ML18094B392

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:
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ML18094B389	List: ML18094B388 ML18094B390 ML18094B391 ML18094B392 ML18094B393
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NUDOCS 9004160163
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PHILADELPHIA ELECTRIC COMPANY

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-NOTICE-Annual Report 1989 9004160163 900404 PDR ADOCK 05000272 I PDR

MAJOR l!Ll!CTRIC Ol!!NERATINO STATIONS

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PHILADELPHIA ELECTRIC COMPANY ANNUAL R EPORT 1989 Financial Highlights 1989 1988  % Change O perating Revenues $3,405,629,000 $ 3 ,228, 712 ,000 5 .5 %

Operating Expenses $2,596,288,000 $ 2 ,486, 117,000 4.4%

Taxes Charged to Operations $435, 756,000 $444,374,000 (1 .9 % )

Operating Income $809,341,000 $742 ,595,000 9 .0 %

Earnings Applicable to Common Stock $493,807,000 $468,765,000 5.3%

Earnings per Average Common Share $2.36 $ 2 .33 1 .3 %

Cash Dividends Paid per Common Share $2.20 $2 .20 Ave rage Shares of Common Stock Outstanding 208,901,000 201 ,517 ,000 3 .7 %

Construction Expenditures $1, 106, 174,000 $1 ,081 ,577 ,000 2 .3 %

To tal Assets $12,720,360,000 $ 1 1,862 ,852 ,000 7 .2 %

Contents EARNINGS AND CONSTRUCTION DIVIDENDS PER SHARE EXPENDITURES Letter to Sha reholders 2

$3. 00 .

$ 1200 Report of 1989 Operations 4 Management's Discussio n a nd Analy sis of Financial Condition a nd Results of Operations 21 2 .5 0.

1000 Consolidated Financial Statements 24 Notes to Finan cial Statements 29 Report of Independent A ccountants 40 2.00 .

. . . .. . .. .. .. 800 .

Fin ancial Statistics 41 r

Operating Statistics 43 Shareholder Information 45 1.50. ** *** * . .. . 600 .

Officers and Directors 46 1.00 . 400 .

.50 200 .

Million Doll ars Dollars 85 86 87 88 89 85 86 87 88 89

• Earn ings Pe r S hare

• External Sources

@ The financial pages of this report are printed on recycled paper. D ivid ends

• Internal Sources Philad elphia Electric Company

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 which 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, sig-nificant challenges remain . In April , we expect a decision by the Pennsylvania Public Utility Com-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. How-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 south-eastern Pennsylvania. Limerick's capacity will enable us to meet the demand growth forecasted Chairman to at least the year 2000 . Finished nine months J. F. Paquette, Jr. ahead of schedule and approximately $380 mil-with the dramatically lion under the PUC-imposed cost cap, Limerick growing Philadelphia Unit No. 2 will a lso be environmentally beneficial skyline in the by not contributing to acid rain or global warming.

background.

Although operations at Peach Bottom have pro-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 per-formance of our Limerick Generating Station .

2 Philadelphia Electric 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, President 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 lected 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 capacity 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 corporate citizen , particularly as a steward of the environment. During 1989, we received a number of major awards and other recognition for our compre-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 conservation efforts and enjoy the beauty of our facilities and their surroundings.

J . F. Paquette , Jr.

Cha irma n o f the B oard Presid ent and Chie f Executive O fficer February 1 , 1990 3

Philadelphia Electric Company

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 ings increase was partially offset by the settlement of the Internal Revenue Service's claim relat-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 kilo-watthours, due to a strong regional economy. Sales to commercial and industrial customers increased 2.3% reflecting increased economic develop-ment in southeastern Pennsylvania and the addition of 2,900 new customers.

Sales to residential customers were 0.8% lower than last year primarily Scrubbers at E.ddystane due to milder summer weather in 1989, compared to the unusually hot Generating Station are weather experienced during the summer of 1988. In 1989, 12,900 new part of the Company's residential customers were connected to the Company's system.

$300 million flue gas GAS OPERATIONS ESTABLISH NEW MARKS desulfurization and As a result of the coldest December in this century (26% colder than particulate removal normal), gas sendout set a new one-year peak of 84.1 billion cubic feet, system.

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 suc-cessfully met the challenge of many weather-related problems.

FINANCINGS COMPLETED During 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 aquatic lesson is presented to students at Muddy Run Recreation Park along the Susquehanna River.

5 Ph iladelphia Electric Company

1989 MAJOR FINANCINGS Month Miiiions of Dollars June Mortgage B onds - 10 % due 2019 $175 .0 October Mortgage Bonds - 9 1/a% due 2019 100.0 Mortgage Bonds - 9 '!*% due 1999 75 .0 December Medium-Term Note Program :

Notes due 1996 - 2005 at a v erage interest rate of 9 .06% 80.0 January- Dividend Reinvestment & Stock December Purchase Plan: 5 ,386 ,882 shares ;

average price of $21 .87 117.8 January- B ank Borrowin gs:

December Revolving Credit Agreement -

net borrowings 225 .0 New term-loan borrowings 167.0 Total $939.8 NEW PLANT INVESTMENT PE received the 1989 The Company invested $1.1 billion in new plant and equipment in 1989, National Land approximately $25 million more than in 1988. Approximately $620 million were Management Award spent for the completion of Limerick Generating Station. During the 1990's, for managing its land holdings along the the level of new plant investment will decrease to approximately $600 million Susquehanna River, per year. A significant portion of these projected amounts will be expendi-including some tures for transmission and distribution projects needed to provide continued 50 square miles of land reliable service.

and 20 islands in RATES AND REGULATION Pennsylvania and On July 21 , 1989, the Company filed a request with Maryland. 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 ith 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 reasonableness of the requested increase have been held , and a PUC decision is due by 6

Philadelphia Electric Company

Conowingo Hydroelectric Generating Station has been producing pollution-free electricity since 1928.

7 Philadelphia Electric Company

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 Philadelph ia Electric Company

April 20, 1990. The PUC Office of Trial Staff and Office of Consumer Advocate (OCA) have recommended increases of only $231 m illion 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-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.

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 Unit No. 2 had operated at a minimum of 95% of capacity for 100 consecu tive hours. The reduction 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 its appeal which sought to revise the PUC impru-dence disallowance associated with construction delays at Limerick Unit No. 1. The OCA and two intervenors dropped their appeals which a lleged that the Company had excess capacity as a resu lt of the addition of Limerick Unit No. 1.

LIMERICK WORK COMPLETED 1989 was a year in which all four Company-operated 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 final 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 ired 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

Philadelphia Electric 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 sched-ul ing 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 unit 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

~ 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.

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 Philadelp hia Electric Com pany

~ 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.

11 Philadelph ia Electric Company

Technicians closely monitor water flow to check stream erosion along the Limerick supplemental cooling water system.

12 Philadelphia Electric Company

facility along the pipeline that discharges water to the East Branch of the Perkiomen Creek to ensure that the strict environmental limits imposed by The scrubbers at the Pennsylvania Department of Environmental Resources are met. See Cromby Generating note 18 of the Notes to Financial Statements for further discussion . Station are also part of PEACH BOlTOM RESTARTED the Company's flue Following the NRC 's 1987 shutdown order, the Company committed to an gas desulfurization and extensive restart program , including management changes, personnel particulate removal system.

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 involving 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 support for some engineering projects, corporate tech-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 Philadelphia Elec tr ic Comp an y

continues to be aggressive in problem resolution and is directly involved 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 asso-ciated with Peach Bottom .

The Company is pleased with the progress made at Peach Bottom to date ; however, con-siderable additional progress is needed to achieve the desired level 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. Approximately 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 approximately $99 million by purchasing over 1 O billion kilowatthours, thereby minimizing the operation of higher-priced generating units on the Company's system . Approximately one-half of these purchases represent coal-fired power purchased directly by the Company from systems outside PJM. Also ,

the avai lability of Limerick generation resulted in sales of 2 billion kilo-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 phar-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 Philadelphia International Airport is planning $500 million in renovations to Pf monitors plant waste water closely.

This is a portion of the waste water treatment facilities at Eddystone Generating Station.

14 Philad e lphia Electric C o mpan y

Conowingo ~

Hydroelectric Station and Fishermen's Park.

The Company currently operates a fish Ii~

facility to allow the upstream passage of migratory fish, particularly the American Shad.

Construction of a new fish I~ is scheduled for 1990 to transport more fish to their spawning grounds.

15 Philadelphia Electric Company

Peach Bottom Atomic Power Station Units No. 2 and No. 3 on the bank of the Susquehanna River returned to service in 1989.

16 Philadelphia Electric Company

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. Water-front developments such as Penn's Landing will include a hotel, townhouses, condominiums, office space, and boating facilities .

In 1989, the Company provided location 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-time accidents, from 62 in 1988 to 34 in 1989. Based on the National Safety The Company has Council's estimated cost of lost- time accidents, this reduction in accidents received numerous resulted in savings to the Company of approximately $650,000 . In the last environmental awards, five years, the Company has reduced its lost- time accidents by 86% for a including the 1989 total savings of over $4.5 million .

Edison Electric ENVIRONMENTAL RESOURCES lnstitute's National Philadelphia Electric is committed to protect, conserve and enhance the Land Management environmental resources of the areas in which we operate . We invest in Award, 1989 recognition the environment because it is good business as well as good citizenship.

from the Nature The investment includes power plants that operate cleanly and efficiently, Conservancy and the providing a quality of life that encourages economic development and the Take Pride in satisfaction of helping to preserve and promote our service territory as a Pennsylvania Award.

desirable place to live, work and play. This 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 Philadelphia Electric 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 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.

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 sanc-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 opera-tion of the Merrill Creek Reservoir, another environmental preserve, located in Warren County, New Jersey. Con -

structed 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 biol-ogists. These dedicated professionals are stationed at our Muddy Run Recreation Park, a facility which attracts over 400,000 visitors annually.

18 Phil adelphia Electric Company

The Visitors Center was completed in 1989 at the Merrill Creek Reservoir and Environmental Preserve in Warren County, New Jersey.

