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| issue date = 12/31/1986
| issue date = 12/31/1986
| title = Philadelphia Electric Co,1986 Annual Rept.
| title = Philadelphia Electric Co,1986 Annual Rept.
| author name = AUSTIN J H, EVERETT J L
| author name = Austin J, Everett J
| author affiliation = PECO ENERGY CO., (FORMERLY PHILADELPHIA ELECTRIC
| author affiliation = PECO ENERGY CO., (FORMERLY PHILADELPHIA ELECTRIC
| addressee name =  
| addressee name =  
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=Text=
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{{#Wiki_filter:NOTICE THE ATTACHED FILES ARE OFFICIAL RECORDS OF THE DIVISION OF DOCUMENT CONTROL. THEY HAVE REEN CHARGED TO YOU FOR A LIMITED TIME PERIOD AND MUST BE RETURNED TO THE RECORDS FACILITY BRANCH 016. PLEASE DO NOT SEND DOCUMENTS CHARGED OUT THROUGH THE MAIL. REMOVAL OF ANY PAGE(S) FROM DOCUMENT FOR REPRODUCTION MUST BE REFERRED TO FILE PERSONNEL.       ?'"7 Ooc'*0t lf?c; -~ .::::::....-
Coatrol DEADLINE RETURN of DOlll RECORDS FACILITY BRANCH
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DEADLINE RETURN DAT Ef)ato~Z          of DOlll
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Philadelphia Electric Company Annual Report 1 986 F inan ci a l H i ghl i gh ts Operating Revenue Op e rating Expenses Taxes Charged to Operations Operat i ng Income Earnings Applicable to Common Stock Earnings per Average Common Share C ash Divid e nd s Paid per Common Shar e Av e rage Shares of Common Stock Outstanding Constmction Expenditures Tota l Assets Con t en ts L e tt e r to Shar e hold e rs R e port of 1986 Operation s 1986 $3,090,869
Philadelphia Electric Company Annual Report 1986 Financial H ighlights                                  1986                      1985            %Change Operating Revenue                                 $3,090,869,000         52 ,94 5, 175,000                   5%
, 000 $2 , 525,859,000  
Operating Expenses                                $2,525,859,000         S2 ,532 ,670 ,000 Taxes Charged to Operations                        $521 ,557,000           S44 0 ,862 ,000               18%
$521 , 557,000 $565,010,000  
Operating Income                                    $565,010,000             S4 l 2,505 ,000               37%
$475 , 359,000 $2.60 $2.20 183,140,767
Earnings Applicable to Common Stock                $475,359,000            S4 34 ,724 ,000                 9%
$966,500,000  
Earnings per Average Common Share                            $2.60                      S2 .56               2%
$10, 7 48,020,000 1985 %Change 52 , 9 4 5 , 1 7 5 , 000 5% S2 , 532 , 670 , 000 S 44 0 , 862 , 000 18% S4 l 2,505 , 000 37% S 4 3 4 , 72 4 , 000 9% S2.56 2% S 2.20 169 , 7 8 4 , 471 8% S864 , 7 00 , 000 12% S l0 , 011,845 , 000 7% 2 5 Mana ge m e nt's Di sc u ss ion and Anal ys i s of Finan c ial C ondition and R es ult s of Operation s 21 C on so lidated Finan c ial Stat e m e nt s 23 N ot es to Finan c ial Stat e m e nt s 28 R e port of Ind e p e ndent C e rtifi e d Public Ac c ountant s 38 Sec ur i ti es, Finan c ial and Operating S tati s ti cs 39 Shar e hold e r Information 44 Offi ce rs and Dir ec tors 45 EARNINGS AND DIVIDENDS PER SHARE Dollar.; 3.0 0 --2.50 -2.00-l.50 1.00 -:so >-f---f--82 8 3 8 4 85 86 -Earnings Per Share -Dividends CONSTRUCTION EXPENDITURES Million ------Dollar.; 1200 1000 800 60 0 8 2 8 3 8 4 85 86 External Sources Internal Sources 0 To Our Shareholders We are pleased to report that 1986 was a yea r of great progress for Philadelphia E l ect ric Co mpan y. Highlights for th e year included the following: 0 Limerick U nit No. 1 was placed into commercial operation on Februar y I , 1986. For its eleven month s of commercial operation during 1986 , the unit perform e d flawlessly , ac hi evi ng a capacity factor of 81 %. On Januar y 26 , 198 7 , U nit No. 1 set a n ew world record for performance of a large powe r reactor during its first fuel cycle , after operating continuousl y for 198 days until the unit was removed from seivice for minor repa i rs. 0 The Company was authorized an ann u al elec t ric rate increase of S 351 million , the largest in the Company's history , as we p l aced S3.8 bi lli on of Limerick U nit No. 1 and associated common plant into se ivice. 0 To moderate the impact of the Limerick rate incr ease on customers , the Company will phase in the incre ase over a three-yea r period in eq ual a mounts of 4 .8% per yea r. Despite the increase , typical customers' December 1 986 e lectric bills were lower than those for December 1985 , due to r ed uced fuel costs. 0 Limerick Unit o. 2 construction proceeded ahead of schedule , and 1986 expenditures were with in the planned expe nditur es of th e cons tru ction cost cap of 5 3 .19 7 billion. 0 The exce llent performance of our nuclear plants r es ult e d in approximately
Cash Dividends Paid per Common Share                          $2.20                     S2.20 Average Shares of Common Stock Outstanding                                183,140,767                169,784 ,47 1                8%
$400 million of fuel sav ing s for 1986. 0 Earnings per share amounted to S2.60 , an increase of four ce nts p e r s hare fr om a year ago. 0 Electric sa les were up 3% compared with last yea r , refl ec ting m ore customers , an improv ed r es identi a l housing market and favorable weather in 198 6. Gas sold an d tran spo rted declin e d due almost entirely to th e reduction in gas tran spo rt e d for others. 0 Rates for natural gas were reduc ed b y approximately S47 milli o n , reflecting prudent purchas es of gas from suppliers and reductions in pipelin e suppliers' rates. O The Pennsylvania Supreme Court denied requests for an appeal of the decision of the Commonwealth Court , affirming an order of the Court of Common Pleas of Bucks Co unt y which directed the completion of the Point Pleasant Project. This deci sio n clears the way for construction to resum e in 198 7. 0 The Com pan y so ld its s t eam h eat sys tem for S3 0 million inJanuar y 1 987. For m a ny years , Phi lade! phia E lectric Co mpan y has h a d both a formal Mission Statement and Corporate Commitments.
Constmction Expenditures                            $966,500,000            S864 ,700 ,000               12%
During 1986 , we reexamin e d and modifi ed them to b e tter reflect current circumstances.
Tota l Assets                                  $10, 7 48,020,000      Sl0 ,011,845 ,000                     7%
To help achieve our Corporate Commi tmen ts and deal with current critical i ss u es , each year we establish specific goals at both the corporate and departmental levels. This annual report present s our new Mission Statement, the Corporate Commitments and specific Critical Issues which chart th e course that o u r Company has set. This report's photography depicts several aspects of our Corporate Commitments. As we look ahead to 1 987 and beyond , we w ill be addressing th ese key C ritic al I ss u es; they a re ( 1) completing Limerick U nit No. 2 on time and within budget; (2) ac hi ev ing standa rd s of exce ll ence in o ur nucl ear o perati o n s; (3) o perating and maintaining o ur base-load generat i on capa cit y to ac hie ve a high l eve l of performance
Contents                                                                                                                                              0 Letter to Shareholders                                                                                          2 Report of 1986 Operations                                                                                      5 Management's Discussion and Anal ysis of Financial Condition and Results of Operations                        21 Consolidated Financial Statements                                                                              23 Notes to Financial Statements                                                                                  28 Report of Independent Certified Public Accountants                                                            38 Sec urities, Financial and Operating Statistics                                                                39 Shareholder Information                                                                                       44 Offi cers and Directors                                                                                        45 EARNINGS AND                               CONSTRUCTION DIVIDENDS PER SHARE                       EXPENDITURES Million -  - - -- -- - -
; (4) adapting to changing compet iti ve forces wit hin our industry; and (5) achieving public recognition as a caring , responsive a nd effi ci e nt o rganization. We cont inue to appreciate the s upport of o ur inv estors and pledge our every effo rt to achieve o ur Co rporat e Co mmitm e n ts for th e genuine benefit of our inv estors , our customers a nd our fellow employees. James L. Everett C hairman of the Board and C hief Executive Officer John H. A u s tin , Jr. Pr esiden t and Chief Operating Officer Jam es L. Everett John H. Austin , Jr. 
Dollar.; 3 .00                              Dollar.; 1200 2.50
                                                                                    -                                     1000 2.00-                                       800 l.50                                         600 1.00
                                                                              -:so     >-   f--   -   f--
82    83    84  85    86                82   83    84  85 86
                                                                              --     Earnings Per Share Dividends External Sources Internal Sources


Commitment to our Customers PE is co mmitt ed to providing safe, reliable and econom i cal utilit y serv i ce to our customers. We will b e responsive to the ir needs and courteous in all our public contacts.
To Our Shareholders                      customers' December 1986 electric        Corporate Commi tments and deal bills were lower than those for         with current critical issues, each year December 1985 , due to reduced          we establish specific goals at both the fuel costs.                             corporate and departmental levels.
Gas Operations personnel inspect the liquified natural gas (LNG) vap orizers and storage tank at the West Conshohocken Gas Plant. During periods of heav y demand i n the winter, the vaporize rs are used to convert the LNG to natural gas to supplement regul ar pipeline supplies.
0 Limerick Unit o . 2 construction      This annual report presents our new proceeded ahead of schedule , and       Mission Statement, the Corporate 1986 expenditures were within the       Commitments and specific Critical planned expenditures of the             Issues which chart the course that our construction cost cap of 5 3 .197        Company has set. This report 's billion.                                 photography depicts several aspects of 0 The exce llent performance of our      our Corporate Commitments.
1986 f INANCIAL REVIEW EARNINGS RISE Earnings per share of common stock in 1986 amounted to S2.60, a 2% increase from the S 2.56 earned in 1985 , wh il e the average number of s har es outstanding incr eased 8% to 18 3 million shares. Total common s tock ea rnings amo unt ed to S475 million , up S4 I million or 9% from a yea r ago. The improvement in p er s h are earn ing s r esulted from incr eased e l ectric base r ates and impro ved electric sales. Earnings for I 986 were r e du ce d approximately seven cents per s h a r e as a r es ult of a S26 million Pennsylvania Public Utility Co mmi ssio n (PUC) disallowance for fuel and other co sts , while th e comparable disallow ance r educed I985 earnings by 2 3 cents per share. F ull financi a l statements and not es begin on pag e 23. Information o n sa l es , revenue , expenses and customers can be found on pages 2 I , 22, 23 , 42 and 43. NEW FINANCINGS COMPLETED The Company raised over SI. I billion in new capital in 1986 to provide for c o nstruction , debt retirements and other needs , as summarized in the table on page 6. Si nce inter est r ates remained at Richard G. Webster (l eft}, Construction Div i sion , and Raymond F. Holman (righ t), Vice President, General Administration, review the progress of construction on the Merrill Creek Reservoir near Phillipsburg, New jersey. They are standing on the foundation for the central core of the embankm ent dam which will be construct ed in 1987. low levels during the year , PE continued to repurchase its outstanding high interest rate bond issues and to refinance those issues at the existing lower rates. A total of S 4 6.9 million of the I 7 Ys% mortgage bonds due 2011 were called for redemption on July I. This completed the retirement of the entire SI 2 5 million issue , which began with a tender offer in November I985. Likewise , S 4 8.9 million of the I8}:1% mortgage bonds due 2009 were redeemed on September I 5 , completing the retirement of this Sl25 million issue, also begun with a November I985 tender offer. Through a November I 986 tender offer , the Company repurchased S76.9 million of its S 100 million of 15'}8% mortgage bonds due 2010. This repurchase and early retirement , as well as the two calls discussed above, enabled PE to reduce annual interest payments by approximately S I8 million.
We are pleased to report that 1986 was    nuclear plants resulted in                   As we look ahead to 1987 and a year of great progress for Philadelphia approximately $400 million of fuel      beyond , we w ill be addressing these Electric Company. Highlights for the     savings for 1986.                       key Critical Issues; they are ( 1) year included the following :            0 Earnings per share amounted to         completing Limerick Unit No. 2 on S2.60 , an increase of four cents per  time and within budget; (2) ac hieving 0 Limerick Unit No . 1 was placed into    share from a year ago .                  standards of excellence in our nuclear commercial operation on February I ,     0 Electric sales were up 3% compared    operatio ns; (3) operating and 1986. For its eleven months of          with last year, reflecting more          maintaining our base-load generation commercial operation during 1986,         customers, an improved residenti al     capacity to achieve a high level of the unit performed flawlessly,            housing market and favorable weather    performance; (4) adapting to achievi ng a capacity factor of 81 %. On  in 1986 . Gas sold and transported      changing competitive forces within January 26, 1987, Unit No. 1 set a new    declined due almost entirely to the     our industry; and (5) achieving public world record for performance of a         reduction in gas transported for others. recognition as a caring, responsive and large power reactor during its first fuel 0 Rates for natural gas were reduced    efficient organization .
Workmen guide the steam dryer assembly for Limerick Unit No. 2 as it is lowered into the reactor vessel. This 40-ton , st ainless steel assembly is about 19 feet high and 20 feet i n diameter. The dr y er removes mo isture from the steam before the steam is fed i nto the turbines to generate electricity. 19 86 MAJOR FINANCINGS Mon th Fe b. Debentures
cycle , after operating continuously for  by approximately S47 million,                We continue to appreciate the 198 days until the unit was removed      reflecting prudent purchases of gas      support of our investors and pledge from seivice for minor repairs.           from suppliers and reductions in         our every effort to achieve our 0 The Company was authorized an          pipeline suppliers' rates.               Corporate Commitments for the ann ual electric rate increase of S351    O The Pennsylvania Supreme Court        genuine benefit of our investors, our million , the largest in the Company's    denied requests for an appeal of the     customers and our fellow employees.
-1 O M!% Series due 1996 Mar. Sinking Fund Debentures
history, as we p laced S3.8 bi llion of  decision of the Commonwealth Court, Limerick Unit No . 1 and associated      affirming an order of the Court of common plant into seivice.                Common Pleas of Bucks County which 0 To moderate the impact of the          directed the completion of the Point     James L. Everett Limerick rate increase on customers ,    Pleasant Project. This decision clears  Chairman of the Board the Company will phase in the            the way for construction to resume       and Chief Executive Officer
-l 1%Seriesdue 2011 May Debentures
                                                                                  ~~?r increase over a three-year period in    in 1987 .
-9.85% Private Placement due 1 993 May Sin kin g Fund Debentures
equal amounts of 4 .8% per year.         0 The Company sold its steam heat Despite the increase , typical          system for S30 million inJanuary 1987.
-10.05% Private Placement due 1998 May Co mm on Stock -3,000 , 000 Sha r es Millions o f Dollars 100.0 350.0 25 0 62.0 LIMERICK CREDIT AGREEMENT REPAID During 1986 , the Company repaid in advance of maturity the entire SSSO million balance under the Limerick Credit Agreement. This revolving credit/term loan agreement with a group of 26 banks was used to finance the costs associated with completing Limerick Unit o. 1 and common plant. By using the Limerick Credit Agreement from 1984 to 1986 and refinancing at favorable rates , the Company was able to realize substantial interest savings. Annual interest costs wou ld h ave been approximately S 30 million more had long-term debt been sold at that time to finance Limerick.
John H . Austin , Jr.
LIMERICK UNIT NO. I RATE INCREASE GRANTED On June 26 , the PUC adop t ed , by a two-to-one vote , a final order granting the Company an annual net increase in revenue of S351 million. The order reflects an overall rate of r eturn of 12.26% and a return on equity of @ 517.79 53.4 14.75%. The increase will be phased in over a three-year period in equal June P o lluti o n Co ntr ol Bonds -8'Ys% du e 2016 34 .o steps of approximately 4 .8% per year , Sept. Pr efe rr ed S t ock -9. 50%, 1 986 Se ri es; 750 , 000 followed by a three-year p eriod for recovery , without interest , of delayed shares@ S 1 00 75.0 billings under the phase-in plan. Oc t. Mortgage Bo n ds -10 14% A major issue in the proceeding Se ri es du e 2016 150.0 involved determining the additional Oct. Mortgage Bonds -8&#xa5;<% Se ri es due 1994 Jan. Common Stock Purchase Dec. Plans: Dividend R ei n vest m e nt , Emp l oyee , PAY SO P-5 , 399,000 Shares; Average Pri ce of $21.07 Co mm on Stock continuous offe rin gs: 3 , 000 , 000 S har es; Average Price of 100.0 113.8 $21.28 638 Total S l , 127.0 capital costs which were incurred as a result of construction delays in 1976 and 1978. The Commission asserted that it had previously determined that the delay decisions were imprudent.
For many years, Phi lade! phia    President Electric Company has had both a        and Chief Operating Officer formal Mission Statement and Corporate Commitments. During 1986, we reexamined and modified them to better reflect current circumstances. To help achieve our
The Company argued that the Commission had made no such determination and that , in any event , due to financial constraints and changes in the regulation and scope of the Limerick project over the construction period , no adjustment was warranted. Nevertheless , the Commission concluded that there should be a rate base reduction of S369 million for these delays. This resulted in a reduction of S80 million in annual revenue which will not be recovered from customers.
The Company has filed an appeal of this decision with the Commonwealth Court of Pennsylvania.
The PUC rejected various excess capacity contentions made by opposing parties and found that Limerick Unit No. 1 is needed to help meet the Company's capacity requirements.
The Commission followed precedent and denied the current recovery in revenue of the 50% of the common plant facilities associated with Limerick Unit No. 2. Although these facilities are in service today , the associated revenue cannot be recovered until Limerick Unit No. 2 is placed in service in 1990. Nevertheless , carrying charges equivalent to the allowance for funds used during construction are being accrued on 50% of the common plant facilities. CO NSTRUCTION INVESTMENTS MADE The Company invested S967 million in new plant and equipment in 1986 , including S 189 million of carrying charges equivalent to the a ll owance for funds used during construction.
Expenditures for 1987 are estimated at Sl.2 billion , including S527 million for Limerick Unit No. 2. STEAM SYSTEM SOLD On January 30 , 1987, the Company sold its steam heat system to Philade l phia Thermal Corporatio n fo r S30 millio n. The sale price is approxima t e l y eq u al to the net book value of t he facilities bei n g sold. Philadelphia Thermal acquired a ll of the production and distribution assets of the system which supplies steam to 4 50 customers in center city Philadelphia and areas of West Phi l adelphia thro u g h thirty-th ree miles of mains. The system has experienced declining sales over the past 13 years. Philade l phia Thermal is a who ll y owned subsidiary of Catalyst Thermal Energy Corporation which owns and operates steam heat sys t ems in Baltimore, St. Louis and Youngstown, Ohio. Catalyst Thermal is a s u bsid i ary of Catalyst Energy Development Corporation which has diversified holdings of over S 1. 2 billion in the energy field. The Penns ylva n ia-Ne w jerse yMa ry l a nd (P}M) Interconnec t ion pro v ides electr i c s er vi ce reliabil i t y at the lo we st possible cost fo r its e l e v en member companies , i nclud i n g PE. J a mes F. McLau g hl i n (sta nd i n g) a n d Al f re d A. Ga mb o n e (s eat ed) mon itor el e c t ric t r a n s m i s s i o n i n t h e PJM c ontrol room.
LIMERICK UPDATES LIMERICK HAS SUCCESSFUL FIRST YEAR In 1 9 8 6 , Lim e ri c k Ge n e rating S tation , th e Co mpan y's new stat e-o f-th e-art nucl e ar facilit y, continued to provide a n exe mplar y demonstration of nucl ea r power as a sa fe , reliable and e c o nomical source of energy. C ommercial operation of Lim e rick U nit No. 1 began on February 1. The unit's performance set a world r e cord for a large power reactor during it s first fuel cycle. After returning from a brief outage on July 13 , the plant ran c ontinuously for 198 da ys until a late J a nuar y 1 9 87 s hutdown for minor r e pair s. U nit No. 2 construction is proc e eding on schedule and e xpenditures continue to be within th e planned levels associated with the co n s truction cost cap of S 3 .197 billion. As of December 31 , the Co mpany had invested S 1.3 billion in Financial management visits the Philadelphia Stock Exchange and the PE trading specialist. (Left to right) Donald M. Stanton, trading specialist, chats with Morton W. Rimerman , Vice President, Finance and Accounting; Donald P. Scott, Treasurer; and Richard G. Gilmore, Senior Vice President, Finance. Unit No. 2, which was approximately 4 9% complete on a man-hour basis. POINT PLEASANT PROGRESSES One component of the planned supplemental cooling water system for Limerick is the Point Pleasant Water Project , which will divert allocated water from the Delaware River to the Schuylkill River. Construction has been suspended since 1984 , when it was approximately 30% complete.
The Point Pleasant Project has been the subject of substantial opposition from various groups , causing extensive litigation and the suspension of construction.
In MayandJune , the Supreme Court of Pennsylvania denied requests for an appeal of the decision of the Commonwealth Court , affirming an order of the Court of Common Pleas of Bucks County which directed the completion of the Point Pleasant Project. In October, a special master was appointed to oversee implementation of the Court of Common Pleas Order. Construction is expected to resume in 1987 , with completion expected in 1988. A PE securities prospectus is checked while on press by Joseph D. O'Loughlin (left), Financial Division, and Robert}. McNamee (right), financial printer. Commitment to our Investors PE is committed to be a financially strong institution, /,ooking at the long term and avoiding slwrt-term expedients.
We will continually evaluate financing alternatives to attract funds at advantageous rates, while providing protection against unreasonable business risks.
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PE is noted for its excellent em ploy e e trai ni ng pro gr a m s. Linemen-in-training work at the 25-foot level wit h en er gized conductors mid-way through the six-week line school program. Sufficient interim supplemental cooling water for 1986 was obtained for Limerick Unit o. 1. The Company has filed with the Delaware River Basin Commission (DRBC) for its 1987 supplemental cooling water needs , pending the availability of the water to be supplied from Point Pleasant. MERRILL CREEK CONSTRUCTION CONTINUES Construc ti on work on the Merrill Creek Project progressed we ll during 1986. The scheduled in-service date for this project is May 1988. Merrill Creek is a small tributary of the Delaware River which is being dammed to create a IS-billion-gallon reservoir near Phillipsburg , New Jersey , about SO mi l es north of Philadelphia.
The project is jointly owned by PE and six other electric utilities , all of which have been ordered by the DRBC to provide a water storage facility as a condition of their authorization to take water from the Delaware River for certain generating units , including Limerick.
The Merrill Creek reservoir, when comp l eted , will be filled with water pumped from the Delaware during times of high flow. Then, during flow or drought conditions , this stored water will be released to the Delaware to replace the water being evaporat ed in the operation of the owners' power plants. The project is expected to cost $217 million , of which the Company's share is S96 million. EXTENDING SERVICES , CAPACITY AND CAPABILITIES AREA DEVELOPMENT CONTINUES SUCCESSFULLY The economy of Southeastern Pennsylvania is expanding, and PE continues to aggressively promote Cardiopulmonary resuscitation (CPR) training has been given to more than 9,000 Company employees and has been effective in s u staining over 30 lives. PE Coordinator of the First Aid/CPR Program, William W. Hand, Safety Division, observes Barbara M. Federici, Personnel Administration Division, practicing CPR. Commitment to our Employees PE is committed to maintaining a highly skilled and dedicated workforce, commensurately co mpensated.
We will provide opportunities and incentives for employees to work productively to their full potential, in accord with the Corporate Equal Opportunity and Affi r mative Action Policy.


A tuition refund program for the successful completion of an approved course of study is offered to all employees.
James L. Everett John H. Austin , Jr.
Drexel University stud ents Lesle y L. Andres and Lawrence L. Middleton, both of Electric Production, are program participants.
 
Nearly 600 other PE employees aetended many different colleges and universities as part of the program in 1986. economic development within its territory.
1986 f INANCIAL        REVIEW EARNINGS RISE Earnings per share of common stock in 1986 amounted to S2.60, a 2%
Under the successful
increase from the S2.56 earned in 1985 , while the average number of shares outstanding increased 8% to 183 million shares. Total common stock earnings amounted to S475 million , up S4 I million or 9% from a year ago.
" We Know the Territory" theme used in radio and print advertising , the Company publicizes the many geographical and economical advantages offered by the Greater Philadelphia metropolitan area. Aided by the strength of the economy and the success of Company promotional programs , PE's Area Development Department assisted 31 new firms to locate in the region in 1986 , thereby creating 2 , 200 new jobs. Also , PE participated in successful efforts to retain and expand 59 existing firms involving 8 , 600 jobs. Prospects for the area remain promising.
The improvement in per share Richard G. Webster (left},
The number of jobs here is at an all-time high, and unemployment has fallen to its l owest level in recent years. Retail sales growth is among the highest in the nation. Commercial and residential development has reached record levels. In downtown Philadelphia alone , over 10 million square feet of new and rehabilitated office space is planned o r under construction.
Commitment to                    earn ings resulted from increased                          Construction Division, and e lectric base rates and improved                          Raymond F. Holman (right), Vice our Customers electric sales. Earnings for I 986 were                    President, General PE is committed to                 reduced approximately seven cents                          Administration, review the providing safe, reliable                                                                      progress of construction on the per share as a result of a S26 million Merrill Creek Reservoir near and economical utility            Pennsylvania Public Utility Phillipsburg, New jersey. They are Commission (PUC) disallowance for                         standing on the foundation for service to our fuel and other costs, while the                            the central core of the customers. We will be              comparable disallowance reduced                            embankment dam which will be responsive to their                I985 earnings by 23 cents per share.                      constructed in 1987.
The transition from a heavy manufacturing-based eco nom y to a light-industry and service-based economy has enabled the region served by the Company to become a leader in health care , pharmaceutical research , information processing and business services.
Full financial statements and needs and courteous in notes begin on page 23 . Information    low levels during the year, PE all our public contacts.           on sales, revenue, expenses and         continued to repurchase its customers can be found on pages 2 I ,  outstanding high interest rate bond 22, 23 , 42 and 43.                     issues and to refinance those issues at the existing lower rates. A total of Gas Operations personnel inspect  NEW FINANCINGS COMPLETED                S46.9 million of the I 7Ys% mortgage the liquified natural gas (LNG)    The Company raised over SI. I billion  bonds due 2011 were called for vaporizers and storage tank at the in new capital in 1986 to provide for  redemption on July I. This completed West Conshohocken Gas Plant.
The local economy was bolstered even further in the fourth quarter of 1986 by Eastman Kodak's decision to locate its new Pharmaceutical Division Headquarters in Chester County. Initial employment of 300 to 500 people is expected , with full employment to reach approximately 2,200 within ten years. EDDYSTONE REHABILITATION PROCEEDS After 26 years of reliable service , Eddystone Generating Station's Unit o. 1 received a new lease on life in 1986. Major equipment replacements were undertaken as part of a rehabilitation program designed to a llow the Compa n y to extend the lif e of Unit No. 1 into the 21st century. Similar work had already been completed on Unit No. 2. With completion of the rehabilitation , these low-cost , coa l-fir ed unit s remain available for base-load capacity.
construction , debt retirements and     the retirement of the entire SI 2 5 During periods of heavy demand other needs, as summarized in the      million issue , which began with a in the winter, the vaporizers are used to convert the LNG to        table on page 6 .                      tender offer in November I985 .
TRAINING EXPANDED Durin g 1 986 , a ll the C omp a n y's nucl ea r o p e rati o n a nd maint e n a n ce trainin g prog ra m s rec e i v ed ac cr e dit a ti o n from th e Na ti o nal Acad e m y for N ucl ea r Tr a ining o f th e In s titute o f N ucl e ar P owe r O p e r a ti o n s. Ex c e ll e n ce in nucl ea r tr a inin g is a k ey e l e m e nt in ac hi ev ing th e hi g h es t s t a nd a rds o f o p era tin g nucl ea r pl a nt safe ty a nd r e li a bilit y. Th e Co mpan y's P eac h B o tt o m Ato mi c P owe r S tati on b e c a me a n ea rl y branch o f th e A cad e my w h e n th e s t a ti o n's fir s t fiv e tr a in i ng pr o gr a m s r ece i ve d a c c r e dit a tion in 1 9 85. Lim e r ic k Ge n e r a ting S tati on p e r so nn e l wo rk e d in co njun c ti o n w ith P eac h B o tt om p erso nn e l to d eve l o p five a dditi o n a l tra inin g programs a t P eac h B o tt o m a nd t e n progr a ms a t Lim e ri ck , w hich r es u lte d in Lim e rick's e ntr y int o th e A c a d e m y. With th e accr e ditati o n of a ll tw e nt y tr a inin g pr og r a m s , th e Co m pa n y b e c a me o ne o f t h e fir s t multipl e-s it e utiliti es to a tt ai n full m e mb e r s t a tu s in th e Aca d e m y. R ecog n iz in g th e n ee d fo r a l a r ger t rai nin g faci lit y fo r M aint e n a n ce Di v i s i on p e r s onnel , th e Co mp a n y h as co n ve rt ed i ts r e tir ed B a rb a d oes Ge n e r a ting S tati on n e ar N orri s to w n to th e B a rbad oes Maint e n a nc e Trainin g Ce nt e r. B y puttin g th e n ew tr a i nin g ce nt e r into o p era ti o n in 1 986 , th e Co mp a n y m ove d closer t o i ts goa l of h av in g 775 tra in ed m a int e n a n ce c r af t s m en b y 1 990. N ucl ear p owe r pl a nt m a int e n a nc e proj ects a l so ha ve b ee n in c orp o rat e d in the B a rb a d oes training. S uch projects a llow tr a in ees to wo rk in a s imul a t e d radi a ti o n a r ea. P E's M a int e n a n ce Di v i s i o n craf t progra m s we r e r ev i ewe d ex t e n s i ve l y by t h e In s t i tut e of ucl ear P owe r O p era ti o ns a nd g i ve n fo rm a l acc r e ditati o n. PJM INTERCONNEC TI O N CUTS C OSTS In 1 986 , P E c u stome r s saved 530 m i lli o n in e n e r gy costs , thanks to the P e nn sy l va ni a-New J ersey-Mar y land (PJ M) I nterco n nect i on. Whi l e l ess than in pr ev i o u s yea r s (d u e to l ower oil p ri ces a nd m u ch l ower p ur chases as th e res ult of t he o p e r a ti on of Limerick U nit No. 1), the a n n u a l savings r e m a in e d s u bs t a nti a l. T h e PJ M Int ercon n ection , the wor ld's fi r st i nt egrated power pool , was created i n 1 927 con n ecting three ut ili ties , i ncluding PE. The present PJM s tm c tur e was established in 1965 as a j o int en t erpr i se of 11 iow n e d utiliti es , w h ic h forma ll y ag r eed to o p e r a t e as a s in g l e sys t em to ac h ieve the s i g nifi ca nt b e n efits to be rea li zed th ro u gh p rovi d i n g r e li able service at the l owes t poss i b l e cost. U sing the l a t es t co m p u te r tec h no l ogy , a staff of P E em pl oyees opera t es t h e contro l ce nt e r in Va ll ey Forge , Pe n nsy l va ni a , A n ine-week splic i ng school training program te ac h es employees the proper lead splicing techniques for underground urban electrical lines.
natural gas to supplement regular      Since interest rates remained at  Likewise, S48 .9 million of the I8}:1%
training Leroy Leighty, Transmission and Distribution, pours molten solder lead to join sleeve to lead jacket cable while instructor Bruce W Bortz looks on. P fl fire training s ch o ol in West C o n shohocken has rec e ive d community-wide re c ognition for its safe fire fighti ng i n st r uction, particularly for fires involving electricity and gas, and has helped numerous fire companies with thei r training.   
pipeline supplies.                                                        mortgage bonds due 2009 were redeemed on September I 5, completing the retirement of this Sl25 million issue, also begun with a November I985 tender offer.
Through a November I 986 tender offer, the Company repurchased S76.9 million of its S100 million of 15'}8%
mortgage bonds due 2010. This repurchase and early retirement, as well as the two calls discussed above, enabled PE to reduce annual interest payments by approximately SI8 million.
 
LIMERICK CREDIT AGREEMENT REPAID During 1986 , the Company repaid in advance of maturity the entire SSSO million balance under the Limerick Credit Agreement . This revolving credit/ term loan agreement with a group of 26 banks was used to finance the costs associated with completing Limerick Unit o. 1 and common plant. By using the Limerick Credit Agreement from 1984 to 1986 and refinancing at favorable rates, the Workmen guide the steam dryer Company was able to realize assembly for Limerick Unit No. 2 as it is lowered into the reactor 1986 MAJOR FINANCINGS                            substantial interest savings. Annual vessel. This 40-ton, stainless steel                                        Millions  interest costs wou ld have been Mon th                                of Dollars approximately S30 million more had assembly is about 19 feet high and 20 feet in diameter. The dryer      Feb . Debentures -      1OM!% Series            long-term debt been sold at that time removes moisture from the steam              due 1996                        100.0  to finance Limerick.
before the steam is fed into the Mar. Sinking Fund Debentures -
turbines to generate electricity.
l 1% Seriesdue 2011            350 .0  LIMERICK UNIT NO. I RATE INCREASE May    Debentures - 9.85%                        GRANTED Private Placement                      On June 26 , the PUC adopted , by a due 1993                        25 0 two-to-one vote , a final order granting May    Sin king Fund Debentures -                the Company an annual net increase in 10 .05% Private Placement revenue of S351 million. The order due 1998                        62.0 reflects an overall rate of return of May    Common Stock -
12.26% and a return on equity of 3,000,000 Shares
                                              @ 517 .79                        53.4  14 .75 %. The increase will be phased
                                    ---------------~
in over a three-year period in equal June  Pollution Control Bonds -
8'Ys% due 2016                  34 .o steps of approximately 4 .8% per year, followed by a three-year period for Sept. Preferred Stock - 9. 50%,
1986 Series; 750 ,000                  recovery, without interest, of delayed shares@ S 100                    75.0  billings under the phase-in plan.
                                    ---------------~
Oct. Mortgage Bonds - 1014%                          A major issue in the proceeding Seri es due 2016                150.0  involved determining the additional
                                    ---------------~
Oct. Mortgage Bonds - 8 &#xa5;<%                    capital costs which were incurred as a Seri es due 1994                100.0  result of construction delays in 1976 Jan . Common Stock Purchase                      and 1978. The Commission asserted Dec.     Plans: Dividend Rei nvestment, Employee, PAYSOP-5,399,000 Shares; Average Price of
                                              $21.07                          113 .8 Common Stock continuous offerings: 3 ,000 ,000 Shares; Average Price of
                                              $21.28                          638 Total      Sl ,127.0
 
CONSTRUCTION INVESTMENTS MADE The Company invested S967 million in new plant and equipment in 1986 ,
including S189 million of carrying charges equivalent to the allowance for funds used during construction.
Expenditures for 1987 are estimated at Sl.2 billion , including S527 million for Limerick Unit No . 2.
that it had previously determined that STEAM SYSTEM SOLD the delay decisions were imprudent. On January 30, 1987, the Company sold The Company argued that the            its steam heat system to Philadelphia Commission had made no such            Thermal Corporation for S30 million.
determination and that, in any event , The sale price is approximately equal to due to financial constraints and      the net book value of the facilities being changes in the regulation and scope of sold. Philadelphia Thermal acquired all the Limerick project over the          of the production and distribution assets construction period , no adjustment    of the system which supplies steam to was warranted . Nevertheless, the      4 50 customers in center city Commission concluded that there        Philadelphia and areas of West should be a rate base reduction of    Phi ladelphia through thirty-three S369 million for these delays. This    miles of mains. The system has resulted in a reduction of S80 million experienced declining sales over the in annual revenue which will not be    past 13 years.
recovered from customers. The                Philadelphia Thermal is a wholly Company has filed an appeal of this    owned subsidiary of Catalyst Thermal decision with the Commonwealth        Energy Corporation which owns and The Pennsylvania-New jersey-Court of Pennsylvania.                operates steam heat systems in             Maryland (P}M) Interconnection The PUC rejected various excess  Baltimore, St. Louis and Youngstown,      provides electric service reliability capacity contentions made by opposing  Ohio. Catalyst Thermal is a subsidiary    at the lowest possible cost for its parties and found that Limerick Unit  of Catalyst Energy Development            eleven member companies, including PE. James F. McLaughlin No . 1 is needed to help meet the      Corporation which has diversified (standing) and Alfred A.
Company's capacity requirements.      holdings of over S1. 2 billion in the Gambone (seated) monitor The Commission followed precedent      energy field.                              electric transmission in the PJM and denied the current recovery in                                                control room.
revenue of the 50% of the common plant facilities associated with Limerick Unit No. 2. Although these facilities are in service today, the associated revenue cannot be recovered until Limerick Unit No. 2 is placed in service in 1990.
Nevertheless, carrying charges equivalent to the allowance for funds used during construction are being accrued on 50% of the common plant facilities .
 
LIMERICK UPDATES LIMERICK HAS SUCCESSFUL FIRST YEAR In 1986 , Limerick Generating Station ,
the Company's new state-of-the-art nuclear facility, continued to provide an exemplary demonstration of nuclear power as a safe , reliable and economical source of energy.
Commercial operation of Limerick Unit No. 1 began on February 1.
The unit's performance set a world                                                A PE securities prospectus is record for a large power reactor during                                            checked while on press by Joseph its first fuel cycle. After returning from                                        D. O'Loughlin (left), Financial a brief outage on July 13 , the plant ran  Unit No. 2, which was approximately    Division, and Robert}. McNamee continuously for 198 days until a late    4 9% complete on a man-hour basis.      (right), financial printer.
January 1987 shutdown for minor repairs.                                  POINT PLEASANT PROGRESSES Unit No . 2 construction is        One component of the planned proceeding on schedule and                supplemental cooling water system for   Commitment to expenditures continue to be within        Limerick is the Point Pleasant Water    our Investors the planned levels associated with the    Project, which will divert allocated PE is committed to be construction cost cap of S3 .197          water from the Delaware River to the billion . As of December 31 , the          Schuylkill River. Construction has      a financially strong Company had invested S1.3 billion in       been suspended since 1984 , when it    institution, /,ooking at was approximately 30% complete. The    the long term and Point Pleasant Project has been the avoiding slwrt-term subject of substantial opposition from Financial management visits the various groups , causing extensive      expedients. We will Philadelphia Stock Exchange and the PE trading specialist. (Left to        litigation and the suspension of        continually evaluate right) Donald M. Stanton, trading          construction. In MayandJune , the financing alternatives specialist, chats with Morton W.           Supreme Court of Pennsylvania denied Rimerman, Vice President, requests for an appeal of the decision to attract funds at Finance and Accounting; Donald P.
of the Commonwealth Court,              advantageous rates, Scott, Treasurer; and Richard G.
Gilmore, Senior Vice President,            affirming an order of the Court of      while providing Finance.                                  Common Pleas of Bucks County which protection against directed the completion of the Point Pleasant Project. In October, a special unreasonable business master was appointed to oversee          risks.
implementation of the Court of Common Pleas Order. Construction is expected to resume in 1987, with completion expected in 1988.
 
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Commitment to the Delaware River for certain          our Employees PE is noted for its excellent                    generating units , including Limerick.
PE is committed to employee training programs.                      The Merrill Creek reservoir, when Linemen-in-training work at the                  comp leted , will be filled with water  maintaining a highly 25-foot level with energized pumped from the Delaware during          skilled and dedicated conductors mid-way through the times of high flow. Then, during low-    workforce, six-week line school program.
flow or drought conditions , this stored commensurately water will be released to the Delaware to replace the water being evaporated    compensated. We will Sufficient interim supplemental  in the operation of the owners' power    provide opportunities cooling water for 1986 was obtained      plants. The project is expected to cost and incentives for for Limerick Unit o . 1. The Company      $217 million , of which the Company's has filed with the Delaware River Basin share is S96 million .                  employees to work Commission (DRBC) for its 1987                                                    productively to their supplemental cooling water needs ,      EXTENDING SERVICES, full potential, in pending the availability of the water to CAPACITY AND CAPABILITIES be supplied from Point Pleasant.
accord with the AREA DEVELOPMENT CONTINUES              Corporate Equal MERRILL CREEK CONSTRUCTION              SUCCESSFULLY                            Opportunity and CONTINUES                                The economy of Southeastern Affirmative Action Construction work on the Merrill        Pennsylvania is expanding, and PE Creek Project progressed well during    continues to aggressively promote        Policy.
1986 . The scheduled in-service date for this project is May 1988. Merrill Creek is a small tributary of the Delaware River which is being dammed to create a IS-billion-gallon Cardiopulmonary resuscitation reservoir near Phillipsburg, New (CPR) training has been given to Jersey, about SO mi les north of more than 9,000 Company Philadelphia. The project is jointly    employees and has been effective owned by PE and six other electric      in sustaining over 30 lives. PE utilities, all of which have been        Coordinator of the First Aid/ CPR ordered by the DRBC to provide a        Program, William W. Hand, Safety Division, observes Barbara water storage facility as a condition of M. Federici, Personnel their authorization to take water from Administration Division, practicing CPR.
 
economic development within its territory. Under the successful "We Know the Territory" theme used in radio and print advertising, the Company publicizes the many geographical and economical advantages offered by the Greater Philadelphia metropolitan area . Aided by the strength of the economy and the  light-industry and service-based success of Company promotional          economy has enabled the region programs , PE 's Area Development        served by the Company to become a Department assisted 31 new firms to      leader in health care , pharmaceutical locate in the region in 1986, thereby    research , information processing and creating 2,200 new jobs. Also, PE        business services. The local economy participated in successful efforts to    was bolstered even further in the retain and expand 59 existing firms      fourth quarter of 1986 by Eastman involving 8 ,600 jobs.                  Kodak's decision to locate its new Prospects for the area remain      Pharmaceutical Division Headquarters promising. The number of jobs here is    in Chester County. Initial employment at an all-time high, and unemployment    of 300 to 500 people is expected, has fallen to its lowest level in recent with full employment to reach years. Retail sales growth is among the  approximately 2,200 within ten years .
highest in the nation. Commercial and residential development has reached      EDDYSTONE REHABILITATION record levels. In downtown              PROCEEDS Philadelphia alone , over 10 million    After 26 years of reliable service, square feet of new and rehabilitated    Eddystone Generating Station's Unit A tuition refund program for the office space is planned or under          o. 1 received a new lease on life in successful completion of an construction.                            1986. Major equipment replacements approved course of study is offered to all employees. Drexel        The transition from a heavy        were undertaken as part of a University students Lesley L.      manufacturing-based economy to a        rehabilitation program designed to Andres and Lawrence L.                                                      allow the Company to extend the life Middleton, both of Electric                                                  of Unit No. 1 into the 21st century.
Production, are program Similar work had already been participants. Nearly 600 other PE employees aetended many                                                      completed on Unit No . 2. With different colleges and universities                                          completion of the rehabilitation , these as part of the program in 1986.                                              low-cost , coal-fired units remain available for base-load capacity.
 
