ML17157B827

Allegheny Electric Cooperative,Inc Annual Rept 1991

ML17157B827
Person / Time
Site:	Susquehanna
Issue date:	12/31/1991
From:	Tilton J, Doreen Turner ALLEGHENY ELECTRIC COOPERATIVE, INC.
To:
Shared Package
ML17157B826	List: ML17157B827 ML20097D468 PLA-3783, Forwards 1991 Annual Finacial Repts for PP&L & Allegheny Electric Cooperative,Inc
References
NUDOCS 9206100148
Download: ML17157B827 (100)

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'legheny Electric Cooperative, Inc., based in Harrisburg, Pa., is a generation and transmission (GKT) cooperative owned and operated by the 14 rural electric cooperatives in Pennsylvania and New Jersey. Allegheny acts as the wholesale power supplier for the coop-eratives. Through them, it serves more than 600,000 rural residents.

Allegheny's 14-member board ofdirectors one director elected from each ofits member co-ops conducts Allegheny's business to best serve the consumer-members ofthe cooperatives.

Allegheny's member cooperatives own and maintain about 16 percent of the electric distribution lines in Pennsylvania, covering nearly one-third of the state's land area in 41 counties. The majority ofthat service area is com-prised ofsome ofthe most rugged and beautifulareas to be found in America today. And Allegheny believes that beauty deserves protection.

Allegheny is proud ofits long-standing environmental

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record. Through this annual report, we are happy to share Message From The President and Chairman..

our commitment and concern for our rural environs.

Bulk Power Sales.

Transmission Projects...

Power Authority Of The State Of New York...

Susquehanna Steam Electric Station...

.12 Load Management............~..............14 Raystown Hydroelectric Project.........l 6 Allegheny Board of Directors....

.....22 Allegheny Management Team..........24 Financials.........................25 920bi00148 PDR ADOCK I

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Allegheny with a level playing field to obtain economical power and to become a fullparticipant in the bulk power market.

Transmission access language drafted in part by Allegheny was picked up in national energy strategy legislation.

Attacks on the non-profit, consumer-owned rural electric program continued in 1991. Allegheny responded to the sensa-tionalistic, inaccurate assaults as they occurred. The year, however, resulted in a major political victory for rural electric cooperatives. President Bush on October 28 signed the 1992 Agricultural Appropriations billthat restored the 25 percent cut in Rural Electrification Administration (REA) insured loan levels made in the 1990 federal budget compro-mise. Allegheny assisted in the restoration

effort, During the year, REA approved Allegheny's request to refund $623,150 in capital credits to our member coopera-tives. It was the second such capital credit retirement by Allegheny, followinga

$367,072 retirement in 1989.

Unfortunately, Pennsylvania's budget crisis iinpacted the cooperative. Allegheny, like all electric utilities in Pennsylvania, was hit by a provision in the state budget to establish five dcdicatcd funding sources for big city mass transit. One ofthose five is a special 12 millhike in the public utility realty tax. The taxwhich willprovide no benefits to rural electric co-op con-sumer-members willcost Allegheny members an additional $ 1.2 millionin fis-cal year 1992.

A major goal ofAllegheny is ensuring the economic health ofour meinber coop-eratives'ervice areas. During the year, the cooperative initiated new programs to assist its members to retain existing busi-nesses and industries and attract new employers. Aggressive efforts by Allegheny and its member cooperatives resulted in four member systems obtaining six zero-interest REA rural development loans for businesses in their service areas. These economic development activities not only help provide job opportunities, they also stabilize the economic base ofrural Pennsylvania and New Jersey.

The decade ahead looks bright for Allegheny. A Power Requirements Study for 1991-2000 predicts Allegheny's energy requirements willgrow at an annual rate of2.1 percent through the year 2000. Our 10 percent share ofSSES willgrow in value as Mid-Atlanticpower markets tighten; our demand-side management efforts will continue to provide benefits well into the next century.

Once again, real progress is being made toward the organization's long-term goal providing rural electric cooperative consumer-members with adequate and reliable supplies ofreasonably-priced electricity.

Jesse C. Tilton III, president (right) and Dave E. Turner, chairman i

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ural Pennsylvania and New Jersey today vast and changing. Providing the resources and a high-quality labor forceforindustrial and commercial growth; pro-viding a new home for crowd-weary people; providingfood and fiber tofeed the nation and the world.

AIIbecause there is electricity.

Soon after the creation ofthe Rural Electrification Administration (REA) in 1935, rural electric cooperatives began springing up as rural residents banded together to set poles and string wire to bring electric-ity to their homes, farms and businesses.

But once the poles were set, rural people still needed a source of power. That source was the same private electric companies whose refusal to serve rural America prompted formation BULK POWER SALES C,

Duringit991, Allegheny continued to estab~iisg itself as a player in the wholesale

)'owermarketi with beneficial sales'o gaf(imobre Gas fs Electric cop)9'any Atlantic r

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power market; the lhjiagara'Mohawk*sale'vIas the co-op/ first transaction~.

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The sales allow~AIIeggheny to "'arkef its projected'excess summer ener- 'j

". gy from thejSus jilehannahtqarn)Electric Station and p'rovide net benefits

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By 1944, leaders ofPennsylvania's budding rural electric coopera-tivess realized that, as individualgroups, they were stillat the mercy of the private companiesin buying electricity. An REA report that year noted Pennsylvania's rural residents served by co-ops were paying electric rates higher than those enjoyed by most co-ops across the nation. Something had to done.

To negotiate for acceptable rates for their consumer-members, Pennsylvania's cooperatives formed Allegheny Electric Cooperative in 1945 to serve as their wholesale power supplier. With the bargaining power ofall the co-ops behind it, Allegheny was able to negotiate rates thatimmediately saved the co-ops 20 percent on their power bills. By achieving a competitive rate forpower on a short-tenn basis, Allegheny could allow its member co-ops to expand, bringing the ben-egts ofelectricity to the 75,000 ruralfamilies stillwithout electricity.

TRANSMISSION PRO) ECTS Allegheny Electric Cooperative, Inc. marked another transmission milestone in 1991 with the energization of the Donegal-Seven Springs transmission project. The effort7.5 miles of 138 kV transmission and a 138/24.9 kV dis-tribution substation provides additional service to Somerset Rural Electric Cooperative. Adequacy of power from previous transmision facilities, coupled with rapid load growth in the Seven Springs Ski Resort area (which includes parts of Somerset, Fayette and Westmoreland counties), necessitated the project.

The line is the second transmission project built by Allegheny. The first, the 5.6-mile, 69 kV Fairfield-MillCreek project in Lycoming County, was completed in july 1990.

Also completed during the year was installation of a 46 kV motor-operated switch at the Claysburg Substation in Valley Rural Electric Cooperative's service area. The work at Claysburg willprovide increased reli-ability for new and existing residential and commercial customers along the U.S. Route 220 North corridor.

Recent improvements to Route 220 are expected to accelerate development in the area, leading to even more load growth in the future.

At its April board meeting, the Allegheny Board of Directors authorized the construction of five additional transmission pro-jects to serve load requirements in co-op service areas.

The largest of the proposed projects is in Bedford Rural Electric Cooperative territory. There a 12-mile, 115 kV trans-mission line and a 115/24.9 kV substation willservice a Texas Eastern gas pipeline pumping station load of approximately 5,000 to 10,000 kilowatts. Engineering design and right-of-way acquisition for the Bedford project was underway as the year ended.

The other proposed projects are currently in planning and engineering stages. They include:

~ a 9-mile, 46 kV transmission line with 12 kV underbuild from the West Penn Austin delivery point to the site of a new substation near the existing Elk Lick metering point in Tri-County Rural Electric Cooperative's territory in Potter County, Pa. The Austin project willextend service for increased commercial and industrial load development now occurring near the Elk Lick metering point and provide a strong electricity source for existing Tri-County members.

~ a 13-mile, 46 kV line from a new West Penn delivery point at Lobo, Clinton County, Pa. to serve both existing commercial load at Cammal, Pa. and a dragline operation of the Fisher Mining I

.p Company in Lycoming County, Pa. The new delivery point and 13 miles of new transmission line are currently under design.

The first five miles of line from Lobo to Cammal willimprove service to the existing load in the southern portion of Tri-County's service territory as well as help serve future load in the area. The second phase calls for an additional eight miles of 46 kV line from Cammal to the Fisher Mining Company operation, which willserve both Fisher's needs and future load requirements in the southcentral section of Tri-County's system.

~ a 14.2-mile 25 kV line from Atwell to the Scrubgrass Power Plant in Central Electric Cooperative's territo-ry. This project is contingent upon sufficient load development in the area neighboring the Scrubgrass Power Plant.

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The cooperative form ofbusiness is a tradition among rural Americans. Itexists in enterprises ranging from electric cooperatives and large farm marketing groups to the more simple, but equally effective, barn raisings and shared chores at harvest time.

Another equally strongand olderrural tradition is respe'ct for nature. That respect is rooted in the immediate dependence ofmany

~g rural people on the fruits of, the land.

Particularly in the 1990s, a "backito nature" attitude prevails. Many municipalities have instituted recycling programs as mandated by law.

Both city and rural residents are realizing the importance ofpreserving our natural countryside.

One ofthe biggest assets ofPennsylvania's countryside is agriculture. Farming contributes to both the state's rural

,F landscape and its economy. Infact, agriculture is l.

Pennsylvania's largest industry. Farms occupy about 28 percent of Pennsylvania's land area and contribute 22 percent ofthe Commonwealth s annual economic production.

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The concern for our rich natural environment also extends to the vast forests and streams that prompted the state's early name ofPenn's Woods. Nearly 57 percent ofPennsylvania is covered inforest. Those wooded acres fuel a large wood products industry and provide recre-ation forstate residents and the thousands ofvisitors vvho make tourism Pennsylvania's sec ond largest industry.

Those farms and woodlands and the peo-ple who enjoy and depend upon them need clean air and water. That's whyAllegheny and its member cooperatives share the environmental con-cerns oftheir consumer-members.

Allegheny's member cooperatives own and main-tainn about 16 percent ofthe electric utilitylines in Pennsylvania, covering nearly one-third ofthe state' land area in 41 counties. The majority ofthat service area is comprised ofsome ofthe most rugged and beautiful areas to be found in America today. Allegheny believes that beauty deserves protection.

POWER AUTHORITYOF THE STATE OF NEW YORK For the third consecutive year, Allegheny received good news regarding its allocation of electricity pro-duced at the Niagara Power Project by the Power Authority of the State of New York (PASNY).

In early October, the U. S. Supreme Court halted the six-year effort by "paper" municipal elec-tric systems in New York and Vermont to receive preference power generated by PASNY.

The High Court refused to review a December 1990 Second Circuit U.S. Court of Appeals decision that rejected the paper municipals'ffort to overturn an earlier Federal Energy Regulatory Commission (FERC) ruling. In that ruling, FERC held that the paper municipals were not "public bodies" under the Niagara Redevelopment Act. FERC noted that the New York paper municipals were ineligible for preference power because they did not sell and distribute power directly to consumers. Vermont's appeal was rejected because it was incapable of selling and distributing power directly to electric consumers at the retail level.

The Appeals Court decision further reaffirmed provisions in the federal Niagara Redevelopment Act that non-profit rural electric cooperatives and legitimate municipal electric systems within economical transmission distance have first right, or preference, to 50 percent of the electric power produced at the Niagara Power Project.

The "paper muni" case began in july 1985 when PASNY started channeling large amounts of low-cost Niagara power to private power companies in New York.

PASNY legitimized those transactions by encouraging New York local governments to create municipal electric systems that existed only on paper. These paper munis then entered into lease operating agreements with private power companies, which used the preference power directly.

Like the New York agencies, the Vermont Department of Public Service fronted as a preference customer and turned power over to private utilities in that state.

In an effort to regain a greater share of PASNY power, Allegheny joined real New York municipal electric systems and other true out-of-state preference customers in a suit against PASNY.

Allegheny's right to an additional 7,700 kilowatts of Niagara power which the cooperative received while the appeal process played out remains intact. Allegheny's total share of PASNY power stands at 43.9 megawatts.

The Supreme Court rejection was the the final, non-appealable step and successfully concludes the issue in favor of Allegheny.

The Niagara project produces electricity at a low cost; in fact, it is among the least expensive in the U.S. Since Allegheny began buying it in 1966, PASNY power has saved the cooperative more than $214 million, compared to the cost of purchasing the same amount of electricity from private power companies.

In 1991, Allegheny's PASNY savings amount-ed to $ 7.4 million. The extra 7.7 megawatt allo-cation alone shaves

$ 1.6 million annually from Allegheny's purchased power costs, based on current rates.

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As cooperatives owned by those they serve, rural electric systems

~ere founded to improve the quality oflifefor rural people by pro-viding affordable, dependable electricity. But other factors also con-tribute to quality oflife. That is why many co-ops also foster eco-nonlicgrowth and community progranis to meet rural needs such as ~ater and sewer improveInents, transportation and medical care.

Allegheny extends these efforts by pursuing clean, non-polluting energy sources and promoting programs and policies designed to reduce the need to construct additional fossil-fiielfiredpower plants.

1 SUSQUEHANNA STEAM'ELECTRIC STATION I

The Susquehanna Steam Electric Station (SSES) a 2,100 megawatt, two-unit, nuclear plant in Luzerne County, Pa., added to its already exceptional operating and safety performance in 1991. Allegheny owns 10 percent of SSES. Pennsylvania Power 8 Light Company (PPQL), a private power company based in Allentown, Pa., is the operator and 90 percent owner of the boiling water reactor facility.

SSES broke its all-time operating records in 1991. The annual capacity factor for Unit 1 was 95.3 per-cent, ranking the unit first in the world during the year among 50 reactors of its type. for Unit 2, capacity factor was 75.8 percent (without refueling, Unit 2 operated at a 91 percent capacity factor). When com-bined, this resulted in a composite capacity factor of 85.5 percent. This figure was well above budget expectations.

In comparison, the average capacity factor for boiling water nuclear reactor plants in the United States is approximately 67 percent, according to the UtilityData Institute.

By the end of fiscal year 1991, SSES had produced 15.9 billion kilowatt-hours of electricity, far surpass-ing its previous record of 14.8 billion kilowatt-hours set in 1987.

SSES provides 56.4 percent of Allegheny's total system energy requirements.

The Cowanesque Reservoir, a water source reserved for use in times of drought, proved it>> value during 10 dry days in September. Ifthe water from the Cowanesque had not been available, SSES may have had to severely reduce power, resulting in additional costs to cooperative consumer-members.

The reservoir was com-pleted and declared in service in July 1990.

Once again, the Nuclear Regulatory Commission (NRC) ranked SSES among the best operated nuclear plants in the nation. In its Systematic Assessment of Licensee Performance (SALP) report, covering the period August 1, 1990 through November 30, 1991, the NRC gave SSES the highest possible rating in five of seven cat-egories.

The results of the SALP report are very impressive.

SSES performance currently ranks eighth out of 72 plants nationally and second among 27 boiling water reactors.

SSES has never received a rating below Category 2the second highest grade possible in the report.

SSES also scored the second-highest possible rank in an Institute of Nuclear Power Operations (INPO) evalua-tion completed in October. INPO is an industry group which promotes safety and effi-ciency at nuclear power plants.

INPO gave the plant high marks for the performance of its personnel, the stable, expe-rienced plant staff, the excellent morale, and the cooperation between work groups. On a scale of1 to 5, with 1 being the highest, SSES was awarded a 2.

INPO noted five "Good Practices" during its inspection. A Good Practice is circulated to other utilities to help improve other plants'erformance.

Most evaluations only turn up one or two Good Practices per plant.

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In Allegheny's early years, long-range power supply was not a top item for the relatively-new cooperatives. However, as rural areas grew so did the need to better ensure an adequate power supply not depen-dent on purchases from private power companies.

In 1966, Allegheny took a major stride toward this goal when, as a preference customer, itbegan purchasing non-pol-luting hydropower generated at the publicly-owned Niagara Power Project from the Power Authorityofthe State ofNew York (PASNY). In addition to its environ-mental benefits, this extremely low-cost hydropower has saved Allegheny niore than $200 millioncom-pared to the cost ofpo~er itwould have needed to buyfrom private utilities.

In 1977, Allegheny continued developing reliable, non-pol-luting energy sources when itcontracted for 10 percent ownership in the Susquehanna Stea>n Electric Station (SSES). SSES is a 2,100 megawatt, two-unit nuclear power plant located near Berwick, Pa. Tfiefacilitysupplies 56 percent ofAllegheny's power supply needs.

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Allegheny furthered its commitment to low-cost, environmentally-benign generation with the Raystown Hydroelectric Project, Wi'lliam I'. Matson Generating Station, which began comniercial operation on June 15, 1988. Named for the firstpresident ofAllegheny, Matson Station is the cooperative's firstwholly developed and operated gener-ating plant. Itsupplies 4.5 percent ofthe energy delivered by Allegheny, enough for about 8,500 average rural homes.

LOAD MANAGEMENT By shifting electricity use of residential water heaters, electric ther-mal storage (ETS) units and dual fuel home heating systems from peak demand periods to times of lesser demand, the Coordinated Load Management System improves system efficiency, lessens the costly demand charges Allegheny must pay for purchased power and reduces the need for new generating capacity.

Allegheny and its member cooperatives launched the load management program in late 1986, using load management equipment to reduce peak demand at individual substations.

By the end of the 1991 fiscal year, more than 23,000 load control receivers (which switch offthe heating element in water heaters during peak hours) had been installed in the homes of volunteer consumer-members.

Participating cooperatives reported gross power cost savings of over $2.3 rnil-lion during the year and a total savings to date of more than $6.3 million in the five years since the y

program began.

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In October 1989, load management coordinating system computers were installed in Allegheny headquarters.

The coordinating system receives electric use and climate data from cooperative member systems and uses it for load forecasting and systemwide load control.

Since then, Allegheny has worked with its wholesale power suppliers to develop data links to allow Allegheny to monitor the suppliers'oad conditions as well as conditions on the member systems. Such refinements willenhance the ability to control purchased power costs and will he ip Allegheny maintain rate stability for its members.

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RAYSTOWN HYDROELECTRIC PROjECT The Raystown Hydroelectric Project, William F. Matson'Generating Station is a 21-megawatt, run-of-the-river hydroelectric plant licensed by the Federal Energy Regulatory Commission. The facility is located at the Raystown Lake and Dam in Huntingdon County, Pa. and generates about 4.5 percent of the energy supplied by Allegheny.

Allegheny operates the plant in close cooperation with the U.S. Army Corps of Engineers, which controls water releases from Raystown Lake, the largest in Pennsylvania.

Despite unusually low flow conditions from May until the end of the year, the Raystown Hydroelectric Project continued successful operation during fiscal 1991. The plant produced in excess of 96.3 million kilowatt-hours of electricity through the period, 12.8 percent above expected generation.

The two-unit plant operated 103 days at maximum output of 21 megawatts compared to 89 days in fiscal 1990.

Record high plant availability of 99 percent was recorded, 2 percent greater than the 97 percent goal and well above the small hydro industry average of 88 percent. Outages were reduced from 62 in fiscal year 1990 to 51 this year. In terms of cost effectiveness, the plant's operating expenses were a lit-e'ie over $2.5 million, or a cost of 2.6 cents per kilowatt-hour.

During the year, the Corps continued studying the feasibility of releasing water from the lake during extreme drought conditions. Allegheny and the Corps have r

worked together to detail the alternatives and assess the impact on plant operation.

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The Corps has pledged its cooperation in developing and assessing all alternatives

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Thanks to PASNY, SSES and Raystown, a full76 percent ofthe energy Allegheny supplies to its member cooperatives today doesn' pollute the air.

WhileAllegheny invests in clean, non-pollutingpower sources, the co-op continues to advocate and defend statutes and regulations to benefit the state's rural residents. One such state law the Unincorporated Area Certified TerritoryIaw, originally enacted in 1975 and codified in 1990, assigns exclusive territories forall of Pennsylvania's rural electric cooperatives and private power compa-nies. The law stipulates that each electric supplier has the exclusive right and duty to provide service within its own territory.

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I This law helps avoid costly duplication offacilities, waste ofmate-rials and further protects natural resources. Italso allows Allegheny's member co-ops to retain large loads, such as businesses, factories and retail centers that move into cooperative territory. This promotes the orderly planning ofnew systems and reduces long-tenn costs forall consumers, limits the environmental impact ofproviding electric ser-vice and assures reliabilityofsupply.

Energy management, conservation and research are top priorities forAllegheny. Through the Coordinated Load Management System, Allegheny and its members cut down expensive peaks in demand placed on the electrical systen>, leading to long-term savings and reduced need for new power plants.

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The Coordinated Load Management System allows member cooper-atives to monitor electric load conditions at 80 substations.

When demands occur, po~er to water heaters ofvolunteer consumer-members is brieflycurtailed. Since a water heater willstore heated water for a long time, there is virtuallyno inconvenience.

To date, the system has saved member cooperatives more than $6.3 millionin gross power costs.

For nearly 50 years, Allegheny has pursued a balanced energy sup-plyprogram. By doing so, itis achieving the goal itset in 1945: to pro-vide rural electric cooperative consumers with an adequate and reli-able supply ofenergy at the lowest possible cost.

And, as the 600,000 consumers ofour co-ops willtestify, that cost includes taking steps to preserve the natural environment that makes our rural landscape the special place itis e.

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Dave Turner Warren EC John Looser Adams EC Alston Teeter Tri-County REC Lowell Friedline Somerset REC Northwestern REC Warr-Tri-County REC Claverack REC Sullivan Co RE Central EC United EC Southwest Central REC Valle omerset REC'edfor NNIw Adams EC

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Ralph Fischer Bedford REC Winston Donaldson Central EC John Drake Claverack REC John Ritchey New Enterprise REC Harold Hines Northwestern REC Donald Streams Southwest Central REC John Anstadt Sullivan County REC Sussex REC James Henderson Sussex REC Anson Brosius United EC Harold Ritchey Valley REC

From left: Rob A. Seide: Director of Communications ta Anthony C. Adonizio:

General Counsel t~ frank M. Betley: Director of Power Supply 8 Engineering ia Laurence V. Bladen: Director of Finance and Administrative Services ia William E. Mowatt: Vice President and Director of Governmental Affairs ia Jesse C. Tilton III: President t~ Robert S. Horn: Risk Manager (not pictured)

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TABLE OF CONTENTS F

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Fl inancial Year In Review.................................,...........................27 Summary of Member Systems......,...............,.............,..............30 Five-Year Financial Statement................~...............,..............,....32 Report of Independent Auditors.........,................,.....................34 alance Sheets......................................................'...,..................35 B

Statements of Operations...............................................36 S

~g4 tatements of Equities................................................................37 Statements of Cash Flows....................................,....,................38 Notes to Fina cial Statements......,...........................................39 yW F

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uringfiscal year 1991 both the niral electrification program in general, a>>d Allegheny i

Electric Cooperative, Inc. specifically, faced and inet a ninnber ofdifficultchallenges.

On the national level, the cooperatives focused on the 25 percent reduction in Rural Electrification Administration (REA) insured loan levels inchided in the 1991 federal budget and on REA's proposed regulation establishiiig an eight-part "nieans test"for allocating nvailable insured loan fiuids. Allegheny actively participated in the rule-niaking process byfiliiigspecific connnents. Additionally, Allegheny supported the legislative egorts ofthe National Rural Electric Cooperative Association which were ultiinately successfiil in getting the loan fiuids restored and the nieans test blocked.

At the same time, Allegheny faced the expiration ofthe Letters ofCredit supporting its 1984 Series A and its 1984 Series B Pollution Control Bond issues. REA had to provide mortgage security to Rabobank Nederland in the form ofa lien accommodation or the Letters ofCredit would have matured in mid-1991.

After much effort, numerous discussions with Rabobank, and meetings with REA, the agency on March 31 approved lien accommodations to Rabobank in the amount of$18.2 million.With these lien accommoda-tions in place, Allegheny successfully obtained extensions on the Letters ofCredit to October 1995. This ensures Allegheny's continuing abilityto utilize variable rate, short-term tax-exempt bonds to finance a por-tion ofthe pollution control facilities at the Susquehanna Steam Electric Station (SSES).

Other Allegheny financial achievements during fiscal year 1991 included obtaining REA approval to retire 1974 capital credits in the amount of$623,150; obtaining from REA an additional 18 months to draw down unadvanced Federal Financing Bank loan funds in connection with SSES; and the first deposit into the Nuclear Regulatory Commission's mandated trust account for decommissioning SSES.

During the year, working with CoBank, Allegheny began to more actively manage the debt portion ofthe Raystown Hydroelectric Project leveraged lease. Each week, Allegheny receives interest rate information from Cobank. Then, at each interest rate resetting date, based upon this and other financial information, Allegheny selects the length ofrollover periods it desires, and the dollar amount ofleveraged lease debt that willbe repriced for each period. This enables Allegheny to periodically fixthe interest rates on the leveraged lease debt and to more effectively manage interest rate exposure.

In June, the Allegheny Board ofDirectors directed the Audit, Finance, Accounting and Allegheny Building Committee to develop and issue a Request for Proposals for auditing services. The committee received a number ofproposals from accounting firms and, after evaluation, the board ofdirectors, in accordance with the requirements set forth in 7 CFR 1773, selected the accounting firmofCoopers 8t Lybrand to perform the0 1991 audit.

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MARGINS To conform to Financial Accounting Standards Board (FASB) Statement No. 92, Allegheny changed the method ofdepreciation for SSES in 1990. This change necessitated the recognition ofdepreciation expense deferred through 1989. To accomplish this, the Allegheny board to write-offthe entire $31 milliondeferral in 1990. As a result ofthis write-offAllegheny incurred a $28 millionnet loss for 1990.

The 1991 margins of$2,539,149 met Allegheny's Times Interest Earned Ratio (TIER) goal of 1.06.

Additional margins of$2,539,845 earned during 1991 in excess ofthis TIER requirement willflowback to member cooperatives in 1992 through Allegheny's cost ofservice billingadjustment.

FINANCING One ofthe largest expense items for Allegheny is interest on long-term debt. During 1991, it accounted for more than 28 percent oftotal Allegheny expenses.

Since 1978, Allegheny has borrowed over $559 million from REA, repaid $82 millionand paid more than $524 millionin interest.

To control interest costs, Allegheny makes every effort to use the lowest-cost financing vehicles available.

These have included pollution control bonds, commercial paper, lines ofcredit, REA insured and guaranteed loans, and leveraged leasing. As ofOctober 31, 1991 Allegheny's dollar weighted average interest rate on out-standing debt (excluding leveraged lease debt) was 7.95973 percent.

POLLUTION CONTROL BONDS: Allegheny has been able to achieve very attractive interest rates by using variable rate tax-exempt pollution control revenue bonds to finance a portion ofthe pollution control facilities at SSES. In 1991, the average yield on the bonds, which bear interest at weekly and monthly variable rates, was 4.9 percent. These bonds issued though the Lehigh County Industrial Development Authorityare backed by irrevocable letters ofcredit issued by Rabobank Nederland.

COMMERCIALPAPER: Allegheny maintains a commercial paper program to supplement short-term project financing. In 1990 Moody's Investors Services reviewed and confirmed its Prime-2 rating of Allegheny's commercial paper. No commercial paper was issued or outstanding during 1991.

LINE OF CREDIT: In fiscal year 1991, Allegheny had a $21.4 millionline ofcredit with the National Rural Utilities Cooperative Finance Corporation (CFC). When needed, this line ofcredit is used to supplement pro-ject financing. The cooperative did not draw on these funds in 1991.

REA INSURED AND GUARANTEED LOANS: Atraditional blend ofREA insured and REA guaranteed loans makes up the vast majority ofAllegheny's debt portfolio and continues to be Allegheny's most impor-tant source offinancing. REA guaranteed loans made by the Federal Financing Bank (FFB) have been used to finance additions to SSES. Approximately 18 percent ofthe $487.2 millionofoutstanding FFB loans to Allegheny continue to bear short term interest rates oftwo years. The remaining FFB loans have 35 year maturities and bear a weighted average interest rate of8.23 percent. Allegheny has utilized REA insured loans to finance transmission and load management projects. Bearing interest at 5 percent, these loans offer one of the lowest sources offinancing available to Allegheny. During 1991, $3.9 millionin REA insured and guaran-teed loans were advanced to the cooperative.

LEVERAGED LEASE: Leveraged leasing the Raystown Hydroelectric Project lowered the cost ofpower produced by the project to below the cost ofthe purchased power it replaced. This provided an immediate savings to Allegheny's member cooperatives.

Under the lease agreement, Allegheny retains control over placement ofthe $23 milliondebt portion ofthe lease. As stated above, in 1991 Allegheny began to more actively manage the lease debt. Under this program, which began inJuly, debt was split between 30-day and two-year maturities. By placing 60 percent ofthe debt 4

in 30-day maturities, Allegheny was able to take advantage oF the decline in interest rates experienced during the year. When compared ta placing the total lease debt in a two-year maturity, the 30-day maturities resulted in an interest savings ofover $65,000 for the remainder ofthe fiscal year.

