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Annual Rept 1978 for Allegheny Electric Cooperative,Inc
	ML17138A784
Person / Time
Site:	Susquehanna
Issue date:	12/31/1978
From:	CURTIS N W; PENNSYLVANIA POWER & LIGHT CO.
To:	;
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ML17138A785	List: ML17138A784; ML18031A261;
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	Download: ML17138A784 (455)
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{{#Wiki_filter:QooQog]fLECTRICCOOPERATIVE, INC.'3iggo)i'F909>40ZZ7 SUSQUEHANNA UP-DATEOnJanuary10,<<1978,Allegheny ElectricCooperative, Inc.became10%ownersofPP&L'sSusquehanna NuclearplantnearBerwick.Construction oftheplantisabouttwo-thirds complete. However,commercial operations ofthetwo1,050,000 kilowattunitswillbedelayedforapproximately sixmonths,mainlyduetotheworkloadoftheNuclearRegulatory Commission {NRC)asaresultoftheTMIincident. ThenewtargetdateforUnitIisJuly,1981.'ork ontheoutershellofthecoolingtowerforUnit1hasresumed.Construction stoppedApril27,1978,afterascaffoldcollapsed onasimilartowerinWestVirginiakilling51workersfromanothercompany.TheSusquehanna coolingtowerwasonly20feetshortofitsfinalheightof540feetwhenthisoccurred. A15volumeFinalSafetyAnalysisReportandathreevolumeEnvironmental ReportwasfiledwiththeNRCaspartofthelicenseapplication tooperatetheSusquehanna plant.Thistook90,000hoursofpreparation timeandincludedhundredsofitems,suchastheplant'simpactonemployment, housing,taxes,zoning,agriculture, recreation, transportation, water,air,vegetation, animals,soilandthereactionofplantneighbors tothesoundsofconstruction. AspartoftheSusquehanna project,a340-acrenaturalpark,Susquehanna Riverlands, isbeingbuiltneartheplantsiteasawildlifepreserve, withobservation areastoenablevisitorstoviewwildlifecloseathand.InJune,1978,theSusquehanna EnergyInformation Center,whichisalsobuiltneartheplantsite,wasopenedtothepublic.TheInformation Centerexplains, inlayman'slanguage, hownuclearfissionisusedtocreatesteamwhich,inturn,isusedtopowertheturbine-generator. Thecenterincludesmanyinteresting energyexhibitswithemphasisonnuclearpower. PRESIIDENT'SREPORYAnadequatesupplyofenergyisextremely important forallofustocontinuetoliveaswedo.Atotallackofallformsofenergyisnotarealistic prospect. Thereisarealistic prospectofdiminishing supplythatwillcreaterealproblemsinsomeareas.ItisAllegheny's responsibility toseethatallitsmembershaveanadequatesupplyofelectricity forthefutureatthelowestpossiblecosttotheconsumer. Toaccomplish this,Allegheny isworkingtowardowningalargprpercentage oftheirowngeneration andtransmission facilities alongwiththeutilization ofoneofthearea'srenewable resource... ourfallingwaters... togenerateelectricity. Todothis,wearepresently tryingtogetauthorization fortheU.S.ArmyCorpsofEngineers hydroprojectatRaystownDamnearHuntingdon. Raystownwouldhelp cutthecostofpurchasing expensive peakingpowerwhichiscurrently generated byveryexpensive naturalgasandoil-fired generators. Wehavealsocompleted studiesonthefeasibility ofbuildingalow-headhydroprojectatanexistingdamsitewhichisnowunderconsideration atREA.Alongwiththis,Allegheny isstudyingthepossibility ofjointownership oftwo400MWanthracite-fired generating units.Thishardcoal,lowinpollutants isfoundinsufficient quantities inthenortheast areaofPennsylvania. Ifthesecoal-fired unitsaredeveloped, theywouldhelpstimulate thelocaleconomyaswellasprovidegeneration forourfutureneeds.Atthesametime,itmakesgoodsensethatwemakeeveryeffortpossibletoincreaseourefficiency ofoperations andstretchoutwhatresources wehavetodaysothattheywillmeetourneedsjustaslongaspossiblethrough"loadmanagement." Loadmanagement isnotapipedream.Itisatested,triedandprovenmeansofimproving theefficiency ofelectricsystemswhichwewillbeutilizing soon.Utilities mustbuildfacilities tomeetpeakdemandofalloftheirconsumers anditmakesgoodsensethatifwecanreducethatpeakbyspreading itoutovermorehoursoftheday,everyonewillgain.Thesearetryingtimesand'eachyearourworkbecomesmorecomplexanddifficult. Onlybyworkingtogetherinthetruecooperative spirit,canwebringourconsumers anadequatesupplyofelectricenergyforthefutureatthelowestpossiblecost.Withthemembersunderstanding andsupport,wecanbeassuredofsuccess. AILLEGHENYBOoD~IRDo QFDolllREC70oBS PRESIDENT JimHenderson SussexVICEPRESIDENT SECRETARY TREASURER MyronLudwickWarrenJohnAnstadtSullivanRobertSterrettCentralBOARDMEMBERSHarrisHornAdamsDennisShafferBedfordJohnDrakeClaverack BenjaminSlickNewEnterprise A.D.Stainbrook Northwestern HiramWalkerSomersetClairD.Buterbaugh Southwest Central~l/UoydDugan,Sr.Tri-County ,JRobertELeonardUnitedDonHillValley Myreportthisyearisdevotedtothe"leadership" responsibilities thathavebeenthrustuponallPowerSupplyCooperatives asaresultofournation'scrisis.Thelargestproblemfacingtheaveragefamilytodayistheconstantly increasing costofenergy.Iamreferring toallformsofenergyincluding

gasoline, otherpetroleum fuels,coal,uraniumand,ofcourse,electricity.

Withlonglinesatthegaspump,thepublicisfinallyconvinced ofanenergycrisis.Ifnewgeneration isdelayedandwehavebrownouts, I'msurealldoubtswillvanish.Therecent30%increaseingasolinepricesprovesthatenergyisthelargestbudgetitem.Energyconservation, therefore, becomesofgreaterimportance. Averyimportant additiontoAllegheny's staffwastherecentemployment ofanEnergyAdvisortodirectourEnergyConservation Program.Ourenergyconservation vanisontheroadhelpingAllegheny's MemberSystemsperforminformational andeducational programsonhowtoconserveenergy.IamhappytoreportthatAllegheny hasdemonstrated itsleadership positioninpromising fullandcompletecooperation withREAAdministrator, RobertFeragen's requestforallpowersupplycooperatives toparticipate inresearchanddevelopment of"alternate" sourcesofenergy.Weareactivelyparticipating inwindenergydevelopment andgeneration usingmethanegasfromcoalmines.Theamountofmethanegasfromcoalminesthatisbeingwastedstaggersyourimagination. Allegheny continues tostudythedevelopment ofhydro-electric projects. Anotherleadership areais"joint-action". Allegheny, incooperation withthePennsylvania Municipal ElectricAssociation (PMEA),willsoonintroduce whatiscalled"Joint-Action/Joint-Agency Legislation" intheGeneralAssembly. Thiswillallowmunicipal utilities tojointogetherwithotherutilities toachieveeconomyofscaleinpowersupplyprograms. Asourceoffuelforgeneration nowappearstobePennsylvania's anthracite coalreserves. TherecentactionbytheEnvironmental Protection Agencytoeliminate scrubberrequirements onanthracite-fueled plantsisatremendous stepinusingthisfueltogenerateelectricity. Wearepresently studyingthispossibility. Inconclusion, Iexpressmymostsincerethanksandappreciation toallAllegheny Directors, Managersandemployees formaking1978ayearofprogressandgivingusthesupporttocontinueour"leadership" responsibilities aswelookatthefuture. TheAllegheny ElectricCooperative, Inc.stillfacesthemostseriouscrisisofitshistorybythepotential lossofitsonlylow-costpowersourcefromtheNiagaraPowerProjectofthePowerAuthority oftheStateofNewYork.In1977,anewtaxonout-of-state. utilities wasenacted.Itaddsa4.5%GrossReceiptsTaxonexportelectricity. TheNewYorkStatelegislature reactedby adoptingaresolution memorializing GovernorCareyofNewYorktonotrenewtheAllegheny contractuntilthePennsylvania legislature tookactiontorepealthistax.Atpresenttime,Allegheny isoperating onaday-to-day supplycontractextension. ThelossofthisPASNYpowertoourfourteenruralelectriccooperatives, wouldhaveastaggering effectonourruralconsumers addingS100-$200peryeartotheirelectricbills.Increases inelectriccostsforpeoplewhoareleastabletoaffordthem.StateRepresentative DavidS.Hayes,hasintroduced legislation (HouseBill852),thatasksfortherepealofthisGrossReceiptsTax.StaffmembersfromAllegheny andthemember-cooperatives areworkingdayandnightwiththeStatelegislature toeffectuate thesuccessful repealofthisdiscriminatory tax.ASeptember voteisexpected, onthebill. REVIEWOFPOWERCOSTSAsofDecember31,1978,Allegheny's averagepurchased powercostfromourfivepowersuppliers reached20.12Mills/KWH or2.012C/KWH. Lastyear,Allegheny's averagecostreached20.11Mills/KWH. Atfirstglance,itappearsthataveragecostsremainedconstantforthe12monthperiodof1978.However,thatisnotentirelythecase.Totalcostdollars'ose from$31,124,700.43 in1977to$32,497,504.81 in1978.Thisrepresents anincreaseof$1,372,804.38 or4.4%inpurchased powercosts.Coupledwiththisincreaseincost,Allegheny's totalsystemspowerrequirements increased from1,547,343,211 KWHin1977to1,615,219,722 KWHin1978-anincreaseof67,876,511 KWHor4.4%.Mathematically, eventhoughpurchased powercostsrose,averagecostsremainedrelatively constantfortheyear.Inconjunction withAllegheny's averagecostofpurchased power,thecostofwholesale powerpurchased byeachofourmembercooperatives fromAllegheny increased from20.93Mills/KWH in1977toanaverageof21.95Mills/KWH in1978-anincreaseof1.02Mills.Intotaldollars,themembercooperatives paidatotalof$35,459,816.11 ascomparedto$32,383,249.22 in1977.Thisrepresents anincreaseof$3,076,566.89 or9.5%duringtheyear.Ofthistotalincrease, 44.6%wasadirectresultofincreased powercostsincurredbyAllegheny andtheremaining 55.4%wasduetoincreased revenuerequirements whichAllegheny neededtofundanumberoffuturepowersupplyprojects, mainlyURADCOwhichisthefuelfortheSusquehanna SteamElectricStation,increased engineering andlegalfees,andotherboard-approved, budget-related itemssuchasthehydrostudies,etc.During1978,Allegheny's totalpurchased powercostrepresented 91.6%ofourtotaloperating revenue.Fortunately forAllegheny andeachofourmembercooperatives, the130megawatts offirmhydropowerandassociated energywhichwepurchasefromthePowerAuthority oftheStateofNewYorkwasstillavailable fortheentireyear.Thispurchaseofclean,dependable, low-costhydropowerfromthePowerAuthority, savedAllegheny atotalof$14,109,247.93 duringtheyear.Anylossorreduction ofthisvaluableenergyresourcewouldbedisastrous fortheruralelectriccooperatives throughout Pennsylvania andNewJersey.Turningtocurrentrate-related matters,Allegheny's policyisandhasalwaysbeen,thatanycashrefundreceivedfromoneofourpowersuppliers asaresultofratecasesbeforetheFederalEnergyRegulatory Commission (FERC),willberefundedinitsentirety, plusanyinterest, tothemembercooperatives. In1978,Allegheny refunded$109,065.19 tothemembersasaresultofasettlement agreement reachedwithJerseyCentralPower5LightCo.Also,Allegheny hadplannedtorefundanadditional $1,446,103.17 becauseofanFERCdecisionrelatingtocasesdealingwithPennsylvania ElectricCompanyandMetropolitan Edison.Thismoneywasnotrefundedtothemembercooperatives becausebothofthesecompanies appealedtheFERCdecisionintheUnitedStatesCourtotAppeals.Fortunately, Allegheny wasabletowinbothcasesbeforethecourtandthisratherlargerefundwillnowbemadetothemembercooperatives atthe1979SummerMeeting.Asidefrompurchases madefromthePowerAuthority oftheStateofNewYork,eachofAllegheny's fourwholesale powersuppliers filedwholesale rateincreases beforetheFERCin1978.Presentestimates arethatthePenelecincreaseamountstoapproximately $5.6millionor24.7%andincreases ouraveragecostfromPenelecfrom33.4Mills/KWH toanestimated 41.3Mills/KWH. TheMet-Edincreaseamountstoapproximately $1.1millionor31%andincreases averagecostfromMet-Edfrom36.2Mills/KWH toanestimated 45.8Mills/KWH. Smallincomparison, theWestPennincreaseamountstoonly$42,000or1.2%andincreases WestPenn'scostfrom22.41Mills/KWH toapproximately 22.69Mills/KWH. TheJerseyCentralincreaseamountstoapproximately $548,000or22.1%andincreases averageJerseyCentralcostsfrom28.08Mills/KWH toapproximately 38.0Mills/KWH. Intotal,theresultofthesefourmajorrateincreases willcauseAllegheny's totalpurchased powercoststoincreasesome$7.2millionorbyapproximately 20%.Averagecostisexpectedtoincreasefrom20.12Mills/KWH toapproximately 25Mills/KWH. Itappearsthatthedaysofcheapelectrical energyaregone.Fortunately, throughtheeffortsofAllegheny's specialcounselWilliamC.Wise,SouthernEngineering CompanyofGeorgia,andtheAllegheny staff;eachofthesemajorrateincreases werecontested beforetheFederalEnergyRegulatory Commission andafullfive-month suspension wasorderedinallcases.Infact,theminimalWestPennincreasewassettledwithnoincreasewhatsoever toAllegheny. Hopefully, oncethePennsylvania ElectricCompany,Metropolitan EdisonCompanyandJerseyCentralPower&LightCompanycasescomebeforetheCommission forfurtherreviewanddebate,Allegheny willsucceedinreducingtheincreases considerably. Weareconvinced thattheunfortunate incidentattheThreeMileIslandNuclearGenerating Facilitywillplayamajorroleintheseratecasediscussions. Nextyear'sAnnualReportwillhopefully, onceagain,announceadditional refundstoourmembercooperatives. Keepingthepriceofelectricity (ourmostdependable andeconomical resource) reasonable, hasalwaysbeenoneofAllegheny's primaryfunctions fortheultimatemember-consumers throughout Pennsylvania andNewJersey. WilliamF.MatsonExecutive VicePresident andGeneralManagerPaulN.TetherowAssistant GeneralManagerC.DonaldBlackburn OfficeManagerWilliamE.MowattGeneralCounsellf[~[)~~,l!IIIIII%~lijlI>>'l!IIIIII!II'obert HornCoordinator JobTrainingandSafetyWilliamLoganAdministrative Assistant andLegislative Representative STP~,IFIF AnthonyAdonizioResearchAssistant Assistant GeneralCounsel!!!Ifll!!!II IllllHllllllllllUlllllllllllIll ~h~iaiaIIIIIIIIIIIIIIII<" IWl~!!!!!!!!!!~ gl!Illll!JII1I!llfllllllllllll, '",,,~.@~ll!!IIIIIIIIIIIIIIIIIIIIII "III<(CharleenBeachlerTypistGeorgeBlackPrintingSpecialist MaryJaneBraniganCentralFileClerkandTypistElizabeth BrownGraphicArtistTeannaByertsProduction Assistant PatGiftExecutive Secretary JanIvanoffEngineering AideRobertaIVlitchell Phototypesetter ThuHuongNguyenBookkeeper RichardOsborneStaffEngineerPatPotteiger Secretary StellaRoadcapBookkeeper WilliamSarantakas JobTrainingandSafetyInstructor EdStevensAccountant II"'atricia StevensPENNLINESEditorial Assistant andSecretary GinnySwainston Secretary GaryWoblerEnergyAdvisorJosephZulloStaffEngineer 8Fil8I2llC[]GoVatellCGDPer8tive St8@stics -'8978MemberCo-opAdamsBedfordCentralClaverack NewEnterprise Northwestein SomersetSouthwest CentralSullivanSussexTri-County: UnitedValleyWarrenTOTALTotalSalesofElectricEnergys7,598,710.20 2,645,441.19 6,284,197.00 5,159,503.00 1,065,233.00 6,773,057.00 4,815,313.64 7,066,408.00 1,437,733;16 2,838.423.00 4,647,792.00 5,153,236.00 5,620,742.00 1,851,577.00 $62,957,366.1 9TotalCostofElectricServices7,073,452.75 2,509,251.60 5,953,551.00 4,829,388.00 1,038,882.00 6,269,110.004,403,008.37 6,392,528.00 1,338,698.07 3,110,544.00 4,447,837.00 4,944,890.00 5,300,776.00 1,695,377.00 $59,307,293.79 TotalCostofPurchased Powers4,299,792.54 1,630,044.24 3,412,779.132,900,847.73 679,850.02 3,845,061 003,028,280.22 4,321,954.69 820,758.33 1,608,605.1 72,412,767.882,494,753.09 3,145,237.85 859,084.22 $35,459,81 6.11TotalUtilityPlants20,446,658.31 6,790,351.36 14,194,819.00 14,150,280.00 1,645,979.00 16,357,390.00 11,847,655.60 14344~.00 3,646,476.67 7,947,149.05 15,919,638.00 16,643,915.0015,763,613.00 6,307,380.00 $166,393,242.99 MemberCooperative AdamsBedfordCentralClaverack NewEnterprise .Northwestern SomersetSouthwest CentralSullivanSussexTri-County UnitedValleyWarrenTOTALNumberofConsumers 14,7106,23619,05111,3902,27813,8838,76615,8204,0826,86613,02713,76613,3847,478150,737,MilesofLine2,0971,0092,7172,1512502,1501,7122,0267113822,4842,4761,97994123,085Consumers PerMileofLine7.06.27.05.39.16.55,17.85.718.05.25.66.87.96.5TotalKWHPurchased 195,161,300 74,893,200 156,797.000 131,816,00530,758,000 176,572,768 134,808,600 199,412,55037,448,044 73,420,000 108,488,978 113,516,150 143,546,030 38,581,033 1,615,219,658AnnualPeakDemand53,21118,67833,94730,6217,87040,50534,20545,2999,95417,28031,49228,26335,46411,281398,070 ALLEGHENY ELECTRICCOOPERATIVE, INC.,3'1DECEMBER1978AND1977AssetsTotalUtilityPlantinService.Communication Equipment Transmission StationEquipment .Laboratory Equipment Construction WorkinProgressTotalUtilityPlantAccumulated Provision forDepreciation .NetUtilityPlant.Investments inAssociated Organizations .Cash-GeneralFunds.Cash-Construction FundsTemporary CashInvestments .SpeciaIDepositsReceivables .TotalCurrentandAccruedAssets.DeferredDebits.TOTALASSETSLiabilities Memberships Patronage CapitalDonatedCapital-Members.DonatedCapital-Non-Members .TotalMarginsandEquitiesLong-Term Debt-REALong-Term Debt-NRUCFCNRUCFC-Subscriptions .AccountsPayable..DeferredCreditsTOTALLIABILITIES ......Member-RevenuesAdamsElectricCooperative, Inc............... BedfordRuralElectricCooperative, Inc.CentralElectricCooperative, Inc............... Claverack RuralElectricCooperative, Inc...... NewEnterprise RuralElectricCo-op,Inc..Northwestern RuralElectricCo-op,Assn.,Inc..SomersetRuralElectricCooperative, Inc..Southwest CentralRuralElectricCo-op,Corp...SullivanCountyRuralElectricCo-op,Inc.SussexRuralElectricCooperative .Tri-County RuralElectricCo-op,Inc.UnitedElectricCooperative, Inc.ValleyRuralElectricCooperative, Inc..WarrenElectricCooperative, IncTOTAL1978S138,79357,06926,989551128,442,220 S128,665,622 23.376S128,642,246 .....S4.745,509 275,3722,400,289 1,141,000 1,115,000 3,445,466 S8,377,127 1,025.557 S142,790,439 19782,8006,388,731 29,3163496,421,196 123,916,00052,97110,865,070 S1,535,202 ..~.....S142,790,439 1978S429979254 1630044243,412.779.132,900,847.73 679,850.02 3,845,061.00 3,028,280.22 4,321,954.69 820,758.33 1,608,605.17 2,412,767.882,494,753.09 3,145,237.85 859,084.22 S35.459,816.11 19771137,67526,98988,824,311 S88,988,975 11.289S88,977,686 S3,273.735 13,7421,845,380 5,099,472 46,958,594 454,351S99.664,366 1977S28003,220,119 29,316349S3,252,584 86,013,668 8,933,313 S1,464.801 S99,664,366 1977S3,611,651.76 1,500,129.623,130,459.00 2,686,046.00 623,565.96 3,283,533.00 2,693,288.95 3,859,708.00 750,480.44 1,456,118.17 2,147,021.00 2,138,026.00 2,895.057.00 797,585.07 S31,572,669.98 tt'il978-OPetretring ENPerIseAllegheny ElectricCooperative, Inc.Wholesale PowerCostPowerAuthority StateofNewYork(PASNY)WestPennJCP&LMet.EdisonPenelecCOSTINDOLLARS3,680,527.35 3,417,733.44 2,019,974.95 2,780,143.96 17,031,265.1 7COSTINMILLS/KWH 5.03M/KWH25.24M/KWH27.51M/KWH30.46M/KWH29.20M/KWHPERCENTAGE OFTOTALCOS111.12%10.33%6.10%8.40%6146%Sub-Total $28,929,644.87 17.91M/KWH.87.41%Transmission Costs(Wheeling forPASNYPower)NewYorkCompanies G.P.U.Companies. Sub-Total .TotalPowerSupplyExpenseOtherExpensesCustomerAccts.Admin.&GeneralDepreciation &Amortization 624,000.00 2,943,859.94 .S3,567,859.94 .$32,497,504.81 $601,640.1 90.39M/KWH1.82M/KWH2.21M/KWH20.12M/KWH0.37M/KWH1.89%8.89%10.78%98.19%1.81%TotalOperating Expense.$33,099,145.00 20.49IVI/KWH100.00%PURCHASED POWERSOURCESBYPERCENTAGE -31DECEMBER1978TOTALKWH-1,615,219,722 -1978-COSTOFOPERATIONS DOLLARDISTRIBUTION MET-ED5.7%WESTJCP&LPENN4.5%84%PASNY12CJCP&L6CADMINISTRATION &GENERAL2CWESTPENN10CPASNYWHEELING2CPASNY45.3%MET-EDISON 8CGPUWHEELING9CPENELEC36.1%PENELEC51C 35AVERAGEMONTHLYWHOLESALE POWERCOST30'00hC25201977-0/HOLESALE POWERCOSTAVERAGEANNUAL'1976 )510JANMAR:~MAYJULSEPTNOVJANMARMAYJULSEPT.NOVFEB-APRŽJUNAUG.OCTDECFEBAPRJUNAUG.OCTDEC1700YearlyKilowattHoursPercentage ofIncrease400MonthlyMegawattDemand16004.39%3501500lh1400Zc0.'130012006.88%677%8.75%300250~~~i4oi04OP11001439%200a~~e410009001971"197219731974197519761977~1978150197819771976JAN.FEBMARAPRMAYJUN'JUI.AUGSEPTOCTtl6VOEC ALYERNAYE ENERGYSOURCES-Everyday,millionsofcubicfeetofmethanegasareexhausted intotheairtoridcoalminesofdangerous methanegas.program.Allegheny ElectrichasheldmeetingsonthiswithWestinghouse Electricandcoalcompanies todevelopthissourceofenergy.Inmostothernationsottheworld,thismethanegasiscapturedandusedtogeneratepower.Underthedirection ofREAAdministrator Feragen's requesttopursuethedevelopment oftheuseof"alternate" sourcesofenergy,Allegheny Electriciscooperating withWestinghouse instudyingpilotprojectsinwesternPennsylvania. Westinghouse Electricreceivedafederalgranttoobtainsomefirst-hand operating experience anddata.Therearecoalcompanies interested incooperating withthisThesepilotprojectswillbesmall.Whenthetechnology isfullydeveloped, thebenefitsfromthisgeneration shouldimprove.Withthecrisisthisnationfacesinsolvingitsenergyproblems, Allegheny Electricisdevotedtodoitsshareinsupporting theeffortsoftheDepartment ofEnergy.Wealsowillcooperate asanREAborrowerinits"alternate energy"programs, whichinturncanbeabenefittothemember-owners ofAllegheny ElectricCooperative. ANYIHIRACQT.E~ COAIL-IFIIR EDGENERAYIION Pennsylvania StateUnivegsiyyundeg.Fgr~t Ayote~tiagly'ignificant tublingblockfromtheUnitedState~sDepartme~t++E~erg, wffichpa~sthe Go/ernogs~Ene gyC,neilandstudiedlarge~yateeinthracite mipnilg.~dring aQer+syrtte(ested'-iq thisproject-N beverperiodŽfrom 1976throughparty~1978. Thiscoyceg4ed~s<the pp~etjaporunreasonabl studyidentified sjtesviipe~r~a thracitevjlhygyI'ng,chai gesijjlp~ol~'d,ing)ttjttgthepowerproduction, suffigidnt t6fFetamoen-yizinyveg~dtoultimad~odcenters.Tj1erol)-generating ~sttfopvtrvoutdljre ppssjbtea~~reatep~wfgayjibv-benepens'rve~btjjj~te bthestucjyyvesto&evaluate ~~oorgjcw+t~tpQrurIelecttjqoperativespq stimujatiprt inareagYr~og'pe~~e5svagina+y-rtow'~~jaus] pro~[[)ps)o~"~'"~','deelo~pentj "open-pit" typefrtinjngwpfch~otge~rcostimersandthosd<intert}ate+i ouldJff~oirfg benefits~to~ffJMdepressed ev'Pigecmmbnites'nthe8jtpacientracitecoalminina teoionofPennsyfvania. n>garea.Untiltheconsumerhasm~learighttoexpecteneratiag efectrfcisg~vta&~tge gece~deliveryofenergyfromone~ratognother, announcem~6tWbp~t e~<Fnviontn~fathiscountrycannotsolveitseergy.crisis. ThePrtacton>Agency topgerrlp~f t$e~+se~ofnationalgridistheprimaryampleof-along-pfjtr-.'( ifs'vngidion'trfitrPfscoatfsverploujdn sutp1\urndtjta~tegfslation thatnbtysreceiveearlyscfCscruftjrarshweeeo~tjus1ffi~d~T ~~eonsfderadon bythoe'interested inthefutureeaaterj'prfcgafngthracfteduato1gg+etc stoogrna'on.miningmadeit%~useaqafidel.~os adreanissescSbgbers couldbeetfgrinated~ tniaohas~i'oneness.ofyoday's energyWsttegheny Eibctrichasvcvorkeke withthehotagesatnd thbfactthatotherfuelsforGorfernor's EnergyGouncilon~heEsesneratron-ate~re etoudprobtems, itcouldbeanthracite ateveryopportunity aplwetht~-perhapsthedayofanthracite continue1ostudytheprospects~t usingsneraltohastndee.arived.fSnthracite. Duetothedeepening energycrisis,Allegheny andit'distribution cooperatives havestrengthened theirconservation programinanefforttoavoidunnecessary wasteofenergyandfindnewalternatives thatwouldbebeneficial forboththecooperative andtheconsumer. Inthisspiritofcooperation, Allegheny hasadoptedapolicyforwindenergyconversion systems.Thepolicyisonethatwillallowamember-consumer tousetheenergyfromthewindtothefullestextentincluding thesaleofexcessenergythatcanbeproducedandsuppliedintothe.powersystem.ThereisanIncreasing interestintheuseofwindenergytogenerateelectricity anditisnecessary thatit'sbenefitsbeexplored.. Allegheny -isresearching thepossibility ofhavingconservation taughtinallPennsylvania schools.Itwould~bebeneficial forallifstudentsweretaughtthebenefitsfor-AllAmericans tobeenergyefficient. AweekinOctoberhadpreviously beensetasideanddesignated's Environmental Week.Allegheny feels,becauseoftheenergycrisisthatconservation shouldalsobe'aught. Newalternatives inwaystoconserveenergyarecontinuously being'revealed, ToenableAllegheny andthedistribution cooperatives toevaluatetheeffectiveness ofthesenewalternatives, testingprogramsareconstantly proceeding. Asolarwaterheater,which'hasbeenunderteststhispastyear,seemsveryeffective, althoughitstillrequiresaheatingelementas,aback-'up." Sinceheatpumpsarepopularinthemilderclimates, aheatpumpwaterheaterhasbeendeveloped. Inmostcases,theycanbeinstalled almostanyplace, althoughthebasementseemstobethemosteffective, asitdoesofferacertainamountofdehumidification whenitruns.Italsorequiresaheatingelementasaback-up.Allegheny hasfiledwiththeDepartment ofEnergy,anapplication foragranttohelpdevelopawaste-type waterheater.Theexperiment wouldusewasteheatfromtwodifferent areas,thechimneyandtheattic,toassistintheconditioning ofwater.Thisisstillpending.Itwasreportedinthe1977AnnualReportthatanenergyvanwaspurchased. It'spurposewastoassistthedistribution cooperatives intheirendeavors toencourage conservation. Itwillbeused'atco-opmeetings, fairs,.schoolsandotherevents.Itcontainsdifferent techniques, .whichcanbefollowed, thatmakesthehomemorecomfortable andenergyefficient. Toensuretheenergyvan'seffectiveness, Allegheny, it'distribution cooperatives andREAareproducing videotapestoillustrate thesetechniques. The'setapeswillbemadeavailable throughREAtoanycooperative inthenation.Theywillalsobereproduced asslidepresentations. Oneofthevideotapeprogramsbeingproducedistoillustrate theretrofitting ofafuel,oilfurnace.Thisprocedure maysaveas'muchas13%onfueloilconsumption. Thistapealsocanbeviewedontheenergyvan. llll0ttennsyvaniaectricooperatives UraProviding LowCostDependable Electricity 150Directors -700Employees 1.6BillionKilowatt-Hours Purchased Annually$166MillionInvestedinPlantServingin47Counties23,085MilesofLine150,737Member-Owners GIRARDSUSQUEHANNA CLAVERACK RURALELECTRICCOOPERATIVE WARRENWARRENELECTRICCOOPERATIVE TIOGATRI-COUIIITY RURALNORTHWESTERN RURALlELECTRICCOOPERATIVE CRAWFORDIMcKEANELECTRICCOOPERATIVE BRADFORDWAYNEPOTTERSULLIVAN+X SULLIVANCOUNTYLYCOMINGRURALELECTRICCOOPERATIVE~ WYOMING/BIAKELYELKICAMERONVENANGOPIKEMERCERSUSSEXSUSSEXRURALMQFIRQE~ELECTRICCOOPERATIVE JEFFERSON CLARIONCLINTONLUZERNECENTRALELECTRICUNITFDFLFCTRICCOLUMBIACOOPERATIVE BUTLERLAWRENCECOOPERATIVE MONTOURCLEARFIELD 7CENTRECARBONNORTHAMPTON NORTHUMBERLAND SNYDERSCHUYLKILL MIFFLINJUNIATABLAIRVALLEYRURALELECTRICCOOPERATIVE DAUPHINARMSTRONG INDIANASOUTHWEST CENTRALBEAVERLEHIGHRURALELECTRICCOOPERATIVE wCAMBRIAWESTMORELAND NEWJERSEYALLEGHENY BERKSBUCKSPERRYLEBANONHUNTINGTON NEWENTERPRISE RURALELECTRICMONTGOMERY WASHINGTON CUMBERLAND SOMERSETLANCASTER BEDFORDCOOPERATIVE ~>/.FUITOM REOPORORORALELECTRICCOOPERATIVE PHILADELPHIA FAYETTESOMERSETRURALELECTRICCOOPERATIVE CHESTERAOAMSELECTRICCOOPERATIVE DELAWAREGREENEADAMSWE%IVIRIINIAMARYLNI PEMMSYLVAMIA RURALELECTRICCOOPERATIVE'S ENERGYVAMSIIjILIIWv~=-ME~fIt-NOTICE-DEADLINERETURNDATE~~7Conti;)g~~FdP~IWVr.vouSA~libCA~I'~7LAPPDQPMVDSyPgI'ECORDSFACILITYBRANCHSTHEATTACHEDFILESAREOFFICIALRECORDSOFTHEDIVISIONOFDOCUMENT. CONTROL.THEYHAVEBEENCHARGEDTOYOUFORALIMITEDTIMEPERIODANDMUSTBERETURNEDTOTHERECORDSFACILITYSEARCH0'IS.PLEASEOONOTSENDDOCUMENTS CHARGEDOUTTHROUGHTHEMAIL.REMOVALOFANYPAGE(S)FROMDOCUMENTFORREPRODUCTION MUSTBEREFERREDTOFILEPERSONNEL. ALLEGHENY ELECTRICCOOPERATIVE, INC.212LOCUSTST.P.O.1266~HARRISBURG. PENNSYLVANIA 17108~PHONE717233-5704 PENNSYLVANIA POWER8LIGHTCOMPANYReyi~latorg THEATTACHEDFILESAREOFFICIALRECORDSOFTHEDIVISIONOFDOCUMENTCONTROL.THEYHAVEBEENCHARGEDTOYOUFORALIMITEDTIMEPERIODANDMUSTBERETURNEDTOTHERECORDSFACILITYBRANCH016.PLEASEDONOTSENDDOCUMENTS CHARGEDOUTTHROUGHTHEMAIL.REMOVALOFANYPAGE(S)FROMDOCUMENTFORREPRODUCTION MUSTBEREFERREDTOFILEPERSONNEL. DEADLINERETURNDATEa-sE0-.9g~j'RECORDSFACILITYBRANCH Highlights Customers, atEndofPeriod............ ~..Kilowatt-hours ofElectricity Generated Operating Revenues.CapitalProvidedbyInvestors, atEndofPeriodReturnonAverageCapitalProvidedbyInvestors .FixedCostRateofLong-Term DebtandPreferred andPreference Stock,atEndofPeriod.CommonStockData:ReturnonAverageCommonEquity......EarningsPerShareDividends DeclaredPerShare........... TimesInterestEarnedBeforeIncomeTaxes1976936Thousand28.5Billion$644Million$2.4Billion8.83%7.91%11.61%$2.68$1.802.621975918Thousand27.5Billion$544Million$2.1Billion876%7.76%12.52%$2.87$1.802.80Pennsylvania Power&LightCompanyisanelectricutilityproviding serviceto936,000,homes andbusinesses overa10,000-square-mile areain29countiesofcentraleasternPennsylvania. Principal citiesinthePPBLserviceareaareAllentown, Bethlehem, Harrisburg,

Hazleton, Lancaster,

Scranton, Williamsport andWilkes-Barre.

So'cRet+," Coiitrol4'l 'ateofDociment'EGULATORY DOCKETFllEContentsChairman's Comments1TheYearinReview3AnalysisofStatement ofIncome13Flnancials 17NotestoFinancial Statements 22Statistical Summary30Dividends andStockPrices31OfficersandDirectors 32PP8L'sNewPresident-Inside backcover Chairman's CommentsAfteryearsofunheededwarnings, severeshortages ofnaturalgasfinallyoccurred, gpgyig.~i.precipitated bytheprolonged wintercold.Onemoresignalthatwer.haveaseriouslong-term energysupplyprobleminthiscountry.Itisnowbeyonddebatethatwhenenergyshortages hit,oursocietyiscrippled. Theharshevidenceoflostemployment I~>andlostproduction isindisputable. Thewinterweatherconditions alsocreatedalargenumberofoperating difficulties forgenerating units.Evenj~so,electricloadsweregenerally met,thoughcapacitymarginsweretight.Theso-called excessgenerating capacityofsomeutilities -criticized hereandthereafewmonthsago-totallydisappeared inthewintercold.Onebrightspotwasthegoodperformance ofnuclearpowerplants,reflecting theirfreedomfromthelimitations ofconventional fuelsupplyanddelivery. Ifithadnotbeenforindustrial plantshutdowns becauseofnaturalgascurtailments, whichreducedelectrical loadsthatwouldotherwise havebeenonline,therewouldhavebeencriticalshortages ofelectricity. Thisisareminderthatthebasicissueofbuildingaheadtohaveadequategenerating capacityandfueltomeettomorrow's electrical needsisverymuchwithus.Leadtimesforpowerplantsitingapprovals andconstruction arelengthening. PP&L'smostrecentlookindicates that,asthingsnoware,wehavetoallowabout13yearstobringanewcoal-burning powerplantonlineatanewsite.Theimplications arescary.Thismeansthat,apartfromcapacitynowinservicepluscapacityunderconstruction, thereisnothingthatcanbedonetoaddmorecoal/nuclear-basedpowersupplyfor1984/1985. Indeed,wearepractically at1990.Everydayisincreasing thehazardoffutureshortages ofelectricpowersupply.Yet(Ij)//pt!':,~~-'~~~'j.- actionisinhibited andconstricted byacomplexamalgamofuncertainties andrisks.Theneedforclarifying andsupportive governmental energyajpoliciesisoverwhelming. Theadoptionofeffective newenergyfj."policiesdependsonwhetherAmericans havethewilltodowhatisrequired. Thegeologicandeconomicrealities underscore theneedformore,ru/investment forfacilities, fuelandadvancedresearch, aswellasmoreinvestment forconservation; Itisgoingtobeanexpensive process,withquickpayoffsbeingunlikely. Forthetimebeingatleast,allsignspointtocontinuing higherpricesforenergy.Thisisnottheanswerpeoplearelookingfor.Itseemstheywouldprefertohearthathigherpricesforenergyarecausedbysomekindofenergyfraudorfix,orbytheheedlessactionsofuncaringmanagements, notionswhichcarrythecomforting thoughtthatif"thescoundrels" canbeidentified andproperlydealtwith,consumerenergyproblemswilldisappear. So,alltoooftenthisiswhatpeoplearetold,frequently coupledwithafewrousingdenunciations of"obsceneprofits."

Although, suchtalkhasanunmistakable popularappeal,itispernicious nonsense.

Itobscuresrealityandpromotescop-outattitudes. Itdiscourages newinvestment andfrustrates thedevelopment andimplementation ofthebasiclong-term energydecisions thatarenecessary. Wewantourinvestors andcustomers toknowthatwhilewethinkitismisleading togivepeoplefalsehopethatsomewaycanbefoundtoprotectthemfromtherealityofhighercostsofenergy,werecognize thatitisourjobinPP&Ltorunatautshipandtoexerteveryefforttoholddowncostsandtoimproveourperformance. Weappreciate thatwearelivinginaneverchanging worldwherenewopportunities forbetterperformance regularly occur.r Weunderstand thatitisourresponsibility toseekthemoutandputthemtogooduse.Werealizethatwecannotseeourselves asothersseeus.Therefore, webelieveintheconceptofoutsideauditstomonitormanagement effectiveness andoperating efficiency. Whilenooneisperfect,andnoonelikestobecriticized, ouraimistohaveaconstructive attitudeabouttheoutsideauditprocessinwhichwewelcomesuggestions andadviceonwhereandhowwecandobetter.Wealsowantourinvestors andcustomers toknowthatoutsideforces,overwhichwehavelittleornocontrol,arethemaincausesforthehighercostsandpricesofenergy.Forexample,wedonothavecontroloverthefactthattheexploration anddevelopment ofenergyresources inmoreremoteandmoredifficult locations, andatgreaterdepths,isboundtobemorecostly.Wedonotconsiderthatweareresponsible forthenationalpoliciesanddecisions thathavecausedinflation withallitsconsequent costincreases. Nordidweestablish thehostofnewandcostlyenvironmental standards thatnowhavetobemet,withinevitable reflections inhigherpricesforelectricservice.Ourabilitytogetthingsdonepromptlyandatlowcosthasnotbeenhelpedbytheendlessstreamofnewgovernmental requirements whichhaveproliferated reports,hearings, investigations andallkindsoftechnical studies.Thesavinggraceinthisoutside-imposed costsituation isthatitdoesnotarisefromanyintention toincreasecosts.Onthecontrary, thedifficulty ratherstemsfromanexcesszealtodogoodthingsforpeoplewithoutsufficiently considering thecostconsequences beforehand. Thisisreallyaproblemofinadequate systemsmanagement. Overtime,energyhasbecomeafflicted bytoomanylaws,regulations andprogramswhichhavedifferent purposesandpriorities, andwhicharenonconnected andunrelated eventhoughtheyexistsidebyside.Wehavenowcometothepointwhereweareboggeddowninanunacceptable mishmashofcrosscurrents andconflicts. Somegovernment management housecleaning isinorder.Itismostencouraging thatPresident Carterhasproposedtoestablish acomprehensive, restructured federalenergydepartment headedbyDr.JamesSchlesinger. Weurgeinvestors andcustomers ofPP8Ltosupportactiontothisend.Wetakethispositionbecauseweareconvinced thatacentralobstacletothenation'sworkingitswayoutoftheenergycrunchisthepresentfragmentation ofenergyjurisdictions withinfederaldepartments andagenciesandwithintheCongressional committee structure. Theproposedfederalenergydepartment couldbeamostsignificant firststeptowardsestablishing anadequatemanagement systemforenergy.Othercounterpart housecleaning stepsinvolving theCongressandfederal-state relationships inenergycouldthenbepursuedwithsomereasonable chanceofsuccess.Withoutfurtherdelaywemustfacethefactthatourpatchwork quiltofpiecemeal energymanagement isnotworking.Certainly weneednaturalgas,butnaturalgascannotmeetallourenergyneeds.Thesameistrueforourothermajorfuelsources-oilandcoalanduranium.Allformintermeshed partsofthenation'soverallenergysupply.Theunavailability ofanyoneisdisruptive ofthewhole.Thatwasn'talwaysso,butitisnow.Themanagement ofenergyasatotalsystemistheonlysafeescaperoutethatstillremainsopentous.WeclosethesecommentswiththegoodnewsthatRobertK.Campbell, aformerexecutive ofWesternElectric's NewYork-based Manufacturing

Division, hasjoinedusaspresident, effective February1.Thisdecision, madebytheboardofdirectors aftermanymonthsofconsideration, isamajorstepintheprocessofproviding forthecontinuing strongmanagement oftheCompany.BobCampbellis47.HebringstoPPLLafinecombination ofexperience and"youngblood."Theinsidebackcoverofthisreportprovidesanin-depthlookatournewpresident.

Ihavebecomechairmanoftheboardandwillcontinueaschiefexecutive officer.Respectfully submitted, JackK.Busby,ChairmanMarch1,1977 TheYearInReview1976EarningsAlthoughearningsavailable forcommonstock~rosenearly8percentto$78.7million,PP&L'spershareearningswere6.6percentlowerfor1976thanayearago-$2.68pershareversus$2.87for1975.Contributing factorsinthedeclinewerethedelayinapprovalofhigherratestooffsetthehighercostsofdoingbusinessandthedilutingeffectofanincreaseof15.3percentinoutstanding shares.HigherRatesAllowedSomehelpinreversing thedownwardtrendofearningscameinAprilandAugustwhenthePennsylvania PublicUtilityCommission (PUC)allowedhigherratestogointoeffect.However,duringthe17monthstheratecasewaspending,additional substantial investment wasmadebytheCompanyinfacilities toserveourcustomers. Likewiseouroperating costsincreased substantially duringthisperiod.Theresultisthatourincome,basedonratesformulated generally on1975costlevels,islaggingsubstantially behindpresentcosts.This"lag"wasasignificant factorinour1976earningspicture.If,backattheoriginalMarch1976deadline, wehadreceivedtheamountwewerefinallyallowed,ourearningspersharefor1976wouldhaveexceededthe1975level.Itappearsthatduring1977wewillagainhavetopetitionthePUCforhigherratestoadjustforthehighercostsofproviding serviceandtocompensate investors forthefundstheyhaveprovidedfornewfacilities. TheCompanyhadoriginally requested anoveralltwo-step15percentincreasebackinMarchof1975becausetheratesineffectatthattimewerenotadequately coveringthecostofproviding electricservice.Thefirststepproposedanincreaseofabout4percentandthesecondsteprequested anadditional 11percent.Afterpublichearingsinthreecitiesbothstepsweresuspended becauseofconcernover"lifeline" provisions intherequest.Wehadfiledthelifelineproposais, whichwouldhaveexemptedfromanyincreasethefirst200kilowatt-hours ofusepermonth,torecognize someoftheinflation problemsfacedbysmailusers,lowincomepeopleandtheelderly.Thesuspension orderalsoinitiated theusualinvestigation oftheraterequest.Afterdenialofinterimreliefbecauseofthelifelineprovisions PP&Lfiledasubstitute requestwhichdeletedthelifelineportion.Thesubstitute 4percentwasallowedtobecomeeffective September 13,1975,subjecttorefund,andhearingsonbothstepsbegan.OnDecember9,1975,thePUCsuspended thesecondstageoftheCompany's requestuntilMarch19,1976,topermitfurtherinvestigation. Morethan20publichearingswereheldbetweenSeptember 1975andtheendofJanuary1976.AstheMarch19,1976statutory deadlinedrewnearitwasapparentthatabacklogofratecaseswouldpreventthePUCfromreachingafinaldecision. InlateFebruarywevoluntarily extendedtheeffective datetoJune1,1976.BythisactiontheCompanywaiveditsrightstorecoupanymoneyitmightlaterbeallowedbylawbecauseofthedelayinthedecision. Becausecollecting make-upor"back"revenueshadbecomesuchavolatileissue,wewantedtoremoverecoupment asanissuesotheratecasecouldbedecidedonitsownmerits.Additionally weaskedthePUCtoallowustocollectonatemporary basis,subjecttorefund,about4percentofthe11percentstilltobedecidedon.Thatadditional amountwasallowedtogointoeffectonApril14.BecauseoftheheavyworkloadatthePUC,nodecisionwasmadebyJune1andPP&Lvoluntarily extendedtheeffective dateandwaivedrecoupment toJuly1,thenagaintoAugust5.ThePUConAugust4announced itstillneededmoretimeandorderedratesthenineffecttobecometemporary rates.Underlaw,arecoupment periodstartedwiththatdate.OnAugust26,1976,thePUCrenderedafinaldecisionallowingtheremaining 7percentincreasetotakeeffect.PP&Lagainwaivedthecollection ofretroactive chargesasbeinginthebestinterests ofbothcustomers andtheCompany.Thisactionallowedusthefull15percentweoriginally requested. PUCLawRevisedDuring1976,lawmakers enactedlegislation which,whenfullyimplemented, shouldallowthePUCtobemoreresponsive tobothutilityandconsumerconcerns. Themostimportant changeinthenewlawcallsforfull-time commissioners withhigherandmorerealistic salaries. Inturn,thefivecommissioners aregivenmoreleewayinsettinghigherstaffsalaries, makingiteasiertoretainandattractanadequate, highlyqualified staffandtosupportabroad-based expansion ofoperations. Newkeypositions willbeaddedtothecommission staff.TheOfficeofAdministrative LawJudgewillhavefullauthority topresideoverevidentiary hearings. TheBureauofConservation, EconomicandEnergyPlanningwillmonitorprogressonenergyconservation andlong-range energyplanning. Otherlegislation createdanOfficeofConsumerAdvocate, separatefromthePUC.Thisadvocatewillrepresent consumers inratecasesbeforethePUC.Ratecaseprocedure isalsobeingchangedeffective October1977.Thecurrentpracticeofallow-ingpromptandpartialratereliefpendingcomple-tionoffullratecaseproceedings iseliminated. Suchreliefisnowmadesubjecttodemonstrating anemergency need.Theretroactive surcharge, nowmandatory incaseswherethePUCallowsanincreaseafteradelaybeyondninemonths,hasbeenrepealed. However,ifmajorratecasesarenotdecidedwithinninemonthsfromthedatearequestisfiled,theratesthatwereaskedforgointoeffectautomatically, subjecttorefund.Anothermajorreformisthatutilities arenowpermitted tobasetheirraterequestsonafuturetestyear,backedupbyappropriate, substantive estimates. Inthepast,allapplications forratereliefhadtobebasedonapriortestyear.PP&Lisconvinced thatstrong,capableandindependent regulation, whichhasthepublic'sconfidence, isessential totheinterests ofconsumers andutilities. Wefeelthatthetotalreformpackageenactedlastyearprovidesagoodstepintheright-direction. However,thereshouldbeperiodicreviewtotestwhether,inpractice, thereformprocedures areworkingsatisfactorily. EconomicRecoveryNudgesEnergyUseUpReflecting animproving economy,ourcustomers'ilowatt-hour useofelectricity increased 6.5percentduring1976.Thisfolloweda1percentgrowthrateinkilowatt-hour usagefor1975andahalfpercentayearearlier.Thisgrowthisattributable mostlytotheimproving economyaftertwodepressed years.Whileitistruethatcolder-than-normal fall-winter weatherincreased fourthquartersales,andcustomerbills,significantly, warmer-than-normal weatherduringtheearly1976heatingseasonpractically offsetthelaterincreases. Weconsidersomegrowthtobeinevitable becauseofincreasing population andupgradedstandards oflivingbutwearesensitive tothehighcostsofgrowthandarethoroughly committed tomoderating growththroughconservation andwiseenergymanagement. Wearebasingourlong-range planningonaforecastofacompoundannualgrowthrateofabout4.5percent.However,wiserandmoreefficient energyusecouldholdthatratedownevenlower.1977Construction BudgetPP&L'sconstruction budgetfor1977is$390million(including $14millionfornuclearfuel),downabout$18millionfromlastyear'sexpenditures. Slightlyover$248millionofthatisbudgetedforourSusquehanna nuclearplant.Thetotalconstruction figureforthenextfiveyearsisalmost$2.2billion.HersheyElectricPurchased PP&Lacquiredalltheoutstanding capitalstockofHersheyElectricCo.(HEC)onDecember31,1976fromHerco,Inc.(formerly HersheyEstates). TermsofthepurchasehadbeenapprovedearlierintheyearbythePUCandtheSecurities andExchangeCommission. HECisapowerdistribution companyonlyandhasnogenerating plants.HECpurchases powerfromanotherelectricutilitytoservethe5,500homesandbusinesses inits28-square-mile service area,andwillcontinuetodosoforthetwoyearsormoreittakestointegrate HEC'soperations intothePPBLsystem.Susquehanna NuclearProjectConstruction ofthetwin1,050,000-kilowatt boilingwaterreactorgenerating unitsnearBerwickcontinued toprogresstowardstartupin1980and1982.Unit1was37percentcompleteattheendof1976andUnit2progressstoodat25percent.Construction milestones for1976includedthestartofthemassivecoolingtowersforbothunits,enclosing theturbinegenerator

building, completion oftheconcretepedestalforUnit1turbine-generator andputtinginplacethereactorpressurevesselforUnit1.Significant eventsinplanningforplantoperation includedunionagreement onstaffingprocedures andthebeginning ofselection andtrainingofpersonnel.

Acomputerized $8-million trainingsimulator willprovideafull-sized workingreplicaoftheactualplantcontrolroom.Thesimulator willbeusedforbothinitialtrainingofplantoperators andforrequiredongoingrefresher training. TheCompanyexpectstocompletenegotiations andsigncontracts duringthefirstquarterof1977forAllegheny ElectricCooperative Inc.,toacquirea10percentownership intheSusquehanna plant.MartinsCreekOilUnitsPP8L'slarge820,000-kilowatt MartinsCreekUnit3completed itsfirstfullyearofserviceinOctober.Itworkedexceptionally wellasa"cycling" unittomeetpeakelectricdemandonoursystemandonthePennsylvania-New Jersey-Maryland Interconnection. Theunitburnsresidual, orheavy,oilandwasdesignedwithoperating characteristics thatallowittomoveitsoutputquicklyupordowntomeet*fluctuating usepatternsthroughout theday.Thisisoneoftheoilunit'smainoperating differences fromourcoalunitswhichhaveamuchslowerup/downcycle.~*'EgPMrConstruction movesaheadatg~plant.Illustrated inthe'+-'kL~.<<<>>~foreground aretheboilingwaterreactorpressurevessels.~~ UsingUnit3inthiswaygreatlylessenstheneedtousetheexpensive-to-operate, smaller,stand-bycombustion turbineswhichburnnumbertwooil,whichisthesameasthatburnedinhomeheatingsystems.Unit4atMartinsCreek,atwinoftheonealreadyinservice,wassynchronized withthePP&LsysteminDecember1976and,afterashakedown period,willbeputintocommercial operation. PipelinetoMartinsCreekThemuch-delayed 84-milepipelinefromMarcusHook,belowPhiladelphia, toourMartinsCreekplant,ontheDelawareRiveraboveEaston,isfinallyinservice.Theprojectrequiredmorethanthreeyearsforgovernmental clearances andlessthansixmonthsforconstruction. Althoughtheoriginalscheduleallowedtwoyearsforapprovalandconstruction oftheline,whichthenappearedtobemorethanadequate, Unit3wascompleted andreadyforoperation beforeconstruction ofthepipelinewasevenbegun.Thedelaymadeitnecessary toconstruct a$2.3millionalternate rail-unloading facilitytoassurefuelforinitialoperation ofUnit3.Arrangements fortankerunloading andstorageterminalfacilities atMarcusHookwerecompleted inearly1976andoilhasbeenflowingthroughthepipelinesinceAugust1976.DuringthecoldweatherofJanuary1977,bothoftheMartinsCreekoilunitswereusedextensively tohelpproducethehugeamountsofelectricity neededbothforourcustomers andforregionalelectricsupply.Duringthatperiod,unaffected byextremeweatherconditions, thepipelinemorethanproveditsvalue.Wellover56.6milliongallonsofoilweredelivered throughthepipelinetoMartinsCreekduringJanuary.Ifwehadstillbeenusingtherailfacilities wereliedonearlier,itwouldhavetakennearlythreemonthstodeliverthesameamountofoilunderoptimumconditions. Wejustcouldnothavegottenthatamountofoiltothoseunitsandatightelectricsupplysituation wouldhavebeenworsened. FuelsPP&Lgenerating facilities areattheheartofourelectricsupplysystem.Withoutfuels,though,ourgenerating plantswouldbejustsomuchidlemachinery. Thepastyearwasmarkedbyparticularly significant developments intheareaoffuelsupply.Anthracite Somepreliminary resultswereannounced inOctober1976,ofayear-long studyintothefeasibility ofbuildingananthracite-burning generating stationnearanthracite fieldslocatedintheCompany's servicearea.Thestudyshowedthatenoughcoalisavailable tofuelatleastfour400,000-kilowatt generating unitsfor30to40years.Thestudyalsooutlinedthefollowing factors:~Anthracite isalowsulfurfuelascomparedwithmosteasternbituminous coal,thusananthracite planthasthepotential formeetingemissionstandards withoutthecumbersome andexpensive sulfurdioxidecontrolequipment neededbytoday'sbituminous-coal-burningplants.However,thefinalanswerwilldependontheapplication oftheCleanAirActandrelatedregulations. ~Surface,oropen-pit, miningistheonlypractical waytoobtainthecoalatthistime.~Theopen-pitminingwouldbelargerthananyseeninthehardcoalregionstodate.Itwouldbesubjecttoapprovalunderstrip-mining lawsandregulations. Weexpectapprovals wouldrequireareclamation effortwhichmustbeplannedbeforethefirstshovelofearthisdug,andwhichwouldleavethelandinbettercondition thanbeforetheminingtookplace.~Themagnitude oftheconceptsunderconsideration involvesapitofaboutone-quarterof asquaremileinareaand400to800feetdeep.Thepitwould"move"overatotalsiteofabouttwotothreesquaremileswithconstantbackfilling andreclamation continuing inthemined-out sectionsasthepitadvances. During1977theCompanywillbeconfirming ownership ofmineralrightsonthemostfavorable sitesindicated bythestudyanddoingadditional coredrillingtofurtherrefinetheinformation onhowmuchcoalisavailable andwhereitis.Thisadditional information isrequiredbeforeafinaldecisionismadeonwhetheranthracite wouldindeedbeaneconomical fuel.Thisfueldecisionwouldbeonlyapartofanoveralldecisionontheeconomics andfeasibility ofananthracite powerplantproject.Bituminous CoalSincetheearly1960sPP&Lhasbeenacquiring coallandanddeveloping miningoperations tothepointwhereabout40percentoftheninemilliontonsofbituminous coalweneedeachyearisminedatouraffiliated sources.Ourminesareoperatedonazero;profit basis.Coalproducedbytheseminesissupplemented byoutsidelocalpurchases whichenableustobroadentheuseofourcoal-cleaning plantsandourunittrains.Theresulthasbeenareasonably sureandstablesystemoflong-term supplyanddeliveryofaboutthreetofourmilliontonsofbituminous coalayear.Overtheyearsthishasmeantsubstantial savingsforourcustomers. Inthepasttwoyears,however,therehavebeenseriousproduction problemsatourGreenwich andOneidamines.Theseproduction problemshavebeengreatlyescalating ourcostsatthesametimetheopencoalmarket,wherewepurchasethebalanceofourrequirements, hasbeen"soft."Asaresulttherehasbeenawideningcostgapbetweenouraffiliated minecoalcostsandmarketcoalcosts.Weareawarethatthepriceadvantages ofmarketcoalarerealtodaybutmaybegonetomorrowsincemostofitisstrip-mine, nonunioncoalproducedfromlimitedlifereserves. Wehaveundertaken anintensive reviewoftheentiresituation. Whilethefinalevaluation willnotbe'&Anopen-pitmineusingshovelandtruckexcavation andhaulageisoneofthemethodssuggested foruseInmininganthracite inayear-long feasibility study. inhandforseveralmonths,ourpreliminary

judgment, subjecttochange,isthatthepossibleshort-term advantages ofaswingtoallmarketcoalpurchasing wouldbemorethanoffsetbythelong-termcost/supply disadvantages.

GreeneCountyReservesIn1974and1975weacquiredcoalrightsinGreeneCountyinsouthwest Pennsylvania whichaddedabout325milliontonstoPP&L'sestimated recoverable coalreserves. IntheratecasedecisionbythePUClastyear,theinvestment inthesereserves($51million)wasexcludedfromthepropertybaseonwhichallowable earningswerecalculated. Becauseofthisandtheuncertainties nowaffecting bothelectricloadgrowthandfinancing ofnewminingfacilities, wearereexamining ourpriorplansfordevelopment oftheGreeneCountyReserves. NinthUnitTrainTheCompany's ninthunitcoaltrainwasputintoserviceduringthesummerof1976.The105-cartrain,alongwiththeeightothercoaltrainsalreadyinservice,yieldedtotalsavingsin1976ofabout$17millionovercostsoftransporting thesameamountofcoalinrailroad-owned cars.TheCompanyhasusedunitcoaltrainssince1964whenwerecognized thatsavingsintransporting coalcouldreduceoverallcostsofelectricity. TheCompanyfleetnowconsistsofnearly1,000cars.OilPP&Lhascontracts withtwomajorsuppliers foralloftheprojected oilneedsofourMartinsCreekunits.Eachofthesuppliers getsitsoilfromdifferent partsoftheworld.Thisgivesusamorediversesupplyandlessensourdependence ononlyonesupplierorcountryforouroilneeds.UraniumWithdeliveryarrangements forthefirstfuelloadsin1980atourSusquehanna nuclearplantalreadytakencareof,wetookanumberofadditional stepsin1976toassureadequateshort-andlong-term uraniumsuppliesfortheplant.Short-term stepsincludedlocatingandbuyinganadditional 650,000poundsofuraniumfordeliveryintheearly1980s. Fortheintermediateandlonger term,weareinvestigating theeconomicfeasibility ofgettingintotheuraniumminingbusiness. Wehavesecuredoptionsonupto22,000acresofUtahproperties andwillcontinueexploration anddrillingonthelandduring1977.Wehavetheoptiontobuythemineralrightsifgoodsuppliesofqualityorearefound.Wearealsoinvestigating thepossibility ofjoiningwithseveralneighboring utilities, whichalsohavenuclearplantsbuiltorplanned,injoint-venture uraniumminingactivities. Thesemovesarebeingconsidered becauseoftheuncertain long-term marketinprocessed uranium.ResearchTheCompanycontinues tobefirmlycommitted toparticipating inawidevarietyofresearchprojectstoinvestigate newwaystoprovideourcustomers withqualityelectricserviceatthelowestpracticable price.During1976,nearly$1.7millionofour$2.7millionresearchbudgetwenttowardfundingvariousindustry-wide electricresearchprojectsthroughEPRI(Electric PowerResearchInstitute). SeveralEPRIprojectsareofparticular interesttoPP&L.Oneofthemostimportant isresearchintofluidized-bed coalcombustion thatcouldbeanalternative tocostlysulfurdioxidefluegasscrubbers. Thismethodburnscoalinthepresenceoflimestone whichtrapsthesulfurbeforeitcanescapewithotherboilergases.OtherEPRIprojectsincludethestudyofcoalgasification andliquefaction andtheimprovement ofpowerplantreliability. About$360,000ofourresearchbudgetwenttowardthefundingoftheliquidmetalfastbreederreactorprojectatOakRidge,Tennessee. Theremainder wasdividedamongotherprojectsincluding thestudyofalternative energysources-thesun,wind,fusionandsolidwaste-andmethodstoimprovetheperformance ofvariouspowerplantequipment. Ourtotalresearchbudgetfor1977isalmost$3.5million. ServiceAreaEconomyEventhough,onanationalbasis,1976wasayearofgearingupfromthebottomofthe1975recession, theunemployment rateinourservicearearoseto8.6perceritfrom1975's7.4percent.Thisrisewasattributed primarily tolayoffsduetosluggishlocaleconomies. Anothereconomicindicator didshowpositivesigns.Withinour10,000-square milearea,wehadanetgainof1,921industryjobsduring1976comparedtoanetlossof1,885in1975.However,therewasstillasubstantial amountofunoccupied industrial spaceavailable atyear-end. Morethan100marketable buildings withatotalofalmost5.5millionsquarefeetareavailable butunoccupied. Becauseofthesecircumstances, weseenocontradiction inurgingconservation andeffective energyuseontheonehand,andactivelysupporting areadevelopment programswhichwillhelpbringinneededjobsontheotherhand-eventhoughsomeincreased useofenergywillresult.Conservation shouldbeanintegralpartofalluseofenergy.Butminimizing theuseofenergyatthepriceofundercutting theemployment uponwhichthesocio/economic viability ofoursocietydependswouldbesolvingaproblembycreatingaworseone.AuditResultsFinalresultsofayear-long, in-depthstudyoftheCompany's operational effectiveness, conducted bythemanagement consulting firmMcKinsey&Co.,werecompleted andmadepublicinMarch1976.Thevoluntary studywasundertaken toidentifyopportunities toreducecostswithoutdecreasing thequalityofelectricserviceandtorecommend aspectsofCompanyoperations thatneedimprovement. Thestudyproduced14keyrecommendations thatcanbegroupedintofourmajorcategories: strengthening PP&L'sfinancial position; intensifying planningincriticalresourceareas;tightening management control;andimproving productivity. ByFebruary1977,detailedresponses andactionplansfor13ofthe14keyrecommendations havebeenapprovedbymanagement. Actionplanshavealsobeendeveloped formanyoftheotherMcKinseyrecommendations. Corporate EnergyPlanningCouncilAsoneresultoftheoperational audit,theCompanyformedaCorporate EnergyPlanningCounciltorespondmoreeffectively totheplanninganddecision-making challenges facingPP&Ltoday.Thequestions whichmustbeansweredaspartoftheplanningprocessarebecomingmorecomplexanddifficult todealwith:Whatwillbethedemandforfutureelectricservice?Whatkindsandsizesofgenerating unitsshouldbebuilt'?Wherecannecessary facilities besited'?Whatratelevelswillbeneededtoraisethecapitalneededtobuildthefacilities? Howmuchcanloadmanagement andenergyconservation programsoffsettheneedfornewfacilities andcapital?Wehavebeenabletodealeffectively withthesequestions throughplanninggroupswhichareapartofthevariousindividual Companydepartments. However,asthepaceofchangehasquickened andthecomplexity ofplanninganddecision-making hasgrown,theneedforcoordination amongplanninggroupshasincreased. Suchcoordination, whichhasbeenlargelyinformal, willnowbeexpandedandformalized bythecounciltoprovideasounderbasisfordecision-making. EnergyConservation Lastyear,werealizedanestimated 88,000-kilowatt reduction indemandgrowthasaresultofcustomerenergyconservation effortsaidedbyPP&L-sponsored programs. Forourresidential customers, conservation programscenteredaroundtechniques developed atourexperimental, solar-supplemented energyconservation homethatwasbuiltin1973northwest ofAllentown. Forexistinghomes,weareadvisingthattheinstallation ofadditional atticinsulation, stormwindowsanddoorsandweather-stripping offersthebestopportunity forsavings.Forarelatively smallinitialinvestment, customers canmaketheirhomeenvironment morecomfortable whileloweringheatingandcoolingcostsoverthelifeofthedwelling. TheCompanyisalsoinvolvedinenergy-conservation programsfornewhomeconstruction. Wecooperated withbuildersineachofourfivedivisions inaBicentennial HomesProject.Thefivehomes,whichincludedthelatestenergy-saving construction methods,heatingandcoolingsystemsandbuildingmaterials, wereopenforpublicinspection lastsummerandwerevisitedbymorethan30,000people.Realizing thecostsavingstothecustomerandtherelatedenergysavings,PP&Lhasadoptedhigherthermalstandards forresidential construction. Thesenewstandards, including theuseoftongue-and-groove styrofoam sheathing, plusenergy-savingrequirements forventilation, waterheatingandspaceheatingandcoolingsystems,becamethefoundation forourEnergy-Efficient HomeAwardProgram.Thisprogramisdesignedtoencourage homebuildersandtheirsubcontractors touseenergy-efficient equipment andconstruction techniques. Sofar,52newhomeshavebeenbuiltundertheguidelines ofthisprogram.Efficient useofenergybyourcommercial andindustrial customers wasencouraged throughourenergymanagement program.Sincetheprogrambeganin1975,PP8Lhasencouraged andhelpedmorethan900industrial andcommercial customers organizeenergymanagement teamstoimprovetheirenergyefficiency. Ofthese,33businesses havereceivedCompanyenergymanagement awardswhichrecognize thatsignificant changesandinvestments havebeenmadetoreduceelectrical demandandenergyuse.Someoftheenergy-saving measuresincorpor-atedbyareabusinesses includetheinstallation ofadditional insulation, theuseofmoreefficient controlsforheating,ventilating andaircondi-tioningsystems,theadditionofheatrecoveryequipment andswitching tohigherefficiency lightingsystems.ConsumerAffairsPrograms1976wasayearwhenPP8Ltooksomefurtherbridge-building stepstoclosetheadversary gapbetweenutilities andconsumeradvocates. Ourfirsttentative stepstowardanevolvingconsumer-interest programweretakenin1972whenwediscontinued ourmarketing programandestablished ourConsumer8Community AffairsDepartment. Energyconservation andenergymanagement, alongwithanincreased emphasisonconsumeraffairs,becameprimaryobjectives. ButPP8Ldidnotjumpdirectlyfrommarketing intoaneatlypackagedconsumeraffairsprogram.Abouttwoyearswerespentmainlylistening toconsumers, tryingtofindoutwhattheirfrustrations andtheirneedswere.Ourconsumeraffairsrepresentatives attendedmeetingsoforganized consumergroupsandweexperimented withlocalized programstryingtofindwherewecouldbemosthelpful.10 Thedoortobettercommunication openedabitmoreinJanuary1976whensixrepresentatives ofCOCO(thenationalConference ofConsumerOrganizations) andtwofromthelocalPOWER(PeopleOutragedWithElectricRates)groupacceptedPP&L'sinvitation tositdownwithourconsumeraffairspeopleandwithJackBusbytodiscussareasofmutualinterest. Sometoughquestions wereaskedanddiscussion wasfrankandstraightforward. Itwasagoodexperience fortheCompanyandbothsidesgottoknoweachotherbetter.FromthosemeetingsgrewthefirstPennsylvania Utility-Consumer EnergyConference heldinHershey,Pa.,inSeptember. Thethree-day conference wasco-sponsored byCOCOandPP&Landwassignificant because,possiblyforthefirsttimeinthenation,aconsumergroupandanelectricutilitywereorganizing alarge,formal,jointcommunication effort.Morethan275personsattendedfrom12states,theDistrictofColumbiaandCanada.Therewereconsumergrouprepresentatives, government andregulatory representatives andpeoplefrom30othergas,telephone andelectricutilities. Throughdebate,discussion andforumsbothsideswereabletopresenttheirviewsonsuchdiversetopicsasratemaking,profits,pollution, energysources,regulation andtaxes.Mostimportantly, though,bothutilities andtheconsumerists involvedintheconference expressed confidencethat theirinvolvementwasasignificantstep ininitiating andencouraging closerdiscussion andunderstanding oftheissueswhichhavesogreatlypolarized differences betweenelectricutilities andtheircustomers countrywide. Providing ourcustomers withsatisfactory serviceisourmainbusinessatPP&L.Thismontageillustrates (atleft)thefirstPennsylvania Utility-Consumer EnergyConference, co-sponsored byPPBLandtheConference ofConsumerOrganizations. 1Thestate-of-the-art CustomerInterruption Analysissystemillustrated onthefarright,isthebackboneforefficient handlingoftroublecallsandforpreciseanalysisoftheseriousness ofproblems. rpit/(Pfj~4v,~.rP~,./(~f@@)pi'Q'h11 Financing 1976wasthesecondlargestfinancing yearintheCompany's historywith$308millionofsecurities sold.ThatfigureincludedPP8L'slargestsingleofferingeverundertaken intheformof$150millionoffirstmortgagebonds.Weanticipate our1977securitysalestobearound$235million.Thisfigureislowerthanlastyearbecauseourconstruction expenditures havesomewhatmoderated, andourcashneedsareexpected tobehelpedbyaone-time, catch-uppaymentfromAllegheny ElectricCooperative forits10percentinterestinourSusquehanna nuclearplant.However,largefinancing programsare,forthetimebeing,anunavoidable wayoflifeforPP8L,andfinancing programsfor1978and1979areexpectedtoincrease. Weareverypleasedwiththeacceptance oftheDividendReinvestment Planwhichlastyearresultedinourissuingmorethan700,000sharesofcommonstock.Theplanallowsinvestment ofdividends fromallclassesofPP&Lstockinourcommonstockata5percentdiscountwithnobrokerage fee.During1976,about$14.3millionwasinvestedthroughtheplan,$7.8millioninreinvested dividends and$6.5millioninoptionalcashpayments. Thisamountedto17percentofthemoneyweraisedbysellingcommonstock.LaborRelations Bymajorityvote,about4,500PP&Lemployees chosetoberepresented byanewunionandratifiedanewthree-year laborcontractwiththeCompanyduring1976.Thepriortwo-yearlaborcontractbetweentheCompanyandtheEmployees Independent Association hadanexpiration dateofJuly25.Underprovisions ofU.S.laborlawtheIBEW(International Brotherhood ofElectrical Workers)wasallowedtofileapetitionwiththeNLRB(National LaborRelations Board)forarepresentation election. TheUWUA(UtilityWorkersUnionofAmerica), aswellasano-unionoption,werealsoallowedtoappearontheballotinanNLRBsupervised election. Inarun-offelectionafteranindecisive firstvote,Local1600-IBEWwascertified asthenewbargaining unitforthe4,500employees. Another270employees intheScrantonareawerealreadyrepresented byLocal1520-IBEWsothatnowallofPP&L'snonsupervisory employees arerepresented bylocalunitsofonenationalunion.Aftertheelectionwascertified inlateJuly,negotiations foranewcontractwerebegunandbothsidesagreedtoworkonaday-to-day basisundertheoldcontractwhichexpiredonJuly25.Anagreement wasreachedonSeptember 8andratifiedbytheunionmembership onSeptember24. TheScrantonlocalhadearlieragreedtoessentially thesamecontractasthenewlocal.Termsofthethree-year contractcalledforan8.5percentwageincreasefor1976,an8percentincreasefor1977andaspecially designedwagereopenerin1978.Fringebenefitsspreadoverthethreeyearsaddanother3.4percenttothecontract. Thethirdyearwagereopeneranda"meet-and-discuss"provision areconsidered innovations inelectricutilitycontracts. Thewagereopenercallsforan"either/or" decisionbyanarbitrator ifanagreement cannotbereachedthroughthenormalbargaining processwithinaspecified timeperiod.Ifanimpassewerereached,boththeunionandmanagement wouldsubmittheirproposals toanarbitrator whomustchooseoneortheotherproposalinitsentirety. However,negotiations betweentheCompanyandunionmaycontinueuntilthearbitrator reachesadecision. Inanyevent,continuation ofthecontractforathirdyearisassured.Themeet-and-discuss provision putsacontractual obligation onbothunionandmanagement tomeetattherequestoftheothertoresolveanycontractissuesthatariseorothersubjectsofmutualinterest. Ifagreements arereached,theycanbeputintoeffectbymutualconsent.TheCompanyandtheunionlocalsseethemeet-and-discussprovision asanopportunity toworkoutbetterwaysofdoingthingsaswellasameansofsettlingdisputesinaspiritofcooperation. 12 AnalysisofStatement ofIncomeThefollowing analysishighlights changesinthefinancial resultsoftheCompanyasreflected ontheStatement ofIncomeshownonpage17.Theperiodscomparedaretheyears1975to1974and1976to1975.ReturnforCommonShareowner During1975and1976,commonshareowners increased theirinvestment intheCompanyby$190millionor36percentthroughreinvested earningsandproceedsof$140million fromtheissuanceof7.6millionsharesofnewCommonStock.Earningsapplicable tocommonstockincreased $9.4millionand$5.7millionin1975and1976,respectively. Earningspershareofcommonstockwere$2.87in1975and$2.68in1976.53.102.802.702.50EarningsPerShare12MonthsEndedEachQuarterDollarsPerShare3.102.70CostofFixedIncomeSecurities Theincreaseinlong-term debtinterestchargesanddividends onPreferred andPreference Stockwasduetoissuanceofsecurities principally tofinancetheconstruction ofnewfacilities andtherefinancing ofmaturingdebtwithsecurities bearinghigherinterestrates.During1975and1976,outstanding long-term debtincreased by$268millionandPreferred andPreference Stockby$145million.Theannualinterestanddividendrequirements onlong-term debtandPreferred andPreference Stockoutstanding atDecember31,1976were$91.6million and$36.6million, respectively. 2.4019721973197419751976TheCompany's 1975and1976earningshavebeenadversely affectedbythehighercostsofproviding electricsewiceandthelackoftimelyraterelief.TimesInterestChargesEarned12MonthsEndedEachQuarterTimesEarned(PreTax)InterestandDividendCostThechangefromtheprioryearininterestchargesanddividends onPreferred andPreference Stockwere:19751976MillionsofDollarsInterestchargesLong-term debt.......... Short-term debt.......... OtherDividends onpreferred andpreference stock......... $16.811.9(3.3)0.9(0.2)0.14.98.9TheCompanypresently hasamiddle-of-the-road bondratingbyelectricindustrystandards (RatedDoubleAbyMoody'sandFitch'sandAPlusbyStandard8Poor's).Oneofthemostimportant measuresindetermining acompany's bondratingandcreditstandingisitsabilitytocoverinterestpayments(Seeadjacentchart).19721973197419751976InterestchargeshavebeenIncreasing morerapidlythantheearningsavailable tocoverthesechargesresulting Inadeterioration oftheTimesEarnedRatio.13 ElectricrevenuesQuantityofsalesto:Ultimatecustomers ..Othersforresale....Rateincreases .......... Fueladjustment clauses.Other(including taxsurcharge) ............ Steamrevenues.Total.....$12.819.3(6.0)0.37.440.455.333.81.67.371.1101.11.0(1.1)$72.1100.03.5AveragePriceOfElectricity AllCustomers CentsPorKwh3.53.02.52.0FuelAdjustment TaxSurcharge 3.02.52.01.51.0BaseRate1.51.019721973197419751976TheabovechartshowsthattheIncreaseInthocostoffuelhasboonthomainfactorIntherecentpriceriseofelectricity. The1976averagebaserateforailcustomers IsaboutthesamaasItwasIntheearly1960s.Operating RevenuesThechangeinoperating revenuesfromtheprioryearisattributable tothefollowing: 19751976MillionsofDollarsBankloansandcommercial papernotesareusedtoprovideworkingcapitalandinterimconstruction financing. Interestonsuchdebtvariesfromyeartoyearduetotheamountofshort-term debtoutstanding andtheinterestratesineffect.Formoreinformation onshort-term debtseeNote4toFinancial Statements onpage25.EnergySalesandOperating RevenuesTheCompanyderivesabout99%ofitsoperating revenuesfromsupplying electricserviceandthebalancefromsupplying steamforheatingandotherpurposesinthecityofHarrisburg. Ratesapplicable tosalestoultimatecustomers areregulated bythePennsylvania PublicUtilityCommission (PUC)andaccounted for98%oftheCompany's revenuefromenergysalesin1976.TheFederalPowerCommission (FPC)regulates salestoothersforresale.TheCompany's totalelectricenergysalesincreased approximately 0.8%in1975.Contractual salestoaneighboring utility,whichhadresultedinrevenuesof$6.1millionin1974,werediscontinued in1975.Excluding salestothisutility,theCompany's growthinenergysaleswas2.6%in1975,withresidential salesup5.0%,commercial salesup7.0%andindustrial salesdown2.1%.Thereduction insalestoindustrial customers wasmoderated bytheadditionofamajorindustrial customerinmid-1974. Excluding salestothiscustomer, industrial saleswouldhavedecreased 7.3%in1975,reflecting thedeclineinindustrial economicactivity. Energysalesincreased 6.5%in1976with increases inresidential salesof6.6%,commercial salesof6.5%andindustrial salesof6.6%.Theincreaseinindustrial salesduring1976reflectsanimprovement intheeconomyandindustrial activitywithintheCompany's servicearea.Formoreinformation onenergysalesseethediscussion under"Economic RecoveryNudgesEnergyUseUp"onpage4.Rateincreases affecting ultimatecustomers becameeffective inJanuary1974($19.1millionannually), September 1975($21.0millionannually), April1976($20.0millionannually) andAugust1976($37.3millionannually). Theincreaseinrevenuesduring1976duetorate14 increases reflectsacarryover into1976ofapproximately $16.0millionapplicable totheSeptember 1975increase, $24.3millionapplicable totheAprilandAugust1976increases and$0.1millionfromarateincreaseaffecting resalecustomers thatbecameeffective inNovember1976.Formoreinformation onratefilingsseethediscussion under"HigherRatesAllowed"onpage3.TheCompany's tariffsincludefueladjustment clauseswhichadjustpricesforelectricserviceforvariations inthecostoffuelusedtogenerateelectricity. Revenuesfromthefueladjustment clausestotaled$134.5millionin1975and$168.3millionin1976,reflecting theincreased leveloffuelcostsandadditional energysales.NetCostofEnergyThenetcostofenergyincludesfuelexpensepluspowerpurchases lesspowersoldtootherutilities. Includedinpowerpurchases isthevalueofelectricity generated duringthetestperiodfortheCompany's newgenerating units.FuelThecostoffuelconsumedincreased during1975and1976asaresultofgreatergeneration ofenergyandincreases inthecostoffuelspurchased. Thequantityof energygenerated during1975increased duetogreateravailability ofcoal-fired generating unitsandtheMartinsCreekNo.3oil-fired generating unitwhichbegancommercial operation inOctober1975.Increased generation during1976resultedprimarily fromafullyear'soperation oftheMartinsCreekunit.Theaveragecostoffuelsconsumedincreased during1975and1976duetothecombinedeffectsofhighercoalpricesandthecostofoilconsumedatMartinsCreekUnitNo.3,whichhasacostperkwhgenerated approximately twicethatoftheCompany's coal-fired units.Theaveragecostoffuelconsumedperkwhgenerated was0.88centsin1974,1.04centsin1975and1.17centsin1976.Thecostoffuelconsumedwhichisrecoverable throughfueladjustment clausesisdeferreduntiltheperiodinwhichsuchcostsarebilledtocustomers. Interchange PowerSalesThetotalelectricenergyavailable forsaleincludesenergygenerated bytheCompany's plantsandpowerFuelExpenseFuelexpenseiscomprised ofthefollowing: 197419751976MillionsofDollarsCostoffuelconsumedElectric............... Steamheat............ Totalcostoffuelconsumed........219.0273.2326.3Lessincreaseinfuelcostsdeferredtomatchrevenuesfromfueladjustment clauses....26.61.6Totalfuelexpense...$192.4271.6$215.2269.2323.13.84.03.24.5321.8CostofFuelConsumedThechangefromtheprioryearinthetotalcostoffuelconsumedisattributable tothefollowing: 19751976MillionsofDollarsElectricQuantityofelectricity generated Averagecostoffuelsburned............ $13.317.940.736.054.053.90.2(0.8)$54.253.1SteamheatTotalQuantityofenergysold......Averagepriceofenergysold.OtherTotal.$47.2(7.9)18.4(5.7)(1.5)0.9$64.1~(12.7Interchange SalesThechangeinInterchange powersalesfromtheprioryearisattributable tothefollowing: 19751976MillionsofDollars15 purchased fromothers,afterdeducting Companyusesandlinelosses.During1975and1976,approximately 31%and29%,respectively, ofthetotalenergyavailable wassoldtootherutilities underinterconnection arrangements. AsrequiredbyboththePUCandtheFPC,suchsalesarenotrecordedasOperating RevenuesbutarecreditedtoOperating ExpensesontheStatement ofIncome.Thequantityofinterchange powersoldincreased during1975duetogreateravailability ofgenerating units,theadditionofMartinsCreekUnitNo.3,theabsenceofcontractual salestoaneighboring utilityandtheCompany's relatively favorable generating costscompared, tothoseofotherinterconnected companies. During1976,increased salestocustomers reducedthequantityofeconomicpoweravailable forsaletointerconnected companies. During1976therewasanarrowing ofthedifferential betweentheCompany's costofgenerating electricity andthepricereceivedforpowersoldontheinterchange, whichpricereflectsasplitting ofthedifference betweenthebuyer'sandtheseller'scostsofgeneration. TheaveragepricetheCompanyreceivedforinterchange powersaleswas1.76centsperkwhin1974,1.97centsperkwhin1975and1.90centsperkwhin1976.Theseamountsweresubstantially inexcessoftheCompany's averagefuelcosts.Expenditures ForElectricFacilities 6ltlionsOfDollars$3.03.02.52.5the"Depreciation" sectioninNote1toFinancial Statements onpage23.Allowance forFundsusedDuringConstruction TheAllowance forfundsusedduringconstruction hasincreased substantially duringthepasttwoyearsasaresultoftheCompany's extensive construction programandtherelatedcarryingcostsofsecurities issuedtofinancetheconstruction expenditures. During1975and1976theaverageratesusedtocomputetheallowance wereequivalent to8.3%and7.9%,respectively. TaxesSeeNote9toFinancial Statements onpage26forinformation relatingtoincometaxesandothertaxes.2.01.52.01.5WagesandEmployeeBenefitsandOtherOperating CostsTheincreases inwagesandemployeebenefitsandotheroperating costssuchasmaterials andsupplies, rentsandinsurance principally reflecttheeffectsofinflation andincreases associated withoperation andmaintenance ofnewfacilities placedinservice.Depreciation Increased depreciation expenseisduetonewfacilities placedinservice,including MartinsCreekUnitNo.3whichbegancommercial operation in1975.Foradditional information concerning areduction intheCompany's composite depreciation ratefor1976,see1.01976'77'78'79'80'81Total'77-'81DCostofElectricFacilities atEndof19760Expenditures toConstruct NewElectricFacilities andAcquireNuclearFuelFinancial healthoftheCompanyisnecessary toraisethelargeamountsofmoneyrequiredtofinancetheconstruction ofelectricfacilities. Plannedconstruction expenditures inthenextfiveyearsareexpectedtobe$2.2billioncomparedto$2.8billionoffacilities attheendof1976,afterbeingInbusinessfor56years.1.016 Statement ofincome1976197519741973Thousands ofDollars1972Operating Revenues(Note2)$644,147544,129472,036384,814345,792Operating ExpensesNetcostofenergyFuelPowerpurchases Interchange powersalesWagesandemployeebenefitsOtheroperating costs.Depreciation Incometaxes(Note9)Taxes,otherthanincome(Note9)Operating IncomeOtherIncomeandDeductions Allowance forfundsusedduringconstruction Incometaxcredits(Note9).Other-netIncomeBeforeInterestChargesInterestChargesLong-term debtShort-term debtandother.IncomeBeforeNonrecurring Credit.Nonrecurring CreditRelatedtoAccounting Change,NetofIncomeTaxes($4,831)(Note3)321,78329,657(160,163) 191,27782,58376,12162,47843,82849.526505,813138,33445,19214,4571,38161,030199,36479,7837,47087,253112,111271,63637,698(172,823) 136,51171,77368,36958,54047,29840,669423,160120,96936,60511,2013,15450,960171,92967,9326,45674,38897,541192,35324,176(108,723) 107,80667,37454,48952,39939,21135,571356,850115,18620,7325,0763,41829,226144,41251,1499,94661,09583,3174,162125,57715,299(70,175)70,70157,42145,23448,83733,94330,005286,14198,67314,967911,30016,358115,03143,2034,91648,11966,91295,22013,514(34,569)74,16555,22039,51241,44626,08625,658262,08783,70514,647334(305)14,67698,38136,5073,95340,46057,921NetIncome-BeforeDividends onPreferred andPreference Stock.Dividends onPreferred andPreference Stock.......EarningsApplicable toCommonStock(Note3)112,11197,54187,47966,91257,92133,36824,50919,65617.19114,526378,74373,03267,82349,72143,395EarningsPerShareofCommonStock(Note3)(a)BeforeNonrecurring CreditNonrecurring Credit$2.68$2.682.872.872.88.193.072.572.482.572.48IAverageNumberofSharesOutstanding (thousands) .Dividends DeclaredPerShareofCommonStock29,367$1.8025,4591.8022,0671.7719,3591.6817,5131.64(a)Basedonaveragenumberofsharesoutstanding. Seeaccompanying NotestoFinancial Statements. 17 BalanceSheetAssetsDecember3119761975Thousands ofDollarsUtilityPlantPlantinservice-atoriginalcostElectricSteamheatLessaccumulated depreciation Construction workinprogress-at costNuclearfuelinprocess-at cost........$2,090,282 7,8962,098,178 458,6971,639,481 720,54420,0842,380,109 1,992,673 7,8052,000,478 406,3131,594,165 430,5336,5292,031,227 Investments Associated companies -atequity........................ Nonutility propertyandotherinvestments-at costorless15,3277,54822,87532,2217,16539,386CurrentAssetsCash(Note4)Accountsreceivable (lessreserve:1976,$1,925;1975,$1,346)Customers OtherNotesreceivable (principally fromassociated company)Recoverable fuelcosts.Coalandfueloil-ataveragecostMaterials andsupplies-ataveragecostOther14,95549,20522,85729,57041,67074,88519,0687,219259,42914,83236,24316,81732,17837,15468,31822,6165,995234,153DeferredDebits4,884$2,667,297 7,1182,311,884 Seeaccompanying NotestoFinancial Statements. 18 Liabilities December3119761975Thousands ofDollarsCapitalization (a)Shareowners investment (Note5)Preferred stockPreference stockCommonstockCapitalstockexpense(deduction) Earningsreinvested (Notes6and7)$231,375210,000495,008(10,220)237,9671,164,130 156,3?5210,000412,303(8,801)212,550982,427Long-term debt1,161,319 2,325,449 1,032,980 2,015,407 CurrentLiabilities Long-term debtduewithinoneyear.Commercial papernotes(Note4).AccountspayableTaxesaccrued.Deferredincometaxesapplicable torecoverable fuelcosts.Dividends payableInterestaccruedOther20,67560,01260,34212,56422,06023,00222,58911,257232,50110,96673,63051,28120,19919,66919,36221,6179,719226,443DeferredandOtherCreditsDeferredinvestment taxcreditsDeferredincometaxesOther.56,52636,86015,961109,347$2,667,297 31,84922,71315,47270,0342,311,884 (a)SeeScheduleofCapitalStockandLong-Term Debtonpage20.Seeaccompanying NotestoFinancial Statements. 19 ScheduleofCapitalStockandLong-Term DebtDecember31,19764,17822,8786,30040,00022,2377,76375,000(a) $231,375Preference Stock-nopar,cumulative, authorized 5,000,000 shares$8.00series,outstanding 350,000shares.................. $8.40series,outstanding 400,000shares.................. $8.70series,outstanding 400,000shares.................. $9.25series,outstanding 200,000shares.................. $11.00series,outstanding 500,000shares.................. $13.00series,outstanding 250,000shares$35,00040,00040,00020,000(b) 50,000(b) 25,000$210,000CapitalStock(Thousands ofDollars)(Note5)Preferred Stock-$100par,cumulative 4M'/o,authorized 629,936shares,outstanding 530,189shares.......$53,019Series,authorized 5,000,000 shares3.35'/0,outstanding 41,783shares...4.40'/0,outstanding 228,773shares..4.600/o,outstanding 63,000shares...7.40'/o,outstanding 400,000shares..8.600/o,outstanding 222,370shares..9.000/o,outstanding 77,630shares...9.24'/o,outstanding 750,000shares..Long-Term Debt(Thousands ofDollars)FirstMortgageBonds2/4~loseriesdue1977............. 3/s'/oseriesdue1978............. 2%loseriesdue1980............. 3/e'/0seriesdue1982............. 10i%%d'/o seriesdue1982............. 3N'/0seriesdue1983............. 3%'/oseriesdue1985............. 4/s'/oseriesdue1991............. 4~/s'/oseriesdue1994............. 5%'/0seriesdue1996............. 6%'/0seriesdue1997............. 7/oseriesdue1999............. 8~/e'/0seriesdue1999............. 9'loseriesdue2000............. 7/i'/oseriesdue2001............. 7/s/0seriesdue2002............. 7h'/oseriesdue2003............. 9~/"loseriesdue2004............. 93/4'/0seriesdue2005............. 9'/"/oseriesdue2005............. .8~/"/oseriesdue2006............. 4A'/0to5/opollution controlseriesAdueannually$500,1977-1983; $900,1984-2002; $7,400,2003Notes7'lodue1980OtherUnamortized discountandpremium-net .Lessamountduewithinoneyear........$20,0003,00037,0007,500100,00025,00025,00030,00030,00030,00030,00040,00040,00050,00060,00075,00080,00080,000125,000(b) 100,000(b) 150,000(a) 28,0001,165,500 20,0005501,186,050 (4,056)1,181,994 20,675$1,161,319 CommonStock-nopar,authorized 50,000,000 shares,outstanding 30,803,318 shares.............. $495,008(c) (a)Issuedin1976.(b)Issuedin1975.(c)CommonStockissuedduring1976and1975wasasfollows(sharesandamountinthousands): 19761975SharesAmountSharesAmountPublicoffering..................... 3,500$67,9353,000$51,450Dividendreinvestment plan......... 71614,2683015,595Employeestockownership plan....35755~4251~829583~301~57045Theamountsshownaboveforthedividendreinvestment planexcludeinstallments receivedatyear-endforsharesissuedinJanuaryofthefollowing year(thousands ofdollars): 1976,$464;1975,$718.Seeaccompanying NotesIoFinancial Statements. 20 Statement ofChangesInFinancial PositionSourceofFundsOperations Netincome(1974includes$4,162nonrecurring credit).Charges(credits) againstincomenotinvolving workingcapitalDepreciation Noncurrent deferredincometaxesandinvestment taxcredits-net'............ Allowance forfundsusedduringconstruction Other.1976197519741973Thousands ofDollars197266,91257,92162,47831,789(45,192)4,669165,85558,54015,701(36,605)7,464142,64152,3998,790(20,732)520128,45648,83711,282(14,967)220112,28441,4467,984(14,647)22092,924$112,11197,54187,479Outsidefinancing CommonstockPreferred stockPreference stockFirstmortgagebonds.Otherlong-term debt.Short-term debt-netincreaseWorkingcapital-decrease(a)Investment inassociated companies -decreaseOther-net.82,70575,000150,000253307,95816,8946,424$497,13157,76335,15670,000225,000208352,97115,166(b) 25,000180,00036045,658286,174685510,778415,31540,90040,000108,00020,024208,9243,1562,672327,03646,94035,00075,0008,34220,231185,51383598279,118Application ofFundsConstruction expenditures .NuclearfuelinprocessAllowance forfundsusedduringconstruction $394,23813,555(45,192)362,601342,4962,793(36,605)308,684267,7243,736(20,732)250,728(14,967)209,529(14,647)204,107224,496218,754Securities retiredFirstmortgagebondsOtherlong-term debtShort-term debt-netdecrease8,0003,05413,61824,67293,00011211,879104,99118,63218,63210,04156,63166,67215,00010,05725,057Dividends onpreferred, preference andcommonstockWorkingcapital-increase(a)Acquisition ofHersheyElectricCompany......Investment inassociated companies -increase.Other-net86,69415,309(b) 7,85570,68658,89782,75350,03743,3306,62423,9902,4274,3053497,131510.778415.315327,036279,118(a)Excludesshort-term debtandlong-term debtduewithinoneyear.(b)Thenetchangesinworkinpcapitalresultedprincipally fromthefollowing: 1976,increases inaccountsreceivable, accountspayable,andfuelinventory, andadecreaseinaccruedtaxes;1975,increases innotesreceivable, accountspayable,accruedtaxes,dividends payableandaccruedinterest. Seeaccompanying NotestoFinanciaiStatements. 21 Statement ofEarningsReinvestecI 197619751974Thousands ofDollars19731972Balance,January1.NetIncome...... Dividends DeclaredPreferred stockPreference stock.CommonstockBalance,December31(Notes6and7)..$212,550112,111324,66113,12820,24053,32686,694$237,967185,69597,541283,2369,39315,11646,17770,686212,550157,11387,479244,5929,39310,26339,24158,897185,695140,23866,912207,1507,5519,64032,84650,037157,113125,64757,921183,5686,4338,09328,80443,330140,238NotesToFinancial Statements December31,1976and19751.SummaryofAccounting PoliciesAccounting SystemAccounting recordsaremaintained inaccordance withtheUniformSystemofAccountsprescribed bytheFederalPowerCommission (FPC)andadoptedbythePennsylvania PublicUtilityCommission (PUC).Prlnclples ofConsolldaf IonTheBalanceSheetatDecember31,1976includestheconsolidated accountsoftheCompanyanditswholly-owned electricdistribution subsidiary, HersheyElectricCompany,whichwasacquiredDecember31,1976.Allsignificant intercompany transactions havebeeneliminated. SeeNote11toFinancial Statements. Associated Companies Investments inunconsolidated subsidiaries (allwholly-owned) andinSafeHarborWaterPowerCorporation (representing one-halfofthatcompany's votingsecurities) arerecordedusingtheequitymethodofaccounting. TheCompany's unconsolidated subsidiaries areengagedincoalminingoperations, holdingcoalreserves, oilpipelineoperations andrealestate.TheCompanybelievesthatitsfinancial positionandresultsofoperations arebestreflected withoutconsolidation ofthesesubsidiaries sincetheyarenotengagedinthebusinessofgenerating anddistributing electricity. Ifalltheunconsolidated subsidiaries wereconsidered intheagg'regate asasinglesubsidiary, theywouldnotconstitute a"significant subsidiary" asthattermisdefinedbytheSecurities andExchangeCommission. UtllltyPlantAdditions toutilityplantandreplacements ofunitsofpropertyarecapitalized atcost.Costsofdepreciable propertyretiredorreplacedareremovedfromutilityplantandsuchcosts,plusremovalcosts,lesssalvage,arechargedtoaccumulated depreciation. Costsoflandretiredorsoldareremovedfromutilityplantandanygainsor22 lossesarereflected ontheStatement ofIncome.Allexpenditures formaintenance andrepairsofpropertyandthecostofreplacement ofitemsdetermined tobelessthanunitsofpropertyarechargedtooperating expenses. Allowance forFundsusedDuringConstruction AsprovidedintheUniformSystemofAccounts, thecostoffundsusedtofinanceconstruction workinprogressiscapitalized aspartofconstruction cost.TheAllowance forfundsusedduringconstruction (Allowance), shownontheStatement ofIncomeunderOtherIncomeand Deductions, isanoncashitemequaltotheamountsocapitalized andservestooffsettheactualcostoffinancing construction workinprogress. SinceFebruary1,1974,inaccordance withprocedures prescribed bythePUC,theCompanyhascomputedtheAllowance ratesemiannually onan"after-tax" basisusingaspecified rateforcommonequityandthecostofdebtandpreferred andpreference stocksecurities issuedinthetwelvemonthspreceding thesemiannual computation. InFebruary1977,theFPCissuedanorderwhichestablished aspecificformulatobeusedincomputing themaximumAllowance rate,effective January1,1977.TheCompanydoesnotanticipate thatadoptionofthenewFPCmethodwillsignificantly effecttheamountofAllowance theCompanywouldotherwise recordin1977.Depreclatlon Forfinancial statement

purposes, thestraight-linemethodofdepreciation isusedtoaccumulate anamountequaltothecostofutilityplantandremovalcosts,lesssalvage,overtheestimated usefullivesofproperty.

Provisions fordepreciation resultedinanannualcomposite rateof3.2'/0in1976and3.3'/oin1975.Thelowercomposite ratefor1976reflectschangesmadeasofJanuary1,1976inestimated usefullivesofcertainfacilities inaccordance withthePUC'sAugust1976rateorder.RevenuesRevenues, arebasedoncyclebillingsrenderedtocertaincustomers monthlyandothersbimonthly. TheCompanydoesnotaccruerevenuesrelatedtoenergydelivered butnotbilled.FuelCostsRecoverable UnderFuelAd/ustmentClausesTheCompany's tariffsincludefueladjustment clausesunderwhichfuelcostsvaryingfromthelevelsallowedinapprovedrateschedules arereflected incustomers'ills afterthefuelcostsareincurred. Thechargetoexpenseforfuelcostsrecoverable inthefuturethroughapplication offueladjustment clausesisdeferredtotheperiodsinwhichthesecostsarebilledtocustomers. SeeNote3toFinancial Statements. IncomeTaxesTheCompanyanditssubsidiaries fileaconsolidated Federalincometaxreturn.Incometaxesareallocated totheindividual companies basedontheirrespective taxableincomeorloss.Incometaxesareallocated toOperating ExpensesandOtherIncomeandDeductions ontheStatement ofIncome.IncometaxcreditsrecordedunderOtherIncomeandDeductions resultprincipally fromthetaxdeductions relatedtointerestexpenseassociated withfinancing construction workinprogress. Deferredtaxaccounting isfollowedforitemswheresimilartreatment inratedeterminations hasbeenorisexpectedtobepermitted bythePUG.Theprincipal itemsareaccelerated amortization ofcertified defensefacilities andpollution controlequipment, deduction ofcostsofremovingretireddepreciable

property, thatportionoftaxdepreciation arisingfromshortening depreciable livesby20'/oundertheclasslifedepreciation system,fuelcostsrecoverable underfueladjustment clauses,theforcedoutagereserveandthecostoffuelconsumedduringthetestperiodofnewgenerating facilities.

