ML17138A784

Annual Rept 1978 for Allegheny Electric Cooperative,Inc

ML17138A784
Person / Time
Site:	Susquehanna
Issue date:	12/31/1978
From:	Curtis N PENNSYLVANIA POWER & LIGHT CO.
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ML17138A785	List: ML17138A784 ML18031A261
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NUDOCS 7909140327
Download: ML17138A784 (455)

Text

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SUSQUEHANNA UP-DATE On January 10, <<1978, Allegheny Electric Cooperative, Inc. became 10% owners of PP&L's Susquehanna Nuclear plant near Berwick.

Construction of the plant is about two-thirds complete.

However, commercial operations of the two 1,050,000 kilowatt units will be delayed for approximately six months, mainly due to the work load of the Nuclear Regulatory Commission {NRC) as a result of the TMI incident. The new target date for Unit I is July, 1981.'ork on the outer shell of the cooling tower for Unit 1 has resumed. Construction stopped April 27, 1978, after a scaffold collapsed on a similar tower in West Virginia killing 51 workers from another company. The Susquehanna cooling tower was only 20 feet short of its final height of 540 feet when this occurred.

A 15 volume Final Safety Analysis Report and a three volume Environmental Report was filed with the NRC as part of the license application to operate the Susquehanna plant. This took 90,000 hours0 days <br />0 hours <br />0 weeks <br />0 months <br /> of preparation time and included hundreds of items, such as the plant's impact on employment, housing, taxes, zoning, agriculture, recreation, transportation, water, air, vegetation, animals, soil and the reaction of plant neighbors to the sounds of construction.

As part of the Susquehanna project, a 340-acre natural park, Susquehanna Riverlands, is being built near the plant site as a wildlife preserve, with observation areas to enable visitors to view wildlife close at hand.

In June, 1978, the Susquehanna Energy Information Center, which is also built near the plant site, was opened to the public. The Information Center explains, in layman's language, how nuclear fission is used to create steam which, in turn, is used to power the turbine-generator. The center includes many interesting energy exhibits with emphasis on nuclear power.

PR ESI IDENT'S REPORY An adequate supply of energy is extremely important for all of us to continue to live as we do. A total lack of all forms of energy is not a realistic prospect. There is a realistic prospect of diminishing supply that will create real problems in some areas. It is Allegheny's responsibility to see that all its members have an adequate supply of electricity for the future at the lowest possible cost to the consumer. To accomplish this, Allegheny is working toward owning a largpr percentage of their own generation and transmission facilities along with the utilization of one of the area's renewable resource... our falling waters... to generate electricity.

To do this, we are presently trying to get authorization for the U.S. Army Corps of Engineers hydro project at Raystown Dam near Huntingdon. Raystownwouldhelp cut the cost of purchasing expensive peaking power which is currently generated by very expensive natural gas and oil-fired generators. We have also completed studies on the feasibility of building a low-head hydro project at an existing dam site which is now under consideration at REA. Along with this, Allegheny is studying the possibility of joint ownership of two 400 MW anthracite-fired generating units.

This hard coal, low in pollutants is found in sufficient quantities in the northeast area of Pennsylvania. If these coal-fired units are developed, they would help stimulate the local economy as well as provide generation for our future needs.

At the same time, it makes good sense that we make every effort possible to increase our efficiency of operations and stretch out what resources we have today so that they will meet our needs just as long as possible through "load management." Load management is not a pipe dream. It is a tested, tried and proven means of improving the efficiency of electric systems which we will be utilizing soon. Utilities must build facilities to meet peak demand of all of their consumers and it makes good sense that if we can reduce that peak by spreading it out over more hours of the day, everyone will gain.

These are trying times and 'each year our work becomes more complex and difficult. Only by working together in the true cooperative spirit, can we bring our consumers an adequate supply of electric energy for the future at the lowest possible cost.

With the members understanding and support, we can be assured of success.

AILLEGHENY BOoD~IRDo QF DolllREC70oBS PRESIDENT Jim Henderson Sussex VICE PRESIDENT SECRETARY TREASURER Myron Ludwick John Anstadt Robert Sterrett Warren Sullivan Central BOARD MEMBERS Harris Horn Dennis Shaffer John Drake Benjamin Slick A.D. Stainbrook Adams Bedford Claverack New Enterprise Northwestern

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Hiram Walker Clair D. Buterbaugh Uoyd Dugan, Sr. Robert E Leonard Don Hill Somerset Southwest Central Tri-County United Valley

My report this year is devoted to the "leadership" responsibilities that have been thrust upon all Power Supply Cooperatives as a result of our nation's crisis.

The largest problem facing the average family today is the constantly increasing cost of energy. I am referring to all forms of energy including gasoline, other petroleum fuels, coal, uranium and, of course, electricity. With long lines at the gas pump, the public is finally convinced of an energy crisis. If new generation is delayed and we have brownouts, I'm sure all doubts will vanish. The recent 30%

increase in gasoline prices proves that energy is the largest budget item.

Energy conservation, therefore, becomes of greater importance. A very important addition to Allegheny's staff was the recent employment of an Energy Advisor to direct our Energy Conservation Program. Our energy conservation van is on the road helping Allegheny's Member Systems perform informational and educational programs on how to conserve energy.

I am happy to report that Allegheny has demonstrated its leadership position in promising full and complete cooperation with REA Administrator, Robert Feragen's request for all power supply cooperatives to participate in research and development of "alternate" sources of energy. We are actively participating in wind energy development and generation using methane gas from coal mines. The amount of methane gas from coal mines that is being wasted staggers your imagination. Allegheny continues to study the development of hydro-electric projects.

Another leadership area is "joint-action". Allegheny, in cooperation with the Pennsylvania Municipal Electric Association (PMEA), will soon introduce what is called "Joint-Action/Joint-Agency Legislation" in the General Assembly. This will allow municipal utilities to join together with other utilities to achieve economy of scale in power supply programs.

A source of fuel for generation now appears to be Pennsylvania's anthracite coal reserves. The recent action by the Environmental Protection Agency to eliminate scrubber requirements on anthracite-fueled plants is a tremendous step in using this fuel to generate electricity. We are presently studying this possibility.

In conclusion, I express my most sincere thanks and appreciation to all Allegheny Directors, Managers and employees for making 1978 a year of progress and giving us the support to continue our "leadership" responsibilities as we look at the future.

The Allegheny Electric Cooperative, Inc. still faces the The loss of this PASNY power to our fourteen rural most serious crisis of its history by the potential loss of its electric cooperatives, would have a staggering effect on only low-cost power source from the Niagara Power Project our rural consumers adding S100-$ 200 per year to their of the Power Authority of the State of New York. electric bills. Increases in electric costs for people who are least able to afford them.

In 1977, a new tax on out-of-state. utilities was enacted.

It adds a 4.5% Gross Receipts Tax on export electricity. The State Representative David S. Hayes, has introduced New York State legislature reactedby adopting a resolution legislation (House Bill 852), that asks for the repeal of this memorializing Governor Carey of New York to not renew Gross Receipts Tax. Staff members from Allegheny and the the Allegheny contract until the Pennsylvania legislature member-cooperatives are working day and night with the took action to repeal this tax. At present time, Allegheny is State legislature to effectuate the successful repeal of this operating on a day-to-day supply contract extension. discriminatory tax. A September vote is expected, on the bill.

REVIEW OF POWER COSTS As of December 31, 1978, Allegheny's average $ 1,446,103.17 because of an FERC decision relating to purchased power cost from our five power suppliers cases dealing with Pennsylvania Electric Company and reached 20.12 Mills/KWH or 2.012C/KWH. Last year, Metropolitan Edison. This money was not refunded to the Allegheny's average cost reached 20.11 Mills/KWH. At member cooperatives because both of these companies first glance, it appears that average costs remained appealed the FERC decision in the United States Court ot constant for the 12 month period of 1978. However, that is Appeals. Fortunately, Allegheny was able to winboth cases not entirely the case. Total cost dollars'ose from before the court and this rather large refund will now be

$ 31,124,700.43 in 1977 to $ 32,497,504.81 in 1978. This made to the member cooperatives at the 1979 Summer represents an increase of $ 1,372,804.38 or 4.4% in Meeting.

purchased power costs. Coupled with this increase in cost, Allegheny's total systems power requirements increased Aside from purchases made from the Power Authority of from 1,547,343,211 KWH in 1977 to 1,615,219,722 KWH the State of New York, each of Allegheny's four wholesale in 1978 an increase of 67,876,511 KWH or 4.4%. power suppliers filed wholesale rate increases before the Mathematically, even though purchased power costs rose, FERC in 1978. Present estimates are that the Penelec average costs remained relatively constant for the year. increase amounts to approximately $ 5.6 million or 24.7%

and increases our average cost from Penelec from 33.4 In conjunction with Allegheny's average cost of Mills/KWHto an estimated 41.3 Mills/KWH.The Met-Ed purchased power, the cost of wholesale power purchased increase amounts to approximately $ 1.1 million or 31%

by each of our member cooperatives from Allegheny and increases average cost from Met-Ed from 36.2 increased from 20.93 Mills/KWHin 1977 to an average of Mills/KWH to an estimated 45.8 Mills/KWH. Small in 21.95 Mills/KWHin 1978 an increase of 1.02 Mills. In comparison, the West Penn increase amounts to only total dollars, the member cooperatives paid a total of $ 42,000 or 1.2% and increases West Penn's cost from

$ 35,459,816.11 as compared to $ 32,383,249.22 in 1977. 22.41 Mills/KWHto approximately 22.69 Mills/KWH.The This represents an increase of $ 3,076,566.89 or 9.5% Jersey Central increase amounts to approximately during the year. Of this total increase, 44.6% was a direct $ 548,000 or 22.1% and increases average Jersey Central result of increased power costs incurred by Allegheny and costs from 28.08 Mills/KWH to approximately 38.0 the remaining 55.4% was due to increased revenue Mills/KWH. In total, the result of these four major rate requirements which Allegheny needed to fund a number of increases will cause Allegheny's total purchased power future power supply projects, mainly URADCO which is the costs to increase some $ 7.2 million or by approximately fuel for the Susquehanna Steam Electric Station, 20%. Average cost is expected to increase from 20.12 increased engineering and legal fees, and other board- Mills/KWH to approximately 25 Mills/KWH. It appears approved, budget-related items such as the hydro studies, that the days of cheap electrical energy are gone.

etc.

Fortunately, through the efforts of Allegheny's special During 1978, Allegheny's total purchased power cost counsel William C. Wise, Southern Engineering Company represented 91.6% of our total operating revenue. of Georgia, and the Allegheny staff; each of these major Fortunately for Allegheny and each of our member rate increases were contested before the Federal Energy cooperatives, the 130 megawatts of firm hydro power and Regulatory Commission and a full five-month suspension associated energy which we purchase from the Power was ordered in all cases. In fact, the minimal West Penn Authority of the State of New York was still available for the increase was settled with no increase whatsoever to entire year. This purchase of clean, dependable, low-cost Allegheny. Hopefully, once the Pennsylvania Electric hydro power from the Power Authority, saved Allegheny a Company, Metropolitan Edison Company and Jersey total of $ 14,109,247.93 during the year. Any loss or Central Power & Light Company cases come before the reduction of this valuable energy resource would be Commission for further review and debate, Allegheny will disastrous for the rural electric cooperatives throughout succeed in reducing the increases considerably. We are Pennsylvania and New Jersey. convinced that the unfortunate incident at the Three Mile Island Nuclear Generating Facility will play a major role in Turning to current rate-related matters, Allegheny's these rate case discussions.

policy is and has always been, that any cash refund received from one of our power suppliers as a result of rate Next year's Annual Report will hopefully, once again, cases before the Federal Energy Regulatory Commission announce additional refunds to our member cooperatives.

(FERC), will be refunded in its entirety, plus any interest, to Keeping the price of electricity (our most dependable and the member cooperatives. In 1978, Allegheny refunded economical resource) reasonable, has always been one of

$ 109,065.19 to the members as a result of a settlement Allegheny's primary functions for the ultimate member-agreement reached with Jersey Central Power 5 Light Co. consumers throughout Pennsylvania and New Jersey.

Also, Allegheny had planned to refund an additional

William F. Matson Executive Vice President and General Manager Paul N. Tetherow lf[

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Assistant General Manager II IIII C. Donald Blackburn Office Manager William E. Mowatt  %~lijl I

General Counsel 'l!IIIIII!II'obert Horn Coordinator Job Training and Safety William Logan Administrative Assistant

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~h~iaia Representative  !!!Ifll!!!II IllllHllllllllllUlllllllllllIll STP~,IFIF I Wl~!!!!!!!!!!~ IIIIIIIIIIIIIIII<" III<(

Anthony Adonizio Research Assistant '",

Assistant General Counsel gl! Illll!JII1I!llfllllllllllll, Charleen Beachler Typist George Black II"'atricia Printing Specialist Stevens Pat Potteiger PENN LINES Mary Jane Branigan Jan Ivanoff Secretary Editorial Assistant Central File Clerk and Typist Engineering Aide and Secretary Stella Roadcap Elizabeth Brown Roberta IVlitchell Bookkeeper Ginny Swainston Graphic Artist Phototypesetter Secretary William Sarantakas Teanna Byerts Thu Huong Nguyen Job Training and Gary Wobler Production Assistant Bookkeeper Safety Instructor Energy Advisor Pat Gift Richard Osborne Ed Stevens Joseph Zullo Executive Secretary Staff Engineer Accountant Staff Engineer

8 Fil 8 I2ll C [] Go Vatell CGDPer8tive St8@stics 978 '8 Total Sales Total Cost Total Cost of Total of of Purchased Utility Member Co-op Electric Energy Electric Service Power Plant Adams s 7,598,710.20 s 7,073,452.75 s 4,299,792.54 s 20,446,658.31 Bedford 2,645,441.19 2,509,251.60 1,630,044.24 6,790,351.36 Central 6,284,197.00 5,953,551.00 3,41 2,779.13 14,194,819.00 Claverack 5,1 59,503.00 4,829,388.00 2,900,847.73 14,1 50,280.00 New Enterprise 1,065,233.00 1,038,882.00 679,850.02 1,645,979.00 Northwestein 6,773,057.00 6,269,1 10.00 3,845,061 00 1 6,357,390.00 Somerset 4,815,313.64 4,403,008.37 3,028,280.22 11,847,655.60 Southwest Central 7,066,408.00 6,392,528.00 4,321,954.69 14344~.00 Sullivan 1,437,733;16 1,338,698.07 820,758.33 3,646,476.67 Sussex 2,838.423.00 3,110,544.00 1,608,605.1 7 7,947,149.05 Tri-County: 4,647,792.00 4,447,837.00 2,41 2,767.88 1 5,919,638.00 United 5,1 53,236.00 4,944,890.00 2,494,753.09 1 6,643,91 5.00 Valley 5,620,742.00 5,300,776.00 3,145,237.85 15,763,613.00 Warren 1,851,577.00 1,695,377.00 859,084.22 6,307,380.00 TOTAL $ 62,957,366.1 9 $ 59,307,293.79 $ 35,459,81 6.1 1 $ 166,393,242.99 Number Miles Consumers Total Annual Member of of Per Mile KWH Peak Cooperative Consumers Line of Line Purchased Demand Adams 14,710 2,097 7.0 195,161,300 53,211 Bedford 6,236 1,009 6.2 74,893,200 18,678 Central 19,051 2,717 7.0 156,797.000 33,947 Claverack 11,390 2,151 5.3 1 31,81 6,005 30,621 New Enterprise 2,278 250 9.1 30,758,000 7,870

. Northwestern 13,883 2,150 6.5 176,572,768 40,505 Somerset 8,766 1,712 5,1 134,808,600 34,205 Southwest Central 15,820 2,026 7.8 1 99,41 2,550 45,299 Sullivan 4,082 711 5.7 37,448,044 9,954 Sussex 6,866 382 18.0 73,420,000 17,280 Tri-County 13,027 2,484 5.2 108,488,978 31,492 United 13,766 2,476 5.6 113,516,150 28,263 Valley 13,384 1,979 6.8 143,546,030 35,464 Warren 7,478 941 7.9 38,581,033 11,281 TOTAL 1 50,737, 23,085 6.5 1,61 5,21 9,658 398,070

ALLEGHENY ELECTRIC COOPERATIVE, INC., 3'1 DECEMBER 1978 AND 1977 Assets 1978 19771 Total Utility Plant in Service . S 138,793 137,675 Communication Equipment 57,069 Transmission Station Equipment . 26,989 26,989 Laboratory Equipment 551 Construction Work in Progress 128,442,220 88,824,311 Total Utility Plant S128,665,622 S 88,988,975 Accumulated Provision for Depreciation . 23.376 11.289 Net Utility Plant. S1 28,642,246 S88,977,686 Investments in Associated Organizations . ..... S 4.745,509 S 3,273.735 Cash General Funds . 275,372 13,742 Cash Construction Funds 2,400,289 Temporary Cash Investments . 1,141,000 Specia I Deposits 1,115,000 1,845,380 Receivables . 3,445,466 5,099,472 Total Current and Accrued Assets . S 8,377,127 4 6,958,594 Deferred Debits . 1,025.557 454,351 TOTAL ASSETS S142,790,439 S 99.664,366 Liabilities 1978 1977 Memberships 2,800 S 2800 Patronage Capital 6,388,731 3,220,119 Donated Capital Members . 29,316 29,316 Donated Capital Non-Members . 349 349 Total Margins and Equities 6,421,196 S 3,252,584 Long-Term Debt REA 1 23,91 6,000 Long-Term Debt NRUCFC 86,013,668 NRUCFC Subscriptions . 52,971 Accounts Payable .. 10,865,070 8,933,313 Deferred Credits S 1,535,202 S 1,464.801 TOTAL LIABILITIES ...... .. ~..... S142,790,439 S99,664,366 Member- Revenues 1978 1977 Adams Electric Cooperative, Inc............... S 429979254 S 3,611,651.76 Bedford Rural Electric Cooperative, Inc. 1 630044 24 1,500,1 29.62 Central Electric Cooperative, Inc............... 3,41 2.779.1 3 3,1 30,459.00 Claverack Rural Electric Cooperative, Inc...... 2,900,847.73 2,686,046.00 New Enterprise Rural Electric Co-op, Inc.. 679,850.02 623,565.96 Northwestern Rural Electric Co-op, Assn., Inc.. 3,845,061.00 3,283,533.00 Somerset Rural Electric Cooperative, Inc.. 3,028,280.22 2,693,288.95 Southwest Central Rural Electric Co-op, Corp... 4,321,954.69 3,859,708.00 Sullivan County Rural Electric Co-op, Inc. 820,758.33 750,480.44 Sussex Rural Electric Cooperative . 1,608,605.17 1,456,118.17 Tri-County Rural Electric Co-op, Inc. 2,41 2,767.88 2,1 47,021.00 United Electric Cooperative, Inc. 2,494,753.09 2,1 38,026.00 Valley Rural Electric Cooperative, Inc.. 3,145,237.85 2,895.057.00 Warren Electric Cooperative, Inc 859,084.22 797,585.07 TOTAL S35.459,816.11 S31,572,669.98

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'il 978-OPetretring ENPerIse Allegheny Electric Cooperative, Inc.

COST IN COST IN PERCENTAGE Wholesale Power Cost DOLLARS MILLS/KWH OF TOTAL COS1 Power Authority State of New York (PASNY) 3,680,527.35 5.03 M/KWH 11.12%

West Penn 3,417,733.44 25.24 M/KWH 10.33%

JCP&L 2,019,974.95 27.51 M/KWH 6.10%

Met. Edison 2,780,143.96 30.46 M/KWH 8.40%

Penelec 1 7,031,265.1 7 29.20 M/KWH 61 46%

Sub-Total $ 28,929,644.87 17.91 M/KWH . 87.41%

Transmission Costs (Wheeling for PASNY Power)

New York Companies 624,000.00 0.39 M/KWH 1.89%

G.P.U. Companies. 2,943,859.94 1.82 M/KWH 8.89%

Sub-Total . . S 3,567,859.94 2.21 M/KWH 1 0.78%

Total Power Supply Expense . $ 32,497,504.81 20.12 M/KWH 98.19%

Other Expenses Customer Accts. $ 601,640.1 9 0.37 M/KWH 1.81%

Admin. & General Depreciation & Amortization Total Operating Expense . $ 33,099,145.00 20.49 IVI/KWH 100.00%

PURCHASED POWER SOURCES 1978 BY PERCENTAGE 31 DECEMBER 1978 COST OF OPERATIONS TOTAL KWH 1,615,219,722 DOLLAR DISTRIBUTION WEST JCP&L PENN 4.5% ADMINISTRATION& GENERAL 2C 84% PASNY WEST WHEELING MET-ED PENN PASNY 2C 5.7% 10C JCP&L 12C 6C GPU WHEELING PASNY MET-EDISON 8C 9C 45.3%

PENELEC 36.1% PENELEC 51C

35 AVERAGE MONTHLY WHOLESALE POWER COST 30' 0

25 0

1977- 0/HOLESALE POWER COST hC 20 AVERAGE ANNUAL'1976

)5 10 JAN MAR: ~

MAY JUL SEPT NOV JAN MAR MAY JUL SEPT . NOV FEB -APR' JUN AUG . OCT DEC FEB APR JUN AUG. OCT DEC Yearly Kilowatt Hours Monthly Megawatt Demand Percentage of Increase 400 1700 4.39%

1600 350

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1500

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8.75%

lh 1400 300 o i Z c0 0 4

.' 1300 OP 6 77%

250 1200 6. 88%

14 39%

1100 ~ e4 200 a

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1000 1978 1977 1976 900 150 1971 "

1972 1973 1974 1975 1976 1977 ~1978 JAN. FEB MAR APR MAY JUN 'JUI. AUG SEPT OCT tl6V OEC

ALYERNAYE ENERGY SOURCES-Every day, millions of cubic feet of methane gas are program. Allegheny Electric has held meetings on this with exhausted into the air to rid coal mines of dangerous Westinghouse Electric and coal companies to develop this methane gas. source of energy.

In most other nations ot the world, this methane gas is These pilot projects willbe small. When the technology is captured and used to generate power. Under the direction fully developed, the benefits from this generation should of REA Administrator Feragen's request to pursue the improve. With the crisis this nation faces in solving its development of the use of "alternate" sources of energy, energy problems, Allegheny Electric is devoted to do its Allegheny Electric is cooperating with Westinghouse in share in supporting the efforts of the Department of studying pilot projects in western Pennsylvania. Energy. We also will cooperate as an REA borrower in its Westinghouse Electric received a federal grant to obtain "alternate energy" programs, which in turn can be a some first-hand operating experience and data. There are benefit to the member-owners of Allegheny Electric coal companies interested in cooperating with this Cooperative.

ANYIHIRACQT.E~

COAIL-IFIIRED GE NERAYIION Pennsylvania State Univegsi yy undeg.Fgr~t A yote~tiagly'ignificant tu bling block from the United State~sDepartme~t++E~erg, wffichpa~sthe Go/ernogs~Ene gy C, neil and studied large~yateeinthracite mipnilg.~dring a Qer+syrtte(ested'-iq this project-N be ver period'from 1976 through party~1978. This coyceg4ed~s<the pp~e tjapor unreasonabl study identified sjtes viipe~r~a thracite vjlhygyI'ng,chai ges ijjlp~ol ~'d,in g)ttjttg the power production, suffigidnt t6 fFet a mo e n-yiz inyveg~d to ultima d~ o d centers. Tj1e rol)-

generating ~st tfopvtrvoutdljre ppssjbte a~~re atep~w fgayjibv -b en e pens'rve~btjjj~te b the stucjy yves to&evaluate stimujatiprt in

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~e5s vagina+ y-rtow'~~jaus] pro~(()p s )o Until the consumer has m~lea right to expect eneratiag efectrfcisg~vta&~tge gece~ delivery of energy from one~r a tognother, announcem~6tWbp~t e~<Fnvi ontn~fa this country cannot solve its e ergy.crisis. The Pr tact on>Agency to pgerrlp~f t$ e~+ se~of national grid is the primary ample of-a long-pfjtr-.'( ifs'vn gi dion't fitrPfscoatfsverploujdn sutp1\urr ndtjta~tegfslation that nbtys receive early s cfCscruftjrarshweeeo~tjus1ffi~d~T ~~eonsfderadon by tho e'interested in the future ea aterj'prfcgafngthracfteduato1gg+etc st o ogr na 'on.

mining made it%~use aq a fidel.~os a drea nisse scSbgbers could be etfgrinated~ tn ia o has~i'oneness.ofyoday's energy Wsttegheny Eibctric hasvcvorkeke with the hotagesatnd thb fact that other fuels for Gorfernor's Energy Gouncil on~he Ese sneratron-ate~re e toudprobtems, it could be anthracite at every opportunity apl we th t~ perhaps the day of anthracite continue 1o study the prospects~t using sneralto has tndee .a rived.

f Snthracite.

Due to the deepening energy crisis, Allegheny and it' Since heat pumps are popular in the milder climates, a distribution cooperatives have strengthened their heat pump water heater has been developed. In most conservation program in an effort to avoid unnecessary cases, they can be installed almost anyplace, although the waste of energy and find new alternatives that would be basement seems to be the most effective, as it does offer a beneficial for both the cooperative and the consumer. certain amount of dehumidification when it runs. It also requires a heating element as a back-up.

In this spirit of cooperation, Allegheny has adopted a policy for wind energy conversion systems. The policy is Allegheny has filed with the Department of Energy, an one that will allow a member-consumer to use the energy application for a grant to help develop a waste-type water from the wind to the fullest extent including the sale of heater. The experiment would use waste heat from two excess energy that can be produced and supplied into the different areas, the chimney and the attic, to assist in the

.power system. There is an Increasing interest in the use of conditioning of water. This is still pending.

wind energy to generate electricity andit is necessary that it's benefits be explored..

Allegheny -is researching the possibility of having It was reported in the 1977 Annual Report that an energy conservation taught in all Pennsylvania schools. It would ~ van was purchased. It's purpose was to assist the be beneficial for all if students were taught the benefits for distribution cooperatives in their endeavors to encourage AllAmericans to be energy efficient. conservation. It will be used'at co-op meetings, fairs,

. schools and other events. It contains different techniques,

.which can be followed, that makes the home more A week in October had previously been set aside and comfortable and energy efficient.

designated's Environmental Week. Allegheny feels, To ensure the energy van's effectiveness, Allegheny, it' because of the energy crisis that conservation should also distribution cooperatives and REA are producing video be'aught. tapes to illustrate these techniques. The'se tapes will be New alternatives in ways to conserve energy are made available through REA to any cooperative in the continuously being'revealed, To enable Allegheny and the nation. They will also be reproduced as slide distribution cooperatives to evaluate the effectiveness of presentations.

these new alternatives, testing programs are constantly One of the video tape programs being produced is to proceeding. illustrate the retrofitting of a fuel,oil furnace. This A solar water heater, which 'has been under tests this procedure may save as 'much as 13% on fuel oil past year, seems very effective, although it still requires a consumption. This tape also can be viewed on the energy heating element as,a back-'up." van.

tennsy vania t Ura ectric ooperatives Providing Low Cost Dependable Electricity Serving in 47 Counties 150 Directors - 700 Employees 23,085 Miles of Line 1.6 Billion Kilowatt-Hours Purchased Annually GIRARD 1 50,737 Member-Owners $ 166 Million Invested in Plant WARREN SUSQUEHANNA l

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ALLEGHENY ELECTRIC COOPERATIVE, INC.

212 LOCUST ST. P.O. 1266 ~ HARRISBURG. PENNSYLVANIA17108 ~ PHONE 717 233-5704

PENNSYLVANIA POWER 8 LIGHT COMPANY Reyi~latorg THE ATTACHED FILES ARE OFFICIAL RECORDS OF THE DIVISION OF DOCUMENT CONTROL. THEY HAVE BEEN CHARGED TO YOU FOR A LIMITED TIME PERIOD AND MUST BE RETURNED TO THE RECORDS FACILITY BRANCH 016. PLEASE DO NOT SEND DOCUMENTS CHARGED OUT THROUGH THE MAIL. REMOVAL OF ANY PAGE(S) FROM DOCUMENT FOR REPRODUCTION MUST BE REFERRED TO FILE PERSONNEL.

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Highlights 1976 1975 Customers, at End of Period ............ ~ .. 936 Thousand 918 Thousand Kilowatt-hours of Electricity Generated 28.5 Billion 27.5 Billion Operating Revenues $ 644 Million $ 544 Million Capital Provided by Investors, at End of Period $ 2.4 Billion $ 2.1 Billion Return on Average Capital Provided by Investors . 8.83% 8 76%

Fixed Cost Rate of Long-Term Debt and Preferred and Preference Stock, at End of Period . 7.91% 7.76%

Common Stock Data:

Return on Average Common Equity ...... 11.61% 12.52%

Earnings Per Share $ 2.68 $ 2.87 Dividends Declared Per Share ........... $ 1.80 $ 1.80 Times Interest Earned Before Income Taxes 2.62 2.80 Pennsylvania Power & Light Company is an electric utility providing service to 936,000,homes and businesses over a 10,000-square-mile area in 29 counties of central eastern Pennsylvania. Principal cities in the PPBL service area are Allentown, Bethlehem, Harrisburg, Hazleton, Lancaster, Scranton, Williamsport and Wilkes-Barre.

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'ate FllE Dociment'EGULATORY DOCKET Contents Chairman's Comments 1 The Year in Review 3 Analysis of Statement of Income 13 Flnancials 17 Notes to Financial Statements 22 Statistical Summary 30 Dividends and Stock Prices 31 Officers and Directors 32 PP8 L's New President-Inside back cover

Chairman's Comments (Ij)//p i.

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After years of unheeded action is inhibited and constricted warnings, severe shortages of by a complex amalgam of uncertainties natural gas finally occurred, and risks. The need for clarifying gpgyig .~ and supportive governmental energy precipitated by the prolonged winter cold. One more signal that we r.

aj policies is overwhelming.

have a serious long-term energy The adoption of effective new energy supply problem in this country. It is now fj. policies depends on whether beyond debate that when energy Americans have the will to do what is shortages hit, our society is crippled. required.

The harsh evidence of lost employment The geologic and economic I~>

and lost production is indisputable. u realities underscore the need for more The winter weather conditions also ,r investment for facilities, fuel and created a large number of operating

/ advanced research, as well as difficulties for generating units. Even j~ more investment for conservation; It is so, electric loads were generally met, going to be an expensive process, with though capacity margins were tight. quick payoffs being unlikely. For the The so-called excess generating time being at least, all signs capacity of some utilities criticized here point to continuing higher prices for energy.

and there a few months ago totally This is not the answer people are disappeared in the winter cold. One bright looking for. It seems they would prefer to spot was the good performance of nuclear hear that higher prices for energy are caused by power plants, reflecting their freedom from the some kind of energy fraud or fix, or by the heedless limitations of conventional fuel supply and actions of uncaring managements, notions which delivery. carry the comforting thought that if "the scoundrels" If it had not been for industrial plant shutdowns can be identified and properly dealt with, consumer because of natural gas curtailments, which reduced energy problems will disappear. So, all too often this electrical loads that would otherwise have been on is what people are told, frequently coupled with a few line, there would have been critical shortages of rousing denunciations of "obscene profits." Although, electricity. such talk has an unmistakable popular appeal, it is This is a reminder that the basic issue of building pernicious nonsense. It obscures reality and ahead to have adequate generating capacity and fuel promotes cop-out attitudes. It discourages new to meet tomorrow's electrical needs is very much with investment and frustrates the development and us. Lead times for power plant siting approvals and implementation of the basic long-term energy construction are lengthening. PP&L's most recent decisions that are necessary.

look indicates that, as things now are, we have to We want our investors and customers to know that allow about 13 years to bring a new coal-burning while we think it is misleading to give people false power plant on line at a new site. The implications are hope that some way can be found to protect them scary. This means that, apart from capacity now in from the reality of higher costs of energy, we service plus capacity under construction, there is recognize that it is our job in PP&L to run a taut ship nothing that can be done to add more coal/nuclear- and to exert every effort to hold down costs and to based power supply for 1984/1985. Indeed, we are improve our performance. We appreciate that we are practically at 1990. Every day is increasing the hazard living in an everchanging world where new of future shortages of electric power supply. Yet opportunities for better performance regularly occur.

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We understand that it is our responsibility to seek energy crunch is the present fragmentation of energy them out and put them to good use. jurisdictions within federal departments and agencies We realize that we cannot see ourselves as others and within the Congressional committee structure.

see us. Therefore, we believe in the concept of The proposed federal energy department could be a outside audits to monitor management effectiveness most significant first step towards establishing an and operating efficiency. While no one is perfect, and adequate management system for energy. Other no one likes to be criticized, our aim is to have a counterpart housecleaning steps involving the constructive attitude about the outside audit process Congress and federal-state relationships in energy in which we welcome suggestions and advice on could then be pursued with some reasonable chance where and how we can do better. of success.

We also want our investors and customers to know Without further delay we must face the fact that our that outside forces, over which we have little or no patchwork quilt of piecemeal energy management is control, are the main causes for the higher costs and not working. Certainly we need natural gas, but prices of energy. For example, we do not have control natural gas cannot meet all our energy needs. The over the fact that the exploration and development of same is true for our other major fuel sources oil and energy resources in more remote and more difficult coal and uranium. All form intermeshed parts of the locations, and at greater depths, is bound to be more nation's overall energy supply. The unavailability of costly. We do not consider that we are responsible for any one is disruptive of the whole. That wasn't always the national policies and decisions that have caused so, but it is now. The management of energy as a total inflation with all its consequent cost increases. Nor system is the only safe escape route that still remains did we establish the host of new and costly open to us.

environmental standards that now have to be met, We close these comments with the good news that with inevitable reflections in higher prices for electric Robert K. Campbell, a former executive of Western service. Our ability to get things done promptly and at Electric's New York-based Manufacturing Division, low cost has not been helped by the endless stream of has joined us as president, effective February 1. This new governmental requirements which have decision, made by the board of directors after many proliferated reports, hearings, investigations and all months of consideration, is a major step in the kinds of technical studies. process of providing for the continuing strong The saving grace in this outside-imposed cost management of the Company. Bob Campbell is 47.

situation is that it does not arise from any intention to He brings to PPLL a fine combination of experience increase costs. On the contrary, the difficultyrather and "young blood." The inside back cover of this stems from an excess zeal to do good things for report provides an in-depth look at our new president.

people without sufficiently considering the cost I have become chairman of the board and will consequences beforehand. This is really a problem of continue as chief executive officer.

inadequate systems management.

Over time, energy has become afflicted by too many laws, regulations and programs which have Respectfully submitted, different purposes and priorities, and which are nonconnected and unrelated even though they exist side by side. We have now come to the point where we are bogged down in an unacceptable mishmash of Jack K. Busby, Chairman crosscurrents and conflicts. Some government management housecleaning is in order.

It is most encouraging that President Carter has March 1, 1977 proposed to establish a comprehensive, restructured federal energy department headed by Dr. James Schlesinger. We urge investors and customers of PP8 L to support action to this end. We take this position because we are convinced that a central obstacle to the nation's working its way out of the

The Year In Review 1976 Earnings faced by smail users, low income people and the Although earnings available for common stock elderly. The suspension order also initiated the usual

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rose nearly 8 per cent to $ 78.7 million, PP&L's per investigation of the rate request.

share earnings were 6.6 per cent lower for 1976 than a After denial of interim relief because of the lifeline year ago $ 2.68 per share versus $ 2.87 for 1975. provisions PP &Lfiled a substitute request which Contributing factors in the decline were the delay in deleted the lifeline portion.

approval of higher rates to offset the higher costs of The substitute 4 per cent was allowed to become doing business and the diluting effect of an increase effective September 13, 1975, subject to refund, and of 15.3 per cent in outstanding shares. hearings on both steps began.

On December 9, 1975, the PUC suspended the Higher Rates Allowed second stage of the Company's request until March Some help in reversing the downward trend of 19, 1976, to permit further investigation.

earnings came in April and August when the More than 20 public hearings were held between Pennsylvania Public UtilityCommission (PUC)

September 1975 and the end of January 1976. As the allowed higher rates to go into effect.

March 19,1976 statutory deadline drew near it was However, during the 17 months the rate case was apparent that a backlog of rate cases would prevent pending, additional substantial investment was made the PUC from reaching a final decision.

by the Company in facilities to serve our customers.

Likewise our operating costs increased substantially In late February we voluntarily extended the during this period. The result is that our income, effective date to June 1, 1976. By this action the based on rates formulated generally on 1975 cost Company waived its rights to recoup any money it levels, is lagging substantially behind present costs. might later be allowed by law because of the delay in the decision. Because collecting make-up or "back" This "lag" was a significant factor in our 1976 revenues had become such a volatile issue, we earnings picture. If, back at the original March 1976 wanted to remove recoupment as an issue so the rate deadline, we had received the amount we were finally case could be decided on its own merits. Additionally allowed, our earnings per share for 1976 would have we asked the PUC to allow us to collect on a exceeded the 1975 level.

temporary basis, subject to refund, about 4 per cent of It appears that during 1977 we will again have to the 11 per cent still to be decided on. That additional petition the PUC for higher rates to adjust for the amount was allowed to go into effect on April 14.

higher costs of providing service and to compensate investors for the funds they have provided for Because of the heavy workload at the PUC, no new facilities. decision was made by June 1 and PP&L voluntarily extended the effective date and waived recoupment to The Company had originally requested an overall July 1, then again to August 5.

two-step 15 per cent increase back in March of 1975 because the rates in effect at that time were not The PUC on August 4 announced it still needed adequately covering the cost of providing more time and ordered rates then in effect to become electric service. temporary rates. Under law, a recoupment period The first step proposed an increase of about 4 per started with that date.

cent and the second step requested an additional 11 On August 26, 1976, the PUC rendered a final per cent. After public hearings in three cities both decision allowing the remaining 7 per cent increase to steps were suspended because of concern over take effect. PP&L again waived the collection of "lifeline" provisions in the request. We had filed the retroactive charges as being in the best interests of lifeline proposais, which would have exempted from both customers and the Company. This action any increase the first 200 kilowatt-hours of use per allowed us the full 15 per cent we month, to recognize some of the inflation problems originally requested.

PUC Law Revised direction. However, there should be periodic review to test whether, in practice, the reform procedures are During 1976, lawmakers enacted legislation working satisfactorily.

which, when fully implemented, should allow the PUC to be more responsive to both utility and consumer concerns. Economic Recovery Nudges Energy Use Up Reflecting an improving economy, our The most important change in the new law calls use of electricity increased 6.5 per cent customers'ilowatt-hour for full-time commissioners with higher and more during 1976. This followed a 1 per cent growth rate in realistic salaries. In turn, the five commissioners are kilowatt-hour usage for 1975 and a half per cent a given more leeway in setting higher staff salaries, year earlier.

making it easier to retain and attract an adequate, This growth is attributable mostly to the improving highly qualified staff and to support a broad-based expansion of operations. economy after two depressed years. While it is true that colder-than-normal fall-winter weather increased New key positions will be added to the commission fourth quarter sales, and customer bills, significantly, staff. The Office of Administrative Law Judge will warmer-than-normal weather during the early 1976 have full authority to preside over evidentiary heating season practically offset the later increases.

hearings. The Bureau of Conservation, Economic and We consider some growth to be inevitable Energy Planning will monitor progress on energy because of increasing population and upgraded conservation and long-range energy planning.

standards of living but we are sensitive to the high Other legislation created an Office of Consumer costs of growth and are thoroughly committed to Advocate, separate from the PUC. This advocate moderating growth through conservation and wise willrepresent consumers in rate cases before the PUC. energy management. We are basing our long-range Rate case procedure is also being changed planning on a forecast of a compound annual growth effective October 1977. The current practice of allow- rate of about 4.5 per cent. However, wiser and ing prompt and partial rate relief pending comple- more efficient energy use could hold that rate down tion of full rate case proceedings is eliminated. even lower.

Such relief is now made subject to demonstrating an emergency need. 1977 Construction Budget The retroactive surcharge, now mandatory in PP&L's construction budget for 1977 is $ 390 cases where the PUC allows an increase after a delay million (including $ 14 million for nuclear fuel),

beyond nine months, has been repealed. However, if down about $ 18 million from last year's expenditures.

major rate cases are not decided within nine months Slightly over $ 248 million of that is budgeted for our from the date a request is filed, the rates that Susquehanna nuclear plant. The total construction were asked for go into effect automatically, figure for the next five years is almost $ 2.2 billion.

subject to refund.

Another major reform is that utilities are now Hershey Electric Purchased permitted to base their rate requests on a future test PP&L acquired all the outstanding capital stock of year, backed up by appropriate, substantive Hershey Electric Co. (HEC) on December 31,1976 from estimates. In the past, all applications for rate relief Herco, Inc. (formerly Hershey Estates). Terms of the had to be based on a prior test year. purchase had been approved earlier in the year by the PP&L is convinced that strong, capable and PUC and the Securities and Exchange Commission.

independent regulation, which has the public's HEC is a power distribution company only and has confidence, is essential to the interests of consumers no generating plants. HEC purchases power from and utilities. We feel that the total reform package another electric utility to serve the 5,500 enacted last year provides a good step in the right- homes and businesses in its 28-square-mile service

area, and will continue to do so for the two years or plant control room. The simulator will be used for more it takes to integrate HEC's operations into both initial training of plant operators and for required the PPBL system. ongoing refresher training.

The Company expects to complete negotiations Susquehanna Nuclear Project and sign contracts during the first quarter of 1977 for Construction of the twin 1,050,000-kilowatt Allegheny Electric Cooperative Inc., to acquire a 10 boiling water reactor generating units near Berwick per cent ownership in the Susquehanna plant.

continued to progress toward startup in 1980 and 1982. Unit 1 was 37 per cent complete at the end Martins Creek Oil Units of 1976 and Unit 2 progress stood at 25 per cent.

PP8 L's large 820,000-kilowatt Martins Creek Unit 3 Construction milestones for 1976 included the completed its first full year of service in October. It start of the massive cooling towers for both units, worked exceptionally well as a "cycling" unit to meet enclosing the turbine generator building, peak electric demand on our system and on the completion of the concrete pedestal for Unit 1 Pennsylvania-New Jersey-Maryland Interconnection.

turbine-generator and putting in place the reactor pressure vessel for Unit 1. The unit burns residual, or heavy, oil and was Significant events in planning for plant operation designed with operating characteristics that allow it included union agreement on staffing procedures to move its output quickly up or down to meet

• and the beginning of selection and training fluctuating use patterns throughout the day. This is of personnel. one of the oil unit's main operating differences A computerized $ 8-million training simulator from our coal units which have a much slower up/

will provide a full-sized working replica of the actual down cycle.

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Using Unit 3 in this way greatly lessens the need to Fuels use the expensive-to-operate, smaller, stand-by PP &L generating facilities are at the heart combustion turbines which burn number two oil, of our electric supply system. Without fuels, though, which is the same as that burned in home heating our generating plants would be just so much idle systems. machinery. The past year was marked by particularly Unit 4 at Martins Creek, a twin of the one already in significant developments in the area of fuel supply.

service, was synchronized with the PP &L system in December 1976 and, after a shakedown period, will be Anthracite put into commercial operation. Some preliminary results were announced in October 1976, of a year-long study into the feasibility of building an anthracite-burning generating station Pipeline to Martins Creek near anthracite fields located in the Company's The much-delayed 84-mile pipeline from Marcus service area.

Hook, below Philadelphia, to our Martins Creek plant, The study showed that enough coal is available to on the Delaware River above Easton, is finally fuel at least four 400,000-kilowatt generating units for in service.

30 to 40 years.

The project required more than three years for The study also outlined the following factors:

governmental clearances and less than six months for ~ Anthracite is a low sulfur fuel as compared construction. Although the original schedule allowed with most eastern bituminous coal, thus an two years for approval and construction of the line, anthracite plant has the potential for which then appeared to be more than adequate, Unit meeting emission standards without the 3 was completed and ready for operation before cumbersome and expensive sulfur dioxide control construction of the pipeline was even begun. The equipment needed by today's bituminous-coal-delay made it necessary to construct a $ 2.3 million burning plants. However, the final answer will alternate rail-unloading facility to assure fuel for depend on the application of the Clean Air initial operation of Unit 3. Act and related regulations.

Arrangements for tanker unloading and storage ~ Surface, or open-pit, mining is the only practical terminal facilities at Marcus Hook were completed in way to obtain the coal at this time.

early 1976 and oil has been flowing through the ~ The open-pit mining would be larger than pipeline since August 1976. any seen in the hard coal regions to date. It would During the cold weather of January 1977, both of be subject to approval under strip-mining laws the Martins Creek oil units were used extensively to and regulations. We expect approvals help produce the huge amounts of electricity would require a reclamation effort which needed both for our customers and for regional must be planned before the first shovel of earth is electric supply. During that period, unaffected by dug, and which would leave the land in better extreme weather conditions, the pipeline more condition than before the mining took place.

than proved its value. ~ The magnitude of the concepts under Well over 56.6 million gallons of oil were delivered consideration involves apitofaboutone-quarterof through the pipeline to Martins Creek during January. a square mile in area and 400 to 800 feet deep.

If we had still been using the rail facilities we relied on The pit would "move" over a total site of earlier, it would have taken nearly three months to about two to three square miles with constant deliver the same amount of oil under optimum backfilling and reclamation continuing in the conditions. We just could not have gotten that amount mined-out sections as the pit advances.

of oil to those units and a tight electric supply During 1977 the Company will be confirming situation would have been worsened. ownership of mineral rights on the most favorable

sites indicated by the study and doing additional core The result has been a reasonably sure and stable drilling to further refine the information on how much system of long-term supply and delivery of about coal is available and where it is. three to four million tons of bituminous coal a year.

This additional information is required before a Over the years this has meant substantial savings for final decision is made on whether anthracite would our customers.

indeed be an economical fuel. In the past two years, however, there have been This fuel decision would be only a part of an overall serious production problems at our Greenwich and decision on the economics and feasibility of an Oneida mines.

anthracite power plant project. These production problems have been greatly escalating our costs at the same time the open coal Bituminous Coal market, where we purchase the balance of our Since the early 1960s PP&L has been acquiring coal requirements, has been "soft." As a result there has land and developing mining operations to the point been a widening cost gap between our affiliated mine where about 40 per cent of the nine million tons of coal costs and market coal costs.

bituminous coal we need each year is mined at our We are aware that the price advantages of market affiliated sources. coal are real today but may be gone tomorrow since Our mines are operated on a zero;profit basis. Coal most of it is strip-mine, nonunion coal produced produced by these mines is supplemented by outside from limited life reserves.

local purchases which enable us to broaden the use We have undertaken an intensive review of the of our coal-cleaning plants and our unit trains. entire situation. While the final evaluation will not be An open-pit mine using shovel and truck excavation and haulage is one of the methods suggested for use In mining anthracite in a year-long feasibility study.

in hand for several months, our preliminary in the early1980s. For the intermediateandlonger term, judgment, subject to change, is that the possible we are investigating the economic feasibility of short-term advantages of a swing to all market coal getting into the uranium mining business. We have purchasing would be more than offset by the long- secured options on up to 22,000 acres of term cost/supply disadvantages. Utah properties and will continue exploration and Greene County Reserves drilling on the land during 1977. We have the In 1974 and 1975 we acquired coal rights in Greene option to buy the mineral rights if good County in southwest Pennsylvania which added supplies of quality ore are found. We are also about 325 million tons to PP &L's estimated investigating the possibility of joining with several recoverable coal reserves. neighboring utilities, which also have nuclear plants In the rate case decision by the PUC last year, the built or planned, in joint-venture uranium mining investment in these reserves ($ 51 million) was activities. These moves are being considered excluded from the property base on which allowable because of the uncertain long-term market in earnings were calculated. Because of this and the processed uranium.

uncertainties now affecting both electric load growth and financing of new mining facilities, we are Research reexamining our prior plans for development of the The Company continues to be firmly committed Greene County Reserves. to participating in a wide variety of research projects Ninth Unit Train to investigate new ways to provide our customers with quality electric service at the lowest The Company's ninth unit coal train was put into practicable price.

service during the summer of 1976. The 105-car train, along with the eight other coal trains During 1976, nearly $ 1.7 million of our $ 2.7 million already in service, yielded total savings in 1976 research budget went toward funding various of about $ 17 million over costs of transporting the industry-wide electric research projects through EPRI same amount of coal in railroad-owned cars. (Electric Power Research Institute).

The Company has used unit coal trains since 1964 Several EPRI projects are of particular interest when we recognized that savings in transporting coal to PP&L. One of the most important is research into could reduce overall costs of electricity. The fluidized-bed coal combustion that could be an Company fleet now consists of nearly 1,000 cars. alternative to costly sulfur dioxide flue gas scrubbers.

This method burns coal in the presence of limestone Oil which traps the sulfur before it can escape with other PP&L has contracts with two major suppliers boiler gases.

for all of the projected oil needs of our Martins Creek Other EPRI projects include the study of coal units. Each of the suppliers gets its oil from different gasification and liquefaction and the improvement of parts of the world. This gives us a more diverse power plant reliability.

supply and lessens our dependence on only one About $ 360,000 of our research budget went supplier or country for our oil needs. toward the funding of the liquid metal fast breeder Uranium reactor project at Oak Ridge, Tennessee. The With delivery arrangements for the first fuel loads remainder was divided among other projects including in 1980 at our Susquehanna nuclear plant already the study of alternative energy sources the sun, taken care of, we took a number of additional steps in wind, fusion and solid waste and methods 1976 to assure adequate short- and long-term uranium to improve the performance of various power supplies for the plant. plant equipment.

Short-term steps included locating and buying Our total research budget for 1977 is almost an additional 650,000 pounds of uranium for delivery $ 3.5 million.

Service Area Economy for 13 of the 14 key recommendations have been approved by management. Action plans have Even though, on a national basis, 1976 was a year of also been developed for many of the other McKinsey gearing up from the bottom of the 1975 recession, the recommendations.

unemployment rate in our service area rose to 8.6 per cerit from 1975's 7.4 per cent. This rise was Corporate Energy Planning Council attributed primarily to layoffs due to sluggish local As one result of the operational audit, the Company economies.

formed a Corporate Energy Planning Council to Another economic indicator did show positive respond more effectively to the planning and signs. Within our 10,000-square mile area, we had a decision-making challenges facing PP &L today.

net gain of 1,921 industry jobs during 1976 compared The questions which must be answered as part of to a net loss of 1,885 in 1975. However, there was still the planning process are becoming more complex a substantial amount of unoccupied industrial space and difficultto deal with: What will be the demand for available at year-end. More than 100 marketable future electric service? What kinds and sizes of buildings with a total of almost 5.5 million square feet generating units should be built'? Where can are available but unoccupied. necessary facilities be sited'? What rate levels Because of these circumstances, we see no will be needed to raise the capital needed to contradiction in urging conservation and effective build the facilities? How much can load management and energy conservation programs offset the energy use on the one hand, and actively supporting need for new facilities and capital?

area development programs which will help bring in needed jobs on the other hand even though some We have been able to deal effectively with these increased use of energy will result. questions through planning groups which are a part of the various individual Company departments.

Conservation should be an integral part of all use of However, as the pace of change has quickened and energy. But minimizing the use of energy at the the complexity of planning and decision-making has price of undercutting the employment upon which the grown, the need for coordination among planning socio/economic viability of our society depends groups has increased. Such coordination, which has would be solving a problem by creating a worse one. been largely informal, will now be expanded and formalized by the council to provide a sounder basis for decision-making.

Audit Results Final results of a year-long, in-depth study of the Energy Conservation Company's operational effectiveness, conducted by Last year, we realized an estimated 88,000-kilowatt the management consulting firm McKinsey & Co., were reduction in demand growth as a result of completed and made public in March 1976.

customer energy conservation efforts aided by The voluntary study was undertaken to identify PP &L-sponsored programs.

opportunities to reduce costs without decreasing the For our residential customers, conservation quality of electric service and to recommend aspects programs centered around techniques developed at of Company operations that need improvement. our experimental, solar-supplemented energy The study produced 14 key recommendations that conservation home that was built in 1973 northwest can be grouped into four major categories: of Allentown.

strengthening PP&L's financial position; intensifying For existing homes, we are advising that the planning in critical resource areas; tightening installation of additional attic insulation, storm management control; and improving productivity. By windows and doors and weather-stripping February 1977, detailed responses and action plans offers the best opportunity for savings. For a relatively

small initial investment, customers can make Consumer Affairs Programs their home environment more comfortable while 1976 was a year when PP8 L took some further lowering heating and cooling costs over the life of bridge-building steps to close the adversary the dwelling.

gap between utilities and consumer advocates.

The Company is also involved in energy- Our first tentative steps toward an evolving conservation programs for new home construction. consumer-interest program were taken in 1972 when We cooperated with builders in each of our five we discontinued our marketing program and divisions in a Bicentennial Homes Project. The five established our Consumer 8 Community Affairs homes, which included the latest energy-saving Department. Energy conservation and energy construction methods, heating and cooling systems management, along with an increased emphasis on and building materials, were open for public consumer affairs, became primary objectives.

inspection last summer and were visited by more But PP8 L did not jump directly from marketing into than 30,000 people.

a neatly packaged consumer affairs program. About Realizing the cost savings to the customer and the two years were spent mainly listening to consumers, related energy savings, PP&L has adopted higher trying to find out what their frustrations and their thermal standards for residential construction. needs were. Our consumer affairs representatives These new standards, including the use of tongue- attended meetings of organized and-groove styrofoam sheathing, plus energy- consumer groups and we saving requirements for ventilation, water heating experimented with and space heating and cooling systems, became localized programs the foundation for our Energy-Efficient Home trying to find Award Program. where we This program is designed to encourage home could be builders and their subcontractors to use energy- most helpful.

efficient equipment and construction techniques.

So far, 52 new homes have been built under the guidelines of this program.

Efficient use of energy by our commercial and industrial customers was encouraged through our energy management program. Since the program began in 1975, PP8 L has encouraged and helped more than 900 industrial and commercial customers organize energy management teams to improve their energy efficiency.

Of these, 33 businesses have received Company energy management awards which recognize that significant changes and investments have been made to reduce electrical demand and energy use.

Some of the energy-saving measures incorpor-ated by area businesses include the installation of additional insulation, the use of more efficient controls for heating, ventilating and air condi-tioning systems, the addition of heat recovery equipment and switching to higher efficiency lighting systems.

10

The door to better communication opened a bit more There were consumer group representatives, in January 1976 when six representatives of COCO (the government and regulatory representatives and national Conference of Consumer Organizations) and people from 30 other gas, telephone and two from the local POWER (People Outraged With electric utilities.

Electric Rates) group accepted PP &L's invitation to sit Through debate, discussion and forums both sides down with our consumer affairs people and with were able to present their views on such diverse Jack Busby to discuss areas of mutual interest. topics as rate making, profits, pollution, energy Some tough questions were asked and discussion sources, regulation and taxes.

was frank and straightforward. It was a good Most importantly, though, both utilities and the experience for the Company and both sides got to consumerists involved in the conference expressed know each other better. confidencethat theirinvolvementwasasignificantstep From those meetings grew the first Pennsylvania in initiating and encouraging closer discussion and Utility-Consumer Energy Conference held in understanding of the issues which have so greatly Hershey, Pa., in September. The three-day conference polarized differences between electric utilities and was co-sponsored by COCO and PP&L and was their customers countrywide.

significant because, possibly for the first time in the nation, a consumer group and an electric utilitywere organizing a large, formal, joint communication effort.

Providing our customers with satisfactory service is our main More than 275 persons business at PP&L. This montage illustrates (at left) the first attended from 12 states, Pennsylvania Utility-Consumer Energy Conference, co-sponsored the District of Columbia by PPB L and the Conference of Consumer Organizations.

1 The state-of-the-art Customer Interruption Analysis and Canada. system illustrated on the far right, is the backbone for efficient handling of trouble calls and for precise analysis of the seriousness of problems.

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h

/ Q 11

Financing In a run-off election after an indecisive first vote, 1976 was the second largest financing year in the Local 1600 IBEW was certified as the new Company's history with $ 308 million of securities bargaining unit for the 4,500 employees. Another 270 sold. That figure included PP8 L's largest single employees in the Scranton area were already offering ever undertaken in the form of $ 150 million represented by Local 1520 IBEW so that now all of first mortgage bonds. of PP&L's nonsupervisory employees are represented We anticipate our 1977 security sales to be by local units of one national union.

around $ 235 million. This figure is lower than last After the election was certified in late July, year because our construction expenditures have negotiations for a new contract were begun and both somewhat moderated, and our cash needs areexpected sides agreed to work on a day-to-day basis under to be helped by a one-time, catch-up payment from the old contract which expired on July 25.

Allegheny Electric Cooperative for its 10 per cent An agreement was reached on September 8 and interest in our Susquehanna nuclear plant. However, ratified by the unionmembership on September24. The large financing programs are, for the time being, Scranton local had earlier agreed to essentially the an unavoidable way of life for PP8 L, and financing same contract as the new local.

programs for 1978 and 1979 are expected to increase.

We are very pleased with the acceptance of the Terms of the three-year contract called for an 8.5 per Dividend Reinvestment Plan which last year resulted in cent wage increase for 1976, an 8 per cent increase our issuing more than 700,000 shares of common for 1977 and a specially designed wage reopener in stock. The plan allows investment of dividends 1978. Fringe benefits spread over the three years add from all classes of PP&L stock in our common another 3.4 per cent to the contract.

stock at a 5 per cent discount with no brokerage fee. The third year wage reopener and a "meet-and-During 1976, about $ 14.3 million was invested discuss" provision are considered innovations through the plan, $ 7.8 million in reinvested in electric utility contracts.

dividends and $ 6.5 million in optional cash payments. The wage reopener calls for an "either/or" This amounted to 17 per cent of the money we raised decision by an arbitrator if an agreement cannot by selling common stock. be reached through the normal bargaining process within a specified time period. If an impasse were reached, both the union and management would submit their proposals to an arbitrator who Labor Relations must choose one or the other proposal in its entirety.

By majority vote, about 4,500 PP &L employees However, negotiations between the Company chose to be represented by a new union and ratified and union may continue until the arbitrator reaches a new three-year labor contract with the Company a decision. In any event, continuation of the contract during 1976. for a third year is assured.

The prior two-year labor contract between the The meet-and-discuss provision puts a contractual Company and the Employees Independent obligation on both union and management to meet Association had an expiration date of July 25. Under at the request of the other to resolve any contract provisions of U.S. labor law the IBEW (International issues that arise or other subjects of mutual Brotherhood of Electrical Workers) was allowed to file interest. If agreements are reached, they can be a petition with the NLRB (National Labor Relations put into effect by mutual consent.

Board) for a representation election. The UWUA The Company and the union locals seethe meet-and-(UtilityWorkers Union of America), as well as a discuss provision as an opportunity to work no-union option, were also allowed to appear on the out better ways of doing things as well as a means ballot in an NLRB supervised election. of settling disputes in a spirit of cooperation.

12

Analysis of Statement of Income The following analysis highlights changes in the financial results of the Company as reflected on the Earnings Per Share Statement of Income shown on page 17. The periods 12 Months Ended Each Quarter compared are the years 1975 to 1974 and 1976 to 1975. Dollars Per Share 53.10 3.10 Return for Common Shareowner During 1975 and 1976, common shareowners increased their investment in the Company by $ 190 million or 36 per cent through reinvested earnings and proceeds of $ 140million from the issuance of 7.6 million 2.80 shares of new Common Stock.

2.70 Earnings applicable to common stock increased $ 9.4 2.70 million and $ 5.7 million in 1975 and 1976, respectively.

Earnings per share of common stock were $ 2.87 in 1975 and $ 2.68 in 1976. 2.50 Cost of Fixed Income Securities 2.40 The increase in long-term debt interest charges and 1972 1973 1974 1975 1976 dividends on Preferred and Preference Stock was due The Company's 1975 and 1976 earnings have to issuance of securities principally to finance the been adversely affected by the higher costs of providing electric sewice and the lack of timely rate construction of new facilities and the refinancing of relief.

maturing debt with securities bearing higher interest rates. During 1975 and 1976, outstanding long-term debt increased by $ 268 million and Preferred and Preference Stock by $ 145 million. The annual interest Times Interest Charges Earned and dividend requirements on long-term debt and 12 Months Ended Each Quarter Preferred and Preference Stock outstanding at Times Earned (Pre Tax)

December 31, 1976were $ 91.6million and $ 36.6million, respectively.

Interest and Dividend Cost The change from the prior year in interest charges and dividends on Preferred and Preference Stock were:

1975 1976 Millions of Dollars Interest charges Long-term debt .......... $ 16.8 11.9 Short-term debt .......... (3.3) 0.9 Other (0.2) 0.1 Dividends on preferred and preference stock ......... 4.9 8.9 The Company presently has a middle-of-the-road 1972 1973 1974 1975 1976 bond rating by electric industry standards (Rated Interest charges have been Increasing more Double A by Moody's and Fitch's and A Plus by rapidly than the earnings available to cover these Standard 8 Poor's). One of the most important charges resulting In a deterioration of the Times Earned Ratio.

measures in determining a company's bond rating and credit standing is its ability to cover interest payments (See adjacent chart).

13

Bank loans and commercial paper notes are used to Operating Revenues provide working capital and interim construction The change in operating revenues from the prior year financing. Interest on such debt varies from year to year is attributable to the following:

due to the amount of short-term debt outstanding and 1975 1976 Millions of Dollars the interest rates in effect. For more information on Electric revenues short-term debt see Note 4 to Financial Statements on Quantity of sales to:

Ultimate customers .. page 25.

$ 12.8 19.3 Others for resale .... (6.0) 0.3 Energy Sales and Operating Revenues Rate increases .......... 7.4 40.4 Fuel adjustment clauses . 55.3 33.8 The Company derives about 99% of its operating Other (including tax revenues from supplying electric service and the surcharge) ............ 1.6 7.3 balance from supplying steam for heating and other 71.1 101.1 Steam revenues . 1.0 (1.1) purposes in the city of Harrisburg.

Total ..... $ 72.1 100.0 Rates applicable to sales to ultimate customers are regulated by the Pennsylvania Public Utility Commission (PUC) and accounted for 98% of the Company's revenue from energy sales in 1976. The Federal Power Commission (FPC) regulates sales to others for resale.

The Company's total electric energy sales increased approximately 0.8% in 1975. Contractual sales to a neighboring utility, which had resulted in revenues of

$ 6.1 million in 1974, were discontinued in 1975.

Average Price Of Electricity Excluding sales to this utility, the Company's growth in All Customers Cents Por Kwh energy sales was 2.6% in 1975, with residential 3.5 3.5 sales up 5.0%, commercial sales up 7.0% and industrial sales down 2.1%. The reduction in sales to industrial 3.0 3.0 customers was moderated by the addition of a major Fuel Adjustment industrial customer in mid-1974. Excluding sales 2.5 2.5 to this customer, industrial sales would have Tax Surcharge decreased 7.3% in 1975, reflecting the decline in 2.0 2.0 industrial economic activity.

Energy sales increased 6.5% in1976with increases in 1.5 1.5 residential sales of 6.6%, commercial sales of 6.5% and Base Rate industrial sales of 6.6%. The increase in industrial sales 1.0 1.0 during 1976 reflects an improvement in the economy and industrial activity within the Company's service area. For more information on energy sales see the discussion under "Economic Recovery Nudges Energy 1972 1973 1974 1975 1976 Use Up" on page 4.

Rate increases affecting ultimate customers became The above chart shows that the Increase In tho cost of fuel has boon tho main factor In the recent price rise of effective in January 1974 ($ 19.1 million annually),

electricity. The 1976 average base rate for ail customers September 1975 ($ 21.0 million annually), April 1976 Is about the sama as It was In the early 1960s.

($ 20.0 million annually) and August 1976 ($ 37.3 million annually).

The increase in revenues during 1976 due to rate 14

increases reflects a carryover into 1976 of Fuel Expense approximately $ 16.0 million applicable to the Fuel expense is comprised of the following:

September 1975 increase, $ 24.3 million applicable to 1974 1975 1976 the April and August 1976 increases and $ 0.1 million Millions of Dollars from a rate increase affecting resale customers that Cost of fuel consumed became effective in November 1976. For more Electric ............... $ 215.2 269.2 323.1 Steam heat ............ 3.8 4.0 3.2 information on rate filings see the discussion under Total cost of fuel "Higher Rates Allowed" on page 3. consumed ........ 219.0 273.2 326.3 Less increase in fuel costs The Company's tariffs include fuel adjustment deferred to match clauses which adjust prices for electric service for revenues from fuel variations in the cost of fuel used to generate electricity. adjustment clauses .... 26.6 1.6 4.5 Revenues from the fuel adjustment clauses totaled Total fuel expense ... $ 192.4 271.6 321.8

$ 134.5 million in 1975 and $ 168.3 million in 1976, reflecting the increased level of fuel costs and additional energy sales.

Net Cost of Energy The net cost of energy includes fuel expense plus power purchases less power sold to other utilities.

Included in power purchases is the value of electricity generated during the test period for the Company's new Cost of Fuel Consumed generating units. The change from the prior year in the total cost of fuel consumed is attributable to the following:

Fuel 1975 1976 The cost of fuel consumed increased during 1975 and Millions of Dollars Electric 1976 as a result of greater generation of energy and Quantity of electricity increases in the costoffuelspurchased. Thequantityof generated $ 13.3 17.9 energy generated during 1975 increased due to greater Average cost of fuels burned ............ 40.7 36.0 availability of coal-fired generating units and the 54.0 53.9 Martins Creek No. 3 oil-fired generating unit which Steam heat 0.2 (0.8) began commercial operation in October 1975. Total $ 54.2 53.1 Increased generation during 1976 resulted primarily from a full year's operation of the Martins Creek unit.

The average cost of fuels consumed increased during 1975 and 1976 due to the combined effects of higher coal prices and the cost of oil consumed at Martins Creek Unit No. 3, which has a cost per kwh generated approximately twice that of the Company's coal-fired units. The average cost of fuel consumed per kwh Interchange Sales generated was 0.88 cents in 1974, 1.04 cents in 1975 and The change in Interchange power sales from the prior 1.17 cents in 1976. year is attributable to the following:

1975 1976 The cost of fuel consumed which is recoverable Millions of Dollars through fuel adjustment clauses is deferred until the period in which such costs are billed to customers. Quantity of energy sold ...... $ 47.2 (7.9)

Average price of energy sold . 18.4 (5.7)

Interchange Power Sales Other (1.5) 0.9 The total electric energy available for sale includes Total . $ 64.1 ~(12.7 energy generated by the Company's plants and power 15

purchased from others, after deducting Company uses the "Depreciation" section in Note 1 to Financial and line losses. During 1975 and 1976, approximately Statements on page 23.

31% and 29%, respectively, of the total energy available was sold to other utilities under interconnection Allowance for Funds used During Construction arrangements. As required by both the PUC and the The Allowance for funds used during construction FPC, such sales are not recorded as Operating has increased substantially during the past twoyears as Revenues but are credited to Operating Expenses on a result of the Company's extensive construction the Statement of Income. program and the related carrying costs of securities The quantity of interchange power sold increased issued to finance the construction expenditures.

during 1975 due to greater availability of generating During 1975 and 1976 the average rates used to units, the addition of Martins Creek Unit No. 3, the compute the allowance were equivalent to 8.3% and absence of contractual sales to a neighboring utility 7.9%, respectively.

and the Company's relatively favorable generating costs compared, to those of other interconnected companies. During 1976, increased sales to customers reduced the quantity of economic power available for sale to interconnected companies.

During 1976 there was a narrowing of the differential between the Company's cost of generating electricity and the price received for power sold on the interchange, which price reflects a splitting of the difference between the buyer's and the seller's costs of generation. The average price the Company received for interchange power sales was 1.76 cents per kwh in Expenditures For Electric Facilities 6lt lions Of Dollars 1974, 1.97 cents per kwh in 1975 and 1.90 cents per kwh $ 3.0 3.0 in 1976. These amounts were substantially in excess of the Company's average fuel costs. 2.5 2.5 Taxes 2.0 2.0 See Note 9 to Financial Statements on page 26 for information relating to income taxes and other taxes. 1.5 1.5 Wages and Employee Benefits and Other 1.0 1.0 Operating Costs The increases in wages and employee benefits and other operating costs such as materials and supplies, rents and insurance principally reflect the effects of inflation and increases associated with operation and 1976 '77 '78 '79 '80 '81 Total

'77-'81 maintenance of new facilities placed in service.

D Cost of Electric Facilities at End of 1976 0 Expenditures to Construct New Electric Facilities Depreciation and Acquire Nuclear Fuel Increased depreciation expense is due to new Financial health of the Company is necessary to raise the large amounts of money required to finance the facilities placedin service, including Martins Creek Unit construction of electric facilities. Planned construction expenditures in the next five years are expected to be No. 3 which began commercial operation in 1975. For $ 2.2 billion compared to $ 2.8 billion of facilities at the additional information concerning a reduction in the end of 1976, after being In business for 56 years.

Company's composite depreciation rate for 1976, see 16

Statement of income 1976 1975 1974 1973 1972 Thousands of Dollars Operating Revenues (Note 2) $ 644,147 544,129 472,036 384,814 345,792 Operating Expenses Net cost of energy Fuel 321,783 271,636 192,353 125,577 95,220 Power purchases 29,657 37,698 24,176 15,299 13,514 Interchange power sales (160,163) (172,823) (108,723) (70,175) (34,569) 191,277 136,511 107,806 70,701 74,165 Wages and employee benefits 82,583 71,773 67,374 57,421 55,220 Other operating costs . 76,121 68,369 54,489 45,234 39,512 Depreciation 62,478 58,540 52,399 48,837 41,446 Income taxes (Note 9) 43,828 47,298 39,211 33,943 26,086 Taxes, other than income (Note 9) 49.526 40,669 35,571 30,005 25,658 505,813 423,160 356,850 286,141 262,087 Operating Income 138,334 120,969 115,186 98,673 83,705 Other Income and Deductions Allowance for funds used during construction 45,192 36,605 20,732 14,967 14,647 Income tax credits (Note 9) . 14,457 11,201 5,076 91 334 Other net 1,381 3,154 3,418 1,300 (305) 61,030 50,960 29,226 16,358 14,676 Income Before Interest Charges 199,364 171,929 144,412 115,031 98,381 Interest Charges Long-term debt 79,783 67,932 51,149 43,203 36,507 Short-term debt and other . 7,470 6,456 9,946 4,916 3,953 87,253 74,388 61,095 48,119 40,460 Income Before Nonrecurring Credit . 112,111 97,541 83,317 66,912 57,921 Nonrecurring Credit Related to Accounting Change, Net of Income Taxes ($ 4,831) (Note 3) 4,162 Net Income Before Dividends on Preferred and Preference Stock . 112,111 97,541 87,479 66,912 57,921 Dividends on Preferred and Preference Stock ....... 33,368 24,509 19,656 17.191 14,526 Earnings Applicable to Common Stock (Note 3) 3 78,743 73,032 67,823 49,721 43,395 Earnings Per Share of Common Stock (Note 3) (a)

Before Nonrecurring Credit $ 2.68 2.87 2.88 2.57 2.48 Nonrecurring Credit .19

$ 2. 68 2.87 3.07 2.57 I 2.48 Average Number of Shares Outstanding (thousands) . 29,367 25,459 22,067 19,359 17,513 Dividends Declared Per Share of Common Stock $ 1.80 1.80 1.77 1.68 1.64 (a) Based on average number of shares outstanding.

See accompanying Notes to Financial Statements.

17

Balance Sheet Assets December 31 1976 1975 Thousands of Dollars Utility Plant Plant in service at original cost Electric $ 2,090,282 1,992,673 Steam heat 7,896 7,805 2,098,178 2,000,478 Less accumulated depreciation 458,697 406,313 1,639,481 1,594,165 Construction work in progress-at cost 720,544 430,533 Nuclear fuel in process-at cost ........ 20,084 6,529 2,380,109 2,031,227 Investments Associated companies at equity ........................ 15,327 32,221 Nonutility property and other investments-at cost or less 7,548 7,165 22,875 39,386 Current Assets Cash (Note 4) 14,955 14,832 Accounts receivable (less reserve: 1976, $ 1,925; 1975, $ 1,346)

Customers 49,205 36,243 Other 22,857 16,817 Notes receivable (principally from associated company) 29,570 32,178 Recoverable fuel costs . 41,670 37,154 Coal and fuel oil at average cost 74,885 68,318 Materials and supplies at average cost 19,068 22,616 Other 7,219 5,995 259,429 234,153 Deferred Debits 4,884 7,118

$ 2,667,297 2,311,884 See accompanying Notes to Financial Statements.

18

Liabilities December 31 1976 1975 Thousands of Dollars Capitalization (a)

Shareowners investment (Note 5)

Preferred stock $ 231,375 156,3?5 Preference stock 210,000 210,000 Common stock 495,008 412,303 Capital stock expense (deduction) (10,220) (8,801)

Earnings reinvested (Notes 6 and 7) 237,967 212,550 1,164,130 982,427 Long-term debt 1,161,319 1,032,980 2,325,449 2,015,407 Current Liabilities Long-term debt due within one year . 20,675 10,966 Commercial paper notes (Note 4) . 60,012 73,630 Accounts payable 60,342 51,281 Taxes accrued . 12,564 20,199 Deferred income taxes applicable to recoverable fuel costs . 22,060 19,669 Dividends payable 23,002 19,362 Interest accrued 22,589 21,617 Other 11,257 9,719 232,501 226,443 Deferred and Other Credits Deferred investment tax credits 56,526 31,849 Deferred income taxes 36,860 22,713 Other . 15,961 15,472 109,347 70,034

$ 2,667,297 2,311,884 (a) See Schedule of Capital Stock and Long-Term Debt on page 20.

See accompanying Notes to Financial Statements.

19

Schedule of Capital Stock and Long-Term Debt December 31, 1976 Capital Stock (Thousands of Dollars) (Note 5) Long-Term Debt (Thousands of Dollars)

Preferred Stock-$ 100 par, cumulative First Mortgage Bonds 4M'/o, authorized 629,936 shares, 2 /4~lo series due 1977 ............. $ 20,000 outstanding 530,189 shares ....... $ 53,019 3/s'/o series due 1978 ............. 3,000 Series, authorized 5,000,000 shares 2% lo series due 1980 ............. 37,000 3.35'/0, outstanding 41,783 shares ... 4,178 3/e'/0 series due 1982 ............. 7,500 4.40'/0, outstanding 228,773 shares ..

10i%%d'/o series due 1982 ............. 100,000 22,878 3N'/0 series due 1983 ............. 25,000 4.600/o, outstanding 63,000 shares ... 6,300 3%'/o series due 1985 ............. 25,000 7.40'/o, outstanding 400,000 shares .. 40,000 4/s'/o series due 1991 ............. 30,000 8.600/o, outstanding 222,370 shares .. 22,237 4~/s'/o series due 1994 ............. 30,000 5%'/0 series due 1996 ............. 30,000 9.000/o, outstanding 77,630 shares ... 7,763 6%'/0 series due 1997 ............. 30,000 9.24'/o, outstanding 750,000 shares .. 75,000(a) 7/o series due 1999 ............. 40,000

$ 231,375 8~/e'/0 series due 1999 ............. 40,000 9'lo series due 2000 ............. 50,000 7/i'/o series due 2001 ............. 60,000 7/s /0 series due 2002 .............

Preference Stock no par, cumulative, 7h'/o series due 2003 .............

75,000 authorized 5,000,000 shares 80,000 9~/"lo series due 2004 ............. 80,000

$ 8.00 series, outstanding 93/4'/0 series due 2005 ............. 125,000(b) 350,000 shares .................. $ 35,000 9'/"/o series due 2005 ............. 100,000(b)

$ 8.40 series, outstanding 8~/"/o series due 2006 ............. 150,000(a) 400,000 shares .................. 40,000 4A'/0 to 5/o pollution control series A due annually $ 500, 1977-1983;

$ 8.70 series, outstanding 400,000 shares .................. 40,000 $ 900, 1984-2002; $ 7,400, 2003 28,000

$ 9.25 series, outstanding 1,165,500 200,000 shares .................. 20,000(b) Notes

$ 11.00 series, outstanding 7'lo due 1980 20,000 500,000 shares .................. 50,000(b) Other 550

$ 13.00 series, outstanding 1,186,050 250,000 shares 25,000 Unamortized discount and premium-net . (4,056)

$ 210,000 1,181,994 Less amount due within one year ........ 20,675 Common Stock no par, authorized $ 1,161,319 50,000,000 shares, outstanding 30,803,318 shares .............. $ 495,008(c)

(a) Issued in 1976.

(b) Issued in 1975.

(c) Common Stock issued during 1976 and 1975 was as follows (shares and amount in thousands):

1976 1975 Shares Amount Shares Amount Public offering ..................... 3,500 $ 67,935 3,000 $ 51,450 Dividend reinvestment plan ......... 716 14,268 301 5,595 Employee stock ownership plan .... 35 755

~4251 ~82 958 3~301 ~57 045 The amounts shown above for the dividend reinvestment plan exclude installments received at year-end for shares issued in January of the following year (thousands of dollars): 1976, $ 464; 1975, $ 718.

See accompanying Notes Io Financial Statements.

20

Statement of Changes In Financial Position 1976 1975 1974 1973 1972 Source of Funds Thousands of Dollars Operations Net income (1974 includes $ 4,162 nonrecurring credit) . $ 112,111 97,541 87,479 66,912 57,921 Charges (credits) against income not involving working capital Depreciation 62,478 58,540 52,399 48,837 41,446 Noncurrent deferred income taxes and investment tax credits net'............ 31,789 15,701 8,790 11,282 7,984 Allowance for funds used during construction (45,192) (36,605) (20,732) (14,967) (14,647)

Other . 4,669 7,464 520 220 220 165,855 142,641 128,456 112,284 92,924 Outside financing Common stock 82,705 57,763 35,156 40,900 46,940 Preferred stock 75,000 40,000 Preference stock 70,000 25,000 35,000 First mortgage bonds . 150,000 225,000 180,000 108,000 75,000 Other long-term debt . 253 208 360 20,024 8,342 Short-term debt net increase 45,658 20,231 307,958 352,971 286,174 208,924 185,513 Working capital decrease (a) 15,166(b) 3,156 Investment in associated companies decrease 16,894 685 83 Other net . 6,424 2,672 598

$ 497,131 510,778 415,315 327,036 279,118 Application of Funds Construction expenditures . $ 394,238 342,496 267,724 224,496 218,754 Nuclear fuel in process 13,555 2,793 3,736 Allowance for funds used during construction (45,192) (36,605) (20,732) (14,967) (14,647) 362,601 308,684 250,728 209,529 204,107 Securities retired First mortgage bonds 8,000 93,000 15,000 Other long-term debt 3,054 112 18,632 10,041 10,057 Short-term debt-net decrease 13,618 11,879 56,631 24,672 104,991 18,632 66,672 25,057 Dividends on preferred, preference and common stock 86,694 70,686 58,897 50,037 43,330 Working capital increase (a) 15,309(b) 82,753 6,624 Acquisition of Hershey Electric Company ...... 7,855 Investment in associated companies increase . 23,990 Other net 2,427 4,305 3497,131 510.778 415.315 327,036 279,118 (a) Excludes short-term debt and long-term debt due within one year.

(b) The net changes in workinp capital resulted principally from the following: 1976, increases in accounts receivable, accounts payable, and fuel inventory, and a decrease in accrued taxes; 1975, increases in notes receivable, accounts payable, accrued taxes, dividends payable and accrued interest.

See accompanying Notes to FinanciaiStatements.

21

Statement of Earnings ReinvestecI 1976 1975 1974 1973 1972 Thousands of Dollars Balance, January 1 . $ 212,550 185,695 157,113 140,238 125,647 Net Income...... 112,111 97,541 87,479 66,912 57,921 324,661 283,236 244,592 207,150 183,568 Dividends Declared Preferred stock 13,128 9,393 9,393 7,551 6,433 Preference stock . 20,240 15,116 10,263 9,640 8,093 Common stock 53,326 46,177 39,241 32,846 28,804 86,694 70,686 58,897 50,037 43,330 Balance, December 31 (Notes 6and 7) .. $ 237,967 212,550 185,695 157,113 140,238 Notes To Financial Statements December 31, 1976 and 1975

1. Summary of Accounting Policies company's voting securities) are recorded using the equity method of accounting. The Company's Accounting System unconsolidated subsidiaries are engaged in coal Accounting records are maintained in mining operations, holding coal reserves, oil accordance with the Uniform System of Accounts pipeline operations and real estate.

prescribed by the Federal Power Commission The Company believes that its financial position (FPC) and adopted by the Pennsylvania Public and results of operations are best reflected without UtilityCommission (PUC). consolidation of these subsidiaries since they are not engaged in the business of generating and Prlnclples of Consolldaf Ion distributing electricity. If all the unconsolidated The Balance Sheet at December 31, 1976 subsidiaries were considered in the agg'regate as a includes the consolidated accounts of the single subsidiary, they would not constitute a Company and its wholly-owned electric "significant subsidiary" as that term is defined by distribution subsidiary, Hershey Electric the Securities and Exchange Commission.

Company, which was acquired December 31,1976.

All significant intercompany transactions have UtllltyPlant been eliminated. See Note 11 to Financial Additions to utility plant and replacements of Statements. units of property are capitalized at cost. Costs of depreciable property retired or replaced are Associated Companies removed from utility plant and such costs, plus Investments in unconsolidated subsidiaries (all removal costs, less salvage, are charged to wholly-owned) and in Safe Harbor Water Power accumulated depreciation. Costs of land retired or Corporation (representing one-half of that sold are removed from utilityplant and any gains or 22

losses are reflected on the Statement of Income. All The Company does not accrue revenues related to expenditures for maintenance and repairs of energy delivered but not billed.

property and the cost of replacement of items determined to be less than units of property are Fuel Costs Recoverable Under Fuel charged to operating expenses. Ad/ustment Clauses The Company's tariffs include fuel adjustment Allowance for Funds used During Construction clauses under which fuel costs varying from the As provided in the Uniform System of Accounts, levels allowed in approved rate schedules are the cost of funds used to finance construction work reflected in customers'ills after the fuel costs are in progress is capitalized as part of construction incurred. The charge to expense for fuel costs cost. The Allowance for funds used during recoverable in the future through application of fuel construction (Allowance), shown on the Statement adjustment clauses is deferred to the periods in of Income under Other Incomeand Deductions, isa which these costs are billed to customers. See Note noncash item equal to the amount so capitalized 3 to Financial Statements.

and serves to offset the actual cost of financing construction work in progress. Income Taxes Since February 1, 1974, in accordance with The Company and its subsidiaries file a procedures prescribed by the PUC, the Company consolidated Federal income tax return. Income has computed the Allowance rate semiannually on taxes are allocated to the individual companies based on their respective taxable income or loss.

an "after-tax" basis using a specified rate for common equity and the cost of debt and preferred Income taxes are allocated to Operating and preference stock securities issuedin the twelve Expenses and Other Income and Deductions on the months preceding the semiannual computation. Statement of Income. Income tax credits recorded In February 1977, the FPC issued an order which under Other Income and Deductions result established a specific formula to be used in principally from the tax deductions related to interest expense associated with financing computing the maximum Allowance rate, effective January 1, 1977. The Company does not anticipate construction work progress.

in that adoption of the new FPC method will Deferred tax accounting is followed for items significantly effect the amount of Allowance the where similar treatment in rate determinations has Company would otherwise record in 1977. been or is expected to be permitted by the PUG. The principal items are accelerated amortization of De preclatlon certified defense facilities and pollution control For financial statement purposes, the straight- equipment, deduction of costs of removing retired line method of depreciation is used to accumulate depreciable property, that portion of tax an amount equal to the cost of utility plant and depreciation arising from shortening depreciable removal costs, less salvage, over the estimated lives by 20'/o under the class life depreciation useful lives of property. Provisions for depreciation system, fuel costs recoverable under fuel resulted in an annual composite rate of 3.2'/0 in 1976 adjustment clauses, the forced outage reserve and and 3.3'/o in 1975. The lower composite rate for1976 the cost of fuel consumed during the test period of reflects changes made as of January 1, 1976 in new generating facilities.

estimated useful lives of certain facilities in Tax reductions arising principally from the use of accordance with the PUC's August 1976 rate order. the declining balance depreciation method, guideline lives and certain income and expenses Revenues being treated differently for tax computation than Revenues, are based on cycle billings rendered to for book purposes are accounted for under the certain customers monthly and others bimonthly. flow-through method.

23

Investment tax credits, which result in a procedures by the PUC. At December 31,1976 and reduction of Federal income taxes payable, are December 31, 1975 the reserve balance was $ 13.9 deferred and amortized over the average lives of the million and $ 11.9 million, respectively.

related property. During 1976 the Company adopted an Employee Stock Ownership Plan Reclasslllcatlons (ESOP) which permits the Company to claim an Certain reclassifications have been made in prior additional 1'/o investment tax credit. An amount years'mounts to make them comparable to the equal to this additional credit is paid to the trustee classification of such items in 1976.

for the ESOP to acquire Common Stock of the Company for employees. See Note 9 to Financial Statements. 2. Rate Filings In March 1975, the Company filed with the PUC Retirement Plan for a general increase in electric revenues. A The Company has a Retirement Plan composed summary of the rate increases resulting from this of two parts: (1) a noncontributory portion which filing, based on annualized revenues as of July 31, provides benefits for all eligible active employees 1975, is as follows (millions of dollars):

with the full cost absorbed by the Company,and (2) a voluntary portion in which contributions are made Effective Oate of Increase Annual Increase by both employees and the Company, but the full September 13, 1975 (interim) . $ 21.0 cost of past service and Plan improvements is borne April 14, 1976 (Interim) ....... 20.0 August 26, 1976 (final) ....... 37.3 by the Company. Approximately 95'/o of eligible active employees are members of the voluntary $ 76.3 portion of the Plan. Company contributions to the The total increase granted ($ 78.3 million or Plan include amounts required to fund current 14.6'/o) represents the entire amount requested by service costs and to amortize unfunded past service the Company. Revenues for 1976 increased costs over periods of not more than 20 years. See approximately $ 40.3 million over 1975 as a result of Note 8 to Financial Statements. the above rate increases.

The FPC permitted a rate increase affecting Forced Outage Reserve resale customers, amounting to approximately $ 1 A self-insurance reserve is provided to cover the million annually, to become effective in November increased level of power costs which are 1976, subject to refund. Revenues for 1976 include experienced when any of the Company's major approximately $ 0.1 million applicable to this generating units are forced out of service due to increase.

damage caused by accident or other unforeseen insurable occurrences. Increased power costs resulting from purchasing or generating 3. Nonrecurring Credit Related to replacement power at higher costs or loss of Accounting Change interchange sales in excess of $ 0.5 million through The Nonrecurring Credit shown on the 1975 and $ 1.0 million effective January 1,1976 for Statement of Income for 1974 represents the each accident or occurrence are charged to the cumulative effect to December 31, 1973of a change reserve. As to certain of the Company's large in accounting for fuel costs, net of related income generating units, costs chargeable to the reserve taxes. The accounting change related to deferring are limited to $ 10 million since outside insurance is the charge to expense for a portion of fuel costs to carried to cover costs in excess of that amount. The the periods in which such costs are billed to reserve is established on the basis of historical customers through application of fuel adjustment experience and has been recognized inratemaking clauses.

24

In the following summary, earnings "As paper notes outstanding at December 31, 1976 and Reported" includes the Nonrecurring Credit 1975 were 4.7o/o and 5.6/o, respectively.

recorded in 1974, and earnings "Restated" reflects The maximum aggregate amount of short-term the effect of retroactive allocation to prior years of debt outstanding at the end of any month during the Nonrecurring Credit related to the change in 1976 was $ 194.6 million and during 1975 was $ 1 42.6 accounting for fuel costs: million with an average aggregate daily amount outstanding during these years of $ 129.6 million and $ 85.2 million, respectively. The approximate 1974 1973 1972 Earnings Applicable to weighted average interest rate of short-term debt Common Stock (a) during 1976 was 5.5o/o and during 1975 was 7.3'/o, As Reported ......... $ 67,823 49,721 43,395 calculated by dividing the total short-term debt Restated ............ 63,661 51,066 43,161 interest expense for the year by the average Earnings Per Share of Common Stock (b) aggregate daily amount of short-term debt As Reported ......... $ 3.07 2.57 2.48 outstanding during the year.

Restated ............. 2.88 2.64 2.46 (a) Thousands of dollars. 5. Capital Stock (b) Based on average number of shares outstanding.

Common Stock of $ 495,008,000at December 31, 1976 includes $ 464,000 cash installments received

4. Compensating Balances and under a dividend reinvestment plan as Short-Term Debt consideration for 20,852 shares of Common Stock In order to provide loans forinterimfinancing and which were issued in January 1977.

provide back-up financing capability for Each of the following series of. stock contains commercial paper notes the Company had lines of sinking fund provisions designed to retire theseries credit with various banks aggregating $ 200million at a redemption price of $ 100 per share:

at December 31, 1976. Use of these lines of credit was restricted at December 31, 1976 to the extent of Shares to be Redemption

$ 4 million by short-term bank loans to certain Redeemed Annually Period companies involved in fuel supplyoperations. Bank Preferred Stock 7.40'/o Series 16,000 1979 - 2003 borrowings are generally for one year and may be 9.24/o Series (a) 30,000 1981 - 2005 prepaid at any time without penalty. No bank loans Preference Stock were outstanding at December 31, 1976 or $ 9.25 Series (b) 40,000 1977-1981 December 31, 1975. $ 11.00 Series (a) 25,000 1981 - 2000

$ 13.00 Series (a) 12,500 1980-1999 Of the Company's lines of credit, $ 144 millionwas maintained by compensating bank balance (a) The Company has the right to redeem on each sinking fund redemption date additional shares up to requirements (not legally restricted as to the number of shares of this Series required to be withdrawal) and $ 56 million by payment of redeemed annually.

commitment fees. (b) ln January 1977, the Company redeemed 40,000 shares of the Preference Stock, $ 9.25 Series.

Compensating bank balance requirements are on an average annual basis which approximated

$ 13.9 million at December 31, 1976. Commitment Capital stock expense represents commissions fees on an annualized basis approximated $ 0.3 and expenses incurred in connection with the million at December 31, 1976. issuance and sale of capital stock. Of the capital Commercial paper notes are generally sold for stock expense balance at December 31, 1976, periods ranging from 30 to 60 days. The weighted approximately $ 3.0 million applicable to the average discount rates applicable to commercial preferred and preference stock series which are to 25

be redeemed through sinking fund provisions will contributions and certain other minor changes to be amortized to Earnings Reinvested as the comply with the Employee Retirement Income respective series of stock are redeemed. No Security Act of 1974. These amendments increased amortization plan is in effect for capital stock the unfunded past service cost and vested benefits expense applicable to other issues of capital stock. by about $ 3.6 million, and the Company's annual cost by about $ 1.0 million commencing in 1977, including amortization of the increased past

6. Dividend Restrictions service cost over 20 years.

The Company's charter and mortgage indentures restrict the payment of cash dividends on Common Stock under certain conditions. Under 9. Taxes the charter provisions, which are the more limiting, Income tax expense for the years 1976 and 1975 no restrictions are effective on the payment of such is recorded on the Statement of Income as shown dividends out of current earnings. The amount of below:

earnings reinvested free of restrictions under the 1976 1975 charter at December 31, 1976 was $ 193.4 million. Thousands of Dollars Included in Operating Expenses Provision

7. Hydroelectric Projects Federal ........... $ 656 22,547 The Company operates two hydroelectric State . ~ ........... 6,766 8,221 7,422 30,768 projects under licenses issued by the FPC. Certain Deferred income taxes ..... 8,745 3,542 reserves required to be provided under the Federal Investment tax credits, net .. 27,661 12,988 Power Act have not been recorded pending 43,828 47,298 approval of the amounts by the FPC. The Company Included in Other Income and Deductions estimates that such reserves applicable to the years Reduction in provision ..... ~14.457) (11,201) from 1946 would not exceed $ 3.0 million at Total income tax expense $ 29,371 36,097 December 31, 1976.

8. Retirement Plan Investment tax credits of $ 29.5 million and $ 14.5 Obligations of the Company's Retirement Plan million for 1976 and 1975, respectively, have been are currently funded through a Trust Fund. At June reflected as reductions of the provision for Federal 30, 1976, the end of the Fund's most recent fiscal income taxes with equivalent amounts included in year, the Fund's assets at market were $ 92.3 million investment tax credits, net. Investment tax credits and at cost were $ 94.5 million. Pension costs for the eliminated the Company's Federal income tax years 1976 and 1975 were $ 9.8 million and $ 8.8 liability for 1976 and resulted in a credit to the million, respectively. provision for income taxes of approximately $ 5.9 million related to a carryback of investment tax Based on the Fund's assets at cost, at June 30, credits to prior years.

1976 the actuarially computed unfunded past service cost was $ 28.6 million. As of the same date Total income tax expense for 1976 has been vested benefits exceeded the cost basis of the credited by approximately $ 5.0 million Fund's assets by $ 20.0 million. representing adjustments of prior years'ax liabilities. The principal adjustment, related to Plan amendments effective as of July 1, 1976, adoption of the modified half-year convention subject to Internal Revenue Service approval, method of computing tax depreciation in the provide for increased benefits, reduced employee Company's 1975 Federal income tax return filed in 26

September1976, reduced totalincometaxexpense Taxes other than income taxes charged to by approximately $ 2.8 million. operating expense were:

1976 1975 Thousands of Dollars Deferred income taxes result from the following State gross receipts $ 28 320 23 756 items: State capital stock ........ 8,860 7,284 1976 1975 State utility real estate .... 8,052 5,980 Thousands of Dollars Social security and other .. 4,294 3,649 Portion of tax depreciation Total .............. $ 49,526 40,669 under the class life depreciation system ..... $ 6,463 4,540 Forced outage reserve ..... (1,041) (3,726)

Other . 3 323 2,728

$ 8,745 3,542

10. Rentals and Noncancelable Lease Commitments Total rentals charged to operating expense for During 1976, approximately $ 6.8 million of the the years 1976 and 1975 amounted to $ 10.5 million amount provided for 1975 income taxes was and $ 9.5 million, respectively.

transferred on the Balance Sheet from Taxes accrued to Deferred income taxes. Such amount At December 31, 1976 the Company was represents the income taxes applicable to a committed for minimum rentals totaling $ 59.3 deduction claimed on the Company's1975 income million under noncancelable leases expiring at tax return for fuel expenses related to the testing of various dates to 1996. The minimum rentals are as the Martins Creek No. 3 Unit in excess of expenses follows (millions of dollars): 1977, $ 5.6; 1978, $ 5.4; recorded on the books. 1979, $ 5.1; 1980, $ 4.9; 1981, $ 4.5; 1982 through Income tax expense differed from the amount 1986, $ 14.8;1987through1991, $ 11.3;1992through computed by applying the combined Federal and 1996, $ 7.7. These rentals are applicable to the State corporate income tax rate (52.94'/o in both following categories of property: combustion 1976 and 1975) to pre-tax income as follows:

turbine generating equipment, $ 16.6 million; railroad coal cars, $ 27.8 million; computer equipment, $ 11.1 million; and construction cranes, 1976 1975 $ 3.8 million. Generally the leases contain renewal Thousands of Dollars Net'income ................ $ 112,111 97,541 options and obligate the Company to pay Income tax expense ........ 29,371 36,097 maintenance, insurance and other related costs.

Pre-tax income ....... $ 141,482 133,638 The impact upon net income in each of the years Indicated income tax expense at combined 1976 and 1975 would be less than 1'/o if all non-tax rate ................... $ 74.901 70,748 capitalized financing leases were capitalized and Reductions due to: amortized on a straight-line basis with interest Allowance for funds used accrued on the basis of the outstanding lease during construction ..... 23,925 19,379 liability.

Tax deduction in excess of book expense:

Depreciation .......... 15,067 9,131 In December 1976, the Company entered into a Tax and pension cost .. 3,354 2,998 commitment to lease certain oil storage facilities in Other . 3,184 3,143 1977. It is expected that the final lease agreement Total ................. 45,530 34,651 will result in the Company paying lease rentals of Incometaxexpense ......... $ 29,371 36,097 approximately $ 2.8 million annually for a period of Effective income tax rates .... 20 8o/o 27.0o/o 20 years commencing in 1977.

27

11. Acquisition million, including $ 14 million for nuclear fuel and On December 31, 1976 the Company acquired all $ 28 million related to environmental protection of the outstanding capital stock of Hershey Electric facilities.

Company (HEC), an electric distribution company. In connection with providing for its future The acquisition cost of the capital stock and the bituminous coal supply, the Company at December repayment of all debt owed by HEC approximated 31, 1976 had guaranteed capital and other

$ 7.9 million. obligations of certain coal suppliers (including The assets of HEC at December 31, 1976 were owned coal companies) aggregating $ 162.2

$ 8.8 million and the revenues and net income for the million.

year 1976 were $ 11.9 million and $ 0.4 million, respectively. 13. Replacement Cost Data (Unaudited)

The impact of the rate of inflation experienced in

12. Commitments and Contingent Liabilities recent years has resulted in replacement costs of The Company estimates that about $ 1.51 billion productive capacity that are significantly greater will be required to complete construction projects than the historical costs of such assets reported in in progress at the end of 1976. Of this amount, the Company's financial statements. In compliance approximately $ 1.15 billion is related to completion with reporting requirements, estimated of the Company's two nuclear generating units at replacement cost information is disclosed in the the Susquehanna Power Plant. The Company's Company's annual report to the Securities and estimated construction program for 1977 is $ 390 Exchange Commission on Form 10-K.

14. Summary of Quarterly Results of Operations (Unaudited)

Earnings Earnings Per Share Quarter Operating Operating Net Applicable to of Common Ended Revenues Income Income Common Stock Stock (a)

Thousands of Dollars 1976 March 31 ........ $ 166,269 $ 34,360 $ 25,189 $ 17,781 $ 0.67 June 30 149,281 28,006 21,281 13,603 0.46 September 30 .... 149,580 35,241 30,423 21,282 0.70 December 31 (b) . 179,017 40,727 35,218 26,077 0.85 1975 March 31 .......... 150,106 29,833 23,673 18,224 0.78 June 30 . 128,984 26,742 22,248 16,677 0.65 September 30 .. ~... 125,917 30,168 25,542 19,461 0.74 December 31 139,122 34,226 26,078 18,670 0.70 (a) Quarterly earnings per share are based on the average number of shares outstanding during the quarter.

(b) Results for the fourth quarter of 1976 include a reduction inincome tax expense of $ 2 4 million due to increased tax depreciation applicable to Martins Creek Unit No. 4 which began test operation in December 1976 and a $ 2.1 million charge to expense (net of income taxes) to adjust the amortization of deferred fuel costs for the years1970-1 975 to the actual fuel adjustment revenues billed during those years.

28

Auditors'pinion Auditors'pinion Haskins 8 Sells Two Broadway Certified Pubtic Accountants New York 10004 The Shareowners and Board of Directors of Pennsylvania Power & Light Company:

We have examined the balance sheet of Pennsylvania Power & Light Company as of December 31, 1976 and 1975, the related statements of income, earnings reinvested, and changes in financial position for the years then ended and the schedule of capital stock and long-term debt as of December 31, 1976. Our examination was made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

ln our opinion, such financial statements and schedule present fairly the financial position of the Company at December 31, 1976 and 1975 and the results of its operations and changes in its financial position for the years then ended, in conformity with generally accepted accounting principles consistently applied during the periods and on a basis consistent with the preceding year.

