~m4 Pennsylvania Power & Light CompanyTwo North Ninth Street ~ Allentown, PA 18101 ~ 215/7706151

Harold W. KeiserVice President-Nuclear Operations21 5/770-7502

MAR 30 1988

Dr. Thomas E. MurleyOffice of Nuclear Reactor RegulationU.S. Nuclear Regulatory CommissionWashington, D.C. 20555

SUSQUEHANNA STEAM ELECTRIC STATIONANNUAL FINANCIAL REPORTPLA-3009 FILE R41-2A

Docket Nos. 50-38750-388

Dear Dr. Murley:

In accordance with lOCFR50.71(b), enclosed is the 1987 annual report forPennsylvania Power 6 Light Co. The annual report for Allegheny ElectricCooperative, Inc., will be forwarded later.

Very truly yours,

H. W. KeiserVice President-Nuclear Operations

Attachment

cc: NRC Document Control Deck (original)NRC Region lMr. F. I. Young — NRC Sr. Resident InspectorMr. M. C. Thadani — NRC Project Manager

7 OVERPP8,L residential consultant Carol

Seitzinger illustrates a distinguishing featureof the company's marketing programs—personal contact. Because of Carol's marketingefforts, the Robert Gownley family ofFrackvilie in Schuylkill County, reconsideredtheir decision to install an oil hot-air heatingsystem in their new home and instead choseto go all-electric with a hydronic thermalstorage Heat Pump Plus system for theirheating and cooling needs. Mr. Gownley,pictured with daughter Colleen, is so pteasedwith the system and his reasonable servicebills, that three additional homeowners havecommitted to the Heat Pump Plus systembased on his testimonial. Electric heat was notthe first choice for the Gownley family —theyhad to be sold the benefits of electricitythrough personal contact with a PP8,L

marketing representative. The personal touchis what has made the company successful Inthe past and what will help PP8L continue tohold its competitive edge in the future. Thepersonal touch builds credibility with PP8,L's

customers. If it's a residence, companyconsultants talk with the homeowner, if it's abusiness or industry, PP8,L's marketingrepresentatives seek out the decision-makers,be they owners, officers, architects orengineers. Personal contact builds trust forPP&L —one customer at a time. In the long-run that is the company's competitive edge—enthusiastic people who know theirproduct applications, and know how to makeelectricity work to provide gains inproductivity, a better lifestyle, a safer energyalternative or a cost-benefit advantage.Pictured on pages 4 through 17 are additionalMarketing 8 Economtc DevelopmentDepartment employees who arerepresentative of the more than 275 peoplewho are PP&L's marketing lifebloodthroughout the company's10,000-square-miteservice territory.

ONTENTS

HighlightsChairman's LetterYear In ReviewFinancial RevtewFinancial StatementsNotes to Financial StatementsSelected Financial and

Operating DataOfficers and Directors

1

2

4

1825

33

42

44

NOTICE OF ANNUAI.NIEETINGThe 1988 annual meeting of shareowners willbe held at1:30 p.m. on Wednesday, April27,1988, at the F.M. Kirby Center for thePerforming Arts, Public Square, Wilkes-Barre,Pa. Formal notice of the meeting and areservation card for meeting attendance areincluded with shareowners'roxy material.

llortnern Division

SenlgrlDivision

(I, ERVICE AREA~ Pennsylvania Power 8 Light Co., based inAllentown, Pa., provides electric service tomore than a million homes and businessesthroughout a 10,5&square-mite area In 29counties of Central Eastern Pennsylvania.Principal cities in the PP&L service area areAllentown, Bethlehem, Harrisburg, Hazleton,Lancaster, Scranton, Wilkes-Barre andWilliamsport.

HarrisburgDivision

sancasreDivision

Pennsylvania

Customers (a)

Common Shareowners (a) .

Electric Energy Sales, Kilowatt-hours ..

Interchange Power Sales,Kilowatt-hours

Electricity Generated, Kilowatt-hours ............ ~...

Operating Revenues

Capital Provided by Investors (a) .

UtilityPlant (a)

Net Plant in Service ...Construction Work in Progress .

Common Stock Data

1987 1986

1,097,518 1,073,146

141,843 147,611

82.2 Billion 30.4 Billion

18.0 Billion 11.3 Billion

44.6 Billion 41.5 Billion

$2.1 Billion $2.2 Billion

$ 5.4 Billion $ 5.5 Billion

$ 6.0 Billion $5.8 Billion

$ 0.1 Billion $0.2 Billion

Return on Average Common Equity ~....... ~........Earnings Per Share ........... ~ ... ~ ..... ~ ~ .........Dividends Declared Per Share .

Market Price Per Share (a).

Book Value Per Share (a)

Times Interest Earned Before IncomeTaxes

(a) Atyear-end.

12.78%

$ 3.32

$2.68

$ 38

$26.26

2.71

12.11%

$3.10

$2.58

$ 36M

$25.71

2.80

PP8IL

",',~~«. "™

Where the PP8L Income Dollar Went in1987

oepreclatlonec

~Yc~~Earnings RelnvestedSC Net Cost of Energy

18C

Materials, services,Rents, etc. 1 4C

Employees

15C Taxes

18C

Income Indudes revenues,Other Income and the alliance

for funds used during constructIon.Interest14C

CHAIRMAN'S

~j7i <pOLD

The continuation of PP&L's strong financialperformance in 1987 was the result of thefollowing three major initiatives undertakenover the past few years to position thecompany to succeed in a more competitivemarketplace:

~ Aggressive marketing and service-areaeconomic development,

~ Cost containment, and~ Achieving specific operational

performance objectives.These three integrated initiatives are

designed to strengthen PP&L as a supplier oflow-cost and reliable electric service in arapidly evolving competitive market wherelow cost and superior customer service areessential for success.

Since a key to maintaining our competitiveedge in the marketplace is holding the lineon the price of our service, one of our prima-ry objectives is to avoid base rate increasesfor at least the remainder of the 1980s.

Actually, PP&L's electricity rates are lowernow than they were in the spring of 1985when rates were increased to recognize thecommercial operation of Susquehanna Unit2.

This strategy is based on our belief that com-petition for the company's markets willinten-sify and that PP&L's strong capacity positionprovides a decisive advantage when operatedeffectively and when marketed aggressively.

ALES AND EARNINGS~ As a result of the company's marketingefforts and the continued growth of theeconomy of Central Eastern Pennsylvania,service-area sales increased 5 percent andtotal electric sales increased 5.9 percent,compared to 1986. This kilowatt-hour salesgrowth was led by significant gains in ourelectrically heated home market and byincreased sales to industrial customers.

The company's total sales increase of 5.9percent reflects the continued growth ofPP&L's contractual power sales to otherutilities. Since the marketing of electricpower to other utilities was first undertakena few years ago, it has grown to become avery important source of revenue for PP&L.Contractual sales to other utilities in 1987amounted to $275 million or about 13 percentof the company's total revenue.

Recently the company entered into acontract with Baltimore Gas and ElectricCo. to provide electric power from ourSusquehanna nuclear units for 10 yearsbeginning in 1991, when a similar contractwith Atlantic City Electric Co. expires.

These sales to other utilities are made ~,<possible by'he outstanding performanceofour generating units and by our favorablemix of low-cost coal and uranium fuels.

Largely because of the effectiveness of ourmarketing and cost containment efforts, thecompany's 1987 earnings were $3.32 pershare, up 22 cents from 1986. Again thisyear, our program to refinance high-costsecurities at lower cost provided a significantcontribution to 1987's earnings improvement.

Since holding down the price of our serviceis essential in today's competitive energymarket, future earnings improvement willcontinue to require holding the line on costsand continuing to be successful in meetingour marketing objectives.

ARKETING AND ECONOMICDEVELOPMENT

Our marketing and economic developmentprograms were more successful than ever in1987, as we continued to introduce newinitiatives last year designed to strengthenthe company's competitive position in theenergy marketplace and promote theeconomic prosperity of the communities weserve.

With pricing flexibilityproving to be avital element in achieving our marketing andeconomic development objectives, weintroduced a new series of price incentives1'ast year to encourage existing industries toexpand and new industries to locate in ourservice area.

This latest package of price incentivesoffers lower rates for businesses that expandtheir usage of electricity and also to thosebusinesses that choose off-peak electric spaceconditioning and water heating.

PP&L marketing and economic develop-ment representatives effectively used thesenew pricing incentives to achieve solid industrialand commercial gains in 1987 both in termsof creating new jobs and kilowatt-hour sales.

Helping to expand and strengthen theeconomy of Central Eastern Pennsylvania isthe primary purpose of PP&L's marketingand economic development programs,because a more prosperous service areasupports the financial health of the companywithout the need for future rate increases.

Assisted by new PP&L pricing and off-peak heating options, the company'sresidential consultants continued to scoreimpressive gains in the home heating marketby promoting the convenience, safety andcost advantages of electricity. Over 80

percent of all new residential customers inPP6r L's service area are choosing electricspace heating.

The company also has been successful inpreventing any significant loss of sales tocustomer-owned cogeneration in spite of stiffcompetition by fuel and equipment suppliers.

Because of our continuing commitment toholding down the price of PP&L's electricservice, the company also is committed to notpaying more for electric power from non-utilitygenerators than required by law andregulation.

The company is required under the termsof the Public UtilityRegulatory Policies Actpassed by Congress in 1978 to purchase theoutput from non-utility electric generatorswhich qualify under the provisions of that law.

However, because of PP&L's very strongcapacity position, the company does not re-quire any additional generation to meet theneeds of our customers for at least the bal-ance of this century.

These circumstances require us to continueto work diligently on behalf of our customersto minimize the potential cost burden of theunneeded non-utility generation being intro-duced in PP&L's service area.

I PERATING PERFORMANCEThe record-breaking results achieved by

PP&L's generating plants in 1987 played avital role in holding down our

customers'lectric

rates, and again demonstrated thecompetitive advantage of the company'sexceptionally strong coal and nucleargenerating capacity.

The followingsummarizes some of themost significant 1987 operating results:~ The outstanding performance of both

Susquehanna nuclear generating unitsmade an essential contribution to PP&L'srecord generation of 44.6 billion kilowatt-hours in 1987.

Operating at a 93.5 percent capacity fac-tor, Unit 2 had the best operating recordamong the 49 General Electric boilingwater reactors worldwide in 1987. Andeven though it underwent a two-and-a-half-month refueling outage last year,Unit 1 achieved a capacity factor of 67.4percent which placed the combined perfor-mance of both Susquehanna units signifi-cantly above the national average. TheNuclear Regulatory Commission also hasgiven Susquehanna a near-perfect ratingby assessing the plant in the top bracket innine of 10 performance categories rated.

The combined 1987 Susquehanna outputwas 14.8 billion kilowatt-hours. The factthatour 90 percent share accounted for about30 percent of the company's total genera-tion again shows how important these nucleargenerating units are in meeting our commit-ments to customers and shareowners.

~ The company's non-nuclear generatingplants also established new records in1987 by combining to achieve an annualequivalent availability of 83.9 percent,topping the previous high set in 1985, andalmost reaching our long-range objectiveof 85 percent set for the mid-1990s.

Combined with the record Susquehannaoutput, this outstanding performancepermitted the company to sell 13 billionkilowatt-hours to other regional utilitieslast year which resulted in benefits forPP&L customers of about $79 million.Looking ahead, it is our objective to continue

developing markets for electric power byproviding a combination of price and serviceoptions that results in customers choosingPP&L over our competition. This strategybuilds on PP&L's strengths —a dedicationto service and operating effectiveness.

By becoming even more responsive to theneeds of our customers, we willbe in a strongposition to take advantage of opportunitiesduring this period of increasing competitionfrom other fuels and non-utilitygeneration. PP&L'sstrong capacity position,favorable prices and goodcustomer service also willbeessential ifefforts under wayto deregulate the electricutilityindustry go as far asto deregulate the transmis-sion of electric power.

The dedicated and talentedpeople of PP&L haveachieved another verysuccessful year. We welcomethe opportunity to acknowl-edge their accomplishmentsand to thank you, our share-owners, for your support.We willall continue to workhard to earn it.

Respectfully submitted,

Robert K. CampbellMarch 1, 1988

YEARIN:

OperationsPersonal safety attitudes and the

determination to operate in a fatality-freework environment have once again paidoff for each of PP&L's 8,300 employees, asthe company completed its seventhstraight calendar year without anemployee fatality.

Because of the potentially hazardousnature of the operation of an electricutility, the company's "Take Care" safetymotto carries special significance forevery employee. To work seven yearswithout a work-related fatality is a tributeto the dedication of all PP&L employeeswho look after themselves and each other.

Additionally, 10 work groups in thecompany achieved more than a millionwork-hours without a lost-time accident.

~ ARNINGS AND DIVIDENDSCommon stock earnings were $3.32 per

share for 1987, compared to $3.10 for1986, and $2.68 for 1985. The earningsimprovement reflects strong energy salesgrowth and continued cost-containmentinitiatives, including the favorable impactof refinancing high-cost securities at alower cost.

PP&L increased its quarterly dividendon common stock by two cents per share,from 65 cents to 67 cents per sharebeginning with the April 1, 1987,dividend. Ithad been 65 cents per sharesince Oct. 1, 1986.

~ NERGY SALES~ AND REVENUES

Reflecting strong economic growth andPP&L's aggressive marketing efforts,total electric energy sales were upapproximately 1.8 billion kilowatt-hours,or 5.9 percent for 1987.

Continuing strong construction in thenew-home market —with 82 percent ofthose new homes using electric heat—helped boost sales to residential customersby 4.4 percent. Sales to commercialcustomers rose 4.2 percent.

Sales to PP&L's industrial customers!recorded an overall increase of 5.7percent. This upturn was led by a stronggain of about 17 percent by steelmanufacturing industries, reversing a 12percent decline in 1986.

Contractual sales to other utilities wereup 529 million kwh, or 9.9 percent,reflecting increased output from thecompany's generating plants.

Lower costs being passed through tocustomers resulted in a net revenuedecrease of 4.6 percent, to $2.1 billion, for1987. The decrease in revenues was due inpart to reduced electric rates that beganJan. 1, 1987, to reflect lower income taxexpense resulting from the Tax ReformAct of 1986, and a lower state tax adjust-ment surcharge. A reduction in fuel andenergy costs and lower costs reflected inbillings for contractual sales to otherutilities also contributed to the lowerrevenues. Since the reduction in revenueswas essentially the same as the decrease inthese costs, the revenue decline had noadverse impact on earnings.

~ ECURITY SALES ANDREDEMPTIONS

or Cash generated from operations during1987, and favorable conditions in thecapital markets, allowed the company tocontinue to retire high-cost securities.Those retirements permitted the companyto reduce its overall capital costs andimprove its financial health.

Redemptions included two series of firstmortgage bonds totaling $200 million,with interest rates of 13.25 percent and16.125 percent, and $77.35 millionofpreference stock in two series, with 11percent and 11.6 percent dividend rates.In addition to these early redemptions,$46.4 million of first mortgage bonds, withan interest rate of 16.5 percent, maturedand were retired. Another $ 52 millionofpreferred and preference stock withdividend rates ranging from 7.4 percent to11 percent was redeemed throughmandatory sinking fund provisions.