19 Philadelph ia Electric Company

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 large-scale gen-eration and approximately two-thirds of the Company's electric output for 1990 will be nuclear. This form of electric generation is environmentally sound because it does not contribute to acid rain 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 wild-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 facili-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 Electric Company

Management's Discussion and Analysis of Financial Condition and Results of Operations Philadelphia General electric rate case. In 1989, this accrual benefited common Electric Company Earnings per share for 1989 were $2.36, an increase of three stock earnings by approximately $82 million.

and Subsidiary Companies cents from 1988 earnings of $2.33, when 3.7% fewer shares On April 27, 1989, the PUC approved a Declaratory were outstanding. The increase in earnings was primarily due Order for Limerick Unit No. 2 which allows for synchronization to higher electric sales and lower penalties from the Nuclear of electric rates for Unit No. 2 with the commercial operation Regulatory Commission (NRC) shutdown of Peach Bottom and date for that unit Under this Declaratory Order, the costs other fue/ charges. The earnings increase was partially offset incurred by the Company to carry and operate this unit, by increased interest expense resulting from the settlement of including 50% of common facilities, from commercial opera-the Salem Unit No. 2 safe harbor /ease transaction. tion until Unit No. 2 is included in rate base are being On January 8, 1990, Limerick Unit No. 2 was placed in deferred. These deferred capital costs and operating expenses, commercial operation. The project was completed nine months the recovery of which is not assured, will be considered in a ahead of schedule at a cost of approximately $2.8 billion. future rate proceeding.

A Pennsylvania Public Utility Commission (PUC) mandated The Company has agreements to sell 200 megawatts cost cap provides for a maximum net rate base allowance of electric generating capacity and associated energy for a for Limerick Unit No. 2 (exclusive ofcommon facilities) of a period of four years to Atlantic City Electric Company and 150 prudent investment of$3.197 billion. megawatts of electric generating capacity and associated On July 21, 1989, the Company filed with the PUC a energy for a period of two years to GPU Service Corporation request for an annual $549 million electric rate increase, net beginning June I, 1990. In addition, the Company has nego-of an estimated $142 million in fuel savings, or approximately tiated an agreement for energy and capacity sales to Baltimore 18.1%. The Company has proposed to phase the increase into Gas and Electric Company for varying amounts beginning in rates over a ten-year period and has requested a return on early 1990. These agreements require approval by the Federal all delayed billings. By order entered August 18, 1989, and Energy Regulatory Commission (FERC).

consistent with standard procedures, the PUC suspended the With approval by the NRC, Peach Bottom Unit No. 2 Company's requested electric rate increase until April 20, returned to service on April 26, 1989, and achieved full 1990, and initiated an investigation. A group of industrial power on August 4, 1989. As a result of achieving full power, customers, the Office of Consumer Advocate (OCA) and the on August 9, 1989, the Company was permitted by the PUC PUC's Office of Trial Staff each submitted positions proposing to remove the temporary electric rates which had denied a that the PUC grant substantially less than the Company's return on the Company's equity investment in Peach Bottom.

requested increase. For 1989, the temporary electric rates reduced revenue by These intervenors recommended increases ranging from approximately $21 million, or six cents per share in common

$I 0 I million to $231 million, which reflect various disallow- stock earnings.

ances of expense and rate base claims and reductions in the The Company did not request recovery of any Peach Company's requested rate of return on common equity. Bottom replacement power costs incurred solely as a result of Additionally, these recommendations, if adopted, would result the NRC's shutdown order. In 1989, replacement power costs in one-time charges to expense ranging from $84 million to attributable to the shutdown order were approximately $57

$445 million. Adoption of these intervenor positions by the million, representing a reduction in common stock earnings of PUC would have a severe adverse impact on the Company's 17 cents per share.

earnings for 1990 and beyond and could result in a reduction In October 1989, the NRC released the Company from or elimination of the Company's current common stock divi- the terms and conditions of the Peach Bottom shutdown order dend. Other intervenors in the rate case have focused on that had been in effect since March 31, 1987. The re/ease per-specific issues such as the phase-in plan and rate structure, mits the Company to operate both units at full power under but did not present total positions for specific rate increase normal NRC regulation and review. Unit No. 3 was returned allowances or disallowances. Although the Company is confi- to service on November 19, 1989 and attained full power on dent that it has provided sufficient support to justify its entire January 5, 1990.

rate increase application, it cannot predict what increase, if In December 1981, the Company sold the federal any, the PUC will permit income tax benefits associated with its 42.59% interest in In accordance with a Declaratory Order issued by the Salem Unit No. 2 for $53.7 million in a safe harbor lease PUC on September 28, 1984, the Company has deferred a transaction. Under the sale agreement, the Company agreed to total of$137.2 million representing all operating costs, carrying indemnify the purchaser against the loss of tax benefits charges on investment, fuel savings and associated income in the event of an Internal Revenue Service (IRS) ruling tax effects of Limerick Unit No. I and 50% of common facili- rendering the sale invalid. The IRS asserted, in auditing the ties from February I, 1986, the date of commercial operation, purchaser, that the sale was invalid. On March 21, 1989, the until the unit was included in rates on June 27, 1986. The Company authorized the purchaser to settle with the IRS, recovery of these costs, which has been challenged by certain which settlement was approved by all parties in September intervenors, is being addressed by the PUC in the current 1989. As a result of the settlement, the Company incurred an electric rate case. a~er-tax charge against income of approximately $29 million, In accordance with a PUC order dated June 27, 1986, or 13 cents per share, in the first quarter of 1989.

the Company has accrued a carrying charge equivalent to In 1989, the Company settled all issues outstanding re-Allowance for Funds Used During Construction (AFUDC) on the garding prior electric Energy Cost Rate Factor (ECRF) investi-50% of Limerick common facilities excluded from rate base gations. On July I, 1989, the PUC eliminated that portion of by that order. The recovery of this carrying charge, which the fuel adjustment clause for retail electric service in is not assured, is being addressed by the PUC in the current Pennsylvania which provided for recovery or refund of only 21

@ The financial pages of this report are printed on recycled paper. Philadelphia Electrlc Company

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

-Continued Philadelphia 80% of the difference between actual costs of fuel and energy Electric Operating Revenue Electric Company interchange costs and the amount of such costs billed to Provided below are the components of the net increase in and Subsidiary Companies customers. Effective on that date, differences between amounts electric operating revenue from 1987 through 1989:

billed to customers and 100% of the costs recoverable are Electric Revenue lncreasel(Decrease) deferred and collected or refunded in future periods by means (Millions of Dollars) of prospective adjustments to rates. 'B9 vs. 'BB 'BB vs. 'B7 'B7 vs. 'B6 Effective July 6, 1989, the ECRF was changed from a Rate Increase $ 0.9 $193.7 credit value of 6.291 mills per kilowatthour (kWh) to a credit Federal Tax Adjustment Credit $ (1.6) (55. I) (34.4) value of2.782 mills per kWh, which represents an increase Fuel Related Revenue 113.4 16. I (149.0) in annual revenue of approximately $/09.5 million.

Sales and Other 57.9 7B.7 100.0 On October 3, 1989, in response to a PUC order, the ---

Company, the OCA and a group of industrial customers filed a Total $169.7 $40.6 $110.3 joint petition with the PUC requesting approval of a new Energy Kilowatthour sales of electricity to retail customers Cost Adjustment (ECA) to modify the ECRF. The ECA provides increased 1.4% in 1989 over 1988 and 5.5% in 1988 over 1987 for incentives or penalties dependent upon nuclear generation due to economic growth and favorable weather.

performance as measured by a composite nuclear system capacity factor. The joint petitioners have requested the PUC to Gas Operating Revenue approve the ECA by April I, 1990. Increased gas revenue for 1989 was primarily attributable to On November 30, 1989, the Company was authorized an increase in the Purchased Gas Costs rate. This increase by the PUC to file a tariffsupplement which increased gas rates was principally the result of the expiration of a refund to by approximately 62 cents per million cubic feet effective customers for earlier overcollections. For 1989, total gas sales, December I, 1989. This rate change includes, in part, the including transported gas, were essentially the same as 1988.

recovery of approximately 90% of the take-or-pay costs which Increased gas revenue for 1988 over 1987 was primarily due the Company must pay to its interstate pipeline suppliers for to increased sales and rates. For 1988, total gas sales, a period of about five years as a result of a settlement before including transported gas, increased 7.6% over 1987.

the FERC pertaining to contract disputes between gas pro-ducers and the interstate pipelines. The Company is not a Fuel and Energy Interchange Expense party to these contracts or settlements. The Company will not For accounting purposes, fuel and energy interchange costs seek recovery from its customers of the remaining /0% of the are deferred until billed as fuel adjustment revenue. (See take-or-pay costs. note I of Notes to Financial Statements, page 29.) In 1989, As a result of the Tax Reform Act of 1986 that reduced fuel and energy interchange costs were $75.8 million higher federal income taxes, the Company in turn reduced rates to than in 1988 primarily due to increased output and higher cost its electric customers by approximately $88 million of fossil fuel generation and costs deferred in previous years.

through a federal tax adjustment credit (FTAC) for the year In 1988, fuel and energy interchange costs were $34.5 million 1989. The FTAC will remain in effect until the 1986 tax higher than in 1987 primarily due to costs deferred in changes are permanently incorporated into base rates, previous years.

which is expected at the conclusion of the Company's current electric rate case. Other Operating and Maintenance Expenses On June I, 1989, the PUC approved the PUC Audit In 1989, non-fuel operating and maintenance expenses Bureau's recommendation to hire a consulting firm to perform increased $30.0 million or 2. 9% over 1988 primarily due to a management and operations audit of the Company. This expenses associated with the Limerick Unit No. I refueling audit is a result of an amendment to the PUC law in 1982 outage. The increase in non-fuel operating and maintenance which required the PUC to conduct periodic management expenses in 1988 over 1987 was primarily due to Peach audits of the larger utilities subject to their regulation. The Bottom related expenses which were partially offset by the last management audit of the Company was conducted Company's cost reduction efforts.

in 1979. The current audit began on July 17, 1989. Detailed reviews of the Company are expected to continue until Income Taxes April 1990 and a final report is scheduled for issuance in Income taxes charged to operations and income tax credits June 1990. included in other income decreased in 1989 compared to In December 1987, the Financial Accounting Standards 1988 and in 1988 compared to 1987 primarily due to higher Board (FASB) issued SFAS 96, "Accounting for Income Taxes," interest charges and higher operating and maintenance expenses.

which requires an asset and liability approach for financial accounting and reporting for income taxes. The FASB has Other Taxes delayed implementation of the new statement, which now Other taxes increased in 1989 versus 1988 due to higher requires adoption of its provisions by the first quarter of 1992. gross receipts taxes which were partially offset by lower Adoption of the statement is not expected to have a material capital stock taxes. Other taxes increased slightly in 1988 effect on the Company's results of operations. over 1987 due to higher payroll and gross receipts taxes.

