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Philadelphia Electric Co,Annual Rept for 1989.
	ML18094B392
Person / Time
Site:	Salem, Hope Creek
Issue date:	12/31/1989
From:	Paquette J; PECO ENERGY CO., (FORMERLY PHILADELPHIA ELECTRIC
To:	;
Shared Package
ML18094B389	List: ML18094B388; ML18094B390; ML18094B391; ML18094B392; ML18094B393;
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	NUDOCS 9004160163
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9004160163 900404 PDR ADOCK 05000272 I PDR -NOTICE-Annual Report 1989 MAJOR l!Ll!CTRIC Ol!!NERATINO STATIONS &OASPLANTS

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ONLY PHILADELPHIA ELECTRIC COMPANY ANNUAL R EP ORT 1989 Financial Highlights 1989 O perat in g Revenues $3,405,629

, 000 Operat ing Expenses $2 , 596,288,000 Taxes Charged to Operations

$435, 756,000 Operat in g Income $809,341,000 Earnings Applicable to Common Stock $493,807,000 Earnings per Average Common Share $2.36 Cash Dividends Paid per Common Share $2.20 Av e rage Shares of Common Stock Outstanding 208,901,000 Construct ion Expenditures

$1, 106, 174,000 T o tal Assets $12,720,360,000 Contents EARNINGS AND L etter to Sh a reholder s 2 DIVIDENDS PER SHARE R eport of 1989 Operations 4 $3.00 . Management

's D i scussi o n a nd Anal y sis of Financial Condit i on a nd R esults of Operations 2 1 2.5 0. .................. ... Con solidated F inancial Statements 24 Notes to Fina n cial Statements 29 Report of Independent A cco untants 40 2.0 0. . . . . . . . . . .... F i n anc i al Statistics 41 r Operating Statistics 4 3 Shareholder Information 45 1.50. ****** .... Officers and Directors 46 1.00 . . 50 Doll a rs 85 86 87 88 89 @The financial pages of this report are printed on recycled paper. D iv id e nd s

E a rn i ng s P e r S hare P h ila d elp h i a Elec tr ic Co m pany 1988 % Change $3 , 228 , 712 , 000 5.5% $2 ,4 86 , 117 , 000 4.4% $444,374, 000 (1.9%) $742 , 595 , 000 9.0% $468 , 765 , 000 5.3% $2.33 1.3% $2.20 201 , 517 , 000 3.7% $1 , 081 , 577 , 000 2.3% $1 1, 862 , 852 , 000 7.2% CONSTRUCTION EXPENDITURES

$12 00 . . . . . . . . . . . . . . . . . . . . . . . . 1000 800. 600. 400. 200. Million Do llars 85 86 87 88 89

Ex t ernal Sources

Interna l Sources Chairman J. F. Paquette, Jr. with the dramatically growing Philadelphia skyline in the background. TO OUR SHAREHOLDERS 1989 was a year of major accomplishments for Philadelphia Electric Company and was highlighted by the return to full operation of both units at our Peach Bottom Atomic Power Station after a shutdown of more than two and one-half years and by the successful completion and record start-up of Limerick Unit No. 2 ahead of schedule and under budget. Earnings per average share for 1989 were $2.36 , an increase of 1 % over the 1988 earnings of $2.33 , when 4% fewer shares were outstanding. The earnings increase was primarily due to higher electric sales and lower penalties from the Peach Bottom shutdown and other fuel charges. The dividend was maintained at $2.20 per share , and the price of the Company's common stock increased from $20 to $23 1/a per share providing a total return of 27% for the year. Electric sales and gas sold and transported set new records primarily due to continued strong regional economic growth which offset the impact of less favorable weather conditions. With all six of the nuclear units wh i ch we completely or partially own now available for 100% operation, we expect to generate about two-thirds of our electrical energy with nuclear power in 1990, thus essentially eliminating our use of oil as a source of electric generation for normal operations and lowering fuel costs for our customers. While we are very pleased with these and other accomplishments described in this report, nificant challenges remain. In April , we expect a decision by the Pennsylvania Public Utility mission (PUC) on our $549 million rate increase application to recover the costs of owning and operating Limerick Unit No. 2. The outcome of this application will have a significant effect on the financial future of the Company, especially our ability to maintain the current annual dividend. lntervenors have argued that the proposed rate increase should be reduced considerably. ever, I believe that the Company has presented a solid case to justify Limerick Unit No. 2 as a prudently built , valuable asset for our service territory which will be a significant factor in enhancing the economic development of eastern Pennsylvania.

Limerick's capacity will enable us to meet the demand growth forecasted to at least the year 2000. Finished nine months ahead of schedule and approximately

$380 lion under the PUC-imposed cost cap, Limerick Unit No. 2 will a l so be environmentally beneficial by not contributing to acid rain or global warming. Although operations at Peach Bottom have gressed considerably, we recognize that the station must improve further to achieve operational excellence. This objective will continue to require intense management attention and considerable corporate resources.

A similar effort will be required to maintain and improve upon the solid formance of our Limerick Generating Station. 2 P hiladelphia E lectric Company To assist in our mission , our Board of Directors was further strengthened with the election of Admiral Kinnaird R. McKee , USN (Ret.), former director of Navy Nuclear Propulsion , and Nelson G. Harris , Pres i dent and Chief Executive Officer of Tasty Baking Company , to the Company's Board of Directors in 1989. Our management team w a s also strengthened with the election of two new vice presidents during the year. Nicholas DeBenedictis , 43 , former President of the Philadelphia Chamber of Commerce and Director of the Pennsylvania Department of Environmental Resources, was elected to the position of Senior Vice President , Corporate and Public Affairs , and David R. Helwig , 38, an 18-year veteran with the Company , was e l ected Vice President , Nuclear Services. With the successful completion of Limerick Unit No. 2, the Company has completed a 20-year construction program of capacity additions. This program has required the investment of $9 billion and has resulted in the addition of 6 , 800 MW of new capacity , most of which has been nuclear , to serve our customers' needs. With no new capacity additions planned in the immediate future , our financing needs in the next five years are expected to be less than 50% ot recent levels because of lower construction spending. As we look to 1990 and beyond , our primary focus will now shift from construction to improving our operations.

We believe we should concentrate on four key factors for future success: 1) Operational excellence throughout our entire organization

2) Customer satisfaction , by continuing to provide quality service and reliability

3) Improved productivity to enable the Company to compete better and to maintain or improve earnings without seeking a rate increase; and 4) To continue to restore credibility by effective communication with all of the public , the media , elected officials and local communities.

As the Company enters this new phase , we are well positioned with a dedicated employee force committed to quality service and an adequate capac i ty base to serve the expanding demands forecasted for our service territory on an environmentally sound basis. This combination of assets should enhance the value of shareholders

' investment in the Company. Philadelphia Electric Company has always been a responsible corpo r ate citizen , particular l y as a steward of the environment. During 1989 , we received a number of major awards and other recognition for our hensive efforts. In addition to the reporting of major Company events of the past year , this annual report documents in text and photographs some of our efforts to preserve , protect and enhance the environment.

The special environmental section begins on page 17. We hope that you will have the opportunity to visit and personally witness our conservat i on efforts and enjoy the beauty of our facilities and their surroundings. J. F. Paquette , Jr. Ch a irm a n o f th e B oa rd Pr es i d ent a nd Chi e f Ex ec uti ve O ff ice r February 1 , 1990 3 Philadelphia Electric Compa n y Scrubbers at E.ddystane Generating Station are part of the Company's

$300 million flue gas desulfurization and particulate removal system. EARNINGS PER SHARE INCREASE Earnings per average share for 1989 amounted to $2.36, an increase of 3 cents from the $2.33 per average share earned in 1988 despite a 3.7% increase in the average number of common shares outstanding. The im provement in earnings was primarily due to higher electric sales and lower penalties from the Peach Bottom shutdown and other fuel charges. With the return of both units at Peach Bottom to commercial operation , there is no further financial penalty. The earn i ngs increas e was partially offset by the settlement of the Internal Revenue Service's claim ing to the 1981 Salem Unit No. 2 safe harbor lease transaction, which reduced 1989 earnings by 13 cents per share. ELECTRIC SALES SET RECORD Electric sales increased 1.4% in 1989 , reaching a record of 32.7 billion watthours, due to a strong regional economy. Sales to commercial and industrial customers increased 2.3% reflecting increased economic ment in southeastern Pennsylvania and the addition of 2,900 new customers.

Sales to residential customers were 0.8% lower than last year primarily due to milder summer weather in 1989 , compared to the unusually hot weather experienced during the summer of 1988. In 1989 , 12,900 new residential customers were connected to the Company's system. GAS OPERATIONS ESTABLISH NEW MARKS As a result of the coldest December in this century (26% colder than normal), gas sendout set a new one-year peak of 84.1 billion cubic feet, surpassing the previous record of 82. 7 billion cubic feet in 1988. Gas sold and transported reached a record of 80.7 billion cubic feet, slightly higher than the previous all-time mark set in 1988 , when 80.6 billion cubic feet were sold and transported. The number of gas customers rose by 7 , 500. Gas operations employees responded to nearly 7 , 000 no-heat calls during December , compared to 4,000 during the same period last year, and cessfully met the challenge of many weather-related problems.

FINANCINGS COMPLETED D uring 1989, the Company raised approximately

$940 million in capital to provide for construction, debt refundings and general corporate needs. The major 1989 financings are summarized in the table on page 6. The Company continued to redeem its high-interest-rate debt issues and to refinance them at lower rates. Proceeds from the $175 million sale of mortgage bonds and $167 million of new bank term loans were used to call three high-interest-rate debt issues for net annual interest savings of $6.2 million. Since the debt refunding program began in 1985 , the Company has been able to reduce annual interest expense by $35 million. 4 Philadelphia Electric Company An aquat i c lesson is presented to students at Muddy Run Recreation Park along the Susquehanna River. 5 P h iladelphia E l ect r ic Company PE received the 1989 National Land Management Award for managing its land holdings along the Susquehanna River, including some 50 square miles of land and 20 islands in Pennsylvania and Maryland.

1989 MAJOR FINANCINGS Month June October December December De cember Mortgage B ond s -1 0% due 2019 Mortgage Bonds -9 1/a% due 2019 Mortgage Bonds -9'!*% due 1999 Medium-Term Note Program: Notes due 1996 -2005 at a v erage interest rate of 9.06% Dividend Reinvestment

& Stock Purchase Plan: 5 , 386 , 882 shares; average price of $21.87 B ank Borrow in gs: R evolving Credit Ag reement -net borrowings New term-loan borrowings NEW PLANT INVESTMENT Miiiions of Dollars Total $175.0 100.0 75.0 80.0 117.8 225.0 167.0 $939.8 The Company invested $1.1 billion in new plant and equipment in 1989 , approximately

$25 million more than in 1988. Approximately

$620 million were spent for the completion of Limer ick Generating Stat ion. During the 1990's, the level of new plant investment will decrease to approximately

$600 million per year. A significant portion of these projected amounts will be tures for transmission and distribution projects needed to provide continued reliable service. RATES AND REGULATION On July 21 , 1989 , the Company filed a request with the Pennsylvania Public Utility Commission (PUC) for an annual increase in electric rates of $549 m ill ion , net of fuel savings. As filed , the 18.1 % increase would be phased in and the deferred revenue recovered w i th interest over a ten-year period. The increase is designed to recover the costs of owning and operating Unit No. 2 and 50% of common plant at Limerick. Full public hearings and investigations into the reasonab l eness of the requested increase have been held , and a PUC decision is due by 6 Philadelphia E lectric Company 7 Philadelphia Electric Company Conowingo Hydroelectric Generating Station has been producing pollution-free electricity since 1928.

The Company tests water quality and takes periodic fish population counts in the East Branch of the Perkiomen Creek, along the supplemental cooling water system for Limerick Generating Station. 8 Philadelp h ia Electric Company Construction of the Point Pleasant Pumping Station , a vital part of the supplemental cooling water system for Limerick Generating Station, was completed in August 1989. April 20, 1990. The PUC Office of Trial Staff and Office of Consumer Advocate (OCA) have recommended increases of only $231 m i llion and $101 million, respectively. In February 1988, the PUC entered an order imposing an annual reduction of electric revenue of approximately

$30 million through the implementation of temporary rates reflecting the denial of a return on the common equity invest-ment in Peach Bottom. This action was a result of the Nuclear Regulatory Commission (NRC) shutdown of Peach Bottom on March 31 , 1987. Effective August 9, 1989 , the Company was authorized by the PUC to remove the temporary rate adjustment because Peach Bottom Un i t No. 2 had operated at a minimum of 95% of capac i ty for 100 consecu ti ve hours. The reduct i on in revenue for 1989 due to this penalty was $21 million , or 6 cents per share. See "PEACH BOTTOM RESTARTED" on page 13. On December 7, the PUC approved the settlement of a ll appeals from the Limerick Unit No. 1 rate order of June 26 , 1986. Under the settlement , the Company withdrew i ts appeal which sought to rev i se the PUC dence disallowance associated with construction delays at Limerick Unit No. 1. The OCA and two intervenors dropped their appeals which a l leged that the Company had excess capacity as a resu l t of the addition of Limerick Unit No. 1. LIMERICK WORK COMPLETED 1989 was a year in which all four Companyoperated nuclear units went from out-of-service through start-up to power generation.

Construction of Limerick Unit No. 2 was completed nine months ahead of schedule and approximately

$380 million under the PUC-mandated cost cap. The unit's fina l cost was just over $2.8 billion, compared to the PUC's cost cap of $3.197 billion set in 1985. Only 40 months of elapsed time were requ ir ed to go from 30% to 100% completion of construction , an industry record. The management of the Limerick Unit No. 2 construction project has been recognized for excellence by many industry observers and organizations.

The NRC gave the project the highest evaluation ever given to a nuclear construction project in its Systematic Assessment of Licensee Performance 9 Phi l adelphia El ect r ic Company (SALP) Report. Also , the Occupational Safety and Health Administration presented the Company with a Safety Excellence award for the project. Limerick Unit No. 2 received an NRC license to load fuel on June 22 , 1989 , and the reactor achieved a sustained nuclear reaction on August 12. On January 8 , 1990 , only 200 days after fuel loading , the unit went into commercial operation. This start-up program 1 1 bettered the previous record by 49 days. In May, Limerick Unit No. 1 returned from a refueling outage during which the systems which operate in common with Unit No. 2 were interconnected. Detailed planning and ul i ng were necessary to avoid a conflict between the Unit No. 1 outage work and the construction of Unit No. 2. Prior to the outage, Unit No. 1 had been operating at reduced power levels because of damage to some of the fuel due to corrosion of the fuel cladding. As a result , approximately two-thirds of the fuel was replaced. By replacing the fuel and by using improved water chemistry management, the un i t has been able to operate continuously since returning to service in May. The Company received an NRC SALP Report for Limerick covering the period May 1 , 1988 through August 31 , 1989. The report found that Limerick had continued its strong performance during the assessment period; however, the category of emergency preparedness received a rating of " acceptable" which was not as high as the rating received in the prior SALP evaluation. Prior to the receipt of this report , the Company had identified concerns with emergency preparedness and taken corrective actions , and this was noted by the NRC. The supplemental cooling water system for Limerick was completed and placed in service on August 2 , 1989. This system, which utilizes portions of the Perkiomen Creek and its east branch , is used to transfer cooling water from the Delaware River to Limerick during those months when Schuylkill River water cannot be used because of either low-flow or high-temperature restrictions. The Company is constructing a water processing and chilling 10 Phil ade l p h ia El ec t ric Co m pany Bradshaw Reservoir, a 25-million-gallon reservoir and pumping station, receives water from Point Pleasant and functions as the dividing point for water for Limerick and two Montgomery County water authorities.