Residential Consultant"AfterCarol showed methe dollar advantages, aswell as the comfort advan-tages of ceramic off-peakheating units, I decided toinstall them in each of the24 townhouses I was develop-ing. The systems haveturned out to be a realsales advantage."

I;I( .r, iI

'I,

h

DennIs MolesevlchBuilding ContractorMt. Carmel, Pa.

Market Saturation forElectric Heat In CEP*

197s Kb'9%)

1982C)(3

*CEP-Central EasternPennsylvania, Pal.'s ServiceTerritory

1987

Qo

Having 82 percent of all new residential unitsuse electric heat is an almost unheard ofenergy market saturation. For PP8,L residentialconsultants, it's just a reflection of the waythe company does business. Consultants workwith developers and new-home owners toencourage electric applications that promoteefficient use of electricity —with emphasis onoff-peak thermal storage systems. PP8,L's

marketing programs help customers make thebest choice of energy.use options —and helpthem save money by using electricity duringoff-peak hours.

Carol seltzinger,PPRL ResldentlalConsultant, withDennIs Molesevlch.

I

5 5

I5(

Power Engineer

5 t 'l f.,tf

~~

~ 5 ~I

"PP&1 helped us find a wayto take our power at a

higher transmission voltage—and save a lot of moneyby building our own substa-tion. When the company'seconomic developmentinitiative was approved, itwas icing on the cake forour plant expansion."

We~-

'

'55

~ 5 graf'/F555

~j~, /.t%el

0

John DarrasVlcc President-OperationsDart Container Corp.Leola, Pa.

4

5 W

Total Energy Sales(Billions of Kwh)

52.2

Robert Sugra,PP&L Senior Power

Engineer, withJohn Darras.

Power engineers market PPS,L's product byhelping industry increase productivity throughnew or improved applications of electricity,and by exploring how the company's ratestructure canbe best tailored to thecustomer's competitive advantage. The DartContainer plant in Lancaster County competeswith 11 other Dart plants for expansion andcapital improvement dollars. A $2.5 millionproduct line expansion, with more than 200new Jobs, was awarded to the Leola plantprimarily because a new customer-builtsubstation qualified the plant for lower rates.

28.1

50.4I I

I I

I I

1985 1986 1987

The company issued $ 150 million ofpreferred stock in 1987. The stock wassold in three $50 million series at dividendrates of 6.875 percent, 7.375 percent and7.82 percent. Additionally, $ 18 million ofcommon stock was issued for the employeestock ownership plan.

EMAND BREAKS RECORDS

~ Hot humid summer weather and theresulting air-conditioning load causedseveral summer peak-demand records tofall for PP&L and for the regional powerpool in which the company participates.

The previous PP&L summer record of4.3 million kilowatts of peak customerdemand set Aug. 15, 1985, was surpassedseveral times in July 1987 and now standsat 4.7 million kilowatts. The Pennsylvania-New Jersey-Maryland power pool peakdemand record also was broken a numberof times during the same period and nowstands at the 40.5-million-kilowatt-demandfigure reached on July 24.

The all-time PP&L system peak of 5.6million kilowatts was set Jan. 5, 1988,during a near-zero-degree cold spell.While the power pool experiences its peakdemand in the summer, PP&L —with itshigh saturation of electric-heat customers—is a winter-peaking company. Theprevious PP&L winter peak was 5.5million kilowatts set in January 1985.

~ OSSIL PLANTS~ HAVE BEST YEAR

PP&L's five fossil-fuel-fired powerplants performed with record-settingeffectiveness in 1987. The plants achievedan average equivalent availability rate of83.9 percent —topping 1987's 81 percenttarget and nearly reaching the 85 percentlong-term goal set for the mid-1990s. Theprevious high for PF&L's present mix ofplants was an 81.7 percent equivalentavailability figure for 1985.

Equivalent availability is a standardmeasure of the percentage of time a unit isavailable to operate at its rated capacity.

( YDROELECTRIC UNITRENOVATED

The first phase of a $ 60 million, multi-year modernization program at thecompany's Holtwood hydroelectricgenerating station, on the lowerSusquehanna River in Lancaster County,was completed in July.

This modernization willextend the lifeof the plant and increase its output. Theprincipal element of the renovation is thereplacement of old and deteriorated cast-iron turbine runners with new ones madeof steel —which willbetter withstandwater flows, and be easier to repair andmaintain.

The 77-year-old Holtwood station is theoldest operating plant in the PP&Lsystem. The renovation program willhelpextend the plant's life into the 21stcentury.

EARING IS INTERNATIONALLANDMARK

- A unique thrust bearing invented morethan 75 years ago, and first tested andplaced in service at the Holtwoodhydroelectric station, was dedicated inJune as an International HistoricMechanical Engineering Landmark.

The designation by the AmericanSociety of Mechanical Engineersrecognizes the global consequences of thesuccess of the bearing and its vitalcontribution to the development of thehydroelectric power industry.

The bearing —capable of supportingthe 220-ton weight of a 12,000-kilowattgenerating unit —was the innovativecreation of Professor Albert Kingsbury, anengineering genius who personallysupervised its installation on Unit 5 at theplant in 1912. The 48-inch-diameterbearing has been in service since that timeand shows virtually no wear.

YEARIN:

YEARIN:

Roller thrust bearings once used in suchinstallations rarely lasted more than twomonths before needing repair orreplacement. Additionally, they limitedthe size of a hydro generating unit.

Professor Kingsbury's invention wasdeceptively simple. Instead of roller orball bearings, a thin filmof oil on a flatsurface supports the massive weight —andpractically eliminates mechanical wear inthe bargain.

Engineering calculations show that theoriginal bearing in use at Holtwood couldperform for another 1,700 years —at thepresent rate of wear —before needingreplacement.

P&L RECEIVESRECOGNITION

Citing the company's marketing andeconomic development programs, theEdison Electric Institute —the nationalindustry trade association —in Marchnamed PP&L one of three finalists for its1986 Edison Award. This was the secondconsecutive year that PP&L was named afinalist for the award, which has beencalled the industry's "utilityof the yearaward."

PP&L was nominated for the award forincreasing sales in 1986 by more than 295million kilowatt-hours through itsmarketing efforts, and for helping toattract more than 6,500 new jobs to itsservice area.

PP&L and a representative of educatorsfrom across the company's serviceterritory received a national SpecialRecognition Award in October from thefederal Department of Energy.

The award, one of only nine givennationally, is for PP&L's school energyeducation program, an innovativecollection of educational units coveringgrades kindergarten through 12 anddealing with all aspects of energy. WhilePP&L sponsors the program, the

development of the units resulted from acooperative partnership effort between thecompany and educators located throughoutCentral Eastern Pennsylvania.

P8 L LENDS A HANDTwice in 1987 PP&L was able to lend a

helping hand to other regional utilitieswhose line crews were overwhelmed bysevere winter-storm damage.

A mutual assistance agreement enableselectric utilities throughout the northeastto call on one another for help in puttingtheir storm-ravaged systems back inservice. At times PP&L has needed help-and at times PP&L crews have providedassistance.

Forty two-man crews, supervisingpersonnel and support workers were sentto the Washington, D.C., area in Februaryto help restore service to 100,000 customerswho were without service as the result of astorm that dumped up to 16 inches'of wetsnow on the Potomac Electric PowerCompany's service territory.

A freak early-October blizzard droppedmore than a foot of heavy, wet snow acrossNew England and prompted NortheastUtilities of Connecticut and NiagaraMohawk Power Corporation of New Yorkto request assistance.

The company sent 136 linemen and 29supervising and support workers to helprestore electric service after snow-ladenfoliage tumbled trees onto power lines.

Under the mutual assistance pact, thecompanies in need are billed for theemployees'ages and the cost of lodging,meals, equipment and other expensesincurred by the borrowed crews that helprestore service.

MarketingancI EconomicDevelo ment

In this decade, marketing is the key to thecompany's success on a number of fronts:increased sales means an improved revenuepicture; more revenues contributes to

"We are in a very competi-tive business with thinprofit margins. We needevery square foot we canget for our sales area andstorage. Competitive elec-tric rates, along with theconvenience and space-saving nature of all-electricoperation allows us tomaximize our profits."

Business Consultant

5 Q@QVM

k u

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4 ~1

E 1

Larry H. MossPresIdentTime MarketsLewlsburg, Pa.

1987

Additional KwhSales ResultingFrom MarketingEfforts

1986

Millions Kwh

Working with commercial establishments,PP8,L business consultants seek outapplications that will increase comfort, lowercosts and provide advantages over energysource competitors. Time Markets, located inthe northwest section of PPLL's serviceterritory, is a rapidly expanding chain ofconvenience stores. With the help of PP&L,various heat recovery systems wereengineered to complement the heat pumpsystems that provide space heating andcooling needs. The maintenance-freeadvantages and simplicity of all-electricoperation allow store managers toconcentrate on store sales and service.

James Paullng,PP&L BusinessConsultant,with Larry Moss.

Area Manager"The quality of water in LakeWallenpaupack is definitelythreatened by uncontrolleddevelopment in this area.With the support of PP&Lfor our watershed manage-ment district, and conscien-tious employees like BillBergstresser participating inthe solution, we know theproblems willnot gountended."

Gerald EhrhardtChairman, LakeWallenpaupack WatershedManagement DlstrlctHawley, Pa.

WllllamBergstresser,PPRL's Honesdale

Area Manager, withGerald Ehrhardt nearLake Wallenpaupack.

10

Company spokesperson, liaison withgovernment bodies and civic organizations—narrow job descriptions cannot adequatelyembrace the wide variety of duties that fall toPP&L's area managers. They are the embodi-ment of the corporation throughout thecompany's operating area. When PPS,L's LakeWallenpaupack was faced with runoffproblems that threaten the quality of thewater in the 5,700-acre body of water, WilliamBergstresser was a driving force behind theorganization of a watershed managementdistrict which is the lake's best hope forecological protection.

Net New Jobs PPSLHelped Bring To CEP

1985 1986 1987

0 0 Q

CA%I

B@C4Q

continued stable rates; stable rates resultin Central Eastern Pennsylvania beingattractive to new business and industry;and new business and industry meansmore jobs for the people in PP&L's servicearea.

And, of course, more jobs meanincreased sales and a liftto the economicprosperity in the region —and the cyclebegins anew. By controlling peak demandwhile increasing sales, PP&L willbebetter able to maintain its competitiveedge in the energy marketplace.

The completion of an unprecedentedconstruction program, marked by thecommercial operation of SusquehannaUnit 2 in 1985, provides PP&L and itscustomers with the assurance that thecompany does not expect to build costlynew generating plants for the balance ofthis century —further stabilizing PP&L'sbase rates.

The successfully completed buildingprogram is a major factor in PP&L'sbeing able to attract new business andindustry to its service area. Businessunderstands the cost impact of avoidingnew construction and the importance ofhaving a reliable supply of electricity.

These positive factors underscore PP&Lefforts to aggressively promote economicdevelopment in Central EasternPennsylvania. The company has had a goalfor the past four years to help bring atleast 5,000 net new jobs to its service areaevery year. That goal has been exceededeach year. In fact, in those four years,PP&L economic development activitieshave been instrumental in providing morethan 26,000 net new jobs for the area.

The company's economic developmentefforts, its engineering consultant servicesfor industrial and commercial customers,plus a variety of programs for residentialcustomers —combined with a customerservice reputation second-to-none inPennsylvania —contribute heavily toPP&L's marketing success.

Because PP&L's well-being is so closelyrelated to the well-being of the people itserves, everyone wins when the company'smarketing efforts are successful.

987 WAS BEST YEAR EVERThe 8,563 net new jobs figure for 1987

greatly surpassed the year's 5,000-job goal—prompting the company to raise thegoal for 1988 to the 10,000-job mark.

Economic development activitiesthroughout the company in 1987 helpedboost electric energy sales by more than214 million kilowatt-hours. Marketingefforts with industrial and commercialcustomers added more than 393 millionkilowatt-hours, and residential marketingprograms accounted for another 33 millionkilowatt-hours of sales.

In total, more than 640 million kilowatt-hours of increased sales resulted from thecompany's economic development andmarketing programs.

Rates ancIPricingIncentives

Rate structure —how PP&L charges forits service —is a vital component in thecompany's overall marketing strategies. Avariety of pricing options helps PP&Lattract new industry and assists existingindustry in becoming more competitive.

PP&L's pricing objective is to offer ratesthat willhelp its industrial and commer-cial customers improve their productivityand profits and, at the same time, try to in-crease company sales during off-peak hourswhen the lowest-cost power is available.This is a triple benefit —the customergets lower-cost power, the companyincreases its sales and, at the same time,restrains its peak load growth.

Major economic development rateinitiatives from 1984 and 1986 wereaugmented in 1987 by a new package ofrate incentives approved by the Penn-sylvania Public UtilityCommission and

YEARIN;

~ - 'v

put into effect in April.The packagefeatures these measures:

—An incentive rate option thatencourages existing industry andcommercial customers to improvetheir productivity through expandedapplications of electricity. The optionincludes a "demand" charge credit of$2 per kilowatt and a one-cent perkilowatt-hour credit for expanded useof electricity. (Demand is a measureof a customer's electrical use at anyone time. Certain customers arecharged based on their maximumdemand.)

—An incentive rate credit, also one centper kilowatt-hour, on high use by newindustrial customers who locate inthe company's service area by 1989.

—New, lower rates designed toencourage industrial and commercialcustomers to install off-peak electricspace conditioning and waterheating.

—A 20 percent reduction in the ratescharged to municipalities for high-pressure sodium street lighting.

The PP&L economic development rateincentives and tariffchanges are designedto help a broad range of industrialcustomers.

Principally, those changes giveindustrial customers additional off-peakhours, and flexibilityin deciding when off-peak billinghours start, allowingindustries more latitude in shift-workscheduling.

A late-1984 incentive package providedspecial rates for large industrialcustomers who agree to allow periodicinterruptions in their electric service.

The next major change came in January1986 when the company adopted a newinitiative which eliminated off-peakdemand charges for all general servicecustomers, and inaugurated experimental

demand-free days. On days when thecompany has low-cost generating capacityavailable, it offers electricity to largeindustrial customers with a demandcredit.

These rate initiatives motivate many ofthe company's industrial customers tooperate a large share of their productionfacilities during off-peak periods. Becausetheir cost for electricity is lower, they cancompete better in their markets.

~ ATES CUTBY $ 37.5 MILLION

On Dec. 17, 1987, the PUC approvedPP&L's plan to cut its electricity rates by$37.5 million (about 2.1 percent) on Jan. 1,1988. Primarily, that reduction passedalong to customers the benefit of lowercorporate income taxes and reflected otherchanges in the cost of doing business.

The Jan. 1 reduction was the third ratedecrease since the end of 1986. The othertwo decreases —a $32 million cut inJanuary 1987 and a $2 million reductionin August —also were tax related. The netdrop in PP&L rates over the period totalsabout $71.5 million, or 3.9 percent.

SusquehannaNuclear Plant

PP&L's two nuclear units continued topost impressive results during 1987,generating about 13 percent moreelectricity than had originally beenbudgeted.

The year started on a high note inJanuary when the plant staff accumulated5 million consecutive employee-hourswithout a lost-time injury.

NN RILLS SUCCESSFULA full-scale emergency preparedness

exercise on April29 earned high marksfrom the Nuclear Regulatory Commission.

