ML18100A391

PECO Annual Rept,1992.

ML18100A391
Person / Time
Site:	Salem, Hope Creek
Issue date:	12/31/1992
From:	Corbin McNeil, Paquette J PECO ENERGY CO., (FORMERLY PHILADELPHIA ELECTRIC
To:
Shared Package
ML18100A389	List: ML18100A388 ML18100A390 ML18100A391
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NUDOCS 9306020093
Download: ML18100A391 (50)

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B A c I D E F G ,____ H I J K I L A TRANSMISSION TOWER AL.ONG THE NEW CECIL*COL.ORA LINE IN MARYLAND B PHILADELPHIA Fooo DISTRIBUTION CENTER c IMPROVED CREDIT AND COLLECTION PROCEDURES INSTITUTED 0 NATURAL GAS ADDED AS A F"UEL AT CROMBY GENERATING STATION E TREE TRIMMING F'OR RELIABLE SERVICE F' PHILADELPHIA SKYLINE G STOCKHOLDERS RECEIVE HIGHER COMMON STOCK DIVIDENDS H WIRE INSTALL.ED BY HELICOPTER LIMERICK GENERATING STATION COOLING TOWERS J NATURAL GAS INSTALLED AT SIMPSON PAPER MILL K SCHOOL PROGRAM AT MUDDY RUN RECREATION PARK L T URBINE BLADE INSPECTION AT EDDYSTONE GENERATING STATION

• Philadelphia Elecrric Compan;. is an operating utilit: 11*hich prm*idcs electric :111d gas sen ice in southeastern Penns\ h ania. T11 o subsidiaries 0\\ n, and a third subsidiar:

opcratcs, the ( ono11 ingo I lnlroelectric Project, and one distribution subsidian* pro,*ides electric sen ice in rno counties in northeastern

-,[an-land.

The total area sen ed by the Company and subsidiaries e<n-ers 2,-+7 5 square miles. Elcctric scn*icc is supplied in an area or 2,340 square miles "ith a population or abour 3,700,000, i ncluding l,600,000 in the Cit;. of Philadelphia

.. \ppro:-..im:nel;.

95 percent of the e l ect ri c sen i ce area and 63 percent orkilo11anhour sales arc in the Ph i ladelphia suburbs and in northeastern

.'.\laryland, and 5 pcrccnt of the sen*ice area and 3 7 percent of such sales arc in the of Philadelphia.

\atural gas sen*icc is supplied to a population of about 1,900,000 in a 1,-+7 5-squarc-milc area of southeastern ania adjaccnt to Philadelphia.

DELAWARE NEW JERSEY

• MARYLAND THIS REPORT IS PRINTED ON RECYCLED ANO RECYCLABLE PAPER.

• 2 LETTER TO SHAREHOLDERS 4 REPORT OF" 1 992 OPER A TIONS 1 7 MANAGEMENT

'S DISCUSSION ANO ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF" OPERATIONS 2 1 CONSOL I DATED FINANCIAL STATEMENTS 26 NOTES TO *SOLIOATED NC I AL STATEMENTS 4 1 REPORT OF" INDEPENDENT ACCOUNTANTS 42 F I NANCI A L STATISTICS 43 OPERATING STATISTICS 45 OFFICERS AND D I RECTOR S 47 SHAR E HOLDER INFORMAT I ON * . I II II II {/ I II I'/' (} ,. I I y y 2 Operating Re\*enues $3,962,469,000

$4 , 01 8, 5 8 6,000 (l.-J.o/c) Operatin g E x p e n ses $2,929,093,000

$2,937,l 96 , 000 ((J.3 % ) Ta x e s C har ge d to Op e rati o n s $546,3 51,000 $583, 506 , 000 (6.4%) Op e ratin g Incom e $1,033,376,000

$ l ,08l, 1 90,00 0 E a rnin gs ,\pplicablc to C o mm o n Sto c k $418,210,000

$4 68,576,000 ( l 0. 7c,() E a rnin gs p e r A\ c ra ge Co mm o n Shar e $1.90 $2. l 5 (

C a s h Di\*id c nd s P a id p e r Co mm o n S har e $1.325 s l.22 5 8.2% A \'e ra gc Sh a res o f Co mm o n Sto c k Om sra ndin g 220 , 24 5 ,000 2 1 8, 234 ,000 0.9% Co n s tru c ti on E x p e nditur e s $563,546 , 000 $4 9 1 ,470 , 000 14.7o/c T o tal A ss et s $12,578,227,000

$1 2,523, 46 0,0 0 0 0.4o/c

• 0 fJllars P t'r .Sh,, rt* s 2 so 2 00 I f , ti f II i 11 gs I S 0 Pt'r I 0 0 .S 0 Di.1dn1dJ Paid Per .\h11u BB B 9 90 9 1 92 II illio11 Dollar* SI 2 SO I. 0 0 0 Co11Jtr11ct1011 7SO I ,-pe11di111 r1*s soo 2SO I nt t' r 11a I \ 0 II I" ( t' J B B 8 9 90 91 92 93* *JJutlgn p h i I ii d t' Ip h I (/ l' I l' ( ' ,-I ( ( () })/ p (/ II )

T a a U R s H A R E H a L a E R s During 1992, Philadelphia Electric Company continued its financial recovery from the adverse 1990 Limerick Unit No. 2 ele case decision and also made significant progress in preparing for the uncertain future facing the utility industry.

1 992 RESULTS e Due primarily to the effects of the settlement of the Peach Bottom co-owners' lawsuits as described below and to an unusually cool summer, earnings per share decreased to $1. 90 per share from $2.1 5 per share recorded in 1991. Despite reduced earnings caused by these one-time events, the Company's overall financial condition improved in 1992 as evidenced by increased shareholder equity, lower debt outstanding, continued strong cash flow and higher security ratings. As a result, the Board of Directors increased the quarterly common stock dividend by 83 effective with the December 1 992 payment. In addition, the stock market reacted to these positive trends as the market price of the Company's common stock continued to outperform the Dow-Jones Utility Average by closing at $26-1 /8 per share on December 3 1, the highest year-end level since 1 968. The settlement of the Peach Bottom co-owners' litigation resulted in a one-time charge of $0.2 7 per share in the first quarter of 1992. The settlement removed a major financial uncertainty and enabled the Company to avoid the possibility of a significantly larger charge with a trial. For 1992, electric retail sales decreased 2.53 due to the mild summer compared with the extremely hot summe r of 1991. After adjusting for the effects of weather, electric usage increased approximately 13 over last year. Gas sa le s benefitted from the cooler weather in 1992 and registered a strong gain of 9 .43. During 1992, our customers benefitted again from rate reductions.

As of January 1, 1993, PECO electric bills are almost 83 lo wer than a year ago, while gas bills have been reduced by 103 since 1990. These rate reductions will not impact shareho ld er earnings.

Our base-load generating plants performed well in 1992. Our nuclear units generated 583 of our total e lectri c production

-* 2, with Limerick Unit No. 2 setting a world record for the longest continuous run of any commercial light-water reactor. This l y strong nuclear performance has been noted by the Nuclear Regulatory Commission in its most recent Systematic Assessm t of Licensee Performance (SALP) eva lu ations for both Limerick and Peach Bottom. During 1992, progress was made on a number of initiatives which will enhance the value of our foss il and h y dro generating units. Cromby Unit No. 2 was successfu ll y converted to burn natural gas as we ll as oil to take advantage of competitive fuel market s. In August, work began on a $54 million modernization project at Eddystone Station Unit No. 2 which wi ll enable the 32-year old, fired unit, already equ ipp ed with flue-gas scrubbers, to operate for another 20 years. Fina ll y, a $32 million life-e x ten s i on program was begun at the Conowingo Hydroelectric Station which will increase its output by 5 3 to 103. These projects wi ll enable the Company to delay adding any new generating capac it y for at least 10 years and to continue o ur exce ll ent record of e n viro nmental protection for decades to come. In December, an unusually fierce winter storm, the fifth worst ever, hit the Company's service territory, resulting in interruptions to almost 200,000 customers.

Aided by contractor crews, our emp l oyees were able to restore service to most customers w ithin 48 hours5.555556e-4 days <br />0.0133 hours <br />7.936508e-5 weeks <br />1.8264e-5 months <br />. The Compa n y is in the middle of a major tree-trimming and vegetation-m anagement program which s hou l d reduce the potential impact of such storms in the future. PREPARING FOR AN UNCERTAIN FUTURE As the utility industry approaches the mid-l 990's, there are many uncertainties clouding its future-such as those related to implementation of the 1990 Clean Air Act and the 1992 National Energy Policy Act and the externa l pressure to relax regulation of the industry.

In many ways, PECO is well prepared for the future, but much effort is still needed to meet the coming changes. Thus, a great deal of our corporate focus in 1992 and the immediate years ahead is to better position PECO for these challenges.

Because of the Company's significant investment in nuclear power and the early installation of flue-gas scrubbers on i owned coal-fired facilities, its electric rates are relatively high within the utility industry.

As a result, in order to im ll y ur competitive position, we have placed significant emphasis on cost control with the goal of reducing costs through early retirement Ph1/adelph1a Flettrir Compan) *

• C orbin A. M cN eill, fr., P res i de nt an d Ch i ef Op era tin g Offi cer f o sep h F. P aq u e tt e, f r., C h a ir m an o f th e Bo ard a n d C hi ef Execu ti ve O fficer incentives, implementation of Quality Management throughout the Company, modification of our salary structure, improved credit and collection procedures, res tru cturing of our Nuclear Group, reduction in contract labor and reduced financing costs through the refunding and refinancing of high-cost secur itie s. Our 1991 division reorganization, whic h decentralized e l ec tric, gas and customer service operations, has yie ld ed many positive results, such as improved customer focus and satisfaction, as we ll as cost accountability.

In 1992 , further steps were taken to strengthen the Company's senior management by add in g two highly ski ll ed executives wit h considerab l e experience o ut side of the utility industry.

In February, William L. Bardeen, 5 4, became Sen ior Vice President and Chief Financial Officer. Mr. Bardeen was formerly Vice President-Finance and Controller for Bell Atlantic Corporation and had spent 18 years in financial operations at Genera l E l ectric Company. In September, Gwendol y n S. King, 5 2, was e l ected Senior Vice President, Corporate and Public Affairs. Mrs. King had been Commissioner of the U.S. Social Security Administration and was responsible for managing an organization with 65,000 emp l oyees and an operating budget of $4.5 billion. vVe are very fortunate to be able to attract * -11 als with such outstanding backgrounds to these important positions within the Company. Their ski lls w ill be extremely helpful u sing the challenges ahead. ational Energy Policy Act ( T EPA) enhances the ability of independent power producers to become sources of electric generation for utilities and requires utilities to provide them with access to their transmission systems under specified conditions.

The full impact of NEPA remains to be seen; however, it opens the possibility for a significant restructuring of the utility industry and requires the rethinking of business approaches and the development of new strategies. PECO has recognized the need to prepare for doing business in an evolving, less-regulated environment through the many initiatives discussed in this report. We have a l so sharpened the focus of our strategic planning efforts to perform comprehensive analyses of the various energy markets and develop improved marketing techniques which will be used to respond to increased competition. In addition to these initiatives, much more must be done to meet the challenges ahead. Success in the '90s and beyond will requir e both innovation and effort, but I believe we have a distinct edge: the energy and imagination of PECO's more than 9,700 emp l oyees. vVe are now being challenged as never before to react to the marketplace, improve our productivity and serve our customers.

It has been proven time and again that the people who actually perform the work best understand their jobs and know how to make them more productive.

I believe the electric and gas utilit y industr y is no different.

This is wh y our Quality Management process promotes employee teamwork, empowerment and individual initiative. Wit h the continued hard work and dedication of our skilled employee body, I am confident we will succeed in a l ess-regu lat ed environment and will find new opportunities to e x cel and prosper as we achieve our goal of becoming a premier regional energy service company that achieves superior customer satisfaction and shareholder value. Thank you for your continued support. We pledge our efforts to successfull y meet the challenges of the future . * .J. F. .JR. CHAIRMAN OF" THE BO ARD AND CHIEF" EXECUTIVE O FFICER FEBRUARY 1 1 l 993 Philadelphia J;'lectric Company

• HIGHLIGHTS Moderni z ation of the Food Distribution Center in South Philadelphia begins. Major construction projects to support the new division reorganization begin .

• PECO goes smoke free on March I .

• Gas conversion completed at Simpson Paper Mill in Miquon, PA .

• Excellence in operation at Limerick Generating Station is recogni z ed by a Pennsylvania Senate Resolution and two industry awards .

• Limerick Training Center is expanded.

Eddystone Station maintenance training facility begins operation.

The Company enrolls customers in a new "Touch Documents" service for the blind and visually impaired.

William L. Bardeen, Senior Vice Preside11t, Fina11ce and Chief Financial Officer, joi11ed the Company in February 1992. He formerly was f 'ice President-Finance and Controller for Bell Atlantic Corporation and also spent 18 ;ears in financial operations at General Electric Company. *

• PHILADELPHIA

'S

• F"OOD DISTRIBUTION e CENTER BEGAN A e

• F"IVE-YEAR, $ 1 7

• MILLION RENOVATION e

• PROJECT IN SOUTH PHILADELPHIA.

THE e

• CENTER GENERATES e ANNUAL SALES

• OF" $2 BILLION 1 e

• EMPLOYS MORE THAN

• 6,000 PEOPLE AND e PROVIDES OVER $2 MILLION IN ANNUAL e

• ELECTRIC REVENUE e FDR THE COMPANY. *

• F"IN ... N<!IAL A SLJLT Common stock earnings for 199 2 were $1. 90 per share as compared to $2.15 in 1991. Earnings were lower than anticipated primarily due to the coolest summer since 1960 which was in sharp contrast to the summer of 1991-one of the warmest ever experienced. Unfavorable weather in 1992 reduced earnings by $0. 3 5 per share compared with 1991 and by $0.25 per share compared with normal weather. Also contributing to the earnings decline was the one-time $0.27 per share charge against earnings due to the settlement of the lawsuits brought by the co-owners of the Peach Bottom Atomic Power Station. In addition, in December, the Company established a provision of $0.05 per share to provide for early retirement incentives and termination payments for up to 600 employees in its Nuclear Group. This action was taken in anticipation of a major restructuring of the Company's nuclear operations, which will occur over the next two years, in order to contain future operating and maintenance costs. The decline in 199. ings was partially offset by increased sales exclusive of we* avings resulting from the Company's ongoing debt and preferred stock refinancing program and lower income taxes. In light of the Company's continued financial improvement, the Board of Directors in October increased the quarterly common stock dividend by 8%, from $0.325 per share to $0.35 per share ($1.40 on an annualized basis), beginning with the December 1992 payment. This was the second consecutive year that the dividend was increased by 8%. A IS:S RESULTS Primarily because of the cool summer weather, electric retail sales decreased 3% for the year. Sales to other utilities increased 2 3 %, helping to offset the decline in retail sales. Total gas sales, including transported gas, increased 9%. Gas heating sales were up 13% due to colder weather during 1992 and the addition of more than 7, 3 00 new customers.

Gas transported for others increased 10% due to favorable rates and an increase in the number of gas transportation customers.

Nearly 8,000 new residential units were connected in 1992, an 8% increase from 1991. Electric space heating was installed in -f these units and gas heat in %, for a total market peIJ1 n of 9 3 % of new residential units. Also, approx mately 650 residential customers converted to electric heat, and more than 1,050 residential customers converted to gas heat. As a result, more than 9, 100 additional customers now use the Company's clean and efficient energy for heating their homes. PEACH BOTTOM Co*OwNERs' SETTLr-MENT In April, the Company and the other co-owners of Peach Bottom reached a settlement of the lawsuits related to the 1987 shutdown of Peach Bottom by the Nuclear Regulatory Commission.

Pursuant to the settlement, which was approved by the U.S. District Court, the Company paid the other three co-owners a total of $131 million. The settlement also resolved counterclaims made by the Company which sought compensation from Public Service Electric and Gas Company (PSE&G) for certain costs incurred by the Company as a result of events at the Salem Generating Station, which is co-owned by the same four companies and operated by PSE&G. The settlement eliminated the uncertainty and financial risk that the Company faced with a trial. It also saved the Company millions of dollars in expert witness costs, attorneys' fees and hours of unproductive time of employees that would have been spent supporting the case. The lawsuits were settled through a process known as alternative dispute resolution in which attorneys and the chief executive officers of the four co-owning companies met with a mediator to reach a satisfactory resolution.

As part of the settlement, the four co-owners are engaging in good-faith negotiations to amend the Peach Bottom and Salem owners' agreements to, among other things, clarify the provisions relating to the liability of the plant operator to the other co-owners.

IMPROVED CREDIT AND COLLECTION PROCESS In an effort to reduce accounts receivable delinquencies and resulting write-offs, in April, the Company instituted changes throughout its credit and collection process. The Company's new strategy focuses on earlier and more forceful collection activity for customers who can afford to pay their bills, but choose not to. The changes include a new credit application process, revised field procedures, improved customer communications and other collection enhancements. While the Company is instituting more stringent collection practices, it is making every effort to assist those customers who cannot afford to pay. The Company operates an outreach Philadelphia Electric Company THE LIMERICK TRAINING CENTER WAS EXPANDED BY 20,000 SQUARE FEET TO CONSOLIDATE NUCLEAR TRAINING AT ONE LOCATION * . . . . . . . . . . . . . . * ..............

