications, and create the office of Administrative Law Judge to conduct hearirigs and submit recommendations to the PUC.COMMON STOCK DIVIDENDS AND MARKET PRICES The Company has paid quarterly cash dividends on its Common Stock in every year since 1946.Dividends declared in the past five years are set forth on the Statement of Income.On February 22, 1978 the Company declared a regular quarterly dividend of 48 cents per share payable on April 1, 1978 to the holders of record of Common Stock on March 10, 1978.Since the Common Stock offered hereby will not be outstanding on the March 10 record date, such shares are not entitled to the April 1 dividend.Future dividends will be dependent upon future earnings, financial requirements and other factors.The high and low sale prices of the Company's Common Stock as reporte'd by The Wa/I Street Journal (as New York Stock Exchange transactions through January 23, 1976 and thereafter as Composite Transactions) were as follows: High Low Quarters in 1976 1st 2nd 3rd 4th 21%20 V<21V4 22Vr 19Vs 19Vr 20 20%Quarters in 1977 1st 2nd 3rd 4th 22Vr 24'/i 25Ve 24Vr 203/4 21%22%22'/i 1979 (through February 22)24'/4 22'/4 The reported last sale price of the Common Stock on the New York Stock Exchange on February 23, 1978 was$22%per share.The book value of the Common Stock at December 31, 1977 was$24.58 per share.Upon the sale of the Common Stock offered hereby, the book value per share at that date on a pro forma basis, reflecting estimated net proceeds to the Company, would have been$The Company has a dividend reinvestment plan which permits holders of its Preferred, Preference and'Common Stock to purchase shares of Common Stock directly from the Company by having cash dividends automatically reinvested at a 5/o discount in the purchase price and by making optional cash payments (to which the 5/o discount does not apply).
Operating Revenues (99%Electric)(a) ........................... Operating Expenses Cost of energy Fuel(b)(c) ..Power purchases..Interchange power sales.Net cost of energy." Other operation. Maintenance.. Depreciation Income taxes(d)... Taxes, other than income(d)Total operating expenses......................... Operating Income.Other Income and Deductions Allowance for funds used during construction(e) Equity and borrowed funds.......................... Equityfunds Income tax credits(d)(e) Other-net(c)..Total other income and deductions .........Income Before Interest Charges..Interest Charges Long-term debt Short-term debt and other Allowance for borrowed funds used during construction(e) ..Net Interest charges....Income Before Nonrecurring Credit.Nonrecurring Credit Related to Accounting Change, Net of Income Taxes ($4,831)(b).Net Income-Before Dividends on Preferred and Preference Stock.Dividends ori Preferred and Preference Stock............... 433,698 39,783 (306,456)167,025 110,764 63,413 68,035 91,501 59,682 580.420 184,311 271,636 321,783 37,698 29,657 (172,823)(160,163)125,577 15,299 (70,175)70,701 69,007 33,648 48,837 33,943 30,005 286,141 98,673 192,353 24,176 (108,723)107,806 80,565 41,298 52,399 39,211 35,571 356,850 115,186 191,277 103,758 54,946 62,478 43,828 49,526 505,813 138,334 136,511 92,186 47,956 58,540 47,298 40,669 423,160 120,969 45,192 36,605 20,732 14,967 22,459 13,708 (928)35,239 219,550 14,457 1,381 61,030 199,364 11,201 3,154 50,960 171,929 5,076 3,418 29,226 144,412 91 1,300 16,358 115,031 79,783 7,470 91,500(f)5,223 67,932 6,456 43,203 4,916 51,149 9,946 (26,936)69,787 149,763 87,253 112,111 74.388 97.541 48,119 61,095 66,912 83,317 4,162 66,912 17,191$49,721 87,479 19,656$67,823 97,541 24,509$73,032 149,763 36,993(g)$112,770 112,111 33,368$78,743 Earnings Applicable to Common Stock.Earnings Per Share of Common Stock Before Nonrecurring Credit..Nonrecurring Credit(b)..Earnings Per Share of Common Stock........ Average Number of Common Shares Outstanding (Thousands). Dividends Declared Per Share of Common Stock.....$2.87$2.88 0.19$3.07$2.57$3.37$2.68$3.37$2.68,$2.87 25,459$1.80$2.57 33,471$1.89 29,367$1.80 22,067$1.77 19,359$1.68 STATEMENT OF INCOME The following Statement of Income for the five years ended December 31, 1977 has been examined by Haskins fr Sells, independent Certified Public Accountants, whose opinion appears elsewhere in this Prospectus. The Statement should be considered in conjunction with its notes and the other financial statements and related notes appearing elsewhere in this Prospectus. 1973 1974 1975 1976 1977 Thousands of Dollars$384,814$472,036.$544,129$644,147$744,731 10
(a)Reference is made to"RATE MATTERS" for additional information concerning fuel adjustment clauses.(b)Effective January 1, 1974, the Company, as authorized by the PUC, changed its method of accounting for fuel costs to achieve matching of fuel expense and revenues by accounting periods.This change resulted in the charge to income for fuel costs recoverable in the future being deferred to the periods in which these costs are billed to customers through application of fuel adjustment clauses.For 1974, fuel costs were lower by a net amount of$26.6 million and, after income tax effects,'Earnings Applicable to Common Stock were increased by$12.6 million ($0.57 per share)as a result of this accounting change.The Nonrecurring Credit shown on the Statement of Income represents the cumulative effect to December 31, 1973 of the change in accounting for fuel costs, net of related income taxes.In the following summary, earnings"As Reported" includes the Nonrecurring Credit recorded in 1974and earnings"Restated" reflects the effect of retroactive application of the change in accounting for fuel costs and related income tax effects had the new method been used since the principal fuel adjustment clause became effective: 1973 1974 Earnings Applicable to Common Stock (thousands of dollars)As Reported.Restated.Earnings Per Share of Common Stock (1)As Reported.Restated.$49,721$67,823 51,066 63,661.$2.57$3.07 2.64 2.88 (1)Based on average number of shares outstanding.(c)Reference is made to"BUSINESS-Fuel Supply (Coal)" for information concerning operations of The Oneida Mining Company (Oneida), one of the Company's subsidiaries, related to (1)the write-otf of certain development costs reflected in Other income-net and (2)the pricing of coal produced by Oneida for fuel adjustment clause purposes reflected in fuel costs, which reduced the Company's net income by approximately $6.6 million and$4.3 million, respectively, in 1977.Future losses may be incurred it present mining plans prove not to be economically feasible.(d)Reference is made to Note 10 to Financial Statements for information relating to taxes.(e)As provided in the Uniform System of Accounts, the cost of funds used to finance construction projects is capitalized as part of construction cost.After a project is placed in service the Company is permitted to include in rates charged for utility service a return on, and depreciation ot, the cost of funds so capitalized. The components of Allowance for funds used during construction (Allowance) shown on the Statement of Income under Other Income and Deductions and Interest Charges are non-cash items equal to the cost of funds capitalized during the period and serve to oftset on the Statement of Income the cost of financing construction. Since February 1, 1974, the Allowance rate has been computed on an after-tax basis and income tax reductions associated with tlie interest (borrowed funds)component of the Allowance are reflected in 11 Prior to January 1, 1977, the method used did not provide for direct compounding and the Company computed the Allowance by applying the rate to a construction work in progress base which did not include the accumulated Allowance which had previously been recorded.However, an equivalent rate can be calculated for the period 1973-1976 by relating the amount of Allowance recorded during the period to the balances of the construction work in progress including the related accumulated Allowance. The Company's Allowance rates and the equivalent rates are as follows: Allowance Equivalent Rate Rate 8.5'/0 7.9'/o 7.5 , 7.0 8.0 7.3 9.25 8.3 8.75 7.9 7.4 7.9 January 1, 1973-January 31, 1974......February 1, 1974-June 30, 1974.......... July 1, 1974-December 31, 1974......... January 1, 1975-December 31, 1975...January 1, 1976-December 31, 1976...January 1, 1977-December 31, 1977:..Beginning January 1, 1978..................... Based on the assumption that funds required for construction financing were provided substantially in the same proportion as the Company's average capitalization ratios over the five-year period ended December 31~1976 (51'/o debt, 18/o preferred and preference stock and 31/o common stock equity)and using an after-tax cost of debt since February 1, 1974, the portion of the Allowance attributable to funds provided by common equity as a percentage of'Earnings Applicable to Common Stock for the years 1973-1976 would be approximately as follows: Income tax credits under Other Income and Deductions with a corresponding increase in the provision for income taxes charged to Operating Expenses.During the period February 1, 1974 through December 31, 1976, the Allowance rate was computed semi-annually in accordance with procedures initiated by the PUC using a specified rate for common equity and the cost of fixed rate securities issued in the twelve months preceding the semi-annual computation. Effective January 1, 1977, the Company computed the Allowance rate in accordance with a 1977 FERC order which (1)provides a formula for determining the maximum Allowance rate, (2)provides for semi-annual compounding and (3)provides for segregating the Allowance into two components, borrowed funds and equity funds.The gross borrowed funds component recorded since January 1, 1977 is included as a credit in the Interest Charges section of the Statement of Income and the remainder of the total Allowance recorded is shown under Other Income and Deductions as Equity funds.The Company has not reclassified the Allowance into borrowed funds and equity funds components prior to January 1, 1977 since the allocation would not be comparable to that required under the FERC formula.1973..1974..1975.1976.1 1 o/o 16 21 27 The Company understands that an issue has been raised in litigation to which it is not a party relating to the Allowance as reported by another public utility.In this litigation, it is alleged that actual earnings 12 were not properly presented in that the Allowance was included as"Other income" without an adequate explanation of this item, and that the Allowance is not in fact income as generally understood, but rather a projection of future earnings not reflecting any actual yield on assets or any revenue during any fiscal period and not in fact earned upon completion of construction. The Allowance, which is not an item of current cash income, is included in the financial'statements of the Company in accordance with the applicable regulatory system of accounts and in accordance with generally accepted accounting principles. The Company is unable to predict the outcome of this litigation or its effect, if any, upon the Company.(f)The annual interest requirements on long-term debt outstanding at December 31, 1977, including the amount due within one year, are$99,515,000.(g)Excluding the annual dividend requirements on 40,000 shares of Preference Stock,$9.25 Series, redeemed in January 1978, the annual dividend requirements on Preferred and Preference Stock outstanding at December 31, 1977 are$20,323,000 and$19,500,000, respectively. The following results of operation for the twelve months ended February 28, 1978 are unaudited but in the opinion of the Company include all adjustments (which comprise only normal recurring accruals)necessary for a fair presentation of such results: Operating Revenues$Operating Income............................................. $Net Income-Before Dividends on Preferred and Preference Stock.......$Earnings Applicable to Common Stock$Earnings Per Share of Common Stock.$For factors adversely affecting current results of operation, see the second paragraph under"MANAGE-MENT'S DISCUSSION AND ANALYSIS OF THE STATEMENT OF INCOME".MANAGEMENTIS DISCUSSION AND ANALYSIS OF THE STATEMENT OF INCOME The Statement of Income reflects the results of past operations and is not intended as any representation as to the results of operations for any future period.Future operating results will necessarily be affected by various and diverse factors and developments, including the obtaining of adequate and timely rate increases, fuel costs, fuel availability, business activity, customer demand, energy conservation, interchange power sales, taxes, labor contracts, availability of capital, governmental actions, environmental expenditures and other matters.The Company is unable to predict the combined effect of the above factors on its future operating results.The Company's earnings in 1977 reflected sharply increased electric sales to interconnected utilities at higher prices and a full year's impact of rate increases which became effective in 1976.The 1976 rate increases will not have a comparable favorable effect on 1978 operating results, as they did in 1977.Accordingly, because of continuing increases in the costs of doing business and expected lower sales to interconnected utilities, lower earnings are anticipated for 1978.In addition, for information concerning a strike by the United Mine Workers of America which is adversely affecting the Company's 1978 operations and earnings, see"BUSINESS-Fuel Supply (Coal)".The following analysis of the Company's financial performance explains the reasons for changes in specific items on the Statement of Income comparing the years 1976 to 1975 and 1977 to 1976.13 A't'I Energy Sales and Operating Revenues The change in operating revenues from the prior year is attributable to the following: Increase (Decrease) csee ian Millions of Dollars Electric revenues Quantity of sales to: Ultimate customers.Others for resale.Rate increases Fuel adjustment clauses.Other (including tax surcharge) Steam revenues Total$19.3 0.3 40.4 33.8 7.3 101.1 (1.1)$100.0$18.0 0.4 36.5 36.7 9.2 100.8 (0.2)$100.6 The Company's energy sales increased 6.5%in 1976 reflecting an improvement in the economy and industrial activity in the Company's service area.Energy sales for 1977, excluding sales of Hershey Electric Company (acquired December 31, 1976), increased 578 million kwh or 2.8%over 1976.Hershey Electric Company sales, which are not included in sales statistics prior to January 1, 1977, totaled 269 million kwh in 1977 resulting in a consolidated sales increase of 4.2%in 1977.The lower sales growth in 1977 was due principally to more moderate weather and a tempering of general economic growth.Rate increases for ultimate customers became effective in September 1975 ($21.0 million annually), April 1976 ($20.0 million annually)and August 1976 ($37.3 million annually). The Company's tariffs include fuel adjustment clauses which adjust prices for electric service for variations in'he cost of fuel used to generate electricity. See, however, the discussion of the Company's Oneida mine under"BUSINESS-Fuel Supply (Coal)" concerning the limited recovery of the cost of coal mined at Oneida.Revenues from the fuel adjustment clauses totaled$168.3 million in 1976 and$205.0 million in 1977, reflecting the increased level of fuel costs and additional energy sales.Reference is made to"RATE MATTERS" for additional information concerning general rate increases granted the Company and fuel adjustment clauses.Cost of Energy The net cost of energy includes fuel expense plus power purchases less power sold to other utilities. Included in power purchases is the value of electricity generated during the test period of the Company's new generating units. ' Fuel.The change in fuel expense from the prior year is attributable to the following: Increase (Decrease) 1976 1977 Millions of Dollars Electric fuel expense Quantity of electricity generated...Average cost of fuels burned........$17.9$54.8 36.0 60.0 53.9 114.8 Less increase in fuel costs deferred to match revenues from fuel adjustment clauses....... Steam heat fuel expense Total..2.9 51.0 (0.8)$50.2 2.8 112.0 (0 1)$111.9 The cost of fuel consumed increased during 1976 and 1977 as a result of greater generation of energy and increases in the cost of fuels purchased. The increase in energy generated was due principally to the addition of the oil-fired Martins Creek units-No.3 was placed in service in October 1975 and No.4 was placed in service in March 1977.See"ELECTRIC STATISTICS" for detail of generation by fuel source.The average cost of fuels consumed increased during 1976 and 1977 due to the combined effects of higher coal prices and the cost of oil consumed at the Martins Creek units, which have a fuel cost per kwh generated approximately twice that of the Company's coal-fired units.The average cost of fuel consumed per kwh generated was 1.04 cents in 1975, 1.17 cents in 1976 and 1.35 cents in 1977.The portion of the cost of fuel consumed which is recoverable through fuel adjustment clauses is deferred to the period in which such costs are billed to customers. Interchange Power Sales.The total electric energy available for sale includes energy generated by the Company's plants and power purchased from others, after deducting Company uses and line losses.During 1976 and 1977, approximately 29/o and 37/o, respectively, of the total electric energy available was sold to other utilities under interconnection arrangements. As required by both the PUC and FERC, such sales are not recorded as.Operating Revenues but are credited to Operating Expenses on the Statement of Income.The change in interchange power sales from the prior year is attributable to the following: Increase (Decrease) Quantity of energy sold..Average price of energy sold.Other.Total.1976 1977 Millions of Dollars$(7.9)$77.6 (5.7)65.5 0.9 3.2$(12.7)$146.3 15 The price received for power sold on the interchange reflects a splitting of the difference between the buyer's and the seller's cost of generation. During 1976 there was a narrowing of the differential between the Company's cost of generating electricity and the price received for interchange power sales.Also ln 1976, increased sales to customers reduced the quantity of economic power available for sales to interconnected companies. The Company experienced an unprecedented level of interchange sales during 1977 at higher prices.These sales were the result of many-factors, including the addition of new generating capacity (Martins Creek Unit No.4), excellent performance of the Company's generating units, extreme weather conditions during certain winter and summer months and the extended outages of several major generating units of other interconnected companies. The average price the Company received for Interchange power sales was 1.97 cents per kwh in 1975, 1.90 cents per kwh in 1976 and 2.43 cents per kwh in 1977.These amounts were substantially in excess of the Company's average fuel costs.Other Operation and Maintenance Expenses The increases in other operation and maintenance expenses such as wages and benefits, materials and supplies, rents and insurance principally reflect the effects of inflation and the costs of operation and maintenance of new facilities placed in service, Including the Company's Martins Creek oil-fired units.Depreciation Increased depreciation expense is due to new facilities placed in service, including Martins Creek Units Nos.3 and 4 which began commercial operation in 1975 and 1977, respectively. For information concerning a reduction in the Company's composite depreciation rate as of January 1, 1976, see Note 5 to Financial Statements. Taxes For an analysis of taxes, see Note 10 to Financial Statements. Allowance for Funds Used During Construction The Allowance for funds used during construction has increased substantially during the years being compared as a result of the Company's extensive construction program.For additional information concerning the Allowance, see Note (e)to the"STATEMENT OF INCOME".Other Income-Net The reduction in Other income-net during 1977 reflects, among other things, a$6.6 million (net of income taxes)loss of The Oneida Mining Company, a subsidiary, which was recorded by the Company in accordance with the equity method of accounting. For additional information see"BUSINESS-Fuel Supply (Coal)". Cost of Fixed Income Securities The changes from the prior year in interest charges on debt and in dividends on Preferred and Preference Stock were: Increase (Decrease) 1976 1977 Millions of Dollars Interest Charges Long-term debt.Short-term debt.Other.Dividends on Preferred and Preference Stock..... $11.9$11.7 0.9 (2.6)0.1 0.4 8.9 3.6 The increases in Iong-term debt interest charges and dividends on Preferred and Preference Stock were due to issuance of securities principally to finance the Company's construction program and the refinancing of maturing debt with securities bearing higher interest rates.During 1976 and 1977, outstanding long-term debt increased by$217 million and Preferred and Preference Stock increased by$121 million.Interest charges on bank loans and commercial paper notes vary from year to year in relation to the amount of short-term debt outstanding and the interest rates in effect.For additional information on short-term debt see Note 4 to Financial Statements. 17 CAPITAL STRUCTURE The capital structure of the Company at December 31, 1977 and as adjusted as of that date to give effect to (1)the redemption of 40,000 shares of Preference Stock,$9.25 Series, in January 1978 and (2)the sale of the Common Stock offered hereby is as follows (thousands of dollars): Actual Amount 4/i Of Total As Adjusted Amount 4/i of Total Long-Term Debt(a)First mortgage bonds (2a/4/o-10'/a/o).............. Notes.Unamortized (discount) and premium-net...Total long-term debt........................ Shareowners Investment(b) Preferred and series preferred stock (3 35o/o-9.24 /o)" Preference stock ($8.00-$13.00)................... Total preferred and preference stock Common stock.Capital stock expense.Earnings reinvested Total common equity.... Total shareowners investment ...Total capitalization .....$1,245,000 20,929 (5,434)1,260,495 48.3 281,375 10.8 206,000 7.9 487,375 582,983 (10,630)286,911 859,264 1,346,639 33.0$2,607,134 100.0$1,245,000 20,929 (5,434)1,260,495 47.3 281,375 10.5 202,000 7.6 100.0 483,375 645,983(c) (10,774)(d) 286,905(d) 922,114 34.6 1,405,489$2,665,984 ,(a)See Notes 4 and 8 to Financial Statements for details concerning short-term and long-term debt.Long-term debt at December 31, 1977 includes$3,756,000 due within one year classified as a current liability on the Balance Sheet.At February 23, 1978 there were no bank loans outstanding and$26.5 million of commercial paper notes outstanding at a weighted average discount rate of 6.75'/o.See Notes 12 and 15 to Financial Statements for information concerning leases and commitments and contingent liabilities.(b)See Note 6 to Financial Statements for details concerning capital stock.(c)Based on assumed proceeds to the Company from the sale of Common Stock offered hereby.The adjusted amount does not include proceeds received subsequent to December 31, 1977 for Common Stock sold under the Company's dividend reinvestment plan.(d)Adjusted for estimated issuance expenses for the Common Stock offered hereby totaling$150,000 and a$6,000 amortization to Earnings reinvested of Capital stock expense applicable to the Preference Stock,$9.25 Series, redeemed in January 1978.18
BUSINESS Revenues.During 1977, about 40'/o of electric operating revenues came from residential customers, 28/o from industrial customers, 27/o from commercial customers and 5/0 from others.During 1977, the Company's largest customer provided about 4.6'/o of electric operating revenues and the 27 largest industrial customers (each of whose billings exceeded$1 million)provided about 12/0 of such revenues.Industrial customers are broadly distributed among industrial classifications. Power Supply.During 1977, the Company produced 33.4 billion kwh in plants owned by the Company and purchased 0.6 billion kwh under firm purchase agreements. During this period, the Company delivered 12.4 billion kwh and received 1.4 billion kwh as power pool interchange. The Company's Martins Creek oil-fired Unit No.4 (820,000 net kilowatt capability) was placed in service in March 1977.The Company's power capability (winter rating)at December 31, 1977 was as follows: Plant Coal-Fired Montour.Brunner Island S unbury.Martins Creek.Keystone.Conemaugh..Holtwood Total Coa!-Fired. Oil-Fired Martins Creek.Combustion Turbines and Diesels..Hydro.Total Generating Capability..... Firm Purchases-Hydro.Total Capability. Net Kilowatt Capability 1,515,000 1,464,000 389,000 300,000 210,000(1) 194,000(2) 73,000 4,145,000 1,640,000 539,000 146,000 6,470,000 76,000(3)6,546,000 (1)Company's 12.34/o undivided interest.(2)Company's 11.39/o undivided interest.(3)From Safe Harbor Water Power Corporation. See"BUSINESS-Hydroelectric Projects". Approximately 37/o of the Company's generating capability at December 31, 1977 has been placed in service in the last five years and 69/o in the last ten years.The capability of generating units is based upon the operating experience and physical condition of the units and may be revised from time to time to reflect changed circumstances. 19 The maximum one-hour demand on the Company's system was 4,431,000 kw, which occurred on January 10, 1978.The Company estimates that it would have experienced a maximum one-hour demand of 4,514,000 kw on January 17, 1977 if a 5/0 voltage reduction had not been in effect to permit the Pennsylvania-New Jersey-Maryland (PJM)Interconnection to supply emergency power to other power pools.The maximum one-hour summer demand was 3,545,000 kw, which occurred on August 29, 1977.For information concerning interchange power sales, see"MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE STATEMENT OF INCOME" and"ELECTRIC STATISTICS". Power Pool.The Company operates its generation and transmission facilities as a part of the PJM Interconnection. The PJM Interconnection, one of the world's largest power pools, includes eleven companies serving about 21 million people in a 50,000 square mile territory covering all or part of Pennsylvania, New Jersey, Maryland, Delaware, Virginia and Washington, D.C.The PJM companies had approximately 44.5 million kw of installed generating capacity at December 31, 1977 and transmission line connections with neighboring power pools have the capability of supplying an additional
2.1 million