The drill, observed by the NRC and theFederal Emergency Management Agency,showed that PP&L could adequately

12

"My husband and I knew wewere probably losing a lot ofheat without proper weather-ization. PP8 L checked ourhome to see what wouldhelp —and the WRAP pro-gram provided us with whatwas needed."

Consumer Affairs Director

'TF'

k+

7

MaryJo SnyderHomemakerHummelstown, Pa. ~

'ouseholds

AssistedBy PP8 L WRAP Program

1986

1985

1987

TOTAL ASSISTED 8555

PP&L's consumer affairs representativesprovide special assistance to individuals andgroups in understanding the service thecompany provides, and the options to pay fortheir electricity. The company's Winter ReliefAssistance Program —WRAP —providesweatherization to help families cut theirenergy consumption. Such energy-savingequipment as storm windows and doors, atticinsulation, weatherstripping, caulking andwater heater insulation are provided forcustomers who use electricity as their mainheating source —or for water heating —andwho meet certain income restrictions.

Alan Baker, PP&l'sHarrisburg DlvlstonConsumer AffaIrsDIrector, with MaryJoSnyder, daughterNatllle, and contrac-tor Marfano Garcia.

13

Regional Community Planner

fo|g/i,g

"tl T

l

".;:,'' O~~ C

r@ a| ~

"PPSL has always been agood'artner

in our industrialdevelopment efforts —in thecase of LVIP IV, though, theywere absolutely essential. Land

parcels of this size andlocation are getting veryscarce. Without this land, thisproject could not exist."

Lehieh ValleyIndustrial Park

Iv

P W.. (

„P

Grover StalnbrookExecutive Vlcc PresidentLehlgh Valley Industrial Park Inc.Bethlehem, Pa.

Increased Sales ResultingFrom 1987 Economic Develop-ment Rate Incentives

Francis Hackett, PP&LRegIonal CommunityPlanner, with Grover

Stalnbrook at newLehlgh Valley Indus-

trial Park IV, nowunder development.

14

PPS,L regional community planners workbehind the scenes with municipal groups andprivate organizations to help develop aninfrastructure of zoning, sewer, water androad systems conducive to Industrialdevelopment. The Lehigh Valley's newestbusiness/industrial park is being developed ona 427-acre site formerly owned by a PP&L

subsidiary. With the land no longer needed forfuture PPKL projects, the company was ableto provide the large undeveloped acreageneeded for the project which —whencompleted —is expected to provide 4,500new jobs for the area.

EPiaal

respond to and manage an emergencysituation at the plant. About 700 peopleparticipated in the drill, including PP&Lemployees, state and county emergencyofficials, and emergency managementpersonnel from 27 municipalities within a10-mile radius of the plant. Allwereresponding to a specially prepared eight-hour scenario, the details of which unfoldwithout prior knowledge by participants.The exercises are held annually todemonstrate the ability of the company todeal with a nuclear emergency.

A very successful "surprise" drillwasheld on Sept. 3 to further test the nuclearemergency team. While the full-scaledrills have been held every year since1982, this was the first time thatparticipants did not know in advancewhen the drillwould occur.

About 100 members of the teamresponded to the call-out to staff theiremergency posts. The exercise establisheda realistic response time for an emergencymobilization.

( ~ NIT 1 REFUELSUnit 1 was shut down on Sept. 12 to

begin its third refueling and inspectionoutage. During its third operating cycle—which began in April 1986 —Unit 1

operated at a very respectable capacityfactor of about 82 percent. Capacity factoris a standard industry measure ofelectricity actually produced compared towhat would have been generated iftheunit had operated continuously at fullpower. It also generated about 10.4 billionkilowatt-hours of electricity —about 6percent more energy than the ambitiousoperating cycle goal set for the unit.

During the outage, about one-quarter ofthe 764 uranium fuel assemblies in thereactor were replaced and more than3,300 maintenance and inspection taskswere completed before the unit was putback in service on Nov. 24.

NIT 2 SETS RECORD"Making history at an early age, Unit 2

established a company record on Nov. 16,when it completed its 205th consecutiveday of generating electricity, breaking a

consecutive-run record set 10 years earlierby one of the company's large coal-firedunits. Such a record is unprecedented fora unit in commercial operation less thanthree years. The run is also the boilingwater reactor world record for a unit in itssecond fuel cycle. The record runcontinued through the end of the yearwhen it stood at 250 days.

Unit 2, in its second fuel cycle, had runup a capacity factor of 93.5 percent for1987 —the best among the 49 GeneralElectric boiling water reactors in theworld. The plant's two-unit capacity factorof 80.5 percent also led the world's G.E.boiling water reactors.

Together the two Susquehanna nuclearunits generated nearly 15 billion kilowatt-hours of electricity in 1987. One billionkilowatt-hours is enough electricity tosupply the annual needs of 100,000residential customers in PP&L's servicearea. Also, those 15 billion kilowatt-hoursexceed the total electric consumption ofPP&L customers in 1970.

RC PRAISES SUSQUEHANNADuring a year-end public meeting

between the Nuclear RegulatoryCommission regional administrators andthe NRC commissioners, Susquehannawas singled out as one of the five bestplants in the nation.

ManagementChanges

Two officers switched positions in March1987 as part of PP&L's job rotation pro-gram. William F». Hecht, vice president-System Power, assumed the vice president-Marketing & Customer Services positionheld by Grayson E. McNair who movedinto the System Power slot vacated byHecht.

The rotation is part of a company-wideprogram that provides opportunities formanagement personnel at all levels to

YEARIN;

~ - 'v

15

YEARIN:

g - 'v

accept challenges needed for theirpersonal development and to experiencenew approaches which willbe needed inmanagerial positions.

George F. Vanderslice, vice presidentand comptroller, retired on April 1, 1987,after 29 years with the company.

Vanderslice joined PP&L in 1958 asmanager of Auditing. He was namedmanager of Budgets in 1962 and becamecomptroller in 1965. He was named vicepresident and comptroller in 1975.

Succeeding Vanderslice, Ronald E. Hillbecame vice president and comptroller onApril 1, 1987.

Hillbegan his career with PP&L in1964 as a graduate trainee. After a two-year military leave, he rejoined thecompany as a systems analyst and laterwas appointed an accountant in theBudget Department. Following a numberof advancements, he was named manager-Financial Reporting in 1979 and becameassistant comptroller in 1986.

Gennaro D. Caliendo, vice president andgeneral counsel, was appointed to thecompany's Corporate ManagementCommittee, effective Jan. 1, 1988.

Caliendo joined the company in 1968 asan attorney and was named assistantcounsel in 1975. He was appointed chiefcounsel-Regulatory Affairs in 1978 andvice president and chief counsel-Regulatory Affairs in 1981. He has beenvice president and general counsel andhead of the Office of General Counsel since1985.

Several changes in the top managementof the company were announced inDecember 1987 in anticipation of theretirement of a senior officer on April1,1988.

Leon L. Nonemaker, senior vicepresident-Division Operations, willretireApril 1, 1988, after a 40-year career withPP&L.

Bruce D. Kenyon, senior vice president-Nuclear, willsucceed Nonemaker assenior vice president-Division Operations.Kenyon willcontinue to serve as a memberof the Corporate Management Committee.

Harold W. Keiser, vice president-Nuclear Operations, has been appointedsenior vice president-Nuclear and willsucceed Kenyon on April1, 1988. He willbecome a member of the CorporateManagement Committee.

Nonemaker joined PP&L in 1948. Headvanced through various positions in thecompany's Engineering, Union Relationsand Personnel departments and in 1962was named salary administrator. In 1964he was appointed operating manager ofPP&L's Lehigh Division and promoted tovice president-Lehigh Division in 1969.

He subsequently served as vicepresident-Marketing and vice president-Consumer and Community Affairs, beforebeing named to the position of senior vicepresident-Division Operations in 1980.

As the new head of Division Operations,Kenyon willhave responsibility for thecompany's six operating divisions and the2,600 employees involved in the key fieldfunctions that meet the electric serviceneeds of PP&L's million-plus customers.

Kenyon joined PP&L in 1976 asmanager-Nuclear Support in the PowerProduction Department. He was namedmanager-Construction Department in1978, and a year later he was promoted toassistant vice president-Nuclear. He wasappointed vice president-NuclearOperations in 1980, and had been seniorvice president-Nuclear since 1985.

As the new senior vice president-Nuclear, Keiser willhave responsibilityfor all nuclear-related functions, primarilythe Susquehanna nuclear plant and all itssupport services. About 1,200 employeescomprise the plant and support staffs.

Keiser joined PP&L as superintendentof the Susquehanna nuclear plant in 1980and supervised the station during the startof its successful commercial operationphase in the early 1980s. He became vicepresident-Nuclear Operations in 1985.

16

Regional Director-Economic Development"While air is free, electricity is

not. We consider electricityour raw material. By com-pressing and separating airinto its components, wemanufacture hundreds oftons of industrial gases a day.Low-cost PP8 L electricity is

the primary reason we'e inPennsylvania."

~4

gj.".TfI =i--O'PD 00 0

0 go ll0 G0

e~s go HQ

g EONQ

=e

0903LI ci g

h

//1

Cl >

< 9.g p ~~IfUfUfII'[<, air. <II

III8 lN II IIIIIIIIIIS PP a a II II II II I,

!3 H 0 ~ II II II II II98si 9 )IIIIQtlii g )II

II F-'=-— I f1 l

PP IE;IIIIIv.-,II <lE"

IIII g libel I%%5 IIIIIItl IIII 3) NIPS ID Bl IIII9 3g g) g EID QQ QQ IIIII9 IIII II) Ic)QQR QQ IIIIIIIII

HDD g >>>< gggPiIIII IIIII,Igg

~ 0 L

David KelerleberManager-Cryogenic Operationsl.lquld Carbonic/IndustrialMedical Gases Corp.Chicago, III.

Qy X"

New Industries PP8 L

Helped Bring To CEP

1985

1986

1987

0

0 0

Through print advertising and personalcontact, PPE,L's Economic Developmentregional directors generate Inquiries aboutCentral Eastern Pennsylvania, then followthem closely in an effort to attract newindustry to the area. When LiquidCarbonic/Industrial Medical Gases Corp.,headquartered in Chicago, was looking for aneastern location for a new air separationplant, PP8L identified 44 sites that met theirrequirements. After 11 separate Inspections,and with the incentive of an attractiveinterruptible rate In PPLL's tariffs, the $19million plant was located in NorthamptonCounty near Allentown.

WilliamJermyn,PPSL RegIonalDtrector.EconomicDevelopment, withDavid Kelerleber.

17

any's Financials of Operations

Review of the CompCondition ancI ResLI t

FINANCIAL

I,

grQ

This review provides a discussion of theCompany's financial condition and res~itsofoperations. Additional information onthese matters is set forth in the financialstatements, schedules and notes on, pages85-41 and the selected financial andoperating data on pages 48 and 4S.

Results of OperationsEarnings per share of common stock

were $3.32 in 1987, $3.10 in 1986 and$2.68 in 1985. The earnings improvementreflects strong energy sales growth andcontinued cost containment initiatives,including the favorable impact of refinanc-ing high-cost securities at a lower cost.

The 1987 improvement in earnings wassomewhat reduced by an accrual for therefund of approximately $ 17.5 millioncollected from customers in prior periodsfor certain taxes and energy costs. SeeNote 2 to Financial Statements foradditional information concerning thisrefund.

The primary reason for the lowerearnings in 1985 was the April 1985 ratedecision of the Pennsylvania Public UtilityCommission (PUC) which granted theCompany only $ 121 millionof the $330million net rate increase requested.

Energy Sales and OperatingRevenues

Total electric energy sales were 1.8billion kwh, or 5.9%, higher in 1987 thanin 1986, reflecting increased sales tocustomers and increased contractual salesto other utilities. System sales, whichexclude contractual sales to other utilities,were 1.3 billion kwh, or 5.0%, higher in1987 than in 1986. Sales to residentialcustomers increased 386 million kwh, or4.4%. Sales to commercial and industrialcustomers increased 298 million kwh, or4.2%, and 452 million kwh, or 5.7%,respectively, reflecting continuedeconomic growth and the beneficial effectof the Company's marketing and economicdevelopment efforts.

Contractual sales to other utilitiesrepresent the energy sold to Atlantic CityElectric Company from the nuclear-fueledSusquehanna Steam Electric Station andthe energy sold to Jersey Central Power &Light Company (JCP&L) from all of theCompany's generating units, These saleswere 529 million kwh, or 9.9%, higher in1987 than in 1986, reflecting increasedoutput from the Company's generatingplants.

Lower costs being passed through tocustomers resulted in a net revenue de-crease of 4.6% for 1987. The decrease inrevenues was due in part to reduced electricrates subject to PUC jurisdiction that began

84.00

Earnings and DividendsPer Share

Denary Prr Stare

Common Stock Book Valuevs. Market Price (Year EAd)

Dollars Pn Skarc

3.00 30

20

1.00 10

83 84 85

H EarningsD Dividends declared

86 87 83 8S 85 86 87

Cl Deok value per shareCl Market price per share

18

n

January 1, 1987 to reflect lower incometax expense resulting from the TaxReform Act of 1986 (Tax Act) and a lowerState Tax Adjustment Surcharge (STAS).A reduction in fuel and energy costs andlower costs reflected in billings forcontractual sales to other utilities alsocontributed to the revenue decline. Sincethe reduction in revenues was essentiallythe same as the decrease in these costs, therevenue decline had no adverse impact onearnings. Details of changes from theprior year in operating revenues areshown in the schedule below.

Tariffs subject to PUC jurisdictionaccounted for approximately 84% of theCompany's revenues in 1987. Theremaining 16% of revenues are regulatedby the Federal Energy RegulatoryCommission (FERC). The FERC alsoregulates interchange power sales which

are classified as a credit to operatingexpenses.

Billings to customers under PUCjurisdiction include: (i) base rate charges;(ii) supplemental charges or credits forenergy costs and state taxes over or underthe levels included in base rates and (iii)effective January 1, 1987, an Income TaxAdjustment (ITA)credit which passesthrough the effect of lower income taxesresulting from the Tax Act. Also effectiveJanuary 1, 1987, the Company rolled intobase rates a level of state taxes previouslyrecovered through the STAS. The lastbase rate increase for customers under thejurisdiction of the PUC went into effectApril 1985. Billings to FERC customers,excluding contractual sales to otherutilities, include base rate charges and asupplemental charge for fuel costs overthe level included in base rates.

Changes in Operating Revenues

ElectricBase rate increases .

Roll-in of state taxes into base rates .......State tax adjustment surcharge...........Income tax adjustment credit.............Recovery of fuel and energy costs .........Change in customer usage ..Contractual sales to other utilities.........Other .

Total electricSteam heat (operations sold in 1985) ........

Total .