CFC: In addition to providing Allegheny with a line ofcredit, CFC has provided financing for the Locust Court Building (Allegheny's offices) and a loan in the amount of$4.4 millionfor load management facilities and transmission projects.

TAXABILITY:Allegheny has a private letter ruling from the Internal Revenue Service providing for the cooperative to remain taxable until an application is made to become a tax-exempt organization again.

Allegheny expects to have tax, losses to carry forward to offset estimated tax liabilityfor the foreseeable future.

REGULATION:Unlike for-profit,investor-owned utilities, Allegheny and its member cooperatives are consumer-owned and non-profit. They are regulated by their consumer-members acting through a member-elected board ofdirectors and are not under the jurisdiction af the Pennsylvania Public UtilityCommission or the New Jersey Board ofPublic Utilities. However, REA does review the cooperative's rate making and operating practices.

Allegheny's board ofdirectors are democratically elected. One director is selected from each ofAllegheny's member cooperatives. The board governs all policies, including the establishment ofrates. Board review of the rate-making process and approval ofeach rate change assures the member cooperatives that the price they pay for electricity is fair and reasonable.

ALL-REQUIREMENTS CONTRACT: Each ofthe 14 cooperatives served by Allegheny has entered into a Wholesale Power and Power Cost Pooling Contract, commonly referred to as an All-Requirements Contract.

As a conditian for approval ofloans to Allegheny, REA required Allegheny's members to execute these con-tracts. Allgeneration and transmissian cooperatives borrowing money from REA are required to have sub-stantially similar contracts signed by their member distribution cooperatives.

By signing this contract, Allegheny's member distribution cooperatives agree to purchase all their power supply needs from Allegheny. They also agree to adjust their retail rates to meet all costs and TIER require-ments.

In January 1977, each ofAllegheny's member cooperatives executed an amendment to the ariginal 1965 contract to cover Allegheny's purchase of 10 percent ofthe Susquehanna Steam Electric Station. The amend-ment extended the contract to December 31, 2025 to cover the lifeofthe plant.

TERRITORIAL INTEGRITY:The Unincorporated Area Certified Territory Law af 1990, originallysigned into law in July 1975 and codified in 1990, assigns exclusive territories for all ofPennsylvania's rural electric st{ i cooperatives and private power companies. The law states that each electric supplier,rhea the exclusive right and duty to provide service within its own territory.

\\

This law helps avoid costly duplication offacilities, waste of atcrials and nht a '(es4rces, plus imprtt'that, efficiency. it also allows cooPeratives to retain large loads ah h, jsinesaes, qndietail centerythatc" evI"ov -'.

'j'=-i'ove into co-oP territory. These additional loads helP the ch il{if(, wh)t'.Itthtatrigrilyrserve sParsely Pogh'e'I't',

t!)('ated areas, to moderate rates by spreading their costs over~

a

SUMMARY

OF OPERATIONS Adams Bedford Central Claverack New Enterprise Northwestern Somerset Operating revenue

$27)277,267

$7>450,022

$ 18,502,595

$ 14,918>639

$3,176,275

$ 16,767,788

$ 12,807,933 OPERATING EXPENSES Purchased potver Operations &maintenance Depreciation Taxes Interest Cost ofElectric Service Operating hlargins Non.operating margins &capital credits Net margins

$ 17>642,696

$5,045,379

$ 1,561,533

$225,787

$ 1>698>927

$26,174>321

$ 1)102,946

$206>110

$ 1>309,056

$5,013,696

$ 1472,049

$358,980

$68/43 S 337,224

$7,350>191

$99,831 SI01384

$201,115

$ 10,947,041

$4/46,986

$943,751

$ 144,146

$ 1,093>936

,$ 17>475,860

$ 1,026,735

$273>731

$1,300,466

$8,601,820

$3,656,048

$ 1>013>880

$214,251

$872,464

$ 14,358,4Q

$560,176

$95,776

$655,952

$2)226,633

$766,204

$ 162,000

$28,970

$0

$3>183>807

($7,532)

$50,201

$42,670

$ 10,163,859

$3,967,499

$878,420

$230,091

$852,626

$ 16,092,494

$675,294

$ 164,564

$839,858

$9,174>999 SI >944>322

$566,857

$ 133>108

$727,931

$ 12,547>217

$260,716

$263,612

$524828 ASSETS Total Utilityplant Less accumulated depreciation I

Net utilityplant Other property &investments Current &accrued assets Deferral debits Total assets

$49,729,924

$ 11,608,869

$38,121,054.

$7,519,539

$5>795,405

$ 117)749

$51>553,747

$14,071,442

$4>384/00

$9,686>942

$2,253,485

$2,135,880

$65,040

$ 14>14 1>347

$9,257491

$26,518,865

$5,301,122

$4>321,382

$4,370

$36,145,739

$8,315,128

$25,499,169

$4,007,774

$ 1,488>767

$ 148,139

$31>143,849

$35,776,156

'33>814,297

$3,376@17

$ 1,924,504

$ 1,451>813

$938,330

$305>136

$0

$2,695>279

$22,225,602

$33,475,348 S9,355,700

$5,015,775

$ 17,209,827

$4,187>733

$24>119>647

$5,842,541

$2,449,645

$476,416

$4,197>975

$3,107

$32,888,250

$25/98,642 LIABILITIES hlargins &equities Long.term debt Current &accrued liabilities Other cralits &reserves Total Liabilities

$ 19>Q l>2S I

$29>672>277

$2,238,395

$ 11,824

$51,553,747

- $6,599,056

$6,488,921

$758,599

$294,770

$ 14,141>347

$ 14,963>703

$ 18405/90

$2,660380

$316,466

$36,145,739

$ 11>457>053

$ 18,452,934

$ 1,316,946

($83,084)

$31,143,849

$ 196,329

$0

$2,498,949

$2,695379

$16,169,825

$2,556>174

$3,126

$ 13,200,478

$ 1,209>639

$ 124,852

$32,888,250

$25,598,642

$14,159,126

$ 11>063,673 OTHER STATISTICS

'Miles ofLinc Consumers served Consumers per mile Ktvh soM per consumer Mwh sales Annual revenue per consumer Plant investment per consumer Revenue per mile ofline 2,464

'2,094 9.0 13,069 288,738

$ 1,235

$ 1,725

$ 11)070

'I 148 7,736 6.7 10,520 81>385

$963

$ 1>252

$6,490 2,932 21,838 7.4 8,102 176,923

$847

$ 1,214

$6,311 2,407 15,154 6.3 9>033 136,884

$984

$ 1,683

$6,198 326 2,486 7.6 13,713 34,091

$ 1,278

$584

$9>743 2,343 16301 7.0 10,477 170,786

$ 1,029

$ 1,480

$7>158 1,841 111108 6.0 12,397 137>705

$ 1>153

$ 1,549

$6,957 Abovefigures adjusted to reflect fiscal pear eniiing October 31, 1991.

'ALLEGHENYMEMBER SYSTEMS Southwest Sullivan Sussex Tri County United Valley Warren TOTAL 522,088,220

$3,718,952

$ 12,003,347

$ 12,877,637

$ 13,076,667

$16,914,220

$5,294,407

$ 186,873>969 515,681>557

$3>301,375

$892>237

$ 139,008

$1,067,245

$21,081,422

$ 1>006,798

$ 148>805

$ 1>155,603 52,357>551

$748,149

$259,026

$37>687

$229,845

$3,632,258 586,693

$51,716

$138,409 56,320,622

$2,384>983

$722826

$ 1381,897

$760,423

$ 11,570,251 5433,096

$205,653

$638,749

$7,304,227

$3,381,563

$852,594

$ 150,461

$ 1,084,798

$12,773,643

$ 103,994

$207>328

$311,322

$7,689>353

$2,897>738

$874,520 5&3,829

$ 1,164,799

$ 12,710,239

$366,428

$ 195,507

$561>935

$ 10,748,768

$3,038,512 S970,434

$140/74 5734,086

$15,632,175

$ 1>282>045

$240>783

$ 1,522,828

$3,075,348

$ 1,020>725

$307,420

$48,686

$142,285

$4,594,464

$699,942

$88@70

$788,313

$ 116,948>170

$38,071>531

$ 10,363,977

$3,026,539

$ 10,766,590

$ 179,176,807

$7>697>162

$2/93,441

$9,990,603

$33.766,993

$5,705,945

$28,061>048

$6,150,524

$2,482,761 5621170

$36,756,503

$8>955,802

$2,942,695

$6,013,107

$ 1,230,308

$531>585

$767

$7)775,767

$22@86,828 55,279,636

$ 17,107>192

$2,656,476

$3,169,925

$347>640

$23381>233

$33898,088 58/29,558

$25>068,530

$3,663,090

$2>219,603

$26,306

$30,977,529

$34,364,522

$9>086,858

$25,277)664 54,844,624

$2>888,829

$293,666

$33304,783

$35,194,403

$9>800,672

$25)393>731

$4,615,528

$4,139,105

$ 19,300

$34>167)664 511,347>198

$3)816,181

$7,531,017

$ 1>591 >303 5 l)290,876

$480,021

$ 10,893>217

$371,882,920

$94,823,313

$277,059,606

$54,802,378

$37,416,874

$2,044,691

$371>323,549

$ 17>687>854

$ 17>218,010 SI)788,977

$61,662

$36>756,503

$2,934,790

$4,501,996

$338,832

$ 149

$7,775,767

$8,002,485

$ 12,691,147 52,533>533

$54,068

$23,281,233

$ 11>518,349

$ 18,609,209

$789,942

$60,029

$30,977,529

$ 10>949>842

$20,699,069

$ 1,193,410

$462,462

$33304,783

$ 18,292,913

$13,483+)1

$2,033>154

$358,097

$34,167,664

$7,149354

$3,151>994

$327,565

$264,304

$ 10,893,2 17

$ 154,605,778 5192,544,651

$22)244>396

$1,928,724

$371>323>549 2>424 19,494 8.0 12>323 240,221

$ 11133

$ 1,439

$9,112 798 4)957 6.2 7,453 36,945

$750

$ 1,213

$4,659 9,822 16.1 101279 100,963 SI)222

$ 1>742

$ 19,700 2>856 15,966 5.6 6,700 106,979

$807

$ 1>570

$4,509 2,615 15,961 6.1 7,182 114)631

$819

$ 1,584

$5,001 2,384 20,679 8.7 8>198 169,525

$818

$ 1,228

$7,095 1>013 8,516 8.4 5>629 47>940

$622

$884

$5>228 26,159 192,112 7.3 9,597 1,843,717 5973

$ 1,442

$7>144

ALLEGHENYELECTRIC COOPERATIVE, I

ASSETS General Plant Construction Work in Progress TOTALP LANT Accumulated provision for depreciation &amortization NET PLANT Non-Utilityproperty - net Capital Credits - NRUCFC Investments in associated organizations Other Investments Cash - general funds Cash - construction fund Temporary investments Special funds Notes receivable Accounts receivable Materials and Supplies. Other Prepayments Other current &accrued assets Deferred debits TOTALASSETS LIABILITIES Memberships Patronage capital Donated capital Long.term debt - REA Long-term debt - other Notes payable Accounts payable Cost ofservice adjustment Accrued taxes Accrued interest Other current &accrued liabilities Deferred credits Operating Reserves TOTALLIABILITIES MEMBER REVENUES Adams Bedford Central Claverack New Enterprise Northwestern Somerset Southwest Central Sullivan Sussex Tri County United Valley Warren TOTALMEMBER REVENUES 1991

$640>405>919

$ 11,495,759

$651)901>679

$ 154) 581>169

$497>320>510

$51010>441

$125>292

$3,879>055

$4)628,698

$640,291

$ 1>889

, $36>895>537

$1>889,548

$3)6951755

$ 131766>227

$4>694,020

$1,133>323

$ 1>047>743

$2>643>004

$577)371>333

$2)800

$12)012>827

$50,730

$7,413,005

$508>537>784

$ 16>830>638

$2>541,2S9

$ 1)815>246

$3>509>277

$507>177

$ 18>130>598

$6,019,991

$577>371>333

$ 18>201,477

$5,180>139

$ 11>410)378

$8)901)042

$2>301>401

$10>484,591

$9>106,826

$16,166>475

$2>390,777

$6>534>524

$7,450>527

$7>948451

$11>123)000

$3>180,783

$ 120,380,490 1990

$633,120,217

$5>903,441

$639)023,658

$ 137>581,537

$501>442,121

$4,970,628

$296,167

$3>879>261

$4>012,303

($887)

$ 12,103

$47,019,705 5 I >901,112

$4,148,632

$11,549,690

$ 1>113>921

$574,342

$499,2M

$581>418,298

$2,800

$9>921 071

$50>730

$5,623,571

$516,407,133

$ 18,923>576

$6,416,815

$545,874

$3,502,011

$683,332

$ 15>187,468

$4,153)917

$581,418>298

$ 16>920011

$4,948,332

$ 11,170,252

$8>739)960

$2>214,818

$ 10>323>184

$8,7371337

$ 14,825,514

$2,345,952

$6,312,906

$7>199,562

$7,664,418

$ 10>650,759

$3>084,646

$ 115,137>651 1989

$616>987,394

$9>240,232

$626>227>626

$88,725,714

$537,501,912

$5,055>971

$322,609

$3)879,452

($457,634)

$ 1,483

$35,078,414

$ 1,903,823

$ 13>734,646

$1,052>028

$342,028

$ 1,350,929

$599,765,661

$2,8M

$38)941>810

$50,730

$4>010>892

$522,511>395

$ 4>287>707

$4,893,235

$551)844

$3,348,615

$664,308

$20,502,325

$599,765,661

$ 16>459>643

$4,934,084

$ 11,123,585

$8,678,763

$2>183,582

$ 10,375,739

$8,772>896

$ 14>548)709

$2,344,198

$6,333>850

$7>194>547

$7>814,898

$ 10,555,639

$3,114,060

$ 114,434,195 1988

$609,034,277

$6,938,574 S615,972,851

$70,828,954

$545>143)897

$5,083,843

$344,133

$3,811,153

$ 1,296,372

$251>664

$39,577>723

$2)071,952

$14,411>035

$1,030>083

$333,278

$8481811

$614>203>944

$2,800

$36>387,453

$50,730

$501,601>153

$30,318,791

$5>180,000

$8)801)704

$5,330,430

$346,221

$3,577>179

$ 12,7S I

$22)5941732

$6141203,944

$ 15,450>524

$4,717)574

$ 10,795,933

$8,348,586

$2,066,695

$9,994,179

$8,351,506

$ 14,005,635

$2,193,827

$6,004,249

$6,887)205

$7>709,440

$9,955,957

$3,051>498

$ 109,532,808 1987

$602,287,851

$26,112>471

$628,400>322

$55,661,S32

$572,738,790

$5 201>705

$330>510

$3>810,055

$543,990 5l>000

$22,518,536

$2,173,210

$ 11>915,466

$988,752

$ 109,812

$ 1,396>250

$62 1>728,076

$2,800

$34,174>253

$49,632

$502,382>263

$30,563,478

$ 19>300>000

$8,923,598

$2>469,273

$513>800

$3)693,592

$85>971

$ 19>569,416

$621,728,076

$ 13,940,070

$4,525,952

$ 10>339>008

$7,971,779

$1,994>346

$9,721>237

$7,683,396

$ 13>512,528

$2,105,638

$5>530,934

$6,525,977

$7>422,506

$9)177,231

$2)974,793

$ 103>425,395

NC. FIVE-YEAR FINANCIALSTATEMENT ELECTRIC ENERGY SALES:

Members Non-members TOTALRECEIPTS Cost ofpower Wheeling RAYSTOlNN:

Generation Operation 8t Maintenance Interest Transmission Taxes OTHER PROJECTS:

Operation gc Maintenance Transmission Depreciation Taxes SSES:

Generation Operation t>c Maintenance Fuel Depreciation Taxes Transmission Maintenance Depreciation Interest Interest charged to Construction - Credit General gt administrative

~ 1991

$120>380,490

$24,966,421

$ 145>346,911

$43,054>251

$8>880,653

$2>320,600

$0

$20@N9

$23493

$300@22

$1S,401

$509+47

$3@52

$20>958,143

$8,452,974

$9,967,034

$4>243>498

$293>213

$804~7

$42>319>156

($1,041+14)

$5>SS9,603 1990

$115,137,651

$14,109,954

$129>247,605

$32,085,914

$9+49,841

$ZS60>147

$0

$ 183,550

$19@85

$ 123,663

$24,052

$466,190

$18,024,408

$9,512,667

$9,034~5

$3,437~2

$216>007

$804,907

$43,018485

($909,146)

$5815,694 1989

$ 114,434,195

$ 16,057,630

$ 130,4 9 1+25

$33858,887

$8@45,773

$Z346~1

$0

$200/21

$16~

$ 18+18,905

$9>413r1 77

$9376,144

$3,429,845

$317/66

$804,768

$42,724,066

($1~3,918)

$5,153,148 1988

$109,532,808

$24347,984

$133,880,792

$40,119,659

$7,441>025

$736,696

$116,970

$0

$0

$19/90,190

$8,634@41

$8,694,096

$3,608,751

$207,431

$804g77

$44,141,039

($2@18~3)

$3,980,631 1987

$103,425495

$31,974 WI

$ 135@99/96

$41>231,647

$6,668,817

$14,981,966

$ 10@20+33

$7>576,680

$3,390,699

$ 194845

$800/50

$45+39,094

($2,407/05)

$4>421@41 TOTALOPERATION EXPENSE

$146>871~2

$ 133,167,671

$132,~27

$ 135,662339

$ 133,023,867 Depreciation Taxes Other deductions

$159,064

$141482

($66'3)

$131897

$ 136,143

$30>417>247

$134,988

$ 109,750

($701>433)

$120833

$ 102>094

($672>383)

$113/32

$97466

($633414)

TOTALEXPENSES

$146>509>594

$163/52/58

$ 132315,632

$135312>683

$132,601351 Operating margins Interest income Other - profit/(loss) net Other capital credits

($1>162,683)

$3,691,751

$ 10>081

$0

($34,604+53)

$4.636,182

$1,462461

$29,912

($1+23/07)

$4328,040

$28>940

$21,184

($1431491)

$2.924>868

$596498

$23,825

$2>798+45

$ 1422,193

$245,604

$ 17,668 NET MARGINS

$2>539>149

($28/76/98)

$2454/57

$2>213,200

$4583,910

Coopers

&Lybrand REPORT OF INDEPENDENT ACCOUNTANTS To the Board ofDirectors Allegheny Electric Cooperative, Ine.

We have audited the accompanying balance sheet ofAllegheny Electric Cooperative, Inc. (Allegheny) as of October 31, 1991 and the related statements ofoperations, equities, and cash flows for the year then ended.

These financial statements are the responsibility ofAllegheny's management.

Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements ofAllegheny Electric Cooperative, Inc. for the year ended October 31, 1990 were audited by other auditors, whose report, dated January 11, 1991, expressed an unqualified opinion on those financial statements and included an explanato-ry paragraph that described the change in accounting principle discussed in Note 13 to the financial state-ments.,

We conducted our audit in accordance with generally accepted auditing standards.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial state-ments are free ofmaterial misstatement.

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

An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the finan-cial position ofAllegheny Electric Cooperative, Inc. at October 31, 1991, and the results ofits operations and its cash flows for the year then ended in conformity with generally accepted accounting principles.

As discussed in Note 1 to the financial statements, Allegheny changed its method ofaccounting for inven-tories in 1991. As discussed in Note 13 to the financial statements in 1990, Allegheny adopted Financial Accounting Standards Board Statement No. 92, "Regulated Enterprises - Accounting for Phase-in Plans."

t 5 North Fifth Street Harrisburg, Pennsylvania January 17, 1992

BALANCESHEETS as ofOctober 31, 1991 and 1990 (in thousands)

ASSETS Electric UtilityPlant:

In service Construction yvork in process Nuclear fuel in process Less accumulated depreciation and amortization OTHER ASSETS ANDINVESTMENTS:

Nonutilityproperty, at cost (net ofaccumulated depreciation of$ 1,656 in 1991 and $ 1,483 in 1990)

.Investments in associated organizations Other investments Other noncurrent assets CURRENT ASSETS:

Cash and cash equivalents Accounts receivable from members Other accounts receivable Inventories Other current assets EQUITIES:

Memberships Donated capital Patronage capital Other margins and equities Unrealized loss on marketable equity securities LONG-TERM DEBT, LESS CURRENT PORTION CURRENT LIABILITIES Current portion oflong-term debt Accounts payable and accrued expenses Accounts payable to members

$632,559 11,496

~!I!

651,902

~545'97 321 5,010 4,068 6,427 19 439 37,117 13>374 4,088 4,694 60 613

$577,373 3

51 37,952 (25,937) 12 069 513 218 13,645 11,550 27 936

$624,880 5,903 8M 639,023 501 442 4,971 4,250 5,812 16 385 47,031 11,045 4,653 2

63 591

$581,418 3

51 38,574 (28,476) 9 975 522 031 10,095 13,435 59 30 070 OTHER LIABILITIESAND DEFERRED CREDITS:

Accrued nuclear decommissioning Deferred income tax benefits from safe harbor lease Other deferred credits 6,020 11,454 24 150

$577,373 4,154 12,166 2

19 342

$581,418 See accontpanying notes tofinancial statentents.

STATEMENTS OF OPERATIONS for the years ended October 31, 1991 and 1990 (in thousands)

Operating revenue, including sales to members of

$ 120,380 in 1991 and $ 115,138 in 1990

$ 145,347

$129,277 OPERATING EXPENSES:

Purchased power Transmission Production Fuel Depreciation, net Taxes 1

Administrative and general Operating margin before interest and other deductions 43054 9,388 23,287 8>453 11,441 4,279 5,994 105,896 39,451 32>086 9,646 20,612 9,513 10,437 3,484 5,596 91,374 37,903 INTEREST AND OTHER DEDUCfIONS:

Interest expense Allowance for funds used during construction Other deductions, net Operating deficit 42,319 (1,042) 14 41>291 (1,840) 43,018 (909) 52 42>161 (4,258)

NONOPERATING MARGINS:

Net nonoperating rental income (loss)

Interest income Other (72) 3,657 82 3 667 2

4,602 1,460 6 064 Margin before income taxes and cumulative effect of change in accounting principle Deferred income tax benefits from safe harbor lease Margin before cumulative effect ofchange in accounting principle Cumulative effect ofchange in accounting principle Net margin (deficit) 1,827 712 2,539 2,539 1,806 776 2,582 (31,058)

$ 28 476 See accompanying notes to financial statements.

STATEMENTS OF EQUITIES for the years ended October 31, 1991 and 1990 (in thousands)

Other Margins Donated Patronage

.and Memberships Capital Capital Equities Unrealized Loss on Marketable Equity Securities Total Balance at November 1, 1989

$3

$51

$38,940

$381994 Change in unrealized loss on marketable equity securities (177)

(177)

Net deficit Retirement ofcapital credits (366)

(28,476)

(28>476)I (366)

Balance at October 31, 1990 Change in unrealiz l

s on marketable equity securities Net margin Retirement ofcapital credits 22) 177 4 177 2,539

~ 2,539 gl (6 51 38,574 (28,476)

(177) 9,97 Balance at October 31, 1991

$3

$51

$37,9 2-(2 372[

,, 3 069 3 l ee acco i ingnotesto i

STATEMENTS OF CASH FLOWS for the years ended October 31, 1991 and 1990 (in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES:

Net margin (deficit)

Adjustments to reconcile net margin (deficit) to net cash provided by operating activities:

Depreciation and fuel amortization, Amortization ofgain on sale ofelectric utilityplant Amortization ofdiscount on other investments Gain on sale ofother investments Deferred income tax benefits from safe harbor lease Cumulative effect ofchange in accounting principle Changes in operating assets and liabilities:

(Increase) decrease in operating assets:

Noncurrent assets Accounts receivable from members Other accounts receivable Inventories Other current assets Increase (decrease) in operating liabilities:

Accounts payable and accrued expenses Accounts payable to members Other liabilities and deferred credits Net cash provided by operating activities 2,539 19,218 (58)

(89)

(116)

(712)

(2,582)

(2,329) 565 (4,694)

(478)

(1,885)

(3,799) 5,578 11,158

$(28,476) 18,628 (58)

(776) 31,058 (463)

(1,716) 416 (124) 4,028 1,537 (327) 23 727 CASH FLOWS FROM INVESTINGACTIVITIES:

Additions to electric utilityplant Reduction in investments in associated organizations Purchase ofother investments Proceeds from sale ofother investments Proceeds from sales ofutilityand nonutilityproperty Net cash used in investing activities (15,136) 182 (12,514) 12,281 (15,187)

(12,565) 27 (13,191) 9,002 58 (16,669)

CASH FLOWS FROM FINANCINGACI'IVITIES:

Proceeds from long-term debt Payments on long-term debt Retirement ofcapital credits Net cash provided by (used in) financing activities Increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning ofyear Cash and cash equivalents at end ofyear 3,933 (9,196)

(622)

(5,885)

(9,914) 47,031

$ 37,117 13,944 (8,340)

(366) 5,238 12,296 34,735

$ 47,031 See accompanying notes tofinancial statements.

NOTES TO FINANCIALSTATEMENTS

1. Summary of Significant Accounting Policies:

Allegheny Electric Cooperative, Inc'. (Allegheny) is a rural electric cooperative utilityestablished under the laws ofthe Commonwealth ofPennsylvania.

Financing assistance is provided by the U.S. Department of Agriculture, Rural Electrification Administration (REA) and, therefore, Allegheny is subject to certain rules and regulations promulgated for rural electric borrowers by REA. Allegheny is a generation and transmission cooperative, providing power supply to fourteen owner/members who are rural electric dis-tribution cooperative utilities providing electric power to consumers in certain areas ofPennsylvania and New Jersey.

Allegheny maintains its accounting records in accordance with the Federal Energy Regulatory Commission's chart ofaccounts as modified and adopted by REA.

Electric UtilityPlant and Depreciation:

Elect'ric utilityplant is stated at cost, which includes an allowance for funds used during construction.

Depreciation for nuclear utilityplant and production assets is provided on the modified sinking fund method under the amended phase-in plan adopted to conform to Financial Accounting Standards Board (FASB) Statement No. 92, "Regulated Enterprises - Accounting for Phase-in Plans" (Statement No. 92).

This statement is further discussed in Note 13. The straight-line method is used for all other assets, except nuclear fuel. The cost ofunits ofproperty retired or replaced is removed from utilityplant accounts and charged to accumulated depreciation.

Nuclear Fuel:

Nuclear fuel is charged to fuel expense based on the quantity ofheat produced for electric generation.

Under the Nuclear Waste Policy Actof 1982, the U.S. Department ofEnergy (DOE) is responsible for the permanent storage and disposal ofspent nuclear fuel removed from nuclear reactors.

Allegheny currently pays to Pennsylvania Power &Light Company (PP&L), co-owner ofSusquehanna Steam Electric Station (SSES), its portion ofDOE fees for such future disposal services.

Cost of Decommissioning Nuclear Plant:

The estimated cost ofdecommissioning Allegheny's portion ofSSES is approximately $35.0 millionand is being accrued over the estimate useful life ofthe plant. Decommissioning costs are included in rates to the extent required to meet the funding schedule approved by the Nuclear Regulatory Commission (NRC).

Differences between amounts accrued and amounts collected in current rates are deferred for future recov-ery in accordance with the funding schedule.

At October 31, 1991, other noncurrent assets included $ 1.8 millionofdeferred decommissioning costs.

As required by the NRC in 1990 Allegheny established a Decommissioning Trust Fund (Trust) which is restricted for use to ultimately decommission SSES. In accordance with the NRC funding schedule,

$0.8 millionwas funded to the Trust for the year ended October 31, 1991 and included in other investments at-October 31, 1991 and 1990 is $3.8 millionand $4.1 million,respectively, offunds which Allegheny's Board ofDirectors has restricted for future payments to the Trust. Accrued nuclear decommissioning at October 31, 1991 and 1990 was $6.0 millionand $4.1 million, respectively.

Allowance for Funds Used During Construction:

Allowance forfunds used during construction represents'he cost ofdirectly related borrowed funds used for construction ofor additions to an electric utilityplant. The allowance is capitalized as a component of the cost ofelectric utilityplant while under construction.

1. Summary of Significarit Accounting Policies, continued:

Investments in Associated Organizations:

Investments in associated organizations are carried at cost.

Preliminary Surveys:

Costs ofpreliminary surveys for potential development projects are recorded as deferred charges in other noncurrent assets. Ifconstruction ofa project results from such surveys, the deferred charges are trans-ferred to the cost ofthe facilities. Ifa preliminary survey is abandoned, the costs incurred are written off.