22 Philadelphia Electric Company

Allowance for Funds Used During Construction associated energy on a short-term basis (1990-1994) to other The increases in AFUDC in 1989 and 1988 compared with utilities in need of additional generation. The arrangements the prior year were the result of increases in construction are forecasted to conclude at a time when the capacity will work in progress, due primarily to construction of Limerick be needed on the Company's system.

Unit No. 2. On July 27, 1988, the co-owners of Peach Bottom filed suits against the Company in the United States District Interest Charges Court for the District of New jersey concerning the shutdown Interest charges on debt increased in 1989 over 1988 due to of Peach Bottom ordered by the NRC. The plaintiffs seek the settlement of the Salem Unit No. 2 safe harbor lease compensation for certain replacement power costs which they transaction and in each of the last three years due to incurred as a result of the shutdown. Additionally, the additional levels of debt outstanding. complaints allege that the co-owners were deprived of the Under the Company's mortgage indenture, additional benefits of their Peach Bottom ownership interests and invest-mortgage bonds may not be issued on the basis of property ments, that they made payments to the Company for capital additions or cash deposits unless earnings before income taxes and operating and maintenance costs for which they received and interest during 12 consecutive calendar months of the no benefit and that they incurred increased costs and lost preceding 15 calendar months are at least two times the pro profits. The suits include claims for punitive damages.

forma annual interest on all mortgage bonds outstanding. Although the Company has taken the appropriate actions to Earnings coverage of mortgage interest, which is one measure defend itself against these claims, if the litigation ultimately is of the Company's ability to issue mortgage bonds, for the determined in favor of the plaintiffs, such determination could calendar years 1989, 1988 and 1987 was 2.67, 2.69 and 2.83 have a material adverse effect upon the Company's financial times, respectively. As of December 31, 1989, the Company condition.

was entitled to issue approximately $1.2 billion of mortgage With the completion of Limerick Unit No. 2, the bonds, without regard to the earnings test, against previously Company is no longer involved in the construction of a major retired bonds. generating unit and is well positioned with adequate capacity to meet the power requirements of customers through the Capitol Expenditures and Changes in Financial Position turn of the century.

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 SULFUR DIOXIDE and licenses which the Company has no assurance will be EMISSIONS REDUCED granted. 94PERCENT Interim financing of the construction program is 300* .. .. . . . .. . ..... .

provided by short- and intermediate-term bank loans which The chart illustrates are also dependent upon the Company's financial position. one outstanding aspect of the Company's Outlook commitment to protect A final decision by the PUC regarding the Company's current and enhance the electric rate case is expected on or about April 20, 1990. The environment. The amount of rate increase granted by the PUC will determine, Company's flue gas to a large extent, the financial health of the Company and its 200* .

ability to maintain the current common stock dividend. The desulfurization and Company has made every effort to minimize the size of the particulate removal requested rate increase. Records have been set with the systems at Eddystone completion of construction and operational start-up of 150 and Crom by generating Limerick Unit No. 2 nine months ahead of schedule and stations have approximately $380 million under the PUC-mandated cost dramatically reduced containment plan. The Company has requested a rate increase sulfur dioxide emissions solely intended to recoup the cost ofbuilding and operating 100 in the Philadelphia Limerick Unit No. 2. Additionally, in order to alleviate the area. Over the last 25 impact upon customers of an 18. I% rate increase, the years while the Company has proposed that the increase be phased in and deferred revenue recovered over a period of ten years, the

..... . .. .... .... .. Company's electric maximum time frame allowed under current accounting output has almost standards. doubled, these To further minimize the level of the increase requested, Thousand Tons I I emissions have been the Company has arranged for sales of system capacity and 65 70 75 80 85 89 reduced by 94%.

23 Philadelphia Electric Company

Consolidated Statements of Income Philadelphia For the Years Ended December 31 Electric Company 1989 1988 1987 and Subsidiary (Thousands of Dollars)

Companies Operating Revenues Electric $3,019,976 $2,850,315 $2,809,673 Gas 385,653 378,397 371,791 Total Operating Revenues 3,405,629 3,228,712 3,181,464 Operating Expenses Fuel and Energy Interchange 820,954 745,110 710,648 Other Operating Expenses 777, 190 727,791 695,440 Maintenance 285,389 304,751 306,706 Depreciation 276,999 264,091 251,934 Income Taxes 195,765 206,774 264,940 Other Taxes 239,991 237,600 234,713 Total Operating Expenses 2,596,288 2,486,117 2,464,381 Operating Income 809,341 742,595 717,083 Other Income and Deductions Allowance for Other Funds Used During Construction 121,851 98,924 77,228 Capitalized Limerick Costs 82,008 73,074 66,582 Credit Related to Limerick Unit No. I Phase-In Plan 24,010 26,162 18,459 Income Tax Credits, Net 56,656 43,467 35,324 Other, Net 4,010 7,900 18,270 Total Other Income and Deductions 288,535 249,527 215,863 Income Before Interest Charges 1,097,876 992,122 932,946 Interest Charges Long-Term Debt 569,689 524,131 467,252 Short-Term Debt 86,429 24,188 17,243 Allowance for Borrowed Funds Used During Construction (148,649) (122,147) (92,155)

Net Interest Charges 507,469 426,172 392,340 Income from Continuing Operations 590,407 565,950 540,606 Income from Discontinued Steam Operations 1,790 Net Income 590,407 565,950 542,396 Preferred Stock Dividends 96,600 97,185 94,156 Earnings Applicable to Common Stock $ 493,807 $ 468,765 $ 448,240 Average Shares of Common Stock Outstanding (Thousands) 208,901 201,517 192,489 Earnings Per Average Common Share from Continuing Operations (Dollars) $2.36 $2.33 $2.33 Earnings Per Average Common Share (Dollars) $2.36 $2.33 $2.33 Dividends Per Common Share (Dollars) $2.20 $2.20 $2.20 See notes to financial statements.

24 Philadelphia Electric Company

Consolidated Statements of Cash Flow Philadelphia For the Years Ended December 31 Electric Company 1989 1988 1987 and Subsidiary Companies (Thousands of Dollars)

Cash Flows From Operating Activities Net Income $590,407 $565,950 $542,396 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:

Depreciation and Amortization 318,403 291,277 288,039 Deferred Income Taxes 107,336 86,156 169,605 Investment Tax Credits, Net (20,250) (9,291) (16,958)

Allowance for Other Funds Used During Construction (121,851) (98,924) (77,228)

Increase in Deferred Limerick Costs (82,008) (73,074) (66,582)

Decrease (Increase) in Unrecovered Revenue 48,057 (61,231) (178,595)

Credit Related to Limerick Unit No. I Phase-In Plan (24,010) (26, 162) ( 18,459)

Amortization of Leased Property 45,200 36,100 49,700 Limerick Unit No. 2 Precommercial Fuel Cost 29,655 Change in Current Assets and Other Current Liabilities (40,749) 193,939 (92,399)

Change in Other Deferred Debits and Credits 44,065 (28,843) (11,769)

Net Cash Provided by Operating Activities 894,255 875,897 587,750 Cash Flows From Investing Activities Increase in Utility Plant (1,037,501) (991,947) (963, 186)

Allowance for Other Funds Used During Construction 121,851 98,924 77,228 Sale of Merrill Creek Reservoir 145,330 Sale of Steam Plant 28,762 (Decrease) Increase in Other Investments ( 10,472) 3,154 (11,232)

Net Cash Used by Investing Activities (926,122) (744,539) (868,428)

Cash Flows From Financing Activities Issuance of Common Stock 117,801 182,345 162,272 Issuance of Preferred Stock 50,000 65,000 Retirement of Preferred Stock Including Change in Other Paid-In Capital (16,842) (20,529) (54,018)

Dividends on Preferred and Common Stock (555,998) (541,526) (517,353)

Change in Dividends Payable 1,514 2,933 (2,964)

Expenses of Issuing Preferred and Common Stock (223) ( 1,632) ( 1,318)

Issuance of Long-Term Debt 597,000 584,200 740,000 Retirement of Long-Term Debt (331,905) (395,702) (328,588)

Premium on Retirement of Long-Term Debt (24,315) (2,800) (42,747)

Net Borrowings Under Revolving Credit Agreements 225,000 150,000 150,000 Change in Short-Term Debt 112,000 ( /02,000) 102,000 Capital Lease Payments (45,200) (36,100) (49,700)

Settlement of Safe Harbor Lease (26, II I)

Change in Escrow Funds (30) 10,459 Net Cash Provided (Used) by Financing Activities 52,721 ( 130,841) 233,043 Net Change in Cash and Cash Equivalents $ 20,854 $ 517 $ (47,635)

Cash and Cash Equivalents at the beginning of the period $ 43,598 $ 43,081 $ 90,716 Cash and Cash Equivalents at the end of the period $ 64,452 $ 43,598 $ 43,081 See notes to financial statements.

25 Philadelphia Electric Company

Consolidated Balance Sheets Philadelphia December 31 Electric Company 1989 1988 and Subsidiary Companies (Thousands of Dollars)

ASSETS Utility Plant, at original cost:

Electric $ 9,278,4-02 $ 9,003,850 Gas 622,510 583,705 Common, used in all services 148,031 148,942 10,048,943 9,736,497 Less: Accumulated Depreciation 2,637,214 2,395,820 7,41 I ,729 7,340,677 Nuclear Fuel, Net 296,357 242,040 Construction Work in Progress 3,012,678 2,465,750 Leased Property, Net 273,523 287,538 Net Utility Plant 10,994,287 10,336,005 Current Assets Cash and Temporary Cash Investments 64,452 43,598 Accounts Receivable Customers 212,306 141 , 107 Other 43,455 34,611 Inventories, at average cost Fossil Fuel 48,391 50,046 Materials and Supplies 141,388 120,210 Deferred Energy Costs 39,243 50,399 Unrecovered Revenue, Net I 17,908 54,087 Compensated Absences 67,602 60,859 Other 18,486 18,008 Total Current Assets 753,231 572,925 Deferred Debits and Other Assets Unrecovered Revenue, Net 163,084 250,952 Deferred Limerick Costs 475,064 375,910 Investments 108,252 97,780 Loss on Reacquired Debt 137,271 118,338 Other 89, 171 110,942 Total Deferred Debits and Other Assets 972,842 953,922 Total $I 2, 720,360 $I 1,862,852 See notes to financial statements.

