ML18040B178

Pennsylvania Power & Light Co,1986 Annual Rept. W/870319 Ltr

ML18040B178
Person / Time
Site:	Susquehanna
Issue date:	12/31/1986
From:	CAMPBELL R K, KEISER H W PENNSYLVANIA POWER & LIGHT CO.
To:	DENTON H Office of Nuclear Reactor Regulation
References
PLA-2820, NUDOCS 8703240134
Download: ML18040B178 (45)

Text

ePennsylvania Power8LightCompanyTwoNorthNinthStreet~Allentown, PA18101~215l770-5151HaroldW.KeiserVicePresident-Nuclear Operations 215/770-7502 MAR191987Mr.HaroldDenton,DirectorOfficeofNuclearReactorRegulation U.S.NuclearRegulatory Commission Washington, D.C.20555SUSQUEHANNA STEAMELECTRICSTATIONANNUALFINANCIAL REPORTPLA-2820FILER41-2ADocketNos.50-38750-388

DearMr.Denton:

Inaccordance with10CFR50.71(b),'enclosed isthe1986annualreportforPennsylvania Power6LightCo.TheannualreportforAllegheny ElectricCooperative, Inc.,willbeforwarded later.Verytrulyyours,~~.W.KeiserVicePresident-Nuclear Operations Attachment cc:NRCDocumentControlDesk(original)

NRCRegionIMr.L.R.Plisco-NRCResidentInspector Mr.M.C.Thadani-NRCProjectManager IIIrlii/~~0~~~~~~~~~~I~~'~~~~I~~~~~~IW~rr+i?wrr4~~i~~'~Ir~~~~~~~~~~~~I" COVERCONTENTS1,tt,.tt'llkes-Barre, Pennsylvania, itsPublicSquareaglowinlight,boastsoneofthemostencouraging storiesofeconomicresurgence lnPP&L's10,000-square-mile servicearea.Thecitygainednationwide attention in1972asoneofthehardest-hit victimsofseverefloodingthataccom-paniedTropicalStormAgnes.Theindomitable spiritofthepeopleoftheWyomingValleyprevailed andtheareaisnowmorevibrantthanever.Agleamingbrassandglassfacadehighlights thenewF.M.KlrbyCenterforthePerforming Arts,arefurbished 1,850-seat theaterwithrootsgoingbacknearly50yearstoaneraoflavishandornatemoviepalaces.ThetheaterisfastbecomingaculturalcenterinNortheast Pennsylvania, andwillbethesiteofPP&L'scorporate annualmeetinginApril1988.Show-ingnosignsthatitssquarewasundereightfeetofwaterIn1972,thecenteroftheseatofgovernment for200-year-old LuzerneCountyIsan-otherCentralEasternPennsylvania community thatPP&Lproudlyserves.Highlights President's LetterYearinReviewFinancial ReviewFinancial Statements NotestoFinancial Statements SelectedFinancial andOperating DataOfficersandDirectors 1241823313840CUSTOMERSERVICEPP&L'smissionstatement saysitall:"Tomeetourcustomers'ngoing needsforeconomical andreliableelectricserviceinwaysthatmeritthetrustandconfidence ofthepublic."TheservicePP&Lprovidesvitallyaffectsthedallylivesof2.5millionpeopleInCentralEasternPennsyl-vania.ThisiswhyPP&Lhasagreatresponsibility tothosepeopletobearesponsive, sensitive company.Butsensitivity canonlybeconveyedbypeople-peoplewhotaketheirJobsandtheirindividual responsibilities seriously.

Inwordsandpictures, onpages4through17,isthestoryofsomeofthepeoplewhoperpetuate PP&L'sreputation forexcellent customerservice.Theirdedication toexcellence keepsPP&L'sperform-anceamongthebest.NoticeofAnnualMeetingThe1987annualmeetingofshare-ownerswillbeheldat1:30p.m.onWednesday, April22,1987,atthePennHarrisInnandConvention Center,Routes11and15,CampHillBypass,CampHill,Pa.Formalnoticeofthemeetingandareservation cardformeetingattendance areIncludedwithshareowners'roxy material.

SERVICEAREAPennsylvania Power&LightCo.,basedinAllentown, Pa.,provideselectricservicetomorethanamillionhomesandbusinesses throughout a10,000-square-mile areain29countiesofCentralEasternPennsylvania.

Principal citiesInthePP&LserviceareaareAllentown, Bethlehem, Harrisburg,

Hazleton, Lancaster,

Scranton, Wllkes-Barre andWilliamsport.

lhhehtlOtDltltlhnCohttolDfVILohlehDltltlohAllentown HIGHLIGHTS

.Customers (a)CommonShareowners (a)..............

ElectricEnergySales,Kilowatt-hours

..Interchange PowerSales,Kilowatt-hours Electricity Generated, Kilowatt-hours Operating RevenuesCapitalProvidedbyInvestors (a)......

UtilityPlant(a)NetPlantinServiceConstruction WorkinProgress.........

CommonStockData198619851,073,146 1,055,546 147,611151,02580.4Billion28.1Billion11.8Billion16.2Billion41.5Billion42.7Billion$2.2Billion$2.0Billion$5.5Billion$5.5Billion$5.8Billion$5.8Billion$0.2Billion$0.2BillionReturnonAverageCommonEquity..EarningsPerShare.Dividends DeclaredPerShare.......MarketPricePerShare(a).........

BookValuePerShare(a)...........

TimesInterestEarnedBeforeIncomeTaxes.(a)Atyear-end.

12.11%$8.10$2.58$86N$25.712.8010.42%$2.68$2.56$28s/4$25.582.87WherethePP&LIncomeDollarWentin1986NetCostofEnergyTaxesInterestEmployees Materials,

Services, Rents,etc.Dividends Depreciation EarningsReinvested 20020014413412012%7C20-Incomeincludesrevenues, otlierincomeandtheallowance forfundsusedduringconstruction.

PRESIDENT'S LETTERTheverypositiveoperating andfinancial resultsachievedbythecompanyin1986clearlyshowthat,withbothSusquehanna generating unitsincommercial operation, we.nowhaveasolidfoundation inplaceformeetingourlong-term commitments tocustomers andshareowners.

Tosucceedintoday'sincreas-inglycompetitive energymarketsrequiresmaintaining topperfor-manceinallphasesofouropera-tions.Thismeansthatwemustcontinuetoprovideelectricpoweratcompetitive pricesandwithsuperiorcustomerservice.Fortu-nately,becauseofPP&L'sexcep-tionallystrongcapacityposition, basedonanefficient mixofcoalandnucleargeneration, thecom-panyhasneverbeeninabetterpositiontomeettheseobjectives.'roviding economical andrelia-bleelectricservicegoeshand-in-handwithenhancing thecom-pany'sfinancial strength.

Andbecausebotharerelatedtosuc-ceedinginthemarketplace, PP&L'smarketing andeconomicdevelop-mentprogramsareaimedatattracting andholdingjob-pro-ducingbusinesses forourserviceareabypromoting thecompany's strongpositionasasupplierofre-liableandcompetitively pricedelectricenergy.SalesandEarningsContributing toourimprovedfinancial performance in1986,kilowatt-hour salestoservice-area customers increased 4.2percentandtotalelectricsalesincreased 8.2percent,comparedto1985.Theservice-area salesgrowthwasledbymajorgainsinourelectrically heatedhomemarketandbyin-creasedsalestocommercial cus-tomers.Althoughindustrial salesincreased byonly1percent,ourindustrial sectorcontinues togrowandbecomemorediversified, withnetgainsthroughplantexpansions andnewindustries morethanoffsetting reducedusageforsteelmanufacturing.

Thecompany's total1986salesin-creaseof8.2percentreflected thebenefitofthefirstfullyearofsell-ingelectricpowerunderourlong-termcontractwithJerseyCentralPower&LightCo.Thiscontractfor945,000kilowatts ofPP&L'stotalgenerating system,andourcontractwithAtlanticCityElect-ricCo.forelectricenergyfromSusquehanna, providerevenuesthathavehelpedtooffsetregula-torydisallowances basedonrul-ingsthatthecompanypresently hastoomuchgenerating capacity.

Themarketing ofelectricpowertootherutilities willcontinuetoprovidethecompanywithimpor-tantsourcesoffuturerevenue.ThesesalesaremadepossiblebyPP&L'sfavorable mixoflow-costcoalanduraniumfuels-andbytheoutstanding performance ofourgenerating units.Thecompany's 1986earningsof$3.10persharewereup42cents,or15.7percent,from1985.Thissignificant improvement isthere-sultofourcontinued emphasisoncostcontainment, including ourveryeffective refinancing pro-gram,andincreased electricenergysales.Aspartofourongoingcostcon-tainmentprogramin1986,weinitiated avoluntary earlyretire-mentprogram,delayedbuildingrenovations andundertook anaggressive programtorefinance highercostsecurities atlowercosttoimproveearningsandtohelpkeepPP&L'spriceforelectricser-viceaslowaspossible.

Lookingahead,wewillworkhardtoholddowncosts,including continuation ofourrefinancing programthatprovedtobepar-ticularly significant inreducingcostsandimproving earningsin1986.Thecompany's strengthened financial positionalsoisreflected bythehighqualityofour1986earnings.

Onlyabout5percentoftheseearningsweretheresultofrecording anon-cashallowance forfundsusedduringconstruction, comparedtoanindustryaverageofabout35percent.Withouttheneedtoconstruct majornewgenerating capacityforatleastthebalanceofthiscentury,thisfavorable liquidity positionshouldcontinuetobeafinancial strengthfortheforeseeable future.Mark,eting andEconomicDevelopment Ouraggressive marketing andeconomicdevelopment programscontinued lastyeartomakeimpor-tantcontributions totheeconomicprosperity ofthecommunities weserve.Theseprogramsalsoaredesignedtoachieveannualin-creasesinkilowatt-hour salestosupportthefinancial healthofthecompanywhilemitigating theneedforfuturerateincreases.

Toachieveoureconomicdevelop-mentandkilowatt-hour salesgrowthobjectives intoday'scom-petitiveenergymarket,it'sessen-tialthatwekeepthepriceforourelectricserviceaslowaspossible.

Forthatreason,weannounced atlastyear'sannualmeetingourob-jectiveofnotraisingbaseratesforatleastthebalanceofthisdecade.Althoughourmarketing andeconomicdevelopment programs continuetoproduceimpressive re-sults,wewillbeexpanding theseef-fortswithnewinitiatives thisyear.Forexample,weplantobroadenourpresentrateincentive programbyintroducing newflexiblepric-ingoptionsdesignedtoencourage existingbusinesscustomers toexpandtheiroperations andtoattractnewindustries toourser-vicearea.Andwewillbesteppingupoureffortstofindnewenergy-efficient electrical usesthatwillprovidebenefitsforresidential, commercial andindustrial customers.

Customerserviceisthekeyele-mentinthesuccessofPP&L'smarketing andeconomicdevelop-mentprograms.

Forexample,hav-ingmorethan80percentofallnewresidential customers chooseelectricspaceheatingresultsfromdedicated PP&Lpeoplewhohaveearnedtheconfidence ofcusto-mers.Thiscommitment tosuper-iorcustomerservicealsowasrec-ognizedinarecentPennsylvania PublicUtilityCommission reportwhichconcluded thatPP&Lhasthelowestcustomercomplaint rateamongPennsylvania electricutilities.

AtPP&L,concernforcustomers goesbeyondbeingareliableelec-tricitysupplier.

Itextendstobeinganeighborwhorespondsintimeofneedandfinancial hardship.

That'thepurposeofourcustomerassis-tanceprogramssuchasOperation HELPandCARES.That'swhatismeantwhenwesaythatPP&L'smarketing programsarebasedonatradition ofresponding toourcustomers'eeds.

plantsdemonstrated theenormouslong-term benefitofthecompany's generating capacity.

Ascompeti-tioncontinues toincrease, thead-vantageofhavingsufficient generating capacitytomeetcur-rentandfuturerequirements becomesclearlyevident.Thisadvantage isparticularly decisivewhenthatgenerating capacityisoperatedefficiently andconsistsofagoodmixoflow-costcoalanduraniumfuels.BothSusquehanna nuclearunitsoperatedverywellin1986,contin-uingtheexcellent recordofper-formancethatthesetwo1,050,000-kilowattgenerating unitshaveachievedsincegoingintocommer-cialoperation.

Amongallboilingwaterreactorsinthenation,Sus-quehannaUnit2rankedfirstintotalgeneration overthepasttwoyearsandUnit1rankedsecond.Eventhoughbothunitsunderwent refueling outagesin1986,theyproduced11.3billionkilowatt-hourslastyearandreceivedanear-perfect ratingintheNuclearRegulatory Commission's System-aticAssessment ofLicenseePer-formancereport.Thecontinued excellent perfor-manceofallofPP&L'sgenerating plantsenabledthecompanytosell11.3billionkilowatt-hours ofmost-lycoal-andoil-fired electricpowertoneighboring utilities lastyear,resulting inbenefitstoourcus-tomersofabout$35million.Becauselow-costelectricgenera-tionisessential inmeetingourcorporate objectives, wehavesetagoaltokeepPP&L'sperformance atthelevelofthebestintheindus-try.Inadditiontoallocating re-sourcestoachieveevenhigherplantavailability, weplantospendabout$140millionoverthenextfiveyearsaspartofourprogramtoextendtheusefullivesofournon-nuclear powerplantsaslongaspossible.

Theseinitiatives aredesignedtoassurethatPP&Liswell-posi-tionedtoprosperinamorecom-petitivebusinessenvironment.

Whilemanychallenges lieahead,webelievethatwehavebuiltasolidfoundation forthecompany's continued success.Ourconfidence isbasedonthetalentsofdedicated PP&Lpeopleandthecontinued supportfromyou,ourshareowners.

Intheyearsahead,wewillcontinuetodoallwecantoassureaprosperous futureforourserviceareaandforyourcompany.Respectfully submitted, Generation Againlastyear,theoutstanding performance ofPP&L'spowerRobertK.CampbellFebruary27,1987 YEARINREVIEWOperations Employeesafety-andmorespecifically, afatality-free workenvironment-continues tobethecompany's numberoneoperating priority.

In1986,thecompanyachieveditssixthstraightcalendaryearwithoutanemployeefatality.

Whilethecompanyprovidesthetools,equipment andtrainingneededtohelpemployees achieveasafeworkingenvironment, itremainsforeveryemployeetomakeaconcerted efforttomakesafeworkhabitsapartofeverything theydo-bothonandoffthejob.Thirteenworkgroupsinthecompanyachievedmorethanamillionwork-hourswithoutalost-time accident.

Thecompany's safetyrecordwasagainamongthebestofthestate'ssevenmajorelectricutilities

-PP&Lhadthesecond-best lost-time accidentrecordamongitsPennsylvania peers.EarningsandDividends Earningsfor1986were$3.10pershareofcommonstockcomparedto$2.68for1985.Theimprovement inearningsresultedfromacombination ofincreased kilowatt-hour sales,cost-containment

measures, andanaggressive programtorefinance high-cost securities atalowercost.Thisreturnsearningstoaboutthesamelevelachievedin1984,whentheywere$3.12pershare.PP&L'squarterly dividendoncommonstockwasincreased onecentpershareto65cents,beginning withtheOct.1,1986,dividend.