11 P hiladelp h ia Elect r ic Company Both units at Limerick Generating Station are now supplying electricity without contributing to global warming or acid rain. The water vapor that billows from the cooling towers is environmentally neutral.

1 2 Philadelphia Elect r ic Company Technicians closely monitor water flow to check stream erosion along the Limerick supplemental cooling water system.

facility along the pipeline that discharges water to the East Bra nch of the Perkiomen Creek to ensure that the strict environmental limits imposed by the Pennsylvania Department of Environmental Resources are met. See note 18 of the Notes to Financial Statements for further discussion. PEACH BOlTOM RESTARTED Following the NRC's 1987 shutdown order, the Company committed to an extensive restart program , including management changes , personnel retraining, strengthening of operational procedures , improved safety and security measures and a wide-ranging maintenance improvement program at the plant. After sufficient progress had been achieved , the NRC gave approval to restart Unit No. 2 on April 17, 1989. Following a thoroughly and cautiously planned restart power testing program inv olving careful self-assessment and NRC concurrence to gradually increase power , Unit No. 2 reached full power on August 4 and has operated in excess of 90% of capacity to date. Unit No. 3 was restarted on November 19 and reached full power on January 5 , 1990. In September , the NRC released a SALP Report for Peach Bottom , which cited improved corporate and plant management , strengthened operating procedures and a significant improvement in the area of security and safeguards between August 1988 and June 1989. The SALP concluded that " the licensed operators have demonstrated that they can effectively and safely operate the plant and both corporate and site management have been actively involved in assuring safety." However , weaknesses were noted in the performance of and suppo rt for some engineering projects , corporate nical assessment activities and management support for health physics training programs and training facilities.

These weaknesses had been previously identified by the Company , and a program to correct them is now in place. On October 5 , 1989 , the NRC released the Company from the terms and conditions of its shutdown order , permitting the Company to run both units at full power under normal NRC regulation and review. When it released the Company from its shutdown order, the NRC stated that " management 13 P hi l adelp hi a El ec t r ic Com p a n y The scrubbers at Cromby Generating Station are also part of the Company's flue gas desulfurization and particulate removal system.

Pf monitors plant waste water closely. This is a portion of the waste water treatment facilities at Eddystone Generating Station. continues to be aggressive in problem resolution and is directly inv olved in assuring nuclear safety." The penalties associated with the shutdown for 1989 amounted to 23 cents per share , compared to 25 cents per share in 1988. See notes 2 and 18 of the Notes to Financial Statements for further discussion ciated with Peach Bottom. The Company is pleased with the progress made at Peach Bottom to date; however , siderable additional progress is needed to achieve the desired leve l of excellence. NEW NUCLEAR HEADQUARTERS The restructuring of the Company's nuclear operations was completed this year with the move from the center-city Corporate Headquarters to the Nuclear Group Headquarters at Chesterbrook on Route 202 in Chester County. Appro ximately 800 employees supporting the operation of Limerick and Peach Bottom are located at the Nuclear Group Headquarters. SAVINGS ON POWER PURCHASES/SALES In 1989 , through its membership in the Pennsylvania-New Jersey-Maryland Interconnection (PJM), the Company achieved savings for customers of approximate ly $99 million by purchasing over 1 O billion kilowatthours , thereby minimizing the operation of higher-priced generating units on the Company's sy s tem. Approximately one-half of these purchases represent coal-fired power purchased directly by the Company from systems outside PJM. Also , the avai l ability of Limerick generation resulted in sales of 2 billion watthours which produced additional savings of approximately

$10 million. For 1990 , with all of our nuclear units in operation , purchases are expected to decrease significantly and sales should increase significantly. AREA DEVELOPMENT GROWTH CONTINUES 1989 was another year of growth for southeastern Pennsylvania.

With its thriving insurance, financial, health care , real estate, publishing, chemical and maceutical industries , the region's unemployment rate of 3.5% continued to be below the state and national rates of 4.6% and 5.5%, respectively.

Commercial development in downtown Philadelphia shows signs of continued growth into the 1990's with construction underway for over four million square feet of office space. New hotel construction will increase the number of hotel rooms in the greater Philadelphia area to over 10 , 000 in the 1990's, and Philade lphia International Airport is planning $500 million in renovations to 14 Ph i l ad e l ph ia El ec t ri c C o mpa n y Conowingo Hydroelectric Station and Fishermen's Park. The Company currently operates a fish facility to allow the upstream passage of migratory fish, particularly the American Shad. Construction of a new fish is scheduled for 1990 to transport more fish to their spawning grounds. 15 P hiladelphia Electric Company Peach Bottom Atomic Power Station Units No. 2 and No. 3 on th e bank of the Susquehanna River returned to serv i ce i n 1989. 16 Philadelphia Electric Company The Company has received numerous environmental awards , including the 1989 Edison Electric lnstitute's National Land Management Award, 1989 recognition from the Nature Conservancy and the Take Pride in Pennsylvania Award. support this growth. Plans are moving ahead and financing has been arranged for the new $530 million Philadelphia Convention Center. Projects representing over $2 billion have been planned for a 2.5-mile stretch along the Philadelphia waterfront. front developments such as Penn's Landing will in clude a hotel, townhouses , condominiums, office space , and boating facilities. In 1989 , the Company provided l ocation assistance to 65 companies in its service area , with 20 companies establishing new facilities , 9 establishing branch plants and 36 relocating within the territory. As a result, 10 , 600 jobs were either created or retained within our service territory. SAFETY RECORD CONTINUES TO IMPROVE In 1989, the Company experienced a significant reduction in lost-tim e accidents , from 62 in 1988 to 34 in 1989. Based on the National Safety Council's estimated cost of lost-time accidents , this reduction in accidents resulted in savings to the Company of approximately

$650 , 000. In the last five years, the Company has reduced its lost-time accidents by 86% for a total sa vi ngs of over $4.5 million. ENVIRONMENTAL RESOURCES Philadelphia Electric is committed to protect , conserve and enhance the environmental resources of the areas in which we operate. We invest in the environment because it is good business as well as good citizenship. The investment includes power plants that operate cleanly and efficiently , providing a quality of life that encourages economic development and the satisfaction of helping to preserve and promote our service territory as a desirable place to live, work and play. T his section of the report highlights 1'1/l'l \\1'1(}\\fll\/J\f\\lf;/*\/l*\f

!ll\IW l'llll\IWll'll/1h'u1.wl(.f ,'m11*1\1 some of the Company's significant contributions. Our concern for the protection of environmental resources began as early as 1928 with the construction of the Conowingo Dam in the Susquehanna River Valley. In 1967 , we constructed the Muddy Run Pumped Storage Generating Station and the prototype Unit No. 1 at Peach Bottom. Each of these power plants presented unique environmental concerns requiring innovative solutions. In 1966 , we voluntarily sponsored pioneering laboratory and field studies to minimize ecological effects of our generating facilities. Many of these studies were initiated prior to the existence of stringent regulatory requirements for operation of power plants. Such an undertaking was unparalleled in the study of effects of power plants on the environment and resulted in new 17 P hiladelphia E lectric Company information which was extremely useful at other power plants throughout the country. The Company has actively supported the restoration of the American Shad, a migratory fish , to the upper Susquehanna River since the 1950's. The species has been declining along the Atlantic Coast since colonial times. As part of these restoration efforts, in 1972 we built a fish lift system at our Conowingo Hydroelectric Station to facilitate the upstream passage of migratory fishes. The Company is currently constructing a new and improved $12.5 million fish lift which will allow collection and transport of up to 1.5 million American Shad and 1 O million River Herring to their spawning grounds each year. In cooperation with the Pennsylvania Game Commission , we have designated 60 acres of land along the Susquehanna River as a Bald Eagle winter tuary. Our national symbol had previously been seen nesting in the area in 1961. In cooperation with the Game Commission and the cabin owners along the reservoir , we were able to protect a newly established nesting pair of Bald Eagles from human intervention by closing the area for ten weeks. This action resulted in the successful birth of an eaglet in 1989. The Company and six other electric utilities share tion of the Merril l Creek Reservoir , another environmental preserve, located in Warren County , New Jersey. Constructed at a total cost of $220 million , the 650-acre reservoir is designed to store water to be released to the Delaware River for use by the utilities during periods of low water flow. Surrounding the reservoir are nearly 2 , 000 acres of forest and fields offering opportunity for nature study , hiking and hunting. The beautiful reservoir lake , with a maximum depth of 220 feet and more than five miles of shoreline, provides an ideal setting for both fishing and boating. We have also demonstrated our commitment to promoting conservation of natural resources and corporate environmental ethics by hiring a qualified staff of professional environmental educators , naturalists and wildlife ogists. These dedicated professionals are stationed at our Muddy Run Recreation P ark, a facility which att racts over 400 , 000 visitors annually. 18 Phil ade lphia Electri c Company Robert}. Miller , Testing and Laboratories Division, conducts water analyses of generating plant water samples at the Company's research and testing labs in Valley Forge.

19 Ph iladelp h ia E lec tr ic Company The Visitors Center was completed in 1989 at the Merrill Creek Reservoir and Environmental Preserve in Warren County, New Jersey. :*

In order to provide additional recreational opportunities along the Susquehanna River , we have developed a comprehensive recreation master plan. Some of the key elements of this plan have included construction of a new visitor center and swimming pool , and the upgrading and development of boat launches , marinas, picnic areas, campgrounds and hiking trails. The environmental efforts at our generating stations , specifically the efficient operation of our Eddystone and Cromby Generating Stations , have resulted in cleaner air. In 1982, the Company installed scrubbing facilities to control sulfur-dioxide emissions at those stations.

Our investment in nuclear power also represents our investment for a cleaner environment. Nuclear plants are the cleanest form of l arge-scale gen-eration and approximately two-thirds of the Company's electric output for 1990 will be nuclear. This form of electric generation is environmenta lly sound because it does not contribute to acid r ain or global warming. (See chart on page 23.) In May , we enrolled the Conowingo Islands Natural Area in the Pennsylvania Chapter of the Nature Conservancy, Natural Areas Registry Program. This natural area has some of Pennsylvania

's most unusual rare plant species. We and our subsidiary , The Susquehanna Electric Company, also enrolled the Deer Creek Natural Area in the Maryland Natural Areas Registry Program. The Deer Creek Natural Area is located on the west bank of the Susquehanna River below the Conowingo Dam. The area supports a wide diversity of flowers, including seven rare or unusual species. By enrolling these areas in the Natural Areas Registry Program, we have agreed to protect these areas and to maintain and manage our transmission line corridors without disturbing the rare plants found along them. In September, the Edison Electric Institute presented to us its first annual National Land Management Award. The Company received the award in recognition of its outstanding achievements and comprehensive policy of managing its land holdings. Another effort to promote our services while also protecting the environment involves the use of natural gas vehicles. Compressed natural gas (CNG) is gaining recognition as an alternative fuel for fleet vehicle operations. Fleet operators are becoming increasingly aware of the cost savings and air quality benefits of fueling their company vehicles with CNG. This awareness has come in part through efforts by the Company in demonstrating that CNG-powered vehicles are efficient and economical.

Environmentalists point to CNG as an alternative fuel that improves air quality by reducing hydrocarbon and carbon monoxide emissions.

Thirty vehicles were converted by year-end and sixty more are committed to conversion in 1990. In addition to the ties built to serve CNG vehicles, Philadelphia Electric will add more filling stations and plans to convert twenty additional vehicles as evidence of our commitment to better air quality and improved efficiency.

We view environmental stewardship as an integral and essential part of the power production process. We design , build and operate our facilities not just to conform to environmental regulations but, more importantly , to meet our own environmental standards as long-term residents of this region. We are proud of our accomplishments and we remain firmly committed to protecting and enhancing the environment throughout our entire service territory. 20 Philadelphia E lectric Company Philadelphia Electric Company and Subsidiary Companies Management's Discussion and Analysis of Financial Condition and Results of Operations General Earnings per share for 1989 were $2.36, an increase of three cents from 1988 earnings of $2.33, when 3.7% fewer shares were outstanding. The increase in earnings was primarily due to higher electric sales and lower penalties from the Nuclear Regulatory Commission (NRC) shutdown of Peach Bottom and other f ue/ charges. The earnings increase was partially offset by increased interest expense resulting from the settlement of the Salem Unit No. 2 safe harbor /ease transaction. On January 8 , 1990, Limerick Unit No. 2 was placed in commercial operation.

The project was completed nine months ahead of schedule at a cost of approximately

$2.8 billion. A Pennsylvania Public Utility Commission (PUC) mandated cost cap provides for a maximum net rate base allowance for Limerick Unit No. 2 (exclusive of common facilities) of a prudent investment of$3.197 billion. On July 21, 1989, the Company filed with the PUC a request for an annual $549 million electric rate increase, net of an estimated

$142 million in fuel savings, or approximately 18.1%. The Company has proposed to phase the increase into rates over a ten-year period and has requested a return on all delayed billings.

By order entered August 18, 1989, and consistent with standard procedures, the PUC suspended the Company's requested electric rate increase until April 20, 1990, and initiated an investigation. A group of industrial customers, the Office of Consumer Advocate (OCA) and the PUC's Office of Trial Staff each submitted positions proposing that the PUC grant substantially less than the Company's requested increase.

These intervenors recommended increases ranging from $I 0 I million to $231 million, which reflect various ances of expense and rate base claims and reductions in the Company's requested rate of return on common equity. Additionally, these recommendations, if adopted, would result in one-time charges to expense ranging from $84 million to $445 million. Adoption of these intervenor positions by the PUC would have a severe adverse impact on the Company's earnings for 1990 and beyond and could result in a reduction or elimination of the Company's current common stock dend. Other intervenors in the rate case have focused on specific issues such as the phase-in plan and rate structure, but did not present total positions for specific rate increase allowances or disallowances.

Although the Company is dent that it has provided sufficient support to justify its entire rate increase application, it cannot predict what increase, if any, the PUC will permit In accordance with a Declaratory Order issued by the PUC on September 28, 1984, the Company has deferred a total of$137.2 million representing all operating costs, carrying charges on investment, fuel savings and associated income tax effects of Limerick Unit No. I and 50% of common ties from February I, 1986, the date of commercial operation, until the unit was included in rates on June 27, 1986. The recovery of these costs , which has been challenged by certain intervenors, is being addressed by the PUC in the current electric rate case. In accordance with a PUC order dated June 27, 1986, the Company has accrued a carrying charge equivalent to Allowance for Funds Used During Construction (AFUDC) on the 50% of Limerick common facilities excluded from rate base by that order. The recovery of this carrying charge, which is not assured, is being addressed by the PUC in the current electric rate case. In 1989, this accrual benefited common stock earnings by approximately

$82 million. On April 27, 1989, the PUC approved a Declaratory Order for Limerick Unit No. 2 which allows for synchronization of electric rates for Unit No. 2 with the commercial operation date for that unit Under this Declaratory Order, the costs incurred by the Company to carry and operate this unit, including 50% of common facilities, from commercial tion until Unit No. 2 is included in rate base are being deferred. These deferred capital costs and operating expenses, the recovery of which is not assured, will be considered in a future rate proceeding.