February 3, 1977 FISCAL AGENTS SECURITIES LISTED ON EXCHANGES TRANSFER AGENTS FOR PREFERRED, NEW YORK STOCK EXCHANGE PREFERENCE AND COMMON STOCK First Mortgage Bonds, 10N% Series due 1982 Industrial Valley Bank and Trust Company 4%% Preferred Stock (Code: PPLPRB) 634 Hamilton Mall 4.40% Series Preferred Stock (Code: PPLPRA)

Allentown, Pennsylvania-18101 8.60% Series Preferred Stock (Code: PPLPRG)

Irving Trust Company 9.24% Series Preferred Stock (Code: PPLPRM)

One Wall Street Preference Stock, $ 8.00 Series Code: PPLPRJ)

New York, New York 10015 Preference Stock, $ 8.40 Series Code: PPLPRH)

Pennsylvania Power & Light Company Preference Stock, $ 8.70 Series Code: PPLPRI)

Two North Ninth Street Preference Stock, $ 11.00 Series (Code: PPLPRL)

Allentown, Pennsylvania 18101 Preference Stock, $ 13.00 Series (Code: PPLPRK)

Common Stock (Code: PPL)

REGISTRARS FOR PREFERRED, PREFERENCE AND COMMON STOCK The First National Bank of Allentown PHILADELPHIASTOCK EXCHANGE Hamilton Mall at Seventh 4yr% Preferred Stock Allentown, Pennsylvania 18101 3.35% Series Preferred Stock Morgan Guaranty Trust Company of New York 4.40% Series Preferred Stock 23 Wall Street 4.60% Series Preferred Stock New York, New York-10015 8.60% Series Preferred Stock 9% Series Preferred Stock 9.24% Series Preferred Stock DIVIDEND DISBURSING OFFICE FOR PREFERRED, Preference Stock, $ 8.00 Series PREFERENCE AND COMMON STOCK Preference Stock, $ 8.40 Series Treasurer Preference Stock, $ 8.70 Series Pennsylvania Power & Light Company Preference Stock, $ 11.00 Series Two hforth Ninth Street Preference Stock, $ 13.00 Series Allentown, Pennsylvania 18101 Common Stock 29

Statistical Summary 1976 1975 1974 1973 1972 Financial Data Capital provided by investors thousands (a) (b) $ 2,406,136 2,100,003 1,828,888 1,533,861 1,375,031 Return on average capital provided by investors  % (c) . 8.83 8.76 8.49 7.90 7.53 Return on average common equity  % (c) .... 11.61 12.52 12.65 11.89 11.60 Fixed cost rate on long-term debt and preferred and preference stock-% (a) ..... 7.91 7.76 6.82 6.17 5.99 Common stock data Book value (a) (c) $ 23.45 23.17 22.91 22.51 21.78 Dividend payout rate  % (c) ........... ~... 68 63 62 64 67 Dividend yield  % (d) 8.1 9.1 11.5 8.4 6.5 Price earnings ratio (c) (d) 8.3 6.9 5.3 7.6 10.3 Times interest earned before income taxes (c). 2.62 2.80 2.92 3.15 3.05 Number of shareowners preferred, preference and common (a) ............... 184,841 171,766 154,126 142,235 135,399 Sales Data Electric customers (a) 936,219 917,920 902,148 886,378 864,439 Electric energy sales millions of kwh Residential 7,267 6,818 6,494 6,324 5,985 Commercial 4,874 4,575 4,275 4,262 3,933 Industrial 7,481 7.020 7,170 6,881 6,458 Other . 732 700 1,024 1,398 637 20,354 19,113 18,963 18,865 17,013 Sources of energy sold-millions of kwh Generated Coal-fired steam stations 25,751 25,384 24,186 24,782 19,097 Oil-fired steam station (e) ........... 1,947 1,149 Combustion turbines and diesels .... 40 84 247 273 601 Hydroelectric stations .............. 809 859 772 816 824 28,547 27,476 25,205 25,871 20,522 Power purchases 2,126 2,241 1,570 1,968 1,784 Interchange power sales .................. (8,358) (8,757) (6,079) (7,237) (3,586)

Company uses and line losses ............. (1,961) (1,847) (1,733) (1,737) (1,707)

Total electric energy sales 20,354 19,113 18,963 18,865 17,013 Average annual residential kwh use .......... 8,931 8,528 8,287 8.253 8,032 Average price per kwh for all customers cents 3.10 2.78 2.44 2.00 1.99 Generation Data Generating capability kilowatts (a) ......... 5,717,000 5,717,000 4,901,000 4,903,000 4,108,000 Peak demand kilowatts (f) ................. 4,514,000 4,122,000 3,772,000 3,662,000 3,598,000 Generation by fuel sources  %

Coal ~ . 90.2 92.4 96.0 95.8 93.1 Oil (e) 7.0 4.5 1.0 1.1 2.9 Hydro 2.8 3.1 3.0 3.1 4.0 Steam station availability-%

Coal-fired Oil-fired (e)

~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ""

~ ~ 78.1 79.0 72.3 80.6 76.7 68.8 75.4 Steam station utilization  %

Coal-fired ........ ~ 70.6 70.1 66.7 71.6 64.3 Oil-fired (e) 26.4 31.4 Fuel cost cents per kwh 1.17 1.04 0.88 0.50 0.49 (a) Yearwnd.

(b) Includes short-term debt. long-term debt, preferred and preference stock and common equity (c) Reflects retroactive allocation to prior years of Nonrecurring Credit recorded In 1974 related to change In accounting for fuel costs.

(d) Based on year-end market price.

(e) First oil-fired steam station unit began commercial operation In 1975 and the second unit began test operation In December 1976.

(I) Winter peak shown was reached early in subsequent year. In 1976, peak Is that whIch would have occurred If a 50A) voltage reduction had not been In effect.

Actual 1976 peak was 4,425.000 kilowatts.

30

Quarterly Dividends and Market Price of Voting Securities for 1976 and 1975 Reported Market Price-Dollars per Share Quarterly Dividends 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Declared High Low High Low High Low High Low 1976 Common Stock .......... $ 0.45 21% 191/s 20'/i 19'h 21 /4 20 22@ 20%

Preferred Stock 4th% 1.125 53 47 51 ~h 47~/4 52'h 48 54'h 50'h Series 3.35% 0.8375 37'h 34 36 33 36'/4 34 38 36~h 4A0 1.10 51 th 44'/s 50 46 51'ls 47'ls 53th 48 4.60% 1.15 50 48'h 48'h 46 49y4 47'h 52 49 7.40% (a) ............ 1.85 86P 2.15 98 87 95 90 98 92'/s 99'h 95 9.00'lo 2.25 97 92 96 89 97'/4 94 101 98 9.24% (b) 104ih 99'/4 106'h 103 Preference Stock

$ 8.00 .................. 2.00 86 77 87 81% 88 83'h 90@ 82t/4

$ 8.40 ................ ~ . 2.10 89 80'/4 89 82'h 92 87'h 95'h 91

$ 8.70 .................. 2.175 94 82 94 87'/i 94 88 99 91'h

$ 9.25(a) 2.3125

$ 11.00 ........ . ......

~ ~ 2.75 111'h 102'h 112 107 112r/s 109M 114th 109rh

$ 13.00 ................. 3.25 125'h 117'h 124 119 130 120'h 130'h 125 1975 Common Stock ....... $ 0.45 20 15Ys 19r/s 17 ls 19r/s 17s/s 19/s 17%

Preferred Stock 1.125 52 44% 49'h 45'h 49 45'h 49 44 h 4'%eries 3.35% 0.8375 35 31'h 34 33 35 32 35 32'h 4.4p 1.10 50'h 41'h 47'h 43 48 44 46'h 43'h 46p 1.15 50 44 47'h 45'h 47 45 49 45 7.40% (a) ... 1.85 8.60% 2.15 93 79'h 88'h 84 88'h 81 90 82 9.PP 2.25 95 80 90 88 91 88 95 88 Preference Stock

$ 8.00 .............. 2.00 85 69 82 75 81 76 79 74

$ 8 40 .............. 2.10 89 73 85 78'h 84'h 77'/4 84 78

$ 8.70 .............. 2.175 92 79 88'/s 82 88'h 80'/s 87'h 80'h

$ 9.25 (a) (c)

$ 11.00 ............. (d) 103 100'h 106'h 100'/4

$ 13.00 ............. 3.25 120 105 118 111 118 110'h 119'h 112 The principal trading market for all classes of stock is the New York Stock Exchange except for the 3 35%, 4 60% and 9 00% Series Preferred Stocks whIch are listed on the Philadelphia Stock Exchange but are traded principally over the counter. Price ranges for the 3.35%, 4.60% and 9.00% Series Preferred Stocks are based on the best available high and low bid prices during the periods and should be viewed ss reasonable approximations.

(a) Stock was a private placement and Is not publicly traded.

(b) Stock issued June 1976, tho third quarter dividend was $ 2.67 and tho fourth quarter dividend wss $ 2.31.

(c) Stock issued In September 1975, fourth quarter dividend was $ 2.3362.

(d) Stock issued August 1975, the third quarter dividend was $ 1.01 and the fourth quarter dividend was $ 2,75.

31

Officers Dlfectol s JACK K. BUSBY, Chairman ol the Board JACK K. BUSBY, Allentown and Chief Executive Oflicer Chairman of the Board and Chief Executive Oflicer ROBERT K. CAMPBELL, President ROBERT K. CAMPBELL, Allentown ROBERT R. FORTUNE, Executive Vice President, Financial President BROOKE R. HARTMAN, Executive Vice President, Operations RALPH R. CRANMER, Williamsport Member ol Board of Directors-Grit Publishing Company JOHN T. KAUFFMAN, Vice President, EDGAR L. DESSEN, Hazleton System Power & Engineering Physician-Radiologist EMMET M. MOLLOY, Vice Presldont, Human Resource & Development ROBERT R. FORTUNE, Allentown Executive Vice President, Financial LEON L. NONEMAKER, Vice President, Division Operations BROOKE R. HARTMAN,Allentown Executive Vice President, Oporations HARRY A. JENSEN, Lancaster Executive Vice President, Armstrong Cork Company, CHESTER R. COLLYER, Treasurer Manufacturer of interior furnishings and specialty products NORMAN W. CURTIS, Vice President, VIRGINIAH. KNAUER, Philadelphia" Engineering & Construction Lecturer on Consumer Affairs JOSEPH L. DONNELLY, Vice President, Finance W. DEMING LEWIS, Bethlehem President ol Lehigh University LOUISE A. EARP, Assistant Secretary JOHN A. NOBLE, Scranton CHARLES E. FUQUA, Vice President, Susquehanna Division Chairman ol the Board and Chlel Executive Oflicer ol Cleland Simpson CHARLES J. GREEN, Vice President, Harrisburg Division Company, Department stores RICHARD H. LICHTENWALNER, Vice President, RUTH PATRICK, Philadelphia information Services Chief Curator of the Limnology Department, CARL R. MAIO, Vice President, Lehigh Division Academy of Natural Sciences JAMES J. McBREARTY, Vice President, Northeast Division NORMAN ROBERTSON, Pittsburgh Senior Vice President and Chief Economist ol EDWARD M. NAGEL, Vice President, Mellon Bank, N.A.

General Counsel and Secretary JOSEPH T. SIMPSON, Harrisburg HERBERT D. NASH JR., Vice President, Chairman of the Board of Harsco Corporation, Consumer & Community Services Diversified manufacturer of fabricated metal products EDWIN H. SEIDLER, Vice President, Distribution CHARLES H. WATTS II, Vienna, Va.

President and Chief Executive Oflicer of The Wolf BRENT S. SHUNK, Vice President, Lancaster Division Trap Foundation for the Performing Arts JEAN A. SMOLICK, Assistant Secretary Executive Committoo: Jack K. Busby, chairman; Messrs. Campbell, Cranmor, DONALD J. TREGO, Assistant Treasurer Harfman, Jensen and Simpson.

Audit Commluoo: Mr. Jensen, Dr. Patrick and Mr. Watts.

GEORGE F. VANDERSLICE, Vice President and Comptroller 'Mr. Hartman will nof be nomlnatod to the board of directors at tho1977 annuol mooting of sharoownors in view of his rotiromonf on June 1, 1977.

PAULINE L. VETOVITZ, Assistant Secretary "Virginia Knauor, forrnor spoclal assistant for consumer affairs fo Prosldont Ford, was oloclod a PP&L dlroclor offoclivo March 1, 1977. Subsequent to Mrs.

HELEN J. WOLFER, Assistant Secretary Knauor's selection. Clifford L. Aloxandor Jr., who was a director during all of 1976, roslgnod from the board when ho became Secretary of the Army in the Corporate Managomont Commluoo: Jack K. Busby, chairman; Messrs. Carter administration.

Campbell, Fortune, Horlman, Kauffmon, Molloy, Ncnomakor ond Fred Kornot Jr. manager-corporate Administration sorving as lho commlttoo's

~

oxocutivo secretary.

The executive organization chart ct the Company ls included in the PP&L Profile.

The Company files Form 10-K annually with the Securities and Exchange Comrnlsllo. Form 10-K Is composed of this Annual Report to sharoownors and additional Information concernIng the Company and Its operations. ThIs additional Information will be available without charge after April 1, 1977 by writing to Pennsylvania Power & Light Company, Two North Ninth Street, Allentown, Pa. 18101, attention: Mr. George I. Kllne, Investor Services Manager.

32

PAL's New President

<xm4',

Robert K. Campbell, 47, is was assigned to the Public Rela-PPLL's new president. Jack K. I tions Division at Western Electric's Busby, Company president since headquarters in New York City.

1957, moved up to chairman of the In 1965, he was transferred to board while remaining as chief Western's new plant in Shreveport, executive officer. PP&L's board of La., as assistant manager of engineer-directors elected the two to their ing and was named manager the respective positions at the January 26, following year.

1977 board meeting. '

Campbell moved to Allentown in June Campbell had been general manager- 4, 1967 after he was promoted to administration for Western Electric, the manager-development and manufacturing nationwide manufacturing arm of the Bell engineer of the Western Electric Allentown System. The Campbell decision was made by Works. He was advanced to director of man-a special committee of the board which was ufacturing in 1969 and was named general made up of Messrs. Busby, Cranmer, Jensen, manager of the Reading, Pa., Works in 1971.

Lewis and Simpson. The selection followed In 1972, he was named general manager of many months of consideration on whether the the Allentown Works, serving until his appoint-future needs of the Company would best be ment in June 1976 as general manager-admin-served by bringing in from outside an executive at istration for Western Electric's Manufacturing the top level. Division at corporate headquarters in New York.

Campbell is a Chicago native, an Army veteran, Campbell is a registered professional engineer and since 1967 has been an Allentown resident and holds membership in the American Society of very active in civic affairs. His advanced education Mechanical Engineers. He also is a member of the spans three professions. In engineering, he has illinois Bar Association.

a bachelor's degree from the Illinois Institute of Campbell has already begun an intensive pro-Technology and a master's degree in mechanical gram of visiting throughout the Company's service engineering from the University of illinois. In busi- area to get to know as many employees as possible ness administration, he has a master's degree from and to become familiar with the complexities of the University of Chicago. And in law, he holds a the business. He sees a basic challenge in the doctorate of jurisprudence from Loyola University. increasingly difficult task of balancing the often-Campbell joined Western Electric in 1957 as a conflicting needs of the customers PPLL serves, development engineer at the Hawthorne Works the employees who provide the service and the in Chicago, advancing to department chief in 1961. investors who put up the money to make the He was promoted to assistant manager in 1963 and service possible.

PPaL PENNSYLVANIA POWER 8 LIGHT COMPANY Two North Ninth Street, Allentown, Pa. 18101 Telephone: Area Code 215 821-5151 LITHO IH U.S.A.

PENNSYLVAN(APOWER 8c LlGHT COMPANY ~ 1973 annual report Wg ~

HIGHLIGHTS 1973 1972 1971 1970 1969 Revenues thousands $ 384,814 345,792 300,707 255,313 223,388 Net Income thousands . ~

$ 66,912 57,921 48,572 34,935 34,609 Earnings Applicable to Common Stock Amount thousands ................., .. $ 49,721 43,395 37,180 28,509 30,787 As a% of Average Common Equity ....... 11.7 11.7 11.8 10.2 12.5 Earnings Per Share based on average number of shares outstanding $ 2.57 2.48 2.37 1.97 2.32 Dividends Per Share . $ 1.68 1.64 1.60 1.60 1.60 Common Stock Data Reported market price per share High . $ 26 27 26'/4 27'/s 34'/2 Low . $ 19 22s/4 21s/s 20'/s 23'/4 Book value at year end $ 22.31 21.63 20.60 19.62 19.10 Dividend payout rate % 65 66 68 81 69 Dividend yield % (a) 8.4 6.5 6.4 6.8 6.5 Price earnings ratio (a) 7.8 10.2 10.5 12.0 10.6 Utility Plant thousands $ 1,846,332 1,637,040 1,458,707 1,275,866 1,120,022 (a) Based on year-end market price.

Contents The Year in Review 2- 9 The Fuel Situation 10-12 Service Area Map 13 Financlals 14-20 Notes to Financial Statements 20-23 Directors and Principal Officers 24 Cover Photos:

Fronl: PP&L's new Power Control Center in Allentown will be the nerve center of the Company's electric generation and distribution system when it becomes fully operational in May 1974. It features the newest, most up-to-date computer and electronic equipment available. When completed it will be In constant computer communication with the Pennsylvania-New Jersey-Maryland control center at Valley Forge.

(PJM)'nterconnection Back: PP &L's newest power plant, Montour Steam Electric Station at Washingtonville, Pa, north of Danville. Unit No. 2 went into commercial operation in April 1973. Both units ran extremely well throughout the year and played an important part in the Company's improved 1973 earnings.

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PP&L: ENERGY IN PERSPECTIVE (IW'l, g)l(">>"~j f,'jii,,',",'Il.'l',,',i','"",l'lg'('j""jest.

Despite longstanding predictions of im- fort have come from reduced lighting in the planning and development stage.

pending domestic short'ages of oil and and adjustment of thermostats. We rec- We have considered a program to con-natural gas, the severe consequences of ognize that there are limits to how much vert the new Martins Creek units to coal.

the Arab oil embargo have generally reduction can be accomplished by We have decided against such action at come as a surprise. The impact has been changing our living habits. Additional this time because the major reconstruc-so substantial and so abrupt that there conservation results will probably de- tion involved would make both units to-have been widespread feelings of shock, velop more slowly because their realiza- tally unavailable for the next few years-anger and disbelief. And considerable tion will largely depend upon the willing- a period when even their limited output scapegoating. In any event, the recent ness of customers to invest in new and may be most valuable and necessary Mideast events emphasize that the nation more efficient equipment designed to from a customer service standpoint.

was long overdue in facing up to the conserve electricity. Carrying out our construction pro-complex and costly requirements of es- It's too early to predict all the effects gram, which means building the new tablishing a reasonable self-sufficiency reductions in the use of electricity will electric facilities that will help to alle-of energy. Inescapably, we now have have on our earnings. Since our generat- viate the energy crunch, ls interlocked before us a huge and multifaceted task. ing plants are coal-fired we believe those with our ability to raise the money re-Where does PP&L stand in terms of plants will continue to run at full capacity. quired. Since our operations provide only the new energy scenario'? Here are some Any electricity not needed by our cus- about 25 per cent of our construction points that we particularly want to bring tomers can be sold to other utilities. needs, 75 per cent of what we need to to your attention. However, bulk sales to other utilities are build and expand has to be financed by PP&L has a favorable generating ca- generally at a lower price than received the sale of securities to investors.

pacity and fuel position at this time. Gen- from retail customers. Raising new capital depends on in-erating equipment performance is good. Beyond 1974, we expect a resump- vestor confidence. And such confidence, We have adequate capacity reserves. tion of yearly growth rates of seven to in turn, depends upon good financial And no "old" power plants. About 96 per nine per cent. For two main reasons performance by PP&L.

cent of our power generation in 1973 (1) normal growth arising from more peo- In an era of steadily rising costs, peri-came from coal-burning generating units. ple, more jobs, more homes, more goods odic rate increases will be necessary.

In early March, we had an average of 55 and services, and the desire for a better Hopefully, it is well understood that days of coal stocks at our power plants. standard of living, and (2) the throwover obtaining these increases, on a justified However, the supply situation is becom- demand for electricity created by the basis, of course, is what ultimately makes ing very tight. More than half our coal is shortages of oil and natural gas. it possible to finance the new facilities being produced by mines that are en- Based upon our evaluation of growth which our customers depend upon for tirely committed to PP&L's needs on a trends, we are proceeding with our pres- service. It may sound strange, but rea-long-term basis. Our fleet of unit coal ent construction program without ma- sonable and timely rate increases are trains integrates these mines with our terial change. Estimated cost for the next very much in the consumer interest.

main power plants. five years is $ 2.1 billion. The program is The nation can overcome the present One reservation should be mentioned. geared to bringing on line 3.7 million energy problems. It will take time, at PP&L does not and cannot operate as if kilowatts of new generating capacity- least a decade. Plus a great deal of pa-it were a separate electrical island. We two 800,000-kilowatt oil-fired units at tience. Plus large new investments for are part of a very large regional power Martins Creek (in 1975 and 1977) and oil, gas and uranium exploration, for con-supply network. Critical regional short- two 1,050,000-kilowatt nuclear units at struction of new pipelines, refineries, coal ages of fuels for electric generation might our new Susquehanna Station (in 1979 mines, rail facilities and manpower train-require us to operate our facilities in and 1981). Beyond that, additional coal, ing, in addition to new power plants and whatever ways are determined to be nuclear and pumped storage capacity is other electric supply facilities. It will also necessary from the standpoint of the be essential to have a continuing and overall regional/national public interest. total commitment to conservation of In 1974, conservation efforts will energy.

probably result in less than anticipated Our society depends on adequate sup-use of electricity. For the current year, plies of energy. We can do the job that kilowatt-hour sales are forecast to be has to be done if all of us work at it to-19.7 billion instead of 20.7 billion. Never- gether. In PP&L we will do our best to do theless the revised and lower forecast our part.

projects a 4.2 per cent increase over kilowatt-hour sales in 1973. The most Respectfully submitted, noticeable effects of the conservation ef-Jack K. Busby, President March 5, 1974

THE YEAR IN REVIEW In 1973 we recorded measurable We were able to attribute two per obviously cannot afford a wait-and-progress in many areas of Company cent of the reduction in December to see attitude. We must press on with activity. Revenues reached the $ 385 warmer-than-normal weather. The our construction programs.

million mark, up 11.3 per cent over remaining seven per cent represents A significant 1973 milestone in 1972. Part of this rise, of course, the efforts of a great many people to our construction program was the came from the 2.7 per cent rate in- use electricity sparingly. Especially completion and start-up of the coal-crease allowed by the Pennsylvania obvious was widespread coopera- fired No. 2 unit at Montour Steam Public Utility Commission (PUC) ef- tion in not installing outdoor Christ- Electric Station which went into fective June 2, 1973. mas lighting. commercial operation in April of Also, after nine months of PUC in- 1973 and added 750,000 kilowatts to vestigation, and 4,000 pages of testi- our generating capacity. The Com-mony and exhibit material, additional Effects on Construction pany's total generating capacity at rate relief averaging 5.7 per cent was Certainly we have asked ourselves year-end was 4,903,000 kilowatts, granted effective Jan. 10, 1974, for what implications this decline in nearly three times our capability at a total increase of 8.4 per cent or growth may have on our long-term the end of 1963.

$ 28.5 million in new annual reve- construction program. Meanwhile, work continues on two nues. We concluded that we cannot re- 800,000-kilowatt oil-fired units at the Kilowatt-hour usage increased 5.7 gard the decline as more than a tem- Martins Creek site on the Delaware per cent over 1972 in the residential porary leveling-off of the long-term River where we already have two category, 8.4 per cent in the com- growth rate. People can only con- small coal-fired units. At the end of mercial area and 6.5 per cent in the serve so much. For example, they 1973 Unit No. 3 was 68 per cent industrial sector. The overall rate of can't go on setting thermostats back complete and No. 4 was 11 per cent growth was 10.9 per cent, including an additional five degrees every win- complete. The first of the big new contracted sales to the Metropolitan ter. We feel that demand will drop units is expected to begin test oper-Edison Company which accounted back to a new base and then con- ations later. this year with an in-for 4.3 per cent of the overall growth. tinue its traditional steady climb service date set for early 1975.

All this despite our intensive efforts upward as we are expected to ac- Work on the pipeline which is the since 1972 in urging energy con- commodate the normal growth of planned oil delivery system for the servation measures by all of our new homes and businesses in our two units has not begun despite au-customers. service area. In 1973 alone, the thorization by the PUC in February We did begin to see a reduction number of customers we served in- 1973. Additional required approvals in the rate of growth toward the end creased by nearly 22,000. must be obtained from the Delaware of the year after President Nixon's We are also beginning to experi- River Basin Commission and other call for a concerted nationwide effort ence a "throwover" effect that has to save energy. In November, PP&L appropriate agencies and authori-been occurring as some present ties. In the meantime oil delivery by began to notice a cutback in our customers switch from other energy customers'se of electricity. The rail is being planned. A full discus-sources to electricity and new cus-downward trend continued through sion of the fuel situation follows on tomers select electricity instead of December when kilowatt-hour usage other energy sources to serve their page 10.

by our customers was down nine needs.

per cent below estimates. If we are to meet our mission of planning many years ahead to have sufficient generation and delivery facilities ready to meet our custom-ers'eeds decades from now, we

PP&L, in cooperation with the Western Precipitation Division of Joy Manufacturing Company, has installed a pilot sulfur dioxide removal system on Sunbury Steam Electric Station's Unit No. 4, right. The one-year pilot program is testing a wet-limestone scrubber system's ability to remove sulfur dioxide (SO>) from a generating unit's stack gas before it canbe released into the atmosphere.

During 1973, coal was king at PP &L.

About 96 per cent of the nearly 26 billion kilowatt-hours of electricity generated by PP&L last year came from coal-fired units. More than 70 per cent of that total came from the Brunner Island generating plant, shown below, and the Montour plant, shown on the back cover.

The fine performance from both plants contributed a large share to improved 1973 earnings.

In Allentown, a seven-level Gen-eral Office addition was completed in June just north of and connected to the present 23-story headquarters building. The new building doubles the floor space of the original Gen-eral Office structure and allows the consolidation of personnel from sev-eral rented office annexes scattered in downtown Allentown.

The main feature of the building is

'H the Company's new Power Control Center shown on the front cover. It incorporates the newest computer and electronic equipment and is one of the most up-to-date facilities of its kind in the country. This equip-r le

'1 ment will allow monitoring and re-mote control of functions and opera-tions to an extent never before possible. For the Company and its J~

customers it means greater reliabil-ity and higher operating efficiency.

Two additional 800,000-kilowatt oil-fired units are moving along on schedule Nuclear Plant Construction at Martins Creek. The first, Unit No. 3, is expected to begin operation Under Way early in 197S. Although the pipeline, being built by Interstate Energy Company to supply crude and residual oil to the plant, is being held up pending After 31 months of intensive review approvals, stop-gap rail delivery of the oil has been arranged. by the Atomic Energy Commission (AEC) and other federal, regional, state and local agencies of the

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I safety and environmental aspects of I

rc' our first nuclear plant, PPBL was given the go-ahead by the AEC on 1

Nov. 2 to begin construction of the r Susquehanna Steam Electric Sta-f tion.

Earth-moving work began three days later at the 955-acre site north of Berwick. The first of the twin 1,050,000-kilowatt boiling water re-actor generating units is scheduled to be completed in 1979, the second F

in 1981. When completed it will rep-resent nearly one-quarter of the Company's installed capacity at that time. With a price tag of nearly $ 1.4 LC I Pi Components of two reactor pressure vessels complete their 1,000-mile barge journey up three rivers and across eight states, from Memphis, Tenn. to Freeport, Pa. From there they were trucked to Montour Steam Electric Station for storage until extensive site preparation is completed at the Company's first nuclear station now being constructed near Berwick. Because of the long lead-time necessary in building a nuclear plant, the components had to be ordered in 1971 even before PP&L submitted its application to the Atomic Energy Commission for a construction permit. Delivery to the Montour site saved several hundred thousand dollars in out-of-state storage fees.

billion, the nuclear plant is the larg- stories high. Fiberglass bags, 1,260 mechanical cleaning equipment de-est single construction project ever of them, were installed in each filter- signed to reduce the pyritic sulfur undertaken by the Company. ing unit. Each bag is 30 feet long and content sufficiently to provide coal Even with the very large capital a foot in diameter. with a total sulfur content of not costs, the Company expects to real- The bags, in series with the old more than 2.5 per cent.

ize very significant savings over the mechanical collectors, are now re- We appreciate, of course, that 30-year operating lifetime of the moving better than 99 per cent of when technology to remove sulfur plant. This is due to the lower and the fly ash from exhaust gases be- and nitrogen oxide from stack gases

. more stable prices we expect for fore they reach the stacks. We had becomes a reality, we may have to nuclear fuel compared to coal and previously installed mechanical and install additional equipment to meet oil. electrostatic dust collecting devices more stringent.air pollution stand-In a time of tight oil supplies and on all units at the plant. However, ards in the future.

doubt over environmental restric- the combination was found to be un- In Lancaster, the Company was tions on the use of coal, nuclear satisfactory on the anthracite boil- praised for the environmental com-generation provides an attractive al- ers due to special fly ash entrapment patibility of its new $ 1.1 million ternative to provide an adequate problems associated with using hard downtown Prince Substation. An at-supply of electric energy while be- coal. tractive eight-foot-high brick wall ing both environmentally and eco- Various steps are under way to screens the low-profile substation nomically attractive. bring under acceptable control the structure and equipment from the particulate, or fly ash, emission from view of passersby. The wall has a stacks on our other bituminous coal- colonial motif, plantings and other Energy and the Environment burning generating units throughout aesthetically pleasing features.

In expanding our energy supply we the PP&L system. In the Company's northeast area, are doing our best to find a balance Also installed at Sunbury was a demolition work was begun on the between adequate energy and an pilot sulfur dioxide (SO2)-removal plant structures at our former Hauto acceptable environment. system on Unit 4 which burns bitu- and Stanton steam electric stations Our objective continues to be to ,minous coal. The project is the re- which ceased operations in 1969 minimize the impact of our opera- sult of a joint research agreement and 1972 respectively. The plants tions on the environment. between PP&L and the Western Pre- will be razed and the land contoured Two of our ongoing environmental cipitation Division of Joy Manufac- and planted to restore it to a condi-projects were focused on the Sun- turing Company. tion environmentally compatible with bury Steam Electric Station where The'wet scrubber" system, the surrounding area.

we have two anthracite and two bi- which uses a limestone water spray tuminous coal-fired generating units. to remove SO2 from flue gas, is still in the research stage and we hope Financing Installation of a $ 5.5-million dust collecting system for the anthracite to gain experience here that will be About $ 225 million was spent for ex-units was completed in June. The useful when a design basis for larger pansion and improvement of our fa-collection equipment is a bag filter- bituminous units is developed in the cilities in 1973. For 1974, the figure ing system which removes fly ash years'ahead. Results so far are en- is expected to rise to $ 305 million.

from stack emissions of the anthra- couraging and an extension of the And for the five years 1974 through cite-fired boilers at the plant. Each test period for another year is being 1978, the amount is $ 2.1 billion.

of the four "baghouse" structures is negotiated. Added to this will be $ 147 million 71 feet long, 40 feet wide and nine The coal we burn contains both we'l need to repay maturing debt in organic and pyritic sulfur. The or- the next five years.

ganic sulfur is inherent in the coal and extremely difficult to remove prior to burning. But a large per-centage of pyritic sulfur can be re-moved from bituminous coal. We are presently installing, at our mines,

Only about one-fourth of the $ 360,000 will go into a liquid metal ing and foamed-in-place urethane money we need to finance this con- fast breeder reactor demonstration around doors and windows.

struction can be generated internally plant to be constructed near Oak The house should be fully tested.

from Company operations'. The rest Ridge, Tenn. Around 85 per cent of and evaluated by 1975 after a typi-must come trom new capital invest- the country's utilities have pledged cal family has lived in the home.

ment in the Company. over $ 300 million for this demonstra- PP8L will then make the results To finance in part our construc- tion project being built by the Ten- known and offer plans for the home tion program and to repay maturing nessee Valley Authority and Com- to contractors, builders and the debt obligations in 1973, the Com-, monwealth Edison Company. public.

r pany sold common and preferred Nearly a million dollars of PP8L stock, first mortgage bonds and an money will go to the Electric Power unsecured note. (See page 18 for a Research Institute (EPRI) under Energy Conservation summary of our busiest year ever in sponsorship of the Edison Electric PP&L has been encouraging energy, the capital markets.) Institute, the industry's trade asso- conservation since early 1972 when During 1974, we anticipate the ciation, which is vastly expanding we completed a dramatic turn-need to issue about $ 250 million ot its research program. around in our marketing policy. We new securities. To maintain the abil- .Such projects as coal gasifica- recognized in the late 60s that our ity to raise this new capital for our tion and liquefaction, the fuel cell, society could not go on consuming expansion programs, PP&L must magnetohydrodynamics (MHD), nu- energy resources at the ever in-continue to be an attractive invest- clear fusion and ultra-high voltage creasing rate it had in the past, and ment and provide a fair return for in- research are being given top priority. that wasteful practices must be elim-vestors. Closer to home, PP8L is building inated.

an "Energy Conservation Home" at Our objective in the turn-around Schnecksville, northwest of Allen- effort was to hold down the rate of Research town. The home is primarily a re- rise in the demand for more and America has a national dilemma to search project designed to make more electric energy to gain time to face up to. Whether we call it an optimum use of energy in every way find solutions to the problems before energy crisis, or a crunch or a fuel possible in a single-family-home us.

problem, the fact is our energy de- without changing people's lifestyle. We turned from promoting electric mand is larger than our supply. The two-story, three-bedroom use to urging wise use of all forms of For the short-term, Americans are house will contain experimental energy, including electricity.

combatting the problem by putting equipment and systems which will Members of our Consumer 8 themselves into an emergency pos- be constantly monitored in an effort Community Affairs Department have ture, forsaking large growth gains to find and document ways of reduc- been working as consultants and and cutting back on energy use. ing energy use and cutting electrical helping our residential, commercial That's part ot the long-range so- demand. and industrial customers. find the lution, too. But an equally important The unique heating system inte- most efficient and wisest ways of part is research. The federal govern- grates solar collection panels and using electricity.

ment is allocating vast amounts ot heat reclamation devices to recover An important part ot this group's money for research in the perfection waste heat from appliances such as efforts has been an information and of the breeder reactor and in the dishwasher, washer, dryer and re- educational program to convince the search for alternate sources ot en- frigerator, as well as waste-water public of the need for conservation.

ergy. The electric industry is doing heat, fireplace flue gases and even Two presentations, "The Energy the same thing. the heat of decomposition in the Crisis" and "Homecology," have PP8L's research budget is about septic tank. been given to over 56,000 people.

$ million for 1974, of which some 2 Basically, the house will be heated and cooled by a water-source heat punlp.

New construction techniques in-clude the use of styrofoam sheath-

On an individual basis PPB L con-sultants have been advising residen-tial builders and developers on the latest techniques for improving the ~XP~+1 )

insulating qualities of homes and tx apartments and helping in the selec-tion of energy-efficient appliances and heating and cooling equipment.

Our industrial and commercial consultants have been working with customers to set up energy man-agement teams to evaluate all energy consumption within their business operations. These teams then identify on a continuing basis those areas where waste can be eliminated.

Additionally, PP &L-sponsored training sessions or energy man-agement forums were held with local and state government engineering and operating personnel, and school building maintenance engineers and administrators. Also included were architects and design engineers and top managers from the largest in-A 4 P

dustrial plants within the Company's service area.

Within our own operations a top A urethane plastic mixture which expands, in a few minutes, to 15 times speed of 50 miles an hour was di- its liquid volume is cutting by half the time it takes a PP&L crew to "set" large rected for all employees driving on transmission poles. The liquid is pumped around the pole where it begins to "cure" and rise or expand like bread dough. The finished product is stronger Company business, and a similar re- than packing the hole with soil and the foam seals out moisture and air in addition striction urged in personal driving. to being insect, rot, water and corrosion-proof.

This effort came on a Company-wide basis in June, several months before a nationwide plea was issued by the President.

Decorative lighting was elimi-nated at all Company facilities in March 1973 and heating and light-ing levels were reduced in our build-ings systemwide during the ensuing months. Through December these efforts amounted to a demand re-duction of about 1,200 kilowatts.

The atomic absorption spectro-photometer now in use at the Company's Chemical Laboratory at Hazteton does, in a few hours, analytical work that used to take a full day. The instrument can detect quantities of 70 different metallic elements in solution with an accuracy down to parts per billion in a sample.

Extensive analysis is continuing experience and performance in nu- The problems and challenges we throughout the Company to see merous specific training areas. This face today are very different from where further energy cuts can be is just one way we are trying to work those we faced only a few years ago.

made. smarter. This is one way we are changing to Another way we are trying to work meet these challenges.

smarter and more effectively and to -In the area of union relations, this People increase productivity involves the spring will mark the end of the three-Significant to our employees'e- realignment of our Engineering and year labor contract between the velopment in 1973 was the initiation Nuclear Development departments. Company and the 5,000 members of of apprentice programs in the line- In the past, power plants were the Employees Independent Asso-man, electricrepairman, transporta- either coal-fired or hydro projects, ciation (EIA) and the 330 members tion and underground repairman job built and designed on a one-at-a- of the Scranton local of the Inter-classifications. time basis. An organization struc- national Brotherhood of Electrical For the employee who enters any tured by engineering discipline was Workers (IBEW). Negotiations for a of the programs it will mean inten- able to cope with this challenge. new contract with the EIA and the sive, documented on-the-job and Today, however, we find our- IBEW are expected to get underway classroom training and the opportu- selves in a multi-plant, capital-in- shortly.

nity to become one of the most well- tensive situation where long lead trained workers in the Company's times and growing energy demands history. result in concurrent planning, design Management Changes While content does vary, of and construction of various types of A number of executive appointments course, there will be three or four power plants. It is essential, there- were made during 1973.

levels in each of the apprentice pro- fore, that our organizational struc- Edward M. Nagel, general coun-grams spanning a'three- or four- ture allow optimum use of our human sel and secretary was appointed year period. resources to complete projects on vice president, general counsel and The on-the-job training portion of schedule, within budget and within secretary.

the programs is designed to insure specified quality limits. Charles J. Green, director, Per-that each person is given a wide Accordingly, our Engineering and sonnel, was appointed to succeed range of tasks upon which to build Nuclear Development departments Jack Hanckel as Harrisburg Division experience, as well as prepare the were reorganized on a project basis vice president when Hanckel retired employee for higher level training. for major power plant projects. For on March 1, 1974 after 43 years with The program will offer all who par- example, a self-contained engineer- the Company.

ticipate an equal opportunity for ad- ing project team including all engi- Brooke R. Hartman, vice presi-vancement. neering disciplines (mechanical, dent, Division Operations, was ap-No longer will supervisors have to civil, electrical, etc.) will be assigned pointed executive vice president, rely solely on memory and judgment to each new power plant project Operations effective March 1, 1974.

to decide whether an employee has rather than passing the plans from He succeeded Executive Vice Presi-the necessary skill and experience one functional department to an- dent Austin Gavin who retired on that for advancement. Now there will be other and trying to assign proper date after more than 37 years with documented evidence of a trainee's priorities. PP&L.

Some of the same procedures will The appointment of an executive be carried over into the design and vice president of Operations will engineering for large new transmis- help in the more effective manage-sion lines, substation and related ment of day-to-day operating prob-research and development projects. lems that are separate and distinct Besides better utilizing our human from long-range corporate planning resources, we expect that the result- - and decision-making.

ing standardization in design, con-struction and operation of these projects will help us attain signifi-cant cost reductions without sacri-ficing quality control or construction schedules.

Leon L. Nonemaker, vice presi-dent, Consumer & Community Affairs, was named to succeed Hart-man as vice president, Division Op-erations.

John T. Kauffman, assistant vice 'j president, System Power & Engi-neering, was appointed vice presi- 4~

dent, System Power & Engineering to succeed Gavin who headed SP&E in addition to his duties as executive vice president.

Both Nonernaker and Kauffman report to Hartman.

Herbert D. Nash Jr., manager, Consumer & Community Services, was named vice president, Con-sumer & Community Services, suc-ceeding Nonemaker.

Three new vice presidential posi-tions have been created. The ap-pointments, which were effective PP8 L's Montour Preserve, built near the new Montour plant to provide an Jan. 1, 1974, reflect the increasing emergency back-up water supply, is becoming very popular as a four-season demand on the resources of various fishing, recreation and ecological-study area. The Company has corporate functions and the expand- sponsored several fishing clinics for area youngsters in cooperation with the Pennsylvania Fish Commission.

ing responsibilities associated with challenges facing the Company.

Norman W. Curtis, manager, Engineering & Construction, was named vice president, Engineering

& Construction within SP&E.

Richard H. Lichtenwalner, man-ager, Communication Services, was named vice president, Public Rela-tions within the Human Resource &

Development Department.

Edwin H. Seidler, manager, Ij Distribution, was appointed vice president, Distribution, in Division )I r

Operations. t,$

ti LI JI (r w Dr. Eugene S. Farjey, a director from 1962 to 1972, died on Sept. 17 r at his home near Beaumont, Pa. Dr. $

Farjey served as the first president of Wilkes College in Wilkes-Barre In fncreasing numbers women are turning to physical-labor jobs traditionally hetd from 1947 to 1970 when he retired by men. This young woman sought and won a position as a laborer on a from that post. He was also chancel- construction crew where she learned to use a power hack saw. PP&L has been lor of the college from 1970 to 1971. encouraging women to broaden their interests and seek jobs that, until now, have been regarded as in the male domain. The Company feels that if a woman can do a job, she should have an equal opportunity to have it.

THE FUEL SITUATION The energy crisis is no longer theoretical. In last No Lack of Resources year's annual report we discussed the growing Just because we are short of energy supplies,

- signs that we were headed for trouble. This year primarily petroleum products, doesn't mean we we have all been asked to lower our heat and cut lack energy resources.

back on our lighting. We can't buy gasoline on The U.S. Geological Survey estimates that the Sundays and the rest of the week we may en- U.S. alone has:

. counter long lines, limited purchases and high Potential oil reserves of 450 billion barrels, or prices. Few of us are so insulated from the real 80 times our consumption in 1971.

world that we haven't been affected in some way Potential natural gas reserves of 2,100 trillion by the shortage of fuel. cubic feet, equivalent to almost 100 times our Although we would probably all agree that we 1971 consumption.

do have a problem, it's hard to find a consensus on just how bad the situation really is. The prob-Potential coal reserves of about 390 billion lem is compounded by a lack of hard data from tons, or about 800 times what we used in 1971.

well established sources on how much oil is avail- For decades we have been using the cheapest, able, where it's coming from, where it's stored most readily-available fuel supplies. But, as this and where it's going. energy supply becomes more restricted, the un-tapped potential begins to look more attractive Oil wells once considered marginal begin to show Origins of the Problem a profit as low petroleum prices begin to rise.

As a society, we helped bring the problem upon More exploration to get at less-readily available ourselves by trying to attain some lofty and lauda- supplies begins to be economically feasible.

ble goals. The Company believes that, for the long run, Oil imports came about because it was cheaper the best approach to having adequate energy to produce a barrel of oil in the Mideast than in supplies is a free and open market. No one can the U.S.the aim was to do something good for repeal the laws of supply and demand.

the consumer, give him all the energy he could Not all of that energy potential we mentioned use at low prices. is clean fuel We are either going to have to be

~

Coal declined as one of the primary fuels more tolerant about air pollution standards or we partly because mine health and safety laws made are going to have to find ways to use dirty fuels it more expensive to get the coal out of the in a cleaner way... and that will cost even more.

ground and environmental standards were set But society will have to make the choice.

that prevented much of the available supply from being burned. Again the objectives were good PP&L's Situation safer working conditions for miners and a cleaner environment for all of us. A full discussion of all the ramifications of the An understandable goal of making sure the fuel crisis and how it affects all of us would take public is safe and free from manmade radiation much more space than we have in this report.

hazards continues to contribute to delays in the However, there are a few points that should be use of nuclear power on a widespread basis." made about the situation at Pennsylvania Power Society craved more cheap energy on the one & Light Company:

~ About 96 per cent of our electric generation hand while limiting supply on the other.

And so our objectives are beginning to clash. came from coal in 1973.

We are at the receiving end of our conflicting ~ Our coal reserves add up to 120 million tons goals. through ownership or control of five mines

in west-central Pennsylvania and through Creek which will burn oil? That's a natural ques-long-term contracts for open-market coal. We tion and one we'e been hearing quite a bit lately.

expect to substantially increase these coal re- An explanation is in order.

serves in 1974, so we are assured of a stable It takes eight to ten years to design and build supply of coal for many years to come. a fossil-fuel generating plant. Long before con-

~ Although the cost of open market coal has been struction begins it must be decided what type of increasing sharply in recent months, PPBL is fuel will be burned.

. When the decision was made in 1969 to fuel able to recover these increased costs through a fuel adjustment surcharge written into our the two Martins Creek units with oil rather than rate structure and approved by the Pennsyl- coal, the following conditions prevailed:

vania Public Utility Commission and the Fed- ~ An increased emphasis on environmental pro-eral Power Commission in 1970. tection meant burning low-sulfur fuels or in-

~ PP8L's seventh unit coal train is expected on stalling equipment that would remove sulfur the rails at mid-year. Each of the trains in the gases and particulate.

fleet has between 105 and 131 cars, and carries ~ The reliability of sulfur-dioxide removal tech-more than 10,000 tons of coal each trip from nology for coal-buining units wasn't proven mine to power plant. then and still isn't proven.

~ The Penn Central Railroad, which last year was ~ Studies by consulting firms indicated that the on the verge of liquidation, has been included price of low-sulfur coal would rise faster than in a sweeping overhaul of the faltering rail net- oil. The studies also indicated adequate sup-work serving most of the Northeast and parts plies of low-sulfur coal for a plant this size of the Midwest. Since practically all of our coal weren't available east of the Rocky Mountains.

comes to us over Penn Central tracks, the pos-

~ At the same time, the consultants'tudies con-sibility that the line would go out of business did cause us a great deal of concern last fall. cluded that plenty of low-sulfur oil would be Legislation pumping nearly $ 560 million into available and would result in much less envi-the reorganization of seven bankrupt railroads, ronmental impact from the standpoint. of both including Penn Central, gives us some assur- sulfur and ash.

ance of continued service.

~ By virtue of PP8L's high percentage of coal-Is Conversion the Answer?

fired capacity, and adequate reserves, the Com-pany in 1973 was able to provide seven billion Now with oil in short supply, PP8L is being kilowatt hours of electricity to companies which asked why we don't change our plans in mid-are more dependent on oil, mostly in the Penn- stream and convert to coal.

sylvania-New Jersey-Maryland (PJM) power The answer is simple. We are past the point of pool. This coal-generated power is estimated no-return. It is neither practical nor feasible at to have saved about 300 million gallons of oil. this time to convert to coal. To undertake a con-version at this point would bring the project to a halt and mean that no energy whatsoever would Why Oil at Martin's Creek? be available from these units for a period of five With oil becoming scarce, PP8L's decisions or six years. Clearly, that is not acceptable.

over the years to depend heavily on coal begin The new Martins Creek units will burn either to look better and better. Why, then, is PP&L crude or residual oil. When adequate supplies of building two new 800,000-kilowatt units at Martins crude oil are available the units can burn that fuel

without going through the intermediate step of Even though extensive engineering and right-passing it through a refinery. This is particularly of-way acquisition have already been completed, helpful during periods of tight refinery capacity, construction of the pipeline had not begun at such as the country is now experiencing. the end of February because of several pending Residual oil is what remains after refineries decisions by regulatory agencies and the courts.

have extracted the gasoline and other distillates Even now, though, it is too late to have the such as diesel fuel and home heating oil from pipeline in operation in time for start-up of Unit the raw crude. Residual fuel has such a high vis- No. 3 in the fall of this year. As soon as this situa-cosity that it becomes solid at room temperature tion became clear, PPP&L began making provi-and must be heated to make it liquid. It cannot sions for alternate emergency rail unloading be used for home heating purposes or conven- facilities at Martins Creek and terminal facilities tional commercial applications. The main user is there and at Marcus Hook so we would have an the utility industry. assured oil delivery system when the plant is A major economic and conservation benefit of completed.

the Martins Creek units is that they can be used All of these problems just emphasize the com-in lieu of generation by combustion turbines plexity of looking into the future and making which burn only No. 2 (home heating) oil and sound business decisions for the years ahead have an efficiency rate significantly lower than based on conditions as they are today and as we the big oil units. think they will be tomorrow.

The new units are specially designed to be used for peaking purposes, with the capacity to pick up load or drop it quickly to meet fluctuating de-mand. They can be shut down overnight or over Long-Range Plans a weekend and be started up quickly. The Martins Looking beyond the new Martins Creek units Creek units provide a unique combination of effi- we see our Susquehanna nuclear units coming ciency and flexibilityof generating characteristics on the line in 1979 and 1981.

not found in coal-fired units. Since power loads Beyond that, we have firm plans for a pumped rise and fall sharply during a twenty-four hour storage hydroelectric facility and tentative plans period, adequate electric service requires the for three large new coal units for the mid 1980s.

use of equipment suited for peaking operation. This will give us a good mix of fuels for the future. We won't have all of our generating eggs in one energy basket.

However, for the short term, we cannot burn Oil Supply brightly while others sit in darkness. Even though Obviously under today's conditions there is un- we are heavily dependent on coal and feel we certainty over the oil supply situation. Even have adequate assured supplies for our needs, though we do have commitments for all of the PP8L is just a part of the larger regional and na-oil for Unit No. 3 and 40 per cent for Unit No. 4, tional energy supply picture. At this time there is the supply could be affected by conditions in just no way of knowing to what extent we will be the Middle East and by government allocation required to use our energy resources in aiding programs. others should that become necessary.

Besides a source of oil, we need a way to get In spite of the uncertainties that exist we have it from the terminal at Marcus Hook, Pa. to Mar- no doubt that this country can solve the problems tins Creek. An 82-mile Interstate Energy Co. pipe- that confront it. But, it will take time and money, line is the planned delivery system for the oil. and a lot of cooperation and understanding.

PENNSYLVANIA N.Y.

SCRANT N ~

ALIKES.BARREy L Walle aupack Plant ILLIAMSPORT~

Susquehann ontour Plant A

~

Plant~+

DANVILLE~ BERWICK ~ HAZLETON Su bury Plant ~~ SUNBURY Martins Creek NewY r ~

PA. ~

Plant*'OTTSVILLE

~ e&HLEHEu ALLENTOWN AR ISBURG ~

Br nfter Island Plan ~ LANCASTER Safe Harbor Plant~ Philadelphia Holtwood Plant A MD. N.J.

~ Baltimo PP&L supplies electric service lo a population of 2,309,000 people in a 10,000 square mile area in

"'nder Units Construction No. 3 and 4 under construction 29 counties of central eastern Pennsylvania.

13

STATISTICAL

SUMMARY

1973 1972 1971 1970 1969 CAPITALINVESTMENT thousands f Long-term debt ................ $ 753,027 635,044 576,760 ~ 514,371 474,182 Preferred and preference stock- .. 271,375 231,375 196,375 156,375 86,375 Common equity ............... 469,608 412,130 351,299 303,117 268,233 1,494,010 1,278,549 1,124,434 973,863 828,790 Short-term debt ........ 39,851 96,482 76,251 97,878 98,500 Total capital investment . $ 1,533,861 1,375,031 1,200,685 1,071,741 '27,290 RETURN ON CAPITAL INVESTMENT as a percentage of average capital investment ............. 7.83 7.56 7.34 6.83 7.13 NUMBER OF SHAREOWNERS preferred, preference and common 142,235 135,399 123,598 111,909 98,450 OPERATIONS ELECTRIC CUSTOMERS ..... 886,378 864,439 843,080 828,643 818,500 ENERGY SALES millions of kilowatt hours Residential 6,324 5,985 5,479 5,093 4,573 Commercial 4,262 3,933 3,533 3,198 2,840 Industrial 6,881 6,458 6,053 5,807 5,566 Other 1,398 637 620 585 552 18,865 17,013 15,685 14,683 13,531 AVERAGE PRICE PER KWH to ultimate customers cents .... 2.06 2.02 1.90 1.71 1.62 SOURCES OF ENERGY SOLD millions of kilowatt hours Generating units Coal-fired '24,782 19,097 15,847 13,702 13,514 Oil-fired 273 '01 642 786 437 Hydroelectric ................ 816 824 684 739 621 Purchased power .............. 384 418 304 339 253

~

Interchanged power Purchases . 1,584 1,366 1,467 . 1 732 1,709 Sales . (7,237) (3,586) (1,758) (1,164) (1,559)

Company uses and losses....... (1,737) (1,707) (1,501) (1,451) (1,444)

Total energy sales ............. 18,865 17,013 15,685 14,683 13,531 FUEL COST mills per kilowatt hour 5.0 4.9 4.8 4.2 3.2 POWER CAPABILITY kilowatts ... 4,903,000 4,108,000 3,496,000 3,256,000 3,124,000 PEAK DEMAND kilowatts (a) ..... 3,662,000 3,598,000 3,294,000 3,238,000 2,850,000 EMPLOYEES 7,139 6,790 6,514 , 6,372 6,238 (a) Winter peak shown was reached early In subsequent year. In 1969 and 1970, peaks are those which would have occurred Il load curtailment measures had not boon In otfoct.

A more detailed review ot the Company's operations ls available. A postal card ls provided with this report to ald you in making this request.

14

STATEMENT OF INCOME 1973 1972 1971 1970 1969 Thousands of Dollars OPERATING REVENUES (Note 3)

(99% electric) ................. 3 384,814 345,782 300,707 255,313 223,388 OPERATING EXPENSES (Notes 4 and 11)

Wages and employee benefits ... 57,421 55,220 48,198 45,779 41,946 Fuel 125,577 95,220 79,499 61,621 44,601 Power purchases .............. 15,299 13,514 18,963 21,982 17,453 Interchange power sales ........ (70,175) (34,569) (15,468) (9,356) (8,865)

Other operating costs .......... 45,234 39512 33,214 24,009 21,865 Depreciation 48,837 41,446 34,903 32173 28,981 Income taxes (Note 9)

Current 22,661 18,102 12,672 4,986 14,400 Deferred . 5,737 2,829 (244) (795) (795)

Investment tax credits Deferred 7 233 7,349 1,597 1,573 3,339 Amortization of deferments credit (1,688) (2,194) (2,480) (2,539) (2,540)

Taxes, other than income ....... 30,005 25,658 22,146 18,197 8,167 286,141 262,087 233,000 197,630 168,552 OPERATING INCOME ............ 98,673 83,705 67,707 57,683 54,836 OTHER INCOME AND DEDUCTIONS Allowance for funds used during construction .......... 14,967 14,647 16,242 9,723 6,369 Other net 1,391 29 113 192 197 16,358 14,676 16,355 9,915 6,566 INCOME BEFORE INTEREST CHARGES 115,031 98,381 84,062 67,598 61,402 INTEREST CHARGES Long-term debt............ 43,203 36,507 30,895 25,381 20,813 Short-term debt ........... 4,790 ',846 4,109 7,1 94 5,935 Other 126 107 486 88 45 48,119 40,460 35,490 32,663 26,793 NET INCOME . 66,912 57,921 48,572 34,935 34,609 Dividends on preferred and preference stock ........ 17,191 14,526 11,392 6,426 3,822 EARNINGS APPLICABLE TO COMMON STOCK ......... $ 49,721 43,395 37,180 28,509 30,787 COMMON STOCK Average number of shares outstanding ............... 19,358,947 17,512,793 15,690,490 14,472,076 13,277,365 Earnings per share, based on average number of shares outstanding ............... $ 2.57 2.48 2.37 1.97 2.32 Dividends per share .......... $ 1.68 1.64 1.60 1.60 1.60 See accompanying Notes to Financtal Statements.

BALANCE SHEET December 31 ASSETS 1973 1972 Thousands of Dollars UTILITY PLANT'lant in service at original cost Electric $ 1,619,327 1,386,223 Steam heat . 7,728 8,110 1,627,055 1,394,333 Less accumulated depreciation 312,178 275,627 1,314,877 1,118,706 Construction work in progress at cost 219,277 242,707 1,534,154 1,361,413 INVESTMENTS Subsidiaries at equity (Note 2) 5,320 3,1 29 Safe Harbor Water Power Corporation at equity (Note 2) .. 3,596 3,315 Nonutility property at cost, less accumulated depreciation . 2,749 2,552 Other at cost or less . 7,354 5,540 19,019 14,536 CURRENT ASSETS Cash (Note 5) . 14,903 13,729 Construction fund for pollution control facilities (Note 6) .. 9,073 Accounts receivable, less reserve Customers 22,656 23,510 Other 10,929 3,330 Materials and supplies at average cost Fuel 26,884 31,601 Operating and construction . 17,006 12,847 Other .............................. 5,598 9,488 107,049 94,505 DEFERRED DEBITS... 6,624 4,650

$ 1,666,846 1,475,104 See accompanying Notes to Financial Statements.

16

December 31 LIABILITIES 1973 1972 Thousands of Dollars CAPITALIZATION*

Shareowners investment Preferred stock 156,375 116,375 Preference stock 115,000 115,000 Common stock 319,384 278,484 Capital stock expense (deduction) (6,889) (6,592)

(No amortization plan in ellect)

Earnings reinvested (Notes 7 and 8) 157,113 140,238 740,983 643,505 Long-Term Debt 753,027 635,044 1,494,010 1,278,549 CURRENT LIABILITIES Bank loans (Note 5) . 30,000 Commercial paper notes (Note 5) . 39,851 66,482 Accounts payable 33,705 27,193 Taxes accrued 13,457 9,963 Dividends payable and interest accrued 28,139 23,003 Other 7,029 6,471 122,181 163,112 DEFERRED AND OTHER CREDITS Accumulated deferred investment tax credits . 15,323 9,779 Accumulated deferred income taxes 17,436 12,035 Contributions in aid of construction . 9,704 5,859 Other 8,192 5,770 50,655 33,443

$ 1,666,846 1,475,104

'Seo Schoduto of Capital Stock and Long-Term Debt on pago 18.

See accompanying Notes to Financial Statements.

SCHEDULE OF CAPITAL STOCK AND LONG-TERM DEBT December 31, 1973 Thousands of Dollars CAPITALSTOCK LONG-TERM DEBT

'PREFERRED STOCK $ 100 par, cumulative FIRST MORTGAGE BONDS 4'/2 /o, authorized 629,936 shares, 3/o series due 1975 $ 93,000 outstanding 530,189 shares ...... $ 53,019 27/s lo series due 1976 ................ 8,000 Series, authorized 2,000,000 shares 2s/4 lo series due 1977 ................ 20,000 3.35/o, outstanding 41,783 shares . 4,178 3'/s% series due 1978 ................ 3,000 4.40 lo, outstanding 228,773 shares . 22,878 2s/4%%d series due 1980 ................ 37,000 4.60%%d, outstanding 63,000 shares . 6,300 3'/s'/o series due 1982 ................ 7,500 7.40/o, outstanding 400,000 shares (a) 40,000 3t/a series due 1983 ................ 25,000

%%d 3s/s'/o series due 1985 ...

8.60/o, outstanding 222,370 shares 22,237 25,000 9/o, outstanding 77,630 shares ... 7,763 4s/s /o series due 1991 ................ 30,000 4s/a /o series due 1994 ................ 30,000

$ 156,375 5s/a /o series due 1996 ................ 30,000 PREFERENCE STOCK no par, cumulative, 6s/4'/o series due 1997 ................ 30,000 authorized 5,000,000 shares 7o/o series due 1999 40,000

$ 8.00 series, outstanding 8t/a  %%d series due 1999 ................ 40,000 350,000 shares ............... $ 35,000 9/o series due 2000 .

7t/4/o seriesdue 2001 ................

50,000 60,000

$ 8.40 series, outstanding 400,000 shares ............... 40,000 7s/s /o series due 2002 ................ 75,000

$ 8.70 series, outstanding 7t/2 /o series due 2003 ................ 80,000 400,000 shares ............... 4t/2 /o to 56/s'/o pollution control series A due annually $ 500, 1977-1983;

$ 115,000 COMMON STOCK no par, authorized

$ 900, 1984-2002; $ 7,400, 2003 ........ 28,000 711,500 30,000,000 shares, outstanding 21,051,255 shares ................. $ 319,384'a)

NOTES 6t/4 10-8t/4  %%d due 1974 to be refinanced 18,550 On July 1, 1979 and annually thoroaftor until tho 7.40/o Sorios 6t/a'/o-7'/o due 1976 . 2,800 Proforrod Stock Is rotlrod In full, 16,000 shares of 7.40'lo Sorlos 7/0 due 1980 20,000 must bo rodoomod through tho operation of'a sinking fund at a rodomptlon prlco of 9100 por share plus accruod and unpaid 41,350 dividends to tho data of such redemption. OTHER 177

$ 753,027 SECURITIES SOLD IN 1972 AND 1973 Security Shares Amount 1972 February First Mortgage Bonds, 7% lo Series due 2002 $ 75,000 February-March Notes, 6t/4 lo-6t/a /o due in 1974 and 1976 . 8,300 July Preference Stock, $ 8.00 Series .......... 350,000 35,000 October Common Stock 2,000,000 46,940

$ 165,240 1973 January First Mortgage Bonds, 7t/2 /o Series due 2003 .. $ 80,000 May First Mortgage Bonds, 4t/2 /o to 5s/s /o Pollution Control Series A due 1977-2003 ........... 28,000 July Note, 7%%d due 1980 . 20,000 August Series Preferred Stock, 7.40/o . 400,000 40,000 November Common Stock . 2,000,000 40,900

$ 208,900 Soo accompanying Notos to Financial Stetomonts.

18

SOURCES OF FUNDS USED FOR NEW CONSTRUCTION 1973 1972 1971 1970 1969 Thousands of Dollars OPERATIONS Net income $ 66,912 57,921 48,572 34,935 34,609 r

Non-cash charges (credits) to income Depreciation 48,837 41,446 34,903 32173 28,981 Allowance for funds used during construction . (14,967) (14,647) (16,242) (9,723) (6,369)

Deferred extraordinary power costs ......... 220 220 220 (2,105)

Deferred income taxes and investment tax credits net . 11,282 7,984 (1,127) (1,762) 3 112,284 92,924 66,326 53,518 57,224 Less cash dividends 50,037 43,330 36,746 29,456 25,097 62,247 49,594 29,580 24,062 32,127 OUTSIDE FINANCING Securities sold Common stock . 40,900 46,940 37,120 28,093 24,050 Preferred stock 40,000 30,000 Preference stock 35,000 40,000 40,000 First mortgage bonds 108,000 75,000 60,000 50,000 '0,000 Long-term notes 20,000 8,300 10,450 2,600 Other long-term debt 24 42 56 87 "Securities retired First mortgage bonds (15,000) (7,763)

Long-term notes (10,000) (8,000) (1,000) (3,500)

Other long-term debt (57) (117) (236) '140)

Short-term debt net increase (decrease) . 20,231 (21,627) (4,122) 8,050 142,252 160,456 117,882 137,659 108,514 OTHER SOURCES AND (USES)

Investments (4,483) 24 (253) ',530 1,472 Refund of prior years Federal income taxes net 2,956 Working capital net change (excluding short-term debt) 3,156(a) (6,624)(a) 23,896 (14,824) (13,652)

Miscellaneous net . 6,357 657 5,052 1,036 203 5,030 (5,943) 28,695 (6,302) (11,977)

TOTAL FUNDS USED FOR NEW CONSTRUCTION (b) $ 209,529 204,107 176,157 155,419 128,664 (a) Tho net changes In working capital resulted principally from the following: 1973, Increases In othor accounts receivable, construc-tton fund, accounts payablo and dividends payable and accrued Interest; 1972, Incroasos In accounts receivable and fuel inventory.

(b) Excludes allowanco for funds used during construction. \

See accompanying Notes to Flnanclat Statomonts.

19

STATEMENT OF EARNINGS REINVESTED 1972 1971 1970 1969 Thousands of Dollars BALANCE, JANUARY 1 $ 1 40,238 125,647 113,821 108,342 98,830 NET INCOME 66,912 57,921 48,572 34,935 34,609 207,150 183,568 162,393 143,277 133,439 DIVIDENDS Preferred and preference stock 17,191 14,526 11,392 6,426 3,822 Common stock (per share 1973, $ 1.68; 1972, $ 1.64; 1971-1969, $ 1.60) ......... '2,846 28,804 25,354 23,030 21,275 50,037 43,330 36,746 29,456 25,097 BALANCE, DECEMBER 31 (Notes 7 and 8) ......... $ 157,113 140,238 125,647 .

113,821 108,342 NOTES TO FINANCIALSTATEMENTS December 31, 1973 and 1972

1.

SUMMARY

OF ACCOUNTING POLICIES amount so capitalized is shown on the Statement Accounting System of Income as an item of Other Income and serves Accounting records are maintained in conform- to offset the actual cost of financing construc-ity with the uniform system of accounts pre- tion work in progress."

scribed by the Federal Power Commission (FPC) and adopted by the Pennsylvania Public Utility Depreciation Commission (PUC) ~ For financial statement purposes, the straight-line method of depreciation is used to accumu-late an amount equal to the cost of utility plant UtilityPlant and removal costs, less salvage, over the esti-Costs of additions to utility plant and replace- mated useful lives of property.

ments of units of property are capitalized. Costs of depreciable property retired or replaced are Subsidiaries eliminated from utility plant accounts and such costs, plus removal costs, less salvage, are Prior to 1973, the Company carried its invest-ments in subsidiaries and in Safe Harbor Water charged to accumulated depreciation. Costs of Power Corporation at cost, and did not record its land retired or sold are eliminated from utility plant accounts and any gains or losses are re- equity in the earnings of these companies except flected on the Statement of Income during the to the extent received as dividends. In 1973, pur-suant to a revision of the uniform system of ac-current year. All expenditures for maintenance counts, the Company adopted the equity method and repairs of property and the cost of replace-of accounting for these investments. Under this ment of items determined to be less than units of method, the Company carries these investments property are charged to operating expenses. on its Balance Sheet at cost plus undistributed earnings since dates of acquisition, and reflects Allowance for Funds used During Construction its equity in the earnings of these companies in As provided in the uniform system of accounts, Other Income on the Statement of Income.

the cost of funds (interest on borrowed money and a reasonable rate on other capital) used to . Revenues finance construction work in progress is capital- Revenues are based on cycle billings rendered ized as Utility Plant.'An amount equal to the to certain customers monthly and others 20

bi-monthly. The Company does not accrue reve- Research and Development nues related to energy delivered but not billed. Research and development costs are charged to The Company's tariffs include fuel adjustment expense. as incurred except for costs related to clauses under which fuel costs above or below specific construction projects which are capi-the levels allowed in approved rate schedules talized.

are permitted to be billed or credited to custom-ers after the fuel costs are incurred.

2. SUBSIDIARIES, CONTROLLED COMPANIES AND SAFE HARBOR Income Taxes The Company has six wholly-owned subsidiaries Deferred tax accounting is followed for items (including three coal companies) and has control where similar treatment in rate determinations over the operations of one other coal company.

has been or is expected to be permitted by the None of these companies is engaged in the busi-PUC. The principal items are accelerated amor- ness of generating and distributing electricity.

tization of certified defense facilities and pollu- The total combined assets of these companies at tion control equipment, deduction of costs of December 31, 1973 and December 31, 1972 was removing retired depreciable property and that less than 5/o of the Company's assets and the portion of tax depreciation arising from shorten- total combined revenue of these companies in ing depreciable lives by 20/0 as permitted by the each of the years 1973 and 1972 (after inter-class life depreciation system. company eliminations) was less than 1/o of the Company's revenues. The Company also owns Tax reductions"arising principally from the use one-third of the outstanding capital stock of Safe of the declining balance depreciation method, Harbor Water Power Corporation representing guideline lives and certain income and expenses one-half of that company's voting securities.

being treated differently for tax computation than for book purposes are accounted for under the As a result of the adoption of the equity method flow-through method. These reductions in income of accounting, the Company recorded as Other tax provisions are also accorded flow-through Income during 1973 approximately $ 812,000 (of treatment in rate determinations by the PUC and which $ 250,000 was received as dividends) as currently result in lower rates for customers than equity in the earnings of subsidiary companies would otherwise be possible. and Safe Harbor Water Power Corporation. Of the amount recorded, approximately $ 500,000 Investment tax credits are deferred. Deferred was applicable to undistributed earnings of these amounts pertaining to the Job Development In- companies from their respective dates of acquisi-vestment Credit (Revenue Act of 1971) are being tion to December 31, 1972.

amortized over the average lives of the related property while amounts pertaining to the credits 3. RATE INCREASES permitted under prior laws are being amortized over 5-year periods. Pursuant to a rate increase request filed in 1973, the PUC granted the Company, effective June 2, 1973, a 2.7'/o increase in electric rates (about $ 10 million annually). Operating revenues for the year Retirement Plan 1973 include $ 4.8 million resulting from this in-The Company has a Retirement Plan composed crease. The final PUC order on the request au-of two parts: (1) a non-contributory portion which thorized the Company to increase electric rates provides benefits for all eligible active employees by an additional 5.7/o (about $ 19 million annu-with the full cost absorbed by the Company, and ally) effective January 10, 1974.

(2) a voluntary portion in which contributions are made by both employees and the Company, but the full cost of past service and Plan improve- 4. STORM DAMAGE ments is borne by the Company. Approximately During June 1972 severe flooding caused by 95'/o of eligible active employees are members Tropical Storm Agnes occurred in the Com-of the voluntary portion of the Plan. Company pany's service area. Effects of the flood increased contributions to the Plan include amounts re- operating expenses by approximately $ 1.6 mil-quired to fund current service costs and to amor- lion (10 cents per share) after giving effect to tize unfunded past service costs over periods of insurance recoveries, casualty reserves and re-not more than 20 years, lated tax reductions.

21

5. COMPENSATING BALANCES AND 7. DIVIDENDRESTRICTIONS SHORT-TERM DEBT The Company's charter and mortgage indentures The Company has lines of credit aggregating restrict the payment of cash dividends on Com-

$ 145 million with various banks which make mon Stock under certain conditions. Under the available loans for interim financing and provide charter provisions, which are the more limiting, back-up financing capability for commercial no restrictions are effective on the payment of paper notes. At December 31, 1973, use of these such dividends out of current earnings. The lines of credit was restricted to the extent of $ 11.5 amount of earnings reinvested free of restrictions million by short-term bank loans to certain owned under the charter at December 31, 1973 was and controlled fuel supply companies. In connec- $ 135.1 million.

tion with these lines of credit the Company main-tains compensating balances which, generally, are on the basis of 10/o of the line of credit or 8. PROPERTIES SUBJECT TO 20/o of the amount borrowed, whichever is FEDERAL LICENSES higher, on an average annual basis. These bal- The Company operates two hydroelectric proj-ances are not restricted as to withdrawal. Based ects under licenses issued by the FPC. Certain on bank borrowings during 1973, the average reserves required to be provided under the Fed-compensating balance requirement was about eral Power Act have not been recorded pending

$ 13.8 million, of which about $ 2.0 million was approval of the amounts by the FPC. The Com-satisfied by "float" (checks issued but not cleared pany estimates that such reserves applicable to by the banks). the years from 1946 would not exceed $ 2.5 mil-Bank borrowings are generally for one year, may lion at December 31, 1973.

be prepaid at any time without penalty and are at the lending bank's prime interest rate in effect 9. INCOME TAXES from time to time, which was 9~/4 /o at December Income tax expense for the years 1973 and 1972 31, 1973. The Company had no bank loans out- is reflected on the Income Statement as follows:

standing at December 31, 1973. Commercial 1973 1972 paper notes are generally sold for periods rang-ing from 30 to 60 days; the weighted average (Thousands of Dollars) discount rate applicable to the $ 39.9 million of Utility Operations:

commercial paper notes outstanding at Decem- Federal income tax... $ 16,454 12,582 ber 31, 1973 was 8.5/o. State income tax..... 6,207 5,520 Deferred income tax .. 5,737 2,829 The maximum aggregate amount of short-term 28,398 20,931 debt outstanding at the end of any month in 1973 was $ 85.2 million; the average aggregate daily Other Income and Deductions (91) (334) amount outstanding during 1973 was $ 60.6 mil- $ 28,307 20,597 lion. The approximate weighted average interest rate of short-term debt during 1973 was 7.9/o, Deferred income taxes result from differences calculated by dividing the total short-term debt- between the time the following items are recog-interest expense for the year by the average nized as expenses for tax and financial statement aggregate daily amount of short-term debt out- purposes:

standing. 1973 1972 (Thousands of Dollars)

6. POLLUTION CONTROL CONSTRUCTION Portion of tax depreciation FUND ,. arising from shortening The unexpended proceeds from the sale of First depreciable lives by 20/o Mortgage Bonds, Pollution Control Series A, under the class life amounting to $ 13.0 million at December 31, 1973, depreciation system ...... $ 3,057 1,550 are held by a trustee in a Construction Fund Costs of removing retired which consists of cash and temporary cash in- depreciable property ..... 2,219 1,8?8 vestments. Payments may be made from the Fund Accelerated amortization of upon requisition by the Company for costs re- pollution control facilities.. 385 196 lated to the construction of certain pollution con- Abnormal loss on retirement trol facilities. The amount expected to be requisi- of property .............. 871 tioned from the Fund in 1974 is classified as a Accelerated amortization of Current Asset while the balance is included as emergency facilities ...... (795) (795) part of Other Investments. $ 5,737 2,829 22

The combined current Federal and State corpo- At December 31, 1973 the Company was com-rate income tax rates equal about 54/o for the mitted under noncancelable leases expiring at Company, after considering the deductibility of various dates to 1996. The minimum rental com-the State income tax expense. However, the ef- mitments under these leases for future years are fective income tax rate (income tax expense as as follows (millions of dollars): 1974, $ 3.7; 1975, a percentage of net income before income tax $ 3.8; 1976, $ 3.7; 1977, $ 3.5; 1978, $ 3.3; 1979 expense and net deferral 'of investment tax through 1983, $ 12.5; 1984 through 1988, $ 7.0; credits) was 28'/o in 1973 and 25/o in 1972. The 1989 through 1993, $ 5.6; after 1993, $ 2.0. Mini-reasons for the lower effective tax rates are mum rental commitments for future years total shown in the following summary: $ 45.1 million, applicable to the following cate-t gories of properties: combustion turbine generat-1973 '972 ing equipment, $ 19.2 million; railroad coal cars,

$ 11.8 million; computer equipment, $ 14.1 million.

(Thousands of Dollars) Generally the leases contain renewal options and Indicated income tax expense obligate the Company to pay maintenance, insur-at combined Federal and ance and other related costs.

State tax rates .......... $ 54,131 45;166 Reductions in indicated tax The impact upon net income in each of the years due to: 1973 and 1972 would be less than 1'/o if all non-Investment tax credits .... 7 233 7,349 capitalized financing leases were capitalized and Allowance for funds used amortized on a straight-line basis with interest during construction accrued on the basis of the outstanding lease nontaxable 8,041 7,906 liability.

Tax depreciation (excluding portion due to shortening depreclabIe lives by 12. COMMITMENTS AND CONTINGENT 20 lo under the class life system) in excess of LIABILITIES book depreciation ..... 7,531 6,145 The Company estimates that about $ 1.8 billion Tax and pension costs- will be required to complete construction proj-tax deduction in excess ects in progress or authorized to be started in of book expense ....... 2,687 2,554 1974. Of this amount, about $ 305 million is ap-Other 332 615 plicable to the year 1974 with the balance to be Total reduction in expended through the year 1981.

indicated income tax ... 25,824 24,569 Actual income Iax expense .. $ 28,307 20,597 The Company is subject to certain present and developing laws and regulations with respect to air and water quality, land use and other envi-

10. RETIREMENT PLAN ronmental matters. The Company is unable to predict the ultimate effect of such laws and regu-Obligations of the Company's Retirement Plan lations upon its existing and proposed facilities are currently funded through a Trust Fund. At and operations. It is possible that such laws and June 30, 1973, the end of the Fund's most recent regulations may require the Company to modify, fiscal year, the Fund's assets at cost were $ 80.0 supplement, replace or cease operating certain million; the actuarially computed unfunded past of its equipment and facilities, delay or impede service cost was $ 13.6 million; and vested bene- construction and operation of new facilities, and fits exceeded the cost basis of the Fund's assets require substantial additional expenditures in by $ 7.3 million. Pension costs for the years 1973 amounts which are not now determinable.

and 1972 were $ 6.8 million and $ 6.7 million, re-spectively, including in each year funding of the In connection with providing for its future bitu-past service cost. minous coal supply, the Company has PUC ap-proval to guarantee the capital obligations of

11. RENTALS AND NONCANCELABLE certain coal suppliers (including four owned or controlled coal companies) up to approximately LEASE COMMITMENTS

$ 100 million outstanding at any one time. Obliga-Total rentals charged to operating expense for tions actually guaranteed under these arrange-1973 and 1972 amounted to $ 7.5 and $ 6.3 million, ments aggregated $ 91.0 million at December 31, respectively. 1973.

23

PRINCIPAL OFFICERSD BOARD OF DIRECTORS JACK K. BUSBY, President CLIFFORD L. ALEXANDER JR., Washington, D.C.

Partner of Arnold & Porter, Counsellors at Law AUSTIN GAVIN, Executive Vico Prosident JOHN T. KAUFFMAN,Assistant Vice President, JACK K. BUSBY, Allentown System Power 8 Engineering President of the Company NORMAN W. CURTIS, Vice President, RALPH R. CRANMER, Williamsport Engineering & Construction President and General Manager of Grit Publishing Company ROBERT R. FORTUNE, Vice President, Financial EDGAR L. DESSEN, Hazleton GEORGE F. VANDERSLICE, Comptroller Physician-Radiologist CHESTER R. COLLYER, Treasurer AUSTIN GAVIN, Allentown DONALD J. TREGO, Assistant Treasurer Executive Vice President ol the Company BROOKE R. HARTMAN, Vice President, Division Operations W. DEMING LEWIS, Bethlehem President ol Lehigh University LEON L. NONEMAKER, Assistant Vico President, Division Operations JOHN A. NOBLE, Scranton CHARLES E. FUQUA, Vice President, Susquehanna Division President ol Cleland Simpson Company JACK HANCKEL, Vice President, Harrisburg Division NORMAN ROBERTSON, Pittsburgh CARL R. MAIO, Vice President, Lehigh Division Senior Vice President and Chief Economist of JAMES J. McBREARTY, Vice President, Northeast Division Mellon Bank,, N.A.

HERBERT D. NASH JR., Vice Presidonl, JOSEPH T. SIMPSON, Harrisburg Consumer and Community Services Chairman of the Board ol Harsco Corporation EDWIN H. SEIDLER, Vico President, Distribution M. J. WARNOCK, Lancaster BRENT S. SHUNK, Vice President, Lancaster Division Chairman ol the Board ol Armstrong Cork Company EMMET M. MOLLOY, Vice President, CHARLES H. WATTS II, Lewisburg Human Resource and Development President of Bucknell University RICHARD H. LICHTENWALNER,Vice Presidenl, S. HAYWARDWILLS, Miami, Florida Public Relations Chairman ol the Board and President ol GAC Corporation EbWARD M. NAGEL, Vico President, Executive Committee: Jack K. Bushy, chairman: Messrs. Gavin, Simpson.

General Counsel and Secretary Warnock and Wills.

Audit Comminee: Charles H. Watts II, chairman: Messrs. Alexander

'As of Jan. 1, 1974 and Warnock.

SECURITIES LISTED ON EXCHANGES FISCAL AGENTS NEW YORK STOCK EXCHANGE TRANSFER AGENTS FOR PREFERRED, First Mortgage Bonds, 3% Sorics duc 1875 PREFERENCE AND COMMON STOCK 4rh% Prolcrrcd Stock (Codo: PPLPRB) Indusulal Valley Bank and Trust Company 4.40% Scrios Prclorrcd Stock (Coda: PPLPRA) 634 Hamilton Mall 8.60% Series Prclorrcd Slack (Codo: PPLPRG) Allentown, Pennsylvania 18 101 Prolcrcnco Stock, $ 8.00 Sorics (Codo: PPLPRJ) Irving Trust Company Prclcrcnco Stock, $ 8.40 Sorlcs (Codo: PPLPRH) Ono Wall Street Prclcrcnco Stock, $ 8.70 Scrios (Coda: PPLPRI)

New York, Now York 10015 Common Stock (Coda: PPL)

Pennsylvania Power & Light Company Two Noah Ninth Strccl PBW STOCK EXCHANGE 4 ye % Preferred Stock Allentown, Pennsylvania 18 101 3.35% Series Preferred Slock REGISTRARS FOR PREFERRED, 4.40% Series Preferred Stock PREFERENCE AND COMMON STOCK 4.60% Series Preferred Stock The First National Bank ol Allentown 8.60% Series Preferred Stock Hamilton Mall at Seventh 8% Series Prolcrrcd Stock Preference Stock, $ 8.00 Series Allentown, Pennsylvania 18101 Prolcrcncc Stock, $ 8.40 Series Morgan Guaranty Trust Company ol Ncw York 23 Wall Street Preference Stock, $ 8.70 Series Common Stock New York, New York 10015 DIVIDEND DISBURSING OFFICE FOR PREFERRED, PREFERENCE AND COMMON STOCK Treasurer Pennsylvania Power & Lighl Company Two North Ninth Street Allentown, Pennsylvania f 8101

ACCOUNTANT'S OPINlON HASKINS & SELLS Two Broadway Certified Pubtlc Accountants New York 10004

',gl To the Shareowners and Board of Directors g~P~

of Pennsylvania Power & Light Company:

We have examined the balance sheets of Penn-o sylvania Power 8 Light Company as of December 31, 1973 and 1972, the related statements of in-come, earnings reinvested and sources of funds used for new construction for the years then ended and the schedule of capital stock and long-term debt as of December 31, 1973. Our examination was made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

In our opinion, such financial statements and schedule present fairly the financial position of the

<<r Company at December 31, 1973 and 1972 and the results of its operations and sources of funds used 'i /

for new construction for the years then ended, in conformity with generally accepted accounting l I,; >jj "tIIJ) principles applied on a consistent basis.

HASKINS & SELLS February S, 1974 In September 1973, PP&L's board of directors and key olficers visited Philadelphia Electric Company's Peach Bottom nuclear generating plant being constructed along the lower Susquehanna River near the Pennsylvania-Maryland border. The directors were able to see first-hand the intricate safeguards that are built into every nuclear generating facility.

The Company files Form 10-K annually with the Securities and Exchange Commission. Form 10;K is composed of this Annual Report to shareowners and additional information concerning the Company and its operations. This additional information will be available after April 1 1974 by writing to Pennsylvania Power 8 Light Company, Two North Ninth Street, Allentown, Pa.

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18101 attention: Mr. George I. Kline, Investor Services Manager.

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PPaL PENNSYLVANIA POWER 8 LIGHT COMPANY Two North Ninth Street, Allentown, Pa. 18101 Telephone: Area Code 215 821-5151 LITHO IN U.S.A.

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, I JUL11 1973m 5 U.S. ATO)A!C ENERGY K:*Yii::-!'.:8 Mail Sec!hn

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]($@j pg ( J 1972 annual report PEN NSYLVANIAPOWER A. LIGHT COMPANY 3 AS

Contents HIGHLIGHTS The Year in Review 2-10 1972 1971 The Energy Crisis 11-14 Revenues . $ 345,792,000 $ 300,707,000 Financials 16-22 Net Income.. 57,921,000 48)572,000 Notes to Financial Statements 22-23 Directors and Principal Officers 24 Earnings Per Share based on average number of shares of common stock outstanding ....,.......... 2.48 2.37 Dividends per share of common stock .. 1.64 1.60 Total Utility Plant......... 1,637,040,000 1,458,707,000 Cover Photos (c/ockw/se /rom fop)

Peggy Wilcox, consumer adviser in the newly formed Consumer & Community Affairs Department, listens while a PP&L customer comments on several aspects of the Company's operations.

An aquatic biologist surveys part of a 50-mile stretch of the Susquehanna River as part of a 10-year environmental surveillance program for PP&L's proposed Susquehanna Steam Electric Station, the Company's first nuclear plant.

Construction continues on the first of two 800,000-kilowatt, oil-fired generating units at the Martins Creek site on the Delaware River. The unit is scheduled to be in service early In 1975.

At the height of Tropical Storm Agnes, Brunner Island generating station had 15 feet of water in the basement. Three weeks after this picture was taken, and in a remarkable display of teamwork and effort, the station was back in service.

President's Message Even though increases in tensions and We emphasize again that our financing ways and means by which our customers problems sometime seem to be a new was possible only because the Company can take steps to conserve their require-norm, we consider that 1972 was a good has maintained a record of good financial ments for electricity, particularly during year for the Company. A modest improve- performance. Such performance includes peak periods. Conservation during peak ment in earnings per share was made three essential requirements: a sound periods is especially important because it possible by higher electric service rates balance in the capital structure between is the increases in peak period use that effective last March and by the favorable debt and equity securities, adequate earn. trigger new construction requirements, performance of our major generating sta- jngs coverage of interest charges and and related financing needs.

tions. This performance was achieved growth in earnings per share for the com- Our policy of conservation of energy was despite the more than $ 1.6 million of spe. mon stock in line with the shareowner's the outgrowth of a variety of short and cial costs (equal to 10 cents a share) increased investment. Otherwise we can- long-term considerations. Oneof the main caused by Tropical Storm Agnes. not maintain investor confidence and reasons was th'e impending "energy We particularly call attention to the many attract the needed new capital. crisis" (see separate section starting on PP&L employees who conducted them- Since new funds needed in the next five page 11). Coal has been restricted by selves with such outstanding skill and years are estimated to be $ 1.5 billion, we environmental limitations. In many parts dedication in a variety of difficult and stress the paramount importance of safe- of the country, natural gas is being hazardous situations during Agnes. The guarding and continuing PP&L's record of rationed. Our domestic oil production is havoc caused by the flood has been greatly good financial performance. It becomes far short of meeting total petroleum needs.

mitigated by courageous self-help and ever more essential that the public also The overall result is an increasing demand massive relief and rehabilitation assis- understand and accept this fact because for electricity as customers turn to this tance. While much remains to be done, our financial health is necessary for a con- form of energy, where feasible, in order to favorable prospects for Northeast Penn- tinuation of quality electric service for our offset scarcities in supplies of other fuels.

sylvania have been re.established. The customers. The circumstances clearly point to in-affected communities have, in just a few As we now see the conditions that exist creasing needs for nuclear power plants.

months, made a great deal of progress. in the national and regional economies, It has become a matter of the highest Notwithstanding the disruption of Agnes, the meeting of this financial responsibility priority for the country to develop new the overall pattern for the PP&L service means periodic rate increases. We are supplies of gas and oil. Also, it is critically area for the year was one of continued aware of the need for productivity gains. important to encourage the prompt corn.

economic growth and rising demands for But such gains cannot meet the total needs pletion of electric power facilities now energy. We were able to meet in full these of the situation. We expect to file in the planned and under construction. The increased electrical requirements. We also near future a rate increase application avoidance of delay in completing such expect to meet without difficulty the pre- with the Pennsylvania Public Utility Com. electric facilities is one of the best ways dicted larger requirements for 1973. mission. now available to lessen the energy crunch PP&L, along with the Pennsylvania. New A major thrust of the Company through- that is so rapidly approaching.

Jersey-Maryland (PJM) Interconnection of out the year has been to carry out our Of course, the key to setting necessary which we are a part, is expanding its commitment to conservation of energy. new governmental policies is public generating capacity. Early in 1972, our During 1973 we expect to substantially understanding of what the energy crisis Montour No. 1 generating unit went in extend our expertise in this field and is all about. To do our part in this process, service and its companion unit, Montour greatly increase our marketing of practical we have instituted broad and intensive No. 2, is nearing completion. This second information programs, both with individual unit is now in trial operation and should customers and the general public. Because be in regular service this spring. These of the long-range importance of these two coal-fired units total 1.5 million kilo- matters, we hope these discussions will watts. They will increase PP &L generating / be persuasive. Toward this end we ask for capacity by over 40 per cent. the active support of our shareowners in Underlying the construction of these and Qrg%3 carrying forward this program.

other new facilities was the Company's successful financing program. The year Respectfully submitted, 1972 marked an all.time high in raising new capital. A total of $ 165 million was obtained through the separate sales of bonds, long-term notes, preference stock and common stock. Jack K. Busby, President March 1, 1973

YEAR IN REVIEW Revenues in 1972 were $ 346 million, the highest in the Company's history. This level was reached, of course, with the assistance of higher rates charged for electric service.

This compares with revenues of $ 301 million in 1971.

The kilowatt hour sales gain was 9.2 per cent over 1971 in the residential category, 11.3 per cent in the commer-cial sector and 6.7 per cent in the industrial area. In each case, these increases are above last year's and reflect the general improvement in the national economy. Overall, the rate of growth was 8.5 per cent. The real significance of this gain over the 1971 level was that even in the face of substantial and growing efforts by the Company to promote energy conservation, the use of electricity continued to rise. While it's still too early to tell whether intensified con-servation efforts will have a significant effect on future energy demands, presently we believe that rising demands for electric service will require a large and continuing con-struction program.

Building to Meet the Demand Building the facilities to meet a predicted demand for elec-tricity is a big and growing job. In 1972 the Company's construction expenditures reached $ 219 million and are expected to rise steadily in the years ahead. This mas-sive amount of construction caused one person to suggest that PP8 L was actually a large construction company which happens to sell electricity as a sideline. This characteriza-tion, while facetious in nature, does emphasize the very substantial building task facing the Company as we strive to provide for our customers'nergy needs.

One of the largest blocks of new generating capacity ever added to the PP8L system was welcomed aboard last March with the addition on schedule of the 720,000-kilowatt No. 1 unit at the Montour Steam Electric Station in the northwest part of PP8 L's service territory. This unit has per-formed very well since its startup and continues to do well, certainly due in good part to the substantial efforts taken to learn from the problems associated with the construction and startup of the Brunner Island No. 3 unit. The No. 2 companion unit at the Montour site is nearing completion with an in-service date scheduled for the spring of this year.

I n addition to the Montour project, there was very sub- should construction of the pipeline be unduly delayed.

I stantial progress made during 1972 on two 800,000-kilo- The 300,000 kilowatts of coal-fired capacity at Martins watt oil-fired units at the Martins Creek site on the Delaware Creek ran well most of the year but encountered some diffi-River. At the end of 1972, the first of these units was 28 culties late in 1972. Unit No. 1 was late in returning from per cent complete and is scheduled to come in service early a scheduled overhaul due to greater-than-expected repair in 1975. The second unit was 2 per cent complete and is requirements and was out of service for 82 days. While scheduled for service early in 1977. Unit No. 1 was being repaired, Unit No. 2 suffered a lubri-The Company is arranging with a pipeline company for cation failure. As of February 1973, both units were back the delivery of low-sulfur oil to the Martins Creek station in service.

by a proposed pipeline from a deep water terminal on the Delaware River. On February 8, 1973, the Pennsylvania Nuclear Plans Move Ahead Public Utility Commission (PUC) authorized subject to a number of conditions operation of the pipeline between Regulatory proceedings involving a construction permit for a terminal south of Philadelphia and the Martins Creek the Susquehanna nuclear station near Berwick continued plant. In a lengthy order following an extensive investigation during 1972. The Company originally announced its inten-during which environmental concerns were aired, the PUC tion to build the two 1.1-million-kilowatt units in September found the pipeline company entitled to a permit for trans- of 1970. Since that time, PP&L has been following the mission of oil through the $ 45 million, five-county line. The permit and licensing procedures required by the Atomic company may not start construction until it gets required Energy Commission (AEC) for securing approval to con-struct the plant. These procedures are thorough and very approvals from the Delaware River Basin Commission and other appropriate agencies. detailed and cover every conceivable aspect of the plant's PPBL is investigating alternate temporary transportation design and construction. A construction permit will be is-fo'r the oil necessary to operate the new Martins Creek units sued only after it has been established to the satisfaction i of the AEC that the plant can be built and operated without risk to the health and safety of our employees or the general public and that it meets all environmental standards. In

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g h A revolutionary concept in service center design, the circular

Lancaster facility, above, allows efficient inventory control and speedy dispatch of service crews. With all the discussion about installing adequate supplies of electric generating capacity, we sometimes forget that stringing the lines to deliver generated power is a big part of our construction effort. In 1972, for example, PP&L crews strung 460 miles of transmission and distribution lines.

April of 1972 the Company's application for a construction Company management, from the Board of'Directors on permit was favorably reviewed by the AEC's Directorate down, has taken substantial steps to become aware of all of Licensing and by the Advisory Committee on Reactor of the environmental, safety and social factors associated Safeguards. In July, the Company submitted a supple- with the construction of a nuclear facility. The Board of mental and greatly expanded environmental report. The Directors for example, late in September, participated in a initial hearings were held at Berwick late in February of this comprehensive program of independent expert briefing year. Further hearings will be held during the summer and on nuclear power, including an informational trip to Gen-the Company hopes that by late 1973 ground can be broken eral Electric's nuclear facilities on the West Coast. The and work can begin on the units. / management of your Company feels contident that it is When one takes into account the approximately six years acting in the best interests of the public and PP&L share-required to actually build a nuclear plant, it is easy to see owners by proceeding to use nuclear power in a PP&L that from start to finish, the placing in service ot a nuclear generating station.

station requires about 10 years. This compares with the six to eight years required for a fossil-fueled station. Even The Wise Use of Energy though the length of time to build a nuclear plant is sub-In this period of energy shortages and impending energy crisis stantial, and even though the capital cost for two nuclear building to meet surging demand must be coupled units at the Susquehanna site is presently estimated to be with a program to encourage the wise use of energy re-

$ 1.2 billion, nuclear power remains an essential economical sources. As mentioned in the insert beginning on page 11 component in meeting the Company's tuture energy re-and discussed there in more detail, the Company in 1972 quirements. We feel that this is particularly so in light of the undertook a very significant shift in its marketing policy.

obvious shortages in other fuels required to generate elec-This shift took form early in the year when the Marketing tricity and in the face of mounting environmental require- Department was restructured and redesignated the Con-ments. While it is true that no form of electrical generation sumer & Community Atfairs Department. Actually this sig-is absolutely without environmental effect, we feel that nificant 'change had been developing for quite a number nuclear power is the cleanest alternative available for the of years. In 1970 the Company eliminated its advertising foreseeable future. The Company has made a great effort expenditures for the promotion of electric heat and began to discuss this issue with interested citizens at every oppor-to drastically cut down on the number of promotional allow-tunity and to explain to them the relative merits of a nuclear- ances granted to various sales allies of the Company. The fueled generating facility. Not everyone we'e spoken to, switch completed this past year thus formalizes a shift from of course, is satisfied with these explanations but we feel a basic policy of promotion to one of conservation.

that most people see the need for such plants.

The Company is also sponsoring forums for groups par-ticularly involved in energy utilization. For instance, the Company in September sponsored an energy conservation forum for architects and engineers, In years past, a gather-ing ot these people had been devoted to encouraging them to select electricity as the energy source in the buildings that they designed. However, in 1972, the Company de-

voted its message to energy conservation in the design Energy and the Environment and construction of structures and sought to enlist the Last year we stated in this report the Company's philosophy support of this influential group. The majority of the archi- in coping with environmental matters. It was and is that tects and engineers in attendance felt that the effort was PPBL is committed and determined to do whatever is re-worthwhile and commended the Company for taking the quired of us and more, where practical, to minimize the initiative in speaking to the energy issue. The Company effect of our operations on the environment. This is still the intends to continue holding such conferences, not only with Company's basic position. However, the dimensions of the architects and engineers, but also with industrial and busi- energy dilemma facing the United States are such that nessleaders. some hard questions must be asked about the formulation On a more philosophical level, the Company participated of environmental rules and regulations, a subject discussed with Lehigh University in the sponsorship of a symposium in the energy crisis insert.

on the question of economic growth. The symposium heard There were many ongoing environmental projects in the from many distinguished historians, sociologists, econo- works at PP8 L in 1972. The Montour Steam Electric Station, mists, and industry representatives regarding the pros and whose No. 1 unit came on the line in the spring, features cons of economic growth in light of the environmental and one of the most comprehensive environmental monitoring resource limitations present today. The conference was and control systems of any electric generating station of its basically an informational one and as such came up with size. For instance, the plant has one air and five water moni-no specific recommendations. However, since economic toring stations tied to the plant computer to keep close tabs growth is so intimately linked to the use and availability of on changing conditions that may call for corrective action.

energy, the Company felt that this discussion was a valu- Two other stations for monitoring air quality will be placed able effort towards coming to grips with the problems of in service later after preliminary data now being gathered energy utilization in a society of changing values. indicates where they should be located. Of course, the plant also has the major pieces of environmental equipment In-house training programs received added emphasis in 1972.

The PP&L Training and Development Center, left, offered about 25 separate courses in Management Development and in Skills and Technical subjects, like this welding course.

In another training effort, a PPB L Affirmative Action program assistant conducts an orientation for two young women employees hired through the National Alliance of Businessmen JOBS program.

which are now common on all electrical generating stations The Company, of course, is subject to certain present of this size. These include a highly efficient dust removal and developing Federal, regional, state and local laws and system, high chimneys which carry gases to altitudes where regulations with respect to air and water quality, land use they can be readily dispersed, and cooling towers which and other environmental matters. The Pennsylvania De-allow the cooling and recirculation of water used in the partment of Environmental Resources (DER) adopted ini-process of generating electricity rather than returning hot tial regulations as part of the implementation plan for Penn-water to the river. In addition, it is anticipated that the Mon- sylvania required by the Federal Clean Air Act as enforced tour Preserve, a public recreation and ecological study area by the United States Environmental Protection Agency.

associated with the reservoir which serves as an alternate Under the presently effective regulations of the DER, com-supply for the plant's water system, will move toward com- panies not in compliance with the emission regulations pletion in 1973. are permitted to apply for variances which, if granted, would Construction of bag filters for air pollution control of units allow up to three years in which to achieve compliance.

No. 1 and No. 2 at Sunbury Steam Electric Station is pro- The Company filed the necessary applications for vari-gressing. It is anticipated that this system, which has been ances outlining its plans for achieving compliance. These designed to trap and remove more than 99 per cent of the plans include, among other things, installing additional dust before it reaches the chimneys, will be completed in dust collection equipment and the processing of coal to the spring. In another potential environmental improve- reduce the sulfur content prior to burning. These variances, ment at the Sunbury station, the Company will conduct a if granted, will provide time during which we can get our one-year pilot test of a wet limestone scrubber system equipment designed, ordered and installed.

which would remove sulfur dioxide gas (SOa) from a small test portion of the total boiler flue gas flow from the No. 4 unit. The test is targeted for a June 1973 startup. The re-moval of sulfur dioxide from stack gases is a major, and as yet unsolved, environmental problem associated with the generation of electric power when using fossil fuels.

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The dedicated efforts of many people were the main reason why PP&L was able to restore electric service quickly to those customers affected by Tropical Storm Agnes. Workers, above, begin the tedious task of checking machinery flooded at the Brunner Island Station.

At top right, the Company's emergency control center coordinates all service restoration efforts 'round-the-clock. And at bottom right, a lineman opens a switch along a flooded street so that power can be routed around an affected area.