92.5(123.5)

(55.2)(50.0)52.0

(16.7)0.7

(100.2)

$ (100.2)

$ 80.4 $ 138.2

(12.4) 8.3

53.334.759.423

217.7(5.3)

$212.4

50.313.1

200.83.8

414.5(0.8)

$413.7

1987 1986 1985(M2llions ofDollars)

50

Sources of EnergyBgl~ojÃea

Dispositton of EnergyBiliioas o/Kwa

40 40

30

20 20

10 10

85 86 87

D Hydro and purchased powerD Oil-fired generationD Nuclear generationD Coal. fired generation

83 84 85 86 87

D Company use. line losses and otherD Interchange power salesD Contractual sales to other utilitiesD System sales to customers

19

Net Cost of EnergyIn 1987, the output from the Company's

generating units was a record 44.6 billionkwh, an increase of 3.1 billion kwh from1986. The increase reflects excellentperformance of all the Company'sgenerating units, highlighted by therecord generation of the Susquehannastation. The Company's 90% share of theSusquehanna station's output was 13.3billion kwh in 1987, a 30.9% increase over1986 generation. Coal-fired unitsgenerated about 26.5 billion kwh in 1987,a 5.2% increase over 1986, with thebalance of total generation coming fromoil-fired and hydro units.

Although generation was up, total fuelexpense in 1987 was about the same asthat in 1986. This was primarily due to thechange in the mix of generation by fuelsource in 1987 compared with 1986.Nuclear generation accounted for 29.8% oftotal output in 1987, up from 24.5% in1986, while higher fuel cost oil generationdeclined to 9.2% in 1987 from 13.1% in1986. Also, the average cost of fuel perkwh generated by nuclear and coal-firedgeneration was 3.4% and 2.4% lower,respectively, in 1987 than in 1986, whilethe fuel cost per kwh of oil-firedgeneration increased 9.1%.

The amount received for interchangepower sales in 1987 was $77.1 million, or26.7%, more than in 1986 due to the higherquantity of energy sold on the interchangeand an increase in the selling price.Interchange power sales in 1987 were 13.0

billion kwh, an increase of 1.7 billion kwh„or 15.4%, from 1986. The increase wasprimarily due to the record generation ofthe Susquehanna station, which resultedin more energy available for sale to theinterchange. The average price receivedfor interchange power sales was 2.8 centsper kwh in 1987 and 2.6 cents per kwh in1986. The increase primarily reflects theeffect of higher oil prices and increaseddemand for energy by interconnectedutilities.

Wages and Benefits, OtherOperating Costs and Depreciation

Wages and employee benefits wereessentially unchanged in 1987 compared to1986. Higher wages were offset by loweremployee benefit costs —principallyreflecting a change in the method used tocompute pension costs. See Note 11 foradditional information concerningpensions. Other operating costs increased$ 15.7 million, or 5.7%, over 1986 reflectingin part higher prices and the costsassociated with increased generation atthe Susquehanna station. Higherdepreciation in 1987 reflects the normalannual increase associated with the use ofa modified straight line method ofdepreciating the Susquehanna stationalong with the depreciation of newfacilities.

Income TaxesTotal income tax expense was $44

million lower in 1987 than in 1986primarily reflecting the lower federal

81200

Capital RequirementsjlMt/ossa/Dollars

Sources of Capital

81200hlillbnso/&4ars

1000 1000

800

600

800

600

400

200

20

81 83 86 8783

D OtherD Security retirements

D Construction, nuclear fuel and otherleased property

86 8783 84 83

D Capital lease obligationsD Outside financing (sales of debt

and equity securities)D Internal sources(principally from operations

plus AFUDC less dividends)

,income tax rate included in the Tax Act.The lower tax expense is being passedthrough to PUC customers in the ITA.

Total income tax expense was $ 113million higher in 1986 than in 1985. Taxesfor 1985 were reduced by the utilization ofa tax loss carryforward of approximately$ 100 million. Taxable income in 1986included a fullyear's effect of higher ratespermitted by the PUC in April 1985 and afullyear's effect of contractual sales toJCP&L.

The Tax Act repealed the investmenttax credit and reduced the amount ofunused investment tax credits that can beused to offset 1987 and future federalincome tax liabilities. At December 31,1987, approximately $ 157 million ofunused investment and payroll-based taxcredits were available to reduce futurefederal income tax liabilities.

For additional information concerningincome taxes, see the Schedule of Taxes onpage 29 and Notes 5 and 15 to FinancialStatements.

Capital Expenditure RequirementsThe schedule below shows actual

construction, nuclear fuel and capital leaseexpenditures for the years 1985-1987 andcurrent projections for the years 1988-1990. Construction expenditures duringthe three years 1985-1987 totaled $726million and are expected to be about $845million during the three years 1988-1990.

Allowance for Funds UsedDuring Construction

Allowance for funds used duringconstruction (AFUDC) totaled about $ 12million in 1987 and $ 11 million in 1986.The total amount of AFUDC recorded in1985 was negative due to an adjustment ofthe income tax component of AFUDCattributable to the utilization of tax losscarryforwards. With no new generatingfacilities under construction, AFUDC isnot expected to be material in theforeseeable future. See Note 6 to FinancialStatements for additional informationconcerning AFUDC.

Lower Financing CostsThe retirement of high-cost securities

during 1986 and 1987 through cashgenerated from operations andrefinancing efforts has helped theCompany reduce interest on long-termdebt and dividends on preferred andpreference stock to $ 326 million in 1987from $ 360 million in 1986 and $376million in 1985.

FinancingDuring the three years 1985-1987, the

Company sold about $ 1.0 billion ofsecurities and also incurred $258 millionof obligations under capital leases(primarily nuclear fuel). The Company's1987 financing program involved the saleof $ 150 millionof preferred stock, theissuance of $ 18 million of common stockfor the Employee Stock Ownership Plan,

Construction expenditures (a)Generating facilities .

Transmission anddistribution facilities .....

, Environmental .

Other

$ 119 $ 121 $ 110$ 84 $ 150 $ 102

93 97 1066 9 21

17 20 21

114 126 14122 20 525 21 21

280 288 27743 43 6424 14 18

$347 $345 $359

200 276 25074 65 4021 14 20

Nuclear fuel owned and leasedOther leased property

Total . $295 $355 $310

Construction, Nuclear Fuel and Capital Lease Expenditures

Actual — Projected—1985 1986 1987 1988 1989 1990

(MillionsofDollars)

'a)

Construction plans are revised from time to time to reflect changes in conditions. Actualconstruction costs may vary from those projected because of changes in plans, cost fluctuations,environmental regulations and other factors. Construction expenditures include AFUDC whichis expected to be less than $20 million in each of the years 1988-1990.

the early redemption of $277 million ofhigh-cost first mortgage bonds andpreference stock and the scheduled retire-ment of $ 100 million of first mortgagebonds and preferred and preference stock.Details of the amount of securities soldand redeemed and other information onsources and uses of funds during 1985-1987 are set forth in the Statement ofChanges in Financial Position on page 28.

Internally generated funds during thenext three years are expected toessentially meet the Company's needs forconstruction expenditures, maturing long-term debt, and preferred and preferencestock sinking fund requirements, whichare expected to aggregate about $ 1.0billion. As a result, outside financing willbe undertaken primarily to provide fundsfor the reduction of short-term debt, theearly retirement of certain high-costsecurities or to take advantage of favor-able market conditions. The exact amount,nature and timing of sales of securitieswillbe determined in the light of marketconditions and other factors.

Financial ConditionThe Company's overall financial

condition continued to improve in 1987.

V

Earnings per share of common stock, at$ 3.32, have increased to the highest levelsince 1982. Certain key financial ratios,which are indicators of liquidity, re-mained at about last year's levels. Theratio of the Company's pre-tax income tointerest charges dropped slightly from 2.8times in 1986 to 2.7 times for 1987. Thecash flow coverage of the Company's com-mon stock dividends was 3.2 times for1987. This is the highest level for this ratioin many years.

Future financial condition and earningsperformance could be adversely affectedby many factors including unanticipatedincreases in future capital requirements,the level of economic activity in theCompany's service area, future action bylegislative bodies or rate-regulatoryagencies and additional costs incurred inconnection with the Company's program ofphasing out affiliated coal-miningoperations. Of particular importance in1988 is the Company's need to requestregulatory approval to change the methodof depreciating the Susquehanna station tocomply with the provisions of a newaccounting standard. See Note 14 toFinancial Statements for additionalinformation concerning this accountingstandard.

Times InterestCharges Earned

(12 Months Ended Each Quarter)

Tieue Zoracd(&r.Tcu)

Cash Flow Coverageof Common Stock Dividends

(12 Months Ended Each Quarter)

83 81 88 86 87 83 84 83 86 87

22

..Index of Financial Data

Auditors'pinionManagement's Report on Responsibility for Financial Statements......Financial Statements

Statement of Income .

Balance Sheet.Statement of Changes in Financial PositionSchedule of Taxes .

Schedule of Capital StockSchedule of Long-Term Debt.Statement of Earnings Reinvested .

Notes to Financial StatementsSelected Financial and Operating Data

23

24

25

26

28

29

3032

33

33

42

Auditors'pinion

DeloitteHas kins+SellsCertified Public Accountants

One World Trade CenterNew York, New York 10048

To the Shareowners and Board of Directors of Pennsylvania Power &Light Company:

We have examined the balance sheets of Pennsylvania Power & Light Company as ofDecember 31, 1987 and 1986 and the related statements of income, earnings reinvested,and changes in financial position for each of the three years in the period ended December31, 1987. Our examinations were made in accordance with generally accepted auditingstandards and, accordingly, included such tests of the accounting records and such otherauditing procedures as we considered necessary in the circumstances.

In our opinion, such financial statements present fairly the financial position of theCompany at December 31, 1987 and 1986 and the results of its operations and the changesin its financial position for each of the three years in the period ended December 31, 1987,in conformity with generally accepted accounting principles consistently applied duringthe period except for the change, with which we concur, in 1987 in the method ofaccounting for pension costs as described in Note 11 to the financial statements.

February 3, 1988

J

Management's Report on Responsibility..for Financial Statements

The management of PennsylvaniaPower &Light Company is responsible forthe preparation, integrity and objectivityof the financial statements and all othersections of this annual report. Thefinancial statements have been preparedin conformity with generally acceptedaccounting principles and the UniformSystem of Accounts prescribed by theFederal Energy Regulatory Commission.In preparing the financial statements,management makes informed estimatesand judgments of the expected effects ofevents and transactions based upon cur-rently available facts and circumstances.

The Company maintains a system ofinternal accounting controls designed toprovide reasonable, but not absolute,assurance that assets are safeguarded andthat transactions and events are executedin accordance with management'sauthorization and are recorded properly topermit preparation of financial statementsin accordance with generally acceptedaccounting principles. The concept ofreasonable assurance recognizes that thecost of a system of internal accountingcontrols should not exceed the benefitsderived and that there are inherentlimitations in the effectiveness of anysystem of internal accounting controls.Fundamental to the control system is theselection and training of qualifiedpersonnel, an organizational structurethat provides appropriate segregation ofduties and the utilization of writtenpolicies and procedures. In addition, theCompany maintains an internal auditing

program to evaluate the Company'sinternal accounting controls, policies andprocedures as to adequacy, applicationand compliance.

Deloitte Haskins & Sells, independentcertified public accountants, have beenengaged to examine the Company'sfinancial statements and to render anopinion as to whether such financialstatements, considered in their entirety,present fairly the Company's financialposition, operating results and changes infinancial position, in conformity withgenerally accepted accounting principles.Their examination is conducted inaccordance with generally acceptedauditing standards and includes suchprocedures believed by them to besufficient to provide reasonable assurancethat the financial statements are notmaterially misleading and do not containmaterial errors.

The Board of Directors, acting throughits Audit Committee, overseesmanagement's responsibilities in thepreparation of the financial statements. Inperforming this function, the AuditCommittee, which is composed of directorswho are not employees of the Company,meets periodically with management, theinternal auditors and the independentcertified public accountants to review thework of each. Deloitte Haskins & Sells andthe internal auditors have free access tothe Audit Committee and to the Board ofDirectors, without management present,to discuss internal accounting control,auditing and financial reporting matters.

4

Statement of Income

Operating Revenues (Note 2)

1987 1986 1985(Thousands ofDollars)

$2,088,759 - $2,188,925 $ 1,976,502

Operating ExpensesNet cost of energy

FuelPower purchases.Interchange power sales.

Wages and employee benefits .

Other operating costs.Depreciation (Note 14) .

Income taxes(Note 5) .

Taxes, other than income .

Deferred Susquehanna energy savings net ofoperating expenses (Note 3) .

640,461101,552

~866,556)375,457277,486298,021169,792287,790150,638

641,74090,379

~(289,422442,697280,936277,286155,073282,712160,896

756,295164,968

~587,618)338,645259,670272,147141,912243,160170,405

29,0751,504,179 1,599,600 1,450,014

Operating Income 584,580 589,325 526,488

Other Income and (Deductions)Allowance for equity funds used during

construction (Note 6) .

Deferred Susquehanna capital costs (Note 8) ..Income tax credits (Note 5)Other —net .

Income Before Interest Charges ..

8,473

5,570(6,188)2,855

587,435

(1,443)

6,959(2,709)2,807

592,132

(51,490)31,74280,764(7,670)53,346

579,834

Interest ChargesLong-term debt .

Short-term debt and other .

Allowance for bor rowed funds usedduring construction (Note 6) .

Net Income

Dividends on Preferred and Preference Stock ..Earnings Applicable to Common Stock .....

Earnings Per Share of Common Stock (a) ..

271,82721,935

~8,788)284,974802,461

54,426

290,78314,036

12,795292,024300,108

69,057

284,53826,872

22,189289,221290,613

91,286

$ 248,085 $ 231,051 $ 199,327

8.82 $ 3.10 $ 2.68

Average Number of Shares Outstanding (thousands) .. 74,644 74,513 74,513

Dividends Declared Per Share of Common Stock ..

(a) Based on average number of shares outstanding.

$ 2.68 $ 2.58 $ 2.56

See accompanying Schedules and Notes to Financial Statements. 25

at December 51

Assets

UtilityPlantPlant in service —at original cost ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~

Less accumulated depreciation (Note 14)

1987 1986(Thousands ofDollars)

$ 7,862,661 $7,072,1421,392,661 1,256,3045,970,000 5,815,838

Construction work in progress —at cost .Nuclear fuel owned and leased —net of amortization (Note 8) ~ ~

Other leased property—net of amortization (Note 8) ~ ~ ~ ~ ~ ~ ~ ~ ~ ~

141,960334,315

82,445

224,426378,432

78,4336,528,720 6,497,129

InvestmentsAssociated companies —at equityReceivable from litigation settlementNonutilityproperty and other—at cost or less ~

42,806

28,20570,511

22,5389,700

17,06549,303

Current AssetsCashSpecial deposit for purchase of nuclear fuelAccounts receivable (less reserve: 1987, $8,051; 1986, $7,262)

Customers ~

Interchange power sales ~

OtherUnbilled revenuesFuel (coal and oil)—at average costMaterials and supplies —at average cost. ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~

Common stock held for dividend reinvestment plan —atcost (Note 7)

Other ~

5,1168,485

173,80129,248

7,90668,478

141,15838,096

9,89821,028

4,0498,550

165,84429,501

9,40790,484

189,67428,647

10,81619,601

498,189 506,573

Deferred DebitsUtilityplant carrying charges —net of amortization (Note 13) ~

Unamortized debt expense and reacquired debt costs ~ ~ ~ ~ ~ ~ ~ ~ ~

Other ~

28,23787,73536,168

102,135

28,60523,34634,11686,067

87,194,555 $7,139,072

26 See accompanying Schedules and 1Votes to Financial Statements.

CapitalizationCommon equity

Common stockCapital stock expense ..Earnings reinvested...

