ML18040B247
| ML18040B247 | |
| Person / Time | |
|---|---|
| Site: | Susquehanna  |
| Issue date: | 12/31/1988 |
| From: | Campbell R, Keiser H PENNSYLVANIA POWER & LIGHT CO. |
| To: | Murley T Office of Nuclear Reactor Regulation |
| References | |
| PLA-3191, NUDOCS 8905020179 | |
| Download: ML18040B247 (90) | |
Text
. AC~I"ELERATED Dl BU'H 0- t DEMON STR ON SYSTEM
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REGULATORY INFORMATION DISTRIBUTION SYSTEM (RIDS) gjA1/dY ACCESSION NBR:8905020179 FACIL:50-387 Susquehanna DOC.DATE:
Ste'am Electric
&~~&- NOTARIZED: NO .
Station, Unit 1, Pennsylva DOCKET 05000387 I
50-388 Susquehanna Steam Electric Station, Unit 2, Pennsylva 05000388 AUTH. NAME AUTHOR AFFILIATION CAMPBELL,R.K. Pennsylvania Power & Light Co.
RECIP.NAME RECIPIENT AFFILIATION R
SUBJECT:
"PPGL Annual Rept 1988." Allegheny Electric Cooperative,Inc I f'nancial stateme ts G. 890427 encl.
DISTRIBUTION CODE: M004D COPIES RECEIVED:LTR J TITLE: 50.71(b) Annual Financial Report ENCL $ SIZE: 7 D S
I NOTES:LPDR 1 cy Transcripts. 05000387 LPDR 1 cy Transcripts. 05000388 l RECIPIENT COPIES RECIPIENT COPIES ID CODE/NAME LTTR ENCL ID CODE/NAME LTTR ENCL PD1-2 PD 1 1 THADANI,M 1 0 INTERNAL: AEO 1 1 AEOD/DSP/TPAB- 1 1 01 1 1 EXTERNAL: LPDR -1 1 NRC PDR 1 1 NOTES: 2 2 R
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NOTE TO ALL "RIDS" RECIPIENrS.
S PIZASE HELP US 10 REDUCE WASTE! CDNZACr 'IHE DOCUMEMr COKCROL DESK, ROOM Pl-37 (EXT. 20079) TO ELIK2QTE KRR KQK FRCH DIPHUBUTION LISTS FOR DOCUMENIS YOU DON'T NEZD!
TOTAL NUMBER OF COPIES REQUIRED: LTTR 9 ENCL 8
Pennsylvania Power 8 Light Company Two North Ninth Street ~ Allentown, PA 18101 ~ 215/7706151 .
Harold W. Keiser Senior V/ce President-Nuclear 215/770.4194 gPR 2'l 1989 Dr. Thomas E. Murley Office of Nuclear Reactor Regulation U.S. Nuclear Regulatory Commission Washington, D.C. 20555 SUSQUEHANNA STEAM ELECTRIC STATION ANNUAL FINANCIAL REPORT Docket Nos. 50-387 PLA-3191 FILE R41-2A and 50-388
Dear Dr. Murley:
/
In accordance with 10CFR50.71(b), enclosed is the 1988 Annual Report for Pennsylvania Power & Light Company. Also enclosed is the 1988 Annual Financial Report including certified financial statements for Allegheny Electric Cooperative, Inc. covering the period November 1, 1987 through October 31, 1988.
Very truly yours, N 4 I E, h$
jt 1
H. W. Keiser Attachments cc: NRC Document Contro3 Desk (original)
NRC Region I Mr. G.S. Barber, NRC Sr. Resident Inspector Mr. M.C. Thadani, NRC Project Manager
0 u H I
1
IRCMNSYLV@,II'8'4 'tl Oo PIQ I LH@MF CooNIN@,MY "We know our strategy is sound. It has been tested. We know we'e well poised for the '90s."
REPORT 1988 8905020i79 88i23i PDR ADOCK 05000387 PDC
~cm p6< f i((
o oo . -Ri~~o To meet our customers'ngoing needs for economical reliable electric service in ways that merit the trust and confidence of the public.
o I o .. Q(oOphgQ 0 s a Maintain the prices that customers pay for PP&L electric service significantly below the average price of electricity paid by Pennsylvania and other regional customers, and over the long term, hold increases in the average price of PP&L electric service below the rise in the general rate of inflation.
~ Achieve a quality of customer service that is among the best when compared with other major electric utilities.
~ Achieve excellence in the safe, reliable and efficient operation and support of our nuclear units that results in national recognition for having one of the best nuclear operations in the country.
~ Hold peak growth rate to a level that permits us to defer the need for additional central. station generation into the 21st century.
Contents ~ Achieve and maintain a return on average common equity that places Highlights PP&L in the top quartile of Salomon Brothers 100 Electric Utilities.
Chairman's Letter 2
~ Achieve and maintain a double A bond rating.
Keiser Interview 6
~ Maintain a level of availability for our generating plants that is in the Kenyon Interview 7 top quartile of similar plants in the United States.
Year In Review 8 t Financial Review 18 a Meet applicable safety, public health and environmental standards construction, operation and maintenance of our facilities.
Financial Statements 25 Notes to Financial
~ Achieve a safety record that is the best among comparable electric Statements utility companies.
Selected Financial ~ Maintain an employee compensation structure that is consistent with and Operating Data overall corporate performance and that recognizes individual Shareowner and Investor contributions.
Information 46 ~ Keep PP&L's delivered price for bituminous coal below the median of Officers and Directors 48 the regional comparison group of utilities.
Cover: Annual Meeting:
Tbe quotation front Chairman See page 46 for details regarding Robert K Cantpbell s letter to PAL's 1989 annual meeting to shareoiuners sets tbe tone for this be beld April26 in Scranton, Pa.
report and for PAL operations into tbe next decade. Tbe photo of iver. Campbell on page 2 was taken in PAL's Susquehanna nuclear plant control rootn training simulator during a visit to tbe facility. Don't miss tbe new look of PAL vehicles on tbe back cover.
i
1987-1988 1988 1987 % Change 1986 rating Data (in thousands)
Total Energy Sales, Kilowatt-hours...... 33,766,133 32,205,298 4.8 3o,424,7o4 System Energy Sales, Kilowatt-hours (a) . 27,946,511 26,336,906 6.1 25,085,948 Interchange Power Sales, Kilowatt-hours 11,304,024 13,o14,796 (131) 11,280,546 Electricity Generated, Kilowatt-hours ... 44,290,213 44,561,913 (o.6) 41,510,755 Generating Capability, Kilowatts ... ~... 7,479 7,499 (o.3) 7,519 Winter Peak Demand, Kilowatts,....... 5,523 5,591(b) (1 2) 5,154(b)
Financial Data (in thousands)
Operating Revenues $ 2,213,903 $ 2,090,244 5.9 $ 2,190,128 Operating Income $ 605,051 $ 590,637 2.4 $ 597,529 Net Income $ 332,042 $ 3o2,461 9.8 $ 300,108 Common Dividends Declared......... $ 207,193 $ 200,003 3.6 $ 192,241 Common Equity $ 2,049,831 $ 1,969,971 4.1 $ 1,915,649 Capital Provided by Investors....... .. ~ $ 5,547,932 $ 5,582,757 (o.6) $ 5,715,823 Construction Expenditures $ 308,876 $ 258,534 19.5 $ 285,212 Construction Work in Progress......... $ 177,333 $ 141,960 24.9 $ 224,426 Property, Plant and Equipment Net.... $ 6,841,584 $ 6,767,214 1.1 $ 6,732,084 Total Assets $ 7,524,648 $ 7,457,346 0.9 $ 7,413,105 Per Common Share Earnings $ 3.73 $ 3.32 12.3 $ 3.10 Dividends Declared $ 2.76 $ 2.68 3.0 $ 2.58 Market Price (c) . $ 36~W $ 33 9.5 $ 36'h Book Value (c) . $ 27.23 $ 26.26 3.7 $ 25.71 er Information turn on Average Common Equity ......,... 13.86% 12.78% 8.5 12.11%
mes Interest Earned Before Income Taxes ... 2.65 2.62 1.1 2.69 Number of Customers (c) . 1,122,628 1,097,518 23 1,o73,146 Common Shares Outstanding (c) ............ 75,248,455 74,972,322 o.4 74,512,797 Number of Common Shareowners (c) ~.... ~ ~ ~ 137,450 141,843 (31) 147,611 Number of Employees (c) . 8,306 8,301 0.1 8,339 (a) Excludes conuactual sales to other utilities.
(b) Winter peaks mere reached early in the subsequent year.
(c) At year end.
Where the PP8rI. Income Dollar Went in 1988 204 Net Cost of Energy 184 Other Operation 104 Maintenance Se Depreciation 16< Taxes 134 Interest 124 Dividends 3t Earnings Reinvested Ircconce llcciclrles revencles, orl>n'ncocne anrl Ibe allocc'ance forfnnrls crserl rlcrrlng corcsrrcrcrlon.
t was a good year for Sales and Earnings PP&L In fact, 1988 Because of our aggressive n was the best year in keting and economic develop our history. Kilo- efforts along with extreme weath-watt-hour sales, er conditions experienced during revenues, earnings and dividends the year our service-area electric were at their highest level ever. sales were up 6.1 percent com-These indicators reinforce our pared to 1987. Our residential belief that the strategies we put in sales led the pace for an increase place a few years ago are sound of 7.6 percent and commercial and serving us well. As we posi- sales were up 6.4 percent, both re-tion ourselves for the 1990s, it is flecting a weather-related boost. In-appropriate to reaffirm to you the dustrial sales climbed 4.3 percent.
kind of company we want to be. These increased sales figures reflect aggressive marketing efforts by PP&L people in the face of strong competition from other energy sources. A continuing healthy economic climate in Central Eastern Pennsylvania helped sustain these higher sales figures. Particularly noteworthy is the sales increase of 14.1 percent for steel manufacturers. This is an encouraging sign after many years of decline earlier in the decade.
nn Including our contractual sal to other electric utilities, total tric energy sales were up about percent nearly 1.6 billion kilo-watt hours over 1987.
Strong sales growth, along with cost-containment initiatives and refinancing high-cost securities at a lower cost, boosted our earnings per share to their highest. ever Our goal is to be the best electric level of $ 3.73 per share 41 cents utility in the country. We see our better than a year ago.
commitment to marketing, cost containment and operating excel-lence as the keys to our success Marketing and in the '90s. Economic Development We plan to stick to the basics We surpassed our marketing which have led to our past suc- and economic development goals cesses. We plan for PP&L to grow handily for 1988. Substantial por-and we will work to increase the tions of the increase in sales for value of your investment by doing the year are directly attributable to what we do best. I will review our the marketing programs we have long-term strategy with you later in in place.
this letter. First, though, I'd like to We continued to dominate the review our 1988 record. residential market in our service
a as 78 percent of all new Regulatory Policies Act passed by centralized control of generating ling units were all-electric. Congress in 1978. We have not and transmission systems. This onnected more than 2,000 backed away, however, from our could lead to chaotic system opera-new off-peak heating systems and commitment to supply to our tion. The ability of a utility or an converted nearly 300 systems from customers the lowest-priced en. integrated power pool to provide fossil-fuel to off-peak electric heat. ergy available therefore we will reliable service would be seriously Our goal of helping to bring not pay more for power from non- hampered. We believe this would jobs to our service territory was utility generators than is required not be in the best interest of cus.
bettered by almost 50 percent as by law and regulation. tomers or investors. We are making more than 14,500 net new jobs We intend to be very diligent in our opposition known in public were created in Central Eastern our efforts to see that every quali- hearings and in other forums.
Pennsylvania. fying facility complies with all Our power engineers faced the contractual and legal obligations Operating Performance competition from fuel and equip- set forth for them to sell power in Our generating plants in 1988 continued the kind of perfor-mance that keeps them consist-ently among the very best in the Industry.
Of particular importance as measurements of our performance "We see our commitment were the reviews in 1988 by the Institute of Nuclear Power to marketing, cost contain- Operations and the Nuclear Regulatory Commission. Both of these evaluations of operations at ment and operating excel- our Susquehanna nuclear plant concluded that the units were lence as the keys to our being run responsibly, conserva-tively and safely.
success in the '90s." INPO awarded the plant its .
highest possible rating and the NRC gave its highest rating in 9 of 11 areas examined and its second-highest rating in the remaining two areas. Both organizations characterized the units as among ment suppliers for proposed co. our service area. We intend to the best-run in the nation.
generation facilities in a number compete vigorously in the market- These kinds of reports give us of areas. Their expertise in prepar- place to assure our customers the renewed confidence in the dedica-ing analyses of true costs and their best value for their energy dollars. tion to excellence among the PP8'cL attention to customer needs We are carefully monitoring employees who maintain and resulted in no customer-owned efforts underway to restructure our operate our nuclear facilities.
co-generation projects being built industry. Of particular concern are The two units at Susquehanna in PP&L's service area in 1988. proposals which would allow combined to generate 14.3 billion Our position on non-utility access to a utility's transmission kilowatt-hours of electric energy in generation projects in our service system for mandatory special- 1988 eight percent above our area has not changed. We are interest wheeling of power to and forecast amount. Unit 1 operated required to purchase output from from large customers and non- at a capacity factor of 91.2 percent, non-utility electric generators utility generators. generating 8.4 billion kilowatt-whose facilities qualify under We believe this special-interest hours 14 percent above the provisions of the Public Utility wheeling would lead to loss of expected amount.
For 120 consecutive days The ability of PP8:L to provide mits deferring the from mid-summer through the fall of new central-station const'ion economical and reliable electric both nuclear units operated service and the ability of PAL to generating plants into the constantly, breaking the station remain a financially strong com- next century.
record by more than 40 days. pany go hand-in. hand. Financial This corporate strategy is critical Our fossil-fueled and hydroelec- strength derives from making to the future mell-being of the tric plants also operated at peak effective use of all the resources company and to our ability to carry performance in 1988. They gener- we have. out our mission.
ated a combined total of 31.4 Our key resources, second in billion kilowatt-hours. The 14 coal- importance only to PP8:L people, Marketing and oil-fired units had a combined are our central-station generating The essential element of how equivalent availability rating of 83.8 and transmission facilities. They we are going to meet the prob-percent almost two percent cannot be economically dupli- lems and challenges of the '90s is above the goal for the year. Oper- cated or replaced in today's world. by maintaining our competitive ating equivalent availability was 92.5 percent.
Equivalent availability is a standard industry measure of the percentage of time a unit is avail-able to operate at its rated capa-city. Operating equivalent avail- "We know many chal-ability excludes time down for planned outages.
As with our nuclear units, this lenges face us in the '90s.
kind of performance puts our fossil-fuel-fired units among the Our strategies must be very best in the industry. National data shows a 76.1 percent average flexible enough to adjust equivalent availability for a unit mix similar to PP8cL's.
This kind of superior operating to change."
performance allowed us to sell about 11 billion kilowatt-hours of energy to other regional utilities last year, resulting in economic benefits for PP8:L customers Maintaining these resources in top edge. Our strategy was formulated amounting to about g0 million.
operating condition is a key PP&L as we completed construction of Poised for the '90s- priority. our big Susquehanna nuclear units Wise use of these facilities and put them into service in the Strategy Overview requires a marketing strategy early- to mid.'80s. As we came out In reviewing our corporate designed to match customer use of our building phase and entered business strategy for the 1990s, we of electric power to the operating our operational phase it was quite should first look at our basic characteristics of our bulk power clear we mere going to have to corporate mission. It is: "To meet supply system. be an aggressive marketing com-our customers'ngoing needs Effective marketing pro- pany. Now we are in the last year for economical and reliable grams willguide our energy of the '80s. We know our strategy is electric service in ways that sales growth rates to assure a sound. It has been tested. We know merit the trust and confidence steadily improving revenue me're well poised for the '90s.
of the public." stream while simultaneously Our aggressive marketing and As owners of PAL you want to limiting our peak demand economic development programs see the company grow in value. growth rate to a level that per- continue to be successful. That is
i ested to by the growing sales, employing our facilities and our look more specifically at our ue and jobs statistics for people in the most effective way Susquehanna generating strategy
. This success comes to us in possible. That's how we'l keep and our marketing strategy spite of some very tough compe- our costs under control. through the perspectives of the tition from oil and gas. Higher senior executives who are revenues are essential for us to Operational Performance responsible for these areas.
continue to hold the line on prices Objectives Subsequent issues of our annual which feeds back into making The third element of our report will highlight other senior certain we can meet our marketing officers and other strategies.
strategy has to do with how effec-objectives.
tively we achieve our operational Higher sales are necessary for objectives. It encompasses the LookingAhead increased earnings. Increased Of course, we know that just approaches we are taking to assure earnings will help keep us from because we have strategies in that our central-station generating filing for higher rates. We an- place, it does not mean that the plants will continue to produce nounced in 1985 that we had an 1990s will unfold for us exactly as relatively low-cost electrical energy objective not to file for higher we plan them to. We know many well into the 21st century.
base rates for the balance of the The strategy is dual-pronged in challenges face us in the '90s. Our
'80s. We know full well we'e that it includes both nuclear- and strategies must be flexible enough going to make that objective, and fossil-fueled plant elements. to adjust to change. We also know we have a target of moving that With the completion of our two we have good people in place to objective into the '90s. It is a Susquehanna nuclear units we help meet the vagaries of a chang-measure of our strategic success achieved the fuel diversity we ing world. We look at many indi-that our rates are slightly lower deemed essential to carrying out cators to help us chart our perfor-now than they were four years ago. mance in that changing world.