The Company has agreements to sell 200 megawatts of electric generating capacity and associated energy for a period of four years to Atlantic City Electric Company and 150 megawatts of electric generating capacity and associated energy for a period of two years to GPU Service Corporation beginning June I, 1990. In addition, the Company has tiated an agreement for energy and capacity sales to Baltimore Gas and Electric Company for varying amounts beginning in early 1990. These agreements require approval by the Federal Energy Regulatory Commission (FERC). With approval by the NRC, Peach Bottom Unit No. 2 returned to service on April 26, 1989, and achieved full power on August 4, 1989. As a result of achieving full power, on August 9, 1989, the Company was permitted by the PUC to remove the temporary electric rates which had denied a return on the Company's equity investment in Peach Bottom. For 1989, the temporary electric rates reduced revenue by approximately

$21 million, or six cents per share in common stock earnings.

The Company did not request recovery of any Peach Bottom replacement power costs incurred solely as a result of the NRC's shutdown order. In 1989, replacement power costs attributable to the shutdown order were approximately

$57 million, representing a reduction in common stock earnings of 17 cents per share. In October 1989, the NRC released the Company from the terms and conditions of the Peach Bottom shutdown order that had been in effect since March 31, 1987. The re/ease mits the Company to operate both units at full power under normal NRC regulation and review. Unit No. 3 was returned to service on November 19, 1989 and attained full power on January 5, 1990. In December 1981, the Company sold the federal income tax benefits associated with its 42.59% interest in Salem Unit No. 2 for $53.7 million in a safe harbor lease transaction.

Under the sale agreement, the Company agreed to indemnify the purchaser against the loss of tax benefits in the event of an Internal Revenue Service (IRS) ruling rendering the sale invalid. The IRS asserted , in auditing the purchaser, that the sale was invalid. On March 21, 1989, the Company authorized the purchaser to settle with the IRS, which settlement was approved by all parties in September 1989. As a result of the settlement, the Company incurred an charge against income of approximately

$29 million, or 13 cents per share, in the first quarter of 1989. In 1989, the Company settled all issues outstanding garding prior electric Energy Cost Rate Factor (ECRF) gations. On July I, 1989, the PUC eliminated that portion of the fuel adjustment clause for retail electric service in Pennsylvania which provided for recovery or refund of only 21 @ The financial pages of this report are printed on recycled paper. Philadelphia Electrlc Company Philadelphia Electric Company and Subsidiary Companies Management's Discussion and Analysis of Financial Condition and Results of Operations -Continued 80% of the difference between actual costs of fuel and energy interchange costs and the amount of such costs billed to customers.

Effective on that date, differences between amounts billed to customers and 100% of the costs recoverable are deferred and collected or refunded in future periods by means of prospective adjustments to rates. Effective July 6, 1989, the ECRF was changed from a credit value of 6.291 mills per kilowatthour (kWh) to a credit value of2.782 mills per kWh, which represents an increase in annual revenue of approximately

$/09.5 million. On October 3, 1989, in response to a PUC order, the Company, the OCA and a group of industrial customers filed a joint petition with the PUC requesting approval of a new Energy Cost Adjustment (ECA) to modify the ECRF. The ECA provides for incentives or penalties dependent upon nuclear generation performance as measured by a composite nuclear system capacity factor. The joint petitioners have requested the PUC to approve the ECA by April I, 1990. On November 30, 1989, the Company was authorized by the PUC to file a tariff supplement which increased gas rates by approximately 62 cents per million cubic feet effective December I, 1989. This rate change includes, in part, the recovery of approximately 90% of the take-or-pay costs which the Company must pay to its interstate pipeline suppliers for a period of about five years as a result of a settlement before the FERC pertaining to contract disputes between gas ducers and the interstate pipelines. The Company is not a party to these contracts or settlements.

The Company will not seek recovery from its customers of the remaining

/0% of the take-or-pay costs. As a result of the Tax Reform Act of 1986 that reduced federal income taxes , the Company in turn reduced rates to its electric customers by approximately

$88 million through a federal tax adjustment credit (FTAC) for the year 1989. The FTAC will remain in effect until the 1986 tax changes are permanently incorporated into base rates, which is expected at the conclusion of the Company's current electric rate case. On June I, 1989 , the PUC approved the PUC Audit Bureau's recommendation to hire a consulting firm to perform a management and operations audit of the Company. This audit is a result of an amendment to the PUC law in 1982 which required the PUC to conduct periodic management audits of the larger utilities subject to their regulation.

The last management audit of the Company was conducted in 1979. The current audit began on July 17, 1989. Detailed reviews of the Company are expected to continue until April 1990 and a final report is scheduled for issuance in June 1990. In December 1987, the Financial Accounting Standards Board (FASB) issued SFAS 96, "Accounting for Income Taxes," which requires an asset and liability approach for financial accounting and reporting for income taxes. The FASB has delayed implementation of the new statement, which now requires adoption of its provisions by the first quarter of 1992. Adoption of the statement is not expected to have a material effect on the Company's results of operations. 22 Electric Operating Revenue Provided below are the components of the net increase in electric operating revenue from 1987 through 1989: Rate Increase Federal Tax Adjustment Credit Fuel Related Revenue Sales and Other Total Electric Revenue lncreasel(Decrease) (Millions of Dollars) 'B9 vs. 'BB 'BB vs. 'B7 'B7 vs. 'B6 $ 0.9 $193.7 $ (1.6) (55.I) (34.4) 113.4 16.I (149.0) 57.9 7B.7 100.0 ---$169.7 $40.6 $110.3 Kilowatthour sales of electricity to retail customers increased 1.4% in 1989 over 1988 and 5.5% in 1988 over 1987 due to economic growth and favorable weather. Gas Operating Revenue Increased gas revenue for 1989 was primarily attributable to an increase in the Purchased Gas Costs rate. This increase was principally the result of the expiration of a refund to customers for earlier overcollections. For 1989, total gas sales, including transported gas, were essentially the same as 1988. Increased gas revenue for 1988 over 1987 was primarily due to increased sales and rates. For 1988, total gas sales, including transported gas, increased 7.6% over 1987. Fuel and Energy Interchange Expense For accounting purposes, fuel and energy interchange costs are deferred until billed as fuel adjustment revenue. (See note I of Notes to Financial Statements, page 29.) In 1989, fuel and energy interchange costs were $75.8 million higher than in 1988 primarily due to increased output and higher cost of fossil fuel generation and costs deferred in previous years. In 1988, fuel and energy interchange costs were $34.5 million higher than in 1987 primarily due to costs deferred in previous years. Other Operating and Maintenance Expenses In 1989, non-fuel operating and maintenance expenses increased

$30.0 million or 2. 9% over 1988 primarily due to expenses associated with the Limerick Unit No. I refueling outage. The increase in non-fuel operating and maintenance expenses in 1988 over 1987 was primarily due to Peach Bottom related expenses which were partially offset by the Company's cost reduction efforts. Income Taxes Income taxes charged to operations and income tax credits included in other income decreased in 1989 compared to 1988 and in 1988 compared to 1987 primarily due to higher interest charges and higher operating and maintenance expenses. Other Taxes Other taxes increased in 1989 versus 1988 due to higher gross receipts taxes which were partially offset by lower capital stock taxes. Other taxes increased slightly in 1988 over 1987 due to higher payroll and gross receipts taxes. Philadelphia Electric Company Allowance for Funds Used During Construction The increases in AFUDC in 1989 and 1988 compared with the prior year were the result of increases in construction work in progress, due primarily to construction of Limerick Unit No. 2. Interest Charges Interest charges on debt increased in 1989 over 1988 due to the settlement of the Salem Unit No. 2 safe harbor lease transaction and in each of the last three years due to additional levels of debt outstanding.

Under the Company's mortgage indenture, additional mortgage bonds may not be issued on the basis of property additions or cash deposits unless earnings before income taxes and interest during 12 consecutive calendar months of the preceding 15 calendar months are at least two times the pro forma annual interest on all mortgage bonds outstanding. Earnings coverage of mortgage interest, which is one measure of the Company's ability to issue mortgage bonds, for the calendar years 1989, 1988 and 1987 was 2.67, 2.69 and 2.83 times, respectively. As of December 31, 1989, the Company was entitled to issue approximately

$1.2 billion of mortgage bonds, without regard to the earnings test, against previously retired bonds. Capitol Expenditures and Changes in Financial Position The Company's construction program is estimated to require expenditures of approximately

$830 million in 1990 and $1.8 billion from 1991to1993, a portion of which will be obtained through external financings.

The construction program is reviewed and revised periodically to reflect changes in economic conditions, revised load forecasts and other appropriate factors. Certain facilities under construction and to be constructed may require permits and licenses which the Company has no assurance will be granted. Interim financing of the construction program is provided by short-and intermediate-term bank loans which are also dependent upon the Company's financial position.

Outlook A final decision by the PUC regarding the Company's current electric rate case is expected on or about April 20, 1990. The amount of rate increase granted by the PUC will determine, to a large extent, the financial health of the Company and its ability to maintain the current common stock dividend. The Company has made every effort to minimize the size of the requested rate increase. Records have been set with the completion of construction and operational start-up of Limerick Unit No. 2 nine months ahead of schedule and approximately

$380 million under the PUC-mandated cost containment plan. The Company has requested a rate increase solely intended to recoup the cost of building and operating Limerick Unit No. 2. Additionally , in order to alleviate the impact upon customers of an 18. I% rate increase, the Company has proposed that the increase be phased in and deferred revenue recovered over a period of ten years, the maximum time frame allowed under current accounting standards. To further minimize the level of the increase requested, the Company has arranged for sales of system capacity and 23 associated energy on a short-term basis (1990-1994) to other utilities in need of additional generation.

The arrangements are forecasted to conclude at a time when the capacity will be needed on the Company's system. On July 27, 1988, the co-owners of Peach Bottom filed suits against the Company in the United States District Court for the District of New jersey concerning the shutdown of Peach Bottom ordered by the NRC. The plaintiffs seek compensation for certain replacement power costs which they incurred as a result of the shutdown. Additionally, the complaints allege that the co-owners were deprived of the benefits of their Peach Bottom ownership interests and ments, that they made payments to the Company for capital and operating and maintenance costs for which they received no benefit and that they incurred increased costs and lost profits. The suits include claims for punitive damages. Although the Company has taken the appropriate actions to defend itself against these claims, if the litigation ultimately is determined in favor of the plaintiffs, such determination could have a material adverse effect upon the Company's financial condition.

With the completion of Limerick Unit No. 2, the Company is no longer involved in the construction of a major generating unit and is well positioned with adequate capacity to meet the power requirements of customers through the turn of the century. SULFUR DIOXIDE EMISSIONS REDUCED 94PERCENT 300* ............... . 200*. 150 100 Thousand Tons ...... , .......... .. I I 65 70 75 80 85 89 The chart illustrates one outstanding aspect of the Company's commitment to protect and enhance the environment.

The Company's flue gas desulfurization and particulate removal systems at Eddystone and Crom by generating stations have dramatically reduced sulfur dioxide emissions in the Philadelphia area. Over the last 25 years while the Company's electric output has almost doubled, these emissions have been reduced by 94%. Philadelphia Electric Company Philadelphia Electric Company and Subsidiary Companies Consolidated Statements of Income Operating Revenues Electric Gas Total Operating Revenues Operating Expenses Fuel and Energy Interchange Other Operating Expenses Maintenance Depreciation Income Taxes Other Taxes Total Operating Expenses Operating Income Other Income and Deductions Allowance for Other Funds Used During Construction Capitalized Limerick Costs Credit Related to Limerick Unit No. I Phase-In Plan Income Tax Credits, Net Other, Net Total Other Income and Deductions Income Before Interest Charges Interest Charges Long-Term Debt Short-Term Debt Allowance for Borrowed Funds Used During Construction Net Interest Charges Income from Continuing Operations Income from Discontinued Steam Operations Net Income Preferred Stock Dividends Earnings Applicable to Common Stock Average Shares of Common Stock Outstanding (Thousands)

Earnings Per Average Common Share from Continuing Operations (Dollars)

Earnings Per Average Common Share (Dollars)

Dividends Per Common Share (Dollars)

See notes to financial statements. 24 Philadelphia Electric Company For the Years Ended December 31 1989 1988 1987 (Thousands of Dollars) $3,019,976 385,653 3,405,629 820,954 777, 190 285,389 276,999 195,765 239,991 2,596,288 809,341 121,851 82,008 24,010 56,656 4,010 288,535 1,097,876 569,689 86,429 (148,649) 507,469 590,407 590,407 96,600 $ 493,807 208,901 $2.36 $2.36 $2.20 $2 , 850,315 378,397 3,228,712 745,110 727,791 304,751 264,091 206,774 237,600 2,486,117 742,595 98,924 73,074 26,162 43,467 7,900 249,527 992,122 524,131 24,188 (122,147) 426,172 565,950 565,950 97,185 $ 468,765 201,517 $2.33 $2.33 $2.20 $2,809,673 371,791 3,181,464 710,648 695,440 306,706 251,934 264,940 234,713 2 , 464,381 717,083 77,228 66,582 18,459 35,324 18,270 215,863 932,946 467,252 17,243 (92,155) 392,340 540,606 1,790 542,396 94,156 $ 448,240 192,489 $2.33 $2.33 $2.20 Philadelphia Electric Company and Subsidiary Companies Consolidated Statements of Cash Flow Cash Flows From Operating Activities Net Income Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities

Depreciation and Amortization Deferred Income Taxes Investment Tax Credits, Net Allowance for Other Funds Used During Construction Increase in Deferred Limerick Costs Decrease (Increase) in Unrecovered Revenue Credit Related to Limerick Unit No. I Phase-In Plan Amortization of Leased Property Limerick Unit No. 2 Precommercial Fuel Cost Change in Current Assets and Other Current Liabilities Change in Other Deferred Debits and Credits Net Cash Provided by Operating Activities Cash Flows From Investing Activities Increase in Utility Plant Allowance for Other Funds Used During Construction Sale of Merrill Creek Reservoir Sale of Steam Plant (Decrease)

Increase in Other Investments Net Cash Used by Investing Activities Cash Flows From Financing Activities Issuance of Common Stock Issuance of Preferred Stock Retirement of Preferred Stock Including Change in Other Paid-In Capital Dividends on Preferred and Common Stock Change in Dividends Payable Expenses of Issuing Preferred and Common Stock Issuance of Long-Term Debt Retirement of Long-Term Debt Premium on Retirement of Long-Term Debt Net Borrowings Under Revolving Credit Agreements Change in Short-Term Debt Capital Lease Payments Settlement of Safe Harbor Lease Change in Escrow Funds Net Cash Provided (Used) by Financing Activities Net Change in Cash and Cash Equivalents Cash and Cash Equivalents at the beginning of the period Cash and Cash Equivalents at the end of the period See notes to financial statements. 25 Philadelph i a E l ectric Company For the Years Ended December 31 1989 1988 1987 (Thousands of Dollars) $590,407 $565,950 $542,396 318,403 291,277 288,039 107,336 86,156 169,605 (20,250) (9,291) (16,958) (121,851)

