ML20042G913

Pennsylvania Power Co 1989 Annual Rept.

ML20042G913
Person / Time
Site:	Beaver Valley
Issue date:	12/31/1989
From:	Rogers J PENNSYLVANIA POWER CO.
To:
Shared Package
ML20042G908	List: ML20042G907 ML20042G910 ML20042G913 ML20042G916 ML20043A651 ML20043A662
References
NUDOCS 9005160275
Download: ML20042G913 (27)

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t PENN POWER a

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m1 Financial Highlights For the Years Ended Deecmber 31, 1989 19h8 Change (In Millions)

Kilowatt ilour Sales . 4Ll? 2 5,021.7 - 81%

Operating llevenuem . 1302 o $278.2 4 8.6%

Operating Expenses and Taxes . 22" 4 211.1 4 8.2%

Operating income 73 6 67.1 4 9.7%

Allowance for Fenos Used During Construction 42 30 4 36.6%

interest Expenac 44 P 42.4 4 6.0%

Net income a4 7 38.0 -

8.7% .

Earnings on Common Stock 24 0 27.0 - 11.1% l Dividends on Capital Stock $ as a $ 38.6 - 08%

Capital Expenditures:

Construction of Facilities 1 259 $ 213 Nuclear Fuel ~r 3.1 Capital Leanes b .4 Total . $ 37 5 $ 24.8 + 51.2%

internally Generated Cash $ 16 9 $ 4.2 + 300 7%

External Financing:

New Fmancing . 5 567 $ 30.5 '

Itedemptions and Itepayments . 40 0 18 8 Net External Financing i 16 7 $ 11.7 4 42 7%

Iteturn on Average Common Equity 86% 9 89 1

4 5

t J Message to Stockholders Record revenues and new highs in customer demand Customers set record demands distinguished Penn Power's performance in 1989. liigh air. conditioning use by our growing customer base

~ Recognizing our progress, both Moody's investor Service and pushed demand to a record peak of 667 megawatts on August 4.

DufT & Phelps upgraded their ratings of our debt and preferred That record was surpassed on December 21, as greater use of stock during the year, electric heating during a record cold wave boosted customer demand to 683 megawatts.

Retail sales remain firm liigher kilowatt-hour sales to commercial and residential Expanding our market customers helped the Company nearly match its 1988 retail in 1989, we added 116 million kilowatt hours of new e sales record. Continued growth of service and retail businesses business. Over the course of our five-year marketing plan, in our area led to a 4.5 percent increase in sales to commer- completed last year, we added a total 647 million kilowatt.

ci'l customers - the fourth year in a row that commercial sales hours of new business- exceeding our goal by 11.5 percent. ,

have set a record. These sales represent an estimated $38 million in additional  !

Residential sales were up 1.6 percent because of our expand. annual revenue. As we enter the 1990s,our marketing strategy ing customer base and increased share of the home heating targets more sales from space heating, water heating and market. This continues our long hinory of uninterrupted an. industrial process heating.

nual growth in residential sales.

Industrial sales were oft 3.7 percent, due mainly to lower Incentive programs encourage new business production by steel companies - the largest segment of our Economic development corporations throughout our service industrial sales. area are receiving $625,000 in seed money from the Company Total kilowatt hour sales were down 8.1 percent, primarily as part of a two-year refund program approved by the PPUC, because of a 28.7 percent drop in sales to other utilities. The funds will help develop industrial sites and buildings that R: fueling outages at Perry 1 and Beaver Valley 1 and the attract new business. Another $100,000 le helping needy scheduled maintenance of other generating units reduced our families pay their energy bills through the Company's Project pportunities for off system sales. REACil liardship rund, administered by the Salvation Army.

However, off system sales were bolstered by our long-term These funds represent interest on revenues collected from agreement with Potomac Electric Power Company (PEPCO), customers through PPUC approved rates for pre. construction which in 1989 more than doubled scheduled sales from 28 to costs of four nuclear units canceled in 1980. Subsequent court 63 megawatts. The agreement extends through the year 2005 actions disallowed those costs and resulted in refunds to cnd will produce an average of $21 million in annual revenues. customers.

Our economic development rate continues to attract new Hevenues reach record level business. This special five year incentive offers significant Total revenues in 1989 were up 8.6 percent to a record $302 savings to qualified industries that move to our service area million because of new rates that reflect costs associated with or expand existing operations here. The 48 companies on this Perry 1. rate have created 1,900 new jobs since 1984 and added more In 1988, the Pennsylvania Public Utility Commission (PPUC) than $19 million in revenues from electric sales, approved a $67.1 million retail rate increase under a four. year in an effort to expand residential heating sales, we introduced phasoin plan. On May 4,1989, the second phase of the increase a seasonal electric rate that provides electric heating customers ,

took efTect. with reduced winter rates.

Despite the record revenues, higher operation and Also, municipal street lighting customers have responded maintenance expenses caused an 8.7 percent decline in net in. favorably to a new rate program which reduces energy costs come, llowever, the extensive maintenance of our generating for communities that convert to sodium vapor lights, resulting units completed in 1989 should significantly improve plant per. in higher efficiency, lower maintenance costs and improved formance as we begin the 1990s. public safety.

2 .

t W.

PENN POWER l

l l

I l

l Success keyed to employee efforts l To help us improve performance, the Employee Savings Plan was mmlified to provide additional Company contributions tied to achievement of certain corporate objectives Ob,iectives were .j;.-

dermed in the areas of earnings, operating efTectivenen, sales . ,. 4. ...

~'~~.~',..

growth, safety, attendance and service value. Last year, employees attained the safety, attendance and service value

.i i objectives M. ..

~. ==N??'...,--

Employees continue to improve productivity through their ~ ren participatmn in the Employee Suggestion System One ides - 4 ~ ^ ' > ^ = ' ~ hea submitted in 1989 by a power plant employee resulted in record "& 4 savings of more than $502,000 4 .

Present and past employees of the New Castle Power Plant '

M ' '

deserve special recognition. On May 4,1989, they celebrated 1 #' '

60 years of safe, reliable operation of the plant.  ;

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- M/ $

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Meeting the challenges of 1990 .

increased competition and acid rain legislation are two im- t gn * ' ck. ./ - .

portant inues facing Penn Power in 1990 , ..

Many Wauhington observers predict that an acid rain pro. +r .  ; 3. .

e posal will become law this year If passed, some electric com-panics will have to install additional environmental equip- - - -

t ment. Fortunately, about 40 percent of our generating capacity * . .

abould not need mayor additional environmental controls. To .

• 4

" * ~

comply with new emissions standards, we will seek the most ' 1 cost.cfTective solutions available.  :  ; ., .% )i ; h. 3 Finding cost.cfTective solutions is only one of the ways we l 30a . , , .

o, , e ensure quality electric service at competitive prices. We con.  : ~1 3 l

tinue to emphasiw customer service, marketing innovation l

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',, j _

, y and improved efficiency. Our extra efforts in all these areas  :

~

will make Penn Power an even tougher competitor. .

f .

t . , .

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~

Justin T. Rogers, Jr.  :^ 12 c Chairman of the Board ' ' c. - , .. C  :

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p.' * ,< *~ s.

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P ^pa - ' '

James E. Markle e p

,..?A .',,;4s#(i M .W i-b -

President

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j New casue, Pennsylvania .m March 7,1990 . . . . n- %nCW %dMos4MA042WMddh 3

l f

I l

Operating Statistics 1989 1988 1987 1988 1985 Revenue from Electric bales (Thousands):

Reside nt ial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $101,794 $ 91,573 $ 74,615 $ 75,751 $ 74,316

! Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,004 50,648 40.209 40,772 39,266 Industnal . . . . . . ......................... 90,523 66,225 69,958 75.923 77,803 Other...... ............................... 8,640 8,145 6,611 6,982 6.916 l Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257,961 236,591 191,393 199,428 198,301 Sales to Utilities . . . . . . . ...... . ......... 27,545 30,890 18,120 15,455 20.125 Tot al . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . 5285.506 $267,481 $209.513 $214,883 $218.426 Revenue from Electric Sales - W:

R esid e nt i al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35.7% 34.2% 35.6% 35.3% 34.0 %

Com mercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.0 18.9 19.2 19.0 18.0 ,

I nd ustrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31.7 32.3 33.4 35.3 35.6 i Other..... ................... ........... 3.0 3.1 3.2 3.2 3.2 Subtot al . . . . . . . . . . . . . , . . . . . . . . . . ....... 90.4 88.5 91.4 92.8 90.8 Sales to Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.6 11.5 8.6 7.2 9.2 Tot al . . . . . , . . . . . . . . . . . . . . . . . . . . . . . . . . . . _1_00.0% 100.0%

100.0 % 100.0% 100.0 %

Kilowatt llour Sales (Millions):

R e side nt ial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,024.2 1,008.3 961.3 922.2 894.3 Com mercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 698.2 668.1 627.8 597.5 565.5 Industrial . . . . . . . . . . . . . . . . . . , , , ........ 1,809.3 1,877.9 1,747.5 1,667.8 1,705.9 Other.., ....................... . ....... 136.5 135.6 126.7 122.0 124.8 Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,668.2 3,689.9 3,463.3 3,309.5 3,290.5 Sales to Utilities . .......... .............