Ithadbeen64centspersharesinceApril1,1985.SalesandRevenuesRevenuesfor1986were$2.19billion,up$212millionoverthepreviousyear.Theincreasecamefromhighersalesandfromthefull12months'ffect ofthe$121'illion rateincreasethecompanywasgrantedinApril1985.Astrongnew-home-building market-andarecord84percentofthosenewhomesusingelectricheat-helpedtoboostsalestoresidential customers by5percentfortheyear.Commercial saleswereup6.4percent,reflecting continued strengthamongretailandwholesale customers andothersinthesmall-business sectorinCentralEasternPennsylvania.

Aslightreboundinindustrial salesbeganatmidyearasthedeclineinsteelmanufacturing wasoffsetbygrowthinotherindustries.

Useofelectricity bythesteelindustrywasdown11.7percentin1986,whilesalestootherindustrial customers roseby2.9percent,foracomposite increaseofabout1percentovertheprioryear.Overall,kilowatt-hour salesincreased 8.2percentover1985.Slightlyoverhalfofthe2.3billionkilowatt-hour increaseresultedfromhighersalestootherutilities

-primarily underlong-term contracts.

SecuritySalesandEarlyRedemptions Theobjective ofPP&Lfinancing activities during1986wastotakeadvantage ofthelowerinterestanddividendratesthatwereprevalent inthecapitalmarketsthroughout theyear.Thecompanywasthusabletoretirehigh-cost securities, therebyreducingitsoverallcapitalcostsandimproving itsfinancial health.The$600millionof1986securitysalesconsisted offour$125millionofferings offirstmortgagebonds,withinterestratesvaryingfrom9percentto10.875percent,and$100millionof7percentseriespreferred stock.CustomerRepresentatives "Iwassurprised athowfastthePP&Ltelephone representative wasabletoarrangeforelectricservicetoournewhome.Wewereonatightschedule, butwewerehookedupontime.Ifeltthecompanyreallycaredaboutme."LynneRothwetter Residential CustomerQuarryvit le,Pa.

LouathaParham(left,foreground),

andSandraShelrlch(below),CustomerRepresentatives InPP&L'sLancaster DivisionServiceCenter.\CU4yh4rX,The79customerrepresentatives acrossPP&i'sserviceareaansweredmorethan1.2milliontelephone inquiries lastyear.About70percentofthecallsareroutine-requestsfornewservice,discon-nections, servicetransfers andpaymentarrangements.

Theother30percentcouldrangefrom"nolight"calls,tochildren's toystangledincompanylines,tolargebillinquiries orstormemergency calls.PP8Lcustomerrepresentatives arenotjustvoicesattheendoftelephone lines.Theyarepeoplewhogenuinely careaboutthecustomers whocontactthem.Foreverycall,customersatisfaction isthegoal.

Distribution Technician EdwardSmith(right),andSteno/Clerk ElaineJones(below),Inthecompany's Lancaster DivisionServiceCenter.//D4"4//Irr.~~~i~Althoughtheyaremorebehind-the-scenes, Distribution Engineering employees determine what'sneededtoserveacustomer.

Itmaybeapolenearanewbuildingandashortspanofwire,orathree-mile sectionoflinetobebuilttoreachanothercustomer's property.

Foreachinstallation, distribution technicians decidewhatmaterials areneededandthe"route"alinewilltake.EachjobisdesignedwithPP&L'sstandards andspecifications inmind,toprovidethesafestandmostreliableservicetofillacustomer's needs.

YEARINREVIEWDistribution Technicians During1986,thecompanyretiredatotalof$475.2millionofsecurities throughearlyredemption provisions:

~$225millionoffirstmortgagebondsintwoserieswithinterestratesof14percentand15.625percent.~$162.5millionofpreference stockinfourserieswithdividendratesrangingfrom13percentto15percent.~$87.7millionofpreferred stockinfourserieswithdividendratesrangingfrom10.75percentto14percent."MyprofitmarginisaffectedbywhatPPBL'stechnicians tellmeis,andisnot,feasibleinrunningelectricservicetooneofmynewhomes.ldependontheiradvice-andthey'eneverletmedown.Theyknowtheirbusiness."

Construction Expenditures Construction expenditures of$579millionareplannedduringthetwoyears1987and1988,eventhoughnonewgeneration facilities areunderconstruc-tion,orcontemplated.

About$227millionhasbeenallocated fornewconstruction andupgrading ofthecompany's transmission anddistribution systeminthenexttwoyears.Anotherlargeportion-$204million-isbudgetedforreplacing wornandobsoleteequipment, life-extension

projects, andprogramstoimprovetheperformance ofourfossil-fueled andhydroelectric generating units.Additionally,

$95millionisbudgetedforongoingimprovements andmodifications attheSusquehanna nuclearplantduring1987and1988.PowerPoolReachesNewPeakBecauseofmoderateweatherconditions, nonewwinterorsummerpeakpowerdemandswererecordedbyPP&Lin1986.PP&L'sannualpeakdemandoccursduringthewinterbecauseofitscustomers'igh electricheatload.However,sultryJulyweathertothesouthofPP&L'sserviceterritory, andtheresulting airconditioning load,pushedthepeakdemandonthePennsylvania-NewJersey-Maryland Interconnection toanewhighof37.5millionkilowatts onJuly7,upfrom37millioninAugust1985.RobertWennerPresIdent WennerConstruction Corp.Wyomlsstng Hills,Pa.HoltwoodUnitGetsLife-Extension OverhaulStudiesconducted byPP&Lhaveshownthatitismoreeconomical toupgradeandcontinuetooperatethecompany's existinggenerating unitsratherthanreplacethemwithnew,morecostlyunits.Aftermorethanthreedecadesofreliableservice,the73,000-kilowatt coal-burning unitatthecompany's Holtwoodplant,locatedalongtheSusquehanna RiverinLancaster County,wasshutdowninMayforamajoroverhaulaimedatextending itsusefullife.Duringthesix-month overhaulthe32-year-old unit,whichburnsamixtureofanthracite andpetroleum coke,underwent

$13millionofrenovations, including majorrepairstoitsboiler.Thisworkisexpectedtoextendtheunit'slifeby15to20years.BrunnerIslandUnitis8GYearsOLdUnit1atPP&L'sBrunnerIslandgenerating plantlocatedalongthewestbankoftheSusquehanna River,15milesbelowHarrisburg, marked25yearsofcommercial operation onJune22,1986.The334,000-kilowatt bituminous-coal-burning unitwasthefirstofageneration oflarge,moreefficient, unitsbuiltbyPP&Lduringthe1960sand1970stomeetincreasing electrical demandduringaperiodofrapideconomicgrowthinthecompany's serviceterritory.

YEARINREVIEWPPd'cLHadLowestComplaint RateAreportpreparedbythePennsylvania PublicUtilityCommission inJune1986showedPP&Lhadthelowestcustomercomplaint rateofanyelectricutilityinthestateduring1985.According tothereport,thenumberofconsumercomplaints againstPP&Ldropped22percentfrom1984to1985,leadingtothelowestinformalcomplaint rateinthestate.Additionally, PP&L'smediation cases-instances inwhichthePUCiscalledonbyacustomertointervene

-droppedby51percent,givingPP&Lthesecond-best mediation rateinthestate.Right-of-Way AgentsMarketing andEconomicDevelopment Marketing PP&L's"product,"

reliableelectricservice,inwaysthatemphasize itsvaluetothecustomer, willenablethecompanytomakeeffective useofitsgenerating capability.

Marketing isanaturaloutgrowth ofthefundamental premisethatabundant, reliableandrelatively inexpensive electricenergywillhelpsparkrenewedeconomicprosperity inCentralEasternPennsylvania.

Theobjectives ofthecompany's marketing effortsinclude:~Increasing kilowatt-hour salestoservice-area customers toachievethelowestpractical costperkilowatt-hour tocustomers forelectricenergy.~Enhancing economicprosperity ofPP&L'sserviceareabyproviding optionsandchoicesforcustomers tobestmeettheirindividual needsforelectricservice."IhavealotofideasabouthowI'dliketoseemylanddeveloped.

lalwayscountonathoroughdiscussion withmyPP&Lright-of-way agent,though,toprovidemewithpractical, opera-tionalconsiderations.

He'sagooda//y."Thecompany's marketing strategyisdesignedtocapitalize ontheuniqueproperties ofelectricity.

Itisaprecisely measurable, extremely versatile andcontrollable formofenergywhosevaluefarexceedsitscost.Thevaluetothecustomerliesintheabilityofelectricenergytoimproveproductivity inbusinessorindustry, toprovideamorehealthful andsafeworkingenviron-ment,toreduceoverallenergycosts,andtoenhancelivingstandards whencomparedtoalternative formsofenergy.ToPP&L,marketing meansenhancing theeconomicprosperity ofitsserviceterritory

-byattracting andholdingjob-producing businesses andindustries.

Applications ofelectricenergythatmakethebestuseofPP&Lcoalandnuclearpowerplants-througharound-the-clock operation

-canbefoundinbusinessandindustry.

Thethrustofthecompany's marketing strategyistoseekoutthoseapplications andtodemonstrate toexistingandprospective customers howelectricenergycanimprovetheirproductivity andbettertheircompetitive posture.Thecompanyisworkingthroughpartnerships withthestate,regionaleconomicdevelopment groups,andmunicipalities toachieveeconomicimprovement.

CharlesKelterRealEstateDeveloper

Danvllle, Pa.JobGoalExceededThe1986corporate goalofhelpingPP&L'sserviceterritory achieveanetincreaseof5,000newjobswasagainexceededas165neworexpanding firmsprovidedanetincreaseofmorethan6,500jobs.PP&L'seconomicdevelopment activities helpedproducemorethan17,500newjobsinCentralEasternPennsylvania duringthepast36months.

Right-of-Way AgentErnieRamirez(tanJacket),Bfoomsburg ServiceCenter,withDanvlllepropertyowner.'/l0'~mi'./~a.,s~.CMQ*f.4PP&Lcannotjustbringinitsequipment andplaceitsfacilities whereveritwouldlike.Wheneverajobcallsforcrewaccesstoprivateproperty, right-of-way representatives mustnegotiate fortherighttoenterorbuildonacustomer's land.Whetherit'sapolelineortrenchalongapropertyline,orlandonwhichtobuildnewtransmission facilities, right-of-way agentsarecalledontousetheirnegotiating skillsanddiplomacy toreachareasonable consensus betweenPP&L'sandaproperty-owner's interests.

Distribution HandymanRussellBennett(right),Harrisburg DivisionDistribution Department, andLehlghDivisionConstruction Mechanics RobertLawler(below,onplatform),

andNellSchaffer(below,right),inAllentown.

~3e.,I~It'stheworkersinthetrenchesandthelinemaninthebuckettrucksthatareprobablythemostvisibleofPPBL'semployees.

Theorangeandgraytrucks,andtheircrews,seemtobeeverywhere.

InPP8L's67-yearhistory,though,therehasnotbeenmuchchangeintheassignment

-getelectricservicetothecustomer.

Qualityfacilities mustbebuilt,orrepaired, inatimelymanner,withpriorityconsideration giventodoingitsafely,andwiththeleastinconvenience tothepublic.NobodydoesitbetterthanPP8Lemployees.

YEARINREVIEWDistribution Crews188tr'esults Thecompany's economicdevelopment effortsin1986alsoboostedelectricenergysalesmorethan164millionkilowatt-hours.

Marketing effortswithindustrial andcommercial customers addedmorethan104millionkilowatt;hours, andresidential marketing programsaddedanother28millionkilowatt-hours.

Overall,296millionkilowatt-hours ofincreased salesresultedfromthecompany's economicdevelopment andmarketing programs.

Thisfigureexceededsalesgoalsby22percent."Successinourbusinessisbasedonhighproduc-tion.PP&Lisequippedandreadytogetthejobdone.IfoundIcouldcountonqualityandreliability fromtheHarrisburg crews.Theygavetheirword,andtheyperformed."

~,'.fj!StevenShenenberger GeneralSuperintendent E.B.AbelConstruction Co.Mountvllle, Pa.RatesandRegulatory MattersEarlyin1986,PP&Lannounced itsobjective ofimproving earningsperformance withoutincreasing retailbaseratesfortheremainder ofthedecade.Thecompanyismeetingthisobjective largelythroughongoingcost-containment

measures, refinancing high-cost securities atlowercost,andthroughincreased sales.Management AuditResultsInApril,thePUCreleasedareportontheauditofPP&L'smanagement andoperations.

Theauditwasconducted byErnst&Whinney,aWash-ington,D.C.,publicaccounting andmanagement consulting firm.Management studiesofallmajorPennsylvania electricutilities areperiodically arrangedbythePUC.Theaudit,whichbeganinmid-1984, examinedmostofthefunctions ofthecompanyandareasofspecialconcerntothePUC-suchasstaffingandcompensation.

Thereportdidnotprovideanoverallconclusion aboutPP&L'sperformance.

Instead,thereportrankedkeytaskareas-suchascorporatemanagement, financial management andcustomerservice-inoneoffivecategories:

optimum,aboveaverage,average,belowaverageandunsatisfactory.

Thirtyofthe34rankingswereaverageorabove,withnoneintheunsatis-factorycategory.

Alongwiththerankings, theauditorsalsosuggested improvements, mostofwhichthecompanyagreedtoimplement oralreadyhadunderway.RateCaseAppealDeniedInOctober,Pennsylvania's Commonwealth Court,bya6-to-1vote,deniedanappealPP&Lfiledin1985afterthePUCruledthatthecompanywasentitledtoonlyabout$121millionofits1984requestfor$330millioninhigherrates.Thecompanyhadsoughttherateincreasemainlytoreflecttheoperating costsofSusquehanna Unit2.ThePUCcuttherequestafterrulingthatUnit2givesthecompanytoomuchgenerating capacityatthistime.Inmid-November thecompanyannounced thatitwouldnotaskthePennsylvania SupremeCourttoreviewthedecisionofthelowercourt.RatesDecreased by$88MillionOnJan.1,1987,thecompanydecreased ratesby$32milliontoreflectareduction infederalincometaxesfor1987,andtoadjustforotherchangesinPP&L'scostofservingcustomers.

Thedecreaseincorporated theeffectoflowerfederaltaxratesbeginning inJanuary,aswellasadecreaseinthestatetaxsurcharge andanincreasein YEARINREVIEWthecompany's energycostrate-thelattertwoofwhichwouldnormallyhavebecomeeffective inApril.RatherthanloweringratesinJanuary,thenadjusting themagaininApril,thecompanyaskedthePUCtopermitallofthechangestobecomeeffective atthebeginning of1987-withtheneteffectoftheadjustments beinganaverage1.8percentdecreaseinrates.Thecompanybelievestheone-timeadjustment contributes toamorestableeconomicatmosphere inCentralEasternPennsylvania andreinforces PP&L'sindustrial development andmarketing efforts.CustomerContactRepresentatives Susquehanna NuclearPlantAnumberofsignificant eventswererecordedforthecompany's Susquehanna nuclearplantnearBerwick,Pa.Thetwin1,050,000-kilowatt boilingwaterreactorsgenerated morethan11billionkilowatt-hours ofelectricity during1986.Bothunitsattheplantranextremely well.Fromearly1985,whenitwentintocommercial operation, throughtheendof1986,Unit2ledallboilingwaterreactorsinthenationintotalelectricity produced.