Taxreductions arisingprincipally fromtheuseofthedeclining balancedepreciation method,guideline livesandcertainincomeandexpensesbeingtreateddifferently fortaxcomputation thanforbookpurposesareaccounted forundertheflow-through method.23 Investment taxcredits,whichresultinareduction ofFederalincometaxespayable,aredeferredandamortized overtheaveragelivesoftherelatedproperty. During1976theCompanyadoptedanEmployeeStockOwnership Plan(ESOP)whichpermitstheCompanytoclaimanadditional 1'/oinvestment taxcredit.Anamountequaltothisadditional creditispaidtothetrusteefortheESOPtoacquireCommonStockoftheCompanyforemployees. SeeNote9toFinancial Statements. Retirement PlanTheCompanyhasaRetirement Plancomposedoftwoparts:(1)anoncontributory portionwhichprovidesbenefitsforalleligibleactiveemployees withthefullcostabsorbedbytheCompany,and (2)avoluntary portioninwhichcontributions aremadebybothemployees andtheCompany,butthefullcostofpastserviceandPlanimprovements isbornebytheCompany.Approximately 95'/oofeligibleactiveemployees aremembersofthevoluntary portionofthePlan.Companycontributions tothePlanincludeamountsrequiredtofundcurrentservicecostsandtoamortizeunfundedpastservicecostsoverperiodsofnotmorethan20years.SeeNote8toFinancial Statements. ForcedOutageReserveAself-insurance reserveisprovidedtocovertheincreased levelofpowercostswhichareexperienced whenanyoftheCompany's majorgenerating unitsareforcedoutofserviceduetodamagecausedbyaccidentorotherunforeseen insurable occurrences. Increased powercostsresulting frompurchasing orgenerating replacement powerathighercostsorlossofinterchange salesinexcessof$0.5millionthrough1975and$1.0millioneffective January1,1976foreachaccidentoroccurrence arechargedtothereserve.AstocertainoftheCompany's largegenerating units,costschargeable tothereservearelimitedto$10millionsinceoutsideinsurance iscarriedtocovercostsinexcessofthatamount.Thereserveisestablished onthebasisofhistorical experience andhasbeenrecognized inratemaking procedures bythePUC.AtDecember31,1976andDecember31,1975thereservebalancewas$13.9millionand$11.9million,respectively. Reclasslllcatlons Certainreclassifications havebeenmadeinprioryears'mounts tomakethemcomparable totheclassification ofsuchitemsin1976.2.RateFilingsInMarch1975,theCompanyfiledwiththePUCforageneralincreaseinelectricrevenues. Asummaryoftherateincreases resulting fromthisfiling,basedonannualized revenuesasofJuly31,1975,isasfollows(millions ofdollars): Effective OateofIncreaseSeptember 13,1975(interim) .April14,1976(Interim) .......August26,1976(final).......AnnualIncrease$21.020.037.3$76.3Thetotalincreasegranted($78.3millionor14.6'/o)represents theentireamountrequested bytheCompany.Revenuesfor1976increased approximately $40.3millionover1975asaresultoftheaboverateincreases. TheFPCpermitted arateincreaseaffecting resalecustomers, amounting toapproximately $1millionannually, tobecomeeffective inNovember1976,subjecttorefund.Revenuesfor1976includeapproximately $0.1millionapplicable tothisincrease. 3.Nonrecurring CreditRelatedtoAccounting ChangeTheNonrecurring CreditshownontheStatement ofIncomefor1974represents thecumulative effecttoDecember31,1973ofachangeinaccounting forfuelcosts,netofrelatedincometaxes.Theaccounting changerelatedtodeferring thechargetoexpenseforaportionoffuelcoststotheperiodsinwhichsuchcostsarebilledtocustomers throughapplication offueladjustment clauses.24 Inthefollowing summary,earnings"AsReported" includestheNonrecurring Creditrecordedin1974,andearnings"Restated" reflectstheeffectofretroactive allocation toprioryearsoftheNonrecurring Creditrelatedtothechangeinaccounting forfuelcosts:197419731972EarningsApplicable toCommonStock(a)AsReported......... $67,82349,72143,395Restated............ 63,66151,06643,161EarningsPerShareofCommonStock(b)AsReported......... $3.072.572.48Restated............. 2.882.642.46(a)Thousands ofdollars.(b)Basedonaveragenumberofsharesoutstanding. 4.Compensating BalancesandShort-Term DebtInordertoprovideloansforinterimfinancing andprovideback-upfinancing capability forcommercial papernotestheCompanyhadlinesofcreditwithvariousbanksaggregating $200million atDecember31,1976.Useoftheselinesofcreditwasrestricted atDecember31,1976totheextentof$4millionbyshort-term bankloanstocertaincompanies involvedinfuelsupplyoperations. Bankborrowings aregenerally foroneyearandmaybeprepaidatanytimewithoutpenalty.Nobankloanswereoutstanding atDecember31,1976orDecember31,1975.OftheCompany's linesofcredit,$144millionwasmaintained bycompensating bankbalancerequirements (notlegallyrestricted astowithdrawal) and$56millionbypaymentofcommitment fees.Compensating bankbalancerequirements areonanaverageannualbasiswhichapproximated $13.9millionatDecember31,1976.Commitment feesonanannualized basisapproximated $0.3millionatDecember31,1976.Commercial papernotesaregenerally soldforperiodsrangingfrom30to60days.Theweightedaveragediscountratesapplicable tocommercial papernotesoutstanding atDecember31,1976and1975were4.7o/oand5.6/o,respectively. Themaximumaggregate amountofshort-term debtoutstanding attheendofanymonthduring1976was$194.6millionandduring1975was$142.6millionwithanaverageaggregate dailyamountoutstanding duringtheseyearsof$129.6millionand$85.2million,respectively. Theapproximate weightedaverageinterestrateofshort-term debtduring1976was5.5o/oandduring1975was7.3'/o,calculated bydividingthetotalshort-term debtinterestexpensefortheyearbytheaverageaggregate dailyamountofshort-term debtoutstanding duringtheyear.5.CapitalStockCommonStockof$495,008,000at December31,1976includes$464,000cashinstallments receivedunderadividendreinvestment planasconsideration for20,852sharesofCommonStockwhichwereissuedinJanuary1977.Eachofthefollowing seriesof.stockcontainssinkingfundprovisions designedtoretiretheseries ataredemption priceof$100pershare:SharestobeRedemption RedeemedAnnuallyPeriodPreferred Stock7.40'/oSeries16,0001979-20039.24/oSeries(a)30,0001981-2005Preference Stock$9.25Series(b)40,0001977-1981 $11.00Series(a)25,0001981-2000$13.00Series(a)12,5001980-1999 (a)TheCompanyhastherighttoredeemoneachsinkingfundredemption dateadditional sharesuptothenumberofsharesofthisSeriesrequiredtoberedeemedannually. (b)lnJanuary1977,theCompanyredeemed40,000sharesofthePreference Stock,$9.25Series.Capitalstockexpenserepresents commissions andexpensesincurredinconnection withtheissuanceandsaleofcapitalstock.OfthecapitalstockexpensebalanceatDecember31,1976,approximately $3.0millionapplicable tothepreferred andpreference stockserieswhichareto25 beredeemedthroughsinkingfundprovisions willbeamortized toEarningsReinvested astherespective seriesofstockareredeemed. Noamortization planisineffectforcapitalstockexpenseapplicable tootherissuesofcapitalstock.6.DividendRestrictions TheCompany's charterandmortgageindentures restrictthepaymentofcashdividends onCommonStockundercertainconditions. Underthecharterprovisions, whicharethemorelimiting, norestrictions areeffective onthepaymentofsuchdividends outofcurrentearnings. Theamountofearningsreinvested freeofrestrictions underthecharteratDecember31,1976was$193.4million.7.Hydroelectric ProjectsTheCompanyoperatestwohydroelectric projectsunderlicensesissuedbytheFPC.CertainreservesrequiredtobeprovidedundertheFederalPowerActhavenotbeenrecordedpendingapprovaloftheamountsbytheFPC.TheCompanyestimates thatsuchreservesapplicable totheyearsfrom1946wouldnotexceed$3.0millionatDecember31,1976.9.TaxesIncometaxexpensefortheyears1976and1975isrecordedontheStatement ofIncomeasshownbelow:19761975Thousands ofDollarsIncludedinOperating ExpensesProvision Federal........... State.~........... Deferredincometaxes.....Investment taxcredits,net..IncludedinOtherIncomeandDeductions Reduction inprovision .....Totalincometaxexpense$6566,7667,4228,74527,66143,828~14.457)$29,37122,5478,22130,7683,54212,98847,298(11,201)36,097contributions andcertainotherminorchangestocomplywiththeEmployeeRetirement IncomeSecurityActof1974.Theseamendments increased theunfundedpastservicecostandvestedbenefitsbyabout$3.6million,andtheCompany's annualcostbyabout$1.0millioncommencing in1977,including amortization oftheincreased pastservicecostover20years.8.Retirement PlanObligations oftheCompany's Retirement Planarecurrently fundedthroughaTrustFund.AtJune30,1976,theendoftheFund'smostrecentfiscalyear,theFund'sassetsatmarketwere$92.3millionandatcostwere$94.5million.Pensioncostsfortheyears1976and1975were$9.8millionand$8.8million,respectively. BasedontheFund'sassetsatcost,atJune30,1976theactuarially computedunfundedpastservicecostwas$28.6million.AsofthesamedatevestedbenefitsexceededthecostbasisoftheFund'sassetsby$20.0million.Planamendments effective asofJuly1,1976,subjecttoInternalRevenueServiceapproval, provideforincreased

benefits, reducedemployeeInvestment taxcreditsof$29.5millionand$14.5millionfor1976and1975,respectively, havebeenreflected asreductions oftheprovision forFederalincometaxeswithequivalent amountsincludedininvestment taxcredits,net.Investment taxcreditseliminated theCompany's Federalincometaxliability for1976andresultedinacredittotheprovision forincometaxesofapproximately

$5.9millionrelatedtoacarryback ofinvestment taxcreditstoprioryears.Totalincometaxexpensefor1976hasbeencreditedbyapproximately $5.0millionrepresenting adjustments ofprioryears'axliabilities. Theprincipal adjustment, relatedtoadoptionofthemodifiedhalf-year convention methodofcomputing taxdepreciation intheCompany's 1975Federalincometaxreturnfiledin26 September1976, reducedtotalincometaxexpense byapproximately $2.8million.Taxesotherthanincometaxeschargedtooperating expensewere:Portionoftaxdepreciation undertheclasslifedepreciation system.....Forcedoutagereserve.....Other.$6,463(1,041)3323$8,7454,540(3,726)2,7283,542Deferredincometaxesresultfromthefollowing items:19761975Thousands ofDollarsStategrossreceiptsStatecapitalstock........Stateutilityrealestate....Socialsecurityandother..Total.............. 19761975Thousands ofDollars$28320237568,8607,2848,0525,9804,2943,649$49,52640,669IncometaxexpensedifferedfromtheamountcomputedbyapplyingthecombinedFederalandStatecorporate incometaxrate(52.94'/o inboth1976and1975)topre-taxincomeasfollows:Net'income ................ Incometaxexpense........Pre-taxincome.......Indicated incometaxexpenseatcombinedtaxrate................... Reductions dueto:Allowance forfundsusedduringconstruction .....Taxdeduction inexcessofbookexpense:Depreciation .......... Taxandpensioncost..Other.Total................. Incometaxexpense ......... Effective incometaxrates....19761975Thousands ofDollars$112,11197,54129,37136,097$141,482133,638$74.90170,74823,92519,37915,0673,3543,18445,530$29,371208o/o9,1312,9983,14334,65136,09727.0o/oDuring1976,approximately $6.8millionoftheamountprovidedfor1975incometaxeswastransferred ontheBalanceSheetfromTaxesaccruedtoDeferredincometaxes.Suchamountrepresents theincometaxesapplicable toadeduction claimedontheCompany's1975 incometaxreturnforfuelexpensesrelatedtothetestingoftheMartinsCreekNo.3Unitinexcessofexpensesrecordedonthebooks.10.RentalsandNoncancelable LeaseCommitments Totalrentalschargedtooperating expensefortheyears1976and1975amountedto$10.5millionand$9.5million,respectively. AtDecember31,1976theCompanywascommitted forminimumrentalstotaling$59.3millionundernoncancelable leasesexpiringatvariousdatesto1996.Theminimumrentalsareasfollows(millions ofdollars): 1977,$5.6;1978,$5.4;1979,$5.1;1980,$4.9;1981,$4.5;1982through1986,$14.8;1987through1991, $11.3;1992through 1996,$7.7.Theserentalsareapplicable tothefollowing categories ofproperty: combustion turbinegenerating equipment, $16.6million;railroadcoalcars,$27.8million;computerequipment, $11.1million;andconstruction cranes,$3.8million.Generally theleasescontainrenewaloptionsandobligatetheCompanytopaymaintenance, insurance andotherrelatedcosts.Theimpactuponnetincomeineachoftheyears1976and1975wouldbelessthan1'/oifallnon-capitalized financing leaseswerecapitalized andamortized onastraight-line basiswithinterestaccruedonthebasisoftheoutstanding leaseliability. InDecember1976,theCompanyenteredintoacommitment toleasecertainoilstoragefacilities in1977.Itisexpectedthatthefinalleaseagreement willresultintheCompanypayingleaserentalsofapproximately $2.8millionannuallyforaperiodof20yearscommencing in1977.27 11.Acquisition OnDecember31,1976theCompanyacquiredalloftheoutstanding capitalstockofHersheyElectricCompany(HEC),anelectricdistribution company.Theacquisition costofthecapitalstockandtherepayment ofalldebtowedbyHECapproximated $7.9million.TheassetsofHECatDecember31,1976were$8.8millionandtherevenuesandnetincomefortheyear1976were$11.9millionand$0.4million,respectively. 12.Commitments andContingent Liabilities TheCompanyestimates thatabout$1.51billionwillberequiredtocompleteconstruction projectsinprogressattheendof1976.Ofthisamount,approximately $1.15billionisrelatedtocompletion oftheCompany's twonucleargenerating unitsattheSusquehanna PowerPlant.TheCompany's estimated construction programfor1977is$390million,including $14millionfornuclearfueland$28millionrelatedtoenvironmental protection facilities. Inconnection withproviding foritsfuturebituminous coalsupply,theCompanyatDecember31,1976hadguaranteed capitalandotherobligations ofcertaincoalsuppliers (including ownedcoalcompanies) aggregating $162.2million.13.Replacement CostData(Unaudited) Theimpactoftherateofinflation experienced inrecentyearshasresultedinreplacement costsofproductive capacitythataresignificantly greaterthanthehistorical costsofsuchassetsreportedintheCompany's financial statements. Incompliance withreporting requirements, estimated replacement costinformation isdisclosed intheCompany's annualreporttotheSecurities andExchangeCommission onForm10-K.14.SummaryofQuarterly ResultsofOperations (Unaudited) QuarterEndedOperating RevenuesEarningsOperating NetApplicable toIncomeIncomeCommonStockThousands ofDollarsEarningsPerShareofCommonStock(a)1976March31........June30September 30....December31(b).$166,269149,281149,580179,017$34,36028,00635,24140,727$25,18921,28130,42335,218$17,78113,60321,28226,077$0.670.460.700.851975March31.......... June30.September 30..~...December31150,106128,984125,917139,12229,83326,74230,16834,22623,67318,2240.7822,24816,6770.6525,54219,4610.7426,07818,6700.70(a)Quarterly earningspersharearebasedontheaveragenumberofsharesoutstanding duringthequarter.(b)Resultsforthefourthquarterof1976includeareduction inincometaxexpenseof$24millionduetoincreased taxdepreciation applicable toMartinsCreekUnitNo.4whichbegantestoperation inDecember1976anda$2.1millionchargetoexpense(netofincometaxes)toadjusttheamortization ofdeferredfuelcostsfortheyears1970-1 975totheactualfueladjustment revenuesbilledduringthoseyears.28 Auditors'pinion Haskins8SellsCertified PubticAccountants Auditors'pinion TwoBroadwayNewYork10004TheShareowners andBoardofDirectors ofPennsylvania Power&LightCompany:WehaveexaminedthebalancesheetofPennsylvania Power&LightCompanyasofDecember31,1976and1975,therelatedstatements ofincome,earningsreinvested, andchangesinfinancial positionfortheyearsthenendedandthescheduleofcapitalstockandlong-term debtasofDecember31,1976.Ourexamination wasmadeinaccordance withgenerally acceptedauditingstandards and,accordingly, includedsuchtestsoftheaccounting recordsandsuchotherauditingprocedures asweconsidered necessary inthecircumstances. lnouropinion,suchfinancial statements andschedulepresentfairlythefinancial positionoftheCompanyatDecember31,1976and1975andtheresultsofitsoperations andchangesinitsfinancial positionfortheyearsthenended,inconformity withgenerally acceptedaccounting principles consistently appliedduringtheperiodsandonabasisconsistent withthepreceding year.February3,1977FISCALAGENTSSECURITIES LISTEDONEXCHANGES TRANSFERAGENTSFORPREFERRED, PREFERENCE ANDCOMMONSTOCKIndustrial ValleyBankandTrustCompany634HamiltonMallAllentown, Pennsylvania-18101 IrvingTrustCompanyOneWallStreetNewYork,NewYork-10015Pennsylvania Power&LightCompanyTwoNorthNinthStreetAllentown, Pennsylvania -18101REGISTRARS FORPREFERRED, PREFERENCE ANDCOMMONSTOCKTheFirstNationalBankofAllentown HamiltonMallatSeventhAllentown, Pennsylvania -18101MorganGuarantyTrustCompanyofNewYork23WallStreetNewYork,NewYork-10015 DIVIDENDDISBURSING OFFICEFORPREFERRED, PREFERENCE ANDCOMMONSTOCKTreasurer Pennsylvania Power&LightCompanyTwohforthNinthStreetAllentown, Pennsylvania -18101NEWYORKSTOCKEXCHANGEFirstMortgageBonds,10N%Seriesdue19824%%Preferred Stock(Code:PPLPRB)4.40%SeriesPreferred Stock(Code:PPLPRA)8.60%SeriesPreferred Stock(Code:PPLPRG)9.24%SeriesPreferred Stock(Code:PPLPRM)Preference Stock,$8.00SeriesCode:PPLPRJ)Preference Stock,$8.40SeriesCode:PPLPRH)Preference Stock,$8.70SeriesCode:PPLPRI)Preference Stock,$11.00Series(Code:PPLPRL)Preference Stock,$13.00Series(Code:PPLPRK)CommonStock(Code:PPL)PHILADELPHIA STOCKEXCHANGE4yr%Preferred 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,$11.00SeriesPreference Stock,$13.00SeriesCommonStock29 Statistical Summary19761975197419731972Financial DataCapitalprovidedbyinvestors -thousands (a)(b)Returnonaveragecapitalprovidedbyinvestors -%(c).Returnonaveragecommonequity-%(c)....Fixedcostrateonlong-term debtandpreferred andpreference stock-%(a).....CommonstockdataBookvalue(a)(c)Dividendpayoutrate-%(c)........... ~...Dividendyield-%(d)Priceearningsratio(c)(d)Timesinterestearnedbeforeincometaxes(c).Numberofshareowners -preferred, preference andcommon(a)............... SalesDataElectriccustomers (a)Electricenergysales-millionsofkwhResidential Commercial Industrial Other.8.8311.618.7612.528.4912.657.9011.897.5311.607.917.766.826.175.99$23.45688.18.32.62184,841936,2197,2674,8747,48173220,35423.17639.16.92.80171,766917,9206,8184,5757.02070019,11322.916211.55.32.92154,126902,1486,4944,2757,1701,02418,96322.51648.47.63.15142,235886,3786,3244,2626,8811,39818,86521.78676.510.33.05135,399864,4395,9853,9336,45863717,013$2,406,136 2,100,003 1,828,888 1,533,861 1,375,031 Sourcesofenergysold-millions ofkwhGenerated Coal-fired steamstationsOil-fired steamstation(e)........... Combustion turbinesanddiesels....Hydroelectric stations.............. 25,7511,9474080925,3841,1498485927,4762,241(8,757)(1,847)19,1138,5282.7828,5472,126(8,358)(1,961)8,9313.105,717,000 4,122,000 92.44.53.179.075.470.131.41.04Powerpurchases Interchange powersales.................. Companyusesandlinelosses............. Totalelectricenergysales20,354Averageannualresidential kwhuse.......... Averagepriceperkwhforallcustomers -centsGeneration DataGenerating capability -kilowatts (a)......... 5,717,000 Peakdemand-kilowatts (f)................. 4,514,000 Generation byfuelsources-%Coal~.90.2Oil(e)7.0Hydro2.8Steamstationavailability-% Coal-fired ~~~~~~~~~~~~~"~"~78.1Oil-fired (e)68.8Steamstationutilization -%Coal-fired ........~70.6Oil-fired (e)26.4Fuelcost-centsperkwh1.17(a)Yearwnd.(b)Includesshort-term debt.long-term debt,preferred andpreference stockandcommonequity24,18624777225,2051,570(6,079)(1,733)18,9638,2872.444,901,000 3,772,000 96.01.03.072.366.70.8824,78227381625,8711,968(7,237)(1,737)18,8658.2532.004,903,000 3,662,000 95.81.13.180.671.60.5019,09760182420,5221,784(3,586)(1,707)17,0138,0321.994,108,000 3,598,000 93.12.94.076.764.30.49(c)Reflectsretroactive allocation toprioryearsofNonrecurring CreditrecordedIn1974relatedtochangeInaccounting forfuelcosts.(d)Basedonyear-endmarketprice.(e)Firstoil-fired steamstationunitbegancommercial operation In1975andthesecondunitbegantestoperation InDecember1976.(I)Winterpeakshownwasreachedearlyinsubsequent year.In1976,peakIsthatwhIchwouldhaveoccurredIfa50A)voltagereduction hadnotbeenIneffect.Actual1976peakwas4,425.000 kilowatts. 30 Quarterly Dividends andMarketPriceofVotingSecurities for1976and1975ReportedMarketPrice-Dollars perShare1976CommonStock.......... Preferred Stock4th%Series3.35%4A04.60%7.40%(a)............ 86P9.00'lo9.24%Quarterly Dividends Declared$0.451.1250.83751.101.151.852.152.25(b)1stQuarterHighLow21%191/s534737'h3451th44'/s5048'h988797922ndQuarterHighLow20'/i19'h51~h47~/43633504648'h46959096893rdQuarterHighLow21/42052'h4836'/43451'ls47'ls49y447'h9892'/s97'/494104ih99'/44thQuarterHighLow22@20%54'h50'h3836~h53th48524999'h9510198106'h103Preference Stock$8.00.................. $8.40................ ~.$8.70.................. $9.25(a)$11.00........~.~......$13.00................. 2.002.102.1752.31252.753.2586778781%8883'h8980'/48982'h9287'h94829487'/i9488111'h102'h112107112r/s109M125'h117'h124119130120'h90@82t/495'h919991'h114th109rh130'h1251975CommonStock.......$0.452015Ys19r/s17ls19r/s17s/s19/s17%Preferred Stock4'%eries3.35%4.4p46p7.40%(a)...8.60%9.PPPreference Stock$8.00.............. $840.............. $8.70.............. $9.25(a)$11.00............. $13.00............. 1.1250.83751.101.151.852.152.252.002.102.175(c)(d)3.255244%3531'h50'h41'h50449379'h958085698973927912010549'h45'h4945'h4944h88'h8488'h8190829088918895888275817679748578'h84'h77'/4847888'/s8288'h80'/s87'h80'h118111103100'h106'h100'/4118110'h119'h112343335323532'h47'h43484446'h43'h47'h45'h47454945Theprincipal tradingmarketforallclassesofstockistheNewYorkStockExchangeexceptforthe335%,460%and900%SeriesPreferred StockswhIcharelistedonthePhiladelphia StockExchangebutaretradedprincipally overthecounter.Pricerangesforthe3.35%,4.60%and9.00%SeriesPreferred Stocksarebasedonthebestavailable highandlowbidpricesduringtheperiodsandshouldbeviewedssreasonable approximations. (a)Stockwasaprivateplacement andIsnotpubliclytraded.(b)StockissuedJune1976,thothirdquarterdividendwas$2.67andthofourthquarterdividendwss$2.31.(c)StockissuedInSeptember 1975,fourthquarterdividendwas$2.3362.(d)StockissuedAugust1975,thethirdquarterdividendwas$1.01andthefourthquarterdividendwas$2,75.31 OfficersDlfectolsJACKK.BUSBY,ChairmanoltheBoardandChiefExecutive OflicerROBERTK.CAMPBELL, President ROBERTR.FORTUNE,Executive VicePresident, Financial BROOKER.HARTMAN,Executive VicePresident, Operations JOHNT.KAUFFMAN, VicePresident, SystemPower&Engineering EMMETM.MOLLOY,VicePresldont, HumanResource&Development LEONL.NONEMAKER, VicePresident, DivisionOperations CHESTERR.COLLYER,Treasurer NORMANW.CURTIS,VicePresident, Engineering &Construction JOSEPHL.DONNELLY, VicePresident, FinanceLOUISEA.EARP,Assistant Secretary CHARLESE.FUQUA,VicePresident, Susquehanna DivisionCHARLESJ.GREEN,VicePresident, Harrisburg DivisionRICHARDH.LICHTENWALNER, VicePresident, information ServicesCARLR.MAIO,VicePresident, LehighDivisionJAMESJ.McBREARTY, VicePresident, Northeast DivisionEDWARDM.NAGEL,VicePresident, GeneralCounselandSecretary HERBERTD.NASHJR.,VicePresident, Consumer&Community ServicesEDWINH.SEIDLER,VicePresident, Distribution BRENTS.SHUNK,VicePresident, Lancaster DivisionJEANA.SMOLICK,Assistant Secretary DONALDJ.TREGO,Assistant Treasurer GEORGEF.VANDERSLICE, VicePresident andComptroller PAULINEL.VETOVITZ, Assistant Secretary HELENJ.WOLFER,Assistant Secretary Corporate Managomont Commluoo: JackK.Busby,chairman; Messrs.Campbell, Fortune,Horlman,Kauffmon, Molloy,Ncnomakor ondFredKornotJr.~manager-corporate Administration sorvingaslhocommlttoo's oxocutivo secretary. Theexecutive organization chartcttheCompanylsincludedinthePP&LProfile.JACKK.BUSBY,Allentown ChairmanoftheBoardandChiefExecutive OflicerROBERTK.CAMPBELL, Allentown President RALPHR.CRANMER,Williamsport MemberolBoardofDirectors-Grit Publishing CompanyEDGARL.DESSEN,HazletonPhysician-Radiologist ROBERTR.FORTUNE,Allentown Executive VicePresident, Financial BROOKER.HARTMAN,Allentown Executive VicePresident, Oporations HARRYA.JENSEN,Lancaster Executive VicePresident, Armstrong CorkCompany,Manufacturer ofinteriorfurnishings andspecialty productsVIRGINIAH.KNAUER,Philadelphia" LectureronConsumerAffairsW.DEMINGLEWIS,Bethlehem President olLehighUniversity JOHNA.NOBLE,ScrantonChairmanoltheBoardandChlelExecutive OflicerolClelandSimpsonCompany,Department storesRUTHPATRICK,Philadelphia ChiefCuratoroftheLimnology Department, AcademyofNaturalSciencesNORMANROBERTSON, Pittsburgh SeniorVicePresident andChiefEconomist olMellonBank,N.A.JOSEPHT.SIMPSON,Harrisburg ChairmanoftheBoardofHarscoCorporation, Diversified manufacturer offabricated metalproductsCHARLESH.WATTSII,Vienna,Va.President andChiefExecutive OflicerofTheWolfTrapFoundation forthePerforming ArtsExecutive Committoo: JackK.Busby,chairman; Messrs.Campbell, Cranmor,Harfman,JensenandSimpson.AuditCommluoo: Mr.Jensen,Dr.PatrickandMr.Watts.'Mr.Hartmanwillnofbenomlnatod totheboardofdirectors attho1977annuolmootingofsharoownors inviewofhisrotiromonf onJune1,1977."Virginia Knauor,forrnorspoclalassistant forconsumeraffairsfoProsldont Ford,wasoloclodaPP&Ldlrocloroffoclivo March1,1977.Subsequent toMrs.Knauor'sselection. CliffordL.Aloxandor Jr.,whowasadirectorduringallof1976,roslgnodfromtheboardwhenhobecameSecretary oftheArmyintheCarteradministration. TheCompanyfilesForm10-KannuallywiththeSecurities andExchangeComrnlsllo. Form10-KIscomposedofthisAnnualReporttosharoownors andadditional Information concernIng theCompanyandItsoperations. ThIsadditional Information willbeavailable withoutchargeafterApril1,1977bywritingtoPennsylvania Power&LightCompany,TwoNorthNinthStreet,Allentown, Pa.18101,attention: Mr.GeorgeI.Kllne,InvestorServicesManager.32 PAL'sNewPresident <xm4',RobertK.Campbell, 47,isPPLL'snewpresident. JackK.Busby,Companypresident since1957,moveduptochairmanoftheboardwhileremaining aschiefexecutive officer.PP&L'sboardofdirectors electedthetwototheirrespective positions attheJanuary26,1977boardmeeting.'Campbellhadbeengeneralmanager-4,administration forWesternElectric, thenationwide manufacturing armoftheBellSystem.TheCampbelldecisionwasmadebyaspecialcommittee oftheboardwhichwasmadeupofMessrs.Busby,Cranmer,Jensen,LewisandSimpson.Theselection followedmanymonthsofconsideration onwhetherthefutureneedsoftheCompanywouldbestbeservedbybringinginfromoutsideanexecutive atthetoplevel.CampbellisaChicagonative,anArmyveteran,andsince1967hasbeenanAllentown residentveryactiveincivicaffairs.Hisadvancededucation spansthreeprofessions. Inengineering, hehasabachelor's degreefromtheIllinoisInstitute ofTechnology andamaster'sdegreeinmechanical engineering fromtheUniversity ofillinois. Inbusi-nessadministration, hehasamaster'sdegreefromtheUniversity ofChicago.Andinlaw,heholdsadoctorate ofjurisprudence fromLoyolaUniversity. CampbelljoinedWesternElectricin1957asadevelopment engineerattheHawthorne WorksinChicago,advancing todepartment chiefin1961.Hewaspromotedtoassistant managerin1963andwasassignedtothePublicRela-ItionsDivisionatWesternElectric's headquarters inNewYorkCity.In1965,hewastransferred toWestern's newplantinShreveport, La.,asassistant managerofengineer-ingandwasnamedmanagerthefollowing year.CampbellmovedtoAllentown inJune1967afterhewaspromotedtomanager-development andmanufacturing engineeroftheWesternElectricAllentown Works.Hewasadvancedtodirectorofman-ufacturing in1969andwasnamedgeneralmanageroftheReading,Pa.,Worksin1971.In1972,hewasnamedgeneralmanageroftheAllentown Works,servinguntilhisappoint-mentinJune1976asgeneralmanager-admin-istration forWesternElectric's Manufacturing Divisionatcorporate headquarters inNewYork.Campbellisaregistered professional engineerandholdsmembership intheAmericanSocietyofMechanical Engineers. HealsoisamemberoftheillinoisBarAssociation. Campbellhasalreadybegunanintensive pro-gramofvisitingthroughout theCompany's serviceareatogettoknowasmanyemployees aspossibleandtobecomefamiliarwiththecomplexities ofthebusiness. Heseesabasicchallenge intheincreasingly difficult taskofbalancing theoften-conflicting needsofthecustomers PPLLserves,theemployees whoprovidetheserviceandtheinvestors whoputupthemoneytomaketheservicepossible. PPaLPENNSYLVANIA POWER8LIGHTCOMPANYTwoNorthNinthStreet,Allentown, Pa.18101Telephone: AreaCode215821-5151LITHOIHU.S.A. PENNSYLVAN(A POWER8cLlGHTCOMPANY~1973annualreport HIGHLIGHTS Revenues-thousands NetIncome-thousands .EarningsApplicable toCommonStockAmount-thousands ................., ..Asa%ofAverageCommonEquity.......EarningsPerShare-basedonaveragenumberofsharesoutstanding Dividends PerShare.CommonStockDataReportedmarketpricepershareHigh.Low.BookvalueatyearendDividendpayoutrate-%Dividendyield-%(a)Priceearningsratio(a)UtilityPlant-thousands (a)Basedonyear-endmarketprice.1973$384,814~$66,912$49,72111.7$2.57$1.68$26$19$22.31658.47.8$1,846,332 Wg~1972345,79257,92143,39511.72.481.642722s/421.63666.510.21,637,040 1971300,70748,57237,18011.82.371.6026'/421s/s20.60686.410.51,458,707 1970255,31334,93528,50910.21.971.6027'/s20'/s19.62816.812.01,275,866 1969223,38834,60930,78712.52.321.6034'/223'/419.10696.510.61,120,022 ContentsTheYearinReviewTheFuelSituation ServiceAreaMapFinanclals NotestoFinancial Statements Directors andPrincipal Officers2-910-121314-2020-2324CoverPhotos:Fronl:PP&L'snewPowerControlCenterinAllentown willbethenervecenteroftheCompany's electricgeneration anddistribution systemwhenitbecomesfullyoperational inMay1974.Itfeaturesthenewest,mostup-to-date computerandelectronic equipment available. Whencompleted itwillbeInconstantcomputercommunication withthePennsylvania-New Jersey-Maryland (PJM)'nterconnection controlcenteratValleyForge.Back:PP&L'snewestpowerplant,MontourSteamElectricStationatWashingtonville, Pa,northofDanville. UnitNo.2wentintocommercial operation inApril1973.Bothunitsranextremely wellthroughout theyearandplayedanimportant partintheCompany's improved1973earnings. ~((((((DON RCC(Cl(OtA(II PP&L:ENERGYINPERSPECTIVE g)l(">>"~j f,'jii,,',",'Il.'l',,',i','"",l'lg'('j""jest. (IW'l,Despitelongstanding predictions ofim-pendingdomesticshort'ages ofoilandnaturalgas,thesevereconsequences oftheAraboilembargohavegenerally comeasasurprise. Theimpacthasbeensosubstantial andsoabruptthattherehavebeenwidespread feelingsofshock,angeranddisbelief. Andconsiderable scapegoating. Inanyevent,therecentMideasteventsemphasize thatthenationwaslongoverdueinfacinguptothecomplexandcostlyrequirements ofes-tablishing areasonable self-sufficiency ofenergy.Inescapably, wenowhavebeforeusahugeandmultifaceted task.WheredoesPP&Lstandintermsofthenewenergyscenario'? Herearesomepointsthatweparticularly wanttobringtoyourattention. PP&Lhasafavorable generating ca-pacityandfuelpositionatthistime.Gen-eratingequipment performance isgood.Wehaveadequatecapacityreserves. Andno"old"powerplants.About96percentofourpowergeneration in1973camefromcoal-burning generating units.InearlyMarch,wehadanaverageof55daysofcoalstocksatourpowerplants.However,thesupplysituation isbecom-ingverytight.Morethanhalfourcoalisbeingproducedbyminesthatareen-tirelycommitted toPP&L'sneedsonalong-term basis.Ourfleetofunitcoaltrainsintegrates thesemineswithourmainpowerplants.Onereservation shouldbementioned. PP&Ldoesnotandcannotoperateasifitwereaseparateelectrical island.Wearepartofaverylargeregionalpowersupplynetwork.Criticalregionalshort-agesoffuelsforelectricgeneration mightrequireustooperateourfacilities inwhateverwaysaredetermined tobenecessary fromthestandpoint oftheoverallregional/national publicinterest. In1974,conservation effortswillprobablyresultinlessthananticipated useofelectricity. Forthecurrentyear,kilowatt-hour salesareforecasttobe19.7billioninsteadof20.7billion.Never-thelesstherevisedandlowerforecastprojectsa4.2percentincreaseoverkilowatt-hour salesin1973.Themostnoticeable effectsoftheconservation ef-forthavecomefromreducedlightingandadjustment ofthermostats. Werec-ognizethattherearelimitstohowmuchreduction canbeaccomplished bychangingourlivinghabits.Additional conservation resultswillprobablyde-velopmoreslowlybecausetheirrealiza-tionwilllargelydependuponthewilling-nessofcustomers toinvestinnewandmoreefficient equipment designedtoconserveelectricity. It'stooearlytopredictalltheeffectsreductions intheuseofelectricity willhaveonourearnings. Sinceourgenerat-ingplantsarecoal-fired webelievethoseplantswillcontinuetorunatfullcapacity. Anyelectricity notneededbyourcus-tomerscanbesoldtootherutilities. However,bulksalestootherutilities aregenerally atalowerpricethanreceivedfromretailcustomers. Beyond1974,weexpectaresump-tionofyearlygrowthratesofseventoninepercent.Fortwomainreasons-(1)normalgrowtharisingfrommorepeo-ple,morejobs,morehomes,moregoodsandservices, andthedesireforabetterstandardofliving,and(2)thethrowover demandforelectricity createdbytheshortages ofoilandnaturalgas.Baseduponourevaluation ofgrowthtrends,weareproceeding withourpres-entconstruction programwithoutma-terialchange.Estimated costforthenextfiveyearsis$2.1billion.Theprogramisgearedtobringingonline3.7millionkilowatts ofnewgenerating capacity-two800,000-kilowatt oil-fired unitsatMartinsCreek(in1975and1977)andtwo1,050,000-kilowatt nuclearunitsatournewSusquehanna Station(in1979and1981).Beyondthat,additional coal,nuclearandpumpedstoragecapacityisintheplanninganddevelopment stage.Wehaveconsidered aprogramtocon-vertthenewMartinsCreekunitstocoal.Wehavedecidedagainstsuchactionatthistimebecausethemajorreconstruc-tioninvolvedwouldmakebothunitsto-tallyunavailable forthenextfewyears-aperiodwheneventheirlimitedoutputmaybemostvaluableandnecessary fromacustomerservicestandpoint. Carryingoutourconstruction pro-gram,whichmeansbuildingthenewelectricfacilities thatwillhelptoalle-viatetheenergycrunch,lsinterlocked withourabilitytoraisethemoneyre-quired.Sinceouroperations provideonlyabout25percentofourconstruction needs,75percentofwhatweneedtobuildandexpandhastobefinancedbythesaleofsecurities toinvestors. Raisingnewcapitaldependsonin-vestorconfidence. Andsuchconfidence, inturn,dependsupongoodfinancial performance byPP&L.Inaneraofsteadilyrisingcosts,peri-odicrateincreases willbenecessary. Hopefully, itiswellunderstood thatobtaining theseincreases, onajustified basis,ofcourse,iswhatultimately makesitpossibletofinancethenewfacilities whichourcustomers dependuponforservice.Itmaysoundstrange,butrea-sonableandtimelyrateincreases areverymuchintheconsumerinterest. Thenationcanovercomethepresentenergyproblems. Itwilltaketime,atleastadecade.Plusagreatdealofpa-tience.Pluslargenewinvestments foroil,gasanduraniumexploration, forcon-struction ofnewpipelines, refineries, coalmines,railfacilities andmanpowertrain-ing,inadditiontonewpowerplantsandotherelectricsupplyfacilities. Itwillalsobeessential tohaveacontinuing andtotalcommitment toconservation ofenergy.Oursocietydependsonadequatesup-pliesofenergy.Wecandothejobthathastobedoneifallofusworkatitto-gether.InPP&Lwewilldoourbesttodoourpart.Respectfully submitted, March5,1974JackK.Busby,President THEYEARINREVIEWIn1973werecordedmeasurable progressinmanyareasofCompanyactivity. Revenuesreachedthe$385millionmark,up11.3percentover1972.Partofthisrise,ofcourse,camefromthe2.7percentratein-creaseallowedbythePennsylvania PublicUtilityCommission (PUC)ef-fectiveJune2,1973.Also,afterninemonthsofPUCin-vestigation, and4,000pagesoftesti-monyandexhibitmaterial, additional ratereliefaveraging 5.7percentwasgrantedeffective Jan.10,1974,foratotalincreaseof8.4percentor$28.5millioninnewannualreve-nues.Kilowatt-hour usageincreased 5.7percentover1972intheresidential

category, 8.4percentinthecom-mercialareaand6.5percentintheindustrial sector.Theoverallrateofgrowthwas10.9percent,including contracted salestotheMetropolitan EdisonCompanywhichaccounted for4.3percentoftheoverallgrowth.Allthisdespiteourintensive effortssince1972inurgingenergycon-servation measuresbyallofourcustomers.

Wedidbegintoseeareduction intherateofgrowthtowardtheendoftheyearafterPresident Nixon'scallforaconcerted nationwide efforttosaveenergy.InNovember, PP&Lbegantonoticeacutbackinourcustomers'se ofelectricity. Thedownwardtrendcontinued throughDecemberwhenkilowatt-hour usagebyourcustomers wasdownninepercentbelowestimates. Wewereabletoattribute twopercentofthereduction inDecembertowarmer-than-normal weather.Theremaining sevenpercentrepresents theeffortsofagreatmanypeopletouseelectricity sparingly. Especially obviouswaswidespread coopera-tioninnotinstalling outdoorChrist-maslighting. EffectsonConstruction Certainly wehaveaskedourselves whatimplications thisdeclineingrowthmayhaveonourlong-term construction program.Weconcluded thatwecannotre-gardthedeclineasmorethanatem-poraryleveling-off ofthelong-term growthrate.Peoplecanonlycon-servesomuch.Forexample,theycan'tgoonsettingthermostats backanadditional fivedegreeseverywin-ter.Wefeelthatdemandwilldropbacktoanewbaseandthencon-tinueitstraditional steadyclimbupwardasweareexpectedtoac-commodate thenormalgrowthofnewhomesandbusinesses inourservicearea.In1973alone,thenumberofcustomers weservedin-creasedbynearly22,000.Wearealsobeginning toexperi-encea"throwover" effectthathasbeenoccurring assomepresentcustomers switchfromotherenergysourcestoelectricity andnewcus-tomersselectelectricity insteadofotherenergysourcestoservetheirneeds.Ifwearetomeetourmissionofplanningmanyyearsaheadtohavesufficient generation anddeliveryfacilities readytomeetourcustom-ers'eedsdecadesfromnow,weobviously cannotaffordawait-and-seeattitude. Wemustpressonwithourconstruction programs. Asignificant 1973milestone inourconstruction programwasthecompletion andstart-upofthecoal-firedNo.2unitatMontourSteamElectricStationwhichwentintocommercial operation inAprilof1973andadded750,000kilowatts toourgenerating capacity. TheCom-pany'stotalgenerating capacityatyear-endwas4,903,000 kilowatts, nearlythreetimesourcapability attheendof1963.Meanwhile, workcontinues ontwo800,000-kilowatt oil-fired unitsattheMartinsCreeksiteontheDelawareRiverwherewealreadyhavetwosmallcoal-fired units.Attheendof1973UnitNo.3was68percentcompleteandNo.4was11percentcomplete. Thefirstofthebignewunitsisexpectedtobegintestoper-ationslater.thisyearwithanin-servicedatesetforearly1975.Workonthepipelinewhichistheplannedoildeliverysystemforthetwounitshasnotbegundespiteau-thorization bythePUCinFebruary1973.Additional requiredapprovals mustbeobtainedfromtheDelawareRiverBasinCommission andotherappropriate agenciesandauthori-ties.Inthemeantimeoildeliverybyrailisbeingplanned.Afulldiscus-sionofthefuelsituation followsonpage10. PP&L,incooperation withtheWesternPrecipitation DivisionofJoyManufacturing Company,hasinstalled apilotsulfurdioxideremovalsystemonSunburySteamElectricStation's UnitNo.4,right.Theone-yearpilotprogramistestingawet-limestone scrubbersystem'sabilitytoremovesulfurdioxide(SO>)fromagenerating unit'sstackgasbeforeitcanbereleasedintotheatmosphere. During1973,coalwaskingatPP&L.About96percentofthenearly26billionkilowatt-hours ofelectricity generated byPP&Llastyearcamefromcoal-fired units.Morethan70percentofthattotalcamefromtheBrunnerIslandgenerating plant,shownbelow,andtheMontourplant,shownonthebackcover.Thefineperformance frombothplantscontributed alargesharetoimproved1973earnings. 'Hler'1J~InAllentown, aseven-level Gen-eralOfficeadditionwascompleted inJunejustnorthofandconnected tothepresent23-storyheadquarters building. ThenewbuildingdoublesthefloorspaceoftheoriginalGen-eralOfficestructure andallowstheconsolidation ofpersonnel fromsev-eralrentedofficeannexesscattered indowntownAllentown. ThemainfeatureofthebuildingistheCompany's newPowerControlCentershownonthefrontcover.Itincorporates thenewestcomputerandelectronic equipment andisoneofthemostup-to-date facilities ofitskindinthecountry.Thisequip-mentwillallowmonitoring andre-motecontroloffunctions andopera-tionstoanextentneverbeforepossible. FortheCompanyanditscustomers itmeansgreaterreliabil-ityandhigheroperating efficiency. Twoadditional 800,000-kilowatt oil-fired unitsaremovingalongonscheduleatMartinsCreek.Thefirst,UnitNo.3,isexpectedtobeginoperation earlyin197S.Althoughthepipeline, beingbuiltbyInterstate EnergyCompanytosupplycrudeandresidualoiltotheplant,isbeinghelduppendingapprovals, stop-gapraildeliveryoftheoilhasbeenarranged. P'.~,~Pc,IIrc'1rfFLCIPiComponents oftworeactorpressurevesselscompletetheir1,000-mile bargejourneyupthreeriversandacrosseightstates,fromMemphis,Tenn.toFreeport, Pa.FromtheretheyweretruckedtoMontourSteamElectricStationforstorageuntilextensive sitepreparation iscompleted attheCompany's firstnuclearstationnowbeingconstructed nearBerwick.Becauseofthelonglead-time necessary inbuildinganuclearplant,thecomponents hadtobeorderedin1971evenbeforePP&Lsubmitted itsapplication totheAtomicEnergyCommission foraconstruction permit.DeliverytotheMontoursitesavedseveralhundredthousanddollarsinout-of-state storagefees.NuclearPlantConstruction UnderWayAfter31monthsofintensive reviewbytheAtomicEnergyCommission (AEC)andotherfederal,regional, stateandlocalagenciesofthesafetyandenvironmental aspectsofourfirstnuclearplant,PPBLwasgiventhego-aheadbytheAEConNov.2tobeginconstruction oftheSusquehanna SteamElectricSta-tion.Earth-moving workbeganthreedayslateratthe955-acresitenorthofBerwick.Thefirstofthetwin1,050,000-kilowatt boilingwaterre-actorgenerating unitsisscheduled tobecompleted in1979,thesecondin1981.Whencompleted itwillrep-resentnearlyone-quarter oftheCompany's installed capacityatthattime.Withapricetagofnearly$1.4 billion,thenuclearplantisthelarg-estsingleconstruction projecteverundertaken bytheCompany.Evenwiththeverylargecapitalcosts,theCompanyexpectstoreal-izeverysignificant savingsoverthe30-yearoperating lifetimeoftheplant.Thisisduetothelowerand.morestablepricesweexpectfornuclearfuelcomparedtocoalandoil.Inatimeoftightoilsuppliesanddoubtoverenvironmental restric-tionsontheuseofcoal,nucleargeneration providesanattractive al-ternative toprovideanadequatesupplyofelectricenergywhilebe-ingbothenvironmentally andeco-nomically attractive. EnergyandtheEnvironment Inexpanding ourenergysupplywearedoingourbesttofindabalancebetweenadequateenergyandanacceptable environment. Ourobjective continues tobetominimizetheimpactofouropera-tionsontheenvironment. Twoofourongoingenvironmental projectswerefocusedontheSun-burySteamElectricStationwherewehavetwoanthracite andtwobi-tuminouscoal-fired generating units.Installation ofa$5.5-million dustcollecting systemfortheanthracite unitswascompleted inJune.Thecollection equipment isabagfilter-ingsystemwhichremovesflyashfromstackemissions oftheanthra-cite-fired boilersattheplant.Eachofthefour"baghouse" structures is71feetlong,40feetwideandninestorieshigh.Fiberglass bags,1,260ofthem,wereinstalled ineachfilter-ingunit.Eachbagis30feetlongandafootindiameter. Thebags,inserieswiththeoldmechanical collectors, arenowre-movingbetterthan99percentoftheflyashfromexhaustgasesbe-foretheyreachthestacks.Wehadpreviously installed mechanical andelectrostatic dustcollecting devicesonallunitsattheplant.However,thecombination wasfoundtobeun-satisfactory ontheanthracite boil-ersduetospecialflyashentrapment problemsassociated withusinghardcoal.Variousstepsareunderwaytobringunderacceptable controltheparticulate, orflyash,emissionfromstacksonourotherbituminous coal-burninggenerating unitsthroughout thePP&Lsystem.Alsoinstalled atSunburywasapilotsulfurdioxide(SO2)-removal systemonUnit4whichburnsbitu-,minouscoal.Theprojectisthere-sultofajointresearchagreement betweenPP&LandtheWesternPre-cipitation DivisionofJoyManufac-turingCompany.The'wetscrubber" system,whichusesalimestone waterspraytoremoveSO2fromfluegas,isstillintheresearchstageandwehopetogainexperience herethatwillbeusefulwhenadesignbasisforlargerbituminous unitsisdeveloped intheyears'ahead. Resultssofarareen-couraging andanextension ofthetestperiodforanotheryearisbeingnegotiated. Thecoalweburncontainsbothorganicandpyriticsulfur.Theor-ganicsulfurisinherentinthecoalandextremely difficult toremovepriortoburning.Butalargeper-centageofpyriticsulfurcanbere-movedfrombituminous coal.Wearepresently installing, atourmines,mechanical cleaningequipment de-signedtoreducethepyriticsulfurcontentsufficiently toprovidecoalwithatotalsulfurcontentofnotmorethan2.5percent.Weappreciate, ofcourse,thatwhentechnology toremovesulfurandnitrogenoxidefromstackgasesbecomesareality,wemayhavetoinstalladditional equipment tomeetmorestringent.air pollution stand-ardsinthefuture.InLancaster, theCompanywaspraisedfortheenvironmental com-patibility ofitsnew$1.1milliondowntownPrinceSubstation. Anat-tractiveeight-foot-high brickwallscreensthelow-profile substation structure andequipment fromtheviewofpassersby. Thewallhasacolonialmotif,plantings andotheraesthetically pleasingfeatures. IntheCompany's northeast area,demolition workwasbegunontheplantstructures atourformerHautoandStantonsteamelectricstationswhichceasedoperations in1969and1972respectively. Theplantswillberazedandthelandcontoured andplantedtorestoreittoacondi-tionenvironmentally compatible withthesurrounding area.Financing About$225millionwasspentforex-pansionandimprovement ofourfa-cilitiesin1973.For1974,thefigureisexpectedtoriseto$305million.Andforthefiveyears1974through1978,theamountis$2.1billion.Addedtothiswillbe$147millionwe'lneedtorepaymaturingdebtinthenextfiveyears. -Onlyaboutone-fourth ofthemoneyweneedtofinancethiscon-struction canbegenerated internally fromCompanyoperations'. Therestmustcometromnewcapitalinvest-mentintheCompany.Tofinanceinpartourconstruc-tionprogramandtorepaymaturingdebtobligations in1973,theCom-,panysoldcommonandpreferred stock,firstmortgagebondsandanunsecured note.(Seepage18forasummaryofourbusiestyeareverinthecapitalmarkets.) During1974,weanticipate theneedtoissueabout$250millionotnewsecurities. Tomaintaintheabil-itytoraisethisnewcapitalforourexpansion

programs, PP&Lmustcontinuetobeanattractive invest-mentandprovideafairreturnforin-vestors.ResearchAmericahasanationaldilemmatofaceupto.Whetherwecallitanenergycrisis,oracrunchorafuelproblem,thefactisourenergyde-mandislargerthanoursupply.Fortheshort-term, Americans arecombatting theproblembyputtingthemselves intoanemergency pos-ture,forsaking largegrowthgainsandcuttingbackonenergyuse.That'spartotthelong-range so-lution,too.Butanequallyimportant partisresearch.

Thefederalgovern-mentisallocating vastamountsotmoneyforresearchintheperfection ofthebreederreactorandinthesearchforalternate sourcesoten-ergy.Theelectricindustryisdoingthesamething.PP8L'sresearchbudgetisabout$2millionfor1974,ofwhichsome$360,000willgointoaliquidmetalfastbreederreactordemonstration planttobeconstructed nearOakRidge,Tenn.Around85percentofthecountry's utilities havepledgedover$300millionforthisdemonstra-tionprojectbeingbuiltbytheTen-nesseeValleyAuthority andCom-monwealth EdisonCompany.NearlyamilliondollarsofPP8LmoneywillgototheElectricPowerResearchInstitute (EPRI)undersponsorship oftheEdisonElectricInstitute, theindustry's tradeasso-ciation,whichisvastlyexpanding itsresearchprogram..Suchprojectsascoalgasifica-tionandliquefaction, thefuelcell,magnetohydrodynamics (MHD),nu-clearfusionandultra-high voltageresearcharebeinggiventoppriority. Closertohome,PP8Lisbuildingan"EnergyConservation Home"atSchnecksville, northwest ofAllen-town.Thehomeisprimarily are-searchprojectdesignedtomakeoptimumuseofenergyineverywaypossibleinasingle-family-home withoutchangingpeople'slifestyle. Thetwo-story, three-bedroom housewillcontainexperimental equipment andsystemswhichwillbeconstantly monitored inanefforttofindanddocumentwaysofreduc-ingenergyuseandcuttingelectrical demand.Theuniqueheatingsysteminte-gratessolarcollection panelsandheatreclamation devicestorecoverwasteheatfromappliances suchasdishwasher, washer,dryerandre-frigerator, aswellaswaste-water heat,fireplace fluegasesandeventheheatofdecomposition intheseptictank.Basically, thehousewillbeheatedandcooledbyawater-source heatpunlp.Newconstruction techniques in-cludetheuseofstyrofoam sheath-ingandfoamed-in-place urethanearounddoorsandwindows.Thehouseshouldbefullytested.andevaluated by1975afteratypi-calfamilyhaslivedinthehome.PP8Lwillthenmaketheresultsknownandofferplansforthehometocontractors, buildersandthepublic.rEnergyConservation PP&Lhasbeenencouraging energy,conservation sinceearly1972whenwecompleted adramaticturn-aroundinourmarketing policy.Werecognized inthelate60sthatoursocietycouldnotgoonconsuming energyresources attheeverin-creasingrateithadinthepast,andthatwastefulpractices mustbeelim-inated.Ourobjective intheturn-around effortwastoholddowntherateofriseinthedemandformoreandmoreelectricenergytogaintimetofindsolutions totheproblemsbeforeus.Weturnedfrompromoting electricusetourgingwiseuseofallformsofenergy,including electricity. MembersofourConsumer8Community AffairsDepartment havebeenworkingasconsultants andhelpingourresidential, commercial andindustrial customers. findthemostefficient andwisestwaysofusingelectricity. Animportant partotthisgroup'seffortshasbeenaninformation andeducational programtoconvincethepublicoftheneedforconservation. Twopresentations, "TheEnergyCrisis"and"Homecology," havebeengiventoover56,000people. Onanindividual basisPPBLcon-sultantshavebeenadvisingresiden-tialbuildersanddevelopers onthelatesttechniques forimproving theinsulating qualities ofhomesandapartments andhelpingintheselec-tionofenergy-efficient appliances andheatingandcoolingequipment. Ourindustrial andcommercial consultants havebeenworkingwithcustomers tosetupenergyman-agementteamstoevaluateallenergyconsumption withintheirbusinessoperations. Theseteamsthenidentifyonacontinuing basisthoseareaswherewastecanbeeliminated. Additionally, PP&L-sponsored trainingsessionsorenergyman-agementforumswereheldwithlocalandstategovernment engineering andoperating personnel, andschoolbuildingmaintenance engineers andadministrators. Alsoincludedwerearchitects anddesignengineers andtopmanagersfromthelargestin-dustrialplantswithintheCompany's servicearea.Withinourownoperations atopspeedof50milesanhourwasdi-rectedforallemployees drivingonCompanybusiness, andasimilarre-striction urgedinpersonaldriving.ThiseffortcameonaCompany-widebasisinJune,severalmonthsbeforeanationwide pleawasissuedbythePresident. Decorative lightingwaselimi-natedatallCompanyfacilities inMarch1973andheatingandlight-inglevelswerereducedinourbuild-ingssystemwide duringtheensuingmonths.ThroughDecembertheseeffortsamountedtoademandre-ductionofabout1,200kilowatts. ~XP~+1)txA4PAurethaneplasticmixturewhichexpands,inafewminutes,to15timesitsliquidvolumeiscuttingbyhalfthetimeittakesaPP&Lcrewto"set"largetransmission poles.Theliquidispumpedaroundthepolewhereitbeginsto"cure"andriseorexpandlikebreaddough.Thefinishedproductisstrongerthanpackingtheholewithsoilandthefoamsealsoutmoistureandairinadditiontobeinginsect,rot,waterandcorrosion-proof. Theatomicabsorption spectro-photometer nowinuseattheCompany's ChemicalLaboratory atHaztetondoes,inafewhours,analytical workthatusedtotakeafullday.Theinstrument candetectquantities of70different metallicelementsinsolutionwithanaccuracydowntopartsperbillioninasample. Extensive analysisiscontinuing throughout theCompanytoseewherefurtherenergycutscanbemade.PeopleSignificant toouremployees'e-velopment in1973wastheinitiation ofapprentice programsintheline-man,electricrepairman, transporta-tionandunderground repairman jobclassifications. Fortheemployeewhoentersanyoftheprogramsitwillmeaninten-sive,documented on-the-job andclassroom trainingandtheopportu-nitytobecomeoneofthemostwell-trainedworkersintheCompany's history.Whilecontentdoesvary,ofcourse,therewillbethreeorfourlevelsineachoftheapprentice pro-gramsspanninga'three-orfour-yearperiod.Theon-the-job trainingportionoftheprogramsisdesignedtoinsurethateachpersonisgivenawiderangeoftasksuponwhichtobuildexperience, aswellaspreparetheemployeeforhigherleveltraining. Theprogramwillofferallwhopar-ticipateanequalopportunity forad-vancement. Nolongerwillsupervisors havetorelysolelyonmemoryandjudgmenttodecidewhetheranemployeehasthenecessary skillandexperience foradvancement. Nowtherewillbedocumented evidenceofatrainee's experience andperformance innu-merousspecifictrainingareas.Thisisjustonewaywearetryingtoworksmarter.Anotherwaywearetryingtoworksmarterandmoreeffectively andtoincreaseproductivity involvestherealignment ofourEngineering andNuclearDevelopment departments. Inthepast,powerplantswereeithercoal-fired orhydroprojects, builtanddesignedonaone-at-a-timebasis.Anorganization struc-turedbyengineering discipline wasabletocopewiththischallenge. Today,however,wefindour-selvesinamulti-plant, capital-in-tensivesituation wherelongleadtimesandgrowingenergydemandsresultinconcurrent

planning, designandconstruction ofvarioustypesofpowerplants.Itisessential, there-fore,thatourorganizational struc-tureallowoptimumuseofourhumanresources tocompleteprojectsonschedule, withinbudgetandwithinspecified qualitylimits.Accordingly, ourEngineering andNuclearDevelopment departments werereorganized onaprojectbasisformajorpowerplantprojects.

Forexample,aself-contained engineer-ingprojectteamincluding allengi-neeringdisciplines (mechanical, civil,electrical, etc.)willbeassignedtoeachnewpowerplantprojectratherthanpassingtheplansfromonefunctional department toan-otherandtryingtoassignproperpriorities. Someofthesameprocedures willbecarriedoverintothedesignandengineering forlargenewtransmis-sionlines,substation andrelatedresearchanddevelopment projects. Besidesbetterutilizing ourhumanresources, weexpectthattheresult-ingstandardization indesign,con-struction andoperation oftheseprojectswillhelpusattainsignifi-cantcostreductions withoutsacri-ficingqualitycontrolorconstruction schedules. Theproblemsandchallenges wefacetodayareverydifferent fromthosewefacedonlyafewyearsago.Thisisonewaywearechangingtomeetthesechallenges. -Intheareaofunionrelations, thisspringwillmarktheendofthethree-yearlaborcontractbetweentheCompanyandthe5,000membersoftheEmployees Independent Asso-ciation(EIA)andthe330membersoftheScrantonlocaloftheInter-nationalBrotherhood ofElectrical Workers(IBEW).Negotiations foranewcontractwiththeEIAandtheIBEWareexpectedtogetunderwayshortly.Management ChangesAnumberofexecutive appointments weremadeduring1973.EdwardM.Nagel,generalcoun-selandsecretary wasappointed vicepresident, generalcounselandsecretary. CharlesJ.Green,director, Per-sonnel,wasappointed tosucceedJackHanckelasHarrisburg Divisionvicepresident whenHanckelretiredonMarch1,1974after43yearswiththeCompany.BrookeR.Hartman,vicepresi-dent,DivisionOperations, wasap-pointedexecutive vicepresident, Operations effective March1,1974.Hesucceeded Executive VicePresi-dentAustinGavinwhoretiredonthatdateaftermorethan37yearswithPP&L.Theappointment ofanexecutive vicepresident ofOperations willhelpinthemoreeffective manage-mentofday-to-day operating prob-lemsthatareseparateanddistinctfromlong-range corporate planning-anddecision-making. LeonL.Nonemaker, vicepresi-dent,Consumer&Community Affairs,wasnamedtosucceedHart-manasvicepresident, DivisionOp-erations. JohnT.Kauffman, assistant vicepresident, SystemPower&Engi-neering,wasappointed vicepresi-dent,SystemPower&Engineering tosucceedGavinwhoheadedSP&Einadditiontohisdutiesasexecutive vicepresident. BothNonernaker andKauffmanreporttoHartman.HerbertD.NashJr.,manager,Consumer&Community

Services, wasnamedvicepresident, Con-sumer&Community

Services, suc-ceedingNonemaker.

Threenewvicepresidential posi-tionshavebeencreated.Theap-pointments, whichwereeffective Jan.1,1974,reflecttheincreasing demandontheresources ofvariouscorporate functions andtheexpand-ingresponsibilities associated withchallenges facingtheCompany.NormanW.Curtis,manager,Engineering &Construction, wasnamedvicepresident, Engineering &Construction withinSP&E.RichardH.Lichtenwalner, man-ager,Communication

Services, wasnamedvicepresident, PublicRela-tionswithintheHumanResource&Development Department.

EdwinH.Seidler,manager,Distribution, wasappointed vicepresident, Distribution, inDivisionOperations. Dr.EugeneS.Farjey,adirectorfrom1962to1972,diedonSept.17athishomenearBeaumont, Pa.Dr.Farjeyservedasthefirstpresident ofWilkesCollegeinWilkes-Barre from1947to1970whenheretiredfromthatpost.Hewasalsochancel-lorofthecollegefrom1970to1971.'j4~PP8L'sMontourPreserve, builtnearthenewMontourplanttoprovideanemergency back-upwatersupply,isbecomingverypopularasafour-season fishing,recreation andecological-study area.TheCompanyhassponsored severalfishingclinicsforareayoungsters incooperation withthePennsylvania FishCommission. IjtiLIt,$JI$r)Ir(rwInfncreasing numberswomenareturningtophysical-labor jobstraditionally hetdbymen.Thisyoungwomansoughtandwonapositionasalaboreronaconstruction crewwhereshelearnedtouseapowerhacksaw.PP&Lhasbeenencouraging womentobroadentheirinterests andseekjobsthat,untilnow,havebeenregardedasinthemaledomain.TheCompanyfeelsthatifawomancandoajob,sheshouldhaveanequalopportunity tohaveit. THEFUELSITUATION Theenergycrisisisnolongertheoretical. Inlastyear'sannualreportwediscussed thegrowing-signsthatwewereheadedfortrouble.Thisyearwehaveallbeenaskedtolowerourheatandcutbackonourlighting. Wecan'tbuygasolineonSundaysandtherestoftheweekwemayen-.counterlonglines,limitedpurchases andhighprices.Fewofusaresoinsulated fromtherealworldthatwehaven'tbeenaffectedinsomewaybytheshortageoffuel.Althoughwewouldprobablyallagreethatwedohaveaproblem,it'shardtofindaconsensus onjusthowbadthesituation reallyis.Theprob-lemiscompounded byalackofharddatafromwellestablished sourcesonhowmuchoilisavail-able,whereit'scomingfrom,whereit'sstoredandwhereit'sgoing.OriginsoftheProblemAsasociety,wehelpedbringtheproblemuponourselves bytryingtoattainsomeloftyandlauda-blegoals.OilimportscameaboutbecauseitwascheapertoproduceabarrelofoilintheMideastthanintheU.S.-theaimwastodosomething goodfortheconsumer, givehimalltheenergyhecoulduseatlowprices.Coaldeclinedasoneoftheprimaryfuelspartlybecauseminehealthandsafetylawsmadeitmoreexpensive togetthecoaloutofthegroundandenvironmental standards weresetthatprevented muchoftheavailable supplyfrombeingburned.Againtheobjectives weregood-saferworkingconditions forminersandacleanerenvironment forallofus.Anunderstandable goalofmakingsurethepublicissafeandfreefrommanmaderadiation hazardscontinues tocontribute todelaysintheuseofnuclearpoweronawidespread basis."Societycravedmorecheapenergyontheonehandwhilelimitingsupplyontheother.Andsoourobjectives arebeginning toclash.Weareatthereceiving endofourconflicting goals.NoLackofResources Justbecauseweareshortofenergysupplies, primarily petroleum

products, doesn'tmeanwelackenergyresources.

TheU.S.Geological Surveyestimates thattheU.S.alonehas:-Potential oilreservesof450billionbarrels,or80timesourconsumption in1971.-Potential naturalgasreservesof2,100trillioncubicfeet,equivalent toalmost100timesour1971consumption. -Potential coalreservesofabout390billiontons,orabout800timeswhatweusedin1971.Fordecadeswehavebeenusingthecheapest, mostreadily-available fuelsupplies. But,asthisenergysupplybecomesmorerestricted, theun-tappedpotential beginstolookmoreattractive Oilwellsonceconsidered marginalbegintoshowaprofitaslowpetroleum pricesbegintorise.Moreexploration togetatless-readily available suppliesbeginstobeeconomically feasible. TheCompanybelievesthat,forthelongrun,thebestapproachtohavingadequateenergysuppliesisafreeandopenmarket.Noonecanrepealthelawsofsupplyanddemand.Notallofthatenergypotential wementioned iscleanfuel~Weareeithergoingtohavetobemoretolerantaboutairpollution standards orwearegoingtohavetofindwaystousedirtyfuelsinacleanerway...andthatwillcostevenmore.Butsocietywillhavetomakethechoice.PP&L'sSituation Afulldiscussion ofalltheramifications ofthefuelcrisisandhowitaffectsallofuswouldtakemuchmorespacethanwehaveinthisreport.However,thereareafewpointsthatshouldbemadeaboutthesituation atPennsylvania Power&LightCompany:~About96percentofourelectricgeneration camefromcoalin1973.~Ourcoalreservesaddupto120milliontonsthroughownership orcontroloffivemines inwest-central Pennsylvania andthroughlong-term contracts foropen-market coal.Weexpecttosubstantially increasethesecoalre-servesin1974,soweareassuredofastablesupplyofcoalformanyyearstocome.~Althoughthecostofopenmarketcoalhasbeenincreasing sharplyinrecentmonths,PPBLisabletorecovertheseincreased coststhroughafueladjustment surcharge writtenintoourratestructure andapprovedbythePennsyl-vaniaPublicUtilityCommission andtheFed-eralPowerCommission in1970.~PP8L'sseventhunitcoaltrainisexpectedontherailsatmid-year. Eachofthetrainsinthefleethasbetween105and131cars,andcarriesmorethan10,000tonsofcoaleachtripfromminetopowerplant.~ThePennCentralRailroad, whichlastyearwasonthevergeofliquidation, hasbeenincludedinasweepingoverhaulofthefaltering railnet-workservingmostoftheNortheast andpartsoftheMidwest.Sincepractically allofourcoalcomestousoverPennCentraltracks,thepos-sibilitythatthelinewouldgooutofbusinessdidcauseusagreatdealofconcernlastfall.Legislation pumpingnearly$560millionintothereorganization ofsevenbankruptrailroads, including PennCentral,givesussomeassur-anceofcontinued service.~ByvirtueofPP8L'shighpercentage ofcoal-firedcapacity, andadequatereserves, theCom-panyin1973wasabletoprovidesevenbillionkilowatthoursofelectricity tocompanies whicharemoredependent onoil,mostlyinthePenn-sylvania-New Jersey-Maryland (PJM)powerpool.Thiscoal-generated powerisestimated tohavesavedabout300milliongallonsofoil.WhyOilatMartin'sCreek?Withoilbecomingscarce,PP8L'sdecisions overtheyearstodependheavilyoncoalbegintolookbetterandbetter.Why,then,isPP&Lbuildingtwonew800,000-kilowatt unitsatMartinsCreekwhichwillburnoil?That'sanaturalques-tionandonewe'ebeenhearingquiteabitlately.Anexplanation isinorder.Ittakeseighttotenyearstodesignandbuildafossil-fuel generating plant.Longbeforecon-struction beginsitmustbedecidedwhattypeoffuelwillbeburned..Whenthedecisionwasmadein1969tofuelthetwoMartinsCreekunitswithoilratherthancoal,thefollowing conditions prevailed: ~Anincreased emphasisonenvironmental pro-tectionmeantburninglow-sulfur fuelsorin-stallingequipment thatwouldremovesulfurgasesandparticulate. ~Thereliability ofsulfur-dioxide removaltech-nologyforcoal-buining unitswasn'tproventhenandstillisn'tproven.~Studiesbyconsulting firmsindicated thatthepriceoflow-sulfur coalwouldrisefasterthanoil.Thestudiesalsoindicated adequatesup-pliesoflow-sulfur coalforaplantthissizeweren'tavailable eastoftheRockyMountains. ~Atthesametime,theconsultants'tudies con-cludedthatplentyoflow-sulfur oilwouldbeavailable andwouldresultinmuchlessenvi-ronmental impactfromthestandpoint. ofbothsulfurandash.IsConversion theAnswer?Nowwithoilinshortsupply,PP8Lisbeingaskedwhywedon'tchangeourplansinmid-streamandconverttocoal.Theanswerissimple.Wearepastthepointofno-return. Itisneitherpractical norfeasibleatthistimetoconverttocoal.Toundertake acon-versionatthispointwouldbringtheprojecttoahaltandmeanthatnoenergywhatsoever wouldbeavailable fromtheseunitsforaperiodoffiveorsixyears.Clearly,thatisnotacceptable. ThenewMartinsCreekunitswillburneithercrudeorresidualoil.Whenadequatesuppliesofcrudeoilareavailable theunitscanburnthatfuel withoutgoingthroughtheintermediate stepofpassingitthrougharefinery. Thisisparticularly helpfulduringperiodsoftightrefinerycapacity, suchasthecountryisnowexperiencing. Residualoiliswhatremainsafterrefineries haveextracted thegasolineandotherdistillates suchasdieselfuelandhomeheatingoilfromtherawcrude.Residualfuelhassuchahighvis-cositythatitbecomessolidatroomtemperature andmustbeheatedtomakeitliquid.Itcannotbeusedforhomeheatingpurposesorconven-tionalcommercial applications. Themainuseristheutilityindustry. Amajoreconomicandconservation benefitoftheMartinsCreekunitsisthattheycanbeusedinlieuofgeneration bycombustion turbineswhichburnonlyNo.2(homeheating)oilandhaveanefficiency ratesignificantly lowerthanthebigoilunits.Thenewunitsarespecially designedtobeusedforpeakingpurposes, withthecapacitytopickuploadordropitquicklytomeetfluctuating de-mand.Theycanbeshutdownovernight oroveraweekendandbestartedupquickly.TheMartinsCreekunitsprovideauniquecombination ofeffi-ciencyandflexibility ofgenerating characteristics notfoundincoal-fired units.Sincepowerloadsriseandfallsharplyduringatwenty-four hourperiod,adequateelectricservicerequirestheuseofequipment suitedforpeakingoperation. OilSupplyObviously undertoday'sconditions thereisun-certainty overtheoilsupplysituation. Eventhoughwedohavecommitments foralloftheoilforUnitNo.3and40percentforUnitNo.4,thesupplycouldbeaffectedbyconditions intheMiddleEastandbygovernment allocation programs. Besidesasourceofoil,weneedawaytogetitfromtheterminalatMarcusHook,Pa.toMar-tinsCreek.An82-mileInterstate EnergyCo.pipe-lineistheplanneddeliverysystemfortheoil.Eventhoughextensive engineering andright-of-wayacquisition havealreadybeencompleted, construction ofthepipelinehadnotbegunattheendofFebruarybecauseofseveralpendingdecisions byregulatory agenciesandthecourts.Evennow,though,itistoolatetohavethepipelineinoperation intimeforstart-upofUnitNo.3inthefallofthisyear.Assoonasthissitua-tionbecameclear,PPP&Lbeganmakingprovi-sionsforalternate emergency railunloading facilities atMartinsCreekandterminalfacilities thereandatMarcusHooksowewouldhaveanassuredoildeliverysystemwhentheplantiscompleted. Alloftheseproblemsjustemphasize thecom-plexityoflookingintothefutureandmakingsoundbusinessdecisions fortheyearsaheadbasedonconditions astheyaretodayandaswethinktheywillbetomorrow. Long-Range PlansLookingbeyondthenewMartinsCreekunitsweseeourSusquehanna nuclearunitscomingonthelinein1979and1981.Beyondthat,wehavefirmplansforapumpedstoragehydroelectric facilityandtentative plansforthreelargenewcoalunitsforthemid1980s.Thiswillgiveusagoodmixoffuelsforthefuture.Wewon'thaveallofourgenerating eggsinoneenergybasket.However,fortheshortterm,wecannotburnbrightlywhileotherssitindarkness. Eventhoughweareheavilydependent oncoalandfeelwehaveadequateassuredsuppliesforourneeds,PP8Lisjustapartofthelargerregionalandna-tionalenergysupplypicture.Atthistimethereisjustnowayofknowingtowhatextentwewillberequiredtouseourenergyresources inaidingothersshouldthatbecomenecessary. Inspiteoftheuncertainties thatexistwehavenodoubtthatthiscountrycansolvetheproblemsthatconfrontit.But,itwilltaketimeandmoney,andalotofcooperation andunderstanding. PENNSYLVANIA N.Y.PA.SCRANTN~ALIKES.BARRE yLWalleaupackPlantILLIAMSPORT ~Susquehann ~Plant~+ontourPlantADANVILLE~BERWICK~HAZLETONSuburyPlant~~SUNBURYMartinsCreekPlant*'OTTSVILLE ~~e&HLEHEuALLENTOWN NewYr~ARISBURG~BrnfterIslandPlan~LANCASTER SafeHarborPlant~HoltwoodPlantAPhiladelphia MD.N.J.~BaltimoPP&Lsupplieselectricserviceloapopulation of2,309,000 peopleina10,000squaremileareain29countiesofcentraleasternPennsylvania. 'nderConstruction "UnitsNo.3and4underconstruction 13 STATISTICAL SUMMARY19731972197119701969CAPITALINVESTMENT -thousands Long-term debt................ Preferred andpreference stock-..Commonequity............... Short-term debt........Totalcapitalinvestment .RETURNONCAPITALINVESTMENT -asapercentage ofaverage"capitalinvestment ............. NUMBEROFSHAREOWNERS-preferred, preference andcommon$753,027271,375469,608635,044231,375412,130f576,760~514,371196,375156,375351,299303,1171,494,010 39,8511,278,549 96,4821,124,434 76,251973,86397,8787.837.567.346.83142,235135,399123,598111,909$1,533,861 1,375,031 1,200,685 1,071,741 474,18286,375268,233828,79098,500'27,2907.1398,450OPERATIONS ELECTRICCUSTOMERS .....ENERGYSALES-millionsofkilowatthoursResidential Commercial Industrial Other6,3244,2626,8811,3985,9853,9336,4586375,4793,5336,0536205,0933,1985,8075854,5732,8405,566552886,378864,439843,080828,643818,500AVERAGEPRICEPERKWHtoultimatecustomers -cents....SOURCESOFENERGYSOLD-millionsofkilowatthoursGenerating unitsCoal-fired Oil-fired Hydroelectric ................ Purchased power.............. ~Interchanged powerPurchases .Sales.Companyusesandlosses....... Totalenergysales............. FUELCOST-millsperkilowatthourPOWERCAPABILITY -kilowatts ...PEAKDEMAND-kilowatts (a).....EMPLOYEES 18,8652.06'24,7822738163841,584(7,237)(1,737)18,8655.04,903,000 3,662,000 7,13917,0132.0219,097'018244181,366(3,586)(1,707)17,0134.94,108,000 3,598,000 6,79015,6851.9015,8476426843041,467.(1,758)(1,501)15,6854.83,496,000 3,294,000 6,51414,6831.7113,7027867393391732(1,164)(1,451)14,6834.23,256,000 3,238,000 ,6,37213,5311.6213,5144376212531,709(1,559)(1,444)13,5313.23,124,000 2,850,000 6,238(a)WinterpeakshownwasreachedearlyInsubsequent year.In1969and1970,peaksarethosewhichwouldhaveoccurredIlloadcurtailment measureshadnotboonInotfoct.AmoredetailedreviewottheCompany's operations lsavailable. Apostalcardlsprovidedwiththisreporttoaldyouinmakingthisrequest.14 STATEMENT OFINCOME19731972197119701969OPERATING REVENUES(Note3)(99%electric) ................. OPERATING EXPENSES(Notes4and11)Wagesandemployeebenefits...FuelPowerpurchases .............. Interchange powersales........Otheroperating costs.......... Depreciation Incometaxes(Note9)CurrentDeferred.Investment taxcreditsDeferredAmortization ofdeferments-creditTaxes,otherthanincome.......57,421125,57715,299(70,175)45,23448,83755,22095,22013,514(34,569)3951241,44648,19879,49918,963(15,468)33,21434,90345,77961,62121,982(9,356)24,0093217341,94644,60117,453(8,865)21,86528,98122,6615,7377233(1,688)30,00518,1022,8297,349(2,194)25,65812,672(244)1,597(2,480)22,1464,986(795)1,573(2,539)18,19714,400(795)3,339(2,540)8,167Thousands ofDollars3384,814345,782300,707255,313223,388OPERATING INCOME............ OTHERINCOMEANDDEDUCTIONS Allowance forfundsusedduringconstruction .......... Other-netINCOMEBEFOREINTERESTCHARGESINTERESTCHARGESLong-term debt............ Short-term debt........... Other286,14198,67314,9671,39116,358115,03143,2034,790126262,08783,70514,6472914,67698,38136,507',846107233,00067,70716,24211316,35584,06230,8954,109486197,63057,6839,7231929,91567,59825,3817,19488168,55254,8366,3691976,56661,40220,8135,93545NETINCOME.Dividends onpreferred andpreference stock........EARNINGSAPPLICABLE TOCOMMONSTOCK......... 48,11966,91217,191$49,72140,46057,92114,52643,39548,57211,39237,18034,9356,42628,50935,49032,66326,79334,6093,82230,787COMMONSTOCKAveragenumberofsharesoutstanding ............... Earningspershare,basedonaveragenumberofsharesoutstanding ............... Dividends pershare.......... $2.57$1.682.481.642.371.601.971.602.321.6019,358,947 17,512,793 15,690,490 14,472,076 13,277,365 Seeaccompanying NotestoFinanctal Statements. BALANCESHEETASSETSUTILITYPLANT'lant inservice-atoriginalcostElectricSteamheat.$1,619,327 7,7281,386,223 8,110December3119731972Thousands ofDollarsLessaccumulated depreciation Construction workinprogress-atcost1,627,055 312,1781,314,877 219,2771,534,154 1,394,333 275,6271,118,706 242,7071,361,413 INVESTMENTS Subsidiaries -atequity(Note2)SafeHarborWaterPowerCorporation -atequity(Note2)..Nonutility property-atcost,lessaccumulated depreciation .Other-atcostorless.5,3203,5962,7497,35419,0193,1293,3152,5525,54014,536CURRENTASSETSCash(Note5).Construction fundforpollution controlfacilities (Note6)..Accountsreceivable, lessreserveCustomers OtherMaterials andsupplies-ataveragecostFuelOperating andconstruction .Other.............................. 14,9039,07322,65610,92926,88417,0065,598107,04913,72923,5103,33031,60112,8479,48894,505DEFERREDDEBITS... 6,624$1,666,846 4,6501,475,104 16Seeaccompanying NotestoFinancial Statements. LIABILITIES December3119731972Thousands ofDollarsCAPITALIZATION* Shareowners investment Preferred stockPreference stockCommonstockCapitalstockexpense(deduction) (Noamortization planinellect)Earningsreinvested (Notes7and8)Long-Term Debt156,375115,000319,384(6,889)157,113740,983753,0271,494,010 116,375115,000278,484(6,592)140,238643,505635,0441,278,549 CURRENTLIABILITIES Bankloans(Note5).Commercial papernotes(Note5).AccountspayableTaxesaccruedDividends payableandinterestaccruedOther39,85133,70513,45728,1397,029122,18130,00066,48227,1939,96323,0036,471163,112DEFERREDANDOTHERCREDITSAccumulated deferredinvestment taxcredits.Accumulated deferredincometaxesContributions inaidofconstruction .Other15,32317,4369,7048,19250,655$1,666,846 9,77912,0355,8595,77033,4431,475,104 'SeoSchodutoofCapitalStockandLong-Term Debtonpago18.Seeaccompanying NotestoFinancial Statements. SCHEDULEOFCAPITALSTOCKANDLONG-TERM DEBTDecember31,1973Thousands ofDollarsCAPITALSTOCK'PREFERRED STOCK-$100par,cumulative 4'/2/o,authorized 629,936shares,outstanding 530,189shares......$53,019Series,authorized 2,000,000 shares3.35/o,outstanding 41,783shares.4,1784.40lo,outstanding 228,773shares.22,8784.60%%d,outstanding 63,000shares.6,300,7.40/o,outstanding 400,000shares(a)40,0008.60/o,outstanding 222,370shares22,2379/o,outstanding 77,630shares...7,763$156,375PREFERENCE STOCK-nopar,cumulative, authorized 5,000,000 shares$8.00series,outstanding 350,000shares............... $35,000$8.40series,outstanding 400,000shares............... $8.70series,outstanding 400,000shares............... 40,000$115,000COMMONSTOCK-nopar,authorized 30,000,000 shares,outstanding 21,051,255 shares................. $319,384'a) OnJuly1,1979andannuallythoroaftor untiltho7.40/oSoriosProforrod StockIsrotlrodInfull,16,000sharesof7.40'loSorlosmustborodoomodthroughthooperation of'asinkingfundatarodomptlon prlcoof9100porshareplusaccruodandunpaiddividends tothodataofsuchredemption. LONG-TERM DEBTFIRSTMORTGAGEBONDS3/oseriesdue197527/sloseriesdue1976................ 2s/4loseriesdue1977................ 3'/s%seriesdue1978................ 2s/4%%dseriesdue1980................ 3'/s'/oseriesdue1982................ 3t/a%%dseriesdue1983................ 3s/s'/oseriesdue1985...".:........... 4s/s/oseriesdue1991................ 4s/a/oseriesdue1994................ 5s/a/oseriesdue1996................ 6s/4'/oseriesdue1997................ 7o/oseriesdue19998t/a%%dseriesdue1999................ 9/oseriesdue2000.7t/4/oseriesdue 2001................ 7s/s/oseriesdue2002................ 7t/2/oseriesdue2003................ 4t/2/oto56/s'/opollution controlseriesAdueannually$500,1977-1983; $900,1984-2002; $7,400,2003........NOTES6t/410-8t/4%%ddue1974-toberefinanced 6t/a'/o-7'/o due1976.7/0due1980OTHER$93,0008,00020,0003,00037,0007,50025,00025,00030,00030,00030,00030,00040,00040,00050,00060,00075,00080,00028,000711,50018,5502,80020,00041,350177$753,027SECURITIES SOLDIN1972AND19731972FebruaryFebruary-MarchJulyOctoberSecurityFirstMortgageBonds,7%loSeriesdue2002Notes,6t/4lo-6t/a/oduein1974and1976.Preference Stock,$8.00Series.......... CommonStockShares350,0002,000,000 Amount$75,0008,30035,00046,940$165,2401973JanuaryMayJulyAugustNovemberFirstMortgageBonds,7t/2/oSeriesdue2003..FirstMortgageBonds,4t/2/oto5s/s/oPollution ControlSeriesAdue1977-2003 ........... Note,7%%ddue1980.SeriesPreferred Stock,7.40/o.CommonStock.400,0002,000,000 $80,00028,00020,00040,00040,900$208,900Sooaccompanying NotostoFinancial Stetomonts. 18 SOURCESOFFUNDSUSEDFORNEWCONSTRUCTION 1973197219711970Thousands ofDollars1969OPERATIONS NetincomeNon-cashcharges(credits) toincomeDepreciation Allowance forfundsusedduringconstruction .Deferredextraordinary powercosts......... Deferredincometaxesandinvestment taxcredits-net.Lesscashdividends 48,837(14,967)22041,446(14,647)22034,903(16,242)22011,282112,28450,03762,2477,98492,92443,33049,594(1,127)66,32636,74629,580$66,91257,92148,57234,93532173(9,723)(2,105)(1,762)53,51829,45624,06234,609r28,981(6,369)357,22425,09732,127OUTSIDEFINANCING Securities soldCommonstock.Preferred stockPreference stockFirstmortgagebondsLong-term notesOtherlong-term debt"Securities retiredFirstmortgagebondsLong-term notesOtherlong-term debtShort-term debt-netincrease(decrease) .40,90040,000108,00020,0002446,94037,12035,00075,000"8,3004240,00060,00010,4505628,09324,05030,00040,00050,000'0,0002,60087(15,000)(7,763)(10,000)(8,000)(1,000)(3,500)(57)(117)(236)'140)20,231(21,627)(4,122)8,050142,252160,456117,882137,659108,514OTHERSOURCESAND(USES)Investments RefundofprioryearsFederalincometaxes-netWorkingcapital-netchange(excluding short-termdebt)Miscellaneous -net.(4,483)24(253)3,156(a)(6,624)(a) 23,8966,3576575,0525,030(5,943)28,695',5301,4722,956(14,824)(13,652)1,036203(6,302)(11,977)TOTALFUNDSUSEDFORNEWCONSTRUCTION (b)$209,529204,107176,157155,419128,664(a)ThonetchangesInworkingcapitalresultedprincipally fromthefollowing: 1973,Increases Inothoraccountsreceivable, construc-ttonfund,accountspayabloanddividends payableandaccruedInterest; 1972,Incroasos Inaccountsreceivable andfuelinventory. (b)Excludesallowanco forfundsusedduringconstruction. \Seeaccompanying NotestoFlnanclat Statomonts. 19 STATEMENT OFEARNINGSREINVESTED BALANCE,JANUARY1NETINCOME197219711970Thousands ofDollars$140,238125,647113,821108,34266,91257,92148,57234,935207,150183,568162,393143,277196998,83034,609133,439DIVIDENDS Preferred andpreference stockCommonstock(pershare-1973,$1.68;1972,$1.64;1971-1969, $1.60)......... BALANCE,DECEMBER31(Notes7and8)......... 17,19114,52611,3926,4263,822'2,84650,03728,80443,33025,35423,03021,27536,74629,45625,097$157,113140,238125,647.113,821108,342NOTESTOFINANCIAL STATEMENTS December31,1973and19721.SUMMARYOFACCOUNTING POLICIESAccounting SystemAccounting recordsaremaintained inconform-itywiththeuniformsystemofaccountspre-scribedbytheFederalPowerCommission (FPC)andadoptedbythePennsylvania PublicUtilityCommission (PUC)~UtilityPlantCostsofadditions toutilityplantandreplace-mentsofunitsofpropertyarecapitalized. Costsofdepreciable propertyretiredorreplacedareeliminated fromutilityplantaccountsandsuchcosts,plusremovalcosts,lesssalvage,arechargedtoaccumulated depreciation. Costsoflandretiredorsoldareeliminated fromutilityplantaccountsandanygainsorlossesarere-flectedontheStatement ofIncomeduringthecurrentyear.Allexpenditures formaintenance andrepairsofpropertyandthecostofreplace-mentofitemsdetermined tobelessthanunitsofpropertyarechargedtooperating expenses. Allowance forFundsusedDuringConstruction Asprovidedintheuniformsystemofaccounts, thecostoffunds(interest onborrowedmoneyandareasonable rateonothercapital)usedto.financeconstruction workinprogressiscapital-izedasUtilityPlant.'An amountequaltotheamountsocapitalized isshownontheStatement ofIncomeasanitemofOtherIncomeandservestooffsettheactualcostoffinancing construc-tionworkinprogress." Depreciation Forfinancial statement

purposes, thestraight-linemethodofdepreciation isusedtoaccumu-lateanamountequaltothecostofutilityplantandremovalcosts,lesssalvage,overtheesti-matedusefullivesofproperty.

Subsidiaries Priorto1973,theCompanycarrieditsinvest-mentsinsubsidiaries andinSafeHarborWaterPowerCorporation atcost,anddidnotrecorditsequityintheearningsofthesecompanies excepttotheextentreceivedasdividends. In1973,pur-suanttoarevisionoftheuniformsystemofac-counts,theCompanyadoptedtheequitymethodofaccounting fortheseinvestments. Underthismethod,theCompanycarriestheseinvestments onitsBalanceSheetatcostplusundistributed earningssincedatesofacquisition, andreflectsitsequityintheearningsofthesecompanies inOtherIncomeontheStatement ofIncome.RevenuesRevenuesarebasedoncyclebillingsrenderedtocertaincustomers monthlyandothers20 bi-monthly. TheCompanydoesnotaccruereve-nuesrelatedtoenergydelivered butnotbilled.TheCompany's tariffsincludefueladjustment clausesunderwhichfuelcostsaboveorbelowthelevelsallowedinapprovedrateschedules arepermitted tobebilledorcreditedtocustom-ersafterthefuelcostsareincurred. IncomeTaxesDeferredtaxaccounting isfollowedforitemswheresimilartreatment inratedeterminations hasbeenorisexpectedtobepermitted bythePUC.Theprincipal itemsareaccelerated amor-tizationofcertified defensefacilities andpollu-tioncontrolequipment, deduction ofcostsofremovingretireddepreciable propertyandthatportionoftaxdepreciation arisingfromshorten-ingdepreciable livesby20/0aspermitted bytheclasslifedepreciation system.Taxreductions"arising principally fromtheuseofthedeclining balancedepreciation method,guideline livesandcertainincomeandexpensesbeingtreateddifferently fortaxcomputation thanforbookpurposesareaccounted forundertheflow-through method.Thesereductions inincometaxprovisions arealsoaccordedflow-through treatment inratedeterminations bythePUCandcurrently resultinlowerratesforcustomers thanwouldotherwise bepossible. Investment taxcreditsaredeferred. Deferredamountspertaining totheJobDevelopment In-vestmentCredit(RevenueActof1971)arebeingamortized overtheaveragelivesoftherelatedpropertywhileamountspertaining tothecreditspermitted underpriorlawsarebeingamortized over5-yearperiods.Retirement PlanTheCompanyhasaRetirement Plancomposedoftwoparts:(1)anon-contributory portionwhichprovidesbenefitsforalleligibleactiveemployees withthefullcostabsorbedbytheCompany,and(2)avoluntary portioninwhichcontributions aremadebybothemployees andtheCompany,butthefullcostofpastserviceandPlanimprove-mentsisbornebytheCompany.Approximately 95'/oofeligibleactiveemployees aremembersofthevoluntary portionofthePlan.Companycontributions tothePlanincludeamountsre-quiredtofundcurrentservicecostsandtoamor-tizeunfundedpastservicecostsoverperiodsofnotmorethan20years,ResearchandDevelopment Researchanddevelopment costsarechargedtoexpense.asincurredexceptforcostsrelatedtospecificconstruction projectswhicharecapi-talized.2.SUBSIDIARIES, CONTROLLED COMPANIES ANDSAFEHARBORTheCompanyhassixwholly-owned subsidiaries (including threecoalcompanies) andhascontrolovertheoperations ofoneothercoalcompany.Noneofthesecompanies isengagedinthebusi-nessofgenerating anddistributing electricity. Thetotalcombinedassetsofthesecompanies atDecember31,1973andDecember31,1972waslessthan5/ooftheCompany's assetsandthetotalcombinedrevenueofthesecompanies ineachoftheyears1973and1972(afterinter-companyeliminations) waslessthan1/ooftheCompany's revenues. TheCompanyalsoownsone-third oftheoutstanding capitalstockofSafeHarborWaterPowerCorporation representing one-halfofthatcompany's votingsecurities. Asaresultoftheadoptionoftheequitymethodofaccounting, theCompanyrecordedasOtherIncomeduring1973approximately $812,000(ofwhich$250,000wasreceivedasdividends) asequityintheearningsofsubsidiary companies andSafeHarborWaterPowerCorporation. Oftheamountrecorded, approximately $500,000wasapplicable toundistributed earningsofthesecompanies fromtheirrespective datesofacquisi-tiontoDecember31,1972.3.RATEINCREASES Pursuanttoarateincreaserequestfiledin1973,thePUCgrantedtheCompany,effective June2,1973,a2.7'/oincreaseinelectricrates(about$10millionannually). Operating revenuesfortheyear1973include$4.8millionresulting fromthisin-crease.ThefinalPUCorderontherequestau-thorizedtheCompanytoincreaseelectricratesbyanadditional 5.7/o(about$19millionannu-ally)effective January10,1974.4.STORMDAMAGEDuringJune1972severefloodingcausedbyTropicalStormAgnesoccurredintheCom-pany'sservicearea.Effectsofthefloodincreased operating expensesbyapproximately $1.6mil-lion(10centspershare)aftergivingeffecttoinsurance recoveries, casualtyreservesandre-latedtaxreductions. 21 5.COMPENSATING BALANCESANDSHORT-TERM DEBTTheCompanyhaslinesofcreditaggregating $145millionwithvariousbankswhichmakeavailable loansforinterimfinancing andprovideback-upfinancing capability forcommercial papernotes.AtDecember31,1973,useoftheselinesofcreditwasrestricted totheextentof$11.5millionbyshort-term bankloanstocertainownedandcontrolled fuelsupplycompanies. Inconnec-tionwiththeselinesofcredittheCompanymain-tainscompensating balanceswhich,generally, areonthebasisof10/oofthelineofcreditor20/ooftheamountborrowed, whichever ishigher,onanaverageannualbasis.Thesebal-ancesarenotrestricted astowithdrawal. Basedonbankborrowings during1973,theaveragecompensating balancerequirement wasabout$13.8million,ofwhichabout$2.0millionwassatisfied by"float"(checksissuedbutnotclearedbythebanks).Bankborrowings aregenerally foroneyear,maybeprepaidatanytimewithoutpenaltyandareatthelendingbank'sprimeinterestrateineffectfromtimetotime,whichwas9~/4/oatDecember31,1973.TheCompanyhadnobankloansout-standingatDecember31,1973.Commercial papernotesaregenerally soldforperiodsrang-ingfrom30to60days;theweightedaveragediscountrateapplicable tothe$39.9millionofcommercial papernotesoutstanding atDecem-ber31,1973was8.5/o.Themaximumaggregate amountofshort-term debtoutstanding attheendofanymonthin1973was$85.2million;theaverageaggregate dailyamountoutstanding during1973was$60.6mil-lion.Theapproximate weightedaverageinterestrateofshort-term debtduring1973was7.9/o,calculated bydividingthetotalshort-term debt-interestexpensefortheyearbytheaverageaggregate dailyamountofshort-term debtout-standing. 6.POLLUTION CONTROLCONSTRUCTION FUNDTheunexpended proceedsfromthesaleofFirstMortgageBonds,Pollution ControlSeriesA,amounting to$13.0millionatDecember31,1973,areheldbyatrusteeinaConstruction Fundwhichconsistsofcashandtemporary cashin-vestments. PaymentsmaybemadefromtheFunduponrequisition bytheCompanyforcostsre-latedtotheconstruction ofcertainpollution con-trolfacilities. Theamountexpectedtoberequisi-tionedfromtheFundin1974isclassified asaCurrentAssetwhilethebalanceisincludedaspartofOtherInvestments. 7.DIVIDENDRESTRICTIONS TheCompany's charterandmortgageindentures restrictthepaymentofcashdividends onCom-monStockundercertainconditions. Underthecharterprovisions, whicharethemorelimiting, norestrictions areeffective onthepaymentofsuchdividends outofcurrentearnings. Theamountofearningsreinvested freeofrestrictions underthecharteratDecember31,1973was$135.1million.8.PROPERTIES SUBJECTTOFEDERALLICENSESTheCompanyoperatestwohydroelectric proj-ectsunderlicensesissuedbytheFPC.CertainreservesrequiredtobeprovidedundertheFed-eralPowerActhavenotbeenrecordedpendingapprovaloftheamountsbytheFPC.TheCom-panyestimates thatsuchreservesapplicable totheyearsfrom1946wouldnotexceed$2.5mil-lionatDecember31,1973.9.INCOMETAXESIncometaxexpensefortheyears1973and1972isreflected ontheIncomeStatement asfollows:19731972(Thousands ofDollars)UtilityOperations: Federalincometax...Stateincometax.....Deferredincometax..OtherIncomeandDeductions $16,4546,2075,73728,398(91)$28,30712,5825,5202,82920,931(334)20,597Portionoftaxdepreciation ,.arisingfromshortening depreciable livesby20/oundertheclasslifedepreciation system......Costsofremovingretireddepreciable property.....Accelerated amortization ofpollution controlfacilities.. Abnormallossonretirement ofproperty.............. Accelerated amortization ofemergency facilities ......$3,0572,219385871(795)$5,7371,5501,8?8196(795)2,829Deferredincometaxesresultfromdifferences betweenthetimethefollowing itemsarerecog-nizedasexpensesfortaxandfinancial statement purposes: 19731972(Thousands ofDollars)22 1973'972(Thousands ofDollars)Indicated incometaxexpenseatcombinedFederalandStatetaxrates.......... Reductions inindicated taxdueto:Investment taxcredits....Allowance forfundsusedduringconstruction-nontaxable Taxdepreciation (excluding portionduetoshortening depreclabIe livesby20loundertheclasslifesystem)inexcessofbookdepreciation .....Taxandpensioncosts-taxdeduction inexcessofbookexpense.......OtherTotalreduction inindicated incometax...ActualincomeIaxexpense..$54,13172338,0417,5312,68733225,824$28,30745;1667,3497,9066,1452,55461524,56920,59710.RETIREMENT PLANObligations oftheCompany's Retirement Planarecurrently fundedthroughaTrustFund.AtJune30,1973,theendoftheFund'smostrecentfiscalyear,theFund'sassetsatcostwere$80.0million;theactuarially computedunfundedpastservicecostwas$13.6million;andvestedbene-fitsexceededthecostbasisoftheFund'sassetsby$7.3million.Pensioncostsfortheyears1973and1972were$6.8millionand$6.7million,re-spectively, including ineachyearfundingofthepastservicecost.11.RENTALSANDNONCANCELABLE LEASECOMMITMENTS Totalrentalschargedtooperating expensefor1973and1972amountedto$7.5and$6.3million,respectively. ThecombinedcurrentFederalandStatecorpo-rateincometaxratesequalabout54/ofortheCompany,afterconsidering thedeductibility oftheStateincometaxexpense.However,theef-fectiveincometaxrate(incometaxexpenseasapercentage ofnetincomebeforeincometaxexpenseandnetdeferral'ofinvestment taxcredits)was28'/oin1973and25/oin1972.Thereasonsforthelowereffective taxratesareshowninthefollowing summary:tAtDecember31,1973theCompanywascom-mittedundernoncancelable leasesexpiringatvariousdatesto1996.Theminimumrentalcom-mitmentsundertheseleasesforfutureyearsareasfollows(millions ofdollars): 1974,$3.7;1975,$3.8;1976,$3.7;1977,$3.5;1978,$3.3;1979through1983,$12.5;1984through1988,$7.0;1989through1993,$5.6;after1993,$2.0.Mini-mumrentalcommitments forfutureyearstotal$45.1million,applicable tothefollowing cate-goriesofproperties: combustion turbinegenerat-ingequipment, $19.2million;railroadcoalcars,$11.8million;computerequipment, $14.1million.Generally theleasescontainrenewaloptionsandobligatetheCompanytopaymaintenance, insur-anceandotherrelatedcosts.Theimpactuponnetincomeineachoftheyears1973and1972wouldbelessthan1'/oifallnon-capitalized financing leaseswerecapitalized andamortized onastraight-line basiswithinterestaccruedonthebasisoftheoutstanding leaseliability. 12.COMMITMENTS ANDCONTINGENT LIABILITIES TheCompanyestimates thatabout$1.8billionwillberequiredtocompleteconstruction proj-ectsinprogressorauthorized tobestartedin1974.Ofthisamount,about$305millionisap-plicabletotheyear1974withthebalancetobeexpendedthroughtheyear1981.TheCompanyissubjecttocertainpresentanddeveloping lawsandregulations withrespecttoairandwaterquality,landuseandotherenvi-ronmental matters.TheCompanyisunabletopredicttheultimateeffectofsuchlawsandregu-lationsuponitsexistingandproposedfacilities andoperations. Itispossiblethatsuchlawsandregulations mayrequiretheCompanytomodify,supplement, replaceorceaseoperating certainofitsequipment andfacilities, delayorimpedeconstruction andoperation ofnewfacilities, andrequiresubstantial additional expenditures inamountswhicharenotnowdeterminable. Inconnection withproviding foritsfuturebitu-minouscoalsupply,theCompanyhasPUCap-provaltoguarantee thecapitalobligations ofcertaincoalsuppliers (including fourownedorcontrolled coalcompanies) uptoapproximately $100millionoutstanding atanyonetime.Obliga-tionsactuallyguaranteed underthesearrange-mentsaggregated $91.0millionatDecember31,1973.23 PRINCIPAL OFFICERSD BOARDOFDIRECTORS JACKK.BUSBY,President AUSTINGAVIN,Executive VicoProsident JOHNT.KAUFFMAN, Assistant VicePresident, SystemPower8Engineering NORMANW.CURTIS,VicePresident, Engineering &Construction ROBERTR.FORTUNE,VicePresident, Financial GEORGEF.VANDERSLICE, Comptroller CHESTERR.COLLYER,Treasurer DONALDJ.TREGO,Assistant Treasurer BROOKER.HARTMAN,VicePresident, DivisionOperations LEONL.NONEMAKER, Assistant VicoPresident, DivisionOperations CHARLESE.FUQUA,VicePresident, Susquehanna DivisionJACKHANCKEL,VicePresident, Harrisburg DivisionCARLR.MAIO,VicePresident, LehighDivisionJAMESJ.McBREARTY, VicePresident, Northeast DivisionHERBERTD.NASHJR.,VicePresidonl, ConsumerandCommunity ServicesEDWINH.SEIDLER,VicoPresident, Distribution BRENTS.SHUNK,VicePresident, Lancaster DivisionEMMETM.MOLLOY,VicePresident, HumanResourceandDevelopment RICHARDH.LICHTENWALNER, VicePresidenl, PublicRelations EbWARDM.NAGEL,VicoPresident, GeneralCounselandSecretary 'AsofJan.1,1974CLIFFORDL.ALEXANDER JR.,Washington, D.C.PartnerofArnold&Porter,Counsellors atLawJACKK.BUSBY,Allentown President oftheCompanyRALPHR.CRANMER,Williamsport President andGeneralManagerofGritPublishing CompanyEDGARL.DESSEN,HazletonPhysician-Radiologist AUSTINGAVIN,Allentown Executive VicePresident oltheCompanyW.DEMINGLEWIS,Bethlehem President olLehighUniversity JOHNA.NOBLE,ScrantonPresident olClelandSimpsonCompanyNORMANROBERTSON, Pittsburgh SeniorVicePresident andChiefEconomist ofMellonBank,,N.A.JOSEPHT.SIMPSON,Harrisburg ChairmanoftheBoardolHarscoCorporation M.J.WARNOCK,Lancaster ChairmanoltheBoardolArmstrong CorkCompanyCHARLESH.WATTSII,Lewisburg President ofBucknellUniversity S.HAYWARDWILLS,Miami,FloridaChairmanoltheBoardandPresident olGACCorporation Executive Committee: JackK.Bushy,chairman: Messrs.Gavin,Simpson.WarnockandWills.AuditComminee: CharlesH.WattsII,chairman: Messrs.Alexander andWarnock.SECURITIES LISTEDONEXCHANGES FISCALAGENTSNEWYORKSTOCKEXCHANGEFirstMortgageBonds,3%Soricsduc18754rh%Prolcrrcd Stock(Codo:PPLPRB)4.40%ScriosPrclorrcd Stock(Coda:PPLPRA)8.60%SeriesPrclorrcd Slack(Codo:PPLPRG)Prolcrcnco Stock,$8.00Sorics(Codo:PPLPRJ)Prclcrcnco Stock,$8.40Sorlcs(Codo:PPLPRH)Prclcrcnco Stock,$8.70Scrios(Coda:PPLPRI)CommonStock(Coda:PPL)PBWSTOCKEXCHANGE4ye%Preferred Stock3.35%SeriesPreferred Slock4.40%SeriesPreferred Stock4.60%SeriesPreferred Stock8.60%SeriesPreferred Stock8%SeriesProlcrrcd StockPreference Stock,$8.00SeriesProlcrcncc Stock,$8.40SeriesPreference Stock,$8.70SeriesCommonStockTRANSFERAGENTSFORPREFERRED, PREFERENCE ANDCOMMONSTOCKIndusulal ValleyBankandTrustCompany634HamiltonMallAllentown, Pennsylvania -18101IrvingTrustCompanyOnoWallStreetNewYork,NowYork-10015Pennsylvania Power&LightCompanyTwoNoahNinthStrcclAllentown, Pennsylvania -18101REGISTRARS FORPREFERRED, PREFERENCE ANDCOMMONSTOCKTheFirstNationalBankolAllentown HamiltonMallatSeventhAllentown, Pennsylvania -18101MorganGuarantyTrustCompanyolNcwYork23WallStreetNewYork,NewYork-10015DIVIDENDDISBURSING OFFICEFORPREFERRED, PREFERENCE ANDCOMMONSTOCKTreasurer Pennsylvania Power&LighlCompanyTwoNorthNinthStreetAllentown, Pennsylvania -f8101 ACCOUNTANT'S OPINlONHASKINS&SELLSCertified PubtlcAccountants TwoBroadwayNewYork10004TotheShareowners andBoardofDirectors ofPennsylvania Power&LightCompany:WehaveexaminedthebalancesheetsofPenn-sylvaniaPower8LightCompanyasofDecember31,1973and1972,therelatedstatements ofin-come,earningsreinvested andsourcesoffundsusedfornewconstruction fortheyearsthenendedandthescheduleofcapitalstockandlong-term debtasofDecember31,1973.Ourexamination wasmadeinaccordance withgenerally acceptedauditingstandards, andaccordingly includedsuchtestsoftheaccounting recordsandsuchotherauditingprocedures asweconsidered necessary inthecircumstances. Inouropinion,suchfinancial statements andschedulepresentfairlythefinancial positionoftheCompanyatDecember31,1973and1972andtheresultsofitsoperations andsourcesoffundsusedfornewconstruction fortheyearsthenended,inconformity withgenerally acceptedaccounting principles appliedonaconsistent basis.HASKINS&SELLS',glg~P~o'ilI,;>jj"tIIJ)<<r/FebruaryS,1974InSeptember 1973,PP&L'sboardofdirectors andkeyolficersvisitedPhiladelphia ElectricCompany's PeachBottomnucleargenerating plantbeingconstructed alongthelowerSusquehanna RivernearthePennsylvania-Maryland border.Thedirectors wereabletoseefirst-hand theintricate safeguards thatarebuiltintoeverynucleargenerating facility. TheCompanyfilesForm10-KannuallywiththeSecurities andExchangeCommission. Form10;KiscomposedofthisAnnualReporttoshareowners andadditional information concerning theCompanyanditsoperations. Thisadditional information willbeavailable afterApril1~1974bywritingtoPennsylvania Power8LightCompany,TwoNorthNinthStreet,Allentown, Pa.18101~attention: Mr.GeorgeI.Kline,InvestorServicesManager. PPaLPENNSYLVANIA POWER8LIGHTCOMPANYTwoNorthNinthStreet,Allentown, Pa.18101Telephone: AreaCode215821-5151LITHOINU.S.A.ryg~.~p'5'-<<.W-r*rL((~-'>pl;';L(,I(T4&v',~".%~"."-'>(~>r~~>.r~~~<<~r~i.><<<<>g~ >>>>g~<<.r..>1'Tkl~>'r~g.~~a<<Ig'0,-<<r..".>r~.[>>,M~45~+~ a,I,,gj,i(jvECEksJUL111973m5U.S.ATO)A!CENERGYK:*Yii::-!'.:8 MailSec!hnQ)0-38V0"388ICPAF~w>y+~>g]($@jJpg(PEN1972annualreportNSYLVANIA POWERA.LIGHTCOMPANY3AS ContentsTheYearinReviewTheEnergyCrisisFinancials NotestoFinancial Statements Directors andPrincipal Officers2-1011-1416-2222-2324HIGHLIGHTS RevenuesNetIncome..EarningsPerSharebasedonaveragenumberofsharesofcommonstockoutstanding ....,.......... Dividends pershareofcommonstock..TotalUtilityPlant......... 2.482.371.641,637,040,000 1.601,458,707,000 19721971.$345,792,000 $300,707,000 57,921,000 48)572,000 CoverPhotos(c/ockw/se /romfop)PeggyWilcox,consumeradviserinthenewlyformedConsumer&Community AffairsDepartment, listenswhileaPP&LcustomercommentsonseveralaspectsoftheCompany's operations. Anaquaticbiologist surveyspartofa50-milestretchoftheSusquehanna Riveraspartofa10-yearenvironmental surveillance programforPP&L'sproposedSusquehanna SteamElectricStation,theCompany's firstnuclearplant.Construction continues onthefirstoftwo800,000-kilowatt, oil-fired generating unitsattheMartinsCreeksiteontheDelawareRiver.Theunitisscheduled tobeinserviceearlyIn1975.AttheheightofTropicalStormAgnes,BrunnerIslandgenerating stationhad15feetofwaterinthebasement. Threeweeksafterthispicturewastaken,andinaremarkable displayofteamworkandeffort,thestationwasbackinservice. President's MessageEventhoughincreases intensionsandproblemssometimeseemtobeanewnorm,weconsiderthat1972wasagoodyearfortheCompany.Amodestimprove-mentinearningspersharewasmadepossiblebyhigherelectricservicerateseffective lastMarchandbythefavorable performance ofourmajorgenerating sta-tions.Thisperformance wasachieveddespitethemorethan$1.6millionofspe.cialcosts(equalto10centsashare)causedbyTropicalStormAgnes.Weparticularly callattention tothemanyPP&Lemployees whoconducted them-selveswithsuchoutstanding skillanddedication inavarietyofdifficult andhazardous situations duringAgnes.Thehavoccausedbythefloodhasbeengreatlymitigated bycourageous self-help andmassivereliefandrehabilitation assis-tance.Whilemuchremainstobedone,favorable prospects forNortheast Penn-sylvaniahavebeenre.established. Theaffectedcommunities have,injustafewmonths,madeagreatdealofprogress. Notwithstanding thedisruption ofAgnes,theoverallpatternforthePP&Lserviceareafortheyearwasoneofcontinued economicgrowthandrisingdemandsforenergy.Wewereabletomeetinfulltheseincreased electrical requirements. Wealsoexpecttomeetwithoutdifficulty thepre-dictedlargerrequirements for1973.PP&L,alongwiththePennsylvania. NewJersey-Maryland (PJM)Interconnection ofwhichweareapart,isexpanding itsgenerating capacity. Earlyin1972,ourMontourNo.1generating unitwentinserviceanditscompanion unit,MontourNo.2,isnearingcompletion. Thissecondunitisnowintrialoperation andshouldbeinregularservicethisspring.Thesetwocoal-fired unitstotal1.5millionkilo-watts.TheywillincreasePP&Lgenerating capacitybyover40percent.Underlying theconstruction oftheseandothernewfacilities wastheCompany's successful financing program.Theyear1972markedanall.timehighinraisingnewcapital.Atotalof$165millionwasobtainedthroughtheseparatesalesofbonds,long-term notes,preference stockandcommonstock.Weemphasize againthatourfinancing waspossibleonlybecausetheCompanyhasmaintained arecordofgoodfinancial performance. Suchperformance includesthreeessential requirements: asoundbalanceinthecapitalstructure betweendebtandequitysecurities, adequateearn.jngscoverageofinterestchargesandgrowthinearningspershareforthecom-monstockinlinewiththeshareowner's increased investment. Otherwise wecan-notmaintaininvestorconfidence andattracttheneedednewcapital.Sincenewfundsneededinthenextfiveyearsareestimated tobe$1.5billion,westresstheparamount importance ofsafe-guardingandcontinuing PP&L'srecordofgoodfinancial performance. Itbecomesevermoreessential thatthepublicalsounderstand andacceptthisfactbecauseourfinancial healthisnecessary foracon-tinuation ofqualityelectricserviceforourcustomers. Aswenowseetheconditions thatexistinthenationalandregionaleconomies, themeetingofthisfinancial responsibility meansperiodicrateincreases. Weareawareoftheneedforproductivity gains.Butsuchgainscannotmeetthetotalneedsofthesituation. Weexpecttofileinthenearfuturearateincreaseapplication withthePennsylvania PublicUtilityCom.mission.AmajorthrustoftheCompanythrough-outtheyearhasbeentocarryoutourcommitment toconservation ofenergy.During1973weexpecttosubstantially extendourexpertise inthisfieldandgreatlyincreaseourmarketing ofpractical /Qrg%3waysandmeansbywhichourcustomers cantakestepstoconservetheirrequire-mentsforelectricity, particularly duringpeakperiods.Conservation duringpeakperiodsisespecially important becauseitistheincreases inpeakperiodusethattriggernewconstruction requirements, andrelatedfinancing needs.Ourpolicyofconservation ofenergywastheoutgrowth ofavarietyofshortandlong-term considerations. Oneofthemainreasonswasth'eimpending "energycrisis"(seeseparatesectionstartingonpage11).Coalhasbeenrestricted byenvironmental limitations. Inmanypartsofthecountry,naturalgasisbeingrationed. Ourdomesticoilproduction isfarshortofmeetingtotalpetroleum needs.Theoverallresultisanincreasing demandforelectricity ascustomers turntothisformofenergy,wherefeasible, inordertooffsetscarcities insuppliesofotherfuels.Thecircumstances clearlypointtoin-creasingneedsfornuclearpowerplants.Ithasbecomeamatterofthehighestpriorityforthecountrytodevelopnewsuppliesofgasandoil.Also,itiscritically important toencourage thepromptcorn.pletionofelectricpowerfacilities nowplannedandunderconstruction. Theavoidance ofdelayincompleting suchelectricfacilities isoneofthebestwaysnowavailable tolessentheenergycrunchthatissorapidlyapproaching. Ofcourse,thekeytosettingnecessary newgovernmental policiesispublicunderstanding ofwhattheenergycrisisisallabout.Todoourpartinthisprocess,wehaveinstituted broadandintensive information

programs, bothwithindividual customers andthegeneralpublic.Becauseofthelong-range importance ofthesematters,wehopethesediscussions willbepersuasive.

Towardthisendweaskfortheactivesupportofourshareowners incarryingforwardthisprogram.Respectfully submitted, JackK.Busby,President March1,1973 YEARINREVIEWRevenuesin1972were$346million,thehighestintheCompany's history.Thislevelwasreached,ofcourse,withtheassistance ofhigherrateschargedforelectricservice.Thiscompareswithrevenuesof$301millionin1971.Thekilowatthoursalesgainwas9.2percentover1971intheresidential

category, 11.3percentinthecommer-cialsectorand6.7percentintheindustrial area.Ineachcase,theseincreases areabovelastyear'sandreflectthegeneralimprovement inthenationaleconomy.Overall,therateofgrowthwas8.5percent.Therealsignificance ofthisgainoverthe1971levelwasthateveninthefaceofsubstantial andgrowingeffortsbytheCompanytopromoteenergyconservation, theuseofelectricity continued torise.Whileit'sstilltooearlytotellwhetherintensified con-servation effortswillhaveasignificant effectonfutureenergydemands,presently webelievethatrisingdemandsforelectricservicewillrequirealargeandcontinuing con-struction program.BuildingtoMeettheDemandBuildingthefacilities tomeetapredicted demandforelec-tricityisabigandgrowingjob.In1972theCompany's construction expenditures reached$219millionandareexpectedtorisesteadilyintheyearsahead.Thismas-siveamountofconstruction causedonepersontosuggestthatPP8Lwasactuallyalargeconstruction companywhichhappenstosellelectricity asasideline.

Thischaracteriza-tion,whilefacetious innature,doesemphasize theverysubstantial buildingtaskfacingtheCompanyaswestrivetoprovideforourcustomers'nergy needs.Oneofthelargestblocksofnewgenerating capacityeveraddedtothePP8LsystemwaswelcomedaboardlastMarchwiththeadditiononscheduleofthe720,000-kilowatt No.1unitattheMontourSteamElectricStationinthenorthwest partofPP8L'sserviceterritory. Thisunithasper-formedverywellsinceitsstartupandcontinues todowell,certainly dueingoodparttothesubstantial effortstakentolearnfromtheproblemsassociated withtheconstruction andstartupoftheBrunnerIslandNo.3unit.TheNo.2companion unitattheMontoursiteisnearingcompletion withanin-service datescheduled forthespringofthisyear. InadditiontotheMontourproject,therewasverysub-Istantialprogressmadeduring1972ontwo800,000-kilo-wattoil-fired unitsattheMartinsCreeksiteontheDelawareRiver.Attheendof1972,thefirstoftheseunitswas28percentcompleteandisscheduled tocomeinserviceearlyin1975.Thesecondunitwas2percentcompleteandisscheduled forserviceearlyin1977.TheCompanyisarranging withapipelinecompanyforthedeliveryoflow-sulfur oiltotheMartinsCreekstationbyaproposedpipelinefromadeepwaterterminalontheDelawareRiver.OnFebruary8,1973,thePennsylvania PublicUtilityCommission (PUC)authorized -subjecttoanumberofconditions -operation ofthepipelinebetweenaterminalsouthofPhiladelphia andtheMartinsCreekplant.Inalengthyorderfollowing anextensive investigation duringwhichenvironmental concernswereaired,thePUCfoundthepipelinecompanyentitledtoapermitfortrans-missionofoilthroughthe$45million,five-county line.Thecompanymaynotstartconstruction untilitgetsrequiredapprovals fromtheDelawareRiverBasinCommission andotherappropriate agencies. PPBLisinvestigating alternate temporary transportation ifo'rtheoilnecessary tooperatethenewMartinsCreekunitsshouldconstruction ofthepipelinebeundulydelayed.The300,000kilowatts ofcoal-fired capacityatMartinsCreekranwellmostoftheyearbutencountered somediffi-cultieslatein1972.UnitNo.1waslateinreturning fromascheduled overhaulduetogreater-than-expected repairrequirements andwasoutofservicefor82days.WhileUnitNo.1wasbeingrepaired, UnitNo.2sufferedalubri-cationfailure.AsofFebruary1973,bothunitswerebackinservice.NuclearPlansMoveAheadRegulatory proceedings involving aconstruction permitfortheSusquehanna nuclearstationnearBerwickcontinued during1972.TheCompanyoriginally announced itsinten-tiontobuildthetwo1.1-million-kilowatt unitsinSeptember of1970.Sincethattime,PP&Lhasbeenfollowing thepermitandlicensing procedures requiredbytheAtomicEnergyCommission (AEC)forsecuringapprovaltocon-structtheplant.Theseprocedures arethoroughandverydetailedandcovereveryconceivable aspectoftheplant'sdesignandconstruction. Aconstruction permitwillbeis-suedonlyafterithasbeenestablished tothesatisfaction oftheAECthattheplantcanbebuiltandoperatedwithoutrisktothehealthandsafetyofouremployees orthegeneralpublicandthatitmeetsallenvironmental standards. In'4~JlA,ghArevolutionary conceptinservicecenterdesign,thecircular;Lancaster

facility, above,allowsefficient inventory controlandspeedydispatchofservicecrews.Withallthediscussion aboutinstalling adequatesuppliesofelectricgenerating

capacity, wesometimes forgetthatstringing thelinestodelivergenerated powerisabigpartofourconstruction effort.In1972,forexample,PP&Lcrewsstrung460milesoftransmission anddistribution lines.

Aprilof1972theCompany's application foraconstruction permitwasfavorably reviewedbytheAEC'sDirectorate ofLicensing andbytheAdvisoryCommittee onReactorSafeguards. InJuly,theCompanysubmitted asupple-mentalandgreatlyexpandedenvironmental report.TheinitialhearingswereheldatBerwicklateinFebruaryofthisyear.FurtherhearingswillbeheldduringthesummerandtheCompanyhopesthatbylate1973groundcanbebrokenandworkcanbeginontheunits./Whenonetakesintoaccounttheapproximately sixyearsrequiredtoactuallybuildanuclearplant,itiseasytoseethatfromstarttofinish,theplacinginserviceotanuclearstationrequiresabout10years.Thiscompareswiththesixtoeightyearsrequiredforafossil-fueled station.Eventhoughthelengthoftimetobuildanuclearplantissub-stantial, andeventhoughthecapitalcostfortwonuclearunitsattheSusquehanna siteispresently estimated tobe$1.2billion,nuclearpowerremainsanessential economical component inmeetingtheCompany's tutureenergyre-quirements. Wefeelthatthisisparticularly soinlightoftheobviousshortages inotherfuelsrequiredtogenerateelec-tricityandinthefaceofmountingenvironmental require-ments.Whileitistruethatnoformofelectrical generation isabsolutely withoutenvironmental effect,wefeelthatnuclearpoweristhecleanestalternative available fortheforeseeable future.TheCompanyhasmadeagreatefforttodiscussthisissuewithinterested citizensateveryoppor-tunityandtoexplaintothemtherelativemeritsofanuclear-fueledgenerating facility. Noteveryonewe'espokento,ofcourse,issatisfied withtheseexplanations butwefeelthatmostpeopleseetheneedforsuchplants.Companymanagement, fromtheBoardof'Directors ondown,hastakensubstantial stepstobecomeawareofalloftheenvironmental, safetyandsocialfactorsassociated withtheconstruction ofanuclearfacility. TheBoardofDirectors forexample,lateinSeptember, participated inacomprehensive programofindependent expertbriefingonnuclearpower,including aninformational triptoGen-eralElectric's nuclearfacilities ontheWestCoast.Themanagement ofyourCompanyfeelscontident thatitisactinginthebestinterests ofthepublicandPP&Lshare-ownersbyproceeding tousenuclearpowerinaPP&Lgenerating station.TheWiseUseofEnergyInthisperiodofenergyshortages -andimpending energycrisis-buildingtomeetsurgingdemandmustbecoupledwithaprogramtoencourage thewiseuseofenergyre-sources.Asmentioned intheinsertbeginning onpage11anddiscussed thereinmoredetail,theCompanyin1972undertook averysignificant shiftinitsmarketing policy.ThisshifttookformearlyintheyearwhentheMarketing Department wasrestructured andredesignated theCon-sumer&Community AtfairsDepartment. Actuallythissig-nificant'changehadbeendeveloping forquiteanumberofyears.In1970theCompanyeliminated itsadvertising expenditures forthepromotion ofelectricheatandbegantodrastically cutdownonthenumberofpromotional allow-ancesgrantedtovarioussalesalliesoftheCompany.Theswitchcompleted thispastyearthusformalizes ashiftfromabasicpolicyofpromotion tooneofconservation. TheCompanyisalsosponsoring forumsforgroupspar-ticularly involvedinenergyutilization. Forinstance, theCompanyinSeptember sponsored anenergyconservation forumforarchitects andengineers, Inyearspast,agather-ingotthesepeoplehadbeendevotedtoencouraging themtoselectelectricity astheenergysourceinthebuildings thattheydesigned. However,in1972,theCompanyde-voteditsmessagetoenergyconservation inthedesignandconstruction ofstructures andsoughttoenlistthesupportofthisinfluential group.Themajorityofthearchi-tectsandengineers inattendance feltthattheeffortwasworthwhile andcommended theCompanyfortakingtheinitiative inspeakingtotheenergyissue.TheCompanyintendstocontinueholdingsuchconferences, notonlywitharchitects andengineers, butalsowithindustrial andbusi-nessleaders. Onamorephilosophical level,theCompanyparticipated withLehighUniversity inthesponsorship ofasymposium onthequestionofeconomicgrowth.Thesymposium heardfrommanydistinguished historians, sociologists, econo-mists,andindustryrepresentatives regarding theprosandconsofeconomicgrowthinlightoftheenvironmental andresourcelimitations presenttoday.Theconference wasbasically aninformational oneandassuchcameupwithnospecificrecommendations. However,sinceeconomicgrowthissointimately linkedtotheuseandavailability ofenergy,theCompanyfeltthatthisdiscussion wasavalu-ableefforttowardscomingtogripswiththeproblemsofenergyutilization inasocietyofchangingvalues.EnergyandtheEnvironment LastyearwestatedinthisreporttheCompany's philosophy incopingwithenvironmental matters.Itwas-andis-thatPPBLiscommitted anddetermined todowhateverisre-quiredofusandmore,wherepractical, tominimizetheeffectofouroperations ontheenvironment. ThisisstilltheCompany's basicposition. However,thedimensions oftheenergydilemmafacingtheUnitedStatesaresuchthatsomehardquestions mustbeaskedabouttheformulation ofenvironmental rulesandregulations, asubjectdiscussed intheenergycrisisinsert.Thereweremanyongoingenvironmental projectsintheworksatPP8Lin1972.TheMontourSteamElectricStation,whoseNo.1unitcameonthelineinthespring,featuresoneofthemostcomprehensive environmental monitoring andcontrolsystemsofanyelectricgenerating stationofitssize.Forinstance, theplanthasoneairandfivewatermoni-toringstationstiedtotheplantcomputertokeepclosetabsonchangingconditions thatmaycallforcorrective action.Twootherstationsformonitoring airqualitywillbeplacedinservicelaterafterpreliminary datanowbeinggatheredindicates wheretheyshouldbelocated.Ofcourse,theplantalsohasthemajorpiecesofenvironmental equipment In-housetrainingprogramsreceivedaddedemphasisin1972.ThePP&LTrainingandDevelopment Center,left,offeredabout25separatecoursesinManagement Development andinSkillsandTechnical

subjects, likethisweldingcourse.Inanothertrainingeffort,aPPBLAffirmative Actionprogramassistant conductsanorientation fortwoyoungwomenemployees hiredthroughtheNationalAllianceofBusinessmen JOBSprogram.

whicharenowcommononallelectrical generating stationsofthissize.Theseincludeahighlyefficient dustremovalsystem,highchimneyswhichcarrygasestoaltitudes wheretheycanbereadilydispersed, andcoolingtowerswhichallowthecoolingandrecirculation ofwaterusedintheprocessofgenerating electricity ratherthanreturning hotwatertotheriver.Inaddition, itisanticipated thattheMon-tourPreserve, apublicrecreation andecological studyareaassociated withthereservoir whichservesasanalternate supplyfortheplant'swatersystem,willmovetowardcom-pletionin1973.Construction ofbagfiltersforairpollution controlofunitsNo.1andNo.2atSunburySteamElectricStationispro-gressing. Itisanticipated thatthissystem,whichhasbeendesignedtotrapandremovemorethan99percentofthedustbeforeitreachesthechimneys, willbecompleted inthespring.Inanotherpotential environmental improve-mentattheSunburystation,theCompanywillconductaone-yearpilottestofawetlimestone scrubbersystemwhichwouldremovesulfurdioxidegas(SOa)fromasmalltestportionofthetotalboilerfluegasflowfromtheNo.4unit.ThetestistargetedforaJune1973startup.There-movalofsulfurdioxidefromstackgasesisamajor,andasyetunsolved, environmental problemassociated withthegeneration ofelectricpowerwhenusingfossilfuels.TheCompany,ofcourse,issubjecttocertainpresentanddeveloping Federal,regional, stateandlocallawsandregulations withrespecttoairandwaterquality,landuseandotherenvironmental matters.ThePennsylvania De-partmentofEnvironmental Resources (DER)adoptedini-tialregulations aspartoftheimplementation planforPenn-sylvaniarequiredbytheFederalCleanAirActasenforcedbytheUnitedStatesEnvironmental Protection Agency.Underthepresently effective regulations oftheDER,com-paniesnotincompliance withtheemissionregulations arepermitted toapplyforvariances which,ifgranted,wouldallowuptothreeyearsinwhichtoachievecompliance. TheCompanyfiledthenecessary applications forvari-ancesoutlining itsplansforachieving compliance. Theseplansinclude,amongotherthings,installing additional dustcollection equipment andtheprocessing ofcoaltoreducethesulfurcontentpriortoburning.Thesevariances, ifgranted,willprovidetimeduringwhichwecangetourequipment

designed, orderedandinstalled.