TRAINING EXPANDED During 1986 , all the Company's nuclear operation and maintenance training programs received accreditation from the National Academy for Nuclear Training of the Institute of Nuclear Power O perati ons.
Exce llence in nuclear training is a key element in achieving the highest standards of operating nuclear plant safety and re liability.
The Company's Peach Botto m Atomic Power Station became an earl y A nine-week splicing school branch of the Academy w hen the          PJM INTERCONNECTI O N training program teaches station's first five train ing programs  CUTS COSTS                                employees the proper lead splicing rece ived accreditation in 1985 .        In 1986 , PE customers saved 530          techniques for underground Limerick Generating Station p ersonne l  million in energy costs, thanks to the    urban electrical lines. Splicer-in-worked in conjunction w ith Peach        Pennsylvania-New Jersey-Maryland          training Leroy Leighty, Transmission and Distribution, Bottom personnel to develop five          (PJM) Interconnection . Whi le less than pours molten solder lead to join additi onal training programs at Peach    in previous years (due to lower oil sleeve to lead jacket cable while Botto m and ten programs at Limeri ck ,  p rices and much lower p urchases as      instructor Bruce W Bortz w hich resulted in Limerick 's entry into the result of the operati on of Limerick  looks on.
the Academy. With the accreditation of    Unit No. 1) , the annual savings all twenty training programs, the        remained substantial.
Company became o ne of the first                The PJM Interconnection , the multiple-site utilities to attai n full  world 's fi rst integrated power pool ,
member status in the Academy.            was created in 1927 con necting three Recognizing the need for a larger  utili ties, including PE . The present trai ning faci lity for Maintenance      PJM stmcture was established in 1965 Di vision personnel , the Company has    as a jo int enterprise of 11 investor-conve rted its retired Barbadoes          owned utilities , w hich forma lly agreed Pfl fire training school in West Generating Stati on near Norristown to    to operate as a single system to ac hieve Conshohocken has received the Barbadoes Maintenance Training        the significant benefits to be reali zed  community-wide recognition for Center. By putting the new training      through provi ding re liable service at  its safe fire fighting instruction, particularly for fires involving center into operation in 1986 , the      the lowest possible cost. Using the electricity and gas, and has helped Company moved closer to its goa l of      latest comp uter tec hnology, a staff of numerous fire companies with having 775 trained maintenance            PE employees operates the control        their training.
craftsmen by 1990. Nuclear power          center in Valley Forge , Pennsylvania, plant maintenance projects also have been incorporated in the Barbadoes training. Such projects allow trainees to work in a simulated radiation area.
PE's Maintenance Division craft programs were reviewed extensively by the Institute of uclear Power Operations and given fo rmal acc reditati on.
 
Commitment to Public Communication PE will be open and      constantly monitoring PJM and surrounding systems and dispatching                                The production of che corporate forthright in power generation and transmission.                                annual report is one of che our communication        Costs are reduced by sharing reserves                              Company~ many major with our customers,      and coordinating maintenance. Energy                              communications efforts. Designer needed to serve the joint system load is                          George Coan (right), assisted by shareholders,                                                                              James H. Miller (left}, Financial produced by combining the most employees and all                                                                          Division, reviews photographs.
economical sources available from any others involved with    of the interconnected utilities .
our business. We will GAS RATES REDUCED                            under more favorable market seek and respectfully During 1986, the Company reduced              conditions and reductions in pipeline consider constructive    gas rates by S46.6 million for 318 ,000      suppliers' rates in 1986.
public input            gas customers in Bucks, Chester, concerning our          Delaware and Montgomery Counties.            COST REDUCTION MEASURES For a residential gas home heating            REVIEWED steuxirdship in          customer, this reduction caused a            The Company always has sought to constructing and        7. 7% decrease in a typical annual bill ,    control costs whi le continuing to operating the facilities from S912 to S842. This decrease was          provide reliable , quality service to primarily due to the Company's ability        customers. During the year, a review necessary to providing to make prudent purchases of gas from        was made of major cost reduction safe, reliable and      producers and pipeline suppliers              actions PE initiated between 1980 and economical utility                                                    1986. This review indicates that the service.                                                              Company saved customers S1. 2 billion during this period. Actions taken should result in continuing ann ual savings of approximately S193 The Limerick Information Center million.
hoses many visitors. This fiber-opcics display panel wich              Over the 1980-1986 period , fuel-accompanying soundtrack          related savings in the Company's explains che basics of boiling    electric, gas and steam businesses wacer reaccor operations co cwo  amounted to approximately $778 Reading School District teachers, million or 65% of the total SI.2 billion Nancee Ryan and Michael Herzfeld.
 
Predictive maintenance will allow plant operators to recognize potential problems and estimate in advance when repairs wi ll be required . This system wi ll e liminate unnecessary maintenance and increase plant ava ilability by decreasing the number Electrical safety is emphasized in                                        of reactive or forced outages. It also the "Reddy and Eddy Show,"        savings. The largest item in this      w ill provide guidance to operators on which travels to area elementary category was 8602 million saved as a    stresses to plant components.
schools. Edward L. Dick result of two-party, e lectric energy        During the past year, the demonstrates electrical principles to student David}. Gea as Robert  purchase agreements between PE and      Company demonstrated once again Brown, the voice and animator of  compani es to the west with low-cost ,  that it is at the forefront of Reddy Kilowatt, observes.          coa l-fired power.                      technological progress in the e lectric Innovative methods of financing  industry. For example , oil-cooled the Company's capital projects ,        transformers at Peach Bottom, which including Limerick Generating Station , ordinaril y must be de-energized for have achieved savings approac hing      cleaning, were cleaned with a robotic Sl9 5 million . Various innovative      arm be ing developed and tested by the productivity improvements and cost      Company in conjunction with EPRI .
saving measures account for the        When perfected , the robotic arm wi ll remaining 822 1 mill ion of savings. provide a means to work safely on The savings figures include over 82.2  energized , high-voltage equipment.
mil lion from employee suggestions that were submitted through the        SAFETY IMPROVEMENTS REALIZED Company's Employee Suggestion          Throughout 1986, the Company System .                                continued to reduce work-related accidents through an effective safety RESEARCH AND TECHNOLOGY ADVANCED In 1986, the Electric Power Research Institute (EPRI) awarded a $IO million contract to PE to develop an on-line diagnostic monitoring center for power plants . The program will involve a predictive maintenance diagnostic center and a techno logy transfer center for the utility industry, both to be located at Eddystone Station.
Currently, plant maintenance is either reacti ve (repairs ar.e made as parts fail) or planned (a prescribed course of work is followed whether or not repairs are immediately needed).
 
program. In the past 24 months, lost-time accidents have been reduced by over 55%. This exceptional improvement has been realized because of a program of increased safety awareness, new and improved training programs, employee interest and management involvement at                                                    A series of radio and television messages addresses the topics of all levels.
service reliability, electrical safety, home energy audits and REACHING CUSTOMERS AND                                                            customer assistance programs.
COMMUNITY MARKETING HELPS BOOST CUSTOMER BASE                          inside and outside the Company. This Marketing programs in 1986 focused      program assists applicants, employees, on providing information to customers  customers and vendors.
on the efficient use of energy. For          Numerous programs have been example, working with the heat pump    designed to help minorities and industry, a media program targeted      women become better qualified as residential customers for conversion to applicants for employment. As a result, electric heat pumps from oil heat.      the Company's minority work force Similarly, conversion to high-          has grown from 4% in 1969 to nearly efficiency gas heating was promoted to  15% presently. PE also has created customers along existing gas mains. In  programs to help high school students all market segments, PE continues to    improve their skills, so that they may aid consumers to make energy            be able to meet employment purchases that complement their        standards. One such program is PREP lifestyles or satisfy their business    (Program Resulting in Employment needs.                                  Possibilities). PE has either created James L. Everett, Chairman, More than 16,000 new living      programs or joined existing programs responds to a question at a units were connected in 1986. In the    in order to increase the availability of Philadelphia Securities Association residential market, electric space      minority and women engineering          Luncheon. The Company heating was installed in 67% of these  graduates. These programs include        communicates with many varied units, with efficient heat pumps        PEEP (Pre-Engineering Exposure          groups throughout the year as part of its Investor Relations accounting for 92% of these new units. Program) , PRIME (Philadelphia Program.
Another 22% will utilize gas heat. As a Regional Introduction of Minorities to result, 89% of new living units in the  Engineering) and the High School Company's service territory will be using PE's clean and efficient energy products.
MINORITY OPPORTUNITIES ENHANCED PE 's Affirmative Action Program is designed to enhance the participation of minorities and women in areas


Commitment to Public Communication PE will be open and forthright in our communication with our customers, shareholders, employees and all others involved with our business.
We will seek and respectfully consider const ructi ve public input concerning our steuxirdship in constructing and operating the facilities necessary to providing safe, reliable and economical utility service. constantly monitoring PJM and surrounding systems and dispatching power generation and transmission.
Costs are reduced by sharing reserves and coordinating maintenance. Energy needed to serve the joint system load is produced b y combining the most economical sources available from any of the interconnected utilities. GAS RATES REDUCED During 1986 , the Company reduced gas rates by S46.6 million for 318 , 000 gas customers in Bucks, Chester , Delaware and Montgomery Counties. For a residential gas home heating customer , this reduction caused a 7.7% decrease in a typical annual bill , from S912 to S842. This decrease was primarily due to the Company's ability to make prudent purchases of gas from producers and pipeline suppliers The Limerick Information Center hoses many visitors.
This opcics display panel wich accompanying soundtrack explains che basics of boiling wacer reaccor operations co cwo Reading School District teachers , Nancee Ryan and Michael Herzfeld. The production of che corporate annual report is one of che many major communications efforts. Designer George Coan (right), assisted by James H. Miller (left}, Financial Division, reviews photographs. under more favorable market conditions and reductions in pipeline supp liers' rates in 1986. COST REDUCTION MEASURES REVIEWED The Company always has sought to control costs whi l e continuing to provide reliable , quality service to customers.
During the year, a review was made of major cost reduction actions PE initiated between 1980 and 1 986. This review indicates that the Company saved customers S 1. 2 billion during this period. Actions taken should result in continuing ann u a l savings of approximately S 1 93 million. Over the 1980-1986 period , related savings in the Company's electric , gas and steam businesses amounted to approximately
$778 million or 65% of the total SI.2 billion Electrical safety is emphasized in the " Redd y and E ddy Show ," which travels to area elementar y s c hools. Edward L. Dick demonstrates electrical pr in ciples to student Da vid}. Gea a s Robert Brown, the voice and animator of Reddy Kilowatt, observes.
sav ing s. T h e larg est it em in this category was 8602 million save d as a result of two-party , e l ect ric e ner gy purch ase ag re e m e nts b etwee n PE and com p a ni es to the wes t with l ow-c ost , coa l-fir e d power. Inn ova ti ve m e th o d s of financing th e Co mp a n y's cap it a l proje cts , including Limerick Generating Station , ha ve achieved sav in gs a ppro ac hing Sl9 5 million. Various inno va tive productivity impro ve m e n ts and cost sav ing me as ur es account for th e r e maining 822 1 mill i on o f savings. T h e savings figures includ e ove r 82.2 mil l ion from e mplo yee suggestions th a t were s ubmitt e d through the Co mpany's Emp l oyee Sugges t ion Sys tem. RESEARCH AND TECHNOLOGY ADVANCED In 1986 , th e Electric P ower R esearc h In s titute (E PRI) awa rd e d a $IO million contract to P E to d eve lop an on-line diagnostic monitoring center for pow e r pl a nts. The program will in vo lve a pr e dictive maint e nance diagnostic center and a techn o logy transfer center for th e utilit y indu s tr y , both to b e loc ate d at Eddystone Station. Currently, plant maintenance is eit h er r eac ti ve (r e pairs a r.e made as parts fail) or planned (a pr escr ibed course of work i s followed whether or not repairs are immediately needed). Predictive maintenance will a ll ow plant operators to recognize potential problems and estima t e in advance when repairs wi ll be req uir ed. This sys t em wi ll e limin a te unn ecessary maintenance an d increase plant ava il ab ilit y by decreasing the number of r eac tive o r forced outages. I t also w ill p rov id e guidance to operators on s tr esses to plant components.
Durin g the past yea r , th e Co mp a n y demonstrated o nc e again that it i s at th e forefront of technological pro g r ess in the e l ect ri c industry.
For exam ple, o il-c oo l ed tran sfo rm ers a t Peach B o tt o m , which o rdin a ril y mu st b e d e-e n e rgized for cleaning, were cleaned with a robotic arm b e ing d eve l o ped a nd tested b y th e Co mpan y in conjunction with E PRI. When p e r fected , the robotic arm wi ll provide a me a n s to work safe ly o n e n e r gize d , high-vo ltage equipment.
SAFETY IMPROVEMENTS REALIZED Throughout 1986, the Company continued to reduce work-related accidents through an effective safety program. In the past 24 months , time accidents have been reduced by over 55%. This exceptional improvement has been realized because of a program of increased safety awareness , new and improved training programs, employee interest and management involvement at all levels. REACHING CUSTOMERS AND COMMUNITY MARKETING HELPS BOOST CUSTOMER BASE Marketing programs in 1986 focused on providing information to customers on the efficient use of energy. For example , working with the heat pump industry , a media program targeted residential customers for conversion to electric heat pumps from oil heat. Similar l y , conversion to efficiency gas heating was promoted to customers along existing gas mains. In all market segments , PE continues to aid consumers to make energy purchases that complement their lifestyles or satisfy their business needs. More than 16 , 000 new living units were connected in 1986. In the residential market , electric space heating was installed in 67% of these units , with efficient heat pumps accounting for 92% of these new units. Another 22% will utilize gas heat. As a result , 89% of new living units in the Company's service territory will be using PE's clean and efficient energy products.
MINORITY OPPORTUNITIES ENHANCED PE's Affirmative Action Program is designed to enhance the participation of minorities and women in areas inside and outside the Company. This program assists applicants , employees , customers and vendors. Numerous programs have been designed to help minorities and women become better qualified as applicants for employment. As a result , the Company's minority work force has grown from 4% in 1969 to nearly 15% presently.
P E also has created programs to help high school students improve their skills , so that they may be able to meet employment standards. One such program is PREP (Program Resulting in Employment Possibilities).
PE has either created programs or joined existing programs in order to increase the availability of minority and women engineering graduates.
These programs include PEEP (Pre-Engineering Exposure Program), PRIME (Philadelphia Regional Introduction of Minorities to Engineering) and the High School A series of radio and television messages addresses the topics of service reliability, electrical safety, home energy audits and customer assistance programs. James L. Everett, Chairman, responds to a question at a Philadelphia Securities Association Luncheon.
The Company communicates with many varied groups throughout the year as part of its Investor Relations Program.
Academies Program (Academy of Applied Electrical Science).
Academies Program (Academy of Applied Electrical Science).
PE contin u es to expand its support of minority businesses in the Philadelphia region through its materials and services procurement activities.
PE continues to expand its support of minority businesses in the Philadelphia region through its materials and services procurement activities. The Minority Business Development Program has been recognized and is enthusiastically supported by PE and the whole local                                           john H. Austin, Jr., President, also business community. Contracts                                                serves as a community volunteer.
The Minority Business Development Program has been recognized and is enthusiastically supported by PE and the whole local business community.
awarded to minority businesses have   the Company's efforts to renew and     He is President of the United Way of Southeastern Pennsylvania.
Contracts awarded to minority businesses have increased tenfold si nc e the present program was formally adopted in late 1982. PE CARES BENEFITS MANY During 1986 , the PE Cares program again served many area residents.
increased tenfold since the present  strengthen its strong tradition of program was formally adopted in late  service to the people of the Delaware 1982.                                Valley. It was designed as a personalized program to assist that PE CARES BENEFITS MANY                segment of the customer population During 1986, the PE Cares program    which , because of age or infirmity,   Commitment to again served many area residents. PE  may have difficulty coping with the     Good Citizenship Cares was established by Philadelphia complexities of today's world. To date, PE will be a Electric Company in 1981 as part of  more than 26,000 customers have responsible corporate been helped by PE Cares. This enthusiastic response has convinced     citizen by contributing PE to continue this effort. Among the   to the common good many services provided to the PE Cares both in our service members are help in establishing special payment arrangements,           area and in the nation.
PE Cares was established by Philadelphia Electric Company in 1981 as part of the Company's efforts to renew and strengthen its strong tradition of service to the people of the Delaware Valley. It was designed as a personalized program to assist that segment of the customer population which , because of age or infirmity , may have difficulty coping with the comp l exities of today's world. To date, more than 26 , 000 customers have been helped by PE Cares. This enth u siastic response has convinced PE to continue this effort. Among the many services provided to the PE Cares members are help in establis hing special payment arrangements , including the change of due dates to coincide with r ece ipt of Social john H. Austin, Jr., President , also serves as a community volunteer.
including the change of due dates to coincide with receipt of Social Earl K. Parker (left) and H. B.
He is President of the United Way of Southeastern Penns ylvania. Commitment to Good Citizenship PE will be a responsible corporate citize n by contributing to the common good both in our service area and in the nation. Earl K. Parker (l eft) and H. B. Winitsky (right), both of Purchasing Department , accept the "Most Visible In-House Program" award from the Minority Input Committee of the New Penn-Del Regional Minority Purchasing Council.
Winitsky (right), both of Purchasing Department, accept the "Most Visible In-House Program " award from the Minority Input Committee of the New Penn-Del Regional Minority Purchasing Council.


Security or retirement checks and budget billing. The PE Cares r epresentatives also can arrange for third-party notification of all matters pertaining to a customer's account , provide programs concerning safet y and conservation and help direct the PE Ca r es participants to governmental and private assistance programs , as appropriate.
Security or retirement checks and budget billing. The PE Cares representatives also can arrange for third-party notification of all matters pertaining to a customer's account, provide programs concerning safety and conservation and help direct the PE Cares participants to governmental and private assistance programs, as appropriate.
AUTOMATED PROGRAMS IMPROVE SERVICE The Company continued to improve its C u stomer Communication System in 1986. An important component of tills overall system is the Trouble Management System , which sets priorities for scheduled work e l ectronically and allows the status of each job to be automatically updated daily. During a s t orm, this system helps to assign the correct work force and eq uipm ent so that service can be restored as quickly an d efficient l y as possible.
the Company achieved a nearly perfect AUTOMATED PROGRAMS IMPROVE                 record of reliable service with a SERVICE                                   service availability index of 99 .989%.
This results in shorter interruptions for cus tom ers and ena bl es P E to maintain its high standard of service reliability. In 1986 , Amanda L. Coleman, Public A ff air s , serves on numerous community and civic commiccees , including the new Penns ylva nia Convention Center Authorit y. She is pictured next to a model of the planned center. the Compan y achieved a nearly perfect record of reliable service wi th a service availability index of 99. 989%. Another part of the Customer Communication System is the Field Order Dispatch Sys t em wh ich allows gas service calls to be electronically transmitted from the ca ll-taking areas to the dispatch office. This greatl y enhances safety , since it ass ur es prompt handling of gas eme r gencies. Finally , the third C u stomer Commun i cation System component , th e Service Applications Management System , permits efficient tracking of new construction so that electric and gas service and installation of meters may be provided efficient ly a nd promptl y. These mod e rn systems give the Company th e means to offer customers eve n better , more reliable service th a n in the p ast. With these sys tem s , e mpl oyees can utili ze more efficient work m et hods a nd cut consuming paper work.
The Company continued to improve               Another part of the Customer its Customer Communication System          Communication System is the Field in 1986. An important component of         Order Dispatch System which allows tills overall system is the Trouble       gas service calls to be electronically Management System, which sets             transmitted from the call-taking areas priorities for scheduled work             to the dispatch office. This greatly electronically and allows the status of   enhances safety, since it assures each job to be automatically updated       prompt handling of gas emergencies.
Management's Discussion and Analysis of Financial Condition and Results of Operations General Total revenue increased in 1986 over 1985 as a result of electric rate increases and higher electric sales. See "Electric Operating Revenue" below. Operation and maintenance expenses decreased in 1986 compared with 1985 as a result of lower fuel expense. The lower fuel expense was primarily due to the excellent performance of the Company's nuclear units. In accordance with the Declaratory Order issued by th,e Pennsylvania Public Utility Commission (PUC) on September 28, 1984, the Company deferred all operating costs, carrying charges on investment, fuel savings and income taxes associated with Limerick Unit No. 1 and 50% of common plant from February 1, 1986, the date of commercial operation, untilJune 27, 1986, the date the plant was included in rates. The combination of this Declaratory Order and theJune 27, 1986 rate order, which permits continued accrual of an amount equivalent to Allowance for Funds Used During Construction (AFUDC) on the remaining 50% of common plant, contributed approximately  
daily. During a storm, this system helps   Finally, the third Customer to assign the correct work force and       Communication System component, equipment so that service can be           the Service Applications Management restored as quickly and efficiently as    System, permits efficient tracking of possible. This results in shorter         new construction so that electric and interruptions for customers and            gas service and installation of meters enables PE to maintain its high           may be provided efficiently and standard of service reliability. In 1986 , promptly.
$221 million to 1986 common stock earnings.
These modern systems give the Company the means to offer customers Amanda L. Coleman, Public                 even better, more reliable service than Affairs, serves on numerous               in the past. With these systems, community and civic commiccees, employees can utilize more efficient including the new Pennsylvania work methods and cut time-Convention Center Authority.
OnJune 27, 1986, the PUC modified the Company's Energy Cost Rate (ECR) so that only 80% of the difference between actual electric energy costs and the amount billed to the customers is subject to fact reconciliation for over/under collections.
She is pictured next to a model of         consuming paper work.
On October 1, 1986, gas rates were reduced by approximately  
the planned center.
$47 million. This change was due primarily to lower fuel costs. Periodic rate relief may be required in the future to offset increases in operating costs or carrying charges in order to prevent any adverse effects on future net income, earnings per average common share and the Company's ability to raise funds. The Tax Reform Act of 1986 (Act) introduces substantial changes to the corporate tax structure beginningJanuary 1, 1987. The rules under which corporations compute their taxable income have been significantly changed. Some of the changes affecting the Company are changes in the corporate tax rate, depreciation rates and repeal of the investment tax credit (ITC). The Company is currently in the process of reviewing the specific impacts of this Act on its future tax liabilities, liquidity and financing plans. In the long run, the Act may increase the Company's cost of doing business.
 
ITC and deferred income taxes have provided significant sources of capital. Although the Company will be entitled to certain ITCs after January 1, 1987 because of carryovers from prior years and portions of its construction program qualifying under transition rules, the benefits of that ITC will be reduced. Repeal of ITC (other than prior year carryovers and qualified transition.
Management's Discussion and Analysis of Financial Condition and Results of Operations General                                                                In December 1985, the Financial Accounting Total revenue increased in 1986 over 1985 as a result of    Standards Board issued Statement No. 87, Employer's electric rate increases and higher electric sales. See      Accounting For Pensions. This statement becomes "Electric Operating Revenue" below.                          *effective in 1987. Statement No. 87 prescribes a method Operation and maintenance expenses decreased in    for determining periodic pension cost which differs 1986 compared with 1985 as a result of lower fuel            significantly from the method utilized by the Company in expense. The lower fuel expense was primarily due to the    1986 and prior years. Historically the Company has used excellent performance of the Company's nuclear units.       the same method for determining periodic pension cost In accordance with the Declaratory Order issued    as used for funding the pension plan. Beginning in 1987, by th,e Pennsylvania Public Utility Commission (PUC) on     the method prescribed by Statement No. 87 for measuring September 28, 1984, the Company deferred all operating       periodic pension cost will differ from the method utilized costs, carrying charges on investment, fuel savings and      for funding purposes. Accordingly, in 1987 and income taxes associated with Limerick Unit No. 1 and         subsequent years, contributions to the pension plan might 50% of common plant from February 1, 1986, the date of       differ from periodic pension cost recorded in the commercial operation, untilJune 27, 1986, the date the       financial statements. The Company has determined that plant was included in rates. The combination of this         pension cost for 1987, determined in accordance with Declaratory Order and theJune 27, 1986 rate order,           Statement No. 87, will be approximately $10 million less which permits continued accrual of an amount equivalent     than 1986 pension cost.
property) and reductions in deferred income taxes resulting from reduced corporate tax rates will increase the Company's external financing requirements.
to Allowance for Funds Used During Construction                       In December 1986, the Financial Accounting (AFUDC) on the remaining 50% of common plant,               Standards Board issued Statement No. 90, Regulated contributed approximately $221 million to 1986               Enterprises - Accounting/or Abandonments and common stock earnings.                                       Disallowances ofPlant Costs. The Company is required OnJune 27, 1986, the PUC modified the               to adopt this statement by 1988. One of the provisions of Company's Energy Cost Rate (ECR) so that only 80% of         Statement No. 90 requires the Company to recognize as a the difference between actual electric energy costs and     loss regulatory disallowances related to plant investment.
Although the corporate income tax rates are reduced, these reductions are offset by the repeal of the ITC, imposition of the Alternative Minimum Tax and other changes which will increase the Company's cash tax payments.
the amount billed to the customers is subject to after-the-  Previously such amounts were included in the costs of the.
In December 1985, the Financial Accounting Standards Board issued Statement No. 87, Employer's Accounting For Pensions.
fact reconciliation for over/under collections.             plant and depreciated over the plant's life. This Statement On October 1, 1986, gas rates were reduced by       may require the Company to record a loss equal to the approximately $47 million. This change was due               $368.9 million of Limerick Unit No. 1 cost excluded from primarily to lower fuel costs.                              rate base by the PUC in its order of June 27, 1986. The Periodic rate relief may be required in the future Company may apply the provisions of this Statement to offset increases in operating costs or carrying charges   cumulatively in the year of adoption or it may in order to prevent any adverse effects on future net       retroactively restate previously issued financial income, earnings per average common share and the           statements. It should be noted that the Company has filed Company's ability to raise funds.                           a petition for review of the PUC's June 27, 1986 order The Tax Reform Act of 1986 (Act) introduces         with the Commonwealth Court of Pennsylvania substantial changes to the corporate tax structure           concerning the PUC's Limerick rate base disallowance.
This statement becomes *effective in 1987. Statement No. 87 prescribes a method for determining periodic pension cost which differs significantly from the method utilized by the Company in 1986 and prior years. Historically the Company has used the same method for determining periodic pension cost as used for funding the pension plan. Beginning in 1987, the method prescribed by Statement No. 87 for measuring periodic pension cost will differ from the method utilized for funding purposes.
beginningJanuary 1, 1987. The rules under which             Although Statement No. 90 would have significantly corporations compute their taxable income have been         affected 1986 results of operations if applied in 1986 (see significantly changed. Some of the changes affecting the    Note 2 to the Consolidated Financial Statements), the Company are changes in the corporate tax rate,               Company believes that, should its aforementioned depreciation rates and repeal of the investment tax credit   petition for review be denied, adoption of Statement No.
Accordingly, in 1987 and subsequent years, contributions to the pension plan might differ from periodic pension cost recorded in the financial statements.
(ITC). The Company is currently in the process of           90 will not significantly affect the Company's future reviewing the specific impacts of this Act on its future tax financing plans or its ability to pay dividends.
The Company has determined that pension cost for 1987, determined in accordance with Statement No. 87, will be approximately
liabilities, liquidity and financing plans. In the long run, the Act may increase the Company's cost of doing             Electric Operating Revenue business. ITC and deferred income taxes have provided       Increased electric revenue in 1986over1985 is significant sources of capital. Although the Company will   attributable to higher base rates and increased sales.
$10 million less than 1986 pension cost. In December 1986, the Financial Accounting Standards Board issued Statement No. 90, Regulated Enterprises
be entitled to certain ITCs after January 1, 1987 because   Kilowatthour sales of electricity to retail customers of carryovers from prior years and portions of its           increased 3 percent in 1986over1985. The increases of construction program qualifying under transition rules,     electric revenue in 1985 and 1984 over the previous the benefits of that ITC will be reduced. Repeal of ITC     corresponding periods are primarily attributable to higher (other than prior year carryovers and qualified transition. base rates.
-Accounting/or Abandonments and Disallowances of Plant Costs. The Company is required to adopt this statement by 1988. One of the provisions of Statement No. 90 requires the Company to recognize as a loss regulatory disallowances related to plant investment.
property) and reductions in deferred income taxes resulting from reduced corporate tax rates will increase     Electric Revenue                  Millions of Dollars the Company's external financing requirements. Although       Increase/ (Decrease)  '86vs. '85    '85 vs. '84    '84vs. '83 the corporate income tax rates are reduced, these           Rate Increases            s 185.0        s 141.4        s 140.0 reductions are offset by the repeal of the ITC, imposition   Fuel Related Revenue      (39.4)          (2.8)          104.0 Sales and Other              37.6          (58.1)          83.8 of the Alternative Minimum Tax and other changes which will increase the Company's cash tax payments.                 Total                  s 183.2        s 80.5          S327.8
Previously such amounts were included in the costs of the. plant and depreciated over the plant's life. This Statement may require the Company to record a loss equal to the $368.9 million of Limerick Unit No. 1 cost excluded from rate base by the PUC in its order of June 27, 1986. The Company may apply the provisions of this Statement cumulatively in the year of adoption or it may retroactively restate previously issued financial statements.
 
It should be noted that the Company has filed a petition for review of the PU C's June 27, 1986 order with the Commonwealth Court of Pennsylvania concerning the PUC's Limerick rate base disallowance.
Gas Operating Revenue                                          tax credits, net, included in other income decreased as a Lower gas revenue in 1986 compared with 1985 is                result of lower allowance for borrowed funds used during attributable to decreases in large commercial and             construction. Income taxes charged to operations industrial sales, gas transported for others and lower fuel-  decreased in 1985 compared with 1984 as a result of related revenue resulting from reductions in the price of      lower operating income and increased in 1984 compared gas purchased from suppliers. Gas revenue decreased in         with 1983 as a result of higher operating income. Income 1985 compared with 1984 due to a decrease in sales and        tax credits, net, included in other income, increased in lower fuel-related revenue resulting from reductions in        1985 and 1984 over the previous corresponding periods the price of gas purchased from suppliers. Gas revenue        as a result of higher allowance for borrowed funds used increased in 1984over1983 due to higher rates and              during construction.
Although Statement No. 90 would have significantly affected 1986 results of operations if applied in 1986 (see Note 2 to the Consolidated Financial Statements), the Company believes that, should its aforementioned petition for review be denied, adoption of Statement No. 90 will not significantly affect the Company's future financing plans or its ability to pay dividends.
increased sales.
Electric Operating Revenue Increased electric revenue in 1986over1985 is attributable to higher base rates and increased sales. Kilowatthour sales of electricity to retail customers increased 3 percent in 1986over1985.
Other Taxes Fuel and Energy Interchange Expense                            Other taxes decreased slightly in 1986 versus 1985 For accounting purposes, fuel and energy interchange          due to lower capital stock and realty taxes. In 1985 and costs are deferred until billed as fuel adjustment revenue. 1984 other taxes increased due to higher capital stock and See "General" above, regarding after-the-fact                  realty taxes, and higher realty and gross receipts taxes, reconciliation for over/under collection. In 1986, gross      respectively.
The increases of electric revenue in 1985 and 1984 over the previous corresponding periods are primarily attributable to higher base rates. Electric Revenue Millions of Dollars Increase/ (Decrease)
fuel and energy interchange costs were $281 million lower than in 1985 due primarily to the excellent              Allowance for Funds Used During Construction performance of the Company's nuclear units. Fuel and          The decrease in AFUDC in 1986 compared with 1985 is a energy interchange costs deferred in previous years and        result of the commercial operation of Limerick Unit No. 1.
'86vs. '85 '85 vs. '84 '84vs. '83 Rate Increases s 185.0 s 141.4 s 140.0 Fuel Related Revenue (39.4) (2.8) 104.0 Sales and Other 37.6 (58.1) 83.8 Total s 183.2 s 80.5 S327.8 Gas Operating Revenue Lower gas revenue in 1986 compared with 1985 is attributable to decreases in large commercial and industrial sales, gas transported for others and lower related revenue resulting from reductions in the price of gas purchased from suppliers.
charged to expense in 1986 amounted to $189 million. In        The increases inAFUDC in 1985and1984 resulted from 1985, gross fuel and energy interchange costs were $212        increases in construction work in progress.
Gas revenue decreased in 1985 compared with 1984 due to a decrease in sales and lower fuel-related revenue resulting from reductions in the price of gas purchased from suppliers.
million lower than in 1984 due primarily to the excellent performance of the Salem Nuclear Station. Fuel and            Interest Charges energy interchange costs deferred in previous years and       Interest charges on debt increased in each of the last three charged to expense in 1985 amounted to $135 million,          years due to additional debt outstanding. The ratio of resulting in net fuel and energy interchange expense          earnings to mortgage interest, which is one measure of remaining essentially the same in 1985 as in 1984. In          the Company's ability to issue additional mortgage bonds, 1984, gross fuel and energy interchange costs were            was 2.82 times, 1.98 times and 2.55 times, at year end, for essentially the same as in 1983; however, electric fuel        1986, 1985 and 1984 respectively.
Gas revenue increased in 1984over1983 due to higher rates and increased sales. Fuel and Energy Interchange Expense For accounting purposes, fuel and energy interchange costs are deferred until billed as fuel adjustment revenue. See "General" above, regarding after-the-fact reconciliation for over/under collection.
costs deferred were lower by $104.2 million, resulting in a net increase in fuel and energy interchange expense          Capital Expenditures and Changes in compared with 1983.                                            Financial Position The Company is carrying on a construction program Other Operating and Maintenance Expenses                      which is estimated to require expenditures of 1986 non-fuel operating and maintenance expenses              approximately $1.2 billion in 1987 and $3.3 billion from increased over 1985 primarily as a result of the              1988 to 1990. A majority of these expenditures relate to commercial operation of Limerick Unit No. 1. Other            the construction of the Company's second 1055-mW operating and maintenance expenses increased in 1985           nuclear generating unit at Limerick. Successful and 1984 over the previous corresponding periods due to       completion of this program is dependent on the inflation, growth in utility plant and increased costs        Company's ability to obtain external financing, primarily associated with the Company's nuclear generating units        through debt arrangements and sales of equity securities and with operating the new flue gas scrubbing systems at      which are subject to market conditions and to meeting the Company's two wholly owned, coal-burning stations.         certain earnings tests. The program also is subject to the licensing requirements of the Nuclear Regulatory Depreciation                                                  Commission, to other regulatory approvals in connection Increases in depreciation in each of the last three years      with the planned supplemental cooling water system for reflect additions to plant in service. The 1986 increase in    Limerick, to financing approvals by the PUC and to depreciation over 1985 is primarily attributable to            changes due to litigation.
In 1986, gross fuel and energy interchange costs were $281 million lower than in 1985 due primarily to the excellent performance of the Company's nuclear units. Fuel and energy interchange costs deferred in previous years and charged to expense in 1986 amounted to $189 million. In 1985, gross fuel and energy interchange costs were $212 million lower than in 1984 due primarily to the excellent performance of the Salem Nuclear Station. Fuel and energy interchange costs deferred in previous years and charged to expense in 1985 amounted to $135 million, resulting in net fuel and energy interchange expense remaining essentially the same in 1985 as in 1984. In 1984, gross fuel and energy interchange costs were essentially the same as in 1983; however, electric fuel costs deferred were lower by $104.2 million, resulting in a net increase in fuel and energy interchange expense compared with 1983. Other Operating and Maintenance Expenses 1986 non-fuel operating and maintenance expenses increased over 1985 primarily as a result of the commercial operation of Limerick Unit No. 1. Other operating and maintenance expenses increased in 1985 and 1984 over the previous corresponding periods due to inflation, growth in utility plant and increased costs associated with the Company's nuclear generating units and with operating the new flue gas scrubbing systems at the Company's two wholly owned, coal-burning stations.
Limerick Unit No. 1 being placed in service.                          Interim financing of the construction program is provided by commercial paper borrowing and short- and Income Taxes                                                  intermediate-term bank loans, which also are dependent Income taxes charged to operations increased in 1986          on the Company's financial position.           _
Depreciation Increases in depreciation in each of the last three years reflect additions to plant in service. The 1986 increase in depreciation over 1985 is primarily attributable to Limerick Unit No. 1 being placed in service. Income Taxes Income taxes charged to operations increased in 1986 over 1985 as a result of higher operating income.
over 1985 as a result of higher operating income. Incom~ _
_ ------------
                                                              ------~-              ~
tax credits, net, included in other income decreased as a result of lower allowance for borrowed funds used during construction.
 
