PLA-2677, Forwards Audited Financial Statements & Other Financial Info for Allegheny Electric Cooperative,Inc for Nov 1984 - Oct 1985

Forwards Audited Financial Statements & Other Financial Info for Allegheny Electric Cooperative,Inc for Nov 1984 - Oct 1985

ML18040B154
Person / Time
Site:	Susquehanna
Issue date:	07/07/1986
From:	Keiser H PENNSYLVANIA POWER & LIGHT CO.
To:	Harold Denton Office of Nuclear Reactor Regulation
References
PLA-2677, NUDOCS 8607110074
Download: ML18040B154 (63)

Text

Pennsylvania Power 8 Light Company Two North Ninth Street

~ Allentown, PA 18101

~ 215/ 770-5151 Harold W. Keiser Vice President-Nuclear Operations 21 5/770-7502 JUL 07 186'r.

Harold R. Denton, Director Office of Nuclear Reactor Regulation U.S. Nuclear Regulatory Commission Washington, DC 20555 SUSQUEHANNA STEAM ELECTRIC STATION ANNUAL FINANCIAL REPORT PLA-2677 FILE R41-2A Docket Nos.

50-387 50-388

Dear Mr. Denton:

In accordance with 10CFR50.71(b),

attached are ten copies of the 1985 annual financial report including certified financial statements for Allegheny Electric Cooperative, Inc.

The attached reports cover the period November 1,

1984 through October 31, 1985.

The 1985 annual report for Pennsylvania Power

& Light Co. was forwarded on April 4, 1986 (PLA-2623).

V truly yours, W. Keiser Vice President-Nuclear Operations Attachments cc:

Mr. L. R. Plisco USNRC Ms. M. J.

Campagnone USNRC

>j,p7iipp74 p5ppp387 8bp7p7 pDR ADOCH PDR z

Audited Financial Statements and Other Financial 'Information ALLEGHENY ELECTRIC COOPERATIVE, INC.

October 31, 1985 Audited Financial Statements t

Auditors Peport.................................

Balance Sheets...................................

Statements of Operations and Patronage Capital...

Statements of Changes in Financial Position......

Notes to Financial Statements....................

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6 Other Financial Information Auditors'eport on Other Financial Information..

Schedules of Nonoperating Rental Income (Expense)

Schedules of Administrative and General Expenses.

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Ernst &Whinney 300 Locust Court 212 Locust Street Harrisburg, Pennsylvania 17101 717/232-7575 Board of Directors Allegheny Electric Cooperative, Inc.

Harrisburg, Pennsylvania We have examined the balance sheets of Allegheny Electric Cooperative, Inc.

as of October 31, 1985 and 1984, and the related statements of operations and patronage capital and changes in financial position for the years then ended.

Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

In our opinion, the financial statements referred to above present fairly the financial position of Allegheny Electric Cooperative, Inc. at October 31, 1985 and 1984, and the results of its operations and changes in its financial position for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis.

Harrisburg, Pennsylvania January 20, 1986

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BALANCE SHEETS ALLEGHENY ELECTRIC COOPERATIVE, IN'SSETS October 31 1985 1984 (In Thousands)

ELECTRIC UTILITY PLANTNote C

In service Note B

Construction work in process Nuclear fuel in process Less accumulated depreciation and amortization OTHER ASSETS AND INVESTMENTS Nonutility property, at cost (net of accumulated depreciation of $793 in 1985 and

$ 658 in 1984)

Investments in associated organizations Note D

Construction advances Other noncurrent assets CURRENT ASSETS Cash and short-term investments of

$16,559 in 1985 and

$25,660 in 1984 Accounts receivable from members Other accounts receivable Other 540,436 9,985 27,345 577,766 25,838 551,928 5,799 4,938 848

'5,539 17

$124

" 16,242 7,208 3,160 550 277,893 236,548 32,668 547,109 12,600 534,509 5,925 6,405 2,309 6,777 21,416 25,396 5,300 3,179 529 27,160 34,404 596,212 590,329

EQUITIES AND LIABILITIES October 31 1985 1984 In Thousands)

EQUITIES Memberships Donated capital Patronage Capital LONG-TERM DEBT, less current portionNote F

CURRENT LIABILITIES Notes payable Note E

Current portion of long-term debtNote F

Accounts payable and accrued expenses Accounts payable to members DEFERRED CREDITS Deferred income tax benefits from safe harbor lease Note G

Other 3

49 24,434 24,486 505,148 27,474 7,003 10,406 1,688 46,571 15,816 4,191 20,007 3

49 19,906 19,958 475,791 60,450 1,209 11,802 921 74,382 16,375 3,823 20,198 S

596,212 S

590,329 See notes to financial statements.

STATEMENTS OF OPERATIONS AND PATRONAGE CAPITAL ALLEGHENY ELECTRIC COOPERATIVE, INC.