IClvrci4.Thededicated effortsofmanypeoplewerethemainreasonwhyPP&Lwasabletorestoreelectricservicequicklytothosecustomers affectedbyTropicalStormAgnes.Workers,above,beginthetedioustaskofcheckingmachinery floodedattheBrunnerIslandStation.Attopright,theCompany's emergency controlcentercoordinates allservicerestoration efforts'round-the-clock. Andatbottomright,alinemanopensaswitchalongafloodedstreetsothatpowercanberoutedaroundanaffectedarea. Forthefuture,theCompanyisunabletopredicttheulti-mateeffectofdeveloping environmental regulation uponitsexistingandproposedfacilities andoperations. How-ever,itispossiblethatsuchregulation mayrequiretheCompanytomodify,supplement, replaceorceaseoperat-ingcertainofitsequipment andfacilities, delayorimpedeitsconstruction andoperation ofnewfacilities andrequireittomakesubstantial additional expenditures inamountsnotyetknown.Becauseofthestateofenvironmental technology, itismucheasiertobringourlargenewplantsintocompliance withexistingregulations thanitiswiththesmallerolderstations. Forthesereasons,plusthoseofhighoperating costandgeneralinefficiency, theCompany,asplanned,wasableduringtheyeartoretiresomeoldelectricgenerat-ingunits.Withthepermission ofthePennsylvania Public.TJUtilityCommission, twogenerating unitsattheCompany's MoltwoodSteamElectricStationwereretiredonOct.1.Thesetwocoal-fired unitshadbeeninservicesince1925.Sparepartshadbecomeincreasingly difficult toobtain,theunits'ost ofoperation hadbeenhighandtheiroutputhadbeenreducedtoholddownstackemissions. InJune,operations atPP&L'sStantonSteamElectricStation,be-tweenScrantonandWilkes-Barre, werediscontinued. Orig-inallyStanton's shutdownwasscheduled forOct.1alongwiththetwoHoltwoodunitsbutdamagebyTropicalStormAgnesmovedaheadthedateforclosing.This106,000-kilowattplant,likethetwoHoltwoodunits,wasalsooldandsufferedfromhighoperating costs.TropicalStormAgnesTheearlyshutdownoftheStantonplantwasonlyasmallpartoftheoveralleffectontheCompanyofTropicalStormAgnes.Actually, intermsofwhatcouldhavehappenedtotheCompanyasaresultofthestorm,theCompanycamethroughtheexperience inrelatively goodshape.Effectsofthefloodreducedearningsby$1.6millionor10centspershare.Financial losseswouldhavebeenmuchgreateriftheCompanyhadnothadfloodinsurance andareservefortheextraordinary powercostsincurredduringthefloodperiod.Themainimpactofthestormwasborneprimarily byourcustomers intheWilkes-Barre andHarrisburg areas.Alltold,about110,000PP8Lhomesandbusinesses, orabout13percentofourcustomers, wereoutofserviceatonetimeoranotherduetodamagedelectricdistribution sys-tems,themaximumatonetimebeing55,000.Throughout theemergency, asourceofpridefortheCompanywasthededicated jobdonebysomanyPPBLmenandwomen.Restoration ofserviceforcustomers becameatotalCom-panycommitment. Oneofthemostnotablejobswastherestoration toactiveservicewithinthreeweeksofallunits attheBrunnerIslandplant.Anotherwastheconstruction fromscratchofasubstation toservetheWilkes-Barre area,ajobdone'roundtheclockandcompleted injust78hours.Inaddition, theCompanycooperated inmakinglandavail-ablefortheplacement oftemporary mobilehomes.Revitalization oftheareasaffectedbythefloodcontinues tobeaprimeconcernofyourCompany,particularly intheWilkes-Barre region.Asyoumayknow,PP8Lwasintheforefront ofeffortsduringtheFiftiesandSixtiestobreatheneweconomiclifeintoournortheast region.Thepeopleatthattimeresponded withagreatdetermination andmadegreatstridesatre-establishing thearea'seconomicvitality. Wehavenodoubtthat,withtheassistance ofFederalandstatefunds,thehardworkinganddetermined peopleofthatregionwillonceagainbringtheareabackfromseveredifficulties. Asonelocalleaderputit,"Thesearepeople,remember, whobattledeconomicadversity beforeandwon.Andthey'lwinagain."HigherRates,Construction Financing Theinevitability ofhigherratesforelectricity isbecomingmoreapparent. AquicklookshowsthatthePP&Lresiden-tialpriceofelectricity between1960and1969declined8percentwhiletheconsumerpriceindexroseawhopping24percent.However,since1969,thingshavechanged.Im-provedtechnologies whichlongpermitted efficiences arenolongeravailable inthesameabundance asyearspast.Inaddition, inflation hascausedtheoverallcostofdoingbusi-nesstorisesharply.Theresultofallthisisthatthepriceofelectricity mustbegintoreflecttoday'sincreasing costofproviding it.Thefollowing listshowsthemajorchangesmadeinratesforelectricserviceinrecentyears.March1970-Taxsurcharge torecoverthecostofin-creasedstatetaxes.April1970-Generalrateincreaseof5percent.Dec.1970-Fueladjustment clausetoadjustthepricesofelectricserviceforvariations inthecostoffuelusedtogenerateelectricity. May1971-Generalrateincreaseof4.4percent.1972sawacontinuation ofthispatternofseekingraterelieftocovertheincreasing costofproviding electricservice.A6percentrateincreasewasgrantedbythePennsylvania PublicUtilityCommission asofMarch28,1972.Thisincrease($17millionannually), inadditiontothe4.4percent($12millionannually) grantedlastyear,wasthePUC'sallowance onourrequestfiledinearly1971.Nowhereisthecontinuing needforadequateratesmoreclearlydemonstrated thaninthesizeandcostoftheCom-pany'sconstruction program.Tomeettheenergyneedsofourcustomers, theCompanymustbuildabout$1'/~billionofelectricfacilities inthenextfiveyearsalone.Sincethenormaloperations ofourbusinessonlygenerateabout25percentofthefundsrequiredforsuchconstruction pur-poses,three-quarters oftheneededmoneymustberaisedbysellingPP8Lsecurities intheopen-market.ThistheCompanyhasbeendoingwithincreasing frequency inthelastfewyears.1972wasyetanotherverybusyyearinthecapitalmarkets,asindicated below:.~FirstMortgageBonds,7'/e%Seriesdueintheyear2002$75,000,000 ~Notesdue1974-1976, 6~/4%-6~h% 8,300,000 ~Preference Stock,$8.00Series,350,000shares35,000,000 ~Commonstock,2millionshares46,940,000 TOTAL$165,240,000 TheCompanywasalsograntedapprovalin1972topar-ticipatewiththeLehighCountyIndustrial Development Authority inthefinancing ofupto$44millionoftax-free industrial revenuebondsforpollution controlpurposes. Thisformofauthority financing forpollution controlwasonlyrecentlymadeavailable toutilitycompanies asaresultofchangesinPennsylvania law.TheCompany's 1973financing yearhasalreadybegunwiththeJanuarysaleof$80,000,000 of30-year,7~/s percentFirstMortgageBonds.Plansfortheremainder oftheyearcallforthesaleofadditional debt,commonandpreferred orpreference stock.Sincethegreatbulkofthefundsweneedmustberaisedfrominvestors likeyourselves, wecon-tinuallyemphasize toourcustomers andtoregulatory offi-cialsthatitisessential thatourratesbehighenoughtogiveusthefinancial performance whichwillattractthisverylargenumberofinvestordollars.PP&L,ofcourse,iscommitted todoingwhatitcanthroughcostcontrolandincreased effectiveness toholddowntheneedforhigherrates.Butasmentioned inthePresident's Message,theincreasing impactofhighercostsfarexceedsouropportunities toreducethem.Two-wayCommunication TheCompanyplacesgreatemphasisoncommunicating withitsvariouspublicsonmatterssuchasrates,ourcon-struction program,environmental issues,nuclearpowerandawholehostofothersubjectswhichwillaffecttheCompany's performance intheyearsahead.ThatiswhytheCompanyin1972accelerated itseffortstobringtheCompany's messagetoabroadercross-section ofpeople.Theserviceareanewsconferences initiated in1971werecontinued thispastyear.Thesewerecandid,two-waydiscussions betweenmanagement andourlocalmedia.Noholdswerebarredandeverysubjectraisedreceivedanairing.Ourwillingness tobeavailable inthismannerispartofaconscious efforttobuildcredibility fortheCom-pany.Certainly, noteveryoneagreeswithus,butwefeel0iri~PP&L'sparticipation inresearchprogramsisgreatlyexpanding. Threesponsored bytheElectricPowerResearchInstitute andtowhichPP&Liscontributing areshownhere.Above,researchbyHighVoltagePowerCorp.onextra-high voltageunderground transmission, usescompressed gasasaninsulator. Magnetohydrodynamics (MHD),topright,isadeveloping conceptforgenerating electricity wherebyagasflameisdirectedbetweencurvedelectromagnets toproduceelectriccurrent.Itfsbeingconducted attheAvcoEverettResearchLaboratory. Andworkcontinues byGeneralElectricCo.onultra-high voltageoverheadtransmission, bottomright,inthe1.1-million-volt to1.5-million-volt range.Presently 500,000voltsisthehighesttransmission voltageonthePP&Lsystem. thatPPBLbenefitsfromthisopenpolicyofwillingness todiscussallpertinent issuesrelatingtoelectricenergy.TheCompany's rollingcommunications medium,"TheEnergyofMan"exhibit,completed anothersuccessful yearoftouringtheservicearea.Thetrain,whichcontainsmuchinformation abouttheCompanyanditsfutureplanswasvisitedthispastyearbymorethan100,000persons.Thisbringsthetrain's1~/2-year attendance toabout225,000.'Management ChangesCliffordL.Alexander, Jr.,partnerintheWashington, D.C.lawfirmofArnold8Porter,waselectedtotheCompany's BoardofDirectors attheAnnualMeetingonApril26,1972.Hefillsthevacancycreatedbytheretirement ofDr.EugeneFarley,chancellor ofWilkesCollege.J3r. FarleyhadservedPPBLwithdistinction for10years.Mr.Alexander servedasforeignaffairsofficerwiththeNationalSecurityCouncilunderPresident Kennedyin1963andasaWhiteHousecounseloncivilrightsunderPresi-dentJohnson.HewaschairmanoftheU.S.EqualEmploy-mentOpportunity Commission from1967to1969.HeisactivewiththeLegalDefenseFundoftheNAACPandwasrecentlynamedsecretary oftheNationalUrbanCoalition. Mr.Alexander isnostrangertoPPBLhavingpreviously beenretainedasaconsultant intheimplementation ofanaffirmative actionprogramtohelpassureequalemploy-mentopportunities throughout theCompany.Effective Dec.1,S.FredDiffenderfer retiredasvicepresident reporting tothepresident onspecialassign-ments.Mr.Diffenderfer hadservedtheCompanymostad-mirablyfor42years.OnJuly1,1972LeonL.Nonemaker wasappointed vicepresident ofthenewConsumer8Community AffairsDe-partment. Hewasformerlyvicepresident-Marketing. Withintheneworganization whichMr.Nonemaker heads,therehasbeenestablished ateamofconsultants whoad-viseandworkwithcustomers inadoptingenergycon-servation techniques. Smallerthantheformermarketing andsalesorganization, theConsumer8Community AffairsDepartment isstaffedbysome125consultants whoofferadviceonwiseenergyuse.Theteamconsistsofconsult-antstoservicesome100,000commercial andindustrial customers. Andthereareresidential, consumereducation andagricultural consultants whoworkamong750,000residential andfarmcustomers. THEENERGYCRISISTherehasbeenagreatdealoftalklatelyaboutanenergycrisisintheUnitedStates.Andforgoodreason.Withsuppliesofneeded,fuelsinshortsupplyorsubjecttolimitedusebecauseofenvironmental reasons;thereisconcernthattheenergydemandsofthenearfuture-betweennowand1985-maynotbemet.Thechartbelowshowshowthedemandforvariousfuelswillrisebythattime.inmanypartsofthemidwestthispastwinter.Denver,Colo.schoolchildrencanattesttothefact.Theirschedules hadtobeshortened be-causeofshortages offuelneededtoheatandlighttheirschoolrooms. IndustryinWisconsin hadtocurtailoperations. Andinmanyotherpartsofthecountry-Pennsylvania included-naturalgasusersweretoldthattheirfuelwasscarce.Indeed,manygascompanies wereorderednottotakeonnewcustomers becauseoftheproblems. 681970GASIMPORTSOOM.NAT.GASNYOROOILIMPORTS00MESTICOIL1985U.S.ENERGYDEMAND5DISTRIBUTION (Quadrillion BTU's)125NUCLEARCOALWHYPP&LISCONCERNED PP&Lisconcerned abouttheproblemfortworeasons.One,weareauserofkeyfuels.Tooperateourgenerating

stations, weuseabout7milliontonsof-coalayear.Wearepresently buildingtwooil-fired generating unitsatourMartinsCreeksiteneartheDelawareRiverwhichwillrequire15millionbarrelsofoileachyear.Thesecondreasonweareconcerned abouttheenergycrisisflowsnaturally fromthefirst.Itisthatweareanenergysupplierinadditiontobeingauser.Itstandstoreasonthatifouruseoffuelstogenerateelectricity iscurtailed becauseofshortsupplies, ourabilitytosupplyelectricenergywillbeseverelyhampered.

Andafterall,supplying electricity isourNo.1job.Whataretheconsequences ofnothavingenoughenergy?Schoolsmayhavetoclose,orattheveryleastoperateonamuchshorterschedule. Factories willnotbeabletooperateatfullcapacity. Asaresult,workersmaybelaidoff.Theuseofelectricdevicesinthehome-re-frigerators, ranges,-teievisions -mayhavetobecurtailed. These'are veryrealpossibilities ifenergysuppliesareallowedtorunshort.Thesignsthatthe'United Statesisalreadyinthemidstofadeveloping energycrunchareap-parent.Severeshortages offueloilwereevidentSHORTAGEOFKEYFUELSThebasicproblemconcernsshortages offossilfuels-naturalgas,oilandcoal.Let'stakealookatthemoneatatime.-Theforecasted demandfornaturalgasismuchgreaterthanthesupply,whichhasleveledoffandisdeclining. Thisshortageismostunfortunate becausenaturalgasisverycleanburningandassuch,ispreferred forenvironmental reasons.Oilshortages represent anevengreaterprob-lem.Thisissobecauseoftheextensive usemade inAmericaofoil-baseproducts, mostnotablygasolineforautomobiles. Inaddition, thereisanextensive homeheatingmarketforoil.Also,oilhasbeenrecentlysoughtoutasalow-sulfur fuelforgenerating electricity inordertocomplywithenvironmental requirements. Evenattoday'slevelofuse,theUnitedStatesmustimportabout20percentofitsoilneeds.Basedontheanticipated demands,theUnitedStatesmayhavetobeimporting over50percentofouroilsupplyby1985.Considering thefactthatmuchofthisoilmustcomefromsources'ofquestionable friendship totheU.S.,therearesubstantial nationalsecurity, aswellasbalance-of-payments

problems, inrelyingonforeignoilimports.Forthesereasons,thereisgreatem-phasistodayoncompleting theAlaskaoilpipe-lineandgettingonwiththejobofexploring thecontinental shelfaswellasotherdomesticloca-tionsfornewoilsources.Theproblemisthatthesestepsinvolveenvironmental problems.

Un-tiltheseareironedout,domesticoilwillbeinshortsupply.Coalpresentsaperplexing problem.Everyoneacknowledges thattherearehugecoaldepositsavailable inthecontinental U.S.Therearesev-eralproblemswithit,however.Muchofthecoaldoesnotmeettheenvironmental standards forsulfurcontent.Therearesubstantial effortsunderwaytodesulfurize coalbuttheseresearcheffortshavenotyetproducedananswer.Anotherprob-lemisthatifAmericaistosubstanially relyoncoalasafuel,wewillhavetofindagreatmanymorecoalminersthanarepresently available. Thiswillnotbeaneasytaskbecausepeoplearenoteasilyattracted tothisverydifficult occu-pation.Andfinally,muchofthecoalavailable mustbestrip-mined. This,ofcourse,represents theultimateenvironmental degradation tomanypeople.Indeed,theU.S.HouseofRepresenta-tivespressedinitslastsessionforabanonthepractice. Sofortheseseveralreasons,amongothers,thevastsuppliesofcoalknowntoexistdonotnecessarily solvethefuelshortage. EFFECTSONELECTRICSUPPLYShortages ofthesekeyfuelscanaffectelectricsuppliesintwoways.One,asmentioned earlier,isduetothefactthatweuselargequantities ofthesefuelstogenerateelectricity. Thus,anyshortagecouldadversely affectourabilitytosupplyservice.Secondly, gasandoilshortages inparticular, couldcausepeopletoswitchtoelec-tricityfortheirpower.Indeed,itisthispotential foralargeswitchtoelectricity thatcouldsub-stantially boosttheneedforourservice.Forthesereasons,wearepresently investigating allavailable alternatives forgenerating electricity. Uranium-nuclearfuel-isthemostobviousalternative. Therearesuppliesofuraniumavail-abletofuelAmerica's powerneedsthroughtheendofthiscentury,utilizing presenttechnology. Weconsidernuclearpoweralogicaladditiontoabalancedpowersupplysystem.We'eex-plainedmanytimestheextraordinary design,construction andoperating procedures devel-opedbytheAtomicEnergyCommission (AEC)fortheseplants.Wepointtotheunmatched safetyrecordofthenuclearpowerindustryandthestringent protection affordedthegeneralpublicintheareaoftheplant.But,somepeo-pledonotagreewithus.Thus,adisputecon-tinuesandwhileitdoes,neededpowerplantsaredelayedandthepressureonthefossilfuelscontinues. Therearepowersourcesotherthanconven-tionalnucleardevelopment. Hopefulprojectslikethenuclearbreederreactor,fusion,magnetohy-drodynamics (MHD)andsolarenergy.Butrealis-tically,thesedevelopments aremanyyearsfromcommercial use.Thus,theproblemofmeeting12 America's powerneedsforatleastthenextde-cadeandahalffallstothebeleagured fossilfuelsandtonuclearpower.ABALANCEDPOLICYISNEEDEDAreasonable balancebetweentheneedformoreenergyandtheneedforacleanerenvironment wouldhelpthesituation. Certainly, wesupporttheneedforacleanerenvironment. Butthefactsarethattherecent,andlaudable, enthu-siasminenvironmental mattershasposedarateofchangeforouroperations thatisverydifficult tocopewith.Allwesuggestisthatwepauseatleastlongenoughtoask,"Howquicklyoughtenviron-mentalrulesbetightened -withoutalsocon-sideringtheimpactintermsofeconomicandsocialsideeffects?" "Whatistheeffect,forexample,ofimposingenvironmental regulations callingforcostlyequipment ofquestionable effectiveness?" Wethinkthattheseareques-tionswhichoughttobeanswered. Wethinkthattheyarereasonable questions andwedonotfeelthattheyareinconsistent withenviron-mentalquality.We,asaCompany,willcontinuetoworkforenvironmental improvement. Allweaskisthatnowthattheimportance ofenvironmental qualityhasbeendetermined tobeaprimarypartofeachandeverydecisionwemakeasaCompany,thattherebeatotalanalysisoftheeffects-onpeo-ple,onjobs,oncoststotheconsumer-ofsuchenvironmental impact.ENERGYCONSERVATION Inviewoftheshortageofkeyfuelsandthepo-tentialeffectonelectrical suppliesifhomesandbusinesses switchtoelectricity asaresult,itisineveryone's bestinteresttoworkhardatcon-servingenergy.WeatPP8Laredoingourpart.Asmentioned intheAnnI2alReport,theCompanyisbuildingthegenerating capacityneededforthefuture,asshowninthischart.However,buildingisjustpartoftheequation. 10,000WHEREWILLPPSLELECTRICITY COMEFROM?MEGAWATTS 80008000SUSO.ISUSQ2J..4000WINTEROEMANOMARTINSCREEK4MARTINSCREEK3MONTOUR22000AVARABEEVRNTERCAPACRV(leeeeled leeeIIRIReeene)70717273747578777878808182Theotherpartistoencourage wherepossiblethewiseuseofourenergyresources. Inkeepingwiththisthrust,theCompanyundertook in1972averysignificant shiftinitsmarketing policy.Employees formerlyinvolvedinmarketing elec-tricityarenowinvolvedinconsulting withenergyusersonthewisestandmosteconomical usesforelectricity. Residential consultants, forin-stance,areworkingwithbuildersanddevelopers toencourage theuseofenergyconservation techniques inhomeconstruction. Industrial rep-resentatives aremakingplantsurveystoattempttodiscoverpotential forenergyconservation inindustrial buildings andprocesses. PP8Lpeoplearegivingchartbriefings ontheenergycrisissituation tovariouscitizens'roups andtoindi-vidualcustomers. 13 TheCompanyhasalsoinitiated advertising, shownbelow,whichisorientedtowardthewaysacustomermayconserveenergy.AHomecology ,l.zlIIr,. That'MoueJJYou'eWasttnt:!...[ItlaCoerorcollsopvsuoh PgWo'roanxioustohearwhatyouthink5'VXIhhh~~isNwlHIcttl~~IWLMT%lilt'~)e~l~I='icKJQ'.".'..:>ACII~'IiProgramhasbeendeveloped forhomeeconomics teachersinourserviceareaforuseinclassrooms toencourage conservation inthehome.TheCompanyhasalsoenteredintoacontractwiththeFranklinInstitute inPhiladelphia forthedesignandconstruction ofanenergyconserva-tion-oriented singlefamilydwelling. Thisdwellingwillcontainexperimental equipment andsystemswhichwilldemonstrate waysofreducingenergyuse.TheCompanyhopestousethishomeasaspringboard foreffortstospreadmorebroadlythemessageofwiseenergyusethroughout ourserviceterritory. THEBASICPROBLEMISTIMEAfinal,overalllookattheenergycrisissituation suggeststhatPPBL,andotherenergycompa-nies,cancontinuetomeetthenation'senergyneeds.Meetthemwithoutdelayingpeople'sas-pirations forabetterlife.Withoutrefusingtoservenewcustomers. Andinthecaseofelectricservice,withoutrationing, andwithouthavingselectedblackouts. Buttimeisneeded.Timetostraighten outthefuelshortageprob-lem.Timetosearchfor,discoverandmakeavail-ablethevastfuelsuppliesknowntoexist.Timeisneededtocometogripswithexistinganddeveloping environmental standards. Thismeansnewtechnologies, newprocesses andnewequipment, muchofitasyetunavailable. Andfinally,wemustbeallowedtobuildwith-outmoredelaythefacilities whichwillserveourcustomers intheyearsjustahead. STATISTICAL SUMMARYCAPITALINVESTMENT CAPITALPROVIDEDBYINVESTORS -thousands Long-term debt................ Preferred andpreference stock..Commonequity................ Short-term debt1972$635,044231,375412,1301,278,549 96,4821971576,760196,375351,2991,124,434 76,2511970514,371156,375303,117973,86397,8781969474,18286,375268,233828,79098,5001968394,26886,375234,957715,60093,950Totalcapitalprovided$1,375,031 1,200,685 I,071,741 927,290809,550RETURNONCAPITALPROVIDEDBYINVESTORS -asapercentage ofaveragecapitalprovided...... NUMBEROFSHAREOWNERS-preferred, preference andcommon7.56135,3997.34123,5986.83111,9097.1398,4506.9894,671UTILITYPLANT-thousands TOTALUTILITYPLANT.......... ACCUMULATED DEPRECIATION ..$1,637,040 275,6271,458,707 1,275,866 274,911249,5511,120,022 1,010,048 225,205220,117UTILITYPLANTLESSDEPRECIATION $1,361,413 1,183,796 1,026,315 894,817789,931ANNUALDEPRECIATION -asapercentage ofaveragedepreciable plant............ OPERATIONS 3.33.23.2.3.23.2ELECTRICCUSTOMERS .....ENERGYSALES-millionsofkilowatthoursResidential -electrically heatedhomes.......... Residential -other........Commercial Industrial .Other2,0423,9433,9336,4586371,7213,7583,5336,0536201,4593,6343,1985,8075851,1473,4262,8405;5665528483,2402,5504,916527863,344843,080828,643818,500805,523AVERAGEANNUALKWHUSE-residential customers..... 17,0138,03215,6857,51014,6837,08613,5316,45812,0815,871AVERAGEPRICEOFELECTRICITY -centsperkilowatthour........ POWERCAPABILITY -kilowatts ...PEAKDEMAND-kilowatts EMPLOYEES 1.994,108,000 3,598,000',790 1.873,496,000 3,294,000 e6,5141.701.611.663,256,000 3,124,000 2,465,000 3)238,000't 2,850)000't 2,5141000',372 6,2386,225'Winterpeakshownwasreachedearlytnsubsequent year.1peaksarethosewhichwoutdhaveoccurre'd iftoadcurtaitmont moasureshadnotbeeninoffoct.16AmoredetailodreviewoltheCompany's operations isavailable. Apostalcaidisprovidedwiththisreporttoaidyouinmakingthisrequest. FINANCIAL SECTION STATEMENT OFINCOME19721971197019691968Thousands ofDollarsOPERATING REVENUES(99%electric) ................. OPERATING EXPENSES(Note3)Wagesandemployeebenefits...FuelPowerpurchases .............. Interchange powersales........Otheroperating costs........... Depreciation .Federalincometaxes(Note6)...Stateincometaxes(Note6).....,DeferredincometaxesProvision Deferredinprioryears-creditInvestment taxcreditsDeferredAmortization ofdeferments-creditTaxes,otherthanincome....... OPERATING INCOME............ OTHERINCOMEANDDEDUCTIONS Allowance forfundsusedduringconstruction .......... Other-net$345,79255,22095,22013,514(34,569)39,51241,44612,5825,5203,624(795)7,349(2,194)25,658262,08783,70514,64729300,70748,19879,49918,963(15,468)33,21434,9039,416.3,256551(795)1,597(2,480)22,146233,00067,70716,242113255,31345,77961,62121,982(9,356)24,009321733,6991,287(795)1,573(2,539)18,197197,63057,6839,723192223,388205,94741,94644,60117,453(8,865)21,86528,98111,1133,28740,73134,81314,846(3,651)19,53526,27216,4102,430(795)3,339(2,540)8,167168,55254,836(795)1,955(2,005)7,293157,83448,1136,3695,868197~8)INCOMEBEFOREINTERESTCHARGESINTERESTCHARGESInterestonlong-term debt...Interestonshort-term debt..Otherinterestcharges...... 14,67698,38136,5073,84610716,35584,06230,8954,1094869,91567,59825,3817,194886,56661,40220,8135,935455,86053,97316,5273,58046NETINCOMEDividends onpreferred andpreference stock......... EARNINGSAPPLICABLE TOCOMMONSTOCK.......... COMMONSTOCKAveragenumberofsharesoutstanding ............... Earningspershare,basedonaveragenumberofsharesoutstanding ............... Dividends pershare......;... 40,46057,92135,49048,57232,66334,93526,793-20,15333,82034,60914,52611,3926,4263,8223,822$43,39537,18028,50930,78729,998$2.48$1.642.371.601.971.602.321.602.301.5617,512,793 15,690,490 14,472,076 13,277,365 13,044,538 Seeaccompanying NotestoFinancial Statements, 17 BALANCESHEETASSETSDecember3119721971Thousands ofDollarsUTILITYPLANT-atoriginalcostElectricSteamheatConstruction workinprogress....Lessaccumulated depreciation $1,386,223 8,110242,7071,637,040 275,6271,361,413 $1,189,818 5,661263,2281,458,707 274,9111,183,796 INVESTMENTS -atcostorlessSubsidiaries SafeHarborWaterPowerCorporation (t/sinterest) ..Nonutility

property, lessaccumulated depreciation

..Other.3,1293,3152,5525,54014,5364,0463,3152,6554,54414,560CURRENTASSETSCashAccountsreceivable, lessreserveCustomers OtherMaterials andsupplies(ataveragecost)Fuel.Operating andconstruction Other13,72923,5103,33031,60112,8479,48894,50514,19718,7552,82428,10310,2656,12480,268DEFERREDDEBITSExtraordinary powercostsOther1,6652,9854,650$1,475,104 1,8852,4594344$1,282,968 18Seeaccompanying NotestoFinancial Statements. LIABILITIES December3119721971Thousands ofDollarsSHAREOWNERS INVESTMENT Preferred stock'reference stock4..........-. Commonstock'apital stockexpense(deduction) .(Noamortization planlnellect)Earningsreinvested inbusiness(Notes4and5).116,375115,000278,484(6,592)140,238643,5053116,37580,000231,544(5,892)125,647547,674LONG-TERM DEBT4(Note2)635,044576,760CURRENTLIABILITIES Bankloans.Commercial papernotesAccountspayabieTaxesaccruedDividends payableandinterestaccruedOther30,00066,48227,1939,96323,0036,471163,11217,00059,25122,87611,73918,7725,631135,269DEFERREDANDOTHERCREDITSAccumulated deferredinvestment taxcredits.Accumulated deferredincometaxes.Contributions inaidofcoristruction Other9,77912,0355,8595,77033,443$1,475,104 4,6249,2064,0565,37923,265$1,282,968 'SeeScheduleofCapitalStockandLong-Term Debtonpage20.Seeaccompanying NotestoFlnanctat Statements. 19 SCHEDULEOFCAPITALSTOCKANDLONG-TERM DEBTDecember31,1972Thousands ofDollars$53,0194,17822,8786,30022,2377,763$116,375PREFERENCE STOCK-nopar,cumulative, authorized 2,000,000 shares$8.00series,outstanding 350,000shares.$8.40series,outstanding 400,000shares.$8.70series,outstanding 400,000shares..F~$35,00040,00040,000$115,000CAPITALSTOCKPREFERRED STOCK-$100par,cumulative 4'/2%authorized 629,936shares,outstanding 530,189shares.......... Series,authorized 2,000,000 shares3.35%,outstanding 41,783shares....4.40%,outstanding 228,773shares...4.60%,outstanding 63,000shares....8.60%,outstanding 222,370shares...9%,outstanding 77,630shares....... LONG-TERM DEBTFIRSTMORTGAGEBONDS3%seriesdue1975.2r/a%seriesdue1976................ 2%%seriesdue1977.....,..... ,...3t/a%seriesdue19782s/4%seriesdue1980................ 3a/a%seriesdue19823t/a%seriesdue1983..............., 3'/a%seriesdue1985................ 4a/a%seriesdue1991................ 4a/a%seriesdue1994.......'......... 5a/a%seriesdue1996................ 6a/a%seriesdue1997................ 7%seriesdue19998'/a%seriesdue1999................ 9%seriesdue20007t/4%seriesdue2001................ 7a/a%seriesdue2002................ /$93,0008,00020,0003,00037,0007,50025,00025,00030,00030,00030,00030,00040,00040,00050,00060,00075,000603,500COMMONSTOCK-nopar,authorized 30,000,000 shares,outstanding 19,051,255 shares$278,484NOTES6t/a%maturingin1973-toberefinanced 6t/4-8t/4%maturingin1974and1976..OTHER.10,0002'i,35031,350194$635,044.SECURITIES SOLDIN1971AND1972issued1971FebruaryMarch-June JulyNovemberSecurityFirstMortgageBonds,7't/4%Seriesdue2001...Notes,6i/4-7t/to% maturingin1974and1976....Preference Stock,$8.70Series.CommonStock.Shares400,0001,600,000 Amount$60,00010,45040,00037,120$147,5701972FebruaryFebruary-MarchJulyOctoberFirstMortgageBonds,7a/a%Seriesdue2002Notes,6i/4-6i/2% maturingin1974and1976Preference Stock,$8.00Series.CommonStock.350,0002,000,000 $75,0008,30035,00046,940$165,240Sooaccompanying NotestoFinancial Statements. 20 SOURCESOFFUNDSUSEDFORNEWCONSTRUCTION 1972197119701969Thousands ofDollars1968OPERATIONS Netincome(a).Lesscashdividends Currentearningsreinvested inbusiness..Depreciation .Deferredextraordinary powercosts........ Deferredincometaxesandinvestment taxcredits-net357,92143,33014,59141,4462207,98464,24148,57236,74611,82634,903220J1,127)45,82234,93529.4565,47932,173(2,105)~1.762)33,78534,60925,0979,51228,981338,49633,82024,1739,64726,272~846)35,073OUTSIDEFINANCING Salesofsecurities Commonstock.Preferred stockPreference stockFirstmortgagebondsLong-term notesOtherlong-term debtSecurities retiredFirstmortgagebondsLong-term notes.Otherlong-term debtShort-term debt-netincrease(decrease) .35,00075,0008,3004240,00060,00010,45056('i5,000) (10,000)(57)20,231160,456(8,000)(117)~21,627117,88246,94037,12028,09330,00040,00050,0002,60087(7,763)(1,000)(236)~4,122)137,65924,05080,00054(3,500)(140)8,050108,514(2,500)(238)63,10060,362OTHERSOURCESAND(USES)Investments Refundofprioryears.Federalincometaxes-netWorkingcapital-netchange(excluding short-termdebt)Miscellaneous -net24(253)4,5301,4721,1162,956(6,624)(b) 23,896(b) (14,824)(13,652)1,2356575,0521,036203174~5,94326,695(6,302)~11,9772,525TOTALFUNDSUSEDFORNEWCONSTRUCTION (a).$218,754192,399165,142135,03397,960(a)Includesallowance forfundsusedduringconstruction. (b)ThonotchangesInworkingcapitalresultedprincipally fromthofollowing: 1972,Increases Inaccountsreceivablo andfuolInventory; 1971,decreases inspecialdepositsandaccountsreceivable. Seeaccompanying NotestoFinancial Statements. 21 STATEMENT OFEARNINGSREINVESTED INBUSINESS19721971BALANCE,JANUARY1NETINCOME.Thousands ofDollars$125,647$113,82157,82148,572183,558162,393DIVIDENDS Preferred andpreference stock.Commonstock(pershare-1972,$1.64;1971,$1.60)BALANCE,DECEMBER31,(Notes4and5)14,52628,80443,330$140,23811,39225,35436,746$125,647NOTESTOFINANCIAL STATEMENTS December31,1972and19711.SUMMARYOFACCOUNTING POLICIESAccounting SystemAccounting recordsaremaintained inconformity withtheuniformsystemofaccountsprescribed bytheFederalPowerCommission andadoptedbythePennsylvania PublicUtilityCommission. UtilityPlantCostofadditions toutilityplantandreplacements ofunitsofpropertyarecapitalized. Costsofde-preciable propertyretiredorreplacedareelimi-natedfromutilityplantaccountsandsuchcosts,plusremovalcost,lesssalvage,arechargedtoaccumulated depreciation. Costsoflandretiredorsoldareeliminated fromutilityplantaccountsandanygainsorlossesarereflected ontheStatement ofIncomeduringthecurrentyear.Allexpenditures formaintenance andrepairsofpropertyandthecostofreplacement ofitemsdetermined tobelessthanunitsofpropertyarechargedtooperating expenses. Allowance forFundsusedDuringConstruction Asprovidedintheuniformsystemofaccounts, thenetcostoffunds(interest onborrowedmoneyandareasonable rateonothercapital)usedtofinanceconstruction workinprogressiscapital-ized.Anamountequaltotheamountsocapital-izedisshownontheStatement ofIncomeasanitemofOtherIncomeandservestooffsettheactualnetcostoffinancing construction workinprogress. Depreciation Forfinancial statement

purposes, depreciation iscomputedusingthestraight-line methodap-pliedonagroupplantoaccumulate anamountequaltothecostofutilityplant,lessnetsalvage,overtheestimated usefullivesofproperty.

Subsidiaries ThecostoftheCompany's investment insubsidi-ariesandotheraffiliated companies isshownunderInvestments ontheBalanceSheet.Interestanddividends receivedontheseinvestments arereflected asOtherIncomeontheStatement ofIncome.Theassets,revenues, andearningsofsubsidiaries arenotsignificant inrelationtothoseoftheCompany.IncomeTaxesProvisions forcurrenttaxespayablearesetforthseparately intheStatement ofIncome.Taxre-ductionsarisingfromtheuseofthedeclining balancedepreciation method,guideline livesandcertainincomeandexpensesbeingtreateddif-ferentlyfortaxcomputation thanforbookpur-posesareaccounted forundertheflow-through method.Thesereductions inincometaxprovi-sionsaretakenintoaccountinratedetermina-tionsbyregulatory authorities andcurrently resultinlowerratesforcustomers thanwouldother-wisebepossible. Deferredtaxaccounting isfollowedinconnec-tionwiththeadditional incometaxreductions relatedtoaccelerated amortization ofcertified 22 defensefacilities andpollution controlequip-ment,useoftheclasslifedepreciation systemand,beginning in1972,deduction ofcostsofremovingretireddepreciable property. Investment taxcreditsaredeferred. Deferredamountspertaining totheJobDevelopment In-vestmentCredit(RevenueActof1971)arebeingamortized overtheaveragelivesoftherelatedpropertywhileamountspertaining tothecreditspermitted underpriorlawsarebeingamortized over5-yearperiods.Retirement PlanTheCompanyhasaRetirement Plancoveringsubstantially allemployees. Contributions aremadebybothemployees andtheCompany,butthefullcostofpastserviceandPlanimprove-mentsisbornebytheCompany.Pensioncostsarefundedcurrently andincludeamortization ofpastservicecostsoverperiodsofnotmorethan20years.ResearchandDevelopment Researchanddevelopment costsarechargedtoexpenseasincurredexceptforcostsre-latedtospecificconstruction projectswhicharecapitalized. 2.SALEOFFIRSTMORTGAGEBONDSOnJanuary8,1973theCompanysold$80millionofFirstMortgageBonds,due2003.Theproceedswereusedforgeneralcorporate purposesin-cludingtheretirement ofaportionofshort-term debtincurred(a)toprovideinterimfinancing forconstruction expenditures and(b)torepay$25millionoflong-term debtwhichmaturedDecem-ber1,1972.3.STORMDAMAGEDuringJune1972severefloodingcausedbyTropicalStormAgnesoccurredintheCompany's servicearea.Effectsofthefloodincreased oper-atingexpensesbyapproximately $1.6million(10centspershare)aftergivingeffecttoinsur-ancerecoveries, casualtyreservesandrelatedtaxreductions. 4.DIVIDENDRESTRICTIONS TheCompany's charterandmortgageindentures restrictthepaymentofcashdividends onCom-monStockundercertainconditions. Underthecharterprovisions, whicharepresently themorelimiting, norestrictions areeffective onthepay-mentofsuchdividends outofcurrentearnings. Theamountofearningsreinvested inbusiness.freeofrestrictions underthecharteratDecem-ber31,1972,aftergivingeffecttothesaleof$80millionofFirstMortgageBondsinJanuary1973,was$103.3million5.PROPERTIES SUBJECTTOFEDERALLICENSESTheCompanyoperatestwohydroelectric proj-ectsunderlicensesissuedbytheFederalPowerCommission (FPC).CertainreservesrequiredtobeprovidedundertheFederalPowerActhavenotbeenrecordedpendingapprovaloftheamountsthereofbytheFPC.TheCompanyestimates thatsuchreservesapplicable totheyearsfrom1946wouldnotexceed$2.3millionatDecember31,1972.6.INCOMETAXESTheexcessoftotaltaxdepreciation overbookdepreciation resultedinlowerprovisions forcur-renttaxespayableof$7.7millionin1972and$7.0millionin1971.7.RETIREMENT PLANTheRetirement PlanwasamendedJuly1,1971andApril1,1972toprovideforincreased bene-fitsandasofJuly1,1971certainofthePlan'sactuarial assumptions werechanged.AtJune30,1972,including thesechanges,theactuarially computedunfundedpastservicecostwasabout$15millionandvestedbenefitsexceededtheas-setsofthefundbyabout$10million.Pensioncostswere$6.7millionin1972and$4.9millionin1971,including ineachperiodfundingofthe,pastservicecost.8.COMMITMENTS ANDCONTINGENT LIABILITIES TheCompany's construction programisesti-matedtorequireexpenditures ofabout$225mil-lionfortheyear1973.Inconnection withproviding foritsfuturebi-tuminouscoalsupply,theCompanyplanstoguarantee thecapitalobligations ofcertaincoalsuppliers (including fourownedorcontrolled coalcompanies) uptoacurrently estimated $90millionoutstanding atanyonetime.Obligations actuallyguaranteed underthesearrangements aggregated $63.0millionatDecember31,1972.Reference ismadetopages6and7ofthisreportforinformation concerning possibleadverseef-fectsofenvironmental regulations ontheCom-pany'soperations. 23 PRINCIPAL OFFICERSBOARDOFDIRECTORS JACKK.BUSBY,President AUSTINGAVIN,Executive VicePresident ROBERTR.FORTUNE,VicePresident, Financial GEORGEF.VANDERSLICE, Comptroller CHESTERR.COLLYER,Treasurer DONALDJ.TREGO,Assistant Treasurer BROOKER.HARTMAN,VicePresident, DivisionOperations CHARLESE.FUQUA,VicePresident, Susquehanna DivisionJACKHANCKEL,VicePresident, Harrisburg DivisionCARLR.MAIO,VicePresident, LehighDivisionJAMESJ.McBREARTY, VicePresident, Northeast DivisionLEONL.NONEMAKER, VicePresident, ConsumerandCommunity A/lairsBRENTSHUNK,VicePresident, Lancaster DivisionEMMETM.MOLLOY,VicePresident, HumanResourceandDevelopment EDWARDM.NAGEL,GeneralCounselandSecretary CLIFFORDL.ALEXANDER, JR.,Washington, D.C.PartnerolArnold8Porter,Counsellors atLawJACKK.BUSBY,Allentown President oltheCompanyRALPHR.CRANMER,Williamsport Presidenl andGeneralManagerolGritPublishing CompanyEDGARL.DESSEN,HazletonPhysician-Radiologist AUSTINGAVIN,Allentown Executive VicePresident oltheCompanyW.DEMINGLEWIS,Bethlehem Presidenl olLehighUniversity JOHNA.NOBLE,ScrantonPresident o/Cia/andSimpsonCompanyNORMANROBERTSON, Pittsburgh SeniorVicePresldenl andChio/Economist olMellonBank,N.A.JOSEPHT.SIMPSON,Harrisburg Chairmano/theBoardotHarscoCorporation M.J.WARNOCK,Lancaster Chairmano/theBoardolArmstrong CorkCompanyCHARLESH.WATTSII,Lewisburg President o/BucknellUniversity S.HAYWARDWILLS,Miami,FloridaChairmanoltheBoardandPresident ofGACCorporation FISCALAGENTSSECURITIES LISTEDONEXCHANGES TRANSFERAGENTSFORPREFERRED, PREFERENCE ANDCOMMONSTOCKIndustrial ValleyBankandTrustCompany634HamlllonStreetAllentown, Pennsylvania -18101IrvingTruslCompanyOnoWallStmotNewYork,NewYork-10015Pennsylvania Power6LightCompany901HamlllonStreelAllentown, Ponnsylvanla -18101REGISTRARS FORPREFERRED, PREFERENCE ANDCOMMONSTOCKThoFirslNationalBankelAllentown Seventh6HamiltonStreetsAllentown, Ponnsylvanla -18101MorganGuarantyTruslCompanyolNewYork23WallStreetNowYork,NewYork-10015DIVIDENDDISBURSING OFFICEFORPREFERRED, PREFERENCE ANDCOMMONST'OCKTreasurer Pennsylvania Power6LightCompany901HamiltonSlreelAllentown, Pennsylvania -18101NEWYORKSTOCKEXCHANGEFirstMortgageBonds,3%Seriesdue19754Y~%Preferred Stock(Code: PPLPRB)4.40%SeriesPreferred Stock(Code:PPLPRA)8.60%SeriesPreferred Stock(Codo:PPLPRG)Prelerenco Stock,$8.00Sorfes(CederPPLPRJ)Pmlerence Stock,$8.40Ser!os(Code:PPLPRH)Preterence Stock,$8.70Series(Code:PPLPRI)CommonStock(Code:PPL)PBWSTOCKEXCHANGE4'%referred Stock3.35%SoriosProlerred Stock4.40%SeriesPmlerredStock4.60%SoriesPreferred Stock8.60%SeriesPrelermdslack9%SeriesPreferred StockPreference Stock,$8.00SeriesPreference Stock,$8.40SeriesPreference Stock,$8.70Set/osCommonStock ACCOUNTANT'S OPINIONHASKINS&SELLSCorlitiod PubtlcAccountants TwoBroedweyNowYork10004TotheShareowners andBoardofDirectors ofPennsylvania Power&LfghtCompany:WehaveexaminedthebalancesheetsofPennsylvania Power&LightCompanyasofDecember31,1972and1971,therelatedstatements ofIncome,earningsrelnvested inbusinessandsourcesoffundsusedfornewconstruction fortheyearsthenendedandthescheduleofcapitalstockandlong-term debtasofDecember31,1972.Ourexamina-tionwasmadeInaccordance withgenerally acceptedaudit-ingstandards, andaccordingly includedsuchtestsoftheaccounting recordsandsuchotherauditingprocedures asweconsidered necessary Inthecircumstances. Inouropinion,suchfinancial statements andschedulepresentfairlythefinancial positionoftheCompanyatDe-cember31,1972and1971andtheresultsofitsoperations andsourcesoffundsusedfornewconstruction fortheyearsthenended,inconformity withgenerally acceptedaccounting principles appliedonaconsistent basis.HASKINS&SELLSFebruary5,1973InlateSeptember 1972,theCompany's BoardofDirectors visitedthenuclearfacilities ofGeneralElectricCo.inCalifornia. Purposeofthetripwasadetailedfamiliarization withthesafety,environmental andoperating patternsofanuclear-fueled generating station. hPENNSYLVANIA POWER8LIGHTCOMPANY901HamiltonStreetAllentown, Pa.18101Telephone: AreaCode215821-5151BULKRATEU.S.POSTAGEPAIDAllentown, Pa.PermitNo.104reulnooNeroYcrrorArrk Pennsylvania Power8LightCompanyAnnualReport3974Wa HIGHLIGHTS 1974197318,865384,81451,0662.641.68EnergySales-millionsofkwh........18,963Revenues-thousands ............... $472,036EarningsApplicable toCommonStock-thousands (a).$63,661EarningsPerShare-basedonaveragenumberofsharesoutstanding (a)........... $2.88,Dividends PerShare................. $1.77ReportedMarketPriceperShareofCommonStockHigh$2326Low$1319NetUtilityPlant-thousands .......... $1,744,901 1,534,154 (a)Reflectsretroactive applfcatlon cfchangeInaccounting forfuelcosts.197217,013345,792197115,685300,707197014,683255,31343,16138,48830,2522.461.642.451.602.091.602726'/427'le227421Vs20'ls1,361,413 1,183,796 1,026,315 Pennsylvania Power&LightCompanyisanelectricutilityproviding servicetomorethan900,000homesandbusi-nessesovera10,000-square-mile areaIn29countiesofcentraleasternPennsylvania. Principal citiesInthePP8LserviceareaareAllentown, Bethlehem, Harrisburg,

Hazleton, Lancaster,

Scranton, Wllliamsport andWilkes-Barre.

ContentsTheYearinReviewManagement AnalysisFinancials NotestoFinancial Statements StockPricesDirectors andPrincipal Officers3-910-1112-1818-222324CoverPhotos:Manypeoplewithmanydifferent skillsareneededtokeepautilitylikePP&Lrunningefficiently. Fromtop:workmenlowerturbinerotorbladesintoUnitThreeatMartinsCreekplant;answering oneofthemorethan891,000customercallstotheCompanyin1974;transmission construction workerslaborhighupona500,000-volt towerwhichwillbecomeanintegralpartoftheCompany's 3,000-mile transmission system;naturalist-directoroftheMontourPreserveneartheCompany's Montourgenerating stationconductsanaturestudyprogramforareaschoolchildren. ToOurShareowners: toprovideymw'heelectricserv:"youwant.Becausethereisnothingmoreimportant thisyear,inouropinion,thanestablishing aneffective nationalenergyprogram,thisletterfocusesonlyonthissubject.ThetextofthereportreviewsourPPBLyearwhich,allthingsconsidered, wentwell-in-cludingthefactthatPP&Lcontinues tohaveamplesuppliesofelectricpowertomeetallcustomerneeds.Fromanoverallenergystandpoint, 1974wasatoughyear.Itbeganandendedwithoutanyrealdetermination ofanationalenergyprogram.Theoilembargo,thecoalstrike,andthedrasticcurtail-mentsofnaturalgassupplywereallforciblere-mindersofthedifficulties thatcanaffectourthreebasicfossilfuels.Continuing highinflation, plushugeincreases incostsofoilandcoal,understandably precipitated consumerangerandprotest.Thenaturalresponseofconsumers hasbeentopressuregovernment torequirethatutilities holdthelineonprices.Inmanycases,actionwastakentopostpone, minimizeordenyrateincreases. Investors inutilitysecurities becameconcerned. Wouldadequateearningsbeallowed'7 Wouldthequalityratingofdebtsecurities bedown-graded' Wouldnecessary rateincreases bewithheld'7 Wouldtheinvestorbecomethevictimofacost/pricesqueeze?Reassuring answerswerefewandfarbetween.Theutilityindustrygenerally sufferedasharpde-clineininvestorconfidence. Somesecuritysaleswerepostponed. Themoneycrunchwason.Add-ingtothefinancial problemwasthelower-than-expectedgrowthinrevenuesbecauseoflowergrowthinelectricusage.Formostutilitycompanies, thenear-term situa-tionleftnochoicebuttomakemajorcutbacksinconstruction, particularly inplannedadditions togenerating capacity. Inthenextseveralyears,thecumulative effectofthesecancellations andde-ferralsofcoalandnuclearpowerplantswillmeanareduction ofapproximately 60millionkilowatts inelectricgenerating capacity. Thereduction iscompatible withthecurrentwis-domthatprojectselectricloadgrowthatratesoffive/sixpercentperyearinsteadofthepastpatternofseven/eight percent.Buttheserevisedloadprojections mayprovetobeinerror,onthelowside,intheeventthatlargethrow-over demandsformoreelectricity arisefromshortages ofotherfuels.Accepting thelowerloadgrowthprojections asreal,thecutbackscouldmeanalostopportunity toreducethenation'sdependency onoilandnaturalgasasfuelsforelectricgeneration. Presently, oilandgasareusedtogenerateabout35percentofthenation'selectricenergy.Thisfigurewouldbereducedtoabout10percentby1985ifadditional coalandnuclearcapacitywereinstalled asorigi-nallyplanned.NowonderLlewellyn King,ofWeeklyEnergyReport,haseditorialized that1974islikelytobelookedbackatastheyearwhenthenationtookthewrongturninenergy.Acriticalfactoristheleadtimesthathavetobedealtwith.Newdeepcoalminestakefiveorsixyearstogetuptofullproduction. Thetimespantodevelopnewoilfields,relatedtransport andre-fineriesisevenlonger.Newpowerplantsandcon-nectingtransmission linesrequireeighttotenyearstobebuilt.Theseleadtimerequirements incombination withnon-starts, delaysandcancellations ofenergysupplyprojectsmean,inourjudgement, thatarealhazardexiststhatthenationcouldreachtheendofitsenergyropebytheearly1980sorbefore. Whatitcomesdowntoisthatthethingsthatcanbedonetoimproveenergysuppliesinthe1980smustbeundertaken now.Nolopsidedviewpoint isintendedorrecom-mended.Commitment toresearchmustbecon-tinuedandexpanded. Andthefocusonenergyconservation mustbeintensified untilconservation becomesanacceptednationalethic.Unfortunately, itisprobablyunrealistic toexpectthattherateofchangeinresearchorconservation, orthetwotogether, canmovefastenoughtopro-tectthenationfromtheenergybindthatcouldmaterialize withinthenextdecade.Thenear-term risksareveryhigh.Recentindus-trialplantshutdowns duetoshortages ofnaturalgasandtheprolonged Britishcoalstrikeof1972havebothprovidedbitterforetastes ofwhathap-penstopeoplewhenbasicenergyisinshortsupply.Byspeakingouttoday,weseektoavertthetragicconsequences ofadeficient electricpowersupplyafewyearshence.Weurgepromptactioninfourbasicareas:~Foroilandnaturalgas-accelerate off-shore development ofnewsupplies. ~Forcoal-moderatesulfurcontentrestrictions forfive/tenyears.Suchactionshould(1)en-couragedevelopment ofnewcoalminesintheeasternandmidwestregionsoftheUnitedStates,(2)lessenthecost/price increaseburdenthathasbeencreatedbytheheight-eneddemandforcoalthatis"low"insulfurcontent,and(3)provideadditional timetode-veloppractical methodsofexcesssulfurre-movalatreasonable cost.~Forsuppliesofelectricity adequatetoprotectthenationalinterest-adoptregulatory poli-ciesandincentives forinvestors thatwillenableutilitycompanies toreactivate construc-tionofthenuclearandcoalpowerplantsthathavebeencancelled anddeferred. ~Forrailtransportation -providethegovern-mentalfundingnecessary torehabilitate andexpandessential railroadfacilities througharailwaytrustfundorothermeans.Thepres-entscenarioof"freightembargonextweek"isintolerable. Formuchofthenation,sever-anceofrailroadserviceterminates suppliesofcoalandotherfuels.Thealmostendlessprocessofdiscussion, de-bates,studiesandre-studies hasbecomethecruxofthenation'senergyproblem.Theresources andtheskillstodothejobareavailable. Whatappearstobelackingisthewilltobreaksomeeggsandmaketheomelet.Toputthematterbluntly,thereseemstobetoomuchconcernthatsomeonewillmakesomeextradollarsasapartofproviding theadditional energysuppliesthatourcountryde-pendsuponforsurvival. Sometimes overlooked isthefactthatreinvestment ofprofitscanbeanim-portantsourceoffundsforfinancing development ofadditional energysupplies. Iftherearewindfallprofits,thetaxcollector cantakecareofthem.Oursocietycancopewithhumanproblemsaris-ingfrominadequate income,including inability topurchasebasicenergyrequirements -ifwehaveenergyavailable. Withoutadequateenergy,oursocietywillnothavetheproductive capability nec-essarytomeethumanneeds.Whatwecannotaffordisanotheryearoflessthanall-outactivitytorebuildandrestructure ournationalenergybase.Thethingtodoistogetonwiththejob.Inthisnationwecanovercometheenergyproblem.Whatittakesisallofusworkingatittogether. InPP&Lwewilldoourbesttodoourpart.Respectfully submitted, March3,1975JackK.Busby,President THEYEARINREVIEWEarningsfor1974were$2.88pershareofcommonstock,up24centsor9.1percentfromthe$2.64earnedin1973.Bothyearsreflectachangein1974inthemethodofaccounting forfuelcostsrecoverable fromcustomers throughtheoperation ofafueladjustment clauseonelectricbills.Ourcurrentmethodofaccounting forfuelcostseliminates theaveragethree-month lagbetweenthetimewerecordedthecostoffuelburnedandthetimewerecordedtherecoveryofthecostthroughcustomerbillings. Withoutthechangeinaccounting, ourearningswouldhavebeen$2.31persharefortheyearcomparedto$2.57for1973.Metropolitan EdisonCo.Thisresultedinanoverallsalesincreaseof.5percentover1973.Whentheseusagefiguresarecomparedtoanaverageoverallgrowthrateofaboutninepercentovertheprevious10yearsitisevidentthattherewasasubstantial cutbackinelectricusebyjustabouteveryclassofcustomer. Withthedownturnintheeconomyandthecontinuing effectiveness ofourcustomers'nergy conservation

measures, thelong-range forecastofelectricusehasbeenreviseddownward.

Butwestillrecognize thepossibility ofpeopleusingmoreelectricenergybecauseofshortages ofnaturalgasandtheuncertainty oftheoilmarket.DividendRaisedTheboardofdirectors onMay22raisedthequarterly dividendrateonPP&Lcommonstockfrom42to45centsashare.Theincreasebringstheannualdividendrateupto$1.80pershare.Thisisthepointwherewewouldhavebeenifearningsproblemshadnotforcedustosuspenddividendincreases in1970and1971afterfollowing apatternofmodestannualincreases offourcentsasharesincetheearly'60s.SmallerGrowthRateTheenergycrisis,energyconservation effortsbyourcustomers andthestateoftheeconomycombinedtoholddowntherateofgrowthinkilowatt-hour usage.Traditionally, weexperienced growthinkilowatt-hour useprincipally becausecustomers usedmorepowerthantheyhadtheyearbefore.1974wasdifferent. Overallresidential usagewentuponly2.7percent,comparedtoanaverageincreaseof9.7percentinrecentyears.Commercial customers used.3percentmoreandindustrial usagewasup4.2percent.Theindustrial figuresincludetheadditiononJuly1oftheSteeltonplantofBethlehem Steeltooursystem.Theplantused366millionkilowatt-hours during1974,about5.1percentoftheindustrial totalfortheyear.Otherenergysalesweredownabout27percent,primarily becauseofreducedcontractual salestoRevenuesUpRevenuesfor1974were$472million,up22.7percentover1973.Mostoftheincreasecamefromrecoveryofrisingcoalcostswhichwerebilledtocustomers throughthefueladjustment clauseexplained laterinthisreport,andfromthe5.7percentrateincreasewhichbecameeffective Jan.10,1974.CoalCostsSkyrocket Thecostoffuelburnedduring1974amountedto$219millioncomparedto$126millionin1973.However,in1974theCompanychangedthemethodofaccounting forfueltoachieveamatchingoffuelexpenseandrelatedcustomerrevenuesbyaccounting periods.Thisaccounting changeresultedinrecording only$192millionasfuelexpensefortheyear1974.Attheendof1974wewerepaying$25atonatthemineforbituminous coalontheopenmarketversus$12atonattheendof1973.WorkStoppageAstrikecalledbytheEmployees Independent Association (EIA)onMay20,1974idledabout5,000unionmembers.TheactionwasthefirstgeneralstrikeintheCompany's history.Itendedwiththeemployees returning toworkonAug.9,1974. ExtraexpensesincurredbytheCompanyasaresultofthestrikecost$2millionaftertaxes.Anewtwo-yearcontracttorunthroughJuly24,1976providesforimprovements infringebenefitsandforwageincreases of8.5percentthefirstyearand8percentthesecondyear.Reductions inemployeecontributions tobenefitplansandotherbenefitimprove-mentsaddanother4.2percentoverthetwoyears.Construction Budgetat$2.1BillionPP&L'sconstruction budgetforthenextfiveyearsisnearly$2.1billion.For1975aloneit's$340million.ThismeanswewillbespendingmoreinthenextfiveyearsthanhasbeeninvestedinourCompanysinceitwasfoundedin1920.Susquehanna ProjectMorethanhalfofthefive-year construction budget,$1.2billion,willbeusedforconstruction oftheCompany's firstnuclearpowerplantnearBerwick.Construction ofthefirstofthetwin1,050,000-kilowatt boilingwaterreactorgenerating units,nowscheduled foroperation in1980,progressed onscheduleandatyear-endwasabouteightpercentcomplete. Unit2construction wasaboutsixpercentcomplete. Longermaterialdeliverytimes,laborshortages, work.stoppages anddesignchangescanallcreatedelaysingettingnuclearplantsontheline.OnewayPP&Lhaschosentosavetimeandexpenseistoadoptthe"big-piece" construction conceptatSusquehanna SteamElectricStation.Thebig-piece construction conceptinvolveson-siteconstruction oflargepartsofthereactorpressurevesselandcontainment liner,simultaneous withfloor-by-floor completion ofthereactorbuilding. Thiscontrasts withlaborious sequential fabrication ofeachsystem,withitsattendant highcosts,delaysandkeyelementspiledupinassemblyareasawaitingtheirturntobeworkedupon.Incomparison withsequential construction, thebig-piece procedure beingusedatSusquehanna promisestosavesubstantial sumsofmoney.9~f'I//l~flIPartofthesteelreactorcontainment linerweighingmorethan200tonswasinchedintoplaceinearlyOctober1974forthefirstoftwin1,050,000-kw nucleargenerating unitsatPP&L'sSusquehanna plantunderconstruction nearBorwick.Placedonabasematofconcretereinforced withabout100tonsofsteelbars,thoquarter-inch steelofthevesselwillreceiveasix-foot-thick mantelofreinforced concreteasshielding forthereactorwithintholiner.Theuniquecranepicturedhasa350-footreachwithaliftingcapacityof280tons-enoughtoliftafully-loaded 747letplane. MartinsCreekProjectMeanwhile, anotherlargegenerating unitisnearingcompletion atourMartinsCreekplantnorthofEaston.Thefirstoftwo800,000-kilowatt crudeorresidualoil-fired unitsisexpectedtocomeonthelineinthespringof1975.Theotherunitisscheduled foroperation earlyin1977.Someofthefactorsinfluencing thedecisionbackin1968and1969tobuildoil-fired unitsatMartinsCreekwere:~Thedesirability ofadiversified fuelmixamongcoal,oilandnuclear.~Thespecialoperating characteristics oftheoilunitswhichwouldallowustopickuploadordropitquicklytomeetfluctuating demandandenableustousetheunitsinplaceofsmaller,expensive-to-operatecombustion turbinegenerators. ~Studiesin1969indicated thatthepriceoflow-sulfur coalwouldrisefasterthanoilandplentyofoilwouldbeavailable. Unfortunately, conditions intheMiddleEasthavechangedallthat.~Strictenvironmental standards thenonthehorizonmadecoalappeartobeanunwisechoicebecauseitmeantburningexpensive low-sulfur coalorinstalling equipment thatwouldremovesulfurgasesandparticulate. Thereliability ofsulfur-dioxide removaltechnology wasnotandstillisn'fullyproven.Ifwehadtomakethedecisiontodayitwouldbedifferent, buttheconditions affecting ourdecisiondidn'changeuntilwewerewellbeyondthepointofturn-aroundinourconstruction. Conversion tocoalisvirtually outofthequestionbecausethecostwouldexceed$400million.Withtheoperation ofthefirstbigoilunitatMartinsCreekabouttobegin,construction ofthe82-milepipelinethatwastohavebeenthedeliverysystemfortheoilhasnotyetbeenstarted.Theproblemisthat,althoughPUCapprovalwasobtainedinFebruary1973,opponents oftheprojecthavechallenged construction ofthepipelineinthecourtsandbeforeadministrative agencies. Seeingthisproblemdeveloping, theCompanyhadtobegina$2.3millionprojectforalternate emergency rail-unloading facilities toinsureoildeliveryuntilthepipelineiscompleted. TheCompanyhasleasedthree50-carunitoiltrainsatanannualcostof$527,000tocarrytheoilfromPhiladelphia toMartinsCreekuntilthepipelinecantakeoverthisoperation. Construction ofthepipelinewilltakeaboutninemonths.Atthispointwejustdon'tknowwhenthatconstruction willbegin.OilisunloadedfromrailroadtankcarsatMarlinsCreekinpreparation forstart-upandtestingofUnit3earlyin1975.Thetemporary emergency unloading facilities weremadenecessary becauseconstruction ofthepipelinewhichwastohavebeentheoildeliverysystemfortheplanthasbeenchal-lengedinthecourtsandbeforeadministrative

agencies, FFA' AtankfarmhasbeenbuiltatMartinsCreekbyInterstate EnergyCo.and1.2millionbarrelsofcrudeoilarestoredforinitialoperation ofthefirstoilunitontheCompany's system.CoalIsStillKingDespitePP8L'sdiversification intooilandnucleargenerating units,coal,atthispoint,isstillourmajorfuel.During1974about96percentoftheCompany's energygeneration camefromcoal.Throughownership orcontroloffiveoperating minesinwest-central Pennsylvania theCompanyisassuredofover100milliontonsofcoalreserves-enoughtoprovideastablesupplyformanyyearstocome.Earlyin1974,PP8Lformedanothercoalcompanywhichacquiredanother114milliontonsofreservesinthePittsburgh coalseaminsouthwestern Pennsylvania.

Additionally, inMarch1974theCompanyagreedtoacquirealltheinterestofManorRealEstateCo.inaportionofthePittsburgh seamadjacenttotheprioracquisition. Thislatestacquisition iscontingent ondrillingtests,scheduled forcompletion inmid-March 1975,toconfirmthatatleast150milliontonsofcoalexist"inplace"intheseam.Basedonpresentminingpracticeandtechnology, theCompanybelievesthatabout50percentofthein-placecoalwouldberecoverable, givingusanother75milliontonsofreserves. Besidesowningorcontrolling thesourceformuchofitscoal,PP8Lalsohasmorethanhalfofthecoalitusesdelivered initsownunittrains.Eachtraininthefleethasatleast105carsandcarriesmorethan10,000tonsofcoaleachtripfromminetopowerplant.Theseventhunittrainjoinedthefleetinlate'74.Theeighthisexpectedlaterin1975.Economies resulting fromcontrolled coalsourcesandtheunittrainsresultedinsavingsforourcustomers ofatleast$20millionin1974.Asaninteresting sidelight, Electrical World,oneoftheleadingtrademagazines oftheelectricutilityindustry, recentlypublished aneditorial titled,"Wecandependoncoal...orcanwe?"Itdiscussed theutilities'ncreasing dependence oncoalandtheproblemsthatwouldinevitably ariseintheminingandtransport ofvastnewamountsofcoal.Itconcludes: "Westronglyrecommend, therefore, thatutilities lookveryseriously intotheacquisition ofcoaldeposits, andintoownership ofhoppercarssufficient toensureatleastminimumacceptable supply."TheCompanyfeelsthatitsexperience andstatistics wouldsupportElectrical World'srecommendation. Thiscertainly doesn'tmean,though,thatPP8Lisimmunetotheeconomicfactorsthatarepushingenergypricesupsosharply.Evenwiththeefficiencies wehave,thepriceofdelivered coalalmostdoubledin1974.Unfortunately, thishasresultedinhighercustomerchargesthroughthefueladjustment clause.,'~~i~f+yP",,+~WN-ta.'I.s~.If~lIHAJJQri,~.~II*f.pSCoalisloadedintooneofPP&L'sseven10,000-ton unittrainsattheCompany's Greenwich mineinwestcentralPennsylvania. Throughownership orcontrolottiveminesandtheuseofitstleetofunittrainstohaulmorethanhaltthecoalweusedlastyear,PP&Lsaveditscus-tomersatleast$20millionin1974. Thefueladjustment clauseauthorizes utilities topassontocustomers theincreases ordecreases infuelcosts.ItaddsnothingtoPP8LprofitsbutallowstheCompanytorecovermostofitsincreasing costsfromsharplyrisingfuelprices.Risingcoalcostsincreased thefueladjustment chargetoourcustomers byabouthalf-a-cent perkilowatt-hour in1974.Financing Theeffectsofinflation werefeltsharplyinthepricePP&Lhadtopaytoraisecapitalin1974.WhentheCompanytalksaboutthehundredsofmillionsofdollarsneededeachyeartobuildnewfacilities wemustalsolookatwherethemoneycomesfrom.Onlyaboutone-fourth ofthefundsweneedtofinanceourconstruction canbegenerated internally fromCompanyoperations. Therestmustcomefromnewcapitalinvestment intheCompany.During1974weraised$240millionthroughoutsidefinancing. Wesold$35millionofcommonstockand$25millionofpreference stockalongwithtwoissuesoffirstmortgagebondstotaling$180million.Thefirstissueofbonds($80million)wassoldat9'/4percentinterest, thesecond($100million)at10'/epercent.Thepreference stockwassoldatadividendcostof13percent.During1975weexpecttoissue$350millionofnewsecurities. Ofthatfigure$93millionwillbeneededtorefundmaturingdebt.Construction CutbackProbablyPP8L'smostmomentous decisionduring1974cameinearlyAugust,whentheCompanydecidedtocutbackconstruction expenditures by$1.3billionforthe10-yearperiod1974through1983andtoadoptaCompany-wide programofgeneralausterity. Thecutbackwasmadenecessary byrapidlychangingeconomic, socialandpolitical conditions regionally andnationally. Theconditions, asweseethem,are:~Aslowdowninboththenationalandtheregionaleconomywithnoquickturn-around expected. Slowereconomicgrowth,infact,maywellbecomealong-term trend.~Amajor"break"inthelongandsteadypatternofrisinguseofelectricity withcustomerresistance tohigherprices,conservation andslowereconomicgrowthallcontributing factors.~Unfavorable financial conditions, including double-digitinterestratesandimpairment ofinvestorconfidence inutilitysecurities, nowlimitingtheamountoffinancing ourindustrycanundertake. ~Ageneralworsening ofthepolitical andregulatory climatewithrespecttoutilityrateincreases andexpansion programs. Withthesechangingcircumstances inmind,arevisedforecastofelectricdemandthrough1984indicates thatgenerating capacityneededtoservecustomers 10yearsfromnowmaybenearlytwomillionkilowatts lessthanearlierestimates. Thiswillgreatlyaffectthelong-range generating plantconstruction schedule. Thetwooil-fired unitsatMartinsCreekwillcomeonlineasscheduled in1975and1977.Thenuclearunitshavebeendelayedoneyeareach.andwillcomeonlinein1980and1982.Thesixgenerating unitsplannedforthemidtolate'80shavebeencutbacktotwounitsinthelate'80s.Foratimeatleast,thesecutbackscanberestoredifconditions begintochangedramatically fromourforecasts. Eventhoughtheforecasted growthrateshavebeenloweredsignificantly, theyarestillexpectedtobesizable-anaveragesixpercentayearthrough1985.Admittedly, however,weliveinatimewhenthepredictability oftheeconomic/social eventsthataffectelectrical usehasbecomeparticularly uncertain. Wewillbegivingextraattention toearlydetection ofindicators thatpointtotheneedforchangesinourpeakloadforecast. CuttingCostsInevitably, alessergrowthinvolumeofbusinessleadstoreductions inpreviously expectedmanpowerneedsforconstruction, operation andmaintenance.,By theendof1974,82employees withlessthansixmonths'ervice, primarily intheconstruction area,hadbeenlaidoff.Thelayoffs,togetherwithconstraint infillingvacancies createdbynormalturnoverhasresultedinmanpowerreductions, bytheendoftheyear,of311employees, or4.3percentofthehighfortheyear.Additionally, elimination orcutbackofworkperformed byoutsidecontractors hashadtheeffectofeliminating theworkofanother161people.WhenthisisaddedtothePP8Lworkforce reduction thetotalcomesto472-oradropofslightlymorethansixpercent.TheCompanyisalsore-examining fuelprocurement practices, outsideworkcontracts, transportation fleetrequirements andmaterialandsupplyinventories, allseekingwaystoreduceexpenses. Planswerealsobeingfirmedupatyear-endtohaveindependent reviewsmadeofourcoalminingoperations andoverallPP8Loperating effectiveness. But,expenseandmanpowercutbacksarenoteasilycomeby.Thereisreallynowaytosubstantially cutbackonmanpowerandexpenseswithoutsomeattendant lossinthescopeandqualityofserviceprovidedbytheCompany.Operation Understanding TheCompanydependsonpublicunderstanding andsupportforitsverysurvival. ThefactthattheelectricutilityindustryandPP8Lcontinuetofacedifficult timesisnosecret.OneofthethingstheCompanyisdoingtoseekpublicsupportisa15-month-long programinwhichourpresident visitsandtalkswiththepeopleweserve.TheprogramiscalledOperation Understanding. President Busbyhascommitted 25percentofhistimefromearlyOctober1974through1975tovisitinginsmallgroupsessionswithnewsmen,serviceclubs,consumeractiongroups,students, businessleaders,publicofficials, employees, minoritygroups,seniorcitizens, women'sorganizations, unionleaders,shareowners andothersthroughout ourservicearea.Withnosetpresentation, hereliesoninformaldiscussion, andquestionandanswersessionstoresponddirectlytothecustomers'eelings andneeds.Theprogramdoesnottrytobrainwash anyone.Wewanttolistentotheproblemsthatpeoplehaveandwewanttogivethemanopportunity tolistentous.Aspartofearningthepublicsupportthatwedependon,wefeelwemustbeaccessible, openandcredibleinouroperations andinourbehaviorandagoodperformer inallaspectsofourbusiness. ResearchProbablythemostvisibleresearchprojecttheCompanyengagedinduring1974wasthecompletion ofourenergyconservation homenorthwest ofAllentown. .lI(~ad%~l~PP8Lhasbeensavingtimeandmoneybyprefabricating majorsubstation sectionsindoorsandcompleting assemblyatthesub-stationsite.Withprefabrication, fieldconstruction timehasdroppedfrom26to20weeks.ThemethodallowsIndoorworkinallkindsofweatherandallworkisdoneatgroundlevelwhichisfasterandsaferthantheon-siterequirements ofusingladdersandbuckettrucks.Estimated savingsforeachsub-stationhavebeenapproximately $5,000ormore. Thehomeusesawater-source heatpumpforheatingandcooling.Theheatingcycleissupplemented bysolarenergycollection panelsandheatreclamation devicestorecoverwasteheatfromappliances, waste-water, fireplace fluegasesandeventheheatofdecomposition intheseptictank.APP8Lemployeefamilywaschosentoliveinthehomeforayeartohelpprovideactualin-usedataforfurtherevaluation oftheenergyconservation methodsbeingtested.Theobjective intheexperimental homeprojectistoexploreanumberofenergyconservation methodsthathavethepotential tosignificantly reducetheelectrical demandofanelectrically-heated single-family home.Aftertheresultsoftheexperiment areavailable theymustbeevaluated todetermine whichmethodsmightbeeconomically feasiblefortheconsumer. Inotherareas,theCompanyeitherhelpedfundorparticipated insuchresearchprojectsassulfurdioxideremovalfromstackemissions, windstressfactorsoncoolingtowers,fastbreederreactor,nuclearfusionandcoalliquefaction andgasification. Additionally, throughElectricPowerResearchInstitute (EPRI)weareinvolvedinanumberofotherprojectstofindnewenergysources,toimprovetheutilization ofpresentenergyresources, andtoimprovethereliability andenvironmental acceptability ofelectricpowergeneration. Directors Dr.RuthPatrick,notedbiologist andchairmanoftheBoardofTrusteesoftheAcademyofNaturalSciencesinPhiladelphia, waselectedadirectorinSeptember following anamendment toCompanybylawsincreasing theauthorized numberofdirectors from12to13.TheCompanynotedwithregretthedeathsduring1974ofthreeformerdirectors. EverettL.Palmer,whowasvicepresident ofPublicRelations andservedasadirectorfrom1960untilhisretirement in1966after42yearswiththeCompany,diedonApril25.HarryFerguson, formeroperating vicepresident andadirectoratthetimeofhisretirement in1958,after38yearswiththeCompany,diedonJuly29.JohnS.WiseJr.,whowaspresident andaboardmemberfor17yearsuntilhisretirement in1945after29yearswiththeCompany,diedonAug.13.Wisewasapioneerintheelectricutilityindustryandwasinstrumental intheformation ofPP8Lin1920.ForthepastseveralyearsPPftL'sboardofdirectors hasheldatwo-daymeetinginSeptember enablingmemberstovisitfacilities essential toCompanyoperations. In1974theboardtouredtheCompany's energyconservation homeandthePP&LTrainingCenternearAllentown, andtheoil-fired unitsbeingbuiltattheMartinsCreekplant.gj',g'j',,IL MANAGEMENT'S DISCUSSION ANDANALYSISOFTHESTATEMENT OFINCOMEThefollowing analysisoftheCompany's financial performance explainsthereasonsforchangesinspe-cificitemsontheStatement ofIncomecomparing theyears1974to1973and1973to1972.ElectricrevenuesIncreaseinquantityofsalesto:Ultimatecustomers Othersforresale..Rateincreases .......Fueladjustment clausesOther..$7.818.0(1.9)8.222.210.555.4(0.4)1.92.385.438.6Steamheatrevenues.......... 1.80.4Total$87.239.0Ratesapplicable tosalestoultimatecustomers areregulated bythePennsylvania PublicUtilityCommis-sion(PUC)andaccounted for97%oftheCompany's revenuefromenergysalesin1974.TheFederalPowerCommission (FPC)regulates salestoothersforresale.TheCompany's electricenergysalestoultimatecus-tomersincreased 6.5%in1973and2.8%in1974.Mostofthe1974increasewasduetosalestotheSteel-tonPlantofBethlehem SteelCorporation whichwasaddedasacustomerinmid-year. Thereducedgrowthratein1974wasdueprimarily toenergyconservation measuresbycustomers andageneraldeclineineco-nomicactivity. Electricenergysalestoothersforresaleduringthetwoyearsremainedrelatively constantexceptforcon-tractedsalestoaneighboring utility,Metropolitan EdisonCompany(MetEd).SalestoMetEdareunderanagreement tosellcapacityandenergyfortheperiodJunethroughSeptember ineachoftheyears1973,1974and1975fromtheCompany's generating unitsatMontourandtheNo.3unitatMartinsCreek(scheduled forserviceinApril1975).RevenuesfromMetEdwere$7.9millionin1973and$6.1millionin1974.Rateincreases affecting ultimatecustomers weregrantedinMarch1972($17millionannually), June1973($10millionannually) andJanuary1974($19mil-lionannually, ofwhichabout$17.8millionisincludedOperating RevenuesTheCompanyderivesabout99%ofitsoperating revenuesfromsupplying electricserviceandthebal-ancefromsupplying steamforheatingandotherpurposes. Thechangeinoperating revenuesfromtheprioryearisattributable tothefollowing: Increase(Decrease) 19741973MillionsofDollarsinrevenuesfortheyear1974).Since1972therehavebeentworateincreases affecting fifteenresalecus-tomersforatotalof$1.6millionannually, withthemostrecentincrease($975,000annually) beinggrantedbytheFPCinSeptember 1974,subjecttopossiblerefund.Theaffectedcustomers areopposingtherateincreaseandtheFPChasscheduled ahearingforMarch1975.TheCompany's tariffsincludefueladjustment clauseswhichadjustpricesforelectricserviceforvariations inthecostoffuelusedtogenerateelec-tricity.Revenuesfromthefueladjustment clausestotaled$23.8millionin1973and$79.2millionin1974.Increase(decrease) inenergysold........... Increaseinaverageprice.OtherTotal.$(11.0)=-34.049.3l.30.20.3$38.535.6Thequantityofinterchange powersoldincreased substantially during1973duetotheavailability ofnewandefficient coal-fired generating unitsatMontourSteamElectricStationplacedinserviceduring1972and1973.Thequantitysoldduring1974wassome-whatlowerthan1973,butthepricesreceivedforsuchpowerweresubstantially higher.Thepricereceivedforinterchange powersalesistoagreatmeasurebasedonarelationship ofthefuelcostsofthesellingandbuyingutilities. AlltheCom-pany'smajorgenerating stationsarefiredbycoalwhileotherinterconnected utilities havesignificant amountsofoil-fired generating capacity. Fortheperiodbegin-ninginlate1973andcontinuing through1974,oilpricesincreased muchmorerapidlythancoalpriceswhichcausedanincreaseinthepricereceivedforinterchanged powerduring1974.Theaveragepricereceivedforinterchange powersaleswas1.76centsperkwhin1974and0.95centsperkwhin1973.Bothamountsweresubstantially inexcessoftheCompany's fuelcostsrelatedtosuchsales.Interchange PowerSalesDuring1974approximately 24%oftheoutputoftheCompany's generating stationswassoldtootherutil-itiesunderinterconnection arrangements. Thiscom-pareswith28%soldin1973.However,asrequiredbyboththePUCandFPC,suchsalesarenotrecordedasOperating RevenuesbutarecreditedtoOperating ExpensesontheStatement ofIncome.Ananalysisofthechangeininterchange powersalesfromtheprioryearfollows:Increase(Decrease) 19741973MillionsofDollars ElectricfuelexpenseIncrease(decrease) inquantityofelectricity generated.... Increaseinaveragecostoffuelsburned............. Effectofchangeinaccounting forfuelcosts............. SteamheatfuelexpenseTotal$(0.9)26.392.33.6(26.6)64.829.92.00.5$66.830.4Theincreaseinfuelcostsduring1974wascausedbytheescalating pricesoffuelsburned(principally coal).Increases infuelexpenserelatedtosalestocustomers arebilledtocustomers throughfueladjust-mentclauses.Undertheclauses,fuelcostsincurredinamonthinexcessofabaseamountarereflected incustomers'ills overasubsequent three-month pe-riod.PriortoOctober1974thefuelexpenserecordedbytheCompanyeachmonthwasthecostoffuelburnedto'generate electricity duringthatmonth.How-ever,duetothesharpriseinthecostoffuelduring1974thisprocedure resultedinpronounced mis-matchingoffuelcostsandrevenuesbyaccounting periods.Therefore, theCompanychangeditsaccount-ingtreatment offuelcostsrecoverable underfueladjustment clausesasdescribed inNote2toFinancial Statements. Thenewaccounting procedure doesnotaffectthepriceofelectricity chargedcustomers northeamounttheCompanypaysforfuel.WagesandEmployeeBenefitsandOtherOperating CostsTheincreases inwagesandemployeebenefitsandotheroperating costssuchasmaterials andsupplies, rentsandinsurance reflectprincipally theeffectsofinflation. Athree-month strikebyapproximately 5,000unionemployees (about70/ooftheCompany's totalworkforce)increased 1974operating expensesbyapprox-imately$2.0millionaftergivingeffecttorelatedin-cometaxreductions. Thefinalagreement, whichresultedinanewtwo-yearlaborcontracttorunthroughJuly1976,providesforimprovements infringebenefitsandforwageincreases of8.5/obeginning inAugust1974and8.0'/obeginning inJuly1975.FuelApproximately 98'/oofthefuelexpenseshownintheStatement ofIncomeisrelatedtogeneration ofelectricity withthebalanceapplicable totheproduc-tionofsteamforheatingandotherpurposes. Thechangeinfuelexpensefromtheprioryearisattribut-abletothefollowing: Increase(Decrease) 19741973MillionsofDollarsDepreciation Increased depreciation expensesince1972isduetonewfacilities placedinservice,including theaddi-tionoftwogenerating unitsatMontourSteamElectricStation.TaxesForadetailedanalysisofincometaxcomponents andeffective incometaxratesseeNote6toFinancial Statements. Taxesotherthanincomeincreased pri-marilybecauseofhigherStategrossreceiptstaxeswhicharebasedonrevenuesandincreased Statecapitalstocktaxresulting principally fromtheaddi-tionalPreferred, Preference andCommonStocksoldduringtheperiods.CostofFinancing Increases fromtheprioryearininterestcharges,dividends onPreferred andPreference StockandtheamountoftheAllowance forfundsusedduringcon-struction areasfollows:Increase19741973MillionsofDollars7.94.80.2Allowance forfundsusedduringconstruction ......... $5.80.3InterestchargesLong-term debt............. 6.7Short-term debt............ 0.9Other..Dividends onpreferred andpreference stock........... 2.52.7Theamountoftheallowance forfundsusedduringconstruction variesfromyeartoyearinrelationtotheamountofconstruction workinprogressandthecostofcapital.Theincreaseinlong-term debtinterestchargesanddividends onPreferred andPreference Stockisduetoissuanceofnewsecurities tofinancetheconstruction ofnewfacilities andtherefinancing ofmaturingdebtwithsecurities bearinghigherinterestrates.During1973and1974,newissuesofsecurities included$308millionoflong-term debtand$65millionofPreferred andPreference Stock.Short-term debtconsistsofbankloansandcommer-cialpapernotesusedtoprovideworkingcapitalandforinterimconstruction financing. Interestonsuchdebtvariesfromyeartoyearduetotheamountofshort-term debtoutstanding andtheinterestratesineffect.Formoreinformation onshort-term debtseeNote3toFinancial Statements. During1973and1974theCompanysold4.2millionsharesofnewCommonStocktofinanceconstruction. TheaveragenumberofsharesofCommonStockout-standingincreased from17.5millionin1972to22.1millionin1974,anincreaseof26/o.Theincreaseintheaveragenumberofsharesoutstanding dilutedearningspershareby11'/oin1973and14/oin1974. STATIST!GALSUMMARYCAPITALINVESTMENT -thousands Long-term debtPreferred andpreference stock....CommonequityShort-term debtTotalcapitalinvestment ................. RETURNONINVESTMENT (a)Returnonaveragecapitalinvestment -%,.Returnonaveragecommonequity-%....COMMONSTOCKDATABookvalueatyearend(a)............... Dividendpayoutrate-%(a)............. Dividendyield-%(b).Priceearningsratio(a)(b)............... NUMBEROFSHAREOWNERS-preferred, preference andcommon.......OPERATIONS ELECTRICCUSTOMERS ENERGYSALES-millionsofkwhResidential Commercial Industrial OtherAVERAGEPRICEPERKWHtoultimatecustomers -cents..SOURCESOFENERGYSOLD-millionsofkwhGenerating unitsCoal-fired Oil-fired -combustion turbines8dieselsHydroelectric ........... Purchased power.Interchanged powerPurchases SalesCompanyusesandlosses.....TotalenergysalesFUELCOST-millsperkwh......POWERCAPABILITY -kilowatts ..PEAKDEMAND-kilowatts (c)...EMPLOYEES 1974$914,349296,375532,6551,743,379 85,509$1,828,888 8.512.6$22.916211.55.3164,126902,1486,4944,2757,1701,02418,9632.4724,1862477723521,218(6,079)(1,733)18,9638.84,901,000 3,772,000 6,9301973753,027271,375469,6081,494,010 39,8511,533,861 7.911.922.51648.47.6142,235886,3786,3244,2626,8811,39818,8652.0624,7822738163841,584(7,237)(1,737)18,8655.04,903,000 3,662,000 7,1391972635,044231,375412,1301,278,549 96,4821,375,031 7.511.621.78676.510.3135,399864,4395,9853,9336,45863717,0132.0219,0976018244181,366(3,586)(1,707)17,0134.94,108,000 3,598,000 6,7901971576,760196,375351,2991,124,434 76,2511,200,685 7.412.220.78666.410.2123,598843,0805,4793,5336,05362015,6851.9015,8476426843041,467(1,758)(1,501)15,6854.83,496,000 3,294,000 6,5141970514,371156,375303,117973,86397,8781,071,741 7.010.819.75766.811.3111,909828,6435,0933,1985,80768514,6831.7113,7027867393391,732(1,164)(1,45I)14,6834.23,256,000 3,238,000 6,372(a)Reflectsretroactive application ofchangeInaccounting forfuelcosts.(b)Basedonyoarwndmarketprice.(c)WinterpeakshownwasreachedearlyInsubsoquont year.In1970peakIsthatwhichwouldhaveoccurredifloadcurtailment measureshadnotbeenIneffect.12 STATEMENT OFINCOMEOperating Revenues19741971197019731972Thousands ofDollars3472,038384,814345,782300,707255,313Operating ExpensesWagesandemployeebenefitsFuel(Note2).Powerpurchases .Interchange powersales.Otheroperating costs.Depreciation Incometaxes(Note6)Taxes,otherthanincome.Operating IncomeOtherIncomeandDeductions Allowance forfundsusedduringconstruction .Incometaxcredits(Note6)Other-netIncomeBeforeInterestCharges.InterestChargesLong-term debtShort-term debtandother.IncomeBeforeCumulative EffectofChangeinAccounting forFuelCostsNonrecurring Cumulative EffecttoDecember31,1973ofChangeinAccounting forFuelCosts,NetofRelatedIncomeTaxes($4,831)(Note2).......... NetincomeDividends onPreferred andPreference Stock.......EarningsApplicable toCommonStock............ 67,374192,35324,176(108,723) 54,48952,39939,21135,571356,850115,18620,7325,0763,4'i829,226144,41251,1499,94661,09583,3174,16287,47919,656$67,82357,421125,57715,299(70,175)45,23448,83733,94330,005286,14198,67314,967911,30016,358115,03143,2034,91648,11966,91266,91217,19149,72155,22095,220'3,514(34,569)39,51241,44626,08625,658262,08783,70514,647334(305)14,67698,38136,5073,95340,46057,92157,92114,52643,39548,19879,49918,963(15,468)33,21434,90311,54522,146233,00067,70716,242176(63)16,35584,06230,8954,59535,49048,57248,57211,39237,18045,77961,62121,982(9,356)24,009321733,22518,197197,63057,6839,723112809,91567,59825,3817,28232,66334,93534,9356,42628,509EarningsPerShareofCommonStock(a)Beforecumulative effectofchangeinaccounting forfuelcostsNonrecurring cumulative effecttoDecember31,1973ofchangeinaccounting forfuelcosts.....$2.88$3.072.572.572.482.482.372.371.971.97ProFormaAmountsAfterGivingEffecttotheRetroactive Application ofChangeinAccounting forFuelCostsEarningsapplicable tocommonstock.......... $63,66151,06643,16138,48830,252Earningspershareofcommonstock(a)AverageNumberofSharesOutstanding (thousands) ..Dividends DeclaredPerShareofCommonStock....(a)Basedonaveragenumberofsharesoutstanding. Seoaccompanying NolesloFfnanclal Slalemenls. $2.8822,0671.772.6419,3591.682.4617,5131.642.4515,6901.602.0914,4721.6013 BALANCESHEETASSETSDecember3119741973Thousands ofDollarsUTILITYPLANTPlantinservice-atoriginalcostElectricSteamheatLessaccumulated depreciation Construction workinprogress-atcost$1,687,740 7,7031,695,443 354,2491,341,194 403,7071,744,901 1,619,327 7,7281,627,055 312,1781,314,877 219,2771,534,154 INVESTMENTS Subsidiaries -atequity.SafeHarborWaterPowerCorporation -atequity...... '.....Nonutility property-atcost,lessaccumulated depreciation ..Other-atcostorless.4,6313,5992,4954,06414,7895,3203,5962,7497,35419,019CURRENTASSETSCash(Note3).Construction fundforpollution controlfacilities (Note4)....Accountsreceivable, lessreserveCustomers OtherRecoverable fuelcosts(Note2)Materials andsupplies-ataveragecostFuelOperating andconstruction .Other.16,2513,93333,90722,57435,58771,88624,9799,139218,25614,9039,07322,65610,92926,88417,0065,598107,049DEFERREDDEBITS7,482$1,985,428 6,6241,666,846 Seeaccompanying NotestoFinancial Statements. SCHEDULEOFCAPlTALSTOCKANDLONG-TERM DEBTDecember31,1974Thousands ofDollarsPREFERENCE STOCK-nopar,cumulative, authorized 5,000,000 shares$8.00series,outstanding 350,000shares............... $8.40series,outstanding 400,000shares............... $8.70series,outstanding 400,000shares............... $13.00series:(a)outstanding 212,500shares..... tobeissuedApril1,1975(b)....$35,00040,00040,00021,2503,750$140,000COMMONSTOCK-nopar,authorized 30,000,000 shares,outstanding 23,251,255 shares............... $354,540CAPITALSTOCKPREFERRED STOCK-$100par,cumulative 4t/2/oauthorized 629,936shares,outstanding 530,189shares......$53,019Series,authorized 5,000,000 shares3.35/o,outstanding 41,783shares.4,1784.40/o,outstanding 228,773shares22,8784.60lo,outstanding 63,000shares..6,3007.40/o,outstanding 400,000shares(a)40,0008.60/o,outstanding 222,370shares22,2379%%d,outstanding 77,630shares...7,763$156,375LONG-TERM DEBTFIRSTMORTGAGEBONDS3'/oseriesdue1975-toberefinanced ..27/a/oseriesdue1976................ 2a/4/oseriesdue1977................ 31/a/oseriesdue1978................ 2a/4'/oseriesdue1980................ 3a/a/oseriesdue198210'/a/oseriesdue1982............... 3t/2!oseriesdue1983................ 3a/a'/oseriesdue1985................ 45/aloseriesdue1991................ 45/8/oseriesdue1994................ 5/a/oseriesdue1996................ 6a/4'/oseriesdue1997................ 7/oseriesdue1999.81/a/oseriesdue1999................ 9/oseriesdue2000.71/4%%dseriesdue2001................ 75/8loseriesdue20027t/2%%dseriesdue2003................ 9t/4/oseriesdue2004................ 4t/2%%dto5/opollution controlseriesAdueannually$500,1977-1983; $900,1984-2002; $7,400,2003....... NOTES6'/2lo-7/odue19767/odue1980OTHER$93,0008,00020,0003,00037,0007,500100,00025,00025,00030,00030,00030,00030,00040,00040,00050,00060,00075,00080,00080,00028,000891,5002,80020,00022,80049$914,349SECURITIES SOLDIN1973AND19741973JanuaryMay'ulyAugustNovemberSecurityFirstMortgageBonds,7t/2loSeriesdue2003..FirstMortgageBonds,4t/2%%dto55/a/oPollution ControlSeriesAdue1977-2003 ........... Note,7'/odue1980.SeriesPreferred Stock,7.40/o.CommonStock.Shares400,0002,000,000 Amount$80,00028,00020,00040,00040,900$208,9001974AprilJulyOctoberOctober2,200,000 250,000(b) $80,00035,15625,000100,000$240,156(a)Boththo7.40/oSorlosProforrod StockandthoProforonco Stock,$13.00SorlosmustborotirodInfullthroughthooporatlon ofsinkingfundsatarodomption priceof$100porsharoplusaccruedandunpaiddividonds tothodataofsuchredemption. BegInning July1,1979andannuallythoroaftor throughthoyoar2003,16,000sharesoftho7.40'/oSorlosProforrod mustborodoomod, andboglnning October1,1980andannuallythereafter throughthoyoar1999,12,500sharesofthoProforonco Stock,$13.00Soriosmustborodoomod. (b)37,500sharestoboIssuedandpaidforApril1,1975underdolayoddeliverycontracts. 16Sooaccompanying NotesfoFinancial Sfafomonfs. LIABILITIES CAPITALIZATION (a)Shareowners investment Preferred stockPreference stockCommonstock.Capitalstockexpense(deduction) .(Noamortization planInellect)Earningsreinvested (Notes5and7)S156,375140,000354,540(7,580)185,695156,375115,000319,384(6,889)157,113December3119741973Thousands ofDollars829,030740,983Long-term debt914,3491,743,379 753,0271,494,010 CURRENTLIABILITIES Commercial papernotes(Note3)Accountspayable.TaxesaccruedDeferredincometaxesonrecoverable fuelcosts(Note2).Dividends payableandinterestaccruedOther.85,50937,12111,85218,84034,6338,338196,29339,85133,70513,45728,1397,029122,181DEFERREDANDOTHERCREDITSDeferredinvestment taxcredits.Deferredincometaxes.Contributions inaidofconstruction (Note10)..Other.18,86022,6894,20745,756$1,985,428 15,32317,4369,7048,19250,6551,666,846 (a)SeoScheduleofCapitalStockandLong-Tertn Debtonpage16.Seeaccompanying NotesloFinancial Statements. STATEMENT OFCHANGESINFINANCIAL POSITION19741973197219711970Thousands ofDollars66,91257,92'I48,57234,93548,83741,44634,90332,17311,2827,984(1,127)(1,762)(20,732)520(14,967)220112,284(9,723)(2,105)53,518(14,647)(16,242)22022092,92466,326128,45635,156Outsidefinancing CommonstockPreferred stockPreference stock.Firstmortgagebonds......... Otherlong-term debt.Short-term debt-netincrease.28,09330,00040,00050,0002,68746,94037,12040,90040,00025,000180,00036045,65835,00075,0008,34220,231185,51340,00060,00010,506108,00020,024286,174208,924147,626150,780SOURCEOFFUNDSOperations Netincome(1974includes$4,162nonrecurring amount)$87,479Charges(credits) againstincomenotinvolving workingcapitalDepreciation.................... 52,399Noncurrent deferredincometaxesandinvestment taxcredits-net.......... 8,790Allowance forfundsusedduringconstruction OtherWorkingcapital(excluding short-term debt)-decreaseOther-net$414,6303,156(a)1,874681326,238279,11823,8964,799242,6478,522212,820APPLICATlON OFFUNDSConstruction expenditures Allowance forfundsusedduringconstruction $271,460(20,732)250,728224,496(14,967)209,529218,754192,399(14,647)(16,242)204,107176,157165,142(9,723)155,419Securities retiredFirstmortgagebondsOtherlong-term debtShort-term debt-netdecrease18,63218,63210,04156,63166,67215,00010,05725,0578,'11721,62729,7447,7631,2364,12213,121Dividends onpreferred, preference andcommonstock.Workingcapital(excluding short-term debt)-increaseOther-net58,89750,03743,33036,74629,45682,753(a) 3,62014,8246,624$414,630326,238279,118242,647212,820ta)Thenetchangesinworkingcapitalresultedprincipally fromthofollowing: 1974,Increases infuelinvontory, accountsreceivable anddeferredfuelcostslessrelateddeferredincometaxes;1973,increases inotheraccountsreceivable, construction lund,accountspayableanddividonds payabloandaccruedinterest. Soeaccompanying NotesfoFinancial Sfatomenfs. Balance,January1............. NetIncome(1974includes$4,162nonrecurring amount)......... $157,11387,479244,592STATEMENT OFEARNINGSREINVESTED 197466,912207,15057,921183,56848,572162,393197119731972Thousands ofDollars140,238125,647113,8211970108,34234,935143,277Dividends Preferred stock............... Preference stock.............. Commonstock(pershare-1974,$1.77;1973,$1.68;1972,$1.64;1971-1970, $1.60)..Balance,December31(Notes5and7)......9,39310,26339,24158,897$185,6957,5519,64032,84650,037157,1136,4338,09328,80443,330140,2386,4334,95925,35436,746125,6476,29513123,03029,456113,821NOTESTOFINANCIAL STATEMENTS December31,1974and19731~SUMMARYOFACCOUNTING POLICIESAccounting SystemAccounting recordsaremaintained inconform-itywiththeuniformsystemofaccountspre-scribedbytheFederalPowerCommission (FPC)andadoptedbythePennsylvania PublicUtilityCommission (PUC).UtilityPlantCostsofadditions toutilityplantandreplace-mentsofunitsofpropertyarecapitalized. Costsofdepreciable propertyretiredorreplacedareeliminated fromutilityplantaccountsandsuchcosts,plusremovalcosts,lesssalvage,arechargedtoaccumulated depreciation. Costsoflandretiredorsoldareeliminated fromutilityplantaccountsandanygainsorlossesarere-flectedontheStatement ofIncome.Allexpendi-turesformaintenance andrepairsofpropertyandthecostofreplacement ofitemsdetermined tobelessthanunitsofpropertyarechargedtooperating expenses. Allowance forFundsusedDuringConstruction Asprovidedintheuniformsystemofaccounts, thecostoffunds(interest onborrowedmoneyandareasonable rateonothercapit'al) usedtofinanceconstruction workinprogressiscapital-izedaspartofconstruction cost.Anamountequaltotheamountsocapitalized isshownontheStatement ofIncomeunderOtherIncomeandDeductions andservestooffsettheactualcostoffinancing construction workinprogress. PriortoFebruary1,1974theinterestcomponent oftherateusedtocomputetheallowance wastreatedona"before-tax" basisandtheratewasnotreducedbyanyrelatedincometaxreduc-tions.Tobeconsistent withthetreatment ac-cordedforrate-making purposestherateusedtocomputetheallowance wasconverted toan"after-tax" basisasofFebruary1,1974.Fortheyear1974,OtherIncomeandDeductions -In-cometaxcreditshasbeencreditedwith$6.1millionofincometaxreductions associated withthisinterest, withacorresponding increaseinincometaxeschargedtoOperating Expenses. Depreciation Forfinancial statement

purposes, thestraight-linemethodofdepreciation isusedtoaccumu-lateanamountequaltothecostofutilityplant18 andremovalcosts,lesssalvage,overtheesti-matedusefullivesofproperty.

Subsidiaries andSafeHarborTheCompanyhassevenwholly-owned subsid-iaries(including fourcoalcompanies) andalsoownsone-third oftheoutstanding capitalstockofSafeHarborWaterPowerCorporation represent-ingone-halfofthatcompany's votingsecurities. Investments insubsidiaries andinSafeHarborWaterPowerCorporation arerecordedusingtheequitymethodofaccounting. Underthismethod,theseinvestments arecarriedontheBalanceSheetatcostplusundistributed earningssincedatesofacquisition, andequityinthecurrentyearearningsofthesecompanies isreflected ontheStatement ofIncomeunderOtherIncomeandDeductions. SincetheCompany's subsidiaries arenoten-gagedinthebusinessofgenerating anddistrib-utingelectricity, theCompanybelievesthatitsfinancial positionandresultsofoperations arebestreflected withoutconsolidation. Ifallthesubsidiaries wereconsidered intheaggregate asasinglesubsidiary, theywouldnotconstitute asignificant subsidiary. RevenuesRevenuesarebasedoncyclebillingsrenderedtocertaincustomers monthlyandothersbi-monthly.TheCompanydoesnotaccruerevenuesrelatedtoenergydelivered butnotbilled.TheCompany's tariffsincludefueladjustment clausesunderwhichfuelcostsaboveorbelowthelevelsallowedinapprovedrateschedules arepermitted tobebilledorcreditedtocustomers afterthefuelcostsareincurred. FuelCostsRecoverable UnderFuelAdjustment ClausesInOctober1974,effective asofJanuary1,1974,theCompanychangeditsmethodofaccounting forfuelcostsrecoverable underfueladjustment clauses.SeeNote2forfurtherinformation re-gardingthisaccounting change.IncomeTaxesDeferredtaxaccounting isfollowedforitemswheresimilartreatment inratedeterminations hasbeenorisexpectedtobepermitted bythePUC.Theprincipal itemsareaccelerated amorti-zationofcertified defensefacilities andpollution controlequipment, deduction ofcostsofremov-ingretireddepreciable

property, thatportionoftaxdepreciation arisingfromshortening depre-ciablelivesby20/oaspermitted bytheclasslifedepreciation systemand,beginning in1974,fuelcostsrecoverable underfueladjustment clauses.Taxreductions arisingprincipally fromtheuseofthedeclining balancedepreciation method,guideline livesandcertainincomeandexpensesbeingtreateddifferently fortaxcomputation thanforbookpurposesareaccounted forundertheflow-through method.Thesereductions inincometaxprovisions arealsoaccordedflow-through treatment inratedeterminations bythePUCandcurrently resultinlowerratesforcustomers thanwouldotherwise bepossible.