Income taxes charged to operations decreased in 1985 compared with 1984 as a result of lower operating income and increased in 1984 compared with 1983 as a result of higher operating income. Income tax credits, net, included in other income, increased in 1985 and 1984 over the previous corresponding periods as a result of higher allowance for borrowed funds used during construction.
Philadelphia Electric Company and Subsidiary Companies Consolidated Statements of Income For the Year Ended December 31 1986              19ss*            19s4*
Other Taxes Other taxes decreased slightly in 1986 versus 1985 due to lower capital stock and realty taxes. In 1985 and 1984 other taxes increased due to higher capital stock and realty taxes, and higher realty and gross receipts taxes, respectively.
(Thousands ofDollars)
Allowance for Funds Used During Construction The decrease in AFUDC in 1986 compared with 1985 is a result of the commercial operation of Limerick Unit No. 1. The increases inAFUDC in 1985and1984 resulted from increases in construction work in progress.
Operating Revenues Electric                                                    $2,699,365        $2,516,191        $2,435,731 Gas                                                            391,504            428,984          462,966 Total Operating Revenues                  3,090,869          2,945,175          2,898,697 Operating Expenses Fuel and Energy Interchange                                    889,277          1,097,731          1,069,849 Other Operating Expenses                                      618,257            548,609          510,726 Maintenance                                                    274,200            262,419          242,675 Depreciation                                                  222,568            183,049          176,433 Income Taxes                                                  288,930            199,900          242,854 Other Taxes                                                    232,627            240,962          206,339 Total Operating Expenses                  2,525,859          2,532,670          2,448,876 Operating Income                                              565,010            412,505          449,821 Other Income and Deductions Allowance for Other Funds Used During Construction              76,821            176,310          134,485 Limerick Carrying Charges                                      188,679 Income Tax Credits, Net                                        102,462            133,415          116,423 Other, Net                                                        2,462              (3,464)            239 Total Other Income and Deductions            370,424            306,261          251,147 Income Before Interest Charges                                935,434            718,766          700,968  <2>
Interest Charges Interest charges on debt increased in each of the last three years due to additional debt outstanding.
Interest Charges Long-Term Debt                                                458,885            435,373          402,475 Short-Term Debt                                                  12,512            17,721            30,912 Allowance for Borrowed Funds Used During Construction        (101,617)          (257,181)          (220,370)
The ratio of earnings to mortgage interest, which is one measure of the Company's ability to issue additional mortgage bonds, was 2.82 times, 1.98 times and 2.55 times, at year end, for 1986, 1985 and 1984 respectively.
Net Interest Charges                        369,780            195,913          213,017 Income from Continuing Operations                              565,654            522,853          487,951 Income from Discontinued Steam Operations                        1,916              2,448            4,438 Estimated Loss on Disposal of Discontinued Steam Operations      (1,250)
Capital Expenditures and Changes in Financial Position The Company is carrying on a construction program which is estimated to require expenditures of approximately
Net Income                                                     566,320            525,301          492,389 Preferred Stock Dividends                                        90,961            90,577            82,682 Earnings Applicable to Common Stock                        $ 475,359          $ 434,724        $ 409,707 Average Shares of Common Stock Outstanding (Thousands)        183,141            169,784          151,804 Income from Continuing Operations Per Average Common Share (Dollars)                            $2.59              $2.55            $2.67 Earnings Per Average Common Share (Dollars)                      $2.60              $2.56            $2.70 Dividends Per Common Share (Dollars)                              $2.20              $2.20            $2.20
$1.2 billion in 1987 and $3.3 billion from 1988 to 1990. A majority of these expenditures relate to the construction of the Company's second 1055-mW nuclear generating unit at Limerick.
*Reclassifiedfor comparative purposes.
Successful completion of this program is dependent on the Company's ability to obtain external financing, primarily through debt arrangements and sales of equity securities which are subject to market conditions and to meeting certain earnings tests. The program also is subject to the licensing requirements of the Nuclear Regulatory Commission, to other regulatory approvals in connection with the planned supplemental cooling water system for Limerick, to financing approvals by the PUC and to changes due to litigation.
Interim financing of the construction program is provided by commercial paper borrowing and short-and intermediate-term bank loans, which also are dependent on the Company's financial position.
_
Philadelphia Electric Company and Subsidiary Companies Consolidated Statements of Income Operating Revenues Electric Gas Total Operating Revenues Operating Expenses Fuel and Energy Interchange Other Operating Expenses Maintenance Depreciation Income Taxes Other Taxes Total Operating Expenses Operating Income Other Income and Deductions Allowance for Other Funds Used During Construction Limerick Carrying Charges Income Tax Credits, Net Other, Net Total Other Income and Deductions Income Before Interest Charges Interest Charges Long-Term Debt Short-Term Debt Allowance for Borrowed Funds Used During Construction Net Interest Charges Income from Continuing Operations Income from Discontinued Steam Operations Estimated Loss on Disposal of Discontinued Steam Operations Net Income Preferred Stock Dividends Earnings Applicable to Common Stock Average Shares of Common Stock Outstanding (Thousands)
Income from Continuing Operations Per Average Common Share (Dollars)
Earnings Per Average Common Share (Dollars)
Dividends Per Common Share (Dollars)
*Reclassified for comparative purposes.
See notes to financial statements.
See notes to financial statements.
For the Year Ended December 31 1986 19ss* 19s4* (Thousands of Dollars) $2,699,365
 
$2,516,191
Philadelphia Electric Company and Subsidiary Companies Consolidated Balance Sheets ASSETS December 31 1986           1985.
$2,435,731 391,504 428,984 462,966 3,090,869 2,945,175 2,898,697 889,277 1,097,731 1,069,849 618,257 548,609 510,726 274,200 262,419 242,675 222,568 183,049 176,433 288,930 199,900 242,854 232,627 240,962 206,339 2,525,859 2,532,670 2,448,876 565,010 412,505 449,821 76,821 176,310 134,485 188,679 102,462 133,415 116,423 2,462 (3,464) 239 370,424 306,261 251,147 935,434 718,766 700,968 <2> 458,885 435,373 402,475 12,512 17,721 30,912 (101,617)
(Thousands ofDollars)
(257,181)
Utility Plant, at original cost Electric                                                $ 8,875,150    $ 4,982,099 Gas                                                          506,021          474,599 Steam                                                        54,176           54,138 Common, used in all services                                128,733          132,323 9,564,080        5,643,159 Less: Accumulated Depreciation                        2,014,710        1,824,420 Net Utility Plant in Service                              7,549,370        3,818,739 Construction Work in Progress                              1,652,615        4,929,093 Leased Property, net                                        281,346          338,141 Net Utility Plant                       9,483,331        9,085,973 Current Assets Cash and Temporary Cash Investments                           90,716          188, 785 Accounts Receivable Customers                                                 345,432          348,233 Other                                                     30,174            22,687 Inventories, at average cost Fossil Fuel                                               54,517          63,594 Materials and Supplies                                     75,219          60,152 Deferred Income Taxes - Energy Costs                         44,842          (51,814)
(220,370) 369,780 195,913 213,017 565,654 522,853 487,951 1,916 2,448 4,438 (1,250) 566,320 525,301 492,389 90,961 90,577 82,682 $ 475,359 $ 434,724 $ 409,707 183,141 169,784 151,804 $2.59 $2.55 $2.67 $2.60 $2.56 $2.70 $2.20 $2.20 $2.20 0 Philadelphia Electric Company and Subsidiary Companies Consolidated Balance Sheets ASSETS Utility Plant, at original cost Electric Gas Steam Common, used in all services Less: Accumulated Depreciation Net Utility Plant in Service Construction Work in Progress Leased Property, net Net Utility Plant Current Assets Cash and Temporary Cash Investments Accounts Receivable Customers Other Inventories, at average cost Fossil Fuel Materials and Supplies Deferred Income Taxes -Energy Costs Compensated Absences Other Total Current Assets Deferred Debits and Other Assets Unrecovered Revenue Deferred Limerick Costs and Carrying Charges Investments Loss on Reacquired Debt Other Total Deferred Debits and Other Assets Total 'Reclassified for comparative purposes.
Compensated Absences                                         50,800          46,370 0 Other                                                         27,681            25,402 Total Current Assets                       719,381          703,409 Deferred Debits and Other Assets Unrecovered Revenue                                         112,472 Deferred Limerick Costs and Carrying Charges                 195,617 Investments                                                   89,702            87,670 Loss on Reacquired Debt                                       76,783            48,589 Other                                                         70,734          86,204 Total Deferred Debits and Other Assets     545,308          222,463 Total                                 $10,748,020    $10,0ll,845
  'Reclassified for comparative purposes.
See notes to financial statements.
See notes to financial statements.
December 31 1986 1985. (Thousands of Dollars) $ 8,875,150
 
$ 4,982,099 506,021 474,599 54,176 54,138 128,733 132,323 9,564,080 5,643,159 2,014,710 1,824,420 7,549,370 3,818,739 1,652,615 4,929,093 281,346 338,141 9,483,331 9,085,973 90,716 188, 785 345,432 348,233 30,174 22,687 54,517 63,594 75,219 60,152 44,842 (51,814) 50,800 46,370 27,681 25,402 719,381 703,409 112,472 195,617 89,702 87,670 76,783 48,589 70,734 86,204 545,308 222,463 $10,748,020
CAPITALIZATION AND LIABILITIFS December 31 1986             1985' (Thousands ofDollars)
$10,0ll,845 CAPITALIZATION AND LIABILITIFS Capitalli:ation Common Shareholders' Equity Common Stock Other Paid-In Capital Retained Earnings Preferred Stock Without Mandatory Redemption With Mandatory Redemption Long-Term Debt Total Capitalli:ation Current Liabilities Notes Payable, Bank Long-Term Debt Due Within One Year Capital Lease Obligations Due Within One Year Accounts Payable Taxes Accrued Deferred Energy Costs Interest Accrued Dividends Payable Compensated Absences Other Total Current Liabilities Deferred Credits and Other Liabilities Capital Lease Obligations Deferred Income Taxes Unamortized Investment Tax Credits Other Total Deferred Credits and Other Liabilities Total $ December 31 1986 1985' (Thousands of Dollars) 2,832,967 7,787 653,127 3,493,881 572,472 374,956 4,286,792 8,728,101 108,570 69,379 182,498 86,187 88,215 90,701 39,607 50,800 29,153 745,110 211,966 694,990 320,107 47,746 1,274,809  
Capitalli:ation Common Shareholders' Equity Common Stock                                            $ 2,832,967      $ 2,601,989 Other Paid-In Capital                                          7,787            7,331 Retained Earnings                                            653,127          583,728 3,493,881        3,193,048 Preferred Stock Without Mandatory Redemption                                 572,472          572,472 With Mandatory Redemption                                   374,956          318,309 Long-Term Debt                                               4,286,792        4,309,131 Total Capitalli:ation                         8,728,101        8,392,960 Current Liabilities Notes Payable, Bank                                                                 1,000 Long-Term Debt Due Within One Year                             108,570            80,800 Capital Lease Obligations Due Within One Year                   69,379          76,326 Accounts Payable                                               182,498          144,407 Taxes Accrued                                                   86,187          58,509 Deferred Energy Costs                                           88,215        (101,655)
$ 2,601,989 7,331 583,728 3,193,048 572,472 318,309 4,309,131 8,392,960 1,000 80,800 76,326 144,407 58,509 (101,655) 93,008 40,698 46,370 25,583 465,046 261,815 502,621 302,409 86,994 1,153,839  
Interest Accrued                                                 90,701          93,008 Dividends Payable                                               39,607          40,698 Compensated Absences                                             50,800          46,370  <8>
$10,748,020  
Other                                                           29,153          25,583 Total Current Liabilities                       745,110          465,046 Deferred Credits and Other Liabilities Capital Lease Obligations                                     211,966          261,815 Deferred Income Taxes                                         694,990          502,621 Unamortized Investment Tax Credits                             320,107          302,409 Other                                                           47,746          86,994 Total Deferred Credits and Other Liabilities   1,274,809       1,153,839 Total                                        $10,748,020     $10,011,845
$10,011,845  
 
<8>
Philadelphia Electric Company and Subsidiary Companies ConsoUdated Statements of Changes In Cash Flows For the Years Ended December 31 1986               1985               1984 (Thousands ofDollars)
Philadelphia Electric Company and Subsidiary Companies ConsoUdated Statements of Changes In Cash Flows For the Years Ended December 31 1986 1985 1984 (Thousands of Dollars) Cash Flow From Operations Income from Continuing Operations $565,654 $522,853  
Cash Flow From Operations Income from Continuing Operations                               $565,654         $522,853           $487,951 Non-Cash Items Included in Income Depreciation and Amortization                                 285,204           183,049           176,433 Nuclear Fuel Disposal Costs                                                         5,601           13,201 Deferred Income Taxes                                         133,419             66,553             78,550 Investment Tax Credits, Net                                   29,041               3,582           49,941 Allowance for Other Funds Used During Construction             (76,821)         (176,310)         (134,485)
$487,951 Non-Cash Items Included in Income Depreciation and Amortization 285,204 183,049 176,433 Nuclear Fuel Disposal Costs 5,601 13,201 Deferred Income Taxes 133,419 66,553 78,550 Investment Tax Credits, Net 29,041 3,582 49,941 Allowance for Other Funds Used During Construction (76,821) (176,310) (134,485)
Increase In Deferred Limerick Costs and Carrying Charges     (179,592)
Increase In Deferred Limerick Costs and Carrying Charges (179,592)
Increase in Unrecovered Revenue                             (112,472)
Increase in Unrecovered Revenue (112,472)
Amortization of Leased Property                                 65,600             60,900             39,100 Limerick Precommercial Fuel Cost                               16,448             45,301 Change In:
Amortization of Leased Property 65,600 60,900 39,100 Limerick Precommercial Fuel Cost 16,448 45,301 Change In: Deferred Energy Costs 189,870 128,240 (80,649) Other Current Assets and Liabilities 39,869 45,395 (41,043) Other Deferred Debits and Credits (17,707) 6,948 (16,112) Net Cash Flow From Continuing Operations 938,513 892,112 572,887 Net Cash Flow From Discontinued Operations 3,468 4,105 3,992 Net Cash Flow From Operations 941,981 896,217 576,879 Cash Flow From Financing Issuance of Common Stock 230,978 241,041 250,445 Issuance of Preferred Stock 75,000 100,000 <8> Retirement of Preferred Stock Including Change in Other Paid-in Capital (17,897) (7,322) (7,757) Dividends on Preferred and Common Stock (494,916)  
Deferred Energy Costs                                     189,870           128,240           (80,649)
(464,003)  
Other Current Assets and Liabilities                       39,869             45,395           (41,043)
Other Deferred Debits and Credits                         (17,707)             6,948           (16,112)
Net Cash Flow From Continuing Operations                         938,513           892,112           572,887 Net Cash Flow From Discontinued Operations                         3,468               4,105             3,992 Net Cash Flow From Operations                                   941,981           896,217           576,879 Cash Flow From Financing Issuance of Common Stock                                         230,978           241,041           250,445 Issuance of Preferred Stock                                       75,000                             100,000 Retirement of Preferred Stock Including Change in Other Paid-in
<8>    Capital Dividends on Preferred and Common Stock (17,897)
(494,916)
(7,322)
(464,003)
(7,757)
(418,098)
(418,098)
Change in Dividends Payable (1,091) (3,098) 16,585 Expenses of Issuing Preferred and Common Stock (2,005) (870) (3,955) Issuance of Long-Term Debt, Including Capital Lease Obligations 869,471 732,364 317,337 Capital Lease Obligations (48,471) (46,364) (58,637) Retirement of Long-Term Debt (260,829)  
Change in Dividends Payable                                       (1,091)             (3,098)           16,585 Expenses of Issuing Preferred and Common Stock                   (2,005)               (870)           (3,955)
(274,391)  
Issuance of Long-Term Debt, Including Capital Lease Obligations 869,471           732,364           317,337 Capital Lease Obligations                                       (48,471)           (46,364)           (58,637)
(12,183) Premium on Retirement of Long-Term Debt (28,930) (45,450) Net Borrowings Under Revolving Credit Agreements (550,000) 150,000 200,000 Change in Short-Term Debt (1,000) (259,000)  
Retirement of Long-Term Debt                                   (260,829)         (274,391)           (12,183)
(7,500) Capital Lease Payments (65,600) (60,900) (39,100) Change in Escrow Funds 2,872 74,775 (80,125) Transfer from Investments 19,656 Payment of Other Obligations (37,719) (61,843) Net Cash Flow From Financing (330,137)  
Premium on Retirement of Long-Term Debt                         (28,930)           (45,450)
(25,061) 276,668 Cash Flow From Investing Increase in Utility Plant, Including Leased Property (771,998)  
Net Borrowings Under Revolving Credit Agreements               (550,000)           150,000           200,000 Change in Short-Term Debt                                         (1,000)         (259,000)             (7,500)
(829,814)  
Capital Lease Payments                                           (65,600)           (60,900)           (39,100)
(1,084,414)
Change in Escrow Funds                                             2,872             74,775           (80,125)
Leased Property 48,471 46,364 58,637 Allowance for Other Funds Used During Construction 76,821 176,310 134,485 Cost of Property Retired and Cost of Removal (86,332) (86,866) (44,014) Transfer (to)/from Deferred Debits 25,157 (11,923) Sale of Magnesium Oxide Facilities 55,92.8 Increase (Decrease) in Other Investments (2,032) (6,799) (1,082) Net Cash Flow From Investing (709,913)  
Transfer from Investments                                                                               19,656 Payment of Other Obligations                                     (37,719)           (61,843)
(712,728)  
Net Cash Flow From Financing                                   (330,137)           (25,061)         276,668 Cash Flow From Investing Increase in Utility Plant, Including Leased Property           (771,998)         (829,814)       (1,084,414)
(880,460)
Leased Property                                                   48,471             46,364             58,637 Allowance for Other Funds Used During Construction               76,821           176,310           134,485 Cost of Property Retired and Cost of Removal                     (86,332)           (86,866)           (44,014)
Net Change in Cash Flow $(98,069)  
Transfer (to)/from Deferred Debits                               25,157           (11,923)
$158,428 $(26,913)
Sale of Magnesium Oxide Facilities                                                                     55,92.8 Increase (Decrease) in Other Investments                         (2,032)             (6,799)           (1,082)
Net Cash Flow From Investing                                   (709,913)         (712,728)         (880,460)
Net Change in Cash Flow                                         $(98,069)         $158,428           $(26,913)
See notes to financial statements.
See notes to financial statements.
Philadelphia Electric Company and Subsidiary Companies Consolidated Statements of Changes in Common Stockholders' Equity and Preferred Stock Other Common Stock Paid-In Retained Preferred Stock Shares Amount Capital Earnings Shares Amount (All amounts in thousands)
Balance,Januaryl, 1984 142,811 $2,110,503
$5,856 $452,964 8,073 $807,335 Net Income 492,389 Cash Dividends Declared Preferred Stock (at specified annual rates) (83,820) Common Stock ($2.20 per share) (334,278)
Expenses of Capital Stock Issues (3,955) Issuance of Stock " ; Public Sales 11,613 144,548 1,000 100,000 Employee Stock Ownership Plans 914 10,563 Dividend Reinvestment and Stock Purchase Plan 6,965 95,334 Redemptions 871 (86) (8,628) Balance, December 31, 1984 162,303 2,360,948 6,727 523,300 8,987 898,707 Net Income 525,301 Cash Dividends Declared Preferred Stock (at specified annual rates) (90,524) Common Stock ($2.20 per share) (373,479)
Expenses of Capital Stock Issues (870) Issuance of Stock Public Sales 7,387 115,008 Employee Stock Ownership Plans 873 15,294 0 Dividend Reinvestment and Stock Purchase Plan 7,117 110,739 Redemptions 604 (79) (7,926) Balance, December 31, 1985 177,680 2,601,989 7,331 583,728 8,908 890,781 Net Income 566,320 Cash Dividends Declared Preferred Stock (at specified annual rates) (91,393) Common Stock ($2.20 per share) (403,523)
Expenses of Capital Stock Issues (2,005) Issuance of Stock Public Sales 6,000 117,216 750 75,000 Employee Stock Ownership Plans 625 13,215 Dividend Reinvestment and Stock Purchase Plan 4,774 100,547 Redemptions 456 (184) (18,353) Balance, December 31, 1986 189,079 $2,832,967
$7,787 $653,127 9,474 $947,428 See notes to financial statements.
------. --
Philadelphia Electric Company and Subsidiary Companies Notes to Financial Statements
: 1. Significant Accounting Policies General All utility subsidiary companies of Philadelphia Electric Company are wholly owned and are included in the consolidated financial statements.
Nonutility subsidiaries are included in investments and accounted for on the equity method. Accounting policies are in accordance with those prescribed by the regulatory authorities having jurisdiction, principally the Federal Energy Regulatory Commission (FERC) and the Pennsylvania Public Utility Commission (PUC). Revenues Revenues are generally recorded in the accounts upon billing to the customer.
Rate increases are billed from dates authorized or permitted to become effective by the regulatory authorities.
Pursuant to a rate phase-in plan approved by the PUC in its electric rate order of]une 27, 1986, the Company is recording revenue equal to the full amount of the rate increase approved, based on kilowatthours billed to customers.
Amounts included in revenue which will not be billed to customers within one year are classified as Unrecovered Revenue in the accompanying balance sheet (see Note 2). Fuel Adjustment Clauses Each of the Company's classes of service is subject to fuel adjustment clauses designed to recover or refund the differences between actual costs of fuel, energy interchange, purchased power, and gas, and the amounts of such costs included in base rates. Differences between the amounts billed to customers and the actual costs recoverable are deferred and recovered or refunded in future periods by means of prospective adjustments to rates. Generally such rates are adjusted annually.
In its June 27, 1986 electric rate order, the PUC modified the electric energy clause to allow the recovery of only 80% of the difference between actual energy costs and the amounts billed to customers.
If the Company recovers more than actual energy costs, 80% of the excess is refundable to customers (see Note 2). Nuclear Fuel Nuclear fuel is capitalized and charged to fuel expense on the unit of production method. Estimated costs of nuclear fuel disposal are charged to fuel expense as the related fuel is burned. Depreciation For financial reporting purposes, depreciation is provided over the estimated service lives of the plant on the straight-line method and, for tax purposes, generally, over shortedives on accelerated-methodS:
Tlie estimatecf decommissioning costs of operating nuclear generating plants, totaling approximately
$287,801,000 as of December 31, 1986, are being charged to operations as permitted for rate-making purposes.
The amounts charged are deposited in an escrow account and invested for funding of future costs. The Company believes that any increase in the estimated costs would be recoverable through adjustments of rates charged to its customers.
Annual depreciation provisions, expressed as a percent of average depreciable utility plant in service, were approximately 2.95% in 1986, 3.35% in 1985 and 3.29% in 1984. Income Taxes Deferred income taxes are provided for differences between book and taxable income to the extent permitted for rate-making purposes.
Investment tax credits, other than credits resulting from contributions to employee stock ownership plans, which do not affect income, are deferred and amortized to income over the estimated useful life of the related utility plant. Allowance for Funds Used During Construction (AFUDC) AFUDC is a non-cash item which is defined in the Uniform Systems of Accounts as "the net cost for the period of construction of borrowed funds used for construction purposes and a reasonable rate on other funds when so used!' AFUDC is recorded as a charge to Construction Work In Progress, and the equivalent credits are to "Interest Charges" for the pretax cost of borrowed funds and to "Other Income" for the remainder as the allowance for other funds. The rate used for capitalizing AFUDC, which averaged 9.55% in 1986, 9.50% in 1985, and 9.40% in 1984, is computed under a method prescribed by the regulatory authorities.
The rate is a "net after-tax rate" and the current income tax reductions applicable to the interest charges capitalized are recorded in "Other Income:' AFUDC is not included in taxable income and the depreciation of capitalized AFUDC is not tax deductible.
Limerick Carrying Charges Under the Uniform System of Accounts prescribed by the FERC, accrual of AFUDC ceases at the time utility plant under construction is placed in service and 100% of common plant of a two-unit plant is deemed to be in service with the first unit. However, the PUC permits only 50% of the common plant to be included in rate base when the first unit is placed in service. Because of the difficulty in synchronizing the recovery of Limerick Unit No. 1 's cost through rates with its commencement of commercial operations, the PUC allowed the Company to record a carrying charge equivalent to AFUDC on the unit and common plant until they were included in rate base on June 27, 1986. In addition the PUC is permitting the Company to record a similar carrying charge on the 50% of common plant which was deemed to be associated with Unit No. 2 and was not included in rate base-un<iffiliCJune27, 1986 electric rate order. Such carrying charges are recorded as a charge to Deferred Debits and as a credit to Other Income.
Gas Exploration and Development Joint Ventures The Company has invested in several joint ventures for exploring and drilling for natural gas. Costs are capitalized under the full cost method and charged to operations commensurate with production.
Gains and Losses on Reacquired Debt Gains and losses on reacquired debt are deferred and amortized to interest expense over the period permitted for rate-making purposes.
: 2. Limerick Generating Station General The Company's Limerick Unit No. 1 commenced commercial operation on February 1, 1986. Construction of the second of the two nuclear units at Limerick resumed in February 1986, following a suspension of approximately 2 years. Unit No. 2 is scheduled to be completed in late 1990. At December 31, 1986, Unit No. 2 was approximately 49 percent complete based on estimated man-hours needed to complete the Unit. As of December 31, 1986, the Company had invested approximately Sl.9 billion in Unit No. 2, including 50% of common plant. Limerick Unit No. 1 Rate Proceedings On September 27, 1985, the Company filed with the PUC for a phased-in electric rate increase designed to yield $671 million annually, net of fuel savings, to recover the costs associated with Limerick Unit No. 1 and 100% of common plant. By order entered June 27, 19,86, the PUC approved an increase of approximately
$ 3 51 million annually, net of fuel savings. The PUC authorized a rate of return on common equity of 14.75%. The increase is being phased-in over three years in equal steps, followed by a three-year recovery period, without interest, of amounts recoverable under the phase-in plan. In accordance with its prior practice, the PUC excluded 50% of common plant from rate base at this time, but permitted continued accrual of an amount equivalent to AFUDC on the excluded 50%. Accordingly, the Company is accruing a carrying charge equivalent to AFUDC on this investment.
The increase also reflects an exclusion from the Company's rate base of $368.9 million due to alleged imprudent construction delays in 1976 and 1978. As indicated below the Company has appealed this exclusion.
The PUC rejected allegations by various parties that Limerick Unit No. 1 represents excess capacity.
For a description of the effects of the June 27, 1986 electric rate order on the Company's accounting policies, see Note l. In accordance with the Declaratory Order issued by the PUC on September 28, 1984, the Company deferred all operating costs, carrying charges on investment, fuel savings and associated income tax effects of Limerick Unit No. 1 and 50% of common plant from February 1, 1986, the date of commercial operation, until the plant was included in rates onJune 27, 1986. The recovery of these costs will be addressed by the PUC in a subsequent electric rate case. Of the $195.6 million of Deferred Limerick Costs and Carrying Charges, the Company had deferred a total of $155.2 million associated with the Declaratory Order. Prospective Accounting Change In December 1986, the Financial Accounting Standards Board issued its Statement No. 90, Regulated Enterprises
-Accounting for Abandonments and Disallowances of Plant Costs, which requires any disallowed costs of recently completed plants to be recognized as a loss. The Company is required to adopt this Statement by 1988. The provisions of the Statement may be applied cumulatively in the year of adoption or may be applied retroactively by restating previously issued financial statements.
If the Company chooses to apply the provisions of Statement No. 90 by retroactive restatement in the year of adoption and the PUC's disallowance of $368.9 million of Limerick Unit No. 1 costs from rate base is not reversed, $368.9 million would be written off as of 1986. This write-off would reduce 1986 income from continuing operations and net income, as reported, by $249 million and the related per share amounts by $1.36. At December 31, 1986, net utility plant in service, deferred income taxes and retained earnings would be reduced by $364.2 million, $115.2 million and $249.0 million, respectively.
After giving effect to the write-off, 1986 proforma results of operations and related per share amounts would be as follows: Proforma As Reported Assuming Retroactive Restatement (Millions of Dollars, Except Per Share Amounts) Income from Continuing Operations . . . S565.7 Net Income . . . . . . . . . . . . . . .
S566.3 Per Share Amounts: Income from Continuing Operations
............. . Net Income .............. . S2.59 $2.60 Limerick Unit No. 2 Cost Cap S316.7 S317.3 $1.23 $1.24 On December 23, 1985, following a PUC investigation, the Company filed its response with the PUC accepting the conditions of the cost containment and operating incentive plans set forth in the PU C's December 5, 198 5 order, which concluded that the Company,could complete the construction of Limerick Unit No. 2 conditioned upon the acceptance by the Company of such cost containment and operating incentive plans, including a maximum net rate base allowance for Unit No. 2 (exclusive of common plant) of a prudent investment of $ 3 .197 billion. This order has been appealed by various parties. Under Statement No. 90 described above, if the Company estimates the total cost to complete Unit No. 2, includingAFUDC, would exceed the $3.197 billion cap, an immediate charge to expense would be recognized for the excess. The Company estimates the cost of Limerick Unit No. 2 will not exceed the $3.197 billion cap.
Philadelphia Electric Company and Subsidiary Companies Notes to Financial Statements
-Continued Excess Capacity Standards On July 10, 1986, the Governor of Pennsylvania signed into law legislation amending numerous provisions of the Pennsylvania Public Utility Code. Among the provisions of the legislation which affect rate regulations, one provision imposes standards on the PUC in determining whether new generating capacity is excess capacity.
This provision requires a disallowance from rates of any portion of new capacity which is determined to be excess capacity.
The provisions relating to excess capacity are applicable to rate cases "pending before the On]une 27, 1986, the Office of Consumer Advocate (OCA) filed a Petition for Reconsideration which sought amendment of the PUC's order enteredJune 27, 1986 with respect to the finding that Limerick Unit No. 1 was not excess capacity.
Additional Petitions for Reconsideration on excess capacity and other issues were filed by certain other parties onJuly 1, 1986, July 7, 1986, July 11, 1986 and July 15, 1986. OnJuly 10, 1986 the OCA filed a Supplemental Petition for Reconsideration which alleged that the Limerick Unit No. 1 rate case was pending at the time the legislation was enacted and sought application of the excess capacity provisions of the legislation to the Limerick Unit No. 1 rate case. On July 16, 1986, a group of the Company's industrial customers filed a Supplemental Petition for Reconsideration joining the OCA's Supplemental Petition for Reconsideration.
By orders entered July 25, 1986, the <&sect;> PUC denied all Petitions for Reconsideration and Supplemental Petitions for Reconsideration.
The PUC held that the legislation did not apply to the Limerick Unit No. 1 rate case. Furthermore, the PUC held that, even if the legislation did apply, Limerick Unit No. 1 did not constitute excess capacity under the standards imposed by the legislation.
On July 25, 1986, the OCAfiled a Petition for Review with the Commonwealth Court of Pennsylvania (Commonwealth Court) of the PUC'sJune 2 7, 1986 electric rate order on the issue of excess capacity and on a particular rate base issue regarding whether certain utility plant was used and useful. On July 28, 1986, PetitionsforReviewofthe PUC'sJune 27, 1986 electric rate order were filed with the Commonwealth
: 3. Sale of Steam Operations Court by the Company appealing the exclusion of $ 368. 9 million from rate base and by a group of the Company's commercial and small industrial customers on the issue of excess capacity and on various rate design and cost of service issues. Supplemental Cooling Water The unavailability of sufficient supplemental cooling water would limit or prohibit operation of Limerick Unit No. 1 and Unit No. 2 (when in operation) during certain months of the year. The Delaware River Basin Commission (DRBC) has approved various Company requests for modification of restrictions on the use of the Schuylkill River for Limerick cooling water (which restrictions create the need for supplemental cooling water for Limerick), a reallocation of cooling water to Limerick from other power plants on the Schuylkill River and the use of water from an upstream municipal reservoir.
The DRBC's approvals were effective through December 31, 1986, and the Company has filed similar requests with the DRBC for its 1987 supplemental cooling water needs. One component of the planned supplemental cooling water system for Limerick is the Point Pleasant Project. The Point Pleasant Project has been the subject of substantial opposition from various groups, including the majority of the Commissioners of Bucks County, and the NeshaminyWater Resources Authority (NWRA). Petitions for Allowance of Appeal were filed with the Supreme Court of Pennsylvania by the Commissioners of Bucks County, NWRA, and a taxpayer in Bucks County from the decision of the Commonwealth Court of Pennsylvania, affirming the decision of the Court of Common Pleas of Bucks County ordering the completion of the Point Pleasant Project. On May 8, 1986, the Supreme Court of Pennsylvania denied the Petition for Allowance of Appeal filed by NWRA. OnJune 23, 1986, the Supreme Court of Pennsylvania denied the remaining two Petitions for Allowance of Appeal. Construction of the Point Pleasant Project has not yet resumed. The Court has appointed a special master to oversee the implementation of the court order that the project be completed.
On June 30, 1986, the Company signed an agreement for the sale of its steam operations.
The sale was completed on January 30, 1987. The Company recorded an estimated loss on disposal of $1,250,000, which includes $1,000,000 in income tax expense associated with timing differences for which deferred taxes, in accordance with the rate-making treatment, had not been provided.
Operating results of the steam operations for 1986, 1985 and 1984 are reported separately as discontinued operations in the accompanying financial statements and are summarized below. Income from Discontinued Operations includes a $1.0 million loss for the period fromJuly 1, 1986 to December 31, 1986. Steam Revenues Operating Expenses, Excluding Depreciation and Taxes Depreciation Income and Other Taxes Income from Discontinued Operations 1986 1985 (Thousands of Dollars) $51,067 $68,529 (45,692) (61,680) (1,923) (1,916) (1,536) (2,485) $ 1,916 $ 2,448 1984 $82,320 (71,570) (1,893) (4,419) $ 4,438 
: 4. Common Stock At December 31, 1986, and 1985, Common Stock without par value, consisted of 240,000,000 shares authorized and 189,078,606and177,679,977 shares, respectively, outstanding.
At December 31, 1986, there were 19,795,818 shares reserved for issuance under stock purchase plans. 5. Preferred Stock At December 31, 1986, and 1985, Preferred Stock, $100 par, cumulative, 10,000,000 shares authorized:
Shares Amount Current Refunding Redemption Restricted Outstanding Price (a) Prior to (b) 1986 1985 1986 1985 (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) 113.35 2-1-89 750,000 750,000 75,000 75,000 12.80% (c) 112.80 5-1-88 750,000 750,000 75,000 75,000 9.50% 103.50 750,000 750,000 75,000 75,000 8.75% 101.00 650,000 650,000 65,000 65,000 7.85% 103.00 500,000 500,000 50,000 50,000 7.80% 103.00 750,000 750,000 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 3.8% 106.00 300,000 300,000 30,000 30,000 5,724,720 5,724,720 572,472 572,472 Series (with mandatory redemption) (d) 17.125% $117.13 5-1-87 300,000 300,000 30,000 30,000 15.25% 110.00 5-1-90 450,000 500,000 45,000 50,000 14.625% (e) 5-1-90 500,000 500,000 50,000 50,000 10% 103.33 5-1-90 176,000 220,000 17,600 22,000 9.52% 103.00 375,360 393,690 37,536 39,369 9.50% 1986 Series 109.50 11-1-91 750,000 75,000 8. 75% 1978 Series 104.63 5-1-88 400,100 433,400 40,010 43,340 7.325% 103.51 510,000 540,000 51,000 54,000 7% 101.00 288,100 296,000 28,810 29,600 3,749,560 3,183,090 374,956 318,309 Total Preferred Stock 9,474,280 8,907,810
$947,428 $890,781 (a) Redeemable, at the option of the Company, at the evidenced by Depositary Receipts, each representing indicated dollar amounts per share, plus accrued 1/10 of a share of Preferred Stock. dividends. ( d) Sinking Fund requirements (par value) in the period (b) Prior to the date specified, none of the shares of each 1987-1991 are as follows: 1987-$14,766,000; series indicated may be redeemed through refunding at an 1988-$16,740,000; 1989-$17,530,000; interest cost or dividend rate which is less than the 1990-$27,530,000; 1991-$23,130,000.
dividend rate of such series. (e) Not redeemable prior to May 1, 1990. ( c) Ownership of these series of Preferred Stock is 0 
<&sect;> Philadelphia Electric Company and Subsidiary Companies Notes to Financial Statements
-Continued
: 6. Long-Term Debt First and Refunding Mortgage Bonds (a) Series 4%% 4%% 3%%-14% 5%-14% 14% 14% Due 1986 1987 $ 1988 1989 1990 1991 At December 31 1986 1985 (Thousands of Dollars) $ 50,000 40,000 40,000 52,500 52,500 62,500 62,500 11,000 11,000 11,000 11,000 4Y2%-151;4%
1992-1996 748,633 650,725 1997-2001 530,939 535,184 8Y2%-12Y2%
2002-2006 500,000 500,000 6%-18%% 2007-2011 221,591 394,273 8"Vs%-18%
2012-2016 882,379 698,379 Total First and Refunding Mortgage Bonds 3,060,542 3,005,561 Notes Payable -Banks (b) 1987-1992 225,000 225,000 Notes Payable -Other 17% 1987 10,000 20,000 Revolving Credit and Term Loan Agreements (c) 550,000 Pollution Control Notes 5Y2%-13% 1997-2013 272,420 272,685 Debentures 4.85% 1986 20,800 Debentures 1990 50,000 50,000 Debentures 9.85%-14%%
1993-2011 787,000 250,000 Sinking Fund Debentures
-Philadelphia Electric Power Company, a Subsidiary Unamortized Debt Discount and Premium, Net Total Long-Term Debt Due Within One Year (d) Long-Term Debt included in Capitalization (e) (a) Utility plant is subject to the lien of the mortgage.
InJuly 1986,the Company called $46,904,000 princip<1.l amount ofl 7%% series due 2011 and in September 1986, called $48,869,000 principal amount of 18%% series due 2009. A portion of the proceeds from the Company's November 1986 sale of $150,000,000 principal amount of 101;4% series due 2016 and $100, 000, 000 principal amount of 8%% series due 1994 was used to repurchase
$76,909,000 principal amount of 15%% series due 2010. Premiums on the repurchases of $30,878,322 were charged to loss on reacquired debt. (b) At various interest rates. (c) At December 31, 1985, the Company had a $550 million revolving credit and term loan agreement with a group of banks which provided financing to complete 4Y2% 1995 14,580 15,325 (24,180) (19,440) 4,395,362 4,389,931 108,570 80,800 $4,286,792
$4,309,131 Limerick Unit No. 1. In 1986 the Company repaid the $550 million of borrowings, thereby terminating the agreement.
The Company also has a $400 million Revolving Credit and Term Loan Agreement with a group of banks which expires in 1987. There is an annual commitment fee of%% on the unused amount. There were no borrowings under this agreement during the year. (d) Long-term debt maturities in the period 1988-1991 are as follows: 1988-$91,689,000; 1989-$78,863,000; 1990-$77,850,000; and 1991-$77,850,000. ( e) The annualized interest on long-term debt at December 31, 1986, was $443.8 million of which $304.4 million was associated with mortgage bonds and $139.4 million was associated with other long-term debt. 
: 7. Short-Term Debt Average Short-Term Borrowings Average Interest Rates, Computed on Daily Basis Maximum Short-Term Borrowings Outstanding 1986 1985 1984 (Thousands of Dollars) $ 233 9.51% $1,000 $127,392 $166,713 6.38% 9.88% $360,000 $302,500 Average Interest Rates on Short-Term Borrowings at December 31: Bank Loans Pollution Control Notes At December 31, 1986, the Company had no short-term debt outstanding under formal and informal lines of credit with banks aggregating approximately
$ 368 8. Jointly Owned Electric Utility Plant 9.50% 9.95% 6.44% million. The Company generally does not have formal compensating balance arrangements with these banks. The Company's ownership interests in jointly owned utility plant at December 31, 1986 were as follows: Peach Bottom Salem Operator Philadelphia Public Service Electric Electric and Company Gas Company Participating Interest 42.49% 42.59% Company's share of: Utility Plant $515,149 $914,589 Accumulated Depreciation 134,065 170,460 Construction Work In Progress 22,707 25,948 The Company's participating interests are financed with Company funds and, when placed in service, all 9. Income Taxes Included in Continuing Operations:
Federal Current Deferred Investment Tax Credits, Net State Current Deferred Included in Other Income and Deductions:
Federal State Total Investment tax credits (ITC) and income tax credits resulting from contributions to employee stock ownership plans reduced Federal income taxes currently payable by $43 million in 1986, $12 million in 1985 and $58 million in 1984. Under the Tax Reform Act of 1986, ITC has been repealed effective January 1, 1986 with the exception of transition property.
The Company believes that Limerick Unit No. 2 qualifies as transition property eligible for ITC.
* Production Plants Transmission Plant Merrill Creek Keystone Conemaugh Reservoir Pennsylvania Pennsylvania Jersey Central Various Electric Electric Power& Companies Company Company Light Company 20.99% 20.72% 44.24% 21%to43% (Thousands of Dollars) $67,028 $64,457 $68,456 24,824 25,205 15,985 2,004 6,008 $38,718 operations are accounted for as if such participating interests were wholly owned facilities.
1986 1985 1984 (Thousands of Dollars) $ 96,562 $105,165 $ 91,769 132,238 60,061 51,747 29,041 3,582 49,941 29,908 24,600 22,594 1,181 6,492 26,803 (83,631) (109,580)
(93,818) (18,831) (23,835) (22,605) $186,468 $ 66,485 $126,431 Approximately
$227 million of additional ITC generated from 1983 through 1986 has not been utilized due to limitations based on taxable income. These credits which expire between 1998 and 2001 maybe used to reduce Federal income taxes in future years; however, approximately
$219 million of these ITC carryovers may be reduced by l 7Yz% in 1987 and by an additional l 7Yz% in 1988 under the provisions of the Tax Reform Act of 1986. <&sect;> 
<B> Philadelphia Electric Company and Subsidiary Companies Notes to Financial Statements
-Continued For a number of years the Company has used accelerated depreciation for income tax purposes and straight line depreciation for financial reporting purposes.
Deferred taxes were recorded only on those timing differences recognized for rate-making.
The cumulative net amount of such timing differences for which deferred taxes were not recorded was approximately
$730 million at December 31, 1986. Since the Company expects to charge customers for taxes when the timing differences reverse, the tax effect of such timing differences is not recorded currently.
Provisions for deferred income taxes on continuing operations consist of the tax effects of the following timing differences:
1986 1985 1984 (Thousands of Dollars) Depreciation arid Amortization
$127,278 $ 34,297 $ 33,814 Nuclear Waste Disposal Costs (5,932) (7,355)
Deferred Energy Costs (95,383) (65,393) 43,761 Precommercial Operation of Limerick Unit No. 1 10,210 97,867 Deferred Limerick Costs 11,004 Loss on Reacquired Debt 14,305 24,592 Unrecovered Revenue 55,040 Other 10,965 (18,878) 8,330 Total $133,419 $ 66,553 $ 78,550 The total income tax provisions on continuing operations differ from amounts computed by applying the Federal statutory tax rate to income and adjusted income before income taxes for the following reasons: Income From Continuing Operations
$565,654 $522,853 $487,951 Total Income Tax Provisions 186,468 66,485 126,431 Income Before Income Taxes 752,122 589,338 614,382 Deduct: Allowance for Funds Used During Construction (non-taxable) 178,438 433,491 354,855 Limerick Carrying Charges (non-taxable) 188,679 Adjusted Income Before Income Taxes $385,005 $155,847 $259,527 Income Taxes on Above at Federal Statutory Rate of 46% 177,102 71,689 119,382 Increase (Decrease) due to: Depreciation Timing Differences Not Normalized 19,230 7,062 6,975 State Income Taxes, Net of Federal Income Tax Benefits 6,620 3,919 14,467 Amortization of Investment Tax Credits (13,468) (8,250) (7,738) Other, Net (3,016) (7,935) (6,655) Total income tax provisions
$186,468 $ 66,485 $126,431 Provision for Income Taxes as a Percent of: Income Before Income Taxes 24.8% 11.3% 20.6% Adjusted Income Before Income Taxes 48.4% 42.7% 48.7%
: 10. Taxes, Other Than Income 1986 1985 1984 (Thousands of Dollars) Gross Receipts $132,468 $128,346 $122,881 Capital Stock 25,511 28,091 13,160 Realty 49,110 62,222 47,923 Other 25,538 22,303 22,375 Total $232,627 $240,962 $206,339 
: 11. Investments At December 31 Gas Exploration and Development Joint Ventures Real Estate Developments and Other Ventures Nonutility Property Escrow Deposits for Decommissioning Nuclear Plants Other Deposits Total 1986 1985 (Thousands of Dollars) $38,299 17,088 13,477 20,278 560 $89,702 $44,743 15,433 13,931 12,563 1,000 $87,670 In 1986 the Company's investment in gas exploration and development joint ventures exceeded the full cost limitation ceiling by $7.2 million, which was charged to expense. 12.Leases Leased property included in Utility Plant at December 31 Nuclear Fuel Electric Plant Common Plant Gross Leased Property Accumulated Amortization Net Leased Property 1986 1985 (Thousands of Dollars) $484,536 $445,699 10,953 48,342 156 3,116 495,645 497,157 (214,299}
(159,016)
$281,346 $338,141 The nuclear fuel obligation is amortized as the fuel is burned. Amortization of leased property totaled $65.6 million, <&sect;> $60.9 million, and $39.l million for the years ended December 31, 1986, 1985 and 1984, respectively.
Other operating expenses include interest on capital lease obligations of $16.4 million, $18.2 million and $22.0 million in 1986, 1985 and 1984, respectively.
During 1986, $40.0 million of electric plant held under capital lease was retired and the lease terminated.
Minimum future lease payments as of December 31, 1986, are: Year Ending December 31 1987 1988 1989 1990 1991 Remaining years Total Minimum Future Lease Payments Imputed Interest (rates ranging from 6.5% to 17%) Present Value of Net Minimum Future Lease Payments Capital Leases $ 89,396 78, 151 71,629 48,418 30,522 13,185 $331,301 (49,955) $281,346 Operating Leases (Thousands of Dollars) $ 33,856 31, 170 31,477 30,596 29,801 97,407 $254,307 Total $123,252 109,321 103,106 79,014 60,323 110,592 $585,608 Rental expense under operating leases totaled $54.0 million, $43.9 million, and $29.2 million, in 1986, 1985 and 1984, respectively.
Philadelphia Electric Company and Subsidiary Companies Notes to Financial Statements
-Continued
: 13. Segment Information
-Continuing Operations Electric Operations Operating Revenues Operating Expenses, excluding depreciation Depreciation Operating Income Utility Plant Additions Gas Operations Operating Revenues Operating Expenses, excluding depreciation Depreciation Operating Income Utility Plant Additions Identifiable Assets (') Electric Gas Nonallocable Assets Total Assets 1986 $ 2,699,365 1,966,004 206,701 $ 526,660 $ 753,232 $ 391,504 337,287 15,867 $ 38,350 $ 35,053 $ 8,811,304 416,824 1,519,892
$10,748,020 1985 1984 (Thousands of Dollars) $ 2,516,191
$2,435,731 1,974,222 1,858,505 168,208 162,959 $ 373,761 $ 414,267 $ 793,195 $1,022,496
$ 428,984 $ 462,966 375,399 413,938 14,841 13,474 $ 38,744 $ 35,554 $ 32,896 $ 30,613 $ 8,885,738
$8,412,532 407,375 405,958 718,732 737,239 SI0,011,845
$9,555,729
'Includes Utility Plant less accumulated depreciation, inventories and allocated common utility property.
: 14. Commitments and Contingencies The Company has incurred substantial commitments in connection with its construction program. Construction expenditures are estimated to be $1.2 billion for 1987 and $3.3 billion for 1988-1990.
These estimates are reviewed and revised periodically to reflect changes in economic conditions, revised load forecasts and other appropriate factors. Facilities under construction and to be constructed, particularly Limerick Generating Station and associated facilities, will require permits and licenses which the Company has no assurance will be granted. The Price-Anderson Act places a "Limit of Liability" of $695 million for claims that could arise from an incident involving any licensed nuclear facility in the nation. All nuclear utilities, including the Company, have covered this exposure through a combination of private insurance and mandatory participation in a secondary financial protection pool. In the event of a nuclear incident, the Company could be assessed up to $13.5 million per incident, involving any licensed nuclear facility in the nation, with a maximum amount of $27 million in any one year. The current Price-Anderson legislation expires in 1987. Bills to amend the Anderson Act, including proposals to substantially modify or eliminate the limitation on liability provisions, have been introduced in Congress.
The Company maintains property insurance, including radiation contamination coverage, for loss or damage to its nuclear facilities.
Although it is impossible to determine the total amount of the loss that may result from an occurrence at these facilities, the Company maintains the maximum amount of insurance presently available, $1.2 billion for each station. Under the terms of the various insurance agreements, the Company could be assessed up to $ 34 mi.Ilion for losses incurred at any plants insured by the insurance companies.
The Company is a member of an industry mutual insurance company which provides replacement power cost insurance in the event of a major outage at a nuclear station. The premium for this coverage is subject to an assessment for adverse loss experience.
The Company's maximum share of any assessment is $16 million. On March 29, 1985, the PUC adjusted the Company's February 28, 1985, Energy Cost Rate (ECR) filing to exclude S45 million of incurred fuel expense from ECR recovery pending an investigation into outages experienced at Peach Bottom Unit No. 2 and Salem Unit No. 1 in 1984. On February 28, 1986, the Company made its annual filing with the PUC for a revision in the ECR which requested a decrease.
On March 20, 1986, the PUC approved the Company's request to lower the ECR, effective April 1, 1986, and the PUC permitted the Companytorecover
$35.25 millionofthe S45 million fuel costs which the PUC had previously excluded from recovery.
The remaining
$ 9. 7 5 million was written off in the quarter ending March 31, 1986. OnJanuary 25, 1985, the PUC adopted an order granting the Company a net increase in annual revenues of $49 million reflecting the inclusion of Salem Unit No. 2 in rates. The Company agreed to guarantee
$116 million of fuel savings from Salem Unit No. 2 for the period from February 1, 1985 to March 31, 1986. Due primarily to a combination of lower than anticipated fuel prices and lower than anticipated generation from Salem Unit No. 2, the energy savings associated with the unit were less than the amount that the Company had guaranteed.
As a result, the Company wrote off $16 million of fuel expenses in the quarter ended March 31, 1986. In December 1981, the Company sold the federal income tax benefits associated with Unit No. 2 of the Salem Generating Station for $53,743,000 in a safe harbor lease transaction.
Under the sale agreement, the Company agreed to indemnify the purchaser against the loss of the tax benefits resulting from any Internal Revenue Service claims which render the sale invalid. 15. Quarterly Data (Unaudited)
The Company's indemnification obligation also includes the payment of interest, at prime rates, on the indemnification amount and all associated costs of contesting an Internal Revenue Service challenge.
The Company has been advised that the Internal Revenue Service has asserted, in auditing the purchaser, that the sale was invalid. Although the purchaser has protested the Internal Revenue Service claims, the Company has no assurance that the protest will be successful.
If the Internal Revenue Service claims against the purchaser are upheld, compliance with the indemnification provisions of the agreement could result in a significant charge to income. The data shown below include all adjustments which the Company considers necessary for a fair presentation of such amounts. Operating Revenues Quarter Ended 1986 1985 March 31 $868,635 $815,886 June 30 675,109 669,319 September 30 803,667 746,388 December 31 743,458 713,582 Earnings Applicable to Common Stock Quarter Ended 1986 1985 (Thousands of Dollars) March 31 $143,699 $128,422 June 30 105,964 96,212 September 30 146,441 101,569 December 31 79,255 108,521 1986 first quarter results include charges of approximately
$13.l million (net ofrelated incomes taxes) resulting from PU C's denial of recovery of approximately
$ 9. 75 million of replacement power costs and $16 million of unrecovered fuel expenses guaranteed (see note 14). Operating Income Net Income 1986 1985 1986 1985 (Thousands of Dollars) $124,446 $123,810 $166,261 $151, 166 92,179 97,763 128,213 118,859 183,081 94,962 168,705 124,163 165,304 95,970 103,141 131,113 Average Shares Outstanding Earnings Per Average Share 1986 1985 1986 1985 (Thousands) (Dollars) 177,843 162,859 $.81 $.79 181,378 168,723 .58 .57 185,171 171,993 .79 .59 188,037 175,401 .42 .62 1985 third quarter results include a charge of approximately
$ 34. 7 million (net of related income taxes) resulting from the PUC's denial of recovery of approximately
$73.0 million of energy costs. Operating Revenues and Operating Income for 1985 and the first three quarters of 1986 differ from the amounts previously reported due to the reclassification to discontinued operations of revenues and expenses associated with the sale ofsteam operations, as follows: Quarter Ended March 31 June 30 September 30 December 31 Operating Revenues Operating Income 1986 1985 1986 (Thousands of Dollars) $25,981 10,106 3,161 $36,413 14,200 4,516 13,400 $2,865 51 (1,948) 1985 $3,082 390 (1,722) 698 w Philadelphia Electric Company and Subsidiary Companies Notes to Financial Statements
-Continued
: 16. Retirement Benefits The Company and its subsidiaries have noncontributory trusteed retirement plans applicable to all regular employees.
Pension costs include normal cost for the year and amortization of unfunded prior service costs over ten to twenty years. Approximately 83 % of such costs were charged to operating expenses and the remainder, associated with construction labor, to the cost of new utility plant. Retirement plan costs, which are funded as accrued, were $42,500,000, $46,700,000, and $42,000,000, in 1986, 1985 and 1984, respectively.
Pension plan data as of the dates of the most recent actuarial valuations is as follows: Actuarial present value of accumulated plan benefits Assumed rate of return Vested Nonvested Net assets available for benefits January 1 1986 1985 (Thousands of Dollars) 7.5% $580,815 7,127 $587,942 7.0% $512,639 60,990 $573,629 $854,917 $645,726 Changes in plan provisions, effective January 1, 1986, increased the actuarial present value of accumulated plan benefits by approximately
$30.6 million while the change in actuarial assumptions decreased the present value by $79.1 million. The actuarial methods and the accounting policies are the same as those used to determine pension expense for the prior year. The preceding tabular disclosures are required under applicable accounting principles.
However, the Company is of the opinion that comparing the actuarial present value of accumulated plan benefits with the net Report of Independent Certified Public Accountants To the Shareholders and Board of Directors Philadelphia Electric Company assets available for benefits may be misleading.
The plan is of a long-term nature and is funded on a basis consistent with this concept. The actuarial value of accumulated plan benefits is, essentially, a hypothetical plan termination calculation which does not take into account future salaries or future service. Net assets, which are measured at fair value at January 1, are subject to fluctuations in the securities markets and, therefore, may not be indicative of the plan's long-term funded status. In December 1985, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 87, Employer's Accounting for Pensions.
This Statement supersedes existing accounting principles for defined benefit pension plans and becomes applicable to the Company in 1987. The Company believes adoption of Statement No. 87 will not have a material impact on its financial statements.
In addition to providing pension benefits, the Company provides certain health care and life insurance benefits for retired employees.
Substantially all of the Company's employees may become eligible for these benefits if they reach retirement age while still working for the Company. These benefits and similar benefits for active employees are provided by an insurance company whose premiums are based on the benefits paid during the year. The Company recognizes the cost of providing these benefits by charging the annual insurance premiums to expense. The cost of providing those benefits for approximately 3,400 retirees during the years 1986, 1985 and 1984 is not separable from the cost of providing benefits for approximately 10,000 active employees for the same period. Total premiums amounted to $31.6 million, $29.3 million, and $26.6 million, for 1986, 1985 and 1984, respectively.
We have examined the consolidated balance sheets of Philadelphia Electric Company and Subsidiary Companies as of December 31, 1986 and 1985, and the related consolidated statements of income, changes in common stockholders' equity and preferred stock, and changes in cash flows for each of the three years in the period ended December 31, 1986. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.
In our opinion, the financial statements referred to above present fairly the consolidated financial position of Philadelphia Electric Company and Subsidiary Companies as of December 31, 1986 and 1985, and the consolidated results of their operations and changes in their financial position for each of the three years in the period ended December 31, 1986, in conformity with generally accepted accounting principles applied on a consistent basis. 2400 Eleven Penn Center Philadelphia, Pennsylvania February 2, 1987 Philadelphia Electric Company and Subsidiary Compan i es Securities Statistics Ratings on Philadelphia Electric Company's Securities Mortgage Bonds Debentures Preferred Stock Agency Rating Date Established Rating Date Established Rating Date Established Duff and Phelps, Inc. 9 3/80 IO 3/80 11 2/83 Fitch Investors Service BBB 9/82 BBB-9/82 BB+ 9/82 Moody's Investors Service Baa3 1/83 Bal 1/83 bal 1/83 Standard & Poor's Corporation BBB-9/82 BB+ 9/82 BB+ 7/86 NYSE -Composite Common Stock Prices, Earnings and Dividends by Quarters (Per Share) 1986 Fourth Third Quarter Quarter High Price $24 1/s $25 1/s Low Price $21 5/8 $19 7 18 Earnings 42&#xa2; 79&#xa2; Dividends 55&#xa2; 55&#xa2; Second Quarter $20 3/s $17 1/8 58&#xa2; 55&#xa2; First Fourth Quarter Quarter $201/2 Sl7% $16 7/s SI4 SH 62<r 55&#xa2; 55<r RETURN ON AVERAGE COMMON STOCK EQUITY Percent 18 15 12 9 6 82 83 84 85 86 1985 Third Quarter Sl6% $14 59<r 55<r Second Firs t Quarter Quarter SI6Y8 Sl6% Sl3"Ve SI4Y.! 57<r 79<r 55<r 55<r RATIO OF EARNINGS TO MORTGAGE INTEREST limes Covered 3 .00 2.50 2.00 1.50 1.00 .50 82 83 84 85 86 
<&sect;> Philadelphia Electric Company and S ubsidiary Com p a ni es Financial Statistics Summary ofF.arnings (Millions of Dollars) For th e Year Ended 1986 Operating Revenues (for details see pages 42 and 43) $3,090.9 Operating Expenses Fuel and Energy Interchange 889.3 labor 417.2 Other Materials , Supplies and Services 475.2 Total Operation and Maintenance 1,781.7 Depreciation 222.6 Taxes 521.6 Total Operating Expenses 2,525.9 Operating Income 565.0 Other Income and Deductions Allowance for Other Funds Use d During Construction 76.8 Limerick Carrying Charges 188.7 Income Tax C redits , net 102.5 Other , net 2.4 Total Other Income and Deductions 370.4 Income Before Interest Charges 935.4 Interest Charges Long-Term Debt 458.9 Sho rt-Te rm Debt 12.5 Allowance for Borrowed Funds Used During Construction (101.6) Net Interest Charges 369.8 Income From Continuing Operations 565.6 Income From Discontinued Operations