Year Ended October 31 1985 1984 (In Thousands)

Operating

revenue, including sales to members of

$87,901 in 1985 and

$ 81,414 in 1984 131,246 109,733 Operating expenses:

Purchased power Transmission Production Fuel Depreciation Taxes Administrative and general OPERATING MARGIN BEFORE INTEREST AND OTHER DEDUCTIONS, 43,280 6,450 14,385 8,280 5,674 3,356 3,004 84,429 46,817 51,964-6,579 8,645 4,209 3,247 1,816 3,553 80,013 29,720 Interest and other deductions:

Interest expense Allowance for funds used during construction Other deductions (credits)-net OPERATING MARGIN (DEFICIT) 55,430 55,604 (10,149)

(25,733)

(465)

(127) 44,816 29,744 2,001 (24)

Nonoperating margins:

Net nonoperating rental expense Interest income MARGIN BEFORE INCOME TAXES Deferred income tax benefits from safe harbor lease (63) 2,031 1,968 3,969 559 (168) 2,660 2,492 27468 518 Patronage capital'at beginning of year NET MARGIN 4,528 19,906 27986 16,920 PATRONAGE CAPITAL AT END OF YEAR 24,434 19,906 See notes to financial statements.

STATEMENTS OF CHANGES IN FINANCIAL POSITION ALLEGHENY ELECTRIC COOPERATIVE, IN'OURCE OF WORKING CAPITAL Net margin Charges (credits) to margin not affecting working capital:

Depreciation Fuel amortization Deferred income tax benefits from safe harbor lease 5,808 7,132 (559) 3,413 3,649 (518)

Year Ended October 31 1985 1984 (In Thousands 4,528 2,986 TOTAL FROM OPERATIONS Additions to long-term debt Proceeds from sale of income tax benefits from safe harbor lease Decrease in construction advances Other sources APPLICATION OF WORKING CAPITAL Additions to electric utility plant Reduction of long-term debt Other applications 16,909 37,047 1 >461 3,073" 58,490 30,233, 7,690 37,923 9,530 27,609 80 1,319 475 39,013 54,553 111746 1,950 68,249 INCREASE (DECREASE) IN WORKING CAPITAL 20,567 (29,236)

CHANGES IN COMPONENTS OF WORKING CAPITAL Increase (decrease) in current assets:

Cash and short-term investments Accounts receivable from members Other accounts receivable Other (9,154)

$ 7,226 1,908 (676)

(19) 818 21 (63)

(7,244) 7,305 Increase (decrease) in current liabilities:

Notes payable Current portion of long-term debt Accounts payable and accrued expenses Accounts payable to members II I

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(32,976) 5,794 (1,396)

'I 767

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(27,811)

INCREASE (DECREASE) IN WORKING CAPITAL 20,567 41,371 1,209 (2,968)

(3,071) 36,541 (29,236)

See notes to financial statements.

NOTES TO FINANCIAL STATEMENTS ALLEGHENY ELECTRIC COOPERATIVE, IN'ctober 31, 1985 NOTE A

SUMMARY

.OF SIGNIFICANT ACCOUNTING POLICIES Allegheny Electric Cooperative, Inc. (Allegheny) is a rural electric cooperative utility established under the laws of the Commonwealth of Pennsylvania.

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 distribution cooperative utilities providing electric power to consumers in certain areas of Pennsylvania and New Jersey.

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

Electric Utility Plant and Depreciation:

Electric utility plant is stated at cost, which'includes an allowance for funds used during construction.

Depreciation is provided on the modified 'sinking fund method 'for nuclear utility plant production assets and the straight-line method for all other

assets, except nuclear fuel.

The cost of units'f property retired or replaced is removed from utility plant accounts and charged to accumulated depreciation.'uclear Fuel:

Nuclear fuel usage is charged to fuel expense based on the quantity of heat produced for electric 'generation.

Under the Nuclear Waste Policy Act of 1982, the U. S. Department of Energy (DOE)'s responsible for the permanent storage and disposal of spent'nuclear fuel'emoved from nuclear reactors.

Allegheny currently pays to Pennsylvania Powe'r 6 Light Company (PP&L), co-owner of Susquehanna Steam Electric Station (SSES), its portion of'OE fees for such future disposal services.

'ost of Decommissionin Nuclear Plant:

Allegheny's portion of the estimated dec'ommissioning costs of SSES are charged to operating expenses over the estimated useful life of the plant.

Allowance for Funds Used During Construction:

Allowance for funds used during construction represents the cost of directly related borrowed funds used for construction of electric utility plant.

The allowance is capitalized as a

component of the cost of the electric utility plant while it is under construction.

Investments in Associated Organizations:

Investments in associated organizations are carried at cost.

NOTES TO FINANCIAL STATEMENTSContinued ALLEGHENY ELECTRIC COOPERATIVE, INCo NOTE A

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIESContinued Preliminary Surveys:

Costs of preliminary surveys for potential development projects are recorded as deferred charges in other noncurrent assets.

If construction of a project results from such 'surveys, the deferred charges are transferred to the cost of the facilities. If a preliminary survey is abandoned, the costs incurred are written"'off.

Short-Term Investments:

Short-term investments are carried at cost, plus accrued interest, which approximates market value.