Investment taxcreditsaredeferred. Deferredamountspertaining totheJobDevelopment In-vestmentCredit(RevenueActof1971)arebeingamortized overtheaveragelivesoftherelatedpropertywhileamountspertaining tothecreditspermitted underpriorlawsarebeingamortized over5-yearperiods.Retirement PlanTheCompanyhasaRetirement Plancomposedoftwoparts:(1)anon-contributory portionwhichprovidesbenefitsforalleligibleactiveemployees withthefullcostabsorbedbytheCompany,and(2)avoluntary portioninwhichcontributions aremadebybothemployees andtheCompany,butthefullcostofpastserviceandPlanimprove-mentsisbornebytheCompany.Approximately 95/oofeligibleactiveemployees aremembersofthevoluntary portionofthePlan.Companycontributions tothePlanincludeamountsre-quiredtofundcurrentservicecostsandtoamor-tizeunfundedpastservicecostsoverperiodsofnotmorethan20years.2.FUELCOSTSRECOVERABLE UNDERFUELADJUSTMENT CLAUSESUnderthefueladjustment clauses,fuelcostsin-curredinamonthinexcessofabaseamountarereflected incustomers'ills overasubsequent three-month period.PriortoOctober1974thefuelexpenserecordedbytheCompanyeachmonthwasthecostoffuelburnedtogenerateelectricity duringthatmonth.However,duetothe19 sharpriseinthecostoffuelduring1974thisprocedure resultedinpronounced mismatching offuelcostsandrevenuesbyaccounting periods.InOctober1974,effective asofJanuary1,1974,theCompany,asauthorized bythePUC,changeditsmethodofaccounting torecordasfuelex-penseanamountcorresponding tothefuelcostsbeingbilledtocustomers duringsuchmonth.Thischangeresultsinmatchingfuelcostsandreve-nuesbydeferring thechargetoincomeoffuelcostsrecoverable inthefuturetotheperiodsinwhichthesecostsarebilledtocustomers throughapplication ofthefuelclauses.Thechangedac-countingalsoconformsmorecloselytothetreat-mentpresently givenfuelcostsbyregulatory bodiesinsettingelectricrates.Following thenewprocedure, $35.6millionofthecostoffuelburnedduring1974wasdeferredatDecember31,1974tobeexpensedintheperiodsthecorresponding fueladjustment revenuesarerecordedand$9.0millionoffuelcostsrepresent-ingtheretroactive deferralatDecember31,1973ofaportionofthecostoffuelburnedin1973waschargedtoexpensein1974.For1974,fuelcostswerelowerbyanetamountof$26.6millionand,afterincometaxeffects,earningsapplicable tocommonstockwereincreased by$12.6million($0.57pershare).Therecording ofthe$9.0milliondeferralofre-coverable fuelcostsatDecember31,1973re-sultedinanonrecurring credittoincomein1974which,afterincometaxeffects,amountedto$4.2million($0.19pershare).TheproformaamountsshownontheStatement ofIncomereflecttheeffectofretroactive application ofdeferredfuelcostaccounting andrelatedincometaxeffectshadthenewmethodbeenusedsincetheprinci-palfueladjustment clausebecameeffective in1970.3.COMPENSATING BALANCESANDSHORT-TERM DEBTInordertoprovideloansforinterimfinancing andprovideback-upfinancing capability forcommer-cialpapernotestheCompanyhadlinesofcreditwithvariousbanksaggregating $197millionatDecember31,1974.Useoftheselinesofcreditwasrestricted totheextentof$13.5millionbyshort-term bankloanstocertainownedandcon-trolledfuelsupplycompanies. Compensating bankbalancesarerequiredinconnection with$145millionoftheselinesofcredit.Compensat-ingbankbalancesaregenerally 10'/oofthelineofcreditor20koftheamountborrowed, which-everishigher,onanaverageannualbasis.Thesebalancesarenotrestricted astowithdrawal. Basedonbankborrowings during1974,theaver-agecompensating bankbalancerequirement wasabout$13.8million,ofwhichabout$2millionwassatisfied by"float"(checksissuedbutnotclearedbythebanks).Linesofcreditaggregating $52millionweremaintained bypaymentofcommitment feeswhicharebasedoneitherapercentage oftheprimeinterestratetimesthelineofcreditorafixedpercentage oftheline.Commitment feesonanannualized basisapproximated $0.4millionatDecember31,1974.Bankborrowings aregenerally foroneyear,andmaybeprepaidatanytimewithoutpenalty.Bor-rowingsunderlinesofcreditrequiring compen-satingbankbalancesareatthelendingbank'sprimeinterestrateineffectfromtimetotime.Borrowings underlinesforwhichcommitment feesarepaidaregenerally at110/oofthelend-ingbank'sprimeinterestrateineffectfromtimetotimeinadditiontothecontinued paymentofthecommitment fee.TheCompanyhadnobankloansoutstanding atDecember31,1974.Com-mercialpapernotesaregenerally soldforpe-riodsrangingfrom30to60days.AtDecember31,1974theCompanyhad$85.5millionofcom-mercialpapernotesoutstanding. Theweightedaveragediscountrateapplicable tothesenoteswas9.4/o.Themaximumaggregate amountofshort-term debtoutstanding attheendofanymonthin1974was$140.3million;theaverageaggregate dailyamountoutstanding during1974was$95.6mil-lion.Theapproximate weightedaverage'interest rateofshort-term debtduring1974was10.0/0,calculated bydividingthetotalshort-term debtin-terestexpensefortheyearbytheaverageaggre-gatedailyamountofshort-term debtoutstanding. 4.POLLUTION CONTROLCONSTRUCTION FUNDTheunexpended proceedsfromthesaleofFirstMortgageBonds,Pollution ControlSeriesA,amounting to$3.9millionatDecember31,1974,areheldbyatrusteeinaConstruction Fundwhichconsistsofcashandtemporary cashin-vestments. PaymentsmaybemadefromtheFund20 uponrequisition bytheCompanyforcostsrelatedtotheconstruction ofcertainpollution controlfacilities. 5.DIVIDENDRESTRICTIONS TheCompany's charterandmortgageindentures restrictthepaymentofcashdividends onCom-monStockundercertainconditions. Underthecharterprovisions, whicharethemorelimiting, norestrictions areeffective onthepaymentofsuchdividends outofcurrentearnings. Theamountofearningsreinvested freeofrestrictions underthecharteratDecember31,1974was$136.7million.Portionoftaxdepreciation arisingfromshortening depreciable livesby20%undertheclasslifedepreciation system......Costsofremovingretireddepreciable property.....Accelerated amortization ofpollution controlfacilities.. Recoverable fuelcosts.....Abnormallossonretirement ofproperty.............. Accelerated amortization ofemergency facilities...... $3,7151,7253,0572,21965814,009(a) 385(87)871(758)$19,262(795)5,73719741973Thousands ofDollars6.INCOMETAXESIncometaxexpensefortheyears1974and1973isreflected ontheStatement ofIncomeasfollows:(a)Excludes$4,831deferredincometaxesrelatedtononrecurring cumulative effecttoDecember31,1973ofchangeinaccounting forfuelcosts.Operating Expenses: CurrentFederal......... State........... DeferredFederal..State....19741973Thousands ofDollars$12,55416,4543,8586,20716,41222,66115,9914,5573,2711,18019,2625,737IncometaxexpensedifferedfromtheamountcomputedbyapplyingthecombinedFederalandStatecorporate incometaxrates(1974,52.94%;1973,53.72%)topre-taxincomeasfollows:19741973Thousands ofDollars$87,47966,91238,96633,852$126,445100,764Investment taxcreditsDeferred........... Amortization ofdeferments......... OtherIncomeandDeductions: FederalState.......... Nonrecurring Cumulative EffecttoDecember31,1973ofChangeinAccounting forFuelCosts:Federal............... StateTotalincometaxexpense.......4,753~1,2163,53739,211(4,156)(920)~a,om)3,8429894,831$38,9667233~1,6885,54533,943(46)(45)~9133,852Deferredincometaxesresultfromdifferences betweenthetimethefollowing itemsarerecog-nizedasexpensesfortaxandfinancial statement purposes: Indicated incometaxexpenseontheaboveatcombinedFederalandStatetaxrates......Reductions inindicated taxdueto:Amortization ofinvestment taxcreditdeferments ..Allowance forfundsusedduringconstruction-nontaxable........... Taxdepreciation inexcessofbookdepreciation ..Taxandpensioncosts-taxdeduction inexcessofbookexpense......Other................. Totalreduction inindicated incometax..Incometaxexpense.......Effective taxrateonpre-taxincome......... 1,2161,68810,9768,0418,7997,5312,4914'4922,68733227,974$38,96630.8%20,27933,852336%$66,94054,13121 7.PROPERTIES SUBJECTTOFEDERALLICENSES, TheCompanyoperatestwohydroelectric proj-ectsunderlicensesissuedbytheFPC.CertainreservesrequiredtobeprovidedundertheFed-eralPowerActhavenotbeenrecordedpendingapprovaloftheamountsbytheFPC.TheCom-panyestimates thatsuchreservesapplicable totheyearsfrom1946wouldnotexceed$2.7mil-lionatDecember31,1974.8.RETIREMENT PLANObligations oftheCompany's Retirement Planarecurrently fundedthroughaTrustFund.AtJune30,1974,theendoftheFund'smostrecentfiscalyear,theFund'sassetsatcostwere$85.9million.Pensioncostswere$6.7millionintheyear1974and$6.8millionin1973.Planamendments effective in1974and1975,sub-jecttoInternalRevenueServiceapproval, pro-videforincreased benefitsandreducedemployeecontributions. Including thesechanges,atJune30,1974theactuarially computedunfundedpastservicecostwas$20.9millionandvestedbene-fitsexceededthecostbasisoftheFund'sassetsby$15.3million.Itisestimated thatPlanamend-mentswillincreaseannualpensioncostsbyapproximately $1.2millionin1975.TheCompanydoesnotcurrently anticipate anysignificant increaseinpensioncostsasaresultoftheEmployeeRetirement IncomeSecurityActof1974.9.RENTALSANDNONCANCELABLE LEASECOMMITMENTS Totalrentalschargedtooperating expensefor1974and1973amountedto$8.9and$7.5million,respectively. AtDecember31,1974theCompanywascom-mittedundernoncancelable leasesexpiringatvariousdatesto1996.Theminimumrentalcom-mitmentsundertheseleasestotal$55.2milliondueasfollows(millions ofdollars): 1975,$5.1;1976,$5.0;1977,$4.8;1978,$4.6;1979,$4.3;1980through1984,$15.6;1985through1989,$8.1;1990through1994,$6.5;after1994,$1.2.Theseminimumrentalcommitments areapplicable tothefollowing categories ofproperty: combus-,tionturbinegenerating equipment, $18.3million;railroadcoalcars,$16.4million;computerequip-ment,$15.9million;construction cranes,$4.6mil-lion.Generally theleasescontainrenewaloptionsandobligatetheCompanytopaymaintenance, insurance andotherrelatedcosts.Theimpactuponnetincomeineachoftheyears1974and1973wouldbelessthan1'/oifallnon-capitalized financing leaseswerecapitalized andamortized onastraight-line basiswithinterestaccruedonthebasisof.theoutstanding leaseliability. 10.CONTRIBUTIONS INAIDOFCONSTRUCTION Inaccordance witharevisionoftheuniformsys-temofaccounts, contributions inaidofconstruc- ,tion,whichisanaccumulation ofnonrefundable amountsreceivedfromcustomers forconstruc-tion,werereclassified asacredittoUtilityPlanteffective January1,1974.11.COMMITMENTS ANDCONTINGENT LIABILITIES TheCompanyestimates thatabout$2.2billionwillberequiredtocompleteconstruction proj-ectsinprogressorauthorized tobestartedin1975.Ofthisamount,about$340millionisap-plicabletotheyear1975withthebalancetobeexpendedthroughtheyear1987.TheCompanyissubjecttocertainpresentanddeveloping lawsandregulations withrespecttoairandwaterquality,landuseandotheren-vironmental matters.TheCompanyisunabletopredicttheultimateeffectofsuchlawsandregu-lationsuponitsexistingandproposedfacilities andoperations. Itispossiblethatsuchlawsandregulations mayrequiretheCompanytomodify,supplement, replaceorceaseoperating certainofitsequipment andfacilities, delayorimpedeconstruction andoperation ofnewfacilities, andrequiresubstantial additional expenditures inamountswhicharenotnowdeterminable. Inconnection withproviding foritsfuturebitu-minouscoalsupply,theCompanyatDecember31,1974hasguaranteed capitalobligations ofcertaincoalsuppliers (including fourownedandtwocontrolled coalcompanies) aggregating $124.8million.22 AUDITORS'PINION TwoBroadwayNewYork10004HASKINS&SELLSCedifiedPublicAccountants TheShareowners andBoardofDirectors ofPennsylvania Power&LightCompany:WehaveexaminedthebalancesheetofPennsylvania Power&LightCompanyasofDecember31,1974and1973,therelatedstatements ofIncome,earningsreinvested, andchangesInfinancial posi-tionfortheyearsthenendedandthescheduleofcapitalstockandlong-term debtasofDecember31,1974.Ourexamination wasmadeinaccordance withgenerally acceptedauditingstandards, andaccordingly Includedsuchtestsoftheaccounting recordsandsuchotherauditingprocedures asweconsidered necessary inthecircumstances. Inouropinion,suchfinancial statements andschedulepresentfairlythefinancial positionoftheCompanyatDecember31,1974and1973andtheresultsofitsoperations andchangesinitsfinancial positionfortheyearsthenended,Inconformity withgenerally acceptedaccounting principles consistently applied(exceptforthechange,withwhichweconcur,inthemethodofaccounting forrecoverable fuelcostsasdescribed inNote2oftheNotestoFinancial Statements) duringtheperiodandonabasisconsistent withthepreceding year.February3,1975HASKINS&SELLSQuarterly Dividends andMarketPriceofVotingSecurities for1974and1973ReportedMarketPrice-DollarsperShareQuarterly Dividends Declared2.002.I02.1752.93(b)1974CommonStock.... ~.~...$0.45(a)Preferred Stock4f/2/o.......... ~...~.1.125Series3.35o/o.............. 4.40o/o.............. 46Q/0740/08.60'/o.............. 9.00'/o.............. Preference Stock$8.00................. $8.40................. $8.70................. $13.00................ 1stQuarterHighLow$23190/457'/2524039560/45255'/253104f/210'I104102100'/2961020/49810699'/22ndQuarterHighLow217/s1654'/2487/038355246'/25249103'/29010094957899801000/4863rdQuarterHighLow18'/41350'/243332948417/s48468982'ls89778068813/469910/473384548877028'/241457075806781'/27086'2109f/21004thQuarterHighLow170/0147/e484320220/4196560'/262587/061424239'/2535851605653102'/21091001091081040.83751.101.15(c)2.152.251973CommonStock.......... 0.4226240/0230/02222'/2Preferred Stock4'/2o/o................ 1.125556053Series3.35o/o.............. 4342434242440o/o.............. 63'/259'/2615758'/446Q/062606060607.40'/o.............. 8.60/o.............. 114109112f/2108'/2108'/4900'/o110109110109109Preference Stock$8.00............ 2.00106102104f/210010396101f/2943/4$8.40................. 2.101090/4105108'/2104105f/298f/210598$8.702.175113107112106'/2105101107'/297'/2Theprincipal tradingmarketforailclassesofstockIsthoNewYorkStockExchangeoxcoptforthe3.35'/o~4.60/oand9.00/oSeriesPreferred whicharoIistodonthoPBWExchangebutaretradedprincipally overthocounter.Pricerangesfortho3.35/o,4.60/oand9.00/oSeriesProforrod Stocksorobasedonthobestavaiiabio highandIowbidpricesduringthoperiodsondshouldbovlowedasreasonable approximations. (a)Firstquarterof1974was$0.42,remaining quarters$0.45.(b)StockIssuodOctobor1974, fourthquartordividendonly.(c)Tho7.40'/oSeriesPreferred wasaprivateplacement inAugust1973ondIsnotpubliclytraded.Tho1973thirdquarterdividendwas$0.9456andsubsequent quarterly dividends wore$1.85.23 PRINCIPAL OFFICERSBOARDOFDIRECTORS JACKK.BUSBY,President BROOKER.HARTMAN,Executive VicePresident, Operations ROBERTR.FORTUNE,VicePresident, Financial GEORGEF.VANDERSLICE, Comptroller CHESTERR.COLLYER,Treasurer DONALDJ.TREGO,Assistant Treasurer JOHNT.KAUFFMAN, VicePresident, SystemPower&Engineering NORMANW.CURTIS,VicePresident, Engineering &Construclion EMMETM.MOLLOY,VicePresident, HumanResourceandDevelopment RICHARDH.LICHTENWALNER, VicePresident, PublicRelations EDWARDM.NAGEL,VicePresident, GeneralCounselandSecretary LEONL.NONEMAKER, VicePresident, DivisionOperations CHARLESE.FUQUA,VicePresident, Susquehanna DivisionCHARLESJ.GREEN,VicePresident, Harrisburg DivisionCARLR.MAIO,VicePresident, LehighDivisionJAMESJ.MCBREARTY, VicePresident, Norlheast DivisionHERBERTD.NASHJR.,VicePresident, ConsumerandCommunity ServicesEDWINH.SEIDLER,VicePresident, Distribution BRENTS.SHUNK,VicePresident, Lancaster DivisionCLIFFORDL.ALEXANDER JR.,Washington, D.C.PartnerolArnold&Porter,Counsellors alLawJACKK.BUSBY,Allentown President oftheCompanyRALPHR.CRANMER,Williamsport MemberolBoardolDirectors -GrllPublishing CompanyEDGARL.DESSEN,HazletonPhysician-Radiologist BROOKER.HARTMAN,Allentown Executive VicePresident, Operations W.DEMINGLEWIS,Bethlehem President ofLehighUniversity JOHNA.NOBLE,ScrantonPresident olClelandSimpsonCompany,Department storesRUTHPATRICK,Philadelphia ChiefCuratoroltheLimnology Department, AcademyolNaturalSciencesNORMANROBERTSON, Pittsburgh SeniorVicePresident andChiefEconomist olMellonBank,N.A.JOSEPHT.SIMPSON,Harrisburg ChairmanoltheBoardolHarscoCorporation, Diversified manufacturer offabricated metalproduclsM.J.WARNOCK,Lancaster ChairmanoltheBoardolArmstrong CorkCompany,Manulacturer ofinteriorfurnishings andspecialty productsCHARLESH.WATTSII,Lewisburg President olBucknellUniversity S.HAYWARDWILLS,Miami,FloridaChairmanoltheBoardandPresident olGACCorporatfon, Community development Executive Committee: JackK.Busby,chairman; Messrs.Hartman,Simpson,WarnockandWills.AuditCommittee: CharlesH.Watts0,chairman; Messrs.Alexander andWarnockandDr.PatrickTheCompanyfilesForm10-KannuallywiththoSecurities andExchangeCommission. Form10-KiscomposodofthisAnnualReporttoshareowners andadditional Informatton concerning theCompanyanditsoperattons. Thisadditional Information willbeavailablo afterApril1,1975bywritingtoPennsylvania Power&LightCompany,TwoNorthNinthStreet,Allentown, Pa.18101,attention: Mr.GeorgoI.Kllno,InvestorServicesManager. FISCALAGENTSTRANSFERAGENTSFORPREFERRED, PREFERENCE ANDCOMMONSTOCKIndustrial ValleyBankandTrustCompany634HamiltonMallAllentown, Pennsylvania -18101IrvingTrustCompanyOneWallStreetNewYork,NewYork-10015Pennsylvania Power&LightCompanyTwoNorthNinthStreotAllentown, Pennsylvania -18101REGISTRARS FORPREFERRED, PREFERENCE ANDCOMMONSTOCKTheFirstNationalBankolAllentown HamiltonMallatSeventhAllentown, Pennsylvania -18101MorganGuarantyTrustCompanyolNowYork23WallStreetNewYork,NewYork-10015DIVIDENDDISBURSING OFFICEFORPREFERRED, PREFERENCE ANDCOMMONSTOCKTreasurer Pennsylvania Power&LightCompanyTwoNorthNinthStreetAllentown, Pennsylvania -18101SECURITIES LISTEDONEXCHANGES NEWYORKSTOCKEXCHANGEFirstMortgageBonds,3%Seriesduo1975FirstMortgageBonds,10Ye%Sorlesduo19824'Preterred Stock(Code:PPLPRB)4.40%SeriesPreferred Stock(Code: PPLPRA)8.60%SoriosPrelorred Stock(Codo:PPLPRG)Prelerenco Stock,$8.00Serios(Codo:PPLPRJ)Prelerenco Stock,$8.40Series(Code:PPLPRH)Prelerence Stock,$8.70Sories(CodotPPLPRI)Prelerenco Stock,$13.00Series(Code:PPLPRK)CommonStock(Code:PPL)PBWSTOCKEXCHANGE4~h%Preferred Stock3.35%SeriesPre!orred Stock4.40%SeriesPrelerred Stock4.60%SeriesPrelerred Stock8.60%SeriesPrelorred Stock9%SeriesPre!orred StockPrelerence Stock,$8.00SeriesPrelerence Stock,$8.40SeriesPrelerence Stock,$8.70SeriesPrelerence Stock,$13.00SeriesCommonStockTheannualmeetingofshareowners willbeheldattheLehlghConsistory ScottishRiteAuditorium, 1533HamiltonSt.,Allentown, Pa.,onWednesday, April23,1975.Formalnoticeofthemeeting,togetherwithareservation cardformeetingattendance, willbemailedtoshareowners ofrecordMarch10,1975,onoraboutMarch17,1975. PpaLPENNSYLVANIA POWER8LIGHTCOMPANYTwoNorthNinthStreet,Allentown, Pa.18101Teiephonet AreaCode215821-5151BULKRATEU.S.POSTAGEPAIDAllentown, Po.PermitNo.104LtZHOINV.S.A. ~Pennsylvania Power&LightCompanyLAnnttelI:Isn't't '1Q7$THEATTACHEDFILESAREOFFICIALRECORDSOFTHEOFFICEOFREGULATION. THEYHAVEBEENCHARGEDTOYOUFORALIMITEDTIMEPERIODANSMUSTBERETURNEDTOTHECENTRALRECORDSSTATION008.ANYPAGE(S}REMOVEDFORREPRODUCTION MUSTBERETURNEDTOITS/THEIRORIGINALORDER.DEADLINERETURNDATEVi',wO'Y.AhcMARYJINKS,ClIIEFCENTRALRECORDSSTATION~~gagg',:fc. HIGHLIGHTS 197418,963472,036197519,113$544,12963,661(a) $2.87$1.80$23.172.88(a)1.7722.912.92(a)2.36(a)ElectricEnergySales-millionskwh.Operating Revenues-thousands ...EarningsApplicable toCommonStock-thousands ......$73,032EarningsPerShare,basedonaveragenumberofsharesoutstanding Dividends DeclaredPerShare......BookValuePerShareTimesInterestEarnedBeforeincometaxexpense2.80Afterincometaxexpense........2.31Construction Expenditures-thousands .$345,289271,460TotalCapitalInvestment-thousands .$2,100,003 1,828,888 (a)Excludeseffectof$4,162,000 Nonrecurring CreditrecordedIn1974.PerCentIncrease(Decrease) 08'/o15.314.7(0.3)1.71.1(4.1)(2.1)272,.14.8Pennsylvania Power&LightCompanyisanelectricutilityproviding serviceto918,000homesand,businesses overa10,000-square-mile areain29countiesofcentraleasternPennsylvania. Principal citiesinthePP&LserviceareaareAllen-town,Bethlehem, Harrisburg,

Hazleton, Lancaster,

Scranton, Williamsport andWilkes-Barre.

ContentsPresident's LetterTheYearInReviewStatistical 'SummaryAnalysisofStatement ofIncomeSupplementary CommentsFinancialsNotestoFinancial Statements Dividends andStockPricesDirectors andOfficers131112Insert15202726CoverPhoto:ThePP&LlinemanisprobablymorevisibleandtypifiesourCompanymorethananyotherindividual. Today'slineman,withhisup-to-date kitoftoolsandequipment isalotmoreefficient thanhispredecessors backthroughPP&L's55-yearhistory.OnthecoverLinemanFirstClassAlbertMolchan,ofCatasauqua, Isworkingsafelyandcomfortably atpole-toplevelfromhiselectrically-Insulated buckettruck.Heisusingahydraulic pressingtoolonanew,de-energized linebeingbuilttoincreasecapacityInaruralsectionofourterritory. Thismodern-day linemanprovidesquiteacontrasttotheearlylinemanwhoworkedprimarily withclimbinghooksandhandtools. ToOurShareowners: Recession andinflation weretheprincipal focalpointsofpublicconcernin1975.Itwasalsoayearofnon-progress inenergy.EventhoughtheEnergyPolicyandConservation Actof1975becamelawatyear-end, thelackofaneffective energypolicycontinues tobeourmostcriticallong-term nationalproblem.Accordingly, thisletterisagaindirectedtothissubject,justasitwaslastyear.Theenergyrecordof1975wasadismalone:importsofforeignoilincreased -naturalgasreservesdecreased -majorareasofenergy-related environmental conflictwerenotresolved-therewasnoclear-cut decisionontheissueofregulation/ deregulation ofoil/natural gaspricing-additional development ofcoalandnuclearresources continued tolag-utilities announced morecutbacksanddelaysininstallation ofnewgenerating facilities astheirabilitytofinancelargeenergyprojectsremainedindoubt.Overall,anatmosphere ofpolitical ambivalence andexpediency persisted, asmanycitizensfocusedsostronglyontheproblemsofhigherenergypricesthattheneedtoprovideforfutureenergyrequirements wasoftenshuntedtooneside.Wecannotaffordtocontinueinthisstyle.Ominoussignsarealreadypresent,forthosewillingtoseethem,thatthenationisslippingtowardsanirreversible energymess.Weareconfronted bytherealitythatittakesadecadeormoretobringnewelectricenergyfacilities online.1976istheyearwhenweshouldbestartingtoprovidenewfacilities for1985/1986. Otherwise, millionsofpeoplemaybe"surprised" whenlightsflickerandfactories arerequiredtocutbackonworkschedules, 10yearshence.Despitethegrowingurgencyoftheenergysituation, thereisnotyetmuchindication that1976willdepartfromtheholdingpatternthatmarked1974and1975.Weaboundinproposedremedies, technical adviceandvoluminous studies.Butwearestillondeadcenter.Why?Ourinterpretation isthatthevarioussocial,economic, financial andpolitical pressures andcounter-pressures thatunderlietheenergyproblemhaveneutralized oneanother.Forthemomentatleast,ournationaldecision-making processseemstohavebeenimmobilized byabalanceofpoweramongconflicting forcesandbeliefs.Thisstalemate reflectstheinchoatestateofpublicunderstanding onenergymatters.Smallwonderthatthissituation exists.Thepublicisrandomlyexposedtoallkindsofinformation andplr,Emisinformation onenergy.Ithasgoodreason,inthispost-Watergate era,tobesuspicious ofbothgovernment andbusinesspronouncements andtobeunsettled bytheconflicting assertions ofscientific experts.Theresultisamishmashofpublicuncertainty andconfusion. Basicquestions anddoubtscontinue. Itisessential thattheyberesolvedbecause,untiltheyare,thelackofdirection ofenergypolicywillcontinue. So,wethinkitisworthwhile torestatesomeenergyfundamentals, asweseethem-eTheeraofplentiful, low-costenergyisover.~Weshallneedmoreenergy.Dealingonlywithpeoplealreadyborn,we"know"thatin14yearstherewillbeanadditional 29millionpeopleofage20andoverinthiscountry.Further,ifwearegoingtoachieveanunemployment rateof,say,5.5percent,wewillneed20millionmorejobs.Thereisnowayoffeeding,housing,clothing, providing forthehealthcare,employment andlifestyle-satisfactions ofthismanymoremillionsofpeoplewithoutadditional suppliesofenergy.~Thediminishing supplyandnon-renewable natureofouroilandnaturalgasresources areareality.Wehavetobecomemuchmoreaggressive inpreparing ourselves toliveinaworldofdecreasing suppliesofbothformsofenergy.~Weshallhavetomakemoreuseoftheenergymaterials thatareavailable, particularly ourcoalanduraniumresources. Thesearethemajorenergymaterials thatwemust,forthetimebeing,relyontoreshapethenation'senergybase.~Furtherdevelopment ofourdomesticoilandnaturalgasresources isessential. Additional suppliescouldlessenourdependency onOPECimportsandprovidemoretimeinwhichtoworkoutanorderlyrestructuring ofthenation'senergysupplymix.~Wemustintensify ourenergyconservation efforts.Weshouldconcedethatwehavebeenwastingenergyinthepastandshoulddomuchmoretouseenergywisely.Wehavetooverhaulourutilization-technology, tightenbuildingstandards andmoderateourenergyconsumption habits.Itwillbeastep-by-step process.Wecannotovernight rebuildalltheexistinghomes,buildings, factories andtransport systemsthatarenowinplace.Eventheenergyconsumption levelsofnewfacilities willreducegradually, becauseofthemomentumofpastdesignsandpractices. ~Wemustexpandresearcheffortstodevelopnewmethodsandsourcesofenergysupply.Here,too,progresswillbeastep-by-step affair.Dramaticbreakthroughs arenotinsight.Manyappraisais warnusnottoexpecttoomuch,toofast.~Inourcomplexandinterdependent world,energyplanninganddecision-making requiretheverybestkindofsystemsmanagement thatwearecapableof.Weneedathoughtful balancing ofeconomic, socialandenvironmental needsandvalues.Andrecognition thattherearelimitstotherateofchangethatcanbetolerated whendealingwithacoreelement,suchasenergy,whichsofundamentally affectsourlives.~Oursocietycancopewithhumanproblemsarisingfrominadequate income,including inability topurchasebasicenergyrequirements -ifwehaveenergyavailable. Withoutadequateenergy,however,oursocietywillnothavetheproductive capability necessary tomeethumanneeds.Weappreciate that'beyond these"energyfundamentals," therearemanycomplicated questions ofwaysandmeansthatwillhavetobedealtwith.Butfirstthingsfirst.Thesefundamentals arenotthemselves accepted. Iftheywere,wewouldnothavetheproblemswedo.Wemustcontinueintensive review,discussion, andanalysisuntilpublicopinionrecognizes thatournation'senergycost/supply crisisisrealandlongterm.Onlythenwillitbepossibletocometogripswiththemanydifficult changesthatareinvolved, nottheleastofwhichisfacinguptotheheavycostofsupporting therequirednewinvestments inenergyfacilities. Verylittlewillhappenuntilpeoplesetasidetheillusionthatthecomplexenergyproblemsthatconfrontuscanbepainlessly overcomebysomekindofquickfix.Weaskforourshareowners'elp insupporting andfacilitating thediscussion andinformational processnecessary tocreateaclimateformakingthebasicenergychangeovers weneed.Withsuchhelp,andadditional helpfromotherinterested andinformedcitizens, wecanmakethenation'sBicentennial theyearwhenwefinallygotstartedoutoftheenergyquagmirethatnowenmeshesus.Respectfully submitted, ~cg/JackK.Busby,President March1,1976 THEYEARINREVIEWPP&L's1975pershareearningswereaboutlevelwith1974-eventhoughabout15percentmoreshareswereissuedduringtheyear,reflecting theincreased shareowner investment intheCompany.Earningsfor1975were$2.87pershareofcommonstock,downonecentfromthe$2.88earnedin1974.ElectricUseEdgingUpLastyear,wereporteda1974growthrateinkilowatt-hour usageofonlyahalfpercentcomparedtoanaverage1963-73annualgrowthrateofaboutninepercent.Thislevelingoffofusewasattributed totheenergycrisis,energyconservation effortsbyourcustomers andthestateoftheeconomy.During1974andearly'75wewereforecasting thatthislevelingoffwasonlytemporary ascustomers implemented energyconservation practices andadjustedtolivingwithlowerenergyuse.Itwasclear,though,thatpeoplecouldnotgoonloweringthermostats anadditional fivedegreeseveryyear.Weexpectedthatanewequilibrium wouldbereachedatsomepointandgrowthwouldresume-althoughataratemuchtemperedbytheinfluence ofhigherenergyprices.Someconfirmation oftheseexpectations wasprovidedbyresidential andcommercial customers whose1975kilowatt-hour usewashigherthanthepreviousyear.Overallresidential usagewasupfivepercentfortheyear,reflecting boththeadditionof15,000customers andhigherindividual electricconsumption. About11,000electrically heatedhomesandapartments wereaddedtooursystemin1975,someofwhich,wefeel,reflectsthe"throwover effect"ofuncertainty inavailability andpriceinthenaturalgasandoilmarket.Commercial usageshowedthegreatestgainofallourclassifications withasevenpercentincreaseover1974.Industrial usewasmoresensitive tothegeneralslowdownoftheeconomyanddroppedtwopercent.Helddownbythedecreaseintheindustrial classification, totaluseofelectricenergyincreased byonly150millionkilowatt-hours in1975-anoverallincreaseofaboutonepercent.Althoughoverallusewasupslightly, thewinterpeakdemandforelectricity increased aboutninepercentfrom1974to1975.Aboutathirdofthatgrowthwasattributable tocolderweather.Therestcamefromincreased customeruse.RevenuesUpRevenuesfor1975were$544million,anincreaseof15.3percentfrom1974.Althoughpartoftheincreaseinrevenuescamefromhigherresidential andcommercial use,mostcamefromtherecoveryv)jSet,>jl'()rg)AwelderJoinssectionsofstainless steelsteamseparators atoponeofthereactorcoresattheCompany's Susquehanna nuclearplantunderconstruction nearBerwick.Theseparators removewaterfromsteamleavingthereactorbeforethesteamreachestheturbine-generator units. ofincreased fuelcoststhroughthefueladjustment charge.(Although therateofincreaseinfuelcostsmoderated during1975,theaveragecostoffuelconsumedwashigherthanduring1974.Thisresultedinhigherfueladjustment revenues. Recoveryofthesehigherfuelcostsaccounted forabout77percentoftheincreaseinrevenues.) ArateincreaseallowedtogointoeffectinSeptember, providedabout$5millioninadditional revenues. CostsUpAlsoTheriseinrevenueswasmatchedbyincreased costs.Totaloperating expenseswereup$66millionover1974,anincreaseofabout19percent.Thisfigurewouldhavebeenevenhigherwithoutthe$64millionincreaseover1974ininterchange hkpowersaleswhich,inkeepingwithregulatory requirements, areclassified asareduction ofexpensesratherthanasrevenues. Muchoftheincreaseinexpensesreflectsthehigheraveragecostforthefuelburnedtogenerateelectricity in1975comparedto1974.Our1975fuelbillamountedto$272millionversus$192millionthepreviousyear.RateIncreaseProceedings ArateincreaserequestfiledbyPPBLinMarch1975hadstillnotcometoafinaldecisionbythedateofthisreport.Stillpendingisourapplication tothePennsylvania PublicUtilityCommission (PUC)foratwo-step, $80-million increaseinrevenues. Thefirststepoftherequestamountedtofourpercent,orabout$22millionannually. Thesecondstepwasforanadditional 11percent,orabout$58millionayear.Wehadaskedthatthefirststepbecomeeffective inJunewhilerecognizing thatthelargersecondstepwouldprobablybesuspended forfurtherstudy.InJune,thePUCsuspended bothstepsoftheproposalbecauseofconcernaboutthatpartoftheraterequestwhichprovidedfornoincreaseforthefirst200kilowatthoursofusebyresidential customers. Thisproposal, oftenreferredtoas"lifelinerates,"wasdesignedtorecognize someoftheinflation problemsfacedbylow-income peopleandtheelderly.Werefiledthefirststepafterremovingthelifelinefeature.Then,whenthePUCdidnotsuspendtherevisedfiling,itbecameeffective onSept.13subjecttopossiblerefundpendingfinalPUCaction.Extensive testimony waspresented bytheCompanyonbothpartsoftheproposedincreaseatpublichearingswhichconcluded inJanuary1976.NofinalPUCactionisexpectedbeforelateMarch1976.IUManyPP8Lwomennowholdpositions traditionally heldbymen.CynthiaWilliams, ofAllentown, isoneofseveralyoungwomenwhohavetakendraftingcoursesandqualified forworkasadraftsman IntheCompany's engineering department. PP&Lalsohaswomenworkingasengineers, handymenandinotherpositions considered, untilrecently, inthemaledomaIn. Construction DollarsinRatesPP&Lmustpayinterestanddividends onthesecurities itsellstofinancetheconstruction offacilities (construction workinprogress). However,underpresentregulatory procedures inPennsylvania, theCompanycannotchargecustomers forthesecostsuntilthefacilities arecompleted andarebeingusedtoprovideservicetocustomers. Duringtheconstruction ofapowerplant,whichnowtakesabout10years,theCompanyhastopaymillionsofdollarsininterestanddividends toinvestors whoprovidethemajorportionoffundsnecessary tofinancetheconstruction ofthefacility. Interestanddividendpaymentsareaone-waystreetduringtheconstruction periodsincetheCompanymustpayforthesecosts,butcannotbegintoincludetheminthecostofservicepaidbycustomers untiltheplantiscompleted. Thissituation resultsinacashdrainontheCompanyatatimewhenitmustraiseunprecedented amountsofmoneytopayfortheconstruction offacilities toprovidefortheincreasing powerneedsofcustomers. Itisforthisreasonthatwehaverequested thePUCtoallow$50millionofconstruction workinprogresstobeincludedinsettingratesinourcurrentratefiling.Ifapproved, weexpecttoincreasethisamountinanorderlystep-by-step processinfutureratefilings.ThiswillenabletheCompanytostrengthen itscashpositionwhichisessential tothefinancing ofnewcustomerservicefacilities. Thisapproachshouldprovideforamoregradualandevenwayofhandlingtheincreases inelectricratesmadenecessary bytheadditionofsuchfacilities. NewAcquisition Asaresultofnegotiations initiated byHersheyEstates,corporate parentofHersheyElectricCompany(HEC),PP&Lhasagreedtoacquireallofthatutility's capitalstock.Thetotalacquisition cost,including therepayment ofdebtobligations, willbeapproximately $8million.Ifwereceiveregulatory approvalfortheacquisition weplantoeventually mergeHECintoourCompany.HECpresently buystheenergytoservethe5,500homesandbusinesses inits28-square-mile territory fromMetropolitan EdisonCo.1976Construction BudgetTheCompany's construction budgetforthenextfiveyearsremainsessentially unchanged fromlastyear'sfigureatnearly$2.1billion.For1976thefigureisabout$390millioncomparedto$345millionspentin1975.Thelargestpartofthe1976budget,$242million,goestowardconstruction ofournuclearplant.Another$39milliongoestowardcompletion oftheMartinsCreekoil-fired Unit4,and$20millionisallocated principally forworkatexistinggenerating stations. Thebudgetforelectrictransmission facilities is$17millionandfordistribution andotherfacilities itis$72million.Susquehanna NuclearPlantProgressonconstruction ofPP&L's$1.7-billion nuclearplantnearBerwickcontinued during1975-althoughhamperedbyasix-week-long regionaloperating engineers'trike. Unit1,scheduled foroperation inlate1980,was21percentcompleteatyear-end. Unit2progressstoodatsixpercentofcompletion. Bothwillbeboilingwaterreactorgenerating unitsandeachwillhavea1,050,000-kilowatt capacity. PP&LandAllegheny ElectricCooperative arecurrently engagedinnegotiations which,ifagreement isreached,wouldresultinAllegheny acquiring a10percentownership ofSusquehanna. Negotiations arealsounderwayonalong-term agreement forUGICorporation's LuzerneElectricDivisiontopurchaseaportionoftheoutputofPP&L'sSusquehanna plantandMartinsCreekoilunits.Thetotalamounttheypurchasewillincreasegradually, reaching3.8percentofSusquehanna and4.9percentoftheMartinsCreekunitsby1983(about40,000-kilowatts fromeachofthefourunits)andwillcontinueatthatleveluntiltheunitsareretired.MartinsCreekOilUnitsPP&L'sgenerating capability increased by820,000kilowatts whenthelargeoil-fired Unit3atourMartinsCreekplantwentintocommercial operation onOct.15. ThisnewadditionisunlikeanyotherPP&Lgenerating unit.Insteadofburningcoaltomakesteam,asourotherlargegenerating unitsdo,Unit3isdesignedtoburneithercrudeorresidualoil.Theunit'sdesignandoperating characteristics allowittobe"cycled"muchfasterthanacoalunit.Thatis,itcangofrompartial-load capacitytofull-load capacityandbackagainrelatively quickly,thusenablingittopickupordroploadtomeetfluctuating demand.Infactwehavefrequently beenshuttingtheunitdown'completely atnightandbringingitbackintouseinthemorning,astheneedforpowerincreased. Theavailability ofthislarge,efficient load-following unitlessensourdependence onsmaller,expensive-to-operate combustion turbineswhichburnaproductverymuchlikehome-heating oil.Unit4,atwinofUnit3,isexpectedtobecompleted inlate1976andincommercial usein1977.OilPipelineThecompletion ofthelong-delayed pipelinetoservetheMartinsCreekoilunitsisatlastinsight.Construction finallybeganonthepipelineinMayafteralmosttwoyearsofcostlydelays.Themultitude ofhearingsthatwereheldonthepipelinehadpostponed construction severaltimes.Theoriginalschedulecalledforthepipelinetobeoperating andreadyforthestart-upofUnit3lastyear.ThedelaysforcedtheCompanytoturntotemporary railtransportation ofoilfortheunits.Althoughthepipelineitselfisintheground,terminalarrangements atMarcusHook,belowPhiladelphia, mustbecompleted beforeoilcanflowtoMartinsCreek.Bituminous CoalDespiteourdiversification intooilandnuclearunits,coalisstillPP&L'sprimaryenergysourceandwecontinued acquisition offuturesuppliesduring1975.During1974and1975PP&Lformedtwosubsidiary coalcompanies, GreeneHillCoalCo.andGreeneManorCoalCo.,whichacquiredabout65,000acresofbituminous coalrightsinGreeneCountyinsouthwest Pennsylvania. Thisaddedabout325milliontonstoPP&L'sestimated recoverable reservesofcoal.Ifdeveloped, thiswouldbeenough,whenaddedtotheapproximately 85milliontonsofreserveswearealreadymining,toassureastablebituminous coalsupplyformanydecadestocome.However,it'salongwaybetweenhavingthereservesandactuallygettingthecoaloutoftheground.Largecapitalinvestments areneededtoopenanewmine.WehaveaskedthePUCtograntusratesthatwillcoverthefinancial carryingcostsofthereserves. Wefeelthatourdevelopment ofnewminesintheGreeneCountyareawouldbeinthebestlong-term interestofourcustomers buttheultimatedecisiononwhetherwewillhavethefinancial capability todoitrestswiththePUC.Besidesowningthecoal,wealreadyhaveacost-saving waytogetittotheplants.PP&Lhasbeenapioneerinoperating itsowncoaltrainssincetheearly'60s.OureighthunittrainwasputintoserviceinJulybringingourfleetuptoatotalof892railroadhoppercars.Theninthunittrainisonorder.Anthracite StudyInOctober,aftermorethan20years'ependence onbituminous coalasitsprimaryfuel,theCompanyannounced planstoexplorethefeasibility ofbuildingananthracite-burning generating stationnearanthracite fieldslocatedintheCompany's servicearea.BeforeandduringWorldWarli,PP&Lwastheworld'slargestuserofanthracite whenweburnedthe"fines"or"silt"coalthatwasleftoverintheprocessofpreparing largersizesforthehomeheatingmarket.Whenhomeuseofcoaldeclinedintheearly1950s,thevolumeoffinesdiminished andPP&Lcouldnotaffordtobuyexpensive, fresh-mined anthracite forgenerating use.So,weturnedtobituminous coalasourprincipal fuel.Now,however,sulfur-emission regulations canaddmanymillionsofdollarstothecostofnewbituminous-coal-burning plants.Sinceanthracite ismuchlowerinsulfurcontentthanbituminous

coal, wecouldpossiblyavoidthecostofsulfur-emission controlequipment andtheassociated operating problemswhichcanadversely affecttheon-linetimeoffutureplants.This,combinedwithlowertransportation costs,sinceweareliterally ontopofthecountry's majoranthracite fields,possiblycouldmakefresh-mined anthracite apractical andeconomicalternative.

Theyear-long studyshouldgiveustheinformation weneedbeforewemakeafuelcommitment foradditional generating capacitythatforecasts nowshowmaybeneededbythemid-80s.Forstudypurposes, theCompanyvisualizes aplantcapacityof1.6millionkilowatts madeupoffourunitsof400,000kilowatts each.Thiswouldmeanapotential needforuptofourmilliontonsofanthracite ayear.BigFinancing Year1975wasthelargestfinancing yearintheCompany's historywith$353millionofsecurities sold.Partofour1975borrowings wereusedtorefund$93millionofmaturing30-yearfirstmortgagebondswhichhadathreepercentinterestrate.Wehadtoreplacethemwith9%percentbonds-asharpexampleoftheeffectsofinflation. Itisnoteworthy alsothatthe$93millionbondissuewastheentiresecureddebtoftheCompanyin1945.Thiscompareswithmorethan$1billionofoutstanding firstmortgagebondsattheendof1975.Weanticipate thatourfinancing needsfor1976willbeabout$276milliontomeetconstruction expenditures andtorefund$11millionofmaturingdebt.Weareencouraged bytheacceptance oftheCompany-administered dividendreinvestment planwhichbeganinApril1975.About$2.5millionofcommon,preferred andpreference dividends wasreinvested innewcommonstockandanother$3millionofcommonwasboughtthroughoptionalcashpaymentsandemployeepayrolldeductions. Arevisedreinvestment planwasintroduced inDecemberwithafivepercentdiscountoncommonstockboughtwithreinvested preferred, preference andcommondividends. Capitalization Milestone Thefinancing during1975broughttotalcapitalinvestedintheCompany-fundsprovidedbycommon,preferred andpreference shareowners, earningsreinvested, short-term andlong-term debt-pastthe$2-billion mark.Wereachedthe$1billionpointin1970,after50yearsinbusiness. Thatsecondbilliontookfiveyears.-.fgMarvinWiegandt, ofAllentown, aPP&Lsurveyorusesanelectronic distancemeasuring deviceonafieldassignment. Theinstrument recordsthetimeittakesforalightbeamtotraveltoitstargetandback.ItthenconvertsthistimetodistanceInaminiature computerthatgivesadigitalread-outin10seconds.Thedeviceisespeciallyuseful acrossbodiesofwaterorfromhillto hillandIsjustoneofthewaysweareseekingto"worksmarter." ~~((4, Operation Understanding President JackK.Busby's15-month-long Operation Understanding odysseythroughout theCompany's 10,000-square-mile territory endedinDecember1975.Duringthatperiod,Busbyspentabout25percentofhistimegathering viewpoints, listening andspeakingtoemployees,

retirees, thenewsmedia,anddiverseconsumer,

business, educational andcitizengroups,mostofwhomarealsocustomers.

Thetravelscoveredwellover8,000mileswithaudiences totalingover10,000peopleinmorethan350separatemeetings. YearOfTheAuditNinemajorauditsorstudiesofvariousaspectsofouroperations wereundertaken in1975.Mostwereinitiated byPP8Landcenteredaroundareassuchas:coalminingefficiency; application offueladjustment charge;andourfuelprocurement practices. Thelargestwasastudyofouroveralloperational effectiveness byMcKinsey&Co.,amanagement consulting firm.Wewerestillawaitingfinalresultsatthedateofthisreport.SitingStudyAuniquefacilities sitingprojectwaslaunchednearHarrisburg during1975.TheCompanyinvitedarearesidents toformacitizens'ask forcetogiveustheirsuggestions andtogivethemavoiceindecidingwherevitalsubstations andelectrical transmission facilities willbelocated.Theresultsofthisexperiment incitizenparticipation shouldhelpusindeveloping futuresitingandland-usepolicies. EnergyConservation Overthelasttwoyearswereportedtoyouontheconstruction andoperation ofourexperimental solar-supplement energyconservation homenearSchnecksville, northwest ofAllentown. Severalvaluableconclusions canbedrawnfromtheexperiment. Thehomeprovedthere'salongwaytogobeforehomeswithsolarheatingandcoolingsystemswillbewithinreachoftheaverageAmericanfamily.Thetechnology isavailable butthecostofbuyingandinstalling thenecessary equipment isprohibitive. However,wefoundthatwitharathermodestadditional new-homeinvestment of$500-$1,000forfoamedinsulation arounddoorsandwindows,polystyrene sheathing, extra-heavy insulation andtriple-glazed windowsitwaspossibletocutheat-loss byalmosthalfcomparedwiththetraditional well-insulated home.Asanoutgrowth oftheexperimental homeprojecttheCompanynowiscooperating withhome-building contractors initsfivedivisions inaspecialenergy-saving Bicentennial HomesProject.Thefivehomes,whichwillincludethelatestenergy-saving heatingandcoolingsystems,andbetterinsulating qualities, arebeingbuiltbylocalcontractors attheirexpensewiththeCompanyproviding fundsforenergyconservation equipment, including solardevices.Thehomeswillbeopenforpublicinspection duringthesummerof1976andsoldinthefall.Agreements callforthebuilderstomaintainmeteringequipment inthehomeforoneyearaftertheyaresoldinordertodetermine theeffectiveness oftheequipment. TheCompanycontinued andexpandeditsformalprogramstoencourage energyconservation byourcustomers. Sixday-longenergymanagement seminarswereheldthroughout theCompany's serviceareabringingtogetherbusinessleaders,government officials andPP8Lenergyconservation specialists foranintensive information exchange. Atwo-dayEnergyDesignForumwasheldformorethan200architects andengineers inSeptember. Itwasanopportunity toexchangeideasonthelatestwaystodesignbuildings usingheating,ventilating andairconditioning systemsthatrequirelessenergywhilestillremaining functional. Acrossourserviceareanearly700energymanagement teamshavebeensetupwithCompanyassistance inalltypesofindustries andbusinesses. Wearealsotakingagoodlookatourownoperations. Energymanagement teamshavebeenestablished tomonitorandimproveenergyuseinoffices,crewquartersandgenerating stations. ,Asanadditional incentive, andtopublicize particularly successful efforts,PP&Lhaspresented anumberofenergymanagement awardstoindustrial andcommercial customers whohavemadesignificant changestoreduceelectrical demandandenergyuse.AreaBusinessDownForthefirsttimeinrecenthistoryPP&L'sservicearealostmoreindustrythanitgainedduringthecalendaryear.Thismeantthatinour10,000-square-mile serviceareawehadanetlossof1,885industryjobsin1975comparedtoagainof1,923in1974.Theunemployment ratewasupto7.4percentcomparedto4.7percentayearago.Atyear-end, morethan100buildings wereavailable forindustrial occupancy. Recognizing thatPP8L'sownfutureistiedcloselywithconditions inourservicearea,wewilldowhatwecantorestoreareaeconomichealth.Inadditiontocontinuing itsestablished programofindustrial development, theCompanywillplacespecialemphasisonaselective andintensive programofadvertising anddirectmailin1976inanefforttobringnewjobstqareaswithparticularly severeunemployment rates.Ourgoalistohelpbringunemployment downtothenationalgoaloffivepercent.ResearchOneofthemorecreativeandinteresting researchprojectsPP&Lengagedinduring1975wastheexperimental burningof50tonsofpelletized municipal solidwaste(trash)atourSunburyplantinMay.Theexperiment centeredaroundaclean,pelletized fuelmadefromthecombustible productsfoundinordinarytrashaftertheglass,metalandotherunburnables havebeenremoved.Resultsshowthatthewastecanbeburnedsatisfactorily whenmixedwithcoal,eventhoughtheheatingvalueismuchlower.Therearemanyproblemstobeironedoutbeforethisfuelcouldbeusedonaregularbasis.Thebiggestoftheproblemsisthatnolarge-scale municipal facilities areavailable tomanufacture thepellets.Also,thecostofre-equipping powerplantstohandlethismaterialcouldprovetobeprohibitive. OnalargerscalePP&Lcontinues tohelpfundindustry-wide electricresearchprojectsthroughEPRI(Electric PowerResearchInstitute). For1975ourdollarcommitment toEPRIresearchwasabout$1.3million.Another$360,000wenttowardtheliquidmetalfastbreederreactorproject,tobebuiltinTennessee, while$645,000wenttootherresearchprogramsduring1975.For1976ourtotalresearchbudget,is$2.7million.InjustthethreeyearsofEPRI'soperation theelectricindustry's commitment totheresearchorganization hasgrownto$160millionin1976.InmanyareastheEPRIprogramsarecloselycoordinated withthoseofthenewly-formed federalEnergyResearchandDevelopment Administration (ERDA)whichnowhasa$3.6-billion-a-year budget.CostReduction Continues Inresponsetothepressures ofinflation, theCompanyhasbeeninvolvedinamajorcostreduction programsincemid-1974. Becauseofthedownturninthenationaleconomy,andthesubstantial slowdowninelectricloadgrowth,PP&Lreduceditstransmission anddistribution construction activityin1974and1975.Recentinflationary effectsoncostsofmaterials, suppliesandwageshavealsoledustocutbackinotherareasofouroperations. Asfaraspersonnel cutbacksareconcerned, sofarwe'ebeenabletomatchourworkforce withourworkloadmainlythroughattrition (resignations, retirements, etc.).Inmanycasesthisattrition approachwasmadepossiblebycooperative management/union programstotransferemployees tonewworklocations. Outsidecontracting hasbeenrestricted andusedonlywherespecialskillsmakeitnecessary, andtotreetrimmingandbuildingmaintenance. Wewillcontinuetoholdnewhirestoaminimum.Atyear-endtheCompanyhadfeweremployees thanin1972eventhoughwegenerated 34percentmoreenergyandserved53,000morecustomers. Management ChangesAnumberofmanagement changestookplacein1975.DirectorMauriceWarnock,chairmanoftheboardofArmstrong CorkCompanyinLancaster, retiredfromthePP'&LboardinAprilundertheage-related guidelines setforthforallPP&Ldirectors. HehadservedPP&LsinceJanuary1964.NamedtosucceedWarnockwasHarryJensen,anexecutive vicepresident anddirectorofArmstrong Cork.Jensenwaselectedbytheshareowners attheannualmeeting.BrookeHartman,PP&L'sexecutive vicepresident-Operations, andaCompanydirector, agreedtoaboardrequesttoextendhisDec.1retirement dateuntilmid-1977. RobertFortune,vicepresident-Financial, waspromotedtoexecutive vicepresident-Financial andnamedaCompanydirectoreffective Dec.1.Bothofthesenewmoveswereaimedatmaintaining andstrengthening PP&L'stopmanagement. DirectorHaywardWills,chairmanoftheboardandpresident ofGACCorp.,CoralGables,Fla.,submitted hisresignation fromthePP&LboardonDec.17.HarryJensenreplacedWillsasamemberoftheexecutive committee oftheboard.Effective Dec.1theboardcreatedanewFinanceDivisionandappointed JosephDonnellytothepositionofvicepresident-Finance toheadtheunit.Comptroller GeorgeVandersjice wasnamedvicepresident andcomptroller, alsoeffective Dec.1.OneofthefinalsectionsofpipeisweldedintoplaceInlateOctoberonthe84-mllepipelinewhichwillcarryoiltoourMartlnsCreekplant.ThelineIsreputedtobethelongestinsulated pipelineInthecountry.The$55-million-dollar projectwasbeguninMayafterseveralcostlydelays.TheCompanyIstemporarily usingrailroaddeliveryuntilthepipelineisinoperation. i,gpQ+Wk4(4*Qy STATISTICAL SUMMARYCAPITALINVESTMENT -thousands (a)Long-term debt(including amountduewithinoneyear)Preferred andpreference stock.......... CommonequityShort-term debtTotalcapitalinvestment ................... FINANCIAL DATAReturnonaveragecapitalinvestment -o/ot(b).Returnonaveragecommonequity-/o(b)..CommonstockdataBookvalue(a)(b)Dividendpayoutrate-'/o(b)Dividendyield-'/o(c)................... Priceearningsratio(b)(c).............. Timesinterestearned(b)BeforeincometaxexpenseAfterincometaxexpense............... NUMBEROFSHAREOWNERS-preferred, preference andcommon(a).....OPERATIONS ELECTRICCUSTOMERS (a)................ ENERGYSALES-millionsofkwhResidential .Commercial .Industrial Other1975$1,043,946 366,375616,0522,026,373 73,630$2,100,003 8.812.5$23.17639.16.92.802.31171,766917,9206,8184,5757,02070019,1131974914,349296,375532,6551,743,379 85,5091,828,888 8.512.622.916211.55.32.922.36154,126902,1486,4944,2757,1701,02418,9631973753,027271,375469,6081,494,010 39,8511,533,861 7.911.922.51648.47.63.152.42142,235886,3786,3244,2626,8811,39818,8651972635,044231,375412,1301,278,549 96,4821,375,031 7.511.621.78676.510.33.052.43135,399864,4395,9853,9336,45863717,0131971576,760196,375351,2991,124,434 76,2511,200,685 7.412.220.78666.410.22.772.41123,598843,0805,4793,5336,05362015,685AVERAGEPRICEPERKWHtoallcustomers -cents................ SOURCESOFENERGY-millionsofkwhGenerated Coal-fired steamstationsOil-fired steamstation............... Combustion turbinesanddiesels.....Hydroelectric stationsPowerpurchases .Total2.7825,3841,149848592,24129,7172.4424,1862477721.57026,7752.0024,7822738161,96827,8391.991.876018241,78422,3066426841,77118,94419,09715,847DISPOSITION OFENERGY-millionsofkwhEnergysalestocustomers ................ Interchange powersales.................. CompanyusesandlinelossesTotalFUELCOST-millsperkwh................. POWERCAPABILITY -kilowatts (a)......... PEAKDEMAND-kilowatts (d)EMPLOYEES (a)19,1138,7571,84729,71710.45,717,000 4,122,000 6,69518,9636,0791,73326,7758.84,901,000 3,772,000 6,93018,8657,2371,73727,8395.04,903,000 3,662,000 7,13917,0133,5861,70722,3064.94,108,000 3,598,000 6,79015,6851,7581,50118,9444.83,496,000 3,294,000 6,514(a)Year-end. (b)Reflectsretroactive allocation toprioryearsofNonrecurring Creditrecordedin1974relatedtochangeinaccounting forfuelcosts.(c)Basedonyear-endmarketprice.(d)Winterpeakshownwasreachedearlyinsubsequent year. ANALYSISOFSTATEMENT OFINCOMEThefollowing analysisoftheCompany's financial performance explainsthereasonsforchangesinspe-cificitemsontheStatement ofIncomecomparing theyears1975to1974and1974to1973.Operating RevenuesTheincreaseor(decrease) inoperating revenuesfromtheprioryearisattributable tothefollowing: 19751974MillionsofDollarsElectricrevenuesQuantityofsalesto:Ultimatecustomers ...OthersforresaleRateincreases Fueladjustment clausesOtherSteamrevenuesTotal......$12.87.8(60)(19)7.422.255.355.41.61.971.185.41.01.8$72.187.2MonthlyFuelAdjustment Charge6CentsPerKwh197319741975Theaboveshowstheincremental costoffueloverabaseamountofabout0.36centsperkwh,whichisbilledtocustomers undertheCompany's principal fueladjust-mentclause.CustomerSalesandOperating RevenuesTheCompanyderivesabout99%ofitsoperating revenuesfromsupplying electricserviceandthebal-ancefromsupplying steamforheatingandotherpurposesinthecityofHarrisburg, Pa.Ratesapplicable tosalestoultimatecustomers areregulated bythePennsylvania PublicUtilityCommis-sion(PUC)andaccounted for98%oftheCompany's revenuefromenergysalesin1975.TheFederalPowerCommission (FPC)regulates salestoothersforresale.TheCompany's electricenergysalestoultimatecustomers increased 2.8%in1974and2.6%in1975.In1975therewasanincreaseof5.0%inresidential salesand7.0%incommercial saleswhilesalestoindustrial customers decreased 2.1%.Thedecreaseinindustrial saleswasmoderated byafullyearofsalestotheSteeltonPlantofBethlehem SteelCorporation whichwasaddedasacustomerinmid-1974. Excluding salestotheSteeltonPlant,theCompany's overallsalesgrowthtoultimatecustomers wouldhavebeen0.7%inboth1974and1975andindustrial saleswouldhavedecreased by7.3%in1975,reflecting thedeclineinindustrial economicactivityandalossof96industrial customers. Electricenergysoldtoothersforresaleduringthetwoyearsremainedrelatively constantexceptforcontractual salestoaneighboring utility,Metropolitan EdisonCompany(MetEd).During1974,340millionkwhweresoldtoMetEd,resulting inrevenuesof$6.1million.TherewerenosalestoMetEdin1975.Rateincreases affecting ultimatecustomers becameeffective inJune1973($10millionannually), January1974($19millionannually), andSeptember 1975($21.7millionannually, ofwhichabout$4.9millionisincludedinrevenuesfortheyear1975).Formoreinformation concerning theCompany's currentrateincreasefilingseeNote2toFinancial Statements. TheCompany's tariffsincludefueladjustment clauseswhichadjustpricesforelectricserviceforvariations inthecostoffuelusedtogenerateelec-tricity.Revenuesfromthefueladjustment clausestotaled$792millionin1974and$1345millionin1975,principally reflecting theincreased leveloffuelcostsexperienced bytheCompany.12 Interchange PowerSales-Thetotalelectricenergyavailable forsalesincludesenergygenerated byPP&Lplantsandpowerpur-chasedfromothers,afterdeducting Companyusesandlinelosses.During1975and1974,approximately 31%and24%,respectively, ofthetotalenergyavailable wassoldtootherutilities underinterconnection arrangements. AsrequiredbyboththePUCandFPC,suchsalesarenotrecordedasOperating RevenuesbutarecreditedtoOperating ExpensesontheState-mentofIncome.Thequantityofinterchange powersoldincreased during1975duetogreateravailability ofgenerating units,including theadditionofMartinsCreekUnitNo.3,theabsenceofcontractual salestoMetEdduring1975andtherelatively favorable priceofPP&L'sgenerating costscomparedtothatofotherinterconnected companies. Thepricereceivedforinterchange powersalesistoagreatmeasurebasedonarelationship ofthefuelcostsofthesellingandbuyingutilities. Approximately 92%oftheCompany's generation during1975camefromcoal-fired unitswhileotherinterconnected utilities hadsignificant amountsofoil-fired generat-ingcapacity. Fortheperiodbeginning inlate1973andcontinuing through1974,oilpricesincreased muchmorerapidlythancoalprices,whichgreatlyincreased thepricetheCompanyreceivedfbrinterchanged powerduring1974.Interchange pricescontinued torisein1975butatamoremoderaterate.TheaveragepricetheCompanyreceivedforinter-changepowersaleswas1.97centsperkwhin1975,1.76centsperkwhin1974and0.95centsperkwhin1973.Theseamountsweresubstantially inexcessoftheCompany's averagefuelcosts.FuelThecostoffuelsburnedperkwhgenerated increased during1974from0.67centsperkwhinJanuary1974,to1.06centsperkwhinDecember1974.During1975theunitcostoffuelsburnedincreased to1.15centsperkwhbyDecember1975reflecting inpartthehighercostofoilburnedattheMartinsCreekNo.3generating unitplacedinserviceduringOctober1975.Theaverageunitcostduring1975was1.04centsperkwhcomparedto0.88centsperkwhin1974,anincreaseof18%.Thecostoffuelburnedwhichisrecoverable throughfueladjustment clausesisdeferreduntiltheperiodinwhichsuchcostsarebilledtocustomers. TaxesForadetailedanalysisofincometaxcomponents, effective incometaxratesandcomponents oftaxesotherthanincomeseeNote6toFinancial Statements. Interchange SalesTheincreaseor(decrease) ininterchange powersalesfromtheprioryearisattributable tothefollowing: 19751974MillionsofDollars$47.2(11.0)18.449.3(1.5)0.2$64.138.5CostoffuelconsumedElectricSteamheat........~..Totalcostoffuelconsumed........Increaseinfuelcostsdeferredtomatchrevenuesfromfueladjustment clausesTotalfuelexpense..$269.2215.2123.84.03.81.8273.2219.0125.6(1.6)(26.6)$271.6192.4125.6CostofFuelConsumedTheincreaseor(decrease) fromtheprioryearinthetotalcostoffuelconsumedisattributable tothefollowing: 19751974MillionsofDollarsElectricQuantityofelectricity generated .......... Averagecostoffuelsburned............. SteamheatTotal.$13.340.754.00.2$54.2(0.9)92.391.42.093.4FuelExpenseFuelexpenseasshownontheStatement ofIncomeincludesthefollowing: 197519741973MillionsofDollars WagesandEmployeeBenefitsandOtherOperating CostsTheincreases inwagesandemployeebenefitsandotheroperating costssuchasmaterials andsupplies, rentsandinsurance reflectprincipally theeffectsofinflation. Athree-month strikeinvolving approximately 5,000unionemployees (about70%oftheCompany's totalworkforce)increased 1974operating expensesbyapproximately $2.0millionaftergivingeffecttorelatedincometaxreductions. $2.0NetUtilityPlant-EndQfYearBillionsofDollars$2.0Depreclatlon Increased depreciation expenseinboth1974and1975isduetonewfacilities placedinservice,including theadditionoftheCompany's MartinsCreekNo.3generating unitin1975.1.51.01.51.0Allowance forFundsUsedDuringConstruction Theallowance forfundsusedduringconstruction hasincreased substantially duringthepasttwoyearsasaresultoftheCompany's extensive construction programandtherelatedcarryingcostsofsecurities issuedtofinancetheconstruction expenditures. Dur-ing1975and1974theaverageratesusedtocomputetheallowance wereequivalent toeffective rates.of8.3%and7.2%,respectively. CostofFinancing Theincreaseinlong-term debtinterestchargesanddividends onPreferred andPreference Stockisduetoissuanceofnewsecurities tofinancetheconstruction ofnewfacilities andtherefinancing ofmaturingdebtwithsecurities bearinghigherinterestrates.During1974and1975,newissuesofsecurities included$405millionoflong-term debtand$95millionofPreferred andPreference Stock.Theannualinterestanddividendrequirements onlong-term debtandPreferred andPreference Stockoutstanding atDecember31,1975were$79.6millionand$29.6million,respectively. Bankloansandcommercial papernotesareusedtoprovideworkingcapitalandinterimconstruction financing. Interestonsuchdebtvariesfromyeartoyearduetotheamountofshort-term debtoutstanding andtheinterestratesineffect.Formoreinformation onshort-term debtseeNote4toFinancial Statements. TheCompanysold2.2millionsharesofCommonStockduring1974and3.3millionsharesin1975.0.50.5InterestandDividendCostTheincreaseor(decrease) fromtheprioryearininterestchargesanddividends onPreferred andPreference Stockwere:19751974MillionsofDollarsInterestchargesLong-term debt........... Short-term debtOther.Dividends onpreferred andpreference stock$16.87.9(3.3)4.8(0.2)0.24.92.5197319741975~NetPlant1nService-originalcostoffacilities servingcustomers lessaccumulated depreciation. Construction WorkinProgress-costoffacilities underconstruction andnotyetinservice. SUPPLEMENTARY COMMENTSTOANNUALREPORTManyoftheresultsshownintheAnnualReporttoShareowners involvecomplexfinancial andlegalconcepts. Oftenthetraditional languageusedistechnical andunfamiliar. Howthendoyoumakethereportmoreunderstandable whilestillcomplying withreporting requirements? Thesesupplementary pagesrepresent anefforttomakethereportmoremeaningful tothereader.Detailandprecision havebeensacrificed forthesakeofbrevity.Wewelcomeyourcomments. TheAnnualReportWhatisit?Whyisitpublished? Whatcanyoufindinit?Theseareallnaturalandbasicquestions. First,theCompanyislegallyrequiredtoprovideitsshareowners withanannualreportontheoperations oftheCompany,butitismorethanjustanaccounting offinancial stewardship fortheyear.Itisanopportunity tolookatperformance, objectives, opportunities and,ingeneral,thecorporate personality ofacompany.Theaudiencefortheannualreportistheworldinwhichacompanyoperates. Inadditiontoshareowners, thatworldincludesPP8Lemployees andretirees, customers, suppliers, government andregulatory officials, financial

analysts, citizensofcommunities wheretheCompanydoesbusiness, potential investors andmanyothers.Highlights Operating highlights (insidecover)givethereaderaquicklookatbasicstatistics abouttheCompany.ThePresident's LetterThisyearinhisletter(pages1and2),JackBusby,theCompany's chiefexecutive officer,presentsabroadreviewofnationalenergyproblemsandcitestheneedforpromptaction.TheYearInReviewThissection(pages3through10)discusses PP8Loperations fortheyearinsomedetail.Earnings, energysupplyanduse,generating

projects, construction, financing, energyconservation andpersonnel changesareamongthetopicsreviewed.

Financial SectionThissection(pages11through27)givesthedetailedstatistical andaccounting factsandinterpretive textthatarenecessary forabasicunderstanding ofthefinancial aspectsoftheCompany's business. Statistical SummaryIncludedonpage11areindicators measuring thefinancial healthoftheCompany.TimesinterestearnedisthenumberoftimestheCompany's incomecoverstheinterestpaidonthemoneytheCompanyowes(mortgage bonds,notesandbankloans)tocreditors. Returnonaveragecommonequityistherateofreturnearnedonallthemoneyinvestedinthebusinessbythecommonshareowners, including theamountoftheirearningsreinvested inthebusiness. UndertheOperations headingarekilowatt-hour sales,averagepriceofelectricity, sourcesanddisposition ofenergy,numberofemployees andotherpertinent operating data. AnalysisofStatement ofIncomeThisanalysisoftheCompany's financial performance (pages12-14)explainsreasonsforchangesinspecificitemsontheStatement ofIncomeforthelasttwoyears.Detailedarethereasonsfortheslightriseinsalesandincreased revenues. Variouscostcomponents inrunningthebusinessarereviewed, suchasfuelandthecostoffinancing. Statement ofIncomeTheStatement ofIncome(page15)showstheresultsofoperating thebusinessoverthewholeyear.Figuresforoneyeardonotprovideenoughinformation toobservetrendsorpatternsintheCompany's operations. PP8LincludesaStatement ofIncomeforfiveyears.TheformoftheStatement ofIncomeusedbymostutilities isgenerally prescribed byregulatory commissions havingjurisdiction overtheutilityratesoftheCompany.Operating revenuesminustheoperating expensesincurredinrunningthebusinessiscalledOperating Income.Thisrepresents theresultsoftheCompany's utilityoperations (forPP&Lthesaleofelectricity andsteam).UnderthecaptionOtherIncomeandDeductions areitemswhichrelatetotheconstruction ofelectricfacilities whicharenotyetusedinutilityoperations andothernon-utility transactions oftheCompany.Interestchargesanddividends onpreferred andpreference stockareamountspaidtocreditors oftheCompanyandownersoftheseclassesofstock.Theamountleftoverforthecommonshareowners afterallexpensesandcostsaretakencareofiscalledEarningsApplicable toCommonStock.Dividingthisamountbytheaveragenumberofcommonsharesoutstanding duringtheyeargivesearningspershare-animportant indicator oftheCompany's financial performance. Thefollowing isabriefexplanation ofsomeofthecaptionsappearing onPP8L'sStatement ofIncome.Operating Revenues: Revenuesareprimarily amountsbilledtocustomers forelectricity. Operating Expenses: Thesearethecostsinvolvedinproviding electricservice.~Wagesandemployeebenefits-Likeemployees ofanyotherbusiness, PP&L'sworkersreceivedwagesandemployeebenefitsforworkperformed inproviding electricservice.~Fuel-Thecostofcoalandoilweburnedinourgenerating units.~Powerpurchases andinterchange powersales-PP8Lisamemberofan11-company powerpoolknownasthePennsylvania-New Jersey-Maryland (PJM)Interconnection. Interchange poweristheelectricity thatisboughtfromorsoldtotheseandotherelectriccompanies inordertohavethemosteconomicutilization ofgenerating facilities. Thepricereceivedforinterchange powersalesismainlybasedontherelationship offuelcostsofthesellingandbuyingutilities. Regulatory authorities requirethatwereduceexpensesbytheamountreceivedfromthesesalesratherthanclassifying itasrevenue.Whetherit'saddedonthetoplineasadditional revenueorsubtracted fromexpenses, theeffecton incomeisthesame.Theparenthesis indicateit'sa"credit"toexpenses-thatis,expensesarelessbythatamountthantheywouldotherwise be.~Otheroperating costs-Includesservices,

supplies, rents,etc.-thosegoodsandservicesPP&Lneedstooperatethebusiness.

Thisincludescostoftree-trimming topreventserviceinterruptions, fireandcasualtyinsurance, researchanddevelopment, rentalofequipment, materials, postage,paperandmanymoreitems.~Depreciation -ThisisatermusedtodescribethecosttotheCompanyofusingupcertaintypesofpropertyoveraperiodoftime.Justlikethenewcaryoumaybuy,theplantswebuildandequipment webuywearoutovertimeorbecomeobsoleteandthevaluedeclines. It'sthesameastheoldercaryoutradeinonthenewone-it'salwaysworthalotlessthanwhenitwasnew.WhenPP8Lbuysequipment thatwillbeinuseoveranumberofyears,itsfullpurchasecostisnotshowninonelumpsumasexpenseontheStatement ofIncome.Instead,wespaceoutthecostovertheperiodtheequipment isexpectedtobeinuse-andduringthattimeitsvalueisdeclining ordepreciating. oIncometaxes-Justliketheindividual

taxpayer, PPBLpaystaxestothefederalandstategovernments basedontherevenueitreceivesminusallowable deductible items.IncometaxesappearintwoplacesontheStatement ofIncome,underOperating ExpensesandasacreditamountunderOtherIncomeandDeductions.

Therearethreemajorcomponents ofIncomeTaxes-current,deferredandinvestment taxcredits,whicharedetailedinNote6toFinancial Statements onpages23and24.Thenetofthecurrentamountsshownrepresent thetaxwhichiscurrently payable.Note6showsthisamount,whichisarrivedatbysubtracting thecreditamountunderOtherIncomeandDeductions fromtheexpenseunderOperating Expense.Thecurrenttaxespayablehavebeenreducedbyinvestment taxcredits.Thesecreditsaredesignedtoencourage companies tokeepplantequipment modernandefficient, andtoexpandfacilities todaytocreatemorejobopportunities and,inturn,promoteahealthier economy.Thecreditsarebasedonapercentage (4percentand10percent)ofthecostofnewplantandequipment placedinserviceor,incertaincircumstances, paymentsmadeonfacilities underconstruction. Undertheincometaxlaw,utilities mustreflectthistaxsavingsasacreditontheStatement ofIncomeoverthelifeoftheproperty. Note6showstheamountofcurrentinvestment creditdeferredandalsotheamountofprioryear'creditsamortized orreflected inincomeduring1974and1975.Asafurtherincentive tostrengthen theeconomy,businesses arepermitted todeferaportionoftheirtaxpaymentstoafuturedatetherebymakingmorecashavailable nowfortheexpansion offacilities. Theportionoftaxexpenseidentified asdeferredrepresents thetaxobligation applicable tothecurrentyear'sincomewhichwillhavetobepaidinfutureyears.~Taxesotherthanincome-PP&Lpaysspecialrealestatetaxes,agrossreceiptstax(whichisonlyapplicable toutilities), capitalstocktaxandothertaxessuchasthecorporate matchingofemployees'ocial Securitydeductions. OtherIncomeandDeductions: ~Allowance forfundsusedduringconstruction (Allowance) -IsthebiggestpartofOtherIncome.Alookatourrate-making mechanism isnecessary toexplainthisitem.Ourelectric(andsteam)ratesarebasedinpartontheannualcostofsecurities usedtofinanceallofourutilityplant(generators, lines,cables,poles,etc.)thatisbeingusedtoprovideservicetoourcustomers. But,wecan'tincludeanyofthispropertyinthebaseusedtoestablish ratesuntilit'sactuallyinuse.Apowerplanttakes10yearsormoretodesign,engineerandbuild.Thepeoplewhodothedesigning, theengineering andthebuilding, andallthefirmswhoprovidematerialcan'twait10yearstogetpaid.Wepayfortheplantasit'sbuilt.Mostofthemoneyneededtofinanceelectricfacilities underconstruction mustbeprovidedbyinvestors. Wemustsellmortgagebondsandcommon,preferred andpreference stocksaswellasborrowfrombanks.Wemustpayinterestanddividends foruseofthismoneyandthesechargesarereflected ontheStatement ofIncomeasacostofdoingbusiness. TheAllowance isanon-cashaccounting creditthatenablesustooffsetthesefinancing costsontheStatement ofIncomeandcorrespondingly includesuchfinancing chargesasacostofthefacilities beingconstructed. Atthetimeconstruction iscompleted andthepropertyisbeingusedtoserveourcustomers, thetotalcostoftheproject,including financing chargesfortheconstruction period,canbeincludedinthebaseusedtoestablish electricrates.~Incometaxcredits-Aportionoftheconstruction-related financing chargesarerepresented byinterestwhichisdeductible for.incometaxpurposesandservestoreducethecurrentpaymentdueonsuchtaxes.Sincethistaxsavingsdoesnotrelatetoutilityoperations becausethefacilities arenotyetinserviceitisshownaspartofnon-utility operations underOtherIncomeandDeductions. ~Othernet-Includesminoramountsofincomeandexpensesrelatedtonon-utility operations. Partoftheseexpensesarecorporate charitable contributions whichareshareowner andnotratepayer expenses. InterestCharges:Theinterestwepaycreditors fortheuseofmoneyloanedunderdebtobligations oftheCompany,whicharemortgagebonds,notesandbankborrowings. Nonrecurring Credit:Thisamountrepresents theeffectonyearspriorto1974ofanaccounting changemadein1974andwasincludedasincomeonaonce-and-done basisforthatyear.Theaccounting changewasmadetomatchtherecording offuelcostswithrelatedrevenuesbilledundertheCompany's fueladjustment clauses.NetIncome-BeforePreferred andPreference StockDividends: ManytimesNetIncomeislookedatastheprofitline,butformostutilitycompanies thereisanadditional costofdoingbusiness-thecostofpreferred andpreference stock.Wehaveacontractual obligation topaysetdividends onpreferred andpreference stockwhichweselltoraisefunds,principally tofinanceconstruction projects. EarningsApplicable toCommonStock:Thisiswhatisleftoverforcommonshareowners. Someofthisamount(about63percent)ispaidasdividends tocommonshareowners andtherestisreinvested inthebusinesstohelppayfortheconstruction ofnewfacilities, whichreducestheneedtosellmorestocksandbonds.EarningsPerShareofCommonStock:AftertakingintoaccountalltheitemsontheStatement ofIncome,akeyindicator inmeasuring thefinancial performance ofacompanyistheamountitearnedfor.eachshareheldbyshareowners ofcommonstock.Thisistheamountwhichisapplicable tocommonstockdividedbytheaveragenumberofcommonsharesoutstanding. Otherimportant measuresonapersharebasisaredividends andcommonequity.Dividends pershareindicatetheamountofdividends paidononeshareofcommonstockduringtheyear.Commonequity(commonstockplusearningsreinvested minuscapitalstockexpense), whichisshownontheBalanceSheet,represents thetotalinvestment bycommonshareowners. Dividingthisamountbythetotalcommonsharesoutstanding iscalledcommoninvestment pershareorbookvalue.TheBalanceSheetWhiletheStatement ofIncomeshowsaninvestorhowwedidoverthewholeyear,theBalanceSheetrepresents thefinancial pictureasitstandsononeparticular day-inourcasethefiguresareshownforDecember31,1974andDecember31,1975.TheBalanceSheet(pages16and17)isdividedintotwosections, AssetsandLiabilities, withbothsectionsalwaysinbalance.Assets:Itemsofvalueownedbyabusiness, suchas:~UtilityPlant-Thefacilities usedtoprovideelectricserviceforourcustomers. Itincludesthatportionofprojectsunderconstruction thatwehavepaidforbutwhicharen'tyetcompleteenoughtobeusedtoprovideserviceandputinourratebase.~Investments -Includesproperty, investments incoalandothercompanies andmiscellaneous holdings. ~CurrentAssets-Cashorassetsthatcangenerally beconverted tocashorareexpectedtobeusedinthebusinessduringthefollowing year.~DeferredDebits-Basically theseareitemswhichwillbechargestoexpenseorotheraccountsoveraperiodoftime.Liabilities: Thisincludeswhatinvestors haveputintoPP8LandamountstheCompanyowestoothers.~Capitalization -Themoneyallofourinvestors (common,preferred andpreference shareowners andbondholders) haveputintothebusiness. Itincludesearningsreinvested whichistheportionofcommonshareowner earningswhichhasgonebackintothebusiness. ~CurrentLiabilities -Generally includesobligations oftheCompanywhichfallduewithinthecomingyearanditemswhichhavebeenbilledbyothers,butnotyetpaid.~DeferredandOtherCredits-Wenotedpreviously (indiscussing incometaxesshownontheStatement ofIncome)thatincometaxpaymentsweredeferred. Underthisbalancesheetcaptionare shownthetaxobligations deferredinthecurrentandprioryearswhichwillcomedueinthefuture.Alsoshownarethetotalinvestment taxcreditswhichhavebeendeferredandwillbecreditedtoincomeoverfutureyears.ScheduleofCapitalStockandLong-Term DebtPage18detailsthevariousclassesofstock,mortgagebondsandotherlong-term debt.Statement ofChangesinFinancial PositionThisstatement (page19)explainswheretheCompanyobtaineditsfunds-suchasfromoperations, borrowings andthesaleofadditional stock.AlsowhattheCompanydidwiththosefunds-suchasconstructing newfacilities, retiringsecurities andpayingdividends tostockholders. Statement ofEarningsReinvested Thecumulative amountofearningsputbackinthebusinessisrecapped(page20)byshowingtheincomeavailable topaydividends andtheamountofdividends paidtoshareowners. NotestoFinancial Statements Eachfinancial statement intheannualreportisfootnoted withthewords"Seeaccompanying NotestoFinancial Statements." Thisreferstothesixpages(20through25)ofexplanatory andsupplemental information ontheCompany's operations. Thepagesprovideaccounting clarification andin-depthexplanations ofmanyitemsfoundinthefinancial statements. Ifthisinformation wereincludedinthefinancial statements, insteadoffootnoted andgroupedtogether, theresultwouldprobablybeanunintelligible jumbleofwordsandnumbers.Thefootnotes aredesignedtoprovidebetterinsightforthosewhowantmoreinterpretive andtechnical information tosupportthefinancial statement. Auditors'pinion This(page26)isthereader'sassurance byanindependent accounting firmthatPPBLhasappliedaccounting principles whicharegenerally usedinfinancial reporting. Itistheauditors'eport thatthefinancial statements havebeenexaminedandtheiropinionastothefairnessofdatapresented. FiscalAgentsandSecurities ListedThisinformation (page26)liststransferagents,registrars, disbursing officeandstockexchangelistingsforallclassesofPPBLstock.Dividends andStockPricesThissection(page27)providesquarterly marketpriceanddividendinformation ofallclassesoftheCompany's stockfortheprevioustwoyears. STATEMENT OFINCOMEThousands ofDollars19751974197319721971Operating Revenues(Note2)$544,129472,036384,814345,792300,707Operating Expenses=WagesandemployeebenefitsFuel(Note3)Powerpurchases Interchange powersalesOtheroperating costs.Depreciation Incometaxes(Note6)Taxes,otherthanincome(Note6)Operating IncomeOtherIncomeandDeductions Allowance forfundsusedduringconstruction Incometaxcredits(Note6),Other-net IncomeBeforeInterestChargesInterestChargesLong-term debt.Short-term 'debtandotherIncomeBeforeNonrecurring CreditNonrecurring CreditRelatedtoAccounting Change,NetofIncomeTaxes($4,831)(Note3)............. NetIncome-BeforePreferred andPreference StockDividends .Dividends onPreferred andPreference Stock..EarningsApplicable toCommonStockEarningsPerShareofCommonStock(a)BeforeNonrecurring Credit.Nonrecurring CreditEarningsonaComparable BasisAfterAllocating Nonrecurring CredittoAppropriate PriorPeriodEarningsapplicable tocommonstockEarningspershareofcommonstock(a)........AverageNumberofSharesOutstanding (thousands) ...Dividends DeclaredPerShareofCommonStock....... 71,773271,63637,698(172,823) 68,36958,54047,29840,669423,160120,96936,60511,2013,15450,960171,92967,9326,45674,38897,54197,54124,509$73,032$2.87$2.87$73,0322.8725,459$1.8067,374192,35324,176(108,723) 54,48952,39939,21135,571356,850115,18620,7325,0763,41829,226144,41251,1499,94661,09583,3174,16287,47919,65667,8232.88.193.0763,6612.8822,0671.7757,421125,57715,299(70,175)45,23448,83733,94330,005286,14198,67314,967911,30016,358115,03143,2034,91648,11966,91266,91217,19149,7212.572.5751,0662.6419,3591.6855,22095,22013,514(34,569)39,51241,44626,08625,658262,08783,70514,647334(305)14,67698,38136,5073,95340,46057,92157,92114,52643,3952.482.4843,1612.4617,5131.6448,19879,49918,963(15,468)33,21434,90311,54522,146233,00067,70716,242176(63)16,35584,06230,8954,59535,49048,57248,57211,39237,1802.372.3738,4882.4515,6901.60(a)Basedonaveragenumberofsharesoutstanding. Seeaccompanying NotestoFinancial Statements. 15 BALANCESHEETASSETSThousands ofDollarsDecember3119751974UTILITYPLANTPlantinservice-at originalcostElectricSteamheatLessaccumulated depreciation Construction workinprogress-atcost$1,992,673 7,8052,000,478 406,3131,594,165 437,0622,031,227 1,687,740 7,7031,695,443 354,2491,341,194 403,7071,744,901 INVESTMENTS Subsidiaries-at equitySafeHarborWaterPowerCorporation -atequityNonutility property-atcost(lessaccumulated depreciation: 1975,$1,069;1974,$554)Other-atcostorless28,5953,6264,6922,47339,3864,6313,5992,4954,06414,789CURRENTASSETSCash(Note4)Accountsreceivable (lessreserve:1975,$1,346;1974,$1,031)Customers OtherNotesreceivable Recoverable fuelcosts(Note3)Materials andsupplies-ataveragecostFuelOperating andconstruction .Other14,83236,24316,81732,17837,15468,31822,6165,995234,15316,25133,90716,8345,74035,58771,88624,97913,072218,256DEFERREDDEBITS7,118$2,311,884 ,7,4821,985,428 Seeaccompanying NotestoFinancial Statements. 16 LIABILITIES Thousands ofDollarsDecember3119751974CAPITALIZATION (a)Shareowners investment (Note5)Preferred stockPreference stockCommonstockCapitalstockexpense(deduction) Earningsreinvested (Notes7and8)$156,375210,000412,303(8,801)212,550982,427156,375140,000354,540(7,580)185,695829,030Long-term debt........1,032,980 2,015,407 914,3491,743,379 CURRENTLIABILITIES Long-term debtduewithinoneyear(a)Commercial papernotes(Note4)AccountspayableTaxesaccruedDeferredincometaxesapplicable torecoverable fuelcosts.Dividends payableInterestaccruedOther.10,96673,63051,28120,19919,66919,36221,6179,719226,44385,50937,12111,85218,84015,84418,7898,338196,293DEFERREDANDOTHERCREDITSDeferredinvestment taxcredits.DeferredincometaxesOther31,84922,71315,47270,034$2,311,884 18,86022,6894,20745,7561,985,428 (a)SeeScheduleofCapitalStockandLong-Term Debtonpage18.FirstMortgageBondsof$93millionwhichmaturedandwererefinanced In1975areincludedlnthelong-term debtbalanceatDecember31,1974.Scaaccompanying NotestoFinancial Statements. SCHEDULEOFCAPITALSTOCKANDLONG-TERM DEBTDecember31,1975Thousands ofDollars4,17822,8786,30040,00022,2377,763$156,375PREFERENCE STOCK-nopar,cumulative, authorized 5,000,000 shares$8.00series,outstanding 350,000shares$8.40series,outstanding 400,000shares$8.70series,outstanding 400,000shares$9.25series,outstanding 200,000shares$11.00series,outstanding 500,000shares$13.00series,outstanding 250,000shares$35,00040,00040,00020,000(a) 50,000(a) 25,000$210,000COMMONSTOCK-nopar,authorized 50,000,000 shares,outstanding 26,551,981 shares.......~......... $412,303CAPITALSTOCK(Note5)PREFERRED STOCK-$100par,cumulative 4%%d'/o,authorized 629,936shares,outstanding 530,189shares.......$53,019Series,authorized 5,000,000 shares3.35'/o,outstanding 41,783shares..4.40'lo,outstanding 228,773shares.4.600/0,outstanding 63,000shares..7.40'/0,outstanding 400,000shares.8.60'/o,outstanding 222,370shares.9%,outstanding 77,630sharesLONG-TERM DEBTFIRSTMORTGAGEBONDS2/s'/0seriesdue1976............. 2/4oloseriesdue1977............. ,3i/s'/0seriesdue1978............. 2/i/0seriesdue1980............. 3Vso/oseriesdue1982....... '......10'/s'/0seriesdue1982............. 3%i'/oseriesdue1983............. 3s%%d%seriesdue1985............. 4s/s%seriesdue1991............. 4'/s%seriesdue1994............. 55%%d%seriesdue1996............. 6N/oseriesdue1997.~...~.~~.~"7%seriesdue1999............. 8~%%d%seriesdue1999.......... ~..9%seriesdue2000............. 7'/i/oseriesdue2001............. 7'Ye'/oseriesdue2002........... ~~7i%%d%seriesdue2003............. 9ilio/oseriesdue2004............. 9Nloseriesdue2005............. 9y4/oseriesdue2005............. 4AD/0to55/6'lopollution controlseriesAdueannually$500,1977-1983; $900,1984-2002; $7,400,2003$8,00020,0003,00037,0007,500100,00025,00025,00030,00030,00030,00030,00040,00040,00050,00060,00075,00080,00080,000125,000(a) 100,000(a) 28,0001,023,500 NOTES6%/0-7/odue19767'/0due1980Other2,80020,00055123,351Unamortized discountandpremium-net. (2,905)1,043,946 Lessamountduewithinoneyear........10,966$1,032,980 (a)Issuedin1975.Seeaccompanying NotestoFinancial Statements. 18 STATEMENT OFCHANGESINFINANCIAL POSITIONThousands ofDollars19751974197319721971SOURCEOFFUNDSOperations Netincome(1974includes$4,162nonrecurring credit)Charges(credits) againstincomenotinvolving workingcapitalDepreciation Noncurrent deferredincometaxesandinvestment taxcredits-net Allowance forfundsusedduringconstruction Other.58,54052,39948,83741,44634,90315,7018,79011,2827,984(1,127)(36,605)7,464(20,732)520(14,967)220(14,647)220(16,242)220142,641128,456112,28492,92466,326$97,54187,47966,91257,92148,572Outsidefinancing Commonstock.Preferred stock.Preference stockFirstmortgagebonds............ Otherlong-term debt............. Short-term debt-netincrease......Workingcapital-decrease(a)................... Investment insubsidiaries -decrease............ Other-net57,76335,15670,000225,00020825,000180,00036045,658$510,778415,319352,971286,17415,166(b) 68940,90040,000108,00020,024208,9243,1564,065328,42935,00075,0008,34220,231185,513917279,35440,00060,00010,506147,62623,8961234,676242,64746,94037,120APPLICATION OFFUNDSConstruction expenditures $345,289Allowance forfundsusedduringconstruction ...(36,605)308,684271,460224,496218,754(20,732)(14,967)(14,647)250,728209,529204,107192,399(16,242)176,157Securities retiredFirstmortgagebonds.Otherlong-term debtShort-term debt-netdecrease.93,00011218,63211,87915,00010,041'0,05756,6318,11721,627Dividends onpreferred, preference andcommonstockWorkingcapital-increase(a)Investment insubsidiaries -increase....Other-net104,99118,63266,67225,05729,74470,68658,89750,03743,33036,74682,753(b) 6,62423,9642,1912,4534,309236$510,778415,319328,429279,354242,647(a)Excludesshort-term debtandlong-term debtduewithinoneyear.(b)ThenetchangesInworkingcapitalresultedprincipally fromthefollowing: 1975,increases Innotesreceivable, accountspayable,accruedtaxes,dividends payableandaccruedinterest; 1974,increases infuelinventory, accountsreceivable anddeferredfuelcostslessrelateddeferredincometaxes.Seeaccompanying NotestoFinanciai Statements. STATEMENT OFEARNINGSREINVESTED Thousands ofDollarsBalance,January1NetIncome(1974includes$4,162nonrecurring credit)Dividends Preferred stockPreference stock................. Commonstock(pershare-1975,$1.80;1974,$1.77;1973,$1.68;1972,$1.64;1971,$1.60)1975$185,69597,541283,2369,39315,11646,17770,6861974157,11387,479244,5929,39310,26339,24158,8971973140,23866,912207,1507,5519,64032,84650,0371972125,64757,921183,5686,4338,09328,80443,3301971113,82148,572162,3936,4334,95925,35436,746Balance,December31(Notes7and8)$212,550185,695157,113140,238125,647NOTESTOFINANCIAL STATEMENTS December31,1975and19741.SUMMARYOFACCOUNTING POLICIESAccounting SystemAccounting recordsaremaintained inaccord-ancewiththeUniformSystemofAccountspre-scribedbytheFederalPowerCommission (FPC)andadoptedbythePennsylvania PublicUtilityCommission (PUC).UtilityPlantAdditions toutilityplantandrepIacements ofunitsofpropertyarecapitalized atcost.Costsofdepreciable propertyretiredorreplacedareremovedfromutilityplantandsuchcosts,plusremovalcosts,lesssalvage,arechargedtoaccumulated depreciation. Costsoflandretiredorsoldareremovedfromutilityplantandanygainsorlossesarereflected ontheStatement ofIncome.Allexpenditures formaintenance andrepairsofpropertyandthecostofreplacement ofitemsdetermined tobelessthanunitsofpropertyarechargedtooperating expenses. Allowance forFundsusedDuringConstruction AsprovidedintheUniformSystemofAccounts, theCompanycapitalizes aspartofconstruction costanamountrepresenting thenetcostoffunds(after-tax interestcostonborrowedmoneyandareasonable rateonothercapital)usedtofinanceconstruction workinprogress. Theallowance forfundsusedduringconstruction (Allowance) asshownontheStatement ofIncomeisanon-cashitemequaltotheamountcapitalized andservestooffsettheactualcostoffinancing construction workinprogress. SinceFebruary1,1974theCompanyhascomputedtheAllowance rateonan"after-tax" basisandincometaxreductions associated withtheinterestcomponent oftheAllowance havebeenreflected asIncometaxcreditsunderOtherIncomeandDeductions withacorresponding increaseincurrentincometaxeschargedtoOperating Expenses. Depreciation Forfinancial statement

purposes, thestraight-linemethodofdepreciation isusedtoaccumu-lateanamountequaltothecostofutilityplantandremovalcosts,lesssalvage,overtheesti-matedusefullivesofproperty.

Provisions fordepreciation resultedinanannualcomposite rateof3.3'/0inboth1975and1974.Subsidiaries andSafeHarborInvestments insubsidiaries (ailwholly-owned) andinSafeHarborWaterPowerCorporation (representing one-halfofthatcompany's votingsecurities) arerecordedusingtheequitymethod20 ofaccounting. TheCompany's subsidiaries areengagedincoalminingoperations, holdingcoalreservesandrealestate.Sincethesubsidiaries arenotengagedinthebusi-nessofgenerating anddistributing electricity, theCompanybelievesthatitsfinancial positionandresultsofoperations arebestreflected withoutconsolidation. If'allthesubsidiaries werecon-sideredintheaggregate asasinglesubsidiary, theywouldnotconstitute a"significant subsidi-ary"asthattermisdefinedbytheSecurities andExchangeCommission. RevenuesRevenuesarebasedoncyclebillingsrenderedtocertaincustomers monthlyandothersbi-monthly.TheCompanydoesnotaccruerevenuesrelatedtoenergydelivered butnotbilled.FuelCostsRecoverable UnderFuelAdjustment ClausesTheCompany's tariffsincludefueladjustment clausesunderwhichfuelcostsvaryingfromthelevelsallowedinapprovedrateschedules arereflected incustomers'ills afterthefuelcostsareincurred. Thechargetoexpenseforfuelcostsrecoverable inthefuturethroughapplication offueladjustment clausesisdeferredtotheperiodsinwhichthesecostsarebilledtocustomers. SeeNote3toFinancial Statements. IncomeTaxesDeferredtaxaccounting isfollowedforitemswheresimilartreatment inratedeterminations hasbeenorisexpectedtobepermitted bythePUC.Theprincipal itemsareaccelerated amorti-zationofcertified defensefacilities andpollution controlequipment, deduction ofcostsofremov-ingretireddepreciable

property, thatportionoftaxdepreciation arisingfromshortening depre-ciablelivesby20'/oundertheclasslifedeprecia-tionsystem,fuelcostsrecoverable underfueladjustment clausesandbeginning in1975theforcedoutagereserve.Taxreductions arisingprincipally fromtheuseofthedeclining balancedepreciation method,guideline livesandcertainincomeandexpensesbeingtreateddifferently fortaxcomputation thanforbookpurposesareaccounted forundertheflow-through method.Investment taxcredits,whichresultinareduction ofcurrentfederalincometaxespayable,aredeferredandarebeingamortized overtheaveragelivesoftherelatedproperty.

Retirement PlanTheCompanyhasaRetirement Plancomposedoftwoparts:(1)anon-contributory portionwhichprovidesbenefitsforalleligibleactiveemployees withthefullcostabsorbedbytheCompany,and(2)avoluntary portioninwhichcontributions aremadebybothemployees andtheCompany,butthefullcostofpastserviceandPlanimprove-mentsisbornebytheCompany.Approximately 95'/0ofeligibleactiveemployees aremembersofthevoluntary portionofthePlan.Companycontributions tothePlanincludeamountsre-quiredtofundcurrentservicecostsandtoamor-tizeunfundedpastservicecostsoverperiodsofnotmorethan20years.ForcedOutageReserveAself-insurance reserveisprovidedtocovertheincreased levelofpowercostswhichareexperi-encedwhenanyoftheCompany's majorgenerating unitsareforcedoutofserviceduetodamagecausedbyaccidentorcertainotherunforeseen incidents. Thereservecoversincreased powercostsresulting frompurchasing orgenerating replacement powerathighercostsorlossofinterchange salesinexcessof$0.5millionforeachaccidentorincident. AstocertainoftheCompany's largegenerating units,costschargeable tothereservearelimitedto$10millionsinceoutsideinsurance iscarriedtocovercostsinexcessofthatamount.Thereserveisestablished onthebasisofhistorical experience andhasbeenrecognized inratemaking proce-duresbythePUC.AtDecember31,1975thereservebalancewas$11.9million.Priorto1975theannualprovision chargedtooperating ex-pensewasreducedbyrelatedincometaxes. 2.RATEFILINGSInMarch1975theCompanyfiledwiththePUCatwo-stage requestforadditional increases inelectricrevenuesofabout15'/0whichtotaledapproximately $80millionannually. ThePUCsuspended bothstagesofthisrequest.TheCom-panysubsequently filedarevisedfirststageincreaseofabout4'/0(approximately $21.7millionannually) whichwasnotsuspended andwentintoeffectonSeptember 13,1975.ThePUCconcluded hearingsonbothstagesinJanuary1976butafinalorderisnotexpectedbeforethelatterpartofMarch1976.Revenuescollected underthe4'/oincreasetotaled$4.9mil-lionduring1975andaresubjecttopossiblerefundpendingfinalactionbythePUC.Arateincreaseofapproximately $1millionannually, affecting 15resalecustomers, waspermitted tobecomeeffective inSeptember 1974bytheFPC.Theaffectedcustomers areopposingtherateincreaseandrevenuescollected aresubjecttopossiblerefund.3.FUELCOSTSRECOVERABLE UNDERFUELADJUSTMENT CLAUSESEffective January1,1974,theCompany,asauthorized bythePUC,changeditsmethodofaccounting forfuelcoststoachievematchingoffuelexpenseandrevenuesbyaccounting periods.Thischangeresultedinthechargetoincomeforfuelcostsrecoverable inthefuturebeingdeferredtotheperiodsinwhichthesecostsarebilledtocustomers throughapplication offueladjustment clauses.For1974,fuelcostswerelowerbyanetamountof$26.6millionand,afterincometaxeffects,earningsapplicable tocommonstockwereincreased by$12.6million($0.57pershare)asaresultofthisaccounting change.TheNonrecurring CreditshownontheStatement ofIncomefor1974represents thecumulative effecttoDecember31,1973ofthechangeinaccounting forfuelcosts,netofrelatedincometaxes.Earningsrestatedonacomparable basisshownontheStatement ofIncomereflecttheeffectofretroactive application ofthechangeinaccount-ingforfuelcostsandrelatedincometaxeffectshadthenewmethodbeenusedsincetheprinci-palfueladjustment clausebecameeffective in1970.4.COMPENSATING BALANCESANDSHORT-TERM DEBTInordertoprovideloansforinterimfinancing andprovideback-upfinancing capability forcommercial papernotestheCompanyhadlinesofcreditwithvariousbanksaggregating $200millionatDecember31,1975.Useoftheselinesofcreditwasrestricted atDecember31,1975totheextentof$9millionbyshort-term bankloanstocertaincompanies involvedinfuelsupplyopera-tions.Bankborrowings aregenerally foroneyearandmaybeprepaidatanytimewithoutpenalty.Nobankloanswereoutstanding atDecember31,1975orDecember31,1974.OftheCompany's linesofcredit,$145millionwasmaintained bycompensating bankbalancerequirements (notlegallyrestricted astowith-drawal)and$55millionbypaymentofcommit-mentfees.Compensating bankbalancerequirements areonanaverageannualbasiswhichapproximated $13.9millionatDecember31,1975.Commitment feesonanannualized basisapproximated $0.4millionatDecember31,1975.Commercial papernotesaregenerally soldforperiodsrangingfrom30to60days.Theweightedaveragediscountratesapplicable tocommercial papernotesoutstanding atDecember31,1975and1974were5.6'/0and9.4'/o,respectively. Themaximumaggregate amountofshort-term debtoutstanding attheendofanymonthduring1975was$142.6millionandduring1974was$1,40.3millionwithanaverageaggregate dailyamountoutstanding 'duringtheseyearsof$85.2millionand$95.6million,'espectively. The22 approximate weightedaverageinterestrateofshor'I-term debtduring1975was7.3'leandduring1974was10.0'/o,calculated bydividingthetotalshort-term debtinterestexpensefortheyearbytheaverageaggregate dailyamountofshort-term debtoutstanding duringtheyear.TheCompanydoesnotamortizecapitalstockexpensewhichrepresents commissions andexpensesincurredinconnection withtheissu-anceandsaleofcapitalstock.Salesofcapitalstockduring1975and1974wereasfollows(sharesandamountinthousands): 1975CommonStockPublicofferingDividendreinvestment andemployeeinvestment plansPreference Stock$11.00Series.......... $9.25Series~~....,,... SharesAmount3,000$51,4503015,59550020050,00020,0001974CommonStock....Preference Stock$13.00Series....2,20025035,15625,000Eachofthefollowing seriesofstockcontainssinkingfundprovisions whicharedesignedtoretiretheseriesataredemption priceof$100pershare:5.CAPITALSTOCKOnApril23,1975theauthorized CommonStockoftheCompanywasincreased from30,000,000 sharesto50,000,000 shares.CommonStockof$412,303,000 atDecember31,1975includes$718,000cashinstallments re-ceivedunderadividendreinvestment planforshareowners andemployeeinvestment planforwhich36,337sharesofCommonStockwereissuedinJanuary1976.Effective January1,1976theCompanyreplaceditstwoinvestment planswith'asingle,newdividendreinvestment planforwhich900,000sharesofunissuedCommonStockhavebeen.authorized forissuancepursu-anttothetermsoftheplan.6.TAXESIncometaxexpensefortheyears1975and1974isreflected ontheStatement ofIncomeasfollows:19751974Thousands ofDollarsOperating ExpensesCurrentFederalState12,5543,85816,412$22,5478,22130,768DeferredFederalState2,9525903,54215,9913,27119,262'nvestment taxcreditsDeferredAmortization ofdeferments .......... OtherIncomeandDeductions-Current FederalState.14,4654,753(1,477)(1,216)12,9883,53747,29839,211(9,164)(4,156)(2,037)(920)(11,201)(5,076)Totalincometaxexpense............ $36,09734,135(a) (a)Excludes$4,831deferredincometaxesrelatedtoNonrecurring Credit.Totaltaxescurrently payableisarrivedatbysubtracting thecreditamountunderOtherIncomeandDeductions fromtheexpenseunderOperating Expensesasfollows:Operating ExpensesOtherIncomeandDeductions ........Total.......... 19751974Thousands ofDollars$30,76816,412(11,201)(5,076)$19,56711,336SharestobeRedemption RedeemedAnnuallyPeriodPreferred Stock7.400/oSeries16,0001979thru2003Preference Stock$13.00Series(a)12,5001980thru1999$11.00Series(a)25,0001981thru2000$9.25Series40,0001977thru1981(a)TheCompanyhastherighttoredeemoneachsinkingfundredemption dateadditional sharesuptothenumberofsharesofthisSeriesrequiredtoberedeemedannually. 23 Deferredincometaxesresultfromthefollowing items:19751974Thousands ofDollarsPortionoftaxdepreciation undertheclasslifedepreciation systemRecoverable fuelcosts.....ForcedoutagereserveOther$4,5403,71582914,009(a) (3,726)1,8991,538$3,54219,262NetincomeIncometaxexpensePre-taxincome$133,638126,445(a)Excludes$4,831deferredincometaxesrelatedtoNonrecurring Credit.IncometaxexpensedifferedfromtheamountcomputedbyapplyingthecombinedFederalandStatecorporate incometaxrates(52.94~/o inboth1975and1974)topre-taxincomeasfollows:19751974Thousands ofDollars$97,54187,47936,09738,966Taxesotherthanincometaxeschargedtooperat-ingexpensewere:StategrossreceiptsStatecapitalstock.......Stateutilityrealestate...SocialsecurityandotherTotal19751974Thousands ofDollars$23,75620,5647,2846,2635,9805,2583,6493,486$40,66935,5717.DIVIDENDRESTRICTIONS TheCompany's charterandmortgage indentures restrictthepaymentofcashdividends onCom-monStockundercertainconditions. Underthecharterprovisions, whicharethemorelimiting, norestrictions areeffective onthepaymentofsuchdividends outofcurrentearnings. Theamountofearningsreinvested freeofrestrictions underthecharteratDecember31,1975was$154.1million.Indicated incometaxexpenseontheaboveatcombinedFederalandStatetaxratesReductions inindicated iocometaxdueto:Amortization ofinvestment taxcreditdeferments ...Allowance forfundsusedduringconstruction-nontaxable ............. Taxdepreciation inexcessofbookdepreciation ....Taxandpensioncosts-taxdeduction inexcessofbookexpenses.......OtherTotalreduction inindicated incometaxIncometaxexpenseEffective taxrateonpre-taxincome...$70,74866,9401,4771,21619,37910,9769,1318,7992,9982,4911,6664,49234,65127,974$36,09738,96627Oo/o308o/o8.HYDROELECTRIC PROJECTSTheCompanyoperatestwohydroelectric proj-ectsunderlicensesissuedbytheFPC.CertainreservesrequiredtobeprovidedundertheFed-eralPowerActhavenotbeenrecordedpendingapprovaloftheamountsbytheFPC.TheCom-panyestimates thatsuchreservesapplicable totheyearsfrom1946wouldnotexceed$2.8mil-lionatDecember31,1975.9.RETIREMENT PLANObligations oftheCompany's Retirement Planarecurrently fundedthroughaTrustFund.AtJune30,1975,theendoftheFund'smostrecentfiscalyear,theFund'sassetsatcostwere$86.6million.Pensioncostswere$8.8millionintheyear1975and$6.7millionin1974.BasedontheFund'sassetsatcost,atJune30,1975theactuarially computedunfundedpastservicecostwas$25.8million.Asofthesamedatevestedbenefitsexceededthecostbasisof24 theFund'sassetsby$20.7millionandexceededthemarketvalueoftheFund'sassetsby$27.0million.accruedonthebasisoftheoutstanding leaseliability. TheCompanydoesnotcurrently anticipate anysignificant increaseinpensioncostsasaresultoftheEmployeeRetirement IncomeSecurityActof1974.10.RENTALSANDNONCANCELABLE LEASECOMMITMENTS Totalrentalschargedtooperating expensefortheyears1975and1974amountedto$9.5and$8.9million,respectively. AtDecember31,1975theCompanywascom-mittedforminimumrentalstotaling$59.4millionundernoncancelable leasesexpiringatvariousdatesto1996.Theminimumrentalsareasfollows(millions ofdollars): 1976,$5.5;1977,$5.3;1978,$5.1;1979,$4.8;1980,$4.6;1981through1985,$15.7;1986through1990,$10.2;1991through1995,$7.9;after1995,$0.3.Theserentalsareapplicable tothefollowing categories ofprop-erty:combustion turbinegenerating equipment, $17.5million;railroadcoalcars,$23.9million;computerequipment, $13.5million;andcon-struction cranes,$4.5million.Generally theleasescontainrenewaloptionsandobligatetheCompanytopaymaintenance, insurance andotherrelatedcosts.Theimpactuponnetincomeineachoftheyears1975and1974wouldbelessthan1%ifallnon-capitalized financing leaseswerecapitalized andamortized onastraight-line basiswithinterest11.PENDINGACQUISITION OnDecember1,1975theCompanyenteredintoapurchase. agreement toacquirealloftheoutstanding capitalstockofHersheyElectricCompany(HEC).Theacquisition costofthecapitalstockandtherepayment ofalldebtowedbyHECwillapproximate $8million.ThereportedrevenuesandnetincomeofHECfortheyear1975were$8.7millionand$0.4million,respectively. Theacquisition willnotbeconsum-mateduntilallnecessary regulatory approvals havebeenreceived. 12.COMMITMENTS ANDCONTINGENT LIABILITIES TheCompanyestimates thatabout$1.43billionwillberequiredtocompleteconstruction proj-ectsinprogressattheendof1975.Ofthisamount,approximately $1.28billionisrelatedtocompletion oftheCompany's twonucleargener-atingunitsatitsSusquehanna PowerPlant.TheCompany's estimated construction programfor1976is$390million.Inconnection withproviding foritsfuturebitu-minouscoalsupply,theCompanyatDecember31,1975hasguaranteed capitalandotherobliga-tionsofcertaincoalsuppliers (including fiveownedandtwocontrolled coalcompanies) aggregating $131.6million.25 HASKINS&SELLSCertified PublicAccountants AUDITORS'PINION TwoBroadwayNewYork10004TheShareowners andBoardofDirectors ofPennsylvania Power&LightCompany:WehaveexaminedthebalancesheetofPennsylvania Power(tLightCompanyasofDecember31,1975and1974,therelatedstatements ofincome,earningsreinvested, andchangesinfinancial positionfortheyearsthenendedandtheschedulebfcapitalstockandlong-term debtasofDecember31,1975.Ourexamin-nationwasmadeinaccordance withgenerally acceptedauditingstandards and,accordingly, includedsuchtestsoftheaccounting recordsandsuchotherauditingprocedures asweconsidered necessary inthecircumstances. Inouropinion,suchfinancial statements andschedulepresentfairlythefinan-cialpositionoftheCompanyatDecember31,1975and1974andtheresultsofitsoperations andchangesinitsfinancial positionfortheyearsthenended,incon-formitywithgenerally acceptedaccounting principles consistently appliedduringtheperiodandonabasisconsistent withthepreceding year(except forthechangein1974,withwhichweconcur,inthemethodofaccounting forrecover-ablefuelcostsasdescribed inNote3oftheNotestoFinancial Statements). February3,1976FISCALAGENTSSECURITIES LISTEDONEXCHANGES TRANSFERAGENTSFORPREFERRED, PREFERENCE ANDCOMMONSTOCKIndustrial ValleyBankandTrustCompany634HamiltonMallAllentown, Pennsylvania -18101IrvingTrustCompanyOneWallStreetNewYork,NewYork-10015Pennsylvania Power&LightCompanyTwoNorthNinthStreetAllentown, Pennsylvania -18101REGISTRARS FORPREFERRED, PREFERENCE ANDCOMMONSTOCKTheFirstNationalBankofAllentown HamiltonMallatSeventhAllentown, Pennsylvania -18101MorganGuarantyTrustCompanyofNewYork23WallStreetNewYork,NewYork-10015DIVIDENDDISBURSING OFFICEFORPREFERRED, PREFERENCE ANDCOMMONSTOCKTreasurer Pennsylvania Power&LightCompanyTwoNorthNinthStreetAllentown, Pennsylvania -18101NEWYORKSTOCKEXCHANGEFirstMortgageBonds,10%%Seriesdue19824%%Preferred Stock(Code:PPLPRB)4.40%SeriesPreferred Stock(Code:PPLPRA)8.60%SeriesPreferred Stock(Code:PPLPRG)Preference Stock,$8.00SeriesCode:PPLPRJ)Preference Stock,$8.40SeriesCode:PPLPRH)Preference Stock,$8.70SeriesCode:PPLPRI)Preference Stock,$11.00Series(Code:PPLPRL)Preference Stock,$13.00Series(Code:PPLPRK)CommonStock(Code:PPL)PBWSTOCKEXCHANGE4~/to/oPreferred Stock3.35%SeriesPreferred Stock4.40%SeriesPreferred Stock4.60%SeriesPreferred Stock8.60%SeriesPreferred, Stock94/oSeriesPreferred StockPreference Stock,$8.00SeriesPreference Stock,$8.40SeriesPreference Stock,$8.70SeriesPreference Stock,$11.00SeriesPreference Stock,$13.00SeriesCommonStock26 Quarterly Dividends andMarketPriceofVotingSecurities for1975and1974ReportedMarketPrice-Dollars perShareQuarterly Dividends Declared1stQuarterHighLow2ndQuarterHighLow3rdQuarterHighLow4thQuarterHighLow1975CommonStockPreferred Stock4'/to/oSeries3.35o/o4.4po/o46po/o740o/o(a)8.60o/o9PPo/o$0.451.1250.83751.101.151.852.152.252015s/s5244'/s49'/s45'h4945'/s4944'/s3531r/s3433353250'/s41'/s47'/r434844504447'h45'/s47453532'/s46'!i43'/s49459379'A88'/s8488'/t819580908891889095828819r/s17Ys19r/s17s/s19'/s17%Preference Stock$8.00$8.40$8.70.$9.25(a)........$11.00$13.002.002.102.1752.3382(c) (b)3.258569897392791201058275817679748578'/t84'A77'ls847888'/s8288'/r80'/s87'/s80'/s103100'A106'h100'/s118111118110M119'h1121974CommonStockPreferred Stock4'Ao/oSeries3.35'/o44po/o460'/o7.40'/o(a)......... 8.60o/o9.PPo/oPreference Stock$8.00$8.40$8.70$13.00$0.45(d)1.1250.83751.101.151.852.152.252.002.102.1752.93(e)2319'/s21r/s1618'/>>1317ls14r/s57'/s5254th48r/s50'/s434843403956%5255'fi53104'/s101104-=102103'h908982'/s87701009489777570100'A969578102'/s98998010699'/r100%86806881M6991'3806781'/r708672109'/s100383533293828'/t5246'/s4841r/s4541524948464845Theprincipal tradingmarketforallclassesofstockIstheNewYorkStockExchangeexceptforthe3.35%.4.60%and9.00%SeriesPreferred StockswhicharelistedonthePBWExchangebutaretradedprincipally overthecounter.Pricerangesforthe3.35%,4.60%and9.00%SeriesPreferred Stocksarebasedonthebestavailable highandlowbidpricesduringtheperiodsandshouldbeviewedasreasonable approximations. (a)Stockwasaprivateplacement andisnotpubliclytraded.(b)StockIssuedAugust1975,thethirdquarterdividendwas$1.01andthefourthquarterdividendwas$2.75.(c)StockIssuedInSeptember 1975,fourthquarterdividendonly.(d)Firstquarterof1974was$0.42,remaining quarters$0.45.(e)StockissuedOctober1974,fourthquarterdividendonly.27 OFFICERSBOARDOFDIRECTORS JACKK.BUSBY,President ROBERTR.FORTUNE,Executive VicePresident, Financial BROOKER.HARTMAN,Executive VicePresident, Operations JOHNT.KAUFFMAN, VicePresident, SystemPower&Engineering EMMETM.MOLLOY,VicePresident, HumanResource&Development LEONL.NONEMAKER, VicePresident, Dlv/sionOperations CHESTERR.COLLYER,Treasurer NORMANW.CURTIS,VicePresident, Engineering &Construction JOSEPHL.DONNELLY, VicePresident, FinanceLOUISEA.EARP,Assistant Secretary CHARLESE.FUQUA,VicePresident, Susquehanna DivisionCHARLESJ.GREEN,VicePresident, Harr/sburg DivisionRICHARDH.LICHTENWALNER, VicePresident, information ServicesCARLR.MAIO,VicePresident, LehlghDivisionJAMESJ.McBREARTY, VicePresident, Northeast DivisionEDWARDM.NAGEL,VicePresident, GonoralCounsolandSecretary HERBERTD.NASHJR.,VicePresident, Consumer&Community ServicesEDWINH.SEIDLER,VicePresident, Distribution BRENTS.SHUNK,VicePresident, Lancaster DivisionJEANA.SMOLICK,Assistant Secretary DONALDJ.TREGO,Assistant Treasurer GEORGEF.VANDERSLICE, VicePresident andComptroller PAULINEL.VETOVITZ, Assistant Secretary HELENJ.WOLFER,Assistant Secretary Corporate Management Committee: JackK.Busby.chairman: Messrs.Fortune.Hartman,Ksuifman, Molloy,Nonemaker andFloydBelsel.executive secretary. Theexecutive organization chartoftheCompanylsIncludedinthePP&LProfile.CLIFFORDL.ALEXANDER JR.,Washington, D.C.Partnero/Verner,Liiplert,

Bernhard, McPherson andAlexander, Counsellors atLawJACKK.BUSBY,Allentown President oftheCompanyRALPHR.CRANMER,Williamsport MemberofBoardo/Directors-Grit Publishing CompanyEDGARL.DESSEN,HazletonPhysician-Radiologist ROBERTR.FORTUNE,Allentown Executive VicePresident, Financial BROOKER.HARTMAN,Allentown Executive VicePros/dent, Operations HARRYA.JENSEN,Lancaster Executive VicePresident, Armstrong CorkCompany,Manufacturer o/interiorfurnishings andspecialty productsW.DEMINGLEWIS,Bethlehem President ofLehlghUniversity JOHNA.NOBLE,ScrantonPresident o/Cia/andSimpsonCompany,Department storesRUTHPATRICK,Philadelphia ChiefCuratoroftheLimnology Departmont, AcademyofNaturalSciencesNORMANROBERTSON, Pittsburgh SeniorVicePresident andChio/Economist ofMellonBank,N.A.JOSEPHT.SIMPSON,Harrisburg ChairmanoftheBoardofHarscoCorporation, Diversified manufacturer oflabrlcated metalproductsCHARLESH.WATTSII,Lewisburg President ofBucknellUnivorsity Executive Committee:

JackK.Busby,chairman; Messrs.Cranmer.Hsrtman.JensenandSimpson.AuditCommittee: CliflordLAlexander, chairman; Mr.Jensen.Dr.PatrickandMr.Watts.TheCompanyfliesForm10-KannuallywiththeSecurities andExchangeCommission. Form10-KIscomposedofthisAnnualReporttoshareowners andadditional Information concernIng theCompanyandItsoperations. Thisadditional Information willbeavailable withoutchargeafterApril1,1976bywritingtoPennsylvanIa Power&LightCompany,TwoNorthNinthStreet,Allentown, Pa.18101,attention: Mr.GeorgeI.Kllne,InvestorServicesManager.28 PP&LDirectors SIMPSONBUSBYI>>Ml\I1CCRANMERFORTUNEDESSENJENSENt'LEWISHARTMANNOBLEWATTSI0trNRCI,PATRICKROBERTSON ALEXANDER +;Ir..Manyofthephotosaboveweretakenatthetwo-daySeptember boardmeetingduringwhichthedirectorstoured theSusquehannanuclearplantconstructlonsite. PpaLPENNSYLVANIA POWER8LIGHTCOMPANYTwoN'orthNinthStreet,Allentown, Pa.18101Telephone: AreaCode215821-51518ULKRATEU.S.POSTAGEPAIDAllenlewn, Pa.PermitNo.l04LITHOIHU.S.A. Regulatory Docket.F~il ,)$,y.">>>>>>VaEXECUTIVE VICEPRESIDENT'S REPORT>>WilliamF.MatsonThebusinessofAllegheny ElectricCooperative isverysimple-thatofpowersupplytothemembership. Fromthatpointon,itbecomeslesssimple-notonlypowersupplybutanabundance ofpoweratthelowestpossiblecosts.Thathelpstoconfusetheissue.Inordertoaccomplish itssingleobjective, Allegheny, duringthecomingyear,willbespendingasignificant amountoftimeonfoursubjects: capitalcredits,loadmanagement, long-range futurepowersupply,andthedecisiononthedepthofourinvolvement ingeneration andtransmission. Ourlong-range projections showthatAllegheny's memberswillrequire1,000MWoffirmcapacity. Eventoday,our137,000membersusenearlyoneandahalfbillionKWH.Ofthis,nearlytwiceasmuchisusedinthewinterascomparedtothesummer.Thisthrowsadisportionate shareofourcosts,load,andneedsforthesystemintohalfoftheyear.Alongwiththemanystudieswhichweconstantly keepcurrent,severalnewstudiesofinteresttothemembersarecurrently inprogress. Adetailedfeasibility studyisbeingconducted todetermine whetherornoteconomics dictatethatweshouldgetinvolvedinself-generation andtransmission ownership. Almostconcurrently withthisstudy,weareconducting asiteselection andfuelsupplyavailability study.Shouldthisfeasibility studyshowthedesirability ofbuildingself-generation plants,aswesuspectitverywellmay,wewillalreadyhavesomeideaastoagenerallocationandapotential sourceoffuel.Likeacrossword puzzle,onlyonepiececanbeputinatatime;butwhenseveralpeopleworkonthecrossword puzzleanumberofdifferent piecescanbespottedsimultaneously. ThatiswhatwearetryingtodowithAllegheny. ThebusinessofaG&Trevolvesaroundpeopleandfigures.Thisannualreportisrepletewithstatistics anddataintheformoftables,graphs,andchartsinorderforyoutovisualize theprogressandgrowthofyourpowersupplycooperative. Inadditiontothestudiesconcurrently beingmaderegarding coalfiredgeneration, wearecontinuing fullspeedaheadonourstudiesforconstruction ofadditional hydroprojects. Eachofyourecognize theimportance oftheblendofhydrowhichwehavebuiltintoAllegheny's ratebasetothemembership. Eachofyoualsorecognizes thegreatamountofcarefulworkthatmustbedonebyyouandbyAllegheny's staffinordertocontinuethoseratiosascloselyaspossible. WeareproudofAllegheny's recordandthinkthatthe10yearresultsshowanexcellent stewardship. Buttrulythepastisprologueandourthoughtsmustbeconstantly gearedforthenext10to20years.Ibelievethatthereportsoftheofficers,

managers, andstaffofthisorganization givenattheannualmeetingwillgiveyouaconcisepictureofthemethodsweplantouseinordertoaccomplish thegoalsandobjectives outlinedinpreviousannualbudgetandworkplanreportstothemembership.