InsecondplaceonthatlistwasUnit1.SecondRefueLing OutageforUnit1Unit1wasshutdownFeb.15,1986,tobeginitssecondrefueling outagesinceitbegancommercial operation inJune1983.Duringtheshutdown, 296ofthereactor's 764nuclearfuelassemblies werereplacedwithnewones.Plantcrewsalsoperformed morethan300requiredinspection teststhatcanbeperformed onlywhiletheunitisnotgenerating electricity.

Inall,morethan2,000individual tasks,including maintenance andmodifications, werecompleted.

TheunitreturnedtoserviceApril23-morethantwoweeksearlierthanoriginally scheduled.

"I'dneverhadoccasiontoseetheinside ofawaterheater,butPP8L'srepre-sentative pointedouthowwecouldlowerenergycostsbysettingourhotwatertemperature backafewdegrees.It'sattention todetailthatsetsPPSLapart."FirstRefueLing ForUnit8Endingoneofthemostsuccessful initialoperating cyclesinthehistoryofthenation'snuclearpowerprogram,Unit2atSusquehanna wasshutdownAug.9tobeginitsfirstrefueling.

Morethan300ofits764fuelbundleswerereplaced, andmorethan2,800tests,maintenance andmodification taskswereperformed duringtheshutdown.

TheunitwasreturnedtoserviceonOct.29,twodaysunderthetimeallotted.

Emergency DriLLSuccessfuL PP&Lemployees againsuccessfully demonstrated totheNuclearRegulatory Commission thattheyarecapableofprotecting thepublicintheeventofanaccidentattheSusquehanna plant.NRCobservers madethatdetermination afteraday-longdrillheldinApril1986totesttheemergency preparedness skillsofPP&Lpersonnel.

Full-scale, NRC-observed drillsareheldannuallyatSusquehanna.

In1986therewasonlylimitedparticipation bythePennsylvania Emergency Management AgencyandLuzerneCountyandColumbiaCountyemergency organizations.

Stateagencies, municipalities andschooldistricts

-whicharerequiredbylawtoparticipate everytwoyears-willjointhe1987drill.Duringthedrill,PP&Lpersonnel, and30representatives oftheNRCresponded toaspecially preparedscenarioforwhichdetailswerenotdisclosed MargaretFureyResidential CustomerClarksGreen,Pa.12 CustomerContactRepresentative FrankSmith(left),NorthernDivisionServiceCenter,Scranton, andServiceman JackAelchert(below),CentralDivisionServiceCenter,Hazfeton.

Servicemen TherearenotypicaldaysforPP&Lservicemen.

Onedaytheymayworkonoverduebillcollec-tion,anothertheymaybechang-ingmetersorlocatingunder-groundelectriccableforexcavators.

Servicemen havemanyopportunities topromotegoodcustomerrelations

-tomanycustomers theyarePP8L.~I)i'henacustomerhasaquestionorproblemthatcan'tberesolvedoverthephone,customercontactrepresentatives callinpersontotrytoprovidesatisfaction.

Acallmaybeassimpleasshowingacustomerhowsettingthethermostat backonawaterheatercouldlowerenergycosts,orascomplicated asresolving largebillcomplaints, correcting backbillingproblemsorcoordinating facilityrelocations orserviceinterruptions.

Customercontactsaremultifaceted

-butrepresenta-tivesstaywithacaseuntilthecustomerissatisfied oraproblemiscaredfor.

MeterReaderPaulCondefer(right),NorthernDivisionServiceCenter,Scranton, andCARESRepresentative TushannaHamilton(below),Susquehanna DivisionServiceCenter,Montoursvllle.

CARESRepresentatives PP&L'sCustomerAssistance andReferralEvaluation Service(CARES)beganasapilotventurein1980andwasimplemented systemwide in1982.CARESrepre-sentatives provideguidanceandassistance tocustomers who,becauseoflegitimate hardships, can'tpaythefullamountoftheirelectricservicebills.r',~draaPI]Becauseoftheirconsistent once-a-month appearance inanyneighborhood, PP&Lmeterreadershavemanyopportunities topromotegoodcustomerrelations.

Althoughtheirprimaryobjective istoreadmeters,theyarealsogoodwillambassadors andoftenprovidecurrentinformation aboutcompanypoliciesoreventsthathaveanimpactonthepublic.Becausetheymustroutinely coveramillionmetersover10,000squaremileseverymonth,PP&Lmeterreadersmustberesourceful, findingwaystoovercomeobstacles

-including unfriendly dogsandunfriendly weather-incarryingouttheirassignments.

YEARINREVIEWtoparticipants untilthesimulated incidents occurred.

Drillactivities tookplaceattheplant,atPP&L'scorporate officesinAllentown, andataMediaOperations CenterattheBerwickYMCA.MeterReaders"I'ebeenimpressed bythefriendliness ofPP8L'smeterreaders.Oneem-ployeetookthetimetoexplainhowhishand-held, computerized recorderworked.Hetoldmehowusingthedeviceimprovedproductivity andhelpedkeepdownservicecosts.llikedthat."TrainingCenterIsFirstTrainingAcademyMemberTheTrainingCenterattheSusquehanna plantinJuly1986becametheinitialmemberoftheNationalAcademyforNuclearTraining.

PP&L'spro-gramatSusquehanna wasthefirstinthenationtobefullyaccredited inwhatwilleventually beanetworkofcampusesatallthenation'snuclearutilities.

TheNationalAcademywasestablished bytheInstitute ofNuclearPowerOperations tofocusandunifytrainingeffortsatU.S.nuclearpowerplants.INPOisanassociation formedin1979byutilities owningnuclearfacilities topromoteimprovements innuclearplantsafetyandreliability.

Tobecomeamemberoftheacademy,autilitymusthaveitstrainingprogramsaccredited byanINPO-appointed independent panel.TheNRChasformallyendorsedtheacademyconcept.Employees JoinNationalSafetyEliteThe725NuclearDepartment employees attheSusquehanna plantwererecognized inApri11986 forbeingamongthestrongest safetyachievers inthecountrywhentheyaccumulated 4millionconsecutive employee-hours withoutalost-time accident.

Theachievement breaksacompanyrecordandcreatesanewPP&Lsafetystandardforpowerplants.NeverbeforehadaPP&Lplantgonethatlongwithoutalost-time accident.

TheNationalSafetyCouncilliststheSusquehanna recordamongthebestofanyAmericanpowerplant,including nuclear,fossil-fueled orhydroelectric.

Atthebeginning of1987,plantemployees reachedthe5millionwork-hour markwithoutalost-time accident.

DebraDICindloResidential CustomerDunmore,Pa.WaterSupplyAgreement ReachedAwatersupplyagreement finalized inJuly1986betweentheSusquehanna RiverBasinCommission andtheU.S.ArmyCorpsofEngineers willrelievethecompanyfrombuildinganexpensive reservoir tomakeupforcoolingwaterlossesattheSusquehanna plantduringperiodsoflowriverflow.UnderSRBCregulations, electricgenerating stationsthatusecoolingtowerswhichevaporate watercouldberequiredtoshutdowninperiodsoflowriverflowunlesstheyhaveasupplyofreplacement water.Undertheagreement, PP&LwillpayaportionofthecostofraisingthelevelofCowanesque LakeinTiogaCountyby85feet.Themodification willallowsufficient waterstoragetoreplace-duringlow-river-flow conditions

-waterfromtheSusquehanna Riverevaporated bytheplant'scoolingsystem.Susquehanna ReportsAreHighlyFavorable Twoindependent reportsonSusquehanna in1986reflected favorably onthemanagement andoperation ofthenuclearplant.Thecompanyreceivednear-perfect gradesintheNRC'sSystematic Assessment ofLicenseePerformance.

Inthatreport,Susquehanna receivedthehighestrankingpossibleinnineof10categories examinedandthesecond-highestrankingintheremaining category.

ThegradesgiveSusquehanna ahighercurrentaverageSALPratingthananyothernuclearplantinthenation.

YEARINREVIEWInanotherreport,citingmanagement effectiveness andstrongprofessional development

programs, INPOconcluded thatahighlevelofprofessionalism isevidentatSusquehanna.

Thereportalsonotedtheimpressive condition andcleanliness oftheplant,andcitedgoodpractices atthefacility.

Italsoofferedsuggestions inthoseareaswhereoperations couldbeenhanced.

Troublemen Management ChangesJohnM.Chappelear, director-Pension Funds,wasappointed vicepresident-Investments andPensionsonJune1,1986.Chappelear joinedPP&Lin1978asmanager-Pension FundInvestments.

Hewasnamedmanager-F<inancial Department Administration in1981,andthatsameyearbecamedirector-Pension Funds.CharlesF<.Russoli,seniorvicepresident-F<inancial, wasnamedexecutive vicepresident-F<inancial effective Nov.1,1986.Russolibecameexecutive vicepresident aftermorethanthreedecadeswithPP&L.Hejoinedthecompanyin1955asagraduatetrainee.AfterservingtwoyearsintheU.S.Army,hereturnedtoPP&Landheldvariousdataprocessing positions untilhispromotion tofinancial analystin1965.Hewasnamedmanager-Budgets in1969,manager-Financial PlanningandReporting in1971,vicepresident-Finance in1979,andvicepresident andtreasurer in1981.Hebecameseniorvicepresident-Financial andchieffinancial officerin1984.WilliamR.White,vicepresident-Power Production retiredonJan.1,1987,afternearly37yearsofcompanyservice.Whitebeganhiselectricutilitycareerin1950asaresultsengineeratthecompany's formerStantonplant.Headvancedthroughseveralpositions therebeforebeingnamedassistant superintendent oftheplantin1963.Hewasnamedsupervisor ofoperations atthecompany's BrunnerIslandplantin1969andplantsuperintendent in1970.Hewasnamedmanager-Power Production in1973andvicepresident in1984.Succeeding White,ThomasM.CrimminsJr.becamevicepresident-Power Production onJan.1,1987.CrimminsjoinedPP&Lin1981asmanager-Nuclear PlantL<ngineering after10yearswiththeGeneralPublicUtilities organization inNewJersey.HislastpositionwithGPUwasmanager-Engineering ProjectswithGPUNuclearCo.Hehadpreviously servedfiveyearsintheNavynuclearsubmarine program.Crimminsservedassuperintendent oftheSusquehanna nuclearplantfromJuly1,1985,untilhisnewappointment.

"IcalledPP&Ltoreportapoweroutage.ThepersonItalkedtoaskedifl'd heardaloudcrack-thesoundofafuseblowing-whichIdid.Fifteenminuteslater,aPP8Lemployeeappearedinmyyardandreplacedthefuse.AIIveryefficient!"

BoardofDirectors TheVeryRev.DanielG.Gambet,OSFS,president ofAllentown CollegeofSt.FrancisdeSales,waselectedadirector, effective Nov.1,1986.FatherGambetjoinedAllentown Collegeasacademicdeanin1964afterservinginvariousteachingandadministrative positions atthehighschoolandcollegelevelsforsevenyears.Hebecamevicepresident andacademicdeanatAllentown Collegein1970,andservedasprovincial oftheEasternProvinceoftheOblatesofSt.FrancisdeSalesfrom1972-1978 inadditiontohisdutiesasvicepresident ofthecollege.HewasnamedAllentown Collegepresident in1978.CharlesE.Russoliwaselectedadirectorofthecompany,effective Nov.1,1986,inanactionconcurrent withhisappointment asexecutive vicepresident.

ClaudeButlerRestdentlat CustomerEmmaus,Pa.

Troubteman JohnFilo(left),andServiceDispatcher RandySchelrer(below),LehlghDivisionServiceCenter,Allentown.

ServiceDispatchers Duringnon-business hours,allcallstoPP&Lcustomerservicenumbersareansweredbyservicedispatchers.

Theyaretheoneswhocustomers reachwhenthereistroubleafter5p.m.Dispatchers alertforemen,crewsandservice-menwhenstormscauseserviceinterruptions.

Blowntransformer fusesareprobablythemostcommoncausesofiso-latedcustomerserviceinterruptions.

Itcouldbeasquirrelorbirds,abranchoralightning stroke,thatshortsoutthelineandblowsthefuse,protecting thecustomer's serviceentrance.

Troublemen areondutyaround-the-clock torespondtocustomerproblems.

It'susuallythetroubleman, orthecrewsenttorestoreserviceafterastorm,thatpro-videsthebestexamplethatPP8Lisalwaysonthejob.

FINANCIAL REVIEWReviewoftheCompany's Financial Condition andResultsofOperations Thisreviewprovidesadiscussion oftheContpany'8 financial condition andresultsofoperations.

Additional information onthesemattersissetforthinthefinancial statements, schedules andnotesonpages8S-S7andtheselectedfinancial andoperating dataonpages88and89.84.00EARNINGSANDDIVIDENDS PERSHAREBatlaraPerSharcResultsofOperations Earningspershareofcommonstockwere$3.10in1986,$2.68in1985and$3.12in1984.The1985dipinearningsprincipally wastheresultofaratedecisionbythePennsylvania PublicUtilityCommission (PUC)inApril1985.TheCompanyhadaskedthePUCforarateincreaseof$330milliontosupporttheadditional costsassociated withoperating Susquehanna Unit2,whichwasplacedinserviceearlyin1985,andotherincreased costsofdoingbusiness.

However,thePUCallowedonly$121millionoftherequested increase.

TheCompanyappealedthedecisiontotheCommonwealth CourtofPennsyl-vania(Court).InOctober1986,theCourtdeniedtheCompany's appealandaffirmedthePUC'sApril1985decision.

NeithertheCompany,noranyoftheotherpartiestotheappealsoughtareviewbythePennsylvania SupremeCourt.Toimprovefinancial health,theCompanyimplemented thefollowing programswhichresultedinearningsreturning toaboutthelevelachievedin1984:~Increaseinitiatives tocontainoperating costsinareaswherethequalityofservicetocustomers wouldnotbeaffected~Refinance high-cost securities atalowercost~Enhancemarketing effortstoincreasesalesTheCompanyisseekingtomaintainbaseratestability byavoidingretailbaserateincreases fortheremainder ofthe1980s.Costcontainment andanaggressive marketing programarekeyelementsinachieving thisobjective andmaintaining financial strength.

EnergySalesandOperating RevenuesTotalelectricenergysaleswere2.3billionkwh,or8.2%,higherin1986thanin1985,reflecting increased salestocustomers andincreased contractual salestootherutilities.

Contractual salestootherutilities represent theenergysoldtoAtlanticCityElectricCompanyfromtheSusquehanna unitsandtheenergysoldtoJerseyCentralPower&LightCompany(JCP&L)fromalloftheCom-pany'sgenerating units.Thesesaleswere1.3billionkwh,or31.9%,higherin1986thanin1985,reflecting primarily afullyear'ssalestoJCP&L.SalestoJCP&LbeganonApril17,1985.Electricenergysales(excluding contractual salestootherutilities) were1.0billionkwh,or4.2%,higherin1986thanin1985.Salestoresidential cus-tomersincreased 417millionkwh,or5.0%,reflecting increased newhomebuildingwithhighacceptance ofelectricheat.Continued economicgrowthwasexperienced inthecommercial sectorwithsalestothisclassofcustomers increasing 431millionkwh,or6.4%.Salestoindustrial customers increased 79millionkwh,or1.0%.Adeclineinsalestothesteelindustryof121millionkwh,or11.7%,wasmorethanoffsetbyanincreaseinsalestootherindustrial customers of200millionkwh,or2.9%.TariffssubjecttoPUCjurisdiction accounted forapproximately 84%oftheCompany's revenuesin1986.Theremaining 16%ofrevenuesareregulated bytheFederalEnergyRegulatory Commission (FERG).TheFERCalsoregu-latesinterchange powersaleswhichareclassified asacredittooperating expenses.