Income Taxes:

Investment and energy 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 of income tax expense in the year in which the credit is utilized for tax purposes.

Variations in the customary relationship between pretax 'accounting income and income tax expense are the result of patronage dividends.

Net operating losses for financial and tax reporting purposes differ as a result of timing differences relating primarily to depreciation.

Proposed Accountin Statement:

The Financial Accounting Standards Board (FASB) issued a draft,.accounting statement, in December 1985 that proposed certain accounting rules to be used by rate-regulated utilities in accounting for rate phase-in plans, plant abandonments, and disallowed plant costs.

Under certain circumstances, the proposed accounting could require utilities to recognize an immediate charge against net income that previously may have been recognized over,a period of time.

Management cannot predict what final accounting rules the FASB may adopt, or the ultimate effect, if any, that such accounting may have on'Allegheny's net margin or financial position.

NOTES TO FINANCIAL STATEMENTSContinued ALLEGHENY ELECTRIC COOPERATIVE, INC.

NOTE B

ELECTRIC UTILITY PLANT IN SERVICE Electric utility plant in service consists of the following:

Nuclear UtilityPlant:

Production Transmission General plant Nuclear fuel Depreciation/

Amortization, Lives/Rates 39 years 2.75%

3% 12.5%

Heat production October 31 1985 1984 (In Thousands) 480,363 231,485 29,200 27,994 829 813 29,120 16,776 Non-Nuclear UtilityPlant 3% 20%;

924

825, t

NOTE CSUSQUEHANNA'TEAM.ELECTRIC STATION TOTAL 540,436 277,893 Allegheny owns a

10% undivided interest in SSES.

PP&L owns the remaining 90%.

Allegheny's portion of costs associated with the station totalled

$ 576 million and

$ 547 million at October 31, 1985 and 1984, respectively.

Allegheny's share of costs, to complete the station are estimated to be approximately

$ 8 million as of October 31, 1985.

Both participants provide their own financing.

Unit Pl of SSES began commercial operations,in June of 1983.

Unit /I2 began commercial operations in February 1985.

Allegheny receives a portion of the total station output equal

'to its percentage ownership.

The statement of operations reflects Allegheny's share of fuel and other operating costs associated with the station.

NOTE D INVESTMENTS IN ASSOCIATED ORGANIZATIONS Investments in associated organizations consist primarily of National Rural Utilities Cooperative Finance Corporation (CFC) patronage capital, "Capital Term Certificates,"

and "Subordinate Term Certificates" and Baltimore Bank for Cooperatives (BBC) "C" stock.

Certificates bear interest at 3% and begin maturing in 2025.

Allegheny is required to maintain these investments pursuant to certain loan and guarantee agreements.

NOTES TO FINANCIAL STATEMENTSContinued ALLEGHENY ELECTRIC COOPERATIVE, IN'OTE E

NOTES PAYABLE Allegheny has short-term lines of credit available with banks and CFC of

$ 52 million of which

$8.9 million and

$41.9 million were outstanding at October 31, 1985 and 1984, respectively.

Interest rates are generally at prime plus 1%.

Notes payable of

$18.6 million were outstanding at October 31, 1985 and 1984 relating to Pollution Control Revenue Bonds issued by an Industrial Development Authority on Allegheny's behalf.

The bonds are sub)ect to purchase on demand of the holder and remarketing on a "best efforts" basis.

Sinking fund redemption is scheduled in varying amounts from 1986 through

2014, and interest is due monthly at variable rates (4.5% to 6.7% for 1985 and 6.1% to 6.9% for 1984).

The bonds are convertible to a fixed interest rate and fixed term at Allegheny's option.

$1.8 million of investments included in other noncurrent assets relate to a debt service reserve fund required under the bond indenture.

- Restrictions are imposed under certain short-term credit arrangements including, among other things, maintenance of ratio requirements under.

existing long-term debt arrangements and limitation of total short-term indebtedness outstanding to an amount not to exceed the remaining unadvanced portion of certain existing REA long-term loan commitments

($70 million at October 31, 1985).

NOTE F LONG-TERM DEBT Long-term debt consists principally of mortgage notes payable for the electric utility plant to the United States of America acting through the Federal Financing Bank (FFB) and guaranteed by REA, and a mortgage loan payable to CFC relating'o nonutility property.

Substantially all the assets of Allegheny are pledged as collateral.

Long-term debt consists of the following:

NOTES TO FINANCIAL STATEMENTSContinued ALLEGHENY ELECTRIC COOPERATIVE, INC.

NOTE F LONG-TERM DEBTContinued Mortgage notes payable to FFB at interest rates varying from 8.28% to 13.185%,

due in varying amounts through 2017 October 31 1985 1984 In Thousands

$ 509,488

$ 474,306 9

1/4% mortgage loan payable to CFC,

$52,685 payable quarterly, including

interest, to January 2015.

Interest rate to be renegotiated in 1986 2,121 2,135 Other Less current portion 542 512,151 7,003 559 477,000 1,209 8 505,148 8 475,791 Allegheny has the option on FFB promissory note advances to elect (subject to REA approval) interim maturity dates of not less than two years nor more than seven years after the date of the advance.