kw to PJM companies. Through December 31, 1977 the maximum one-hour demand on the power pool was approximately 32.2 million kw, which occurred on July 21, 1977.The Company is also a party to the Mid-Atlantic Area Coordination Agreement which provides for the coordinated planning of generation and transmission facilities by the companies included in the PJM Interconnection. Fuel Supply.During 1977, 79/0 of the Company's energy generation came from coal-fired stations, 19/0 from oil-fired stations and 2/o from hydroelectric stations.Anthracite (including petroleum coke).................. Bituminous Coal (1).Total.Coal.The following tabulation shows the amount of anthracite and bituminous coal burned by the Company's generating stations during 1977, and the estimated requirements for coal over the remainder of the expected useful lives of the Company's generating stations.Estimated Burned Requirements During Over plant Type of Fuel 1977 Lives Millions of Tons 1.2 20.0 10.0 235.0 112 255.0 (1)Includes the Company's share of the bituminous coal for the jointly-owned Keystone and Conemaugh generating stations.See"BUSINESS-Power Supply".Labor contracts between mine owners and the United Mine Workers of America expired on December 6, 1977 and a strike started on that date.The curtailment of coal deliveries has resulted in a reduction of coal inventories and has caused the Company, along with other members of the PJM Interconnection (See"BUSINESS-Power Supply"), to implement certain actions designed to reduce the use of coal and to extend the period during which their coal-fired units may be operated at reduced levels.Pursuant to the PJM coal strike contingency plan, which has been filed with the various regulatory commissions having jurisdiction over PJM companies, the output of coal-fired stations on the PJM is to 20 be reduced to 75%of normal levels when coal inventories drop to 45 days supply and 50%of normal levels when coal inventories reach 30 days supply.In accordance with the PJM contingency plan, the Company has reduced the output from its bituminous coal-fired stations as follows: Normal Capability Date of%of Normal Station (kilowatts) Rednollon Genersllon Montour.1,515,000 February 19 75%Brunner Island.1,464,000 January 28 75%Martins Creek 300,000 February 15 50%S unbury 238,000 January 26 75%Based on current reduced levels of generation at its coal-fired stations, the Company estimates that at February 18, 1978 its coal inventory was sufficient for about 44 days of operation (37 days based on normal generation levels).If the strike continues so that bituminous coal levels at the Brunner Island, Montour and Sunbury stations reach 30 days supply, the output of those stations is expected to be reduced to 50%of normal levels, thereby extending the period over which those units can operate.Based on current projections and barring unforeseen circumstances, the Company estimates that its generating capability will be adequate to permit the Company to meet the energy requirements of its customers into May 1978.The receipt of coal from suppliers not affected by the strike, the relaxation of sulfur dioxide emission limitations by'environmental agencies to permit the use of petroleum coke as a supplement to bituminous coal and mandatory reductions of customer usage would be expected to extend further the period over which the generating capability of the Company would be sufficient to meet the energy requirements of the Company's customers. In addition to the reduction of the output from their coal-fired units, the members of the PJM Interconnection, including the Company, and various governmental authorities are urging customers to voluntarily reduce energy consumption. Mandatory reductions of power in certain portions of western Pennsylvania, which are not served by PJM companies, have been approved by the PUC.In the event that the strike is not settled in the near future, further reductions of power and interruptions of service may be mandated by governmental authorities on a wide-scale basis.Reduced output from the Company's coal-fired units has forced the Company to increase its use of higher cost oil-fired generation (including combustion turbines)and has resulted in less energy being available for delivery to interconnected utilities, an important contributor to net income in 1977.At the same time, the Company has had to increase its purchases of power from interconnected utilities. While the increased cost which will result from the greater utilization of the Company's oil-fired generation is recoverable through fuel adjustment clauses, the Company's reduced level of interchange sales and increased purchases of power from interconnected utilities are having an adverse effect on earnings.The adverse effects of the strike on the Company's generating capability and earnings will become more pronounced the longer the strike continues. During 1977, 36%of the Company's coal supply was obtained from subsidiary mining companies (approximately one-third of which was purchased by those companies in the open market), 9%under long-term contracts and 55%by short-term contracts and open market purchases. At December 31, 1977, the Company's inventory of anthracite was about 2.2 million tons.The balance of the Company's requirements for anthracite, as well as its requirements for petroleum coke, over the remainder of the expected useful lives of the Company's anthracite-fired generating stations is expected to be obtained by the acquisition of additional anthracite silt banks and from short-term contracts and open market purchases. The following tabulation lists the bituminous coal reserves owned or controlled at December 31, 1977 by the Company's subsidiary, Pennsylvania Mines Corporation. These reserves, all of which are located in Pennsylvania, are recoverable by deep mining operations. The information under the headings"Estimated Recoverable Reserves as of January 1, 1976" and"Average/o Sulfur (By'l(l/eight)" was provided by Paul Weir Company Incorporated on the basis of its independent studies and the Company has included such information herein in reliance upon such studies.The Company has not retained any other independent organization to review and report on its bituminous coal reserves.Estimated Recoverable Reserves Average asof 4/a January 1, 1976 1977 Sulfur (By 1976(1)Production Production Weight)(4)ThousandsofTons Assigned Reserves(2) Greenwich Oneida.Rushton.Tunnelton. Total Assigned Reserves..~....Unassigned Reserves(3) Greene Hill.Greene Manor.66,649 21,638 7,694 10,187 106,168 159,877 162,682 1,585 265 556 403 2,809 1,753 220 476 378 2,827 2.7 3.3 4.5 1.7 2.9 3.3 Total Unassigned Reserves... 322,559 Total.428,727 2,809 2,827 (1)Includes only proven reserves for which tonnage is computed from dimensions revealed in outcrop data, mine workings and drill holes.(2)Assigned reserves represent coal which can be mined on the basis of current mining practices and techniques through the use of mine openings and plant facilities currently in existence or under construction. (3)Unassigned reserves represent undeveloped reserves or reserves that would require substantial additional mining facilities before operations could begin.(4)Raw coal, dry basis (prior to cleaning). Prior to 1976 the Company purchased a portion of its coal requirements from The Oneida Mining Company (Oneida), a subsidiary of The North American Coal Corporation (North American), under a long-term cost of production sales contract.In March 1976, in an effort to control the abnormally high cost of coal delivered to the Company from the Oneida mine, the Company asserted a contractual right to 22 take over Oneida.Litigation with North American, which contested the Company's take-over, was settled in February 1977 on terms which gave the Company uncontested control over Oneida.With the conclusion of the litigation the Company was able to expand the scope of studies previously undertaken to determine what changes should be made in Oneida's mining operations. In September 1977, the Company adopted a mining plan which provides for the continuation of steam coal mining in certain sections of the Oneida mine and the write-off of a portion of the development costs incurred from 1970 through 1974 with respect to other sections of the Oneida mine which have been abandoned or bypassed because of poor mining conditions. The sections of the Oneida mine that have been abandoned were not included in the estimate of recoverable reserves for the Oneida mine shown in the above tabulation. This write-off, which was not recovered through the application of the Company's fuel adjustment clauses, resulted in a$6.6 million reduction of the Company's net income ($.20 per share of Common Stock)for the year 1977.Effective February 1, 1977 the Company began to price Oneida coal for fuel adjustment clause calculation purposes at the average cost per ton of coal produced by the Company's other affiliated mines rather than at Oneida's higher cost.This action reduced the Company's net income by about$4.3 million ($.13 per share of Common Stock)during the period from February through December 31, 1977.The Company estimates that its net income will continue to be reduced by about$400,000 per month until the Company determines whether to make additional investments for further development of the Oneida mine.The Company had planned to reach a decision with respect to the Oneida mine by mld-1978, but because of lost production time resulting from the strike by the United Mine Workers of America, the Company expects to delay that decision until late 1978.In the event that the Company determines to make these investments, it is expected that the difference between the cost of Oneida coal and the average cost per ton of coal produced by the Company's other affiliated mines will be capitalized rather than being included in the current cost of coal.The amount capitalized would be reflected in the cost of coal after the mine was fully developed. However, if adverse mining conditions prevent the further development of the Oneida mine, mining operations may be terminated and additional losses incurred.At December 31, 1977 and after giving effect to the September 1977 write-off, the aggregate capital investment in Oneida's facilities (including lease obligations) amounted to about$35 million, substantially all of which was guaranteed directly or indirectly by the Company.r The Company has a long-term contract with a bituminous coal supplier (Lady Jane)under which the supplier is obligated to deep-mine its reserves to exhaustion. Production at the Lady Jane mine amounted to 185,000 tons during 1977.Run-of-mine coal from the Lady Jane mine has an average sulfur content of about 3.5%%d.The coal burned in the Company's generating stations contains both organic and pyritic sulfur.Mechanical cleaning~processes installed at the mines are being utilized to reduce the pyritic sulfur content of the coal.The reduction of the pyritic sulfur content has lowered the total sulfur content of the coal burned to levels which permit compliance with current sulfur dioxide emission regulations established by the Pennsylvania Department of Environmental Resources (DER).See"BUSINESS-Environmental Matters".The regulations applicable to the Company's generating stations generally, limit the total sulfur content of coal to not more than 2.5/o.Coal obtained under short-term contracts and by open market purchases currently has an average sulfur content of about 2.2'/o.23
/The Company owns a 12.34/o undivided interest in the Keystone station and an 11.39'/o undivided interest in the Conemaugh station, both of which are mine-mouth generating stations located in western Pennsylvania. The owners of the Keystone station have a long-term contract, which may be extended through 2012, with a supplier for 90k of the annual bituminous coal requirements of the Keystone station.The owners of the Conemaugh station have a long-term contract with another supplier for at least 80/o of the annual bituminous coal requirements of the Conemaugh station for the life of the station.To the extent that the requirements of these plants are not covered by long-term contracts, the bituminous coal requirements are, with minor exceptions, obtained from local suppliers. The Company expects that assigned reserves and long-term contracts will provide 40'/o to 50'/o of its projected bituminous coal requirements during the next five years.The balance of these requirements will have to be obtained under short-term contracts or by open market purchases. The extent to which unassigned reserves may eventually be mined to meet the fuel requirements of future generating stations will depend upon future economic conditions and other factors which cannot now be predicted. Excluding mine-mouth plant requirements, about 83/o of the Company's bituminous coal purchased during 1977 was delivered by the Company's unit trains, which at December 31, 1977 consisted of 980.hopper cars.Use of the Company's hopper cars for delivery of coal minimizes the Company's dependence upon railroad-supplied hopper cars which from time to time are in short supply.The average delivered cost of coal has increased substantially over the past several years from$11.89 per ton in 1973 to$25.72 per ton during 1977.The average delivered cost of coal purchased during 1977 was as follows: bituminous coal purchased from subsidiary companies (including coal purchased by those companies in the open market)and under long-term contracts,$30.64 per ton;bituminous coal purchased by the Company under short-term contracts and in the open market,$24.20 per ton;and anthracite, including petroleum coke,$11.31 per ton.Bituminous coal purchased in the open market by the Company and its subsidiaries is primarily surface-mined. Bituminous coal produced by subsidiary companies and purchased by the Company under long-term contracts is deep-mined. Oil.The two 820,000 kw oil-fired generating units at the Company's Martins Creek station are designed to burn either crude or residual oil and to follow significant load changes or operate as base load units.J The Company has contracted with oil suppliers for the expected requirements of the Martins Creek oil units through 1979.An agreement with one of the suppliers, under which the Company can purchase up to three-quarters of its expected oil requirements for these units, provides for automatic annual renewals beyond 1979 unless terminated upon one year's prior written notice by either party.Oil for the Martins Creek station is delivered to a deep water terminal on the Delaware River at Marcus Hook, Pennsylvania. The Company has a long-term contract with an unaffiliated company to provide unloading and oil storage services at that terminal.The oil is transported from Marcus Hook to storage facilities at the Martins Creek station by a pipeline which was constructed primarily for the use of the Company by its subsidiary, Interstate Energy Company (IEC).The pipeline and related facilities, substantially the only assets of IEC, were placed in service at a cost of approximately $55 million.Of that amount,$40.5 million was obtained from the Company and the balance was borrowed from banks.The.Company expects to formalize its obligations for the operating expenses and annual carrying charges of the pipeline in connection with the permanent financing of these facilities in 1978.FERC and PUC tariffs are in effect for the delivery of oil by IEC from Marcus Hook to Martins Creek.24 k The Company and IEC have arranged to provide pipeline delivery services to another utility beginning in mid-l978.Pipeline delivery services may be available from the deep water terminal to other delivery points at locations and tariff rates which have not yet been established. Nuclear.The Company presently has under construction two nuclear-fueled generating units at its Susquehanna site.See"CONSTRUCTION PROGRAM".In anticipation of the commercial operation of these units, the Company has made commitments to meet certain of the nuclear fuel cycle requirements for these units., The nuclear fuel cycle consists of the mining and milling of uranium ore to uranium concentrate; the conversion of uranium concentrate to uranium hexafluoride; the enrichment of uranium hexafluoride; the fabrication of fuel assemblies; the utilization of nuclear fuel in the reactor;temporary storage of spent fuel;and the reprocessing or permanent disposal of spent fuel.Based upon the presently scheduled in-service dates and planned fuel cycles for these units the following tabulation shows the year through which contracts are expected to provide the Susquehanna station's requirements for the various segments of the nuclear fuel cycle, assuming that suppliers meet their contractual commitments. Susquehanna Unit 1.....Susquehanna Unit 2.....Uranium Concen-trate(1)(2)1983 1983 Conversion 1985 1985 Enrichment 2007 2009 Fabriaalion 1994 1994 Re process-ing(3)1992 1992 (1)The Company has an option to purchase a portion of a supplier's production for the years 1984-1990 which, if exercised, will provide a portion of the Company's uranium concentrate requirements for that period.(2)The uranium concentrates scheduled to be delivered through 1983 are expected to be sufficient to permit the operation of the Susquehanna units through 1985.Under its enrichment contracts with the Company, the Department of Energy (DOE)may make changes in enrichment specifications. Such changes may necessitate the acquisition by the Company of additional quantities of uranium concentrate during the periods indicated in the tabulation. (3)There are currently no commercially operating facilities in the United States for the reprocessing of spent fuel.Shipments from Susquehanna to the reprocessor were initially scheduled to begin in the early 1980s following the expansion of the reprocessor's facility.The reprocessor has informed the Company that because of the increased capital and operating costs expected to be incurred to comply with NRC criteria relating to the expansion, the reprocessor does not intend to continue in that business and is seeking to teiminate the contract with respect to the Susquehanna units.The Company estimates that there will be sufficient storage capability in the spent fuel pools at Susquehanna to accommodate the fuel that is expected to be discharged through 1984.Because the Company does not currently anticipate being able to ship spent fuel off-site by 1985 for storage or reprocessing, the Company is developing plans to install additional spent fuel storage capacity in the Susquehanna spent fuel pools.In April 1977 President Carter stated that he would defer indefinitely the commercial reprocessing of spent nuclear fuel and the recycling of the plutonium produced in domestic and foreign nuclear power programs.Based in part on President Carter's statements, the NRC has 25 'P p , terminated its rulemaking proceeding regarding the recycling of spent fuel.In October 1977 DOE , proposed a policy under which the Federal Government would take title to spent nuclear fuel from electric utilities on payment of a fee and assume responsibility for its interim storage and ultimate disposal.Additional arrangements, for which there is no present assurance, will be required to satisfy the fuel requirements of the Susquehanna units over their estimated useful lives.Regulation. The Company is a public utility under the laws of the Commonwealth of Pennsylvania and is subject to regulation as such by the Pennsylvania Public Utility Commission. The Company is subject in certain of its activities to the jurisdiction of the Federal Energy Regulatory Commission under Parts I, II and III of the Federal Power Act.The Company is a holding company under the Public Utility Holding Company Act of 1935 but has been exempted by the Securities and Exchange Commission from the provisions of that Act applicable to it as a holding company.The Company is subject to the jurisdiction of the Nuclear Regulatory Commission in connection with the construction of the Susquehanna units.See"CONSTRUCTION PROGRAM".The Company is also subject to the jurisdiction of certain Federal, regional, state and local regulatory agencies with respect to air and water quality, land use and other environmental matters.See"BUSINESS-Environmental Matters".The coal mining operations of the Company's subsidiaries are subject to the Federal Coal Mine Health and Safety Act of 1969.Proposed Energy Legislation. A conference committee of Congress'currently is considering legislation designed to achieve energy conservation through the application of various regulatory and tax measures and to encourage the development and use of relatively abundant domestic fuels-primarily coal.The conference committee has tentatively agreed to require state public utility commissions to consider certain rate design standards. The Company is unable to predict what measures, if any, will ultimately be enacted or what effect any measures enacted will have on the Company.Environmental Matters.The Company is subject to certain present and developing Federal, regional.state and local laws and regulations with respect to air and water quality, land use and other environmental matters.Except as described below, the Company is presently in substantial compliance with applicable environmental laws and regulations and has all of the permits currently required to operate its facilities. Air.The Federal Clean Air Act Amendments of 1977 (1977 Amendments) include, among other things, provisions that: (a)require the prevention of significant deterioration of existing air quality in regions where air quality is better than applicable ambient standards;(b)restrict the construction of new emission sources, including coal-fired and oil-fired generating stations, in areas which have not attained specified ambient air quality standards;(c)revise the standards of performance applicable to new emission sources and require that new fossil fueled generating units achieve the revised standards by the application of the best available control technology which reqUirement, in effect, appears to prohibit the use of low sulfur coal at new emission sources without further treatment, such as the cleaning of coal or the use of scrubbers; and (d)require the United States Environmental Protection Agency (EPA)to impose substantial non-compliance penalties for failure to comply with air pollution regulations after July 1, 1979 and provide for new civil penalties of up to$25,000 per day of violation for facilities found to be in violation of the requirements of an applicable implementation plan.26 Under procedures established by the Pennsylvania Department of Environmental Resources (DER)prior to the 1977 Amendments, companies not in compliance with emission regulations have been permitted to enter into consent orders with DER which allow continued operation of facilities during the time in which steps are being taken to achieve compliance. In this regard, the Company and the DER have entered into a consent order with respect to particulate emission regulations as follows: 1 Unit Comptiance Date Brunner Island No.1.December 31, 1980 Brunner Island No.3.June 30, 1981 Montour No.1.June 30, 1981 Montour No.2 December 31, 1980 As a result of the 1977 Amendments, the Company expects to enter into a new consent order with DER which will establish new compliance dates of not later than July 1, 1979 for the Montour units.The Company currently anticipates that the installation of flue gas conditioning equipment at the Montour units and additional fuel quality control equipment or procedures at the Company's affiliated mines will permit the Company to achieve compliance at the Montour units by July 1, 1979.The Company also expects to enter into a new consent order with DER for the Brunner Island units.Since the Company has been proceeding on a schedule which was designed to achieve compliance at the Brunner Island units by the dates shown in the tabulation, the Company will not be able to achieve compliance at these units by July 1, 1979.As a result, it is expected that the compliance dates established by the new consent order for the Brunner Island units will remain unchanged from that shown ln the tabulation. Although the amount of the Company's payments to the Pennsylvania Clean Air Fund pursuant to the new consent orders has not been determined, the Company expects that the payments will be substantially in excess of$3,500 per month which is being paid pursuant to the current consent order.Because of non-compliance of the Brunner Island and Montour units, the Company may be subject to substantial non-compliance and civil penalties under the 1977 Amendments in amounts which are not now determinable. The Company and DER are currently discussing a consent order for Unit No.4 at the Company's Sunbury station.The Company expects that any consent order would permit the Company to continue to operate the unit during the time in which the Company is taking steps to achieve compliance with DER particulate emission regulations, Although it currently expects that Unit No.4 at the Sunbury station can be in compliance with applicable DER standards by July 1, 1979 the Company may be subject to fines or penalties, including fines or penalties under the 1977 Amendments, during the period of non-compliance. The Company's request for an operating permit for Sunbury Unit No.3 is currently pending before DER.In July 1977 EPA notified the Company of an alleged violation at the Company's Holtwood steam station of opacity particulate emission regulations established by DER.Following discussions with DER and EPA, the Company in January 1978 agreed to install additional emission control facilities at the Holtwood station.It ls expected that these facilities will not be able to be placed in service before mid-1981 and that the Company may be subject to fines and penalties for failure to meet the July 1, 1979 compliance date established by the 1977 Amendments. The Company's estimate of construction expenditures for the years 1978-1980 includes estimated expenditures during that period to achieve compliance with DER particulate emission regulations at the Brunner Island, Montour, Sunbury and Holtwood Units.See"CONSTRUCTION PROGRAM".27 ll pl The processing of coal to reduce the sulfur content prior to burning permits the Company to comply with current sulfur dioxide emission regulations. If, however, the sulfur dioxide emission regulations applicable to the Company's existing generating stations are amended to significantly reduce permissible discharges, the Company may be required to further reduce the sulfur content of the coal prior to burning or install equipment for the removal of sulfur dioxide from flue gases.DER has proposed regulations which, if adopted, could have the effect of limiting the sulfur dioxide emissions from the Company's Sunbury station.Compliance with such regulations could be expected to require the Company to make additional expenditures at the Sunbury station in amounts which are not now determinable. VYater.To meet the standard of"best practicable control technology currently available" established by the Federal Water Pollution Control Act, as amended in December 1977 (Water Act), the Company's coal mining subsidiaries are planning to install waste water treatment equipment at certain of their facilities and have filed the necessary applications with DER.The failure by the subsidiaries to meet the Water Act standard by July 1, 1977 may subject the subsidiaries to fines and penalties which are not expected to be material in amount.The Water Act requires the application of the"best available technology economically achievable" by July 1, 1984 with respect to certain discharges from existing facilities and authorizes EPA to establish discharge limitations and compliance schedules for certain other pollutants. With respect to"new" facilities, the Water Act authorizes EPA to establish standards of performance which will require the application of the"best available demonstrated control technology". The Water Act also requires that the location, design, construction and capacity of cooling water intake structures reflect the application of the"best technology available for minimizing adverse environmental impact".EPA has adopted effluent limitations, guidelines and standards for steam electric stations and guidelines for existing coal mines.EPA limitations, guidelines and standards are enforced through the issuance of discharge permits which specify the applicable limitations on discharges. Compliance with applicable state and regional water quality standards is accomplished by requiring the appropriate state or interstate agency to issue a water quality certification with respect to each application. The terms and conditions of any such water quality certification must be incorporated in the discharge permit issued by EPA.EPA has issued discharge permits for the operation of the Company's generating stations and for construction activities at the Susquehanna station.Applications for discharge permits for the sewage treatment plant at the Montoursville service center and the coal mining operations of the Company's subsidiaries are pending before EPA.DER has issued the required water quality certification for the Pennsylvania Mines Corporation (PMC)discharge permits.The Company believes that certain discharge limitations contained in the DER certification for the Montour station are more stringent than those established by applicable guidelines and regulations and has requested a hearing before DER concerning these limitations. DER also administers state and certain regional laws and regulations with respect to effluent discharges and water quality.The Company and DER are also discussing the necessity of installing additional water treatment facilities at certain of the Company's plants.Regulations adopted by the Department of Interior's Office of Surface Mining, Reclamation and Enforcement pursuant to the Surface Mining Control Act of 1977, which also applies to the disposal of refuse from underground mines, are expected to,delay the issuance by DER of a coal refuse disposal permit for PMC and may require additional expenditures at PMC in amounts which are not now determinable but which may be substantial. 