Our marketing and economic our long. term strategy. In 1988, our coal-fired plants generated Those indicators show we are out-development people are recog-about 60 percent of the power we performing our competitors. We ized as among the very best in intend to continue doing so.
produced. Our nuclear units pro.
country. The skills we are Your ongoing confidence and vided 29 percent, and our oil-fired eloping in marketing are going units produced about 10 percent, support of PP&L are also important to be even more essential as we elements of our success. We thank and 1 percent came from our go out into the future. It is an hydroelectric units. you for that and pledge to continue ongoing requirement that we be The basic premise underlying to work hard to be worthy of it.
in a position to effectively meet our customers'eeds. We are our production strategy for the Susquehanna plant is that it will be Respectfully submitted, applying electro-technology to operated in such a way that we factories and homes throughout never compromise public or our service territory and we know that at PP&L the customer has to employee safety. And it will be operated and maintained so that it be number one.
generates the maximum amount Robert K Campbell of power for which it is capable. March 1, 1989 Cost Containment Recognizing their status as Another key element of our irreplaceable resources, the main strategy is cost containment. We thrust of our fossil-fueled. plant have a big job to do at PP&L We production strategy is to work very don't expect to reduce our costs hard to continue achieving while we'e increasing our busi- consistent equivalent availability ness and increasing the value of for our units of 80 percent or the company. But, we recognize better which will in turn keep that we must alter functions, PP&L among the best in the change our organization, and industry.
constantly reassess whether we are The interviews which followwill
PPRL Nuclear Department Supports Corporate Strategy By Striving For Operational Excellence arold Keiser, 45, is We are constantly finding ways senior vice president- to operate, modify and maintain Nuclear, and a our equipment for the long haul member of the com-J and we are spending the pany's Corporate money necessary to make these Management Committee. He has ~1/i f improvements.
been with PP&L for eight years, Question: You ntentioned tbe during which time he served as importance of outage perfonn-superintendent of the Susque- ance. 1P/oat does that mean?
hanna nuclear plant. He has a master's degree in nuclear engi- Keiser: Outage performance ingg means managing activities when a neering, is a veteran of the U.S.
nuclear navy and was a licensed unit is down for maintenance or senior reactor operator. He joined refueling as well as we do when the plant is running at full power.
PP&L with several years of nuclear engineering and management By reducing outage durations to a minimum, while maximizing experience with another utility.
accomplishments when a unit Question: How does the Nuclear of service, we are contributi'ut Departntent contribute to achiev- Harold Keiser to high unit availability. That the PAL corporate strategy? means we have to closely manage Keiser: Our mission is to operate a scheduled outage to assure that and maintain the Susquehanna ourselves. Meeting regulatory all work is performed safely, is plant so that it generates the maxi- requirements is not necessarily technically correct and is done mum amount of power without sufficient. We must clearly com- right the first time. Each activity to compromising public or employee municate our standards, monitor be accomplished is carefully safety. performance and hold ourselves planned. Manpower, equipment accountable for the results. In and material for the activity are Question: How do you achieve everything we do, we strive to pre-staged for maximum that? achieve "operational excellence" effectiveness.
Keiser: Key ingredients are plant not just be "good enough."
performance, personnel perform- Question: How do you bacht up ance, periodic assessment and Question: Do these standards such ambitious performance outage performance. Most impor- apply to plant perfonnance and objectives?
~naintenance also? Keiser: Most important is our tant, though, are our thoroughly trained, dedicated and knowledge- Keiser: Plant performance is wide network of support people, able people. They are essential to dependent on the proper opera. both on-site and at our General the safe, efficient and reliable tion, maintenance and repair of Office. The company is fully com-operation of Susquehanna. individual components. mitted to providing the human Ifwe are to continue producing resources required to safely operate Question: What standards do low-cost electricity well into the the plant with an availability factor these employees aim for? 21st century, we have to rely on among the best in the nation. These Keiser: Ifwe want to be recog- long-range maintenance plans. We resources encompass a variety o nized as one of the best nuclear have both preventive and predic- disciplines and skills engine utilities in the United States, we tive programs in process to iden- ing, licensing, fuels, legal, proct.
have to set high standards. First tify action needed to achieve long- ment and administrative, in addition and foremost we must satisfy term reliable plant performance. to operating.
To Division Operations People, Customer Service Is Number One and Marketing Is A Personal Commitment ruce D. Kenyon, Question: Llectricity costs money.
45, is senior vice People aren't likely to use nrorejust president-Division because we rvant therrr to. How do Operations and a you increase sales under those member of the circumstances?
Corporate Management Commit- Kenyon: Our challenge is to help tee. During his 12 years with PP8:L our customers find increased appli-he has headed the company's con- cations of electric energy. Our struction field forces and nuclear marketing strategy capitalizes on support services. In 1980 he became the unique properties of electricity.
vice president-Nuclear Operations It is a precisely measurable, ex-and advanced to senior vice presi- tremely versatile and controllable dent in charge of the Nuclear form of energy whose value to cus-Department in 1985. He has been tomers for most applications far head of Division Operations since exceeds its cost. This value lies in April 1988. the ability of electric energy to im-prove productivity in business or stion: First of all, what is industry, to provide a more health-Division Operations? Bruce Kenyon ful and safe working environment, to reduce overall energy costs, and Kenyon: Essentially the depart- to enhance living standards.
ment is made up of all the field forces and associated support to be committed to excellence in people who provide direct service the performance of his or her in- Question: PAL bas plenty of to our customers. Included are dividual part of the organization. power to sell now, but does it rnake line crews, meter readers, cus- sense to keep selling ifthat leads to tomer service representatives and a need for expensive nerv plants?
our marketirtg and economic Question: Then every Division Kenyon: While keeping unit costs development employees. Division Operations employee contributes to down by generating more is clearly Operations makes up about 35 PAL's corporate goals? in our customers'est interest, a percent of company employees. Kenyon: Yes, they do. We just comparable increase in the peak couldn't compete effectively with- demand growth rate is not. Our Question: Wbatisyour out their commitment and dedica- marketing programs are designed department's purpose or mission? tion to meeting our customers'eeds.
to help mitigate the growth of our In everything they do, these peak demand. We have identified Kenyon: Our long. term commit- those applications that contribute ment to provide quality electric people have an opportunity to, in service is literally our reason to some way, contribute to our mark- heavily to our peak demand and eting strategy. That, in a nutshell, we are offering incentives or op.
exist.
involves increasing kilowatt-hour tions to customers who can shift sales to our customers so we can their use patterns. The same goes Question: Can you take that achieve the lowest kwh unit cost, for new customers. We recognize own to a personal level? and enhancing the economic that growth in peak demand is an yon: Every person in Division prosperity of our service area by inevitable part of increasing sales, rations contributes to deliver- providing options and choices for but we are being successful in ing low.cost, reliable power to our customers that best meet their holding down the rate of growth customers. Each one is expected needs for electric service. in peak demand.
he following month- zation services for low-income observed by Nuclear Regulato by-month review families. Commission (NRC).
provides highlights ~ More than a foot of snow in ~ Institute of Nuclear Power of what made news late-January storm downs Operations awards highest at PP8cL during 1988 power lines leaving up to possible rating to Susquehanna For a detailed review of the com- 150,000 customers out of after two-week, on-site evalua-pany's financial condition and a service. Crews moved from less tion of nuclear plant operations.
discussion of the results of 1988 affected areas to help restore Fewer than 10 of the nation's operations, please see the informa- services. Eighty-two crews from 66 nuclear plants are in the tion beginning on page 18. Potomac Electric Power Co., "best" category.
New York State Electric 8c Gas ~ Quarterly common stock Corp., and West Penn Power dividend increased from 67 to JANUARY Co. arrive to help. 69 cents per share in recogni-
~ Agreement reached for sale of tion of increased shareowner
~ PAL customers set new winter 6.6 percent of electrical output investment and improved peak demand record of of PP8cL's Susquehanna nuclear earnings.
5,591,000 kilowatts during frigid weather. Pennsylvania-New power plant to Baltimore Gas and Electric Co. for 10 years Jersey-Maryland (PJM) power starting in 1991. Contract re- MARCH pool customers also reach new places a similar sales agreement winter peak of 35,738,000 kilowatts.
with Atlantic City Electric which expires at that time. ~ Susquehanna Unit 2 shut down
~ Pennsylvania State Senate pre- for its second refueling, ending sents citation to company for its continuous operating run of energy education program now FEBRUARY 314 days bettering PP8cL in use in 90 percent of PAL's record by more than 100 days.
service. area school districts. ~ Annual nuclear emergency drill ~ PP8cL sells $ 125 million of n
~ PP8cL's funding for 1988 Winter held for Susquehanna nuclear first mortgage bonds to the Relief Assistance Program plant. Employees earn high public through underwriters t (WRAP) set at $ 3 million. The marks for their reaction to un- yield 9.3 percent. Funds used to program provides free weatheri- folding scenario in exercise retire short. term debt issued to PPM. Service Area Profile
,Pennsylvania Power 8: Light Co.,
based in Allentown, Pa., provides electric service to more than 1.1 nton million homes and businesses S
5 throughout a 10,000-square-mile Wllllamsiaort +5 g wtlrtes rrarre f f
area in 29 counties of Central Eastern Pennsylvania. Principal llaaleton Central Division cities in the PP8cL service area are nethle em uarrisburg Dia~sion ~8 Allentown, Bethlehem, Harrisburg, Allentoarn Lancaster Dhision Hazleton, Lancaster, Scranton, Lehlgh Division r arrlsburg 8 Wilkes-Barre and Williamsport.
Yonhem Division Lancaster Susqueitanna Dia~sion ps
rovide interim financing for mpany's capital requirements.
P&L named one of four final- Marketing and Economic Development ists for 1987 Edison Award.
Nomination for Edison Electric he company completed its fifth year of aggressive Institute utility.of. the-year marketing and economic development activities with award recognizes the corn.
the strongest-growth year in its history. The following pany's marketing and economic highlights provide a measure of how well PP&L development achievements. marketing employees are meeting the competitive challenges from other energy suppliers and how well the company's economic development activities are helping to attract industry and jobs to Central Eastern Pennsylvania.
~ PP&L reports on one of the best ~ Energy sales rose to their highest level ever 33.8 billion kilowatt-hours. Of that total, 27.9 billion kilowatt-hours were sales years in its history at the com-pany's 68th annual meeting at to PP&L customers, an increase of 6.1 percent over 1987.
the F. M. Kirby Center for the ~ 5.8 billion kilowatt-hours were sold to other utilities through Performing Arts in Wilkes-Barre. contractual arrangement with PP&L
~ More than 862 million kilowatt-hours in annualized new sales were attributed to aggressive PP&L marketing and economic development activities. Of that total, 396 million kilowatt-hours of new sales were recorded in the industrial and commercial sales
~ PP&L marketing employees win categories and 99 million kilowatt-hours in the residential market.
nine of possible 13 awards in About 367 million kilowatt-hours of sales resulted from economic Pennsylvania Electric Associa- development activities by PP&L and its local, regional and state tion (PEA) Industrial and allies.
ommercial Awards program. ~ More than 2,000 new off-peak, all-electric thermal storage heating
'he awards recognize outstand-systems were installed in PP&L's service area.
ing work to help customers use electricity in ways that will ~ Owners of over 14,000 new single-family homes and townhouses make them more productive chose electric heat for their new dwellings.
and more competitive in their ~ More than 14,500 net new jobs (additional jobs from new or fields. expanded business and industry, less jobs lost) were recorded in a The company sponsors a day- PP&L's service area. This exceeds the 1988 company goal of 10,000 long industrial waste manage- net new jobs by nearly 50 percent. This brings the total to more ment seminar in Hazleton to than 40,000 net new jobs in PP&L's service area for the last five help its industrial customers years.
review current waste generation and management issues.
New Lilowatt-bour sales and
~ Four ofpossible six places in PEA net newjobsin PAL's service residential marketing competi- area bave climbed dratnatic-tion awarded to company resi- ally since tbe coinpany initi- QO dential marketing representatives. ated its aggressive tnarketing W,674 a Systematic Assessment of and econontic development Licensee Performance (SALP) progrants five years ago.
report by the NRC gives the Susquehanna nuclear plant the 8,563 highest possible rating in nine 258 227 of 11 categories, and the second-6,543 highest mark in the remaining 5,739 5 f16 two areas. C3 MillionKwh
'or the third year in a row, C3 Yet Nev Jobs Pennsylvania Public UtilityCom. 1984 1985 1986 1987 1988 mission (PUC) study shows
JULY 1988 Safety Report PP&L customers'ummertimi peak-demand record of 4,694,000 kilowatts set in 1987 mployee safety continued to be a fundamental is broken twice in July as high objective in all of PP&L's operations for 1988. The best air conditioning use caused by expression of that objective is the "Take Care" safety hot, humid weather pushes theme adopted in 1988. It appeared on banners, caps, demand peak to 4,757,000 visors and stationery. The theme combined personal, kilowatts. PJM customers also group and company safety efforts in a way that stresses highest set new regional power pool human values. demand record.
These efforts were marred by two tragic work-related employee Members of Local 1520 of the fatalities the first job-related deaths since 1980. But, by focusing on International Brotherhood of personal responsibility and "watching out" for each other, PP&L Electrical Workers (IBEW), rep-employees continued a long. term trend of fewer injuries and fewer resenting 230 PP&L workers in motor vehicle accidents. the Scranton area, ratify a new These positive accomplishments highlighted 1988:
three-year labor agreement with
~ A decrease in work-related lost-time accidents. the company. The agreement
~ A decrease in no-lost-time accidents. provides benefit improvements and 4 percent wage increase in
~ Continued decrease in motor vehicle accident frequency. Over the the first two years, and 3.5 per-past five years, chargeable motor vehicle accidents have decreased cent in the third year of the by 42 percent. new contract.
~ 13 work groups reached million.hour safety milestones.
West Penn Power Co. sends 29
~ Nuclear Department employees amassed three million work-hours crews to PP&L service area to without a lost-time accident. help restore service after vio The ultimate goal of our safety prognms is to make PP&L employees thunderstorms disrupt service.
among the safest people in the electric utility industry. to 140,000 customers.
AUGUST PP&L with the lowest customer percent. Proceeds used to retire ~ Hot weather air conditioning complaint rate of all the state' short term debt issued to provide load causes summer peak-electric utilities. The company interim financing for the com- demand record set a month was also a leader in reducing pany's capital requirements. earlier to be broken three times service termination for non- ~ Regional power reserves in August. New peak is payment of electric bills. strained as tempentures soar 5,004,000 kilowatts. PJM de-and demand for electricity rises mand also climbs to new dramatically to meet air condi- record of 43,073,000 kilowatts.
JUNE tioning load. This is the first in A new three-year labor agree-a series of 18 instances during ment with the 5,000 members
~ The Energy Information Center the long, hot summer that mem- of IBEW Local 1600 across the associated with the Susque- ber utilities of the PJM power PP&L system is ratified with hanna nuclear plant enters its pool set various records for terms similar to earlier agree-second decade of operation summer peak loads. ment with Local 1520.
having reached more than s Susquehanna Unit 2 completes ~ Thirty crews and support 200,000 people through its its second refueling and returns personnel are sent to Rockville, programs. to service. About one-fourth of Md. area to help restore service
~ PP&L sells $ 125 million of first the unit's 764 fuel assemblies to Potomac Electric Power C mortgage bonds to an under- are replaced and more than customers after severe thun writing group which offers 4,000 maintenance and inspec- storms lash the Baltimore-them to the public to yield 9.73 tion tasks are completed. Washington area.
lentown area hit hard by
'olent thunderstorms isrupting power to 15,000 customers. Crews from other Director/Officer Changes company divisions help restore service. he following changes occurred among the board of directors and ofFicers of the company. Additional SEPTEMBER biographical information on the directors and oAicers of the company, including ages and years of service, can be found on page 48.
~ PJM companies breathe collec-tive sigh of relief as sweltering ~ Frances R. I-iesselbein, national executive director of Girl Scouts of summer of 1988 fades into the the U.S.A., New York City, retired from the board on April 27, 1988, record books. The June, July, the date of the annual meeting. She had been a director since 1981.