_ 949J 1.331.8 719.0 683.6 899.1 Tot al . . , . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,617.2 5,021.7 4,1 _82.3 3.993.1 4,189.6

-m -

Customers Served at December 31:

Resident ial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118,285 116,988 115,793 114,646 113,697 i Comme rcial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,718 14,622 14,261 13,923 13,768 '

I nd ustrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264 264 273 278 283 Other....... ........ .... ....... . .... 114 149 142 135 134 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133,381 132,023 130,469 128,982 127.882 Residential Customer Averages:

Average kWh Used per Residential Customer. . . . 3.717 8.676 8.357 8,091 7,885 Average Price per kWh Rosidential (Cents) . . . . . 8.75 7.91 7.77 8.49 8.31 Kilowatt.Ilours Generated (Millions) . . . . . . ..... 4,040.4 4,447.1 4,197.2 3,966.8 4,012.9 Peak Load (Megawatts) . . . . ......... ........ 683 666 611 547 569 Cost of Coal per Million Btu . . . . . . . . . . .. .. $ 1.34 $ 1.35 $ 1.34 $ 1.40 $ 1.50 Generating Capability:

k - Conl....... ..., ........ .... .. ... 74 GW 74.6% 74.6 % 80.2% 77.7 %

O il . . . . . . . . . . . . . ..... ... . ... ....... 2.8 2.8 2.8 3.0 6.1 Nuclear , . . . . . . . . .. . ... ......... 22.6 22.6 22.6 16.8 16.2 To t al . . . , . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0 % 100.0 % 100.0%

__100.0%

Sources of Electric Generation:

Coal . . . . . . . . . .... .... .... . ...... .. 76.6% 71.8% 75.0% 78.7% 73.8%

N uclear . . . . . . . . . . . . . . . . . . . . . . . . . . . ,

,_23.4 28.2 25.0 21.3 26.2 Total . . . . . . . . . . . . . . . . .............. 100.0% 100.0 % 100.6W 100.0%

100J%

Number of Employees at December 31 . . . . . Ig75 1,716 1,725 1,774 1,790 4

i

& rennpowen b Selected Financial Data 1989 1988 1987 (Dollars in Thousands) 1986 1985 Operating Revenues . . . . . . . . . . . . . . . . . . . . . . . . $ 302,038 $ 278,164 $ 223,197 $ 233,024 $ 235,406 Operating income . . . . . . . . . . . . . . . . . . . ...., $ 73.588 $ 67,054 $ 45,991 $ $1,154 $ 53,514 N et income (i) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 34,660 $ 37,960 $ 37,594 $ 44,740 $ 46,593

. Earnings on Common Stock (i) . . . . . . ......, .. $ 23,987 $ 26.993 $ 26,511 $ 33,529 $ 36,576 Cash Dividends on Common Stock . . . . . . . . . . . , $ 27,676 $ 27,676 $ 27,676 $ 25.998 $ 23,560 Total Assets at December 31 .,. ,,. ..., ... . $1,065.574 $1,014,052 $ 979,890 $ 965,663 $ 964,735 Utility Plant . . , .. .... .......... ....... $1,157,385 $1,131,962 $1,121,765 $1,063.719 $1,012,057 Depreciation Reserve . . . . . . . . . . . . . . . . . . . . . 282,645 264,168 238.011 210,108 192.524 Net Utility P!ard . . . . . ... ......... .... . ,$ 87 3 4j $ 867,794 $ 883,754 $ 853,611 $ 819.533 m

CAPITALIZATION:

Common Stockholt.er's Equity . ... .. ........ $ 274,158 ' $ 277,839 $ 278,510 $ 279,672 $ 260,131 Preferred Stock-Not Subject to Mandatory Redemption . . . . . , , 41,905 41,905 41,905 41,905 41,905 Subject to Mandatory Redemption . , . . . . . . . . 59,662 65,102 68,142 69,362 70,662 Long. Term Debt. . . ...,....... ... . ...... 411,473 403,111 422,668 408,598 430,756 Total Capitalization . . . . . ....... .. ,$ 787.198 $ 787.957 $ 811,225 $ 799,537 $ 803.454 CAPITALIZATION RATIOS:

Common Stockholder's Equity . . . . . . . . . . , . . , 34.8 % 35.3% 34.3 % 35.0% 32.4 %

Preferred Stock-Not Subjod to Mandatory Redemption .. . .. 5.3 5.3 5.2 5.2 5.2 Subject to Mandatory Redemption . . . . . . 7.6 8.3 8.4 8.7 8.8

~ Long. Term Debt . . . . .... .. .... ... . 52.3 51.1 52.1 51.1 53.6 Total Capitalization . ... .... . ,. .

_1g0J% 100.0% 100.0% 100.0 % 100.0 %

(1) 1987 includes an $11,000,000 charge resulting from a Supreme Court of Pennsylvania decision concerning the recovery of costs associated with planned nuclear units which were terminated in 1980, resulting in a $7,300,000 reduction in net income and earnings on common stock (see Note 3 to the Financial Statementsk 5

l 1

1 i i

\

\ l l Managementh Discussion and Analysis ol Results of Operations and Financial Condition Results of Operations  !

Operat mg revenues increased $23,874,000 in 1989 primari.

l ly due to the full efTect of a r ate mereake granted the Com pany in 1988 The followmg summarnes the reasons for the

, changes in operating revenues during 1989 an 11988

? 1989 1988

. . . , s .. . . - (In Mllhonei I

! ~.L .

'p Sales to Hesidential, Commercial l umsunt,g and Industrial customers.

$p h[

w increased base rates . $213 $33 3 y,_.

Increased kilowatt hour sales 0.6 11.7

--- t utmosy*! _.  ; Decreased fuel rnovery rates (0.th (1.31 age unkms  :

Tbtal 20.9 43.7 etk%m w,wie Sales to utilities (3 31 12 8

+

..r Revenue from transactions MWiu with Ohio Edison - 4.8 (2.6> ,

jpm ,

Other 1.5 1.1 1

~* Net incream .

had f, . ..;

- - ;' $23.9 $550 3 #

J. A ~ '

r

=

. Kilowatt hour salch to retail customers were relatively unchanged in 1989, with increases in sales to residential and ao  :  ?- commer cial customers of 1.64 and 4.5% , respectively, offset by ,

tu u yt m m 4_ . -

.~ o decrease in sales to industrial customers of 3.74. liowever, )

i: total kilowatt hour sales were down 814 in 1989 compared

1/S ;t- to 1988 due to a 28.7% drop in sales to other utilities iiJ The changes in fuel coste during the last two years werr at.

tributable to the following factors:

- M (1 ..

1989 1988

., 4, .

l 1 i (In Mllhonsi ls Change in fuel prices . $ (4.5) $ 4.2

. W#

. , l J. Change in fuel consumption (2.0) 3.4 i Diflerence in net deferred fuel costs . 10.2 (12 2)

,.fi

' Ytb Net change $ 3.7 ((.4.6)

Ia l -

i t The Company's commitment to purchase a portion of

J m Cleveland Electric illuminating Company's (CEl> Itrry Unit 1 l, * ,

.: . capacity, which began in November 1987 and ended in May l $$ . .

;t 1989, was primarily responsible for the decrease in purchased l . ?% and interchanged power expense in 1989 In addition to the

- ** capacity purchase arrangement, purchased and interchanged 76 *

~<  ; power increased m 1988, compared to 1987, as a result of ad-dit onal power purchased in 1988 to meet demand during a scheduled maintenance outt je at the New Castle Plant and N

, .,;,, . a refueling outage at Beaver Valley Unit 1.

...7.-  ;, <. , i- Other operation and maintenance expenses increased in 1989

.L . 1 . .. .n.  : . , E A '.

• 2.s U! M * ' due to costs meurred during refueling outages at the Com.

' i G E ilvi&s!&JH 1%ih fMi M i:M M? $ # G #1 W . pany's nuclear generating units and outages at several other 6

PENN POWER Company generating umts The commercial operation of Perry Capital Henources and Liquidity Umt 1 in November 1987 was primarily responsible for the Despite lower carnmg> m i 9S9, net cash provided from opera mereases m operation and maintenance expenses, deprecia t mns was higher compared to 1985 primardy due to the Com-tion und general taxes and decreased allowance for funds used panyi mcrease m electric rates in May 1989 The merouse in during construction in 1988 compared to 1987 Mamtenance ratas. designed to produce additmnal annual cash revenue of expenses also merensed m 1988 as a result of the 19$8 outages aproximately $28,000,000, was the second step m the Com described m the precedmg paragraph pc yi phase m plan The increase m expenses attributable to the commerem! ash and cash equivalents at December 31,1989 were operation of Perry Unit I was somewhat oilset by an account- f b,864,00(L The Company also had unused bank linen of credit ing order from the Pennsylvama Pubhc Utility Commission of $5,000,000 at December 31,1989, $37,000,000 of additional tPPUC) permitting the Company to defer Perry Unit I costs funds available under a system funds agreement with Ohio until May 4,1988 <see Note 2 to the Financial Statemento Edison Company and $25,000,000 of additmnal funds available Other income increased in 1989 as a result ofinterest earned under special uncommitted bank borrowing facilities.

on reve me accrued in connection with the Company % phase Capital requirements in 1989 for the Company's construc-l in plan (see Note 2 to the Financial Statemento Oiher income tmn programs, capital leases and nuclear fuel were approx-was atTected m 1987 by the write-oft of approximately unately $37,000,000 The 19tK) 1994 construction program and l $2,000,000 of costs ameiated with four nuclear generating capital lease requirements are currently estimated to be ap.