===1.9 Estimated===
Philadelphia Electric Company and Subsidiary Companies Consolidated Statements of Changes in Common Stockholders' Equity and Preferred Stock Other Common Stock    Paid-In        Retained      Preferred Stock Shares      Amount  Capital        Earnings    Shares        Amount (All amounts in thousands)
Balance,Januaryl, 1984                          142,811  $2,110,503  $5,856      $452,964      8,073      $807,335 Net Income                                                                          492,389 Cash Dividends Declared Preferred Stock (at specified annual rates)                                                    (83,820)
Common Stock ($2.20 per share)                                                  (334,278)
Expenses of Capital Stock Issues                                                        (3,955)
Issuance of Stock                                                                                    ; "
Public Sales                                  11,613      144,548                            1,000      100,000 Employee Stock Ownership Plans                    914      10,563 Dividend Reinvestment and Stock Purchase Plan                        6,965        95,334 Redemptions                                                          871                        (86)        (8,628)
Balance, December 31, 1984                      162,303    2,360,948  6,727        523,300      8,987      898,707 Net Income                                                                          525,301 Cash Dividends Declared Preferred Stock                                                -~
(at specified annual rates)                                                    (90,524)
Common Stock ($2.20 per share)                                                  (373,479)
Expenses of Capital Stock Issues                                                          (870)
Issuance of Stock Public Sales                                  7,387      115,008 Employee Stock Ownership Plans                    873      15,294 Dividend Reinvestment and                                                                                            0 Stock Purchase Plan                        7,117      110,739 Redemptions                                                          604                        (79)        (7,926)
Balance, December 31, 1985                      177,680    2,601,989  7,331        583,728      8,908      890,781 Net Income                                                                          566,320 Cash Dividends Declared Preferred Stock (at specified annual rates)                                                    (91,393)
Common Stock ($2.20 per share)                                                  (403,523)
Expenses of Capital Stock Issues                                                      (2,005)
Issuance of Stock Public Sales                                  6,000      117,216                              750        75,000 Employee Stock Ownership Plans                    625      13,215 Dividend Reinvestment and Stock Purchase Plan                        4,774      100,547 Redemptions                                                          456                      (184)      (18,353)
Balance, December 31, 1986                      189,079  $2,832,967  $7,787      $653,127      9,474      $947,428 See notes to financial statements.
 
Philadelphia Electric Company and Subsidiary Companies Notes to Financial Statements
: 1. Significant Accounting Policies                          for funding of future costs. The Company believes that any increase in the estimated costs would be recoverable General                                                      through adjustments of rates charged to its customers.
All utility subsidiary companies of Philadelphia Electric    Annual depreciation provisions, expressed as a percent of Company are wholly owned and are included in the            average depreciable utility plant in service, were consolidated financial statements. Nonutility subsidiaries  approximately 2.95% in 1986, 3.35% in 1985 and 3.29%
are included in investments and accounted for on the        in 1984.
equity method. Accounting policies are in accordance with those prescribed by the regulatory authorities having  Income Taxes jurisdiction, principally the Federal Energy Regulatory      Deferred income taxes are provided for differences Commission (FERC) and the Pennsylvania Public Utility        between book and taxable income to the extent permitted Commission (PUC).                                            for rate-making purposes. Investment tax credits, other than credits resulting from contributions to employee Revenues                                                    stock ownership plans, which do not affect income, are Revenues are generally recorded in the accounts upon        deferred and amortized to income over the estimated billing to the customer. Rate increases are billed from      useful life of the related utility plant.
dates authorized or permitted to become effective by the regulatory authorities.                                      Allowance for Funds Used During Construction Pursuant to a rate phase-in plan approved by the    (AFUDC)
PUC in its electric rate order of]une 27, 1986, the          AFUDC is a non-cash item which is defined in the Company is recording revenue equal to the full amount of    Uniform Systems of Accounts as "the net cost for the the rate increase approved, based on kilowatthours billed    period of construction of borrowed funds used for to customers. Amounts included in revenue which will        construction purposes and a reasonable rate on other not be billed to customers within one year are classified as funds when so used!' AFUDC is recorded as a charge to Unrecovered Revenue in the accompanying balance sheet        Construction Work In Progress, and the equivalent credits (see Note 2).                                                are to "Interest Charges" for the pretax cost of borrowed funds and to "Other Income" for the remainder as the Fuel Adjustment Clauses                                      allowance for other funds. The rate used for capitalizing Each of the Company's classes of service is subject to fuel  AFUDC, which averaged 9.55% in 1986, 9.50% in 1985, adjustment clauses designed to recover or refund the        and 9.40% in 1984, is computed under a method differences between actual costs of fuel, energy            prescribed by the regulatory authorities. The rate is a "net interchange, purchased power, and gas, and the amounts      after-tax rate" and the current income tax reductions of such costs included in base rates. Differences between    applicable to the interest charges capitalized are recorded the amounts billed to customers and the actual costs        in "Other Income:' AFUDC is not included in taxable recoverable are deferred and recovered or refunded in        income and the depreciation of capitalized AFUDC is not future periods by means of prospective adjustments to        tax deductible.
rates. Generally such rates are adjusted annually.
In its June 27, 1986 electric rate order, the PUC  Limerick Carrying Charges modified the electric energy clause to allow the recovery    Under the Uniform System of Accounts prescribed by the of only 80% of the difference between actual energy costs    FERC, accrual of AFUDC ceases at the time utility plant and the amounts billed to customers. If the Company          under construction is placed in service and 100% of recovers more than actual energy costs, 80% of the excess    common plant of a two-unit plant is deemed to be in is refundable to customers (see Note 2).                    service with the first unit. However, the PUC permits only 50% of the common plant to be included in rate base Nuclear Fuel                                                when the first unit is placed in service.
Nuclear fuel is capitalized and charged to fuel expense on          Because of the difficulty in synchronizing the the unit of production method. Estimated costs of nuclear    recovery of Limerick Unit No. 1's cost through rates with fuel disposal are charged to fuel expense as the related    its commencement of commercial operations, the PUC fuel is burned.                                              allowed the Company to record a carrying charge equivalent to AFUDC on the unit and common plant until Depreciation                                                they were included in rate base on June 27, 1986. In For financial reporting purposes, depreciation is provided  addition the PUC is permitting the Company to record a over the estimated service lives of the plant on the        similar carrying charge on the 50% of common plant straight-line method and, for tax purposes, generally, over  which was deemed to be associated with Unit No. 2 and shortedives on accelerated-methodS: Tlie estimatecf          was not included in rate base-un<iffiliCJune27, 1986 decommissioning costs of operating nuclear generating        electric rate order. Such carrying charges are recorded as a plants, totaling approximately $287,801,000 as of            charge to Deferred Debits and as a credit to Other December 31, 1986, are being charged to operations as        Income.
permitted for rate-making purposes. The amounts charged are deposited in an escrow account and invested
 
Gas Exploration and Development Joint Ventures              Deferred Limerick Costs and Carrying Charges, the The Company has invested in several joint ventures for      Company had deferred a total of $155.2 million exploring and drilling for natural gas. Costs are          associated with the Declaratory Order.
capitalized under the full cost method and charged to operations commensurate with production.                    Prospective Accounting Change In December 1986, the Financial Accounting Standards Gains and Losses on Reacquired Debt                        Board issued its Statement No. 90, Regulated Enterprises Gains and losses on reacquired debt are deferred and        - Accounting for Abandonments and Disallowances of amortized to interest expense over the period permitted    Plant Costs, which requires any disallowed costs of for rate-making purposes.                                  recently completed plants to be recognized as a loss. The Company is required to adopt this Statement by 1988.
: 2. Limerick Generating Station                              The provisions of the Statement may be applied cumulatively in the year of adoption or may be applied General                                                    retroactively by restating previously issued financial The Company's Limerick Unit No. 1 commenced                statements. If the Company chooses to apply the commercial operation on February 1, 1986. Construction      provisions of Statement No. 90 by retroactive restatement of the second of the two nuclear units at Limerick          in the year of adoption and the PUC's disallowance of resumed in February 1986, following a suspension of          $368.9 million of Limerick Unit No. 1 costs from rate approximately 2 years. Unit No. 2 is scheduled to be        base is not reversed, $368.9 million would be written off completed in late 1990. At December 31, 1986, Unit          as of 1986. This write-off would reduce 1986 income No. 2 was approximately 49 percent complete based on        from continuing operations and net income, as reported, estimated man-hours needed to complete the Unit. As        by $249 million and the related per share amounts by of December 31, 1986, the Company had invested              $1.36. At December 31, 1986, net utility plant in service, approximately Sl.9 billion in Unit No. 2, including 50%    deferred income taxes and retained earnings would be of common plant.                                            reduced by $364.2 million, $115.2 million and $249.0 million, respectively. After giving effect to the write-off, Limerick Unit No. 1 Rate Proceedings                        1986 proforma results of operations and related per share On September 27, 1985, the Company filed with the PUC      amounts would be as follows:
for a phased-in electric rate increase designed to yield
$671 million annually, net of fuel savings, to recover the Proforma costs associated with Limerick Unit No. 1 and 100% of                                                As Reported Assuming Retroactive common plant. By order entered June 27, 19,86, the PUC                                                              Restatement approved an increase of approximately $ 3 51 million                                  (Millions ofDollars, Except Per Share Amounts) annually, net of fuel savings. The PUC authorized a rate of Income from return on common equity of 14.75%. The increase is            Continuing Operations . . .              S565.7        S316.7 being phased-in over three years in equal steps, followed  Net Income . . . . . . . . . . . . . . . S566.3        S317.3 Per Share Amounts:
by a three-year recovery period, without interest, of      Income from Continuing amounts recoverable under the phase-in plan. In              Operations ............. .                S2.59          $1.23 accordance with its prior practice, the PUC excluded        Net Income .............. .                  $2.60          $1.24 50% of common plant from rate base at this time, but permitted continued accrual of an amount equivalent to      Limerick Unit No. 2 Cost Cap AFUDC on the excluded 50%. Accordingly, the Company        On December 23, 1985, following a PUC investigation, is accruing a carrying charge equivalent to AFUDC on this  the Company filed its response with the PUC accepting investment. The increase also reflects an exclusion from    the conditions of the cost containment and operating the Company's rate base of $368.9 million due to alleged    incentive plans set forth in the PUC's December 5, 198 5 imprudent construction delays in 1976 and 1978. As          order, which concluded that the Company,could indicated below the Company has appealed this              complete the construction of Limerick Unit No. 2 exclusion. The PUC rejected allegations by various parties  conditioned upon the acceptance by the Company of that Limerick Unit No. 1 represents excess capacity. For a  such cost containment and operating incentive plans, description of the effects of the June 27, 1986 electric    including a maximum net rate base allowance for Unit rate order on the Company's accounting policies, see        No. 2 (exclusive of common plant) of a prudent Note l.                                                    investment of $ 3 .197 billion. This order has been In accordance with the Declaratory Order issued    appealed by various parties. Under Statement No. 90 by the PUC on September 28, 1984, the Company              described above, if the Company estimates the total cost deferred all operating costs, carrying charges on          to complete Unit No. 2, includingAFUDC, would exceed investment, fuel savings and associated income tax effects  the $3.197 billion cap, an immediate charge to expense of Limerick Unit No. 1 and 50% of common plant from        would be recognized for the excess. The Company February 1, 1986, the date of commercial operation, until  estimates the cost of Limerick Unit No. 2 will not exceed the plant was included in rates onJune 27, 1986. The        the $3.197 billion cap.
recovery of these costs will be addressed by the PUC in a subsequent electric rate case. Of the $195.6 million of
 
Philadelphia Electric Company and Subsidiary Companies Notes to Financial Statements - Continued Excess Capacity Standards                                      Court by the Company appealing the exclusion of $ 368. 9 On July 10, 1986, the Governor of Pennsylvania signed          million from rate base and by a group of the Company's into law legislation amending numerous provisions of the      commercial and small industrial customers on the issue of Pennsylvania Public Utility Code. Among the provisions        excess capacity and on various rate design and cost of of the legislation which affect rate regulations, one          service issues.
provision imposes standards on the PUC in determining whether new generating capacity is excess capacity. This      Supplemental Cooling Water provision requires a disallowance from rates of any            The unavailability of sufficient supplemental cooling portion of new capacity which is determined to be excess      water would limit or prohibit operation of Limerick Unit capacity. The provisions relating to excess capacity are      No. 1 and Unit No. 2 (when in operation) during certain applicable to rate cases "pending before the Commission~'      months of the year. The Delaware River Basin Commission On]une 27, 1986, the Office of Consumer Advocate              (DRBC) has approved various Company requests for (OCA) filed a Petition for Reconsideration which sought        modification of restrictions on the use of the Schuylkill amendment of the PUC's order enteredJune 27,                  River for Limerick cooling water (which restrictions 1986 with respect to the finding that Limerick Unit            create the need for supplemental cooling water for No. 1 was not excess capacity. Additional Petitions for        Limerick), a reallocation of cooling water to Limerick Reconsideration on excess capacity and other issues were      from other power plants on the Schuylkill River and the filed by certain other parties onJuly 1, 1986, July 7, 1986,  use of water from an upstream municipal reservoir. The July 11, 1986 and July 15, 1986. OnJuly 10, 1986 the          DRBC's approvals were effective through December 31, OCA filed a Supplemental Petition for Reconsideration          1986, and the Company has filed similar requests with the which alleged that the Limerick Unit No. 1 rate case was      DRBC for its 1987 supplemental cooling water needs.
pending at the time the legislation was enacted and                    One component of the planned supplemental sought application of the excess capacity provisions of        cooling water system for Limerick is the Point Pleasant the legislation to the Limerick Unit No. 1 rate case. On      Project. The Point Pleasant Project has been the subject of July 16, 1986, a group of the Company's industrial            substantial opposition from various groups, including the customers filed a Supplemental Petition for                    majority of the Commissioners of Bucks County, and the Reconsideration joining the OCA's Supplemental Petition        NeshaminyWater Resources Authority (NWRA). Petitions for Reconsideration. By orders entered July 25, 1986, the      for Allowance of Appeal were filed with the Supreme
<&sect;> PUC denied all Petitions for Reconsideration and              Court of Pennsylvania by the Commissioners of Bucks Supplemental Petitions for Reconsideration. The PUC            County, NWRA, and a taxpayer in Bucks County from the held that the legislation did not apply to the Limerick Unit  decision of the Commonwealth Court of Pennsylvania, No. 1 rate case. Furthermore, the PUC held that, even if      affirming the decision of the Court of Common Pleas of the legislation did apply, Limerick Unit No. 1 did not        Bucks County ordering the completion of the Point constitute excess capacity under the standards imposed        Pleasant Project. On May 8, 1986, the Supreme Court of by the legislation. On July 25, 1986, the OCAfiled a          Pennsylvania denied the Petition for Allowance of Appeal Petition for Review with the Commonwealth Court of            filed by NWRA. OnJune 23, 1986, the Supreme Court of Pennsylvania (Commonwealth Court) of the PUC'sJune            Pennsylvania denied the remaining two Petitions for 2 7, 1986 electric rate order on the issue of excess          Allowance of Appeal. Construction of the Point Pleasant capacity and on a particular rate base issue regarding        Project has not yet resumed. The Court has appointed a whether certain utility plant was used and useful. On July    special master to oversee the implementation of the court 28, 1986, PetitionsforReviewofthe PUC'sJune 27, 1986          order that the project be completed.
electric rate order were filed with the Commonwealth
: 3. Sale of Steam Operations On June 30, 1986, the Company signed an agreement for the sale of its steam operations. The sale was completed on January 30, 1987. The Company recorded an estimated loss on disposal of $1,250,000, which includes $1,000,000 in income tax expense associated with timing differences for which deferred taxes, in accordance with the rate-making treatment, had not been provided.
Operating results of the steam operations for 1986, 1985 and 1984 are reported separately as discontinued operations in the accompanying financial statements and are summarized below. Income from Discontinued Operations includes a $1.0 million loss for the period fromJuly 1, 1986 to December 31, 1986.
1986            1985          1984 (Thousands ofDollars)
Steam Revenues                                                                    $51,067        $68,529        $82,320 Operating Expenses, Excluding Depreciation and Taxes                              (45,692)        (61,680)      (71,570)
Depreciation                                                                        (1,923)        (1,916)        (1,893)
Income and Other Taxes                                                              (1,536)        (2,485)        (4,419)
Income from Discontinued Operations                                              $ 1,916        $ 2,448        $ 4,438
: 4. Common Stock At December 31, 1986, and 1985, Common Stock without                outstanding. At December 31, 1986, there were par value, consisted of 240,000,000 shares authorized              19,795,818 shares reserved for issuance under stock and 189,078,606and177,679,977 shares, respectively,                purchase plans.
: 5. Preferred Stock At December 31, 1986, and 1985, Preferred Stock, $100 par, cumulative, 10,000,000 shares authorized:
Shares                      Amount Current    Refunding Redemption    Restricted              Outstanding Price (a)  Prior to (b)        1986          1985            1986        1985 (Thousands ofDollars)
Series (without mandatory redemption) 14.15%(c)                                    $114.15      2-1-90          500,000      500,000      $ 50,000    $ 50,000 13.35% (c)                                      113.35      2-1-89          750,000      750,000        75,000      75,000 12.80% (c)                                      112.80      5-1-88          750,000      750,000        75,000      75,000 9.50%                                          103.50                      750,000      750,000        75,000      75,000 8.75%                                          101.00                      650,000      650,000        65,000      65,000 7.85%                                          103.00                      500,000      500,000        50,000      50,000 7.80%                                          103.00                      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 3.8%                                            106.00                      300,000      300,000        30,000      30,000 5,724,720 5,724,720            572,472      572,472 Series (with mandatory redemption) (d) 0 17.125%                                      $117.13      5-1-87          300,000      300,000        30,000      30,000 15.25%                                        110.00      5-1-90          450,000      500,000        45,000      50,000 14.625%                                            (e)      5-1-90          500,000      500,000        50,000      50,000 10%                                            103.33      5-1-90          176,000      220,000        17,600      22,000 9.52%                                          103.00                        375,360      393,690        37,536      39,369 9.50% 1986 Series                              109.50    11-1-91            750,000                      75,000
: 8. 75% 1978 Series                            104.63      5-1-88          400,100      433,400        40,010      43,340 7.325%                                        103.51                        510,000      540,000        51,000      54,000 7%                                            101.00                        288,100      296,000        28,810      29,600 3,749,560 3,183,090            374,956      318,309 Total Preferred Stock                                          9,474,280 8,907,810          $947,428    $890,781 (a) Redeemable, at the option of the Company, at the                evidenced by Depositary Receipts, each representing indicated dollar amounts per share, plus accrued                    1/10 of a share of Preferred Stock.
dividends.                                                          ( d) Sinking Fund requirements (par value) in the period (b) Prior to the date specified, none of the shares of each          1987-1991 are as follows: 1987-$14,766,000; series indicated may be redeemed through refunding at an            1988-$16,740,000; 1989-$17,530,000; interest cost or dividend rate which is less than the                1990-$27,530,000; 1991-$23,130,000.
dividend rate of such series.                                        (e) Not redeemable prior to May 1, 1990.
( c) Ownership of these series of Preferred Stock is
 
Philadelphia Electric Company and Subsidiary Companies Notes to Financial Statements - Continued
: 6. Long-Term Debt At December 31 Series            Due                  1986          1985 (Thousands ofDollars)
First and Refunding Mortgage Bonds (a) 4%%            1986                        $    50,000 4%%            1987          $    40,000        40,000 3%%-14%              1988                52,500        52,500 5%-14%            1989                62,500        62,500 14%          1990                11,000        11,000 14%          1991                11,000        11,000 4Y2%-151;4%      1992-1996              748,633        650,725 6~%-11%%          1997-2001              530,939        535,184 8Y2%-12Y2%        2002-2006              500,000        500,000 6%-18%%        2007-2011              221,591        394,273 8"Vs%-18%      2012-2016              882,379        698,379 Total First and Refunding Mortgage Bonds                                                          3,060,542      3,005,561 Notes Payable - Banks                                                  (b)  1987-1992              225,000        225,000 Notes Payable - Other                                                17%          1987                10,000        20,000 Revolving Credit and Term Loan Agreements                                                (c)                                        550,000 Pollution Control Notes                                      5Y2%-13%      1997-2013              272,420        272,685 Debentures                                                        4.85%            1986                              20,800 Debentures                                                        14~%            1990                50,000        50,000 Debentures                                                9.85%-14%%        1993-2011              787,000        250,000
<&sect;> Sinking Fund Debentures - Philadelphia Electric Power Company, a Subsidiary                                      4Y2%          1995                14,580        15,325 Unamortized Debt Discount and Premium, Net                                                          (24,180)      (19,440)
Total Long-Term Debt                                                                4,395,362      4,389,931 Due Within One Year (d)                                                                              108,570        80,800 Long-Term Debt included in Capitalization (e)                                                    $4,286,792 $4,309,131 (a) Utility plant is subject to the lien of the ~ompany's        Limerick Unit No. 1. In 1986 the Company repaid the mortgage. InJuly 1986,the Company called $46,904,000              $550 million of borrowings, thereby terminating the princip<1.l amount ofl 7%% series due 2011 and in                agreement. The Company also has a $400 million September 1986, called $48,869,000 principal amount              Revolving Credit and Term Loan Agreement with a group of 18%% series due 2009. A portion of the proceeds from          of banks which expires in 1987. There is an annual the Company's November 1986 sale of $150,000,000                commitment fee of%% on the unused amount. There principal amount of 101;4% series due 2016 and                  were no borrowings under this agreement during the year.
    $100, 000, 000 principal amount of 8%% series due 1994          (d) Long-term debt maturities in the period 1988-1991 was used to repurchase $76,909,000 principal amount of          are as follows: 1988-$91,689,000; 1989-$78,863,000; 15%% series due 2010. Premiums on the repurchases of              1990-$77,850,000; and 1991-$77,850,000.
    $30,878,322 were charged to loss on reacquired debt.            ( e) The annualized interest on long-term debt at (b) At various interest rates.                                  December 31, 1986, was $443.8 million of which (c) At December 31, 1985, the Company had a $550                  $304.4 million was associated with mortgage bonds and million revolving credit and term loan agreement with a          $139.4 million was associated with other long-term debt.
group of banks which provided financing to complete
: 7. Short-Term Debt 1986              1985              1984 (Thousands ofDollars)
Average Short-Term Borrowings                                                            $ 233          $127,392          $166,713 Average Interest Rates, Computed on Daily Basis                                            9.51%              6.38%            9.88%
Maximum Short-Term Borrowings Outstanding                                                $1,000        $360,000          $302,500 Average Interest Rates on Short-Term Borrowings at December 31:
Bank Loans                                                                                                  9.50%            9.95%
Pollution Control Notes                                                                                                      6.44%
At December 31, 1986, the Company had no short-term                million. The Company generally does not have formal debt outstanding under formal and informal lines of                compensating balance arrangements with these banks.
credit with banks aggregating approximately $ 368
: 8. Jointly Owned Electric Utility Plant The Company's ownership interests in jointly owned utility plant at December 31, 1986 were as follows:
Production Plants                                Transmission Plant Peach                                                        Merrill Creek Bottom            Salem        Keystone      Conemaugh          Reservoir Operator                            Philadelphia  Public Service    Pennsylvania    Pennsylvania    Jersey Central          Various Electric    Electric and          Electric      Electric          Power&        Companies Company    Gas Company          Company        Company    Light Company Participating Interest                    42.49%          42.59%            20.99%        20.72%            44.24%        21%to43%
Company's share of:                                                      (Thousands ofDollars)
Utility Plant                      $515,149      $914,589            $67,028        $64,457                            $68,456 Accumulated Depreciation            134,065        170,460            24,824          25,205                              15,985 Construction Work In Progress        22,707        25,948              2,004          6,008          $38,718                      <&sect;>
The Company's participating interests are financed with            operations are accounted for as if such participating Company funds and, when placed in service, all                    interests were wholly owned facilities.
: 9. Income Taxes 1986              1985              1984 (Thousands ofDollars)
Included in Continuing Operations:
Federal Current                                                                        $ 96,562          $105,165          $ 91,769 Deferred                                                                        132,238            60,061            51,747 Investment Tax Credits, Net                                                        29,041              3,582          49,941 State Current                                                                            29,908            24,600            22,594 Deferred                                                                            1,181              6,492          26,803 Included in Other Income and Deductions:
Federal                                                                              (83,631)        (109,580)          (93,818)
State                                                                                (18,831)          (23,835)          (22,605)
Total                                                                  $186,468          $ 66,485          $126,431 Investment tax credits (ITC) and income tax credits                        Approximately $227 million of additional ITC resulting from contributions to employee stock                    generated from 1983 through 1986 has not been utilized ownership plans reduced Federal income taxes currently            due to limitations based on taxable income. These credits payable by $43 million in 1986, $12 million in 1985 and            which expire between 1998 and 2001 maybe used to
$58 million in 1984. Under the Tax Reform Act of 1986,            reduce Federal income taxes in future years; however, ITC has been repealed effective January 1, 1986 with the          approximately $219 million of these ITC carryovers may exception of transition property. The Company believes            be reduced by l 7Yz% in 1987 and by an additional l 7Yz%
that Limerick Unit No. 2 qualifies as transition property          in 1988 under the provisions of the Tax Reform Act of eligible for ITC.
* 1986.
 
Philadelphia Electric Company and Subsidiary Companies Notes to Financial Statements - Continued For a number of years the Company has used            which deferred taxes were not recorded was accelerated depreciation for income tax purposes and          approximately $730 million at December 31, 1986. Since straight line depreciation for financial reporting            the Company expects to charge customers for taxes when purposes. Deferred taxes were recorded only on those          the timing differences reverse, the tax effect of such timing differences recognized for rate-making. The            timing differences is not recorded currently.
cumulative net amount of such timing differences for Provisions for deferred income taxes on continuing operations consist of the tax effects of the following timing differences:
1986            1985            1984 (Thousands ofDollars)
Depreciation arid Amortization                                                  $127,278          $ 34,297        $ 33,814 Nuclear Waste Disposal Costs                                                                        (5,932)        (7,355)
Deferred Energy Costs                                                            (95,383)        (65,393)          43,761 Precommercial Operation of Limerick Unit No. 1                                    10,210          97,867 Deferred Limerick Costs                                                            11,004 Loss on Reacquired Debt                                                            14,305          24,592 Unrecovered Revenue                                                                55,040 Other                                                                              10,965          (18,878)          8,330 Total                                                              $133,419          $ 66,553        $ 78,550 The total income tax provisions on continuing operations differ from amounts computed by applying the Federal statutory tax rate to income and adjusted income before income taxes for the following reasons:
Income From Continuing Operations                                              $565,654        $522,853          $487,951 Total Income Tax Provisions                                                      186,468          66,485          126,431
<B> Income Before Income Taxes                                                        752,122          589,338          614,382 Deduct: Allowance for Funds Used During Construction (non-taxable)                178,438          433,491          354,855 Limerick Carrying Charges (non-taxable)                                188,679 Adjusted Income Before Income Taxes                                $385,005        $155,847          $259,527 Income Taxes on Above at Federal Statutory Rate of 46%                            177,102          71,689          119,382 Increase (Decrease) due to:
Depreciation Timing Differences Not Normalized                                  19,230            7,062          6,975 State Income Taxes, Net of Federal Income Tax Benefits                            6,620            3,919          14,467 Amortization of Investment Tax Credits                                        (13,468)          (8,250)        (7,738)
Other, Net                                                                      (3,016)          (7,935)        (6,655)
Total income tax provisions                                        $186,468        $ 66,485          $126,431 Provision for Income Taxes as a Percent of:
Income Before Income Taxes                                                        24.8%            11.3%          20.6%
Adjusted Income Before Income Taxes                                                48.4%            42.7%          48.7%
: 10. Taxes, Other Than Income 1986            1985            1984 (Thousands ofDollars)
Gross Receipts                                                                  $132,468        $128,346          $122,881 Capital Stock                                                                      25,511          28,091          13,160 Realty                                                                            49,110          62,222          47,923 Other                                                                              25,538          22,303          22,375 Total                                                              $232,627        $240,962          $206,339
: 11. Investments At December 31                                                                                1986                  1985 (Thousands ofDollars)
Gas Exploration and Development Joint Ventures                                              $38,299                $44,743 Real Estate Developments and Other Ventures                                                  17,088                15,433 Nonutility Property                                                                          13,477                13,931 Escrow Deposits for Decommissioning Nuclear Plants                                            20,278                12,563 Other Deposits                                                                                    560                  1,000 Total                                                                          $89,702                $87,670 In 1986 the Company's investment in gas exploration and development joint ventures exceeded the full cost limitation ceiling by $7.2 million, which was charged to expense.
12.Leases Leased property included in Utility Plant at December 31                                      1986                  1985 (Thousands ofDollars)
Nuclear Fuel                                                                                $484,536              $445,699 Electric Plant                                                                                10,953                48,342 Common Plant                                                                                      156                  3,116 Gross Leased Property                                                                        495,645              497,157 Accumulated Amortization                                                                    (214,299}            (159,016)
Net Leased Property                                                                        $281,346              $338,141 The nuclear fuel obligation is amortized as the fuel is burned. Amortization of leased property totaled $65.6 million,      <&sect;>
$60.9 million, and $39.l million for the years ended December 31, 1986, 1985 and 1984, respectively. Other operating expenses include interest on capital lease obligations of $16.4 million, $18.2 million and $22.0 million in 1986, 1985 and 1984, respectively. During 1986, $40.0 million of electric plant held under capital lease was retired and the lease terminated. Minimum future lease payments as of December 31, 1986, are:
Year Ending December 31                                                Capital Leases      Operating Leases          Total (Thousands ofDollars) 1987                                                                    $ 89,396            $ 33,856            $123,252 1988                                                                      78, 151            31, 170            109,321 1989                                                                      71,629              31,477              103,106 1990                                                                      48,418              30,596                79,014 1991                                                                      30,522              29,801                60,323 Remaining years                                                            13,185              97,407              110,592 Total Minimum Future Lease Payments                                    $331,301            $254,307            $585,608 Imputed Interest (rates ranging from 6.5% to 17%)                        (49,955)
Present Value of Net Minimum Future Lease Payments                      $281,346 Rental expense under operating leases totaled $54.0 million, $43.9 million, and $29.2 million, in 1986, 1985 and 1984, respectively.