At the date of the advance or on the maturity of an interim advance, Allegheny may also designate that it desires a long-term maturity of 34 years after the end of the calendar year in which the advance was made.

At October 319 1985, Allegheny had

$144 million of advances maturing within one year which it intends to refinance for 34 years.

Aggregate maturities of long-term debt for the four years subsequent to October 31, 1986 are as follows (in thousands):

1987 1988 1989 1990 7,976 9,940 10,266 1 1 9727 The above maturity schedule reflects management's intent to convert FFB advances with interim maturity dates to,long-term debt.

Allegheny has used a

rate it estimates to be an appropriate long-term rate, based on the October 31, 1985 interest rate, to compute the annual principal requirements.

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

Allegheny was in compliance with such requirements at October 31, 1985.

NOTES TO FINANCIAL STATEMENTSContinued ALLEGHENY ELECTRIC COOPERATIVE, INC+

NOTE G

INCOME TAKES At October 31, 1985, Allegheny had available net operating loss carryovers of

$1.5 million for financial reporting purposes and

$ 150 million for tax reporting purposes, and investment tax credit carryovers of approximately

$ 31.8 million for both financial a'nd tax reporting purposes, expiring through 2000.

In 1983, Allegheny sold certain investment and energy tax credits and depreciation deductions pursuant to a safe harbor lease.

The proceeds from the sale, including interest earned

thereon, have been deferred and are being recognized over the term of the lease (30 years).

The net proceeds and related interest were required by REA to be used to retire outstanding FFB debt.

Under the terms of the safe harbor lease, Allegheny is contingently liable in varying amounts in the event the lessor's tax benefits are disallowed and in the event of certain other occurrences; The maximum amount for which Allegheny was contingently liable approximated

$ 24 million at October 31, 1985.

Payment 'of this contingent liability has been guaranteed by CFC.

NOTE H 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 years ended October 31, 1985 and 1984, were

$1.8 million and

$1.4 million, respectively.

NOTE I COMMITMENTS AND CONTINGENCIES Allegheny and PP&L are members of certain insurance programs which provide coverage for property damage to members'uclear generating plants.

Allegheny's portion of the facilities at SSES is insured against property damage losses up to

$110 million under these programs.

Allegheny is also a

member of an insurance program which provides coverage for the cost of replacement power during prolonged outages of nuclear 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

$1.9 million.

NOTES TO FINANCIAL STATEMENTSContinued ALLEGHENY ELECTRIC COOPERATIVE, IN'OTE I

COMMITMENTS AND CONTINGENCIESContinued Allegheny's public liability for claims resulting from a nuclear incident is currently limited to

$ 65 million under provisions of the Price-Anderson Act (Act).

Allegheny is protected against this potential liability by a combination of commercial insurance and an industry retrospective assessment program.

In the event of a nuclear incident at any of the facilities owned by others and covered by the Act, Allegheny could be assessed up to

$1 million per incident, but not more than

$ 2 million in a calendar year in the event more than one incident is experienced.

The Act is scheduled to expire in August

1987, and Congress is considering several proposals to amend the Act.

Management is unable to predict what action Congress might ultimately take regarding the Act and what effect such action might have on Allegheny's potential liability.

The Board of Directors has approved construction of a hydroelectric generation facility and purchase of equipment for a project to reduce peak power demand (Load Management Project).

Financing for these projects has been arranged with REA ($48.8 million) and CFC ($3.2 million);

At October 31, 1985, project costs of the hydroelectric generation facility were

$1.4 million, drawdowns,of loan advances were

$265,000, and total construction costs are estimated to be

$41.5 million.

NOTE J SUBSEQUENT EVENT On December 27, 1985,

$10.5 million in Pollution Control Revenue Bonds were issued by an Industrial Development Authority on Allegheny's behalf.

The Bonds are subject to purchase on demand of the holder and remarketing on a "best efforts" basis.

The proceeds will be used to retire existing REA loans.

Ernst &Whinney 300 Locust Court 212 Locust Street Harrisburg, Pennsylvania 17101 717/232-7575 Allegheny Electric Cooperative, Inc.

Harrisburg, Pennsylvania The audited financial statements of the Cooperative and our report thereon are presented in the preceding section of this report.

The information presented hereinafter is for purposes of additional analysis and is not required for a fair presentation of the financial position, results of operations, or changes in financial position of the Cooperative.

Such information has been subjected to the auditing procedures applied in our examination of the financial statements and, in our opinion, is fairly stated in all material respects in relation to the financial statements taken as a whole.