Cash Equivalents:

For purposes ofthe statements ofcash flows, Allegheny considers all highlyliquid investments with an original maturity ofthree months or less when purchased to be cash equivalents.

Cash equivalents are car-ried at cost, plus accrued interest, which approximates market value.

Inventories:

Effective January 1, 1991, Allegheny began to account for certain power plant spare parts using a deferred (inventory) method. Under this method, purchases ofspare parts under inventory control are included in an inventory account and then charged to the appropriate capital or expense accounts when the parts are used or consumed.

Prior to 1991, power plant spare parts were generally either capitalized or charged to expense at the time ofpurchase.

The January 1, 1991 value ofthese spare parts was $4.5 millionand was recorded as an increase in inventory on the balance sheet. The associated income statement effect was deferred and willbe amortized as a credit to expense over a three-year period consistent with the ratemaking treatment.

Allegheny filed an application with the Internal Revenue Service in September 1990 requesting permis-sion to use this method ofaccounting for income tax purposes. Ifapproved, Allegheny would include the value ofthese spare parts as ofNovember 1, 1990 in taxable income over several years.

Inventories are carried at the lower ofcost or market value, cost being determined on the average cost method.

Other Investments:

Other investments include U.S. government obligations, corporate obligations, and common stocks (mar-ketable equity securities). The U.S. government and corporate obligations are stated at amortized cost which approximates market value. Marketable equity securities are carried at the lower oftheir aggregate cost or market value. Changes in net unrealized losses on noncurrent marketable equity securities are recorded directly in a separate equities'ccount and are not included in the determination ofnet margin.

Realized gains and losses are determined on a specific identification basis.

Patronage Capital and Other Margins and Equities:

In 1990 Allegheny established an unallocated equity account, Other Margins and Equities, as a result ofa charge against income for the cumulative effect ofa change in accounting principle (see Note 13). This charge against income has been recorded as a deficiency in an unallocated equity account as ofOctober 31, 1990, since the amount is not allocable to Allegheny's members.

Beginning in 1990, all margins recog-nized by Allegheny are required by REA to be used to reduce this deficiency. In addition the 1990 margin stabilization plan adjustment (see Note 1) was calculated prior to the cumulative effect adjustment.

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Rates:

The Board ofDirectors ofAllegheny has fullauthority to establish electric rates subject to approval by the REA.

Revenues:

Revenues from the sale ofelectricity are recorded based on billings to members and on contracts and scheduled power usages, as appropriate.

Income Taxes:

Net operating losses for financial and tax reporting purposes differ as a result oftiming differences relating primarilyto depreciation.

Investnient'tax credits, other than those sold through the safe harbor lease arrangement, are accounted for under the flow-through method whereby credits are recognized as a reduction ofincome tax expense in the year in which the credit is utilized for tax purposes.

The Financial Accounting Standards Board issued Statement ofFinancial Accounting Standards No. 96, "Accounting for Income Taxes" (Statement No. 96), as amended by Statements No. 100, No. 103, and No.

108, which require a change, effective for the fiscal year beginning November 1, 1993, from the current method ofaccounting for income taxes pursuant to Accounting Principles Board Opinion No. 11, to the liabilitymethod. Management expects that the adoption ofStatement No. 96 willnot have a material impact on Allegheny's net margin or financial position.

Margin Stabilization Plan:

Allegheny established a margin stabilization plan which has been approved by REA. Under the provisions ofthe plan, Allegheny develops a budgeted margin each year based on a targeted Times Interest Earned Ratio (TIER) of 1.06. Ifthe actual margin realized is in excess ofthe TIER, Allegheny records the differ-ence as a reduction ofthe current year's operating revenue and as a liabilityto its members.

Conversely, i the actual margin'all'd is les than the TIER, Allegheny records the difference as.a addition to the cur-rent year's operatin re enue an as a receivable from its members.

The liabilityor re ivable recorded at the end ofeach year iE in orporat into Allegheny's rate st(ucture for the followingyea through a cost-of-servicebillingadjust e tmade yAlleghen toits members.

For the earsended ber31;5991 y

y and 1990, oper'ating reve u

were r uced by $2.5 millionaiI

$6.4 million,respectivel e to actual

' '4~

margins exceeding the TIE hase a nants are1nclnded in a coonts payable to member t

tober 31, 1991 and 1990.

In accordance with REA req i ants he aforementioned m in stabilization pl'an c se nof 1

E, October31, 1991, with credits to bers or the October 31, 199 h

'lityc ntinuing hrou Octobe 31, 1992.

~ll, Reclassifications:

The1990financialstatementshavebeen e

as 'toconformwithth c rre,ye

'se ta on.

2. Electric UtilityPlant In Service:

Electric utilityplant in service consists ofthe followingat October 31, 1991 and 1990:

Depreciation/

Amortization, Lives/Rates 1991 1990 (In thousands)

Nuclear UtilityPlant:

Production Transmission General plant Nuclear fuel 39 years

$516,391 2.75%

32,193 3% -12.5%

859 Heat production 76,314

$513,408 32,201 825 71,921 Non-Nuclear UtilityPlant 3% -33%

625,757 6,802 618,355 6,525 Total

$632,559

$624,880

3. Susquehanna Steam Electric Station:

Allegheny owns a 10% undivided interest in SSES. PP&L owns the remaining 90%. Both participants pro-vide their own financing. Allegheny's portion ofSSES'ssets totalled $639 millionand $629 millionat October 31, 1991 and 1990, respectively. Allegheny's share ofanticipated costs for ongoing construction and nuclear fuel for SSES is estimated to be approximately $60 millionover the next five years, Allegheny receives a portion ofthe total SSES output equal to its percentage ownership. The balance sheets and state-ments ofoperations reflects Allegheny's respective share ofassets, liabilities and operations associated with SSES.

4. Investments in Associated Organizations:

Investments in associated organizations, at cost, consist ofthe followingat October 31, 1991 and 1990:

1991 1990 (In thousands)

NATIONALRURALUTILITIESCOOPERATIVE FNANCE Corporation Subordinated Term Certificates, bearing interest from 0% to 4%, maturing January 1, 2014 through October 1, 2080

$3,860

$3,860 NATIONALRURALUTILITIESCOOPERATIVE FINANCE Corporation Capital Term Certificates 125 296 NATIONALBANKFOR COOPERATIVES:

C Stock E Stock OTHER 33 30 44 30 20 20

$4>068

$4,250 Allegheny is required to maintain these investments pursuant to certain loan and guarantee agreements.

5. Other Investments:

Allegheny's investments are invested in a variety offinancial instruments, the related values as presented in the financial statements are subject to various market fluctuations which include changes in the equity markets, interest rate environment and the general economic conditions. Other investments consisted of the followingat October 31, 1991 and 1990:

1991 1990 Cost Market Cost Market (in thousands)

(in thousands)

DEcoMMissioNINGTRUsT FUND A:

Money market funds U.S. Government securities Corporate bonds Common stocks 64 1,824 913 990 3)791 64 1,874 935 1,095 3)968 32 2,414 759 984 4,189 32 2)420 755 807 4,014 Allowance from unrealized loss on common stocks 3,791 3,968 (177}

4,012 4,014 NRC MANDATEDDEcoMMlssloNINGTRUsT FUND 8:

Money market funds U.S. Gover'time t securi 'es 33 779 812 33 793 826 DEBT SERvlcE REsE v UND:

U.S. Government c

ities 1,775 Accrued interest receiva le 775 5

1,775 9

49,

'y 25.

$6,421

$,61:; j'I),$l2, '$ 5, 14 The gross unrealized gains and lo in h value ofcommon sto 'ere $

and,g'39., ref iv~elv, at~

'I'ctober31,1991and$

11and$ 188, e

i ely,atOctober31,19

0

6. Long-Term Debt:

Long-term debt consists principallyofadvances under mortgage notes payable for electric utilityplant to REA and to the United States ofAmerica acting through the Federal Financing Bank (FFB) and guaranteed by REA. Substantially all the assets ofAllegheny are pledged as collateral. Long-term debt consists ofthe following:

1991 1990 (In thousands)

Advances under mortgage notes payable to FFB at interest rates varying from 6.418% to 13.820%

in 1991 and 7.338% to 13.820% in 1990, due in varying amounts through 2021

$487,276

$493,860 Pollution control revenue bonds, payable semi-annually, including interest through 2014. Variable rates ranged from 3.75% to 6.0% in '1991 and 5.5% to 7.1% in 1990 27)000 27,400 Mortgage loan payable to CFC, payable in various quarterly installments, including interest through January 2015. Variable rates ranged from 6.625% to 9.125% in 1991 and 9.125% to 9.75% in 1990 t

1,973 2,004 Notes payable to CFC, payable in various quarterly installments, including interest through October 2019.

Variable rates ranged from 6.625%

to 9. 125% in 1991 and 9.125% to 9.75% in 1990 3,101 3,123 5% mortgage notes payable to REA due in varying amounts through 2019 7,513 5,719 Other 20 Less current portion 526)863 13,645 532,126 10,095

$513,218

$522,031

Allegheny has the option on advances under long-term mortgage notes payable to FFB to elect (subject to REA approval) a short-term interest rate with an interim maturity date oftwo years after the date ofthe advance. At the date ofthe advance or on the maturity ofan interim advance, Allegheny may also desig-nate that it desires a long-term interest rate with a long-term maturity up to a maximum of34 years from the end ofthe calendar year in which the note was issued. AtOctober 31, 1991 and 1990, Allegheny had elected short-term interest rates and interim maturities on advances under these mortgage notes payables to FFB of$92.2 millionand $92.2 million,respectively. The remaining advances under mortgage notes payable to FFB have previously been converted to long-term interest rates and maturities. AtOctober 31, 1991, Allegheny had $593 millionofadvances which are scheduled to mature and have interest rates reset within one year. Allegheny intends to roll these advances over for additional two-year periods or to extend them to long-term maturities, in accordance with the mortgage agreement.

Long-term Pollution Control Revenue Bonds (Bonds) were issued by an industrial development authority on Allegheny's behalf. The Bonds are subject to purchase on demand ofthe holder and remar-keting on a "best efforts" basis until the Bonds are converted to a fixed interest rate at Allegheny's option.

Ifa fixed interest rate is established for the Bonds, the Bonds willcease to be subject to purchase by the remarketing agent or the trustee. The Bonds are collateralized by irrevocable letters ofcredit from Rabobank Nederland which are backed by a five-year credit facilityin the event the bondholders tender the Bonds prior to the conversion to a fixed interest rate and the Bonds cannot be remarketed. The stated amount ofthe letters ofcredit are equal to the amount ofoutstanding Bonds plus an amount equal to sixty-fivedays'nterest accrued on the Bonds at 12%. The indenture agreement contains various redemp-tion provisions with redemption prices ranging from 100% to 103%. Included in other investments, at both October 31, 1991 and 1990 are $ 1.8 millionofinvestments which relate to a debt service reserve fund required under the bond indenture.

FUTURE MATURITIESOF LONG-TERM DEBT FOR THE NEXT FIVE YEARS ARE AS FOLLOWS (IN THOUSANDS):

1992

$ 13,645 1993

$9,800 1994

$ 10,237 1995

$ 10,543 1996

$ 10,899 The above maturity schedule reflects management's intent to convert advances under mortgage notes payable to FFB with interim maturity dates to long-term debt. Included in 1992's future maturities is a

$4.3 million advance under mortgage notes payable which is required to be retired pursuant to a June 30, 1988 letter from REA to Allegheny issued'in connection with the Raystown leveraged lease.

Allegheny has a short-term line ofcredit available with CFC of$21.4 million. There were no amounts outstanding at October 31, 1991 or 1990. The interest rate is generally at prime plus 1%. Restrictions are imposed under the line ofcredit arrangement including, among other things, maintenance ofratio requirements under existing long-term debt arrangements and limitation oftotal short-term indebtedness outstanding to an amount not to exceed the remaining unadvanced portion ofcertain existing REA guar-anteed FFB long-term commitments of$38.6 millionat October 31, 1991.

AtOctober 31, 1991,.Allegheny had unadvanced portions ofcertain existing REA and CFC long-term commitments of$4.3 million.

6. Long-Term Debt, continued:

Allegheny is required by mortgage covenants to maintain certain levels ofinterest coverage and annual debt service coverage.

Allegheny was in compliance with such requirements at October 31, 1991 and 1990.

Certain ofAllegheny's long-term debt is at variable interest rates and is therefore subject to various market and interest rate fluctuations.

During 1991 and 1990, Allegheny incurred interest costs of$42.3 millionand $43.0 million, respective-ly, ofwhich $ 1.0 millionand $0.9 million, respectively, was capitalized as part ofthe construction ofthe electric utilityplant. Interest paid, net ofamounts capitalized, was $41.3 millionand $41.9 million, respectively.

7. Income Taxes:

AtOctober 31, 1991, Allegheny had available nonmember net operating loss carryfonvards of$ 17.0 mil-lion for financial reporting purposes and $ 161.4 millionfor tax reporting purposes expiring through 2005 and investment tax credit carryforwards ofapproximately $34.0 millionfor both financial and tax report-ing purposes, expiring through 2003. Under the Tax Reform Act of 1986, the amount ofinvestment tax credit allowable as a result ofa carryforward must be reduced by 35%. Allegheny also had operating loss carryforwards attributable to member activities of$ 19.8 millionfor financial reporting purposes and

$ 155.3 millionfor tax reporting purposes which may be carried forward indefinitely.

8. Related Party Transactions:

Allegheny has an arrangement with an associated organization, Pennsylvania Rural Electric Association (PREA), under which PREA provides Allegheny with certain management, general, and administrative services on a cost reimbursement basis. Total costs for the services provided for the year ended October 31, 1991 and 1990 were approximately $3.6 millionand $3.1 million,respectively.

9. Commitments and Contingencies:

Insurance:

Allegheny and PP&L are members ofcertain insurance programs which provide coverage for property damage to members'uclear generating plants. Allegheny's portion ofthe facilities at SSES is insured against property damage losses up to $232.5 millionunder these programs. Allegheny is also a member of an insurance program which provides coverage for the cost ofreplacement power during prolonged out-ages ofnuclear units caused by certain specified conditions. Under the property and replacement power insurance programs, Allegheny could be assessed retrospective premiums in the event the insurers'osses exceed their reserves.

The maximum amount Allegheny could be assessed under these programs during the current policy year is $0.7 million.

Allegheny's public liabilityfor claims resulting from a nuclear incident is currently limited to $780.7

millionunder provisions ofthe Price-Anderson Amendments Act of 1988 (Act), which extended the Price-Anderson Act to August 1, 2002. Allegheny is protected against this potential liabilityby a combination of commercial insurance and an industry retrospective assessment program.

In the event ofa nuclear incident at any ofthe facilities owned by others and covered by the Act, Allegheny could be assessed up to $ 12.6 millionper incident, but not more than $2 millionin a calendar year.

Safe Harbor Leases:

Allegheny previously sold certain investment and energy tax credits and depreciation deductions pursuant to a safe harbot; lease. The proceeds from the sale, including interest earned thereon, have been deferred

and are being recognized on the statements ofoperations over the 30-year term lease. The net proceeds and related interest were required by REA to be used to retire outstanding FFB debt.

Under the term ofthe safe harbor lease, Allegheny is contingently liable in varying amounts in the event the lessor's tax benefits are disallowed and in the event ofcertain other occurrences.

The maximum amount forwhich Allegheny was contingently liable at October 31, 1991 was approximately $ 19 million.

Payment ofthis contingent liabilityhas been guaranteed by CFC.

Litigation:

In the normal course ofbusiness, there are various claims and suits pending against Allegheny. In the opinion ofAllegheny's management, the amount ofsuch losses that might result from these claims and suits, ifany, would not affect materially the financial statements.

10. Sale/Leaseback Arrangement:

Allegheny previously completed a sale and leaseback ofits hydroelectric generation facilityat the Raystown Dam (the Facility). The Facility was sold to a trustee bank representing Ford Motor Credit Company (Ford) for $32 millionin cash. Under terms ofthe arrangement, Allegheny is leasing the Facility from Ford's trustee for an initialterm of30 years.

Payments under the lease are due in semi-annual installments which commenced January 10, 1989. At the end ofthe 30-year term, Allegheny willhave the option to purchase the Facility for an amount equal to the Facility's fair market value or for a certain amount fixed by the transaction documents (determined by 1988 appraisal ofthe then foreseeable residual value at the end ofthe lease term), whichever is less.

Allegheny also has the option to renew the lease for a five-year fixed rate renewal and three fair market renewal periods, each ofwhich may not be for a term ofless than two years.

Payments during the fixed rate renewal period are 30% ofthe average semi-annual installments during the initial lease term.

Allegheny willretain co-licensee status for the Facility throughout the term ofthe lease. The gain of$ 1.9 millionrelated to the sale is being recognized over the lease term in the same proportion that the annual rental payments relate to total rental payments.

The payments by Allegheny under this lease were determined in part on the assumption that Ford will be entitled to certain income tax benefits as a result ofthe sale and leaseback ofthe Facility. In the event that Ford were to lose all or any portion ofsuch tax benefit, Allegheny would be required to indemnify Ford for the amount ofthe additional federal income tax payable by Ford as a result ofany such loss.

The leaseback ofthe Facility is accounted for as an operating lease by Allegheny. As ofOctober 31, 1991, future minimum lease'payments under this lease, which can vary based on the interest paid on the debt used by Ford to finance the transaction, are estimated as follows (in thousands):

1992

$ 1,932 1993 2)361 1994 2,361 1995 2,361 1996 2 237 Thereafter 52,815 Total minimum lease payments

$64,067 The future minimum lease payments shown above are for the initiallease term and the five-year renewal period. These paymeiits are based on an assumed interest rate of8.8% and may fluctuate based on differ-ences between the future interest rate and the assumed interest rate.

~

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10. Sale/Leaseback Arrangement, continued:

Rental expense for this lease totalled $ 1.8 millionand $2.1 millionfor the years ended October 31, 1991 and 1990, respectively.

11. Pennsylvania Electric Company Settlement:

In July 1991, a settlement was reached between Pennsylvania Electric Company (Penelec) and Allegheny for excess energy wheeled through and used by the Penelec System. Under the settlement agreement Penelec willreimburse Allegheny $2.5 millionfor the excess energy received. Allegheny recognized the full amount ofthe settlement during 1991.

12. Concentrations of Credit Risk:

Allegheny is comprised ofmember rural electric cooperatives, whose operations are located in Pennsylvania and New Jersey. The member cooperatives'rimary service areas are small communities located throughout much ofrural Pennsylvania and New Jersey.

13. Change in Accounting Principle:

Effective November 1, 1989, Allegheny adopted Financial Accounting Standards Board Statement No. 92, "Regulated Enterprises - Accounting for Phase-in Plans" (Statement No. 92). Under Statement No. 92, a utilitymay capitalize on its balance sheet the costs deferred under a rate phase-in plan ifthe plan meets specific criteria including the requirement that such costs are recovered within 10 years ofthe date the deferrals began.

Otherwise, the deferred must be charged to expense in the period incurred.

'nder the method ofdepreciation used by Allegheny for nuclear utilityplant production assets prior to ovember 1, 1989, which was previously approved by REA, the amount ofdepreciation included in elec-t ic ates during the first 10 years ofthe related assets'ives was substantially les/than the amount that i o ldhavebeenincluded'usingstraight-linedepreciation.

Accordingly,thismethodo depreciationused o such assets was cons'dered to be a phase-in plan,under Statement No. 92 nat did ot meet the 10-year

~/

/

overy period establ'ed by Statement No. 92.

In order to comp vith Statement No. 92, All gheny amended its pha

-in pla der the amended s

afit-lificr thtf tri1 be used by All eny'for the remaining lj e of os

'defe'p 'Oct lee gl, pi lp Dunderthephase-tn an N

. ygs4at g milli n'

milliP,resPectively.

e(h

'as l,r q d t ie da chargeagainst inc in 0 for the cumulative effectofa ets. The net amount of ed to comply with Statement dpnf~t/ 'ip e'in amount of$31.1 mill'e

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CONTENTS

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hose shareowners who closely follow PAL annual reports from year to year willnotice some changes from recent years. This report features black and white photographs rather than the full.color reports utilized since 1983. In the mid-and late-'80s, our full-color report reflected the nation's business climate. PP8cL chose to match the annual report character of those we competed with in the energy marketplace. This report reflects new realities in today's business world.

Electric utilities like many businesses are implementing ways to be more cost-effective, and re.evaluating what messages their publi-cations are sending to their audiences.

At PAL, every department, every employee, is being asked to redouble efforts to re-evaluate priorities and look at the way jobs and projects are performed and how goals are met. This report is our effort to give you all the information you need to evaluate PAL as an investment and as a good corporate citizen, in a package that reflects our culture of being cost-effective in all we do.

You also may note the "recyclable" logo on this page. Full-

- color printing on gloss-coated paper is difficultor impossible to pro-cess for re-use. This report meets common standards for recycling.

As part of our re.evaluation, we also considered printing this report on recycled paper. While recycled paper for "low-end" uses is gener-ally available, reasonably priced higher grades that look acceptable and perform reliably on high-speed printing presses are not available in the quantity demanded by the market. The company agrees in principle with the use of recycled paper, and uses it in a number of applications. We willexpand our use of recycled paper as appropri-ate, and as market availability allows.

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1992 Annual Meeting PAL's 1992 annual meeting will be held April 22 at the Williamsport Scottish Rite Auditorium, 348 Market St., Williams-port, Pa. See page 46 for details.

1991 1990 1990-1991

% Change 1989 Operating Data (in thousands)

Total Energy Sales, Kilowatt-hours(a).......

System Energy Sales, Kilowatt-hours(b).....

Interchange Power SalesKilow'att-hours (a)..

Electricity Generated, Kilowatt-hours....,

Net System Capacity, Kilowatts(c)(d).......

Winter Peak Demand, Kilowatts(e).........

Financial Data(in thousands)

Operating Revenues(a)........,...,....,

Operating Income...

NetIncome............,..............

Common Dividends Declared..... ~......

Common Equity(c).

CapitalProvidedbyInvestors(c)....,....,

Construction Expenditures '.....,........

Construction Workin Progress (c)....,....

Property, Plantand EquipmentNet(c).....

Total Assets(c)

Per Common Share Earnings Dividends Declared..

Market Price(c)

Book Value(c).

Other Information Return on Average Common Equity......,

Times Interest Earned Before Income Taxes..

Number ofCustomers Electric(a) (c),.....

Common Shares Outstanding(c)..........

Number ofCommon Shareowners (c).......

Number ofEmployees Electric(c)........

I 36,218,811 I 29,036,169 7,553,348 41,551,242 7,797 5,974 I

, $ 2,559,696

$ 582,331

$ 348,414 I

$ 234,626

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2.78 1,143,592 75,422,739 132,197 8,108 (a) Years prior to 1991 have been restated to reflect the reclassification ofdistinct sales ofenergy to certain utilities from interchange power sales to energy sales and operating revenues. See Financial Note 17 forfurther discussion of interchange power sales.

(b) Excludes contractual sales to other utilities.

(c) Atyear.end.

(d) Total generating capacity plus firmcapacity purchases less firmcapacity sales, (e) Except for 1989, winter peaks were reached early in the subsequent year.

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or Pennsylvania Power & Light Co., 1991 was a year of accomplishment in the face of ever-increasing challenges.

It was a year of achievement:

~ We achieved an earnings level needed to maintain financial health.

~ For the sixth year in a row, we made good on our objective not to increase base rates.

~ Our Susquehanna nuclear plant shauered its single-year record for generating electricity, breaking the old mark by more than I billion kilowatt-hours in producing 15.9 billion kwh.

~ PP&L had the lowest consumer complaint rate among Pennsylvania's major electric utilities.

~ Through consolidation of division activities, more than 900,000 cus-tomers are now being served by our new centralized customer contact facility.

~ Through an aggressive collection program, we reduced the amount of our overdue customer bills by $ 14 million.

~ Our land'management prognms were honored as the best in the nation.

But 1991 also was a year in which we responded to the challenges that come with doing business in today' world:

~ Central Eastern Pennsylvania, along with the rest of the nation, is endur-ing a recession.

As a result, total sales to our service-area customers when adjusted for weather were essentially flat. Industrial sales were down by 3 percent.

~ The recession also meant that housing starts were down, putting a dent in our marketing and economic development results.

~ For the second year in a row, milder-than-normal weather also slowed the rate of increase in our sales.

~ A state business tax increase drove up our rates while dampening the atmosphere for economic develop-ment and business retention.

The past year served to further con-firm what we have acknowledged for some time: Change is really the only thing that is constant in today's world.

We willsucceed only ifwe manage the change that is coming our way from all directions. In an increasingly competitive atmosphere, those who manage change willwin. Those who don', will lose. That's why we spend an increasing amount of our time plan-ning for the future a future that will be markedly different from what we'e known.

Competition. That one word more than any other defines the future of PP&L as well as the electric utility industry. We already are seeing the influence of deregulation on our industry. Today, we are not only corn.

peting with oil and gas as energy

sources, we are competing with other suppliers of electricity.

This is not just a regional concern.

The "global" marketplace is having-and willcontinue to have important impacts on our success as a company.

A look at the transportation and steel industries gives us a clear picture of how global competition translates into regional economic fallout. And, if American industry is not strong, our business willsuffer.

That's mhy we are working to shape the future, while we keep close tabs on the essential day-to.day challenges of doing business.

What are we doing about our future?

Articulating Our Vision One important step is articulating a vision, our aspiration for PP&L as we near the next century. After extensive discussions throughout the year, wc distilled our vision to eight concise words: PP&L willbe tbe energy supplier ofchoice. Our vision means PP&L willposition itself so that our customers can make a clear choice in selecting us to provide the energy to heat their homes and offices, to power their industrial facilities, to make their lives more productive and enjoyable.

Striving toward that vision will re-quire an additional commitment from each PP&L employee and the con-tinued support of our shareowners.

It requires the best in customer service, excellence in operation and sensitivity to all our publics. It requires a con-tinuing commitment to keep our rates stable.

As a companion to our vision, we also have articulated a set of corporate values, which are the collective prin-ciples and ideals that guide our ac-tions. These values define the charac-ter of our organization. They describe what the corporation stands for.

Defining a vision and establishing values were important initiatives of the past year, but they weren't the only ones. We also surveyed our customers and the results mere very positive. In fact, 92 percent of those surveyed have a favorable impression of PP&L.

But a more competitive future en-sures that we cannot be satisfied with the positive impressions that customers have of us today. We know that the ex-pectations of our customers willcon-tinue to rise and that we must improve our service accordingly. We are ex-amining closely the results of this survey to identify opportunities to more effectively position PP&L in a competitive environment.

To have our vision become reality, we must offer the highest quality ser-vice to our customers at competitive rates. As we mentioned earlier, we cannot achieve that level of service without improving. That's the concept behind our continuous performance improvement process.

CPIP, as we call this endeavor, is PP&L's total quali-ty effort.

CPIP willset the tone for PP&L in the future. At its heart is the convic-tion that there are better and more effective ways to do everything that we do and that, after we find those better ways, we begin to search for even better ones. CPIP will involve all employees; everyone will be part of the team. CPIP means we are commit-ted to listening to our employees, to our customers, to others in our in-dustry, to anyone else who might hold the keys to a "quality way."

The successful companies of the future will have a "restless" culture.

They will encounge aggressive ques-tioning of the status quo. They will

3 percent and commercial sales growth was not as strong as in previous years.

This flattening of sales is directly at-tributable to economic conditions in our service territory.

Kauffman not be static. They will manage change rather than be buffeted by it.

We began CPIP by asking all our em-ployees what they think about the company, about the way we operate the business, about the way they are involved in our operations, about ways we can improve. The results of that baseline study willprovide us with a good starting point for CPIP.

We then will move on to the next part of the process, which will involve the drawing up of a "game plan" to improve our performance at PP&L.

The game plan willidentify ways to more involve all PP&L people in managing costs and improving our products, work methods and services.

Our ultimate objective: complete customer satisfaction.

Emphasizing Our Strategies While we set our sights on the future, however, we cannot afford to short-change the present. That's why we continue to emphasize the impor-tant strategies we followed to achieve success in the '80s and the early part of the '90s.

Our four-pronged strategy:

~ Aggressive marketing and economic Hecht development programs

~ Effective cost management

~ Operational excellence

~ Sensitivity to people Let's take a look at how we did in these areas during 1991.

During 1991, we narrowly achieved our marItettng and economfc development goals. We think this is a remarkable achievement in light of the challenges of a recession, combined with a state tax increase that eroded Pennsylvania's stature as a pro-business state. During the summer of 1991, to resolve a state budget deficit, Pennsyl-vania increased business taxes substan-tially, making it one of the highest business tax states in the nation.

While we were successful in creating new sales through marketing, those ef-forts were diminished by declines in all customer sectors, so our overall sales were flat. When adjusting for dif-ferences in weather between the two years, our 1991 sales increased over 1990 sales by just 0.2 percent. This, of course, is significantly less than the 3.5 percent annual increases experienced through the 1988 to 1990 period.