Billingstocustomers underPUCjurisdiction includebaseratechargesalongwithsupplemental chargesforenergycostsandstatetaxesoverthelevels3.002.001.008283848586~Earnings~Dividends declaredCOMMONSTOCKBOOKVALUEVS.MARKETPRICE(YearEnd)840DollarsPcrSharc3020108283848586~Bookvaluepershare~Marketpricepcrshare includedinbaserates.StartingonJanuary1,1987,anewIncomeTaxAdjust-ment(ITA) passesthroughtothesecustomers theeffectoflowerincometaxesresulting fromtheTaxReformActof1986(TaxAct).BillingstoFERCcustomers (excluding contractual salestootherutilities) includebaseratechargesandasupplemental chargeforfuelcostsoverthelevelincludedinbaserates.Detailsofthechangesfromtheprioryearinoperating revenuesareshownbelow.Haserateincreases forcustomers underthejurisdiction ofthePUCwentintoeffectAugust1983andApril1985.InDecember1985,theCompanysolditssteamheatplantandassociated distribution systemintheCityofHarrisburg.

Inprioryears,revenuesfromsteamheatoperations werelessthan1%oftheCompany's annualtotaloperating revenues.

SOURCESOFENERGY50BillionsofKuh4030ChangesinOperating Revenues198619851984(lifiLlionsofDollars)20ElectricBaserateincreases.

Recoveryoffuelandenergycosts..Changeincustomerusage.........

Contractual salestootherutilities

..Other(principally taxsurcharge)

..TotalelectricSteamheatTotal.$80.449.638.359.5(10.1)217.7(5.3)$212.4$138.250.313.1200.812.1414.5(0.8)$413.7$257.5(17.0)31.113.328.1313.01.4$314.410828384858G~Hydroandpurchased power~Oil.fired generation

~Nucleargeneration

~Coalfiredgeneration NetCostofEnergyIn1986,theoutputfromtheCompany's generating unitswas41.5billionkwh,adecreaseof1.2billionkwhfrom1985.Thedeclinereflectsgeneration lostduringrefueling outagesforbothoftheSusquehanna nuclearunits.TheCompany's shareofthenuclearunits'utput was10.2billionkwhin1986.Coal-fired unitsgenerated about25.2billionkwhandthebalanceoftotalgeneration camefromoil-fired andhydrounits.Fuelexpensein1986was15.1%lowerthanin1985dueprincipally tothelowercostofcoalandoil.Theaveragecostoffuelperkwhgenerated bycoal-fired stationswas6.2%lowerin1986thanin1985,whilethefuelcostperkwhofoil-fired generation declined41.0%.Theamountreceivedforinterchange powersalesin1986was$298.2millionlessthanin1985duetothelowerquantityofenergysoldandareduction inthesellingprice.Interchange salesin1986were11.3billionkwh,adecreaseof5.0billionkwh,or30.5%,from1985.Thedecreasewasprimarily attributable tothereduceddemand,byinterconnected utilities, forenergyfromtheCompany.Theaveragepricereceivedforinterchange saleswas2.57centsperkwhin1986and3.62centsperkwhin1985.Thedeclineprimarily reflectstheimpactoflower-cost oilonthepricingofinterchange sales.W'agesanfjBenefits, OtherOperating CostsandDepreciation Wagesandemployeebenefitsandotheroperating costsincreased overtheprioryearinboth1986and1985reflecting inparthigherpricesandthecostsassociated withoperating Susquehanna Unit2.Higherdepreciation in1986reflectsthenormalannualincreaseassociated withtheuseofamodifiedstraight-line methodofdepreciating theSusquehanna nuclearplantalongwiththedepreciation ofnewfacilities.

DISPOSITION OFENERGY60BillionsofKuh40302010828384868G~Companyuse,linelossesandother~Interchange powersales~Contractual salestootherutilities

~Systemsalestocustomers IncomeTaxesTotalincometaxexpensewas$113millionhigherin1986thanin1985.Taxesfor1985werereducedbytheutilization oftaxlosscarryforwards ofapproxi-mately$100millionforbothfederalandstateincometaxpurposes.

Taxableincomein1986includedafullyear'seffectofhigherratespermitted bythePUCinApril1985andafullyear'seffectofcontractual salestoJCPErL.TheTaxActrepealstheinvestment taxcreditandreducestheamountofunusedinvestment taxcreditsthatcanbeusedtooffsetfuturefederalincometaxliabilities.

AftergivingeffecttotheTaxActandgeneration oftaxcreditsin1987ontransitional

property, theCompanyestimates thatapproximately

$146millionofunusedi'nvestment andpayroll-based creditswillbeavailable toreducefederalincometaxliabilities in1987andfutureyears.Foradditional information concerning incometaxes,seetheScheduleofTaxesonpage27andNotes5and15toFinancial Statements.

CayitaLExpenditure Requirements Theschedulebelowshowsactualconstruction andnuclearfuelexpenditures fortheyears1984-1986 andcurrentprojections fortheyears1987-1989.

Construction expenditures duringthethreeyears1984-1986 totaled$898millionandareexpectedtobeabout$871millionduringthethreeyears1987-1989.

812001,000800600400200CAPITALREQUIREMENTS Miltie<<<<ofDollarsConstruction andNuclearFuelExpenditures

-Actual--Projected-198419851986198719881989(Millions ofDollars)848586878889-Art<<al--Proj<rtrd-C3Other~Securityretirements

~Construction andnuclearfuelConstruction expenditures (a)Generating facilities (b).....Transmission anddistribution facilities......

Environmental

.OtherNuclearfuel(c).Total8493975691117204222002761037465$525$274$341104123131232412321518283296292353463$318$330$355$322$84$150$124$134$131SOURCESOFCAPITAL81200tt'l'ft)<pit<<rs 1,000(a)Construction plansarerevisedfromtimetotimetoreflectchangesinconditions.

Actualconstruction costsmayvaryfromthoseprojected becauseofchangesinplans,costfluctuations, environmental regulations andotherfactors.Construction expenditures includeAFUDCwhichisexpectedtobelessthan$25millionineachoftheyears1987-1989.

(b)Includesamountsspentin1984and1985tocompletetheSusquehanna unitsandamountsspentformodifications andimprovements toallgenerating facilities.

(c)Includesbothownedandleasednuclearfuel.800600400ALLozoance forFundsUsedDuringConstruction (AFUDC)TheSusquehanna unitsaccounted forabout)166millionofthetotal$169mil-lionofAFUDCrecordedduring1984.ThetotalamountofAFUDCrecordedin1985wasnegativeduetoanadjustment oftheincometaxcomponent ofAFUDCattributable totheutilization oftaxlosscarryforwards.

Withnonewgenerating facilities underconstruction, theamountofAFUDCfor1986totaledabout$11millionandisnotexpectedtobematerialintheforeseeable future.SeeNote6toFinancial Statements foradditional information concerning AFUDC.200848586878889-Art<<<<t--f'rojrrtr<t-~Capitalleaseobligations

~Outsidefinancing (salesofdebtandequitysecurities)

Internalsources(principally fromoperations plusAFVDClessdividends) 20 Financing Duringthethreeyears1984-1986, theCompanysoldabout$1.2billionofsecurities andalsoincurred$241millionofobligations undercapitalleases(primarily nuclearfuel).TheCompany's 1986financing programinvolvedthesaleof$600millionofsecurities undertaken primarily totakeadvantage ofimprovedconditions inthecapitalmarkets.About$475millionofhighcostsecurities wereredeemedwithlowercostsecurities therebyreducingtheCompany's overallcostoffinancing.

Detailsoftheamountofsecurities soldandredeemedandotherinformation onsourcesandusesoffundsduring1984-1986 aresetforthintheStatement ofChangesinFinancial Positiononpage26.TheCompanypresently estimates thatoutsidefinancing duringthethreeyears1987-1989 willbeabout$600million,oraboutone-halfoftheamountrequiredduringthepriorthreeyears.F<undsfromsecurities salesandfrominternalsourceswillbeusedtofinanceconstruction expenditures, repay$97millionofmaturinglong-term debtobligations, meet$133millionofpreferred andpreference stocksinkingfundrequirements andfortheearlyretirement of$684millionofcertainhigh-cost issuesofpreference stockandlong-term debt.TheCompanyintendstoissueabout$170millionofsecurities in1987.Theexactamount,natureandtimingofsalesofsecurities in1987andsubsequent yearswillbedetermined inthelightofmarketconditions andotherfactors.Fundsgenerated frominternalsourcesareexpectedtoprovideabout61%oftotalfundsrequiredduringthethreeyears1987-1989 comparedwith44'Foduringthethreeyears1984-1986.

TIMESINTERESTCHARGESEARNED(12MonthsEndedEachQuarter)3TimrsEar<<rd(Pre Toz)8283848588Financial Condition TheCompany's overallfinancial condition continues toimprove.Earningspershareofcommonstock,at$3.10,havereturnedtoaboutthelevelexperi-encedin1984.Certainkeyfinancial ratios,whichareindicators ofliquidity, alsoshowedgains.TheratiooftheCompany's pre-taxincometointerestchargesincreased to2.8timesfortheyear1986.Thisisthehighestlevelforthisratiosince1979.ThecashflowcoverageoftheCompany's commonstockdividends was2.8timesfortheyear1986.Thisisthehighestlevelforthisratiosince1977.Certainprovisions oftheTaxActandapplication oftheCompany's ITAriderareexpectedtohaveanadverseeffectontheCompany's pre-taxinterestcoverageandinternalcashgeneration.

Theloweroveralltaxexpenseantici-patedduetothedeclineinthefederalincometaxratewillbepassedthroughtocustomers intheITA.Therepealoftheinvestment taxcredit,capitalization ofcertaincostspreviously deductible whenincurredandotherprovisions oftheTaxActwilladversely affectcashflow.Futurefinancial condition andearningsperformance willdependonmanyfactorsincluding unanticipated increases infuturecapitalrequirements, thelevelofeconomicactivityintheCompany's servicearea,futureactionbyrate-regulatory

agencies, possibleadverseeffectsofproposedaccounting changesbytheFinancial Accounting Standards Board(FASB)andpossiblecostsincurredinconnection withtheCompany's programofphasingoutaffiliated coal-mining operations.

CASHFLOWCOVERAGEOFCOMMONSTOCKDIVIDENDS (1211onths EndedEachQuarter)3TimesDiridrn<i<<Corrred ImpactsofInflation Inprioryears,theCompanyincludedcertainsupplementary information onchangingpricesinanunaudited notetotheFinancial Statements.

TheF<ASBrecentlydecidedthatpresentation oftheinformation wasoptional, andtheCompanyelectednottoincludeitinthisyear'sannualreportbecauseexperi-encehasshownthattheinformation generally wasnotused.Theprincipal effectsofpricechangesontheCompany's operations arediscussed inothersectionsofthisreview.8283848586 Management's ReportontheFinancial Statements Themanagement ofPennsylvania Power&,LightCompanyisresponsible forthepreparation, integrity andobjectivity ofthefinancial statements andallothersectionsofthisannualreport.Thefinancial statements havebeenpreparedinconformity withgenerally acceptedaccounting principles andtheUniformSystemofAccountsprescribed bytheFederalEnergyRegulatory Commission.

Inpreparing thefinancial statements, management makesinformedestimates andjudgments oftheexpectedeffectsofeventsandtransactions baseduponcurrently available factsandcircumstances.

TheCompanymaintains asystemofinternalaccounting controlsdesignedtoprovidereasonable, butnotabsolute, assurance thatassetsaresafeguarded andthattransactions andeventsareexecutedinaccordance withmanagement's authorization andarerecordedproperlytopermitpreparation offinancial statements inaccordance withgenerally acceptedaccounting principles.

Theconceptofreasonable assurance recognizes thatthecostofasystemofinternalaccounting controlsshouldnotexceedthebenefitsderivedandthatthereareinherentlimitations intheeffectiveness ofanysystemofinternalaccounting controls.

Fundamental tothecontrolsystemistheselection andtrainingofqualified personnel, anorganizational structure thatprovidesappropriate segregation ofdutiesandtheutilization ofwrittenpoliciesandprocedures.

Inaddition, theCompanymaintains aninternalauditingprogramtoevaluatetheCompany's internalaccounting

controls, policiesandprocedures astoadequacy, application andcompliance.

DeloitteHaskins&Sells,independent certified publicaccountants, havebeenengagedtoexaminetheCompany's financial statements andtorenderanopinionastowhethersuchfinancial statements, considered intheirentirety, presentfairlytheCompany's financial

position, operating resultsandchangesinfinancial

position, inconformity withgenerally acceptedaccounting principles.

Theirexamination isconducted inaccordance withgenerally acceptedauditingstandards andincludessuchprocedures believedbythemtobesufficient toprovidereasonable assurance thatthefinancial statements arenotmaterially misleading anddonotcontainmaterialerrors.TheBoardofDirectors, actingthroughitsAuditCommittee, overseesmanagement's responsibilities inthepreparation ofthefinancial statements.

Inperforming thisfunction, theAuditCommittee, whichiscomposedofdirectors whoarenotemployees oftheCompany,meetsperiodically withmanagement, theinternalauditorsandtheindependent certified publicaccountants toreviewtheworkofeach.DeloitteHaskins&SellsandtheinternalauditorshavefreeaccesstotheAuditCommittee andtotheBoardofDirectors, withoutmanagement present,todiscussinternalaccounting control,auditingandfinancial reporting matters.Auditors'pinion DeloitteHaskins+Sells Certified PublicAccountants OneWorldTradeCenterNewYork,NewYork10048TotheShareowners andBoardofDirectors ofPennsylvania Power&LightCompany:WehaveexaminedthebalancesheetsofPennsylvania Power&LightCompanyasofDecember31,1986and1985andtherelatedstatements ofincome,earningsreinvested, andchangesinfinancial positionforeachofthethreeyearsintheperiodendedDecember31,1986.Ourexaminations weremadeinaccordance withgenerally acceptedauditingstandards and,accordingly, includedsuchtestsoftheaccounting recordsandsuchotherauditingprocedures asweconsidered necessary inthecircumstances.

Inouropinion,suchfinancial statements presentfairlythefinancial positionoftheCompanyatDecember31,1986and1985andtheresultsofitsoperations andthechangesinitsfinancial positionforeachofthethreeyearsintheperiodendedDecember31,1986,inconformity withgenerally acceptedaccounting principles appliedonaconsistent basis.February4,198722 Statement ofIncome19861985(Thousands ofDollars)1984Operating Revenues(Note2)$2,188,925

$1,976,502

$1,562,782 Operating ExpensesNetcostofenergyFuel.Powerpurchases.........

Interchange powersales.WagesandemployeebenefitsOtheroperating costs.Depreciation.