Harrisburg, Pennsylvania January 20, 1986

SCHEDULES OF NONOPERATING RENTAL INCOME (EXPENSE)

ALLEGHENY ELECTRIC COOPERATIVE,IN'ear Ended October 31 1985 1984 In Thousands INCOME:

Rental-building Rental-parking EXPENSES:

Utilities Payroll and employee benefits Management and leasing fees Office and administrative expenses Maintenance and repairs Real estate taxes Insurance Interest Depreciation Loss on property disposal NET NONOPERATING RENTAL EXPENSE 669 47 716 139 38 21 5

75 136 34 197 134 779 63 656 47 703 129 39 21 12 99 133 30 198 166 44 871 168

SCHEDULES OF ADMINISTRATIVEAND GENERAL EXPENSES ALLEGHENY ELECTRIC COOPERATIVE, INC+

Year Ended October 31 1985 1984 (In Thousands) 122 78 541 478 71 361 102 87 192 66 46 19 804 37 110 97 919 940 83 279 79 82 113 120 58 16 632.

Office supplies Travel, conventions, and meetings Payroll and employee benefits Legal, auditing, and engineering Association membership dues Experimental and general research Board meetings, directors'ees, and travel Penn Lines Information programs Rent Payroll taxes Insurance Insurance SSES Miscellane ous 25 TOTAL ADMINISTRATIVEAND GENERAL EXPENSES 3,004 3,553 Audited Financial Statements and Other Financial Information ALLEGHENY ELECTRIC COOPERATIVE ~

INC ~

October 31, 1985 Audited Financial Statements Auditors Report.................................

1 Balance Sheets...................................

Statements of Operations and Patronage Capital...

Statements of Changes in Financial Position......

Notes to Financial Statements....................

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6 Other Financial Information Auditors'eport on Other Financial Information..

Schedules of Nonoperating Rental Income (Expense)

Schedules of Administrative and General Expenses.

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4 Ernst &Whinney 300 Locust Court 212 Locust Street Harrisburg, Pennsylvania 17101 717/232-7575 Board of Directors Allegheny Electric Cooperative, Inc.

Harrisburg, Pennsylvania f

We have examined the balance sheets of Allegheny Electric Cooperative, Inc.

as of October 31, 1985 and 1984, and the related statements of operations and patronage capital and changes in financial position for the years then ended.

Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we 'considered necessary in the circumstances.

In our opinion, the financial, statements referred to above present fairly the financial position of Allegheny Electric Cooperative, Inc. at October 31, 1985 and 1984, and the results of its operations and changes in its financial position for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis-.

Harrisburg, Pennsylvania January 20, 1986

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BALANCE SHEETS ALLEGHENY ELECTRIC COOPERATIVE, INC.

ASSETS October 31 1985 1984 (In Thousands)

ELECTRIC UTILITY PLANTNote C

In service Note B

Construction work in process Nuclear fuel in process 540,436 277,893 9,985 236,548 27,345 32,668 Less accumulated depreciation and amortization 577,766 25,838 547,109 12,600 551,928 534,509 OTHER ASSETS AND INVESTMENTS Nonutility property, at cost (net of accumulated depreciation of $ 793 in 1985 and

$ 658 in 1984)

Investments inassociated organizations Note D

Construction advances Other noncurrent assets 5,799 4,938 848 5,539 17,124 5,925 6,405 2,309 6,777 21,416 CURRENT ASSETS Cash and short-term investments of

$16,559 in 1985 and

$25,660 in 1984 Accounts receivable from members Other accounts receivable Other 16,242 7,208 3,160 550 27,160 25,'396 5,300 3,179 529 34,404 596,212' 590,329

EQUITIES AND LIABILITIES EQUITIES Memberships Donated capital Patronage Capital October 31 1985 1984 (In Thousands) 3 3

49 49 24,434 19,906 LONG-TERM DEBT, less current portionNote F

CURRENT LIABILITIES Notes payable Note E

Current portion of long-term debtNote F

Accounts payable and accrued expenses Accounts payable to members I

DEFERRED CREDITS Deferred income tax benefits from safe harbor lease Note G

Other 24,486 505,148 27,474 7,003 10,406 1,688 46,571 15,816 4,191 20,007 19,958 475,791 60,450 1,209 11,802 921 74,382 16,375 3,823 20,198 S

596,212 S

590,329 See notes to financial statements.

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STATEMENTS OF OPERATIONS AND PATRONAGE CAPITAL ALLEGHENY ELECTRIC COOPERATIVE, INC.

Operating

revenue, including sales to members of

$87,901 in 1985 and

$ 81,414 in 1984 Year Ended October 31 1985 1984 (In Thousands) 131,246 109,733 Operating expenses:

Purchased power Transmission Production Fuel Depreciation Taxes Administrative and general OPERATING MARGIN BEFORE INTEREST AND OTHER DEDUCTIONS Interest and other deductions:

Interest expense Allowance for funds used during construction Other deductions (credits)-net OPERATING MARGIN (DEFICIT) e Nonoperating margins:

Net nonoperating rental expense Interest income e

MARGIN BEFORE INCOME TAXES Deferred income tax benefits from safe harbor lease 43,280 6,450 14,385 8,280 5,674 3,356 3,004 84,429 46,817 55,430 (10,149)

(465) 44,816 2,001 (63) 2,031 1,968 3,969 559 51,964 6,579 8,645 4,209 3,247 1,816 3,553 80,013 29,720 55,604 (25,733)

(127) 29,744 (24)

(168) 2,660 2,492 2,468 518 Patronage capital at beginning of year NET MARGIN 4,528 19,906 2,986 16,920 PATRONAGE CAPITAL AT END OF YEAR 24,434 19,906 See notes to financial statements.