ILL COUNTY CONVERTED ITS BOILERS SO THAT IT COULD BURN NATURAL GAS AS WELL AS OIL.

p. to direct these customers to funding sources such as the federally funded Low Income Home Energy Assistance Program and the Company's Customer Assistance Program. As a result of this aggressive new program, delinquent accounts receivable decreased by $41 million or 2 I 3 in 199 2. The favorable turnaround in the second half of 1992 is expected to produce further improvements in 199 3. While total uncollectible accounts expense increased

$20 million during 1992, decreasing earnings by $0.05 per share, the increase was experienced early in 1992 before the new collection procedures were fully effective.

During 1992, to refinance high-cost debt and preferred stock, the Company sold more than $1.5 billion of new securities as summarized below: MILLIONS CF' SECURITY 0CLL4RB February Mortgage Bonds due 1999@ 7-1/23 $250 Ar, : Mortgage Bonds due 2002 @ 8% 200 Mortgage Bonds due 2022@ 8-3/43 1 SO Medium-Term Notes due 1994@ 5.733 65 June Tax-exempt Bonds due 2022 @ 6-5/83 30 Mortgage Bonds due 2022@ 8-5/83 125 Ju l y Mortgage Bonds due 2002@ 7-1123 100 September Mortgage Bonds due 2022@ 8-1/43 250 Mortgage Bonds due 2002@ 7-1/83 200 October $ 7. 96 Series Cumulative Preferred Stock: 5 .6 million Depositary Shares, $2 5/share, $1. 99 dividend rate 140 TOTAL $1,510 These refinancings, together with the redemption of $169 million of securities with internally generated funds, result in annualized savings of approximately

$50 million or $0.15 per share. In addition, 2.6 million shares of common stock were purchased in the open market at an average price of $2 5. 9 5 with the proceeds from reinvested dividends in the Company's Div* Reinvestment and Stock Purchase Plan. 'ttiement of the Peach Bottom co-owners' lawsuits re -a a major uncertainty facing the Company and contributed in part to the upgrading of the Company's securities' ratings. Standard & Poor's Corporation, Duff and Phelps, Inc., Moody's Investors Service and Fitch Investors Service, Inc. upgraded the Company's ratings. See page 44 for a summary of the current ratings. g T,,. MArrEFts On Apri l 1, 1992, the Company implemented electric rate reductions through its Energy Cost Adjustment and its State Tax Adjustment, providing for an average decrease of 33 in customers' monthly electric bills. The rate reductions, combined with a base rate reduction of 53 which took effect on January 1, 1993, have resulted in an overall reduction in customers' electric bills of near l y 83, he l ping to improve the Company's competitive position.

These rate reductions have no impact on the Company's earnings.

In part due to the excellent performance of the Company's nuclear units during 1992, the Company expects to pass on to customers fuel savings of approximately

$80 million beginning April I, 199 3, which will further reduce electric rates by approximately

23. In September, the Company filed a request with the Pennsylvania Public Utility Commission (PUC) for a 1. 53 electric base-rate increase designed to recover $50 million of costs associated with the implementation in I 99 3 of Statement of Financial Accounting Standards (SF AS) No. I 06, "Employers' Accounting for Postretirement Benefits Other Than Pensions." SF AS No. I 06 requires that corporations accrue the liability for expected non-pension postretirement benefits over an employee's work career, rather than on a as-you-go basis. In October, the PUC suspended this request to May I 0, 199 3 in order to conduct an investigation. The National Energy Policy Act of 1992 requires, among other things, state regulatory commissions to consider new regulatory standards that allow a utility's investments in energy conservation and energy efficiency resources to be at least as profitable (giving consideration to income lost from reduced sales due to investments in conservation and efficiency) as its investments in generation, transmission and distribution facilities.

In February 1991, PECO proposed a set of side management (DSM) programs with an annua l budget of $19 million. The PUC held hearings in 1992 regarding the need for and form of a ratemaking mechanism to recover the costs of DSM programs.

Approximately one-half of the states have adopted incentive ratemaking mechanisms for DSM. The PUC is expected to issue a final ruling on a DSM cost recovery and incentive mechanism in 199 3. Philadelphia Electric Company HIGHLIGHTS A new bi/I-collection process is instituted to reduce customer payment delinquencies.

230,000-Volt Cecil-Colora transmission line is energized in Maryland.

The Company and the other Peach Bottom co-owners settle lawsuits.

A NEw i 6.5-MILE Architectural lighting enhances downtown Philadelphia buildings.

• PECO lauded for American Shad restoration program at Conowingo Dam by Maryland governor.

• Cromby Generating Station is converted, allowing it to burn natural gas as well as oil. A new emergency response center to support Peach Bottom and Limerick is opened in Coatesvi!!e.

PECO's natural gas vehicle fleet and a refueling station are expanded . . . . . . . . . . . . . . . . THE COMPANY INSTITUTED MANY CHANGES IN ITS CREDIT ANO COLLECTION PROCESS IN 1 992 TD REDUCE DELINQUENT CUSTOMER BILLS. e 230-KV TRANSMISSION

• e LINE WAS ENERGIZED

• e IN MAY, CONNECTING

• e CECIL SUBSTATION IN ELKTON, MD TD

• e COLDRA SUBSTATION

• e NEAR RISING SUN, MD

• James W Durham, Senior Vice President and General Counsel, joined the Company in 198 A11 attorney, Mr. was formerly Senior Vice President, General Cou11sel and Secretary of Portland General Electric Company and Portland General Corporation in Oregon. *

• MANY NEW CENTER *

• CITY BUILDINGS

• INCORPORATE

• ARCHITECTURAL

• LIGHTING * ***************

CROMBY GENERATING STATION UNIT NO, 2 WAS CONVERTED TO BURN NATURAL GAS AS WELL AS OIL. ROBERT 0. MURPHY , GAS OPERATIONS , COORDINATED THE GAS SUPPLY PORTION OF THE $14 MILLION PROJECT , * *

• THE COMPANY OBTAINED SEVERAL OF THE FIRST VEHICLES PRODUCED COMMERCIALLY IN THE UNITED STATES F"OR EXCLUSIVE USE CF NATURAL GAS, CARL P. OVERTURF, TRANSPORTATION, REFUELS A NEW TRUCK, HIGHLIGHTS

• Ground wire and fiber-optic cable are installed from a helicopter.

• 230,000-Volt Woodbourne-Heaton transmission line in Bucks and Montgomery Counties is completed and tested. Eddystone Generating Station launches $54 million project to extend the operation of Unit No. 2 into the next century. A new enzergency telephone service to handle up to 12,000 calls per hour is implemented.

A 1. 5% single-issue electric rate increase request is filed to recover non-pension postretirenzent benefits costs. A new Gas Operations Control Center is completed a t West Conshohocken.

...............

GROUND WIRE IS REPLACED TO PROTECT THE WIRES BENEATH FROM LIGHTNING STRIKES, REPLACEMENT MID-AIR SAVES BOTH TIME ANO MONEY. Gwendolyn S. King, Senior Vice President, Corporate and Public Affairs, joined the Company i11 October 199 2. She was previously Commissioner of the U.S. Social Security Administration, an organization with 65,000 employees. MUDDY RUN

• e RECREATION PARK

• e CONTINUED TO

• OFFER INTERESTING STUDENT PROGRAMS, SUCH AS THIS e AQUATIC LESSON.

The Com pan) 's ca pi cal expenditures increased to $5 64 million in 1992, compan.:d to $491 million in 1991. The Company's capital oudays for I 99 3 are budgeted to be $59 3 million, all of \\ hich are expected to be pro\*ided by internally generated funds. \ \'ith su Cficienr generating capacity into the next decade, annual construction expenditures ha\*e declined about 50Cic since I 989, the last year of Limerick Unit :\o. 2 construction.

The Company has agreements with other utilities to sell 799 mega\\'atts (m \ \') of energy of which 400 m \ \' arc also sold as installed generating capacit).

0\ er $12 7 million of reYenue net of fuel expense, equi\ alent to $0. 3 3 per share of common stock earnings, \\ere generated by these sales of energy and capacity to other utilities during 1992. Also, the Company realized approximately

$45 million of sa1 ings through the normal purch e and sale of economical po\\'er through its membership ll1 nnsyh'ania

-New Jersey -l\1aryland Interconnection d the continuation of its long-standing agreement to purchase lo\\ er-cost, coal-fired po\\'er from outside PJ:.L These latter sa\*ings are passed on to cusromers as lower fuel charges through the Energy Cost [\djustment.

Limerick Generating Station Unit No. 2 set a new world record of 5 3 3 days for the longest continuous run of any commercial light-water nuclear reactor, eclipsing the former record of 502 days. Unit No. 2 operated continuously from June 5, 1991, \\hen it returned from a 7 5-day refueling outage, until :-\member 20, when it \1*as remored briefly from sen ice to repair an oil leak in a non-nuclear portion of the plant. During its record run, the unit operated at 97% of full capacity and generated more than I 3 billion kilO\\*atthours of clean, reliable, lo\1 -fuel-cost electricity for PECO customers.

That is enough electricity ro supply the entire city ol Philadelphia for one year. Jn June, the C.S. :--.;uclear Regulatory Commission

(:\'RC) released a "iystcmatic

.-\ssessment of Licensee Performance report of the :\'RC's latest operations assessment or \\a. The rcpon stated that the Company's management iined ro operating a safe and rcliablc nuclear pm1 er plant and that the Company's approach to the operation of the facility, the safety of the 11 orkcrs and the protection of the health and safety of the public was conscrrnti1-e and utilized a strong root-cause analysis program. ln December, the :-\RC: released its latest S.-\LP assessment of Peach Botrom and found "broad based performance imprO\emcnts." The :\'RC evaluation found that "management continued to maintain a strong saf'ct) perspectil'e through the assessment period (.\ugust, 1991 -October, 1992). :..Ianagement fostered broad-based performance impro\ ements that led to stronger programs in most functional areas. l\lany or the programmatic 11*eaknesses ident i fied during the previous assessment period ha1-e either been eliminated or performance has been impro\*ed." Ilo\\'c1*er , the SALP report also i de nti fi ed se1*eral wca k ne sses 1\ a rran ting continued management attention.

\mong the areas identified for impro\*emcnt \\ere plant performance monitoring and eng111ecring and technical support. The Company has an O\\ nership interest in six nuclear units -mo units each at Limerick (100%), Peach Bottom (42.49%) and (42.59%) -which produced 58% of the Company's total electric output in 1992, cquil'alent tO burning 41 million barrels of oil and saving 01 er $5 20 million in fuel costs for customers.

The Company\ O\-crall nuclear capacity factor was 7 I lfc for I 992. \ se1 ere December storm \\'ith hea1*v rams accompanied by high \\'inds \\as the fifth-11 orst storm to hit the Company's scffice terriror:-.

".\early 192,000 cusromers experienced pm1 er interruptions.

Three hundred cre\vs \\ orkecl more than 2 5 ,000 manhours to speed the restoration effort. The Compa!1\* has a comprchensi1 e tree-trimming and Ycgetation-management program for the more than one million trees gro\\*ing under or adjacent to aerial lines. In I 99 2, the Compan: increased its tree trimming budget hy 22% to S 19 million in a major effort to reduce the number and duration of tree-related power outages, and similar amounts arc expected to be spent during the next rn o years. lmpro1-cmcnrs in sen ice reliability to electric customers, especially during summer storms, arc anticipated.

p /. i I {/ d t' I p h I ll l I l' ( I F ! ( ( f) Ill p (/ JJ )

EXPANDED CF'"F"ICE e FACILITIES AND A NEW e

• GAS SYSTEM CCNTRCL. e ROOM WERE COMPLETED

• AT THE WEST e

• CONSHCHCCKEN GAB PL.ANT. ALL.AN L. CHEW,

• GAS OPERATIONS e * (STANDING), e ANGELO F". MICAL.IZZl 1 GAS e

• OPERATIONS (SEATED). e * * * * * * * * * * * * * * * *

• EDDYSTONE GENERATING STATION HAS BEGUN A $54 MILL.ION RENCVATICN PRCGRAM 1 THE MCST EXTENSIVE IN ITS 32*YEAR HISTCRY 1 TC EXTEND SERVICE INTC THE NEXT CENTURY. MARIO SALCEDO, TURBINE* GEN ER ATC R GROUP (LEFT). RICHARD 0. CL.ARK, II, TUR Bl NE* GENERATOR GROUP (BEL.aw).

.er to contain tree-trimming costs, the Company has introduced the "Plant Right" program which provides assistance to property owners in the selection of the proper species of trees for planting under or near utility power lines. "Plant Right" is one of the most complete sources of tree information in Pennsylvania.

It provides comprehensi\*e data on more than 12 5 species of trees suited to various planting conditions found in Pennsylvania.

In several easy steps, customers can obtain a list and description of trees suited to their particular sites. The largest and most comprehensive outage at one of the Company's non-nuclear generating facilities began in August at Eddystone Generating Station. The work on Unit No. 2, one of the two, 3 2-year-old, 3 50-m\V coal-fired units, will cost $54 million, last eight months and involve 200 Company and more than 300 contract employees.

This major project will extend the unit's operating life approximately 20 years. In he Company completed the conversion of Cromby Generating Station Unit No. 2 to natural gas, thereby allowing the unit to burn either oil or gas. The conversion, completed at a cost of $14 million, is expected to save electric customers approximately

$2 million annually in fuel costs, reduce sulfur dioxide emissions by 2,000 tons per year and generate more than $1 million in additional gas revenue per year. \Vith the implementation of the 1990 Clean Air Act and the passage of the National Energy Policy Act of 1992, the outlook for the development of natural gas vehicles (NGVs) has never been more positive.

PECO had 70 NGVs operating at the end of 1992 and plans to have 300 operating by the end of 1994. Last year marked the first time that major automobile manufacturers produced NGVs for sale to the general public. The Company is also promoting the use of NGV s by area fleet operators.

The goal is to communicate the benefits of NGVs to fleet operators as they prepare to comply with the Clean Air and National Energy Policy Acts. In June, the Company spo a regional NGV symposium which attracted over 40 es and featured the national introduction of a line of natural gas pick-up trucks. A stalled national economy, general corporate downsizings and tight credit limited regional business activity in 1992. Nevertheless, there are some positive economic developments in the region.

The region's pharmaceutical, health care and biotechnology industries are expanding and adding employees to their workforces.

Business Week magazine and other financial publications are trumpeting greater Philadelphia's "Medical Mile," its "biotech boomlet," and top-flight medical schools and research institutions.

To capitalize on the Philadelphia region's strengths, the Company launched a major campaign to attract health product businesses, as well as advanced technology companies in electronics, telecommunications, environmental science, chemicals, medical instruments and information technology.

\Vorking closely with the Pennsylvania Department of Commerce and economic development agencies in suburban Philadelphia and northeastern Maryland, the Company provided locational assistance to more than 1 7 companies that established new facilities in our service territory.

As a result, 2,800 jobs were created in 1992. Since 1989, the International Brotherhood of Electrical

\Vorkers (!BEW) has been attempting to organize Company employees.

In 1991, the IBEW petitioned the National Labor Relations Board (NLRB) to hold a certification election for approximately one-half of the Company's workforce to determine whether those employees want the IBEW to represent them. In February 1992, the Independent Group Association (IGA) also petitioned the NLRB to represent a slightly larger group of employees.

The IGA is an employee association that has represented non-management employees for SO years; however, it has never sought to negotiate a legally enforceable collective-bargaining agreement.

It is likely that a vote will be scheduled by the NLRB in I 99 3. The Company believes that establishing a union is not in the best interest of either the Company or the employees and strongly opposes establishing any union. A union-free environment better enables the Company and its employees to move forward and deal with the challenges of Jess regulation and increased competition that lie ahead. Ph1/adrlphia Electric Company HIGHLIGHTS

• World record of 5 3 3 da ys of continuous operation i s establi s h ed b y Limerick Un i t No. 2. PECO, along w ith th e Philadelphia Fire Department, distributes s mok e detectors. Common stock dividend is increased .

• Early retirement program is offer e d to Nuclear Group employees.

A 1 % gas rate decrease, reflectin g th e lower cost of natural gas, i s effecti ve December 1. Liquid propane tanks are installed at Chester gas plant to me e t peak demands. Fifth worst storm in history strikes PECO territor y. Major tree-trimming program to increase reliability commences.

Electric base rates decrease 4. 6%, reflecting the end of the phase-in portion of the Limerick Unit No. 2 rate case settlement.

.............

THE COMPANY ASSISTED THE PHILADELPHIA FIRE DEPARTMENT'S DISTRIBUTION OF SMOKE DETECTORS TO LOW-INCOME PHILADELPHI A R ES IDEN TS, L IME R ICK U NIT

• NO. 2 SET A WORLD RECORD OF 533 DAYS FOR T H E L O NGEST

• CONTINUOUS RUN OF ANY COMMERC I AL LIGHT-WATER NUCLEAR REACTOR.

ELEVEN NEW 90,000-GALLON STORAGE TANKS

• WERE INSTALLED AT THE COMPANY'S TILGHMAN STREET GAS PLANT IN CHESTER, PA TO HOLD LIQUID PROPANE TO MEET PEAK HEATING DEMANDS, Dickinson .If. Smith, Senior J 'ice Preside111, .Yue/ear, joined the Company in 1987 as the plant manager of Peach Bottom. He formerly ser*ved as a Rear .ldmiral in the [;. S ..

and u:as Chief of Staff of the ,I/lied .1 t!antit Command of.\'.1 TO. ..............

THE COMMON STOCK DIVIDEND WAS INCREASED AGAIN IN 1 992.