28 Delaware River Basin Commission approval of the Company's water withdrawal permit for the oil-fired units at the Martins Creek station requires the Company to provide make-up water at certain times or-to curtail operation of these units during certain periods of low flow in the Delaware River.It is the Company's intention to supply the required make-up water from its Lake Wallenpaupack hydroelectric project.See"BUSINESS-Hydroelectric Projects". The regulations of the Susquehanna River Basin Commission require that water users provide make-up water during certain periods of low flow in the Susquehanna River.In connection with the construction of the Susquehanna station, the Company is considering, among other alternatives, the construction of a reservoir to provide make-up water.Preliminary environmental and engineering feasibility studies with respect to the reservoir have been undertaken by the Company and the Company estimates that the cost of this reservoir would approximate $45 million.The Company's share of such cost during the years 1978-1980 is included in its estimate of construction expenditures for that period.See"CONSTRUCTION PROGRAM".'In 1974 the Borough of Tremont, Pennsylvania, and several residents of the Borough of Tremont commenced a suit against ten defendants, including the Company, in the Court of Common Pleas, Schuylkill County, Pennsylvania. The complaint in this proceeding (which purports to be a class action on behalf of all residents of the Borough of Tremont)alleges, among other things, that the failure of the defendants to comply with the provisions of various Federal and state environmental laws in connection with the maintenance of certain culm and silt banks in the vicinity of the Borough of Tremont caused the plaintiffs named in the complaint to suffer damages of approximately $1.3 million during the flooding resulting from Tropical Storm Agnes.In July 1977 Gold Mills, Inc.commenced a suit against the same defendants containing similar allegations and claiming damages of$3.6 million.Plaintiffs in both proceedings are seeking to recover punitive damages in unspecified amounts.Nuc/ear.The U.S.Court of Appeals for the District of Columbia in July 1976 announced decisions in two cases to which the Company was not a party concerning the scope of the NRC environmental review of nuclear plants.In one decision the Court held that the NRC must give further consideration in all cases to the environmental impact of the reprocessing of spent fuel and the disposal of radioactive waste material.In October 1976 the NRC initiated rulemaking proceedings to evaluate further the environmental impact of reprocessing and waste disposal and in March 1977 the NRC adopted an interim rule relating to these matters.In August 1977, in its decision terminating the show cause proceedings initiated by an environmental group to halt the construction or operation of 14 nuclear fuel units in Pennsylvania and New Jersey, including the Susquehanna units, the NRC Appeal Panel concluded that the application of the interim rule would not significantly affect the cost benefit analysis for the Susquehanna units.A further proceeding relating to a final rule with respect to the environmental impact of the reprocessing of spent fuel and the disposal of radioactive waste material is currently pending before the NRC.It is expected that the results of the NRC rulemaking proceedings will serve as a basis for the cost benefit analysis required by the National Environmental Policy Act of 1969 in connection with the issuance of operating licenses for nuclear plants including the Susquehanna units.In the other decision the Court held that the NRC must consider energy conservation as an alternative to the construction of nuclear plants in licensing proceedings where energy conservation (in addition to alternative means of generating power)is raised as an issue.Since energy conservation is considered in connection with individual licensing proceedings, the NRC has not initiated a rulemaking proceeding with respect to these matters.The Supreme Court has granted review of both Court of Appeals decisions. The action of the NRC in March 1977 in adopting the interim rule relating to the environmental impact of fuel reprocessing and 29 waste disposal has been appealed to the U.S.Court of Appeals for the District of Columbia.The Company is unable to predict what further actions may be taken by the NRC or the Courts with respect to any of these matters or the effect that such actions or actions by environmental agencies could have on the cost or in-service dates of the Susquehanna units.See"CONSTRUCTION PROGRAM".General.During the period 1973 through 1977, the Company's construction expenditures aggregated about$1.61 billion, of which the Company estimates that about$83 million was for compliance with Federal, state and local environmental laws and regulations. Approximately $150 million of capital expenditures for such compliance are included in the Company's 1978-1980 construction program and it may be that substantial additional expenditures for such purposes in an amount not now determinable will be required during such period and thereafter. From time to time the Company and its subsidiaries have been cited for violations of DER and EPA air and water quality regulations in connection with the operation of their facilities and, as a result, may be subject to certain penalties which are not expected to be material in amount.The Company is unable to predict the ultimate effect of developing environmental law and regulation upon its existing and proposed facilities and operations. However, it is possible that such law and regulation may require the Company to modify, supplement, replace or cease operating its equipment and facilities, delay or impede its construction and operation of new facilities, and require it to make substantial additional expenditures In amounts which are not now determinable. Hydroelectric Projects.The Company operates the Holtwood hydroelectric project (102,000 kw capability) and the Wallenpaupack hydroelectric project (44,000 kw capability), the original licenses for which expired in 1970 and 1974, respectively. Pending final action on the Company's applications for new long-term licenses for both projects, FERC has granted the Company interim annual licenses to operate the projects.The interim annual licenses incorporate the terms and conditions of the original long-term licenses.The Company's Holtwood application is being opposed by a municipal electric system.The Holtwood and Wallenpaupack projects represent current investments on a depreciated original cost basis of$9.6 million and$10.1 million, respectively. The Federal Power Act provides that if, upon expiration of a major project license, the United States takes over the project or a license for the project is issued to a new licensee, the original licensee shall be paid the"net investment" in the property, not to exceed fair value, plus severance damages, if any.Certain reserves which are required by the Act and which relate to the calculation of"net investment" have not been recorded pending approval of the amounts thereof by FERC.In April 1977, FERC issued a proposed rulemaking which, if adopted, would require a licensee to record these reserves by an appropriation of earnings reinvested. The amount of earnings reinvested so appropriated would be restricted as to the payment of dividends. The Company estimates that such reserves applicable to the period 1946 through December 31, 1977 would not exceed$3.1 million for its two licensed projects.The Company also owns one-third of the capital stock of Safe Harbor Water Power Corporation (Safe Harbor)which holds a major project license for the operation of its hydroelectric plant (230,000 kw capability). The Company is entitled to one-third of the capacity (76,000 kw)of the Safe Harbor plant.The Safe Harbor license expires in 1980.In April 1977 Safe Harbor filed an application with FERC for a new long-term license and the proposed installation of five additional 37,500 kw units.The additional units will increase the total capability of the Safe Harbor plant to 417,500 kw and the Company will be entitled to one-thifd of the total capacity (139,167 kw)..30 ELECTRIC STATISTICS 1973 1974 1975 1976 1977 Power Capability(thousands of kw)Coal-fired steam stations Oil-fired steam station..Combustion turbines and diesels........................ Hydroelectric stations..Firm purchases (hydro).Total..Winter Peak Demand (thousands of kw)(a)................. Sources of Energy (millions of kwh)Generated Coal-fired steam stations.Oil-fired steam station.Combustion turbines and diesels................. Hydroelectric stations..Power purchases..Total.Disposition of Energy (millions of kwh)Energy sales to customers. Interchange power sales(b)..Company uses and line losses......Total..Fuel Cost of Energy Generated (cents per kwh).......... Cost of Coal Received, including freight and handling cost (per ton).Energy Sales (millions of kwh)Residential. Commercial. Industrial... Other.Total.Operating Revenues (thousands) Residential. Commercial. Industrial.. Other Total.Number of Customers (end of period)........................ Average Use Per Residential Customer (kwh)............. Average Revenue (cents per kwh)Residential. Commercial. Industrial.. All customers.. Total Operating Expenses per kwh of Energy Sales (cents per kwh)(b)... 4,140 541 146 76 4,903 3,662 4,140 539 146 76 4,901 3 772 4,136 820 539 146 76 5,717 4,122 4,136 820 539 146 76 5,717 4,425 4,145 1,640 539 146 76 6,546 4,431 24,782 273 816 1,968 27,839 18,865 7,237 1,737 27,839 0.50 24,186 247 772 1,570 26,775 18,963 6,079 1,733 26,775 0.88 25,384 1,149 84 859 2,241 29,717 19,113 8,757 1,847 29,717 1.04" 25,751 1,947 40 809 2,126 30,673 20,354 8,358 1,961 30,673 1.17 26,299 6,271 115 735 1,977 35,397 21,201 12,433 1,763 35,397 1.35 6,324 4,262 6,881 1,398 18,865$154,681 101,670 99,928 25,868$382,147 886,378 8,253 6,494 4,275 7,170 1,024 18,963$187,265 121,314 131,452 27,539$467,570 902,148 8,287 6,818 4,575 7,020 700 19,113$218,904 143,673 150,365 25,686$538,628 917,920 8,528 7,267 4,874 7,481 732 20,354$257,828 170,990 180,957 29,949$639,724 936,219 8,931 7,539 5,211 7,697 754 21,201$296,179 201,639 209,527 33,183$740,528 954,613 9,063 2.45 2.39 1.45 2.00 2.88 2.84 1.83 2.44 3.21 3.55 3.14 3.51 2.14 2.42 2.78 3.10 3.93 3.87 2.72 3.45 1.52 1.88 2.21 2.49 2.64$11.89$20.80$23.38$25.36$25.72 Note: Statistics of the Company and Hershey Electric Company are consolidated since January 1, 1977.(a)Winter peak shown was reached early in subsequent year.The Company estimates that it would have experienced a peak for 1976 of 4,514,000 kw if a 5/o voltage reduction had not been in effect.(b)As provided in the applicable regulatory system of accounts, receipts from interchange power sales have been treated as reductions of operating expenses.31 DESCRIPTION OF COMMON STOCK The outstanding Common Stock is, and the Common Stock offered hereby when issued and paid for will be, fully paid and non-assessable. The following is a summary of certain provisions of the Company's Articles of Incorporation and mortgages, copies of which are exhibits to the Registration Statement. Dividend Rights.Subject to the Articles of Incorporation and mortgage restrictions on dividends referred to below and to the preferential rights of the Preferred Stock and Preference Stock, dividends may be declared on the Common Stock out of funds legally available for the payment thereof.Dividend Restrictions. The Company's Articles of Incorporation provide that no dividends (other than dividends payable by the issuance of Common Stock)on, or purchases or acquisitions of, or distributions on, the Common Stock shall be paid or made by the Company aggregating an amount in excess of (a)75'/o of the current year's earnings otherwise available for Common Stock, if after such payment, purchase, acquisition or distribution the ratio of the aggregate of the stated value of Common Stock and earnings reinvested to total capitalization, including earnings reinvested, will be less than 25'/0, and (b)50'/o of such earnings, if after such payment, purchase, acquisition or distribution, such ratio will be less than 20/o.At December 31, 1977 there were no restrictions on the payment of dividends out of earnings reinvested. The Company's mortgage contains a provision which, in general, restricts the payment of Common Stock dividends in cash if the effect thereof will be to bring the aggregate of earnings reinvested plus the provisions for depreciation to a point below the maintenance and replacement fund requirements which have not been satisfied by actual expenditures. Such provision did not result in the restriction of any portion of earnings reinvested of the Company at December 31, 1977.An assumed mortgage on the former Scranton Electric Company properties acquired by merger in 1956 also contains restrictions on the payment of Common Stock dividends which do not limit the availability of earnings reinvested. Voting Rights.Except as hereinafter otherwise set forth, the holder of each share of Preferred Stock, Preference Stock and Common Stock has one vote on any question presented to any shareowners'eeting, a majority in number of shares regardless of class being considered a majority in value or in interest within the meaning of any statute or law requiring the consent of shareowners holding a majority in interest or a greater amount in value of stock of the Company.If and when dividends payable on any Preferred Stock shall be in arrears in an amount equivalent to the annual dividend rate or more per share and thereafter until all dividends on the Preferred Stock in arrears shall have been paid, the holders of the Preferred Stock, voting as a single class, shall be entitled to elect a majority of the full Board of Directors, and the holders of the Preference Stock and Common Stock, voting separately as a class, and subject to the rights of the holders of Preference Stock as described below, shall have the right'o elect the remaining directors. If and when dividends payable on the Preference Stock shall be in arrears in an amount equivalent to one and one-half times the annual dividend rate or more per share and thereafter until all dividends on the Preference Stock in arrears shall have been paid, the holders of the Preference Stock voting as a single class (and subject to rights of holders of Preferred Stock)shall be entitled to elect two directors. Under Pennsylvania law, all shareowners of the Company have the unconditional right of cumulative voting in the election of directors. 32 Liquidation Rights.After satisfaction of the preferential liquidation rights of the Preferred Stock and the Preference Stock, the holders of the Common Stock are entitled to share, ratably, in the distribution of all remaining assets.See Note 6 to Financial Statements for.the liquidation preferences of the Preferred Stock and Preference Stock.Preemptive Rights.The holders of Commbn Stock do not have preemptive rights as to additional issues of Common Stock.Certain Tax Matters.In the opinion of Edward M.Nagel, Esq., General Counsel of the Company, the Common Stock is exempt from existing personal property taxes in Pennsylvania. Listing.The Common Stock is listed on the New York and Philadelphia Stock Exchanges. Transfer Agents and Registrars. The Transfer Agents are certain employees of the Company, Industrial Valley Bank and Trust Company, Allentown, Pa., and Irving Trust Company, New York, N.Y.The Registrars are The First National Bank of Allentown, Pa., and Morgan Guaranty Trust Company of New York, N.Y.EXPERTS The balance sheets as of December 31, 1976 and 1977 and the related statements of income, earnings reinvested, and changes in financial position for each of the five years in the period ended December 31, 1977 included in this Prospectus have been examined by Haskins 8 Sells, independent Certified Public Accountants, as stated in their opinion appearing herein, and have been so included in, reliance upon such opinion given upon the authority of that firm as experts in accounting and auditing.Information in the tabulation of the Assigned Reserves and Unassigned Reserves under the headings"Estimated Recoverable Reserves as of January 1, 1976" and"Average/o Sulfur (By Weight)" under the caption"BUSINESS-Fuel Supply (Coal)" was provided by Paul Weir Company Incorporated and is included herein in reliance on its authority as an expert.Statements made herein as to matters of law and legal conclusions have been reviewed by Edward M.Nagel, Esq., General Counsel of the Company, and have been made in reliance on his authority as an expert.LEGAL OPINIONS The validity of the Common Stock offered hereby will be passed upon for the Company by Edward,, M.Nagel, Esq., General Counsel of the Company, and Messrs.Simpson Thacher 8 Bartlett, New York, N.Y., and for the Underwriters by Messrs.Sullivan 6 Cromwell, New York, N.Y.However, all matters of law of the Commonwealth of Pennsylvania will be passed upon only by Mr.Nagel, who is a full-time employee of the Company.33 'I I J t~l f MANAGEMENT Directors*JACK K.BUSBY, Chairman of the Board and Chief Executive Officer of the Company*ROBERT K.CAMPBELL, President of the Company*RALPH R.CRANMER, Member of the Board of Directors of Grit Publishing Company EDGAR L.DESSEN, Physician-Radiologist 'OBERT R.FORTUNE, Executive Vice President, Financial of the ,Company*HARRY A.JENSEN, President and Chief Executive Officer of Armstrong Cork Company*Member of Executive Committee. Officers JACK K.BUSBY, Chairman of the Board and Chief Executive Officer ROBERT K.CAMPBELL, President ROBERT R.FORTUNE, Executive Vice President, Financial VIRGINIA H.KNAUER, President of Virginia Knauer and Associates, Inc.W.DEMING LEWIS, President of Lehigh University JOHN A.NOBLE, Chairman of the Board and Chief Executive Officer of Cleiand Simpson Company RUTH PATRICK, Chief Curator of the Limnology Department of the Academy of Natural Sciences of Philadelphia NORMAN ROBERTSON, Senior Vice President and Chief Economist of Mellon Bank, N.A.*JOSEPH T.SIMPSON, Chairman of the Board of Harsco Corporation CHARLES H.WATTS II, Educational and Business Consultant, former President of Bucknell University JOHN T.KAUFFMAN, Vice President, System Power L Engineering EMMET M.MOLLOY, Vice President, Human Resource 8 Development LEON L.NONEMAKER, Vice President, Division Operations CHESTER R.COLLYER, Treasurer NORMAN W.CURTIS, Vice President, Engineering &Construction JOSEPH L.DONNELLY, Vice President, Finance LOUISE A.EARP, Assistant Secretary CHARLES E.FUQUA, Vice President, Susquehanna Division CHARLES J.GREEN, Vice President, Harrisburg Division RICHARD H.LICHTENWALNER, Vice President, Information Services CARL R.MAIO, Vice President, Lehigh Division JAMES J.McBREARTY, Vice President, Northeast Division EDWARD M.NAGEL, Vice President, General Counsel and Secretary HERBERT D.NASH JR., Vice President, Consumer 6 Community Services EDWIN H.SEIDLER, Vice President, Distribution BRENT S.SHUNK, Vice President, Lancaster Division JEAN A.SMOLICK, Assistant Secretary DONALD J.TREGO, Assistant Treasurer GEORGE F.VANDERSLICE, Vice President and Comptroller PAULINE L.VETOVITZ, Assistant Secretary HELEN J.WOLFER, Assistant Secretary 34 V i PENNSYLVANIA POWER&LIGHT COMPANY STATEMENT OF CHANGES IN FINANCIAL POSITION 1973 1974 1975 1976 Thousands of Dollars 1977 SOURCE OF FUNDS Operations Net income..Charges (credits)against income not involving working capital Depreciation. Noncurrent deferred income taxes and Investment tax credits-net........'.................... Allowance for, funds used during construction ....Other..48,837 52,39958,540 62,478 68,035 11,282 (14,967)220 112,284 8,790 (20,732)520 128,456 15,701 (36,605)7,464 142,641 31,789 (45,192)4,669 165,855 33,579 (49,395)(1~191)200,791$" 66,912$87,479$97,541$112,111$149,763 Outside Financing Common stock.Preferred and preference stock...... First mortgage bonds..Other long-term debt Short-term debt-net increase......Working Capital-decrease (a).Investments in Associated Companies-decrease........... Deposits from Allegheny Electric Cooperative (Note 14)...Other-net..Total Source of Funds................................. APPLICATION OF FUNDS Construction Expenditures (Note 14).Nuclear Fuel in Process (Note 14)..................................... Allowance for Funds Used During Construction................ 1 40,900 40,000 108,000'0,024 208,924 3,156 35,156 25,000 180,000 360 45,658 286,174 685 57,763 70,000 225,000 208 352,971 15,166 2,672$327,036$415,315$510,778$224,496 (14,967)209,529$267,724$342,496 3,736 2,793 (20,732)(36,605)250.728'08,684 82,705 75,000 150,000 253 87,975 50,000 100,000 576 6,424$497,131$394,238 13,555 (45,192)362,601$362,558 17,680 (49,395)330,843 307,958 238,551 16,894 84,215 608$524,165 Securities Retired Preference stock.First mortgage bonds..Other long-term debt..Short-term debt-net decrease..... Dividends on Preferred, Preference and Common Stock..Working Capital-'ncrease (a).................... Acquisition of Hershey Electric Company......................... Investments in Associated Companies-Increase............. Other-net..Total Application of Funds........................... ~Changes in Components of Working Capital (a)Cash and temporary cash investments.............................. Accounts and notes receivable. Coal and fuel oil..Recoverable fuel costs, less related deferred income taxes.Accounts payable and accrued taxes............................... Dividends payable and interest accrued.......:................... Other-net..Increase (Decrease) .10,041 56,631 66,672 50,037 798$327,036 18,632 18,632 58,897 82,753 4,305$415,315 (10,006)(5,136)(289)$(3,156)16,747 (1,811)(6,494)10,205$82,753$10,247$(3,792)6,745 22,896 (4,717)45,002 93,000 112 11,879 104,991 70,686 23,990 2,427$510,778$(5,352)28,757 (3,568)738 (22,507)(6,346)(6,888)$(15,166)8,000 3,054 13,618 24,672 86,694, 15,309 7,855 4,000 20,500 196 36,612 61,308 100,813 31,020 181$123 16,394 6,567 2,125 8,501 (4,612)(13,789)$15,309$19,136 12,279 30,874 3,189 (26,756)(4,034)'3,668$31,020$497,131$524,165 (a)Excludes short and long-term debt due within one year.See accompanying Notes to Financial Statements. 35 PENNSYLVANIA POWER&LIGHT COMPANY BALANCE SHEET ASSETS Thousands of Dollars December 31, 1978 1977 UTILITY PLANT Plant in service-at original cost Electric................................... Steam heat..Total plant In service.Less accumulated depreciation (Note 5)Net plant in service..Construction work in progress-at cost.Nuclear fuel in process-at cost.Net utility plant (Note 8)..INVESTMENTS Associated companies-at equity..Nonutility property and other-at cost or less..Total investments. CURRENT ASSETS Cash (Note 4)..Temporary cash fnvestments, at cost which approximates market.Accounts receivable (less reserve: 1976,$1,925;1977,$2,715)Customers.Other Notes receivable (principally from associated company)..Recoverable fuel costs..Coal and fuel oil-at average cost..Materials and supplies-at average cost.Other.Total current assets.DEFERRED DEBITS..$2,090,282 7,896 2,098,178 458,697 1,639,481 720,544 20,084 2,380,109 15,327 7,548 22,875 14,955 49,205 22,857 29,570 41,670 74,885 19,068 7,219 259,429 4,884$2,323,792 8,140 2,331,932 508,948 1,822,984 829,481 37,764 2,690,229 17,640 7,419 25,059 14,098 19,993 52,380 28,988 32,543 48,987 105,759'9,445 7,811 330,004 5,030 Total.$2,667,297$3,050,322 See accompanying Notes to Financial Statements. 36 ~4 PENNSYLVANIA POWER 8r LIGHT COMPANY BALANCE SHEET L I A B IL I TIE 6 Thousands of Dollars December 31, 1976 1977 CAPITALIZATION Shareowners Investment (Notes 6, 7 and 9)Preferred stock.Preference stock..Commop stock.Capital stock expense.Earnings relnvested. Total shareowners Investment. Long-term debt (Note 8).Total capitalization CURRENT LIABILITIES Long-term debt due within one year (Note 8).Commercial paper notes (Note 4).Accounts payable (Note 13)..Taxes accrued..Deferred Income taxes applicable to recoverable fuel costs..Dividends payabie..Interest accrued.Other (Note 13).Total current liabilities. DEFERRED AND OTHER CREDITS Deferred Investment tax credits.Deferred Income taxes..Deposits from Allegheny Electric Cooperative (Note 14)..Other.Total deferred and other credits..COMMITMENTS AND CONTINGENT LIABILITIES (Note 15)Total.$231,375 210,000, 495,008 (10,220)237,967 1,164,130 1,161,319 2,325,449 20,675 60,012 50,415 12,564 22,060 23,002 22,589 21,184 232,501 56,526 36,860 15,961 109,347$2,667,297$281,375 206,000 582,983 (10,630)286,911 1,346,639 1,256,739 2,603,378 3,756 23,400 62,472 27,263 26,188 26,612 23,013 25,821 218,525 82,078 44,887 84,215 17,239 228,419$3,050,322 See accompanying Notes to Financial Statements. 37 PENNSYLVANIA POWER&LIGHT COMPANY STATEMENT OF EARNINGS REINVESTED BALANCE, JANUARY 1.ADD NET INCOME.Total..1973$140,238 66,912 207,150 1974 1975 1978 Thousands of Dollars$157,113$185,695$212,550 87,479'7,541 112,111 244,592 283,236 324,661$237,967 149,763 387,730 DEDUCT Cash Dividends Declared Preferred stock (at specified annual rates)................. Preference stock (at specified annual rates)............... Common stock (per share-1973,$1.68;1974,$1.77;1975 and 1976,$1.80;1977,$1.89)........... Other.Total.BALANCE, DECEMBER 31(Notes 7 and 9)....7,551 9,393 9,640'0,263 32,84639,241 50,037 58,897$157,113$185,695 9,393 15,116 46,177 70,686$212,550 13,128 20,240 53,326 86,694$237,967 17,123 19,870 63,820 6 100,819$286,911 I See accompanying Notes to Financial Statements 38' PENNSYLVANIA POWER&LIGHT COMPANY NOTES TO FINANCIAL STATEMENTS 1.