STATEMENTS OF CHANGES IN FINANCIAL POSITION ALLEGHENY ELECTRIC COOPERATIVE, INC.

SOURCE OF WORKING CAPITAL Net margin Charges (credits) to margin not affecting working capital:

Depreciation Fuel amortization Deferred income tax benefits from safe harbor lease 5,808 71132 (559) 3,413 3,649 (518)

Year Ended October 31 1985 1984 (In Thousands) 4,528 2,986 TOTAL FROM OPERATIONS Additions to long-term debt Proceeds from sale of income tax benefits from safe harbor lease Decrease in construction advances Other sources APPLICATION OF WORKING CAPITAL Additions to, electric utility plant Reduction of long-term debt Other applications 16,909 37,047 1,461 3,073 58,490 30,233 7,690 9,530 27,609 80 1,319 475 39,013 54,553 11,746 1,950 37,923 68,249 INCREASE (DECREASE),IN WORKING CAPITAL 20,567 (29,236)

CHANGES IN COMPONENTS OF WORKING CAPITAL Increase (decrease) in current assets.:

Cash and short-term investments Accounts receivable from members Other accounts receivable Other (9 154) 1,908 (19) 21

,(7,244) 7,226 (676) 818 (63) 7,305 Increase (decrease) in current liabilities:

Notes payable Current portion of long-term debt Accounts payable and accrued expenses Accounts payable to members (32,976) 41,371 5,794 1,209

".(1,396), (2,968) 767 (3,071)

(27,811) 36,541 INCREASE (DECREASE) IN WORKING CAPITAL 20,567 (29,236)

See notes to financial statements.

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NOTES TO FINANCIAL STATEMENTS ALLEGHENY ELECTRIC COOPERATIVE, INC.

October 31, 1985 NOTE A

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES Allegheny Electric Cooperative, Inc. (Allegheny) is a rural electric cooperative utility established under the laws of the Commonwealth of Pennsylvania.

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 distribution cooperative utilities providing electric power to consumers in certain areas of Pennsylvania and New Jersey.

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

Electric Utility Plant and Depreciation:

Electric utility plant is stated at

cost, which includes an allowance for funds used during construction.

Depreciation is provided on the modified sinking fund method for nuclear utility plant p'roduction" assets and the straight-line method for all other

assets, except nuclear fuel.

The cost of units. of property retired or replaced is removed from utility plant accounts and charged to accumulated depreciation.

Nuclear Fuel:

Nuclear fuel usage is charged to fuel expense based on the quantity of heat produced for electric genera'tion.

Under the Nuclear Waste Policy Act of 1982, the U. S. Department of Energy (DOE) is responsible for the permanent'torage and disposal of spent nuclear fuel removed from nuclear reactors.

Allegheny currently pays to Pennsylvania Power

& Light Company (PP&L), co-owner of Susquehanna Steam Electric Station (SSES), its portion. of DOE fees for such future disposal services.

Cost of Decommissioning Nuclear Plant:

Allegheny's portion of the estimated decommissioning costs of SSES are charged to operating expenses over the estimated useful life of the plant.

Allowance for Funds Used During Construction:

Allowance for funds used during construction represents the cost of directly related borrowed funds used for construction of electric utility plant.

The allowance is capitalized as a

component of the cost of the electric utility plant while it is under construction.

Investments in Associated Organizations:

Investments in associated organizations are carried at cost.

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NOTES TO FINANCIAL STATEMENTSContinued ALLEGHENY ELECTRIC COOPERATIVE, INC.

NOTE A

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIESContinued Preliminary Surveys:

Costs of preliminary surveys for potential development projects are recorded as deferred charges in other noncurrent assets.

If construction of a project results from such surveys, the deferred charges are transferred to the cost of the facilities. If a preliminary survey is abandoned, the costs incurred are written off.

Short-Term Investments:

Short-term, investments are carried at cost, plus accrued interest, which approximates market value.

Income Taxes:

Investment and energy 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 of income tax expense in the year in which the credit is utilized for tax purposes.

Variations in the customary relationship between pretax accounting income and income tax expense are the result of patronage dividends.

Net operating losses for financial and tax reporting purposes differ as a result of timing differences relating primarily to depreciation.

Proposed Accountin Statement:

The Financial Accounting Standards Board FASB) issued a draft accounting statement in December 1985 that proposed certain accounting rules to be used by'ate-regulated utilities'n accounting for rate phase-in plans, plant abandonments, and disallowed plant costs.

Under certain circumstances, the proposed accounting could require utilities to recognize an. immediate charge against net income that previously may have been recognized over a period of time.

Management cannot predict what final accounting rules the FASB may adopt, or the ultimate effect, if any, that such accounting may have on Allegheny's net margin or financial position.'