(98,924) (77,228) (82,008) (73,074) (66,582) 48,057 (61,231) (178,595)

(24,010) (26, 162) ( 18,459) 45,200 36,100 49,700 29,655 (40,749) 193,939 (92,399) 44,065 (28,843) (11,769) 894,255 875,897 587,750 (1,037,501)

(991,947)

(963 , 186) 121,851 98,924 77,228 145,330 28,762 ( 10,472) 3,154 (11,232) (926,122)

(744,539)

(868,428) 117,801 182,345 162,272 50,000 65,000 (16,842) (20,529) (54,018) (555,998)

(541,526)

(517,353) 1,514 2,933 (2,964) (223) ( 1,632) ( 1,318) 597,000 584,200 740,000 (331,905)

(395,702)

(328,588)

(24,315) (2,800) (42,747) 225,000 150,000 150,000 112,000 ( /02,000) 102,000 (45,200) (36,100) (49,700) (26, II I) (30) 10,459 52,721 ( 130,841) 233,043 $ 20,854 $ 517 $ (47,635) $ 43,598 $ 43,081 $ 90,716 $ 64,452 $ 43,598 $ 43,081 Philadelphia Electric Company and Subsidiary Companies Consolidated Balance Sheets ASSETS Utility Plant, at original cost: Electric Gas Common , used in all services Less: Accumulated Depreciation Nuclear Fuel, Net Construction Work in Progress Leased Property, Net Net Utility Plant Current Assets Cash and Temporary Cash Investments Accounts Receivable Customers Other Inventories , at average cost Fossil Fuel Materials and Supplies Deferred Energy Costs Unrecovered Revenue , Net Compensated Absences Other Total Current Assets Deferred Debits and Other Assets Unrecovered Revenue, Net Deferred Limerick Costs Investments Loss on Reacquired Debt Other Total Deferred Debits and Other Assets Total See notes to financial statements. 28 Philadelphia E l ectrtc Company December 31 1989 1988 (Thousands of Dollars) $ 9,278,4-02

$ 9 , 003 , 850 622,510 583,705 148,031 148,942 10,048,943 9,736,497 2,637,214 2 , 395,820 7,41 I ,729 7 , 340,677 296,357 242,040 3,012,678 2,465 , 750 273,523 287,538 10,994,287 10,336,005 64,452 43,598 212,306 141 , 107 43,455 34 , 611 48,391 50,046 141,388 120,210 39,243 50,399 I 17,908 54 , 087 67,602 60 , 859 18,486 18 , 008 753,231 572,925 163,084 250,952 475,064 375,910 108,252 97,780 137,271 118,338 89, 171 110 , 942 972,842 953 , 922 $I 2, 720,360 $I 1 , 862 , 852 Philadelphia Electric Company and Subsidiary Companies CAPITALIZATION AND LIABILITIES Capitalization Common Shareholders' Equity Common Stock Other Paid-In Capital Retained Earnings Preferred Stock Without Mandatory Redemption With Mandatory Redemption Long-Term Debt Total Capitalization Current Liabilities Notes Payable, Bank Long-Term Debt Due Within One Year Capital Lease Obligations Due Within One Year Accounts Payable Taxes Accrued Deferred Income Taxes Interest Accrued Dividends Payable Compensated Absences Other Total Current Liabilities Deferred Credits and Other Liabilities Capital Lease Obligations Deferred Income Taxes Unamortized Investment Tax Credits Other Total Deferred Credits and Other Liabilities Commitments and Contingencies (Notes 3 and 18) Total 27 Philadelphia Electric Company December]/

1989 1988 (Thousands of Dollars) $ 3,295,385

$ 3,177,584 5,311 5,119 444,049 409,863 3,744,745 3,592,566 622,472 622,472 351,044 368,078 5,762,741 5,219,511 10,481,002 9,802,627 112,000 17, 100 70,235 73,726 72,046 232,318 180,831 141, 140 139,966 59,021 20,011 124,238 129,408 41,089 39,575 67,602 60,859 20,525 19,877 888,759 732,808 199,797 215,492 809,486 753,267 242,292 272,976 99,024 85,682 1,350,599 1,327,417

$12, 720,360 $11,862,852

Consolidated Statements 0 f Changes in Common Shareholders' Equity and Preferred s t 0 c k Philadelphia Other Electric Company Common Stock Po id-In Retained Preferred Stock and Subsidiary Shares Amount Capital Earnings Shares Amount Companies (All amounts in thousands)

Balance, January I, 1987 189,079 $2,832,967

$7,787 $363,344 9,474 $947,428 Net Income 542,396 Cash Dividends Declared Preferred Stock (at specified annual rates) (94,068) Common Stock ($2.20 per share) (423,285)

Expenses of Capital Stock Issues (1,317) Issuance of Stock Public Sa/es 1,500 32,429 650 65,000 Employee Stock Ownership Plans 1,303 26,690 Dividend Reinvestment and Stock Purchase Plan 4,995 103,153 Redemptions (3,208) (508) (50,810) Balance, December 31, 1987 196,877 2,995,239 4,579 387,070 9,616 961,618 Net Income 565,950 Cash Dividends Declared Preferred Stock (at specified annual rates) (97,463) Common Stock ($2.20 per share) (444,063)

Expenses of Capital Stock Issues (1,631) Issuance of Stock Public Sales 2,000 37,435 500 50,000 Employee Stock Ownership Plans 609 11,478 Dividend Reinvestment and Stock Purchase Plan 7,103 133 , 432 Redemptions 540 (211) (21,068) --Balance, December 31, 1988 206,589 3,177,584 5,119 409,863 9,905 990,550 Net Income 590,407 Cash Dividends Declared Preferred Stock (at specified annual rates) (96,448) Common Stock ($2.20 per share) (459,550)

Expenses of Capital Stock Issues (223) Issuance of Stock Public Sales Dividend Reinvestment and Stock Purchase Plan* 5,387 II 7,801 Redemptions 192 (170) (17,034) --Balance, December 31, 1989 211,976 $3,295,385

$5,311 $444,049 9,735 $973,516 *During 1989 , the Employee Stock Ownership Plans were incorporated into the Dividend Reinvestment and Stock Purchase Plan. See notes to financial statements. 28 Philadelphia Electric Company Philadelphia Electric Company and Subsidiary Companies Notes to Financial Statements I. Significant Accounting Policies General The consolidated financial statements of Philadelphia Electric Company (Company) include the accounts of its utility subsidiary companies, all of which are wholly owned. Non-utility subsidiaries are not material and are accounted for on the equity method. Accounting policies are in accordance with those prescribed by the regulatory authorities having jurisdiction, principally the Federal Energy Regulatory Commission (FERC) and the Pennsylvania Public Utility Commission (PUC). Revenues Revenues are generally recorded in the accounts upon billing to the customer. Rate increases are billed from dates authorized or permitted to become effective by the regulatory authorities. On June 27, 1989, the final phase of the electric rate increase approved by the PUC in its June 27, 1986 order became effective. This final phase is designed to recover , over a three-year period, the unrecovered revenue previously deferred under the Company's rate increase phase-in plan. As of December 31, 1989, the Company had approximately

$281 million of Unrecovered Revenue, Net, which is classified as a current or other asset in the accompanying balance sheets according to whether it will be billed to customers within the next year or in subsequent years. Fuel Adjustment Clauses As of July I, 1989 , the PUC eliminated the portion of the fuel adjustment clause for retail electric service in Pennsylvania which provided for recovery or refund of only 80% of the difference between actual costs of fuel and energy change costs and the amount of such costs billed to customers.

Effective on that date, differences between amounts billed to customers and 100% of the costs recoverable are deferred and collected or refunded in future periods by prospective adjustments to rates. Gas service has a Purchased Gas Costs clause designed to recover or refund the differences between the actual costs of gas sold and the amount of such costs included in rates. Effective December 1989, the PUC permitted the Company to begin recovery, through a separate clause, of approximately 90% of take-or-pay costs billed to the Company by its state pipeline suppliers (see note 18). Nuclear Fuel Nuclear fuel is capitalized and charged to fuel expense on the unit of production method. Estimated costs of nuclear fuel disposal are charged to fuel expense as the related fuel is consumed.

Nuclear fuel at the Peach Bottom Atomic Power Station (Peach Bottom) and Salem Generating Station (Salem) is accounted for as a capital lease. Nuclear fuel at the Limerick Generating Station (Limerick) is owned. Depreciation and Decommissioning For financial reporting purposes, depreciation is provided over the estimated service lives of the plant on the straight-line method and, for tax purposes, generally over shorter lives on accelerated methods. Annual depreciation provisions, expressed as a percent of average depreciable utility plant 29 in service, were approximately

2. 92% in 1989, 2.87% in 1988 and 2.84% in 1987. The Company's ownership portion of the estimated nuclear-related costs for decommissioning (exclusive of Limerick Unit No.2) as approved for ratemaking purposes is $287,801,000 as of December 31, 1989. The associated annual expense currently is being charged to operations consistent with amounts approved for ratemaking purposes. The amounts charged are deposited in escrow and trust accounts and invested for funding of future costs. The Company believes that any increase in the estimated costs would be recoverable through adjustments to rates charged to customers (see note 18). Income Taxes Deferred income taxes are provided for differences between book and taxable income to the extent approved for making purposes. In addition, the effects of the Alternative Minimum Tax (AMT) are normalized.

Investment tax credits (ITC), other than credits resulting from contributions to employee stock ownership plans which do not affect income, are deferred and amortized to income over the estimated useful life of the related utility plant ITC related to plant in service, not included in rate base, are accounted for on the flow-through method. Allowance for Funds Used During Construction (AFUDC) AFUDC is a non-cash item which is defined in the Uniform System of Accounts as "the net cost for the period of construction of borrowed funds used for construction poses and a reasonable rate on other funds when so used." AFUDC is recorded as a charge to Construction Work In Progress, and the credits are to Interest Charges for the pretax cost of borrowed funds and to Other Income and Deductions for the remainder as the allowance for other funds. The rate used for capitalizing AFUDC, 9.50% in 1989, 1988 and 1987, is computed under a method prescribed by the regulatory authorities. The rate is a net rate and the current income tax reductions applicable to the interest charges capitalized are recorded in Other Income and Deductions.

In addition, the PUC is permitting the Company to record a carrying charge equivalent to AFUDC on 50% of Limerick common facilities which is deemed associated with Unit No. 2 and the credit is to Capitalized Limerick Costs. AFUDC and carrying charges on 50% of Limerick common facilities are not included in regular taxable income and the depreciation of capitalized AFUDC and the amortization of carrying charges are not tax deductible. Under the Tax Reform Act ofJ986, AFUDC and carrying charges are considered tax preference items when computing the Company's AMT. Gas Exploration and Development Joint Ventures The Company has invested in several joint ventures for exploring and drilling for natural gas. Costs are capitalized under the full-cost method and charged to operations commensurate with production.

Gains and Losses on Reacquired Debt Gains and losses on reacquired debt are deferred and amortized to interest expense over the period approved for ratemaking purposes.

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

2. Nuclear Operations Limerick Generating Station Limerick Generating Station consists of two wholly owned nuclear units , located at Limerick , Montgomery County , Pennsylvania. Both units are boiling water reactors with a combined net generating capacity of 2 , 110 megawatts (MW). Unit No. I commenced commercial operation on February /, 1986. Unit No. 2 commenced commercial operation on January 8, 1990 , following resumption of construction of the unit in February 1986 ,

a PUC-ordered suspension. A PUC-mandated cost containment plan provides for a maximum net rate base allowance for Unit No. 2 (exclusive of common facilities) of a prudent investment of $3.197 billion. The Company expects the final cost of Unit No. 2 will be $2.816 billion. As of December 31, 1989, the Company had invested approximately

$2.27 billion in Unit No. I, $2.78 billion in Unit No. 2 and $1.35 billion in common facilities. In January 1990, the investment in utility plant for Unit No. 2 was reclassified from Construction Work in Progress to Utility Plant See note 3 for discussion of the current electric rate case , in which recovery of the Company's investment in Unit No. 2 and 50% of common facilities is requested. On April 27 , 1989 , the PUC approved a Declaratory Order for Unit No. 2 which allows for synchronization of electric rates for Unit No. 2 with the commercial operation date for that unit Under the Declaratory Order, the pany is deferring costs associated with Unit No. 2 and 50% of common facilities incurred during the period from commercial operation to the suspension date of the pending electric rate increase request The recovery of these costs, which is not assured , will be addressed by the PUC in a subsequent electric rate case. On July 28, 1986, a petition for review of the PUC's June 27, 1986 electric rate order was filed with the wealth Court of Pennsylvania (Commonwealth Court) by the Company appealing the exclusion of $368. 9 million of costs associated with Unit No. I from rate base , due to allegedly imprudent construction delays in 197 6 and 1978. Appeals were also filed by the Office of Consumer Advocate (OCA) and a group of the Company's commercial and small industrial customers on excess capacity and various rate design and cost of service issues. On March 31, 1988, the Commonwealth Court issued an order affirming the PUC on excess capacity and all other issues and remanded the construction delay issue to the PUC for further hearing and adjudication.

On December 7, 1989 , the PUC approved a settlement resolving all outstanding l i tigation arising from the June 27, 1986 electric rate order. The net effect of the settlement was to leave in place the PUC's order , including the $368. 9 million rate base disallowance. Peach Bottom Atomic Power Station Peach Bottom consists of two nuclear generating units, located at Peach Bottom, York County , Pennsylvania. Both units are boiling water reactors. These units were placed into commercial operation in 197 4 and are jointly owned by the Company , 42.49%; Public Service Electric and Gas Company , 42. 49%; Atlantic City Electric Company, 7.51%; and Delmarva Power and Light Company , 7.51%. The Company's share of the units' net generating capacity is 886 MW Under the 30 Owners Agreement, the Company , as operator of Peach Bottom , is reimbursed by the other owners for costs incurred in the operation of the facility in the same proportion as their respective ownership interests. At December 31, 1989, the Company's net investment in Peach Bottom was $457. I million (see note 6). On April 17, 1989, the Nuclear Regulatory Commission (NRC) approved restart of Peach Bottom, following a March 31 , 1987 NRC order which required the Company to shut down the station. See note 18 for discussion of tion resulting from the shutdown. On April 26, 1989 , restart of Unit No. 2 was commenced and the unit began producing electricity on May 22 , 1989. On July 21, 1989 , the NRC authorized full power operation and on August 4, 1989, Unit No. 2 attained full power. On November 19, 1989, restart of Unit No. 3 was commenced and the unit began producing electricity on December//, 1989. On January 5, 1990 , Unit No. 3 attained full power. The Company charged to expense non-recoverable replacement power costs of approximately

$57 million, $61 million and $58 million in 1989 , 1988 and 1987, tively, as a consequence of the Peach Bottom shutdown.

The associated reduction in common stock earnings was mately 17, 18 and 17 cents per share in 1989 , 1988 and 1987, respectively.