August period proved to be ~ Harold S. Mohler, a director since 1978, died at his home in the hottest since PP&L began Hershey, Pa. on Aug. 31, 1988. He was the retired president and tracking such data. chairman of the board of Hershey Foods Corp.
~ Dr. Ruth Leventhal, provost and dean and professor of biology at Penn State Harrisburg, The Capital College, was elected to the OCTOBER board effective Nov. 1, 1988.
~ PP&L Industrial and Commer- ~ Edwin H. Seidler, vice president-Engineering & Construction, cial engineers earn six of nine ended a 39-year career with PP&L when he retired Feb. 1, 1988.
"place" awards and six honor- E Leon L Nonemaker, senior vice president-Division Operations, able mentions in annual retired April 1, 1988, after a 40.year career with PP&L Edison Electric Institute Cus- ~ Bruce D. Kenyon, senior vice president-Nuclear, succeeded tomer Services and Marketing Nonemaker as senior vice president-Division Operations efFective wards program. The awards April 1, 1988. As a senior officer, he continues to serve as a epresent top entries among member of the Corporate Management Committee.
more than 200 submissions from more than 40 electric ~ Harold W. Keiser, vice president-Nuclear Operations, succeeded utilities nationwide. Kenyon as senior vice president-Nuclear effective April 1, 1988. He also became a member of the Corporate Management Committee
~ The 5,000th service area at that time.
teacher is trained in the use of ~ ClifFord L Jones, president of the Pennsylvania Chamber of PP&L lesson packages on ener- Business and Industry, headquartered in Harrisburg, was elected to gy at Harrisburg workshop. the board effective Feb. 1, 1989.
The program, begun in 1981, deals with all aspects of ener-gy and is packaged in speci-ally designed and tested lessons for kindergarten through 12th grades. agreement with Baltimore Gas related adjustments and a and Electric Co. for purchase of decrease in the fuel adjust-capacity and energy from the ment clause earlier in the NOVEMBER Susquehanna plant. year. Thc increase applies to the 17 municipalities and one
~ Severe weather in %Vest Penn investor-owned utility that buy Power Co. service area dis- DECEMBER bulk power from PP&L for rupts power supply to cus- resale to their own customers.
tomers. PP&L sends eight ~ FERC allows $ 3.5 million rate PUC grants PP&L request for crews and supervisory per- increase for wholesale depreciation and tax-related sonnel to help in restoration customers. Even after the 9.7 changes, effective Jan. 1, 1989, ffort. percent increase, rates are tltat lowers retail rates by Federal Energy Regulatory about $ 400,000 lower than at $ 13.6 million or about three-Commission (FERC) accepts beginning of 1988 due to tax- quarters of 1 percent.
"Iwas a little skePtical I when saw PP&L's cost analysis for a beat punip and thermal storage system. I'e been I
so pleased with my low bNs, though, find myself
'selling'be system to friends."
Homeowner John Lyter, Carlisie, Pa.
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t Meetl:king Cexnyetktken Heed.-On s PAL residential consultant Erich Klein first heard it, the Walnut Court residential develop.
ment in Carlisle, Pa., was all but sewed up for natural gas. Service lines were nearby and ready to go. The developer really wanted gas Klein bypassed the developer and personally contacted nine people who had purchased property there. He pointed out that they had nothing to lose by letting him do a cost analysis to show how PP8cL's Four Star Home concept could save them money on their energy bills.
This aggressive personal contact paid off. So far, five homeowners half of those in the development decided to go all-electric in a "gas" development. End result: an additional 100,000 kilowatt-hours of annual sales for PP8cL Erich Klein's sales savvy was recognized by a first-place award in a 1988 Pennsylvania Electric Association marketing competition.
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8MDlIF 'FQ846//COo M881 QCOk!L IIAQlKIF058 "We tntttally constdered propane for our aroma cbemtcals production process. PAL suggested an alternative electric system that bas Increased our efffc(ency, provtded cost benefits and safer operation."
Charles Haas, Plant Mgr., Quantum Chemical Corp..Emery Division Prcdjvcing IFragmnces HeetrieaHy ower engineer Frank Gaida makes it clear that p when it comes to fragrances he hardly knows the difference between expensive perfume and room freshener. But he does know energy.
Gaida helped engineer heat transfer, distillation vacuum and space heating applications for the Quantum Chemical Corp. facility in Lock Haven, Pa., and did cost analyses that showed the benefits of electric operation.
Chemicals from the plant are used in compounding fragrances that scent soaps, shampoos, perfumes and other consumer products.
Gaida's aggressive marketing stance, combined with his engineering prowess, showed that all that is required to take advantage of the special qualities of electricity in industrial applications is an open mind and innovative engineering. The end result means about 1.2 million kilowatt-hours of annual sales for PP8cL and a first place award in the Edison Electric Institute's annual marketing competition for Gaida.
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ICOoljOoMGC D>IVv'I60olPMIM'f "What first impressed me was PP&L's persistence in showing me literally downs ofpossible sites for my new pEant. Then we sat down and looked at tbe electric I
rates and knew Pd found a new home."
Mare Solda, Vice President, Jamison Plastic Corp.
H" HeelI:6C KateS Clinch Zhe Deal t took three years of site-selection and planning meetings between Jamison Plastic, PP&L's economic development employees and the company's local, county and state allies. But, persistence paid offwith a new 100,000-square-foot industrial facility in Allentown, Pa., and 150 new jobs and 10 million kilowatt-hours in added annual electric sales.
It started with a consultant's request in 1984 for electric rate comparison data. Company employees then made a "cold" call at Jamison's Long Island headquarters. Preliminary figures showed a 40 to 50 percent energy cost reduction might be realized by locating a new plastic products plant in PP&L's service area.
The difFicult job of finding just the right site involved a team effort between PP&L and a number of outside agencies. What clinched the deal was PP&L's electric rates and a chance for lower operating costs and higher profit margins.
E9ID EEOC
@HltkISCOAL !RIVvo ll%%
Earnings and Dividends Review of the Company's Financial Per Share Condition and Results of Operations Dollars lprv'ero his review provides a discussion of the Company's consoli-dated financial condition and results of operations.
Additional information on these matters is set forth in the financial statements, schedules and notes on pages 25-41 and the selected financial and operating data on pages 42-45.
Results of Operations Earnings per share of common stock were $ 3.73 in 1988, $ 3.32 in 1987 and $ 3.10 in 1986. The 1988 earnings are the highest in the history of the Company, representing an increase of 41 cents, or 12.3%, over 1987. The improvement in earnings can be attributed to strong sales 1.00 performance, reflecting a continuing healthy economic climate, the effect of the Company's aggressive marketing and economic development programs and extreme weather conditions during the year. Weather in the first quarter of 1988 was much colder than in 1987, resulting in increased sales for heating. An cxtendcd period of abnormally hot 8< 8g 87 summer weather, which resulted in the high use of air conditioning, C3 Earnings pcr share boosted sales during the third quarter of 1988.
m Dividends declared In addition to increased sales, cost containment initiatives under-taken by the Company and the refinancing of high cost securities at a lower cost had a favorable impact on earnings growth.
Earnings for 1987 were reduced by about 10 cents per share due to nonrecurring accrual for the refund in 1988 of approximately $ 17.5 million collected from customers in prior periods for certain taxes and Common Stock Book Value energy costs.
vs. Market Price (Year End)
Dollars per Share Electric Energy Sales fi0 System, or service area, sales were 27.9 billion kwh in 1988, an increase of 1.6 billion kwh, or 6.1%, over 1987. This increase was primarily attributable to strong economic conditions, aggressive marketing and economic development programs and extreme weather conditions experienced during the year. Sales to residential customers increased 699 million kwh, or 7.6%, in 1988. Sales to commercial and industrial cus-tomers increased 475 million kwh, or 6.4%, and 361 million kwh, or 4.3%,
respectively. The Company estimates that system energy sales were 20 about 551 million kwh higher in 1988 than in 1987 due to the impact of weather in both years.
The success of marketing and economic development activities is measured by estimating the annual level of additional energy sales that 10 are expected to be realized from these programs. These additional sales will generally be realized over at least a two year period, and possibly longer, ifa major commercial or industrial customer is involved. The annual level of additional sales expected from these programs was 296 0
Si 85 86 87 88 million kwh in 1986, 640 million kwh in 1987 and 862 million kwh in 1988. The goal for 1989 is annual sales of 900 million lvvh.
Cl Book nlue per share C3 Marker price per share The Company currently anticipates weather-normalized system sales of approximately 28.5 billion kwh for 1989, an increase of 1.1 billion or 3.8%, over 1988 weather-normalized sales, and a 0.5 billion kwh, or 1.8%, increase over actual 1988 sales.
Total electric energy sales, which include contractual sales to other
'ties, were 1.6 billion kmh, or 4.8%, higher in 1988 than in 1987. Sources of Energy
>tractual sales to other utilities represent the energy sold to Atlantic City Electric Company from the nuclear-fueled Susquehanna Steam Billions of Ku b Electric Station and the energy sold to Jersey Central Power 8: Light Company from all of the Company's generating units. These contractual sales mere about 5.8 billion kmh in both 1988 and 1987.
I0 ll Operating Revenues Total operating revenues increased $ 123.7 million, or 5.9%, in 1988 over 1987. The higher revenues mere due primarily to increased customer usage and recovery of higher fuel and energy costs. The increased revenues were partially offset by lower costs reflected in billings for contractual sales to other utilities and reductions for lower fedcnl 20 income tax expense resulting from the Tax Reform Act of 1986 (Tax Act).
Details of changes from the prior year in operating revenues are shown in the schedule below. 10 Tariffs subject to Pennsylvania Public UtilityCommission (PUC) jurisdiction accounted for approximately 85% of the Company's revenues in 1988. The remaining 15% of revenues are regulated by the Federal 0 sl 85 86 87 88 Energy Regulatory Commission (FERC). The FERC also regulates inter-change power sales which are classified as a credit to operating expenses. M I lydro and purdtased power Billings to customers under PUC jurisdiction include: (i) base nte Cl Oil fired generation charges; (ii) supplemental charges or credits for energy costs and state Kl Nuclear generation Cl Coal fired generation taxes over or under the levels included in base rates and (iii) effective anuary 1, 1987, an Income Tax Adjustment (ITA) credit which reduces il customers'ills for the effect of lomer income taxes resulting from Tax Act. See Note 2 to Financial Statements for information concerning the roll-in to base ntes for certain state taxes and the ITA credit. The last base rate increase for PUC jurisdictional customers went Disposition of Energy into effect in April 1985.
Billings to FERC jurisdictional customers, excluding contnctual sales Billions o Kub to other utilities, include base rate charges and a supplemental charge for 50 fuel costs over the level included in base rates. The last base rate increase for FERC jurisdictional customers went into effect in December 1988.
Contnctual capacity and energy sales to other utilities are regulated by 40 the FERC and are made at a price covering the Company's cost of service, including a return on investment.
Changes in Operating Revenues 1988 1987 1986 20 (Blillio>rsof Dollars)
Electric Base nte increases. $ 80.4 Roll-in ofstate taxes into base ntes... $ 92.5 10 State tax adjustment surcharge...... $ 16.5 (123.5) (12.4)
Income tax adjustment credit....... (67.1) (55.2)
Recovery of fuel and energy costs... 93.0 (50.0) 53.3 Change in customer usage ......... 86.1 52.0 34.7 0 SI 85 86 87 88 Contnctual sales to other utilities... (10.6) (16.7) 594 23 Cg Company usc, line losses and other Other 5.5 0.7 m Interchange power sales Total electric 123.4 (100.2) 217.7 Cl Contractual sales to other utilities er . 0.3 0.3 ~s.~ Cl Sptem sales to customers Total . Itas.'7 $~99.9) $ 212.1
Generating Capability Net Cost of Energy December 31, 1988)
'At In 1988, the net cost ofenergy was $ 455 million, an increase of $
million over 1987. The increase primarily was due to higher sales of electricity to customers which resulted in less energy being available for Coal fired Steam Stations 49.6% interchange power sales and to increased purchases by interconnected Nuclear Steam Station 22.6% utilities of energy under separate agreements with other utilities. The Oil fired Steam Station 19.6% Company sold 1.7 billion kwh less to interchange companies in 1988 at a CTs & Diesels 6.5%
I lplfoeiectric 1.7%
slightly lower average price resulting in an $ 85 million reduction in interchange power sales.
Output from the Company's generating units in 1988 was 44.3 billion kwh, about the same as in 1987. The Company's 90% share of the Susque-hanna station's output was 12.9 billion kwh in 1988, a 3.1% decrease from 1987, resulting from more refueling outage time. However, generation was 26.6 billion kwh for coal-fired units and 4.2 billion kwh for oil-fired units in 1988, increases of 0.5% and 2.2%, respectively, over 1987.
Coal-fired and nuclear units had capacity factors of 73.1% and 77.7%,
respectively, in 1988, slightly above expectations. In 1989, the average capacity factor of coal-fired units is expected to be slightly higher than in 1988, while the capacity factor of the two Susquehanna nuclear units is expected to be lower due to refueling outages planned for each unit.
Total fuel expense in 1988 was lower than 1987 due to less nuclear
'Excluding the effect of firm purchases generation and lower unit fuel cost for oil-fired generation. The average and sales.
cost of fuel per kwh generated by oil-fired generation was 14.6% lower in 1988 than in 1987.
Other Operation, Maintenance and Depreciation Other operation and maintenance costs increased $ 42.1 million, o 7.4%, over 1987 primarily reflecting increases in wages and benefits, Cost of Long Term Debt additional Susquehanna operating costs, higher marketing expenses and and Preferred an increase in the provision for uncollectible accounts.
and Preference Stock itllllions of Dollars Higher depreciation in 1988 reflects the normal annual increase associated with the method of depreciating the Susquehanna station and the depreciation of new property, plant and equipment placed in service.
See Notes 2 and 3 to Financial Statements for information concerning changes in depreciation for the Susquehanna station to comply with new accounting rules and changes in the depreciable lives of certain fossil-fired plants.
Income Taxes 200 Total income tax expense declined from $ 275 million in 1986 to
$ 229 million in 1987 and $ 188 million in 1988, primarily reflecting the lower federal income tax rate included in the Tax Act. The lower tax expense is being reflected in lower rates to the Company's customers.
The Tax Act repealed the investment tax credit. At December 31, 1988, approximately $ 86 million of unused investment and payroll-based tax credits were available to offset future federal income tax liabilities.
0 84 85 86 87 88 Cl Dhidends on preferred Lower Financing Costs and preference stock The retirement of high-cost securities during the years 1986-1988 wi M Interest on long term debt cash generated from operations and refinancing efforts has allowed th Company to reduce interest on long-term debt and dividends on prefen
d preference stock to $ 320 million in 1988 from $ 383 million in 1985.
The Company will continue to take advantage of opportunities to Sources of Capital re high-cost securities, thereby reducing its cost of capital. However, future retirements of securities are not expected to occur at the same ,trillions of Dollars level as that experienced during the 1986-1988 period. As a result, the $ 1,200 substantial reduction in interest expense and dividends on preferred and preference stock experienced during the past few years is not expected to continue.
Capital Expenditure Requirements The schedule below shows the Company's actual capital expendi ~
tures for the years 1986-1988 and current projections for the years 1989-1991. Construction expenditures during the three years 1986-1988 totaled
$ 853 million and are expected to be about $ 966 million during the three years 1989-1991.
Capital Expenditure Requirements (a)
Actual 1986 1987 1988 Projected 1989 1990 1991 0
(llfillionsof Dollars) st sS s6 s7 ss Construction expenditures Generating facilities ...... $ 150 $ 102 $ 126 $ 129 $ 131 $ 131
~ Other (principally capital tease obligations)
Transmission and ~ Outside finanring (sales of debt and distribution facilities.... 97 106 129 128 152 160 equity sccuritics)
Environmental ..........
~ ~ ~ ~ 9 21 26 16 5 5 ~ operations internal sources (principally from plus equity AFUDC Other . 29 30 28 39 34 36 less dividends) 285 259 309 312 322 332 uclear fuel owned and leased 65 40 46 46 54 53 Other leased property ...... 14 20 22 17 19 Capital Requirements Total. $ 364 $ 319 $ 368 $ 380 $ 393 $ 404
.trillions of Dollars
$ 1,200 (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 fluctuations, environmental regulations and other factors. Construction expenditures include AFUDC which is expected to be less than $ 20 million in each of 1,000 the years 1989-1991.