SUMMARY
OF ACCOUNTING POLICIES Accounting System Accounting records are maintained in accordance with the Uniform System of Accounts prescribed by the Federal Energy Regulatory Commission (FERC)and adopted by the Pennsylvania Public Utility Commission (PUC).Principles of Consolidation The accounts of the Company and Hershey Electric Cbmpany (Hershey), a wholly-owned electric distribution subsidiary acquired December 31, 1976, are consolidated in the accompanying financial statements from the acquisition date.All significant intercompany transactions have been eliminated. The acquisition cost of the capital stock and the repayment of all debt owed by Hershey approximated $7.9 million.The operations of Hershey are not material compared to operations of the Company.Associated Companies Investments in unconsolidated subsidiaries (all wholly-owned) and in Safe Harbor Water Power Corporation (one-third of the outstanding capital stock representing one-half of that company's voting securities) are recorded using the equity method of accounting. The Company's unconsolidated subsidiaries are engaged in coal mining operations, holding coal reserves, uranium exploration, oil pipeline operations and real estate.Except for uranium mining claims in Wyoming and Utah and minor amounts of real estate held in other states, the Company's unconsolidated subsidiaries'roperty and operations are in Pennsylvania. The Company believes that its financial position and results of operations are best reflected without consolidation of these subsidiaries since they are not engaged in the business of generating or distributing electricity. If all the unconsolidated subsidiaries were considered in the aggregate as a single subsidiary, they would not constitute a"significant subsidiary" as that term is defined by the Securities and Exchange Commission (SEC).Utility Plant Additions to utility plant and replacements of units of property are capitalized at cost.Costs of depreciable property retired or replaced are removed from utility plant and such costs, plus removal costs, less salvage, are charged to accumulated depreciation. Costs of land retired or sold are removed from utility plant and any gains or losses are reflected on the Statement of Income.All expenditures for maintenance and repairs of property and the cost of replacement of items determined to be less than units of property are charged to operating expenses.Allowance for Funds Used During Construction As provided in the Uniform System of Accounts, the cost of funds used to finance construction projects is capitalized as part of construction cost.The components of Allowance for funds used during construction shown on the Statement of Income under Other Income and Deductions and Interest Charges are non-cash items equal to the amount so capitalized and serve to offset the actual cost of financing construction. Reference is made to Note (e)to the"STATEMENT OF INCOME".Depreciation For financial statement purposes, the straight-line method of depreciation is used to accumulate an amount equal to the cost of utility plant and removal costs, less salvage, over the estimated useful lives of property.Reference is made to Note 5 to Financial Statements. 39 PENNSYLVANIA POWER&LIGHT COMPANY NOTES TO FINANCIAL STATEMENTS -(Continued) Revenues Revenues are based on cycle billings rendered to certain customers monthly and others bi-monthly. The Company does not accrue revenues related to energy delivered but not billed.Fuel Costs Recoverable Under Fuel Adjustment Clauses The Company's tariffs filed with both the PUC and FERC include fuel adjustment clauses under which fuel costs varying from the levels allowed in approved rate schedules are reflected in customers'ills after the fuel costs are incurred.Fuel costs recoverable in the future through application of fuel adjustment clauses are deferred and charged to expense during the periods in which such costs are billed to customers. Reference is made to Notes (b)and (c)to the"STATEMENT OF INCOME" and to"RATE MATTERS" for further information regarding the fuel adjustment clauses.Income Taxes The Company and its subsidiaries file a consolidated Federal income tax return.Income taxes are allocated to the individual companies based on their respective taxable income or loss.Income taxes are allocated to Operating Expenses and Other Income and Deductions on the Statement of Income.Income tax reductions associated with the interest (borrowed funds)component of the Allowance for funds used during construction constitute the principal item of Income tax credits under Other Income and Deductions. Deferred tax accounting is followed for items where similar treatment in rate determinations has been or is expected to be permitted by the PUC.The principal items are accelerated amortization of certified defense facilities and pollution control equipment, deduction of costs of removing retired depreciable property, that portion of tax depreciation arising from shortening depreciable lives by 20/0 under the class life depreciation system, fuel costs recoverable under fuel adjustment clauses, the forced outage reserve and the cost of fuel consumed during the test period of new generating facilities. Tax reductions arising principally from the use of the declining balance depreciation method, guideline lives and certain income and expenses being treated differently for tax computation purposes than for book purposes are accounted for under the flow-through method.Investment tax credits, which result in a reduction of Federal income taxes payable, are deferred and amortized over the average lives of the related property.The tax credits are generally equal to 10/o of (1)the cost of certain property placed in service and (2)progress payments for the construction of certain facilities that have a construction period of at least two years.The Company has adopted an Employee Stock Ownership Plan (ESOP)which permits the Company to claim an additional 1/o investment tax credit.An amount equal to this additional credit is paid to the ESOP trustee to acquire Common Stock of the Company for employees. Reference is made to Note 10 to Financial Statements. Retirement Plan The Company has a Retirement Plan composed of two parts: (1)a non-contributory portion which provides benefits for all eligible active employees with the full cost absorbed by the Company, and (2)a voluntary portion in which contributions are made by both employees and the Company, but the full cost of Plan improvements, including related prior service costs, is borne by the Company.Approximately 95/o of eligible active employees are members of the voluntary portion of the Plan.Company contributions to the Plan include amounts required to fund current service costs and to amortize unfunded prior service costs over periods of not more than 20 years.Reference is made to Note 11 to Financial Statements. 40 il r, PENNSYLVANIA POWER&LIGHT COMPANY NOTES TO FINANCIAL STATEMENTS -(Continued) Forced Outage Reserve A self-insurance reserve is provided to cover the increased level of power costs which are experienced when any of the Company's major generating units are forced out of service due to damage caused by accident or other unforeseen insurable occurrences. Increased power costs resulting from purchasing or generating replacement power at higher costs or loss of interchange sales in excess of$0.5 million through 1975 and$1 million effective January 1, 1976 for each accident or occurrence are charged to the reserve.As to certain of the Company's large generating units, costs chargeable to the reserve are limited to$12.5 million since outside insurance is carried to cover costs in excess of that amount.The reserve is established on the basis of historical experience and has been recqgnized in ratemaking procedures by the PUC.At December 31, 1976 and December 31, 1977 the reserve balance was$13.9 million and$14.5 million, respectively. 2.RATE FILINGS Reference is made to information appearing under"RATE MATTERS".3.FUEL COSTS RECOVERABLE UNDER FUEL ADJUSTMENT CLAUSES ,Reference is made to Notes (a), (b)and (c)to the"STATEMENT OF INCOME".4.LINES OF CREDIT AND SHORT-TERM DEBT Short-term debt of the Company consists of bank loans (generally borrowed for one year at the prime interest rate and prepayable at any time without penalty)and commercial paper notes (generally maturing within 30 to 60 days).In order to provide interim financing and back-up financing capability for commercial paper notes, the Company has lines of credit with banks that are maintained by compensating bank balance requirements (not legally restricted as to withdrawal) or the payment of commitment fees.Information regarding such short-term debt and lines of credit is as follows (thousands of dollars): Short-term debt outstanding Weighted average short-term debt interest rate.............................. Maximum aggregate short-term debt outstanding at any month Average daily short-term debt outstanding (a)Aggregate amount.Weighted average interest rate (b)........... Lines of credit (c)Maintained by compensating bank balances........................... Maintained by payment of commitment fees........................... Average annual compensating bank balance requirement.............. Annual commitment fees..As of December 31, 1979$60,012 4.7o/o 1977$23,400 6.5'/0$129,598 5.5o/0$143,500$56,500$13,850$313$79,202 5.7o/o$147,500$52,500$13,300$319$194,578$106,727 (a)During the preceding year.(b)Calculated by dividing short-term interest expense for the year by the average aggregate daily short-term debt outstanding during the year.(c)Use of these lines of credit was restricted at December 31, 1976 and December 31, 1977 to the extent of$4 million by short-term bank loans to two subsidiary companies. 41 PENNSYLVANIA POWER&LIGHT COMPANY NOTES TO FINANCIAL STATEMENTS -(Continued) 5.DEPRECIATION Provisions for depreciation as a percent of the average original cost of depreciable property have approximated 3.4%for 1973, 3.3%for 1974 and 1975 and 3.2%for 1976 and 1977.The lower composite depreciation rate for 1976 and 1977 reflects changes made in estimated useful lives of certain facilities in accordance with a PUC rate order issued in 1976.No provision is being made for depreciation or amortization of intangibles of approximately $1.3 million included In Utility Plant.6.CAPITAL STOCK Common Stock-no par consists of 50,000,000 authorized shares of which 30,803,318 shares were, outstanding at December 31, 1976 and 34,923,452 shares were outstanding at December 31, 1977.Common Stock of$582,983,000 at December 31, 1977 includes$686,000 cash installments received under a dividend reinvestment plan as consideration for 29,603 shares of Common Stock which were issued in-January 1978.Preferred Stock ($100 par, cumulative) and Preference Stock (no par, cumulative) consisted of the following (thousands of dollars): Shares Amount Redemption Price Final Outstanding December 31, Authorized 1977 December 31, 1976 1977 December 31, 1977 Year Price Etfectlve Preferred 4'%.......... Series........ 3.35%....4.40%....4 60 7.40%....8.00%....8.60%....9.00%....9.24%Total..... 629,936 5,000,000 530,189 41,783 228,773 63,000 400,000 500,000 222,370 77,630 750,000 4,178 22,878 6,300 40,000 22 237 7,763 75,000 4,178, 22,878 6,300 40,000 50,000 22,237 7,763 75,000 103.50 102.00 103.00 112.00 112.00 110.00 110.00 115.00$231,375$281,375$53,019$53,019$110.00$110.00 103.50 102.00 103.00 100.00 1998 100.00 1997 101.00 1990 101.00 1990 101.00 1991 Preference ......5,000,000$8.00........... $8.40........... $8.70........... $9.25........... $11.00......... $13.00......... Total..... 350,000 400,000 400,000 160,000 500,000 250,000$35,000 40,000 40,000 20,000 50,000 25,000$35,000 40,000 40,000 16,000 50,000 25,000$210,000$206,000$105.50 110.00 109.00 109.90 111.05$101.00 1987 101.00 1986 101.00 1984 100.00 1981 100.00 1995 100.00 1994 42 Ik ,~'. PENNSYLVANIA POWER&LIGHT COMPANY NOTES TO FINANCIAL STATEMENTS -(Continued) RedemPtion Period The Preference Stock may not be refunded through certain refunding operations prior to the following dates:$8.70 Series, 7/1/78;$13.00 Series, 10/1/84;$11.00 Series, 7/1/85.Otherwise, the Preferred and Preference Stock may be redeemed, in whole or in part, at the option of the Company at redemption prices ranging between the December 31, 1977 price and the final price shown above, with the exception that the Preference Stock,$9.25 Series, is not redeemable by the Company other than through the sinking fund requirement or voluntary liquidation. The liquidation prices of all issues of Preferred Stock, which are payable on a parity with each other and in preference to the Preference Stock and the Common Stock, are as follows: involuntary liquidation $100 a share;voluntary liquidation $100 a share for the 4V2/o Preferred Stock and the redemption price in effect at the time for the Series Preferred Stock;plus in each case any unpaid dividends. The liquidation prices of all series of Preference Stock, which are payable on a parity with each other after satisfaction of the preferential rights of Preferred Stock and in preference to the Common Stock, are as follows: involuntary liquidation $100 a share;voluntary liquidation the redemption price in effect at the time, with the exception that the voluntary liquidation price of the Preference Stock,$9.25 Series, is$110'share;plus in each case any unpaid dividends. Each of the following series of stock contains sinking fund provisions designed to retire the series at a redemption price of$100 a share plus accrued and unpaid dividends to the'date of such redemption: Shares to be Redeemed Annually Preferred Stock.7.40/o Series.8.00/o Series.9.24/o Series (a).....Preference Stock$9.25 Series (b)......$11.00 Series (a)....$13.00 Series (a)....16,000 25,000 30,000 40,000 25,000 12,500 July 1, 1979-July 1, 2003 Oct.1, 1983-Oct.1, 2002 July 1, 1981-July 1, 2005 Jan.1, 1977-Jan.1, 1981 July 1, 1981-July 1, 2000 Oct.1, 1980-Oct.1, 1999 (a)The Company has the right to redeem on each sinking fund redemption date additional shares up to the number of shares of this Series required to be redeemed annually.(b)In January 1978, the Company redeemed 40,000 shares.Capital stock expense represents commissions and expenses incurred in connection with the issuance and sale of capital stock.Capital stock expense applicable to the preferred and preference stock series which are to be redeemed through sinking fund provisions is amortized to Earnings Reinvested as the respective series of stock are redeemed.The unamortized balance applicable to these series of stocks was$3.2 million at December 31, 1977.No amortization plan is in effect for capital stock expense applicable to other issues of capital stock.43 ll PENNSYLVANIA POWER 4 LlGHT COlHPANY NOTES TO FINANCIAL STATEMENTS -(Continued) Changes in capital stock for the period January 1, 1973 through December 31, 1977 were as follows (shares and amounts in thousands): 1973 1975 1976 1977 Year Shares Amount Iaaued (Redeemed) Common, Public Offering......................... 2,000$40,900 Preferred, 7.40'/e Series............................ 400 40,000 1974 Common, Public Offering......................... 2,200 35,156 Preference,$13.00 Series..~..................... 250 25,000 Common Public Offering.3,000 51,450 Dividend Reinvestment Plan................. 301 5,595 Preference,$11.00 Series........................ 500 50,000 Preference,$9.25 Series.......................... 200 20,000 Common Public Offering.3,500 67,935 Dividend Reinvestment Plan................. 716 14,268 Employee Stock Ownership Plan.......... 35 755 Preferred, 9.24'/e Series............................ 750 75,000 Common Public Offering.3,200 67,040 Dividend Reinvestment Plan................. 812 18,185 Employee Stock Ownership Plan.......... 108 2,528 Preferred, 8.00'/e Series............................ 500 50,000 Preference,$9.25 Series.......................... (40)(4,000)7.DIVIDEND RESTRICTIONS Reference is made to information appearing under"DESCRIPTION OF COMMON Dividend Restrictions". 8.LONG-TERM DEBT Long-term debt outstanding consisted of the following (thousands of dollars): December 31, STOCK-First mortgage bonds..Notes: 7~/0 due 1980.Other.Unamortized (discount) and premium-net...Total.Less amount due within one year................... Total long-term debt.1976$1,165,500 11 20,000 550 (4,056)1,181,994 20,675 1977$'I,245,000 20,000 929 (5,434)1,260,495 3,756$1,161,319$1,256,739 44 S-t k IU PENNSYLVANIA POWER 8c LIGHT COMPANY NOTES TO FINANCtAL STATEMENTS -(Continued) First mortgage bonds consisted of the following series at December 31, 1976 and December 31, 1977 (thousands of dollars): Out!tending Outatandlng Serlea Due 1978 1977 2%/o 1977$20,000 3Vao/o 1978 3,000$3,000 27'o 1980 37,000 37,000 3%/o, 1982 7,500 7,500 10Va'/o 1982 100,000 100,000 3'o 1983 25,000 25,000 3%/o 1985 25,000 25,000 4%o/o 1991 30 000 30 000 4%'/o 1994 30,000 30,000 5%o/o 1996 30 000 30 000 6%o/o 1997 30 000 30 000 Se rica 7'/o 8Vao/o 9 o/o 7'/4'/o o/o 7V20/0 9'/4'/o 9%o/o 9Vio/o 8Vio/o 8Vao/o (a)Due 1978 1977 1999$40,000$40,000 1999 40,000 40,000 2000 50,000 50,000 2001 60,000 60,000 2002 75,000 75,000 2003 80,000 80,000 2004 80,000 80,000 2005 125,000 125,000 2005 100,000 100,000 2006 150,000 150,000 2007 100,000 28,000 27,500 (a)4V2/o to 5%/o Pollution Control Series A due annually:$500, 1977-1983; $900, 1984-2002; $7,400, 2003.The maximum aggregate annual sinking fund requirements through.1982 of the outstanding mortgage bonds are (thousands of dollars): 1978 1979$2,740$3,265 1982$4,450 1980$3,050 The amount of long-term debt maturing in each calendar year through 1982 is (thousands of dollars): cars 1979 1980 1981 1982$3,756$666$57,660$645$108,098.Lesser requirements will apply for the years 1978-1982 if long-term debt is 50/o or less of net property.'The Company has the right to meet all of these requirements with property additions or bonds.Substantially all utility plant is subject to the liens of the Company's mortgages. 9.HYDROELECTRIC PROJECTS Reference is made to the information appearing under"BUSINESS-Hydroelectric Projects". 45 f Fh'd dpd~'I Fhh d V d F~I dd~hh*h F\~ PENNSYLVANIA POWER 8c LIGHT COMPANY NOTES TO RNANCIAL STATEMENTS -(Continued) 10.TAXES Income tax expense is recorded on the Statement of Income as follows (thousands of dollars): 1073 1974 1075 1079 1977 Operating Expenses Provision Federal..................... $16,454 State........................ 6,207 22,661$12,554$22,547$656$34,804 3,858 8,221 6,766 16,193 16,412 30,768 7,422 50,997 Deferred Federal..................... 4,557 1,180 15,991 3,271 2,952 590 7,185 1,560 9,394 2,761 5,737 19,262 3,542 8,745 12,155'Investment tax credits Deferred................... Amortization of defer-ments................. ~~7,233 4,753 14,465 29,496 30,592 (1,688)(1,216)(1,477)(1,835)(2,243)5,545 3,537 12,988 27,661 28,349 Other Income and Deductions Provision (credit)Federal.......... State............. 33,943 39,211 47,298 43,828 91,501 (46)(4,156)(9,164)(11,859)(11,008)(45)(920)(2,037)(2,598)(2,700)(91)(5,076)(11,201)(14,457)(13,708)Total income tax expense........$33,852 Federal and State Income Taxes Payable (Credit)........$22,570$34,135(a)$36,097$29,371$77,793$11,336$19,567$(7,035)$37,289 (a)Excludes$4,831,000 deferred Income taxes related to Nonrecurring Credit.Investment tax credits eliminated the Company's Federal income tax liability for 1976 and resulted In a credit to the provision for income taxes of approximately $5.9 million related'to a carryback of Investment tax credits to prior years.Total income tax expense for 1976 has been credited by approximately $5.0 million representing adjustments of prior years'ax liabilities. The principal adjustment, related to adoption of the modified half-year convention method of computing tax depreciation in the Company's 1975 Federal income tax return, reduced total income tax experise by approximately $2.8 million.46 t l~il N'II)sl PENNSYLVANIA POWER&LIGHT COMPANY NOTES TO FINANCIAL STATEMENTS-(Continued) 2,680$5,737 Deferred income taxes result from the following 1973 Tax depreciation (class life system).$3,057 Recoveiable fuel costs.................... Forced outage reserve.................... Other Total.items (thousands of dollars): 1974 1975 197B$3,715$4,540$6,463 14,009(a)829 2,391 (3,726)(1,041)1,538 1,899 932$19,262$3,542$8,745 1977$6,173 4,128 (344)2,198$12,155 Federal and 1977$149,763 77,793 Net income.Income tax expense... Pre-tax income.Indicated income tax expense at combined tax rates (shown below).......... Reductions due to: Allowance for funds used during construction. Tax depreciation (guideline lives and declining balance method).............. Tax and pension cost.......................... Other-net.Total.Income tax expense..Combined Federal and State income tax rates.Effective income tax rates.......................... $227,556$54,131$66,940$70,748$74,901$121,651 8,041 10,976 19,379 23,925" 26,407 9,131 2,998 3,143 7,531 2,687 2,020 10,953 3,753 2,745 15,067 3,354 3,184 8,799 2,491 5,708 20,279 27,974 34,651 45,530 43,858$33,852$38,966$36,097$29,371$77,793 E 53.72/o 52.94/o 52.94/o 52.94/o 53.46/o 33.6'/0 30.8'/o 27.0'/o 20.8'/o 34 2o/o (a)Excludes$4,831,000 deferred income taxes related to Nonrecurring Credit.Income tax expense differed from the amount computed by applying the combined State corporate income tax rates to pre-tax income as follows (thousands of dollars): 1973'974 1975 1975$66,912$87,479$97,541$112,111 33,852 38,966 36,097 29,371$100,764$126,445$133,638$141,482 Taxes other than income taxes charged to operating expense were (thousands of dollars): 1973 1974 1975 1975 1977 State gross receipts............................ $16,867$20,564$23,756$28,320$32,932 State capital stock.'5,403 6,263 7,284 8,860 9,996 State utility realty 4,687 5,258 5,980 8,052 11,582 Social security and other..................... 3,048 3,486 3,649 4,294 5,172 Total.$30,005$35,571$40,669$49,526$59,682 1 47 ~1~h k 11.RETIREMENT PLAN PENNSYLVANIA POWER&LIGHT COMPANY NOTES TO FINANCIAL STATEMENTS -(Continued) Obligations of the Company's Retirement Plan are currently funded through a Trust Fund.At June 30, 1977, the end of the Plan's most recent fiscal year, the Fund's assets at market were$100.3 million and at cost were$104.6 million.Pension costs were (thousands of dollars): 1973$6,761 1974$6,661 1975$8,830 1976$9,755 1977$11,315 Plan amendments effective as of July 1, 1976, subject to Internal Revenue Service approval, provided for increased benefits, reduced employee contributions and certain other minor changes to comply with the Employee Retirement Income Security Act of 1974.Based on the Fund's assets at cost, at June,30, 1977 the actuarially computed unfunded prior service cost was$27.2 million.As of the same date the actuarially computed value of vested benefits exceeded the cost basis of the Fund's assets by$17.4 million.12.RENTALS AND LEASE COMMITMENTS Principal rental costs affecting expenses were as follows (thousands of dollars): 1973 1974 1975 1976, 1977 Charged to: Operating expense...Fuel inventory(a) .......$7,515$8,911$9,477$942$870$1,276$10,502$11,023$1,761$2,349 (a)Represents rental of railroad coal cars which amounts are charged to fuel inventory and subsequently included in fuel expense.At December 31, 1977, the Company had long-term lease agreements which require future minimum rentals as follows (millions of dollars): 1978,$14.5;1979,$13.5;1980,$12.7;1981,$11.7;1982,$10.5;after 1982,$89.3.The Company also leases other property under short-term agreements with rentals currently amounting to approximateiy $3.3 million annually.Generally the Company's long-term leases contain renewal options and obligate the Company to pay maintenance, insurance and other related costs.The leases do not include restrictions on any of the Company's other financial activities. Certain of the Company's leases meet the capitalization criteria established by the Financial Accounting Standards Board in 1977 which would normally require (1)that an asset and associated liability be recorded at an amount equal to the present value of the minimum lease payments and (2)that expense be charged with amortization of the lease asset and interest expense on the liability. However, in accordance with the manner in which the Company's rates have been established by the PUC, the Company accounts for such leases as operating leases and appropriate accounts have been charged with actual rental expense, and an asset and associated liability related to such leases have not been recorded.48