Paramount ofcourse,inaruralelectricG&Tisthestrongandenthusiastic supportofitsmembers.Forthat,wethankeachofyou. PRESIDENT'S REPORTReubenYoselsonAlthoughthisismyfirstreportasthePresident ofAllegheny ElectricCooperative, asapastpresident ofmylocalcooperative andasamemberofAllegheny's boardandaninterested onlookerformorethan20years,Ihavelongsharedtheagonyofdefeatandtheecstacyofsuccesswithyou.Theroleoftheboardofdirectors haschangedsignificantly overtheyears.Mostofthischangeisofcourseduetotheincreased sophistication ofthetimesandoftheoperation ofAllegheny. Still,theboardmustprovideitsprimaryfunctionofbeingapolicymakingbodyandasoundingboardformanagement touseinproposing thenewprograms, techniques andtechnologies necessary inorderforustoaccomplish ourobjectives. Manyofusareconcerned aboutthechangingmembership ofourmembercooperatives andtheresponsibility thatAllegheny directors shareintryingtoaccomplish theseemingly impossible objective oflow-costpowertothemembers.Still,directors areremissintheirresponsibility iftheydonotcarefully andcontinuously informthemselves ofthesuccessthatAllegheny hashadinmeetingthisobjective andinturnpassingonthefantastic savingsofwholesale powertothemembercooperatives. Youmustbeabletorelatetoyourindividual membership thesuccesses whichyouhavehadandtotranslate thosesuccesses intothecomparatively lowerrateswhichruralelectricmembersarecurrently enjoying. Mostquestions canonlybeansweredwiththequestion: comparedtowhat?Yes,wemustallagreeelectricity costsarehighbutcomparedtowhat,orcomparedtowhose,orcomparedtowhatothersource?Whenthesequestions arecarefully exploredandcarefully answeredtoourmembership, weshouldhope'that theanswerswillsatisfythequestions ofthemembers.Theseareindeedtryingtimesandtheytakestrongactiontocounteract theadversities whichconfrontus.Wemustmakenosmallplans-ourplansmustbestrong,theymustbeadequatetomeetthetestsofthetimesandtheymustbesufficient toaccomplish ourobjectives. Asyourpresident, Iseekyouradvice,counsel,guidanceandstrongsupportoftheattainment ofthesegoals. Lelttoright:MyronLudwick,LloydDugan,Sr.~RobertE.Leonard,HarrisHorn,DennisShaffer,JohnAnstadt.ReubenYoselson, BenjaminSlick,HiramW.Walker,DanielA.Clark,ClairO.Bulerbaugh, A.D.Stainbrook. Missingfromphoto:JamesHenderson, WilliamJ.McDanel.CO-OPADDRESSES ANDDIRECTORS AdamsElectricCooperative', Inc.P.O.Box130Gettysburg, PA17325HarrisS.Horn,DirectorSomersetRuralElectricCo-op,Inc.127E.FairviewStreetSomerset, PA15501HiramW.Walker,DirectorBedfordRuralElectricCo-op,Inc.P.O.Box335Bedford,PA15522DennisShaller,DirectorSouthwest CentralREC,Inc.P.O.Box70,AirportRd.~R.D.4Indiana,PA15701ClairO.Buterbaugh, DirectorCentralElectricCooperative, Inc.P.O.Box329Parker,PA16049WilliamJ.McDanel,DirectorSullivanCountyREC,Inc.Forksville, Pennsylvania 18616JohnAnstadt,DirectorClaverack RuralElectricCo-op,Inc.Towanda,PA18848ReubenYoselson, DirectorSussexRuralElectricCooperative 22E.MainStreetSussex,NJ07461JamesL.Henderson, DirectorNewEnterprise RuralElectricCooperative, Inc.NewEnterprise, PA16664BenjaminSlick,DirectorNorthwestern RuralElectricCooperative Association, Inc.R.D.1Cambridge Springs,PA16403A.D.Stainbrook, DirectorTri-County REC,Inc.22N.MainStreetMansfield, PA16933LloydDugan,Sr.,DirectorUnitedElectricCooperative, Inc.Box477DuBois,PA15801RobertE.Leonard,DirectorValleyRuralElectricCo-op,Inc.Box477Huntingdon, PA16652DanielA.Clark,DirectorWarrenElectricCo-op,Inc.320E.MainStreetYoungsville, PA16371MyronLudwick,Director ALLEGHENY OFFICERSPresident --ReubenYoselsonVicePresident -WilliamJ.McoanelSecretary -JohnAnstadtTreasurer -MyronLudwickSTATISTICS No.ofmembers-14No.ofconsumers,- 136,845TotalKWHpurchased -1,355,237,657 Non-coincident demand-322,176VITALCOOPERATIVE STATISTICS PACo-opAdamsBedfordCentralClaverack NewEnterprise Northwestern SomersetSouthwest CentralSullivanSussexTri-County UnitedValleyWarrentofConsumers 12,6485,76317,63710,4972,12312,8428,14813,7693,7485,83212,37412,51511,9696,980MilesofLine1,9769582,6202,1212652,0381,6681,9776813592,3332,4291,865912Consumers PerMileofLine6.46.06.74.58.06.34.97.05.516.25.35.26.47.7TotalKWHPurchased 151,103,200 64,733,800 136,810,000 120,014,839 26,659,600 153,083,908 101,779,500 158,168,732 32,714,941 59,708,500 97,091,160 95,I78,000122,539,000 35,652,477 AnnualPeakDemand38,48314,97631,00227,9896,2133327223,40632.0278,89214.34027,73224,38028,13511.329TOTALAverage136,8459,77522,2021,5861,355,237,657 322.1766,9 TREASURER'S REPORTALLEGHENY ELECTRICCOOPERATIVE, INC.BALANCESHEET-31DECEMBER1975and1974ASSETSTotalUtilityPlantinServiceTransmission StationEquipment TotalUtilityPlantAccumulated Provision forDepreciation NetUtilityPlantInvestments inAssociated Organizations Cash-GeneralFundsTemporary CashInvestments Receivables TotalCurrentandAccruedAssetsTotalAssets1975$10,36826,98937,3574,60332,7541,757,687 3,4771,030,000 2,066,778 4,857,942 $4,890,696 1974,$8,70626,98935,6952,63033,0651,010302,841200,0002,335,152 2,837,993 $2,872,068 LIABILITIES Memberships 'atronage CapitalDonatedCapital-MembersDonatedCapital-NonMembersDeficitMarginTotalMarginsandEquitiesLong-Term Debt-NRUCFCAccountsPayableTotalLiabilities 19752,8001,600,107 29,31634981,632,572 1,070,060 2,I88,064$4,890,696 19742,800990,22129,316349~22.2031,000,483-1.871,585 $2,872,068 TREASURER'S REPORT(CONT'D)MEMBERAdamsElectricCooperative, Inc.BedfordRuralElectricCooperative, Inc.CentralElectricCooperative, Inc.Claverack RuralElectricCooperative, Inc.NewEnterprise RuralElectricCooperative, Inc.Northwestern RuralElectricCoop.Assn.,Inc.SomersetRuralElectricCooperative, Inc.Southwest CentralRuralElectricCooperative Corp.SullivanCountyRuralElectricCooperative, Inc.SussexRuralElectricCooperative Tri-County RuralElectricCooperative, Inc.UnitedElectricCooperative, Inc.ValleyRuralElectricCooperative, Inc.WarrenElectricCooperative, Inc.1975$2,239,700.31 924,101.49 1,943,324.94 1.743,370.66 388,314.67 2,197,618.66 1,490,125.57 2,243,091.20 469,767.07 856,103.99 1,424,850.38 1,373,438.00 1,766.102.36 528.526.07 $19,588,"435.37 974$1,808,333.04 790,212.09 1,643,603.73 1,524,959.90 320,010.44 1,906,421.25 1,221,326.78 1,826,916.88 413,220.36 675,834.56 1,234,845.17 $,161,517.96 1,488,658.48 460.336.42 $16,476,197.06 POWERPURCHASED BYALLEGHENY PowerAuthority oftheStateofNewYorkPennsylvania ElectricCompanyMetropolitan EdisonCompanyWestPennPowerCompanyNewJerseyPower&LightCompanyTotalPurchased Power$3,694,665.00 7,366,418.14 1,253,214.79 2;258,409.45 1.205.369.05 $15,778,076.43 $3,089,120.73 7,127,064.48 822,408.60 1'69,168.14 995.814.52 $13,203,576.47 PowerAuthority oftheStateofNewYorkPennsylvania ElectricCompanyMetropolitan EdisonCompanyWestPennPowerCompanyNewJerseyPower&LightCompanyTotalPurchased Power19755.0219.4122.6718.2020.1911.64MILLS/KWH 19745.0316.5416.3610.2919.0310.47 TREASURER'SREPORT(CONTD)TRANSMISSION CHARGESNewYorkCompanies G.P.U.Companies TotalTransmission ExpenseTotalPurchased PowerTotalPowerSupplyExpenseOtherExpensesTotalOperating Expenses1975$624,000.00 2,352,337.20 $2.976,337.20 15,778,077.00 18,754,414.20 273.131.00 $19,027,545.20 1974$494,149.08 1,952,468.48 $2,446,617.56 13,203,576.47 15,650,194.03 221,697.00 $15,871,891.03 24.023.022.021.020.019.018.017.0--AVERAGECOSTPAIDTOPASNY..AVERAGESUPPLEMENTAL COSTAVERAGEALLEGHENY TOTALCOSTe~~~~~~~f~'~~~~~~~~~~~,~~~~~~~~~~16.015.0XQ14.013.0l2.011.010.0~~~~~~~0~~~~t~y~~~~8.07.06.05.0403.02.01.00.0AYJULSEPNOVJANMARMAYJULSEPNOVAUGOCTDECFEBAPR.JUNAUGOCT197419751976 POWERPURCHASED 31DECEMBER1975MET.EDISON4.08%WESTPENNJCPL9.16%4.40%PASNY54.35%PENELEC28.01%TOTALKWH-1,355,237,659 ADMINISTRATIVE andGENERAL1.44%COSTOFOPERATIONS 31DECEMBER1975WESTPENN11.87%JCPL6.33%METEDISON7orq<NEerod1g+gO~o+OPASNY19.42%c5'PUWHEELINGgg12.36%NYWHEELING3.28%~O0PENELEC38.71%o~~st51.63%' 3403201975300197428019731972o2602401971MONTHLYMWDEMAND2202001801970160140120100JANFEBMARAPRMAYJUNJULAUGSEPOCTNOVDECYEARLYKILOWATTHOURSKWH(MILLIONS) 15001400130012001100100090080019705.57%INCREASE19711439%INCREASE19726.88%INCREASE1.11.".'i19737.45%INCREASE~0~~~~~~0~~~~~~~~~~0~~~~~~~~~~~~~~~~~~~~~~~~~~~~'~~~~4~~~~~~~~~~~~~0~~~00~~~~~~~~~~~~~~~0~~~~~~~~~4~~~~~4~~0~~~~~~~~0~~4~~~~~~~~~~~~~~~~~4~~~~~~~~~~6.77%INCREASE~~~~~~~~~~~~~~~~tYo~oV~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~\~~~~~~~~~~~~~~~~~~~~~~~~~~~~t~~~~~~~~~~~~~~~~t~~~~~oVt~0~~iV~~~~~~~IVY~~\~~~4Yt~oV~~~~~~~~~~~~~~~~~~tVoY~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Vt~~~~~~~YIVo~~~~~~~~~~~~~~~~~~~~~~~~~IVY~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Vt~~~~~~~~~~~~~~~~~~~~~~~~~~~~i~~~~~~~~~~~~~~~~~~\OVo~~~~~~~~~~~~~~~~~~~~~oVSVtIVY~~~~~~~~~~~~~~~~~~~~~~~~VoVo~~~~~~~VIVI~~~\~~~~~~~~~~~~~~~~~~~IVY~~~~~tVt~~~~~~~~~~110~~~~~tV4Vt~~~~~~~~~~~~~1YotVt~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~OIO~~~~~~1Vo~~~~~~~~~OV11974197510 DEPARTMENT OFENGINEERING ANDPOWERSUPPLY(LtoR)GaryFries,RichardOsborne,HarlanSaverson, JosephZuiioHarlanM.Severson-DirectorofPlanningJosephD.Zullo-StaffEngineerRichardOsborne-StaffEngineerGaryFries-StatisticianSouthernEngineering CompanyofGeorgia-Consulting Engineers Theprimaryresponsibility oftheEngineering andPowerSupplyDepartment istoinsureareliableandadequatepowersupplyforallofAllegheny's 14memberruraldistribution coopera-tives.Inordertomeetthisresponsibility, theDepartment continually preparesandupdateslongrangepowerrequirement projections foreachmemberandthenfocusesonthenecessary futureplanningneededtoinsuretheserequirements. PowersupplyplanningforAllegheny's membersinvolves: (1)negotiations withpowersuppliers forthepurchaseandtransmission ofenergyatreasonable ratesapprovedbytheFederalPowerCommission, (2)jointownership inashareofthreenew,efficient, nucleargenerating unitswhicharebeingconstructed bymajorcompanies ofthePennsylvania, NewJersey,andMary-landInterconnection, (3)emphasizing theurgentneedforthedevelopment ofallpotential hydroelectric generating sitesthroughout Pennsylvania, and(4)preparing theinitialfeasibility studiesneededtoimplement aconsumerorientedloadmanagement andenergyconservation programthroughout themembercooperatives. Asidefrompowersupplyplanning, theEngineering andPowerSupplyDepartment isalsoresponsible fordetermining thewholesale powerratewhichAllegheny appliesequallytoeachmembercooperative. Also,theDepartment providesanumberofadditional servicestothemembers.Theseservicesincludecostofserviceandretailratestudies,ratecasesbeforeStateRegulatory Commissions, andengineering coordination betweenAllegheny, itsmembersandtheprivatepowercompanies. Theenergysituation facingthisNationandtheWorldtodaydictatestheneedforsoundsystemplanning. TheEngineering andPowerSupplyDepartment, inconjunction withSouthernEngi-neeringCompanyofGeorgia,themembercooperatives andtheirconsulting engineers, willcontinually strivetofurtherAllegheny's mainobjective -asufficient supplyoflowcostelectrical energytotheruralconsumer-owners ofitsmembercooperatives, nowandinthefuture. LEGALSERVICESANDRESEARCHMarianSchwalmFurmanJamesMurraySueVertolliMarianSchwalmFurman-GeneralCounselandDirectorofResearch-ResearchAssistant -Secretary toLegalDepartment andExecutive VicePresident GeneralCounselrepresents Allegheny inlegalaspectsofitsdealingswithitsmembersandwithotherentities. Reviewandinterpretation otFederalandStateStatutes, regulatory directives andcourtdecisions aswellasadviceoncompliance areamongthelegalservices. Researchisconducted andtestimony preparedforpublicagenciesonproposedlegislation, pendingad-ministrative actions,andotherpowersupplyproblemsaffecting thecooperatives. SpecialCounsel,WilliamC.Wise,isretainedonacontinuing basisformattersrequiring specialexpertise inpowersupplynegotiations, proceedings beforeregulatory agenciesandlitigation. ADMINISTRATIVE ASSISTANT ANDDIRECTOROFSPECIALPROJECTSHarlanSeversonHarlanSeverson-Administrative Assistant &DirectorofSpecialProjectsOnMay1,HarlanSeversonjoinedthestaffofAllegheny, havingworkedpreviously forageneration andtransmission cooperative inSouthDakotafor18yearsandasaCongressional andSenateaideforthepast5years.Heisnowparticipating inthenegotiating sessionswithPennsylvania PowerandLightandhasbeenassignedasDirectoroftheDepartment ofEngi-'neeringandPowerSupply,onatemporary basis.OFFICESERVICESC.DonaldBlackburn C.DonaldBfackburn StellaRoadcapRitaMartinezDarleneJonesLeeSitton-OlficeManager-Assistant Bookkeeper -GeneralOffice-GeneralSecertary -Receptionist andSecretary TheOfficeServicesDepartment maintains thebudget,booksofaccount,payrollrecordsandallbillsandpayments. Allquarterly andannualtaxreturns,andotherfinancial reportsarepre-pared.AffairsoftheOfficeServicesDepartment arecoordinated withactivities oftheotherdepartments oftheCooperative inordertogivemaximumservicestomembers.12 MEMBERSERVICESWilliamLoganr~r'illiam Logan-DirectorCommunity Development andMemberServicesMaryJoKeating-Associate Editor,PENNLINESPattiStevens-Secretary Thisdepartment isinvolvedwiththeprimaryfunctionofproviding andexchanging information withthemembersystemsandthegeneralpublic.Themanyactivities requiredinthisinforma-tionprogramarecenteredaroundthemonthlypublication ofPENNLINES,newsletters, memos,newsreleasesandthemiscellaneous correspondence. TheMemberServicesstaffisresponsi-bleforcoordinating andextending activities conducted bylocalelectriccooperatives including powerusepromotions, youthactivities, women'sprograms, andavarietyofmeetingsandconferences. Legislative responsibilities aresharedwiththelegaldepartment PENNLINESistheofficialmonthlypublication ofPennsylvania's RuralElectricCooperatives. Sinceitsinception inOctober,1966,PENNLINESisthevoiceofover137,000ruralelectricmembersthoughtout theservicearea.PENNLINESisdesignedtokeepmembersinformedoftheirprogramsandprogress. PENNLINESstaffincludes: EditorWilliamF.Matson,ManagingEditorWilliamLoganandAssociate EditorMaryJoKeating.JOBTRAININGANDSAFETYRobertHornRobertS.Horn-DirectorRobertSpangler-Instructor Thisprogrambringstoallemployees programsdesignedtohelpthemaccomplish theirjobsinthesafest,mostefficient mannerinordertopreventaccidents andtobringtothemembership thebestpossibleservice.Specifictrainingprogramsaresodesignedastoappealtoandmeettheneedsoftheemployees ofthecooperative. Theuseofprotective equipment isdemonstrated andencouraged onallthosejobswherethereisaneed.Specialinformation programsareusedtoinstructemployees inthecorrectprocedures tobeusedincaringforavictimintheeventanaccidentshouldoccur.Oneoftheobjectives ofthesafetyprogramistoworkwiththeco-opstoestablish publiceducatiorl

programs, suchasthehighvoltagedemonstration, toincreasethepublic'sawareness astothehazardsinvolvedinelectrical distribution linesanduseinthehome.Thisdepartment isalsoresponsible forkeepingabreastofnewdevelopments inthefieldofelectrical distribution, andforthecoordination ofotheractivities thatwillenhancetheruralelectrification programonalocallevel.13 TERRITORIAL INTEGRITY Theyear1975sawthepassageofSenateBill719bytheGeneralAssemblyanditsapprovalbyGovernorMiltonJ.Shappwhichsuccessfully concluded afifteenyeareffortonthepartoftheRuralElectricCooperatives tosecureterritorial integrity fortheirareasofservice.Amodelforotherstatestocopy,thislegislation isatributetoallruralelectricleaderswhoworkedlongandhardforitspassageandtothegreatdemocratic systemofgovernment underwhichweliveandprosper.HEADQUARTERS BUILDINGAllegheny's newcorporate headquarters, aseven-story, 63,000squarefootcommercial officebuilding, willnotonlyprovideAllegheny withthespacetofunctionatpeakefficiency butbyrentingourexcessspace,givesusthebesteconomicpackageaswell.The3.5milliondollarconstruction, joiningHarrisburg's urbanrenewalproject,willbeequippedtodealwiththesophisticated problemsofcontemporary

business, suchasaudio-visual communications, in-housemeetingandconference spacetosavemoneyandtime,andagood,logicalofficesystemtoupgradethequalityandquantityofproductivity.

NUCLEARNEGOTIATIONS Negotiations forAllegheny's jointownership inthreenucleargenerating unitscontinued throughout 1975withthePennsylvania PowerandLightCompanyandtheGeneralPublicUtilities Corporation. Hopefully, agreements suitabletoallpartiescanbeconcluded in1976.HYDRO-POWER POTENTIAL Themaximumdevelopment ofhydro-power inPennsylvania haslongbeenoneofAllegheny's majorconcerns. Developments in1975indicatethatthelongawaitedinstallation ofhydrogenerating facilities atRaystownDammaybecomearealityinthenotsodistantfuture.However,hydro-power sufferedasevereblowwhenconstruction ofthemulti-purpose TocksIslandLakeProjectwasdeferredbytheDelawareRiverBasinCommission. OnlyGovernorShappofPennsylvania continued topressfortheimmediate construction ofTocksIsland.Nowhowever,theCityofPhiladelphia andseveralNewJerseycommunities areseeingmunicipal watersho'rtages, sowemaygetTocksbackontopagain,14 PEOPLE0POWER<PROGRESSOneofthewaysAllegheny furthersitsobjective -obtaining lowcostpowerfortheruralconsumer-owners ofitsmembercooperatives -isbyaffiliation withstateandnationalorganizations whoseinterests parallelourown.WemaintaincloseliaisonwithPennsylvania RuralElectricAssociation, theserviceorganization forAllegheny's members.PREAsupportsjointactivities, suchasgrouppurchasing, thatelectriccooperatives inPennsylvania andneighboring statescanengageinmoreeconomically onagroupbasis.Actingasatradeassociation PREAfurnishes awiderangeofserviceshelpfultoAllegheny anditsmembers.Allegheny isamemberofNationalRuralElectricCooperative Association, PREA'snationalcounterpart. NRECAmaintains programsforitsmembership inmanyfieldssuchassafetyandjobtraining, retirement

benefits, insurance, management

training, personnel payscalesandorganization, andwholesale powersupply.NRECAalsosupportsinternational cooperation andprovidesassistance toruralelectriccooperatives indeveloping nationsboththroughtheU.S.AIDprogramandthroughrelatedcontracts.

Severalmanagersandothersfromourmembercooperatives andoneofourstafrmembershavespentvaryingamountsoftimeworkinginforeigncountries tohelpthemdeveloptheirprogramsforproviding electricservicetothepeoplethroughcooperative programs. Weparticipate inthenationalactivities oftheAmericanPublicPowerAssociation, withAllegheny staffmembersonitsRateCommittee, Legislative Committee, PowerSupplyPlanningCommittee, andManagement AdvisoryCommittee. Throughtheseactivities aswellasattendance atitsnationalmeetings, wekeepintouchwiththebestinformedopinionofoutstanding leadersinthepubliclyownedandconsumerorientedsegmentoftheelectricpowerindustry. Thetraditional majorsourceoffinancing forcooperative generating facilities hasbeenTheRuralElectrification Administration. Throughout its40yearhistory,REAhasmadeloansto1,069ruralelectriccooperatives andpubliclyownedsystems,andalsoto25investor-owned privateutilities, forthepurposeofgettingelectricity intoruralareas.Ruralelectriccooperatives haveestablished anoutstanding repayment record.NoAllegheny membercooperative haseverbeendelinquent inpaymentsonthetotalofalmost$100milliontheyhaveborrowed. Allegheny hasneverborrowedfromREAbutisnowintheprocessofpreparing foraloanapplication aspartofthefinancing ofitspartownership innuclearplantsandtransmission lines.TheNationalRuralUtilities Cooperative FinanceCorporation (CFC)hasbeenestablished byruralelectriccooperatives nationwide tomeetpartoftheirconstantly increasing capitalfinancing needs.Allegheny isamemberofCFCandisengagedinpreliminary discussions towardobtaining partofitsnear-future financing fromthissource.Inrecentyearsreliability councilshavebeenestablished withintheelectricutilityindustry, pursuanttoordersissuedbytheFederalPowerCommission. Cooperatives andmunicipal utilities serveonboardsorcommittees ofthesecouncils, therebymaintaining liaisonwithinvestor-owned bulkpowersuppliers onpowerplanningandservicereliability. Allegheny participates asanassociate ontheMid-Atlantic AreaCouncilExecutive BoardandasamemberoftheEastCentralAreaReliability CouncilLiaisonCommittee. AnAllegheny staffmemberalsorepresents Pennsylvania municipal utilities, undertheaegisofthePennsylvania Municipal ElectricAssociation, onthereliability councils. PENIISVLSNIII RORIILELECIRICCOOPERRTIUES Providing Low-CostDependable Electricity to137,000Member.Consumers inpennsylvania andNewJerseyeServingIn47Countiese150Directors -700Employees e22,000MilesofLinee1.4BillionKWH'sPurchased Annuallye137,000Member-Owners e$128,000,000 InvestedInPlantRETTYORKOHIOrsmroHvrrs)ClETEBACK BUBAl,GECTBICrCOOPEBATITE towakca'.-."rr-~---------PISUGITABCOUBIY0le04LCOOPEBATffE.GECTBICCOOPEBATIIE jvourrosvnra cLucarcos sprurrosoeeetoeeee lwlelr]Ir--~-yII4e,eee'~-~I~I/ICEIIIBAlQECTBICB~IUBITEDGEfBICCOOPERATIYErS'OOPEBAIIYE P~SoIreos~elelllir~r./~NW4o-~i/eeeeOCa~aW/'~/CW~/!~~ggggIe'eFt-"/OCUweecornrvssvap WTNrRECfJERSEYeel0olceletrQECTBjCCOOPEBATITE /7>BUBAlQECIBIC'eajeeeo~sJwceoler---gr'~ofiAtAIISGECTBICCOOPEBITTE) SOREBSETBUBAlfBEDFOBDBUBAli~// i/////J~IBllsllQEfBIC/-Irslal15.e~~/~vorwsvrLLs~-~r'r' l/V~'e/>GECIBICCOOPEBA ~sussa1ceeeeery'ergegfeeeeeie Weo~eoweeeeeoee CIARYEARD IRRIIIIA Registration No.2-SECURITIES ANDEXCHANGECOMMISSION WASHINGTON, D.C.20549FORMS-7REGISTRATION STATEMENT Under't:CURtyl:SltgE'>:CHAhGE CQ!tl'it!SSlGti P~ECt:-IVED NQV]11977THESECURITIES ACTOF1933OFFICEOFRHPOPTSJp~~~&trpnT(p[c;p;<q"vppgPennsylvania Power8tLightCompany(Exactnameofregistrant asspecNedinitscharter)Commonwealth ofPennsylvania (Stateorotherjurisdiction ofincorporation ororganization) TwoNorthNinthStreet,Allentown, Pennsylvania (Addressofprincipal executive offices)23-0959590 (I.R.S.EmployerIdentification No.)18101(ZtpCode)Registrant's telephone number,including areacode:215-821-5151 R;R.FORTUNE,Executive VicePresident -Financial 'woNorthNinthStreetAllentown, Pennsylvania 18101(Nameandaddressofagentforservice)Copyto:CHARLESA.READ,Esq.Reid&Priest40WallStreetNewYork,N.Y.10005Approximate dateofcommencement ofproposedsaletothepublic:Assoonaspracticable afterthisRegistration Statement becomeseffective. CALCULATION OFREGISTRATION FEETitleofeachclassofsecurities toberegistered Amounttoberegistered Proposedmaximumofferingpriceperunit'roposed maximumaggregate offeringprice'mount ofregistration feeFirstMortgageBonds,%Seriesdue2007$100,000,000 102%$102,000,000 $20,400Forthepurposeofcalculating theregistration feeonly.Theregistrant herebyamendsthisRegistration Statement onsuchdateordatesasmaybenecessary todelayitseffective dateuntiltheregistrant shallfileafurtheramendment whichspecifically statesthatthisRegistration Statement shallthereafter becomeeffective inaccord-ancewithSection8(a).oftheSecurities Actof1933oruntiltheRegistration Statement shallbecomeeffective onsuchdateastheCommission, actingpursuanttosaidSection8(a),maydetermine. PENNSYLVANIA POWER&LIGHTCOMPANYFormS-7ItemNo.1~230~4..5..78..9..10o~~~~1~~~~~~~i0~~12CrossReference SheetforProspectus HeadingInProspectus CoverPageofProspectus Purchasers Application ofProceedsConstruction ProgramFinancing Construction ProgramFinancing Business.ElectricStatistics MapStatement ofIncomeStatement ofChangesinFinancial PositionStatement ofEarningsRelnvested

CoverPageofProspectus Description ofBondsFinancial Statements OpinionofIndependent Certified PublicAccountants InsideFrontCoverofProspectus
OmittedfromProspectus asItemisinapplicable oranswerisinthenegative.

J', CIED~ElEO~~LIEELDCLICOl~LIEOOI~DEOEOEDEIIEDEDEO~DLEDLIED~~CkDLOD~eaEDEDZCLOIDL~~tlLI~EllEO~D~DCCIClC-~%EOED~EDPJLIClILI~'EEOEOPlEECEEDCD~maEDCl'EEIEO.~DEIIEIICDEOEII~EOLEEDEDIClEDCLlOEDDLED~OE~n~IIEII~Cl40EEIE~DEIIED~OLILEtl~EOcnR=-EEI>ElEOED~~~LEIEDOEDED.~~OI.EDEDEEICCCngLCLEIILICELE~O~ED~OI~.C3!ILI4CJaJAOIOlLIE/I~~El~C-ED,LEED~CCEDLEEOCl~EDED,OI~CEOLI~D~CLIEnEIIPRELIMINARY PROSPECTUS DATEDNOVEMBER11E1977$100,000,000 Pennsylvania Power&LightCompanyFirstMortgageBonds,%Seriesdue2007InterestpayableJune1andDecember1DueDecember1,2007TheBondswillberedeemable atanytimeattheapplicable GeneralandSpecialRedemption Pricessetforthherein,withaccruedinteresttothedatefixedforredemption, exceptthatpriortoDecember1,1982noredemption maybemadeattheapplicable GeneralRedemption Pricewithorinanticipation offundstobeborrowedhavinganeffective interestcosttotheCompanyoflessthan%perannum.TheinitialGeneralandSpecialRedemption Pricesare%and%,respectively. See"Description ofBonds".THESESECURITIES HAVENOTBEENAPPROVEDORDISAPPROVED BYTHESECURITIES ANDEXCHANGECOMMISSION NORHASTHECOMMIS-SIONPASSEDUPONTHEACCURACYORADEQUACYOFTHISPROS-PECTUS.ANYREPRESENTATION TOTHECONTRARYIS.ACRIMINALOFFENSE.ThedateofthisProspectus isDecember, 1977.ThisProspectus istobeusedinconnection withthePublicInvitation forBidsforthepurchaseoftheBonds.TheInvitation statesthatbidswillbereceivedbytheCompanyatMorganGuarantyTrustCompanyofNewYork,MorganGuarantyHall,28thfloor,15BroadStreet,NewYork,NewYork,upto11:00A.M.,NewYorkTime,onDecember13,1977;orsuchothertimeanddateasmaybefixedbytheCompanyasprovidedintheStatement ofTermsandConditions RelatingtoBids,andthatCompanyofficersandcounsel,representatives ofindependent certified publicaccountants andcounselfortheprospective Purchasers willbeavailable atMorganGuarantyTrustCompanyofNewYork,MorganGuarantyHall,28thfloor,15BroadStreet,NewYork,NewYork,onDecember6,1977at11:00A.M.,NewYorkTime,toreviewwithprospective bidderstheinformation withrespecttotheCompanycontained intheRegistration Statement andthematterssetforthintheStatement ofTermsandConditions RelatingtoBids. INCONNECTION WITHTHISOFFERING, THEPURCHASERS MAYOVER-ALLOT OREFFECTTRANSACTIONS WHICHSTABILIZE ORMAINTAINTHEMARKETPRICEOFTHESECURITIES OFFEREDHEREBYATALEVELABOVETHATWHICHMIGHTOTHERWISE PREVAII.INTHEOPENMARKET.SUCHSTABILIZING, IFCOMMENCED, MAYBEDISCONTINUED ATANYTIME.TheCompanyissubjecttotheinformational requirements oftheSecurities ExchangeActof1934andinaccordance therewith filesreportsandotherinformation withtheSecurities andExchangeCommission. Information concerning directors andofficers, theirremuneration andanymaterialinterestofsuchpersonsintransactions withtheCompany,asofparticular dates,isdisclosed inproxystatements distributed tostockholders oftheCompanyandfiledwiththeCommission. Suchreports,proxystatements andotherinformation canbeinspected andcopiedattheofficesoftheCommission atRoom6101,1100LStreet,N.W.,Washington, D.C.;Room1204,EverettMcKinleyDirksenBuilding, 210South

DearbornStreet,

Chicago,III.;Room1100,FederalBuilding, 26FederalPlaza,NewYork,N.Y.;andSuite1710,10960WilshireBoulevard, LosAngeles,Calif.Copiesofthismaterialcanalsobeobtainedatprescribed ratesfromthePublicReference SectionoftheCommission atitsprincipal officeat500NorthCapitolStreet,N.W.,Washington, D.C.20549.TheCommonStockoftheCompanyislistedontheNewYorkandPhiladelphia StockExchanges. Reports,proxystatements andotherinformation concerning theCompanycanbeinspected andcopiedattherespective officesoftheseexchanges atRoom401,20BroadStreet,NewYork,N.Y.,andat17thStreetandStockExchangePlace,Philadelphia, Pennsylvania. Inaddition, reports,proxystatements andotherinformation concerning theCompanycanbeinspected attheofficesoftheCompany,TwoNorthNinthStreet,'llentown, Pennsylvania. Nodealer,salesmanorotherpersonhasbeenauthorized togiveanyinformation ortomakeanyrepresentation notcontained inthisProspectus inconnection withtheoffermadebythisProspectus and,ifgivenormade,suchinformation orrepresentation mustnotberelieduponashavingbeenauthorized bytheCompany.ThisProspectus Isnotanoffertosellorasolicitation ofanoffertobuyinanyjurisdiction inwhichitisunlawfultomakesuchanofferorsolicitation. NeitherthedeliveryofthisProspectus noranysalemadehereunder shall,underanycircumstances, createanyimplication thattherehasbeennochangeintheaffairsoftheCompanysincethedatehereof.TABLEOFCONTENTSProspectus SummaryTheCompany.ProblemsAffecting theElectricUtilityIndustryandtheCompany.................... Application ofProceeds............................ Construction Program.Financing. RateMatters.Statement ofIncome.Management's Discussion andAnalysisoftheStatement ofIncome................... CapitalStructure ..Page3445578101418Business..ElectricStatistics .Description ofBondsExperts.LegalOpinions. OpinionofIndependent Certified PublicAccountants. Financial Statements Purchasers Map.Page1930313535353655BackCover ServiceArea81%172100%PROSPECTUS SUMMARYThefollowing materialisqualified initsentiretybythedetailedinformation andfinancial statements appearing elsewhere inthisProspectus. THEOFFERINGSecurityOffered..............~............ FirstMortgageBondsPrincipal Amount............... $100,000,000 InterestPaymentDates....................... June1andDecember1Maturity.................................. December1,2007Limitation onRedemption ................... Non-redeemable priortoDecember1,1982throughcertainrefunding operations UseofProceeds............... Generalcorporate purposesincluding thereduction ofshort-term debtincurredto(a)retirematuringlong-term debtand(b)provideinterimfinancing forconstruction expenditures THECOMPANYBusiness. TheCompanyderivesabout99%ofitsoperating revenuesfromelectricserviceApproximately 10,000squaremilesincentraleast-ernPennsylvania withapopulation of2.4millionpeopleSourcesofGeneration duringCoal........................... thetwelvemonthsendedOilSeptember 30,1977Hydro........................ ~FINANCIAL INFORMATION Operating Revenues(thousands). Netincome-BeforeDividends onPreferred andPreference Stock(thousands). EarningsApplicable toCommonStock(thousands)............... EarningsPerShare..RatioofEarningstoFixedChargesActual.ProForma.......~UtilityPlant,Net-atendofperiod(thousands) ..................... YearEndedDecember31,1976$644,147$112,111~$78,743$2.682.53$2,380,109 TwelveMonthsEndedSeptember 30,1977$735,277$145,815$109,529$3.373.192.86$2,607,919 AsofSeptember 30,1977ActualAsAdjusted(1) Capitalization (thousands) Long-Term Debt(including currentmatu-rities).. Preferred andPreference Stock.................... CommonEquity.Total$1,161,532 437,375839,388$'I,261,532 487,375841,669$2,438,295 $2,590,576 487%18.832.51000%(1)Asadjustedtogiveeffectto(i)$2,528,000 ofCommonStockissuedlnOctober1977inaccordance withtheCompany's EmployeeStockOwnership Plan,(il)thesaleof$50,000,000 of8%SeriesPreferred StockinOctober1977and(lii)thesaleoftheBonds. lI THECOMPANYTheCompanyisanoperating utility,incorporated underthelawsoftheCommonwealth ofPennsylvania in1920.TheCompany's generalofficesarelocatedatTwoNorthNinthStreet,Allentown, Pennsylvania 18101,anditstelephone numberis215-821-5151. ThepropertyoftheCompanyislocatedinPennsylvania (seeMap),iswellmaintained andisingoodoperating condition. TheCompanyderivesabout99/oofitsoperating revenuesfromsupplying electricservice,andthebalancefromsupplying steamforheatingandotherpurposesinthecityofHarrisburg. TheCompanyservesa10,000squaremileterritory in29countiesofcentraleasternPennsylvania (seeMap),withapopulation ofapproximately 2,400,000 persons.Thisserviceareahasahighpercentage ofopenlandaswellas111communities withpopulations over5,000,thelargestofwhicharethecitiesofAllentown, Bethlehem, Harrisburg,

Hazleton, Lancaster,

Scranton, Wilkes-Barre andWilliamsport.

Important industrial, recreational andagricultural sectionsarelinkedtotheeasternpopulation centersbyanextensive limited-access highwaysystem.HersheyElectricCompany,asubsidiary oftheCompany,provideselectricdistribution servicetoapproximately 5,700customers inHershey,Pennsylvania. PROBLEMSAFFECTING THEELECTRICUTILITYINDUSTRYANDTHECOMPANYTheelectricutilityindustryingeneralhasbeenexperiencing problemsof(a)increasing costsoffuel,wages,materials andequipment, (b)substantially increased capitaloutlaysandlongerconstruction periodsforlargerandmorecomplexnewgenerating units,(c)uncertainties inpredicting futureloadrequirements, (d)increased financing requirements coupledwithperiodically uncertain availability ofbothequityandborrowedcapital,(e)pastandprospective salesofcommonstockbelowbookvalue,(f)fuelavailability, (g)increased construction costsanddelaysandoperating restrictions duetoenvironmental requirements, (h)theeffectiveness ofenergyconservation effortsandtheimpactoffluctuating economicconditions, (i)litigation andproposedlegislation whichmayhavetheeffectofdelayingorpreventing construction ofnucleargenerating andotherfacilities orlimitingtheuseofexistingfacilities,'nd (j)regulatory lagingrantingneededrateincreases andtheinadequacy ofsuchincreases whengranted.TheCompanyalsohasbeenexperiencing similarproblemsinvaryingdegrees.Forinformation regarding theeffectontheCompanyofcertainofthesegeneralproblems, see"CONSTRUCTION PROGRAM", "FINANCING", "RATEMATTERS", "STATEMENT OFINCOME","MANAGEMENT'S DISCUSSION ANDANALYSISOFTHESTATEMENT OFINCOME","BUSINESS" and"ELECTRIC STATISTICS". Congresscurrently isconsidering legislation designedtoachieveenergyconservation throughtheapplication ofvariousregulatory andtaxmeasuresandtoencourage thedevelopment anduseofrelatively abundantdomesticfuels-primarily coal.Inaddition, consideration isbeinggiventoprovisions whichwouldrequirestateutilitycommissions toadoptandenforceFederalratestandards. TheCompanyisunabletopredictwhatmeasures, ifany,willbeenactedorwhateffectsanymeasuresenactedwillhaveontheCompany.Reference ismadeto"BUSINESS -FuelSupply(Coal)"forinformation concerning (1)thewrite-off ofcertaindevelopment costsbyTheOneidaMiningCompany,oneoftheCompany's affiliated mines,andthepricingofcoalproducedbyOneidaforfueladjustment clausepurposes, whichreducedtheCompany's netincomebyapproximately $6.6millionand$3.6million,respectively, forthe"twelvemonthsendedSeptember 30,1977and(2)thepossibility offuturelossesifpresentminingplansforOneidaprovenottobeeconomically feasible. APPLICATION OFPROCEEDSThenetproceedsfromthesaleoftheFirstMortgageBondsofferedhereby(theBonds)willbeaddedtotheCompany's generalfundsandusedforgeneralcorporate purposesincluding thereduction ofshort-term debtincurredto(a)retire$20.5millionofmaturinglong-term debtand(b)provideinterimfinancing forconstruction expenditures. CONSTRUCTION PROGRAMTheCompany's construction programisundercontinuing reviewandisrevisedfromtimetotimetoreflectchangesincustomer. demand,businessconditions, thecostandavailability ofcapitalandotherfactors.Actualconstruction expenditures anddatesofcompletion forvariousconstruction projectsmayvarybecauseofchangesintheCompany's plans,costfluctuations, theavailability oflabor,materials andequipment, environmental regulations, licensing delaysandotherfactors.Thefollowing tabulation showsactualconstruction andnuclearfuelexpenditures for1976andtheCompany's currentestimateoftheseexpenditures forthethreeyears1977-1979 including provision fortheAllowance forfundsusedduringconstruction (Allowance). 1976197719791979MillionsofDollarsConstruction costs:Newgenerating equipment ................... Transmission anddistribution facilities.. OtherTotalconstruction costs.... Nuclearfuelinprocess.. Total.$295801939414$408$243$340921032138356481144$370$485$2941194746040$500*$280.7millionexpendedthroughSeptember 30,1977.Estimated construction costsforthethreeyears1977-1979 include$97millionforenvironmental protection. See"BUSINESS-Environmental Matters"forinformation concerning possibleadditional capitalrequirements. TheCompany's estimateofconstruction andnuclearfuelexpenditures duringtheperiod1977-1979 hasbeenreducedtoreflecttheexpectedsaleofa10/oundivided'ownership interestintheSusquehanna nuclearunitstoAllegheny ElectricCooperative, Inc.(Allegheny). Pursuanttoagreements withAllegheny, thissaleisexpectedtobeeffectedassoonaspracticable following thereceiptofnecessary approvals fromtheNuclearRegulatory Commission (NRC)andtheRuralElectrification Administration (REA).TheproposedsalewasapprovedbythePennsylvania PublicUtilityCommission (PUC)inAugust1977. Pendingthereceiptoftherequiredapprovals, Allegheny madeaninitialpaymenttotheCompanyof$65millioninMarch1977andbecameobligated topaycurrently 10'/oofthesubsequent construction andnuclearfuelexpenditures fortheSusquehanna units.ThroughSeptember 30,1977Allegheny's paymentstotheCompanyapproximated $79million.IntheeventthattheNRCandREAapprovals arenotobtainedbyMarch16,1978,Allegheny's investment intheSusquehanna unitsisrequiredtoberefunded. Construction oftheSusquehanna unitsisproceeding underNRCconstruction permitsissuedinNovember1973.AtSeptember 30,1977,construction ofUnitNo.1wasabout53/ocompleted andUnitNo.2wasabout36/ocompleted. Anoperating licensefromtheNRCwillberequiredpriortothestart-upandtestingofeachunit.Changesindesignnecessary tomeetNRCrequirements, delaysindeliveryofmaterialandequipment, scarcityoflabor,environmental regulations andotherfactorshaveresultedinfailurestomeetcertainconstruction schedulemilestones andhavecreatedahighprobability thatthecurrently scheduled in-service datesfortheSusquehanna units-1980and1982-willnotbeachieved. Unlessconstruction progressimprovessignificantly andtherequiredlicensesandregulatory approvals areobtainedonatimelybasis,thein-service datesforeachoftheunitswillbedelayed.However,pendinganevaluation offutureconstruction

progress, theCompanyismaintaining thecurrentin-service schedule.

Theestimated totalnetcapability ofeachoftheSusquehanna unitsis1,050,000 kilowatts. GivingeffecttoAllegheny's expectedownership of10/ooftheSusquehanna units,theCompany's shareoftheestimated totalnetcapability ofeachoftheunitswillbe945,000kilowatts anditsshareoftheestimated construction expenditures fortheunits(excluding nuclearfuel)iscurrently estimated at$1.64billion.TheCompanyestimates thataone-yeardelayofthein-service datesoftheSusquehanna unitswouldincreasetheCompany's shareofthecostoftheseunitsbyabout$200million.TheUnitedStatesDistrictCourtfortheWesternDistrictofNorthCarolinahasheldthattheprovisions ofthePrice-Anderson Actlimitingliability oftheownersofnuclearpowerplants,andofthecontractors andsuppliers forsuchplants,totheamountsofavailable insurance andgovernmental indemnity areunconstitutional asviolating thedueprocessandequalprotection clausesoftheUnited.StatesConstitution. TheUnitedStatesSupremeCourthasgrantedreviewoftheDistrictCourtdecision. IftheSupremeCourtaffirmsthedecision, thelimitation ofliability wouldnotbeavailable totheCompany.AlthoughthefullimpactofadecisionbytheSupremeCourtcannotbeevaluated atthistime,theCompanydoesnotexpecttochangeitsplanstocompletetheconstruction ofandtooperatetheSusquehanna units.Recentamendments tothePrice-Anderson Act,whicharealsothesubjectofthislitigation, providethatallownersofnuclearreactorsmaybeassessedupto$5millionperoperating reactorforeachnuclearincidentoccurring atanyreactorintheUnitedStateswithalimitoftwoassessments peryear.GivingeffecttotheCompany's expected90/oownership oftheSusquehanna units,theCompany's maximumexposureunderthePrice-Anderson ActwhenbothSusquehanna unitshavebeenplacedincommercial operation isnotexpectedtoexceed$18millionperyear. FINANCING Thefinancing ofitsconstruction programrequirestheCompanytoengageinfrequentsalesofsecurities, including debtandpreferred, preference andcommonstocks.Interimfinancing isobtainedfrombankborrowings andthesaleofcommercial paper.TheCompany's 1977-1979 construction andnuclearfuelexpenditures arecurrently estimated at$1.36billion.Approximately two-thirds ofthisamountisexpectedtobeobtainedfromoutsidefinancing withthebalancetobeprovidedfrominternalsources.Theestimates ofconstruction andnuclearfuelexpenditures andinternalfundssourcesbothincludetheAllowance. Inaddition, about$25millionofmaturinglong-term debtobligations and$14millionofpreferred andpreference stocksinkingfundrequirements areplanned-to bemetduring1977-1979 bysalesofsecurities. Inadditiontothe$100millionexpectedtoberaisedbythesaleoftheBonds,during1977theCompanyobtained$67millionthroughthesaleof3.2millionsharesofCommonStockand$50millionthroughthesaleof500,000sharesofSeriesPreferred Stock.ThroughSeptember 30,1977theCompanyhasobtained$13.2millionthroughsalesofCommonStockunderitsDividendReinvestment Plan.Theexactamount,natureandtimingoffuturesalesofsecurities willofnecessity'be determined Inthelightofmarketconditions andotherfactors.Themortgageindenture underwhichtheCompany's firstmortgagebondsareissuedcontainscertainprovisions, principally earningscoverageandpropertyadditions tests,limitingtheissuanceofadditional bonds.See"DESCRIPTION OFBONDS."TheCompanyestimates thatapplication oftheserestrictions, ofwhichtheavailability ofpropertyadditions ispresently themostlimiting, wouldhavepermitted theCompany,asofSeptember 30,1977,aftergivingeffecttotheproposedsaleofa10/oundivided interestinSusquehanna toAllegheny andthesaleoftheBonds,toissueabout$396millionprincipal amountofbonds.Thisamountexceedstheprincipal amountofbondsthattheCompanyexpectstoissuethrough1979.TheCom'pany's chartercontainsprovisions limitingtheissuanceofadditional sharesofPreferred Stock.Themorerestrictive oftheseprovisions requiresIncomeBeforeInterestCharges(grossincome)ofnotlessthan1.5timesthesumoftheannualized interestrequirements onindebtedness tobeoutstanding andthedividendrequirements onPreferred Stocktobeoutstanding. Effective January1,1977,theFederalPowerCommission, nowtheFederalEnergyRegulatory Commission (FERC),revisedtheaccounting treatment fortheAllowance. SeeNote(e)tothe"STATEMENT OFINCOME."Thechangeinthemethodofrecording theAllowance mayhavetheeffectofreducingtoanextentnotnowdetermined theamountofPreferred StockwhichtheCompanycanissuebut,basedontheCompany's earningsforthetwelvemonthsendedSeptember 30,1977andaftergivingeffecttothesaleof$50millionofSeriesPreferred StockinOctober1977andthesaleoftheBonds(8th/0interestrateassumed), themethodofrecording theAllowance wouldnotlimittheamountofPreferred StockwhichtheCompanyplanstoissueduring1978.Therearenocharterprovisions limitingtheissuanceofPreference Stock. RATEMATTERSSalestoultimatecustomers, whichareregulated bythePUC,accounted forapproximately 98'/ooftheCompany's revenuesfromelectricsalesoverthepastfiveyears.Theremaining 2/oofrevenuesfromelectricsales,represented bysalestoothersforresale,areregulated byFERCasareinterchange powersales,whichareclassified asacredittooperating expenses. TheCompany's PUCandFERCtariffsincludefueladjustment clauses.See,however,thediscussion oftheCompany's Oneidamineunder"BUSINESS -FuelSupply(Coal)"concerning thelimitedrecoveryofthecostofcoalminedatOneida.PUCtariffsalsoincludeataxsurcharge torecoverthecostofincreased Pennsylvania taxes.Since1971theCompanyhasrequested andthePUChasgrantedthefollowing generalincreases inbaseratechargesforelectricserviceexpressed aspercentages ofannualized revenueslnthetestyearusedforthefinalPUCorderineachproceeding. Annualized revenuesconsistofrevenuesderivedfrombaserates,fueladjustment clausesandthetaxsurcharge. IncreaseGrantedRequestFiledMarch1971o/oIncreaseRequested 15.2TestYear(TwelveMonthsEnded)Increase'ffective December31,1970May1971March19724-Millions 4/e$12.14.417.16.2$29.210.6April197311.4April30,1973June1973January1974$9.42.619.15.2$28.57.8March197514.6July31,1975September 1975$21.03.9April197620.03.7August197637.37.0$78.314.6Acomplainant intheCompany's March1975rateproceeding appealedtheAugust1976decisionofthePUCgrantingthe14.6/0increaserequested bytheCompany.Thisappeal,whichwasdeniedbytheCommonwealth CourtofPennsylvania, raisedobjections regarding, amongotherthings,theexistence andamountofdifferences inratesbetweencertainoftheclassesofservicesprovidedbytheCompany.ThisappealdidnotquestionthePUC'sAugust1976decisionwithrespecttomeasuresofvalue,levelofrevenuesorrateofreturn.Thecomplainant hasfiledapetitionwiththeSupremeCourtofPennsylvania requesting areviewoftheactiontakenbytheCommonwealth Court.Arateincreaseaggregating approximately $1millionannuallyfortheCompany's fifteenresalecustomers waspermitted byFERCtobecomeeffective, subjecttorefund,inNovember1976.Certainoftheaffectedcustomers whowereopposingtheincreasehaveenteredintoasettlement agreement withtheCompany.Arequestforapprovalofthisagreement ispresently pendingbeforeFERC. Inaproceeding affecting allPennsylvania electricutilities, thePUCinMay1975instituted aninvestigation intofueladjustment clauses.Atthecommencement ofthisinvestigation thePUCproposedforconsideration, amongotherthings,(1)alimitation ontherecoveryofincreased fuelcoststolessthan100'lo,(2)theinclusion ofnuclearfuelcostsintheformula,(3)arevisioninthemethodofcalculating thefuelcostsastheyrelatetointerchange powerpurchases andsalesand(4)theuseofa12-monthperiodfordetermining thecurrentcostoffuel.Inaseparateproceeding affecting alllargePennsylvania electricutilities, thePUCinOctober1977announced thatalthoughitwasnot"atthispointopeningaformalproposedrulemaking proceeding", ithasbegunconsideration ofaproposaltoreplacefueladjustment clauseswithalevelized energycostrate.UnderthePUC'sproposal, eachutility's energycostratewouldincludeall(1)fossilfuelcosts,(2)purchased powerenergycosts,(3)netinterchange energysalesandpurchases and(4)nuclearfuelcosts.Autility's energycostratewouldbesetprospectively, utilizing adjustedhistorical data,andisintendedtoremainstableoveratwelvemonthperiodapprovedbythePUC.Intheeventofunusualcircumstances duringatwelvemonthperiod,autilitywouldhaveanopportunity topetitionthePUCtoreviseitsenergycostrate.Theproposalcontemplates thatiftheenergycostsactuallyincurredexceedcostsspecified intheutility's energycostrate,thefullamountofexcesscostsmaynotberecoverable bytheutility.Intheeventofanover-recovery ofenergycosts,theutilitywouldberequiredtorefundaportionoftheexcesstocustomers. Theproposalstatesthataccumulated deferredfuelcostsunderthepresentfueladjustment clauseswouldberecoverable overaperiodprescribed bythePUC.TheCompanyisunabletopredicttheultimateresultsofeitheroftheseproceedings. Amendments tothePennsylvania PublicUtilityLaw,generally effective inOctober1977,havealteredthePUC'srate-making procedures. Amongotherthings,theamendments shortentheperiodduringwhichthePUCmustactonafilingofageneralrateincieasefromelevenmonthstoninemonths.Interimratereliefduringthependencyofageneralrateincreaserequestwillnotbepermitted exceptunderconditions offinancial emergency. Thenewprovisions permittheuseoffutureprojected ratherthanhistorical testyearsasthebasisforrateincreases. Theamendments alsoprescribe certainchangesinPUCprocedures forvotingonrateincreaseapplications, andcreatetheofficeofAdministrative LawJudgetoconducthearingsandsubmitrecommendations tothePUC. STATEMENT OFINCOMEThefollowing Statement ofIncomeforthefiveyearsendedDecember31,1976hasbeenexaminedbyHaskins8Sells,independent Certified PublicAccountants, whoseopinionappearselsewhere inthisProspectus. TheStatement forthetwelvemonthsendedSeptember 30,1977hasnotbeenauditedbutintheopinionof.theCompanyincludesalladjustments (whichcompriseonlynormalrecurring accrualsexceptforthewrite-off ofcertaindevelopment costsbyoneoftheCompany's subsidiaries described innote(c))necessary forafairpresentation oftheresultsofoperations forthatperiod.TheStatement shouldbe'onsidered inconjunction withitsnotesandtheotherfinancial statements andrelatednotesappearing elsewhere inthisProspectus. Operating Revenues(99/0Electric)(a).......................... Operating ExpensesCostofenergyFuel(bxc). Powerpurchases. Interchange powersales................................ Netcostofenergy.................................. Otheroperation ...............'................................... Maintenance.. Deprechtlon ..tncometaxes(d)..~Taxes,otherthanincome(d) ................................. Totaloperating expenses....................... Operating Income.OtherIncomeandDeductions Allowance forfundsusedduringconstruction(e) Allfunds(prior toJanuary1,1977)................ Equityfunds(sinceJanuary1,1977)............. Incometaxcredits(d)(e) ..Other-net(c).Totalotherincomeanddeductions ........IncomeBeforeInterestCharges................................... InterestChargesLong-term debtShort-term debtandother.................................... Allowance forborrowedfundsusedduringcon-struction (sinceJanuary1~1977)(e)................... NetInterestcharges............................... IncomeBeforeNonrecurring Credit............................. Nonrecurring CreditRelatedtoAccounting Change,NetofIncomeTaxes($4,831)(b) .............................. NetIncome-BeforeDividends onPreferred andPreference StockDividends onPreferred andPreference Stock.............. EarningsAppllcab'le toCommonStock........................ EarningsPerShareofCommonStockBeforeNonrecurring Credit................................... Nonrecurring Credit(b). EarningsPerShareofCommonStock........... AverageNumberofCommonSharesOutstanding (Thousands). Dividends DeclaredPerShareofCommonStock........RatioofEarningstoFixedCharges(h) Actual............. ProForma..Supplemental RatioofEarningstoFixedCharges(h) Actual..ProForma1972$345,79212MonthsEndedSept.30,19771978(Unaudited) $644,147$735,27795,220,13,514(34,569)74,16561,63333,09941,44626,08625,658262,08783,705125.57715,299(70,175)70,70169,00733,64848,83733,94330,005286,14198,673192,35324,176(108,723) 107,80680,56541,29852,39939,21135.571356,850115,186271,63637,698(172,823) 136,51192,18647,95658,54047,29840,669423,160120,969321,78329,657(160,163) 191,277103,75854,94662,47843,82849,526505,813138,334412,94043,220(279,618) 176,542109,38259,07466,39085,34557,974554,707180,57014,647334'305)14,67698.38136,5073,95340.46057,92157,92114,526$43.39514,967911,30016,358.115,031'3,2034,91648,11966,91266,91217,191$49,72120,7325,0763,418'29,226144,41251,1499,94661,09583,3174,16287,47919,656$67,82336,60511,2013,15450,960171,92967,9326,45674,38897,54197,54124,509$73,03245,19214,4571,38161,030199,36479,7837,47087,253112,111112,11133,368$78,74313,83916,40414,579(4,443)40,379220,94988,671(f) 6,138(19,675)75,134145,815145,81536,286(g) $109,529$2.48$2.57$2.48$2.57$2.880.19$3.07$2.87$2.68$3.37$2.87$2.68$3.3717,513$1.642.8919,359$1.682.8922,067$1.772.8825,459$1.802.6529,367$1.802.5332,504$1.863.192.862.742.702.652.442.252.792.54YearEndedDecember31,197319741975Thousands ofDollars$384,814$472,036$544,12910 (a)Reference ismadeto"RATEMATTERS"foradditional information concerning fueladjustment clauses,aPennsylvania PublicUtilityCommission (PUC)orderproposing toreplacethefueladjustment clausewithalevelized energycostrateandasummaryoftheCompany's rateproceedings. (b)Effective January1,1974,theCompany,asauthorized bythePUC,changeditsmethodofaccounting forfuelcoststoachievematchingoffuelexpenseandrevenuesbyaccounting periods.Thischangeresultedinthechargetoincomeforfuelcostsrecoverable inthefuturebeingdeferredtotheperiodsinwhichthesecostsarebilledtocustomers throughapplication offueladjustment clauses.For1974,fuelcostswerelowerbyanetamountof$26.6millionand,afterincometaxeffects,EarningsApplicable toCommonStockwereincreased by$12.6million($0.57pershare)asaresultofthisaccounting change.TheNonrecurring CreditshownontheStatement ofIncomerepresents thecumulative effecttoDecember31,1973ofthechangeinaccounting forfuelcosts,netofrelatedincometaxes.Inthefollowing summary,earnings"AsReported" includestheNonrecurring Creditrecordedin1974,andearnings"Restated" reflectstheeffectofretroactive application ofthechangeinaccounting forfuelcostsandrelatedincometaxeffectshadthenewmethodbeenusedsincetheprincipal fueladjustment clausebecameeffective: 197219791974EarningsApplicable toCommonStock(thousands ofdollars)AsReported. Restated..EarningsPerShareofCommonStock($)AsReported. Restated. $43,39543,161$2.482.46$49,72151,066$67,82363,661$2.57$3.072.64'.88(P)Basedonaveragenumberofsharesoutstanding. (c)Reference ismadeto"BUSINESS -FuelSupply(Coal)"forinformation concerning operations ofoneoftheCompany's subsidiaries, TheOneidaMiningCompany(Oneida), relatedto(1)thewrite-off ofcertaindevelopment costsreflected inOtherincome-net andthepricingofcoalproducedbyOneidaforfueladjustment clausepurposesreflected infuelcosts;whichreducedtheCompany's netincomebyapproximately $6.6millionand$3.6million,respectively, forthetwelvemonthsendedSeptember 30,1977and(2)thepossibility offuturelossesifpresentminingplansprovenottobeeconomically feasible., (d)Reference ismadetoNote10toFinancial Statements forinformation relatingtotaxes.(e)Inaccordance withapplicable regulatory accounting procedures, thecostoffundsusedtofinanceconstruction workinprogressiscapitalized aspartofconstruction costandwhentheconstruction workisplacedinservice,theCompanyispermitted toincludeinrateschargedforutilityserviceareturnon,anddepreciation of,thecostoffundssocapitalized. Thecomponents ofAllowance forfundsusedduringconstruction (Allowance) shownontheStatement ofIncomearenon-cashitemsequaltothecostoffundscapitalized duringtheperiodandservetooffsetontheStatement ofIncometheeffectofthecostoffinancing construction workinprogress. SinceFebruary1,1974,inaccordance withprocedures prescribed bythePUC,theAllowance ratehasbeencomputedonanafter-tax basisandincometaxreductions associated withtheinterest(borrowed funds)component oftheAllowance havebeenreflected inIncometaxcreditsunderOther11 I4 IncomeandDeductions withacorresponding increaseintheprovision forincometaxeschargedtoOperating Expenses. DuringtheperiodFebruary1,1974throughDecember31,1976,theAllowance ratewascomputedsemi-annually usingaspecified rateforcommonequityandthecostoffixedratesecurities issuedinthetwelvemonthspreceding thesemi-annual computation. Effective asofJanuary1,1977,theCompanyhasusedarateof7.4/owhichwascomputedinaccordance witha1977FederalEnergyRegulatory Commission (FERC)orderwhich(1)providesaformulafordetermining themaximumAllowance rate,(2)providesforsemi-annual compounding and(3)providesforsegregating theAllowance intotwocomponents, borrowedfundsandother(equity)funds.Thegrossborrowedfundscomponent recordedsinceJanuary1,1977isincludedasacreditintheInterestChargessectionoftheStatement ofIncomeandtheremainder ofthetotalAllowance recordedisshownunderOtherIncomeandDeductions asEquityfunds.TheCompanyhasnotreclassified theAllowance intoborrowedfundsandequityfundscomponents priortoJanuary1,1977sincetheallocation wouldnotbecomparable tothatrequiredundertheFERCformula.PriortoJanuary1,1977,themethoduseddidnotprovidefordirectcompounding andtheCompanycomputedtheAllowance byapplyingtheratetoaconstruction workinprogressbasewhichdidnotincludetheaccumulated Allowance whichhadpreviously beenrecorded. However,anequivalent ratecanbecalculated fortheperiod1972-1976 byrelatingtheamountofAllowance recordedduringtheperiodtothebalancesoftheconstruction workinprogressincluding therelatedaccumulated Allowance. TheCompany's Allowance rateandtheequivalent ratefortheperiod1972-1976 areasfollows:Allowance .Equivalent RateRateJanuary1,1972-December31,1972....8.0/o7.4/oJanuary1,1973 -January31,1974....... 8.57.9February1,1974-June30,1974........... 7.57.0July1,1974-December31,1974.......... 8.07.3January1,1975 -December31,1975.... 9.258.3January1,1976-December31,1976....8.757.9Basedontheassumption thatfundsrequiredforconstruction financing wereprovidedsubstantially inthesameproportion astheCompany's averagecapitalization ratiosoverthefive-year periodendedDecember31,1976(51/odebt,18/opreferred andpreference stockand31'/0commonstockequity)andusinganafter-tax costofdebtsinceFebruary1,1974,theportionoftheAllowance attributable tofundsprovidedbycommonequityasapercentage ofEarningsApplicable toCommonStockfortheyears1972-1976 wouldbeapproximately asfollows:197210/01973.i..111974.161975.211976.27Basedonthesesameassumptions, theCompanyestimates thatthecommonequitycomponent oftheAllowance recordedintheperiodOctober-December1976wouldbeapproximately 25/oofthe$26.1millionEarningsApplicable toCommonStockforthesameperiod.12 ~JE TheCompanyunderstands thatanissuehasbeenraisedinlitigation towhichitisnotapartyrelating'otheAllowance asreportedbyanotherpublicutility.Inthislitigation, itisallegedthatactualearningswerenotproperlypresented inthattheAllowance wasincludedas"OtherIncome"withoutanadequateexplanation ofthisItem,andthattheAllowance isnotinfactincomeasgenerally understood, butratheraprojection offutureearningsnotreflecting. anyactualyieldonassetsoranyrevenueduringanyfiscalperiodandnotinfactearneduponcompletion of'construction. TheAllowance, whichisnotanitemofcurrentcashincome,isincludedinthefinancial statements oftheCompanyinaccordance withtheapplicable regulatory systemofaccountsandinaccordance withgenerally acceptedaccounting principles. TheCompanyisunabletopredicttheoutcomeofthislitigation oritseffect,ifany,upontheCompany.(f)Theannualinterestrequirements onlong-term debtoutstanding atSeptember 30,1977,including theamountduewithinoneyear,are$90,975,000 andontheBondswillbe$(g)Theannualdividendrequirements onPreferred andPreference Stockoutstanding atSeptember 30,1977are$20,323,000 and$19,870,000, respectively, including theannualdividendrequirements on500,000sharesof8%SeriesPreferred StockissuedonOctober19,1977.(h)"Earnings" usedtocomputethisratioconsistofnetincome(1974includes$4,162,000 nonrecurring credit),excluding theundistributed incomeorlossofunconsolidated subsidiaries andotherassociated companies, pIusfixedchargesandincometaxes(including deferredincometaxesandinvestment taxcredits-net). "FixedCharges"consistofinterestcharges(excluding theallowance forborrowedfunds)andtheestimated interestcomponent ofmajorleaserentaisandone-third ofailotherrents.TheproformaratioofearningstofixedchargesforthetwelvemonthsendedSeptember 30,1977reflectsearningsasdefinedaboveand(1)annualinterestchargesonthelong-term debtoutstanding asofSeptember 30,1977andtheBonds(8V~%interestrateassumedfortheBonds),(2)annualinterestchargeson$95millionofaverageshort-term debt(commercial paperatanassumedrateof67~%)assumedtobeoutstanding duringthetwelvemonthsendedSeptember 30,1978,basedontheaverageshort-term debtoutstanding duringthetwelvemonthsendedSeptember 30,1977(excluding short-term debtincurredonJuly1,1977toretire$20millionofbonds,andtoberepaidfromthesaleoftheBonds),and(3)theinterestcomponent ofrentalsforthetwelvemonthsendedSeptember 30,1977.Achangeof.10%intheinterestrateoftheBondswouldresultinachangeofapproximately .003intheproformaratio.Thesupplemental ratiosofearningstofixedchargesinclude,inadditiontotheitemsdefinedabove,theapplicable undistributed incomeorlossandfixedchargesofunconsolidated subsidiaries andotherassociated companies. Excluding the$4,162,000 nonrecurring creditfromincome,the1974ratiowouldbe2.75andthesupplemental ratiowouldbe2.53.13 MANAGEMENT'S DISCUSSION ANDANALYSISOFTHESTATEMENT OFINCOMETheStatement ofIncomereflectstheresultsofpastoperations andisnotIntendedasanyrepresentation astotheresultsofoperations foranyfutureperiod.Futureoperating resultswillnecessarily beaffectedbyvariousanddiversefactorsanddevelopments, including theobtaining ofadequateandtimelyrateincreases, businessactivity, customerdemand,energyconservation, Inter-changepowersales,taxes,laborcontracts, fuelcosts,availability ofcapital,governmental actions,environmental expenditures andothermatters.TheCompanyisunabletopredictthecombinedeffectoftheabovefactorsonitsfutureoperating results.TheCompany's earningsimprovement forthetwelvemonthsendedSeptember 30,1977wasdueprincipally tosharplyincreased electricsalesathigherpricestointerconnected utilities andtoincreased electricsalesathigherratestocustomers, asmorefullydiscussed below.Thefollowing analysisoftheCompany's financial performance explainsthereasonsforchangesinspecificitemsontheStatement ofIncomecomparing theyears1975to1974,1976to1975andthe.twelvemonthsendedSeptember 30,1977totheyear1976.EnergySalesandOperating RevenuesThechangeinoperating revenuesfromthepriorperiodisattributable tothefollowing: Increase(Decrease) 19751978INllllons ofDollars1977(a)ElectricrevenuesQuantityofsalesto:Ultimatecustomers................ Othersforresale.................... Rateincreases. Fueladjustment clauses............... Other(including taxsurcharge)..... Steamrevenues.. Total..$12.8$19.3$17.5(6.0)0.30.27.440.436.255.333.829.11.67.38.171.1101.191.11.0(1.1)$72.1$100.0$91.1(a)TwelvemonthsendedSeptember 30.TheCompany's totalelectricenergysalesincreased lessthan1/oin1975,principally reflecting theeconomicrecession, energyconservation andtheexpiration ofcontractsalestoaneighboring utility.Energysalesincreased 6.5'/oin1976reflecting animprovement intheeconomyandindustrial activityintheCompany's servicearea.ForthetwelvemonthsendedSeptember 30,1977,energysalesincreased 4.4/oover1976,whichwaspartially attributable tothemoreextremeweatherconditions inthefirstninemonthsof1977comparedtothemilderthannormalweatherexperienced inthesameperiodduring1976.Rateincreases affecting ultimatecustomers becameeffective inJanuary1974($19.1millionannually), September 1975($21.0millionannually), April1976($20.0millionannually) andAugust1976,($37.3millionannually). 14 IIFP TheCompany's tariffsincludefueladjustment clauseswhichadjustpricesforelectricserviceforvariations inthecostoffuelusedtogenerateelectricity. See,however,thediscussion oftheCompany's Oneidamineunder"BUSINESS -FuelSupply(Coal)"concerning thelimitedrecoveryofincreases inthecostofcoalminedatOneida.Revenuesfromthefueladjustment clausestotaled$134.5millionin1975,$168.3millionin1976and$197.4millionforthetwelvemonthsendedSeptember 30,1977,reflecting theincreased leveloffuelcostsandadditional energysales.Reference ismadeto"RATEMATTERS"forinformation concerning generalrateincreases grantedtheCompanyandaPennsylvania PublicUtilityCommission (PUC)orderproposing toreplacethefueladjustment clausewithalevelized energycostrate.CostofEnergyThenetcostofenergyincludesfuelexpensepluspowerpurchases lesspowersoldtootherutilities. Includedinpowerpurchases isthevalueofelectricity generated duringthetestperiodoftheCompany's newgenerating units.Fuel.FuelexpenseasshownontheStatement ofIncomeincludesthefollowing: 19741975197B1977(a)MillionsofDollarsCostoffuelconsumedElectric. $215.2Steamheat.3.8Totalcostoffuelconsumed................... 219.0Lessincreaseinfuelcostsdeferredtomatchrevenuesfromfueladjustment clauses.............. 26.6Totalfuelexpense.$192.4$269.2$323.1$414.84.03.23.2273.2326.3418.01.64.55.1$271.6$321.8$412.9(a)TwelvemonthsendedSeptember 30.Thechangefromthepriorperiodinthetotalcostoffuelconsumed, showninthepreceding

schedule, isattributable tothefollowing:

Increase(Decrease) 197519751977(a)MillionsofDollarsElectricQuantityofelectricity generated .....Averagecostoffuelsburned.......... Steamheat.Total.$13.3$17.9$44.540.736.047.254.053.991.70.2(0.8)$54.2$53.1$91.7(a)TwelvemonthsendedSeptember 30.Thecostoffuelconsumedincreased duringtheperiodscomparedasaresultofgreatergeneration ofenergyandincreases inthecostoffuelspurchased. Thequantityofenergygenerated during1975increased duetogreateravailability ofcoal-fired generating unitsandtheMartinsCreekNo.3oil-fired generating unitwhichbegancommercial operation inOctober1975.Increased generation during197615

resultedprimarily fromafullyear'soperation oftheMartinsCreekNo.3unit.InMarch1977,theMartinsCreekNo.4oil-fired unitbegancommerical operation providing additional generating capability. See"ELECTRIC STATISTICS" forthedetailofgeneration byfuelsource.Theaveragecostoffuelsconsumedincreased during1975,1976andthetwelvemonthsendedSeptember 30,1977duetothecombinedeffectsofhighercoalpricesandthecostofoilconsumedattheMartinsCreekUnitswhichhaveacostper,kwhgenerated approximately twicethatoftheCompany's coal-fired units.Theaveragecostoffuelconsumedperkwhgenerated was0.88centsin1974,1.04centsin1975,1.17centsin1976and1.32centsinthetwelvemonthsendedSeptember 30,1977.Theportionofthecostoffuelconsumedwhichisrecoverable throughfueladjustment clausesisdeferredtotheperiodinwhichsuchcostsarebilledtocustomers. Interchange PowerSa/es.Thetotalelectricenergyavailable forsaleincludesenergygenerated bytheCompany's plantsandpowerpurchased fromothers,afterdeducting Companyusesandlinelosses.During1975,1976andthetwelvemonthsendedSeptember 30,1977,approximately 31/0,29/oand35/o,respectively, ofthetotalelectricenergyavailable wassoldtootherutilities underinterconnection arrangements. AsrequiredbyboththePUCandFERC,suchsalesarenotrecordedasOperating RevenuesbutarecreditedtoOperating ExpensesontheStatement ofIncome.Thechangeininterchange powersalesfromthepriorperiodisattributable tothefollowing: Increase(Decrease) 197519761977(a)MillionsofDollarsQuantityofenergysold.$47.2$(7.9)$61.1Averagepriceofenergysold.18.4(5.7)55.9Other(1.5)0.92.5Total.$64.1$(12.7)$119.5(a)TwelvemonthsendedSeptember 30.Thequantityofinterchange powersoldincreased during.1975duetogreateravailability ofgenerating units,theadditionofMartinsCreekUnitNo.3,theabsenceofcontractual salestoaneighboring utilityandtheCompany's relatively favorable generating costscomparedtothoseofotherinterconnected companies. During1976,increased salestocustomers reducedthequantityofpoweravailable ataneconomicpriceforsaletointerconnected companies. TheadditionofMartinsCreekUnitNo.4,extremeweatherconditions andextendedoutagesofm'ajorgenerating unitsofotherinter-connected utilities resultedinsharplyincreased interchange salesduringthetwelvemonthsendedSeptember 30,1977.During1976therewasanarrowing ofthedifferential betweentheCompany's costofgenerating electricity andthepricereceivedforpowersoldontheinterchange, whichpricereflectsasplitting ofthedifference betweenthebuyer'sandtheseller'scostsofgeneration. TheaveragepricetheCompanyreceivedperkwhofinterchange powersaleswas1.76centsln1974,1.97centsin1975,1.90centsin1976and2.39centsinthetwelvemonthsendedSeptember 30,1977.Theseamountsweresubstantially inexcessoftheCompany's averagefuelcosts.OtherOperation andMaintenance ExpensesTheincreases inotheroperation andmaintenance expensessuchaswagesandbenefits, materials andsupplies, rentsandinsurance principally reflecttheeffectsofinflation andthecostsofoperation andmaintenance ofnewfacilities placedinservice.16 Depreciation Increased depreciation expenseisduetonewfacilities placedinservice,including MartinsCreekUnitsNos.3and4whichbegancommercial operation in1975and1977,respectively. Forinformation concerning areduction intheCompany's composite depreciation rateasofJanuary1,1976,seeNote5toFinancial Statements. TaxesForananalysisoftaxesseeNote10toFinancial Statements. Allowance forFundsUsedDuringConstruction TheAllowance forfundsusedduringconstruction hasincreased substantially duringtheyearsbeingcomparedasaresultoftheCompany's extensive construction programandtherelatedcarryingcostsofsecurities issuedtofinancetheconstruction expenditures. Foradditional information concerning theAllowance, seeNote(e)tothe"STATEMENT OFINCOME".OtherIncome-NetThereduction inOtherincome-netduringthetwelvemonthsendedSeptember 30,1977reflectsa$6.6million(netofincometaxes)lossofasubsidiary, TheOneidaMiningCompany.Foradditional information see"BUSINESS -FuelSupply(Coal)".CostofFixedIncomeSecurities Thechangesfromthepriorperiodininterestchargesondebtandindividends onPreferred andPreference Stockwere:Increase(Decrease) 1979197B1977(a)MillionsofDollarsInterestChargesLong-term debt.Short-term debt.Other.Dividends onPreferred andPreference Stock$16.8$11.9$8.9(3.3)0.9(1.7)(0.2)0.10.44.98.92.9(a)TwelvemonthsendedSeptember 30.Theincreases inlong-term debtinterestchargesanddividends onPreferred andPreference Stockwereduetoissuanceofsecurities principally tofinancetheCompany's construction programandtherefinancing ofmaturingdebtwithsecurities bearinghigherinterestrates.DuringtheperiodJanuary1,1975throughSeptember 30,1977,outstanding long-term debtincreased by$247millionandPreferred andPreference Stockincreased by$141miilion.interestonbankloansandcommercial papernotesvariesfromyeartoyearduetotheamountofshort-term debtoutstanding andtheinterestratesineffect.Foradditional information onshort-term debtseeNote4toFinancial Statements. 17 CAPITALSTRUCTURE Thecapitalstructure oftheCompanyatSeptember 30,1977andasadjustedasofthatdatetogiveeffectto(1)$2,528,000 ofCommonStockissuedonOctober14,1977inaccordance withtheCompany's EmployeeStockOwnership Plan,(2)thesateof$50,000,000 of8%SeriesPreferred StockonOctober19,1977and(3)thesaleoftheBonds,isasfollows(thousands ofdollars): ActualAmount%ofTotalAsAdjustedAmount,%ofTotalLong-Term Debt(a)FirstMortgageBonds2/4%-10'/a% outstanding ........."............. Bondstobeoutstanding ........................ NotesUnamortized DiscountandPremium-Net....Totallong-term debt........................ Shareowners Investment(c) Preferred andSeriesPreferred Stock(3.35%-9.24%).... Preference Stock{$8.00-$13.00).................. Totalpreferred andpreference stock~~~oor~~ooor~oro~~oo~or~oo~~~~~~CommonStock.CapitalStockExpense.EarningsReinvested .....Totalcommonequity....................... Totalshareowners investment ......... $1,145,000 20,430(3,898)1,'I61,532231,375206,000437,375575,458(10,428)274,358839,3881,276,763 9.58.534.4281,37510.9206,0007.9487,375577,986(d) (10,675)(e) 274,358841,6691,329,044 32.5$1,145,000 100,00020,430(3,898)(b) 1,261,532 '8.7Totalcapitalization ...$2,438,295 100.0$2,590,576 100.0(a)SeeNotes4and8toFinancial Statements fordetailsconcerning short-term andlong-term debt.Long-term debtatSeptember 30,1977includes$3,676,000 duewithinoneyearclassified asacurrentliability ontheBalanceSheet.AtNovember10,1977therewerenobankloansoutstanding and$86.6millionofcommercial papernotesoutstanding ataweightedaveragediscountrateof6.5%.SeeNotes12and15toFinancial Statements forinformation concerning leasesandcommitments andcontingent liabilities. (b)BasedonassumedproceedstotheCompanyof100%oftheprincipal amountoftheBonds.{c)SeeNote6toFinancial Statements fordetailsconcerning capitalstock.(d)Theadjustedamountdoesnotincludeproceedsreceivedsubsequent toSeptember 30,1977forCommonStocksoldundertheCompany's dividendreinvestment plan.(e)Afteraddingestimated issuanceexpensesandplacement feesapplicable to8%SeriesPreferred StocksoldonOctober19,1977.18 k BUSINESSRevenues. DuringthetwelvemonthsendedSeptember 30,1977,about40/0ofelectricoperating revenuescamefromresidential customers, 28/0fromindustrial customers, 27%fromcommercial customers and5/0fromothers.DuringthetwelvemonthsendedSeptember 30,1977,theCompany's largestcustomerprovidedabout4.7/0ofelectricoperating revenuesandthe26largestindustrial customers (eachofwhosebillingsexceeded$1million)providedabout11.7%%dofsuchrevenues. Industrial customers arebroadlydistributed amongindustrial classifications. PowerSupply.DuringthetwelvemonthsendedSeptember 30,1977,theCompanyproduced32.5billionkwhinplantsownedbytheCompanyandpurchased 0.5billionkwhunderafirmpurchaseagreement. DuringthisperiodtheCompanydelivered 11.6billionkwhandreceived1.6billionkwhaspowerpoolinterchange. TheCompany's MartinsCreekoil-fired UnitNo.4(820,000netkilowattcapability) wasplacedinserviceinMarch1977.TheCompany's powercapability (winterrating)atSeptember 30,1977wasasfollows:Coal-Fired MontourBrunnerIsland.Sunbury.MartinsCreek..Keystone.. Conemaugh ..Holtwood. PlantNetKilowattCapability 1,515,000 1,454,000 390,000,300,000210,000(1) 194,000(2) 73,000TotalCoal-Fired ..Oil-Fired MartinsCreek..Combustion TurbinesandDlesels.Hydro.TotalGenerating Capability..... FirmPurchases -HydroTotalCapability.. 4,136,000 1,640,000 539,000146,0006,461,000 76,000(3) 6,537,000 (1)Company's 12.34/0undivided interest. (2)Company's 11.39/0undivided interest. (3)FromSafeHarborWaterPowerCorporation. See"BUSINESS -Hydroelectric Projects". Approximately 37/0oftheCompany's generating capability atSeptember 30,1977hasbeenplacedinserviceinthelastfiveyearsand69/ointhelasttenyears.Thecapability ofgenerating unitsisbasedupontheoperating experience andphysicalcondition oftheunitsandmayberevisedfromtimetotimetoreflectchangedcircumstances. 19

Themaximumone-hourdemandontheCompany's systemwas4,425,000 kw,whichoccurredonJanuary17,1977.TheCompanyestimates thatitwouldhaveexperienced amaximumone-hourdemandof4,514,000 kwonthatdateifa5/0voltagereduction hadnotbeenineffecttopermitthePennsylvania-New Jersey-Maryland Interconnection tosupplyemergency powertootherpowerpools.Themaximumone-hoursummerdemandwas3,545,000 kw,whichoccurredonAugust29,1977.For"information concerning interchange powersales,see"MANAGEMENT'S DISCUSSION ANDANALYSISOFTHESTATEMENT OFINCOME"and"ELECTRIC STATISTICS". FuelSupply.DuringthetwelvemonthsendedSeptember 30,1977,81/0oftheCompany's energygeneration camefromcoal-fired

stations, 17/ofromoil-fired stationsand2/0fromhydroelectric stations.

Coal.Thefollowing tabulation showstheamountofanthracite andbituminous coalburnedbytheCompany's generating stationsduringthetwelvemonthsendedSeptember 30,1977,andtheestimated requirements forcoalovertheremainder oftheexpectedusefullivesoftheCompany's generating stations. TypeofFuelAnthracite (including petroleum coke)..... Bituminous Coal(1)Total.BurnedDuringTlNelveMonthsEstimated EndedRequirements September OverPlant30,1977LivesMillionsofTons1.220.010.0225.011.2245.0(1)IncludestheCompany's shareofthebituminous coalforthejointly-owned KeystoneandConemaugh generating stations. See"BUSINESS -PowerSupply".TheCompany's policygenerally istomaintaina45to60daycoalsupplyatitsgenerating stations. Sincelaborcontracts betweenmineownersandtheUnitedMineWorkersofAmericaexpireonDecember6,1977,theCompany,inanticipation of,possiblestrikes,isattempting toincreaseitscoalinventory overnormallevels.AtSeptember 30,1977,basedonestimated usage,theCompany's coalinventory wassufficient forabout68daysofoperations. DuringthetwelvemonthsendedSeptember 30,1977,39/0oftheCompany's coalsupplywasobtainedfromsubsidiary miningcompanies (approximately one-third-of whichwaspurchased bythosecompanies intheopenmarket),10%underlong-term contracts and51/0byshort-term contracts andopenmarketpurchases. AtSeptember 30,1977,theCompany's inventory ofanthracite wasabout2.1milliontons.ThebalanceoftheCompany's requirements foranthracite, aswellasitsrequirements forpetroleum coke,overtheremainder oftheexpectedusefullivesoftheCompany's anthracite-fired generating stationsisexpectedtobeobtainedbyshort-term contracts andopenmarketpurchases. Thefollowing tabulation liststhebituminous coalreservesownedorcontrolled atSeptember 30,1977bytheCompany's subsidiary, Pennsylvania MinesCorporation. Thesereserves, allofwhicharelocatedinPennsylvania, arerecoverable bydeepminingoperations. Theinformation undertheheadings"Estimated Recoverable ReservesasofJanuary1,1976"and"Average/0Sulfur(ByWeight)"was20 providedbyPaulWeirCompanyIncorporated onthebasisofitsindependent studiesandtheCompanyhasincludedsuchinformation hereininrelianceuponsuchstudies.TheCompanyhasnotretainedanyotherindependent organization toreviewandreportonitsbituminous coalreserves. Estimated Recoverable Reserves1977AverageasofProduction '/oJanuary1,1976ThroughSulfur(By1976(1)Production September 30Weight)(4)Thousands ofTonsAssignedReserves(2) Greenwich. Oneida.Rushton.Tunnelton. TotalAssignedReserves....... Unassigned Reserves(3) GreeneHill,GreeneManor.............................. TotalUnassigned Reserves...Total........................... ~..66,64921,6387,69410,187106,168159,877162,682322,559428,7271,5852655564032,8092,8091,3821733863052,2462,2462.73.34.51.72.93.3(1)Includesonlyprovenreservesforwhichtonnageiscomputedfromdimensions revealedinoutcropdata,mineworkingsanddrillholes.(2)Assignedreservesrepresent coalwhichcanbeminedonthebasisofcurrentminingpractices andtechniques throughtheuseofmineopeningsandplantfacilities currently inexistence orunderconstruction. (3)Unassigned reservesrepresent undeveloped reservesorreservesthatwouldrequiresubstantial additional miningfacilities beforeoperations couldbegin.(4)Rawcoal,drybasis(priortocleaning). Priorto1976theCompanypurchased aportionofitscoalrequirements fromTheOneidaMiningCompany(Oneida), asubsidiary ofTheNorthAmericanCoalCorporation (NorthAmerican), underalong-term costofproduction salescontract. InMarch1976,inanefforttocontroltheabnormally highcostofcoaldelivered totheCompanyfromtheOneidamine,theCompanyassertedacontractual righttotakeoverOneida.Litigation withNorthAmerican, whichcontested theCompany's take-over, wassettledinFebruary1977ontermswhichgavetheCompanyuncontested controloverOneida.Withtheconclusion ofthelitigation theCompanywasabletoexpandthescopeofstudiespreviously undertaken todetermine whatchangesshouldbemadeinOneida'sminingoperations. InSeptember 1977,theCompanyadoptedaninterimplanwhichprovidesforthecontinuation ofsteamcoalminingincertainsectionsoftheOneidamineandthewrite-off ofaportionofthedevelopment costsincurredfrom1970through1974withrespecttoothersectionsoftheOneidaminewhicharebeingabandoned orbypassedbecauseofpoorminingconditions. Thiswrite-off, whichwillnotberecovered throughtheapplication oftheCompany's fueladjustment clauses,resultedina$6.6millionreduction oftheCompany's netincome($.20pershareofCommonStock)forthetwelvemonthsendedSeptember 30,1977.21 Effective February1,1977theCompanybegan.topriceOneidacoalforfueladjustment clausecalculation purposesattheaveragecostpertonofcoalproducedbytheCompany's otheraffiliated minesratherthanatOneida'shighercost.ThisactionreducedtheCompany's netincomebyabout$3.6million($.11pershareofCommonStock)duringtheperiodfromFebruarythroughSeptember 30,1977.TheCompanyestimates thatitsnetincomewillcontinuetobereducedbyabout$400,000permonththroughmid-1978whentheCompanyexpectstodetermine whethertocontinuetomakeadditional investments forfurtherdevelopment oftheOneidamine.IntheeventthattheCompanydetermines tomaketheseinvestements, itisexpectedthatthedifference betweenthecostofOneidacoalandtheaveragecostpertonofcoalproducedbytheCompany's otheraffiliated mineswillbecapitalized ratherthanbeingchargedagainsttheCompany's currentearnings. However,ifadverseminingconditions preventthefurtherdevelopment oftheOneidamine,miningoperations maybeterminated andadditional lossesincurred. AtSeptember 30,1977andaftergivingeffecttotheSeptember 1977write-off, theaggregate capitalinvestment inOneida'sfacilities (including leaseobligations) amountedtoabout$36million,substantially allofwhichwasguaranteed directlyorindirectly bytheCompany.TheCompanyhasalong-term contractwithabituminous coalsupplier(LadyJane)underwhichthesupplierisobligated todeep-mine itsreservestoexhaustion. Production attheLadyJanemineamountedto200,000tonsduringthetwelvemonthsendedSeptember 30,1977.Run-of-mine coalfromtheLadyJaneminehasanaveragesulfurcontentofabout3.5/o.ThecoalburnedintheCompany's generating stationscontainsbothorganicandpyriticsulfur.Mechanical cleaningprocesses installed attheminesarebeingutilizedtoreducethepyriticsulfurcontentofthecoal.Thereduction ofthepyriticsulfurcontenthasloweredthetotalsulfurcontentofthecoalburnedtolevelswhichpermitcompliance withcurrentsulfurdioxideemissionregulations established bythePennsylvania Department ofEnvironmental Resources (DER).See"BUSINESS -Environmental Matters". Theregulations applicable totheCompany's generating stationsgenerally limitthetotalsulfurcontentofcoaltonotmorethan2.5lo.Coalobtainedundershort-term contracts andbyopenmarketpurchases currently hasanaveragesulfurcontentofabout2.2'/o.TheCompanyownsa12.34/oundivided interestintheKeystonestationandan11.39/oundivided interestintheConemaugh station,bothofwhicharemine-mouth generating stationslocatedinwesternPennsylvania. TheownersoftheKeystonestationhavealong-term

contract, whichmaybeextendedthrough2012,withasupplierfor90/ooftheannualbituminous coalrequirements oftheKeystonestation.TheownersoftheConemaugh stationhavealong-term contractwithanothersupplierforatleast80'/ooftheannualbituminous coalrequirements oftheConemaugh stationforthelifeofthestation.Totheextentthattherequirements oftheseplantsarenotcoveredbylong-term contracts, thebituminous coalrequirements are,withminorexceptions, obtainedfromlocalsuppliers.

TheCompanyexpectsthatassignedreservesandlong-term contracts willprovide40/oto50/oofitsprojected bituminous coalrequirements duringthenextfiveyears.Thebalanceoftheserequirements willhavetobeobtainedundershort-term contracts orbyopenmarketpurchases. Theextenttowhichunassigned reservesmayeventually beminedtomeetthefuelrequirements offuturegenerating stationswilldependuponfutureeconomicconditions andotherfactorswhichcannotnowbepredicted. Excluding mine-mouth plantrequirements, about84/ooftheCompany's bituminous coalpurchased duringthetwelvemonthsendedSeptember 30,1977wasdelivered bytheCompany's unittrains,whichatSeptember 30,1977consisted of980hoppercars.UseoftheCompany's hoppercarsfordeliveryofcoalminimizes theCompany's dependence uponrailroad-supplied hoppercarswhichfromtimetotimeareinshortsupply.22

Theaveragedelivered costofcoalhasincreased substantially overthepastseveralyearsfrom$10.66pertonin1972to$25.79pertonduringthetwelvemonthsendedSeptember 30,1977.Theaveragedelivered costofcoalpurchased duringthetwelvemonthsendedSeptember 30,1977wasasfollows:bituminous coalpurchased fromsubsidiary companies (including coalpurchased bythosecompanies intheopenmarket)andunderlong-term contracts, $30.44perton;bituminous coalpurchased bytheCompanyundershort-term contracts andintheopenmarket,$23.66perton;andanthracite, including petroleum coke,$11.92perton.Bituminous coalpurchased intheopenmarketbytheCompanyanditssubsidiaries isprimarily surface-mined. Bituminous coalproducedbysubsidiary companies andpurchased bytheCompanyunderlong-term contracts isdeep-mined. Oil.Thetwo820,000kwoil-fired generating unitsattheCompany's MartinsCreekstationaredesignedtoburneithercrudeorresidualoilandtofollowsignificant loadchangesoroperateasbaseloadunits.TheCompanyhascontracted withoilsuppliers fortheexpectedrequirements oftheMartinsCreekoilunitsthrough1979.Anagreement withoneofthesuppliers, underwhichtheCompanycanpurchaseuptothree-quarters ofitsexpectedoilrequirements fortheseunits,providesforautomatic annualrenewalsbeyond1979unlessterminated upononeyear'spriorwrittennoticebyeitherparty.OilfortheMartinsCreekstationisdelivered toadeepwaterterminalontheDelawareRiveratMarcusHook,Pennsylvania. TheCompanyhasalong-term contractwithanunaffiliated companytoprovideunloading andoilstorageservicesatthatterminal. Theoillstransported fromMarcusHooktostoragefacilities attheMartinsCreekstationbyapipelinewhichwasconstructed primarily fortheuseoftheCompanybyitssubsidiary, Interstate EnergyCompany(IEC).Thepipelineandrelatedfacilities, substantially theonlyassetsofIEC,wereplacedinserviceatacostofapproximately $55million.Ofthatamount,$40.5millionwasobtainedfromtheCompanyandthebalancewasborrowedfrombanks.TheCompanyexpectstoformalize itsobligations fortheoperating expensesandannualcarryingchargesofthepipelineinconnection withthepermanent financing ofthesefacilities in1978.FERCandPUCtariffsareineffectforthedeliveryofoilbyIECfromMarcusHooktoMartinsCreek.TheCompanyandIEChavearrangedtoprovidepipelinedeliveryservicestoanotherutilitybeginning inmid-1978. Pipelinedeliveryservicesalsowillbeavailable fromthedeepwaterterminaltootherdeliverypointsatlocations andtariffrateswhichhavenotyetbeenestablished. Nuclear.TheCompanypresently hasunderconstruction twonuclear-fueled generating unitsatitsSusquehanna site.See"CONSTRUCTION PROGRAM". Inanticipation ofthecommercial operation oftheseunits,theCompanyhasmadecommitments tomeetcertainofthenuclearfuelrequirements fortheseunits.Thenuclearfuelcycleconsistsoftheminingandmillingofuraniumoretouraniumconcentrate; theconversion ofuraniumconcentrate touraniumhexafluoride; theenrichment ofuraniumhexafluoride; thefabrication offuelassemblies; theutilization ofnuclearfuelinthereactor;temporary storageofspentfuel;andthereprocessing orpermanent disposalofspentfuel.Baseduponthepresently scheduled In-service datesandplannedfuelcyclesfortheseunitsthefollowing tabulation showstheyearthroughwhichcontracts areexpectedtoprovidetheSusquehanna station's requirements forthevarioussegmentsofthenuclearfuelcycle,assumingfulfillment bysuppliers oftheircontractual commitments. 23 44*!'~44III,I4I~!~ Susquehanna Unit1.....Susquehanna Unit2.....UraniumConcen-trate(1)(2)19831983Conversion 198519852007200919941994Enrichment(3) Fabrication Reprocess-ing(3)19921992(1)TheCompanyhasanoptiontopurchaseaportionofasupplier's production fortheyears1984-1990 which,ifexercised, willprovideaportionoftheCompany's uraniumconcentrate requirements forthatperiod.(2)Theuraniumconcentrates scheduled tobedelivered through1983are,expectedtobesufficient topermittheoperation oftheSusquehanna unitsthrough1985.UndertheCompany's enrichment contracts withtheDepartment ofEnergy(formerly theEnergyResearchandDevel-opmentAdministration), theDepartment ofEnergymaymakechangesinenrichment sPecifications. Suchchangesmaynecessitate theacquisition bytheCompanyofadditional quantities ofuraniumconcentrate duringtheperiodsindicated inthetabulation. (3)Arulemaking proceeding regarding therecycllng ofspentfueliscurrently pendingbeforetheNRC.TheCompanymayberequiredtoobtainadditional enrichment servicesafter1987iftheNRCpermitstherecycling ofplutonium andtheCompanyisunabletohaveitsspentfuelreprocessed. Therearecurrently nocommercially operating facilities intheUnitedStatesforthereprocessing ofspentfuel.Shipments fromSusquehanna tothereprocessor wereinitially scheduled tobeginintheearly1980sfollowing theexpansion ofthereprocessor's facility. Thereprocessor hasinformedtheCompanythatbecauseoftheincreased capitalandoperating costsexpectedtobeincurredtocomplywithNRCcriteriarelatingtotheexpansion, thereprocessor doesnotintendtocontinueinthatbusinessandisseekingtoterminate thecontractwithrespecttotheSusquehanna units.TheCompanyestimates thattherewillbesufficient storagecapability inthespentfuelpoolsatSusquehanna toaccommodate thefuelthatisexpectedtobedischarged through1984.BecausetheCompanydoesnotcurrently'anticipate beingabletoshipspentfueloff-siteby1985forstorageorreprocessing, theCompanyisdeveloping planstoinstalladditional spentfuelstoragecapacityintheSusquehanna spentfuelpools.InApril1977President Carterstatedthathewoulddeferindefinitely thecommercial reprocessing andrecycling oftheplutonium producedindomesticandforeignnuclearpowerprograms. InOctober1977theDepartment ofEnergyproposedtoassumeresponsibility forstorageanddisposalofspentnuclearfuelproducedinnuclearpowerplantswhilethequestionofultimatedisposalisbeingsettled.Undertheproposedpolicy,theFederalGovernment wouldtaketitletospentnuclearfuelfromelectricutilities onpaymentofafeeandstoreitinaretrievable fashionataGovernment approvedsite.Additional arrangements, forwhichthereisnopresentassurance, willberequiredtosatisfythefuelrequirements oftheSusquehanna unitsovertheirestimated usefullives.PowerPool.TheCompanyoperatesitsgeneration andtransmission facilities asapartofthePennsylvania-New Jersey-Maryland (PJM)Interconnection. ThePJMInterconnection, oneoftheworld'largestpowerpools,includeselevencompanies servingabout21millionpeopleina50,000squaremile24 territory coveringallorpartofPennsylvania, NewJersey,Maryland,

Delaware, VIrginiaandWashington, D.C.ThePJMcompanies hadapproximately 44.4millionkwofinstalled generating capacityatSeptember 30,1977andtransmission lineconnections withneighboring powerpoolshavethecapability ofsupplying anadditional 2.1millionkwtoPJMcompanies.

ThroughSeptember 30,1977themaximumone-hourdemandonthepowerpoolwasapproximately 32.2millionkw,whichoccurredonJuly21,1977.TheCompanyisalsoapartytotheMid-Atlantic AreaCoordination Agreement whichprovidesforthecoordinated planningofgeneration andtransmission facilities bythecompanies includedinthePJMInterconnection. Regulation. TheCompanyisapublicutilityunderthelawsoftheCommonwealth ofPennsylvania andissubjecttoregulation assuchbythePennsylvania PublicUtilityCommission. UntilOctober1,1977theCompanywassubjectincertainofitsactivities tothejurisdiction oftheFederalPowerCommission underPartsI,IIandIIIoftheFederalPowerAct.Effective October1,1977thesefunctions weretransferred inaccordance withtheDepartment ofEnergyOrganization ActtotheFederalEnergyRegulatory Commission, anindependent regulatory commission withinthenewlycreatedDepartment ofEnergy.TheActalsotransfers totheSecretary ofEnergyallofthefunctions oftheEnergyResearchandDevelopment Administration. See"BUSINESS -FuelSupply(Nuclear)". TheCompanyisaholdingcompanyunderthePublicUtilityHoldingCompanyActof1935buthasbeenexemptedbytheSecurities andExchangeCommission fromtheprovisions ofthatActapplicable toitasaholdingcompany.TheCompanyissubjecttothejurisdiction oftheNuclearRegulatory Commission inconnection withtheconstruction oftheSusquehanna units.See"CONSTRUCTION PROGRAM". TheCompanyisalsosubjecttothejurisdiction ofcertainFederal,regional, stateandlocalregulatory agencieswithrespecttoairandwaterquality,landuseandotherenvironmental matters.See"BUSINESS -Environmental Matters". Thecoalminingoperations oftheCompany's subsidiaries aresubjecttotheFederalCoalMineHealthandSafetyActof1969.Environmental Matters.TheCompanyissubjecttocertainpresentanddeveloping Federal,regional, stateandlocallawsandregulations withrespecttoairandwaterquality,landuseandotherenvironmental matters.Exceptasdescribed below,theCompanyispresently insubstantial compliance withapplicable environmental lawsandregulations andhasallofthepermitscurrently requiredtooperateitsfacilities. Air.TheFederalCleanAirActAmendments of1977(1977Amendments) include,amongotherthings,provisions that:(a)requiretheprevention ofsignificant deterioration ofexistingairqualityinregionswhereairqualityisbetterthanapplicable ambientstandards; (b)restricttheconstruction ofnewemissionsources,including coalandoil-fired generating

stations, inareaswhichhavenotattainedspecified ambientairqualitystandards; (c)revisethestandards ofperformance applicable tonewemissionsourcesandrequirethatfossilfueledgenerating unitsachievetherevisedstandards bytheapplication ofthebestavailable controltechnology whichrequirement, ineffect,appearstoprohibittheuseoflowsulfurcoalatnewemissionsourceswithoutfurthertreatment, suchasthecleaningofcoalortheuseofscrubbers; and(d)requiretheUnitedStatesEnvironmental Protection Agency(EPA)toimposesubstantial penalties forfailuretocomplywithairpollution regulations afterJuly1,1979andprovideforcivilpenalties ofupto$25,000perdayforfacilities foundtobeinviolation ofanapplicable stateimplementation plan.25 Underprocedures established bythePennsylvania Department ofEnvironmental Resources (DER)priortothe1977Amendments, companies notincompliance withemissionregulations havebeenpermitted toenterintoconsentorderswithDERwhichallowcontinued operation duringthetimeinwhichstepsarebeingtakentoachievecompliance.

Inthisregard,theCompanyandtheDERhaveenteredintoaconsentorderwithrespecttoparticulate emissionregulations asfollows:UnitBrunnerIslandNo.1.BrunnerIslandNo.3.MontourNo.1......MontourNo.2Compliance DateDecember31,1980June30,1981June30,1981December31,1980Underthetermsoftheconsentorder,theCompanyisrequiredtomakecertainpaymentstothePennsylvania CleanAirFunduntilcompliance isachieved, withrespecttoanyparticular unit.WhiletheCompanyisunableatthistimetoestimatetheexactamountofthepayments, itdoesnotexpectthatsuchpaymentsintheaggregate willbematerialinamount.Asaresultofthe1977Amendments, theconsentordermayhavetoberevisedtoestablish anewcompliance dateofnotlaterthanJuly1,1979.SincetheCompanyhasbeenproceeding onaschedulewhichwasdesignedtoachievecompliance bythedatesshowninthetabulation, thereisaliighprobability thataJuly1,1979compliance datemaynotbemetattheBrunnerIslandunits.TheCompanycurrently expectsthattheinstallation offluegasconditioning equipment attheMontourunitswillpermittheCompanytoachievecompliance atthoseunitsbyJuly1,1979.Estimated expenditures duringtheyears1977-1979 toachievecompliance attheBrunnerIslandandMontourunitsa'eincludedintheCompany's estimateofconstruction expenditures forthatperiod.See"CONSTRUCTION PROGRAM". TheCompanyandDERarecurrently discussing aconsentorderforUnitsNo.'3andNo.4attheCompany's Sunburystation.TheCompanyexpectsthatanyconsentorderwouldpermittheCompanytocontinuetooperatetheunitsduringthetimeinwhichtheCompanyistakingstepstoachievecompliance withDERparticulate emissionstandards. TheCompanycurrently expectsthattheUnitsNo.3andNo.4attheSunburystationcanbeincompliance withapplicable DERstandards byJuly1,1979.InJuly1977EPAnotifiedtheCompanyofanallegedviolation attheCompany's Holtwoodsteamstationofopacityemissionregulations established byDER.Pendingresolution ofthismatter,whichiscurrently thesubjectofappealsbytheCompanytotheEnvironmental HearingBoardofDER,theCompanyiscontinuing tooperatetheHoltwoodsteamstationeventhoughDERhasnotissuedanoperating permitforthatstation.Thecontinued operation oftheHoltwoodsteamstationmaysubjecttheCompanytocertainpenalties whicharenotcurrently expectedtobematerialinamount.Theprocessing ofcoaltoreducethesulfurcontentpriortoburningpermitstheCompanytocomplywithcurrentsulfurdioxideemissionregulations. If,however,thesulfurdioxideemissionregulations applicable totheCompany's existinggenerating stationsareamendedtosignificantly reducepermissible discharges, theCompanymayberequiredtoinstallequipment fortheremovalofsulfurdioxidefromfluegases.26 Water.TomeettheJuly1,1977standardof"bestpracticable controltechnology currently available" established bytheFederalWaterPollution ControlAct(WaterAct),theCompanyhasinstalled wastewatertreatment facilities atitssteamelectricstations. TheCompany's coalminingsubsidiaries areplanningtoinstallwastewatertreatment equipment atcertainoftheirfacilities andhavefiledthenecessary applications withDER.Thefailurebythesubsidiaries tomeettheJuly1,1977WaterActstandardmaysubjectthesubsidiaries tofinesandpenalties whicharenotexpectedtobemateriallnamount.TheWaterActrequirestheapplication ofthe"bestavailable technology economically achievable" byJuly1,1983withrespecttoeffluentdischarges fromexisting'facilities. Withrespectto"new"facilities, theWaterActauthorizes EPAtoestablish standards ofperformance whichwillrequirethe~application ofthe"bestavailable demonstrated controltechnology" including, wherepracticable, agoalofnodischarge ofpollutants. TheWaterActalsorequiresthatthelocation, design,construction andcapacityofcoolingwaterintakestructures reflecttheapplication ofthe"besttechnology available forminimizing adverseenvironmental impact".EPAhasadoptedeffluentlimitations, guidelines andstandards. forsteamelectricstationsandguidelines forexistingcoalmines.EPAlimitations, guidelines andstandards areenforcedthroughtheissuanceofdischarge permitswhichspecifytheapplicable limitations ondischarges. Compliance withapplicable stateandregionalwaterqualitystandards isaccomplished byrequiring theappropriate stateorinterstate agencytoissueawaterqualitycertification withrespecttoeachapplication. Thetermsandconditions ofanysuchwaterqualitycertification mustbeincorporated inthedischarge permitissuedbyEPA.EPAhasIssueddischarge permitsfortheoperation oftheCompany's generating stationsandforconstruction activities attheCompany's Susquehanna station.Applications fordischarge permitsforthesewagetreatment plantattheMontoursville servicecenterandthecoalminingoperations oftheCompany's subsidiaries arependingbeforeEPA.DERhasissuedtherequiredwaterqualitycertification forthePennsylvania MinesCorporation discharge permits.TheCompanybelievesthatcertaindischarge limitations contained lntheDERcertification fortheMontourstationaremorestringent thanthoseestablished byapplicable guidelines andregulations andhasrequested ahearingbeforeDERconcerning theselimitations. DERalsoadministers stateandcertainregionallawsandregulations withrespecttoeffluentdischarges andwaterquality.TheCompanyandDERarealsodiscussing thenecessity ofinstalling additional watertreatment facilities atcertainoftheCompany's plants.DelawareRiverBasinCommission approvaloftheCompany's waterwithdrawal permitfortheoil-firedunitsattheMartinsCreekstationrequirestheCompanytoprovidemake-upwateratcertaintimesortocurtailoperation oftheseunitsduringcertainperiodsoflowflowintheDelawareRiver.Itisthe27 tC.r Company's intention tosupplytherequiredmake-upwaterfromitsLakeWallenpaupack hydroelectric project.See"BUSINESS -Hydroelectric Projects". Inconnection withtheconstruction oftheSusquehanna station,theCompanyisreviewing withtheSusquehanna RiverBasinCommission theneedtoconstruct areservoir toprovidemake-upwaterduringcertainlow-flowperiodsintheSusquehanna River.TheCompanyestimates thatthecostofthisreservoir wouldapproximate $45million.TheCompany's shareofsuchcostduringtheyears1977-1979 isincludedinitsestimateofconstruction expenditures forthatperiod.See"CONSTRUCTION PROGRAM". In1974theBoroughofTremont,Pennsylvania, andseveralresidents oftheBoroughofTremontcommenced asuitagainsttendefendants, including theCompany,intheCourtofCommonPleas,Schuylkill County,Pennsylvania. Thecomplaint inthisproceeding (whichpurportstobeaclassactiononbehalfofallresidents oftheBoroughofTremont)alleges,amongotherthings,thatthefailureofthedefendants tocomplywiththeprovisions ofvariousFederalandstateenvironmental lawsinconnection withthemaintenance ofcertainculmandsiltbanksinthevicinityoftheBoroughofTremontcausedtheplaintiffs namedinthecomplaint tosufferdamagesofapproximately $1.3millionduringthefloOdingresulting fromTropicalStormAgnes.InJuly1977GoldMills,Inc.commenced aquitagainstthesamedefendants containing similarallegations andclaimingdamagesof$3.6million.Plaintiffs inbothproceedings areseekingtorecoverpunitivedamagesinunspecified amounts.Nuclear.TheU.S.CourtofAppealsfortheDistrictofColumbiainJuly1976announced decisions intwocasestowhichtheCompanywasnotapartyconcerning thescopeoftheNRCenvironmental reviewofnuclearplants.InonedecisiontheCourtheldthattheNRCmustgivefurtherconsideration inallcasestotheenvironmental impactofthereprocessing ofspentfuelandthedisposalofradioactive wastematerial. InOctober1976theNRCinitiated rulemaking proceedings toevaluatefurthertheenvironmental Impactofreprocessing andwastedisposalandinMarch1977theNRCadoptedaninterimrulerelatingtothesematters.InAugust1977,initsdecisionterminating theshowcauseproceedings initiated byanenvironmental grouptohalttheconstruction oroperation of14nuclearfuelunitsinPennsylvania andNewJersey,including theSusquehanna units,theNRCAppealPanelconcluded thattheapplication oftheinterimrulewouldhavenooperative significance onthecostbenefitanalysisfortheSusquehanna units.ItisexpectedthattheresultsoftheNRCrulemaking proceedings willserveasabasisforthecostbenefitanalysisrequiredbytheNationalEnvironmental PolicyActof1969lnconnection withtheissuanceofoperating licensesfornuclearplantsincluding theSusquehanna units.IntheotherdecisiontheCourtheldthattheNRCmustconsiderenergyconservation asanalternative totheconstruction ofnuclearplantsinlicensing proceedings whereenergyconservation (inadditiontoalternative meansofgenerating power)israisedasanissue.TheNRChasnotinitiated arulemaking proceeding withrespecttoenergyconservation matters.TheSupremeCourthasgrantedreviewofbothCourtofAppealsdecisions. TheactionoftheNRCinMarch1977inadoptingtheinterimrulerelatingtotheenvironmental impactoffuelreprocesslng andwastedisposalhasbeenappealedtotheU.S.CourtofAppealsfortheDistrictofColumbia. TheCompanyisunabletopredictwhatfurtheractionsmaybetakenbytheNRCortheCourtswithrespecttoanyofthesemattersortheeffectthatsuchactionsoractionsbyenvironmental agenciescouldhaveonthecostorin-service datesoftheSusquehanna units.See"CONSTRUCTION PROGRAM". 28 General.Duringtheperiod1972through1976,theCompany's construction expenditures aggregated about$1.47billion,ofwhichtheCompanyestimates thatabout$82millionwasforcompliance withFederal,stateandlocalenvironmental lawsandregulations. Approximately $97millionofcapitalexpenditures forsuchcompliance areincludedintheCompany's 1977-1979 construction programanditmaybethatsubstantial additional expenditures forsuchpurposesinanamountnotnowdeterminable willberequiredduringsuchperiodandthereafter. FromtimetotimetheCompanyanditssubsidiaries havebeencitedforviolations ofDERandEPAairandwaterqualityregulations inconnection withtheoperation oftheirfacilities and,asaresult,maybesubjecttocertainpenalties whicharenotexpectedtobematerialinamount.TheCompanyisunabletopredicttheultimateeffectofdeveloping environmental lawandregulation uponitsexistingandproposedfacilities andoperations. However,itispossiblethatsuchlawandregulation mayrequiretheCompanytomodify,supplement, replaceorceaseoperating itsequipment andfacilities, delayorimpedeitsconstruction andoperation ofnewfacilities, andrequireittomakesubstantial additional expenditures inamountswhicharenotnowdeterminable. Hydroelectric Projects. TheCompanyoperatestheHoltwoodhydroelectric project(102,000kwcapability) andtheWallenpaupack hydroelectric project(44,000kwcapability), theoriginallicensesforwhichexpiredin1970and1974,respectively. PendingfinalactionontheCompany's applications fornewlong-term licensesforbothprojects, FERChasgrantedtheCompanyinterimannuallicensestooperatetheprojects. Theinterimannuallicensesincorporate thetermsandconditions oftheoriginallong-term licenses. TheCompany's Holtwoodapplication isbeingopposedbyamunicipal electricsystem.TheHoltwoodandWallenpaupack projectsrepresent currentinvestments onadepreciated originalcostbasisof$9.6millionand$10.1million,respectively. TheFederalPowerActprovidesthatif,uponexpiration ofamajorprojectlicense,theUnitedStatestakesovertheprojectoralicensefortheprojectisissuedtoanewlicensee, theoriginallicenseeshallbepaidthe"netinvestment" intheproperty, nottoexceedfairvalue,plusseverance damages,ifany.CertainreserveswhicharerequiredbytheActandwhichrelatetothecalculation of"netinvestment" havenotbeenrecordedpendingapprovaloftheamountsthereofbyFERC.InApril1977,FERCissuedaproposedrulemaking which,ifadopted,wouldrequirealicensee'to recordthesereservesbyanappropriation ofearningsreinvested. Theamountofearningsreinvested soappropriated wouldberestricted astothepaymentofdividends. TheCompanyestimates thatsuchreservesapplicable totheperiod1946throughSeptember 30,1977wouldnotexceed$3.0millionforitstwolicensedprojects. TheCompanyalsoownsone-third ofthecapitalstockofSafeHarborWaterPowerCorporation (SafeHarbor)whichholdsamajorprojectlicensefortheoperation ofitshydroelectric plant(230,000kwcapability). TheCompanyisentitledtoone-third ofthecapacity(76,000kw)oftheSafeHarborplant.TheSafeHarborlicenseexpiresin1980.InApril1977SafeHarborfiledanapplication withFERCforanewlong-term licenseandtheproposedinstallation offiveadditional 37,500kwunits.Theadditional unitswillIncreasethetotalcapability oftheSafeHarborplantto417,500kwandtheCompanywillbeentitledtoone-third ofthetotalcapacity(139,167kw).29

ELECTRlCSTATlST(CS 1972197319741975YearEndedDecember31,1976TwelveMonthsEndedSeptem-ber30,1977(a)PowerCapability (thousands ofkw)Coal-fired steamstations............................. Oil-fired steamstation................................. Combustion turbinesanddiesels................. Hydroelectric stations.................................. Firmpurchases {hydro)................................ Total.PeakDemand{thousands ofkw)(b).................... SourcesofEnergy(millions ofkwh)Generated Coal-fired steamstations...............,..... Oil-fired steamstation.......................... Combustion turbinesanddiesefs......... Hydroelectric stations........................... Powerpurchases.. Total.Disposition ofEnergy(millions ofkwh)Energysafestocustomers........................... Interchange powersales(c).......................... Companyusesandlinelosses.................... Total.FuelCostofEnergyGenerated (centsperkwh)..CostofCoalReceived, including freightandhandlingcost(perton).................................... EnergySales(millions ofkwh)Residential. Commercial. Industrial.. Other.Total.Operating Revenues(thousands) Residential. Commercial. Industrial. Other.Total.NumberofCustomers (endofperiod)................. AverageUsePerResidential Customer(kwh).....AverageRevenue(centsperkwh)Residential. Commercial. Industrial ..Allcustomers TotalOperating ExpensesperkwhofEnergySales(centsperkwh)(c).................................. 3,345541146764,1083,5984,140541146764,9033,6624,140539146764,9013.7724,136820539146765,7174,1224,136820539146765,7174,4254,1361,640539146766,5374,42519,09724,7826012738248161,7841,96822,30627,83924,1862477721,57026,77525,3841~149848592,24129,71725,7511,947408092,12630,67326,3325,3981296852,10834,65217,0133.5861,70722,3060.4918,8657.2371,73727,8390.5018,9636,0791,73326,7750.8819,1138,7571,84729,7171.0420,3548,3581,96130,6731.1721,25011,5661,83634,6521.325,9853,9336,45863717,013$142,58592,55592,20126,226$343.667864,4398,0322.382.351.431.996,3244,2626,8811,39818,865$154,681101,67099,92825,868$382,147886,3788,2532.452.391.452.006,4944,2757,1701,02416.663$187,265121,314131,45227,539$467,570902,1488,2872.882.841.832.446,8184,5757,02070019,113$218,904143,673150,36525,686$538,628917,9208,5283.213.142.142.787,2674,8747,48173220,354$257,828170,990180,95729,949$639,724936,2198,9313,553,512.423.107,6075,1957,69875021,250$294,063198,158205,61033,002$730,833946,9869,1973.873.812.673.401.541.521.882.212.49'.61$10.66$11.89$20.80$23.38$25.36$25.79(d)(a)Consolidated statistics oftheCompanyandHersheyElectricCompanysinceJanuary1,1977.(b)Winterpeakshownfortheyears1972-1976 wasreachedearlyinsubsequent year.TheCompanyestimates thatitwouldhaveexperienced apeakfor1976andthetwelvemonthsendedSeptember 30,1977of4,514,000 kwifa5/ovoltagereduction hadnotbeenineffect.(c)Asprovidedintheapplicable regulatory systemofaccounts, receiptsfrominterchange powersaleshavebeentreatedasreductions ofoperating expenses. (d)Thecostofcoalreceived, including freightandhandlingcosts,was$26.06pertoninthemonthofSeptember 1977.30 DESCRIPTION OFBONDSGeneral.TheBondswillmatureDecember1,2007,willbearinterestattherateshownintheirtitlepayableJune1andDecember1,andwillbeissuedonlylnregistered formindenominations of$1,000andmultiples thereof.TheBondswillbeissuedunderaMortgageandDeedofTrust,datedasofOctober1,1945,assupplemented (Mortgage), ofwhichMorganGuarantyTrustCompanyofNewYorkisTrustee.Principal andinterestwillbepayableinNewYorkCityattheofficeoragencyoftheCompany,whichinitially willbetheprincipal officeoftheTrustee.InterestalsowillbepayableatthegeneralofficesoftheCompanyinAllentown, Pennsylvania. Exchanges andtransfers oftheBondsmaybemadeattheprincipal officeoftheTrusteeorattheofficesofsuchothercompanies astheCompanymaydesignate fromtimetotime.TheCompanydoesnotpresently plantodesignate anyothercompanyforsuchpurpose.TherewillbenochargebytheCompanyforanyexchangeortransferoftheBonds.Statements hereinconcerning theBondsandtheMortgagearebriefsummaries anddonotpurporttobecomplete. TheymakeuseoftermsdefinedintheMortgage, andarequalified intheirentiretybyexpressreferences tothecitedSectionsandArticles. TheBondsdonothaveanysinkingorimprovement fundorotherprovision foramortization priortomaturity. However,allseriesofbondscreatedpriorto1973dohavesinkingorimprovement fundprovisions. Redemption andPurchaseoftheBonds.TheBondswillberedeemable, inwholeorinpart,on30days'otice (a)atthefollowing specialredemption pricesforthemaintenance andreplacement fund,orwithcertaindepositsandproceedsofproperty, and(b)atthefollowing generalredemption pricesforallotherredemptions: IfRedeemedDuringTwelveMonthsPeriodEndingNovember301978................. 1979................. 1980................. 1981................. 1982................. 1983................. 1984................. 1985..~.............. 1986........... ~.....1987................. 1988................. 1989................. 1990................. 1991................. 1992................. GeneralRedemption Priceso/oSpecialRedemption PricesO/0IfRedoemedDuringTwelveMonthsPeriodEndingNovember301993................. 'I994................. 1995................. 1996................. 1997................. 1998................. 1999................. 2000................. 2001................. 2002................. 2003................. 2004................. 2005................. 2006................. 2007................. O/0o/o100.00100.00GeneralSpecialRedemption Redemption PricesPrices31 I' ineachcase,togetherwithaccruedinteresttothedatefixedforredemption; providedthatnoBondsshallberedeemable atthegeneralredemption pricespriortoDecember1,1982,withborrowedfundsorinanticipation offundstobeborrowed, havinganeffective interestcosttotheCompany(calculated inaccordance withacceptable financial practice) oflessthanloperannum.Theredemption maybemadesubjecttoreceiptbytheTrusteeoftheredemption moneysbeforethedatefixedforredemption andtheredemption noticeshallbeofnoeffectunlesssuchmoneysaresoreceived. Cashdeposited underanyprovisions intheMortgage(withcertainexceptions) maybeappliedtothepurchaseofbondsofanyseries.(Mortgage, Art.XandTwenty-third Supplemental, Sec.1.)Maintenance andReplacement Fund.Eachyear15V~/oofadjustedgrossoperating revenuesmustbespentformaintenance andreplacements ofmortgaged

electric, gas,steamandhotwaterpropertyandcertainautomotive equipment.