28 Philadelphia Electrtc Company

Philadelphia December]/

Electric Company 1989 1988 and Subsidiary Companies (Thousands of Dollars)

CAPITALIZATION AND LIABILITIES Capitalization Common Shareholders' Equity Common Stock $ 3,295,385 $ 3,177,584 Other Paid-In Capital 5,311 5,119 Retained Earnings 444,049 409,863 3,744,745 3,592,566 Preferred Stock Without Mandatory Redemption 622,472 622,472 With Mandatory Redemption 351,044 368,078 Long-Term Debt 5,762,741 5,219,511 Total Capitalization 10,481,002 9,802,627 Current Liabilities Notes Payable, Bank 112,000 Long-Term Debt Due Within One Year 17, 100 70,235 Capital Lease Obligations Due Within One Year 73,726 72,046 Accounts Payable 232,318 180,831 Taxes Accrued 141, 140 139,966 Deferred Income Taxes 59,021 20,011 Interest Accrued 124,238 129,408 Dividends Payable 41,089 39,575 Compensated Absences 67,602 60,859 Other 20,525 19,877 Total Current Liabilities 888,759 732,808 Deferred Credits and Other Liabilities Capital Lease Obligations 199,797 215,492 Deferred Income Taxes 809,486 753,267 Unamortized Investment Tax Credits 242,292 272,976 Other 99,024 85,682 Total Deferred Credits and Other Liabilities 1,350,599 1,327,417 Commitments and Contingencies (Notes 3 and 18)

Total $12, 720,360 $11,862,852 27 Philadelphia Electric Company

Consolidated Statements 0 f Changes in Common Shareholders' Equity and Preferred st 0 ck Philadelphia Other Common Stock Po id-In Preferred Stock Electric Company Retained 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

Notes to Financial Statements Philadelphia I. Significant Accounting Policies in service, were approximately 2. 92% in 1989, 2.87% in 1988 Electric Company and 2.84% in 1987.

and Subsidiary General The Company's ownership portion of the estimated Companies The consolidated financial statements of Philadelphia Electric nuclear-related costs for decommissioning (exclusive of Company (Company) include the accounts of its utility Limerick Unit No.2) as approved for ratemaking purposes subsidiary companies, all ofwhich are wholly owned. Non-utility is $287,801,000 as of December 31, 1989. The associated subsidiaries are not material and are accounted for on the equity annual expense currently is being charged to operations method. Accounting policies are in accordance with those consistent with amounts approved for ratemaking purposes.

prescribed by the regulatory authorities having jurisdiction, The amounts charged are deposited in escrow and trust principally the Federal Energy Regulatory Commission (FERC) accounts and invested for funding of future costs. The and the Pennsylvania Public Utility Commission (PUC). Company believes that any increase in the estimated costs would be recoverable through adjustments to rates charged Revenues to customers (see note 18).

Revenues are generally recorded in the accounts upon billing to the customer. Rate increases are billed from dates Income Taxes authorized or permitted to become effective by the regulatory Deferred income taxes are provided for differences between authorities. book and taxable income to the extent approved for rate-On June 27, 1989, the final phase of the electric rate making purposes. In addition, the effects of the Alternative increase approved by the PUC in its June 27, 1986 order Minimum Tax (AMT) are normalized. Investment tax credits became effective. This final phase is designed to recover, over (ITC), other than credits resulting from contributions to a three-year period, the unrecovered revenue previously employee stock ownership plans which do not affect income, deferred under the Company's rate increase phase-in plan. As are deferred and amortized to income over the estimated of December 31, 1989, the Company had approximately useful life of the related utility plant ITC related to plant

$281 million of Unrecovered Revenue, Net, which is in service, not included in rate base, are accounted for on the classified as a current or other asset in the accompanying flow-through method.

balance sheets according to whether it will be billed to customers within the next year or in subsequent years. Allowance for Funds Used During Construction (AFUDC)

AFUDC is a non-cash item which is defined in the Uniform Fuel Adjustment Clauses System of Accounts as "the net cost for the period of As ofJuly I, 1989, the PUC eliminated the portion of the fuel construction of borrowed funds used for construction pur-adjustment clause for retail electric service in Pennsylvania poses and a reasonable rate on other funds when so used."

which provided for recovery or refund of only 80% of the AFUDC is recorded as a charge to Construction Work In difference between actual costs of fuel and energy inter- Progress, and the credits are to Interest Charges for the change costs and the amount of such costs billed to customers. pretax cost of borrowed funds and to Other Income and Effective on that date, differences between amounts billed to Deductions for the remainder as the allowance for other funds.

customers and 100% of the costs recoverable are deferred The rate used for capitalizing AFUDC, 9.50% in 1989, and collected or refunded in future periods by prospective 1988 and 1987, is computed under a method prescribed by adjustments to rates. the regulatory authorities. The rate is a net a~er-tax Gas service has a Purchased Gas Costs clause designed rate and the current income tax reductions applicable to to recover or refund the differences between the actual costs the interest charges capitalized are recorded in Other Income of gas sold and the amount of such costs included in rates. and Deductions. In addition, the PUC is permitting the Effective December 1989, the PUC permitted the Company Company to record a carrying charge equivalent to AFUDC to begin recovery, through a separate clause, of approximately on 50% of Limerick common facilities which is deemed 90% of take-or-pay costs billed to the Company by its inter- associated with Unit No. 2 and the credit is to Capitalized state pipeline suppliers (see note 18). Limerick Costs. AFUDC and carrying charges on 50% of Limerick common facilities are not included in regular taxable Nuclear Fuel income and the depreciation of capitalized AFUDC and the Nuclear fuel is capitalized and charged to fuel expense on amortization of carrying charges are not tax deductible.

the unit of production method. Estimated costs of nuclear Under the Tax Reform Act ofJ986, AFUDC and carrying fuel disposal are charged to fuel expense as the related charges are considered tax preference items when computing fuel is consumed. Nuclear fuel at the Peach Bottom Atomic the Company's AMT.

Power Station (Peach Bottom) and Salem Generating Station (Salem) is accounted for as a capital lease. Gas Exploration and Development Joint Ventures Nuclear fuel at the Limerick Generating Station (Limerick) The Company has invested in several joint ventures for is owned. exploring and drilling for natural gas. Costs are capitalized under the full-cost method and charged to operations Depreciation and Decommissioning commensurate with production.

For financial reporting purposes, depreciation is provided over the estimated service lives of the plant on the straight-line Gains and Losses on Reacquired Debt method and, for tax purposes, generally over shorter lives Gains and losses on reacquired debt are deferred and on accelerated methods. Annual depreciation provisions, amortized to interest expense over the period approved for expressed as a percent of average depreciable utility plant ratemaking purposes.

29 Philadelphia Electric Company

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 Philadelphia 2. Nuclear Operations Owners Agreement, the Company, as operator of Peach Electric Company Bottom, is reimbursed by the other owners for costs incurred and Subsidiary Limerick Generating Station in the operation of the facility in the same proportion as Companies Limerick Generating Station consists of two wholly owned their respective ownership interests. At December 31, 1989, nuclear units, located at Limerick, Montgomery County, the Company's net investment in Peach Bottom was $457. I Pennsylvania. Both units are boiling water reactors with a million (see note 6).

combined net generating capacity of2, 110 megawatts (MW). On April 17, 1989, the Nuclear Regulatory Commission Unit No. I commenced commercial operation on February (NRC) approved restart of Peach Bottom, following a

/, 1986. Unit No. 2 commenced commercial operation on March 31, 1987 NRC order which required the Company January 8, 1990, following resumption of construction of the to shut down the station. See note 18 for discussion of litiga-unit in February 1986, a~er a PUC-ordered suspension. tion resulting from the shutdown. On April 26, 1989, restart of A PUC-mandated cost containment plan provides for a Unit No. 2 was commenced and the unit began producing maximum net rate base allowance for Unit No. 2 (exclusive electricity on May 22, 1989. On July 21, 1989, the NRC of common facilities) of a prudent investment of $3.197 authorized full power operation and on August 4, 1989, Unit billion. The Company expects the final cost of Unit No. 2 No. 2 attained full power. On November 19, 1989, restart will be $2.816 billion. As of December 31, 1989, the Company of Unit No. 3 was commenced and the unit began producing had invested approximately $2.27 billion in Unit No. I, electricity on December//, 1989. On January 5, 1990,

$2.78 billion in Unit No. 2 and $1.35 billion in common Unit No. 3 attained full power.

facilities. In January 1990, the investment in utility plant for The Company charged to expense non-recoverable Unit No. 2 was reclassified from Construction Work in replacement power costs of approximately $57 million, Progress to Utility Plant See note 3 for discussion of the $61 million and $58 million in 1989, 1988 and 1987, respec-current electric rate case, in which recovery of the Company's tively, as a consequence of the Peach Bottom shutdown. The investment in Unit No. 2 and 50% of common facilities associated reduction in common stock earnings was approxi-is requested. mately 17, 18 and 17 cents per share in 1989, 1988 and 1987, On April 27, 1989, the PUC approved a Declaratory respectively.

Order for Unit No. 2 which allows for synchronization of On March I, 1988, the Company placed into effect electric rates for Unit No. 2 with the commercial operation temporary rates reflecting the denial by the PUC of a common date for that unit Under the Declaratory Order, the Com- equity return on the Company's investment in Peach Bottom.

pany is deferring costs associated with Unit No. 2 and On March 31, 1989, the PUC entered an order authorizing the 50% of common facilities incurred during the period from Company to remove the temporary rates on one day's notice commercial operation to the suspension date of the pending when one unit at Peach Bottom had operated for 100 continuous electric rate increase request The recovery of these costs, hours at 95% of the unit's rated capacity. On August 8, 1989, which is not assured, will be addressed by the PUC in a Unit No. 2 had completed 100 continuous hours at or above subsequent electric rate case. 95% capacity. Accordingly, on August 9, 1989, the Company On July 28, 1986, a petition for review of the PUC's was permitted by the PUC's March 31, 1989 order to remove June 27, 1986 electric rate order was filed with the Common- the temporary rates. The revenue reduction associated with wealth Court of Pennsylvania (Commonwealth Court) by the the temporary rates was approximately $21 million for 1989 Company appealing the exclusion of $368.9 million of costs and $25 million for 1988. The associated reduction in common associated with Unit No. I from rate base, due to allegedly stock earnings was approximately six cents per share for 1989 imprudent construction delays in 197 6 and 1978. Appeals were and seven cents per share for 1988.

also filed by the Office of Consumer Advocate (OCA) and a On February 27, 1989, the Company and the Com-group of the Company's commercial and small industrial monwealth of Pennsylvania (Commonwealth) entered into a customers on excess capacity and various rate design and settlement agreement, subject to NRC approval, with respect cost of service issues. On March 31, 1988, the Commonwealth to restart issues raised by the Commonwealth in proceedings Court issued an order affirming the PUC on excess capacity before an Atomic Safety and Licensing Board, and in litigation and all other issues and remanded the construction delay before the United States Court of Appeals for the Third Circuit issue to the PUC for further hearing and adjudication. On The settlement agreement provides the Commonwealth December 7, 1989, the PUC approved a settlement resolving access to information concerning the plant and its operations all outstanding litigation arising from the June 27, 1986 and provides for the Commonwealth's monitoring of plant electric rate order. The net effect of the settlement was to operations. The Company also agreed to submit to the NRC leave in place the PUC's order, including the $368.9 million for approval a variety of changes in standards, plant opera-rate base disallowance. tions and program assessment NRC approval was granted on August 31, 1989.