PENNSYLVANIA POWER Sc LIGHT COMPANY NOTES TO FINANCIAL STATEINENTS -(Conttnued) In accordance with SEC disclosure requirements applicable to all regulated companies subject to the rate-making process that do not record capital leases as assets with associated liabilities, the Company has computed the aggregate asset and liability balances that would have been recorded had all leases meeting the definition of a capital lease been capitalized as follows (thousands of dollars): December 31, Capital lease asset Accumulated amortization care$78,713 (33,320)$45,393 Current obligations under capital leases........................... $7,543 Noncurrent obligations under capital leases..................... 40,445$47,988 1977$104,291 (37,855)$66,436$8,173 61,333$69,506 The excess of the above liability balances over the related asset balances represents the differences between (i)the amortization and interest expense that would have been recorded since inception of the leases and (li)the actual rentals incurred.The difference in the amount of such amortization and interest expense compared to actual rentals recorded is not material for each of the years 1973-1977. 13.RECLASSIFICATION Approximately $9.9 million representing an accrual at December 31, 1976 for current liabilities related to construction of facilities has been reclassified on the Balance Sheet from Accounts payable to Other current liabilities to make the Item comparable to the classification in 1977.14.SALE OF 10/o OF SUSQUEHANNA PLANT In January 1978, pursuant to agreements entered into in March 1977, the Company sold to Allegheny Electric Cooperative, Inc.(Allegheny) a 10/o undivided ownership in the Susquehanna nuclear plant currently under construction. Through December 31, 1977, Allegheny made deposits aggregating approximately $84 million representing amounts due under the agreements. The Company's 1977 construction and nuclear fuel expenditures shown on the'Statement of Changes in Financial Position Include 100/o of the expenditures applicable to the Susquehanna plant.Approximately $23 million of Allegheny's deposits represented its share of th'e 1977 expenditures. 15.COMMITMENTS AND CONTINGENT LIABILITIES The Company estimates that about$1.31 billion will be required to complete construction projects in progress at the end of 1977, excluding nuclear fuel payments.Of this amount, approximately $1.05 billion represents the Company's share of costs required to complete the two nuclear generating units at Susquehanna. Reference Is made to additional information appearing under"CONSTRUCTION PROGRAM","BUSINESS-Environmental Matters" and"BUSINESS-Fuel Supply".49 PENNSYLVANIA POWER Sc LIGHT COMPANY NOTES TO FINANCIAL STATEMENTS-(Continued) In connection with providing for its future bituminous coal supply, the Company at December 31, 1977 had guaranteed capital and other obligations of certain coal suppliers (including owned coal companies) aggregating $160.8 million.See"BUSINESS-Fuel Supply (Coal)".16.
SUMMARY
OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Quarterly earnings can be Influenced by weather, timing of rate relief, performance of generating stations, sales to other utilities and other factors such as those described under"MANAGEMENT'S " DISCUSSION AND ANALYSIS OF THE STATEMENT OF INCOME".Quarter Ended Operating Revenues Operating Income Net Income The following is summary quarterly data for the years 1976 and 1977 (thousands of dollars): Earnings Earnings Per Share Applicable To Of Common Common Stock Stock(a)1976 M arch 3 1.............................. ~..J une 30..............~..................... September 30.......................... December 31(b)....................... 1977 March 31 , June 30.......September 30(c)...................... December 31............~.............. $166,269 149,281 149,580 179,017$34,360 28,006 35,241 40,727 208,894.47,017 173,299.43,912 174,067 48,913 188,471 44,469$25,189 21,281 30,423 35,218 ll 40,114 35,547 34,936 39,166$17,781 13,603 , 21,282 26,077 31,066 26,498 25,888 29,318$0.67 0.46 0.70 0.85 1.00 0.79 0.75 0.84 (a)Based on the average number of shares outstanding during the quarter.(b)Results for the fourth quarter of 1976 include a reduction in income tax expense of$2.4 million due to increased tax depreciation applicable to Martins Creek Unit No.4 which began test operation in December 1976 and a$2.1 million charge to expense (net of income taxes)to adjust the amortization of deferred fuel costs for the years 1970-1975 to the actual fuel adjustment revenues billed during those years.(c)Results for the third quarter of 1977 include a$6.6 million (net of income taxes)loss ($.20 per share)of a subsidiary company which was recorded by the Company in accordance with equity accounting: 17.REPLACEMENT COST DATA (UNAUDITED) In compliance with the rules of the SEC, the Company has estimated certain replacement cost information for utility plant in service and depreciation. The Company has not included replacement cost data for materials and supplies inventory since the amount of the inventory is not significant. Replacement cost data relating to fuel inventories have not been Included since changes in cost levels are recovered through the operation of fuel adjustment clauses.50 PENNSYLVANIA POWER 8r LIGHT COMPANY NOTES TO FINANCIAL STATEMENTS-(Continued) Although the replacement cost data disclosed herein have, in the Company's opinion, been reasonably estimated in accordance witli rules and interpretations of such rules published by the SEC, the Company believes that investors should be aware of the imprecision and limitations of this information and of the many subjective judgments required in the replacement cost estimation. The replacement cost of utility plant is based on the hypothetical assumption that the Company would replace its entire productive capacity as of December 31, 1977, whether or not the funds to do so were available or such"instant" replacement were physically or legally possible.This assumption requires that the Company contemplate actions as of December 31, 1977 that ordinarily would not be addressed all at one time.Accordingly, the information should not be interpreted to indicate that the Company actually has present plans to replace its productive capacity or that actual replacement would or could take place in the manner assumed in estimating the information. In the normal course of business, the Company will replace its productive capacity over an extended period of time.Decisions concerning replacement will be made in light of the economics, availability of funds, fuel availability, equipment availability, customer demand and regulatory requirements existing when such determinations are made and could differ substantially from the assumptions on which the data Included herein are based.The replacement cost data presented are not necessarily representative of the"current market value" of existing facilities or of the"fair value" of utility plant as that term is used in rate proceedings before the PUC.The replacement cost information presented does not reflect all of the effects of inflation on the Company's current costs of operating the business.The Company has not attempted to quantify the total impact of inflation, environmental and other governmental regulations (except as set forth below)and changes in other.economic factors on the business because of the many unresolved conceptual problems and rate-making considerations involved in doing so.Accordingly, it is the Company's view that the replacement cost data presented herein cannot be used alone to determine the total effect of inflation on reported net income.The computed replacement cost of the Company's utility plant in service and related accumulated depreciation with comparative historical cost data are as follows (millions of dollars): Computed'istorical Replacement Cost Cost Utility plant in service at December 31,'977 Subject to replacement cost determination ........Land, plant held for future use and intangibles at original cost.Total plant in service..Less accumulated depreciation .Net plant in service.$2,216$5,045 116 5,161 1,197$3,964 51 d s'~I~n PENNSYLVANIA POWER&LIGHT COMPANY NOTES TO FINANCIAL STATEMENTS -(Concluded) The replacement cost of coal-fired and oil-fired steam station capability was determined by trending the construction cost of the most recently installed bituminous coal-fired units (800 mw capability range)and computing a replacement cost per kw capability of the units.This cost per kw was applied to the Company,'s respective coal-fired and oil-fired steam station capability to determine the gross replacement cost of such facilities. The gross replacement cost of bituminous coal-fired units at December 31, 1977 includes approximately $725 million which the Company estimates would have to be expended to enable such facilities to meet particulate and sulfur dioxide emission regulations existing at December 31, 1977, using current technology. The original installed cost of hydroelectric, other power production, transmission, distribution, and other facilities was trended to determine replacement cost.The trend indices utilized were determined by the Company and are believed to be more representative of the changes in construction costs experienced by the Company than published indices.As of December 31, 1976, the Company computed the replacement cost of oil-fired steam station capability based on the assumption that this capability would be replaced with other oil-fired steam stations.However, as a result of pending Federal legislation introduced in 1977 which would restrict the building of future oil-fired steam stations, the Company has assumed that as of December 31, 1977 its oil-fired steam station capability would be replaced with coal-fired units.The accumulated depreciation related to the replacement cost of productive capacity was determined by applying the same percentage relationship that existed between gross utility plant and accumulated depreciation by functional groups on a historical basis at December 31, 1977 to the current replacement cost of the productive capacity.The computed replacement cost depreciation expense for the years 1976 and 1977 and com-parative historical cost data are as follows (millions of dollars): 1976 1977 Depreciation expense...~...... Computed Replaco-Historical ment Historical Cost Cost Cost$62$123$68 Computed Replace-ment Cost$140 Replacement cost depreciation expense for the years 1976 and 1977 was determined on a straight-line basis by applying the functional class depreciation accrual rates currently in use to the average of year-end replacement cost amounts for the respective functional class.Such amounts have been calculated in accordance with SEC instructions and do not represent an actual expense.Within the context of utility rate-making procedures, the purpose of book depreciation expense, as shown on the Statement of Income, is to provide recovery of invested capital over the life of the related facilities, and is not intended to provide a fund equal to the amount necessary to replace such facilities at the cost level existing at the time of replacement. No adjustment has been made to computed replacement cost depreciation expense for 1976 to reflect the change in assumptions regarding the replacement of oil-fired steam station capability described above.52 OPINION OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS PENNSYLVANIA POWER 8 LIGHT COMPANY: We have examined the balance sheets of Pennsylvania Power 8 Light Company as of December 31, 1976 and 1977 and the related statements of income, earnings reinvested, and changes in financial position for each of the five years in the period ended December 31, 1977.Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circum-stances.ln our opinion, such financial statements present fairly the financial position of the Company at December 31, 1976 and 1977 and the results of its operations and the changes in its financial position for each of the five years in the period ended December 31, 1977, in conformity with generally accepted accounting principles consistently applied during the period except for the change in 1974, with which we concur, in the method of accounting for recoverable fuel costs as described in Note (b)to the Statement of Income.HASKINS 8 SELLS New York, New York February 3, 1978 53,
UNDERWRITING The Underwriters named below have severally agreed to purchase from the Company the respective numbers of shares of Common Stock offered hereby: The First Boston Corporation.............................. Drexel Burnham Lambert Incorporated .............. Bache Halsey Stuart Shields Incorporated.......... Merrill Lynch, Pierce, Fenner&Smith In-corporated. Advest, Inc.Allen&Company of Lakeland, Inc...................... Almstedt Brothers, Inc.Arthurs, Lestrange&Short................................. Babbitt, Meyers 8 Company............................... Bacon, Whlpple 8 Co.Robert W.Baird&Co.Incorporated ................... Baker, Watts&Co..Bateman Eichler, Hill Richards, Incorporated .....Birr, Wilson&Co., Inc D.H.Blair 8 Co., Inc.......................................... William Blair 8 Company.................................... Blyth Eastman Dillon 8 Co.Incorporated............ Boennlng&Scattergood, Inc.............................. Boettcher&Company.J.C.Bradford 8 Co., Incorporated ..................... Alex.Brown&Sons..Bruns, Nordeman, Rea 8 Co.............................. Butcher 8 Singer Inc.......................................... Butler, Wick&Co.The Chicago Corporation ................................... Colin, Hochstln Co.C.C.Colllngs and Company, Inc......................".. Cowen 8 Company.Crowell, Weedon 8 Co.Cunningham, Schmertz&Co., Inc...................... Dain, Kalman 8 Quail, Incorporated ................... Dillon, Read 8 Co.Inc........................................ Doft 8 Co., inc.Donaldson, Lufkln&Jenrette Securities Corpo-ration.A.G.Edwards&Sons, Inc................................. Elklns, Stroud, Suplee&Co................................ Fahnestock 8 Co.Ferris&Company, Incorporated......................... First Albany Corporation..................................... Number of Shares 290,000 290,000 290,000, 290,000 20,000 7,000 7,000 13,000 13,000 13,000 20,000 7,000 20,000 7,000 7,000 20,000 41,000 13,000 13,000 13,000 20,000 13,000 30,000 7,000 13,000 7,000 7,000 7,000 13,000 7,000 20,000 41,000 13,000 41,000 20,000 30,000 13,000 13,000 7,000 First Equity Corporation of Florida.......... First of Michigan Corporation.................. First Pittsburgh Securities Corporation.... ~Goldman, Sachs 8 Co.Gradison 8 Company Incorporated .....Gruntal 8 Co.Hefren-Tillotson, Inc.Bernard Herold&Co., Inc.............. Herzfeld&Stern..Hopper Soliday 8 Co., Inc.............. Howe, Barnes 8 Johnson, Inc........ E.F.Hutton 8 Company Inc........... Interstate Securities Corporation..... Janney Montgomery Scott Inc....Johnston, Lemon&Co.Incorporated................. Josephthal &Co.Incorporated ........................... Kidder, Peabody&Co.Incorporated.................. Ladenburg, Thalmann&Co.Inc......................... Laidlaw Adams 8 Peck Inc................................. Lazard Freres&Co.James A.Leavens, Inc.Legg Mason Wood Walker, Incorporated............ Lehman Brothers Kuhn Loeb Incorporated......... Loeb Rhoades, Hornblower &Co....................... A.E.Masten&Co.~Incorporated ....................... McDonald&Company The Milwaukee Company................................... Moore, Leonard 8 Lynch, Incorporated.............. Moore&Schley, Cameron&Co......................... Morgan, Olmstead, Kennedy&Gardner, In-corporated ..Moseley, Hallgarten &Estabrook Inc.................. W.H.Newboid's Son&Co., Inc......................... The Ohio Company Oppenheimer 8 Co., Inc..................................... Paine, Webber, Jackson&Curtis tncorporated... Parker/Hunter Incorporated ............................... H.O.Peet8 Co.Inc Philips, Appel&Walden, Inc.............................. The Pierce, Wulbern, Murphey Corp................... Piper, Jeffrey 8 Hopwood incorporated .............. Number of Shares 7,000 13,000 7,000 41,000 7,000 13,000 7,000 7,000 13,000 13,000 7,000 41,000 13,000 30,000 13,000 13,000 41,000 20,000 7,000 41,000 7,000 20,000 41,000 41,000 13,000 20,000 7,000 30,000 7,000 7,000 20,000 20,000 20,000 20,000 41,000 30,000 7,000 7,000 7,000 20,000 54 Prescott, Ball&Turben.Raymond, James&Associates, Inc................... The Robinson-Humphrey Company, Inc............ Wm.C.Roney&Co..R.Rowland&Co.~Incorporated......................... Salomon Brothers.. H.B.Shalne&Co.~Inc.Shearson Hayden Stone Inc............................... Shuman, Agnew&Co.~Inc................................ Simpson, Emery&Company, Inc....................... Smith Barney, Harris upham&Co.Incorporated E.W.Smith Co.Stilel, Nicolaus&Company Incorporated ........... Number of Shares 20,000 7,000 20,000 7,000 13,000 41,000 7,000 41,000 20,000 7,000 41,000 7,000 13,000 Sutro&Co.tncorporated......................... Thomson McKinnon Securities Inc.......... Tucker, Anthony&R.L.Day, Inc............ Vercoe&Company Inc...Warburg Paribas Becker Incorporated..... Weeden&Co.Incorporated .................... Wertheim&Co., Inc....... Wheat, First Securities, Inc...................... White, Weld&Co.Incorporated .............. Dean Witter Reynolds Inc........................ Warren W.York&Co., Inc....................... Total.Number of Shares 20,000 20,000 20,000 7,000 41,000 20,000 41,000 20,000 41,000 41,000 30,000 3,000,000 The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent. The nature of the underwriting commitment is such that the Underwriters will be obligated to purchase all of the shares of Common Stock offered hereby provided that, under certain conditions involving defaults by one or more of the Underwriters which aggregate more than 300,000 shares, the Company may either terminate such Agreement or require each non-defaulting Underwriter to purchase the number of shares set forth opposite its name above plus 1/9 of such number of shares.The Company has been advised by The First Boston Corporation, Drexel Burnham Lambert Incorporated, Bache Halsey Stuart Shields, Incorporated and Merrill Lynch, Pierce, Fenner 8 Smith Incorporated, as Representatives of the Underwriters, that the Underwriters propose to offer such Common Stock to the public initially at the public offering price determined as provided on the cover page of this Prospectus and, through the Representatives, to certain dealers at such price less a concession of not more than e per share;that the Underwriters and such dealers may allow a discount of not more than rf per share on sales to other dealers;and that the public offering price and concessions and discounts to dealers may be changed by the Representatives. 5'5 PENNSYLVANIA POWER 6 LIGHT COMPANY A K." PB4IA'IYLVAMA '."'I SERVICE AREA I Y OHO.~~"SI'=pet aoYI.YAIOA II.iowa'+%A i L-,i)I'alSIIIAhO ,'.VA-'WALILIOIAUP~= a'--j+WNLIAMAAOAv 0~LOOMLMIAO LLWIAMMO i'AZLalON S aaAAToas cRftK NLAONOT I 4 O M I AAAIAMMO~I~I VAIAA-'m~oaaavaaa wo~LINLLNaaa NIOWN~j~l&ADALAMA Jk f~" Ia YORK~oeg u GENERATING STATIONS PART II.INFORMATION NOT REQUIRED IN PROSPECTUS. Item 13.Other Expenses of Issuance and Distribution. Securities and Exchange Commission registration fee...Stock exchange listing fees.Printing and engraving. Fees and expenses of Transfer Agent and Registrar...... Legal fees.Accounting fees.Postage Blue Sky fees and expenses Miscellaneous.. Total.