I units terminated m 1980, an prescribed by accounting stand ards of the Financial Accounting Standards Board <FASHi l

Also in 1987, a Supreme Court of Pennsylvania ruhng '

disallowing the recovery of the costs of these terminated units .t from the Company's retail customers resulted in an additional write oft of $8,300,000 to other income.

During 1989, the Company issued $20,000,000 ofit744 first -'T' mortgage bonds which mature in thirty years The proceeds were used for the retirement at maturity of a like amount of lN

'1" ,

1

1. s 15% first mortgage bondt The refunding will reduce annual .

~

' %tft .

8-mterest expense by approximately $1,000,000 The Company 30 also increased short-term borrowings durmg 1989 by Q4 b.J - y ,

$37,000,000. Those borrowmgs are essentially finanemg a por. .' ",  %%

tion of the revenues receivable from customers under the Com ?ft

'~

" ^

~

panyi phase-in plan. Interest expense increased in 1988 com

mred to 1987 due to the issuance of $27,100,000 of long term )

pp t g debt during 1988 ano $35,000,000 during the third quarter "

, = uz: gr t j!

of 1987. Interest on nuclear fuel obligations increased in 1989 primarily as a result ofincreased interest rates on nuclear fuel 'um~is .

- +

M l ' ,: ' .

6 obligations.

The FASB has issued Statement of Financial Accounting  ; ..

Standards No 96, " Accounting for Income Taxes," which the ' ;# ..

i Company must adopt by 1992. As discussed in Note 1 to the ,, ,

Financial Statements, this change is not expected to have a 6 .

s

- .~ ,

material effect on net income ,

l The eh etric utility industry is subject to inflatmnarv = , -

i - s l

pressures similar to those exper'ienced 3b all other mdustries b," 'Z '

, .. L N(. ,

To the extent that the C-mpany incurs additional costs or .,

/ 3 receives benefits repulting from the efTects of inflation, it in Q. f ~ ; J.,

Er# ! ", s .l' M "2 - Mn t- '..

t anticipated that those effects will ultamately be reflected in "? -

g the Company % rater NMMMDEMidMMM&n%AhiM -

7

l l

l l

l l 1

l I l

I l

b d Managemenrs Discussion and Analysis pnOnued)

I proximately $227,000,000 (excluding nuclear fuelt of which of Pennsylvama, which afTirmed the PPUC's disallowing approximate!y $34,000,000 applies to 1990 The Company has recovery of most of the Company's costs incurred with the additional cash requirements of approximate >y $116,000.tK)0 Perry Umt I capacity purchase from CEI. If the PPUC's for the 1990 1994 period to meet maturities of, and smking decision is ultimately upheld, the Company would be forced l fund requirements for, long-term debt texcludmg nuclear fuelt to write ofl the deferred costs, which would reduce net income and preferred stock; of that amount approximately $28,000,(KK) by approximately $10,000,000 applies to 1990 Changes in environmental regulations could substantially Investments for additwnal nuclear fuel during the 1990 1994 mereuse the Company's capital requirements and operating permd are estimated to be approximately $32,000,000, of which costs 1,egislation amending the Clean Air Act could aflect the approximately $8,000,000 applies to 1990 Dermg the same Company's operations See Note 7 to the Financial Statements periods, the Company's nuclear fuel mvestments are expected for a further discussion and possible impact regarding en-to be reduced by approximately $56fKK),000 and $14,000,000, vironmental matters respectively, as the nuclear fuel is consumed.

Sales by the Company of nrst mortgage bonds and of pre-ferred stock require that applicable earnmg8 coverage tests be met. With respect to issuance of first mortgage bonds, cther l

requirements also apply and are more restrictive than the j, ... W k ap ^ 7 g( "k ') -

earmngs test at the present time. The Company is currently , __ _.. .

able to issue $160,000,000 principal amount of first mortgage  : ,

e -

bonds ($86,000,000 agamst property additions, excluding Perry  !

J Unit 2 property additions, and $74,000,000 against previous- l

f% -'f'

., 4 ly retired bondst The Company does not currently meet the  ; 6( . . .. .. .f'" '

requirements in its Charter for the issuance of additional -'

preferred stock **

In February 1990, the Company issued $5,200,000 of new pollution control notes The Company currently expects that M['

"b  ? ,? -

external unanemgs will be necessary through 1994 to provide a portion of its cash requirements. Such financings may in-

,y .

~

SM

- p' s

Ot' -

1 . . . .

I clude the sale of common stock, as well as preferred stock, nrst _a4  % M2 mortgage h(mde and other long-term debt. The extent and mix

g % qpp 2.

,4 h..g" ' .

' ; y. . . A, ;' h..$ .. y a

of such financings will depend on the need for external funds '. 7 c,a ' : ': Zc as well as market conditions, the maintenance of an ap-  :

^Pm sq%

propriate capital structure and th( ability to comply with ,

h.SY - 5' . 'S[5 ,' Q [#g-sg .

coverage requirements in order to issue first mortgage bonds i 4'

and preferred stock. d  ! , J The Company will increase its elect- .itee in May 1990 in connection with its phase-in plan, resulting in additional i

'f NYN a'

- 4 7'  ?

) (.

N annual cash revenue of approximately $32,000,000. An addi. g ?r i* T- l

( [$$ '

tional annual rate increase of approximately $36,000,000 in 1991 will be implemented prior to a scheduled $52,000,000 . 10 . .

1

.1 r- s-p

4 h! ; t.

~: l l

reduction in 1992 which completes the phase-in program. k I

However, there will be no material effect to net income since .

the Company recognizes revenue under the phase-in plan as - ~

^

l if the full revenue level had been placed into effect in 1988. p ' '- . ,

With the 1990 increase, amounts recognized as accrued i

'~ ,. .. ,..<.

revenues in 1988 and 1989 will begin to be recovered =4 ' 5# '= *. "

The Supreme Court of Pennsylvania has agreed to hear the 'J '

Company's appeal of a decision of the Commonwenith Court

..S W =

', I 's M 8

p i.

PENN POWER i

rl L_J Statements OfincOme

' For the Years Ended December 31, 1989 1988 1987 (in Thousands)

Operating Revenues (Note 2) .. . . . . . . . . . . . . . . . . ,................. $302,038 $278,164 $223,197 Operating Expenses and Taxe:

Operation-Fuel....................................................... 54,194 50,487 55,100' Purchased and interchanged power, net. . . . . . . . . . . . . . . . . . ....... 15,067 24,181 3,428 Other operation expenses . . . . ........... ..................... 62.819 53,430 48.244 Tot al operation . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . , . . . , . . . . , , . . 132,080 128,098 106,772 M :inten a nce . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,870 21,745 18,977 Provision for depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . 28,363 28,469 22,547  :

General t ax es . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , 19,464 18,623 14,943  ;

Deferred Perry Unit I costs (Note 2) , . . . . . . . . ... , .........,,... 29 (6,334) (1,855)

I ncome t a x es , . . . . . . . . . . . . , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,644 20,509 15.822 >

Total operating expenses and taxes . . . . . . . . . . . , . . . . . . . . . . . . . . 228,450 211,110 _177,203 Ope ratin g In c o me . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73.588 67,054 45,991  ;

i Other income and Deductionu:

Allowance for equity funds used i' du ring construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 428 185 19,181 2 Miscellaneous, net (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....., 3,141 1,105 (9,251) l; income taxes - credit (provision) . . . . . . . . . . . . . . . . . . . . . . . . . . ....., _( 1,308) (527) 2.920 Total other income and deductions . . . . . . . . . . . . . . . . . . . . . . . . . . , 2.261 763 12,850 l

l Tot al I n co me . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , 75,849 67,817 - 58,841 ,

l' Net Interest:

i . Interest on long term debt . . . . . . , ......................... .... 38,216 38,437 35,793 Interest on nuclear fuel obligations . . . . . . . . . . .......... .... 3,361- 2,630 3,674 Deferred Perry Unit 1 interest (Note 2) . . . . . . . . . . . . . . . . . . . . ..... - (9,651) (3,369)

' Allowance for borrowed funds used during construction , , . . . . . . . . . . ................ .. . (3,725) (2,855) (16,593)

Other interest expense . . . . .................. .. . . .. ,, ... 3,337 1,296 1,742 *

. Net interest . . . . . . . . . . ..... ..... ......... .,..... . 41,189 29,857 21,247 i N e t i n co m e . . . . . . . . . . . . . . , . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,660 37,960 37,594 Preferred Stock Dividend Requirements . . . . . . . . . . . . . . . . . . . . . . . . 10,673 10,967 11,083

- E rnings on Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 23,987 $ 26,993 $ 26,511

, The accompanying Notes to Financial Statements are an integral part of these statements.