Financing During the three years 1986-1988, the Company sold about $ 1.0 billion of securities and also incurred $ 225 million of obligations under capital leases (primarily nuclear fuel). The Company's 1988 financing program involved the sale of $ 250 million of first mortgage bonds, the issuance of $ 10 million of common stock for the Employee Stock Ownership Plan, the early redemption of $ 159 million of first mortgage bonds and $ 13 million of preferred stock and the scheduled retirement of
$ 21 million of first mortgage bonds and $ 44 million of preferred and preference stock The Company also prepaid $ 25 million of secured term notes and subsidiary companies retired $ 6 million of maturing notes. st sS s6 s7 ss Details of cash flows from financing activities during 1986-1988 are set ~ Other rth in the Consolidated Statement of Cash Flows on page 28. Cl Security rctlrcmcnts Internally generated funds during the next three years are expected m Construction, nuclear fuel and other teased property essentially meet the Company's needs for construction expenditures,
Return on retirement of long-term debt and preferred and preference stock sinkin Average Common Equity fund requirements, which are expected to aggregate about $ 1.3 billion (12 illonths Ended Epoch Quarter) Outside financing, including the sale in January 1989 of $ 125 million it~cenl principal amount of first mortgage bonds, will be undertaken primarily to l5 provide funds for the reduction of short-term debt or the carly retirement of certain high-cost securities. The exact amount, nature and timing of additional sales of securities will be determined in the light of market conditions and other factors.
10 Financial Condition The Company's overall financial condition continued to improve in 1988. Earnings per share of common stock, at $ 3.73, have increased to the highest level ever. The Company earned a 13.86% return on average common equity. The allowance for funds used during construction (AFUDC), a non-cash credit to income, accounted for only about 5 percent of earnings. AFUDC is expected to remain low for an extended period of time as the Company does not plan to construct any new central-station generating plants for at least the balance of this century.
The ratio of the Company's pre-tax income to interest charges 0 increased slightly from 2.6 times in 1987 to 2.7 times in 1988. Thc Si 85 86 87 88 Company has increased common stock dividends from an annual per share rate of $ 2.56 in 1985 to $ 2.76 in 1988, while decreasing the payout ratio from 96% in 1985 to 74% in 1988. The market price per share of common stock was $ 36.125 at the end of 1988, or $ 8.90 per share above book value. The ratio of the market to book value of common stock was 133%, an increase from 126% at the end of 1987.
Future financial condition and earnings performance could be adversely affected by many factors including unanticipated increases in future capital requirements, the level of economic activity in the Company's service area, future action by legislative bodies or rate-regulatory agencies and additional costs incurred in connection with the Company's program of phasing out aAiliated coal. mining operations.
8@fDDIFR Oolt I'HIIAIICHN,LDD4,11'4,.
Independent Auditors'eport 23 Management's Report on Responsibility for Financial Statements........... ~ 24 Financial Statements Consolidated Statement of Income . 25 Consolidated Balance Sheet 26 Consolidated Statement of Cash Flows 28 Schedule of Taxes . 29 Schedule of Capital Stock 30 Schedule of Long Term Debt . 32 Consolidated Statement of Earnings Reinvested 33 Notes to Financial Statements. 34 Selected Financial and Operating Data 42 Shareowner and Investor Information 46 8880>IN'158D>158'II'llD>6'II'OON'N'Oo1R'II'eleitte Haskies+Sells One World Trade Center Certified Public Accountants New York, New York 10(H8 To the Shareowners and Board of Directors of Pennsylvania Power 8c Light Company:
We have audited the accompanying consolidated balance sheets of Pennsylvania Power 8: Light Company and its subsidiaries as of December 31, 1988 and 1987 and the related consolidated statements of incomeearnings reinvested, and of cash flows for each of the three years in the period ended December 31, 1988. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, 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 audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Pennsylvania Power & Light Company and its subsidiaries at December 31, 1988 and 1987 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1988 in conformity with generally accepted accounting principles.
As discussed in Notes 1 and 12 to the consolidated financial statements, in 1988 the Company changed its consolidation policy to conform with Statement of Financial Accounting Standards No. 94 and in 1987 the Company changed its method of accounting for pension costs to conform with Statement of Financial Accounting Standards No. 87.
February 3, 1989
Mk,MkIN1IM'ii" @ QÃ8 Ool8V Management's Report on Responsibility for Financial Statements The management of Pennsylvania Power 8: Light Company is responsible for the preparation, integrity and objectivity of the financial statements and all other sections of this annual report. The financial statements were prepared in accordance with generally accepted accounting principles and the Uniform System of Accounts prescribed by the Federal Energy Regulatory Commission, and management believes that the statements are not misstated due to material fraud or error. In pre-paring the financial statements, management makes informed estimates and judgments of the expected effects of events and transactions based upon currently available facts and circumstances.
The Company's financial statements have been audited by Deloitte Haskins & Sells, independent certified public accountants, whose report with respect to the financial statements appears on page 23 of this report. Deloitte Haskins 8: Sells'ppointment as auditors has been ratified by the share-owners. Management has made available to Deloitte Haskins 8c Sells all the Company's financial records and related data, as well as the minutes of shareowners'nd directors'eetings. Manage-rnent believes that all representations made to Deloitte Haskins 8c Sells during its audit were valid and appropriate.
The Company maintains a system of internal controls designed to provide reasonable, but not absolute, assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use or disposition and the prevention and detection of fraudulent finan-cial reporting. The concept of reasonable assurance recognizes that the cost of a system of internal controls should not exceed the benefits derived and that there are inherent limitations in the effec-tiveness of any system of internal controls.
Fundamental to the control system is the selection and training of qualified personnel, an organizational structure that provides appropriate segregation of duties, the utilization of written policies and procedures and the continual monitoring of the system for compliance. In addition, the Company maintains an internal auditing program to evaluate the Company's system of internal control for adequacy, application and compliance. Management considers the internal auditors'nd Deloitte Haskins 8c Sells'ecommendations concerning its system of internal control and has taken actions which are believed to be cost-effective in the circumstances to respond appropriately to these recommendations. Management believes that the Company's system of internal control is adequate to accomplish the objectives discussed in this report.
The Hoard of Directors, acting through its Audit Committee, oversees management's responsi-bilities in the preparation of the financial statements. In performing this function, the Audit Com-mittee, which is composed of six independent directors, meets periodically with management, the internal auditors and the independent certified public accountants to review the work of each.
Deloitte Haskins 8c Sells and the internal auditors have free access to the Audit Committee and to the Board of Directors, without management present, to discuss internal accounting control, auditing and financial reporting matters.
Management also recognizes its responsibility for fostering a strong ethical climate so that the Com-pany's affairs are conducted according to the highest standards of personal and corporate conduct.
This responsibility is characterized and reflected in the Company's Standards of Integrity, which is publicized throughout the Company. The Standards of Integrity addresses: the necessity of ensuring open communication within the Company; potential conflicts of interest; compliance with all appli-cable laws, including those relating to financial disclosure; and the confidentiality of proprietary in.
formation. The Company maintains a systematic program to assess compliance with these policies.
onsolidated Statement of Income VSYLVANIAPOWER R LIGHT COMPANYAND SUBSIDIARIES 1988 1987 1986 (Tbousands of Dollaa)
Operating Revenues (Note 2) $ 2,213,903 $ 2,090,244 $ 2,190,128 Operating Expenses Operation Fuel 624,332 636,872 634,292 Power purchases. 1117920 101,552 90,379 Interchange power sales ~281,501 (366,556) (289,422)
Net cost of energy . 454,751 371,868 435,249 Other. 388,846 352,161 352,328 Maintenance 224,368 218,959 206,315 Depreciation (Note 3) . ~ ~ ~ ~ ~ ~ ~ ~ ~ 234,283 222,655 211,492 Deferred depreciation (Note 3 ) ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ (47,7s4) (52,427) (56,1o6)
Income taxes (Note 6) . 191,245 235,689 282,380 Taxes, other than income .. 163,143 150,702 16o,941 1,608,852 1,499,607 1,592,599 Operating Income 605,051 590,637 597,529 Other Income and (Deductions)
Allowance for equity funds used during construction (Note 7) . 4,923 3,473 (1,443)
Income tax credits (Note 6) 3,570 7,136 6,909 Other net 2,210 (1,4oo) 4,521 10,703 9,209 9,987 come Before Interest Charges 615,754 599,846 6o7,516 Interest Charges long. term debt...., .. ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 267,430 278,732 298,358 Short-term debt and other . 26)892 30,728 25,242 Allowance for borrowed funds used during construction and interest capitalized (Note 7), . ~10,610 (12,075) (16,192) 283,712 297,385 307,408 Net Income. 332,042 302,461 300,108 Dividends on Preferred and Preference Stock . 52,177 54,426 69,057 Earnings Applicable to Common Stock..... 279,865 $ 248,035 $ 231,051 Earnings Per Share of Common Stock (a) . 3.73 $ 3.32 $ 3.10 Average Number of Shares Outstanding (thousands) 75,071 74,644 74,513 Dividends Declared Per Share of Common Stock . ~ ~ ~ ~ ~ ~ ~ ~ 2.76 $ 2.68 $ 2.58 (a) Based on average number of shares outstanding.
See accompanyAig Sclmdules and Notes to Financtal Statements.
Consolidated LIGHT PENNSYLVANIAPOWER Balance Sheet at December 31 8'c COMPANY AND SUBSIDIARIES Assets 1988 1987 CTbonsands of Dollars)
Property, Plant and Equipment Electric utility plant in service at original cost $ 7,590,085 $ 7,362,661 Accumulated depreciation (Note 3) ... (1,787,284) (1,599,179)
Deferred depreciation (Note 3) ......... 253,922 206,518 6,056,723 5,970,000 Construction work in progress at cost 177,333 141,960 Nuclear fuel owned and leased net of amortization (Note 9)........ 303,620 334,315 Other leased property net of amortization (Note 9) ............... 78,770 82,445 Electric utility plant net 6,616,446 6,528,720 Other property nct of depreciation, amortization and depletion (1988, $ 114,054; 1987, $ 103,214)... 225,138 23s,494 6,841,584 6,767,214 Investments Associated company at equity, 20,171 20,171 Other at cost or less. ~... 44,526 28,531 64,697 48,702 Current Assets Cash and cash equivalents (Note 1)....................... 6,091 Special deposit for purchase of nuclear fuel .
Accounts receivable (less reserve: 1988, $ 14,765; 1987, $ 8,051) 4,051 S,~i Customers . I I
~ ~ ~ ~ ~ ~ \ I ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 179,631 173,801 Interchange power sales . 29,656 29,243 0 ther 12,305 9,038 Unbillcd revenues . 68,836 63,473 Fuel (coal and oil) at average cost. 106,324 148,555 Materials and supplies at average cost 35,137 36,724 Common stock held for dividend reinvestment plan at cost (No'te 8) o ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 9,524 9,893 0 ther .. 32,476 28,025 4s4,031 512,674 Deferred Debits Utilityplant carrying charges net of amortization (Note 1) .......... 27,826 28,237 Unamortized debt expense and reacquired debt costs............... 49,768 37,735 Mine development costs net of amortization . 20,034 25,290 0 ther ~ ~ 0 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 0 ~ ~ 36,708 37 494 n4 ss6 128,756
$ 7,524,64s $ 7,457,346 See accompanying Schedules and Noles lo Financial Statements.
Liabilities 1988 1987 PTbotrsands of Dollars)
Capitalization Common equity Common stock $ 1,334,424 $ 1,325,525 Capital stock expense (12,672) (12,937)
Earnings reinvested . 728,079 657,383 2)049,831 1,969,971 Preferred and preference stock With sinking fund requirements 438,290 495,590 Without sinking fund requirements 231,375 231,375 Long-term debt 2,599,840 2,558,360 5,319,336 5,255,296 Current Liabilities Commercial paper 93,000 168,000 Bank loans and other notes . 108,652 130,321 Long-term debt due within one year 26,944 29,140 Capital lease obligations due within one year (Note 9) .... ~.........
~ ~ ~ 74,275 84,142 Recounts payable . 113,536 102,941 axes accrued . ~ 29,387 40,110 Interest accrued . 70,950 70,760 Dividends payable . 64,434 64,286 Energy revenues to be refunded 70,652 42,327 Other 98,030 89,235 749,860 821,262 Deferred Credits and Other Noncurrent Liabilities Deferred investment tax credits (Note 6). 238,112 217,415 Deferred income taxes (Notes 6 and 14) 821,054 746,449 Capital lease obligations (Note 9) 298,531 331,064 Other 97,755 85,860 1,455,452 1,380,788 Commitments and Contingent Liabilities (Note 15).......
$ 7,524,648 $ 7,457,346 See accompanying Scbedtrles and Notes to Financial Statements.
10584%cokL 'Fk'iF@M@lt'F@
Consolidated4 LIGHT PENNSYLVhNIh POWER StatementhNDof Cash Plows SUBSIDIhRIES COMPhNY 1988 1987 198 (Thousands of Dollars)
Cash Flows From Operating Activities Net income ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ $ 332,042 $ 302,461 $ 300,108 Adjustments to reconcile net income to net cash provided by operating activities Depreciation ~ ~ ~ ~ ~ ~ 204i687 188,246 168,374 Amortization of property under capital leases . 8s,6ss 88,267 72,218 Deferred income taxes and investment tax credits .......... 101,944 148,683 221,599 Equity component of AFUDC ........................... (4,923) (3,473) 1,443 Change in current assets and current liabilities excluding cash Accounts receivable (10,210) (4,678) 5,212 Unbilled and refundable electric revenues . 22,962 69,338 (S8,316)
Materials and supplies 1,587 (4,'203) (3,806)
Fuel inventories .................................... 42,231 (2,901) 14,209 Accounts payable . 10,595 8,010 (4 734)
Accrued interest and taxes . (1o,'S33) (30,006) 9,725 0 ther,. \ 4,344 239 (14,091)
Other operating activities
~ ~ ~ ~ ~ ~ ~
net.... 9,194 (99) 17,978 Net cash provided by operating activities. 789,575 759,884 729,919 Cash Flows From Investing Activities Property, plant and equipment expenditures............. (341,577) (292,195) (352,239)
Proceeds from sales of nuclear fuel to trust 21,669 63,1S4 52,112 Proceeds from contract settlement ..., .. 8,730 8,5 Other investing activities net 1,609 6,238 (10,6 Net cash used in investing activities . ~(318,299 (214,073) (302,248)
Cash Flows From Financing Activities Issuance of long. term debt 250,000 520,000 Issuance of preferred stock ...... ~ ~.... ~... ~ ~ ~ ~ ~ ~ 150,000 100,000 Issuance of common stock 9,686 16,387 Retirement of long. term debt ......,... (210,295) (265,687) (331,917)
Retirement of preferred and preference stock............ (57,300) (129,649) (>>S,771)
Payments on capital lease obligations (89,123) (93,488) (75,165)
Dividends paid (259,223) (251,497) (270,050)
Net increase (decrease) in short. term debt (96,669) S4,733 (3,672)
Costs associated with issuance and retirement of securities. (17,461) (25,471) (51,933)
Other financing activities net . ~237 55 196 Net cash used in financing activities. ~470,622 (544,617) (428,312)
Net Increase (Decrease) In Cash and Cash Equivalents 654 1,194 (641)
Cash and Cash Equivalents at Beginning of Period........., S,437 4,243 4,884 Cash and Cash Equivalents at End of Period 6,091 $ 5,437 $ 4,243 Supplemental Disclosures of Cash Flow Information accompanying Cash paid during the year for Interest (net of amount capitalized) . $ 272o64 $ 296,744 $ 300,7 Income taxes............................... ............ ~ ~ ~ $ 95,494 $ 99,836 $ 36,6 See Schedules and Notes to Flnanclal Statements.
hedule of Tmres SYLVANIAPOWER LIGHT COMPANY AND SUBSIDIARIES tt$
1988 1987 1986 (Thousands of Dollars)
Income Tax Expense (Note 6)
Included in operating expenses Provision Federal $ 62,285 $ 63,468 $ 32,656 State ~ ~ ~ ~ ~ 27,328 23,680 28,111 89,613 87,148 6o,767 Deferred Federal 73,184 112,185 135,106 State 975 6,338 5,092 74,159 118,523 140,198 Investment tax credit, net Federal ... 27,473 30,018 81,415 191,245 235,689 282,380 Included in other income and deductions Provision (credit) Federal (3,139) (6,127) (5,249)
State ~743 (1,151) (1,646) 3,882 (7,278) (6,895)
Deferred Federal 301 (2o1) 6 State 11 343 (2o) 312 142 (14) 3,570 (7,136) (6,909)
Total income tax expense Federal . 160,104 199,343 243,934 State . ~ ~ ~ ~ 27,571 29,210 31,537
$ 187,675 $ 228,553 $ 275,471 Detail of deferred taxes in operating expenses Tax depreciation. $ 93,119 $ 107,249 $ 131,892 Reacquired debt costs ..................... ~ ~ ~ ~ ~ ~ ~ ~ 3,24s 5,801 (6,'5oo) 9,557 (2,'511)
Unbilied revenues ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ (S,142)
Other . ~24,066 11,973 1,26o
$ 74,159 $ 118,523 $ 140,198 Reconciliation of Income Tax Expense Indicated federal income tax on pre.tax income at statutory tax rate (1988, 34%; 1987, 39.95%; 1986, 46%) . ~276 704 $ 212 140 $ 264 766 Increase (decrease) due to:
State income taxes,.......... 19,310 19,478 19,299 Depreciation differences not normalized 10,227 10,258 8,987 Amortization of investment tax credit... (9,954) (8,477) (7,165)
AFUDC (Note 7) (1,674) (1,388) (5,222)
Other . ~6,930 (3,458) (5,194) 10,971 16,413 10,705 Total income tax expense $ 187,675 $ 228,553 $ 275,471 Effective income tax rate . 36.1% 43.0% 47.9%
Taxes, Other Than Income State gross fccclpts ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ t ~ ~ ~ ~ ~ ~ 0 t t ~ ~ ~ ~ ~
$ s3,847 $ 83,203 $ 79,242 State utility realty...,..., . 35,294 26,513 41,475 tate capital stock 23,379 21,827 22,789 ocial security and other... 20,623 19,159 17,435
$ 163,143 $ 150,702 $ 160,941 See accontpanying Notes to Financfal Statements
I'HMAMCHAL 'Fk'FitII58'F Schedule PENNSYLVANIAPOWER of Capital Stock 4 LIGEIT COMPANY AND SUBSIDIARIES at December 31 Outstanding 1988 1981 Shares Outstanding 1988 0
Shares Authorized (Tlmusands of Dollars)
Preferred Stock $ 100 par, cumulative (a)
Att 4/2%<v.
\ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 53,019 $ 53,019 530,189 629,936 Series. 481246 528 346 4,812,456 10,000,000 534,265 4 581,365 Preference Stock no par, cumulative (a) ............ 135,400 $ 145,600 1,354,000 5,000,000 Common Stock no par (a) ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ e ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ $ 1,323,653 75,248,455 85,000,000 Employee Subscriptions (employee stock ownership plan) e ~ ~ ~ ~ ~ ~ ~ 1 085 1,872
$ 1,334,424 $ 1,325,525 Details of Preferred and Preference Stock (b)
Optional Sinking Fund Redemption Provisions (c)
Shares Price Per Shares to be Outstanding Outstanding Share Redeemed Redemption 1988 1987 1988 1988 Annually Period
('Thousands of Dollars)
With Sinking Fund Requirements Series Preferred 6.875% (d) $ 5o,ooo $ 50,000 500,000 $ 106.88 100,000 1993-1997 7.00% (d).... 100,000 100,000 1,000,000 107.00 200,000 1993.19 7.375% (d) 50,000 50,000 500,000 107.38 25,000 1993.2 7.40% ...... 24,000 25,600 240,000 lo2.96 16,000 1989-20 7 75% ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 12,000 7.82% (d) . 50,000 50,000 500,000 107.82 100,000 1993-1997 7.927% (e) (f) ............... 15,000 15,000 150,000 125.00 30,000 1989-1993 8 00% ~ ~ ~ ~ ~ ~ 35,000 37,500 350,000 103.60 25,000 1989-2002
~ ~
8.00%, Second 2,000 4,ooo 20,000 100.00 20,000 1989 20,000 s.75% (d) . 4s,ooo 51,000 480,000 110.00 30,000 1989-2004 9.24% (d) ...............,... 43,890 49,890 438,900 103.00 30,000 1989-2003 Preference
$ 8.625 (f) . 20 400 30 600 204,000 None 102,000 1989-1990
$ 438,290 $ 495,590 Without Sinking Fund Requirements 4~6% Preferred .... 53 019 $ 53,019 530,189, $ 110.00 Series Preferred 3 35% ~ ~ ~ ~ ~ ~ 4,178 4,178 41,7s3 103.50 4.4o% 225878 22,878 228,773 102.00 4.6o% 6,300 6,300 63,000 103.00 s.6o% 22 237 22 237 222,370 104.00 9 00% ~ ~ ~ ~ ~ ~ ~ ~ ~ 7,763 7,763 77,630 104.00 Preference
$ 8.00 35,000 35,000 350,000 101.00
$ s.4o. 4o,ooo 4o,ooo 4oo,ooo 101.00
$ 8.70 40 000 40000 400,000 101.00 See accompanying Notes to Financial Statentents.
$ 231,375 $ 231,375 0
creases (Decreases) in Capital Stock (Tbottsattds of Dollars) 1988 198/ 1986 Shares Amount Shares Amount Shares Amount Common Stock issued under employee stock ownership plan............. 276,133 $ 9,686 459,525 $ 16,387 Series Preferred Stock 6.875% 500,000 50,000 7.00% . 1,000,000 $ 100,000 7.375% 500,000 50,000 7.'40%..................... (16,000) (1,600) (16,000) (1,'600) (16,000) (1,600) 7.75%........
7.82% .
(120,000) (12,000) (120,000) 500,000 (12,000) 50,000 (120,000) (12,000) 8 00% (25,000) (2,500) (25,000) (2,500) (25,000) (2,500) 8.00%, Second,...,,........ (20,000) (2,000) (20,000) (2,000) (20,000) (2',000) 8.25% .... ~ ~ . ~ .. ..
~ (200,'000) (20,000) (100,000) (10,'000) (100',000) (10,000) 8.75% . (30,000) (3,000) (30,000) (3,000) (30,000) (3,000) 9.24% . (60,'000) (6',000) (60,'000) (6,000) (30,000) (3,000) 10.75% (265,000) (26,'500) 11.00% . (260,000) (26,'000) 11.25%.................... (150,000) (15,000) 14.00% (340,000) (34,000)
Preference Stock
$ 8.625. (102,000) (10,200) (102,000) (10,200) (102,000) (10,200)
$ 11.00........... (323,492) (32,349) (50,000) (5,000)
$ 11.60. (500,000) (50,000)
$ 13.00. (149,705) (14,971) 13.00, Second .............
~ ~ ~ ~ ~ ~ ~ ~ ~ ~ (500,000) (50,000) 13.68. ~ ~ (500,000) (50,000)
$ 15.00. (500,000) (50,000)
Decreases in Preferred and Preference Stocks represent: i (i) the redemption of stock pursuant to sinking fund requirements, (ii) shares redeemed pursuant to optional redemption provisions, or (iii) shares reacquired through market purchases and subsequently cancelled (used to meet sinking fund requirements).
(a) Each share of preferred, preference and common stock entitles the holder to one vote on any question presented to any shareowners'eeting.
(b) The involuntary liquidation price of the preferred and preference stock is $ 100 per sharc, and the optional voluntary liquidation price is the optional redemption price per sharc in effect, except for the 4/i% Preferred and the $ 8.625 Series Preference Stocks which arc
$ 100 per sharc (plus in each case any unpaid dividends). Uquidation payments on preferred stock have priority to such payments on thc preference stock (c) The aggregate amount of sinking fund redemption requirements through 1993 are (thousands of dollars): 1989, $ 24,190; 1990,
$ 23,300; 1991, $ 13,100; 1992, $ 13,100; 1993, $ 55,600.
(d) On certain sinking fund redemption dates, additional shares may be redeemed up to the number of shares required to be redeemed annually.
(c) Effective April 1, 1988, the dividend rate was reduced from 11.00K to 7.927% pursuant to a one-time adjustment.
( f) Because certain federal income tax benefits have been lost to corporate holders of these stocks, the Company may be required to make indemnity payments suAicient to provide the holders with an agreed upon effective yield after federal income taxes. At December 31, 1988, the Company estimates that future indemnity payments would be about $ 3.3 million, most of which would be payable only after the stock is redeemed or is sold by the holders.
See accompanying /Votes to Financial Statements.
Schedule of Long-Term Debt at December 31 PENNSYLVANIAPOWER tk LIGHT COMPANY AND SUBSIDIARIES Outstanding 1988 1987 Maturity(b)
Company P'bonsands of Dollars)
First Mortgage Bonds (a) 16/2% o ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ $ 10,100 August 1, 1988 16 /2% e ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 10,400 September 1, 1988 12t/% ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 10,000 10,000 February 1, 1989 16t/2% .. 7,000 7,000 August 1, 1989 16t/% (c). 10,400 September 1, 1989 12 /s% e ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 10,000 10,000 February 1, 1990 16t/a% 8,500 8,500 August 1, 1990 16/a% (c). 10,400 September 1, 1990 'e) 12'/s% 10,000 10,000 February 1, 1991 16/% (c). 10,400 September 1, 1991 30,000 30,000 December 1, 1991 10,000 10,000 February 1, 1992 12'/s% 10i000 10,000 February 1, 1993 4 /8% 'to 1 3 /2% ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 590,000 340,000 1994-1998 7% to 9% 0 ~ 0 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 345,000 345,000 1999.2003 8'/4% to 93/4% 555,000 555,000 2004-2008 13i/s% (d) .. 125,000 2009.2013 9% to 12s/4% .. 625,000 625,000 2014-2018 First Mortgage Pollution Control Bonds (a) 5/s% Series A .... ~... ~.... ~..... 17,495 20,060 77/s% to St/e% Series C . 20,000 20,000 (e) 11'/4% to 11t/2% Series D 70,000 70,000 (e) 10s/e% Series E . 37,750 37,750 March 1, 201 10s/s% Series F 115,500 115,500 September 1, 2 9s/s% Series G 55,000 55,000 July 1, 20 2,526,245 2,455,510 Other Long-Term Debt Secured term notes (a) (f) (g) 75,000 100,000 March 31, 1991 Miscellaneous promissory notes 346 496 1989-1995 2,601,591 2,556,006 Unamortized (discount) and premium net .. ~21,511 (21,240) 2,580,080 2,534,766 Less amount due within one year 17,114 20,710 2,562,966 2,514,056 Subsidiaries Notes (f) (h) .. 46,704 52,734 1989.1996 Less amount due within one year ... ~ .. 9,830 8,430 36,874 44,304 Total long-term debt (i) ......... $ 2,599,840 $ 2,558,360 (a) Substantially all owned electric utilityplant is subject to the lien of the Company's first mongage. Ccnain electric utilityplant is also subject to the lien of a second mongage issued as security for term notes.
(b) Aggregate long term ~debt maturitlcs through~ 1993 arc (thousands of dollars): 1989,I $ 26,944;
~
~
~
~ I 1990,I $ 24%8; 1991,I $ 121,664; I~
) ~I 1992, $ 17355; 1993,
~ II ~
$ 17,339. hiaxlmum sinking fund rcquircmcnts aggregate $ 32.1 million through 1993 and may be met with property additions or retirement of bonds.
~ ~
~ ~
~<nployem'Accorarting for Pensions. Under this statement, net periodic pension cost is determined using the projected unit credit method, whereas pension cost for prior years was determined using a different actuarial method.
The Company also has a Supplemental Executive Retirement Plan (SERP) for certain management employees. Benefits are based on the employees'ervice and earnings as defined in the SERP. The SERP is a non.qualified plan under the Internal Revenue Code and has no advanced funding. Benefit payments are made directly by the Company to retired employees or their beneficiaries. At December 31, 1988, the projected benefit obligation was approximately $ 5.9 million.
Pension costs for 1988, 1987 and 1986 were $ 17.3 million, $ 17.4 million and $ 29.1 million, respectively.
Of these amounts, $ 10.9 million each in 1988 and 1987 and $ 18.7 million in 1986 were charged to operating expenses, and the balance was charged to construction and other accounts. The decline in pension cost in 1987 was principally attributable to adoption of the new accounting statement.
The components of the Company's net pension cost for 1988 and 1987 include (thousands of dollars):
1988 1987 Service cost benefits earned during the period . $ 23,510 $ 23,578 Interest cost 30,682 27,453 Actual return on plan assets (56,381) (21,365)
Net amortization and deferral . 19 528 (12,217)
Net periodic pension cost 8 17,339 8 17449
The funded status of the Company's plan was (thousands of dollars):
December 31 1988 1987 Fair value of plan assets $ 567,192 $ 509,500 Actuarial present value of benefit obligations:
Vested benefits . 285,417 244,991 Nonvested benefits 2,012 10,716 Accumulated benefit obligation 287,429 255,707 Effect of projected future compensation............... 140,238 132,533 Projected benefit obligation 427,667 388,240 Plan assets in excess of projected benefit obligation 139,525 121,260 Unrecognized transition asset (being amortized over 23 years) (94,915) (99,434)
Unrecognized prior service cost (591)
Unrecognized net gain . (42,030) (21,826)
Prepaid expense 1 989 $ None The weighted average discount rate and rate of increase in future compensation used in determining the 1988 actuarial present value of the projected benefit obligation were 7.5% and 6.4%, respectively. The expected long. term rate of return on plan assets was 7.0%. Plan assets consist primarily of common stocks, government and corporate bonds and temporary cash investments.
Subsidiary mining companies have noncontributory defined benefit pension plans covering substantially all non.bargaining, full time employees which are 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.
'ilie pension cost for non.bargaining employees together with contributions to the UMWA Health and Retirement Funds for 1988, 1987 and 1986 aggregated $ 3.8 million, $ 7.4 million and $ 6.9 million, respectivel 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 1988, 1987 and 1986 was $ 1.2 million, $ 3.7 million and $ 2.4 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 cost of these benefits for retired employees are generally recognized when premiums are paid. I iowever, the mining subsidiaries also include in an accrual for future mine closing costs an amount to pay for such benefits after mining operations have ended. The cost of retiree health and life insurance benefits recognized as expense by the Company and its subsidiaries was approximately (millions of dollars): 1988, $ 4.7; 1987, $ 3.6 and 1986, $ 4.1.
Jointly Owned Facilities At December 31, 1988, the Company individually or through a subsidiary owned undivided interests in the following facilities (millions of dollars):
Merrill Generating Stations Creek Susquehanna Keystone Conemaugh Reservoir Ownershi p Interest......... 90.00% 12.34% 11.39% 8.37%
Electric UtilityPlant in Service.... .. ~... . $ 3,869 $ 43 $ 43
~ ~ ~ ~
Other Property $ 20 Accumulated Depreciation............ 185 17 17 Construction Work in Progress.............. 28 1 1 Each participant in these facilities provides its own financing. The Company receives a portion of the total output of the generating stations 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 provides water during periods of low river flow to replace water from the Delaware River used by the Company and other utilities in the production of electricity.
Accounting for Income Taxes In December 1987, the FASH issued SFAS 96, Accorrnting for Income Taxes, which established new accounting rules that will change the manner in which income tax expense is determined for accounting purposes. Prior accounting rules utilized a deferred method while SFAS 96 utilizes a liability method under which deferred tax liabilities are recorded and adjusted for the effect of a cltange in tax law or rates. In De-cember 1988, the FASB delayed the effective date of SFAS 96 to fiscal years beginning after December 15, 1989.
It is expected that when the Company adopts SFAS 96 in 1990, an increase in the deferred tax liability will be recorded for tax benefits previously flowed through to customers and for other temporary tax diflerences. 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 Tax Act lowered the maximum corporate federal income tax rate from 46% to 34%, most entities when adopting SFAS 96 will be required to adjust their deferred income tax reserves to reflect the lower tax rate. However, the Tax Act essentially prohibits utilities from adjusting, to the 34% tax rate, certain deferred tax reserves related to depreciation. As a result, when the Company adopts SFAS 96, no substantial reduction in existing deferred income tax reserves is expected because of the lower federal tax rate.
Commitments and Contingent Liabilities The Company's construction expenditures are estimated to aggregate $ 312 million in 1989, $ 322 million in 1990 and $ 332 million in 1991, including AFUDC. See the section entitled Capital Expenditure Require.
ments on page 21 for additional information.
The Company is a member of certain insurance programs which provide coverage for property damage to members'uclear generating plants. Facilities at the Susquehanna station are insured against property dam.
age losses up to $ 1.7 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 specified conditions. Under the property 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, 1988 was about $ 15 million.
In 1987, the Nuclear Regulatory Commission (NRC) amended its regulations to require that nuclear power plant licensees obtain property damage insurance coverage of not less than $ 1.06 billion. The NRC regulations further provide that any proceeds of this insurance must be segregated and be used, first, to place and maintain the reactor in a safe and stable condition and, second, to complete required decontamination operations before any insurance proceeds would be made available to the Company or the trustee under the mortgage. Under these regulations, such requirements were to be incorporated in the Company's on. site property damage insurance policies for the Susquehanna station before October 5, 1988. The NRC, however, is in the process of revising its regulations to postpone the implementation of these requirements by 18 months. In the interim, the NRC has granted an extension for compliance under the existing regulations. The Company is unable to predict what effect the amended regulations may have at the time insurance proceeds would be paid.