$13,425 8,000 80,000 1,000 27,000 5,000 8,500 4,500 2,575$150,000 All of the above except the Securities and Exchange Commission registration fee are estimated. Item 14.Relationship ivith Registrant of Experts named in Statement. Reference is made to the captions"Experts" and"Legal Opinions" in the Prospectus. Item 15.Indemnification of Directors and efieers.Article VII of the By-Laws of the Company reads as follows: "Indemnification of Directors, Officers, Etc.SEGTIQN 7.01.Directors and Overs;Third Party Actions.The corporation shall indemnify any director or officer of the corporation who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was an authorized representative of the corporation (which, for the purposes of this Article, shall mean a director, officer, employee or agent of the corporation, or a person who is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise) against expenses (including attorneys'ees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful.The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in, or not opposed to, the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful.SEcl'toN 7.02.Directors and Ogcers;Derivative Actions.The corporation shall indemnify any director or officer of the corporation who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was an authorized representative of the corporation, against expenses (including attorneys'ees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a 4 4 4 t 4~4 44 tt I I 4 4 4 4 4~:4~I~4 4~4, 4 4 I~4 4 44 II~'1 I 4 I-'4~'"'kf=4'P I 4 manner he reasonably believed to be in, or not opposed to, the best interests of the corporation and except that'no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the corporation unless and only to the extent that the court of common pleas of the county in which the registered office of the corporation is located or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the court of common pleas or such other court shall deem proper.SEGTIQN 7.03.Employees and Agents.To the extent that an authorized representative of the corporation who neither was nor is a director or officer of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 7.01 and 7.02 of this Article or in defense of any claim, issue or matter therein, he shall be indemnified by the corporation against expenses (including attorneys'ees) actually and reasonably incurred by him in connection therewith. Such an authorized representative may, at the discretion of the corporation, be indemnified by the corporation in any other circumstances to any extent if the corporation would be required by Sections 7.01 or 7.02 of this Article to indemnify such person in such circumstances to such extent if he were or had been a director or officer of the corporation. SEGTloN 7.04.Procedure for Effecting Indemnification. Indemnification under Sections 7.01, 7.02 or 7.03 of this Article shall be made when ordered by court (in which case the expenses, including attorneys'ees, of the authorized representative in enforcing such right of indemnification shall be added to and be included in the final judgment against the corporation) and may be made in a specific case upon a determination that indemnification of the authorized representative is required or proper in the circumstances because he has met the applicable standard of conduct set forth in Sections 7.01 or 7.02 of this Article.Such determination shall be made: (1)By the board of directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (2)If such a quorum is not obtainable, or, even if obtainable a majority vote of a quorum of disinterested directors so direct, by independent legal counsel in a written opinion, or (3)By the shareholders. SEGTIQN 7.05.Advancing Expenses.Expenses (including attorneys'ees) incurred in defending a civil or criminal action, suit or proceeding shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding, upon receipt of an undertaking by or on behalf of a director or officer to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the corporation as required in this Article or as authorized by law and may be paid by the corporation in advance on behalf of any other authorized representative when authorized by the board of directors upon receipt of a similar undertaking. SEGTIoN 7.06.Scope of Article.Each person who shall act as an authorized representative of the corporation, shall be deemed to be doing so in reliance upon such rights of indemnification as are provided in this Article.The indemnification provided by this Article shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any agreement, vote of shareholders or disinterested directors, statute or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office or position, and shall continue as to a person who has ceased to be an authorized representative of the corporation and shall inure to the benefit of the heirs, executors and administrators of such a person." Directors and officers of the Company may also be indemnified in certain circumstances pursuant to the statutory provisions of general.application contained in the Pennsylvania Business Corporation Law. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, oScers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, oScer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such'director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.Reference is also made to the form of Underwriting Agreement, filed as Exhibit 1 hereto, which contains provisions for indemnification of the Company and its directors and oScers by the several Underwriters against certain civil liabilities for information furnished by the Underwriters. The Company presently has an insurance policy which, among other things, includes liability insurance coverage for oScers and directors, with a$20,000 deductible clause, under which oScers and directors are covered against any"loss" by reason of payment of damages, judgments, settlements and costs, as well as charges and expenses incurred in the defense of actions, suits or proceedings."Loss" is specifically defined to exclude fines and penalties, as well as matters deemed uninsurable under the law pursuant to which the insurance policy shall be construed. The policy also contains other specific exclusions, including illegally obtained personal profit or advantage, and dishonesty. The policy also provides for reimbursement to the Company for loss incurred by having indemnified oScers or directors as authorized by state statute, company by-laws, or any other agreement. Item 16.Treatment of Proceeds from Stork to be Registered. Inapplicable. Item 17.Other Documents Filed as a Part of the Registration Statement.(a)Statements of eligibility and qualification of persons designated to act as trustee under an indenture to be qualified under the Trust Indenture Act of 1939.Inapplicable.(b)Exhibits.Incorporation by Reference Exbiblt No.2(a)-1 2(a)-2-Forms of Agreement Among Underwriters and Underwriting Agreement-Specimen of Common Stock Certificate -Copy of Restated Articles of Incorporation.'revious Filing Registration Statement (No.2-9140)Registration Statement (No.2-60291)Previous Exhibit Designation 2(a)-2 2(a)-2(i)-Amendment to Articles of Incorporation 2(a)-2(ii) -Amendment to Articles of Incorporation 'P C Incorporation by Reference Exhibit No.2(a)-3-Copy of By-laws Previous Filing Previous Exhibit Designation 2(a)-4 2(a)-5 2(a)-6 2(a)-7 2(a)-8 2(a)-9 2(a)-10 2(a)-11 2(a)-12 2(a)-13 2(a)-14 2(a)-15 2(a)-16 2(a)-17 2(a)-18 2(a)-19 2(a)-20 2(a)-21 2(a)-22 2(a)-23-Mortgage and Deed of Trust, dated as of October I, 1945, between the Company and Guaranty Trust Company of New York (now Morgan Guaranty Trust Company of, New York), as Trustee-Supplement, dated as of July I, 1947, to said Mortgage and Deed of Trust-Supplement, dated as of December I, 1948, to said Mortgage and Deed of Trust-Supplement, dated as of February I, 1950, to said Mortgage and Deed of Trust-Supplement, dated as of March I, 1953, to said Mortgage and Deed of Trust-Supplement, dated July I, 1954, to said Mort-gage and Deed of Trust-Supplement, dated as of August I, 1955, to said Mortgage and Deed of Trust-Supplement, dated as of December I, 1961, to said Mortgage and Deed of Trust-Supplement, dated as of March I, 1964, to said Mortgage and Deed of Trust-Supplement, dated as of June I, 1966, to said Mortgage and Deed of Trust-Supplement, dated as of November I, 1967, to said Mortgage and Deed of Trust-Supplement, dated as of December I, 1967, to said Mortgage and Deed of Trust-Supplement, dated as of January I, 1969, to said Mortgage and Deed of Trust ,-Supplement, dated as of June I, 1969, to said Mortgage and Deed of Trust-Supplement, dated as of March I, 1970, to said Mortgage and Deed of Trust-Supplement, dated as of February I, 1971, to said Mortgage and Deed of Trust-Supplement, dated as of February I, 1972, to said Mortgage and Deed of Trust-Supplement, dated as of January I, 1973, to said Mortgage and Deed of Trust-,Supplement, dated as of May I, 1973, to said Mortgage and Deed of Trust-Supplement, dated as of April I, 1974, to said Mortgage and Deed of Trust Registration Statement (No.2-5872)Registration Statement (No.2-60291)Registration Statement (No.2-60291)Registration Statement (No.2-60291)Registration Statement (No.2-60291)Registration Statement (No.2-19255)Registration Statement (No.2-60291)Registration Statement (No.2-19255)Registration Statement (No.2-60291)Registration Statement (No.2-60291)Registration Statement (No.2-60291)Registration Statement (No.2-60291)Registration Statement (No.2-60291)Registration Statement (No.2-60291)Registration Statement (No.2-60291)Registration Statement (No.2-60291)Registration Statement (No.2-60291)Registration Statement (No.2-60291)Registration Statement (No.2-60291)Registration Statement (No.2-60291)7(c)2(a)-5 2(a)-6 2(a)-7 2(a)-8 2(b)-5 2(a)-10 2(b)-7 2(a)-12 2(a)-13 2(a)-14 2(a)-15 2(a)-16 2(a)-17 2(a)-18 2(a)-19 2(a)-20 2(a)-21 2(a)-22 2(a)-23 11-4 F ,1 incorporation by Reference Exhibit No.2(a)-24 2(a)-25 2(a)-26 2(a)-27 2(a)-28 2(a)-29 2(a)-30 2(a)-31 2(a)-32 2(a)-33 2(a)-34 2(a)-35 2(a)-36-Supplement, dated as of October 1, 1974, to said Mortgage and Deed of Trust-Supplement, dated as of May 1, 1975, to said Mortgage and Deed of Trust Previous Filing Registration Statement (No.2-60291)Registration Statement (No.2-60291)-Supplement, dated as of November 1, 1975, to Registration Statement said Mortgage and Deed of Trust (No.2-54831)-Supplement, dated as of December 1, 1976, to said Mortgage and Deed of Trust-Supplement, dated as of December 1, 1977, to said Mortgage and Deed of Trust-Mortgage and Deed of Trust, dated as of February 15, 1937, between The Scranton Elec-tric Company (to which company the Company is successor by merger)and Chemical Bank&Trust Company (now Chemical Bank)and Howard B.Smith (P.J.Gilkeson, successor), as Trustees-Supplement, dated as of November 1, 1946, to said Mortgage and Deed of Trust-Supplement, dated as of April 1, 1948, to said Mortgage and Deed of Trust-Supplement, dated as of May 15, 1952, to said Mortgage and Deed of Trust Registration Statement (No.2-57633)Registration Statement (No.2-60291)Registration Statement (No.2-6289)Form 1-MD, Registration Statement (No.2-6289)Registration Statement (No.2-60291)Registration Statement (No.2-60291)-Instrument providing for resignation of Individ-ual Trustee and appointment of successor Indi-vidual Trustee under said Mortgage and Deed of Trust Registration Statement (No.2-60291)-Supplement, dated as of September 1, 1952, to Registration Statement said Mortgage and Deed of Trust (No.2-60291)-Supplement, dated as of January 31, 1956, to Registration Statement said Mortgage and Deed of Trust (No.2-60291)-Supplement, dated January 31, 1956, to said RcgistrationStatement Mortgage and Deed of Trust (No.2-19255)Previous Exhibit Designation 2(a)-24 2(a)-25 2(a)-26 2(a)-26 2(a)-28 D B-1 2(a)-31 2(a)-32, 2(a)-33 2(a)-34 2(d)-6 2(a)-36 2(a)-37 2(a)-38 2(a)-39 2(a)-40-Instrument providing for resignation of Individ-ual Trustee and appointment of successor Indi-vidual Trustee under said Mortgage and Deed of Trust-Instrument providing for resignation of Individ-ual Trustee and appointmcnt of successor Indi-vidual Trustee under said Mortgage and Deed of Trust-Loan Agreement dated February 9, 1973, be-tween the Company and The Chase Manhattan Bank, N.A., as amended-Preferred Stock Purchase Agreement, dated July 11, 1973, between the Company and The Prudential Insurance Company of America Registration Statement (No.2-60291)Registration Statement (No.2-58290)2(a)-37 2(a)-37 Incorporation by Reference Exhibit No.2(a)-41 2(a)-42 3(a)-Preference Stock Purchase Agreement, dated September 22, 1975, between the Company and Alco Standard Corporation -Composite Conformed Copy of Preferred Stock Purchase Agreement, dated October 11, 1977, between the Company and the purchasers named therein-Opinion of Edward M.Nagel, Esq., with respect to legality of securities being registered here-under Previous Filing Registration Statement (No.2-60291)Previous Exhibit Designation 2(a)-42 3(b)3(c)I 4(a)4(b)S(a)-Opinion of Messrs.Simpson Thacher&Bartlett with respect to legality of securities being regis-tered hereunder-Consent of Paul Weir Company Incorporated -Article VII of the Company's By-Laws, relating to indemnification of directors and oScers, is set forth in Item 15, to which reference is hereby made-Copy of Memorandum of Excess Liability In-surance, dated December 31, 1972, Covering Excess Public Liability&Property Damage, including Errors and Omissions, Employee Ben-efits and Directors and OScers Liability-Copy of Coal Sales Agreement, dated January 1, 1972, between the Company and Pennsylva-nia Mines Corporation (formerly Greenwich Collieries Company)Registration Statement (No.2-51907)Registration Statement (No.2-42777)4(b)5(b)5(b)-Copy of Interconnection Agreement, dated Registra'tion Statement February 23, 1965, between Public Service (No.2'-26170)Electric&Gas Company and the Company 13(a)5(c)-Copy of Interconnection Agreement, dated February 19, 1965, between Philadelphia Elec-tric Company and the Company Registration Statement (No.2-26170)13(b)5(c)-1-Copy of Supplemental Agreement, dated Jan-Registration Statement uary 27, 1967, to said Interconnection Agree-'No.2-26170) ment 13(b)-1 5(c)-2 5(d)5(e)-Copy of Supplemental Agreement, dated Octo-ber 20, 1969, to said Interconnection Agreement-Copy of Interconnection Agreement, dated April 9, 1974, between New York Power Pool Group, and Pennsylvania-New Jersey-Maryland Group-Copy of Interconnection Agreement, dated September 26, 1956, among Public Service Electric&Gas Company, Philadelphia Electric Company, the Company, Baltimore Gas&Electric Company, Pennsylvania Electric Com-pany, Metropolitan Edison Company, New Jersey Power&Light Company and Jersey Central Power&Light Company Registration Statement (No.2-35654)Registration Statement (No;2-51907)Registration Statement (No.2-60291)5(c)-2 5(e)5(e) Incorporation by Reference Exhibit No 5(e)-1-Copy of Supplemental Agreement, dated Jan-uary 28, 1965, to said Interconnection Agree-ment Previous Filing Registration Statement (No.2-26170)Previous Exhibit Designation 13(d)-1 5(e)-2 5(e)-3 5(e)-4 5(e)-5 5(f)5(f)-1-Copy of Supplement entitled"Appendix A Me-ter Locations", dated July 28, 1972, to said Interconnection Agreement-Copy of Supplemental Agreement, dated April 1, 1974, to,said Interconnection Agreement-Copy of Schedules 5.02 and 5.03, efFective for filing August 1, 1974, to said Interconnection Agreement-Copy of Supplemerital Agreement, dated June 15, 1977, to said Interconnection Agreement-Copy of Conowingo Backwater Agreement, dated February 20, 1926, among Pennsylvania Water&Power Company (to which company the Company is successor by merger), the Susquehanna Power Company, the Susque-hanna Electric Company, and Philadelphia Electric Company-Copy of Supplemental Letter Agreement, dated March 1, 1976, to said Conowingo Backwater Agreement Registration Statement (No.2-51907)Registration Statement (No.2-51312)Registration Statement (No.2-52931)Registration Statement (No.2-60291)Registration Statement (No.2-4254}Registration Statement (No.2-57633)5(f)-2 5(f)-4 5(e)-1 5(e)-5 I-14 5(g)-1 5(f)-2-Copy of Supplemental Letter Agreement, dated Registration Statement August 5, 1977, to said Conowingo Backwater (No.2-60291) Agreement 5(f)-2 5(g)5(h)5(i)5(j)5(k)-Copy of Power Supply Contract, dated as of June 1, 1955, among Baltimore Gas&Electric Company, the Company, and Safe Harbor Wa-ter Power Corporation -Copy of Agreement on the scheduling and dispatching of Safe Harbor and Holtwood Proj-ects, dated as of June 1, 1955, among Safe Harbor Water Power Corporation, Baltimore Gas&Electric Company and the Company-Copy of Transmission Contract, dated as of July 20, 1960, among the Company, Safe Harbor Water Power Corporation and Baltimore Gas&Electric Company-Memorandum of Agreement regarding Key-stone Electric Generating Station, dated December 7, 1964, between the Company and Atlantic City Electric Company ct al.-Keystone Operating Agreement, dated Decem-ber 1, 1965, between Pennsylvania Electric Company and the Company et al.Registration Statement (No.2-14608)Registration Statement (No.2-14608)Registration Statement (No.2-26170)Registration Statement (No.2-60291)Registration Statement (No.2-60291)13(o)13(p)13(11)5(j)5(k) Incorporation by Reference Exhibit No.5(l)5(m)5(m)-1 5(n)5(n)-1 5(o)5(p)-1 5(p)-2 5(p)-3 5(p)-4 5(p)-5 5(p)-6 5(p)-7 5(p)-8 5(q)5(q)-1-Memorandum of Owners'greement Regard-ing Conemaugh Steam Electric Station, dated August 1, 1966, between the Company and Atlantic City Electric Company et al.-Conemaugh Operating Agreement, dated December 1, 1967, between Pennsylvania Elec-tric Company and the Company et al.-Supplement No.1, dated June'4, 1969, to said Conemaugh Operating Agreement-Copy of Interconnection Agreement, dated May 31, 1968, between Pennsylvania Electric Com-pany and the Company-Copy of Appendix B, Revision 2, dated October 1, 1971, to said Interconnection Agreement-Copy of Interconnection Agreement, dated Au-gust 1, 1935, between Luzerne County Gas&Electric Corporation (now UGI Corporation) and the Company-Copy of Supplemental Agreement, dated June 1, 1960, to said Interconnection Agreement-Copy of Amendment to said Supplemental Agreement, dated January 31, 1968, to said Interconnection Agreement-Copy of Amendment to said Supplemental Agreement, dated February 6, 1969, to said Interconnection Agreement-Copy of Amendment to said Supplemental Agreement, dated March 27, 1970, to said Interconnection Agreement-Copy of Amendment to said Supplemental Agreement, dated October 10, 1972, to said Interconnection Agreement-Copy of Amendment to said Supplemental Agreement, dated May 1, 1973, to said Inter-connection Agreement-Copy of Supplemental Agreement, dated December 11, 1974, to said Interconnection Agre;.ment -Copy of Supplemental Agreement, dated April 22, 1975, to said Interconnection Agreement-Copy of Interconnection Agreement, dated April 26, 1965, between West Penn Power Company et al.and the Company et al.-Copy of Schedule 7.01, issued May 4, 1967, to said Interconnection Agreement Previous Filing Registration Statement (No.2-60291)Registration Statement (No.2-60291)Registration Statement (No.2-60291)Registration Statement (No.2-30918)Registration Statement (No.2-42013)Registration Statement (No.2-26170)Registration Statement (No.2-26170)Registration Statement (No.2-33042)Registration Statement (No.2-33042)Registration Statement (No.2-38149)Registration Statement (No.2-46508)Registration Statement (No.2-49227)Registration Statement (No.2-52693)Registration Statement (No.2-52931)Registration Statement (No.2-26170)"'egistration Statement (No.2-30918)Previous Exhibit Designation 5(1)5(m)5(m)-1 4(J)5(k)-1 13(J)13(j)-1 5(I()-2 5(k)-3 5(I()-4 5(1)-5 5(1)-6 5(1)-7 5(1)-8 13(1()4(1)-1 5(q)-2-Copy of Schedule 1.05, issued December 22, Registration Statement 1971, to said Interconnection Agreement (No.2-50488)5(m)-2 Incorporation by Reference Exhibit No.5(q)-3 5(q)-4 5(q)-5 5(r)5(r)-1 5(r)-2 5(s)5(s)-1 5(s)-2 5(t)5(t)-1 5(t)-2 5(t)-3 5(t)-4 5(t)-5 5(t)-6 5(t)-7 5(t)-8-Copy of Schedules 1.06, 5.02, 6.02 and 9.01, dated November 14, 1974, to said Inter-connection Agreement-Copy of Schedule 4.03, issued February 9, 1976, to said Interconnection Agreement-Copy of Schedule 7.03, dated August 16, 1976, to said Interconnection Agreement-Copy of Interconnection Agreement, dated September 30, 1965, between The Cleveland Electric Illuminating Company and the Com-pany et al.-Copy of Schedule 8.02, issued March 24, 1975, to said Interconnection Agreement-Copy of Schedules 1.02, 4.02, 5.02, 6.02, 7.02 and 9.01, dated November 12, 1975 to said Interconnection Agreement-Copy of Interconnection Agreement, dated September 30, 1965, between Virginia Electric and Power Company and the Company et al.-Copy of Schedule 7.0I, issued June 20, 1967, to said Interconnection Agreement-Copy of Supplemental Agreement, dated September 1, 1976, to said Interconnection Agreement-Copy of Interconnection Agreement, dated October 30, 1964, between Metropolitan Edison Company and the Company-Copy of Supplemental Agreement, dated September 29, 1967, to said Interconnection Agreement-Copy of Supplemental Agreement, dated May 20, 1968, to said Interconnection Agreement-Copy of Supplemental Agreement, dated Octo-ber 4, 1968, to said Interconnection Agreement-Copy of Supplemental Agreement, dated November 22, 1968, to said Interconnection Agreement-Copy of Supplemental Agreement, dated June 26, 1970, to said Interconnection Agreement-Copy of Appendix B, Revision 9, dated May 25, 1971, to said Interconnection Agreement-Copy of Supplemental Agreement, dated June 21, 1974, to said Interconnection Agreement-Copy of Revision to Appendix C, dated September 10, 1974, to said Interconnection Agreement Previous Filing Registration Statement (No.2-52693)Registration Statement (No.2-56389)Registration Statement (No.2-57633)Registration Statement (No.2-26170)Registration Statement (No.2-52931)Registration Statement (No.2-56389)Registration Statement (No.2-26170)Registration Statement (No.2-30918)Registration Statement (No.2-57633)Registration Statement (No.2-26170)Registration Statement (No.2-30918)Registration Statement (No.2-30918)Registration Statement (No.2-30918)Registration Statement (No.2-33042)Registration Statement (No.2-38149)Registration Statement (No.2-40765)Registration Statement (No.2-51907)Registration Statement (No.2-52693)Previous Exhibit Designation 5(m)-3 5(m)-4 5(m)-5 13(1)5(n)-2 5(n)-2 13(m)4(n)-1 5(o)-2 13(n)4(o)-1 4(o)-2 4(o)-3 5(o)-4 5(o)-6 5(p)-6 5(p)-10 5(p)-11