For the future, the Company is unable to predict the ulti- Utility Commission, two generating units at the Company's mate effect of developing environmental regulation upon Moltwood Steam Electric Station were retired on Oct. 1.

its existing and proposed facilities and operations. How- These two coal-fired units had been in service since 1925.

ever, it is possible that such regulation may require the Spare parts had become increasingly difficult to obtain, Company to modify, supplement, replace or cease operat- the units'ost of operation had been high and their output ing certain of its equipment and facilities, delay or impede had been reduced to hold down stack emissions. In June, its construction and operation of new facilities and require operations at PP&L's Stanton Steam Electric Station, be-it to make substantial additional expenditures in amounts tween Scranton and Wilkes-Barre, were discontinued. Orig-not yet known. inally Stanton's shutdown was scheduled for Oct. 1 along Because of the state of environmental technology, it is with the two Holtwood units but damage by Tropical Storm much easier to bring our large new plants into compliance Agnes moved ahead the date for closing. This 106,000-with existing regulations than it is with the smaller older kilowatt plant, like the two Holtwood units, was also old and stations. For these reasons, plus those of high operating suffered from high operating costs.

cost and general inefficiency, the Company, as planned, was able during the year to retire some old electric generat-Tropical Storm Agnes ing units. With the permission of the Pennsylvania Public The early shutdown of the Stanton plant was only a small part of the overall effect on the Company of Tropical Storm Agnes. Actually, in terms of what could have happened to the Company as a result of the storm, the Company came through the experience in relatively good shape. Effects of the flood reduced earnings by $ 1.6 million or 10 cents per share. Financial losses would have been much greater if the Company had not had flood insurance and a reserve for the extraordinary power costs incurred during the flood period.

.T The main impact of the storm was borne primarily by our J

customers in the Wilkes-Barre and Harrisburg areas. All told, about 110,000 PP8 L homes and businesses, or about 13 per cent of our customers, were out of service at one time or another due to damaged electric distribution sys-tems, the maximum at one time being 55,000. Throughout the emergency, a source of pride for the Company was the dedicated job done by so many PPBL men and women.

Restoration of service for customers became a total Com-pany commitment. One of the most notable jobs was the restoration to active service within three weeks of all units

at the Brunner Island plant. Another was the construction electricity must begin to reflect today's increasing cost of from scratch of a substation to serve the Wilkes-Barre area, providing it.

a job done 'round the clock and completed in just 78 hours9.027778e-4 days <br />0.0217 hours <br />1.289683e-4 weeks <br />2.9679e-5 months <br />. The following list shows the major changes made in rates In addition, the Company cooperated in making land avail- for electric service in recent years.

able for the placement of temporary mobile homes.

March 1970 Tax surcharge to recover the cost of in-Revitalization of the areas affected by the flood continues creased state taxes.

to be a prime concern of your Company, particularly in the April 1970 General rate increase of 5 per cent.

Wilkes-Barre region. As you may know, PP8L was in the Dec. 1970 Fuel adjustment clause to adjust the prices forefront of efforts during the Fifties and Sixties to breathe of electric service for variations in the cost new economic life into our northeast region. The people of fuel used to generate electricity.

at that time responded with a great determination and made May 1971 General rate increase of 4.4 per cent.

great strides at re-establishing the area's economic vitality. 1972 saw a continuation of this pattern of seeking rate We have no doubt that, with the assistance of Federal and relief to cover the increasing cost of providing electric state funds, the hard working and determined people of that service. A 6 per cent rate increase was granted by the region will once again bring the area back from severe Pennsylvania Public Utility Commission as of March 28, difficulties. As one local leader put it, "These are people, 1972. This increase ($ 17 million annually), in addition to the remember, who battled economic adversity before and won. 4.4 per cent ($ 12 million annually) granted last year, was And they'l win again."

the PUC's allowance on our request filed in early 1971.

Nowhere is the continuing need for adequate rates more Higher Rates, Construction Financing clearly demonstrated than in the size and cost of the Com-The inevitability of higher rates for electricity is becoming pany's construction program. To meet the energy needs of more apparent. A quick look shows that the PP&L residen- our customers, the Company must build about $ 1'/~ billion tial price of electricity between 1960 and 1969 declined 8 of electric facilities in the next five years alone. Since the per cent while the consumer price index rose a whopping 24 normal operations of our business only generate about 25 per cent. However, since 1969, things have changed. Im- per cent of the funds required for such construction pur-proved technologies which long permitted efficiences are poses, three-quarters of the needed money must be raised no longer available in the same abundance as years past. In by selling PP8 L securities in the open- market. This the addition, inflation has caused the overall cost of doing busi- Company has been doing with increasing frequency in the ness to rise sharply. The result of all this is that the price of last few years. 1972 was yet another very busy year in the capital markets, as indicated below: .

~ First Mortgage Bonds, 7'/e% Series due in the year 2002 $ 75,000,000

~ Notes due 1974-1976, 6~/4%-6~h% 8,300,000

~ Preference Stock,

$ 8.00 Series, 350,000 shares 35,000,000

~ Common stock, 2 million shares 46,940,000 TOTAL $ 165,240,000 The Company was also granted approval in 1972 to par-ticipate with the Lehigh County Industrial Development Authority in the financing of up to $ 44 million of tax-free

industrial revenue bonds for pollution control purposes. Two-way Communication This form of authority financing for pollution control was The Company places great emphasis on communicating only recently made available to utility companies as a result with its various publics on matters such as rates, our con-of changes in Pennsylvania law. struction program, environmental issues, nuclear power The Company's 1973 financing year has already begun and a whole host of other subjects which will affect the with the January sale of $ 80,000,000 of 30-year,7~/s per cent Company's performance in the years ahead. That is why First Mortgage Bonds. Plans for the remainder of the year the Company in 1972 accelerated its efforts to bring the call for the sale of additional debt, common and preferred Company's message to a broader cross-section of people.

or preference stock. Since the great bulk of the funds we The service area news conferences initiated in 1971 were need must be raised from investors like yourselves, we con- continued this past year. These were candid, two-way tinually emphasize to our customers and to regulatory offi- discussions between management and our local media.

cials that it is essential that our rates be high enough to No holds were barred and every subject raised received give us the financial performance which will attract this very an airing. Our willingness to be available in this manner large number of investor dollars. is part of a conscious effort to build credibility for the Com-PP&L, of course, is committed to doing what it can pany. Certainly, not everyone agrees with us, but we feel 0

through cost control and increased effectiveness to hold down the need for higher rates. But as mentioned in the President's Message, the increasing impact of higher costs far exceeds our opportunities to reduce them.

i PP&L's participation in research programs is greatly expanding.

i~ r Three sponsored by the Electric Power Research Institute and to which PP&L is contributing are shown here. Above, research by High Voltage Power Corp. on extra-high voltage underground transmission, uses compressed gas as an insulator. Magnetohydrodynamics (MHD), top right, is a developing concept for generating electricity whereby a gas flame is directed between curved electromagnets to produce electric current. It fs being conducted at the Avco Everett Research Laboratory.

And work continues by General Electric Co. on ultra-high voltage overhead transmission, bottom right, in the 1.1-million-volt to 1.5-million-volt range. Presently 500,000 volts is the highest transmission voltage on the PP &L system.

that PPBL benefits from this open policy of willingness to discuss all pertinent issues relating to electric energy.

The Company's rolling communications medium, "The Energy of Man" exhibit, completed another successful year of touring the service area. The train, which contains much information about the Company and its future plans was visited this past year by more than 100,000 persons. This brings the train's 1~/2-year attendance to about 225,000.

'Management Changes Clifford L. Alexander, Jr., partner in the Washington, D.C.

law firm of Arnold 8 Porter, was elected to the Company's Board of Directors at the Annual Meeting on April 26, 1972.

He fills the vacancy created by the retirement of Dr. Eugene Farley, chancellor of Wilkes College.J3r. Farley had served PPBL with distinction for 10 years.

Mr. Alexander served as foreign affairs officer with the National Security Council under President Kennedy in 1963 and as a White House counsel on civil rights under Presi-dent Johnson. He was chairman of the U.S. Equal Employ-ment Opportunity Commission from 1967 to 1969. He is active with the Legal Defense Fund of the NAACP and was recently named secretary of the National Urban Coalition.

Mr. Alexander is no stranger to PPBL having previously been retained as a consultant in the implementation of an affirmative action program to help assure equal employ-ment opportunities throughout the Company.

Effective Dec. 1, S. Fred Diffenderfer retired as vice president reporting to the president on special assign-ments. Mr. Diffenderfer had served the Company most ad-mirably for 42 years.

On July 1, 1972 Leon L. Nonemaker was appointed vice president of the new Consumer 8 Community Affairs De-partment. He was formerly vice president-Marketing.

Within the new organization which Mr. Nonemaker heads, there has been established a team of consultants who ad-vise and work with customers in adopting energy con-servation techniques. Smaller than the former marketing and sales organization, the Consumer 8 Community Affairs Department is staffed by some 125 consultants who offer advice on wise energy use. The team consists of consult-ants to service some 100,000 commercial and industrial customers. And there are residential, consumer education and agricultural consultants who work among 750,000 residential and farm customers.

THE ENERGY CRISIS There has been a great deal of talk lately about in many parts of the midwest this past winter.

an energy crisis in the United States. And for Denver, Colo. school children can attest to the good reason. With supplies of needed, fuels in fact. Their schedules had to be shortened be-short supply or subject to limited use because cause of shortages of fuel needed to heat and of environmental reasons; there is concern that light their schoolrooms. Industry in Wisconsin the energy demands of the near future between had to curtail operations. And in many other parts now and 1985 may not be met. The chart below of the country Pennsylvania included natural shows how the demand for various fuels will rise gas users were told that their fuel was scarce.

by that time. Indeed, many gas companies were ordered not to take on new customers because of the problems.

WHY PP&L IS CONCERNED U.S. ENERGY DEMAND 5 DISTRIBUTION (Quadrillion BTU's) PP&L is concerned about the problem for two reasons. One, we are a user of key fuels. To 125 operate our generating stations, we use about 7 NUCLEAR million tons of- coal a year. We are presently COAL building two oil-fired generating units at our GAS IMPORTS Martins Creek site near the Delaware River which 68 will require 15 million barrels of oil each year.

OOM. NAT. GAS The second reason we are concerned about the NYORO energy crisis flows naturally from the first. It is that we are an energy supplier in addition to being OIL IMPORTS a user. It stands to reason that if our use of fuels 00MESTIC OIL to generate electricity is curtailed because of 1970 1985 short supplies, our ability to supply electric energy will be severely hampered. And after all, supplying electricity is our No. 1 job.

What are the consequences of not having enough energy? Schools may have to close, or SHORTAGE OF KEY FUELS at the very least operate on a much shorter The basic problem concerns shortages of fossil schedule. Factories will not be able to operate fuels natural gas, oil and coal. Let's take a look at full capacity. As a result, workers may be laid at them one at a time.-

off. The use of electric devices in the home re- The forecasted demand for natural gas is much frigerators, ranges,-teievisions may have to be greater than the supply, which has leveled off and curtailed. These'are very real possibilities if is declining. This shortage is most unfortunate energy supplies are allowed to run short. because natural gas is very clean burning and as The signs that the'United States is already in such, is preferred for environmental reasons.

the midst of a developing energy crunch are ap- Oil shortages represent an even greater prob-parent. Severe shortages of fuel oil were evident lem. This is so because of the extensive use made

in America of oil-base products, most notably practice. So for these several reasons, among gasoline for automobiles. In addition, there is an others, the vast supplies of coal known to exist extensive home heating market for oil. Also, oil do not necessarily solve the fuel shortage.

has been recently sought out as a low-sulfur fuel for generating electricity in order to comply with environmental requirements. EFFECTS ON ELECTRIC SUPPLY Even at today's level of use, the United States Shortages of these key fuels can affect electric must import about 20 per cent of its oil needs. supplies in two ways. One, as mentioned earlier, Based on the anticipated demands, the United is due to the fact that we use large quantities of States may have to be importing over 50 per cent these fuels to generate electricity. Thus, any of our oil supply by 1985. Considering the fact shortage could adversely affect our ability to that much of this oil must come from sources supply service. Secondly, gas and oil shortages in

'of questionable friendship to the U.S., there are particular, could cause people to switch to elec-substantial national security, as well as balance- tricity for their power. Indeed, it is this potential of-payments problems, in relying on foreign oil for a large switch to electricity that could sub-imports. For these reasons, there is great em- stantially boost the need for our service. For phasis today on completing the Alaska oil pipe- these reasons, we are presently investigating all line and getting on with the job of exploring the available alternatives for generating electricity.

continental shelf as well as other domestic loca-Uranium nuclear fuel is the most obvious tions for new oil sources. The problem is that alternative. There are supplies of uranium avail-these steps involve environmental problems. Un- able to fuel America's power needs through the til these are ironed out, domestic oil will be in end of this century, utilizing present technology.

short supply. We consider nuclear power a logical addition Coal presents a perplexing problem. Everyone to a balanced power supply system. We'e ex-acknowledges that there are huge coal deposits plained many times the extraordinary design, available in the continental U.S. There are sev- construction and operating procedures devel-eral problems with it, however. Much of the coal oped by the Atomic Energy Commission (AEC) does not meet the environmental standards for for these plants. We point to the unmatched sulfur content. There are substantial efforts under safety record of the nuclear power industry and way to desulfurize coal but these research efforts the stringent protection afforded the general have not yet produced an answer. Another prob- public in the area of the plant. But, some peo-lem is that if America is to substanially rely on ple do not agree with us. Thus, a dispute con-coal as a fuel, we will have to find a great many tinues and while it does, needed power plants more coal miners than are presently available. are delayed and the pressure on the fossil fuels This will not be an easy task because people continues.

are not easily attracted to this very difficult occu- There are power sources other than conven-pation. And finally, much of the coal available tional nuclear development. Hopeful projects like must be strip-mined. This, of course, represents the nuclear breeder reactor, fusion, magnetohy-the ultimate environmental degradation to many drodynamics (MHD) and solar energy. But realis-people. Indeed, the U.S. House of Representa- tically, these developments are many years from tives pressed in its last session for a ban on the commercial use. Thus, the problem of meeting 12

America's power needs for at least the next de- We at PP8L are doing our part. As mentioned cade and a half falls to the beleagured fossil in the AnnI2al Report, the Company is building fuels and to nuclear power. the generating capacity needed for the future, as shown in this chart. However, building is just A BALANCED POLICY IS NEEDED part of the equation.

A reasonable balance between the need for more energy and the need for a cleaner environment would help the situation. Certainly, we support WHERE WILL the need for a cleaner environment. But the PPSL ELECTRICITY COME FROM?

facts are that the recent, and laudable, enthu- MEGAWATTS siasm in environmental matters has posed a rate 10,000 of change for our operations that is very difficult 8000 to cope with. SUSQ 2 SUSO. I J..

All we suggest is that we pause at least long 8000 enough to ask, "How quickly ought environ- MARTINS CREEK 4 mental rules be tightened without also con-4000 WINTER OEMANO MARTINS CREEK 3 MONTOUR 2 sidering the impact in terms of economic and social side effects?" "What is the effect, for 2000 AVARABEE VRNTER CAPACRV (leeeeled leee IIRI Reeene) example, of imposing environmental regulations calling for costly equipment of questionable effectiveness?" We think that these are ques- 70 71 72 73 74 75 78 77 78 78 80 81 82 tions which ought to be answered. We think that they are reasonable questions and we do not feel that they are inconsistent with environ-The other part is to encourage where possible mental quality.

the wise use of our energy resources. In keeping We, as a Company, will continue to work for with this thrust, the Company undertook in 1972 environmental improvement. All we ask is that a very significant shift in its marketing policy.

now that the importance of environmental quality Employees formerly involved in marketing elec-has been determined to be a primary part of each tricity are now involved in consulting with energy and every decision we make as a Company, that there be a total analysis of the effects on peo-users on the wisest and most economical uses ple, on jobs, on costs to the consumer of such for electricity. Residential consultants, for in-stance, are working with builders and developers environmental impact.

to encourage the use of energy conservation techniques in home construction. Industrial rep-ENERGY CONSERVATION resentatives are making plant surveys to attempt In view of the shortage of key fuels and the po- to discover potential for energy conservation in tential effect on electrical supplies if homes and industrial buildings and processes. PP8L people businesses switch to electricity as a result, it is are giving chart briefings on the energy crisis in everyone's best interest to work hard at con- situation to various citizens'roups and to indi-serving energy. vidual customers.

13

The Company has also initiated advertising, will contain experimental equipment and systems shown below, which is oriented toward the ways which will demonstrate ways of reducing energy a customer may conserve energy. A Homecology use. The Company hopes to use this home as a springboard for efforts to spread more broadly the message of wise energy use throughout our Coeror service territory.

, l.zlIIr,.