The Company's public liability for claims resulting from a nuclear incident at the Susquehanna plant is limited to about $ 7.6 billion under provisions of The Price Anderson Amendments Act of 1988 (the Act),
which extended The Price Anderson Act to August 1, 2002. The Company is protected against this liabilityby a combination of commercial insurance and an industry assessment program. A utility's liability under the assessment program will be indexed annually for inflation and will be 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 December 1986, the Company redeemed at $ 100 per share $ 87.7 million of Preferred Stock representing all outstanding shares of the 10.75%, 11.00%, 11.25% and 14.00% Series Preferred Stock Several complaints ltave been filed in the United States District Court for the Southern District of New York by certain former holders of sltares of the 10.75%, 11.00% and 14.00% Series requesting a declaratory judgment that the Company's redemption of those three series breached the Company's contractual obligations to the plaintiffs and that (a) the Company is liable to pay plaintiffs amounts equal to the redemption premiums of $ 3.59 per share with respect to the 10.75% Series, $ 25 per share with respect to the 11.00% Series and $ 20 per share with respect to the 14.00% Series, and (b) in the alternative the redemption be rescinded and plaintifls be awarded damages in amounts to be ascertained. The Company believes that it was entitled to call the Preferred Stock for redemption at a price of $ 100 per share but cannot predict the outcome of the court proceedings.
At December 31, 1988, the Company had guaranteed $ 18 million of obligations of certain unconsoli ~
dated companies.
Selected Financial and Operating Data 1988 1987 1986 198 CONSOLIDATED OPERATIONS Income Items thousands Operating revenues $ 2,213,903 $ 2,090,244 $ 2,190,128 $ 1,977,981 Operating income . 605,051 590,637 597,529 536,115 Net income (a) . 332,042 302,461 300,108 290,613 Earnings applicable to common stock (a) ......... 279,865 248,035 231,051 199,327 Balance Sheet Items thousands (b)
Electric utility plant in service net............... $ 6,056,723 $ 5,970,000 $ 5,815,838 $ 5,776,687 Construction work in progress . ~... .. 1777333 141,960 224,426 161,684
~
Other property, plant and equipment net . ~...... 607,528 655,254 691,820 699,448 Total assets . 7,524,648 7,457,346 7,413,105 7,255,918 Long. term debt . 2,626,784 2,587,500 2,849,972 2,664,564 Preferred and preference stock With sinking fund requirements................ 438,290 495,590 475,239 691,010 Without sinking fund requirements............. 231,375 231,375 231,375 231,375 Common equity 2,049,831 1,969,971 1,915,649 1,905,700 Short-term debt .. 201,652 298,321 243,588 247,260 Total capital provided by investors . . ~.... ~......
~ 5,547,932 5,582,757 5,715,823 5,739,909 Financial Ratios Return on average common equity % (a)......... 13,86 12.78 12.11 10.42 Embedded cost rates (b)
Long. term debt % 10.15 10.31 10.53 11 23 Preferred and preference stock % ............. 7.66 7.77 833 10.02 Times interest earned before income taxes ~....... 2.65 2.62 2.69 2.28 Ratio of earnings to fixed charges total enterprise basis (c) 2.57 2.53 2.58 2.19 Depreciation as % of average depreciable property... 2.6 2.5 23 23 Common Stock Data Number of shares outstanding thousands Year-end 75,248 74,972 74,513 Average ~ ~ ~ ~ ~ ~ 75,071 74,644 74,513 Earnings per share (a)............. $ 3.73 $ 3.32 $ 3.10 Dividends declared per share .$ 2.76 $ 2.68 $ 2.58 $ 2.56 Book value per share (b) $ 27.23 $ 26.26 $ 25.71 $ 25.58 Market price per share (b) . $ 36X $ 33 $ 36th $ 28'/4 Dividend payout rate % (a) 74 81 83 96 Dividend yield % (d) . 7.70 737 7.30 9.81 Price earnings ratio (a) (d) . 9.61 10.95 11.39 9.76 ELECTRIC OPERATIONS Revenue Data By class of service thousands Residential $ 768,051 $ 737,066 $ 714,753 $ 634,669 Commercial 592,023 572,623 557,216 492,686 495,968 492,491 473,488 438,427 Other energy sales ~... ~ ~....... 75 507 74 228 74 047 64,223 System sales 1,931,549 1,876,408 1,819,504 1,630,005 Contractual sales to other utilities .............. 264 760 275 339 292 044 232 598 Total from energy sales billed ............... 2,196,309 2,151,747 2,111,548 1,862,603 Unbilled revenues net ...................... (18,187) (84,888) 52,344 ,78,545 Other operating revenues . 34 073 21 900 25 033 30,059 Total electric operating revenues............. $ 2,212,195 52 088,759 $ 2,188,925 $ 1,971,207 Average price per kwh billed cents Residential . 7.79 8.05 8.15 7.60 Commercial ~ 7.46 7.68 7.78 7.32 Industrial 5.64 5.84 5.93 5.55 Total for ultimate customers................ ~ 7.02 723 734 6.85 Total for all customers. 6.50 6.68 6.94 6.
Total for system sales . 6.91 7.12 7.25 (a) 1981 net income and earnings applicable to common stock include a nonrecumng credit related to an accounting change, while indicated financial ratios and common stock data for that year are computed excluding the nonrecurttng credit from earnings.
(b) Year end.
1983 1982 1981 1980 1979 1978
$ 1,564,542 $ 1,250,071 $ 1,221,379 $ 1,134,903 $ 886,727 $ 861,985 $ 799,018 418,689 300,563 236,43o 227,o44 180,782 194,026 179,379 318,903 296,011 278,886 244,077 179,759 182,198 149,035 226,758 210,173 210,572 183,182 120,384 133,532 107,365
$ 3,856,738 $ 3,842,826 $ 2,107,651 $ 2,049,418 $ 1,949,904 $ 1,881,006 $ 1,830,421 2,020,780 1,730,223 2,923,744 2,312,289 1,874,397 1,473,1s7 16104,989 733,002 670,239 582,740 496,739 394,003 346,263 324,078 7,231,058 6,744,iso 6,152,976 5,410,245 4,654,055 4,087,511 3,638,360 2,674,036 2,477,700 2,417,244 2,261,767 1,920,269 1,656,286 1,406,087 738,027 714,830 621,634 544,231 510,800 44i,4oo 312,000 231,375 231,375 231,375 231,375 231,375 231,375 231,375 1,896,987 1,767,949 i,643,695 1,435,437 1,250,717 1,113,441 982,368 278,652 351,194 324,664 321,481 162,315 101,884 200,720 5,819,077 5,543,048 5,238,612 4,794,291 4,075,476 3,544,3s6 3,132,550 12.30 12.29 13.60 12.74 10.38 12.91 11.47 11.11 10.98 10.80 10.84 10.71 9.32 8.17 9.94 9.66 9.41 8.93 8.49 8.43 8.39 2.24 2.20 1.94 1.79 1.92 2.42 2.51 2.o6 2.05 1.81 1.77 1.90 2.40 2.50 2.7 2.9 3,4 34 33 33 33 4,513 70,335 66,46i 5s,447 50,627 43,497 39,074 2,767 68,642 62,809 53,912 45,598 40,231 37,587
$ 3.12 $ 3.o6 $ 3.35 $ 3.17 $ 2.64 $ 3.32 $ 2.86
$ 2.4s $ 24o $ 2.32 $ 2.24 $ 2.12 $ 2.04 $ 1.92
$ 25.46 $ 25.12 $ 24.7i $ 24.52 $ 24.6s $ 25.57 $ 25.12
$ 25'/s $ 20'/s $ 21 $ 17t/s $ 15'/s $ 17'/4 $ 19t/6 80 79 70 72 82 62 68 11.00 10.48 11.95 13.34 12.01 10.38 9.00 7.24 7.4s 5.79 5.30 6.6s 5.92 7.46
$ 591,922 $ 529,911 $ 503,557 $ 4ii,66s $ 349,714 $ 341,987 $ 315,691 44i,65i 386,617 363,233 292,984 246,o24 232,610 2i6,787 411,533 367,950 347,726 295,006 245,513 244,265 224,209 59,526 47,275 47,731 39,4s4 2s,4so 27,664 26,652 1,504,632 1,331,753 1,262,247 1,039,142 869,731 s46,526 783,339 31,809 is,404 1,536,441 1,350,247 1,262,247 1,039,142 869,731 846,526 783,339 (9,725) (i19,539) (6i,652) 76,ss4 29,960 12,972 12,708 io,142 10,595 9,941 10,659
$ i,556.676 $ 1,243,680 $ 1213303 tl 126 168 $ 880,326 $ 856,467 $ 793,998 7.00 6.51 6.26 509 4.34 4.24 4.07 6.77 6.32 6.11 4.97 4.28 4.19 4.01 5.07 4.83 4.75 3.70 3.10 3.00 2.s4 6.3o 5.91 5.74 4.59 3.90 3.79 3.62 5.86 5.66 4.53 3.87 3.75 3.59 5.83 5.66 4.53 3.87 3.75 3.59 (c) Computed using earnings and lixed charges of the Company and all of its aAiliated companies. Fixed cltarges consist of interest on short and long term debt, other interest charges, interest on capital !ease obligations and the estimated intcrcst component of other rentals.
(d) Based on average of month cnd market prices.
ILIA'IllYllkQ QI%'01%K Selected I inancial and Operating Data ELECTRIC OPERATIONS (Continued) 1988 1987 1986 19 Sales Data Customers (a) 1,122,628 1,097,518 1,073,146 1,055,546 Average annual residential kwh use............... 10,059 9,565 9,344 9,034 Electric energy sales billed millions of kwh Residential 9,856 9,157 8,771 8,354 Commercial 7,932 7,457 7,159 6,7zs Industrial . 8,799 8,438 7,986 7,907 Other . 1,36o 1,285 1,170 1,082 System sales . ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 0 ~ 27,947 26,337 25,086 24,071 Contractual sales to other utilities ........ ~..... 5,819 5,868 5,339 4,04s Total electric energy sales billed ............. 33,766 32,205 30,425 28,119 Sources of energy sold millions of kwh Generated Coal. fired steam stations . 26,6o7 26,465 25,151 26,237 Nuclear steam station (b) 12,867 13,285 10,151 11,534 Oil-fired steam station 4,186 4,095 5,453 4,316 Combustion turbines and diesels (oil) ........ 57 28 17 18 Hydroelectric stations 573 689 739 61z 44,29o 44,562 41,511 42,717 Power purchases . 3,027 2,707 2,032 3,716 Interchange power sales (11,304) (i3,oi5) (11,281) (i6,235)
Company use, line losses and other . (2,247) (z,o49) (i,s37) (2,079)
Total electric energy sales billed .. 33,766 32,205 30,425 28,119 Generation Data Generating capability thousands of kw (a) ....... 7,479 7,499 7,519 7,513 Winter peak demand thousands of kw (c)........ 5,523 5,591 5,154 Generation by fuel source 9' oal ~ ~ ~ ~ ~ ~ ~ ~ ~ 0 6o.1 59.4 6o.6 Nuclear (b) 29.0 29.8 24.4 0'l ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 9.6 9.3 132 10.2 Hydroelectric . 1.3 1.5 1.8 1.4 Steam station availability %
Coal-fired . 81.3 833 78.8 7s.6 Nuclear (b) 77.7 so.4 6i.7 70.7 Oil fired 90.1 s4.7 s4.7 87.2 Steam station capacity factor 96 Coal. fired . 73.1 72.9 69.3 72.3 Nuclear (b) 77.7 80.5 61.3 70.5 Oil fired 29.1 28.5 38.0 30.0 Fuel Cost Data Cost per kwh generated cents Coal. fired steam stations 1.64 1.63 i.67 1.78 Nuclear steam station (b) . o.56 0.56 0.58 o.6i Oil.fired steam station... 2.76 323 z.96 5.02 Combustion turbines and diesels (oil) .......... 5.89 6.51 7.81 9.31 Average 1.44 1.46 1.57 1.81 Cost of fossil fuel received at steam stations Coal per ton . $ 39.52 $ 39 30 $ 40.17 $ 4z.oo Crude and residual oil per barrel ............. $ 15.95 $ 18.51 $ i6.s3 $ zs.4z CapitalLtation Ratios %
Long. term debt 47.9 46.9 50.4 47.1 Short. term debt 1.7 31 2.1 1.7 I referred and preference stock 12.4 13.5 12.8 16.7 Common equity. ~ ~ 38.0 36.5 347 34.5 Times Interest Earned Before Income Taxes .. 2.73 2.71 2.80 (a)....................
~ ~
Employees 8,306 8,301 8,339 (a) Year cnd.
(b) the Company's first nuclear unit was placed in commercial operation on June 8, 1983 and the second unit on February 12, 1985.
(c) nte winter peaks shown were reached early in the subsequent year for years except 1988.
1983 1982 1981 1980 1979 1978 1,039,381 1,026,144 1,013,623 1,006,570 999,525 987,005 972,993 9,282 9,051 9,039 9,157 9,205 9,353 9,166 8,454 8,138 s,o45 8,088 s,o56 s,o66 7,764 6,527 6,119 5,946 5,893 5,743 5,554 5,408 8,117 7,623 7,324 7,968 7,910 8,135 7,891 1,o43 968 982 1,005 784 800 781 24,141 22,848 22,297 22,954 22,493 22,555 21,844 357 209 24,49s 23,057 22,297 22,954 22,493 22,555 21,s44 26,695 26,885 25,477 24,s41 26,596 26,4s7 24,167 6,295 4,509 293 4,121 5,581 3,1s6 4,705 5,692 5,777 6,426 32 45 13 32 33 37 1o6 747 700 612 622 533 799 701 37,890 37,720 29,581 30,200 32,854 33,100 31,4oo 3,765 3,880 1,414 744 1,415 2,124 1,319 (15,377) (16,4o5) (6,9oo) (6,274) (9,798) (11,089) (9,010)
(1,780) (2,138) (1,798) (1,716) (1,978) (1,580) (1,865) 24,498 23,057 22,297 22,954 22,493 22,555 21,s44 7,484 7 494 6,546 6,546 6,546 6,546 6,536 4,s69 4,4s9 5,207 4 945 4,427 4,701 713 86.1 82.2 81.0 80.0 77.0 11.9 1.0 11.0 14.9 10.8 15.7 17.4 17.6 20.8 2.0 1.9 2.1 2.1 1.6 2.4 2.2 75.2 78.8 79.1 74.7 78.7 76.6 735 66.7 67.7 6s.o 75.8 80.4 73.4 79.6 80.0 73.4 733 74.0 70.2 6s.4 73.0 731 66.6 65.7 67.5 28.6 38.8 22.2 32.8 395 4o.2 447 1.75 1.6s 1.77 1.64 1.4o 1.30 1.26 0.54 o.66 5.31 5.23 5.62 5.75 4.55 3.20 223 9.82 10.21 10.74 10.51 7.89 4.6s 4.10 1.98 2.15 2.20 2.30 1.96 1.65 1.47
$ 42.75 $ 39 37 $ 42.32 $ 39.59 $ 33.78 $ 30.70 $ 29.54
$ 31.32 $ 29.79 $ 30.94 $ 33.47 $ 26.44 $ 18.81 $ 13 09 46.7 45.1 46.7 47.6 46.9 46.2 42.3 1.9 3.6 32 39 1.5 0.9 6.4 17.4 17.9 17.1 17.0 19.2 199 18.3 34.0 33.4 330 31.5 32.4 330 330 2.35 2.29 2.05 1.91 2.06 2.64 2.s6
,386 8,160 8,208 7,999 7,702, 7,590 7,244
00418I0%J58 I Q 458D 058% I FOoQ 058NOoQS94F00o58 The following information is Record Dates: The 1989 record Lost Stock or Bond Certifica provided as a service to share- dates for dividends are March 10, Please call or write to Investor owners and other investors. For June 9, September 8 and Decem- Services for an explanation of t any questions you may have ber 8. to replace lost stock or 'rocedure or additional information you Direct Deposit of Dividends:
bond certificates.
may require about PP&L or Shareowners may choose to have Publications: Several publica-your investments in the com- their dividend checks deposited tions are prepared each year and pany, please feel free to call directly into their checking or sent to all investors of record and the toll-free number listed to others who request their names below, or write to: savings account. Quarterly divi-dend payments are electronically be placed on our mailing lists.
Investor Services Department credited on the dividend date, or These publications are:
Pennsylvania Power 6 Light Co.
the first business day thereafter.
Annual Report published and Two North Ninth Street mailed to all shareowners of Allentotvn, Pa. 18101 Dividend Reinvestment Plan: record in mid-March.