On March I, 1988 , the Company placed into effect temporary rates reflecting the denial by the PUC of a common equity return on the Company's investment in Peach Bottom. On March 31 , 1989, the PUC entered an order authorizing the Company to remove the temporary rates on one day's notice when one unit at Peach Bottom had operated for 100 continuous hours at 95% of the unit's rated capacity. On August 8, 1989, Unit No. 2 had completed 100 continuous hours at or above 95% capacity. Accordingly, on August 9 , 1989, the Company was permitted by the PUC's March 31 , 1989 order to remove the temporary rates. The revenue reduction associated with the temporary rates was approximately

$21 million for 1989 and $25 million for 1988. The associated reduction in common stock earnings was approximately six cents per share for 1989 and seven cents per share for 1988. On February 27, 1989 , the Company and the monwealth of Pennsylvania (Commonwealth) entered into a settlement agreement, subject to NRC approval, with respect to restart issues raised by the Commonwealth in proceedings before an Atomic Safety and Licensing Board, and in litigation before the United States Court of Appeals for the Third Circuit The settlement agreement provides the Commonwealth access to information concerning the plant and its operations and provides for the Commonwealth's monitoring of plant operations. The Company also agreed to submit to the NRC for approval a variety of changes in standards, plant tions and program assessment NRC approval was granted on August 31, 1989. 3. Current Electric Rate Case On July 21 , 1989 , the Company filed with the PUC for an annual $549 million electric rate increase, net of $142 million in estimated fuel savings, or approximately 18.1%. Included in the Company's claim is an addition to rate base of$3.762 billion for Limerick Unit No. 2 and 50% of common facilities. In order to lessen the effect of the increase on customers , the Company has proposed t o phase in the increase with Philadelphia Electric Company annual increments of 5% to become effective in April of each year from 1990 through 1993, and a final increase of I. 9% to become effective in April 1994. Under the Company's posal, the rates would remain at that level for six years to recover previously unbilled revenues together with carrying charges, which the phase-in plan would cease and rates would return to the requested level of increase. Also as a part of the rate filing, the Company has reflected the sale of 400 MW of system capacity and associated energy. The PUC held an investigation and a series of public hearings prior to the closing of the record on December 15, 1989. A final sion is expected in April 1990. On July 10, 1986, the Governor of Pennsylvania signed into law legislation amending numerous provisions of the Pennsylvania Public Utility Code. One provision of the legislation which affects rate regulation imposes standards on the PUC in determining whether new generating capacity is excess capacity. This provision requires a disallowance from rates of any portion of new capacity which is determined to be excess capacity. This excess capacity law is applicable to Limerick Unit No. 2. The Company is seeking recovery of $137.2 million of operating costs, carrying charges on investment , fuel savings and associated income tax effects of Limerick Unit No. I and 50% of common facilities from February I, 1986, the date of commercial operation, until the unit was included in rates on June 27, 1986. These costs were deferred in dance with a Declaratory Order issued by the PUC on September 28, 1984. During the second fuel cycle for Limerick Unit No. I, the Company experienced certain fuel failures. The Company is currently inspecting the fuel prematurely discharged from Unit No. I to fully determine which fuel can be reused in future reloads. The fuel that was prematurely discharged from the reactor has a residual value of$52.6 million. Based upon samples of the fuel taken to date, the Company currently estimates up to 50% of that fuel can be utilized in future fuel cycles. The Company has proposed to recover , in this electric rate case, the costs of the unusable fuel estimated at $26.3 million over a four-year period. Disallowance by the PUC of all or part of plant costs or costs deferred pending regulatory approval, as proposed by certain intervenors in the current electric rate case, would result in an immediate charge to expense. 4. Sales of Accounts Receivable In December 1988, the Company entered into a five-year agreement with a financial institution whereby it can sell on a daily basis and with limited recourse up to $200 million of an undivided interest in designated accounts receivable. At December 31 , 1989, the Company had sold a $200 million interest in accounts receivable under this agreement The Company retained the servicing responsibility for these ables. The average interest rate computed on a daily basis on the portion of the accounts receivable sold but not yet collectedwas9.45%and9.39%for/989and/988,respectively.

By terms of this agreement, under certain stances, up to $7 5 million of unrecovered revenue could 31 be included in the pool of eligible receivables. At December 31, 1989, no unrecovered revenue was included in the pool of eligible receivables. 5. Retirement Benefits The Company and its subsidiaries have non-contributory trusteed retirement plans applicable to all regular employees. The benefits are based primarily upon employees' years of service and average earnings prior to retirement The Company's funding policy is to contribute , at a minimum, amounts sufficient to meet ER/SA requirements. Approximately 62% of pension costs were charged to operations and the remainder , associated with construction labor, to the cost of new utility plant Pension cost was $7 , 532 , 000 in 1989 , $7,101 , 000 in 1988 and $29 , 458 , 000 in 1987. Pension costs for 1989 , 1988 and 1987 included the following components:

Service cost-Benefits earned during the period Interest cost on projected benefit obligations Actual return on plan assets Amortization of transition asset Amortization and deferral Net pension cost 1989 1988 1987 (Thousands of Dollars) $ 25,570 $ 24 , 073 $26 , 970 91,318 (263,191)

(4,539) 158,374 $ 7,532 85 , 779 (134 , 647) (4 , 539) 36 , 435 $ 7 , 101 80 , 588 (41 , 929) (4 , 539) (31,632) $29 , 458 Change in Net Periodic Pension Cost The change in net periodic pension cost in 1989, 1988 and 1987 was accounted for as follows: 1989 1988 1987 Change i n number , characteristics (Thousands of Dollars) and salary levels of participants and net actuarial gain $(198) $ 16 , 189 $ (/, 492) Change in plan provisions 629 375 2 , 873 ------Net change prior to SFAS 87 431 16 , 564 1,381 Changes to comply with SFAS 87 (24 , 972) Changes due to mid-year plan amendment 10 , 549 Change in actuarial assumptions (38 , 921) Net change $ 431 $(22 , 357) $(13 , 042) Plan assets consist principally of common stock, U.S. government obligations and other fixed income iments. In determining pension cost the assumed long-term rate of return on assets was 9.5% for 1989 and 1988 and 7.5% for 1987. The weighted-average discount rate used in determining the actuarial present value of the projected benefit obligation was 8. 7 5% at December 31 , 1989, 1988 and 1987. The rate of increase in estimated future compensation levels ranged from 5% to 7% at December 31 , 1989 and 1988 , and 6% to 7% at December 31 , 1987. Prior service cost is amortized on a straight-line basis over the average remaining service period of employees expected to receive benefits under the plan. Philadelphia Electric Company Philadelphia Electric Company and Subsidiary Companies N o t e s t o F i n a n c i a I S t a t e m e n t s-Continued The funded status of the plan at December 31, 1989 and 1988 is summarized as follows: Actuarial present value of accumulated plan benefit obligations

Vested benefit obligations Accumulated benefit obligation Projected benefit obligation for services rendered to date Plan assets at fair value Funded status Unrecognized transition asset Unrecognized prior service costs Unrecognized net (gain) Prepaid pension costs 1989 1988 (Thousands of Dollars) $ (878,074)

$ (738,761)

(882,504)

(747,751)

$( 1,207,617)

$( 1,046,731) 1,399,656 1,163,148 192,039 116,417 (72,016) (76,554) 107,376 II 1,715 (221,484)

(151,578)

$ 5,915 $ 6. Jointly Owned Electric Utility Plant In addition to providing pension benefits, the Company provides certain health care and life insurance benefits for retired employees. Substantial/ya/I of the Company's employees may become eligible for these benefits if they reach ment age while still working for the Company. These benefits and similar benefits for active employees are provided by an insurance company whose premiums are based upon the benefits paid during the year. The Company recognizes the cost of providing these benefits by charging the annual insurance premiums to expense. The cost of providing those benefits for approximately 4 , I 00 retirees during the years 1989, 1988 and 1987 is not separable from the cost of providing benefits for approximately 11,300 active employees for the same period. Total premiums amounted to $42.2 million, $38.8 million and $30.0 million for 1989, 1988 and 1987, respectively. The Company's ownership interests in jointly owned utility plant at December 31, 1989 were as follows: Transmission and Production Plants Other Plant Peach Bottom Salem Keystone Conemaugh Operator Philadelphia Public Service Pennsylvania Pennsylvania Various Electric Electric and Electric Electric Companies Company Gas Company Company Company Participating Interest 42.49% 42.59%

20.99% 20.72% 21%to43% (Thousands of Dollars) Company's share of: Utility Plant $601,737 $1,000,916

$73,258 $78,877 $75,538 Accumulated Depreciation 179,413 255 , 423 31,197 31,391 20,425 Construction Work In Progress 34,759 25 , 624 4,865 2,444 5,818 The Company's participating interests are financed with Company funds and, when placed in service, all operations are accounted for as if such participating interests were wholly owned facilities. 7. Sale of Salem Unit No. 2 Tax Benefits In December 1981, the Company sold the federal income tax benefits associated with Salem Unit No. 2 for $53.7 million in a safe harbor /ease transaction.

Under the sale agreement, the Company agreed to indemnify the purchaser against the loss of the tax benefits resulting from any Internal Revenue Service (IRS) claims which would render the sale invalid. In fact, the IRS did assert that the sale was invalid. On March 21, 1989, the Company entered into an agreement with the chaser authorizing a settlement with the IRS which received 8. Cash and Cash Equivalents final approval by the Congressional Joint Committee on Taxation in September 1989. Under the settlement, the Company incurred an after-tax charge against income of approximately

$29 million, or approximately 13 cents per share, in the first quarter of 1989. The Company is entitled to claim a portion of the tax benefits associated with its interest in Salem Unit No. 2 and, as a consequence, is entitled to claim a refund of certain federal and state income taxes paid for the years 1981 through 1987, plus interest thereon, and to utilize certain of those benefits in subsequent tax years. For purposes of the Statement of Cash Flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.

The following supplemental disclosures are required by SFAS No. 95: Cash paid during the year: Interest (net of amount capitalized)

Income taxes (net of refunds) Noncash Investing and Financing:

Capital lease obligations incurred 32 Philadelphia Electric Company 1989 1988 1987 $511,467 66,864 31,200 (Thousands of Dollars) $420,181 82,730 35,800 $367 , 277 75,100 55,095

9. Common Stock At December 31, 1989and1988, Common Stock without par value consisted of 240,000,000 shares authorized and 10. Preferred Stock 211, 97 5, 905 and 206,589,023 shares outstanding, respectively.

At December 31, 1989, there were 12,423,500 shares reserved for issuance under stock purchase plans. At December 31, 1989 and 1988, cumulative Preferred Stock, $/00 par, consisted of 15,000,000 shares authorized.

Shares Amount Current Refunding Outstanding Redemption Restricted Price (a) Prior to (b) 1989 1988 1989 1988 Series (without mandatory redemption) 14.15% (c) $114.15 13.35% (c) 108.90 12.80% (c) 108.50 10.75% (d) (d) 9.50% 101.00 8.75% 101.00 7.85% 101.00 7.80% 101.00 7.75% 101.00 4.68% 104.00 4.4% 112.50 4.3% 102.00 3.80% 106.00 Series (with mandatory redemption) (e) 15.25% 110.00 14.625% (f) 10% 100.00 9.875% 109.88 9.52% 103.00 9.50% 1986 Series 109.50 8.75% 1978 Series /03.09 7.325% 102.63 7% 101.00 Total Preferred Stock (a) Redeemable, at the option of the Company, at the indicated dollar amounts per share, plus accrued dividends. (b) Prior to the date specified, none of the shares of each series indicated may by redeemed through refunding at an interest or dividend rate which is less than the rate of such series. (c) Ownership of these series of preferred stock is evidenced by depositary receipts, each representing one-tenth of a share of preferred stock. (d) The dividend rate through April 30, 1993is10.75%

per annum, and the rate for each subsequent dividend period, either a long-term period (1-10 years) or a short-term period (49 days), will be established by an auction held on the business day next preceding the beginning of each such period. 33 (Thousands of Dollars) 2-1-90 500,000 500,000 $ 50,000 $ 50,000 750,000 750,000 75,000 75,000 750,000 750,000 75,000 75,000 (d) 500,000 500,000 50,000 50,000 750,000 750,000 75,000 75,000 650,000 650,000 65,000 65,000 500,000 500,000 50,000 50,000 750,000 750,000 75,000 75,000 200,000 200,000 20,000 20,000 150,000 150,000 15,000 15,000 274,720 274,720 27,472 27,472 150,000 150,000 15,000 15,000 300,000 300,000 *30,000 30,000 6,224,720 6,224 , 720 622,472 622,472 5-1-90 300,000 350 , 000 30,000 35,000 (f) 500,000 500,000 50,000 50,000 5-1-90 44,000 88,000 4,400 8,800 8-1-92 650,000 650,000 65,000 65,000 279,520 287,180 27,952 28,718 11-1-91 750,000 750,000 75,000 75,000 300,200 333 , 500 30,020 33,350 420,000 450,000 42,000 45,000 266,720 272.100 26,672 27,210 3,510,440 3,680,780 351,044 368,078 9,735,160 9,905,500

$973,516 $990,550 The issue is redeemable during any long-term period only on the last day of the period or following an unsuccessful auction, in an aggregate number which constitutes one or more units (/,000 shares), at a price of$100 per share, plus accrued and unpaid dividends to the redemption date on the shares redeemed.

On any dividend payment date with respect to a short-term period, units are redeemable, in whole or part, at the option of the Company at a price of$100,000 per unit, plus an amount equal to accrued and unpaid dividends to the date of redemption. (e) Sinking fund requirements (par value) in the period 1990-1994 are as follows: 1990-$23,230,000

1991-$21,054,000; 1992-$25,380,000; 1993-$38,380

, 000; 1994-$38,380,000. (f) Not redeemable prior to May I, 1990. Philadelphia E l ectric Company Philadelphia Electric Company and Subsidiary Companies N o t e s t o F i n a n c i a I S t a t e m e n t s-Continued I I. Long-Term Debt First and Refunding Mortgage Bonds (a) Se r ies 5%-14% 14% 14% 14% 6 1/i o/o-14% 4 1 12%-14% Due 1989 1990 1991 1992 1993 1994 At December 31 1989 1988 (Thousands of Dollars) $ 62,500 $ I I ,000 11,000 11.000 11,000 11.000 11,000 11.000 71,000 181 .ooo 181,000 6 1/so/o-15 1 14% 1995-1999 1,027,356 961,134 7 3/so/o-I 15/so/o 2000-2004 543,394 549,220 6%-10 1 1 4% 2005-2009 363,500 463,500 I 0 1 12%-I f3/4o/o 2010-2014 291,000 298,962 87/so/o-12 1/so/o 2015-2019 1,279,000 1,004,000 Total First and Refunding Mortgage Bonds Notes Payable-Banks Revolving Credit and (b) 1991-1996 (c) 1993-1995 5 1/io/o-13%

1997-2013 3,789,250 3,624,316 572,000 405,000 525,000 300,000 265,315 269,615 Term Loan Agreements Pollution Control Notes Debentures 9.85%-14 3 14% 1993-2011 556,850 706,850 Medium-Term Notes Sinking Fund Debentures-Phi/adelphia Electric Power Company, a Subsidiary Unamortized Debt Discount and Premium, Net Total Long-Term Debt Due Within One Year (e) Long-Term Debt included in Capitalization (f) (a) Utility Plant is subject to the lien of the Company's mortgage. (b) At various interest rates. (c) The Company has a $700 million revolving credit and term loan agreement with a group of banks designed to vide the financing for the construction program, particularly Limerick Unit No. 2, and general corporate purposes. The revolving credit arrangement converts into a term loan in November 1992. The borrowings are due in six semi-annual installments with the first payment due 6 months after version into the term loan. Interest on outstanding borrowings is based on specific formulas selected by the Company ing yields on several types of debt instruments. There is an annual commitment fee of0.3% on the unused amount At December 31, 1989 and 1988, $525 million and $300 million , respectively, were outstanding under this agreement The Company also has a $400 million revolving credit and term loan agreement with a group of banks which expires in I 2. Short-Term Debt Average Borrowings Average Interest Rates, Computed on Daily Basis Maximum Borrowings Outstanding Average Interest Rates on Bank Loans at December 31: (d) 1996-2005 80,000 4 1 12% 1995 12,758 13,671 (21,332) (29,706) 5,779,841 5,289 , 746 I 7, 100 70,235 $5.762,741