[I t collsopvsuoh Pg Wo'ro anxious THE BASIC PROBLEM IS TIME la to hear what you think 5 'VXI hhh

~~~is Nwl

~

H A final, overall look at the energy crisis situation That' IcttlMT% lilt'IWL MoueJJ suggests that PPBL, and other energy compa-You'e ~ l~ )e

~

Wast tnt:!...

nies, can continue to meet the nation's energy needs. Meet them without delaying people's as-pirations for a better life. Without refusing to I ='i c KJQ serve new customers. And in the case of electric ACI service, without rationing, and without having I

~'I i selected blackouts. But time is needed.

Time to straighten out the fuel shortage prob-lem. Time to search for, discover and make avail-able the vast fuel supplies known to exist.

Program has been developed for home economics Time is needed to come to grips with existing teachers in our service area for use in classrooms and developing environmental standards. This to encourage conservation in the home. means new technologies, new processes and The Company has also entered into a contract new equipment, much of it as yet unavailable.

with the Franklin Institute in Philadelphia for the And finally, we must be allowed to build with-design and construction of an energy conserva- out more delay the facilities which will serve our tion-oriented single family dwelling. This dwelling customers in the years just ahead.

STATISTICAL

SUMMARY

1972 1971 1970 1969 1968 CAPITAL INVESTMENT CAPITAL PROVIDED BY INVESTORS thousands Long-term debt ................ $ 635,044 576,760 514,371 474,182 394,268 Preferred and preference stock .. 231,375 196,375 156,375 86,375 86,375 Common equity ................ 412,130 351,299 303,117 268,233 234,957 1,278,549 1,124,434 973,863 828,790 715,600 Short-term debt 96,482 76,251 97,878 98,500 93,950 Total capital provided $ 1,375,031 1,200,685 I,071,741 927,290 809,550 RETURN ON CAPITAL PROVIDED BY INVESTORS as a percentage of average capital provided...... 7.56 7.34 6.83 7.13 6.98 NUMBER OF SHAREOWNERS-preferred, preference and common 135,399 123,598 111,909 98,450 94,671 UTILITYPLANT thousands TOTAL UTILITYPLANT .......... $ 1,637,040 1,458,707 1,275,866 1,120,022 1,010,048 ACCUMULATEDDEPRECIATION .. 275,627 274,911 249,551 225,205 220,117 UTILITY PLANT LESS DEPRECIATION $ 1,361,413 1,183,796 1,026,315 894,817 789,931 ANNUAL DEPRECIATION as a percentage of average depreciable plant ............ 3.3 3.2 3.2 . 3.2 3.2 OPERATIONS ELECTRIC CUSTOMERS ..... 863,344 843,080 828,643 818,500 805,523 ENERGY SALES millions of kilowatt hours Residential electrically heated homes .......... 2,042 1,721 1,459 1,147 848 Residential other ........ 3,943 3,758 3,634 3,426 3,240 Commercial 3,933 3,533 3,198 2,840 2,550 Industrial . 6,458 6,053 5,807 5;566 4,916 Other 637 620 585 552 527 17,013 15,685 14,683 13,531 12,081 AVERAGE ANNUALKWH USE residential customers..... 8,032 7,510 7,086 6,458 5,871 AVERAGE PRICE OF ELECTRICITY cents per kilowatt hour........ 1.99 1.87 1.70 1.61 1.66 POWER CAPABILITY kilowatts ... 4,108,000 3,496,000 3,256,000 3,124,000 2,465,000 PEAK DEMAND kilowatts 3,598,000',790 3,294,000 e 3)238,000't 2,850)000't 2,5141000',372 EMPLOYEES 6,514 6,238 6,225

'Winter peak shown was reached early tn subsequent year.

1 peaks are those which woutd have occurre'd if toad curtaitmont moasures had not been in offoct.

A more detailod review ol the Company's operations is available. A postal caid is provided with this report to aid you in making this request.

16

FINANCIALSECTION STATEMENT OF INCOME 1972 1971 1970 1969 1968 Thousands of Dollars OPERATING REVENUES (99% electric) ................. $ 345,792 300,707 255,313 223,388 205,947 OPERATING EXPENSES (Note 3)

Wages and employee benefits ... 55,220 48,198 45,779 41,946 40,731 Fuel 95,220 79,499 61,621 44,601 34,813 Power purchases .............. 13,514 18,963 21,982 17,453 14,846 Interchange power sales ........ (34,569) (15,468) (9,356) (8,865) (3,651)

Other operating costs........... 39,512 33,214 24,009 21,865 19,535 Depreciation . 41,446 34,903 32 173 28,981 26,272 Federal income taxes (Note 6) ... 12,582 9,416. 3,699 11,113 16,410 State income taxes (Note 6) ..... 5,520 3,256 1,287 3,287 2,430

, Deferred income taxes Provision 3,624 551 Deferred in prior years credit (795) (795) (795) (795) (795)

Investment tax credits Deferred 7,349 1,597 1,573 3,339 1,955 Amortization of deferments credit (2,194) (2,480) (2,539) (2,540) (2,005)

Taxes, other than income....... 25,658 22,146 18,197 8,167 7,293 262,087 233,000 197,630 168,552 157,834 OPERATING INCOME ............ 83,705 67,707 57,683 54,836 48,113 OTHER INCOME AND DEDUCTIONS Allowance for funds used during construction Other net

.......... 14,647 29 14,676 16,242 113 16,355 9,723 192 9,915 6,369 197 6,566

~8) 5,868 5,860 INCOME BEFORE INTEREST CHARGES 98,381 84,062 67,598 61,402 53,973 INTEREST CHARGES Interest on long-term debt... 36,507 30,895 25,381 20,813 16,527 Interest on short-term debt .. 3,846 4,109 7,194 5,935 3,580 Other interest charges...... 107 486 88 45 46 40,460 35,490 32,663 26,793 - 20,153 NET INCOME 57,921 48,572 34,935 34,609 33,820 Dividends on preferred and preference stock......... 14,526 11,392 6,426 3,822 3,822 EARNINGS APPLICABLE TO COMMON STOCK.......... $ 43,395 37,180 28,509 30,787 29,998 COMMON STOCK Average number of shares outstanding ............... 17,512,793 15,690,490 14,472,076 13,277,365 13,044,538 Earnings per share, based on average number of shares outstanding ............... $ 2.48 2.37 1.97 2.32 2.30 Dividends per share......;... $ 1.64 1.60 1.60 1.60 1.56 See accompanying Notes to Financial Statements, 17

BALANCE SHEET December 31 ASSETS 1972 1971 Thousands of Dollars UTILITYPLANT at original cost Electric $ 1,386,223 $ 1,189,818 Steam heat 8,110 5,661 Construction work in progress .... 242,707 263,228 1,637,040 1,458,707 Less accumulated depreciation 275,627 274,911 1,361,413 1,183,796 INVESTMENTS at cost or less Subsidiaries 3,129 4,046 Safe Harbor Water Power Corporation (t/s interest) .. 3,315 3,315 Nonutility property, less accumulated depreciation .. 2,552 2,655 Other . 5,540 4,544 14,536 14,560 CURRENT ASSETS Cash 13,729 14,197 Accounts receivable, less reserve Customers 23,510 18,755 Other 3,330 2,824 Materials and supplies (at average cost)

Fuel . 31,601 28,103 Operating and construction 12,847 10,265 Other 9,488 6,124 94,505 80,268 DEFERRED DEBITS Extraordinary power costs 1,665 1,885 Other 2,985 2,459 4,650 4 344

$ 1,475,104 $ 1,282,968 See accompanying Notes to Financial Statements.

18

December 31 LIABILITIES 1972 1971 Thousands of Dollars SHAREOWNERS INVESTMENT Preferred 116,375 3 116,375 stock'reference stock4 ........... 115,000 80,000 Common 278,484 231,544 stock expense (deduction) stock'apital

. (6,592) (5,892)

(No amortization plan ln ellect)

Earnings reinvested in business (Notes 4 and 5) . 140,238 125,647 643,505 547,674 LONG-TERM DEBT4 (Note 2) 635,044 576,760 CURRENT LIABILITIES Bank loans . 30,000 17,000 Commercial paper notes 66,482 59,251 Accounts payabie 27,193 22,876 Taxes accrued 9,963 11,739 Dividends payable and interest accrued 23,003 18,772 Other 6,471 5,631 163,112 135,269 DEFERRED AND OTHER CREDITS Accumulated deferred investment tax credits . 9,779 4,624 Accumulated deferred income taxes . 12,035 9,206 Contributions in aid of coristruction 5,859 4,056 Other 5,770 5,379 33,443 23,265

$ 1,475,104 $ 1,282,968

'See Schedule of Capital Stock and Long-Term Debt on page 20.

See accompanying Notes to Flnanctat Statements.

19

SCHEDULE OF CAPITAL STOCK AND LONG-TERM DEBT December 31,1972 Thousands of Dollars CAPITAL STOCK LONG-TERM DEBT PREFERRED STOCK $ 100 par, cumulative FIRST MORTGAGE BONDS 4'/2% authorized 629,936 shares, 3% series due 1975 . $ 93,000 outstanding 530,189 shares.......... $ 53,019 2r/a% series due 1976 ................ 8,000 Series, authorized 2,000,000 shares 2%% series due 1977 .....,..... ,... 20,000 3.35%, outstanding 41,783 shares .... 4,178 3t/a% series due 1978 3,000 4.40%, outstanding 228,773 shares ... 22,878 2s/4% series due 1980 ................ 37,000 4.60%, outstanding 63,000 shares .... 6,300 3a/a% series due 1982 7,500 8.60%, outstanding 222,370 shares ... 22,237 3t/a% series due 1983 ..............., 25,000 9%, outstanding 77,630 shares....... 7,763 3'/a% series due 1985 ................ 25,000

$ 116,375 4a/a% series due 1991 ................ 30,000 STOCK no par, cumulative, 4a/a% series due 1994 .......'......... 30,000 PREFERENCE authorized 2,000,000 shares 5a/a% series due 1996 ................ 30,000

$ 8.00 series, outstanding 350,000 6a/a% series due 1997 ................ 30,000 shares . $ 35,000 7% series due 1999 40,000

$ 8.40 series, outstanding 400,000

~

8'/a% series due 1999 ................ 40,000 shares . 40,000 9% series due 2000 50,000

$ 8.70 series, outstanding 400,000 7t/4% series due 2001 ................ 60,000 shares ..

F 40,000 7a/a% series due 2002

/

................ 75,000

$ 115,000 603,500 COMMON STOCK no par, authorized NOTES 30,000,000 shares, outstanding 6t/a% maturing in 1973 19,051,255 shares $ 278,484 to be refinanced 10,000 6t/4-8 t/4% maturing in 1974 and 1976 .. 2'i,350 31,350 OTHER . 194

$ 635,044 .

SECURITIES SOLD IN 1971 AND 1972 issued Security Shares Amount 1971 February First Mortgage Bonds, 7't/4% Series due 2001 ... $ 60,000 March-June Notes, 6i/4-7t/to% maturing in 1974 and 1976 .... 10,450 July Preference Stock, $ 8.70 Series . 400,000 40,000 November Common Stock . 1,600,000 37,120

$ 147,570 1972 February First Mortgage Bonds, 7a/a% Series due 2002 $ 75,000 February-March Notes, 6i/4-6i/2% maturing in 1974 and 1976 8,300 July Preference Stock, $ 8.00 Series . 350,000 35,000 October Common Stock . 2,000,000 46,940

$ 165,240 Soo accompanying Notes to Financial Statements.

20

SOURCES OF FUNDS USED FOR NEW CONSTRUCTION 1972 1971 1970 1969 1968 Thousands of Dollars OPERATIONS Net income (a) . 3 57,921 48,572 34,935 34,609 33,820 Less cash dividends 43,330 36,746 29.456 25,097 24,173 Current earnings reinvested in business .. 14,591 11,826 5,479 9,512 9,647 Depreciation . 41,446 34,903 32,173 28,981 26,272 Deferred extraordinary power costs........ 220 220 (2,105)

Deferred income taxes and investment tax credits net 7,984 J1,127) ~1.762) 3 ~846) 64,241 45,822 33,785 38,496 35,073 OUTSIDE FINANCING Sales of securities Common stock . 46,940 37,120 28,093 24,050 Preferred stock 30,000 Preference stock 35,000 40,000 40,000 First mortgage bonds 75,000 60,000 50,000 80,000 Long-term notes 8,300 10,450 2,600 Other long-term debt 42 56 87 54 Securities retired First mortgage bonds ('i5,000) (7,763)

Long-term notes . (10,000) (8,000) (1,000) (3,500) (2,500)

Other long-term debt (57) (117) (236) (140) (238)

Short-term debt net increase (decrease) . 20,231 ~21,627 ~4,122) 8,050 63,100 160,456 117,882 137,659 108,514 60,362 OTHER SOURCES AND (USES)

Investments 24 (253) 4,530 1,472 1,116 Refund of prior years. Federal income taxes net 2,956 Working capital net change (excluding short-term debt) (6,624)(b) 23,896(b) (14,824) (13,652) 1,235 Miscellaneous net 657 5,052 1,036 203 174

~5,943 26,695 (6,302) ~11,977 2,525 TOTAL FUNDS USED FOR NEW CONSTRUCTION (a) . $ 218,754 192,399 165,142 135,033 97,960 (a) Includes allowance for funds used during construction.

(b) Tho not changes In working capital resulted principally from tho following: 1972, Increases In accounts receivablo and fuol Inventory; 1971, decreases in special deposits and accounts receivable.

See accompanying Notes to Financial Statements.

21

STATEMENT OF EARNINGS REINVESTED IN BUSINESS 1972 1971 Thousands of Dollars BALANCE, JANUARY 1 $ 125,647 $ 113,821 NET INCOME . 57,821 48,572 183,558 162,393 DIVIDENDS Preferred and preference stock . 14,526 11,392 Common stock (per share 1972, $ 1.64; 1971, $ 1.60) 28,804 25,354 43,330 36,746 BALANCE, DECEMBER 31, (Notes 4 and 5) $ 140,238 $ 125,647 NOTES TO FINANCIALSTATEMENTS December 31,1972 and1971

1.

SUMMARY

OF ACCOUNTING POLICIES Depreciation For financial statement purposes, depreciation Accounting System is computed using the straight-line method ap-Accounting records are maintained in conformity plied on a group plan to accumulate an amount with the uniform system of accounts prescribed equal to the cost of utility plant, less net salvage, by the Federal Power Commission and adopted over the estimated useful lives of property.

by the Pennsylvania Public Utility Commission.

Subsidiaries Utility Plant The cost of the Company's investment in subsidi-Cost of additions to utility plant and replacements aries and other affiliated companies is shown of units of property are capitalized. Costs of de- under Investments on the Balance Sheet. Interest preciable property retired or replaced are elimi- and dividends received on these investments are nated from utility plant accounts and such costs, reflected as Other Income on the Statement of plus removal cost, less salvage, are charged to Income. The assets, revenues, and earnings of accumulated depreciation. Costs of land retired subsidiaries are not significant in relation to those or sold are eliminated from utility plant accounts of the Company.

and any gains or losses are reflected on the Statement of Income during the current year. Income Taxes All expenditures for maintenance and repairs of Provisions for current taxes payable are set forth property and the cost of replacement of items separately in the Statement of Income. Tax re-determined to be less than units of property are ductions arising from the use of the declining charged to operating expenses. balance depreciation method, guideline lives and certain income and expenses being treated dif-Allowance for Funds used During Construction ferently for tax computation than for book pur-As provided in the uniform system of accounts, poses are accounted for under the flow-through method. These reductions in income tax provi-the net cost of funds (interest on borrowed money and a reasonable rate on other capital) used to sions are taken into account in rate determina-finance construction work in progress is capital- tions by regulatory authorities and currently result in lower rates for customers than would other-ized. An amount equal to the amount so capital-ized is shown on the Statement of Income as an wise be possible.

item of Other Income and serves to offset the Deferred tax accounting is followed in connec-actual net cost of financing construction work tion with the additional income tax reductions in progress. related to accelerated amortization of certified 22

defense facilities and pollution control equip- . free of restrictions under the charter at Decem-ment, use of the class life depreciation system ber 31, 1972, after giving effect to the sale of $ 80 and, beginning in 1972, deduction of costs of million of First Mortgage Bonds in January 1973, removing retired depreciable property. was $ 103.3 million Investment tax credits are deferred. Deferred amounts pertaining to the Job Development In- 5. PROPERTIES SUBJECT TO vestment Credit (Revenue Act of 1971) are being FEDERAL LICENSES amortized over the average lives of the related The Company operates two hydroelectric proj-property while amounts pertaining to the credits ects under licenses issued by the Federal Power permitted under prior laws are being amortized Commission (FPC). Certain reserves required to over 5-year periods. be provided under the Federal Power Act have not been recorded pending approval of the amounts Retirement Plan thereof by the FPC. The Company estimates that The Company has a Retirement Plan covering such reserves applicable to the years from 1946 substantially all employees. Contributions are would not exceed $ 2.3 million at December 31, made by both employees and the Company, but 1972.

the full cost of past service and Plan improve-ments is borne by the Company. Pension costs 6. INCOME TAXES are funded currently and include amortization of past service costs over periods of not more than The excess of total tax depreciation over book 20 years. depreciation resulted in lower provisions for cur-rent taxes payable of $ 7.7 million in 1972 and $ 7.0 Research and Development million in 1971.

Research and development costs are charged to expense as incurred except for costs re- 7. RETIREMENT PLAN lated to specific construction projects which are The Retirement Plan was amended July 1, 1971 capitalized. and April 1, 1972 to provide for increased bene-fits and as of July 1, 1971 certain of the Plan's

2. SALE OF FIRST MORTGAGE BONDS actuarial assumptions were changed. At June 30, On January 8, 1973 the Company sold $ 80 million 1972, including these changes, the actuarially of First Mortgage Bonds, due 2003. The proceeds computed unfunded past service cost was about were used for general corporate purposes in- $ 15 million and vested benefits exceeded the as-cluding the retirement of a portion of short-term sets of the fund by about $ 10 million. Pension debt incurred (a) to provide interim financing for costs were $ 6.7 million in 1972 and $ 4.9 million construction expenditures and (b) to repay $ 25 in 1971, including in each period funding of the, million of long-term debt which matured Decem- past service cost.

ber 1, 1972.

8. COMMITMENTS AND CONTINGENT

3. STORM DAMAGE LIABILITIES During June 1972 severe flooding caused by The Company's construction program is esti-Tropical Storm Agnes occurred in the Company's mated to require expenditures of about $ 225 mil-service area. Effects of the flood increased oper- lion for the year 1973.

ating expenses by approximately $ 1.6 million In connection with providing for its future bi-(10 cents per share) after giving effect to insur- tuminous coal supply, the Company plans to ance recoveries, casualty reserves and related guarantee the capital obligations of certain coal tax reductions. suppliers (including four owned or controlled coal companies) up to a currently estimated $ 90

4. DIVIDEND RESTRICTIONS million outstanding at any one time. Obligations The Company's charter and mortgage indentures actually guaranteed under these arrangements restrict the payment of cash dividends on Com- aggregated $ 63.0 million at December 31, 1972.

mon Stock under certain conditions. Under the charter provisions, which are presently the more Reference is made to pages 6 and 7 of this report limiting, no restrictions are effective on the pay- for information concerning possible adverse ef-ment of such dividends out of current earnings. fects of environmental regulations on the Com-The amount of earnings reinvested in business pany's operations.

23

PRINCIPAL OFFICERS BOARD OF DIRECTORS JACK K. BUSBY, President CLIFFORD L. ALEXANDER, JR., Washington, D.C.

Partner ol Arnold 8 Porter, Counsellors at Law AUSTIN GAVIN, Executive Vice President JACK K. BUSBY, Allentown ROBERT R. FORTUNE, Vice President, Financial President ol the Company GEORGE F. VANDERSLICE, Comptroller RALPH R. CRANMER, Williamsport Presidenl and General Manager ol Grit Publishing Company CHESTER R. COLLYER, Treasurer DONALD J. TREGO, Assistant Treasurer EDGAR L. DESSEN, Hazleton Physician-Radiologist BROOKE R. HARTMAN, Vice President, Division Operations AUSTIN GAVIN, Allentown CHARLES E. FUQUA, Vice President, Executive Vice President ol the Company Susquehanna Division W. DEMING LEWIS, Bethlehem JACK HANCKEL, Vice President, Harrisburg Division Presidenl ol Lehigh University CARL R. MAIO, Vice President, Lehigh Division JOHN A. NOBLE, Scranton JAMES J. McBREARTY, Vice President, President o/ Cia/and Simpson Company Northeast Division NORMAN ROBERTSON, Pittsburgh LEON L. NONEMAKER, Vice President, Senior Vice Presldenl and Chio/ Economist ol Consumer and Community A/lairs Mellon Bank, N.A.

BRENT SHUNK, Vice President, Lancaster Division JOSEPH T. SIMPSON, Harrisburg Chairman o/ the Board ot Harsco Corporation EMMET M. MOLLOY, Vice President, Human Resource and Development M. J. WARNOCK, Lancaster EDWARD M. NAGEL, General Counsel and Secretary Chairman o/ the Board ol Armstrong Cork Company CHARLES H. WATTS II, Lewisburg President o/ Bucknell University S. HAYWARDWILLS, Miami, Florida Chairman ol the Board and President of GAC Corporation FISCAL AGENTS SECURITIES LISTED ON EXCHANGES TRANSFER AGENTS FOR PREFERRED, NEW YORK STOCK EXCHANGE PREFERENCE AND COMMON STOCK First Mortgage Bonds, 3% Series due 1975 Industrial Valley Bank and Trust Company 4Y~% Preferred Stock(Code: PPLPRB) 634 Hamlllon Street 4.40% Series Preferred Stock (Code: PPLPRA)

Allentown, Pennsylvania 18101 8.60% Series Preferred Stock (Codo: PPLPRG)

Irving Trusl Company Prelerenco Stock, $ 8.00 Sorfes (Ceder PPLPRJ)

Ono Wall Stmot Pmlerence Stock, $ 8.40 Ser!os (Code: PPLPRH)

New York, New York 10015 Preterence Stock, $ 8.70 Series (Code: PPLPRI)

Common Stock (Code: PPL)

Pennsylvania Power 6 Light Company 901 Hamlllon Streel Allentown, Ponnsylvanla 18101 PBW STOCK EXCHANGE 4'%referred Stock REGISTRARS FOR PREFERRED, 3.35% Sorios Prolerred Stock PREFERENCE AND COMMON STOCK 4.40% Series Pmlerred Stock Tho Firsl National Bank el Allentown 4.60% Sories Preferred Stock Seventh 6 Hamilton Streets 8.60% Series Prelermd slack Allentown, Ponnsylvanla 18101 9% Series Preferred Stock Preference Stock, $ 8.00 Series Morgan Guaranty Trusl Company ol New York Preference Stock, $ 8.40 Series 23 Wall Street Preference Stock, $ 8.70 Set/os Now York, New York 10015 Common Stock DIVIDEND DISBURSING OFFICE FOR PREFERRED, PREFERENCE AND COMMON ST'OCK Treasurer Pennsylvania Power 6 Light Company 901 Hamilton Slreel Allentown, Pennsylvania 18101

ACCOUNTANT'S OPINION HASKINS & SELLS Two Broedwey Corlitiod Pubtlc Accountants Now York 10004 To the Shareowners and Board of Directors of Pennsylvania Power & Lfght Company:

We have examined the balance sheets of Pennsylvania Power & Light Company as of December 31, 1972 and 1971, the related statements of Income, earnings relnvested in business and sources of funds used for new construction for the years then ended and the schedule of capital stock and long-term debt as of December 31, 1972. Our examina-tion was made In accordance with generally accepted audit-ing standards, and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary In the circumstances.

In our opinion, such financial statements and schedule present fairly the financial position of the Company at De-cember 31, 1972 and 1971 and the results of its operations and sources of funds used for new construction for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis.

HASKINS & SELLS February 5, 1973 In late September 1972, the Company's Board of Directors visited the nuclear facilities of General Electric Co.

in California. Purpose of the trip was a detailed familiarization with the safety, environmental and operating patterns of a nuclear-fueled generating station.

h PENNSYLVANIA POWER 8 LIGHT COMPANY BULK RATE 901 Hamilton Street Allentown, Pa. 18101 U. S. POSTAGE Telephone: Area Code 215 821-5151 PA I D Allentown, Pa.

Permit No. 104 reulno oN eroYcrro rArrk

Pennsylvania Power 8 Light Company Wa Annual Report 3974

HIGHLIGHTS 1974 1973 1972 1971 1970 Energy Sales millions of kwh ........ 18,963 18,865 17,013 15,685 14,683 Revenues thousands ............... $ 472,036 384,814 345,792 300,707 255,313 Earnings Applicable to Common Stock-thousands (a) . $ 63,661 51,066 43,161 38,488 30,252 Earnings Per Share based on average number of shares outstanding (a) ........... $ 2.88 2.64 2.46 2.45 2.09

,Dividends Per Share ................. $ 1.77 1.68 1.64 1.60 1.60 Reported Market Price per Share of Common Stock High $ 23 26 27 26'/4 27'le Low $ 13 19 2274 21 Vs 20'ls Net Utility Plant thousands .......... $ 1,744,901 1,534,154 1,361,413 1,183,796 1,026,315 (a) Reflects retroactive applfcatlon cf change In accounting for fuel costs.

Pennsylvania Power & Light Company is an electric utility providing service to more than 900,000 homes and busi-nesses over a 10,000-square-mile area In 29 counties of central eastern Pennsylvania. Principal cities In the PP8L service area are Allentown, Bethlehem, Harrisburg, Hazleton, Lancaster, Scranton, Wllliamsport and Wilkes-Barre.

Contents The Year in Review 3- 9 Management Analysis 10-1 1 Financials 12-18 Notes to Financial Statements 18-22 Stock Prices 23 Directors and Principal Officers 24 Cover Photos: Many people with many different skills are needed to keep a utility like PP&L running efficiently. From top: workmen lower turbine rotor blades into Unit Three at Martins Creek plant; answering one of the more than 891,000 customer calls to the Company in 1974; transmission construction workers labor high up on a 500,000-volt tower which will become an integral part of the Company's 3,000-mile transmission system; naturalist-director of the Montour Preserve near the Company's Montour generating station conducts a nature study program for area school children.

to provide ym w'he electric serv:

you want.

To Our Shareowners:

Because there is nothing more important this construction, particularly in planned additions to year, in our opinion, than establishing an effective generating capacity. In the next several years, the national energy program, this letter focuses only on cumulative effect of these cancellations and de-this subject. The text of the report reviews our PPB L ferrals of coal and nuclear power plants will mean year which, all things considered, went well in- a reduction of approximately 60 million kilowatts in cluding the fact that PP&L continues to have ample electric generating capacity.

supplies of electric power to meet all customer The reduction is compatible with the current wis-needs. dom that projects electric load growth at rates of From an overall energy standpoint, 1974 was a five/six per cent per year instead of the past pattern tough year. It began and ended without any real of seven/eight per cent. But these revised load determination of a national energy program. The projections may prove to be in error, on the low oil embargo, the coal strike, and the drastic curtail- side, in the event that large throw-over demands for ments of natural gas supply were all forcible re- more electricity arise from shortages of other fuels.

minders of the difficulties that can affect our three Accepting the lower load growth projections as basic fossil fuels. real, the cutbacks could mean a lost opportunity to Continuing high inflation, plus huge increases in reduce the nation's dependency on oil and natural costs of oil and coal, understandably precipitated gas as fuels for electric generation. Presently, oil consumer anger and protest. and gas are used to generate about 35 per cent of The natural response of consumers has been to the nation's electric energy. This figure would be pressure government to require that utilities hold reduced to about 10 per cent by 1985 if additional the line on prices. In many cases, action was taken coal and nuclear capacity were installed as origi-to postpone, minimize or deny rate increases. nally planned. No wonder Llewellyn King, of Weekly Investors in utility securities became concerned. Energy Report, has editorialized that 1974 is likely Would adequate earnings be allowed'7 Would the to be looked back at as the year when the nation quality rating of debt securities be down-graded' took the wrong turn in energy.

Would necessary rate increases be withheld'7 A critical factor is the lead times that have to be Would the investor become the victim of a cost/ dealt with. New deep coal mines take five or six price squeeze? years to get up to full production. The time span to Reassuring answers were few and far between. develop new oil fields, related transport and re-The utility industry generally suffered a sharp de- fineries is even longer. New power plants and con-cline in investor confidence. Some security sales necting transmission lines require eight to ten years were postponed. The money crunch was on. Add- to be built.

ing to the financial problem was the lower-than- These lead time requirements in combination expected growth in revenues because of lower with non-starts, delays and cancellations of energy growth in electric usage. supply projects mean, in our judgement, that a real For most utility companies, the near-term situa- hazard exists that the nation could reach the end of tion left no choice but to make major cutbacks in its energy rope by the early 1980s or before.

What it comes down to is that the things that can enable utilitycompanies to reactivate construc-be done to improve energy supplies in the 1980s tion of the nuclear and coal power plants that must be undertaken now. have been cancelled and deferred.

No lopsided viewpoint is intended or recom- ~ For rail transportation provide the govern-mended. Commitment to research must be con- mental funding necessary to rehabilitate and tinued and expanded. And the focus on energy expand essential railroad facilities through a conservation must be intensified until conservation railway trust fund or other means. The pres-becomes an accepted national ethic. ent scenario of "freight embargo next week" Unfortunately, it is probably unrealistic to expect is intolerable. For much of the nation, sever-that the rate of change in research or conservation, ance of railroad service terminates supplies of or the two together, can move fast enough to pro- coal and other fuels.

tect the nation from the energy bind that could The almost endless process of discussion, de-materialize within the next decade. bates, studies and re-studies has become the crux The near-term risks are very high. Recent indus- of the nation's energy problem. The resources and trial plant shutdowns due to shortages of natural the skills to do the job are available. What appears gas and the prolonged British coal strike of 1972 to be lacking is the will to break some eggs and have both provided bitter foretastes of what hap- make the omelet. To put the matter bluntly, there pens to people when basic energy is in short seems to be too much concern that someone will supply. make some extra dollars as a part of providing the By speaking out today, we seek to avert the additional energy supplies that our country de-tragic consequences of a deficient electric power pends upon for survival. Sometimes overlooked is supply a few years hence. We urge prompt action the fact that reinvestment of profits can be an im-in four basic areas: portant source of funds for financing development

~ For oil and natural gas accelerate off-shore of additional energy supplies. If there are windfall development of new supplies. profits, the tax collector can take care of them.

~ For coal moderate sulfur content restrictions Our society can cope with human problems aris-for five/ten years. Such action should (1) en- ing from inadequate income, including inability to courage development of new coal mines in the purchase basic energy requirements if we have eastern and midwest regions of the United energy available. Without adequate energy, our States, (2) lessen the cost/price increase society will not have the productive capability nec-burden that has been created by the height- essary to meet human needs.

ened demand for coal that is "low" in sulfur What we cannot afford is another year of less content, and (3) provide additional time to de- than all-out activity to rebuild and restructure our velop practical methods of excess sulfur re- national energy base. The thing to do is to get on moval at reasonable cost. with the job. In this nation we can overcome the

~ For supplies of electricity adequate to protect energy problem. What it takes is all of us working the national interest adopt regulatory poli- at it together. In PP&L we will do our best to do cies and incentives for investors that will our part.

Respectfully submitted, March 3, 1975 Jack K. Busby, President

THE YEAR IN REVIEW Earnings for 1974 were $ 2.88 per share of common Metropolitan Edison Co. This resulted in an overall sales stock, up 24 cents or 9.1 per cent from the $2.64 earned increase of .5 per cent over 1973.

in 1973. Both years reflect a change in 1974 in the When these usage figures are compared to an average method of accounting for fuel costs recoverable from overall growth rate of about nine per cent over the customers through the operation of a fuel adjustment previous 10 years it is evident that there was a substantial clause on electric bills. cutback in electric use by just about every class Our current method of accounting for fuel costs of customer.

eliminates the average three-month lag between the With the downturn in the economy and the continuing time we recorded the cost of fuel burned and the time effectiveness of our customers'nergy conservation we recorded the recovery of the cost through measures, the long-range forecast of electric use has customer billings. been revised downward. But we still recognize the Without the change in accounting, our earnings would possibility of people using more electric energy because have been $ 2.31 per share for the year compared to of shortages of natural gas and the uncertainty of the oil

$ 2.57 for 1973. market.

Dividend Raised Revenues Up The board of directors on May 22 raised the quarterly Revenues for 1974 were $ 472 million, up 22.7 per cent dividend rate on PP&L common stock from 42 to 45 over 1973. Most of the increase came from recovery of cents a share. rising coal costs which were billed to customers through The increase brings the annual dividend rate up to the fuel adjustment clause explained later in this report,

$ 1.80 per share. This is the point where we would have and from the 5.7 per cent rate increase which became been if earnings problems had not forced us to suspend effective Jan. 10, 1974.

dividend increases in 1970 and 1971 after following a pattern of modest annual increases of four cents a share since the early '60s. Coal Costs Skyrocket The cost of fuel burned during 1974 amounted to

$ 219 million compared to $ 126 million in 1973. However, Smaller Growth Rate in 1974 the Company changed the method of accounting for fuel to achieve a matching of fuel expense and related The energy crisis, energy conservation efforts by our customers and the state of the economy combined to customer revenues by accounting periods. This hold down the rate of growth in kilowatt-hour usage. accounting change resulted in recording only $ 1 92 million as fuel expense for the year 1974.

Traditionally, we experienced growth in kilowatt-hour use principally because customers used more power At the end of1974 we were paying $ 25 a ton at the than they had the year before. mine for bituminous coal on the open market versus

$ 12 a ton at the end of 1973.

1974 was different. Overall residential usage went up only 2.7 per cent, compared to an average increase of 9.7 per cent in recent years. Commercial customers used .3 per cent more and industrial usage was up Work Stoppage 4.2 per cent. The industrial figures include the addition A strike called by the Employees Independent on July 1 of the Steelton plant of Bethlehem Steel to our Association (EIA) on May 20, 1974 idled about 5,000 system. The plant used 366 million kilowatt-hours during union members.

1974, about 5.1 per cent of the industrial total for the year. The action was the first general strike in the Other energy sales were down about 27 per cent, Company's history. It ended with the employees primarily because of reduced contractual sales to returning to work on Aug. 9, 1974.

Extra expenses incurred by the Company as a result Construction of the first of the twin 1,050,000-kilowatt of the strike cost $ 2 million after taxes. boiling water reactor generating units, now scheduled A new two-year contract to run through July 24, 1976 for operation in 1980, progressed on schedule and at provides for improvements in fringe benefits and for year-end was about eight per cent complete. Unit 2 wage increases of 8.5 per cent the first year and 8 per construction was about six per cent complete.

cent the second year. Reductions in employee Longer material delivery times, labor shortages, work.

contributions to benefit plans and other benefit improve- stoppages and design changes can all create delays in ments add another 4.2 per cent over the two years. getting nuclear plants on the line.

One way PP&L has chosen to save time and expense is to adopt the "big-piece" construction concept at Construction Budget at $ 2.1 Billion Susquehanna Steam Electric Station.

PP&L's construction budget for the next five years is The big-piece construction concept involves on-site nearly $ 2.1 billion. For 1975 alone it's $ 340 million. construction of large parts of the reactor pressure vessel This means we will be spending more in the next and containment liner, simultaneous with floor-by-floor five years than has been invested in our Company since completion of the reactor building. This contrasts with it was founded in 1920. laborious sequential fabrication of each system, with its attendant high costs, delays and key elements piled up in assembly areas awaiting their turn to be Susquehanna Project worked upon.

More than half of the five-year construction budget, In comparison with sequential construction, the

$ 1.2 billion, will be used for construction of the big-piece procedure being used at Susquehanna Company's first nuclear power plant near Berwick. promises to save substantial sums of money.

Part of the steel reactor containment liner weighing more than 200 tons was inched into place in early October 1974 for the first of twin 1,050,000-kw nuclear generating units at PP&L's Susquehanna plant under construction near Borwick.

Placed on a basemat of concrete reinforced with about 100 tons of steel bars, tho quarter-inch steel of the vessel will receive a six-foot-thick mantel of reinforced concrete as shielding for the 9~ f'I//l~fl reactor within tho liner. The unique crane pictured has a 350-foot reach with a lifting capacity of I

280 tons enough to lifta fully-loaded 747 let plane.

Martins Creek Project removal technology was not and still isn' Meanwhile, another large generating unit is nearing fully proven.

completion at our Martins Creek plant north of Easton. If we had to make the decision today it would be The first of two 800,000-kilowatt crude or residual different, but the conditions affecting our decision didn' oil-fired units is expected to come on the line in the change until we were well beyond the point of turn-around in our construction. Conversion to coal is spring of 1975. The other unit is scheduled for operation early in 1977. virtually out of the question because the cost would exceed $ 400 million.

Some of the factors influencing the decision back in 1968 and 1969 to build oil-fired units at Martins With the operation of the first big oil unit at Martins Creek were: Creek about to begin, construction of the 82-mile pipeline that was to have been the delivery system for

~ The desirability of a diversified fuel mix among the oil has not yet been started.

coal, oil and nuclear. The problem is that, although PUC approval was

~ The special operating characteristics of the oil units obtained in February 1973, opponents of the project which would allow us to pick up load or drop it have challenged construction of the pipeline in the quickly to meet fluctuating demand and enable us courts and before administrative agencies.

to use the units in place of smaller, expensive-to- Seeing this problem developing, the Company had to operate combustion turbine generators. begin a $ 2.3 million project for alternate emergency

~ Studies in 1969 indicated that the price of low-sulfur rail-unloading facilities to insure oil delivery until the coal would rise faster than oil and plenty of oil pipeline is completed.

would be available. Unfortunately, conditions in the The Company has leased three 50-car unit oil trains Middle East have changed all that. at an annual cost of $ 527,000 to carry the oil from

~ Strict environmental standards then on the horizon Philadelphia to Martins Creek until the pipeline can take made coal appear to be an unwise choice because over this operation.

it meant burning expensive low-sulfur coal or Construction of the pipeline will take about nine installing equipment that would remove sulfur gases months. At this point we just don't know when that and particulate. The reliability of sulfur-dioxide construction will begin.

Oil is unloaded from railroad tank cars at Marlins Creek in preparation FA' for start-up and testing of Unit 3 early in 1975. The temporary emergency unloading facilities were made necessary because construction of the pipeline which was to have been the oil delivery system for the plant has been chal- F lenged in the courts and before administrative agencies,

A tank farm has been built at Martins Creek by Besides owning or controlling the source for much of Interstate Energy Co. and 1.2 million barrels of crude its coal, PP8 L also has more than half of the coal it oil are stored for initial operation of the first oil unit uses delivered in its own unit trains. Each train in the on the Company's system. fleet has at least 105 cars and carries more than 10,000 tons of coal each trip from mine to power plant.

The seventh unit train joined the fleet in late '74.

Coal Is Still King The eighth is expected later in 1975.

Despite PP8 L's diversification into oil and nuclear Economies resulting from controlled coal sources generating units, coal, at this point, is still our major and the unit trains resulted in savings for our customers fuel. During 1974 about 96 per cent of the Company's of at least $ 20 million in 1974.

energy generation came from coal.

As an interesting sidelight, Electrical World, one of Through ownership or control of five operating mines the leading trade magazines of the electric utility in west-central Pennsylvania the Company is assured of industry, recently published an editorial titled, "We can over 100 million tons of coal reserves enough to depend on coal... or can we?" It discussed the provide a stable supply for many years to come. dependence on coal and the problems that utilities'ncreasing Early in 1974, PP8 L formed another coal company would inevitably arise in the mining and transport of vast which acquired another 114 million tons of reserves in new amounts of coal. It concludes: "We strongly the Pittsburgh coal seam in southwestern Pennsylvania. recommend, therefore, that utilities look very seriously Additionally, in March 1974 the Company agreed to into the acquisition of coal deposits, and into ownership acquire all the interest of Manor Real Estate Co. in a of hopper cars sufficient to ensure at least minimum portion of the Pittsburgh seam adjacent to the prior acceptable supply." The Company feels that its acquisition. experience and statistics would support Electrical This latest acquisition is contingent on drilling tests, World's recommendation.

scheduled for completion in mid-March 1975, to confirm This certainly doesn't mean, though, that PP8 L is that at least 150 million tons of coal exist "in place" immune to the economic factors that are pushing energy in the seam. Based on present mining practice and prices up so sharply. Even with the efficiencies we have, technology, the Company believes that about 50 per cent the price of delivered coal almost doubled in 1974.

of the in-place coal would be recoverable, giving us Unfortunately, this has resulted in higher customer another 75 million tons of reserves. charges through the fuel adjustment clause.

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~ lI ,~ Coal is loaded into one of PP&L's

. ~

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• f. seven 10,000-ton unit trains at the Company's Greenwich mine in west central Pennsylvania. Through ownership or control ot tive mines and the use of its tleet of unit trains p

S to haul more than halt the coal we used last year, PP&L saved its cus-tomers at least $ 20 million in 1974.

The fuel adjustment clause authorizes utilities to pass ~ A major "break" in the long and steady pattern of on to customers the increases or decreases in fuel costs. rising use of electricity with customer resistance to It adds nothing to PP8 L profits but allows the Company to higher prices, conservation and slower economic recover most of its increasing costs from sharply rising growth all contributing factors.

fuel prices. ~ Unfavorable financial conditions, including double-Rising coal costs increased the fuel adjustment digit interest rates and impairment of investor charge to our customers by about half-a-cent per confidence in utility securities, now limiting the kilowatt-hour in 1974. amount of financing our industry can undertake.

~ A general worsening of the political and regulatory climate with respect to utility rate increases and expansion programs.

Financing With these changing circumstances in mind, a revised The effects of inflation were felt sharply in the price forecast of electric demand through 1984 indicates that PP&L had to pay to raise capital in 1974. generating capacity needed to serve customers 10 years When the Company talks about the hundreds of from now may be nearly two million kilowatts less than millions of dollars needed each year to build new earlier estimates.

facilities we must also look at where the money This will greatly affect the long-range generating plant comes from. construction schedule. The two oil-fired units at Martins Only about one-fourth of the funds we need to finance Creek will come on line as scheduled in 1975 and 1977.

our construction can be generated internally from The nuclear units have been delayed one year each.

Company operations. The rest must come from new and will come on line in 1980 and 1982.

capital investment in the Company. The six generating units planned for the mid to late During 1974 we raised $ 240 million through outside '80s have been cut back to two units in the late '80s.

financing. We sold $ 35 million of common stock and For a time at least, these cutbacks can be restored if

$ 25 million of preference stock along with two issues conditions begin to change dramatically from our of first mortgage bonds totaling $ 180 million. The first forecasts.

issue of bonds ($ 80 million) was sold at 9'/4 per cent Even though the forecasted growth rates have been interest, the second ($ 100 million) at 10'/e per cent. lowered significantly, they are still expected to be sizable The preference stock was sold at a dividend cost of an average six per cent a year through 1985.

13 per cent.

Admittedly, however, we live in a time when the During 1975 we expect to issue $ 350 million of new predictability of the economic/social events that affect securities. Of that figure $ 93 million will be needed electrical use has become particularly uncertain. We to refund maturing debt. will be giving extra attention to early detection of indicators that point to the need for changes in our peak load forecast.

Construction Cutback Probably PP8 L's most momentous decision during 1974 came in early August, when the Company decided Cutting Costs to cut back construction expenditures by $ 1.3 billion for Inevitably, a lesser growth in volume of business leads the 10-year period 1974 through 1983 and to adopt a to reductions in previously expected manpower needs Company-wide program of general austerity. for construction, operation and maintenance.,By the end The cutback was made necessary by rapidly changing of 1974, 82 employees with less than six months'ervice, economic, social and political conditions regionally primarily in the construction area, had been laid off.

and nationally. The conditions, as we see them, are: The layoffs, together with constraint in fillingvacancies

~ A slowdown in both the national and the regional created by normal turnover has resulted in manpower economy with no quick turn-around expected. reductions, by the end of the year, of 311 employees, Slower economic growth, in fact, may well become or 4.3 per cent of the high for the year.

a long-term trend. Additionally, elimination or cutback of work performed

by outside contractors has had the effect of eliminating president visits and talks with the people we serve. The the work of another 161 people. When this is added program is called Operation Understanding.

to the PP8 L workforce reduction the total comes to 472 or a drop of slightly more than six per cent.

President Busby has committed 25 per cent of his time from early October 1974 through 1975 to visiting in The Company is also re-examining fuel procurement small group sessions with newsmen, service clubs, practices, outside work contracts, transportation fleet consumer action groups, students, business leaders, requirements and material and supply inventories, all public officials, employees, minority groups, senior seeking ways to reduce expenses. citizens, women's organizations, union leaders, Plans were also being firmed up at year-end to have shareowners and others throughout our service area.

independent reviews made of our coal mining operations With no set presentation, he relies on informal and overall PP8 L operating effectiveness. discussion, and question and answer sessions to But, expense and manpower cutbacks are not easily respond directly to the customers'eelings and needs.

come by. There is really no way to substantially cut The program does not try to brainwash anyone. We back on manpower and expenses without some want to listen to the problems that people have and we attendant loss in the scope and quality of service want to give them an opportunity to listen to us.

provided by the Company. As part of earning the public support that we depend on, we feel we must be accessible, open and credible in our operations and in our behavior and a good performer in all aspects of our business.

Operation Understanding The Company depends on public understanding and support for its very survival. The fact that the electric utility industry and PP8 L continue to face difficulttimes Research is no secret. Probably the most visible research project the One of the things the Company is doing to seek public Company engaged in during 1974 was the completion support is a 15-month-long program in which our of our energy conservation home northwest of Allentown.

.l I

PP8 L has been saving time and

( money by prefabricating major substation sections indoors and completing assembly at the sub-station site. With prefabrication,

~ ad%~ l~

field construction time has dropped from 26 to 20 weeks. The method allows Indoor work in all kinds of weather and all work is done at ground level which is faster and safer than the on-site requirements of using ladders and bucket trucks.

Estimated savings for each sub-station have been approximately

$ 5,000 or more.

The home uses a water-source heat pump for heating present energy resources, and to improve the reliability and cooling. The heating cycle is supplemented by solar and environmental acceptability of electric power energy collection panels and heat reclamation devices generation.

to recover waste heat from appliances, waste-water, fireplace flue gases and even the heat of decomposition in the septic tank. Directors A PP8 L employee family was chosen to live in the Dr. Ruth Patrick, noted biologist and chairman of the home for a year to help provide actual in-use data for Board of Trustees of the Academy of Natural Sciences further evaluation of the energy conservation methods in Philadelphia, was elected a director in September being tested. following an amendment to Company bylaws increasing The objective in the experimental home project is to the authorized number of directors from 12 to 13.

explore a number of energy conservation methods that The Company noted with regret the deaths during have the potential to significantly reduce the electrical 1974 of three former directors.

demand of an electrically-heated single-family home. Everett L. Palmer, who was vice president of Public After the results of the experiment are available they Relations and served as a director from 1960 until must be evaluated to determine which methods might his retirement in 1966 after 42 years with the Company, be economically feasible for the consumer. died on April 25.

In other areas, the Company either helped fund or Harry Ferguson, former operating vice president and participated in such research projects as sulfur dioxide a director at the time of his retirement in 1958, after removal from stack emissions, wind stress factors on 38 years with the Company, died on July 29.

cooling towers, fast breeder reactor, nuclear fusion and John S. Wise Jr., who was president and a board coal liquefaction and gasification. member for 17 years until his retirement in 1945 after Additionally, through Electric Power Research Institute 29 years with the Company, died on Aug. 13. Wise was (EPRI) we are involved in a number of other projects to a pioneer in the electric utility industry and was find new energy sources, to improve the utilization of instrumental in the formation of PP8 L in 1920.

For the past several years PPft L's board of directors has held a two-day meeting in September enabling members to visit facilities essential to Company operations. In 1974 the board toured the Company's energy conservation home and the PP&L Training Center near Allentown, and the oil-fired units being built at the Martins Creek plant.

gj',g 'j ',, I L

MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE STATEMENT OF INCOME The following analysis of the Company's financial in revenues for the year 1974). Since 1972 there have performance explains the reasons for changes in spe- been two rate increases affecting fifteen resale cus-cific items on the Statement of Income comparing the tomers for a total of $ 1.6 million annually, with the most years 1974 to 1973 and 1973 to 1972. recent increase ($ 975,000 annually) being granted by the FPC in September 1974, subject to possible refund.

Operating Revenues The affected customers are opposing the rate increase The Company derives about 99% of its operating and the FPC has scheduled a hearing for March 1975.

revenues from supplying electric service and the bal- The Company's tariffs include fuel adjustment ance from supplying steam for heating and other clauses which adjust prices for electric service for purposes. variations in the cost of fuel used to generate elec-The change in operating revenues from the prior tricity. Revenues from the fuel adjustment clauses year is attributable to the following: totaled $ 23.8 million in 1973 and $ 79.2 million in 1974.

Increase (Decrease) 1974 1973 Interchange Power Sales Millions of Dollars During 1974 approximately 24% of the output of the Electric revenues Company's generating stations was sold to other util-Increase in quantity of ities under interconnection arrangements. This com-sales to: pares with 28% sold in 1973. However, as required by Ultimate customers $ 7.8 18.0 both the PUC and FPC, such sales are not recorded Others for resale .. (1.9) 8.2 as Operating Revenues but are credited to Operating Rate increases ....... 22.2 10.5 Expenses on the Statement of Income.

Fuel adjustment clauses 55.4 (0.4) An analysis of the change in interchange power Other .. 1.9 2.3 sales from the prior year follows:

85.4 38.6 Steam heat revenues.......... 1.8 0.4 Increase (Decrease)

Total $ 87.2 39.0 1974 1973 Millions of Dollars Rates applicable to sales to ultimate customers are Increase (decrease) in regulated by the Pennsylvania Public Utility Commis-sion (PUC) and accounted for 97% of the Company's energy sold ........... $ (11.0) =-

34.0 Increase in average price . 49.3 l.3 revenue from energy sales in 1974. The Federal Power Other 0.2 0.3 Commission (FPC) regulates sales to others for resale. Total . $ 38.5 35.6 The Company's electric energy sales to ultimate cus-tomers increased 6.5% in1973 and 2.8% in1974. Most The quantity of interchange power sold increased of the 1974 increase was due to sales to the Steel- substantially during 1973 due to the availability of new ton Plant of Bethlehem Steel Corporation which was and efficient coal-fired generating units at Montour added as a customer in mid-year. The reduced growth Steam Electric Station placed in service during 1972 rate in 1974 was due primarily to energy conservation and 1973. The quantity sold during 1974 was some-measures by customers and a general decline in eco- what lower than 1973, but the prices received for such nomic activity. power were substantially higher.

Electric energy sales to others for resale during the The price received for interchange power sales is to two years remained relatively constant except for con- a great measure based on a relationship of the fuel tracted sales to a neighboring utility, Metropolitan costs of the selling and buying utilities. All the Com-Edison Company (Met Ed). Sales to Met Ed are under pany's major generating stations are fired by coal while an agreement to sell capacity and energy for the other interconnected utilities have significant amounts period June through September in each of the years of oil-fired generating capacity. For the period begin-1973, 1974 and 1975 from the Company's generating ning in late 1973 and continuing through 1974, oil units at Montour and the No. 3 unit at Martins Creek prices increased much more rapidly than coal prices (scheduled for service in April 1975). Revenues from which caused an increase in the price received for Met Ed were $ 7.9 million in 1973 and $ 6.1 million in interchanged power during 1974.

1974. The average price received for interchange power Rate increases affecting ultimate customers were sales was 1.76 cents per kwh in 1974 and 0.95 cents granted in March 1972 ($ 17 million annually), June per kwh in 1973. Both amounts were substantially in 1973 ($ 10 million annually) and January 1974 ($ 19 mil- excess of the Company's fuel costs related to such lion annually, of which about $ 17.8 million is included sales.

Fuel Depreciation Approximately 98'/o of the fuel expense shown in Increased depreciation expense since 1972 is due the Statement of Income is related to generation of to new facilities placed in service, including the addi-electricity with the balance applicable to the produc- tion of two generating units at Montour Steam Electric tion of steam for heating and other purposes. The Station.

change in fuel expense from the prior year is attribut-able to the following: Taxes For a detailed analysis of income tax components Increase (Decrease) and effective income tax rates see Note 6 to Financial 1974 1973 Statements. Taxes other than income increased pri-Millions of Dollars marily because of higher State gross receipts taxes Electric fuel expense which are based on revenues and increased State Increase (decrease) in quantity capital stock tax resulting principally from the addi-of electricity generated.... $ (0.9) 26.3 tional Preferred, Preference and Common Stock sold Increase in average cost of during the periods.

fuels burned............. 92.3 3.6 Effect of change in accounting Cost of Financing for fuel costs............. (26.6) Increases from the prior year in interest charges, 64.8 29.9 dividends on Preferred and Preference Stock and the Steam heat fuel expense 2.0 0.5 amount of the Allowance for funds used during con-Total $ 66.8 30.4 struction are as follows:

Increase The increase in fuel costs during 1974 was caused 1974 1973 by the escalating prices of fuels burned (principally Millions of Dollars coal). Increases in fuel expense related to sales to Allowance for funds used customers are billed to customers through fuel adjust-ment clauses. Under the clauses, fuel costs incurred during construction ......... $ 5.8 0.3 Interest charges in a month in excess of a base amount are reflected in Long-term debt............. 7.9 6.7 customers'ills over a subsequent three-month pe-riod. Prior to October 1974 the fuel expense recorded Short-term debt ............ 4.8 0.9 Other .. 0.2 by the Company each month was the cost of fuel Dividends on preferred and burned to'generate electricity during that month. How- preference stock ........... 2.5 2.7 ever, due to the sharp rise in the cost of fuel during The amount of the allowance for funds used during 1974 this procedure resulted in pronounced mis- construction varies from year to year in relation to the matching of fuel costs and revenues by accounting amount of construction work in progress and the cost periods. Therefore, the Company changed its account- of capital.

ing treatment of fuel costs recoverable under fuel The increase in long-term debt interest charges and adjustment clauses as described in Note 2 to Financial dividends on Preferred and Preference Stock is due to Statements. issuance of new securities to finance the construction The new accounting procedure does not affect the of new facilities and the refinancing of maturing debt price of electricity charged customers nor the amount with securities bearing higher interest rates. During the Company pays for fuel. 1973 and 1974, new issues of securities included $ 308 million of long-term debt and $ 65 million of Preferred Wages and Employee Benefits and Other and Preference Stock.

Operating Costs Short-term debt consists of bank loans and commer-The increases in wages and employee benefits and cial paper notes used to provide working capital and other operating costs such as materials and supplies, for interim construction financing. Interest on such rents and insurance reflect principally the effects of debt varies from year to year due to the amount of inflation. short-term debt outstanding and the interest rates in A three-month strike by approximately 5,000 union effect. For more information on short-term debt see employees (about 70/o of the Company's total work Note 3 to Financial Statements.

force) increased 1974 operating expenses by approx- During 1973 and 1974 the Company sold 4.2 million imately $ 2.0 million after giving effect to related in- shares of new Common Stock to finance construction.

come tax reductions. The final agreement, which The average number of shares of Common Stock out-resulted in a new two-year labor contract to run standing increased from 17.5 million in 1972 to 22.1 through July 1976, provides for improvements in fringe million in 1974, an increase of 26/o. The increase in benefits and for wage increases of 8.5/o beginning in the average number of shares outstanding diluted August 1974 and 8.0'/o beginning in July 1975. earnings per share by 11'/o in 1973 and 14/o in 1974.

STATIST!GAL

SUMMARY

1974 1973 1972 1971 1970 CAPITAL INVESTMENT thousands Long-term debt $ 914,349 753,027 635,044 576,760 514,371 Preferred and preference stock .... 296,375 271,375 231,375 196,375 156,375 Common equity 532,655 469,608 41 2,130 351,299 303,117 1,743,379 1,494,010 1,278,549 1,124,434 973,863 Short-term debt 85,509 39,851 96,482 76,251 97,878 Total capital investment ................. $ 1,828,888 1,533,861 1,375,031 1,200,685 1,071,741 RETURN ON INVESTMENT (a)

Return on average capital investment  %,. 8.5 7.9 7.5 7.4 7.0 Return on average common equity  % .... 12.6 11.9 11.6 12.2 10.8 COMMON STOCK DATA Book value at year end (a) ............... $ 22.91 22.51 21.78 20.78 19.75 Dividend payout rate % (a) ............. 62 64 67 66 76 Dividend yield % (b) . 11.5 8.4 6.5 6.4 6.8 Price earnings ratio (a) (b) ............... 5.3 7.6 10.3 10.2 11.3 NUMBER OF SHAREOWNERS preferred, preference and common ....... 164,126 142,235 135,399 123,598 111,909 OPERATIONS ELECTRIC CUSTOMERS 902,148 886,378 864,439 843,080 828,643 ENERGY SALES millions of kwh Residential 6,494 6,324 5,985 5,479 5,093 Commercial 4,275 4,262 3,933 3,533 3,198 Industrial 7,170 6,881 6,458 6,053 5,807 Other 1,024 1,398 637 620 685 18,963 18,865 17,013 15,685 14,683 AVERAGE PRICE PER KWH to ultimate customers cents .. 2.47 2.06 2.02 1.90 1.71 SOURCES OF ENERGY SOLD millions of kwh Generating units Coal-fired 24,186 24,782 19,097 15,847 13,702 Oil-fired combustion turbines 8 diesels 247 273 601 642 786 Hydroelectric ........... 772 816 824 684 739 Purchased power . 352 384 418 304 339 Interchanged power Purchases 1,218 1,584 1,366 1,467 1,732 Sales (6,079) (7,237) (3,586) (1,758) (1,164)

Company uses and losses ..... (1,733) (1,737) (1,707) (1,501) (1,45 I)

Total energy sales 18,963 18,865 17,013 15,685 14,683 FUEL COST mills per kwh ...... 8.8 5.0 4.9 4.8 4.2 POWER CAPABILITY kilowatts .. 4,901,000 4,903,000 4,108,000 3,496,000 3,256,000 PEAK DEMAND kilowatts (c) ... 3,772,000 3,662,000 3,598,000 3,294,000 3,238,000 EMPLOYEES 6,930 7,139 6,790 6,514 6,372 (a) Reflects retroactive application of change In accounting for fuel costs.

(b) Based on yoarwnd market price.

(c) Winter peak shown was reached early In subsoquont year. In 1970 peak Is that which would have occurred if load curtailment measures had not been In effect.

12

STATEMENT OF INCOME 1974 1973 1972 1971 1970 Thousands of Dollars Operating Revenues 3472,038 384,814 345,782 300,707 255,313 Operating Expenses Wages and employee benefits 67,374 57,421 55,220 48,198 45,779 Fuel (Note 2) . 192,353 125,577 95,220 79,499 61,621 Power purchases . 24,176 15,299 '3,514 18,963 21,982 Interchange power sales . (108,723) (70,175) (34,569) (15,468) (9,356)

Other operating costs . 54,489 45,234 39,512 33,214 24,009 Depreciation 52,399 48,837 41,446 34,903 32173 Income taxes (Note 6) 39,211 33,943 26,086 11,545 3,225 Taxes, other than income . 35,571 30,005 25,658 22,146 18,197 356,850 286,141 262,087 233,000 197,630 Operating Income 115,186 98,673 83,705 67,707 57,683 Other Income and Deductions Allowance for funds used during construction . 20,732 14,967 14,647 16,242 9,723 Income tax credits (Note 6) 5,076 Other net 3,4'i 8 91 1,300 334 (305) 176 (63) 112 80 29,226 16,358 14,676 16,355 9,915 Income Before Interest Charges . 144,412 115,031 98,381 84,062 67,598 Interest Charges Long-term debt 51,149 43,203 36,507 30,895 25,381 Short-term debt and other . 9,946 4,916 3,953 4,595 7,282 61,095 48,119 40,460 35,490 32,663 Income Before Cumulative Effect of Change in Accounting for Fuel Costs 83,317 66,912 57,921 48,572 34,935 Nonrecurring Cumulative Effect to December 31, 1973 of Change in Accounting for Fuel Costs, Net of Related Income Taxes ($ 4,831) (Note 2) .......... 4,162 Net income 87,479 66,912 57,921 48,572 34,935 Dividends on Preferred and Preference Stock ....... 19,656 17,191 14,526 11,392 6,426 Earnings Applicable to Common Stock ............ $ 67,823 49,721 43,395 37,180 28,509 Earnings Per Share of Common Stock (a)

Before cumulative effect of change in accounting for fuel costs $ 2.88 2.57 2.48 2.37 1.97 Nonrecurring cumulative effect to December 31, 1973 of change in accounting for fuel costs .....

$ 3.07 2.57 2.48 2.37 1.97 Pro Forma Amounts After Giving Effect to the Retroactive Application of Change in Accounting for Fuel Costs Earnings applicable to common stock.......... $ 63,661 51,066 43,161 38,488 30,252 Earnings per share of common stock (a) $ 2.88 2.64 2.46 2.45 2.09 Average Number of Shares Outstanding (thousands) .. 22,067 19,359 17,513 15,690 14,472 Dividends Declared Per Share of Common Stock .... 1.77 1.68 1.64 1.60 1.60 (a) Based on average number of shares outstanding.

Seo accompanying Noles lo Ffnanclal Slalemenls.

13

BALANCE SHEET December 31 ASSETS 1974 1973 Thousands of Dollars UTILITYPLANT Plant in service at original cost Electric $ 1,687,740 1,619,327 Steam heat 7,703 7,728 1,695,443 1,627,055 Less accumulated depreciation 354,249 312,178 1,341,194 1,314,877 Construction work in progress at cost 403,707 219,277 1,744,901 1,534,154 INVESTMENTS Subsidiaries at equity . 4,631 5,320 Safe Harbor Water Power Corporation at equity...... '..... 3,599 3,596 Nonutility property at cost, less accumulated depreciation .. 2,495 2,749 Other at cost or less . 4,064 7,354 14,789 19,019 CURRENT ASSETS Cash (Note 3) . 16,251 14,903 Construction fund for pollution control facilities (Note 4) .... 3,933 9,073 Accounts receivable, less reserve Customers 33,907 22,656 Other 22,574 10,929 Recoverable fuel costs (Note 2) 35,587 Materials and supplies at average cost Fuel 71,886 26,884 Operating and construction . 24,979 17,006 Other . 9,139 5,598 218,256 107,049 DEFERRED DEBITS 7,482 6,624

$ 1,985,428 1,666,846 See accompanying Notes to Financial Statements.

SCHEDULE OF CAPlTAL STOCK AND LONG-TERM DEBT December 31,1974 Thousands of Dollars CAPITALSTOCK LONG-TERM DEBT PREFERRED STOCK $ 100 par, cumulative FIRST MORTGAGE BONDS 4t/2 /o authorized 629,936 shares, 3'/o series due 1975 to be refinanced .. $ 93,000 outstanding 530,189 shares ...... $ 53,019 27/a /o series due 1976................ 8,000 2a/4 /o series due 1977 ................ 20,000 Series, authorized 5,000,000 shares 31/a /o series due 1978 ................ 3,000 3.35/o, outstanding 41,783 shares. 4,178 2a/4'/o series due 1980 ................ 37,000 4.40/o, outstanding 228,773 shares 22,878 3a/a /o series due 1982 7,500 4.60 lo, outstanding 63,000 shares .. 6,300 10'/a /o series due 1982 ............... 100,000 7.40/o, outstanding 400,000 shares (a) 40,000 3t/2!o series due 1983 ................ 25,000 3a/a'/o series due 1985 ................ 25,000 8.60/o, outstanding 222,370 shares 22,237 45/a lo series due 1991 ................ 30,000 9%%d, outstanding 77,630 shares ... 7,763 45/8 /o series due 1994 ................ 30,000

$ 156,375 5/a /o series due 1996 ................ 30,000 6a/4'/o series due 1997 ................ 30,000 7/o series due 1999 . 40,000 PREFERENCE STOCK no par, cumulative, 81/a /o series due 1999 ................ 40,000 9/o series due 2000 . 50,000 authorized 5,000,000 shares

$ 8.00 series, outstanding 71/4%%d series due 2001 ................ 60,000 75/8 lo series due 2002 75,000 350,000 shares ............... $ 35,000 7t/2 series due 2003 ................ 80,000

$ 8.40 series, outstanding

%%d 9t/4 /o series due 2004 ................ 80,000 400,000 shares 40,000 4t/2  %%d to 5/o pollution control series A

$ 8.70 series, outstanding due annually $ 500, 1977-1983; 400,000 shares ............... 40,000 $ 900, 1984-2002; $ 7,400, 2003....... 28,000

$ 13.00 series: (a) 891,500 outstanding 212,500 shares..... 21,250 NOTES to be issued April 1, 1975 (b).... 3,750 6'/2 lo-7/o due 1976 2,800

$ 140,000 7/o due 1980 20,000 COMMON STOCK no par, authorized 22,800 30,000,000 shares, outstanding OTHER 49 23,251,255 shares ............... $ 354,540 $ 914,349 SECURITIES SOLD IN 1973 AND 1974 Security Shares Amount 1973 January First Mortgage Bonds, 7t/2 lo Series due 2003 .. $ 80,000 May First Mortgage Bonds, 4t/2 to 55/a /o Pollution

%%d Control Series A due 1977-2003 28,000

'uly Note, 7'/o due 1980 . 20,000 August Series Preferred Stock, 7.40/o . 400,000 40,000 November Common Stock . 2,000,000 40,900

$ 208,900 1974 April $ 80,000 July 2,200,000 35,156 October 250,000(b) 25,000 October 100,000

$ 240,156 (a) Both tho 7.40/o Sorlos Proforrod Stock and tho Proforonco Stock, $ 13.00 Sorlos must bo rotirod In full through tho oporatlon of sinking funds at a rodomption price of $ 100 por sharo plus accrued and unpaid dividonds to tho data of such redemption. BegInning July 1, 1979 and annually thoroaftor through tho yoar 2003, 16,000 shares of tho 7.40'/o Sorlos Proforrod must bo rodoomod, and boglnning October 1, 1980 and annually thereafter through tho yoar 1999, 12,500 shares of tho Proforonco Stock, $ 13.00 Sorios must bo rodoomod.

(b) 37,500 shares to bo Issued and paid for April 1, 1975 under dolayod delivery contracts.

Soo accompanying Notes fo Financial Sfafomonfs.

16

December 31 LIABILITIES 1974 1973 Thousands of Dollars CAPITALIZATION(a)

Shareowners investment Preferred stock S 156,375 156,375 Preference stock 140,000 115,000 Common stock . 354,540 319,384 Capital stock expense (deduction) . (7,580) (6,889)

(No amortization plan In ellect)

Earnings reinvested (Notes 5 and 7) 185,695 157,113 829,030 740,983 Long-term debt 914,349 753,027 1,743,379 1,494,010 CURRENT LIABILITIES Commercial paper notes (Note 3) 85,509 39,851 Accounts payable . 37,121 33,705 Taxes accrued 11,852 13,457 Deferred income taxes on recoverable fuel costs (Note 2) . 18,840 Dividends payable and interest accrued 34,633 28,139 Other . 8,338 7,029 196,293 122,181 DEFERRED AND OTHER CREDITS Deferred investment tax credits . 18,860 15,323 Deferred income taxes . 22,689 17,436 Contributions in aid of construction (Note 10) .. 9,704 Other . 4,207 8,192 45,756 50,655

$ 1,985,428 1,666,846 (a) Seo Schedule of Capital Stock and Long-Tertn Debt on page 16.

See accompanying Notes lo Financial Statements.

STATEMENT OF CHANGES IN FINANCIALPOSITION 1974 1973 1972 1971 1970 SOURCE OF FUNDS Thousands of Dollars Operations Net income (1974 includes $ 4,162 nonrecurring amount) $ 87,479 66,912 57,92'I 48,572 34,935 Charges (credits) against income not involving working capital Depreciation.................... 52,399 48,837 41,446 34,903 32,173 Noncurrent deferred income taxes and investment tax credits net .......... 8,790 11,282 7,984 (1,127) (1,762)

Allowance for funds used during construction (20,732) (14,967) (14,647) (16,242) (9,723)

Other 520 220 220 220 (2,105) 128,456 112,284 92,924 66,326 53,518 Outside financing Common stock 35,156 40,900 46,940 37,120 28,093 Preferred stock 40,000 30,000 Preference stock . 25,000 35,000 40,000 40,000 First mortgage bonds......... 180,000 108,000 75,000 60,000 50,000 Other long-term debt . 360 20,024 8,342 10,506 2,687 Short-term debt net increase . 45,658 20,231 286,174 208,924 185,513 147,626 150,780 Working capital (excluding short-term debt) decrease 3,156(a) 23,896 Other net 1,874 681 4,799 8,522

$ 414,630 326,238 279,118 242,647 212,820 APPLICATlON OF FUNDS Construction expenditures $ 271,460 224,496 218,754 192,399 165,142 Allowance for funds used during construction (20,732) (14,967) (14,647) (16,242) (9,723) 250,728 209,529 204,107 176,157 155,419 Securities retired First mortgage bonds 15,000 7,763 Other long-term debt 18,632 10,041 10,057 8,'117 1,236 Short-term debt net decrease 56,631 21,627 4,122 18,632 66,672 25,057 29,744 13,121 Dividends on preferred, preference and common stock . 58,897 50,037 43,330 36,746 29,456 Working capital (excluding short-term debt) increase 82,753(a) 6,624 14,824 Other net 3,620

$ 414,630 326,238 279,118 242,647 212,820 ta) The net changes in working capital resulted principally from tho following: 1974, Increases in fuel invontory, accounts receivable and deferred fuel costs less related deferred income taxes; 1973, increases in other accounts receivable, construction lund, accounts payable and dividonds payablo and accrued interest.

Soe accompanying Notes fo Financial Sfatomenfs.

STATEMENT OF EARNINGS REINVESTED 1974 1973 1972 1971 1970 Thousands of Dollars Balance, January 1 ............. $ 157,113 140,238 125,647 113,821 108,342 Net Income (1974 includes $ 4,162 nonrecurring amount) ......... 87,479 66,912 57,921 48,572 34,935 244,592 207,150 183,568 162,393 143,277 Dividends Preferred stock ............... 9,393 7,551 6,433 6,433 6,295 Preference stock .............. 10,263 9,640 8,093 4,959 131 Common stock (per share 1974, $ 1.77; 1973, $ 1.68; 1972, $ 1.64; 1971-1970, $ 1.60) .. 39,241 32,846 28,804 25,354 23,030 58,897 50,037 43,330 36,746 29,456 Balance, December 31 (Notes 5 and 7) ...... $ 185,695 157,113 140,238 125,647 113,821 NOTES TO FINANCIALSTATEMENTS Allowance for Funds used During Construction December 31, 1974 and 1973 As provided in the uniform system of accounts, the cost of funds (interest on borrowed money and a reasonable rate on other capit'al) used to finance construction work in progress is capital-1~

SUMMARY

OF ACCOUNTING POLICIES ized as part of construction cost. An amount equal to the amount so capitalized is shown on the Statement of Income under Other Income and Accounting System Deductions and serves to offset the actual cost of Accounting records are maintained in conform- financing construction work in progress.

ity with the uniform system of accounts pre-scribed by the Federal Power Commission (FPC) Prior to February 1, 1974 the interest component and adopted by the Pennsylvania Public Utility of the rate used to compute the allowance was Commission (PUC). treated on a "before-tax" basis and the rate was not reduced by any related income tax reduc-tions. To be consistent with the treatment ac-UtilityPlant corded for rate-making purposes the rate used to Costs of additions to utility plant and replace- compute the allowance was converted to an ments of units of property are capitalized. Costs "after-tax" basis as of February 1, 1974. For the of depreciable property retired or replaced are year 1974, Other Income and Deductions In-eliminated from utility plant accounts and such come tax credits has been credited with $ 6.1 costs, plus removal costs, less salvage, are million of income tax reductions associated with charged to accumulated depreciation. Costs of this interest, with a corresponding increase in land retired or sold are eliminated from utility income taxes charged to Operating Expenses.

plant accounts and any gains or losses are re-flected on the Statement of Income. All expendi-tures for maintenance and repairs of property and Depreciation the cost of replacement of items determined to For financial statement purposes, the straight-be less than units of property are charged to line method of depreciation is used to accumu-operating expenses. late an amount equal to the cost of utility plant 18

and removal costs, less salvage, over the esti- PUC. The principal items are accelerated amorti-mated useful lives of property. zation of certified defense facilities and pollution control equipment, deduction of costs of remov-Subsidiaries and Safe Harbor ing retired depreciable property, that portion of tax depreciation arising from shortening depre-The Company has seven wholly-owned subsid- ciable lives by 20/o as permitted by the class life iaries (including four coal companies) and also depreciation system and, beginning in 1974, fuel owns one-third of the outstanding capital stock of costs recoverable under fuel adjustment clauses.

Safe Harbor Water Power Corporation represent-ing one-half of that company's voting securities. Tax reductions arising principally from the use of the declining balance depreciation method, Investments in subsidiaries and in Safe Harbor guideline lives and certain income and expenses Water Power Corporation are recorded using the being treated differently for tax computation than equity method of accounting. Under this method, for book purposes are accounted for under the these investments are carried on the Balance flow-through method. These reductions in income Sheet at cost plus undistributed earnings since tax provisions are also accorded flow-through dates of acquisition, and equity in the current treatment in rate determinations by the PUC and year earnings of these companies is reflected on currently result in lower rates for customers than the Statement of Income under Other Income and would otherwise be possible.

Deductions.

Investment tax credits are deferred. Deferred Since the Company's subsidiaries are not en- amounts pertaining to the Job Development In-gaged in the business of generating and distrib- vestment Credit (Revenue Act of 1971) are being uting electricity, the Company believes that its amortized over the average lives of the related financial position and results of operations are property while amounts pertaining to the credits best reflected without consolidation. If all the permitted under prior laws are being amortized subsidiaries were considered in the aggregate as over 5-year periods.

a single subsidiary, they would not constitute a significant subsidiary.

Retirement Plan The Company has a Retirement Plan composed Revenues of two parts: (1) a non-contributory portion which Revenues are based on cycle billings rendered provides benefits for all eligible active employees to certain customers monthly and others bi- with the full cost absorbed by the Company, and monthly. The Company does not accrue revenues (2) a voluntary portion in which contributions are related to energy delivered but not billed. The made by both employees and the Company, but Company's tariffs include fuel adjustment clauses the full cost of past service and Plan improve-under which fuel costs above or below the levels ments is borne by the Company. Approximately allowed in approved rate schedules are permitted 95/o of eligible active employees are members to be billed or credited to customers after the fuel of the voluntary portion of the Plan. Company costs are incurred. contributions to the Plan include amounts re-quired to fund current service costs and to amor-Fuel Costs Recoverable Under Fuel tize unfunded past service costs over periods of not more than 20 years.

Adjustment Clauses In October 1974, effective as of January 1, 1974, the Company changed its method of accounting for fuel costs recoverable under fuel adjustment 2. FUEL COSTS RECOVERABLE UNDER clauses. See Note 2 for further information re- FUEL ADJUSTMENT CLAUSES garding this accounting change. Under the fuel adjustment clauses, fuel costs in-curred in a month in excess of a base amount are Income Taxes reflected in customers'ills over a subsequent three-month period. Prior to October 1974 the Deferred tax accounting is followed for items fuel expense recorded by the Company each where similar treatment in rate determinations month was the cost of fuel burned to generate has been or is expected to be permitted by the electricity during that month. However, due to the 19

sharp rise in the cost of fuel during 1974 this $ 145 million of these lines of credit. Compensat-procedure resulted in pronounced mismatching ing bank balances are generally 10'/o of the line of fuel costs and revenues by accounting periods. of credit or 20 k of the amount borrowed, which-ever is higher, on an average annual basis. These In October 1974, effective as of January 1, 1974, balances are not restricted as to withdrawal.

the Company, as authorized by the PUC, changed Based on bank borrowings during 1974, the aver-its method of accounting to record as fuel ex- age compensating bank balance requirement pense an amount corresponding to the fuel costs was about $ 13.8 million, of which about $ 2 million being billed to customers during such month. This was satisfied by "float" (checks issued but not change results in matching fuel costs and reve- cleared by the banks).

nues by deferring the charge to income of fuel costs recoverable in the future to the periods in Lines of credit aggregating $ 52 million were which these costs are billed to customers through maintained by payment of commitment fees application of the fuel clauses. The changed ac- which are based on either a percentage of the counting also conforms more closely to the treat- prime interest rate times the line of credit or a ment presently given fuel costs by regulatory fixed percentage of the line. Commitment fees on bodies in setting electric rates. an annualized basis approximated $ 0.4 million at December 31, 1974.

Following the new procedure, $ 35.6 million of the Bank borrowings are generally for one year, and cost of fuel burned during 1974 was deferred at may be prepaid at any time without penalty. Bor-December 31, 1974 to be expensed in the periods rowings under lines of credit requiring compen-the corresponding fuel adjustment revenues are sating bank balances are at the lending bank's recorded and $ 9.0 million of fuel costs represent- prime interest rate in effect from time to time.

ing the retroactive deferral at December 31, 1973 Borrowings under lines for which commitment of a portion of the cost of fuel burned in 1973 was fees are paid are generally at 110/o of the lend-charged to expense in 1974. For 1974, fuel costs ing bank's prime interest rate in effect from time were lower by a net amount of $ 26.6 million and, to time in addition to the continued payment of after income tax effects, earnings applicable to the commitment fee. The Company had no bank common stock were increased by $ 12.6 million loans outstanding at December 31, 1974. Com-($ 0.57 per share). mercial paper notes are generally sold for pe-riods ranging from 30 to 60 days. At December The recording of the $ 9.0 million deferral of re- 31, 1974 the Company had $ 85.5 million of com-coverable fuel costs at December 31, 1973 re- mercial paper notes outstanding. The weighted sulted in a nonrecurring credit to income in 1974 average discount rate applicable to these notes which, after income tax effects, amounted to $ 4.2 was 9.4/o.

million ($ 0.19 per share). The pro forma amounts shown on the Statement of Income reflect the The maximum aggregate amount of short-term effect of retroactive application of deferred fuel debt outstanding at the end of any month in 1974 cost accounting and related income tax effects was $ 140.3 million; the average aggregate daily had the new method been used since the princi- amount outstanding during 1974 was $ 95.6 mil-pal fuel adjustment clause became effective in lion. The approximate weighted average'interest 1970. rate of short-term debt during 1974 was 10.0/0, calculated by dividing the total short-term debt in-terest expense for the year by the average aggre-gate daily amount of short-term debt outstanding.

3. COMPENSATING BALANCES AND SHORT-TERM DEBT In order to provide loans for interim financing and provide back-up financing capability for commer- 4. POLLUTION CONTROL CONSTRUCTION cial paper notes the Company had lines of credit FUND with various banks aggregating $ 197 million at The unexpended proceeds from the sale of First December 31, 1974. Use of these lines of credit Mortgage Bonds, Pollution Control Series A, was restricted to the extent of $ 13.5 million by amounting to $ 3.9 million at December 31, 1974, short-term bank loans to certain owned and con- are held by a trustee in a Construction Fund trolled fuel supply companies. Compensating which consists of cash and temporary cash in-bank balances are required in connection with vestments. Payments may be made from the Fund 20

upon requisition by the Company for costs related 1974 1973 to the construction of certain pollution control Thousands of Dollars facilities. Portion of tax depreciation arising from shortening depreciable lives by 20%

under the class life

5. DIVIDEND RESTRICTIONS depreciation system ...... $ 3,715 3,057 Costs of removing retired The Company's charter and mortgage indentures depreciable property ..... 1,725 2,219 restrict the payment of cash dividends on Com-mon Stock under certain conditions. Under the Accelerated amortization of pollution control facilities.. 658 385 charter provisions, which are the more limiting, no restrictions are effective on the payment of Recoverable fuel costs ..... 14,009(a) such dividends out of current earnings. The Abnormal loss on retirement amount of earnings reinvested free of restrictions of property.............. (87) 871 under the charter at December 31, 1974 was Accelerated amortization of

$ 136.7 million. emergency facilities...... (758) (795)

$ 19,262 5,737 (a) Excludes $ 4,831 deferred income taxes related to

6. INCOME TAXES nonrecurring cumulative effect to December 31, 1973 of change in accounting for fuel costs.

Income tax expense for the years 1974 and 1973 is reflected on the Statement of Income as follows:

1974 1973 Income tax expense differed from the amount Thousands of Dollars computed by applying the combined Federal and Operating Expenses: State corporate income tax rates (1974, 52.94%;

Current 1973, 53.72%) to pre-tax income as follows:

Federal State

........... $ 1 2,554 16,454 3,858 6,207 1974 1973 16,41 2 22,661 Thousands of Dollars Deferred Federal .. 15,991 4,557 $ 87,479 66,912 State .... 3,271 1,180 38,966 33,852 19,262 5,737 $ 126,445 100,764 Investment tax credits Indicated income tax Deferred ........... 4,753 7 233 expense on the above Amortization of at combined Federal deferments......... ~1,216 ~1,688 and State tax rates ...... $ 66,940 54,131 3,537 5,545 39,211 33,943 Reductions in indicated tax Other Income and Deductions: due to:

Federal (4,156) (46) Amortization of investment State .......... (920) (45) tax credit deferments .. 1,216 1,688

~a,om) ~91 Allowance for funds used Nonrecurring Cumulative during construction Effect to December 31, 1973 nontaxable........... 10,976 8,041 of Change in Accounting for Fuel Costs: Tax depreciation in excess Federal ............... 3,842 of book depreciation .. 8,799 7,531 State 989 Tax and pension costs-4,831 tax deduction in excess Total income tax of book expense ...... 2,491 2,687 expense ....... $ 38,966 33,852 Other ................. 4 '492 332 Total reduction in Deferred income taxes result from differences indicated income tax .. 27,974 20,279 between the time the following items are recog- Income tax expense ....... $ 38,966 33,852 nized as expenses for tax and financial statement Effective tax rate on purposes: pre-tax income ......... 30.8% 33 6%

21

7. PROPERTIES SUBJECT TO railroad coal cars, $ 16.4 million; computer equip-FEDERAL LICENSES, ment, $ 15.9 million; construction cranes, $ 4.6 mil-The Company operates two hydroelectric proj- lion. Generally the leases contain renewal options ects under licenses issued by the FPC. Certain and obligate the Company to pay maintenance, reserves required to be provided under the Fed- insurance and other related costs.

eral Power Act have not been recorded pending approval of the amounts by the FPC. The Com- The impact upon net income in each of the years pany estimates that such reserves applicable to 1974 and 1973 would be less than 1'/o if all non-the years from 1946 would not exceed $ 2.7 mil- capitalized financing leases were capitalized and lion at December 31, 1974. amortized on a straight-line basis with interest accrued on the basis of. the outstanding lease liability.

8. RETIREMENT PLAN Obligations of the Company's Retirement Plan are currently funded through a Trust Fund. At 10. CONTRIBUTIONS IN AID OF June 30, 1974, the end of the Fund's most recent CONSTRUCTION fiscal year, the Fund's assets at cost were $ 85.9 In accordance with a revision of the uniform sys-million. Pension costs were $ 6.7 million in the tem of accounts, contributions in aid of construc-year 1974 and $ 6.8 million in 1973. , tion, which is an accumulation of nonrefundable amounts received from customers for construc-Plan amendments effective in 1974 and 1975, sub- tion, were reclassified as a credit to Utility Plant ject to Internal Revenue Service approval, pro- effective January 1, 1974.

vide for increased benefits and reduced employee contributions. Including these changes, at June 30, 1974 the actuarially computed unfunded past service cost was $ 20.9 million and vested bene- 11. COMMITMENTS AND CONTINGENT fits exceeded the cost basis of the Fund's assets LIABILITIES by $ 15.3 million. It is estimated that Plan amend-ments will increase annual pension costs by The Company estimates that about $ 2.2 billion approximately $ 1.2 million in 1975. will be required to complete construction proj-ects in progress or authorized to be started in 1975. Of this amount, about $ 340 million is ap-The Company does not currently anticipate any significant increase in pension costs as a result plicable to the year 1975 with the balance to be of the Employee Retirement Income Security Act expended through the year 1987.

of 1974.

The Company is subject to certain present and developing laws and regulations with respect to air and water quality, land use and other en-

9. RENTALS AND NONCANCELABLE vironmental matters. The Company is unable to LEASE COMMITMENTS predict the ultimate effect of such laws and regu-Total rentals charged to operating expense for lations upon its existing and proposed facilities 1974 and 1973 amounted to $ 8.9 and $ 7.5 million, and operations. It is possible that such laws and respectively. regulations may require the Company to modify, supplement, replace or cease operating certain At December 31, 1974 the Company was com- of its equipment and facilities, delay or impede mitted under noncancelable leases expiring at construction and operation of new facilities, and various dates to 1996. The minimum rental com- require substantial additional expenditures in mitments under these leases total $ 55.2 million amounts which are not now determinable.

due as follows (millions of dollars): 1975, $ 5.1; 1976, $ 5.0; 1977, $ 4.8; 1978, $ 4.6; 1979, $ 4.3; 1980 In connection with providing for its future bitu-through 1984, $ 15.6; 1985 through 1989, $ 8.1; minous coal supply, the Company at December 1990 through 1994, $ 6.5; after 1994, $ 1.2. These 31, 1974 has guaranteed capital obligations of minimum rental commitments are applicable to certain coal suppliers (including four owned and the following categories of property: combus-, two controlled coal companies) aggregating tion turbine generating equipment, $ 18.3 million; $ 1 24.8 million.

22

AUDITORS'PINION HASKINS & SELLS Two Broadway Cedified Public Accountants New York 10004 The Shareowners and Board of Directors of Pennsylvania Power & Light Company:

We have examined the balance sheet of Pennsylvania Power & Light Company as of December 31, 1974 and 1973, the related statements of Income, earnings reinvested, and changes In financial posi-tion for the years then ended and the schedule of capital stock and long-term debt as of December 31, 1974. Our examination was made in accordance with generally accepted auditing standards, and accordingly Included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

In our opinion, such financial statements and schedule present fairly the financial position of the Company at December 31, 1974 and 1973 and the results of its operations and changes in its financial position for the years then ended, In conformity with generally accepted accounting principles consistently applied (except for the change, with which we concur, in the method of accounting for recoverable fuel costs as described in Note 2 of the Notes to Financial Statements) during the period and on a basis consistent with the preceding year.

HASKINS & SELLS February 3, 1975 Quarterly Dividends and Market Price of Voting Securities for 1974 and 1973 Reported Market Price Dollars per Share Quarterly Dividends 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Declared High Low High Low High Low High Low 1974 Common Stock.... ~ . ~... $ 0.45(a) $ 23 190/4 217/s 16 18'/4 13 170/0 147/e Preferred Stock 4f/2 /o .......... ~... ~ . 1.125 57'/2 52 54'/2 487/0 50'/2 43 48 43 Series 3.35o/o .............. 40 39 38 35 33 29 38 28'/2 4.40o/o .............. 560/4 52 52 46'/2 48 417/s 45 41 46Q/0 55'/2 53 52 49 48 46 48 45 740/0 8.60'/o .............. 104 f/2 10'I 103'/2 90 89 82'ls 87 70 9.00'/o .............. 104 102 100 94 89 77 70 75 Preference Stock 8.00.................

8.40.................

8.70.................

$ 13.00 ................

2.00

2. I 0 2.175 2.93(b) 100'/2 1020/4 106 96 98 99'/2 95 99 1000/4 78 80 86 80 813/4 910/4 68 69 73 80 81'/2 86 109f/2

'2 67 70 100 1973 Common Stock .......... 0.42 26 240/0 230/0 22 22'/2 20 220/4 19 Preferred Stock 4'/2 o/o ................ 1.125 65 60'/2 62 587/0 61 55 60 53 Series 3.35o/o .............. 0.8375 43 42 43 42 42 42 42 39'/2 4 40o/o .............. 1.10 63'/2 59'/2 61 57 58'/4 53 58 51 46Q/0 1.15 62 60 60 60 60 60 56 53 7.40'/o .............. (c) 8.60/o .............. 2.15 114 109 112 f/2 108'/2 108'/4 102'/2 109 100 9 00'/o 2.25 110 109 110 109 109 109 108 104 Preference Stock

$ 8.00 ............ 2.00 106 102 104 f/2 100 103 96 101 f/2 943/4

$ 8.40 ................. 2.10 1090/4 105 108'/2 104 105f/2 98f/2 105 98

$ 8.70 2.175 113 107 112 106'/2 105 101 107'/2 97'/2 The principal trading market for ail classes of stock Is tho New York Stock Exchange oxcopt for the 3.35'/o 4.60/o and 9.00/o Series Preferred which

~

aro Iistod on tho PBW Exchange but are traded principally over tho counter. Price ranges for tho 3.35/o, 4.60/o and 9.00/o Series Proforrod Stocks oro based on tho best avaiiabio high and Iow bid prices during tho periods ond should bo vlowed as reasonable approximations.

(a) First quarter of 1974 was $ 0.42, remaining quarters $ 0.45.

(b) Stock Issuod Octobor1974, fourth quartor dividend only.

(c) Tho 7.40'/o Series Preferred was a private placement in August 1973 ond Is not publicly traded. Tho 1973 third quarter dividend was $ 0.9456 and subsequent quarterly dividends wore $ 1.85.

23

PRINCIPAL OFFICERS BOARD OF DIRECTORS JACK K. BUSBY, President CLIFFORD L. ALEXANDERJR., Washington, D.C.

Partner ol Arnold & Porter, Counsellors al Law BROOKE R. HARTMAN, Executive Vice President, Operations ROBERT R. FORTUNE, Vice President, Financial JACK K. BUSBY, Allentown President of the Company GEORGE F. VANDERSLICE, Comptroller RALPH R. CRANMER, Williamsport CHESTER R. COLLYER, Treasurer DONALD J. TREGO, Assistant Treasurer Member ol Board ol Directors Grll Publishing Company EDGAR L. DESSEN, Hazleton JOHN T. KAUFFMAN, Vice President, Physician-Radiologist System Power & Engineering NORMAN W. CURTIS, Vice President, BROOKE R. HARTMAN, Allentown Engineering & Construclion Executive Vice President, Operations W. DEMING LEWIS, Bethlehem EMMET M. MOLLOY, Vice President, Human Resource and Development President of Lehigh University RICHARD H. LICHTENWALNER, Vice President, JOHN A. NOBLE, Scranton Public Relations President ol Cleland Simpson Company, EDWARD M. NAGEL, Vice President, Department stores General Counsel and Secretary RUTH PATRICK, Philadelphia LEON L. NONEMAKER, Vice President, Division Operations Chief Curator ol the Limnology Department, Academy ol Natural Sciences CHARLES E. FUQUA, Vice President, Susquehanna Division NORMAN ROBERTSON, Pittsburgh CHARLES J. GREEN, Vice President, Harrisburg Division Senior Vice President and Chief Economist ol CARL R. MAIO, Vice President, Lehigh Division Mellon Bank, N.A.

JAMES J. MCBREARTY, Vice President, Norlheast Division JOSEPH T. SIMPSON, Harrisburg HERBERT D. NASH JR., Vice President, Chairman ol the Board ol Harsco Corporation, Consumer and Community Services Diversified manufacturer of fabricated metal producls EDWIN H. SEIDLER, Vice President, Distribution M.J. WARNOCK, Lancaster BRENT S. SHUNK, Vice President, Lancaster Division Chairman ol the Board ol Armstrong Cork Company, Manulacturer of interior furnishings and specialty products CHARLES H. WATTS II, Lewisburg President ol Bucknell University S. HAYWARDWILLS, Miami, Florida Chairman ol the Board and President ol GAC Corporatfon, Community development Executive Committee: Jack K. Busby, chairman; Messrs. Hartman, Simpson, Warnock and Wills.

Audit Committee: Charles H. Watts 0, chairman; Messrs. Alexander and Warnock and Dr. Patrick The Company files Form 10-K annually with tho Securities and Exchange Commission. Form 10-K is composod of this Annual Report to shareowners and additional Informatton concerning the Company and its operattons. This additional Information will be availablo after April 1, 1975 by writing to Pennsylvania Power & Light Company, Two North Ninth Street, Allentown, Pa. 18101, attention: Mr. Georgo I. Kllno, Investor Services Manager.

FISCAL AGENTS TRANSFER AGENTS FOR PREFERRED, PREFERENCE AND COMMON STOCK Industrial Valley Bank and Trust Company 634 Hamilton Mall Allentown, Pennsylvania 18101 Irving Trust Company One Wall Street New York, New York 10015 Pennsylvania Power & Light Company Two North Ninth Streot Allentown, Pennsylvania 18 101 REGISTRARS FOR PREFERRED, PREFERENCE AND COMMON STOCK The First National Bank ol Allentown Hamilton Mall at Seventh Allentown, Pennsylvania 18101 Morgan Guaranty Trust Company ol Now York 23 Wall Street New York, New York 10015 DIVIDEND DISBURSING OFFICE FOR PREFERRED, PREFERENCE AND COMMON STOCK Treasurer Pennsylvania Power & Light Company Two North Ninth Street Allentown, Pennsylvania 18101 SECURITIES LISTED ON EXCHANGES NEW YORK STOCK EXCHANGE First Mortgage Bonds, 3% Series duo 1975 First Mortgage Bonds, 10Ye% Sorles duo 1982 4' Preterred Stock (Code: PPLPRB) 4.40% Series Preferred Stock(Code: PPLPRA) 8.60% Sorios Prelorred Stock (Codo: PPLPRG)

Prelerenco Stock, $ 8.00 Serios (Codo: PPLPRJ)

Prelerenco Stock, $ 8.40 Series (Code: PPLPRH)

Prelerence Stock, $ 8.70 Sories (Codot PPLPRI)

Prelerenco Stock, $ 13.00 Series (Code: PPLPRK)

Common Stock (Code: PPL)

PBW STOCK EXCHANGE 4~h% Preferred Stock 3.35% Series Pre!orred Stock 4.40% Series Prelerred Stock 4.60% Series Prelerred Stock 8.60% Series Prelorred Stock 9% Series Pre!orred Stock Prelerence Stock, $ 8.00 Series Prelerence Stock, $ 8.40 Series Prelerence Stock, $ 8.70 Series Prelerence Stock, $ 13.00 Series Common Stock The annual meeting of shareowners will be held at the Lehlgh Consistory Scottish Rite Auditorium, 1533 Hamilton St., Allentown, Pa., on Wednesday, April 23, 1975. Formal notice of the meeting, together with a reservation card for meeting attendance, will be mailed to shareowners of record March 10, 1975, on or about March 17, 1975.

PpaL BULK RATE U. S. POSTAGE PENNSYLVANIA POWER 8 LIGHT COMPANY Two North Ninth Street, Allentown, Pa. 18101 PA I D Allentown, Po.

Teiephonet Area Code 215 821-5151 Permit No. 104 LtZHO IN V.S.A.

~ Pennsylvania Power & Light Company L

A nnt tel I:Isn't't Q7$

'1 THE ATTACHED FILES ARE OFFICIAL RECORDS OF THE OFFICE OF REGULATION. THEY HAVE BEEN CHARGED TO YOU FOR A LIMITEDTIME PERIOD ANS MUST BE RETURNED TO THE CENTRAL RECORDS STATION 008. ANY PAGE(S}

REMOVED FOR REPRODUCTION MUST BE RETURNED TO ITS/THEI R ORI GINAL ORDER.

DEADLINE RETURN DATE V

i',w O 'Y.Ah c MARY JINKS, ClIIEF CENTRAL RECORDS STATION

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HIGHLIGHTS Per Cent Increase 1975 1974 (Decrease)

Electric Energy Sales millions kwh. 19,113 18,963 0 8'/o Operating Revenues thousands ... $ 544,129 472,036 15.3 Earnings Applicable to Common Stock thousands ...... $ 73,032 63,661(a) 14.7 Earnings Per Share, based on average number of shares outstanding $ 2.87 2.88(a) (0.3)

Dividends Declared Per Share ...... $ 1.80 1.77 1.7 Book Value Per Share $ 23.17 22.91 1.1 Times Interest Earned Before income tax expense 2.80 2.92(a) (4.1)

After income tax expense ........ 2.31 2.36(a) (2.1)

Construction Expenditures thousands . $ 345,289 271,460 27 2,.

Total Capital Investment thousands . $ 2,100,003 1,828,888 14.8 (a) Excludes effect of $ 4,162,000 Nonrecurring Credit recorded In 1974.

Pennsylvania Power & Light Company is an electric utility providing service to 918,000 homes and,businesses over a 10,000-square-mile area in 29 counties of central eastern Pennsylvania. Principal cities in the PP&L service area are Allen-town, Bethlehem, Harrisburg, Hazleton, Lancaster, Scranton, Williamsport and Wilkes-Barre.

Contents President's Letter 1 The Year In Review 3 Statistical 'Summary 11 Analysis of Statement of Income 12 Supplementary Comments Insert Fina ncials 15 Notes to Financial Statements 20 Dividends and Stock Prices 27 Directors and Officers 26 Cover Photo: The PP&L lineman is probably more visible and typifies our Company more than any other individual. Today's lineman, with his up-to-date kit of tools and equipment is a lot more efficient than his predecessors back through PP&L's 55-year history. On the cover Lineman First Class Albert Molchan, of Catasauqua, Is working safely and comfortably at pole-top level from his electrically-Insulated bucket truck. He is using a hydraulic pressing tool on a new, de-energized line being built to increase capacity In a rural section of our territory. This modern-day lineman provides quite a contrast to the early lineman who worked primarily with climbing hooks and hand tools.

To Our Shareowners:

Recession and inflation were the principal focal points of public concern in 1975. It was also a year of non-progress in energy. Even though the Energy Policy and Conservation Act of 1975 became law at year-end, the lack of an effective energy policy continues to be our most critical long-term national problem. Accordingly, this letter is again directed to this subject, just as it was last year.

The energy record of 1975 was a dismal one:

imports of foreign oil increased natural gas reserves decreased major areas of energy-related environmental conflict were not resolved there was no clear-cut decision on the issue of regulation/

deregulation of oil/natural gas pricing additional development of coal and nuclear resources continued to lag utilities announced more cutbacks and delays in installation of new generating facilities as their ability to finance large energy projects remained in doubt.

Overall, an atmosphere of political ambivalence and expediency persisted, as many citizens focused so strongly on the problems of higher energy prices that the need to provide for future energy requirements was often shunted to one side.

We cannot afford to continue in this style.

Ominous signs are already present, for those willing to see them, that the nation is slipping towards an irreversible energy mess. We are confronted by the reality that it takes a decade or more to bring new electric energy facilities on line. 1976 is the year when we should be starting to provide new pl r,

facilities for 1985/1986. Otherwise, millions of people may be "surprised" when lights flicker and factories are required to cut back on work schedules, 10 years hence.

Despite the growing urgency of the energy situation, there is not yet much indication that 1976 will depart from the holding pattern that marked E 1974 and 1975. We abound in proposed remedies, technical advice and voluminous studies. But we are still on dead center. Why?

Our interpretation is that the various social, economic, financial and political pressures and counter-pressures that underlie the energy problem misinformation on energy. It has good reason, have neutralized one another. For the moment at in this post-Watergate era, to be suspicious of both least, our national decision-making process seems government and business pronouncements and to have been immobilized by a balance of power to be unsettled by the conflicting assertions of among conflicting forces and beliefs. scientific experts. The result is a mishmash of public This stalemate reflects the inchoate state of public uncertainty and confusion. Basic questions and understanding on energy matters. Small wonder doubts continue. It is essential that they be resolved that this situation exists. The public is randomly because, until they are, the lack of direction of exposed to all kinds of information and energy policy will continue.

So, we think it is worthwhile to restate some ~ In our complex and interdependent world, energy fundamentals, as we see them- energy planning and decision-making require e The era of plentiful, low-cost energy is over. the very best kind of systems management that

~ We shall need more energy. Dealing only with we are capable of. We need a thoughtful people already born, we "know" that in 14 balancing of economic, social and years there will be an additional 29 million environmental needs and values. And people of age 20 and over in this country. recognition that there are limits to the rate of Further, if we are going to achieve an change that can be tolerated when dealing with unemployment rate of, say, 5.5 per cent, we will a core element, such as energy, which so need 20 million more jobs. There is no way of fundamentally affects our lives.

feeding, housing, clothing, providing for the ~ Our society can cope with human problems health care, employment and lifestyle- arising from inadequate income, including satisfactions of this many more millions of inability to purchase basic energy requirements people without additional supplies of energy. if we have energy available. Without

~ The diminishing supply and non-renewable adequate energy, however, our society will not nature of our oil and natural gas resources area have the productive capability necessary to reality. We have to become much more meet human needs.

aggressive in preparing ourselves to live in a We appreciate that'beyond these "energy world of decreasing supplies of both forms fundamentals," there are many complicated of energy. questions of ways and means that will have to be

~ We shall have to make more use of the energy dealt with. But first things first. These fundamentals materials that are available, particularly our are not themselves accepted. If they were, we coal and uranium resources. These are the would not have the problems we do.

major energy materials that we must, for the We must continue intensive review, discussion, time being, rely on to reshape the nation's and analysis until public opinion recognizes that our energy base. nation's energy cost/supply crisis is real and long

~ Further development of our domestic oil and term. Only then will it be possible to come to grips with the many difficult changes that are involved, natural gas resources is essential. Additional not the least of which is facing up to the heavy supplies could lessen our dependency on cost of supporting the required new investments in OPEC imports and provide more time in which to work out an orderly restructuring of the energy facilities. Very little will happen until people nation's energy supply mix. set aside the illusion that the complex energy problems that confront us can be painlessly

~ We must intensify our energy conservation overcome by some kind of quick fix.

efforts. We should concede that we have We ask for our shareowners'elp in supporting been wasting energy in the past and should do and facilitating the discussion and informational much more to use energy wisely. We have to process necessary to create a climate for making the overhaul our utilization-technology, tighten basic energy changeovers we need. With such help, building standards and moderate our energy and additional help from other interested and consumption habits. It will be a step-by-step informed citizens, we can make the nation's process. We cannot overnight rebuild all the Bicentennial the year when we finally got started existing homes, buildings, factories and out of the energy quagmire that now enmeshes us.

transport systems that are now in place. Even the energy consumption levels of new facilities

~cg/

will reduce gradually, because of the Respectfully submitted, momentum of past designs and practices.

~ We must expand research efforts to develop new methods and sources of energy supply.

Here, too, progress will be a step-by-step affair. Jack K. Busby, President Dramatic breakthroughs are not in sight. Many appraisais warn us not to expect too much, too fast. March 1, 1976

THE YEAR IN REVIEW PP&L's 1975 per share earnings were about level Held down by the decrease in the industrial with 1974 even though about 15 per cent more classification, total use of electric energy increased shares were issued during the year, reflecting the by only 150 million kilowatt-hours in 1975 an increased shareowner investment in the Company. overall increase of about one per cent.

Earnings for 1975 were $ 2.87 per share of common Although overall use was up slightly, the winter peak stock, down one cent from the $ 2.88 earned in 1974. demand for electricity increased about nine per cent from 1974 to 1975. About a third of that growth Electric Use Edging Up was attributable to colder weather. The rest came from Last year, we reported a 1974 growth rate in increased customer use.

kilowatt-hour usage of only a half per cent compared to an average 1963-73 annual growth rate of about nine Revenues Up per cent. This leveling off of use was attributed Revenues for 1975 were $ 544 million, an increase to the energy crisis, energy conservation efforts by of 15.3 per cent from 1974. Although part of the our customers and the state of the economy. increase in revenues came from higher residential During 1974 and early '75 we were forecasting that and commercial use, most came from the recovery this leveling off was only temporary as customers implemented energy conservation practices and adjusted to living with lower energy use. It was clear, though, that people could not go on lowering thermostats an additional five degrees every year.

We expected that a new equilibrium would be reached at some point and growth would resume v)j although at a rate much tempered by the influence of higher energy prices.

Some confirmation of these expectations was provided by residential and commercial customers Set, whose 1975 kilowatt-hour use was higher than the previous year. Overall residential usage was up five per cent for the year, reflecting both the addition of 15,000 customers and higher individual electric consumption. About 11,000 electrically heated >jl'( )

homes and apartments were added to our system r in 1975, some of which, we feel, reflects the "throwover effect" of uncertainty in availability and price in g) the natural gas and oil market.

Commercial usage showed the greatest gain of all our classifications with a seven per cent increase over 1974. Industrial use was more sensitive to the general slowdown of the economy and dropped two per cent.

A welder Joins sections of stainless steel steam separators atop one of the reactor cores at the Company's Susquehanna nuclear plant under construction near Berwick. The separators remove water from steam leaving the reactor before the steam reaches the turbine-generator units.

of increased fuel costs through the fuel adjustment power sales which, in keeping with regulatory charge. (Although the rate of increase in fuel requirements, are classified as a reduction of costs moderated during 1975, the average cost of fuel expenses rather than as revenues.

consumed was higher than during 1974. This Much of the increase in expenses reflects the resulted in higher fuel adjustment revenues. higher average cost for the fuel burned to generate Recovery of these higher fuel costs accounted for electricity in 1975 compared to 1974. Our 1975 about 77 per cent of the increase in revenues.) A fuel bill amounted to $ 272 million versus $ 192 million rate increase allowed to go into effect in September, the previous year.

provided about $ 5 million in additional revenues.

Rate Increase Proceedings Costs Up Also A rate increase request filed by PPBL in March The rise in revenues was matched by increased 1975 had still not come to a final decision by the date costs. Total operating expenses were up $ 66 of this report. Still pending is our application to million over 1974, an increase of about 19 per cent. the Pennsylvania Public Utility Commission (PUC)

This figure would have been even higher without for a two-step, $ 80-million increase in revenues.

the $ 64 million increase over 1974 in interchange The first step of the request amounted to four per cent, or about $ 22 million annually. The second step was for an additional 11 per cent, or about $ 58 million a year.

We had asked that the first step become effective in June while recognizing that the larger second step would probably be suspended for further study.

In June, the PUC suspended both steps of the proposal because of concern about that part of the hk rate request which provided for no increase for the first 200 kilowatt hours of use by residential customers. This proposal, often referred to as "life line rates," was designed to recognize some of the inflation problems faced by low-income people and the elderly.

We refiled the first step after removing the lifeline feature. Then, when the PUC did not suspend the revised filing, it became effective on Sept. 13 subject to possible refund pending final PUC action.

Extensive testimony was presented by the Company on both parts of the proposed increase at public hearings which concluded in January 1976. No final PUC action is expected before late March 1976.

IU Many P P8 L women now hold positions traditionally held by men.

Cynthia Williams, of Allentown, is one of several young women who have taken drafting courses and qualified for work as a draftsman In the Company's engineering department.

PP&L also has women working as engineers, handymen and in other positions considered, until recently, in the male domaIn.

Construction Dollars in Rates 1976 Construction Budget PP&L must pay interest and dividends on the The Company's construction budget for the next securities it sells to finance the construction of facilities five years remains essentially unchanged from (construction work in progress). However, under last year's figure at nearly $ 2.1 billion. For 1976 present regulatory procedures in Pennsylvania, the the figure is about $ 390 million compared to Company cannot charge customers for these costs $ 345 million spent in 1975.

until the facilities are completed and are being used to The largest part of the 1976 budget, $ 242 million, provide service to customers. goes toward construction of our nuclear plant.

During the construction of a power plant, which now Another $ 39 million goes toward completion of the takes about 10 years, the Company has to pay millions Martins Creek oil-fired Unit 4, and $ 20 million is of dollars in interest and dividends to investors who allocated principally for work at existing generating provide the major portion of funds necessary to finance stations. The budget for electric transmission the construction of the facility. Interest and dividend facilities is $ 17 million and for distribution and payments are a one-way street during the construction other facilities it is $ 72 million.

period since the Company must pay for these costs, but cannot begin to include them in the cost of service Susquehanna Nuclear Plant paid by customers until the plant is completed. This Progress on construction of PP&L's $ 1.7-billion situation results in a cash drain on the Company at a nuclear plant near Berwick continued during time when it must raise unprecedented amounts of 1975 although hampered by a six-week-long money to pay for the construction of facilities to provide regional operating engineers'trike.

for the increasing power needs of customers.

It is for this reason that we have requested the PUC to Unit 1, scheduled for operation in late 1980, was 21 allow $ 50 million of construction work in progress to per cent complete at year-end. Unit 2 progress be included in setting rates in our current rate filing. If stood at six per cent of completion. Both will be approved, we expect to increase this amount in an boiling water reactor generating units and each will orderly step-by-step process in future rate filings. This have a 1,050,000-kilowatt capacity.

will enable the Company to strengthen its cash position PP&L and Allegheny Electric Cooperative are which is essential to the financing of new customer currently engaged in negotiations which, if agreement service facilities. This approach should provide for a is reached, would result in Allegheny acquiring a 10 more gradual and even way of handling the increases per cent ownership of Susquehanna.

in electric rates made necessary by the addition of Negotiations are also under way on a long-term such facilities.

agreement for UGI Corporation's Luzerne Electric Division to purchase a portion of the output of PP&L's New Acquisition Susquehanna plant and Martins Creek oil units. The As a result of negotiations initiated by Hershey total amount they purchase will increase gradually, Estates, corporate parent of Hershey Electric reaching 3.8 per cent of Susquehanna and 4.9 percent Company (HEC), PP&L has agreed to acquire all of that of the Martins Creek units by 1983 (about 40,000-utility's capital stock. The total acquisition cost, kilowatts from each of the four units) and willcontinue including the repayment of debt obligations, will be at that level until the units are retired.

approximately $ 8 million.

If we receive regulatory approval for the acquisition Martins Creek Oil Units we plan to eventually merge HEC into our Company. PP&L's generating capability increased by HEC presently buys the energy to serve the 5,500 820,000 kilowatts when the large oil-fired Unit 3 at homes and businesses in its 28-square-mile our Martins Creek plant went into commercial territory from Metropolitan Edison Co. operation on Oct. 15.

This new addition is unlike any other PP&L This added about 325 million tons to PP&L's generating unit. Instead of burning coal to make estimated recoverable reserves of coal. If developed, steam, as our other large generating units do, this would be enough, when added to the Unit 3 is designed to burn either crude or approximately 85 million tons of reserves we are residual oil. already mining, to assure a stable bituminous coal The unit's design and operating characteristics supply for many decades to come.

allow it to be "cycled" much faster than a coal unit. However, it's a long way between having the That is, it can go from partial-load capacity to reserves and actually getting the coal out of the full-load capacity and back again relatively quickly, ground. Large capital investments are needed to open thus enabling it to pick up or drop load to meet a new mine. We have asked the PUC to grant us fluctuating demand. In fact we have frequently been rates that will cover the financial carrying costs shutting the unit down'completely at night and of the reserves.

bringing it back into use in the morning, as the need for power increased. The availability We feel that our development of new mines in the of this large, efficient load-following unit lessens our Greene County area would be in the best long-term dependence on smaller, expensive-to-operate interest of our customers but the ultimate decision on combustion turbines which burn a product very much whether we will have the financial capability to do like home-heating oil. it rests with the PUC.

Unit 4, a twin of Unit 3, is expected to be completed Besides owning the coal, we already have a in late 1976 and in commercial use in 1977. cost-saving way to get it to the plants. PP&L has been a pioneer in operating its own coal trains since Oil Pipeline the early '60s. Our eighth unit train was put into service The completion of the long-delayed pipeline to in July bringing our fleet up to a total of 892 railroad serve the Martins Creek oil units is at last in sight. hopper cars. The ninth unit train is on order.

Construction finally began on the pipeline in May Anthracite Study after almost two years of costly delays.

In October, after more than 20 years'ependence The multitude of hearings that were held on the on bituminous coal as its primary fuel, the Company pipeline had postponed construction several times. announced plans to explore the feasibility of The original schedule called for the pipeline to be building an anthracite-burning generating station operating and ready for the start-up of Unit 3 last year. near anthracite fields located in the Company's The delays forced the Company to turn to temporary service area.

rail transportation of oil for the units.

Before and during World War li, PP&L was the Although the pipeline itself is in the ground, terminal world's largest user of anthracite when we burned the arrangements at Marcus Hook, below Philadelphia, "fines" or "silt" coal that was left over in the process must be completed before oil can flowto Martins Creek. of preparing larger sizes for the home heating market.

Bituminous Coal When home use of coal declined in the early 1950s, Despite our diversification into oil and nuclear units, the volume of fines diminished and PP&L could not coal is still PP&L's primary energy source and we afford to buy expensive, fresh-mined anthracite continued acquisition of future supplies during 1975. for generating use. So, we turned to bituminous coal as our principal fuel.

During 1974 and 1975 PP&L formed two subsidiary coal companies, Greene Hill Coal Co. and Greene Now, however, sulfur-emission regulations can add Manor Coal Co., which acquired about 65,000 acres of many millions of dollars to the cost of new bituminous coal rights in Greene County in southwest bituminous-coal-burning plants. Since anthracite is Pennsylvania. much lower in sulfur content than bituminous coal,

we could possibly avoid the cost of sulfur-emission common, preferred and preference dividends was control equipment and the associated operating reinvested in new common stock and another $ 3 problems which can adversely affect the on-line time million of common was bought through optional cash of future plants. payments and employee payroll deductions.

This, combined with lower transportation costs, A revised reinvestment plan was introduced in since we are literally on top of the country's major December with a five per cent discount on anthracite fields, possibly could make fresh-mined common stock bought with reinvested preferred, anthracite a practical and economic alternative. preference and common dividends.

The year-long study should give us the information we need before we make a fuel commitment for Capitalization Milestone additional generating capacity that forecasts now The financing during 1975 brought total capital show may be needed by the mid-80s. invested in the Company funds provided by common, For study purposes, the Company visualizes a preferred and preference shareowners, earnings plant capacity of 1.6 million kilowatts made up of reinvested, short-term and long-term debt past four units of 400,000 kilowatts each. This would the $ 2-billion mark. We reached the $ 1 billion point in mean a potential need for up to four million tons of 1970, after 50 years in business. That second billion anthracite a year. took five years.

Big Financing Year 1975 was the largest financing year in the Company's history with $ 353 million of securities sold.

Part of our 1975 borrowings were used to refund

$ 93 million of maturing 30-year first mortgage bonds which had a three per cent interest rate. We

.fg had to replace them with 9% per cent bonds a sharp example of the effects of inflation. It is noteworthy also that the $ 93 million bond issue was the entire secured debt of the Company in 1945. This compares with more than $ 1 billion of outstanding first mortgage bonds at the end of 1975.

We anticipate that our financing needs for 1976 will be about $ 276 million to meet construction expenditures and to refund $ 11 million of maturing debt.

We are encouraged by the acceptance of the Company-administered dividend reinvestment plan which began in April 1975. About $ 2.5 million of Marvin Wiegandt, of Allentown, a PP &L surveyor uses an electronic distance measuring device on a field assignment. The instrument records the time it takes for a light beam to travel to its target and back. It then converts this time to distance In a miniature computer that gives a digital read-out in 10 seconds.

The device isespeciallyuseful across bodiesofwaterorfromhillto hill and Is just one of the ways we are seeking to "work smarter."

4,

~~((

Operation Understanding American family. The technology is available but President Jack K. Busby's 15-month-long the cost of buying and installing the necessary Operation Understanding odyssey throughout the equipment is prohibitive.

Company's 10,000-square-mile territory ended in However, we found that with a rather modest December 1975. additional new-home investment of $ 500-$ 1,000 for During that period, Busby spent about 25 per cent foamed insulation around doors and windows, of his time gathering viewpoints, listening and polystyrene sheathing, extra-heavy insulation and speaking to employees, retirees, the news media, and triple-glazed windows it was possible to cut heat-loss diverse consumer, business, educational and by almost half compared with the traditional citizen groups, most of whom are also customers. well-insulated home.

The travels covered well over 8,000 miles with As an outgrowth of the experimental home project audiences totaling over 10,000 people in more than the Company now is cooperating with home-building 350 separate meetings. contractors in its five divisions in a special energy-saving Bicentennial Homes Project.

Year Of The Audit The five homes, which will include the latest Nine major audits or studies of various aspects of energy-saving heating and cooling systems, and our operations were undertaken in 1975. Most were better insulating qualities, are being built by local initiated by PP8 L and centered around areas such as:

contractors at their expense with the Company coal mining efficiency; application of fuel adjustment providing funds for energy conservation equipment, charge; and our fuel procurement practices.

including solar devices.

The largest was a study of our overall operational effectiveness by McKinsey & Co., a management The homes will be open for public inspection during consulting firm. We were still awaiting final results the summer of 1976 and sold in the fall. Agreements at the date of this report. call for the builders to maintain metering equipment in the home for one year after they are sold in order Siting Study to determine the effectiveness of the equipment.

A unique facilities siting project was launched The Company continued and expanded its formal near Harrisburg during 1975. The Company invited programs to encourage energy conservation by area residents to form a citizens'ask force to our customers.

give us their suggestions and to give them a voice Six day-long energy management seminars were in deciding where vital substations and electrical held throughout the Company's service area bringing transmission facilities will be located. together business leaders, government officials The results of this experiment in citizen participation and PP8L energy conservation specialists for an should help us in developing future siting and intensive information exchange.

land-use policies. A two-day Energy Design Forum was held for more than 200 architects and engineers in September.

Energy Conservation It was an opportunity to exchange ideas on the latest Over the last two years we reported to you on the ways to design buildings using heating, ventilating construction and operation of our experimental and air conditioning systems that require less solar-supplement energy conservation home near energy while still remaining functional.

Schnecksville, northwest of Allentown. Across our service area nearly 700 energy Several valuable conclusions can be drawn from management teams have been set up with Company the experiment. The home proved there's a long way assistance in all types of industries and businesses.

to go before homes with solar heating and cooling We are also taking a good look at our own operations.

systems will be within reach of the average Energy management teams have been established

to monitor and improve energy use in offices, crew Also, the cost of re-equipping power plants to quarters and generating stations. handle this material could prove to be prohibitive.

, As an additional incentive, and to publicize On a larger scale PP&L continues to help fund particularly successful efforts, PP&L has presented industry-wide electric research projects through a number of energy management awards to industrial EPRI (Electric Power Research Institute). For 1975 and commercial customers who have made significant our dollar commitment to EPRI research was about changes to reduce electrical demand and energy use. $ 1.3 million. Another $ 360,000 went toward the Area Business Down liquid metal fast breeder reactor project, to be built in Tennessee, while $ 645,000 went to other For the first time in recent history PP&L's research programs during 1975. For 1976 our service area lost more industry than it gained total research budget, is $ 2.7 million.

during the calendar year. This meant that in our 10,000-square-mile service area we had a net loss of In just the three years of EPRI's operation the electric 1,885 industry jobs in 1975 compared to a gain of industry's commitment to the research organization 1,923 in 1974. The unemployment rate was up to 7.4 has grown to $ 160 million in 1976.

per cent compared to 4.7 per cent a year ago. At year-end, more than 100 buildings were available for In many areas the EPRI programs are closely industrial occupancy. coordinated with those of the newly-formed federal Energy Research and Development Administration Recognizing that PP8L's own future is tied closely (ERDA) which now has a $ 3.6-billion-a-year budget.

with conditions in our service area, we will do what we can to restore area economic health. In addition to continuing its established program of industrial Cost Reduction Continues development, the Company willplace special emphasis In response to the pressures of inflation, the on a selective and intensive program of advertising Company has been involved in a major cost and direct mail in 1976 in an effort to bring new jobs tq reduction program since mid-1974. Because of the areas with particularly severe unemployment rates. downturn in the national economy, and the Our goal is to help bring unemployment down to the substantial slowdown in electric load growth, PP&L national goal of five per cent. reduced its transmission and distribution construction activity in 1974 and 1975.

Research Recent inflationary effects on costs of materials, One of the more creative and interesting research supplies and wages have also led us to cut back in projects PP&L engaged in during 1975 was the other areas of our operations.

experimental burning of 50 tons of pelletized municipal solid waste (trash) at our Sunbury plant As far as personnel cutbacks are concerned, so far in May. we'e been able to match our workforce with our The experiment centered around a clean, pelletized workload mainly through attrition (resignations, fuel made from the combustible products found in retirements, etc.). In many cases this attrition approach ordinary trash after the glass, metal and other was made possible by cooperative management/union unburnables have been removed. programs to transfer employees to new work locations.

Results show that the waste can be burned Outside contracting has been restricted and used satisfactorily when mixed with coal, even though only where special skills make it necessary, and to tree the heating value is much lower. There are many trimming and building maintenance. We will continue problems to be ironed out before this fuel could be to hold new hires to a minimum. At year-end the used on a regular basis. The biggest of the problems Company had fewer employees than in 1972 even is that no large-scale municipal facilities are available though we generated 34 per cent more energy and to manufacture the pellets. served 53,000 more customers.

Management Changes Robert Fortune, vice president-Financial, was A number of management changes took place promoted to executive vice president-Financial and in 1975. named a Company director effective Dec. 1.

Director Maurice Warnock, chairman of the Both of these new moves were aimed at maintaining board of Armstrong Cork Company in Lancaster, and strengthening PP&L's top management.

retired from the PP'&L board in April under the Director Hayward Wills, chairman of the board age-related guidelines set forth for all PP&L directors.

and president of GAC Corp., Coral Gables, Fla.,

He had served PP&L since January 1964.

submitted his resignation from the PP&L board Named to succeed Warnock was Harry Jensen, on Dec. 17. Harry Jensen replaced Wills as a an executive vice president and director of member of the executive committee of the board.

Armstrong Cork. Jensen was elected by the shareowners at the annual meeting. Effective Dec. 1 the board created a new Brooke Hartman, PP&L's executive vice Finance Division and appointed Joseph Donnelly to president-Operations, and a Company director, the position of vice president-Finance to head the unit.

agreed to a board request to extend his Dec. 1 Comptroller George Vandersjice was named vice retirement date until mid-1977. president and comptroller, also effective Dec. 1.

One of the final sections of pipe is welded into place In late October on the 84-mlle pipeline which will carry oil to our Martlns Creek plant.

The line Is reputed to be the longest insulated pipeline In the country.

The $ 55-million-dollar project was begun in May after several costly delays. The Company Is temporarily using railroad delivery until the pipeline is in operation.

i,gpQ+W k 4 (

4 Qy

STATISTICAL

SUMMARY

1975 1974 1973 1972 1971 CAPITAL INVESTMENT thousands (a)

Long-term debt (including amount due within one year) $ 1,043,946 914,349 753,027 635,044 576,760 Preferred and preference stock .......... 366,375 296,375 271,375 231,375 196,375 Common equity 616,052 532,655 469,608 412,130 351,299 2,026,373 1,743,379 1,494,010 1,278,549 1,124,434 Short-term debt 73,630 85,509 39,851 96,482 76,251 Total capital investment ................... $ 2,100,003 1,828,888 1,533,861 1,375,031 1,200,685 FINANCIALDATA Return on average capital investment o/ot(b). 8.8 8.5 7.9 7.5 7.4 Return on average common equity /o (b) .. 12.5 12.6 11.9 11.6 12.2 Common stock data Book value (a) (b) $ 23.17 22.91 22.51 21.78 20.78 Dividend payout rate '/o (b) 63 62 64 67 66 Dividend yield '/o (c) ................... 9.1 11.5 8.4 6.5 6.4 Price earnings ratio (b) (c) .............. 6.9 5.3 7.6 10.3 10.2 Times interest earned (b)

Before income tax expense 2.80 2.92 3.15 3.05 2.77 After income tax expense ............... 2.31 2.36 2.42 2.43 2.41 NUMBER OF SHAREOWNERS preferred, preference and common (a) ..... 171,766 154,126 142,235 135,399 123,598 OPERATIONS ELECTRIC CUSTOMERS (a) ................ 917,920 902,148 886,378 864,439 843,080 ENERGY SALES millions of kwh Residential . 6,818 6,494 6,324 5,985 5,479 Commercial . 4,575 4,275 4,262 3,933 3,533 Industrial 7,020 7,170 6,881 6,458 6,053 Other 700 1,024 1,398 637 620 19,113 18,963 18,865 17,013 15,685 AVERAGE PRICE PER KWH to all customers cents ................ 2.78 2.44 2.00 1.99 1.87 SOURCES OF ENERGY millions of kwh Generated Coal-fired steam stations 25,384 24,186 24,782 19,097 15,847 Oil-fired steam station ............... 1,149 Combustion turbines and diesels ..... 84 247 273 601 642 Hydroelectric stations 859 772 816 824 684 Power purchases . 2,241 1.570 1,968 1,784 1,771 Total 29,717 26,775 27,839 22,306 18,944 DISPOSITION OF ENERGY millions of kwh Energy sales to customers ................ 19,113 18,963 18,865 17,013 15,685 Interchange power sales .................. 8,757 6,079 7,237 3,586 1,758 Company uses and line losses 1,847 1,733 1,737 1,707 1,501 Total 29,717 26,775 27,839 22,306 18,944 FUEL COST mills per kwh ................. 10.4 8.8 5.0 4.9 4.8 POWER CAPABILITY kilowatts (a) ......... 5,717,000 4,901,000 4,903,000 4,108,000 3,496,000 PEAK DEMAND-kilowatts (d) 4,122,000 3,772,000 3,662,000 3,598,000 3,294,000 EMPLOYEES (a) 6,695 6,930 7,139 6,790 6,514 (a) Year-end. (c) Based on year-end market price.

(b) Reflects retroactive allocation to prior years of Nonrecurring Credit (d) Winter peak shown was reached early in subsequent year.

recorded in 1974 related to change in accounting for fuel costs.

ANALYSIS OF STATEMENT OF INCOME The following analysis of the Company's financial performance explains the reasons for changes in spe-cific items on the Statement of Income comparing the years 1975 to 1974 and 1974 to 1973.

Operating Revenues Customer Sales and Operating Revenues The increase or (decrease) in operating revenues The Company derives about 99% of its operating from the prior year is attributable to the following: revenues from supplying electric service and the bal-1975 1974 ance from supplying steam for heating and other Millions of Dollars Electric revenues purposes in the city of Harrisburg, Pa.

Quantity of sales to: Rates applicable to sales to ultimate customers are Ultimate customers ... $ 12.8 7.8 Others for resale (60) (1 9) regulated by the Pennsylvania Public Utility Commis-Rate increases 7.4 22.2 sion (PUC) and accounted for 98% of the Company's Fuel adjustment clauses 55.3 55.4 revenue from energy sales in 1975. The Federal Power Other 1.6 1.9 Commission (FPC) regulates sales to others for resale.

71.1 85.4 Steam revenues 1.0 1.8 The Company's electric energy sales to ultimate Total ...... $ 72.1 87.2 customers increased 2.8% in 1974 and 2.6% in 1975. In 1975 there was an increase of 5.0% in residential sales and 7.0% in commercial sales while sales to industrial customers decreased 2.1%. The decrease in industrial sales was moderated by a full year of sales to the Steelton Plant of Bethlehem Steel Corporation which Monthly Fuel Adjustment Charge was added as a customer in mid-1974. Excluding sales to the Steelton Plant, the Company's overall sales 6

Cents Per Kwh growth to ultimate customers would have been 0.7% in both 1974 and 1975 and industrial sales would have decreased by 7.3% in 1975, reflecting the decline in industrial economic activity and a loss of 96 industrial customers.

Electric energy sold to others for resale during the two years remained relatively constant except for contractual sales to a neighboring utility, Metropolitan Edison Company (Met Ed). During 1974, 340 million kwh were sold to Met Ed, resulting in revenues of $ 6.1 million. There were no sales to Met Ed in 1975.

Rate increases affecting ultimate customers became effective in June 1973 ($ 10 million annually), January 1974 ($ 19 million annually), and September 1975

($ 21.7 million annually, of which about $ 4.9 million is included in revenues for the year 1975). For more information concerning the Company's current rate 1973 1974 1975 increase filing see Note 2 to Financial Statements.

The above shows the incremental cost of fuel over a The Company's tariffs include fuel adjustment base amount of about 0.36 cents per kwh, whichis billed clauses which adjust prices for electric service for to customers under the Company's principal fuel adjust- variations in the cost of fuel used to generate elec-ment clause.

tricity. Revenues from the fuel adjustment clauses totaled $ 79 2 million in 1974 and $ 134 5 million in 1975, principally reflecting the increased level of fuel costs experienced by the Company.

12

Interchange Power Sales The total electric energy available for sales includes energy generated by PP&L plants and power pur-chased from others, after deducting Company uses and line losses. During 1975 and 1974, approximately Interchange Sales 31% and 24%, respectively, of the total energy available was sold to other utilities under interconnection The increase or (decrease) in interchange power sales from the prior year is attributable to the following:

arrangements. As required by both the PUC and FPC, 1975 1974 such sales are not recorded as Operating Revenues Millions of Dollars but are credited to Operating Expenses on the State- $ 47.2 (11.0) ment of Income. 18.4 49.3 (1.5) 0.2 The quantity of interchange power sold increased during 1975 due to greater availability of generating $ 64.1 38.5 units, including the addition of Martins Creek Unit No. 3, the absence of contractual sales to Met Ed during 1975 and the relatively favorable price of PP&L's generating costs compared to that of other interconnected companies. Fuel Expense The price received for interchange power sales is to a great measure based on a relationship of the fuel Fuel expense as shown on the Statement of Income includes the following:

costs of the selling and buying utilities. Approximately 1975 1974 1973 92% of the Company's generation during 1975 came Millions of Dollars from coal-fired units while other interconnected Cost of fuel consumed utilities had significant amounts of oil-fired generat- Electric $ 269.2 215.2 123.8 ing capacity. For the period beginning in late 1973 and Steam heat ........ ..~ 4.0 3.8 1.8 continuing through 1974, oil prices increased much Total cost of fuel more rapidly than coal prices, which greatly increased consumed ........ 273.2 219.0 125.6 Increase in fuel costs the price the Company received fbr interchanged deferred to match power during 1974. Interchange prices continued to revenues from fuel rise in 1975 but at a more moderate rate. adjustment clauses (1.6) (26.6)

The average price the Company received for inter- Total fuel expense .. $ 271.6 192.4 125.6 change power sales was 1.97 cents per kwh in 1975, 1.76 cents per kwh in 1974 and 0.95 cents per kwh in 1973. These amounts were substantially in excess of the Company's average fuel costs.

Fuel Cost of Fuel Consumed The cost of fuels burned per kwh generated increased during 1974 from 0.67 cents per kwh in The increase or (decrease) from the prior year in the total cost of fuel consumed is attributable to the January 1974,to 1.06 cents per kwh in December 1974. following:

During 1975 the unit cost of fuels burned increased to 1975 1974 1.15 cents per kwh by December 1975 reflecting in part Millions of Dollars the higher cost of oil burned at the Martins Creek No.3 Electric generating unit placed in service during October 1975. Quantity of electricity generated .......... $ 13.3 (0.9)

The average unit cost during 1975 was 1.04 cents per Average cost of fuels kwh compared to 0.88 cents per kwh in 1974, an burned ............. 40.7 92.3 increase of 18%. 54.0 91.4 The cost of fuel burned which is recoverable through Steam heat 0.2 2.0 fuel adjustment clauses is deferred until the period in Total . $ 54.2 93.4 which such costs are billed to customers.

Taxes For a detailed analysis of income tax components, effective income tax rates and components of taxes other than income see Note 6 to Financial Statements.

Wages and Employee Benefits and Other Operating Costs The increases in wages and employee benefits and other operating costs such as materials and supplies, rents and insurance reflect principally the effects of Net Utility Plant inflation.

End Qf Year A three-month strike involving approximately 5,000 Billions of Dollars union employees (about 70% of the Company's total work force) increased 1974 operating expenses by approximately $ 2.0 million after giving effect to related $ 2.0 $ 2.0 income tax reductions.

Depreclatlon Increased depreciation expense in both 1974 and 1.5 1.5 1975 is due to new facilities placed in service, including the addition of the Company's Martins Creek No. 3 generating unit in 1975.

1.0 1.0 Allowance for Funds Used During Construction The allowance for funds used during construction has increased substantially during the past two years as a result of the Company's extensive construction 0.5 0.5 program and the related carrying costs of securities issued to finance the construction expenditures. Dur-ing 1975 and 1974 the average rates used to compute the allowance were equivalent to effective rates. of 8.3% and 7.2%, respectively.

Cost of Financing The increase in long-term debt interest charges and

~ 1973 1974 Net Plant1n Service 1975 original cost of facilities serving customers less accumulated depreciation.

Construction Work in Progress cost of facilities dividends on Preferred and Preference Stock is due to under construction and not yet in service.

issuance of new securities to finance the construction of new facilities and the refinancing of maturing debt with securities bearing higher interest rates. During 1974 and 1975, new issues of securities included $ 405 million of long-term debt and $ 95 million of Preferred and Preference Stock.

The annual interest and dividend requirements on Interest and Dividend Cost long-term debt and Preferred and Preference Stock The increase or (decrease) from the prior year in outstanding at December 31, 1975 were $ 79.6 million interest charges and dividends on Preferred and and $ 29.6 million, respectively. Preference Stock were:

Bank loans and commercial paper notes are used to 1975 1974 Millions of Dollars provide working capital and interim construction Interest charges financing. Interest on such debt varies from year to Long-term debt ........... $ 16.8 7.9 year due to the amount of short-term debt outstanding Short-term debt (3.3) 4.8 and the interest rates in effect. For more information Other . (0.2) 0.2 Dividends on preferred and on short-term debt see Note 4 to Financial Statements. preference stock 4.9 2.5 The Company sold 2.2 million shares of Common Stock during 1974 and 3.3 million shares in 1975.

SUPPLEMENTARY COMMENTS TO ANNUALREPORT Many of the results shown in the Annual Report to Shareowners involve complex financial and legal concepts. Often the traditional language used is technical and unfamiliar. How then do you make the report more understandable while still complying with reporting requirements?

These supplementary pages represent an effort to make the report more meaningful to the reader. Detail and precision have been sacrificed for the sake of brevity. We welcome your comments.

The Annual Report What is it? Why is it published? What can you find in it? These are all natural and basic questions. First, the Company is legally required to provide its shareowners with an annual report on the operations of the Company, but it is more than just an accounting of financial stewardship for the year. It is an opportunity to look at performance, objectives, opportunities and, in general, the corporate personality of a company.

The audience for the annual report is the world in which a company operates. In addition to shareowners, that world includes PP8L employees and retirees, customers, suppliers, government and regulatory officials, financial analysts, citizens of communities where the Company does business, potential investors and many others.

Highlights Operating highlights (inside cover) give the reader a quick look at basic statistics about the Company.

The President's Letter This year in his letter (pages 1 and 2), Jack Busby, the Company's chief executive officer, presents a broad review of national energy problems and cites the need for prompt action.

The Year In Review This section (pages 3 through 10) discusses PP8 L operations for the year in some detail. Earnings, energy supply and use, generating projects, construction, financing, energy conservation and personnel changes are among the topics reviewed.

Financial Section This section (pages 11 through 27) gives the detailed statistical and accounting facts and interpretive text that are necessary for a basic understanding of the financial aspects of the Company's business.

Statistical Summary Included on page 11 are indicators measuring the financial health of the Company. Times interest earned is the number of times the Company's income covers the interest paid on the money the Company owes (mortgage bonds, notes and bank loans) to creditors. Return on average common equity is the rate of return earned on all the money invested in the business by the common shareowners, including the amount of their earnings reinvested in the business.

Under the Operations heading are kilowatt-hour sales, average price of electricity, sources and disposition of energy, number of employees and other pertinent operating data.

Analysis of Statement of Income This analysis of the Company's financial performance (pages 12-14) explains reasons for changes in specific items on the Statement of Income for the last two years. Detailed are the reasons for the slight rise in sales and increased revenues. Various cost components in running the business are reviewed, such as fuel and the cost of financing.

Statement of Income The Statement of Income (page 15) shows the results of operating the business over the whole year. Figures for one year do not provide enough information to observe trends or patterns in the Company's operations. PP8L includes a Statement of Income for five years.

The form of the Statement of Income used by most utilities is generally prescribed by regulatory commissions having jurisdiction over the utility rates of the Company.

Operating revenues minus the operating expenses incurred in running the business is called Operating Income. This represents the results of the Company's utility operations (for PP&L the sale of electricity and steam). Under the caption Other Income and Deductions are items which relate to the construction of electric facilities which are not yet used in utility operations and other non-utility transactions of the Company. Interest charges and dividends on preferred and preference stock are amounts paid to creditors of the Company and owners of these classes of stock. The amount left over for the common shareowners after all expenses and costs are taken care of is called Earnings Applicable to Common Stock. Dividing this amount by the average number of common shares outstanding during the year gives earnings per share an important indicator of the Company's financial performance.

The following is a brief explanation of some of the captions appearing on PP8L's Statement of Income.

Operating Revenues: Revenues are primarily amounts billed to customers for electricity.

Operating Expenses: These are the costs involved in providing electric service.

~

Wages and employee benefits Like employees of any other business, PP&L's workers received wages and employee benefits for work performed in providing electric service.

~ Fuel The cost of coal and oil we burned in our generating units.

~ Power purchases and interchange power sales PP8 L is a member of an 11-company power pool known as the Pennsylvania-New Jersey-Maryland (PJM) Interconnection. Interchange power is the electricity that is bought from or sold to these and other electric companies in order to have the most economic utilization of generating facilities. The price received for interchange power sales is mainly based on the relationship of fuel costs of the selling and buying utilities. Regulatory authorities require that we reduce expenses by the amount received from these sales rather than classifying it as revenue. Whether it's added on the top line as additional revenue or subtracted from expenses, the effect on

income is the same. The parenthesis indicate it's a "credit" to expenses that is, expenses are less by that amount than they would otherwise be.

~ Other operating costs Includes services, supplies, rents, etc.

those goods and services PP&L needs to operate the business. This includes cost of tree-trimming to prevent service interruptions, fire and casualty insurance, research and development, rental of equipment, materials, postage, paper and many more items.

~ Depreciation This is a term used to describe the cost to the Company of using up certain types of property over a period of time. Just like the new car you may buy, the plants we build and equipment we buy wear out over time or become obsolete and the value declines. It's the same as the older car you trade in on the new one it's always worth a lot less than when it was new. When PP8L buys equipment that will be in use over a number of years, its full purchase cost is not shown in one lump sum as expense on the Statement of Income. Instead, we space out the cost over the period the equipment is expected to be in use and during that time its value is declining or depreciating.

o Income taxes Just like the individual taxpayer, PPBL pays taxes to the federal and state governments based on the revenue it receives minus allowable deductible items.

Income taxes appear in two places on the Statement of Income, under Operating Expenses and as a credit amount under Other Income and Deductions. There are three major components of Income Taxes current, deferred and investment tax credits, which are detailed in Note 6 to Financial Statements on pages 23 and 24.

The net of the current amounts shown represent the tax which is currently payable. Note 6 shows this amount, which is arrived at by subtracting the credit amount under Other Income and Deductions from the expense under Operating Expense.

The current taxes payable have been reduced by investment tax credits. These credits are designed to encourage companies to keep plant equipment modern and efficient, and to expand facilities today to create more job opportunities and, in turn, promote a healthier economy. The credits are based on a percentage (4 per cent and 10 per cent) of the cost of new plant and equipment placed in service or, in certain circumstances, payments made on facilities under construction. Under the income tax law, utilities must reflect this tax savings as a credit on the Statement of Income over the life of the property. Note 6 shows the amount of current investment credit deferred and also the amount of prior year' credits amortized or reflected in income during 1974 and 1975.

As a further incentive to strengthen the economy, businesses are permitted to defer a portion of their tax payments to a future date thereby making more cash available now for the expansion of facilities. The portion of tax expense identified as deferred represents the tax obligation applicable to the current year's income which will have to be paid in future years.

~ Taxes other than income PP&L pays special real estate taxes, a gross receipts tax (which is only applicable to utilities), capital stock tax and other taxes such as the corporate matching of employees'ocial Security deductions.

Other Income and Deductions:

~ Allowance for funds used during construction (Allowance) Is the biggest part of Other Income. A look at our rate-making mechanism is necessary to explain this item.

Our electric (and steam) rates are based in part on the annual cost of securities used to finance all of our utility plant (generators, lines, cables, poles, etc.) that is being used to provide service to our customers. But, we can't include any of this property in the base used to establish rates until it's actually in use.

A power plant takes 10 years or more to design, engineer and build.

The people who do the designing, the engineering and the building, and all the firms who provide material can't wait 10 years to get paid. We pay for the plant as it's built.

Most of the money needed to finance electric facilities under construction must be provided by investors. We must sell mortgage bonds and common, preferred and preference stocks as well as borrow from banks. We must pay interest and dividends for use of this money and these charges are reflected on the Statement of Income as a cost of doing business.

The Allowance is a non-cash accounting credit that enables us to offset these financing costs on the Statement of Income and correspondingly include such financing charges as a cost of the facilities being constructed. At the time construction is completed and the property is being used to serve our customers, the total cost of the project, including financing charges for the construction period, can be included in the base used to establish electric rates.

~ Income tax credits A portion of the construction-related financing charges are represented by interest which is deductible for .

income tax purposes and serves to reduce the current payment due on such taxes. Since this tax savings does not relate to utility operations because the facilities are not yet in service it is shown as part of non-utility o perations under Other Income and Deductions.

~ Other net Includes minor amounts of income and expenses related to non-utility operations. Part of these expenses are corporate charitable contributions which are shareowner and not ratepayer expenses.

Interest Charges: The interest we pay creditors for the use of money loaned under debt obligations of the Company, which are mortgage bonds, notes and bank borrowings.

Nonrecurring Credit: This amount represents the effect on years prior to 1974 of an accounting change made in 1974 and was included as income on a once-and-done basis for that year. The accounting change was made to match the recording of fuel costs with related revenues billed under the Company's fuel adjustment clauses.

Net Income Before Preferred and Preference Stock Dividends: Many times Net Income is looked at as the profit line, but for most utility companies there is an additional cost of doing business the cost of preferred and preference stock. We have a contractual obligation to pay set dividends on preferred and preference stock which we sell to raise funds, principally to finance construction projects.

Earnings Applicable to Common Stock: This is what is left over for common shareowners. Some of this amount (about 63 per cent) is paid as dividends to common shareowners and the rest is reinvested in the business to help pay for the construction of new facilities, which reduces the need to sell more stocks and bonds.

Earnings Per Share of Common Stock: After taking into account all the items on the Statement of Income, a key indicator in measuring the financial performance of a company is the amount it earned for. each share held by shareowners of common stock. This is the amount which is applicable to common stock divided by the average number of common shares outstanding.

Other important measures on a per share basis are dividends and common equity. Dividends per share indicate the amount of dividends paid on one share of common stock during the year. Common equity (common stock plus earnings reinvested minus capital stock expense),

which is shown on the Balance Sheet, represents the total investment by common shareowners. Dividing this amount by the total common shares outstanding is called common investment per share or book value.

The Balance Sheet While the Statement of Income shows an investor how we did over the whole year, the Balance Sheet represents the financial picture as it stands on one particular day in our case the figures are shown for December 31, 1974 and December 31, 1975. The Balance Sheet (pages 16 and 17) is divided into two sections, Assets and Liabilities, with both sections always in balance.

Assets: Items of value owned by a business, such as:

~ Utility Plant The facilities used to provide electric service for our customers. It includes that portion of projects under construction that we have paid for but which aren't yet complete enough to be used to provide service and put in our rate base.

~ Investments Includes property, investments in coal and other companies and miscellaneous holdings.

~ Current Assets Cash or assets that can generally be converted to cash or are expected to be used in the business during the following year.

~ Deferred Debits Basically these are items which will be charges to expense or other accounts over a period of time.

Liabilities: This includes what investors have put into PP8 L and amounts the Company owes to others.

~ Capitalization The money all of our investors (common, preferred and preference shareowners and bondholders) have put into the business. It includes earnings reinvested which is the portion of common shareowner earnings which has gone back into the business.

~ Current Liabilities Generally includes obligations of the Company which fall due within the coming year and items which have been billed by others, but not yet paid.

~ Deferred and Other Credits We noted previously (in discussing income taxes shown on the Statement of Income) that income tax payments were deferred. Under this balance sheet caption are

shown the tax obligations deferred in the current and prior years which will come due in the future. Also shown are the total investment tax credits which have been deferred and will be credited to income over future years.

Schedule of Capital Stock and Long-Term Debt Page 18 details the various classes of stock, mortgage bonds and other long-term debt.

Statement of Changes in Financial Position This statement (page 19) explains where the Company obtained its funds such as from operations, borrowings and the sale of additional stock. Also what the Company did with those funds such as constructing new facilities, retiring securities and paying dividends to stockholders.

Statement of Earnings Reinvested The cumulative amount of earnings put back in the business is recapped (page 20) by showing the income available to pay dividends and the amount of dividends paid to shareowners.

Notes to Financial Statements Each financial statement in the annual report is footnoted with the words "See accompanying Notes to Financial Statements." This refers to the six pages (20 through 25) of explanatory and supplemental information on the Company's operations. The pages provide accounting clarification and in-depth explanations of many items found in the financial statements. If this information were included in the financial statements, instead of footnoted and grouped together, the result would probably be an unintelligible jumble of words and numbers.

The footnotes are designed to provide better insight for those who want more interpretive and technical information to support the financial statement.

Auditors'pinion This (page 26) is the reader's assurance by an independent accounting firm that PPB L has applied accounting principles which are generally used in financial reporting. It is the auditors'eport that the financial statements have been examined and their opinion as to the fairness of data presented.

Fiscal Agents and Securities Listed This information (page 26) lists transfer agents, registrars, disbursing office and stock exchange listings for all classes of PPB L stock.

Dividends and Stock Prices This section (page 27) provides quarterly market price and dividend information of all classes of the Company's stock for the previous two years.

STATEMENT OF INCOME Thousands of Dollars 1975 1974 1973 1972 1971 Operating Revenues (Note 2) $ 544,129 472,036 384,814 345,792 300,707 Operating Expenses

= Wages and employee benefits 71,773 67,374 57,421 55,220 48,198 Fuel (Note 3) 271,636 192,353 125,577 95,220 79,499 Power purchases 37,698 24,176 15,299 13,514 18,963 Interchange power sales (172,823) (108,723) (70,175) (34,569) (15,468)

Other operating costs . 68,369 54,489 45,234 39,512 33,214 Depreciation 58,540 52,399 48,837 41,446 34,903 Income taxes (Note 6) 47,298 39,211 33,943 26,086 11,545 Taxes, other than income (Note 6) 40,669 35,571 30,005 25,658 22,146 423,160 356,850 286,141 262,087 233,000 Operating Income 120,969 115,186 98,673 83,705 67,707 Other Income and Deductions Allowance for funds used during construction 36,605 20,732 14,967 14,647 16,242 Income tax credits (Note 6) 11,201 5,076 91 334 176

, Other-net 3,154 3,418 1,300 (305) (63) 50,960 29,226 16,358 14,676 16,355 Income Before Interest Charges 171,929 144,412 115,031 98,381 84,062 Interest Charges Long-term debt . 67,932 51,149 43,203 36,507 30,895 Short-term 'debt and other 6,456 9,946 4,916 3,953 4,595 74,388 61,095 48,119 40,460 35,490 Income Before Nonrecurring Credit 97,541 83,317 66,912 57,921 48,572 Nonrecurring Credit Related to Accounting Change, Net of Income Taxes ($ 4,831) (Note 3) ............. 4,162 Net Income Before Preferred and Preference Stock Dividends . 97,541 87,479 66,912 57,921 48,572 Dividends on Preferred and Preference Stock .. 24,509 19,656 17,191 14,526 11,392 Earnings Applicable to Common Stock $ 73,032 67,823 49,721 43,395 37,180 Earnings Per Share of Common Stock (a)

Before Nonrecurring Credit . $ 2.87 2.88 2.57 2.48 2.37 Nonrecurring Credit .19

$ 2.87 3.07 2.57 2.48 2.37 Earnings on a Comparable Basis After Allocating Nonrecurring Credit to Appropriate Prior Period Earnings applicable to common stock $ 73,032 63,661 51,066 43,161 38,488 Earnings per share of common stock (a) ........ 2.87 2.88 2.64 2.46 2.45 Average Number of Shares Outstanding (thousands) ... 25,459 22,067 19,359 17,513 15,690 Dividends Declared Per Share of Common Stock....... $ 1.80 1.77 1.68 1.64 1.60 (a) Based on average number of shares outstanding.

See accompanying Notes to Financial Statements.

15

BALANCE SHEET ASSETS Thousands of Dollars December 31 1975 1974 UTILITY PLANT Plant in service-at original cost Electric $ 1,992,673 1,687,740 Steam heat 7,805 7,703 2,000,478 1,695,443 Less accumulated depreciation 406,313 354,249 1,594,165 1,341,194 Construction work in progress at cost 437,062 403,707 2,031,227 1,744,901 INVESTMENTS Subsidiaries-at equity 28,595 4,631 Safe Harbor Water Power Corporation at equity 3,626 3,599 Nonutility property at cost (less accumulated depreciation:

1975, $ 1,069; 1974, $ 554) 4,692 2,495 Other at cost or less 2,473 4,064 39,386 14,789 CURRENT ASSETS Cash (Note 4) 14,832 16,251 Accounts receivable (less reserve: 1975, $ 1,346; 1974, $ 1,031)

Customers 36,243 33,907 Other 16,817 16,834 Notes receivable 32,178 5,740 Recoverable fuel costs (Note 3) 37,154 35,587 Materials and supplies at average cost Fuel 68,318 71,886 Operating and construction . 22,616 24,979 Other 5,995 13,072 234,153 218,256 DEFERRED DEBITS 7,118 , 7,482

$ 2,311,884 1,985,428 See accompanying Notes to Financial Statements.

16

LIABILITIES Thousands of Dollars December 31 1975 1974 CAPITALIZATION(a)

Shareowners investment (Note 5)

Preferred stock $ 156,375 156,375 Preference stock 210,000 140,000 Common stock 412,303 354,540 Capital stock expense (deduction) (8,801) (7,580)

Earnings reinvested (Notes 7 and 8) 212,550 185,695 982,427 829,030 Long-term debt ........ 1,032,980 914,349 2,015,407 1,743,379 CURRENT LIABILITIES Long-term debt due within one year (a) 10,966 Commercial paper notes (Note 4) 73,630 85,509 Accounts payable 51,281 37,121 Taxes accrued 20,199 11,852 Deferred income taxes applicable to recoverable fuel costs . 19,669 18,840 Dividends payable 19,362 15,844 Interest accrued 21,617 18,789 Other . 9,719 8,338 226,443 196,293 DEFERRED AND OTHER CREDITS Deferred investment tax credits . 31,849 18,860 Deferred income taxes 22,713 22,689 Other 15,472 4,207 70,034 45,756

$ 2,311,884 1,985,428 (a) See Schedule of Capital Stock and Long-Term Debt on page 18. First Mortgage Bonds of $ 93 million which matured and were refinanced In 1975 are included ln the long-term debt balance at December 31, 1974.

Sca accompanying Notes to Financial Statements.

SCHEDULE OF CAPITAL STOCK AND LONG-TERM DEBT December 31, 1975 Thousands of Dollars CAPITAL STOCK (Note 5) LONG-TERM DEBT PREFERRED STOCK $ 100 par, cumulative FIRST MORTGAGE BONDS 4%%d'/o, authorized 629,936 shares, 2/s'/0 series due 1976............. $ 8,000 outstanding 530,189 shares ....... $ 53,019 2/4olo series due 1977............. 20,000 3i/s'/0 series due 1978............. 3,000 Series, authorized 5,000,000 shares ,

2/i/0 series due 1980............. 37,000 3.35'/o, outstanding 41,783 shares .. 4,178 3Vso/o series due 1982....... '...... 7,500 4.40'lo, outstanding 228,773 shares . 22,878 10'/s'/0 series due 1982............. 100,000 4.600/0, outstanding 63,000 shares .. 6,300 3%i'/o series due 1983............. 25,000 7.40'/0, outstanding 400,000 shares . 40,000 3s%%d% series due 1985............. 25,000 8.60'/o, outstanding 222,370 shares . 22,237 4s/s% series due 1991............. 30,000 7,763 4'/s% series due 1994............. 30,000 9%, outstanding 77,630 shares 55%%d% series due 1996............. 30,000

$ 156,375 6N /o series due 1997. ~... . .~ ~ ~ ~ " 30,000 7% series due 1999............. 40,000 8~%%d% series due 1999.......... .. ~ 40,000 9% series due 2000............. 50,000 PREFERENCE STOCK no par, cumulative, 7'/i /o series due 2001............. 60,000 authorized 5,000,000 shares 7'Ye'/o series due 2002........... ~ ~ 75,000

$ 8.00 series, outstanding 7i%%d% series due 2003............. 80,000 350,000 shares $ 35,000 9ilio/o series due 2004............. 80,000

$ 8.40 series, outstanding 9N lo series due 2005............. 125,000(a) 400,000 shares 40,000 9y4 /o series due 2005............. 100,000(a) 4AD/0 to 55/6'lo pollution control series A

$ 8.70 series, outstanding due annually $ 500, 1977-1983; 400,000 shares 40,000

$ 900, 1984-2002; $ 7,400, 2003 28,000

$ 9.25 series, outstanding 200,000 shares 20,000(a) 1,023,500

$ 11.00 series, outstanding NOTES 500,000 shares 50,000(a) 6%/0-7/o due 1976 2,800

$ 13.00 series, outstanding 7'/0 due 1980 20,000 250,000 shares 25,000 Other 551 23,351

$ 210,000 Unamortized discount and premium-net. (2,905) 1,043,946 COMMON STOCK no par, authorized Less amount due within one year ........ 10,966 50,000,000 shares, outstanding 26,551,981 shares ....... ~......... $ 412,303 $ 1,032,980 (a) Issued in 1975.

See accompanying Notes to Financial Statements.

18

STATEMENT OF CHANGES IN FINANCIALPOSITION Thousands of Dollars 1975 1974 1973 1972 1971 SOURCE OF FUNDS Operations Net income (1974 includes $ 4,162 nonrecurring credit) $ 97,541 87,479 66,912 57,921 48,572 Charges (credits) against income not involving working capital Depreciation 58,540 52,399 48,837 41,446 34,903 Noncurrent deferred income taxes and investment tax credits-net 15,701 8,790 11,282 7,984 (1,127)

Allowance for funds used during construction (36,605) (20,732) (14,967) (14,647) (16,242)

Other . 7,464 520 220 220 220 142,641 128,456 112,284 92,924 66,326 Outside financing Common stock . 57,763 35,156 40,900 46,940 37,120 Preferred stock . 40,000 Preference stock 70,000 25,000 35,000 40,000 First mortgage bonds ............ 225,000 180,000 108,000 75,000 60,000 Other long-term debt............. 208 360 20,024 8,342 10,506 Short-term debt net increase ...... 45,658 20,231 352,971 286,174 208,924 185,513 147,626 Working capital decrease (a) ................... 15,166(b) 3,156 23,896 Investment in subsidiaries decrease ............ 689 917 123 Other net 4,065 4,676

$ 510,778 415,319 328,429 279,354 242,647 APPLICATION OF FUNDS Construction expenditures $ 345,289 271,460 224,496 218,754 192,399 Allowance for funds used during construction ... (36,605) (20,732) (14,967) (14,647) (16,242) 308,684 250,728 209,529 204,107 176,157 Securities retired First mortgage bonds . 93,000 15,000 Other long-term debt 112 18,632 10,041 '0,057 8,117 Short-term debt net decrease . 11,879 56,631 21,627 104,991 18,632 66,672 25,057 29,744 Dividends on preferred, preference and common stock 70,686 58,897 50,037 43,330 36,746 Working capital increase (a) 82,753(b) 6,624 Investment in subsidiaries increase .... 23,964 2,191 Other net 2,453 4,309 236

$ 510,778 415,319 328,429 279,354 242,647 (a) Excludes short-term debt and long-term debt due within one year.

(b) The net changes In working capital resulted principally from the following: 1975, increases In notes receivable, accounts payable, accrued taxes, dividends payable and accrued interest; 1974, increases in fuel inventory, accounts receivable and deferred fuel costs less related deferred income taxes.

See accompanying Notes to Financiai Statements.

STATEMENT OF EARNINGS REINVESTED Thousands of Dollars 1975 1974 1973 1972 1971 Balance, January 1 $ 185,695 157,113 140,238 125,647 113,821 Net Income (1974 includes $ 4,162 nonrecurring credit) 97,541 87,479 66,912 57,921 48,572 283,236 244,592 207,150 183,568 162,393 Dividends Preferred stock 9,393 9,393 7,551 6,433 6,433 Preference stock ................. 15,1 16 10,263 9,640 8,093 4,959 Common stock (per share 1975, $ 1.80; 1974, $ 1.77; 1973,

$ 1.68; 1972, $ 1.64; 1971, $ 1.60) 46,177 39,241 32,846 28,804 25,354 70,686 58,897 50,037 43,330 36,746 Balance, December 31 (Notes 7 and 8) $ 212,550 185,695 157,113 140,238 125,647 NOTES TO FINANCIALSTATEMENTS reasonable rate on other capital) used to finance December 31, 1975 and 1974 construction work in progress. The allowance for funds used during construction (Allowance) as

1.

SUMMARY

OF ACCOUNTING POLICIES shown on the Statement of Income is a non-cash item equal to the amount capitalized and serves Accounting System to offset the actual cost of financing construction Accounting records are maintained in accord- work in progress.

ance with the Uniform System of Accounts pre-scribed by the Federal Power Commission (FPC) Since February 1, 1974 the Company has and adopted by the Pennsylvania Public Utility computed the Allowance rate on an "after-tax" basis and income tax reductions associated with Commission (PUC).

the interest component of the Allowance have Utility Plant been reflected as Income tax credits under Other Income and Deductions with a corresponding Additions to utility plant and repIacements of increase in current income taxes charged to units of property are capitalized at cost. Costs of Operating Expenses.

depreciable property retired or replaced are removed from utility plant and such costs, plus Depreciation removal costs, less salvage, are charged to accumulated depreciation. Costs of land retired For financial statement purposes, the straight-or sold are removed from utility plant and any line method of depreciation is used to accumu-gains or losses are reflected on the Statement of late an amount equal to the cost of utility plant Income. All expenditures for maintenance and and removal costs, less salvage, over the esti-repairs of property and the cost of replacement of mated useful lives of property. Provisions for items determined to be less than units of property depreciation resulted in an annual composite are charged to operating expenses. rate of 3.3'/0 in both 1975 and 1974.

Allowance for Funds used During Construction Subsidiaries and Safe Harbor As provided in the Uniform System of Accounts, Investments in subsidiaries (ail wholly-owned) the Company capitalizes as part of construction and in Safe Harbor Water Power Corporation cost an amount representing the net cost of funds (representing one-half of that company's voting (after-tax interest cost on borrowed money and a securities) are recorded using the equity method 20

of accounting. The Company's subsidiaries are guideline lives and certain income and expenses engaged in coal mining operations, holding coal being treated differently for tax computation than reserves and real estate. for book purposes are accounted for under the Since the subsidiaries are not engaged in the busi- flow-through method.

ness of generating and distributing electricity, the Investment tax credits, which result in a reduction Company believes that its financial position and of current federal income taxes payable, are results of operations are best reflected without deferred and are being amortized over the consolidation. If 'all the subsidiaries were con- average lives of the related property.

sidered in the aggregate as a single subsidiary, they would not constitute a "significant subsidi-ary" as that term is defined by the Securities and Retirement Plan Exchange Commission. The Company has a Retirement Plan composed of two parts: (1) a non-contributory portion which Revenues provides benefits for all eligible active employees Revenues are based on cycle billings rendered with the full cost absorbed by the Company, and to certain customers monthly and others bi- (2) a voluntary portion in which contributions are monthly. The Company does not accrue made by both employees and the Company, but revenues related to energy delivered but not the full cost of past service and Plan improve-billed. ments is borne by the Company. Approximately 95'/0 of eligible active employees are members Fuel Costs Recoverable Under Fuel of the voluntary portion of the Plan. Company Adjustment Clauses contributions to the Plan include amounts re-The Company's tariffs include fuel adjustment quired to fund current service costs and to amor-clauses under which fuel costs varying from the tize unfunded past service costs over periods of levels allowed in approved rate schedules are not more than 20 years.

reflected in customers'ills after the fuel costs are incurred. The charge to expense for fuel costs Forced Outage Reserve recoverable in the future through application of A self-insurance reserve is provided to cover the fuel adjustment clauses is deferred to the periods increased level of power costs which are experi-in which these costs are billed to customers. See enced when any of the Company's major Note 3 to Financial Statements.

generating units are forced out of service due to Income Taxes damage caused by accident or certain other unforeseen incidents. The reserve covers Deferred tax accounting is followed for items increased power costs resulting from purchasing where similar treatment in rate determinations or generating replacement power at higher costs has been or is expected to be permitted by the or loss of interchange sales in excess of $ 0.5 PUC. The principal items are accelerated amorti-million for each accident or incident. As to certain zation of certified defense facilities and pollution of the Company's large generating units, costs control equipment, deduction of costs of remov-chargeable to the reserve are limited to $ 10 ing retired depreciable property, that portion of million since outside insurance is carried to cover tax depreciation arising from shortening depre-costs in excess of that amount. The reserve is ciable lives by 20'/o under the class life deprecia-established on the basis of historical experience tion system, fuel costs recoverable under fuel and has been recognized in ratemaking proce-adjustment clauses and beginning in 1975 the dures by the PUC. At December 31, 1975 the forced outage reserve.

reserve balance was $ 11.9 million. Prior to 1975 Tax reductions arising principally from the use the annual provision charged to operating ex-of the declining balance depreciation method, pense was reduced by related income taxes.

2. RATE FILINGS Earnings restated on a comparable basis shown In March 1975 the Company filed with the PUC a on the Statement of Income reflect the effect of two-stage request for additional increases in retroactive application of the change in account-electric revenues of about 15'/0 which totaled ing for fuel costs and related income tax effects approximately $ 80 million annually. The PUC had the new method been used since the princi-suspended both stages of this request. The Com- pal fuel adjustment clause became effective in 1970.

pany subsequently filed a revised first stage increase of about 4'/0 (approximately $ 21.7 million annually) which was not suspended and went into effect on September 13, 1975. 4. COMPENSATING BALANCES AND SHORT-TERM DEBT The PUC concluded hearings on both stages in In order to provide loans for interim financing January 1976 but a final order is not expected and provide back-up financing capability for before the latter part of March 1976. Revenues commercial paper notes the Company had lines collected under the 4'/o increase totaled $ 4.9 mil- of credit with various banks aggregating $ 200 lion during 1975 and are subject to possible million at December 31, 1975. Use of these lines of refund pending final action by the PUC. credit was restricted at December 31, 1975 to the extent of $ 9 million by short-term bank loans to A rate increase of approximately $ 1 million certain companies involved in fuel supply opera-annually, affecting 15 resale customers, was tions. Bank borrowings are generally for one year permitted to become effective in September 1974 and may be prepaid at any time without penalty.

by the FPC. The affected customers are opposing No bank loans were outstanding at December 31, the rate increase and revenues collected are 1975 or December 31, 1974.

subject to possible refund.

Of the Company's lines of credit, $ 145 million was maintained by compensating bank balance

3. FUEL COSTS RECOVERABLE UNDER requirements (not legally restricted as to with-FUEL ADJUSTMENT CLAUSES drawal) and $ 55 million by payment of commit-Effective January 1, 1974, the Company, as ment fees.

authorized by the PUC, changed its method of accounting for fuel costs to achieve matching of Compensating bank balance requirements are on fuel expense and revenues by accounting an average annual basis which approximated periods. This change resulted in the charge to $ 13.9 million at December 31, 1975. Commitment income for fuel costs recoverable in the future fees on an annualized basis approximated $ 0.4 being deferred to the periods in which these costs million at December 31, 1975.

are billed to customers through application of fuel adjustment clauses. For 1974, fuel costs were Commercial paper notes are generally sold for lower by a net amount of $ 26.6 million and, after periods ranging from 30 to 60 days. The weighted income tax effects, earnings applicable to average discount rates applicable to commercial common stock were increased by $ 12.6 million paper notes outstanding at December 31, 1975

($ 0.57 per share) as a result of this accounting and 1974 were 5.6'/0 and 9.4'/o, respectively.

change.

The maximum aggregate amount of short-term The Nonrecurring Credit shown on the Statement debt outstanding at the end of any month during of Income for 1974 represents the cumulative 1975 was $ 142.6 million and during 1974 was effect to December 31, 1973 of the change in $ 1,40.3 million with an average aggregate daily accounting for fuel costs, net of related income amount outstanding 'during these years of $ 85.2 taxes. million and $ 95.6 million,'espectively. The 22

approximate weighted average interest rate of Shares to be Redemption Redeemed Annually Period shor'I-term debt during 1975 was 7.3'le and during Preferred Stock 1974 was 10.0'/o, calculated by dividing the total 7.400/o Series 16,000 1979 thru 2003 short-term debt interest expense for the year by Preference Stock the average aggregate daily amount of short-term $ 13.00 Series (a) 12,500 1980 thru 1999

$ 11.00 Series (a) 25,000 1981 thru 2000 debt outstanding during the year. $ 9.25 Series 40,000 1977 thru 1981 (a) The Company has the right to redeem on each sinking fund redemption date additional shares up

5. CAPITAL STOCK to the number of shares of this Series required to On April 23, 1975 the authorized Common Stock be redeemed annually.

of the Company was increased from 30,000,000 shares to 50,000,000 shares. 6. TAXES Income tax expense for the years 1975 and 1974 Common Stock of $ 412,303,000 at December 31, is reflected on the Statement of Income as follows:

1975 includes $ 718,000 cash installments re- 1975 1974 ceived under a dividend reinvestment plan for Thousands of Dollars shareowners and employee investment plan for Operating Expenses Current which 36,337 shares of Common Stock were Federal $ 22,547 12,554 issued in January 1976. Effective January 1, 1976 State 8,221 3,858 the Company replaced its two investment plans 30,768 16,412 with'a single, new dividend reinvestment plan for Deferred which 900,000 shares of unissued Common Federal 2,952 15,991 State 590 3,271 Stock have been. authorized for issuance pursu-ant to the terms of the plan. 3,542 19,262 tax credits 'nvestment The Company does not amortize capital stock Deferred 14,465 4,753 expense which represents commissions and Amortization of deferments .......... (1,477) (1,216) expenses incurred in connection with the issu- 3,537 12,988 ance and sale of capital stock.

47,298 39,211 Other Income and Sales of capital stock during 1975 and 1974 were Deductions-Current Federal (9,164) (4,156) as follows (shares and amount in thousands): State . (2,037) (920) 1975 Shares Amount (11,201) (5,076)

Common Stock Total income tax Public offering 3,000 $ 51,450 expense ............ $ 36,097 34,135(a)

Dividend reinvestment and employee (a) Excludes $ 4,831 deferred income taxes related to investment plans 301 5,595 Nonrecurring Credit.

Preference Stock

$ 11.00 Series .......... 500 50,000 Total taxes currently payable is arrived at by

$ 9.25 Series ~ ~....,,... 200 20,000 subtracting the credit amount under Other 1974 Income and Deductions from the expense under Common Stock .... 2,200 35,156 Operating Expenses as follows:

Preference Stock

$ 13.00 Series .... 250 25,000 1975 1974 Thousands of Dollars Each of the following series of stock contains Operating Expenses $ 30,768 16,412 Other Income and sinking fund provisions which are designed to Deductions ........ (11,201) (5,076) retire the series at a redemption price of $ 100 per Total .......... $ 19,567 11,336 share:

23

Deferred income taxes result from the following Taxes other than income taxes charged to operat-items: ing expense were:

1975 1974 1975 1974 Thousands of Dollars Portion of tax depreciation Thousands of Dollars under the class life State gross receipts $ 23,756 20,564 depreciation system $ 4,540 3,715 State capital stock ....... 7,284 6,263 Recoverable fuel costs ..... 829 14,009(a) State utility real estate ... 5,980 5,258 Forced outage reserve (3,726) Social security and other 3,649 3,486 Other 1,899 1,538 Total $ 40,669 35,571

$ 3,542 19,262 (a) Excludes $ 4,831 deferred income taxes related to Nonrecurring Credit.

7. DIVIDEND RESTRICTIONS Income tax expense differed from the amount The Company's charter andmortgage indentures computed by applying the combined Federal and restrict the payment of cash dividends on Com-State corporate income tax rates (52.94~/o in both mon Stock under certain conditions. Under the 1975 and 1974) to pre-tax income as follows: charter provisions, which are the more limiting, 1975 1974 no restrictions are effective on the payment of Thousands of Dollars such dividends out of current earnings. The Net income $ 97,541 87,479 amount of earnings reinvested free of restrictions Income tax expense 36,097 38,966 under the charter at December 31, 1975 was Pre-tax income $ 133,638 126,445 $ 154.1 million.

Indicated income tax expense on the above 8. HYDROELECTRIC PROJECTS at combined Federal and State tax rates The Company operates two hydroelectric proj-

$ 70,748 66,940 ects under licenses issued by the FPC. Certain Reductions in indicated reserves required to be provided under the Fed-iocome tax due to: eral Power Act have not been recorded pending Amortization of investment approval of the amounts by the FPC. The Com-tax credit deferments ... 1,477 1,216 pany estimates that such reserves applicable to Allowance for funds used the years from 1946 would not exceed $ 2.8 mil-during construction lion at December 31, 1975.

nontaxable ............. 19,379 10,976 Tax depreciation in excess of book depreciation .... 9,131 8,799 9. RETIREMENT PLAN Tax and pension costs- Obligations of the Company's Retirement Plan tax deduction in excess are currently funded through a Trust Fund. At of book expenses ....... 2,998 2,491 June 30, 1975, the end of the Fund's most recent Other 1,666 4,492 fiscal year, the Fund's assets at cost were $ 86.6 million. Pension costs were $ 8.8 million in the Total reduction in indicated income tax 34,651 27,974 year 1975 and $ 6.7 million in 1974.

Income tax expense $ 36,097 38,966 Based on the Fund's assets at cost, at June 30, 1975 the actuarially computed unfunded past Effective tax rate on service cost was $ 25.8 million. As of the same pre-tax income ... 27 Oo/o 30 8o/o date vested benefits exceeded the cost basis of 24

the Fund's assets by $ 20.7 million and exceeded accrued on the basis of the outstanding lease the market value of the Fund's assets by $ 27.0 liability.

million.

The Company does not currently anticipate any 11. PENDING ACQUISITION significant increase in pension costs as a result On December 1, 1975 the Company entered into of the Employee Retirement Income Security Act a purchase. agreement to acquire all of the of 1974.

outstanding capital stock of Hershey Electric Company (HEC). The acquisition cost of the

10. RENTALS AND NONCANCELABLE capital stock and the repayment of all debt owed LEASE COMMITMENTS by HEC will approximate $ 8 million.

Total rentals charged to operating expense for The reported revenues and net income of HEC for the years 1975 and 1974 amounted to $ 9.5 and the year 1975 were $ 8.7 million and $ 0.4 million,

$ 8.9 million, respectively. respectively. The acquisition will not be consum-mated until all necessary regulatory approvals At December 31, 1975 the Company was com- have been received.

mitted for minimum rentals totaling $ 59.4 million under noncancelable leases expiring at various dates to 1996. The minimum rentals are as follows (millions of dollars): 1976, $ 5.5; 1977, $ 5.3; 1978, 12. COMMITMENTS AND

$ 5.1; 1979, $ 4.8; 1980, $ 4.6; 1981 through 1985, CONTINGENT LIABILITIES

$ 15.7; 1986 through 1990, $ 10.2; 1991 through The Company estimates that about $ 1.43 billion 1995, $ 7.9; after 1995, $ 0.3. These rentals are will be required to complete construction proj-applicable to the following categories of prop- ects in progress at the end of 1975. Of this erty: combustion turbine generating equipment, amount, approximately $ 1.28 billion is related to

$ 17.5 million; railroad coal cars, $ 23.9 million; completion of the Company's two nuclear gener-computer equipment, $ 13.5 million; and con- ating units at its Susquehanna Power Plant. The struction cranes, $ 4.5 million. Generally the Company's estimated construction program for leases contain renewal options and obligate the 1976 is $ 390 million.

Company to pay maintenance, insurance and other related costs. In connection with providing for its future bitu-minous coal supply, the Company at December The impact upon net income in each of the years 31, 1975 has guaranteed capital and other obliga-1975 and 1974 would be less than 1% if all non- tions of certain coal suppliers (including five capitalized financing leases were capitalized and owned and two controlled coal companies) amortized on a straight-line basis with interest aggregating $ 131.6 million.

25

AUDITORS'PINION HASKINS & SELLS Two Broadway Certified Public Accountants New York 10004 The Shareowners and Board of Directors of Pennsylvania Power & Light Company:

We have examined the balance sheet of Pennsylvania Power (t Light Company as of December 31, 1975 and 1974, the related statements of income, earnings reinvested, and changes in financial position for the years then ended and the schedule bf capital stock and long-term debt as of December 31,1975. Our examin-nation was made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

In our opinion, such financial statements and schedule present fairly the finan-cial position of the Company at December 31, 1975 and 1974 and the results of its operations and changes in its financial position for the years then ended, in con-formity with generally accepted accounting principles consistently applied during the period and on a basis consistent with the preceding year(except for the change in 1974, with which we concur, in the method of accounting for recover-able fuel costs as described in Note 3 of the Notes to Financial Statements).

February 3, 1976 FISCAL AGENTS SECURITIES LISTED ON EXCHANGES TRANSFER AGENTS FOR PREFERRED, NEW YORK STOCK EXCHANGE PREFERENCE AND COMMON STOCK First Mortgage Bonds, 10%% Series due 1982 Industrial Valley Bank and Trust Company 4%% Preferred Stock (Code: PPLPRB) 634 Hamilton Mall 4.40% Series Preferred Stock (Code: PPLPRA)

Allentown, Pennsylvania 18101 8.60% Series Preferred Stock (Code: PPLPRG)

Irving Trust Company Preference Stock, $ 8.00 Series Code: PPLPRJ)

One Wall Street Preference Stock, $ 8.40 Series Code: PPLPRH)

New York, New York 10015 Preference Stock, $ 8.70 Series Code: PPLPRI)

Pennsylvania Power & Light Company Preference Stock, $ 11.00 Series (Code: PPLPRL)

Two North Ninth Street Preference Stock, $ 13.00 Series (Code: PPLPRK)

Allentown, Pennsylvania 18101 Common Stock (Code: PPL)

REGISTRARS FOR PREFERRED, PBW STOCK EXCHANGE PREFERENCE AND COMMON STOCK 4~/to/o Preferred Stock The First National Bank of Allentown 3.35% Series Preferred Stock Hamilton Mall at Seventh 4.40% Series Preferred Stock Allentown, Pennsylvania 18101 4.60% Series Preferred Stock Morgan Guaranty Trust Company of New York 8.60% Series Preferred, Stock 94/o Series Preferred Stock 23 Wall Street New York, New York 10015 Preference Stock, $ 8.00 Series Preference Stock, $ 8.40 Series Preference Stock, $ 8.70 Series DIVIDEND DISBURSING OFFICE FOR PREFERRED, Preference Stock, $ 11.00 Series PREFERENCE AND COMMON STOCK Preference Stock, $ 13.00 Series Treasurer Common Stock Pennsylvania Power & Light Company Two North Ninth Street Allentown, Pennsylvania 1 8101 26

Quarterly Dividends and Market Price of Voting Securities for 1975 and 1974 Reported Market Price-Dollars per Share Quarterly Dividends 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Declared High Low High Low High Low High Low 1975 Common Stock $ 0.45 20 15s/s 19r/s 17Ys 19r/s 17s/s 19'/s 17%

Preferred Stock 4'/to/o 1.125 52 44'/s 49'/s 45'h 49 45'/s 49 44'/s Series 3.35o/o 0.8375 35 31r/s 34 33 35 32 35 32'/s 4.4po/o 1.10 50'/s 41'/s 47'/r 43 48 44 46'!i 43'/s 4 6po/o 1.15 50 44 47'h 45'/s 47 45 49 45 7 40o/o (a) 1.85 8.60o/o 2.15 93 79'A 88'/s 84 88'/t 81 90 82 9 PPo/o 2.25 95 80 90 88 91 88 95 88 Preference Stock

$ 8.00 2.00 85 69 82 75 81 76 79 74

$ 8.40 2.10 89 73 85 78'/t 84'A 77'ls 84 78

$ 8.70 2.175 92 79 88'/s 82 88'/r 80'/s 87'/s 80'/s

. $ 9.25 (a) ........ 2.3382(c)

$ 11.00 (b) 103 100'A 106'h 100'/s

$ 13.00 3.25 120 105 118 111 118 110M 119'h 112 1974 Common Stock $ 0.45(d) 23 19'/s 21r/s 16 18'/>> 13 17 ls 14r/s Preferred Stock 4'Ao/o 1.125 57'/s 52 54th 48r/s 50'/s 43 48 43 Series 3.35'/o 0.8375 40 39 38 35 33 29 38 28'/t 4 4po/o 1.10 56% 52 52 46'/s 48 41r/s 45 41 4 60'/o 1.15 55'fi 53 52 49 48 46 48 45 7.40'/o (a)......... 1.85 8.60o/o 2.15 104'/s 101 103'h 90 89 82'/s 87 70 9.PPo/o 2.25 104 =102 100 94 89 77 75 70 Preference Stock

$ 8.00 2.00 100'A 96 95 78 80 68 80 67 69 81'/r 70

$ 8.40

$ 8.70 2.10 2.175 102'/s 106 98 99'/r 99 100%

80 86 91'3 81M 86 109'/s 72 100

$ 13.00 2.93(e)

The principal trading market for all classes of stock Is the New York Stock Exchange except for the 3.35%. 4.60% and 9.00% Series Preferred Stocks which are listed on the PBW Exchange but are traded principally over the counter. Price ranges for the 3.35%, 4.60% and 9.00% Series Preferred Stocks are based on the best available high and low bid prices during the periods and should be viewed as reasonable approximations.

(a) Stock was a private placement and is not publicly traded.

(b) Stock Issued August 1975, the third quarter dividend was $ 1.01 and the fourth quarter dividend was $ 2.75.

(c) Stock Issued In September 1975, fourth quarter dividend only.

(d) First quarter of 1974 was $ 0.42, remaining quarters $ 0.45.

(e) Stock issued October 1974, fourth quarter dividend only.

27

OFFICERS BOARD OF DIRECTORS JACK K. BUSBY, President CLIFFORD L. ALEXANDER JR., Washington, D.C.

Partner o/ Verner, Liiplert, Bernhard, ROBERT R. FORTUNE, Executive Vice President, Financial McPherson and Alexander, Counsellors at Law BROOKE R. HARTMAN, Executive Vice President, Operations JACK K. BUSBY, Allentown JOHN T. KAUFFMAN, Vice President, President of the Company System Power & Engineering RALPH R. CRANMER, Williamsport EMMET M. MOLLOY, Vice President, Member of Board o/ Directors-Grit Publishing Company Human Resource & Development EDGAR L. DESSEN, Hazleton LEON L. NONEMAKER, Vice President, Physician-Radiologist Dlv/sion Operations ROBERT R. FORTUNE, Allentown Executive Vice President, Financial BROOKE R. HARTMAN, Allentown Executive Vice Pros/dent, Operations CHESTER R. COLLYER, Treasurer HARRY A. JENSEN, Lancaster NORMAN W. CURTIS, Vice President, Executive Vice President, Armstrong Cork Company, Engineering & Construction Manufacturer o/ interior furnishings and specialty products JOSEPH L. DONNELLY, Vice President, Finance W. DEMING LEWIS, Bethlehem President of Lehlgh University LOUISE A. EARP, Assistant Secretary JOHN A. NOBLE, Scranton CHARLES E. FUQUA, Vice President, Susquehanna Division President o/ Cia/and Simpson Company, Department stores CHARLES J. GREEN, Vice President, Harr/sburg Division RUTH PATRICK, Philadelphia RICHARD H. LICHTENWALNER, Vice President, Chief Curator of the Limnology Departmont, information Services Academy of Natural Sciences CARL R. MAIO, Vice President, Lehlgh Division NORMAN ROBERTSON, Pittsburgh JAMES J. McBREARTY, Vice President, Northeast Division Senior Vice President and Chio/ Economist of Mellon Bank, N.A.

EDWARD M. NAGEL, Vice President, JOSEPH T. SIMPSON, Harrisburg Gonoral Counsol and Secretary Chairman of the Board of Harsco Corporation, HERBERT D. NASH JR., Vice President, Diversified manufacturer of labrlcated metal products Consumer & Community Services CHARLES H. WATTS II, Lewisburg EDWIN H. SEIDLER, Vice President, Distribution President of Bucknell Univorsity BRENT S. SHUNK, Vice President, Lancaster Division Executive Committee: Jack K. Busby, chairman; Messrs. Cranmer. Hsrtman.

Jensen and Simpson.

JEAN A. SMOLICK, Assistant Secretary Audit Committee: Cliflord L Alexander, chairman; Mr. Jensen.

Dr. Patrick and Mr. Watts.

DONALD J. TREGO, Assistant Treasurer GEORGE F. VANDERSLICE, Vice President and Comptroller PAULINE L. VETOVITZ, Assistant Secretary HELEN J. WOLFER, Assistant Secretary Corporate Management Committee: Jack K. Busby. chairman: Messrs. Fortune.

Hartman, Ksuifman, Molloy, Nonemaker and Floyd Belsel. executive secretary.

The executive organization chart of the Company ls Included in the PP&L Profile.

The Company flies Form 10-K annually with the Securities and Exchange Commission. Form 10-K Is composed of this Annual Report to shareowners and additional Information concernIng the Company and Its operations. This additional Information will be available without charge after April 1, 1976 by writing to PennsylvanIa Power & Light Company, Two North Ninth Street, Allentown, Pa. 18101, attention: Mr. George I. Kllne, Investor Services Manager.

28

PP&L Directors SIMPSON BUSBY I>>

Ml

\

I 1 C CRANMER FORTUNE t

DESSEN JENSEN LEWIS HARTMAN NOBLE WATTS I

0 trN RC I,

+;Ir ..

PATRICK ROBERTSON ALEXANDER Many of the photos above were taken at the two-day September board meeting during which the directorstoured the Susquehannanuclearplantconstructlonsite.

PpaL 8ULK RATE U. S. POSTAGE PENNSYLVANIA POWER 8 LIGHT COMPANY Two N'orth Ninth Street, Allentown, Pa. 18101 PAID Allenlewn, Pa.

Telephone: Area Code 215 821-5151 Permit No. l04 LITHO IH U.S.A.

Regulatory Docket.F~il

, )$ ,

EXECUTIVE VICE PRESIDENT'S REPORT y

>>Va William F. Matson The business of Allegheny Electric Cooperative is very simple - that of power supply to the membership. From that point on, it becomes less simple - not only power supply but an abundance of power at the lowest possible costs. That helps to confuse the issue. In order to accomplish its single objective, Allegheny, during the coming year, will be spending a significant amount of time on four subjects: capital credits, load management, long-range future power supply, and the decision on the depth of our involvement in generation and transmission.

Our long-range projections show that Allegheny's members will require 1,000 MW of firm capacity. Even today, our 137,000 members use nearly one and a half billion KWH. Of this, nearly twice as much is used in the winter as compared to the summer.

This throws a disportionate share of our costs, load, and needs for the system into half of the year. Along with the many studies which we constantly keep current, several new studies of interest to the members are currently in progress. A detailed feasibility study is being conducted to determine whether or not economics dictate that we should get involved in self-generation and transmission ownership. Almost concurrently with this study, we are conducting a site selection and fuel supply availability study.

Should this feasibility study show the desirability of building self-generation plants, as we suspect it very well may, we will already have some idea as to a general location and a potential source of fuel. Like a crossword puzzle, only one piece can be put in at a time; but when several people work on the crossword puzzle a number of different pieces can be spotted simultaneously. That is what we are trying to do with Allegheny. The business of a G&T revolves around people and figures. This annual report is replete with statistics and data in the form of tables, graphs, and charts in order for you to visualize the progress and growth of your power supply cooperative.

In addition to the studies concurrently being made regarding coal fired generation, we are continuing full speed ahead on our studies for construction of additional hydro projects. Each of you recognize the importance of the blend of hydro which we have built into Allegheny's rate base to the membership. Each of you also recognizes the great amount of careful work that must be done by you and by Allegheny's staff in order to continue those ratios as closely as possible.

We are proud of Allegheny's record and think that the 10 year results show an excellent stewardship. But truly the past is prologue and our thoughts must be constantly geared for the next 10 to 20 years. I believe that the reports of the officers, managers, and staff of this organization given at the annual meeting will give you a concise picture of the methods we plan to use in order to accomplish the goals and objectives outlined in previous annual budget and work plan reports to the membership.

Paramount of course, in a rural electric G&T is the strong and enthusiastic support of its members. For that, we thank each of you.

PRESIDENT'S REPORT Reuben Yoselson Although this is my first report as the President of Allegheny Electric Cooperative, as a past president of my local cooperative and as a member of Allegheny's board and an interested onlooker for more than 20 years, I have long shared the agony of defeat and the ecstacy of success with you.

The role of the board of directors has changed significantly over the years. Most of this change is of course due to the increased sophistication of the times and of the operation of Allegheny. Still, the board must provide its primary function of being a policy making body and a sounding board for management to use in proposing the new programs, techniques and technologies necessary in order for us to accomplish our objectives. Many of us are concerned about the changing membership of our member cooperatives and the responsibility that Allegheny directors share in trying to accomplish the seemingly impossible objective of low-cost power to the members.

Still, directors are remiss in their responsibility if they do not carefully and continuously inform themselves of the success that Allegheny has had in meeting this objective and in turn passing on the fantastic savings of wholesale power to the member cooperatives. You must be able to relate to your individual membership the successes which you have had and to translate those successes into the comparatively lower rates which rural electric members are currently enjoying.

Most questions can only be answered with the question: compared to what? Yes, we must all agree electricity costs are high but compared to what, or compared to whose, or compared to what other source? When these questions are carefully explored and carefully answered to our membership, we should hope'that the answers will satisfy the questions of the members. These are indeed trying times and they take strong action to counteract the adversities which confront us. We must make no small plans - our plans must be strong, they must be adequate to meet the tests of the times and they must be sufficient to accomplish our objectives.

As your president, I seek your advice, counsel, guidance and strong support of the attainment of these goals.

Lelt to right: Myron Ludwick, Lloyd Dugan, Sr. Robert E. Leonard, Harris Horn, Dennis Shaffer, John Anstadt. Reuben Yoselson,

~

Benjamin Slick, Hiram W. Walker, Daniel A. Clark, Clair O. Bulerbaugh, A. D. Stainbrook. Missing from photo: James Henderson, William J. McDanel.

CO-OP ADDRESSES AND DIRECTORS Adams Electric Cooperative', Inc. Somerset Rural Electric Co-op, Inc.

P.O. Box 130 127 E. Fairview Street Gettysburg, PA 17325 Somerset, PA 15501 Harris S. Horn, Director Hiram W. Walker, Director Bedford Rural Electric Co-op, Inc. Southwest Central REC, Inc.

P.O. Box 335 P.O. Box 70, Airport Rd. R.D. 4

~

Bedford, PA 15522 Indiana, PA 15701 Dennis Shaller, Director Clair O. Buterbaugh, Director Central Electric Cooperative, Inc. Sullivan County REC, Inc.

P.O. Box 329 Forksville, Parker, PA 16049 Pennsylvania 18616 William J. McDanel, Director John Anstadt, Director Claverack Rural Electric Co-op, Inc. Sussex Rural Electric Cooperative Towanda, PA 18848 22 E. Main Street Reuben Yoselson, Director Sussex, NJ 07461 James L. Henderson, Director New Enterprise Rural Electric Tri-County REC, Inc.

Cooperative, Inc. 22 N. Main Street New Enterprise, PA 16664 Mansfield, PA 16933 Benjamin Slick, Director Lloyd Dugan, Sr., Director Northwestern Rural Electric United Electric Cooperative, Inc.

Cooperative Association, Inc. Box 477 R.D. 1 DuBois, PA 15801 Cambridge Springs, PA 16403 Robert E. Leonard, Director A. D. Stainbrook, Director Valley Rural Electric Co-op, Inc. Warren Electric Co-op, Inc.

Box 477 320 E. Main Street Huntingdon, PA 16652 Youngsville, PA 16371 Daniel A. Clark, Director Myron Ludwick, Director

ALLEGHENY OFFICERS STATISTICS President - - Reuben Yoselson No. of members - 14 Vice President - William J. Mcoanel No. of consumers,- 136,845 Secretary - John Anstadt Total KWH purchased - 1,355,237,657 Treasurer - Myron Ludwick Non-coincident demand - 322,1 76 VITALCOOPERATIVE STATISTICS Miles Consumers Annual tof of Per Mile Total KWH Peak PA Co-op Consumers Line of Line Purchased Demand Adams 12,648 1,976 6.4 151,103,200 38,483 Bedford 5,763 958 6.0 64,733,800 14,976 Central 17,637 2,620 6.7 136,810,000 31,002 Claverack 10,497 2,121 4.5 120,014,839 27,989 New Enterprise 2,123 265 8.0 26,659,600 6,213 Northwestern 12,842 2,038 6.3 153,083,908 33 272 Somerset 8,148 1,668 4.9 101,779,500 23,406 Southwest Central 13,769 1,977 7.0 158,168,732 32.027 Sullivan 3,748 681 5.5 32,714,941 8,892 Sussex 5,832 359 16.2 59,708,500 14.340 Tri-County 12,374 2,333 5.3 97,091,160 27,732 United 12,515 2,429 5.2 95, I 78,000 24,380 Valley 11,969 1,865 6.4 1 22,539,000 28,135 Warren 6,980 912 7.7 35,652,477 11.329 TOTAL 136,845 22,202 1,355,237,657 322.176 Average 9,775 1,586 6,9

TREASURER'S REPORT ALLEGHENY ELECTRIC COOPERATIVE, INC.

BALANCE SHEET - 31 DECEMBER 1975 and 1974 ASSETS 1975 1974, Total Utility Plant in Service $ 10,368 $ 8,706 Transmission Station Equipment 26,989 26,989 Total Utility Plant 37,357 35,695 Accumulated Provision for Depreciation 4,603 2,630 Net Utility Plant 32,754 33,065 Investments in Associated Organizations 1,757,687 1,010 Cash - General Funds 3,477 302,841 Temporary Cash Investments 1,030,000 200,000 Receivables 2,066,778 2,335,152 Total Current and Accrued Assets 4,857,942 2,837,993 Total Assets $ 4,890,696 $ 2,872,068 LIABILITIES 1975 1974 Memberships 2,800 2,800 Capital

'atronage 1,600,107 990,221 Donated Capital - Members 29,316 29,316 Donated Capital - Non Members 349 349 8

Deficit Margin ~22.203 Total Margins and Equities 1,632,572 1,000,483-Long-Term Debt - NRUCFC 1,070,060 Accounts Payable 2, I88,064 1.871,585 Total Liabilities $ 4,890,696 $ 2,872,068

TREASURER'S REPORT (CONT'D)

MEMBER 1975 974 Adams Electric Cooperative, Inc. $ 2,239,700.31 $ 1,808,333.04 Bedford Rural Electric Cooperative, Inc. 924,101.49 790,212.09 Central Electric Cooperative, Inc. 1,943,324.94 1,643,603.73 Claverack Rural Electric Cooperative, Inc. 1.743,370.66 1,524,959.90 New Enterprise Rural Electric Cooperative, Inc. 388,314.67 320,010.44 Northwestern Rural Electric Coop. Assn., Inc. 2,197,618.66 1,906,421.25 Somerset Rural Electric Cooperative, Inc. 1,490,125.57 1,221,326.78 Southwest Central Rural Electric Cooperative Corp. 2,243,091.20 1,826,916.88 Sullivan County Rural Electric Cooperative, Inc. 469,767.07 413,220.36 Sussex Rural Electric Cooperative 856,103.99 675,834.56 Tri-County Rural Electric Cooperative, Inc. 1,424,850.38 1,234,845.17 United Electric Cooperative, Inc. 1,373,438.00 $ ,161,517.96 Valley Rural Electric Cooperative, Inc. 1,766.102.36 1,488,658.48 Warren Electric Cooperative, Inc. 528.526.07 460.336.42

$ 19,588,"435.37 $ 16,476,197.06 POWER PURCHASED BY ALLEGHENY Power Authority of the State of New York $ 3,694,665.00 $ 3,089,120.73 Pennsylvania Electric Company 7,366,418.14 7,127,064.48 Metropolitan Edison Company 1,253,214.79 822,408.60 West Penn Power Company 2;258,409.45 1 '69,168.14 New Jersey Power & Light Company 1.205.369.05 995.814.52 Total Purchased Power $ 15,778,076.43 $ 13,203,576.47 MILLS/KWH 1975 1974 Power Authority of the State of New York 5.02 5.03 Pennsylvania Electric Company 19.41 16.54 Metropolitan Edison Company 22.67 16.36 West Penn Power Company 18.20 10.29 New Jersey Power & Light Company 20.19 19.03 Total Purchased Power 11.64 10.47

TR EAS UR ER'S R E PORT (CON TD)

TRANSMISSION CHARGES 1975 1974 New York Companies $ 624,000.00 $ 494,149.08 G.P.U. Companies 2,352,337.20 1,952,468.48 Total Transmission Expense $ 2.976,337.20 $ 2,446,617.56 Total Purchased Power 15,778,077.00 13,203,576.47 Total Power Supply Expense 18,754,414.20 15,650,194.03 Other Expenses 273.131.00 221,697.00 Total Operating Expenses $ 19,027,545.20 $ 15,871,891.03 24.0 23.0 AVERAGE COST PAID TO PASNY

.. AVERAGE SUPPLEMENTAL COST 22.0 AVERAGE ALLEGHENYTOTAL COST 21.0 ~

~ ~ ~

~, ~

~

20.0 ~ ~ ~ f~ '

~ ~ ~ ~

~

19.0 e

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18.0 17.0 16.0 ~ ~ t ~ ~ ~ ~ ~ ~ ~ 0 ~ ~

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13.0 l2.0 11.0 10.0 8.0 7.0 6.0 5.0 40 3.0 2.0 1.0 0.0 AY JUL SEP NOV JAN MAR MAY JUL SEP NOV AUG OCT DEC FEB APR .JUN AUG OCT 1974 1975 1976

POWER PURCHASED 31 DECEMBER 1975 WEST PENN JCPL 9.16%

4.40%

MET.

EDISON 4.08%

PASNY 54.35%

PENELEC 28.01%

TOTAL KWH - 1,355,237,659 ADMINISTRATIVEand GENERAL 1.44%

7orq<

COST OF OPERATIONS NEe NY WHEELING 3.28%

31 DECEMBER 1975 rod WEST PENN 1g +g O 11.87% ~o +

PASNY O 19.42% ~O 0

JCPL 6.33% c5 MET EDISON

'PU WHEELING gg 12.36%

PENELEC 38.71%

o~

~st 51.63% '

340 320 1975 300 1974 280 1973 1972 o 260 240 1971 MONTHLY 220 MW DEMAND 200 1970 180 160 140 120 100 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC 1500 YEARLY KILOWATT 7.45%

1400 HOURS INCREASE

~ 0 ~ ~ ~

6.77% ~ ~ ~ 0

~ ~ ~ ~ ~

1300 ~ ~ ~ ~

INCREASE ~ 0 ~ ~ ~

~ ~ ~ ~

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INCREASE \ YttVooV ~ ~ ~ ~ 0

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~ ~ ~ ~ ~~ ~~ ~ ~~ ~ ~ ~ ~ Y ~ ~ ~ 0 1100 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~

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800 1970 1971 1972 1973 1974 1975 10

DEPARTMENT OF ENGINEERING AND POWER SUPPLY (L to R) Gary Fries, Richard Osborne, Harlan Saverson, Joseph Zuiio Harlan M. Severson - Director of Planning Southern Engineering Company Joseph D. Zullo - Staff Engineer of Georgia - Consulting Engineers Richard Osborne - Staff Engineer Gary Fries - Statisti cian The primary responsibility of the Engineering and Power Supply Department is to insure a reliable and adequate power supply for all of Allegheny's 14 member rural distribution coopera-tives. In order to meet this responsibility, the Department continually prepares and updates long range power requirement projections for each member and then focuses on the necessary future planning needed to insure these requirements.

Power supply planning for Allegheny's members involves: (1) negotiations with power suppliers for the purchase and transmission of energy at reasonable rates approved by the Federal Power Commission, (2) joint ownership in a share of three new, efficient, nuclear generating units which are being constructed by major companies of the Pennsylvania, New Jersey, and Mary-land Interconnection, (3) emphasizing the urgent need for the development of all potential hydroelectric generating sites throughout Pennsylvania, and (4) preparing the initial feasibility studies needed to implement a consumer oriented load management and energy conservation program throughout the member cooperatives.

Aside from power supply planning, the Engineering and Power Supply Department is also responsible for determining the wholesale power rate which Allegheny applies equally to each member cooperative. Also, the Department provides a number of additional services to the members. These services include cost of service and retail rate studies, rate cases before State Regulatory Commissions, and engineering coordination between Allegheny, its members and the private power companies.

The energy situation facing this Nation and the World today dictates the need for sound system planning. The Engineering and Power Supply Department, in conjunction with Southern Engi-neering Company of Georgia, the member cooperatives and their consulting engineers, will continually strive to further Allegheny's main objective - a sufficient supply of low cost electrical energy to the rural consumer-owners of its member cooperatives, now and in the future.

LEGAL SERVICES AND RESEARCH Marian Schwalm Furman Marian Schwalm Furman - General Counsel and Director of Research James Murray - Research Assistant Sue Vertolli - Secretary to Legal Department and Executive Vice President General Counsel represents Allegheny in legal aspects of its dealings with its members and with other entities. Review and interpretation ot Federal and State Statutes, regulatory directives and court decisions as well as advice on compliance are among the legal services. Research is conducted and testimony prepared for public agencies on proposed legislation, pending ad-ministrative actions, and other power supply problems affecting the cooperatives.

Special Counsel, William C. Wise, is retained on a continuing basis for matters requiring special expertise in power supply negotiations, proceedings before regulatory agencies and litigation.

ADMINISTRATIVEASSISTANT AND DIRECTOR OF SPECIAL Harlan Severson PROJECTS Harlan Severson-Administrative Assistant & Director of Special Projects On May 1, Harlan Severson joined the staff of Allegheny, having worked previously for a generation and transmission cooperative in South Dakota for 18 years and as a Congressional and Senate aide for the past 5 years. He is now participating in the negotiating sessions with Pennsylvania Power and Light and has been assigned as Director of the Department of Engi-

'neering and Power Supply, on a temporary basis.

OFFICE SERVICES C. Donald Blackburn C. Donald Bfackburn - Olfice Manager Stella Roadcap - Assistant Bookkeeper Rita Martinez - General Office Darlene Jones - General Secertary Lee Sitton - Receptionist and Secretary The Office Services Department maintains the budget, books of account, payroll records and all bills and payments. All quarterly and annual tax returns, and other financial reports are pre-pared. Affairs of the Office Services Department are coordinated with activities of the other departments of the Cooperative in order to give maximum services to members.

12

r MEMBER SERVICES William Logan

~r'illiam Logan - Director Community Development and Member Services Mary Jo Keating - Associate Editor, PENN LINES Patti Stevens - Secretary This department is involved with the primary function of providing and exchanging information with the member systems and the general public. The many activities required in this informa-tion program are centered around the monthly publication of PENN LINES, newsletters, memos, news releases and the miscellaneous correspondence. The Member Services staff is responsi-ble for coordinating and extending activities conducted by local electric cooperatives including power use promotions, youth activities, women's programs, and a variety of meetings and conferences. Legislative responsibilities are shared with the legal department PENN LINES is the official monthly publication of Pennsylvania's Rural Electric Cooperatives.

Since its inception in October, 1966, PENN LINES is the voice of over 137,000 rural electric members thoughtout the service area. PENN LINES is designed to keep members informed of their programs and progress. PENN LINES staff includes: Editor William F. Matson, Managing Editor William Logan and Associate Editor Mary Jo Keating.

JOB TRAINING AND SAFETY Robert Horn Robert S. Horn - Director Robert Spangler - Instructor This program brings to all employees programs designed to help them accomplish their jobs in the safest, most efficient manner in order to prevent accidents and to bring to the membership the best possible service. Specific training programs are so designed as to appeal to and meet the needs of the employees of the cooperative. The use of protective equipment is demonstrated and encouraged on all those jobs where there is a need. Special information programs are used to instruct employees in the correct procedures to be used in caring for a victim in the event an accident should occur. One of the objectives of the safety program is to work with the co-ops to establish public educatiorl programs, such as the high voltage demonstration, to increase the public's awareness as to the hazards involved in electrical distribution lines and use in the home.

This department is also responsible for keeping abreast of new developments in the field of electrical distribution, and for the coordination of other activities that will enhance the rural electrification program on a local level.

13

TERRITORIAL INTEGRITY The year 1975 saw the passage of Senate Bill 719 by the General Assembly and its approval by Governor Milton J. Shapp which successfully concluded a fifteen year effort on the part of the Rural Electric Cooperatives to secure territorial integrity for their areas of service. A model for other states to copy, this legislation is a tribute to all rural electric leaders who worked long and hard for its passage and to the great democratic system of government under which we live and prosper.

HEADQUARTERS BUILDING Allegheny's new corporate headquarters, a seven-story, 63,000 square foot commercial office building, will not only provide Allegheny with the space to function at peak efficiency but by renting our excess space, gives us the best economic package as well. The 3.5 million dollar construction, joining Harrisburg's urban renewal project, will be equipped to deal with the sophisticated problems of contemporary business, such as audio-visual communications, in-house meeting and conference space to save money and time, and a good, logical office system to upgrade the quality and quantity of productivity.

NUCLEAR NEGOTIATIONS Negotiations for Allegheny's joint ownership in three nuclear generating units continued throughout 1975 with the Pennsylvania Power and Light Company and the General Public Utilities Corporation. Hopefully, agreements suitable to all parties can be concluded in 1976.

HYDRO-POWER POTENTIAL The maximum development of hydro-power in Pennsylvania has long been one of Allegheny's major concerns. Developments in 1975 indicate that the long awaited installation of hydro generating facilities at Raystown Dam may become a reality in the not so distant future.

However, hydro-power suffered a severe blow when construction of the multi-purpose Tocks Island Lake Project was deferred by the Delaware River Basin Commission. Only Governor Shapp of Pennsylvania continued to press for the immediate construction of Tocks Island. Now however, the City of Philadelphia and several New Jersey communities are seeing municipal water sho'rtages, so we may get Tocks back on top again, 14

PEOPLE 0 POWER < PROGRESS One of the ways Allegheny furthers its objective - obtaining low cost power for the rural consumer-owners of its member cooperatives - is by affiliation with state and national organizations whose interests parallel our own.

We maintain close liaison with Pennsylvania Rural Electric Association, the service organization for Allegheny's members. PREA supports joint activities, such as group purchasing, that electric cooperatives in Pennsylvania and neighboring states can engage in more economically on a group basis. Acting as a trade association PREA furnishes a wide range of services helpful to Allegheny and its members.

Allegheny is a member of National Rural Electric Cooperative Association, PREA's national counterpart. NRECA maintains programs for its membership in many fields such as safety and job training, retirement benefits, insurance, management training, personnel pay scales and organization, and wholesale power supply.

NRECA also supports international cooperation and provides assistance to rural electric cooperatives in developing nations both through the U.S. AID program and through related contracts. Several managers and others from our member cooperatives and one of our stafr members have spent varying amounts of time working in foreign countries to help them develop their programs for providing electric service to the people through cooperative programs.

We participate in the national activities of the American Public Power Association, with Allegheny staff members on its Rate Committee, Legislative Committee, Power Supply Planning Committee, and Management Advisory Committee. Through these activities as well as attendance at its national meetings, we keep in touch with the best informed opinion of outstanding leaders in the publicly owned and consumer oriented segment of the electric power industry.

The traditional major source of financing for cooperative generating facilities has been The Rural Electrification Administration. Throughout its 40 year history, REA has made loans to 1,069 rural electric cooperatives and publicly owned systems, and also to 25 investor-owned private utilities, for the purpose of getting electricity into rural areas. Rural electric cooperatives have established an outstanding repayment record.

No Allegheny member cooperative has ever been delinquent in payments on the total of almost $ 100 million they have borrowed.

Allegheny has never borrowed from REA but is now in the process of preparing for a loan application as part of the financing of its part ownership in nuclear plants and transmission lines.

The National Rural Utilities Cooperative Finance Corporation (CFC) has been established by rural electric cooperatives nationwide to meet part of their constantly increasing capital financing needs. Allegheny is a member of CFC and is engaged in preliminary discussions toward obtaining part of its near-future financing from this source.

In recent years reliability councils have been established within the electric utility industry, pursuant to orders issued by the Federal Power Commission. Cooperatives and municipal utilities serve on boards or committees of these councils, thereby maintaining liaison with investor-owned bulk power suppliers on power planning and service reliability. Allegheny participates as an associate on the Mid-Atlantic Area Council Executive Board and as a member of the East Central Area Reliability Council Liaison Committee. An Allegheny staff member also represents Pennsylvania municipal utilities, under the aegis of the Pennsylvania Municipal Electric Association, on the reliability councils.

PENIISVLSNIII RORIIL ELECIRIC COOPERRTIUES Providing Low-Cost Dependable Electricity to 137,000 Member. Consumers in pennsylvania and New Jersey e Serving In 47 Counties e 150 Directors - 700 Employees e 22,000 Miles of Line e 1.4 Billion KWH's Purchased Annually RETT YORK e 137,000 Member-Owners e $ 128,000,000 Invested In Plant rs mroHvrrs COOP EBATffE.

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Registration No. 2-SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM S-7 't: CURtyl:S l tg E'>:CHAhGE CQ!tl'it!SSlGti REGISTRATION STATEMENT P~ECt:-IVED Under NQV]1 1977 THE SECURITIES ACT OF 1933 OFFICE OF RHPOPTS Jp~~~&t rp n T(p[ c;p;< q" vppg Pennsylvania Power 8t Light Company (Exact name of registrant as specNed in its charter)

Commonwealth of Pennsylvania 23-0959590 (State or other jurisdiction of incorporation or organization) (I. R. S. Employer Identification No.)

Two North Ninth Street, Allentown, Pennsylvania 18101 (Address of principal executive offices) (Ztp Code)

Registrant's telephone number, including area code: 215-821-5151 R; R. FORTUNE, Executive Vice President Financial

'wo North Ninth Street Allentown, Pennsylvania 18101 (Name and address of agent for service)

Copy to:

CHARLES A. READ, Esq.

Reid & Priest 40 Wall Street New York, N. Y. 10005 Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

CALCULATIONOF REGISTRATION FEE Proposed Amount unit'roposed maximum maximum Title of each class of securities to be registered to be registered offering price per aggregate offering price'mount of registration fee First Mortgage Bonds,  % Series due 2007 $ 100,000,000 102% $ 102,000,000 $ 20,400 For the purpose of calculating the registration fee only.

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accord-ance with Section 8(a).of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

PENNSYLVANIA POWER & LIGHT COMPANY Cross Reference Sheet for Prospectus Form S-7 Item No. Heading In Prospectus 1 ~ Cover Page of Prospectus 2 Purchasers 3 0 ~ Application of Proceeds Construction Program Financing 4..

5.. Construction Program Financing Business

. Electric Statistics Map Statement of Income Statement of Changes in Financial Position Statement of Earnings Relnvested 7

• 8.. Cover Page of Prospectus Description of Bonds 9..

10 o ~~ ~ ~

1 ~~~ ~ ~~~ i 0~ ~ Financial Statements Opinion of Independent Certified Public Accountants 12 Inside Front Cover of Prospectus

• Omitted from Prospectus as Item is inapplicable or answer is in the negative.

J',

PRELIMINARY PROSPECTUS DATED NOVEMBER 1 1E 1977 C I ED EO~~

$ 100,000,000

~ El LI EE L DC LI C Ol LI

~

EO OI~ D EO EO Pennsylvania Power & Light Company ED EII ED ED

~ D ED L

EO LI First Mortgage Bonds,  % Series due 2007 ED

~

~ Ck Interest payable June 1 and December 1 Due December 1, 2007 DLOD ~

ea ED EDZ CL The Bonds will be redeemable at any time at the applicable General and Special Redemption OI DL

~ tl LI ~ ~

Ell EO

~ D Prices set forth herein, with accrued interest to the date fixed for redemption, except that prior D

~

I CC Cl to December 1, 1982 no redemption may be made at the applicable General Redemption C-ED LI

~~%ED I EO PJ Price with or in anticipation of funds to be borrowed having an effective interest cost to the

'E LI Cl ~ EO EO Company of less than  % per annum. The initial General and Special Redemption Prices P l EE ED CE are  % and  %, respectively. See "Description of Bonds".

CD~ma ED Cl '

EEI EO.

~ D EII EII CD EO EII ~ EO LE ED ED I THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY Cl ED lO CL THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMIS-ED DL ED SION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROS-E~n

~ O II PECTUS. ANY REPRESENTATION TO THE CONTRARY IS.A CRIMINAL EII Cl ~ ~

OFFENSE.

40 EEI E

~ D EII ED

~O LI Etl EO

~ L cn R= This Prospectus is to be used in connection with the Public Invitation for Bids for the purchase of the EEI Bonds. The Invitation states that bids will be received by the Company at Morgan Guaranty Trust

>El EO Company of New York, Morgan Guaranty Hall, 28th floor, 15 Broad Street, New York, New York, up to ED ED O~ ~~ LEI 11:00 A.M., New York Time, on December 13, 1977; or such other time and date as may be fixed by the ED. ~~

ED EEI OI .ED ED CC Cn L

g Company as provided in the Statement of Terms and Conditions Relating to Bids, and that Company CL EII LI officers and counsel, representatives of independent certified public accountants and counsel for the CE LE prospective Purchasers will be available at Morgan Guaranty Trust Company of New York, Morgan

~ O~ ED~ Guaranty Hall, 28th floor, 15 Broad Street, New York, New York, on December 6, 1977 at 11:00 A.M.,

I ~.C OI LI 4CJ 3! New York Time, to review with prospective bidders the information with respect to the Company aJ AOI contained in the Registration Statement and the matters set forth in the Statement of Terms and Ol LI E/I ~ Conditions Relating to Bids.

~ C- E

~ El LE ED D,

~

ED l LE EO CC C

~ ED ED,OI

~ C EO LI

~D

~C LI En EII The date of this Prospectus is December, 1977.

IN CONNECTION WITH THIS OFFERING, THE PURCHASERS MAY OVER-ALLOTOR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAINTHE MARKET PRICE OF THE SECURITIES OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAII. IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

The Company is subject to the informational requirements of the Securities Exchange Act of 1934 and in accordance therewith files reports and other information with the Securities and Exchange Commission. Information concerning directors and officers, their remuneration and any material interest of such persons in transactions with the Company, as of particular dates, is disclosed in proxy statements distributed to stockholders of the Company and filed with the Commission. Such reports, proxy statements and other information can be inspected and copied at the offices of the Commission at Room 6101, 1100 L Street, N.W., Washington, D. C.; Room 1204, Everett McKinley Dirksen Building, 210 South

Dearborn Street,

Chicago, III.; Room 1100, Federal Building, 26 Federal Plaza, New York, N. Y.;

and Suite 1710, 10960 Wilshire Boulevard, Los Angeles, Calif. Copies of this material can also be obtained at prescribed rates from the Public Reference Section of the Commission at its principal office at 500 North Capitol Street, N.W., Washington, D. C. 20549. The Common Stock of the Company is listed on the New York and Philadelphia Stock Exchanges. Reports, proxy statements and other information concerning the Company can be inspected and copied at the respective offices of these exchanges at Room 401, 20 Broad Street, New York, N. Y., and at 17th Street and Stock Exchange Place, Philadelphia, Pennsylvania. In addition, reports, proxy statements and other information concerning the Company can be inspected at the offices of the Company, Two North Ninth Street,

'llentown, Pennsylvania.

No dealer, salesman or other person has been authorized to give any information or to make any representation not contained in this Prospectus in connection with the offer made by this Prospectus and, if given or made, such information or representation must not be relied upon as having been authorized by the Company. This Prospectus Is not an offer to sell or a solicitation of an offer to buy in any jurisdiction in which it is unlawful to make such an offer or solicitation. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the date hereof.

TABLE OF CONTENTS Page Page Prospectus Summary 3 Business .. 19 The Company. 4 Electric Statistics . 30 Problems Affecting the Electric Utility Description of Bonds 31 Industry and the Company .................... 4 Experts. 35 Application of Proceeds............................ 5 Legal Opinions. 35 Construction Program. 5 Opinion of Independent Certified Public Financing. 7 Accountants. 35 Rate Matters. 8 Financial Statements 36 Statement of Income. 10 Purchasers 55 Management's Discussion and Analysis Map. Back of the Statement of Income ................... 14 Cover Capital Structure .. 18

PROSPECTUS

SUMMARY

The following material is qualified in its entirety by the detailed information and financial statements appearing elsewhere in this Prospectus.

THE OFFERING Security Offered ..............~............ First Mortgage Bonds Principal Amount............... $ 100,000,000 Interest Payment Dates ....................... June 1 and December 1 Maturity.................................. December 1, 2007 Limitation on Redemption ................... Non-redeemable prior to December 1, 1982 through certain refunding operations Use of Proceeds............... General corporate purposes including the reduction of short-term debt incurred to (a) retire maturing long-term debt and (b) provide interim financing for construction expenditures THE COMPANY Business. The Company derives about 99% of its operating revenues from electric service Service Area Approximately 10,000 square miles in central east-ern Pennsylvania with a population of 2.4 million people Sources of Generation during Coal ........................... 81%

the twelve months ended Oil 17 September 30, 1977 Hydro........................ ~ 2 100%

FINANCIALINFORMATION Year Twelve Months Ended Ended December 31, September 30, 1976 1977 Operating Revenues (thousands).

Net income Before Dividends on Preferred and Preference

$ 644,147 $ 735,277 Stock (thousands). $ 112,111 ~

$ 145,815 Earnings Applicable to Common Stock (thousands)............... $ 78,743 $ 109,529 Earnings Per Share.. $ 2.68 $ 3.37 Ratio of Earnings to Fixed Charges Actual. 2.53 3.19 Pro Forma .......

~

Utility Plant, Net at end of period (thousands) ..................... $ 2,380,109 2.86

$ 2,607,919 As of September 30, 1977 Actual As Adjusted(1)

Capitalization (thousands)

Long-Term Debt (including current matu-rities).. $ 1,161,532 $ 'I,261,532 48 7%

Preferred and Preference Stock .................... 437,375 487,375 18.8 Common Equity. 839,388 841,669 32.5 Total $ 2,438,295 $ 2,590,576 100 0%

(1) As adjusted to give effect to (i) $ 2,528,000 of Common Stock issued ln October 1977 in accordance with the Company's Employee Stock Ownership Plan, (il) the sale of $ 50,000,000 of 8%

Series Preferred Stock in October 1977 and (lii) the sale of the Bonds.

l I

THE COMPANY The Company is an operating utility, incorporated under the laws of the Commonwealth of Pennsylvania in 1920. The Company's general offices are located at Two North Ninth Street, Allentown, Pennsylvania 18101, and its telephone number is 215-821-5151. The property of the Company is located in Pennsylvania (see Map), is well maintained and is in good operating condition.

The Company derives about 99/o of its operating revenues from supplying electric service, and the balance from supplying steam for heating and other purposes in the city of Harrisburg. The Company serves a 10,000 square mile territory in 29 counties of central eastern Pennsylvania (see Map), with a population of approximately 2,400,000 persons. This service area has a high percentage of open land as well as 111 communities with populations over 5,000, the largest of which are the cities of Allentown, Bethlehem, Harrisburg, Hazleton, Lancaster, Scranton, Wilkes-Barre and Williamsport. Important industrial, recreational and agricultural sections are linked to the eastern population centers by an extensive limited-access highway system.

Hershey Electric Company, a subsidiary of the Company, provides electric distribution service to approximately 5,700 customers in Hershey, Pennsylvania.

PROBLEMS AFFECTING THE ELECTRIC UTILITYINDUSTRY AND THE COMPANY The electric utility industry in general has been experiencing problems of (a) increasing costs of fuel, wages, materials and equipment, (b) substantially increased capital outlays and longer construction periods for larger and more complex new generating units, (c) uncertainties in predicting future load requirements, (d) increased financing requirements coupled with periodically uncertain availability of both equity and borrowed capital, (e) past and prospective sales of common stock below book value, (f) fuel availability, (g) increased construction costs and delays and operating restrictions due to environmental requirements, (h) the effectiveness of energy conservation efforts and the impact of fluctuating economic conditions, (i) litigation and proposed legislation which may have the effect of delaying or preventing construction of nuclear generating and other facilities or limiting the use of existing facilities,'nd (j) regulatory lag in granting needed rate increases and the inadequacy of such increases when granted.

The Company also has been experiencing similar problems in varying degrees. For information regarding the effect on the Company of certain of these general problems, see "CONSTRUCTION PROGRAM",

"FINANCING", "RATE MATTERS", "STATEMENT OF INCOME", "MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE STATEMENT OF INCOME", "BUSINESS" and "ELECTRIC STATISTICS".

Congress currently is considering legislation designed to achieve energy conservation through the application of various regulatory and tax measures and to encourage the development and use of relatively abundant domestic fuels primarily coal. In addition, consideration is being given to provisions which would require state utility commissions to adopt and enforce Federal rate standards. The Company is unable to predict what measures, if any, will be enacted or what effects any measures enacted will have on the Company.

Reference is made to "BUSINESS Fuel Supply (Coal)" for information concerning (1) the write-off of certain development costs by The Oneida Mining Company, one of the Company's affiliated mines, and the pricing of coal produced by Oneida for fuel adjustment clause purposes, which reduced the Company's net income by approximately $ 6.6 million and $ 3.6 million, respectively, for the" twelve months ended September 30, 1977 and (2) the possibility of future losses if present mining plans for Oneida prove not to be economically feasible.

APPLICATION OF PROCEEDS The net proceeds from the sale of the First Mortgage Bonds offered hereby (the Bonds) will be added to the Company's general funds and used for general corporate purposes including the reduction of short-term debt incurred to (a) retire $ 20.5 million of maturing long-term debt and (b) provide interim financing for construction expenditures.

CONSTRUCTION PROGRAM The Company's construction program is under continuing review and is revised from time to time to reflect changes in customer. demand, business conditions, the cost and availability of capital and other factors. Actual construction expenditures and dates of completion for various construction projects may vary because of changes in the Company's plans, cost fluctuations, the availability of labor, materials and equipment, environmental regulations, licensing delays and other factors.

The following tabulation shows actual construction and nuclear fuel expenditures for 1976 and the Company's current estimate of these expenditures for the three years 1977-1979 including provision for the Allowance for funds used during construction (Allowance).

1976 1977 1979 1979 Millions of Dollars Construction costs:

New generating equipment ................... $ 295 $ 243 $ 340 $ 294 Transmission and distribution facilities.. 80 92 103 119 Other 19 21 38 47 Total construction costs.... 394 356 481 460 Nuclear fuel in process.. 14 14 4 40 Total. $ 408 $ 370 $ 485 $ 500

• 280.7 million

$ expended through September 30, 1977.

Estimated construction costs for the three years 1977-1979 include $ 97 million for environmental protection. See "BUSINESS-Environmental Matters" for information concerning possible additional capital requirements.

The Company's estimate of construction and nuclear fuel expenditures during the period 1977-1979 has been reduced to reflect the expected sale of a 10/o undivided'ownership interest in the Susquehanna nuclear units to Allegheny Electric Cooperative, Inc. (Allegheny). Pursuant to agreements with Allegheny, this sale is expected to be effected as soon as practicable following the receipt of necessary approvals from the Nuclear Regulatory Commission (NRC) and the Rural Electrification Administration (REA). The proposed sale was approved by the Pennsylvania Public Utility Commission (PUC) in August 1977.

Pending the receipt of the required approvals, Allegheny made an initial payment to the Company of $ 65 million in March 1977 and became obligated to pay currently 10'/o of the subsequent construction and nuclear fuel expenditures for the Susquehanna units. Through September 30, 1977 Allegheny's payments to the Company approximated $ 79 million. In the event that the NRC and REA approvals are not obtained by March 16, 1978, Allegheny's investment in the Susquehanna units is required to be refunded.

Construction of the Susquehanna units is proceeding under NRC construction permits issued in November 1973. At September 30, 1977, construction of Unit No. 1 was about 53/o completed and Unit No. 2 was about 36/o completed. An operating license from the NRC will be required prior to the start-up and testing of each unit. Changes in design necessary to meet NRC requirements, delays in delivery of material and equipment, scarcity of labor, environmental regulations and other factors have resulted in failures to meet certain construction schedule milestones and have created a high probability that the currently scheduled in-service dates for the Susquehanna units 1980 and 1982 will not be achieved.

Unless construction progress improves significantly and the required licenses and regulatory approvals are obtained on a timely basis, the in-service dates for each of the units will be delayed. However, pending an evaluation of future construction progress, the Company is maintaining the current in-service schedule.

The estimated total net capability of each of the Susquehanna units is 1,050,000 kilowatts. Giving effect to Allegheny's expected ownership of 10/o of the Susquehanna units, the Company's share of the estimated total net capability of each of the units will be 945,000 kilowatts and its share of the estimated construction expenditures for the units (excluding nuclear fuel) is currently estimated at $ 1.64 billion. The Company estimates that a one-year delay of the in-service dates of the Susquehanna units would increase the Company's share of the cost of these units by about $ 200 million.

The United States District Court for the Western District of North Carolina has held that the provisions of the Price-Anderson Act limiting liability of the owners of nuclear power plants, and of the contractors and suppliers for such plants, to the amounts of available insurance and governmental indemnity are unconstitutional as violating the due process and equal protection clauses of the United.

States Constitution. The United States Supreme Court has granted review of the District Court decision.

If the Supreme Court affirms the decision, the limitation of liability would not be available to the Company.

Although the full impact of a decision by the Supreme Court cannot be evaluated at this time, the Company does not expect to change its plans to complete the construction of and to operate the Susquehanna units. Recent amendments to the Price-Anderson Act, which are also the subject of this litigation, provide that all owners of nuclear reactors may be assessed up to $ 5 million per operating reactor for each nuclear incident occurring at any reactor in the United States with a limit of two assessments per year. Giving effect to the Company's expected 90/o ownership of the Susquehanna units, the Company's maximum exposure under the Price-Anderson Act when both Susquehanna units have been placed in commercial operation is not expected to exceed $ 18 million per year.

FINANCING The financing of its construction program requires the Company to engage in frequent sales of securities, including debt and preferred, preference and common stocks. Interim financing is obtained from bank borrowings and the sale of commercial paper.

The Company's 1977-1979 construction and nuclear fuel expenditures are currently estimated at

$ 1.36 billion. Approximately two-thirds of this amount is expected to be obtained from outside financing with the balance to be provided from internal sources. The estimates of construction and nuclear fuel expenditures and internal funds sources both include the Allowance. In addition, about $ 25 million of maturing long-term debt obligations and $ 14 million of preferred and preference stock sinking fund requirements are planned-to be met during 1977-1979 by sales of securities.

In addition to the $ 100 million expected to be raised by the sale of the Bonds, during 1977 the Company obtained $ 67 million through the sale of 3.2 million shares of Common Stock and $ 50 million through the sale of 500,000 shares of Series Preferred Stock. Through September 30, 1977 the Company has obtained $ 13.2 million through sales of Common Stock under its Dividend Reinvestment Plan.

The exact amount, nature and timing of future sales of securities will of necessity'be determined In the light of market conditions and other factors.

The mortgage indenture under which the Company's first mortgage bonds are issued contains certain provisions, principally earnings coverage and property additions tests, limiting the issuance of additional bonds. See "DESCRIPTION OF BONDS." The Company estimates that application of these restrictions, of which the availability of property additions is presently the most limiting, would have permitted the Company, as of September 30, 1977, after giving effect to the proposed sale of a 10/o undivided interest in Susquehanna to Allegheny and the sale of the Bonds, to issue about $ 396 million principal amount of bonds. This amount exceeds the principal amount of bonds that the Company expects to issue through 1979.

The Com'pany's charter contains provisions limiting the issuance of additional shares of Preferred Stock. The more restrictive of these provisions requires Income Before Interest Charges (gross income) of not less than 1.5 times the sum of the annualized interest requirements on indebtedness to be outstanding and the dividend requirements on Preferred Stock to be outstanding. Effective January 1, 1977, the Federal Power Commission, now the Federal Energy Regulatory Commission (FERC), revised the accounting treatment for the Allowance. See Note (e) to the "STATEMENT OF INCOME." The change in the method of recording the Allowance may have the effect of reducing to an extent not now determined the amount of Preferred Stock which the Company can issue but, based on the Company's earnings for the twelve months ended September 30, 1977 and after giving effect to the sale of $ 50 million of Series Preferred Stock in October 1977 and the sale of the Bonds (8th /0 interest rate assumed),

the method of recording the Allowance would not limit the amount of Preferred Stock which the Company plans to issue during 1978. There are no charter provisions limiting the issuance of Preference Stock.

RATE MATTERS Sales to ultimate customers, which are regulated by the PUC, accounted for approximately 98'/o of the Company's revenues from electric sales over the past five years. The remaining 2/o of revenues from electric sales, represented by sales to others for resale, are regulated by FERC as are interchange power sales, which are classified as a credit to operating expenses. The Company's PUC and FERC tariffs include fuel adjustment clauses. See, however, the discussion of the Company's Oneida mine under "BUSINESS Fuel Supply (Coal)" concerning the limited recovery of the cost of coal mined at Oneida.

PUC tariffs also include a tax surcharge to recover the cost of increased Pennsylvania taxes.

Since 1971 the Company has requested and the PUC has granted the following general increases in base rate charges for electric service expressed as percentages of annualized revenues ln the test year used for the final PUC order in each proceeding. Annualized revenues consist of revenues derived from base rates, fuel adjustment clauses and the tax surcharge.

Increase Granted Request o/o Increase Test Year Increase'ffective Filed Requested (Twelve Months Ended) 4-Millions 4/e March 1971 15.2 December 31, 1970 May 1971 $ 12.1 4.4 March 1972 17.1 6.2

$ 29.2 10.6 April 1973 11.4 April 30, 1973 June 1973 $ 9.4 2.6 January 1974 19.1 5.2

$ 28.5 7.8 March 1975 14.6 July 31, 1975 September 1975 $ 21.0 3.9 April 1976 20.0 3.7 August 1976 37.3 7.0

$ 78.3 14.6 A complainant in the Company's March 1975 rate proceeding appealed the August 1976 decision of the PUC granting the 14.6/0 increase requested by the Company. This appeal, which was denied by the Commonwealth Court of Pennsylvania, raised objections regarding, among other things, the existence and amount of differences in rates between certain of the classes of services provided by the Company.

This appeal did not question the PUC's August 1976 decision with respect to measures of value, level of revenues or rate of return. The complainant has filed a petition with the Supreme Court of Pennsylvania requesting a review of the action taken by the Commonwealth Court.

A rate increase aggregating approximately $ 1 million annually for the Company's fifteen resale customers was permitted by FERC to become effective, subject to refund, in November 1976. Certain of the affected customers who were opposing the increase have entered into a settlement agreement with the Company. A request for approval of this agreement is presently pending before FERC.

In a proceeding affecting all Pennsylvania electric utilities, the PUC in May 1975 instituted an investigation into fuel adjustment clauses. At the commencement of this investigation the PUC proposed for consideration, among other things, (1) a limitation on the recovery of increased fuel costs to less than 100'lo, (2) the inclusion of nuclear fuel costs in the formula, (3) a revision in the method of calculating the fuel costs as they relate to interchange power purchases and sales and (4) the use of a 12-month period for determining the current cost of fuel.

In a separate proceeding affecting all large Pennsylvania electric utilities, the PUC in October 1977 announced that although it was not "at this point opening a formal proposed rulemaking proceeding", it has begun consideration of a proposal to replace fuel adjustment clauses with a levelized energy cost rate. Under the PUC's proposal, each utility's energy cost rate would include all (1) fossil fuel costs, (2) purchased power energy costs, (3) net interchange energy sales and purchases and (4) nuclear fuel costs. A utility's energy cost rate would be set prospectively, utilizing adjusted historical data, and is intended to remain stable over a twelve month period approved by the PUC. In the event of unusual circumstances during a twelve month period, a utility would have an opportunity to petition the PUC to revise its energy cost rate. The proposal contemplates that if the energy costs actually incurred exceed costs specified in the utility's energy cost rate, the full amount of excess costs may not be recoverable by the utility. In the event of an over-recovery of energy costs, the utility would be required to refund a portion of the excess to customers. The proposal states that accumulated deferred fuel costs under the present fuel adjustment clauses would be recoverable over a period prescribed by the PUC.

The Company is unable to predict the ultimate results of either of these proceedings.

Amendments to the Pennsylvania Public Utility Law, generally effective in October 1977, have altered the PUC's rate-making procedures. Among other things, the amendments shorten the period during which the PUC must act on a filing of a general rate inciease from eleven months to nine months.

Interim rate relief during the pendency of a general rate increase request will not be permitted except under conditions of financial emergency. The new provisions permit the use of future projected rather than historical test years as the basis for rate increases. The amendments also prescribe certain changes in PUC procedures for voting on rate increase applications, and create the office of Administrative Law Judge to conduct hearings and submit recommendations to the PUC.

STATEMENT OF INCOME The following Statement of Income for the five years ended December 31, 1976 has been examined by Haskins 8 Sells, independent Certified Public Accountants, whose opinion appears elsewhere in this Prospectus. The Statement for the twelve months ended September 30, 1977 has not been audited but in the opinion of. the Company includes all adjustments (which comprise only normal recurring accruals except for the write-off of certain development costs by one of the Company's subsidiaries described in note (c))

necessary for a fair presentation of the results of operations for that period. The Statement should be

'onsidered in conjunction with its notes and the other financial statements and related notes appearing elsewhere in this Prospectus.

12 Months Year Ended December 31, Ended Sept. 30, 1977 1972 1973 1974 1975 1978 (Unaudited)

Thousands of Dollars Operating Revenues (99/0 Electric)(a).......................... $ 345,792 $ 384,814 $ 472,036 $ 544,129 $ 644,147 $ 735,277 Operating Expenses Cost of energy Fuel(bxc). 95,220 125.577 192,353 271,636 321,783 412,940 Power purchases. , 13,514 15,299 24,176 37,698 29,657 43,220 Interchange power sales................................ (34,569) (70,175) (108,723) (172,823) (160,163) (279,618)

Net cost of energy.................................. 74,165 70,701 107,806 136,511 191,277 176,542 Other operation ...............'................................... 61,633 69,007 80,565 92,186 103,758 109,382 Maintenance.. 33,099 33,648 41,298 47,956 54,946 59,074 Deprechtlon .. 41,446 48,837 52,399 58,540 62,478 66,390 tncome taxes(d) .. 26,086 33,943 39,211 47,298 43,828 85,345

~ Taxes, other than income(d) ................................. 25,658 30,005 35.571 40,669 49,526 57,974 Total operating expenses ....................... 262,087 286,141 356,850 423,160 505,813 554,707 Operating Income. 83,705 98,673 115,186 120,969 138,334 180,570 Other Income and Deductions Allowance for funds used during construction(e)

All funds(prior to January 1, 1977) ................ 14,647 14,967 20,732 36,605 45,192 13,839 Equity funds (since January 1, 1977) ............. 16,404 Income tax credits(d)(e) ..

Other net(c) .

334

'305) 91 1,300 5,076 3,418 11,201 3,154 14,457 1,381 14,579 (4,443)

Total other income and deductions ........ 14,676 16,358 . '29,226 50,960 61,030 40,379 Income Before Interest Charges................................... 98.381 115,031 144,412 171,929 199,364 220,949 Interest Charges Long-term debt 36,507 '3,203 51,149 67,932 79,783 88,671(f)

Short-term debt and other .................................... 3,953 4,916 9,946 6,456 7,470 6,138 Allowance for borrowed funds used during con-struction (since January 1 1977)(e)...................

~

(19,675)

Net Interest charges ............................... 40.460 48,119 61,095 74,388 87,253 75,134 Income Before Nonrecurring Credit ............................. 57,921 66,912 83,317 97,541 112,111 145,815 Nonrecurring Credit Related to Accounting Change, Net of Income Taxes ($ 4,831)(b) .............................. 4,162 Net Income Before Dividends on Preferred and Preference Stock 57,921 66,912 87,479 97,541 112,111 145,815 Dividends on Preferred and Preference Stock.............. 14,526 17,191 19,656 24,509 33,368 36,286(g)

Earnings Appllcab'le to Common Stock........................ $ 43.395 $ 49,721 $ 67,823 $ 73,032 $ 78,743 $ 109,529 Earnings Per Share of Common Stock Before Nonrecurring Credit................................... $ 2.48 $ 2.57 $2.88 $ 2.87 $ 2.68 $ 3.37 Nonrecurring Credit(b). 0.19 Earnings Per Share of Common Stock........... $ 2.48 $2.57 $ 3.07 $ 2.87 $ 2.68 $3.37 Average Number of Common Shares Outstanding (Thousands). 17,513 19,359 22,067 25,459 29,367 32,504 Dividends Declared Per Share of Common Stock ........ $ 1.64 $ 1.68 $ 1.77 $ 1.80 $ 1.80 $ 1.86 Ratio of Earnings to Fixed Charges(h)

Actual............. 2.89 2.89 2.88 2.65 2.53 3.19 Pro Forma .. 2.86 Supplemental Ratio of Earnings to Fixed Charges(h)

Actual.. 2.74 2.70 2.65 2.44 2.25 2.79 Pro Forma 2.54 10

(a) Reference is made to "RATE MATTERS" for additional information concerning fuel adjustment clauses, a Pennsylvania Public Utility Commission (PUC) order proposing to replace the fuel adjustment clause with a levelized energy cost rate and a summary of the Company's rate proceedings.

(b) Effective January 1, 1974, the Company, as authorized by the PUC, changed its method of accounting for fuel costs to achieve matching of fuel expense and revenues by accounting periods. This change resulted in the charge to income for fuel costs recoverable in the future being deferred to the periods in which these costs are billed to customers through application of fuel adjustment clauses. For 1974, fuel costs were lower by a net amount of $ 26.6 million and, after income tax effects, Earnings Applicable to Common Stock were increased by $ 12.6 million ($ 0.57 per share) as a result of this accounting change.

The Nonrecurring Credit shown on the Statement of Income represents the cumulative effect to December 31, 1973 of the change in accounting for fuel costs, net of related income taxes.

In the following summary, earnings "As Reported" includes the Nonrecurring Credit recorded in 1974, and earnings "Restated" reflects the effect of retroactive application of the change in accounting for fuel costs and related income tax effects had the new method been used since the principal fuel adjustment clause became effective:

1972 1979 1974 Earnings Applicable to Common Stock (thousands of dollars)

As Reported. $ 43,395 $ 49,721 $ 67,823 Restated .. 43,161 51,066 63,661 Earnings Per Share of Common Stock ($ )

As Reported.

Restated.

$ 2.48 2.46

$ 2.57 2.64 '.88

$ 3.07 (P) Based on average number of shares outstanding.

(c) Reference is made to "BUSINESS Fuel Supply (Coal)" for information concerning operations of one of the Company's subsidiaries, The Oneida Mining Company (Oneida), related to (1) the write-off of certain development costs reflected in Other income-net and the pricing of coal produced by Oneida for fuel adjustment clause purposes reflected in fuel costs; which reduced the Company's net income by approximately $ 6.6 million and $ 3.6 million, respectively, for the twelve months ended September 30, 1977 and (2) the possibility of future losses if present mining plans prove not to be economically feasible.,

(d) Reference is made to Note 10 to Financial Statements for information relating to taxes.

(e) In accordance with applicable regulatory accounting procedures, the cost of funds used to finance construction work in progress is capitalized as part of construction cost and when the construction work is placed in service, the Company is permitted to include in rates charged for utility service a return on, and depreciation of, the cost of funds so capitalized. The components of Allowance for funds used during construction (Allowance) shown on the Statement of Income are non-cash items equal to the cost of funds capitalized during the period and serve to offset on the Statement of Income the effect of the cost of financing construction work in progress.

Since February 1, 1974, in accordance with procedures prescribed by the PUC, the Allowance rate has been computed on an after-tax basis and income tax reductions associated with the interest (borrowed funds) component of the Allowance have been reflected in Income tax credits under Other 11

I 4

Income and Deductions with a corresponding increase in the provision for income taxes charged to Operating Expenses. During the period February 1, 1974 through December 31, 1976, the Allowance rate was computed semi-annually using a specified rate for common equity and the cost of fixed rate securities issued in the twelve months preceding the semi-annual computation.

Effective as of January 1, 1977, the Company has used a rate of 7.4/o which was computed in accordance with a 1977 Federal Energy Regulatory Commission (FERC) order which (1) provides a formula for determining the maximum Allowance rate, (2) provides for semi-annual compounding and (3) provides for segregating the Allowance into two components, borrowed funds and other (equity) funds.

The gross borrowed funds component recorded since January 1, 1977 is included as a credit in the Interest Charges section of the Statement of Income and the remainder of the total Allowance recorded is shown under Other Income and Deductions as Equity funds. The Company has not reclassified the Allowance into borrowed funds and equity funds components prior to January 1, 1977 since the allocation would not be comparable to that required under the FERC formula.

Prior to January 1, 1977, the method used did not provide for direct compounding and the Company computed the Allowance by applying the rate to a construction work in progress base which did not include the accumulated Allowance which had previously been recorded. However, an equivalent rate can be calculated for the period 1972-1976 by relating the amount of Allowance recorded during the period to the balances of the construction work in progress including the related accumulated Allowance.

The Company's Allowance rate and the equivalent rate for the period 1972-1976 are as follows:

. Equivalent Allowance Rate Rate January 1, 1972 December 31, 1972.... 8.0 /o 7.4/o January1,1973 January31,1974....... 8.5 7.9 February 1, 1974 June 30, 1974........... 7.5 7.0 July 1, 1974 December 31, 1974.......... 8.0 7.3 January1,1975 December31,1975.... 9.25 8.3 January 1, 1976 December 31, 1976.... 8.75 7.9 Based on the assumption that funds required for construction financing were provided substantially in the same proportion as the Company's average capitalization ratios over the five-year period ended December 31, 1976 (51/o debt, 18/o preferred and preference stock and 31'/0 common stock equity) and using an after-tax cost of debt since February 1, 1974, the portion of the Allowance attributable to funds provided by common equity as a percentage of Earnings Applicable to Common Stock for the years 1972-1976 would be approximately as follows:

1972 10/0 1973.i.. 11 1974. 16 1975. 21 1976. 27 Based on these same assumptions, the Company estimates that the common equity component of the Allowance recorded in the period October December 1976 would be approximately 25/o of the

$ 26.1 million Earnings Applicable to Common Stock for the same period.

12

~J E

The Company understands that an issue has been raised in litigation to which it is not a party relating 'o the Allowance as reported by another public utility. In this litigation, it is alleged that actual earnings were not properly presented in that the Allowance was included as "Other Income" without an adequate explanation of this Item, and that the Allowance is not in fact income as generally understood, but rather a projection of future earnings not reflecting. any actual yield on assets or any revenue during any fiscal period and not in fact earned upon completion of'construction. The Allowance, which is not an item of current cash income, is included in the financial statements of the Company in accordance with the applicable regulatory system of accounts and in accordance with generally accepted accounting principles. The Company is unable to predict the outcome of this litigation or its effect, if any, upon the Company.

(f) The annual interest requirements on long-term debt outstanding at September 30, 1977, including the amount due within one year, are $ 90,975,000 and on the Bonds will be $

(g) The annual dividend requirements on Preferred and Preference Stock outstanding at September 30, 1977 are $ 20,323,000 and $ 19,870,000, respectively, including the annual dividend requirements on 500,000 shares of 8% Series Preferred Stock issued on October 19, 1977.

(h) "Earnings" used to compute this ratio consist of net income (1974 includes $ 4,162,000 nonrecurring credit), excluding the undistributed income or loss of unconsolidated subsidiaries and other associated companies, pIus fixed charges and income taxes (including deferred income taxes and investment tax credits-net). "Fixed Charges" consist of interest charges (excluding the allowance for borrowed funds) and the estimated interest component of major lease rentais and one-third of ail other rents.

The pro forma ratio of earnings to fixed charges for the twelve months ended September 30, 1977 reflects earnings as defined above and (1) annual interest charges on the long-term debt outstanding as of September 30, 1977 and the Bonds (8V~% interest rate assumed for the Bonds), (2) annual interest charges on $ 95 million of average short-term debt (commercial paper at an assumed rate of 67~%)

assumed to be outstanding during the twelve months ended September 30, 1978, based on the average short-term debt outstanding during the twelve months ended September 30, 1977 (excluding short-term debt incurred on July 1, 1977 to retire $ 20 million of bonds, and to be repaid from the sale of the Bonds),

and (3) the interest component of rentals for the twelve months ended September 30, 1977. A change of

.10% in the interest rate of the Bonds would result in a change of approximately .003 in the pro forma ratio.

The supplemental ratios of earnings to fixed charges include, in addition to the items defined above, the applicable undistributed income or loss and fixed charges of unconsolidated subsidiaries and other associated companies.

Excluding the $ 4,162,000 nonrecurring credit from income, the 1974 ratio would be 2.75 and the supplemental ratio would be 2.53.

13

MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE STATEMENT OF INCOME The Statement of Income reflects the results of past operations and is not Intended as any representation as to the results of operations for any future period. Future operating results will necessarily be affected by various and diverse factors and developments, including the obtaining of adequate and timely rate increases, business activity, customer demand, energy conservation, Inter-change power sales, taxes, labor contracts, fuel costs, availability of capital, governmental actions, environmental expenditures and other matters. The Company is unable to predict the combined effect of the above factors on its future operating results.

The Company's earnings improvement for the twelve months ended September 30, 1977 was due principally to sharply increased electric sales at higher prices to interconnected utilities and to increased electric sales at higher rates to customers, as more fully discussed below.

The following analysis of the Company's financial performance explains the reasons for changes in specific items on the Statement of Income comparing the years 1975 to 1974, 1976 to 1975 and the.

twelve months ended September 30, 1977 to the year 1976.

Energy Sales and Operating Revenues The change in operating revenues from the prior period is attributable to the following:

Increase (Decrease) 1975 1978 1977(a)

INllllons of Dollars Electric revenues Quantity of sales to:

Ultimate customers................ $ 12.8 $ 19.3 $ 17.5 Others for resale.................... (6.0) 0.3 0.2 Rate increases. 7.4 40.4 36.2 Fuel adjustment clauses ............... 55.3 33.8 29.1 Other (including tax surcharge)..... 1.6 7.3 8.1 71.1 101.1 91.1 Steam revenues.. 1.0 (1.1)

Total.. $ 72.1 $ 100.0 $ 91.1 (a) Twelve months ended September 30.

The Company's total electric energy sales increased less than 1/o in 1975, principally reflecting the economic recession, energy conservation and the expiration of contract sales to a neighboring utility.

Energy sales increased 6.5'/o in 1976 reflecting an improvement in the economy and industrial activity in the Company's service area. For the twelve months ended September 30, 1977, energy sales increased 4.4/o over 1976, which was partially attributable to the more extreme weather conditions in the first nine months of 1977 compared to the milder than normal weather experienced in the same period during 1976.

Rate increases affecting ultimate customers became effective in January 1974 ($ 19.1 million annually), September 1975 ($ 21.0 million annually), April 1976 ($ 20.0 million annually) and August 1976,

($ 37.3 million annually).

14

II F

P

The Company's tariffs include fuel adjustment clauses which adjust prices for electric service for variations in the cost of fuel used to generate electricity. See, however, the discussion of the Company's Oneida mine under "BUSINESS Fuel Supply (Coal)" concerning the limited recovery of increases in the cost of coal mined at Oneida. Revenues from the fuel adjustment clauses totaled $ 134.5 million in 1975, $ 168.3 million in 1976 and $ 197.4 million for the twelve months ended September 30, 1977, reflecting the increased level of fuel costs and additional energy sales.

Reference is made to "RATE MATTERS" for information concerning general rate increases granted the Company and a Pennsylvania Public Utility Commission (PUC) order proposing to replace the fuel adjustment clause with a levelized energy cost rate.

Cost of Energy The net cost of energy includes fuel expense plus power purchases less power sold to other utilities.

Included in power purchases is the value of electricity generated during the test period of the Company's new generating units.

Fuel. Fuel expense as shown on the Statement of Income includes the following:

1974 1975 197B 1977(a)

Millions of Dollars Cost of fuel consumed Electric. $ 215.2 $ 269.2 $ 323.1 $ 414.8 Steam heat. 3.8 4.0 3.2 3.2 Total cost of fuel consumed ................... 219.0 273.2 326.3 418.0 Less increase in fuel costs deferred to match revenues from fuel adjustment clauses.............. 26.6 1.6 4.5 5.1 Total fuel expense. $ 192.4 $ 271.6 $ 321.8 $ 412.9 (a) Twelve months ended September 30.

The change from the prior period in the total cost of fuel consumed, shown in the preceding schedule, is attributable to the following:

Increase (Decrease) 1975 1975 1977(a)

Millions of Dollars Electric Quantity of electricity generated ..... $ 13.3 $ 17.9 $ 44.5 Average cost of fuels burned .......... 40.7 36.0 47.2 54.0 53.9 91.7 Steam heat. 0.2 (0.8)

Total. $ 54.2 $ 53.1 $ 91.7 (a) Twelve months ended September 30.

The cost of fuel consumed increased during the periods compared as a result of greater generation of energy and increases in the cost of fuels purchased. The quantity of energy generated during 1975 increased due to greater availability of coal-fired generating units and the Martins Creek No. 3 oil-fired generating unit which began commercial operation in October 1975. Increased generation during 1976 15

resulted primarily from a full year's operation of the Martins Creek No. 3 unit. In March 1977, the Martins Creek No. 4 oil-fired unit began commerical operation providing additional generating capability. See "ELECTRIC STATISTICS" for the detail of generation by fuel source. The average cost of fuels consumed increased during 1975, 1976 and the twelve months ended September 30, 1977 due to the combined effects of higher coal prices and the cost of oil consumed at the Martins Creek Units which have a cost per, kwh generated approximately twice that of the Company's coal-fired units. The average cost of fuel consumed per kwh generated was 0.88 cents in 1974, 1.04 cents in 1975, 1.17 cents in 1976 and 1.32 cents in the twelve months ended September 30, 1977.

The portion of the cost of fuel consumed which is recoverable through fuel adjustment clauses is deferred to the period in which such costs are billed to customers.

Interchange Power Sa/es. The total electric energy available for sale includes energy generated by the Company's plants and power purchased from others, after deducting Company uses and line losses.

During 1975, 1976 and the twelve months ended September 30, 1977, approximately 31/0, 29/o and 35/o, respectively, of the total electric energy available was sold to other utilities under interconnection arrangements. As required by both the PUC and FERC, such sales are not recorded as Operating Revenues but are credited to Operating Expenses on the Statement of Income.

The change in interchange power sales from the prior period is attributable to the following:

Increase (Decrease) 1975 1976 1977(a)

Millions of Dollars Quantity of energy sold. $ 47.2 $ (7.9) $ 61.1 Average price of energy sold . 18.4 (5.7) 55.9 Other (1.5) 0.9 2.5 Total. $ 64.1 $ (12.7) $ 119.5 (a) Twelve months ended September 30.

The quantity of interchange power sold increased during. 1975 due to greater availability of generating units, the addition of Martins Creek Unit No. 3, the absence of contractual sales to a neighboring utility and the Company's relatively favorable generating costs compared to those of other interconnected companies. During 1976, increased sales to customers reduced the quantity of power available at an economic price for sale to interconnected companies. The addition of Martins Creek Unit No. 4, extreme weather conditions and extended outages of m'ajor generating units of other inter-connected utilities resulted in sharply increased interchange sales during the twelve months ended September 30, 1977.

During 1976 there was a narrowing of the differential between the Company's cost of generating electricity and the price received for power sold on the interchange, which price reflects a splitting of the difference between the buyer's and the seller's costs of generation. The average price the Company received per kwh of interchange power sales was 1.76 cents ln 1974, 1.97 cents in 1975, 1.90 cents in 1976 and 2.39 cents in the twelve months ended September 30, 1977. These amounts were substantially in excess of the Company's average fuel costs.

Other Operation and Maintenance Expenses The increases in other operation and maintenance expenses such as wages and benefits, materials and supplies, rents and insurance principally reflect the effects of inflation and the costs of operation and maintenance of new facilities placed in service.

16

Depreciation Increased depreciation expense is due to new facilities placed in service, including Martins Creek Units Nos. 3 and 4 which began commercial operation in 1975 and 1977, respectively. For information concerning a reduction in the Company's composite depreciation rate as of January 1, 1976, see Note 5 to Financial Statements.

Taxes For an analysis of taxes see Note 10 to Financial Statements.

Allowance for Funds Used During Construction The Allowance for funds used during construction has increased substantially during the years being compared as a result of the Company's extensive construction program and the related carrying costs of securities issued to finance the construction expenditures. For additional information concerning the Allowance, see Note (e) to the "STATEMENT OF INCOME".

Other Income Net The reduction in Other income net during the twelve months ended September 30, 1977 reflects a

$ 6.6 million (net of income taxes) loss of a subsidiary, The Oneida Mining Company. For additional information see "BUSINESS Fuel Supply (Coal)".

Cost of Fixed Income Securities The changes from the prior period in interest charges on debt and in dividends on Preferred and Preference Stock were:

Increase (Decrease) 1979 197B 1977(a)

Millions of Dollars Interest Charges Long-term debt. $ 16.8 $ 11.9 $ 8.9 Short-term debt. (3.3) 0.9 (1.7)

Other. (0.2) 0.1 0.4 Dividends on Preferred and Preference Stock 4.9 8.9 2.9 (a) Twelve months ended September 30.

The increases in long-term debt interest charges and dividends on Preferred and Preference Stock were due to issuance of securities principally to finance the Company's construction program and the refinancing of maturing debt with securities bearing higher interest rates. During the period January 1, 1975 through September 30, 1977, outstanding long-term debt increased by $ 247 million and Preferred and Preference Stock increased by $ 141 miilion.

interest on bank loans and commercial paper notes varies from year to year due to the amount of short-term debt outstanding and the interest rates in effect. For additional information on short-term debt see Note 4 to Financial Statements.

17

CAPITAL STRUCTURE The capital structure of the Company at September 30, 1977 and as adjusted as of that date to give effect to (1) $ 2,528,000 of Common Stock issued on October 14, 1977 in accordance with the Company's Employee Stock Ownership Plan, (2) the sate of $ 50,000,000 of 8% Series Preferred Stock on October 19, 1977 and (3) the sale of the Bonds, is as follows (thousands of dollars):

Actual  % of As Adjusted  % of Amount Total Amount, Total Long-Term Debt(a)

First Mortgage Bonds 2 /4%-10'/a% outstanding ........."............. $ 1,145,000 $ 1,145,000 Bonds to be outstanding ........................ 100,000 Notes 20,430 20,430 Unamortized Discount and Premium Net.... (3,898) (3,898)(b)

Total long-term debt........................ 1, 'I 61,532 1,261,532 '8.7 Shareowners Investment(c)

Preferred and Series Preferred Stock (3.35%-9.24%).... 231,375 9.5 281,375 10.9 Preference Stock {$8.00-$ 13.00) .................. 206,000 8.5 206,000 7.9 Total preferred and preference stock oor ooor oro