TH E F IF'T H-W ORST STOR M I N THE COMP A N Y'S HISTOR Y STRUC K ON D E CEMBER 1 1 , AF'FECTING SER V ICE TD 1 92,000 CUSTOMERS. * * * * * * * * * * * * *

• William /. Kaschub, Senior Vice President, Human Resources, joined the Company in June 1991. He was previously Vice President, Human Resources for GTE North and had been with the GTE organization since 1973. * * * * * * * * * * * * * *

• PECO IS WORKING TD REDUCE THE NUMBER AND DURATION OF TREE-RELATED POW. OUTAGES WITH TIMELY TREE-TRIMMING AND VEGETATION M AN AGEMENT.

Philadelphia Electric Company and Subsidiary Companies M ANAGEME T'S DI SCUSS I ON AND A ALYS I S

• O F FI NANC I A L C o DI T I ON AN D R ESULTS OF O PE R ATIONS EARNINGS AND DIVIDENDS Earnings per common share in 1992 were $1.90 compared to $2.15 in 1991. The decline in earnings was primarily due to unfavorable 1992 weather which reduced earnings by $0. 3 5 per share and to the $0.2 7 per share charge for the settlement of the co-owners' litigation concerning the 1987 shutdown of Peach Bottom Atomic Power Station (Peach Bottom). These decreases were partially offset by a $0.19 per share increase resulting from reduced financing costs associated with the refinancing of high-cost, long-term debt and preferred stock and the reduction in total debt, and a $0. l 7 per share increase resulting from increased sales, exclusive of weather effects, and other factors. As a result ofits improved financial condition, as evidenced by the upgrading ofits securities' ratings, the Company increased its annual dividend per share by 8% to $1.40, effective with the dividend payable in December 1992. OPERATING REVENUES (M ii/ions of Doi/ors) Electric Revenue (Decrease)

Increase '92 VS '91 '91 VS '90 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * $(io3.) * * * * * * *$ * *39 Ra ases 80 T stment Re venues 48 44 Fuel Adjustment Revenue (22) 31 Energy and Capacity Sales 12 6 7 $ (65) $261 1992vs 1991 Electric revenues decreased by approximately

$65 million, or 1.8%, in 199 2 compared to 1 991 primarily as a result of lower sales to residential customers and to large commercial and industrial ers, which were partially offset by increased sales to house-heating customers and small commercial and industrial customers.

The unusually cool summer of 1992 was the major reason for decreased residential sales. Total electric customers increased in 1992 by 0.6%. Effective April 1, 1992, the Energy Cost Adjustment (ECA) was changed from a credit value of 1.867 mills per kilowatthour (kWh) to a credit value of 3. 7 64 mills perk Wh, which represents a decrease in annual revenue of approximately

$59 million. Gas revenues increased by approximately

$9 million, or 2.6%, in 1992 compared to 1991 primarily as a result of higher sales to heating customers due to the cooler weather and an increase in heating customers.

1991vs1990 Electric revenues increased nearly $261 million, or 7. 7%, in 1991 com ll o 1 99? primarily to the full-year effectof the Limerick Un rate increase and higher kWh sales to other utilities, as we! all classes of customers except large commercial and industrial.

Revenue also increased due to higher sales associated with the hotter summer weather. Effective April 20, I 991, the ECA was changed from a credit value of mills per kWh to a credit value of 1.867 mills per kWh, wh ich represents an increase in annual revenue of approximately$

59 million. Gas revenues decreased by approximately

$29 million, or 7.5%, in I compared to 1990 primarily due to lower sales compared to year and the substantial curtailment of purchases by a major industrial customer during 1991. FUEL AND ENERGY INTERCHANGE EXPENSE 1992vs 1991 Fuel and energy interchange costs decreased

$70 million in 1992 compared to 1991 primarily due to lower fuel costs and to slightly lower output. 1991vs1990 Fuel and energy interchange costs decreased

$15 million in 1991 compared to 1990 primarily due to lower fuel costs, partially offset by increased output. OTHER OPERATING AND MAINTENANCE EXPENSES 1992vs 1991 Other operating and maintenance expenses increased

$8 5 million in 1992 compared to 1991, primarily due to higher charges for uncollectible accounts, non-recurring maintenance expenditures curred at the Company's nuclear generating facilities, the charge for the Nuclear Group Voluntary Early Retirement Program and Voluntary Separation Package, higher environmental-related charges and increases in other administrative and general expenses.

1991vs1990 Other operating and maintenance expenses decreased

$2 7 3 million in 1991 compared to 1990, primarily due to the elimination of the costs associated with the Company's one-time Early Retirement Plan initiated in 1990 and the implementation of the cost-containment program in 1991. DEPRECIATION EXPENSE 1992vs 1991 Depreciation expense increased in 1992 compared to 1991 primarily due to additions to plant in service. 1991vs1990 increased in 1991 compared to 1990 nly due to Limenck Unit o. 2 being placed in rate base in April 1990. Philad elphia Electric Company

• P hiladelphia Electric Co11lpany and Su b s i dia r y Co11lpanies MANAGEMENT'S DI SCUSS I ON AND ANALYS I S OF F I NA C I AL Co D I T I ON AND R ESULTS OF O PERATIONS

• C ONTINUED ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION 1992 vs 1991 Allowance for Funds Used During Construction (AFUDC) creased in 1992 compared to 1991 primarily due to a decrease in the 1992 AFUDC rate. 1991vs1990 AFUDC decreased in 1991 compared to 1990 primarily due to Limerick Unit No. 2 being placed into commercial operation on January 8, 1990. Capitalized Limerick Costs were not incurred after April 20, 1990 due to the inclusion of Limerick Unit No. 2 in rate base as of that date. INCOME TAXES As discussed further in note 11 of Notes to Consolidated Financial Statements, the Financial Accounting Standards Board (F ASE) issued Statement of Financial Accounting Standards (SF AS) No. 109, "Accounting for Income Taxes," which must be adopted by the first quarter of 1993. Adoption of SF AS No. 109 is not expec:ed to have a material effect upon the Compan y's results of operanons as the Company expects to receive recovery for taxes when paid. 1992vs 1991 Income taxes charged to operations and to other income decreased in 1992 compared to 1991 primarily due to lower pre-tax income and the cost associated with the settlement of the Peach Bottom owners' litigation.

1991vs1990 Income taxes charged to operations and to other income increased in 1991 compared to 1990 due to higher operating income and reduced expenses, primarily the costs associated with th_e Plan and the disallowances resulting from the L1menck Unit No. 2 rate order in 1 990. OTHER TAXES 1992vs 1991 Other taxes increased in 1992 compared to 1 991 primarily due to the refunds in 1 991 of prior years' real estate tax over-collections.

1991vs1990 Other taxes increased in 1991 compared to 1990 primarily due to increased Penns y lvania tax rates associated with capital stock and real estate taxe s and an increase in gross receipts tax due to higher revenue. INTEREST CHARGES 1992vs 1991 Interest charges decreased in 1 992 compared to 1991 primarily

_due to the Compan y's on-going program to refinance and refund interest long-term debt, lower levels of total debt outstanding and lower interest rates o n bank borrowings.

1991vs1990 Interest charges decreased in 1991 compared to 1990 due to ti o ns in t o t a l debt o utstandin g and l o wer inter es t rates, partiall y off s et b y the increa s ed servic e charges re s ulting from the sale of additional accounts receivable in January 1991. PREFERRED STOCK DIVIDENDS 1992vs 1991 Preferred stock di v idends decreased in 1992 compared to 1991 due to the reduced number of preferred shares outstanding and the refunding of high-cost preferred stock. 1991vs1990 Preferred stock dividends decreased in 1991 compared to 1990 due to the reduced number of preferred shares outstanding.

Ll"1UIDITY AND CAPITAL RESOURCES The Company's capital requirements are primarily for capital ditures for its construction program and for debt service. Capital resources available to meet these requirements and dividend ments are funded from cash provided by utility operations and, to the extent necessary, external financing.

The Company meets its short-term liquidity requirements rily through bank lines of credit, which were $291 at December 31, 1992, against which $110. 5 million was outstanding, and through a $100 million commercial paper program. No nts were outstanding at year end under the commercial pape m. The Company believes these sources of short-term liq adequate.

The reduction in the Company's level of capital expenditures as a result of the completion of its nuclear construction program has improved the Company's financial condition.

Also contributing.

to this improvement were the effects of the Company's cost-contamment program, an aggressive bill collection program, revenues fr?m sales of capacity and energy to other utilities and the 1990 reducnon in the common stock dividend. During 1992 and 1 991, the Company met its capital requirements with cash generated through operations.

Net cash provided by operating activities for 199 2 was $1. 2 billion, representing a 3 3. 7% increase over the 1989 level, which was the year prior to the last electric base rate increase.

For 1993 through 1996, the Company expects that substantiall y all of its capital needs will be provided through internally generated funds. Construction program expenditures for 1992 were $564 million and are estimated to be $593 million in 1993 and $1.6 billion from 1994 to 1996. The estimated expenditures include the Company's share of the installation of flue-gas desulfurization equipment bers), but do not include any amounts for towers the Salem Generating Station (Salem) that may be reqUlred for environmental reasons. The Company does not presently anticipate that construction of the Salem cooling towers will be required; however, if m il n the estimated cost to the Company is in the range of$230 mi

• 00 million and may require external sources of financing.

Certai . ties under construction and to be constructed may require permits and licenses which the Compan y has no assurance will be granted. Philadelphia Electric Co11lpany Philad e lph ia Ele c tr i c C o mpa n y a n d Sub si diar y C ompa n ies MANAGEMENT'S DISCUSSION A o A ALY SIS 0 F F I ANCIAL c 0 OITJO A 0 RESULTS 0 F 0PERATIO s

• CONTINUED Influenced by the favorable financial market conditions, the Company has continued its aggressive refinancing program. During 1992, $1. 5 billion of high-cost, long-term debt and preferred stock were replaced with debt and preferred stock carrying significantly reduced rates of interest and dividends.

Also during 1992, the Company utilized internally generated cash to repay $149 million of debt and to redeem $20 million of preferred stock. These tions resulted in a reduction of approximately

$41 million in ized interest and $9 million in annualized preferred stock dividends.

The Company's improved securities' ratings and coverage ratios have enhanced its ability to access the capital markets to take advantage of refinancing opportunities.

The ratios under the Company's mortgage indenture and Articles of Incorporation at December 31, 1992 were 3. 31 and 2.00 times, respectively, pared with minimum issuance requirements of 2.00 and 1.50. As a result of its improved financial position, the Company satisfied all of its 1992 Dividend Reinvestment and Stock Purchase Plan (DRIP) requirements with the purchase of shares of common stock on the open market. Prior to 1992, the Company issued new shares of common stock to meet the DRIP requirements, thereby increasing the total number of common shares outstanding. Depend-in e Company's specific requirements, the Company will de ther to use new unissued shares or purchase shares on the open rket in the future. The Company's capital structure as of December 3 I, 1992 was common equity, 40. 7 3; preferred stock, 6.6 3; and long-term debt, 5 2. 73; compared to its capital structure as of December 3 I, 1991 of common equity, 38.8 3; preferred stock, 7.33; and long-term debt, 5 3. 93. The Company anticipates that its improved financial tion will allow it to further strengthen its balance sheet. OUTLOOK Continued improvement of the Company's financial condition and its future operating results are dependent on a number of factors affecting the Company and the utility industry generally.

These factors include the regulation and operation of nuclear generating facilities, which represent 4 5 3 of the Company's generating ity, the future effects of increased competition, regulatory and accounting changes and compliance with environmental regulations.

During 1992, the Company's nuclear plants operated at 71 3 capacity and produced 5 8 3 of the Company's generation. In addition to permitting the Company to meet the needs of its customers and commitments for off-system sales, continued successful opera ti on of the nuclear plants is necessary to avoid penalties under the ECA. The 1991 settlement of all appeals arising from the Limerick Unit No. 2 rate case affords the Company the opportunity, through sales 'lities and th e efficient operation of Limerick, to increase ngs without increasing base rates. See note 2 of Notes to ated Financial Statements for the description of the terms of the settlement.

The Company has agreements with neighboring utilities to sell up to 799 megawatts (mW) of installed generating capacity and/or energy. At December 3 I, I 992, the Company had agreements to sell 400 mW of capacity and 200 mW of energy with terms expiring through June 1994. In addition, the Company had weekly contracts to sell 599 mW of energy. In 1993, the Compan y expects to sell over $120 million of capacity and energy through these agreements. As part of the settlement of the Limerick Unit o. 2 rate case, the Company agreed not to file an electric base rate increase prior to April 1994 e x cept for single-issue rate filings to recover substantial creases in costs associated with legislative or regulatory changes. Pursuant to this exception, on September 11, 1992, the Company filed with the Pennsylvania Public Utility Commission (PUC) a request for a 1.53 electric base rate increase designed to recover $50.2 million of costs that would be charged to electric operations associated with the implementation of SF AS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (see note 2 ofNotes to Consolidated Financial Statements).

The adoption of SF AS No. I 06 in the first quarter of 199 3 will result in a transition liability of approximately

$ 5 7 2 million (which the Company expects to amortize over an allowed 20-year period) and in recognition of an annual accrual of $89 million (including the amortization of the transition liability), which is $65 million more than the current annually recognized cost. Non-pension postretirement benefits costs traditionall y ha v e been allowed for ratemaking on a pay-as-you-go basis. Unless the PUC permits recovery of the additional pension postretirement benefits costs through the ratemaking cess, the Company's earnings will be adversely affected by the adoption of SF AS No. I 06. In ovember 1992, the F ASB issued SF AS No. 112, "Emplo y ers' Accounting for Postemployment Benefits," which must be adopted by the first quarter of 1994. Adoption of SF AS o. 112 is not expected to have a material effect upon the Company's results of operations.

The Company expects to adopt SF AS No. 112 in the first quarter of 1994 and is currently evaluating the method of adoption.

The Company has no present plans to file for a general increase in base rates in the foreseeable future. Growth in revenues from retail sales is therefore dependent on the rate of growth of the economy in the Company's service territory.

During 1992, the final segment of the combined Limerick Unit No. 1 and Unit No. 2 phase-in plans was completed.

As a result, electric rates were reduced by 4.6 3 on January 1, 199 3. Additionall y , the Company's continued strong nuclear performance will ute to an electric rate reduction of approximately 2 3 in April 199 3 as energy cost rate adjustments reflect the fuel economy of nuclear plant operations.

These rate reductions do not affect earnings but, in the case of the reduction related to the phase-in plans, will reduce internall y generated cash. Inflation impacts the Company through increased operating costs and increased replacement costs of utility plant. The Compan y expects that it would recover any increased operating costs, but in times of high inflation, the Company could be adversely impacted by P h i l adelph ia El ec tr i c Com p any Phila d tl p hia E l ec tri c C o mpa ny and Sub1idiar y CompanitJ MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 0PERATIO s

• C 0 N T I N U E D the regulatory lag in reflecting these increased costs in rates. In addition, the replacement cost of the Company's utility plant is significantly higher than the historical cost reflected in the financial statements.

The National Energy Policy Act ofl 99 2 (Energy Act) is designed, among other things, to promote competition among utility and utility generators by amending the Public Utility Holding Company Act of 19 3 5 ( 19 3 5 Act) to exempt a new class of independent power producers (exempt wholesale generators) which are not subject to regulation under the 19 35 Act. The Energy Act also amends the Federal Power Act to allow the Federal Energy Regulatory sion (FERC) to order wholesale wheeling to provide utilities and non-utility generators with access to utility transmission facilities; however, retail wheeling is prohibited.

The provisions direct FERC to set prices for wheeling to allow utilities to recover all legitimate, verifiable and economic costs for providing wheeling services, including the cost of expanding their transmission facilities to accommodate required transmission access. The costs are to be recovered from the company whose electricity is being wheeled rather than from the utilities' native-load retail customers.

In tion, the Energy Act restricts FER C's ability to order wheeling if it would impair the ability of a utility to provide reliable power to its existing customers.

The Energy Act also provides that utilities with nuclear reactors must pay for the decommissioning and decontamination of the U.S. Department of Energy's (DOE) nuclear fuel enrichment facilities.

The total costs are estimated to be $15 0 million per year for 15 years, of which the Company's share is $6. 3 8 million per year. The Energy Act provides that these costs are to be recoverable in the same manner as other fuel costs. The Company has recorded the liability and a related regulatory asset of $9 5. 7 million for such costs at December 31, 1992. The Company will seek recovery of these costs through the ECA as mandated by the Energy Act, although such recovery is not assured. The Company cannot predict what other effect, if any, the Energy Act will have on the Company's operations.

The Company expects its level of capital investment in utility plant to remain relatively stable since it has sufficient electric generating capacity to meet the anticipated needs of its service territory well into the next decade. Because of the Company's substantial ment in and reliance on its nuclear generating units, any changes in regulations by the Nuclear Regulatory Commission (NRC) requiring additional investments or resulting in increased operating costs of nuclear generating units could adversely affect the Company. The Company's budgeted capital expenditures through 1996 include its share of the costs of scrubbers being installed at the Conemaugh Generating Station. This is the only investment required , by the Company to comply with the Phase I sulfur dioxide limitations of the Amendments to the Clean Air Act of! 990 (Clean Air Act). The Company's two service-area coal-fired plants, Eddystone and Cromby, are equipped with scrubbers.