Sales to residential customers in-creased only slightly when adjusted for weather. Industrial sales were down by Rates Remain Stable Even as we deal with the prospect of a reduced rate of sales growth, we are continuing to meet our objective of not increasing base rates until at least the 1994-95 period. Unfortunate-ly, our customer bills increased by 3 percent during 1991 because of the state tax increases.

Despite that in-

crease, as we entered 1992, our average price per kilowatt-hour was still at about the level it was in 1986. We still believe that a key to our success is our ability to keep rates competitive. Clear-ly, rate stability is the key component of our marketing and economic development efforts.

Because we need to keep rates stable and continue to improve our earnings and dividends, we are placing addi-tional emphasis on our effecttve cost management strategy. Following through on our effort to better plan for the future, we are including all areas and levels of the company in an integrated planning process.

This process provides a long-range outlook, so that we can work toward our objectives with a coordinated approach.

One of the benefits of our long-term planning has always been to provide advance warning where reallocation of resources is necessary.

One area where we have concluded change is ap-propriate is in the number of full-time employees.

We decided that it is necessary to return to the declining trend that we had established in the latter half of the 1980s. For that reason, we have established a plan that will decrease the number of full-time employees to about 7,500 by the mid-1990s.

We have talked with all our em-ployees about our long-range planning process, about the competitive re-quirements of the future, about the need to contain costs and the resulting staffing reductions, which we expect

to come primarily through normal attrition.

Another important strategy is opera-ttonal excellence Superior perfor-mance of our power plants is neces-sary ifwe are to keep costs to cus-tomers down and earnings up. During 1991, our fossil fuel, nuclear and hydro units generated more than 41.5 billion kilowatt-hours.

The Susquehanna nuclear plant led the way, breaking its previous station record by generating nearly 16 billion kwh. Susquehanna Unit 1 generated electricity for all but six and one-half days during the year, running up a 95 percent capacity factor, the best in the world for General Electric boiling water reactors. Unit 2 at Susquehanna operated at a capacity factor of 76 per-cent, despite a refueling outage during the year.

The superior performance of Sus-quehanna and our other power plants not only allows us to sell more kwh in a given year, but also earns us a reputation that paves the way for our aggressive effort to sell capacity to other utilities.

Superior Customer Service Operational excellence, however, does not end with our power plants.

Our commitment to excellence in ser-vice to our customers is equally impor-tant ifwe are to be the supplier of choice. That commitment again was clearly translated into action during 1991.

By the end of the year, more than 900,000 of our 1.2 million customers were being served by our new system-wide Customer Contact Center. Open-ed in June 1990, the center gives customers wider access to service 24-hours-a-day, seven-days.a-week.

In its first full year of operation, the center handled about 844,000 cus-tomer calls.

The center offers new features, in-cluding the Power Assistance Line, which goes into action ifthere is a storm that leads very quickly to a large volume of customer calls. While we are staffing up our contact center to deal with the emergency, the Power Assistance Line enables large numbers of customers to tell a computer what their problem is. We are using PAL, however, only for brief periods when our customer contact representatives are overwhelmed.

We firmlybelieve that our customers want to talk with a real person and it is our goal to pro-vide that kind of responsiveness, ex-cept in the most severe circumstances.

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-,;.don'. will;lose." 'i, The center is just one example of our continuing commitment to pro-viding the best in services to our customers an example of our sen-stttvity to people. Our sensitivity to the concerns of our customers also is exemplified by the fact that, for the sixth year in a row, PAL had the lowest customer complaint rate of ma-jor electric utilities in Pennsylvania.

Our sensitivity to people also is reflected in our relationship with our employees. The superior performance of PP&L people resulted in the com-pany achieving seven of our nine employee incentive goals in 1991. The company's compensation package which includes comprehensive benefits is meant to encourage that con-tinued pursuit of excellence.

We have not ignored you, the shareowner, in our people sensitivity strategy. We think our record of annual dividend increases since 1979 is an ex-ample of our keen awareness of the

'needs of the people who own this business.

PP8i:L's four basic strategies have served us well and they remain very important to our daily operations.

We will, however, continue to assess their effectiveness as we plan to meet the competition that the future holds.

Also, these strategies have played an important role in maintaining the com-pany's financial health. Our earnings for 1991 were $4.01 per share of com-mon stock, 6 cents higher than in 1990. And, ifwe had experienced nor-mal weather in 1991, earnings would have been 12 cents per share higher.

Despite the impact of mild weather and the recession, the S4.01 per share earned in 1991 represents an annual growth rate in earnings of 5.3 percent since the end of 1986.

Several factors have played an impor-tant part in that earnings improvement.

These include aggressive marketing and economic development programs, ef-fective cost management, and a reduc-tion in interest expense and dividends on preferred and preference stock.

Also, our strong generating capacity enabled us to add another dimension of revenue, beginning in 1989, by entering into innovative capacity-related transactions with other utilities.

In December, we announced our in-tention to split our common stock.

The split would bring the price of our stock, which has doubled since the mid-1980s, in line with other electric utilities. Shareowners will be asked to approve the split at the annual meeting in April.

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Environmental Commitment Even as we do our best to maintain strong financial performance in a more competitive future, we are addressing the ongoing challenge to protect the environment as we provide an essen-tial service to the people of Central Eastern Pennsylvania.

As we clearly point out in the en-vironmental values statement that we developed in 1991, we are committed to serving our customers in a manner that protects the environment for pres-ent and future generations.

We man-age our business to minimize wastes and emissions that affect the environ-ment. As a company, we manage and conserve natural resources, we protect environmental diversity and we pro-mote energy efficiency.

Because we'e done more than sim-ply comply with previous laws on sulfur dioxide emissions, we expect only a small increase in customer costs about 1 percent will be needed to comply with the first phase of the Clean Air Act amendments passed last year by Congress.

Because we have been making substantial improvements over the years, the early reductions at our plants will come, in part, from the burning of lower-sulfur coal.

The later reductions, however, will involve the installation of "scrubbers" on some of our generating units.

While the Clean Air Act amendments will result in a cleaner environment for all of us, PAL has been working toward this goal for some time.

Our actions continue to demonstrate our clear commitment to the environ-ment. Our land management programs have earned awards, but more impor-tantly, they have increased environ-mental awareness among people in our service area. The Montour Preserve, Susquehanna Riverlands, the Holtwood recreation areas and Lake Wallen-paupack are excellent examples of en-vironmental commitment at work to-day in our communities.

We are adding to our environmental programs in 1992. In the spring we will be giving away more than 120,000 fir seedlings in a program called "Trees for the Future." The program will stress the importance of environmental awareness and education.

Another environmental concern among some of the people in our ser-vice area is the question of EMFs-the electric and magnetic fields present near electrical appliances and our facilities. Although the current scien-tific evidence does not demonstrate a

health problem, we are sensitive to the concerns of our customers.

For that reason, we are meeting with cus-tomers, offering to measure EMF levels in their homes and businesses and pro-vide them with information. We'e even taking steps to reduce EMFs, where practical, in the design of new transmission and distribution facilities.

We are responding to the percep-tions of our customers as well as to the cold scientific "facts."

Deregulation Issues In a way, perception also is the challenge we face as Congress con-siders legislation that would change the very nature of our business. In light of the deregulation that has oc-curred in other major industries over the years, there is a perception by some in the federal government that the nation would be better served with a deregulated electric utilityindustry.

While this is a complicated question, we must be careful not to put the long-term best interests of the nation at risk. Our position on the deregula-tion issue is clear: we support action that will maintain competitive, stable rates for PAL customers while main-taining the reliability of electric supply.

None of the electric utility deregula-tion proposals now being discussed adequately deal with the challenge of maintaining system reliability.

The decisions on these matters must result in the highest long-term eco-nomic productivity of the nation.

Some of the deregulation schemes be-ing discussed would benefit certain special interest users of the electric supply system while putting the average customer, particularly resi-dential customers, at an economic disadvantage.

In addition, some of the deregula-tion scenarios would allow indepen-dent power suppliers to enter and leave the electric business as they see fit, without regard to any obligation to serve customers. This is not in the best interest of the nation and the general public because electricity is a service that is essential to the very survival of our way of life.

You can be sure that we willcon-tinue to be active in helping to shape the future of the utility industry.

As we step forward in the 1990s, the world is changing and so is PP&L. We are concentrating on our competitive situation, we are looking beyond to-day's operational concerns and assess-ing what we need to do to realize our vision for the future.

Thanks to your continuing support, PP8:L is a healthy company, a company that can effectively plan for the future with the confidence that our 72 years of success have given us.

We have a vision. We have the lead-ership in place to get us there. We have the strategies to provide the pathway.

We will succeed because we'e not shrinking from the uncertain future.

We'e planning to manage the future in a way that willassure continued suc-cess for your company.

John T. Kauffman

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William F. Hecht March I, 1992

anuary

~ E. Allen Deaver, executive vice president and a member of the board ofdirectors ofArmstrong World Indus-tries, Lancaster, and Dr. Stuart Heydt, president and chief operating officer of the Geisinger Foundation, Danville, join PP&L's board, effective Jan.

1.

~ Year-end figures show 1990 earnings of $3.95 per share ofcommon stock as energy sales for the year are depressed by extremely mild weather. With nor-mal weather, per share earnings would have been

$4.20.

February

~ The quarterly dividend on common stock is increased by 4 percent, from 74.5 cents to 77.5 cents per share.

This continues the record of dividend increases every year since 1979.

~ The company's Susquehanna nuclear plant earns the highest possible grade in five of seven performance areas in an assessment by the Nuclear Regula-tory Commission. The second highest mark was earned in the other two categories.

~ "Working Toward a Brighter Tomor-row" is chosen from among 3,000 em-ployee entries as the new company slogan.

March

~ 143 line and support employees are sent to Niagara Mohawk Co.'s service area to help restore electric service to thousands of customers affected by a severe ice storm in New York State.

~ Unit 2 at the Susquehanna nuclear plant begins its fourth refueling and inspection outage.

~ PAL asks the Federal Energy Reg-ulatory Commission to approve a 9.65 percent,

$ 4.1 million, increase for the 17 municipalities and one in-vestor-owned utilitywhich comprise the company's wholesale customer group.

April

~ An agreement calling for sharing of nuclear-related information is signed by PAL and top officials of the Kursk nuclear power plant in Russia. The agreement follows an exchange ofdele-gations between Kursk and the Sus-quehanna nuclear plant in 1990.

~ PAL undertakes initiatives to respond to customer concerns about the effects of electric and magnetic fields. These initiatives include design changes in some of its new transmission and dis-tribution facilities, a customer field measurement program and support of additional EMF research.

~ An agreement is reached between PP8cL and the General Electric Co.

settling an outstanding contract claim against G.E. which arose during con-struction of the Susquehanna plant.

PP&L customers and Allegheny Electric Cooperative willshare in the benefits of the settlement. Allegheny is a 10 percent owner of Susquehanna hiay

~ PP&L's dedication to exemplary cus-tomer service is evident as company residential consultants win six ofeight marketing awards in the annual com-petition sponsored by the Pennsylvania Electric Association.

~ Susquehanna Unit 2 returns to service after safely completing its fourth refuel-ing and inspection outage. The outage was completed in 60 days, the shortest refueling outage in the plant's history.

June

~ PP&L is one of 25 utilities across the country to sponsor a nationwide study of the magnetic fields that exist in and around people's homes. A randomly selected group of 36 residential cus-tomers are asked to participate in the 1,000-home study conducted by the Electric Power Research Institute. Meas-uring devices willrecord the strength of magnetic fields in the homes for a six-month period.

July

~ The company's stewardship of its land holdings earns a first-place "Take Pride in Pennsylvania" award and a semi-finalist spot in national competition sponsored by the U.S. Department of the Interior.

~ PP&L sells $ 150 million of first mort-gage bonds to an underwriting group and retires short-term debt that was in-curred to provide interim financing for the company's capital requirements.

~ Hot, muggy weather and heavy use of air conditioners combine to drive cus-tomer demand for electricity to three new record summer peaks with that mark reaching 5,398,000 kilowatts.

~ The Public UtilityCommission announ-ces that for the sixth straight year PP&L has the lowest consumer com-plaint rate among Pennsylvania utilities.

August

~ A group of 20 oil dealers files an anti-trust suit against PP&L, alleging the company has acquired a major share ofthe residential home heating market through an electric thermal-storage rate and an incentive program tied to the installation ofelectric heat pumps. The company believes its marketing pro.

grams are lawful and is vigorously de-fending the litigation.

~ A substantial increase in state taxes forces the company to file for a $38 million increase in the State Tax Ad-justment Surcharge on customer bills.

The surcharge is allowed to go into effect, but the new taxes are seen as

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having a dampening effect on the company's economic development ac-tivities in its service area.

~ About 140 employees are sent to help utilitycrews in New York, Connecticut and Massachusetts restore service to hundreds of thousands of customers left without power after Hurricane Bob rips throughout the Northeast.

~ The company's land management ac-tivities win additional national recogni-tion from the Edison Electric Institute.

September

~ Members of two locals of the Interna-tional Brotherhood of Electric Work-

ers, representing about 5,000 PP&L employees, ratify new labor agree-ments with the company after rejecting an offer earlier in the year.

~ As one of nine utilities that own the mine-mouth Conemaugh Electric Gen-erating Station in western Pennsylva-nia, PP&L commits more than

$ 41 million as its share of new pollution control equipment there. Conemaugh willbe one of the first plants in the country to install flue gas scrubbers to comply with the 1990 Clean Air Act amendments.

~ William F. Hecht is named PP&L's president and chief operating officer as John T. Kauffman relinquishes the titleofpresident, while continuing as chairman and chief executive officer. The board ofdirectors chooses the 27-year PP&L veteran as the com-pany's seventh president after a year-long search both inside and outside the company.

~ Drought conditions in both the Sus-quehanna and Delaware River basins prompt first-ever releases from Cowa-nesque Reservoir in Tioga County, and MerrillCreek Reservoir in New Jersey, to help replace cooling water used by PP&L power plants along both rivers.

These reservoirs provide water during periods of low river flow to replace water used by utilities in producing electricity.

October

~ Alden F. Wagner Jr., vice president of the company's Lancaster Division, retires after 35 years with PP&L. He is succeeded byJohn H. Saeger, vice president-Marketing & Customer Ser-vices, and former vice president ofthe company's Susquehanna Division.

~ Edward M. Nagel, vice president-Federal Policy, retires after 39 years with PP&L.

~ The Nuclear Regulatory Commission gives PP&L's nuclear emergency re-sponse organization high marks for its performance in an exercise held in co-operation with state and county emer-gency groups and the 27 municipalities in the Susquehanna plant emergency planning zone.

November

~ Chairman John T. Kauffman visits Chugo-ku Electric Power Co. of Hiroshima, Japan. His tour of Chugoku facilities strengthens the relationship begun by the two companies in 1990.

~ Susquehanna earns the second high-est of five possible ratings for plant performance in an evaluation by the Institute for Nuclear Power Opentions.

The evaluations are conducted every 18 to 24 months for every nuclear power plant in the country.

December

~ PP&L's board authorizes a two-for-one common stock split. The split would take place in May 1992, ifapproved by the Pennsylvania Public Utility Commission and by shareowners at the 1992 annual meeting in April.

~ Robert J. Shovlin is appointed vice president-Power Production & Engi-neering, effective Jan. I, 1992.

~ Fedenl Energy Regulatory Commission gives finalapproval to a $ 4.1 millionin-crease for PP&L wholesale customers.

~ CliffordL. Alexander Jr., a PP&L direc-tor for 15 years, submits his resigna-tion, effective Dec. 31, 1991.

~ Susquehanna's two units generate a

net 15.86 billionkilowatt-hours ofelec-tricity during 1991, a plant record.

~ Despite a rash of generator problems that affected three major units in the last quarter of the year, PP&L's fossil-fuel genenting units exceed their avail-ability goal for the year.

ennsylvania Power K Light Co., head-quartered in Allen-town, Pa., provides electric service to approximately 1.2 million homes and businesses throughout a 10,000-square-mile area in 29 counties of Central Eastern Pennsylvania.

Principal cities in the PP8:L service area are Allentown, Bethlehem, Harrisburg, Hazleton, Lancaster, Scranton, Wilkes-Barre and Williamsport. The area is at the heart of the nation's largest industrial and commercial market area.

More than 70 million consumers live within a 300-mile radius.

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hroughout its nearly 72 years of corpo-rate life, PP8zL has been a leader in the communities it serves. As part of their jobs and as a big part of their off-work hours thousands of PP%L people have sought ways to improve the quality of life in Central Eastern Pennsylvania.

As Chairman John Kauffman has said so many times while attending community events, "The well-being of PP8:L is closely tied to the well-being of the communities we serve. Ve cannot be a strong, prosperous business organization unless we operate in a strong, prosperous environ-ment. The perception of the quality of life in our 10,000-square-mile service area goes a long way in attracting people, business and new jobs to our area. The people who live and work here are special. They willdetermine what this area will be like generations from now."

PAL people are committed to sharing their time, their experience, their leadership and

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themselves in hundreds of organizations to enhance both economic prosperity and quality of life in our communities.

PP8zL people are an integral part of the economic, political and social structure of Central Eastern Pennsylvania.

At PAL, community involvement means being a responsible and responsive corporate citizen. It means caring about cultural and civic values in our communities, and operating our business in harmony with those values.

Community involvement means corporate monetary contributions to organizations serving those who live where we serve. It means PP8rL people providing leadership roles in United XVay campaigns and other community fund-raisexs; it means making useful community service a part of the job descriptions of those who work closely with community leaders and economic develop-ment partners; it means encouraging employees to be involved during their off-work hours; and it

means setting a good example by making community service and involvement a corporate value.

Each year company employees nominate their fellow employees for one of six division community service awards. One of those six is chosen for company-wide recognition. Part of those awards include contributions to organizations of the winners'hoice.

Pictured on these pages are many employees who have won, or have been nominated for, those awards. Some have served quietly without recognition or fanfare taking their satisfaction in having made a contri-bution toward making someone's day brighter.

These people are the human face of a corporate entity. They certainly aren't all the peo-ple who serve. They are a small representative handful. For every one shown, there are scores more who make important contributions every day of their lives. These people are the essence of community involvement at Pennsylvania Power K Light Co.

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Results of Operations Earnings Earnings per share of common stock were $4.01 in 1991, $3,95 in 1990 and $4.05 in 1989. Milder-than.normal weather for the second year in a row, coupled with the additional pressures in 1991 of the recession, had an adverse effect on earnings. Energy sales experienced during extremely hot weather this past summer were not sufficient to offset the impact of mild temperatures that occurred during the first quarter and in December, Earniny would have been 12 cents per share higher had there been normal weather. Earniny for 1990 were affected by extremely mild weather'and would have been 25 cents per share higher had there been normal vleather in the Company's service area.

Although there were weather extremes during 1989, weather ended up being measured as essentially normal for the entire year.

Despite the impact of mild weather and the recession, the $ 4.01 per Share earned for 1991 represents an annual growth rate in earnings of 5.3% since 1986, Several factors have played an important part in that.

earniny improvement. These include aggressive marketing and economic development programs, effective cost management, and a reduction in interest expense and dividends on preferred and preference stock.

ln addition, the Company's strong generating capacity enabled it to add another dimension of revenue, beginning in 1989, by entering into several capacity-related transactions with other utilities. These transac-tions resulted in net additional revenues in 1991 of about $ 3.1 million, or higher earniny of about 2 cents per share of common stock, when compared to 1990. These transactions increased 1990 earnings per share by about 7 cents over 1989 and increased 1989 earnings per share by about 19 cents.

Electric Energy Sales

- System, or service area, sales were '29.0 billion kwh in 1991, an in.

crease of364 million kwh, or 1.3%, over 1990. 7jvo major factors adversely affected sales growth in 1991 the weather and the reces.

sion. Extremely mild weather depressed system sales in both 1991 and 1990 primarily due to reduced use of electricity for heating by residen.

tial and commercial customers.

System sales vlere down an estimated 287 million kwh in 1991 and 604 million kwh in 1990 due to milder-than normal weather, The Company estimates that ifnormal weather had been experienced in both years, system sales for 1991 would have increased by 47 million kwh over 1990, Actual sales to residential and commercial customers in 1991 increased 282 million kwh, or 2.8%, and 323 millionkwh, or 3.8%, respectively, over 1990. However, as previously noted, sales performance in both 1991 and 1990 were adversely affected by milder-than-normal weather, with 1990 sales being depressed more than 1991 due to the weather.

The Company estimates that under normal weather conditions for both years, sales to residential and commercial customers in 1991 would have increased 60 million kwh, or 0.6%, and 238 million kwh, or 2.8%,

respectively, over 1990, The economic recession depressed growth in sales to all categories of customers. New single-family home construction in the Company's ser-vice territory was down 21.5% in 1991 compared to 1990. Certain categories of commercial customers have shown the effects of the economic uncertainty, However, the largest impact of the recession was in reduced sales to industrial customers, which declined 260 million kwh, or 3.0%, in 1991 compared to 1990.

The Company currently expects that the economic recession will continue to adversely affect energy sales in 1992. System sales in 1992 are currently forecasted to be approximately 29.8 billion kwh, an in-crease of 734 million kwh, or 2.5%, over 1991 actual system sales, but only a 447 million kwh, or 1.5%, increase over 1991 weather-normal.

ized sales, The 1,5% expected increase in 1992 system sales over 1991 weather-normalized sales is substantially below'he comparable percen-tage increases experienced in 1990 and 1989, which were 3,0% and 3,7%, respectively, Although slow economic growth is anticipated in 1992, marketing and economic development continues to be a key corporate initiative.

One of the Companys goals is to achieve a specified annual level, of ad-ditional energy sales from its marketing and economic development programs, These 'additional sales generally willbe realized over at least two-year period, and possibly longer if a, major commercial or in.

dustrial customer is involved, The level of additional sales estimated from these programs in 1991 was 436.5 million kwh.

The Company's 1992 marketing and economic development goal is to achieve annual net sales growth of 435 million kwh. The 1992 goal reflects the expectation that there willcontinue to be slow economic growth in the Companys service territory during 1992. During 1991, Dollars share I

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Pennsylvania enacted legislation that substantially increased the tax burden of companies doing business in the state. The Company is con-cerned that the current tax structure willimpede economic develop-ment in the state and may adversely affect related energy sales growth.

The Company is unable to predict to what extent, ifany, the current tax structure may ultimately be changed to lessen the current tax burden on businesses.

Competition from other fuel sources for certain energy applications has increased in recent years. The Company's electric heat market share in new residential construction has dropped from 74% in 1989 to 69%

in 1991. The Company's goal for 1992 is a 70% electric heat market share in new residential construction.

Certain large customers have considered self.generation of electricity over the past several years. However, the Company has lost no signifi-cant load to customer owned generation, Total electric energy sales, which include contractual sales to other utilities, were 36.2 billion kwh in 1991, an increase of 519 million kwh, or 1.5%, compared to 1990. Contractual sales to other utilities primarily represent energy sold to Atlantic City Electric Company (Athnnc),

Baltimore Gas &Electric Company (BG&E) and Jersey Central Power &

Light Company (jCP&L) pursuant to bulk povler contracts whereby these utilities purchase a specified percentage of the capacity and related energy from Company-owned generating units. Contractual sales to other utilities were about 72 billion kwh in 1991, or 2.2% higher than 1990.

Capacfty-Related and Transntfssfon Entftfetnent 21 ansactfons The Company's strong generating capacity position has enabled it to enter into a number of capacity. related transactions with other electric utilities. These transactions include: (i) the sale of capacity credits but no energy to other utilities in the Pennsylvania. New Jersey-Maryland Interconnection (PJhi) to enable them to satisfy their PJM contractual capacity obligations; (ii) agreements with both PJhi and non.PJhi utilities for the reservation ofoutput during certain periods from the Company's hiartins Creek units with the option to purchase energy from those units; and (iii)arrangements whereby other PJM utilities can purchase the Company's cntitlements to use the PJM transmission system to import energy from utilities outside the PJM.

Revenues from the sale of capacity credits, the reservation ofoutput 79.9

$ 55.3 45.7 38.2; (14.4) 50.6 9.1 (3.3)

,38.5 from the hiartins Creek units and the. sale of transmission entitlements, net of foregone interchange savings which are included in the Com-pany's Energy Cost Rate (ECR), totaled $35,4 million in 1991, $32.3 million in 1990 and $23.3 million in 1989. The Company currently expects about $33 millionof revenues from these transactions during 1992.

The Company is continuing to look for opportunities to derive addi-tional revenues due to its strong generating capacity position. The amount of revenues from these types of transactions depends on many factors, and it is difficultto predict the amount of revenues the Com-pany willultimately realize. from these transactions.

OPeratfng Revenues Total operating revenues increased

$ 140.0 million, or 5.8%, in 1991 over 1990, Details of changes in operating revenues from the prior year are shown in the schedule below.

Changes in Operating Revenues 1991 1990 1989

(~1fllionsof Dollars)

Wholesale rate increase....

I $

2.4 3.3 Depreciation changes.......

(8.6)

State tax adjustment surcharge.......,.....,.

22.0 2.0 Special base rate credit adjustment,...........,

(16.7) j Recovery of fuel and energy costs............,

Change in customer usage.......,.. ~.,...

Contractual sales to other utilities,.........

Capacity. related and transmission entitlement transactions net.......

3.1 '.9 23,3 Other..........,....

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Total,....,....,,,...,

$ 140.0

$43.3

$ 149.3 Tariffs subject to Pennsylvania Public UtilityCommission (PUC) jurisdiction accounted for approximately 84% of the Company's 0 'f~.

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revenues from energy sales in 1991. The remaining 16% of such revenues resulted from sales regulated by the Federal Energy Regulatory Commission (FERC). The FERC also regulates interchange power sales, which are classified as a credit to operating expenses.

Billings to customers under PUC jurisdiction include: (i) base rate charges(ii) the ECR which is a supplemental charge or credit for fuel and other energy costs over or under the levels included in base rates; (iii)a state tax adjustment surcharge (STAS) which adjusts retail customers'ills for the effects of changes in state tax rates; and (iv) beginning in 1991, a special base rate credit adjustment (SBRCA) that flows through to customers the effects of certain nonrecurring items, See Financial Note 3 for additional information regarding rate matters.

The Company has an objective of not increasing PUC jurisdictional base rates for electricity until at least the 1994 1995 period. This price stability will help foster prosperity among communities served and, at the same time, enhance the Company's financial strength through in.

creased energy sales. The last base rate increase for PUC jurisdictional customers went into effect in April 1985.

Billings to FERC jurisdictional customers, excluding contractual sales to other utilities and capacity-related and transmission entitlement trans; actions, include base rate charges and a supplemental charge or credit for energy costs over or under the levels included in base rates. In March 1991, the Company filed with the FERC a base rate increase re-quest of about $ 4.1 million, or 9.65%, on an annual basis for FERC jurisdictional customers, which became effective May 19, 1991, The last base rate increase for FERC jurisdictional customers went into effect in December 1988.

Contractual sales to other utilities are regulated by the FERC. Sales to AtlanticBGLEand JCP&L are made at a price covering the Company's cost of service, including a return on investment. Energy sales relating to the reservation of output from the Martins Creek units and energy sales to certain utilities are generally made at a price equal to the cost of fuel plus an amount to reflect foregone interchange savings, Capacity-related and transmission entitlement transactions are also regulated by the FERC and are made at prices negotiated by the Com-pany and the purchaser, subject to a price cap accepted by the FERC.

Net Cost ofEnergy Energy sales to certain utilities, previously included in interchange power sales, have been reciassiTied as operating revenues, effective as of January I, 1991. Prior periods have been restated to conform to the current presentation.

See Financial Note 17 for additional informa-tion concerning the reclassification and information concerning the future reclassification of all interchange power sales to operating revenues.

ln 1991, the net cost of energy was

$662 million, an increase of $72 million over 1990. The increase was due to additional purchases of energy from non-utility generating companies and less energy sold to interconnected utilities resulting from an increase in the availability of nuclear generating capacity of interconnected utilities. The increase was partially offset by a decrease in short. term power purchased from other utilities and the termination on February I, 1991 of an agreement whereby the Company purchased a portion of Allegheny Electric Cooperative's share of the output of the Susquehanna nuclear-fueled station.

Output from the Company"s generating units in 1991 was 41,6 billion kwh, a decrease of 0.4 billion kwh compared with 1990. The decrease was due principally to reduced output from the Company's coal. fired units caused by extended outages at several large units, partially offset by the record output from the Susquehanna station, The Company's share of Susquehanna's generation was 14.3 billion kwh, an increase of 1.0 billion kwh, or 7.7%, over the 1987 record.