$5,219,511 1992. There is an annual commitment fee of0.375% on the unused amount At December 31, 1989 and 1988, no amount was outstanding under this agreement ( d) The Company has a program for the issuance of up to $200 million of medium-term notes collateralized by mortgage bonds. These notes will be offered at varying maturities and interest rates to be set at the time of sale. As of December 31 , 1989, the Company had issued $80 million under this program at an average coupon rate of 9.06%. (e) Long-term debt maturities in the period 1991-1994 are as follows: 1991-$75,598,000; 1992-$131,913,000; 1993-$547,348,000; 1994-$389,748,000. (f) The annualized interest on long-term debt at December 31, 1989, was $570.0 million of which $37 6.8 million was for mortgage bonds and $193.2 million was for other term debt 1989 1988 1987 (Thousands o(Dol/ars)

$ 94,000 $114 , 164 $ 30 , 937 9.98% 8.18% 7.74% $248,500 $216,000 $205 , 000 9.61% 7.98% At December 31 , 1989, the Company had $112 million in short-term debt outstanding under formal and informal lines of credit with banks aggregating approximately

$310 million. The Company generally does not have formal compensating balance arrangements with these banks. 34 Philadelphia Electric Company

13. Income Taxes (Continuing Operations)

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

Federal Current Deferred State Current Deferred Total ITC and income tax credits resulting from contributions to employee stock ownership plans reduced federal income taxes currently payable by $16 million in 1989, $23 million in 1988 and $20 million in 1987. Under the Tax Reform Act of 1986, ITC has been repealed effective January I, 1986 with the exception of transition property. The Company believes that Limerick Unit No. 2 qualifies as transition property eligible for ITC. Approximately

$222 million of additional business credits generated from 1983 through 1989 have not been utilized due to limitations based on taxable income. These credits, which expire between 1998 and 2004, may be used to reduce federal income taxes in future years. The Company's 1989, 1988 and 1987 current tax 1989 1988 (Thousands of Dollars) $ 56,342 $ 57,484 160,972 132,742 (20,250) (9,291) 14, 128 22,982 ( 15,427) 2,857 (1,063) 16,578 (41,647) (48,732) ( 17,384) (10,602) 3,438 (711) $139, 109 $163,307 1987 $ 74,185 186,390 ( 16 , 960) 9,386 11 , 939 1,845 (27,730) (10,650) 1,211 $229,616 liability was determined under the AMT method resulting in a tax credit of $162 million which can be utilized in future years when regular tax liability exceeds AMT liability.

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

Deferred taxes were recorded only on those timing differences normalized for making. The cumulative net amount of such timing differences for which deferred taxes were not recorded was approximately

$433 million at December 31, 1989. Since the Company expects to charge customers for taxes when the timing differences reverse, the tax effect of such timing differences is not recorded currently.

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

1989 1988 1987 (Thousands of Dollars) Depreciation and Amortization

$89,626 $72,966 $ 93,075 Deferred Energy Costs (7,664) 17,332 45,566 Precommercial Operation of Limerick Unit No. 2 59,396 Reacquired Debt 6,039 ( 1,874) 16,668 Unrecovered Revenue (18,122) 23,425 77,583 Alternative Minimum Tax (48,873) (29/76) (82,963) Adoption ofSFAS 90 and SFAS 92 23,993 25,087 23,533 Gain on Sale of Merrill Creek Reservoir (19,899) Other 2,941 (I, 105) (I ,652) Total $107,336 $86,156 $171,810 35 Philadelphia Electric Company Philadelphia Electric Company and Subsidiary Companies N o t e s t o F i n a n c i a I S t a t e m e n t s-Continued The total income tax provisions on continuing operations d i ffered from amounts computed by applying the federal statutory tax rate to income and adjusted income before income taxes for the following reasons: Income From Continuing Operations Total Income Tax Provisions Income Before Income Taxes Deduct: Allowance for Funds Used During Construction Limerick Carrying Charges Adjusted Income Before Income Taxes Income Taxes on Above at Federal Statutory Rate of 34% in 1989 and 1988 , and 39. 95% in 1987 Increase (Decrease) due to: Depreciation Timing Differences Not Normalized Effects of SFAS 90 and SFAS 92 Unbilled Revenue State Income Taxes, Net of Federal Income Tax Benefits Amortization of Investment Tax Credits Other, Net Total Income Tax Provisions Provision for Income Taxes as a Percent of: Income Before Income Taxes Adjusted Income Before Income Taxes In December 1987, the Financial Accounting Standards Board (FASB) issued SFAS 96, "Accounting for Income Taxes," which requires an asset and liabil i ty approach for financial accounting and reporting for income taxes. The FASB has delayed mentation of the new statement, which now requires adoption of its provisions by the first quarter of I 992. The 14. Taxes, Other Than Income-Operating Gross Receipts Capital Stock Realty Payroll Other Total 15. Investments At December 31 Gas Exploration and Development joint Ventures Real Estate Developments and Other Ventures Non-Utility Property Escrow Deposits for Decommissioning Nuclear Plants Other Deposits Total 36 1989 1988 1987 (Thousands of Dollars) $590,407 $565,950 $540 , 606 139, 109 163,307 229 , 616 729,516 729,257 770 , 222 270,500 221,071 169,383 82,008 73,074 66,582 $377,008 $435 , 112 $534 , 257 $128,183 $147,938 $213,436 2,612 5 , 493 23,920 5,761 5 , 993 (9,784) 13,551 12 , 903 12,137 (10,062) 9,587 9,151 (311) (I 1,903) (13,586) (625) (6,704) (5 , 658) $139,109 $163 , 307 $229 , 616 19.1% 22.4% 29.8% 36.9% 37.5% 43.0% provisions of the statement may be applied cumulatively in the year of adoption or may be applied retroactively by restating previously issued financial statements.

Adoption of the ment is not expected to have a material effect upon the Company's results of operations. 1989 $149,210 25,848 35,296 28,040 1,597 $239,991 1988 (Thousands of Dollars) $137,172 33,519 35,975 27 , 095 3 , 839 $237,600 1989 1987 $134,091 32,400 37,098 25,978 5,146 $234,713 1988 (Thousands of Dollars) $ 11,099 $11,657 23,633 23,541 18,745 17,550 53, 750 43,677 1,025 1 , 355 $108,252 $97,780 Philadelph i a Electric Company

16. Leases Leased property included i n Utility Plant at December 31 Nuclear Fuel Electric Plant Common Plant Gross Leased Property Accumulated Amortization Net Leased Property The nuclear fuel obligation is amortized as the fuel is consumed.

Amortization of leased property totaled $45.2 million, $36. I million and $49.7 million for the years ended December 31 , 1989 , 1988 and 1987, respectively.

Other operating expenses Year Ending December 31 1990 1991 1992 1993 1 994 Remaining Years Total M i nimum Future Lease Payments Imputed Interest (rates ranging from 6.5% to 17%) Present Value of Net Min i mum Future Lease Payments 1989 1988 (Thousands of Dollars) $534,607 $502,796 9,325 9,879 I 56 543,933 (270,410)

$273,523 512 , 731 (225,193)

$287,538 i nclude interest on capital lease obligations of $19.0 million, $15.4 million and $14.0 million in 1989, 1988 and 1987, respectively. Minimum future lease payments as of December 31, 1989 are: Capital leases Operating leases Total (Thousands of Dollars) $ 97 , 334 $ 73,871 $ 171,205 78,197 93 , 232 171,429 71,684 85,349 157,033 47 , 569 84 , 115 131,684 34,930 82,937 117 , 867 3,990 713,246 717,236 $333,704 $1,132,750

$1 , 466,454 (60, 181) $273,523 Rental expense under operating leases totaled $7 6.1 million , $64.2 million and $51.4 million i n 1989, 1988 and 1987, respectively.

17. Segment Information 1989 1988 1987 (Thousands of Dollars) Electr i c Operations Operating Revenues $ 3,019,976 $ 2 , 850,315 $ 2 , 809 , 673 Operating Expenses , excluding depreciation 2,009,158 1,913 , 725 1,895 , 104 Depreciation 257,420 245,499 234,925 Operating Income $ 753,398 $ 691,091 $ 679 , 644 Utility Plant Addit i ons $ 961,621 $ 827,620 $ 908,799 Gas Operations Operating Revenues $ 385,653 $ 378 , 397 $ 371 , 791 Operating Expenses , exclud i ng depreciation 310, 131 308 , 301 317,343 Depreciat i on 19,579 18 , 592 17,009 Operating Income $ 55,943 $ 51 , 504 $ 37 , 439 Utility Plant Additions

$ 44,571 $ 46 , 117 $ 44 , 328 Identifiable Assets* Electric $10,638,292

$10 , 012,922 $ 9,178 , 435 Gas 529,864 500 , 205 449 , 986 Nonallocable Assets 1,552,204 1 , 349,725 1,581,315 Total Assets $I 2, 720,360 $11,862,852

$11,209,736

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

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

18. Commitments and Contingencies The Company has incurred substantial commitments in connection with its construction program. Construction expenditures are estimated to be approximately

$830 million for 1990 and $1.8 billion for 1991-1993. These estimates are reviewed and revised periodically to reflect changes in economic conditions, revised load forecasts ahd other priate factors. Certain facilities under construction and to be constructed may require permits and licenses which the Company has no assurance will be granted. The Price-Anderson Act , as revised August 22, 1988, places a limit of liability of$7.7 billion for claims that could arise from an incident involving any licensed nuclear facility in the nation. All utilities with nuclear generating plants, including the Company, obtained coverage for these potential claims through a combination of private insurances of$200 million and mandatory participation in a financial protection pool. Each party with an ownership interest in a nuclear reactor could be assessed up to $63 million per reactor, payable at $10 million per reactor per year. The Company has an ownership interest in six nuclear reactors.

This ment is subject to inflation and an additional surcharge of 5% if the total amount of claims and legal costs exceed the basic assessment Jn addition, Congress could impose further revenue raising measures on the nuclear industry to poy claims. The Company maintains property insurance, including contamination coverage, for Joss or damage to its nuclear facilities. Although it is not possible to determine reasonably the total amount of the Joss that may result from an occurrence at these facilities, the Company maintains the maximum amount of insurance presently available, $2.035 billion for each station. Under the terms of the various insurance agreements, the Company could be assessed up to $32 million for losses incurred at any plants insured by the insurance companies. The Company is self-insured to the extent that any losses may exceed the maximum amount of insurance available. The Company is a member of an industry mutual insurance company which provides replacement power cost insurance in the event of a major outage at a nuclear station. The premium for this coverage is subject to an assessment for adverse Joss experience. The Company's maximum share of any assessment is $20 million per year. On September 12, 1988, the PUC issued a proposed policy statement with respect to recovery of pipeline pay costs billed by the interstate pipelines under FERC-approved tariffs. The policy statement proposed a preferred recovery method under which the distribution company would absorb 50% of take-or-pay amounts billed by its pipeline suppliers. The Company began incurring such charges in May 1988 , and presently estimates its allocable portion of these costs to be approximately

$40 million over a five-year period. On June 9 , 1989, the PUC adopted a final policy statement regarding the sharing of take-or-pay costs, though not specifying the portion to be shared by customers. On November 30, 1989, the Company was authorized by the PUC to file a tariff ment which increased gas rates by approximately 62 cents per Mc( effective December /, 1989. This rate change includes in part the recovery of approximately 90% of the take-or-pay costs which the Company must pay to its interstate pipeline pliers for a period of about five years. The Company will not seek recovery from its customers of the remaining 10% of the or-pay costs resulting from a settlement by the FERC of contract 38 disputes between gas producers and the interstate pipelines.

The Company is not a party to these contracts or settt/ements. On July 27, 1988, Public Service Enterprise Group Incorporated and its subsidiary Public Service Electric and Gas Company (PSE&G) filed an action against the Company in the United States District Court for the District of New Jersey concerning the shutdown of Peach Bottom ordered by the NRC; on the same date, Atlantic City Electric Company (Atlantic Electric) and Delmarva Power and Light Com pony filed a similar suit against the Company with the same court The two suits allege that the Company breached two provisions of the Owners Agreement (Agreement) pursuant to which the four companies own Peach Bottom and under which the Company operates Peach Bottom. These suits also variously allege negligence, gross negligence, failure to disclose, fraudulent misrepresentation and negligent misrepresentation.

The tiffs seek compensation for certain replacement power costs they have incurred as a result of the shutdown of Peach Bottom and for increased operating and maintenance costs and lost profits. PSE&G and Atlantic Electric further allege that they have been required by the New Jersey Board of Public Utilities to provide their customers with a credit because of the Peach Bottom shutdown.

Neither of the complaints specifies any dollar amounts of damages. Both complaints include claims for punitive damages. On October 21, 1988 , the Company filed motions seeking dismissal of the tort claims in both actions. On August 24, 1989, the District Court issued an opinion and order which denied a motion by the Company to dismiss plaintiffs' tort claims, granted the Company's motion to dismiss plaintiffs' fraud claims (subject to plaintiffs' amending their complaints to plead fraud with the requisite specificity), denied PSE&G's motion to dismiss contingent breach-of-contract counterclaims the Company had asserted against PSE&G for outages and NRC penalties at the Sa/em Generating Station (which is operated by PSE&G and 42.59% owned by the Company), and ordered that action (including discovery) on those claims be stayed. On October 5, 1989, plaintiffs filed amended complaints which repleaded their fraud claims. PSE&G's amended complaint includes additional contingent contract claims related to other alleged outages and NRC penalties at Peach Bottom. The parties to the litigation are currently engaged in ongoing discovery.

If the litigation is ultimately determined favorably to the plaintiffs, such mination could have a material adverse effect on the Company's financial condition.

Consolidated actions are pending in the Court of Common Pleas of Philadelphia County by certain shareholders of the Company against both the Company's former Chairman and former President, alleging mismanagement and gence in connection with the events leading to the shutdown of Peach Bottom by the NRC on March 31, 1987. The lawsuit is currently in discovery and trial has been scheduled for September 1990. The Company is a party only as a nominal defendant and any recovery by the plaintiffs, net of their attorneys' fees and expenses, would be poid to the Company. In conjunction with the Company's current electric rate request, the Company filed a revised decommissioning cost estimate based upon total cost The Company's share of this revised cost is $642,622,000 expressed in 1990 dollars. Under a contract with the U.S. Department of Energy (DOE), DOE is obligated ultimately to take possession of all Philadelphia Electric Company spent nuclear fuel generated by the Company's nuclear units for long-term storage. The contract currently requires that a spent fuel disposal fee of one mill ($.00 I) per net hour generated be paid to DOE. The fee may be adjusted in order to ensure full cost recovery. The Company's generating units have on-site storage facilities with the capacity to store spent fuel discharged from the units through the mid-1990's.