The Company will be required to comply with the nitrogen oxides (NOx) emission limitations of the Clean Air Act by May 3 1, 199 5 at its service-area generating units, all of which are in an ozone nonattainment area. The Company estimates that installing low-NOx burners, which is one of the possible technologies and the lowest in cost, on all of its oil and gas sources would require a capital expenditure of$2 l million. The cost of compliance could be less if the Company is not required to make modifications to all ofits units or implements a system which permits credits or averaging among sources. If, however, further technological improvements are required, the cost of compliance could be substantially higher. As a result of its prior investments in scrubbers for Eddystone and Cromby and its investment in nuclear generating capacity, the Company believes that compliance with the Clean Air Act will have less impact on the Company's electric rates than on the rates of other Pennsylvania utilities which are more dep on coal-fired generation.

An evaluation of all Company sites for potential enviro ental clean-up liability is currently in progress, including approximately 20 sites where manufactured gas plant activities may have resulted in site contamination.

Past activities at several sites have resulted in actual site contamination.

The Company is presently engaged in performing detailed evaluations of these sites to define the nature and extent of the contamination and to determine the necessity of remediation and to identify possible remediation alternatives.

The Company has accrued the $11 million of remediation costs that currently can be reasonably estimated.

The Company cannot currently predict whether it will incur other significant liabilities for any additional remediation costs at these or additional sites identified by environmental agencies or others. The Company would ultimately seek to recover through the ratemaking process all capital costs and any increased operating costs, including those associated with NRC regulation of the Company's nuclear generating stations and environme.gtal compliance and remediation, although such recovery is not assured. For a discussion of other contingencies, see notes 2 and 3 of Notes to Consolidated Financial Statements.

• Philadelphia Electric Company Philadelphia Electric Company and Subsidiary Companies Co , S OLID A TED ST A T E M ENTS OF I NCOME For the Years Ended De cem b er 31 (Thousands of Dollars) 1992 1991 1990 ******************************************************************************

• • • • • • • OPERATING REVENUES Electric Gas TOTAL OPERATING REVENUES OPERATING EXPENSES Fuel and Energy Interchange Other Operating Early Retirement Plan Maintenance Depreciation Income Taxes Other Taxes TOTAL OPERATING EXPENSES OPERATING INCOME OTHER INCOME AND DEDUCTIONS Allowance for Other Funds Used During Construction Capitalized Limerick Costs Adjustment to Limerick Plant Costs Settlement of Peach Bottom Litigation In axes 0 TOTAL OTHER INCOME AND DEDUCTIONS INCOME BEF"ORE INTEREST CHARGES INTEREST CHARGES Long-Term Debt Short-Term Debt TOTAL INTEREST CHARGES Allowance for Borrowed Funds Used During Construction NET INTEREST CHARGES Income before cumulati ve effect of accounting change Cumulative effect as ofJanuary 1 , 1990 of account ing change for unbilled operating revenues (Note 4) Net Income Preferred Stock Dividends EARNINGS APPLICABLE TO COMMON STOCK Average Shares of Common Stock Outstanding (Thousands)

Earnings per average common share before cumulative effect of accounting change (Dollars)

Cumulative effect as of January 1, 1 990 of accounting change for unbilled operating s (Dollar s) ARNINGS PER AVERAGE COMMON SHARE (DOLLARS)

DIVIDENDS PER COMMON SHARE (DOLLARS)

See N ot es to Consolidated Financial Statements.

$3,597,141 365,328 3,962,469 709,115 906,346 353,502 413,779 264,483 281,868 2,929,093 1,033,376 10,461 (103,078) 40,160 3,392 (49,065) 984,311 484,153 31,419 515,572 (10,202) 505,370 478,941 478,941 60,731 $ 418,210 220,245 $ 1.90 $ 1.90 $" .... " i:3"i5" Philadelphia Electric Company $3,662,573 356,013 4,018,586 778,674 842,375 3 32,269 400,572 308,945 274,561 2,937,396 1,081,190 10,619 (16,442) 28,696 22,873 1,104,063 545,488 36,360 581,848 (12,465) 569,383 5 34,680 5 34,680 66,104 $ 468,576 .............. 218,234 $ 2.15 $ 2.15 $ ...... i:2T5 $3,401,644 385,029 3,786,673 793,432 858,913 249,252 3 39,650 3 57 ,540 181,320 238,852 3,018,959 767,714 27,184 80,325 (263,860) 86,869 (9,735) (79,217) 688,497 579,837 31,034 610,871 (28,151) 582,720 105,777 108 , 413 214,190 90,319 214,356 $ 0.07 0.51 Philadelphia Electric Company and Subsidiary Companies CO::SSOL I DATED B A L A1'CE SH EE T S ASSETS December (Thousands of Dollar s) 1992 1991 ****************************************************************

• • • UTILITY PLANT , AT ORIGINAL COST Electric Gas Common Less Accumulated Provision for Depreciation uclear Fuel, Net Construction Work in Progress Leased Property, Net NET UTILITY PLANT CURRENT ASSETS Cash and Temporary Cash Investments Accounts Receivable, Net Customers Other Inventories, at Average Cost Fossil Fuel Materials and Supplies Deferred Income Taxes U nrecovered Phase-In Plan Revenue, Other et TOTAL CURRENT ASSETS DEFERRED DEBITS AND OTHER ASSETS Deferred Limerick Costs Investments Loss on Reacquired Debt Other TOTAL DEFERRED DEBITS AND OTHER ASSETS TOTAL See Notes to Consolidated Financial Statements.

Philadtlphia Electric Company $12,797,389 781,708 162 1 061 13,741,158 315871317 10,153,841 188,609 348,792 209 2 994 10 1 901 1 236 50,369 138,880 62,571 63,688 156,706 39,285 38,466 549 1 965 455,161 202,422 273,120 196,323 111271026

$12,578,227

$12,451,374 717,293 158,835 13,327,502 3,267,188 10,060,314 189,566 348,533 223,749 10,822,162 97,061 215,353 68,249 16 ,973 (34,918) 142,267 73,361 783,162 476,932 169,653 187,740 8 3 ,811 918,136 $12,523,460 Philad elphia Electric Company and Subs i diary Companies CONSOLIDAT E D B A L ANCE SH EETS CAP ALIZATION ANO LIABILITIES December 3 1 (Thousands of Dollars) 1992 1991 ****************************************

CAPITALIZATION Common Shareholders' Equity Common Stock Other Paid-In Capital Retained Earnings Preferred and Preference Stock Without Mandatory Redemption With Mandatory Redemption Long-Term Debt TOTAL CAPITALIZATION CURRENT LIABILITIES Notes Payable, Bank Long-Term Debt Due Within One Year Capital Lease Obligations Due Within One Year Accounts Payable Taxes Accrued De Energy Cos t s In ccrued Di s Payable Other TOTAL CURRENT LIABILITIES DEFERRED CREDITS AND OTHER LIABILITIES Capital Lease Obligations Deferred Income Taxes Unamortized Investment Tax Credits Pension Obligation for Early Retirement Plan Other TOTAL DEFERRED CREDITS AND OTHER LIABILITIES c 0 M M I T M E N T s A N D c 0 N T I N G E N c I E s ( Otes 2 and 3) TOTAL See Notes to Consolidated Financial Statements .

• Philadelph ia Electric Company $ 3,459,131 1,214 561,824 4,022,169 422,472 231,130 5,203,961 9,879,732 110,500 98,998 58,998 241,462 24,334 72,999 115,923 19,459 87,887 830,560 150,996 1,001,939 302,508 141,675 270,817 1,867,935

$12,578,227

$ 3,446,666 1,214 444,399 3,892,279 422,472 315,592 5,415,584 10,045,927 22,712 56,114 288,865 163,193 20,040 126,457 36,066 110,016 823,463 167,635 844,084 302,8 3 2 145,092 194,427 1,654,070

$12,523,460 Philadelphia Electric Company and Su b 1idiary CompanitJ CONSOL I DATED STATEMENTS OF CAS H FLOWS (Thou1and1 of Dollars) 1992 1991 1990 CASH FLOWS FROM OPERA T ING ACTIVITIES Net Income $ 478 , 941 $ 5 34,680 $ 214,190 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:

Early Retirement Plan 211,380 Adjustment to Limerick Plant Costs 263,860 Cumulative Effect of Accounting Change (1 08,413) Depreciation and Amortization 512,957 521,291 451,997 Deferred Income Taxes 81,943 77,836 (57,713) Capitalized Limerick Costs (8 0,325) Unrecovered Phase-In Plan Revenue 142,267 96,705 42,020 Deferred Energy Costs 52,959 16,593 42,690 Sale of Accounts Receivable 125,000 Amortization of Leased Property 54,600 59,400 70,100 Changes in Working Capital: Accounts Receivable 82,151 (7 0,907) 32,166 Inventories 1,395 (26,926) (5,084) Accounts Payable (47,403) 36,326 (13 , 659) Other Current Assets and Liabilities (136,627) 54,63 3 1,368 Other Items Affecting Operations (2 7 ,693) 21,102 69,124 Net Cash Flows Provided by Operating Activities 1,195,490 1,445,733 01 CASH FLOWS FROM INVESTING ACTIVITIES Investment in Plant (594,476)

(496,093) (514,006)

Increase in Investments (322769) (43,827) (17,574) et Cash Flows Used by Investing Activities (627,245)

(5 39,920) (531,580) CASH FLOWS FROM FINANCING ACTIVITIES Change in Short-Term Debt 110,500 (68,500) (43,500) Issuance of Common Stock 12,465 66,453 84,828 Issuance of Preferred Stock 140,000 Retirement of Preferred Stock (224,462)

(15,330) (224,219)

Issuance of Long-Te r m Debt 1,369,540 278,000 205,000 Retirement of Long-Term Debt (1,504,87

7) (692,867)

(131,678) Loss on Reacquired Debt (85,380) (58,419) 7,950 Dividends on Preferred and Common Stock (349,856)

(33 3,319) (3 98,192) Change in Dividends Payable (16,607) 8,57 5 (13,598) Expenses oflssuing Long-Term Debt and Preferred Stock (11,660) (68) (16,941) Capital Lease Payments (542600) (59,400) (7 0, 100) Net Cash Flows from Financing Activities (6142937)

(87 4,87 5) (600,450) (Decrease)

Increase in Cash and Cash Equivalents (46,692) 30,938 1,671 Cash and Cash Equivalents at beginning of period 97,061 66,123 64,452 Cash and Cash Equivalents at end of period $ 50,369 $ 97,061 $ 66, 12 3 ********************

....................

See Notes to Consolidated Financial Statements.

l Philadelphia Electric Company Phi ladelphia Electric Company and Subsidiary Companies CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS' EQUITY AND PREFERRED STOCK (All Amounts in Thousands)

Balance, January 1, 1990 Net Income Cash Dividends Declared Preferred Stock (at specified annual rates) Common Stock ($1.45 per share) Expenses of Capital Stock Issues Issuance of Stock Dividend Reinvestment and Stock Purchase Plan Redemptions Balance, December 31, 1990 Net Income Cash Dividends Declared Preferred Stock (at specified annual rates) n Stock ($1.225 per share) Ex f Capital Stock Issues Issuance of Stock Dividend Reinvestment and Stock Purchase Plan Long-Term Incentive Plan Redemptions Balance, December 31, 1991 Net Income Cash Dividends Declared Preferred Stock (at specified annual rates) Common Stock ($1.325 per share) Expenses of Capital Stock Issues Issuance of Stock Long-Term Incentive Plan Issuances Redemptions Balance, December 3 1, 1992 See Consolidated Financial Statements.

Common Stock Shares Amount 211,976 $3,295,385 4,977 216,9 5 3 2,925 152 220,030 504 84,828 3,380,213 63,207 3,246 3,446,666 12,465 220,534 $3,459,131 Other Paid-In Capital $5,311 (4,097) 1,214 1,214 Retained Preferred Stock Earnings Shares Amount $444,049 214,190 (87,920) (310,272)

(16,941) 243,106 534,680 (65,966) (267 ,35 3) (68) 444,399 478,941 (58,021) (291,835)

(11,660) 9,735 (2,201) 7,534 (15 3) 7 ,381 1,400 (2,245) $973,516 (220,122) 7 5 3,394 (15,330) 738,064 140,000 (224,462)

$1,214 $561,824 6,536 $65 3,602 ******************************************************************************************

Philadelphia Electric Company

• Philadelphia Electric Company and Subsidiary Companits NOTES TO CONSOL I DATED fI.'ANCIAL STATEMENTS I. Significant Accounting Policies GENERAL The consolidated financial statements of Philadelphia Electric pany (Company) include the accounts ofits utility subsidiary nies, all of which are wholly owned. Non-utility subsidiaries are not material and are accounted for on the equity method. Accounting policies are in accordance with those prescribed by the regulatory authorities having jurisdiction, principally the Pennsylvania Public Utility Commission (PUC) and the Federal Energy Regulatory Commission (FE RC). REVENUES In 1991, the FERC issued Accounting Release 14 (AR-14) which requires the Company to classify interchange sales as electric ating revenues.

Previously, interchange sales were credited to fuel and energy interchange expense. The Company adopted the sions of AR-14, effective January 1, 1992, and has reclassified the prior years to conform to the new requirements.

Electric revenues and fuel and energy interchange expenses increased by $4 3 million and $82 million for 1 991 and 1990, respectively, as a result of adoption of AR-14. The Company records revenues for services provided but not yet billed (see note 4 ). On June 2 7, 1989, the final phase of the electric rate increase approved by the PUC in its June 27, 1986 order became effective.

This final phase was designed to recover, over approximately a year period, the unrecovered revenue under the Company's 1986 phase-in plan. Pursuant to a phase-in plan approved by the PUC in its electric rate order dated April 1 9, 1990, the Company recorded revenue equal to the full amount of the rate increase approved, based on kilowatthours rendered to customers. On April 5, 1991, that plan was amended by the PUC as part of the settlement of all appeals arising from the Limerick Unit No. 2 rate proceeding to permit recovery of the remaining unrecovered revenue by December 3 1, 1992 (see note 2). As of December 31, 1992, the Company had no Unrecovered Phase-In Plan Revenue. FUEL AND ENERGY COST ADJUSTMENT CLAUSES The Company's classes of service are subject to fuel adjustment clauses designed to recover or refund the differences between actual costs of fuel, energy interchange, purchased power and gas and the amounts of such costs included in base rates. Differences between the amounts billed to customers and the actual costs recoverable are deferred and recovered or refunded in future periods by means of prospective adjustments to rates. Generally, such rates are adjusted every twelve months. In addition to reconciling fuel costs and re ve nues, the Company's Energy Cost Adjustment (ECA), lished by the PUC, incorporates a nuclear performance standard which allows for financial bonuses or penalties depending upon whether the Company's system nuclear capacity factor exceeds or falls below a specified range (see note 2). The Company recovers, through a separate PUC clause, 90% of take-or-pay costs billed to the Company by its interstate pipeline suppliers.

NUC L EAR FUEL Nuclear fuel is capitalized and charged to fuel expense on the unit of production method. Estimated costs of nuclear fuel disposal are charged to fuel expense as the related fuel is consumed.

The Company's share of nuclear fuel at Peach Bottom Atomic Power Station (Peach Bottom) and Salem Generating Station (Salem) is accounted for as capital leases. Nuclear fuel at Limerick Generating Station (Limerick) is owned. DEPRECIATION AND DECOMMISSIONING For financial reporting purposes, depreciation is provided over the estimated service lives of plant on the straight-line method and, for tax purposes, generally over shorter lives on accelerated methods. Annual depreciation provisions for financial reporting purposes, expressed as a percent of average depreciable utility plant in vice, were approximately 2.7 5% in 1992, 2.74% in 1991 9% in 1990. The Company's ownership portion of the estimate for decommissioning nuclear generating sta t ions, based on site-specific studies, as approved for ratemaking purposes by the PUC, is $643 million expressed in 1990 dollars. The associated annual expense currently is being charged to operations consistent with amounts approved for ratemaking purposes.

The amounts recovered from customers are deposited in escrow and trust accounts and invested for funding of future costs (see note 3 ). INCOME TAXES Deferred income tax provisions are made for differences between book and taxable income to the extent approved for ratemaking purposes. In addition, the effects of the Alternative Minimum Tax (AMT) are normalized.

Investment Tax Credit (ITC) is deferred and amortized to income over the estimated useful lives of the related utility plant. ITC related to plant in service, not included in rate base, is accounted for on the flow-through method. ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION CAFUDCl AFUDC is the cost, during the period of construction, of debt and equity funds used to finance construction projects.

AFUDC is recorded as a charge to Construction Work in Progress, and the credits are to Interest Charges for the pre-tax cost ofbor-ds and to Other Income and Deductions for the rema* the allowance for other funds. The rates used for capitalizing DC, which averaged 10.61%in1992, I0.88%i n 1991 and9.01%in1990, are computed under a method prescribed by the regulatory authori-Philadelphia Electric Company Philad el phia El ec tri c C o mpa ny and S u b s idi a r y Com p anie s 0 T E S T 0 C 0 '\ S 0 L l D A T E 0 F I :-.; A . C I .\ L S T ,\ T E C\1 E -..; T S ties. The 199 2 and I 991 ra t es are pre-tax and the I 990 rate is net after-tax. AFUDC is not incl u ded in regu l ar taxab l e income and the depreciation of capitalized AFUDC is not tax ded u ctible. NUCLEAR OUTAGE COSTS Incremental nuclear maintenance and refueling outage costs are accrued over the unit operating cycle of approximately 18 months. For each unit, an accrual for incremental nuclear maintenance and refueling outage expense is estimated based upon the latest planned outage schedule and estimated costs for the outage. Differences between the accrued and actual expense for the outage are recorded when such differences are known (see note 4). CAPITALIZED SOFTWARE COSTS Software projects which exceed $5 million are capitalized.