Loss on Disposal of Discontinued Operations (1.2) Net Income 566.3 Preferred Stock Dividends 90.9 F.arnings Applicable to Common Stock 475.4 Dividends on Common Stock 403.5 F.arnings Retained $ 71.9 Income From Continuing Operations Per Average Common Share $ 2.59 F.arnings Per Average Common Share (Dollars)  
Philadelphia Electric Company and Subsidiary Companies Notes to Financial Statements - Continued
$ 2.60 Dividends per Common Share (Dollars)  
: 13. Segment Information - Continuing Operations 1986                    1985                    1984 (Thousands ofDollars)
$ 2.20 Common Stock Equity (Per Share) $ 18.47 Average Shares of Common Stock Outstanding (Millions) 183.1 1985 $2,945.2 1 , 09 7.8 370.8 440.1 1 , 908.7 183.0 440.9 2 , 532.6 412.6 1 76.3 133.4 (3.5) 306.2 718.8 43 5.4 17.7 (257.2) 195.9 522.9 2.4 525.3 90.6 434.7 373.5 $ 61.2 s 2.55 $ 2.56 s 2.20 $ 17.97 169.8 198 4 1983 198 2 1981 1976 $2,898.7 $2,524.9 $2,571.5 $2,358.5 $1 , 183.6 1 , 069.9 939.5 1 , 079.0 1 , 134.9 454.1 339.6 311.2 285.4 251.3 161.9 413.8 342.3 307.4 248.4 80.6 1 , 823.3 1 , 593.0 1 , 671.8 1,634.6 696.6 176.4 163.4 142.1 128.6 96.5 449.l 376.8 370.8 2 73.9 181.5 2 ,44 8.8 2,133.2 2 , 184.7 2 , 037.1 974.6 44 9.9 391.7 386.8 321.4 209.0 13 4.5 108.1 65.7 65.0 30.1 116.4 8 7.9 75.8 63.2 2 4.2 0.2 (3.1) (0.7) 2.5 2.6 251.1 192.9 1 40.8 1 30.7 56.9 70 1.0 584.6 527.6 452.1 265.9 4 02.5 330.2 308.9 266.7 1 47.6 30.9 35.2 32.0 33.2 3.6 (220.4) (167 .9) (147.6) (123.8) (47.5) 213.0 19 7.5 193.3 1 76.1 103.7 4 88.0 387.1 334.3 276.0 162.2 4.4 2.0 1.9 1.6 2.4 49 2.4 389.1 336.2 2 77.6 16 4.6 82.7 67.4 5 7.6 53.8 39.0 409.7 321.7 2 7 8.6 223.8 125.6 334.3 283.6 2 4 0.5 189.5 107.7 $ 7 5.4 $ 38.1 s 38.1 $ 34.3 $ 1 7.9 s 2.67 $ 2.39 s 2.38 s 2.23 s 1.88 $ 2.70 s 2.40 s 2.39 $ 2.2 5 $ 1.91 s 2.20 $ 2.12 s 2.06 $ 1.90 $ 1.64 $ 17.81 $ 17.99 s 17.93 $ 18.10 s 19.13 151.8 133.9 116.5 99.6 65.6
Electric Operations Operating Revenues                                        $ 2,699,365              $ 2,516,191              $2,435,731 Operating Expenses, excluding depreciation                    1,966,004              1,974,222                1,858,505 Depreciation                                                    206,701                168,208                162,959 Operating Income                                            $    526,660            $    373,761            $ 414,267 Utility Plant Additions                                    $    753,232            $    793,195            $1,022,496 Gas Operations Operating Revenues                                          $    391,504            $    428,984            $  462,966 Operating Expenses, excluding depreciation                      337,287                375,399                413,938 Depreciation                                                      15,867                  14,841                  13,474 Operating Income                                            $    38,350            $    38,744            $    35,554 Utility Plant Additions                                    $    35,053            $    32,896            $    30,613 Identifiable Assets (')
Electric                                                    $ 8,811,304            $ 8,885,738              $8,412,532 Gas                                                              416,824                407,375                405,958 Nonallocable Assets                                            1,519,892                718,732                737,239 Total Assets                                                $10,748,020            SI0,011,845              $9,555,729
'Includes Utility Plant less accumulated depreciation, inventories and allocated common utility property.
: 14. Commitments and Contingencies                              available, $1.2 billion for each station. Under the terms of The Company has incurred substantial commitments in            the various insurance agreements, the Company could be connection with its construction program. Construction        assessed up to $ 34 mi.Ilion for losses incurred at any expenditures are estimated to be $1.2 billion for 1987        plants insured by the insurance companies. The Company and $3.3 billion for 1988-1990. These estimates are            is a member of an industry mutual insurance company reviewed and revised periodically to reflect changes in        which provides replacement power cost insurance in the economic conditions, revised load forecasts and other          event of a major outage at a nuclear station. The premium appropriate factors. Facilities under construction and to      for this coverage is subject to an assessment for adverse be constructed, particularly Limerick Generating Station      loss experience. The Company's maximum share of any and associated facilities, will require permits and licenses  assessment is $16 million.
which the Company has no assurance will be granted.                    On March 29, 1985, the PUC adjusted the The Price-Anderson Act places a "Limit of              Company's February 28, 1985, Energy Cost Rate (ECR)
Liability" of $695 million for claims that could arise from    filing to exclude S45 million of incurred fuel expense an incident involving any licensed nuclear facility in the    from ECR recovery pending an investigation into outages nation. All nuclear utilities, including the Company, have    experienced at Peach Bottom Unit No. 2 and Salem Unit covered this exposure through a combination of private        No. 1 in 1984. On February 28, 1986, the Company made insurance and mandatory participation in a secondary          its annual filing with the PUC for a revision in the ECR financial protection pool. In the event of a nuclear          which requested a decrease. On March 20, 1986, the PUC incident, the Company could be assessed up to $13.5            approved the Company's request to lower the ECR, million per incident, involving any licensed nuclear          effective April 1, 1986, and the PUC permitted the facility in the nation, with a maximum amount of $27          Companytorecover $35.25 millionofthe S45 million million in any one year. The current Price-Anderson            fuel costs which the PUC had previously excluded from legislation expires in 1987. Bills to amend the Price-        recovery. The remaining $ 9. 7 5 million was written off in Anderson Act, including proposals to substantially modify      the quarter ending March 31, 1986.
or eliminate the limitation on liability provisions, have              OnJanuary 25, 1985, the PUC adopted an order been introduced in Congress.                                  granting the Company a net increase in annual revenues The Company maintains property insurance,              of $49 million reflecting the inclusion of Salem Unit No. 2 including radiation contamination coverage, for loss or        in rates. The Company agreed to guarantee $116 million damage to its nuclear facilities. Although it is impossible    of fuel savings from Salem Unit No. 2 for the period from to determine the total amount of the loss that may result      February 1, 1985 to March 31, 1986. Due primarily to a from an occurrence at these facilities, the Company            combination of lower than anticipated fuel prices and maintains the maximum amount of insurance presently
 
lower than anticipated generation from Salem Unit No. 2,            The Company's indemnification obligation also includes the the energy savings associated with the unit were less than          payment of interest, at prime rates, on the indemnification the amount that the Company had guaranteed. As a result,            amount and all associated costs of contesting an Internal the Company wrote off $16 million of fuel expenses in                Revenue Service challenge. The Company has been the quarter ended March 31, 1986.                                    advised that the Internal Revenue Service has asserted, in In December 1981, the Company sold the federal                    auditing the purchaser, that the sale was invalid. Although income tax benefits associated with Unit No. 2 of the                the purchaser has protested the Internal Revenue Service Salem Generating Station for $53,743,000 in a safe                  claims, the Company has no assurance that the protest harbor lease transaction. Under the sale agreement, the              will be successful. If the Internal Revenue Service claims Company agreed to indemnify the purchaser against the                against the purchaser are upheld, compliance with the loss of the tax benefits resulting from any Internal                indemnification provisions of the agreement could result Revenue Service claims which render the sale invalid.                in a significant charge to income.
: 15. 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                  1986                1985              1986                1985              1986                1985 (Thousands ofDollars)
March 31                    $868,635            $815,886          $124,446          $123,810          $166,261            $151, 166 June 30                      675,109            669,319            92,179              97,763          128,213            118,859 September 30                803,667            746,388            183,081              94,962          168,705            124,163 December 31                  743,458            713,582            165,304              95,970          103,141            131,113 Earnings Applicable                    Average Shares to Common Stock                        Outstanding                    Earnings Per Average Share Quarter Ended                  1986                1985              1986                1985                1986                1985  w (Thousands ofDollars)                      (Thousands)                                (Dollars)
March 31                    $143,699            $128,422            177,843            162,859                $.81                $.79 June 30                      105,964              96,212          181,378            168,723                  .58                  .57 September 30                146,441            101,569            185,171            171,993                  .79                  .59 December 31                    79,255            108,521            188,037            175,401                  .42                  .62 1986 first quarter results include charges of approximately          1985 third quarter results include a charge of
$13.l million (net ofrelated incomes taxes) resulting              approximately $ 34. 7 million (net of related income from PUC's denial of recovery of approximately $9. 75                taxes) resulting from the PUC's denial of recovery of million of replacement power costs and $16 million of                approximately $73.0 million of energy costs.
unrecovered fuel expenses guaranteed (see note 14).
Operating Revenues and Operating Income for 1985 and the first three quarters of 1986 differ from the amounts previously reported due to the reclassification to discontinued operations of revenues and expenses associated with the sale ofsteam operations, as follows:
Operating Revenues                                  Operating Income Quarter Ended                            1986                    1985                      1986                      1985 (Thousands ofDollars)
March 31                              $25,981                  $36,413                    $2,865                    $3,082 June 30                                  10,106                  14,200                        51                        390 September 30                              3,161                  4,516                    (1,948)                  (1,722)
December 31                                                      13,400                                                  698
 
Philadelphia Electric Company and Subsidiary Companies Notes to Financial Statements - Continued
: 16. Retirement Benefits                                              assets available for benefits may be misleading. The plan is The Company and its subsidiaries have noncontributory                of a long-term nature and is funded on a basis consistent trusteed retirement plans applicable to all regular                  with this concept. The actuarial value of accumulated employees. Pension costs include normal cost for the year            plan benefits is, essentially, a hypothetical plan and amortization of unfunded prior service costs over ten            termination calculation which does not take into account to twenty years. Approximately 83 % of such costs were                future salaries or future service. Net assets, which are charged to operating expenses and the remainder,                      measured at fair value at January 1, are subject to associated with construction labor, to the cost of new                fluctuations in the securities markets and, therefore, may utility plant. Retirement plan costs, which are funded as            not be indicative of the plan's long-term funded status.
accrued, were $42,500,000, $46,700,000, and                                  In December 1985, the Financial Accounting
$42,000,000, in 1986, 1985 and 1984, respectively.                   Standards Board issued Statement of Financial Accounting Pension plan data as of the dates of the most recent        Standards No. 87, Employer's Accounting for Pensions.
actuarial valuations is as follows:                                  This Statement supersedes existing accounting principles January 1         for defined benefit pension plans and becomes applicable 1986        1985    to the Company in 1987. The Company believes adoption Actuarial present value of accumulated      (Thousands ofDollars)    of Statement No. 87 will not have a material impact on its plan benefits                                                        financial statements.
Assumed rate of return                          7.5%          7.0%        In addition to providing pension benefits, the Vested                                      $580,815    $512,639    Company provides certain health care and life insurance Nonvested                                      7,127        60,990  benefits for retired employees. Substantially all of the
                                              $587,942    $573,629  Company's employees may become eligible for these Net assets available for benefits            $854,917    $645,726    benefits if they reach retirement age while still working for the Company. These benefits and similar benefits for Changes in plan provisions, effective January 1,            active employees are provided by an insurance company 1986, increased the actuarial present value of                        whose premiums are based on the benefits paid during accumulated plan benefits by approximately $30.6                      the year. The Company recognizes the cost of providing million while the change in actuarial assumptions                    these benefits by charging the annual insurance premiums decreased the present value by $79.1 million. The                    to expense. The cost of providing those benefits for actuarial methods and the accounting policies are the                approximately 3,400 retirees during the years 1986, 1985 same as those used to determine pension expense for the              and 1984 is not separable from the cost of providing prior year.                                                          benefits for approximately 10,000 active employees for The preceding tabular disclosures are required              the same period. Total premiums amounted to $31.6 under applicable accounting principles. However, the                  million, $29.3 million, and $26.6 million, for 1986, Company is of the opinion that comparing the actuarial                1985 and 1984, respectively.
present value of accumulated plan benefits with the net Report of Independent Certified Public Accountants To the Shareholders and Board of Directors Philadelphia Electric Company We have examined the consolidated balance sheets of Philadelphia Electric Company and Subsidiary Companies as of December 31, 1986 and 1985, and the related consolidated statements of income, changes in common stockholders' equity and preferred stock, and changes in cash flows for each of the three years in the period ended December 31, 1986. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.
In our opinion, the financial statements referred to above present fairly the consolidated financial position of Philadelphia Electric Company and Subsidiary Companies as of December 31, 1986 and 1985, and the consolidated results of their operations and changes in their financial position for each of the three years in the period ended December 31, 1986, in conformity with generally accepted accounting principles applied on a consistent basis.
2400 Eleven Penn Center Philadelphia, Pennsylvania February 2, 1987
 
Philadelphia Electric Company and Subsidiary Companies Securities Statistics Ratings on Philadelphia Electric Company's Securities Mortgage Bonds                    Debentures                        Preferred Stock Agency                                            Rating  Date Established      Rating  Date Established        Rating      Date Established Duff and Phelps, Inc.                                9            3/80              IO          3/80                    11            2/83 Fitch Investors Service                            BBB          9/82              BBB-          9/82                  BB+              9/82 Moody's Investors Service                          Baa3          1/83            Bal          1/83                  bal              1/83 Standard & Poor's Corporation                      BBB-          9/82              BB +          9/82                  BB+              7/86 NYSE - Composite Common Stock Prices, Earnings and Dividends by Quarters (Per Share) 1986                                                          1985 Fourth      Third      Second          First            Fourth          Third          Second            First Quarter      Quarter    Quarter        Quarter            Quarter        Quarter          Quarter      Quarter High Price                        $24 1/s      $25 1/s      $203/s        $201/2            Sl7%          Sl6%              SI6Y8        Sl6%
Low Price                        $21 5/8      $19718      $171/8        $167/s            SI4            $14              Sl3"Ve        SI4Y.!
Earnings                            42&#xa2;          79&#xa2;          58&#xa2;            SH                62<r            59<r            57<r          79<r Dividends                          55&#xa2;          55&#xa2;          55&#xa2;            55&#xa2;                55<r          55<r            55<r          55<r RETURN ON AVERAGE                            RATIO OF EARNINGS COMMON STOCK                                TO MORTGAGE EQUITY                                      INTEREST Percent 18                              limes Covered 3 .00 15                                            2.50 12                                            2.00 9                                            1.50 6                                            1.00
                                                                                                                          .50 82 83 84 85    86                                82 83 84 85        86
 
Philadelphia Electric Company and Subsidiary Compani es Financial Statistics Summary ofF.arnings            (Millions ofDollars)
For the Year Ended                                    1986        1985      1984        1983       1982      1981       1976 Operating Revenues (for details see pages 42 and 43)                  $3,090.9  $2,945.2 $2,898.7 $2,524.9 $2,571.5 $2,358.5 $1 ,183 .6 Operating Expenses Fuel and Energy Interchange                            889.3    1,097.8    1,069.9       939 .5   1,079 .0   1,134 .9   454.1 labor                                                  417.2      370.8      339.6       311.2     285 .4     251.3     161.9 Other Materials, Supplies and Services                475.2      440.1      413.8       342 .3     307.4     248.4       80 .6 Total Operation and Maintenance                  1,781.7    1,908.7    1,823.3     1,593.0   1,671.8   1,634.6     696.6 Depreciation                                          222.6        183.0      176.4       163 .4     142.1     128.6       96.5 Taxes                                                  521.6      440 .9    449.l       376.8     370 .8     273.9     181.5 Total Operating Expenses                          2,525.9    2,532.6    2,448 .8   2,133 .2   2, 184.7   2,037.1     974.6 Operating Income                                      565.0      412.6      449 .9     391.7       386.8     321.4     209 .0 Other Income and Deductions Allowance for Other Funds Used During Construction                                  76.8      176.3      134. 5     108.1       65.7     65 .0     30.1 Limerick Carrying Charges                              188.7 Income Tax Credits, net                                102.5      133.4      116.4       8 7.9     75.8     63 .2     24.2 Other, net                                                2.4       (3.5)      0 .2       (3.1)     (0.7)     2.5       2.6 Total Other Income and Deductions                    370.4      306.2    251.1       192 .9     140.8     130.7       56 .9 Income Before Interest Charges                        935.4      718.8      70 1.0     584.6       527.6     452. 1     265 .9 Interest Charges Long-Term Debt                                        458.9      43 5.4     402.5       330.2       308.9     266 .7     147.6
<&sect;> Short-Term Debt                                          12.5        17.7      30.9       35.2       32 .0     33 .2       3.6 Allowance for Borrowed Funds Used During Construction                                (101.6)    (257 .2)  (220.4)     (167 .9)   (147.6)   (123 .8)   (47 .5)
Net Interest Charges                                369.8      195 .9    213.0       197. 5     193 .3   176. 1     103 .7 Income From Continuing Operations                      565.6      522 .9    488 .0     387.1       334.3     276 .0     162 .2 Income From Discontinued Operations                                            1.9        2 .4      4.4         2.0       1.9       1.6       2 .4 Estimated Loss on Disposal of Discontinued Operations                            (1.2)
Net Income                                              566.3      525 .3    49 2.4     389.1       336.2     277.6      164.6 Preferred Stock Dividends                                90.9        90.6       82.7       67.4       57.6     53 .8     39.0 F.arnings Applicable to Common Stock                                                475.4      434.7      409.7       321.7       278 .6   223 .8     125 .6 Dividends on Common Stock                              403.5      373.5      334.3     283 .6     240.5     189.5     107.7 F.arnings Retained                                  $ 71.9    $    61.2 $    75.4 $     38.1 s   38.1 $   34 .3 $   17.9 Income From Continuing Operations Per Average Common Share                          $ 2.59    s    2.55  s   2.67 $     2.39 s   2.38 s   2.23   s   1.88 F.arnings Per Average Common Share (Dollars)                                  $ 2.60    $    2.56 $     2.70 s     2.40 s   2.39 $   2.2 5 $   1.91 Dividends per Common Share (Dollars)                                        $ 2.20 s 2.20 s 2.20             $     2 .12 s   2.06 $   1.90 $     1.64 Common Stock Equity (Per Share)                      $ 18.47 $ 17.97 $ 17.81         $   17 .99 s   17.93 $ 18.10 s 19.13 Average Shares of Common Stock Outstanding (Millions)                              183.1      169.8      151 .8     133 .9     116.5     99 .6     65.6


==SUMMARY==
==SUMMARY==
OF FINANCIAL CONDffiON (Millions of Dollars) December 31 1986 1985 198 4 1983 1982 1981 1976 Assets Utility Plant, at original cost $11,216.7  
OF FINANCIAL CONDffiON (Millions ofDollars)
$10,572.2  
December 31                               1986     1985       1984      1983     1982     1981     1976 Assets Utility Plant, at original cost         $11,216.7 $10,572.2 $9,834.1 $8,864 .2 $7,905.7 $7,044.7 $4,747.2 Less: Accumulated Depreciation           2,014.7 1,824.4 1,726.3 1,592.0 1,450.1           1,330.6   860 .3 Leased Property, Net                       281.3     338.1     352 .1   364 .0   299.l   270.0     91.6 Net Utility Plant                 9,483.3 9,085 .9 8 ,4 59.9 7,636.2 6 ,7 54.7 5,984.1       3,978 .5 Current Assets Cash and Temporary Cash Investments                             90.7   188.8       30.4     57 .2     50 .0   30.7     23 .8 Accounts Receivable                       375.6     370.9     384.2     338.6     342.2     342 .4   168.0 Inventories                               129.7     123.7     150.5     131.1     143.0   132 .2   88.3 Deferred Income Taxes - Energy Costs       44.8     (51.8) (117.7)     (76.5)     43.3     17.0   (10.5)
$9,834.1 $8,864.2 $7,905.7 $7,044.7 $4,747.2 Less: Accumulated Depreciation 2,014.7 1 , 824.4 1 , 726.3 1,592.0 1,450.1 1 , 330.6 860.3 Leased Property, Net 281.3 338.1 352.1 364.0 299.l 270.0 91.6 Net Utility Plant 9,483.3 9 , 085.9 8 ,4 59.9 7,636.2 6 ,7 54.7 5,984.1 3 , 978.5 Current Assets Cash and Temporary Cash Investments 90.7 188.8 30.4 57.2 50.0 30.7 23.8 Accounts Receivable 375.6 370.9 384.2 338.6 342.2 342.4 168.0 Inventories 129.7 123.7 150.5 131.1 143.0 132.2 88.3 Deferred Income Taxes -Energy Costs 44.8 (51.8) (117.7) (76.5) 43.3 17.0 (10.5) Other 78.6 71.8 137.0 52.3 40.2 35.l 20.8 Deferred Debits and Other Assets Unrecovered Revenue 112.5 Deferred Limerick Costs and Carrying Charges 195.6 Investments 89.7 87.7 80.9 99.4 91.4 77.8 13.2 Loss on Reacquired Debt 76.8 48.6 Other 70.7 86.2 82.9 80.4 24.9 31.5 14.7 Total $10,748.0  
Other                                       78.6     71.8     137.0     52.3     40.2     35.l     20 .8 Deferred Debits and Other Assets Unrecovered Revenue                       112.5 Deferred Limerick Costs and Carrying Charges                       195.6 Investments                               89.7       87.7     80 .9     99 .4     91.4     77.8     13.2 Loss on Reacquired Debt                   76.8       48.6 Other                                     70.7       86.2     82 .9     80.4     24 .9   31.5     14 .7 Total                           $10,748.0 $10,011.8 $9,208.1 $8,318.7 $7,489.7 $6,650.8 $4,296.8 Capitalization and Liabilities Common Stock                           $ 2,833.0 $ 2,602 .0 $2,361.0 $2,110.5 $1,826.2 $1,572 .4 $1,002.8 Other Paid-In Capital                         7.8       7.3       6.7       5.9       4.6       3.9     1.7 Retained Earnings                           653.1     583.7     523.3     452 .9   423.6     387.2   321.2 Common Shareholders' Equity       3,493.9   3,193.0   2,891.0   2,569.3   2,254.4   1,963.5 1,325.7 0 Preferred Stock:
$10,011.8  
Without Mandatory Redemption             572.5     572 .5   572.5     522.5     372.5     372.5   372.5 With Mandatory Redemption                 374.9     318.3     326.2     284 .9   292 .3   266.9   162.6 Long-Term Debt                           4,286.8   4,309.2   3,778.0   3,381.8   3,028.5   2,74 5.7 1,936.4 Total Capitalization               8,728.1   8,393.0   7,567.7   6,7 58.5 5,947 .7 5,348.6 3,797.2 Current Liabilities Short-Term Debt                                       1.0   260.0     267.5       64 .7   54.2     7.2 Long-Term Debt Due Within One Year       108.6       80.8     50.4               21.3     36.1     36.9 Lease Obligations Due Within One Year     69.4       76.3     68 .3     61.5     32.5     53.9     10.6 Accounts and Dividends Payable           222.1     185.l     200.l     179.9     188.5     188.9     83.9 Taxes Accrued                             86.1       58.5     40.3     25 .8     65.9     68.4     20 .2 Deferred Energy Costs                     88.2   (101.7)   (229.9)   (149.3)     85.4     31.3   (19.9)
$9,208.1 $8,318.7 $7,489.7 $6,650.8 $4,296.8 Capitalization and Liabilities Common Stock $ 2,833.0 $ 2,602.0 $2,361.0 $2,110.5 $1,826.2 $1,572.4 $1,002.8 Other Paid-In Capital 7.8 7.3 6.7 5.9 4.6 3.9 1.7 Retained Earnings 653.1 583.7 523.3 452.9 423.6 387.2 321.2 Common Shareholders' Equity 3,493.9 3 , 193.0 2,891.0 2 , 569.3 2,254.4 1 , 963.5 1 , 325.7 0 Preferred Stock: Without Mandatory Redemption 572.5 572.5 572.5 522.5 372.5 372.5 372.5 With Mandatory Redemption 374.9 318.3 326.2 284.9 292.3 266.9 162.6 Long-Term Debt 4,286.8 4,309.2 3,778.0 3,381.8 3,028.5 2 ,74 5.7 1 , 936.4 Total Capitalization 8,728.1 8,393.0 7,567.7 6 ,7 58.5 5,947.7 5,348.6 3,797.2 Current Liabilities Short-Term Debt 1.0 260.0 267.5 64.7 54.2 7.2 Long-Term Debt Due Within One Year 108.6 80.8 50.4 21.3 36.1 36.9 Lease Obligations Due Within One Year 69.4 76.3 68.3 61.5 32.5 53.9 10.6 Accounts and Dividends Payable 222.1 185.l 200.l 179.9 188.5 188.9 83.9 Taxes Accrued 86.1 58.5 40.3 25.8 65.9 68.4 20.2 Deferred Energy Costs 88.2 (101.7) (229.9) (149.3) 85.4 31.3 (19.9) Interest Accrued 90.7 93.0 91.1 91.8 99.8 82.3 43.2 Other 80.0 72.0 127.2 54.1 24.7 18.l 4.6 Deferred Credits and Other Liabilities Capital Lease Obligations 212.0 261.8 283.8 302.5 266.6 216.1 81.0 Deferred Income Taxes 695.0 502.6 373.3 346.5 290.5 273.5 110.8 Unamortized Investment Tax Credits 320.1 302.4 299.4 249.7 296.0 204.0 88.0 Other 47.7 87.0 76.4 130.2 106.1 75.4 33.1 Total $10,748.0  
Interest Accrued                           90.7       93.0     91.1     91.8     99 .8   82.3     43.2 Other                                     80.0       72.0   127.2       54.1     24.7     18.l     4.6 Deferred Credits and Other Liabilities Capital Lease Obligations                 212.0     261.8     283.8     302.5     266.6     216 .1   81.0 Deferred Income Taxes                     695.0     502.6     373.3     346.5     290.5     273 .5   110.8 Unamortized Investment Tax Credits       320.1     302.4     299.4     249.7     296.0     204.0     88.0 Other                                     47.7       87.0     76.4   130.2     106.1     75.4     33 .1 Total                           $10,748.0 $10,011.8 $9,208.1 $8,318.7 $7,489.7 $6,650.8 $4,296 .8
$10,011.8  
 
$9,208.1 $8,318.7 $7,489.7 $6,650.8 $4,296.8
Philadelphia Electric Company and Subsidiary Companies Operating Statistics ELECTRIC OPERATIONS 1986       1985        1984      1983      1982      1981        1976 Output ( Millions ofKilowatthours)
<*> Philadelphia Electric Company and Subsidiar y Companies Operating Statistics ELECTRIC OPERATIONS 1986 Output (Millions of Kilowatthours) Steam 7,864 Nuclear 17,125 Hydraulic 1,848 Pumped Storage Output 1,176 Pumped Storage Input (1,661) Purchase and Net Interchange 4,258 Internal Combustion 269 Other 382 Total Electric Output 31,261 Sales (Millions of Kilowatthours)
Steam                                           7,864     9,4 55    11 ,085    10,4 57    8,598      9 ,931  13 ,385 Nuclear                                      17,125      8 ,3 59    6,462    5,520    10,743      7,464      4,937 Hydraulic                                      1,848      1,484      2,085    1,739      1,581      1,397      2,065 Pumped Storage Output                          1,176      1,235      1,100        979    1,126      1,101      1,062 Pumped Storage Input                          (1,661)  (1 ,7 54)  (1 ,579)  (1,427)  (1,665)    (1,624)    (1,506)
Residential 8,900 Small Commercial and Industrial 4,022 large Commercial and Industrial 15,068 All Other 993 Service Territory 28,983 Jersey Central Power and Light (Salem Unit No. 2) Total Electric Sales 28,983 Number of Customers, December 31 1985 9 ,4 55 8 ,3 59 1 ,4 84 1 , 235 (1 ,7 54) 10 , 252 178 1 , 254 30 ,4 63 8 ,4 40 3 ,7 31 14 , 920 1 , 044 28 , 135 28 , 135 Residential 1,263,465 1 , 245 ,4 81 Small Commercial and Industrial 127,797 124 ,7 19 large Commercial and Industrial 4,668 4,881 All Other 763 773 198 4 198 3 1982 1981 19 7 6 11 , 085 10 ,4 57 8,598 9 , 931 13 , 385 6 ,4 62 5 , 520 10 ,743 7,464 4,937 2,085 1 ,73 9 1,581 1 ,3 97 2 , 065 1 , 100 979 1 , 126 1 , 101 1 , 062 (1 , 579) (1,427) (1,665) (1,624)  
Purchase and Net Interchange                  4,258    10,252      11 ,975    12,181    11,120    11 ,173        7,666 Internal Combustion                              269        178        425        491        178        283        792 Other                                            382      1,254                                          528        36 Total Electric Output                  31,261    30,463      31 ,553    29,940    31,681    30,253      28,4 37 Sales ( Millions ofKilowatthours)
(1,506) 11 , 975 12,181 11,120 11 , 173 7,666 425 491 178 283 792 528 36 31 , 553 29,940 31,681 30 , 253 28 ,4 37 8,515 8 ,4 67 7 , 877 8 , 014 7,585 3 , 543 3,284 3,142 3 , 115 2 , 755 14 , 881 14 ,47 8 14 , 178 14,916 14 , 662 1 , 061 1 , 003 1 , 012 1 , 005 1 , 271 28,000 27 , 232 26 , 209 27 , 050 26 , 273 1 , 395 346 3 , 352 1 , 218 29 , 395 27,578 29,561 28 , 268 26,273 1 , 230 , 883 1 , 217 , 635 1 , 206,944 1 , 200,238 1 , 137,544 121 , 676 119,292 118,407 117 , 016 115 , 422 5 , 100 5 ,437 5 , 616 5 ,7 90 5 ,7 47 751 751 762 746 2 , 345 Total Electric Customers 1,396,693 1 , 375 , 854 1 , 358 ,4 10 1 , 343 , 115 1 , 331 , 729 1,323,790 1 , 261 , 058 Operating Revenues (Millions of Dollars) Residential  
Residential                                    8,900      8 ,440      8,515    8 ,467    7 ,877    8 ,014      7,585 Small Commercial and Industrial                4,022      3,731      3,543     3,284     3,142     3,115       2,755 large Commercial and Industrial              15,068    14,920      14,881    14,478    14,178     14,916     14,662 All Other                                        993      1,044      1,061     1,003     1,012     1,005       1,271 Service Territory                            28,983    28,135      28,000     27,232   26,209   27,050     26 ,273 Jersey Central Power and Light (Salem Unit No. 2)                                                1,395       346     3,352     1,218 Total Electric Sales                    28,983    28,135      29 ,395   27,578   29,561     28,268     26,273 Number of Customers, December 31 Residential                              1,263,465 1,245 ,481 1,230,883 1,217 ,635 1,206,944 1,200,238 1, 137,544 Small Commercial and Industrial            127,797 124,7 19 121 ,676 119,292 118,407 117,016 115 ,422 large Commercial and Industrial                4,668      4,881      5,100     5,437     5,616     5,790      5,747
$1,023.6 $923.9 $854.9 $744.0 S694.4 s643.7 $373.2 Small Commercial and Industrial 437.0 388.7 360.2 316.6 310.6 285.9 149.3 large Commercial and Industrial 1,103.3 1,061.8 1 , 008.5 877.4 922.3 917.1 442.9 All Other 135.5 141.8 145.1 139.4 118.3 109.5 59.4 Service Territory 2,699.4 2,516.2 2 , 368.7 2 , 077.4 2 , 045.6 1,956.2 1 , 024.8 Jersey Central Power & Light (Salem Unit No. 2) 67.0 30.5 135.4 45.9 Total Electric Revenues $2,699.4 $2 , 516.2 $2 ,4 35.7 $2,107.9 $2 , 181.0 $2,002.1 Sl , 024.8 Operating Expenses (Millions of Dollars) Operating expenses excluding depreciation  
<>  All Other                                        763        773        751       751       762       746     2,345 Total Electric Customers             1,396,693 1,375 ,854 1,358,4 10 1,343 ,115 1,331 ,729 1,323,790 1,261 ,058 Operating Revenues (Millions ofDollars)
$1,966.0 Sl , 974.2 $1 , 858.5 Sl,592.0 $1 , 688.4 S 1,586.5 $750.2 Depreciation 206.7 168.2 163.0 150.9 130.2 117.3 88.0 Total Operating Expenses $2,172.7 $2 , 142.4 S2 , 021.5 Sl,742.9 Sl , 818.6 Sl , 703.8 S838.2 Electric Operating Income (Millions of Dollars) $ 526.7 s 373.8 s 414.2 s 365.0 s 362.4 s 298.3 $186.6 Average Use per Residential Customer (kilowatthours)
Residential                               $1,023.6     $923 .9     $854.9     $744 .0   S694.4     s643 .7     $373.2 Small Commercial and Industrial               437.0     388.7       360.2     316.6     310.6     285.9       149.3 large Commercial and Industrial             1,103.3   1,061.8     1,008.5     877 .4     922.3     917.1       442.9 All Other                                       135.5     141.8       145 .1   139.4     118.3     109.5       59.4 Service Territory                           2,699.4   2,516.2     2,368.7   2,077 .4 2,045.6   1,956.2     1,024 .8 Jersey Central Power & Light (Salem Unit No. 2)                                                 67.0       30.5     135.4       45 .9 Total Electric Revenues               $2,699.4   $2 ,516.2   $2 ,435 .7 $2,107.9 $2 ,181.0 $2,002 .1   Sl ,024 .8 Operating Expenses (Millions ofDollars)
Without Electric Heating 6,177 6,034 6 , 160 6 , 319 5 , 875 6,022 6,298 With Electric Heating 16,661 15,923 17 , 293 16 , 523 16,813 18,054 22 , 154 Total 7,097 6,820 6,960 6 , 990 6,544 6,699 6,710 Electric Peak Load , Demand (thousands of kws) 6,134 6 , 034 5 , 925 5 , 879 5 , 691 5 ,7 31 5 , 346 Net Electric Generating Capacity -Year End Summer rating (thousands of kws) 7,870 7,599 7 , 765 7 , 974 8,006 8,006 7 , 742 Cost of Fuel per Million Btu $1.18 Sl.72 $2.22 $2.25 Sl.57 $2.10 Sl.24 Btu per Net Kilowatthour Generated 10,844 10,843 10 , 920 10,906 10 , 918 10 , 930 10,529 GAS OPERATIONS 1986 Sales (Million s of Cubic Feet) Residential 1,856 House Heating 25,731 Commercial and Industrial 33,834 All Other 578 Total Gas Sales 61,999 Gas Transported for Customers 3,907 Total Gas Sales & Transported 65,906 Number of Customers, December 31 Residential 68,590 House Heating 225,010 Commercial and Industrial 24,884 Total Gas Customers 318,484 Operating Revenues (M illions of Dollars) Residential  
Operating expenses excluding depreciation                           $1,966.0   Sl ,974.2   $1 ,858.5 Sl,592.0 $1 ,688.4 S1,586.5     $750 .2 Depreciation                                   206.7     168.2       163.0     150.9     130.2     117.3       88.0 Total Operating Expenses             $2,172.7   $2 ,142 .4 S2 ,021.5 Sl,742.9 Sl ,818.6 Sl ,703 .8   S838.2 Electric Operating Income (Millions ofDollars)                       $ 526.7   s 373 .8   s 414.2   s 365.0 s   362.4 s 298.3       $186.6 Average Use per Residential Customer (kilowatthours)
$ 18.0 House Heating 189.8 Commercial and Industrial 177.7 All Oth e r 2.0 Subtotal $387.5 Other Revenues (including Transported for Customers)  
Without Electric Heating                       6,177     6,034       6,160     6,319     5,875     6,022       6,298 With Electric Heating                         16,661   15,923     17,293     16,523   16,813     18,054     22 ,154 Total                                   7,097     6,820       6,960     6 ,990     6,544     6,699       6,710 Electric Peak Load, Demand (thousands of kws)                             6,134     6 ,034     5,925     5,879     5,691     5,731      5,346 Net Electric Generating Capacity -
Year End Summer rating (thousands of kws)                             7,870     7,599       7,765     7,974     8,006     8,006       7,742 Cost of Fuel per Million Btu                     $1.18     Sl .72     $2.22     $2 .25     Sl.57     $2.10       Sl.24 Btu per Net Kilowatthour Generated               10,844   10,843     10,920     10,906   10,918     10,930     10,529
 
GAS OPERATIONS 1986           1985              1984              1983      1982            1981        1976 Sales (Millions of Cubic Feet)
Residential                                       1,856         1,810              1,941            2,168      2,442          2,446        2,34 2 House Heating                                    25,731       23 ,227          25 ,4 29          22 ,981    24 ,237        24,675      24 ,540 Commercial and Industrial                         33,834       36,254            41, 145          39 ,043    41,660          45,670      33,390 All Other                                            578         1,209              1,282                672      422            127            89 Total Gas Sales                             61,999       62,500            69,797            64 ,864    68,761          72,918      60,361 Gas Transported for Customers                     3,907       10,262              3,794                789 Total Gas Sales & Transported               65,906       72 ,762          73,591            65,653      68,761          72 ,918    60 ,361 Number of Customers, December 31 Residential                                       68,590       69,632            70,794            72,501      76,638          78,426 89,459 House Heating                                   225,010     217,840          211,984            206,443      198,910        193,038 162,993 Commercial and Industrial                         24,884       24 ,234          23,442            22 ,810    22 ,324        21,578      19,669 Total Gas Customers                         318,484     311,706          306,220            301 ,754    297,872        293,042 272,121 Operating Revenues (Millions ofDollars)
Residential                                       $ 18.0       $ 18.7           s  19.0           s  19.1  s  18.1        s  15.4      s    8 .7 House Heating                                      189.8          185.4            191.7              165 .8    147.1          128.5        73.3 Commercial and Industrial                          177.7          214.1            243 .7            227 .3    221.1          209.7          76.1 All Other                                            2.0            5.2              5.6                3.0        1.8            0.5          0.2 Subtotal                                    $387.5        $423.4            $460.0            $415 .2    $388.1          $354.1      $158.3 Other Revenues (including Transported for Customers)             4.0            5.5              3.0                1.8      2 .3            2.3          0.6 Total Gas Revenues                          $391.5        $428.9            $463.0            $417.0      $390.4          $356.4      $158.9 Operating Expenses (Millions of Dollars)
Operating expenses excluding
                                                                                                                                                          <E>
depreciation                                    $337.3        $375.4            S413.9            $377.6      S354.l          $322.0      s128.1 Depreciation                                        15.9            14.8            13.5              12.7      11.9            11.3            8 .4 Total Operating Expenses                    $353.2        $390.2            $427.4            $390 .3    $366.0          $333.3      S136.5 Gas Operating Income          (Millions ofDollars)  $ 38.3        $ 38.7            s  35.6          $ 26.7    $ 24.4          $ 23.1      s  22 .4 ELECTRIC SALES                                      GAS SALES (including Salem Unit                                & TRANSPORTED fllo. 2)
Billions of                                            Billionsof - - - - - - -
kilowanhours 30                                        Cubic Fee1 90 75 60 30 15 82  83  84    85    86                        82  83 84  85    86
                                                                          -        Salem Uni1No. 2 Sales
 
Philadelphia Electric Company and Subsidiary Companies Shareholder Information Stock Exchange Listings                                    Annual Meeting Most PE Securities are listed on the New York Stock        The Annual Meeting of the Shareholders of the Company Exchange and the Philadelphia Stock Exchange.              will be held on April 8 , 1987, at 10:30 A.M. at the Philadelphia Electric Power Company Debentures are        Pennsylvania Hall Auditorium, Philadelphia Civic Center, listed on the Philadelphia Stock Exchange.                34th Street & Civic Center Boulevard, Philadelphia, PA.
Common stock shareholders of record at the close of Dividends                                                  business on February 27, 1987, are entitled to vote at this The Company has paid dividends on its common stock        meeting.
continually since 1902 . The Board of Directors normally  Notice of the meeting, proxy statement, and proxy will be considers common stock dividends for payment in March,    mailed under separate cover. Prompt return of the proxies June , September and December.                            will be appreciated.
The Company estimates that the $2.20 per share dividend paid to common shareholders in 1986 is fully taxable as    FormlO-K dividend income for Federal income tax purposes.          Form 10-K, the annual report filed with the Securities and Exchange Commission, is available, without charge, to Dividend Reinvestment and Stock Purchase Plan              shareholders upon written request to Philadelphia Shareholders may use their dividends to purchase          Electric Company, 2301 Market Street, PO. Box 8699 ,
additional shares of common stock through the              Philadelphia, PA 19101 , Attn: Financial Division, S21-1.
Company's Dividend Reinvestment and Stock Purchase Plan. Philadelphia Electric pays all brokerage and service Shareholders fees . Customers of the Company who are not shareholders  The Company has 294 ,715 shareholders of record of may enroll in the plan by making a one-time purchase of    common stock, an 11% increase in 5 years.
common stock directly from the Company. All shareholders have the opportunity to invest additional Transfer Agents and Registrars funds in common stock of the Company, whether or not PHILADELPHIA ELECI'RIC COMPANY -            Preferred and they have their dividends reinvested - also with all fees Common Stocks borne by the Company.
Registrars:  Mellon Bank (East) N.A.
Over 34 % of the Company's common shareholders were Four Mellon Bank Center participants. In 1986, they invested more than $100 Philadelphia, PA 19102 million through the Plan, including cash payments.
Information concerning this Plan may be obtained from                    Morgan Shareholder Services Trust Co.
D. P Scott, Treasurer, Philadelphia Electric Company,                    30WBroadway,NY,NY10015 2301 Market Street, PO. Box 8699 , Philadelphia, PA Transfer 19101.
Agents:      Philadelphia Electric Company 2301 Market St., Phila. , PA 19101 Comments Welcomed The Company always is pleased to answer questions and                    Morgan Shareholder Services Trust Co.
provide information. Please address your comments to                    30WBroadway,NY,NY10015 Mrs. L. S. Binder, Secretary, Philadelphia Electric        PHILADELPHIA ELECI'RIC COMPANY - First and Company, 2301 Market Street, PO. Box 8699,                Refunding Mortgage Bonds Philadelphia, PA 19101.                                    Trustee:      Fidelity Bank, National Association Inquiries relating to shareholder accounting records ,                  Broad & Walnut Sts. , Phila., PA 19109 stock transfer and change of address should be directed to New York Philadelphia Electric Company, 2301 Market Street, PO.
Agent:        Morgan Guaranty Trust Co. of NY, Box 8699, Philadelphia, PA 19101 , Attn: Stock Transfer 30WBroadway, NY,NY10015 Section, S6-4 .
PHILADELPHIA ELECI'RIC COMPANY - Debentures PHILADELPHIA ELECTRIC POWER COMPANY (A Toll-Free Telephone Line Subsidiary) - Debentures Toll-free telephone lines are available to the Company's Trustee:      The Philadelphia National Bank, shareholders for inquiries concerning their stock Broad & Chestnut Sts. , Phila. , PA 19101 ownership. When calling from outside of Pennsylvania, call 1-800-223-7326 . From within Pennsylvania, call      New York 1-800-242-7326. Local Philadelphia calls should be made    Agent:        Irving Trust Co., One Wall Street, to 841-5795 .                                                            NY, NY 10015 General Office:      2301 Market Street, PO. Box 8699 , Phila.,
PA 19101. (215) 841-4000 .
 