9 1 -

L P

Balance Sheets Assets At December 31, 1989 1988 (In Thousands)

Utility Plant:

In service, at original cost . . . . . . . . . . . . . . . . . . . . . . . . . ................... $1,067,317 $1,039,166 Less - Accumulated provision for depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . 282.645 264,168-784.672 774,998 Construction work in progress -

Electric plant (Note 7) . . . . . . . . . . . . . . . . . . . . . . . ........................ . 71,309 66.293 N ucl ear fu el . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.759 26,503 90,068 92,796

_ 874,740 867,794 .

Other Property and Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,050 2,346 Current Assets:

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , 8,864 4,670 Receivables - ,

Customers (less accumulated provisions of $767.000 and '

$734,000, respectively, for uncollectible accounts) . . . . . . . . . . .... ......... 18,062 15,487 Pare nt company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,897 14,673' Other................................................ .......... . 12,603 12.577 Materials and supplies, at average cost -

Fue1.......,................,.................................... 7.340 7,529 '

Other.......................... . ........ ... ....... , .. . ....... 9,735 9,025 Prepayments . . . . . . . . . . . . . . ............. ......... . ... . ........ 1,669 1,329  ;

74,170 65,290 Deferred Charges:

Deferred fuel costs (Note 7) . . . . . . . . . . . . . . . . . . . ...... ............. ... .. 21,151 18,065 Accrued eustomer revenues (Note 2) .. ............. .. ...... ... . .. 60.854 30.045 Deferred Perry Unit i costs (Note 2) . . . . . . .. ... .... ..... . ... ....... 21,180 21,200 Other........ ....... ............ .... .......... ..... ... ... 9,429 9,303 112.614 78,622

$1,065,574 $1,014,052 l n ---

10.~

~?

/m t

(a# rempowen p

t C pitalization and Liabilities At December 31, 1989 1988 (In Thousands)

Ccpitalization (See Statements of Capitalization):

Common stockholder'a equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 274.158 $ 277,839 Preferred stock - 41,905 Not subject to mandatory redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,905 59.662 65,102 Subject to mandatory redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Long term debt - 1,742 Associat ed companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,196 Other............................................,............... 376.277 401,369 787,957 l 187 198 t

L Current IJabilities:

Currently payable preferred stock and long term debt -

Associated companies . . . . . . . . . . . . . . . . . . . . ..........................., 13,192 170 Other ............... ................................, ............ 27,761 54,336 Notes payable (Note 6)-

28.000 4,000 Banks...............................................................

Paren t com pany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.000 -

Accounts payable -

4,411 1

Associated companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,345 32.328- 29,548 Other................ ....... ........ .. ..................... ... .

Accrued taxes . . . . . . . . . . . . . , .,.... ........................... ...... 6.432 6,543 9,267 9,842 Accrued interest . . . ........ .. ............ ..... .....................

10,209 12,532 Other ... .................................... ........................

150,534 121,382 Deferred Credits: 59,900 86,842 Accumulated deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

30,405 31.576 Accumulated deferred investment tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,237 10,595 Other ....................... ........................... ...... ... ..

12_7,.84__2 104,713-Commitments, Guarantees and Contingencies (Notes 4 and 7). . . . . . . . ......

$1.065.574 $1,014,052 The accompanying Notes to Financial Statements are an integral part of these balance sheets.

11

[-

I a

. Statements of Capitalization At December 31 1989 1988 (In Thousands)

Common Stockholder's Equity:

Common stock, $30 par value,6,500,000 shares authorized 6.290,000 sh ares outst a ndin g . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $188,700 $188,700 Ot her pa i d -i n ca pi tal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201 209 Retained earnings (Note 5a) . . . . . . . . . . . . ........................................ ... , _ 65,257 88,930 Total eommon stockholder's equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . _ , 274J58 ._ 277,839 i

Op~~tional ~p-Redem tion Price Number of Shares Aggregate Outst_andinE _ (In 1989 1988 Per Share Thousands)

Preferred Stock (Note $bh Cumulative, $100 par value Authorized - 1,200.000 shares Not Subject to Mandatory Redemption:

4.24 04.64 % . . . . . . . . . . . 141,049 141.049 $102.98105.00 $14,614 14,105 14,105 7.64 08.00% . . . , . . . . . . 118,000 118.000 102.56 103.27 12.144 11.800 11,800 8.4 849.16% . . . . . . . , . . . _160,000 160,000 103.08 104.58 16,612 _ 16,00_0 16A00 .

Total not subject to mandatory redemption . . . . . . . .

Subject to Mandatory flg flg9 J h370 41 1905 41J_05 Redemption (Note Sc):

8.24410.50% . . . . . ... 160,000 165,000 $104.12107.22 $16.969 16.000 16,500 11.00411.50% . . . . . . . . . 305,616 339.616 103.29 106.39 32.110 30.562 33.962 13.00015.00% . . . . . . . . 167,200 173,600 109.75 113.66 18,613 16,720 17,360 Redemption within one year . . . . . . . . . (3f20) (2 17_20)

Total subject to mandatory redemption . . . . . . . . . J32g16 ,,g8 1216 Jg _ 59y62 651102 Iong. Term Debt (Note 5dh First mortgage bonda -

9.56% weighted average interest rate, due 1989 through 1994. . . . . . . . . . . . . . . . . . . . . . . 62.938 87,268 9.79% weighted average interest rate, due 1995 through 1999. . . . . . ..... . ... .... . 57,010 58,940 8.47% weighted average interest rate, due 2000 through 2004. . . . . . . . . . . . ............. 53,184 54.232 9.22% weighted average interest rate, due 2005 through 2000. . . . . . . . . . . . . . . . . . . . . . . 40,000 40,000 9.74 % weighted average interest rate, due 2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . _ _ 20.,000 -

Total first mortgage bonds . . .......... . ........... ., ....... ... . ......... 233,732 240,440 Secured notes and obligation -

7.85% weighted average interest rate, due 1989 through 1994. . . . . . . . . . . . . . .. ....... 20.804 20,919 l 11.01% weighted average interest rate, due 1995 through 1999. ... . ...... .... .... 49,261 49.261 10.09% weighted average interest rate, due 2000 through 2004. . . . . . . . .......... . ..... 36.098 35.782 7.34% welghted average interest rate, due 2005 through 200.;. . ..... ... . ......... 12,720 12,720 11.12% weighted average interest rate, due 2010 through 2014. . .. . .... .. ... ... 17.900 17,889 -

8.11% weighted average interest rate, due 2015 through 2018. .... . .... .. ... ... 24,550 2M50 Total secured notes and obl.igation . . . . . . . . . . .... ... . ...... ... .. . . ... 161,333 1 181_1_21 Other obligations -

N uclear fue1. . . . . . . . . . . . . . . . . . . . . . . . . , .. .. ........ . . . . .. ... 46,645 43,778 Capital leases (Note 4) . . .. .. ...... .. .. .... . .... ... .... .. ....... 8pS2 10,562 Total other obligations . . . . . , . ........ .... . ... .. . . . .. .. . . ......

_5M27 54 340 Net unamortized discount on debt and other . . . .. . . .. . . . ...... . (986) (1,001)

Long-term debt due within one year . . . .. .. .. .. . .. .. . ..... (37,333) (51,786)

Total long term debt . .. ...... .. ... .. . . . ... ... . .. 403,111 411373 Total capitalization . . . . . . .. .. . ... .... .. ... .. . .. . .... . ..

y(7398 ,J787 1951 9 The accompanying Notes to Financial Statements are an integral part of these statements.

-12 o

1 l

rewpown i

I

.q 1 l._J Statements of Retained Earnings For the Years Ended December 31, 1989 1988 1987 ,

(In Thousands)

Bal: nce at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 88,930 $ 89,598 ' $ 90,760 N I t i ncom e . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34.660 37,960 37,594

_ 123.590 127,558 128,354 -

Cah dividends on common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,676 27,676 27,676 C:sh dividends on preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.657 10,952 11,080 ,

38.333 38,628 38,756  !

' Bal:nce at end of year (Note 5a) . . . . . . . . . . . . . . . . . , ........... $ 85.257 $ 88,930 $ 89,598 E

o Statements of Capital Stock and Other Paid in Capital .

Preferred Stock Not Subject to Subject to Common Stock Mandatory _ Redemption Mandatory Redemption Other Number Par Pald-In Number Par Number Par

, of Shares , ,_Value._ . Capital of Shares Value af Shares Value (Dollars in Thousands)

Bal:nce, January 1,1987 . . . . . . . . 6,290,000 5188,700 $212 419,049 $41,905 706,591 $70,659 Sinking Fund Redemptions -

8.24 % Series . . . . . . . . . . . . . . (5,000) (500) .