Incometaxes(Note5)Taxes,otherthanincomeDeferredSusquehanna energysavingsnetofoperating expenses(Note3).Operating Income641,74090,879~289,422) 442,697280,986277,286155,073282,712160,8961,599,600 589,825756,295164,963~587,613333,645259,670272,147141,912243,160170,40529,0751,450,014 526,488720,670171,953~(647,186 245,437232,632219,002118,763185,784154,2061,155,824 406,958OtherIncomeand(Deductions)

Allowance forequityfundsusedduringconstruction (Note6).DeferredSusquehanna capitalcosts(Note3)..Incometaxcredits(Note5).Other-net.................................

IncomeBeforeInterestCharges(1,443)6,959~2,709)2,807592,182(51,490)31,74280,764~7,67053,346579,83464,743(718)62,623~4,830)121,818528,776InterestChargesLong-term debtShort-term debtandotherAllowance forborrowedfundsusedduringconstruction (Note6)290,78814,03612,795284,53826,872280,32833,740(22,189)(104,195)

NetIncomeDividends onPreferred andPreference Stock...EarningsApplicable toCommonStock......209,873318,90892,145292,024289,221290,61391,286300,10869,057281,051$199,327$226,758EarningsPerShareofCommonStock(a)..$3.10$268$312AverageNumberofSharesOutstanding (thousands)

..74,51874,51372,767Dividends DeclaredPerShareofCommonStock...(a)Basedonaveragenumberofsharesoutstanding.

$2.58$2.56$2.48Seeaccompanying Schedules andNotestoFinancial Statements.

BalanceSheetatDecember31Assets19861985(Thousands ofDollars)UtilityPlantPlantinservice-atoriginalcostLessaccumulated depreciation Construction workinprogress-atcost.Nuclearfuelownedandleased-netofamortization (Note8)..Otherleasedproperty-netofamortization (Note8)..........

$7,072,142 1,256,304 5,815,838 224,426378,43278,4336,497,129

$6,916,733 1,140,046 5,776,687 161,684372,44679,3186,390,135 Investments Associated companies

-atequityReceivable fromlitigation settlement

.Nonutility propertyandother-atcostorless22,5389,70017,06549,30318,09919,20013,02350,322CurrentAssetsCashSpecialdepositforpurchaseofnuclearfuel.Accountsreceivable (lessreserve:1986,$7,262;1985,$6,223)Customers

.Interchange powersales.OtherUnbilledrevenuesFuel(coalandoil)-ataveragecostMaterials andsupplies-ataveragecost.Commonstockheldfordividendreinvestment plan-atcost(Note7)Other.4,0498,550165,84429,5019,40790,484139,67428,64710,81619,189506,1614,615152,48346,0867,23168,840154,57223,60911,87825,121494,435Deferred, DebitsUtilityplantcarryingcharges(Note14).Unamortized debtexpenseandreacquired debtcosts..Other.28,60523,34634,52886,4794,58526,16230,747$7,139,072

$6,965,639 24Seeaccompanying Schedules andNotestoFinancial Statements.

LiaNLitotes19861985(Thousands ofDollars)Capitalization CommonequityCommonstockCapitalstockexpense.Earningsreinvested

$1,807,267 (14,155)622,5871,915,649

$1,807,267 (16,669)615,1021,905,700 Preferred andpreference stockWithsinkingfundrequirements.

Withoutsinkingfundrequirements.

Long-term debt475,289281,8752,732,223 5,854,486 691,010231,3752,507,213 5,335,298 CurrentLiabilities Commercial paper.........

Long-term debtduewithinoneyearCapitalleaseobligations duewithinoneyear(Note8)..AccountspayableTaxesaccrued.InterestaccruedDividends payableDeferredincometaxesEnergyrevenuestoberefundedOther112,00046,56874,360101,20565,60678,42561,06880,92571,044686,19695,50097,72370,420114,45057,50669,71470,10433,43736,67251,416696,942DeferredCreditsandOtherNoncurrent Liabilities Deferredinvestment taxcreditsDeferredincometaxesCapitalleaseobligations (Note8)Other190,797570,986829,48857,1691,148,890 120,482432,806826,11054,001933,899Commitments andContingent Liabilities (Note16)..$7,189,072

$6,965,639 Seeaccompanying Schedules andNotestoFinancial Statements.

19851984(Thousands ofDollars)SourceofFundsFromoperations NetincomeCharges(credits) toincomenotinvolving workingcapitalDepreciation

.Amortization ofpropertyundercapitalleases...

Noncurrent deferredincometaxesandinvestment taxcredits-netAllowance forfundsusedduringconstruction...

Other.$318,903$290,613300,108118,76338,649141,91277,850155,07371,380133,10329,301~5,406207,575(11,352)~922)125,038(168,938) 3,220Statement ofChangesinFinancial Position1986Outsidefinancing Commonstock.Preferred andpreference stockFirstmortgagebondsShort-term debt-netincrease(decrease).....

Capitalleaseobligations 721,862100,000500,00016,500616,50081,595$1,419,957 667,373180,000~9,300170,70079,533$917,606435,63584,20350,000403,250~35,200452,25379,894$967,782Application ofFundsConstruction expenditures

.Additions tonuclearfuel-ownedandleased...Allowance forfundsusedduringconstruction

..Securities retiredPreferred andpreference stockFirstmortgagebondsSecuredtermnotesReduction incapitalleaseobligations

...........

Dividends onpreferred, preference andcommonstockPremiumonredemption ofpreference stock.....

Premiumonretirement oflong-term debt.......

Workingcapital-increase(excluding debtandcapitalleaseobligations)

(a).Other-net.$275,76165,281~11,352)329,690315,771323,470639,24174,327261,29827,28317,54041,75728,821$1,419,957

$199,85274,34529,301303,49847,01776,534100,000223,55184,530282,03614,3449,647$917,606$421,697103,518(168,938) 356,27726,80380,154100,000206,95747,695273,23666,02917,588$967,782(a)Changesincomponents ofworkingcapital(excluding debtandcapitalleaseobligations)

Cash~Accountsreceivable.

Unbilledandrefundable

revenues, netofdeferredtaxes.Fuel(coalandoil).Accountspayableandaccruedtaxes..................

Other-net

.Netincrease.

$,(566)(1,048)60,828(14,898)5,145(7,704)$41,757$(1,839)48,23470,594(43,289)(20,053)(39,303)$14,344$(299)1,917(7,438)70,771(32,277)33,355$66,02926Seeaccompanying Schedules andNotestoFinancial Statements.

ScheduleofTaxes19861985(Thousands ofDollars)1984IncomeTaxExpense(Note5)Includedinoperating expensesProvision

-Federal.StateDeferred-Federal.StateInvestment taxcredit,net-Federal..Includedinotherincomeanddeductions Provision (credit)-F(ederalState.Totalincometaxexpense-F(ederalStateDetailofdeferredtaxesinoperating expensesTaxdepreciation Reacquired debtcosts.DeferredSusquehanna energysavingsnetofope'rating expensesStateutilityrealtytaxOther$37,71827,72865,441130,5765,092185,66881,608282,712(5,818)~1,646)(6,959)244,57931,174$275,758$129,8889,557(3,088)~694)$135,668$78,64828,458102,106107,954~2,898105,64635,408243,160(67,005)(13,759)(80,764)155,0057,391$162,396$130,287(15,811)(13,291)4,511$105,646$51,79011,24363,033128,8442,815126,659(3,908)185,784(51,370)~(11,258(62,628)120,3562,805$128,161$120,23214,888~(8,461$126,659Reconciliation ofIncomeTaxExpenseIndicated federalincometaxonpre-taxincomeatstatutory taxrate(46%).Increase(decrease) dueto:AFUDC(Note6)Stateincometaxes.TaxandpensioncostDeferredSusquehanna capitalcosts......

Depreciation differences notnormalized

..Utilization oflosscarryforward..........

Other.Totalincometaxexpense.Effective incometaxrate$264,896(5,222)19,078(5,762)8,987~6,224)10,857$275,75847.9%$208,38413,478(1,566)(5,245)(14,601)12,290(52,604)2,260(45,988)$162,39635.8%$203,350(77,656)1,960(5,719)8811,439544(80,189)$123,16127.9%Taxes,OtherThanIncomeStategrossreceipts.

Statecapitalstock.Stateutilityrealty.Socialsecurityandother...$79,20922,78941,46717,481$160,896$73,54923,55756,40716,892$170,405$66,71123,04448,31616,135$154,206Seeaccompanying

¹testoFinancial Statements.

SCheduleOfCapitalStOCkatDecember31Outstanding 19861985(T/iousands ofDollars)SharesOutstanding Shares1986Authorized Preferred Stock-$100par,cumulative (a)41/Series$58,019415,446$468,46553,019530,189629,936451,0464,154,456 10,000,000

$504,065Preference Stock-nopar,cumulative (a)...CommonStock-nopar(a).DetailsofPreferred andPreference Stock(b)$288,149$418,3202,381,492 5,000,000

$1,807,267

$1,307,267 74,512,797 85,000,000 Outstanding 19861985(Thousands ofDollars)nts$100,00027,20024,00040,0006,00080,00054,00055,890$28,80036,00042,5008,00040,00057,00058,89026,50015,00026,00015,00034,00015,00051,00037,84950,00014,97150,00050,00050,00040,80082,84950,000$475,239$691,010WithSinkingFundRequireme SeriesPreferred 7.00%(d)................

7.40%7.75%8.00%8.00%,Second...........

8.25%8.75%(d)................

9.24%(d)............,...

10.75o/o11.00$,Adjustable (e)(f)..11.00%11.25%14.00%Preference

$8.625(f)................

$11.00(d)...............

$11.60(d)(g)..~.........

$13.00$13.00,Second..........

$13.68$15.001,000,000 272,000240,000400,00060,000800,000540,000558,900$107.00103.55100.87112.00101.78101.84110.00103.00150,000125.00408,000323,492500,000None104.95114.00OptionalRedemption SharesPricePerOutstanding Share19861986200,00016,000120,00025,00020,000100,00030,00030,00080,0001993-1997 1987-2008 1987-1988 1987-2002 1987-1989 1987-1989 1987-2004 1987-2005 1989-1998 102,00025,00025,0001987-1990 1987-2000 1989-2008 SinkingFundProvisions(c)

SharestobeRedeemedRedemption AnnuallyPeriodWithoutSinkingFund4~/>%Preferred

.....SeriesPreferred 3.35%4.40o/o4.60%8.60%9.00%Preference

$8.00$8.40$8.70Requirements 58,0194,17822,8786,300222377,76385,00040,00040,0004,17822,8786,30022,2377,76885,00040,00040,00041,788228,77363,000222,37077,630350,000400,000400,000103.50102.00103.00104.00104.00103.00101.00101.00$53,019530,189$110.00$281,875$231,37528Seeaccompanying NotestoFinancial Statements.

Increases (Decreases) inCapitalStock(Thousands ofDollars)1986SharesAmount1985SharesAmount1984SharesAmount(16,000)(1,600)(120,000)

(12,000)(25,000)(2,500)CommonStock-issuedunderdividendreinvestment plan(h)..4,177,927

$84,874SeriesPreferred Stock7.00%.1,000,000

$100,0007.40%............

(16,000)(1,600)(16,000$(1,6007.50%.....................

(150,000(15,0007.75%..................

(120,000(12,000(120,000(12,0008.00%...................

(25,000(2,500(25,000(2,5008.00%,Second.................

(20,000(2,000(20,000(2,0008.25%....................

(100,000(10,000(100,000(10,0008.75%................

(30,000(3,000(30,000(3,0009.24%......................

(30,000(3,000(650(65(58,660)(5,866)10.75%...............

265,00026,50011.00/0...............

260,00026,00011.25%................

150,00015,00014.00%..................

340,00034,000Preference Stock$8.625....

(102,000(10,200$13.00...........

149,70514,9714,31743217,8751,787$13.00,Second................

500,00050,000$13.68............

500,00050,000500,00050,000$15.00..............

500,000(50,000Decreases inPreferred andPreference Stocksrepresent:

(i)theredemption ofstockpursuanttosinkingfundrequirements, (ii)sharesredeemedpursuanttooptionalredemption provisions, or(iii)sharesreacquired throughmarketpurchases andsubsequently cancelled (usedtomeetsinkingfundrequirements).

(a)Eachshareofpreferred, preference andcommonstockentitlestheholdertoonevoteonanyquestionpresented toanyshareowners'eeting.

(b)Theinvoluntary liquidation priceofthepreferred andpreference stockis$100pershare,andtheoptionalvoluntary liquidation priceistheoptionalredemption pricepershareineffect,exceptforthe4~/%Preferred andthe$8.625SeriesPreference Stockswhichare$100pershare(plusineachcaseanyunpaiddividends).

Liquidation paymentsonpreferred stockhaveprioritytosuchpaymentsonthepreference stock.(c)Theaggregate amountofsinkingfundredemption requirements through1991are(thousands ofdollars):

1987,$45,539;1988,$46,800;1989,$40,300;1990,$28,300;1991,$18,100.(d)Oncertainsinkingfundredemption dates,additional sharesmayberedeemeduptothenumberofsharesrequiredtoberedeemedannually.

(e)Effective April1,1988,thedividendrateissubjecttoaone-timeadjustment pursuanttoaformulabasedonthethencurrentprimerate.(f)Intheeventcertainfederalincometaxbenefitsarelosttocorporate holdersofthesestocks,theCompanymayberequiredtomakeindemnity paymentssufficient toprovidetheholderswithanagreeduponeffective yieldafterfederalincometaxes.AtDecember31,1986,theCompanyestimates thatfutureindemnity paymentswouldnotexceed$4.8million,mostofwhichwouldbepayableonlyaftertheholderssellorredeemthestock.(g)Ownership ofthe$11.60Preference Stockisevidenced byDepositary Preference Shares,eachrepresenting

~/<shareofPreference Stock.TheCompanyintendstoredeemalloftheoutstanding StockonFebruary18,1987attheoptionalredemption priceof$115.52pershare($28.88perdepositary share)whichincludes$1.52pershare($0.38perdepositary share)representing anamountequaltotheaccrueddividends fromJanuary1,1987.(h)Since1985,sharesforthedividendreinvestment planhavebeenacquiredintheopenmarket.Seeaccompanying NotestoFinancial Statements.

FirstMortgageBonds(a)15%.16/2%14s/4%16y2%16y2%16y%16y%12ys%16y2%16y2%12ye%16y2%16y2%14%(c).12y,%16y2%4/s%45/s%to16ys%6s/4%to9%.7y2%to93/4%Sy2%to15'/s%(c)9%to13y4%FirstMortgagePollution ControlBonds(a)5/s%SeriesA...............................

7/s%to8ys%SeriesC.lly4%tolly2%SeriesD10~/8%SeriesE105/8%SeriesF.93/>%SeriesG.$16,67030,90050,00036,00010,40010,10010,40010,0007,00010,40010,0008,50010,400125,00010,00010,40030,000305,000220,000610,000200,000475,000$86,00010,40010,10010,40010,0007,00010,40010,0008,50010,40010,00010,40080,000480,000220,000610,000100,000850,00020,90020,00070,00087,750115,50055,00021,80020,00070,00037,750115,50055,000SCheduleOfLOng-TermDebtatDecember31Outstanding 19861985(Thousands ofDollars)Maturity(b)February1,1986August1,1986December12,1986August1,1987September 1,1987August1,1988September 1,1988February1,1989August1,1989September 1,1989February1,1990August1,1990September 1,1990December1,1990February1,1991September 1,1991December1,19911992-1996 1997-2001 2002-2006 2007-2011 2012-2016 (d)(d)(d)March1,2014September 1,2014July1,2015OtherLong-Term DebtSecuredtermnotes(a)(e)Miscellaneous promissory notesUnamortized (discount) andpremium-net..Lessamountduewithinoneyear..2,702,750 100,0006682,808,418 (24,622)2,778,791 46,5682,526,220 100,0004682,626,688 (21,752)2,604,986 97,728March31,19911987-1995

$2,782,228

$2,507,213 (a)Substantially allutilityplantissubjecttothelienoftheCompany's firstmortgage.