At December 31, 1992 and 1991, capitalized software costs totalled $40 million (net of $1 million accumulated amortization) and $19 million, respectively.

Such capitalized amounts are amortized ratably over the expected life of the projects when they become operational, not to exceed 10 years. GAINS AND LOSSES ON REAC('1UIRED DEBT nd losses on reacquired debt are deferred and amortized to interest expense over the period approved for ratemaking purposes. RECLASSIFICATIONS Certain prior year amounts have been reclassified for comparative purposes.

These reclassifications had no effect on net income. 2. Rate .Hatters LIMERICK UNIT No. 2 ELECTRIC RATE ORDER B y its order dated April 19, 1990, the PUC approved a $242 million annual electric increase to be phased in over approximately three y ears principally to recover costs associated with Limerick Unit No. 2 and associated common facilities.

ew tariffs implementing the PUC order became effective on April 20, 1990. The Company was denied recovery of certain plant costs and a return on deferred Limerick costs, resulting in a pre-tax charge of$264 million. Also, as part of the rate order, the Company was denied recovery of other costs deferred pending regulatory approval, resulti n g in an addi t iona l pre-tax loss of$ 3 2 million. The PUC order also reduced the Company's requested increase b y $106 million resulting from a disallowance of a return on common eq ll r 3 99 megawatts (mW) of Limerick Unit No. 2 and as common facilities, finding that the Company had 3 99 mW of r erm excess capacity.

As part of the PUC order, the PUC approved recovery of $28 5 million of deferred Limerick costs representing carrying charges and Phil a delphia depreciation associated with 50% of Limerick common facilities.

These costs are included in rate base and are being recovered over the l ife of Limerick. The PUC also approved recovery of $13 7 million of Limerick Unit No. 1 costs which had previously been deferred pursuant to a Declaratory Order dated September 28, 1984. These costs are being recovered over a ten-year period without a return on investment.

On April 5, 1991, the PUC approved the settlement of all appeals arising from the Limerick Unit No. 2 rate order. Under the terms of the settlement, the Company is allowed to retain for shareholders any proceeds above the average energy cost for sales of up to 399 mW of capacity and/or associated energy'. Beginning on April 1, 1994, the settlement provides for the Company to share in the benefits which result from the operation of both Limerick Unit No. 1 and Unit No. 2 through the retention of 16.5% of the energy savings. Through 1994, the Company's potential benefit from the sale of up to 399 mW of capacity/energy and the retained Limerick energy savings is limited to $106 million per year, with any excess accruing to customers.

Beginning in 199 5, in addition to retaining the first $106 million, the Company will share in any excess above $106 million with the Company's share of the excess being l 0% in 199 5, 20% in 1996 and 30% in 1997 and thereafter.

During 1 992 and 1991, the Company recorded as revenue, net of fuel costs, $ 34 million and $2 5 million, respectively, as a result of the sale of the 399 mW of capacity and/or associated energy. As a part of the settlement, the Company agreed not to file an electric base rate increase before April 1994, except as allowed by the PUC or under terms of the agreement.

This does not preclude emergency or single-issue rate filings (e.g., a substantial change in costs associated with new legislation or regulations).

The Company also agreed to consolidate previously authorized Limerick Unit No. l and Unit No. 2 phase-in plans and levelize the associated rate increases between May 1, 1991 and December 31, 1992. SINGLE-ISSUE ELECTRIC BASE RATE INCREASE FILED On September 11, 1992, the Company filed with the PUC a request for a 1.5% electric base rate increase designed to reco v er $50.2 million of costs associated with the implementation of Statement of Financial Accounting Standards (SFAS) No. 106, "Employers' counting for Postretirement Benefits Other Than Pensions," which requires that the expected costs of the benefits be charged to expense during the years employees render service, but not later than the date eligible for retirement.

This is a significant change from the Company's current policy of recognizing the costs of these benefits as they are paid. The filing was made on the basis of the single-issue rate filing exception to the base rate increase moratorium agreed to in the Limerick settlement agreement.

Under the Company's proposal, the additional revenue received from the requested rate increase would be segregated in trust funds and reserved solely for payment of pension postretirement benefits.

On October 22, 1992, the PUC El ec tric C ompa n y Phi l adelphia Electric C ompa ny and Sub1idiar y C ompaniu NOTES TO CONSOL I DATED FINANCIAL STATEMENTS C 0 N T I N U E 0

• suspended the Company's electric base rate increase request to May 10, 199 3 in order to conduct an investigation.

Non-pension postretirement benefits costs have been allowed for ratemaking on a pay-as-you-go basis. Unless the PUC permits recovery of the additional non-pension postretirement benefits costs through the ratemaking process, the Company's earnings will be ad v ersel y affected by the adoption of SF AS No. 106. LIMERICK UNIT Na. 2 DECLARATORY ORDER Pursuant to a Declaratory Order of the PUC, the Company deferred the operating and maintenance expenses, depreciation and accrued carrying charges on its capital investment in Limerick Unit No. 2 and 50% of Limerick common facilities during the period from January 8, 1990, the commercial operation date of Limerick Unit No. 2, until April 20, 1990, the effective date of the Limerick Unit No. 2 rate order. At December 3 1, 1992, such costs included in Deferred Limerick Costs totalled approximately

$91 million. Recovery of such costs deferred pursuant to the Declaratory Order will be addressed by the PUC in a subsequent electric base rate case, although such recovery is not assured. Any amounts not recovered would be charged against income. ENERGY COST ADJUSTMENT The Company is subject to a PUC-established electric ECA which, in addition to reconciling fuel costs and revenues, incorporates a nuclear performance standard which allows for financial bonuses or penalties depending on whether the Company's system nuclear capacity factor exceeds or falls below a specified range. The bonuses or penalties are based upon average system replacement energy costs. If the capacity factor is within the range of 60-70%, there is no bonus or penalty. If the capacity factor exceeds the specified range, progressive incremental bonuses are earned and, if the capacity factor falls below the specified range, progressive mental penalties are incurred.

For the year ended December 31, 1992 , the Company's nuclear capacity factor was 71 %. This resulted in the Company earning a bonus of approximately

$1 million, which is reflected in 1992 income. For the y ear ended December 31, 1991, the Company's nuclear capacity factor w as 7 5%. This entitled the Company to a bonus of appro x imately $ 5 million, which is reflected in 1991 income. For the year ended December 31, 1990, the Company neither earned a bonus nor incurred a penalty. 3. C o mmitments and Contingencies CONSTRUCTION EXPENDITURES Construction expenditures are estimated to be$ 5 9 3 million for 199 3 and $1.6 billion for 1994-1996.

For 1993-1996, the Company e x pect s that substantiall y all of its capital needs will be provided through internall y gen e rated funds. These co nstruction expenditure estimates are re v iewed and revised periodically to reflect chang es in econ o mic conditions, revised load forecasts and other appropriat e factors. Certain facilities under construction and to be constructed may require permits and licenses which the Company has no ance will be granted. The Company's operations have in the past and may in the future require substantial capital expenditures in order to comply with environmental laws. The Company expects that any capital tures to construct facilities for compliance with environmental laws and the operating costs of such facilities would be recoverable through the ratemaking process, although such recovery is not assured. PEACH BOTTOM LIT I GATION On April 2, 199 2 , the United States District Court for the District of New Jersey approved a settlement of the lawsuits filed against the Company by the other co-owners of Peach Bottom concerning the 1987 shutdown of Peach Bottom ordered by the Nuclear Regulatory Commission (NRC). As part of the settlement, the Company paid $1 3 1 million to the other co-owners on October 1, 1 99 2 and the Company recognized a charge against income ($76 million, net of taxes) in the first quarter of 1992. The settlement also resolved counterclaims asserte e Company which sought compensation from Public Servi 1c and Gas Company (PSE&G) for costs incurred by the Com y as a result of certain events at Salem, which is operated by PSE&G and 42. 59% owned by the Company. As part of the settlement, the owners are engaging in good-faith negotiations to amend the Peach Bottom and Salem owners agreements to, among other things, clarify the provisions relating to liability of the plant operator to the other co-owners. In 1990, the Company received net proceeds of $28 million ($16 million, net of taxes) in settlement of a shareholders' deri vtive suit in connection with the 1987 Peach Bottom shutdo w n. Recognition of the $28 million had been deferred pending the resolution of the co-owners' litigation.

As a result of the settlement of the co-owners' litigation, the $28 million was recognized a s other income in the first quarter of 1992 and reported as an offset against the amount of the above-mentioned charge relating to the settlement of the co-owners' litigation.

The Company had sought an additional

$9 million from one of the Company's officer liability insurance carriers related to an insurance coverage issue; but, after arbitration did not receive any additional monies. NUCLEAR INSURANCE The Price-Anderson Act,"as amended (Price-Anderson Act), sets th e limit of liability of approximately

$7 .8 billion for claims that could arise from an incident involving any licensed nuclear faci

• he nation. The limit is subject to increase to reflect the effects n and changes in the number of licensed reactors. All utilities w ith nuclear generating units, including the Compan y , ha v e o btained co v erage for these p o tential claims through a c o mbinati o n o f pri va t e Philadelphia Electric Company Philadelphia Electric Company and Suh1idiary C ompanie1 NOTES TO C ONSOL I DATED F I NANC I AL STATEMENTS

• C ONTINU E D insurances of$200 million and mandatory participation in a financial protection pool. Under the Price-Anderson Act, all nuclear reactor licensees can be assessed up to $6 3 million per reactor per incident, payable at $10 *million per reactor per incident per year. This assessment is subject to inflation and an additional surcharge of 53 if the total amount of claims and legal costs exceeds the basic assessment.

If the damages from an incident at a licensed nuclear facility exceed $7.8 billion, the President of the United States is to submit to Congress a plan for providing additional compensation to the injured parties. Congress could impose further revenue-raising measures on the nuclear industry to pay claims. The Price-Anderson Act and the extensive regulation of nuclear safety by the NRC do n ot preempt claims under state law for personal, property or puni t ive damages related to radiation hazards. The Company maintains property insurance, including tamination expense coverage and premature decommissioning coverage, for loss or damage to its nuclear facilities. Although it is not possib l e to determine the total amount of the loss that may result from an occurrence at these facilities, the Company maintains its tionate share of $2.625 billion of insurance for each station. Under the terms of the various insurance agreements, the Company could be as up to $ 3 5 million for losses incurred at any plant insured by nee companies.

The Company is self-insured to the extent osses may exceed the amount of insurance maintained.

Any such losses, if not recovered through the ratemaking process, could have a material adverse effect on the Company's financial condition. The Company is a member of an industry mutual insurance company which provides replacement power cost insurance in the event of a major outage at a nuclear station. The premium for this coverage is subject to an assessment for adverse loss experience. The Company's maximum share ofany assessment is $1 7 million per year. NUCLEAR DECOMMISSIONING AND SPENT FUEL STORAGE In conjunction with the Company's April 19, 1990 electric rate order, the PUC recognized a revised decommissioning cost estimate based upon total cost. The Company's share of this revised cost is $64 3 million expressed in 1990 dollars. Under a contract with the U.S. Department of Energy (DOE), the DOE is obligated ultimately to take possession of all spent nuclear fuel generated by the Company's nuclear units for long-term storage by no later than 1998. The contract currently requires that a spent fuel disposal fee ofone mill ($.001) per netkilowa t thour generated be paid to the DOE. The fee may be adjusted prospectively in order t o ensure full cost recovery. The DOE has stated that it will not be able to open a permanent, high-level nuclear waste storage facility until 2010, at th t. The DOE stated that the delay was a result ofits seeking bout the suitability of the proposed storage facility site at ountain, Nevada, opposition to this location for the tory and the DO E's revision of its civilian nuclear waste program. The DOE stated that it would seek legislation from Congress for the construction of a temporary storage facility which would accept spent nuclear fuel from utilities in 1998 or soon thereafter.

Although progress is being made at Yucca Mountain and several communities have expressed interest in providing a temporary storage site, the Company cannot predict when the temporary and permanent federal storage facilities will become available.

Peach Bottom and Limerick have on-site storage facilities with the capacity to store spent fuel discharged from the units through the late-l 990's and, by further modifying spent fuel storage facilities, capacity could be provided to approximately 2010. Salem has spent fuel storage capacity through 1998 for Unit No. 1 and 2002 for Uni t No. 2. PSE&G is planning expansion of the fuel storage capacity of Salem. The ational Energy Policy Act of 1992 (Energy Act) states, among other things, that utilities with nuclear reactors must pay for the decommissioning and decontamination of the DOE nuclear fuel enrichment facilities.

The total costs are estimated to be $150 million per year for 15 years, of which the Company's share is $6. 3 8 million per year. The Energy Act provides that these costs are to be recoverable in the same manner as other fuel costs. The Company has recorded the liability and a related regulatory asset of $9 5. 7 million for such cos ts a t December 31, 1992. The Company will seek recovery of those costs through the ECA. The Company believes that the ultimate costs of decommissioning, spent fuel disposal and the assessment under the Energy Act will be recoverable through rates, although such recovery is not assured. ENVIRONMENTAL CONCERNS Under federal and state environmental laws, the Company is generally liable for the costs of remediating environmental contamination of property now or formerly owned by the Company, or of property contaminated by hazardous waste generated by the Company. The Company owns or leases a substantial number of real estate parcels, including parcels on which its operations or the operations of others may have resulted in contamination of these areas by substances which are considered hazardous under the environmental laws. The Company is currently involved in a number of proceedings relating to sites where hazardous waste has been deposited and may be subject to such additional proceedings in the future. An evaluation of all Company sites for potential environmental clean-up liability is in progress, including approximately 20 sites where manufactured gas plant activities may have resulted in site contamination.

Past activities at several sites have resulted in actual site contamination.

The Company is presently engaged in performing detailed evaluations of these sites to define the nature and extent of the contamination and to determine the necessity of remediation and to identify possible remediation alternatives.

The Company has accrued the $11 million of remediation costs that currently can be reasonably estimated.

The Company cannot currently predict whether it will incur other significant liabilities for additional remediation costs at these or additional sites identified by environmental agencies or others or Philadelph i a E l ec tric C o m pa ny P hiladelphia Elec tri c Com pan y a n d Sub s idiar y Co mpa n ies OTE TO CONSOL I DATED FI ANC I AL STATEMENTS CONT I N U ED

• whether any such costs will be recoverable through rates or from third parties. OTHER LITIGAT I ON On April 11, 1991, 3 3 former employees of the Company filed an amended class action suit against the Company in the United States District Court for the Eastern District of Pennsylvania (Eastern District Court) on behalf of approximately 141 persons who retired from the Company between January and April 1990. The lawsuit, filed under the Employee Retirement Income Security Act (ERISA), alleges that the Company fraudulently and/or negligently sented or concealed facts concerning the Company's one-time Early Retirement Plan initiated in 1990 and thus induced the plaintiffs to retire or not to defer retirement immediately before the initiation of the Early Retirement Plan, thereby depriving the plaintiffs of stantial pension and salary benefits.

On June 6, 1991, the plaintiffs filed amended complaints adding additional plaintiffs.

The lawsuit names the Company, the Company's Service Annuity Plan (SAP) and two Company officers as defendants. The plaintiffs seek mately $20 million in damages representing, among other things, increased pension benefits and nine-months salary pursuant to the terms of the Early Retirement Plan, as well as punitive damages. On July 29, 1992, the Eastern District Court granted the Company's motion for summary judgment and entered judgment in favor of the Company. On August 13, 1992, the plaintiffs filed an appeal with the United States Court of Appeals for the Third Circuit (Appeals Court). The ultimate outcome of this matter is not expected to have a material adverse effec t on the Company's financial condition.

On May 2, 1991, 3 7 former employees of the Company filed an amended class action suit against the Company, the SAP and three former Company officers in the Eastern District Court on behalf of 14 7 former employees who retired from the Company from January through June 1987. The lawsuit was filed under ERISAandconcerns the August l, 1987 amendment to the SAP. The plaintiffs claim that the Company concealed or misrepresented the fact that the ment to the SAP was planned to increase retirement benefits and, as a consequence, they retired prior to the amendment to the SAP and were deprived of significant retirement benefits.

The complaint does not specify any dollar amount of damages. On July 29, 1992, the Eastern District Court granted the Company's motion for summary judgment and entered judgment in favor of the Company. On August 13, 1992, the plaintiffs filed an appeal with the Appeals Court. The ultimate outcome of this matter is not expected to have a material adverse effect on the Compan y's financial condition.

On August 4, 1992, attorneys on behalf of two shareholders filed a shareholder derivative action against several of the Compan y's present and former officers alleging mismanagement, waste of corporate assets and breach of fiduciary duty in connection with the Compan y's credit and collections practices.

The basis of the complaint is the findings and conclusions contained in the Credit and Collections section of the May 1991 PUC Management Audit Report prepared b y Ernst & Young. The plaintiffs seek, among other things, an unspecified amount of damages and the awarding to the plaintiffs of the costs and disbursements of the action, including attorneys' fees. On December 4, 1992, the Company filed nary objections asking that the action be dismissed because of the plaintiffs' failure to first serve a demand on the Company's Board of Directors.

Any monetary damages which may be recovered, net of expenses, would be paid to the Company because the lawsuit is brought derivatively by shareholders on behalf of the Company. The Company is involved in various other litigation matters, the ultimate outcomes of which, while uncertain, are not expected to have a material adverse effect on the Company's financial condition.