Incorporation by Reference Exhibit No.5(t)-9 5(t)-10 5(t)-11 5(u)5(u)-I 5(u)-2 5(u)-3 5(u)-4 5(u)-5 5(u)-6 5(u)-7 5(v)5(w)5(w)-I 5(x)5(y)-Copy of Revision to Appendix C, dated October 30, 1974, to said Interconnection Agreement-Copy of Revision to Rate Schedule, dated April 28, 1975, to said Interconnection Agreement-Copy of Supplemental Agreement, dated April 5, 1976, to said Interconnection Agreement-Copy of thc Extra High Voltage Transmission System Agreement, dated April 27, 1967, be-tween the Company and Public Service Electric&Gas Company, et al.-Copy of Schedule 13.02, issued March 26, 1969, in connection with said Agreement-Copy of Supplemental Agreement, dated Octo-ber 17, 1969, to said Agreement-Copy of Operating and Maintenance Agree-ments, dated as of February I, 1970, in'con-nection with said Agreemcnt-Copy of Schedules 11.04 and 12.03, issued July 16, 1971, in connection with said Agreement-Copies of Revisions to Schedule A, issued Jan-uary I, 1975 and May I, 1975, to said Schedule 12.03-Copy of Supplemental Agreement, dated May 17, 1972, to said Agreement-Copy of Schedules 2.03, 3.03, 4.03, 6.02 and 8.04, issued July 29, 1976, to said Agreement-Copy of the Susquehanna-Eastern 500 KV Transmission System Agreement, date as of April 30, 1976, between the Company and Public Service Electric and Gas Company, et al.-Copy of Mid-Atlantic Area Coordination Agreement, dated April 23, 1971, between the Company and Atlantic City Electric Company, et al.-Copy of Agreement on Coordinated Program for Reduction in Energy Use, dated April I, 1977, between the Company and Atlantic City Electric Company, et al.-Copy of 115 KV Seward-Conemaugh Inter-connection Facilities Agreement, dated March 2, 1970, between Pennsylvania Electric Com-pany and the Company, et al.-Pipeline System Contract, dated as of June 22, 1972, between the Company and Gulf Interstatc Engineering Company Previous Filing Registration Statement (No.2-52693)Registration Statement (No.2-52931)Registration Statement (No.2-56389)Registration Statement (No.2-30918)Registration Statement (No.2-33042)Registration Statement (No.2-35654)Registration Statement (No.2-38149)Registration Statement (No.2-42013)Registration Statement (No.2-54831)Registration Statement (No.2-45713)Registration Statement (No.2-57633)Registration Statement (No.2-57633)Registration Statement (No.2-40765)Registration Statement (No.2-60291)Registration Statement (No.2-38149)Registration Statement (No.2-45713)Previous Exhibit Designation .5(p)-12 5(p)-13 5(p)-11 4(1)5(p)-I-5(p)-3 5(p)-4 5(q)-4 5(q)-5 5(q)-5 5(q)-7 5(r)5(r)5(w)-I 5(r)5(u) III~II f'I I If'lf h l;(=I II~)II Incorporalion by Reference Exhibit No.5(y)-I-Copy of Amendment, dated as of November 1, 1973, to said Pipeline System Contract I Previous Filing Registration Statement (No.2-51907)Previous Exhibit Designation 5(LI)-I 5(y)-2-Copy of Amendment, dated as of January 23, 1974, to said Pipeline System Contract Registration Statement (No.2-51901)5(u)-2 5(y)-3-Copy of Amendment, dated as of January 1, RcgistrationStatement 5(u)-3 1975, to said Pipeline System Contract (No.2-54831)5(y)-4-Copy of Amendment, dated as of January 1, RcgistrationStatement 5(t)-4 1976, to said Pipeline System Contract (No.2-5290)s(z)-Pollution Control Facilities Agreement, dated, as of May 1, 1973, between the Company and the Lehigh County Industrial Development Au-'hority 5(aa)-Copy of Petroleum Product Sales Agreement RegistrationStatement 5(y)for the sale of residual oil, dated as of January (No.2-54299).1, 1975, between the Company and Amerada Hess Corporation 5(bb)-Copy of Agreement, dated as of January 1, Registration Statement 5(w)1977, between the Company and Asiatic Petro-(No.2-5290)leum Corporation for the sale of oil 5(cc)-Copy of Agreement, dated as of March 24, Registration Statement 5(y)1977, between the Company and Sun Oil Com-(No.2-58290)pany of Pennsylvania 5(dd)-Copy of Participation Agrccment, dated as of Registration Statement 5(dd)March 18, 1977, between the Company and (No.2-60291) Allegheny Electric Cooperative, Inc.5(dd)-1-Copy ofSecond Termination Agreement, dated RegistrationStatemcnt-5(dd)-1 September 16, 1977, between the Company and (No.2-60291)Allegheny Electric Cooperative, Inc.6-Calculation of Allocation of Allowance for'unds Used During Construction Attributable to Funds Provided by Common Stock Equity h K r II~$/I SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Allentown, and Commomvealth of Pennsylvania, on the 24th day of February, 1978.PENNSYLVANIA POWER&LIGHT COMPANY By/S/JACK K.BUSBY Jack K.Busby, Chairman of thc Board and Chief Executive OIIIccr Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed below by thc following persons in the capacities indicated on the 24th day of February, 1978.Signature/S/JACK K.BUSBY Jack K.Busby, Chairman of the Board and Chief Executive Oiiiccr Title Principal Executive Officer/s/R.R.FoRTUNE R.R.Fortune, Executive Vice Prcsidcnt-Financial Principal Financial and Accounting OAicer JAGK K.BUsBY, RALPH R.CRANMER, RoBERT K.CAMPBELL, EDGAR L.DEssEN, R.R.FoRTUNE, HARRY A.JENSEN, VIRGINIA H.KNAUER, W.DEM-ING LEWIS, JOHN A.NOBLE, NORMAN ROBERTSON AND CHARLEs H.WATTs II Directors By/s/JAcK K.BvsBY Jack K.Busby, Attorney-in. fact CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS PENNSYLYANIA PowER&LIGHT CoMPANY We hereby consent to the use in this Registration Statement of our opinion dated February 3, 1978 appearing in the Prospectus which is a part of such Registration Statement, and to the references to us under the headings"Statement of Income" and"Experts" in such Prospectus. HASKINS&SELLS New York, New York February 24, 1978 (The consents of Edward M.Nagel, Esq., Messrs.Simpson Thacher&Bartlett and Paul Weir Company Incorporated are filed as exhibits 3(a), 3(b)and 3(c), respectively, to the Registration Statement.) C i n/I PENNSYLVANIA POWER 4 LIGHT COMPANY ALLOCATION OF PORTION OF ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFUDC)ATTRIBUTABLE TO FUNDS PROVIDED BY COMMON STOCK EQUITY For Years Prior to 1977 Included in the Statement of Income (Thousands of Dollars)EXHIBIT 6 Capitalization Incremental Ratios(a)Rate(b)FAIuivalcnt Rate(c)Earnings Applicable Allocation of io Common AFUDC Stock Portion of AFUDC Attributable io Common Stock Equity as a Percentage of Earnings Applicable io Common Stock 1976 Long-Term Debt........................... Preferred and Preference Stock....Common Stock Equity.................. 51%18 31 4.65%2.37%$13,506 10.28 1.85 10,543 3.71 21,143 7.93%$45,192$78,743 27%1975 Long-Term Debt..............,........... Preferred and Preference Stock....Common Stock Equity.................. 51%18 31 4.67%13.31 2.38%2.40 3.56 8.34%$10,446 10,534 15,625$36,605$73,032 21%1974 Long-Term Debt........................... Preferred and Prefcrencc Stock....Common Stock Equity.................. 51%18 31 4.11%2.10%7.44 1.34 3.80 7.24%$6,013 3,837 10,882$20,732$67,823 16%1973 Long-Term Debt........................... Prcfcrred and Preference Stock....Common Stock Equity.................. 51%18 31 6.99%3.56%$6,762 7.40 1.33 2,526 2.99 5,679 7.88%$14,967$49,721 11%(a)Assumes that funds used to finance construction during each year were provided in the same proportion as the Company's average capitalization ratios during the five years ended December 31, 1976.(b)For 1973 incremental rates were determined on the basis that the cost of long-term debt and preferred and preference stock financing was equivalent to the cost of securities issued in the year.No adjustment was made for income tax reductions resulting from interest expense attributable to the portion of AFUDC provided by long-term debt.Since February 1, 1974, the Company has computed the AFUDC,rate on an"after-tax" basis to be consistent with the treatment accorded this item for rate-making purposes by the Pennsylvania Public Utility Commission (PUC).The incremental rates used in the above computation for 1974, 1975,and 1976 are consistent with the AFUDC rate computation filed semi-annually with the PUC which were based on securities issued in the twelve months preceding the semi-annual computation. For the same reason, effective February 1, 1974, the incremental rate for the debt component was reduced by the related income tax reduction.(c)The equivalent rate for each year is calculated by dividing the amount of AFUDC recorded during the year by the balances of the construction work in progress including the accumulated AFUDC. i~I'l'L~II'L*a L~II'I I L L f L i L t~L~I y~ POWER PURCHASE AGREEMENT BETWEEN PENNSYLVANIA POWER 5 LIGHT COMPANY AND ALLEGHENY ELECTRIC COOPERATIVE, INC.MARCH 18, 1977 l)), I POl<E R PURCHASE AGREEt IENT TABLE OF CONTENTS Pave Mo.Article I, Article II Article III Article IV Article V Article VI Article VlI Article VIII Article IX Article X Article XI Article XI I Article XIII Article XIV Article XV Article XVI Article XVII Article XVIII 1lefinitions Buy Back Test Energy Economic Regulation AE Excess Energy Billing and Payment Successors, Assigns, Transferees and Grantees Notice Amendments Counterparts Governing Law Benefit of Agreement Severability Failure to Enforce Provision's of'his Agreemen't Article Headings Not to Affect Meaning Filing Suspension and Termination of this.Agreement Best Efforts Signatures 12 18 22 23 24 25 26 27 28 29 30 31 32 33 Exhibit A Exhibit B EXHIBITS Off-site Facilities Operating Costs POWER PURCHASE AGREEMENT BETWEEN PENNSYLVANIA POWER 6 LIGHT COMPANY AND ALLEGHENY ELECTRIC COOPERATIVE, INC.This AGREL'ML'NT, c>>tered into this 18th day of March, 1977, by and between Pennsylvania Power 5 Light Company, (herein-after PL), a corporation organized and existing under the laws of the Commonwealth of Pennsylvania, with its corporate head-quarters at Two North Ninth Street, Allentown, Pennsylvania 18101, and Allegheny Electric Cooperative, Inc.(hereinafter AE), a corporation organized and existing under the laws of the Common-wealth of Pennsylvania, with its corpo>ate headquarters at 2929 North Front Street, Harrisburg, Pennsyj.vania 17110.WHEREAS, PL is a public utility engaged in the genera-tion, transmission and distribution of electric power and energy in the Commonwealth of Pennsylvania, and AE is engaged in the sale of electric power and energy to its members in the Common-wealth of Pennsylvania and the State of New Jersey;and WHEREAS, PL and AE, as tenants in common, own a ninety percent and ten percent undivided ownership interest, respectively, in two nuclear generating units, one of which is designated as Susquehanna Unit 81 and the second of which is designated as Susquehanna Unit t2 (hereinafter collectively referred to as Susquehanna), located in Salem Township, Luzerne County, Pennsyl-vania;.and NON, THEREFORE, In consideration of the premises and.the covenants herein contained, PL and AE intending to be legally bound hereby, mutually agree and promise as follows: Article I: Definitions AGREEMENT ALLOWANCE FOR FUNDS USED DURING CON-STRUCTION BILLING MONTH BUSINESS DAY CONTRACT OPERATION This Power Purchase Agreement. The Allowance For Funds Used During Construction of Susquehanna as recorded in PL's or AE's accounting books and records as the case may be.For PL Allowance for Funds Used During Construc-tion is intended to encompass the terms Allowance for Funds Used During Construc-tion, Interest Charged to Construction, Interest During Construction, Allowance for Other Funds Used During Construction or Allowance for Borrowed Funds Used During Construction as defined in the Uniform System of Accounts for Class A and B Utilities as was and as may be amended from time to time.For AE Allowance For Funds Used Durj.ng Construction is intended to encompass the terms Allowance for Funds Used During Con'struction and Interest Charged to Construction as defined in the Uniform System of Accounts Prescribed for Electric Borrogers of the Rural Electrifi-cation Administration. That calendar month during which power is sold or purchased pursuant to the terms of this Agreement. Any day other than a Saturday or Sunday or a day on which banking institutions in the Commonwealth of Pennsylvania are required by law not to transact banking business..PL shall place Susquehanna Unit Fl and Sus-'uehanna 82 individually in Contract Opera-tion at the earliest practicable date that it has been determined that such unit is , a reliable source of capacity and complies fully with all requirements of all appli-cable statutes and the rules and regula-tions of the Nuclear Regulatory Commission and such other regulatory agencies as shall have competent jurisdiction over the planning, design, licensing, construction, operation and maintenance of Susquehanna. 3 Such date with respect to each such unit shall be.the date of Contract Operation for such unit.PARTIES PARTY SUSQUEHANNA Pt.<<nd AE.Either E'L or AE.The two nuclear generating units with all on-site auxiliaries and on-site facilities related thereto designated as Susquehanna Unit Nl and Susquehanna Unit n2 located in Luzerne County, Pennsylvania, and such off-site property designated on Exhibit A, attached hereto and made a part hereof as may be added to from time to time to'eflect additions to Susquehanna and sub-tracted from time to time to reflect retirements from Susquehanna, but Susque-hanna shall incl'ude no transmission facilities. UNIT Either Susquehanna Unit 81 or Susquehanna Unit 82 as appropriate.(End of Article I) Article I I:~Bu Back A.llf t'ective l)ates The purchase of capacity and energy and the payment therefore provided for in this Article II of this Agreement shall commence on the date each Unit begins Contract Operation and shall terminate on the ninth anniversary of the date of Contract Operation of each respective Unit.B.Unit tl and Unit N2 transactions are separate The sales and payments provided for in this Article II'of this Agreement with respect to Susquehanna Unit 81 shall be considered independent and separate'from the sales and payments provided for in this Article II of this Agreement with respect to Susquehanna Unit 82 and vice versa, except with respect to the appropriate allocation of any sales and payments provided for in this Article II of this Agreement common to both Units.5 C.Purchase Amounts AE shall sell to VL<<nd PL shall purchase from All a fractional part (hereinafter'urchase Ratio)of AE's capacity and energy from Susquehanna Unit Nl and Susquehanna Unit N2 individually in accordance with the following formula: (I)(1050)-A Purchase Ratio=(I)(1050)where I is a factor determined as one-tenth (O.l)plus or minus any adjusted proportion of Susquehanna undivided ownership interest which AE acquires as a result of providing optional financing to continue or complete the construction of Susquehanna Unit 81 and/or Susquehanna Unit F2, if said optional financing is provided as a result of PL being unable to obtain the required financing upon reasonable terms in order to continue or complete the construction of Susquehanna Unit Pl and/or Susquehanna Unit 42, and where A is a factor having the following values during the.time periods set forth below: "A" Factor Period 3/18/77'-5/31/81 6/1/81-5/31/82 6/1/82-5/31/83 6/1/83-5/31/84 6/1/84-5/31/85 Sus.Unit Pl 40 50 60 70 80 Sus.Unit II2 40 50 60 70
6/1/85-5/31/86 6/1/86-5/31/87 6/1/87-termination pursuant to Article II, Subpart A hereof.90 105 105 80 90 105 l(ith respect to each Unit of Susquehanna individually, the Purchase Ratio shall be zero: (a)until each said Unit has been placed in Con-tract Operation; or (b)for such times as the calculation of the Purchase Ratio yields a negative quantity.D.Charges for Purchase For the capacity and energy purchased from Susquehanna Unit Hl or Susquehanna Unit N2 individually as herein contemplated, PL shall pay each month to AE pursuant to the procedures specifically set forth in this Article II an amount equal to the sum of the following, multiplied by the Purchase Ratio.for the Unit (as defined in this Article II, Subpart C): 1.Carrying Charge Component as defined in this Article II, Subpart E;2.Plus, Depr'eciation Expense Component as defined in this Article II, Subpart F;3.Plus, Decommissioning Provision Component as defined in this Article II, Subpart G;'
4.Plus, Operation and Maintenance Cost Component defined in this Article II, Subpart H;E.Carrying Charge Component 1.The Carrying Charge Component for each Unit indi-vidually shall be an amount equal to th..Rate Base of AE (as set forth in this Article II, Subpart E-2)for the Unit multiplied by the AE Adjusted Cost of Capital Rate for the Unit (as set forth in this Article II, Subpart E-3).4 2.Rate Base of AE shall be computed individually for each Unit and shall be the average of the balances at the begin-ning and the end of the Billing Month for the following items: (a)All costs of plant in-service related to land and depreciable assets applicable to the Unit as permitted pursuant to the Uniform System of Accounts prescribed for electric borrowers of the Rural Electrification Administration, January 1, 1972, as it may be amended from time to time, including AE's Allowance for Funds Used During Construction related to such costs;(b)Minus, amounts withheld under contracts with contractors, subcontractors and others supplying or constructing equipment, services, or materials related to the Unit;(c)Minus, Accumulated Reserve for Depreciation Component which shall be the amount of the Depreciation Expense Component (as defined in this Article II, Subpart F)accumulated since the Contract Operation date;8 (d)Minus, Accumulated Decommissioning Provision Component which shall be the amount of the Decommissioning Pro-.vision Component (as defined in this Article II, Subpart G)accumulated since the Contract Operation date;(e)Plus, AE's investment associated with each Unit in fabricated nuclear fuel in the reactor or available for installation in the reactor or removed from the reactor, if any, minus accumulated amortization of such fuel, reprocessing costs of such fuel, and other fuel cycle costs or credits attributable to the portion of such'nuclear fuel consumed, all of which shall be based on data set forth on AE's books and records;(f)Plus, AE's investment associated with or allocated to each Unit in materials and supplies and undistributed stores expense, if any, all of which shall be based on data set forth on AE's books and records.3..AE's Adjusted Cost of Capital Rate shall be equal to: with the result rounded to the fifth decimal place.The quantities appearing in the formula are defined as: I=The aggregate of AE's interest accrued during the Billing Month on loans (Loans)used to finance AE's ownership interest in items included in Rate Base.9 P=Average of the daily amount of said Loans out-standing during the Billing Month.B=Megawatt hours generated by the Unit involved during the Billing Month.C=1,050 Mf x Number of Hours in the Billing Month x 65$(in the first Billing Month the number of billing hours shall be computed from the date of Contract Operation). In the event that the laws of the United States are changed so that PL is no longer subject to the Federal Income Tax or a similar tax, the 0 01675 shown in the formula above shall be changed to 0.00750.F.Depreciation Expense Component The Depreciation Expense Component shall be determined by multiplying the depreciable portion of AE's original cost for the Unit as of the beginning of the Billing Month[as defined in this Article II, Subpart E-2(a)]by three and two-tenths percent (3.2<)and then dividing that product obtained by twelve (12).G.Decommissioning Provision Component The Decommissioning Provision Component shall be deter-mined by multiplying the depreciable portion of AE's original cost for each Unit as of the beginning of the Billing Month[as defined in this Article II, Subpart E-2(a)]by one-half of one percent (0.54)and then dividing the product obtained by twelve>>10-H.Operation and Maintenance Cost Component The Operation and Maintenance Cost Component shall he equal to the sum of the followi.ng: l.Operating Costs as defined on Exhibit B, attached hereto and made a part hereof, applicable to the month for which a bill will be rendered by PL to AE for operating AE's undivided ownership interest in Susquehanna. 2.The costs directly associated with nuclear fuel consumed by AE to produce power for the month.It is recog-nized by the Parties that as of the execution of this Agreement financial arrangements and accounting with respect to nuclear fuel have not been finalized. It is, however, intended that costs directly associated with fuel consumed to produce power for each month shall include a properly allocated portion of spent fuel storage costs, fuel reprocessing costs, final fuel disposal costs and fuel cycle costs or credits not otherwise provided for herein.(End of Article II) A.AE shall sell to PL and PL shall purchase from AE all of AE's share of the net energy which is produced by Susquehanna Unit Nl and Susquehanna Unit!f2 prior to the time each respective Unit of Susquehanna is placed into Contract Operation. Said net energy shall hereinafter be referred to as AE Test Energy.B.PL.shall pay to AE a charge for AE's Test Energy which shall be computed monthly and shall equal the kilowatt hours of AE Test Energy produced that month multiplied by the average dollar per net kilowatt hour cost that month of all fuel consumed by PL's coal-fired steam generating units (excluding from such computation all net generation produced that month for PL's account at the Keystone and Conemaugh Steam Electric Stations and the fuel costs related thereto).(End of Article III) Article IV: Economic Re ulation A.The term Economic Regulation shall mean that situation where any portion or all of the available capability of Susquehanna is not placed into operation because the operation of that portion or all of such capability would have the effect of increasing the cost of that operating system of which Susquehanna is a part[currently the Pennsylvania-New Jersey-Maryland Interconnection (PJM)].PL shall use its best efforts to predict on each Business Day whether or not Susque-4 hanna's operation will be limited by Economic Regulation during succeeding days (up to and including at least the next suc-ceeding Business Day).PL shall notify AE of predictions that Susquehanna's operation will be limited by Economic Regulation by not later than 2:00 P.M.of the day said prediction is made.As to any day that PL predicts that Susquehanna's operation will be limited by Economic Regulation, PL shall supply to AE, at AE's option and subject to the terms and conditions set forth in this Article IV, that amount of energy which is equal to AE'.s undivided ownership interest in Susquehanna multiplied by that portion of all of the total available capa-bility of Susquehanna which is not placed into operation because of Economic Regulation less that portion of such e'nergy which PL would have purchased pursuant to Article II hereof.AE shall notify PL if AE desires to receive energy pursuant to the terms hereof at the time PL notifies AE that Susquehanna operations are expected to be limited by Economic Regulation. -13>> B.In the event that at any time or from time to time Susquehanna shall be in Economic Regulation,.and PL did not predict on or prior to the preceding Business Day that Susquehanna would be in Economic Regulation, PL shall supply and AE shall purchase that amount of energy which is equal to AE's undivided ownership interest in Susquehanna multiplied by that portion of all of the total available capability of Susquehanna which is not placed into operation because of Economic Regulation less that portion of such energy which PL would have purchased pursuant to Article II hereof.C.AE shall pay to PL the following charges relating to the supply of energy by PL to AE pursuant to Article IV hereof under the terms and conditions set forth below.All charges to AE shall be computed on an hourly basi and shall be equal to the greater of: 1.The average of: (a)PL's fuel costs and variable operation and maintenance costs as determined from generating station incremental energy cost tables[Generating Station Incre-mental Energy Cost Tables (Cost Tables)as prepared by PL and amended by PL from time to time in accordance with PL's normal practices and procedures] for the PL system generating units and net interchange costs to supply energy to AE pursuant to this Article IV which are over and above PL's system fuel, operation, maintenance, and net inter-change costs at the time of such supply, had such supply not taken place.