Directors                              Officers                                Officers
'John H. Austin , Jr.                    James L. Everett                        Lucy S. Binde r President and Chief Operating Officer    Chairman of the Board and Chief      Secretary of the Company                          Executive Officer Donald P Scott William T. Coleman , Jr. , Esqu ire    Joh n H. Austin , Jr.                  Treasurer Senior Partner of the law firm of        President and Chief Operating Officer O'Melveny & Myers                                                          James D. Lync h Richard G. Gi lmore                    Assistant Secretary M. Walter D'Alessio                    Senior Vice President, Finance and President and Chief Executive O.fficei;    Chief Financial Officer            ]. Robert Causton Latimer & Buck, Inc. (Mortgage                                              Assistant Treasurer Banking and Real Estate              John S. Kemper Development)                        Senior Vice President, Engineering and Jon A. Katherine Production                        Assistant Treasurer
'James L. Eve rett Chairman of the Board and Chief        Edward G. Bauer, Jr.                  William M. Lennox.Jr.
Executive Officer of the Company      Vice President and General Counsel    Assistant Treasurer Clifford Brenner William S. Gaither                                                              Management Changes:
Vice President, Corporate President, Drexel University                                                  On April 28 , 1986 , the Fi nance and Communications Accounting Department was realigned as
'Robert F. Gilkeson                                                            fo llows:
Charles L. Fritz Chairman of the Executive Committee                                            Ri chard G. Gil more was elected Senior Vice President, Personnel and of the Company                                                              Vice President, Fi nance and Chief Industrial Relations Financial Officer Ric hard G . Gilmore                    Joseph W. Gallagher                    Morton W. Ri merman was elected Vice Senior Vice President, Finance and      Vice President, Nuclear Operations    Pres ident, Finance and Accounti ng Chief Financial Officei* of the Company                                                                    Raymond C. Wi lliams was elected Vice Raymond F. Holman President, Rates Vice President, General
'Robe rt D. Harrison                        Administration                    Donald P Scott was elected Treasurer Vice Chairman, john Wanamaker,                                                Joseph F. Paq uette , Jr. tendered his Philadelphia ( Merchandising)        S. Joseph Kowalski                    resignation as Vice President , Finance Vice President, Engineering and      and Accounting, effective Apri l 30 ,
Paul R. Kaiser                              Research                            1986 .
Chairman Emeritus, Tasty Baking Company ( Diversified                Kenneth G. Lawrence                    On May 23 , 1986 , Albert G. Mikalauskas Manufacturing)                        Vice President, Commercial            was elected Vice Presi dent, Transmission Operations                        and Distribution, succeeding Thomas W.
'Joseph C. Ladd                                                                Coppock, who ret ired Ju ly 1, 1986 .
Chairman and Chief Executive Officer,  Albert G. Mika lauskas                O n Nove mber 24 , 1986 , the Engineering Fidelity Mutual Life Insurance        Vice President, Electric Transmission and Research and Electric Production Company                                  and Distribution                  Departments were realigned as fo llows:
Phi lip G. Mulligan                    John S. Kemper was elected Senior Vice Ed ithe]. Levit, M.D.
Vice President, Gas Operations        Pres ident, Engi neering and Production President Emeritus and Vice Chairman of the Board, National                                            Joseph W. Gallagher was elected Vice Board of Medical Examiners          A. Lewis Parry, Jr.                    President, Nuclear Operations Vice President, Purchasing and        S.Joseph Kowa lski was elected Vice
'Joseph ]. McLaughlin                        General Services                  President, Engineering and Research President and Chief Executive Officer,                                        Alvin ). Weigand was elected Vice Beneficial Mutual Savings Bank      Morton W. Rimerman Vice President, Finance and          President, Electric Production Director Change:                            Accounting                        Vincent S. Boyer, Senior Vice President, William S. Fishman's term expi red                                            Nuclear Power, and Shields L. Daltroff, March 31 , 1986                      Alvin]. Weigand                        Vice President, Electric Produ ction, Vice President, Electric Production    reti red March 1, 1987 .
*Member of the Executive Committee                                              O n November 24 , 1986 , Kenneth G.
Raymond C. Wi llia.ms Lawrence was elected Vice President, Vice President, Rates Commerc ial Operations, succeed ing William B. Morl ok, w ho retired February 1, 1987 .


===4.0 Total===
Philadelphia Electric Company BULK RATE 230 1 Market Street           U.S. POSTAGE PAID PO Box 8699                   Philadelphia PA Philadelphia PA 1910 1       Permit No. 378}}
Gas Revenues $391.5 Operating Expenses (Mi lli on s of Dollars) Operating expenses excluding depreciation
$337.3 Depreciation 15.9 Total Operating Expenses $353.2 Gas Operating Income (Millions of Dollars) $ 38.3 1985 1984 1983 1,810 1 ,941 2,168 23 , 227 25 ,4 29 22 , 981 36 , 254 41, 1 45 39 , 043 1 , 209 1 , 282 672 62,500 69 ,7 97 64 , 864 10 , 262 3,794 789 72 ,7 62 73,591 65,653 69 , 632 70,794 72,501 217,840 211,984 206,443 24 , 234 23,442 22 ,810 311,706 306 , 220 301 ,7 5 4 $ 18.7 s 19.0 185.4 191.7 214.1 243.7 5.2 5.6 $423.4 $460.0 5.5 3.0 $428.9 $463.0 $375.4 S413.9 14.8 13.5 $390.2 $427.4 $ 38.7 s 35.6 ELECTRIC SALES (including Salem Unit fllo. 2) Billions of kil owanhours 30 s 19.1 165.8 227.3 3.0 $415.2 1.8 $417.0 $377.6 12.7 $390.3 $ 26.7 82 83 84 85 86 -Salem Uni 1 No. 2 Sales 1982 1981 1976 2,442 2,446 2 ,34 2 24 , 237 24,675 24 , 540 41,660 45,670 33,390 422 127 89 68,761 72,918 60 , 361 68,761 72 , 918 60 ,3 61 76,638 78,426 89,459 198 , 910 193 , 038 162,993 22 , 324 21,578 19,669 297,872 293,042 272,121 s 18.1 s 15.4 s 8.7 147.1 128.5 73.3 221.1 209.7 76.1 1.8 0.5 0.2 $388.1 $354.1 $158.3 2.3 2.3 0.6 $390.4 $356.4 $158.9 S354.l $322.0 s 128.1 11.9 11.3 8.4 $366.0 $333.3 S136.5 $ 24.4 $ 23.1 s 22.4 GAS SALES & TRANSPORTED Billionsof Cub i c Fee1 90 75 60 30 15 82 83 84 85 86 <E>
Philadelphia Electric Company and Subsidiary Companies Shareholder Information Stock Exchange Listings Most PE Securities are listed on the New York Stock Exchange and the Philadelphia Stock Exchange.
Philadelphia Electric Power Company Debentures are listed on the Philadelphia Stock Exchange. Dividends The Company has paid dividends on its common stock continually since 1902. The Board of Directors normally con s iders common stock dividends for payment in March , June , September and December.
The Company estimates that the $2.20 per share dividend paid to common shareholders in 1986 is full y taxable as dividend income for Federal income tax purposes. Dividend Reinvestment and Stock Purchase Plan Shareholders may use their dividends to purchase additional shares of common stock through the Company's Dividend Reinvestment and Stock Purchase Plan. Philadelphia Electric pays all brokerage and service fees. Customers of the Company who are not shareholders ma y enroll in the plan by making a one-time purchase of common stock directly from the Company. All shareholders have the opportunity to invest additional funds in common stock of the Company , whether or not they have their dividends reinvested
-also with all fees borne by the Company. Over 34 % of the Company's common shareholders were participants. In 1986 , they invested more than $100 million through the Plan , including cash payments. Information concerning this Plan may be obtained from D. P Scott , Treasurer , Philadelphia Electric Company , 2301 Market Street , PO. Box 8699 , Philadelphia , PA 19101. Comments Welcomed The Company always is pleased to answer questions and provide information. Please address your comments to Mrs. L. S. Binder, Secretary , Philadelphia Electric Company , 2301 Market Street , PO. Box 8699 , Philadelphia , PA 19101. Inquiries relating to shareholder accounting records , stock transfer and change of address should be directed to Philadelphia Electric Company , 2301 Market Street , PO. Box 8699, Philadelphia , PA 19101 , Attn: Stock Transfer Section , S6-4. Toll-Free Telephone Line Toll-free telephone lines are available to the Company's shareholders for inquiries concerning their stock ownership.
When calling from outside of Pennsylvania , call 1-800-223-7326. From within Pennsylvania, call 1-800-242-7326. Local Philadelphia calls should be made to 841-5795. Annual Meeting The Annual Meeting of the Shareholders of the Company will be held on April 8 , 1987 , at 10:30 A.M. at the Pennsylvania Hall Auditorium , Philadelphia Civic Center , 34th Street & Civic Center Boulevard , Philadelphia, PA. Common stock shareholders of record at the close of business on February 27, 1987 , are entitled to vote at this meeting. Notice of the meeting , proxy statement , and proxy will be mailed under separate cover. Prompt return of the proxies will be appreciated. FormlO-K Form 10-K, the annual report filed with the Securities and Exchange Commission , is available , without charge , to shareholders upon written request to Philadelphia Electric Compan y, 2301 Market Street , PO. Box 8699 , Philadelphia , PA 19101 , Attn: Financial Division , S21-1. Shareholders The Company has 294 , 715 shareholders of record of common stock , an 11% increase in 5 years. Transfer Agents and Registrars PHILADELPHIA ELECI'RIC COMPANY -Preferred and Common Stocks Registrars
: Mellon Bank (East) N.A. Transfer Agents: Four Mellon Bank Center Philadelphia , PA 19102 Morgan Shareholder Services Trust Co. 30WBroadway,NY,NY10015 Philadelphia Electric Company 2301 Market St., Phila., PA 19101 Morgan Shareholder Services Trust Co. 30WBroadway,NY,NY10015 PHILADELPHIA ELECI'RIC COMPANY -First and Refunding Mortgage Bonds Trustee: Fidelity Bank , National Association Broad & Walnut Sts., Phila., PA 19109 New York Agent: Morgan Guaranty Trust Co. of NY, 30WBroadway
, NY,NY10015 PHILADELPHIA ELECI'RIC COMPANY -Debentures PHILADELPHIA ELECTRIC POWER COMPANY (A Subsidiary)
-Debentures Trustee: The Philadelphia National Bank , New York Agent: General Office: Broad & Chestnut Sts., Phila., PA 19101 Irving Trust Co., One Wall Street , NY, NY 10015 2301 Market Street, PO. Box 8699 , Phila., PA 19101. (215) 841-4000.
Directors
'John H. Austin , Jr. Pr e sid e nt and Ch i ef Operating Officer of the C ompan y William T. Coleman , Jr., Es qu ire Senior Partn e r of the law firm of O'Me l ve n y & Myers M. Walter D'Alessio Pr e siden t and C hief Executive O.fficei; Latim e r & Buck , In c. (Mortgage Bankin g and Real E state D e ve l opm e nt) 'James L. Eve r ett Chairman of the Board a n d Chief Executi ve Officer of the Company Willi a m S. Gaithe r Pr e s i dent , Dr ex e l U niversity
'Rob e rt F. Gilkeson C hairman of the Executive Commi tt ee o f th e Co mpany Ric h ar d G. G ilm o r e Seni o r Vice President , Finance and C hi e f Financia l Officei* of t he Co mpany 'Rob e rt D. Harrison Vi ce C hairman , john Wanamaker, Phi l ad e l phia (M e rchandisin g) Paul R. Kais e r C hairman Emeritus , Tasty Baking C ompany (Diversified Manufac t ur i ng) 'Jo s eph C. Ladd C hairman and Chief Executive Officer, Fid e lity Mutual Lif e Insuran c e Co mpan y Ed i t h e]. Levit , M.D. Pr e sident Em e ritus and Vice C h airman of the Board , Nationa l Board of Medica l Exam i ners 'Josep h]. McLa u g h l i n President and Chief Exec u tive Officer, B e neficial Mutua l Savings Bank Director Change: William S. Fi s hman's term expi r e d March 31 , 1 9 86 *Member of t he Execu ti ve Commi tt ee Officers James L. Eve r e tt C hairman of the Board and C hi e f Executive Officer Joh n H. A u stin , J r. President and Chief Operatin g Off i cer Richard G. Gi l more S e nior Vic e Pr e sid e nt , Financ e and C hi e f Financial Offic e r J o hn S. Kemper S e ni o r Vice Presiden t , Engineer i ng and Produc t ion Edward G. Ba u er , J r. Vice P r esident and Genera l C ounsel C l ifford Bren n er Vic e Presiden t , Corporate Co mmunica t ions Charles L. Fritz Vice P r esid e nt , Personne l and I ndustria l Re l at i ons Josep h W. Ga ll ag h er Vice P r es i den t , N u c l ear Opera t ions Ra y mon d F. Ho lm a n Vic e President , Genera l A dminis t ra t ion S. Jo s eph Kowalski Vic e President , E n gin e ering and R esea r c h Kenne th G. Law r e n ce V i c e P residen t , Commerc i a l Opera ti ons Albert G. M i ka l a u s k as Vice President , Electr i c Transmission and Distribution Phi l ip G. M ulli gan Vice Presiden t , Gas Operations A. Lewis P a rr y , J r. Vic e Presiden t , Pu rchasing and Genera l Serv i ces Morton W. Rimerman Vi ce Presid e nt , Financ e and A c c ounting Al v in]. Weigand Vice Pres i dent , E l ectr i c Produc ti on Raymon d C. Wi lli a.ms Vic e Pres i de nt , R a t es O ffic er s L u c y S. B in de r Secretary D o n a ld P Scott Treasurer Ja m es D. L ync h Assis t ant S ec r e tar y ]. R obert Causto n Assistant Tr e asur e r J o n A. Kath e rine Ass i stant T r eas u rer W illi a m M. Le nn ox.J r. Ass i s t an t Treasure r Ma n agemen t Change s: On Apr i l 28 , 1986 , th e Fi n ance an d Account i ng Dep a r tment was r e aligned as fo ll ows: Ri c h ard G. G il mo r e was elec t ed Se n ior Vice Presi d e nt , Fi n ance an d Chief F i na n c i a l Office r Morto n W. Ri me rm a n was elec t ed Vice P res id e nt , Fina n ce a nd Acco unti ng Ray m o nd C. Wi lli a m s was elec t e d Vice Preside nt , Ra t es Don a l d P Scott was e l ecte d Treasurer Josep h F. P aq u e tt e , Jr. t e nd ered his resig n a t ion as V i ce Pres i dent , F i nance and Accounting , effec t ive Apri l 30 , 1986. O n May 23 , 1 986 , Albert G. M i ka l a u skas was el ecte d Vice P resi d e nt , Tra n s m iss i o n a nd D i s tributi o n , s u cceed ing T h o m as W. Coppoc k , who ret ir ed Ju ly 1 , 1 986. O n Nove m ber 2 4 , 1 986 , th e Engineering and R esearch and E l ectric Production Departme n ts wer e re a ligne d as fo ll ows: Jo hn S. Kempe r was electe d Se ni o r V i ce P res id ent , Engi n eering an d Prod u ct i on J osep h W. Ga ll ag h e r was elected Vi c e Pr es i d e nt , N ucl ea r O p era ti o n s S.Jose ph Kowa l s ki was ele ct e d V i ce P r es id ent , E n g in ee r i ng a nd R esea r c h Alv in). We i gand was electe d Vice Pres i dent , E l ectric Prod u ct i on Vincent S. Boyer , Senior Vice President , N u clear Power , and Shields L. Da l troff , V i ce Pr esident , E l ec tri c Pro du c t ion , re ti re d Ma r c h 1 , 198 7. O n Nove m be r 2 4 , 1986 , K enne t h G. Law r e n ce was e l ected V i ce Pr esi d e nt , Co mm e r c i a l O p era ti o n s, s u ccee d i ng W illi am B. Mo rl o k , w h o r e t i r ed Fe bru a r y 1 , 1 987.
Philadelphia E l ec tri c Compa n y 230 1 M a rk et Street PO B ox 8699 Phil ade l p hi a PA 1 910 1 BULK RATE U.S. POSTAGE PAID Philadelphia PA Permit N o. 378}}

Latest revision as of 07:03, 3 February 2020

Philadelphia Electric Co,1986 Annual Rept.
ML18092B468
Person / Time
Site: Salem, Hope Creek, Limerick, 05000000
Issue date: 12/31/1986
From: Joseph Austin, Everett J
PECO ENERGY CO., (FORMERLY PHILADELPHIA ELECTRIC
To:
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ML18092B463 List:
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NUDOCS 8703200022
Download: ML18092B468 (48)
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Text

NOTICE THE ATTACHED FILES ARE OFFICIAL RECORDS OF THE DIVISION OF DOCUMENT CONTROL. THEY HAVE REEN CHARGED TO YOU FOR A LIMITED TIME PERIOD AND MUST BE RETURNED TO THE RECORDS FACILITY BRANCH 016. PLEASE DO NOT SEND DOCUMENTS CHARGED OUT THROUGH THE MAIL. REMOVAL OF ANY PAGE(S) FROM DOCUMENT FOR REPRODUCTION MUST BE REFERRED TO FILE PERSONNEL.  ?'"7 Ooc'*0t lf?c; -~ .::::::....-

Coatrol ~~-:3~

DEADLINE RETURN DAT Ef)ato~Z of DOlll

~DWtEilll RECORDS FACILITY BRANCH

Philadelphia Electric Company Annual Report 1986 Financial H ighlights 1986 1985 %Change Operating Revenue $3,090,869,000 52 ,94 5, 175,000 5%

Operating Expenses $2,525,859,000 S2 ,532 ,670 ,000 Taxes Charged to Operations $521 ,557,000 S44 0 ,862 ,000 18%

Operating Income $565,010,000 S4 l 2,505 ,000 37%

Earnings Applicable to Common Stock $475,359,000 S4 34 ,724 ,000 9%

Earnings per Average Common Share $2.60 S2 .56 2%

Cash Dividends Paid per Common Share $2.20 S2.20 Average Shares of Common Stock Outstanding 183,140,767 169,784 ,47 1 8%

Constmction Expenditures $966,500,000 S864 ,700 ,000 12%

Tota l Assets $10, 7 48,020,000 Sl0 ,011,845 ,000 7%

Contents 0 Letter to Shareholders 2 Report of 1986 Operations 5 Management's Discussion and Anal ysis of Financial Condition and Results of Operations 21 Consolidated Financial Statements 23 Notes to Financial Statements 28 Report of Independent Certified Public Accountants 38 Sec urities, Financial and Operating Statistics 39 Shareholder Information 44 Offi cers and Directors 45 EARNINGS AND CONSTRUCTION DIVIDENDS PER SHARE EXPENDITURES Million - - - -- -- - -

Dollar.; 3 .00 Dollar.; 1200 2.50

- 1000 2.00- 800 l.50 600 1.00

-:so >- f-- - f--

82 83 84 85 86 82 83 84 85 86

-- Earnings Per Share Dividends External Sources Internal Sources

To Our Shareholders customers' December 1986 electric Corporate Commi tments and deal bills were lower than those for with current critical issues, each year December 1985 , due to reduced we establish specific goals at both the fuel costs. corporate and departmental levels.

0 Limerick Unit o . 2 construction This annual report presents our new proceeded ahead of schedule , and Mission Statement, the Corporate 1986 expenditures were within the Commitments and specific Critical planned expenditures of the Issues which chart the course that our construction cost cap of 5 3 .197 Company has set. This report 's billion. photography depicts several aspects of 0 The exce llent performance of our our Corporate Commitments.

We are pleased to report that 1986 was nuclear plants resulted in As we look ahead to 1987 and a year of great progress for Philadelphia approximately $400 million of fuel beyond , we w ill be addressing these Electric Company. Highlights for the savings for 1986. key Critical Issues; they are ( 1) year included the following : 0 Earnings per share amounted to completing Limerick Unit No. 2 on S2.60 , an increase of four cents per time and within budget; (2) ac hieving 0 Limerick Unit No . 1 was placed into share from a year ago . standards of excellence in our nuclear commercial operation on February I , 0 Electric sales were up 3% compared operatio ns; (3) operating and 1986. For its eleven months of with last year, reflecting more maintaining our base-load generation commercial operation during 1986, customers, an improved residenti al capacity to achieve a high level of the unit performed flawlessly, housing market and favorable weather performance; (4) adapting to achievi ng a capacity factor of 81 %. On in 1986 . Gas sold and transported changing competitive forces within January 26, 1987, Unit No. 1 set a new declined due almost entirely to the our industry; and (5) achieving public world record for performance of a reduction in gas transported for others. recognition as a caring, responsive and large power reactor during its first fuel 0 Rates for natural gas were reduced efficient organization .

cycle , after operating continuously for by approximately S47 million, We continue to appreciate the 198 days until the unit was removed reflecting prudent purchases of gas support of our investors and pledge from seivice for minor repairs. from suppliers and reductions in our every effort to achieve our 0 The Company was authorized an pipeline suppliers' rates. Corporate Commitments for the ann ual electric rate increase of S351 O The Pennsylvania Supreme Court genuine benefit of our investors, our million , the largest in the Company's denied requests for an appeal of the customers and our fellow employees.

history, as we p laced S3.8 bi llion of decision of the Commonwealth Court, Limerick Unit No . 1 and associated affirming an order of the Court of common plant into seivice. Common Pleas of Bucks County which 0 To moderate the impact of the directed the completion of the Point James L. Everett Limerick rate increase on customers , Pleasant Project. This decision clears Chairman of the Board the Company will phase in the the way for construction to resume and Chief Executive Officer

~~?r increase over a three-year period in in 1987 .

equal amounts of 4 .8% per year. 0 The Company sold its steam heat Despite the increase , typical system for S30 million inJanuary 1987.

John H . Austin , Jr.

For many years, Phi lade! phia President Electric Company has had both a and Chief Operating Officer formal Mission Statement and Corporate Commitments. During 1986, we reexamined and modified them to better reflect current circumstances. To help achieve our

James L. Everett John H. Austin , Jr.

1986 f INANCIAL REVIEW EARNINGS RISE Earnings per share of common stock in 1986 amounted to S2.60, a 2%

increase from the S2.56 earned in 1985 , while the average number of shares outstanding increased 8% to 183 million shares. Total common stock earnings amounted to S475 million , up S4 I million or 9% from a year ago.

The improvement in per share Richard G. Webster (left},

Commitment to earn ings resulted from increased Construction Division, and e lectric base rates and improved Raymond F. Holman (right), Vice our Customers electric sales. Earnings for I 986 were President, General PE is committed to reduced approximately seven cents Administration, review the providing safe, reliable progress of construction on the per share as a result of a S26 million Merrill Creek Reservoir near and economical utility Pennsylvania Public Utility Phillipsburg, New jersey. They are Commission (PUC) disallowance for standing on the foundation for service to our fuel and other costs, while the the central core of the customers. We will be comparable disallowance reduced embankment dam which will be responsive to their I985 earnings by 23 cents per share. constructed in 1987.

Full financial statements and needs and courteous in notes begin on page 23 . Information low levels during the year, PE all our public contacts. on sales, revenue, expenses and continued to repurchase its customers can be found on pages 2 I , outstanding high interest rate bond 22, 23 , 42 and 43. issues and to refinance those issues at the existing lower rates. A total of Gas Operations personnel inspect NEW FINANCINGS COMPLETED S46.9 million of the I 7Ys% mortgage the liquified natural gas (LNG) The Company raised over SI. I billion bonds due 2011 were called for vaporizers and storage tank at the in new capital in 1986 to provide for redemption on July I. This completed West Conshohocken Gas Plant.

construction , debt retirements and the retirement of the entire SI 2 5 During periods of heavy demand other needs, as summarized in the million issue , which began with a in the winter, the vaporizers are used to convert the LNG to table on page 6 . tender offer in November I985 .

natural gas to supplement regular Since interest rates remained at Likewise, S48 .9 million of the I8}:1%

pipeline supplies. mortgage bonds due 2009 were redeemed on September I 5, completing the retirement of this Sl25 million issue, also begun with a November I985 tender offer.

Through a November I 986 tender offer, the Company repurchased S76.9 million of its S100 million of 15'}8%

mortgage bonds due 2010. This repurchase and early retirement, as well as the two calls discussed above, enabled PE to reduce annual interest payments by approximately SI8 million.

LIMERICK CREDIT AGREEMENT REPAID During 1986 , the Company repaid in advance of maturity the entire SSSO million balance under the Limerick Credit Agreement . This revolving credit/ term loan agreement with a group of 26 banks was used to finance the costs associated with completing Limerick Unit o. 1 and common plant. By using the Limerick Credit Agreement from 1984 to 1986 and refinancing at favorable rates, the Workmen guide the steam dryer Company was able to realize assembly for Limerick Unit No. 2 as it is lowered into the reactor 1986 MAJOR FINANCINGS substantial interest savings. Annual vessel. This 40-ton, stainless steel Millions interest costs wou ld have been Mon th of Dollars approximately S30 million more had assembly is about 19 feet high and 20 feet in diameter. The dryer Feb . Debentures - 1OM!% Series long-term debt been sold at that time removes moisture from the steam due 1996 100.0 to finance Limerick.

before the steam is fed into the Mar. Sinking Fund Debentures -

turbines to generate electricity.

l 1% Seriesdue 2011 350 .0 LIMERICK UNIT NO. I RATE INCREASE May Debentures - 9.85% GRANTED Private Placement On June 26 , the PUC adopted , by a due 1993 25 0 two-to-one vote , a final order granting May Sin king Fund Debentures - the Company an annual net increase in 10 .05% Private Placement revenue of S351 million. The order due 1998 62.0 reflects an overall rate of return of May Common Stock -

12.26% and a return on equity of 3,000,000 Shares

@ 517 .79 53.4 14 .75 %. The increase will be phased

~

in over a three-year period in equal June Pollution Control Bonds -

8'Ys% due 2016 34 .o steps of approximately 4 .8% per year, followed by a three-year period for Sept. Preferred Stock - 9. 50%,

1986 Series; 750 ,000 recovery, without interest, of delayed shares@ S 100 75.0 billings under the phase-in plan.

~

Oct. Mortgage Bonds - 1014% A major issue in the proceeding Seri es due 2016 150.0 involved determining the additional

~

Oct. Mortgage Bonds - 8 ¥<% capital costs which were incurred as a Seri es due 1994 100.0 result of construction delays in 1976 Jan . Common Stock Purchase and 1978. The Commission asserted Dec. Plans: Dividend Rei nvestment, Employee, PAYSOP-5,399,000 Shares; Average Price of

$21.07 113 .8 Common Stock continuous offerings: 3 ,000 ,000 Shares; Average Price of

$21.28 638 Total Sl ,127.0

CONSTRUCTION INVESTMENTS MADE The Company invested S967 million in new plant and equipment in 1986 ,

including S189 million of carrying charges equivalent to the allowance for funds used during construction.

Expenditures for 1987 are estimated at Sl.2 billion , including S527 million for Limerick Unit No . 2.

that it had previously determined that STEAM SYSTEM SOLD the delay decisions were imprudent. On January 30, 1987, the Company sold The Company argued that the its steam heat system to Philadelphia Commission had made no such Thermal Corporation for S30 million.

determination and that, in any event , The sale price is approximately equal to due to financial constraints and the net book value of the facilities being changes in the regulation and scope of sold. Philadelphia Thermal acquired all the Limerick project over the of the production and distribution assets construction period , no adjustment of the system which supplies steam to was warranted . Nevertheless, the 4 50 customers in center city Commission concluded that there Philadelphia and areas of West should be a rate base reduction of Phi ladelphia through thirty-three S369 million for these delays. This miles of mains. The system has resulted in a reduction of S80 million experienced declining sales over the in annual revenue which will not be past 13 years.

recovered from customers. The Philadelphia Thermal is a wholly Company has filed an appeal of this owned subsidiary of Catalyst Thermal decision with the Commonwealth Energy Corporation which owns and The Pennsylvania-New jersey-Court of Pennsylvania. operates steam heat systems in Maryland (P}M) Interconnection The PUC rejected various excess Baltimore, St. Louis and Youngstown, provides electric service reliability capacity contentions made by opposing Ohio. Catalyst Thermal is a subsidiary at the lowest possible cost for its parties and found that Limerick Unit of Catalyst Energy Development eleven member companies, including PE. James F. McLaughlin No . 1 is needed to help meet the Corporation which has diversified (standing) and Alfred A.

Company's capacity requirements. holdings of over S1. 2 billion in the Gambone (seated) monitor The Commission followed precedent energy field. electric transmission in the PJM and denied the current recovery in control room.

revenue of the 50% of the common plant facilities associated with Limerick Unit No. 2. Although these facilities are in service today, the associated revenue cannot be recovered until Limerick Unit No. 2 is placed in service in 1990.

Nevertheless, carrying charges equivalent to the allowance for funds used during construction are being accrued on 50% of the common plant facilities .

LIMERICK UPDATES LIMERICK HAS SUCCESSFUL FIRST YEAR In 1986 , Limerick Generating Station ,

the Company's new state-of-the-art nuclear facility, continued to provide an exemplary demonstration of nuclear power as a safe , reliable and economical source of energy.

Commercial operation of Limerick Unit No. 1 began on February 1.

The unit's performance set a world A PE securities prospectus is record for a large power reactor during checked while on press by Joseph its first fuel cycle. After returning from D. O'Loughlin (left), Financial a brief outage on July 13 , the plant ran Unit No. 2, which was approximately Division, and Robert}. McNamee continuously for 198 days until a late 4 9% complete on a man-hour basis. (right), financial printer.

January 1987 shutdown for minor repairs. POINT PLEASANT PROGRESSES Unit No . 2 construction is One component of the planned proceeding on schedule and supplemental cooling water system for Commitment to expenditures continue to be within Limerick is the Point Pleasant Water our Investors the planned levels associated with the Project, which will divert allocated PE is committed to be construction cost cap of S3 .197 water from the Delaware River to the billion . As of December 31 , the Schuylkill River. Construction has a financially strong Company had invested S1.3 billion in been suspended since 1984 , when it institution, /,ooking at was approximately 30% complete. The the long term and Point Pleasant Project has been the avoiding slwrt-term subject of substantial opposition from Financial management visits the various groups , causing extensive expedients. We will Philadelphia Stock Exchange and the PE trading specialist. (Left to litigation and the suspension of continually evaluate right) Donald M. Stanton, trading construction. In MayandJune , the financing alternatives specialist, chats with Morton W. Supreme Court of Pennsylvania denied Rimerman, Vice President, requests for an appeal of the decision to attract funds at Finance and Accounting; Donald P.

of the Commonwealth Court, advantageous rates, Scott, Treasurer; and Richard G.

Gilmore, Senior Vice President, affirming an order of the Court of while providing Finance. Common Pleas of Bucks County which protection against directed the completion of the Point Pleasant Project. In October, a special unreasonable business master was appointed to oversee risks.

implementation of the Court of Common Pleas Order. Construction is expected to resume in 1987, with completion expected in 1988.

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Commitment to the Delaware River for certain our Employees PE is noted for its excellent generating units , including Limerick.

PE is committed to employee training programs. The Merrill Creek reservoir, when Linemen-in-training work at the comp leted , will be filled with water maintaining a highly 25-foot level with energized pumped from the Delaware during skilled and dedicated conductors mid-way through the times of high flow. Then, during low- workforce, six-week line school program.

flow or drought conditions , this stored commensurately water will be released to the Delaware to replace the water being evaporated compensated. We will Sufficient interim supplemental in the operation of the owners' power provide opportunities cooling water for 1986 was obtained plants. The project is expected to cost and incentives for for Limerick Unit o . 1. The Company $217 million , of which the Company's has filed with the Delaware River Basin share is S96 million . employees to work Commission (DRBC) for its 1987 productively to their supplemental cooling water needs , EXTENDING SERVICES, full potential, in pending the availability of the water to CAPACITY AND CAPABILITIES be supplied from Point Pleasant.

accord with the AREA DEVELOPMENT CONTINUES Corporate Equal MERRILL CREEK CONSTRUCTION SUCCESSFULLY Opportunity and CONTINUES The economy of Southeastern Affirmative Action Construction work on the Merrill Pennsylvania is expanding, and PE Creek Project progressed well during continues to aggressively promote Policy.

1986 . The scheduled in-service date for this project is May 1988. Merrill Creek is a small tributary of the Delaware River which is being dammed to create a IS-billion-gallon Cardiopulmonary resuscitation reservoir near Phillipsburg, New (CPR) training has been given to Jersey, about SO mi les north of more than 9,000 Company Philadelphia. The project is jointly employees and has been effective owned by PE and six other electric in sustaining over 30 lives. PE utilities, all of which have been Coordinator of the First Aid/ CPR ordered by the DRBC to provide a Program, William W. Hand, Safety Division, observes Barbara water storage facility as a condition of M. Federici, Personnel their authorization to take water from Administration Division, practicing CPR.

economic development within its territory. Under the successful "We Know the Territory" theme used in radio and print advertising, the Company publicizes the many geographical and economical advantages offered by the Greater Philadelphia metropolitan area . Aided by the strength of the economy and the light-industry and service-based success of Company promotional economy has enabled the region programs , PE 's Area Development served by the Company to become a Department assisted 31 new firms to leader in health care , pharmaceutical locate in the region in 1986, thereby research , information processing and creating 2,200 new jobs. Also, PE business services. The local economy participated in successful efforts to was bolstered even further in the retain and expand 59 existing firms fourth quarter of 1986 by Eastman involving 8 ,600 jobs. Kodak's decision to locate its new Prospects for the area remain Pharmaceutical Division Headquarters promising. The number of jobs here is in Chester County. Initial employment at an all-time high, and unemployment of 300 to 500 people is expected, has fallen to its lowest level in recent with full employment to reach years. Retail sales growth is among the approximately 2,200 within ten years .

highest in the nation. Commercial and residential development has reached EDDYSTONE REHABILITATION record levels. In downtown PROCEEDS Philadelphia alone , over 10 million After 26 years of reliable service, square feet of new and rehabilitated Eddystone Generating Station's Unit A tuition refund program for the office space is planned or under o. 1 received a new lease on life in successful completion of an construction. 1986. Major equipment replacements approved course of study is offered to all employees. Drexel The transition from a heavy were undertaken as part of a University students Lesley L. manufacturing-based economy to a rehabilitation program designed to Andres and Lawrence L. allow the Company to extend the life Middleton, both of Electric of Unit No. 1 into the 21st century.

Production, are program Similar work had already been participants. Nearly 600 other PE employees aetended many completed on Unit No . 2. With different colleges and universities completion of the rehabilitation , these as part of the program in 1986. low-cost , coal-fired units remain available for base-load capacity.

TRAINING EXPANDED During 1986 , all the Company's nuclear operation and maintenance training programs received accreditation from the National Academy for Nuclear Training of the Institute of Nuclear Power O perati ons.

Exce llence in nuclear training is a key element in achieving the highest standards of operating nuclear plant safety and re liability.

The Company's Peach Botto m Atomic Power Station became an earl y A nine-week splicing school branch of the Academy w hen the PJM INTERCONNECTI O N training program teaches station's first five train ing programs CUTS COSTS employees the proper lead splicing rece ived accreditation in 1985 . In 1986 , PE customers saved 530 techniques for underground Limerick Generating Station p ersonne l million in energy costs, thanks to the urban electrical lines. Splicer-in-worked in conjunction w ith Peach Pennsylvania-New Jersey-Maryland training Leroy Leighty, Transmission and Distribution, Bottom personnel to develop five (PJM) Interconnection . Whi le less than pours molten solder lead to join additi onal training programs at Peach in previous years (due to lower oil sleeve to lead jacket cable while Botto m and ten programs at Limeri ck , p rices and much lower p urchases as instructor Bruce W Bortz w hich resulted in Limerick 's entry into the result of the operati on of Limerick looks on.

the Academy. With the accreditation of Unit No. 1) , the annual savings all twenty training programs, the remained substantial.

Company became o ne of the first The PJM Interconnection , the multiple-site utilities to attai n full world 's fi rst integrated power pool ,

member status in the Academy. was created in 1927 con necting three Recognizing the need for a larger utili ties, including PE . The present trai ning faci lity for Maintenance PJM stmcture was established in 1965 Di vision personnel , the Company has as a jo int enterprise of 11 investor-conve rted its retired Barbadoes owned utilities , w hich forma lly agreed Pfl fire training school in West Generating Stati on near Norristown to to operate as a single system to ac hieve Conshohocken has received the Barbadoes Maintenance Training the significant benefits to be reali zed community-wide recognition for Center. By putting the new training through provi ding re liable service at its safe fire fighting instruction, particularly for fires involving center into operation in 1986 , the the lowest possible cost. Using the electricity and gas, and has helped Company moved closer to its goa l of latest comp uter tec hnology, a staff of numerous fire companies with having 775 trained maintenance PE employees operates the control their training.

craftsmen by 1990. Nuclear power center in Valley Forge , Pennsylvania, plant maintenance projects also have been incorporated in the Barbadoes training. Such projects allow trainees to work in a simulated radiation area.

PE's Maintenance Division craft programs were reviewed extensively by the Institute of uclear Power Operations and given fo rmal acc reditati on.

Commitment to Public Communication PE will be open and constantly monitoring PJM and surrounding systems and dispatching The production of che corporate forthright in power generation and transmission. annual report is one of che our communication Costs are reduced by sharing reserves Company~ many major with our customers, and coordinating maintenance. Energy communications efforts. Designer needed to serve the joint system load is George Coan (right), assisted by shareholders, James H. Miller (left}, Financial produced by combining the most employees and all Division, reviews photographs.

economical sources available from any others involved with of the interconnected utilities .

our business. We will GAS RATES REDUCED under more favorable market seek and respectfully During 1986, the Company reduced conditions and reductions in pipeline consider constructive gas rates by S46.6 million for 318 ,000 suppliers' rates in 1986.

public input gas customers in Bucks, Chester, concerning our Delaware and Montgomery Counties. COST REDUCTION MEASURES For a residential gas home heating REVIEWED steuxirdship in customer, this reduction caused a The Company always has sought to constructing and 7. 7% decrease in a typical annual bill , control costs whi le continuing to operating the facilities from S912 to S842. This decrease was provide reliable , quality service to primarily due to the Company's ability customers. During the year, a review necessary to providing to make prudent purchases of gas from was made of major cost reduction safe, reliable and producers and pipeline suppliers actions PE initiated between 1980 and economical utility 1986. This review indicates that the service. Company saved customers S1. 2 billion during this period. Actions taken should result in continuing ann ual savings of approximately S193 The Limerick Information Center million.

hoses many visitors. This fiber-opcics display panel wich Over the 1980-1986 period , fuel-accompanying soundtrack related savings in the Company's explains che basics of boiling electric, gas and steam businesses wacer reaccor operations co cwo amounted to approximately $778 Reading School District teachers, million or 65% of the total SI.2 billion Nancee Ryan and Michael Herzfeld.

Predictive maintenance will allow plant operators to recognize potential problems and estimate in advance when repairs wi ll be required . This system wi ll e liminate unnecessary maintenance and increase plant ava ilability by decreasing the number Electrical safety is emphasized in of reactive or forced outages. It also the "Reddy and Eddy Show," savings. The largest item in this w ill provide guidance to operators on which travels to area elementary category was 8602 million saved as a stresses to plant components.

schools. Edward L. Dick result of two-party, e lectric energy During the past year, the demonstrates electrical principles to student David}. Gea as Robert purchase agreements between PE and Company demonstrated once again Brown, the voice and animator of compani es to the west with low-cost , that it is at the forefront of Reddy Kilowatt, observes. coa l-fired power. technological progress in the e lectric Innovative methods of financing industry. For example , oil-cooled the Company's capital projects , transformers at Peach Bottom, which including Limerick Generating Station , ordinaril y must be de-energized for have achieved savings approac hing cleaning, were cleaned with a robotic Sl9 5 million . Various innovative arm be ing developed and tested by the productivity improvements and cost Company in conjunction with EPRI .

saving measures account for the When perfected , the robotic arm wi ll remaining 822 1 mill ion of savings. provide a means to work safely on The savings figures include over 82.2 energized , high-voltage equipment.

mil lion from employee suggestions that were submitted through the SAFETY IMPROVEMENTS REALIZED Company's Employee Suggestion Throughout 1986, the Company System . continued to reduce work-related accidents through an effective safety RESEARCH AND TECHNOLOGY ADVANCED In 1986, the Electric Power Research Institute (EPRI) awarded a $IO million contract to PE to develop an on-line diagnostic monitoring center for power plants . The program will involve a predictive maintenance diagnostic center and a techno logy transfer center for the utility industry, both to be located at Eddystone Station.