4. Changes in Accounting In 1990, the Company began recording operating revenues for services provided but not yet billed to more closely match revenues with expenses.

Previously, the Company recognized operating enues when services were billed. The cumulative effect of the change on the periods prior to January l, 1990, was $108 million, net of income tax effects of$2 million, or $0. 51 per share. Thee e change upon net income for 1990 was not material.

The r er of the income tax expense applicable to the aforementioned un illed operating revenues was recorded in the years reported for tax purposes in accordance with the ratemaking treatment. Also in 1990, the Company adopted an accounting policy to accrue for incremental nuclear maintenance and refueling outage costs for nuclear plants over the period of the unit operating cycle, which is approximately 18 months. Previously, the Company nized such costs as incurred during the outage period. The after-tax effect of this accounting change decreased 1990 net income by $1 7 million, or $0.08 per share, which includes the cumulative effect on periods prior to January l, 1990. 5. R etirement Benefits The Company and its subsidiaries have non-contributory trusteed retirement plans applicable to all regular employees.

The benefits are based primarily upon employees' years of service and average ings prior to retirement.

The Company's funding policy is to contribute, at a minimum, amounts sufficient to meet ERISA ments. Approximately 78%, 79% and 86% of pension costs were charged to operations in 1992, 1991 and 1990, respectively, and the remainder, associated with construction labor, to the cost of new utility plant. Pension costs were $26,042,000 in 1992, $22,340,00

.91 and $12 ,206,000 in 1990. Pension costs for 1 992, 1 991 0 Philadelphia Electric Company Phil adelph ia Electric Company and Sub1idiary Companie!

NOTES TO Co SOL I DATED FINANC I AL STATEMENTS

• C ONT I NU E D included the following components

(Thousands of Dollars) 1992 Service cost -benefits earned during the period $ 30,191 Interest cost on projected benefit obligations 129,000 Actual return on plan assets (122,869)

Amortization of transition asset (4,539) Amortization and deferral (5,741) Net pension cost $ 26,042 ...........

.. 1991 $ 23,692 121,826 (345,677)

(4,539) 227,038 $ 22,340 ............ CHANGE IN NET PERIODIC PENSION COST 1990 $ 30,365 99,554 (24,735) (4,5 39) (88,439) $ 12,206 . ........... The change in net periodic pension cost in 199 2, 1991 and 1990 was accounted for as follows: (Thousands of Dollars} 1992 1991 1990 .............

.............

..................................

.................

.... Change in number, characteristics and salary levels of participants et actuarial gain $ (840) $ 3,402 Ch plan provisions Change m actuarial assumptions et change 4,542 $ 3 , 702 1,978 4,754 $10,134 $ (3,996) 799 7,871 $ 4,674 Plan assets consist principally ofcommon stock, U.S. government obligations and other fixed-income instruments.

In determining pension costs, the assumed long-term rate of return on assets was 9.5% for 1992, 1991and1990.

The weighted-average discount rate used in determining the actuarial present value of the projected benefit obligation was 7. 7 5% at December 31, 1992 and 1991, and 8.25% at December 31, 1990. The average rate of increase in future compensation levels ranged from4.5%to6.5%atDecember 31, 1992, 1991and1990.

Prior service cost is amortized on a straight-line basis over the average remaining service period of employees expected to receive benefits under the plan. The funded status of the plan at December 3 1, 199 2 and 1991 is summarized as follows: (Thousands of Dollars} 1992 1991 ..........................................

....................................... Actuarial present value of accumulated plan benefit obligations:

Vested benefit obligations Accumulated benefit obligation Projected benefit obligation for services rendered to date Plan assets at fair value Funded status Unrecognized transition asset Unrecognized prior service costs Unrecognized net gain Pension liability

$( 1 , 315 , 292) $(1,410 , 77 7) $(1 ,7 40 , 013) 1, 7 09 , 802 (30 , 211) (58,402) 101 , 955 (183 , 8 2 0) $ (170 , 478) $(1,302,564)

$(1,388,328)

$(1,655,806) 1,649,700 (6, 106) (62,941) 108,193 (221,072)

$ (181,926)

On May 2 5, 1990, the Company's Board of Directors approved a one-time Early Retirement Plan for employees who were fifty years of age or older and had five or more years of credited service as of December 31, 1990. The estimated costs associated with the program of $249 million ($150 million, net of taxes) were nized in the third quarter of 1990. In December 1992, the Company's Board of Directors approved a Voluntary Early Retirement Program and Voluntary Separation Package for Nuclear Group employees who are fifty years of age or older and have five or more years of credited service with the Company as of March 31, 199 3. The estimated costs associated with the program of $18. 5 million ($10.8 million, net of taxes) were recognized in the fourth quarter of 1992. In addition to providing pension benefits, the Company provides certain health care and life insurance benefits for retired employees.

Substantially all of the Com parry' s employees will become eligible for these benefits if they reach retirement age while still working for the Company. These benefits and similar benefits for active employees are pro v ided by an insurance company whose premiums are based upon the benefits paid during the year. The Company recognizes the cost of providing these benefits by charging the annual insurance premiums to expense. The cost of providing these benefits for approximately 6,000 retirees during the years 1992 and 1991, and 5,200 retirees during 1990, and for approximatel y 9,800, 9,700 and I 0, 500 active employees forche same periods, respecti v ely, amounted to $ 5 6 million for 1992 and 1991 and $ 5 4 million for 1 990. Phil adelphia Electric Company Philadelphia Electr i c Company and Subsidia r y Companiu NOTES TO CONSOL I DATED F I NANC I AL STATEME T S CO NT I N U ED

• In December 1990 , th e Financial Accounting Standards Board (FASB) issued SFAS No. 106. The Company w ill adopt the sions of SF AS No. 106 in the first quarter of 199 3 and expects to amortize the transition liability over an allowed 20-y ear period. SF AS No. 106 will significantly increase non-pension postretirement benefits expense recognition.

The Company's liability under SF AS No. 106 is $572 million as of January 1 , 1993. The annual accrual for non-p ension postretirement benefits costs (including tion of the transition liability) is approximately

$89 million. The Company's comparable pay-as-you-go costs for these benefits, which are currentl y being reco ve red in base rates , were approximately

$24 million in 1992 (see note 2). 6. Accounts Receivable Accounts receivable at December 3 1, 1992 and 1991 included unbilled operating re ve nues of $111.2 million and $120. 5 million, respectivel

y. Accounts receivable at December 3 1, 1992 and 1991 were net of an allowance for uncollectible accounts of $18 million and $30 million, respectively. The Company is party to an agreement with a financial institution whereby it can sell on a dail y basis and with limited recourse an undi v ided interest in up to $ 3 2 5 million of designated accounts receivable for a five-y ear period ending January 24, 1996. At December 31, 1992 and 1991, the Company had sold a $325 million interest in accounts receivable under this agreement. The Company retains the servicing responsibility for these receivables.

The service charges for accounts receivable sold under this agreement were included as interest charges and were approximately

$15 million, $2 2 million and $18 million in 1992, 1991 and 1990, respectively.

By terms of this agreement, under certain circumstances, up to $ 3 5 million of deferred Limerick cost s could be included in the pool of eligible receivables.

At December 31, 1992, $ 30 million of such costs were included in the pool of eligible receivables.

7. Common Stock At 3 1, 1992 and 1 991, common stock without par value consISted of 500,000,000 shares authorized and 220 5 34 048 and , ' 220,030,400 shares outstanding, respectively.

At December 31, 1992, there were 5 ,800,841 shares reserved for issuance under stock purchase plans.

• The Company maintains a Long-Term Incentive Plan (L TIP) for certain full-time salaried employees of the Company. The types of long-term incentive awards which may be granted under the L TIP are non-qualified options to purchase shares of the Company's common stock, dividend equivalents and shares of restricted common stock. Pursuant to the L TIP, 2,44 5 ,8 3 3 shares of common stock were reserved for issuance.

The following table summarizes option activity during 1992, 1991 and 1990: 1992 1991 1990 i ............

i" ,656;i*44 ... i","i : 26;6*7 5* ..... 93*8;6oci Options granted 1,380,000 1,018,500 274,177 Options exercised 504,411 151,996 Options cancelled 86,000 3 3 6, 9 3 5 Balance at December 3 1 2,445,833 1,656,244 Exercisable at December 31 1 , 162,833 800,744 884,000 The options we re exercised at an average option price of $24. 7 3 per share and $21. 3 5 per share in 1992 and 1 991, respectively.

The average exercise price of shares under option are $ 2 3 .18 per share, $20. 34 per share and $21.18 per share at December 31, 1992 , 1991 and 1990, respecti vely.

• Philadelphia Electric Company P h i ladelph i a E lect ri c Company and Sub1idia r y Compan i e! OTES T O C ONSOL ID ATED F I NANC I AL STATEMENTS

• 8. Preferred and P reference Stock At December 31, 1992 and 1 991, Series Preference Stock consisted of 100,000,000 shares authorized, of which no shares were outstanding.

At December 3 1, 1992 and 1 991, cumulative Preferred Stock, no par va l ue, consisted of I 5 ,000,000 shares authorized. Current Shares Amount Redemption Outstanding (Thousands of Dollars) Price (a) 1992 1991 1992 1991 .......................................................................................

................................................................................. Series (without mandatory redemption) $10.75(b)

$9.50 $8.75 $7.85 $7.80 $7.75 $4.68 $4.40 $4.30 $3.80 $7. 96(c) Se. with mandatory redemption)(e)

$

$ $9.87 5 $9.52 $9.50 1986 Series $8. 7 5 197 8 Series $7. 32 5 $7.00 Total Preferred Stock (a) Redeemable, at the option of the Compan y , at the indicated dollar amounts per share , plus accrued di v idends. (b) The di v idend rate through April 30, 1993 is $10. 7 5 per annum, and the rate for each subsequent di v idend period, either a long-term period (1-10 years) or a short-term period (49 days), will be lished b y an auction held on the business da y next preceding the beginning of each such period. The issue is redeemable during any long-term period only on the last da y of the period or following an unsucce s sful auction, in an aggregate number which constitutes one or more units (1,000 shares), at a price of$100 per share, plus accrued and unpaid di v idends to the redemption date on the shares redeemed. (b) 500,000 500,000 $ 50,000 $ 50,000 750,000 7 5,000 650,000 65,000 $101.00 500,000 500,000 50,000 50,000 101.00 750,000 750,000 75,000 75,000 101.00 200,000 200,000 20,000 20,000 104.00 150,000 150,000 15,000 15,000 112.50 274,720 274,720 27,472 27,472 102.00 150,000 150,000 15,000 15,000 106.00 300,000 300,000 30,000 30,000 (d) 1,400,000 140,000 4,224,720 4,224,720 422,472 422,472 200,000 20,000 500,000 50,000 105.00 650,000 650,000 65 , 000 65,000 101.00 200,000 236,321 20,000 23,632 106.33 675,000 720,000 67,500 72,000 101.54 200,300 233,600 20,030 23,360 101.75 330,000 360,000 33,000 36,000 101.00 256 , 000 256,000 25,600 25,600 2,311,300 3,155,921 231,130 315,592 6,536,020 7,380,641

$65 3,602 $7 38 , 064 .............. ............. ............ . ........... On an y di v idend payment date with respect to a short-term period, units are redeemable, in w hole or in part, at the option of the Compan y at a price of $100 , 000 per unit, plus an amount equal to accrued and unpaid di v idends to the redemption date. (c) Ownership of this series of preferred stock is evidenced by depositary receipts, each representing one-fourth of a share of preferred stock. ( d) None of the shares of this series are subject to redemption prior to October 1, 1997. ( e) Sinking fund requirements

($100 per share) in the period 199 3-1997 are $2 5 ,8 80,000 annuall y. P hiladelph i a Elec t r i c Company

• Philadelphia Electric Company and Sub1idiary Companiu NOTES TO CONSOL I DATED F I A 1 CIAL STATEMENTS CONTI NU E D

• 9. Long-Term Debt (Thousands of Dollars) First and Refunding Mortgage Bonds (a) Total First and Refunding Mortgage Bonds otes Payable -Banks Revolving Credit and Term Loan Agreements Pollution Control otes Debentures Medium-Term Notes Sinking Fund Debentures

-Philadelphia Electric Power Company, a Subsidiary Unamortized Debt Discount and Premium, Net Total Long-Term Debt Due Within One Year (e) Long-Term Debt included in Capitalization (f) (a) Utility Plant is subject to the lien of the Company's mortgage. (b) The Company has entered into interest rate swap agreements to reduce the impact of changes in interest rates on certain of these notes. At December 3 1, 199 2 and 1991, the Company had ing three interest rate swap agreements with commercial banks, for a total notional principal amount of$242 million. These agreements are subject to performance by the commercial banks, which are counterparties to the interest rate swap. However, the Company does not anticipate nonperformance by the counterparties.

The annual interest rate for these notes, giving effect to the interest rate swaps, was 10.28% at December 31, 1992. ( c) The Company has a $ 5 2 5 million revolving credit and term loan agreement with a group of banks. The revolving credit arrangement converts into a term loan in November 1994. The borrowings are due in six semi-annual installments with the first payment due six months after the conversion into the term loan. Interest on outstanding borrowings is based on specific formulas selected by the Company involving yields on several types of debt instruments.

There is an annual commitment fee of0.15% on the unused amount. At ber 31, 1992 and 1991, $525 million was outstanding under this agreement.

The annual interest rate for this revolving credit agree-At December 31 Series Due 1992 1991 14% 1992 $ 11,000 6'h% -14% 1993 $ 60 , 000 71,000 4'h% -14% 1994 170 , 000 181,000 9%-10%% 1995 51,200 202,800 8V.% 1996 80,000 80,000 Mfs% -11 % 1997 75,000 27 5,000 7'h% -11 % 1998-2002 1 , 430 , 200 714,499 6% -lO V.% 2003-2007 359,437 463,500 9 1/s% 2008-2012 100 , 000 100,000 8%% -12Vs% 2013-2017 379,900 784,440 6%%-11 % 2018-2022 1,3071130 827,590 4,012,867 3,710,829 (b) 1993-1996 372 , 000 422,000 (c) 1995-1997 525,000 525,000 5'h%-13% 1997-2012 173 , 700 173,700 9.85%-11% 1993-2011 87,000 537,000 (d) 1994-2005 150 , 000 85,000 4'h% 1995 11,350 _.) (28,958) 5,302 , 959 5,438,296 98 1 998 221712 $5,203,961

$5,415,584 ............... ...............

ment was 3.84% at December 31, 1992. The Company also has a $15 0 million revolving credit and term loan agreement with .a group of banks. The revolving credit agreement converts into a term loan in July 1994 and the commitment terminates in 1996. There is an annual commitment fee of 0.2 % on the unused amount. At December 31, 1992 and 1991, no amount was outstanding under this agreement. (d) The Company has a program for the issuance of up to $200 million medium-term notes collateralized by mortgage bonds. The notes are offered from time-to-time at varying maturities and interest rates set at the time of sale. As of December 31, 1992 and 1991, respectively, the Company had outstanding

$150 million and $8 5 million under this program at an average coupon rate of 7 .61 % and 9.05%. (e) Long-term debt maturities, including mandatory sinking fund requirements, in the period 1994-1997 are as follows: 1994-$261,398,000; 199 5-$25 6, 748,000; 1996-$480, 998,000; 1997-$281,498,000. (f) Theannualizedinterestonlong-termdebtatDecember 31, 1992, was $426.7 million, of which $352.4 million was associ-ith mortgage bonds and $74.3 million was associated with o term debt. Philadelphia Electric Company Philadelphia Electric Company and Subsidiary Companies N 0 T E s T 0 c 0 N s 0 L I D A T E D F I N A N c I A L s r A r I \I I " I s CO NTIN U E D I 0. Short-Term Debt (Thousands of Dollars) Average Borrowings Average Interest Rates, Computed on Daily Basis Maximum Borrowings Outstanding Average Interest Rates at December 31 1 9 9 2 $ 50 , 161 3.723 $25 5 , 500 3.723 1991 $13,493 6.17% $81,000 1990 $ 60,344 8.85% $187,000 8.98% At December 31, 1992, the Company had formal and informal lines of credit with banks aggregating approximately

$291 million against which $110. 5 million of short-term debt was outstanding.

The Company does not have formal compensating balance arrangements with these banks. The Company has a $100 million commercial paper program and at December 31, 1992, there was no commercial paper outstanding.

11. I ncome Taxes (Thousands of Dollars) INCLUDED IN OPERATING INCOME: Federal Current Deferred Investment Tax Credit, Net State Cu Federal Current Deferred IN OTHER INCOME AND DEDUCTIONS:

Investment Tax Credit, Net State Current Deferred Income Tax Effect of Cumulative Effect of Accounting Change for Unbilled Operating Revenues TOTAL Investment tax and other general business credits reduced federal income taxes currently payable by $41 million, $71 million and $31 million in 1992, 1991and1990,respectively.

UndertheTaxReform Act of 1986, ITC was repealed effective January l, 1986 with the exception of transition property.

The Company believes that erick Unit No. 2 qualifies as transition property eligible for ITC. Approximately

$94 million of additional business credits generated from 19 86 through 1 991 have not been utilized due to limitations based on taxable income. These credits, which expire between 200 l and 2006, may be used to reduce federal income taxes in future years. Th ternal Revenue Service (IRS) has completed its examina-tion ompany's federal income tax returns through 1986. In 199 mpany recognized as income $24. 5 million, or $0.11 per share, as a result of the favorable settlement of the Company's 1984-1986 federal income tax returns. 1 992 $1 3 1 ,0 5 4 6 6 ,281 (3,495) 7 8,5 4 6 (7,9 0 3) (4 5 ,295) 20,23 7 (18,43 0) 3, 32 8 $224,323 ............