~~~ ~ ~ ~ ~ ~ oo or oo

~ ~ ~~~ ~~~ 437,375 487,375 Common Stock. 575,458 577,986(d)

Capital Stock Expense. (10,428) (10,675)(e)

Earnings Reinvested ..... 274,358 274,358 Total common equity....................... 839,388 34.4 841,669 32.5 Total shareowners investment ......... 1,276,763 1,329,044 Total capitalization ... $ 2,438,295 100.0 $ 2,590,576 100.0 (a) See Notes 4 and 8 to Financial Statements for details concerning short-term and long-term debt.

Long-term debt at September 30, 1977 includes $ 3,676,000 due within one year classified as a current liability on the Balance Sheet. At November 10, 1977 there were no bank loans outstanding and $ 86.6 million of commercial paper notes outstanding at a weighted average discount rate of 6.5%. See Notes 12 and 15 to Financial Statements for information concerning leases and commitments and contingent liabilities.

(b) Based on assumed proceeds to the Company of 100% of the principal amount of the Bonds.

{c) See Note 6 to Financial Statements for details concerning capital stock.

(d) The adjusted amount does not include proceeds received subsequent to September 30, 1977 for Common Stock sold under the Company's dividend reinvestment plan.

(e) After adding estimated issuance expenses and placement fees applicable to 8% Series Preferred Stock sold on October 19, 1977.

18

k BUSINESS Revenues. During the twelve months ended September 30, 1977, about 40/0 of electric operating revenues came from residential customers, 28/0 from industrial customers, 27% from commercial customers and 5/0 from others. During the twelve months ended September 30, 1977, the Company's largest customer provided about 4.7/0 of electric operating revenues and the 26 largest industrial customers (each of whose billings exceeded $ 1 million) provided about 11.7%%d of such revenues.

Industrial customers are broadly distributed among industrial classifications.

Power Supply. During the twelve months ended September 30, 1977, the Company produced 32.5 billion kwh in plants owned by the Company and purchased 0.5 billion kwh under a firm purchase agreement. During this period the Company delivered 11.6 billion kwh and received 1.6 billion kwh as power pool interchange.

The Company's Martins Creek oil-fired Unit No. 4 (820,000 net kilowatt capability) was placed in service in March 1977. The Company's power capability (winter rating) at September 30, 1977 was as follows:

Net Kilowatt Plant Capability Coal-Fired Montour 1,515,000 Brunner Island . 1,454,000 Sunbury. 390,000, Martins Creek.. 300,000 Keystone.. 210,000(1)

Conemaugh .. 194,000(2)

Holtwood. 73,000 Total Coal-Fired .. 4,136,000 Oil-Fired Martins Creek.. 1,640,000 Combustion Turbines and Dlesels. 539,000 Hydro. 146,000 Total Generating Capability..... 6,461,000 Firm Purchases Hydro 76,000(3)

Total Capability.. 6,537,000 (1) Company's 12.34/0 undivided interest.

(2) Company's 11.39/0 undivided interest.

(3) From Safe Harbor Water Power Corporation.

See "BUSINESS Hydroelectric Projects".

Approximately 37/0 of the Company's generating capability at September 30, 1977 has been placed in service in the last five years and 69/o in the last ten years. The capability of generating units is based upon the operating experience and physical condition of the units and may be revised from time to time to reflect changed circumstances.

19

The maximum one-hour demand on the Company's system was 4,425,000 kw, which occurred on January 17, 1977. The Company estimates that it would have experienced a maximum one-hour demand of 4,514,000 kw on that date if a 5/0 voltage reduction had not been in effect to permit the Pennsylvania-New Jersey-Maryland Interconnection to supply emergency power to other power pools.

The maximum one-hour summer demand was 3,545,000 kw, which occurred on August 29, 1977. For" information concerning interchange power sales, see "MANAGEMENT'SDISCUSSION AND ANALYSIS OF THE STATEMENT OF INCOME" and "ELECTRIC STATISTICS".

Fuel Supply. During the twelve months ended September 30, 1977, 81/0 of the Company's energy generation came from coal-fired stations, 17/o from oil-fired stations and 2/0 from hydroelectric stations.

Coal. The following tabulation shows the amount of anthracite and bituminous coal burned by the Company's generating stations during the twelve months ended September 30, 1977, and the estimated requirements for coal over the remainder of the expected useful lives of the Company's generating stations.

Burned During TlNelve Months Estimated Ended Requirements September Over Plant Type of Fuel 30, 1977 Lives Millions of Tons Anthracite (including petroleum coke)..... 1.2 20.0 Bituminous Coal (1) 10.0 225.0 Total. 11.2 245.0 (1) Includes the Company's share of the bituminous coal for the jointly-owned Keystone and Conemaugh generating stations. See "BUSINESS Power Supply".

The Company's policy generally is to maintain a 45 to 60 day coal supply at its generating stations.

Since labor contracts between mine owners and the United Mine Workers of America expire on December 6, 1977, the Company, in anticipation of, possible strikes, is attempting to increase its coal inventory over normal levels. At September 30, 1977, based on estimated usage, the Company's coal inventory was sufficient for about 68 days of operations.

During the twelve months ended September 30, 1977, 39/0 of the Company's coal supply was obtained from subsidiary mining companies (approximately one-third-of which was purchased by those companies in the open market), 10% under long-term contracts and 51/0 by short-term contracts and open market purchases.

At September 30, 1977, the Company's inventory of anthracite was about 2.1 million tons. The balance of the Company's requirements for anthracite, as well as its requirements for petroleum coke, over the remainder of the expected useful lives of the Company's anthracite-fired generating stations is expected to be obtained by short-term contracts and open market purchases.

The following tabulation lists the bituminous coal reserves owned or controlled at September 30, 1977 by the Company's subsidiary, Pennsylvania Mines Corporation. These reserves, all of which are located in Pennsylvania, are recoverable by deep mining operations. The information under the headings "Estimated Recoverable Reserves as of January 1, 1976" and "Average /0 Sulfur (By Weight)" was 20

provided by Paul Weir Company Incorporated on the basis of its independent studies and the Company has included such information herein in reliance upon such studies. The Company has not retained any other independent organization to review and report on its bituminous coal reserves.

Estimated Recoverable Reserves 1977 Average as of Production '/o January 1, 1976 Through Sulfur (By 1976(1) Production September 30 Weight) (4)

Thousands of Tons Assigned Reserves(2)

Greenwich. 66,649 1,585 1,382 2.7 Oneida. 21,638 265 173 3.3 Rushton . 7,694 556 386 4.5 Tunnelton. 10,187 403 305 1.7 Total Assigned Reserves....... 106,168 2,809 2,246 Unassigned Reserves(3)

Greene Hill 159,877 2.9

, Greene Manor .............................. 162,682 3.3 Total Unassigned Reserves ... 322,559 Total ........................... ..

~ 428,727 2,809 2,246 (1) Includes only proven reserves for which tonnage is computed from dimensions revealed in outcrop data, mine workings and drill holes.

(2) Assigned reserves represent coal which can be mined on the basis of current mining practices and techniques through the use of mine openings and plant facilities currently in existence or under construction.

(3) Unassigned reserves represent undeveloped reserves or reserves that would require substantial additional mining facilities before operations could begin.

(4) Raw coal, dry basis (prior to cleaning).

Prior to 1976 the Company purchased a portion of its coal requirements from The Oneida Mining Company (Oneida), a subsidiary of The North American Coal Corporation (North American), under a long-term cost of production sales contract. In March 1976, in an effort to control the abnormally high cost of coal delivered to the Company from the Oneida mine, the Company asserted a contractual right to take over Oneida. Litigation with North American, which contested the Company's take-over, was settled in February 1977 on terms which gave the Company uncontested control over Oneida. With the conclusion of the litigation the Company was able to expand the scope of studies previously undertaken to determine what changes should be made in Oneida's mining operations. In September 1977, the Company adopted an interim plan which provides for the continuation of steam coal mining in certain sections of the Oneida mine and the write-off of a portion of the development costs incurred from 1970 through 1974 with respect to other sections of the Oneida mine which are being abandoned or bypassed because of poor mining conditions. This write-off, which will not be recovered through the application of the Company's fuel adjustment clauses, resulted in a $ 6.6 million reduction of the Company's net income

($ .20 per share of Common Stock) for the twelve months ended September 30, 1977.

21

Effective February 1, 1977 the Company began.to price Oneida coal for fuel adjustment clause calculation purposes at the average cost per ton of coal produced by the Company's other affiliated mines rather than at Oneida's higher cost. This action reduced the Company's net income by about $ 3.6 million ($ .11 per share of Common Stock) during the period from February through September 30, 1977.

The Company estimates that its net income will continue to be reduced by about $ 400,000 per month through mid-1978 when the Company expects to determine whether to continue to make additional investments for further development of the Oneida mine. In the event that the Company determines to make these investements, it is expected that the difference between the cost of Oneida coal and the average cost per ton of coal produced by the Company's other affiliated mines will be capitalized rather than being charged against the Company's current earnings. However, if adverse mining conditions prevent the further development of the Oneida mine, mining operations may be terminated and additional losses incurred. At September 30, 1977 and after giving effect to the September 1977 write-off, the aggregate capital investment in Oneida's facilities (including lease obligations) amounted to about $ 36 million, substantially all of which was guaranteed directly or indirectly by the Company.

The Company has a long-term contract with a bituminous coal supplier (Lady Jane) under which the supplier is obligated to deep-mine its reserves to exhaustion. Production at the Lady Jane mine amounted to 200,000 tons during the twelve months ended September 30, 1977. Run-of-mine coal from the Lady Jane mine has an average sulfur content of about 3.5/o.

The coal burned in the Company's generating stations contains both organic and pyritic sulfur.

Mechanical cleaning processes installed at the mines are being utilized to reduce the pyritic sulfur content of the coal. The reduction of the pyritic sulfur content has lowered the total sulfur content of the coal burned to levels which permit compliance with current sulfur dioxide emission regulations established by the Pennsylvania Department of Environmental Resources (DER). See "BUSINESS Environmental Matters". The regulations applicable to the Company's generating stations generally limit the total sulfur content of coal to not more than 2.5 lo. Coal obtained under short-term contracts and by open market purchases currently has an average sulfur content of about 2.2'/o.

The Company owns a 12.34/o undivided interest in the Keystone station and an 11.39/o undivided interest in the Conemaugh station, both of which are mine-mouth generating stations located in western Pennsylvania. The owners of the Keystone station have a long-term contract, which may be extended through 2012, with a supplier for 90/o of the annual bituminous coal requirements of the Keystone station. The owners of the Conemaugh station have a long-term contract with another supplier for at least 80'/o of the annual bituminous coal requirements of the Conemaugh station for the life of the station. To the extent that the requirements of these plants are not covered by long-term contracts, the bituminous coal requirements are, with minor exceptions, obtained from local suppliers.

The Company expects that assigned reserves and long-term contracts will provide 40/o to 50/o of its projected bituminous coal requirements during the next five years. The balance of these requirements will have to be obtained under short-term contracts or by open market purchases. The extent to which unassigned reserves may eventually be mined to meet the fuel requirements of future generating stations will depend upon future economic conditions and other factors which cannot now be predicted.

Excluding mine-mouth plant requirements, about 84/o of the Company's bituminous coal purchased during the twelve months ended September 30, 1977 was delivered by the Company's unit trains, which at September 30, 1977 consisted of 980 hopper cars. Use of the Company's hopper cars for delivery of coal minimizes the Company's dependence upon railroad-supplied hopper cars which from time to time are in short supply.

22

The average delivered cost of coal has increased substantially over the past several years from

$ 10.66 per ton in 1972 to $ 25.79 per ton during the twelve months ended September 30, 1977. The average delivered cost of coal purchased during the twelve months ended September 30, 1977 was as follows: bituminous coal purchased from subsidiary companies (including coal purchased by those companies in the open market) and under long-term contracts, $ 30.44 per ton; bituminous coal purchased by the Company under short-term contracts and in the open market, $ 23.66 per ton; and anthracite, including petroleum coke, $ 11.92 per ton. Bituminous coal purchased in the open market by the Company and its subsidiaries is primarily surface-mined. Bituminous coal produced by subsidiary companies and purchased by the Company under long-term contracts is deep-mined.

Oil. The two 820,000 kw oil-fired generating units at the Company's Martins Creek station are designed to burn either crude or residual oil and to follow significant load changes or operate as base load units.

The Company has contracted with oil suppliers for the expected requirements of the Martins Creek oil units through 1979. An agreement with one of the suppliers, under which the Company can purchase up to three-quarters of its expected oil requirements for these units, provides for automatic annual renewals beyond 1979 unless terminated upon one year's prior written notice by either party.

Oil for the Martins Creek station is delivered to a deep water terminal on the Delaware River at Marcus Hook, Pennsylvania. The Company has a long-term contract with an unaffiliated company to provide unloading and oil storage services at that terminal. The oil ls transported from Marcus Hook to storage facilities at the Martins Creek station by a pipeline which was constructed primarily for the use of the Company by its subsidiary, Interstate Energy Company (IEC). The pipeline and related facilities, substantially the only assets of IEC, were placed in service at a cost of approximately $ 55 million. Of that amount, $ 40.5 million was obtained from the Company and the balance was borrowed from banks. The Company expects to formalize its obligations for the operating expenses and annual carrying charges of the pipeline in connection with the permanent financing of these facilities in 1978. FERC and PUC tariffs are in effect for the delivery of oil by IEC from Marcus Hook to Martins Creek.

The Company and IEC have arranged to provide pipeline delivery services to another utility beginning in mid-1978. Pipeline delivery services also will be available from the deep water terminal to other delivery points at locations and tariff rates which have not yet been established.

Nuclear. The Company presently has under construction two nuclear-fueled generating units at its Susquehanna site. See "CONSTRUCTION PROGRAM". In anticipation of the commercial operation of these units, the Company has made commitments to meet certain of the nuclear fuel requirements for these units. The nuclear fuel cycle consists of the mining and milling of uranium ore to uranium concentrate; the conversion of uranium concentrate to uranium hexafluoride; the enrichment of uranium hexafluoride; the fabrication of fuel assemblies; the utilization of nuclear fuel in the reactor; temporary storage of spent fuel; and the reprocessing or permanent disposal of spent fuel. Based upon the presently scheduled In-service dates and planned fuel cycles for these units the following tabulation shows the year through which contracts are expected to provide the Susquehanna station's requirements for the various segments of the nuclear fuel cycle, assuming fulfillment by suppliers of their contractual commitments.

23

4 4

4 ~

4 III,I 4

I ~

! ~

Uranium Concen- Reprocess-trate(1) (2) Conversion Enrichment(3) Fabrication ing(3)

Susquehanna Unit 1 ..... 1983 1985 2007 1994 1992 Susquehanna Unit 2 ..... 1983 1985 2009 1994 1992 (1) The Company has an option to purchase a portion of a supplier's production for the years 1984-1990 which, if exercised, will provide a portion of the Company's uranium concentrate requirements for that period.

(2) The uranium concentrates scheduled to be delivered through 1983 are, expected to be sufficient to permit the operation of the Susquehanna units through 1985. Under the Company's enrichment contracts with the Department of Energy (formerly the Energy Research and Devel-opment Administration), the Department of Energy may make changes in enrichment sPecifications.

Such changes may necessitate the acquisition by the Company of additional quantities of uranium concentrate during the periods indicated in the tabulation.

(3) A rulemaking proceeding regarding the recycllng of spent fuel is currently pending before the NRC. The Company may be required to obtain additional enrichment services after 1987 if the NRC permits the recycling of plutonium and the Company is unable to have its spent fuel reprocessed.

There are currently no commercially operating facilities in the United States for the reprocessing of spent fuel. Shipments from Susquehanna to the reprocessor were initially scheduled to begin in the early 1980s following the expansion of the reprocessor's facility. The reprocessor has informed the Company that because of the increased capital and operating costs expected to be incurred to comply with NRC criteria relating to the expansion, the reprocessor does not intend to continue in that business and is seeking to terminate the contract with respect to the Susquehanna units. The Company estimates that there will be sufficient storage capability in the spent fuel pools at Susquehanna to accommodate the fuel that is expected to be discharged through 1984. Because the Company does not currently'anticipate being able to ship spent fuel off-site by 1985 for storage or reprocessing, the Company is developing plans to install additional spent fuel storage capacity in the Susquehanna spent fuel pools.

In April 1977 President Carter stated that he would defer indefinitely the commercial reprocessing and recycling of the plutonium produced in domestic and foreign nuclear power programs. In October 1977 the Department of Energy proposed to assume responsibility for storage and disposal of spent nuclear fuel produced in nuclear power plants while the question of ultimate disposal is being settled. Under the proposed policy, the Federal Government would take title to spent nuclear fuel from electric utilities on payment of a fee and store it in a retrievable fashion at a Government approved site.

Additional arrangements, for which there is no present assurance, will be required to satisfy the fuel requirements of the Susquehanna units over their estimated useful lives.

Power Pool. The Company operates its generation and transmission facilities as a part of the Pennsylvania-New Jersey-Maryland (PJM) Interconnection. The PJM Interconnection, one of the world' largest power pools, includes eleven companies serving about 21 million people in a 50,000 square mile 24

territory covering all or part of Pennsylvania, New Jersey, Maryland, Delaware, VIrginia and Washington, D.C. The PJM companies had approximately 44.4 million kw of installed generating capacity at September 30, 1977 and transmission line connections with neighboring power pools have the capability of supplying an additional 2.1 million kw to P JM companies. Through September 30, 1977 the maximum one-hour demand on the power pool was approximately 32.2 million kw, which occurred on July 21, 1977. The Company is also a party to the Mid-Atlantic Area Coordination Agreement which provides for the coordinated planning of generation and transmission facilities by the companies included in the PJM Interconnection.

Regulation. The Company is a public utility under the laws of the Commonwealth of Pennsylvania and is subject to regulation as such by the Pennsylvania Public Utility Commission. Until October 1, 1977 the Company was subject in certain of its activities to the jurisdiction of the Federal Power Commission under Parts I, II and III of the Federal Power Act. Effective October 1, 1977 these functions were transferred in accordance with the Department of Energy Organization Act to the Federal Energy Regulatory Commission, an independent regulatory commission within the newly created Department of Energy. The Act also transfers to the Secretary of Energy all of the functions of the Energy Research and Development Administration. See "BUSINESS Fuel Supply (Nuclear)". The Company is a holding company under the Public Utility Holding Company Act of 1935 but has been exempted by the Securities and Exchange Commission from the provisions of that Act applicable to it as a holding company.

The Company is subject to the jurisdiction of the Nuclear Regulatory Commission in connection with the construction of the Susquehanna units. See "CONSTRUCTION PROGRAM". The Company is also subject to the jurisdiction of certain Federal, regional, state and local regulatory agencies with respect to air and water quality, land use and other environmental matters. See "BUSINESS Environmental Matters". The coal mining operations of the Company's subsidiaries are subject to the Federal Coal Mine Health and Safety Act of 1969.

Environmental Matters. The Company is subject to certain present and developing Federal, regional, state and local laws and regulations with respect to air and water quality, land use and other environmental matters. Except as described below, the Company is presently in substantial compliance with applicable environmental laws and regulations and has all of the permits currently required to operate its facilities.

Air. The Federal Clean Air Act Amendments of 1977 (1977 Amendments) include, among other things, provisions that: (a) require the prevention of significant deterioration of existing air quality in regions where air quality is better than applicable ambient standards; (b) restrict the construction of new emission sources, including coal and oil-fired generating stations, in areas which have not attained specified ambient air quality standards; (c) revise the standards of performance applicable to new emission sources and require that fossil fueled generating units achieve the revised standards by the application of the best available control technology which requirement, in effect, appears to prohibit the use of low sulfur coal at new emission sources without further treatment, such as the cleaning of coal or the use of scrubbers; and (d) require the United States Environmental Protection Agency (EPA) to impose substantial penalties for failure to comply with air pollution regulations after July 1, 1979 and provide for civil penalties of up to $ 25,000 per day for facilities found to be in violation of an applicable state implementation plan.

25

Under procedures established by the Pennsylvania Department of Environmental Resources (DER) prior to the 1977 Amendments, companies not in compliance with emission regulations have been permitted to enter into consent orders with DER which allow continued operation during the time in which steps are being taken to achieve compliance. In this regard, the Company and the DER have entered into a consent order with respect to particulate emission regulations as follows:

Unit Compliance Date Brunner Island No. 1. December 31, 1980 Brunner Island No. 3. June 30, 1981 Montour No. 1...... June 30, 1981 Montour No. 2 December 31, 1980 Under the terms of the consent order, the Company is required to make certain payments to the Pennsylvania Clean Air Fund until compliance is achieved, with respect to any particular unit. While the Company is unable at this time to estimate the exact amount of the payments, it does not expect that such payments in the aggregate will be material in amount. As a result of the 1977 Amendments, the consent order may have to be revised to establish a new compliance date of not later than July 1, 1979.

Since the Company has been proceeding on a schedule which was designed to achieve compliance by the dates shown in the tabulation, there is a liigh probability that a July 1, 1979 compliance date may not be met at the Brunner Island units. The Company currently expects that the installation of flue gas conditioning equipment at the Montour units will permit the Company to achieve compliance at those units by July 1, 1979. Estimated expenditures during the years 1977-1979 to achieve compliance at the Brunner Island and Montour units a'e included in the Company's estimate of construction expenditures for that period. See "CONSTRUCTION PROGRAM".

The Company and DER are currently discussing a consent order for Units No.'3 and No. 4 at the Company's Sunbury station. The Company expects that any consent order would permit the Company to continue to operate the units during the time in which the Company is taking steps to achieve compliance with DER particulate emission standards. The Company currently expects that the Units No. 3 and No. 4 at the Sunbury station can be in compliance with applicable DER standards by July 1, 1979.

In July 1977 EPA notified the Company of an alleged violation at the Company's Holtwood steam station of opacity emission regulations established by DER. Pending resolution of this matter, which is currently the subject of appeals by the Company to the Environmental Hearing Board of DER, the Company is continuing to operate the Holtwood steam station even though DER has not issued an operating permit for that station. The continued operation of the Holtwood steam station may subject the Company to certain penalties which are not currently expected to be material in amount.

The processing of coal to reduce the sulfur content prior to burning permits the Company to comply with current sulfur dioxide emission regulations. If, however, the sulfur dioxide emission regulations applicable to the Company's existing generating stations are amended to significantly reduce permissible discharges, the Company may be required to install equipment for the removal of sulfur dioxide from flue gases.

26

Water. To meet the July 1, 1977 standard of "best practicable control technology currently available" established by the Federal Water Pollution Control Act (Water Act), the Company has installed waste water treatment facilities at its steam electric stations. The Company's coal mining subsidiaries are planning to install waste water treatment equipment at certain of their facilities and have filed the necessary applications with DER. The failure by the subsidiaries to meet the July 1, 1977 Water Act standard may subject the subsidiaries to fines and penalties which are not expected to be material ln amount.

The Water Act requires the application of the "best available technology economically achievable" by July 1, 1983 with respect to effluent discharges from existing'facilities. With respect to "new" facilities, the Water Act authorizes EPA to establish standards of performance which will require the

~ application of the "best available demonstrated control technology" including, where practicable, a goal of no discharge of pollutants. The Water Act also requires that the location, design, construction and capacity of cooling water intake structures reflect the application of the "best technology available for minimizing adverse environmental impact". EPA has adopted effluent limitations, guidelines and standards. for steam electric stations and guidelines for existing coal mines.

EPA limitations, guidelines and standards are enforced through the issuance of discharge permits which specify the applicable limitations on discharges. Compliance with applicable state and regional water quality standards is accomplished by requiring the appropriate state or interstate agency to issue a water quality certification with respect to each application. The terms and conditions of any such water quality certification must be incorporated in the discharge permit issued by EPA.

EPA has Issued discharge permits for the operation of the Company's generating stations and for construction activities at the Company's Susquehanna station. Applications for discharge permits for the sewage treatment plant at the Montoursville service center and the coal mining operations of the Company's subsidiaries are pending before EPA. DER has issued the required water quality certification for the Pennsylvania Mines Corporation discharge permits. The Company believes that certain discharge limitations contained ln the DER certification for the Montour station are more stringent than those established by applicable guidelines and regulations and has requested a hearing before DER concerning these limitations.

DER also administers state and certain regional laws and regulations with respect to effluent discharges and water quality. The Company and DER are also discussing the necessity of installing additional water treatment facilities at certain of the Company's plants.

Delaware River Basin Commission approval of the Company's water withdrawal permit for the oil-fired units at the Martins Creek station requires the Company to provide make-up water at certain times or to curtail operation of these units during certain periods of low flow in the Delaware River. It is the 27

t C

.r

Company's intention to supply the required make-up water from its Lake Wallenpaupack hydroelectric project. See "BUSINESS Hydroelectric Projects". In connection with the construction of the Susquehanna station, the Company is reviewing with the Susquehanna River Basin Commission the need to construct a reservoir to provide make-up water during certain low-flow periods in the Susquehanna River. The Company estimates that the cost of this reservoir would approximate $ 45 million. The Company's share of such cost during the years 1977-1979 is included in its estimate of construction expenditures for that period. See "CONSTRUCTION PROGRAM".

In 1974 the Borough of Tremont, Pennsylvania, and several residents of the Borough of Tremont commenced a suit against ten defendants, including the Company, in the Court of Common Pleas, Schuylkill County, Pennsylvania. The complaint in this proceeding (which purports to be a class action on behalf of all residents of the Borough of Tremont) alleges, among other things, that the failure of the defendants to comply with the provisions of various Federal and state environmental laws in connection with the maintenance of certain culm and silt banks in the vicinity of the Borough of Tremont caused the plaintiffs named in the complaint to suffer damages of approximately $ 1.3 million during the floOding resulting from Tropical Storm Agnes. In July 1977 Gold Mills, Inc. commenced a quit against the same defendants containing similar allegations and claiming damages of $ 3.6 million. Plaintiffs in both proceedings are seeking to recover punitive damages in unspecified amounts.

Nuclear. The U.S. Court of Appeals for the District of Columbia in July 1976 announced decisions in two cases to which the Company was not a party concerning the scope of the NRC environmental review of nuclear plants. In one decision the Court held that the NRC must give further consideration in all cases to the environmental impact of the reprocessing of spent fuel and the disposal of radioactive waste material. In October 1976 the NRC initiated rulemaking proceedings to evaluate further the environmental Impact of reprocessing and waste disposal and in March 1977 the NRC adopted an interim rule relating to these matters. In August 1977, in its decision terminating the show cause proceedings initiated by an environmental group to halt the construction or operation of 14 nuclear fuel units in Pennsylvania and New Jersey, including the Susquehanna units, the NRC Appeal Panel concluded that the application of the interim rule would have no operative significance on the cost benefit analysis for the Susquehanna units. It is expected that the results of the NRC rulemaking proceedings will serve as a basis for the cost benefit analysis required by the National Environmental Policy Act of 1969 ln connection with the issuance of operating licenses for nuclear plants including the Susquehanna units.

In the other decision the Court held that the NRC must consider energy conservation as an alternative to the construction of nuclear plants in licensing proceedings where energy conservation (in addition to alternative means of generating power) is raised as an issue. The NRC has not initiated a rulemaking proceeding with respect to energy conservation matters.

The Supreme Court has granted review of both Court of Appeals decisions. The action of the NRC in March 1977 in adopting the interim rule relating to the environmental impact of fuel reprocesslng and waste disposal has been appealed to the U.S. Court of Appeals for the District of Columbia. The Company is unable to predict what further actions may be taken by the NRC or the Courts with respect to any of these matters or the effect that such actions or actions by environmental agencies could have on the cost or in-service dates of the Susquehanna units. See "CONSTRUCTION PROGRAM".

28

General. During the period 1972 through 1976, the Company's construction expenditures aggregated about $ 1.47 billion, of which the Company estimates that about $ 82 million was for compliance with Federal, state and local environmental laws and regulations. Approximately $ 97 million of capital expenditures for such compliance are included in the Company's 1977-1979 construction program and it may be that substantial additional expenditures for such purposes in an amount not now determinable will be required during such period and thereafter.

From time to time the Company and its subsidiaries have been cited for violations of DER and EPA air and water quality regulations in connection with the operation of their facilities and, as a result, may be subject to certain penalties which are not expected to be material in amount.

The Company is unable to predict the ultimate effect of developing environmental law and regulation upon its existing and proposed facilities and operations. However, it is possible that such law and regulation may require the Company to modify, supplement, replace or cease operating its equipment and facilities, delay or impede its construction and operation of new facilities, and require it to make substantial additional expenditures in amounts which are not now determinable.

Hydroelectric Projects. The Company operates the Holtwood hydroelectric project (102,000 kw capability) and the Wallenpaupack hydroelectric project (44,000 kw capability), the original licenses for which expired in 1970 and 1974, respectively. Pending final action on the Company's applications for new long-term licenses for both projects, FERC has granted the Company interim annual licenses to operate the projects. The interim annual licenses incorporate the terms and conditions of the original long-term licenses. The Company's Holtwood application is being opposed by a municipal electric system. The Holtwood and Wallenpaupack projects represent current investments on a depreciated original cost basis of $ 9.6 million and $ 10.1 million, respectively.

The Federal Power Act provides that if, upon expiration of a major project license, the United States takes over the project or a license for the project is issued to a new licensee, the original licensee shall be paid the "net investment" in the property, not to exceed fair value, plus severance damages, if any.

Certain reserves which are required by the Act and which relate to the calculation of "net investment" have not been recorded pending approval of the amounts thereof by FERC. In April 1977, FERC issued a proposed rulemaking which, if adopted, would require a licensee'to record these reserves by an appropriation of earnings reinvested. The amount of earnings reinvested so appropriated would be restricted as to the payment of dividends. The Company estimates that such reserves applicable to the period 1946 through September 30, 1977 would not exceed $ 3.0 million for its two licensed projects.

The Company also owns one-third of the capital stock of Safe Harbor Water Power Corporation (Safe Harbor) which holds a major project license for the operation of its hydroelectric plant (230,000 kw capability). The Company is entitled to one-third of the capacity (76,000 kw) of the Safe Harbor plant.

The Safe Harbor license expires in 1980. In April 1977 Safe Harbor filed an application with FERC for a new long-term license and the proposed installation of five additional 37,500 kw units. The additional units will Increase the total capability of the Safe Harbor plant to 417,500 kw and the Company will be entitled to one-third of the total capacity (139,167 kw).