Toll-Free Phone Number: For Shareowners may choose to have Sbareowners'eus1etter an dividends on their common, easy-to.read newsletter containing information regarding your in-vestor account, or other inquiries, preferred or preference stocks current items of interest to share-call toll-free: 800-322-9532 when reinvested in PP&L common stock owners published and mailed instead of receiving the dividend at the beginning of each quarter.
calling from inside Pennsylvania, or 800-345-3085 when calling from by check. Additionally, a special year-end edition containing unaudited outside Pennsylvania. Certificate Safekeeping: results of the year's operations is Shareowners participating in the Annual Meeting: The annual mailed in early February.
meeting of shareowners is held Dividend Reinvestment Plan may choose to have their common Quarterly Revtettt published each year on the fourth Wednes- in May, August and November to stock certificates forwarded to the day of April. The 1989 annual company for safekeeping. These provide quarterly financial meeting will be held at 1:30 p.m. shares will be registered in the information to investors.
on Wednesday, April 26, 1989, at name of the company as agent for Periodic Mailings: Letters fr the Masonic Temple-Scottish Rite the company regarding new in-plan participants and will be Cathedral, 420 N. Washington credited to the participant's vestor programs, special items of Avenue, Scranton, Pa. A reservation account. Dividends paid on any interest, or other pertinent infor-card for meeting attendance is mation are mailed on a non.
shares held in the plan will be included with shareowners'roxy reinvested. scheduled basis as necessary.
material. Duplicate Mailings: Annual re-Lost Dividend or Interest ports and other investor publica-Proxy Material: A proxy state- Checks: Dividend or interest ment, a proxy and a reservation tions are mailed to each investor checks lost by investors, or those account. Ifyou have more than card for the company's annual which may be lost in the mail, will meeting are mailed in a package one account, or there is more than be replaced ifthe check has not one investor in your household, which includes the annual report. been located by the 10th business This material was mailed begin. you may call or write to request day following the payment date. that only one publication be ning March 16, 1989, to all share-owners of record as of March Transfer of Stock or Bonds: delivered to your address. Please 10, 1989. Stock or bonds may be transferred provide account numbers for all from one name to another or to a duplicate mailings.
Dividends: For 1989, the declara. new account in the name of an- Form 10-K and PP&L Profile:
tion of dividends is considered by other person. Please call or write The company's annual report filed the board or its executive commit- regarding transfer instructions. with the Securities and Exchange tee, on February 22, May 24, August Commission on Form 10.K is avail-23 and November 22, for payment Bondholder Information: able about mid-March. The PP&L on April 1, July 1 and October 1, Much of the information and many Profile, a 10-year statistical review 1989, andJanuary 1, 1990,respec- of the procedures detailed here for containing in. depth information tively. Dividend checks are mailed shareowners also apply to bond- about the company, is available ahead of those dates with the holders. Questions related to Investors may obtain a co 'ay.
intention they arrive as close as bondholder accounts should be these publications, at no cost, by possible to the payment dates. directed to Investor Services. or writing to Investor Services.'ng
sted Securities: Fiscal Agents:
Stock Transfer Agents and York Stock Exchange PhIEadelphla Stock Exchange Registrars Common Stock (Code: PPL) Common Stock Morgan Sbarebolder Services Trust 4t/a% Preferred Stock 4t/a% Preferred Stock Company (Code: PPLPRB) 3.35% Series Preferred Stock 30 1P'est Broadway Netv York, New York 10007-2192 4.40% Series Preferred Stock 4 40% Series Preferred Stock (Code: PPLPRA) 4.60% Series Preferred Stock Pennsylvania Potver 6 Ligbt Co.
8.60% Series Preferred Stock 8.60% Series Preferred Stock Investor Services-Stock Transfer (Code: PPLPRG) 9% Series Preferred Stock Dividend Disbursing Office and 9.24% Series Preferred Stock 9.24% Series Preferred Stock Dividend Reinvestment PEan (Code: PPLPRM) Preference Stock, $ 8.00 Series Agent Preference Stock, $ 8.00 Series Preference Stock, $ 8.40 Series Pennsylvania Potver 6 Light Co.
Vice President and Treasurer (Code: PPLPRJ) Preference Stock, $ 8.70 Series Preference Stock, $ 8.40 Series Mortgage Bond Trustee (Code: PPLPRH) Morgan Guaranty Trust Company Preference Stock, $ 8.70 Series of Netv York Corporate Trust Department (Code: PPLPRI) 30 1P'est Broadway New York New York 10015 Bond Interest Paying Agent Pennsylvania Power 6 Light Co.
Investor Services Department rterly Financial, Common Stock Price and Dividend Data (Unaudited)
For the Quarters Ended March 31 June 30 Sept. 30 Dec. 31
('Thousands of Dollars, Except Per Sbare Amounts) 1988 Operating revenues ~ $ 607,353 $ 521,601 $ 532,851 $ 552,098 Operating income 180,143 135,921 145,366 143,621 Net income . 111,637 68,421 76,217 75,767 Earnings applicable to common stock .... 98,041 54,980 63,590 63,254 Earnings per common share . 131 0.73 0.85 0.84 Dividends declared per common share (a) 0.69 0.69 0.69 0.69 Price per common share H'gh ~ ~ ~ ~ ~ ~ ~ ~ ~ 37~/e 37t/a 36'/s 37 Low 33t/e 33'/e 33'/4 34'/4 1987 (b)
Operating revenues . $ 550,627 $ 484,737 $ 500,443 $ 554,437 Operating income ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 164,026 137,016 141,921 147,674 Net income . ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 91,434 64,661 69,576 76,790 Earnings applicable to common stock 78,467 50,210 56,383 62,975 Earnings per common share . 1.05 0.67 0.76 0.84 Dividends declared per common share (a)............... 0.67 0.67 0.67 0.67 Price per common share High ~ ~ 41s/e 39s/e 37/s 37~/e Low ~ ~ ~ ~ ~ ~ ~ ~ 36'/e 34 33'/a 28'/s 1ic Company has paid quarterly cash dividends on its common stock in every year since 1946, The dividends paid per share in 1988 and 1987 were t .74 and $ 2.66, respectively. The most recent regular quanerly dividend paid by thc Company was 69 cents per share (equivalent to $ 2.76 per
~
annum) paid January 1, 1989. Future dividends will be dependent upon future earnings, financial requirements and other factors.
~
(b) Restated on a consolidated basis.
8 Fl OoÃ@OCII Ih5800 D00IICFOol@
Officers ROBERT K. CAMPBELL 58 (12), Chairman, Prmldent and Chief Executtte Officer MERLIN F. HERIZOG 57 (29), E>recuthe Vice President Corporate Serztces JOHN T. KAUFF)MIAN62 (38), &ecuttte Vice Presldeiu.operations CHARLES E. RUSSOLI 55 (33), Executke Vice President.Financial HAROLD W. KEISER 45 (8), Senior Vice I resident.Nuclear BRUCE D. KENYON 45 (12), Senior Vice President Dttr'sion Operations JOHN R. BIGGAR 44 (19), Vice I'resident Finance GENNARO D. CALIENDO 48 (20), Vice President and Getrerat Counsel JOHN M. CHAPPELEAR 50 (10), vice President Intestments and Pensions THOMAS M. CRIMMINSJR. 45 (8), Vice President.Pouter Production ROBERT S. GOMBOS 45 (23), Vlcc I)resident Human Resource 6 Detvlopment CHARLES J. GREEN 58 (28), Vice President Harrisburg Dttzston WILLIAMF. HECHT 45 (24), Vice President htarkettng 6 Ciistomer Senses RONALD E. HILL46 (24), Vice President and Comptroller JOHN P. KIERZKOWSKI 49 (17), Vice President and Treasurer CARL R. MAIO 62 (39), Vice Aestdent.lebigb Di~v'sion GRAYSON E. MCNAIR 48 (26), Vice Amtdent@stenr I'ouer EDWARD M. NAGEL 62 (36), Vice Aesldent and Secretary HERBERT D. NASH JR. 62 (40), Vice Prestdeitt.central Division CIAIR W. NOLL 55 (28), Vice I'resident Procurement 6 Computer Serztces JOHN E. ROTH 60 (34), Vice I'restdent Norti>em Division JOHN H. SAEGER 50 (28), Vice PrestdentSusquebanna Dtt)tston BRENT S. SHUNK 63 (42), Vlcc I'resident Lancaster Dtt)tston Corporate Management Committee) Robert K Campbell, chairman; Merlin F. Ilcnzog, John T. JEAN A. SMOLICK 54 (36), Amstant Secretary Kauffman, Charles 6 Russoll, Itarold W. Kclscr, PAULINE L VETOVITZ42 (24), Assistant Secretary Bruce D. Kent)n, Gennaro D. Caliendo, and Edv aid F. Rels, Director Corporate Planning, HELEN J. WOLFER 59 (40), Assistant Secretary and itssistant Treasurtv serving as the committee's executive secretary. Numbers indicate age and pars of service ( ) as of Mmh I, 1989.
Directors CUFFORD L AUSLANDER JR. 55 (13), Wasllington, D.C., Rmfdent, rite>rander6)tssoctates Inc. Consultants to buslnetr goternment and industry ROSWELL BRAYION SR 7 1 (8)) Wool fICll) Chalrinan of tbe Board, Ipootrtcb Inc. )'Ilainifacturer ofgarments for outdoor act tt)tttes JEFFREY J. BURDGE 66 (6), Camp Hill, Cl>airman of tbe Board, ftarsco Corporatioia hlaniifacturer ofprocessed andfabrtcated metals ROBERT K CAMPBELL 58 (12), Allentown, Ct>atrinan of tbe Board, President and CbtefE>recut'fficer EDGAR L DESSEN 72 (23), Hazleton, PbJstctan Radiologist EDWARD DONLEY 67 (6), Allentown, Ct>atm)an, Executtue Committee, Atr Abducts and Chemicals Inc. hlanufacturer of industrial anti cont ntercial gases and chemicals REV. DANIELG. GAMBET, O.S.F.S. 59 (2), Center Valley, President, Allentown College of St. Francis de Sales MERLIN F. HERTZOG 57 (5), Allentown, Executlee Vice President Corporate Stvt>tees HARRYA. JENSEN 70 (13), lancaster, forntor Director and foriner Chief Executtte Officer, Executtve Committee) Roben IC Campbell, Artnstrong I'ortd industries lnc. htanufactttrer of interior furiitsbtngs and spectattyproducts chairman; Edgar L Dessen, Iianyh. Jensen and CUFFORD L JONES 61 ( ), Harrisburg, President, PennsJtt)anta chamber of Bustness Norman Robenson. and indiistry hudlt Committee) Daitd L nesslcr, chairman; Clifford L hIexandcr Jr., Rosv cll Bialton Sr., JOHN T. KAUFFMAN62 (10), Allentown, E>recuttte vice President.operations Daniel G. Gambet, Ruth lmcnthaI and Ralph W. RUTH LEVENTHAL 48 ('), Middletown, Protr>st, Dean and Prr>fessor of Biology, Peim State Richardson Jr. Harrisburg (ybe Capital College)
Corporate Responslblllty Committee) Jeffrey J. RALPH W. RICHARDSON JR. 71 (9), State College, Consultant, agricultural and Burdge, chairman; Edgar L Dessen, Daniel G. enuironntentat sciences Gambct, Clifford L Jones, Ruth le)cnthal and Da)td L itesslcr. NORMAN ROBERISON 61 (19), Pittsburgh) Selilor Vice President and Chief Economist, Management Development and Compensa-Mellon Bank, NM tion Committee) Rosv)ull Bralton Sr., chairman; CHARLES E. RUSSOLI 55 (2), Allentown, E>recuttee Vlcc President Financial Cliffor L Alc)cmdcr Jr., Edgar L Dcssen, Edwud DAVID L TRESSLER 52 (7), Scnnton, cbalrinan of tbe Board and Chief Executor Officer, Donley and Norman Rcbcnson.
Northeastern Bank of PenrtsJtvanta Nomlnatlng Committee) Ralph W. Richardson Jr., chairman; Jeffrey J. Burdge, Ed))aid Donley, Numbers indicate age and )tars of service ( ) on pp&L board as of March I, 1989.
Itarry A Jensen and Clifford L Jones. 'Less than one year.
t Board of Directors Pictured here are the outside, non.employee members of PAL's board.
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Alexander Brayton Burdge EI.ECTI WILL CL A 30,00
Dessen Donlcy Gambet Jensen Jones Leventhal
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Rieltardson Robertson Tressler
Pennsylvania Power & Light Company Two North Ninth Street ~ Allentown, PA 18101 ~ 215 I 770.5151 New Look For Vehicles PAL has begun a program that eventually will change the appearance of all the company's motor vehicles. In a changeover that will take 5 to 10 years, the old gray and orange color scheme is being phased out in favor of a new color combination white with orange and steel. blue striping on the side, along with the familiar orange logo. The new look provides a clean, crisp modern appearance making the vehicles more visible and adding an extra measure of safety.
~ fr~ v ~
jp Ei 0-LITHO IN U.S.A
Audited Financial Statements and Other Financial Information Allegheny Electric Cooperative, Inc.
October 31, 1988
[g~gll] Ernst @Whinny
Audited Financial Statements and Other Financial Information ALLEGHENY ELECTRIC COOPERATIVE, INC.
October 31, 1988 Audited Financial Statements Report of Independent Auditors................. ~ ~ ~ 1 Balance Sheets........... ~ ~ ~ 2 Statements of Operations and Patronage Capital. ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 4 Statements of Cash Flovs.... ~ . ~ - ~ ~ ~ ~ ~ ~ ~ ~ .
~ ~ ~ ~ ~ ~ ~ ~ ~ 5 Notes to Financial Statements.................. ~ ~ ~ 6 Other Financial Information Report of Independent Auditors on Other Financial Information.......... 15 Schedules of Nonoperating Rental Income (Loss)......................... 16 Schedules of Administrative and General Expenses....................... 17
<I Ernst &Whinney. 300 Locust Court 212 Locust Street Harrisburg, Pennsylvania 17101 717/232-7575 Re ort of Inde endent Auditors Board of Directors Allegheny Electric Cooperative, Inc.
Harrisburg, Pennsylvania We have audited the accompanying balance sheets of Allegheny Electric Cooperative, Inc., as of October 31, 1988 and 1987, and the related statements of operations and patronage capital, and cash flows for the years then ended. These financial statements are the responsibility of management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, 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 audits provide a reasonable basis for ou'r opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Allegheny Electric Cooperative, Inc. at October 31, 1988 and 1987, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles.
Harrisburg, Pennsylvania January 13, 1989
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BALANCE SHEETS ALLEGHENY ELECTRIC COOPERATIVE, INC.
October 31 1988 1987 (In Thousands)
ASSETS ELECTRIC UTILITY PLANT Note C In service Note B 595,959 9 584,815 Construction work in process 6,939 26,112 Nuclear fuel in process 13 075 17 473 615,973 628,400 Less accumulated depreciation and amortization 70 829 55 662 5457144 572,738 OTHER ASSETS AND INVESTMENTS Nonutility property, at cost (net of accumulated depreciation of $ 1,183 in 1988 and $ 1,047 in 1987) 5,084 5,202 Investments in associated organizations Note D 4,247 4, 392 Construction advances 65 574 Other noncurrent assets 4 924 3 968 14,320 14,136 CURRENT ASSETS Cash and short-term investments of $ 39,668 in 1988 and $ 22,539 in 1987 39,679 22,510 Accounts receivable from members 9,264 8,453 Other accounts receivable 50147 30463 Other current assets 650 428 54 740 34 854
October 31 1988 1987 (In Thousands)
EQUITIES AND LIABILITIES EQUITIES Memberships 3 $ 3 Donated capital 51 50 Patronage capital 36 387 34 174 36$ 441 34,227 LONG-TERM DEBT, less current portion Note F 496,569 517$ 156 CURRENT LIABILITIES Notes payable Note E 33,380 28,400 Current portion of long-term debt Note F 7$ 151 6,690 Accounts payable and accrued expenses 12,665 13,187 Accounts payable to members 5 403 2 499 58,599 50,776 DEFERRED CREDITS Deferred income tax benefi.ts from safe harbor lease Note G 13,689 14,408 Other deferred credits 8 906 5 161 22,595 19,569 See notes to financial statements.