The Company believes that the ultimate cost of sioning and spent fuel disposal will be recoverable through adjustments of rates. On October 3, 1989, the Company, the OCA and a group of industrial customers , filed a joint petition with the PUC to approve establishment of an Energy Cost Adjustment (ECA) to replace the existing Energy Cost Rate Factor. The ECA would provide for recovery of 100% of the difference between the Company's actual costs of fuel and energy interchange and the amount of costs billed to customers through an reconciliation. The clause would also incorporate a nuclear performance standard which allows for financial bonuses or penalties depending upan whether the Company's system nuclear capacity factor exceeds or falls below a specified range. The joint petitioners have requested the PUC approve the ECA coincident with new base rates associated with the current electric rate case. Because of permit and regulatory conditions which restrict the use of the Schuylkill River and the Perkiomen Creek as normal sources of cooling water for the Limerick units, a supply of supplemental cooling water is needed to avoid the limitation or cessation of operation of the Limerick units during certain months of the year. This supplemental water may be needed for as many as six months per year , depending upon stream flows , temperature and related conditions. Construction of various components of a planned plemental cooling water system (System), comprised of pumping stations, a reservoir and transmission mains to convey water from the Delaware River to Limerick by way of the Perkiomen Creek, was completed in July 1989 , and the System was placed in service on August 2 , 1989. Operation of the System is being phased in to meet the permit requirements of the Pennsylvania Department of Environmental Resources (DER) for monitoring the effect of the increased flow on the receiving stream, the East Branch of the Perkiomen Creek (East Branch), and its banks. Any significant adverse effects found to be caused by the discharge of water into the East Branch may require corrective action. Otherwise , the System is scheduled to be fully operational on or about June I, 1990. On July 14 , 1988 , the DER issued a National Pollutant Discharge Elimination System (NPDES) permit which places limits on the quality and temperature of Delaware River water to be released to receiving streams for use at Limerick.

These limits could interrupt the operation of the System. Although 19. Quarterly Data (Unaudited) the Company has appealed these restrictions, it is constructing a water processing facility (Facility) to provide the seasonal cooling and treatment that are expected to be necessary to meet the requirements of the NPDES permit As of February I, 1990 , construction of the Facility is 40% complete, and it is scheduled to be in operation prior to the seasonal need for treatment or cooling as required to meet the requirements of the NPDES permit In addition to the appeal by the Company of the NPDES permit conditions, appeals by opponents of the System are also pending on the issuance of the NPDES permit and the DER's conclusion that erosion effects from the operation of the System will not be significant If interim sources of supplemental cooling water are not available in sufficient quantities to meet the needs for cooling water at Limerick , limitations on or cessation of operation of the Limerick units may be required in the event that the Facility is not completed in time to meet the seasonal water quality requirements imposed by the NPDES permit , or the Company does not succeed on appeal. Flowage rights are required over 25 6 riparian properties located along the East Branch. The Company has acquired such rights by purchase from most of the riparian owners, leaving 40 riparian owners from whom flowage rights must be acquired by purchase or eminent domain. On April 26 , 1989, in a proceeding brought by six riparian owners against the Company, the Court of Common Pleas of Bucks County ruled that the Company has the right to acquire flowage rights by the power of eminent domain. To date , this issue has not been raised by any of the remaining riparian owners from whom flowage rights must be acquired. In order to further assure the availability of adequate cooling water for the Limerick units in the event of an ment or other failure of the System, including the Facility, the Company is preparing to submit to the Delaware River Basin Commission (DRBC) requests for Jong-term approval to use back-up sources of cooling water previously approved by the DRBC on an annual basis. These include municipal reservoirs and other power plant water allocations. Also, since the System is in its first year of operation, the Company is requesting for 1990 to continue to use dissolved oxygen limitations in lieu of temperature limits in the Schuylkill River in order to reduce the number of days that the System must be used. Should the System for any reason not be available for operation and the back-up sources of cooling water not be approved , the operation of the Limerick units during critical months may depend upon the successful development, licensing and construction of a modified supplemental cooling water system and the continued successful acquisition and approval of interim sources, pending the availability of the modified system. There is no assurance that the Company will be successful in these efforts. The data shown below include all adjustments which the Company considers necessary for a fair presentation of such amounts. Operating Revenues Operating Income Net Income Quarter Ended 1989 1988 1989 1988 1989 1988 (Thousands of Dollars) March]/ $890,371 $851 , 259 $232,529 $204 , 301 $143,310 $161 , 374 June JO 777,541 699 , 640 157,123 155,751 108,945 110,064 September 30 895,394 898,988 247,451 244,076 205,533 196 , 861 December 31 842,323 778 , 825 172,238 138,467 132,619 97 , 651 39 Philadelphia Electric Company l Philadelphia Electric Company and Subsidiary Companies N o t e s t o F i n a n c i a I S t a t e m e n t s-Continued Earnings Applicable Average Shares to Common Stock Outstanding Earnings Per Average Share Quarter Ended 1989 1988 1989 1988 1989 1988 (Thousands of Dollars) (Thousands) (Dollars)

March]/ $118,859 $137 , 734 206,763 197 , 575 $.57 $.70 June JO 84,795 85 , 435 208,260 200,227 .41 .43 September 30 181,534 172 , 401 209,556 202,843 .87 .85 December JI 108,619 73 , 195 210,970 205,366 .51 .36 1989 first quarter results include a charge of approximately

$29.0 million , or approximately 13 cents per share (net of related income taxes), resulting from settlement of a dispute with the IRS relative to the sale of federal income tax benefits associated with the Company's interest in Salem Unit No. 2 in a safe harbor lease transation (see note 7). Operating revenue was penalized approximately

$21 million and $25 million in 1989 and 1988, respectively.

as a result of the denial by the PUC of a common equity return on the investment in Peach Bottom; operating expense was increased approximately

$57 million and $61 million in 1989 and 1988, respectively.

for replacement power costs associated with the shutdown (see note 2). Quarterly data is shown below: Common Decrease in Equity Penalty Replacement Earnings per Average Share Imposed by PUC Power Costs (Net of Related Income Taxes) Quarter Ended 1989 1988 1989 1988 1989 1988 (Thousands of Dollars) (Dollars)

March]/ $7,931 $/,387 $23,037 $13 , 161 $.09 $.04 june30 7,484 September 30 5,484 December]/

0 Report of Independent Accountants To the Shareholders and Board of Directors Philadelphia Electric Company 6,859 19, 195 15,004 .08 9,374 6,580 11,270 .04 7,365 8,470 21 , 833 .02 We have audited the accompanying consolidated balance sheets of Philadelphia Electric Company and Subsidiary Companies as of December 31, 1989 and 1988, and the related consolidated statements of income, changes in common shareholders' equity and preferred stock, and cash flows for each of the three years in the period ended December 31, 1989. These financial statements are the responsibility of the Companies' management Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.

An audit also includes assessing the accounting principles used and significant estimates made by management , as well as evaluating the overall financial statement presentation.

We believe that our audits provide a reasonable basis for our opinion. .07 .06 .09 In our opinion , the financial statements referred to above present fairly , in all material respects , the consolidated financial position of Philadelphia Electric Company and Subsidiary Companies as of December 31 , 1989 and 1988, and the consolidated results of their operations and their cash flows for each of three years in the period ended December 31, 1989, in conformity w i th generally accepted accounting principles. As discussed in Note 18 to the consolidated financial statements, certain legal actions were filed against the Company in 1988 by the other co-owners of the Peach Bottom Atomic Power Station seeking compensatory and punitive damages related to the shutdown of this Station. As discussed in Note 3 to the consolidated financial statements, certain parties have proposed adjustments to the rate increase filed by the Company in 1989, related to the commercial operation of Limerick Generating Station Unit No. 2. The ultimate outcome of these legal actions and of the request for an electric rate increase cannot presently be determined. Accordingly, no provision for any liability or loss that may result has been made in the accompanying consolidated financial statements. 2400 Eleven Penn Center Philadelphia , Pennsylvan i a February I , 1990 40 Philadelphia Electric Company Financial S t a t i s t i c s Philadelphia Electric Company and Subsidiary Companies

SUMMARY

OF EARNINGS (Millions of Dollars) For the Year Ended 1989 1988 1987 1986 1985 1984 Operating Revenues (for details see pages 43 and 44) $3,405.6 $3,228.7 $3 , 181.5 $3,090.9 $2,945.2 $2,898.7 Operating Expenses Fuel and Energy Interchange 821.0 745.I 710.6 889.3 1 , 097.8 1,069.9 Labor 425.2 424.2 437.6 417.2 370.8 339.6 Other Materials, Supplies and Services 637.3 608.3 564.6 475.2 440.I 413.8 Total Operation and Maintenance 1,883.5 1,777.6 1,712.8 1,781.7 1,908.7 1,823.3 Depreciation 277.0 264.I 251.9 217.7 183.0 176.4 Taxes 435.8 444.4 499.7 517.0 440.9 449.I Total Operating Expenses 2,596.3 2 , 486./ 2 , 464.4 2,516.4 2,532.6 2,448.8 Operating Income 809.3 742.6 717.I 574.5 412.6 449.9 Other Income and Deductions Allowance for Other Funds Used During Construction 121.9 98.9 77.2 76.8 176.3 134.5 Capitalized Limerick Costs 82.0 73.I 66.6 172.9 Adjustment to Utility Plant Costs (368.9) Credit (Charge) Related to Limerick Unit No. I Phase-In Plan 24.0 26.2. 18.4 (91.8) Income Tax Credits, Net 56.7 43.5 35.3 279.7 133.4 116.4 Other, Net 4.0 7.9 18.3 2.4 (3.5) 0.2 Total Other Income and Deductions 288.6 249.6 215.8 71. I 306.2 251.I Income Before Interest Charges 1,097.9 992.2 932.9 645.6 718.8 701.0 Interest Charges Long-Term Debt 569.7 524.I 467.3 458.9 435.4 402.5 Short-Term Debt 86.4 24.2 17.2 12.5 17.7 30.9 Allowance for Borrowed Funds Used During Construction (148.7) (122. I) (92.2) (101.6) (257.2) -(220.4) Net Interest Charges 507.4 426.2 392.3 369.8 195.9 213.0 Income From Continuing Operations 590.5 566.0 540.6 275.8 522.9 488.0 Income From Discontinued Operations 1.8 1.9 2.4 4.4 Loss on Disposal of Discontinued Operations ( 1.2) Net Income 590.5 566.0 542.4 276.5 525.3 492.4 Preferred Stock Dividends 96.6 97.2 94.2 90.9 90.6 82.7 Earnings Applicable to Common Stock 493.9 468.8 448.2 185.6 434.7 409.7 Dividends on Common Stock 459.6 444.I 423.3 403.5 373.5 334.3 Earnings Retained $ 34.3 $ 24.7 $ 24.9 $ (217.9) $ 61.2 $ 75.4 Earnings Per Average Common Share From Continuing Operations (Dollars)

$ 2.36 $ 2.33 $ 2.33 $ I.Of $ 2.55 $ 2.67 Earnings Per Average Common Share (Dollars)

$ 2.36 $ 2.33 $ 2.33 $ 1.01 $ 2.56 $ 2.70 Dividends per Common Share (Dollars)

$ 2.20 $ 2.20 $ 2.20 $ 2.20 $ 2.20 $ 2.20 Common Stock Equity (Per Share) $ 17.67 $ 17.39 $ 17.20 $ 16.95 $ 17.97 $ 17.81 Average Shares of Common Stock Outstanding (Miiiions) 208.9 201.5 192.5 183.I 169.8 151.8 41 Ph il ade l p hia Elec tric Compan y Financial S t a t i S t i C S-Continued Philadelphia Electric Company and Subsidiary Companies

SUMMARY

OF FINANCIAL CONDITION (Millions of Dollars) December 31 1989 1988 1987 1986 1985 1984 Assets Utility Plant. at original cost $13,358.0

$12,444.3 $11,641.2 $10,847.8 $10,572.2 $9,834.I Less: Accumulated Depreciation 2,637.2 2,395.8 2,169.4 2 , 005.7 1,824.4 1 , 726.3 Leased Property.

Net 273.5 287.5 287.2 281.3 338.I 352.I Net Utility Plant 10,994.3 10 , 336.0 9,759.0 9 , 123.4 9 , 085.9 8 , 459.9 Current Assets Cash and Temporary Cash Investments 64.4 43.6 43.0 90.7 188.8 30.4 Accounts Receivable 255.8 175.7 385.8 375.6 370.9 384.2 Inventories 189.8 170.3 150.3 129.7 123.7 150.5 Unrecovered Revenue , Net 118.0 54.I Deferred Energy Costs 39.2 50.4 6.2 (88.2) 101.7 229.9 Other 86. I 78.9 73.8 78.6 71.8 137.0 Deferred Debits and Other Assets Unrecovered Revenue, Net 163.0 251.0 217.6 20.6 Deferred Umerick Costs 475.I 375.9 286.0 202.7 Investments 108.2 97.8 100.9 89.7 87.7 80.9 Loss on Reacquired Debt 137.3 118.3 119./ 76.8 48.6 Other 89.2 110.9 68.0 70.7 86.2 82.9 Total $12,720.4

$11 , 862.9 $11,209.7 $10 , 170.3 $10 , 165.3 $9 , 555.7 Capitalization and Liabilities Common Stock $ 3,295.4 $ 3 , 177.6 $ 2 , 995.2 $ 2 , 833.0 $ 2 , 602.0 $ 2,361.0 Other Paid-In Capital 5.3 5.1 4.6 7.8 7.3 6.7 Retained Earrnings 444.I 409.9 387.I 363.3 583.7 523.3 Common Shareholders' Equity 3,744.8 3,592.6 3,386.9 3 , 204./ 3 , 193.0 2 , 891.0 Preferred Stock: Without Mandatory Redemption 622.4 622.4 572.5 572.5 572.5 572.5 With Mandatory Redemption 351. I 368.I 389./ 374.9 318.3 326.2 Long-Term Debt 5,762.7 5 , 219.5 4 , 870.7 4 , 286.8 4 , 309.2 3,778.0 Total Capitalization 10,481.0 9 , 802.6 9,219.2 8 , 438.3 8 , 393.0 7 , 567.7 Current Liabilities Short-Term Debt 112.0 102.0 1.0 260.0 Long-Term Debt Due Within One Year 17. I 70.2 80.9 108.6 80.8 50.4 Lease Obligations Due Within One Year 73.8 72. I 60.6 69.4 76.3 68.3 Accounts and Dividends Payable 273.4 220.4 206.0 222.I 185.I 200./ Taxes Accrued 141. I 140.0 114.7 86.I 58.5 40.3 Deferred Income Taxes 59.0 20.0 2.7 (44.8) 51.8 117.7 Interest Accrued 124.3 129.4 121.7 90.7 93.0 91./ Other 88.I 80.7 72. I 80.0 72.0 127.2 Deferred Credits and Other Liabilities Capital Lease Obligations 199.8 215.5 226.6 212.0 261.8 283.8 Deferred Income Taxes 809.5 753.3 682.9 560.5 502.6 373.3 Unamortized Investment Tax Credits 242.3 273.0 282.3 299.7 302.4 299.4 Other 99.0 85.7 38.0 47.7 87.0 76.4 Total $12,720.4