Certainutilityplantisalsosubjecttothelienofasecondmortgageissuedassecurityfortermnotes.(b)Aggregate long-term debtmaturities through1991are(thousands ofdollars):

1987,$46,568;1988,$21,550;1989,$28,414;1990,$29,839;1991,$151,339.Maximumsinkingfundrequirements aggregate

$33.7millionthrough1991andmaybemetwithpropertyadditions orretirement ofbonds.(c)InMarch1986,theCompanyredeemed$125millionprincipal amountofFirstMortgageBonds,14%Seriesdue1990and$100millionprincipal amountofFirstMortgageBonds,15~/8%Seriesdue2010.(d)Bondsmatureannuallyasfollows(thousands ofdollars):

(i)SeriesAonMay1,1988-2002,

$900;2003,$7,400(ii)Series0onAprilI,2000,$4,000;2006-2009,

$2,000;2010,$8,000(iii)SeriesDonNovember1,2002,$15,000;2012,$55,000.(e)Variableinterestrate.30Seeaccompanying NotestoFinancial Statements.

Statement ofEarningsReinvested Balance,January1AddNetIncomeDeductCashdividends declaredPreferred stock-atrequiredannualrates..Preference stock-atrequiredannualrates.Commonstock-pershare:1986,$2.58;1985,$2.56;1984,$2.48Costsassociated withtheredemption ofpreferred andpreference stock.198441,47027,587192,24181,37544,53746,749190,75047,43744,708181,09119861985(Thousands ofDollars)$615,102$606,525$560,858300,108290,613318,908915,210897,138879,761Balance,December31292,678$622,537282,036$615,102273,236$606,525NotestoFinancial Statements 1.SummaryofSignificant Accounting PoliciesAccounting RecordsAccounting recordsaremaintained inaccordance withtheUniformSystemofAccountsprescribed bytheFederalEnergyRegulatory Commission (FERC)andadoptedbythePennsylvania PublicUtilityCommission (PUC).Affiliated Companies Investments inunconsolidated subsidiaries (allwhollyowned)andinSafeHarborWaterPowerCorporation (ofwhichtheCompanyownsone-third oftheoutstanding capitalstockrepresenting one-halfofthevotingsecurities) arerecordedusingtheequitymethodofaccounting.

Unconsolidated subsidiaries operateintheUnitedStatesandareengagedincoalmining,holdingcoalreserves, oilpipelineoperations andrealestateinvestment.

Allunconsolidated subsidiaries considered intheaggregate wouldnotconstitute a"significant subsidiary" asthattermisdefinedbytheSecurities andExchangeCommission.

UtilityPlantandDepreciation Additions toutilityplantandreplacement ofunitsofpropertyarecapitalized atcost.Thecostofunitsofpropertyretiredorreplacedisremovedfromutilityplantaccountsandchargedtoaccumulated depreciation.

Expenditures formaintenance andrepairsofpropertyandthecostofreplacing itemsdetermined tobelessthanunitsofpropertyarechargedtooperating expense.Forfinancial statement

purposes, depreciation isbeingprovidedovertheestimated usefullivesofpropertyandiscomputedusingamodifiedstraight-line methodfortheSusquehanna nuclearplantandthestraight-line methodforallotherproperty.

Thesemethodsarealsousedforrate-making purposes.

Themodifiedstraight-line methodprovidesforanincreasing amountofannualdepreciation forthenuclearplantuntiltheyear2000,atwhichtimetheplant'snetundepreciated costwillbedepreciated inequalannualamountsovertheplant'sremaining life.Provisions fordepreciation, asapercentofaveragedepreciable

property, approximated 2.2%in1986and1985and2.5%in1984.NuclearDecommissioning andF~uelDisposalAnannualprovision fordecommissioning costsoftheSusquehanna nuclearplant,equaltotheamountallowedforrate-making

purposes, ischargedtooperating expense.Suchamounts,netofincometaxes,areinvestedinsecurities keptinasegregated investment accountwhichcanbeusedonlyforfuturedecommissioning costs.TheU.S.Department ofEnergy(DOE)isresponsible forthepermanent storageanddisposalofspentnuclearfuelremovedfromnuclearreactors.

TheCompanycurrently paysDOEafeeforfuturedisposalservicesandrecoverssuchcostsincustomerrates.PremiumonReacquired Securities AsprovidedintheUniformSystemofAccounts, thepremiumspaidandexpensesincurredintherefunding oflong-term debtaredeferredandamortized overthelifeofthenewdebtissueandpremiumspaidtoretirepreferred andpreference stockarechargedtoretainedearnings.

Allowance forfundsUsedDuingConstruction AsprovidedintheUniformSystemofAccounts, thecostoffundsusedtofinanceconstruction iscapitalized aspartofconstruction cost.Thecomponents ofAllowance forFundsUsedDuringConstruction (AFUDC)shownontheStatement ofIncomeunderotherincomeanddeductions andinterestchargesarenon-cashitemsequaltothecostoffundscapitalized duringtheperiod.Theequityfundscomponent isreducedbytheincometaxsavingsrealizedduetothetaxdeductibility ofconstruction-related interest.

UndertheTaxReformActof1986(TaxAct),mostconstruction interestwillnolongerbedeductible.

Accordingly, effective January1,1987,AFUDCwillnotbereducedbytaxsavings.AFUDCservestooffsetontheStatement ofIncometheinterestchargesondebtanddividends onpreferred andpreference stockincurredtofinanceconstruction.

Inaddition, areturnoncommonequityusedtofinanceconstruction isimputed.(SeeNote6).CapitalLeasesCapitalleasedpropertyisrecordedatthepresentvalueoffutureleasepaymentsandisamortized sothatthetotalofinterestontheleaseobligation andamortization oftheleasedpropertyequalstherentalexpenseallowedforrate-making purposes.

(SeeNote8).RevenuesRevenuesarerecordedbasedontheamountsofelectricity delivered tocustomers totheendofeachaccounting period.Thisincludesamountscustomers willbebilledforelectricity delivered fromthetimemeterswerelastreadtotheendoftherespective accounting period.TheCompany's PUCtariffscontainanenergycostrateunderwhichcustomers arebilledanestimated amountforfuelandotherenergycosts.Anydifference betweentheactualandestimated amountforsuchcostsiscollected fromorrefundedtocustomers inasubsequent period.Revenuesapplicable toenergycostratebillingsarerecordedatthelevelofactualenergycostsandthedifference isrecordedaspayabletoorreceivable fromcustomers.

Effective January1,1987,theCompanybegantoapplyanIncomeTaxAdjustment(ITA) credittoPUCcustomers'ills toreflecttheexpectedreduction inincometaxexpenseduetotheTaxAct.IncomeTaxesTheCompanyanditssubsidiaries fileaconsolidated federalincometaxreturn.Incometaxesareallocated totheindividual companies basedontheirrespective taxableincomeorlossandinvestment andpayroll-based taxcredits.Incometaxesapplicable totheCompanyareallocated tooperating expensesandotherincomeanddeductions ontheStatement ofIncome.Under.otherincomeanddeductions, theincometaxcreditsrelateprincipally tothetaxreductions associated withtheinterestexpensethatisoffsetbytheborrowedfundscomponent ofAFUDC.Deferredincometaxesarerecordedfortimingdifferences betweenbookandtaxableincometotheextenttheyarepermitted inratedeterminations byregulatory agencies.

Thetwoprincipal itemsforwhichdeferredtaxesarenotcurrently recordedare(i)certainpensioncostsandemployee-related taxescapitalized forbookpurposesbutdeductedcurrently forincometaxesand(ii)aportionoftaxdepreciation inexcessofbookdepreciation relatedtopropertyplacedinservicepriorto1980.Investment andpayroll-based taxcreditsresultinareduction offederalincometaxespayable.Suchtaxcredits,otherthancreditsresulting fromcontributions totheemployeestockownership plan,aredeferredwhenutilizedandamortized overtheaveragelivesoftherelatedproperty.

(SeeNote5).PensionPlanTheCompanyhasanoncontributory pensionplancoveringsubstantially allemployees.

Companycontributions totheplanincludecurrentservicecostsandallamountsrequiredtoamortizeunfundedpriorservicecostsoverperiodsofnotmorethan20years.Effective January1,1987,theCompanyadoptedtheprocedures requiredbyStatement ofFinancial Accounting Standards No.87-Employers Accounting forPensions.

Thisstatement prescribes procedures todetermine periodicpensioncostwhichdifferfromthosepreviously usedbytheCompany.(SeeNote10).Reclassification Certainamountsfromprioryearfinancial statements havebeenreclassified toconformtothecurrentyearpresentation.

32 2.RateMattersInApril1985,thePUCgranted$121millionofthe$330millionnetrateincreaserequested bytheCompanytoreflecttheoperation ofUnit2attheSusquehanna nuclear-fueled stationandotherincreased costsofdoingbusiness.

Areturnonthecommonequityinvestment inSusquehanna Unit2wasdeniedbasedonthePUC'sconclusion thattheCompanytemporarily hadtoomuchgenerating capacity.

Thisadjustment reducedrequested revenuesbyabout$161million.ThePUCorderindicated thattheequitydisallowance wouldcontinueuntiltheCompanycanshowthatUnit2'sneteconomicbenefitsexceeditsnetcost,orthatitscapacityisnecessary forsystemreliability.

Theothermajoradjustment disallowed recoveryofabout$37millionofthecostofelectricity purchased fromAllegheny ElectricCooperative, Inc.'s(Allegheny) 10%undivided interestintheSusquehanna units.Theagreement withAllegheny providesthattheCompanywillpurchasedeclining amountsofelectricity fromAllegheny throughearly1991.TheCompanyappealedtotheCommonwealth CourtofPennsylvania (Court)thePUCdecisions regarding excesscapacityandthepurchases fromAllegheny.

InOctober1986,theCourtaffirmedthePUC'sdecision.

NeithertheCompanynoranyoftheotherpartiestotheappealsoughtareviewbythePennsylvania SupremeCourt.ThePUChasapprovedtheCompany's requesttoreduceitsretailratesbyapproximately

$32millioneffective January1,1987.Thisnetreduction reflects:

(1)a$47milliondecreaseduetothelowerincometaxexpenseanticipated asaresultoftheTaxAct;(2)a$26milliondecreasebecauseofchangesinthestatetaxsurcharge; and(3)a$41millionincreaseincoststoberecovered throughtheenergycostrate.TheFERCpermitted annualincreases inratesforwholesale customers of$4.2millioneffective March1984and$5.7millioneffective January1986.3.DeferralofSusquehanna Operating andCarryingCostsInaccordance withordersofthePUC,theCompanydeferredcertainoperating andcapitalcosts,netofenergysavings,associated withSusquehanna Units1and2.Thecostsdeferredwereincurredfromthedatetheunitswereplacedincommercial operation untiltheeffective datesoftherateincreases reflecting operation oftheunits.Thedeferredcostsplusrelateddeferredincometaxestotaled$39.2millionatDecember31,1986.TheCompanyexpectstoultimately recoverthisamountinrateschargedtocustomers.

SuchrecoverywillbesubjecttoPUCreviewandapproval.

Noreturnisbeingaccruedonthedeferredcosts.4.SalesofGenerating CapacityandEnergyTheCompanyprovidesAtlanticCityElectricCompany(Atlantic) with125,000kilowatts ofcapacityandenergyfromtheSusquehanna unitsandJerseyCentralPowerandLightCompany(JCP&L)with945,000kilowatts oftheCompany's totalgenerating capacityandenergy.ThesalesaremadeatapriceequaltotheCompany's costofproviding service,whichincludesareturnontheCompany's investment ingenerating capacity.

SalestoAtlanticbeganin1983andexpirein1991,whenanotheragreement providesAtlanticwith125,000kilowatts ofcapacityandenergyfromtheCompany's coal-fired stationsuntiltheyear2000.SalestoJCP&Lbeganin1985andcontinuethrough1995,withtheamountthendeclining uniformly eachyearuntiltheendoftheagreement in1999.5.IncomeTaxesTaxableincomefor1985wassufficient fortheCompanytoutilizeitslosscarryforwards ofapproxi-mately$100millionsothatthecurrentprovision forincometaxexpensein1985wasreducedbyapproximately

$58milliontoreflecttheutilization ofsuchcarryforwards.

Thereduction inthecurrentprovision forincometaxeswasoffsetontheStatement ofIncomebyanequaldecreaseintheallowance forfundsusedduringconstruction.

(SeeNote6).TheTaxActcontainsnumerousprovisions thatwillaffecttheCompany.Someofthemajorprovisions includeareduction inthecorporate incometaxrate,repealoftheinvestment andpayroll-basedtaxcreditsandareduction oftheamountofinvestment taxcreditswhichcanbecarriedforwardtoreducefederaltaxespayable.TheCompanywillalsoberequiredtocapitalize fortaxpurposescertainitemssuchasinterest, pensioncostandpayrolltaxeswhichformerlyweredeductible whenincurred.

Theexpectedreduction intaxexpenseduetotheTaxActwillbepassedthroughtocustomers byapplication oftheITA.33 TheTaxActrequiresthatanyunusedinvestment taxcreditsatDecember31,1986bereducedby17.5%andthatanysuchunusedcreditsatDecember31,1987bereducedbyanadditional 17.5%.TheCompanyestimates that,aftergivingeffecttotheTaxActandthegeneration ofinvestment taxcreditsin1987,approximately

$146millionofinvestment andpayroll-based taxcreditswillbeavailable toreducefederalincometaxliabilities in1987andfutureyears.

Thecarryforward periodfortheunusedcreditsatDecember31,1986expiresintheyears1996to2001.TheCompanyhasnotrecordeddeferredincometaxesforcertaintimingdifferences inaccordance withPUCratetreatment.

Thecumulative netamountofsuchtimingdifferences forwhichdeferredincometaxeshavenotbeenrecordedapproximated

$661millionatDecember31,1986.TheCompanywouldexpecttorecoverthroughelectricrevenuesthetaxeswhendueinfutureyears.SeeNote15forinformation concerning aproposedaccounting statement forincometaxes.6.Allowance forFundsUsedDuringConstruction Through1986,AFUDCwasrecordedonanafter-tax basiswiththeequitycomponent reducedbytheincometaxsavingsrealizedduetothetaxdeductibility ofconstruction-related interest.

TheCompanyhadtaxlossesduringtheperiod1982-1984 dueinparttothelargeamountofconstruction interestincurred.

Asaresult,theincometaxreduction reflected inAF<UDCinthoseyearswaslimitedtothetaxapplicable toconstruction interestdetermined tobeusableasataxdeduction.