Liabilities1987 1986

(T/~ousands ofDollars)

$ 1,825,525 $ 1,307,267(12,987) '14,155)657,388 622,537

1,969,971 1,915,649

Preferred and preference stockWith sinking fund requirements.....Without sinking fund requirements.

Long-term debt .

495,590 475,239281,875 231,375

2,514,056 2,732,2235,210,992 5,354,486

Current LiabilitiesCommercial paper .....................Long-term debt due within one year .

Capital lease obligations due within one year (Note 8).... ~.... ~ ..Accounts payableTaxes accruedInterest accrued ..... ~ .. ~ .................................. ~

Dividends payable.Energy revenues to be refundedOther .

168,00020,71088,522

105,45039,87769,62264,28642,82773,799

112,00046,56874,360

101,20565,60678,42561,063

71,044667,093 605,271

Deferred Credits and Other Noncurrent LiabilitiesDeferred investment tax credits (Note 5) .Deferred income taxes (Notes 5 and 15)Capital lease obligations (Note 8) .

Other .

218,638728,678825,862

58,297

190,797601,911329,438

57,1691,816,470 1,179,315

Commitments and Contingent Liabilities (Note 16) . ~....

$7,194,555 $7,139,072

See accompany& tg ScAedules and Notes to Financial Statements. 27

\

Statement of Changes in Financial positionSource of Funds

From operationsNet incomeCharges (credits) to income not involving

working capitalDepreciation ~

Amortization of property under capital leases ~ ~

Noncurrent deferred income taxes andinvestment tax credits —net ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~

Allowance for funds used during construction. ~

Other ~

1987 1986 1985(Thousands ofDollars)

$ 302,461 $ 300,108 $290,613

169,79287,516

155,07371,380

141,91277,850

133,10329,301(5,406)

144,598 205,064(12,261) (11,352)

(1,525) ~922690,581 719,351 667,373

Outside financingCommon stockPreferred stockFirst mortgage bondsShort-term debt—net increase (decrease) ~ ~ ~

18,258150,000

56,000

100,000500,000

16,500180,000

(9,300)224,258 616,500 170,700

Capital lease obligations ~ ~

Working capital —decrease (excluding debt andcapital lease obligations) (a) ~

96,808

35,902

81,595 79,533

$ 1,047,549 $ 1,417,446 $917,606

Application of FundsConstruction expenditures ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~

Additions to nuclear fuel owned and leased ~ ~ ~ ~ ~

Additions to other leased propertyAllowance for funds used during construction ~ ~

249,653 $ 275,76140,014 65,28220,000 14,146

~12,261) ~11,352)

$ 199,85174,34420,41829,301

297,406 343,837 323,914

Securities retiredPreferred and preference stockFirst mortgage bondsSecured term notes ~

129,649247,240

315,771323,470

47,01776,534

100,000376,889 639,241 223,551

Reduction in capital lease obligations ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~

Dividends on preferred, preference andcommon stock

Premium on redemption of preference stock. ~ ~ ~ ~

Premium on retirement of long-term debt ~ ~ ~ ~ ~ ~ ~

Working capital —increase (excluding debt andcapital lease obligations) (a)

Other —net ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~

91,222

254,4299,264

14,160

74,327

261,29827,28317,540

72,5104,179 ~13,590)

84,530

282,036

14,927~11,352

$ 1,047,549 $ 1,417,446 $917,606

(a) Changes in components of working capital(excluding debt and capital lease obligations)

CashAccounts receivable.Unbilled and refundable revenues .

Fuel (coal and oil)Accounts payable and accrued taxes ~ ~ ~ ~ ~ ~ ~

Other-netNet increase (decrease).

$ 1,0676,198

(69,338)1,479

21,9842,708

$ (35,902)

$ (566)(1,048)91,753

(14,898)5,145

(7,876)

$ 72,510

$ (1,839)48,23470,594

(43,289)(20,053)(38,720)

$ 14,927

28 See accompanying Schedules and Notes to Financial Statements.

~ ~

Sc:heclLIle of Taxes4( 1987 1986 1985

(Thousands ofDollars)Income Tax Expense (Note 5)

Included in operating expensesProvision —Federal .

State

Deferred —Federal ..State ..

Investment tax credit, net—Federal.......

Included in other income and deductionsProvision (credit)—Federal ..

State ............

Deferred —FederalState .

$ 65,63522,92288,557

118,8796,338

119,717

29,516287,790

~7,620)1,668

3872,050

$ 37,71327,72865,441

130,5765,092

135,668

81,603282,712

(5,313)~1,646

(6,959)

$ 78,64823,458

102,106

107,954~(2,308

105,646

35,408243,160

(67,005)~13,759

(80,764)

~5,570) (6,959) (80,764)

Total income tax expense —FederalState

204,01028,210

244,57931,174

155,0057,391

$282,220 $275,753 $ 162,396

Detail of deferred taxes in operating expensesTax depreciation... ~ ~....Reacquired debt costsState utilityrealty tax .. ~

Deferred Susquehanna energy savings netof operating expenses .

Other .

$ 106,6015,8012,549

4,766

$ 129,8389,557

(3,033)

694

$ 130,237

(13,291)

(15,811)4,511

$ 119,717 $ 135,668 $ 105,646

Reconciliation of Income Tax ExpenseIndicated federal income tax on

pre-tax income at statutory tax rate(1987: 39.95%; 1986-1985: 46%) ........

Increase (decrease) due to:State income taxesDepreciation differences not normalized ..AFUDC (Note 6)...Utilization of loss carryforward..........Deferred Susquehanna capital costs......Other .

$213,605

18,68010,258(1,888)

~8,935)18,615

$264,896

19,0788,987

(5,222)

11,98610,857

$208,384

(1,566)12,29013,478

(52,604)(14,601)

~2,985(45,988)

Total income tax expenseEffective income tax rate .. 47.9% 35.8%48.4%

$282,220 $275,758 $ 162,396

Taxes, Other Than IncomeState gross receipts.State utilityrealty...State capital stockSocial security and other..............

$ 88,14926,50221,82719,155

$ 150,633

$ 79,20941,46722,78917,431

$ 160,896

$ 73,54956,40723,55716,892

$ 170,405

See accompanying Notes to Financial Statements. 29

Schedule of Capital at December 51

SharesOutstanding Outstanding

1987 1986 1987(Thousands ofDollars)

SharesAuthorized

Preferred Stock —$ 100 par, cumulative (a)4i/2%Series.

$ 53,019528,846581,365

$ 53,019 530,189 629,936415,446 5,283,456 10,000,000

$ 468,465

Preference Stock —no par, cumulative (a) ~ ~ ~ $ 145,600 $ 238,149 1,456,000 5,000,000

Common Stock —no par(a) ..........Employee Subscriptions

(employee stock ownership plan) ~ ~

$ 1,328,653 $ 1,307,267 74,972,822 85,000,000

1,872

$ 1,825,525 $ 1,307,267

Details of Preferred and Preference Stock (b)

15,000

$495,590 $475,239

Outstanding1987 1986

(Thousands ofDollars)With Sinking Fund Requirements

Series Preferred6.875% (d)........ $ 50,0007.00% (d) ~ ~ ~ ~ ~ ~ ~ ~ ~ 100,000 $ 100,0007.375% (d)........ 50,0007.40%... ~ ~ ~ ~ ~ ~ ~ ~ ~ 25,600 27,2007.75% ~ . ~ . ~ . ~ . ~ . ~ ~ 12,000 24,0007.82% (d) ~ ~ ~ ~ ~ ~ ~ ~ ~ 50,0008.00%............ 87,500 40,0008.00%, Second ~ ~ ~ ~ 4,000 6,0008.25%............ 20,000 30,0008.75% (d) ~ ~ ~ ~ ~ ~ ~ ~ ~ 51,000 54,0009.24% (d)......... 49,890 55,89011.00%, Adjustable

(e) (f) .......... 15,000Preference

$8.625 (f) ~ ~ ~ ~ ~ ~ ~ ~ 30,600 40,800$ 11.00 (g) ~ ~ ~ ~ ~ ~ ~ ~ 32,849$ 11.60 (h) ~ ~ ~ ~ ~ ~ ~ ~ 50,000

500,0001,000,000

500,000256,000120,000500,000875,000

40,000200,000510,000498,900

$ 106.88107.00107.38103.26100.00107.82104.00100.89100.92110.00108.00

150,000 125.00

306,000 None

OptionalRedemption

Shares Price PerOutstanding Share

1987 1987

100,000200,000

25,00016,000

120,000100,00025,00020,000

100,00030,00030,000

1993-19971998-19971993-20121988-2003

19881993-19971988-20021988-19891988-19891988-20041988-2005

30,000 1989-1993

102,000 1988-1990

Sinking FundProvisions(c)

Shares to beRedeemed RedemptionAnnually Period

Without Sinking Fund4~/2% Preferred .....Series Preferred

8.35% ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~

4.40%............4.60%............8.60% ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~

9.00%......... ~ . ~

Preference$8.00 ............$8.40 ............

4,17822,878

6,30022 287

7,763

4,17822,878

6,30022,237

7,763

35,00040,00040,000

35,00040,00040,000

$281,875 $231,375

Requirements$ 53,019 $ 53,019

41,783228,773

63,000222,370

77,630

350,000400,000400,000

103.50102.00103.00104.00104.00

101.00101.00101.00

530,189 $ 110.00

30 Se. accompanying Notes to Financial Statements.

Increases (Decreases) in Capital Stock (Thousands of Dollars)

1987Shares Amount

1986Shares Amount

1985Shares Amount

$ 16,887

50,0001,000,000

500,000(16,000) (16,000) $ (1,600

15,00012,000

2,000(10,000

(3,000(65

(12,000)

25,00020,000

(100,00030,00030,000

265,000260,000150,000340,000

(4,210) (421)

(4,317) (432)

Common Stock —issuedunder employee stockownership plan .......... 459,525

Series Preferred Stock6.875% ................. 500,0007.00% . $ 100,0007.375% 50,0007.40% . (1,600) (1,600) (16,0007.50%. (150,0007.75/o........ (120,000) (12,000) (120,000) (120,0007.82%.............. 500,000 50,0008.00%................... (25,000 (2,500 (2,500 (25,0008.00%, Second............ (20,000 (2,000 (2,000 (20,0008.25%........ (100,000 (10,000 (10,000 (100,0008.75%................... (30,000 (3,000 (3,000 (30,0009.24/o......... (60,000 (6,000 (3,000 (65010.75% 26,50011.00% 26,00011.25% 15,00014.00% . 84,000

Preference Stock$8.625 (102,000) (10,200)$ 11.00 (50,000) (5,000)$ 11.60$ 13.00 149,705 14,971$ 13.00, Second ........... 500,000 50,000$ 13.68 .... 500,000 50,000$ 15.00 500,000 50,000

Decreases in Preferred and Preference Stocks represent: (i) the redemption of stock pursuant to sinkingfund requirements, (ii) shares redeemed pursuant to optional redemption provisions, or (iii)sharesreacquired through market purchases and subsequently cancelled (used to meet sinking fundrequirements).

(a) Each share of preferred, preference and common stock entitles the holder to one vote on any questionpresented to any shareowners'eeting.

(b) The involuntary liquidation price of the preferred and preference stock is $ 100 per share, and theoptional voluntary liquidation price is the optional redemption price per share in effect, except for the4~/2% Preferred and the $8.625 Series Preference Stocks which are $ 100 per share (plus in each caseany unpaid dividends). Liquidation payments on preferred stock have priority to such payments onthe preference stock.

(c) The aggregate amount of sinking fund redemption requirements through 1992 are (thousands ofdollars): 1988, $43,190; 1989, $35,300; 1990, $23,300; 1991, $ 13,100; 1992, $ 13,100.

(d) On certain sinking fund redemption dates, additional shares may be redeemed up to the number ofshares required to be redeemed annually.

(e) Effective April 1, 1988, the dividend rate is subject to a one-time adjustment pursuant to a formulabased on the then current prime rate.

(f) Because certain federal income tax benefits have been lost to corporate holders of these stocks, theCompany may be required to make indemnity payments sufficient to provide the holders with anagreed upon effective yield after federal income taxes. At December 31, 1987, the Company estimatesthat future indemnity payments would not exceed $4.8 million, most of which would be payable onlyafter the stock is redeemed or is sold by the holders.

(g) The Company redeemed all of the outstanding Stock on August 7, 1987 at the optional redemptionprice of $ 105.50 per share which included $ 1.10 per share representing an amount equal to theaccrued dividends from July 1, 1987.

(h) The Company redeemed all of the outstanding Stock on February 18, 1987 at the optional redemptionprice of $ 115.52 per share which included $ 1.52 per share representing an amount equal to theaccrued dividends from January 1, 1987.

See accompanying Notes to Financial Statements.

First Mortgage Bonds (a)16'/2%16'/%16'/2%16'/2%12'/s%16~/2%

16'/2%12~/e%

16'/2%16'/2%12'/s%16'/%4s/%12'/s%16'/s% (c)4s/% to 13)/2%7% to 9%7~/2% to 9s/4%

13i/4% (d)9% to 13/s% .

First Mortgage Pollution Control Bonds (a)5/s% Series A .

7/s% to 8/s% Series C.ll~/4% to 11~/s% Series D10s/s% Series E10/s% Series F»

9/s% Series G .

10,10010,40010,000

7,00010,40010,000

8,50010,40010,00010,40080,00010,000

850,000265,000635,000

750,000

$ 36,00010,40010,10010,40010,0007,000

10,40010,0008,500

10,40010,00010,40030,00010,000

100,000350,000265,000635,000100,000750,000

August 1, 1987September 1, 1987

August 1, 1988September 1, 1988

February 1, 1989August 1, 1989

September 1, 1989February 1, 1990

August 1, 1990September 1, 1990

February 1, 1991September 1, 1991December 1, 1991February 1, 1992

April 1, 19921993-19971998-20022003-20072008-20122013-2017

20,90020,00070,00037,750

115,50055,000

20,06020,00070,00037,750

115,50055,000

2,455,510 2,702,750

(e)(e)(e)

March 1, 2014September 1, 2014

July 1, 2015

at December 51

Outstanding1987 1986 Maturity(b)

(Thousands ofDollars)

Other Long-Term DebtSecured term notes (a) (f) .

Miscellaneous promissory notes ~ ~ ~ ~

100,000496

100,000668

March 31, 19911988-1995

Less amount due within one year ~ ~ ~

2,584,76620,710

2,556,006Unamortized(discount) andpremium —net... ~21,240)

2,803,418(24,622)

2,778,79146,568

$2,514,056 $2,732,223

(a) Substantially all utilityplant is subject to the lien of the Company's first mortgage. Certain utilityplant is also subject to the lien of a second mortgage issued as security for term notes.

(b) Aggregate long-term debt maturities through 1992 are (thousands of dollars): 1988, $20,710; 1989,$28,414; 1990, $29,839; 1991, $ 151,339; 1992, $ 10,939. Maximum sinking fund requirements aggregate$32.6 million through 1992 and may be met with property additions or retirement of bonds.