Currently, plant maintenance is either reacti ve (repairs ar.e made as parts fail) or planned (a prescribed course of work is followed whether or not repairs are immediately needed).

program. In the past 24 months, lost-time accidents have been reduced by over 55%. This exceptional improvement has been realized because of a program of increased safety awareness, new and improved training programs, employee interest and management involvement at A series of radio and television messages addresses the topics of all levels.

service reliability, electrical safety, home energy audits and REACHING CUSTOMERS AND customer assistance programs.

COMMUNITY MARKETING HELPS BOOST CUSTOMER BASE inside and outside the Company. This Marketing programs in 1986 focused program assists applicants, employees, on providing information to customers customers and vendors.

on the efficient use of energy. For Numerous programs have been example, working with the heat pump designed to help minorities and industry, a media program targeted women become better qualified as residential customers for conversion to applicants for employment. As a result, electric heat pumps from oil heat. the Company's minority work force Similarly, conversion to high- has grown from 4% in 1969 to nearly efficiency gas heating was promoted to 15% presently. PE also has created customers along existing gas mains. In programs to help high school students all market segments, PE continues to improve their skills, so that they may aid consumers to make energy be able to meet employment purchases that complement their standards. One such program is PREP lifestyles or satisfy their business (Program Resulting in Employment needs. Possibilities). PE has either created James L. Everett, Chairman, More than 16,000 new living programs or joined existing programs responds to a question at a units were connected in 1986. In the in order to increase the availability of Philadelphia Securities Association residential market, electric space minority and women engineering Luncheon. The Company heating was installed in 67% of these graduates. These programs include communicates with many varied units, with efficient heat pumps PEEP (Pre-Engineering Exposure groups throughout the year as part of its Investor Relations accounting for 92% of these new units. Program) , PRIME (Philadelphia Program.

Another 22% will utilize gas heat. As a Regional Introduction of Minorities to result, 89% of new living units in the Engineering) and the High School Company's service territory will be using PE's clean and efficient energy products.

MINORITY OPPORTUNITIES ENHANCED PE 's Affirmative Action Program is designed to enhance the participation of minorities and women in areas

Academies Program (Academy of Applied Electrical Science).

PE continues to expand its support of minority businesses in the Philadelphia region through its materials and services procurement activities. The Minority Business Development Program has been recognized and is enthusiastically supported by PE and the whole local john H. Austin, Jr., President, also business community. Contracts serves as a community volunteer.

awarded to minority businesses have the Company's efforts to renew and He is President of the United Way of Southeastern Pennsylvania.

increased tenfold since the present strengthen its strong tradition of program was formally adopted in late service to the people of the Delaware 1982. Valley. It was designed as a personalized program to assist that PE CARES BENEFITS MANY segment of the customer population During 1986, the PE Cares program which , because of age or infirmity, Commitment to again served many area residents. PE may have difficulty coping with the Good Citizenship Cares was established by Philadelphia complexities of today's world. To date, PE will be a Electric Company in 1981 as part of more than 26,000 customers have responsible corporate been helped by PE Cares. This enthusiastic response has convinced citizen by contributing PE to continue this effort. Among the to the common good many services provided to the PE Cares both in our service members are help in establishing special payment arrangements, area and in the nation.

including the change of due dates to coincide with receipt of Social Earl K. Parker (left) and H. B.

Winitsky (right), both of Purchasing Department, accept the "Most Visible In-House Program " award from the Minority Input Committee of the New Penn-Del Regional Minority Purchasing Council.

Security or retirement checks and budget billing. The PE Cares representatives also can arrange for third-party notification of all matters pertaining to a customer's account, provide programs concerning safety and conservation and help direct the PE Cares participants to governmental and private assistance programs, as appropriate.

the Company achieved a nearly perfect AUTOMATED PROGRAMS IMPROVE record of reliable service with a SERVICE service availability index of 99 .989%.

The Company continued to improve Another part of the Customer its Customer Communication System Communication System is the Field in 1986. An important component of Order Dispatch System which allows tills overall system is the Trouble gas service calls to be electronically Management System, which sets transmitted from the call-taking areas priorities for scheduled work to the dispatch office. This greatly electronically and allows the status of enhances safety, since it assures each job to be automatically updated prompt handling of gas emergencies.

daily. During a storm, this system helps Finally, the third Customer to assign the correct work force and Communication System component, equipment so that service can be the Service Applications Management restored as quickly and efficiently as System, permits efficient tracking of possible. This results in shorter new construction so that electric and interruptions for customers and gas service and installation of meters enables PE to maintain its high may be provided efficiently and standard of service reliability. In 1986 , promptly.

These modern systems give the Company the means to offer customers Amanda L. Coleman, Public even better, more reliable service than Affairs, serves on numerous in the past. With these systems, community and civic commiccees, employees can utilize more efficient including the new Pennsylvania work methods and cut time-Convention Center Authority.

She is pictured next to a model of consuming paper work.

the planned center.

Management's Discussion and Analysis of Financial Condition and Results of Operations General In December 1985, the Financial Accounting Total revenue increased in 1986 over 1985 as a result of Standards Board issued Statement No. 87, Employer's electric rate increases and higher electric sales. See Accounting For Pensions. This statement becomes "Electric Operating Revenue" below. *effective in 1987. Statement No. 87 prescribes a method Operation and maintenance expenses decreased in for determining periodic pension cost which differs 1986 compared with 1985 as a result of lower fuel significantly from the method utilized by the Company in expense. The lower fuel expense was primarily due to the 1986 and prior years. Historically the Company has used excellent performance of the Company's nuclear units. the same method for determining periodic pension cost In accordance with the Declaratory Order issued as used for funding the pension plan. Beginning in 1987, by th,e Pennsylvania Public Utility Commission (PUC) on the method prescribed by Statement No. 87 for measuring September 28, 1984, the Company deferred all operating periodic pension cost will differ from the method utilized costs, carrying charges on investment, fuel savings and for funding purposes. Accordingly, in 1987 and income taxes associated with Limerick Unit No. 1 and subsequent years, contributions to the pension plan might 50% of common plant from February 1, 1986, the date of differ from periodic pension cost recorded in the commercial operation, untilJune 27, 1986, the date the financial statements. The Company has determined that plant was included in rates. The combination of this pension cost for 1987, determined in accordance with Declaratory Order and theJune 27, 1986 rate order, Statement No. 87, will be approximately $10 million less which permits continued accrual of an amount equivalent than 1986 pension cost.

to Allowance for Funds Used During Construction In December 1986, the Financial Accounting (AFUDC) on the remaining 50% of common plant, Standards Board issued Statement No. 90, Regulated contributed approximately $221 million to 1986 Enterprises - Accounting/or Abandonments and common stock earnings. Disallowances ofPlant Costs. The Company is required OnJune 27, 1986, the PUC modified the to adopt this statement by 1988. One of the provisions of Company's Energy Cost Rate (ECR) so that only 80% of Statement No. 90 requires the Company to recognize as a the difference between actual electric energy costs and loss regulatory disallowances related to plant investment.

the amount billed to the customers is subject to after-the- Previously such amounts were included in the costs of the.

fact reconciliation for over/under collections. plant and depreciated over the plant's life. This Statement On October 1, 1986, gas rates were reduced by may require the Company to record a loss equal to the approximately $47 million. This change was due $368.9 million of Limerick Unit No. 1 cost excluded from primarily to lower fuel costs. rate base by the PUC in its order of June 27, 1986. The Periodic rate relief may be required in the future Company may apply the provisions of this Statement to offset increases in operating costs or carrying charges cumulatively in the year of adoption or it may in order to prevent any adverse effects on future net retroactively restate previously issued financial income, earnings per average common share and the statements. It should be noted that the Company has filed Company's ability to raise funds. a petition for review of the PUC's June 27, 1986 order The Tax Reform Act of 1986 (Act) introduces with the Commonwealth Court of Pennsylvania substantial changes to the corporate tax structure concerning the PUC's Limerick rate base disallowance.

beginningJanuary 1, 1987. The rules under which Although Statement No. 90 would have significantly corporations compute their taxable income have been affected 1986 results of operations if applied in 1986 (see significantly changed. Some of the changes affecting the Note 2 to the Consolidated Financial Statements), the Company are changes in the corporate tax rate, Company believes that, should its aforementioned depreciation rates and repeal of the investment tax credit petition for review be denied, adoption of Statement No.

(ITC). The Company is currently in the process of 90 will not significantly affect the Company's future reviewing the specific impacts of this Act on its future tax financing plans or its ability to pay dividends.

liabilities, liquidity and financing plans. In the long run, the Act may increase the Company's cost of doing Electric Operating Revenue business. ITC and deferred income taxes have provided Increased electric revenue in 1986over1985 is significant sources of capital. Although the Company will attributable to higher base rates and increased sales.

be entitled to certain ITCs after January 1, 1987 because Kilowatthour sales of electricity to retail customers of carryovers from prior years and portions of its increased 3 percent in 1986over1985. The increases of construction program qualifying under transition rules, electric revenue in 1985 and 1984 over the previous the benefits of that ITC will be reduced. Repeal of ITC corresponding periods are primarily attributable to higher (other than prior year carryovers and qualified transition. base rates.

property) and reductions in deferred income taxes resulting from reduced corporate tax rates will increase Electric Revenue Millions of Dollars the Company's external financing requirements. Although Increase/ (Decrease) '86vs. '85 '85 vs. '84 '84vs. '83 the corporate income tax rates are reduced, these Rate Increases s 185.0 s 141.4 s 140.0 reductions are offset by the repeal of the ITC, imposition Fuel Related Revenue (39.4) (2.8) 104.0 Sales and Other 37.6 (58.1) 83.8 of the Alternative Minimum Tax and other changes which will increase the Company's cash tax payments. Total s 183.2 s 80.5 S327.8

Gas Operating Revenue tax credits, net, included in other income decreased as a Lower gas revenue in 1986 compared with 1985 is result of lower allowance for borrowed funds used during attributable to decreases in large commercial and construction. Income taxes charged to operations industrial sales, gas transported for others and lower fuel- decreased in 1985 compared with 1984 as a result of related revenue resulting from reductions in the price of lower operating income and increased in 1984 compared gas purchased from suppliers. Gas revenue decreased in with 1983 as a result of higher operating income. Income 1985 compared with 1984 due to a decrease in sales and tax credits, net, included in other income, increased in lower fuel-related revenue resulting from reductions in 1985 and 1984 over the previous corresponding periods the price of gas purchased from suppliers. Gas revenue as a result of higher allowance for borrowed funds used increased in 1984over1983 due to higher rates and during construction.

increased sales.

Other Taxes Fuel and Energy Interchange Expense Other taxes decreased slightly in 1986 versus 1985 For accounting purposes, fuel and energy interchange due to lower capital stock and realty taxes. In 1985 and costs are deferred until billed as fuel adjustment revenue. 1984 other taxes increased due to higher capital stock and See "General" above, regarding after-the-fact realty taxes, and higher realty and gross receipts taxes, reconciliation for over/under collection. In 1986, gross respectively.

fuel and energy interchange costs were $281 million lower than in 1985 due primarily to the excellent Allowance for Funds Used During Construction performance of the Company's nuclear units. Fuel and The decrease in AFUDC in 1986 compared with 1985 is a energy interchange costs deferred in previous years and result of the commercial operation of Limerick Unit No. 1.

charged to expense in 1986 amounted to $189 million. In The increases inAFUDC in 1985and1984 resulted from 1985, gross fuel and energy interchange costs were $212 increases in construction work in progress.

million lower than in 1984 due primarily to the excellent performance of the Salem Nuclear Station. Fuel and Interest Charges energy interchange costs deferred in previous years and Interest charges on debt increased in each of the last three charged to expense in 1985 amounted to $135 million, years due to additional debt outstanding. The ratio of resulting in net fuel and energy interchange expense earnings to mortgage interest, which is one measure of remaining essentially the same in 1985 as in 1984. In the Company's ability to issue additional mortgage bonds, 1984, gross fuel and energy interchange costs were was 2.82 times, 1.98 times and 2.55 times, at year end, for essentially the same as in 1983; however, electric fuel 1986, 1985 and 1984 respectively.

costs deferred were lower by $104.2 million, resulting in a net increase in fuel and energy interchange expense Capital Expenditures and Changes in compared with 1983. Financial Position The Company is carrying on a construction program Other Operating and Maintenance Expenses which is estimated to require expenditures of 1986 non-fuel operating and maintenance expenses approximately $1.2 billion in 1987 and $3.3 billion from increased over 1985 primarily as a result of the 1988 to 1990. A majority of these expenditures relate to commercial operation of Limerick Unit No. 1. Other the construction of the Company's second 1055-mW operating and maintenance expenses increased in 1985 nuclear generating unit at Limerick. Successful and 1984 over the previous corresponding periods due to completion of this program is dependent on the inflation, growth in utility plant and increased costs Company's ability to obtain external financing, primarily associated with the Company's nuclear generating units through debt arrangements and sales of equity securities and with operating the new flue gas scrubbing systems at which are subject to market conditions and to meeting the Company's two wholly owned, coal-burning stations. certain earnings tests. The program also is subject to the licensing requirements of the Nuclear Regulatory Depreciation Commission, to other regulatory approvals in connection Increases in depreciation in each of the last three years with the planned supplemental cooling water system for reflect additions to plant in service. The 1986 increase in Limerick, to financing approvals by the PUC and to depreciation over 1985 is primarily attributable to changes due to litigation.

Limerick Unit No. 1 being placed in service. Interim financing of the construction program is provided by commercial paper borrowing and short- and Income Taxes intermediate-term bank loans, which also are dependent Income taxes charged to operations increased in 1986 on the Company's financial position. _

over 1985 as a result of higher operating income. Incom~ _

~- ~

Philadelphia Electric Company and Subsidiary Companies Consolidated Statements of Income For the Year Ended December 31 1986 19ss* 19s4*

(Thousands ofDollars)

Operating Revenues Electric $2,699,365 $2,516,191 $2,435,731 Gas 391,504 428,984 462,966 Total Operating Revenues 3,090,869 2,945,175 2,898,697 Operating Expenses Fuel and Energy Interchange 889,277 1,097,731 1,069,849 Other Operating Expenses 618,257 548,609 510,726 Maintenance 274,200 262,419 242,675 Depreciation 222,568 183,049 176,433 Income Taxes 288,930 199,900 242,854 Other Taxes 232,627 240,962 206,339 Total Operating Expenses 2,525,859 2,532,670 2,448,876 Operating Income 565,010 412,505 449,821 Other Income and Deductions Allowance for Other Funds Used During Construction 76,821 176,310 134,485 Limerick Carrying Charges 188,679 Income Tax Credits, Net 102,462 133,415 116,423 Other, Net 2,462 (3,464) 239 Total Other Income and Deductions 370,424 306,261 251,147 Income Before Interest Charges 935,434 718,766 700,968 <2>

Interest Charges Long-Term Debt 458,885 435,373 402,475 Short-Term Debt 12,512 17,721 30,912 Allowance for Borrowed Funds Used During Construction (101,617) (257,181) (220,370)

Net Interest Charges 369,780 195,913 213,017 Income from Continuing Operations 565,654 522,853 487,951 Income from Discontinued Steam Operations 1,916 2,448 4,438 Estimated Loss on Disposal of Discontinued Steam Operations (1,250)

Net Income 566,320 525,301 492,389 Preferred Stock Dividends 90,961 90,577 82,682 Earnings Applicable to Common Stock $ 475,359 $ 434,724 $ 409,707 Average Shares of Common Stock Outstanding (Thousands) 183,141 169,784 151,804 Income from Continuing Operations Per Average Common Share (Dollars) $2.59 $2.55 $2.67 Earnings Per Average Common Share (Dollars) $2.60 $2.56 $2.70 Dividends Per Common Share (Dollars) $2.20 $2.20 $2.20

  • Reclassifiedfor comparative purposes.

See notes to financial statements.

Philadelphia Electric Company and Subsidiary Companies Consolidated Balance Sheets ASSETS December 31 1986 1985.

(Thousands ofDollars)

Utility Plant, at original cost Electric $ 8,875,150 $ 4,982,099 Gas 506,021 474,599 Steam 54,176 54,138 Common, used in all services 128,733 132,323 9,564,080 5,643,159 Less: Accumulated Depreciation 2,014,710 1,824,420 Net Utility Plant in Service 7,549,370 3,818,739 Construction Work in Progress 1,652,615 4,929,093 Leased Property, net 281,346 338,141 Net Utility Plant 9,483,331 9,085,973 Current Assets Cash and Temporary Cash Investments 90,716 188, 785 Accounts Receivable Customers 345,432 348,233 Other 30,174 22,687 Inventories, at average cost Fossil Fuel 54,517 63,594 Materials and Supplies 75,219 60,152 Deferred Income Taxes - Energy Costs 44,842 (51,814)

Compensated Absences 50,800 46,370 0 Other 27,681 25,402 Total Current Assets 719,381 703,409 Deferred Debits and Other Assets Unrecovered Revenue 112,472 Deferred Limerick Costs and Carrying Charges 195,617 Investments 89,702 87,670 Loss on Reacquired Debt 76,783 48,589 Other 70,734 86,204 Total Deferred Debits and Other Assets 545,308 222,463 Total $10,748,020 $10,0ll,845

'Reclassified for comparative purposes.

See notes to financial statements.

CAPITALIZATION AND LIABILITIFS December 31 1986 1985' (Thousands ofDollars)

Capitalli:ation Common Shareholders' Equity Common Stock $ 2,832,967 $ 2,601,989 Other Paid-In Capital 7,787 7,331 Retained Earnings 653,127 583,728 3,493,881 3,193,048 Preferred Stock Without Mandatory Redemption 572,472 572,472 With Mandatory Redemption 374,956 318,309 Long-Term Debt 4,286,792 4,309,131 Total Capitalli:ation 8,728,101 8,392,960 Current Liabilities Notes Payable, Bank 1,000 Long-Term Debt Due Within One Year 108,570 80,800 Capital Lease Obligations Due Within One Year 69,379 76,326 Accounts Payable 182,498 144,407 Taxes Accrued 86,187 58,509 Deferred Energy Costs 88,215 (101,655)

Interest Accrued 90,701 93,008 Dividends Payable 39,607 40,698 Compensated Absences 50,800 46,370 <8>

Other 29,153 25,583 Total Current Liabilities 745,110 465,046 Deferred Credits and Other Liabilities Capital Lease Obligations 211,966 261,815 Deferred Income Taxes 694,990 502,621 Unamortized Investment Tax Credits 320,107 302,409 Other 47,746 86,994 Total Deferred Credits and Other Liabilities 1,274,809 1,153,839 Total $10,748,020 $10,011,845

Philadelphia Electric Company and Subsidiary Companies ConsoUdated Statements of Changes In Cash Flows For the Years Ended December 31 1986 1985 1984 (Thousands ofDollars)

Cash Flow From Operations Income from Continuing Operations $565,654 $522,853 $487,951 Non-Cash Items Included in Income Depreciation and Amortization 285,204 183,049 176,433 Nuclear Fuel Disposal Costs 5,601 13,201 Deferred Income Taxes 133,419 66,553 78,550 Investment Tax Credits, Net 29,041 3,582 49,941 Allowance for Other Funds Used During Construction (76,821) (176,310) (134,485)

Increase In Deferred Limerick Costs and Carrying Charges (179,592)

Increase in Unrecovered Revenue (112,472)

Amortization of Leased Property 65,600 60,900 39,100 Limerick Precommercial Fuel Cost 16,448 45,301 Change In:

Deferred Energy Costs 189,870 128,240 (80,649)

Other Current Assets and Liabilities 39,869 45,395 (41,043)

Other Deferred Debits and Credits (17,707) 6,948 (16,112)

Net Cash Flow From Continuing Operations 938,513 892,112 572,887 Net Cash Flow From Discontinued Operations 3,468 4,105 3,992 Net Cash Flow From Operations 941,981 896,217 576,879 Cash Flow From Financing Issuance of Common Stock 230,978 241,041 250,445 Issuance of Preferred Stock 75,000 100,000 Retirement of Preferred Stock Including Change in Other Paid-in

<8> Capital Dividends on Preferred and Common Stock (17,897)

(494,916)

(7,322)

(464,003)

(7,757)

(418,098)

Change in Dividends Payable (1,091) (3,098) 16,585 Expenses of Issuing Preferred and Common Stock (2,005) (870) (3,955)

Issuance of Long-Term Debt, Including Capital Lease Obligations 869,471 732,364 317,337 Capital Lease Obligations (48,471) (46,364) (58,637)

Retirement of Long-Term Debt (260,829) (274,391) (12,183)

Premium on Retirement of Long-Term Debt (28,930) (45,450)

Net Borrowings Under Revolving Credit Agreements (550,000) 150,000 200,000 Change in Short-Term Debt (1,000) (259,000) (7,500)

Capital Lease Payments (65,600) (60,900) (39,100)

Change in Escrow Funds 2,872 74,775 (80,125)

Transfer from Investments 19,656 Payment of Other Obligations (37,719) (61,843)

Net Cash Flow From Financing (330,137) (25,061) 276,668 Cash Flow From Investing Increase in Utility Plant, Including Leased Property (771,998) (829,814) (1,084,414)

Leased Property 48,471 46,364 58,637 Allowance for Other Funds Used During Construction 76,821 176,310 134,485 Cost of Property Retired and Cost of Removal (86,332) (86,866) (44,014)

Transfer (to)/from Deferred Debits 25,157 (11,923)

Sale of Magnesium Oxide Facilities 55,92.8 Increase (Decrease) in Other Investments (2,032) (6,799) (1,082)

Net Cash Flow From Investing (709,913) (712,728) (880,460)

Net Change in Cash Flow $(98,069) $158,428 $(26,913)

See notes to financial statements.

Philadelphia Electric Company and Subsidiary Companies Consolidated Statements of Changes in Common Stockholders' Equity and Preferred Stock Other Common Stock Paid-In Retained Preferred Stock Shares Amount Capital Earnings Shares Amount (All amounts in thousands)

Balance,Januaryl, 1984 142,811 $2,110,503 $5,856 $452,964 8,073 $807,335 Net Income 492,389 Cash Dividends Declared Preferred Stock (at specified annual rates) (83,820)

Common Stock ($2.20 per share) (334,278)

Expenses of Capital Stock Issues (3,955)

Issuance of Stock  ; "

Public Sales 11,613 144,548 1,000 100,000 Employee Stock Ownership Plans 914 10,563 Dividend Reinvestment and Stock Purchase Plan 6,965 95,334 Redemptions 871 (86) (8,628)

Balance, December 31, 1984 162,303 2,360,948 6,727 523,300 8,987 898,707 Net Income 525,301 Cash Dividends Declared Preferred Stock -~

(at specified annual rates) (90,524)

Common Stock ($2.20 per share) (373,479)

Expenses of Capital Stock Issues (870)

Issuance of Stock Public Sales 7,387 115,008 Employee Stock Ownership Plans 873 15,294 Dividend Reinvestment and 0 Stock Purchase Plan 7,117 110,739 Redemptions 604 (79) (7,926)

Balance, December 31, 1985 177,680 2,601,989 7,331 583,728 8,908 890,781 Net Income 566,320 Cash Dividends Declared Preferred Stock (at specified annual rates) (91,393)

Common Stock ($2.20 per share) (403,523)

Expenses of Capital Stock Issues (2,005)

Issuance of Stock Public Sales 6,000 117,216 750 75,000 Employee Stock Ownership Plans 625 13,215 Dividend Reinvestment and Stock Purchase Plan 4,774 100,547 Redemptions 456 (184) (18,353)

Balance, December 31, 1986 189,079 $2,832,967 $7,787 $653,127 9,474 $947,428 See notes to financial statements.

Philadelphia Electric Company and Subsidiary Companies Notes to Financial Statements

1. Significant Accounting Policies for funding of future costs. The Company believes that any increase in the estimated costs would be recoverable General through adjustments of rates charged to its customers.

All utility subsidiary companies of Philadelphia Electric Annual depreciation provisions, expressed as a percent of Company are wholly owned and are included in the average depreciable utility plant in service, were consolidated financial statements. Nonutility subsidiaries approximately 2.95% in 1986, 3.35% in 1985 and 3.29%

are included in investments and accounted for on the in 1984.

equity method. Accounting policies are in accordance with those prescribed by the regulatory authorities having Income Taxes jurisdiction, principally the Federal Energy Regulatory Deferred income taxes are provided for differences Commission (FERC) and the Pennsylvania Public Utility between book and taxable income to the extent permitted Commission (PUC). for rate-making purposes. Investment tax credits, other than credits resulting from contributions to employee Revenues stock ownership plans, which do not affect income, are Revenues are generally recorded in the accounts upon deferred and amortized to income over the estimated billing to the customer. Rate increases are billed from useful life of the related utility plant.

dates authorized or permitted to become effective by the regulatory authorities. Allowance for Funds Used During Construction Pursuant to a rate phase-in plan approved by the (AFUDC)

PUC in its electric rate order of]une 27, 1986, the AFUDC is a non-cash item which is defined in the Company is recording revenue equal to the full amount of Uniform Systems of Accounts as "the net cost for the the rate increase approved, based on kilowatthours billed period of construction of borrowed funds used for to customers. Amounts included in revenue which will construction purposes and a reasonable rate on other not be billed to customers within one year are classified as funds when so used!' AFUDC is recorded as a charge to Unrecovered Revenue in the accompanying balance sheet Construction Work In Progress, and the equivalent credits (see Note 2). are to "Interest Charges" for the pretax cost of borrowed funds and to "Other Income" for the remainder as the Fuel Adjustment Clauses allowance for other funds. The rate used for capitalizing Each of the Company's classes of service is subject to fuel AFUDC, which averaged 9.55% in 1986, 9.50% in 1985, adjustment clauses designed to recover or refund the and 9.40% in 1984, is computed under a method differences between actual costs of fuel, energy prescribed by the regulatory authorities. The rate is a "net interchange, purchased power, and gas, and the amounts after-tax rate" and the current income tax reductions of such costs included in base rates. Differences between applicable to the interest charges capitalized are recorded the amounts billed to customers and the actual costs in "Other Income:' AFUDC is not included in taxable recoverable are deferred and recovered or refunded in income and the depreciation of capitalized AFUDC is not future periods by means of prospective adjustments to tax deductible.

rates. Generally such rates are adjusted annually.

In its June 27, 1986 electric rate order, the PUC Limerick Carrying Charges modified the electric energy clause to allow the recovery Under the Uniform System of Accounts prescribed by the of only 80% of the difference between actual energy costs FERC, accrual of AFUDC ceases at the time utility plant and the amounts billed to customers. If the Company under construction is placed in service and 100% of recovers more than actual energy costs, 80% of the excess common plant of a two-unit plant is deemed to be in is refundable to customers (see Note 2). service with the first unit. However, the PUC permits only 50% of the common plant to be included in rate base Nuclear Fuel when the first unit is placed in service.

Nuclear fuel is capitalized and charged to fuel expense on Because of the difficulty in synchronizing the the unit of production method. Estimated costs of nuclear recovery of Limerick Unit No. 1's cost through rates with fuel disposal are charged to fuel expense as the related its commencement of commercial operations, the PUC fuel is burned. allowed the Company to record a carrying charge equivalent to AFUDC on the unit and common plant until Depreciation they were included in rate base on June 27, 1986. In For financial reporting purposes, depreciation is provided addition the PUC is permitting the Company to record a over the estimated service lives of the plant on the similar carrying charge on the 50% of common plant straight-line method and, for tax purposes, generally, over which was deemed to be associated with Unit No. 2 and shortedives on accelerated-methodS: Tlie estimatecf was not included in rate base-un<iffiliCJune27, 1986 decommissioning costs of operating nuclear generating electric rate order. Such carrying charges are recorded as a plants, totaling approximately $287,801,000 as of charge to Deferred Debits and as a credit to Other December 31, 1986, are being charged to operations as Income.

permitted for rate-making purposes. The amounts charged are deposited in an escrow account and invested

Gas Exploration and Development Joint Ventures Deferred Limerick Costs and Carrying Charges, the The Company has invested in several joint ventures for Company had deferred a total of $155.2 million exploring and drilling for natural gas. Costs are associated with the Declaratory Order.

capitalized under the full cost method and charged to operations commensurate with production. Prospective Accounting Change In December 1986, the Financial Accounting Standards Gains and Losses on Reacquired Debt Board issued its Statement No. 90, Regulated Enterprises Gains and losses on reacquired debt are deferred and - Accounting for Abandonments and Disallowances of amortized to interest expense over the period permitted Plant Costs, which requires any disallowed costs of for rate-making purposes. recently completed plants to be recognized as a loss. The Company is required to adopt this Statement by 1988.

2. Limerick Generating Station The provisions of the Statement may be applied cumulatively in the year of adoption or may be applied General retroactively by restating previously issued financial The Company's Limerick Unit No. 1 commenced statements. If the Company chooses to apply the commercial operation on February 1, 1986. Construction provisions of Statement No. 90 by retroactive restatement of the second of the two nuclear units at Limerick in the year of adoption and the PUC's disallowance of resumed in February 1986, following a suspension of $368.9 million of Limerick Unit No. 1 costs from rate approximately 2 years. Unit No. 2 is scheduled to be base is not reversed, $368.9 million would be written off completed in late 1990. At December 31, 1986, Unit as of 1986. This write-off would reduce 1986 income No. 2 was approximately 49 percent complete based on from continuing operations and net income, as reported, estimated man-hours needed to complete the Unit. As by $249 million and the related per share amounts by of December 31, 1986, the Company had invested $1.36. At December 31, 1986, net utility plant in service, approximately Sl.9 billion in Unit No. 2, including 50% deferred income taxes and retained earnings would be of common plant. reduced by $364.2 million, $115.2 million and $249.0 million, respectively. After giving effect to the write-off, Limerick Unit No. 1 Rate Proceedings 1986 proforma results of operations and related per share On September 27, 1985, the Company filed with the PUC amounts would be as follows:

for a phased-in electric rate increase designed to yield

$671 million annually, net of fuel savings, to recover the Proforma costs associated with Limerick Unit No. 1 and 100% of As Reported Assuming Retroactive common plant. By order entered June 27, 19,86, the PUC Restatement approved an increase of approximately $ 3 51 million (Millions ofDollars, Except Per Share Amounts) annually, net of fuel savings. The PUC authorized a rate of Income from return on common equity of 14.75%. The increase is Continuing Operations . . . S565.7 S316.7 being phased-in over three years in equal steps, followed Net Income . . . . . . . . . . . . . . . S566.3 S317.3 Per Share Amounts:

by a three-year recovery period, without interest, of Income from Continuing amounts recoverable under the phase-in plan. In Operations ............. . S2.59 $1.23 accordance with its prior practice, the PUC excluded Net Income .............. . $2.60 $1.24 50% of common plant from rate base at this time, but permitted continued accrual of an amount equivalent to Limerick Unit No. 2 Cost Cap AFUDC on the excluded 50%. Accordingly, the Company On December 23, 1985, following a PUC investigation, is accruing a carrying charge equivalent to AFUDC on this the Company filed its response with the PUC accepting investment. The increase also reflects an exclusion from the conditions of the cost containment and operating the Company's rate base of $368.9 million due to alleged incentive plans set forth in the PUC's December 5, 198 5 imprudent construction delays in 1976 and 1978. As order, which concluded that the Company,could indicated below the Company has appealed this complete the construction of Limerick Unit No. 2 exclusion. The PUC rejected allegations by various parties conditioned upon the acceptance by the Company of that Limerick Unit No. 1 represents excess capacity. For a such cost containment and operating incentive plans, description of the effects of the June 27, 1986 electric including a maximum net rate base allowance for Unit rate order on the Company's accounting policies, see No. 2 (exclusive of common plant) of a prudent Note l. investment of $ 3 .197 billion. This order has been In accordance with the Declaratory Order issued appealed by various parties. Under Statement No. 90 by the PUC on September 28, 1984, the Company described above, if the Company estimates the total cost deferred all operating costs, carrying charges on to complete Unit No. 2, includingAFUDC, would exceed investment, fuel savings and associated income tax effects the $3.197 billion cap, an immediate charge to expense of Limerick Unit No. 1 and 50% of common plant from would be recognized for the excess. The Company February 1, 1986, the date of commercial operation, until estimates the cost of Limerick Unit No. 2 will not exceed the plant was included in rates onJune 27, 1986. The the $3.197 billion cap.

recovery of these costs will be addressed by the PUC in a subsequent electric rate case. Of the $195.6 million of

Philadelphia Electric Company and Subsidiary Companies Notes to Financial Statements - Continued Excess Capacity Standards Court by the Company appealing the exclusion of $ 368. 9 On July 10, 1986, the Governor of Pennsylvania signed million from rate base and by a group of the Company's into law legislation amending numerous provisions of the commercial and small industrial customers on the issue of Pennsylvania Public Utility Code. Among the provisions excess capacity and on various rate design and cost of of the legislation which affect rate regulations, one service issues.

provision imposes standards on the PUC in determining whether new generating capacity is excess capacity. This Supplemental Cooling Water provision requires a disallowance from rates of any The unavailability of sufficient supplemental cooling portion of new capacity which is determined to be excess water would limit or prohibit operation of Limerick Unit capacity. The provisions relating to excess capacity are No. 1 and Unit No. 2 (when in operation) during certain applicable to rate cases "pending before the Commission~' months of the year. The Delaware River Basin Commission On]une 27, 1986, the Office of Consumer Advocate (DRBC) has approved various Company requests for (OCA) filed a Petition for Reconsideration which sought modification of restrictions on the use of the Schuylkill amendment of the PUC's order enteredJune 27, River for Limerick cooling water (which restrictions 1986 with respect to the finding that Limerick Unit create the need for supplemental cooling water for No. 1 was not excess capacity. Additional Petitions for Limerick), a reallocation of cooling water to Limerick Reconsideration on excess capacity and other issues were from other power plants on the Schuylkill River and the filed by certain other parties onJuly 1, 1986, July 7, 1986, use of water from an upstream municipal reservoir. The July 11, 1986 and July 15, 1986. OnJuly 10, 1986 the DRBC's approvals were effective through December 31, OCA filed a Supplemental Petition for Reconsideration 1986, and the Company has filed similar requests with the which alleged that the Limerick Unit No. 1 rate case was DRBC for its 1987 supplemental cooling water needs.

pending at the time the legislation was enacted and One component of the planned supplemental sought application of the excess capacity provisions of cooling water system for Limerick is the Point Pleasant the legislation to the Limerick Unit No. 1 rate case. On Project. The Point Pleasant Project has been the subject of July 16, 1986, a group of the Company's industrial substantial opposition from various groups, including the customers filed a Supplemental Petition for majority of the Commissioners of Bucks County, and the Reconsideration joining the OCA's Supplemental Petition NeshaminyWater Resources Authority (NWRA). Petitions for Reconsideration. By orders entered July 25, 1986, the for Allowance of Appeal were filed with the Supreme

<§> PUC denied all Petitions for Reconsideration and Court of Pennsylvania by the Commissioners of Bucks Supplemental Petitions for Reconsideration. The PUC County, NWRA, and a taxpayer in Bucks County from the held that the legislation did not apply to the Limerick Unit decision of the Commonwealth Court of Pennsylvania, No. 1 rate case. Furthermore, the PUC held that, even if affirming the decision of the Court of Common Pleas of the legislation did apply, Limerick Unit No. 1 did not Bucks County ordering the completion of the Point constitute excess capacity under the standards imposed Pleasant Project. On May 8, 1986, the Supreme Court of by the legislation. On July 25, 1986, the OCAfiled a Pennsylvania denied the Petition for Allowance of Appeal Petition for Review with the Commonwealth Court of filed by NWRA. OnJune 23, 1986, the Supreme Court of Pennsylvania (Commonwealth Court) of the PUC'sJune Pennsylvania denied the remaining two Petitions for 2 7, 1986 electric rate order on the issue of excess Allowance of Appeal. Construction of the Point Pleasant capacity and on a particular rate base issue regarding Project has not yet resumed. The Court has appointed a whether certain utility plant was used and useful. On July special master to oversee the implementation of the court 28, 1986, PetitionsforReviewofthe PUC'sJune 27, 1986 order that the project be completed.

electric rate order were filed with the Commonwealth

3. Sale of Steam Operations On June 30, 1986, the Company signed an agreement for the sale of its steam operations. The sale was completed on January 30, 1987. The Company recorded an estimated loss on disposal of $1,250,000, which includes $1,000,000 in income tax expense associated with timing differences for which deferred taxes, in accordance with the rate-making treatment, had not been provided.

Operating results of the steam operations for 1986, 1985 and 1984 are reported separately as discontinued operations in the accompanying financial statements and are summarized below. Income from Discontinued Operations includes a $1.0 million loss for the period fromJuly 1, 1986 to December 31, 1986.

1986 1985 1984 (Thousands ofDollars)

Steam Revenues $51,067 $68,529 $82,320 Operating Expenses, Excluding Depreciation and Taxes (45,692) (61,680) (71,570)

Depreciation (1,923) (1,916) (1,893)

Income and Other Taxes (1,536) (2,485) (4,419)

Income from Discontinued Operations $ 1,916 $ 2,448 $ 4,438

4. Common Stock At December 31, 1986, and 1985, Common Stock without outstanding. At December 31, 1986, there were par value, consisted of 240,000,000 shares authorized 19,795,818 shares reserved for issuance under stock and 189,078,606and177,679,977 shares, respectively, purchase plans.
5. Preferred Stock At December 31, 1986, and 1985, Preferred Stock, $100 par, cumulative, 10,000,000 shares authorized:

Shares Amount Current Refunding Redemption Restricted Outstanding Price (a) Prior to (b) 1986 1985 1986 1985 (Thousands ofDollars)

Series (without mandatory redemption) 14.15%(c) $114.15 2-1-90 500,000 500,000 $ 50,000 $ 50,000 13.35% (c) 113.35 2-1-89 750,000 750,000 75,000 75,000 12.80% (c) 112.80 5-1-88 750,000 750,000 75,000 75,000 9.50% 103.50 750,000 750,000 75,000 75,000 8.75% 101.00 650,000 650,000 65,000 65,000 7.85% 103.00 500,000 500,000 50,000 50,000 7.80% 103.00 750,000 750,000 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 3.8% 106.00 300,000 300,000 30,000 30,000 5,724,720 5,724,720 572,472 572,472 Series (with mandatory redemption) (d) 0 17.125% $117.13 5-1-87 300,000 300,000 30,000 30,000 15.25% 110.00 5-1-90 450,000 500,000 45,000 50,000 14.625% (e) 5-1-90 500,000 500,000 50,000 50,000 10% 103.33 5-1-90 176,000 220,000 17,600 22,000 9.52% 103.00 375,360 393,690 37,536 39,369 9.50% 1986 Series 109.50 11-1-91 750,000 75,000

8. 75% 1978 Series 104.63 5-1-88 400,100 433,400 40,010 43,340 7.325% 103.51 510,000 540,000 51,000 54,000 7% 101.00 288,100 296,000 28,810 29,600 3,749,560 3,183,090 374,956 318,309 Total Preferred Stock 9,474,280 8,907,810 $947,428 $890,781 (a) Redeemable, at the option of the Company, at the evidenced by Depositary Receipts, each representing indicated dollar amounts per share, plus accrued 1/10 of a share of Preferred Stock.

dividends. ( d) Sinking Fund requirements (par value) in the period (b) Prior to the date specified, none of the shares of each 1987-1991 are as follows: 1987-$14,766,000; series indicated may be redeemed through refunding at an 1988-$16,740,000; 1989-$17,530,000; interest cost or dividend rate which is less than the 1990-$27,530,000; 1991-$23,130,000.

dividend rate of such series. (e) Not redeemable prior to May 1, 1990.

( c) Ownership of these series of Preferred Stock is

Philadelphia Electric Company and Subsidiary Companies Notes to Financial Statements - Continued

6. Long-Term Debt At December 31 Series Due 1986 1985 (Thousands ofDollars)

First and Refunding Mortgage Bonds (a) 4%% 1986 $ 50,000 4%% 1987 $ 40,000 40,000 3%%-14% 1988 52,500 52,500 5%-14% 1989 62,500 62,500 14% 1990 11,000 11,000 14% 1991 11,000 11,000 4Y2%-151;4% 1992-1996 748,633 650,725 6~%-11%% 1997-2001 530,939 535,184 8Y2%-12Y2% 2002-2006 500,000 500,000 6%-18%% 2007-2011 221,591 394,273 8"Vs%-18% 2012-2016 882,379 698,379 Total First and Refunding Mortgage Bonds 3,060,542 3,005,561 Notes Payable - Banks (b) 1987-1992 225,000 225,000 Notes Payable - Other 17% 1987 10,000 20,000 Revolving Credit and Term Loan Agreements (c) 550,000 Pollution Control Notes 5Y2%-13% 1997-2013 272,420 272,685 Debentures 4.85% 1986 20,800 Debentures 14~% 1990 50,000 50,000 Debentures 9.85%-14%% 1993-2011 787,000 250,000

<§> Sinking Fund Debentures - Philadelphia Electric Power Company, a Subsidiary 4Y2% 1995 14,580 15,325 Unamortized Debt Discount and Premium, Net (24,180) (19,440)

Total Long-Term Debt 4,395,362 4,389,931 Due Within One Year (d) 108,570 80,800 Long-Term Debt included in Capitalization (e) $4,286,792 $4,309,131 (a) Utility plant is subject to the lien of the ~ompany's Limerick Unit No. 1. In 1986 the Company repaid the mortgage. InJuly 1986,the Company called $46,904,000 $550 million of borrowings, thereby terminating the princip<1.l amount ofl 7%% series due 2011 and in agreement. The Company also has a $400 million September 1986, called $48,869,000 principal amount Revolving Credit and Term Loan Agreement with a group of 18%% series due 2009. A portion of the proceeds from of banks which expires in 1987. There is an annual the Company's November 1986 sale of $150,000,000 commitment fee of%% on the unused amount. There principal amount of 101;4% series due 2016 and were no borrowings under this agreement during the year.