Peach Bottom Atomic Power Station Peach Bottom consists of two nuclear generating units, located 3. Current Electric Rate Case at Peach Bottom, York County, Pennsylvania. Both units are On July 21, 1989, the Company filed with the PUC for an boiling water reactors. These units were placed into annual $549 million electric rate increase, net of $142 million commercial operation in 1974 and are jointly owned by the in estimated fuel savings, or approximately 18.1%. Included in Company, 42.49%; Public Service Electric and Gas Company, the Company's claim is an addition to rate base of$3.762 42.49%; Atlantic City Electric Company, 7.51%; and Delmarva billion for Limerick Unit No. 2 and 50% of common facilities.

Power and Light Company, 7.51%. The Company's share In order to lessen the effect of the increase on customers, of the units' net generating capacity is 886 MW Under the the Company has proposed to phase in the increase with 30 Philadelphia Electric Company

annual increments of5% to become effective in April of each be included in the pool of eligible receivables. At December 31, year from 1990 through 1993, and a final increase of I.9% 1989, no unrecovered revenue was included in the pool of to become effective in April 1994. Under the Company's pro- eligible receivables.

posal, the rates would remain at that level for six years to recover previously unbilled revenues together with carrying 5. Retirement Benefits charges, a~er which the phase-in plan would cease and rates The Company and its subsidiaries have non-contributory would return to the requested level of increase. Also as a trusteed retirement plans applicable to all regular employees.

part of the rate filing, the Company has reflected the sale of The benefits are based primarily upon employees' years of 400 MW of system capacity and associated energy. The PUC service and average earnings prior to retirement The held an investigation and a series of public hearings prior to Company's funding policy is to contribute, at a minimum, the closing of the record on December 15, 1989. A final deci- amounts sufficient to meet ER/SA requirements. Approximately sion is expected in April 1990. 62% of pension costs were charged to operations and the On July 10, 1986, the Governor of Pennsylvania signed remainder, associated with construction labor, to the cost of into law legislation amending numerous provisions of the new utility plant Pennsylvania Public Utility Code. One provision ofthe legislation Pension cost was $7,532,000 in 1989, $7,101,000 in which affects rate regulation imposes standards on the PUC 1988 and $29,458,000 in 1987. Pension costs for 1989, in determining whether new generating capacity is excess 1988 and 1987 included the following components:

capacity. This provision requires a disallowance from rates of any portion of new capacity which is determined to be excess 1989 1988 1987 capacity. This excess capacity law is applicable to Limerick Service cost- Benefits earned (Thousands of Dollars)

Unit No. 2. during the period $ 25,570 $ 24,073 $26,970 The Company is seeking recovery of $137.2 million Interest cost on projected benefit obligations 91,318 85,779 80,588 of operating costs, carrying charges on investment, fuel savings Actual return on plan assets (134,647) (41 ,929)

(263,191) and associated income tax effects of Limerick Unit No. I Amortization of transition asset (4,539) (4,539) (4,539) and 50% of common facilities from February I, 1986, the Amortization and deferral 158,374 36,435 (31,632) date of commercial operation, until the unit was included in Net pension cost $ 7,532 $ 7, 101 $29,458 rates on June 27, 1986. These costs were deferred in accor-dance with a Declaratory Order issued by the PUC on September 28, 1984. Change in Net Periodic Pension Cost During the second fuel cycle for Limerick Unit No. I, the The change in net periodic pension cost in 1989, 1988 and Company experienced certain fuel failures. The Company is 1987 was accounted for as follows:

currently inspecting the fuel prematurely discharged from Unit 1989 1988 1987 No. I to fully determine which fuel can be reused in future Change in number, characteristics (Thousands of Dollars) reloads. The fuel that was prematurely discharged from the and salary levels of participants reactor has a residual value of$52.6 million. Based upon and net actuarial gain $(198) $ 16, 189 $ (/ ,492) samples of the fuel taken to date, the Company currently Change in plan provisions 629 375 2,873 estimates up to 50% of that fuel can be utilized in future Net change prior to SFAS 87 431 16,564 1,381 fuel cycles. The Company has proposed to recover, in this Changes to comply with SFAS 87 (24,972) electric rate case, the costs of the unusable fuel estimated at Changes due to mid-year plan amendment 10,549

$26.3 million over a four-year period.

Change in actuarial assumptions (38,921)

Disallowance by the PUC of all or part of plant costs or costs deferred pending regulatory approval, as proposed Net change $ 431 $(22,357) $(13,042) by certain intervenors in the current electric rate case, would result in an immediate charge to expense.

Plan assets consist principally of common stock,

4. Sales of Accounts Receivable U.S. government obligations and other fixed income instru-In December 1988, the Company entered into a five-year ments. In determining pension cost the assumed long-term agreement with a financial institution whereby it can sell on rate of return on assets was 9.5% for 1989 and 1988 and a daily basis and with limited recourse up to $200 million 7.5% for 1987.

of an undivided interest in designated accounts receivable. The weighted-average discount rate used in determining At December 31, 1989, the Company had sold a $200 million the actuarial present value of the projected benefit obligation interest in accounts receivable under this agreement The was 8.75% at December 31, 1989, 1988 and 1987. The rate Company retained the servicing responsibility for these receiv- of increase in estimated future compensation levels ranged ables. The average interest rate computed on a daily basis from 5% to 7% at December 31, 1989 and 1988, and 6% to on the portion of the accounts receivable sold but not yet 7% at December 31, 1987.

collectedwas9.45%and9.39%for/989and/988,respectively. Prior service cost is amortized on a straight-line basis By terms of this agreement, under certain circum- over the average remaining service period of employees stances, up to $75 million of unrecovered revenue could expected to receive benefits under the plan.

31 Philadelphia Electric Company

N ot es t o F i n a n c i a I S t a t e m e n t s-Continued Philadelphia The funded status of the plan at December 31, 1989 In addition to providing pension benefits, the Company Electric Company and 1988 is summarized as follows: provides certain health care and life insurance benefits for and Subsidiary 1989 1988 retired employees. Substantial/ya/I ofthe Company's employees Companies Actuarial present value (Thousands of Dollars) may become eligible for these benefits if they reach retire-of accumulated plan ment age while still working for the Company. These benefits benefit obligations: and similar benefits for active employees are provided by Vested benefit obligations $ (878,074) $ (738,761) an insurance company whose premiums are based upon the Accumulated benefit obligation (882,504) (747,751) benefits paid during the year. The Company recognizes the Projected benefit obligation for cost of providing these benefits by charging the annual insurance services rendered to date $( 1,207,617) $( 1,046,731)

Plan assets at fair value 1,399,656 1,163,148 premiums to expense. The cost of providing those benefits for approximately 4, I00 retirees during the years 1989, 1988 Funded status 192,039 116,417 Unrecognized transition asset (72,016) (76,554) and 1987 is not separable from the cost of providing benefits Unrecognized prior service costs 107,376 II 1,715 for approximately 11,300 active employees for the same Unrecognized net (gain) (221,484) (151,578) period. Total premiums amounted to $42.2 million, $38.8 Prepaid pension costs $ 5,915 $ million and $30.0 million for 1989, 1988 and 1987, respectively.

6. Jointly Owned Electric Utility Plant 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%

Company's share of: (Thousands of Dollars)

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 final approval by the Congressional Joint Committee on In December 1981, the Company sold the federal income tax Taxation in September 1989. Under the settlement, the benefits associated with Salem Unit No. 2 for $53.7 million Company incurred an after-tax charge against income of in a safe harbor /ease transaction. Under the sale agreement, approximately $29 million, or approximately 13 cents per the Company agreed to indemnify the purchaser against the share, in the first quarter of 1989. The Company is entitled to loss of the tax benefits resulting from any Internal Revenue claim a portion of the tax benefits associated with its interest Service (IRS) claims which would render the sale invalid. In in Salem Unit No. 2 and, as a consequence, is entitled to fact, the IRS did assert that the sale was invalid. On March 21, claim a refund of certain federal and state income taxes paid 1989, the Company entered into an agreement with the pur- for the years 1981 through 1987, plus interest thereon, and to chaser authorizing a settlement with the IRS which received utilize certain of those benefits in subsequent tax years.

8. Cash and Cash Equivalents 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:

1989 1988 1987 (Thousands of Dollars)

Cash paid during the year:

Interest (net of amount capitalized) $511,467 $420,181 $367,277 Income taxes (net of refunds) 66,864 82,730 75,100 Noncash Investing and Financing:

Capital lease obligations incurred 31,200 35,800 55,095 32 Philadelphia Electric Company

9. Common Stock 211, 975, 905 and 206,589,023 shares outstanding, respectively.

At December 31, 1989and1988, Common Stock without At December 31, 1989, there were 12,423,500 shares reserved par value consisted of 240,000,000 shares authorized and for issuance under stock purchase plans.

10. Preferred Stock At December 31, 1989 and 1988, cumulative Preferred Stock, $/00 par, consisted of 15,000,000 shares authorized.