11.00% Series. . . . . . . . . ..... (7,975) _ (797) .

Ballnee, December 31,1987...... 6,290,000 188,700 212 419,049 41,905 693,616 69,362 Sinking Fund Redemptions -

8.24% Series . . . . . . . . . . . . . (5,000) (500) 11.00% Series . . . . . . . . . . . .. (4,000) (400) 15.00% Series . . . . . . . . . . . . . . . (3) (6,400) (640)

. Bince, December 31,1988...... 6.290,000 188,700 209 419,049 41,905 678,216 67,822 Sinking Fimd Redemptions --

8.24 % Series . . . . . . . . . . . . . . (5,000) (500) 11.00% Series. . . ........... (4,000) (400) 11.50% Series . . . . . . . . . . . . . . . (6) (30,000) . (3,000) 15.00% Series . . . . . . . . . . . . . . (2) (6,400) (640)

. Bal:nce, December 31,1989...... 6,290,000 $168,700 $201 419,049 $4 -

.-,1,90,5,. _ 632,81_6

_ $63,282

, The accompanying Notes to Financial Statements are an integral part of these statements.

13 i

t s

i 4

L~

Statements of Cash flows For the Years Ended December 31, 1989 1988 1987 (In Thousands)

Cash Flows From Operating Activities:

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ................ .. $ 34.630 $ 37,960 $ 37,594 Principal noncash items -

Depreciation and amortization . . . ...................... ......... 37,519 40,132 31,469 Deferred income taxes, net . . . .......................... .. ...... 21,043 18,319 11,338 Investment tax credits, net . . . . . . . . .. ........ ...... ............ (1,171) (748) (1,044)

Deferred (accrued) revenue, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (32.976) (31,177) 39 Allowance for equity funds used d uri ng construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (428) (185) (19,181)

Deferred fuel costs, net . . . . . . . . . . ........................... ... (3.086) (13,248) (618)

Writt-oft of terminated construction projects . . . . . . . . . . . . . . . . . . . . ,,,, - - 10,473 Deferred Perry Unit 1 costs . . . . . . . . . . . . . . . . . ....... ............. 29 (15,985) (5,224)

Change in applicable assets and liabilities -

Receivables . . . . . . . . . . . . . . . . ..........,........... ... ....... (3,825) (813) 12,524 Materials and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. (521) 4.261 . (4,926)

Accounts payable . . . . . . . . . . . . . . . . . . .... ..... .... .......... 7,933 (4.587) (2,697)

Other....... . ............................ ....... ........., (3,959) 8,913 (3,130)

Net cash prov.ded from operations . . . . . . . . . . . . . . . . . . . . . . . . 55.218 42.842 66,617 Cash Flows From Financing Activities:

New financing -

Long term debt . . . . . . . . . . . . . ............... .......... ......... 20.000 27,271 35,235 Notes payable, net . . . . . . . . . . . . . . . . . .......... ................,. 37,000 4,000 -

Other..... ..................... ................... .......... (315) (723) (506)

Redemptions and Repayments -

Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.540 1,540 1,297 1 on g term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... 35,433 17,296 28,974 Dividend payments -

Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,676 27,676 27,676 Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.657 10,952 11,080 Net cash used for financing activities . . . . . . . . . . . . . . . . . . . . . . . , _ 21.621 26,916 34,298 Cash Flows From Investing Activities:

Property a dditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,659 21,370 41,831 Purchase of investments . . . . . . . . . . . . . . . . ......... .. .............. 932 687 370 Sale of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...... - (1,331) (723)

. Other ................................. ......... .... .......... 812 (472) (909)

Net cash used for investing activities . . . . . . . . . . . . . . . . . . . . . . 29.403 20,254 40.569

~ Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . 4,194 (4,328) (8,250)

Cash and cash equivalents at beginning of year . . . . . . ... ........... 4,670 8,998 17,248 Cash and cash equivalents at end of year . . . . . . ................ ... 8 8.864 $ 4,670 $ 8,998 mmm Supplemental Cash Flows Information:

Cash paid duing the year -

Interest (net of amounts capitalized) . . . . . . . . . . . . . . . ..... . .. ..... $ 41,004 $ 38,495 $ 23,537 Income taxes . . . . . . . . . . . . . . . . . ........... ........ . ....... .. 3,260 2,767 6,443 The accompcying Notes to Financial Statements are an integral part of these statements.

' 14 -

t t

I h PENN POWER U Statements oIhes For the Years Ended December 31, 1989 1988 1987 (in Thousands)

General Taxer.:

State gross receipts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,017 $ 9,004 $ 8,566 Real and pers.onal property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,834 6.004 2,820 State ca pital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,754 1,923 1,852 Social security and unemployment . . . . . . . . . . . . . . . . ................... 1.633 1,545 1,553 Other ..................................... .... .......... ... ... 226 147 152 Total general tax es . . . . . . . . . . . . . . . . . . . . . . . . . . . . .......... ..... $19.464 $18,623 $14,943 Provision for income Taxes:

Currently payable -

Federal..............................................,,..... $ 1.080 $ 3,592 $ 2.543 Stat <>......................................... . . ........ . ... -

(127) 65

_ 1.080 3,465 2,608 Deferred, net (see below)-

Federal ............................ ....... ...... .... ...... .. 18,532 15,898 10,823 State ............................................... ........... _2A11 2,421 515 21,043 18.319 11,338 Investment tax crodits, net of amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . _ (1,171) (748) (1,044)

Total provision for income taxes . . , . . . . . . . . . . .. ............ $20_,952 $21,036 $12,902 Income Statement Classification of Provision for income Taxes:

Operatin g incom e . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........... $19,644 $20,509 $15,822 Ot her income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... . .. ...... .. .. 1,308 527 (2,920)

Total provision for income taxes . . . . . . . . . . . . . . . . . . . .. .. ........ $21,036 $12,902

_$20._952 So:rces of Deferred Income Taxes:

Excess of tax over book depreciation, net . . . . . . . . . . ................. .. $ 7,058 $ 7,245 $16,237 -

DifTerence between tax and book revenue, net . . . . . . ... ............... 12,015 8,937 (1,930)

Allowance for borrowed funds used during construction . . . . . . . . . . . . . . , . . 680 1,024 7,377 Deferred fuel cost s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,202 5,161 275 Deferred Perry U nit I costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11) 5,071- 1,860 Amortization of deferred interest on leased nuclear fuel . . . . . . . . . . . . . . . . . . (1,125) (1,350) . (536)

T;rminated construction projects ...................... .............. (20) (15) (3.885)

Propert y t axes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 (541) 1,724 Alternative minimum tax deferral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.441) (4,862) (3,423)

Operating loss carryforward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,244 (1,729) (7,820)

- Other, net..................................................... 352 (622) 1,459 Net deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. $21.043 $18,319 $11.338 Reconcillation of Federal Income Tax Expense at

l. 8tatutory Rate to Total Provision for Income Taxes:

Book income before provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . $55.612 $58,996 $50,496 mmm=

Federal income tax expense at statutory rate . . . . . . . . . . . ......... .... $18.908 $20,059 $20,173 l Increases (reductions) in taxes resulting from:

l Excess of book over tax depreciation, net . . . . . . .. .... ... . ... . 1,949 1,181 1,057 State income taxes, net of federal income tax benefit . . . . . . . . . . . . . . .......... .. .......... .. ... 1.657 1,514 349 Allowance for funds used during construction,

, which does not constitute taxable income . . . . . . . ... ...... ...... (269) (140) (7,663)

! Amortization ofinvestment tax credit . . .... . ... ... .. .. . (1,532) (1,690) (1,794)

Other, net . . . . . . . . ... ......... .......... ... . .. .. .. ... 239 112 780 Total provision for income taxes . . . . . . . . . . . . . . . . .... .... ......, $20,952 $21,036 $12,902 I m-

)

i Tlo accompanying Notes to Financial Statements are an integral part of these statements.