(b)That increase in the fuel costs and variable operation and maintenance costs as determined from the Cost Tables for Susquehanna which would have~resulted had that portion of the total <<v:i i Jab I c capability of Susquehanna,>>h Lch was not placed into operation, beo>>placed into operation, divided by that portion of the total available energy of Susquehanna which was not placed into operation in KNH and then that quotient multiplied by the actual energy in kilowatt hours supplied by PL to AE pursuant to this Article IV;or 2.PL's fuel costs and variable operation and maintenance costs as determined from Cost Tables for the PL system generating units and net interchange costs to supply energy to AE pursuant to this Article IV which are over and above PL's system fuel, operation, maintenance, and net interchange costs at the time of such supply, had such supply not taken place.D.The provisions of this Article IV shall terminate in the event and on the day on which AE becomes a member of a power pool.(End of Article IV) Article V: AE Excess Ener A.If for any day, or from day to day, AE desires to sell or otherwise dispose of any portion or all of its share of energy which is produced by Susqueh;.nna to other than AE's member cooperatives, AE shall on or before ten o'lock A.M.of the last Business Day preceding the day or days on which AE desires to sell said energy, first offer (Offer)to PL the option of purchasing said energy.Each Offer shall stipulate the amount P of energy which AE does not desire to sell for each hour of the day of the sale;all AE energy which is actually produced each hour on the day of the sale in excess of the stipulated amounts shall be the amount available for purchase by PL.PL shall have until 2:00 P.M.of the day of the Offer to notify AE of the exercis-ing of said option.l.Each Offer made by AE and each acceptance thereof by PL shall be deemed an individual and separate trans-action (Transaction). 2.PL shall pay to AE monthly for the actual energy purchased charges relating to each Transaction which charges shall be determined on an hourly basis, and shall be equal to the greater of: (a)The average of (l)the fuel costs and variable'operation and maintenance costs as determined from the Cost Tables for Sus-quehanna to produce that energy purchased by PL pursuant to each Transaction and (2)the reduction in PL's fuel costs and variable operation and maintenance costs as deter-mined from the Cost Tables for the PL system generating units and interchange net costs t I I resulting directly from the purchase of energy t'rom AF.pursuant to each Transaction (ezcludi>>g those charges resulting From applic>>tio>> ol tho provisions of.this Article);ov (b)The fuel costs and variable operation and maintenance costs as determined from the Cost Tables for Susquehanna to produce that energy purchased by PL pursuant to each Transaction. B.The provisions of this Article V shall terminate in the event and on the day on which AE becomes a member of a power pool~(End of Article V)
Article VI: Billin and Payment A.All bills sent from PL to AE shall be for a calendar month and shall be rondereQ by PL as soon as practic-able subsequent to the close of each calendar month.AE shall make payment to PL'in immediately available funds on the tenth (10th)day subsequent to the issuance by PL of each bill, by wire transfer to PL's account at The First Pennsylvania Bank, N.A.at Philadelphia, Pennsylvania, or any other bank which PL may designate in writing.B.If AE shall fail to pay to PL any sum due to PL pursuant to this Agreement, there shall be added to any overdue.amounts interest compounded daily from the date such payment was due until paid in full which shall be computed based on the rate of interest in effect from time to time equal to the minimum commercial lending rate charged to responsible and substantial borrowers (prime rate)by The First Pennsylvania Bank, N.A., Philadelphia, Pennsylvania, its successors and assigns, plus two percent (2~)computed on the basis of a 360-day year.If any payment is due on a day not a Business Day, it may be made on the next Business Day without premium orpenalty.C.All bills sent from AE to PL shall be for a calendar month.Bills for power delivered under Article III (Test Energy)and Article V (AE Excess Energy)and the follow'ing portions of Article II (Buy Back): l.Carryi~ig, Ch;>>pc Component I Art.icl.e i 1-)>(I)I: 2.Depreciation Expense Component[Article I.l D(2)~;3.-Decommissioning Provision Component[Article II D(3)1;r 4.Nuclear Fuel Costs[Article II-D(4))shall be rendered by AE as soon as practicable subsequent to the close of the calendar month.PL shall make payment to AE in immediately available funds on the tenth (10th)day subsequent to the issuance by AE of each bill by wire transfer to AE's account at Commonwealth National Bank in Harrisburg, Pennsylvania or any other bank which AE may designate in writing.As to Operation and Maintenar.,ce Cost Component[Article II-D(4)excluding nuclear fuel costs]related to the power transaction contemplated pursuant to Article II (Buy Back)AE shall, on or before the twenty-fifth day of ea'ch month, commencing with the first month prior to the first month the Operation and Maintenance Cost Component is expected to be billed pursuant to Article II-D(4), notify PL of the amount of Estimated Operation and Maintenance Cost Component anticipated to be billed under Article II-D(4), by AE during the next calendar month.PL shall make payment to AE in immediately available funds'such Estimated Operation and Maintenance Cost Component (and for the settlement of Actual Operation and Maintenance Cost Component as detailed below)by the tenth day of the month immediately succeeding the mont'h on which AE rendered an esti-mated bill to PL, by wire transfer to AE's account at Commonwealth 19 National Bank, Harrisburg, Pennsylvania or any other bank which AE may designate in writing.On or before the twenty-fifth day of each month begin-ning with the second month in which there have been Operation and Maintenance Cost Component, AE shall notify PL'of its share of Actual Operation and Maintenance Cost Component billable for the prior month.Any difference between the Actual Operation and Maintenance Cost Component and the Estimated Operation and Maintenance Cost Component for the same month shall be shown on the notification. Any such difference shall be settled between the Parties by an adjustment to the bill sent to PL by AE on the twenty-fifth day of each month and payable on the tenth day of the next month.D.If PL shall fail to pay to AE any sum due to AE\pursuant to this Agreement, there shall be added to any overdue amounts interest compounded daily from the date such payment was due until paid in full which shall be computed based on the rate of interest in effect from time to time equal to the minimum commercial lending rate charged to responsible and substantial borrowers (prime rate)by The First Pennsyl-vania Bank, N.A., Philadelphia, Pennsylvania, its successors and assigns, plus two percent (2:)computed on the basis of a 360-day year.If.any payment is due on a day not a Business Day it may be made on the next Business Day without premium or penalty.E.PL and AE shall adjust all billings, at any time, in a timely manner, as necessary. -I F.PL and AE shall have the right to audit and examine the accounts, books and records of the other relating to the transactions herein contemplated, at any time and from time to time during normal business hours, at the place where such accounts, books and records are normally maintained, at the expense of the examining party, except however, AE may not have access to any of the aforementioned items which by the terms under which PL holds or has access to such items, if such items are classified as confidential, secret, prcprietary, or the like.PL shall use all best efforts, upon the request of AE, to obtain the necessary permission from the holders or owners of such con-fidential, secret, or proprietary items, to permit AE to have access to said items (any cost associated with said permission shall be the sole responsibility of AE).(End of Article VI)21 Article VII: Successors, Assi ns, Transferees and Grantees This Agreement sha L.l c>>ui o to the bene Cit ol;>>>il ho binding upon the successors, assigns, transferees, and grantees of the Parties.AE and PL shall notify the other Party of its intention to assign this Agreement.(End of Article VII)22
Article VIII: Notice Any notice, request, consent, offer, acceptance, rejection or other communication required by this Agreement to be in writing shall be deemed given when deposited in the United States Mail, first class postage prepaid, and if given to PL shall be addressed to: Pennsylvania Power 5 Light Company Two North Ninth Street Allentown, Pennsylvania 18101 Attention: Treasurer and if given to AE shall be addressed to: Allegheny Electric Cooperative, Inc.2929 North Front Street Harrisburg, Pennsylvania 17110 Attention: Mr.William F.Matson unless a'different officer or address shall have been designated by the respective Party, by notice in writing.(End of Article VIII) I I I I Article IX: Amendments Any amendment to this Agreement shall not become effec-tive until approved by the Adminstrator of the Rural Electrifica-tion Administration. The Termination Agreement by and between PL and AE bearing even date herewith shall not be deemed an amend-ment to this Agreement, requiring as a condition to its becoming effective the approval of the Administrator of the Rural Electri-fication Administration.(End of Article IX) A1 This Agreement may be executed in two or more counter-parts, each'of which shall be deemed an original but all of which together shall constitute one and the same instrument.(End oX Article X) The validity, interpretation, and performance o.f this Agreement and of each and every provision hereunder shall, except as otherwise provided by law, be governed by the laws of the Commonwealth of Pennsylvania.(End of Article XI) Article XII: Benefit ot Av,ream<<>>t Except as contemplated in Article VII of this Agree-ment, the provisions of this Agreement are for the benefit of the Parties hereto and not for any other person or entity.(End of Article XII)27 l I I The provisions of this Agreement are sevorablc,;n>d if any provision shall be determined to be illegal and uncnforce-able, such determination shall in no manner affect any other provision hereof, and the remainder of this Agreement shall remain in full force and effect without regard to the fact that one or several provisions of this Agreement may be determined from time to time to be illegal or unenforceable provided, how-ever, that the intention and essence of this Agreement may still be accomplished and satisfied.(End of Article XIII)-28>> Article XIV: Failure to Enlorce l'rovisions of this A rcomcnt ,The failure of any V;arty to insist.in any one or moro instances upon strict performance of any'of the provisions of this Agreement or to take advantage of its rights hereunder, shall not be construed as a waiver of any such provisions, or the relinquishment of any such rights, but the same shall continue to remain in full force and effect.(End of Article XIV) Article'XV: Article Headings Not to Affect Meanin The descriptive headings of the various Articles of this.Agreement have been inserted for convenience or ref-erence only and shall in no manner mod'ify or restrict any of.the terms or provisions hereof.(End of Article XV) Article XVI:~Filin If and to the extent that this Agreement or any part heieof shall be required to be filed, or shall be filed with any regulatory agency as a rate or rate schedule, nothing in this Agreement shall be construed as affecting in any way the right of PL to unilaterally make application to such a'gency for a change in rates, charges, classifications, or service, or any sale, regulations, or contract relating thereto under applicable laws.To the extent that PL makes any.,such AE shall have the right to intervene in any proceeding filing, involving such a filing by PL and shall have the right to object to any proposed change.(End of Article.XVI) I I) Article XVII: Sus ension and Termination of this A reement A.This Agreement shall expire, terminate, and become null and void, except as limited by Subpart B of this Article XVII, and except as limited by the terms of this Subpart A of this Article XVII, thirty-six months subsequent to the date on which Susquehanna is no longer used for the purpose of producing elec-tric energy for sale, except that in the event that an earlier termination date is set forth in any specific Article of this Agreement, then such'earlier termination date shall be applicable and controlling with respect to that Article.B.In the event that any cause or causes of action whether in law or in equity have arisen prior to the termination of this Agreement, said cause or causes of action shall not expire, terminate or become null and void upon the expiration, termination and becoming null and void of this Agreement, but said cause or causes of action shall be actionable pursuant to the applicable statute of limitation or the applicable doctrine of laches.C.In the event that either PL or AE is in default in any of its obligations 'to the other pursuant to any Agreement between PL and AE bearing even date herewith, then all of PL's or AE's obligations to the other under this Agreement shall be sus-pended and unenforceable until said default is cured by the defaulting party.(End of Article XVII)32 Article XVIII: Best Efforts During the term of this Agreement AE and PL shall each use all best efforts to obtain and.to keep in effect any and all governmental, regulatory or other authorizations, per-mits, approvals, licenses, permissions and applications as may be necessary for each Party to perform its obligations under this Agreement.(End of Article XVIII) IN WITNESS WHEREOF, each of the Parties hereto has duly executed this Agreement in Washington, District of Columbia, this 18th day of March, 1977.PENNSYLVANIA POWER g LIGHT COMPANY By: Attest: keek.Secretary; ALLEGHENY ELECTRIC COOPERATIVE, INCORPORATED By: Attest: COMMONWEALTH OF PENNSYLVANIA )COUNTY OF On this, the.-" day of 1977, before me, a Notary Public in and for the Commonwealth of Pennsylvania, the undersigned, officer, personally appeared who acknowledged himself to be the..."~-".'."'-."-" of a Pennsylvania corporation, and that he as such~'..'-, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing the name of the corporation by himself as IN WITNESS NHEREOF, I hereunto set my hand and official seal.NOTARY PUBUQ Allent wn, Loh gh C un y, Pennsylvania tAy Comml=slo.. Expires Juno 6, 1977 Notary Pu lac ,, Pennsylvania My Commission Expires: COMMONNEALTH OF PENNSYLVANIA )COUNTY OF Qo.~h., n On this, the lg day of~~~"~~~., 1977, before me, a Notary Public, in and for the Commonwealth of Pennsylvania, the undersigned oFficer, personally appeared III.be toe&<~who acknowledged himsel f to be the I~u~l 0 of (fcgl eny El~'c-(o~t'dtiv<~j. sc., a Pennsylvania corporation, and that he as such[peg<d~+., being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing the name of the corporation by himself as Prebid~&-IN WITNESS WHEREOF, I hereunto set my hand and official seal.Notary Pu lz.c , Pennsylvania My Commission Expires: NoTARY cUpgic~y Commission Expiyos JQ'}'y]$J5l7o 82M'Asburg, Po. EXHIBIT A Off-Site Facilities (1)An Air-Monitoring Station (No.7H1)located on the roof of the North Building of the Pennsylvania Power 5 Light Company General Office at Two North Ninth Street, Allen-town, Pennsylvania, Lehigh County.(2)An Air-Monitoring Station (No.12El)located on land leased from the Berwick Hospital, Briar Creek Township, Columbia County, Pennsylvania, at 701 East 16th Street, Berwick, Pennsylvania 18603.(3)An Air-Monitoring Station (No.3D1)located at R.D.t2, Wapwallopen, Pennsylvania, on land leased from the Pond Hill Lily Lake Fire Company, Village of Pond Hill, Luzerne County, Pennsylvania. (4)An Air-Monitoring Station (No.4Sl)at the Icthyological Associates Company located at R.D.81, Berwick, Pennsylvania 18603.(5)An Air-Monitoring Station (No.1Dl)located at Mocanaqua, Pennsylvania, at the following coordinates: N 1'0'E, 45 ft.'88'26', 25 ft.;N 1 34', 225 ft~~N 4 4', 110 ft.;N 88'6'W, 25 ft.more or less;S 69'9', 120 ft.(6)Equipment, supplies and materials currently being constructed by various entities in various places, which equip-ment, supplies and materials will be used on the Susquehanna plant site. (7)Uranium Oxide and Uranium Hexa floride owned by PL located in the custody of Lucius Pitkin, Inc.and Allied Chemical Nuclear Products Division, both at Metropolis, Illinois.(8)Uranium Hexafloride owned by PL located at U.S.Energy Research and Development Administration at Oak Ridge, Tennessee. EXHIBIT B OPERATING COSTS Operating Costs shall mean all costs and expenses, direct and indirect, incurred by or on behalf of PL properly assignable to AE's undivided ownership interest in Susquehanna and 100: of all costs and expenses, direct or indirect, incurred by AE, or on behalf of AE other than the Operating Costs incurred by or on behalf of PL, properly assignable to Susquehanna. Such costs and expenses'hall be determined and allocated, in accor-dance with'generally accepted accounting principles, consistently applied, and shall include, but shall not be limited to the following, provided that if any payment made or cost incurred is for the benefit of Susquehanna, and is also for the benefit of some other PL facility, then Operating Costs shall include only that portion of such payment or cost which is equitably allocable to Susquehanna and which is not otherwise paid for: l.All costs of labor and services performed which shall include, but shall not be limited to: wages'to hourly employees, wages to salaried employees, shift differential and pay for time not worked such as vacations, sickness, and other time off in accordance with PL policies and union contracts, costs of social security taxes, unemployment insurance expenses, and all other payroll taxes, group life insurance, group hos-pitalization, medical insurance, pension and other employee benefit plan contributions, Workmen's Compensation, public liability insurance, accidental death and dismemberment insurance, long-term disability insurance, h alth insurance and all other fringe benefits accruing to PL's employees; 2.All costs of materials and supplies and utilities services for plant operation and maintenance; 2 3.All costs of tools, machinery and equipment; 4.All costs for rental of tools, machinery and equipment leased for plant operation and maintenance; S.-All costs of licenses, fees, assessments, fines, penalties, and charges imposed by governmental regulatory, administrative or supervisory bodies or entities, or by law;6.All costs of work by outside contractors, consultants, and specialists such as lawyers, engineers, accoun-tants and others as deemed necessary by PL in the operation, maintenance and management of Susquehanna; 7.All insurance costs;8.All taxes, provided,'however, that PL and AE shall separately bear the costs of taxes which are either imposed on PL or AE as separate entities or are imposed on the separate undivided ownership interests of PL or AE in Susquehanna; 9.All costs associated with maintaining the security of Susquehanna; 10.All costs associated with low river flow'augmentation; 11.All costs of any nature whatsoever associated with any shutdown, entombment, termination or removal of Susque-hanna, to be shared by the Parties hereto as Operating Costs;12.All fuel costs not paid for by AE pursuant to other agreements; 13.All administrative and general expenses incurred which enure to the benefit of Susquehanna shall be equitably allocated to Susquehanna and shall include but shall not be limited to the general services and costs of all PL's operations, such as: safety, accounting, payroll, computer services, legal, personnel, training, information services, claims work, general supervision, general supplies and expenses, auditing, communication expenses, research and development, studies and investigations relative to Susquehanna (including but not limited to nuclear production and development), and costs of operating all office buildings in which such services and general costs are incurred;to Susquehanna; 14.Overheads incurred shall be equitably allocated 3 15.Expenses incurred and applicable to generating stations owned and operated by PL which cannot be charged directly ,to specific generating stations shall be equitably allocated to each of such generating stations including Susquehanna. Such costs and expenses include but are not limited to wages and other expenses of the Manager of Power Production or PL and his staff, consultants fees, and other expenses of a general nature related to generating stations;16..All costs of load dispatching and System Control;17.All costs of owning (including depreciation) and operating auxiliary or supporting facilities of PL which enure to the benefits of Susquehanna shall be equitably allocated to Susquehanna.}}