(c) In March 1987, the Company redeemed $ 100 million principal amount of First Mortgage Bonds, 16~/2%

Series due 1992.(d) In September 1987, the Company redeemed $ 100 million principal amount of First Mortgage Bonds,

131/4% Series due 2012.(e) Bonds mature annually as follows (thousands of dollars): (i) Series A on May 1, 1988, $60; 1989-2002,

$900; 2003, $7,400 (ii)Series C on April 1, 2000, $4,000; 2006-2009, $2,000; 2010, $8,000 (iii)Series Don November 1 ~ 2002, $ 15,000; 2012, $ 55,000.

(f) Variable interest rate.

32 See accompanying Notes to Financial Statements.

.Statement of Earnings Reinvesteci1987 1986 1985

(Thousands ofDollars)

Balance, January 1

Add Net Income ....

DeductCash dividends declared

Preferred stock —at required annual rates......Preference stock —at required annual rates.....Common stock —per share: 1987, $2.68;

1986, $2.58; 1985, $2.56Costs associated with the redemption of

preferred and preference stock ................

Balance, December 31

$622,587 $615,102 $606,525302,461 300,108 290,613924,998 915,210 897,138

40,86814,058

41,47027,587

44,53746,749

200,003 192,241 190,750

18,186 31,875267,615 292,678 282,036

$657,888 $622,537 $ 615,102

Notes to Einancial Statements1. Summary of Significant

Accounting PoliciesAccounting Records

Accounting records are maintained inaccordance with the Uniform System ofAccounts prescribed by the FederalEnergy Regulatory Commission (FERC)and adopted by the Pennsylvania PublicUtilityCommission (PUC).

AffiliatedCompaniesInvestments in unconsolidated

subsidiaries (all wholly owned) and in SafeHarbor Water Power Corporation (ofwhich the Company owns one-third of theoutstanding capital stock representingone-half of the voting securities) arerecorded using the equity method ofaccounting. Unconsolidated subsidiariesoperate in the United States and areengaged in coal mining, holding coalreserves, oil pipeline operations and realestate investment. Allunconsolidatedsubsidiaries considered in the aggregatewould not constitute a "significantsubsidiary" as that term is defined by theSecurities and Exchange Commission.

In October 1987, the F<inancialAccounting Standards Board (FASB)issued Statement of Financial AccountingStandards (SF<AS) 94, ConsoHdation ofAllMajority-owned Subsidiaries. Inaccordance with the provisions of SF<AS94, the Company in 1988 willprepareconsolidated financial statements whichinclude majority-owned subsidiaries. Themost significant effect on the Company'sfinancial statements willbe the addition ofsubsidiary assets and liabilities(approximately $268 million at December31, 1987) on the balance sheet.

UtilityPlant and DepreciationAdditions to utilityplant and

replacement of units of property arecapitalized at cost. The cost of units ofproperty retired or replaced is removedfrom utilityplant accounts and charged toaccumulated depreciation. Expendituresfor maintenance and repairs of propertyand the cost of replacing items determinedto be less than units of property arecharged to operating expense.

F<or financial statement purposes,depreciation is being provided over theestimated useful lives of property and iscomputed using a modified straight linemethod for the nuclear-fueledSusquehanna Steam E<lectric Station andthe straight line method for all otherproperty. These methods are also used forrate-making purposes. The modifiedstraight line method provides for anincreasing amount of annual depreciationfor the Susquehanna station until the year2000, at which time the plant's netundepreciated cost willbe depreciated inequal annual amounts over the plant'sremaining life. Provisions fordepreciation, as a percent of averagedepreciable property, approximated 2.4%in 1987 and 2.2% in 1986 and 1985.

The method of depreciation for theSusquehanna station is considered to be arate phase-in plan under accounting rulesadopted by the FASB in 1987. TheCompany intends to request regulatoryapproval in 1988 to change its method ofdepreciating the Susquehanna station.(See Note 14.)

Nuclear Decommissioning andFuel Disposal

An annual provision for decommis-sioning costs of the Susquehanna station,equal to the amount allowed for rate-making purposes, is charged to operatingexpense. Such amounts are invested in atrust fund which can be used only forfuture decommissioning costs.

The U.S. Department of Energy (DOE)is responsible for the permanent storageand disposal of spent nuclear fuel removedfrom nuclear reactors. The Companycurrently pays DOE a fee for futuredisposal services and recovers such costsin customer rates.

Premium on ReacquiredLong-Term Debt

As provided in the Uniform System ofAccounts, the premium paid and expensesincurred to redeem long-term debt aredeferred and amortized over the life of thenew debt issue or the remaining life of theretired debt when the redemption is notfinanced by a new issue.

Allowance for FundsUsed During Construction

As provided in the Uniform System ofAccounts, the cost of funds used to financeconstruction projects is capitalized as partof construction cost. The components ofallowance for funds used duringconstruction (AFUDC) shown on theStatement of Income under other incomeand deductions and interest charges arenon-cash items equal to the cost of fundscapitalized during the period.

AFUDC serves to offset on theStatement of Income the interest chargeson debt and dividends on preferred andpreference stock incurred to financeconstruction. In addition, a return oncommon equity used to financeconstruction is imputed. (See Note 6.)

Capital LeasesCapital leased property is recorded at

the present value of future lease paymentsand is amortized so that the total ofinterest on the lease obligation andamortization of the leased property equalsthe rental expense allowed for rate-making purposes. (See Note 8.)

RevenuesRevenues are recorded based on the

amounts of electricity delivered tocustomers through the end of eachaccounting period. This includes amountscustomers willbe billed for electricitydelivered from the time meters were lastread to the end of the respective period.

The Company's PUC tariffs contain anEnergy Cost Rate (ECR) under which

customers are billed an estimated amountfor fuel and other energy costs. Anydifference between the actual andestimated amount for such costs iscollected from or refunded to customers ina subsequent period. Revenues applicableto ECR billings are recorded at the level ofactual energy costs and the difference isrecorded as payable to or receivable fromcustomers.

Effective January 1, 1987, the Companybegan to apply an Income Tax Adjustment(ITA)credit to PUC customers'ills toreflect the reduction in income taxexpense due to the Tax Reform Act of1986 (Tax Act). Any difference betweenthe ITAcredited to customers and theCompany's actual change in income taxexpense due to the Tax Act is alsocollected from or refunded to customersin a subsequent period. The Companyrecords any such difference as payable toor receivable from customers.Income Taxes

The Company and its subsidiaries file aconsolidated federal income tax return.Income taxes are allocated to theindividual companies based on theirrespective taxable income or loss andinvestment and payroll-based tax credits.Income taxes applicable to the Companyare allocated to operating expenses andother income and deductions on theStatement of Income.

Deferred income taxes are recorded fortiming differences between book andtaxable iricome to the extent they arepermitted in rate determinations byregulatory agencies. The principal itemfor which deferred taxes is not currentlyrecorded is the difference between taxdepreciation and book depreciation relatedto property placed in service prior to 1981.

Investment and payroll-based taxcredits result in a reduction of federalincome taxes payable. The investment taxcredits are deferred when utilized andamortized over the average lives of therelated property. The Tax Act repealedthe investment tax credit effectiveDecember 31, 1985, except for tax creditsapplicable to transition property, andrepealed the payroll-based tax credit foryears after 1986. (See Note 5.)

In December 1987, the FASB issuednew accounting rules that willaffectdeferred income taxes recorded by theCompany. (See Note 15.)Pension Plan

The Company has a noncontributorypension plan covering substantially allemployees. Company funding is basedupon actuarially determined computationsthat take into account the amount deduct-

ible for income tax pur poses and therr'finimum contribution required under theEmployee Retirement Income SecurityAct of 1974.

Effective January 1, 1987, the Companydetermined its pension cost in accordancewith provisions of SFAS 87,

Employers'ccountingfor Pensions. This statementprescribes procedures to determine

periodic pension cost which differ fromthose previously used by the Company.(See Note 11.)

ReclassificationCertain amounts from prior year

financial statements have been reclassifiedto conform to the current yearpresentation.

2. Rate MattersIn December 1986, the PUC approved

the Company's request to reduce its retailrates by approximately $32 millioneffective January 1, 1987. This reductionreflected the net effect of: (1) a $47 milliondecrease which was put in place throughthe ITA to reflect lower income taxexpense resulting from the Tax Act; (2) a$26 million decrease because of changes inthe State Tax Adjustment Surcharge(STAS) and (3) a $41 million increase incosts to be recovered through the ECR.

Following a complaint filed by theOffice of Consumer Advocate generallychallenging these rate changes, theCompany and other parties to theproceeding entered into settlementagreements which have been approved bythe PUC. The agreements require theCompany to refund to customers in 1988approximately $ 17 million related to taxissues and approximately $0.5 millionrelated to ECR issues. Accrual of theserefunds adversely affected 1987 earningsby about 10 cents per share of commonstock.

In December 1987, the PUC approvedthe Company's request to reduce its retailrates by approximately $37.5 millioneffective January 1, 1988. This reductionreflects the net effect of: (1) a $ 65 milliondecrease in the ITA, primarily as a result

of a decrease in the maximum federalcorporate income tax rate from a blended39.95% in 1987 to 34% in 1988 under theTax Act; (2) a $25.8 million increase in theECR reflecting the net effect of antici-pated increases in energy costs and (3) a$2.2 million increase in the STAS. TheLehigh Valley Power Committee has fileda complaint with the PUC against theECR component of the filing.The Companyhas filed a motion to dismiss the com-plaint. The Company cannot predict theultimate outcome of this matter.

In April 1985, the PUC granted $ 121million of the $380 million net rateincrease requested by the Company toreflect the operation of Unit 2 at theSusquehanna station and other increasedcosts of doing business. A return on thecommon equity investment in Unit 2 wasdenied based on the PUC's conclusion thatthe Company temporarily had too muchgenerating capacity. This adjustmentreduced requested revenues by about $ 161million. The PUC order indicated that theequity disallowance would continue untilthe Company can show that Unit 2's neteconomic benefits exceed its net cost orthat its capacity is necessary for systemreliability.

The FERC permitted a $5.7 millionincrease in rates for resale customerseffective January 1986.

3. Deferral of SusquehannaOperating and Carrying Costs

In accordance with orders of the PUC,the Company deferred certain operatingand capital costs, net of energy savings,associated with Units 1 and 2 at theSusquehanna station. The costs deferredwere incurred from the date the unitswere placed in commercial operation until

the effective dates of the rate increasesreflecting operation of the units. The de-ferred costs plus related deferred incometaxes totaled $89.2 million at December31, 1987. The Company expects to ultimate-ly recover this amount in rates charged tocustomers. Such recovery willbe subjectto PUC review and approval. No return isbeing accrued on the deferred costs.

4. Sales of Generating Capacityand Energy

The Company provides Atlantic City

Electric Company (Atlantic) with 125,000kilowatts of capacity and energy from theSusquehanna station and Jersey Central

Power and Light Company (JCP&L) with945,000 kilowatts of the Company's totalgenerating capacity and energy. Sales toAtlantic began in 1983 and expire in 1991,when another agreement provides Atlanticwith 125,000 kilowatts of capacity andenergy from the Company's coal-firedstations until the year 2000. Sales toJCP&L began in 1985 and continuethrough 1995, with the amount thendeclining uniformly each year until theend of the agreement in 1999.

In January 1988, the Company enteredinto an agreement which provides thatbeginning in October 1991 Baltimore Gas

and Electric Company (BG&E) willpurchase 125,000 kilowatts of theCompany's share of capacity and relatedenergy from the Susquehanna station.Sales to BG&E willcommence followingthe expiration of the agreement withAtlantic and willcontinue through May2001. The agreement with BG&E must beapproved by the FERC.

The agreements with Atlantic, JCP&Land BG&E provide that sales are to bemade at a price equal to the Company'scost of providing service, which includes areturn on the Company's investment ingenerating capacity.

5. Income TaxesThe Tax Act contains numerous

provisions that affected the Company in1987. Major provisions include a reductionin the corporate income tax rate, repeal ofthe investment and payroll-based taxcredits, a limitation of the amount ofinvestment tax credits the Company cancurrently utilize due to the alternativeminimum tax and a reduction of theamount of investment tax credits theCompany can carry forward to reducefuture federal taxes payable. TheCompany is also required to capitalize fortax purposes certain items such asinterest, pension cost and payroll taxesassociated with construction costs whichformerly were deductible when incurred.

Total federal income tax expense wasreduced in 1987 and is expected to befurther reduced in 1988 as a result of theTax Act. The net reduction in tax expensedue to the Tax Act is passed through toPUC customers by application of the ITA.

The Company estimates that, aftergiving effect to reductions required by theTax Act, approximately $ 141 millionofinvestment and $ 16 million of payroll-based tax credits willbe available toreduce income tax liabilities in 1988 and

future years. The carryforward period forthe unused credits at December 31, 1987expires in the years 1997 to 2002. Theamount of unused investment tax creditsis subject to change, pending the enactmentof a technical corrections act by Congress.

Taxable income for 1985 was sufficientfor the Company to utilize a tax losscarryforward of approximately $ 100million so that the current provision forincome tax expense in 1985 was reducedby approximately $ 58 million to reflect theutilization of such carryforwards. Thereduction in the current provision forincome taxes was offset on the Statementof Income by an equal decrease inAFUDC. (See Note 6.)

The Company has not recorded deferredincome taxes for certain timing differ-ences in accordance with PUC ratetreatment. The cumulative net amount ofsuch timing differences for which deferredincome taxes have not been recordedapproximated $634 million at December31, 1987. The Company would expect torecover through electric revenues thetaxes when due in future years.

See Note 15 for information concerninga new accounting statement for incometaxes.

36

6. Allowance for Funds UsedDuring Construction

Through 1986, AFUDC was recorded onan after-tax basis with the equitycomponent reduced by the income taxsavings realized due to the tax deducti-bilityof construction-related interest. Thetax savings related to the deductibility ofconstruction interest was included inincome tax credits under other income anddeductions on the Statement of Income.Under the Tax Act, most constructioninterest is no longer deductible.

Accordingly, effective January 1, 1987, theCompany stopped reducing AFUDC byany tax savings and began recording de-ferred income taxes for the tax effectof anydifference between the amount of construc-tion interest capitalized through AFUDCand that capitalized for tax purposes.

Taxable income for 1985 was sufficientto permit the Company to utilize a tax losscarryforward that existed at the end of1984. The loss carryforward was due inpart to the large amount of constructioninterest incurred in prior years. As a

result, the income tax reduction'reflectediiT AFUDC in the tax loss years waslimited to the tax applicable toconstruction interest determined to beusable as a tax deduction. Accordingly,

AFUDC for 1985 was reduced by about$ 58 million representing the tax effect ofprior year construction interest includedin the loss carryforward.

7. Stock Held For DividendReinvestment Plan

At December 31, 1987, the Companytemporarily held 298,803 shares of

Common Stock which were acquired inthe open market for distribution to partici-pants in the Dividend Reinvestment Plan.

8. LeasesProperty under capital leases consists of the following (thousands of dollars):

December 311987 1986

Nuclear fuel, net of accumulated amortization—1987, $ 148,106; 1986, $ 106,030 ................................

Vehicles, oil storage tanks and other property, net of accumulatedamortization —1987, $54,259; 1986, $52,119

Net property under capital leases .