TheCompanynowownsnogasorhotwaterproperty. Suchrequirements maybemetbydepositing cashwiththeTrustee;certifying expenditures formaintenance andrepairsofsuchproperty, forgrosspropertyadditions andforcertainautomotive equipment; orbytakingcreditforbondsandqualified priorlienbondsretired.Suchcashmaybewithdrawn onsimilarbases.TheCompanyhasreservedtheright(withoutanyconsentorotheractionbytheholdersofanyseriesofbondscreatedafterJanuary1973,including theBonds)tomakesuchamendments totheMortgageasshallbenecessary todeletetheMaintenance andReplacement Fund.TheCompanyhasnopresentintention ofrequesting abondhoiders meetingtodeletetheMaintenance andReplacement Fund.(Mortgage, Sec.39;Twenty-third Supplemental, Sec.3.)SpecialProvisions forRetirement oftheBonds.If,duringanytwelve-month period,mortgaged propertyisdisposedofbyorderofortoanygovernmental authority, resulting inthereceiptof$10millionormoreasproceeds, theCompany(subjecttocertainconditions) mustapplysuchproceeds(lesscertaindeductions) totheretirement ofbondsofanyseries.TheBondsareredeemable atthespecialredemption pricesinthatevent.(Mortgage, Sec.64.)Security. TheBonds,togetherwithallotherbondsnoworhereafter issuedundertheMortgage, willbesecuredbytheMortgage, whichconstitutes, intheopinionofEdwardM.Nagel,Esq.,GeneralCounseloftheCompany,afirstmortgagelienonalloftheCompany's properties (exceptthosereferredtobelow),subJectto(1)leasesofminorportionsoftheCompany's propertytoothersforuseswhich,inhisopinion,donotinterfere withitsbusiness, (2)leasesofcertainpropertyoftheCompanynotusedinitselectricutilitybusiness, (3)minordefects,irregularities anddeficiencies intitlesofproperties andrights-of-way,whichdonotmaterially impairtheuseofsuchpropertyandrights-of-way forthepurposesoftheCompany,(4)otherexceptedencumbrances, and(5)astocertainpropertysituatedprimarily inLackawanna, Luzerne,Susquehanna, WayneandWyomingCounties, Pennsylvania, thepriorlienofTheScrantonElectricCompanyMortgageandDeedofTrust,datedFebruary15,1937,assupplemented. Ingeneral,thereareexceptedfromthelienoftheMortgageallcashandsecurities; equipment, apparatus, materials orsuppliesheldforsaleorotherdisposition;

aircraft, automobiles andothervehicles; timber,minerals, mineralrightsandroyalties; andreceivables, contracts, leasesandoperating agreements.

TheMortgagecontainsprovisions forincluding afteracquiredpropertywithinthelienthereof,subjecttoanypre-existing liensandtocertainlimitations inthecaseofconsolidation, mergerorsaleofsubstantially alloftheCompany's assets.(Mortgage, Sec.87.)32 AIi$ IssuanceofAdditional Bonds.Bondsofanyseriesmaybeissuedfromtimetotimeonthebasesof:(1)60/oofpropertyadditions toelectric, gas,steamorhotwaterproperty, acquiredafterJune30,1945,butnotincluding naturalgasproduction propertyandafteradjustments forretirements offundedpropertyotherthanpropertyforsupplying water;(2)retirement ofbondsorqualified priorlienbonds;and(3)depositofcash.Withcertainexceptions inthecaseof(2)above,theissuanceofbondsrequiresadjustednetearningsbeforeincometaxesfortwelveoutofthepreceding fifteenmonthsofatleasttwicetheannualinterestrequirements onallbondsatthetimeoutstanding, including thosebeingissued,andonallindebtedness ofpriorrank.Incomputing adjustednetearnings, anamountequaltothemaintenance andreplacement fundrequirements mustbeusedinlieuofactualexpenditures formaintenance andrepairsandprovisions forpropertyretirement. Theissuanceofbondsonthebasisofpropertyadditions subjecttoliensisrestricted. Itisexpectedthat$20.5millionofBondswillbeissuedagainsttheretirement ofalikeprincipal amountofbondswhichmaturedduring1977andtheremainder willbeissuedagainstunfundedpropertyadditions andthat,aftergivingeffectto,theproposedsaleofa10/oundivided ownership interestintheSusquehanna units(see"CONSTRUCTION PROGRAM")andtheissuanceoftheBonds,unfundedpropertyadditions remaining wouldhavebeenapproximately $660million,asofSeptember 30,1977.Inaddition, whenthebondsofallseriesissuedpiiorto1973havebeenretired,propertyadditions theretofore fundedtosatisfysinkingorimprovement fundsforsuchserieswillreverttounfundedstatus.TheCompanyhasreservedtherighttoamendtheMortgagewithoutanyconsentorotheractionbyholdersofanyseriesofbonds(including theBonds)created(1)afterFebruary28,1970toincludeNuclearFuel(andsimilaroranalogous devicesorsubstances) asPropertyAdditions, and(2)afterNovember30,1976tomakeavailable asPropertyAdditions variousformsofspacesatellites, spacestationsandotheranalogous facilities, variousfueltransportation facilities (primarily railroadcarsandotherrailroadequipment, tankersandothervessels), andgenerally,

electric, gasandenergyorfuelproperty(including propertyforthedevelopment ofelectricity, gasandfuelorenergyinanyform)andwaterandsteamheatproperty.

SuchpropertycouldbelocatedanywhereifdulysubjecttothelienoftheMortgageandusefulinconnection withtheenergy,fuelorwaterbusiness. Exceptedpropertywouldcontinuetoincludepropertyusedprincipally fortheproduction orgathering ofnaturalgas.Theamountoftheobligations securedbypriorliensonmortgaged propertymaybeincreased, providedthat,ifanypropertysubjecttosuchpriorlienshallhavebeenmadethebasisofacreditundertheMortgage, alltheadditional obligations aredeposited withtheTrusteeorthetrusteeorotherholderofaqualified lien.However,noadditional Scrantonbondsmaybeissuedexcepttorefundorreplacethosepresently outstanding unlessconsented tobytheholdersof70/oofthebonds.(Mortgage, Secs.4to7,20to30,and46,Thirteenth Supplemental, Sec.4,Twenty-second Supplemental, Sec.3andTwenty-third Supplemental, Sec.7.)ReleaseandSubstitution ofProperty. Propertymaybereleaseduponthebasesof(1)thedepositofcash,or,toalimitedextent,purchasemoneymortgages, (2)propertyadditions, afteradjustments incertaincasestooffsetretirements andaftermakingadjustments forqualified priorlienbondsoutstanding againstpropertyadditions, and(3)waiveroftherighttoissuebondswithoutapplyinganyearningstests.Cashmaybewithdrawn uponthebasesstatedin(2)and(3)above.(Mortgage, Art.XIandSecs.5,31,32,37,46to50,100and118.)33 /1 DividendCovenant. Nocashdividends oncommonstockmaybepaidunlessaftersuchpaymentstheamountremaining inearnedsurplus(hereindescribed asearningsreinvested) plustheprovisions madesubsequent toSeptember 30,1945fordepreciation andretirement ofpropertyshallequalthemaintenance andreplacement fundrequirements oftheMortgageforsuchperiod,lessmaintenance expenditures. (Mortgage, Sec.39andTwenty-third Supplemental, Sec.2.)Reference isalsomadetoNote7toFinancial Statements. Modification ofMortgage. Bondholders'ights maybemodifiedwiththeconsentoftheholdersof70%ofthebonds.Iflessthanallseriesofbondsareaffected, theconsentoftheholdersof70%ofeachseriesaffectedisalsorequired. TheCompanyhasreservedtheright(withoutanyconsentorotheractionbyholdersofanyseriesofbondscreatedafter1970,including theBonds)tosubstitute 66%%for70%intheforegoing provisions. Ingeneral,nomodification ofthetermsofpaymentofprincipal orinterestandnomodification affecting thelienorreducingthepercentage requiredformodification iseffective againstanyBondholder withouthisconsent.(Mortgage, Art.XIX,Fourteenth Supplemental, Sec.4.)DefaultsandNoticeThereof.Defaultsare:defaultinpaymentofprincipal; defaultfor60daysinpaymentofinterestorofinstallments offundsforretirement ofbonds;certaindefaultswithrespecttoqualified lienbonds;certaineventsinbankruptcy, insolvency orreorganization; anddefaultfor90daysafternoticeinothercovenants. TheTrusteemaywithholdnoticeofdefault(exceptinpaymentofprincipal, interestoranyfundforretirement ofbonds),ifitthinksitisintheinterests oftheBondholders. (Mortgage, Secs.65and66.)Holdersof25%ofthebondsmaydeclaretheprincipal andinterestdueondefault,butamajoritymayannulsuchdeclaration Ifsuchdefaulthasbeencured.NoholderofbondsmayenforcethelienoftheMortgageunless(1)hehasgiventheTrusteewrittennoticeofadefault;(2)holdersof25%ofthebondshaverequested theTrusteetoactandoffereditreasonable opportunity toactandindemnity satisfactory totheTrusteeagainstthecosts,expensesandliabilities tobeincurredthereby;and(3)theTrusteehasfailedtoact.TheTrusteeisnotrequiredtoriskitsfundsorincurpersonalliability ifthereisreasonable groundforbelieving thattherepayment isnotreasonably assured.Amajorityofthebondsmaydirectthetime,method,andplaceofconducting anyproceedings foranyremedyavailable totheTrustee,orexercising anytrustorpowerconferred upontheTrustee.(Mortgage, Secs.67,71,80and95.)EvidencetoBeFurnished totheTrustee.Compliance withMortgageprovisions isevidenced bywrittenstatements oftheCompany's officersorpersonsselectedorpaidbytheCompany.Incertainmajormatters,theaccountant, appraiser, engineerorcounselmustbeindependent. Variouscertificates andotherpapersarerequiredtobefiledannuallyandincertainevents,including anannualcertificate withreference tocompliance withthetermsoftheMortgageandabsenceofDefaults. CertainTaxMatters.IntheopinionofEdwardM.Nagel,Esq.,GeneralCounseloftheCompany,Bondsownedbyindividuals residinginPennsylvania aresubjecttothe4millsPennsylvania corporate loanstax.Suchtaxwillbewithheldfrominterestpaymentstosuch'individuals. Mr.NagelisalsooftheopinionthattheBondsareexemptfromexistingpersonaipropertytaxesinPennsylvania. EXPERTSThebalancesheetasofDecember31,1976andtherelatedstatements ofincome,earningsreinvested andchangesinfinancial positionforeachofthefiveyearsintheperiodendedDecember31,1976includedlnthisProspectus havebeenexaminedbyHaskins&Sells,independent Certified PublicAccountants, asstatedintheiropinionappearing herein,andhavebeensoincludedinrelianceuponsuchopiniongivenupontheauthority ofthatfirmasexpertsinaccounting andauditing. Statements madehereinastomattersoflawandlegalconclusions havebeenreviewedbyEdwardM.Nagel,Esq.,GeneralCounseloftheCompany,andhavebeenmadeinrelianceonhisauthority asanexpert.Information inthetabulation oftheAssignedReservesandUnassigned Reservesundertheheadings"Estimated Recoverable ReservesasofJanuary1,1976"and"Average/oSulfur(ByWeight)"underthecaption"BUSINESS -FuelSupply(Coal)"wasprovidedbyPaulWeirCompanyIncorporated andisincludedhereininrelianceonitsauthority asanexpert.LEGALOPINIONSThevalidityoftheBondswillbepasseduponfortheCompanybyEdwardM.Nagel,Esq.,GeneralCounseloftheCompany,andMessrs.Reid&Priest,NewYork,N.Y.,andforthePurchasers byMessrs.Sullivan&Cromwell, NewYork,N.Y.However,allmatterspertaining totheorganization oftheCompany,titlesandthelienoftheMortgageandallmattersoflawoftheCommonwealth ofPennsylvania willbepassedupononlybyMr.Nagel,whoisafull-time employeeoftheCompany.OPINIONOFINDEPENDENT CERTIFIED PUBLICACCOUNTANTS PENNSYLVANIA POWER&LIGHTCOMPANY:WehaveexaminedthebalancesheetofPennsylvania Power&.LightCompanyasofDecember31,1976andtherelatedstatements ofincome,earningsreinvested, andchangesinfinancial positionforeachofthefiveyearsintheperiodendedDecember31,1976.Ourexamination wasmadeinaccordance withgenerally acceptedauditingstandards and,accordingly, includedsuchtestsoftheaccounting recordsandsuchotherauditingprocedures asweconsidered necessary inthecircum-stances.Inouropinion,suchfinancial statements presentfairlythefinancial positionoftheCompanyatDecember31,1976andtheresultsofitsoperations andthechangesinitsfinancial positionforeachofthefiveyearsintheperiodendedDecember31,1976,inconformity withgenerally acceptedaccounting principles applied(exceptforthechangein1974,withwhichweconcur,inthemethodofaccounting forrecoverable fuelcostsasdescribed inNote(b)totheStatement ofIncome)onaconsistent basis.HASKINS&SELLSNewYork,NewYorkFebruary3,197735 I' PENNSYLVANIA POWER&LIGHTCOMPANYBALANCESHEETASSETSThousands ofDollarsSeptember 30,December31,19771976(Unaudited) UTILITYPLANTPlantlnservice-atoriginalcostElectric................................ Steamheat.TotalplantfnserviceLessaccumu'lated depreciation (Note5).Netplantinservice.. Construction workinprogress-etcost.Nuclearfuelinprocess-atcost..Netutilityplant(Note8).INVESTMENTS Associated companies -atequity.Nonutility propertyandother-atcostorless.Totalinvestments.. CURRENTASSETSCash(Note4).Accountsreceivable (lessreserve:1976,$1,925;1977,$2,809)Customers .Other.Notesreceivable (principally fromassociated company).. Recoverable fuelcosts.Coalandfueloil-ataveragecost.Materials andsupplies-ataveragecost.Other.Totalcurrentassets..DEFERREDDEBITS.$2,090,282 7,8962,098,178 458,6971,639,481 720,54420,0842,380,109 15,3277,54822,87514,95549,20522,85729,57041,67074,88519,0687,219259,4294,884$2,303,547 7,9082,311,455 495,8761,815,579 758,92733,4132,607,919 16,3447,46923,81313,44245,23738,55329,50047,296102,11719,65910,917306,7216,454Total..$2,667,297 $2,944,907 Seeaccompanying NotestoFinancial Statements. 36 PENNSYLVANIA POWER&LIGHTCOMPANYBALANCESHEETLIABILITIESThousands ofDollarsSeptember 30,December31,19771976.(Unaudited) CAPITALIZATION Shareowners investment (Notes6,7and9)Preferred stock.Preference stock..Commonstock.CapitalstockexpenseEarnIngsrelnvested. Totalshareowners Investment ..Long-term debt(Note8).Totalcapitalization ..CURRENTLIABILITIES Long-term debtduewithinoneyear(Note8).Commercial papernotes(Note4).Accountspayable..Taxesaccrued.DeferredIncometaxesapplicable torecoverable fuelcosts.DMdendspayable.Interestaccrued.DepositsfromAllegheny ElectricCooperative (Note14).Other..Totalcurrentliabilities DEFERREDANDOTHERCREDITSDeferredinvestment taxcredits.....Deferredincometaxes.Other..Totaldeferredandothercredits.COMMITMENTS ANDCONTINGENT LIABILITIES (Note15)$231,375210,000495,008(10,220)237,9671,164,130 1,161,319 2,325,449 20,67560,01260,34212,56422,06023,00222,58911,257232,50156,52636,86015,961109,347$231,375206,000575,458(10,428)274,3581,276,763 1,157,856 2,434,619 3,67691,46071,93623,29725,03925,65630,82678,84920,820371,55977,44543,53817,746138,729Total$2,667,297 $2,944,907 Seeaccompanying NotestoFinancial Statements. 37 ill,t PENNSYLVANIA POWER&LIGHTCOMPANYSTATEMENT OFCHANGESINFINANCIAL POSITION1972197319741975Thousands ofDollarsYearEndedDecember31,1978TwelveMonthsEndedSeptember 30,1977(unaudited) SOURCEOFFUNDSOperations Netincome(1974includes$4,162nonrecurring credit).. Charges(credits) againstincomenotInvolving workingcapitalDepreciation ..Noncurrent deferredincometaxesandInvestment taxcredits-net.......................... Allowance forfundsusedduringconstruction.. Other.41,4467,984(14,647)22092,92448,83711,282(14,967)220112,28452,3998,790(20,732)520128,45658,54015,701(36,605)7,464142,64162,47831,789(45,192)4,669165,85566,39042,338(49,918)8,524213,149$57,921$66,912$87,479$97,541$112,111$145,815OutsideFinancing CommonstockPreferred stockPreference stock.Firstmortgagebonds.Otherlong-term debt.Short-term debt-netincrease.....WorkingCapital-decrease(a)Investments inAssociated Companies -decrease..... DepositsfromAllegheny ElectricCooperative ............ Other-net.TotalSourceofFunds.......................... APPLICATION OFFUNDSConstruction Expenditures. NuclearFueltnPr'ocess. Allowance forFundsUsedDuringConstruction ......... 46,94035,00075,0008,34220,231185,51383598$279,11840,90040,000108,00020,024208.9243,1562,672$327,036(14,647)204,107(14,967)209,529$218,754$224,49635,15625,000180,00036045,658286,17468557,76370,000225,000208352,97115,166$267,7243,736(20,732)250,728$342,4962,793(36,605)308,684$415,315$510,77882,70575,000150,000253397.95816,8946,424$497,131$394,23813,555(45,192)362,60184,994l150,000196235.19078,8494,351$531,539$365,73716,464(49,918)332,283Securities RetiredPreference stock..Firstmortgagebonds..Otherlong-term debtShort-term debt-netdecrease...Dividends onPreferred, Preference andCommonStockWorkingCapital-tncrease(a).Acquisition ofHersheyElectricCompany....................... Investments inAssociated Companie~ncrease.......... Other-net.TotalApplication ofFunds........................ 15,00010,05725,05743,3306,62410,04156,63166,67250,037798$279,118$327,03618,63218,63258,89782,7534,305$415,31593,00011211,879104,99170,68623,9902,427$510,7788,0003,05413,61824,67286,69415,3097,855$497,1314,00028,50024841,82074,56897,20313,0567,8556,574$531,539ChangesinComponents ofWorkingCapital(a)Cash,temporary cashinvestments andspecialfunds....Accountsandnotesreceivabte. Fuelinventory. Recoverable fuelcosts,lessrelateddeferredIncometaxes.Accountspayableandaccruedtaxes............................. Dividends payableandinterestaccrued......................... Other-netIncrease(Decrease).................................. $(468)5,2613,498(2,541)(4,231)5,105$6,624$10,2476,745(4,717)(10,006)(5,136)(289)$(3,156)$(3,792)22,89645,00216,747(1,811)(6,494)10,205$82,753$(5,352)28,757(3,568)738(22,507)(6,346)(6,888)$(15,166)$12316,3946,5672,125(1,426)4,612)3,862)$15,309$(15)32,60033,6612,389(40,281(6,368)(8,930$13,056(a)Excludesshort-term debt,long-term debtduewithinoneyearandAllegheny deposits. Seeaccompanying NotestoFinancial Statements. 38 PENNSYLVANlA POlVER85LIGHTCOMPANYSTATEMENT OFEARNINGSREINVESTED 1972YearEndedDecember31,197319741975Thousands ofDollars1976TwelveMonthsEndedSeptember 30,1977(Unaudited) BALANCEATBEGINNING OFPERIOD............ ADDNETINCOME(1974includes$4,162nonrecurring credit).$125,647$140,238$157,113$185,695$212,55057,92166,91287,47997,541112,111$225,752145,815Total.183568,207,150244,592283,236324,661371,557DEDUCTCashDividends DeclaredPreferred stock(atspecified annualrates)..Preference stock(atspecified annualrates)..Commonstock(pershare-1972,$1.64;1973,$1.68;1974,$1.77;1975and1976,$1.80;twelvemonthsendedSeptember 30,1977,$1.86)..Other(Note6)6,4338,09328,8047,5519,64032,8469,39310,26339,2419,39315,11646,17713,12820,24053,32616,32319,96360,9176TotalBALANCEATENDOFPERIOD(Notes7and9)43,330$140,23850,037$157,11358,897$185,69570,68686,694$212,550$237,96797,209$274,358Seeaccompanying NotestoFinancial Statements 39

PENNSYLVANIA POWER&LIGHTCOMPANYNOTESTOFINANCIAL STATEMENTS (Information torthePeriodEndedSeptember 30,1977launaudited) 1.SUMMARYOFACCOUNTING POLICIESAccounting System~Accounting recordsaremaintained inaccordance withtheUniformSystemofAccountsprescribed bytheFederalEnergyRegulatory Commission (FERC)andadoptedbythePennsylvania PublicUtilityCommission (PUC).Reference ismadeto"BUSINESS -Regulation" forinformation regarding thetransferofthefunctions oftheFederalPowerCommission toFERCinaccordance withtheDepartment ofEnergyOrganization Act.Principles ofConsolidation TheaccountsoftheCompanyandHersheyElectricCompany,awholly-owned electricdistribution subsidiary acquiredDecember31,1976,areconsolidated intheaccompanying financial statements asoftheacquisition date.Allsignificant intercompany transactions havebeeneliminated. Theoperations ofHersheyElectricCompanyarenotmaterialcomparedtothatoftheCompany.Reference ismadetoNote13toFinancial Statements. Associated Companies Investments inunconsolidated subsidiaries (allwholly-owned) andinSafeHarborWaterPowerCorporation (representing one-halfofthatcompany's votingsecurities) arerecordedusingtheequitymethodofaccounting. TheCompany's unconsolidated subsidiaries areengagedincoalminingoperations, holdingcoalreservesanduraniumminingclaims,oilpipelineoperations andrealestate.TheCompanybelievesthatitsfinancial positionandresultsofoperations arebestreflected withoutconsolidation ofthesesubsidiaries sincetheyarenotengagedinthebusinessofgenerating anddistributing electricity. Ifalltheunconsolidated subsidiaries wereconsidered intheaggregate asasinglesubsidiary, theywouldnotconstitute a"significant subsidiary" asthattermisdefinedbytheSecurities andExchangeCommission. UtilityPlantAdditions toutilityplantandreplacements ofunitsofpropertyarecapitalized atcost.Costsofdepreciable propertyretiredorreplacedareremovedfromutilityplantandsuchcosts,plusremovalcosts,lesssalvage,arechargedtoaccumulated depreciation. Costsoflandretiredorsoldareremovedfromutilityplantandanygainsorlossesarereflected ontheStatement ofIncome.Allexpenditures formaintenance andrepairsofpropertyandthecostofreplacement ofitemsdetermined tobelessthanunitsofpropertyarechargedtooperating expenses. 40 PENNSYLVANIA POWER&LIGHTCOMPANYNOTESTOFINANCIAL STATEMENTS -(Continued) Allowance forFundsUsedDuringConstruction AsprovidedintheUniformSystemofAccounts, thecostoffundsusedtofinanceconstruction workinprogressiscapitalized aspartofconstruction cost.Thecomponents ofAllowance forfundsusedduringconstruction shownontheStatement ofIncomeunderOtherIncomeandDeductions andInterestChargesarenon-cashitemsequaltotheamountsocapitalized andservetooffsettheactualcostoffinancing construction workinprogress. Reference ismadetoNote(e)tothe"STATEMENT OFINCOME".Depreciation Forfinancial statement

purposes, thestraight-line methodofdepreciation Isusedtoaccumulate anamountequaltothecostofutilityplantandremovalcosts,lesssalvage,overtheestimated usefullivesofproperty.

Reference ismadetoNote5toFinancial Statements. RevenuesRevenuesarebasedoncyclebillingsrenderedtocertaincustomers monthlyandothersbi-monthly. TheCompanydoesnotaccruerevenuesrelatedtoenergydelivered butnotbilled.FuelCostsRecoverable UnderFuelAdjustment ClausesTheCompany's tariffsfiledwithboththePUCandFERCincludefueladjustment clausesunderwhichfuelcostsvaryingfromthelevelsallowedinapprovedrateschedules arereflected incustomers'ills afterthefuelcostsareincurred. Thechargetoexpenseforfuelcostsrecoverable inthefuturethroughapplication offueladjustment clausesisdeferredtotheperiodsinwhichthesecostsarebilledtocustomers. Reference ismadetoNotes(b)and(c)tothe"STATEMENT OFINCOME"andto"RATEMATTERS"forfurtherinformation regarding thefueladjustment clausesandaPUCorderproposing toreplacetheexistingfueladjustment clausewithalevelized energycostrate.IncomeTaxesTheCompanyanditssubsidiaries fileaconsolidated Federalincometaxreturn.Incometaxes.areallocated totheindividual companies basedontheirrespective taxableincomeorloss.Incometaxesareallocated toOperating ExpensesandOtherIncomeandDeductions ontheStatement ofIncome.IncometaxcreditsrecordedunderOtherIncomeandDeductions resultprincipally fromthetaxdeductions relatedtointerestexpenseassociated withfinancing construction workinprogress. Deferredtaxaccounting isfollowedforitemswheresimilartreatment inratedeterminations hasbeenorisexpectedtobepermitted bythePUC.Theprincipal itemsareaccelerated amortization ofcertified defensefacilities andpollution controlequipment, deduction ofcostsofremovingretireddepreciable

property, thatportionoftaxdepreciation arisingfromshortening depreciable livesby20'loundertheclass41 PENNSYLVANIA POWER&LIGHTCOMPANYNOTESTOFINANCIAL STATEMENTS

-(Continued) lifedepreciation system,fuelcostsrecoverable underfueladjustment clauses,theforcedoutagereserveandthecostoffuelconsumedduringthetestperiodofnewgenerating facilities. Taxreductions arisingprincipally fromtheuseofthedeclining balancedepreciation method,guideline livesandcertainincomeandexpensesbeingtreateddifferently fortaxcomputation thanforbookpurposesareaccounted forundertheflow-through method.Investment taxcredits,whichresultinareduction ofFederalincometaxespayable,aredeferredandamortized overtheaveragelivesoftherelatedproperty. Thetaxcreditsaregenerally equalto10/oof(1)thecostofcertainpropertyplacedinserviceand,insomeinstances, (2)partialpaymentsofconstruction costsofotherfacilities. In1976theCompanyadoptedanEmployeeStockOwnership Plan(ESOP)whichpermitstheCompanytoclaimanadditional 1/oinvestment taxcredit.Anamountequaltothisadditional creditispaidtothetrusteefortheESOPtoacquireCommonStockoftheCompanyforemployees. Reference ismadetoNote10toFinancial Statements. Retirement PlanTheCompanyhasaRetirement Plancomposedoftwoparts:(1)anon-contributory portionwhichprovidesbenefitsforalleligibleactiveemployees withthefullcostabsorbedbytheCompany,and(2)avoluntary portionInwhichcontributions aremadebybothemployees andtheCompany,butthefullcostofpastserviceandPlanimprovements isbornebytheCompany.Approximately 95/oofeligibleactiveemployees aremembersofthevoluntary portionofthePlan.Companycontributions tothePlanincludeamountsrequiredtofundcurrentservicecostsandtoamortizeunfundedpastservicecostsoverperiodsofnotmorethan20years.Reference ismadetoNote11toFinancial Statements. ForcedOutageReserve~Aself-insurance reserveisprovidedtocovertheincreased levelofpowercostswhichareexperienced whenanyoftheCompany's majorgenerating unitsareforcedoutofserviceduetodamagecausedbyaccidentorotherunforeseen insurable occurrences. Increased powercostsresulting frompurchasing orgenerating replacement powerathighercostsorlossofinterchange salesinexcessof$0.5millionthrough1975and$1millioneffective January1,1976foreachaccidentoroccurrence arechargedtothereserve.AstocertainoftheCompany's largegenerating units,costschargeable tothereservearelimitedto$12.5millionsinceoutsideinsurance iscarriedtocovercostsinexcessofthatamount.Thereservelsestablished onthebasisofhistorical experience andhasbeenrecognized inratemaking procedures bythePUC.AtDecember31,1976andSeptember 30,1977thereservebalancewas$13.9millionand$13.8million,respectively. 2.RATEFILINGSReference ismadetoinformation appearing under"RATEMATTERS". 3.FUELCOSTSRECOVERABLE UNDERFUELADJUSTMENT CLAUSESReference ismadetoNotes(b)and(c)tothe"STATEMENT OFINCOME".42 PENNSYLVANIA POWER&LIGHTCOMPANYNOTESTOFINANCIAL STATEMENTS -(Continued) 4.COMPENSATING BALANCESANDSHORT-TERM DEBTShort-term debtoftheCompanyconsistsofbankloans(generally borrowedforoneyearattheprimeinterestrateandprepayable atanytimewithoutpenalty)andcommercial papernotes(generally maturingwithin30to60days).Inordertoprovideinterimfinancing andback-upfinancing capability forcommercial papernotes,theCompanyhaslinesofcreditwithvariousbanksthataremaintained bycompensating bankbalancerequirements (notlegallyrestricted astowithdrawal) orthepaymentofcommitment fees.Information regarding suchshort-term debtandlinesofcreditisasfollows(thousands ofdollars): Short-term debtoutstanding Weightedaverageshort-term debtinterestrate.............................. Maximumaggregate short-term debtoutstanding atanymonthend(a).Averagedailyshort-term debtoutstanding (a)Aggregate amount.Weightedaverageinterestrate(b).Linesofcredit(c)Maintained bycompensating bankbalances........................... Maintained bypaymentofcommitment fees........................... Averageannualcompensating bankbalancerequirement.............. Annualcommitment fees..AsofOecember31,1979$60,01247o/oAsofSeptember 30,1977$91,4606.2'lo$129,59855o/o$100,1885.4'lo$143,500$56,500$18,850$313$147,500$52,500$13,300$302$194,578$194,578(a)Duringpreceding twelvemonths.(b)Calculated bydividingshort-term interestexpensefortheperiodbytheaverageaggregate dailyshort-term debtoutstanding duringtheperiod.(c)Useoftheselinesofcreditwasrestricted atDecember31,1976andSeptember 30,1977totheextentof$4millionbyshort-term bankloanstocertaincompanies involvedinfuelsupplyoperations. 5.DEPRECIATION Provisions fordepreciation asapercentoftheaverageoriginalcostofdepreciable propertyhaveapproximated 3.3/efor1972,3.4/ofor1973,3.3/efor1974and1975and3.2/ofor1976andthetwelvemonthsendedSeptember 30,1977.Thelowercomposite depreciation ratefor1976andthetwelvemonthsendedSeptember 30,1977reflectschangesmadeasofJanuary1,1976inestimated usefullivesofcertainfacilities inaccordance withthePUC'sAugust1976rateorder.Noprovision isbeingmadefordepreciation oramortization ofintangibles ofapproximately $1.3millionincludedinUtilityPlant.43 PENNSYLVANIA POWER&LIGHTCOMPANYNOTESTOFINANCIAL STATEMENTS -(Continued) 6.CAPITALSTOCKCommonStock-noparconsistsof50,000,000 authorized sharesofwhich30,803,318 shareswereoutstanding atDecember31,1976and34,599,105 shareswereoutstanding atSeptember 30,1977.CommonStockof$575,458,000 atSeptember 30,1977includes$640,000cashinstallments receivedunderadividendreinvestment planasconsideration for27,249sharesofCommonStockwhichwereissuedinOctober1977.Preferred Stock($100par,cumulative) andPreference Stock(nopar,cumulative) consisted ofthefollowing (thousands ofdollars): SharesAmountRedemption PriceFinalDecember31,September 30,September 30,Authorized Outstanding 197619771977PriceYearPreferred 4go/o............ Series.......... 3.35'/o......4.40'/o~,~~..4.60'/o......7.40'/o......8.60'/o......900'/o......9.24o/o......Total..... 629,9365,000,000 530,18941,783228,77363,000400,000222,37077,630750,0004,17822,8786,30040,00022,2377,76375,0004,17822,8786,30040,00022,2377,76375,000$231,375$231,375$53,019$53,019103.50102.00103.00112.00110.00110.00115.00103.50102.00103.00100.001998101.001990101.001990101.001991$110.00$110.00Preference ......5,000,000 $8.00........... $8.40........... $8.70........... $9.25........... $11.00......... $13.00......... Total..... 350,000400,000400,000160,000500,000250,000$35,00040,00040,00020,00050,00025,000$35,00040,00040,00016,00050,00025,000$210,000$206,000-$105.50110.00109.00109.90111.70$101.001987101.001986101.001984100.001981100.001995100.001994ThePreference Stockmaynotberefundedthroughcertainrefunding operations priortothefollowing dates:$8.70series,7/1/78;$13.00series,10/1/84;$11.00series,7/1/85.Otherwise, thePreferred andPreference Stockmayberedeemed, inwholeorinpart,attheoptionoftheCompanyatredemption pricesrangingbetweentheSeptember 30,1977priceandthefinalpriceshownabove,withtheexception thatthePreference Stock,$9.25Series,isnotredeemable bytheCompanyotherthanthroughthesinkingfundrequirement orvoluntary liquidation. 44 PENNSYLVANIA POWER&LIGHTCOMPANYNOTESTOFINANCIAL STATEMENTS -(Continued) Theliquidation pricesofallissuesofPreferred Stock,whicharepayableonaparitywitheachotherandinpreference tothePreference StockandtheCommonStock,areasfollows:involuntary liquidation $100ashare;voluntary liquidation $100ashareforthe4'~/oPreferred Stockandtheredemption priceineffectatthetimefortheSeriesPreferred Stock;plusineachcaseanyunpaiddividends. Theliquidation pricesofPreference Stock,whicharepayableaftersatisfaction ofthepreferential rightsofPreferred Stockandinpreference totheCommonStock,areasfollows:involuntary liquidation $100ashare;voluntary liquidation theredemption priceineffectatthetime,withtheexception thatthevoluntary liquidation priceofthePreference Stock,$9.25Series,is$110ashare;plusineachcaseanyunpaiddividends. Eachofthefollowing seriesofstockcontainssinkingfundprovisions designedtoretiretheseriesataredemption priceof$100ashareplusaccruedandunpaiddividends tothedateofsuchredemption: Preferred Stock740/oSeries.9.24/sSeries(a)................~....... Preference Stock$9.25Series(b)......................... $11.00Series(a)....................... $13.00Series(a)....................... SharestobeRedeemedAnnually16,00030,00040,00025,00012,500Redemption PeriodJuly1,1979-July1,2003July1,1981-July1,2005Jan.1,1977-Jan.1,1981July1,1981-July1,2000Oct.1,1980-Oct.1,1999(a)TheCompanyhastherighttoredeemoneachsinkingfundredemption dateadditional sharesuptothenumberofsharesofthisSeriesrequiredtoberedeemedannually. (b)InJanuary1977,theCompanyredeemed40,000sharesofthePreference Stock,$9.25Series.Capitalstockexpenserepresents commissions andexpensesincurredinconnection withtheissuanceandsaleofcapitalstock.OfthecapitalstockexpensebalanceatSeptember 30,1977,approximately $3.0millionapplicable tothepreferred andpreference stockserieswhicharetoberedeemedthroughsinkingfundprovisions willbeamortized toEarningsReinvested astherespective seriesofstockareredeemed. Noamortization planisineffectforcapitalstockexpenseapplicable tootherissuesofcapitalstock.45 Nq PENNSYLVANIA POWER&LIGHTCOMPANYJuly1972.......October1972.......................... August1973...................... November1973.July1974e~~~~~~~~~~~~~~~~~~~~~~~~October1974April1975.August1975.September 1975..1975..559567,93575,000April1976.June1976.October1976197614,26867,040NOTESTOFINANCIAL STATEMENTS -(Continued) SalesofcapitalstocksinceJanuary1,1972areasfollows(sharesandamountsinthousands): ClassSharesAmountPreference, $8.00Series350$35,000Common2,00046,9407.40/0SeriesPreferred 40040,000Common2,00040,900Common2,20035,156Preference, $13.00Series25025,000Common3,00051,450Preference, $11.00Series50050,000Preference, $9.25Series20020,000Common-dividendreinvestment andemployeemonthlyinvestment plans301Common3,5009.24/oSeriesPreferred 750Common-employeestockownership plan35755Common-dividendreinvestment plan716Common3,200Common-dividendreinvestment plan59613,234OnOctober14,1977,theCompanyissued$2,528,000 (107,573shares)ofCommonStocktotheTrusteeoftheCompany's EmployeeStockOwnership Plan.OnOctober19,1977,theCompanysold500,000shares($50million)of8/oSeriesPreferred Stock($100par)tothreeinstitutional investors. Thetermsofthe8/oSeriesPreferred Stockincludeasinkingfundprovision designedtoretire25,000shares($2.5million)ofthestockannuallyduringtheyears1983through2002.7.DIVIDENDRESTRICTIONS TheCompany's charterandmortgageindentures restrictthepaymentofcashdividends onCommonStockundercertainconditions. Underthecharterprovisions, whicharethemorelimiting, norestrictions areeffective onthepaymentofsuchdividends outofcurrentearnings. Theamountofearningsreinvested freeofrestrictions underthecharterwas$193.4millionatDecember31,1976and$269.5millionatSeptember 30,1977,aftergivingeffectto(1)theissueof$2,528,000 ofCommonStockinOctober1977,(2)thesaleof$50,000,000 of8/oSeriesPreferred StockinOctober1977and(3)thesaleoftheBonds.46 PENNSYLVANIA POWER8aLIGHTCOMPANYNOTESTOFINANClAL STATEMENTS -(Continued) 8.LONG-TERM DEBTLong-term debtoutstanding consisted ofthefollowing (thousands ofdollars): December31,September 30,19781977$1,165,500 $1,145,000 Firstmortgagebonds..Notes:7'/odue1980.Other.Unamortized (discount) andpremium-net....Total..Lessamountduewithinoneyear.................... Totallong-term debt.20,000550(4,056)1,181,994 20,675$1,161,319 20,000430(3,898)1,161,532 3,676$1,157,856 Firstmortgagebondsconsisted ofthefollowing seriesatDecember31,1976andSeptember 30,1977(thousands ofdollars): Series2s/io/o3Vso/o2s/4o/o3%o/o10'!s'/o3V2o/o3%o/o4%o/o4%o/o5%o/o6s/4o/oOutstanding Due197819771977$20,00019783,000$3,000'198037,00037,00019827,5007,5001982100,000100,000198325,00025,000198525,00025,000199130,00030,000199430,00030,000199630,00030,000199730,00030,000SeriesDue7o/o19998t/so/o19999o/o20007/4/o20017%o/o20027Vso/o20039t/4o/o2004974o/o20059/4'/o20058'/4'lo2006(a)1978$40,00040,00050,00060,00075,00080,00080,000125,000100,000150,00028,0001977$40,00040,00050,00060,00075,00080,00080,000125,000100,000150,00027,500Outstanding (a)Pollution ControlSeriesAdue1977-2003, 4Vs/oto5%/o.Theamountoflong-term debtmaturingineachcalendaryearthrough1982is(thousands ofdollars): 197719781979198019811982$20,762$3,686$574$57,568$553$108,006Themaximumaggregate annualsinkingfundrequirements through1982oftheoutstanding. mortgagebondsare(thousands ofdollars): 197719781979198019811982$1,575$2,740.$3,265$3,050$3,050$4,450Lesserrequirements willapplyfortheyears1978-1982 iflong-term debtis50/oorlessofnetproperty. TheCompanyhastherighttomeetalloftheserequirements withpropertyadditions orbonds.Substantially allutilityplantissubjecttotheliensoftheCompany's mortgages. 47 lfEg/ PENNSYLVANIA POWER&LIGHTCOMPANYNOTESTOFINANCIAL STATEMENTS -(Continued) 9.HYDROELECTRIC PROJECTSReference ismadetotheinformation appearing under"BUSINESS -Hydroelectric Projects". 10.TAXESIncometaxexpenseisrecordedontheStatement ofIncomeasfollows(thousands ofdollars): 197219731974197519761977(a)Operating ExpensesProvision Federal;........ State............ $12,5825,520$16,4546,207\$12,554$22,5473,8588,221$6566,766$22,03013,88018,10222,66116,41230,7687,42235,910DeferredFederal................~.... 2,176State........................ 6532,8294,5571,18015,9913,2715,73719,2622,952590i3,5427,1851,5608,9761,9528,74510,928Investment taxcreditsDeferred................ ~..Amortization ofdefer-ments................... 7,3497,2334,75314,46529,49640,887(2,194)(1,688)(1,216)(1,477)(1,835)(2,380)5,1555,5453,53712,98827,66138,50726,08633,94339,21147,29843,82885,345OtherIncomeandDeductions Reduction inprovision Federal..................... State........................ Deferredinvestment taxcredits......................... (263)(71)(46)(45)(4,156)(920)(9,164)(2,037)(11,859)(2,598)(11,288)(2,619)(672)(334)Totalincometaxexpense......... $25,752FederalandStateIncomeTaxesPayable(Credit)........$17,768(91)(5,076)(11,201)(14,457)(14,579)$33,852$34,135(b) $36,097$29,371$70,766$22,570$11,336$19,567$(7,035)$22,003(a)TwelvemonthsendedSeptember 30.(b)Excludes$4,831,000 deferredincometaxesrelatedtoNonrecurring Credit.Investment taxcreditseliminated theCompany's Federalincometaxliability for1976andresultedinacredittotheprovision forincometaxesofapproximately $5.9millionrelatedtoacarrybackofinvestment taxcreditstoprioryears.Totalincometaxexpensefor1976hasbeencreditedbyapproximately $5.0millionrepresenting adjustments ofprioryears'axliabilities. Theprincipal adjustment, relatedtoadoptionofthemodifiedhalf-year convention methodofcomputing tax48 PENNSYLVANIA POWER&LIGHTCOMPANYNOTESTOFINANClAL STATEMENTS -(Continued) $3,715$4,54014,009(b) 829(3,726)1,5381,899$19,262$3,542$6,4252,688(189)2,004$6,4632,391(1,041)932$8,7452,680$5,73711279$10,928$2,829depreciation intheCompany's 1975Federalincometaxreturn,reducedtotalincometaxexpensebyapproximately $2.8million.Deferredincometaxesresultfromthefollowing items(thousands ofdollars): 197219731974197519761977(a)Portionoftaxdepreciation undertheclasslifedepreciation system.$1,550$3,057Recoverable fuelcosts.................... Forcedoutagereserve.................... Other(a)TwelvemonthsendedSeptember 30.(b)Excludes$4,831,000 deferredincometaxesrelatedtoNonrecurring Credit.ThecombinedFederalandStatecorporate incometaxratesfortheCompany,aftergivingeffecttothedeductibility oftheStateincometaxexpense,rangedfrom52.9%to54.0%duringtheperiodsshownontheStatement ofIncome.IncometaxexpensedifferedfromtheamountcomputedbyapplyingthecombinedFederalandStatecorporate incometaxratestopre-taxincomeasfollows(thousands ofdollars): 197219731974197519761977(a)Netincome..$57,921$66,912$87,479$97,541$112,111$145,815Incometaxexpense.............................. 25,75233,85238,96636,09729,37170,766Pre-taxincome..~..$83,673$100,764$126,445$133,638$141,482$216,581Indicated incometaxexpenseatcom-binedtaxrates.$45,166$54,131$66,940$70,748$74,901$114,658Reductions dueto:Allowance forfundsusedduringconstruction......... 7,9068,04110,97619,37923,92526,426Taxdeduction inexcessofbookexpense:Depreciation............................ 6,1457,5318,7999,13115,06713,271Taxandpensioncost.............. 2,5542,6872,4912,9983,3543,623Other-net.2,8092,0205,7083,1433,184572Total.19,41420,27927,97434,65145,53043,892Incometaxexpense..........................~... $25,752$33,852$38,966$36,097$29,371$70,766Effective incometaxrates...................... 30.8%33.6%30.8%27.0%20.8%32.7%(a)TwelvemonthsendedSeptember 30.49 PENNSYLVANIA POWER&LIGHTCOMPANYNOTESTOFINANCIAL STATEMENTS -(Continued) lTaxesotherthanincometaxeschargedto1972Stategrossreceipts............................. $15,194Statecapitalstock.4,428Stateutilityrealestate.......................... 3,611Socialsecurityandother................... ~.2,425Total$25,658operating expensewere(thousands ofdollars): 197319741975197B1977(a)$16,867$20,564$23,756$28,320$32,4155,4036,2637,2848,8609,6094,6875,2585,9808,05210,7003,0483,4863,6494,2945,250$30,005$35,571$40,669$49,526$57,974(a)TwelvemonthsendedSeptember 30.11.RETIREMENT PLANObligations oftheCompany's Retirement Planarecurrently fundedthroughaTrustFund.AtJune30,1976,thedateofthePlan'smostrecentactuarial examination, theFund'sassetsatmarketwere$92.3millionandatcostwere$94.5million.Pensioncostswere(thousands ofdollars): 1972197319741975197B1977(a)$6,733$6,761$6,661$8,830$9,755$10,936(a)TwelvemonthsendedSeptember 30.BasedontheFund'sassetsatcost,atJune30,1976theactuarially computedunfundedpastservicecostwas$28.6million.AsofthesamedatevestedbenefitsexceededthecostbasisoftheFund'sassetsby$20.0million.Planamendments effective asofJuly1,1976,subjecttoInternalRevenueServiceapprovai, provideforincreased

benefits, reducedemployeecontributions andcertainotherminorchangestocomplywiththeEmployeeRetirement IncomeSecurityActof1974.Theseamendments increased theunfundedpastservicecostandvestedbenefitsbyabout$3.6million,andtheCompany's annualcostbyabout$1.0millioncommencing in1977,including amortization oftheincreased pastservicecostover20years.12.RENTALSANDNONCANCELLABLE LEASECOMMITMENTS Rentalswerechargedtooperating expenseinthefollowing amounts(thousands ofdollars):

197219731974197519791977(a)$6,279$7,515$8,911$9,477$10,502$11,002(a)TwelvemonthsendedSeptember 30.50

PENNSYLVANIA POWER&LIGHTCOMPANYNOTESTOFINANCIAL STATEMENTS -(Continued) AtSeptember 30,1977,theCompanywascommitted forminimumrentalstotaling$113.2millionundernoncancellable leasesexpiringatvariousdatesto1997.Theminimumrentalsareasfollows~(thousands ofdollars): After197719781979198919811982-1988 1987-1991 1992-1998 1998$6,586$8,083$7,754$7,554$7,208$28,188$24,681$21,156$2,039Theseminimumrentalcommitments areapplicable tothefollowing categories ofproperty: oilstoragefacilities, $54.7million;railroadcoalcars,$27.0million;combustion turbinegenerating equipment, $16.6million;computerequipment, $11.1million;andconstruction cranes,$3.8million.Generally theleasescontainrenewaloptionsandobligatetheCompanytopaymaintenance, insurance andotherrelatedcosts.Thepresentvalueoffutureminimumleasecommitments atSeptember 30,1977applicable tononcapitalized financing leases(asdefinedbytheSecurities andExchangeCommission) waslessthan5/eoftheCompany's capitalization, andtheimpactonnetincomefortheyears1975,1976andthetwelvemonthsendedSeptember 30,1977ifallnoncapitalized financing leaseswerecapitalized andamortized onastraight-line basiswithinterestaccruedonthebasisoftheoutstanding leaseliability, islessthan3/eoftheaveragenetincomeofthelatestthreeyears.13.ACQUISITION OnDecember31,1976theCompanyacquiredalloftheoutstanding capitalstockofHersheyElectricCompany(HEC),anelectricdistribution company.Theacquisition costofthecapitalstockandtherepayment ofalldebtowedbyHECapproximated $7.9million.14.SALEOF100/oOFSUSQUEHANNA PLANTReference ismadetoinformation appearing under"CONSTRUCTION PROGRAM"regarding agreements betweentheCompanyandAllegheny ElectricCooperative, Inc.(Allegheny) forthesaleofa10/eundivided ownership interestintheCompany's Susquehanna NuclearUnitsanddepositsreceivedfromAllegheny (amounting to$78.8millionatSeptember 30,1977)whicharesubjecttorefundifnecessary regulatory approvals ofthesalearenotreceivedbyMarch16,1978.15.COMMITMENTS ANDCONTINGENT LIABILITIES TheCompanyestimates thatabout$1.51billionwillberequiredtocompleteconstruction projectsinprogressattheendof1976.Ofthisamount,approximately $1.15billionisrelatedtocompletion oftheCompany's twonucleargenerating unitsatSusquehanna. Reference ismadetoadditional information appearing under"CONSTRUCTION PROGRAM", "BUSINESS -Environmental Matters"and"BUSINESS -FuelSupply(Oil)and(Nuclear)". 51 PENNSYLVANIA POWER&LIGHTCOMPANYNOTESTOFINANCIAL STATEMENTS -(Continued) Inconnection withproviding foritsfuturebituminous coalsupply,theCompanyatSeptember 30,1977hadguaranteed capitalandotherobligations ofcertaincoalsuppliers (including ownedcoalcompanies) aggregating $166.5million.See"BUSINESS -FuelSupply(Coal)".16.SUMMARYOFQUARTERLY RESULTSOFOPERATIONS (UNAUDITED) Quarterly earningscanbeinfluenced byweather,timingofraterelief,performance ofgene'rating

stations, salestootherutilities andotherfactorssuchasthosedescribed under"MANAGEMENT'S DISCUSSION ANDANALYSISOFTHESTATEMENT OFINCOME".Thefollowing issummaryquarterly datafortheyears1975and1976andthefirstthreequartersof1977(thousands ofdollars):

EarningsPerShareOfCommonStock(a)EarningsApplicable ToCommonStockOperating IncomeNetIncome$29,83326,74230,16834,226$18,22416,67719,46118,6700.670.460.700.85166,269149,281~.....149,580179,01725,18921,28130,42335,218auarterOperating EndedRevenues1975March31.$150,106$23,673$0.78,June30.128,98422,2480.65September 30.......................... 125,91725,5420.74December31........................... 139,12226,0780.701976March31.34,36017,781June30..28,00613,603.September 30.................... 35,24121,282December31(b)................. 40,72726,0771977March31208,89447,01740,11431,0661.00June30..173,29943,91235,54726,4980.79September 30(c)...................... 174,06748,91334,93625,8880.75(a)Quarterly earningspersharearebasedontheaveragenumberofsharesoutstanding duringthequarter.(b)Resultsforthefourthquarterof1976includeareduction inincometaxexpenseof$2.4millionduetoincreased taxdepreciation applicable toMartinsCreekUnitNo.4whichbegantestoperation December11,1976anda$2.1millionchargetoexpense(netofincometaxes)toadjusttheamortization ofdeferredfuelcostsfortheyears1970-1975 totheactualfueladjustment revenuesbilledduringthoseyears.(c)Netincomeforthethirdquarterof1977includesa$6.6million(netofincometaxes)loss($.20pershare)ofasubsidiary company.Foradditional information see"BUSINESS -FuelSupply(Coal)". PENNSYLVANIA POWER&LIGHTCOMPANYNOTESTOFINANCIAL STATEMENTS -(Continued) 17.REPLACEMENT COSTDATA(UNAUDITED) Incompliance withtherulesoftheSecurities andExchangeCommission (SEC),theCompanyhasestimated certainreplacement costinformation forutilityplantinserviceanddepreciation. TheCompanyhasnotincludedreplacement costdatafor-materials andsuppliesinventory sincetheamountoftheinventory isnotsignificant. Replacement costdatarelatingtofuelinventories havenotbeenincludedsincechangesincostlevelsarerecovered throughtheoperation offueladjustment clauses.Althoughthereplacement costdatadisclosed hereinhave,intheCompany's opinion,beenreasonably estimated inaccordance withrulesandinterpretations ofsuchrulespublished bytheSEC,theCompanybelievesthatinvestors shouldbeawareoftheimprecision andlimitations ofthisinformation andofthemanysubjective judgments requiredInthereplacement costestimation. Thereplacement costinformation isbasedonthehypothetical assumption thattheCompanywouldreplaceitsentireproductive capacityatDecember31,1976,whetherornotthefundstodosowereavailable orsuch"instant" replacement werephysically orlegallypossible. Thisassumption requiresthattheCompanycontemplate actionsatDecember31,1976thatordinarily wouldnotbeaddressed allatonetime.Accordingly, theinformation shouldnotbeinterpreted toindicatethattheCompanyactuallyhaspresentplanstoreplaceitsproductive capacityorthatactualreplacement wouldorcouldtakeplaceinthemannerassumedinestimating theinformation. Inthenormalcourseofbusiness, theCompanywillreplaceitsproductive capacityoveranextendedperiodoftime.Decisions concerning replacement willbemadeInlightoftheeconomics, availability offunds,fuelavailability, equipment availability, customerdemandandregulatory requirements existingwhensuchdeterminations aremadeandcoulddiffersubstantially fromtheassumptions onwhichthedataincludedhereinarebased.Thereplacement costdatapresented arenotnecessarily representative ofthe"currentmarketvalue"ofexistingfacilities orofthe"fairvalue"ofutilityplantasthattermisusedinrateproceedings beforethePUC.Thereplacement costinformation presented doesnotreflectalloftheeffectsofinflation ontheCompany's currentcostsofoperating thebusiness. TheCompanyhasnotattempted toquantifythetotalimpactofinflation, environmental andothergovernmental regulations (exceptassetforthbelow)andchangesinothereconomicfactorsonthebusinessbecauseofthemanyunresolved conceptual problemsandratemaking considerations involvedindoingso.Accordingly, itistheCompany's viewthatthereplacement costdatapresented hereincannotbeusedalonetodetermine thetotaleffectofinflation onreportednetincome.53

PENNSYLVANIA POWER&LIGHTCOMPANYNOTESTOFINANCIAL STATEMENTS-(Concluded) Thecomputedreplacement costoftheCompany's utilityplantinserviceandrelateddepreciation expensewithcomparative historical costdataareasfollows(millions ofdollars): ComputedReplacement CostUtilityplantinserviceatDecember31,1976Subjecttoreplacement costdetermination ........Land,plantheldforfutureuseandintangibles atoriginalcost.Totalplantinservice.. Lessaccumulated depreciation Netplantinservice............................ Depreciation expensefortheyear1976.................... $1,9861122,098459$1,639$62$4,3121124,4241,033$3,391$123Thereplacement costofcoal-fired andoil-fired steamstationcapability wasdetermined bytrendingtheconstruction costofthemostrecentlyinstalled units(800mwcapability range)andcomputing areplacement costperkwcapability oftheunits.ThiscostperkwwasappliedtotheCompany's respective coal-fired andoil-fired steamstationcapability todetermine thegrossreplacement costofsuchfacilities. Theoriginalinstalled costofhydroelectric, otherpowerproduction, transmission, distribution, andotherfacilities wastrendedtodetermine replacement cost.Thetrendindicesutilizedweredetermined bytheCompanyandarebelievedtobemorerepresentative ofthechangesinconstruction costsexperienced bytheCompanythanpublished indices.~Thereplacement costofcoal-fired steamstationswasbasedontheassumption thatsuchfacilities wouldbereplacedwithbituminous coal-fired units.Accordingly, basedoncurrenttechnology, thegrossreplacement costofutilityplantatDecember31,1976includesapproximately $500millionwhichtheCompanyestimates wouldhavetobeexpendedtoenablesuchfacilities tomeetparticulate andsulfurdioxideemissionregulations existingatDecember31,1976.Theaccumulated depreciation relatedtothereplacement costofproductive capacitywasdetermined byapplyingthesamepercentage relationship thatexistedbetweengrossutilityplantandaccumulated depreciation byfunctional groupsonahistorical basisatDecember31,1976tothecurrentreplacement costoftheproductive capacity. Replacement costdepreciation expensefortheyear1976wasdetermined onastraight-line basisbyapplyingthefunctional classdepreciation accrualratescurrently inusetotherespective functional classaveragereplacement costamounts.Suchamounthasbeencalculated inaccordance withSECinstructions anddoesnotrepresent anactualexpense.Withinthecontextofutilityratemaking procedures, thepurposeofbookdepreciation expense,asshownontheStatement ofIncome,lstoproviderecoveryofinvestedcapitaloverthelifeoftherelatedfacilities, andisnotintendedtoprovideafundequaltotheamountnecessary toreplacesuchfacilities atthecostlevelexistingatthetimeofreplacement. 54 PURCHASERS ThePurchasers namedbelowhaveseverally agreedtopurchasefromtheCompanythefollowing respective principal amountsofBonds.Purchaser Principal AmountPurchaser Principal AmountTotal.$100,000,000 55 HRVVVORS'. '"PBASYLVAMA '-'-~PENNSYLVANIA POWER6UGHTCOMPANYSERVICEAREAPKOSBtiPVAIRS W.VRtWSIlf~A4StACK t4scaaanw*4wsx~hl.p~IlsvsNhISRt;'thamsvaas,,".sssssvowts ~sNkSStSSVSS h~g4Nsswwv,'+-ttPENNSYI.VANA skNcsssss 8AvlshtKsI ~.GENERATING STATIONS VI' PARTII.INFORMATION NOTREQUIREDINPROSPECTUS. Item13.OtherExpensesofIssuanceandDistribution oftheBonds.Securities andExchangeCommission registration fee............................ Printingandengraving ..FeesandexpensesofTrustee,including counselandauthentication fees................ ~................ Legalfees.Accounting fees..Postage.................................................................................................... Ratingagencyfees.BlueSkyfeesandexpenses.Recording feesMiscellaneous.. Total$20,40065;00030,00027,5005,00020,00022,0004,5002,5003,100$200,000AlloftheaboveexcepttheSecurities andExchangeCommission registration feeareestimated. Item14.Relationship withRegistrant ofExpertsnamedinStatement. Reference ismadetothecaptions"Experts" and"LegalOpinions" intheProspectus. Item15.Indemnification ofDirectors andOfficers. ArticleVIIoftheBy-LawsoftheCompanyreadsasfollows:"Indemnification ofDirectors,

Officers, Etc.SzcrtoN7.01.Directors andOjgcers;ThirdPartyActions.Thecorporation shallindemnify anydirectororofficerofthecorporation whowasorisapartyoristhreatened tobemadeapartytoanythreatened, pendingorcompleted action,suitorproceeding, whethercivil,criminal, administrative orinvestigative (otherthananactionbyorintherightofthecorporation) byreasonofthefactthatheisorwasanauthorized representative ofthecorporation (which,forthepurposesofthisArticle,shallmeanadirector, officer,employeeoragentofthecorporation, orapersonwhoisorwasservingattherequestofthecorporation asadirector, officer,employeeoragentofanothercorporation, partnership, jointventure,trustorotherenterprise) againstexpenses(including attorneys'ees),

judgments, finesandamountspaidinsettlement actuallyandreasonably incurredbyhiminconnection withsuchaction,suitorproceeding ifheactedingoodfaithandinamannerhereasonably believedtobein,ornotopposedto,thebestinterests ofthecorporation, and,withrespecttoanycriminalactionorproceeding, hadnoreasonable causetobelievehisconductwasunlawful. Thetermination ofanyaction,suitorproceeding byjudgment, order,settlement, conviction, oruponapleaofnolocontendere oritsequivalent, shallnot,ofitself,createapresumption thatthepersondidnotactingoodfaithandinamannerwhichhereasonably believedtobein,ornotopposedto,thebestinterests ofthecorporation, and,withrespecttoanycriminalactionorproceeding, hadreasonable causetobelievethathisconductwasunlawful. SEGTIoN7.02.Directors andOjfieers; Derivative Actions.Thecorporation shallindemnify anydirectororofficerofthccorporation whowasorisapartyoristhreatened tobemadeapartytoanythreatened, pendingorcompleted actionorsuitbyorintherightofthecorporation toprocureajudgmentinitsfavorbyreasonofthefactthatheisorwasanauthorized representative ofthecorporation, againstexpcnscs(including attorneys'ees) actuallyandreasonably incurredbyhimin'onnection withthedefenseorsettlement ofsuchactionorsuitifheactedingoodfaithandina gt4 mannerhereasonably believedtobein,ornotopposedto,thebestinterests ofthecorporation andexceptthatnoindemnification shallbemadeinrespectofanyclaim,issueormatterastowhichsuchpersonshallhavebeenadjudgedtobeliablefornegligence ormisconduct intheperformance ofhisdutytothecorporation unlessandonlytotheextentthatthecourtofcommonpleasofthecountyinwhichtheregistered officeofthecorporation islocatedorthecourtinwhichsuchactionorsuitwasbroughtshalldetermine uponapplication that,despitetheadjudication ofliability butinviewofallthecircumstances ofthecase,suchpersonisfairlyandreasonably entitledtoindemnity forsuchexpenseswhichthecourtofcommonpleasorsuchothercourtshalldeemproper.SECTIoN7.03.Employees andAgents.Totheextentthatanauthorized representative ofthecorporation whoneitherwasnorisadirectororofficerofthecorporation hasbeensuccessful onthemeritsorotherwise indefenseofanyaction,suitorproceeding referredtoinSections7.01and7.02ofthisArticleorindefenseofanyclaim,issueormattertherein,heshallbeindemnified bythecorporation againstexpenses(including attorneys'ees) actuallyandreasonably incurredbyhiminconnection therewith. Suchanauthorized representative may,atthediscretion ofthecorporation, beindemnified bythecorporation inanyothercircumstances toanyextentifthecorporation wouldberequiredbySections7.01or7.02ofthisArticletoindemnify suchpersoninsuchcircumstances tosuchextentifhewereorhadbeenadirectororofficerofthecorporation. SEGTIoN7.04.Procedure forEgecringIndemnification. Indemnification underSections7.01,7.02or7.03ofthis'Article shallbemadewhenorderedbycourt(inwhichcasetheexpenses, including attorneys'ees, oftheauthorized representative inenforcing suchrightofindemnification shallbeaddedtoandbeincludedinthefinaljudgmentagainstthecorporation) andmaybemadeinaspecificcaseuponadetermination thatindemnification oftheauthorized representative isrequiredorproperinthecircumstances becausehehasmettheapplicable standardofconductsetforthinSections7.01or7.02ofthisArticle.Suchdetermination shallbemade:(1)Bytheboardofdirectors byamajorityvoteofaquorumconsisting ofdirectors whowerenotpartiestosuchaction,suitorproceeding, or(2)Ifsuchaquorumisnotobtainable, or,evenifobtainable amajorityvoteofaquorumofdisinterested directors sodirect,byindependent legalcounselinawrittenopinion,or(3)Bytheshareholders. SacTtoN7.05.Advancing Expenses. Expenses(including attorneys'ees) incurredindefending acivilorcriminalaction,suitorproceeding shallbepaidbythecorporation inadvanceofthefinaldisposition ofsuchaction,suitorproceeding, uponreceiptofanundertaking byoronbehalfofadirectororofficertorepaysuchamountunlessitshallultimately bedetermined thatheisentitledtobeindemnified bythecorporation asrequiredinthisArticleorasauthorized bylawandmaybepaidbythecorporation inadvanceonbehalfofanyotherauthorized representative whenauthorized bytheboardofdirectors uponreceiptofasimilarundertaking. SEGTIQN7.06.ScopeofArticle.Eachpersonwhoshallactasanauthorized representative ofthecorporation, shallbedeemedtobedoingsoinrelianceuponsuchrightsofindemnification asareprovidedinthisArticle.Theindemnification providedbythisArticleshallnotbedeemedexclusive ofanyotherrightstowhichthoseseekingindemnification maybeentitledunderanyagreement, voteofshareholders ordisinterested directors, statuteorotherwise, bothastoactioninhisofficialcapacityandastoactioninanothercapacitywhileholdingsuchofficeorposition, andshallcontinueastoapersonwhohasceasedtobeanauthorized representative ofthecorporation andshallinuretothebenefitoftheheirs,executors andadministrators ofsuchaperson."Directors andofficersoftheCompanymayalsobeindemnified incertaincircumstances pursuanttothestatutory provisions ofgeneralapplication contained inthePennsylvania BusinessCorporation Law. ]t Insofarasindemnification forliabilities arisingundertheSecurities Actof1933maybepermitted todirectors, officersandcontrolling personsoftheCompanypursuanttotheforegoing provisions, orotherwise, theCompanyhasbeeninformedthatintheopinionoftheSecurities andExchangeCommission suchindemnification isagainstpublicpolicyasexpressed intheActandis,therefore, unenforc'cable. Intheeventthataclaimforindemnification againstsuchliabilities (otherthanthepaymentbytheCompanyofexpensesincurredorpaidbyadirector, officerorcontrolling personoftheregistrant inthesuccessful defenseofanyaction,suitorproceeding) isassertedbysuchdirector, officerorcontrolling personinconnection withthesecurities beingregistered, theCompanywill,unlessintheopinionofitscounselthematterhasbeensettledbycontrolling precedent, submittoacourtofappropriate jurisdiction thequestionwhethersuchindemnification byitisagainstpublicpolicyasexpressed intheActandwillbegovernedbythefinaladjudication ofsuchissue.Reference isalsomadetotheFormofBid,including TermsofPurchase, filedasExhibit1(b)hereto,whichcontainsprovisions forindemnification oftheCompanyanditsdirectors andofficersbytheseveralPurchasers. againstcertaincivilliabilities forinformation furnished bythePurchasers.. TheCompanypresently hasaninsurance policywhich,amongotherthings,includesliability insurance coverageforofficersanddirectors, witha$20,000deductible clause,underwhichofficersanddirectors arecoveredagainstany"loss"byreasonofpaymentofdamages,judgments, settlements andcosts,aswellaschargesandexpensesincurredinthedefenseofactions,suitsorproceedings. "Loss"isspecifically definedtoexcludefinesandpenalties,'s wellasmattersdeemeduninsurable underthelawpursuanttowhichtheinsurance policyshallbeconstrued. Thepolicyalsocontainsotherspecificexclusions, including illegally obtainedpersonalprofitoradvantage, anddishonesty. Thepolicyalsoprovidesforreimbursement totheCompanyforlossincurredbyhavingindemnified officersordirectors asauthorized bystatestatute,companyby-laws,oranyotheragreement. Item16.Treatment ofProceedsfrom StocktobcRegistered. Inapplicable. Item17.OtherDocuments FiledasaPartofrheRegistration Srafement. (a)Statements ofeligibility andqualification ofpersonsdesignated toactastrusteeunderanindenture tobequalified undertheTrustIndenture Actof1939.Statement onFormT-1ofMorganGuarantyTrustCompanyofNewYork.(b)Exhibits. Incorporation byReference ExhibitNo.1(a)1(b)l(c)2(a)-1-PublicInvitation forBidstogetherwithState-mentofTerms&,Conditions relatingtoBids-FormofBid,including TermsofPurchase-FormofAgreement AmongPurchasers (TobefiledbyPost-Effective Amendment) -FormofFirstMortgageBond,due2007PreviousFilingPreviousExhibitDesignation 2(a)-2-CopyofRestatedArticlesofIncorporation, asamended IYg~l1 Incorporation byReference ExhibitNo.2(a)-32(a)-42(a)-5-CopyofBy-laws-MortgageandDeedofTrust,datedasofOctoberI,1945,betweentheCompanyandGuarantyTrustCompanyofNewYork(nowMorganGuarantyTrustCompanyofNewYork),asTrustee-Supplement, datedasofJulyI,1947,tosaidMortgageandDeedofTrustPreviousFilingRegistration Statement (No.2-58290)Registration Statement (No.2;5872)PreviousExhibitDeslgnatton2(a)-37(c)2(a)-6-Supplement, datedasofDecemberI,1948,tosaidMortgageandDeedofTrust2(a)-7-Supplement, datedasofFebruaryI,1950,tosaidMortgageandDeedofTrust'2(a)-8-Supplement, datedasofMarchI,1953,tosaidMortgageandDeedofTrust.2(a)-9'2(a)-10-Supplement, datedJulyI,1954,tosaidMort-gageandDeedofTrust-Supplement, datedasofAugustI,1955,tosaidMortgageandDeedofTrust~Registration Statement (No.2-19255)2(b)-5'2(a)-112(a)-122(a)-13-Supplement, datedasofDecemberI,1961,tosaidMortgageandDeedofTrust-Supplement, datedasofMarchI,1964,tosaidMortgageandDeedofTrust-Supplement, datedasofJuneI,1966,tosaidMortgageandDeedofTrustRegistration Statement (No.2-19255)2(b)-72(a)-14-Supplement, datedasofNovemberI,1967,tosaidMortgageandDeedofTrust2(a)-15-Supplement, datedasofDecemberI,1967,tosaidMortgageandDeedofTrust2(a)-16-Supplement, datedasofJanuaryI,1969,tosaidMortgageandDeedofTrust2(a)-17-Supplement, datedasofJuneI,1969,tosaidMortgageandDeedofTrust2(a)-18-Supplement, datedasofMarchI,1970,tosaidMortgageandDeedofTrust2(a)-19-Supplement, datedasofFebruaryI,1971,tosaidMortgageandDeedofTrust2(a)-20-Supplement, datedasofFebruaryI,1972,tosaidMortgageandDeedofTrust w~lllNlty'l*epf11xk Incorporation byReference ExhibitNo.2(a)-21-Supplement, datedasofJanuary1,1973,tosaidMortgageandDeedofTrustPreviousFilingPreviousExhibitDesignation 2(a)-22l-Supplement, datedasofMay1,1973,tosaidMortgageandDeedofTrust2(a)-23-Supplement, datedasofApril1,1974,tosaidMortgage.and DeedofTrust2(a)-24-Supplement, datedasofOctober1,1974,tosaidMortgageandDeedofTrust2(a)-25-Supplement, datedasofMay1,1975,tosaidMortgageandDeedofTrust2(a)-262(a)-272(a)-282(a)-29'2(a)-30, '2(a)-310(a)-322(a)-33-Supplement, datedasofNovember1,1975,tosaidMortgageandDeedofTrust-Supplement, datedasofDecember1,1976,tosaidMortgageandDeedofTrust-ProposedSupplement, tobedatedasofDecember1,1977,tosaidMortgageandDeedofTrust-MortgageandDeedofTrust,datedasof.February15,1937,betweenTheScrantonElec-tricCompany(towhichcompanytheCompanyissuccessor bymerger)andChemicalBank&TrustCompany(nowChemicalBank)andHowardB.Smith(P.J.Gilkeson, successor), asTrustees-Supplement, datedasofNovember1,1946,tosaidMortgageandDeedofTrust-Supplement, datedasofApril1,1948,tosaidMortgageandDeedofTrust-Supplement, datedasofMay15,1952,tosaidMortgageandDeedofTrust-Supplement, datedasofSeptember 1,1952,tosaidMortgage'and DeedofTrustRegistration Statement (No.2-54831)Registration Statement (No.2-57633)Registration Statement (No.2-6289)Form1-MD,Registration Statement (No.2-6289)2(a)-262(a)-26DB-12(a)-34-Supplement, datedasofJanuary31,1956,tosaidMortgageandDeedofTrust2(a)-352(a)-362(a)-37-Supplement, datedJanuary31,1956,tosaidMortgageandDeedofTrust-Instrument providing forresignation ofIndivid-ualTrusteeandappointment ofsuccessor Indi-vidualTrusteeundersaidMortgageandDeedofTrust-Instrument providing forresignation ofIndivid-ualTrusteeandappointment ofsuccessor Indi-vidualTrusteeundersaidMortgageandDeedofTrustRegistration Statement (No.2-19255)2(d)-6 Incorporation byReference ExhibitNo.2(a)-382(a)-392(a)-402(a)-412(a)-423(a)3(b)3(c)4(a)4(b)S(a)5(b)5(c)5(c)-1'5(c)-25(d)-Instrument providing forresignation ofIndivid-ualTrusteeandappointment ofsuccessor Indi-vidualTrusteeundersaidMortgageandDeedofTrust-LoanAgreement datedFebruary9,1973,be-tweentheCompanyandTheChaseManhattan Bank,N.A.-Preferred StockPurchaseAgreement, datedJuly11,1973,betweentheCompanyandThePrudential Insurance CompanyofAmerica-Preference StockPurchaseAgreement, datedSeptember 22,1975,betweentheCompanyandAlcoStandardCorporation -Composite Conformed CopyofPreferred StockPurchaseAgreement, datedOctober11,1977,betweentheCompanyandthepurchasers namedtherein-OpinionofEdwardM.Nagel,Esq.,withrespect'olegalityofsecurities beingregistered here-under-OpinionofMessrs.Reid&Priestwithrespecttolegalityofsecurities beingregistered hereunder -ConsentofPaulWeirCompanyIncorporated -ArticleVIIoftheCompany's By-Laws,relatingtoindemnification ofdirectors andofficers, issetforthinItem15,towhichreference isherebymade-CopyofMemorandum ofExcessLiability In-surance,datedDecember31,1972,CoveringExcessPublicLiability &PropertyDamage,including ErrorsandOmissions, EmployeeBen-efitsandDirectors andOfficersLiabthty-CopyofCoalSalesAgreement, datedJanuary1,1972,betweentheCompanyandGreenwich Collieries Company-CopyofInterconnection Agreement, datedFebruary23,1965,betweenPublicServiceElectric&GasCompanyandtheCompany-CopyofInterconnection Agreement, datedFebruary19,1965,betweenPhiladelphia Elec-tricCompanyandtheCompany-CopyofSupplemen'tal Agreement, datedJan-uary27,1967,tosaidInterconnection Agree-ment-CopyofSupplemental Agreement, datedOcto-ber20,f969,tosaidInterconnection Agreement -CopyofInterconnection Agreement, datedApril9,1974,betweenNewYorkPowerPoolGroupandPennsylvania-New Jersey-Maryland GroupPreviousFilingRegistration Statement (No.2-58290)Form8-K,July1973(DocketNo.1-905)Form8-K,August1973(DocketNo.1-905)Form8-K,September 1975(DocketNo.1-905)Registration Statement (No.2-51907)Registration Statement (No.2-42777)Registration Statement (No.2-26170)Registration Statement (No.2-26170)Registration Statement (No.2-26170)Registration Statement (No.2-35654)Registration Statement'No. 2-51907)PreviousExhibitDesignation 2(a)-37AA4(b)5(b)13(a)13(b)13(b)-15(c)-25(e) Incorporation byReference ExhibitNo.5(e)5(e)-15(e)-25(e)-35(e)-45(e)-55(f)'5(f)-15(f)-25(g)5(h)5(i)5(j)5(k)-CopyofInterconnection Agreement, datedSeptember 26,1956,amongPublicServiceElectric&GasCompany,Philadelphia ElectricCompany,theCompany,Baltimore Gas&ElectricCompany,Pennsylvania ElectricCom-pany,Metropolitan EdisonCompany,NewJerseyPower&LightCompanyandJerseyCentralPower&LightCompany-CopyofSupplemental Agreement, datedJan-uary28,1965,tosaidInterconnection Agree-ment-CopyofSupplement entitled"Appendix AMe-terLocations", datedJuly28,1972,tosaidInterconnection Agreement -CopyofSupplemental Agreement, datedApril1,1974,tosatdInterconnection Agreement -CopyofSchedule5.03,effective forfilingAu-gust1,1974,tosaidInterconnection Agreement -CopyofSupplemental Agreement, datedJune15,1977,tosaidInterconnection Agreement -CopyofConowingo Backwater Agreement, datedFebruary20,1926,amongPennsylvania Water&PowerCompany(towhichcompanytheCompanyissuccessor bymerger),theSusquehanna PowerCompany,theSusque-hannaElectricCompany,andPhiladelphia ElectricCompany-CopyofSupplemental LetterAgreement, datedMarch1,1976,tosaidConowingo Backwater Agreement -CopyofSupplemental LetterAgreement, datedAugust5,1977,tosaidConowingo Backwater Agreement -CopyofPowerSupplyContract, datedasofJune1,1955,amongBaltimore Gas&ElectricCompany,theCompany,andSafeHarborWaterPowerCorporation -CopyofAgreement onthe'scheduling anddispatching ofSafeHarborandHoltwoodProj-ects,datedasofJune1,1955,amongSafeHarborWaterPowerCorporation, Baltimore Gas&ElectricCompanyandtheCompany-CopyofTransmission

Contract, datedasofJuly20,1960,amongtheCompany,SafeHarborWaterPowerCorporation andBaltimore Gas&ElectricCompany-Memorandum ofAgreement regarding Key-stoneElectricGeherating Station,datedDecember7,1964,betweentheCompanyand'tlanticCityElectricCompanyetal.-KeystoneOperating Agreement, datedDecem-ber1,1965,betweenPennsylvania ElectricCompanyandtheCompanyetal.PreviousFiling,Registration Statement

~(No.2-26170)Registration Statement (No.2-51907)Registration Statement (No2-51312)Registration Statement (No2-52931)Registration Statement (No.2-4254)Registration Statement (No.2-57633)Registration Statement (No.2-14608)Registration Statement (No.2-14608)Registration Statement (No.2-26170)PreviousExhibitDesignation 13(d)-15(f)-25(f)-45(e)-1I-145(g)-113(o)13(I)13(h) Incorporation byReference ExhibitNo.5(1)5(m)5(m)-15(n)5(n)-15(o)5(p)-15(p)-25(p)-3'5(p)-45(p)-55(p)-65(p)-75(p)-85(q)5(q)-I5(q)-25(q)-35(tl)-4-Memorandum ofOwners'greement Regard-ingConemaugh SteamElectricStation,datedAugust1,'1966,betweentheCompanyandAtlanticCityElectricCompanyetal.-Conemaugh Operating Agreement, datedDecember1,1967,betweenPennsylvania Elec-tricCompanyandtheCompanyetal.-Supplement No.1,datedJune4,1969,tosaidConemaugh Operating Agreement -CopyofInterconnection Agreement, datedMay31,1968,betweenPennsylvania ElectricCom-panyandtheCompany'CopyofAppendixB,Revision2,datedOctober1,1971,tosaidInterconnection Agreement -CopyofInterconnection Agreement, datedAu-gust1,1935,betweenLuzerneCountyGas&ElectricCorporation (nowUGICorporation) andtheCompany-CopyofSupplemental Agreement, datedJune1,1960,tosaidInterconnection Agreement -CopyofAmendment tosaidSupplemental Agreement, datedJanuary31,1968,tosaidInterconnection Agreement -CopyofAmendment tosaid,Supplemental Agreement, datedFebruary6,1969,tosaidInterconnection Agreement -CopyofAmendment tosaidSupplemental Agreement, datedMarch27,1970,tosaidInterconnection Agreement -CopyofAmendment tosaidSupplemental Agreement, datedOctober10,1972,tosaidInterconnection Agreement -CopyofAmendment tosaidSupplemental Agreement, datedMay1,1973,tosaidInter-connection Agreement -CopyofSupplemental Agreement, datedDecemberll,1974,tosaidInterconnection Agreement -CopyofSupplemental Agreementdated April22,1975,tosaidInterconnection Agreement -CopyofInterconnection Agreement, datedApril26,1965,betweenWestPennPowerCompanyetal.andtheCompanyetal.-CopyofSchedule7.01,issuedMay4,1967,tosaidInterconnection Agreement -CopyofSchedule1.05,issuedDecember22,1971,tosaidInterconnection Agreement -CopyofSchedules 1.06,5.02,6.02and9.01,datedNovember14,1974,tosaidInter-connection Agreement --'CopyofSchedule4.03,issuedFebruary', 1976,tosaidInterconnection Agreement PII-8PreviousFilingRegistration Statement (No.2-30918)Registration Statement (No.2-42013)Registration Statement (No.2-26170)Registration Statement (No.2-26170)Registration Statement (No.2-33042)Registration Statement (No.2-33042)Registration Statement (No.2-38149)Registration Statement (No.2-46508)Registration St'atement (No.2-49227)Registration Statement (No.2-52693)Registration Statement (No.2-52931)Registration Statement (No.2-26170)Registration Statement (No.2-30918)Registration Statement (No.2-50488)'egistration Statement (No.2-52693)Regist'ration Statement (No.2-56389)PreviousExhibitDesignation 4(j)5(k)-I13(j)\13(j)-I5(k)-25(k)-35(1()-45(1)-55(1)-713(k)'5(m)-25(m)-35(m)-4 -~J<<,<<"I'<<<<l<<1<<'r/<<//<</~<<II<<<<1*1<<<<Ih Incorporation byReference ExblbltNo5(q)-5'5(r)5(r)-15(r)-25(s)5(s)-15(s)-25(t).5(t)-15(t)-25(t)-35(t)-45(t)-55(t)-65(t)-75(t)-85(t)-95(t)-105(t)-115'(u)PreviousFilingRegistration Statement (No.2-57633)'Registration Statement (No.2-26170)-CopyofSchedule7.03,datedAugust16,1976,tosaidInterconnection Agreement -CopyofInterconnection Agreement, datedSeptember 30,1965,betweenTheCleveland ElectricIlluminating CompanyandtheCom-panyetal.-CopyofSchedule8.02,issuedMarch24,1975,;tosaidInterconnection Agreement -CopyofSchedules 1.02,4.02,5.02,6.02,7.02and9.01,datedNovember12,1975tosaidInterconnection Agreement -CopyofInterconnection Agreement, datedSeptember 30,1965,betweenVirginiaElectricandPowerCompanyandtheCompanyetal.-CopyofSchedule7.01,issuedJune2Q,1967,tosaidInterconnection Agreement -CopyofSupplemental Agreement, datedSeptember 1,1976,tosaidInterconnection Agreement -CopyofInterconnection Agreement, datedOctober30,1964,betweenMetropolitan EdisonCompanyandtheCompany-CopyofSupplemental Agreement, datedSeptember 29,1967,tosaidInterconnection Agreement -CopyofSupplemental Agreement, datedMay20,1968,tosaidInterconnection Agreement -"CopyofSupplemental Agreement, datedOcto-ber4,1968,tosaidInterconnection Agreement -CopyofSupplemental Agreement," datedNovember22,1968,tosaidInterconnection Agreement -CopyofSupplemental Agreement, datedJune26,1970,tosaidInterconnection Agreement -CopyofAppendixB,Revision9,datedMay25,1971,tosaidInterconnection Agreement -CopyofSupplemental Agreement, datedJune21,1974,tosaidInterconnection Agreement -CopyofRevisiontoAppendixC,datedSeptember 10,1974,tosaidInterconnection Agreement -CopyofRevisiontoAppendixC,datedOctober30,1974,tosaidInterconnection Agreement -CopyofRevisiontoRateSchedule, datedApril28,1975,tosaidInterconnection Agreement -CopyofSupplemental Agreement, datedApril5,1976,tosaidInterconnection Agreement -CopyoftheExtraHighVoltageTransmission SystemAgreement, datedApril27,1967,be-tweentheCompanyandPublicServiceElectric4GasCompany,etal.Registration Statement (No.2-52931)Registration Statement (No.2-56389)Registration Statement (No.2-26170)Registration Statement (No.2-30918)Registration Statement (No.2-57633)Registration Statement (No.2-26170)Registration Statement (No.2-30918),Registration Statement (No.2-30918)Registration Statement (No.2-30918)Registration Statement (No.2-33Q42)Registration Statement (No.2-38149)Registration Statement (No.2-40765)Registration Statement (No.2-51907)Registration Statement (No.2-52693)Registration Statement (No.2-52693)Registration Statement (No.2-52931)Registration Statement (No.2-56389)Registration Statement (No.2-30918)PreviousExblbltDeslgnstion 5(m)-513(1)5(n)-25(n)-213(m)4(n)-15(o)-213(n)4(o)-14(o)-24(o)-35(o)-45(o)-65(1)-65(p)-105(p)-115(p)-125(p)-135(p)-114(p) IIfI ExhibitNo.5(u)-15(u)-25(u)-35(u)-45(G)-55(u)-65(u)-75(v)5(w)5(w)-15(x)5(y)5(y)-15(y)-25(y)-35(y)-45(z)S(aa)-CopyofSchedule13.02,issuedMarch26,1969,inconnection withsaidAgreement -CopyofSupplemental Agreement, datedOcto-ber17,1969,tosaidAgreement -CopyofOperating andMaintenance Agree-ments,datedasofFebruary1,1970,incon-nectionwithsaidAgreement -CopyofSchedules 11.04and12.03,issuedJuly16,1971,inconnection withsaidAgreement -CopiesofRevisions toScheduleA,issuedJan-uary1,1975andMay1,1975,tosaidSchedule12.03-CopyofSupplemental Agreement, datedMay17,1972,tosaidAgreement -CopyofSchedules 2.03,3.03,4.03,6.02and8.04,issuedJuly29,1976,tosaidAgreement -CopyoftheSusquehanna-Eastern 500KVTransmission SystemAgreement, dateasofApril30,1976,betweentheCompanyandPublicServiceElectricandGasCompany,etal.-CopyofMid-Atlantic AreaCoordination Agreement, datedApril23,1971,betweentheCompanyandAtlanticCityElectricCompany,etal.-CopyofAgreement onCoordinated ProgramforReduction inEnergyUse,datedApril1,1977,betweentheCompanyandAtlanticCity.ElectricCompany,etal.-Copyof115KVSeward-Conemaugh Inter-connection Facilities Agreement, datedMarch2,1970,betweenPennsylvania ElectricCom-panyandtheCompany,etal.-PipelineSystemContract, datedasofJune22,1972,betweentheCompanyandGulfInterstate Engineering Company-CopyofAmendment, datedasofNovember1,~1973,tosaidPipelineSystemContract-CopyofAmendment, datedasofJanuary23,1974,tosaidPipelineSystemContract-CopyofAmendment, datedasofJanuary1,1975,tosaidPipelineSystemContract-CopyofAmendment, datedasofJanuary1,1976,tosaidPipelineSystemContract-Pollution ControlFacilities Agreement, datedasofMay1,1973,betweentheCompanyandtheLehighCountyIndustrial Development Au-thority-CopyofPetroleum ProductSalesAgreement forthesaleofresidualoil,datedasofJanuary1,1975,betweentheCompanyandAmeradaHessCorporation Incorporation byReference PreviousFilingRegistration Statement (No.2-33042)Registration Statement (No.2-35654)Registration Statement (No.2-38149)PreviousExhibitDesignation 5(p)-15(1)-35(p)-4Registration Statement (No.2-42013)Registration Statement (No.2-54831)Registration Statement (No.2-45713)Registration Statement (No.2-57633)Registration Statement (No.2-57633)5(q)-45(q)-55(q)-55(q)-75(r)Registration Statement (No.2-40765)5(r)Registration Statement (No.2-38149)5(r)Registration Statement (No.2-51907)Registration Statement (No.2-51901)Registration Statement (No.2-54831)Registration Statement (No.2-5290)Form8-K,May1973(DocketNo.1-905)5(u)-15(u)-25(u)-35(t)-4~ARegistration Statement (No.2-54299). 5(y)Registration Statement 5(u)(No.2-45713) h:s'htI Incorporation byReference ExhibitNo.5(bb)5(cc)5(dd)5(dd)-16(a)6(b)-CopyofAgreement, datedasofJanuary1,1977,betweentheCompanyandAsiaticPetro-leumCorporation forthesaleofoil,-CopyofAgreement, datedasofMarch24,1977,betweentheCompanyandSunOilCom-panyofPennsylvania -CopyofParticipation Agreement, datedasofMarch18,1977,betweentheCompanyandAllegheny ElectricCooperative, Inc.-CopyofSecondTermination Agreement, datedSeptember 16,1977,betweentheCompanyandAllegheny ElectricCooperative, Inc.-Computation ofRatioofEarningstoFixedCharges-ActualandProForma-Supplemental Computation ofRatioofEarn-ingstoFixedCharges-ActualandProForma-Calculation ofAllocation ofAllowance forFundsUsedDuringConstruction Attributable toFundsProvidedbyCommonStockEquityPreviousFilingRegistration Statement (No.2-5290)Registration Statement (No.2-58290)PreviousExhibitDesignation 5(w)5(y) SIGNATURES Pursuanttotherequirements oftheSecurities Actof1933,theregistrant hasdulycausedthisregistration statement tobesignedonitsbehalfbytheundersigned, thereunto dulyauthorized, intheCityofAllentown, andCommomvealth ofPennsylvania, onthe11thdayofNovember, 1977.PENNsYLYANIA PowER&LIGHTCoMPANYBy/s/JACKK.BUsBYJackK.Busby,ChairmanoftheBoardAndChiefExecutive OllicerPursuanttotherequirements oftheSecurities Actof1933,thisregistration statement hasbeensignedbelo>vbythefollowing personsinthecapacities indicated onthe11thdayofNovember, 1977.Signature /s/JAGKK.BvsBYJackK.Busby,ChairmanofthcBoardandChiefExecutive.OIIlccr Title~Principal Executive ,Officer/s/R.R.FoRTUNER.R.Fortune,Executive VicePresident-Financial Principal Financial andAccounting OScerRALPHR.CRANMER,EDGARL.DESSEN,R.R.FORTUNQHARRYA.JENsEN,W.DEMINGLEwis,JoltNA.NoBI.E,NORMANROBERTSON, JOSEPHT.SIMPSONANDCHARLESH.WATrsIIDirectors By/s/JACKK.BUsBYJackK.Busby,Attorney-in-fact 9V4 CONSENTOFINDEPENDENT CERTIFIED PUBLICACCOUNTANTS PENNSYLVANIA POWER&LIGHTCOMPANY:WeherebyconsenttotheuseinthisRegistration Statement ofouropiniondatedFebruary3,1977appearing intheProspectus whichisapartofsuchRegistration Statement, andtothereferences tousunder"Statement ofIncome"and"Experts" insuchProspectus. HASKINs&SELLSNewYork,NewYorkNovember11,1977(TheconsentsofEdwardM.Nagel,Esq.,Messrs.Reid&PriestandPaulWeirCompanyIncorporated arefiledasExhibits3(a),3(b)and3(c),respectively, totheRegistration Statement.) IIIt EXHIBIT6(a)PENNSYLVANIA POWER4LIGHTCOMPANYCOMPUTATION OFRATIOOFEARNINGSTOFIXEDCHARGESACTUALANDPROFORMA(Thousands ol'ollars) YearEndedDecember31,TwelveMonthsEndedSeptember 30,197719721973197419751976ActualAdjust-PromentsFormaFixedcharges,asdefined:Interestonlong-term debt.............................. Interestonshort-term debt............................. Otherinterestcharges........,...,....,.........,..... Amortization ofdebtdiscountexpenseandprcmium-net.. Estimated interestcomponent ofrentals.......Totalfixedcharges..........................

Earnings, asdefined:Netincome..Undistributed (earnings) orlossesofsub-'idiarycompanies......................................;

Add(Deduct): Federalincometaxes.............................. Stateincometaxes................................... Deferredincometaxes...................:........ Chargeequaltoinvestment taxcredit,lessamortizauon ................................. Incometaxesonotherincomeandde-ductions-net ......,..........,..........:--. Totalfixedchargesasabove.................. Totalearnings.................................. Ratioofearningstofixedcharges......................... Ratioofearningstofixedchargesexcluding $4,162Nonrecurring Creditand$4,831,re-lateddeferredincometaxesin1974.................. $36,5Q?$43,2Q3$51,149$67,932$79,783$88,6713,846',7909,5626,2287,1345,426991143433880413$10,805(1) $99,476986(2)641241381241'903,7024,9566,0546,354$44,162$53,075$67,149$80,7422562996,4597,565$93672$102374$11,7912997,565$114,165(562)57,92166,350(30)(102)87,44997,4392,1747,804114,285153,619(5,549)7,804148,07012,5825,5202,82916,4546,2075,73712,55422,5473,8588,22124,093(a) 3,5426566,7668,74522,03013,88010,928(5,122)(1,120)16,90812,76010,9285,1555,5453,53712,98827,66138,50738,507(334)(91)44,16253,075$127,835$153,2772.892.89(5,076)67,149$193,5642.88(11/01)80,742$214,2782.65(14,457)(14,579)93,672102,37411,791$237,3282.53$326,7593.19(14,579)114,165$326,7592.862.75$57,921$66,912$&7,479$97,541$112,111$145,815$(5,549)$140,266(a)Includes$4,831defeircdincometaxesapplicable toNonrecurring Credit.Adjustments: (I)Annualinterestrequirement on$100,000,000 principal amountofBonds(assumedinterestrate88/2%)........................................ Additional interestrequirement on$150,000,000 principal amountof88/4%ScricsBondsdueDecemberI,2006issuedDecember21,1976..Lessaccruedinterestrequirement on$8,000,000 principal amountof2F6%FirstMortgageBondsretiredNovemberI,1976.....Lessaccruedinterestrequirement on$500,000principal amountof45%Polluriion ConuolSeriesABondsretiredMayI,1977Lessaccruedinterestrequirements on$20,000,000 principal amountof2'/4%FirstMortgageBondsretiredJulyI,1977............. $8,5002,750(19)(13)(413)$10,805(2)Annualintereston$95,000,000 principal amountofcommercial papernotes(assumedinterestrate-6'4%) assumedtobeoutstanding duringthetwclvcmonthsendedSeptember 30,1978.............................................. $6,412Lessactualinterestoncommercial papernotesandbankloansoutstanding duringperiod.................. (5,426)$986 EXHIBIT6(b)PENNSYLVANIA POWER4LIGHTCOMPANYSUPPLEMENTAL COMPUTATION OFRATIOOFEARNINGSTOFIXEDCHARGESACIUALANDPROFORMA(Thousands ofDollars)TwelveMonthsEndedSeptember 30,19771972197319741975YearEndedDecember31,1976ActualAdjust-PromentsformaFixedcharges,asdefined:Intcrcstonlong-term debt.............................. Interestonshort-term debt............................. Otherinterestcharges..................................... Amortization ofdebtdiscount, expenseandpremium-net.Estimated interestcotnponent ofrentals.......Fixedchargesofownedorcontrolled com-paniesapplicable tototalenterprise .......... Totalfixedcharges.......................... $36,5073,84699$43,2034,79011483,702124,9563,8736,310$48,035$59,385$51,149$67,9329,5626,22834338$79,7837,13480$88,6715,426413411906,0546,3542566,4192997,5659,60012,00219,28418,307$76,749$92,744$112,956$120,8812997,565$11,79118,507$132,6720$10,805(1) $99,476986(2)6,412413Earnings, asdefined:Nctincome.Add(Deduct): Federalincometaxes,.......,....,......,............. Stateincometaxes..Deferredincometaxes.................................... Chargeequaltoinvestment taxcredit,lessamortization ..Incometaxesonotherincomeanddeduc-tions-net. Totalfixedchargesasabove.......................... Totalearnings.... Ratioofearningstofixedcharges.....Ratioofearningstohxedchargesexduding$4,162Nonrecurring Creditand$4,831re-lateddeferredincometaxesin1974.................. 12,5825,5202,82916,4546,2075,73712,55422,5473,8588,22124,093(a) 3,5426566,7668,74522,03013,88010,928(5,122)(1,120)16,90812976010,9285,1555,5453,53712,98827,66138,50738,507(334)48,035$131,7082.74(91)59,385$160,1492.70(5,076)76,7498203.1942.63(11,201)92,744$226,3822.44(14,457)(14,579)112,956120,88111,791$254,438$337,4622.252.79(14,579)132,672$337,4622.542.53$57,921$66,912$87,479$97,541$112,111$145,815$(5,549)$140,266(a)Includes$4,831deferredincometaxesapplicable toNonrecurring Credit.Adjustments: (I)Annualinterestrequirement on$100,000,000 principal amountofBonds(assumedinterestrate-85).................................. Additional interestrequirement on$150,000,000 principal amountof88/0%SeriesBondsdueDecemberI,2006issuedDecember21,1976.Lessaccruedinterestrequirement on$8,000,000 principal amouritof2V0%FirstMortgageBondsretiredNovemberI,1976..Lessaccruedinterestrequirement on$500,000principal amountof48/2%Pollution ControlSeriesABondsretiredMayI,1977.Lessaccruedinterestrequirements on$20,000,000 principal amountof2'/0%FirstMortgageBondsretiredJulyI,1977...... (2)Annualintereston$95,000,000 principal amountofcommercial papernotes(assumedinterestrate-6'/0%) assumedtobeoutstanding duringthetwelvemonthsendedSeptember 30,1978.Lessactualinterestoncommercial papernotesandbankloansoutstanding duringperiod.................................................. $8,5002,750(19)(13)(413)$10,805$6,412(5,426)$986 EXHIBIT7PENNSYLVANIA POWER&LIGHTCOMPANYALLOCATION OFPORTIONOFALLOWANCE FORFUNDSUSEDDURINGCONSTRUCTION (ALLOWANCE) ATIIBUTABLE TOFUNDSPROVIDEDBYCOMMONSTOCKEQUITYForPeriodsPriortoJanuary1,1977IncludedintheStatement ofIncome(Thousands ofDellars)Capitalization Incremental Ratios(a) Rate(b)Equivalent Allocation of'ate(c)'llowance EarningsApplicable toCommonStockPortionofAllowance Attributable toCommonStockEquityasaPercentage ofEarningsApplicable toCommonStockThreemonthsendedDecember31,1976Long-Term Debt................................. Preferred andPreference Stock.......... CommonStockEquity........................ 51%18314.64%2.37%9.991.803.717.88%$4,1623,1616,516$13,839$26,07725%1976Long-Term Debt,,....,....,...,.... Preferred andPreference Stock.... CommonStockEquity.................. 51%18314.65%2.37%$13,50610.281.8510,5433.7121,1437.93%$45,192$78,74327%1975Long-Term Debt........................... Preferred andPreference Stock.... CommonStockEquity.................. 51%18314.67%2.38%13.312AO3.568.34%$10,44610,53415,625$36,605$73,03221%1974Long-Term Debt........................... Preferred andPreference Stock.... CommonStockEquity.................. 1973Long-Tenn Debt............................. Preferred andPrcferencc Stock...... CommonStockEquity.................... 51%183151%18314.11%7.446.99%7.402.10%1.343.807.24%3.56%1.332.997.88%$6,0133,83710,882$20,732$6,7622,5265,679$14,967$67,823$49,72116%11%1972Long-Term Debt............................. Preferred andPreference Stock...... CommonStockEquity.................... 51%18317.49%8.003.82%1.442.107.36%$7,6022,8664,179$14,647$43,39510%(a)Assumesthatfundsusedtofinanceconstruction duringeachperiodwereprovidedinthesameproportion astheCompany's averagecapitalization ratiosduringthefiveyearsendedDecember31,1976.(b)Fortheyears1972through1973incremental ratesweredetermined onthebasisthatthecostoflong-term debtandpreferred andpreference stockfinancing wasequivalent tothecostofsecurities issuedineachoftheperiods.Noadjustment wasmadeforincometaxreductions resulting frominterestexpenseattributable totheportionofAllowance providedbylong-term debt.SinceFebruary1,1974,theCompanyhascomputedtheAllowance rateonan"after-tax" basistobeconsistent withthetreatment accordedthisitemforrate-making purposesbythePennsylvania PublicUtilityCommission (PUC).Theincremental ratesusedintheabovecomputation for1974,1975and1976areconsistent withtheAllowance ratecomputation filedsemi-annually withthePUCwhichwerebasedonsecurities issuedinthetwelvemonthspreceding thesemi-annual computation. Forthesamereason,effective February1,1974,theincremental rateforthedebtcomponent wasreducedbytherelatedincometaxreduction. (c)Theequivalent rateforeachperiodiscalculated bydividingtheamountofAllowance recordedduringtheperiodbythebalancesoftheconstruction workinprogressincluding theaccumulated Allowance. Registration No.2-485r-rQWASHINGTONs DC20549cg;rsS'Crrr','t.FORMS-7CPI~"',r, fiFpgREGISTRATION STATEEhg-/9/8Underr7'0p0'1p@2'gVregsTHESECURITIES ACTOF1933SECURITIES ANDEXCHANGECOMMISSION Pennsylvania Power8LightCompany(Exactnameofregistrant asspecified initscharter)Commonwealth ofPennsylvania (Stateorotherjurisdiction ofincorporation ororganization) 23-0959590 (I.R.S.EmployerIdentification No.)TwoNorthNinthStreet,Allentown, Pennsylvania (Addressofprincipal executive offices)18101(ZipCode)Registrant's telephone number,including areacode:215-821-5151 R.R.FORTUNE,Executive VicePresident -Financial TwoNorthNinthStreetAllentown, Pennsylvania 18101(Nameandaddressofagentforservice)Copyto:RICHARDM.DICKE,Esq.SimpsonThacher&BartlettOneBatteryParkPlazaNewYork,N.Y.10004Approximate dateofcommencement ofproposedsaletothepublic:Assoonaspracticable after.thisRegistration Statement becomeseffective. CALCULATION OFREGISTRATION FEETitleofeachclassofsecurities toberegistered CommonStock(withoutnominalorparvalue)..Amounttoberegistered 3,000,000 shs.Proposedmaximumofferingpriceperunit'22%Proposedmaximumaggregate offeringprico*$67,125,000 Amountofregistration fee$13,425*Forthepurposeofcalculating theregistration feeonly.ThepriceshownisbaseduponasalepriceontheNewYorkStockExchangeonFebruary16,1978forsecurities ofthesameclassasthosetobeofferedinaccordance withRule457(b).Theregistrant herebyamendsthisRegistration Statement onsuchdateordatesasmaybenecessary todelayitseffective dateuntiltheregistrant shallfileafurtheramendment whichspecifically statesthatthisRegistration Statement shallthereafter becomeeffective inaccord-ancewithSection8(a)oftheSecurities Actof1933oruntiltheRegistration Statement shallbecomeeffective onsuchdateastheCommission, actingpursuanttosaidSection8(a),maydetermine. PENNSYLVANIA POWER&LIGHTCOMPANYFormS-7ItemNo.1..2..4..5..8..9..10..1112..CrossReference SheetforProspectus HeadingInProspectus CoverPageofProspectus Underwriting Application ofProceedsConstruction ProgramFinancing Construction ProgramFinancing BusinessElectricStatistics Management MapStatement ofIncomeStatement ofChangesinFinancial PositionStatement ofEarningsReinvested CoverPageofProspectus Description ofCommonStockFinancial Statements OpinionofIndependent Certified PublicAccountants InsideFrontCoverofProspectus

OmittedfromProspectus asItemisinapplicable oranswerisinthenegative.