Taxableincomefor1985wassufficient topermittheCompanytoutilizeallofitslosscarryforwards thatexistedattheendof1984.Accordingly, AF<UDCfor1985wasreducedbyabout$58millionrepresenting thetaxeffectofprioryearconstruction interestincludedinthelosscarryforwards.

7.StockHeldforDividendReinvestment PlanAtDecember31,1986,theCompanytemporarily held284,730sharesofCommonStockwhichwereacquiredintheopenmarketfordistribution toparticipants intheDividendReinvestment Plan.8.LeasesPropertyundercapitalleasesconsistsofthefollowing (thousands ofdollars):

Nuclearfuel,nctofaccumulated amortization-1986,$106,030;1985,$137,974Vehicles, oilstoragetanksandotherproperty, nctofaccumulated amortization

-1986,$52,119;1985,$44,259.Nctpropertyundercapitalleases.December3119861985$325,365$317,21278,43379,318$403,798$396,530Nuclearfuelleasepayments, whicharechargedtoexpenseasthefuelisusedforthegeneration ofelectricity, were$68.0millionin1986and$78.5millionin1985.F<uturenuclearfuelleasepaymentswillbebasedonthequantityofelectricity producedbytheSusquehanna units.Themaximumamountofunamortized nuclearfuelleasableundercurrentarrangements is$350million.FutureminimumleasepaymentsundercapitalleasesineffectatDecember31,1986(excluding nuclearfuel)wouldaggregate

$104.1million,including

$25.6millionofimputedinterest.

Duringthefiveyearsending1991,suchpaymentswoulddecreasefrom$20.3millionperyearto$10.2millionperyear.Interestoncapitalleaseobligations wasrecordedasoperating expensesontheStatement ofIncomeinthefollowing amounts(thousands ofdollars):

1986,$15,889;1985,$18,256and1984,$13,836.Generally, capitalleasescontainrenewaloptionsandobligatetheCompanytopaymaintenance, insurance andotherrelatedcosts.TheCompanyalsohasenteredintovariousoperating leaseswhicharenotmaterialwithrespecttotheCompany's financial position.

9.CreditArrangements TheCompanyissuescommercial paperand,fromtimetotime,borrowsfrombankstoprovideshort-term fundsrequiredforgeneralcorporate purposes.

Revolving creditarrangements aremaintained withagroupofbanksprincipally asaback-upfortheCompany's commercial paper.Thebankshavecommitted tolendtheCompanyupto$200milliononarevolving basisinreturnforthepaymentofcommitment fees.Anyloansmadeunderthesecreditarrangements wouldmatureonJune30,1990and,attheoptionoftheCompany,interestrateswouldbebaseduponcertificate ofdepositrates,Eurodollar depositratesortheprimerate.TheCompanyalsomaintains linesofcreditaggregating

$35millionwithvariousbanksinreturn~34 sforthemaintenance ofcompensating balancesorthepaymentofcommitment fees.Bankborrowings generally bearinterestatratesnegotiated atthetimeoftheborrowing.

Therewerenoborrowings outstanding attheendof1986underthesecreditarrangements.

Commitment feesincurredwere(millions ofdollars):

1986,$0.5;1985,$1.6and1984,$2.6.10.PensionPlanandOtherPostemployment BenefitsPensioncostswere(millions ofdollars):

1986,$29.1;1985,$27.3and1984,$29.0.Oftheseamounts,$18.7millionin1986,$18.9millionin1985and$18.0millionin1984werechargedtooperating

expenses, andthebalancewaschargedtoconstruction andotheraccounts.

Theactuarial presentvalueofaccumulated pensionplanbenefitsandnetassetsattheendoftheplan'srecentfiscalyearswereasfollows(thousands ofdollars):

June3019861985Actuarial presentvalueofaccumulated planbenefits:

(a)VestedNonvested

.$229,760$203,46613,15212,584$242,912$216,050Netassetsavailable forbenefits.$487,691$369,371(a)Excludesaccumulated planbenefitswhicharetheobligation offourinsurance companies underinsurance contracts.

Theassumedrateofreturnusedindetermining theactuarial presentvalueofaccumulated planbenefitswas6.5%forboththeJune30,1986andtheJune30,1985valuations.

TheFinancial Accounting Standards Board(FtASB)hasissuedanaccounting statement whichestablishes newprocedures todetermine pensioncostandincreases relateddisclosure requirements.

TheCompanyadoptedtheprocedures requiredbythisstatement effective January1,1987andexpectsthatpensioncostwilldeclinetoabout$16millionin1987.Substantially alloftheCompany's employees willbecomeeligibleforcertainhealthcareandlifeinsurance benefitsuponretirement.

Thecostofthesebenefitsforretiredemployees isgenerally recognized asexpensewhenpremiumsarepaid.Suchcostswereapproximately (millions ofdollars):

1986,$3.5;1985,$2.0and1984,$2.3.ll.JointlyOwnedFacilities AtDecember31,1986,theCompanyownedundivided interests inthefollowing jointlyownedfacilities (millions ofdollars):

Ownership Interest............

UtilityPlantinService.Accumulated Depreciation Construction WorkinProgress.Generating Stations-Susquehanna KeystoneConemaugh 90.00%,12.34%11.39%$3,712$40$3793151411313MerrillCreekReservoir 8.37%$8Eachparticipant inthesefacilities providesitsownfinancing.

TheCompanyreceivesaportionofthetotaloutputofthegenerating stationsequaltoitspercentage ownership.

TheCompany's shareoffuelandotheroperating costsassociated withthestationsisreflected ontheStatement ofIncome.TheMerrillCreekReservoir isunderconstruction andwillprovidewaterduringperiodsoflowriverflowtoreplacewaterfromtheDelawareRiverusedbytheownersintheproduction ofelectricity.

12.Affiliated CompanyTransactions Theprincipal transactions withaffiliated companies involvethepurchaseofelectricity fromSafeHarborWaterPowerCorporation, thepurchaseofcoal,thepaymentofinterestandothercostsrelatedtocoalreservesandthepaymentofchargesfortransportation ofoilbypipeline.

Costsrelatedtothesetransactions withaffiliates aggregated (millions ofdollars):

1986,$218.5;1985,$271.0and1984,$291.9.Underequityaccounting, theoperations ofaffiliated companies resultedinafter-tax chargesagainsttheCompany's netincomeof(millions ofdollars):

1986,$0.8;1985,$2.6and1984,$4.1.AtDecember31,1986,theCompanyhadguaranteed

$236.4millionoftheobligations ofaffiliated companies.

13.Affiliated Coal-Mining Operations TheCompanypurchased approximately

$196millionofcoalfromitsaffiliated miningcompanies in1986atpricesequaltothecostofmining.Thecostofcoalpurchased isincludedintheenergycostscollected fromcustomers.

Thecostofaffiliated coal(particularly coalfromtheGreenwich mine)hasgenerally beenhigherthanthecostofcoalpurchased fromothersources.AllthecoalminedattheGreenwich mineisdelivered totheCompany's Montourgenerating stationandaccountsforaboutone-halfofthecoalburnedatMontour.ThePUChasadoptedastandardagainstwhichthecostofallcoaldelivered toMontourwillbemeasuredoveratwo-yeartrialperiodwhichbeganApri11,1986.Thestandardisdetermined monthlybasedonthecostofcoalpurchased byotherPennsylvania electricutilities.

Attheendofthetrialperiod,thenetamountofanycostsinexcessof,orlessthan,thestandardwillbedetermined.

Unlessthestandardiscontinued beyondthetrialperiod,thenetamountofanycostsinexcessofthestandardwillbereturnedtoPUCcustomers throughtheCompany's 1989-1990 energycostrate.Dataastothestandardisavailable fortheperiodApril1,1986throughSeptember 30,1986.Forthisperiod,thecostofcoaldelivered toMontourhasbeenlessthanthestandard.

Planshavebeenadoptedwhichwillresultinphasingoutminingoperations ofaffiliated companies bythemid-1990s.

TheCompanyexpectsthatoverthisperiodinvestments incoalandfacilities willberecovered andthatcoalwillbeproducedatpricesthatwillberecovered inelectricrates.However,theCompanycannotpredictwhatfutureactionmaybetakenbythePUCorwhetherfutureeventsorcircumstances couldsubstantially alterthecurrentminingplans.AdverseactionbythePUCoradversechangesintheminingplanscouldresultinmaterialchargesagainsttheCompany's earnings.

AtDecember31,1986,thecapitalinvestment byaffiliated companies incoal-mining operations amountedtoabout$93million.14.UtilityPlantCarryingChargesInDecember1986,theCompanyreclassified fromutilityplanttodeferreddebits$28.6millionofnetcarryingchargeaccrualsrecordedoncertainfacilities forSusquehanna andMartinsCreekgenerating stations.

Thedeferredamountwillbeamortized toexpenseovertheremaining lifeofthestations.

Thisresolvesacontested accounting andreporting matterwhichresultedfromanexamina-tionoftheCompany's booksbytheFERC.15.Accounting Statements TheFASBissuedanaccounting statement inDecember1986thatestablished accounting rulestobeusedbyrate-regulated utilities inaccounting forplantabandonments anddisallowed plantcosts.TheCompanybelievesithasnosituations coveredbythestatement, including theSusquehanna Unit2disallowance, referredtoinNote2.TheFASHpreviously hadproposedaccounting forphase-inplansbutthismatterwasdeferredforfurtherconsideration.

InSeptember 1986,theFASHissuedaproposedaccounting statement thatwouldchangethemannerinwhichincometaxexpenseisdetermined foraccounting purposes.

Currentaccounting rulesutilizeadeferredmethodwhilethenewaccounting proposalutilizesaliability methodunderwhichdeferredtaxliabilities wouldberecordedandadjusted, whenrequired, fortheeffectofachangeintaxlaworrates.BecausetheTaxActwilllowerthetopcorporate taxratefrom469oto34/,mostentitieswouldberequiredtoadjusttheirdeferredincometaxreservestoreflectthelowertaxrateiftheFASHproposalbecomeseffective.

However,theTaxActessentially prohibits utilities fromadjusting, tothe34%taxrate,deferredtaxreservesrelatedtotheAccelerated CostRecoverySystemofdepreci-ation.Asaresult,theCompanydoesnotexpectanysubstantial reduction initscurrentdeferredincometaxreservesintheeventthattheFASBproposalbecomeseffective.

InDecember1986,theFASHissuedaproposedaccounting statement thatwouldrequiretheCompanytoprepareconsolidated financial statements thatincludemajority-owned subsidiaries.

Iftheproposalisadoptedinitscurrentform,themostsignificant effectontheCompany's financial statements wouldbetheadditionofabout$275millionofassetsandliabilities onthebalancesheet.Asubstantial portionoftheliabilities wouldrepresent obligations ofsubsidiaries currently guaranteed bytheCompany.Withregardtothepreceding proposedaccounting statements, theCompanycannotpredictwhatfinalaccounting rulestheFASHmayadopt,ortheultimateeffect,ifany,thatsuchaccounting mayhaveontheCompany's netincomeorfinancial position.

SeeNote10forinformation onaFASHstatement relativetopensioncosts.36 16.Commitments andContingent Liabilities TheCompany's construction expenditures areestimated toaggregate

$283millionin1987,$296millionin1988and$292millionin1989,including theallowance forfundsusedduringconstruc-tion.SeethesectionentitledCapitalExpenditure Requirements onpage20foradditional information.

TheCompanyisamemberofcertaininsurance programswhichprovidecoverageforpropertydamagetomembers'uclear generating plants.Facilities attheSusquehanna plantareinsuredagainstpropertydamagelossesupto$1.2billionundertheseprograms.

TheCompanyisalsoamemberofaninsurance programwhichprovidesinsurance coverageforthecostofreplacement powerduringprolonged outagesofnuclearunitscausedbycertainspecified conditions.

Underthepropertyandreplacement powerinsurance

programs, theCompanycouldbeassessedretrospective premiumsintheeventtheinsurers'osses exceedtheirreserves.

ThemaximumamounttheCompanycouldbeassessedduringthecurrentpolicyyearisabout$16million.TheCompany's publicliability forclaimsresulting fromanuclearincidentislimitedcurrently to$700millionunderprovisions ofthePrice-Anderson Act.TheCompanyisprotected againstthispotential liability byacombination ofcommercial insurance andanindustryassessment program.Intheeventofanuclearincidentatanyofthefacilities ownedbyothersandcoveredbythePrice-AndersonAct,theCompanycouldbeassessedupto$10millionperincident, butnotmorethan$20millioninacalendaryearintheeventmorethanoneincidentisexperienced.

Congressisconsidering severalproposals toamendthePrice-Anderson ActwhichexpiresinAugust1987.Theproposedamendments generally includeprovisions whichwouldincreasethepublicliability limitofutilities intheeventofanuclearincident.

TheCompanyisunabletopredictwhatactionCongressmightultimately takeregarding thePrice-Anderson Actandwhateffectsuchactionorexpiration ofthePrice-Anderson ActmighthaveontheCompany's potential liability.

InDecember1986,theCompanyredeemedat$100pershare$87.7millionofPreferred Stockrepresenting alloutstanding sharesofthe10.75%,11.00%,11.25%and14.00%SeriesPreferred Stock.Severalcomplaints havebeenfiledintheUnitedStatesDistrictCourtbyholdersofsharesofthe10.75%,11.00%and14.00%Seriesrequesting adeclaratory judgmentthattheCompany's redemp-tionofthosethreeseriesbreachedtheCompany's contractual obligations totheplaintiffs andthat(a)theCompanyisliabletopayplaintiffs amountsequaltotheredemption premiumsof$3.59persharewithrespecttothe10.75%Series,$25persharewithrespecttothe11.00%Seriesand$20persharewithrespecttothe14.00%Series,and(b)inthealternative theredemption berescinded andplaintiffs beawardeddamagesinamountstobeascertained.

TheCompanybelievesthatitwasentitledtocallthePreferred Stockforredemption atapriceof$100persharebutcannotpredicttheoutcomeofthecourtproceedings.

SeeNote12forinformation abouttheCompany's guarantee ofaffiliated companies'bligations.

17.Quarterly Financial, CommonStockPriceandDividendData(Unaudited)

FortheC}uarters Ended:March31June30Sept.30Dec.31(Thousands ofDollars,ExceptPerShareAmounts)Operating revenues$596,087$518,514$528,650$545,674Operating income167,334131,499143,201147,291Netincome.95,15160,52167,53176,905Earningsapplicable tocommonstock............

74,83043,57551,26061,386Earningspercommonshare(a).................

1.000.580.690.82Dividends declaredpercommonshare(b)........

0.64O.G40.650.65High/lowpricepercommonshare(c)............

33/J27/s34/31/s43/s/33/s 40/4/361985Operating revenues$486,495$479,762$483,782$526,463Operating income.122,122122,003136,733145,630Netincome104,55158,94960,57366,540Earningsapplicable tocommonstock............

81,22135,94038,04244,124Earningspercommonshare(a).................

1.090.480.510.59Dividends declaredpercommonshare(b)........O.G40.640.640.64High/lowpricepercommonshare(c)............

27/s/24/s 27/J23/s27/s/23/s 29/23/4(a)Thequarterly amountsdonotequalannualearningspershareduetorounding.

(b)TheCompanyhaspaidquarterly cashdividends onitscommonstockineveryyearsince1946.Thedividends paidpersharein198Gand1985were$2.57and$2.54,respectively.