29

ELECTRlC STATlST(CS Twelve Months Ended Year Ended December 31, Septem-ber 30, 1972 1973 1974 1975 1976 1977(a)

Power Capability (thousands of kw)

Coal-fired steam stations............................. 3,345 4,140 4,140 4,136 4,136 4,136 Oil-fired steam station ................................. 820 820 1,640 Combustion turbines and diesels................. 541 541 539 539 539 539 Hydroelectric stations.................................. 146 146 146 146 146 146 Firm purchases {hydro)................................ 76 76 76 76 76 76 Total. 4,108 4,903 4,901 5,717 5,717 6,537 Peak Demand {thousands of kw)(b) .................... 3,598 3,662 3.772 4,122 4,425 4,425 Sources of Energy (millions of kwh)

Generated Coal-fired steam stations...............,..... 19,097 24,782 24,186 25,384 25,751 26,332 Oil-fired steam station .......................... 1~ 149 1,947 5,398 Combustion turbines and diesefs ......... 601 273 247 84 40 129 Hydroelectric stations........................... 824 816 772 859 809 685 Power purchases.. 1,784 1,968 1,570 2,241 2,126 2,108 Total. 22,306 27,839 26,775 29,717 30,673 34,652 Disposition of Energy (millions of kwh)

Energy safes to customers........................... 17,013 18,865 18,963 19,113 20,354 21,250 Interchange power sales(c).......................... 3.586 7.237 6,079 8,757 8,358 11,566 Company uses and line losses .................... 1,707 1,737 1,733 1,847 1,961 1,836 Total. 22,306 27,839 26,775 29,717 30,673 34,652 Fuel Cost of Energy Generated (cents per kwh) .. 0.49 0.50 0.88 1.04 1.17 1.32 Cost of Coal Received, including freight and handling cost (per ton) .................................... $ 10.66 $ 11.89 $ 20.80 $ 23.38 $ 25.36 $ 25.79(d)

Energy Sales (millions of kwh)

Residential. 5,985 6,324 6,494 6,818 7,267 7,607 Commercial. 3,933 4,262 4,275 4,575 4,874 5,195 Industrial.. 6,458 6,881 7,170 7,020 7,481 7,698 Other. 637 1,398 1,024 700 732 750 Total. 17,013 18,865 16.663 19,1 13 20,354 21,250 Operating Revenues (thousands)

Residential. $ 142,585 $ 154,681 $ 187,265 $ 218,904 $ 257,828 $ 294,063 Commercial. 92,555 101,670 121,314 143,673 170,990 198,158 Industrial. 92,201 99,928 131,452 150,365 180,957 205,610 Other. 26,226 25,868 27,539 25,686 29,949 33,002 Total. $ 343.667 $ 382,147 $ 467,570 $ 538,628 $ 639,724 $ 730,833 Number of Customers (end of period)................. 864,439 886,378 902,148 917,920 936,219 946,986 Average Use Per Residential Customer (kwh) ..... 8,032 8,253 8,287 8,528 8,931 9,197 Average Revenue (cents per kwh)

Residential. 2.38 2.45 2.88 3.21 3,55 3.87 Commercial. 2.35 2.39 2.84 3.14 3,51 3.81 Industrial .. 1.43 1.45 1.83 2.14 2.42 2.67 All customers 1.99 2.00 2.44 2.78 3.10 3.40 Total Operating Expenses per kwh of Energy Sales (cents per kwh)(c) .................................. 1.54 1.52 1.88 2.21 2.49 '.61 (a) Consolidated statistics of the Company and Hershey Electric Company since January 1, 1977.

(b) Winter peak shown for the years 1972-1976 was reached early in subsequent year. The Company estimates that it would have experienced a peak for 1976 and the twelve months ended September 30, 1977 of 4,514,000 kw if a 5/o voltage reduction had not been in effect.

(c) As provided in the applicable regulatory system of accounts, receipts from interchange power sales have been treated as reductions of operating expenses.

(d) The cost of coal received, including freight and handling costs, was $ 26.06 per ton in the month of September 1977.

30

DESCRIPTION OF BONDS General. The Bonds will mature December 1, 2007, will bear interest at the rate shown in their title payable June 1 and December 1, and will be issued only ln registered form in denominations of $ 1,000 and multiples thereof. The Bonds will be issued under a Mortgage and Deed of Trust, dated as of October 1, 1945, as supplemented (Mortgage), of which Morgan Guaranty Trust Company of New York is Trustee. Principal and interest will be payable in New York City at the office or agency of the Company, which initially will be the principal office of the Trustee. Interest also will be payable at the general offices of the Company in Allentown, Pennsylvania. Exchanges and transfers of the Bonds may be made at the principal office of the Trustee or at the offices of such other companies as the Company may designate from time to time. The Company does not presently plan to designate any other company for such purpose. There will be no charge by the Company for any exchange or transfer of the Bonds.

Statements herein concerning the Bonds and the Mortgage are brief summaries and do not purport to be complete. They make use of terms defined in the Mortgage, and are qualified in their entirety by express references to the cited Sections and Articles. The Bonds do not have any sinking or improvement fund or other provision for amortization prior to maturity. However, all series of bonds created prior to 1973 do have sinking or improvement fund provisions.

Redemption and Purchase of the Bonds. The Bonds will be redeemable, in whole or in part, on 30 days'otice (a) at the following special redemption prices for the maintenance and replacement fund, or with certain deposits and proceeds of property, and (b) at the following general redemption prices for all other redemptions:

If Redeemed If Redoemed During During Twelve Twelve Months Months Period General Special Period General Special Ending Redemption Redemption Ending Redemption Redemption November 30 Prices Prices November 30 Prices Prices 1 978 ................. o/o O/0 1 993 ................. O/0 o/o

'I 994 .................

1 979 .................

1 980 ................. 1 995 .................

1 98 1 ................. 1 996 .................

1 982 ................. 1 997 .................

1 983 ................. 1 998 .................

1 984 ................. 1 999 .................

1 985 .. ..............

~ 2000 .................

1 986 ........... .....

~ 200 1 .................

1 987 ................. 2002 .................

1 988 ................. 2003 .................

1 989 ................. 2004 .................

1 990 ................. 2005 .................

1 99 1 ................. 2006 .................

1992 ................. 2007 ................. 100.00 100.00 31

I' in each case, together with accrued interest to the date fixed for redemption; provided that no Bonds shall be redeemable at the general redemption prices prior to December 1, 1982, with borrowed funds or in anticipation of funds to be borrowed, having an effective interest cost to the Company (calculated in accordance with acceptable financial practice) of less than lo per annum.

The redemption may be made subject to receipt by the Trustee of the redemption moneys before the date fixed for redemption and the redemption notice shall be of no effect unless such moneys are so received.

Cash deposited under any provisions in the Mortgage (with certain exceptions) may be applied to the purchase of bonds of any series.

(Mortgage, Art. X and Twenty-third Supplemental, Sec. 1.)

Maintenance and Replacement Fund. Each year 15V~/o of adjusted gross operating revenues must be spent for maintenance and replacements of mortgaged electric, gas, steam and hot water property and certain automotive equipment. The Company now owns no gas or hot water property.

Such requirements may be met by depositing cash with the Trustee; certifying expenditures for maintenance and repairs of such property, for gross property additions and for certain automotive equipment; or by taking credit for bonds and qualified prior lien bonds retired. Such cash may be withdrawn on similar bases. The Company has reserved the right (without any consent or other action by the holders of any series of bonds created after January 1973, including the Bonds) to make such amendments to the Mortgage as shall be necessary to delete the Maintenance and Replacement Fund.

The Company has no present intention of requesting a bondhoiders meeting to delete the Maintenance and Replacement Fund. (Mortgage, Sec. 39; Twenty-third Supplemental, Sec. 3.)

Special Provisions for Retirement of the Bonds. If, during any twelve-month period, mortgaged property is disposed of by order of or to any governmental authority, resulting in the receipt of $ 10 million or more as proceeds, the Company (subject to certain conditions) must apply such proceeds (less certain deductions) to the retirement of bonds of any series. The Bonds are redeemable at the special redemption prices in that event. (Mortgage, Sec. 64.)

Security. The Bonds, together with all other bonds now or hereafter issued under the Mortgage, will be secured by the Mortgage, which constitutes, in the opinion of Edward M. Nagel, Esq., General Counsel of the Company, a first mortgage lien on all of the Company's properties (except those referred to below), subJect to (1) leases of minor portions of the Company's property to others for uses which, in his opinion, do not interfere with its business, (2) leases of certain property of the Company not used in its electric utility business, (3) minor defects, irregularities and deficiencies in titles of properties and rights-of-way, which do not materially impair the use of such property and rights-of-way for the purposes of the Company, (4) other excepted encumbrances, and (5) as to certain property situated primarily in Lackawanna, Luzerne, Susquehanna, Wayne and Wyoming Counties, Pennsylvania, the prior lien of The Scranton Electric Company Mortgage and Deed of Trust, dated February 15, 1937, as supplemented. In general, there are excepted from the lien of the Mortgage all cash and securities; equipment, apparatus, materials or supplies held for sale or other disposition; aircraft, automobiles and other vehicles; timber, minerals, mineral rights and royalties; and receivables, contracts, leases and operating agreements.

The Mortgage contains provisions for including after acquired property within the lien thereof, subject to any pre-existing liens and to certain limitations in the case of consolidation, merger or sale of substantially all of the Company's assets. (Mortgage, Sec. 87.)

32

A

'I i$

Issuance of Additional Bonds. Bonds of any series may be issued from time to time on the bases of: (1) 60/o of property additions to electric, gas, steam or hot water property, acquired after June 30, 1945, but not including natural gas production property and after adjustments for retirements of funded property other than property for supplying water; (2) retirement of bonds or qualified prior lien bonds; and (3) deposit of cash. With certain exceptions in the case of (2) above, the issuance of bonds requires adjusted net earnings before income taxes for twelve out of the preceding fifteen months of at least twice the annual interest requirements on all bonds at the time outstanding, including those being issued, and on all indebtedness of prior rank. In computing adjusted net earnings, an amount equal to the maintenance and replacement fund requirements must be used in lieu of actual expenditures for maintenance and repairs and provisions for property retirement. The issuance of bonds on the basis of property additions subject to liens is restricted. It is expected that $ 20.5 million of Bonds will be issued against the retirement of a like principal amount of bonds which matured during 1977 and the remainder will be issued against unfunded property additions and that, after giving effect to, the proposed sale of a 10/o undivided ownership interest in the Susquehanna units (see "CONSTRUCTION PROGRAM" ) and the issuance of the Bonds, unfunded property additions remaining would have been approximately $ 660 million, as of September 30, 1977. In addition, when the bonds of all series issued piior to 1973 have been retired, property additions theretofore funded to satisfy sinking or improvement funds for such series will revert to unfunded status.

The Company has reserved the right to amend the Mortgage without any consent or other action by holders of any series of bonds (including the Bonds) created (1) after February 28, 1970 to include Nuclear Fuel (and similar or analogous devices or substances) as Property Additions, and (2) after November 30, 1976 to make available as Property Additions various forms of space satellites, space stations and other analogous facilities, various fuel transportation facilities (primarily railroad cars and other railroad equipment, tankers and other vessels), and generally, electric, gas and energy or fuel property (including property for the development of electricity, gas and fuel or energy in any form) and water and steam heat property. Such property could be located anywhere if duly subject to the lien of the Mortgage and useful in connection with the energy, fuel or water business. Excepted property would continue to include property used principally for the production or gathering of natural gas.

The amount of the obligations secured by prior liens on mortgaged property may be increased, provided that, if any property subject to such prior lien shall have been made the basis of a credit under the Mortgage, all the additional obligations are deposited with the Trustee or the trustee or other holder of a qualified lien. However, no additional Scranton bonds may be issued except to refund or replace those presently outstanding unless consented to by the holders of 70/o of the bonds.

(Mortgage, Secs. 4 to 7, 20 to 30, and 46, Thirteenth Supplemental, Sec. 4, Twenty-second Supplemental, Sec. 3 and Twenty-third Supplemental, Sec. 7.)

Release and Substitution of Property. Property may be released upon the bases of (1) the deposit of cash, or, to a limited extent, purchase money mortgages, (2) property additions, after adjustments in certain cases to offset retirements and after making adjustments for qualified prior lien bonds outstanding against property additions, and (3) waiver of the right to issue bonds without applying any earnings tests. Cash may be withdrawn upon the bases stated in (2) and (3) above. (Mortgage, Art.

XI and Secs. 5, 31, 32, 37, 46 to 50, 100 and 118.)

33

/

1

Dividend Covenant. No cash dividends on common stock may be paid unless after such payments the amount remaining in earned surplus (herein described as earnings reinvested) plus the provisions made subsequent to September 30, 1945 for depreciation and retirement of property shall equal the maintenance and replacement fund requirements of the Mortgage for such period, less maintenance expenditures. (Mortgage, Sec. 39 and Twenty-third Supplemental, Sec. 2.) Reference is also made to Note 7 to Financial Statements.

Modification of Mortgage. Bondholders'ights may be modified with the consent of the holders of 70% of the bonds. If less than all series of bonds are affected, the consent of the holders of 70% of each series affected is also required. The Company has reserved the right (without any consent or other action by holders of any series of bonds created after 1970, including the Bonds) to substitute 66%% for 70% in the foregoing provisions. In general, no modification of the terms of payment of principal or interest and no modification affecting the lien or reducing the percentage required for modification is effective against any Bondholder without his consent. (Mortgage, Art. XIX, Fourteenth Supplemental, Sec. 4.)

Defaults and Notice Thereof. Defaults are: default in payment of principal; default for 60 days in payment of interest or of installments of funds for retirement of bonds; certain defaults with respect to qualified lien bonds; certain events in bankruptcy, insolvency or reorganization; and default for 90 days after notice in other covenants. The Trustee may withhold notice of default (except in payment of principal, interest or any fund for retirement of bonds), if it thinks it is in the interests of the Bondholders.

(Mortgage, Secs. 65 and 66.)

Holders of 25% of the bonds may declare the principal and interest due on default, but a majority may annul such declaration If such default has been cured. No holder of bonds may enforce the lien of the Mortgage unless (1) he has given the Trustee written notice of a default; (2) holders of 25% of the bonds have requested the Trustee to act and offered it reasonable opportunity to act and indemnity satisfactory to the Trustee against the costs, expenses and liabilities to be incurred thereby; and (3) the Trustee has failed to act. The Trustee is not required to risk its funds or incur personal liability if there is reasonable ground for believing that the repayment is not reasonably assured. A majority of the bonds may direct the time, method, and place of conducting any proceedings for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee. (Mortgage, Secs. 67, 71, 80 and 95.)

Evidence to Be Furnished to the Trustee. Compliance with Mortgage provisions is evidenced by written statements of the Company's officers or persons selected or paid by the Company. In certain major matters, the accountant, appraiser, engineer or counsel must be independent. Various certificates and other papers are required to be filed annually and in certain events, including an annual certificate with reference to compliance with the terms of the Mortgage and absence of Defaults.

Certain Tax Matters. In the opinion of Edward M. Nagel, Esq., General Counsel of the Company, Bonds owned by individuals residing in Pennsylvania are subject to the 4 mills Pennsylvania corporate loans tax. Such tax will be withheld from interest payments to such'individuals. Mr. Nagel is also of the opinion that the Bonds are exempt from existing personai property taxes in Pennsylvania.

EXPERTS The balance sheet as of December 31, 1976 and the related statements of income, earnings reinvested and changes in financial position for each of the five years in the period ended December 31, 1976 included ln this Prospectus have been examined by Haskins & Sells, independent Certified Public Accountants, as stated in their opinion appearing herein, and have been so included in reliance upon such opinion given upon the authority of that firm as experts in accounting and auditing.

Statements made herein as to matters of law and legal conclusions have been reviewed by Edward M. Nagel, Esq., General Counsel of the Company, and have been made in reliance on his authority as an expert.

Information in the tabulation of the Assigned Reserves and Unassigned Reserves under the headings "Estimated Recoverable Reserves as of January 1, 1976" and "Average /o Sulfur (By Weight)"

under the caption "BUSINESS Fuel Supply (Coal)" was provided by Paul Weir Company Incorporated and is included herein in reliance on its authority as an expert.

LEGAL OPINIONS The validity of the Bonds will be passed upon for the Company by Edward M. Nagel, Esq., General Counsel of the Company, and Messrs. Reid & Priest, New York, N. Y., and for the Purchasers by Messrs.

Sullivan & Cromwell, New York, N. Y. However, all matters pertaining to the organization of the Company, titles and the lien of the Mortgage and all matters of law of the Commonwealth of Pennsylvania will be passed upon only by Mr. Nagel, who is a full-time employee of the Company.

OPINION OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS PENNSYLVANIA POWER & LIGHT COMPANY:

We have examined the balance sheet of Pennsylvania Power &.Light Company as of December 31, 1976 and the related statements of income, earnings reinvested, and changes in financial position for each of the five years in the period ended December 31, 1976. Our examination was made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circum-stances.

In our opinion, such financial statements present fairly the financial position of the Company at December 31, 1976 and the results of its operations and the changes in its financial position for each of the five years in the period ended December 31, 1976, in conformity with generally accepted accounting principles applied (except for the change in 1974, with which we concur, in the method of accounting for recoverable fuel costs as described in Note (b) to the Statement of Income) on a consistent basis.

HASKINS & SELLS New York, New York February 3, 1977 35

I' PENNSYLVANIAPOWER & LIGHT COMPANY BALANCE SHEET ASSETS Thousands of Dollars September 30, December 31, 1977 1976 (Unaudited)

UTILITYPLANT Plant ln service at original cost Electric................................ $ 2,090,282 $ 2,303,547 Steam heat. 7,896 7,908 Total plant fn service 2,098,178 2,311,455 Less accumu'lated depreciation (Note 5) . 458,697 495,876 Net plant in service.. 1,639,481 1,815,579 Construction work in progress et cost. 720,544 758,927 Nuclear fuel in process at cost.. 20,084 33,413 Net utilityplant (Note 8). 2,380,109 2,607,919 INVESTMENTS Associated companies at equity. 15,327 16,344 Nonutility property and other at cost or less. 7,548 7,469 Total investments.. 22,875 23,813 CURRENT ASSETS Cash (Note 4). 14,955 13,442 Accounts receivable (less reserve: 1976, $ 1,925; 1977, $ 2,809)

Customers . 49,205 45,237 Other. 22,857 38,553 Notes receivable (principally from associated company).. 29,570 29,500 Recoverable fuel costs. 41,670 47,296 Coal and fuel oil at average cost. 74,885 102,117 Materials and supplies at average cost. 19,068 19,659 Other. 7,219 10,917 Total current assets.. 259,429 306,721 DEFERRED DEBITS. 4,884 6,454 Total .. $ 2,667,297 $2,944,907 See accompanying Notes to Financial Statements.

36

PENNSYLVANIAPOWER & LIGHT COMPANY BALANCE SHEET LIAB IL IT I E S Thousands of Dollars September 30, December 31, 1977 1976 . (Unaudited)

CAPITALIZATION Shareowners investment (Notes 6, 7 and 9)

Preferred stock. $ 231,375 $ 231,375 Preference stock.. 210,000 206,000 Common stock. 495,008 575,458 Capital stock expense (10,220) (10,428)

EarnIngs relnvested. 237,967 274,358 Total shareowners Investment .. 1,164,130 1,276,763 Long-term debt (Note 8). 1,161,319 1,157,856 Total capitalization .. 2,325,449 2,434,619 CURRENT LIABILITIES Long-term d ebt due within one year (Note 8). 20,675 3,676 Commercial paper notes (Note 4). 60,012 91,460 Accounts payable .. 60,342 71,936 Taxes accrued . 12,564 23,297 Deferred Income taxes applicable to recoverable fuel costs. 22,060 25,039 DMdends payable. 23,002 25,656 Interest accrued. 22,589 30,826 Deposits from Allegheny Electric Cooperative (Note 14). 78,849 Other.. 11,257 20,820 Total current liabilities 232,501 371,559 DEFERRED AND OTHER CREDITS Deferred investment tax credits ..... 56,526 77,445 Deferred income taxes. 36,860 43,538 Other.. 15,961 17,746 Total deferred and other credits. 109,347 138,729 COMMITMENTSAND CONTINGENT LIABILITIES(Note 15)

Total $ 2,667,297 $2,944,907 See accompanying Notes to Financial Statements.

37

ill

,t

PENNSYLVANIAPOWER & LIGHT COMPANY STATEMENT OF CHANGES IN FINANCIALPOSITION Twelve Months Ended Year Ended December 31, September 30, 1977 1972 1973 1974 1975 1978 (unaudited)

Thousands of Dollars SOURCE OF FUNDS Operations Net income (1974 includes $ 4,162 nonrecurring credit).. $ 57,921 $ 66,912 $ 87,479 $ 97,541 $ 112,111 $ 145,815 Charges (credits) against income not Involving working capital Depreciation .. 41,446 48,837 52,399 58,540 62,478 66,390 Noncurrent deferred income taxes and Investment tax credits net.......................... 7,984 11,282 8,790 15,701 31,789 42,338 Allowance for funds used during construction.. (14,647) (14,967) (20,732) (36,605) (45,192) (49,918)

Other. 220 220 520 7,464 4,669 8,524 92,924 112,284 128,456 142,641 165,855 213,149 Outside Financing Common stock 46,940 40,900 35,156 57,763 82,705 84,994 l Preferred stock 40,000 75,000 Preference stock. 35,000 25,000 70,000 First mortgage bonds. 75,000 108,000 180,000 225,000 150,000 150,000 Other long-term debt. 8,342 Short-term debt net increase ..... 20,231 20,024 360 45,658 208 253 196 185,513 208.924 286,174 352,971 397.958 235.190 Working Capital decrease (a) 3,156 Investments in Associated Companies decrease..... 83 685 15,166 16,894 Deposits from Allegheny Electric Cooperative ............

Other net. 598 2,672 6,424 78,849 4,351 Total Source of Funds .......................... $ 279,118 $ 327,036 $ 415,315 $ 510,778 $ 497,131 $ 531,539 APPLICATION OF FUNDS Construction Expenditures. $ 218,754 $ 224,496 $ 267,724 $ 342,496 $ 394,238 $ 365,737 Nuclear Fuel tn Pr'ocess. 3,736 2,793 13,555 16,464 Allowance for Funds Used During Construction ......... (14,647) (14,967) (20,732) (36,605) (45,192) (49,918) 204,107 209,529 250,728 308,684 362,601 332,283 Securities Retired Preference stock.. 4,000 First mortgage bonds.. 15,000 93,000 8,000 28,500 Other long-term debt 10,057 Short-term debt net decrease ...

10,041 56,631 18,632 112 11,879 3,054 13,618 248 41,820 25,057 66,672 18,632 104,991 24,672 74,568 Dividends on Preferred, Preference and Common Stock 43,330 Working Capital tncrease (a). 6,624 50,037 58,897 82,753 70,686 86,694 15,309 97,203 13,056 Acquisition of Hershey Electric Company....................... 7,855 7,855 Investments in Associated Companie~ncrease..........

Other net.

798 4,305 23,990 2,427 6,574 Total Application of Funds........................ $ 279,118 $ 327,036 $ 415,315 $ 510,778 $ 497,131 $ 531,539 Changes in Components of Working Capital (a)

Cash, temporary cash investments and special funds .... $ (468) $ 10,247 $ (3,792) $ (5,352) $ 123 $

Accounts and notes receivabte. (15) 5,261 6,745 22,896 28,757 16,394 32,600 Fuel inventory. 3,498 (4,717) 45,002 (3,568) 6,567 33,661 Recoverable fuel costs, less related deferred Income taxes. 16,747 738 2,125 2,389 Accounts payable and accrued taxes............................. (2,541) (10,006) (1,811) (22,507) (1,426) (40,281 Dividends payable and interest accrued .........................

Other net (4,231) 5,105 (5,136)

(289)

(6,494) 10,205 (6,346)

(6,888) 4,612) 3,862)

(6,368)

(8,930 Increase (Decrease).................................. $ 6,624 $ (3,156) $ 82,753 $ (15,166) $ 15,309 $ 13,056 (a) Excludes short-term debt, long-term debt due within one year and Allegheny deposits.

See accompanying Notes to Financial Statements.

38

PENNSYLVANlAPOlVER 85 LIGHT COMPANY STATEMENT OF EARNINGS REINVESTED Twelve Months Ended Year Ended December 31, September 30, 1977 1972 1973 1974 1975 1976 (Unaudited)

Thousands of Dollars BALANCEAT BEGINNING OF PERIOD ............ $ 125,647 $ 140,238 $ 157,113 $ 185,695 $ 212,550 $ 225,752 ADD NET INCOME (1974 includes $ 4,162 nonrecurring credit) . 57,921 66,912 87,479 97,541 112,111 145,815 Total . 183568 ,207,150 244,592 283,236 324,661 371,557 DEDUCT Cash Dividends Declared Preferred stock (at specified annual rates).. 6,433 7,551 9,393 9,393 13,128 16,323 Preference stock (at specified annual rates).. 8,093 9,640 10,263 15,116 20,240 19,963 Common stock (per share 1972,

$ 1.64; 1973, $ 1.68; 1974, $ 1.77; 1975 and 1976, $ 1.80; twelve months ended September 30, 1977,

$ 1.86).. 28,804 32,846 39,241 46,177 53,326 60,917 Other (Note 6) 6 Total 43,330 50,037 58,897 70,686 86,694 97,209 BALANCEAT END OF PERIOD (Notes 7 and 9) $ 140,238 $ 157,113 $ 185,695 $ 212,550 $ 237,967 $ 274,358 See accompanying Notes to Financial Statements 39

PENNSYLVANIAPOWER & LIGHT COMPANY NOTES TO FINANCIALSTATEMENTS (Information tor the Period Ended September 30, 1977 la unaudited)

1.

SUMMARY

OF ACCOUNTING POLICIES Accounting System

~

Accounting records are maintained in accordance with the Uniform System of Accounts prescribed by the Federal Energy Regulatory Commission (FERC) and adopted by the Pennsylvania Public Utility Commission (PUC). Reference is made to "BUSINESS Regulation" for information regarding the transfer of the functions of the Federal Power Commission to FERC in accordance with the Department of Energy Organization Act.

Principles of Consolidation The accounts of the Company and Hershey Electric Company, a wholly-owned electric distribution subsidiary acquired December 31, 1976, are consolidated in the accompanying financial statements as of the acquisition date. All significant intercompany transactions have been eliminated. The operations of Hershey Electric Company are not material compared to that of the Company. Reference is made to Note 13 to Financial Statements.

Associated Companies Investments in unconsolidated subsidiaries (all wholly-owned) and in Safe Harbor Water Power Corporation (representing one-half of that company's voting securities) are recorded using the equity method of accounting. The Company's unconsolidated subsidiaries are engaged in coal mining operations, holding coal reserves and uranium mining claims, oil pipeline operations and real estate.

The Company believes that its financial position and results of operations are best reflected without consolidation of these subsidiaries since they are not engaged in the business of generating and distributing electricity. If all the unconsolidated subsidiaries were considered in the aggregate as a single subsidiary, they would not constitute a "significant subsidiary" as that term is defined by the Securities and Exchange Commission.

Utility Plant Additions to utility plant and replacements of units of property are capitalized at cost. Costs of depreciable property retired or replaced are removed from utility plant and such costs, plus removal costs, less salvage, are charged to accumulated depreciation. Costs of land retired or sold are removed from utility plant and any gains or losses are reflected on the Statement of Income. All expenditures for maintenance and repairs of property and the cost of replacement of items determined to be less than units of property are charged to operating expenses.

40

PENNSYLVANIAPOWER & LIGHT COMPANY NOTES TO FINANCIALSTATEMENTS (Continued)

Allowance for Funds Used During Construction As provided in the Uniform System of Accounts, the cost of funds used to finance construction work in progress is capitalized as part of construction cost. The components of Allowance for funds used during construction shown on the Statement of Income under Other Income and Deductions and Interest Charges are non-cash items equal to the amount so capitalized and serve to offset the actual cost of financing construction work in progress.

Reference is made to Note (e) to the "STATEMENT OF INCOME".

Depreciation For financial statement purposes, the straight-line method of depreciation Is used to accumulate an amount equal to the cost of utility plant and removal costs, less salvage, over the estimated useful lives of property. Reference is made to Note 5 to Financial Statements.

Revenues Revenues are based on cycle billings rendered to certain customers monthly and others bi-monthly.

The Company does not accrue revenues related to energy delivered but not billed.

Fuel Costs Recoverable Under Fuel Adjustment Clauses The Company's tariffs filed with both the PUC and FERC include fuel adjustment clauses under which fuel costs varying from the levels allowed in approved rate schedules are reflected in customers'ills after the fuel costs are incurred. The charge to expense for fuel costs recoverable in the future through application of fuel adjustment clauses is deferred to the periods in which these costs are billed to customers. Reference is made to Notes (b) and (c) to the "STATEMENT OF INCOME" and to "RATE MATTERS" for further information regarding the fuel adjustment clauses and a PUC order proposing to replace the existing fuel adjustment clause with a levelized energy cost rate.

Income Taxes The Company and its subsidiaries file a consolidated Federal income tax return. Income taxes. are allocated to the individual companies based on their respective taxable income or loss.

Income taxes are allocated to Operating Expenses and Other Income and Deductions on the Statement of Income. Income tax credits recorded under Other Income and Deductions result principally from the tax deductions related to interest expense associated with financing construction work in progress.

Deferred tax accounting is followed for items where similar treatment in rate determinations has been or is expected to be permitted by the PUC. The principal items are accelerated amortization of certified defense facilities and pollution control equipment, deduction of costs of removing retired depreciable property, that portion of tax depreciation arising from shortening depreciable lives by 20'lo under the class 41

PENNSYLVANIAPOWER & LIGHT COMPANY NOTES TO FINANCIALSTATEMENTS (Continued) life depreciation system, fuel costs recoverable under fuel adjustment clauses, the forced outage reserve and the cost of fuel consumed during the test period of new generating facilities.

Tax reductions arising principally from the use of the declining balance depreciation method, guideline lives and certain income and expenses being treated differently for tax computation than for book purposes are accounted for under the flow-through method.

Investment tax credits, which result in a reduction of Federal income taxes payable, are deferred and amortized over the average lives of the related property. The tax credits are generally equal to 10/o of (1) the cost of certain property placed in service and, in some instances, (2) partial payments of construction costs of other facilities. In 1976 the Company adopted an Employee Stock Ownership Plan (ESOP) which permits the Company to claim an additional 1/o investment tax credit. An amount equal to this additional credit is paid to the trustee for the ESOP to acquire Common Stock of the Company for employees.

Reference is made to Note 10 to Financial Statements.

Retirement Plan The Company has a Retirement Plan composed of two parts: (1) a non-contributory portion which provides benefits for all eligible active employees with the full cost absorbed by the Company, and (2) a voluntary portion In which contributions are made by both employees and the Company, but the full cost of past service and Plan improvements is borne by the Company. Approximately 95/o of eligible active employees are members of the voluntary portion of the Plan. Company contributions to the Plan include amounts required to fund current service costs and to amortize unfunded past service costs over periods of not more than 20 years. Reference is made to Note 11 to Financial Statements.

Forced Outage Reserve

~

A self-insurance reserve is provided to cover the increased level of power costs which are experienced when any of the Company's major generating units are forced out of service due to damage caused by accident or other unforeseen insurable occurrences. Increased power costs resulting from purchasing or generating replacement power at higher costs or loss of interchange sales in excess of

$ 0.5 million through 1975 and $ 1 million effective January 1, 1976 for each accident or occurrence are charged to the reserve. As to certain of the Company's large generating units, costs chargeable to the reserve are limited to $ 12.5 million since outside insurance is carried to cover costs in excess of that amount. The reserve ls established on the basis of historical experience and has been recognized in ratemaking procedures by the PUC. At December 31, 1976 and September 30, 1977 the reserve balance was $ 13.9 million and $ 13.8 million, respectively.

2. RATE FILINGS Reference is made to information appearing under "RATE MATTERS".

3. FUEL COSTS RECOVERABLE UNDER FUEL ADJUSTMENT CLAUSES Reference is made to Notes (b) and (c) to the "STATEMENT OF INCOME".

42

PENNSYLVANIAPOWER & LIGHT COMPANY NOTES TO FINANCIALSTATEMENTS (Continued)

4. COMPENSATING BALANCES AND SHORT-TERM DEBT Short-term debt of the Company consists of bank loans (generally borrowed for one year at the prime interest rate and prepayable at any time without penalty) and commercial paper notes (generally maturing within 30 to 60 days). In order to provide interim financing and back-up financing capability for commercial paper notes, the Company has lines of credit with various banks that are maintained by compensating bank balance requirements (not legally restricted as to withdrawal) or the payment of commitment fees. Information regarding such short-term debt and lines of credit is as follows (thousands of dollars):

As of As of Oecember 31, September 30, 1979 1977 Short-term debt outstanding $ 60,012 $ 91,460 Weighted average short-term debt interest rate .............................. 4 7o/o 6.2'lo Maximum aggregate short-term debt outstanding at any month end (a). $ 194,578 $ 194,578 Average daily short-term debt outstanding (a)

Aggregate amount. $ 129,598 $ 100,188 Weighted average interest rate (b) . 5 5o/o 5.4'lo Lines of credit (c)

Maintained by compensating bank balances........................... $ 143,500 $ 147,500 Maintained by payment of commitment fees ........................... $ 56,500 $ 52,500 Average annual compensating bank balance requirement.............. $ 18,850 $ 13,300 Annual commitment fees.. $ 313 $ 302 (a) During preceding twelve months.

(b) Calculated by dividing short-term interest expense for the period by the average aggregate daily short-term debt outstanding during the period.

(c) Use of these lines of credit was restricted at December 31, 1976 and September 30, 1977 to the extent of $ 4 million by short-term bank loans to certain companies involved in fuel supply operations.

5. DEPRECIATION Provisions for depreciation as a per cent of the average original cost of depreciable property have approximated 3.3/e for 1972, 3.4/o for 1973, 3.3/e for 1974 and 1975 and 3.2/o for 1976 and the twelve months ended September 30, 1977. The lower composite depreciation rate for 1976 and the twelve months ended September 30, 1977 reflects changes made as of January 1, 1976 in estimated useful lives of certain facilities in accordance with the PUC's August 1976 rate order. No provision is being made for depreciation or amortization of intangibles of approximately $ 1.3 million included in Utility Plant.

43

PENNSYLVANIAPOWER & LIGHT COMPANY NOTES TO FINANCIALSTATEMENTS (Continued)

6. CAPITAL STOCK Common Stock no par consists of 50,000,000 authorized shares of which 30,803,318 shares were outstanding at December 31, 1976 and 34,599,105 shares were outstanding at September 30, 1977.

Common Stock of $ 575,458,000 at September 30, 1977 includes $ 640,000 cash installments received under a dividend reinvestment plan as consideration for 27,249 shares of Common Stock which were issued in October 1977.

Preferred Stock ($ 100 par, cumulative) and Preference Stock (no par, cumulative) consisted of the following (thousands of dollars):

Shares Amount Redemption Price Final December 31, September 30, September 30, Authorized Outstanding 1976 1977 1977 Price Year Preferred 4go/o ............ 629,936 530,189 $ 53,019 $ 53,019 $ 110.00 $ 110.00 Series .......... 5,000,000 3.35'/o ...... 41,783 4,178 4,178 103.50 103.50 4.40'/o ~, ..

~~ 228,773 22,878 22,878 102.00 102.00 4.60'/o ...... 63,000 6,300 6,300 103.00 103.00 7.40'/o ...... 400,000 40,000 40,000 112.00 100.00 1998 8.60'/o ...... 222,370 22,237 22,237 110.00 101.00 1990 9 00'/o ...... 77,630 7,763 7,763 110.00 101.00 1990 9.24o/o ...... 750,000 75,000 75,000 115.00 101.00 1991 Total..... $ 231,375 $ 231,375 Preference ...... 5,000,000

$ 8.00........... 350,000 $ 35,000 $ 35,000 $ 105.50 $ 101.00 1987

$ 8.40........... 400,000 40,000 40,000 110.00 101.00 1986

$ 8.70........... 400,000 40,000 40,000 109.00 101.00 1984

$ 9.25........... 160,000 20,000 16,000 100.00 1981

$ 11.00......... 500,000 50,000 50,000 109.90 100.00 1995

$ 13.00......... 250,000 25,000 25,000 111.70 100.00 1994 Total..... $ 210,000 $ 206,000-The Preference Stock may not be refunded through certain refunding operations prior to the following dates: $ 8.70 series, 7/1/78; $ 13.00 series, 10/1/84; $ 11.00 series, 7/1/85. Otherwise, the Preferred and Preference Stock may be redeemed, in whole or in part, at the option of the Company at redemption prices ranging between the September 30, 1977 price and the final price shown above, with the exception that the Preference Stock, $ 9.25 Series, is not redeemable by the Company other than through the sinking fund requirement or voluntary liquidation.

44

PENNSYLVANIAPOWER & LIGHT COMPANY NOTES TO FINANCIALSTATEMENTS (Continued)

The liquidation prices of all issues of Preferred Stock, which are payable on a parity with each other and in preference to the Preference Stock and the Common Stock, are as follows: involuntary liquidation

$ 100 a share; voluntary liquidation $ 100 a share for the 4' /o Preferred Stock and the redemption price in effect at the time for the Series Preferred Stock; plus in each case any unpaid dividends.

The liquidation prices of Preference Stock, which are payable after satisfaction of the preferential rights of Preferred Stock and in preference to the Common Stock, are as follows: involuntary liquidation

$ 100 a share; voluntary liquidation the redemption price in effect at the time, with the exception that the voluntary liquidation price of the Preference Stock, $ 9.25 Series, is $ 110 a share; plus in each case any unpaid dividends.

Each of the following series of stock contains sinking fund provisions designed to retire the series at a redemption price of $ 100 a share plus accrued and unpaid dividends to the date of such redemption:

Shares to be Redeemed Annually Redemption Period Preferred Stock 7 40/o Series. 16,000 July 1, 1979 July 1, 2003 9.24/s Series (a) ................~....... 30,000 July 1, 1981 July 1, 2005 Preference Stock

$ 9.25 Series (b)......................... 40,000 Jan. 1, 1977 Jan. 1, 1981

$ 11.00 Series (a) ....................... 25,000 July 1, 1981 July 1, 2000

$ 13.00 Series (a) ....................... 12,500 Oct. 1, 1980 Oct. 1, 1999 (a) The Company has the right to redeem on each sinking fund redemption date additional shares up to the number of shares of this Series required to be redeemed annually.

(b) In January 1977, the Company redeemed 40,000 shares of the Preference Stock, $ 9.25 Series.

Capital stock expense represents commissions and expenses incurred in connection with the issuance and sale of capital stock. Of the capital stock expense balance at September 30, 1977, approximately $ 3.0 million applicable to the preferred and preference stock series which are to be redeemed through sinking fund provisions will be amortized to Earnings Reinvested as the respective series of stock are redeemed. No amortization plan is in effect for capital stock expense applicable to other issues of capital stock.

45

N q

PENNSYLVANIAPOWER & LIGHT COMPANY NOTES TO FINANCIALSTATEMENTS (Continued)

Sales of capital stock since January 1, 1972 are as follows (shares and amounts in thousands):

Class Shares Amount July 1972 ....... Preference, $ 8.00 Series 350 $ 35,000 October 1972 .......................... Common 2,000 46,940 August 1973...................... 7.40/0 Series Preferred 400 40,000 November 1973. Common 2,000 40,900 July 1 974 e~~~~~~~~~~~~~~~~~~ ~ ~ ~ ~ ~ ~ Common 2,200 35,156 October 1974 Preference, $ 13.00 Series 250 25,000 April 1975. Common 3,000 51,450 August 1975. Preference, $ 11.00 Series 500 50,000 September 1975.. Preference, $ 9.25 Series 200 20,000 1975..

Common dividend reinvestment and employee monthly investment plans 301 5 595 April 1976. Common 3,500 67,935 June 1976. 9.24/o Series Preferred 750 75,000 October 1976 Common employee stock ownership plan 35 755 1976 Common dividend reinvestment plan 716 14,268 Common 3,200 67,040 Common dividend reinvestment plan 596 13,234 On October 14, 1977, the Company issued $ 2,528,000 (107,573 shares) of Common Stock to the Trustee of the Company's Employee Stock Ownership Plan.

On October 19, 1977, the Company sold 500,000 shares ($ 50 million) of 8/o Series Preferred Stock

($ 100 par) to three institutional investors. The terms of the 8/o Series Preferred Stock include a sinking fund provision designed to retire 25,000 shares ($ 2.5 million) of the stock annually during the years 1983 through 2002.

7. DIVIDEND RESTRICTIONS The Company's charter and mortgage indentures restrict the payment of cash dividends on Common Stock under certain conditions. Under the charter provisions, which are the more limiting, no restrictions are effective on the payment of such dividends out of current earnings. The amount of earnings reinvested free of restrictions under the charter was $ 193.4 million at December 31, 1976 and

$ 269.5 million at September 30, 1977, after giving effect to (1) the issue of $ 2,528,000 of Common Stock in October 1977, (2) the sale of $ 50,000,000 of 8/o Series Preferred Stock in October 1977 and (3) the sale of the Bonds.

46

PENNSYLVANIAPOWER 8a LIGHT COMPANY NOTES TO FINANClALSTATEMENTS (Continued)

8. LONG-TERM DEBT Long-term debt outstanding consisted of the following (thousands of dollars):

December 31, September 30, 1978 1977 First mortgage bonds.. $ 1,165,500 $ 1,145,000 Notes:

7'/o due 1980. 20,000 20,000 Other. 550 Unamortized (discount) and premium net .... (4,056) 430 (3,898)

Total.. 1,181,994 1,161,532 Less amount due within one year.................... 20,675 3,676 Total long-term debt. $ 1,161,319 $ 1,157,856 First mortgage bonds consisted of the following series at December 31, 1976 and September 30, 1977 (thousands of dollars):

Outstanding Outstanding Series Due 1978 1977 Series Due 1978 1977 2s/io/o 1977 $ 20,000 7 o/o 1999 $ 40,000 $ 40,000 3Vso/o 1978 3,000 $ 3,000 8t/so/o 1999 40,000 40,000 2s/4o/o '1980 37,000 37,000 9 o/o 2000 50,000 50,000 3%o/o 1982 7,500 7,500 7 /4 /o 2001 60,000 60,000 1 0'!s'/o 1982 100,000 100,000 7%o/o 2002 75,000 75,000 3V2o/o 1983 25,000 25,000 7Vso/o 2003 80,000 80,000 3%o/o 1985 25,000 25,000 9t/4o/o 2004 80,000 80,000 4%o/o 1991 30,000 30,000 974o/o 2005 125,000 125,000 4%o/o 1994 30,000 30,000 9 /4'/o 2005 100,000 100,000 5%o/o 1996 30,000 30,000 8'/4'lo 2006 150,000 150,000 6s/4o/o 1997 30,000 30,000 (a) 28,000 27,500 (a) Pollution Control Series A due 1977-2003, 4Vs/o to 5%/o.

The amount of long-term debt maturing in each calendar year through 1982 is (thousands of dollars):

1977 1978 1979 1980 1981 1982

$ 20,762 $ 3,686 $ 574 $ 57,568 $ 553 $ 108,006 The maximum aggregate annual sinking fund requirements through 1982 of the outstanding.

mortgage bonds are (thousands of dollars):

1977 1978 1979 1980 1981 1982

$ 1,575 $ 2,740 .

$ 3,265 $ 3,050 $ 3,050 $ 4,450 Lesser requirements will apply for the years 1978-1982 if long-term debt is 50/o or less of net property. The Company has the right to meet all of these requirements with property additions or bonds.

Substantially all utility plant is subject to the liens of the Company's mortgages.

47

lf

/

E g

PENNSYLVANIAPOWER & LIGHT COMPANY NOTES TO FINANCIALSTATEMENTS (Continued)

9. HYDROELECTRIC PROJECTS Reference is made to the information appearing under "BUSINESS Hydroelectric Projects".

10. TAXES Income tax expense is recorded on the Statement of Income as follows (thousands of dollars):

1972 1973 1974 1975 1976 1977(a)

Operating Expenses

\

Provision Federal;........ $ 12,582 $ 16,454 $ 12,554 $ 22,547 $ 656 $ 22,030 State ............ 5,520 6,207 3,858 8,221 6,766 13,880 18,102 22,661 16,412 30,768 7,422 35,910 Deferred Federal................~.... 2,176 4,557 15,991 2,952 7,185 8,976 State ........................ 653 1,180 3,271 590 i 1,560 1,952 2,829 5,737 19,262 3,542 8,745 10,928 Investment tax credits Deferred................ .. ~ 7,349 7,233 4,753 14,465 29,496 40,887 Amortization of defer-ments ................... (2,194) (1,688) (1,216) (1,477) (1,835) (2,380) 5,155 5,545 3,537 12,988 27,661 38,507 26,086 33,943 39,211 47,298 43,828 85,345 Other Income and Deductions Reduction in provision Federal..................... (263) (46) (4,156) (9,164) (11,859) (11,288)

State ........................ (71) (45) (920) (2,037) (2,598) (2,619)

Deferred investment tax credits ......................... (672)

(334) (91) (5,076) (11,201) (14,457) (14,579)

Total income tax expense......... $ 25,752 $ 33,852 $ 34,135(b) $ 36,097 $ 29,371 $ 70,766 Federal and State Income Taxes Payable (Credit) ........ $ 17,768 $ 22,570 $ 11,336 $ 19,567 $ (7,035) $ 22,003 (a) Twelve months ended September 30.

(b) Excludes $ 4,831,000 deferred income taxes related to Nonrecurring Credit.

Investment tax credits eliminated the Company's Federal income tax liability for 1976 and resulted in a credit to the provision for income taxes of approximately $ 5.9 million related to a carry back of investment tax credits to prior years. Total income tax expense for 1976 has been credited by approximately $ 5.0 million representing adjustments of prior years'ax liabilities. The principal adjustment, related to adoption of the modified half-year convention method of computing tax 48

PENNSYLVANIAPOWER & LIGHT COMPANY NOTES TO FINANClALSTATEMENTS (Continued) depreciation in the Company's 1975 Federal income tax return, reduced total income tax expense by approximately $ 2.8 million.

Deferred income taxes result from the following items (thousands of dollars):

1972 1973 1974 1975 1976 1977(a)

Portion of tax depreciation under the class life depreciation system. $ 1,550 $ 3,057 $ 3,715 $ 4,540 $ 6,463 $ 6,425 Recoverable fuel costs.................... 14,009(b) 829 2,391 2,688 Forced outage reserve .................... (3,726) (1,041) (189)

Other 11279 2,680 1,538 1,899 932 2,004

$ 2,829 $ 5,737 $ 19,262 $ 3,542 $ 8,745 $ 10,928 (a) Twelve months ended September 30.

(b) Excludes $ 4,831,000 deferred income taxes related to Nonrecurring Credit.

The combined Federal and State corporate income tax rates for the Company, after giving effect to the deductibility of the State income tax expense, ranged from 52.9% to 54.0% during the periods shown on the Statement of Income. Income tax expense differed from the amount computed by applying the combined Federal and State corporate income tax rates to pre-tax income as follows (thousands of dollars):

1972 1973 1974 1975 1976 1977(a)

Net income. . $ 57,921 $ 66,912 $ 87,479 $ 97,541 $ 112,111 $ 145,815 Income tax expense .............................. 25,752 33,852 38,966 36,097 29,371 70,766 Pre-tax income. . .. $ 83,673 $ 100,764 $ 126,445 $ 133,638 $ 141,482 $ 216,581

~

Indicated income tax expense at com-bined tax rates. $ 45,166 $ 54,131 $ 66,940 $ 70,748 $ 74,901 $ 114,658 Reductions due to:

Allowance for funds used during construction......... 7,906 8,041 10,976 19,379 23,925 26,426 Tax deduction in excess of book expense:

Depreciation............................ 6,145 7,531 8,799 9,131 15,067 13,271 Tax and pension cost .............. 2,554 2,687 2,491 2,998 3,354 3,623 Other net. 2,809 2,020 5,708 3,143 3,184 572 Total. 19,414 20,279 27,974 34,651 45,530 43,892 Income taxexpense..........................~... $ 25,752 $ 33,852 $ 38,966 $ 36,097 $ 29,371 $ 70,766 Effective income tax rates ...................... 30.8% 33.6% 30.8% 27.0% 20.8% 32.7%

(a) Twelve months ended September 30.

49

PENNSYLVANIAPOWER & LIGHT COMPANY NOTES TO FINANCIALSTATEMENTS (Continued) l Taxes other than income taxes charged to operating expense were (thousands of dollars):

1972 1973 1974 1975 197B 1977(a)

State gross receipts............................. $ 15,194 $ 16,867 $ 20,564 $ 23,756 $ 28,320 $ 32,415 State capital stock. 4,428 5,403 6,263 7,284 8,860 9,609 State utility real estate.......................... 3,611 4,687 5,258 5,980 8,052 10,700 Social security and other ................... ~ . 2,425 3,048 3,486 3,649 4,294 5,250 Total $ 25,658 $ 30,005 $ 35,571 $ 40,669 $ 49,526 $ 57,974 (a) Twelve months ended September 30.

11. RETIREMENT PLAN Obligations of the Company's Retirement Plan are currently funded through a Trust Fund. At June 30, 1976, the date of the Plan's most recent actuarial examination, the Fund's assets at market were

$ 92.3 million and at cost were $ 94.5 million. Pension costs were (thousands of dollars):

1972 1973 1974 1975 197B 1977(a)

$ 6,733 $ 6,761 $ 6,661 $ 8,830 $ 9,755 $ 10,936 (a) Twelve months ended September 30.

Based on the Fund's assets at cost, at June 30, 1976 the actuarially computed unfunded past service cost was $ 28.6 million. As of the same date vested benefits exceeded the cost basis of the Fund's assets by $ 20.0 million.

Plan amendments effective as of July 1, 1976, subject to Internal Revenue Service approvai, provide for increased benefits, reduced employee contributions and certain other minor changes to comply with the Employee Retirement Income Security Act of 1974. These amendments increased the unfunded past service cost and vested benefits by about $ 3.6 million, and the Company's annual cost by about

$ 1.0 million commencing in 1977, including amortization of the increased past service cost over 20 years.

12. RENTALS AND NONCANCELLABLE LEASE COMMITMENTS Rentals were charged to operating expense in the following amounts (thousands of dollars):

1972 1973 1974 1975 1979 1977(a)

$ 6,279 $ 7,515 $8,911 $ 9,477 $ 10,502 $ 11,002 (a) Twelve months ended September 30.

50

PENNSYLVANIAPOWER & LIGHT COMPANY NOTES TO FINANCIALSTATEMENTS (Continued)

At September 30, 1977, the Company was committed for minimum rentals totaling $ 113.2 million under noncancellable leases expiring at various dates to 1997. The minimum rentals are as follows

~

(thousands of dollars):

After 1977 1978 1979 1989 1981 1982-1988 1987-1991 1992-1998 1998

$ 6,586 $ 8,083 $ 7,754 $ 7,554 $ 7,208 $ 28,188 $ 24,681 $ 21,156 $ 2,039 These minimum rental commitments are applicable to the following categories of property: oil storage facilities, $ 54.7 million; railroad coal cars, $ 27.0 million; combustion turbine generating equipment, $ 16.6 million; computer equipment, $ 11.1 million; and construction cranes, $ 3.8 million.

Generally the leases contain renewal options and obligate the Company to pay maintenance, insurance and other related costs.

The present value of future minimum lease commitments at September 30, 1977 applicable to noncapitalized financing leases (as defined by the Securities and Exchange Commission) was less than 5/e of the Company's capitalization, and the impact on net income for the years 1975, 1976 and the twelve months ended September 30, 1977 if all noncapitalized financing leases were capitalized and amortized on a straight-line basis with interest accrued on the basis of the outstanding lease liability, is less than 3/e of the average net income of the latest three years.

13. ACQUISITION On December 31, 1976 the Company acquired all of the outstanding capital stock of Hershey Electric Company (HEC), an electric distribution company. The acquisition cost of the capital stock and the repayment of all debt owed by HEC approximated $ 7.9 million.

14. SALE OF 100/o OF SUSQUEHANNA PLANT Reference is made to information appearing under "CONSTRUCTION PROGRAM" regarding agreements between the Company and Allegheny Electric Cooperative, Inc. (Allegheny) for the sale of a 10/e undivided ownership interest in the Company's Susquehanna Nuclear Units and deposits received from Allegheny (amounting to $ 78.8 million at September 30, 1977) which are subject to refund if necessary regulatory approvals of the sale are not received by March 16, 1978.

15. COMMITMENTS AND CONTINGENT LIABILITIES The Company estimates that about $ 1.51 billion will be required to complete construction projects in progress at the end of 1976. Of this amount, approximately $ 1.15 billion is related to completion of the Company's two nuclear generating units at Susquehanna.

Reference is made to additional information appearing under "CONSTRUCTION PROGRAM",

"BUSINESS Environmental Matters" and "BUSINESS Fuel Supply (Oil) and (Nuclear)".

51

PENNSYLVANIAPOWER & LIGHT COMPANY NOTES TO FINANCIALSTATEMENTS (Continued)

In connection with providing for its future bituminous coal supply, the Company at September 30, 1977 had guaranteed capital and other obligations of certain coal suppliers (including owned coal companies) aggregating $ 166.5 million. See "BUSINESS Fuel Supply (Coal)".

16.

SUMMARY

OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

Quarterly earnings can be influenced by weather, timing of rate relief, performance of gene'rating stations, sales to other utilities and other factors such as those described under "MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE STATEMENT OF INCOME".

The following is summary quarterly data for the years 1975 and 1976 and the first three quarters of 1977 (thousands of dollars):

Earnings Earnings Per Share auarter Operating Operating Net Applicable To Of Common Ended Revenues Income Income Common Stock Stock(a) 1975 March 31. $ 150,106 $ 29,833 $ 23,673 $ 18,224 $ 0.78, June 30. 128,984 26,742 22,248 16,677 0.65 September 30 .......................... 125,917 30,168 25,542 19,461 0.74 December 31 ........................... 139,122 34,226 26,078 18,670 0.70 1976 March 31. 166,269 34,360 25,189 17,781 0.67 June 30.. 149,281 28,006 21,281 13,603 . 0.46 September 30 .................... ~..... 149,580 35,241 30,423 21,282 0.70 December 31(b)................. 179,017 40,727 35,218 26,077 0.85 1977 March 31 208,894 47,017 40,114 31,066 1.00 June 30.. 173,299 43,912 35,547 26,498 0.79 September 30(c) ...................... 174,067 48,913 34,936 25,888 0.75 (a) Quarterly earnings per share are based on the average number of shares outstanding during the quarter.

(b) Results for the fourth quarter of 1976 include a reduction in income tax expense of $ 2.4 million due to increased tax depreciation applicable to Martins Creek Unit No. 4 which began test operation December 11, 1976 and a $ 2.1 million charge to expense (net of income taxes) to adjust the amortization of deferred fuel costs for the years 1970-1975 to the actual fuel adjustment revenues billed during those years.

(c) Net income for the third quarter of 1977 includes a $ 6.6 million (net of income taxes) loss ($ .20 per share) of a subsidiary company. For additional information see "BUSINESS Fuel Supply (Coal)".

PENNSYLVANIAPOWER & LIGHT COMPANY NOTES TO FINANCIALSTATEMENTS (Continued)

17. REPLACEMENT COST DATA (UNAUDITED)

In compliance with the rules of the Securities and Exchange Commission (SEC), the Company has estimated certain replacement cost information for utility plant in service and depreciation. The Company has not included replacement cost data for- materials and supplies inventory since the amount of the inventory is not significant. Replacement cost data relating to fuel inventories have not been included since changes in cost levels are recovered through the operation of fuel adjustment clauses.

Although the replacement cost data disclosed herein have, in the Company's opinion, been reasonably estimated in accordance with rules and interpretations of such rules published by the SEC, the Company believes that investors should be aware of the imprecision and limitations of this information and of the many subjective judgments required In the replacement cost estimation.

The replacement cost information is based on the hypothetical assumption that the Company would replace its entire productive capacity at December 31, 1976, whether or not the funds to do so were available or such "instant" replacement were physically or legally possible. This assumption requires that the Company contemplate actions at December 31, 1976 that ordinarily would not be addressed all at one time.

Accordingly, the information should not be interpreted to indicate that the Company actually has present plans to replace its productive capacity or that actual replacement would or could take place in the manner assumed in estimating the information. In the normal course of business, the Company will replace its productive capacity over an extended period of time. Decisions concerning replacement will be made In light of the economics, availability of funds, fuel availability, equipment availability, customer demand and regulatory requirements existing when such determinations are made and could differ substantially from the assumptions on which the data included herein are based.

The replacement cost data presented are not necessarily representative of the "current market value" of existing facilities or of the "fair value" of utility plant as that term is used in rate proceedings before the PUC.

The replacement cost information presented does not reflect all of the effects of inflation on the Company's current costs of operating the business. The Company has not attempted to quantify the total impact of inflation, environmental and other governmental regulations (except as set forth below) and changes in other economic factors on the business because of the many unresolved conceptual problems and ratemaking considerations involved in doing so. Accordingly, it is the Company's view that the replacement cost data presented herein cannot be used alone to determine the total effect of inflation on reported net income.

53

PENNSYLVANIAPOWER & LIGHT COMPANY NOTES TO FINANCIALSTATEMENTS-(Concluded)

The computed replacement cost of the Company's utility plant in service and related depreciation expense with comparative historical cost data are as follows (millions of dollars):

Computed Replacement Cost Utilityplant in service at December 31, 1976 Subject to replacement cost determination ........ $ 1,986 $ 4,312 Land, plant held for future use and intangibles at original cost. 112 112 Total plant in service.. 2,098 4,424 Less accumulated depreciation 459 1,033 Net plant in service ............................ $ 1,639 $ 3,391 Depreciation expense for the year 1976.................... $ 62 $ 123 The replacement cost of coal-fired and oil-fired steam station capability was determined by trending the construction cost of the most recently installed units (800 mw capability range) and computing a replacement cost per kw capability of the units. This cost per kw was applied to the Company's respective coal-fired and oil-fired steam station capability to determine the gross replacement cost of such facilities. The original installed cost of hydroelectric, other power production, transmission, distribution, and other facilities was trended to determine replacement cost. The trend indices utilized were determined by the Company and are believed to be more representative of the changes in construction costs experienced by the Company than published indices. ~

The replacement cost of coal-fired steam stations was based on the assumption that such facilities would be replaced with bituminous coal-fired units. Accordingly, based on current technology, the gross replacement cost of utility plant at December 31, 1976 includes approximately $ 500 million which the Company estimates would have to be expended to enable such facilities to meet particulate and sulfur dioxide emission regulations existing at December 31, 1976.

The accumulated depreciation related to the replacement cost of productive capacity was determined by applying the same percentage relationship that existed between gross utility plant and accumulated depreciation by functional groups on a historical basis at December 31, 1976 to the current replacement cost of the productive capacity.

Replacement cost depreciation expense for the year 1976 was determined on a straight-line basis by applying the functional class depreciation accrual rates currently in use to the respective functional class average replacement cost amounts. Such amount has been calculated in accordance with SEC instructions and does not represent an actual expense. Within the context of utility ratemaking procedures, the purpose of book depreciation expense, as shown on the Statement of Income, ls to provide recovery of invested capital over the life of the related facilities, and is not intended to provide a fund equal to the amount necessary to replace such facilities at the cost level existing at the time of replacement.

54

PURCHASERS The Purchasers named below have severally agreed to purchase from the Company the following respective principal amounts of Bonds.

Principal Principal Purchaser Amount Purchaser Amount Total. $ 100,000,000 55

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PART II. INFORMATION NOT REQUIRED IN PROSPECTUS.

Item 13. Other Expenses of Issuance and Distribution of the Bonds.

Securities and Exchange Commission registration fee ............................ $ 20,400 Printing and engraving .. 65;000 Fees and expenses of Trustee, including counsel and authentication fees.... ............ .. ..............

~ 30,000 Legal fees. 27,500 Accounting fees .. 5,000 Postage .................................................................................................... 20,000 Rating agency fees. 22,000 Blue Sky fees and expenses . 4,500 Recording fees 2,500 Miscellaneous.. 3,100 Total $ 200,000 All of the above except the Securities and Exchange Commission registration fee are estimated.

Item 14. Relationship with Registrant of Experts named in Statement.

Reference is made to the captions "Experts" and "Legal Opinions" in the Prospectus.

Item 15. Indemnification of Directors and Officers.

Article VII of the By-Laws of the Company reads as follows:

"Indemnification of Directors, Officers, Etc.

SzcrtoN 7.01. Directors and Ojgcers; Third Party Actions. The corporation shall indemnify any director or officer of the corporation who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was an authorized representative of the corporation (which, for the purposes of this Article, shall mean a director, officer, employee or agent of the corporation, or a person who is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise) against expenses (including attorneys'ees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding ifhe acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in, or not opposed to, the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful.

SEGTIoN 7.02. Directors and Ojfieers; Derivative Actions. The corporation shall indemnify any director or officer of thc corporation who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was an authorized representative of the corporation, against expcnscs (including attorneys'ees) actually and reasonably incurred by him in

'onnection with the defense or settlement of such action or suit if he acted in good faith and in a

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manner he reasonably believed to be in, or not opposed to, the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the corporation unless and only to the extent that the court of common pleas of the county in which the registered office of the corporation is located or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the court of common pleas or such other court shall deem proper.

SECTIoN 7.03. Employees and Agents. To the extent that an authorized representative of the corporation who neither was nor is a director or officer of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 7.01 and 7.02 of this Article or in defense of any claim, issue or matter therein, he shall be indemnified by the corporation against expenses (including attorneys'ees) actually and reasonably incurred by him in connection therewith. Such an authorized representative may, at the discretion of the corporation, be indemnified by the corporation in any other circumstances to any extent ifthe corporation would be required by Sections 7.01 or 7.02 of this Article to indemnify such person in such circumstances to such extent ifhe were or had been a director or officer of the corporation.

SEGTIoN 7.04. Procedure for Egecring Indemnification. Indemnification under Sections 7.01, 7.02 or 7.03 of this'Article shall be made when ordered by court (in which case the expenses, including attorneys'ees, of the authorized representative in enforcing such right of indemnification shall be added to and be included in the final judgment against the corporation) and may be made in a specific case upon a determination that indemnification of the authorized representative is required or proper in the circumstances because he has met the applicable standard of conduct set forth in Sections 7.01 or 7.02 of this Article. Such determination shall be made:

(1) By the board of directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (2) Ifsuch a quorum is not obtainable, or, even ifobtainable a majority vote of a quorum of disinterested directors so direct, by independent legal counsel in a written opinion, or (3) By the shareholders.

SacTtoN 7.05. Advancing Expenses. Expenses (including attorneys'ees) incurred in defending a civil or criminal action, suit or proceeding shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding, upon receipt of an undertaking by or on behalf of a director or officer to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the corporation as required in this Article or as authorized by law and may be paid by the corporation in advance on behalf of any other authorized representative when authorized by the board of directors upon receipt of a similar undertaking.

SEGTIQN 7.06. Scope of Article. Each person who shall act as an authorized representative of the corporation, shall be deemed to be doing so in reliance upon such rights of indemnification as are provided in this Article.

The indemnification provided by this Article shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any agreement, vote of shareholders or disinterested directors, statute or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office or position, and shall continue as to a person who has ceased to be an authorized representative of the corporation and shall inure to the benefit of the heirs, executors and administrators of such a person."

Directors and officers of the Company may also be indemnified in certain circumstances pursuant to the statutory provisions of general application contained in the Pennsylvania Business Corporation Law.

]t Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforc'cable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

Reference is also made to the Form of Bid, including Terms of Purchase, filed as Exhibit 1(b) hereto, which contains provisions for indemnification of the Company and its directors and officers by the several Purchasers. against certain civil liabilities for information furnished by the Purchasers..

The Company presently has an insurance policy which, among other things, includes liability insurance coverage for officers and directors, with a $ 20,000 deductible clause, under which officers and directors are covered against any "loss" by reason of payment of damages, judgments, settlements and costs, as well as charges and expenses incurred in the defense of actions, suits or proceedings. "Loss" is specifically defined to exclude fines and penalties,'s well as matters deemed uninsurable under the law pursuant to which the insurance policy shall be construed. The policy also contains other specific exclusions, including illegally obtained personal profit or advantage, and dishonesty.

The policy also provides for reimbursement to the Company for loss incurred by having indemnified officers or directors as authorized by state statute, company by-laws, or any other agreement.

Item 16. Treatment of Proceedsfrom Stock to bc Registered.

Inapplicable.

Item 17. Other Documents Filed as a Part of rhe Registration Srafement.

(a) Statements of eligibility and qualification of persons designated to act as trustee under an indenture to be qualified under the Trust Indenture Act of 1939.

Statement on Form T-1 of Morgan Guaranty Trust Company of New York.

(b) Exhibits.

Incorporation by Reference Previous Previous Exhibit Exhibit No. Filing Designation 1(a) Public Invitation for Bids together with State-ment of Terms &, Conditions relating to Bids 1(b) Form of Bid, including Terms of Purchase l(c) Form of Agreement Among Purchasers (To be filed by Post-Effective Amendment) 2(a)-1 Form of First Mortgage Bond, due 2007 2(a)-2 Copy of Restated Articles of Incorporation, as amended

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Incorporation by Reference Previous Previous Exhibit Exhibit No. Filing Deslgnat ton 2(a)-3 Copy of By-laws Registration Statement 2(a)-3 (No. 2-58290) 2(a)-4 Mortgage and Deed of Trust, dated as of Registration Statement 7(c)

October I, 1945, between the Company and (No. 2;5872)

Guaranty Trust Company of New York (now Morgan Guaranty Trust Company of New York), as Trustee 2(a)-5 Supplement, dated as of July I, 1947, to said Mortgage and Deed of Trust 2(a)-6 Supplement, dated as of December I, 1948, to said Mortgage and Deed of Trust 2(a)-7 Supplement, dated as of February I, 1950, to said Mortgage and Deed of Trust

'2(a)-8 Supplement, dated as of March I, 1953, to said Mortgage and Deed of Trust

.2(a)-9 Supplement, dated July I, 1954, to said Mort- ~ Registration Statement 2(b)-5 gage and Deed of Trust (No. 2-19255)

'2(a)-10 Supplement, dated as of August I, 1955, to said Mortgage and Deed of Trust

'2(a)-11 Supplement, dated as of December I, 1961, to Registration Statement 2(b)-7 said Mortgage and Deed of Trust (No. 2-19255) 2(a)-12 Supplement, dated as of March I, 1964, to said Mortgage and Deed of Trust 2(a)-13 Supplement, dated as of June I, 1966, to said Mortgage and Deed of Trust 2(a)-14 Supplement, dated as of November I, 1967, to said Mortgage and Deed of Trust 2(a)-15 Supplement, dated as of December I, 1967, to said Mortgage and Deed of Trust 2(a)-16 Supplement, dated as of January I, 1969, to said Mortgage and Deed of Trust 2(a)-17 Supplement, dated as of June I, 1969, to said Mortgage and Deed of Trust 2(a)-18 Supplement, dated as of March I, 1970, to said Mortgage and Deed of Trust 2(a)-19 Supplement, dated as of February I, 1971, to said Mortgage and Deed of Trust 2(a)-20 Supplement, dated as of February I, 1972, to said Mortgage and Deed of Trust

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Incorporation by Reference Previous Previous Exhibit Exhibit No. Filing Designation 2(a)-21 Supplement, dated as of January 1, 1973, to said Mortgage and Deed of Trust 2(a)-22 l Supplement, dated as of May 1, 1973, to said Mortgage and Deed of Trust 2(a)-23 Supplement, dated as of April 1, 1974, to said Mortgage.and Deed of Trust 2(a)-24 Supplement, dated as of October 1, 1974, to said Mortgage and Deed of Trust 2(a)-25 Supplement, dated as of May 1, 1975, to said Mortgage and Deed of Trust 2(a)-26 Supplement, dated as of November 1, 1975, to Registration Statement 2(a)-26 said Mortgage and Deed of Trust ( No. 2-54831) 2(a)-27 Supplement, dated as of December 1, 1976, to Registration Statement 2(a)-26 said Mortgage and Deed of Trust (No. 2-57633) 2(a)-28 Proposed Supplement, to be dated as of December 1, 1977, to said Mortgage and Deed of Trust 2(a)-29 Mortgage and Deed of Trust, dated as of Registration Statement D

. February 15, 1937, between The Scranton Elec- (No. 2-6289) tric Company (to which company the Company is successor by merger) and Chemical Bank &

Trust Company (now Chemical Bank) and Howard B. Smith (P. J. Gilkeson, successor), as

'2(a)-30, Trustees Supplement, dated as of November 1, 1946, to Form 1-MD, B-1 said Mortgage and Deed of Trust Registration Statement (No. 2-6289)

'2(a)-31 Supplement, dated as of April 1, 1948, to said Mortgage and Deed of Trust 0(a)-32 Supplement, dated as of May 15, 1952, to said Mortgage and Deed of Trust 2(a)-33 Supplement, dated as of September 1, 1952, to said Mortgage'and Deed of Trust 2(a)-34 Supplement, dated as of January 31, 1956, to said Mortgage and Deed of Trust 2(a)-35 Supplement, dated January 31, 1956, to said Registration Statement 2(d)-6 Mortgage and Deed of Trust (No. 2-19255) 2(a)-36 Instrument providing for resignation of Individ-ual Trustee and appointment of successor Indi-vidual Trustee under said Mortgage and Deed of Trust 2(a)-37 Instrument providing for resignation of Individ-ual Trustee and appointment of successor Indi-vidual Trustee under said Mortgage and Deed of Trust

Incorporation by Reference Previous Previous Exhibit Exhibit No. Filing Designation 2(a)-38 Instrument providing for resignation of Individ- Registration Statement 2(a)-37 ual Trustee and appointment of successor Indi- (No. 2-58290) vidual Trustee under said Mortgage and Deed of Trust 2(a)-39 Loan Agreement dated February 9, 1973, be- Form 8-K, tween the Company and The Chase Manhattan July 1973 Bank, N.A. (Docket No. 1-905) 2(a)-40 Preferred Stock Purchase Agreement, dated Form 8-K, A July 11, 1973, between the Company and The August 1973 Prudential Insurance Company of America (Docket No. 1-905) 2(a)-41 Preference Stock Purchase Agreement, dated Form 8-K, A September 22, 1975, between the Company and September 1975 Alco Standard Corporation (Docket No. 1-905) 2(a)-42 Composite Conformed Copy of Preferred Stock Purchase Agreement, dated October 11, 1977, between the Company and the purchasers named therein 3(a) Opinion of Edward M. Nagel, Esq., with respect legality of securities being registered here-

'o under 3(b) Opinion of Messrs. Reid & Priest with respect to legality of securities being registered hereunder 3(c) Consent of Paul Weir Company Incorporated 4(a) Article VII of the Company's By-Laws, relating to indemnification of directors and officers, is set forth in Item 15, to which reference is hereby made 4(b) -Copy of Memorandum of Excess Liability In- Registration Statement 4(b) surance, dated December 31, 1972, Covering (No. 2-51907)

Excess Public Liability & Property Damage, including Errors and Omissions, Employee Ben-efits and Directors and Officers Liabthty S(a) Copy of Coal Sales Agreement, dated January Registration Statement 5(b) 1, 1972, between the Company and Greenwich ( No. 2-42777)

Collieries Company 5(b) Copy of Interconnection Agreement, dated Registration Statement 13(a)

February 23, 1965, between Public Service (No. 2-26170)

Electric & Gas Company and the Company 5(c) Copy of Interconnection Agreement, dated Registration Statement 13(b)

February 19, 1965, between Philadelphia Elec- (No. 2-26170) tric Company and the Company 5(c)-1 Copy of Supplemen'tal Agreement, dated Jan- Registration Statement 13(b)-1 uary 27, 1967, to said Interconnection Agree- (No. 2-26170) ment

'5(c)-2 Copy of Supplemental Agreement, dated Octo- Registration Statement 5(c)-2 ber 20, f969, to said Interconnection Agreement (No. 2-35654) 5(d) Copy of Interconnection Agreement, dated Registration Statement'No. 5(e)

April 9, 1974, between New York Power Pool 2-51907)

Group and Pennsylvania-New Jersey-Maryland Group

Incorporation by Reference Previous Previous Exhibit Exhibit No. Filing Designation 5(e) Copy of Interconnection Agreement, dated September 26, 1956, among Public Service Electric & Gas Company, Philadelphia Electric Company, the Company, Baltimore Gas &

Electric Company, Pennsylvania Electric Com-pany, Metropolitan Edison Company, New Jersey Power & Light Company and Jersey Central Power & Light Company 5(e)-1 Copy of Supplemental Agreement, dated Jan- , Registration Statement 13(d)-1 uary 28, 1965, to said Interconnection Agree- ~

(No. 2-26170) ment 5(e)-2 Copy of Supplement entitled "Appendix A Me- Registration Statement 5(f)-2 ter Locations", dated July 28, 1972, to said (No. 2-51907)

Interconnection Agreement 5(e)-3 Copy of Supplemental Agreement, dated April Registration Statement 5(f)-4 1, 1974, to satd Interconnection Agreement (No 2-51312) 5(e)-4 Copy of Schedule 5.03, effective for filing Au- Registration Statement 5(e)-1 gust 1, 1974, to said Interconnection Agreement (No 2-52931) 5(e)-5 Copy of Supplemental Agreement, dated June 15, 1977, to said Interconnection Agreement 5(f) Copy of Conowingo Backwater Agreement, Registration Statement I-14 dated February 20, 1926, among Pennsylvania ( No. 2-4254)

Water & Power Company (to which company the Company is successor by merger), the Susquehanna Power Company, the Susque-hanna Electric Company, and Philadelphia Electric Company

'5(f)-1 Copy of Supplemental Letter Agreement, dated Registration Statement 5(g)-1 March 1, 1976, to said Conowingo Backwater (No. 2-57633)

Agreement 5(f)-2 Copy of Supplemental Letter Agreement, dated August 5, 1977, to said Conowingo Backwater Agreement 5(g) Copy of Power Supply Contract, dated as of Registration Statement 13(o)

June 1, 1955, among Baltimore Gas & Electric (No. 2-14608)

Company, the Company, and Safe Harbor Water Power Corporation 5(h) Copy of Agreement on the 'scheduling and Registration Statement 13(I )

dispatching of Safe Harbor and Holtwood Proj- (No. 2-14608) ects, dated as of June 1, 1955, among Safe Harbor Water Power Corporation, Baltimore Gas & Electric Company and the Company 5(i) Copy of Transmission Contract, dated as of July Registration Statement 13(h) 20, 1960, among the Company, Safe Harbor (No. 2-26170)

Water Power Corporation and Baltimore Gas &

Electric Company 5(j) Memorandum of Agreement regarding Key-stone Electric Geherating Station, dated December 7, 1964, between the Company and

'tlantic City Electric Company et al.

5(k) Keystone Operating Agreement, dated Decem-ber 1, 1965, between Pennsylvania Electric Company and the Company et al.

Incorporation by Reference Previous Previous Exhibit Exhibit No. Filing Designation 5(1) Memorandum of Owners'greement Regard-ing Conemaugh Steam Electric Station, dated August 1,'1966, between the Company and Atlantic City Electric Company et al.

5(m) Conemaugh Operating Agreement, dated December 1, 1967, between Pennsylvania Elec-tric Company and the Company et al.

5(m)-1 Supplement No. 1, dated June 4, 1969, to said Conemaugh Operating Agreement 5(n) Copy of Interconnection Agreement, dated May Registration Statement 4(j) 31, 1968, between Pennsylvania Electric Com- (No. 2-30918) pany and the Company 5(n)-1 ' Copy of Appendix B, Revision 2, dated October Registration Statement 5(k)-I 1, 1971, to said Interconnection Agreement (No. 2-42013) 5(o) Copy of Interconnection Agreement, dated Au- Registration Statement 13(j) gust 1, 1935, between Luzerne County Gas & (No. 2-26170) \

Electric Corporation (now UGI Corporation) and the Company 5(p)-1 Copy of Supplemental Agreement, dated June Registration Statement 13(j)-I 1, 1960, to said Interconnection Agreement (No. 2-26170) 5(p)-2 Copy of Amendment to said Supplemental Registration Statement 5(k)-2 Agreement, dated January 31, 1968, to said (No. 2-33042)

Interconnection Agreement 5(p)-3 Copy of Amendment to said, Supplemental Registration Statement 5(k)-3 Agreement, dated February 6, 1969, to said (No. 2-33042)

Interconnection Agreement

'5(p)-4 Copy of Amendment to said Supplemental Registration Statement 5(1()-4 Agreement, dated March 27, 1970, to said (No. 2-38149)

Interconnection Agreement 5(p)-5 Copy of Amendment to said Supplemental Registration Statement 5(1)-5 Agreement, dated October 10, 1972, to said (No. 2-46508)

Interconnection Agreement 5(p)-6 Copy of Amendment to said Supplemental Registration St'atement Agreement, dated May 1, 1973, to said Inter- (No. 2-49227) connection Agreement 5(p)-7 Copy of Supplemental Agreement, dated Registration Statement 5(1)-7 December ll, 1974, to said Interconnection (No. 2-52693)

Agreement 5(p)-8 Copy of Supplemental Agreementdated April Registration Statement 22, 1975, to said Interconnection Agreement (No. 2-52931) 5(q) Copy of Interconnection Agreement, dated Registration Statement 13(k)

April 26, 1965, between West Penn Power (No. 2-26170)

Company et al. and the Company et al.

5(q)-I Copy of Schedule 7.01, issued May 4, 1967, to Registration Statement said Interconnection Agreement (No. 2-30918) 5(q)-2 Copy of Schedule 1.05, issued December 22, Registration Statement '5(m)-2 1971, to said Interconnection Agreement (No.

5(q)-3 Copy of Schedules 1.06, 5.02, 6.02 and 9.01, 2-50488)'egistration Statement 5(m)-3 dated November 14, 1974, to said Inter- (No. 2-52693) connection Agreement 5(tl)-4 -

'Copy of Schedule 4.03, issued February', Regist'ration Statement 5(m)-4 1976, to said Interconnection Agreement (No. 2-56389)

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Incorporation by Reference Previous Previous Exblblt Exblblt No Filing Deslgnstion 5(q)-5 Copy of Schedule 7.03, dated August 16, 1976, Registration Statement 5(m)-5 to said Interconnection Agreement (No. 2-57633)

'5(r) Copy of Interconnection Agreement, dated 'Registration Statement 13(1)

September 30, 1965, between The Cleveland (No. 2-26170)

Electric Illuminating Company and the Com-pany et al.

5(r)-1 Copy of Schedule 8.02, issued March 24, 1975,; Registration Statement 5(n)-2 to said Interconnection Agreement (No. 2-52931) 5(r)-2 Copy of Schedules 1.02, 4.02, 5.02, 6.02, 7.02 Registration Statement 5(n)-2 and 9.01, dated November 12, 1975 to said (No. 2-56389)

Interconnection Agreement 5(s) Copy of Interconnection Agreement, dated Registration Statement 13(m)

September 30, 1965, between Virginia Electric (No. 2-26170) and Power Company and the Company et al.

5(s)-1 Copy of Schedule 7.01, issued June 2Q, 1967, to Registration Statement 4(n)-1 said Interconnection Agreement (No. 2-30918) 5(s)-2 Copy of Supplemental Agreement, dated Registration Statement 5(o)-2 September 1, 1976, to said Interconnection (No. 2-57633)

Agreement 5(t). Copy of Interconnection Agreement, dated Registration Statement 13(n)

October 30, 1964, between Metropolitan Edison (No. 2-26170)

Company and the Company 5(t)-1 Copy of Supplemental Agreement, dated Registration Statement 4(o)-1 September 29, 1967, to said Interconnection (No. 2-30918)

Agreement 5(t)-2 Copy of Supplemental Agreement, dated May , Registration Statement 4(o)-2 20, 1968, to said Interconnection Agreement (No. 2-30918) 5(t)-3 "Copy of Supplemental Agreement, dated Octo- Registration Statement 4(o)-3 ber 4, 1968, to said Interconnection Agreement (No. 2-30918) 5(t)-4 Copy of Supplemental Agreement," dated Registration Statement 5(o)-4 November 22, 1968, to said Interconnection (No. 2-33Q42)

Agreement 5(t)-5 Copy of Supplemental Agreement, dated June Registration Statement 5(o)-6 26, 1970, to said Interconnection Agreement (No. 2-38149) 5(t)-6 Copy of Appendix B, Revision 9, dated May 25, Registration Statement 5(1 )-6 1971, to said Interconnection Agreement (No. 2-40765) 5(t)-7 Copy of Supplemental Agreement, dated June Registration Statement 5(p)-10 21, 1974, to said Interconnection Agreement (No. 2-51907) 5(t)-8 Copy of Revision to Appendix C, dated Registration Statement 5(p)-11 September 10, 1974, to said Interconnection (No. 2-52693)

Agreement 5(t)-9 Copy of Revision to Appendix C, dated October Registration Statement 5(p)-12 30, 1974, to said Interconnection Agreement (No. 2-52693) 5(t)-10 Copy of Revision to Rate Schedule, dated April Registration Statement 5(p)-13 28, 1975, to said Interconnection Agreement (No. 2-52931) 5(t)-11 Copy of Supplemental Agreement, dated April Registration Statement 5(p)-11 5, 1976, to said Interconnection Agreement (No. 2-56389) 5'(u) Copy of the Extra High Voltage Transmission Registration Statement 4(p)

System Agreement, dated April 27, 1967, be- (No. 2-30918) tween the Company and Public Service Electric 4 Gas Company, et al.

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Incorporation by Reference Previous Previous Exhibit Exhibit No. Filing Designation 5(u)-1 Copy of Schedule 13.02, issued March 26, 1969, Registration Statement 5(p)-1 in connection with said Agreement (No. 2-33042) 5(u)-2 Copy of Supplemental Agreement, dated Octo- Registration Statement 5(1 )-3 ber 17, 1969, to said Agreement (No. 2-35654) 5(u)-3 Copy of Operating and Maintenance Agree- Registration Statement 5(p)-4 ments, dated as of February 1, 1970, in con- (No. 2-38149) nection with said Agreement 5(u)-4 Copy of Schedules 11.04 and 12.03, issued July Registration Statement 5(q)-4 16, 1971, in connection with said Agreement (No. 2-42013) 5(G)-5 Copies of Revisions to Schedule A, issued Jan- Registration Statement 5(q)-5 uary 1, 1975 and May 1, 1975, to said Schedule (No. 2-54831) 12.03 5(u)-6 Copy of Supplemental Agreement, dated May Registration Statement 5(q)-5 17, 1972, to said Agreement (No. 2-45713) 5(u)-7 Copy of Schedules 2.03, 3.03, 4.03, 6.02 and Registration Statement 5(q)-7 8.04, issued July 29, 1976, to said Agreement (No. 2-57633) 5(v) Copy of the Susquehanna-Eastern 500 KV Registration Statement 5(r)

Transmission System Agreement, date as of (No. 2-57633)

April 30, 1976, between the Company and Public Service Electric and Gas Company, et al.

5(w) Copy of Mid-Atlantic Area Coordination Registration Statement 5(r)

Agreement, dated April 23, 1971, between the (No. 2-40765)

Company and Atlantic City Electric Company, et al.

5(w)-1 Copy of Agreement on Coordinated Program for Reduction in Energy Use, dated April 1, 1977, between the Company and Atlantic City.

Electric Company, et al.

5(x) Copy of 115 KV Seward-Conemaugh Inter- Registration Statement 5(r) connection Facilities Agreement, dated March (No. 2-38149) 2, 1970, between Pennsylvania Electric Com-pany and the Company, et al.

5(y) Pipeline System Contract, dated as of June 22, Registration Statement 5(u) 1972, between the Company and Gulf Interstate (No. 2-45713)

Engineering Company 5(y)-1 Copy of Amendment, dated as of November 1, ~ Registration Statement 5(u)-1 1973, to said Pipeline System Contract (No. 2-51907) 5(y)-2 Copy of Amendment, dated as of January 23, Registration Statement 5(u)-2 1974, to said Pipeline System Contract (No. 2-51901) 5(y)-3 Copy of Amendment, dated as of January 1, Registration Statement 5(u)-3 1975, to said Pipeline System Contract (No. 2-54831) 5(y)-4 Copy of Amendment, dated as of January 1, Registration Statement 5(t)-4 1976, to said Pipeline System Contract (No. 2-5290) 5(z) Pollution Control Facilities Agreement, dated Form 8-K, ~

A as of May 1, 1973, between the Company and May 1973 the Lehigh County Industrial Development Au- (Docket No. 1-905) thority S(aa) Copy of Petroleum Product Sales Agreement Registration Statement 5(y) for the sale of residual oil, dated as of January (No. 2-54299).

1, 1975, between the Company and Amerada Hess Corporation

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Incorporation by Reference Previous Previous Exhibit Exhibit No. Filing Designation 5(bb) Copy of Agreement, dated as of January 1, Registration Statement 5(w) 1977, between the Company and Asiatic Petro- (No. 2-5290) leum Corporation for the sale of oil, 5(cc) Copy of Agreement, dated as of March 24, Registration Statement 5(y) 1977, between the Company and Sun Oil Com- (No. 2-58290) pany of Pennsylvania 5(dd) Copy of Participation Agreement, dated as of March 18, 1977, between the Company and Allegheny Electric Cooperative, Inc.

5(dd)-1 Copy of Second Termination Agreement, dated September 16, 1977, between the Company and Allegheny Electric Cooperative, Inc.

6(a) Computation of Ratio of Earnings to Fixed Charges Actual and Pro Forma 6(b) Supplemental Computation of Ratio of Earn-ings to Fixed Charges Actual and Pro Forma Calculation of Allocation of Allowance for Funds Used During Construction Attributable to Funds Provided by Common Stock Equity

SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Allentown, and Commomvealth of Pennsylvania, on the 11th day of November, 1977.

PENNsYLYANIAPowER & LIGHT CoMPANY By /s/ JACK K. BUsBY Jack K. Busby, Chairman of the Board And Chief Executive Ollicer Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed belo>v by the following persons in the capacities indicated on the 11th day of November, 1977.

Signature Title Principal Executive

/s/ JAGK K. BvsBY

~

, Officer Jack K. Busby, Chairman of thc Board and Chief Executive.OIIlccr Principal Financial and

/s/ R. R. FoRTUNE Accounting OScer R. R. Fortune, Executive Vice President-Financial RALPH R. CRANMER, EDGAR L. DESSEN, R. R. FORTUNQ HARRY A. JENsEN, W. DEMING LEwis, JoltN A. NoBI.E, NORMAN ROBERTSON, JOSEPH T. SIMPSON AND CHARLES Directors H. WATrs II By /s/ JACK K. BUsBY Jack K. Busby, Attorney-in-fact

9 V

4

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS PENNSYLVANIAPOWER & LIGHT COMPANY:

We hereby consent to the use in this Registration Statement of our opinion dated February 3, 1977 appearing in the Prospectus which is a part of such Registration Statement, and to the references to us under "Statement of Income" and "Experts" in such Prospectus.

HASKINs & SELLS New York, New York November 11, 1977 (The consents of Edward M. Nagel, Esq., Messrs. Reid & Priest and Paul Weir Company Incorporated are filed as Exhibits 3(a), 3(b) and 3(c), respectively, to the Registration Statement.)

II It EXHIBIT6(a)

PENNSYLVANIAPOWER 4 LIGHT COMPANY COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES ACTUALAND PRO FORMA (Thousands ol'ollars)

Twelve Months Ended Year Ended December 31, September 30, 1977 Adjust- Pro 1972 1973 1974 1975 1976 Actual ments Forma Fixed charges, as defined:

Interest on long-term debt.............................. $ 36,5Q? $ 43,2Q3 $ 51,149 $ 67,932 $ 79,783 $ 88,671 $ 10,805(1) $ 99,476 Interest on short-term debt............................. 3,846 ',790 9,562 6,228 7,134 5,426 986(2) 6 412 Other interest charges........,...,....,.........,..... 99 114 343 38 80 413 413 Amortization of debt discount expense and prcmium-net..

Estimated interest component of rentals .......

8 12 41 '90 256 6,45 9 299 7,565 299 7,565 3,702 4,956 6,054 6,354 Total fixed charges .......................... $ 44,162 $ 53,075 $ 67,149 $ 80,742 $ 93 672 $ 102 374 $ 11,791 $ 114,165 Earnings, as defined:

Net income.. $ 57,921 $ 66,912 $ &7,479 $ 97,541 $ 112,111 $ 145,815 $ (5,549) $ 140,266 Undistributed (earnings) or losses of sub-

'idiarycompanies......................................; (562) (30) (102) 2,174 7,804 7,804 57,921 66,350 87,449 97,439 114,285 153,619 (5,549) 148,070 Add (Deduct):

Federal income taxes.............................. 12,582 16,454 12,554 22,547 656 22,030 (5,122) 16,908 State income taxes................................... 5,520 6,207 3,858 8,221 6,766 13,880 (1,120) 12,760 Deferred income taxes ...................:........ 2,829 5,737 24,093(a) 3,542 8,745 10,928 10,928 Charge equal to investment tax credit, less amortizauon ................................. 5,155 5,545 3,537 12,988 27,661 38,507 38,507 Income taxes on other income and de-ductions-net ......,..........,..........:--. (334) (91) (5,076) (11/01) (14,457) (14,579) (14,579)

Total fixed charges as above .................. 44,162 53,075 67,149 80,742 93,672 102,374 11,791 114,165 Total earnings.................................. $ 127,835 $ 153,277 $ 193,564 $ 214,278 $ 237,328 $ 326,759 $ 326,759 Ratio of earnings to fixed charges ......................... 2.89 2.89 2.88 2.65 2.53 3.19 2.86 Ratio of earnings to fixed charges excluding

$ 4,162 Nonrecurring Credit and $ 4,831, re-lated deferred income taxes in 1974 .................. 2.75 (a) Includes $ 4,831 defeircd income taxes applicable to Nonrecurring Credit.

Adjustments:

(I) Annual interest requirement on $ 100,000,000 principal amount of Bonds (assumed interest rate 88/2%) ........................................ $ 8,500 Additional interest requirement on $ 150,000,000 principal amount of 88/4% Scrics Bonds due December I, 2006 issued December 21, 1976 .. 2,750 Less accrued interest requirement on $ 8,000,000 principal amount of 2F6% First Mortgage Bonds retired November I, 1976 ..... (19)

Less accrued interest requirement on $ 500,000 principal amount of 45% Polluriion Conuol Series A Bonds retired May I, 1977 (13)

Less accrued interest requirements on $ 20,000,000 principal amount of 2'/4% First Mortgage Bonds retired July I, 1977............. (413)

$ 10,805 (2) Annual interest on $ 95,000,000 principal amount of commercial paper notes (assumed interest rate-6'4%) assumed to be outstanding during the twclvc months ended September 30, 1978.............................................. $ 6,412 Less actual interest on commercial paper notes and bank loans outstanding during period.................. (5,426)

$ 986

EXHIBIT6(b)

PENNSYLVANIAPOWER 4 LIGHT COMPANY SUPPLEMENTAL COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES ACIUALAND PRO FORMA (Thousands of Dollars)

Twelve Months Ended September 30, 1977 Year Ended December 31, Adjust- Pro 1972 1973 1974 1975 1976 Actual ments forma Fixed charges, as defined: 0 Intcrcst on long-term debt.............................. $ 36,507 $ 43,203 $ 51,149 $ 67,932 $ 79,783 $ 88,671 $ 10,805(1) $ 99,476 Interest on short-term debt............................. 3,846 4,790 9,562 6,228 7,134 5,426 986(2) 6,412 Other interest charges..................................... 99 114 343 38 80 413 413 Amortization of debt discount, expense and premium net. 8 12 41 190 256 299 299 Estimated interest cotnponent of rentals ....... 3,702 4,956 6,054 6,354 6,419 7,565 7,565 Fixed charges of owned or controlled com-panies applicable to total enterprise .......... 3,873 6,310 9,600 12,002 19,284 18,307 18,507 Total fixed charges.......................... $ 48,035 $ 59,385 $ 76,749 $ 92,744 $ 112,956 $ 120,881 $ 11,791 $ 132,672 Earnings, as defined:

Nct income. $ 57,921 $ 66,912 $ 87,479 $ 97,541 $ 112,111 $ 145,815 $ (5,549) $ 140,266 Add (Deduct):

Federal income taxes,.......,....,......,............. 12,582 16,454 12,554 22,547 656 22,030 (5,122) 16,908 State income taxes .. 5,520 6,207 3,858 8,221 6,766 13,880 (1,120) 129760 Deferred income taxes.................................... 2,829 5,737 24,093(a) 3,542 8,745 10,928 10,928 Charge equal to investment tax credit, less amortization .. 5,155 5,545 3,537 12,988 27,661 38,507 38,507 Income taxes on other income and deduc-tions-net. (334) (91) (5,076) (11,201) (14,457) (14,579) (14,579)

Total fixed charges as above .......................... 48,035 59,385 76,749 92,744 112,956 120,881 11,791 132,672 Total earnings.... $ 131,708 $ 160,149 8203.194 $ 226,382 $ 254,438 $ 337,462 $ 337,462 Ratio of earnings to fixed charges ..... 2.74 2.70 2.63 2.44 2.25 2.79 2.54 Ratio of earnings to hxed charges exduding

$ 4,162 Nonrecurring Credit and $ 4,831 re-lated deferred income taxes in 1974 .................. 2.53 (a) Includes $ 4,831 deferred income taxes applicable to Nonrecurring Credit.

Adjustments:

( I ) Annual interest requirement on $ 100,000,000 principal amount of Bonds (assumed interest rate-85) .................................. $ 8,500 Additional interest requirement on $ 150,000,000 principal amount of 88/0% Series Bonds due December I, 2006 issued December 21, 1976. 2,750 Less accrued interest requirement on $ 8,000,000 principal amourit of 2V0% First Mortgage Bonds retired November I, 1976.. (19)

Less accrued interest requirement on $ 500,000 principal amount of 48/2% Pollution Control Series A Bonds retired May I, 1977.

(13)

Less accrued interest requirements on $ 20,000,000 principal amount of 2'/0% First Mortgage Bonds retired July I, 1977...... (413)

$ 10,805 (2) Annual interest on $ 95,000,000 principal amount of commercial paper notes (assumed interest rate-6'/0%) assumed to be outstanding during the twelve months ended September 30, 1978. $ 6,412 Less actual interest on commercial paper notes and bank loans outstanding during period.................................................. (5,426)

$ 986

EXHIBIT7 PENNSYLVANIAPOWER & LIGHT COMPANY ALLOCATIONOF PORTION OF ALLOWANCEFOR FUNDS USED DURING CONSTRUCTION (ALLOWANCE)ATIIBUTABLETO FUNDS PROVIDED BY COMMON STOCK EQUITY For Periods Prior to January 1, 1977 Included in the Statement of Income (Thousands of Dellars)

Portion of Allowance Attributable to Common Stock Equity as a Earnings Percentage of Applicable Earnings Applicable Capitalization Incremental Equivalent Allocation of to Common to Common Ratios(a) Rate(b) 'llowance 'ate(c)

Stock Stock Three months ended December 31, 1976 Long-Term Debt................................. 51% 4.64% 2.37% $ 4,162 Preferred and Preference Stock.......... 18 9.99 1.80 3,161 Common Stock Equity........................ 31 3.71 6,516 7.88% $ 13,839 $ 26,077 25%

1976 Long-Term Debt,,....,....,...,.... 51% 4.65% 2.37% $ 13,506 Preferred and Preference Stock.... 18 10.28 1.85 10,543 Common Stock Equity.................. 31 3.71 21,143 7.93% $ 45,192 $ 78,743 27%

1975 Long-Term Debt........................... 51% 4.67% 2.38% $ 10,446 Preferred and Preference Stock.... 18 13.31 2AO 10,534 Common Stock Equity.................. 31 3.56 15,625 8.34% $ 36,605 $ 73,032 21%

1974 Long-Term Debt........................... 51% 4.11% 2.10% $ 6,013 Preferred and Preference Stock.... 18 7.44 1.34 3,837 Common Stock Equity.................. 31 3.80 10,882 7.24% $ 20,732 $ 67,823 16%

1973 Long-Tenn Debt............................. 51% 6.99% 3.56% $ 6,762 Preferred and Prcferencc Stock...... 18 7.40 1.33 2,526 Common Stock Equity.................... 31 2.99 5,679 7.88% $ 14,967 $ 49,721 11%

1972 Long-Term Debt............................. 51% 7.49% 3.82% $ 7,602 Preferred and Preference Stock...... 18 8.00 1.44 2,866 Common Stock Equity.................... 31 2.10 4,179 7.36% $ 14,647 $ 43,395 10%

(a) Assumes that funds used to finance construction during each period were provided in the same proportion as the Company's average capitalization ratios during the five years ended December 31, 1976.

(b) For the years 1972 through 1973 incremental rates were determined on the basis that the cost of long-term debt and preferred and preference stock financing was equivalent to the cost of securities issued in each of the periods. No adjustment was made for income tax reductions resulting from interest expense attributable to the portion of Allowance provided by long-term debt.

Since February 1, 1974, the Company has computed the Allowance rate on an "after-tax" basis to be consistent with the treatment accorded this item for rate-making purposes by the Pennsylvania Public UtilityCommission (PUC). The incremental rates used in the above computation for 1974, 1975 and 1976 are consistent with the Allowance rate computation filed semi-annually with the PUC which were based on securities issued in the twelve months preceding the semi-annual computation. For the same reason, effective February 1, 1974, the incremental rate for the debt component was reduced by the related income tax reduction.

(c) The equivalent rate for each period is calculated by dividing the amount of Allowance recorded during the period by the balances of the construction work in progress including the accumulated Allowance.

Registration No. 2-485 r-r Q

SECURITIES AND EXCHANGE COMMISSION WASHINGTONs D C 20549 cg; rsS

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FORM S-7 CPI~"',r, fi Fpg REGISTRATION STATE Ehg - /9/8 Under r 7'0p 2'g 0'1 p@

Vregs THE SECURITIES ACT OF 1933 Pennsylvania Power 8 Light Company (Exact name of registrant as specified in its charter)

Commonwealth of Pennsylvania 23-0959590 (State or other jurisdiction of incorporation or organization) (I. R. S. Employer Identification No.)

Two North Ninth Street, Allentown, Pennsylvania 18101 (Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: 215-821-5151 R. R. FORTUNE, Executive Vice President Financial Two North Ninth Street Allentown, Pennsylvania 18101 (Name and address of agent for service)

Copy to:

RICHARD M. DICKE, Esq.

Simpson Thacher & Bartlett One Battery Park Plaza New York, N. Y. 10004 Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

CALCULATIONOF REGISTRATION FEE Proposed Proposed Amount maximum maximum Title of each class of to be offering price aggregate Amount of securities to be registered registered per offering prico* registration fee unit'22%

Common Stock (without nominal or par value) .. 3,000,000 shs. $ 67,125,000 $ 13,425

• For the purpose of calculating the registration fee only. The price shown is based upon a sale price on the New York Stock Exchange on February 16, 1978 for securities of the same class as those to be offered in accordance with Rule 457(b).

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accord-ance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

PENNSYLVANIA POWER & LIGHT COMPANY Cross Reference Sheet for Prospectus Form S-7 Item No. Heading In Prospectus 1.. Cover Page of Prospectus 2.. Underwriting Application of Proceeds Construction Program Financing 4..

5.. Construction Program Financing Business Electric Statistics Management Map Statement of Income Statement of Changes in Financial Position Statement of Earnings Reinvested Cover Page of Prospectus Description of Common Stock 8..

9..

10..

11 Financial Statements Opinion of Independent Certified Public Accountants 12.. Inside Front Cover of Prospectus

• Omitted from Prospectus as Item is inapplicable or answer is in the negative.

EXPLANATORY NOTE The form of prospectus filed as a part of this Registration Statement has two cover pages, the first of which makes provision for presenting the actual initial terms of offering of the Common Stock and the second of which describes the formula pursuant to which such terms will be determined. Prospectuses bearing the first form of cover page, appropriately completed, will be distributed only in final form (i.e.,

after the Registration Statement becomes effective); prospectuses bearing the second form of cover page will be distributed only in preliminary form. Ten copies of the prospectus in the exact form in which it is to be used after the effective date of this Registration Statement will be filed with the Securities and Exchange Commission pursuant to Rule 424(b).