Other Operatfon, Matntenance and Deprectatton Other operation costs increased

$30.5 million, or 7.1%, over 1990 primarily reflecting increases in wages and benefits and higher costs associated with operating the Susquehanna station, The Company, in addressing the increases in wages and benefits, has plans to reduce the number of full.time employees by approximately 7.0% to about 7,500 by the mid 1990s. This reduction is expected to come primarily from normal attrition.

The amortization of the deferred cost of power plant spare parts is credited to maintenance expense on the Consolidated Statement of In*

come (see Power'lant Spare Parts on page 19). Excluding this amortiza.

tion, maintenance expenses increased by $ 1,1 million in 1991, or 0.5%,

compared to 1990.

Higher depreciation in 1991 reflects the scheduled annual increase associated with the method of depreciating the Susquehanna station and the depreciation of new property, plant and equipment placed in hlllllons o dollars 5 l,000, htllllons o dollars h I 000 I u S00

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service. As approved by the PUC and the FERC, the depreciation ex-pense for the Susquehanna station will increase annually through the year 1998. Beginning in 1999, depreciation is scheduled to switch to the straight. line method at a level substantially less than the amount expected in 1998.

'Taxes In August 1991, Pennsylvania enacted legislation that increased the Company's'tate taxes by approximately

$38 million on an annual basis, The Company is recovering substantially all of the increased state taxes through application of a surcharge on billings to retail customers and through billings for the contractual sale of capacity and related energy to other utilities.

The Tax Reform Act of 1986 repealed the investment tax credit. Dur-ing 1991, the Company utilized the remaining $ 16 millionof previously unused tax credits to reduce its federal income tax liability.

Flnanclng Costs The Company has continued to take advantage of opportunities to reduce its financing costs during the years 1989-1991 by the retirement.

of long-term debt and preferred and preference stock with cash from operations and refinancing at a lower cost. Interest on long.term debt and dividends on preferred and preference stock have decreased by $ 43 million from S320 million in 1988 to $277 million in 1991.

Pouer'lant Spare Parts Effective January I, 1991, the Company began to account, for certain power plant spare parts using a deferred (inventory) method, Under this method, purchases ofspare parts under inventory control are included in an inventory account and then charged to the appropriate capital or expense accounts when the parts are used or consumed. Prior to 1991, power plant spare parts were generally either capitalized or charged to expense at the time of purchase.

The January I, 1991 cost of these spare parts was $ 116.8 million, This amount was recorded as an increase in the materials and supplies inven.

tory account on the balance sheet at January I, 1991. The associated in.

come statement effect was deferred and is being amortized as a credit to expense over a five-year period. The annual amortization applicable to retail customers is included in the SBRCA credit applied to cus-tomers'ills effective April 1991, and the annual amortization applicable to wholesale customers is reflected in the base rate increase effective May 1991.

Financial Condition Capital Expendtture Requirements The schedule below shows the Company"s actual capital expenditures for electric utilityoperations for the years 1989-1991 and current projec-tions for the years'992.1994, Construction expenditures during the years 1989-1991 totaled about

$905 million and are expected to be about

$ 1,2 billion during the years 1992 1994.

Flnanclng and llquldfty For the years 1989-1991, the Company issued

$525 million of long-term debt and about $25 million of common stock and also incurred

$ 180 million of obligations under capital leases (primarily nuclear fuel).

During 1991, the Company's primary source of capital was from inter-nally generated funds. The Company also sold $ 150 million principal amount of first mortgage bonds in a public offering and issued

$8 million of common stock to the Employee Stock Ownership Plan. Dur-ing the year, the Company retired $ 119 million of short. term debt, S37 millionof long.term debt and $ 19 million of preferred stock.

After the payment of dividends, internally generated funds during the years 1992-1994 are currently expected to provide approximately 85 lo, of the Company's construction expenditures.

Sales of securities willbe undertaken during the 1992-1994 period as needed to meet the Company's capital requirements to retire maturing long-term debt and preferred stock sinking fund requirements and to provide funds for the early retirement of high. cost securities ifsuch retirements are determined to be appropriate in the light of market con.

ditions and other factors.

The Company's ability to issue securities during the next three years is not expected to be limited by earnings or other issuance tests. To enhance financin flexibility,a $ 167 million revolving credit arrange-ment is maintained with a group of banks and is used principally as a back-up for commercial paper issued by the Company. 'fhe Company also maintains a $5 million bank line of credit. A subsidiary maintains a

$ 100 million revolving credit arrangement. No borrowings were out-standing at the end of 1991 under these arrangements.

131 148 165 186 15 16 11 16 25 23 37 56 280 288 337 381

'194 200 52 98 50 42 391 435 Capital Expenditure Requirements (a)

Actual

Projected,

1989 1990 1991 1992 1993 1994 (htitttous ofDollars)

Construction expenditures Generating facilities...,......

~..,...

$ 109

$ 101

$ 124

$ 123

$ 95

$ 95 Transmission and distribution facilities..........

Environmental.......,.....,...,..

Other Nuclear fuel owned and leased,...

Other leased property.....,....,....,.

Total, 33 53 41 45 59 45 12 18 17 23 21 22

$325

$359

$395

$449

$ 471

$502 (a) Capital expenditure plans are revised from time to time to reflect changes in conditions.

Actual expenditures may vary from those projected because of changes in plans, cost flu-ctuation, environmental reguhtions and other factors. Construction expenditures include AFtIDC which is expected to be less than $21 million In each of the years 1992-1994.

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In December 1991, the Company's Board of Directors authorized a two-for-one split of the Company's common stock and an increase in the authorized number of shares from 85,000,000 to 170,000,000, sub-ject to shareowner and PUC approval. The Company willseek PUC approval in early 1992 and shareowner approval at the annual share-owneis'eeting in April 1992. Ifapproved, it would be the Company's first stock split since May 1959 and willbring the price of the Com-pany's stock more in line with the current stock prices in the electric utilityindustry.

Current Ftnanclal Condttlon The Company's overall financial condition remained strong in 1991.

Earningsyer share of common stock of $ 4.01 exceeded last year"s earn.

iny by 6 cents per share. Earniny performance for 1991 and 1990 was adversely affected 12 cents and 25 cents, respectively, by mild weather.

The decline in the growth rate of weather. normalized energy sales reflects the effects of the recession, particularly on sales to industrial customers, and also adversely affected the Company's earniny. The Company earned a 13.42% return on average common equity during 1991. The allowance for funds used during construction (AFUDC), a non.cash credit to income, accounted for only about 4% of earniny.

AFUDC is expected to remain low through the mid-1990s. During the latter part of the 1990s, when the Company willbe making capitat expenditures to comply with the recently enacted clean air legislation, the amount of AFUDC is expected to increase. The amount of AFUDC recorded willdepend on the timing and level of construction work in progress as weli as the rate treatment afforded the capital expenditures required to comply with the clean air legislation. Pennsylvania law cur-rently allows construction work in progress to be claimed in rate base for such expenditures.

The ratio of the Company's pretax income to interest charges in.

creased slightly from 2.9 times in 1990 to 3.1 times in 1991, The Com-pany has increased common stock dividends each year from an annual per share rate of $2.86 in 1989 to $3.10 in 1991. The ratio of the market price to book value of common stock was 174% at the end of 1991 compared to 149% at the end of 1990.

'Eernttnatton ofCoal-hltnlng Operattons The Company is closing its subsidiary coal.mining operations due principally to the depletion of coal reserves and the high cost of mined coal as compared to the price of coal purchased on the open market.

One of the three operating mines was shut down at the end ofJune 1991, and the other two are scheduled to close by the middle of 1992.

The investment in coal, mining, equipment and other facilities amounted to about $ 10 million at December 31, 1991, a decrease of about $20 million from the end of 1990. The Company expects that at the time the mines are shut down, the subsidiaries'emaining in.

vestments in coal, mining equipment and other facilities willhave been included in the cost of coal purchased by the Company and recovered through energy costs collected from customers, However, the Company cannot predict whether regulatory action, proposed legislation related to health care benefits for miners or other events could have an adverse, impact. on the Company's earnings, The Company will replace the coal produced by its subsidiaries with coal acquired through new contracts with non-affiliated suppliers and open market purchases.

Clean AtrLeglslatlon and Other Snvtronntental hfatters In November 1990, federal clean air legislation was enacted that deals in part, with acid rain and attainment of federal ambient ozone standards.

Under the acid rain provisions of the legislation, 'sulfur diox-ide emissions must meet specified Phase 1 levels by January I, 1995 and must meet more stringent Phase II emission levels by January 1, 2000.

In addition, the legislation specifies the timing for compliance with the nitrogen oxide emission limitations set forth in the acid rain provisions.

About 55% of the Company's coal. fired generating capacity must meet the Phase I sulfur dioxide standards. The Company expects that it willbe able to meet those standards by the use of low sulfur coal, addi-tional processing through coal cleaning plants and the installation of scrubbers at the Conemaugh station, in which the Company has an 11.39% ownership interest. In addition, the Company expects to Install low.nitrogen oxide burners on the units that must meet Phase I'stan-dards. The Company may also choose to limit the capacity factors of certain of its affected units and, to the extent permitted by the legisla.

tion, take advantage of trading emission allowances among its generating units or with other utilities.

The Company currently estimates that the cost of compliance with the Phase I acid rain standards willrequire an increase in customer rates of about 1% (based on 1991 revenue levels).

To meet the Phase II standards, the Company expects to install scrub-bers on about 65% of its coal-fired generating capacity as well as to continue its Phase I compliance activities for the balance of its coal.

fired generating capacity. In addition, the, Company expects to install low'-nitrogen oxide burners on the balance of its coal. fired generating capacity. The cost of compliance with the Phase ll standards is current-ly estimated to require an increase in customer rates (based on 1991 revenue levels) of about 4% above the increase expected to result from Phase I compliance with the acid rain provisions of the legislation.

The Company currently expects that capital expenditures of about

$ 130 million(in 1991 dollars) willbe required through the beginning of 1995 to comply with the Phase I acid rain requirements and that an ad-ditional $670 million (also in 1991 dollars) willbe required in the mid.

to late 1990s to comply with Phase II acid rain requirements.

Under current Pennsylvania law, construction work in progress for non-revenue producing assets, such as capital expenditures for pollution control equipmenr, can be claimed in rate base.

The 1990 legislation also addresses geographical areas that do not meet federal ambient ozone standards.

The legislation provides that all states within the Northeast Ozone Transport Region (from New England to areas of Yirginia adjacent to the District of Columbia) must require reasonably available control technology (RACT) on all stationary sources of nitrogen oxides within the Region by May 1995. It is expected that Pennsylvania willdefine this as low nitrogen oxide burners similar to those already planned by the Company to meet the acid rain re-quirements of the legislation, Ifsuch a determination is made by Penn-sylvania, the Company would have to advance the installation of the Iow.nitrogen oxide burners, with a currently estimated capital cost of about $ 110 million (in 1991 dollars) and planned for Phase ll com-pliance, to meet the May 1995 deadline, The Company estimates that the cost of compliance with the RACT provisions could require an in-crease in customer rates of about one. half of 1% (based on 1991 revenue levels). These estimated costs are based on the Company's preliminary evaluation of the ambient ozone provisions of the legisla.

tion and would be in addition to the increase discussed above for com-pliance with the Phase I acid rain provisions.

The legislation also requires modeling studies concerning the impact of nitrogen oxide emissions from power plants located in the Northeast Ozone Transport Region. Ifthe results of those modeling studies in-dicate that further nitrogen oxide emission reductions are required to meet federal ambient ozone standards, the Company may be required to install in the last half of the 1990s additional equipment to reduce nitrogen oxide emissions. Ifit should be determined that the installa.

tion of such additional equipment is required the Company's preliminary estimates indicate that the cost of compliance could require capital expenditures of up to $580 million (in 1991 dollars) and an in-

crease in customer rates of as much 'as 4% (based on 1991 revenue levels). These estimated costs would be in addition to the amounts discussed above for compliance with the acid rain and the RACT ozone provisions of the legislation, Until action has been taken by the appropriate regulatory bodies, the Company willnot be able to determine the exact method ofcorn.

pliance with the acid rain and ozone provisions of the legislation, or the cost thereof and its impact on customer rates, The Company has discovered groundwater degradation at the Brun-ner Island steam electric station. The degradation is attributable to fuel oil which has leaked from underground facilities and to seepage from coal refuse and disposal areas and from the station's coal storage pile.

The Company also discovered in 1990 that bag filters, used to trap fly ash from the plant and previously deposited in an ash basin, leach out cadmium in sufficient quantities under laboratory conditions to classify them as hazardous waste under Pennsylvania Department of En-vironmental Resources (DER) regulations. The Company is currently negotiating a Consent Order with the DER to address these issues and is proceeding to develop and implement various remedial action plans intended to address these different degradation sources. Similar but less substantial groundwater degradation may exist at some of the other power plants.

Since 1980, the DER has been considering a program for the han-dling and disposal of industrial (or residual) solid waste, The DER has proposed regulations for this purpose, which are expected to be final by mid-1992. The final regulations are currently expected to require the Company to submit detailed information on waste generation, minimization and disposal practices. The final regulations are also ex-pected to require that the Company repermit existing ash basins at all of its coal-fired generating stations by applying updated standards for waste disposal. In lieu of installing liners and leachate collection systems for ash impoundments, the regulations would allow the Com-pany to continue to operate an existing ash basin ifit can meet the regulatory criteria for demonstrating that the facility is not polluting groundwater. Any ash basins that cannot be repcrmit ted will be re-quired either to close within five years or to file an abatement plan.

Any new ash basin must meet the rigid site and design standards ex-pected to be set forth in the final regulations. In addition, the siting of future facilities and waste handling methods at Company facilities could also be affected.

The Company currently estimates that about

$ 155 million of capital expenditures could be required to correct groundwater degradation problems at the Brunner Island station and to meet the residual waste disposal regulations in the form currently proposed by the DER.

Changes to the final regulations may lower these costs. Such expen-ditures during the years 1992.1994 could total about

$52 millionof which about $9 million is included in the Company's estimate of 1992-1994 construction expenditures shown in the tabulation on page

19. Actions taken to correct the Brunner Island groundwater degrada-tion problems and to comply with the DER's proposed regulations are also expected to result in increased operating costs in amounts which are not now determinable but could be substantial.

The issue of potential polychlorinated biphenyl (PCB) contamination at certain of the Company's substations and pole sites is currently being pursued by the DER. In this regard,'he DER sent the Company a pro-posed Consent Order under which the Company would assess and, if necessary, remediate sites where PCB contamination may exist. The Company is continuing to negotiate with the DER. The costs of address-ing these PCB issues are not now determinable but could be substantial.

The Company does not anticipate that the costs, which will be charged to operating expense, for work currently planned to clean up or remediate known sites involving the removal of hazardous or toxic substances willbe material in amount, However, future clean up or remediation work at sites currently under review, or at sites currently unknown, may result in substantial operating costs which the Company cannot reasonably estimate at this time.

In complying with statutes, regulations and actions by regulatory bodies involving environmental matters, including the areas of water and air quality, hazardous and solid waste handling and disposal and toxic substances, the Company may be required to modify, replace or cease operating certain of its facilities. The Company may also incur substantial capital expenditures and operating expenses in amounts which are not now determinable.

Industry Restructuring Inttlatloes The Department of Energy in developing a national energy strategy, the FERC, the US. Congress and others are considering certain issues which could significantly affect the structure and competitive business environment of the electric utility industry. These issues include, among others, transmission system access, voluntary bidding arrangements for providing new generating capacity and amendment of the Public Utility Holding Company Act of 1935 (PUHCA), mainly to create a new class of independent power producers that would be exempt from PUHCA regulation, The Company is unable to predict the ultimate outcome or the impact, ifany, that these initiatives may have on the Company's operations. However, the Company believes that its strong generating capacity position, competitively priced electricity and good customer service place it in a position to adapt to changes that may arise from these initiatives.

Accounting Statements Not Yet Adopted The Financial Accounting Standards Board (FASH) has issued three ac-counting statements that the Company has not yet adopted, The effec-tive date of one of these statements, Statement of Financial Accounting Standards (SFAS) 96, "Accounting for Income, Taxes," which was to become effective for fiscal years beginning after December 15, 1991, has been deferred until fiscal years beginning after December 15, 1992 because the FASB has issued a proposed statement that would supersede SFAS 96 and modify certain of its provisions. Under both the original statement and the proposed statement, the Company would have to record an additional deferred tax liabilityfor tax benefits previously flowed through to customers and for other temporary tax differences. The increased tax liabilitywould be offset by a correspon.

ding asset representing the future revenue expected through the ratemaking process to pay for the taxes.

The second statement, SFAS 106, "Employer's Accounting for Postretirement Benefits Other Than Pensions," effective for fiscal years beginning after December 15, 1992, involves new requirements for ac-counting for the costs of postretirement benefits other than pensions.

The statement requires accrual, during the years that the employees render the necessary service, of the expected cost of providmg those benefits. In 1991, caps were established on the amount the Company willpay for retiree health care cost for all employees who retire on or after April I, 1993. Based on preliminary actuarial studies, the Company estimates that its accrued cost for postretirement benefits other than pensions willbe approximately

$ 25 million in 1993. This compares to an estimated cash payment of about

$8 million for those benefits in 1993,. These amounts are preliminary estimates and are subject to change as more definitive analyses are performed.

The third statement, SFAS 107, "Disclosures about Fair Value of Finan-cial Instruments," effective for years ending after December 15, 1992,

'requires disclosure of the fair value of financial instruments, The Company does ttot intend to adopt these new statements until their effective dates.

Independent Auditors'eport..

Management's Report on Responsibility forFinancial Statements Financial Statements Consolidated Statement ofIncome Consolidated Statement ofCash Flows, Consolidated Balance Sheet Consolidated Statement ofShareowners'ommon Equity Consolidated Statementof Preferred and Preference Stock Consolidated Statement ofLongTerm Debt Notes to Financial Statements....

Selected Financial and Operating Data Shareowner and Investor Information....,...,

Quarterly Financial, Common Stock Price and Dividend Data..

22 23 24 25 26 28 28 30 31 42 46 47 I

~

~

I I

~

Oeloittea Toiiehe

/W To the Shareowners and Board ofDirectors ofPennsylvania Power KlightCompany; We have audited the accompanying consolidated balance sheets and statements'of preferred and preferencestockand long term debt ofPennsylvania Power 5 LightCompany and its subsidiaries as ofDecember 31, 1991 and 1990, and the related consolidated statements ofincome, shareowners'ommon equity, and cash flows foreach ofthe three years in the period ended December 31, 1991. These financial statements are the responsibility ofthe Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

Veconducted ouraudits inaccordance withgenerally acceptedauditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free ofmaterial misstate-ment. Anaudit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significant estimates made by management, as wellas evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion, Inour opinion, such consolidated financial statements present'fairly, inall material respects, the financial position ofthe Pennsylvania Power &LightCompany and its subsidiaries at December 31, 1991 and 1990, and the results oftheir operations and their cash'flows foreach ofthe three yearsin the period ended December 31, 1991 inconformity withgenerally accepted accounting principles.

~ p~rM Parsippany, NewJersey February3, 1992

The management ofPennsylvania Power R. LightCompany is responsible for the preparation, integrity and objectivity ofthe consolidated financial statements and allother sections ofthis annual report. The financial statements were prepared inaccor-dance withgenerally accepted accounting principles and the UniformSystem ofAccounts prescribed by the Federal Energy Regulatory Commission. Inpreparing the financial statements, management makes informed estimates and judgments ofthe expected effects ofevents and transactions based upon current-lyavailable facts and circumstances.- Management believes that the financial statements are free ofmaterial misstatement and present fairlythe financial position, results ofoperations and cash flowsofthe Company,,

The Company's consolidated financial statements have been audited by Deloitte &Touche, independent certified public ac-countants, whose report withrespect to the financial statements appears on page 22 ofthis report. Deloitte &Touche's appoint-ment as auditors was previously ratified by the shareowners.

, Management has made available to Deloitte S Touche all the Company's financial records and related data, as wellas the minutes ofshareowners'nd directors'eetings.

Management believes that all representations made to Deloitte &Touche dur-ingits audit were validand appropriate.

The Company maintains a system ofinternal control designed to provide reasonable, but not absolute, assuranceas to the in-tegrity and reliabilityofthe financial statements, the protection ofassets from unauthorized use or disposition and the preven-tion and detection offraudulent financial reporting. The con-cept ofreasonable assurance recognizes that the cost ofa system ofinternal control should not exceed the benefits derived and that there are inherent limitations in the effectiveness'ofany system ofinternal control.

Fundamental to the control system is the selection and train-ing ofqualified personnel, an organizational structure that pro-vides appropriate segregation ofduties, the utilizationofwritten policies and procedures and the continual monitoring ofthe system forcompliance. Inaddition, the Companymaintainsan internal auditing program to evaluate the Company's system of internal control foradequacy, application and compliance.

Management considers the internal auditors'and Deloitte &

Touche's recommendations concerning its system ofinternal control and has taken actions which are believed to be cost-effective inthe circumstances to respond appropriately to these recommendations, Management believes that the Company's system ofinternal control is adequate to accomplish the objec-tives discussed in this report.

The Hoard ofDirectors, acting through its AuditCommittee, oversees management's responsibilities inthepreparation ofthe

'inancial statements. Inperforming this function, the Audit Committee, which is composed offiveindependent directors, meets periodically withmanagement, the internal auditors and the independent certified public accountants to review the workofeach. Deloitte 5 Touche and the internal auditors have free access to the AuditCommittee and to the Board ofDi-rectors, withoutmanagement present, to discuss internal ac-counting control, auditing and financial reporting matters.

Management also recognizes its responsibility forfostering a strong ethical climate so that the Company's affairs are con-ducted according to the highest standards ofpersonal and cor-porate conduct. This responsibility is characterized and re-flected in the Company's Standards ofIntegrity, which is publicized throughout the Company.'The Standards ofIntegrity addresses: the necessity ofensuring open communication withinthe Company; potential conflicts ofinterest; proper pro-curement activities; compliance withallapplicable laws, in-cluding those relating to financial disclosure; and the confi-dentiality ofproprietary information. The Company maintains a systematic program to assess compliance with these policies.

John T. Kauffman,,

Chairman and CbiefExecutive Officer C.E. Russoli, Executive VicePresident and ChiefFinanciai Officer

Operating Revenues(Notes 1,2,3 and 17)............,..

Operating Expenses Operation Fuel..

Power purchases Interchange popper sales (Note 17)...

Netcostofenergy Other.......,....

Maintenance..........,

Depreciation (Notes 1 and 4)..

Deferred depreciation (Notes 1 and 4).

Income taxes (Note 8)...

Taxes, other thanincome(Note 8)..

Operating Income 1991 1990 1989 P'i>ousands ofDollars)

$ 2 559 696

! $2,419 717'2,376,455 I

586,325 '79,272 625,993 256,320 228 336 171,437 (180,231)!

(217,546)

(255,987) 662,414 590,062 541,443 461,133 430,681 411,525 206,861, 223,528 234,063 246,212,'34,252 222,536 (7,047)

(15,707)

(23,475) 217,366 196,301 207,189 190,426 '70,234 164,324 1,977,365 i

1,829,351 1,757,605 582,331 i

590,366 618,850 Other Income and(Deductions)

-Allowance forequity funds used during construction(Note 1)

Income tax credits (Note 8).

Othernet 2,961, 903 7,616, 3,512 2,174 5,903 2,728 3,514 4,227 11,480, 11,589 10,469

, IncomeBeforelnterestCharges 593,811 601,955 629,319 Interest Charges Long-term debt..

Short-termdebtandother Allowance forborrowed funds used during construction and interest capitalized(Note 1)

Net Income, DividendsonPreferredandPreferenceStock Earnings Applicable to Common Stock 232,092

'2,25 (8,949),

245,397 348,414 44,687 303,727 239,250 255,223 27,559 31,799 (8,760)

(11,139) 258,049 275,883 343,906 353,436 46,125 48,418 297,781 305,018 Earnings Per Share ofCommon Stock(a)...

4.01, 3.95 4.05 Average Number ofShares Outstanding (thousands)...,......

Dividends Declared Per Share ofCommon Stock...,....,...,

(a) Based on average number ofshares outstanding.

75,691 i $

3.10 75,462 75,314 2.98 2.86 See accompanying Notes to Firtartclal Statemett ts.

1991 1990 1989 (TI>ousands ofDollars)

Cash Flows From Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities Depreciation Amortization ofproperty under capital leases.........

Amortization ofdeferred cost ofpower plant spare parts Deferred income taxes and investment tax credits ~....

Equity component ofAFUDC.........

Change in current assets and current liabilities Accounts receivable....

Unbilledandrefundableelectricrevenues Materials and supplies (Note 16).

Fuel inventories.

Accounts payable Accrued interest and taxes..........

0 Other operating activitiesnet Net cash provided by operating activities........

Cash Flows From Investing Activities Property, plant and equipment expenditures Proceeds from sales ofnuclear fuel to trust

'Financial investments..

~ ~........,..

Other investing activitiesnet............

Net cash used ininvesting activities

, $ 348,414 i $ 343>906 261,180 242,661 96,565 90,704 (17>818) i 52,118 81,509 (2,961)

(3,512)

(14,380)'5,627 (45,725);

(5,042) 1,200 ',793 25,887 (85,379)

(>>',835) 17,858 '14,086) 8,012 33>015 49,432 42,760 767,947 i

753,353 (374,397),'(337,995) 48,914 30,014 (50,876)'43,052) 4,191, 7 093 (372, 168) i (343,940)

$ 353436 220,375 82,138 106,693 (2,728)

(1,788)

(22>927) 499 6,445 (6,457) 13,862 (38,776) 40,186 750,958 (307,688) 31,809 (3,'513) 5,715 (273,677)

Cash Flows Prom Pinancing Activities Issuance oflong-term debt Issuance ofcommon stock Retirement oflong-term debt Retirement ofpreferred and preference stock Payments on capital lease obligations.

~

Dividends paid...............,

Net increase(decrease) inshort-term debt Costs associated withissuance and retirement ofsecurities..

Other financing activitiesnet Net cash used in financing activities......,......

150,000 8,401

'37,460)

(19,100) l (100,227)

(277,323),

(1 18,770)

'2,136),

(160)

(396,775) 9,371 (182,335)

(26,300)

(94,461)

(269,186) 170,511 (13,347) 95 (405,652) 375,000 6,884 (350,300)

(28,300)

(85,697)

(262>401)

(106,223)

(27,308)

(280)

(478,625)

Net Increase (Decrease) InCash and Cash Equivalents...,..

Cash and Cash Equivalents at Beginning ofPeriod.,

Cash and Cash Equivalents at End ofPeriod (996) 8,508; 3,761 4,747 i $

7,512 I $

8,508 (1,344) 6,091 4,747 Supplemental Disclosures ofCash Plow Information Cash paid during the year for Interest(net ofamount capitalized).. ~......

Income taxes...

. '229,066,

$ 252,325

. '154,136,'117,597

$ 255,425 87,016 See accompanying Notes to Ftnanctal Statements.

Assets Property, Plant and Equipment Electric utilityplant inservice at original cost.....,.........

Accumulated depreciation (Notes 1 and 4)

~

Deferred depreciation(Notes 1 and 4).....,,,,............

Construction workinprogress at cost...,....... ~.........

Nuclear fuel owned and leased net of amortization(Note 11)...

Other leased propertynet ofamortization(Note 11).......,.,

Electric utilityplantnet Other propertynet ofdepreciation, amortization and depletion(1991, $ 135,050; 1990, $ 142,188)........,...

1991 1990 (Thousands ofDollars) i $8,300,914 '8)095,363 (2,304,266)'(2,147,603) 299,848

,'292,848 6,296,496 6,240,608 183,242 143,084 197,794 i

238,360 76,351 i

76,576 6,753,883,',698p628 I

175,695 195,593 6,929,578 ',894,221 Investments Associated companyat equity......,

Nuclear plant decommissioning trust fund(Notes 1 and 6).....

Financial investments (Notes 1 and 9)

Otherat cost or less 17~115 i

58,043 i

113,951 7,511, 196,620

'7,121 46,864 61,077 6,587 131,649 Current Assets Cashandcashequivalents(Note1).............,......,...,

Accounts receivable(less reserve: 1991, $27,655; 1990, $27,198)

Customers Interchange power sales...,

Other...,

Unbilled revenues Fuel(coal and oil)ataverage cost........,...,........,

~..

Materialsandsupplies ataveragecost(Note16),....,........

Common stock held fordividend reinvestment planat cost(Note10)

Other 7,512 183,735 18,332, 19,489

'2,285 i

159,371 148,431 i

12,225, 44,266, 665,646

',508 177,153 15,979 15,292 70,281 185,258 32,845 11,384 41,454 558,154 Deferred Debits Utilityplant carrying charges net ofamortization(Note%)......

Unamortized debt expense and reacquired debt costs.........

Other.................,.