$326,940 $325,365

82,445 78,433

8409,385 $403,798

Nuclear fuel lease payments, which arecharged to expense as the fuel is used forthe generation of electricity, were (millionsof dollars): 1987, $86.7; 1986, $ 68.0 and1985, $78.5. Future nuclear fuel leasepayments willbe based on the quantity ofelectricity produced by the Susquehannaunits. The maximum amount of unamor-tized nuclear fuel leasable under currentarrangements is $ 350 million.

Future minimum lease payments undercapital leases in effect at December 31,1987 (excluding nuclear fuel) wouldaggregate $ 109.5 million, including $27.0million of imputed interest. During the

five years ending 1992, such paymentswould decrease over the period from $22.0million per year to $ 11.5 million per year.

Interest on capital lease obligations wasrecorded as operating expenses on theStatement of Income in the followingamounts (thousands of dollars): 1987,$ 18,639; 1986, $ 15,889 and 1985, $ 18,256.

Generally, capital leases containrenewal options and obligate the Companyto pay maintenance, insurance and otherrelated costs. The Company also hasentered into various operating leaseswhich are not material with respect to theCompany's financial position.

9. Affiliated Company TransactionsThe principal transactions with

affiliated companies involve the purchaseof electricity from Safe Harbor WaterPower Corporation, the purchase of coal,the payment of interest and other costsrelated to coal reserves and the paymentfor oil transportation by pipeline. Costsrelated to these transactions with affiliatesaggregated (millions of dollars): 1987,$231.2; 1986, $218.5 and 1985, $271.0.

Under equity accounting, the operationsof affiliated companies resulted in after-tax charges against the Company's netincome of (millions of dollars): 1987, $3.4;1986, $ 0.8 and 1985, $2.6.

At December 31, 1987, the Companyhad guaranteed $207.2 million of theobligations of affiliated companies.

The Company purchased approximately$209 million of coal from its affiliated

mining companies in 1987 at prices equalto the cost of mining. The cost of coalpurchased is included in the energy costscollected from customers. The cost ofaffiliated coal (particularly coal from theGreenwich mines) has generally beenhigher than the cost of coal purchasedfrom other sources.

All the coal mined at the Greenwichmines is delivered to the Company'sMontour generating station and presentlyaccounts for about 40% to 50% of the coaldelivered to Montour. The PUC hasadopted a standard against which the costof all coal delivered to Montour willbemeasured over a two-year trial periodwhich began April 1, 1986. The standardis determined monthly based on the cost ofcoal purchased by other Pennsylvaniaelectric utilities. At the end of the trialperiod, the net amount of any costs in

excess of, or less than, the standard for thetwo years willbe determined. Unless thestandard is continued beyond the trialperiod, the net amount of any costs inexcess of the standard willbe returned toPUC customers through the Company's1989-1990 energy cost rate. Data as to thestandard is available for the period April1, 1986 through August 31, 1987. For thisperiod, the cost of coal delivered toMontour has been less than the standard.

Plans have been adopted which willresult in phasing out mining operations ofaffiliated companies by the early 1990s.The Company expects that over this period

investments in coal and facilities willberecovered and that coal willbe produced '.

at prices that willbe recovered in electricrates. However, the Company cannotpredict what future action may be takenby the PUC or whether future events orcircumstances could substantially alterthe current mining plans. Adverse actionby the PUC or adverse changes in themining plans could result in materialcharges against the Company's earnings.

At December 31, 1987, the capitalinvestment by affiliated companies in coal-mining operations amounted to about $81million.

10. Credit ArrangementsThe Company issues commercial paper

and, from time to time, borrows frombanks to provide short-term fundsrequired for general corporate purposes.

Revolving credit arrangements aremaintained with a group of banksprincipally as a back-up for the Company'scommercial paper. The banks havecommitted to lend the Company up to $200millionon a revolving basis in return forthe payment of commitment fees. Anyloans made under these credit arrange-ments would mature on June 30, 1990 and,at the option of the Company, interest

rates would be based upon certificate ofdeposit rates, Eurodollar deposit rates orthe prime rate.

The Company also maintains lines ofcredit aggregating $32 million with vari-ous banks in return for the maintenanceof compensating balances or the paymentof commitment fees. Bank borrowingsgenerally bear interest at rates negotiatedat the time of the borrowing.

There were no borrowings outstandingat the end of 1987 under these creditarrangements. Commitment fees incurredwere (millions of dollars): 1987, $ 0.5; 1986,$0.5 and 1985, $ 1.6.

11. Pension Plan and OtherPostemployment Benefits

The Company has a noncontributorydefined benefit pension plan coveringsubstantially all employees. Benefits arebased upon a participant's earnings andlength of participation in the plan, subjectto meeting certain minimum requirements.Effective January 1, 1987, the Companyadopted the provisions of SFAS 87,Z<mytoyers'Accounting for Pensions.Under this statement, net periodic pensioncost is determined using the projected unitcredit method, whereas pension cost forprior years was determined using adifferent actuarial method.

Pension costs for 1987, 1986 and 1985were $ 17.4 million, $29.1 million and $27.3

million, respectively. Of these amounts,$ 10.9 million in 1987, $ 18.7 million in 1986and $ 18.9 million in 1985 were charged tooperating expenses, and the balance wascharged to construction and otheraccounts. The decline in 1987 pension costwas principally attributable to adoption ofthe new accounting statement.

The weighted average discount rate andrate of increase in future compensationused in determining the actuarial presentvalue of the projected benefit obligationwere 7.5% and 6.4%, respectively. Theexpected long-term rate of return on planassets was 7.0%. Plan assets consistprimarily of common stocks, governmentand corporate bonds and temporary cashinvestments.

The components of net pension cost for 1987 include (thousands of dollars):

Service cost-benefits earned during the period.Interest cost on projected benefit obligationActual return on plan assetsNet amortization and deferralNet periodic pension cost

$ 23,58827,443

(21,365)(12,217)

3 17.449

'he funded status of the plan at December 31, 1987 was (thousands of dollars):

Ftair value of plan assets .

Actuarial present value of benefit obligations:Vested benefits .

Nonvested benefits .

Accumulated benefit obligationEffect of projected future compensation

Projected benefit obligationPlan assets in excess of projected benefit obligation ........ ~

Unrecognized transition asset (being amortized over 23 years) ................Unrecognized net gainAccrued pension cost at December 31, 1987 ....

$509,500

244,99110.716

255,707132,533

388,240

121,260(99,434)(21,826)

None

Substantially all of the Company'semployees willbecome eligible for certainhealth care and life insurance benefitsupon retirement. The cost of these benefits

for retired employees is generally recog-nized as expense when premiums are paidand were approximately (millions of dol-lars): 1987, $2.6; 1986, $3.5 and 1985, $2.0.

12. Jointly Owned FacilitiesAt December 31, 1987, the Company owned undivided interests in the following

facilities (millions of dollars):Merrill

Generating Stations—CreekSusquehanna Keystone Conemaugh Reservoir*

90.00% 12.34% 11.39% 8.37%

$3,839 $40 $42139 16 15

Ownership Interest .............UtilityPlant in Service .........Accumulated Depreciation......Construction Work

in Progress................... 31 3 1 $ 18

*Ownership interest is through a wholly owned subsidiary.

Each participant in these facilities associated with the stations is reflected onprovides its own financing with the the Statement of Income. The MerrillCompany advancing money to its subsi- Creek Reservoir willprovide water duringdiary for the MerrillCreek Reservoir. The periods of low river flow to replace waterCompany receives a portion of the total from the Delaware River used by theoutput of the generating stations equal to Company and other utilities in theits percentage ownership. The Company's production of electricity.share of fuel and other operating costs

15. UtilityPlant Carrying ChargesIn December 1986, the Company in

accordance with a FERC orderreclassified from utilityplant to deferreddebits $28.6 millionof net carrying chargeaccruals recorded on certain facilities for

Susquehanna and Martins Creekgenerating stations. The amount is beingamortized to expense over the remaininglife of the stations. During 1987,approximately $0.4 million was amortizedto expense.

14. Rate Phase-in PlanIn August 1987, the FASB issued SFAS

92, Regulated Enterprises —Accounting forPhase-in Plans, which established newaccounting rules for rate phase-in plansassociated with a major newly constructedgenerating plant. Under SFAS 92, autilitymay capitalize on its balance sheetthe costs deferred under a rate phase-inplan if the plan meets specific criteria

including the requirement that such costsare recovered within 10 years of the datethe deferrals began. Otherwise, thedeferred costs must be charged to expensein the period incurred. The currently usedmodified straight line method ofdepreciating the Susquehanna station isconsidered to be a rate phase-in plan thatdoes not meet the 10-year recovery periodestablished in SFAS 92 to permit

39

capitalization of deferred costs. Theamount of depreciation charged tocustomers during the first 10 years ofSusquehanna's life using the modifiedstraight line method of depreciation issubstantially less than the amountcustomers would have been charged usingstraight line depreciation.

SFAS 92 is effective in 1988, but its.application may be delayed ifa utilityseeks to amend its rate phase-in plan tocomply with the new accounting rules.The Company intends to request in 1988appropriate regulatory approval to complywith the new FASB rules. Such approval

is required to avoid making materialcharges against earnings for thedifference between straight line andmodified straight line depreciation ofSusquehanna.

As of December 31, 1987, cumulativedepreciation of Susquehanna was lower by$207 million using the modified straightline method rather than the straight linemethod. For 1987, 1986 and 1985, thecharge for modified straight linedepreciation was $52 million, $ 55 millionand $55 million, respectively, less thanstraight line depreciation.

15. Accounting for Income TaxesIn December 1987, the FASB issued

SFAS 96, Acconnting for Income Taxes,which established new accounting rulesthat willchange the manner in whichincome tax expense is determined foraccounting purposes. Prior accountingrules utilized a deferred method whileSFAS 96 utilizes a liabilitymethod underwhich deferred tax liabilities are recordedand adjusted for the effect of a change intax law or rates. The new rules must beadopted by 1989.

It is expected that SFAS 96 will requirethe Company to record additional deferredtax reserves for tax benefits previouslyflowed through to customers and for othertemporary tax differences. The increased

tax reserves willbe offset by acorresponding asset representing thefuture revenue expected to be providedthrough the ratemaking process.

Because the Tax Act lowered themaximum corporate federal income taxrate from 46%%d to 34%, most entities whenadopting SFAS 96 willbe required toadjust their deferred income tax reservesto reflect the lower tax rate. However, theTax Act essentially prohibits utilities fromadjusting, to the 34%%d tax rate, deferred taxreserves related to depreciation. As aresult, when the Company adopts SFAS96, no substantial reduction in existingdeferred income tax reserves is expectedbecause of the lower tax rate.

40

16. Commitments and ContingentLiabilities

The Company's constructionexpenditures are estimated to aggregate$280 million in 1988, $288 million in 1989and $277 million in 1990, includingAFUDC. See the section entitled CapitalExpenditure Requirements on page 21 foradditional information.

The Company is a member of certaininsurance programs which providecoverage for property damage tomembers'uclear generating plants.Facilities at the Susquehanna station areinsured against property damage losses upto $ 1.5 billion under these programs. TheCompany is also a member of an insuranceprogram which provides insurancecoverage for the cost of replacement powerduring prolonged outages of nuclear unitscaused by certain specified conditions.Under the property and replacementpower insurance programs, the Companycould be assessed retrospective premiumsin the event the insurers'osses exceedtheir reserves. The maximum amount the

Company could be assessed at December31, 1987 was about $ 15 million.

In October 1987, the NuclearRegulatory Commission (NRC) amendedits regulations to require that nuclearpower plant licensees obtain propertydamage insurance coverage of not lessthan $ 1.06 billion. The NRC regulationsfurther provide that any proceeds of thisinsurance must be segregated and be used,first, to place and maintain the reactor ina safe and stable condition and, second, tocomplete required decontaminationoperations before any insurance proceedswould be made available to the Companyor the trustee under the mortgage. TheCompany must incorporate such require-ments in its on-site property damageinsurance policies for the Susquehannastation before October 5, 1988. TheCompany is unable to predict what effectthe amended regulations may have at thetime insurance proceeds would be paid.

The Company's public liabilityforclaims resulting from a nuclear incident iscurrently limited to $720 million under

(t ~

provisions of the Price-Anderson, Act. TheCompany is protected against thispotential liabilityby a combination ofcommercial insurance and an industryassessment program. In the event of anuclear incident at any of the facilitiesowned by others and covered by the Price-Anderson Act, the Company could beassessed up to $ 10 million per incident,but not more than $20 million in acalendar year in the event more than oneincident is experienced.

The Price-Anderson Act expired onAugust 1, 1987. However, such expirationdoes not affect the current public liabilitylimitation for the Company's Susquehannastation. The United States House ofRepresentatives has passed legislationrenewing the Price-Anderson Act andincreasing the public liabilitylimitto $7billion. Under the legislation passed by theHouse of Representatives, the Companycould be assessed up to $ 126 million perincident. The United States Senate isconsidering similar legislation. TheCompany is unable to predict what actionCongress willultimately take regardingthe Price-Anderson Act.

In December 1986, the Company

redeemed at $ 100 per share $87.7 millionof Preferred Stock representing alloutstanding shares of the 10.75%, 11.00%,11.25% and 14.00% Series Preferred Stock.Several complaints have been filed in theUnited States District Court for theSouthern District of New York by holdersof shares of the 10.75%, 11.00% and 14.00%Series requesting a declaratory judgmentthat the Company's redemption of thosethree series breached the Company'scontractual obligations to the plaintiffsand that (a) the Company is liable to payplaintiffs amounts equal to the redemptionpremiums of $3.59 per share with respectto the 10.75% Series, $25 per share withrespect to the 11.00% Series and $20 pershare with respect to the 14.00% Series,and (b) in the alternative the redemptionbe rescinded and plaintiffs be awardeddamages in amounts to be ascertained.The Company believes that it was entitledto call the Preferred Stock for redemptionat a price of $ 100 per share but cannotpredict the outcome of the courtproceedings.

See Note 9 for information about theCompany's guarantee of affiliatedcompanies'bligations.

17. Quarterly Financial, Common Stock Price and Dividend Data (Unaudited)For the Quarters Ended

March 31 June 30 Sept. 30 Dec. 31(Thousands ofDollars, Except Per Share Amounts)

1987Operating revenues....................Operating income ..Net income.Earnings applicable to common stock...Earnings per common share (a) ........Dividends declared per

common share (b)....................Price per common share (c)

High.Low

$550,280162,52091,43478,467

1.05

$484,354136,497

64,66160,210

0.67

$500,082140,39669,57656,383

0.76

$554,043146,16776,79062,975

0.84

41s/e

36s/e

39e/e

3437s/s33'/s

37~/s

28s/e

0.67 0.67 0.67 0.67

$546,674147,29176,90561,386

0.82

$618,614131,49960,62143,676

0.58

0.65

1986Operating revenues..................... $ 696,087 $528,650Operating income .. 167,334 143,201Net income......... 95,161 67,531Earnings applicable to common stock..... 74,830 51,260Earnings per common share (a) .......... 1.00 0.69Dividends declared per

common share (b)...................... 0.64 0.64Price per common share (c)

High. 33'/e 34 43e/e 40i/eLow 27s/e 31'/e 33/s 36

(a) The quarterly amounts may not equal annual earnings per share due to changes in thenumber of common shares outstanding during the year or rounding.