$100, 000, 000 principal amount of 8%% series due 1994 (d) Long-term debt maturities in the period 1988-1991 was used to repurchase $76,909,000 principal amount of are as follows: 1988-$91,689,000; 1989-$78,863,000; 15%% series due 2010. Premiums on the repurchases of 1990-$77,850,000; and 1991-$77,850,000.

$30,878,322 were charged to loss on reacquired debt. ( e) The annualized interest on long-term debt at (b) At various interest rates. December 31, 1986, was $443.8 million of which (c) At December 31, 1985, the Company had a $550 $304.4 million was associated with mortgage bonds and million revolving credit and term loan agreement with a $139.4 million was associated with other long-term debt.

group of banks which provided financing to complete

7. Short-Term Debt 1986 1985 1984 (Thousands ofDollars)

Average Short-Term Borrowings $ 233 $127,392 $166,713 Average Interest Rates, Computed on Daily Basis 9.51% 6.38% 9.88%

Maximum Short-Term Borrowings Outstanding $1,000 $360,000 $302,500 Average Interest Rates on Short-Term Borrowings at December 31:

Bank Loans 9.50% 9.95%

Pollution Control Notes 6.44%

At December 31, 1986, the Company had no short-term million. The Company generally does not have formal debt outstanding under formal and informal lines of compensating balance arrangements with these banks.

credit with banks aggregating approximately $ 368

8. Jointly Owned Electric Utility Plant The Company's ownership interests in jointly owned utility plant at December 31, 1986 were as follows:

Production Plants Transmission Plant Peach Merrill Creek Bottom Salem Keystone Conemaugh Reservoir Operator Philadelphia Public Service Pennsylvania Pennsylvania Jersey Central Various Electric Electric and Electric Electric Power& Companies Company Gas Company Company Company Light Company Participating Interest 42.49% 42.59% 20.99% 20.72% 44.24% 21%to43%

Company's share of: (Thousands ofDollars)

Utility Plant $515,149 $914,589 $67,028 $64,457 $68,456 Accumulated Depreciation 134,065 170,460 24,824 25,205 15,985 Construction Work In Progress 22,707 25,948 2,004 6,008 $38,718 <§>

The Company's participating interests are financed with operations are accounted for as if such participating Company funds and, when placed in service, all interests were wholly owned facilities.

9. Income Taxes 1986 1985 1984 (Thousands ofDollars)

Included in Continuing Operations:

Federal Current $ 96,562 $105,165 $ 91,769 Deferred 132,238 60,061 51,747 Investment Tax Credits, Net 29,041 3,582 49,941 State Current 29,908 24,600 22,594 Deferred 1,181 6,492 26,803 Included in Other Income and Deductions:

Federal (83,631) (109,580) (93,818)

State (18,831) (23,835) (22,605)

Total $186,468 $ 66,485 $126,431 Investment tax credits (ITC) and income tax credits Approximately $227 million of additional ITC resulting from contributions to employee stock generated from 1983 through 1986 has not been utilized ownership plans reduced Federal income taxes currently due to limitations based on taxable income. These credits payable by $43 million in 1986, $12 million in 1985 and which expire between 1998 and 2001 maybe used to

$58 million in 1984. Under the Tax Reform Act of 1986, reduce Federal income taxes in future years; however, ITC has been repealed effective January 1, 1986 with the approximately $219 million of these ITC carryovers may exception of transition property. The Company believes be reduced by l 7Yz% in 1987 and by an additional l 7Yz%

that Limerick Unit No. 2 qualifies as transition property in 1988 under the provisions of the Tax Reform Act of eligible for ITC.

  • 1986.

Philadelphia Electric Company and Subsidiary Companies Notes to Financial Statements - Continued For a number of years the Company has used which deferred taxes were not recorded was accelerated depreciation for income tax purposes and approximately $730 million at December 31, 1986. Since straight line depreciation for financial reporting the Company expects to charge customers for taxes when purposes. Deferred taxes were recorded only on those the timing differences reverse, the tax effect of such timing differences recognized for rate-making. The timing differences is not recorded currently.

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

1986 1985 1984 (Thousands ofDollars)

Depreciation arid Amortization $127,278 $ 34,297 $ 33,814 Nuclear Waste Disposal Costs (5,932) (7,355)

Deferred Energy Costs (95,383) (65,393) 43,761 Precommercial Operation of Limerick Unit No. 1 10,210 97,867 Deferred Limerick Costs 11,004 Loss on Reacquired Debt 14,305 24,592 Unrecovered Revenue 55,040 Other 10,965 (18,878) 8,330 Total $133,419 $ 66,553 $ 78,550 The total income tax provisions on continuing operations differ from amounts computed by applying the Federal statutory tax rate to income and adjusted income before income taxes for the following reasons:

Income From Continuing Operations $565,654 $522,853 $487,951 Total Income Tax Provisions 186,468 66,485 126,431

Income Before Income Taxes 752,122 589,338 614,382 Deduct: Allowance for Funds Used During Construction (non-taxable) 178,438 433,491 354,855 Limerick Carrying Charges (non-taxable) 188,679 Adjusted Income Before Income Taxes $385,005 $155,847 $259,527 Income Taxes on Above at Federal Statutory Rate of 46% 177,102 71,689 119,382 Increase (Decrease) due to:

Depreciation Timing Differences Not Normalized 19,230 7,062 6,975 State Income Taxes, Net of Federal Income Tax Benefits 6,620 3,919 14,467 Amortization of Investment Tax Credits (13,468) (8,250) (7,738)

Other, Net (3,016) (7,935) (6,655)

Total income tax provisions $186,468 $ 66,485 $126,431 Provision for Income Taxes as a Percent of:

Income Before Income Taxes 24.8% 11.3% 20.6%

Adjusted Income Before Income Taxes 48.4% 42.7% 48.7%

10. Taxes, Other Than Income 1986 1985 1984 (Thousands ofDollars)

Gross Receipts $132,468 $128,346 $122,881 Capital Stock 25,511 28,091 13,160 Realty 49,110 62,222 47,923 Other 25,538 22,303 22,375 Total $232,627 $240,962 $206,339

11. Investments At December 31 1986 1985 (Thousands ofDollars)

Gas Exploration and Development Joint Ventures $38,299 $44,743 Real Estate Developments and Other Ventures 17,088 15,433 Nonutility Property 13,477 13,931 Escrow Deposits for Decommissioning Nuclear Plants 20,278 12,563 Other Deposits 560 1,000 Total $89,702 $87,670 In 1986 the Company's investment in gas exploration and development joint ventures exceeded the full cost limitation ceiling by $7.2 million, which was charged to expense.

12.Leases Leased property included in Utility Plant at December 31 1986 1985 (Thousands ofDollars)

Nuclear Fuel $484,536 $445,699 Electric Plant 10,953 48,342 Common Plant 156 3,116 Gross Leased Property 495,645 497,157 Accumulated Amortization (214,299} (159,016)

Net Leased Property $281,346 $338,141 The nuclear fuel obligation is amortized as the fuel is burned. Amortization of leased property totaled $65.6 million, <§>

$60.9 million, and $39.l million for the years ended December 31, 1986, 1985 and 1984, respectively. Other operating expenses include interest on capital lease obligations of $16.4 million, $18.2 million and $22.0 million in 1986, 1985 and 1984, respectively. During 1986, $40.0 million of electric plant held under capital lease was retired and the lease terminated. Minimum future lease payments as of December 31, 1986, are:

Year Ending December 31 Capital Leases Operating Leases Total (Thousands ofDollars) 1987 $ 89,396 $ 33,856 $123,252 1988 78, 151 31, 170 109,321 1989 71,629 31,477 103,106 1990 48,418 30,596 79,014 1991 30,522 29,801 60,323 Remaining years 13,185 97,407 110,592 Total Minimum Future Lease Payments $331,301 $254,307 $585,608 Imputed Interest (rates ranging from 6.5% to 17%) (49,955)

Present Value of Net Minimum Future Lease Payments $281,346 Rental expense under operating leases totaled $54.0 million, $43.9 million, and $29.2 million, in 1986, 1985 and 1984, respectively.

Philadelphia Electric Company and Subsidiary Companies Notes to Financial Statements - Continued

13. Segment Information - Continuing Operations 1986 1985 1984 (Thousands ofDollars)

Electric Operations Operating Revenues $ 2,699,365 $ 2,516,191 $2,435,731 Operating Expenses, excluding depreciation 1,966,004 1,974,222 1,858,505 Depreciation 206,701 168,208 162,959 Operating Income $ 526,660 $ 373,761 $ 414,267 Utility Plant Additions $ 753,232 $ 793,195 $1,022,496 Gas Operations Operating Revenues $ 391,504 $ 428,984 $ 462,966 Operating Expenses, excluding depreciation 337,287 375,399 413,938 Depreciation 15,867 14,841 13,474 Operating Income $ 38,350 $ 38,744 $ 35,554 Utility Plant Additions $ 35,053 $ 32,896 $ 30,613 Identifiable Assets (')

Electric $ 8,811,304 $ 8,885,738 $8,412,532 Gas 416,824 407,375 405,958 Nonallocable Assets 1,519,892 718,732 737,239 Total Assets $10,748,020 SI0,011,845 $9,555,729

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

14. Commitments and Contingencies available, $1.2 billion for each station. Under the terms of The Company has incurred substantial commitments in the various insurance agreements, the Company could be connection with its construction program. Construction assessed up to $ 34 mi.Ilion for losses incurred at any expenditures are estimated to be $1.2 billion for 1987 plants insured by the insurance companies. The Company and $3.3 billion for 1988-1990. These estimates are is a member of an industry mutual insurance company reviewed and revised periodically to reflect changes in which provides replacement power cost insurance in the economic conditions, revised load forecasts and other event of a major outage at a nuclear station. The premium appropriate factors. Facilities under construction and to for this coverage is subject to an assessment for adverse be constructed, particularly Limerick Generating Station loss experience. The Company's maximum share of any and associated facilities, will require permits and licenses assessment is $16 million.

which the Company has no assurance will be granted. On March 29, 1985, the PUC adjusted the The Price-Anderson Act places a "Limit of Company's February 28, 1985, Energy Cost Rate (ECR)

Liability" of $695 million for claims that could arise from filing to exclude S45 million of incurred fuel expense an incident involving any licensed nuclear facility in the from ECR recovery pending an investigation into outages nation. All nuclear utilities, including the Company, have experienced at Peach Bottom Unit No. 2 and Salem Unit covered this exposure through a combination of private No. 1 in 1984. On February 28, 1986, the Company made insurance and mandatory participation in a secondary its annual filing with the PUC for a revision in the ECR financial protection pool. In the event of a nuclear which requested a decrease. On March 20, 1986, the PUC incident, the Company could be assessed up to $13.5 approved the Company's request to lower the ECR, million per incident, involving any licensed nuclear effective April 1, 1986, and the PUC permitted the facility in the nation, with a maximum amount of $27 Companytorecover $35.25 millionofthe S45 million million in any one year. The current Price-Anderson fuel costs which the PUC had previously excluded from legislation expires in 1987. Bills to amend the Price- recovery. The remaining $ 9. 7 5 million was written off in Anderson Act, including proposals to substantially modify the quarter ending March 31, 1986.

or eliminate the limitation on liability provisions, have OnJanuary 25, 1985, the PUC adopted an order been introduced in Congress. granting the Company a net increase in annual revenues The Company maintains property insurance, of $49 million reflecting the inclusion of Salem Unit No. 2 including radiation contamination coverage, for loss or in rates. The Company agreed to guarantee $116 million damage to its nuclear facilities. Although it is impossible of fuel savings from Salem Unit No. 2 for the period from to determine the total amount of the loss that may result February 1, 1985 to March 31, 1986. Due primarily to a from an occurrence at these facilities, the Company combination of lower than anticipated fuel prices and maintains the maximum amount of insurance presently

lower than anticipated generation from Salem Unit No. 2, The Company's indemnification obligation also includes the the energy savings associated with the unit were less than payment of interest, at prime rates, on the indemnification the amount that the Company had guaranteed. As a result, amount and all associated costs of contesting an Internal the Company wrote off $16 million of fuel expenses in Revenue Service challenge. The Company has been the quarter ended March 31, 1986. advised that the Internal Revenue Service has asserted, in In December 1981, the Company sold the federal auditing the purchaser, that the sale was invalid. Although income tax benefits associated with Unit No. 2 of the the purchaser has protested the Internal Revenue Service Salem Generating Station for $53,743,000 in a safe claims, the Company has no assurance that the protest harbor lease transaction. Under the sale agreement, the will be successful. If the Internal Revenue Service claims Company agreed to indemnify the purchaser against the against the purchaser are upheld, compliance with the loss of the tax benefits resulting from any Internal indemnification provisions of the agreement could result Revenue Service claims which render the sale invalid. in a significant charge to income.

15. 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 1986 1985 1986 1985 1986 1985 (Thousands ofDollars)

March 31 $868,635 $815,886 $124,446 $123,810 $166,261 $151, 166 June 30 675,109 669,319 92,179 97,763 128,213 118,859 September 30 803,667 746,388 183,081 94,962 168,705 124,163 December 31 743,458 713,582 165,304 95,970 103,141 131,113 Earnings Applicable Average Shares to Common Stock Outstanding Earnings Per Average Share Quarter Ended 1986 1985 1986 1985 1986 1985 w (Thousands ofDollars) (Thousands) (Dollars)

March 31 $143,699 $128,422 177,843 162,859 $.81 $.79 June 30 105,964 96,212 181,378 168,723 .58 .57 September 30 146,441 101,569 185,171 171,993 .79 .59 December 31 79,255 108,521 188,037 175,401 .42 .62 1986 first quarter results include charges of approximately 1985 third quarter results include a charge of

$13.l million (net ofrelated incomes taxes) resulting approximately $ 34. 7 million (net of related income from PUC's denial of recovery of approximately $9. 75 taxes) resulting from the PUC's denial of recovery of million of replacement power costs and $16 million of approximately $73.0 million of energy costs.

unrecovered fuel expenses guaranteed (see note 14).

Operating Revenues and Operating Income for 1985 and the first three quarters of 1986 differ from the amounts previously reported due to the reclassification to discontinued operations of revenues and expenses associated with the sale ofsteam operations, as follows:

Operating Revenues Operating Income Quarter Ended 1986 1985 1986 1985 (Thousands ofDollars)

March 31 $25,981 $36,413 $2,865 $3,082 June 30 10,106 14,200 51 390 September 30 3,161 4,516 (1,948) (1,722)

December 31 13,400 698

Philadelphia Electric Company and Subsidiary Companies Notes to Financial Statements - Continued

16. Retirement Benefits assets available for benefits may be misleading. The plan is The Company and its subsidiaries have noncontributory of a long-term nature and is funded on a basis consistent trusteed retirement plans applicable to all regular with this concept. The actuarial value of accumulated employees. Pension costs include normal cost for the year plan benefits is, essentially, a hypothetical plan and amortization of unfunded prior service costs over ten termination calculation which does not take into account to twenty years. Approximately 83 % of such costs were future salaries or future service. Net assets, which are charged to operating expenses and the remainder, measured at fair value at January 1, are subject to associated with construction labor, to the cost of new fluctuations in the securities markets and, therefore, may utility plant. Retirement plan costs, which are funded as not be indicative of the plan's long-term funded status.

accrued, were $42,500,000, $46,700,000, and In December 1985, the Financial Accounting

$42,000,000, in 1986, 1985 and 1984, respectively. Standards Board issued Statement of Financial Accounting Pension plan data as of the dates of the most recent Standards No. 87, Employer's Accounting for Pensions.

actuarial valuations is as follows: This Statement supersedes existing accounting principles January 1 for defined benefit pension plans and becomes applicable 1986 1985 to the Company in 1987. The Company believes adoption Actuarial present value of accumulated (Thousands ofDollars) of Statement No. 87 will not have a material impact on its plan benefits financial statements.

Assumed rate of return 7.5% 7.0% In addition to providing pension benefits, the Vested $580,815 $512,639 Company provides certain health care and life insurance Nonvested 7,127 60,990 benefits for retired employees. Substantially all of the

$587,942 $573,629 Company's employees may become eligible for these Net assets available for benefits $854,917 $645,726 benefits if they reach retirement age while still working for the Company. These benefits and similar benefits for Changes in plan provisions, effective January 1, active employees are provided by an insurance company 1986, increased the actuarial present value of whose premiums are based on the benefits paid during accumulated plan benefits by approximately $30.6 the year. The Company recognizes the cost of providing million while the change in actuarial assumptions these benefits by charging the annual insurance premiums decreased the present value by $79.1 million. The to expense. The cost of providing those benefits for actuarial methods and the accounting policies are the approximately 3,400 retirees during the years 1986, 1985 same as those used to determine pension expense for the and 1984 is not separable from the cost of providing prior year. benefits for approximately 10,000 active employees for The preceding tabular disclosures are required the same period. Total premiums amounted to $31.6 under applicable accounting principles. However, the million, $29.3 million, and $26.6 million, for 1986, Company is of the opinion that comparing the actuarial 1985 and 1984, respectively.

present value of accumulated plan benefits with the net Report of Independent Certified Public Accountants To the Shareholders and Board of Directors Philadelphia Electric Company We have examined the consolidated balance sheets of Philadelphia Electric Company and Subsidiary Companies as of December 31, 1986 and 1985, and the related consolidated statements of income, changes in common stockholders' equity and preferred stock, and changes in cash flows for each of the three years in the period ended December 31, 1986. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

In our opinion, the financial statements referred to above present fairly the consolidated financial position of Philadelphia Electric Company and Subsidiary Companies as of December 31, 1986 and 1985, and the consolidated results of their operations and changes in their financial position for each of the three years in the period ended December 31, 1986, in conformity with generally accepted accounting principles applied on a consistent basis.

2400 Eleven Penn Center Philadelphia, Pennsylvania February 2, 1987

Philadelphia Electric Company and Subsidiary Companies Securities Statistics Ratings on Philadelphia Electric Company's Securities Mortgage Bonds Debentures Preferred Stock Agency Rating Date Established Rating Date Established Rating Date Established Duff and Phelps, Inc. 9 3/80 IO 3/80 11 2/83 Fitch Investors Service BBB 9/82 BBB- 9/82 BB+ 9/82 Moody's Investors Service Baa3 1/83 Bal 1/83 bal 1/83 Standard & Poor's Corporation BBB- 9/82 BB + 9/82 BB+ 7/86 NYSE - Composite Common Stock Prices, Earnings and Dividends by Quarters (Per Share) 1986 1985 Fourth Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter High Price $24 1/s $25 1/s $203/s $201/2 Sl7% Sl6% SI6Y8 Sl6%

Low Price $21 5/8 $19718 $171/8 $167/s SI4 $14 Sl3"Ve SI4Y.!

Earnings 42¢ 79¢ 58¢ SH 62<r 59<r 57<r 79<r Dividends 55¢ 55¢ 55¢ 55¢ 55<r 55<r 55<r 55<r RETURN ON AVERAGE RATIO OF EARNINGS COMMON STOCK TO MORTGAGE EQUITY INTEREST Percent 18 limes Covered 3 .00 15 2.50 12 2.00 9 1.50 6 1.00

.50 82 83 84 85 86 82 83 84 85 86

Philadelphia Electric Company and Subsidiary Compani es Financial Statistics Summary ofF.arnings (Millions ofDollars)

For the Year Ended 1986 1985 1984 1983 1982 1981 1976 Operating Revenues (for details see pages 42 and 43) $3,090.9 $2,945.2 $2,898.7 $2,524.9 $2,571.5 $2,358.5 $1 ,183 .6 Operating Expenses Fuel and Energy Interchange 889.3 1,097.8 1,069.9 939 .5 1,079 .0 1,134 .9 454.1 labor 417.2 370.8 339.6 311.2 285 .4 251.3 161.9 Other Materials, Supplies and Services 475.2 440.1 413.8 342 .3 307.4 248.4 80 .6 Total Operation and Maintenance 1,781.7 1,908.7 1,823.3 1,593.0 1,671.8 1,634.6 696.6 Depreciation 222.6 183.0 176.4 163 .4 142.1 128.6 96.5 Taxes 521.6 440 .9 449.l 376.8 370 .8 273.9 181.5 Total Operating Expenses 2,525.9 2,532.6 2,448 .8 2,133 .2 2, 184.7 2,037.1 974.6 Operating Income 565.0 412.6 449 .9 391.7 386.8 321.4 209 .0 Other Income and Deductions Allowance for Other Funds Used During Construction 76.8 176.3 134. 5 108.1 65.7 65 .0 30.1 Limerick Carrying Charges 188.7 Income Tax Credits, net 102.5 133.4 116.4 8 7.9 75.8 63 .2 24.2 Other, net 2.4 (3.5) 0 .2 (3.1) (0.7) 2.5 2.6 Total Other Income and Deductions 370.4 306.2 251.1 192 .9 140.8 130.7 56 .9 Income Before Interest Charges 935.4 718.8 70 1.0 584.6 527.6 452. 1 265 .9 Interest Charges Long-Term Debt 458.9 43 5.4 402.5 330.2 308.9 266 .7 147.6

<§> Short-Term Debt 12.5 17.7 30.9 35.2 32 .0 33 .2 3.6 Allowance for Borrowed Funds Used During Construction (101.6) (257 .2) (220.4) (167 .9) (147.6) (123 .8) (47 .5)

Net Interest Charges 369.8 195 .9 213.0 197. 5 193 .3 176. 1 103 .7 Income From Continuing Operations 565.6 522 .9 488 .0 387.1 334.3 276 .0 162 .2 Income From Discontinued Operations 1.9 2 .4 4.4 2.0 1.9 1.6 2 .4 Estimated Loss on Disposal of Discontinued Operations (1.2)

Net Income 566.3 525 .3 49 2.4 389.1 336.2 277.6 164.6 Preferred Stock Dividends 90.9 90.6 82.7 67.4 57.6 53 .8 39.0 F.arnings Applicable to Common Stock 475.4 434.7 409.7 321.7 278 .6 223 .8 125 .6 Dividends on Common Stock 403.5 373.5 334.3 283 .6 240.5 189.5 107.7 F.arnings Retained $ 71.9 $ 61.2 $ 75.4 $ 38.1 s 38.1 $ 34 .3 $ 17.9 Income From Continuing Operations Per Average Common Share $ 2.59 s 2.55 s 2.67 $ 2.39 s 2.38 s 2.23 s 1.88 F.arnings Per Average Common Share (Dollars) $ 2.60 $ 2.56 $ 2.70 s 2.40 s 2.39 $ 2.2 5 $ 1.91 Dividends per Common Share (Dollars) $ 2.20 s 2.20 s 2.20 $ 2 .12 s 2.06 $ 1.90 $ 1.64 Common Stock Equity (Per Share) $ 18.47 $ 17.97 $ 17.81 $ 17 .99 s 17.93 $ 18.10 s 19.13 Average Shares of Common Stock Outstanding (Millions) 183.1 169.8 151 .8 133 .9 116.5 99 .6 65.6

SUMMARY

OF FINANCIAL CONDffiON (Millions ofDollars)

December 31 1986 1985 1984 1983 1982 1981 1976 Assets Utility Plant, at original cost $11,216.7 $10,572.2 $9,834.1 $8,864 .2 $7,905.7 $7,044.7 $4,747.2 Less: Accumulated Depreciation 2,014.7 1,824.4 1,726.3 1,592.0 1,450.1 1,330.6 860 .3 Leased Property, Net 281.3 338.1 352 .1 364 .0 299.l 270.0 91.6 Net Utility Plant 9,483.3 9,085 .9 8 ,4 59.9 7,636.2 6 ,7 54.7 5,984.1 3,978 .5 Current Assets Cash and Temporary Cash Investments 90.7 188.8 30.4 57 .2 50 .0 30.7 23 .8 Accounts Receivable 375.6 370.9 384.2 338.6 342.2 342 .4 168.0 Inventories 129.7 123.7 150.5 131.1 143.0 132 .2 88.3 Deferred Income Taxes - Energy Costs 44.8 (51.8) (117.7) (76.5) 43.3 17.0 (10.5)

Other 78.6 71.8 137.0 52.3 40.2 35.l 20 .8 Deferred Debits and Other Assets Unrecovered Revenue 112.5 Deferred Limerick Costs and Carrying Charges 195.6 Investments 89.7 87.7 80 .9 99 .4 91.4 77.8 13.2 Loss on Reacquired Debt 76.8 48.6 Other 70.7 86.2 82 .9 80.4 24 .9 31.5 14 .7 Total $10,748.0 $10,011.8 $9,208.1 $8,318.7 $7,489.7 $6,650.8 $4,296.8 Capitalization and Liabilities Common Stock $ 2,833.0 $ 2,602 .0 $2,361.0 $2,110.5 $1,826.2 $1,572 .4 $1,002.8 Other Paid-In Capital 7.8 7.3 6.7 5.9 4.6 3.9 1.7 Retained Earnings 653.1 583.7 523.3 452 .9 423.6 387.2 321.2 Common Shareholders' Equity 3,493.9 3,193.0 2,891.0 2,569.3 2,254.4 1,963.5 1,325.7 0 Preferred Stock:

Without Mandatory Redemption 572.5 572 .5 572.5 522.5 372.5 372.5 372.5 With Mandatory Redemption 374.9 318.3 326.2 284 .9 292 .3 266.9 162.6 Long-Term Debt 4,286.8 4,309.2 3,778.0 3,381.8 3,028.5 2,74 5.7 1,936.4 Total Capitalization 8,728.1 8,393.0 7,567.7 6,7 58.5 5,947 .7 5,348.6 3,797.2 Current Liabilities Short-Term Debt 1.0 260.0 267.5 64 .7 54.2 7.2 Long-Term Debt Due Within One Year 108.6 80.8 50.4 21.3 36.1 36.9 Lease Obligations Due Within One Year 69.4 76.3 68 .3 61.5 32.5 53.9 10.6 Accounts and Dividends Payable 222.1 185.l 200.l 179.9 188.5 188.9 83.9 Taxes Accrued 86.1 58.5 40.3 25 .8 65.9 68.4 20 .2 Deferred Energy Costs 88.2 (101.7) (229.9) (149.3) 85.4 31.3 (19.9)

Interest Accrued 90.7 93.0 91.1 91.8 99 .8 82.3 43.2 Other 80.0 72.0 127.2 54.1 24.7 18.l 4.6 Deferred Credits and Other Liabilities Capital Lease Obligations 212.0 261.8 283.8 302.5 266.6 216 .1 81.0 Deferred Income Taxes 695.0 502.6 373.3 346.5 290.5 273 .5 110.8 Unamortized Investment Tax Credits 320.1 302.4 299.4 249.7 296.0 204.0 88.0 Other 47.7 87.0 76.4 130.2 106.1 75.4 33 .1 Total $10,748.0 $10,011.8 $9,208.1 $8,318.7 $7,489.7 $6,650.8 $4,296 .8

Philadelphia Electric Company and Subsidiary Companies Operating Statistics ELECTRIC OPERATIONS 1986 1985 1984 1983 1982 1981 1976 Output ( Millions ofKilowatthours)

Steam 7,864 9,4 55 11 ,085 10,4 57 8,598 9 ,931 13 ,385 Nuclear 17,125 8 ,3 59 6,462 5,520 10,743 7,464 4,937 Hydraulic 1,848 1,484 2,085 1,739 1,581 1,397 2,065 Pumped Storage Output 1,176 1,235 1,100 979 1,126 1,101 1,062 Pumped Storage Input (1,661) (1 ,7 54) (1 ,579) (1,427) (1,665) (1,624) (1,506)

Purchase and Net Interchange 4,258 10,252 11 ,975 12,181 11,120 11 ,173 7,666 Internal Combustion 269 178 425 491 178 283 792 Other 382 1,254 528 36 Total Electric Output 31,261 30,463 31 ,553 29,940 31,681 30,253 28,4 37 Sales ( Millions ofKilowatthours)

Residential 8,900 8 ,440 8,515 8 ,467 7 ,877 8 ,014 7,585 Small Commercial and Industrial 4,022 3,731 3,543 3,284 3,142 3,115 2,755 large Commercial and Industrial 15,068 14,920 14,881 14,478 14,178 14,916 14,662 All Other 993 1,044 1,061 1,003 1,012 1,005 1,271 Service Territory 28,983 28,135 28,000 27,232 26,209 27,050 26 ,273 Jersey Central Power and Light (Salem Unit No. 2) 1,395 346 3,352 1,218 Total Electric Sales 28,983 28,135 29 ,395 27,578 29,561 28,268 26,273 Number of Customers, December 31 Residential 1,263,465 1,245 ,481 1,230,883 1,217 ,635 1,206,944 1,200,238 1, 137,544 Small Commercial and Industrial 127,797 124,7 19 121 ,676 119,292 118,407 117,016 115 ,422 large Commercial and Industrial 4,668 4,881 5,100 5,437 5,616 5,790 5,747

<> All Other 763 773 751 751 762 746 2,345 Total Electric Customers 1,396,693 1,375 ,854 1,358,4 10 1,343 ,115 1,331 ,729 1,323,790 1,261 ,058 Operating Revenues (Millions ofDollars)

Residential $1,023.6 $923 .9 $854.9 $744 .0 S694.4 s643 .7 $373.2 Small Commercial and Industrial 437.0 388.7 360.2 316.6 310.6 285.9 149.3 large Commercial and Industrial 1,103.3 1,061.8 1,008.5 877 .4 922.3 917.1 442.9 All Other 135.5 141.8 145 .1 139.4 118.3 109.5 59.4 Service Territory 2,699.4 2,516.2 2,368.7 2,077 .4 2,045.6 1,956.2 1,024 .8 Jersey Central Power & Light (Salem Unit No. 2) 67.0 30.5 135.4 45 .9 Total Electric Revenues $2,699.4 $2 ,516.2 $2 ,435 .7 $2,107.9 $2 ,181.0 $2,002 .1 Sl ,024 .8 Operating Expenses (Millions ofDollars)

Operating expenses excluding depreciation $1,966.0 Sl ,974.2 $1 ,858.5 Sl,592.0 $1 ,688.4 S1,586.5 $750 .2 Depreciation 206.7 168.2 163.0 150.9 130.2 117.3 88.0 Total Operating Expenses $2,172.7 $2 ,142 .4 S2 ,021.5 Sl,742.9 Sl ,818.6 Sl ,703 .8 S838.2 Electric Operating Income (Millions ofDollars) $ 526.7 s 373 .8 s 414.2 s 365.0 s 362.4 s 298.3 $186.6 Average Use per Residential Customer (kilowatthours)

Without Electric Heating 6,177 6,034 6,160 6,319 5,875 6,022 6,298 With Electric Heating 16,661 15,923 17,293 16,523 16,813 18,054 22 ,154 Total 7,097 6,820 6,960 6 ,990 6,544 6,699 6,710 Electric Peak Load, Demand (thousands of kws) 6,134 6 ,034 5,925 5,879 5,691 5,731 5,346 Net Electric Generating Capacity -

Year End Summer rating (thousands of kws) 7,870 7,599 7,765 7,974 8,006 8,006 7,742 Cost of Fuel per Million Btu $1.18 Sl .72 $2.22 $2 .25 Sl.57 $2.10 Sl.24 Btu per Net Kilowatthour Generated 10,844 10,843 10,920 10,906 10,918 10,930 10,529

GAS OPERATIONS 1986 1985 1984 1983 1982 1981 1976 Sales (Millions of Cubic Feet)

Residential 1,856 1,810 1,941 2,168 2,442 2,446 2,34 2 House Heating 25,731 23 ,227 25 ,4 29 22 ,981 24 ,237 24,675 24 ,540 Commercial and Industrial 33,834 36,254 41, 145 39 ,043 41,660 45,670 33,390 All Other 578 1,209 1,282 672 422 127 89 Total Gas Sales 61,999 62,500 69,797 64 ,864 68,761 72,918 60,361 Gas Transported for Customers 3,907 10,262 3,794 789 Total Gas Sales & Transported 65,906 72 ,762 73,591 65,653 68,761 72 ,918 60 ,361 Number of Customers, December 31 Residential 68,590 69,632 70,794 72,501 76,638 78,426 89,459 House Heating 225,010 217,840 211,984 206,443 198,910 193,038 162,993 Commercial and Industrial 24,884 24 ,234 23,442 22 ,810 22 ,324 21,578 19,669 Total Gas Customers 318,484 311,706 306,220 301 ,754 297,872 293,042 272,121 Operating Revenues (Millions ofDollars)

Residential $ 18.0 $ 18.7 s 19.0 s 19.1 s 18.1 s 15.4 s 8 .7 House Heating 189.8 185.4 191.7 165 .8 147.1 128.5 73.3 Commercial and Industrial 177.7 214.1 243 .7 227 .3 221.1 209.7 76.1 All Other 2.0 5.2 5.6 3.0 1.8 0.5 0.2 Subtotal $387.5 $423.4 $460.0 $415 .2 $388.1 $354.1 $158.3 Other Revenues (including Transported for Customers) 4.0 5.5 3.0 1.8 2 .3 2.3 0.6 Total Gas Revenues $391.5 $428.9 $463.0 $417.0 $390.4 $356.4 $158.9 Operating Expenses (Millions of Dollars)

Operating expenses excluding

<E>

depreciation $337.3 $375.4 S413.9 $377.6 S354.l $322.0 s128.1 Depreciation 15.9 14.8 13.5 12.7 11.9 11.3 8 .4 Total Operating Expenses $353.2 $390.2 $427.4 $390 .3 $366.0 $333.3 S136.5 Gas Operating Income (Millions ofDollars) $ 38.3 $ 38.7 s 35.6 $ 26.7 $ 24.4 $ 23.1 s 22 .4 ELECTRIC SALES GAS SALES (including Salem Unit & TRANSPORTED fllo. 2)

Billions of Billionsof - - - - - - -

kilowanhours 30 Cubic Fee1 90 75 60 30 15 82 83 84 85 86 82 83 84 85 86

- Salem Uni1No. 2 Sales

Philadelphia Electric Company and Subsidiary Companies Shareholder Information Stock Exchange Listings Annual Meeting Most PE Securities are listed on the New York Stock The Annual Meeting of the Shareholders of the Company Exchange and the Philadelphia Stock Exchange. will be held on April 8 , 1987, at 10:30 A.M. at the Philadelphia Electric Power Company Debentures are Pennsylvania Hall Auditorium, Philadelphia Civic Center, listed on the Philadelphia Stock Exchange. 34th Street & Civic Center Boulevard, Philadelphia, PA.

Common stock shareholders of record at the close of Dividends business on February 27, 1987, are entitled to vote at this The Company has paid dividends on its common stock meeting.

continually since 1902 . The Board of Directors normally Notice of the meeting, proxy statement, and proxy will be considers common stock dividends for payment in March, mailed under separate cover. Prompt return of the proxies June , September and December. will be appreciated.

The Company estimates that the $2.20 per share dividend paid to common shareholders in 1986 is fully taxable as FormlO-K dividend income for Federal income tax purposes. Form 10-K, the annual report filed with the Securities and Exchange Commission, is available, without charge, to Dividend Reinvestment and Stock Purchase Plan shareholders upon written request to Philadelphia Shareholders may use their dividends to purchase Electric Company, 2301 Market Street, PO. Box 8699 ,

additional shares of common stock through the Philadelphia, PA 19101 , Attn: Financial Division, S21-1.

Company's Dividend Reinvestment and Stock Purchase Plan. Philadelphia Electric pays all brokerage and service Shareholders fees . Customers of the Company who are not shareholders The Company has 294 ,715 shareholders of record of may enroll in the plan by making a one-time purchase of common stock, an 11% increase in 5 years.

common stock directly from the Company. All shareholders have the opportunity to invest additional Transfer Agents and Registrars funds in common stock of the Company, whether or not PHILADELPHIA ELECI'RIC COMPANY - Preferred and they have their dividends reinvested - also with all fees Common Stocks borne by the Company.

Registrars: Mellon Bank (East) N.A.

Over 34 % of the Company's common shareholders were Four Mellon Bank Center participants. In 1986, they invested more than $100 Philadelphia, PA 19102 million through the Plan, including cash payments.

Information concerning this Plan may be obtained from Morgan Shareholder Services Trust Co.

D. P Scott, Treasurer, Philadelphia Electric Company, 30WBroadway,NY,NY10015 2301 Market Street, PO. Box 8699 , Philadelphia, PA Transfer 19101.

Agents: Philadelphia Electric Company 2301 Market St., Phila. , PA 19101 Comments Welcomed The Company always is pleased to answer questions and Morgan Shareholder Services Trust Co.

provide information. Please address your comments to 30WBroadway,NY,NY10015 Mrs. L. S. Binder, Secretary, Philadelphia Electric PHILADELPHIA ELECI'RIC COMPANY - First and Company, 2301 Market Street, PO. Box 8699, Refunding Mortgage Bonds Philadelphia, PA 19101. Trustee: Fidelity Bank, National Association Inquiries relating to shareholder accounting records , Broad & Walnut Sts. , Phila., PA 19109 stock transfer and change of address should be directed to New York Philadelphia Electric Company, 2301 Market Street, PO.

Agent: Morgan Guaranty Trust Co. of NY, Box 8699, Philadelphia, PA 19101 , Attn: Stock Transfer 30WBroadway, NY,NY10015 Section, S6-4 .

PHILADELPHIA ELECI'RIC COMPANY - Debentures PHILADELPHIA ELECTRIC POWER COMPANY (A Toll-Free Telephone Line Subsidiary) - Debentures Toll-free telephone lines are available to the Company's Trustee: The Philadelphia National Bank, shareholders for inquiries concerning their stock Broad & Chestnut Sts. , Phila. , PA 19101 ownership. When calling from outside of Pennsylvania, call 1-800-223-7326 . From within Pennsylvania, call New York 1-800-242-7326. Local Philadelphia calls should be made Agent: Irving Trust Co., One Wall Street, to 841-5795 . NY, NY 10015 General Office: 2301 Market Street, PO. Box 8699 , Phila.,

PA 19101. (215) 841-4000 .

Directors Officers Officers

'John H. Austin , Jr. James L. Everett Lucy S. Binde r President and Chief Operating Officer Chairman of the Board and Chief Secretary of the Company Executive Officer Donald P Scott William T. Coleman , Jr. , Esqu ire Joh n H. Austin , Jr. Treasurer Senior Partner of the law firm of President and Chief Operating Officer O'Melveny & Myers James D. Lync h Richard G. Gi lmore Assistant Secretary M. Walter D'Alessio Senior Vice President, Finance and President and Chief Executive O.fficei; Chief Financial Officer ]. Robert Causton Latimer & Buck, Inc. (Mortgage Assistant Treasurer Banking and Real Estate John S. Kemper Development) Senior Vice President, Engineering and Jon A. Katherine Production Assistant Treasurer

'James L. Eve rett Chairman of the Board and Chief Edward G. Bauer, Jr. William M. Lennox.Jr.

Executive Officer of the Company Vice President and General Counsel Assistant Treasurer Clifford Brenner William S. Gaither Management Changes:

Vice President, Corporate President, Drexel University On April 28 , 1986 , the Fi nance and Communications Accounting Department was realigned as

'Robert F. Gilkeson fo llows:

Charles L. Fritz Chairman of the Executive Committee Ri chard G. Gil more was elected Senior Vice President, Personnel and of the Company Vice President, Fi nance and Chief Industrial Relations Financial Officer Ric hard G . Gilmore Joseph W. Gallagher Morton W. Ri merman was elected Vice Senior Vice President, Finance and Vice President, Nuclear Operations Pres ident, Finance and Accounti ng Chief Financial Officei* of the Company Raymond C. Wi lliams was elected Vice Raymond F. Holman President, Rates Vice President, General

'Robe rt D. Harrison Administration Donald P Scott was elected Treasurer Vice Chairman, john Wanamaker, Joseph F. Paq uette , Jr. tendered his Philadelphia ( Merchandising) S. Joseph Kowalski resignation as Vice President , Finance Vice President, Engineering and and Accounting, effective Apri l 30 ,

Paul R. Kaiser Research 1986 .

Chairman Emeritus, Tasty Baking Company ( Diversified Kenneth G. Lawrence On May 23 , 1986 , Albert G. Mikalauskas Manufacturing) Vice President, Commercial was elected Vice Presi dent, Transmission Operations and Distribution, succeeding Thomas W.

'Joseph C. Ladd Coppock, who ret ired Ju ly 1, 1986 .

Chairman and Chief Executive Officer, Albert G. Mika lauskas O n Nove mber 24 , 1986 , the Engineering Fidelity Mutual Life Insurance Vice President, Electric Transmission and Research and Electric Production Company and Distribution Departments were realigned as fo llows:

Phi lip G. Mulligan John S. Kemper was elected Senior Vice Ed ithe]. Levit, M.D.

Vice President, Gas Operations Pres ident, Engi neering and Production President Emeritus and Vice Chairman of the Board, National Joseph W. Gallagher was elected Vice Board of Medical Examiners A. Lewis Parry, Jr. President, Nuclear Operations Vice President, Purchasing and S.Joseph Kowa lski was elected Vice

'Joseph ]. McLaughlin General Services President, Engineering and Research President and Chief Executive Officer, Alvin ). Weigand was elected Vice Beneficial Mutual Savings Bank Morton W. Rimerman Vice President, Finance and President, Electric Production Director Change: Accounting Vincent S. Boyer, Senior Vice President, William S. Fishman's term expi red Nuclear Power, and Shields L. Daltroff, March 31 , 1986 Alvin]. Weigand Vice President, Electric Produ ction, Vice President, Electric Production reti red March 1, 1987 .

  • Member of the Executive Committee O n November 24 , 1986 , Kenneth G.

Raymond C. Wi llia.ms Lawrence was elected Vice President, Vice President, Rates Commerc ial Operations, succeed ing William B. Morl ok, w ho retired February 1, 1987 .

Philadelphia Electric Company BULK RATE 230 1 Market Street U.S. POSTAGE PAID PO Box 8699 Philadelphia PA Philadelphia PA 1910 1 Permit No. 378

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