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NOTES TO FINANCIAL STATEMENTSContinued ALLEGHENY ELECTRIC COOPERATIVE, INC.

NOTE B

ELECTRIC UTILITY PL'ANT IN SERVICE Electric utility plant in service consists of the following:

Nuclear UtilityPlant:

Production Transmission General plant Nuclear fuel Depreciation/

Amortization, Lives/Rates 39 years 2.75%

3% 12. 5%

Heat production October 31 1985 1984 In Thousands) 480,363 231,485 29,200 27,994 829 813 29,120 16,776 Non-Nuclear Utility Plant 3% 20%

924 825 TOTAL 540,436 277,893 NOTE C

SUSQUEHANNA STEAM ELECTRIC STATION Allegheny owns a

10% undivided interest in SSES.

PP&L owns the'emaining 90%.

Allegheny's portion of costs associated with the station totalled

$ 576 million and

$ 547 million at October 31, 1985 and 1984, respectively.

Allegheny's share of costs to complete the station are estimated to be approximately

$ 8 million as of October 31, 1985.

Both participants provide their own financing.

Unit f/1 of SSES began commercial operations in June of 1983.

Unit //2 began commercial operations in February 1985.

Allegheny receive's a portion of the total station output equal to its percentage ownership.

The statement of operations reflects Allegheny's share of fuel and other 'operating costs associated with the station.

NOTE D INVESTMENTS IN ASSOCIATED ORGANIZATIONS Investments in associated organizations consist primarily of National Rural Utilities Cooperative Finance Corporation (CFC) patronage capital, "Capital Term Certificates,"

and "Subordinate Term Certificates" and Baltimore Bank for Cooperatives (BBC) "C" stock.

Certificates bear interest at 3% and begin maturing in 2025.

Allegheny is required to maintain these investments pursuant to certain loan and guarantee agreements.

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NOTES TO FINANCIAL STATEMENTSContinued ALLEGHENY ELECTRIC COOPERATIVE, IN'OTE E

NOTES PAYABLE Allegheny has short-term lines of credit available with banks and CFC of $52 million of which

$8.9 million and

$41.9 million were outstanding at October 31, 1985 and 1984, respectively.

Interest rates are generally at prime plus 1%.

Notes payable of

$18.6 million were outstanding at October 31, 1985 and 1984 relating to Pollution Control Revenue Bonds issued by an Industrial Development Authority on Allegheny's behalf.

The bonds are subject to purchase on demand of the holder and remarketing on a "best efforts" basis.

Sinking fund redemption is scheduled in varying amounts from 1986 through

2014, and interest is due monthly at variable rates (4.5% to 6.7% for 1985 and 6.1% to 6.9% for 1984).

The bonds are convertible to a fixed interest rate and fixed term at Allegheny's option.

$1.8 million of investments included in other noncurrent assets relate to a debt service reserve fund required under the bond indenture.

Restrictions are imposed under certain short-term credit arrangements including, among other things, maintenance of ratio requirements under existing long-term debt arrangements and'limitation of total short-term indebtedness outstanding to an amount not to exceed the remaining unadvanced portion of 'certain existing REA long'-term loan commitments

( $70 million at October 31, 1985).

NOTE F LONG-TERM DEBT Long-term debt consists principally of, mortgage notes payable for the electric utility plant to the United States of America acting through the Federal Financing Bank (FFB) and guaranteed by REA, and a mortgage loan payable to CFC relating to nonutility property.

Substantially all the assets of Allegheny are pledged as collateral.

Long-term debt consists of the following:

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NOTES TO FINANCIAL STATEMENTSContinued ALLEGHENY ELECTRIC COOPERATIVE, INC.

NOTE F LONG-TERM DEBTContinued Mortgage notes payable to FFB at interest rates varying from 8.28% to 13.185X, due in varying amounts through 2017 October 31 1985 1984 In Thousands)

$ 509,488

$ 474,306 9

1/4% mortgage loan payable to CFC,

$52,685 payable quarterly, including

interest, to -January 2015.

Interest rate to be renegotiated in 1986 2,121 2,135 Other Less current portion 542 512,151 7,003

$ 505,148 559 477,000 1,209

$ 475,791 Allegheny has the option on FFB promissory note advances to elect (subject to REA approval) interim maturity dates of not less than two years nor more than seven years after'he date of the advance.

At the date of the advance or on the maturity of an interim advance, Allegheny may also designate that it desires a long-term maturity of 34 years after the end of the calendar year in which the advance was made.

At October 31, 1985, Allegheny had

$ 144 million of advances maturing within one year which it'ntends to refinance for 34 years.

Aggregate maturities of long-term debt for the four years subsequent to October 31, 1986 are as follows (in thousands):

1987 1988 1989 1990 7,976 9,940 10,266 11,727 II The above maturity schedule reflects management's intent to convert FFB advances with interim maturity dates to long-term debt.

Allegheny has used a

rate it estimates to be an appropriate long-term rate, based on the October 31, 1985 interest rate, to compute the annual.principal requirements.

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

Allegheny was in compliance with such requirements at October 31, 1985.