(b) The Company has paid quarterly cash dividends on its common stock in every year since1946. The dividends paid per share in 1987 and 1986 were $2.66 and $2.57, respectively.The most recent regular quarterly dividend paid by the Company was 67 cents per share(equivalent to $2.68 per annum) paid January 1, 1988. Future dividends willbedependent upon future earnings, financial requirements and other factors.

(c) The Company's common stock is listed on the New York and Philadelphia StockExchanges.

Selected Financial and Operating1987 1986 1985

Data1984 1983

Income Items —thousandsOperating revenues .

Operating income.Allowance for funds used during

construction.Net income .Earnings applicable to common stock.....

Balance Sheet Items —thousands (a)Net utilityplant in service .........Construction work in progress......Total assets .Long-term debt .Preferred and preference stock

With sinking fund requirements .......Without sinking fund requirements.....

Common equity .Short-term debtTotal capital provided by investors .......

Financial RatiosReturn on average common equity—% ....Embedded cost rates (a)

Long-term debt—%.Preferred and preference stock —% .....

Times interest earned beforeincome taxes .......................

Ratio of earnings to fixed charges-totalenterprise basis (b)

Depreciation as % of averagedepreciable property .................

Common Stock DataNumber of shares outstanding —thousands

Year-endAverage .

Earnings per shareDividends declared per share ~...........Book value per share (a) ................Market price per share (a) ..............Dividend payout rate —%................Dividend yield—% (c) .

Price earnings ratio (c) .................Fuel Cost Data

Cost per kwh generated-centsCoal-fired steam stations..............Nuclear steam station (d) .............Oil-fired steam station................Combustion turbines and diesels (oil)....

Average .

Cost of fossil fuel received at steam stationsCoal —per tonResidual oil—per barrel ..............

Employees (a) .

$2,088,759 $2,188,925 $ 1,976,502 $ 1,562,782 $ 1,248,397584,580 589,325 526,488 406,958 289,930

251,548296,011210,173

168,938318,903226,758

11,352300,108231,051

12,261302,461248,035

(29,301)290,613199,327

$5,815,838 $5,776,687 $3,860,960 $3,847,301224,426 161,684 2,020,839 1,730,228

7,139,072 6,965,639 6,910,783 6,418,5092,778,791 2,604,936 2,604,506 2,387,249

..... $ 5,970,000141,960

7,194,5552,534,766

691,010231,375

1,905,70095,500

5,528,521

738,027231,375

1,896,987104,800

5,575,695

495,590231,375

1,969,971168,000

5,399,702

475,239231,375

1,915,649112,000

5,513,054

714,830231,375

1,767,949190,000

5,291,403

12.11 10.4212.78 12.30 12.29

10.989.66

11.2410.02

10.568.33

10.327.77

11.129.94

2.292.352.372.802.71

2.06 2.042.192.592.54

2.5 2.72.22.22.4

74,51372,767$ 3.12$ 2.48$25.46$ 25Ye

8011.00

7.24

70,33568,642$ 3.06$ 2.40$25.12$ 20~/e

7910.487.48

74,513 74,51374,513 74,513$ 3.10 $ 2.68$ 2.58 $ 2.56$25.71 $25.58$ 36 N $ 28~/i

83 967.30 9.81

11.39 9.76

74,97274,644$ 3.32$ 2.68$26.26

3381

7.3710.95

1.750.545.319.821.98

1.680.665.23

10.212.15

1.67 1.780.58 0.612.96 5.027.81 9.311.57 1.81

1.630.563.236.511.46

$39.37$29.79

8,160

$40.17 $42.00$ 16.83 $28.42

8,339 8,433

$ 39.30$ 18.51

8,301

$42.75$31.32

8,386

(a) Year-end.(b) Computed using earnings and fixed charges of the Company and all of its affiliated companies. Fixed

charges consist of interest on short- and long-term debt, other interest charges, interest on capitallease obligations and the estimated interest component of other rentals.

(c) Based on average of month-end market prices.(d) The Company's first nuclear unit was placed in commercial operation on June 8, 1983 and the second

unit on February 12, 1985.(e) The winter peaks shown were reached early in the subsequent year.

5

Sales DataElectric customers (a) .Average annual residential kwh use........Electric energy sales billed—millions of kwh

Residential .

Commercial .Industrial ..Other

System salesContractual sales to other utilities........

Total electric energy sales billed .......Sources of energy sold—millions of kwh

GeneratedCoal-fired steam stations..............Nuclear steam station (d) .............Oil-fired steam station ~.... ~..........Combustion turbines and diesels (oil) ...Hydroelectric stations................

1987 1986 1985 1984 1983

9,1577,4578,4381,285

26,3375,868

32,205

8,7717,1597,9861,170

25,0865,339

30,425

8,3546,7287,9071,082

24,0714,048

28,119

8,4546,5278,1171,043

24,141357

24,498

8,1386,1197,623

968

22,848209

23,057

26,46513,2854,095

28689

25,15110,151

5,45317

739

26,23711,5344,316

18612

26,6956,2954,121

32747

26,8854,5095,581

45700

1,097,518 1,073,146 1,055,546 1,039,381 1,026,1449,565 9,344 9,034 9,282 9,051

44,562 41,511 42,717 37,890 37,7202,707 2,032 3,716 3,765 3,880

(13,015) (11,281) (16,235) (15,377) (16,405)(2,049) (1,837) (2,079) (1,780) (2,138)

Power purchasesInterchange power sales ~..........Company use, line losses and other ..

Total electric energy sales billed ..Electric Revenue Data

By class of service —thousandsResidentialCommercial .IndustrialOther energy sales

System salesContractual sales to other utilities...

Total from energy sales billed ....Unbilled revenues, net ........Other operating revenues..........

Total electric operating revenues

Average price per kwh billed-centsResidentialCommercial .Industrial

Total for ultimate customers ~....Total for all customers..... ~ . ~...Total for system sales ...... ~....

24,49832,205 30,425 28,119 23,057

.. $ 737,066 $ 714,753 $ 634,669 $ 591,922 $ 529,911572,623 557,216 492,686 441,651 386,617492,491 473,488 438,427 411,533 367,950

74,228 74,047 64,223 59,526 47,2751,504,632

31,8091,876,408

275,3391,630,005

232,5981,819,504

292,0441,331,753

18,494

2,151,747 2,111,548(84,888) 52,34421,900 25,033

1,862,60378,54530,059

1,536,441 1,350,247(9,725) (119,539)29,960 12,972

7.006.775.076.306.276.23

8.057.685.847.236.687.12

8.157.785.937.346.947.25

7.607.325.556.856.626.77

6.516.324.835.915.865.83

....... $2,088,759 $2,188,925 $1,971,207 $ 1,556,676 $ 1,243,680

Generation DataGenerating capability—thousands of kw (a) ..Winter peak demand —thousands of kw (e)...Generation by fuel source-%

CoalNuclear (d)OilHydroelectric

Steam station availability—%Coal-fired .Nuclear (d)Oil-fired

Steam station utilization—%Coal-fired ..Nuclear (d) .Oil-fired

7,4995,591

59.429.8

9.31.5

83.380.484.7

72.980.528.5

7,5195,154

60.624.413.2

1.8

78.861.784.7

69.361.338.0

7,5134,981

61.427.010.2

1.4

78.670.787.2

72.370.530.0

7,4845,519

70.416.611.02.0

75.266.768.0

73.365.728.6

7,4944,869

71.311.914.9

1.9

78.867.775.8

74.067.538.8

43

Officers Dir'ectorsROBERT K. CAMPBELL,Chairman of the Board,

President and Chief Executive OfficerMERLINF. HERTZOG, Executive Vice President-

Corporate Services

JOHN T. KAUFFMAN,Executive Vice President-Operations

CHARLES E. RUSSOLI, Executive Vice President-Financial

BRUCE D. KENYON,Senior Vice President-NuclearLEON L. NONEMAKER,Senior Vice President-

Division Operations

JOHN R. BIGGAR, Vice President-FinanceGENNARO D. CALIENDO, Vice President

and General Counsel

JOHN M. CHAPPELEAR, Vice President-Inavstmentsand Pensions

THOMAS M. CRIMMINSJR., Vice President-Pou:er Production

ROBERT S. GOMBOS, Vice President-Human Resource 4 Development

CHARLES J. GREEN, Vice President-Harrisburg Division

WILLIAMF. HECHT, Vice President-iifarketing ck Customer Services

RONALD E. HILL, Vice President and ComptrollerHAROLD W. KEISER, Vice President-

Nuclear OperationsJOHN P. KIERZKOWSKI,Vice President

and TreasurerCARL R. MAIO, Vice President-Lehigh DivisionGRAYSON E. MCNAIR,VicePresident-System Pou:er

EDWARD M. NAGEL, Vice President and SecretaryHERBERT D. NASH JR., Vice President-

Central DivisionCLAIRW. NOLL, Vice President-

Procurement dc Computer Services

JOHN E. ROTH, Vice President-Northern DivisionJOHN H. SAEGER, Vice President-

Susquehanna DivisionEDWIN H. SEIDLER, Vice President-

Engineering P. Construction-SystemPower d'c Engineering

BRENT S. SHUNK, Vice President-Lancaster DivisionJEAN A. SMOLICK,Assistant SecretaryPAULINE L. VETOVITZ,Assistant SecretaryHELEN J. WOLFER, Assislant Secretary

and Assistant Treasurer

Corporate ihlanagemcnt Commhtcc: Robert K. Campbell.chairman: ilferlinF. Hertzog, John T. Kauffman. Charles E.Russoli, Bruce D. Kenyon, Leon L. Nonemaker, Gennaro D.Caliendo, and Edward F. Reis, Director-Corporate Planning,serving as the committee's executive secretary.

CLIFFORD L. ALEXANDERJR.,Washington, D.C.President, Alexander ck Associates Inc.Consultants to business, government and industryROSWELL BRAYTON SR., WoolrichChairman of the Board, 1Voolrich Inc. ilfanufacturerofgarments for outdoor activitiesJEFFREY J. BURDGE, Camp HillChairman of the Board, Harsco Corporation.1lfanufacturer ofprocessed and fabricated metals

ROBERT K. CAMPBELL,AllentownChairinan of the Board, President and Chief ExecutiveOfficerEDGAR L. DESSEN, HazletonPhysician-RadiologistEDWARD DONLEY, AllentownChairinan, Executive Committee, AirProducts andChemicals Inc. i'ifanufacturer ofinduslrial andcommercial gases and chemicals

REV. DANIELG. GAMBET, O.S.F.S.,Center ValleyPresident, Allentown College ofS4 Francis de Sales

MERLINF. HERTZOG, AllentownExecutive Vice President-Corporate Services

FRANCES R. HESSELBEIN, New York CityNational Executive Director, GirlScouts of the IIS.A.

HARRY A. JENSEN, LancasterDirector and former Chief Executive Officer, Armstrong1VorldIndustriesInc. Manufacturerofinteriorfurnishingsand specialty productsJOHN T. KAUFFMAN,AllentownExecutive Vice President-OperationsHAROLD S. MOHLER, HersheyFormer Chairinan of the Board, Hershey FoodsCorporation. Diversified manufacturer offood products

RALPH W. RICHARDSON JR., State CollegeConsultant, agricultural and environmental sciences

NORMAN ROBERTSON, PittsburghSenior Vice President and Chief Economisf,Me((on Bank, N.A.CHARLES E. RUSSOLI, AllentownExecutive Vice President-FinaiicialDAVIDL. TRESSLER, ScrantonChairinan of the Board and Chief Executive Officer,Norlheastern Bank ofPennsylvania

Executive Committee: Robert K. Campbell, chairman; EdgarL. Desscn, Harry A. Jensen and Norman Robertson.Audit Commluec: David L. Tressier. chairman; CliffordLAlexander Jr.. Roswell Brayton Sr., Rev. Daniel G. Gambet,Harold S. hiohler and Ralph W. Richardson Jr.Corporate Responsibility Committee: Frances R. Hesselbein,chairman: Jeffrey J. Burdge, Edgar L. Dessen, Rev. Daniel G.Gambet, lfarold 8. Mohler and David L. Tressler.ihfanaxcmcnt Development and Compensation Committee:Roswell Brayton Sr. chairman: Clifford L. Alexander Jr. ~

Edgar L. Dessen, Edward Donley and Norman Robertson.Nominating Committee: Ralph IV. Richardson Jr. ~ chairman;Jeffrey J. Burdge, Edward Donley, Frances R. Hesselbein andHarry A. Jensen.

Form10-K and PPSL PROFILEThe company's annual report filed with the Securities and Exchange Commission on Form 10-K willbe availablemid-March. Each year the company publishes the PPlhL Profile, a 10-year statistical review, containingin-depth information about the company. The 1977-1987 Profile willbe available in May. A shareowner mayobtain a copy of thcsc publications, at no cost, by writing to Pennsylvania Power 4 LightCompany, Two NorthNinth Street, Allentown, PA 18101, Attention: Mr. George I. Kline, Manager-Investor Services.

Bayard of Directors

Alexander 8rayton Burdge Dcssen

Donley Gambet

(i >,

Hesselbein Jensen

\ /

Mohler Richardson Robertson

Corporate Management CommitteeTressler

~ -,—~ I%I Cess

Reis Nonemaker Hertzog Campbell Kauffman Russoli Kenyon Caliendo

~gpss, Pennsylvania Power & Light CompanyTwo North Ninth Street ~ Allentown, PA 18101 ~ 215 I 7705151

Fiscal AgentsSecurities ListedOn Exchanges

TRANSFER AGENTS FOR PREFERRED,PREFERENCE AND COMMON STOCK

Morgan Shareholder Services Trust Company30 West BroadwayNew York, New York 10007-2192

Pennsylvania Power &Light CompanyManager-Investor ServicesTwo North Ninth StreetAllentown, Pennsylvania 18101

REGISTRARS FOR PREFERRED,PREFERENCE AND COMMON STOCK

Morgan Shareholder Services Trust Company30 West BroadwayNew York, New York 10007-2192

Pennsylvania Power & Light CompanyManager-Investor ServicesTwo North Ninth StreetAllentown, Pennsylvania 18101

DIVIDENDDISBURSING OFFICE ANDDIVIDENDREINVESTMENT PLAN AGENT

Pennsylvania Power & Light CompanyVice President and TreasurerTwo North Ninth StreetAllentown, Pennsylvania 18101

NEW YORK STOCK EXCHANGE

4'%referred Stock (Code: PPLPRB)4.40% Series Preferred Stock Code: PPLPRA)8.60% Series Preferred Stock Code: PPLPRG)9.24% Series Preferred Stock Code: PPLPRM)Preference Stock, $8.00 Series Code: PPLPRJ)Preference Stock, $8.40 Series Code: PPLPRH)Preference Stock, $8.70 Series Code: PPLPRI)Common Stock (Code: PPL)

PHILADELPHIASTOCK EXCHANGE

4I//,,% Preferred Stock3.35% Series Preferred Stock4.40% Series Preferred Stock4.60% Series Preferred Stock8.60% Series Preferred Stock9% Series Preferred Stock9.24% Series Preferred StockPreference Stock, $8.00 SeriesPreference Stock, $8.40 SeriesPreference Stock, $8.70 SeriesCommon Stock

LITHO IM U.S.