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Pennsylvania Power 8 Light Company Common Stock (without nominal or par value) 3,000,000 Shares Outstanding shares of Common Stock are, and the shares of Common Stock offered hereby will be, listed on the New York and Philadelphia Stock Exchanges. The reported last sale price of the Common Stock on the New York Stock Exchange on March 29, 1978 was $ per share.

ln the opinion of counsel for the Company, the Common Stock is exempt from existing personal property taxes in Pennsylvania.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION To THE CONTRARY IS A CRIMINALOFFENSE.

C underwriting Price to Discounts and Proceeds to Public Commissions (1) Company(2)

Per Share $

Total $

(1) The Company has agreed to Indemnify the several Underwriters against certain civil liabilities, including liabilities under the Securities Act of 1933.

(2) Before deduction of expenses payable by the Company estimated at

$ 150,000.

The shares of Common Stock are offered by the several Underwriters when, as and if issued by the Company and accepted by the Underwriters and subject to their right to reject orders in whole or ln part.

It is expected that the Common Stock offered hereby will be ready for delivery in Philadelphia, Pennsylvania, on or about April 6, 1978.

The First Boston Corporation Drexel Burnham Lambert Incorporated Bache Halsey Stuart Shields Incorporated Merrill Lynch, Pierce, Fenner & Smith Incorporated The date of this Prospectus is March, 1978.

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PRELIMINARY PROSPECTUS DATED FEBRUARY 24, 1978 CD e

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~D N IO E cee 41 Iel Pennsylvania Power 8 Light Company Ill

~ D CO COmmOn StOCk E Cel (without nominal or par value)

I ID CD 41

~ IC 3,000,000 Shares Cl IO Outstanding shares of Common Stock are, and the shares of Common C Cel 41 Iel Stock offered hereby will be, listed on the New York and Philadelphia I

41 ID Stock Exchanges. The reported last sale price of the Common Stock on 41 C 41 the New York Stock Exchange on February 23, 1978 was $ 22% per share.

Z ID CJ CO In the opinion of counsel for the Company, the Common Stock is exempt Zl ID Zl CO from existing personal property taxes in Pennsylvania.

CD cc 41 THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE B

E Cel ~ SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION CD <D c 41

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PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY 44 E. CC CO C

REPRESENTATION TO THE CONTRARY IS A CRIMINALOFFENSE.

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~ D The initial public offering price of the shares offered hereby will be a fixed price determined by IO Iel CO agreement between the Company and the Representatives of the Underwriters within ten business days cel

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after the effective date of the registration statement. The initial public offering price per share will not be 41 Iec higher than the reported last sale (regular way) or the reported last asked price of the Common Stock of 41 CIO CO W CD~ the Company on the New York Stock Exchange immediately prior to the determination of the initial public ID 6 I offering price, whichever is higher, plus cents.

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e W Cel Cl IO The underwriting discount will be an amount per share, not in excess of  % of the initial public

,offering price, determined by agreement between the Company and the Representatives of the I

CD Ol ID Underwriters. The Company has agreed to indemnify the several Underwriters against certain civil 41 41 IO

~ ec liabilities, including liabilities under the Securities Act of 1933.

I CO 4J IO 1 The proceeds to the Company will be an amount equal to the initial public offering price less (i) the Cel III underwriting discount and (ii) ex'penses payable by the Company estimated at $ 150,000.

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~ CC The shares of Common Stock will be offered by the several Underwriters when, as and if issued by the ID CD cel CD c Company and accepted by the Underwriters and subject to their right to reject orders in whole or in part.

Cl 41 The First Boston Corporation E~ Cel 41 OI Drexel Burnham Lambert CD Incorporated

~ 41 41 E In 41 Bache Halsey Stuart Shields 41 Cn III Incorporated 41 CC1 Iel c E

Cel C

Merrill Lynch, Pierce, Fenner 8t Smith CO Cel Incorporated CD 44 E 41 I C ce cIO 11 Iec C1 Cel The date of this Prospectus is March, 1978.

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IN CONNECTION WITH THIS, OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, THE PHILADELPHIA STOCK EXCHANGE OR IN THE OVER-THE-COUNTER MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

The Company is subject to the informational requirements of the Securities Exchange Act of 1934 and in accordance therewith files reports and other information with the Securities and Exchange Commission. Information concerning directors and officers, their remuneration and any material interest of such persons in transactions with the Company, as of particular dates, is disclosed in proxy statements distributed to stockholders of the Company and filed with the Commission. Such reports, proxy statements and other information can be inspected and copied at the public reference facilities maintained by the Commission at 1100 L Street, N.W., Washington, D. C.; 219 South

Dearborn Street,

Chicago, III.; 26 Federal Plaza, New York, N. Y.; and 10960 Wilshire Boulevard, Los Angeles, Calif.

Copies of this material can also be obtained at prescribed rates from the Public Reference Section of the Commission at its principal office at 500 North Capitol Street, N.W., Washington, D. C. 20549. The Common Stock of the Company is listed on the New York and Philadelphia Stock Exchanges. Reports, proxy statements and other information concerning the Company can be inspected and copied at the respective offices of these exchanges at Room 401, 20 Broad Street, New York, N. Y., and at 17th Street and Stock Exchange Place, Philadelphia, Pennsylvania. In addition, reports, proxy statements and other information concerning the Company can be inspected at the offices of the Company, Two North Ninth Street, Allentown, Pennsylvania.

No dealer, salesman or other person has been authorized to give any Information or to make any representation not contained in this Prospectus in connection with the offer made by this Prospectus and, if given or made, such information or representation must not be relied upon as having been authorized by the Company. This Prospectus is not an offer to sell or a solicitation of an offer to buy in any jurisdiction in which it is unlawful to make such an offer or solicitation. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the date hereof.

TABLE OF CONTENTS Page Page Prospectus Summary.. 3 Capital Structure 18 The Company 4 Business. 19 Problems Affecting the Electric Utility Electric Statistics 31 Industry and the Company .................... 4 Description of Common Stock ...............~... 32 Application of Proceeds............................ 4 Experts 33 Construction Program.. 5 Legal Opinions.. 33 Financing.. 6 Management. 34 Rate Matters. 7 Financial Statements ....... 35 Common Stock Dividends and Opinion of Independent Certified Public Market Prices .. 9 Accountants.. 53 Statement of Income. 10 Underwriting . 54 Management's Discussion and Analysis Map. Back of the Statement of Income ................... k Cover

PROSPECTUS

SUMMARY

The following material is qualified in its entirety by the detailed information and financial statements appearing elsewhere in this Prospectus.

THE OFFERING Security Offered ........................... Common Stock Number of Shares ........................ 3,000,000 Useof Proceeds........................... General corporate purposes including the reduction of short-term debt incurred to provide interim financing of construction and nuclear fuel expenditures Listed........................... New York and Philadelphia Stock Exchanges (Symbol:

PPL)

Price Range 1977 ........................ 25'/a-20'/4 1978 (Through February 22) ..... 24'/4-22'/4 Closing Price February 23, 1978 (New York Stock Exchange) ..... 22%

THE COMPANY Business . The Company derives about 99/o of its operating revenues from electric service Service Area... Approximately 10,000 square miles in central eastern Pennsylvania with a population of 2.4 million persons Sources of Generation during 1977.................................. Coal 79o/o Oil 19 Hydro 2 100'/o FINANCIALINFORMATION 1976 1977(a)

Operating Revenues (thousands) ..... $ 644,147 $ 744,731 Net Income Before Dividends on Preferred and Preference Stock (thousands) .. $ 112,111 $ 149,763 Earnings Applicable to Common Stock(thousands) ... $ 78,743 $ 112,770 Earnings Per Share ... $ 2.68 $ 3.37 Dividends Declared Per Share of Common Stock.......

Net Utility Plant at year end (thousands) ..................

$ 1.80

$ 2,380,109

$ 1.89

$ 2,690,229 As of December 31, 1977 ActuaI As Adjusted(b)

Capitalization (thousands)

Long-Term Debt(including current maturities) .... $ 1,260,495 $ 1,260,495 47.3 /o Preferred and Preference Stock .......................... 487,375 483,375 18.1 Common Equity.......................... 859,264 922,114 34.6 Total...................................................... $ 2,607,134 $ 2,665,984 100.0/o (a) For factors affecting 1977 and current results, see the second paragraph under "Management's Discussion and Analysis of the Statement of Income".

(b) As adjusted to give effect to (I) the redemption of 40,000 shares of Preference Stock in January 1976 and (ii) the estimated net proceeds from the sale of the Common Stock offered hereby.

THE COMPANY The Company is an operating utility, incorporated under the laws of the Commonwealth of Pennsylvania in 1920. The Company's general offices are located at Two North Ninth Street, Allentown, Pennsylvania 18101, and its telephone number is 215-821-5151. The property of the Company is located in Pennsylvania (see Map), is well maintained and is in good operating condition.

The Company derives about 99/o of its operating revenues from supplying electric service, and the balance from supplying steam in the city of Harrisburg. The Company serves a 10,000 square mile territory in 29 counties of central eastern Pennsylvania (see Map), with a population of approximately 2,400,000 persons. This service area has a high percentage of open land as well as 111 communities with populations over 5,000, the largest of which are the cities of Allentown, Bethlehem, Harrisburg, Hazleton, Lancaster, Scranton, Wilkes-Barre and Williamsport. Important industrial, recreational and agricultural sections are linked to the eastern population centers by an extensive limited-access highway system.

Hershey Electric Company, a subsidiary of the Company, provides electric distribution service to approximately 6,300 customers in Hershey, Pennsylvania.

PROBLEMS AFFECTING THE ELECTRIC UTILITYINDUSTRY AND THE COMPANY The electric utility industry in general has been experiencing problems of (a) increasing costs of fuel, wages, materials and equipment, (b) substantially increased capital outlays and longer construction periods for larger and more complex new generating units, (c) uncertainties in predicting future load requirements, (d) increased financing requirements coupled with periodically uncertain availability of both equity and borrowed capital, (e) past and prospective sales of common stock below book value, (f) fuel availability, (g) increased construction costs and delays and operating restrictions due to environmental requirements, (h) the effectiveness of energy conservation efforts and the impact of fluctuating economic conditions, (i) litigation and proposed legislation which may have the effect of delaying or preventing construction of nuclear generating and other facilities or limiting the use of existing -facilities=and (j) regulatory lag in granting needed rate increases and th'e inadequacy of such increases when granted.

The Company also has been experiencing similar problems in varying degrees. For information regarding the effect on the Company of certain of these general problems, see "CONSTRUCTION PROGRAM",

"FINANCING", "RATE MATTERS", "STATEMENT OF INCOME", "MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE STATEMENT OF INCOME", "BUSINESS" and "ELECTRIC STATISTICS".

Reference is made to "BUSINESS 'Fuel Supply (Coal)" for information concerning (1) the pricing of coal produced by The Oneida Mining Company, one of the Company's affiliated mines, for fuel adjustment clause purposes, which reduced the Company's net income by approximately $ 4.3 million during 1977 and (2) the possibility of future losses if present mining plans for Oneida prove not to be economically feasible.

Reference is made to "BUSINESS Fuel Supply (Coal)" for information concerning a strike by the United Mine Workers of America which is adversely affecting the Company's 1978 operations and earnings.

APPLICATION OF PROCEEDS The net proceeds from the sale of the Common Stock offered hereby will be added to the Company's general funds and used for general corporate purposes including the reduction of short-term debt incurred to provide interim financing for construction and nuclear fuel expenditures.

CONSTRUCTION PROGRAM The Company's construction program is under continuing review and is revised from time to time to reflect changes in customer demand, business conditions, the cost and availability of capital and other factors. Actual construction expenditures and dates of completion for various construction projects may vary because of changes in the Company's plans, cost fluctuations, the availability of labor, materials and equipment, environmental regulations, licensing delays and other factors.

The Susquehanna station, which is the only generating facility that the Company currently has under construction, will consist of two nuclear-fueled generating units each having an estimated total net capability of 1,050,000 kilowatts. In March 1977 the Company agreed to sell a 10/o undivided ownership interest in the Susquehanna nuclear units to Allegheny Electric Cooperative, Inc. (Allegheny). Pending receipt of the regulatory approvals required to complete the sale, Allegheny made an initial payment to the Company of $ 65 million in March 1977 and became obligated to pay currently 10/o of subsequent construction and nuclear fuel expenditures for the Susquehanna units. Through December 31, 1977, Allegheny's payments to the Company approximated $ 84 million. In January 1978, following receipt of the necessary approvals from the Pennsylvania Public Utility Commission (PUC), the Nuclear Regulatory Commission (NRC) and the Rural Electrification Administration, the sale was completed, Construction of the Susquehanna units is proceeding under NRC construction permits issued..in November 1973. At December 31, 1977, construction of Unit No. 1 was about 60'/o completed and Unit No. 2 was about 40/o completed. An operating license from the NRC will be required prior to the start-up and testing of each unit. Changes in desigrt necessary to meet NRC requirements, delays in delivery of material and equipment, scarcity of labor and other factors have nearly exhausted schedule contin-gencies built into the project. As a result, and in recognition of the potential for delays in future construction as well as in obtaining the required licenses and regulatory approvals, on a timely basis, the Company has revised the estimated in-service date for Susquehanna Unit No. 1 from November 1980 to February 1981. Subsequent evaluations may require the Company to further delay the estimated in-service date for Susquehanna Unit No. 1 and to delay the currently estimated 1982 in-service date for Unit No. 2.

The following tabulation shows actual construction and nuclear fuel expenditures for 1977 and the Company's current estimate of these expenditures for the three years 1978-1980 including provision for the Allowance for funds used during construction (Allowance). The amounts shown in the tabulation, have been reduced to reflect Allegheny's contribution to the cost of the Susquehanna units and nuclear fuel.

1977 1978 1979 1980 Millions of Dollars Construction expenditures:

New generating facilities .......................

Transmission and distribution facilities ..

Other

'8

$ 237 16

$ 330 103 38

$ 324 114 52

$ 264 123 86 Total construction expenditures ..... 341 471 490 473 Nuclear fuel in process.. 16 4 40 57 Total. $ 357 $ 475 $ 530 $ 530 Estimated construction expenditures for the three years 1978-1980 include $ 150 million for environmental protection.

See "BUSINESS Environmental Matters" for information concerning possible additional capital requirements.

The Company's 90% share of the estimated total net capability of each of the Susquehanna units will be 945,000 kilowatts and its share of the estimated construction expenditures (based on the currently scheduled in-service dates, but excluding nuclear fuel) is estimated at $ 1.75 billion. The Company estimates that a delay of one year in the 1981 and 1982 in-service dates of the Susquehanna units would increase the Company's share of the cost of tliese units by about $ 175 million.

The United States District Court for the Western District of North Carolina has held that the provisions of the Price-Anderson Act limiting liability of the owners of nuclear power plants, and of the contractors and suppliers for such plants, to the amounts of available insurance and governmental indemnity are unconstitutional as violating the due process and equal protection clauses of the United States Constitution. The United States Supreme Court has granted review of the District Court decision.

If the Supreme Court affirms the decision, the limitation of liabilitywould not be available to the Company.

Although the full impact of a decision by the Supreme Court cannot be evaluated at this time, the Company does not expect to change its plans to complete the construction of and to operate-the Susquehanna units. Recent amendments to the Price-Anderson Act, which may be aftected by this litigation, provide that-all owners of nuclear reactors may be assessed up to $ 5 million per operating reactor for each nuclear incident occurring at any reactor in the United States with a limit of two assessments per year. Giving effect to the Company's 90% ownership of the Susquehanna units, the maximum assessment against the Company under the Price-Anderson Act when both Susquehanna units have been placed in commercial operation is not expected to exceed $ 18 million per year.

FINANCING The tinancing of its construction program requires the Company to engage in frequent sales of securities, including debt and preterred, preterence and common stocks. Interim financing is obtained from bank borrowings and the sale of commercial paper.

The Company's 1978-1980 construction and nuclear fuel expenditures are currently estimated at

$ 'f.54 billion. Approximately two-thirds of this amount is expected to be obtained from outside financing with the balance to be provided from internal sources. The estimates of construction and nuclear fuel expenditures and internal funds sources both include the Allowance. In addition, about $ 62 million of maturing long-term debt obligations and $ 16.5 million of preferred and preference stock sinking fund requirements are planned to be met during 1978-1980 by sales of securities.

In addition to the sale of the Common Stock offered hereby, the Company anticipates that other securities will be sold during 1978. The exact amount, nature and timing of future sales of securities will of necessity be determined in the light of market conditions and other factors.

'he mortgage indenture under which the Company's first mortgage bonds are issued contains certain provisions, principally earnings coverage and property additions tests, limiting the issuance of additional bonds. The Company estimates that application of these restrictions, of which the availability of property additions is presently the most limiting, would have permitted the Company, as of December 31, 1977, after giving effect to the sale of a 10% undivided interest in Susquehanna to Allegheny, to issue f

6

about $ 443 million principal amount of bonds. This amount exceeds the principal amount of bonds that the Company currently expects to issue through 1979. Indenture tests, however, would have to be met at the time of issuance.

The Company's charter contains provisions limiting the issuance of additional shares of Preferred Stock. The more restrictive of these provisions requires Income Before Interest Charges (gross income) of not less than 1.5 times the sum of the annualized interest requirements on indebtedness to be outstanding and the dividend requirements on Preferred Stock to be outstanding. In calculating gross income under the provisions of the Company's charter, the Company includes the borrowed and equity funds components of the Allowance as a part of gross income. Based on the Company'.s earnings for the year 1977, the gross income provisions would not limit the amount of Preferred Stock which the Company plans to issue during 1978. There are no charter provisions limiting the issuance of Preference Stock.

RATE MATTERS Sales to ultimate customers, which are regulated by the PUC, accounted for approximately 98/0 of the Company's revenues from electric sales over the past five years. The remaining 2'/o of revenues from electric sales, represented by sales to others for resale, are regulated by the Federal Energy Regulatory Commission (FERC) as are interchange power sales, which are classified as a credit to operating expenses. The Company's PUC and FERC tariffs include fuel adjustment clauses. See, however, the discussion of the Company's Oneida mine under "BUSINESS Fuel Supply (Coal)" concerning the limited recovery of the cost of coal mined at Oneida. PUC tariffs also include a tax surcharge to recover the cost of increased Pennsylvania taxes.

Since 1973 the Company has requested and the PUC has granted the following general increases in base rate charges for electric service expressed as percentages of annualized revenues in the test year-used for the final PUC order in each proceeding. Annualized revenues consist of revenues derived from base rates, fuel adjustment clauses and the tax surcharge.

Increase Granted Request o/o Increase Test Year Increase Filed Requested (Twelve Months Ended) Effective 0-Millions 4/O April 1973 11.4 April 30, 1973 June 1973 $ 9.4 2.6 January 1974 19.1 5.2

$ 28.5 7.8 March 1975 14.6 July 31, 1975 September 1975 $ 21.0 3.9 April 1976 20.0 3.7 August 1976 37.3 7.0

$ 78.3 . 14.6 A complainant in the Company's March 1975 rate proceeding appealed the August 1976 decision of the PUC granting the 14.6/o increase. This appeal, which was denied by the Commonwealth Court of

I Pennsylvania, raised objections regarding, among other things, the existence and amount of differences in rates between certain of the classes of services provided by the Company. This appeal did not question the PUC's August 1976 decision with respect to measures of value, level of revenues or rate of return. The Supreme Court of Pennsylvania has agreed to review the action taken by the Commonwealth Court in denying the complainant's appeal.

A rate increase aggregating approximately $ 1 million annually for the Company's fifteen resale customers was permitted by FERC to become effective, subject to refund, in November 1976. Certain of the affected customers who were opposing the increase have entered into a settlement agreement with the Company. A request for approval of this agreement is presently pending before FERC.

In a proceeding affecting ail Pennsylvania electric utilities, the PUC in May 1975 instituted an investigation into fuel adjustment clauses. At the commencement of this investigation the PUC proposed for consideration, among other things, (1) a limitation on the recovery of increased fuel costs to less than 100/o, (2) the inclusion of nuclear fuel costs in the formula, (3) a revision in the method of calculating the fuel costs as they relate to interchange power purchases and sales and (4) the use of a twelve month period for determining the current cost of fuel.

In a separate proceeding affecting all major Pennsylvania electric utilities, the PUC in November 1977 issued proposed regulations to replace fuel adjustment clauses with a levelized energy cost rate.

Under the PUC's proposed regulations, which would become operative on July 1, 1978, each utility's energy cost rate. would include all (1).fossil fuel costs, (2) nuclear fuel costs, (3) purchased power energy costs and (4) net interchange energy sales and purchases. Utilizing historical and projected data, a utility's energy cost rate would be set prospectively for a twelve month period determined by the PUC during which the rate is intended to remain stable. An upward or downward adjustment in the rate could be made during the twelve month period in the event that actual costs were significantly greater or less than the energy cost rate. The proposed regulations contemplate that if the costs actually incurred exceed costs specified in the utility's energy cost rate, the full amount of excess costs may not be recoverable by the utility. In the event of an over-recovery of energy costs, the utilitywould be required to refund either a portion or all of the excess to customers, depending 'upon the amount of such excess. In addition, provisions are made for penalties under certain circumstances. The proposed regulations provide that deferred fuel costs accumulated under the present fuel adjustment clauses would be recoverable pursuant to a reasonable plan filed by a utility.

The Pennsylvania legislature is currently considering several proposals which would eliminate automatic adjustment clauses for fuel and purchased power costs incurred by major Pennsylvania electric utilities and would permit the recovery of these costs only through base rates.

The Company is unable to predict the ultimate outcome of the foregoing administrative and legislative proceedings.

Amendments to the Pennsylvania Public Utility Law, generally effective in October 1977, have altered the PUC's rate-making procedures. Among other things, the amendments shorten the period during which the PUC must act on a filing of a general rate increase from eleven months to nine months.

Interim rate relief during the pendency of a general r'ate increase request will not be permitted except under conditions of financial emergency. The new provisions permit the use of future projected rather

than historical test years as the basis for rate filings. The amendments also prescribe certain changes in PUC procedures for voting on rate increase applications, and create the office of Administrative Law Judge to conduct hearirigs and submit recommendations to the PUC.

COMMON STOCK DIVIDENDS AND MARKET PRICES The Company has paid quarterly cash dividends on its Common Stock in every year since 1946.

Dividends declared in the past five years are set forth on the Statement of Income. On February 22, 1978 the Company declared a regular quarterly dividend of 48 cents per share payable on April 1, 1978 to the holders of record of Common Stock on March 10, 1978. Since the Common Stock offered hereby will not be outstanding on the March 10 record date, such shares are not entitled to the April 1 dividend.

Future dividends will be dependent upon future earnings, financial requirements and other factors.

The high and low sale prices of the Company's Common Stock as reporte'd by The Wa/I Street Journal (as New York Stock Exchange transactions through January 23, 1976 and thereafter as Composite Transactions) were as follows:

1979 Quarters in 1976 Quarters in 1977 (through 1st 2nd 3rd 4th 1st 2nd 3rd 4th February 22)

High 21% 20 V< 21V4 22Vr 22Vr 24'/i 25Ve 24Vr 24'/4 Low 19Vs 19Vr 20 20% 203/4 21% 22% 22'/i 22'/4 The reported last sale price of the Common Stock on the New York Stock Exchange on February 23, 1978 was $ 22% per share.

The book value of the Common Stock at December 31, 1977 was $ 24.58 per share. Upon the sale of the Common Stock offered hereby, the book value per share at that date on a pro forma basis, reflecting estimated net proceeds to the Company, would have been $

The Company has a dividend reinvestment plan which permits holders of its Preferred, Preference and'Common Stock to purchase shares of Common Stock directly from the Company by having cash dividends automatically reinvested at a 5/o discount in the purchase price and by making optional cash payments (to which the 5/o discount does not apply).

STATEMENT OF INCOME The following Statement of Income for the five years ended December 31, 1977 has been examined by Haskins fr Sells, independent Certified Public Accountants, whose opinion appears elsewhere in this Prospectus. The Statement should be considered in conjunction with its notes and the other financial statements and related notes appearing elsewhere in this Prospectus.

1973 1974 1975 1976 1977 Thousands of Dollars Operating Revenues (99% Electric)(a) ........................... $384,814 $ 472,036 . $ 544,129 $ 644,147 $ 744,731 Operating Expenses Cost of energy Fuel(b)(c) .. 125,577 192,353 271,636 321,783 433,698 Power purchases .. 15,299 24,176 37,698 29,657 39,783 Interchange power sales. (70,175) (108,723) (172,823) (160,163) (306,456)

Net cost of energy. 70,701 107,806 136,511 191,277 167,025 Other operation. 69,007 80,565 92,186 103,758 110,764 Maintenance.. 33,648 41,298 47,956 54,946 63,413 Depreciation 48,837 52,399 58,540 62,478 68,035 Income taxes(d)... 33,943 39,211 47,298 43,828 91,501 Taxes, other than income(d) 30,005 35,571 40,669 49,526 59,682 Total operating expenses......................... 286,141 356,850 423,160 505,813 580.420 Operating Income. 98,673 115,186 120,969 138,334 184,311 Other Income and Deductions Allowance for funds used during construction(e)

Equity and borrowed funds.......................... 14,967 20,732 36,605 45,192 Equityfunds 22,459 Income tax credits(d)(e) 91 5,076 11,201 14,457 13,708 Other net(c) .. 1,300 3,418 3,154 1,381 (928)

Total other income and deductions ......... 16,358 29,226 50,960 61,030 35,239 Income Before Interest Charges.. 115,031 144,412 171,929 199,364 219,550 Interest Charges Long-term debt 43,203 51,149 67,932 79,783 91,500(f)

Short-term debt and other 4,916 9,946 6,456 7,470 5,223 Allowance for borrowed funds used during construction(e) .. (26,936)

Net Interest charges .... 48,119 61,095 74.388 87,253 69,787 Income Before Nonrecurring Credit. 66,912 83,317 97.541 112,111 149,763 Nonrecurring Credit Related to Accounting Change, Net of Income Taxes ($ 4,831)(b) . 4,162 Net Income Before Dividends on Preferred and 149,763 Preference Stock. 66,912 87,479 97,541 112,111 Dividends ori Preferred and Preference Stock............... 17,191 19,656 24,509 33,368 36,993(g)

Earnings Applicable to Common Stock. $ 49,721 $ 67,823 $ 73,032 $ 78,743 $ 112,770 Earnings Per Share of Common Stock Before Nonrecurring Credit .. $ 2.57 $ 2.88 $ 2.87 $ 2.68 $ 3.37 Nonrecurring Credit(b) .. 0.19 Earnings Per Share of Common Stock........ $ 2.57 $3.07 $ 2.87 $ 2.68, $3.37 Average Number of Common Shares Outstanding (Thousands). 19,359 22,067 25,459 29,367 33,471 Dividends Declared Per Share of Common Stock ..... $ 1.68 $ 1.77 $ 1.80 $ 1.80 $ 1.89 10

(a) Reference is made to "RATE MATTERS" for additional information concerning fuel adjustment clauses.

(b) Effective January 1, 1974, the Company, as authorized by the PUC, changed its method of accounting for fuel costs to achieve matching of fuel expense and revenues by accounting periods. This change resulted in the charge to income for fuel costs recoverable in the future being deferred to the periods in which these costs are billed to customers through application of fuel adjustment clauses. For 1974, fuel costs were lower by a net amount of $ 26.6 million and, after income tax effects,'Earnings Applicable to Common Stock were increased by $ 12.6 million ($ 0.57 per share) as a result of this accounting change.

The Nonrecurring Credit shown on the Statement of Income represents the cumulative effect to December 31, 1973 of the change in accounting for fuel costs, net of related income taxes.

In the following summary, earnings "As Reported" includes the Nonrecurring Credit recorded in 1974and earnings "Restated" reflects the effect of retroactive application of the change in accounting for fuel costs and related income tax effects had the new method been used since the principal fuel adjustment clause became effective:

1973 1974 Earnings Applicable to Common Stock (thousands of dollars)

As Reported. $ 49,721 $ 67,823 Restated. 51,066 63,661 Earnings Per Share of Common Stock (1)

As Reported. . $ 2.57 $ 3.07 Restated. 2.64 2.88 (1) Based on average number of shares outstanding.

(c) Reference is made to "BUSINESS Fuel Supply (Coal)" for information concerning operations of The Oneida Mining Company (Oneida), one of the Company's subsidiaries, related to (1) the write-otf of certain development costs reflected in Other income-net and (2) the pricing of coal produced by Oneida for fuel adjustment clause purposes reflected in fuel costs, which reduced the Company's net income by approximately $ 6.6 million and $ 4.3 million, respectively, in 1977. Future losses may be incurred it present mining plans prove not to be economically feasible.

(d) Reference is made to Note 10 to Financial Statements for information relating to taxes.

(e) As provided in the Uniform System of Accounts, the cost of funds used to finance construction projects is capitalized as part of construction cost. After a project is placed in service the Company is permitted to include in rates charged for utility service a return on, and depreciation ot, the cost of funds so capitalized. The components of Allowance for funds used during construction (Allowance) shown on the Statement of Income under Other Income and Deductions and Interest Charges are non-cash items equal to the cost of funds capitalized during the period and serve to oftset on the Statement of Income the cost of financing construction.

Since February 1, 1974, the Allowance rate has been computed on an after-tax basis and income tax reductions associated with tlie interest (borrowed funds) component of the Allowance are reflected in 11

Income tax credits under Other Income and Deductions with a corresponding increase in the provision for income taxes charged to Operating Expenses. During the period February 1, 1974 through December 31, 1976, the Allowance rate was computed semi-annually in accordance with procedures initiated by the PUC using a specified rate for common equity and the cost of fixed rate securities issued in the twelve months preceding the semi-annual computation.

Effective January 1, 1977, the Company computed the Allowance rate in accordance with a 1977 FERC order which (1) provides a formula for determining the maximum Allowance rate, (2) provides for semi-annual compounding and (3) provides for segregating the Allowance into two components, borrowed funds and equity funds. The gross borrowed funds component recorded since January 1, 1977 is included as a credit in the Interest Charges section of the Statement of Income and the remainder of the total Allowance recorded is shown under Other Income and Deductions as Equity funds. The Company has not reclassified the Allowance into borrowed funds and equity funds components prior to January 1, 1977 since the allocation would not be comparable to that required under the FERC formula.

Prior to January 1, 1977, the method used did not provide for direct compounding and the Company computed the Allowance by applying the rate to a construction work in progress base which did not include the accumulated Allowance which had previously been recorded. However, an equivalent rate can be calculated for the period 1973-1976 by relating the amount of Allowance recorded during the period to the balances of the construction work in progress including the related accumulated Allowance.

The Company's Allowance rates and the equivalent rates are as follows:

Allowance Equivalent Rate Rate January 1, 1973 January 31, 1974 ...... 8.5 '/0 7.9'/o February 1, 1974 June 30, 1974.......... 7.5 7.0 July 1, 1974 December 31, 1974......... 8.0 7.3 January 1, 1975 December 31, 1975... 9.25 8.3 January 1, 1976 December 31, 1976... 8.75 7.9 January 1, 1977 December 31, 1977:.. 7.4 Beginning January 1, 1978 ..................... 7.9 Based on the assumption that funds required for construction financing were provided substantially in the same proportion as the Company's average capitalization ratios over the five-year period ended December 31 1976 (51'/o debt, 18/o preferred and preference stock and 31/o common stock equity) and

~

using an after-tax cost of debt since February 1, 1974, the portion of the Allowance attributable to funds provided by common equity as a percentage of'Earnings Applicable to Common Stock for the years 1973-1976 would be approximately as follows:

1973.. 1 1 o/o 1974.. 16 1975. 21 1976. 27 The Company understands that an issue has been raised in litigation to which it is not a party relating to the Allowance as reported by another public utility. In this litigation, it is alleged that actual earnings 12

were not properly presented in that the Allowance was included as "Other income" without an adequate explanation of this item, and that the Allowance is not in fact income as generally understood, but rather a projection of future earnings not reflecting any actual yield on assets or any revenue during any fiscal period and not in fact earned upon completion of construction. The Allowance, which is not an item of current cash income, is included in the financial 'statements of the Company in accordance with the applicable regulatory system of accounts and in accordance with generally accepted accounting principles. The Company is unable to predict the outcome of this litigation or its effect, if any, upon the Company.

(f) The annual interest requirements on long-term debt outstanding at December 31, 1977, including the amount due within one year, are $ 99,515,000.

(g) Excluding the annual dividend requirements on 40,000 shares of Preference Stock, $ 9.25 Series, redeemed in January 1978, the annual dividend requirements on Preferred and Preference Stock outstanding at December 31, 1977 are $ 20,323,000 and $ 19,500,000, respectively.

The following results of operation for the twelve months ended February 28, 1978 are unaudited but in the opinion of the Company include all adjustments (which comprise only normal recurring accruals) necessary for a fair presentation of such results:

Operating Revenues $

Operating Income.............................................

Net Income Before Dividends on Preferred and Preference Stock ....... $

Earnings Applicable to Common Stock $

Earnings Per Share of Common Stock. $

For factors adversely affecting current results of operation, see the second paragraph under "MANAGE-MENT'S DISCUSSION AND ANALYSIS OF THE STATEMENT OF INCOME".

MANAGEMENTIS DISCUSSION AND ANALYSIS OF THE STATEMENT OF INCOME The Statement of Income reflects the results of past operations and is not intended as any representation as to the results of operations for any future period. Future operating results will necessarily be affected by various and diverse factors and developments, including the obtaining of adequate and timely rate increases, fuel costs, fuel availability, business activity, customer demand, energy conservation, interchange power sales, taxes, labor contracts, availability of capital, governmental actions, environmental expenditures and other matters. The Company is unable to predict the combined effect of the above factors on its future operating results.

The Company's earnings in 1977 reflected sharply increased electric sales to interconnected utilities at higher prices and a full year's impact of rate increases which became effective in 1976. The 1976 rate increases will not have a comparable favorable effect on 1978 operating results, as they did in 1977.

Accordingly, because of continuing increases in the costs of doing business and expected lower sales to interconnected utilities, lower earnings are anticipated for 1978. In addition, for information concerning a strike by the United Mine Workers of America which is adversely affecting the Company's 1978 operations and earnings, see "BUSINESS Fuel Supply (Coal)".

The following analysis of the Company's financial performance explains the reasons for changes in specific items on the Statement of Income comparing the years 1976 to 1975 and 1977 to 1976.

13

A

't

'I

Energy Sales and Operating Revenues The change in operating revenues from the prior year is attributable to the following:

Increase (Decrease) csee ian Millions of Dollars Electric revenues Quantity of sales to:

Ultimate customers . $ 19.3 $ 18.0 Others for resale. 0.3 0.4 Rate increases 40.4 36.5 Fuel adjustment clauses . 33.8 36.7 Other (including tax surcharge) 7.3 9.2 101.1 100.8 Steam revenues (1.1) (0.2)

Total $ 100.0 $ 100.6 The Company's energy sales increased 6.5% in 1976 reflecting an improvement in the economy and industrial activity in the Company's service area. Energy sales for 1977, excluding sales of Hershey Electric Company (acquired December 31, 1976), increased 578 million kwh or 2.8% over 1976.

Hershey Electric Company sales, which are not included in sales statistics prior to January 1, 1977, totaled 269 million kwh in 1977 resulting in a consolidated sales increase of 4.2% in 1977. The lower sales growth in 1977 was due principally to more moderate weather and a tempering of general economic growth.

Rate increases for ultimate customers became effective in September 1975 ($ 21.0 million annually),

April 1976 ($ 20.0 million annually) and August 1976 ($ 37.3 million annually).

The Company's tariffs include fuel adjustment clauses which adjust prices for electric service for variations in'he cost of fuel used to generate electricity. See, however, the discussion of the Company's Oneida mine under "BUSINESS Fuel Supply (Coal)" concerning the limited recovery of the cost of coal mined at Oneida. Revenues from the fuel adjustment clauses totaled $ 168.3 million in 1976 and $ 205.0 million in 1977, reflecting the increased level of fuel costs and additional energy sales.

Reference is made to "RATE MATTERS" for additional information concerning general rate increases granted the Company and fuel adjustment clauses.

Cost of Energy The net cost of energy includes fuel expense plus power purchases less power sold to other utilities.

Included in power purchases is the value of electricity generated during the test period of the Company's new generating units.

Fuel. The change in fuel expense from the prior year is attributable to the following:

Increase (Decrease) 1976 1977 Millions of Dollars Electric fuel expense Quantity of electricity generated ... $ 17.9 $ 54.8 Average cost of fuels burned ........ 36.0 60.0 53.9 114.8 Less increase in fuel costs deferred to match revenues from fuel adjustment clauses....... 2.9 2.8 51.0 112.0 Steam heat fuel expense (0.8) (0 1)

Total.. $ 50.2 $ 111.9 The cost of fuel consumed increased during 1976 and 1977 as a result of greater generation of energy and increases in the cost of fuels purchased. The increase in energy generated was due principally to the addition of the oil-fired Martins Creek units No. 3 was placed in service in October 1975 and No. 4 was placed in service in March 1977. See "ELECTRIC STATISTICS" for detail of generation by fuel source. The average cost of fuels consumed increased during 1976 and 1977 due to the combined effects of higher coal prices and the cost of oil consumed at the Martins Creek units, which have a fuel cost per kwh generated approximately twice that of the Company's coal-fired units. The average cost of fuel consumed per kwh generated was 1.04 cents in 1975, 1.17 cents in 1976 and 1.35 cents in 1977.

The portion of the cost of fuel consumed which is recoverable through fuel adjustment clauses is deferred to the period in which such costs are billed to customers.

Interchange Power Sales. The total electric energy available for sale includes energy generated by the Company's plants and power purchased from others, after deducting Company uses and line losses.

During 1976 and 1977, approximately 29/o and 37/o, respectively, of the total electric energy available was sold to other utilities under interconnection arrangements. As required by both the PUC and FERC, such sales are not recorded as. Operating Revenues but are credited to Operating Expenses on the Statement of Income.

The change in interchange power sales from the prior year is attributable to the following:

Increase (Decrease) 1976 1977 Millions of Dollars Quantity of energy sold.. $ (7.9) $ 77.6 Average price of energy sold . (5.7) 65.5 Other. 0.9 3.2 Total. $ (12.7) $ 146.3 15

The price received for power sold on the interchange reflects a splitting of the difference between the buyer's and the seller's cost of generation. During 1976 there was a narrowing of the differential between the Company's cost of generating electricity and the price received for interchange power sales. Also ln 1976, increased sales to customers reduced the quantity of economic power available for sales to interconnected companies.

The Company experienced an unprecedented level of interchange sales during 1977 at higher prices. These sales were the result of many-factors, including the addition of new generating capacity (Martins Creek Unit No. 4), excellent performance of the Company's generating units, extreme weather conditions during certain winter and summer months and the extended outages of several major generating units of other interconnected companies.

The average price the Company received for Interchange power sales was 1.97 cents per kwh in 1975, 1.90 cents per kwh in 1976 and 2.43 cents per kwh in 1977. These amounts were substantially in excess of the Company's average fuel costs.

Other Operation and Maintenance Expenses The increases in other operation and maintenance expenses such as wages and benefits, materials and supplies, rents and insurance principally reflect the effects of inflation and the costs of operation and maintenance of new facilities placed in service, Including the Company's Martins Creek oil-fired units.

Depreciation Increased depreciation expense is due to new facilities placed in service, including Martins Creek Units Nos. 3 and 4 which began commercial operation in 1975 and 1977, respectively. For information concerning a reduction in the Company's composite depreciation rate as of January 1, 1976, see Note 5 to Financial Statements.

Taxes For an analysis of taxes, see Note 10 to Financial Statements.

Allowance for Funds Used During Construction The Allowance for funds used during construction has increased substantially during the years being compared as a result of the Company's extensive construction program. For additional information concerning the Allowance, see Note (e) to the "STATEMENT OF INCOME".

Other Income Net The reduction in Other income net during 1977 reflects, among other things, a $ 6.6 million (net of income taxes) loss of The Oneida Mining Company, a subsidiary, which was recorded by the Company in accordance with the equity method of accounting. For additional information see "BUSINESS Fuel Supply (Coal)".

Cost of Fixed Income Securities The changes from the prior year in interest charges on debt and in dividends on Preferred and Preference Stock were:

Increase (Decrease) 1976 1977 Millions of Dollars Interest Charges Long-term debt. $ 11.9 $ 11.7 Short-term debt. 0.9 (2.6)

Other. 0.1 0.4 Dividends on Preferred and Preference Stock..... 8.9 3.6 The increases in Iong-term debt interest charges and dividends on Preferred and Preference Stock were due to issuance of securities principally to finance the Company's construction program and the refinancing of maturing debt with securities bearing higher interest rates. During 1976 and 1977, outstanding long-term debt increased by $ 217 million and Preferred and Preference Stock increased by

$ 121 million.

Interest charges on bank loans and commercial paper notes vary from year to year in relation to the amount of short-term debt outstanding and the interest rates in effect. For additional information on short-term debt see Note 4 to Financial Statements.

17

CAPITAL STRUCTURE The capital structure of the Company at December 31, 1977 and as adjusted as of that date to give effect to (1) the redemption of 40,000 shares of Preference Stock, $ 9.25 Series, in January 1978 and (2) the sale of the Common Stock offered hereby is as follows (thousands of dollars):

Actual 4/i Of As Adjusted 4/i of Amount Total Amount Total Long-Term Debt(a)

First mortgage bonds (2a/4 /o-10'/a /o) .............. $ 1,245,000 $ 1,245,000 Notes. 20,929 20,929 Unamortized (discount) and premium net ... (5,434) (5,434)

Total long-term debt........................ 1,260,495 48.3 1,260,495 47.3 Shareowners Investment(b)

Preferred and series preferred stock (3 35o/o-9.24 /o)" 281,375 10.8 281,375 10.5 Preference stock ($ 8.00-$ 13.00) ................... 206,000 7.9 202,000 7.6 Total preferred and preference stock 487,375 483,375 Common stock. 582,983 645,983(c)

Capital stock expense . (10,630) (10,774)(d)

Earnings reinvested 286,911 286,905(d)

Total common equity.... 859,264 33.0 922,114 34.6 Total shareowners investment ... 1,346,639 1,405,489 Total capitalization ..... $ 2,607,134 100.0 $ 2,665,984 100.0

,(a) See Notes 4 and 8 to Financial Statements for details concerning short-term and long-term debt.

Long-term debt at December 31, 1977 includes $ 3,756,000 due within one year classified as a current liability on the Balance Sheet. At February 23, 1978 there were no bank loans outstanding and $ 26.5 million of commercial paper notes outstanding at a weighted average discount rate of 6.75'/o. See Notes 12 and 15 to Financial Statements for information concerning leases and commitments and contingent liabilities.

(b) See Note 6 to Financial Statements for details concerning capital stock.

(c) Based on assumed proceeds to the Company from the sale of Common Stock offered hereby.

The adjusted amount does not include proceeds received subsequent to December 31, 1977 for Common Stock sold under the Company's dividend reinvestment plan.

(d) Adjusted for estimated issuance expenses for the Common Stock offered hereby totaling

$ 150,000 and a $ 6,000 amortization to Earnings reinvested of Capital stock expense applicable to the Preference Stock, $ 9.25 Series, redeemed in January 1978.

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BUSINESS Revenues. During 1977, about 40'/o of electric operating revenues came from residential customers, 28/o from industrial customers, 27/o from commercial customers and 5/0 from others. During 1977, the Company's largest customer provided about 4.6'/o of electric operating revenues and the 27 largest industrial customers (each of whose billings exceeded $ 1 million) provided about 12/0 of such revenues. Industrial customers are broadly distributed among industrial classifications.

Power Supply. During 1977, the Company produced 33.4 billion kwh in plants owned by the Company and purchased 0.6 billion kwh under firm purchase agreements. During this period, the Company delivered 12.4 billion kwh and received 1.4 billion kwh as power pool interchange.

The Company's Martins Creek oil-fired Unit No. 4 (820,000 net kilowatt capability) was placed in service in March 1977. The Company's power capability (winter rating) at December 31, 1977 was as follows:

Net Kilowatt Plant Capability Coal-Fired Montour. 1,515,000 Brunner Island 1,464,000 S unbury. 389,000 Martins Creek. 300,000 Keystone. 210,000(1)

Conemaugh .. 194,000(2)

Holtwood 73,000 Total Coa!-Fired. 4,145,000 Oil-Fired Martins Creek. 1,640,000 Combustion Turbines and Diesels .. 539,000 Hydro. 146,000 Total Generating Capability..... 6,470,000 Firm Purchases Hydro . 76,000(3)

Total Capability. 6,546,000 (1) Company's 12.34/o undivided interest.

(2) Company's 11.39/o undivided interest.

(3) From Safe Harbor Water Power Corporation. See "BUSINESS Hydroelectric Projects".

Approximately 37/o of the Company's generating capability at December 31, 1977 has been placed in service in the last five years and 69/o in the last ten years. The capability of generating units is based upon the operating experience and physical condition of the units and may be revised from time to time to reflect changed circumstances.

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The maximum one-hour demand on the Company's system was 4,431,000 kw, which occurred on January 10, 1978. The Company estimates that it would have experienced a maximum one-hour demand of 4,514,000 kw on January 17, 1977 if a 5/0 voltage reduction had not been in effect to permit the Pennsylvania-New Jersey-Maryland (PJM) Interconnection to supply emergency power to other power pools. The maximum one-hour summer demand was 3,545,000 kw, which occurred on August 29, 1977. For information concerning interchange power sales, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE STATEMENT OF INCOME" and "ELECTRIC STATISTICS".

Power Pool. The Company operates its generation and transmission facilities as a part of the PJM Interconnection. The PJM Interconnection, one of the world's largest power pools, includes eleven companies serving about 21 million people in a 50,000 square mile territory covering all or part of Pennsylvania, New Jersey, Maryland, Delaware, Virginia and Washington, D.C. The PJM companies had approximately 44.5 million kw of installed generating capacity at December 31, 1977 and transmission line connections with neighboring power pools have the capability of supplying an additional 2.1 million kw to PJM companies. Through December 31, 1977 the maximum one-hour demand on the power pool was approximately 32.2 million kw, which occurred on July 21, 1977. The Company is also a party to the Mid-Atlantic Area Coordination Agreement which provides for the coordinated planning of generation and transmission facilities by the companies included in the PJM Interconnection.

Fuel Supply. During 1977, 79/0 of the Company's energy generation came from coal-fired stations, 19/0 from oil-fired stations and 2/o from hydroelectric stations.

Coal. The following tabulation shows the amount of anthracite and bituminous coal burned by the Company's generating stations during 1977, and the estimated requirements for coal over the remainder of the expected useful lives of the Company's generating stations.

Estimated Burned Requirements During Over plant Type of Fuel 1977 Lives Millions of Tons Anthracite (including petroleum coke).................. 1.2 20.0 Bituminous Coal (1) . 10.0 235.0 Total. 112 255.0 (1) Includes the Company's share of the bituminous coal for the jointly-owned Keystone and Conemaugh generating stations. See "BUSINESS Power Supply".

Labor contracts between mine owners and the United Mine Workers of America expired on December 6, 1977 and a strike started on that date. The curtailment of coal deliveries has resulted in a reduction of coal inventories and has caused the Company, along with other members of the PJM Interconnection (See "BUSINESS Power Supply" ), to implement certain actions designed to reduce the use of coal and to extend the period during which their coal-fired units may be operated at reduced levels. Pursuant to the PJM coal strike contingency plan, which has been filed with the various regulatory commissions having jurisdiction over PJM companies, the output of coal-fired stations on the PJM is to 20

be reduced to 75% of normal levels when coal inventories drop to 45 days supply and 50% of normal levels when coal inventories reach 30 days supply. In accordance with the PJM contingency plan, the Company has reduced the output from its bituminous coal-fired stations as follows:

Normal Capability Date of  % of Normal Station (kilowatts) Rednollon Genersllon Montour. 1,515,000 February 19 75%

Brunner Island. 1,464,000 January 28 75%

Martins Creek 300,000 February 15 50%

S unbury 238,000 January 26 75%

Based on current reduced levels of generation at its coal-fired stations, the Company estimates that at February 18, 1978 its coal inventory was sufficient for about 44 days of operation (37 days based on normal generation levels). If the strike continues so that bituminous coal levels at the Brunner Island, Montour and Sunbury stations reach 30 days supply, the output of those stations is expected to be reduced to 50% of normal levels, thereby extending the period over which those units can operate.

Based on current projections and barring unforeseen circumstances, the Company estimates that its generating capability will be adequate to permit the Company to meet the energy requirements of its customers into May 1978. The receipt of coal from suppliers not affected by the strike, the relaxation of sulfur dioxide emission limitations by'environmental agencies to permit the use of petroleum coke as a supplement to bituminous coal and mandatory reductions of customer usage would be expected to extend further the period over which the generating capability of the Company would be sufficient to meet the energy requirements of the Company's customers.

In addition to the reduction of the output from their coal-fired units, the members of the PJM Interconnection, including the Company, and various governmental authorities are urging customers to voluntarily reduce energy consumption. Mandatory reductions of power in certain portions of western Pennsylvania, which are not served by PJM companies, have been approved by the PUC. In the event that the strike is not settled in the near future, further reductions of power and interruptions of service may be mandated by governmental authorities on a wide-scale basis.

Reduced output from the Company's coal-fired units has forced the Company to increase its use of higher cost oil-fired generation (including combustion turbines) and has resulted in less energy being available for delivery to interconnected utilities, an important contributor to net income in 1977. At the same time, the Company has had to increase its purchases of power from interconnected utilities. While the increased cost which will result from the greater utilization of the Company's oil-fired generation is recoverable through fuel adjustment clauses, the Company's reduced level of interchange sales and increased purchases of power from interconnected utilities are having an adverse effect on earnings. The adverse effects of the strike on the Company's generating capability and earnings will become more pronounced the longer the strike continues.

During 1977, 36% of the Company's coal supply was obtained from subsidiary mining companies (approximately one-third of which was purchased by those companies in the open market), 9% under long-term contracts and 55% by short-term contracts and open market purchases.

At December 31, 1977, the Company's inventory of anthracite was about 2.2 million tons. The balance of the Company's requirements for anthracite, as well as its requirements for petroleum coke,

over the remainder of the expected useful lives of the Company's anthracite-fired generating stations is expected to be obtained by the acquisition of additional anthracite silt banks and from short-term contracts and open market purchases.

The following tabulation lists the bituminous coal reserves owned or controlled at December 31, 1977 by the Company's subsidiary, Pennsylvania Mines Corporation. These reserves, all of which are located in Pennsylvania, are recoverable by deep mining operations. The information under the headings "Estimated Recoverable Reserves as of January 1, 1976" and "Average /o Sulfur (By 'l(l/eight)" was provided by Paul Weir Company Incorporated on the basis of its independent studies and the Company has included such information herein in reliance upon such studies. The Company has not retained any other independent organization to review and report on its bituminous coal reserves.

Estimated Recoverable Reserves Average asof 4/a January 1, 1976 1977 Sulfur (By 1976(1) Production Production Weight) (4)

ThousandsofTons Assigned Reserves(2)

Greenwich 66,649 1,585 1,753 2.7 Oneida. 21,638 265 220 3.3 Rushton. 7,694 556 476 4.5 Tunnelton. 10,187 403 378 1.7 Total Assigned Reserves ..~.... 106,168 2,809 2,827 Unassigned Reserves(3)

Greene Hill. 159,877 2.9 Greene Manor. 162,682 3.3 Total Unassigned Reserves... 322,559 Total. 428,727 2,809 2,827 (1) Includes only proven reserves for which tonnage is computed from dimensions revealed in outcrop data, mine workings and drill holes.

(2) Assigned reserves represent coal which can be mined on the basis of current mining practices and techniques through the use of mine openings and plant facilities currently in existence or under construction.

(3) Unassigned reserves represent undeveloped reserves or reserves that would require substantial additional mining facilities before operations could begin.

(4) Raw coal, dry basis (prior to cleaning).

Prior to 1976 the Company purchased a portion of its coal requirements from The Oneida Mining Company (Oneida), a subsidiary of The North American Coal Corporation (North American), under a long-term cost of production sales contract. In March 1976, in an effort to control the abnormally high cost of coal delivered to the Company from the Oneida mine, the Company asserted a contractual right to 22

take over Oneida. Litigation with North American, which contested the Company's take-over, was settled in February 1977 on terms which gave the Company uncontested control over Oneida. With the conclusion of the litigation the Company was able to expand the scope of studies previously undertaken to determine what changes should be made in Oneida's mining operations. In September 1977, the Company adopted a mining plan which provides for the continuation of steam coal mining in certain sections of the Oneida mine and the write-off of a portion of the development costs incurred from 1970 through 1974 with respect to other sections of the Oneida mine which have been abandoned or bypassed because of poor mining conditions. The sections of the Oneida mine that have been abandoned were not included in the estimate of recoverable reserves for the Oneida mine shown in the above tabulation. This write-off, which was not recovered through the application of the Company's fuel adjustment clauses, resulted in a $ 6.6 million reduction of the Company's net income ($ .20 per share of Common Stock) for the year 1977.

Effective February 1, 1977 the Company began to price Oneida coal for fuel adjustment clause calculation purposes at the average cost per ton of coal produced by the Company's other affiliated mines rather than at Oneida's higher cost. This action reduced the Company's net income by about $ 4.3 million ($ .13 per share of Common Stock) during the period from February through December 31, 1977.

The Company estimates that its net income will continue to be reduced by about $ 400,000 per month until the Company determines whether to make additional investments for further development of the Oneida mine. The Company had planned to reach a decision with respect to the Oneida mine by mld-1978, but because of lost production time resulting from the strike by the United Mine Workers of America, the Company expects to delay that decision until late 1978. In the event that the Company determines to make these investments, it is expected that the difference between the cost of Oneida coal and the average cost per ton of coal produced by the Company's other affiliated mines will be capitalized rather than being included in the current cost of coal. The amount capitalized would be reflected in the cost of coal after the mine was fully developed. However, if adverse mining conditions prevent the further development of the Oneida mine, mining operations may be terminated and additional losses incurred.

At December 31, 1977 and after giving effect to the September 1977 write-off, the aggregate capital investment in Oneida's facilities (including lease obligations) amounted to about $ 35 million, substantially all of which was guaranteed directly or indirectly by the Company. r The Company has a long-term contract with a bituminous coal supplier (Lady Jane) under which the supplier is obligated to deep-mine its reserves to exhaustion. Production at the Lady Jane mine amounted to 185,000 tons during 1977. Run-of-mine coal from the Lady Jane mine has an average sulfur content of about 3.5%%d.

The coal burned in the Company's generating stations contains both organic and pyritic sulfur.

Mechanical cleaning~processes installed at the mines are being utilized to reduce the pyritic sulfur content of the coal. The reduction of the pyritic sulfur content has lowered the total sulfur content of the coal burned to levels which permit compliance with current sulfur dioxide emission regulations established by the Pennsylvania Department of Environmental Resources (DER). See "BUSINESS Environmental Matters". The regulations applicable to the Company's generating stations generally, limit the total sulfur content of coal to not more than 2.5/o. Coal obtained under short-term contracts and by open market purchases currently has an average sulfur content of about 2.2'/o.

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/

The Company owns a 12.34/o undivided interest in the Keystone station and an 11.39'/o undivided interest in the Conemaugh station, both of which are mine-mouth generating stations located in western Pennsylvania. The owners of the Keystone station have a long-term contract, which may be extended through 2012, with a supplier for 90k of the annual bituminous coal requirements of the Keystone station. The owners of the Conemaugh station have a long-term contract with another supplier for at least 80/o of the annual bituminous coal requirements of the Conemaugh station for the life of the station. To the extent that the requirements of these plants are not covered by long-term contracts, the bituminous coal requirements are, with minor exceptions, obtained from local suppliers.

The Company expects that assigned reserves and long-term contracts will provide 40'/o to 50'/o of its projected bituminous coal requirements during the next five years. The balance of these requirements will have to be obtained under short-term contracts or by open market purchases. The extent to which unassigned reserves may eventually be mined to meet the fuel requirements of future generating stations will depend upon future economic conditions and other factors which cannot now be predicted.

Excluding mine-mouth plant requirements, about 83/o of the Company's bituminous coal purchased during 1977 was delivered by the Company's unit trains, which at December 31, 1977 consisted of 980 hopper cars. Use of the Company's hopper cars for delivery of coal minimizes the Company's dependence upon railroad-supplied hopper cars which from time to time are in short supply.

The average delivered cost of coal has increased substantially over the past several years from

$ 11.89 per ton in 1973 to $ 25.72 per ton during 1977. The average delivered cost of coal purchased during 1977 was as follows: bituminous coal purchased from subsidiary companies (including coal purchased by those companies in the open market) and under long-term contracts, $ 30.64 per ton; bituminous coal purchased by the Company under short-term contracts and in the open market, $ 24.20 per ton; and anthracite, including petroleum coke, $ 11.31 per ton. Bituminous coal purchased in the open market by the Company and its subsidiaries is primarily surface-mined. Bituminous coal produced by subsidiary companies and purchased by the Company under long-term contracts is deep-mined.

Oil. The two 820,000 kw oil-fired generating units at the Company's Martins Creek station are designed to burn either crude or residual oil and to follow significant load changes or operate as base load units.

J The Company has contracted with oil suppliers for the expected requirements of the Martins Creek oil units through 1979. An agreement with one of the suppliers, under which the Company can purchase up to three-quarters of its expected oil requirements for these units, provides for automatic annual renewals beyond 1979 unless terminated upon one year's prior written notice by either party.

Oil for the Martins Creek station is delivered to a deep water terminal on the Delaware River at Marcus Hook, Pennsylvania. The Company has a long-term contract with an unaffiliated company to provide unloading and oil storage services at that terminal. The oil is transported from Marcus Hook to storage facilities at the Martins Creek station by a pipeline which was constructed primarily for the use of the Company by its subsidiary, Interstate Energy Company (IEC). The pipeline and related facilities, substantially the only assets of IEC, were placed in service at a cost of approximately $ 55 million. Of that amount, $ 40.5 million was obtained from the Company and the balance was borrowed from banks. The

. Company expects to formalize its obligations for the operating expenses and annual carrying charges of the pipeline in connection with the permanent financing of these facilities in 1978. FERC and PUC tariffs are in effect for the delivery of oil by IEC from Marcus Hook to Martins Creek.

24

k The Company and IEC have arranged to provide pipeline delivery services to another utility beginning in mid- l978. Pipeline delivery services may be available from the deep water terminal to other delivery points at locations and tariff rates which have not yet been established.

Nuclear. The Company presently has under construction two nuclear-fueled generating units at its Susquehanna site. See "CONSTRUCTION PROGRAM". In anticipation of the commercial operation of these units, the Company has made commitments to meet certain of the nuclear fuel cycle requirements for these units., The nuclear fuel cycle consists of the mining and milling of uranium ore to uranium concentrate; the conversion of uranium concentrate to uranium hexafluoride; the enrichment of uranium hexafluoride; the fabrication of fuel assemblies; the utilization of nuclear fuel in the reactor; temporary storage of spent fuel; and the reprocessing or permanent disposal of spent fuel. Based upon the presently scheduled in-service dates and planned fuel cycles for these units the following tabulation shows the year through which contracts are expected to provide the Susquehanna station's requirements for the various segments of the nuclear fuel cycle, assuming that suppliers meet their contractual commitments.

Uranium Concen- Re process-trate(1) (2) Conversion Enrichment Fabriaalion ing(3)

Susquehanna Unit 1 ..... 1983 1985 2007 1994 1992 Susquehanna Unit 2 ..... 1983 1985 2009 1994 1992 (1) The Company has an option to purchase a portion of a supplier's production for the years 1984-1990 which, if exercised, will provide a portion of the Company's uranium concentrate requirements for that period.

(2) The uranium concentrates scheduled to be delivered through 1983 are expected to be sufficient to permit the operation of the Susquehanna units through 1985. Under its enrichment contracts with the Company, the Department of Energy (DOE) may make changes in enrichment specifications. Such changes may necessitate the acquisition by the Company of additional quantities of uranium concentrate during the periods indicated in the tabulation.

(3) There are currently no commercially operating facilities in the United States for the reprocessing of spent fuel. Shipments from Susquehanna to the reprocessor were initially scheduled to begin in the early 1980s following the expansion of the reprocessor's facility. The reprocessor has informed the Company that because of the increased capital and operating costs expected to be incurred to comply with NRC criteria relating to the expansion, the reprocessor does not intend to continue in that business and is seeking to teiminate the contract with respect to the Susquehanna units. The Company estimates that there will be sufficient storage capability in the spent fuel pools at Susquehanna to accommodate the fuel that is expected to be discharged through 1984. Because the Company does not currently anticipate being able to ship spent fuel off-site by 1985 for storage or reprocessing, the Company is developing plans to install additional spent fuel storage capacity in the Susquehanna spent fuel pools.

In April 1977 President Carter stated that he would defer indefinitely the commercial reprocessing of spent nuclear fuel and the recycling of the plutonium produced in domestic and foreign nuclear power programs. Based in part on President Carter's statements, the NRC has 25

'P p

, terminated its rulemaking proceeding regarding the recycling of spent fuel. In October 1977 DOE proposed a policy under which the Federal Government would take title to spent nuclear fuel from electric utilities on payment of a fee and assume responsibility for its interim storage and ultimate disposal.

Additional arrangements, for which there is no present assurance, will be required to satisfy the fuel requirements of the Susquehanna units over their estimated useful lives.

Regulation. The Company is a public utility under the laws of the Commonwealth of Pennsylvania and is subject to regulation as such by the Pennsylvania Public Utility Commission. The Company is subject in certain of its activities to the jurisdiction of the Federal Energy Regulatory Commission under Parts I, II and III of the Federal Power Act. The Company is a holding company under the Public Utility Holding Company Act of 1935 but has been exempted by the Securities and Exchange Commission from the provisions of that Act applicable to it as a holding company.

The Company is subject to the jurisdiction of the Nuclear Regulatory Commission in connection with the construction of the Susquehanna units. See "CONSTRUCTION PROGRAM". The Company is also subject to the jurisdiction of certain Federal, regional, state and local regulatory agencies with respect to air and water quality, land use and other environmental matters. See "BUSINESS Environmental Matters". The coal mining operations of the Company's subsidiaries are subject to the Federal Coal Mine Health and Safety Act of 1969.

Proposed Energy Legislation. A conference committee of Congress'currently is considering legislation designed to achieve energy conservation through the application of various regulatory and tax measures and to encourage the development and use of relatively abundant domestic fuels primarily coal. The conference committee has tentatively agreed to require state public utility commissions to consider certain rate design standards. The Company is unable to predict what measures, if any, will ultimately be enacted or what effect any measures enacted will have on the Company.

Environmental Matters. The Company is subject to certain present and developing Federal, regional. state and local laws and regulations with respect to air and water quality, land use and other environmental matters. Except as described below, the Company is presently in substantial compliance with applicable environmental laws and regulations and has all of the permits currently required to operate its facilities.

Air. The Federal Clean Air Act Amendments of 1977 (1977 Amendments) include, among other things, provisions that: (a) require the prevention of significant deterioration of existing air quality in regions where air quality is better than applicable ambient standards; (b) restrict the construction of new emission sources, including coal-fired and oil-fired generating stations, in areas which have not attained specified ambient air quality standards; (c) revise the standards of performance applicable to new emission sources and require that new fossil fueled generating units achieve the revised standards by the application of the best available control technology which reqUirement, in effect, appears to prohibit the use of low sulfur coal at new emission sources without further treatment, such as the cleaning of coal or the use of scrubbers; and (d) require the United States Environmental Protection Agency (EPA) to impose substantial non-compliance penalties for failure to comply with air pollution regulations after July 1, 1979 and provide for new civil penalties of up to $ 25,000 per day of violation for facilities found to be in violation of the requirements of an applicable implementation plan.

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Under procedures established by the Pennsylvania Department of Environmental Resources (DER) prior to the 1977 Amendments, companies not in compliance with emission regulations have been permitted to enter into consent orders with DER which allow continued operation of facilities during the time in which steps are being taken to achieve compliance. In this regard, the Company and the DER have entered into a consent order with respect to particulate emission regulations as follows:

1 Unit Comptiance Date Brunner Island No. 1. December 31, 1980 Brunner Island No. 3. June 30, 1981 Montour No. 1. June 30, 1981 Montour No. 2 December 31, 1980 As a result of the 1977 Amendments, the Company expects to enter into a new consent order with DER which will establish new compliance dates of not later than July 1, 1979 for the Montour units. The Company currently anticipates that the installation of flue gas conditioning equipment at the Montour units and additional fuel quality control equipment or procedures at the Company's affiliated mines will permit the Company to achieve compliance at the Montour units by July 1, 1979. The Company also expects to enter into a new consent order with DER for the Brunner Island units. Since the Company has been proceeding on a schedule which was designed to achieve compliance at the Brunner Island units by the dates shown in the tabulation, the Company will not be able to achieve compliance at these units by July 1, 1979. As a result, it is expected that the compliance dates established by the new consent order for the Brunner Island units will remain unchanged from that shown ln the tabulation.

Although the amount of the Company's payments to the Pennsylvania Clean Air Fund pursuant to the new consent orders has not been determined, the Company expects that the payments will be substantially in excess of $ 3,500 per month which is being paid pursuant to the current consent order.

Because of non-compliance of the Brunner Island and Montour units, the Company may be subject to substantial non-compliance and civil penalties under the 1977 Amendments in amounts which are not now determinable.

The Company and DER are currently discussing a consent order for Unit No. 4 at the Company's Sunbury station. The Company expects that any consent order would permit the Company to continue to operate the unit during the time in which the Company is taking steps to achieve compliance with DER particulate emission regulations, Although it currently expects that Unit No. 4 at the Sunbury station can be in compliance with applicable DER standards by July 1, 1979 the Company may be subject to fines or penalties, including fines or penalties under the 1977 Amendments, during the period of non-compliance.

The Company's request for an operating permit for Sunbury Unit No. 3 is currently pending before DER.

In July 1977 EPA notified the Company of an alleged violation at the Company's Holtwood steam station of opacity particulate emission regulations established by DER. Following discussions with DER and EPA, the Company in January 1978 agreed to install additional emission control facilities at the Holtwood station. It ls expected that these facilities will not be able to be placed in service before mid-1981 and that the Company may be subject to fines and penalties for failure to meet the July 1, 1979 compliance date established by the 1977 Amendments.

The Company's estimate of construction expenditures for the years 1978-1980 includes estimated expenditures during that period to achieve compliance with DER particulate emission regulations at the Brunner Island, Montour, Sunbury and Holtwood Units. See "CONSTRUCTION PROGRAM".

27

ll pl

The processing of coal to reduce the sulfur content prior to burning permits the Company to comply with current sulfur dioxide emission regulations. If, however, the sulfur dioxide emission regulations applicable to the Company's existing generating stations are amended to significantly reduce permissible discharges, the Company may be required to further reduce the sulfur content of the coal prior to burning or install equipment for the removal of sulfur dioxide from flue gases. DER has proposed regulations which, if adopted, could have the effect of limiting the sulfur dioxide emissions from the Company's Sunbury station. Compliance with such regulations could be expected to require the Company to make additional expenditures at the Sunbury station in amounts which are not now determinable.

VYater. To meet the standard of "best practicable control technology currently available" established by the Federal Water Pollution Control Act, as amended in December 1977 (Water Act), the Company's coal mining subsidiaries are planning to install waste water treatment equipment at certain of their facilities and have filed the necessary applications with DER. The failure by the subsidiaries to meet the Water Act standard by July 1, 1977 may subject the subsidiaries to fines and penalties which are not expected to be material in amount.

The Water Act requires the application of the "best available technology economically achievable" by July 1, 1984 with respect to certain discharges from existing facilities and authorizes EPA to establish discharge limitations and compliance schedules for certain other pollutants. With respect to "new" facilities, the Water Act authorizes EPA to establish standards of performance which will require the application of the "best available demonstrated control technology". The Water Act also requires that the location, design, construction and capacity of cooling water intake structures reflect the application of the "best technology available for minimizing adverse environmental impact". EPA has adopted effluent limitations, guidelines and standards for steam electric stations and guidelines for existing coal mines.

EPA limitations, guidelines and standards are enforced through the issuance of discharge permits which specify the applicable limitations on discharges. Compliance with applicable state and regional water quality standards is accomplished by requiring the appropriate state or interstate agency to issue a water quality certification with respect to each application. The terms and conditions of any such water quality certification must be incorporated in the discharge permit issued by EPA.

EPA has issued discharge permits for the operation of the Company's generating stations and for construction activities at the Susquehanna station. Applications for discharge permits for the sewage treatment plant at the Montoursville service center and the coal mining operations of the Company's subsidiaries are pending before EPA. DER has issued the required water quality certification for the Pennsylvania Mines Corporation (PMC) discharge permits. The Company believes that certain discharge limitations contained in the DER certification for the Montour station are more stringent than those established by applicable guidelines and regulations and has requested a hearing before DER concerning these limitations.

DER also administers state and certain regional laws and regulations with respect to effluent discharges and water quality. The Company and DER are also discussing the necessity of installing additional water treatment facilities at certain of the Company's plants.

Regulations adopted by the Department of Interior's Office of Surface Mining, Reclamation and Enforcement pursuant to the Surface Mining Control Act of 1977, which also applies to the disposal of refuse from underground mines, are expected to,delay the issuance by DER of a coal refuse disposal permit for PMC and may require additional expenditures at PMC in amounts which are not now determinable but which may be substantial.

28

Delaware River Basin Commission approval of the Company's water withdrawal permit for the oil-fired units at the Martins Creek station requires the Company to provide make-up water at certain times or

-to curtail operation of these units during certain periods of low flow in the Delaware River. It is the Company's intention to supply the required make-up water from its Lake Wallenpaupack hydroelectric project. See "BUSINESS Hydroelectric Projects". The regulations of the Susquehanna River Basin Commission require that water users provide make-up water during certain periods of low flow in the Susquehanna River. In connection with the construction of the Susquehanna station, the Company is considering, among other alternatives, the construction of a reservoir to provide make-up water.

Preliminary environmental and engineering feasibility studies with respect to the reservoir have been undertaken by the Company and the Company estimates that the cost of this reservoir would approximate $ 45 million. The Company's share of such cost during the years 1978-1980 is included in its estimate of construction expenditures for that period. See "CONSTRUCTION PROGRAM".

'In 1974 the Borough of Tremont, Pennsylvania, and several residents of the Borough of Tremont commenced a suit against ten defendants, including the Company, in the Court of Common Pleas, Schuylkill County, Pennsylvania. The complaint in this proceeding (which purports to be a class action on behalf of all residents of the Borough of Tremont) alleges, among other things, that the failure of the defendants to comply with the provisions of various Federal and state environmental laws in connection with the maintenance of certain culm and silt banks in the vicinity of the Borough of Tremont caused the plaintiffs named in the complaint to suffer damages of approximately $ 1.3 million during the flooding resulting from Tropical Storm Agnes. In July 1977 Gold Mills, Inc. commenced a suit against the same defendants containing similar allegations and claiming damages of $ 3.6 million. Plaintiffs in both proceedings are seeking to recover punitive damages in unspecified amounts.

Nuc/ear. The U.S. Court of Appeals for the District of Columbia in July 1976 announced decisions in two cases to which the Company was not a party concerning the scope of the NRC environmental review of nuclear plants. In one decision the Court held that the NRC must give further consideration in all cases to the environmental impact of the reprocessing of spent fuel and the disposal of radioactive waste material. In October 1976 the NRC initiated rulemaking proceedings to evaluate further the environmental impact of reprocessing and waste disposal and in March 1977 the NRC adopted an interim rule relating to these matters. In August 1977, in its decision terminating the show cause proceedings initiated by an environmental group to halt the construction or operation of 14 nuclear fuel units in Pennsylvania and New Jersey, including the Susquehanna units, the NRC Appeal Panel concluded that the application of the interim rule would not significantly affect the cost benefit analysis for the Susquehanna units. A further proceeding relating to a final rule with respect to the environmental impact of the reprocessing of spent fuel and the disposal of radioactive waste material is currently pending before the NRC. It is expected that the results of the NRC rulemaking proceedings will serve as a basis for the cost benefit analysis required by the National Environmental Policy Act of 1969 in connection with the issuance of operating licenses for nuclear plants including the Susquehanna units.

In the other decision the Court held that the NRC must consider energy conservation as an alternative to the construction of nuclear plants in licensing proceedings where energy conservation (in addition to alternative means of generating power) is raised as an issue. Since energy conservation is considered in connection with individual licensing proceedings, the NRC has not initiated a rulemaking proceeding with respect to these matters.

The Supreme Court has granted review of both Court of Appeals decisions. The action of the NRC in March 1977 in adopting the interim rule relating to the environmental impact of fuel reprocessing and 29

waste disposal has been appealed to the U.S. Court of Appeals for the District of Columbia. The Company is unable to predict what further actions may be taken by the NRC or the Courts with respect to any of these matters or the effect that such actions or actions by environmental agencies could have on the cost or in-service dates of the Susquehanna units. See "CONSTRUCTION PROGRAM".

General. During the period 1973 through 1977, the Company's construction expenditures aggregated about $ 1.61 billion, of which the Company estimates that about $ 83 million was for compliance with Federal, state and local environmental laws and regulations. Approximately $ 150 million of capital expenditures for such compliance are included in the Company's 1978-1980 construction program and it may be that substantial additional expenditures for such purposes in an amount not now determinable will be required during such period and thereafter.

From time to time the Company and its subsidiaries have been cited for violations of DER and EPA air and water quality regulations in connection with the operation of their facilities and, as a result, may be subject to certain penalties which are not expected to be material in amount.

The Company is unable to predict the ultimate effect of developing environmental law and regulation upon its existing and proposed facilities and operations. However, it is possible that such law and regulation may require the Company to modify, supplement, replace or cease operating its equipment and facilities, delay or impede its construction and operation of new facilities, and require it to make substantial additional expenditures In amounts which are not now determinable.

Hydroelectric Projects. The Company operates the Holtwood hydroelectric project (102,000 kw capability) and the Wallenpaupack hydroelectric project (44,000 kw capability), the original licenses for which expired in 1970 and 1974, respectively. Pending final action on the Company's applications for new long-term licenses for both projects, FERC has granted the Company interim annual licenses to operate the projects. The interim annual licenses incorporate the terms and conditions of the original long-term licenses. The Company's Holtwood application is being opposed by a municipal electric system. The Holtwood and Wallenpaupack projects represent current investments on a depreciated original cost basis of $ 9.6 million and $ 10.1 million, respectively.

The Federal Power Act provides that if, upon expiration of a major project license, the United States takes over the project or a license for the project is issued to a new licensee, the original licensee shall be paid the "net investment" in the property, not to exceed fair value, plus severance damages, if any.

Certain reserves which are required by the Act and which relate to the calculation of "net investment" have not been recorded pending approval of the amounts thereof by FERC. In April 1977, FERC issued a proposed rulemaking which, if adopted, would require a licensee to record these reserves by an appropriation of earnings reinvested. The amount of earnings reinvested so appropriated would be restricted as to the payment of dividends. The Company estimates that such reserves applicable to the period 1946 through December 31, 1977 would not exceed $ 3.1 million for its two licensed projects.

The Company also owns one-third of the capital stock of Safe Harbor Water Power Corporation (Safe Harbor) which holds a major project license for the operation of its hydroelectric plant (230,000 kw capability). The Company is entitled to one-third of the capacity (76,000 kw) of the Safe Harbor plant.

The Safe Harbor license expires in 1980. In April 1977 Safe Harbor filed an application with FERC for a new long-term license and the proposed installation of five additional 37,500 kw units. The additional units will increase the total capability of the Safe Harbor plant to 417,500 kw and the Company will be entitled to one-thifd of the total capacity (139,167 kw)..

30

ELECTRIC STATISTICS 1973 1974 1975 1976 1977 Power Capability(thousands of kw)

Coal-fired steam stations 4,140 4,140 4,136 4,136 4,145 Oil-fired steam station.. 820 820 1,640 Combustion turbines and diesels ........................ 541 539 539 539 539 Hydroelectric stations .. 146 146 146 146 146 Firm purchases (hydro). 76 76 76 76 76 Total.. 4,903 4,901 5,717 5,717 6,546 Winter Peak Demand (thousands of kw)(a)................. 3,662 3 772 4,122 4,425 4,431 Sources of Energy (millions of kwh)

Generated "

Coal-fired steam stations. 24,782 24,186 25,384 25,751 26,299 Oil-fired steam station. 1,149 1,947 6,271 Combustion turbines and diesels ................. 273 247 84 40 115 Hydroelectric stations .. 816 772 859 809 735 Power purchases .. 1,968 1,570 2,241 2,126 1,977 Total. 27,839 26,775 29,717 30,673 35,397 Disposition of Energy (millions of kwh)

Energy sales to customers. 18,865 18,963 19,113 20,354 21,201 Interchange power sales(b) .. 7,237 6,079 8,757 8,358 12,433 Company uses and line losses ...... 1,737 1,733 1,847 1,961 1,763 Total.. 27,839 26,775 29,717 30,673 35,397 Fuel Cost of Energy Generated (cents per kwh).......... 0.50 0.88 1.04 1.17 1.35 Cost of Coal Received, including freight and handling cost (per ton). $ 11.89 $ 20.80 $ 23.38 $ 25.36 $ 25.72 Energy Sales (millions of kwh)

Residential. 6,324 6,494 6,818 7,267 7,539 Commercial. 4,262 4,275 4,575 4,874 5,211 Industrial... 6,881 7,170 7,020 7,481 7,697 Other. 1,398 1,024 700 732 754 Total. 18,865 18,963 19,113 20,354 21,201 Operating Revenues (thousands)

Residential. $ 154,681 $ 187,265 $ 218,904 $ 257,828 $ 296,179 Commercial. 101,670 121,314 143,673 170,990 201,639 Industrial.. 99,928 131,452 150,365 180,957 209,527 Other 25,868 27,539 25,686 29,949 33,183 Total. $ 382,147 $ 467,570 $ 538,628 $ 639,724 $ 740,528 Number of Customers (end of period) ........................ 886,378 902,148 917,920 936,219 954,613 Average Use Per Residential Customer (kwh)............. 8,253 8,287 8,528 8,931 9,063 Average Revenue (cents per kwh)

Residential. 2.45 2.88 3.21 3.55 3.93 Commercial. 2.39 2.84 3.14 3.51 3.87 Industrial.. 1.45 1.83 2.14 2.42 2.72 All customers.. 2.00 2.44 2.78 3.10 3.45 Total Operating Expenses per kwh of Energy Sales (cents per kwh)(b)... 1.52 1.88 2.21 2.49 2.64 Note: Statistics of the Company and Hershey Electric Company are consolidated since January 1, 1977.

(a) Winter peak shown was reached early in subsequent year. The Company estimates that it would have experienced a peak for 1976 of 4,514,000 kw if a 5/o voltage reduction had not been in effect.

(b) As provided in the applicable regulatory system of accounts, receipts from interchange power sales have been treated as reductions of operating expenses.

31

DESCRIPTION OF COMMON STOCK The outstanding Common Stock is, and the Common Stock offered hereby when issued and paid for will be, fully paid and non-assessable. The following is a summary of certain provisions of the Company's Articles of Incorporation and mortgages, copies of which are exhibits to the Registration Statement.

Dividend Rights. Subject to the Articles of Incorporation and mortgage restrictions on dividends referred to below and to the preferential rights of the Preferred Stock and Preference Stock, dividends may be declared on the Common Stock out of funds legally available for the payment thereof.

Dividend Restrictions. The Company's Articles of Incorporation provide that no dividends (other than dividends payable by the issuance of Common Stock) on, or purchases or acquisitions of, or distributions on, the Common Stock shall be paid or made by the Company aggregating an amount in excess of (a) 75'/o of the current year's earnings otherwise available for Common Stock, if after such payment, purchase, acquisition or distribution the ratio of the aggregate of the stated value of Common Stock and earnings reinvested to total capitalization, including earnings reinvested, will be less than 25'/0, and (b) 50'/o of such earnings, if after such payment, purchase, acquisition or distribution, such ratio will be less than 20/o. At December 31, 1977 there were no restrictions on the payment of dividends out of earnings reinvested.

The Company's mortgage contains a provision which, in general, restricts the payment of Common Stock dividends in cash if the effect thereof will be to bring the aggregate of earnings reinvested plus the provisions for depreciation to a point below the maintenance and replacement fund requirements which have not been satisfied by actual expenditures. Such provision did not result in the restriction of any portion of earnings reinvested of the Company at December 31, 1977. An assumed mortgage on the former Scranton Electric Company properties acquired by merger in 1956 also contains restrictions on the payment of Common Stock dividends which do not limit the availability of earnings reinvested.

Voting Rights. Except as hereinafter otherwise set forth, the holder of each share of Preferred Stock, Preference Stock and Common Stock has one vote on any question presented to any shareowners'eeting, a majority in number of shares regardless of class being considered a majority in value or in interest within the meaning of any statute or law requiring the consent of shareowners holding a majority in interest or a greater amount in value of stock of the Company. If and when dividends payable on any Preferred Stock shall be in arrears in an amount equivalent to the annual dividend rate or more per share and thereafter until all dividends on the Preferred Stock in arrears shall have been paid, the holders of the Preferred Stock, voting as a single class, shall be entitled to elect a majority of the full Board of Directors, and the holders of the Preference Stock and Common Stock, voting separately as a class, and subject to the rights of the holders of Preference Stock as described below, shall have the right 'o elect the remaining directors. If and when dividends payable on the Preference Stock shall be in arrears in an amount equivalent to one and one-half times the annual dividend rate or more per share and thereafter until all dividends on the Preference Stock in arrears shall have been paid, the holders of the Preference Stock voting as a single class (and subject to rights of holders of Preferred Stock) shall be entitled to elect two directors. Under Pennsylvania law, all shareowners of the Company have the unconditional right of cumulative voting in the election of directors.

32

Liquidation Rights. After satisfaction of the preferential liquidation rights of the Preferred Stock and the Preference Stock, the holders of the Common Stock are entitled to share, ratably, in the distribution of all remaining assets. See Note 6 to Financial Statements for. the liquidation preferences of the Preferred Stock and Preference Stock.

Preemptive Rights. The holders of Commbn Stock do not have preemptive rights as to additional issues of Common Stock.

Certain Tax Matters. In the opinion of Edward M. Nagel, Esq., General Counsel of the Company, the Common Stock is exempt from existing personal property taxes in Pennsylvania.

Listing. The Common Stock is listed on the New York and Philadelphia Stock Exchanges.

Transfer Agents and Registrars. The Transfer Agents are certain employees of the Company, Industrial Valley Bank and Trust Company, Allentown, Pa., and Irving Trust Company, New York, N. Y.

The Registrars are The First National Bank of Allentown, Pa., and Morgan Guaranty Trust Company of New York, N. Y.

EXPERTS The balance sheets as of December 31, 1976 and 1977 and the related statements of income, earnings reinvested, and changes in financial position for each of the five years in the period ended December 31, 1977 included in this Prospectus have been examined by Haskins 8 Sells, independent Certified Public Accountants, as stated in their opinion appearing herein, and have been so included in, reliance upon such opinion given upon the authority of that firm as experts in accounting and auditing.

Information in the tabulation of the Assigned Reserves and Unassigned Reserves under the headings "Estimated Recoverable Reserves as of January 1, 1976" and "Average /o Sulfur (By Weight)"

under the caption "BUSINESS Fuel Supply (Coal)" was provided by Paul Weir Company Incorporated and is included herein in reliance on its authority as an expert.

Statements made herein as to matters of law and legal conclusions have been reviewed by Edward M. Nagel, Esq., General Counsel of the Company, and have been made in reliance on his authority as an expert.

LEGAL OPINIONS The validity of the Common Stock offered hereby will be passed upon for the Company by Edward,,

M. Nagel, Esq., General Counsel of the Company, and Messrs. Simpson Thacher 8 Bartlett, New York, N. Y., and for the Underwriters by Messrs. Sullivan 6 Cromwell, New York, N. Y. However, all matters of law of the Commonwealth of Pennsylvania will be passed upon only by Mr. Nagel, who is a full-time employee of the Company.

33

'I I

J t

f ~ l

MANAGEMENT Directors

• JACK K. BUSBY, VIRGINIAH. KNAUER, Chairman of the Board and Chief Executive President of Virginia Knauer and Associates, Inc.

Officer of the Company W. DEMING LEWIS,

• ROBERT K. CAMPBELL, President of Lehigh University President of the Company JOHN A. NOBLE,

• RALPH R. CRANMER, Chairman of the Board and Chief Executive Member of the Board of Directors of Grit Officer of Cleiand Simpson Company Publishing Company RUTH PATRICK, EDGAR L. DESSEN, Chief Curator of the Limnology Department of the Physician-Radiologist Academy of Natural Sciences of Philadelphia R. FORTUNE, 'OBERT NORMAN ROBERTSON, Executive Vice President, Financial of the Senior Vice President and Chief Economist of

,Company Mellon Bank, N.A.

• HARRYA. JENSEN,

• JOSEPH T. SIMPSON, President and Chief Executive Officer of Armstrong Cork Company Chairman of the Board of Harsco Corporation CHARLES H. WATTS II,

• Member of Executive Committee. Educational and Business Consultant, former President of Bucknell University Officers JACK K. BUSBY, Chairman of the Board and Chief JOHN T. KAUFFMAN,Vice President, Executive Officer System Power L Engineering ROBERT K. CAMPBELL, President EMMET M. MOLLOY,Vice President, ROBERT R. FORTUNE, Executive Vice President, Human Resource 8 Development Financial LEON L. NONEMAKER, Vice President, Division Operations CHESTER R. COLLYER, Treasurer EDWARD M. NAGEL, Vice President, NORMAN W. CURTIS, Vice President, General Counsel and Secretary Engineering & Construction HERBERT D. NASH JR., Vice President, JOSEPH L. DONNELLY, Vice President, Finance Consumer 6 Community Services LOUISE A. EARP, Assistant Secretary EDWIN H. SEIDLER, Vice President, Distribution CHARLES E. FUQUA, Vice President, BRENT S. SHUNK, Vice President, Lancaster Susquehanna Division Division CHARLES J. GREEN, Vice President, Harrisburg JEAN A. SMOLICK, Assistant Secretary Division DONALD J. TREGO, Assistant Treasurer RICHARD H. LICHTENWALNER,Vice President, GEORGE F. VANDERSLICE, Vice President and Information Services Comptroller CARL R. MAIO, Vice President, Lehigh Division PAULINE L. VETOVITZ, Assistant Secretary JAMES J. McBREARTY, Vice President, Northeast HELEN J. WOLFER, Assistant Secretary Division 34

V i

PENNSYLVANIAPOWER & LIGHT COMPANY STATEMENT OF CHANGES IN FINANCIALPOSITION 1973 1974 1975 1976 1977 Thousands of Dollars SOURCE OF FUNDS Operations Net income.. $ " 66,912 $ 87,479 $ 97,541 $ 112,111 $ 149,763 Charges (credits) against income not involving working capital Depreciation. 48,837 52,399 58,540 62,478 68,035 Noncurrent deferred income taxes and Investment tax credits net ........'.................... 11,282 8,790 15,701 31,789 33,579 Allowance for,funds used during construction .... (14,967) (20,732) (36,605) (45,192) (49,395)

Other.. 220 520 7,464 4,669 (1 191)

~

112,284 128,456 142,641 165,855 200,791 Outside Financing Common stock. 40,900 35,156 57,763 82,705 87,975 Preferred and preference stock...... 40,000 25,000 70,000 75,000 50,000 First mortgage bonds.. 108,000 180,000 225,000 150,000 100,000 Other long-term debt 360 208 253 576

'0,024 Short-term debt net increase ...... 45,658 208,924 286,174 352,971 307,958 238,551 Working Capital decrease (a). 3,156 15,166 Investments in Associated Companies decrease ........... 685 16,894 Deposits from Allegheny Electric Cooperative (Note 14) ... 84,215 Other net.. 2,672 6,424 608 Total Source of Funds................................. $ 327,036 $ 415,315 $ 510,778 $ 497,131 $ 524,165 APPLICATION OF FUNDS Construction Expenditures (Note 14) . $ 224,496 $ 267,724 $ 342,496 $ 394,238 $ 362,558 Nuclear Fuel in Process (Note 14)..................................... 3,736 2,793 13,555 17,680 Allowance for Funds Used During Construction................ (14,967) (20,732) (36,605) (45,192) (49,395) 1 209,529 250.728 '08,684 362,601 330,843 Securities Retired Preference stock. 4,000 First mortgage bonds.. 93,000 8,000 20,500 Other long-term debt.. 10,041 18,632 112 3,054 196 Short-term debt net decrease..... 56,631 11,879 13,618 36,612 66,672 18,632 104,991 24,672 61,308 Dividends on Preferred, Preference and Common Stock .. 50,037 58,897 70,686 86,694, 100,813 Working Capital 'ncrease (a) .................... 82,753 15,309 31,020 Acquisition of Hershey Electric Company ......................... 7,855 Investments in Associated Companies Increase............. 798 23,990 181 Other net.. 4,305 2,427 Total Application of Funds........................... $ 327,036 $ 415,315 $ 510,778 $ 497,131 $ 524,165

~

Changes in Components of Working Capital (a)

Cash and temporary cash investments.............................. $ 10,247 $ (3,792) $ (5,352) $ 123 $ 19,136 Accounts and notes receivable. 6,745 22,896 28,757 16,394 12,279 Coal and fuel oil.. (4,717) 45,002 (3,568) 6,567 30,874 Recoverable fuel costs, less related deferred income taxes. 16,747 738 2,125 3,189 Accounts payable and accrued taxes ............................... (10,006) (1,811) (22,507) 8,501 (26,756)

Dividends payable and interest accrued .......:................... (5,136) (6,494) (6,346) (4,612) (4,034)

Other net.. (289) 10,205 (6,888) (13,789) '3,668 Increase (Decrease) . $ (3,156) $ 82,753 $ (15,166) $ 15,309 $ 31,020 (a) Excludes short and long-term debt due within one year.

See accompanying Notes to Financial Statements.

35

PENNSYLVANIAPOWER & LIGHT COMPANY BALANCE SHEET ASSETS Thousands of Dollars December 31, 1978 1977 UTILITYPLANT Plant in service at original cost Electric................................... $ 2,090,282 $ 2,323,792 Steam heat.. 7,896 8,140 Total plant In service. 2,098,178 2,331,932 Less accumulated depreciation (Note 5) 458,697 508,948 Net plant in service.. 1,639,481 1,822,984 Construction work in progress at cost. 720,544 829,481 Nuclear fuel in process at cost. 20,084 37,764 Net utilityplant (Note 8) .. 2,380,109 2,690,229 INVESTMENTS Associated companies at equity.. 15,327 17,640 Nonutility property and other at cost or less.. 7,548 7,419 Total investments. 22,875 25,059 CURRENT ASSETS Cash (Note 4) .. 14,955 14,098 Temporary cash fnvestments, at cost which approximates market. 19,993 Accounts receivable (less reserve: 1976, $ 1,925; 1977, $ 2,715)

Customers . 49,205 52,380 Other 22,857 28,988 Notes receivable (principally from associated company) .. 29,570 32,543 Recoverable fuel costs .. 41,670 48,987 Coal and fuel oil at average cost.. 74,885 Materials and supplies at average cost. 19,068 105,759'9,445 Other. 7,219 7,811 Total current assets. 259,429 330,004 DEFERRED DEBITS .. 4,884 5,030 Total. $ 2,667,297 $ 3,050,322 See accompanying Notes to Financial Statements.

36

~ 4 PENNSYLVANIAPOWER 8r LIGHT COMPANY BALANCE SHEET LIAB IL I TIE 6 Thousands of Dollars December 31, 1976 1977 CAPITALIZATION Shareowners Investment (Notes 6, 7 and 9)

Preferred stock. $ 231,375 $ 281,375 Preference stock .. 210,000, 206,000 Commop stock. 495,008 582,983 Capital stock expense. (10,220) (10,630)

Earnings relnvested. 237,967 286,911 Total shareowners Investment. 1,164,130 1,346,639 Long-term debt (Note 8). 1,161,319 1,256,739 Total capitalization 2,325,449 2,603,378 CURRENT LIABILITIES Long-term debt due within one year (Note 8). 20,675 3,756 Commercial paper notes (Note 4). 60,012 23,400 Accounts payable (Note 13) .. 50,415 62,472 Taxes accrued .. 12,564 27,263 Deferred Income taxes applicable to recoverable fuel costs.. 22,060 26,188 Dividends payabie.. 23,002 26,612 Interest accrued. 22,589 23,013 Other (Note 13) . 21,184 25,821 Total current liabilities. 232,501 218,525 DEFERRED AND OTHER CREDITS Deferred Investment tax credits. 56,526 82,078 Deferred Income taxes .. 36,860 44,887 Deposits from Allegheny Electric Cooperative (Note 14) .. 84,215 Other. 15,961 17,239 Total deferred and other credits .. 109,347 228,419 COMMITMENTSAND CONTINGENT LIABILITIES(Note 15)

Total. $ 2,667,297 $ 3,050,322 See accompanying Notes to Financial Statements.

37

PENNSYLVANIAPOWER & LIGHT COMPANY STATEMENT OF EARNINGS REINVESTED 1973 1974 1975 1978 Thousands of Dollars BALANCE, JANUARY 1. $ 140,238 $ 157,113 $ 185,695 $ 212,550 $ 237,967 ADD NET INCOME. 66,912 87,479'7,541 112,111 149,763 Total.. 207,150 244,592 283,236 324,661 387,730 DEDUCT Cash Dividends Declared Preferred stock (at specified annual rates) ................. 7,551 9,393 9,393 13,128 17,123 Preference stock (at specified annual rates)............... 9,640 '0,263 15,116 20,240 19,870 Common stock (per share 1973, $ 1.68; 1974,

$ 1.77; 1975 and 1976, $ 1.80; 1977, $ 1.89)........... 32,846 39,241 46,177 53,326 63,820 Other. 6 Total. 50,037 58,897 70,686 86,694 100,819 BALANCE, DECEMBER 31(Notes 7 and 9).... $ 157,113 $ 185,695 $ 212,550 $ 237,967 $ 286,911 I

See accompanying Notes to Financial Statements 38'

PENNSYLVANIAPOWER & LIGHT COMPANY NOTES TO FINANCIALSTATEMENTS

1.

SUMMARY

OF ACCOUNTING POLICIES Accounting System Accounting records are maintained in accordance with the Uniform System of Accounts prescribed by the Federal Energy Regulatory Commission (FERC) and adopted by the Pennsylvania Public Utility Commission (PUC).

Principles of Consolidation The accounts of the Company and Hershey Electric Cbmpany (Hershey), a wholly-owned electric distribution subsidiary acquired December 31, 1976, are consolidated in the accompanying financial statements from the acquisition date. All significant intercompany transactions have been eliminated.

The acquisition cost of the capital stock and the repayment of all debt owed by Hershey approximated

$ 7.9 million. The operations of Hershey are not material compared to operations of the Company.

Associated Companies Investments in unconsolidated subsidiaries (all wholly-owned) and in Safe Harbor Water Power Corporation (one-third of the outstanding capital stock representing one-half of that company's voting securities) are recorded using the equity method of accounting. The Company's unconsolidated subsidiaries are engaged in coal mining operations, holding coal reserves, uranium exploration, oil pipeline operations and real estate.

Except for uranium mining claims in Wyoming and Utah and minor amounts of real estate held in other states, the Company's unconsolidated subsidiaries'roperty and operations are in Pennsylvania.

The Company believes that its financial position and results of operations are best reflected without consolidation of these subsidiaries since they are not engaged in the business of generating or distributing electricity. If all the unconsolidated subsidiaries were considered in the aggregate as a single subsidiary, they would not constitute a "significant subsidiary" as that term is defined by the Securities and Exchange Commission (SEC).

Utility Plant Additions to utility plant and replacements of units of property are capitalized at cost. Costs of depreciable property retired or replaced are removed from utility plant and such costs, plus removal costs, less salvage, are charged to accumulated depreciation. Costs of land retired or sold are removed from utility plant and any gains or losses are reflected on the Statement of Income. All expenditures for maintenance and repairs of property and the cost of replacement of items determined to be less than units of property are charged to operating expenses.

Allowance for Funds Used During Construction As provided in the Uniform System of Accounts, the cost of funds used to finance construction projects is capitalized as part of construction cost. The components of Allowance for funds used during construction shown on the Statement of Income under Other Income and Deductions and Interest Charges are non-cash items equal to the amount so capitalized and serve to offset the actual cost of financing construction. Reference is made to Note (e) to the "STATEMENT OF INCOME".

Depreciation For financial statement purposes, the straight-line method of depreciation is used to accumulate an amount equal to the cost of utility plant and removal costs, less salvage, over the estimated useful lives of property. Reference is made to Note 5 to Financial Statements.

39

PENNSYLVANIAPOWER & LIGHT COMPANY NOTES TO FINANCIALSTATEMENTS (Continued)

Revenues Revenues are based on cycle billings rendered to certain customers monthly and others bi-monthly.

The Company does not accrue revenues related to energy delivered but not billed.

Fuel Costs Recoverable Under Fuel Adjustment Clauses The Company's tariffs filed with both the PUC and FERC include fuel adjustment clauses under which fuel costs varying from the levels allowed in approved rate schedules are reflected in customers'ills after the fuel costs are incurred. Fuel costs recoverable in the future through application of fuel adjustment clauses are deferred and charged to expense during the periods in which such costs are billed to customers. Reference is made to Notes (b) and (c) to the "STATEMENT OF INCOME" and to "RATE MATTERS" for further information regarding the fuel adjustment clauses.

Income Taxes The Company and its subsidiaries file a consolidated Federal income tax return. Income taxes are allocated to the individual companies based on their respective taxable income or loss.

Income taxes are allocated to Operating Expenses and Other Income and Deductions on the Statement of Income. Income tax reductions associated with the interest (borrowed funds) component of the Allowance for funds used during construction constitute the principal item of Income tax credits under Other Income and Deductions.

Deferred tax accounting is followed for items where similar treatment in rate determinations has been or is expected to be permitted by the PUC. The principal items are accelerated amortization of certified defense facilities and pollution control equipment, deduction of costs of removing retired depreciable property, that portion of tax depreciation arising from shortening depreciable lives by 20/0 under the class life depreciation system, fuel costs recoverable under fuel adjustment clauses, the forced outage reserve and the cost of fuel consumed during the test period of new generating facilities.

Tax reductions arising principally from the use of the declining balance depreciation method, guideline lives and certain income and expenses being treated differently for tax computation purposes than for book purposes are accounted for under the flow-through method.

Investment tax credits, which result in a reduction of Federal income taxes payable, are deferred and amortized over the average lives of the related property. The tax credits are generally equal to 10/o of (1) the cost of certain property placed in service and (2) progress payments for the construction of certain facilities that have a construction period of at least two years. The Company has adopted an Employee Stock Ownership Plan (ESOP) which permits the Company to claim an additional 1/o investment tax credit. An amount equal to this additional credit is paid to the ESOP trustee to acquire Common Stock of the Company for employees.

Reference is made to Note 10 to Financial Statements.

Retirement Plan The Company has a Retirement Plan composed of two parts: (1) a non-contributory portion which provides benefits for all eligible active employees with the full cost absorbed by the Company, and (2) a voluntary portion in which contributions are made by both employees and the Company, but the full cost of Plan improvements, including related prior service costs, is borne by the Company. Approximately 95/o of eligible active employees are members of the voluntary portion of the Plan. Company contributions to the Plan include amounts required to fund current service costs and to amortize unfunded prior service costs over periods of not more than 20 years. Reference is made to Note 11 to Financial Statements.