EXPLANATORY NOTETheformofprospectus filedasapartofthisRegistration Statement hastwocoverpages,thefirstofwhichmakesprovision forpresenting theactualinitialtermsofofferingoftheCommonStockandthesecondofwhichdescribes theformulapursuanttowhichsuchtermswillbedetermined. Prospectuses bearingthefirstformofcoverpage,appropriately completed, willbedistributed onlyinfinalform(i.e.,aftertheRegistration Statement becomeseffective); prospectuses bearingthesecondformofcoverpagewillbedistributed onlyinpreliminary form.Tencopiesoftheprospectus intheexactforminwhichitistobeusedaftertheeffective dateofthisRegistration Statement willbefiledwiththeSecurities andExchangeCommission pursuanttoRule424(b).~0cket8+y gyp<<ff'rfole~QfQ@~l<~iFa.Eggggg~~,<~~OCIIPjlf,II f.. Pennsylvania Power8LightCompanyCommonStock(withoutnominalorparvalue)3,000,000 SharesOutstanding sharesofCommonStockare,andthesharesofCommonStockofferedherebywillbe,listedontheNewYorkandPhiladelphia StockExchanges. ThereportedlastsalepriceoftheCommonStockontheNewYorkStockExchangeonMarch29,1978was$pershare.lntheopinionofcounselfortheCompany,theCommonStockisexemptfromexistingpersonalpropertytaxesinPennsylvania. THESESECURITIES HAVENOTBEENAPPROVEDORDISAPPROVED BYTHESECURITIES ANDEXCHANGECOMMISSION NORHASTHECOMMISSION PASSEDUPONTHEACCURACYORADEQUACYOFTHISPROSPECTUS. ANYREPRESENTATION ToTHECONTRARYISACRIMINALOFFENSE.CPerShareTotal$$PricetoPublicunderwriting Discounts andCommissions (1)ProceedstoCompany(2) (1)TheCompanyhasagreedtoIndemnify theseveralUnderwriters againstcertaincivilliabilities, including liabilities undertheSecurities Actof1933.(2)Beforededuction ofexpensespayablebytheCompanyestimated at$150,000.ThesharesofCommonStockareofferedbytheseveralUnderwriters when,asandifissuedbytheCompanyandacceptedbytheUnderwriters andsubjecttotheirrighttorejectordersinwholeorlnpart.ItisexpectedthattheCommonStockofferedherebywillbereadyfordeliveryinPhiladelphia, Pennsylvania, onoraboutApril6,1978.TheFirstBostonCorporation DrexelBurnhamLambertIncorporated BacheHalseyStuartShieldsIncorporated MerrillLynch,Pierce,Fenner&SmithIncorporated ThedateofthisProspectus isMarch,1978. I44'4'I44414~14~~,4' ~DIOEIIDZZlBECD414411~CJIOcel~D41CIOIDeWWCDCO~6ICel~IDIOClCD4J1IIIECCCO~CCCDIDcCl41CelE~41OI~41In41CnIII41cEECIOcec11IecOl4141COIOCel11CDcelCD41E41IelCO4441ICDIel41cee~D41~DIllE41CDClIOCCelI4141CJCOIDZlCD41Cel~<c~DE.-CCCDcnIel41IecNIelCOCel~IC41IelIDC41IDCOccCOCDO~DCOCIIDIO~ecICC1CelCCelCDC1CelPRELIMINARY PROSPECTUS DATEDFEBRUARY24,1978ePennsylvania Power8LightCompanyCOmmOnStOCk(withoutnominalorparvalue)3,000,000 SharesOutstanding sharesofCommonStockare,andthesharesofCommonStockofferedherebywillbe,listedontheNewYorkandPhiladelphia StockExchanges. ThereportedlastsalepriceoftheCommonStockontheNewYorkStockExchangeonFebruary23,1978was$22%pershare.IntheopinionofcounselfortheCompany,theCommonStockisexemptfromexistingpersonalpropertytaxesinPennsylvania. THESESECURITIES HAVENOTBEENAPPROVEDORDISAPPROVED BYTHESECURITIES ANDEXCHANGECOMMISSION NORHASTHECOMMISSION PASSEDUPONTHEACCURACYORADEQUACYOFTHISPROSPECTUS. ANYREPRESENTATION TOTHECONTRARYISACRIMINALOFFENSE.Theinitialpublicofferingpriceofthesharesofferedherebywillbeafixedpricedetermined byagreement betweentheCompanyandtheRepresentatives oftheUnderwriters withintenbusinessdaysaftertheeffective dateoftheregistration statement. Theinitialpublicofferingpricepersharewillnotbehigherthanthereportedlastsale(regularway)orthereportedlastaskedpriceoftheCommonStockoftheCompanyontheNewYorkStockExchangeimmediately priortothedetermination oftheinitialpublicofferingprice,whichever ishigher,pluscents.Theunderwriting discountwillbeanamountpershare,notinexcessof%oftheinitialpublic,offering price,determined byagreement betweentheCompanyandtheRepresentatives ofthe"Underwriters. TheCompanyhasagreedtoindemnify theseveralUnderwriters againstcertaincivilliabilities, including liabilities undertheSecurities Actof1933.TheproceedstotheCompanywillbeanamountequaltotheinitialpublicofferingpriceless(i)theunderwriting discountand(ii)ex'penses payablebytheCompanyestimated at$150,000.ThesharesofCommonStockwillbeofferedbytheseveralUnderwriters when,asandifissuedbytheCompanyandacceptedbytheUnderwriters andsubjecttotheirrighttorejectordersinwholeorinpart.TheFirstBostonCorporation DrexelBurnhamLambertIncorporated BacheHalseyStuartShieldsIncorporated MerrillLynch,Pierce,Fenner8tSmithIncorporated ThedateofthisProspectus isMarch,1978. <fi INCONNECTION WITHTHIS,OFFERING, THEUNDERWRITERS MAYOVER-ALLOT OREFFECTTRANSACTIONS WHICHSTABILIZE ORMAINTAINTHEMARKETPRICEOFTHECOMMONSTOCKOFTHECOMPANYATALEVELABOVETHATWHICHMIGHTOTHERWISE PREVAILINTHEOPENMARKET.SUCHTRANSACTIONS MAYBEEFFECTEDONTHENEWYORKSTOCKEXCHANGE, THEPHILADELPHIA STOCKEXCHANGEORINTHEOVER-THE-COUNTERMARKET.SUCHSTABILIZING, IFCOMMENCED, MAYBEDISCONTINUED ATANYTIME.TheCompanyissubjecttotheinformational requirements oftheSecurities ExchangeActof1934andinaccordance therewith filesreportsandotherinformation withtheSecurities andExchangeCommission. Information concerning directors andofficers, theirremuneration andanymaterialinterestofsuchpersonsintransactions withtheCompany,asofparticular dates,isdisclosed inproxystatements distributed tostockholders oftheCompanyandfiledwiththeCommission. Suchreports,proxystatements andotherinformation canbeinspected andcopiedatthepublicreference facilities maintained bytheCommission at1100LStreet,N.W.,Washington, D.C.;219South

DearbornStreet,

Chicago,III.;26FederalPlaza,NewYork,N.Y.;and10960WilshireBoulevard, LosAngeles,Calif.Copiesofthismaterialcanalsobeobtainedatprescribed ratesfromthePublicReference SectionoftheCommission atitsprincipal officeat500NorthCapitolStreet,N.W.,Washington, D.C.20549.TheCommonStockoftheCompanyislistedontheNewYorkandPhiladelphia StockExchanges. Reports,proxystatements andotherinformation concerning theCompanycanbeinspected andcopiedattherespective officesoftheseexchanges atRoom401,20BroadStreet,NewYork,N.Y.,andat17thStreetandStockExchangePlace,Philadelphia, Pennsylvania. Inaddition, reports,proxystatements andotherinformation concerning theCompanycanbeinspected attheofficesoftheCompany,TwoNorthNinthStreet,Allentown, Pennsylvania. Nodealer,salesmanorotherpersonhasbeenauthorized togiveanyInformation ortomakeanyrepresentation notcontained inthisProspectus inconnection withtheoffermadebythisProspectus and,ifgivenormade,suchinformation orrepresentation mustnotberelieduponashavingbeenauthorized bytheCompany.ThisProspectus isnotanoffertosellorasolicitation ofanoffertobuyinanyjurisdiction inwhichitisunlawfultomakesuchanofferorsolicitation. NeitherthedeliveryofthisProspectus noranysalemadehereunder shall,underanycircumstances, createanyimplication thattherehasbeennochangeintheaffairsoftheCompanysincethedatehereof.TABLEOFCONTENTSProspectus Summary.. TheCompanyProblemsAffecting theElectricUtilityIndustryandtheCompany.................... Application ofProceeds............................ Construction Program.. Financing.. RateMatters.CommonStockDividends andMarketPrices..Statement ofIncome.Management's Discussion andAnalysisoftheStatement ofIncome................... Page3444567910CapitalStructure Business. ElectricStatistics Description ofCommonStock...............~... ExpertsLegalOpinions.. Management. Financial Statements .......OpinionofIndependent Certified PublicAccountants.. Underwriting .Map.kPage18193132333334355354BackCover PROSPECTUS SUMMARYThefollowing materialisqualified initsentiretybythedetailedinformation andfinancial statements appearing elsewhere inthisProspectus. THEOFFERINGSecurityOffered........................... CommonStockNumberofShares........................ 3,000,000 UseofProceeds........................... Generalcorporate purposesincluding thereduction ofshort-term debtincurredtoprovideinterimfinancing ofconstruction andnuclearfuelexpenditures Listed........................... NewYorkandPhiladelphia StockExchanges (Symbol:PPL)PriceRange1977........................ 25'/a-20'/4 1978(ThroughFebruary22).....24'/4-22'/4 ClosingPriceFebruary23,1978(NewYorkStockExchange) .....22%THECOMPANYBusiness.TheCompanyderivesabout99/oofitsoperating revenuesfromelectricserviceServiceArea...Approximately 10,000squaremilesincentraleasternPennsylvania withapopulation of2.4millionpersonsSourcesofGeneration during1977.................................. Coal79o/oOil19Hydro2100'/oFINANCIAL INFORMATION 19761977(a)Operating Revenues(thousands) .....$644,147$744,731NetIncome-BeforeDividends onPreferred andPreference Stock(thousands) ..$112,111$149,763EarningsApplicable toCommonStock(thousands) ...$78,743$112,770EarningsPerShare...$2.68$3.37Dividends DeclaredPerShareofCommonStock....... $1.80$1.89NetUtilityPlant-atyearend(thousands) .................. $2,380,109 $2,690,229 AsofDecember31,1977ActuaIAsAdjusted(b) Capitalization (thousands) Long-Term Debt(including currentmaturities) ....$1,260,495 Preferred andPreference Stock.......................... 487,375CommonEquity.......................... 859,264Total...................................................... $2,607,134 $1,260,495 47.3/o483,37518.1922,11434.6$2,665,984 100.0/o(a)Forfactorsaffecting 1977andcurrentresults,seethesecondparagraph under"Management's Discussion andAnalysisoftheStatement ofIncome".(b)Asadjustedtogiveeffectto(I)theredemption of40,000sharesofPreference StockinJanuary1976and(ii)theestimated netproceedsfromthesaleoftheCommonStockofferedhereby. THECOMPANYTheCompanyisanoperating utility,incorporated underthelawsoftheCommonwealth ofPennsylvania in1920.TheCompany's generalofficesarelocatedatTwoNorthNinthStreet,Allentown, Pennsylvania 18101,anditstelephone numberis215-821-5151. ThepropertyoftheCompanyislocatedinPennsylvania (seeMap),iswellmaintained andisingoodoperating condition. TheCompanyderivesabout99/oofitsoperating revenuesfromsupplying electricservice,andthebalancefromsupplying steaminthecityofHarrisburg. TheCompanyservesa10,000squaremileterritory in29countiesofcentraleasternPennsylvania (seeMap),withapopulation ofapproximately 2,400,000 persons.Thisserviceareahasahighpercentage ofopenlandaswellas111communities withpopulations over5,000,thelargestofwhicharethecitiesofAllentown, Bethlehem, Harrisburg,

Hazleton, Lancaster,

Scranton, Wilkes-Barre andWilliamsport.

Important industrial, recreational andagricultural sectionsarelinkedtotheeasternpopulation centersbyanextensive limited-access highwaysystem.HersheyElectricCompany,asubsidiary oftheCompany,provideselectricdistribution servicetoapproximately 6,300customers inHershey,Pennsylvania. PROBLEMSAFFECTING THEELECTRICUTILITYINDUSTRYANDTHECOMPANYTheelectricutilityindustryingeneralhasbeenexperiencing problemsof(a)increasing costsoffuel,wages,materials andequipment, (b)substantially increased capitaloutlaysandlongerconstruction periodsforlargerandmorecomplexnewgenerating units,(c)uncertainties inpredicting futureloadrequirements, (d)increased financing requirements coupledwithperiodically uncertain availability ofbothequityandborrowedcapital,(e)pastandprospective salesofcommonstockbelowbookvalue,(f)fuelavailability, (g)increased construction costsanddelaysandoperating restrictions duetoenvironmental requirements, (h)theeffectiveness ofenergyconservation effortsandtheimpactoffluctuating economicconditions, (i)litigation andproposedlegislation whichmayhavetheeffectofdelayingorpreventing construction ofnucleargenerating andotherfacilities orlimitingtheuseofexisting-facilities=and (j)regulatory lagingrantingneededrateincreases andth'einadequacy ofsuchincreases whengranted.TheCompanyalsohasbeenexperiencing similarproblemsinvaryingdegrees.Forinformation regarding theeffectontheCompanyofcertainofthesegeneralproblems, see"CONSTRUCTION PROGRAM", "FINANCING", "RATEMATTERS", "STATEMENT OFINCOME","MANAGEMENT'S DISCUSSION ANDANALYSISOFTHESTATEMENT OFINCOME","BUSINESS" and"ELECTRIC STATISTICS". Reference ismadeto"BUSINESS -'FuelSupply(Coal)"forinformation concerning (1)thepricingofcoalproducedbyTheOneidaMiningCompany,oneoftheCompany's affiliated mines,forfueladjustment clausepurposes, whichreducedtheCompany's netincomebyapproximately $4.3millionduring1977and(2)thepossibility offuturelossesifpresentminingplansforOneidaprovenottobeeconomically feasible. Reference ismadeto"BUSINESS -FuelSupply(Coal)"forinformation concerning astrikebytheUnitedMineWorkersofAmericawhichisadversely affecting theCompany's 1978operations andearnings. APPLICATION OFPROCEEDSThenetproceedsfromthesaleoftheCommonStockofferedherebywillbeaddedtotheCompany's generalfundsandusedforgeneralcorporate purposesincluding thereduction ofshort-term debtincurredtoprovideinterimfinancing forconstruction andnuclearfuelexpenditures. CONSTRUCTION PROGRAMTheCompany's construction programisundercontinuing reviewandisrevisedfromtimetotimetoreflectchangesincustomerdemand,businessconditions, thecostandavailability ofcapitalandotherfactors.Actualconstruction expenditures anddatesofcompletion forvariousconstruction projectsmayvarybecauseofchangesintheCompany's plans,costfluctuations, theavailability oflabor,materials andequipment, environmental regulations, licensing delaysandotherfactors.TheSusquehanna station,whichistheonlygenerating facilitythattheCompanycurrently hasunderconstruction, willconsistoftwonuclear-fueled generating unitseachhavinganestimated totalnetcapability of1,050,000 kilowatts. InMarch1977theCompanyagreedtosella10/oundivided ownership interestintheSusquehanna nuclearunitstoAllegheny ElectricCooperative, Inc.(Allegheny). Pendingreceiptoftheregulatory approvals requiredtocompletethesale,Allegheny madeaninitialpaymenttotheCompanyof$65millioninMarch1977andbecameobligated topaycurrently 10/oofsubsequent construction andnuclearfuelexpenditures fortheSusquehanna units.ThroughDecember31,1977,Allegheny's paymentstotheCompanyapproximated $84million.InJanuary1978,following receiptofthenecessary approvals fromthePennsylvania PublicUtilityCommission (PUC),theNuclearRegulatory Commission (NRC)andtheRuralElectrification Administration, thesalewascompleted, Construction oftheSusquehanna unitsisproceeding underNRCconstruction permitsissued..in November1973.AtDecember31,1977,construction ofUnitNo.1wasabout60'/ocompleted andUnitNo.2wasabout40/ocompleted. Anoperating licensefromtheNRCwillberequiredpriortothestart-upandtestingofeachunit.Changesindesigrtnecessary tomeetNRCrequirements, delaysindeliveryofmaterialandequipment, scarcityoflaborandotherfactorshavenearlyexhausted schedulecontin-genciesbuiltintotheproject.Asaresult,andinrecognition ofthepotential fordelaysinfutureconstruction aswellasinobtaining therequiredlicensesandregulatory approvals, onatimelybasis,theCompanyhasrevisedtheestimated in-service dateforSusquehanna UnitNo.1fromNovember1980toFebruary1981.Subsequent evaluations mayrequiretheCompanytofurtherdelaytheestimated in-servicedateforSusquehanna UnitNo.1andtodelaythecurrently estimated 1982in-service dateforUnitNo.2.Thefollowing tabulation showsactualconstruction andnuclearfuelexpenditures for1977andtheCompany's currentestimateoftheseexpenditures forthethreeyears1978-1980 including provision fortheAllowance forfundsusedduringconstruction (Allowance). Theamountsshowninthetabulation, havebeenreducedtoreflectAllegheny's contribution tothecostoftheSusquehanna unitsandnuclearfuel.1977197819791980MillionsofDollarsConstruction expenditures: Newgenerating facilities ....................... $237Transmission anddistribution facilities ..'8Other16Totalconstruction expenditures .....341Nuclearfuelinprocess.. 16Total.$357$330103384714$475$324$26411412352864904734057$530$530Estimated construction expenditures forthethreeyears1978-1980 include$150millionforenvironmental protection. See"BUSINESS -Environmental Matters"forinformation concerning possibleadditional capitalrequirements. TheCompany's 90%shareoftheestimated totalnetcapability ofeachoftheSusquehanna unitswillbe945,000kilowatts anditsshareoftheestimated construction expenditures (basedonthecurrently scheduled in-service dates,butexcluding nuclearfuel)isestimated at$1.75billion.TheCompanyestimates thatadelayofoneyearinthe1981and1982in-service datesoftheSusquehanna unitswouldincreasetheCompany's shareofthecostoftlieseunitsbyabout$175million.TheUnitedStatesDistrictCourtfortheWesternDistrictofNorthCarolinahasheldthattheprovisions ofthePrice-Anderson Actlimitingliability oftheownersofnuclearpowerplants,andofthecontractors andsuppliers forsuchplants,totheamountsofavailable insurance andgovernmental indemnity areunconstitutional asviolating thedueprocessandequalprotection clausesoftheUnitedStatesConstitution. TheUnitedStatesSupremeCourthasgrantedreviewoftheDistrictCourtdecision. IftheSupremeCourtaffirmsthedecision, thelimitation ofliability wouldnotbeavailable totheCompany.AlthoughthefullimpactofadecisionbytheSupremeCourtcannotbeevaluated atthistime,theCompanydoesnotexpecttochangeitsplanstocompletetheconstruction ofandtooperate-the Susquehanna units.Recentamendments tothePrice-Anderson Act,whichmaybeaftectedbythislitigation, providethat-allownersofnuclearreactorsmaybeassessedupto$5millionperoperating reactorforeachnuclearincidentoccurring atanyreactorintheUnitedStateswithalimitoftwoassessments peryear.GivingeffecttotheCompany's 90%ownership oftheSusquehanna units,themaximumassessment againsttheCompanyunderthePrice-Anderson ActwhenbothSusquehanna unitshavebeenplacedincommercial operation isnotexpectedtoexceed$18millionperyear.FINANCING Thetinancing ofitsconstruction programrequirestheCompanytoengageinfrequentsalesofsecurities, including debtandpreterred, preterence andcommonstocks.Interimfinancing isobtainedfrombankborrowings andthesaleofcommercial paper.TheCompany's 1978-1980 construction andnuclearfuelexpenditures arecurrently estimated at$'f.54billion.Approximately two-thirds ofthisamountisexpectedtobeobtainedfromoutsidefinancing withthebalancetobeprovidedfrominternalsources.Theestimates ofconstruction andnuclearfuelexpenditures andinternalfundssourcesbothincludetheAllowance. Inaddition, about$62millionofmaturinglong-term debtobligations and$16.5millionofpreferred andpreference stocksinkingfundrequirements areplannedtobemetduring1978-1980 bysalesofsecurities. InadditiontothesaleoftheCommonStockofferedhereby,theCompanyanticipates thatothersecurities willbesoldduring1978.Theexactamount,natureandtimingoffuturesalesofsecurities willofnecessity bedetermined inthelightofmarketconditions andotherfactors.'hemortgageindenture underwhichtheCompany's firstmortgagebondsareissuedcontainscertainprovisions, principally earningscoverageandpropertyadditions tests,limitingtheissuanceofadditional bonds.TheCompanyestimates thatapplication oftheserestrictions, ofwhichtheavailability ofpropertyadditions ispresently themostlimiting, wouldhavepermitted theCompany,asofDecember31,1977,aftergivingeffecttothesaleofa10%undivided interestinSusquehanna toAllegheny, toissuef6 about$443millionprincipal amountofbonds.Thisamountexceedstheprincipal amountofbondsthattheCompanycurrently expectstoissuethrough1979.Indenture tests,however,wouldhavetobemetatthetimeofissuance. TheCompany's chartercontainsprovisions limitingtheissuanceofadditional sharesofPreferred Stock.Themorerestrictive oftheseprovisions requiresIncomeBeforeInterestCharges(grossincome)ofnotlessthan1.5timesthesumoftheannualized interestrequirements onindebtedness tobeoutstanding andthedividendrequirements onPreferred Stocktobeoutstanding. Incalculating grossincomeundertheprovisions oftheCompany's charter,theCompanyincludestheborrowedandequityfundscomponents oftheAllowance asapartofgrossincome.BasedontheCompany'.s earningsfortheyear1977,thegrossincomeprovisions wouldnotlimittheamountofPreferred StockwhichtheCompanyplanstoissueduring1978.Therearenocharterprovisions limitingtheissuanceofPreference Stock.RATEMATTERSSalestoultimatecustomers, whichareregulated bythePUC,accounted forapproximately 98/0oftheCompany's revenuesfromelectricsalesoverthepastfiveyears.Theremaining 2'/oofrevenuesfromelectricsales,represented bysalestoothersforresale,areregulated bytheFederalEnergyRegulatory Commission (FERC)asareinterchange powersales,whichareclassified asacredittooperating expenses. TheCompany's PUCandFERCtariffsincludefueladjustment clauses.See,however,thediscussion oftheCompany's Oneidamineunder"BUSINESS -FuelSupply(Coal)"concerning thelimitedrecoveryofthecostofcoalminedatOneida.PUCtariffsalsoincludeataxsurcharge torecoverthecostofincreased Pennsylvania taxes.Since1973theCompanyhasrequested andthePUChasgrantedthefollowing generalincreases inbaseratechargesforelectricserviceexpressed aspercentages ofannualized revenuesinthetestyear-usedforthefinalPUCorderineachproceeding. Annualized revenuesconsistofrevenuesderivedfrombaserates,fueladjustment clausesandthetaxsurcharge. RequestFiledApril1973o/oIncreaseRequested TestYearIncrease(TwelveMonthsEnded)Effective 11.4April30,1973June1973January19740-Millions $9.419.1$28.54/O2.65.27.8IncreaseGrantedMarch197514.6July31,1975September 1975April1976August1976$21.03.920.03.737.37.0$78.3.14.6Acomplainant intheCompany's March1975rateproceeding appealedtheAugust1976decisionofthePUCgrantingthe14.6/oincrease. Thisappeal,whichwasdeniedbytheCommonwealth Courtof I Pennsylvania, raisedobjections regarding, amongotherthings,theexistence andamountofdifferences inratesbetweencertainoftheclassesofservicesprovidedbytheCompany.ThisappealdidnotquestionthePUC'sAugust1976decisionwithrespecttomeasuresofvalue,levelofrevenuesorrateofreturn.TheSupremeCourtofPennsylvania hasagreedtoreviewtheactiontakenbytheCommonwealth Courtindenyingthecomplainant's appeal.Arateincreaseaggregating approximately $1millionannuallyfortheCompany's fifteenresalecustomers waspermitted byFERCtobecomeeffective, subjecttorefund,inNovember1976.Certainoftheaffectedcustomers whowereopposingtheincreasehaveenteredintoasettlement agreement withtheCompany.Arequestforapprovalofthisagreement ispresently pendingbeforeFERC.Inaproceeding affecting ailPennsylvania electricutilities, thePUCinMay1975instituted aninvestigation intofueladjustment clauses.Atthecommencement ofthisinvestigation thePUCproposedforconsideration, amongotherthings,(1)alimitation ontherecoveryofincreased fuelcoststolessthan100/o,(2)theinclusion ofnuclearfuelcostsintheformula,(3)arevisioninthemethodofcalculating thefuelcostsastheyrelatetointerchange powerpurchases andsalesand(4)theuseofatwelvemonthperiodfordetermining thecurrentcostoffuel.Inaseparateproceeding affecting allmajorPennsylvania electricutilities, thePUCinNovember1977issuedproposedregulations toreplacefueladjustment clauseswithalevelized energycostrate.UnderthePUC'sproposedregulations, whichwouldbecomeoperative onJuly1,1978,eachutility's energycostrate.wouldincludeall(1).fossil fuelcosts,(2)nuclearfuelcosts,(3)purchased powerenergycostsand(4)netinterchange energysalesandpurchases. Utilizing historical andprojected data,autility's energycostratewouldbesetprospectively foratwelvemonthperioddetermined bythePUCduringwhichtherateisintendedtoremainstable.Anupwardordownwardadjustment intheratecouldbemadeduringthetwelvemonthperiodintheeventthatactualcostsweresignificantly greaterorlessthantheenergycostrate.Theproposedregulations contemplate thatifthecostsactuallyincurredexceedcostsspecified intheutility's energycostrate,thefullamountofexcesscostsmaynotberecoverable bytheutility.Intheeventofanover-recovery ofenergycosts,theutilitywouldberequiredtorefundeitheraportionoralloftheexcesstocustomers, depending 'upontheamountofsuchexcess.Inaddition, provisions aremadeforpenalties undercertaincircumstances. Theproposedregulations providethatdeferredfuelcostsaccumulated underthepresentfueladjustment clauseswouldberecoverable pursuanttoareasonable planfiledbyautility.ThePennsylvania legislature iscurrently considering severalproposals whichwouldeliminate automatic adjustment clausesforfuelandpurchased powercostsincurredbymajorPennsylvania electricutilities andwouldpermittherecoveryofthesecostsonlythroughbaserates.TheCompanyisunabletopredicttheultimateoutcomeoftheforegoing administrative andlegislative proceedings. Amendments tothePennsylvania PublicUtilityLaw,generally effective inOctober1977,havealteredthePUC'srate-making procedures. Amongotherthings,theamendments shortentheperiodduringwhichthePUCmustactonafilingofageneralrateincreasefromelevenmonthstoninemonths.Interimratereliefduringthependencyofageneralr'ateincreaserequestwillnotbepermitted exceptunderconditions offinancial emergency. Thenewprovisions permittheuseoffutureprojected rather thanhistorical testyearsasthebasisforratefilings.Theamendments alsoprescribe certainchangesinPUCprocedures forvotingonrateincreaseapplications, andcreatetheofficeofAdministrative LawJudgetoconducthearirigs andsubmitrecommendations tothePUC.COMMONSTOCKDIVIDENDS ANDMARKETPRICESTheCompanyhaspaidquarterly cashdividends onitsCommonStockineveryyearsince1946.Dividends declaredinthepastfiveyearsaresetforthontheStatement ofIncome.OnFebruary22,1978theCompanydeclaredaregularquarterly dividendof48centspersharepayableonApril1,1978totheholdersofrecordofCommonStockonMarch10,1978.SincetheCommonStockofferedherebywillnotbeoutstanding ontheMarch10recorddate,suchsharesarenotentitledtotheApril1dividend. Futuredividends willbedependent uponfutureearnings, financial requirements andotherfactors.ThehighandlowsalepricesoftheCompany's CommonStockasreporte'd byTheWa/IStreetJournal(asNewYorkStockExchangetransactions throughJanuary23,1976andthereafter asComposite Transactions) wereasfollows:HighLowQuartersin19761st2nd3rd4th21%20V<21V422Vr19Vs19Vr2020%Quartersin19771st2nd3rd4th22Vr24'/i25Ve24Vr203/421%22%22'/i1979(throughFebruary22)24'/422'/4ThereportedlastsalepriceoftheCommonStockontheNewYorkStockExchangeonFebruary23,1978was$22%pershare.ThebookvalueoftheCommonStockatDecember31,1977was$24.58pershare.UponthesaleoftheCommonStockofferedhereby,thebookvaluepershareatthatdateonaproformabasis,reflecting estimated netproceedstotheCompany,wouldhavebeen$TheCompanyhasadividendreinvestment planwhichpermitsholdersofitsPreferred, Preference and'Common StocktopurchasesharesofCommonStockdirectlyfromtheCompanybyhavingcashdividends automatically reinvested ata5/odiscountinthepurchasepriceandbymakingoptionalcashpayments(towhichthe5/odiscountdoesnotapply).

Operating Revenues(99%Electric)(a) ........................... Operating ExpensesCostofenergyFuel(b)(c) ..Powerpurchases ..Interchange powersales.Netcostofenergy."Otheroperation. Maintenance.. Depreciation Incometaxes(d)... Taxes,otherthanincome(d) Totaloperating expenses......................... Operating Income.OtherIncomeandDeductions Allowance forfundsusedduringconstruction(e) Equityandborrowedfunds.......................... Equityfunds Incometaxcredits(d)(e) Other-net(c)..Totalotherincomeanddeductions ......... IncomeBeforeInterestCharges.. InterestChargesLong-term debtShort-term debtandotherAllowance forborrowedfundsusedduringconstruction(e) ..NetInterestcharges....IncomeBeforeNonrecurring Credit.Nonrecurring CreditRelatedtoAccounting Change,NetofIncomeTaxes($4,831)(b) .NetIncome-BeforeDividends onPreferred andPreference Stock.Dividends oriPreferred andPreference Stock............... 433,69839,783(306,456) 167,025110,76463,41368,03591,50159,682580.420184,311271,636321,78337,69829,657(172,823) (160,163) 125,57715,299(70,175)70,70169,00733,64848,83733,94330,005286,14198,673192,35324,176(108,723) 107,80680,56541,29852,39939,21135,571356,850115,186191,277103,75854,94662,47843,82849,526505,813138,334136,51192,18647,95658,54047,29840,669423,160120,96945,19236,60520,73214,96722,45913,708(928)35,239219,55014,4571,38161,030199,36411,2013,15450,960171,9295,0763,41829,226144,412911,30016,358115,03179,7837,47091,500(f) 5,22367,9326,45643,2034,91651,1499,946(26,936)69,787149,76387,253112,11174.38897.54148,11961,09566,91283,3174,16266,91217,191$49,72187,47919,656$67,82397,54124,509$73,032149,76336,993(g) $112,770112,11133,368$78,743EarningsApplicable toCommonStock.EarningsPerShareofCommonStockBeforeNonrecurring Credit..Nonrecurring Credit(b) ..EarningsPerShareofCommonStock........ AverageNumberofCommonSharesOutstanding (Thousands). Dividends DeclaredPerShareofCommonStock.....$2.87$2.880.19$3.07$2.57$3.37$2.68$3.37$2.68,$2.8725,459$1.80$2.5733,471$1.8929,367$1.8022,067$1.7719,359$1.68STATEMENT OFINCOMEThefollowing Statement ofIncomeforthefiveyearsendedDecember31,1977hasbeenexaminedbyHaskinsfrSells,independent Certified PublicAccountants, whoseopinionappearselsewhere inthisProspectus. TheStatement shouldbeconsidered inconjunction withitsnotesandtheotherfinancial statements andrelatednotesappearing elsewhere inthisProspectus. 19731974197519761977Thousands ofDollars$384,814$472,036.$544,129$644,147$744,73110

(a)Reference ismadeto"RATEMATTERS"foradditional information concerning fueladjustment clauses.(b)Effective January1,1974,theCompany,asauthorized bythePUC,changeditsmethodofaccounting forfuelcoststoachievematchingoffuelexpenseandrevenuesbyaccounting periods.Thischangeresultedinthechargetoincomeforfuelcostsrecoverable inthefuturebeingdeferredtotheperiodsinwhichthesecostsarebilledtocustomers throughapplication offueladjustment clauses.For1974,fuelcostswerelowerbyanetamountof$26.6millionand,afterincometaxeffects,'Earnings Applicable toCommonStockwereincreased by$12.6million($0.57pershare)asaresultofthisaccounting change.TheNonrecurring CreditshownontheStatement ofIncomerepresents thecumulative effecttoDecember31,1973ofthechangeinaccounting forfuelcosts,netofrelatedincometaxes.Inthefollowing summary,earnings"AsReported" includestheNonrecurring Creditrecordedin1974andearnings"Restated" reflectstheeffectofretroactive application ofthechangeinaccounting forfuelcostsandrelatedincometaxeffectshadthenewmethodbeenusedsincetheprincipal fueladjustment clausebecameeffective: 19731974EarningsApplicable toCommonStock(thousands ofdollars)AsReported. Restated. EarningsPerShareofCommonStock(1)AsReported. Restated. $49,721$67,82351,06663,661.$2.57$3.072.642.88(1)Basedonaveragenumberofsharesoutstanding. (c)Reference ismadeto"BUSINESS -FuelSupply(Coal)"forinformation concerning operations ofTheOneidaMiningCompany(Oneida), oneoftheCompany's subsidiaries, relatedto(1)thewrite-otf ofcertaindevelopment costsreflected inOtherincome-net and(2)thepricingofcoalproducedbyOneidaforfueladjustment clausepurposesreflected infuelcosts,whichreducedtheCompany's netincomebyapproximately $6.6millionand$4.3million,respectively, in1977.Futurelossesmaybeincurreditpresentminingplansprovenottobeeconomically feasible. (d)Reference ismadetoNote10toFinancial Statements forinformation relatingtotaxes.(e)AsprovidedintheUniformSystemofAccounts, thecostoffundsusedtofinanceconstruction projectsiscapitalized aspartofconstruction cost.AfteraprojectisplacedinservicetheCompanyispermitted toincludeinrateschargedforutilityserviceareturnon,anddepreciation ot,thecostoffundssocapitalized. Thecomponents ofAllowance forfundsusedduringconstruction (Allowance) shownontheStatement ofIncomeunderOtherIncomeandDeductions andInterestChargesarenon-cashitemsequaltothecostoffundscapitalized duringtheperiodandservetooftsetontheStatement ofIncomethecostoffinancing construction. SinceFebruary1,1974,theAllowance ratehasbeencomputedonanafter-tax basisandincometaxreductions associated withtlieinterest(borrowed funds)component oftheAllowance arereflected in11 PriortoJanuary1,1977,themethoduseddidnotprovidefordirectcompounding andtheCompanycomputedtheAllowance byapplyingtheratetoaconstruction workinprogressbasewhichdidnotincludetheaccumulated Allowance whichhadpreviously beenrecorded. However,anequivalent ratecanbecalculated fortheperiod1973-1976 byrelatingtheamountofAllowance recordedduringtheperiodtothebalancesoftheconstruction workinprogressincluding therelatedaccumulated Allowance. TheCompany's Allowance ratesandtheequivalent ratesareasfollows:Allowance Equivalent RateRate8.5'/07.9'/o7.5,7.08.07.39.258.38.757.97.47.9January1,1973-January31,1974......February1,1974-June30,1974.......... July1,1974-December31,1974......... January1,1975-December31,1975...January1,1976-December31,1976...January1,1977-December31,1977:..Beginning January1,1978..................... Basedontheassumption thatfundsrequiredforconstruction financing wereprovidedsubstantially inthesameproportion astheCompany's averagecapitalization ratiosoverthefive-year periodendedDecember31~1976(51'/odebt,18/opreferred andpreference stockand31/ocommonstockequity)andusinganafter-tax costofdebtsinceFebruary1,1974,theportionoftheAllowance attributable tofundsprovidedbycommonequityasapercentage of'Earnings Applicable toCommonStockfortheyears1973-1976 wouldbeapproximately asfollows:IncometaxcreditsunderOtherIncomeandDeductions withacorresponding increaseintheprovision forincometaxeschargedtoOperating Expenses. DuringtheperiodFebruary1,1974throughDecember31,1976,theAllowance ratewascomputedsemi-annually inaccordance withprocedures initiated bythePUCusingaspecified rateforcommonequityandthecostoffixedratesecurities issuedinthetwelvemonthspreceding thesemi-annual computation. Effective January1,1977,theCompanycomputedtheAllowance rateinaccordance witha1977FERCorderwhich(1)providesaformulafordetermining themaximumAllowance rate,(2)providesforsemi-annual compounding and(3)providesforsegregating theAllowance intotwocomponents, borrowedfundsandequityfunds.Thegrossborrowedfundscomponent recordedsinceJanuary1,1977isincludedasacreditintheInterestChargessectionoftheStatement ofIncomeandtheremainder ofthetotalAllowance recordedisshownunderOtherIncomeandDeductions asEquityfunds.TheCompanyhasnotreclassified theAllowance intoborrowedfundsandequityfundscomponents priortoJanuary1,1977sincetheallocation wouldnotbecomparable tothatrequiredundertheFERCformula.1973..1974..1975.1976.11o/o162127TheCompanyunderstands thatanissuehasbeenraisedinlitigation towhichitisnotapartyrelatingtotheAllowance asreportedbyanotherpublicutility.Inthislitigation, itisallegedthatactualearnings12 werenotproperlypresented inthattheAllowance wasincludedas"Otherincome"withoutanadequateexplanation ofthisitem,andthattheAllowance isnotinfactincomeasgenerally understood, butratheraprojection offutureearningsnotreflecting anyactualyieldonassetsoranyrevenueduringanyfiscalperiodandnotinfactearneduponcompletion ofconstruction. TheAllowance, whichisnotanitemofcurrentcashincome,isincludedinthefinancial 'statements oftheCompanyinaccordance withtheapplicable regulatory systemofaccountsandinaccordance withgenerally acceptedaccounting principles. TheCompanyisunabletopredicttheoutcomeofthislitigation oritseffect,ifany,upontheCompany.(f)Theannualinterestrequirements onlong-term debtoutstanding atDecember31,1977,including theamountduewithinoneyear,are$99,515,000. (g)Excluding theannualdividendrequirements on40,000sharesofPreference Stock,$9.25Series,redeemedinJanuary1978,theannualdividendrequirements onPreferred andPreference Stockoutstanding atDecember31,1977are$20,323,000 and$19,500,000, respectively. Thefollowing resultsofoperation forthetwelvemonthsendedFebruary28,1978areunaudited butintheopinionoftheCompanyincludealladjustments (whichcompriseonlynormalrecurring accruals) necessary forafairpresentation ofsuchresults:Operating Revenues$Operating Income............................................. $NetIncome-BeforeDividends onPreferred andPreference Stock.......$EarningsApplicable toCommonStock$EarningsPerShareofCommonStock.$Forfactorsadversely affecting currentresultsofoperation, seethesecondparagraph under"MANAGE-MENT'SDISCUSSION ANDANALYSISOFTHESTATEMENT OFINCOME".MANAGEMENTIS DISCUSSION ANDANALYSISOFTHESTATEMENT OFINCOMETheStatement ofIncomereflectstheresultsofpastoperations andisnotintendedasanyrepresentation astotheresultsofoperations foranyfutureperiod.Futureoperating resultswillnecessarily beaffectedbyvariousanddiversefactorsanddevelopments, including theobtaining ofadequateandtimelyrateincreases, fuelcosts,fuelavailability, businessactivity, customerdemand,energyconservation, interchange powersales,taxes,laborcontracts, availability ofcapital,governmental actions,environmental expenditures andothermatters.TheCompanyisunabletopredictthecombinedeffectoftheabovefactorsonitsfutureoperating results.TheCompany's earningsin1977reflected sharplyincreased electricsalestointerconnected utilities athigherpricesandafullyear'simpactofrateincreases whichbecameeffective in1976.The1976rateincreases willnothaveacomparable favorable effecton1978operating results,astheydidin1977.Accordingly, becauseofcontinuing increases inthecostsofdoingbusinessandexpectedlowersalestointerconnected utilities, lowerearningsareanticipated for1978.Inaddition, forinformation concerning astrikebytheUnitedMineWorkersofAmericawhichisadversely affecting theCompany's 1978operations andearnings, see"BUSINESS -FuelSupply(Coal)".Thefollowing analysisoftheCompany's financial performance explainsthereasonsforchangesinspecificitemsontheStatement ofIncomecomparing theyears1976to1975and1977to1976.13 A't'I EnergySalesandOperating RevenuesThechangeinoperating revenuesfromtheprioryearisattributable tothefollowing: Increase(Decrease) cseeianMillionsofDollarsElectricrevenuesQuantityofsalesto:Ultimatecustomers .Othersforresale.Rateincreases Fueladjustment clauses.Other(including taxsurcharge) SteamrevenuesTotal$19.30.340.433.87.3101.1(1.1)$100.0$18.00.436.536.79.2100.8(0.2)$100.6TheCompany's energysalesincreased 6.5%in1976reflecting animprovement intheeconomyandindustrial activityintheCompany's servicearea.Energysalesfor1977,excluding salesofHersheyElectricCompany(acquired December31,1976),increased 578millionkwhor2.8%over1976.HersheyElectricCompanysales,whicharenotincludedinsalesstatistics priortoJanuary1,1977,totaled269millionkwhin1977resulting inaconsolidated salesincreaseof4.2%in1977.Thelowersalesgrowthin1977wasdueprincipally tomoremoderateweatherandatempering ofgeneraleconomicgrowth.Rateincreases forultimatecustomers becameeffective inSeptember 1975($21.0millionannually), April1976($20.0millionannually) andAugust1976($37.3millionannually). TheCompany's tariffsincludefueladjustment clauseswhichadjustpricesforelectricserviceforvariations in'hecostoffuelusedtogenerateelectricity. See,however,thediscussion oftheCompany's Oneidamineunder"BUSINESS -FuelSupply(Coal)"concerning thelimitedrecoveryofthecostofcoalminedatOneida.Revenuesfromthefueladjustment clausestotaled$168.3millionin1976and$205.0millionin1977,reflecting theincreased leveloffuelcostsandadditional energysales.Reference ismadeto"RATEMATTERS"foradditional information concerning generalrateincreases grantedtheCompanyandfueladjustment clauses.CostofEnergyThenetcostofenergyincludesfuelexpensepluspowerpurchases lesspowersoldtootherutilities. Includedinpowerpurchases isthevalueofelectricity generated duringthetestperiodoftheCompany's newgenerating units. ' Fuel.Thechangeinfuelexpensefromtheprioryearisattributable tothefollowing: Increase(Decrease) 19761977MillionsofDollarsElectricfuelexpenseQuantityofelectricity generated ...Averagecostoffuelsburned........$17.9$54.836.060.053.9114.8Lessincreaseinfuelcostsdeferredtomatchrevenuesfromfueladjustment clauses....... SteamheatfuelexpenseTotal..2.951.0(0.8)$50.22.8112.0(01)$111.9Thecostoffuelconsumedincreased during1976and1977asaresultofgreatergeneration ofenergyandincreases inthecostoffuelspurchased. Theincreaseinenergygenerated wasdueprincipally totheadditionoftheoil-fired MartinsCreekunits-No.3wasplacedinserviceinOctober1975andNo.4wasplacedinserviceinMarch1977.See"ELECTRIC STATISTICS" fordetailofgeneration byfuelsource.Theaveragecostoffuelsconsumedincreased during1976and1977duetothecombinedeffectsofhighercoalpricesandthecostofoilconsumedattheMartinsCreekunits,whichhaveafuelcostperkwhgenerated approximately twicethatoftheCompany's coal-fired units.Theaveragecostoffuelconsumedperkwhgenerated was1.04centsin1975,1.17centsin1976and1.35centsin1977.Theportionofthecostoffuelconsumedwhichisrecoverable throughfueladjustment clausesisdeferredtotheperiodinwhichsuchcostsarebilledtocustomers. Interchange PowerSales.Thetotalelectricenergyavailable forsaleincludesenergygenerated bytheCompany's plantsandpowerpurchased fromothers,afterdeducting Companyusesandlinelosses.During1976and1977,approximately 29/oand37/o,respectively, ofthetotalelectricenergyavailable wassoldtootherutilities underinterconnection arrangements. AsrequiredbyboththePUCandFERC,suchsalesarenotrecordedas.Operating RevenuesbutarecreditedtoOperating ExpensesontheStatement ofIncome.Thechangeininterchange powersalesfromtheprioryearisattributable tothefollowing: Increase(Decrease) Quantityofenergysold..Averagepriceofenergysold.Other.Total.19761977MillionsofDollars$(7.9)$77.6(5.7)65.50.93.2$(12.7)$146.315 Thepricereceivedforpowersoldontheinterchange reflectsasplitting ofthedifference betweenthebuyer'sandtheseller'scostofgeneration. During1976therewasanarrowing ofthedifferential betweentheCompany's costofgenerating electricity andthepricereceivedforinterchange powersales.Alsoln1976,increased salestocustomers reducedthequantityofeconomicpoweravailable forsalestointerconnected companies. TheCompanyexperienced anunprecedented levelofinterchange salesduring1977athigherprices.Thesesalesweretheresultofmany-factors, including theadditionofnewgenerating capacity(MartinsCreekUnitNo.4),excellent performance oftheCompany's generating units,extremeweatherconditions duringcertainwinterandsummermonthsandtheextendedoutagesofseveralmajorgenerating unitsofotherinterconnected companies. TheaveragepricetheCompanyreceivedforInterchange powersaleswas1.97centsperkwhin1975,1.90centsperkwhin1976and2.43centsperkwhin1977.Theseamountsweresubstantially inexcessoftheCompany's averagefuelcosts.OtherOperation andMaintenance ExpensesTheincreases inotheroperation andmaintenance expensessuchaswagesandbenefits, materials andsupplies, rentsandinsurance principally reflecttheeffectsofinflation andthecostsofoperation andmaintenance ofnewfacilities placedinservice,Including theCompany's MartinsCreekoil-fired units.Depreciation Increased depreciation expenseisduetonewfacilities placedinservice,including MartinsCreekUnitsNos.3and4whichbegancommercial operation in1975and1977,respectively. Forinformation concerning areduction intheCompany's composite depreciation rateasofJanuary1,1976,seeNote5toFinancial Statements. TaxesForananalysisoftaxes,seeNote10toFinancial Statements. Allowance forFundsUsedDuringConstruction TheAllowance forfundsusedduringconstruction hasincreased substantially duringtheyearsbeingcomparedasaresultoftheCompany's extensive construction program.Foradditional information concerning theAllowance, seeNote(e)tothe"STATEMENT OFINCOME".OtherIncome-NetThereduction inOtherincome-netduring1977reflects, amongotherthings,a$6.6million(netofincometaxes)lossofTheOneidaMiningCompany,asubsidiary, whichwasrecordedbytheCompanyinaccordance withtheequitymethodofaccounting. Foradditional information see"BUSINESS -FuelSupply(Coal)". CostofFixedIncomeSecurities Thechangesfromtheprioryearininterestchargesondebtandindividends onPreferred andPreference Stockwere:Increase(Decrease) 19761977MillionsofDollarsInterestChargesLong-term debt.Short-term debt.Other.Dividends onPreferred andPreference Stock..... $11.9$11.70.9(2.6)0.10.48.93.6Theincreases inIong-term debtinterestchargesanddividends onPreferred andPreference Stockwereduetoissuanceofsecurities principally tofinancetheCompany's construction programandtherefinancing ofmaturingdebtwithsecurities bearinghigherinterestrates.During1976and1977,outstanding long-term debtincreased by$217millionandPreferred andPreference Stockincreased by$121million.Interestchargesonbankloansandcommercial papernotesvaryfromyeartoyearinrelationtotheamountofshort-term debtoutstanding andtheinterestratesineffect.Foradditional information onshort-term debtseeNote4toFinancial Statements. 17 CAPITALSTRUCTURE Thecapitalstructure oftheCompanyatDecember31,1977andasadjustedasofthatdatetogiveeffectto(1)theredemption of40,000sharesofPreference Stock,$9.25Series,inJanuary1978and(2)thesaleoftheCommonStockofferedherebyisasfollows(thousands ofdollars): ActualAmount4/iOfTotalAsAdjustedAmount4/iofTotalLong-Term Debt(a)Firstmortgagebonds(2a/4/o-10'/a/o).............. Notes.Unamortized (discount) andpremium-net...Totallong-term debt........................ Shareowners Investment(b) Preferred andseriespreferred stock(335o/o-9.24 /o)"Preference stock($8.00-$13.00)................... Totalpreferred andpreference stockCommonstock.Capitalstockexpense.Earningsreinvested Totalcommonequity.... Totalshareowners investment ...Totalcapitalization .....$1,245,000 20,929(5,434)1,260,495 48.3281,37510.8206,0007.9487,375582,983(10,630)286,911859,2641,346,639 33.0$2,607,134 100.0$1,245,000 20,929(5,434)1,260,495 47.3281,37510.5202,0007.6100.0483,375645,983(c) (10,774)(d) 286,905(d) 922,11434.61,405,489 $2,665,984 ,(a)SeeNotes4and8toFinancial Statements fordetailsconcerning short-term andlong-term debt.Long-term debtatDecember31,1977includes$3,756,000 duewithinoneyearclassified asacurrentliability ontheBalanceSheet.AtFebruary23,1978therewerenobankloansoutstanding and$26.5millionofcommercial papernotesoutstanding ataweightedaveragediscountrateof6.75'/o.SeeNotes12and15toFinancial Statements forinformation concerning leasesandcommitments andcontingent liabilities. (b)SeeNote6toFinancial Statements fordetailsconcerning capitalstock.(c)BasedonassumedproceedstotheCompanyfromthesaleofCommonStockofferedhereby.Theadjustedamountdoesnotincludeproceedsreceivedsubsequent toDecember31,1977forCommonStocksoldundertheCompany's dividendreinvestment plan.(d)Adjustedforestimated issuanceexpensesfortheCommonStockofferedherebytotaling$150,000anda$6,000amortization toEarningsreinvested ofCapitalstockexpenseapplicable tothePreference Stock,$9.25Series,redeemedinJanuary1978.18

BUSINESSRevenues. During1977,about40'/oofelectricoperating revenuescamefromresidential customers, 28/ofromindustrial customers, 27/ofromcommercial customers and5/0fromothers.During1977,theCompany's largestcustomerprovidedabout4.6'/oofelectricoperating revenuesandthe27largestindustrial customers (eachofwhosebillingsexceeded$1million)providedabout12/0ofsuchrevenues. Industrial customers arebroadlydistributed amongindustrial classifications. PowerSupply.During1977,theCompanyproduced33.4billionkwhinplantsownedbytheCompanyandpurchased 0.6billionkwhunderfirmpurchaseagreements. Duringthisperiod,theCompanydelivered 12.4billionkwhandreceived1.4billionkwhaspowerpoolinterchange. TheCompany's MartinsCreekoil-fired UnitNo.4(820,000netkilowattcapability) wasplacedinserviceinMarch1977.TheCompany's powercapability (winterrating)atDecember31,1977wasasfollows:PlantCoal-Fired Montour.BrunnerIslandSunbury.MartinsCreek.Keystone. Conemaugh ..HoltwoodTotalCoa!-Fired. Oil-Fired MartinsCreek.Combustion TurbinesandDiesels..Hydro.TotalGenerating Capability..... FirmPurchases -Hydro.TotalCapability. NetKilowattCapability 1,515,000 1,464,000 389,000300,000210,000(1) 194,000(2) 73,0004,145,000 1,640,000 539,000146,0006,470,000 76,000(3) 6,546,000 (1)Company's 12.34/oundivided interest. (2)Company's 11.39/oundivided interest. (3)FromSafeHarborWaterPowerCorporation. See"BUSINESS -Hydroelectric Projects". Approximately 37/ooftheCompany's generating capability atDecember31,1977hasbeenplacedinserviceinthelastfiveyearsand69/ointhelasttenyears.Thecapability ofgenerating unitsisbasedupontheoperating experience andphysicalcondition oftheunitsandmayberevisedfromtimetotimetoreflectchangedcircumstances. 19 Themaximumone-hourdemandontheCompany's systemwas4,431,000 kw,whichoccurredonJanuary10,1978.TheCompanyestimates thatitwouldhaveexperienced amaximumone-hourdemandof4,514,000 kwonJanuary17,1977ifa5/0voltagereduction hadnotbeenineffecttopermitthePennsylvania-New Jersey-Maryland (PJM)Interconnection tosupplyemergency powertootherpowerpools.Themaximumone-hoursummerdemandwas3,545,000 kw,whichoccurredonAugust29,1977.Forinformation concerning interchange powersales,see"MANAGEMENT'S DISCUSSION ANDANALYSISOFTHESTATEMENT OFINCOME"and"ELECTRIC STATISTICS". PowerPool.TheCompanyoperatesitsgeneration andtransmission facilities asapartofthePJMInterconnection. ThePJMInterconnection, oneoftheworld'slargestpowerpools,includeselevencompanies servingabout21millionpeopleina50,000squaremileterritory coveringallorpartofPennsylvania, NewJersey,Maryland,

Delaware, VirginiaandWashington, D.C.ThePJMcompanies hadapproximately 44.5millionkwofinstalled generating capacityatDecember31,1977andtransmission lineconnections withneighboring powerpoolshavethecapability ofsupplying anadditional 2.1millionkwtoPJMcompanies.

ThroughDecember31,1977themaximumone-hourdemandonthepowerpoolwasapproximately 32.2millionkw,whichoccurredonJuly21,1977.TheCompanyisalsoapartytotheMid-Atlantic AreaCoordination Agreement whichprovidesforthecoordinated planningofgeneration andtransmission facilities bythecompanies includedinthePJMInterconnection. FuelSupply.During1977,79/0oftheCompany's energygeneration camefromcoal-fired

stations, 19/0fromoil-fired stationsand2/ofromhydroelectric stations.

Anthracite (including petroleum coke).................. Bituminous Coal(1).Total.Coal.Thefollowing tabulation showstheamountofanthracite andbituminous coalburnedbytheCompany's generating stationsduring1977,andtheestimated requirements forcoalovertheremainder oftheexpectedusefullivesoftheCompany's generating stations. Estimated BurnedRequirements DuringOverplantTypeofFuel1977LivesMillionsofTons1.220.010.0235.0112255.0(1)IncludestheCompany's shareofthebituminous coalforthejointly-owned KeystoneandConemaugh generating stations. See"BUSINESS -PowerSupply".Laborcontracts betweenmineownersandtheUnitedMineWorkersofAmericaexpiredonDecember6,1977andastrikestartedonthatdate.Thecurtailment ofcoaldeliveries hasresultedinareduction ofcoalinventories andhascausedtheCompany,alongwithothermembersofthePJMInterconnection (See"BUSINESS -PowerSupply"),toimplement certainactionsdesignedtoreducetheuseofcoalandtoextendtheperiodduringwhichtheircoal-fired unitsmaybeoperatedatreducedlevels.PursuanttothePJMcoalstrikecontingency plan,whichhasbeenfiledwiththevariousregulatory commissions havingjurisdiction overPJMcompanies, theoutputofcoal-fired stationsonthePJMisto20 bereducedto75%ofnormallevelswhencoalinventories dropto45dayssupplyand50%ofnormallevelswhencoalinventories reach30dayssupply.Inaccordance withthePJMcontingency plan,theCompanyhasreducedtheoutputfromitsbituminous coal-fired stationsasfollows:NormalCapability Dateof%ofNormalStation(kilowatts) Rednollon Genersllon Montour.1,515,000 February1975%BrunnerIsland.1,464,000 January2875%MartinsCreek300,000February1550%Sunbury238,000January2675%Basedoncurrentreducedlevelsofgeneration atitscoal-fired

stations, theCompanyestimates thatatFebruary18,1978itscoalinventory wassufficient forabout44daysofoperation (37daysbasedonnormalgeneration levels).Ifthestrikecontinues sothatbituminous coallevelsattheBrunnerIsland,MontourandSunburystationsreach30dayssupply,theoutputofthosestationsisexpectedtobereducedto50%ofnormallevels,therebyextending theperiodoverwhichthoseunitscanoperate.Basedoncurrentprojections andbarringunforeseen circumstances, theCompanyestimates thatitsgenerating capability willbeadequatetopermittheCompanytomeettheenergyrequirements ofitscustomers intoMay1978.Thereceiptofcoalfromsuppliers notaffectedbythestrike,therelaxation ofsulfurdioxideemissionlimitations by'environmental agenciestopermittheuseofpetroleum cokeasasupplement tobituminous coalandmandatory reductions ofcustomerusagewouldbeexpectedtoextendfurthertheperiodoverwhichthegenerating capability oftheCompanywouldbesufficient tomeettheenergyrequirements oftheCompany's customers.

Inadditiontothereduction oftheoutputfromtheircoal-fired units,themembersofthePJMInterconnection, including theCompany,andvariousgovernmental authorities areurgingcustomers tovoluntarily reduceenergyconsumption. Mandatory reductions ofpowerincertainportionsofwesternPennsylvania, whicharenotservedbyPJMcompanies, havebeenapprovedbythePUC.Intheeventthatthestrikeisnotsettledinthenearfuture,furtherreductions ofpowerandinterruptions ofservicemaybemandatedbygovernmental authorities onawide-scale basis.ReducedoutputfromtheCompany's coal-fired unitshasforcedtheCompanytoincreaseitsuseofhighercostoil-fired generation (including combustion turbines) andhasresultedinlessenergybeingavailable fordeliverytointerconnected utilities, animportant contributor tonetincomein1977.Atthesametime,theCompanyhashadtoincreaseitspurchases ofpowerfrominterconnected utilities. Whiletheincreased costwhichwillresultfromthegreaterutilization oftheCompany's oil-fired generation isrecoverable throughfueladjustment clauses,theCompany's reducedlevelofinterchange salesandincreased purchases ofpowerfrominterconnected utilities arehavinganadverseeffectonearnings. TheadverseeffectsofthestrikeontheCompany's generating capability andearningswillbecomemorepronounced thelongerthestrikecontinues. During1977,36%oftheCompany's coalsupplywasobtainedfromsubsidiary miningcompanies (approximately one-third ofwhichwaspurchased bythosecompanies intheopenmarket),9%underlong-term contracts and55%byshort-term contracts andopenmarketpurchases. AtDecember31,1977,theCompany's inventory ofanthracite wasabout2.2milliontons.ThebalanceoftheCompany's requirements foranthracite, aswellasitsrequirements forpetroleum

coke, overtheremainder oftheexpectedusefullivesoftheCompany's anthracite-fired generating stationsisexpectedtobeobtainedbytheacquisition ofadditional anthracite siltbanksandfromshort-term contracts andopenmarketpurchases.

Thefollowing tabulation liststhebituminous coalreservesownedorcontrolled atDecember31,1977bytheCompany's subsidiary, Pennsylvania MinesCorporation. Thesereserves, allofwhicharelocatedinPennsylvania, arerecoverable bydeepminingoperations. Theinformation undertheheadings"Estimated Recoverable ReservesasofJanuary1,1976"and"Average/oSulfur(By'l(l/eight)" wasprovidedbyPaulWeirCompanyIncorporated onthebasisofitsindependent studiesandtheCompanyhasincludedsuchinformation hereininrelianceuponsuchstudies.TheCompanyhasnotretainedanyotherindependent organization toreviewandreportonitsbituminous coalreserves. Estimated Recoverable ReservesAverageasof4/aJanuary1,19761977Sulfur(By1976(1)Production Production Weight)(4)ThousandsofTons AssignedReserves(2) Greenwich Oneida.Rushton.Tunnelton. TotalAssignedReserves..~....Unassigned Reserves(3) GreeneHill.GreeneManor.66,64921,6387,69410,187106,168159,877162,6821,5852655564032,8091,7532204763782,8272.73.34.51.72.93.3TotalUnassigned Reserves... 322,559Total.428,7272,8092,827(1)Includesonlyprovenreservesforwhichtonnageiscomputedfromdimensions revealedinoutcropdata,mineworkingsanddrillholes.(2)Assignedreservesrepresent coalwhichcanbeminedonthebasisofcurrentminingpractices andtechniques throughtheuseofmineopeningsandplantfacilities currently inexistence orunderconstruction. (3)Unassigned reservesrepresent undeveloped reservesorreservesthatwouldrequiresubstantial additional miningfacilities beforeoperations couldbegin.(4)Rawcoal,drybasis(priortocleaning). Priorto1976theCompanypurchased aportionofitscoalrequirements fromTheOneidaMiningCompany(Oneida), asubsidiary ofTheNorthAmericanCoalCorporation (NorthAmerican), underalong-term costofproduction salescontract. InMarch1976,inanefforttocontroltheabnormally highcostofcoaldelivered totheCompanyfromtheOneidamine,theCompanyassertedacontractual rightto22 takeoverOneida.Litigation withNorthAmerican, whichcontested theCompany's take-over, wassettledinFebruary1977ontermswhichgavetheCompanyuncontested controloverOneida.Withtheconclusion ofthelitigation theCompanywasabletoexpandthescopeofstudiespreviously undertaken todetermine whatchangesshouldbemadeinOneida'sminingoperations. InSeptember 1977,theCompanyadoptedaminingplanwhichprovidesforthecontinuation ofsteamcoalminingincertainsectionsoftheOneidamineandthewrite-off ofaportionofthedevelopment costsincurredfrom1970through1974withrespecttoothersectionsoftheOneidaminewhichhavebeenabandoned orbypassedbecauseofpoorminingconditions. ThesectionsoftheOneidaminethathavebeenabandoned werenotincludedintheestimateofrecoverable reservesfortheOneidamineshownintheabovetabulation. Thiswrite-off, whichwasnotrecovered throughtheapplication oftheCompany's fueladjustment clauses,resultedina$6.6millionreduction oftheCompany's netincome($.20pershareofCommonStock)fortheyear1977.Effective February1,1977theCompanybegantopriceOneidacoalforfueladjustment clausecalculation purposesattheaveragecostpertonofcoalproducedbytheCompany's otheraffiliated minesratherthanatOneida'shighercost.ThisactionreducedtheCompany's netincomebyabout$4.3million($.13pershareofCommonStock)duringtheperiodfromFebruarythroughDecember31,1977.TheCompanyestimates thatitsnetincomewillcontinuetobereducedbyabout$400,000permonthuntiltheCompanydetermines whethertomakeadditional investments forfurtherdevelopment oftheOneidamine.TheCompanyhadplannedtoreachadecisionwithrespecttotheOneidaminebymld-1978,butbecauseoflostproduction timeresulting fromthestrikebytheUnitedMineWorkersofAmerica,theCompanyexpectstodelaythatdecisionuntillate1978.IntheeventthattheCompanydetermines tomaketheseinvestments, itisexpectedthatthedifference betweenthecostofOneidacoalandtheaveragecostpertonofcoalproducedbytheCompany's otheraffiliated mineswillbecapitalized ratherthanbeingincludedinthecurrentcostofcoal.Theamountcapitalized wouldbereflected inthecostofcoalaftertheminewasfullydeveloped. However,ifadverseminingconditions preventthefurtherdevelopment oftheOneidamine,miningoperations maybeterminated andadditional lossesincurred. AtDecember31,1977andaftergivingeffecttotheSeptember 1977write-off, theaggregate capitalinvestment inOneida'sfacilities (including leaseobligations) amountedtoabout$35million,substantially allofwhichwasguaranteed directlyorindirectly bytheCompany.rTheCompanyhasalong-term contractwithabituminous coalsupplier(LadyJane)underwhichthesupplierisobligated todeep-mine itsreservestoexhaustion. Production attheLadyJanemineamountedto185,000tonsduring1977.Run-of-mine coalfromtheLadyJaneminehasanaveragesulfurcontentofabout3.5%%d.ThecoalburnedintheCompany's generating stationscontainsbothorganicandpyriticsulfur.Mechanical cleaning~processes installed attheminesarebeingutilizedtoreducethepyriticsulfurcontentofthecoal.Thereduction ofthepyriticsulfurcontenthasloweredthetotalsulfurcontentofthecoalburnedtolevelswhichpermitcompliance withcurrentsulfurdioxideemissionregulations established bythePennsylvania Department ofEnvironmental Resources (DER).See"BUSINESS -Environmental Matters". Theregulations applicable totheCompany's generating stationsgenerally, limitthetotalsulfurcontentofcoaltonotmorethan2.5/o.Coalobtainedundershort-term contracts andbyopenmarketpurchases currently hasanaveragesulfurcontentofabout2.2'/o.23

/TheCompanyownsa12.34/oundivided interestintheKeystonestationandan11.39'/oundivided interestintheConemaugh station,bothofwhicharemine-mouth generating stationslocatedinwesternPennsylvania. TheownersoftheKeystonestationhavealong-term

contract, whichmaybeextendedthrough2012,withasupplierfor90koftheannualbituminous coalrequirements oftheKeystonestation.TheownersoftheConemaugh stationhavealong-term contractwithanothersupplierforatleast80/ooftheannualbituminous coalrequirements oftheConemaugh stationforthelifeofthestation.Totheextentthattherequirements oftheseplantsarenotcoveredbylong-term contracts, thebituminous coalrequirements are,withminorexceptions, obtainedfromlocalsuppliers.

TheCompanyexpectsthatassignedreservesandlong-term contracts willprovide40'/oto50'/oofitsprojected bituminous coalrequirements duringthenextfiveyears.Thebalanceoftheserequirements willhavetobeobtainedundershort-term contracts orbyopenmarketpurchases. Theextenttowhichunassigned reservesmayeventually beminedtomeetthefuelrequirements offuturegenerating stationswilldependuponfutureeconomicconditions andotherfactorswhichcannotnowbepredicted. Excluding mine-mouth plantrequirements, about83/ooftheCompany's bituminous coalpurchased during1977wasdelivered bytheCompany's unittrains,whichatDecember31,1977consisted of980.hoppercars.UseoftheCompany's hoppercarsfordeliveryofcoalminimizes theCompany's dependence uponrailroad-supplied hoppercarswhichfromtimetotimeareinshortsupply.Theaveragedelivered costofcoalhasincreased substantially overthepastseveralyearsfrom$11.89pertonin1973to$25.72pertonduring1977.Theaveragedelivered costofcoalpurchased during1977wasasfollows:bituminous coalpurchased fromsubsidiary companies (including coalpurchased bythosecompanies intheopenmarket)andunderlong-term contracts, $30.64perton;bituminous coalpurchased bytheCompanyundershort-term contracts andintheopenmarket,$24.20perton;andanthracite, including petroleum coke,$11.31perton.Bituminous coalpurchased intheopenmarketbytheCompanyanditssubsidiaries isprimarily surface-mined. Bituminous coalproducedbysubsidiary companies andpurchased bytheCompanyunderlong-term contracts isdeep-mined. Oil.Thetwo820,000kwoil-fired generating unitsattheCompany's MartinsCreekstationaredesignedtoburneithercrudeorresidualoilandtofollowsignificant loadchangesoroperateasbaseloadunits.JTheCompanyhascontracted withoilsuppliers fortheexpectedrequirements oftheMartinsCreekoilunitsthrough1979.Anagreement withoneofthesuppliers, underwhichtheCompanycanpurchaseuptothree-quarters ofitsexpectedoilrequirements fortheseunits,providesforautomatic annualrenewalsbeyond1979unlessterminated upononeyear'spriorwrittennoticebyeitherparty.OilfortheMartinsCreekstationisdelivered toadeepwaterterminalontheDelawareRiveratMarcusHook,Pennsylvania. TheCompanyhasalong-term contractwithanunaffiliated companytoprovideunloading andoilstorageservicesatthatterminal. Theoilistransported fromMarcusHooktostoragefacilities attheMartinsCreekstationbyapipelinewhichwasconstructed primarily fortheuseoftheCompanybyitssubsidiary, Interstate EnergyCompany(IEC).Thepipelineandrelatedfacilities, substantially theonlyassetsofIEC,wereplacedinserviceatacostofapproximately $55million.Ofthatamount,$40.5millionwasobtainedfromtheCompanyandthebalancewasborrowedfrombanks.The.Companyexpectstoformalize itsobligations fortheoperating expensesandannualcarryingchargesofthepipelineinconnection withthepermanent financing ofthesefacilities in1978.FERCandPUCtariffsareineffectforthedeliveryofoilbyIECfromMarcusHooktoMartinsCreek.24 k TheCompanyandIEChavearrangedtoprovidepipelinedeliveryservicestoanotherutilitybeginning inmid-l978.Pipelinedeliveryservicesmaybeavailable fromthedeepwaterterminaltootherdeliverypointsatlocations andtariffrateswhichhavenotyetbeenestablished. Nuclear.TheCompanypresently hasunderconstruction twonuclear-fueled generating unitsatitsSusquehanna site.See"CONSTRUCTION PROGRAM". Inanticipation ofthecommercial operation oftheseunits,theCompanyhasmadecommitments tomeetcertainofthenuclearfuelcyclerequirements fortheseunits.,Thenuclearfuelcycleconsistsoftheminingandmillingofuraniumoretouraniumconcentrate; theconversion ofuraniumconcentrate touraniumhexafluoride; theenrichment ofuraniumhexafluoride; thefabrication offuelassemblies; theutilization ofnuclearfuelinthereactor;temporary storageofspentfuel;andthereprocessing orpermanent disposalofspentfuel.Baseduponthepresently scheduled in-service datesandplannedfuelcyclesfortheseunitsthefollowing tabulation showstheyearthroughwhichcontracts areexpectedtoprovidetheSusquehanna station's requirements forthevarioussegmentsofthenuclearfuelcycle,assumingthatsuppliers meettheircontractual commitments. Susquehanna Unit1.....Susquehanna Unit2.....UraniumConcen-trate(1)(2)19831983Conversion 19851985Enrichment 20072009Fabriaalion 19941994Reprocess-ing(3)19921992(1)TheCompanyhasanoptiontopurchaseaportionofasupplier's production fortheyears1984-1990 which,ifexercised, willprovideaportionoftheCompany's uraniumconcentrate requirements forthatperiod.(2)Theuraniumconcentrates scheduled tobedelivered through1983areexpectedtobesufficient topermittheoperation oftheSusquehanna unitsthrough1985.Underitsenrichment contracts withtheCompany,theDepartment ofEnergy(DOE)maymakechangesinenrichment specifications. Suchchangesmaynecessitate theacquisition bytheCompanyofadditional quantities ofuraniumconcentrate duringtheperiodsindicated inthetabulation. (3)Therearecurrently nocommercially operating facilities intheUnitedStatesforthereprocessing ofspentfuel.Shipments fromSusquehanna tothereprocessor wereinitially scheduled tobeginintheearly1980sfollowing theexpansion ofthereprocessor's facility. Thereprocessor hasinformedtheCompanythatbecauseoftheincreased capitalandoperating costsexpectedtobeincurredtocomplywithNRCcriteriarelatingtotheexpansion, thereprocessor doesnotintendtocontinueinthatbusinessandisseekingtoteiminate thecontractwithrespecttotheSusquehanna units.TheCompanyestimates thattherewillbesufficient storagecapability inthespentfuelpoolsatSusquehanna toaccommodate thefuelthatisexpectedtobedischarged through1984.BecausetheCompanydoesnotcurrently anticipate beingabletoshipspentfueloff-siteby1985forstorageorreprocessing, theCompanyisdeveloping planstoinstalladditional spentfuelstoragecapacityintheSusquehanna spentfuelpools.InApril1977President Carterstatedthathewoulddeferindefinitely thecommercial reprocessing ofspentnuclearfuelandtherecycling oftheplutonium producedindomesticandforeignnuclearpowerprograms. BasedinpartonPresident Carter'sstatements, theNRChas25 'Pp ,terminated itsrulemaking proceeding regarding therecycling ofspentfuel.InOctober1977DOE,proposedapolicyunderwhichtheFederalGovernment wouldtaketitletospentnuclearfuelfromelectricutilities onpaymentofafeeandassumeresponsibility foritsinterimstorageandultimatedisposal. Additional arrangements, forwhichthereisnopresentassurance, willberequiredtosatisfythefuelrequirements oftheSusquehanna unitsovertheirestimated usefullives.Regulation. TheCompanyisapublicutilityunderthelawsoftheCommonwealth ofPennsylvania andissubjecttoregulation assuchbythePennsylvania PublicUtilityCommission. TheCompanyissubjectincertainofitsactivities tothejurisdiction oftheFederalEnergyRegulatory Commission underPartsI,IIandIIIoftheFederalPowerAct.TheCompanyisaholdingcompanyunderthePublicUtilityHoldingCompanyActof1935buthasbeenexemptedbytheSecurities andExchangeCommission fromtheprovisions ofthatActapplicable toitasaholdingcompany.TheCompanyissubjecttothejurisdiction oftheNuclearRegulatory Commission inconnection withtheconstruction oftheSusquehanna units.See"CONSTRUCTION PROGRAM". TheCompanyisalsosubjecttothejurisdiction ofcertainFederal,regional, stateandlocalregulatory agencieswithrespecttoairandwaterquality,landuseandotherenvironmental matters.See"BUSINESS -Environmental Matters". Thecoalminingoperations oftheCompany's subsidiaries aresubjecttotheFederalCoalMineHealthandSafetyActof1969.ProposedEnergyLegislation. Aconference committee ofCongress'currently isconsidering legislation designedtoachieveenergyconservation throughtheapplication ofvariousregulatory andtaxmeasuresandtoencourage thedevelopment anduseofrelatively abundantdomesticfuels-primarily coal.Theconference committee hastentatively agreedtorequirestatepublicutilitycommissions toconsidercertainratedesignstandards. TheCompanyisunabletopredictwhatmeasures, ifany,willultimately beenactedorwhateffectanymeasuresenactedwillhaveontheCompany.Environmental Matters.TheCompanyissubjecttocertainpresentanddeveloping Federal,regional. stateandlocallawsandregulations withrespecttoairandwaterquality,landuseandotherenvironmental matters.Exceptasdescribed below,theCompanyispresently insubstantial compliance withapplicable environmental lawsandregulations andhasallofthepermitscurrently requiredtooperateitsfacilities. Air.TheFederalCleanAirActAmendments of1977(1977Amendments) include,amongotherthings,provisions that:(a)requiretheprevention ofsignificant deterioration ofexistingairqualityinregionswhereairqualityisbetterthanapplicable ambientstandards; (b)restricttheconstruction ofnewemissionsources,including coal-fired andoil-fired generating

stations, inareaswhichhavenotattainedspecified ambientairqualitystandards; (c)revisethestandards ofperformance applicable tonewemissionsourcesandrequirethatnewfossilfueledgenerating unitsachievetherevisedstandards bytheapplication ofthebestavailable controltechnology whichreqUirement, ineffect,appearstoprohibittheuseoflowsulfurcoalatnewemissionsourceswithoutfurthertreatment, suchasthecleaningofcoalortheuseofscrubbers; and(d)requiretheUnitedStatesEnvironmental Protection Agency(EPA)toimposesubstantial non-compliance penalties forfailuretocomplywithairpollution regulations afterJuly1,1979andprovidefornewcivilpenalties ofupto$25,000perdayofviolation forfacilities foundtobeinviolation oftherequirements ofanapplicable implementation plan.26 Underprocedures established bythePennsylvania Department ofEnvironmental Resources (DER)priortothe1977Amendments, companies notincompliance withemissionregulations havebeenpermitted toenterintoconsentorderswithDERwhichallowcontinued operation offacilities duringthetimeinwhichstepsarebeingtakentoachievecompliance.

Inthisregard,theCompanyandtheDERhaveenteredintoaconsentorderwithrespecttoparticulate emissionregulations asfollows:1UnitComptiance DateBrunnerIslandNo.1.December31,1980BrunnerIslandNo.3.June30,1981MontourNo.1.June30,1981MontourNo.2December31,1980Asaresultofthe1977Amendments, theCompanyexpectstoenterintoanewconsentorderwithDERwhichwillestablish newcompliance datesofnotlaterthanJuly1,1979fortheMontourunits.TheCompanycurrently anticipates thattheinstallation offluegasconditioning equipment attheMontourunitsandadditional fuelqualitycontrolequipment orprocedures attheCompany's affiliated mineswillpermittheCompanytoachievecompliance attheMontourunitsbyJuly1,1979.TheCompanyalsoexpectstoenterintoanewconsentorderwithDERfortheBrunnerIslandunits.SincetheCompanyhasbeenproceeding onaschedulewhichwasdesignedtoachievecompliance attheBrunnerIslandunitsbythedatesshowninthetabulation, theCompanywillnotbeabletoachievecompliance attheseunitsbyJuly1,1979.Asaresult,itisexpectedthatthecompliance datesestablished bythenewconsentorderfortheBrunnerIslandunitswillremainunchanged fromthatshownlnthetabulation. AlthoughtheamountoftheCompany's paymentstothePennsylvania CleanAirFundpursuanttothenewconsentordershasnotbeendetermined, theCompanyexpectsthatthepaymentswillbesubstantially inexcessof$3,500permonthwhichisbeingpaidpursuanttothecurrentconsentorder.Becauseofnon-compliance oftheBrunnerIslandandMontourunits,theCompanymaybesubjecttosubstantial non-compliance andcivilpenalties underthe1977Amendments inamountswhicharenotnowdeterminable. TheCompanyandDERarecurrently discussing aconsentorderforUnitNo.4attheCompany's Sunburystation.TheCompanyexpectsthatanyconsentorderwouldpermittheCompanytocontinuetooperatetheunitduringthetimeinwhichtheCompanyistakingstepstoachievecompliance withDERparticulate emissionregulations, Althoughitcurrently expectsthatUnitNo.4attheSunburystationcanbeincompliance withapplicable DERstandards byJuly1,1979theCompanymaybesubjecttofinesorpenalties, including finesorpenalties underthe1977Amendments, duringtheperiodofnon-compliance. TheCompany's requestforanoperating permitforSunburyUnitNo.3iscurrently pendingbeforeDER.InJuly1977EPAnotifiedtheCompanyofanallegedviolation attheCompany's Holtwoodsteamstationofopacityparticulate emissionregulations established byDER.Following discussions withDERandEPA,theCompanyinJanuary1978agreedtoinstalladditional emissioncontrolfacilities attheHoltwoodstation.Itlsexpectedthatthesefacilities willnotbeabletobeplacedinservicebeforemid-1981andthattheCompanymaybesubjecttofinesandpenalties forfailuretomeettheJuly1,1979compliance dateestablished bythe1977Amendments. TheCompany's estimateofconstruction expenditures fortheyears1978-1980 includesestimated expenditures duringthatperiodtoachievecompliance withDERparticulate emissionregulations attheBrunnerIsland,Montour,SunburyandHoltwoodUnits.See"CONSTRUCTION PROGRAM". 27 llpl Theprocessing ofcoaltoreducethesulfurcontentpriortoburningpermitstheCompanytocomplywithcurrentsulfurdioxideemissionregulations. If,however,thesulfurdioxideemissionregulations applicable totheCompany's existinggenerating stationsareamendedtosignificantly reducepermissible discharges, theCompanymayberequiredtofurtherreducethesulfurcontentofthecoalpriortoburningorinstallequipment fortheremovalofsulfurdioxidefromfluegases.DERhasproposedregulations which,ifadopted,couldhavetheeffectoflimitingthesulfurdioxideemissions fromtheCompany's Sunburystation.Compliance withsuchregulations couldbeexpectedtorequiretheCompanytomakeadditional expenditures attheSunburystationinamountswhicharenotnowdeterminable. VYater.Tomeetthestandardof"bestpracticable controltechnology currently available" established bytheFederalWaterPollution ControlAct,asamendedinDecember1977(WaterAct),theCompany's coalminingsubsidiaries areplanningtoinstallwastewatertreatment equipment atcertainoftheirfacilities andhavefiledthenecessary applications withDER.Thefailurebythesubsidiaries tomeettheWaterActstandardbyJuly1,1977maysubjectthesubsidiaries tofinesandpenalties whicharenotexpectedtobematerialinamount.TheWaterActrequirestheapplication ofthe"bestavailable technology economically achievable" byJuly1,1984withrespecttocertaindischarges fromexistingfacilities andauthorizes EPAtoestablish discharge limitations andcompliance schedules forcertainotherpollutants. Withrespectto"new"facilities, theWaterActauthorizes EPAtoestablish standards ofperformance whichwillrequiretheapplication ofthe"bestavailable demonstrated controltechnology". TheWaterActalsorequiresthatthelocation, design,construction andcapacityofcoolingwaterintakestructures reflecttheapplication ofthe"besttechnology available forminimizing adverseenvironmental impact".EPAhasadoptedeffluentlimitations, guidelines andstandards forsteamelectricstationsandguidelines forexistingcoalmines.EPAlimitations, guidelines andstandards areenforcedthroughtheissuanceofdischarge permitswhichspecifytheapplicable limitations ondischarges. Compliance withapplicable stateandregionalwaterqualitystandards isaccomplished byrequiring theappropriate stateorinterstate agencytoissueawaterqualitycertification withrespecttoeachapplication. Thetermsandconditions ofanysuchwaterqualitycertification mustbeincorporated inthedischarge permitissuedbyEPA.EPAhasissueddischarge permitsfortheoperation oftheCompany's generating stationsandforconstruction activities attheSusquehanna station.Applications fordischarge permitsforthesewagetreatment plantattheMontoursville servicecenterandthecoalminingoperations oftheCompany's subsidiaries arependingbeforeEPA.DERhasissuedtherequiredwaterqualitycertification forthePennsylvania MinesCorporation (PMC)discharge permits.TheCompanybelievesthatcertaindischarge limitations contained intheDERcertification fortheMontourstationaremorestringent thanthoseestablished byapplicable guidelines andregulations andhasrequested ahearingbeforeDERconcerning theselimitations. DERalsoadministers stateandcertainregionallawsandregulations withrespecttoeffluentdischarges andwaterquality.TheCompanyandDERarealsodiscussing thenecessity ofinstalling additional watertreatment facilities atcertainoftheCompany's plants.Regulations adoptedbytheDepartment ofInterior's OfficeofSurfaceMining,Reclamation andEnforcement pursuanttotheSurfaceMiningControlActof1977,whichalsoappliestothedisposalofrefusefromunderground mines,areexpectedto,delaytheissuancebyDERofacoalrefusedisposalpermitforPMCandmayrequireadditional expenditures atPMCinamountswhicharenotnowdeterminable butwhichmaybesubstantial. 28 DelawareRiverBasinCommission approvaloftheCompany's waterwithdrawal permitfortheoil-firedunitsattheMartinsCreekstationrequirestheCompanytoprovidemake-upwateratcertaintimesor-tocurtailoperation oftheseunitsduringcertainperiodsoflowflowintheDelawareRiver.ItistheCompany's intention tosupplytherequiredmake-upwaterfromitsLakeWallenpaupack hydroelectric project.See"BUSINESS -Hydroelectric Projects". Theregulations oftheSusquehanna RiverBasinCommission requirethatwaterusersprovidemake-upwaterduringcertainperiodsoflowflowintheSusquehanna River.Inconnection withtheconstruction oftheSusquehanna station,theCompanyisconsidering, amongotheralternatives, theconstruction ofareservoir toprovidemake-upwater.Preliminary environmental andengineering feasibility studieswithrespecttothereservoir havebeenundertaken bytheCompanyandtheCompanyestimates thatthecostofthisreservoir wouldapproximate $45million.TheCompany's shareofsuchcostduringtheyears1978-1980 isincludedinitsestimateofconstruction expenditures forthatperiod.See"CONSTRUCTION PROGRAM". 'In1974theBoroughofTremont,Pennsylvania, andseveralresidents oftheBoroughofTremontcommenced asuitagainsttendefendants, including theCompany,intheCourtofCommonPleas,Schuylkill County,Pennsylvania. Thecomplaint inthisproceeding (whichpurportstobeaclassactiononbehalfofallresidents oftheBoroughofTremont)alleges,amongotherthings,thatthefailureofthedefendants tocomplywiththeprovisions ofvariousFederalandstateenvironmental lawsinconnection withthemaintenance ofcertainculmandsiltbanksinthevicinityoftheBoroughofTremontcausedtheplaintiffs namedinthecomplaint tosufferdamagesofapproximately $1.3millionduringthefloodingresulting fromTropicalStormAgnes.InJuly1977GoldMills,Inc.commenced asuitagainstthesamedefendants containing similarallegations andclaimingdamagesof$3.6million.Plaintiffs inbothproceedings areseekingtorecoverpunitivedamagesinunspecified amounts.Nuc/ear.TheU.S.CourtofAppealsfortheDistrictofColumbiainJuly1976announced decisions intwocasestowhichtheCompanywasnotapartyconcerning thescopeoftheNRCenvironmental reviewofnuclearplants.InonedecisiontheCourtheldthattheNRCmustgivefurtherconsideration inallcasestotheenvironmental impactofthereprocessing ofspentfuelandthedisposalofradioactive wastematerial. InOctober1976theNRCinitiated rulemaking proceedings toevaluatefurthertheenvironmental impactofreprocessing andwastedisposalandinMarch1977theNRCadoptedaninterimrulerelatingtothesematters.InAugust1977,initsdecisionterminating theshowcauseproceedings initiated byanenvironmental grouptohalttheconstruction oroperation of14nuclearfuelunitsinPennsylvania andNewJersey,including theSusquehanna units,theNRCAppealPanelconcluded thattheapplication oftheinterimrulewouldnotsignificantly affectthecostbenefitanalysisfortheSusquehanna units.Afurtherproceeding relatingtoafinalrulewithrespecttotheenvironmental impactofthereprocessing ofspentfuelandthedisposalofradioactive wastematerialiscurrently pendingbeforetheNRC.ItisexpectedthattheresultsoftheNRCrulemaking proceedings willserveasabasisforthecostbenefitanalysisrequiredbytheNationalEnvironmental PolicyActof1969inconnection withtheissuanceofoperating licensesfornuclearplantsincluding theSusquehanna units.IntheotherdecisiontheCourtheldthattheNRCmustconsiderenergyconservation asanalternative totheconstruction ofnuclearplantsinlicensing proceedings whereenergyconservation (inadditiontoalternative meansofgenerating power)israisedasanissue.Sinceenergyconservation isconsidered inconnection withindividual licensing proceedings, theNRChasnotinitiated arulemaking proceeding withrespecttothesematters.TheSupremeCourthasgrantedreviewofbothCourtofAppealsdecisions. TheactionoftheNRCinMarch1977inadoptingtheinterimrulerelatingtotheenvironmental impactoffuelreprocessing and29 wastedisposalhasbeenappealedtotheU.S.CourtofAppealsfortheDistrictofColumbia. TheCompanyisunabletopredictwhatfurtheractionsmaybetakenbytheNRCortheCourtswithrespecttoanyofthesemattersortheeffectthatsuchactionsoractionsbyenvironmental agenciescouldhaveonthecostorin-service datesoftheSusquehanna units.See"CONSTRUCTION PROGRAM". General.Duringtheperiod1973through1977,theCompany's construction expenditures aggregated about$1.61billion,ofwhichtheCompanyestimates thatabout$83millionwasforcompliance withFederal,stateandlocalenvironmental lawsandregulations. Approximately $150millionofcapitalexpenditures forsuchcompliance areincludedintheCompany's 1978-1980 construction programanditmaybethatsubstantial additional expenditures forsuchpurposesinanamountnotnowdeterminable willberequiredduringsuchperiodandthereafter. FromtimetotimetheCompanyanditssubsidiaries havebeencitedforviolations ofDERandEPAairandwaterqualityregulations inconnection withtheoperation oftheirfacilities and,asaresult,maybesubjecttocertainpenalties whicharenotexpectedtobematerialinamount.TheCompanyisunabletopredicttheultimateeffectofdeveloping environmental lawandregulation uponitsexistingandproposedfacilities andoperations. However,itispossiblethatsuchlawandregulation mayrequiretheCompanytomodify,supplement, replaceorceaseoperating itsequipment andfacilities, delayorimpedeitsconstruction andoperation ofnewfacilities, andrequireittomakesubstantial additional expenditures Inamountswhicharenotnowdeterminable. Hydroelectric Projects. TheCompanyoperatestheHoltwoodhydroelectric project(102,000kwcapability) andtheWallenpaupack hydroelectric project(44,000kwcapability), theoriginallicensesforwhichexpiredin1970and1974,respectively. PendingfinalactionontheCompany's applications fornewlong-term licensesforbothprojects, FERChasgrantedtheCompanyinterimannuallicensestooperatetheprojects. Theinterimannuallicensesincorporate thetermsandconditions oftheoriginallong-term licenses. TheCompany's Holtwoodapplication isbeingopposedbyamunicipal electricsystem.TheHoltwoodandWallenpaupack projectsrepresent currentinvestments onadepreciated originalcostbasisof$9.6millionand$10.1million,respectively. TheFederalPowerActprovidesthatif,uponexpiration ofamajorprojectlicense,theUnitedStatestakesovertheprojectoralicensefortheprojectisissuedtoanewlicensee, theoriginallicenseeshallbepaidthe"netinvestment" intheproperty, nottoexceedfairvalue,plusseverance damages,ifany.CertainreserveswhicharerequiredbytheActandwhichrelatetothecalculation of"netinvestment" havenotbeenrecordedpendingapprovaloftheamountsthereofbyFERC.InApril1977,FERCissuedaproposedrulemaking which,ifadopted,wouldrequirealicenseetorecordthesereservesbyanappropriation ofearningsreinvested. Theamountofearningsreinvested soappropriated wouldberestricted astothepaymentofdividends. TheCompanyestimates thatsuchreservesapplicable totheperiod1946throughDecember31,1977wouldnotexceed$3.1millionforitstwolicensedprojects. TheCompanyalsoownsone-third ofthecapitalstockofSafeHarborWaterPowerCorporation (SafeHarbor)whichholdsamajorprojectlicensefortheoperation ofitshydroelectric plant(230,000kwcapability). TheCompanyisentitledtoone-third ofthecapacity(76,000kw)oftheSafeHarborplant.TheSafeHarborlicenseexpiresin1980.InApril1977SafeHarborfiledanapplication withFERCforanewlong-term licenseandtheproposedinstallation offiveadditional 37,500kwunits.Theadditional unitswillincreasethetotalcapability oftheSafeHarborplantto417,500kwandtheCompanywillbeentitledtoone-thifd ofthetotalcapacity(139,167kw)..30 ELECTRICSTATISTICS 19731974197519761977PowerCapability(thousands ofkw)Coal-fired steamstationsOil-fired steamstation.. Combustion turbinesanddiesels........................ Hydroelectric stations..Firmpurchases (hydro).Total..WinterPeakDemand(thousands ofkw)(a)................. SourcesofEnergy(millions ofkwh)Generated Coal-fired steamstations. Oil-fired steamstation.Combustion turbinesanddiesels................. Hydroelectric stations..Powerpurchases ..Total.Disposition ofEnergy(millions ofkwh)Energysalestocustomers. Interchange powersales(b)..Companyusesandlinelosses......Total..FuelCostofEnergyGenerated (centsperkwh).......... CostofCoalReceived, including freightandhandlingcost(perton).EnergySales(millions ofkwh)Residential. Commercial. Industrial... Other.Total.Operating Revenues(thousands) Residential. Commercial. Industrial.. OtherTotal.NumberofCustomers (endofperiod)........................ AverageUsePerResidential Customer(kwh)............. AverageRevenue(centsperkwh)Residential. Commercial. Industrial.. Allcustomers.. TotalOperating ExpensesperkwhofEnergySales(centsperkwh)(b)... 4,140541146764,9033,6624,140539146764,90137724,136820539146765,7174,1224,136820539146765,7174,4254,1451,640539146766,5464,43124,7822738161,96827,83918,8657,2371,73727,8390.5024,1862477721,57026,77518,9636,0791,73326,7750.8825,3841,149848592,24129,71719,1138,7571,84729,7171.04"25,7511,947408092,12630,67320,3548,3581,96130,6731.1726,2996,2711157351,97735,39721,20112,4331,76335,3971.356,3244,2626,8811,39818,865$154,681101,67099,92825,868$382,147886,3788,2536,4944,2757,1701,02418,963$187,265121,314131,45227,539$467,570902,1488,2876,8184,5757,02070019,113$218,904143,673150,36525,686$538,628917,9208,5287,2674,8747,48173220,354$257,828170,990180,95729,949$639,724936,2198,9317,5395,2117,69775421,201$296,179201,639209,52733,183$740,528954,6139,0632.452.391.452.002.882.841.832.443.213.553.143.512.142.422.783.103.933.872.723.451.521.882.212.492.64$11.89$20.80$23.38$25.36$25.72Note:Statistics oftheCompanyandHersheyElectricCompanyareconsolidated sinceJanuary1,1977.(a)Winterpeakshownwasreachedearlyinsubsequent year.TheCompanyestimates thatitwouldhaveexperienced apeakfor1976of4,514,000 kwifa5/ovoltagereduction hadnotbeenineffect.(b)Asprovidedintheapplicable regulatory systemofaccounts, receiptsfrominterchange powersaleshavebeentreatedasreductions ofoperating expenses. 31 DESCRIPTION OFCOMMONSTOCKTheoutstanding CommonStockis,andtheCommonStockofferedherebywhenissuedandpaidforwillbe,fullypaidandnon-assessable. Thefollowing isasummaryofcertainprovisions oftheCompany's ArticlesofIncorporation andmortgages, copiesofwhichareexhibitstotheRegistration Statement. DividendRights.SubjecttotheArticlesofIncorporation andmortgagerestrictions ondividends referredtobelowandtothepreferential rightsofthePreferred StockandPreference Stock,dividends maybedeclaredontheCommonStockoutoffundslegallyavailable forthepaymentthereof.DividendRestrictions. TheCompany's ArticlesofIncorporation providethatnodividends (otherthandividends payablebytheissuanceofCommonStock)on,orpurchases oracquisitions of,ordistributions on,theCommonStockshallbepaidormadebytheCompanyaggregating anamountinexcessof(a)75'/oofthecurrentyear'searningsotherwise available forCommonStock,ifaftersuchpayment,purchase, acquisition ordistribution theratiooftheaggregate ofthestatedvalueofCommonStockandearningsreinvested tototalcapitalization, including earningsreinvested, willbelessthan25'/0,and(b)50'/oofsuchearnings, ifaftersuchpayment,purchase, acquisition ordistribution, suchratiowillbelessthan20/o.AtDecember31,1977therewerenorestrictions onthepaymentofdividends outofearningsreinvested. TheCompany's mortgagecontainsaprovision which,ingeneral,restricts thepaymentofCommonStockdividends incashiftheeffectthereofwillbetobringtheaggregate ofearningsreinvested plustheprovisions fordepreciation toapointbelowthemaintenance andreplacement fundrequirements whichhavenotbeensatisfied byactualexpenditures. Suchprovision didnotresultintherestriction ofanyportionofearningsreinvested oftheCompanyatDecember31,1977.AnassumedmortgageontheformerScrantonElectricCompanyproperties acquiredbymergerin1956alsocontainsrestrictions onthepaymentofCommonStockdividends whichdonotlimittheavailability ofearningsreinvested. VotingRights.Exceptashereinafter otherwise setforth,theholderofeachshareofPreferred Stock,Preference StockandCommonStockhasonevoteonanyquestionpresented toanyshareowners'eeting, amajorityinnumberofsharesregardless ofclassbeingconsidered amajorityinvalueorininterestwithinthemeaningofanystatuteorlawrequiring theconsentofshareowners holdingamajorityininterestoragreateramountinvalueofstockoftheCompany.Ifandwhendividends payableonanyPreferred Stockshallbeinarrearsinanamountequivalent totheannualdividendrateormorepershareandthereafter untilalldividends onthePreferred Stockinarrearsshallhavebeenpaid,theholdersofthePreferred Stock,votingasasingleclass,shallbeentitledtoelectamajorityofthefullBoardofDirectors, andtheholdersofthePreference StockandCommonStock,votingseparately asaclass,andsubjecttotherightsoftheholdersofPreference Stockasdescribed below,shallhavetheright'oelecttheremaining directors. Ifandwhendividends payableonthePreference Stockshallbeinarrearsinanamountequivalent tooneandone-halftimestheannualdividendrateormorepershareandthereafter untilalldividends onthePreference Stockinarrearsshallhavebeenpaid,theholdersofthePreference Stockvotingasasingleclass(andsubjecttorightsofholdersofPreferred Stock)shallbeentitledtoelecttwodirectors. UnderPennsylvania law,allshareowners oftheCompanyhavetheunconditional rightofcumulative votingintheelectionofdirectors. 32 Liquidation Rights.Aftersatisfaction ofthepreferential liquidation rightsofthePreferred StockandthePreference Stock,theholdersoftheCommonStockareentitledtoshare,ratably,inthedistribution ofallremaining assets.SeeNote6toFinancial Statements for.theliquidation preferences ofthePreferred StockandPreference Stock.Preemptive Rights.TheholdersofCommbnStockdonothavepreemptive rightsastoadditional issuesofCommonStock.CertainTaxMatters.IntheopinionofEdwardM.Nagel,Esq.,GeneralCounseloftheCompany,theCommonStockisexemptfromexistingpersonalpropertytaxesinPennsylvania. Listing.TheCommonStockislistedontheNewYorkandPhiladelphia StockExchanges. TransferAgentsandRegistrars. TheTransferAgentsarecertainemployees oftheCompany,Industrial ValleyBankandTrustCompany,Allentown, Pa.,andIrvingTrustCompany,NewYork,N.Y.TheRegistrars areTheFirstNationalBankofAllentown, Pa.,andMorganGuarantyTrustCompanyofNewYork,N.Y.EXPERTSThebalancesheetsasofDecember31,1976and1977andtherelatedstatements ofincome,earningsreinvested, andchangesinfinancial positionforeachofthefiveyearsintheperiodendedDecember31,1977includedinthisProspectus havebeenexaminedbyHaskins8Sells,independent Certified PublicAccountants, asstatedintheiropinionappearing herein,andhavebeensoincludedin,relianceuponsuchopiniongivenupontheauthority ofthatfirmasexpertsinaccounting andauditing. Information inthetabulation oftheAssignedReservesandUnassigned Reservesundertheheadings"Estimated Recoverable ReservesasofJanuary1,1976"and"Average/oSulfur(ByWeight)"underthecaption"BUSINESS -FuelSupply(Coal)"wasprovidedbyPaulWeirCompanyIncorporated andisincludedhereininrelianceonitsauthority asanexpert.Statements madehereinastomattersoflawandlegalconclusions havebeenreviewedbyEdwardM.Nagel,Esq.,GeneralCounseloftheCompany,andhavebeenmadeinrelianceonhisauthority asanexpert.LEGALOPINIONSThevalidityoftheCommonStockofferedherebywillbepasseduponfortheCompanybyEdward,,M.Nagel,Esq.,GeneralCounseloftheCompany,andMessrs.SimpsonThacher8Bartlett, NewYork,N.Y.,andfortheUnderwriters byMessrs.Sullivan6Cromwell, NewYork,N.Y.However,allmattersoflawoftheCommonwealth ofPennsylvania willbepassedupononlybyMr.Nagel,whoisafull-time employeeoftheCompany.33 'IIJt~lf MANAGEMENT Directors

JACKK.BUSBY,ChairmanoftheBoardandChiefExecutive OfficeroftheCompany*ROBERTK.CAMPBELL, President oftheCompany*RALPHR.CRANMER,MemberoftheBoardofDirectors ofGritPublishing CompanyEDGARL.DESSEN,Physician-Radiologist

'OBERTR.FORTUNE,Executive VicePresident, Financial ofthe,Company*HARRYA.JENSEN,President andChiefExecutive OfficerofArmstrong CorkCompany*MemberofExecutive Committee. OfficersJACKK.BUSBY,ChairmanoftheBoardandChiefExecutive OfficerROBERTK.CAMPBELL, President ROBERTR.FORTUNE,Executive VicePresident, Financial VIRGINIAH.KNAUER,President ofVirginiaKnauerandAssociates, Inc.W.DEMINGLEWIS,President ofLehighUniversity JOHNA.NOBLE,ChairmanoftheBoardandChiefExecutive OfficerofCleiandSimpsonCompanyRUTHPATRICK,ChiefCuratoroftheLimnology Department oftheAcademyofNaturalSciencesofPhiladelphia NORMANROBERTSON, SeniorVicePresident andChiefEconomist ofMellonBank,N.A.*JOSEPHT.SIMPSON,ChairmanoftheBoardofHarscoCorporation CHARLESH.WATTSII,Educational andBusinessConsultant, formerPresident ofBucknellUniversity JOHNT.KAUFFMAN, VicePresident, SystemPowerLEngineering EMMETM.MOLLOY,VicePresident, HumanResource8Development LEONL.NONEMAKER, VicePresident, DivisionOperations CHESTERR.COLLYER,Treasurer NORMANW.CURTIS,VicePresident, Engineering &Construction JOSEPHL.DONNELLY, VicePresident, FinanceLOUISEA.EARP,Assistant Secretary CHARLESE.FUQUA,VicePresident, Susquehanna DivisionCHARLESJ.GREEN,VicePresident, Harrisburg DivisionRICHARDH.LICHTENWALNER, VicePresident, Information ServicesCARLR.MAIO,VicePresident, LehighDivisionJAMESJ.McBREARTY, VicePresident, Northeast DivisionEDWARDM.NAGEL,VicePresident, GeneralCounselandSecretary HERBERTD.NASHJR.,VicePresident, Consumer6Community ServicesEDWINH.SEIDLER,VicePresident, Distribution BRENTS.SHUNK,VicePresident, Lancaster DivisionJEANA.SMOLICK,Assistant Secretary DONALDJ.TREGO,Assistant Treasurer GEORGEF.VANDERSLICE, VicePresident andComptroller PAULINEL.VETOVITZ, Assistant Secretary HELENJ.WOLFER,Assistant Secretary 34 Vi PENNSYLVANIA POWER&LIGHTCOMPANYSTATEMENT OFCHANGESINFINANCIAL POSITION1973197419751976Thousands ofDollars1977SOURCEOFFUNDSOperations Netincome..Charges(credits) againstincomenotinvolving workingcapitalDepreciation. Noncurrent deferredincometaxesandInvestment taxcredits-net........'.................... Allowance for,fundsusedduringconstruction ....Other..48,83752,39958,54062,47868,03511,282(14,967)220112,2848,790(20,732)520128,45615,701(36,605)7,464142,64131,789(45,192)4,669165,85533,579(49,395)(1~191)200,791$"66,912$87,479$97,541$112,111$149,763OutsideFinancing Commonstock.Preferred andpreference stock...... Firstmortgagebonds..Otherlong-term debtShort-term debt-netincrease......WorkingCapital-decrease(a).Investments inAssociated Companies -decrease........... DepositsfromAllegheny ElectricCooperative (Note14)...Other-net..TotalSourceofFunds................................. APPLICATION OFFUNDSConstruction Expenditures (Note14).NuclearFuelinProcess(Note14)..................................... Allowance forFundsUsedDuringConstruction................ 140,90040,000108,000'0,024208,9243,15635,15625,000180,00036045,658286,17468557,76370,000225,000208352,97115,1662,672$327,036$415,315$510,778$224,496(14,967)209,529$267,724$342,4963,7362,793(20,732)(36,605)250.728'08,68482,70575,000150,00025387,97550,000100,0005766,424$497,131$394,23813,555(45,192)362,601$362,55817,680(49,395)330,843307,958238,55116,89484,215608$524,165Securities RetiredPreference stock.Firstmortgagebonds..Otherlong-term debt..Short-term debt-netdecrease..... Dividends onPreferred, Preference andCommonStock..WorkingCapital-'ncrease(a).................... Acquisition ofHersheyElectricCompany......................... Investments inAssociated Companies -Increase............. Other-net..TotalApplication ofFunds........................... ~ChangesinComponents ofWorkingCapital(a)Cashandtemporary cashinvestments.............................. Accountsandnotesreceivable. Coalandfueloil..Recoverable fuelcosts,lessrelateddeferredincometaxes.Accountspayableandaccruedtaxes............................... Dividends payableandinterestaccrued.......:................... Other-net..Increase(Decrease) .10,04156,63166,67250,037798$327,03618,63218,63258,89782,7534,305$415,315(10,006)(5,136)(289)$(3,156)16,747(1,811)(6,494)10,205$82,753$10,247$(3,792)6,74522,896(4,717)45,00293,00011211,879104,99170,68623,9902,427$510,778$(5,352)28,757(3,568)738(22,507)(6,346)(6,888)$(15,166)8,0003,05413,61824,67286,694,15,3097,8554,00020,50019636,61261,308100,81331,020181$12316,3946,5672,1258,501(4,612)(13,789)$15,309$19,13612,27930,8743,189(26,756)(4,034)'3,668$31,020$497,131$524,165(a)Excludesshortandlong-term debtduewithinoneyear.Seeaccompanying NotestoFinancial Statements. 35 PENNSYLVANIA POWER&LIGHTCOMPANYBALANCESHEETASSETSThousands ofDollarsDecember31,19781977UTILITYPLANTPlantinservice-atoriginalcostElectric................................... Steamheat..TotalplantInservice.Lessaccumulated depreciation (Note5)Netplantinservice.. Construction workinprogress-atcost.Nuclearfuelinprocess-atcost.Netutilityplant(Note8)..INVESTMENTS Associated companies -atequity..Nonutility propertyandother-atcostorless..Totalinvestments. CURRENTASSETSCash(Note4)..Temporary cashfnvestments, atcostwhichapproximates market.Accountsreceivable (lessreserve:1976,$1,925;1977,$2,715)Customers .OtherNotesreceivable (principally fromassociated company)..Recoverable fuelcosts..Coalandfueloil-ataveragecost..Materials andsupplies-ataveragecost.Other.Totalcurrentassets.DEFERREDDEBITS..$2,090,282 7,8962,098,178 458,6971,639,481 720,54420,0842,380,109 15,3277,54822,87514,95549,20522,85729,57041,67074,88519,0687,219259,4294,884$2,323,792 8,1402,331,932 508,9481,822,984 829,48137,7642,690,229 17,6407,41925,05914,09819,99352,38028,98832,54348,987105,759'9,445 7,811330,0045,030Total.$2,667,297 $3,050,322 Seeaccompanying NotestoFinancial Statements. 36 ~4 PENNSYLVANIA POWER8rLIGHTCOMPANYBALANCESHEETLIABILITIE6Thousands ofDollarsDecember31,19761977CAPITALIZATION Shareowners Investment (Notes6,7and9)Preferred stock.Preference stock..Commopstock.Capitalstockexpense.Earningsrelnvested. Totalshareowners Investment. Long-term debt(Note8).Totalcapitalization CURRENTLIABILITIES Long-term debtduewithinoneyear(Note8).Commercial papernotes(Note4).Accountspayable(Note13)..Taxesaccrued..DeferredIncometaxesapplicable torecoverable fuelcosts..Dividends payabie.. Interestaccrued.Other(Note13).Totalcurrentliabilities. DEFERREDANDOTHERCREDITSDeferredInvestment taxcredits.DeferredIncometaxes..DepositsfromAllegheny ElectricCooperative (Note14)..Other.Totaldeferredandothercredits..COMMITMENTS ANDCONTINGENT LIABILITIES (Note15)Total.$231,375210,000,495,008(10,220)237,9671,164,130 1,161,319 2,325,449 20,67560,01250,41512,56422,06023,00222,58921,184232,50156,52636,86015,961109,347$2,667,297 $281,375206,000582,983(10,630)286,9111,346,639 1,256,739 2,603,378 3,75623,40062,47227,26326,18826,61223,01325,821218,52582,07844,88784,21517,239228,419$3,050,322 Seeaccompanying NotestoFinancial Statements. 37 PENNSYLVANIA POWER&LIGHTCOMPANYSTATEMENT OFEARNINGSREINVESTED BALANCE,JANUARY1.ADDNETINCOME.Total..1973$140,23866,912207,150197419751978Thousands ofDollars$157,113$185,695$212,55087,479'7,541 112,111244,592283,236324,661$237,967149,763387,730DEDUCTCashDividends DeclaredPreferred stock(atspecified annualrates)................. Preference stock(atspecified annualrates)............... Commonstock(pershare-1973,$1.68;1974,$1.77;1975and1976,$1.80;1977,$1.89)........... Other.Total.BALANCE,DECEMBER31(Notes7and9)....7,5519,3939,640'0,26332,84639,24150,03758,897$157,113$185,6959,39315,11646,17770,686$212,55013,12820,24053,32686,694$237,96717,12319,87063,8206100,819$286,911ISeeaccompanying NotestoFinancial Statements 38' PENNSYLVANIA POWER&LIGHTCOMPANYNOTESTOFINANCIAL STATEMENTS 1.SUMMARYOFACCOUNTING POLICIESAccounting SystemAccounting recordsaremaintained inaccordance withtheUniformSystemofAccountsprescribed bytheFederalEnergyRegulatory Commission (FERC)andadoptedbythePennsylvania PublicUtilityCommission (PUC).Principles ofConsolidation TheaccountsoftheCompanyandHersheyElectricCbmpany(Hershey), awholly-owned electricdistribution subsidiary acquiredDecember31,1976,areconsolidated intheaccompanying financial statements fromtheacquisition date.Allsignificant intercompany transactions havebeeneliminated. Theacquisition costofthecapitalstockandtherepayment ofalldebtowedbyHersheyapproximated $7.9million.Theoperations ofHersheyarenotmaterialcomparedtooperations oftheCompany.Associated Companies Investments inunconsolidated subsidiaries (allwholly-owned) andinSafeHarborWaterPowerCorporation (one-third oftheoutstanding capitalstockrepresenting one-halfofthatcompany's votingsecurities) arerecordedusingtheequitymethodofaccounting. TheCompany's unconsolidated subsidiaries areengagedincoalminingoperations, holdingcoalreserves, uraniumexploration, oilpipelineoperations andrealestate.ExceptforuraniumminingclaimsinWyomingandUtahandminoramountsofrealestateheldinotherstates,theCompany's unconsolidated subsidiaries'roperty andoperations areinPennsylvania. TheCompanybelievesthatitsfinancial positionandresultsofoperations arebestreflected withoutconsolidation ofthesesubsidiaries sincetheyarenotengagedinthebusinessofgenerating ordistributing electricity. Ifalltheunconsolidated subsidiaries wereconsidered intheaggregate asasinglesubsidiary, theywouldnotconstitute a"significant subsidiary" asthattermisdefinedbytheSecurities andExchangeCommission (SEC).UtilityPlantAdditions toutilityplantandreplacements ofunitsofpropertyarecapitalized atcost.Costsofdepreciable propertyretiredorreplacedareremovedfromutilityplantandsuchcosts,plusremovalcosts,lesssalvage,arechargedtoaccumulated depreciation. Costsoflandretiredorsoldareremovedfromutilityplantandanygainsorlossesarereflected ontheStatement ofIncome.Allexpenditures formaintenance andrepairsofpropertyandthecostofreplacement ofitemsdetermined tobelessthanunitsofpropertyarechargedtooperating expenses. Allowance forFundsUsedDuringConstruction AsprovidedintheUniformSystemofAccounts, thecostoffundsusedtofinanceconstruction projectsiscapitalized aspartofconstruction cost.Thecomponents ofAllowance forfundsusedduringconstruction shownontheStatement ofIncomeunderOtherIncomeandDeductions andInterestChargesarenon-cashitemsequaltotheamountsocapitalized andservetooffsettheactualcostoffinancing construction. Reference ismadetoNote(e)tothe"STATEMENT OFINCOME".Depreciation Forfinancial statement

purposes, thestraight-line methodofdepreciation isusedtoaccumulate anamountequaltothecostofutilityplantandremovalcosts,lesssalvage,overtheestimated usefullivesofproperty.

Reference ismadetoNote5toFinancial Statements. 39 PENNSYLVANIA POWER&LIGHTCOMPANYNOTESTOFINANCIAL STATEMENTS -(Continued) RevenuesRevenuesarebasedoncyclebillingsrenderedtocertaincustomers monthlyandothersbi-monthly. TheCompanydoesnotaccruerevenuesrelatedtoenergydelivered butnotbilled.FuelCostsRecoverable UnderFuelAdjustment ClausesTheCompany's tariffsfiledwithboththePUCandFERCincludefueladjustment clausesunderwhichfuelcostsvaryingfromthelevelsallowedinapprovedrateschedules arereflected incustomers'ills afterthefuelcostsareincurred. Fuelcostsrecoverable inthefuturethroughapplication offueladjustment clausesaredeferredandchargedtoexpenseduringtheperiodsinwhichsuchcostsarebilledtocustomers. Reference ismadetoNotes(b)and(c)tothe"STATEMENT OFINCOME"andto"RATEMATTERS"forfurtherinformation regarding thefueladjustment clauses.IncomeTaxesTheCompanyanditssubsidiaries fileaconsolidated Federalincometaxreturn.Incometaxesareallocated totheindividual companies basedontheirrespective taxableincomeorloss.Incometaxesareallocated toOperating ExpensesandOtherIncomeandDeductions ontheStatement ofIncome.Incometaxreductions associated withtheinterest(borrowed funds)component oftheAllowance forfundsusedduringconstruction constitute theprincipal itemofIncometaxcreditsunderOtherIncomeandDeductions. Deferredtaxaccounting isfollowedforitemswheresimilartreatment inratedeterminations hasbeenorisexpectedtobepermitted bythePUC.Theprincipal itemsareaccelerated amortization ofcertified defensefacilities andpollution controlequipment, deduction ofcostsofremovingretireddepreciable

property, thatportionoftaxdepreciation arisingfromshortening depreciable livesby20/0undertheclasslifedepreciation system,fuelcostsrecoverable underfueladjustment clauses,theforcedoutagereserveandthecostoffuelconsumedduringthetestperiodofnewgenerating facilities.