5 STATEMENTS OF OPERATIONS AND PATRONAGE CAPITAL ALLEGHENY ELECTRIC COOPERATIVE, INC.
Year Ended October 31 1988 1987 (In Thousands)
Operating revenue, including sales to members of $ 109,533 in 1988 and $ 103,425 in 1987 $ 133,881 $ 135,400 Operating expenses:
Purchased power 40,120 41,232 Transmission 7,650 6j863 Production 20,226 14,975 Fuel 8,634 10,320 Depreciation 9,619 8,491 Taxes 3,609 3,397 Administrative and general 4 083 4 525 93 941 89 803 OPERATING MARGIN BEFORE INTEREST AND OTHER DEDUCTIONS 39,940 45,597 Interest and other deductions:
Interest expense 44,264 45,839 Allowance for funds used during construction (2,319) (2,407)
Other deductions (credits), net (7) (6) 41 938 43 426 OPERATING MARGIN (DEFICIT) (1,998) 2,171 Nonoperating margins:
Net nonoperating rental income (loss) (1) 246 Interest 2j891 1,488 Other Noteincome I 602 3 492 1 734 MARGIN BEFORE INCOME TAXES 1,494 3,905 Deferred income tax benefits from safe harbor lease 719 679 NET MARGIN 2j213 4 j584 Patronage capital at beginning of year 34 174 29 590 PATRONAGE CAPITAL AT See notes to financial statements.
I STATEMENTS OF CASH PLOWS ALLEGHENY ELECTRIC COOPERATIVE, INC.
Year Ended October 31 1988 1987 (In Thousands)
OPERATING ACTIVITIES Net margin $ 2,213 $ 4,584 Adjustments to reconcile net margins to net cash provided by operating activities:
Depreciation and fuel amortization 17,070 17,410 Gain on sale of electric utility plant (20)
Deferred income tax benefits from safe harbor lease (719) (679)
Changes in operating assets and liabilities:
(Increase) decrease in operating assets:
Noncurrent assets (956) 336 Accounts receivable from members (811) (431)
Other accounts receivable (1,684) (899)
Other current assets (222) (215)
.Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses (522) 1,465 Accounts payable-members 2,904 2,290 Other deferred credits 303 (64)
NET CASH PROVIDED BY OPERATING ACTIVITIES 17,556 23,797 INVESTING ACTIVITIES Additions to electric utility plant (16,785) (26,318)
Proceeds from sale of electric utility plant, net of expenses 30,889 Decrease (increase) in construction advances 509 (247)
Reduction in investments in associated organizations 145 617 NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 14,758 (25,948)
FINANCING ACTIVITIES Proceeds from long-term debt 12,293 27,494 Payments on long-term debt (27,439) (8,090)
Donated capital 1 NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (15 145) 19 404 INCREASE IN CASH AND CASH EQUIVALENTS 17,169 17,253 Cash and cash equivalents at beginning of year 22 510 5 257 CASH AND CASH EQUIVALENTS See notes to financial statements.
I NOTES TO FINANCIAL STATEMENTS ALLEGHENY ELECTRIC COOPERATIVE, INC.
October 31, 1988 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 Utilit Plant and De reciation: The 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 retired for all other assets, except nuclear fuel. The cost of units of property 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 generation. Under the Nuclear Waste Policy Act of 1982, the U. S. Department of Energy (DOE) is responsible for the permanent storage 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 Decommissionin Nuclear Plant: Allegheny's portion of the estimated decommissioning costs of SSES is charged to operating expenses over the estimated useful life of the plant.
Allowance for Funds Used Durin 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 electric utility plant while under construction.
Investments in Associated Or anizations: Investments in associated organizations are carried at cost.
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NOTES TO FINANCIAL STATEMENTS Continued ALLEGHENY ELECTRIC COOPERATIVE, INC.
NOTE A
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES Continued Preliminar Surve s: 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.
Cash E uivalents: For purposes of the statements of cash flows, Allegheny considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Short-Term Investments: Short-term investments are carried at cost, plus accrued interest, which approximates market value.
Income Taxes: Investment 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.
The Tax Reform Act of 1986 (the Act), enacted on October 22, 1986, repealed the Investment Tax Credit as of January 1, 1986. Provisions exist within the Act which allow for investment tax credits on certain property referred to as "transition property" placed in service after December 31, 1985. During the years ended October 31, 1988 and 1987, Allegheny placed in service transition property eligible for investment tax credits.
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.
Accountin for Phase-In Plans: In August 1987, the Financial Accounting Standards Board issued Statement No. 92, "Regulated Enterprises Accounting for Phase-in Plans" (Statement). The Statement specifies the accounting for existing and future phase-in plans and is effective for fiscal years beginning after December 15, 1987. The Statement, if ultimately determined to be applicable to Allegheny, would be effective for the fiscal year ending October 31, 1989 and would require Allegheny to recognize an immediate charge against income for the difference between the modified sinking method of depreciation currently used for nuclear utility plant production assets and the straight-line method of depreciation. The difference between these two methods is approximately $ 26.1 million at October 31, 1988. Management is currently evaluating the potential alternatives available to minimize the charge against income which may be required as a result of this Statement, including modifying the existing phase-in plan or obtaining REA approval to avoid having to apply the Statement.
I NOTES TO FINANCIAL STATEMENTS Continued ALLEGHENY ELECTRIC COOPERATIVE, INC.
NOTE A
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES Continued Statements of Cash Flows: In November 1987, the Financial Accounting Standards Board issued Statement No. 95, "Statement of Cash Flows." Allegheny adopted the provisions of the Statement in its 1988 financial statements and restated the previously reported statement of changes in financial position for 1987 to comply with the Statement.
NOTE B ELECTRIC UTILITY PLANT IN SERVICE Electric utility plant in service consists of the following:
Depreciation/
Amortization, October 31 Lives/Rates 1988 1987 (In Thousands)
Nuclear Utility Plant:
Production 39 years 505 j 920 $ 502 283
~
Transmission 2.75% 30,176 30,174 General plant 3% 12.5% 827 827 Nuclear fuel Heat production 57,818 50,368 Non-Nuclear Utility Plant 3% 33% 1 218 1 163 TOTAL $ 595 959 $ 584 815 NOTE C SUSQUEHANNA STEAM ELECTRIC STATION Allegheny owns a 10% undivided interest in SSES. PP6L owns the remaining 90%.
Both participants provide their own financing. Allegheny's portion of costs associated with the station totalled $ 612 million and $ 605 million at October 31, 1988 and 1987, respectively. Allegheny's share of anticipated costs for ongoing construction and nuclear-fuel for SSES are estimated to be approximately $ 31.9 million over the next three years. 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 4% and begin maturing in 2014.
Allegheny is required to maintain these investments pursuant to certain loan and guarantee agreements.
I NOTES TO FINANCIAL STATEMENTS Continued ALLEGHENY ELECTRIC COOPERATIVE, INC.
NOTE E NOTES PAYABLE Allegheny has short-term lines of credit available with banks and CFC of $ 52 million. There were no amounts outstanding at October 31,- 1988 or 1987.
Interest rates are generally at prime plus 1%.
Notes payable at October 31, 1988 and October 31, 1987 includes $ 28.2 million and $ 28.4 million, respectively, 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 through 2014, and interest is due monthly at variable rates (4.7% to 8.5% for 1988 and 3.4% to 6.8% for 1987). 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 at both October 31, 1988 and 1987 relate to a debt service reserve fund required under the bond indenture.
The notes payable balance at October 31, 1988 also includes $ 5.2 million of unsecured commercial paper with interest at 8.325% maturing on January 20, 1989.
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 ($ 52.7 million at October 31, 1988).
NOTE F LONG-TERM DEBT Long-term debt consists principally of mortgage notes payable for the electric utility plant to REA and to the United States of America acting through the Federal Financing Bank (FFB) and guaranteed by REA, a mortgage loan payable to CFC relating to nonutility property, and commercial paper issued by Allegheny for temporary construction financing. The commercial paper used for temporary construction financing was retired during the current year in connection with Allegheny's sale/leaseback arrangement (see Note J). Substantially all the assets of Allegheny are pledged as collateral. Long-term debt consists of the following:
October 31 1988 1987 (In Thousands)
Mortgage notes payable to FFB at interest rates varying from 7.281%
to 13.820% in 1988 and 6.473% to 13.820% in 1987, due in varying amounts through 2021 $ 499,103 $ 499,877
E NOTES TO FINANCIAL STATEMENTS Continued ALLEGHENY ELECTRIC COOPERATIVE, INC.
NOTE F LONG-TERM DEBTContinued October 31 1988 1987 (In Thousands)
Mortgage loan payable to CFC, payable in various quarterly installments, including interest through January 2015.
The interest rate was converted during 1987 from a fixed rate of 9.25% to a variable rate. Variable rates ranged from 7.75% to 9.25% in 1988 and 7.38% to 9.00% in 1987 $ 2i060 $ 2,085 5% mortgage notes payable to REA due in varying amounts through 2015 2,498 2,505 Commercial paper with interest at 8.275% 19,300 Other 59 79 503,720 523,846 Less current portion 151 6,690 7
I $
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 31, 1988, Allegheny had $ 47.3 million of advances maturing within one year which it intends to convert to long-term obligations, either by rolling them over for additional two-year periods or extending them to facility life-time financing, in accordance with the mortgage agreement.
Aggregate maturities of long-term debt for the four years subsequent to October 31, 1988 are as follows (in thousands):
1990 $ 8,172 1991 9,328 1992 11,677 1993 13,284 The above maturity schedule reflects management's intent to convert FFB advances with interim maturity dates to long-term debt. Allegheny has used an interest rate it estimates to be an appropriate long-term rate, based on the October 31, 1988 interest rate, to compute the annual principal requirements.
I NOTES TO FINANCIAL STATEMENTS Continued ALLEGHENY ELECTRIC COOPERATIVE, INC.
NOTE F LONG-TERM DEBTContinued 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, 1988.
During 1988 and 1987, Allegheny incurred interest costs of $ 44.3 million and
$ 45.8 million, respectively. Interest paid was $ 44.4 million and $ 46.1 million, respectively.
NOTE G INCOME TAXES At October 31, 1988, Allegheny had available net operating loss carryforwards of $ 3.6 million for financial reporting purposes and $ 296 million for tax reporting purposes, and investment tax credit carryforwards of approximately
$ 33.9 million for both financial and tax reporting purposes, expiring through 2003. Under the Tax Reform Act of 1986, the amount of investment tax credit allowable as a result of a carryforward must be reduced by 35%.
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
'elated 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 $ 21 million at October 31, 1988. 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, 1988 and 1987 were $ 2.2 million and $ 1.8 million, respectively.
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NOTES TO FINANCIAL STATEMENTS Continued ALLEGHENY ELECTRIC COOPERATIVE, INC.
NOTE ICOMMITMENTS 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 $ 157.5 million under these programs. Allegheny is also' 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 $ .6 million.
Allegheny's public liability for claims resulting from a nuclear incident is currently limited to $ 757 million under provisions of the Price-Anderson Amendments Act of 1988 (Act), which extended the Price Anderson Act to August 1, 2002. 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 $ 12.6 million per incident, but not more than $ 2 million in a calendar year.
Allegheny is currently purchasing equipment for a project to reduce peak power demand (Load Management Project). Financing for the Load Management Project has been arranged with REA ($ 7.3 million) and CFC ($ 3.2 million). At October 31, 1988, total costs to complete the Load Management Project were estimated at $ 12.9 million. Costs incurred. through October 31, 1988 were $ 6.5 million.
Allegheny also has a project to construct certain transmission facilities.
Financing for this project has been arranged with REA ($ 3.0 million) and CFC
($ 1.3 million) ~ No costs were incurred related to this project at October 31, 1988.
On July 31, 1987, Allegheny entered into an agreement with Sithe Energies USA, Inc. (Sithe) to transfer its interests in the development of the Allegheny River Locks and Dams Number 8 and 9 Hydroelectric Project to Sithe. Interests to be transferred included Allegheny's license granted by the Federal Energy Regulatory Commission (FERC) to construct the hydroelectric project. The agreement calls for three payments to be made by Sithe:
The first payment, in the amount of $ 250,000, was received and recorded by Allegheny in November 1987 in exchange for deliverance of evidence of release of any liens or claims against the FERC license.
l NOTES TO FINANCIAL STATEMENTS Continued ALLEGHENY ELECTRIC COOPERATIVE, INC.
NOTE ICOMMITMENTS AND CONTINGENCIES Continued The second payment, in the amount of $ 1.4 million, is contingent upon the execution by Sithe of a power purchase agreement for sale of all or part of the energy and capacity produced by the project and all necessary wheeling and transmission agreements required to effectuate the delivery of the project power and energy to its purchaser. While Sithe signed a
,power purchase agreement during 1988, they have not finalized the necessary wheeling and transmission agreements. Accordingly, this payment has not been recorded by Allegheny as of October 31, 1988 since receipt of this payment is contingent upon the finalization of such agreements.
The third payment, in the amount of $ 822,000, is payable to Allegheny twelve months subsequent to the date of the execution by Sithe of the aforementioned power purchase agreement. Since this agreement was executed by Sithe during 1988, Allegheny has accrued the $ 822,000 as of October 31, 1988.
Total payments received and accrued by Allegheny during 1988 under this agreement, net of related costs, resulted in a gain of approximately $ 582,000, which is included in the 1988 statement of operations.
In addition, FERC requires that construction must begin by March 1989. Title to the project reverts back to Allegheny after 40 years of operation or on August 24, 2030, whichever is earlier.
NOTE J SALE/LEASEBACK ARRANGEMENT On June 30, 1988, Allegheny completed the sale and simultaneous leaseback of its hydroelectric generation facility at the Raystown Dam (the Facility). The Facility was sold to Ford Motor Credit Company (Ford) for $ 32 million in cash.
Under terms of the arrangement, Allegheny will lease the Facility from Ford for an initial term of thirty years. Payments under the lease are due in semiannual installments commencing January 10, 1989. At the end of the thirty-year term, Allegheny will have the option to purchase the Facility for an amount equal to the Facility's fair market value. Allegheny also has the option to renew the lease for a five-year fixed rate renewal and three fair market renewal periods, each of which may not be for a term of less than two years. Payments during the fixed rate renewal period are 30% of the average semiannual installments during the initial lease term. Allegheny will retain co-licensee status for the Facility throughout the term of the lease. The sale resulted in a $ 3.5 million gain which will be recognized over the lease term in the same proportion that the annual rental payments relate to total rental payments.
NOTES TO FINANCIAL STATEMENTS Continued ALLEGHENY ELECTRIC COOPERATIVE, INC+
NOTE J SALE/LEASEBACK ARRANGEMENTContinued Cash proceeds from the sale were used by Allegheny to retire $ 20.6 million of commercial paper, the proceeds of which had been used to partially finance the construction of the Facility and $ 1.3 million of mortgage notes payable to FFB. In addition, a total of $ 1.9 million of the proceeds were deposited into an escrow account with the Meridian Trust Company. This amount represented the total amounts being retained under the construction contracts for the Facility. As of October 31, 1988, a total of $ 1.5 million remains in escrow for this purpose and is included with other noncurrent assets.
I 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 of the sale and leaseback of the Facility. In the event that Ford were to lose all or any portion of such tax benefits, Allegheny would be required to indemnify Ford for the amount of the additional federal income tax payable by Ford as a result of any such loss.
The leaseback of the Facility is accounted for as an operating lease by Allegheny. Future minimum lease payments under this lease as of October 31, 1988 are as follows (in thousands):
1989 1,892 1990 1,892 1991 1,892 1992 1,892 1993 2,312 Thereafter 58 547 Total Minimum Lease Payments $ 68 427 Rental expense for this lease totalled $ 669 thousand for the year ended October 31, 1988.
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'I Ernst &Whinney 300 Locust Court 212 Locust Street Harrisburg, Pennsylvania 17101 717/232-7575 Re ort of Inde endent Auditors on Other Financial Information 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 cash flows of the Cooperative. Such information has been subjected to the auditing procedures applied in our audit 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 13, 1989 5
SCHEDULES OF NONOPERATING RENTAL INCOME (LOSS)
ALLEGHENY ELECTRIC COOPERATIVE, INC.
Year Ended October 31 1988 1987 (In Thousands)
INCOME:
Rental-building 818 739 Rental-parking 86 58 904 797 EXPENSES'tilities 207 192 Payroll and employee benefits 35 39 Management and leasing fees 26 25 Office and administrative expenses 50 12 Maintenance and repairs 66 80 Real estate taxes 169 151 Insurance 43 45 Interest 173 170 Depreciation 136 135 Gain on property disposal (298) 905 551 NET NONOPERATING RENTAL INCOME (LOSS) (I) S 246 I
SCHEDULES OF ADMINISTRATIVE AND GENERAL EXPENSES ALLEGHENY ELECTRIC COOPERATIVE, INC.
Year Ended October 31 1988 1987 (In Thousands)
Office supplies 116 151 Travel, conventions, and meetings 172 106 Payroll and employee benefits 1,256 1,225 Legal, auditing, and engineering 851 865 Association membership dues 42 31 Experimental and general research 362 Board meetings, directors'ees, and travel 123 116 Penn Lines 100 96 Information programs 91 341 Rent 189 150 Payroll taxes 102 91 Insurance 59 60 Insurance SSES 869 854 Insurance Raystown 63 Miscellaneous 50 77