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NOTES TO FINANCIAL STATEMENTSContinued ALLEGHENY ELECTRIC COOPERATIVE, INC.

NOTE G

INCOME TAXES At October 31, 1985, Allegheny had available net operating loss carryovers of

$1.5 million for financial reporting purposes and

$150 million for tax reporting purposes, and investment tax credit carryovers of approximately

$31.8 million for both financial and tax reporting purposes, expiring through 2000.

In 1983, Allegheny sold certain investment and energy tax credits and depreciation deductions pursuant to a safe harbor lease.

The proceeds from the sale, including interest earned

thereon, have been deferred and are being recognized over the term of the lease (30 years).

The net proceeds and related interest were required by REA to be used to retire outstanding FFB debt.

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

The maximum amount for which Allegheny was contingently liable approximated

$ 24 million at October 31, 1985.

Payment of this contingent liability has been guaranteed by CFC..

NOTE H 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'ervices provided for the years ended October 31, 1985 and 1984, were

$1.8 million and

$ 1.4 million, respectively.

NOTE I COMMITMENTS AND CONTINGENCIES Allegheny and PPGL are members of certain insurance programs which provide coverage for property damage to members'uclear generating plants.

Allegheny's portion of the facilities at SSES is insured against property damage losses up to

$110 million under these programs.

Allegheny is also a

member of an insurance program which provides coverage for the cost of replacement power during prolonged outages of nuclear 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

$1.9 million.

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NOTES TO FINANCIAL STATEMENTSContinued ALLEGHENY ELECTRIC COOPERATIVE, INC.

NOTE I COMMITMENTS AND CONTINGENCIESContinued Allegheny's public liability for claims resulting from a nuclear incident is currently limited to

$ 65 million under provisions of the Price-Anderson Act (Act).

Allegheny is protected against this potential liability by a combination of commercial insurance and an industry retrospective assessment program.

In the event of a nuclear incident at any of the facilities owned by others and covered by the Act, Allegheny could be assessed up to

$1 million per incident, but not more than

$ 2 million in a calendar year in the event more than one incident is experienced.

The Act is scheduled to expire in August

1987, and Congress is considering several proposals to amend the Act.

Management is unable to predict what action Congress might ultimately take regarding the Act and what effect such action might have on Allegheny's potential liability.'he Board of,Directors has approved construction of a hydroelectric generation facility and purchase of equipment for a p'roject to reduce peak power demand (Load Management Project).

Financing for these projects has been arranged with REA ($48.8 million) and CFC ($3.2 million).

At October 31, 1985, project costs of the hydroelectric generation facility were

$1.4 million, drawdowns of loan advances were

$265,000, and total construction costs are estimated to be

$41.5 million.

NOTE J SUBSEQUENT EVENT On December 27, 1985,

$10.5 million in Pollution Control Revenue Bonds were issued by an Industrial Development Authority on Allegheny's behalf.

The Bonds are subject to purchase on demand of the holder and remarketing on a "best efforts" basis.

The proceeds will be used to retire existing REA loans.

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Ernst &Whinney 300 Locust Court 212 Locust Street Harrisburg, Pennsylvania 17101 717/232-7575 Allegheny Electric Cooperative, Inc.

Harrisburg, Pennsylvania The audited financial statements of the Cooperative and our report thereon are presented in the preceding section of this report.

The information presented hereinafter is for purposes of additional analysis and is not required for a fair presentation of the financial position, results of operations, or changes in financial position of the Cooperative.

Such information has been subjected to the auditing procedures appli,ed in our examination of the financial statements and, in our opinion, is fairly stated in all material respects in relation to the financial statements taken as a whole.

Harrisburg, Pennsylvania January 20, 1986 I

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SCHEDULES OF NONOPERATING RENTAL INCOME (EXPENSE)

ALLEGHENY ELECTRIC COOPERATIVE,IN'ear Ended October 31 1985 1984 In Thousands INCOME:

Rental-building Rental-parking 669 47 716 656 47 703 EXPENSES:

Utilities Payroll and employee benefits Management and leasing fees Office and administrative expenses Maintenance and repairs Real estate taxes Insurance Interest Depreciation Loss on property disposal NET NONOPERATING RENTAL EXPENSE 139 38 21 5

75 136 34 197 134 779 63 S

129 39 21 12 99 133 30 198 166 44 871 168 SCHEDULES OF ADMINISTRATIVEAND GENERAL EXPENSES ALLEGHENY ELECTRIC COOPERATIVE, INC.

Year Ended October 31 1985 1984 (In Thousands)

Office supplies Travel, conventions, and meetings Payroll and employee benefits Legal, auditing, and engineering Association membership dues Experimental and general research Board meetings, directors'ees, and travel Penn Lines I

Information programs Rent Payroll taxes Insurance Insurance SSES Miscellaneous 122 78 541 478 71 361 102 87 192 66 46 19 804 37 110 97 919 940 83 279 79 82 113 120 58 16 632 25 TOTAL ADMINISTRATIVEAND GENERAL EXPENSES 3,004 3,553 I

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