15 l

r I

Notes to Financial Statements (1) Summary of Significant Accounting Policies: to pay a share of the construction costs of any jointly owned The Company, a wholly owned subsidiary of Ohio Edison facility in the same proportion as its ownership interest. The Company (Edison), follows the accounting policies and prae- Company's portion of operating expenses associated with these tices prescribed by the Pennsylvania Public Utility Commis- jointly owned facilities is included in the corresponding sion (PPUC) and the Feders) Ettergy Regulatory Commission operating expenses on the Statements of Income (see Note 2 (FERC). Certain financial statement items for periods prior with respect to the deferral of Perry Unit I costa). The to 1989 have been reclassified to conform to the 1989 amounts reflected on the Balance Sheet under utility plant at presentation. December 31,1989, include the following:

Revenues - Utility Arcuniulated Construction Coenpany's The Company's retail customers are metered on a cycle basis. runt provi. ion for work in owner. hip Revenue is recognized for electric service based on meters read Genmitar tinit _ in smi fe. pepreention, . Progm. m intemt through the end of the month. Reference is made to Note 2 an Thou and.)

with respect to the Company's policy of accruing revenues in connection with a rate phase in plan.

y S*'"'",' t m>w $mm s 6.no 20 sn Bruce Man neld-Revenues from Sharon Steel Corporation, the Company's No.1. No. 2 1:rgest customer, amounted to approximately $29,335,000, and Nc. 3. . 86.100 28.900 200 6.76%

$27,862,000 and $22,003,000, in 1989,1988 and 1987, respec. D'*

• Y'"'1 tively, representmg 9.7%,10.0% and 9.99, respectively, of the p$'s;T emw em 2.3% non Company's total operating revenues. On April 17, 1987, and common Sharon Steel filed a Petition under Chapter 11 of the Federal neinue. . sos.400 ri.soo 800 6.24

• Bankrug,tcy Code. The Company has filed a proof of claim in reny Na 2. - -

5Asw 6.24 %

this proceeding of approximately $800,000 for electric service T"'*l - F 2" d l8 * '84 "

furnished to Sharon Steel prior to the Chapter 11 filing. The W Esclude nucientidel in process which has not yet been assigned to a specific Company is currently being paid in weekly installments but nuclear una.

has retained the right to be paid for current electric service en a daily basis coupled with the right to establish a security Nuclear Fuel -

d: posit of $500,000 pursuant to the Order of the Bankruptcy During 1989, OES Fuel, incorporated (OES FueD, a wholly Court, owned subsidiary of Edison, became the sole lessor for the Com-pany's nuclear fuel requirements. The Company previously Fuel Costs - met its nuclear fuel requirements through third. party leasing The Company recovers fuel costs not otherwise recovered arrangements. Minimum lease payments during the next five through base rates from its customers through an annual years are estimated to be as follows:

"levelized" energy cost rate (ECR). The ECR, which includes 1990. . . . . . . . . . . . . . . . . . . $ 12,994,000 Miustment for any over or under collection from customers, 1991...... .. .......... 9,882,000 la recalculated esch year. Accordingly, the Company defers the 1992.. ,. ...,.. ......... 8,464,000 difference between actual energy costs and the amounts cur. 1993. .. .....,.. ...... . 6,430,000 rently recovered from its customers. 1994...... . .....,. ...., 3,877,000 The Company amortizes the cost of nuclear fuel based on the Utility Plant and Depreclation - rate of consumption. The Company's electric rates include Utility pla.nt reflects the original cost of construction, in. amounts for the future disposal of spent nuclear fuel based cluding payroll and related costs such as taxes, pensions and upon the formula used to compute payments to the United cther fringe benefits, administrative and general costs and States Department of Energy.

ellowance for funds used during construction (AFUDC).

The Company provides for depreciation on a straight.line Allowance for Funds Used During Construction -

basis at various rates over the estimated lives of property in. AFUDC represents financing costs capitalized to construc-cluded in plant in service. The annual composite rates for elec. tion work in progress (CWIP) during the construction period.

tric plant were 2.99-in 1989 and 1988 and 3.1% in 1987. The The borrewed funds portion reflects capitalized interest Company recognizes as depreciation expense estimated nuclear payments and the equity funds portion represents the noncash decommissioning costs as the costs are recovered from capitalization of imputed equity costs which are charged to customers. Such amounts are invested in external decommis. construction. AFUDC varies according to changes in the sioning trust funds, level of CWIP and in the cost of capital. The Company capital.

ized AFUDC to electric plant utilizing a net of tax rate in Common Ownership of Generating Facilities - 1987, which is consistent with the rate treatment. Effective The Company and other Central Area Power Coordination January 1,1988, substantially all of the Company's CWIP was Group (CAPCO) companies own, as tenants in common, various subject to the capitalization rules for interest contained in the power generating facilities. Each of the companies is obligated Tax Reform Act of 1986; therefore, no adjustment was

~61 s

PENN POWER necessary to reduce the CWIP AFUDC rate to recognize a cur. deferred tax liabilities will be collected from its customers rent income tax benefit. The AFUDC rates (excluding nuclear when the taxes become payable, an asset will be recognized fuel interest) were 10.9% ,10.4% and 10.1% in 1989,1988 and for that probable future revenue. The Company is not required 1987, respectively. Capitalization rates for interest on nuclear to adopt SFAS No. 96 until 1992. Ilowever, if the Company full were 10.1%, 8.5% and 8.2% in 1989,1988 and 1987, had adopted the stan6ard as of December 31,1989,it estimates respectively. that total assets would have increased by approximately

$200,000,000 with no material efTect to net income.

Income Taxes -

Details of the total provision for income taxes are shown on Retirement Benefits -

the Statements of Taxes. The deferred income taxes result from The Company's trusteed, noncontributory defined benefit timing differences in the recognition of revenues and expenses pension plan covers almost all full time employees. Upon f;r tax and accounting purposes. The Company expects that retirement, employees receive a monthly pension based on def;rred taxes which have not been provided will be collected length of service and compensation. The Company uses the from its customers when the taxes become payable, based upon projected unit credit method for funding purposes and was not the established rate making practices of the PPUC and the required to make pension contributions during the three years FERC. As of December 31,1989, the cumulative net income ended December 31,1989.

tax timing di!Terences for which deferred income taxes have The following sets forth the funded status of the plan and not been provided were approximately $100,000.000. amounts recognized on the Balance Sheets:

The Compt.ny defers investment tax credits (lTC) utilized Ind emortires these credits to income over the estimated life At December 31, ---

1989 1988-of th> related property. The Tax Reform Act of 1986 repealed Actuarial present value of the ITC efTective January 1,1986, except for certain transi- ga ns:

tion property. As of December 31, 1989, approximately (e '.... . . . $50,836,000 $45,104,000

$10,000,000 of unused ITC was available to offset future Nonvested benefits . .. 262 000 341,000 federal income taxes payable, of which approximately - -

$8.000,000 expires at the end of 2001 with the remainder ex. Accumulated benefit piring at the end of 2002. The Company also has approximately obligation . . . .... $3,g9L000 9 H5 3445,000

$9,700,000 of alternative minimum tax credits available to oft.

set future federal income taxes payable; such credits may be Plan assets at fair value . . . . . . . $99,094,000 $84,834,000 c:rried forward indefinitely. Actuarial precent value The Company has also accumulated approximately of projected bene'it

$17,500,000 of tax net operating losses through December 31. obligation . , , . .. . . . ,_67,252,000 67 409,0

, _00 1989, of which approximately $3,200,000 expires at the end Plan assets in excess of pro-of 2002 with the remainder expiring at the end of 2003. Such jected benefit obligation . . .. 31,842,000 17,425,000 tax net operating losses have been recognized by not providing Unrecognized net gain . . . (24,480,000) (5,055,000) dif;rred income taxes of approximately $1,700,000 and Unrecognized prior

$7,800,000 in 1988 and 1987, respectively, which would other. service cost . . . . .,,.. .. 3,824,000 31,000 wise have been provided; during 1989 approximately Unrecognized net

$2,200,000 of such deferred taxes were restored due to the use transition asset . . . . . . 1131691,000) R4,745 1000) of prior years' tax net operating losses for book purposes. Under Net pension liability . . . . . $-2j0_5,000 $ 2,344,UOU th> tax sharing agreement between the Company and Edison, the cash benefit of tax net operating losses is realized by the Company in the future when the Company's taxable income The assets of the plan consist primarily of common stocks, is suflicient to ofTset suct' losses. United States government bonds and corporate bonds. Net pen-The Financial Accounting Standards Board issued Statement sion costs for the three years ended December 31,1989 were of Financial Accounting Standards (SFASn No. 96," Account- computed as follows:

ing for income Taxes" which, among other %ings, requires 1989 1988 1987 l a ch:nge in the method used by enterprises to account for de- Service cost - benefits ferred income taxes. Under the standard, deferred income tax earned during li:bluties must be recognized at the statutory income tax rates the period . . . . . . $ 3,611,000 $ 3,480,000 $ 3,247,000 .

In effect when the liabilities are expected to be paid. The new Interest on projected  !

st!ndard also requires recognition of a deferred tax liab'iity benefit obligation . 5,908,000 5,4 B4,000 4,883,000 f:r t:x benefits that have previously been flowed through t Return on plan essets. (17,492,000) (11,995,000) (2,122,000) th) Company's customers and an assumed deferred tax liabih.- Net deferral ty cpplicable to the equity component of AFUDC, for which (amortization) . .. 8,134,000 3,521.000 (5,649,000) -

no income tax timing difTerence exuts under current account. Net pension cost . . $_161J00 Q9(000 $_359,g00 ing standards. Since the Company expects that the additional 17 7

Notes (continued)

The assumed discount rate used in determining the actuarial crease is be5g phased in over several years, such that all present value of the projected benefit obligation was 9% in each amounts deferred during the phase.in period will be fully year. The assumed rate of increase in future compensation recovered by the end of the fourth year. Under this phase.in levels used to measure this obligation was 5% in 1989 and 7% plan, the Company's ates were initially increased to produce in 1988 and 1987. The assumed expected long term rates of approximately $24,000,000 in additional cash revenue; the return on plan assets were 104 in 1989 and 1988, and 9% in second year increase of approximately $28,000,000 was im.