Shares Amount Current Refunding Redemption Restricted Outstanding Price (a) Prior to (b) 1989 1988 1989 1988 (Thousands of Dollars)

Series (without mandatory redemption) 14.15% (c) $114.15 2-1-90 500,000 500,000 $ 50,000 $ 50,000 13.35% (c) 108.90 750,000 750,000 75,000 75,000 12.80% (c) 108.50 750,000 750,000 75,000 75,000 10.75% (d) (d) (d) 500,000 500,000 50,000 50,000 9.50% 101 .00 750,000 750,000 75,000 75,000 8.75% 101 .00 650,000 650,000 65,000 65,000 7.85% 101.00 500,000 500,000 50,000 50,000 7.80% 101.00 750,000 750,000 75,000 75,000 7.75% 101.00 200,000 200,000 20,000 20,000 4.68% 104.00 150,000 150,000 15,000 15,000 4.4% 112.50 274,720 274,720 27,472 27,472 4.3% 102.00 150,000 150,000 15,000 15,000 3.80% 106.00 300,000 300,000 *30,000 30,000 6,224,720 6,224,720 622,472 622,472 Series (with mandatory redemption) (e) 15.25% 110.00 5-1-90 300,000 350,000 30,000 35,000 14.625% (f) (f) 500,000 500,000 50,000 50,000 10% 100.00 5-1-90 44,000 88,000 4,400 8,800 9.875% 109.88 8-1-92 650,000 650,000 65,000 65,000 9.52% 103.00 279,520 287,180 27,952 28,718 9.50% 1986 Series 109.50 11-1-91 750,000 750,000 75,000 75,000 8.75% 1978 Series /03.09 300,200 333,500 30,020 33,350 7.325% 102.63 420,000 450,000 42,000 45,000 7% 101 .00 266,720 272.100 26,672 27,210 3,510,440 3,680,780 351,044 368,078 Total Preferred Stock 9,735,160 9,905,500 $973,516 $990,550 (a) Redeemable, at the option ofthe Company, at the indicated The issue is redeemable during any long-term period only on dollar amounts per share, plus accrued dividends. the last day of the period or following an unsuccessful auction, (b) Prior to the date specified, none of the shares of each in an aggregate number which constitutes one or more units series indicated may by redeemed through refunding at an (/,000 shares), at a price of$100 per share, plus accrued interest or dividend rate which is less than the rate of and unpaid dividends to the redemption date on the shares such series. redeemed. On any dividend payment date with respect to a (c) Ownership of these series of preferred stock is evidenced short-term period, units are redeemable, in whole or part, at by depositary receipts, each representing one-tenth ofa share of the option of the Company at a price of$100,000 per unit, preferred stock. plus an amount equal to accrued and unpaid dividends to the (d) The dividend rate through April 30, 1993is10.75% date of redemption.

per annum, and the rate for each subsequent dividend period, (e) Sinking fund requirements (par value) in the period 1990-either a long-term period (1-10 years) or a short-term period 1994 are as follows: 1990-$23,230,000; 1991-$21,054,000; (49 days), will be established by an auction held on the 1992-$25,380,000; 1993-$38,380,000; 1994-$38,380,000.

business day next preceding the beginning of each such period. (f) Not redeemable prior to May I, 1990.

33 Philadelphia Electric Company

N ot es t o F i n a n c i a I S t a t e m e n t s-Continued Philadelphia I I. Long-Term Debt Electric Company At December 31 and Subsidiary Companies Series Due 1989 1988 (Thousands of Dollars)

First and Refunding Mortgage Bonds (a) 5%-14% 1989 $ 62,500 14% 1990 $ I I ,000 11,000 14% 1991 11.000 11,000 14% 1992 11.000 11,000 61/i o/o-14% 1993 11.000 71,000 4 112%-14% 1994 181 .ooo 181,000 6 /so/o-15 114%

1 1995-1999 1,027,356 961,134 73/so/o- I 15/so/o 2000-2004 543,394 549,220 6%-10 114% 2005-2009 363,500 463,500 I0 112%- 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 3,789,250 3,624,316 Notes Payable-Banks (b) 1991-1996 572,000 405,000 Revolving Credit and Term Loan Agreements (c) 1993-1995 525,000 300,000 Pollution Control Notes 5 1/io/o-13% 1997-2013 265,315 269,615 Debentures 9.85%-14 314% 1993-2011 556,850 706,850 Medium-Term Notes (d) 1996-2005 80,000 Sinking Fund Debentures-Phi/adelphia Electric Power Company, a Subsidiary 4 112% 1995 12,758 13,671 Unamortized Debt Discount and Premium, Net (21,332) (29,706)

Total Long-Term Debt 5,779,841 5,289,746 Due Within One Year (e) I 7, 100 70,235 Long-Term Debt included in Capitalization (f) $5.762,741 $5,219,511 (a) Utility Plant is subject to the lien ofthe Company's mortgage. 1992. There is an annual commitment fee of0.375% on the (b) At various interest rates. unused amount At December 31, 1989 and 1988, no amount (c) The Company has a $700 million revolving credit and was outstanding under this agreement term loan agreement with a group of banks designed to pro- (d) The Company has a program for the issuance of up to vide the financing for the construction program, particularly $200 million of medium-term notes collateralized by mortgage Limerick Unit No. 2, and general corporate purposes. The bonds. These notes will be offered at varying maturities and revolving credit arrangement converts into a term loan in interest rates to be set at the time of sale. As of December November 1992. The borrowings are due in six semi-annual 31 , 1989, the Company had issued $80 million under this installments with the first payment due 6 months after con- program at an average coupon rate of 9.06%.

version into the term loan. Interest on outstanding borrowings (e) Long-term debt maturities in the period 1991-1994 is based on specific formulas selected by the Company involv- are as follows: 1991-$75,598,000; 1992-$131,913,000; ing yields on several types of debt instruments. There is an 1993-$547,348,000; 1994-$389,748,000.

annual commitment fee of0.3% on the unused amount At (f) The annualized interest on long-term debt at December December 31, 1989 and 1988, $525 million and $300 million, 31, 1989, was $570.0 million of which $37 6.8 million was respectively, were outstanding under this agreement for mortgage bonds and $193.2 million was for other long-The Company also has a $400 million revolving credit and term debt term loan agreement with a group of banks which expires in I2. Short-Term Debt 1989 1988 1987 (Thousands o(Dol/ars)

Average Borrowings $ 94,000 $114, 164 $ 30,937 Average Interest Rates, Computed on Daily Basis 9.98% 8.18% 7.74%

Maximum Borrowings Outstanding $248,500 $216,000 $205,000 Average Interest Rates on Bank Loans at December 31 : 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) 1989 1988 1987 (Thousands of Dollars)

Included in Operating Income:

Federal Current $ 56,342 $ 57,484 $ 74,185 Deferred 160,972 132,742 186,390 Investment Tax Credits, Net (20,250) (9,291) ( 16,960)

State Current 14, 128 22,982 9,386 Deferred ( 15,427) 2,857 11 ,939 Included in Other Income and Deductions:

Federal Current (1,063) 16,578 1,845 Deferred (41,647) (48,732) (27,730)

State Current ( 17,384) (10,602) (10,650)

Deferred 3,438 (711) 1,211 Total $139, 109 $163,307 $229,616 ITC and income tax credits resulting from contributions to liability was determined under the AMT method resulting employee stock ownership plans reduced federal income taxes in a tax credit of $162 million which can be utilized in currently payable by $16 million in 1989, $23 million in 1988 future years when regular tax liability exceeds AMT liability.

and $20 million in 1987. Under the Tax Reform Act of 1986, For a number ofyears, the Company has used accelerated ITC has been repealed effective January I, 1986 with the depreciation for income tax purposes and straight-line depre-exception of transition property. The Company believes that ciation for financial reporting purposes. Deferred taxes were Limerick Unit No. 2 qualifies as transition property eligible recorded only on those timing differences normalized for rate-for ITC. making. The cumulative net amount ofsuch timing differences Approximately $222 million of additional business for which deferred taxes were not recorded was approximately credits generated from 1983 through 1989 have not been $433 million at December 31, 1989. Since the Company utilized due to limitations based on taxable income. These expects to charge customers for taxes when the timing credits, which expire between 1998 and 2004, may be used differences reverse, the tax effect of such timing differences to reduce federal income taxes in future years. is not recorded currently.

The Company's 1989, 1988 and 1987 current tax 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

Not es t o F i n a n c i a I S t a t e m e n t s-Continued Philadelphia The total income tax provisions on continuing operations differed from amounts computed by applying the federal statutory Electric Company tax rate to income and adjusted income before income taxes for the following reasons:

and Subsidiary Companies 1989 1988 1987 (Thousands of Dollars)

Income From Continuing Operations $590,407 $565,950 $540,606 Total Income Tax Provisions 139, 109 163,307 229,616 Income Before Income Taxes 729,516 729,257 770,222 Deduct: Allowance for Funds Used During Construction 270,500 221,071 169,383 Limerick Carrying Charges 82,008 73,074 66,582 Adjusted Income Before Income Taxes $377,008 $435,112 $534,257 Income Taxes on Above at Federal Statutory Rate of 34% in 1989 and 1988, and 39.95% in 1987 $128,183 $147,938 $213,436 Increase (Decrease) due to:

Depreciation Timing Differences Not Normalized 2,612 5,493 23,920 Effects of SFAS 90 and SFAS 92 5,761 5,993 (9,784)

Unbilled Revenue 13,551 12,903 12,137 State Income Taxes, Net of Federal Income Tax Benefits (10,062) 9,587 9,151 Amortization of Investment Tax Credits (311) (I 1,903) (13,586)

Other, Net (625) (6,704) (5,658)

Total Income Tax Provisions $139,109 $163,307 $229,616 Provision for Income Taxes as a Percent of:

Income Before Income Taxes 19.1% 22.4% 29.8%

Adjusted Income Before Income Taxes 36.9% 37.5% 43.0%

In December 1987, the Financial Accounting Standards Board provisions ofthe statement may be applied cumulatively in (FASB) issued SFAS 96, "Accounting for Income Taxes," which the year of adoption or may be applied retroactively by restating requires an asset and liability approach for financial accounting previously issued financial statements. Adoption of the state-and reporting for income taxes. The FASB has delayed imple- ment is not expected to have a material effect upon the mentation of the new statement, which now requires Company's results of operations.

adoption of its provisions by the first quarter of I992. The

14. Taxes, Other Than Income-Operating 1989 1988 1987 (Thousands of Dollars)

Gross Receipts $149,210 $137,172 $134,091 Capital Stock 25,848 33,519 32,400 Realty 35,296 35,975 37,098 Payroll 28,040 27,095 25,978 Other 1,597 3,839 5,146 Total $239,991 $237,600 $234,713