$11,862.9 $11,209.7

$10,170.3 $10 , 165.3 $9 , 555.7 42 Philadelphia Electric Company

Operating S t a t i S t i C S Philadelphia Electric Company and Subsidiary Companies ELECTRIC OPERATIONS 1989 1988 1987 1986 1985 1984 Output (Millions of Kilowatthours)

Steam 10,470 10 , 225 9 , 835 7,864 9,455 11 , 085 Nuclear 12,890 12 , 328 11 , 853 17,125 8 , 359 6,462 Hydraulic 1,743 1 , 307 1 , 590 1,848 1 , 484 2,085 Pumped Storage Output 1,354 1 , 515 1,251 1,176 1,235 1 , 100 Pumped Storage Input (1,937) (2 , 163) ( 1,787) (1 , 661) ( 1,754) ( 1 , 579) Purchase and Net Interchange 9,165 11,367 9,806 4 , 258 10,252 11 , 975 Internal Combustion 348 285 232 269 178 425 Other 1,063 382 1 , 254 Total Electric Output 35,096 34,864 32,780 31,261 30 , 463 31 , 553 Sales (Millions of Kilowatthours)

Residential 9,974 10,058 9 , 441 8,900 8 , 440 8 , 515 Small Commercial and Industrial 4,921 4,666 4,341 4,022 3,731 3 , 543 Large Commercial and Industrial 16,749 16,516 15,789 15 , 068 14 , 920 14,881 Al/Other 1,031 999 974 993 1 , 044 1,061 Service Territory 32,675 32 , 239 30 , 545 28 , 983 28 , 135 28 , 000 Jersey Central Power and Light (Salem Unit No. 2) 1 , 395 Total Electric Sales 32,675 32 , 239 30,545 28,983 28 , 135 29,395 Number of Customers, December 3 I Residential 1,309,717 1 , 296,784 1,280 , 297 1 , 263 , 465 1 , 245 , 481 1 , 230 , 883 Small Commercial and Industrial 138,244 135 , 274 131 , 279 127,797 124,719 121 , 676 Large Commercial and Industrial 4,449 4 , 520 4 , 589 4 , 668 4 , 881 5 , 100 Al/Other 775 779 , 771 763 773 751 Total Electric Customers I ,453, 185 1 , 437 , 357 1,416,936 1,396,693 1,375 , 854 1 , 358 , 410 Operating Revenues (Mill i ons of Dollars) Residential

$1,157.0 $1 , 127.8 $1,092.6 $1 , 023.6 $ 923.9 $ 854.9 Small Commercial and Industrial 537.I 489.4 471.7 437.0 388.7 360.2 Large Commerc i al and Industrial I 182.0 1 , 089.3 1 , 103.3 1 , 103.3 1 , 061.8 1008.5 Al/Other 143.9 143.8 142./ 135.5 141.8 145./ Service Territory 3,020.0 2,850.3 2 , 809.7 2 , 699.4 2,516.2 2,368.7 Jersey Central Power & Light (Salem Unit No. 2) 67.0 Total Electric Revenues $3,020.0 $2,850.3 $2 , 809.7 $2 , 699.4 $2 , 516.2 $2 , 435.7 Operating Expenses (Millions of Dollars) Operating expenses excluding depreciation

$2,009.2 $1 , 913.7 $1,895.I $1 , 96 1.4 $1 , 9 7 4.2 $1 , 858.5 Depreciation 257.4 245.5 234.9 201.8 168.2 163.0 Total Operating Expenses $2,266.6 $2 , 159.2 $2 , 130.0 $2 , 163.2 $2 , 142.4 $2 , 021.5 Electric Operating Income (M i llions of Dollars) $ 753.4 $ 691./ $ 679.7 $ 536.2 $ 373.8 $ 414.2 Average use per Residential Customer (k il owatthours)

Without Electr i c Heat i ng 6,488 6 , 667 6 , 431 6,177 6 , 034 6 , 160 W i th Electr i c Heat i ng 17,250 17,738 16 , 824 16 , 661 15,923 17 , 293 Total 7,655 7 , 807 7 , 427 7 , 097 6 , 820 6 , 960 Electric Peak Load , Demand (thousands of kilowatts) 6,467 6 , 826 6 , 547 6 , 134 6 , 0 3 4 5 , 925 Net Electr i c Generating Capacity-Year-End Summer rat i ng (thousands of kilowatts) 7,759 7 , 762 7,762 7 , 870 7 , 599 7,765 Cost of Fuel per Mill i on Btu $1.37 $1.19 $1.35 $1.18 $1.72 $2.22 Btu per Net Ki/owatthour Generated 10,894 10,881 10 , 879 10,844 10 , 843 10 , 920 @ 43 Philadelphia Electric Company 0 p e r a t i n g S t a t i S t i C S-Continued Philadelphia Electric Company and Subsidiary Companies GAS OPERATIONS 1989 1988 1987 1986 1985 1984 Sales (Millions of Cubic Feet) Residential 1,951 1 , 933 1,854 1,856 1 , 810 1,941 House Heating 28,301 28 , 112 26 , 010 25,731 23 , 227 25,429 Commercial and Industrial 30,038 39 , 073 38 , 170 33,834 36,254 41 , 145 Al/Other 2,344 2,228 1 , 541 578 1,209 1 , 282 Total Gas Sales 62,634 71 , 346 67,575 61 , 999 62,500 69 , 797 Gas Transported for Customers 18,033 9,272 7,374 3,907 10,262 3,794 Total Gas Sales & Transported 80,667 80,618 74,949 65,906 72,762 73,591 Number of Customers, December 31 Residential 65,544 66 , 599 67,688 68,590 69,632 70 , 794 House Heating 246,273 239 , 022 231,618 225,010 217,840 211,984 Commercial and Industrial 28,369 27 , 119 26.021 24,884 24,234 23,442 Total Gas Customers 340,186 332,740 325,327 318 , 484 311,706 306,220 Operating Revenues (Millions of Dollars) Residential

$ 18.0 $ 17.0 $ 16.7 $ 18.0 $ 18.7 $ 19.0 House Heating 195.8 180.6 175.7 189.8 185.4 191.7 Commercial and Industrial 152.5 165./ 167.5 177.7 214.I 243.7 Al/Other 7.3 6.6 4.4 2.0 5.2 5.6 Subtotal $373.6 $369.3 $364.3 $387.5 $423.4 $460.0 Other Revenues (including Transported for Customers)

12. I 9.1 7.5 4.0 5.5 3.0 Total Gas Revenues $385.7 $378.4 $371.8 $391.5 $428.9 $463.0 Operating Expenses (Millions of Dollars) Operating expenses excluding depreciation

$310.2 $308.3 $317.4 $337.3

$375.4 $413.9 Depreciation 19.6 18.6 17.0 15.9 14.8 13.5 Total Operating Expenses $329.8 $326.9 $334.4 $353.2 $390.2 $427.4 Gas Operating Income (Millions of Dollars) $ 55.9 $ 51.5 $ 37.4 $ 38.3 $ 38.7 $ 35.6 Securities Statistics Ratings on Philadelphia Electric Company's Securities Mortgage Bonds Debentures Preferred Stack Agency Rating Date Established Rating Date Established Rating Date Established Duff and Phelps, Inc. BBB . 3180 BBB-3180 BB+ 2183 Fitch Investors Service BBB 9182 BBB-9182 BB+ 9182 Moody's Investors Service Baa3 1183 Bal 1183 bat 1183 ----Standard & Poor's Corporation BBB-9182 BB+ 9182 BB+ 7186 NYSE-Composite Common Stock Prices, Earnings and Dividends by Quarters (Per Share) 1989 1988 Fourth Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter High Price $24 $24 1 h $22% $21 1/a $20'/* $19 $19 1/s $21 1 14 Low Price $21'1*

$19'1* $18 1 1 2 $17 1/s $167/s $18 Earnings 51¢ 87¢ 41¢ 57¢ 36¢ 85¢ 43¢ 70¢ Dividends 55¢ 55¢ 55¢ 55¢ 55¢ 55¢ 55¢ 55¢ 44 Philadelphia Electric Company Shareholder Information Stock Exchange Listings Most Company securities are listed on the New York Stock Exchange and the Philadelphia Stock Exchange. Philadelphia Electric Power Company Debentures are listed on the Philadelphia Stock Exchange. Dividends The Company has paid dividends on its common stock continually since 1902. The Board of Directors normally considers common stock dividends for payment in March, June, September and December.

The Company estimates that the $2.20 per share dividend paid to common shareholders in 1989 is fully taxable as dividend income for federal income tax purposes.

Div i dend Reinvestment and Stock Purchase Plan Shareholders may use their dividends to purchase additional shares of common stock through the Company's Dividend Reinvestment and Stock Purchase Plan (Plan). The Company pays all brokerage and service fees for stock purchases.

Customers of the Company who are not shareholders may enroll in the Plan by making a one-time purchase of common stock directly from the Company. All shareholders have the opportunity to invest additional funds in common stock of the Company. whether or not they have their dividends also with all fees borne by the Company. In 1989, over 37% of the Company's common shareholders were participants in the Plan and they invested more than $117 million through the Plan, including cash payments.

Information concerning this Plan may be obtained from D. P. Scott, Treasurer, Philadelphia Electric Company , 2301 Market Street, P.O. Box 8699, Philadelphia, PA 19101. Comments Welcomed The Company is always pleased to answer questions and provide information. Please address your comments to Mrs. L S. Binder, Secretary, Philadelphia Electric Company. 2301 Market Street, P.O. Box 8699, Philadelphia, PA 19101. Inquiries relating to shareholder accounting records, stock transfer and change of address should be directed to Philadelphia Electric Company , 2301 Market Street, P.O. Box 8487, Philadelphia, PA 19101, Attn: Shareholder Services, S6-4. Toll-Free Telephone Line Toll-free telephone lines are available to the Company's shareholders for inquiries concerning their stock ownership.

When calling from outside of Pennsylvania, call 1-800-223-7326. From within Pennsylvania call 1-800-242-7326.

Local Philadelphia calls should be made to 841-5795. 4!5 Annual Meeting The Annual Meeting of the Shareholders of the Company will be held on April 11, 1990, at 10: 30 a.m. in the Pennsylvania Hall Auditorium, Philadelphia Civic Center , 34th Street and Civic Center Boulevard, Philadelphia, PA. The record date for voting at the shareholders' meeting is March 2, 1990. Notice of the meeting , proxy statement, and proxy will be mailed under separate cover. Prompt return of the proxies will be appreciated. FormlO-K Form 10-K, the annual report filed with the Securities and Exchange Commission, is available, without charge , to shareholders upon written request to Philadelphia Electric Company. 2301 Market Street, P.O. Box 8699, Philadelphia , PA 19101, Attn: Financial Division, S21-I. Shareholders The Company has 282,623 shareholders of record of common stock, a 14% increase in 10 years. Transfer Agents and Registrars PHILADELPHIA ELECTRIC Preferred and Common Stocks Registrars:

Mellon Bank (East) N.A. P.O. Box 7899 Corporate Trust 199-C385 Philadelphia, PA 19102 First Chicago Trust Company of New York 30 W. Broadway, NY, NY 10015 Transfer Agents: Philadelphia Electric Company 2301 Market St, Phi/a., PA 19101 First Chicago Trust Company of New York 30 W. Broadway, NY, NY 10015 PHILADELPHIA ELECTRIC First and Refunding Mortgage Bonds Trustee: Fidelity Bank, National Association Corporate Trust Operations Broad & Walnut Sts., Phi/a., PA 19109 New York Agent: Morgan Guaranty Trust Co. of NY 30 W. Broadway, NY, NY 10015 PHILADELPHIA ELECTRIC COMPANY-Debentures PHILADELPHIA ELECTRIC POWER COMPANY (A Subsidiary)-Debentures Trustee: The Philadelphia National Bank Corporate Trust Department P.O. Box 7907 Philadelphia, PA 19106 New York Agent: The Bank of New York IOI Barclay St, NY, NY 10286 General Office: 2301 Market Street, P.O. Box 8699 , Phi/a., PA 19101. (215) 841-4000. Philadelphia Electric Company Officers Joseph F. Paquette, Jr. (55) Chairman, President and Chief Execut i ve Office r Corbin A. McNeil/, Jr. (50) Executive Vice President , Nuclear Richard G. Gilmore (62) Senior Vice President , Finance and Chief Financial Officer Raymond F. Holman (62) Senior Vice President, Operations James W. Durham (52) Senior Vice President , Legal and Genera/ Counsel Nicholas DeBenedlctls (44) Senior Vice President , Corporate and Public Affairs John S. Kemper ( 61) Vice President, Engineering and Production Morton W. Rimerman (60) Vice President, Finance Raymond C. Williams (63) Vice President , Rates AlbertG. Mikalauskas (53) Vice President , Commercial Operations S. Joseph Kowalski ( 61) Vice President, Nuclear Engineering Alvin J. Weigand (51) Vice President , Electric Transmission and Distribution Kenneth G. Lawrence (42) Vice President, Gas Operations Graham M. Leitch (55) Vice President, Limerick Generating Station Dickinson M. Smith (56) Vice President, Peach Bottom Atomic Power Station Albert}. Solecki (49) Vice President , Informat i on Systems and General Serv i ce s David R. Helwig (38) V i ce Presiden t, Nuclear Services Donald P. Scott (55) Treasurer Lucy S. Binder (52) Secretary Management Changes: Jon A. Katherine (54) Assistant Treasurer William M. Lennox, Jr. (52) Assistant Treasurer

}. Robert Causton (52) Assistant Treasurer M. Dorothy Lyons (48) Assistant Secretary Nicholas DeBenedictis was elected Senior Vice President , Corporate and Public Affairs , effective Apr i l 10 , 1989. Clifford Brenner ret i red as Senior Vice President, Corporate Communicat i ons , on May I , 1989. Dav i d R. Helwig was elected Vice President , Nuclear Services , effective June 26, 1989. Eugene j. Bradley ret i red as Vice President and Associate Genera/ Counsel , on September I , 1989. Joseph W. Gallagher retired as Vice President, Nuclear Services , on September I, 1989. Joseph A. Carter resigned as V i ce President , Human Resources , on October 31 , 1989. Philip G. Mulligan retired as Vice President , Gas Operations, on February I, 1990. Kenneth G. Lawrence was elected Vice President, Gas Operations, effective January I , 1990. Albert G. Mikalauskas was elected Vice President , Commercial Operations , effective January I , 1990. Alvin j. Weigand was elected Vice President , Electric Transmission and Distribution , effective January I , 1990. john S. Kemper was elected Vice President, Engineering and Production , effective January I, 1990. 48 Phil ade l p hia Electric C om p any

Nelson G Hams was elected a member Philadelphia Electric Company 2301 Market Street PO Box8699 Philadelphia PA 19101 , BULK RATE U.S. POSTAGE PAID Rochester NY Permit No. 709

@@ Line 3: / Line 3: @@
 | issue date = 12/31/1989
 | title = Philadelphia Electric Co,Annual Rept for 1989.
-| author name = PAQUETTE J F
+| author name = Paquette J
 | author affiliation = PECO ENERGY CO., (FORMERLY PHILADELPHIA ELECTRIC
 | addressee name =

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