40

il r,

PENNSYLVANIAPOWER & LIGHT COMPANY NOTES TO FINANCIALSTATEMENTS (Continued)

Forced Outage Reserve A self-insurance reserve is provided to cover the increased level of power costs which are experienced when any of the Company's major generating units are forced out of service due to damage caused by accident or other unforeseen insurable occurrences. Increased power costs resulting from purchasing or generating replacement power at higher costs or loss of interchange sales in excess of

$ 0.5 million through 1975 and $ 1 million effective January 1, 1976 for each accident or occurrence are charged to the reserve. As to certain of the Company's large generating units, costs chargeable to the reserve are limited to $ 12.5 million since outside insurance is carried to cover costs in excess of that amount. The reserve is established on the basis of historical experience and has been recqgnized in ratemaking procedures by the PUC. At December 31, 1976 and December 31, 1977 the reserve balance was $ 13.9 million and $ 14.5 million, respectively.

2. RATE FILINGS Reference is made to information appearing under "RATE MATTERS".

3. FUEL COSTS RECOVERABLE UNDER FUEL ADJUSTMENT CLAUSES

,Reference is made to Notes (a), (b) and (c) to the "STATEMENT OF INCOME".

4. LINES OF CREDIT AND SHORT-TERM DEBT Short-term debt of the Company consists of bank loans (generally borrowed for one year at the prime interest rate and prepayable at any time without penalty) and commercial paper notes (generally maturing within 30 to 60 days). In order to provide interim financing and back-up financing capability for commercial paper notes, the Company has lines of credit with banks that are maintained by compensating bank balance requirements (not legally restricted as to withdrawal) or the payment of commitment fees. Information regarding such short-term debt and lines of credit is as follows (thousands of dollars):

As of December 31, 1979 1977 Short-term debt outstanding $ 60,012 $ 23,400 Weighted average short-term debt interest rate .............................. 4.7o/o 6.5'/0 Maximum aggregate short-term debt outstanding at any month

$ 194,578 $ 106,727 Average daily short-term debt outstanding (a)

Aggregate amount. $ 129,598 $ 79,202 Weighted average interest rate (b) ........... 5.5o/0 5.7o/o Lines of credit (c)

Maintained by compensating bank balances........................... $ 143,500 $ 147,500 Maintained by payment of commitment fees ........................... $ 56,500 $ 52,500 Average annual compensating bank balance requirement.............. $ 13,850 $ 13,300 Annual commitment fees.. $ 313 $ 319 (a) During the preceding year.

(b) Calculated by dividing short-term interest expense for the year by the average aggregate daily short-term debt outstanding during the year.

(c) Use of these lines of credit was restricted at December 31, 1976 and December 31, 1977 to the extent of $ 4 million by short-term bank loans to two subsidiary companies.

41

PENNSYLVANIAPOWER & LIGHT COMPANY NOTES TO FINANCIALSTATEMENTS (Continued)

5. DEPRECIATION Provisions for depreciation as a percent of the average original cost of depreciable property have approximated 3.4% for 1973, 3.3% for 1974 and 1975 and 3.2% for 1976 and 1977. The lower composite depreciation rate for 1976 and 1977 reflects changes made in estimated useful lives of certain facilities in accordance with a PUC rate order issued in 1976. No provision is being made for depreciation or amortization of intangibles of approximately $ 1.3 million included In Utility Plant.

6. CAPITAL STOCK Common Stock no par consists of 50,000,000 authorized shares of which 30,803,318 shares were, outstanding at December 31, 1976 and 34,923,452 shares were outstanding at December 31, 1977.

Common Stock of $ 582,983,000 at December 31, 1977 includes $ 686,000 cash installments received under a dividend reinvestment plan as consideration for 29,603 shares of Common Stock which were issued in-January 1978.

Preferred Stock ($ 100 par, cumulative) and Preference Stock (no par, cumulative) consisted of the following (thousands of dollars):

Shares Amount Redemption Price Final Outstanding December 31, December 31, December 31, Year Authorized 1977 1976 1977 1977 Price Etfectlve Preferred 4'%.......... 629,936 530,189 $ 53,019 $ 53,019 $ 110.00 $ 110.00 Series........ 5,000,000 3.35% .... 41,783 4,178 4,178, 103.50 103.50 4.40% .... 228,773 22,878 22,878 102.00 102.00 4 60 63,000 6,300 6,300 103.00 103.00 7.40% .... 400,000 40,000 40,000 112.00 100.00 1998 8.00% .... 500,000 50,000 112.00 100.00 1997 8.60% .... 222,370 22 237 22,237 110.00 101.00 1990 9.00% .... 77,630 7,763 7,763 110.00 101.00 1990 9.24% 750,000 75,000 75,000 115.00 101.00 1991 Total..... $ 231,375 $ 281,375 Preference ...... 5,000,000

$ 8.00........... 350,000 $ 35,000 $ 35,000 $ 105.50 $ 101.00 1987

$ 8.40........... 400,000 40,000 40,000 110.00 101.00 1986

$ 8.70........... 400,000 40,000 40,000 109.00 101.00 1984

$ 9.25........... 160,000 20,000 16,000 100.00 1981

$ 11.00......... 500,000 50,000 50,000 109.90 100.00 1995

$ 13.00......... 250,000 25,000 25,000 111.05 100.00 1994 Total..... $ 210,000 $ 206,000 42

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PENNSYLVANIAPOWER & LIGHT COMPANY NOTES TO FINANCIALSTATEMENTS (Continued)

The Preference Stock may not be refunded through certain refunding operations prior to the following dates: $ 8.70 Series, 7/1/78; $ 13.00 Series, 10/1/84; $ 11.00 Series, 7/1/85. Otherwise, the Preferred and Preference Stock may be redeemed, in whole or in part, at the option of the Company at redemption prices ranging between the December 31, 1977 price and the final price shown above, with the exception that the Preference Stock, $ 9.25 Series, is not redeemable by the Company other than through the sinking fund requirement or voluntary liquidation.

The liquidation prices of all issues of Preferred Stock, which are payable on a parity with each other and in preference to the Preference Stock and the Common Stock, are as follows: involuntary liquidation

$ 100 a share; voluntary liquidation $ 100 a share for the 4V2/o Preferred Stock and the redemption price in effect at the time for the Series Preferred Stock; plus in each case any unpaid dividends.

The liquidation prices of all series of Preference Stock, which are payable on a parity with each other after satisfaction of the preferential rights of Preferred Stock and in preference to the Common Stock, are as follows: involuntary liquidation $ 100 a share; voluntary liquidation the redemption price in effect at the time, with the exception that the voluntary liquidation price of the Preference Stock, $ 9.25 Series, is $ 110 share; plus in each case any unpaid dividends.

Each of the following series of stock contains sinking fund provisions designed to retire the series at a redemption price of $ 100 a share plus accrued and unpaid dividends to the 'date of such redemption:

Shares to be Redeemed Annually RedemPtion Period Preferred Stock.

7.40/o Series. 16,000 July 1, 1979 July 1, 2003 8.00/o Series. 25,000 Oct. 1, 1983 Oct. 1, 2002 9.24/o Series (a) ..... 30,000 July 1, 1981 July 1, 2005 Preference Stock

$ 9.25 Series (b)...... 40,000 Jan. 1, 1977 Jan. 1, 1981

$ 11.00 Series (a) .... 25,000 July 1, 1981 July 1, 2000

$ 13.00 Series (a) .... 12,500 Oct. 1, 1980 Oct. 1, 1999 (a) The Company has the right to redeem on each sinking fund redemption date additional shares up to the number of shares of this Series required to be redeemed annually.

(b) In January 1978, the Company redeemed 40,000 shares.

Capital stock expense represents commissions and expenses incurred in connection with the issuance and sale of capital stock. Capital stock expense applicable to the preferred and preference stock series which are to be redeemed through sinking fund provisions is amortized to Earnings Reinvested as the respective series of stock are redeemed. The unamortized balance applicable to these series of stocks was $ 3.2 million at December 31, 1977. No amortization plan is in effect for capital stock expense applicable to other issues of capital stock.

43

ll PENNSYLVANIAPOWER 4 LlGHT COlHPANY NOTES TO FINANCIALSTATEMENTS (Continued)

Changes in capital stock for the period January 1, 1973 through December 31, 1977 were as follows (shares and amounts in thousands):

Year Shares Amount Iaaued (Redeemed) 1973 Common, Public Offering ......................... 2,000 $ 40,900 Preferred, 7.40'/e Series............................ 400 40,000 1974 Common, Public Offering ......................... 2,200 35,156 Preference, $ 13.00 Series ..~..................... 250 25,000 1975 Common Public Offering. 3,000 51,450 Dividend Reinvestment Plan ................. 301 5,595 Preference, $ 11.00 Series ........................ 500 50,000 Preference, $ 9.25 Series .......................... 200 20,000 1976 Common Public Offering. 3,500 67,935 Dividend Reinvestment Plan................. 716 14,268 Employee Stock Ownership Plan .......... 35 755 Preferred, 9.24'/e Series............................ 750 75,000 1977 Common Public Offering. 3,200 67,040 Dividend Reinvestment Plan ................. 812 18,185 Employee Stock Ownership Plan .......... 108 2,528 Preferred, 8.00'/e Series............................ 500 50,000 Preference, $ 9.25 Series .......................... (40) (4,000)

7. DIVIDEND RESTRICTIONS Reference is made to information appearing under "DESCRIPTION OF COMMON STOCK Dividend Restrictions".

8. LONG-TERM DEBT Long-term debt outstanding consisted of the following (thousands of dollars):

December 31, 1976 1977 First mortgage bonds.. $ 1,165,500 $ 'I,245,000 Notes: 11 7~/0 due 1980. 20,000 20,000 Other. 550 929 Unamortized (discount) and premium net ... (4,056) (5,434)

Total. 1,181,994 1,260,495 Less amount due within one year................... 20,675 3,756 Total long-term debt. $ 1,161,319 $ 1,256,739 44

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PENNSYLVANIAPOWER 8c LIGHT COMPANY NOTES TO FINANCtALSTATEMENTS (Continued)

First mortgage bonds consisted of the following series at December 31, 1976 and December 31, 1977 (thousands of dollars):

Out!tending Outatandlng Serlea Due 1978 1977 Se rica Due 1978 1977 2% /o 1977 $ 20,000 7 '/o 1999 $ 40,000 $ 40,000 3Vao/o 1978 3,000 $ 3,000 8Vao/o 1999 40,000 40,000 27'o 1980 37,000 37,000 9 o/o 2000 50,000 50,000 3% /o, 1982 7,500 7,500 7'/4'/o 2001 60,000 60,000 10Va'/o 1982 100,000 100,000 o/o 2002 75,000 75,000 3'o 1983 25,000 25,000 7V20/0 2003 80,000 80,000 3% /o 1985 25,000 25,000 9'/4'/o 2004 80,000 80,000 4%o/o 1991 30 000 30 000 9%o/o 2005 125,000 125,000 4%'/o 1994 30,000 30,000 9Vio/o 2005 100,000 100,000 5%o/o 1996 30 000 30 000 8Vio/o 2006 150,000 150,000 6%o/o 1997 30 000 30 000 8Vao/o 2007 100,000 (a) 28,000 27,500 (a) 4V2/o to 5%/o Pollution Control Series A due annually: $ 500, 1977-1983; $ 900, 1984-2002;

$ 7,400, 2003.

The amount of long-term debt maturing in each calendar year through 1982 is (thousands of dollars):

cars 1979 1980 1981 1982

$ 3,756 $ 666 $ 57,660 $ 645 $ 108,098 The maximum aggregate annual sinking fund requirements through .1982 of the outstanding mortgage bonds are (thousands of dollars):

1978 1979 1980 1982

$ 2,740 $ 3,265 $ 3,050 $ 4,450

. Lesser requirements will apply for the years 1978-1982 if long-term debt is 50/o or less of net property. 'The Company has the right to meet all of these requirements with property additions or bonds.

Substantially all utility plant is subject to the liens of the Company's mortgages.

9. HYDROELECTRIC PROJECTS Reference is made to the information appearing under "BUSINESS Hydroelectric Projects".

45

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PENNSYLVANIAPOWER 8c LIGHT COMPANY NOTES TO RNANCIALSTATEMENTS (Continued)

10. TAXES Income tax expense is recorded on the Statement of Income as follows (thousands of dollars):

1073 1974 1075 1079 1977 Operating Expenses Provision Federal..................... $ 16,454 $ 12,554 $ 22,547 $ 656 $ 34,804 State ........................ 6,207 3,858 8,221 6,766 16,193 22,661 16,412 30,768 7,422 50,997 Deferred Federal..................... 4,557 15,991 2,952 7,185 9,394 1,180 3,271 590 1,560 2,761 5,737 19,262 3,542 8,745 12,155

'Investment tax credits Deferred................... 7,233 4,753 14,465 29,496 30,592 Amortization of defer-ments ................. ~ ~ (1,688) (1,216) (1,477) (1,835) (2,243) 5,545 3,537 12,988 27,661 28,349 33,943 39,211 47,298 43,828 91,501 Other Income and Deductions Provision (credit)

Federal.......... (46) (4,156) (9,164) (11,859) (11,008)

State ............. (45) (920) (2,037) (2,598) (2,700)

(91) (5,076) (11,201) (14,457) (13,708)

Total income tax expense ........ $ 33,852 $ 34,135(a) $ 36,097 $ 29,371 $ 77,793 Federal and State Income Taxes Payable (Credit) ........ $ 22,570 $ 11,336 $ 19,567 $ (7,035) $ 37,289 (a) Excludes $ 4,831,000 deferred Income taxes related to Nonrecurring Credit.

Investment tax credits eliminated the Company's Federal income tax liability for 1976 and resulted In a credit to the provision for income taxes of approximately $ 5.9 million related'to a carryback of Investment tax credits to prior years. Total income tax expense for 1976 has been credited by approximately $ 5.0 million representing adjustments of prior years'ax liabilities. The principal adjustment, related to adoption of the modified half-year convention method of computing tax depreciation in the Company's 1975 Federal income tax return, reduced total income tax experise by approximately $ 2.8 million.

46

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PENNSYLVANIAPOWER & LIGHT COMPANY NOTES TO FINANCIALSTATEMENTS-(Continued)

Deferred income taxes result from the following items (thousands of dollars):

1973 1974 1975 197B 1977 Tax depreciation (class life system). $ 3,057 $ 3,715 $ 4,540 $ 6,463 $ 6,173 Recoveiable fuel costs.................... 14,009(a) 829 2,391 4,128 Forced outage reserve .................... (3,726) (1,041) (344)

Other 2,680 1,538 1,899 932 2,198 Total. $ 5,737 $ 19,262 $ 3,542 $ 8,745 $ 12,155 (a) Excludes $ 4,831,000 deferred income taxes related to Nonrecurring Credit.

Income tax expense differed from the amount computed by applying the combined Federal and State corporate income tax rates to pre-tax income as follows (thousands of dollars):

1973 '974 1975 1975 1977 Net income. $ 66,912 $ 87,479 $ 97,541 $ 112,111 $ 149,763 Income tax expense... 33,852 38,966 36,097 29,371 77,793 Pre-tax income. $ 100,764 $ 126,445 $ 133,638 $ 141,482 $ 227,556 Indicated income tax expense at combined tax rates (shown below).......... $ 54,131 $ 66,940 $ 70,748 $ 74,901 $ 121,651 Reductions due to:

Allowance for funds used during "

construction. 8,041 10,976 19,379 23,925 26,407 Tax depreciation (guideline lives and declining balance method) .............. 7,531 8,799 9,131 15,067 10,953 Tax and pension cost.......................... 2,687 2,491 2,998 3,354 3,753 Other net. 2,020 5,708 3,143 3,184 2,745 Total. 20,279 27,974 34,651 45,530 43,858 Income tax expense.. $ 33,852 $ 38,966 $ 36,097 $ 29,371 $ 77,793 Combined Federal and State income tax E rates. 53.72/o 52.94/o 52.94/o 52.94/o 53.46/o Effective income tax rates .......................... 33.6'/0 30.8'/o 27.0'/o 20.8'/o 34 2o/o Taxes other than income taxes charged to operating expense were (thousands of dollars):

1973 1974 1975 1975 1977 State gross receipts ............................ $ 16,867 $ 20,564 $ 23,756 $ 28,320 $ 32,932

' 7,284 8,860 9,996 State capital stock. 5,403 6,263 State utility realty 4,687 5,258 5,980 8,052 11,582 Social security and other ..................... 3,048 3,486 3,649 4,294 5,172 Total . $ 30,005 $ 35,571 $ 40,669 $ 49,526 $ 59,682 1

47

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PENNSYLVANIAPOWER & LIGHT COMPANY NOTES TO FINANCIALSTATEMENTS (Continued)

11. RETIREMENT PLAN Obligations of the Company's Retirement Plan are currently funded through a Trust Fund. At June 30, 1977, the end of the Plan's most recent fiscal year, the Fund's assets at market were $ 100.3 million and at cost were $ 104.6 million. Pension costs were (thousands of dollars):

1973 1974 1975 1976 1977

$ 6,761 $ 6,661 $ 8,830 $ 9,755 $ 11,315 Plan amendments effective as of July 1, 1976, subject to Internal Revenue Service approval, provided for increased benefits, reduced employee contributions and certain other minor changes to comply with the Employee Retirement Income Security Act of 1974.

Based on the Fund's assets at cost, at June,30, 1977 the actuarially computed unfunded prior service cost was $ 27.2 million. As of the same date the actuarially computed value of vested benefits exceeded the cost basis of the Fund's assets by $ 17.4 million.

12. RENTALS AND LEASE COMMITMENTS Principal rental costs affecting expenses were as follows (thousands of dollars):

1973 1974 1975 1976, 1977 Charged to:

Operating expense ... $ 7,515 $ 8,911 $ 9,477 $ 10,502 $ 11,023 Fuel inventory(a) ....... $ 942 $ 870 $ 1,276 $ 1,761 $ 2,349 (a) Represents rental of railroad coal cars which amounts are charged to fuel inventory and subsequently included in fuel expense.

At December 31, 1977, the Company had long-term lease agreements which require future minimum rentals as follows (millions of dollars): 1978, $ 14.5; 1979, $ 13.5; 1980, $ 12.7; 1981, $ 11.7; 1982, $ 10.5; after 1982, $ 89.3. The Company also leases other property under short-term agreements with rentals currently amounting to approximateiy $ 3.3 million annually. Generally the Company's long-term leases contain renewal options and obligate the Company to pay maintenance, insurance and other related costs. The leases do not include restrictions on any of the Company's other financial activities.

Certain of the Company's leases meet the capitalization criteria established by the Financial Accounting Standards Board in 1977 which would normally require (1) that an asset and associated liability be recorded at an amount equal to the present value of the minimum lease payments and (2) that expense be charged with amortization of the lease asset and interest expense on the liability. However, in accordance with the manner in which the Company's rates have been established by the PUC, the Company accounts for such leases as operating leases and appropriate accounts have been charged with actual rental expense, and an asset and associated liability related to such leases have not been recorded.

48

PENNSYLVANIAPOWER Sc LIGHT COMPANY NOTES TO FINANCIALSTATEINENTS (Conttnued)

In accordance with SEC disclosure requirements applicable to all regulated companies subject to the rate-making process that do not record capital leases as assets with associated liabilities, the Company has computed the aggregate asset and liability balances that would have been recorded had all leases meeting the definition of a capital lease been capitalized as follows (thousands of dollars):

December 31, care 1977 Capital lease asset $ 78,713 $ 104,291 Accumulated amortization (33,320) (37,855)

$ 45,393 $ 66,436 Current obligations under capital leases ........................... $ 7,543 $ 8,173 Noncurrent obligations under capital leases ..................... 40,445 61,333

$ 47,988 $ 69,506 The excess of the above liability balances over the related asset balances represents the differences between (i) the amortization and interest expense that would have been recorded since inception of the leases and (li) the actual rentals incurred. The difference in the amount of such amortization and interest expense compared to actual rentals recorded is not material for each of the years 1973-1977.

13. RECLASSIFICATION Approximately $ 9.9 million representing an accrual at December 31, 1976 for current liabilities related to construction of facilities has been reclassified on the Balance Sheet from Accounts payable to Other current liabilities to make the Item comparable to the classification in 1977.

14. SALE OF 10/o OF SUSQUEHANNA PLANT In January 1978, pursuant to agreements entered into in March 1977, the Company sold to Allegheny Electric Cooperative, Inc. (Allegheny) a 10/o undivided ownership in the Susquehanna nuclear plant currently under construction. Through December 31, 1977, Allegheny made deposits aggregating approximately $ 84 million representing amounts due under the agreements.

The Company's 1977 construction and nuclear fuel expenditures shown on the'Statement of Changes in Financial Position Include 100/o of the expenditures applicable to the Susquehanna plant.

Approximately $ 23 million of Allegheny's deposits represented its share of th'e 1977 expenditures.

15. COMMITMENTS AND CONTINGENT LIABILITIES The Company estimates that about $ 1.31 billion will be required to complete construction projects in progress at the end of 1977, excluding nuclear fuel payments. Of this amount, approximately $ 1.05 billion represents the Company's share of costs required to complete the two nuclear generating units at Susquehanna.

Reference Is made to additional information appearing under "CONSTRUCTION PROGRAM",

"BUSINESS Environmental Matters" and "BUSINESS Fuel Supply".

49

PENNSYLVANIAPOWER Sc LIGHT COMPANY NOTES TO FINANCIALSTATEMENTS-(Continued)

In connection with providing for its future bituminous coal supply, the Company at December 31, 1977 had guaranteed capital and other obligations of certain coal suppliers (including owned coal companies) aggregating $ 160.8 million. See "BUSINESS Fuel Supply (Coal)".

16.

SUMMARY

OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

Quarterly earnings can be Influenced by weather, timing of rate relief, performance of generating stations, sales to other utilities and other factors such as those described under "MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE STATEMENT OF INCOME".

The following is summary quarterly data for the years 1976 and 1977 (thousands of dollars):

Earnings Earnings Per Share Quarter Operating Operating Net Applicable To Of Common Ended Revenues Income Income Common Stock Stock(a) 1976 March 3 1 .............................. .. ~ $ 166,269 $ 34,360 $ 25,189 $ 17,781 $ 0.67 J une 30..............~..................... 149,281 28,006 21,281 13,603 0.46 September 30 .......................... 149,580 35,241 30,423 , 21,282 0.70 December 31(b) ....................... 179,017 40,727 35,218 26,077 0.85 1977 ll March 31 208,894 . 47,017 40,114 31,066 1.00

, June 30....... 173,299 . 43,912 35,547 26,498 0.79 September 30(c) ...................... 174,067 48,913 34,936 25,888 0.75 December 31 ............~.............. 188,471 44,469 39,166 29,318 0.84 (a) Based on the average number of shares outstanding during the quarter.

(b) Results for the fourth quarter of 1976 include a reduction in income tax expense of $ 2.4 million due to increased tax depreciation applicable to Martins Creek Unit No. 4 which began test operation in December 1976 and a $ 2.1 million charge to expense (net of income taxes) to adjust the amortization of deferred fuel costs for the years 1970-1975 to the actual fuel adjustment revenues billed during those years.

(c) Results for the third quarter of 1977 include a $ 6.6 million (net of income taxes) loss ($ .20 per share) of a subsidiary company which was recorded by the Company in accordance with equity accounting:

17. REPLACEMENT COST DATA (UNAUDITED)

In compliance with the rules of the SEC, the Company has estimated certain replacement cost information for utility plant in service and depreciation. The Company has not included replacement cost data for materials and supplies inventory since the amount of the inventory is not significant.

Replacement cost data relating to fuel inventories have not been Included since changes in cost levels are recovered through the operation of fuel adjustment clauses.

50

PENNSYLVANIAPOWER 8r LIGHT COMPANY NOTES TO FINANCIALSTATEMENTS-(Continued)

Although the replacement cost data disclosed herein have, in the Company's opinion, been reasonably estimated in accordance witli rules and interpretations of such rules published by the SEC, the Company believes that investors should be aware of the imprecision and limitations of this information and of the many subjective judgments required in the replacement cost estimation.

The replacement cost of utility plant is based on the hypothetical assumption that the Company would replace its entire productive capacity as of December 31, 1977, whether or not the funds to do so were available or such "instant" replacement were physically or legally possible. This assumption requires that the Company contemplate actions as of December 31, 1977 that ordinarily would not be addressed all at one time.

Accordingly, the information should not be interpreted to indicate that the Company actually has present plans to replace its productive capacity or that actual replacement would or could take place in the manner assumed in estimating the information. In the normal course of business, the Company will replace its productive capacity over an extended period of time. Decisions concerning replacement will be made in light of the economics, availability of funds, fuel availability, equipment availability, customer demand and regulatory requirements existing when such determinations are made and could differ substantially from the assumptions on which the data Included herein are based.

The replacement cost data presented are not necessarily representative of the "current market value" of existing facilities or of the "fair value" of utility plant as that term is used in rate proceedings before the PUC.

The replacement cost information presented does not reflect all of the effects of inflation on the Company's current costs of operating the business. The Company has not attempted to quantify the total impact of inflation, environmental and other governmental regulations (except as set forth below) and changes in other. economic factors on the business because of the many unresolved conceptual problems and rate-making considerations involved in doing so. Accordingly, it is the Company's view that the replacement cost data presented herein cannot be used alone to determine the total effect of inflation on reported net income.

The computed replacement cost of the Company's utility plant in service and related accumulated depreciation with comparative historical cost data are as follows (millions of dollars):

Computed Replacement 'istorical Cost Cost Utilityplant in service at December 31,'977 Subject to replacement cost determination ........ $ 2,216 $ 5,045 Land, plant held for future use and intangibles at original cost. 116 Total plant in service.. 5,161 Less accumulated depreciation . 1,197 Net plant in service. $ 3,964 51

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PENNSYLVANIAPOWER & LIGHT COMPANY NOTES TO FINANCIALSTATEMENTS (Concluded)

The replacement cost of coal-fired and oil-fired steam station capability was determined by trending the construction cost of the most recently installed bituminous coal-fired units (800 mw capability range) and computing a replacement cost per kw capability of the units. This cost per kw was applied to the Company,'s respective coal-fired and oil-fired steam station capability to determine the gross replacement cost of such facilities. The gross replacement cost of bituminous coal-fired units at December 31, 1977 includes approximately $ 725 million which the Company estimates would have to be expended to enable such facilities to meet particulate and sulfur dioxide emission regulations existing at December 31, 1977, using current technology. The original installed cost of hydroelectric, other power production, transmission, distribution, and other facilities was trended to determine replacement cost. The trend indices utilized were determined by the Company and are believed to be more representative of the changes in construction costs experienced by the Company than published indices.

As of December 31, 1976, the Company computed the replacement cost of oil-fired steam station capability based on the assumption that this capability would be replaced with other oil-fired steam stations. However, as a result of pending Federal legislation introduced in 1977 which would restrict the building of future oil-fired steam stations, the Company has assumed that as of December 31, 1977 its oil-fired steam station capability would be replaced with coal-fired units.

The accumulated depreciation related to the replacement cost of productive capacity was determined by applying the same percentage relationship that existed between gross utility plant and accumulated depreciation by functional groups on a historical basis at December 31, 1977 to the current replacement cost of the productive capacity.

The computed replacement cost depreciation expense for the years 1976 and 1977 and com-parative historical cost data are as follows (millions of dollars):

1976 1977 Computed Computed Replaco- Replace-Historical ment Historical ment Cost Cost Cost Cost Depreciation expense...~...... $ 62 $ 123 $ 68 $ 140 Replacement cost depreciation expense for the years 1976 and 1977 was determined on a straight-line basis by applying the functional class depreciation accrual rates currently in use to the average of year-end replacement cost amounts for the respective functional class. Such amounts have been calculated in accordance with SEC instructions and do not represent an actual expense. Within the context of utility rate-making procedures, the purpose of book depreciation expense, as shown on the Statement of Income, is to provide recovery of invested capital over the life of the related facilities, and is not intended to provide a fund equal to the amount necessary to replace such facilities at the cost level existing at the time of replacement. No adjustment has been made to computed replacement cost depreciation expense for 1976 to reflect the change in assumptions regarding the replacement of oil-fired steam station capability described above.

52

OPINION OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS PENNSYLVANIA POWER 8 LIGHT COMPANY:

We have examined the balance sheets of Pennsylvania Power 8 Light Company as of December 31, 1976 and 1977 and the related statements of income, earnings reinvested, and changes in financial position for each of the five years in the period ended December 31, 1977. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circum-stances.

ln our opinion, such financial statements present fairly the financial position of the Company at December 31, 1976 and 1977 and the results of its operations and the changes in its financial position for each of the five years in the period ended December 31, 1977, in conformity with generally accepted accounting principles consistently applied during the period except for the change in 1974, with which we concur, in the method of accounting for recoverable fuel costs as described in Note (b) to the Statement of Income.

HASKINS 8 SELLS New York, New York February 3, 1978 53,

UNDERWRITING The Underwriters named below have severally agreed to purchase from the Company the respective numbers of shares of Common Stock offered hereby:

Number Number of of Shares Shares The First Boston Corporation.............................. 290,000 First Equity Corporation of Florida .......... 7,000 Drexel Burnham Lambert Incorporated .............. 290,000 First of Michigan Corporation.................. 13,000 Bache Halsey Stuart Shields Incorporated.......... 290,000, First Pittsburgh Securities Corporation.... 7,000 Merrill Lynch, Pierce, Fenner & Smith In- ~

Goldman, Sachs 8 Co. 41,000 corporated. 290,000 Gradison 8 Company Incorporated ..... 7,000 Advest, Inc. 20,000 Gruntal 8 Co. 13,000 Allen & Company of Lakeland, Inc...................... 7,000 Hefren-Tillotson, Inc. 7,000 Almstedt Brothers, Inc. 7,000 Bernard Herold & Co., Inc.............. 7,000 Arthurs, Lestrange & Short ................................. 13,000 Herzfeld & Stern .. 13,000 Babbitt, Meyers 8 Company............................... 13,000 Hopper Soliday 8 Co., Inc.............. 13,000 Bacon, Whlpple 8 Co. 13,000 Howe, Barnes 8 Johnson, Inc........ 7,000 Robert W. Baird & Co. Incorporated ................... 20,000 E. F. Hutton 8 Company Inc........... 41,000 Baker, Watts & Co.. 7,000 Interstate Securities Corporation..... 13,000 Bateman Eichler, Hill Richards, Incorporated ..... 20,000 Janney Montgomery Scott Inc.... 30,000 Birr, Wilson & Co., Inc 7,000 Johnston, Lemon & Co. Incorporated................. 13,000 D. H. Blair 8 Co., Inc.......................................... 7,000 Josephthal & Co. Incorporated ........................... 13,000 William Blair 8 Company .................................... 20,000 Kidder, Peabody & Co. Incorporated.................. 41,000 Blyth Eastman Dillon 8 Co. Incorporated............ 41,000 Ladenburg, Thalmann & Co. Inc......................... 20,000 Boennlng & Scattergood, Inc.............................. 13,000 Laidlaw Adams 8 Peck Inc................................. 7,000 Boettcher & Company. 13,000 Lazard Freres & Co. 41,000 J. C. Bradford 8 Co., Incorporated ..................... 13,000 James A. Leavens, Inc. 7,000 Alex. Brown & Sons.. 20,000 Legg Mason Wood Walker, Incorporated............ 20,000 Bruns, Nordeman, Rea 8 Co.............................. 13,000 Lehman Brothers Kuhn Loeb Incorporated......... 41,000 Butcher 8 Singer Inc.......................................... 30,000 Loeb Rhoades, Hornblower & Co....................... 41,000 Butler, Wick & Co. 7,000 A. E. Masten & Co. Incorporated .......................

~ 13,000 The Chicago Corporation ................................... 13,000 McDonald & Company 20,000 Colin, Hochstln Co. 7,000 The Milwaukee Company ................................... 7,000 C. C. Colllngs and Company, Inc......................".. 7,000 Moore, Leonard 8 Lynch, Incorporated.............. 30,000 Cowen 8 Company. 7,000 Moore & Schley, Cameron & Co......................... 7,000 Crowell, Weedon 8 Co. 13,000 Morgan, Olmstead, Kennedy & Gardner, In-Cunningham, Schmertz & Co., Inc...................... 7,000 corporated .. 7,000 Dain, Kalman 8 Quail, Incorporated ................... 20,000 Moseley, Hallgarten & Estabrook Inc.................. 20,000 Dillon, Read 8 Co. Inc........................................ 41,000 W. H. Newboid's Son & Co., Inc......................... 20,000 Doft 8 Co., inc. 13,000 The Ohio Company 20,000 Donaldson, Lufkln & Jenrette Securities Corpo- Oppenheimer 8 Co., Inc..................................... 20,000 ration. 41,000 Paine, Webber, Jackson & Curtis tncorporated... 41,000 A. G. Edwards & Sons, Inc................................. 20,000 Parker/Hunter Incorporated ............................... 30,000 Elklns, Stroud, Suplee & Co................................ 30,000 H. O. Peet8 Co. Inc 7,000 Fahnestock 8 Co. 13,000 Philips, Appel & Walden, Inc.............................. 7,000 Ferris & Company, Incorporated......................... 13,000 The Pierce, Wulbern, Murphey Corp................... 7,000 First Albany Corporation..................................... 7,000 Piper, Jeffrey 8 Hopwood incorporated .............. 20,000 54

Number Number of of Shares Shares Prescott, Ball & Turben. 20,000 Sutro & Co. tncorporated......................... 20,000 Raymond, James & Associates, Inc................... 7,000 Thomson McKinnon Securities Inc.......... 20,000 The Robinson-Humphrey Company, Inc............ 20,000 Tucker, Anthony & R. L. Day, Inc............ 20,000 Wm. C. Roney & Co.. 7,000 Vercoe & Company Inc... 7,000 R. Rowland & Co. Incorporated.........................

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13,000 Warburg Paribas Becker Incorporated..... 41,000 Salomon Brothers.. 41,000 Weeden & Co. Incorporated .................... 20,000 H. B. Shalne & Co. Inc.

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7,000 Wertheim & Co., Inc....... 41,000 Shearson Hayden Stone Inc............................... 41,000 Wheat, First Securities, Inc...................... 20,000 Shuman, Agnew & Co. Inc................................

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20,000 White, Weld & Co. Incorporated .............. 41,000 Simpson, Emery & Company, Inc....................... 7,000 Dean Witter Reynolds Inc........................ 41,000 Smith Barney, Harris upham & Co. Incorporated 41,000 Warren W. York & Co., Inc....................... 30,000 E. W. Smith Co. 7,000 Total . 3,000,000 Stilel, Nicolaus & Company Incorporated ........... 13,000 The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent. The nature of the underwriting commitment is such that the Underwriters will be obligated to purchase all of the shares of Common Stock offered hereby provided that, under certain conditions involving defaults by one or more of the Underwriters which aggregate more than 300,000 shares, the Company may either terminate such Agreement or require each non-defaulting Underwriter to purchase the number of shares set forth opposite its name above plus 1/9 of such number of shares.

The Company has been advised by The First Boston Corporation, Drexel Burnham Lambert Incorporated, Bache Halsey Stuart Shields, Incorporated and Merrill Lynch, Pierce, Fenner 8 Smith Incorporated, as Representatives of the Underwriters, that the Underwriters propose to offer such Common Stock to the public initially at the public offering price determined as provided on the cover page of this Prospectus and, through the Representatives, to certain dealers at such price less a concession of not more than e per share; that the Underwriters and such dealers may allow a discount of not more than rf per share on sales to other dealers; and that the public offering price and concessions and discounts to dealers may be changed by the Representatives.

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PART II. INFORMATION NOT REQUIRED IN PROSPECTUS.

Item 13. Other Expenses of Issuance and Distribution.

Securities and Exchange Commission registration fee ... $ 13,425 Stock exchange listing fees. 8,000 Printing and engraving. 80,000 Fees and expenses of Transfer Agent and Registrar...... 1,000 Legal fees. 27,000 Accounting fees. 5,000 Postage 8,500 Blue Sky fees and expenses 4,500 Miscellaneous.. 2,575 Total. $ 150,000 All of the above except the Securities and Exchange Commission registration fee are estimated.

Item 14. Relationship ivith Registrant of Experts named in Statement.

Reference is made to the captions "Experts" and "Legal Opinions" in the Prospectus.

Item 15. Indemnification of Directors and efieers.

Article VII of the By-Laws of the Company reads as follows:

"Indemnification of Directors, Officers, Etc.

SEGTIQN 7.01. Directors and Overs; Third Party Actions. The corporation shall indemnify any director or officer of the corporation who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was an authorized representative of the corporation (which, for the purposes of this Article, shall mean a director, officer, employee or agent of the corporation, or a person who is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise) against expenses (including attorneys'ees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding ifhe acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in, or not opposed to, the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful.

SEcl'toN 7.02. Directors and Ogcers; Derivative Actions. The corporation shall indemnify any director or officer of the corporation who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was an authorized representative of the corporation, against expenses (including attorneys'ees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a

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manner he reasonably believed to be in, or not opposed to, the best interests of the corporation and except that'no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the corporation unless and only to the extent that the court of common pleas of the county in which the registered office of the corporation is located or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the court of common pleas or such other court shall deem proper.

SEGTIQN 7.03. Employees and Agents. To the extent that an authorized representative of the corporation who neither was nor is a director or officer of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 7.01 and 7.02 of this Article or in defense of any claim, issue or matter therein, he shall be indemnified by the corporation against expenses (including attorneys'ees) actually and reasonably incurred by him in connection therewith. Such an authorized representative may, at the discretion of the corporation, be indemnified by the corporation in any other circumstances to any extent ifthe corporation would be required by Sections 7.01 or 7.02 of this Article to indemnify such person in such circumstances to such extent if he were or had been a director or officer of the corporation.

SEGTloN 7.04. Procedure for Effecting Indemnification. Indemnification under Sections 7.01, 7.02 or 7.03 of this Article shall be made when ordered by court (in which case the expenses, including attorneys'ees, of the authorized representative in enforcing such right of indemnification shall be added to and be included in the final judgment against the corporation) and may be made in a specific case upon a determination that indemnification of the authorized representative is required or proper in the circumstances because he has met the applicable standard of conduct set forth in Sections 7.01 or 7.02 of this Article. Such determination shall be made:

(1) By the board of directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (2) Ifsuch a quorum is not obtainable, or, even ifobtainable a majority vote of a quorum of disinterested directors so direct, by independent legal counsel in a written opinion, or (3) By the shareholders.

SEGTIQN 7.05. Advancing Expenses. Expenses (including attorneys'ees) incurred in defending a civil or criminal action, suit or proceeding shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding, upon receipt of an undertaking by or on behalf of a director or officer to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the corporation as required in this Article or as authorized by law and may be paid by the corporation in advance on behalf of any other authorized representative when authorized by the board of directors upon receipt of a similar undertaking.

SEGTIoN 7.06. Scope of Article. Each person who shall act as an authorized representative of the corporation, shall be deemed to be doing so in reliance upon such rights of indemnification as are provided in this Article.

The indemnification provided by this Article shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any agreement, vote of shareholders or disinterested directors, statute or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office or position, and shall continue as to a person who has ceased to be an authorized representative of the corporation and shall inure to the benefit of the heirs, executors and administrators of such a person."

Directors and officers of the Company may also be indemnified in certain circumstances pursuant to the statutory provisions of general. application contained in the Pennsylvania Business Corporation Law.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, oScers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, oScer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such'director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

Reference is also made to the form of Underwriting Agreement, filed as Exhibit 1 hereto, which contains provisions for indemnification of the Company and its directors and oScers by the several Underwriters against certain civil liabilities for information furnished by the Underwriters.

The Company presently has an insurance policy which, among other things, includes liability insurance coverage for oScers and directors, with a $ 20,000 deductible clause, under which oScers and directors are covered against any "loss" by reason of payment of damages, judgments, settlements and costs, as well as charges and expenses incurred in the defense of actions, suits or proceedings. "Loss" is specifically defined to exclude fines and penalties, as well as matters deemed uninsurable under the law pursuant to which the insurance policy shall be construed. The policy also contains other specific exclusions, including illegally obtained personal profit or advantage, and dishonesty.

The policy also provides for reimbursement to the Company for loss incurred by having indemnified oScers or directors as authorized by state statute, company by-laws, or any other agreement.

Item 16. Treatment of Proceeds from Stork to be Registered.

Inapplicable.

Item 17. Other Documents Filed as a Part of the Registration Statement.

(a) Statements of eligibility and qualification of persons designated to act as trustee under an indenture to be qualified under the Trust Indenture Act of 1939.

Inapplicable.

(b) Exhibits.

Incorporation by Reference Previous Exhibit Exbiblt No. Filing Designation Forms of Agreement Among Underwriters and Underwriting Agreement 2(a)-1 Specimen of Common Stock Incorporation.'revious Certificate Registration Statement (No. 2-9140) 2(a)-2 Copy of Restated Articles of Registration Statement 2(a)-2 (No. 2-60291) 2(a)-2(i) Amendment to Articles of Incorporation 2(a)-2(ii) Amendment to Articles of Incorporation

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Incorporation by Reference Previous Previous Exhibit Exhibit No. Filing Designation 2(a)-3 Copy of By-laws 2(a)-4 Mortgage and Deed of Trust, dated as of Registration Statement 7(c)

October I, 1945, between the Company and (No. 2-5872)

Guaranty Trust Company of New York (now Morgan Guaranty Trust Company of, New York), as Trustee 2(a)-5 Supplement, dated as of July I, 1947, to said Registration Statement 2(a)-5 Mortgage and Deed of Trust (No. 2-60291) 2(a)-6 Supplement, dated as of December I, 1948, to Registration Statement 2(a)-6 said Mortgage and Deed of Trust ( No. 2-60291) 2(a)-7 Supplement, dated as of February I, 1950, to Registration Statement 2(a)-7 said Mortgage and Deed of Trust (No. 2-60291) 2(a)-8 Supplement, dated as of March I, 1953, to said Registration Statement 2(a)-8 Mortgage and Deed of Trust ( No. 2-60291) 2(a)-9 Supplement, dated July I, 1954, to said Mort- Registration Statement 2(b)-5 gage and Deed of Trust (No. 2-19255) 2(a)-10 Supplement, dated as of August I, 1955, to said Registration Statement 2(a)-10 Mortgage and Deed of Trust (No. 2-60291) 2(a)-11 Supplement, dated as of December I, 1961, to Registration Statement 2( b)-7 said Mortgage and Deed of Trust (No. 2-19255) 2(a)-12 Supplement, dated as of March I, 1964, to said Registration Statement 2(a)-12 and Deed of Trust ( No. 2-60291) 2(a)-13 Mortgage Supplement, dated as of June I, 1966, to said Registration Statement 2(a)-13 Mortgage and Deed of Trust (No. 2-60291) 2(a)-14 Supplement, dated as of November I, 1967, to Registration Statement 2(a)-14 said Mortgage and Deed of Trust ( No. 2-60291) 2(a)-15 Supplement, dated as of December I, 1967, to Registration Statement 2(a)-15 said Mortgage and Deed of Trust (No. 2-60291) 2(a)-16 Supplement, dated as of January I, 1969, to Registration Statement 2(a)-16 said Mortgage and Deed of Trust (No. 2-60291) 2(a)-17 ,

Supplement, dated as of June I, 1969, to said Registration Statement 2(a)-17 Mortgage and Deed of Trust ( No. 2-60291) 2(a)-18 Supplement, dated as of March I, 1970, to said Registration Statement 2(a)-18 Mortgage and Deed of Trust (No. 2-60291) 2(a)-19 Supplement, dated as of February I, 1971, to Registration Statement 2(a)-19 said Mortgage and Deed of Trust ( No. 2-60291) 2(a)-20 Supplement, dated as of February I, 1972, to Registration Statement 2(a)-20 said Mortgage and Deed of Trust (No. 2-60291) 2(a)-21 Supplement, dated as of January I, 1973, to Registration Statement 2(a)-21 said Mortgage and Deed of Trust ( No. 2-60291) 2(a)-22 ,Supplement, dated as of May I, 1973, to said Registration Statement 2(a)-22 Mortgage and Deed of Trust ( No. 2-60291) 2(a)-23 Supplement, dated as of April I, 1974, to said Registration Statement 2(a)-23 Mortgage and Deed of Trust ( No. 2-60291) 11-4

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incorporation by Reference Previous Previous Exhibit Exhibit No. Filing Designation 2(a)-24 Supplement, dated as of October 1, 1974, to Registration Statement 2(a)-24 said Mortgage and Deed of Trust ( No. 2-60291) 2(a)-25 Supplement, dated as of May 1, 1975, to said Registration Statement 2(a)-25 Mortgage and Deed of Trust (No. 2-60291) 2(a)-26 Supplement, dated as of November 1, 1975, to Registration Statement 2(a)-26 said Mortgage and Deed of Trust (No. 2-54831) 2(a)-27 Supplement, dated as of December 1, 1976, to Registration Statement 2(a)-26 said Mortgage and Deed of Trust ( No. 2-57633) 2(a)-28 Supplement, dated as of December 1, 1977, to Registration Statement 2(a)-28 said Mortgage and Deed of Trust ( No. 2-60291) 2(a)-29 Mortgage and Deed of Trust, dated as of Registration Statement D February 15, 1937, between The Scranton Elec- (No. 2-6289) tric Company (to which company the Company is successor by merger) and Chemical Bank &

Trust Company (now Chemical Bank) and Howard B. Smith (P. J. Gilkeson, successor), as 2(a)-30 Trustees Supplement, dated as of November 1, 1946, to Form 1-MD, B-1 said Mortgage and Deed of Trust Registration Statement Supplement, (No. 2-6289) 2(a)-31 dated as of April 1, 1948, to said Registration Statement 2(a)-31 Mortgage and Deed of Trust (No. 2-60291) 2(a)-32 Supplement, dated as of May 15, 1952, to said Registration Statement 2(a)-32, Mortgage and Deed of Trust (No. 2-60291) 2(a)-33 Supplement, dated as of September 1, 1952, to Registration Statement 2(a)-33 said Mortgage and Deed of Trust (No. 2-60291) 2(a)-34 Supplement, dated as of January 31, 1956, to Registration Statement 2(a)-34 said Mortgage and Deed of Trust (No. 2-60291) 2(a)-35 Supplement, dated January 31, 1956, to said RcgistrationStatement 2(d)-6 Mortgage and Deed of Trust (No. 2-19255) 2(a)-36 Instrument providing for resignation of Individ- Registration Statement 2(a)-36 ual Trustee and appointment of successor Indi- ( No. 2-60291) vidual Trustee under said Mortgage and Deed of Trust 2(a)-37 Instrument providing for resignation of Individ- Registration Statement 2(a)-37 ual Trustee and appointment of successor Indi- (No. 2-60291) vidual Trustee under said Mortgage and Deed of Trust 2(a)-38 Instrument providing for resignation of Individ- Registration Statement 2(a)-37 ual Trustee and appointmcnt of successor Indi- ( No. 2-58290) vidual Trustee under said Mortgage and Deed of Trust 2(a)-39 Loan Agreement dated February 9, 1973, be-tween the Company and The Chase Manhattan Bank, N.A., as amended 2(a)-40 Preferred Stock Purchase Agreement, dated July 11, 1973, between the Company and The Prudential Insurance Company of America

Incorporation by Reference Previous Previous Exhibit Exhibit No. Filing Designation 2(a)-41 Preference Stock Purchase Agreement, dated September 22, 1975, between the Company and Alco Standard Corporation 2(a)-42 Composite Conformed Copy of Preferred Stock Registration Statement 2(a)-42 Purchase Agreement, dated October 11, 1977, (No. 2-60291) between the Company and the purchasers named therein 3(a) Opinion of Edward M. Nagel, Esq., with respect to legality of securities being registered here-under 3(b) Opinion of Messrs. Simpson Thacher & Bartlett with respect to legality of securities being regis-tered hereunder 3(c) Consent of Paul Weir Company Incorporated I

4(a) Article VII of the Company's By-Laws, relating to indemnification of directors and oScers, is set forth in Item 15, to which reference is hereby made 4(b) Copy of Memorandum of Excess Liability In- Registration Statement 4(b) surance, dated December 31, 1972, Covering (No. 2-51907)

Excess Public Liability & Property Damage, including Errors and Omissions, Employee Ben-efits and Directors and OScers Liability S(a) Copy of Coal Sales Agreement, dated January Registration Statement 5(b) 1, 1972, between the Company and Pennsylva- (No. 2-42777) nia Mines Corporation (formerly Greenwich Collieries Company) 5(b) Copy of Interconnection Agreement, dated Registra'tion Statement 13(a)

February 23, 1965, between Public Service (No. 2'-26170)

Electric & Gas Company and the Company 5(c) Copy of Interconnection Agreement, dated Registration Statement 13(b)

February 19, 1965, between Philadelphia Elec- (No. 2-26170) tric Company and the Company 5(c)-1 Copy of Supplemental Agreement, dated Jan- Registration Statement 13( b)-1 uary 27, 1967, to said Interconnection Agree- 'No.2-26170) ment 5(c)-2 Copy of Supplemental Agreement, dated Octo- Registration Statement 5(c)-2 ber 20, 1969, to said Interconnection Agreement (No. 2-35654) 5(d) Copy of Interconnection Agreement, dated Registration Statement 5(e)

April 9, 1974, between New York Power Pool ( No; 2-51907)

Group, and Pennsylvania-New Jersey-Maryland Group 5(e) Copy of Interconnection Agreement, dated Registration Statement 5(e)

September 26, 1956, among Public Service (No. 2-60291)

Electric & Gas Company, Philadelphia Electric Company, the Company, Baltimore Gas &

Electric Company, Pennsylvania Electric Com-pany, Metropolitan Edison Company, New Jersey Power & Light Company and Jersey Central Power & Light Company

Incorporation by Reference Previous Previous Exhibit Exhibit No Filing Designation 5(e)-1 Copy of Supplemental Agreement, dated Jan- Registration Statement 13(d)-1 uary 28, 1965, to said Interconnection Agree- (No. 2-26170) ment 5(e)-2 Copy of Supplement entitled "Appendix A Me- Registration Statement 5( f)-2 ter Locations", dated July 28, 1972, to said ( No. 2-51907)

Interconnection Agreement 5(e)-3 Copy of Supplemental Agreement, dated April Registration Statement 5(f)-4 1, 1974, to,said Interconnection Agreement (No. 2-51312) 5(e)-4 Copy of Schedules 5.02 and 5.03, efFective for Registration Statement 5(e)-1 filing August 1, 1974, to said Interconnection (No. 2-52931)

Agreement 5(e)-5 Copy of Supplemerital Agreement, dated June Registration Statement 5(e)-5 15, 1977, to said Interconnection Agreement (No. 2-60291) 5(f) Copy of Conowingo Backwater Agreement, Registration Statement I-14 dated February 20, 1926, among Pennsylvania (No. 2-4254}

Water & Power Company (to which company the Company is successor by merger), the Susquehanna Power Company, the Susque-hanna Electric Company, and Philadelphia Electric Company 5(f)-1 Copy of Supplemental Letter Agreement, dated Registration Statement 5(g)-1 March 1, 1976, to said Conowingo Backwater ( No. 2-57633)

Agreement 5( f)-2 Copy of Supplemental Letter Agreement, dated Registration Statement 5( f)-2 August 5, 1977, to said Conowingo Backwater (No.2-60291)

Agreement 5(g) Copy of Power Supply Contract, dated as of Registration Statement 13(o)

June 1, 1955, among Baltimore Gas & Electric (No. 2-14608)

Company, the Company, and Safe Harbor Wa-ter Power Corporation 5(h) Copy of Agreement on the scheduling and Registration Statement 13(p) dispatching of Safe Harbor and Holtwood Proj- (No. 2-14608) ects, dated as of June 1, 1955, among Safe Harbor Water Power Corporation, Baltimore Gas & Electric Company and the Company 5(i) Copy of Transmission Contract, dated as of July Registration Statement 13(11) 20, 1960, among the Company, Safe Harbor (No. 2-26170)

Water Power Corporation and Baltimore Gas &

Electric Company 5(j) Memorandum of Agreement regarding Key- Registration Statement 5(j) stone Electric Generating Station, dated (No. 2-60291)

December 7, 1964, between the Company and Atlantic City Electric Company ct al.

5(k) Keystone Operating Agreement, dated Decem- Registration Statement 5(k) ber 1, 1965, between Pennsylvania Electric (No. 2-60291)

Company and the Company et al.

Incorporation by Reference Previous Previous Exhibit Exhibit No. Filing Designation 5(l) Memorandum of Owners'greement Regard- Registration Statement 5(1) ing Conemaugh Steam Electric Station, dated (No. 2-60291)

August 1, 1966, between the Company and Atlantic City Electric Company et al.

5(m) Conemaugh Operating Agreement, dated Registration Statement 5(m)

December 1, 1967, between Pennsylvania Elec- (No. 2-60291) tric Company and the Company et al.

5(m)-1 Supplement No. 1, dated June'4, 1969, to said Registration Statement 5(m)-1 Conemaugh Operating Agreement (No. 2-60291) 5(n) Copy of Interconnection Agreement, dated May Registration Statement 4(J) 31, 1968, between Pennsylvania Electric Com- ( No. 2-30918) pany and the Company 5(n)-1 Copy of Appendix B, Revision 2, dated October Registration Statement 5(k)-1 1, 1971, to said Interconnection Agreement (No. 2-42013) 5(o) Copy of Interconnection Agreement, dated Au- Registration Statement 13(J) gust 1, 1935, between Luzerne County Gas & ( No. 2-26170)

Electric Corporation (now UGI Corporation) and the Company 5(p)-1 Copy of Supplemental Agreement, dated June Registration Statement 13(j)-1 1, 1960, to said Interconnection Agreement (No. 2-26170) 5(p)-2 Copy of Amendment to said Supplemental Registration Statement 5(I()-2 Agreement, dated January 31, 1968, to said (No. 2-33042)

Interconnection Agreement 5(p)-3 Copy of Amendment to said Supplemental Registration Statement 5(k)-3 Agreement, dated February 6, 1969, to said (No. 2-33042)

Interconnection Agreement 5(p)-4 Copy of Amendment to said Supplemental Registration Statement 5(I()-4 Agreement, dated March 27, 1970, to said (No. 2-38149)

Interconnection Agreement 5(p)-5 Copy of Amendment to said Supplemental Registration Statement 5(1)-5 Agreement, dated October 10, 1972, to said (No. 2-46508)

Interconnection Agreement 5(p)-6 Copy of Amendment to said Supplemental Registration Statement 5(1)-6 Agreement, dated May 1, 1973, to said Inter- ( No. 2-49227) connection Agreement 5(p)-7 Copy of Supplemental Agreement, dated Registration Statement 5(1)-7 December 11, 1974, to said Interconnection (No. 2-52693)

Agre;.ment 5(p)-8 Copy of Supplemental Agreement, dated April Registration Statement 5(1)-8 22, 1975, to said Interconnection Agreement ( No. 2-52931) 5(q) Copy of Interconnection Agreement, dated Registration Statement 13(1()

April 26, 1965, between West Penn Power (No. 2-26170)

Company et al. and the Company et al.

5(q)-1 Copy of Schedule 7.01, issued May 4, 1967, to Statement

"'egistration 4(1)-1 said Interconnection Agreement (No. 2-30918) 5(q)-2 Copy of Schedule 1.05, issued December 22, Registration Statement 5(m)-2 1971, to said Interconnection Agreement (No. 2-50488)

Incorporation by Reference Previous Previous Exhibit Exhibit No. Filing Designation 5(q)-3 Copy of Schedules 1.06, 5.02, 6.02 and 9.01, Registration Statement 5(m)-3 dated November 14, 1974, to said Inter- (No. 2-52693) connection Agreement 5(q)-4 Copy of Schedule 4.03, issued February 9, Registration Statement 5(m)-4 1976, to said Interconnection Agreement (No. 2-56389) 5(q)-5 Copy of Schedule 7.03, dated August 16, 1976, Registration Statement 5(m)-5 to said Interconnection Agreement ( No. 2-57633) 5(r) Copy of Interconnection Agreement, dated Registration Statement 13(1)

September 30, 1965, between The Cleveland (No. 2-26170)

Electric Illuminating Company and the Com-pany et al.

5(r)-1 Copy of Schedule 8.02, issued March 24, 1975, Registration Statement 5(n)-2 to said Interconnection Agreement ( No. 2-52931) 5(r)-2 Copy of Schedules 1.02, 4.02, 5.02, 6.02, 7.02 Registration Statement 5(n)-2 and 9.01, dated November 12, 1975 to said ( No. 2-56389)

Interconnection Agreement 5(s) Copy of Interconnection Agreement, dated Registration Statement 13(m)

September 30, 1965, between Virginia Electric ( No. 2-26170) and Power Company and the Company et al.

5(s)-1 Copy of Schedule 7.0I, issued June 20, 1967, to Registration Statement 4(n)-1 said Interconnection Agreement (No. 2-30918) 5(s)-2 Copy of Supplemental Agreement, dated Registration Statement 5(o)-2 September 1, 1976, to said Interconnection ( No. 2-57633)

Agreement 5(t) Copy of Interconnection Agreement, dated Registration Statement 13(n)

October 30, 1964, between Metropolitan Edison ( No. 2-26170)

Company and the Company 5(t)-1 Copy of Supplemental Agreement, dated Registration Statement 4(o)-1 September 29, 1967, to said Interconnection (No. 2-30918)

Agreement 5(t)-2 Copy of Supplemental Agreement, dated May Registration Statement 4(o)-2 20, 1968, to said Interconnection Agreement (No. 2-30918) 5(t)-3 Copy of Supplemental Agreement, dated Octo- Registration Statement 4(o)-3 ber 4, 1968, to said Interconnection Agreement ( No. 2-30918) 5(t)-4 Copy of Supplemental Agreement, dated Registration Statement 5(o)-4 November 22, 1968, to said Interconnection (No. 2-33042)

Agreement 5(t)-5 Copy of Supplemental Agreement, dated June Registration Statement 5(o)-6 26, 1970, to said Interconnection Agreement (No. 2-38149) 5(t)-6 Copy of Appendix B, Revision 9, dated May 25, Registration Statement 5(p)-6 1971, to said Interconnection Agreement (No. 2-40765) 5(t)-7 Copy of Supplemental Agreement, dated June Registration Statement 5(p)-10 21, 1974, to said Interconnection Agreement ( No. 2-51907) 5(t)-8 Copy of Revision to Appendix C, dated Registration Statement 5(p)-11 September 10, 1974, to said Interconnection (No. 2-52693)

Agreement

Incorporation by Reference Previous Previous Exhibit Exhibit No. Filing Designation 5(t)-9 Copy of Revision to Appendix C, dated October Registration Statement . 5(p)-12 30, 1974, to said Interconnection Agreement ( No. 2-52693) 5(t)-10 Copy of Revision to Rate Schedule, dated April Registration Statement 5(p)-13 28, 1975, to said Interconnection Agreement ( No. 2-52931) 5(t)-11 Copy of Supplemental Agreement, dated April Registration Statement 5(p)-11 5, 1976, to said Interconnection Agreement ( No. 2-56389) 5(u) Copy of thc Extra High Voltage Transmission Registration Statement 4(1 )

System Agreement, dated April 27, 1967, be- (No. 2-30918) tween the Company and Public Service Electric

& Gas Company, et al.

5(u)-I Copy of Schedule 13.02, issued March 26, 1969, Registration Statement 5(p)-I in connection with said Agreement ( No. 2-33042) 5(u)-2 Copy of Supplemental Agreement, dated Octo- Registration Statement - 5(p)-3 ber 17, 1969, to said Agreement ( No. 2-35654) 5(u)-3 Copy of Operating and Maintenance Agree- Registration Statement 5(p)-4 ments, dated as of February I, 1970, in'con- ( No. 2-38149) nection with said Agreemcnt 5(u)-4 Copy of Schedules 11.04 and 12.03, issued July Registration Statement 5(q)-4 16, 1971, in connection with said Agreement (No. 2-42013) 5(u)-5 Copies of Revisions to Schedule A, issued Jan- Registration Statement 5(q)-5 uary I, 1975 and May I, 1975, to said Schedule ( No. 2-54831) 12.03 5(u)-6 Copy of Supplemental Agreement, dated May Registration Statement 5(q)-5 17, 1972, to said Agreement (No. 2-45713) 5(u)-7 Copy of Schedules 2.03, 3.03, 4.03, 6.02 and Registration Statement 5(q)-7 8.04, issued July 29, 1976, to said Agreement (No. 2-57633) 5(v) Copy of the Susquehanna-Eastern 500 KV Registration Statement 5(r)

Transmission System Agreement, date as of ( No. 2-57633)

April 30, 1976, between the Company and Public Service Electric and Gas Company, et al.

5(w) Copy of Mid-Atlantic Area Coordination Registration Statement 5(r)

Agreement, dated April 23, 1971, between the (No. 2-40765)

Company and Atlantic City Electric Company, et al.

5(w)-I Copy of Agreement on Coordinated Program Registration Statement 5(w)-I for Reduction in Energy Use, dated April I, (No. 2-60291) 1977, between the Company and Atlantic City Electric Company, et al.

5(x) Copy of 115 KV Seward-Conemaugh Inter- Registration Statement 5(r) connection Facilities Agreement, dated March (No. 2-38149) 2, 1970, between Pennsylvania Electric Com-pany and the Company, et al.

5(y) Pipeline System Contract, dated as of June 22, Registration Statement 5(u) 1972, between the Company and Gulf Interstatc (No. 2-45713)

Engineering Company

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Incorporalion by Reference Previous Previous Exhibit Exhibit No. Filing Designation 5(y)-I Copy of Amendment, dated as of November 1, Registration Statement 5(LI)-I 1973, to said Pipeline System Contract (No. 2-51907)

I 5(y)-2 Copy of Amendment, dated as of January 23, Registration Statement 5(u)-2 1974, to said Pipeline System Contract ( No. 2-51901) 5(y)-3 Copy of Amendment, dated as of January 1, RcgistrationStatement 5(u)-3 1975, to said Pipeline System Contract (No. 2-54831) 5(y)-4 Copy of Amendment, dated as of January 1, RcgistrationStatement 5(t)-4 1976, to said Pipeline System Contract (No. 2-5290) s(z) Pollution Control Facilities Agreement, dated, as of May 1, 1973, between the Company and the Lehigh County Industrial Development Au-

'hority 5(aa) Copy of Petroleum Product Sales Agreement RegistrationStatement 5(y) for the sale of residual oil, dated as of January (No. 2-54299)

.1, 1975, between the Company and Amerada Hess Corporation 5(bb) Copy of Agreement, dated as of January 1, Registration Statement 5(w) 1977, between the Company and Asiatic Petro- (No. 2-5290) leum Corporation for the sale of oil 5(cc) Copy of Agreement, dated as of March 24, Registration Statement 5(y) 1977, between the Company and Sun Oil Com- (No. 2-58290) pany of Pennsylvania 5(dd) Copy of Participation Agrccment, dated as of Registration Statement 5(dd)

March 18, 1977, between the Company and (No.2-60291)

Allegheny Electric Cooperative, Inc.

5(dd)-1 Copy ofSecond Termination Agreement, dated RegistrationStatemcnt- 5(dd)-1 September 16, 1977, between the Company and (No. 2-60291)

Allegheny Electric Cooperative, Inc.

6 Calculation of Allocation of Allowance Used During Construction Attributable for'unds to Funds Provided by Common Stock Equity

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SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Allentown, and Commomvealth of Pennsylvania, on the 24th day of February, 1978.

PENNSYLVANIA POWER & LIGHT COMPANY By /S/ JACK K. BUSBY Jack K. Busby, Chairman of thc Board and Chief Executive OIIIccr Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed below by thc following persons in the capacities indicated on the 24th day of February, 1978.

Signature Title Principal Executive

/S/ JACK K. BUSBY Officer Jack K. Busby, Chairman of the Board and Chief Executive Oiiiccr Principal Financial and

/s/ R. R. FoRTUNE Accounting OAicer R. R. Fortune, Executive Vice Prcsidcnt-Financial JAGK K. BUsBY, RALPH R. CRANMER, RoBERT K.

CAMPBELL, EDGAR L. DEssEN, R. R. FoRTUNE, HARRY A. JENSEN, VIRGINIAH. KNAUER, W. DEM- Directors ING LEWIS, JOHN A. NOBLE, NORMAN ROBERTSON AND CHARLEs H. WATTs II By /s/ JAcK K. BvsBY Jack K. Busby, Attorney-in. fact

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS PENNSYLYANIA PowER & LIGHT CoMPANY We hereby consent to the use in this Registration Statement of our opinion dated February 3, 1978 appearing in the Prospectus which is a part of such Registration Statement, and to the references to us under the headings "Statement of Income" and "Experts" in such Prospectus.

HASKINS & SELLS New York, New York February 24, 1978 (The consents of Edward M. Nagel, Esq., Messrs. Simpson Thacher & Bartlett and Paul Weir Company Incorporated are filed as exhibits 3(a), 3(b) and 3(c), respectively, to the Registration Statement.)

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EXHIBIT6 PENNSYLVANIAPOWER 4 LIGHT COMPANY ALLOCATIONOF PORTION OF ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFUDC) ATTRIBUTABLETO FUNDS PROVIDED BY COMMON STOCK EQUITY For Years Prior to 1977 Included in the Statement of Income (Thousands of Dollars)

Portion of AFUDC Attributable io Common Stock Equity as a Earnings Percentage of Applicable Earnings Applicable Capitalization Incremental FAIuivalcnt Allocation of io Common io Common Ratios(a) Rate(b) Rate(c) AFUDC Stock Stock 1976 Long-Term Debt........................... 51% 4.65% 2.37% $ 13,506 Preferred and Preference Stock.... 18 10.28 1.85 10,543 Common Stock Equity.................. 31 3.71 21,143 7.93% $ 45,192 $ 78,743 27%

1975 Long-Term Debt..............,........... 51% 4.67% 2.38% $ 10,446 Preferred and Preference Stock .... 18 13.31 2.40 10,534 Common Stock Equity.................. 31 3.56 15,625 8.34% $ 36,605 $ 73,032 21%

1974 Long-Term Debt........................... 51% 4.11% 2.10% $ 6,013 Preferred and Prefcrencc Stock.... 18 7.44 1.34 3,837 Common Stock Equity.................. 31 3.80 10,882 7.24% $ 20,732 $ 67,823 16%

1973 Long-Term Debt........................... 51% 6.99% 3.56% $ 6,762 Prcfcrred and Preference Stock.... 18 7.40 1.33 2,526 Common Stock Equity.................. 31 2.99 5,679 7.88% $ 14,967 $ 49,721 11%

(a) Assumes that funds used to finance construction during each year were provided in the same proportion as the Company's average capitalization ratios during the five years ended December 31, 1976.

(b) For 1973 incremental rates were determined on the basis that the cost of long-term debt and preferred and preference stock financing was equivalent to the cost of securities issued in the year. No adjustment was made for income tax reductions resulting from interest expense attributable to the portion of AFUDC provided by long-term debt.

Since February 1, 1974, the Company has computed the AFUDC,rate on an "after-tax" basis to be consistent with the treatment accorded this item for rate-making purposes by the Pennsylvania Public UtilityCommission (PUC). The incremental rates used in the above computation for 1974, 1975,and 1976 are consistent with the AFUDC rate computation filed semi-annually with the PUC which were based on securities issued in the twelve months preceding the semi-annual computation. For the same reason, effective February 1, 1974, the incremental rate for the debt component was reduced by the related income tax reduction.

(c) The equivalent rate for each year is calculated by dividing the amount of AFUDC recorded during the year by the balances of the construction work in progress including the accumulated AFUDC.

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POWER PURCHASE AGREEMENT BETWEEN PENNSYLVANIA POWER 5 LIGHT COMPANY AND ALLEGHENY ELECTRIC COOPERATIVE, INC.

MARCH 18, 1977

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POl<E R PURCHASE AGREEt IENT TABLE OF CONTENTS Pave Mo.

Article I, 1lefinitions Article II Buy Back Article III Test Energy 12 Article IV Economic Regulation Article V AE Excess Energy Article VI Billing and Payment 18 Article VlI Successors, Assigns, Transferees and 22 Grantees Article VIII Notice 23 Article IX Amendments 24 Article X Counterparts 25 Article XI Governing Law 26 Article XI I Benefit of Agreement 27 Article XIII Severability 28 Article XIV Failure to Enforce Provision's 29 Agreemen't of'his Article XV Article Headings Not to Affect Meaning 30 Article XVI Filing 31 Article XVII Suspension and Termination of this 32

.Agreement Article XVIII Best Efforts 33 Signatures EXHIBITS Exhibit A Off-site Facilities Exhibit B Operating Costs

POWER PURCHASE AGREEMENT BETWEEN PENNSYLVANIA POWER 6 LIGHT COMPANY AND ALLEGHENY ELECTRIC COOPERATIVE, INC.

This AGREL'ML'NT, c>>tered into this 18th day of March, 1977, by and between Pennsylvania Power 5 Light Company, (herein-after PL), a corporation organized and existing under the laws of the Commonwealth of Pennsylvania, with its corporate head-quarters at Two North Ninth Street, Allentown, Pennsylvania 18101, and Allegheny Electric Cooperative, Inc. (hereinafter AE), a corporation organized and existing under the laws of the Common-wealth of Pennsylvania, with its corpo> ate headquarters at 2929 North Front Street, Harrisburg, Pennsyj.vania 17110.

WHEREAS, PL is a public utility engaged in the genera-tion, transmission and distribution of electric power and energy in the Commonwealth of Pennsylvania, and AE is engaged in the sale of electric power and energy to its members in the Common-wealth of Pennsylvania and the State of New Jersey; and WHEREAS, PL and AE, as tenants in common, own a ninety percent and ten percent undivided ownership interest, respectively, in two nuclear generating units, one of which is designated as Susquehanna Unit 81 and the second of which is designated as Susquehanna Unit t2 (hereinafter collectively referred to as Susquehanna), located in Salem Township, Luzerne County, Pennsyl-vania;.and

NON, THEREFORE, In consideration of the premises and .the covenants herein contained, PL and AE intending to be legally bound hereby, mutually agree and promise as follows:

Article I: Definitions AGREEMENT This Power Purchase Agreement.

ALLOWANCE FOR FUNDS The Allowance For Funds Used During USED DURING CON- Construction of Susquehanna as recorded STRUCTION in PL's or AE's accounting books and records as the case may be. For PL Allowance for Funds Used During Construc-tion is intended to encompass the terms Allowance for Funds Used During Construc-tion, Interest Charged to Construction, Interest During Construction, Allowance for Other Funds Used During Construction or Allowance for Borrowed Funds Used During Construction as defined in the Uniform System of Accounts for Class A and B Utilities as was and as may be amended from time to time. For AE Allowance For Funds Used Durj.ng Construction is intended to encompass the terms Allowance for Funds Used During Con'struction and Interest Charged to Construction as defined in the Uniform System of Accounts Prescribed for Electric Borrogers of the Rural Electrifi-cation Administration.

BILLING MONTH That calendar month during which power is sold or purchased pursuant to the terms of this Agreement.

BUSINESS DAY Any day other than a Saturday or Sunday or a day on which banking institutions in the Commonwealth of Pennsylvania are required by law not to transact banking business.

CONTRACT OPERATION .PL shall place Susquehanna Unit Fl and Sus-

'uehanna 82 individually in Contract Opera-tion at the earliest practicable date that it has been determined that such unit is a reliable source of capacity and complies fully with all requirements of all appli-cable statutes and the rules and regula-tions of the Nuclear Regulatory Commission and such other regulatory agencies as shall have competent jurisdiction over the planning, design, licensing, construction, operation and maintenance of Susquehanna.

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Such date with respect to each such unit shall be. the date of Contract Operation for such unit.

PARTIES Pt. <<nd AE.

PARTY Either E'L or AE.

SUSQUEHANNA The two nuclear generating units with all on-site auxiliaries and on-site facilities related thereto designated as Susquehanna Unit Nl and Susquehanna Unit n2 located in Luzerne County, Pennsylvania, and such off-site property designated on Exhibit A, attached hereto and made a part hereof as may be added to from time to time additions to Susquehanna and sub-to'eflect tracted from time to time to reflect retirements from Susquehanna, but Susque-hanna shall incl'ude no transmission facilities.

UNIT Either Susquehanna Unit 81 or Susquehanna Unit 82 as appropriate.

(End of Article I)

Article I I: ~Bu Back A. llft'ective l)ates The purchase of capacity and energy and the payment therefore provided for in this Article II of this Agreement shall commence on the date each Unit begins Contract Operation and shall terminate on the ninth anniversary of the date of Contract Operation of each respective Unit.

B. Unit tl and Unit N2 transactions are separate The sales and payments provided for in this Article II

'of this Agreement with respect to Susquehanna Unit 81 shall be considered independent and separate'from the sales and payments provided for in this Article II of this Agreement with respect to Susquehanna Unit 82 and vice versa, except with respect to the appropriate allocation of any sales and payments provided for in this Article II of this Agreement common to both Units.

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C. Purchase Amounts AE shall sell to VL <<nd PL shall purchase from All a fractional part (hereinafter'urchase Ratio) of AE's capacity and energy from Susquehanna Unit Nl and Susquehanna Unit N2 individually in accordance with the following formula:

(I) (1050) - A Purchase Ratio =

(I) (1050) where I is a factor determined as one-tenth (O.l) plus or minus any adjusted proportion of Susquehanna undivided ownership interest which AE acquires as a result of providing optional financing to continue or complete the construction of Susquehanna Unit 81 and/or Susquehanna Unit F2, if said optional financing is provided as a result of PL being unable to obtain the required financing upon reasonable terms in order to continue or complete the construction of Susquehanna Unit Pl and/or Susquehanna Unit 42, and where A is a factor having the following values during the

. time periods set forth below:

"A" Factor Period Sus . Unit Pl Sus . Unit II2 3/18/77 5/31/81 40 6/1/81 - 5/31/82 50 40 6/1/82 - 5/31/83 60 50 6/1/83 - 5/31/84 70 60 6/1/84 - 5/31/85 80 70

6/1/85 - 5/31/86 90 80 6/1/86 - 5/31/87 105 90 6/1/87 - termination 105 105 pursuant to Article II, Subpart A hereof.

l(ith respect to each Unit of Susquehanna individually, the Purchase Ratio shall be zero:

(a) until each said Unit has been placed in Con-tract Operation; or (b) for such times as the calculation of the Purchase Ratio yields a negative quantity.

D. Charges for Purchase For the capacity and energy purchased from Susquehanna Unit Hl or Susquehanna Unit N2 individually as herein contemplated, PL shall pay each month to AE pursuant to the procedures specifically set forth in this Article II an amount equal to the sum of the following, multiplied by the Purchase Ratio. for the Unit (as defined in this Article II, Subpart C):

1. Carrying Charge Component as defined in this Article II, Subpart E;

2. Plus, Depr'eciation Expense Component as defined in this Article II, Subpart F;

3. Plus, Decommissioning Provision Component as defined in this Article II, Subpart G;'

4. Plus, Operation and Maintenance Cost Component defined in this Article II, Subpart H; E. Carrying Charge Component

1. The Carrying Charge Component for each Unit indi-vidually shall be an amount equal to th..Rate Base of AE (as set forth in this Article II, Subpart E-2) for the Unit multiplied by the AE Adjusted Cost of Capital Rate for the Unit (as set forth in this Article II, Subpart E-3).

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2. Rate Base of AE shall be computed individually for each Unit and shall be the average of the balances at the begin-ning and the end of the Billing Month for the following items:

(a) All costs of plant in-service related to land and depreciable assets applicable to the Unit as permitted pursuant to the Uniform System of Accounts prescribed for electric borrowers of the Rural Electrification Administration, January 1, 1972, as it may be amended from time to time, including AE's Allowance for Funds Used During Construction related to such costs; (b) Minus, amounts withheld under contracts with contractors, subcontractors and others supplying or constructing equipment, services, or materials related to the Unit; (c) Minus, Accumulated Reserve for Depreciation Component which shall be the amount of the Depreciation Expense Component (as defined in this Article II, Subpart F) accumulated since the Contract Operation date; 8

(d) Minus, Accumulated Decommissioning Provision Component which shall be the amount of the Decommissioning Pro-

.vision Component (as defined in this Article II, Subpart G) accumulated since the Contract Operation date; (e) Plus, AE's investment associated with each Unit in fabricated nuclear fuel in the reactor or available for installation in the reactor or removed from the reactor, if any, minus accumulated amortization of such fuel, reprocessing costs of such fuel, and other fuel cycle costs or credits attributable to the portion of such'nuclear fuel consumed, all of which shall be based on data set forth on AE's books and records; (f) Plus, AE's investment associated with or allocated to each Unit in materials and supplies and undistributed stores expense, if any, all of which shall be based on data set forth on AE's books and records.

3.. AE's Adjusted Cost of Capital Rate shall be equal to:

with the result rounded to the fifth decimal place. The quantities appearing in the formula are defined as:

I = The aggregate of AE's interest accrued during the Billing Month on loans (Loans) used to finance AE's ownership interest in items included in Rate Base.

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P = Average of the daily amount of said Loans out-standing during the Billing Month.

B = Megawatt hours generated by the Unit involved during the Billing Month.

C = 1,050 Mf x Number of Hours in the Billing Month x 65$ (in the first Billing Month the number of billing hours shall be computed from the date of Contract Operation).

In the event that the laws of the United States are changed so that PL is no longer subject to the Federal Income Tax or a similar tax, the 0 01675 shown in the formula above shall be changed to 0.00750.

F. Depreciation Expense Component The Depreciation Expense Component shall be determined by multiplying the depreciable portion of AE's original cost for the Unit as of the beginning of the Billing Month [as defined in this Article II, Subpart E-2(a)] by three and two-tenths percent (3.2<) and then dividing that product obtained by twelve (12).

G. Decommissioning Provision Component The Decommissioning Provision Component shall be deter-mined by multiplying the depreciable portion of AE's original cost for each Unit as of the beginning of the Billing Month [as defined in this Article II, Subpart E-2(a)] by one-half of one percent (0.54) and then dividing the product obtained by twelve

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H. Operation and Maintenance Cost Component The Operation and Maintenance Cost Component shall he equal to the sum of the followi.ng:

l. Operating Costs as defined on Exhibit B, attached hereto and made a part hereof, applicable to the month for which a bill will be rendered by PL to AE for operating AE's undivided ownership interest in Susquehanna.

2. The costs directly associated with nuclear fuel consumed by AE to produce power for the month. It is recog-nized by the Parties that as of the execution of this Agreement financial arrangements and accounting with respect to nuclear fuel have not been finalized. It is, however, intended that costs directly associated with fuel consumed to produce power for each month shall include a properly allocated portion of spent fuel storage costs, fuel reprocessing costs, final fuel disposal costs and fuel cycle costs or credits not otherwise provided for herein.

(End of Article II)

A. AE shall sell to PL and PL shall purchase from AE all of AE's share of the net energy which is produced by Susquehanna Unit Nl and Susquehanna Unit !f2 prior to the time each respective Unit of Susquehanna is placed into Contract Operation. Said net energy shall hereinafter be referred to as AE Test Energy.

B. PL. shall pay to AE a charge for AE's Test Energy which shall be computed monthly and shall equal the kilowatt hours of AE Test Energy produced that month multiplied by the average dollar per net kilowatt hour cost that month of all fuel consumed by PL's coal-fired steam generating units (excluding from such computation all net generation produced that month for PL's account at the Keystone and Conemaugh Steam Electric Stations and the fuel costs related thereto).

(End of Article III)

Article IV: Economic Re ulation A. The term Economic Regulation shall mean that situation where any portion or all of the available capability of Susquehanna is not placed into operation because the operation of that portion or all of such capability would have the effect of increasing the cost of that operating system of which Susquehanna is a part [currently the Pennsylvania-New Jersey-Maryland Interconnection (PJM)]. PL shall use its best efforts to predict on each Business Day whether or not Susque-4 hanna's operation will be limited by Economic Regulation during succeeding days (up to and including at least the next suc-ceeding Business Day). PL shall notify AE of predictions that Susquehanna's operation will be limited by Economic Regulation by not later than 2:00 P.M. of the day said prediction is made.

As to any day that PL predicts that Susquehanna's operation will be limited by Economic Regulation, PL shall supply to AE, at AE's option and subject to the terms and conditions set forth in this Article IV, that amount of energy which is equal to AE'.s undivided ownership interest in Susquehanna multiplied by that portion of all of the total available capa-bility of Susquehanna which is not placed into operation because of Economic Regulation less that portion of such e'nergy which PL would have purchased pursuant to Article II hereof. AE shall notify PL if AE desires to receive energy pursuant to the terms hereof at the time PL notifies AE that Susquehanna operations are expected to be limited by Economic Regulation.

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B. In the event that at any time or from time to time Susquehanna shall be in Economic Regulation,.and PL did not predict on or prior to the preceding Business Day that Susquehanna would be in Economic Regulation, PL shall supply and AE shall purchase that amount of energy which is equal to AE's undivided ownership interest in Susquehanna multiplied by that portion of all of the total available capability of Susquehanna which is not placed into operation because of Economic Regulation less that portion of such energy which PL would have purchased pursuant to Article II hereof.

C. AE shall pay to PL the following charges relating to the supply of energy by PL to AE pursuant to Article IV hereof under the terms and conditions set forth below. All charges to AE shall be computed on an hourly basi and shall be equal to the greater of:

1. The average of:

(a) PL's fuel costs and variable operation and maintenance costs as determined from generating station incremental energy cost tables [Generating Station Incre-mental Energy Cost Tables (Cost Tables) as prepared by PL and amended by PL from time to time in accordance with PL's normal practices and procedures] for the PL system generating units and net interchange costs to supply energy to AE pursuant to this Article IV which are over and above PL's system fuel, operation, maintenance, and net inter-change costs at the time of such supply, had such supply not taken place.

(b) That increase in the fuel costs and variable operation and maintenance costs as determined from the Cost Tables for Susquehanna which would have

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resulted had that portion of the total

<<v:i i Jab I c capability of Susquehanna,

>>h Lch was not placed into operation, beo>> placed into operation, divided by that portion of the total available energy of Susquehanna which was not placed into operation in KNH and then that quotient multiplied by the actual energy in kilowatt hours supplied by PL to AE pursuant to this Article IV; or

2. PL's fuel costs and variable operation and maintenance costs as determined from Cost Tables for the PL system generating units and net interchange costs to supply energy to AE pursuant to this Article IV which are over and above PL's system fuel, operation, maintenance, and net interchange costs at the time of such supply, had such supply not taken place.

D. The provisions of this Article IV shall terminate in the event and on the day on which AE becomes a member of a power pool.

(End of Article IV)

Article V: AE Excess Ener A. If for any day, or from day to day, AE desires to sell or otherwise dispose of any portion or all of its share of energy which is produced by Susqueh;.nna to other than AE's member cooperatives, AE shall on or before ten o'lock A.M. of the last Business Day preceding the day or days on which AE desires to sell said energy, first offer (Offer) to PL the option of purchasing said energy. Each Offer shall stipulate the amount P

of energy which AE does not desire to sell for each hour of the day of the sale; all AE energy which is actually produced each hour on the day of the sale in excess of the stipulated amounts shall be the amount available for purchase by PL. PL shall have until 2:00 P.M. of the day of the Offer to notify AE of the exercis-ing of said option.

l. Each Offer made by AE and each acceptance thereof by PL shall be deemed an individual and separate trans-action (Transaction).

2. PL shall pay to AE monthly for the actual energy purchased charges relating to each Transaction which charges shall be determined on an hourly basis, and shall be equal to the greater of:

(a) The average of (l) the fuel costs and variable'operation and maintenance costs as determined from the Cost Tables for Sus-quehanna to produce that energy purchased by PL pursuant to each Transaction and (2) the reduction in PL's fuel costs and variable operation and maintenance costs as deter-mined from the Cost Tables for the PL system generating units and interchange net costs t

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resulting directly from the purchase of energy t'rom AF. pursuant to each Transaction (ezcludi>>g those charges resulting From applic>>tio>> ol tho provisions of. this Article); ov (b) The fuel costs and variable operation and maintenance costs as determined from the Cost Tables for Susquehanna to produce that energy purchased by PL pursuant to each Transaction.

B. The provisions of this Article V shall terminate in the event and on the day on which AE becomes a member of a power pool ~

(End of Article V)

Article VI: Billin and Payment A. All bills sent from PL to AE shall be for a calendar month and shall be rondereQ by PL as soon as practic-able subsequent to the close of each calendar month. AE shall make payment to PL 'in immediately available funds on the tenth (10th) day subsequent to the issuance by PL of each bill, by wire transfer to PL's account at The First Pennsylvania Bank, N. A. at Philadelphia, Pennsylvania, or any other bank which PL may designate in writing.

B. If AE shall fail to pay to PL any sum due to PL pursuant to this Agreement, there shall be added to any overdue

.amounts interest compounded daily from the date such payment was due until paid in full which shall be computed based on the rate of interest in effect from time to time equal to the minimum commercial lending rate charged to responsible and substantial borrowers (prime rate) by The First Pennsylvania Bank, N. A.,

Philadelphia, Pennsylvania, its successors and assigns, plus two percent (2~) computed on the basis of a 360-day year. If any payment is due on a day not a Business Day, it may be made on the next Business Day without premium or penalty.

C. All bills sent from AE to PL shall be for a calendar month. Bills for power delivered under Article III (Test Energy) and Article V (AE Excess Energy) and the follow'ing portions of Article II (Buy Back):

l. Carryi~ig, Ch;>>pc Component I Art.icl.e i 1

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2. Depreciation Expense Component [Article I.l D(2) ~;

3.- Decommissioning Provision Component [Article II D(3) 1; r

4. Nuclear Fuel Costs [Article II - D(4))

shall be rendered by AE as soon as practicable subsequent to the close of the calendar month. PL shall make payment to AE in immediately available funds on the tenth (10th) day subsequent to the issuance by AE of each bill by wire transfer to AE's account at Commonwealth National Bank in Harrisburg, Pennsylvania or any other bank which AE may designate in writing.

As to Operation and Maintenar.,ce Cost Component [Article II - D(4) excluding nuclear fuel costs] related to the power transaction contemplated pursuant to Article II (Buy Back) AE shall, on or before the twenty-fifth day of ea'ch month, commencing with the first month prior to the first month the Operation and Maintenance Cost Component is expected to be billed pursuant to Article II - D(4), notify PL of the amount of Estimated Operation and Maintenance Cost Component anticipated to be billed under Article II - D(4), by AE during the next calendar month.

PL shall make payment to AE in immediately available funds 'such Estimated Operation and Maintenance Cost Component (and for the settlement of Actual Operation and Maintenance Cost Component as detailed below) by the tenth day of the month immediately succeeding the mont'h on which AE rendered an esti-mated bill to PL, by wire transfer to AE's account at Commonwealth 19

National Bank, Harrisburg, Pennsylvania or any other bank which AE may designate in writing.

On or before the twenty-fifth day of each month begin-ning with the second month in which there have been Operation and Maintenance Cost Component, AE shall notify PL 'of its share of Actual Operation and Maintenance Cost Component billable for the prior month. Any difference between the Actual Operation and Maintenance Cost Component and the Estimated Operation and Maintenance Cost Component for the same month shall be shown on the notification. Any such difference shall be settled between the Parties by an adjustment to the bill sent to PL by AE on the twenty-fifth day of each month and payable on the tenth day of the next month.

D. If PL shall fail

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to pay to AE any sum due to AE pursuant to this Agreement, there shall be added to any overdue amounts interest compounded daily from the date such payment was due until paid in full which shall be computed based on the rate of interest in effect from time to time equal to the minimum commercial lending rate charged to responsible and substantial borrowers (prime rate) by The First Pennsyl-vania Bank, N.A., Philadelphia, Pennsylvania, its successors and assigns, plus two percent (2:) computed on the basis of a 360-day year. If. any payment is due on a day not a Business Day it may be made on the next Business Day without premium or penalty.

E. PL and AE shall adjust all billings, at any time, in a timely manner, as necessary.

-I F. PL and AE shall have the right to audit and examine the accounts, books and records of the other relating to the transactions herein contemplated, at any time and from time to time during normal business hours, at the place where such accounts, books and records are normally maintained, at the expense of the examining party, except however, AE may not have access to any of the aforementioned items which by the terms under which PL holds or has access to such items, if such items are classified as confidential, secret, prcprietary, or the like.

PL shall use all best efforts, upon the request of AE, to obtain the necessary permission from the holders or owners of such con-fidential, secret, or proprietary items, to permit AE to have access to said items (any cost associated with said permission shall be the sole responsibility of AE).

(End of Article VI) 21

Article VII: Successors, Assi ns, Transferees and Grantees This Agreement sha L.l c>>ui o to the bene Cit ol;>>>il ho binding upon the successors, assigns, transferees, and grantees of the Parties. AE and PL shall notify the other Party of its intention to assign this Agreement.

(End of Article VII) 22

Article VIII: Notice Any notice, request, consent, offer, acceptance, rejection or other communication required by this Agreement to be in writing shall be deemed given when deposited in the United States Mail, first class postage prepaid, and if given to PL shall be addressed to:

Pennsylvania Power 5 Light Company Two North Ninth Street Allentown, Pennsylvania 18101 Attention: Treasurer and if given to AE shall be addressed to:

Allegheny Electric Cooperative, Inc.

2929 North Front Street Harrisburg, Pennsylvania 17110 Attention: Mr. William F. Matson unless a'different officer or address shall have been designated by the respective Party, by notice in writing.

(End of Article VIII)

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Article IX: Amendments Any amendment to this Agreement shall not become effec-tive until approved by the Adminstrator of the Rural Electrifica-tion Administration. The Termination Agreement by and between PL and AE bearing even date herewith shall not be deemed an amend-ment to this Agreement, requiring as a condition to its becoming effective the approval of the Administrator of the Rural Electri-fication Administration.

(End of Article IX)

A 1 This Agreement may be executed in two or more counter-parts, each'of which shall be deemed an original but all of which together shall constitute one and the same instrument.

(End oX Article X)

The validity, interpretation, and performance o.f this Agreement and of each and every provision hereunder shall, except as otherwise provided by law, be governed by the laws of the Commonwealth of Pennsylvania.

(End of Article XI)

Article XII: Benefit ot Av,ream<<>>t Except as contemplated in Article VII of this Agree-ment, the provisions of this Agreement are for the benefit of the Parties hereto and not for any other person or entity.

(End of Article XII) 27

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The provisions of this Agreement are sevorablc,;n>d if any provision shall be determined to be illegal and uncnforce-able, such determination shall in no manner affect any other provision hereof, and the remainder of this Agreement shall remain in full force and effect without regard to the fact that one or several provisions of this Agreement may be determined from time to time to be illegal or unenforceable provided, how-ever, that the intention and essence of this Agreement may still be accomplished and satisfied.

(End of Article XIII)

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Article XIV: Failure to Enlorce l'rovisions of this A rcomcnt

,The failure of any V;arty to insist .in any one or moro instances upon strict performance of any 'of the provisions of this Agreement or to take advantage of its rights hereunder, shall not be construed as a waiver of any such provisions, or the relinquishment of any such rights, but the same shall continue to remain in full force and effect.

(End of Article XIV)

Article 'XV: Article Headings Not to Affect Meanin The descriptive headings of the various Articles of this. Agreement have been inserted for convenience or ref-erence only and shall in no manner mod'ify or restrict any of

.the terms or provisions hereof.

(End of Article XV)

Article XVI: ~Filin If and to the extent that this Agreement or any part heieof shall be required to be filed, or shall be filed with any regulatory agency as a rate or rate schedule, nothing in this Agreement shall be construed as affecting in any way the right of PL to unilaterally make application to such a'gency for a change in rates, charges, classifications, or service, or any sale, regulations, or contract relating thereto under applicable laws. To the extent that PL makes any .,such filing, AE shall have the right to intervene in any proceeding involving such a filing by PL and shall have the right to object to any proposed change.

(End of Article. XVI)

I I)

Article XVII: Sus ension and Termination of this A reement A. This Agreement shall expire, terminate, and become null and void, except as limited by Subpart B of this Article XVII, and except as limited by the terms of this Subpart A of this Article XVII, thirty-six months subsequent to the date on which Susquehanna is no longer used for the purpose of producing elec-tric energy for sale, except that in the event that an earlier termination date is set forth in any specific Article of this Agreement, then such 'earlier termination date shall be applicable and controlling with respect to that Article.

B. In the event that any cause or causes of action whether in law or in equity have arisen prior to the termination of this Agreement, said cause or causes of action shall not expire, terminate or become null and void upon the expiration, termination and becoming null and void of this Agreement, but said cause or causes of action shall be actionable pursuant to the applicable statute of limitation or the applicable doctrine of laches.

C. In the event that either PL or AE is in default in any of its obligations 'to the other pursuant to any Agreement between PL and AE bearing even date herewith, then all of PL's or AE's obligations to the other under this Agreement shall be sus-pended and unenforceable until said default is cured by the defaulting party.

(End of Article XVII) 32

Article XVIII: Best Efforts During the term of this Agreement AE and PL shall each use all best efforts to obtain and. to keep in effect any and all governmental, regulatory or other authorizations, per-mits, approvals, licenses, permissions and applications as may be necessary for each Party to perform its obligations under this Agreement.

(End of Article XVIII)

IN WITNESS WHEREOF, each of the Parties hereto has duly executed this Agreement in Washington, District of Columbia, this 18th day of March, 1977.

PENNSYLVANIA POWER g LIGHT COMPANY By:

Attest:

keek. Secretary; ALLEGHENY ELECTRIC COOPERATIVE, INCORPORATED By:

Attest:

COMMONWEALTH OF PENNSYLVANIA )

COUNTY OF On this, the .-" day of 1977, before me, a Notary Public in and for the Commonwealth of Pennsylvania, the undersigned, officer, personally appeared who acknowledged himself to be the ... " ~-" .'. "' -."-" of corporation, and that he as such a

~

authorized to do so, executed the foregoing instrument for the Pennsylvania

, being purposes therein contained by signing the name of the corporation by himself as IN WITNESS NHEREOF, I hereunto set my hand and official seal.

NOTARY PUBUQ Allent wn, Loh gh C un y, Pennsylvania tAy Comml=slo.. Expires Juno 6, 1977 Notary Pu lac

,, Pennsylvania My Commission Expires:

COMMONNEALTH OF PENNSYLVANIA )

COUNTY OF Qo.~h., n On this, the lg day of ~~~"~~~., 1977, before me, a Notary Public, in and for the Commonwealth of Pennsylvania, the undersigned oFficer, personally appeared III.be toe&<~

who acknowledged himsel f to be the I 0

~ u~l of (fcgl eny El~' c- (o~t'dtiv<~j. sc., a Pennsylvania corporation, and that he as such [ peg <d~+

authorized to do so, executed the foregoing instrument for the

., being purposes therein contained by signing the name of the corporation by himself as Prebid~&-

IN WITNESS WHEREOF, I hereunto set my hand and official seal.

Notary Pu lz.c

, Pennsylvania My Commission Expires:

NoTARY cUpgic

~y Commission Expiyos JQ'}'

y ]$ J5l7o 82M'Asburg, Po.

EXHIBIT A Off-Site Facilities (1) An Air-Monitoring Station (No. 7H1) located on the roof of the North Building of the Pennsylvania Power 5 Light Company General Office at Two North Ninth Street, Allen-town, Pennsylvania, Lehigh County.

(2) An Air-Monitoring Station (No. 12El) located on land leased from the Berwick Hospital, Briar Creek Township, Columbia County, Pennsylvania, at 701 East 16th Street, Berwick, Pennsylvania 18603.

(3) An Air-Monitoring Station (No. 3D1) located at R. D. t2, Wapwallopen, Pennsylvania, on land leased from the Pond Hill Lily Lake Fire Company, Village of Pond Hill, Luzerne County, Pennsylvania.

(4) An Air-Monitoring Station (No. 4Sl) at the Icthyological Associates Company located at R. D. 81, Berwick, Pennsylvania 18603.

(5) An Air-Monitoring Station (No. 1Dl) located at Mocanaqua, Pennsylvania, at the following coordinates: N 1'0'E, 45 ft.' 88 '26', 25 ft.; N 1 34', 225 ft ~ ~ N 4 4',

110 ft.; N 88'6'W, 25 ft. more or less; S 69'9', 120 ft.

(6) Equipment, supplies and materials currently being constructed by various entities in various places, which equip-ment, supplies and materials will be used on the Susquehanna plant site.

(7) Uranium Oxide and Uranium Hexa floride owned by PL located in the custody of Lucius Pitkin, Inc. and Allied Chemical Nuclear Products Division, both at Metropolis, Illinois.

(8) Uranium Hexafloride owned by PL located at U. S.

Energy Research and Development Administration at Oak Ridge, Tennessee.

EXHIBIT B OPERATING COSTS Operating Costs shall mean all costs and expenses, direct and indirect, incurred by or on behalf of PL properly assignable to AE's undivided ownership interest in Susquehanna and 100: of all costs and expenses, direct or indirect, incurred by AE, or on behalf of AE other than the Operating Costs incurred by or on behalf of PL, properly assignable to Susquehanna. Such costs and expenses'hall be determined and allocated, in accor-dance with'generally accepted accounting principles, consistently applied, and shall include, but shall not be limited to the following, provided that if any payment made or cost incurred is for the benefit of Susquehanna, and is also for the benefit of some other PL facility, then Operating Costs shall include only that portion of such payment or cost which is equitably allocable to Susquehanna and which is not otherwise paid for:

l. All costs of labor and services performed which shall include, but shall not be limited to: wages 'to hourly employees, wages to salaried employees, shift differential and pay for time not worked such as vacations, sickness, and other time off in accordance with PL policies and union contracts, costs of social security taxes, unemployment insurance expenses, and all other payroll taxes, group life insurance, group hos-pitalization, medical insurance, pension and other employee benefit plan contributions, Workmen's Compensation, public liability insurance, accidental death and dismemberment insurance, long-term disability insurance, h alth insurance and all other fringe benefits accruing to PL's employees;

2. All costs of materials and supplies and utilities services for plant operation and maintenance;

2

3. All costs of tools, machinery and equipment;

4. All costs for rental of tools, machinery and equipment leased for plant operation and maintenance; S. -All costs of licenses, fees, assessments, fines, penalties, and charges imposed by governmental regulatory, administrative or supervisory bodies or entities, or by law;

6. All costs of work by outside contractors, consultants, and specialists such as lawyers, engineers, accoun-tants and others as deemed necessary by PL in the operation, maintenance and management of Susquehanna;

7. All insurance costs;

8. All taxes, provided,'however, that PL and AE shall separately bear the costs of taxes which are either imposed on PL or AE as separate entities or are imposed on the separate undivided ownership interests of PL or AE in Susquehanna;

9. All costs associated with maintaining the security of Susquehanna;

10. All costs associated with low river flow

'augmentation;

11. All costs of any nature whatsoever associated with any shutdown, entombment, termination or removal of Susque-hanna, to be shared by the Parties hereto as Operating Costs;

12. All fuel costs not paid for by AE pursuant to other agreements;

13. All administrative and general expenses incurred which enure to the benefit of Susquehanna shall be equitably allocated to Susquehanna and shall include but shall not be limited to the general services and costs of all PL's operations, such as: safety, accounting, payroll, computer services, legal, personnel, training, information services, claims work, general supervision, general supplies and expenses, auditing, communication expenses, research and development, studies and investigations relative to Susquehanna (including but not limited to nuclear production and development), and costs of operating all office buildings in which such services and general costs are incurred;

14. Overheads incurred shall be equitably allocated to Susquehanna;

3

15. Expenses incurred and applicable to generating stations owned and operated by PL which cannot be charged directly

,to specific generating stations shall be equitably allocated to each of such generating stations including Susquehanna. Such costs and expenses include but are not limited to wages and other expenses of the Manager of Power Production or PL and his staff, consultants fees, and other expenses of a general nature related to generating stations; 16.. All costs of load dispatching and System Control;

17. All costs of owning (including depreciation) and operating auxiliary or supporting facilities of PL which enure to the benefits of Susquehanna shall be equitably allocated to Susquehanna.