1991 $120,646 67,914 58,078 71,5 1 6 (9,209) (1,957) 16,483 (7 3 2) 2,648 $325,387 ............ 1990 $137,554 15,884 15 ,6 3 8 $ 44,347 (32,102) (23,150) (42,096) (10,146) (12,078) 601 (1,888) 92,564 . ........... For the years 1987 through 1990, the Company's tax liability was determined under the AMT method resulting in a cumulative tax credit of $176 million which can be utilized in future years when regular tax liability exceeds AMT liability. The Company uses accelerated depreciation for income tax purposes and straight-line depreciation for financial reporting poses. Deferred taxes are recorded only on those timing differences normalized for ratemaking.

The cumulative net amount of such timing differences for which deferred taxes were not recorded was approximately

$877 million at December 31, 1992. Since the pany expects to charge customers for taxes when the timing ences reverse, the tax effect of such timing differences is not recorded currently.

In February 1992, the FASB issued SFAS No. 109, "Accounting for Income Taxes," which requires an asset and liability approach for Philadelphia Electric Company P hiladelphia Electric Company and S ubs i d i ary C ompa ni es NOTES TO CONSOL I DATED F I NANC I AL STATEMENTS financial accounting and reporting for income taxes. The provisions of SF AS No. 109 may be applied cumulatively in the year of adoption or may be applied retroacti v ely by restating pre v iously issued cial statem e nt s. Adoption of SF AS No. 109 is required by the first quarter of 199 3 and is not expected to have a material effect upon the

• Company's results of operations as the Company expects to receive recovery for taxes when paid. The Company expects to adopt SFAS No. 109 in 1993 using the cumulative adoption provisions of the statement.

The Company expects that the adoption of SF AS No. 109 will increase total assets and liabilities by approximately

$1. 9 billion. Provisions for deferred income taxes consist of the tax effects of the following timing differences: (Tho usan d s of D oll a rs) Depreciation and Amorti z ation Deferred Energy Costs Precommercial Operation of Limerick Unit No. 2 Deferred Limerick Unit No. 2 Costs Early Retirement Plan Incremental Nuclear Maintenance and Refueling Outage Costs Uncollectible Accounts Reacquired Debt U nrecovered Revenue Alternative Minimum Ta x Limerick Plant Disallowances and Phase-In Plan Other TOTAL 1992 $ 93,469 (18,033) 1,865 (1,627) (2,629) 39,123 (56,050) 15 , 118 10,707 $ 81,943 .............

1991 $ 89,760 (19,916) 16,024 (5 ,629) (7,7 50) 18,688 (43,983) 6,3 31 16,634 7,677 The total income tax provisions differed from amounts computed b y appl y ing the federal statutory tax rate to income and adjusted inc income ta x es as shown below: (Tho usands of D ollars) et Income Total Income Tax Provisions Income Before Income Taxes Deduct: Allowance for Funds Used During Construction Limerick Carrying Charges AoJUSTEO INCOME BEFORE INCOME TAXES Income Ta x es on Adjusted Income at Federal Statutory Rate of 34% Increase (Decrease) due to: Depreciation Timing Differences N ot Normali z ed Limerick Plant Disallowances and Phase-In Plan Cumulative Effect of Accounting Change for Unbilled Operating Revenu e s Unbilled Re v enues Not Normali z ed State Income Ta x es, Net of Federal Income Ta x Benefits Amorti za tion ofln v e s tment Ta x Credit s Prior Period Income Ta x Settlement s Other, Net TOTAL INCOME TAX PROVISIONS Provisions for Income Ta x es as a Percent of: Income B efo re Income T ax e s A djust e d Inc o me Before Incom e T ax e s Philadelphia Electric Company 1992 1991 $478,941 $534,680 224,323 325,387 703,264 860,067 20,663 23,084 $682,601 $836,983 ............. ............ $232,084 $284,574 10,427 1 5 ,258 2,159 3,490 (5,766) 5,620 36,657 42,387 (24,624) (17,030) (20,65 5) (13,227) (5,959) 4,315 $224,323 $325,387 ............. . ........... 31.9% 37.8% 32.9% 38.9% ************

• ............ 1990 $119,943 (13,761) (1,221) 8,547 (83,588) 1 (1 1,5 74): (15,813) I (4,526) I (24,939) (20,478) (7,283) (3 ,020)

_3) ore 1990 $2 14,190 92,564 306,754 55,335 80,325 $17 1,094 $ 58,172 20,647 69,284 (37,910) 8,769 507 (20, 3 20) (9, 124) 2,5 39 I ,564 I I .2% I 54.1 %

Ph iladelph ia El ec t ric Company and Sub1id i ary Compan i eJ NOTES TO CONSOL I DATED FI NANC I AL STATEMENTS C O NTIN U ED 12. Taxes, Other Than I ncome-Operating (Thousand s of Dollar s) 1992 1991 1990 .......................................................................

...............

...........................................................................

....... Gross Receipts $158,314 $158,719 $148,274 Capital Stock 28,013 34,924 21,817 Real Estate 63,593 43,023 33,632 Payroll 29,410 31,439 30,854 Other 2,538 6,456 4,275 TOTAL $281 , 868 $274,56[ $238,852 Leased property included in Utility Plant at December 3 l (Thousand s of Dollars) Nuclear Fuel Electric Plant Gross Leased Property Accumulated Amortization et Leased Property I 3. Leases 1992 $471,276 2,234 473,510 (263,516)

$209,994 ............ 1991 $4 7 9,771 2,271 482,042 (258,293) $223,749 ************ T fuel obligation is amortized as the fuel is consumed.

Amortization of leased property totaled $ 5 4.6 million, $ 5 9 .4 million and $ 70. 1 million for ended December 31, 1992, 1991 and 1990, respectively.

Other operating expenses included interest on capital lease obligations of $7 .1 million, $9. 9 million and $15. 7 million in 1 992, 1991 and 1990, respecti v ely. Minimum future lea s e pa y ments as of December 3 1, 1992 were as follows: Year Ending December 3 1 (Thousands of Dollars} 1993 1994 1995 1996 1997 Remaining Years Total Minimum Future Lease Pa y ments Imputed Interest (rates ranging from 6.5% to 17.0%) Present Value of Net Minimum Future Lease Payments Capital Leases Operating Leases $ 68,05 3 $ 93,885 65,852 92,934 60,322 91,832 40,835 55,569 92 54,661 1,272 629,589 236,426 $1,01 8 ,470 ................ (26,432) $209,994 ..............

Total $ 161,938 158,786 152,154 96,404 54,753 6 3 0,861 $1,254,896

................ Rental expense under operating leases totaled $9 3 .8 million, $88.6 million and $8 7. 5 million in 1992, 1991 and 1990, respectivel

y. P h i ladelphia E lec t ric Company Philadelphia Ele ctric Company and Subsidiary Compan i es NOTES TO CONSOL ID ATE D FI NANC I A L S TA TEM EN T S CONTINU E D 1-f.. J ointly Owned Electric Utility P lant The Company's ownership interests in jointly owned electric utility plant at December 31, 1992 were as follows: Production Plants Peach Bottom Salem Keystone Conemaugh Operator Philadelphia Public Service Pennsylvania Pennsylvania Electric Electric and Electric Electric ComEany Gas ComEany ComEany ComEany Participating Interest 42.49% 42.59%

20.99% 20.72% Company's share of (Thousands of Dollars) Utility Plant $694,65 3 $1,100,546

$84,793 $85,382 Accumulated Depreciation 233,409 331,320 39,937 40,297 Construction Work In Progress 16,959 49,476 5,396 25,7 57 Transmission and Other Plant Various Companies 21%to43% $87,135 25,029 1,068 The Company's participating interests are financed with Company funds and, when placed in service, all operations are accounted for as if such participating interests were wholly owned facilities.

1 5. Segment I nformation (Thousands of Dollars) 1992 1991 1990 ELECTRIC OPERATIONS Operating Revenues $ 3,597,141

$ 3,662,573

$ 3,401,644 Operating Expenses, excluding Depreciation 2,236,907 2,253,159 2,325,25 5 Depreciation 390,846 379,607 337,715 Operating Income $ 969,388 $ 1,029,807

$ 738,674 Utility Plant Additions

$ 461,407 $ 422,780 $ 430,179 ................ . ...............

• • • • • • • • • • • • • • • • GA s OPERATIONS Operating Revenues $ 365,328 $ 356,013 $ 385,029 Operating Expenses, excluding Depreciation 278,407 283,665 336,164 Depreciation 22,933 20,965 19,825 Operating Income $ 63,988 $ 51,383 $ 29,040 Utility Plant Additions

$ 74,858 $ 55,098 $ 51,07 3 ................ . ............... **************** Identifiable Assets* Electric $10,393,449

$10,213,296

$10,510,639 Gas 658,825 590,151 542,917 Nonallocable Assets 1,525,953 1,720,013 1,512,395 TOTAL ASSETS $12,578,227

$12,523,460

$12,565,951

................ . ............... *Includes Utility Plant less accumulated depreciation, inventorie s.and allocated common utility property.

Philadelphia Electric Company Ph i lad e lphia E le c t ric C o m pa ny and Sub s idiar y Co m pa n i es NOTES TO CO SOLIDATED FI ANCIAL STATEMENTS CONTINUED

16. Cash and Cash Equivalents For purposes of the Statements of Cash Flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.

The following disclosures are supplementary to the accompanying Statements of Cash Flows: (Thou s ands of Dollars) Cash Paid During the Year: Interest (net of amount capitalized) Income taxes (net of refunds) oncash Investing and Financing:

Capital Lease Obligations Incurred 1992 $515,696 224,3 52 40,757 1991 $5 51,944 193,340 41,905 1990 $597,603 97 ,621 30,845 17. Investments (Thou s a n d s Dollars) Trusts and Escrow Accounts for Decommissioning Nuclear Plants Real Estate Developments and Other Ventures No "lity Property G ration and Development

] oint Ventures Ot TOTAL 18. Financial Instruments December 31 1992 1991 $125,703 48,273 23,141 5,026 279 $202,422 $ 98,693 41,076 23,763 5,842 279 $169,653 In December 1991, the FASB issued SFAS No. 107, "Disclosure About Fair Value of Financial Instruments," effective for the Company for the year ended December 3 1, 199 2. SF AS No. 107 requires additional disclosure about the fair value of financial instruments, including liabilities, for which it is practicable to estimate fair v alue. Fair v alues are estimated based on quoted market prices for the same or similar issues. The carrying amounts and fair values of the Company's financial instruments as of December 3 l, 199 2 are as follows: (Tho u san d s o f Dollar s) Cash and temporary cash investments Long-term debt (including amounts due within one y ear) Trusts and Escrow Accounts for Decommissioning Nuclear Plants Financial instruments which potentiall y subject the Company to concentrations of credit risk consist principally o f temporary cash m v ts and customer accounts recei v able. The Compan y places its ry cash in v estments with high credit, quality fmancial ns. At times, such in v estments ma y be in e x cess of the Carrying Amount $ 50,369 5,302,959 125,703 Fair Value $ 50,369 5,546,896 131,138 Federal Depository Insurance Corporation limit. Concentrations of credit risk with respect to customer accounts receivable are limited due to the Company's larg e number of customers and their dispersion acr o s s man y industries.

Ph iladelphia E l ectric Company

• Philadelphia Electric Company and Sub1idiary Companiu NOTES TO CONSOL ID ATE D FI NANC I AL S TATEME TS CONT I NUED ** 19. Q uarterly Data (Unaudited)

The data shown below include all adjustments which the Company considers necessary for a fair presentation of such amounts. Operating Revenues Operating Income Net Income Quarter Ended 1992 1991 1992 1991 1992 1991 March 31 June 30 September 3 0 December 31 Quarter Ended March 31 June 30 September 3 0 December 31 $1,079,890 903,245 996,138 983,196 $1,008,325 964,137 1,077,526 968,598 Earnings Applicable to Common Stock 1992 1991 (Thousands of Dollars) $ 72,013 $127,044 78,207 108,512 128,754 157,014 139,236 76,006 1991 operating revenues have been reclassified to reflect the adoption of AR-14 (see note 1 ). 1992 firs't quarter results included a net charge of approximately

$103 million ($60 million, net of taxes), or $0.27 per share, as a result of the settlement of the litigation concerning the 1987 shutdown of (Thou1ands of Dollars) $2 74,580 $286,871 222,426 262,893 268,699 312,162 267 , 671 219,264 Average Shares Outstanding 1992 1991 (Thousands) 220,068 217,014 220,170 217,812 220,327 218,611 220,411 219,467 Peach Bottom (see note 3). $ 88,401 94 , 325 142,338 153 , 877 $143,846 125,038 173,402 92,394 Earnings Per Average Share 1992 1991 (Dollars)

$0.33 $0.58 0.35 0.50 0.59 0.72 0.63 0.35 1992 fourth quarter results included a net benefit of$24 or $0.11 per share, as a result of the settlement of the 1984-1986 federal income tax returns. n, 's Philadelphia Electric Company P hi l a d elp hia Elect ri c Com p any a nd Subsidiary Companies REPORT OF" INOEPENOENT ACCOUNTANTS T o the Shareholders and Board of Directors Philadelphia Electric Compan y: We have audited the accompanying consolidated balance sheets of Philadelphia Electric Company and Subsidiary Companies as of December 3 1, 199 2 and 1991, and the related consolidated statements of income, cash flows, and changes in common shareholders

' equity and preferred stock for each of the three years in the period ended December 31, 1992. These financial statements are the responsibility of the Companies' management.

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

An audit includes examining, on a test basis, e v idence supporting the amounts and disclosures in the financial statements.

An audit also includes assessing the accounting principles used and significant estimates made b y management, as well as evaluating the o v erall financial statement presentation.

We believe that our audit s provide a r e asonable basi s for our opinion. In our o pinion , the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Philadelphia Electric Company and Subsidiary Companies as of December 3 1, 199 2 and 1991, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1992, in conformity with generally accepted acc o unting principles. As discussed in Note 4 to the consolidated financial statements, the Company changed its methods of accounting forunbilled operating re v enues an-cremental nuclear maintenance and refueling outage costs in 1990. 24-enPennCenter T Philadelphia, Penns y l v ania F e brua ry 1 , 199 3 S 3 0 2 5 20 I 1 5 I 0 BB COMMON STOCK PRICE VS. BOOK VALUE D o llars P er Share .1. *1* .. B9 90 9, 92 Hi g h C lo s i ng P r i ce I L o w Book Value 15% I 0 a t Year-End 0 P hiladelphia Electric Company

• RETURN ON AVERAGE COMMON STOCK EQUITY P ercen t BB B9 90 9, 92 Philad tlphia Elec tric Company and Sub1idiary Companie1 F I NANC I AL S TATIST I CS

SUMMARY

OF" EARNINGS ANO FINANCIAL CONDITION (Million1 of Do/Ian)

• For the Year Ended 1992 1991 1990 1989 1988 1987 *************

• • • • • • • • • Operating Revenues $ 3,962.5 $ 4,018.6 $ 3,786.7 $ 3,473.8 $ 3,246.3 $ 3,213.0 Operating Income 1 , 033.4 1,081.2 767.7 809.3 742.6 717.1 Income from Continuing Operations 478.9 534.7 105.8 590.5 566.0 540.6 Net Income 478.9 534.7 214.2 590.5 566.0 542.4 Earnings Applicable to Common Stock 418.2 468.6 123.9 493.9 468.8 448.2 Earnings Per Average Common Share From Continuing Operations (Dollars) 1.90 2.15 0.07 2.36 2.33 2.33 Earnings Per Average Common Share (Dollars) 1.90 2.15 0.58 2.36 2.3 3 2.33 Dividends Per Common Share (Dollars) 1.325 1.225 1.45 2.20 2.20 2.20 Common Stock Equity (Per Share) 18.24 17.69 16.71 17.67 17.39 17.20 Average Shares of Common Stock Outstanding (Millions) 220.2 218.2 214.4 208.9 201.5 192.5 .................

.......................................................................................................................................................... At December 31 Net Utility Plant, at Original Cost Leased Property, Net Total Current Assets Total Deferred Debits and Other Assets Total Assets Common Shareholders' Equity Preferred and Preference Stock Without Mandatory Redemption With Mandatory Redemption Long-Term Debt Total Capitalization Total Current Liabilities Total Deferred Credits and Other Liabilities Total Capitalization and Liabilities ELECTRIC SALES Billion Kilo watt ho ur1 40 ............

...... . 3 D *** 20 ... ID *** BB B9 90 91 92 $10,691.2 210.0 550.0 1 , 127 .0 $12 , 578.2 .............

$ 4,022.2 422.5 231.1 5,203.9 9,879.7 830.6 1 , 867.9 $12,578.2 .............

Sain to Othtr Utilitie1

$10,598.4 223.8 783.2 918.1 $12,523.5 . ........... $ 3,892. 3 422.5 315.6 5,415.6 10,046.0 823.4 1,654.1 $12,523.5 . ............ $10,591.3

$10,720.8

$10,048.5 241.3 273.5 287.5 745.0 655.0 502.5 938.6 972.8 953.9 $12,516.2 $12,622.l $11,792.4 . ............ . ........... . ...........