~

25,757 69>321 47,673, 142,751 i

,'7,934,595 i

26,500 74,167 50,751 151,418

$7,735,442 Seeaccompanybtg Notes to Ftnanctal Statements,

Liabilities 1991 1990 (Thousands ofDollars)

Capitalization Common equity Common stock Capital stockexpense......,....,

Earnings reinvested...,......,....

Preferred and preference stock Withsinking fund requirements...

Withoutsinking fund requirements Long-term debt i $ 1,358,091 i

(12,187)

I 952,106, 2,298,010 364,590

'31,375 2,575,794; 5,469,769 I

$ 1,351,046 (12,449) 883,162 2,221,759 383,690 231 375 2,434,143 5,270,967 Current Liabilities Commercial paper (Note 13).. ~.........

3ankloansandothernotes(Note13)........,............

Long-term debt due withinone year Capital lease obligations due withinone year (Note 11).......

Accounts payable Taxes accrued....,........,

~.,,..........

'Interest accrued........,

Dividends payable Energy revenues to be refunded Other....,....

Deferred Credits and Other Noncurrent Liabilities Deferredinvestment taxcredits(Note 8)

Deferred income taxes (Note8),...........

Capital lease obligations(Note 11).........

Unamortized cost ofpower plan(spare parts(Note 16).......,..

Accrued nuclear plant decommissioning costs (Notes '1 and 6)....

Accrued mine closing costs Other......

Commitments and Contingent Liabilities(Note 18)...

74,000 i

73,170 6,439

,'0,489,'05,211 I

48,521

'9,450

)

69,615

'07 i

118,414 I

645,716 t

269,852 1,040,429 191,487 I

98,968 i

59,963

'5,244I 103,167 l

i 1,819,110 I

$ 7,934,595 i

209,000 56,940 36,453 88,533 117,046 34,521 65,592 67,626 44,128 101,247 821',086 270,244 985,730 214,22 1.

48,431

48) 583 76,180 1,643,389

$7,735,442 See accompanying Notes to Flnanclal Statements.

CommonStockOutstanding CapitaiStock Earnings Shares (a)

Amount Expense (b)

Reinvested Total (Thousands ofDollars) 75,248,455

$ 1,334,424

$(12,672) 174,284 5,800 76 75,422,739

$ 1,340,224

$(12 p596) 226,231 10,822 147

$(12,449) 75,648,970

$1,351,046

~

I 178,664 I 75,827,634 7,045 262

$ 1,358,091

$(12,187)

Balance atDecember 31, 1988....

Netincome Cash dividends declared Preferredstock...............

Preference stock..............

Common stock($ 2.86).........

Stock redemption costs...........

Employee stock ownership plan(c)..

Other, Balance atDecember 31, 1989....

Net income Gash dividends declared Preferred stock Preferencestock..............

Common stock($ 2.98).........

Stock redemption costs...........

Employee stock ownership plan (c)..

Other....

Balance atDecember 31, 1990....

Netincome,...,,...,...,,....,

Cash dividends declared Preferred stock Preferencestock.............

Common stock($ 3.10)........

Stockredemptioncosts,.........

Employee stock ownership plan (c).

Other,

~

BalanceatDecember31, 1991...

$ 728,079

$2,049>831 353,436 (37,898)

(10,520)

(215,386)

(6,001)

$ 811,710

$2,139,338 343,906 (36,485)

(9,640)

(224,850)

(1,479)

$ 883,162

$2,221,759 348,414 (35,047)

(9,640)

(234,626)

(157)

$ 952,106

$2,298,010

'a)

No par value, 85,000,000shares authorized. Each share entitles the holders to one vote on any question presented towny shareowners'eeting, In December 1991, the board ofdirectors authorized a two.for-one sp!itofthe Company's common stock and increased the number ofshares authorized from 85,000,000 to I70 000,000, subject to shareowner and Pennsylvania Public UtilityCommission approval.

(b) Includes the net unrealized loss applicable to marketable securities.

(c) Includesemployeesubscriptions.

I I

I I

~

I I

I

)

I I

I Preferred Stock

$100 par, cumulative (a) 4th%

Series....

Preference Stockno par, cumulative(a)..

Shares Outstanding Shares 1991 Authorized Outstanding 1991 1990 (Thousands ofDollars)

I $ 53,019 I $ 53,019 530,189 629,936 427,946 i

447,046 4,279,456 10,000,000

$480 965 i $ 500,065 i $ 115,000 '115,000 1,150,000 5,000,000 See accompanying Notes toFinancial Slatenr enrs.

Details ofPreferred and Preference Stock (b)

Optional Redemption Shares Price Per Outstanding Outstanding Share 1991 1990 1991 1991 P'bousands ofDollars)

Sinking Fund Provisions (c)

Shares to be Redeemed Redemption Annually Period WithSinking Fund Requirements Series Preferred 6.875%(d)..........,.....!

7.00% (d).............,...

'.375%(d).......,........

'.40%

7.82%(d)....,....,.......

I 7.927%

8.00%..

8.75% (d),,

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

'50,000 I $ 50,000 100,000 I

100,000 50,000, 50,000 19,200 I

20,800 50,000 ','0,000 6,000, 9,000 27,500,i 30,000 36,000 42,000 25,890 I

31,890

$ 364,590 I $383,690 500,000 lp000,000 500,000 192,000 500,000 6o,'ooo 275,000 3601000 258,900

$ 106.88

'1 07.00 107.38 102.07 107.82 100.00 102.40 103.98 101.00 100,000 200,000 25,000 16,000 100,000 30,000 25,000 30,000 30,000 1993-1997 1993-1997 1993-2012 1992-2003 1993-1997 1992-1993 1992-2002 1992-2003 1992-2000 ents 4

~

~

WithoutSinking Fund Requirem 4th% Preferred...,.......

Series Preferred 3.35%

~ ~,.

4 40%

4.60%..

s'.6o%..

'.00%

(e)

Preference

$8.00....,

~..

$s.4o.......

$8.70...,......

$ 53,019, 4,178 22,878, 6,300

~

22,237 I

7,763 35,000 4o,ooo 40,000 I

4,178 22,878 6,300 22',237 7,763 41,783 228,773 63,000 222,370 77,630 103.50 102.00 103,00 101.00 101.00 35,000 40,000 4o,ooo 350,000 4oo,ooo 4oo,ooo 101.00 101.00 101.00 53,019 530,189

$ 110.00

$231,375

$231,375 Decreases inPreferred and Preference. Stock(Thousands ofDollars) 1991 Shares Amount 1990 Shares Amount 1989 Shares Amount

$(1,6oo)

(3,000) 2,500) 2,000)

(3,000)

(6,ooo)

$(1,600)

(3,000)

(2,500)

$(1,600)

(3,000)

(2,500)

(6,ooo)

(6,'ooo)

Series Preferred Stock 7.4o%..................

(16,ooo)

(16,000)

(16,000) 7.927%

~

(30,000)

(30,000)

(30,000) 8.00%,.;........

~

~

~

~..

(25,000)

(25,000)

(25,000) 8.00%,Second....,......

(20,000) 8.75%

~

~

~. '......

(60,000)

(30,000)

(3,000)

(30,000) 9.24%...,.........

(60 000)

(6o,'ooo)

(6',ooo)

(6o,'ooo)

Preference Stock

$8.625,.............,.

~.

(102,000)

(10,200)

(102,000)

(10,200)

Decreases in Preferred and Preference Stocks represent: (i)the redemption ofstock pursuant to sinking fund requirements, or (ii) shares redeemed pursuant to optional redemption provisions.

(a ) Each share ofpreferred and preference stock entitles the holders to one vore on any question preSented to any shareowners'eeting.

(b) The Involuntary liquidation price ofthe preferred and preference stock is $ 100 pershare. The optfonal voluntary liquidation price is the optional redemption price per share i'n effect, except forthe 4 14 % Preferred Stock forwhich such prfce is $ 100 per share(plus in each case any unpaid dividends). Llqufdatfonpaymentsonprcferredstockhavepriorftytosuchpaymcntsontheprcferenccstock.

(c) The aggregate amount ofsinklng fund redemption requirements through 1996 are (thousands ofdolhrs): 1992, $ 11,990; 1993, $55,600; l994,

$52,600; 1995, $52,600; 1996, $52,600.

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

(e ) On February 1, 1992, the Company redeemed all outsnmdlng shares ofthe 924% and the 9.00% Series Preferred Stocks at their optional redemption prices pershareplusanyunpafddividends.

Seeaccompanylng Notes to Financial Statements.

Company First Mortgage Bonds (a) 4$/s%

4>/s%...,.,

~

~

9$/s%

5/s/0

~

~ I i

~

~

~

~

~

~

~

6s/4% to 9/s%

7/a% to 9/j%.

8/,%

9% to 107/s%

9/4% to 10%

First Mortgage Pollution Control Bonds (a) 5$/,%SeriesA(c)........

77/s% tO81/,% SerieSC....,....,..........

111/4% to11i/,% Series D......,

10$/,% Series E...

10$/,% Series F.......,..

9$/s% Series G...

Outstanding 1991 l990 (Thousands ofDollars) 16,560 20,000 70,000 37,750 115,500 55,000 30,000 30,000 I

30,000 125,000 i

125,000 30,000 I

30)000 470,000 '70)000 610,000 i

610,000 100,000

~

100,000 375,000

)

375,000 525,000

,'375,000 15,500,'0,000

)

70,000

'7,750

'15,500 i

55,000 hf aturity(b)

December 1, 1991 March 1, 1994 February 1,,1996 June 1, 1996 1997-2001 2002-2006 2007-2011 2012-2016 2017-2021 (d)

(d)

(d)

March 1, 2014 September 1, 2014 July 1, 2015 Miscellaneous promissory notes.

Unamortized(discount) and premiumnet..

Less amount due withinone year 2,578,750 155 2,578,905 (20,672)!

2,558,233 i

39 2,459,810 194 2,460,o04 (19,822) 2,440,182 30,039 1992-1995 2,558,194 i

2,410,143 Subsidiaries Notes(e)..

Lessamountduewithinoneyear................,

24,000,',4oo 17,600, 3o,414 6,414 24,000 1992-1'996 Total long-term debt

'2,575,794!

$2,434,143

( a ) Substantially allowned electric utilityplant is sublect to the lien ofthe Company's firstmortgage.

(b) Aggregate long term debt maturities through 1996are(thousands ofdollars): 1992, $6 439; 1993, $6 439; 1994, $33,338; 1995, $3,338," 1996, $ 162,300Maximum sinking fund requirements aggregate $29 0 millionthrough 1996 and may be met withproperty additiOns or retirement ofbonds.

(c) The Company acquired on the open market during 1991 $ 1,060,000 prlncipal amount ofpollutioncontrol revenue bonds issued by the Lehigh County Industrial Development Authority which are supported by the Series ABonds', This acquisition satisfied the hiay I, 1992 maturity of

$160,000 ofSeries ABonds and the hlay I, 1993 maturity of$900,000 ofSeries ABonds.

(d) Bonds mature annually as follows(thousands ofdollars): (I)series Aon May I, 1994-2002, $900; 2003, $7,400(il) series con AprilI, 2000, $4,000;2006 2009, $2,000; 2010, $8,000(iii)Series Don November I,2002, $ 15,000; 2012, $55,000.

(e)

Various fixed rates ranging from 9% to 12%. During 1991, subsidiary companies retired $64 millionofmaturing notes.

See accompanying Notes to Financial Statements.

Im

0o Accountfng Records Accounting records for utilityoperations are maintained in accor.

dance with the Uniform System of Accounts prescribed by the Federal Energy Regulatory Commission (FERC) and adopted by the Penn.

sylvania Public UtilityCommission (PUC). (See Note 17)

Prfnclples of Consolldatfon Allwholly owned subsidiaries (principally involved in coal mining, holding coal reserves, oil pipeline operations and passive financial in.

vestments) have been consolidated in the accompanying flinanciai statements and all significant intercompany transactions have been eliminated. Income and expenses ofsubsidiaries not related to utility operations have been classified under other income and deductions on the Consolidated Statement of Income.

The investment in Safe Harbor Water Power Corporation (Safe Har-bor), of which the Company owns one-third of the outstanding capital stock representing one-half of the voting securities, is recorded using the equity method of accounting. The Company's principal transaction with Safe Harbor is the purchase of electricity amounting to (millions of dollars): 1991, $9.3; 1990, $9.5 and 1989,

$9.6. Under equity account-ing, the operations of Safe Harbor resulted in additional income to the Company of (millions of dollars): 1991, $2.2; 1990, $2.5 and 1989, $2.6 UtllftyPlant and Deprecfatfon Additions to utility plant and replacement of units of property are capitalized at cost. The cost of units of property retired or replaced is removed from utilityplant accounts and charged to accumulated depreciation. Expenditures I'or maintenance and repairs of property and the cost of replacing items determined to be less than units of property are charged to operating expense.

For financial statement purposes, depreciation is being provided over the estimated useful lives of property and is computed using a straight-line method for all property except for property placed in service prior to January I, 1989 at the nuclear-fueled Susquehanna steam electric station. Current PUC and FERC rate orders provide for an increasing amount of annual depreciation for property placed in service prior to January I, 1989 at the Susquehanna station until the late 1990s, at which time depreciation is scheduled to switch to the straight-line method. Provisions for depreciation, as a percent of average depreciable property, approximated 3.1% in 1991, 2.9% in 1990 and 2.7% in 1989.

UtllltyPlant Carrying Charges Carrying charge accruals on certain facilities for the Susquehanna and Martins Creek stations are recorded as deferred debits in accordance with a FERC order. These amounts are being amortized to expense over the remaining lives of the stations.

Nuclear Decommfsslonfng and Fuel Dfsposal An annual provision for the Company's share of the future decom-missioning of the Susquehanna station, equal to the amount allowed for ratemaking purposes, is charged to operating expense. Such amounts are invested in a trust fund which can be used only for future decom.

missioning costs, (See Note 6.)

The U.S. Department of Energy (DOE) is responsible for the perma-nent storage and disposal of spent nuclear fuel removed from nuclear reactors. The Company currently pays DOE a fee for future disposal services and recovers such costs in customer rates.

Ffnancfal Investments Marketable equity securities are carried at the lower of their aggregate cost or market valuedetermined at the balance sheet date, Marketable debt securities are carried at amortized cost. Gains and losses on the sale of marketable securities are recognized upon realization utilizing the specific cost identification method, Investments in financial limited partnerships are accounted for using the equity method of accounting and venture capital investments are recorded at cost. (See Note 9.)

Premium on Reacqufred Long-Term Debt As provided in the Uniform System of Accounts, the premium paid and expenses incurred to redeem long-term debt are deferred and amortized over the life of the new debt issue or the remaining life of the retired debt when the redemption is not financed by a new issue.

Allouance for Funds Used During Constructfon As provided in the Uniform System of Accounts, the cost of funds used to finance construction projects is capitalized as part of construc-tion cost. The components of allowance for funds used during con.

struction (AFUDC) shown on the Consolidated Statement of Income under other income and deductions and interest charges are non cash items equal to the cost of funds capitalized during the period.

AFUDC serves to offset on the Consolidated Statement of Income the interest charges on debt and dividends on preferred and preference stock incurred to finance construction. In addition, a return on corn.

mon equity used to finance construction is imputed.

Capftal Leases Leased property'capitalized on the Consolidated Balance Sheet is

.'ecorded at the present value of future lease payments and is amortized so that the total of interest on the lease obligation and amortization of the leased property equals the rental expense allowed for ratemaking purposes.

(See Note 11.)

Revenues Electric revenues are recorded based on the amounts ofelectricIty delivered to customers through the end of each accounting period. This includes amounts customers willbe billed for electricity delivered from the time meters were last read to the end of the respective period.

The Company's PUC tariffs contain an Energy Cost Rate (ECR) under which customers are billed an estimated amount for fuel and other energy costs. Any difference between the actual and estimated amount for such costs is collected from or refunded to customers in a subse-quent period. Revenues applicable to ECR billings are recorded at the level of actual energy costs and the difference is recorded as payable to or receivable from customers.

The Company, in April 1991, began to appl~ a Special Base Rate Credit Adjustment (SBRCA) to PUC customers bills to reflect two nonrecurring items related to (i) the use of an inventory method of ac-counting for certain power plant spare parts and (ii) the sale of capacity and related energy from the Company's wholly owned coal-flired sta-tions to Atlantic City Electric Company (Atlantic). (See Note 3.)

In August 1991, Pennsylvania enacted legislation that increased the Company's state taxes, The Company's retail tariffs include a provision for a State Tax Adjustment Surcharge (STAS) which provides for the recovery of new or increased state taxes. On August 24, 1991, the Com-pany began recovering through the STAS the increase in taxes applicable to retail customers.

(See Note 3,)

Income Taxes The Company and its wholly owned subsidiaries file a consolidated federal income tax return. Income taxes are allocated to operating expenses and other income and deductions on the Consolidated Statement of Income.

Deferred income taxes are recorded for timing differences between book and taxable income to the extent they are permitted in rate deter-minations by regulatory agencies, The principal item for which deferred

taxes are not currently recorded is the difference between tax deprecia-tion and book depreciation related to property placed in service prior to 1981.

,Investment tax credits are deferred when utilized and amortized over the average lives of the related property. The investment tax credit was repealed effective December 31, 1985.

The Financial Accounting Standards Board (FASB) has issued new accounting rules that willaffect deferred income taxes recorded by the Company. (See Note 8.}

Penston Plan The Company has a noncontributory pension plan covering substan-tially all employees, and subsidiary mining companies have a noncon-tributory pension plan for substantially all non.bargaining full-time employees. Funding is based upon actuarially determined computations that take into account the amount deductible for income tax purposes and the minimum contribution required under the Employee Retire-ment Income Security Act of 1974. (See Note 14.)

Cash Eqntoalents The Company considers all highly liquid debt instruments purchased with original maturities of three months or less to be cash equivalents, Reclasstflcation Certain amounts from prior years',financial statements have been reclassified to conform to the current year presentation.

cP a BxKN 68 QtK6KEc The Company is an operating electric utilityserving approximately 1.2 million customers in a 10,000 square-mile territory of central eastern Pennsylvania with a population of approximately 2.6 million persons.

Substantially all of the Company's operating revenues are derived from the sale of electric energy subject to PUC and FERC regulation.

Customers are generally billed for electric service on a monthly basis after electricity is delivered.

'uring 1991, about 97% of total operating revenues was derived from electric energy sales with 35% coming from residential customers, 28%

from commercial customers, 21% from industrial customers, 13% from contractual sales to other utilities and 3% from others. The Company's largest industrial customer provided about 1.6% of revenues from energy sales during 1991. Twenty.six industrial customers, whose bill-iny exceeded

$3 million each, provided about 7.5% of such revenues, Industrial customers are broadly distributed among industrial classifications.

9 Ri8lRAM Certain industrial customers have filed complaints with the PUC against the Company's ECR for the 1990.91 and 1991-92 ECR periods.

The PUC permitted the ECRs to become effective, as filed, subject. to the pending complaints. The industrial customers generally oppose the Company's recovery on a current basis through the ECR of the cost of output purchased from certain non.utility generating companies or uestion the manner in which the cost of such purchases is recovered t rough the ECR. The Company included the cost of output purchased from non-utility generating companies in its ECR filings on the basis of prior PUC orders that determined such costs were just and reasonable and could be recovered by the Company on a current basis through the ECR. The industrial customers have also requested a full investigation by the PUC into the Company's sale of capacity credits, reservation of output and sale of transmission entitlements (off;system sales). Certain of the industrial customers contend that the revenues from these off-system sales should be credited against the ECR. These transactions are discussed in Note 7.

In May 1991, the PUC dismissed the complaint filed by certain in-dustrial customers against the Company's ECR for the 1989-90 period.

That complaint also opposed the Company's recovery on a current basis through the ECR of the cost of output purchased from certain non.utility generating companies. Those industrial customers did not appeal the PUC's decision. Previously, in an appeal pertaining to a PUC decision dismissing a similar complaint against the ECR for the 1988-89 period, the Commonwealth Court of Pennsylvania (the Court) issued an opinion affirming the PUC order which dismissed the complaint.

In November 1991, the PUC accepted an Administrative Law Judge' (ALJ) recommended decision that, in most respects, dismissed the'om-plaint filed by a group of industrial customers against the Company's 1991-92 ECR. This action accepts the ALJ's recommendation to hold hearings regarding capacity-related off-system sales but does not address the complaints of certain other industrial customers currently pending against the Company's ECR. The Company filed a petition requesting that the PUC reconsider its decision to hold heariny regarding capacity-related offsystem sales.

In October 1991, a group of Pennsylvania industrial customers peti-tioned the PUC to institute a generic investigation of the procedures and policies of jurisdictional electric utilities with respect to their ECRs and to issue appropriate regulations with respect to the ECR, The Com-pany filed an answer in opposition to the petition in November 1991, In June 1991, the Court issued a decision that reversed a PUC order regarding a waiver of certain fuel use standards in an agreement with Continental Energy Associates, a non-utility generating company, and remanded the case back to the PUC for further consideration.

Subse-quently, the Company filed a stipulation settling all issues in the case and the PUC approved that stipulation in October 1991, In March 1991, the PUC approved the Company's request to imple-ment a SBRCA to reduce retail customers'ills effective April 1, 1991.

The SBRCA flows through to retail customers the effects of two nonrecurring items. The first involves the effect of using an inventory method of accounting for certain power plant spare parts that were previously capitalized or charged to expense when purchased, The cost of the spare parts recorded as an increase in the materials and supplies inventory account at January 1, 1991 was 5116.8 million. The correspond-ing credit to income was deferred and is being amortized over a five.

year period with the annual amortization applicable to retail customers included in the SBRCA.

The second item in the SBRCA relates to a change in the Company's contractual sales of capacity and related energy to other utilities, On September 30, 1991, the agreement that provided Atlantic with 126,000 kilowatts of the Company's share of capacity and related energy from the Susquehanna station expired and was replaced on October I, 1991

by a similar agreement pursuant to which the Company willsell 126,000 kilowaus of the Company's share of Susquehanna capacity and related energy to Baltimore Gas 5 Electric Company (BGSE) through May 2001. The costs previously recovered from Atlantic for the sale of Susquehanna capacity and related energy will now be recovered from BGLE, On October 1, 1991, Atlantic began purchasing )25,000 kilowatts of capacity (summer rating) and related energy from the Company's wholly owned coal fired stations. However, the costs that the Company willrecover from the sale of coal-fired capacity and related energy to Atlantic are currently reflected in retail base rate tariffs. Effective April I, 1991, the Company included in the SBRCA a credit for the costs, except energy costs, recovered from the sale of coal. fired capacity and related energy to Atlantic The change in energy costs associated with the sale is'eflected in the ECR.

The SBRCA reduced revenues from retail customers by about $ 16.7 million in 1991, but did not adversely affect net income.

In May 1991, the Company filed with the PUC a request for approval of a proposed settlement with the General Electric Company of outstanding contract claims arising from construction ofthe Susquehan-na station. As part of the request, the Company has proposed to flow proceeds of the settlement back to its retail customers through the SBRCA at the rate of $ 11 million per year over five years, beginning April I, 1992. This matter remains pending before the PUC.

In August 1991, Pennsylvania enacted legislation that increased the Company's state taxes by approximately

$38 million on an annual basis, Certain of these tax increases are effective as ofJanuary I, 1991. The Company's retail rates include a provision for a STAS, which provides for recovery of costs associated with new or increased state taxes, The Company filed a request with the PUC on August 14, 1991 to recover through the STAS the increase in taxes applicable to retail rates. The proposed STAS rate became effective for electricity used on and after August 24, 1991 and is designed to recover the retroactive part of the increased taxes over the period ending March 31, 1992, The Company deferred approximately

$ 21.4 million of the increased taxes which are applicable to the period prior to August 24, 1991. The amount deferred is being amortized over the period the increased tax expense is being recovered through application of the STAS. The Office of Consumer Ad-vocate and the Oflice of Small Business Advocate have filed a joint peti-tion requesting that the PUC require a demonstration by major Penn.

sylvania utilities that any proposed increase in the STAS willnot result in unjust and unreasonable rates. The Company filed an answer in op-position to the petition, The portion of the increased taxes applicable to the Company's contractual sales of capacity and related energy to other utilities is recovered as a cost ofproviding such service.

The Company cannot predict the ultimate outcome of the various rate matters pending before the PUC.

In March 1991, the Company filed with the FERC a base rate increase request of $4.1 million, or 9.65%, for wholesale customers, effective May 18, 1991. The FERC permitted the proposed rates to become effec-tive May 19, 1991, subject to hearings. A settlement agreement was subsequently entered into by all parties that resulted in the full amount of the increase remaining in effect and the Company agreed not to file any wholesale base rate increase request that would propose an effec-tive date before August I, 1994. The FERC accepted the senlement agreement for filingin December 1991.

4 K9h ORees=ko $9zo The Company records the annual depreciation for the Susquehanna station in compliance with the provisions of Statement of Financial Ac-counting Standards (SFAS) 92, "Regulated Enterprises-Accounting for Phase. in Plans," which established accounting rules for rate phase-in plans associated with a major newly constructed generating station.

The difference between straight-line depreciation and the amount of depreciation for the Susquehanna station reflected in electric rates is shown as deferred depreciation on the Consolidated Statement of Income and the Consolidated Balance Sheet.

Qo QO"'ggjf~ (ig 0

8XQQ (R66gfk (ck35@

In accordance with orders of the PUC, the Company deferred certain operating and capital costs, net of energy savings, associated with Units 1 and 2 at the Susquehanna station, The costs deferred were incurred from the date the units were placed in commercial operation until the effective dates of the rate increases reflecting operation of the units.

The deferred costs plus related deferred income taxes totaled $39.2 million at December 31, 1991, The Company expects to ultimately recover this amount in rates charged to customers, Such recovery will be subject to PUC review and approval. No return is being accrued on the deferred costs, (a Raktme ti

~

~

oe The Company's most recent study indicates that its share of the total estimated cost of decommissioning the radioactive portion of the Susquehanna station is approximately $350 million in 1988 dollars.

Under current rates, the Company collects about $6.9 million annual-ly from customers for the cost of decommissioning the Susquehanna station. The amounts collected, less applicable taxes, are deposited in an external trust fund for investment and can be used only for future decommissioning costs. The balance in the trust fund at December 31, 1991 was approximately

$58.0 million, The most recent estimated cost of decommissioning Susquehanna is higher than the estimate used to determine the amount currently col.

lected in retail rates. As a result, the Company would expect to request recovery of a higher level of decommissioning expense in its next retail base rate proceeding.

The Company provided Atlantic with 126,000 kilowatts of the Com-pany's share of capacity and related energy from the Susquehanna sta-tion from 1983 through September 30, 1991. Another agreement pro-vides Atlantic with 125,000 kilowatts of capacity (summer rating) and related energy from the Company's wholly owned coal fired stations from October I, 1991 through September 2000.

On October I, 1991, immediately following the expiration of the agreement with Atlantic, the Company began providing BG&E with 126,000 kilowatts of the Company's share of capacity and related energy from the Susquehanna station. Sales to BG&E willcontinue through May 2001.

The Company provides Jersey Central Power and Light (jCP&L) with 945,000 kilowatts of capacity and related energy from all of the Com-pany's generating units. Sales to JCP&L began in 1985 and willcontinue at the 945,000 kflowatt level through 1995with the amount then declining uniformly each year until the end of the agreement in December 1999.

These agreements provide that sales are to be made at a price equal to the Company's cost of providing service, which includes a return on the Company's investment in generating capacity.

In addition to these bulk power contractual sales, the Company has entered into several agreements with other electric utilities in the Pennsylvania. New Jersey. Maryland Interconnection (PJM) for the sale of capacity credits from the Company's system capacity. These capacity credits are used by the other utilities to meet their installed capacity obligation in the PJM. The price received for these sales is based on a percentage of the rate the utilities would have paid to purchase installed capacity under the PJM agreement, The length of these agreements and the amount of capacity credits sold vary. The longest agreement cur-rently in effect is scheduled to terminate in the year 2001, The Company has entered into arrangements with several utilities both inside and outside the PJM for the reservation of output from either the oil.fired or coal-fired units at the Martins Creek station during certain periods of time. Specific deliveries of energy are requested by the purchasing utility as needed during the reservation period. One utility has agreed to purchase a maximum of 10 megawatt hours per hour of the output the Company purchases from non utilitygenerating companies for the period June 1990 through May 1995. The Company includes as a credit to the ECR the revenue received for these deliveries of energy.

Arrangements also have been entered into whereby PJM utilities can purchase a portion of the Company's entitlement to use the PJM transmission system to import energy from utilities outside the PJM, These transactions may be made through monthly auctions or by negotiated prices over extended periods of time. The Company in-'ludes, as a credit to the ECR, the foregone interchange savings that were not realized when the sale of transmission entitlements reduces the amount of energy the Company imports and sells to other utilities.