Taxreductions arisingprincipally fromtheuseofthedeclining balancedepreciation method,guideline livesandcertainincomeandexpensesbeingtreateddifferently fortaxcomputation purposesthanforbookpurposesareaccounted forundertheflow-through method.Investment taxcredits,whichresultinareduction ofFederalincometaxespayable,aredeferredandamortized overtheaveragelivesoftherelatedproperty. Thetaxcreditsaregenerally equalto10/oof(1)thecostofcertainpropertyplacedinserviceand(2)progresspaymentsfortheconstruction ofcertainfacilities thathaveaconstruction periodofatleasttwoyears.TheCompanyhasadoptedanEmployeeStockOwnership Plan(ESOP)whichpermitstheCompanytoclaimanadditional 1/oinvestment taxcredit.Anamountequaltothisadditional creditispaidtotheESOPtrusteetoacquireCommonStockoftheCompanyforemployees. Reference ismadetoNote10toFinancial Statements. Retirement PlanTheCompanyhasaRetirement Plancomposedoftwoparts:(1)anon-contributory portionwhichprovidesbenefitsforalleligibleactiveemployees withthefullcostabsorbedbytheCompany,and(2)avoluntary portioninwhichcontributions aremadebybothemployees andtheCompany,butthefullcostofPlanimprovements, including relatedpriorservicecosts,isbornebytheCompany.Approximately 95/oofeligibleactiveemployees aremembersofthevoluntary portionofthePlan.Companycontributions tothePlanincludeamountsrequiredtofundcurrentservicecostsandtoamortizeunfundedpriorservicecostsoverperiodsofnotmorethan20years.Reference ismadetoNote11toFinancial Statements. 40

ilr, PENNSYLVANIA POWER&LIGHTCOMPANYNOTESTOFINANCIAL STATEMENTS

-(Continued) ForcedOutageReserveAself-insurance reserveisprovidedtocovertheincreased levelofpowercostswhichareexperienced whenanyoftheCompany's majorgenerating unitsareforcedoutofserviceduetodamagecausedbyaccidentorotherunforeseen insurable occurrences. Increased powercostsresulting frompurchasing orgenerating replacement powerathighercostsorlossofinterchange salesinexcessof$0.5millionthrough1975and$1millioneffective January1,1976foreachaccidentoroccurrence arechargedtothereserve.AstocertainoftheCompany's largegenerating units,costschargeable tothereservearelimitedto$12.5millionsinceoutsideinsurance iscarriedtocovercostsinexcessofthatamount.Thereserveisestablished onthebasisofhistorical experience andhasbeenrecqgnized inratemaking procedures bythePUC.AtDecember31,1976andDecember31,1977thereservebalancewas$13.9millionand$14.5million,respectively. 2.RATEFILINGSReference ismadetoinformation appearing under"RATEMATTERS". 3.FUELCOSTSRECOVERABLE UNDERFUELADJUSTMENT CLAUSES,Reference ismadetoNotes(a),(b)and(c)tothe"STATEMENT OFINCOME".4.LINESOFCREDITANDSHORT-TERM DEBTShort-term debtoftheCompanyconsistsofbankloans(generally borrowedforoneyearattheprimeinterestrateandprepayable atanytimewithoutpenalty)andcommercial papernotes(generally maturingwithin30to60days).Inordertoprovideinterimfinancing andback-upfinancing capability forcommercial papernotes,theCompanyhaslinesofcreditwithbanksthataremaintained bycompensating bankbalancerequirements (notlegallyrestricted astowithdrawal) orthepaymentofcommitment fees.Information regarding suchshort-term debtandlinesofcreditisasfollows(thousands ofdollars): Short-term debtoutstanding Weightedaverageshort-term debtinterestrate.............................. Maximumaggregate short-term debtoutstanding atanymonthAveragedailyshort-term debtoutstanding (a)Aggregate amount.Weightedaverageinterestrate(b)........... Linesofcredit(c)Maintained bycompensating bankbalances........................... Maintained bypaymentofcommitment fees........................... Averageannualcompensating bankbalancerequirement.............. Annualcommitment fees..AsofDecember31,1979$60,0124.7o/o1977$23,4006.5'/0$129,5985.5o/0$143,500$56,500$13,850$313$79,2025.7o/o$147,500$52,500$13,300$319$194,578$106,727(a)Duringthepreceding year.(b)Calculated bydividingshort-term interestexpensefortheyearbytheaverageaggregate dailyshort-term debtoutstanding duringtheyear.(c)Useoftheselinesofcreditwasrestricted atDecember31,1976andDecember31,1977totheextentof$4millionbyshort-term bankloanstotwosubsidiary companies. 41 PENNSYLVANIA POWER&LIGHTCOMPANYNOTESTOFINANCIAL STATEMENTS -(Continued) 5.DEPRECIATION Provisions fordepreciation asapercentoftheaverageoriginalcostofdepreciable propertyhaveapproximated 3.4%for1973,3.3%for1974and1975and3.2%for1976and1977.Thelowercomposite depreciation ratefor1976and1977reflectschangesmadeinestimated usefullivesofcertainfacilities inaccordance withaPUCrateorderissuedin1976.Noprovision isbeingmadefordepreciation oramortization ofintangibles ofapproximately $1.3millionincludedInUtilityPlant.6.CAPITALSTOCKCommonStock-noparconsistsof50,000,000 authorized sharesofwhich30,803,318 shareswere,outstanding atDecember31,1976and34,923,452 shareswereoutstanding atDecember31,1977.CommonStockof$582,983,000 atDecember31,1977includes$686,000cashinstallments receivedunderadividendreinvestment planasconsideration for29,603sharesofCommonStockwhichwereissuedin-January 1978.Preferred Stock($100par,cumulative) andPreference Stock(nopar,cumulative) consisted ofthefollowing (thousands ofdollars): SharesAmountRedemption PriceFinalOutstanding December31,Authorized 1977December31,19761977December31,1977YearPriceEtfectlve Preferred 4'%.......... Series........ 3.35%....4.40%....4607.40%....8.00%....8.60%....9.00%....9.24%Total..... 629,9365,000,000 530,18941,783228,77363,000400,000500,000222,37077,630750,0004,17822,8786,30040,000222377,76375,0004,178,22,8786,30040,00050,00022,2377,76375,000103.50102.00103.00112.00112.00110.00110.00115.00$231,375$281,375$53,019$53,019$110.00$110.00103.50102.00103.00100.001998100.001997101.001990101.001990101.001991Preference ......5,000,000 $8.00........... $8.40........... $8.70........... $9.25........... $11.00......... $13.00......... Total..... 350,000400,000400,000160,000500,000250,000$35,00040,00040,00020,00050,00025,000$35,00040,00040,00016,00050,00025,000$210,000$206,000$105.50110.00109.00109.90111.05$101.001987101.001986101.001984100.001981100.001995100.00199442 Ik,~'. PENNSYLVANIA POWER&LIGHTCOMPANYNOTESTOFINANCIAL STATEMENTS -(Continued) RedemPtion PeriodThePreference Stockmaynotberefundedthroughcertainrefunding operations priortothefollowing dates:$8.70Series,7/1/78;$13.00Series,10/1/84;$11.00Series,7/1/85.Otherwise, thePreferred andPreference Stockmayberedeemed, inwholeorinpart,attheoptionoftheCompanyatredemption pricesrangingbetweentheDecember31,1977priceandthefinalpriceshownabove,withtheexception thatthePreference Stock,$9.25Series,isnotredeemable bytheCompanyotherthanthroughthesinkingfundrequirement orvoluntary liquidation. Theliquidation pricesofallissuesofPreferred Stock,whicharepayableonaparitywitheachotherandinpreference tothePreference StockandtheCommonStock,areasfollows:involuntary liquidation $100ashare;voluntary liquidation $100ashareforthe4V2/oPreferred Stockandtheredemption priceineffectatthetimefortheSeriesPreferred Stock;plusineachcaseanyunpaiddividends. Theliquidation pricesofallseriesofPreference Stock,whicharepayableonaparitywitheachotheraftersatisfaction ofthepreferential rightsofPreferred Stockandinpreference totheCommonStock,areasfollows:involuntary liquidation $100ashare;voluntary liquidation theredemption priceineffectatthetime,withtheexception thatthevoluntary liquidation priceofthePreference Stock,$9.25Series,is$110'share;plusineachcaseanyunpaiddividends. Eachofthefollowing seriesofstockcontainssinkingfundprovisions designedtoretiretheseriesataredemption priceof$100ashareplusaccruedandunpaiddividends tothe'dateofsuchredemption: SharestobeRedeemedAnnuallyPreferred Stock.7.40/oSeries.8.00/oSeries.9.24/oSeries(a).....Preference Stock$9.25Series(b)...... $11.00Series(a)....$13.00Series(a)....16,00025,00030,00040,00025,00012,500July1,1979-July1,2003Oct.1,1983-Oct.1,2002July1,1981-July1,2005Jan.1,1977-Jan.1,1981July1,1981-July1,2000Oct.1,1980-Oct.1,1999(a)TheCompanyhastherighttoredeemoneachsinkingfundredemption dateadditional sharesuptothenumberofsharesofthisSeriesrequiredtoberedeemedannually. (b)InJanuary1978,theCompanyredeemed40,000shares.Capitalstockexpenserepresents commissions andexpensesincurredinconnection withtheissuanceandsaleofcapitalstock.Capitalstockexpenseapplicable tothepreferred andpreference stockserieswhicharetoberedeemedthroughsinkingfundprovisions isamortized toEarningsReinvested astherespective seriesofstockareredeemed. Theunamortized balanceapplicable totheseseriesofstockswas$3.2millionatDecember31,1977.Noamortization planisineffectforcapitalstockexpenseapplicable tootherissuesofcapitalstock.43 ll PENNSYLVANIA POWER4LlGHTCOlHPANYNOTESTOFINANCIAL STATEMENTS -(Continued) ChangesincapitalstockfortheperiodJanuary1,1973throughDecember31,1977wereasfollows(sharesandamountsinthousands): 1973197519761977YearSharesAmountIaaued(Redeemed) Common,PublicOffering......................... 2,000$40,900Preferred, 7.40'/eSeries............................ 40040,0001974Common,PublicOffering......................... 2,20035,156Preference, $13.00Series..~..................... 25025,000CommonPublicOffering. 3,00051,450DividendReinvestment Plan................. 3015,595Preference, $11.00Series........................ 50050,000Preference, $9.25Series.......................... 20020,000CommonPublicOffering. 3,50067,935DividendReinvestment Plan................. 71614,268EmployeeStockOwnership Plan.......... 35755Preferred, 9.24'/eSeries............................ 75075,000CommonPublicOffering. 3,20067,040DividendReinvestment Plan................. 81218,185EmployeeStockOwnership Plan.......... 1082,528Preferred, 8.00'/eSeries............................ 50050,000Preference, $9.25Series.......................... (40)(4,000)7.DIVIDENDRESTRICTIONS Reference ismadetoinformation appearing under"DESCRIPTION OFCOMMONDividendRestrictions". 8.LONG-TERM DEBTLong-term debtoutstanding consisted ofthefollowing (thousands ofdollars): December31,STOCK-Firstmortgagebonds..Notes:7~/0due1980.Other.Unamortized (discount) andpremium-net...Total.Lessamountduewithinoneyear................... Totallong-term debt.1976$1,165,500 1120,000550(4,056)1,181,994 20,6751977$'I,245,000 20,000929(5,434)1,260,495 3,756$1,161,319 $1,256,739 44 S-tkIU PENNSYLVANIA POWER8cLIGHTCOMPANYNOTESTOFINANCtAL STATEMENTS -(Continued) Firstmortgagebondsconsisted ofthefollowing seriesatDecember31,1976andDecember31,1977(thousands ofdollars): Out!tending Outatandlng SerleaDue197819772%/o1977$20,0003Vao/o19783,000$3,00027'o198037,00037,0003%/o,19827,5007,50010Va'/o1982100,000100,0003'o198325,00025,0003%/o198525,00025,0004%o/o199130000300004%'/o199430,00030,0005%o/o199630000300006%o/o19973000030000Serica7'/o8Vao/o9o/o7'/4'/oo/o7V20/09'/4'/o9%o/o9Vio/o8Vio/o8Vao/o(a)Due197819771999$40,000$40,000199940,00040,000200050,00050,000200160,00060,000200275,00075,000200380,00080,000200480,00080,0002005125,000125,0002005100,000100,0002006150,000150,0002007100,00028,00027,500(a)4V2/oto5%/oPollution ControlSeriesAdueannually: $500,1977-1983; $900,1984-2002; $7,400,2003.Themaximumaggregate annualsinkingfundrequirements through.1982oftheoutstanding mortgagebondsare(thousands ofdollars): 19781979$2,740$3,2651982$4,4501980$3,050Theamountoflong-term debtmaturingineachcalendaryearthrough1982is(thousands ofdollars): cars1979198019811982$3,756$666$57,660$645$108,098.Lesserrequirements willapplyfortheyears1978-1982 iflong-term debtis50/oorlessofnetproperty. 'TheCompanyhastherighttomeetalloftheserequirements withpropertyadditions orbonds.Substantially allutilityplantissubjecttotheliensoftheCompany's mortgages. 9.HYDROELECTRIC PROJECTSReference ismadetotheinformation appearing under"BUSINESS -Hydroelectric Projects". 45 fFh'ddpd~'IFhhdVdF~Idd~hh*hF\~ PENNSYLVANIA POWER8cLIGHTCOMPANYNOTESTORNANCIALSTATEMENTS -(Continued) 10.TAXESIncometaxexpenseisrecordedontheStatement ofIncomeasfollows(thousands ofdollars): 10731974107510791977Operating ExpensesProvision Federal..................... $16,454State........................ 6,20722,661$12,554$22,547$656$34,8043,8588,2216,76616,19316,41230,7687,42250,997DeferredFederal..................... 4,5571,18015,9913,2712,9525907,1851,5609,3942,7615,73719,2623,5428,74512,155'Investment taxcreditsDeferred................... Amortization ofdefer-ments................. ~~7,2334,75314,46529,49630,592(1,688)(1,216)(1,477)(1,835)(2,243)5,5453,53712,98827,66128,349OtherIncomeandDeductions Provision (credit)Federal.......... State............. 33,94339,21147,29843,82891,501(46)(4,156)(9,164)(11,859)(11,008)(45)(920)(2,037)(2,598)(2,700)(91)(5,076)(11,201)(14,457)(13,708)Totalincometaxexpense........$33,852FederalandStateIncomeTaxesPayable(Credit)........$22,570$34,135(a) $36,097$29,371$77,793$11,336$19,567$(7,035)$37,289(a)Excludes$4,831,000 deferredIncometaxesrelatedtoNonrecurring Credit.Investment taxcreditseliminated theCompany's Federalincometaxliability for1976andresultedInacredittotheprovision forincometaxesofapproximately $5.9millionrelated'to acarryback ofInvestment taxcreditstoprioryears.Totalincometaxexpensefor1976hasbeencreditedbyapproximately $5.0millionrepresenting adjustments ofprioryears'axliabilities. Theprincipal adjustment, relatedtoadoptionofthemodifiedhalf-year convention methodofcomputing taxdepreciation intheCompany's 1975Federalincometaxreturn,reducedtotalincometaxexperisebyapproximately $2.8million.46 tl~ilN'II)sl PENNSYLVANIA POWER&LIGHTCOMPANYNOTESTOFINANCIAL STATEMENTS-(Continued) 2,680$5,737Deferredincometaxesresultfromthefollowing 1973Taxdepreciation (classlifesystem).$3,057Recoveiable fuelcosts.................... Forcedoutagereserve.................... OtherTotal.items(thousands ofdollars): 19741975197B$3,715$4,540$6,46314,009(a) 8292,391(3,726)(1,041)1,5381,899932$19,262$3,542$8,7451977$6,1734,128(344)2,198$12,155Federaland1977$149,76377,793Netincome.Incometaxexpense... Pre-taxincome.Indicated incometaxexpenseatcombinedtaxrates(shownbelow).......... Reductions dueto:Allowance forfundsusedduringconstruction. Taxdepreciation (guideline livesanddeclining balancemethod).............. Taxandpensioncost.......................... Other-net.Total.Incometaxexpense.. CombinedFederalandStateincometaxrates.Effective incometaxrates.......................... $227,556$54,131$66,940$70,748$74,901$121,6518,04110,97619,37923,925"26,4079,1312,9983,1437,5312,6872,02010,9533,7532,74515,0673,3543,1848,7992,4915,70820,27927,97434,65145,53043,858$33,852$38,966$36,097$29,371$77,793E53.72/o52.94/o52.94/o52.94/o53.46/o33.6'/030.8'/o27.0'/o20.8'/o342o/o(a)Excludes$4,831,000 deferredincometaxesrelatedtoNonrecurring Credit.IncometaxexpensedifferedfromtheamountcomputedbyapplyingthecombinedStatecorporate incometaxratestopre-taxincomeasfollows(thousands ofdollars): 1973'97419751975$66,912$87,479$97,541$112,11133,85238,96636,09729,371$100,764$126,445$133,638$141,482Taxesotherthanincometaxeschargedtooperating expensewere(thousands ofdollars): 19731974197519751977Stategrossreceipts............................ $16,867$20,564$23,756$28,320$32,932Statecapitalstock.'5,4036,2637,2848,8609,996Stateutilityrealty4,6875,2585,9808,05211,582Socialsecurityandother..................... 3,0483,4863,6494,2945,172Total.$30,005$35,571$40,669$49,526$59,682147 ~1~hk 11.RETIREMENT PLANPENNSYLVANIA POWER&LIGHTCOMPANYNOTESTOFINANCIAL STATEMENTS -(Continued) Obligations oftheCompany's Retirement Planarecurrently fundedthroughaTrustFund.AtJune30,1977,theendofthePlan'smostrecentfiscalyear,theFund'sassetsatmarketwere$100.3millionandatcostwere$104.6million.Pensioncostswere(thousands ofdollars): 1973$6,7611974$6,6611975$8,8301976$9,7551977$11,315Planamendments effective asofJuly1,1976,subjecttoInternalRevenueServiceapproval, providedforincreased

benefits, reducedemployeecontributions andcertainotherminorchangestocomplywiththeEmployeeRetirement IncomeSecurityActof1974.BasedontheFund'sassetsatcost,atJune,30,1977theactuarially computedunfundedpriorservicecostwas$27.2million.Asofthesamedatetheactuarially computedvalueofvestedbenefitsexceededthecostbasisoftheFund'sassetsby$17.4million.12.RENTALSANDLEASECOMMITMENTS Principal rentalcostsaffecting expenseswereasfollows(thousands ofdollars):

1973197419751976,1977Chargedto:Operating expense...Fuelinventory(a) .......$7,515$8,911$9,477$942$870$1,276$10,502$11,023$1,761$2,349(a)Represents rentalofrailroadcoalcarswhichamountsarechargedtofuelinventory andsubsequently includedinfuelexpense.AtDecember31,1977,theCompanyhadlong-term leaseagreements whichrequirefutureminimumrentalsasfollows(millions ofdollars): 1978,$14.5;1979,$13.5;1980,$12.7;1981,$11.7;1982,$10.5;after1982,$89.3.TheCompanyalsoleasesotherpropertyundershort-term agreements withrentalscurrently amounting toapproximateiy $3.3millionannually. Generally theCompany's long-termleasescontainrenewaloptionsandobligatetheCompanytopaymaintenance, insurance andotherrelatedcosts.Theleasesdonotincluderestrictions onanyoftheCompany's otherfinancial activities. CertainoftheCompany's leasesmeetthecapitalization criteriaestablished bytheFinancial Accounting Standards Boardin1977whichwouldnormallyrequire(1)thatanassetandassociated liability berecordedatanamountequaltothepresentvalueoftheminimumleasepaymentsand(2)thatexpensebechargedwithamortization oftheleaseassetandinterestexpenseontheliability. However,inaccordance withthemannerinwhichtheCompany's rateshavebeenestablished bythePUC,theCompanyaccountsforsuchleasesasoperating leasesandappropriate accountshavebeenchargedwithactualrentalexpense,andanassetandassociated liability relatedtosuchleaseshavenotbeenrecorded. 48

PENNSYLVANIA POWERScLIGHTCOMPANYNOTESTOFINANCIAL STATEINENTS -(Conttnued) Inaccordance withSECdisclosure requirements applicable toallregulated companies subjecttotherate-making processthatdonotrecordcapitalleasesasassetswithassociated liabilities, theCompanyhascomputedtheaggregate assetandliability balancesthatwouldhavebeenrecordedhadallleasesmeetingthedefinition ofacapitalleasebeencapitalized asfollows(thousands ofdollars): December31,CapitalleaseassetAccumulated amortization care$78,713(33,320)$45,393Currentobligations undercapitalleases........................... $7,543Noncurrent obligations undercapitalleases..................... 40,445$47,9881977$104,291(37,855)$66,436$8,17361,333$69,506Theexcessoftheaboveliability balancesovertherelatedassetbalancesrepresents thedifferences between(i)theamortization andinterestexpensethatwouldhavebeenrecordedsinceinception oftheleasesand(li)theactualrentalsincurred. Thedifference intheamountofsuchamortization andinterestexpensecomparedtoactualrentalsrecordedisnotmaterialforeachoftheyears1973-1977. 13.RECLASSIFICATION Approximately $9.9millionrepresenting anaccrualatDecember31,1976forcurrentliabilities relatedtoconstruction offacilities hasbeenreclassified ontheBalanceSheetfromAccountspayabletoOthercurrentliabilities tomaketheItemcomparable totheclassification in1977.14.SALEOF10/oOFSUSQUEHANNA PLANTInJanuary1978,pursuanttoagreements enteredintoinMarch1977,theCompanysoldtoAllegheny ElectricCooperative, Inc.(Allegheny) a10/oundivided ownership intheSusquehanna nuclearplantcurrently underconstruction. ThroughDecember31,1977,Allegheny madedepositsaggregating approximately $84millionrepresenting amountsdueundertheagreements. TheCompany's 1977construction andnuclearfuelexpenditures shownonthe'Statement ofChangesinFinancial PositionInclude100/ooftheexpenditures applicable totheSusquehanna plant.Approximately $23millionofAllegheny's depositsrepresented itsshareofth'e1977expenditures. 15.COMMITMENTS ANDCONTINGENT LIABILITIES TheCompanyestimates thatabout$1.31billionwillberequiredtocompleteconstruction projectsinprogressattheendof1977,excluding nuclearfuelpayments. Ofthisamount,approximately $1.05billionrepresents theCompany's shareofcostsrequiredtocompletethetwonucleargenerating unitsatSusquehanna. Reference Ismadetoadditional information appearing under"CONSTRUCTION PROGRAM", "BUSINESS -Environmental Matters"and"BUSINESS -FuelSupply".49 PENNSYLVANIA POWERScLIGHTCOMPANYNOTESTOFINANCIAL STATEMENTS-(Continued) Inconnection withproviding foritsfuturebituminous coalsupply,theCompanyatDecember31,1977hadguaranteed capitalandotherobligations ofcertaincoalsuppliers (including ownedcoalcompanies) aggregating $160.8million.See"BUSINESS -FuelSupply(Coal)".16.SUMMARYOFQUARTERLY RESULTSOFOPERATIONS (UNAUDITED) Quarterly earningscanbeInfluenced byweather,timingofraterelief,performance ofgenerating

stations, salestootherutilities andotherfactorssuchasthosedescribed under"MANAGEMENT'S "DISCUSSION ANDANALYSISOFTHESTATEMENT OFINCOME".QuarterEndedOperating RevenuesOperating IncomeNetIncomeThefollowing issummaryquarterly datafortheyears1976and1977(thousands ofdollars):

EarningsEarningsPerShareApplicable ToOfCommonCommonStockStock(a)1976March31.............................. ~..June30..............~..................... September 30.......................... December31(b)....................... 1977March31,June30....... September 30(c)...................... December31............~.............. $166,269149,281149,580179,017$34,36028,00635,24140,727208,894.47,017173,299.43,912174,06748,913188,47144,469$25,18921,28130,42335,218ll40,11435,54734,93639,166$17,78113,603,21,28226,07731,06626,49825,88829,318$0.670.460.700.851.000.790.750.84(a)Basedontheaveragenumberofsharesoutstanding duringthequarter.(b)Resultsforthefourthquarterof1976includeareduction inincometaxexpenseof$2.4millionduetoincreased taxdepreciation applicable toMartinsCreekUnitNo.4whichbegantestoperation inDecember1976anda$2.1millionchargetoexpense(netofincometaxes)toadjusttheamortization ofdeferredfuelcostsfortheyears1970-1975 totheactualfueladjustment revenuesbilledduringthoseyears.(c)Resultsforthethirdquarterof1977includea$6.6million(netofincometaxes)loss($.20pershare)ofasubsidiary companywhichwasrecordedbytheCompanyinaccordance withequityaccounting: 17.REPLACEMENT COSTDATA(UNAUDITED) Incompliance withtherulesoftheSEC,theCompanyhasestimated certainreplacement costinformation forutilityplantinserviceanddepreciation. TheCompanyhasnotincludedreplacement costdataformaterials andsuppliesinventory sincetheamountoftheinventory isnotsignificant. Replacement costdatarelatingtofuelinventories havenotbeenIncludedsincechangesincostlevelsarerecovered throughtheoperation offueladjustment clauses.50 PENNSYLVANIA POWER8rLIGHTCOMPANYNOTESTOFINANCIAL STATEMENTS-(Continued) Althoughthereplacement costdatadisclosed hereinhave,intheCompany's opinion,beenreasonably estimated inaccordance witlirulesandinterpretations ofsuchrulespublished bytheSEC,theCompanybelievesthatinvestors shouldbeawareoftheimprecision andlimitations ofthisinformation andofthemanysubjective judgments requiredinthereplacement costestimation. Thereplacement costofutilityplantisbasedonthehypothetical assumption thattheCompanywouldreplaceitsentireproductive capacityasofDecember31,1977,whetherornotthefundstodosowereavailable orsuch"instant" replacement werephysically orlegallypossible. Thisassumption requiresthattheCompanycontemplate actionsasofDecember31,1977thatordinarily wouldnotbeaddressed allatonetime.Accordingly, theinformation shouldnotbeinterpreted toindicatethattheCompanyactuallyhaspresentplanstoreplaceitsproductive capacityorthatactualreplacement wouldorcouldtakeplaceinthemannerassumedinestimating theinformation. Inthenormalcourseofbusiness, theCompanywillreplaceitsproductive capacityoveranextendedperiodoftime.Decisions concerning replacement willbemadeinlightoftheeconomics, availability offunds,fuelavailability, equipment availability, customerdemandandregulatory requirements existingwhensuchdeterminations aremadeandcoulddiffersubstantially fromtheassumptions onwhichthedataIncludedhereinarebased.Thereplacement costdatapresented arenotnecessarily representative ofthe"currentmarketvalue"ofexistingfacilities orofthe"fairvalue"ofutilityplantasthattermisusedinrateproceedings beforethePUC.Thereplacement costinformation presented doesnotreflectalloftheeffectsofinflation ontheCompany's currentcostsofoperating thebusiness. TheCompanyhasnotattempted toquantifythetotalimpactofinflation, environmental andothergovernmental regulations (exceptassetforthbelow)andchangesinother.economicfactorsonthebusinessbecauseofthemanyunresolved conceptual problemsandrate-making considerations involvedindoingso.Accordingly, itistheCompany's viewthatthereplacement costdatapresented hereincannotbeusedalonetodetermine thetotaleffectofinflation onreportednetincome.Thecomputedreplacement costoftheCompany's utilityplantinserviceandrelatedaccumulated depreciation withcomparative historical costdataareasfollows(millions ofdollars): Computed'istorical Replacement CostCostUtilityplantinserviceatDecember31,'977Subjecttoreplacement costdetermination ........Land,plantheldforfutureuseandintangibles atoriginalcost.Totalplantinservice.. Lessaccumulated depreciation .Netplantinservice.$2,216$5,0451165,1611,197$3,96451 ds'~I~n PENNSYLVANIA POWER&LIGHTCOMPANYNOTESTOFINANCIAL STATEMENTS -(Concluded) Thereplacement costofcoal-fired andoil-fired steamstationcapability wasdetermined bytrendingtheconstruction costofthemostrecentlyinstalled bituminous coal-fired units(800mwcapability range)andcomputing areplacement costperkwcapability oftheunits.ThiscostperkwwasappliedtotheCompany,'s respective coal-fired andoil-fired steamstationcapability todetermine thegrossreplacement costofsuchfacilities. Thegrossreplacement costofbituminous coal-fired unitsatDecember31,1977includesapproximately $725millionwhichtheCompanyestimates wouldhavetobeexpendedtoenablesuchfacilities tomeetparticulate andsulfurdioxideemissionregulations existingatDecember31,1977,usingcurrenttechnology. Theoriginalinstalled costofhydroelectric, otherpowerproduction, transmission, distribution, andotherfacilities wastrendedtodetermine replacement cost.Thetrendindicesutilizedweredetermined bytheCompanyandarebelievedtobemorerepresentative ofthechangesinconstruction costsexperienced bytheCompanythanpublished indices.AsofDecember31,1976,theCompanycomputedthereplacement costofoil-fired steamstationcapability basedontheassumption thatthiscapability wouldbereplacedwithotheroil-fired steamstations. However,asaresultofpendingFederallegislation introduced in1977whichwouldrestrictthebuildingoffutureoil-fired steamstations, theCompanyhasassumedthatasofDecember31,1977itsoil-fired steamstationcapability wouldbereplacedwithcoal-fired units.Theaccumulated depreciation relatedtothereplacement costofproductive capacitywasdetermined byapplyingthesamepercentage relationship thatexistedbetweengrossutilityplantandaccumulated depreciation byfunctional groupsonahistorical basisatDecember31,1977tothecurrentreplacement costoftheproductive capacity. Thecomputedreplacement costdepreciation expensefortheyears1976and1977andcom-parativehistorical costdataareasfollows(millions ofdollars): 19761977Depreciation expense...~...... ComputedReplaco-Historical mentHistorical CostCostCost$62$123$68ComputedReplace-mentCost$140Replacement costdepreciation expensefortheyears1976and1977wasdetermined onastraight-linebasisbyapplyingthefunctional classdepreciation accrualratescurrently inusetotheaverageofyear-endreplacement costamountsfortherespective functional class.Suchamountshavebeencalculated inaccordance withSECinstructions anddonotrepresent anactualexpense.Withinthecontextofutilityrate-making procedures, thepurposeofbookdepreciation expense,asshownontheStatement ofIncome,istoproviderecoveryofinvestedcapitaloverthelifeoftherelatedfacilities, andisnotintendedtoprovideafundequaltotheamountnecessary toreplacesuchfacilities atthecostlevelexistingatthetimeofreplacement. Noadjustment hasbeenmadetocomputedreplacement costdepreciation expensefor1976toreflectthechangeinassumptions regarding thereplacement ofoil-fired steamstationcapability described above.52 OPINIONOFINDEPENDENT CERTIFIED PUBLICACCOUNTANTS PENNSYLVANIA POWER8LIGHTCOMPANY:WehaveexaminedthebalancesheetsofPennsylvania Power8LightCompanyasofDecember31,1976and1977andtherelatedstatements ofincome,earningsreinvested, andchangesinfinancial positionforeachofthefiveyearsintheperiodendedDecember31,1977.Ourexaminations weremadeinaccordance withgenerally acceptedauditingstandards and,accordingly, includedsuchtestsoftheaccounting recordsandsuchotherauditingprocedures asweconsidered necessary inthecircum-stances.lnouropinion,suchfinancial statements presentfairlythefinancial positionoftheCompanyatDecember31,1976and1977andtheresultsofitsoperations andthechangesinitsfinancial positionforeachofthefiveyearsintheperiodendedDecember31,1977,inconformity withgenerally acceptedaccounting principles consistently appliedduringtheperiodexceptforthechangein1974,withwhichweconcur,inthemethodofaccounting forrecoverable fuelcostsasdescribed inNote(b)totheStatement ofIncome.HASKINS8SELLSNewYork,NewYorkFebruary3,197853,

UNDERWRITING TheUnderwriters namedbelowhaveseverally agreedtopurchasefromtheCompanytherespective numbersofsharesofCommonStockofferedhereby:TheFirstBostonCorporation.............................. DrexelBurnhamLambertIncorporated .............. BacheHalseyStuartShieldsIncorporated.......... MerrillLynch,Pierce,Fenner&SmithIn-corporated. Advest,Inc.Allen&CompanyofLakeland, Inc...................... AlmstedtBrothers, Inc.Arthurs,Lestrange &Short................................. Babbitt,Meyers8Company............................... Bacon,Whlpple8Co.RobertW.Baird&Co.Incorporated ................... Baker,Watts&Co..BatemanEichler,HillRichards, Incorporated .....Birr,Wilson&Co.,IncD.H.Blair8Co.,Inc.......................................... WilliamBlair8Company.................................... BlythEastmanDillon8Co.Incorporated............ Boennlng&Scattergood, Inc.............................. Boettcher &Company.J.C.Bradford8Co.,Incorporated ..................... Alex.Brown&Sons..Bruns,Nordeman, Rea8Co.............................. Butcher8SingerInc.......................................... Butler,Wick&Co.TheChicagoCorporation ................................... Colin,HochstlnCo.C.C.ColllngsandCompany,Inc......................".. Cowen8Company.Crowell,Weedon8Co.Cunningham, Schmertz&Co.,Inc...................... Dain,Kalman8Quail,Incorporated ................... Dillon,Read8Co.Inc........................................ Doft8Co.,inc.Donaldson, Lufkln&JenretteSecurities Corpo-ration.A.G.Edwards&Sons,Inc................................. Elklns,Stroud,Suplee&Co................................ Fahnestock 8Co.Ferris&Company,Incorporated......................... FirstAlbanyCorporation..................................... NumberofShares290,000290,000290,000,290,00020,0007,0007,00013,00013,00013,00020,0007,00020,0007,0007,00020,00041,00013,00013,00013,00020,00013,00030,0007,00013,0007,0007,0007,00013,0007,00020,00041,00013,00041,00020,00030,00013,00013,0007,000FirstEquityCorporation ofFlorida.......... FirstofMichiganCorporation.................. FirstPittsburgh Securities Corporation.... ~Goldman,Sachs8Co.Gradison8CompanyIncorporated .....Gruntal8Co.Hefren-Tillotson, Inc.BernardHerold&Co.,Inc.............. Herzfeld&Stern..HopperSoliday8Co.,Inc.............. Howe,Barnes8Johnson,Inc........ E.F.Hutton8CompanyInc........... Interstate Securities Corporation..... JanneyMontgomery ScottInc....Johnston, Lemon&Co.Incorporated................. Josephthal &Co.Incorporated ........................... Kidder,Peabody&Co.Incorporated.................. Ladenburg, Thalmann&Co.Inc......................... LaidlawAdams8PeckInc................................. LazardFreres&Co.JamesA.Leavens,Inc.LeggMasonWoodWalker,Incorporated............ LehmanBrothersKuhnLoebIncorporated......... LoebRhoades,Hornblower &Co....................... A.E.Masten&Co.~Incorporated ....................... McDonald&CompanyTheMilwaukee Company................................... Moore,Leonard8Lynch,Incorporated.............. Moore&Schley,Cameron&Co......................... Morgan,Olmstead, Kennedy&Gardner,In-corporated ..Moseley,Hallgarten &Estabrook Inc.................. W.H.Newboid's Son&Co.,Inc......................... TheOhioCompanyOppenheimer 8Co.,Inc..................................... Paine,Webber,Jackson&Curtistncorporated... Parker/Hunter Incorporated ............................... H.O.Peet8Co.IncPhilips,Appel&Walden,Inc.............................. ThePierce,Wulbern,MurpheyCorp................... Piper,Jeffrey8Hopwoodincorporated .............. NumberofShares7,00013,0007,00041,0007,00013,0007,0007,00013,00013,0007,00041,00013,00030,00013,00013,00041,00020,0007,00041,0007,00020,00041,00041,00013,00020,0007,00030,0007,0007,00020,00020,00020,00020,00041,00030,0007,0007,0007,00020,00054

Prescott, Ball&Turben.Raymond,James&Associates, Inc...................

TheRobinson-Humphrey Company,Inc............ Wm.C.Roney&Co..R.Rowland&Co.~Incorporated......................... SalomonBrothers.. H.B.Shalne&Co.~Inc.ShearsonHaydenStoneInc............................... Shuman,Agnew&Co.~Inc................................ Simpson,Emery&Company,Inc....................... SmithBarney,Harrisupham&Co.Incorporated E.W.SmithCo.Stilel,Nicolaus&CompanyIncorporated ........... NumberofShares20,0007,00020,0007,00013,00041,0007,00041,00020,0007,00041,0007,00013,000Sutro&Co.tncorporated......................... ThomsonMcKinnonSecurities Inc.......... Tucker,Anthony&R.L.Day,Inc............ Vercoe&CompanyInc...WarburgParibasBeckerIncorporated..... Weeden&Co.Incorporated .................... Wertheim&Co.,Inc....... Wheat,FirstSecurities, Inc...................... White,Weld&Co.Incorporated .............. DeanWitterReynoldsInc........................ WarrenW.York&Co.,Inc....................... Total.NumberofShares20,00020,00020,0007,00041,00020,00041,00020,00041,00041,00030,0003,000,000 TheUnderwriting Agreement providesthattheobligations oftheUnderwriters aresubjecttocertainconditions precedent. Thenatureoftheunderwriting commitment issuchthattheUnderwriters willbeobligated topurchaseallofthesharesofCommonStockofferedherebyprovidedthat,undercertainconditions involving defaultsbyoneormoreoftheUnderwriters whichaggregate morethan300,000shares,theCompanymayeitherterminate suchAgreement orrequireeachnon-defaulting Underwriter topurchasethenumberofsharessetforthoppositeitsnameaboveplus1/9ofsuchnumberofshares.TheCompanyhasbeenadvisedbyTheFirstBostonCorporation, DrexelBurnhamLambertIncorporated, BacheHalseyStuartShields,Incorporated andMerrillLynch,Pierce,Fenner8SmithIncorporated, asRepresentatives oftheUnderwriters, thattheUnderwriters proposetooffersuchCommonStocktothepublicinitially atthepublicofferingpricedetermined asprovidedonthecoverpageofthisProspectus and,throughtheRepresentatives, tocertaindealersatsuchpricelessaconcession ofnotmorethanepershare;thattheUnderwriters andsuchdealersmayallowadiscountofnotmorethanrfpershareonsalestootherdealers;andthatthepublicofferingpriceandconcessions anddiscounts todealersmaybechangedbytheRepresentatives. 5'5 PENNSYLVANIA POWER6LIGHTCOMPANYAK."PB4IA'IYLVAMA '."'ISERVICEAREAIYOHO.~~"SI'=petaoYI.YAIOA II.iowa'+%AiL-,i)I'alSIIIAhO ,'.VA-'WALILIOIAUP~= a'--j+WNLIAMAAOAv 0~LOOMLMIAO LLWIAMMOi'AZLalON SaaAAToascRftKNLAONOTI4OMIAAAIAMMO~I~IVAIAA-'m~oaaavaaawo~LINLLNaaa NIOWN~j~l&ADALAMA Jkf~"IaYORK~oeguGENERATING STATIONS PARTII.INFORMATION NOTREQUIREDINPROSPECTUS. Item13.OtherExpensesofIssuanceandDistribution. Securities andExchangeCommission registration fee...Stockexchangelistingfees.Printingandengraving. FeesandexpensesofTransferAgentandRegistrar...... Legalfees.Accounting fees.PostageBlueSkyfeesandexpensesMiscellaneous.. Total.$13,4258,00080,0001,00027,0005,0008,5004,5002,575$150,000AlloftheaboveexcepttheSecurities andExchangeCommission registration feeareestimated. Item14.Relationship ivithRegistrant ofExpertsnamedinStatement. Reference ismadetothecaptions"Experts" and"LegalOpinions" intheProspectus. Item15.Indemnification ofDirectors andefieers.ArticleVIIoftheBy-LawsoftheCompanyreadsasfollows:"Indemnification ofDirectors,

Officers, Etc.SEGTIQN7.01.Directors andOvers;ThirdPartyActions.Thecorporation shallindemnify anydirectororofficerofthecorporation whowasorisapartyoristhreatened tobemadeapartytoanythreatened, pendingorcompleted action,suitorproceeding, whethercivil,criminal, administrative orinvestigative (otherthananactionbyorintherightofthecorporation) byreasonofthefactthatheisorwasanauthorized representative ofthecorporation (which,forthepurposesofthisArticle,shallmeanadirector, officer,employeeoragentofthecorporation, orapersonwhoisorwasservingattherequestofthecorporation asadirector, officer,employeeoragentofanothercorporation, partnership, jointventure,trustorotherenterprise) againstexpenses(including attorneys'ees),

judgments, finesandamountspaidinsettlement actuallyandreasonably incurredbyhiminconnection withsuchaction,suitorproceeding ifheactedingoodfaithandinamannerhereasonably believedtobein,ornotopposedto,thebestinterests ofthecorporation, and,withrespecttoanycriminalactionorproceeding, hadnoreasonable causetobelievehisconductwasunlawful. Thetermination ofanyaction,suitorproceeding byjudgment, order,settlement, conviction, oruponapleaofnolocontendere oritsequivalent, shallnot,ofitself,createapresumption thatthepersondidnotactingoodfaithandinamannerwhichhereasonably believedtobein,ornotopposedto,thebestinterests ofthecorporation, and,withrespecttoanycriminalactionorproceeding, hadreasonable causetobelievethathisconductwasunlawful. SEcl'toN7.02.Directors andOgcers;Derivative Actions.Thecorporation shallindemnify anydirectororofficerofthecorporation whowasorisapartyoristhreatened tobemadeapartytoanythreatened, pendingorcompleted actionorsuitbyorintherightofthecorporation toprocureajudgmentinitsfavorbyreasonofthefactthatheisorwasanauthorized representative ofthecorporation, againstexpenses(including attorneys'ees) actuallyandreasonably incurredbyhiminconnection withthedefenseorsettlement ofsuchactionorsuitifheactedingoodfaithandina 444t4~444ttII44444~:4~I~44~4,44I~4444II~'1I4I-'4~'"'kf=4'PI4 mannerhereasonably believedtobein,ornotopposedto,thebestinterests ofthecorporation andexceptthat'noindemnification shallbemadeinrespectofanyclaim,issueormatterastowhichsuchpersonshallhavebeenadjudgedtobeliablefornegligence ormisconduct intheperformance ofhisdutytothecorporation unlessandonlytotheextentthatthecourtofcommonpleasofthecountyinwhichtheregistered officeofthecorporation islocatedorthecourtinwhichsuchactionorsuitwasbroughtshalldetermine uponapplication that,despitetheadjudication ofliability butinviewofallthecircumstances ofthecase,suchpersonisfairlyandreasonably entitledtoindemnity forsuchexpenseswhichthecourtofcommonpleasorsuchothercourtshalldeemproper.SEGTIQN7.03.Employees andAgents.Totheextentthatanauthorized representative ofthecorporation whoneitherwasnorisadirectororofficerofthecorporation hasbeensuccessful onthemeritsorotherwise indefenseofanyaction,suitorproceeding referredtoinSections7.01and7.02ofthisArticleorindefenseofanyclaim,issueormattertherein,heshallbeindemnified bythecorporation againstexpenses(including attorneys'ees) actuallyandreasonably incurredbyhiminconnection therewith. Suchanauthorized representative may,atthediscretion ofthecorporation, beindemnified bythecorporation inanyothercircumstances toanyextentifthecorporation wouldberequiredbySections7.01or7.02ofthisArticletoindemnify suchpersoninsuchcircumstances tosuchextentifhewereorhadbeenadirectororofficerofthecorporation. SEGTloN7.04.Procedure forEffecting Indemnification. Indemnification underSections7.01,7.02or7.03ofthisArticleshallbemadewhenorderedbycourt(inwhichcasetheexpenses, including attorneys'ees, oftheauthorized representative inenforcing suchrightofindemnification shallbeaddedtoandbeincludedinthefinaljudgmentagainstthecorporation) andmaybemadeinaspecificcaseuponadetermination thatindemnification oftheauthorized representative isrequiredorproperinthecircumstances becausehehasmettheapplicable standardofconductsetforthinSections7.01or7.02ofthisArticle.Suchdetermination shallbemade:(1)Bytheboardofdirectors byamajorityvoteofaquorumconsisting ofdirectors whowerenotpartiestosuchaction,suitorproceeding, or(2)Ifsuchaquorumisnotobtainable, or,evenifobtainable amajorityvoteofaquorumofdisinterested directors sodirect,byindependent legalcounselinawrittenopinion,or(3)Bytheshareholders. SEGTIQN7.05.Advancing Expenses. Expenses(including attorneys'ees) incurredindefending acivilorcriminalaction,suitorproceeding shallbepaidbythecorporation inadvanceofthefinaldisposition ofsuchaction,suitorproceeding, uponreceiptofanundertaking byoronbehalfofadirectororofficertorepaysuchamountunlessitshallultimately bedetermined thatheisentitledtobeindemnified bythecorporation asrequiredinthisArticleorasauthorized bylawandmaybepaidbythecorporation inadvanceonbehalfofanyotherauthorized representative whenauthorized bytheboardofdirectors uponreceiptofasimilarundertaking. SEGTIoN7.06.ScopeofArticle.Eachpersonwhoshallactasanauthorized representative ofthecorporation, shallbedeemedtobedoingsoinrelianceuponsuchrightsofindemnification asareprovidedinthisArticle.Theindemnification providedbythisArticleshallnotbedeemedexclusive ofanyotherrightstowhichthoseseekingindemnification maybeentitledunderanyagreement, voteofshareholders ordisinterested directors, statuteorotherwise, bothastoactioninhisofficialcapacityandastoactioninanothercapacitywhileholdingsuchofficeorposition, andshallcontinueastoapersonwhohasceasedtobeanauthorized representative ofthecorporation andshallinuretothebenefitoftheheirs,executors andadministrators ofsuchaperson."Directors andofficersoftheCompanymayalsobeindemnified incertaincircumstances pursuanttothestatutory provisions ofgeneral.application contained inthePennsylvania BusinessCorporation Law. Insofarasindemnification forliabilities arisingundertheSecurities Actof1933maybepermitted todirectors, oScersandcontrolling personsoftheCompanypursuanttotheforegoing provisions, orotherwise, theCompanyhasbeeninformedthatintheopinionoftheSecurities andExchangeCommission suchindemnification isagainstpublicpolicyasexpressed intheActandis,therefore, unenforceable. Intheeventthataclaimforindemnification againstsuchliabilities (otherthanthepaymentbytheCompanyofexpensesincurredorpaidbyadirector, oScerorcontrolling personoftheregistrant inthesuccessful defenseofanyaction,suitorproceeding) isassertedbysuch'director, officerorcontrolling personinconnection withthesecurities beingregistered, theCompanywill,unlessintheopinionofitscounselthematterhasbeensettledbycontrolling precedent, submittoacourtofappropriate jurisdiction thequestionwhethersuchindemnification byitisagainstpublicpolicyasexpressed intheActandwillbegovernedbythefinaladjudication ofsuchissue.Reference isalsomadetotheformofUnderwriting Agreement, filedasExhibit1hereto,whichcontainsprovisions forindemnification oftheCompanyanditsdirectors andoScersbytheseveralUnderwriters againstcertaincivilliabilities forinformation furnished bytheUnderwriters. TheCompanypresently hasaninsurance policywhich,amongotherthings,includesliability insurance coverageforoScersanddirectors, witha$20,000deductible clause,underwhichoScersanddirectors arecoveredagainstany"loss"byreasonofpaymentofdamages,judgments, settlements andcosts,aswellaschargesandexpensesincurredinthedefenseofactions,suitsorproceedings. "Loss"isspecifically definedtoexcludefinesandpenalties, aswellasmattersdeemeduninsurable underthelawpursuanttowhichtheinsurance policyshallbeconstrued. Thepolicyalsocontainsotherspecificexclusions, including illegally obtainedpersonalprofitoradvantage, anddishonesty. Thepolicyalsoprovidesforreimbursement totheCompanyforlossincurredbyhavingindemnified oScersordirectors asauthorized bystatestatute,companyby-laws,oranyotheragreement. Item16.Treatment ofProceedsfromStorktobeRegistered. Inapplicable. Item17.OtherDocuments FiledasaPartoftheRegistration Statement. (a)Statements ofeligibility andqualification ofpersonsdesignated toactastrusteeunderanindenture tobequalified undertheTrustIndenture Actof1939.Inapplicable. (b)Exhibits. Incorporation byReference ExbibltNo.2(a)-12(a)-2-FormsofAgreement AmongUnderwriters andUnderwriting Agreement -SpecimenofCommonStockCertificate -CopyofRestatedArticlesofIncorporation.'revious FilingRegistration Statement (No.2-9140)Registration Statement (No.2-60291)PreviousExhibitDesignation 2(a)-22(a)-2(i) -Amendment toArticlesofIncorporation 2(a)-2(ii) -Amendment toArticlesofIncorporation 'PC Incorporation byReference ExhibitNo.2(a)-3-CopyofBy-lawsPreviousFilingPreviousExhibitDesignation 2(a)-42(a)-52(a)-62(a)-72(a)-82(a)-92(a)-102(a)-112(a)-122(a)-132(a)-142(a)-152(a)-162(a)-172(a)-182(a)-192(a)-202(a)-212(a)-222(a)-23-MortgageandDeedofTrust,datedasofOctoberI,1945,betweentheCompanyandGuarantyTrustCompanyofNewYork(nowMorganGuarantyTrustCompanyof,NewYork),asTrustee-Supplement, datedasofJulyI,1947,tosaidMortgageandDeedofTrust-Supplement, datedasofDecemberI,1948,tosaidMortgageandDeedofTrust-Supplement, datedasofFebruaryI,1950,tosaidMortgageandDeedofTrust-Supplement, datedasofMarchI,1953,tosaidMortgageandDeedofTrust-Supplement, datedJulyI,1954,tosaidMort-gageandDeedofTrust-Supplement, datedasofAugustI,1955,tosaidMortgageandDeedofTrust-Supplement, datedasofDecemberI,1961,tosaidMortgageandDeedofTrust-Supplement, datedasofMarchI,1964,tosaidMortgageandDeedofTrust-Supplement, datedasofJuneI,1966,tosaidMortgageandDeedofTrust-Supplement, datedasofNovemberI,1967,tosaidMortgageandDeedofTrust-Supplement, datedasofDecemberI,1967,tosaidMortgageandDeedofTrust-Supplement, datedasofJanuaryI,1969,tosaidMortgageandDeedofTrust,-Supplement, datedasofJuneI,1969,tosaidMortgageandDeedofTrust-Supplement, datedasofMarchI,1970,tosaidMortgageandDeedofTrust-Supplement, datedasofFebruaryI,1971,tosaidMortgageandDeedofTrust-Supplement, datedasofFebruaryI,1972,tosaidMortgageandDeedofTrust-Supplement, datedasofJanuaryI,1973,tosaidMortgageandDeedofTrust-,Supplement, datedasofMayI,1973,tosaidMortgageandDeedofTrust-Supplement, datedasofAprilI,1974,tosaidMortgageandDeedofTrustRegistration Statement (No.2-5872)Registration Statement (No.2-60291)Registration Statement (No.2-60291)Registration Statement (No.2-60291)Registration Statement (No.2-60291)Registration Statement (No.2-19255)Registration Statement (No.2-60291)Registration Statement (No.2-19255)Registration Statement (No.2-60291)Registration Statement (No.2-60291)Registration Statement (No.2-60291)Registration Statement (No.2-60291)Registration Statement (No.2-60291)Registration Statement (No.2-60291)Registration Statement (No.2-60291)Registration Statement (No.2-60291)Registration Statement (No.2-60291)Registration Statement (No.2-60291)Registration Statement (No.2-60291)Registration Statement (No.2-60291)7(c)2(a)-52(a)-62(a)-72(a)-82(b)-52(a)-102(b)-72(a)-122(a)-132(a)-142(a)-152(a)-162(a)-172(a)-182(a)-192(a)-202(a)-212(a)-222(a)-2311-4 F,1 incorporation byReference ExhibitNo.2(a)-242(a)-252(a)-262(a)-272(a)-282(a)-292(a)-302(a)-312(a)-322(a)-332(a)-342(a)-352(a)-36-Supplement, datedasofOctober1,1974,tosaidMortgageandDeedofTrust-Supplement, datedasofMay1,1975,tosaidMortgageandDeedofTrustPreviousFilingRegistration Statement (No.2-60291)Registration Statement (No.2-60291)-Supplement, datedasofNovember1,1975,toRegistration Statement saidMortgageandDeedofTrust(No.2-54831)-Supplement, datedasofDecember1,1976,tosaidMortgageandDeedofTrust-Supplement, datedasofDecember1,1977,tosaidMortgageandDeedofTrust-MortgageandDeedofTrust,datedasofFebruary15,1937,betweenTheScrantonElec-tricCompany(towhichcompanytheCompanyissuccessor bymerger)andChemicalBank&TrustCompany(nowChemicalBank)andHowardB.Smith(P.J.Gilkeson, successor), asTrustees-Supplement, datedasofNovember1,1946,tosaidMortgageandDeedofTrust-Supplement, datedasofApril1,1948,tosaidMortgageandDeedofTrust-Supplement, datedasofMay15,1952,tosaidMortgageandDeedofTrustRegistration Statement (No.2-57633)Registration Statement (No.2-60291)Registration Statement (No.2-6289)Form1-MD,Registration Statement (No.2-6289)Registration Statement (No.2-60291)Registration Statement (No.2-60291)-Instrument providing forresignation ofIndivid-ualTrusteeandappointment ofsuccessor Indi-vidualTrusteeundersaidMortgageandDeedofTrustRegistration Statement (No.2-60291)-Supplement, datedasofSeptember 1,1952,toRegistration Statement saidMortgageandDeedofTrust(No.2-60291)-Supplement, datedasofJanuary31,1956,toRegistration Statement saidMortgageandDeedofTrust(No.2-60291)-Supplement, datedJanuary31,1956,tosaidRcgistrationStatement MortgageandDeedofTrust(No.2-19255)PreviousExhibitDesignation 2(a)-242(a)-252(a)-262(a)-262(a)-28DB-12(a)-312(a)-32,2(a)-332(a)-342(d)-62(a)-362(a)-372(a)-382(a)-392(a)-40-Instrument providing forresignation ofIndivid-ualTrusteeandappointment ofsuccessor Indi-vidualTrusteeundersaidMortgageandDeedofTrust-Instrument providing forresignation ofIndivid-ualTrusteeandappointmcnt ofsuccessor Indi-vidualTrusteeundersaidMortgageandDeedofTrust-LoanAgreement datedFebruary9,1973,be-tweentheCompanyandTheChaseManhattan Bank,N.A.,asamended-Preferred StockPurchaseAgreement, datedJuly11,1973,betweentheCompanyandThePrudential Insurance CompanyofAmericaRegistration Statement (No.2-60291)Registration Statement (No.2-58290)2(a)-372(a)-37 Incorporation byReference ExhibitNo.2(a)-412(a)-423(a)-Preference StockPurchaseAgreement, datedSeptember 22,1975,betweentheCompanyandAlcoStandardCorporation -Composite Conformed CopyofPreferred StockPurchaseAgreement, datedOctober11,1977,betweentheCompanyandthepurchasers namedtherein-OpinionofEdwardM.Nagel,Esq.,withrespecttolegalityofsecurities beingregistered here-underPreviousFilingRegistration Statement (No.2-60291)PreviousExhibitDesignation 2(a)-423(b)3(c)I4(a)4(b)S(a)-OpinionofMessrs.SimpsonThacher&Bartlettwithrespecttolegalityofsecurities beingregis-teredhereunder -ConsentofPaulWeirCompanyIncorporated -ArticleVIIoftheCompany's By-Laws,relatingtoindemnification ofdirectors andoScers,issetforthinItem15,towhichreference isherebymade-CopyofMemorandum ofExcessLiability In-surance,datedDecember31,1972,CoveringExcessPublicLiability &PropertyDamage,including ErrorsandOmissions, EmployeeBen-efitsandDirectors andOScersLiability -CopyofCoalSalesAgreement, datedJanuary1,1972,betweentheCompanyandPennsylva-niaMinesCorporation (formerly Greenwich Collieries Company)Registration Statement (No.2-51907)Registration Statement (No.2-42777)4(b)5(b)5(b)-CopyofInterconnection Agreement, datedRegistra'tion Statement February23,1965,betweenPublicService(No.2'-26170) Electric&GasCompanyandtheCompany13(a)5(c)-CopyofInterconnection Agreement, datedFebruary19,1965,betweenPhiladelphia Elec-tricCompanyandtheCompanyRegistration Statement (No.2-26170)13(b)5(c)-1-CopyofSupplemental Agreement, datedJan-Registration Statement uary27,1967,tosaidInterconnection Agree-'No.2-26170) ment13(b)-15(c)-25(d)5(e)-CopyofSupplemental Agreement, datedOcto-ber20,1969,tosaidInterconnection Agreement -CopyofInterconnection Agreement, datedApril9,1974,betweenNewYorkPowerPoolGroup,andPennsylvania-New Jersey-Maryland Group-CopyofInterconnection Agreement, datedSeptember 26,1956,amongPublicServiceElectric&GasCompany,Philadelphia ElectricCompany,theCompany,Baltimore Gas&ElectricCompany,Pennsylvania ElectricCom-pany,Metropolitan EdisonCompany,NewJerseyPower&LightCompanyandJerseyCentralPower&LightCompanyRegistration Statement (No.2-35654)Registration Statement (No;2-51907)Registration Statement (No.2-60291)5(c)-25(e)5(e) Incorporation byReference ExhibitNo5(e)-1-CopyofSupplemental Agreement, datedJan-uary28,1965,tosaidInterconnection Agree-mentPreviousFilingRegistration Statement (No.2-26170)PreviousExhibitDesignation 13(d)-15(e)-25(e)-35(e)-45(e)-55(f)5(f)-1-CopyofSupplement entitled"Appendix AMe-terLocations", datedJuly28,1972,tosaidInterconnection Agreement -CopyofSupplemental Agreement, datedApril1,1974,to,saidInterconnection Agreement -CopyofSchedules 5.02and5.03,efFective forfilingAugust1,1974,tosaidInterconnection Agreement -CopyofSupplemerital Agreement, datedJune15,1977,tosaidInterconnection Agreement -CopyofConowingo Backwater Agreement, datedFebruary20,1926,amongPennsylvania Water&PowerCompany(towhichcompanytheCompanyissuccessor bymerger),theSusquehanna PowerCompany,theSusque-hannaElectricCompany,andPhiladelphia ElectricCompany-CopyofSupplemental LetterAgreement, datedMarch1,1976,tosaidConowingo Backwater Agreement Registration Statement (No.2-51907)Registration Statement (No.2-51312)Registration Statement (No.2-52931)Registration Statement (No.2-60291)Registration Statement (No.2-4254}Registration Statement (No.2-57633)5(f)-25(f)-45(e)-15(e)-5I-145(g)-15(f)-2-CopyofSupplemental LetterAgreement, datedRegistration Statement August5,1977,tosaidConowingo Backwater (No.2-60291) Agreement 5(f)-25(g)5(h)5(i)5(j)5(k)-CopyofPowerSupplyContract, datedasofJune1,1955,amongBaltimore Gas&ElectricCompany,theCompany,andSafeHarborWa-terPowerCorporation -CopyofAgreement onthescheduling anddispatching ofSafeHarborandHoltwoodProj-ects,datedasofJune1,1955,amongSafeHarborWaterPowerCorporation, Baltimore Gas&ElectricCompanyandtheCompany-CopyofTransmission

Contract, datedasofJuly20,1960,amongtheCompany,SafeHarborWaterPowerCorporation andBaltimore Gas&ElectricCompany-Memorandum ofAgreement regarding Key-stoneElectricGenerating Station,datedDecember7,1964,betweentheCompanyandAtlanticCityElectricCompanyctal.-KeystoneOperating Agreement, datedDecem-ber1,1965,betweenPennsylvania ElectricCompanyandtheCompanyetal.Registration Statement (No.2-14608)Registration Statement (No.2-14608)Registration Statement (No.2-26170)Registration Statement (No.2-60291)Registration Statement (No.2-60291)13(o)13(p)13(11)5(j)5(k)

Incorporation byReference ExhibitNo.5(l)5(m)5(m)-15(n)5(n)-15(o)5(p)-15(p)-25(p)-35(p)-45(p)-55(p)-65(p)-75(p)-85(q)5(q)-1-Memorandum ofOwners'greement Regard-ingConemaugh SteamElectricStation,datedAugust1,1966,betweentheCompanyandAtlanticCityElectricCompanyetal.-Conemaugh Operating Agreement, datedDecember1,1967,betweenPennsylvania Elec-tricCompanyandtheCompanyetal.-Supplement No.1,datedJune'4,1969,tosaidConemaugh Operating Agreement -CopyofInterconnection Agreement, datedMay31,1968,betweenPennsylvania ElectricCom-panyandtheCompany-CopyofAppendixB,Revision2,datedOctober1,1971,tosaidInterconnection Agreement -CopyofInterconnection Agreement, datedAu-gust1,1935,betweenLuzerneCountyGas&ElectricCorporation (nowUGICorporation) andtheCompany-CopyofSupplemental Agreement, datedJune1,1960,tosaidInterconnection Agreement -CopyofAmendment tosaidSupplemental Agreement, datedJanuary31,1968,tosaidInterconnection Agreement -CopyofAmendment tosaidSupplemental Agreement, datedFebruary6,1969,tosaidInterconnection Agreement -CopyofAmendment tosaidSupplemental Agreement, datedMarch27,1970,tosaidInterconnection Agreement -CopyofAmendment tosaidSupplemental Agreement, datedOctober10,1972,tosaidInterconnection Agreement -CopyofAmendment tosaidSupplemental Agreement, datedMay1,1973,tosaidInter-connection Agreement -CopyofSupplemental Agreement, datedDecember11,1974,tosaidInterconnection Agre;.ment -CopyofSupplemental Agreement, datedApril22,1975,tosaidInterconnection Agreement -CopyofInterconnection Agreement, datedApril26,1965,betweenWestPennPowerCompanyetal.andtheCompanyetal.-CopyofSchedule7.01,issuedMay4,1967,tosaidInterconnection Agreement PreviousFilingRegistration Statement (No.2-60291)Registration Statement (No.2-60291)Registration Statement (No.2-60291)Registration Statement (No.2-30918)Registration Statement (No.2-42013)Registration Statement (No.2-26170)Registration Statement (No.2-26170)Registration Statement (No.2-33042)Registration Statement (No.2-33042)Registration Statement (No.2-38149)Registration Statement (No.2-46508)Registration Statement (No.2-49227)Registration Statement (No.2-52693)Registration Statement (No.2-52931)Registration Statement (No.2-26170)"'egistration Statement (No.2-30918)PreviousExhibitDesignation 5(1)5(m)5(m)-14(J)5(k)-113(J)13(j)-15(I()-25(k)-35(I()-45(1)-55(1)-65(1)-75(1)-813(1()4(1)-15(q)-2-CopyofSchedule1.05,issuedDecember22,Registration Statement 1971,tosaidInterconnection Agreement (No.2-50488)5(m)-2 Incorporation byReference ExhibitNo.5(q)-35(q)-45(q)-55(r)5(r)-15(r)-25(s)5(s)-15(s)-25(t)5(t)-15(t)-25(t)-35(t)-45(t)-55(t)-65(t)-75(t)-8-CopyofSchedules 1.06,5.02,6.02and9.01,datedNovember14,1974,tosaidInter-connection Agreement -CopyofSchedule4.03,issuedFebruary9,1976,tosaidInterconnection Agreement -CopyofSchedule7.03,datedAugust16,1976,tosaidInterconnection Agreement -CopyofInterconnection Agreement, datedSeptember 30,1965,betweenTheCleveland ElectricIlluminating CompanyandtheCom-panyetal.-CopyofSchedule8.02,issuedMarch24,1975,tosaidInterconnection Agreement -CopyofSchedules 1.02,4.02,5.02,6.02,7.02and9.01,datedNovember12,1975tosaidInterconnection Agreement -CopyofInterconnection Agreement, datedSeptember 30,1965,betweenVirginiaElectricandPowerCompanyandtheCompanyetal.-CopyofSchedule7.0I,issuedJune20,1967,tosaidInterconnection Agreement -CopyofSupplemental Agreement, datedSeptember 1,1976,tosaidInterconnection Agreement -CopyofInterconnection Agreement, datedOctober30,1964,betweenMetropolitan EdisonCompanyandtheCompany-CopyofSupplemental Agreement, datedSeptember 29,1967,tosaidInterconnection Agreement -CopyofSupplemental Agreement, datedMay20,1968,tosaidInterconnection Agreement -CopyofSupplemental Agreement, datedOcto-ber4,1968,tosaidInterconnection Agreement -CopyofSupplemental Agreement, datedNovember22,1968,tosaidInterconnection Agreement -CopyofSupplemental Agreement, datedJune26,1970,tosaidInterconnection Agreement -CopyofAppendixB,Revision9,datedMay25,1971,tosaidInterconnection Agreement -CopyofSupplemental Agreement, datedJune21,1974,tosaidInterconnection Agreement -CopyofRevisiontoAppendixC,datedSeptember 10,1974,tosaidInterconnection Agreement PreviousFilingRegistration Statement (No.2-52693)Registration Statement (No.2-56389)Registration Statement (No.2-57633)Registration Statement (No.2-26170)Registration Statement (No.2-52931)Registration Statement (No.2-56389)Registration Statement (No.2-26170)Registration Statement (No.2-30918)Registration Statement (No.2-57633)Registration Statement (No.2-26170)Registration Statement (No.2-30918)Registration Statement (No.2-30918)Registration Statement (No.2-30918)Registration Statement (No.2-33042)Registration Statement (No.2-38149)Registration Statement (No.2-40765)Registration Statement (No.2-51907)Registration Statement (No.2-52693)PreviousExhibitDesignation 5(m)-35(m)-45(m)-513(1)5(n)-25(n)-213(m)4(n)-15(o)-213(n)4(o)-14(o)-24(o)-35(o)-45(o)-65(p)-65(p)-105(p)-11

Incorporation byReference ExhibitNo.5(t)-95(t)-105(t)-115(u)5(u)-I5(u)-25(u)-35(u)-45(u)-55(u)-65(u)-75(v)5(w)5(w)-I5(x)5(y)-CopyofRevisiontoAppendixC,datedOctober30,1974,tosaidInterconnection Agreement -CopyofRevisiontoRateSchedule, datedApril28,1975,tosaidInterconnection Agreement -CopyofSupplemental Agreement, datedApril5,1976,tosaidInterconnection Agreement -CopyofthcExtraHighVoltageTransmission SystemAgreement, datedApril27,1967,be-tweentheCompanyandPublicServiceElectric&GasCompany,etal.-CopyofSchedule13.02,issuedMarch26,1969,inconnection withsaidAgreement -CopyofSupplemental Agreement, datedOcto-ber17,1969,tosaidAgreement -CopyofOperating andMaintenance Agree-ments,datedasofFebruaryI,1970,in'con-nectionwithsaidAgreemcnt -CopyofSchedules 11.04and12.03,issuedJuly16,1971,inconnection withsaidAgreement -CopiesofRevisions toScheduleA,issuedJan-uaryI,1975andMayI,1975,tosaidSchedule12.03-CopyofSupplemental Agreement, datedMay17,1972,tosaidAgreement -CopyofSchedules 2.03,3.03,4.03,6.02and8.04,issuedJuly29,1976,tosaidAgreement -CopyoftheSusquehanna-Eastern 500KVTransmission SystemAgreement, dateasofApril30,1976,betweentheCompanyandPublicServiceElectricandGasCompany,etal.-CopyofMid-Atlantic AreaCoordination Agreement, datedApril23,1971,betweentheCompanyandAtlanticCityElectricCompany,etal.-CopyofAgreement onCoordinated ProgramforReduction inEnergyUse,datedAprilI,1977,betweentheCompanyandAtlanticCityElectricCompany,etal.-Copyof115KVSeward-Conemaugh Inter-connection Facilities Agreement, datedMarch2,1970,betweenPennsylvania ElectricCom-panyandtheCompany,etal.-PipelineSystemContract, datedasofJune22,1972,betweentheCompanyandGulfInterstatc Engineering CompanyPreviousFilingRegistration Statement (No.2-52693)Registration Statement (No.2-52931)Registration Statement (No.2-56389)Registration Statement (No.2-30918)Registration Statement (No.2-33042)Registration Statement (No.2-35654)Registration Statement (No.2-38149)Registration Statement (No.2-42013)Registration Statement (No.2-54831)Registration Statement (No.2-45713)Registration Statement (No.2-57633)Registration Statement (No.2-57633)Registration Statement (No.2-40765)Registration Statement (No.2-60291)Registration Statement (No.2-38149)Registration Statement (No.2-45713)PreviousExhibitDesignation .5(p)-125(p)-135(p)-114(1)5(p)-I-5(p)-35(p)-45(q)-45(q)-55(q)-55(q)-75(r)5(r)5(w)-I5(r)5(u) III~IIf'IIIf'lfhl;(=III~)II Incorporalion byReference ExhibitNo.5(y)-I-CopyofAmendment, datedasofNovember1,1973,tosaidPipelineSystemContractIPreviousFilingRegistration Statement (No.2-51907)PreviousExhibitDesignation 5(LI)-I5(y)-2-CopyofAmendment, datedasofJanuary23,1974,tosaidPipelineSystemContractRegistration Statement (No.2-51901)5(u)-25(y)-3-CopyofAmendment, datedasofJanuary1,RcgistrationStatement 5(u)-31975,tosaidPipelineSystemContract(No.2-54831)5(y)-4-CopyofAmendment, datedasofJanuary1,RcgistrationStatement 5(t)-41976,tosaidPipelineSystemContract(No.2-5290)s(z)-Pollution ControlFacilities Agreement, dated,asofMay1,1973,betweentheCompanyandtheLehighCountyIndustrial Development Au-'hority5(aa)-CopyofPetroleum ProductSalesAgreement RegistrationStatement 5(y)forthesaleofresidualoil,datedasofJanuary(No.2-54299).1,1975,betweentheCompanyandAmeradaHessCorporation 5(bb)-CopyofAgreement, datedasofJanuary1,Registration Statement 5(w)1977,betweentheCompanyandAsiaticPetro-(No.2-5290)leumCorporation forthesaleofoil5(cc)-CopyofAgreement, datedasofMarch24,Registration Statement 5(y)1977,betweentheCompanyandSunOilCom-(No.2-58290)panyofPennsylvania 5(dd)-CopyofParticipation Agrccment, datedasofRegistration Statement 5(dd)March18,1977,betweentheCompanyand(No.2-60291) Allegheny ElectricCooperative, Inc.5(dd)-1-CopyofSecondTermination Agreement, datedRegistrationStatemcnt-5(dd)-1September 16,1977,betweentheCompanyand(No.2-60291)Allegheny ElectricCooperative, Inc.6-Calculation ofAllocation ofAllowance for'undsUsedDuringConstruction Attributable toFundsProvidedbyCommonStockEquity hKrII~$/I SIGNATURES Pursuanttotherequirements oftheSecurities Actof1933,theregistrant hasdulycausedthisregistration statement tobesignedonitsbehalfbytheundersigned, thereunto dulyauthorized, intheCityofAllentown, andCommomvealth ofPennsylvania, onthe24thdayofFebruary, 1978.PENNSYLVANIA POWER&LIGHTCOMPANYBy/S/JACKK.BUSBYJackK.Busby,ChairmanofthcBoardandChiefExecutive OIIIccrPursuanttotherequirements oftheSecurities Actof1933,thisregistration statement hasbeensignedbelowbythcfollowing personsinthecapacities indicated onthe24thdayofFebruary, 1978.Signature /S/JACKK.BUSBYJackK.Busby,ChairmanoftheBoardandChiefExecutive OiiiccrTitlePrincipal Executive Officer/s/R.R.FoRTUNER.R.Fortune,Executive VicePrcsidcnt-Financial Principal Financial andAccounting OAicerJAGKK.BUsBY,RALPHR.CRANMER,RoBERTK.CAMPBELL, EDGARL.DEssEN,R.R.FoRTUNE,HARRYA.JENSEN,VIRGINIAH.KNAUER,W.DEM-INGLEWIS,JOHNA.NOBLE,NORMANROBERTSON ANDCHARLEsH.WATTsIIDirectors By/s/JAcKK.BvsBYJackK.Busby,Attorney-in. fact CONSENTOFINDEPENDENT CERTIFIED PUBLICACCOUNTANTS PENNSYLYANIA PowER&LIGHTCoMPANYWeherebyconsenttotheuseinthisRegistration Statement ofouropiniondatedFebruary3,1978appearing intheProspectus whichisapartofsuchRegistration Statement, andtothereferences tousundertheheadings"Statement ofIncome"and"Experts" insuchProspectus. HASKINS&SELLSNewYork,NewYorkFebruary24,1978(TheconsentsofEdwardM.Nagel,Esq.,Messrs.SimpsonThacher&BartlettandPaulWeirCompanyIncorporated arefiledasexhibits3(a),3(b)and3(c),respectively, totheRegistration Statement.) Cin/I PENNSYLVANIA POWER4LIGHTCOMPANYALLOCATION OFPORTIONOFALLOWANCE FORFUNDSUSEDDURINGCONSTRUCTION (AFUDC)ATTRIBUTABLE TOFUNDSPROVIDEDBYCOMMONSTOCKEQUITYForYearsPriorto1977IncludedintheStatement ofIncome(Thousands ofDollars)EXHIBIT6Capitalization Incremental Ratios(a) Rate(b)FAIuivalcnt Rate(c)EarningsApplicable Allocation ofioCommonAFUDCStockPortionofAFUDCAttributable ioCommonStockEquityasaPercentage ofEarningsApplicable ioCommonStock1976Long-Term Debt........................... Preferred andPreference Stock.... CommonStockEquity.................. 51%18314.65%2.37%$13,50610.281.8510,5433.7121,1437.93%$45,192$78,74327%1975Long-Term Debt..............,........... Preferred andPreference Stock....CommonStockEquity.................. 51%18314.67%13.312.38%2.403.568.34%$10,44610,53415,625$36,605$73,03221%1974Long-Term Debt........................... Preferred andPrefcrencc Stock.... CommonStockEquity.................. 51%18314.11%2.10%7.441.343.807.24%$6,0133,83710,882$20,732$67,82316%1973Long-Term Debt........................... Prcfcrred andPreference Stock.... CommonStockEquity.................. 51%18316.99%3.56%$6,7627.401.332,5262.995,6797.88%$14,967$49,72111%(a)Assumesthatfundsusedtofinanceconstruction duringeachyearwereprovidedinthesameproportion astheCompany's averagecapitalization ratiosduringthefiveyearsendedDecember31,1976.(b)For1973incremental ratesweredetermined onthebasisthatthecostoflong-term debtandpreferred andpreference stockfinancing wasequivalent tothecostofsecurities issuedintheyear.Noadjustment wasmadeforincometaxreductions resulting frominterestexpenseattributable totheportionofAFUDCprovidedbylong-term debt.SinceFebruary1,1974,theCompanyhascomputedtheAFUDC,rate onan"after-tax" basistobeconsistent withthetreatment accordedthisitemforrate-making purposesbythePennsylvania PublicUtilityCommission (PUC).Theincremental ratesusedintheabovecomputation for1974,1975,and1976areconsistent withtheAFUDCratecomputation filedsemi-annually withthePUCwhichwerebasedonsecurities issuedinthetwelvemonthspreceding thesemi-annual computation. Forthesamereason,effective February1,1974,theincremental rateforthedebtcomponent wasreducedbytherelatedincometaxreduction. (c)Theequivalent rateforeachyeariscalculated bydividingtheamountofAFUDCrecordedduringtheyearbythebalancesoftheconstruction workinprogressincluding theaccumulated AFUDC. i~I'l'L~II'L*aL~II'IILLfLiLt~L~Iy~ POWERPURCHASEAGREEMENT BETWEENPENNSYLVANIA POWER5LIGHTCOMPANYANDALLEGHENY ELECTRICCOOPERATIVE, INC.MARCH18,1977 l)),I POl<ERPURCHASEAGREEtIENTTABLEOFCONTENTSPaveMo.ArticleI,ArticleIIArticleIIIArticleIVArticleVArticleVIArticleVlIArticleVIIIArticleIXArticleXArticleXIArticleXIIArticleXIIIArticleXIVArticleXVArticleXVIArticleXVIIArticleXVIII1lefinitions BuyBackTestEnergyEconomicRegulation AEExcessEnergyBillingandPaymentSuccessors, Assigns,Transferees andGranteesNoticeAmendments Counterparts Governing LawBenefitofAgreement Severability FailuretoEnforceProvision's of'hisAgreemen't ArticleHeadingsNottoAffectMeaningFilingSuspension andTermination ofthis.Agreement BestEffortsSignatures 1218222324252627282930313233ExhibitAExhibitBEXHIBITSOff-siteFacilities Operating Costs POWERPURCHASEAGREEMENT BETWEENPENNSYLVANIA POWER6LIGHTCOMPANYANDALLEGHENY ELECTRICCOOPERATIVE, INC.ThisAGREL'ML'NT, c>>teredintothis18thdayofMarch,1977,byandbetweenPennsylvania Power5LightCompany,(herein-afterPL),acorporation organized andexistingunderthelawsoftheCommonwealth ofPennsylvania, withitscorporate head-quartersatTwoNorthNinthStreet,Allentown, Pennsylvania 18101,andAllegheny ElectricCooperative, Inc.(hereinafter AE),acorporation organized andexistingunderthelawsoftheCommon-wealthofPennsylvania, withitscorpo>ateheadquarters at2929NorthFrontStreet,Harrisburg, Pennsyj.vania 17110.WHEREAS,PLisapublicutilityengagedinthegenera-tion,transmission anddistribution ofelectricpowerandenergyintheCommonwealth ofPennsylvania, andAEisengagedinthesaleofelectricpowerandenergytoitsmembersintheCommon-wealthofPennsylvania andtheStateofNewJersey;andWHEREAS,PLandAE,astenantsincommon,ownaninetypercentandtenpercentundivided ownership

interest, respectively, intwonucleargenerating units,oneofwhichisdesignated asSusquehanna Unit81andthesecondofwhichisdesignated asSusquehanna Unitt2(hereinafter collectively referredtoasSusquehanna),

locatedinSalemTownship, LuzerneCounty,Pennsyl-vania;.and NON,THEREFORE, Inconsideration ofthepremisesand.thecovenants hereincontained, PLandAEintending tobelegallyboundhereby,mutuallyagreeandpromiseasfollows: ArticleI:Definitions AGREEMENT ALLOWANCE FORFUNDSUSEDDURINGCON-STRUCTION BILLINGMONTHBUSINESSDAYCONTRACTOPERATION ThisPowerPurchaseAgreement. TheAllowance ForFundsUsedDuringConstruction ofSusquehanna asrecordedinPL'sorAE'saccounting booksandrecordsasthecasemaybe.ForPLAllowance forFundsUsedDuringConstruc-tionisintendedtoencompass thetermsAllowance forFundsUsedDuringConstruc-tion,InterestChargedtoConstruction, InterestDuringConstruction, Allowance forOtherFundsUsedDuringConstruction orAllowance forBorrowedFundsUsedDuringConstruction asdefinedintheUniformSystemofAccountsforClassAandBUtilities aswasandasmaybeamendedfromtimetotime.ForAEAllowance ForFundsUsedDurj.ngConstruction isintendedtoencompass thetermsAllowance forFundsUsedDuringCon'struction andInterestChargedtoConstruction asdefinedintheUniformSystemofAccountsPrescribed forElectricBorrogers oftheRuralElectrifi-cationAdministration. Thatcalendarmonthduringwhichpowerissoldorpurchased pursuanttothetermsofthisAgreement. AnydayotherthanaSaturdayorSundayoradayonwhichbankinginstitutions intheCommonwealth ofPennsylvania arerequiredbylawnottotransactbankingbusiness. .PLshallplaceSusquehanna UnitFlandSus-'uehanna82individually inContractOpera-tionattheearliestpracticable datethatithasbeendetermined thatsuchunitis,areliablesourceofcapacityandcompliesfullywithallrequirements ofallappli-cablestatutesandtherulesandregula-tionsoftheNuclearRegulatory Commission andsuchotherregulatory agenciesasshallhavecompetent jurisdiction overtheplanning, design,licensing, construction, operation andmaintenance ofSusquehanna. 3 Suchdatewithrespecttoeachsuchunitshallbe.thedateofContractOperation forsuchunit.PARTIESPARTYSUSQUEHANNA Pt.<<ndAE.EitherE'LorAE.Thetwonucleargenerating unitswithallon-siteauxiliaries andon-sitefacilities relatedtheretodesignated asSusquehanna UnitNlandSusquehanna Unitn2locatedinLuzerneCounty,Pennsylvania, andsuchoff-sitepropertydesignated onExhibitA,attachedheretoandmadeaparthereofasmaybeaddedtofromtimetotimeto'eflect additions toSusquehanna andsub-tractedfromtimetotimetoreflectretirements fromSusquehanna, butSusque-hannashallincl'udenotransmission facilities. UNITEitherSusquehanna Unit81orSusquehanna Unit82asappropriate. (EndofArticleI) ArticleII:~BuBackA.llft'ectivel)atesThepurchaseofcapacityandenergyandthepaymenttherefore providedforinthisArticleIIofthisAgreement shallcommenceonthedateeachUnitbeginsContractOperation andshallterminate ontheninthanniversary ofthedateofContractOperation ofeachrespective Unit.B.UnittlandUnitN2transactions areseparateThesalesandpaymentsprovidedforinthisArticleII'ofthisAgreement withrespecttoSusquehanna Unit81shallbeconsidered independent andseparate'from thesalesandpaymentsprovidedforinthisArticleIIofthisAgreement withrespecttoSusquehanna Unit82andviceversa,exceptwithrespecttotheappropriate allocation ofanysalesandpaymentsprovidedforinthisArticleIIofthisAgreement commontobothUnits.5 C.PurchaseAmountsAEshallselltoVL<<ndPLshallpurchasefromAllafractional part(hereinafter'urchase Ratio)ofAE'scapacityandenergyfromSusquehanna UnitNlandSusquehanna UnitN2individually inaccordance withthefollowing formula:(I)(1050)-APurchaseRatio=(I)(1050)whereIisafactordetermined asone-tenth (O.l)plusorminusanyadjustedproportion ofSusquehanna undivided ownership interestwhichAEacquiresasaresultofproviding optionalfinancing tocontinueorcompletetheconstruction ofSusquehanna Unit81and/orSusquehanna UnitF2,ifsaidoptionalfinancing isprovidedasaresultofPLbeingunabletoobtaintherequiredfinancing uponreasonable termsinordertocontinueorcompletetheconstruction ofSusquehanna UnitPland/orSusquehanna Unit42,andwhereAisafactorhavingthefollowing valuesduringthe.timeperiodssetforthbelow:"A"FactorPeriod3/18/77'-5/31/816/1/81-5/31/826/1/82-5/31/836/1/83-5/31/846/1/84-5/31/85Sus.UnitPl4050607080Sus.UnitII240506070

6/1/85-5/31/866/1/86-5/31/876/1/87-termination pursuanttoArticleII,SubpartAhereof.901051058090105l(ithrespecttoeachUnitofSusquehanna individually, thePurchaseRatioshallbezero:(a)untileachsaidUnithasbeenplacedinCon-tractOperation; or(b)forsuchtimesasthecalculation ofthePurchaseRatioyieldsanegativequantity. D.ChargesforPurchaseForthecapacityandenergypurchased fromSusquehanna UnitHlorSusquehanna UnitN2individually ashereincontemplated, PLshallpayeachmonthtoAEpursuanttotheprocedures specifically setforthinthisArticleIIanamountequaltothesumofthefollowing, multiplied bythePurchaseRatio.fortheUnit(asdefinedinthisArticleII,SubpartC):1.CarryingChargeComponent asdefinedinthisArticleII,SubpartE;2.Plus,Depr'eciation ExpenseComponent asdefinedinthisArticleII,SubpartF;3.Plus,Decommissioning Provision Component asdefinedinthisArticleII,SubpartG;'

4.Plus,Operation andMaintenance CostComponent definedinthisArticleII,SubpartH;E.CarryingChargeComponent 1.TheCarryingChargeComponent foreachUnitindi-viduallyshallbeanamountequaltoth..RateBaseofAE(assetforthinthisArticleII,SubpartE-2)fortheUnitmultiplied bytheAEAdjustedCostofCapitalRatefortheUnit(assetforthinthisArticleII,SubpartE-3).42.RateBaseofAEshallbecomputedindividually foreachUnitandshallbetheaverageofthebalancesatthebegin-ningandtheendoftheBillingMonthforthefollowing items:(a)Allcostsofplantin-service relatedtolandanddepreciable assetsapplicable totheUnitaspermitted pursuanttotheUniformSystemofAccountsprescribed forelectricborrowers oftheRuralElectrification Administration, January1,1972,asitmaybeamendedfromtimetotime,including AE'sAllowance forFundsUsedDuringConstruction relatedtosuchcosts;(b)Minus,amountswithheldundercontracts withcontractors, subcontractors andotherssupplying orconstructing equipment,

services, ormaterials relatedtotheUnit;(c)Minus,Accumulated ReserveforDepreciation Component whichshallbetheamountoftheDepreciation ExpenseComponent (asdefinedinthisArticleII,SubpartF)accumulated sincetheContractOperation date;8 (d)Minus,Accumulated Decommissioning Provision Component whichshallbetheamountoftheDecommissioning Pro-.visionComponent (asdefinedinthisArticleII,SubpartG)accumulated sincetheContractOperation date;(e)Plus,AE'sinvestment associated witheachUnitinfabricated nuclearfuelinthereactororavailable forinstallation inthereactororremovedfromthereactor,ifany,minusaccumulated amortization ofsuchfuel,reprocessing costsofsuchfuel,andotherfuelcyclecostsorcreditsattributable totheportionofsuch'nuclear fuelconsumed, allofwhichshallbebasedondatasetforthonAE'sbooksandrecords;(f)Plus,AE'sinvestment associated withorallocated toeachUnitinmaterials andsuppliesandundistributed storesexpense,ifany,allofwhichshallbebasedondatasetforthonAE'sbooksandrecords.3..AE'sAdjustedCostofCapitalRateshallbeequalto:withtheresultroundedtothefifthdecimalplace.Thequantities appearing intheformulaaredefinedas:I=Theaggregate ofAE'sinterestaccruedduringtheBillingMonthonloans(Loans)usedtofinanceAE'sownership interestinitemsincludedinRateBase.9 P=AverageofthedailyamountofsaidLoansout-standingduringtheBillingMonth.B=Megawatthoursgenerated bytheUnitinvolvedduringtheBillingMonth.C=1,050MfxNumberofHoursintheBillingMonthx65$(inthefirstBillingMonththenumberofbillinghoursshallbecomputedfromthedateofContractOperation).

IntheeventthatthelawsoftheUnitedStatesarechangedsothatPLisnolongersubjecttotheFederalIncomeTaxorasimilartax,the001675shownintheformulaaboveshallbechangedto0.00750.F.Depreciation ExpenseComponent TheDepreciation ExpenseComponent shallbedetermined bymultiplying thedepreciable portionofAE'soriginalcostfortheUnitasofthebeginning oftheBillingMonth[asdefinedinthisArticleII,SubpartE-2(a)]bythreeandtwo-tenths percent(3.2<)andthendividingthatproductobtainedbytwelve(12).G.Decommissioning Provision Component TheDecommissioning Provision Component shallbedeter-minedbymultiplying thedepreciable portionofAE'soriginalcostforeachUnitasofthebeginning oftheBillingMonth[asdefinedinthisArticleII,SubpartE-2(a)]byone-halfofonepercent(0.54)andthendividingtheproductobtainedbytwelve>>10-H.Operation andMaintenance CostComponent TheOperation andMaintenance CostComponent shallheequaltothesumofthefollowi.ng: l.Operating CostsasdefinedonExhibitB,attachedheretoandmadeaparthereof,applicable tothemonthforwhichabillwillberenderedbyPLtoAEforoperating AE'sundivided ownership interestinSusquehanna. 2.Thecostsdirectlyassociated withnuclearfuelconsumedbyAEtoproducepowerforthemonth.Itisrecog-nizedbythePartiesthatasoftheexecution ofthisAgreement financial arrangements andaccounting withrespecttonuclearfuelhavenotbeenfinalized. Itis,however,intendedthatcostsdirectlyassociated withfuelconsumedtoproducepowerforeachmonthshallincludeaproperlyallocated portionofspentfuelstoragecosts,fuelreprocessing costs,finalfueldisposalcostsandfuelcyclecostsorcreditsnototherwise providedforherein.(EndofArticleII) A.AEshallselltoPLandPLshallpurchasefromAEallofAE'sshareofthenetenergywhichisproducedbySusquehanna UnitNlandSusquehanna Unit!f2priortothetimeeachrespective UnitofSusquehanna isplacedintoContractOperation. Saidnetenergyshallhereinafter bereferredtoasAETestEnergy.B.PL.shallpaytoAEachargeforAE'sTestEnergywhichshallbecomputedmonthlyandshallequalthekilowatthoursofAETestEnergyproducedthatmonthmultiplied bytheaveragedollarpernetkilowatthourcostthatmonthofallfuelconsumedbyPL'scoal-fired steamgenerating units(excluding fromsuchcomputation allnetgeneration producedthatmonthforPL'saccountattheKeystoneandConemaugh SteamElectricStationsandthefuelcostsrelatedthereto). (EndofArticleIII) ArticleIV:EconomicReulationA.ThetermEconomicRegulation shallmeanthatsituation whereanyportionoralloftheavailable capability ofSusquehanna isnotplacedintooperation becausetheoperation ofthatportionorallofsuchcapability wouldhavetheeffectofincreasing thecostofthatoperating systemofwhichSusquehanna isapart[currently thePennsylvania-New Jersey-Maryland Interconnection (PJM)].PLshalluseitsbesteffortstopredictoneachBusinessDaywhetherornotSusque-4hanna'soperation willbelimitedbyEconomicRegulation duringsucceeding days(uptoandincluding atleastthenextsuc-ceedingBusinessDay).PLshallnotifyAEofpredictions thatSusquehanna's operation willbelimitedbyEconomicRegulation bynotlaterthan2:00P.M.ofthedaysaidprediction ismade.AstoanydaythatPLpredictsthatSusquehanna's operation willbelimitedbyEconomicRegulation, PLshallsupplytoAE,atAE'soptionandsubjecttothetermsandconditions setforthinthisArticleIV,thatamountofenergywhichisequaltoAE'.sundivided ownership interestinSusquehanna multiplied bythatportionofallofthetotalavailable capa-bilityofSusquehanna whichisnotplacedintooperation becauseofEconomicRegulation lessthatportionofsuche'nergywhichPLwouldhavepurchased pursuanttoArticleIIhereof.AEshallnotifyPLifAEdesirestoreceiveenergypursuanttothetermshereofatthetimePLnotifiesAEthatSusquehanna operations areexpectedtobelimitedbyEconomicRegulation. -13>> B.IntheeventthatatanytimeorfromtimetotimeSusquehanna shallbeinEconomicRegulation,.and PLdidnotpredictonorpriortothepreceding BusinessDaythatSusquehanna wouldbeinEconomicRegulation, PLshallsupplyandAEshallpurchasethatamountofenergywhichisequaltoAE'sundivided ownership interestinSusquehanna multiplied bythatportionofallofthetotalavailable capability ofSusquehanna whichisnotplacedintooperation becauseofEconomicRegulation lessthatportionofsuchenergywhichPLwouldhavepurchased pursuanttoArticleIIhereof.C.AEshallpaytoPLthefollowing chargesrelatingtothesupplyofenergybyPLtoAEpursuanttoArticleIVhereofunderthetermsandconditions setforthbelow.AllchargestoAEshallbecomputedonanhourlybasiandshallbeequaltothegreaterof:1.Theaverageof:(a)PL'sfuelcostsandvariableoperation andmaintenance costsasdetermined fromgenerating stationincremental energycosttables[Generating StationIncre-mentalEnergyCostTables(CostTables)aspreparedbyPLandamendedbyPLfromtimetotimeinaccordance withPL'snormalpractices andprocedures] forthePLsystemgenerating unitsandnetinterchange coststosupplyenergytoAEpursuanttothisArticleIVwhichareoverandabovePL'ssystemfuel,operation, maintenance, andnetinter-changecostsatthetimeofsuchsupply,hadsuchsupplynottakenplace.(b)Thatincreaseinthefuelcostsandvariableoperation andmaintenance costsasdetermined fromtheCostTablesforSusquehanna whichwouldhave~resultedhadthatportionofthetotal <<v:iiJabIccapability ofSusquehanna, >>hLchwasnotplacedintooperation, beo>>placedintooperation, dividedbythatportionofthetotalavailable energyofSusquehanna whichwasnotplacedintooperation inKNHandthenthatquotientmultiplied bytheactualenergyinkilowatthourssuppliedbyPLtoAEpursuanttothisArticleIV;or2.PL'sfuelcostsandvariableoperation andmaintenance costsasdetermined fromCostTablesforthePLsystemgenerating unitsandnetinterchange coststosupplyenergytoAEpursuanttothisArticleIVwhichareoverandabovePL'ssystemfuel,operation, maintenance, andnetinterchange costsatthetimeofsuchsupply,hadsuchsupplynottakenplace.D.Theprovisions ofthisArticleIVshallterminate intheeventandonthedayonwhichAEbecomesamemberofapowerpool.(EndofArticleIV) ArticleV:AEExcessEnerA.Ifforanyday,orfromdaytoday,AEdesirestosellorotherwise disposeofanyportionorallofitsshareofenergywhichisproducedbySusqueh;.nna tootherthanAE'smembercooperatives, AEshallonorbeforeteno'lockA.M.ofthelastBusinessDaypreceding thedayordaysonwhichAEdesirestosellsaidenergy,firstoffer(Offer)toPLtheoptionofpurchasing saidenergy.EachOffershallstipulate theamountPofenergywhichAEdoesnotdesiretosellforeachhourofthedayofthesale;allAEenergywhichisactuallyproducedeachhouronthedayofthesaleinexcessofthestipulated amountsshallbetheamountavailable forpurchasebyPL.PLshallhaveuntil2:00P.M.ofthedayoftheOffertonotifyAEoftheexercis-ingofsaidoption.l.EachOffermadebyAEandeachacceptance thereofbyPLshallbedeemedanindividual andseparatetrans-action(Transaction). 2.PLshallpaytoAEmonthlyfortheactualenergypurchased chargesrelatingtoeachTransaction whichchargesshallbedetermined onanhourlybasis,andshallbeequaltothegreaterof:(a)Theaverageof(l)thefuelcostsandvariable'operation andmaintenance costsasdetermined fromtheCostTablesforSus-quehannatoproducethatenergypurchased byPLpursuanttoeachTransaction and(2)thereduction inPL'sfuelcostsandvariableoperation andmaintenance costsasdeter-minedfromtheCostTablesforthePLsystemgenerating unitsandinterchange netcostst II resulting directlyfromthepurchaseofenergyt'romAF.pursuanttoeachTransaction (ezcludi>>g thosechargesresulting Fromapplic>>tio>> olthoprovisions of.thisArticle); ov(b)Thefuelcostsandvariableoperation andmaintenance costsasdetermined fromtheCostTablesforSusquehanna toproducethatenergypurchased byPLpursuanttoeachTransaction. B.Theprovisions ofthisArticleVshallterminate intheeventandonthedayonwhichAEbecomesamemberofapowerpool~(EndofArticleV)

ArticleVI:BillinandPaymentA.AllbillssentfromPLtoAEshallbeforacalendarmonthandshallberondereQbyPLassoonaspractic-ablesubsequent tothecloseofeachcalendarmonth.AEshallmakepaymenttoPL'inimmediately available fundsonthetenth(10th)daysubsequent totheissuancebyPLofeachbill,bywiretransfertoPL'saccountatTheFirstPennsylvania Bank,N.A.atPhiladelphia, Pennsylvania, oranyotherbankwhichPLmaydesignate inwriting.B.IfAEshallfailtopaytoPLanysumduetoPLpursuanttothisAgreement, thereshallbeaddedtoanyoverdue.amountsinterestcompounded dailyfromthedatesuchpaymentwasdueuntilpaidinfullwhichshallbecomputedbasedontherateofinterestineffectfromtimetotimeequaltotheminimumcommercial lendingratechargedtoresponsible andsubstantial borrowers (primerate)byTheFirstPennsylvania Bank,N.A.,Philadelphia, Pennsylvania, itssuccessors andassigns,plustwopercent(2~)computedonthebasisofa360-dayyear.IfanypaymentisdueonadaynotaBusinessDay,itmaybemadeonthenextBusinessDaywithoutpremiumorpenalty.C.AllbillssentfromAEtoPLshallbeforacalendarmonth.Billsforpowerdelivered underArticleIII(TestEnergy)andArticleV(AEExcessEnergy)andthefollow'ing portionsofArticleII(BuyBack): l.Carryi~ig, Ch;>>pcComponent IArt.icl.e i1-)>(I)I:2.Depreciation ExpenseComponent [ArticleI.lD(2)~;3.-Decommissioning Provision Component [ArticleIID(3)1;r4.NuclearFuelCosts[ArticleII-D(4))shallberenderedbyAEassoonaspracticable subsequent tothecloseofthecalendarmonth.PLshallmakepaymenttoAEinimmediately available fundsonthetenth(10th)daysubsequent totheissuancebyAEofeachbillbywiretransfertoAE'saccountatCommonwealth NationalBankinHarrisburg, Pennsylvania oranyotherbankwhichAEmaydesignate inwriting.AstoOperation andMaintenar.,ce CostComponent [ArticleII-D(4)excluding nuclearfuelcosts]relatedtothepowertransaction contemplated pursuanttoArticleII(BuyBack)AEshall,onorbeforethetwenty-fifth dayofea'chmonth,commencing withthefirstmonthpriortothefirstmonththeOperation andMaintenance CostComponent isexpectedtobebilledpursuanttoArticleII-D(4),notifyPLoftheamountofEstimated Operation andMaintenance CostComponent anticipated tobebilledunderArticleII-D(4),byAEduringthenextcalendarmonth.PLshallmakepaymenttoAEinimmediately available funds'suchEstimated Operation andMaintenance CostComponent (andforthesettlement ofActualOperation andMaintenance CostComponent asdetailedbelow)bythetenthdayofthemonthimmediately succeeding themont'honwhichAErenderedanesti-matedbilltoPL,bywiretransfertoAE'saccountatCommonwealth 19 NationalBank,Harrisburg, Pennsylvania oranyotherbankwhichAEmaydesignate inwriting.Onorbeforethetwenty-fifth dayofeachmonthbegin-ningwiththesecondmonthinwhichtherehavebeenOperation andMaintenance CostComponent, AEshallnotifyPL'ofitsshareofActualOperation andMaintenance CostComponent billableforthepriormonth.Anydifference betweentheActualOperation andMaintenance CostComponent andtheEstimated Operation andMaintenance CostComponent forthesamemonthshallbeshownonthenotification. Anysuchdifference shallbesettledbetweenthePartiesbyanadjustment tothebillsenttoPLbyAEonthetwenty-fifth dayofeachmonthandpayableonthetenthdayofthenextmonth.D.IfPLshallfailtopaytoAEanysumduetoAE\pursuanttothisAgreement, thereshallbeaddedtoanyoverdueamountsinterestcompounded dailyfromthedatesuchpaymentwasdueuntilpaidinfullwhichshallbecomputedbasedontherateofinterestineffectfromtimetotimeequaltotheminimumcommercial lendingratechargedtoresponsible andsubstantial borrowers (primerate)byTheFirstPennsyl-vaniaBank,N.A.,Philadelphia, Pennsylvania, itssuccessors andassigns,plustwopercent(2:)computedonthebasisofa360-dayyear.If.anypaymentisdueonadaynotaBusinessDayitmaybemadeonthenextBusinessDaywithoutpremiumorpenalty.E.PLandAEshalladjustallbillings, atanytime,inatimelymanner,asnecessary. -I F.PLandAEshallhavetherighttoauditandexaminetheaccounts, booksandrecordsoftheotherrelatingtothetransactions hereincontemplated, atanytimeandfromtimetotimeduringnormalbusinesshours,attheplacewheresuchaccounts, booksandrecordsarenormallymaintained, attheexpenseoftheexamining party,excepthowever,AEmaynothaveaccesstoanyoftheaforementioned itemswhichbythetermsunderwhichPLholdsorhasaccesstosuchitems,ifsuchitemsareclassified asconfidential, secret,prcprietary, orthelike.PLshalluseallbestefforts,upontherequestofAE,toobtainthenecessary permission fromtheholdersorownersofsuchcon-fidential, secret,orproprietary items,topermitAEtohaveaccesstosaiditems(anycostassociated withsaidpermission shallbethesoleresponsibility ofAE).(EndofArticleVI)21 ArticleVII:Successors, Assins,Transferees andGranteesThisAgreement shaL.lc>>uiotothebeneCitol;>>>ilhobindinguponthesuccessors, assigns,transferees, andgranteesoftheParties.AEandPLshallnotifytheotherPartyofitsintention toassignthisAgreement. (EndofArticleVII)22

ArticleVIII:NoticeAnynotice,request,consent,offer,acceptance, rejection orothercommunication requiredbythisAgreement tobeinwritingshallbedeemedgivenwhendeposited intheUnitedStatesMail,firstclasspostageprepaid,andifgiventoPLshallbeaddressed to:Pennsylvania Power5LightCompanyTwoNorthNinthStreetAllentown, Pennsylvania 18101Attention: Treasurer andifgiventoAEshallbeaddressed to:Allegheny ElectricCooperative, Inc.2929NorthFrontStreetHarrisburg, Pennsylvania 17110Attention: Mr.WilliamF.Matsonunlessa'different officeroraddressshallhavebeendesignated bytherespective Party,bynoticeinwriting.(EndofArticleVIII) IIII ArticleIX:Amendments Anyamendment tothisAgreement shallnotbecomeeffec-tiveuntilapprovedbytheAdminstrator oftheRuralElectrifica-tionAdministration. TheTermination Agreement byandbetweenPLandAEbearingevendateherewithshallnotbedeemedanamend-menttothisAgreement, requiring asacondition toitsbecomingeffective theapprovaloftheAdministrator oftheRuralElectri-ficationAdministration. (EndofArticleIX) A1ThisAgreement maybeexecutedintwoormorecounter-parts,each'ofwhichshallbedeemedanoriginalbutallofwhichtogethershallconstitute oneandthesameinstrument. (EndoXArticleX) Thevalidity, interpretation, andperformance o.fthisAgreement andofeachandeveryprovision hereunder shall,exceptasotherwise providedbylaw,begovernedbythelawsoftheCommonwealth ofPennsylvania. (EndofArticleXI) ArticleXII:BenefitotAv,ream<<>>t Exceptascontemplated inArticleVIIofthisAgree-ment,theprovisions ofthisAgreement areforthebenefitofthePartiesheretoandnotforanyotherpersonorentity.(EndofArticleXII)27 lII Theprovisions ofthisAgreement aresevorablc,;n>d ifanyprovision shallbedetermined tobeillegalanduncnforce-able,suchdetermination shallinnomanneraffectanyotherprovision hereof,andtheremainder ofthisAgreement shallremaininfullforceandeffectwithoutregardtothefactthatoneorseveralprovisions ofthisAgreement maybedetermined fromtimetotimetobeillegalorunenforceable

provided, how-ever,thattheintention andessenceofthisAgreement maystillbeaccomplished andsatisfied.

(EndofArticleXIII)-28>> ArticleXIV:FailuretoEnlorcel'rovisions ofthisArcomcnt,ThefailureofanyV;artytoinsist.inanyoneormoroinstances uponstrictperformance ofany'oftheprovisions ofthisAgreement ortotakeadvantage ofitsrightshereunder, shallnotbeconstrued asawaiverofanysuchprovisions, ortherelinquishment ofanysuchrights,butthesameshallcontinuetoremaininfullforceandeffect.(EndofArticleXIV) Article'XV:ArticleHeadingsNottoAffectMeaninThedescriptive headingsofthevariousArticlesofthis.Agreement havebeeninsertedforconvenience orref-erenceonlyandshallinnomannermod'ifyorrestrictanyof.thetermsorprovisions hereof.(EndofArticleXV) ArticleXVI:~FilinIfandtotheextentthatthisAgreement oranypartheieofshallberequiredtobefiled,orshallbefiledwithanyregulatory agencyasarateorrateschedule, nothinginthisAgreement shallbeconstrued asaffecting inanywaytherightofPLtounilaterally makeapplication tosucha'gencyforachangeinrates,charges,classifications, orservice,oranysale,regulations, orcontractrelatingtheretounderapplicable laws.TotheextentthatPLmakesany.,suchAEshallhavetherighttointervene inanyproceeding filing,involving suchafilingbyPLandshallhavetherighttoobjecttoanyproposedchange.(EndofArticle.XVI) II) ArticleXVII:SusensionandTermination ofthisAreementA.ThisAgreement shallexpire,terminate, andbecomenullandvoid,exceptaslimitedbySubpartBofthisArticleXVII,andexceptaslimitedbythetermsofthisSubpartAofthisArticleXVII,thirty-six monthssubsequent tothedateonwhichSusquehanna isnolongerusedforthepurposeofproducing elec-tricenergyforsale,exceptthatintheeventthatanearliertermination dateissetforthinanyspecificArticleofthisAgreement, thensuch'earliertermination dateshallbeapplicable andcontrolling withrespecttothatArticle.B.Intheeventthatanycauseorcausesofactionwhetherinlaworinequityhavearisenpriortothetermination ofthisAgreement, saidcauseorcausesofactionshallnotexpire,terminate orbecomenullandvoidupontheexpiration, termination andbecomingnullandvoidofthisAgreement, butsaidcauseorcausesofactionshallbeactionable pursuanttotheapplicable statuteoflimitation ortheapplicable doctrineoflaches.C.IntheeventthateitherPLorAEisindefaultinanyofitsobligations 'totheotherpursuanttoanyAgreement betweenPLandAEbearingevendateherewith, thenallofPL'sorAE'sobligations totheotherunderthisAgreement shallbesus-pendedandunenforceable untilsaiddefaultiscuredbythedefaulting party.(EndofArticleXVII)32 ArticleXVIII:BestEffortsDuringthetermofthisAgreement AEandPLshalleachuseallbesteffortstoobtainand.tokeepineffectanyandallgovernmental, regulatory orotherauthorizations, per-mits,approvals,

licenses, permissions andapplications asmaybenecessary foreachPartytoperformitsobligations underthisAgreement.

(EndofArticleXVIII) INWITNESSWHEREOF,eachofthePartiesheretohasdulyexecutedthisAgreement inWashington, DistrictofColumbia, this18thdayofMarch,1977.PENNSYLVANIA POWERgLIGHTCOMPANYBy:Attest:keek.Secretary; ALLEGHENY ELECTRICCOOPERATIVE, INCORPORATED By:Attest: COMMONWEALTH OFPENNSYLVANIA )COUNTYOFOnthis,the.-"dayof1977,beforeme,aNotaryPublicinandfortheCommonwealth ofPennsylvania, theundersigned, officer,personally appearedwhoacknowledged himselftobethe..."~-".'."'-."-"ofaPennsylvania corporation, andthatheassuch~'..'-,beingauthorized todoso,executedtheforegoing instrument forthepurposesthereincontained bysigningthenameofthecorporation byhimselfasINWITNESSNHEREOF,Ihereuntosetmyhandandofficialseal.NOTARYPUBUQAllentwn,LohghCuny,Pennsylvania tAyComml=slo.. ExpiresJuno6,1977NotaryPulac,,Pennsylvania MyCommission Expires: COMMONNEALTH OFPENNSYLVANIA )COUNTYOFQo.~h.,nOnthis,thelgdayof~~~"~~~., 1977,beforeme,aNotaryPublic,inandfortheCommonwealth ofPennsylvania, theundersigned oFficer,personally appearedIII.betoe&<~whoacknowledged himselftobetheI~u~l0of(fcglenyEl~'c-(o~t'dtiv<~j. sc.,aPennsylvania corporation, andthatheassuch[peg<d~+.,beingauthorized todoso,executedtheforegoing instrument forthepurposesthereincontained bysigningthenameofthecorporation byhimselfasPrebid~&- INWITNESSWHEREOF,Ihereuntosetmyhandandofficialseal.NotaryPulz.c,Pennsylvania MyCommission Expires:NoTARYcUpgic~yCommission ExpiyosJQ'}'y]$J5l7o82M'Asburg, Po. EXHIBITAOff-SiteFacilities (1)AnAir-Monitoring Station(No.7H1)locatedontheroofoftheNorthBuildingofthePennsylvania Power5LightCompanyGeneralOfficeatTwoNorthNinthStreet,Allen-town,Pennsylvania, LehighCounty.(2)AnAir-Monitoring Station(No.12El)locatedonlandleasedfromtheBerwickHospital, BriarCreekTownship, ColumbiaCounty,Pennsylvania, at701East16thStreet,Berwick,Pennsylvania 18603.(3)AnAir-Monitoring Station(No.3D1)locatedatR.D.t2,Wapwallopen, Pennsylvania, onlandleasedfromthePondHillLilyLakeFireCompany,VillageofPondHill,LuzerneCounty,Pennsylvania. (4)AnAir-Monitoring Station(No.4Sl)attheIcthyological Associates CompanylocatedatR.D.81,Berwick,Pennsylvania 18603.(5)AnAir-Monitoring Station(No.1Dl)locatedatMocanaqua, Pennsylvania, atthefollowing coordinates: N1'0'E,45ft.'88'26',25ft.;N134',225ft~~N44',110ft.;N88'6'W,25ft.moreorless;S69'9',120ft.(6)Equipment, suppliesandmaterials currently beingconstructed byvariousentitiesinvariousplaces,whichequip-ment,suppliesandmaterials willbeusedontheSusquehanna plantsite. (7)UraniumOxideandUraniumHexaflorideownedbyPLlocatedinthecustodyofLuciusPitkin,Inc.andAlliedChemicalNuclearProductsDivision, bothatMetropolis, Illinois. (8)UraniumHexafloride ownedbyPLlocatedatU.S.EnergyResearchandDevelopment Administration atOakRidge,Tennessee. EXHIBITBOPERATING COSTSOperating Costsshallmeanallcostsandexpenses, directandindirect, incurredbyoronbehalfofPLproperlyassignable toAE'sundivided ownership interestinSusquehanna and100:ofallcostsandexpenses, directorindirect, incurredbyAE,oronbehalfofAEotherthantheOperating CostsincurredbyoronbehalfofPL,properlyassignable toSusquehanna. Suchcostsandexpenses'hall bedetermined andallocated, inaccor-dancewith'generally acceptedaccounting principles, consistently applied,andshallinclude,butshallnotbelimitedtothefollowing, providedthatifanypaymentmadeorcostincurredisforthebenefitofSusquehanna, andisalsoforthebenefitofsomeotherPLfacility, thenOperating Costsshallincludeonlythatportionofsuchpaymentorcostwhichisequitably allocable toSusquehanna andwhichisnototherwise paidfor:l.Allcostsoflaborandservicesperformed whichshallinclude,butshallnotbelimitedto:wages'tohourlyemployees, wagestosalariedemployees, shiftdifferential andpayfortimenotworkedsuchasvacations,

sickness, andothertimeoffinaccordance withPLpoliciesandunioncontracts, costsofsocialsecuritytaxes,unemployment insurance

expenses, andallotherpayrolltaxes,grouplifeinsurance, grouphos-pitalization, medicalinsurance, pensionandotheremployeebenefitplancontributions, Workmen's Compensation, publicliability insurance, accidental deathanddismemberment insurance, long-termdisability insurance, halthinsurance andallotherfringebenefitsaccruingtoPL'semployees; 2.Allcostsofmaterials andsuppliesandutilities servicesforplantoperation andmaintenance; 23.Allcostsoftools,machinery andequipment; 4.Allcostsforrentaloftools,machinery andequipment leasedforplantoperation andmaintenance; S.-Allcostsoflicenses, fees,assessments, fines,penalties, andchargesimposedbygovernmental regulatory, administrative orsupervisory bodiesorentities, orbylaw;6.Allcostsofworkbyoutsidecontractors, consultants, andspecialists suchaslawyers,engineers, accoun-tantsandothersasdeemednecessary byPLintheoperation, maintenance andmanagement ofSusquehanna; 7.Allinsurance costs;8.Alltaxes,provided,'however, thatPLandAEshallseparately bearthecostsoftaxeswhichareeitherimposedonPLorAEasseparateentitiesorareimposedontheseparateundivided ownership interests ofPLorAEinSusquehanna; 9.Allcostsassociated withmaintaining thesecurityofSusquehanna; 10.Allcostsassociated withlowriverflow'augmentation; 11.Allcostsofanynaturewhatsoever associated withanyshutdown, entombment, termination orremovalofSusque-hanna,tobesharedbythePartiesheretoasOperating Costs;12.AllfuelcostsnotpaidforbyAEpursuanttootheragreements; 13.Alladministrative andgeneralexpensesincurredwhichenuretothebenefitofSusquehanna shallbeequitably allocated toSusquehanna andshallincludebutshallnotbelimitedtothegeneralservicesandcostsofallPL'soperations, suchas:safety,accounting, payroll,computerservices, legal,personnel,

training, information

services, claimswork,generalsupervision, generalsuppliesandexpenses,

auditing, communication

expenses, researchanddevelopment, studiesandinvestigations relativetoSusquehanna (including butnotlimitedtonuclearproduction anddevelopment),

andcostsofoperating allofficebuildings inwhichsuchservicesandgeneralcostsareincurred; toSusquehanna; 14.Overheads incurredshallbeequitably allocated 315.Expensesincurredandapplicable togenerating stationsownedandoperatedbyPLwhichcannotbechargeddirectly,tospecificgenerating stationsshallbeequitably allocated toeachofsuchgenerating stationsincluding Susquehanna. SuchcostsandexpensesincludebutarenotlimitedtowagesandotherexpensesoftheManagerofPowerProduction orPLandhisstaff,consultants fees,andotherexpensesofageneralnaturerelatedtogenerating stations; 16..Allcostsofloaddispatching andSystemControl;17.Allcostsofowning(including depreciation) andoperating auxiliary orsupporting facilities ofPLwhichenuretothebenefitsofSusquehanna shallbeequitably allocated toSusquehanna.}}

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