Themostrecentregularquarterly dividendpaidbytheCompanywas65centspershare(equivalent to$2.60perannum)paidJanuary1,1987.Futuredividends willbedependent uponfutureearnings, financial requirements andotherfactors.(c)TheCompany's commonstockislistedontheNewYorkandPhiladelphia StockExchanges.

37 SelectedFinancial andOperating Data19861985198419831982IncomeItems-thousands Operating revenuesOperating income.Allowance forfundsusedduringconstruction...

Netincome.Earningsapplicable tocommonstock...~~..BalanceSheetItems-thousands (a)Netutilityplantinservice.Construction workinprogress.............

TotalassetsLong-term debt.Preferred andpreference stockWithsinkingfundrequirements..........

Withoutsinkingfundrequirements

.......Commonequity.Short-term debtTotalcapitalprovidedbyinvestors....

~...~.Financial RatiosReturnonaveragecommonequity-%.......Embeddedcostrates(a)Long-term debt-%Preferred andpreference stock-%........

Timesinterestearnedbeforeincometaxes..~Ratioofearningstofixedcharges-totalenterprisebasis(b)Depreciation as%ofaveragedepreciable property.

CommonStockDataNumberofsharesoutstanding

-thousands Year-end.

Average.Earningspershare.Dividends declaredpershare..............

Taxability ofdividendincome-%(c)........

Bookvaluepershare(a).Marketpricepershare(a).................

Dividendpayoutrate-%Dividendyield-%(c)(d)Priceearningsratio(d).FuelCostDataCostperkwhgenerated

-centsCoal-fired steamstations................

Nuclearsteamstation(e)................

Oil-fired steamstationCombustion turbinesanddiesels(oil)......

Average.CostoffossilfuelreceivedatsteamstationsCoal-perton.Residualoil-perbbl.Employees (a)$2,188,925 589,32511,352300,108231,051$1,976,502 526,488(29,301)290,613199,327$1,562,782 406,958168,938318,903226,758$1,248,397 289,930251,548296,011210,173$1,219,548 223,083246,423278,886210,572475,239231,3751,915,649 112,0005,513,054 691,010231,3751,905,700 95,5005,528,521 738,027231,3751,896,987 104,8005,575,695 714,830231,3751,767,949 190,0005,291,403 621,634231,3751,643,695 160,5454,980,567 12.1110.548.332.802.592.210.4211.2410.022.372.192.212.3011.129.942.352.062.512.2910.989.662.292.042.713.6010.819.412.051.813.374,51374,513$3.10$2.58100.00$25.71$36M837.3011.3974,51374,513$2.68$2.56100.00$25.58$283/4969.819.7674,51372,767$3.12$2.4863.29$25.46$25~/s8011.007.2470,33568,642$3.06$2.400$25.12$205/87910.487.4866,46162,809$3.35$2.320$24.71$217011.955.791.670.582.967.811.57$40.17$16.838,3391.780.615.029.311.81$42.00$28.428,4331.750.545.319.821.98$42.75$31.328,3861.680.665.23=10.212.15$39.37$29.798,1601.775.6210.742.20$42.32$30.948,208$5,815,838

$5,776,687

$3,860,960

$3,847,301

$2,112,169 224,426161,6842,020,839 1,730,228 2,923,841 7,139,072 6,965,639 6,910,783 6,418,509 5,829,138 2,778,791 2,604,936 2,604,506 2,387,249 2,323,318 (a)Year-end.

(b)Fixedchargesconsistofinterestonshort-andlong-term debt,otherinterestcharges,interestoncapitalleaseobligations andtheestimated interestcomponent ofotherrentals.(c)Basedonholdingoneshareofcommonstockfortheentireyear.(d)Basedonaverageofmonth-end marketprices.(e)TheCompany's firstnuclearunitwasplacedincommercial operation onJune8,1983andthesecondunitonFebruary12,1985.(f)Thewinterpeaksshownwerereachedearlyinthesubsequent year.

SalesDataElectriccustomers (a).Averageannualresidential kwhuse........

Electricenergysalesbilled-millionsofkwhResidential

.Commercial Industrial

.OtherSystemsales.Contractual salestootherutilities........

Totalelectricenergysalesbilled.......Sourcesofenergysold-millions ofkwhGenerated Coal-fired steamstations..............

Nuclearsteamstation(e).............

Oil-fired steamstation................

Combustion turbinesanddiesels(oil)...Hydroelectric stations................

19861,073,146 9,3448,7717,1597,9861,17025,0865,33930,42525,15110,1515,4531773919851,055,546 9,0348,3546,7287,9071,08224,0714.04828,11926,23711,5344,3161861219841,039,381 9,2828,4546,5278,1171,04324,14135724,49826,6956,2954,1213274719831,026,144 9,0518,1386,1197,62396822,84820923,05726,8854,5095,5814570019821,013,623 9,0398,0455,9467,32498222,29722,29725,4772933,18613612Powerpurchases Interchange powersales......

~~....Companyuse,linelossesandother...Totalelectricenergysalesbilled...ElectricRevenueDataByclassofservice-thousands Residential Commercial Industrial

.Otherenergysales.SystemsalesContractual salestootherutilities....

Totalfromenergysalesbilled...~.Unbilledrevenues, net........,.....

Otheroperating revenues.....,....

~.Totalelectricoperating revenues.

Averagepriceperkwhbilled-centsResidential

.Commercial Industrial

.Totalforultimatecustomers

......Totalforallcustomers.....

~......Totalforsystemsales........~...41,5112,032(11,281)(1,837)30,425$714,753557,216473,48874,0471,819,504 292,0442,111,548 52,34425,033$2,188,925 8.157.785.937.346.947.2542,7173,716(16,235)(2,079)28,119$634,669492,686438,42764,2231,630,005 232,5981,862,603 78,54530,059$1,971,207 7.607.325.556.856.626.7737,8903,765(15,377)(1,780)24,49837,7203,880(16,405)(2,138)23,05729,5811,414(6,900)(1,798)22,297$591,922441,651411,53359,5261,504,632 31,809$529,911386,617367,95047,2751,331,753 18,494$503,557363,233347,72647,7311,262,247

$1,556,676

$1,243,680

$1,213,303 7.006.775.076.306.276.236.516.324.835.915.865.836.266.114.755.745.665.661,536,441 1,350,247 1,262,247 (9,725)(119,539)

(61,652)29,96012,97212,708Generation DataGenerating capability

-thousands ofkw(a)..Winterpeakdemand-thousands ofkw(f)..Generation byfuelsource-%CoalNuclear(e).Oil.Hydroelectric Steamstationavailability-%

Coal-fired

.Nuclear(e).Oil-fired Steamstationutilization

-%Coal-fired

.Nuclear(e).Oil-fired 7,5195,15460.624.413.21.878.861.784.769.361.338.07,5134,98161.427.010.21.478.670.787.272.370.530.07,4845,51970.416.611.02.075.266.768.073.365.728.67,4944,86971.311.914.91.978.867.775.874.067.538.86,5464,48986.11.010.82.179.180.470.222.239 OfficersDirectors aROBERTK.CAMPBELL, President andChiefExecutive OfficerMERLINF.HERTZOG,Executive VicePresident-Corporate ServicesJOHNT.KAUFFMAN, Executitu VicePresident-Operations CHARLESE.RUSSOLI,Executive VicePresident-Financial BRUCED.KENYON,SeniorVicePresident-I<luctear LEONL.NONEMAKER, SeniorVicePresident-DivisionOperations JOHNR.BIGGAR,VicePresident-Finance GENNAROD.CALIENDO, VicePresident andGeneralCounselJOHNM.CHAPPELEAR, VicePresident-Intv'.stments andPensionsTHOMASM.CRIMMINSJR.,VicePresident-Pou:erProduction ROBERTS.GOMBOS,VicePresident-HumanResource<i'cDevelopment CHARLESJ.GREEN,VicePresident-Harrisburg DcvisionWILLIAMF<.HE<CHT,VicePresident-System PouterHAROLDW.KEISER,VicePresident-I<luctear Operations JOHNP.KIERZKOWSKI, VicePresident andTreasurer CARLR.MAIO,VicePresident-Lehigh DivisionGRAYSONE.McNAIR,VicePresident-

<'tfarketing

&CustomerServicesEDWARDM.NAGEL,VicePresident andSecretary HERBERTD.NASHJR.,VicePresident-Central DivisionCLAIRW.NOLL,VicePresident-Procurement ZComputerScrviccsJOHNE.ROTH,VicePresident-Northern DivisionJOHNH.SAEGER,VicePresident-Susquehanna DivisionEDWINH.SEIDLER,VicePresident-Engineering

<f;Constrccction-Systenc Power<f;Enginccri ngBRENTS.SHUNK,VicePresident-i.ancaster DivisionJEANA.SMOLICK,Assistant Secretary GEORGEF.VANDERSLICE, VicePresident andComptroller PAULINEL.VETOVITZ, Assistant Secretary HELENJ.WOLF'ER,Assistant Secretary andAssistant Treasurer Corporate ilfanagement Committee:

RobertK.Campbell, chairman; MerlinF.Hertzog,JohnT.Kauffman, CharlesE.Russoli,BruceD.Kenyon,LeonL.Nonemaker, andEdwardl'.Reis,Director-Corporate

Planning, servingasthecommittee's executive secretary.

CLIFFORDL.ALEXANDER JR.,Washington, S.C."'President, Alexander

&Associates Inc.Consultants tobusiness, government andindustryROSWELLBRAYTONSR.,WoolrichChairmanoftheBoardandChiefExecutive Officer,'lVoolrich lVoolenMillsInc.Mantcfacturer ofgarmentsforouldooractivities JEFFREYJ.BURDGE,CampHillChairmanofticeBoardandClciefExecutive Officer,HarscoCorporation.

Manufacturer ofprocessed andfabricated metalsROBERTK.CAMPBELL, Allentown President andChiefExecutive OfficerEDGARL.DESSEN,HazletonPhysician-Radiologist EDWARDDONLEY,Allentown

Chaimnan, Executive Commitlee, AirProductsandChemicals Inc.llfanufacturer ofindustrial andcommercial gasesandchemicals REV.DANIELG.GAMBET,O.S.F.S.,

CenterValleyPresident, Al(entotvn CollegeofS4FrancisdeSalesMERLINF.HERTZOG,Allentown Executive VicePresident-Corporate ServicesFRANCESR.HL<SSELBE<IN, NewYorkCityNationalExecutive

Director, GirlScoutsoftheU.S.A.HARRYA.JENSEN,Lancaster DirectorandformerChiefExecutive Officn;Armstrong lVorldIndustries I>>c.Manufacturer ofinteriorfurnislcings andspecialty productsJOHNT.KAUFFMAN, Allentown Executive VicePresident-Operations HAROLDS.MOHLER,HersheyFormerChairmanoftheBoard,HersheyFoodsCorporation.

Diversified manufaclurer offoodproductsRALPHW.RICHARDSON JR.,StateCollegeConsullant, agricultural andenvironmental sciencesNORMANROBERTSON, Pittsburgh SeniorVicePresident andChiefEconomist, MellonBank,l<I.A.CHARLESE.RUSSOLI,Allentown Executive VicePresident-Financial DAVIDL.TRESSLER, ScrantonChairmanoftheBoardandChiefExecutive Officer,Northeastern BankofPennsylvania Executive Committee:

RobertK.Campbell, chairman; EdgarL.Dessen,HarryA.JensenandNormanRobertson.

AuditCommittee:

DavidL.Tressler, chairman; CliffordL.Alexander Jr.,RoswellBraytonSr.,Rev.DanielG.Gambet,ilaroldS.MehlerandRalphW.Richardson Jr.Corporate Responsibility Committee:

FrancesR.Hesselbein, chairman; JeffreyJ.Burdtte,EdgarL.Dessen,Rev.DanielG.Gambet,HaroldS.MohlerandDavulL.Tressler.

Management Development andCompensation Committee:

RoswellBraytonSr..chairman; CliffordL.Alexander Jr.,EdgarL.Dessen,EdwardDonleyandNormanRobertson.

Nominating Committee:

RalphW.Richardson Jr..chairman; JeffreyJ.Burdge,EdwardDonley,FrancesR.Hesselbein andHarryA.Jensen.Form10-KandPP&LPROFILEThecompany's annualreportfiledwithtltcSecurities andExchangeCommission onForm10-Kwillbcavailable mid-March.

Eachyearthecompanypublishes thePP&LProfile,a10-yearstatistical review,containing in.depthinformation aboutthecompany.The1976-198G Profilewillbeavailable inMay.Ashareowner mayobtainacopyofthesepublications, atnocost,bywritingtoPennsylvania Power&LightCompany,TwoNorthNinthStreet,Allentown, PA18101,Attention:

Mr.GcorgcI.Klinc,Manager-Investor Services.

40 BoardofDirectors

$$t<tIAlexander BraytonurdgeDessen,<./!,!.'fr,'iyDonleyGambetHesselbein Jensen~I,vlMohlerRichardson Robertson TresslerCorporate Management Committee 4a4NlNi)I4Nonemaker HertzogCampbellKauffmanRussoliKenyon

~ggQgPennsylvania Power&LightCompanyTwoNorthNinthStreet~Allentown, PA18101~215I770-5151BULKRAgEU.S.POStAGEPAIDAllentown.

Pa.PermitNo.104FiscalAgentsSecurities ListedOnExchanges TRANSFERAGENTSFORPREFERRED, PREFERENCE ANDCOMMONSTOCKMorganShareholder ServicesTrustCompany30WestBroadwayNewYork,NewYork10007-2192 Pennsylvania Power&LightCompanyManager-Investor ServicesTwoNorthNinthStreetAllentown, Pennsylvania 18101'EGISTRARS FORPREFERRED, PREFERENCE ANDCOMMONSTOCKMorganShareholder ServicesTrustCompany30WestBroadwayNewYork,NewYork10007-2192 Pennsylvania Power&,LightCompanyManager-Investor ServicesTwoNorthNinthStreetAllentown, Pennsylvania 18101DIVIDENDDISBURSING OFFICEANDDIVIDENDREINVESTMENT PLANAGENTPennsylvania Power&LightCompanyVicePresident andTreasurer TwoNorthNinthStreetAllentown, Pennsylvania 18101NEWYORKSTOCKEXCHANGE4tvaa%Preferred Stock(Code:PPLPRB)4.40%SeriesPreferred StockCode:PPLPRA)8.60%SeriesPreferred StockCode:PPLPRG)9.24%SeriesPreferred StockCode:PPLPRM)Preference Stock,$8.00SeriesCode:PPLPRJ)Preference Stock,$8.40SeriesCode:PPLPRH),Preference Sto'ck,$8.70SeriesCode:PPLPRI)-'Prefer'ence Stock.$11.00Series(Code:PPLPRL)Comm'onStock(Code:PPL)PHILADELPHIA STOCKEXCHANGE4'%referred Stock3.35%SeriesPreferred Stock4.40%SeriesPreferred Stock4.60%SeriesPreferred Stock8.60%SeriesPreferred Stock9%SeriesPreferred Stock9.24%SeriesPreferred StockPreference Stock,$8.00SeriesPreference Stock,$8.40SeriesPreference Stock,$8.70SeriesPreference Stock,$11.00SeriesCommonStock