Revenu'es from the sale of capacity credits, the reservation of output from the Martins Creek units and the sale of transmission entitlements (net of foregone interchange savings included in the ECR) totaled $35,4 million in 1991, $32.3 million in 1990 and $23.3 million in 1989. For information relating to proceedings pending before the PUC with respect to capacity related sales, see Note 3, Q

S3ms In August 1991, Pennsylvania enacted legislation that increased the Company's state income and other taxes retroactive to January I, 1991.

See Note 3 for information concerning the recovery of these increased taxes.

During 1991, the Company utilized the remaining $ 16 million of previously unused tax credits to reduce its federal income tax liability.

In accordance with PUC rate treatment, the Company has not recorded deferred income taxes for certain timing differences. The cumulative net amount of such timing differences for which deferred income taxes have not been recorded approximated

$ 541 million at December 31, 1991. The Company would expect to recover through electric revenues the taxes when due in future years.

In December 1987, the FASB issued SFAS 96, "Accounting for Income Taxes," which established new accounting rules that willchange the manner in which income tax expense is determined for accounting pur-poses, Prior accounting rules titilized a deferred method while SFAS 96 utilizes a liabilitymethod under which deferred tax liabilities are

,recorded and adjusted for the effect of a change in tax law or rates.

The FASH has delayed the effective date for SFAS 96 to fiscal years beginning after December 15, 1992. In June 1991, the FASB issued a proposed statement on income taxes that would supersede SFAS 96 and would change or modify certain provisions of SFAS 96. The proposed statement, ifadopted, would be effective for fiscal years beginning after December 15, 1992. The Company does not intend to adopt the new accounting rules on income taxes until the final effective date.

It is expected that when the Company adopts the new accounting rules on income taxes, an increase in the deferred tax liabilitywillbe recorded for tax benefits previously flowed through to customers and for other temporary tax differences, The increased tax liabilitywill be offset by a corresponding asset representing the future revenue expected to be provided through the ratemaking process to pay for the tax liability.

Because the maximum corporate federal income tax rate was lowered from 46% to 34% in 19II6, most'ntities when adopting the new ac-counting rules on income taxes willbe required to adjust their deferred income tax reserves to reflect the lower tax rate. However, federal legislation essentially prohibits utilities from immediately adjusting, to the 34% tax rate, certain deferred tax reserves related to depreciation, As a result, when the Company adopts the new accounting rules on in-come taxes, no substantial reduction in existing deferred income tax reserves is expected because of the lower federal tax rate.

A reconciliation of federal income taxes derived from statutory tax rates applied to income from continuing operations for accounting purposes and such taxes charged to expense for the consolidated Company is as follows (thousands of dollars):

Income Tax Expense Included in operating expenses ProvisionFederal...

State.

Deferred Federal...,............,,..

Investment tax credit, net-Federal......,....,

Included in other income and deductions Provision (credit)-Federal, State...........

~......,

Deferred-Federal S tate g

1 0

~

4 4

E 1

~

~ 4

~ I

~

1

) ~

Total income tax expense Federal....,........,

State..........,....,.

Detail of deferred taxes in operating expenses Tax depreciation..........,....,......,.

Reacquired debt costs,.

Unbilled revenues...........,...,... ~......,

0 Reconciliation of Income Tax Expense Indicated federal income tax on pretax income at statutory tax rate (34%)...,...

Increase (decrease) due to:

State income taxes...

Depreciation differences not normalized......,..

Amortization of investment tax credit....,.....

AFUDC (Note I).

0 ther s

~

ar

~

~ i

~

~

Total income tax expense......,......,,...,.

Effective income tax rate 1991

$ 114)904 49,534 164,43s, 51,547, 225 51,772

)

1)156 217,366

(

(126) i

(

33 j

(93)

(

(64o),

(170)

(810)

(903)

I 166,841 49,622

$216,463

'72)113 (1,938) i (18,403) j

$ 51,772 I

)

i l $ 192)058 34,319 9)080 (15,048),

(1)007)

I (2,939) i 24,405 I )216,463 38 30/

1990

$ 86950 3o,564 il7,5i4 68,593 310 68,903 9,884 196,301 (4,46i)

(435)

(4,896) 2,673 2,722 (2,174) 163)639 30,488

$ 194,127

$ 93,367 3,672 (8,142)

(19,994)

) 68,903

$ 182)931 20,970 12,220 (14,261)

(1,194)

(G,539) 11)196

$ 194,127 36.1%

1989

$ 85,634 30,853 116,487 75,418 1,368 76,7s6 13,916 207,189 (is,66i)

(844)

(19,505) 151853 138 15,991 (3,514) 172I160 31,515

)203,675

$ 95 475 6',148 (8,142)

(16,695)

$ 76,7S6

$ 189,418 22,205 9,497 (13,017)

(927)

(3,501) 14,257

$203,675 3G.6%

Taxes, other than income, consist of the following(thousands of dollars}:

Thxes, Other Than Income State gross receipts State utility realty.,

State capital stock Social security and other'....................

1991

$ 91,504 ij 43,432, 32,579, 22,911 I

$ 190)426 i

1990

$ 88,304 34,115 24,875 22>940

)170,234 1989

$ 83,804 34,782 23,795 2i,943

$ 164,324 Marketable equity securities At cost Net unrealized loss At lower of aggregate cost or Marketable debt securities Financial limited partnerships.

Venture capital investments Total market.

The market value of marketable equity securities was $9,364,000 at December 31, 1991. The net unrealized loss at December 31, 1990 ap-Financial investments consisted of the following investments held by subsidiary companies (thousands of dollars):

December 31 1991 1990 9,192

$ 6,965

~

~

~

~

~

~"

i I

(175) 9,192 6,790 63,155 i

29,617 35,069 '8,169 6,535 ',501 113'951 '61,077 plicable to marketable equity securities, net of applicable income taxes, is included in common equity, tot tttmlhllMlllt t'ttdKlxttt~

At December 31, 1991, the Company temporarily held 240,515 shares of Common Stock which were acquired in the open market. These shares were distributed to participants in the Dividend Reinvestment Plan in January 1992.

The Company and a subsidiary have entered into capital leases con.

sisting of the following (thousands of dollars);

December 31 1991 1990 Nuclear fuel, net of accumulated amortization (1991, $238,876; 1990, $213,755)

Vehicles, oil storage tanks and other property, net of accumulated amortization (1991> $83,254; 1990,

$ 73>810).....,,.....,...,...,....

Net property under capital leases

$ 192) 596 79,379,

$271)975

$222,369 80383

$302,754

Capital lease obligations incurred for the acquisition of nuclear fuel and other property were (millions of dollars): 1991, $69.5; 1990, $54.3 and 1989, $55.8.

Nuclear fuel lease payments, which are charged to expense as the fuel is used for the generation of electricity, were (millions of dollars):

1991, $95.5; 1990,

$92.6 and 1989, $86.1, Future nuclear fuel lease payments willbe based on the quantity of electricity produced by the Susquehanna station. The maximum amount of unamortized nuclear fuel leasable under current arrangements is $250 million.

Future minimum lease payments under capital leases in effect at December 31, 1991 (excluding nuclear fuel) would aggregate

$95.2 million, including $ 15.8 million in imputed interest. During the five years ending 1996, such payments would decrease from $24.3 million per year to $9.2 million per year.

Interest on capital lease obligations was recorded as operating ex-penses on the Consolidated Statement of Income in the following amounts (millions of dollars); 1991, $20.5; 1990, $23.0 and 1989, $25.2.

Generally, capital leases contain renewal options and obligate the Company and a subsidiary to pay maintenance, insurance and other related costs. Vbrious operating leases have also been entered into which are not material with respect to the'Company's financial position.

The Company purchases coal from certain subsidiaries at prices equal to the cost of mining. These purchases totaled approximately $ 188 million in 1991, $ 184 million in 1990 and $ 163 million in 1989. The cost of coal purchased is included in the energy costs collected from customers. The cost of coal purchased from subsidiaries'(particularly coal from the Greenwich mines) has generally been higher than the cost of coal purchased from other sources.

All the coal produced at the Greenwich mines is delivered to the Company's Montour steam electric station. The PUC has adopted a stan-dard based on the cost of coal purchased by other Pennsylvania electric utilities against which the cost of all coal delivered to Montour is measured.

The standard covers the three-year period from April 1, 1990 through March 31, 1993. The Company anticipates that the net amount of any costs in excess of the standard during this three-year period will be returned to PUC customers through the Company's 1994-95 ECR, Data as to the standard is available for the period from April 1, 1990 through July 31, 1991. For this period, the cost of coal delivered to Montour was less than the standard.

The Company is closing its subsidiary coal mining operations due principally to the depletion of coal reserves and the high cost of mined coal as compared to the price of coal purchased on the open market.

One of the three operating mines was shut down at the end ofJune 1991. The Greenwich mines are scheduled to close at the end of March 1992 and the third mine is scheduled to close by the middle of 1992.

The Company expects that at the time the mines are shut down, the subsidiaries'emaining investments in coal, mining equipment and other facilities willhave been included in the cost of coal purchased by the Company and recovered through energy costs collected from customers.

However, the Company cannot predict whether regulatory action, proposed legislation related to health care benefits for miners or other events could have an adverse impact on the Company's earnings.

At December 31, 1991, the capital investment in subsidiary coal-mining operations amounted to about

$ 10 million, a decrease of about

$20 million from the end of 1990.

The Company issues commercial paper and, from time to time, bor-rows from banks to provide short. term funds required for general cor-porate purposes, In addition, certain subsidiaries also borrow from banks to obtain short-term funds, Bank borrowings generally bear interest at rates negotiated at the time of the borrowing.

Revolving credit arrangements are maintained with a group of banks in return for the payment of commitment fees. The line of credit is maintained principally as a back-up for the Company's commercial paper. The banks have committed to lend the Company up to $ 167 million on a revolving basis. Any loans made under these credit ar-rangements would mature on June 30, 1994 and, at 'the option of the Company, interest rates would be based upon certificate of deposit rates, Eurodollar deposit rates or the prime rate. In addition, a sub-

'sidiary of the Company has a revolving credit arrangement with a group of banks as a back-up for short-term borrowings. The banks have agreed to lend the subsidiary up to $ 100 million on a revolving basis in return for the payment of commitment fees, Interest rates for borrow-ings would be based on the London interbank offered rate in effect at the time of the borrowing. No borrowings were outstanding at December 31, 1991 under either of these revolving credit arrangements.

The Company also maintains a $5 million line of credit with a bank in return for the maintenance of a compensating balance. No borrow-ings were outstanding at December 31, 1991 under this line of credit.

The Company leases jts nuclear fuel from a trust funded by sales of

'commercial paper backed by a letter of credit, The maximum financing capacity of the trust under existing credit arrangements is $250 million.

Commitment fees incurred were (millions of dollars): 1991, $0.3; 1990, $0.2 and 1989, $0.5.

55 Ete~io59zoamGC<5hRP Da Nfl'he Company has a noncontributory defined benefit pension plan (Plan) covering substantially all employees. Benefits are based upon a participant's earnings and length of participation in the Plan, subject to meeting certain minimum requirements.

The Company also has two supplemental retirement plans for certain management employees and directors, Benefit payments pursuant to 8

these supplemental plans are made directly'y the Company, At December 31, 1991, the projected benefit obligation of these sup-plemental plans was approximately

$9.0 million.

The components of the Company's net periodic pension cost for the three plans were (thousands of dollars):

1991 1990 1989 Service cost-benefits earned during the period.......

Interest cost Actual return on plan assets

~

Net amortization and deferral i

$ 28,188, 4o,6o5, (182,956)

'34,26s

'26,712 36,993 4,96s (50,227)

$ 25,565 33,925 (119,572) 77,468 Net periodic pension cost, I

$ 20,105

$ 1s,446

$ 17,386 The net periodic pension cost charged to operating expenses was

$ 12,6 million in 1991,

$ 12.1 million in 1990 and $ 10.9 million in 1989, The balance was charged to construction and other accounts. The funded status of the Company's Plan was (thousands of dollars);

Fair value of plan assets.,....,....,.....,..

Actuarial present value of benefit obligations:

Vested benefits....

Nonvested benefits Accumulated benefit obligation...

Effect of projected future compensation Projected benefit obligation,...........,....

Unrecognized transition assets (being amortized over 23 years)

Unrecognized prior service cost,.....,.........

Unrecognized net gain............,.........

IL 4

I )

~

~

~ )

~

~

)

Accrued expense Plan assets in excess of projected benefit obligation.........

(85,875) 4,864 (90,563)

December 31 1991 1990

$ 804)210

$ 642777 358,676'333,197 1,228 i

1,338 359,904

)

334,535 198,734 '68,407 558,638,'02,942 245)572 I

139)835 I

(81,356),'9)392 (244) 225),'

$ (50)617) i

$ (31,739)

The weighted average discount rate and rate of increase in future compensation used in determining the actuarial present value of pro.

, jected benefit obligations were 7.5% and 6.4%, respectively, on both December 31, 1991 and December 31, 1990. The assumed long.term rates of return on assets used in determining pension cost in 1991 and 1990 were 7.75% and 7.5%, respectively. Plan assets consist primarily of common stocksgovernment and corporate bonds and temponry cash investments.

Subsidiary mining companies have a noncontributory defined benefit pension plan covering substantially all non.bargaining, full-time employees which is fully funded primarily by group annuity contracts with insurance companies. Substantially all union employees of these subsidiaries are covered by a pension plan administered by the Trustees of the United Mine Workers of America (UMWA)Health and Retirement Funds. The pension cost for non bargaining employees together with contributions to the UMWA Health and Retirement Funds for 1991, 1990 and 1989 aggregated

$5.4 million, $4.8 million and $3.7 million, respec-tively. Unfunded vested benefits of employees participating in the UMWA Health and Retirement Funds have not been determined.

Subsidiary mining companies are liable under federal and state laws to pay black lung benefits to claimants and dependents, with respect to approved claims, and are members of a trust which was established to facilitate payment of such liabilities. The actuarially determined expense for black lung benefits for 1991, 1990 and 1989 was $0.5 million, $0.6 million and $0.5 million, respectively, Substantially all employees of the Company and its subsidiaries will become eligible for certain health care and life insurance benefits upon retirement, The Company recognizes the cost of these benefits for retired employees when premiums are paid. However, the subsidiary mining companies include in an accrual for future mine closing costs an amount to pay for such benefits after mining opentions have ended.

The cost of retiree health and life insurance benefits recognized as ex-

pense by the Company and its subsidiaries was approximately (millions of dollars); 1991, $9.5; 1990, $7.6 and 1989, $ 5.1.

In December 1990, the FASB issued SFAS 106, "Employer's Account-ing for Postretirement Benefits Other Than Pensions," which established new rules for accounting for the costs of these benefits, SFAS 106 is ef-fective for fiscal years beginning after December 15, 1992 and requires accrual, during the years that the employees render the necessary ser-vice, of the expected cost of providing those benefits. During 1991, caps were established on the amount the Company willpay for retiree health care cost for all employees who retire on or after April I, 1993.

Based on preliminary actuarial studies, the Company estimates that its accrued cost for postretirement benefits other than pensions willbe ap.

proximately $ 25 million in 1993 when it adopts SFAS 106. This com-pares to an estimated cash payment of a'bout $ 8 million for those benefits in 1993. These amounts are preliminary estimates and are sub-ject to change as more definitive analyses are performed.

The Company has an Employee Stock Ownership Plan (ESOP) for all full.time employees having more than one year of service. Contribu-tions to the ESOP have been funded with investment and payroll-based tax credits previously available to the Company under federal law to ac-quire shares of the Company's Common Stock, Contributions funded with these tax credits were completed in 1991. As ofJanuary I, 1990, dividends on all shares credited to participants'ccounts have been paid in cash. The Company deducts the amount of those dividends for income tax purposes and contributes to the ESOP shares having a cost equal to the tax savings resulting from that deduction and contribution.

05 gckoi8p Op~mzG Lkr@NW At December 31, 1991, the Company or a subsidiary owned undivid-ed interests in the following facilities (millions of dollars):

Ownership interest...........,.........

Electric utility plant in service, '...,.....,.

Other. property..

Accumulated depreciation......,...........

Construction work in progress.....,........

404 57 23 21 2

4 Generating Stations Susquehanna Keystone Conemaugh 9P PP%

12.34%

11.39%

$3,941

$49

$47 Merrill Creek Reservoir 8.37%

$21 3

Each participant in these facilities provides its own financing. The Company receives a portion of the total output of the generating sta-tions equal to its percentage ownership. The Company's share of fuel and other operating costs associated with the stations is reflected on the Consolidated Statement of Income. The Merrill Creek Reservoir pro-vides water during periods of low river flow to replace water from the Delaware River used by the Company and other utilities in the produc-tion of electricity.

O(5 fAmm'Sfk69inc QKi Effective January I, 1991, the Company began to account for certain power plant spare parts using a deferred (inventory) method. Under this method, purchases of spare parts under inventory control are included in an inventory account and then charged to the appropriate capital or expense accounts when the parts are used or consumed. Prior to 1991, power plant spare parts were generally either capitalized or charged to expense at the time of purchase.

The January I, 1991 cost of these spare parts was $ 116.8 million. This amount was recorded as an increase in the materials and supplies inven.

tory account on the balance sheet at January I, 1991. The associated in-come statement effect was deferred and is being amortized as a credit to expense over a five-year period. The PUC has approved the Com-pany's proposal to include the annual amortization applicable to retail customers in the SBRCA credited to customers'ills effective April I, 1991. (See Note 3,)

The Company filed an application with the Internal Revenue Service (IRS) in July 1990 requesting permission to use this method of accoun-ting for income tax purposes. The IRS has nor acted on the Company"s request> but ifthe request is approved, the Company would include the cost of the spare parts as ofJanuary I, 1991 in taxable income over several years.

. Qig~f~

gi) 0 i

~ Wmm In November 1991, the FERC issued Accounting Release Number AR.14 that would require the Company to reclassify interchange power sales to PJM member companies from a credit to operating expenses to operating revenues effective as ofJanuary I, 1991. The Company and several other electric utilities disagreed with this accounting release and filed requests for rehearing with the FERC. Upon considering'hese re.

quests, the FERC reaffirmed its position that interchange power sales must be reclassified to operating revenues, but postponed the effective date of Accounting Release Number AR-14 to January 1, 1992. Accord-ingly, beginning January I, 1992, the Company willreclassify its inter-change power sales from a credit to operating expenses to operating revenues on the Consolidated Statement of Income. The amounts that willbe reclassified for prior years are (thousands of dollars): 1991,

$ 181,019; 1990, $218,205 and 1989, $256,460. Such reclassification will have no effect on net income.

In the third quarter of 1991, the Company reclassified, as ofJanuary 1, 1991, the receipts from distinct sales of energy to certain utilities from interchange power sales to operating revenues on the Consoli-dated Statement of Income. This reclassification more appropriately records these transactions in accordance with the Uniform System of Accounts. The reclassification had no effect on net income. Energy sales to these utilities in 1990 and 1989 of $ 31.0 million and $20.0 million, respectively, have been reclassified to conform with the current presentation.

The Company's construction expenditures are estimated to aggregate

$ 381 million in 1992, $ 391 million in 1993 and $435 million in 1994, including AFUDC. See "Capital Expenditure Requirements" on page 19 for additional information, The Company is a member of certain insurance programs which pro.

vide coverage for property damage to members'uclear generating sta-tions. Facilities at the Susquehanna station are insured against property damage losses up to $2.5 billion under these programs. The Company is also a member of an insurance program which provides insurance coverage for the cost of replacement power during prolonged outages of nuclear units caused by certain speciffied conditions. Under the pro.

perty and replacement power insurance programs, the Company could be assessed retrospective premiums in the event the, insurers'osses exceed their reserves, The maximum amount the Company could be assessed under these programs at December 31, 1991 was about $ 14.8 million.

In April 1990, the Nuclear Regulatory Commission amended its regulations to require that in the event of an accident, where the estimated cost of stabilization and decontamination exceeds

$ 100 million, proceeds of property damage insurance be segregated and used, first, to place and maintain the reactor in a safe and stable condi-tion and, second, to complete required decontamination operations before any insurance proceeds would be made available to the Com-pany or the trustee under the mortgage. Under these regulations, such requirements were incorporated in the Company's on-site property damage insurance policies for the Susquehanna station effective April 1991, The Company's public liabilityfor'laims resulting from a nuclear in.

cident at the Susquehanna station is limited to about $ 7.8 billion under provisions of The Price Anderson Amendments Act of 1988 (the Act).

The Company i$ protected against this liabilityby a combination of commercial insurance and an industry assessment program. A utility's liabilityunder the assessment program willbe indexed not less than once during each five.year period for inflation and willbe subject to an additional surcharge of 5% in the event the total amount of public claims and costs exceeds the basic assessment.

In the event of a nuclear incident at any of the reactors covered by the Act, the Company could be assessed up to $ 126 million per incident, payable at a rate of $20 million per year, plus the additional 5% surcharge, ifapplicable.

In November 1990, federal clean air legislation was enacted that deals, in part, with acid rain and attainment of federal ambient ozone standards.

Under the acid rain provisIons of the legislation, sulfur diox-ide emissions must meet specified Phase I levels by January 1, 1995 and must meet more stringent Phase II emission levels by January I, 2000, In addition, the legislation specifies the timing for compliance with the nitrogen oxide emission limitations set forth in the acid rain provisions, About 55% of the Company's coal. fired generating capacity must meet the Phase I sulfur dioxide standards.

The Company expects that it willbe able to meet those standards by the use of low sulfur coal, addi.

tional processing through coal cleaning plants and the installation of scrubbers at the Conemaugh station, in which the Company has an 11.39% ownership interest. In addition, the Company expects to install low nitrogen oxide burners on the units that must meet Phase I stan-dards. The Company may also choose to limit the capacity factors of certain of its affected units and, to the extent permitted by the legisla-tion, take advantage of trading emission allowances among its generating units or with other utilities.

The Company currently estimates that the cost, of compliance with the Phase I acid rain standards willrequire an increase in customer rates of about 1% (based on 1991 revenue levels).

To meet the Phase II standards, the Company expects to install scrub-bers on about 65% of its coal-fired generating capacity as well as to continue its Phase I compliance. activities for the balance of its coal-fired generating capacity, In addition, the Company expects to install low.nitrogen oxide burners on the balance of its coal-fired generating capacity. The cost of compliance with the Phase II standards is current-ly estimated to require an increase in customer rates (based on 1991 revenue levels) of about 4% above the increase expected to result from Phase I compliance with the acid rain provisions of the legislation.

The Company currently expects that capital expenditures of about

$ 130 million (in 1991 dollars) willbe required through the beginning of 1995 to comply with the Phase I acid rain requirements and that an ad.

ditlonal $670 million (also in 1991 dollars) willbe required in the mid.

to.late 1990s to comply with Phase II acid rain requirements.

Under current Pennsylvania Iaw, construction work in progress for non-revenue producing assets, such as capital expenditures for pollution control equipment, can be claimed in rate base, The 1990 legislation also addresses geographical areas that do not meet federal ambient ozone 'standards. The legislation provides that all states within the Northeast Ozone Transport Region (from New England

to areas of Virginia adjacent to the District of Columbia) must require reasonably available control technology (RACT) on all stationary sources of nitrogen oxides within the Region by hfay 1995. It is expected that Pennsylvania willdefine this as low.nitrogen oxide burners similar to those already planned by the Company to meet the acid rain re-quirements of the legislation. Ifsuch a determination is made by Penn-sylvania, the Company would have to advance the installation of the low.nitrogen oxide burners, with a currently estimated capital cost of about $ 110 million (in 1991 dollars) and planned for Phase II corn.

pliance, tp meet the May 1995 deadline. The Company estimates that the cost of compliance with the RACT provisions could require an in.

crease in customer rates of about one-half of 1% (based on 1991 revenue levels), These estimated costs are based on the Company's preliminary evaluation of the ambient ozone provisions of the legisla-tion and would be in addition to the increase discussed above for com-pliance with the Phase I acid rain provisions.

The legislation also requires modeling studies'concerning the impact of nitrogen oxide emissions from power plants located in the Northeast Ozone Transport Region. Ifthe results ofthose modeling studies in-dicate that further nitrogen oxide emission reductions are required to meet federal ambient ozone standards, the Company may be required to install in the last half of the 1990s additional equipment to reduce nitrogen oxide emissions. Ifit should be determined that the installa-tion of such additional equipment is required, the Company's pre-liminary estimates indicate that the cost of compliance could require capital expenditures of up to $580 million (in 1991 dollars) and an increase in customer rates of as much as 4% (based on 1991 revenue levels), These estimated costs would be in addition to the amounts discussed above for compliance with the acid rain and the RACT ozone provisions of the legislation.

Until action has been taken by the appropriate regulatory bodies, the Company willnot be able to determine the exact method of corn.

pliance with the acid rain and ozone provisions of the legislation, or the cost thereof and its impact on customer rates.

The Company has discovered groundwater degradation at the Brun.

ner Island steam electric station, The degradation is attributable to fuel oil which has leaked from underground facilities and to seepage from coal refuse and disposal areas and from the station's coal storage pile.

The Company also discovered in 1990 that bag-filters, used to trap fly ash from the plant and previously deposited in an ash basin, leach out cadmium in sufficient quantities under laboratory conditions to classify them as hazardous waste under Pennsylvania Department of En-vironmental Resources (DER) regulations. The Company is currently negotiating a Consent Order with the DER to address these issues and is proceeding to develop and implement various remedial action plans intended to address these different degradation sources. Similar but less substantial groundwater degradation may exist at some of the other power plants, Since 1980, the DER has been considering a program for the handling and disposal of industrial (or residual) solid waste. The DER has proposed regulations for this purpose, which are expected to be final by mid.1992. The final regulations are currently expected to re-quire the Company to submit detailed information on waste generation, minimization and disposal practices. The final regulations are also ex-pected to require that the Company repermit existing ash basins at all of its coal. fired generating stations by applying updated standards for waste disposal. In lieu of installing liners and leachate collection systems for ash impoundments, the regulations would allow the Com.

pany to continue to operate an existing ash basin ifit can meet the regulatory criteria for demonstrating that the facility is not polluting groundwater. Any ash basins that cannot be repermlued willbe re-quired either to close within five years or to file, an abatement

plan,

, Any new ash basin must meet the rigid site and design standards ex-pected to be set forth in the final regulations. In addition, the siting of future facilities and waste handling methods at Company facilities could also be affected.

The Company currently estimates that about $ 155 millionof capital expenditures could be required to correct the groundwater degradation problems at the Brunner Island station and to meet the residual waste disposal regulations in the form currently proposed by 'the DER, Changes to the flinal regulations may lower these costs. Such expen.

ditures during the years 1992.1994 could total about $52 million of which about $9 million is included in the Company's estimate of 1992-1994 construction expenditures shown in the tabulation on page

19. Actions taken to correct the Brunner Island groundwater degrada-tion problems and to comply with the DER's proposed regulations are also expected to result in increased operating costs in amounts which are not now determinable but could be substantial.

The issue of potential polychlorinated biphenyl (PCB) contamination at certain of the Company's substations and pole sites is currently being pursued by the DER. In this regard, the DER sent the Company a pro.

posed Consent Order under which the Company would assess and, if necessary, remediate sites where PCB contamination may exist. The Company is continuing to negotiate with the DER. The costs of ad-dressing these PCB issues are not now determinable but could be substantial.

The Company does not anticipate that the costs, which willbe charged to operating expense, for work currently planned to clean up or remediate known sites involving the removal, of hazardous or toxic substances will be material in amount. However, future clean up or remediation work at sites currently under review or at sites currently unknown, may result in substantial operating costs which the Company cannot reasonably estimate at this time, In complying with statutes, regulations and actions by regulatory bodies involving environmental matters, including the areas of water and air quality, hazardous and solid waste handling and disposal and toxic substances the Company may be required to modify, replace or cease operating certain of its facilities. The Company may also incur substantial capital expenditures and operating expenses in amounts which are not now determinable.

In August 1991, a group of fuel oil dealers in tfie Company's service area filed a complaint against the Company in United States District Court for the Eastern District of Pennsylvania alleging that the Com-pany's promotion of electric heat pumps and off.peak thermal storage systems had violated and continues to violate the federal antitrust laws.

Specifically, the complaint alleges that the Company's use of its PUC-filed tariffto provIde a lower electric rate for newly constructed residences equipped with thermal storage systems, combined with the

'ompany's program of providing cash grants to developers and contrac-tors for the installation of high efficiency heat pumps in these residences, allowed the Company to illegally capture at least 70% of the market for heating in new residential construction within its service area, The complaint also alleges that the cash, grant program violated and continues to violate the Racketeer Influenced and Corrupt Organizations Act (RICO).

The complaint requests judgment against the Company for a sum in excess of $ 10 million for the alleged antitrust violations, treble the damages alleged to have been sustained by the plaintiffs over the past four years. Separately, the complaint requests judgment for a sum in ex-cess of $ 10 million for the alleged RICO violations, treble the damages alleged to have been sustained by the plaintiffs over the past four years, Finally, the complaint requests a permanent injunction against all ac-tivities found to be illegal, including the cash grant program.