1987, plemented in 1989. The ditTerence between revenues actually The Company provides a minimum amount of noncon. billed and revenues that would have been billed absent the tributory life insurance to retired employees in addition to op. phase.in plan is recognized as additional accrued revenue for tional contributory insurance. llealth care benefits, which in. nnancial reporting purposes. Such revenues and associated in.

clude certain employee deductibles and copayments, are also terest accrued for future collection in connection with this plan available to retired employees, their dependents and, under amounted to approximately $60,854,000 as of December 31, certain circumstances, their survivors. The Company pays in- 1989, of which approximately $30,809,000 and $30,045,000 surance preiniums to cover a portion of these benents in ex. were accrued during 1989 and 1988, respectively.

cess of set limits; all amounts up to the limits are paid by the The Company was ordered by the PPUC to defer IVrry Unit 1 Company. Expenses associated with health care and life in, operation and maintenance costs (net of energy savings from suranee benents for retirees amounted to $526,000, $668,000 the unit), depreciation expense, property taxes and interest ex.

end $617,000 in 1989,1988 and 1987, respectively, pense beginning with its November 18, 1987, commercial operation date until May 4,1988, when Perry Unit 1 operating Transactions with Affiliated Companies - costs were recognized in the Company's electric rates. Based Operating revenues for 1989,1988 and 1987 include on this order, the Company has deferred $21,180,000 for future

$11,108,000, $5,816,000 and $8,544,000, respectively, at. recovery from its retail customers.

tributable to transactions with Edison. Such revenues resulted primarily from Edison's purchase of capacity from the (3) Terminated Construction Projects:

Company's ownership interest in Beaver Valley Unit 1 and In January 1980, the Company and all other CAPCO com.

Sammis Unit 7. Purchased and interchanged power, net, panies terminated plans to construct four nuclear generating reflects charges (credits) of $10,091,000, $9,809.000 and units. On October 15, 1987, the Supreme Court of Penn-($128,000) due to the Company's net interchange power trans- sylvania reversed ajudgment of the Commonwealth Court of

- actions with Edison during 1989,1988 and 1987, respective. Pennsylvania which aflirmed the PPUC's decision to permit ly. Fuel expense for 1989 includes $5,663,000 for nuclear fuel the Company to recover the costs of the terminated units. The leased to the Company by OES Fuel and other interest expense Supreme Court's decision was based on its interpretation of includes $2,033,000 of interest on loans with Edison. Other Section 1315 of the Pennsylvania Public Utility Code (which operation expenses for 1989,1988 and 1987 include $4,298,000, was in effect at the time of the PPUC's rate order), which it

$3,779,000 and $3,542,000, respectively, primarily attributable concluded bars the recovery of such costs through the rate mak.

to data processing services rendered by Edison to the Company, ing process. The Company wrote off the unamortized costs of the terminated units applicable to its PPUC jurisdictional Supplemental Cash Flows Information - customers and established a liability for potential customer All temporary cash investments purchased with an initial refunds of previously recovered costs, reducing net income by maturity of three months or less are reported as cash approximately $7.300,000 in 1987. On January 11,1989, the .

equivalents on the Balance Sheets. The Company records tem- U.S. Supreme Court upheld the Supreme Court of Penn.

porary cash investments at cost, which approximates their sylvania's decision and refunds for amounts previously col.

market value. Noncash nnancing and investing activities in. lected began in September 1989, cluded capital leases of $8,997,000, $4,553,000 and $8,331,000  ;

for the years 1989,1988 and 1987, respectively, Noncash in. (4) Leases, vesting activities also include allowance for equity funds The Company leases certain transmission facilities, computer used during construction. equipment, office space and other property and equipment under cancelable and noncancelable leases. Consistent with (2) Itecovery of Perry Unit 1 Costs: the regulatory treatment, rental payments for capital and

. The PPUC granted the Company a base rate increase, effec-tive May 4.1988, designed to produce approximately

- $67,100,000 of additional annual operating revenues. The in.

l

-18 ,

PENN POMR operating leases are charged to operating expenses on the (c) Prefermd Stock Subject to Mandatory Hedemption -

Stxtements of Income. Such costs for the three years ended Annual sinking fund provisions for the Company's preferred December 31,1989, are summarized as follows: stock are as follows:

__ Series _ Shares D_ ate Beginning.

gggg gggg ggg7 8.24% 5.000 December 1 (i)

Gn Thousandel 11.00% 4,000 January 1 (i)

Interest on capital leases . . . . . $1,199 $1,365 $1,665 15.00% 3,200 July 15 (i)

Amortization of capitalleases. . . 2,103 3,578 5,053 11.50% 15.000 July 15 (i)

Operating leases . . . . . . . .... 1,294 _1,177 1,113 13.00% 5,000 July 1 1990 Total rental paymiuts . . . . M96 63

{6120 {Q91 11.50% B 30,000 September 1 1991 10.50% 100,000 April 1 2040 The future minimum lease payments as of December 31, (i) Retirements of this series have begun.

1989, are:

Capital Operating Preferred shares are retired at $100 per share plus accrued I#""*" ""*"

dividends. The Company's sinking fund requirements for the 1990............ . .... $ 2,172,000 $ 161,000 next five years are:

1991............ ... 2,019,000 153,000 1992 ...., . ...... ...... 1,819.000 148,000 $3,620,000 116,000 1990. .... ........ ............. ..

1993 .. ..... ...... . 1,615,000 1991,..... ..... ..................... 6,220,000 1994 ................ .. 1,573.000 101,000 1992,.................................. 6.220,000 Years thereafter . . . . . . . . . . J5,17L000 _2J4LO@ 1993.. . ..... .... ...... ........ ... 6.220,000 Total minimum lease 1994,..... ............. ... . ........ 6,220,000 payments. . ...... ..... $24,375,000 gj4J6p00 (d) 1,ong. Term Debt -

Executory costs . ......... _5 / 65,000 The mortgage and its supplements, which secure all of the Net minimum lease Company's first mortgage bonds, serve as direct first mortgage payments . . . . . . . . . . . . 18,710,000 liens on substantially all property and franchises, other than Interest portion . . . . . . . . . . . . 10J2&OOO specifically excepted property, owned by the Company.

Pr:sent value of net Based on tl.e amount of bonds authenticated by the Trustee minimum leate payments. . 8,082,000 through December 31,1989, the Company's annual sinkiny Less current portion . . . . . . , . 858,000 and improvement fund requirement for all bonds issued under

-~

the mortgage amounts to $1,220.000. The Company expects Noncurrent portion . , . . . . . . gy2 3000 to satisfy this requirement in 1990 by certifying unfunded prop-erty additions at 166%% of the required amount.

(5) Capitalizatiom Sinking fund requirements for certain series of first mort.

(:) Retained Earnings - gage bonds and maturing long. term debt (excluding capital Under the Company's Charter, the Company's retained earn- leases) for the next five years are:

ings unrestricted for payment of cash dividends on the Com-piny's common stock were $59,494,000 at December 31,1989. 1990. .. ............ ...... ....... . $23,481,000 1991. . ... . .. ... ... .. . ., 5,635.^00 (b) Preferred Stock - 1992. ...... ... .... . ... ..... 18,444,000 At the Company's option, all preferred stock may be re- '1993 . ... .... ..... .. ........... 32,589,000 deemed in whole, or in part, at any time upon not less than 1994. .. . .... ... ... ....... 3,593,000 30 nor more than 60 days' notice, unless otherwise noted.

Redemption of all preferred stock issued within the past five The weighted average interest rates shown on the yeirs is subject to certain restrictions regarding refunding Statements of Capitalization relate to long term debt outstand-operations. The optional redemption prices shown on the ing at December 31,1989. The Company's obligations to repay Statements of Capitalization will decline to eventual certain pollution control revenue bonds are secured by series minimums per share according to the Charter provisions that of nrst mortgage bonds and,in some cases, by subordinate liens establish each series. on the related pollution control facilities.