15. Investments At December 31 1989 1988 (Thousands of Dollars)

Gas Exploration and Development joint Ventures $ 11,099 $11,657 Real Estate Developments and Other Ventures 23,633 23,541 Non-Utility Property 18,745 17,550 Escrow Deposits for Decommissioning Nuclear Plants 53, 750 43,677 Other Deposits 1,025 1,355 Total $108,252 $97,780 36 Philadelphia Electric Company

16. Leases Leased property included in Utility Plant at December 31 1989 1988 (Thousands of Dollars)

Nuclear Fuel $534,607 $502,796 Electric Plant 9,325 9,879 Common Plant I 56 Gross Leased Property 543,933 512,731 Accumulated Amortization (270,410) (225,193)

Net Leased Property $273,523 $287,538 The nuclear fuel obligation is amortized as the fuel is consumed. include interest on capital lease obligations of $19.0 million, Amortization of leased property totaled $45.2 million, $36. I $15.4 million and $14.0 million in 1989, 1988 and 1987, million and $49.7 million for the years ended December 31, respectively. Minimum future lease payments as of December 1989, 1988 and 1987, respectively. Other operating expenses 31, 1989 are:

Year Ending December 31 Capital leases Operating leases Total (Thousands of Dollars) 1990 $ 97,334 $ 73,871 $ 171,205 1991 78,197 93,232 171,429 1992 71,684 85,349 157,033 1993 47,569 84, 115 131,684 1994 34,930 82,937 117,867 Remaining Years 3,990 713,246 717,236 Total Minimum Future Lease Payments $333,704 $1,132,750 $1 ,466,454 Imputed Interest (rates ranging from 6.5% to 17%) (60, 181)

Present Value of Net Minimum Future Lease Payments $273,523 Rental expense under operating leases totaled $7 6.1million, $64.2 million and $51.4 million in 1989, 1988 and 1987, respectively.

17. Segment Information 1989 1988 1987 (Thousands of Dollars)

Electric 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 Additions $ 961,621 $ 827,620 $ 908,799 Gas Operations Operating Revenues $ 385,653 $ 378,397 $ 371 ,791 Operating Expenses, excluding depreciation 310, 131 308,301 317,343 Depreciation 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 less accumulated depreciation, inventories and allocated common utility property.

37 Philadelphia Electric Company

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 Philadelphia 18. Commitments and Contingencies disputes between gas producers and the interstate pipelines.

Electric Company The Company has incurred substantial commitments in The Company is not a party to these contracts or settt/ements.

and Subsidiary connection with its construction program. Construction On July 27, 1988, Public Service Enterprise Group Companies expenditures are estimated to be approximately $830 million Incorporated and its subsidiary Public Service Electric and Gas for 1990 and $1.8 billion for 1991-1993. These estimates Company (PSE&G) filed an action against the Company in the are reviewed and revised periodically to reflect changes in United States District Court for the District of New Jersey economic conditions, revised load forecasts ahd other appro- concerning the shutdown of Peach Bottom ordered by the priate factors. Certain facilities under construction and to NRC; on the same date, Atlantic City Electric Company (Atlantic be constructed may require permits and licenses which the Electric) and Delmarva Power and Light Com pony filed a similar Company has no assurance will be granted. suit against the Company with the same court The two suits The Price-Anderson Act, as revised August 22, 1988, allege that the Company breached two provisions of the places a limit of liability of$7.7 billion for claims that Owners Agreement (Agreement) pursuant to which the four could arise from an incident involving any licensed nuclear companies own Peach Bottom and under which the Company facility in the nation. All utilities with nuclear generating plants, operates Peach Bottom. These suits also variously allege including the Company, obtained coverage for these potential negligence, gross negligence, failure to disclose, fraudulent claims through a combination of private insurances of$200 misrepresentation and negligent misrepresentation. The plain-million and mandatory participation in a financial protection tiffs seek compensation for certain replacement power costs pool. Each party with an ownership interest in a nuclear they have incurred as a result of the shutdown of Peach reactor could be assessed up to $63 million per reactor, Bottom and for increased operating and maintenance costs payable at $10 million per reactor per year. The Company and lost profits. PSE&G and Atlantic Electric further allege has an ownership interest in six nuclear reactors. This assess- that they have been required by the New Jersey Board of ment is subject to inflation and an additional surcharge of5% Public Utilities to provide their customers with a credit if the total amount of claims and legal costs exceed the basic because of the Peach Bottom shutdown. Neither of the assessment Jn addition, Congress could impose further complaints specifies any dollar amounts of damages. Both revenue raising measures on the nuclear industry to poy claims. complaints include claims for punitive damages. On The Company maintains property insurance, including October 21, 1988, the Company filed motions seeking dismissal contamination coverage, for Joss or damage to its nuclear of the tort claims in both actions. On August 24, 1989, the facilities. Although it is not possible to determine reasonably the District Court issued an opinion and order which denied a total amount of the Joss that may result from an occurrence motion by the Company to dismiss plaintiffs' tort claims, at these facilities, the Company maintains the maximum amount granted the Company's motion to dismiss plaintiffs' fraud of insurance presently available, $2.035 billion for each claims (subject to plaintiffs' amending their complaints to station. Under the terms of the various insurance agreements, plead fraud with the requisite specificity), denied PSE&G's the Company could be assessed up to $32 million for losses motion to dismiss contingent breach-of-contract counterclaims incurred at any plants insured by the insurance companies. The the Company had asserted against PSE&G for outages and Company is self-insured to the extent that any losses may NRC penalties at the Sa/em Generating Station (which is exceed the maximum amount of insurance available. operated by PSE&G and 42.59% owned by the Company),

The Company is a member of an industry mutual and ordered that action (including discovery) on those counter-insurance company which provides replacement power cost claims be stayed. On October 5, 1989, plaintiffs filed amended insurance in the event of a major outage at a nuclear station. complaints which repleaded their fraud claims. PSE&G's The premium for this coverage is subject to an assessment for amended complaint includes additional contingent breach-of-adverse Joss experience. The Company's maximum share of contract claims related to other alleged outages and NRC any assessment is $20 million per year. penalties at Peach Bottom. The parties to the litigation are On September 12, 1988, the PUC issued a proposed currently engaged in ongoing discovery. If the litigation is policy statement with respect to recovery of pipeline take-or- ultimately determined favorably to the plaintiffs, such deter-pay costs billed by the interstate pipelines under FERC-approved mination could have a material adverse effect on the tariffs. The policy statement proposed a preferred recovery Company's financial condition.

method under which the distribution company would absorb Consolidated actions are pending in the Court of 50% of take-or-pay amounts billed by its pipeline suppliers. Common Pleas of Philadelphia County by certain shareholders The Company began incurring such charges in May 1988, of the Company against both the Company's former Chairman and presently estimates its allocable portion of these costs and former President, alleging mismanagement and negli-to be approximately $40 million over a five-year period. On gence in connection with the events leading to the shutdown June 9, 1989, the PUC adopted a final policy statement regarding of Peach Bottom by the NRC on March 31, 1987. The lawsuit the sharing of take-or-pay costs, though not specifying the is currently in discovery and trial has been scheduled for portion to be shared by customers. On November 30, 1989, September 1990. The Company is a party only as a nominal the Company was authorized by the PUC to file a tariff supple- defendant and any recovery by the plaintiffs, net of their ment which increased gas rates by approximately 62 cents per attorneys' fees and expenses, would be poid to the Company.

Mc( effective December /, 1989. This rate change includes in In conjunction with the Company's current electric rate part the recovery ofapproximately 90% ofthe take-or-pay costs request, the Company filed a revised decommissioning cost which the Company must pay to its interstate pipeline sup- estimate based upon total cost The Company's share pliers for a period ofabout five years. The Company will not seek of this revised cost is $642,622,000 expressed in 1990 recovery from its customers of the remaining 10% of the take- dollars. Under a contract with the U.S. Department of Energy or-pay costs resulting from a settlement by the FERC ofcontract (DOE), DOE is obligated ultimately to take possession of all 38 Philadelphia Electric Company

l spent nuclear fuel generated by the Company's nuclear units the Company has appealed these restrictions, it is constructing for long-term storage. The contract currently requires that a a water processing facility (Facility) to provide the seasonal spent fuel disposal fee of one mill ($.00 I) per net kilowatt- cooling and treatment that are expected to be necessary to hour generated be paid to DOE. The fee may be adjusted in meet the requirements of the NPDES permit As of February order to ensure full cost recovery. The Company's generating I, 1990, construction of the Facility is 40% complete, and it units have on-site storage facilities with the capacity to store is scheduled to be in operation prior to the seasonal need for spent fuel discharged from the units through the mid-1990's. treatment or cooling as required to meet the requirements of The Company believes that the ultimate cost of decommis- the NPDES permit In addition to the appeal by the Company sioning and spent fuel disposal will be recoverable through of the NPDES permit conditions, appeals by opponents of the adjustments of rates. System are also pending on the issuance of the NPDES On October 3, 1989, the Company, the OCA and a permit and the DER's conclusion that erosion effects from the group of industrial customers, filed a joint petition with the operation of the System will not be significant If interim PUC to approve establishment of an Energy Cost Adjustment sources of supplemental cooling water are not available in (ECA) to replace the existing Energy Cost Rate Factor. The sufficient quantities to meet the needs for cooling water at ECA would provide for recovery of 100% of the difference Limerick, limitations on or cessation of operation of the between the Company's actual costs of fuel and energy Limerick units may be required in the event that the Facility interchange and the amount of costs billed to customers is not completed in time to meet the seasonal water quality through an a~er-the-fact reconciliation. The clause would also requirements imposed by the NPDES permit, or the Company incorporate a nuclear performance standard which allows for does not succeed on appeal.

financial bonuses or penalties depending upan whether the Flowage rights are required over 25 6 riparian properties Company's system nuclear capacity factor exceeds or falls located along the East Branch. The Company has acquired below a specified range. The joint petitioners have requested such rights by purchase from most of the riparian owners, the PUC approve the ECA coincident with new base rates leaving 40 riparian owners from whom flowage rights must associated with the current electric rate case. be acquired by purchase or eminent domain. On April 26, 1989, Because of permit and regulatory conditions which in a proceeding brought by six riparian owners against the restrict the use ofthe Schuylkill River and the Perkiomen Creek Company, the Court of Common Pleas of Bucks County ruled as normal sources of cooling water for the Limerick units, a that the Company has the right to acquire flowage rights by supply of supplemental cooling water is needed to avoid the the power of eminent domain. To date, this issue has not limitation or cessation of operation of the Limerick units been raised by any of the remaining riparian owners from during certain months of the year. This supplemental water whom flowage rights must be acquired.

may be needed for as many as six months per year, depending In order to further assure the availability of adequate upon stream flows, temperature and related conditions. cooling water for the Limerick units in the event of an equip-Construction of various components of a planned sup- ment or other failure of the System, including the Facility, the plemental cooling water system (System), comprised ofpumping Company is preparing to submit to the Delaware River Basin stations, a reservoir and transmission mains to convey water Commission (DRBC) requests for Jong-term approval to use from the Delaware River to Limerick by way of the Perkiomen back-up sources of cooling water previously approved by the Creek, was completed in July 1989, and the System was DRBC on an annual basis. These include municipal reservoirs placed in service on August 2, 1989. Operation of the System and other power plant water allocations. Also, since the System is being phased in to meet the permit requirements of the is in its first year of operation, the Company is requesting Pennsylvania Department of Environmental Resources (DER) for 1990 to continue to use dissolved oxygen limitations in lieu for monitoring the effect of the increased flow on the receiving of temperature limits in the Schuylkill River in order to reduce stream, the East Branch of the Perkiomen Creek (East the number of days that the System must be used.