The Company believes that the allegations made in the complaint are without merit. However, the Company cannot predict the ultimate out-come of this litigation.

At December 31, 1991, the Company had guaranteed

$ 17 millionof obligations of certain unconsolidated companies.

CONSOLIDATEDOPERATIONS Income Itemsthousands Operating revenues (a).

Operating income Net income (b)

Earnings applicable to common stock (b)...,....,..

Balance Sheet Itemsthousands (c)

Electric utilityplantin service net...............

Construction workin progress Other property, plantand equipment net.... ~,...

Total assets.

Long-term debt Preferred and preference stock Withsinking fund requirements Withoutsinking fund requirements.............

Common equity......,

Short-term debt.

Total capital provided by investors...,..........,

Financial Ratios Returnonaveragecommonequity % (b).........

Embedded cost rates (c)

Long-term debt%

Preferred and preference stock%....,........

Times interest earned before income taxes.........

Ratio ofearnings to fixed charges total enterprise basis (d)

Depreciation as % ofaverage depreciable property...

Common Stock Data Number ofshares outstanding thousands Year-end Average Numberofshareowners(c)...,,......,.......,

Earnings per share (b).

Dividends declared per share Book value per share (c)

Market price per'share (c),

Dividend payout rate% (b)...

Dividend yield% (e)..

Price earnings ratio (b) (e)

~

1991

! $2,559,696

'82,331 348,414 I

303,727 i $6,296,496

'83,242 449,840 7,934,595 i

2,582,233 364,590 I

231,375 2,298,010 147,170 i

5,623,378, I

13.42 9.72 7.51 3.06 3.04 I

3.1 75,828 75,691 127,272

$ 4.01

$ 3.10

$ 30.30 523/s 77 6.69 1 1.55 1990

$2,419,717 590,366 343,906 297,781 86,240,608 143,084 510>529 7,735,442 2,470,596 3831690 231,375 2>221,759 265,940 5,573,360 13.65 9.69 7.54 2.86 2.81 2.9 75,649 75,462 1'30,719

$ 3.95

$ 2.98

$29.36 43 3/~

76 7.15 10,56 1989 82,376,455 618,850 353,436 305,018

$6,198,693 115,799 552,150 7,598,968 2,650,276 409,990 231,375 2,139,338 95,429 5,526,408 14.62 9.80 7.62 2.78 2.69 2.7 75,423 75,314 132>197

$ 405

$ 2.86

$28.36 42r/s 71 7.33 9.63 1988

$2,227)114 605,051 332,042 279,865 86,056,723 177,333 607,528 7,524,648 2>626>784 438,290 231,375 2)049,831 201,652 5,547,932 13.86 10.15 7.66 2.65 2.57 2.6 75,248 75,071 137,450 8 3.73

$ 2.76

$27.23 36>/)

7 7.70 9.61 ELECTRICOPERATIONS Revenue Data By class ofservicethousands Residential....,,

Commercial.............

~,

Industrial Otherenergysales System sales Contractual sales to other utilities(a)............

Total from energy sales billed(a)..............

Unbilled revenues net Other operating revenues...,,...............

Totalelectricoperatingrevenues(a).......,...

Average price per kwh billedcents Residential Commercial Industrial................,

Total forultimate customers Total forsystemsales

'842,771 i

800,587 687,632 647,949 506,038 503,806 83,630,'8,489 I

2,120,071 2,030,831 322,298 313,207 2,442,369,',344,038 47,022 i

5,043 68,283 68,950

$2,557,674

$2,418,031 8.12 i

7,92 7.76 7.59 598 i

578 7.39 i

7.17 7.30 i

7.08 the reclassiflcatlon ofreceipts from the disti ysales and operating revenues. See Financia ting revenues.

nonrecurringcredlt relatedtoanaccountln g the nonrecurringcredit fromearnings, 776,673 612,762 488,691 80,144 8

768,051 592,023 495,968 75,507 1,931,549 277,971 1.,958,270 316,508 2,274,778 39,628 60,373 2,209,520 (18,187) 34,073 82,374,779

$2,225,406 772 7.40 5.60 6.97 6.89 7.79 7.46 5,64 7.02 6.91 nct sale ofenergy to certain I Note 17 forinformation con-g change, whileindicated flnan-(a)

Years 1982 through 1990havebeenrestatedtoreflectchangesdueto utilities, which began in 1982, frominterchange power sales to energ cerning the future reclassification ofinterchange power sales to opera (b) 1981 net income and earnings applicable to common stock include a cial ratios and common stock data forthe year are computed excludin

1987 1986 1985 1984 1983 1982 198 M991 1981

% Change

$2,097,704 590,637 302,461 248,035 S5>970,000 141,960 655,254 7,457,346 2,587>500 495,590 231,375 1,969,971 298>321 5,582,757 12.78 10.31 7.77 2.62 253 2.5

$2,197,747 597,529 300,108 231,051

$ 5,815,838 224,426 691,820 7>413,105 2>849,972 475,239 231,375 1,915,649 243,588 5,715,823 12.11 10.53 833 2.69 2.58 2.3

$2>001>258 536,115 290>613 199,327

$ 5,776,687 161,684 699,448 7,255,918 2,664,564 691>010 231,375 1,905,700 247,260 5,739,909 10.42 11.23 10.02 2.28 2.19 2.3

$ 1,585,457 418,689 318,903 226>758

$3>856,738 2,020,780 733,002 7,231,058 2,674,036 738,027 231,375 1>896,987 278,652 5,819>077 12,30 11.11 994 2.24 2.06 2.7

$ 1,270,589 300,563 296,011 210,173

$3 >842> 826 1,730,223 670,239 6,744,180 2,477,700 714,830 231,375 1,767,949 351,194 5,543,048 12,29 10.98 9.66 2.20 2.05 2.9 S 1>233,154 236,430 278,886 210,572

$2,107>651 2,923,744 582,740 6,152,976 2,417,244 621,634 231,375 1,643,695 324,664 5,238,612 13.60 10.80 9.41 1,94 1.81 34

$ 1,134,903 227,044 244,077 183,182

$2,049,418 2,312,289 496,739 5,410,245 2,261,767 544,231 231,375 1,435,437 321,481 4,794,291 12.74 10.84 8.93 1.79 1.77 34 125.5 156.5 42,7 65.8 207.2 (921)

)9,4) 14.2 (33.0) 60.1 (54.2) 173 5.3 15.9) 70.9 71.8 (8.8) 74,972 74,644 141,843

$ 3.32

$ 2.68

$26.26 8

33 81 7.37 10.95 74,513 74,513 147,611

$ 3.10

$ 2.58

$25.71 8 36/

83 7.30 11.39 74,513 74,513 151,025 8 2.68

$ 2.56

$25.58 28gf 9.81 9.76 74,513 72,767 162,903

$ 3.12

$ 2.48

$25.46 25i/s 80

'11.00 7.24 70,335 68,642 169,142

$ 3.06 8 2.40

$25.12

$ 20/s 79 10.48 7.48 66,461 62,809 169,127

$ 3.35

$ 2.32

$24.71 21 70 11.95 5.79 58,447 53,912 165,096

$ 3,17

$ 2.24

$24.52 17/s 72 13.34 5.30 29.7 40.4 (22.9) 26.5 38.4 23.6 207,3 6.9 (49.9) 117.9 737,066 572,623 492>491 74,228 634,669 492,686 438,427 64,223 714,753 557,216 473,488 74,047 1,876,408 282,799 1,,630,005 255,875 1,819,504 299,663 2,119,167 52,344 25,033 2,159,207 (84,888) 21,900 1,885,880 78,545 30,059

$2,096,219

$2,196,544

$ 1,994,484 591,922 441,651 411,533 59,526 1,504,632 52,724 1,557,356 (9 725) 29,960

$ 1,577,591 529,911 386,617 367,950 47,275 8

503,557 363,233 347,726 47,731 1>262,247 11,775 1,331,753 39,012 1,370,765 (119,539) 12,972 1,274>022 (61,652) 12,708

$ 1,264,198

$ 1,225,078 411,668 292,984 295,006 39,484 1>039,142 1,039,142 76,884 10,142

$ 1,,126,168 104.7

>>4,7 71.5 111.8 104.0 135.0 (38.8) 573.3 127.1 8.05 7.68 5.84 7.23 7.12 8.15 7.78 5.93 7.34 7.25 7.60 732 5.55 6.85 6.77 7,00 6.77 5.07 6.30 6.23 6.51 6.32 4.83 5.91 5.83 6.26 6.11 4.75 5.74 5.66 5.09 4.97 3.70 4.59 4.53 59.5 56.1 61.6 61.0 61.1 (c) Year-end.

(d) Computed using earnings and fixedcharges ofthe Company and allofits amiated companies. Fixed charges consist ofinterest on short-and long-term debt, other interest chuges, interest on capital lease obligations and the esumated interest component ofother rentals.

(e)

Based on avetageof mouthed market prices.

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1991 1990 1989 1988 ELECTRICOPERATIONS (Continued)

Sales Data Customers(a)(b)...,.........,...,.....,

Average annual residential kwh use Electric energy sales billedmillionsofkwh Residential Commercial...,

Industrial Other System sales..

Contractualsales toother utilities(a).......

Total electric energy sales billed(a),......

Sources ofenergy soldmillionsofkwh Generated Coal-fired steam stations Nuclear steam station (c)

Oil-firedsteam station Combustion turbines and diesels (oil),...,

Hydroelectricstations 1,122,632 10,059 1,173,679 10,101 10,385 8,861 8,456 1,334 29,036 7,183 36,219 1,143,592 lo,o64 1,161,231 91947 10,103 8,538 8,716 1,315 9,856 7,932 8,799 1,360 10,061 8,285 8,723 1,333 28,672 7,028 28,4o2 6,956 27,947 6,268 34,215 35,358 35,700 26,6o7 12,867 4,186 57 573 44,290 3,027 (10,855)

(2,247) 43,658 3,586 (9,234)

(2,652) 34,215 7,479 5,566 7,864 6,'ooo 62.1 27-3 9.0 1.6 60.1 29.0 9.6 1.3 81.3 77,7 90.1 81.1 72.1 76.3 74.6 72.0 26.6 73.1 77.7 29,1 1.66 0.59 4.18 7.68 1.41 1.64 o.56 2.76 589 1.44

$39.04

$ 17.71

$39.52

$ 15 95 47.9 1.7 12.4 38.0 2.73 8,306 to certain utilities, concerning the future 24,805 j

26,409 27,104 145271 131254 1 11916 1,939 i

1,442 3,817 15 33 107 521 '04 714 41,551 l

41,942 Power purchases...,.,

j 4,542 4,634 Interchange power sales(a)....

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(7,553)

(8,971)

Company use, line losses and other.............,

(2,321)'(1,905)

Toraleleclriceoer8ysalesbbled(a)............;

36,219 j'35,700 35,358 Generation Data Net system capacitythousands ofkw (b) (d).......

j 7,797 ',912 Winterpeakdemand thousandsofkw(e)...,.....;

5,974 ',661 Generation by fuel source %

Coal 59.7 '3.0 Nuclear(c).....

I 34.3 j

31.6 Oil 4.7'.5 Hydroelectric, 1.3 1,9 Steam station availability%

Coal-fired 78.1 '2.5 Nuclear(c)....

j 86.3 80.2 Oil-fired...

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i 86.7 82.8 Steam station capacity factor%

Coal-fired 68.2

~l 72.7 Nuclear(c)....,....

85.8 80.1 Oil-fired,...

13.5 j

10.0 Ituel Cost Data Cost per kwh generated cents Coal-fired steam stations 1.75 1,61 Nuclear steam station (c).

0.57 0.58 Oil-firedsteamstation...........,...........

I 3.58'.03 Combustion turbines and diesels(oil),.........,

j 7.52 i

5.95 Average,,

j 1.43 j

1,46 Cost offossil fuel received at steam stations Coalperton........,....,................

'42.87 j

$40.64 Residual oilper barrel...,...,

$ 18.76

$21.52 Capitalization Ratios %

Long-term debt 46.3 j

44.5 483 Short-term debt..

1.3 3.8 0.2 Preferred and preference stock 108 it 112 11.9 Common equity.,

41.6 4o.5 39.6 Times Interest Earned Before Income Taxes......

3.11 j

2.93 2.88 Employees(b).....,........,,,.....,...,....,

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8,144 j

8,149 8,108

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( a )

Years 1982 through 1990 have been restated to reflect changes due to thc reclassifllcation ofrcceiptS from the distinct sale ofenergy which began in 1982, frominterchange power sales to energy sales and operating revenues. See Financial Note 17 forinformation rcclassiflcation ofInterchange power sales to operating revenues.

b) Year.end.

c) The Company's firstnuclear unit wasplaced incommercial operation onJune 8, 1983 and the second unit on February 12, 1985, Rl

1987 1986 1985 1984 1983 1982 1981-1991 1981

% Change 1,097,521 9,565 9,157 7,457 8,438 1,285 26,337 6,201 32,538 1,073>150 9,344 8,771 7,159 7,986 1,170 25,086 5,602 30,688 1,055,549 9,034 8,354 6,728 7,907 1,082 24>071 4,850 28,921 1,039,384 9,282 8,454 6,527 8,117 1,043 24,141 1,002 25,143 1,026,148 9,051 8,138 6,1i9 7,623 968 22,848 845 23,693 1,013,625 9,039 8,045 5,946 7,324 982 22,297 348 22,645 1,006,570 9,157 8,088 5,893 7,968 1,005 22,954 22,954 i6.6 10.3 28.4 50.4 6.i 32.7 26.5 57.8 26,465 13,285 4,095 28 689 44,S62 2,707 (12,682)

(2,049) 32,538 7,499 5,591 59.4 29.8 9.3 1.5 833 80.4 84.7 72.9 80,5 28.5 25,151 10)151 S,4S3 17 739 4i,511 2>032 (11,018)

(1,837) 30,688 7,519 5,154 60.6 24.4 13.2 1.8 78.8 61.7 84.7 69.3 6i.3 38.0 26,237 11,534 4,3i6 18 612 42,7i7 3,7i6 (15,433)

(2,079) 28,921 7,513 4,981 6i.4 27.0 10.2 1.4 78.6 70.7 87.2 72.3 70.5 30.0 26,695 6,295 4,121

'32 747 37)890 3,765 (14,732)

(1,780) 25,143 7,484 5,519 70.4 i6.6 11.0 2.0 75.2 66.7 68.0 733 65.7 28.6 26,885 4,509 5,581 45 700 37,720 3)880 (15,769)

(2,138) 23,693 7,494 4,869 71.3 11.9 i4.9 1.9 78.8 67.7 75.8 74.0 67.5 38.8 2S,477 293 3,186 13 6i2 29,581 i,4i4 (6,552)

(1,798) 22,645 6,s46 4,489 86.1 1,0 10.8 2.1 79.1 80.4 70.2 22.2 24,841 4,70S 32 622 30,200 744 (6,274)

(1,716) 22,954 6,s46 5,207 82.2

'15.7 2.1 74.7 73.4 68.4 32.8 (0.1)

(58.8) 16.2) 37.6 510.5 (20.4)

(35.3) 57,8 19.1 i4,7 (27.4)

(70,1)

(38.1) 4.6 18.1 (0 3)

(58.8) 1.63 0.56 323 6.51 1.46

$39.30

$ 18.51 46.9 3.1 13.5 36.5 2.71 8,301 1.67 0.58 2.96 7,81 1.57

$40.17

$ 16.83 50.4 2.1 12.8 34.7 2.80 8,339 1.78 0.6i 5.02 9.31 1,81

$ 42.00

$28,42 47.1 1.7 16.7 34.5 2.37 8,433 1.75 0.54 5.31 9.82 1.98

$42.75

$31.32 46.7 1.9 17.4 34.0 235 8,386 i.68 0.66 5.23 10.21 2.15

$39.37

$29.79 45.1 3.6 17.9 33.4 2.29 8,160 1.77 5.62 10.74 2.20

$42.32

$30.94 46.7 32 17.1 330 2.05 8)208 1.64 5.75 10.51 2.30

$39.59

$ 33 47 47.6 39 17.0

'1.5 1.91 7,999 6.7 (37.7)

(28.4)

(37.8) 8.3 (43.9)

(P~:7I (36.5) 32.1 62.8 1.8 (d) Total generating capacityplus firmcapacity purchases less Armcapacity sales.

(e) Except for1989, the winterpeaks shown were reached early in the subsequent year,

Cy he follow-ing informa-tion is provided as a service to shareowners and other investors.

For any questions you may have or additional information you may require about PP&Lor your investments inthe company, please feel free to call the toll-free number listed below, or writeto:

George 1. Kline, Manager Investor Services Department Pennsylvania Potver &LightCo.

TtvoNorth NintbStreet Allentotvn, Pa. 18101 Toll-Free Phone Number: For in-formation regarding your investor account, or other inquiries, call toll-free: 800-322-9532 when calling from inside Pennsylvania, or 800-345-3085 when calling from outside Pennsylvania.

Annual Meeting: The annual meeting ofshareowners is held each year on the fourth Wednesday of April.The 1992 annual meeting will be held at 1:30 p.m. on Wednesday, April22, 1992, at the Williamsport Scottish Rite Auditorium, 348 Market St., Williamsport, Pa. Areservation card formeeting attendance is in-cluded withshareowners'roxy material.

Proxy Material: Aproxy state-ment, a proxy and a reservation card forthe company's annual meeting are mailed in a package which in-cludes the annual report. This ma-terial was mailed beginning March 16, 1992, to allshareowners of record as ofMarch 10, 1992.

Dividends: For 1992, the declara-tion ofdividends is considered by the board, or its executive commit-tee, on February 26, May 27, August 26 and November 25, forpayment on April1,July 1 and October 1, 1992, and January 1, 1993, respec-tively. Dividend checks are mailed ahead ofthose dates with the inten-tion they arrive as close as possible to the payment dates.

Record Dates: The 1992 record dates fordividends are March 10, June 10, September 10 and December 10.

DirectDeposit ofDividends:

Shareowners may choose to have their dividend checks deposited directly into their checking or sav-ings account. Quarterly dividend payments are electronically credited on the dividend date, or the first business day thereafter.

Dividend Reinvestment Plan:

Shareowners may choose to have dividends on their common, prefer-red or preference stocks reinvested in PP&Lcommon stock instead of receiving the dividend by check.

Certificate Safekeeping:

Shareowners participatingin the Dividend Reinvestment Plan may choose to have their common stock certificates forwarded to the com-pany forsafekeeping. These shares willbe registered in the name ofthe company as agent forplan par-ticipants and willbe credited to the participant's account. Dividends paid on any shares held in the plan willbe reinvested.

Lost Dividend or Interest Checks: Dividend or interest checks lost by investors, or those which may be lost in the mail, willbe replac-ed ifthe check has not been located by the 10th business day following the payment date.

Transfer ofStock or Bonds: Stock or bonds may be transferred from one name to another or to a new ac-count in the name ofanother person.

Please call or write regarding transfer instructions.

Bondholder Information: Much ofthe information and many ofthe procedures detailed here forshare-owners also apply to bondholders.

Questions related to bondholder accounts should be directed to Investor Services.

Lost Stock orBond Certificates:

Please call or write to Investor Ser-vices foran explanation ofthe pro-cedure to replace lost stock or bond certificates.

Publications: Several publications are prepared each year and sent to all investors ofrecord and to others who request their names be placed on our mailing lists. These publica-tions are:

Annua/Report published and mailed to allshareowners ofrecord in mid-March.

Sbareowtters'Newsletter an easy-to-read newsletter containing current items ofinterest to share-owners published and mailed at the beginning ofeach quarter. Addi-tionally, a special year-end edition containing unaudited results ofthe year's operations is mailed in early February.

Quarterly Reviewpublished in May, August and November to pro-vide quarterly financial information to investors.

Periodic Mailings: Letters from the company regarding new investor programs, special items ofinterest, or other pertinent information are mailed on a non-scheduled basis as necessary.

Duplicate Mailings: Annual reports and other investor publica-tions are mailed to each investor account. Ifyou have more than one account, or there is more than one in-vestor in your household, you may call or write to request that only one publication be delivered to your address. Please provide account numbers forall duplicate mailings.

Form 10-Kand PP&LProfile: The company's annual report, filedwith the Securities and Exchange Com-mission on Form IO-K, is available about mid-March. The PP&L Profile, a 10-year statistical review contain-ing in-depth information about the company, is available in May. In-vestors may obtain a copy ofthese publications, at no cost, by calling or writingto Investor Services.

Listed Securities:

Nezv YorkStock Excbange Common Stock(Code: PPL) 4i/,% Preferred Stock (Code: PPLFRB) 4.40% Series Preferred Stock (Code: PPLPRA) 8.60% Series Preferred Stock (Code: PPLFRG)

Preference Stock, $8.00 Series (Code: PPLPRJ)

Preference Stock, $8.40 Series (Code: PFLFRH)

Preference Stock, $8.70 Series (Code: PFLPRI)

Pbfladelpbfa Stock Exchange Common Stock 4i/,% Preferred Stock 3.35% Series Preferred Stock 4.40% Series Preferred Stock 4.60% Series Freferred Stock 8.60% Series Preferred Stock Preference Stock, $8.00 Series Freference Stock, $8.40 Series Preference Stock, $8.70 Series Fiscal Agents:

Stock Transfer Agents and Regfstrars First Chicago Trust Co. ofNew York P.O. Box3981 Church Street Station New York, New York 10008-3981 Pennsylvania Power &LightCo.

Investor Services Department DfvfdendDfsbursfng Officeand DividendRefnvestntent Plan Agent Pennsylvania Porver 6 LightCo.

Investor Services Departnrent Mortgage Bond Trustee Morgan Guaranty Trust Co. ofNew York 55 Exchange Place Basement 'A" New York, New York 10260 Bond Interest Payfng Agent Pennsylvania Power &LightCo.

Investor Services Department

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'991 Operating revenues (b)..

Operating income Net income Earnings applicable to common stock..

Earnings per common share(c)

Dividends declared per common share(d)..

Price per common share High.

Low..

1990

$673,835 169,960 110,382 99,036 1.31 0.775

$ 599,606 131,049 72,475 61,189 0.81 0.775

$630,721 139,615 80,851 69,733 0.92 0.775

$655,534 141,707 84,7o6 73,769 0.97 0.775 45 46t/s 48 52$/s 41 /4 42/s 43/z 47/4 For the Quarters Ended (a)

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

$645,386 170,409 107,626 95,937 1.27 0.745

$622,961 146,517 86,'6o2 75,256 1.00 0.745

$ 568,900 129,147 66,82o 55,191 0.73 o.745

$ 582,470 144,293 82,858 71,397 0.95 0.745 Operating revenues (b).

Operatingincome Net income Earnings applicable to common stock Earningspercommonshare(c)

Dividends declared per common share (d).............

Price per common share High 43 /s 43 /s 42 /s 44 /s Low 40 39/a 39 39/s

( a ) The Company's electric utilitybusiness is seasonal in nature withpeak sales periods genenlly occurring inthe winter months. Accordingly, com-parisons among quarters ofa year may not be indicative ofoverall trends and changes inopentions.

(b) Openting revenues for 1990 and the quarters ending March 31 and June 30, 1991 have been restated to reflect changes due to the reclassification of receipts from the distinct sale ofenergy to certain utilitiesfrom interchange power sa! es to openting revenues. See Financial Note 17 forinformation concerning the future reclassification ofInterchange power sales to openting revenues. The amounts to be reclassified for the quarters ended March 31,June 30, Sept. 30 and Dec. 31 are (thousands ofdollars): 1991, $47 712, $55,465, $40 478, $37 364; 1990, $46 720, $57 509, $83,207, $30,769, respectively.

( c) The sum ofthe quarterly amounts may not equal annual earnings per share due to changes in the number ofcommon shares outstanding during the yearor rounding.

(d) The Company has paid quarterly cash dividends on its common stock inevery year since 1946. The dividends paid per share in 1991 and 1990 were

$3.07 and $2 95, respectively The most recent regular quarterly dividend paid by the Company was 775 cents per share (equivalent to $3. loper annum) paid January 1, 1992. Future dividends willbe dependent upon future earnings, financia requirements and other factors.

Officers JOHN T. KAUFFMAN65 (41), Cbalrman and Chief Executive Officer WILLIAMF. HECHT 48 (27), President and Chief Operating Offfcer CHARLES E. RUSSOLI 58 (36), Executive Vice President and Chief Financial Officer GENNARO D. CALIENDO 51 (23), Senior Vice President, General Counsel and Secretary HAROLD W. KEISER 48 (11), Senior Vfce President-hfucfear JOSEPH C. KRUM 54 (32), Senior Vfce President-Division Operations FRANCIS A. LONG 51 (28), Senior Vice PresfdentSyste>n Power 6 Engbteerlng LINDACURRY BARTHOLOMEW43 (21), Vice President-Public Affairs JOHN R. BIGGAR 47 (22), Vice President-Finance ROBERT G. BYRAM 46 (15), Vice President-Ivucfear Operations STEVEN H. CANTONE 48 (12), Vlcc President-Central Division JOHN M. CHAPPELEAR 53 (13), Vlcc Presfdent-Investments and Pensions ROBERT S. GOMBOS 48 (26), Vice President-Human Resource 6 Development RONALD E. HILL49 (27), Vice President and Comptroller JOHN P. KIERZKOWSKI 52 (20), Vice Presfdent and Treasurer GRAYSON E. McNAIR 51 (29), Vice President-Leblgb Dfulslon JOHN R. MENICHINI44 (23), Vice President.Harrisburg Division CLAIR W. NOLL 58 (31), Vice President-Information Services EDWARD F. REIS 61 (35), Vlcc President-Corporate Planning JOHN E. ROTH 63 (37), Vice President-Nortbern Dlulslon JOHN H. SAEGER 53 (31), Vice President-Lancaster Division ROBERT J. SHOVLIN 51 (29), Vice President-Power Production 6 Englneerbtg JEAN A. SMOLICK 57 (39), Assistant Secretary RAYMOND F. SUHOCKI 46 (18), Vlcc Presfdent-Susquebanna Dtvlslon PAULINE L. VETOVITZ45 (27), Assistant Secretary HELEN J. WOLFER 63 (44), Assistant Secretary and Asststant Treasurer Numbers indicate age and years of service (

) as of March 1, 1992.

Directors

'CLIFFORD L. ALEXANDERJR. 58 (16), Washington, D.C., President, Alexander 6 Assoctates Inc. Consultants to busbtess, government and brdustry JEFFREY J. BURDGE 69 (9), Camp Hill, Former Cbafrman of tbe Board, Harsco Corporation. hfanufacturer ofprocessed and fabricated metals E. ALLENDEAVER 56 (1), Lancaster, Executive Vice President, Armstrong lt'orldIndustries Inc. hfanufacturer of interiorfurnlsblngs and specfalty products EDWARD DONLEY70 (9), Allentown, Chairman, Executfue Committee, AirProducts and Cbemlcals Inc. hfanufacturer of industrial and commercial gases and chemicals WILLIAMJ. FLOOD 56 (2), Hazleton) Secretary-Treasurer, Hlgbuay Equipment 6 Supply Co. Supplter of beavy equipment for bigbway construction and tndustry REV. DANIELG. GAMBET, O.S.F.S. 62 (5), Center Valley, President, Allentown College of St. Francis de Sales ELMER D. GATES 62 (2), Bethlehem, Vfce Chairman, Fuller Company. hfanufacturer of plants, machinery and equfpment for industry WILLIAMF. HECHT 48 (1), Allentown, Prestdent and Cblef Operating Officer STUART HEYDT 52 (1), Danville, President and Cblef Executive Officer, Gelslnger Foundation. Parent company of Gelslnger Health C'are System CLIFFORD L. JONES 64 (3), Mechanicsburg, Former President, Pennsylvania Chamber of Business and Industry JOHN T. KAUFFMAN65 (13), Allentown, Ci>airman and Cbief Executive Officer RUTH LEVENTHAL51 (3), Middletown, Provost and Dean, Penn Slate Harrisburg (The Capital College)

NORMAN ROBERTSON 64 (22)) Pittsburgh, Senior Vice President and CblefEconomist, hfellon Bank, II.A.

CHARLES E. RUSSOLI 58 (5), Allentown, Executiue Vice President and Cblef Flnancfal Officer DAVIDL. TRESSLER 55 (10), Scranton, Executive Directorofthefosepb hf. hfcDade Center for Technology and Applied Research at tbe Untverslty ofScranton Numbers indicate age and years of service (

) on PP&L board as of March 1, 1992.

'Mr. Alexander resigned from the board effective Dec. 31, 1991.

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Picture'd here are the outside, non-empioyee members of PMI.'s board.

ggg Pennsylvania Power 5 Ught Gompany TwofforthNinth8treet a Allentown, PA18101

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