$ 3,624.5 $ 3,744.8 $ 3,592.6 422.5 622.4 622.4 330.9 3 51.l 368.1 5,830.8 5,762.7 5,219.5 10,208.7 10,481.0 9,802.6 783.8 790.5 662.4 1,523.7 1,350.6 1,327.4 $12,516.2

$12,622.1

$11,792.4

............. . ............

.............

GAS SALES & TRANSPORTED GAS Billion1 of Cubic Feet ID D ******.****

• • .*.******* BO SD 40 20 BB 89 90 91 92 Philadelphia Eltctric Company $ 9,471.8 287.2 650.3 791.5 $11,200.8 . ............

.9 389.1 4,870.7 9,219.2 7 51.8 1,229.8 $11,200.8 . ............

Philadelphia Electric Company and Sub1idiary Companie1 OP E R A TI NG S TA TI ST I CS RIC OPERATIONS o u T Pu T (Millions of Kilowatthours)

Fossil uclear Hydro Pumped Storage Output Pumped Storage Input Purchase and Interchange Internal Combustion Other TOTAL ELECTRIC OUTPUT s ALE s (Millions of Kilowatthours)

Residential Small Commercial and Industrial Large Commercial and Industrial Other Service Territory Interchange Sales Sales to Other Utilities N R TOTAL ELECTRIC SALES .R OF CUSTOMERS, DECEMBER 31 Sma ommercial and Industrial Large Commercial and Industrial Other TOTAL ELECTRIC CUSTOMERS OPERATING REVENUES (MillionsofDollars)

Residential Small Commercial and Industrial Large Commercial and Industrial Other Service Territory Interchange Sales Sales to Other Utilities

$ 1992 8,082 24,428 1,803 1,597 (2,217) 8,675 29 42,397 9,894 5,367 15,770 962 31,993 1,231 6,699 39,923 1,333,926 141,253 3,972 857 1,480,008 1,304.5 $ 669.8 1,223.2 168.0 3,365.5 32.l 199.5 1991 7,376 25,735 1,388 1,65 3 (2,35 5) 8,603 79 42,479 10, 311 5,284 16,177 1,029 32,801 1,612 5,445 39,858 1,324,795 140,901 4,162 840 1,470,698 1,342.3 $ 641.0 1,278.9 170.4 3,432.6 42.8 187.2 1990 7,913 23,715 2,266 1,437 (2,059) 5,787 152 180 39,391 9,815 5,066 16,554 1,010 32,445 2,7 51 1,865 37,061 1,320,126 140,305 4,344 817 1,465,592 1,229.8 $ 595.2 1,247.1 166.9 3,239.0 81.5 81.1 1989 10,470 12,890 1,743 1,354 (1,937) 11,192 348 1,063 37,123 9,974 4,921 16,749 1,031 32,67 5 2,027 34,702 1,309,717 138,244 4,449 775 1,453,185 1,157.0 $ 5 3 7 .1 1,182.0 1 43.9 3,020.0 68.2 1988 1 0,225 12,328 1,307 1,515 (2,163) 11,802 285 35,299 10,058 4,666 16,516 999 32,239 435 32,674 1,296,784 13 5,274 4,520 779 1,437,357 1,127.8 $ 489.4 1,089.3 143.8 2,850.3 17.6 1987 9,835 11,8 5 3 1,590 1,25 1 (1,787) 10,428 232 33,402 9,441 4,341 15,789 974 30,545 622 31,167 1,280,297 131,279 4,589 771 1,416,936 1,092.6 471.7 1,103.3 142.l 2,809.7 31.5 TOTAL ELECTRIC REVENUES $ 3,597.l $ 3,662.6 $ 3,401.6 $ 3,088.2 $ 2,867.9 $ 2,841.2 0 PE RATING EXPENSES (Millionsof D o/l ars) Operating Expenses, excluding Depreciation Depreciation TOTAL OPERATING EXPENSES $ 2,236.9 $ 2,253.2 $ 2,325.2 $ 2,077.4 $ 390.8 379.6 337.7 257.4 ----1,931.3 $ 245.5 1,926.6 234.9 $ 2,627.7 $ 2,632.8 $ 2,662.9 $ 2,334.8 $ 2,176.8 $ 2,161.5 E LE CTR I c 0 PE RATING IN c 0 ME (Millions of Dollars) ...... .. ...

.. .....

.. ? .....

.. .....

... 1. ...... ??.?:?. Average Use per Residential Customer (kilowatthours)

El N Without Electric Heating With Electric Heating Total eak Load, Demand (thousands of kilowatts) ic Generating Capacity -Year-End Summer Rating (thousands of kilowatts)

Cost of Fuel per Million Btu Btu per et Kilowatthour Generated 6,259 16,288 7,443 6,617 8,766 $0.82 10,657 6,707 16,201 7,801 7,096 8,766 $0.92 10,849 Philadelphia Electric Company

• 6 ,37 6 16,038 7,464 6,7 55 8,766 $1.13 10,844 6,488 17 ,250 7,655 6,467 7,759 $1.37 10,894 6,667 17,738 7,807 6,826 7,762 $1.19 10,881 6,431 16,824 7,427 6,547 7,762 $1.35 10,879 Philadelphia E lectr i c Company and S ub s idiar y Co mpan ie s 0 PE R AT I G S TAT I ST I CS GAS OPERATIONS s ALE s (Millions of Cubic Feet) Residential House Heating Commercial and Industrial Other TO T AL GAS SALES Gas Transported for Customers TOTAL GAS SALES & TRANSPORTED NUMBER OF CUSTOMERS, DECEMBER 3 1 Residential House Heating Commercial and Industrial TOTAL GAS CUSTOMERS OPERATING REVENUES (Mi!lionsofDollars)

Residential House Heating Commercial and Industrial Other Subtotal Other Revenues (including Transported for Customers)

TOTAL GAS REVENUES 0 PE RATING E XPE N s ES (MiflionsofDoflars)

Operating E x penses, e x cluding Depreciation Depreciation TOTAL OPERATING EXPENSES GAS OPERATING INCOME (MillionsofDollars)

SECURITIES STATISTICS Ratings on Philadelphia Electric Compan y's Securities 1992 1,819 29,750 21,497 618 53,684 23,588 77,272 59,859 269,577 30,956 360,392 $ 16.4 201.9 121.1 2.0 $341.4 23.9 $365.3 $278.4 22.9 $301.3 $ 64.0 1991 1,746 26,423 20,492 534 49,195 21,414 70,609 62,444 260,473 30,204 353,121 $ 17.0 192.4 123.6 2.2 $3 3 5 .2 20.8 $356.0 $283.7 21.0 $304.7 $ 51.3 1990 1,778 25,303 23,228 1,567 51,876 24,413 76,289 63,267 254,564 29,456 347,287 $ 18.1 200.8 144.7 5.6 $369.2 15.8 $385.0 $3 36.2 19.8 $356.0 $ 29.0 1989 1,951 28,301 30,038 2,344 62,634 18,033 80,667 65,544 246,273 28,369 340,186 $ 18.0 195.8 152.5 7.3 $373.6 12.1 $385.7 $310.2 19.6 $329.8 $ 55.9 1988 1,933 28, 112 39,073 2,228 71,346 9,272 80,618 66,599 239,022 27,119 332,740 $ 17.0 180.6 165.1 6.6 $369.3 9.1 $378.4 $308.3 18.6 $326.9 $ 51.5 1987 1,854 26,010 38,170 1,541 67 ,57 5 7,374 74,949 67,688 231,618 26,021 325,327 $ 16.7 17 5.7 167.5 4.4 64.3 .5 .8 $317.4 17.0 $334.4 $ 37.4 Mortgage Bonds Rating Date Established Debentures Preferred Stock Agency Rating Date Established Rating Date Established Duff and Phelps, Inc. BBB+ 4/92 BBB 4/92 BBB-8/91 Fitch Investors Service, Inc. A-9/92 BBB+ 9/92 BBB+ 9/92 Moody's Investors Service Baal 4/92 Baa2 4/92 baa2 4/92 Standard & Poor's Corporation BBB+ 4/92 BBB 4/92 BBB 4/92 NYSE-COMPOSITE COMMON STOCK PR I CES, EARNINGS AND DIVIDENDS BY "1UARTER (PER SHARE) 1992 1991 Fourth Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter High Price $26-3/4 $26-3/4 $26-5/8 $26 $26 $22-7/8 $21 1 8 Low Price $25 $25 $23-5/8 $22-5/8 $22-1/8 $19-7 /8 $19-1/2 /2 Close $26-118 $26-3/8 $26-3/8 $24-5/8 $25-7/8 $22-5/8 $20-1/8 Earnings 63¢ 59¢ 35¢ 33¢ 3 5<!: 72¢ 50¢ 58¢ Di v idends 35¢ 32.5¢ 32.5¢ 32.5¢ 3 2. 5<!: 30¢ 30¢ 30¢ Philadelphia Electric Company

• Philadelphia Electric Company and Sub1idiary Compa11ie1

• JOSEPH F. PAQUETTE, JR. (SB) Chairman and Chief Executive Officer CORBIN A. MCNEILL, JR. (53) President and Chief Operating Officer WILLIAM L. BARDEEN (54) Senior Vice President, Finance and Chief Financial Officer JAMES W. DURHAM (55) Senior Vice President and General Counsel WILLIAM J. KASCHUB (50) Senior Vice President, Human Resources GWENDOLYN S. KING (52) Senior Vice President , Corporate and Public Affairs DICKINSON M. SMITH (59) Senior Vice President, Nuclear O FF I CE R S DAVID R. HELWIG (41) Vice President, Limerick Generating Station THOMAS P. HILL, JR. (44) Vice President and Controller KENNETH G. LAWRENCE (45) Vice President, Gas Operations JOHN M. MADARA, JR. (49) Vice President, Production ALBERT G. MIKALAUSKAS (56) Vice President, Customer and Marketing Services DONALD B. MILLER, JR. (5 1) Vice President, Peach Bottom Atomic Power Station GERALD R. RAINEY (43) Vice President, Nuclear Services MORTON W. RIMERMAN (63) Vice President, Finance and Treasurer WILLIAM H. SMITH , Ill (44) Vice President, Planning and Performance MANAGEMENT CHANGES ALBERT J. SOLECKI (521 Vice President, Information Systems and General Services ALVIN J. WEIGAND (541 Vice President, Transmission and Distribution Services LUCY S. BINDER (55) Secretary J. BARRY MITCHELL (45) Assistant Treasurer and Director of Financial Operations JAMES F. HOHENSTEIN (49) Assistant Treasurer M. DOROTHY LYONS (5 1) Assistant Secretary TODD D. CUTLER (32) Assistant Secretary William L. Bardeen was elected Senior Vice President, Finance and Chief Financial Officer, effective February 18, 1992. Gerald R. Raine y was elected Vice President, Nuclear Services, effective July 20, 1992. Raymond F. Holman retired as Senior Vice President, Planning and Performance, effective May 1, 1992. William H. Smith, III, was elected Vice President, Planning and Performance, effective May 1, 1992. Nicholas DeBenedictis resigned as Senior Vice President, Corporate and Public Affairs, effective June 30, 1992. David R. Helwig was elected Vice President, Limerick Generating Station, effective July 20, 1992. Todd D. Cutler was elected Assistant Secretary, effective July 27, 1992. Graham M. Leitch retired as Vice President, Limerick Generating Station, effective August 1, 1992. Gwendolyn S. King was elected Senior Vice President, Corporate and Public Affairs, effective October 1, 1992. Philadelphia Electric Co111pany Ph iladtlphia E l e c tri c C o m p any a n d Su b s i d i ary Com pa nies SUSAN W, CATHERWOOD (49) Chairman , Trustee Board, The University of Pennsylvania Medical Center M. WALTER D'ALESSIO (59) President and Chief Executive Officer, Latimer & Buck, Inc. (Mortgage banking and real estate development)

RICHARD G. GILMORE* (65) Former Senior Vice President, Finance and Chief Financial Officer of the Company RICHARD H. GLANTON , ESQU I RE (46) Partner of the law firm Reed Smith Shaw &McClay

• M e mber of Execu ti ve C o mmi tt ee BOARD OF D IRECTO R S JAMES A. HAGEN* (60) Chairman, President and Chief Executive Officer, Consolidated Rail Corporation NELSON G. HARRIS (66) Chairman of the Executi v e Committee, Tasty Baking Company ROBERT 0. HARRISON (69) Management and marketing consultant JOSEPH C::. LADD (66) Former Chairman, The Fidelity Mutual Life Insurance Company EDITHE J. LEVIT, M.O.* (66) President Emeritus and Life Member of the Board, National Board of Medical Examiners ADMIRAL KINNA I RD R. MCKEE* (63) Director Emeritus, U.S. Navy Nuclear Propulsion Philadelphia Ele c tric Company JOSEPH J, MCLAUGHLIN

• (64) President and Chief Executive Officer, Beneficial Mutual Savings Bank C::ORBIN A. MCNEILL, JR. (53) President and Chief Operating Officer of the Compan y JOHN M. PALMS , PHO. (57) President, University of South Carolina JOSEPH F. PAQUETTE , JR.* (58 Chairman and Chief Executive Officer of the Company RONALD RUBIN (6 1) General Partner, Richard I. Rubin & Co. (Real estate development and management)

Philadelphia Jlettr1t" {,1Jmpt11!)

1111il \uhrid i ar) <.o mpafli t>* * !\lost Company securities arc listed on the !'\cw \' ork Stock change and the Philadelphia Srock Exchange.

Philadelphia Elccffic Power Company Dcbemurcs arc listed on the Philadelphia Stock Exchange.

The Company has paid di\*idends on ics common stock since 1902. The Board of Directors normally considers common scock dividends for paymem in lvlarch, J unc, September and December.

The Company estimates that the $1. 3 2 5 per share dividend paid co common shareholders in 1992 is fully taxable as di\*idcnd income for federal income tax purposes.

Shareholders may use their di\*idends to purchase additional shares of common stock through the Company's Di1*idend Rein-1 cstmem and Stock Purchase Plan (Plan). The Company pays all brokerage and service fees for Plan purchases.

,\II shareholders ha\*e the opportunity w im*est additional Cunds in common stock of the Company, whether or nor ha1*e their di 1*idcnds reinvesced-also with all purchasing fees borne by d1e Company. In I 992, 01*er 48% of the Company's common shareholders

• ticipants in the Plan. Information concerning the Plan may nee! from: First Chicago Trust Company of New York, P.O. Box 3 506, Church Street Station, l'\ew York, NY 10008-3 506. The Company is always pleased to answer questions and prOl*ide information.

Please address your comments tO Mrs. L. S. Binder, Sccrctar), Philadelphia Electric Company, 2 30 I l1arket Street, P.O. Box 8699, Philadelphia, PA 19 l 0 I. Inquiries relating w shareholder accounting records, stock fer and change of address should be directed to: First Chicago Trust Company of "New York, P.O. Box 398 l, Church Street Station, New York, l'\Y 10008-3981.

Toll-free telephone lines arc arnilablc to the Company's shareholders for inquiries concerning their stock Oll'ncrship.

Calls should be made to 1-800-626-8729.

The ,\nnual t\leeting of Shareholders oC th<.: Com pan) ll'ill be held on ,\pril 14, 199 3. The record date for rnting at the shareholders' meeting is February 24, 199 3. Notice of the meeting, proxy ment and pro.\y '"ill be mailed under separate co1*er. Prompt return o.,;,, w;IJ be Form 0-K, the annual report filed with the Securities and Exchange Commission, is available, without charge, to s hholders upon written request to Philadelphia Electric Compa n y, 2301 Market Street, P.O. Box 8699, Philadelphia, PA 1910 1 , Attent i on: Financial Division, S2 1-1. The Company had 2 30, 748 common swck shareholders of record as of December 3 l, 1992. P1111 .\DJ JPJ JL\ El.Et 11m -Preferred and Common Stocks Registrar

& Transfer Agent: First Chicago Trust Company of"Ncw York 30 \V. Broadway, NY, NY I 0007 P1JJL\DELPJ11A ELECTRIC \ -First and Refunding Mortgage Bonds Trustee: Fidelity Bank, National ,\ssociation Corporate Trust Operations Broad & \ \' aJnut Sts., Phi la., PA 19109 :\e11 \' ork . \gent:

Guaranty Trust Co. of NY Corporate Trust Department 30 \V. Broadway, NY, NY I 0007 P1111 .\DFLPJ JJA ELECTRIC Cm1P ,\:-\Y-Debentures P1 JJL\DJ LPJ IL\ ELEC m1c Pmn R (.\ Subsidiary)-Debentures Trustee: CoreStates Bank, N.A. Corporate Trust Department P.O. Box 7907 Philadelphia, PA I 9101-7907 l'\ew York , \gent: t\larine Midland Bank Corporate Trust Departmem 140 Broadway Operations Le1*e! A :\Y, l 00 I 5 2301 ;\larket Street, P.O. Box 8699, Philadelphia, PA 19101; (215) 841-4000.

I n July l 992, the Company surveyed a random sample of 2,500 common smck shareholders to c1*aluate the Company's

,\nnual Report. They gave their opinions on all aspects of the report, including their clear preference for a standard report with phy instead of a plain report 11 ithout They expressed a desire to use more recycled paper, ll"hich we ha1*e done with this report (I 00% recycled).

The length of the report was judged to be satisfactory. 0\*er 773 of the respondcms

\"iewed the 199 L report as "ab01*e <ll'erage" or "outstanding."\.

\' e wish to extend our tion to all of the shareholders ll'ho panicipated in the sun*ey.

I