Branch), and its banks. Any significant adverse effects found Should the System for any reason not be available for to be caused by the discharge of water into the East Branch operation and the back-up sources of cooling water not be may require corrective action. Otherwise, the System is approved, the operation of the Limerick units during critical scheduled to be fully operational on or about June I, 1990. months may depend upon the successful development, licensing On July 14, 1988, the DER issued a National Pollutant and construction of a modified supplemental cooling water Discharge Elimination System (NPDES) permit which places system and the continued successful acquisition and approval limits on the quality and temperature of Delaware River water of interim sources, pending the availability of the modified to be released to receiving streams for use at Limerick. These system. There is no assurance that the Company will be limits could interrupt the operation of the System. Although successful in these efforts.

19. Quarterly Data (Unaudited)

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

Operating Revenues Operating Income Net Income Quarter Ended 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

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 Philadelphia Earnings Applicable Average Shares Electric Company to Common Stock Outstanding Earnings Per Average Share and Subsidiary Quarter Ended 1988 1989 1988 1989 1988 1989 Companies (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 with the IRS relative to the sale of federal income tax benefits

$29.0 million, or approximately 13 cents per share (net of associated with the Company's interest in Salem Unit No. 2 related income taxes), resulting from settlement of a dispute 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 6,859 19, 195 15,004 .08 .07 September 30 5,484 9,374 6,580 11,270 .04 .06 December]/ 0 7,365 8,470 21 ,833 .02 .09 Report of Independent Accountants To the Shareholders and Board of Directors Philadelphia Electric Company We have audited the accompanying consolidated balance sheets of Philadelphia Electric Company and Subsidiary Companies as of December 31, 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.

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 with 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 ofthe Peach Bottom Atomic Power Station seeking compensatory and punitive damages related to the shutdown ofthis 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 ofthese 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, Pennsylvania February I, 1990 40 Philadelphia Electric Company

Financial St 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 Philadelphia Electric Company

Financial St at 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 St 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 (Millions 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 Commercial 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 ,974.2 $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 (Millions of Dollars) $ 753.4 $ 691 . / $ 679.7 $ 536.2 $ 373.8 $ 414.2 Average use per Residential Customer (kilowatthours)

Without Electric Heating 6,488 6,667 6,431 6,177 6,034 6, 160 With Electric Heating 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 6,034 5,925 Net Electric Generating Capacity-Year-End Summer rating (thousands of kilowatts) 7,759 7,762 7,762 7,870 7,599 7,765 Cost of Fuel per Million 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 St 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 1h $22% $21 1/a $20'/* $19 $19 1/s $21 114 Low Price $21'1* 1

$21 ~ $193~ $19'1* $18 112 $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 Annual Meeting Most Company securities are listed on the New York Stock The Annual Meeting of the Shareholders of the Company will Exchange and the Philadelphia Stock Exchange. Philadelphia be held on April 11, 1990, at 10:30 a.m. in the Pennsylvania Electric Power Company Debentures are listed on the Hall Auditorium, Philadelphia Civic Center, 34th Street and Philadelphia Stock Exchange. Civic Center Boulevard, Philadelphia, PA.

The record date for voting at the shareholders' Dividends meeting is March 2, 1990. Notice of the meeting, proxy The Company has paid dividends on its common stock statement, and proxy will be mailed under separate cover.

continually since 1902. The Board of Directors normally Prompt return ofthe proxies will be appreciated.

considers common stock dividends for payment in March, June, September and December. The Company estimates that FormlO-K the $2.20 per share dividend paid to common shareholders Form 10-K, the annual report filed with the Securities and in 1989 is fully taxable as dividend income for federal Exchange Commission, is available, without charge, to income tax purposes. shareholders upon written request to Philadelphia Electric Company. 2301 Market Street, P.O. Box 8699, Philadelphia, Dividend Reinvestment and Stock Purchase Plan PA 19101, Attn: Financial Division, S21-I.

Shareholders may use their dividends to purchase additional shares ofcommon stock through the Company's Dividend Shareholders Reinvestment and Stock Purchase Plan (Plan). The Company The Company has 282,623 shareholders of record of common pays all brokerage and service fees for stock purchases. stock, a 14% increase in 10 years.

Customers of the Company who are not shareholders may enroll in the Plan by making a one-time purchase of common Transfer Agents and Registrars stock directly from the Company. All shareholders have the PHILADELPHIA ELECTRIC COMPANY-opportunity to invest additional funds in common stock ofthe Preferred and Common Stocks Company. whether or not they have their dividends reinvested- Registrars: Mellon Bank (East) N.A.

also with all fees borne by the Company. In 1989, over 37% P.O. Box 7899 of the Company's common shareholders were participants Corporate Trust in the Plan and they invested more than $117 million through 199-C385 the Plan, including cash payments. Information concerning Philadelphia, PA 19102 this Plan may be obtained from D. P. Scott, Treasurer, First Chicago Trust Company of New York Philadelphia Electric Company, 2301 Market Street, 30 W. Broadway, NY, NY 10015 P.O. Box 8699, Philadelphia, PA 19101. Transfer Agents: Philadelphia Electric Company 2301 Market St, Phi/a., PA 19101 Comments Welcomed First Chicago Trust Company of New York The Company is always pleased to answer questions and 30 W. Broadway, NY, NY 10015 provide information. Please address your comments to Mrs. L S. Binder, Secretary, Philadelphia Electric Company. PHILADELPHIA ELECTRIC COMPANY-2301 Market Street, P.O. Box 8699, Philadelphia, PA 19101. First and Refunding Mortgage Bonds Inquiries relating to shareholder accounting records, stock Trustee: Fidelity Bank, National Association transfer and change of address should be directed to Corporate Trust Operations Philadelphia Electric Company, 2301 Market Street, P.O. Box Broad & Walnut Sts., Phi/a., PA 19109 8487, Philadelphia, PA 19101, Attn: Shareholder Services, S6-4. New York Agent: Morgan Guaranty Trust Co. of NY 30 W. Broadway, NY, NY 10015 Toll-Free Telephone Line Toll-free telephone lines are available to the Company's PHILADELPHIA ELECTRIC COMPANY-Debentures shareholders for inquiries concerning their stock ownership. PHILADELPHIA ELECTRIC POWER COMPANY When calling from outside of Pennsylvania, call (A Subsidiary)-Debentures 1-800-223-7326. From within Pennsylvania call Trustee: The Philadelphia National Bank 1-800-242-7326. Local Philadelphia calls should be made to Corporate Trust Department 841-5795. 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.

4!5 Philadelphia Electric Company

Officers Joseph F. Paquette, Jr. (55) Albert}. Solecki (49) Jon A. Katherine (54)

Chairman, President and Chief Vice President, Information Systems and Assistant Treasurer Executive Officer General Services William M . Lennox, Jr. (52)

Corbin A. McNeil/, Jr. (50) David R. Helwig (38) Assistant Treasurer Executive Vice President, Nuclear Vice President, Nuclear Services

}. Robert Causton (52)

Richard G. Gilmore (62) Donald P. Scott (55) Assistant Treasurer Senior Vice President, Finance and Treasurer Chief Financial Officer M. Dorothy Lyons (48)

Lucy S. Binder (52) Assistant Secretary Raymond F. Holman (62) Secretary Senior Vice President, Operations James W. Durham (52) Management Changes:

Senior Vice President, Legal and Genera/ Counsel Nicholas DeBenedictis was elected Senior Vice President, Corporate and Public Affairs, effective April 10, 1989.

Nicholas DeBenedlctls (44)

Senior Vice President, Corporate Clifford Brenner retired as Senior Vice President, Corporate and Public Affairs Communications, on May I, 1989.

John S. Kemper ( 61)

David R. Helwig was elected Vice President, Nuclear Services, effective Vice President, Engineering June 26, 1989.

and Production Eugene j. Bradley retired as Vice President and Associate Genera/

Counsel, on September I, 1989.

Morton W. Rimerman (60)

Vice President, Finance Joseph W. Gallagher retired as Vice President, Nuclear Services, on September I, 1989.

Raymond C. Williams (63)

Vice President, Rates Joseph A. Carter resigned as Vice President, Human Resources, on October 31, 1989.

AlbertG. Mikalauskas (53)

Vice President, Commercial Operations Philip G. Mulligan retired as Vice President, Gas Operations, on February I, 1990.

S. Joseph Kowalski ( 61)

Vice President, Nuclear Engineering Kenneth G. Lawrence was elected Vice President, Gas Operations, effective January I, 1990.

Alvin J. Weigand (51)

Vice President, Electric Albert G. Mikalauskas was elected Vice President, Commercial Transmission and Distribution Operations, effective January I, 1990.

Alvin j. Weigand was elected Vice President, Electric Transmission and Kenneth G. Lawrence (42)

Distribution, effective January I, 1990.

Vice President, Gas Operations john S. Kemper was elected Vice President, Engineering and Production, Graham M . Leitch (55) effective January I, 1990.

Vice President, Limerick Generating Station Dickinson M. Smith (56)

Vice President, Peach Bottom Atomic Power Station 48 Philadelp hia Electric Comp any

Nelson G Hams was elected a member

Philadelphia Electric Company BULK RATE 2301 Market Street U.S. POSTAGE PAID PO Box8699 Rochester NY Philadelphia PA 19101 Permit No. 709

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