19

E a

EZ

=

Notes untmued)

E (6) Notes Parble to Banks and I ines of Credit: merease its total cost by amounts which are not p:esently The Company has lines of credit with banks that provide for deternunable. If a decision were made to terminate Unit 2, borrowings of up to $5,000,000 based on the prevailing prime certain costs which are currently assigned to Unit 2 would be

" or similar interest rate Short term borrowings may be made reassigm 4. where appropriate, to Umt 1. However, cancella-

= under these lines of credit on the Company's unsecured notes. tion chaw payaNe to contractors and other costs of termina-The Company is required to pay commitment fees of l'29 to tion could be incurred. Pending completion of the CAPCO

, assure the availabihty of these lines of credit. All of the cur- review , the Company is unable to predict whether the eunstruc-rent imes expire December 31,1990, however, any unused tion on Umt 2 will continue or, if continued, on what basis lines may be canceled by the banks at any time such continuation will proceed The Company also has a credit agreement with Edison Based 'n Fection 520 of the Pennsylvania Pubhc Utility Code L whereby either company can borrow available funds from the r which specoc..t,y permits utilities to recover a return of, but other by issuing unsecured notes at the prevailing prime or not a return un, prudently meurred costs of any partially com e similar interest rate. Under the terms of this agreement there pleted facihty when cancellation is found by the PPUC to be is no maxim m borrowing limit; however. the Company's in the public interest for any generating umt canceled after borrowing under this agreement is currently limited by the October 10,1985L the Company believes it could recover its r PPUC to a 'otal of $50,000,000. Either company can termmate mvestment in Unit 2 with respect to us PPUC jurisdictional the agreemem with six months' notice. customers. If a decision were made to termmate Perry Unit 2, the Company's reported net income would be reduced at that m Commitments, Guarantees and Contingencies: time by the difference between the cost of Perry Unit 2 and Construction Program -

the present value of revenue to be colk cted from re tailjurisdic-The Company's current budget forecast reflects exptmditures tional customers apphcable to the unit.

g c 'approximately $227,000,000 for property additions and im- The FERC has revised its policy with retpect to recovering provements from 1990 through 1994, of which approximately the costs of termmated construction projects. As a result, if g $34,000,000 is applicable to 1990. Perry Unit 2 were terminated, the Company would be required a The C APCO companies are continuing to review the status to write off one-half of its investment applicable to its FERC '

- of Perry Unit 2. Currently, no significant work is being per- jurisdictional customers if and to the extent that the FERC formed on the umt and the Company does not capitalize revised policy is applicable. Under such circumstances, the re-

- AFUL)C. Until review of the status of Umt 2 has been com- maining costs, plus a return on the unamortized investment, pleted, there will be no defined schedule for its completion; would be recovered from its FERC in" dictional customers.

D the const: uction estimates for the 1990-1994 period do not in.

clude any amounts applicable to Perry Unit 2 if construction Guarantees -

g of the unit were to be resumed. Possible alternatives being The Company, tt>gether with the other C APCO companies, reviewed with respect to Unit 2 melude mdefinite suspension has several guarantees of certain debt and lease obligations of construction on the unit, resumption of work on the unit in connection with a coal supply contract for the Bruce

- and termination of the unit. In accordance with the C APCO Mansfield Plant. As of Decemt'er 31,1989, the Company's arran, ements, none of these alternatives may be implemented share of the guarantee was $16,700,000. The price under t'he withou the approval of each of the CAPCO compames- coal supply contract, which meludes certain minimum Duque ,e Lign* Company's (Duquesne) claimed "de facto" payments, has been determined to be suflicient to satisfy the abandonment, tor rate makmg purposes, of its 13 749 interest debt and lease obligations The Company's total payments in Perry Unit 2 was accepted by the PPUC in a 1987 rate order under the coal supply contract amountbd to $11,376,000, a and Duquesne was allowed recovery ofits investment m Perry $11,317,000 and $6,630,000 during 1989,1988 and 1987, Unit 2 over a ten-year period. Duquesne has advised the PPUC respectively. Under the coal supply c mtract, the Company's '

that it will not agree to the resumption of construction of Perry future nummum payments are '

Unit 2 Duquesne's decision was independently made and does not repn esent a decision on the port of the Company to abe.n-ion Unit 2 for rate making or any other purposes However, 1990 $ 2.910,000 any future decision on the status of Perry Umt 2 will have 1991. 2,833,000

~

to take mto account Duquesne's position imd ways will have 1992 2,702.000 to be found to accommodate this position if constructisn on the 1993 2,571,000 unit is to resume 1994 2,441,000 Delay in the completion of Perry Unit 2 can he expycted to Years thereafter 10.281,000 20

PENN POWER En:rgy Cost Rate Proceedings - already determined that sources in midwestern states con-On January 22,1988,11 e PPUC entered an order instituting tribute to air pollution which they allege is endangering public an investigation into the justness and reasonableness of the health and welfare in Canada. The EPA is being asked to of-Company's proposed ECR. The proposed ECR included, among ficially confirm this determination. The EPA has informed the

' other things, five months of the costs of purchasing 12 petitioners that it does not presently have suflicient informa-megzwatts of Perry Unit I capacity from Cleveland Electric tion to act on the petitions. On November 1.1988, the peti-Illuminating Company (CEI) as provided in a 1980 agreement tioners filed a petition for review in the U.S. Court of Appeals

. among the CAPCO companies. The remaining 13 months of for the District of Columbia challenging EPA's alleged

. the CEI purchase were to be reflected in a subsequent ECR decision to reject their request for findings. The Company,

' filing. On April 28,1988, the PPUC disallowed all costs at- along with other electric utility companies and others, inter.

Ltributable to this purchase to the extent that such costa ex- vened in the appeal. Oral arguments are scheduled for

- cced the Company's average energy costs. Ou June 16,1989, February 15,1990. The Company is unable to predict the out-the Commonwealth Court of Pennsylvania affirmed this deci. come of this proceeding.

sion. The Supreme Court of Pennsylvania has agreed to hear During the past several years, the U.S. Court of Appeals for en appeal of the Commonwealth Court's decision. lf this order the District of Columbia reversed several significant portions

tands after appeal, it is currently estimated that net income of the EPA's regulations on the methods used by the EPA to

' would be reduced by approximately $10,000,000. The Company determine the amount of stack height credit for establishing

'is unable to predict the ultimate disposition of this matter. individual source emission limits for SO,. Portions of the latest EPA regulations were reversed and remanded by the Court

, Environmental Matters - in January 1988 as a result of appeals by the Company, Edison Various federal, state and local authorities regulate the Com- and others. Review of this decision was sought by environmen-

. pany with regard to air and water quality and other en- tal groups before the U.S. Supreme Court and thereaner the vironmental matters, The Company estimates that compliance Company, Edison and others filed their own petitions for i requires additional capital expenditures of approximately review before that Court. The Supreme Court declined to hear

- $6,000,000, which is included in the construction estimate the case. ARer the EPA promulgates new regulations in con-

' given above under " Construction Program" for the period 1990 formity with tae final Court decision in this matter, Ohio and through 1994. Pennsylvania must then review their emission limits to en-As part of the reauthorization of the Clean Air Act,legisla- sure conformance with the new EPA regulations. Such review tion has been introcluced in Congress to address the so-called could result in more stringent emission limits for some existing

" acid rain" problem. Various bills introduced would require planta and increased capital costs and operating expenses. The

. reductions in emissions of sulfur dioxide (SO ) and oxides of Company is currently unable to predict the outcome of these nitrogen from utility power plants and other sources located proceedings.

. in several states, including Ohio and Pennsylvania.The Com- In June 1987, the EPA announced regulations covering small pany is unable to predict whether legislation will be enacted particulate matter emissions from utility boilers. Although the

and, if so, to what extent, if any, the emission limits at the Company has an ownership interest in a generating unit in Company's plants would be affected. Substantial changes in -one of the two counties in Ohio where EPA computer model-3 the emission limits could result in the need for changes in coal ing predicts excessive small particulate emissions will be supply, significant capital investments in flue gas desulfuriza- found, the Company is unable to predict the ultimate effect tion or other pollution control equipment or the closing of some of these regulations.

- coal. fired generating capacity to assure compliance. lf flue gas With respect to the environmental matters described above, desulfurization equipment were to be installed on all of its the Company expects that any resulting additional capital generating units to achieve compliance, a circumstance that costs which may be required, as well as any required increase m2y be physically impossible because of space limitations at in operating costs, would ultimately be recovered from its

- Sammis Unit 7, the Company estimates that the capital costs customers.

associated with such installation could exceed $100,000,000.

In April 1988, several states, the Province of Ontario and several environmental groups petitioned the Environmental Protection Agency (EPA) to conduct a rulemaking under Sec-tion 115 of the Clean Air Act. Section 115 is that portion of the Clean Air Act which addresses pollution across interna-tional boundras. The petitioners claim that the EPA has 21

E Notes (continued)

(8) Summary of Quarterly Financial Data (Unaudited):

The following summarizes certain operating results by quarter for 1989 and 1988.  !

March 31, June 30, September 30, December 31,' l Three Months Ended 1989 1989 1989 1989 ,

1 On Thousands)

Operating Rev enues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $77,126 $73,736 $76,763 $74,413

, Operating Expenses and Taxes . . . . . . . . . . . . . . . . . . . . . . . 55,546 55,001 58,079 59,824 Operating Income . . . . . . . ........................... 21,580 18,735 18,684 14,589 Other income and Deductions . . . . . . . . . . . . . . . . . , , , 294 481 337 1,149 Net Interest. . ................................. ... 9,857 10,269 10,481 10,582 Net income . . . .............. ..... ......... ... $12,01'i $ 8,947 $ 8,540 $ 5,156 Earnings on Common Stock . . . . . . . . . . . . . , . . . . . . . . . . , $ 9,257 $ 6,240 $ 5,927 - $ 2,563 i

1 March 31, June 30, September 30, December 31, .

Three Months Ended 1988 1988 1988 1988 Gn Thousands)

Operating Revenues . . . . . . . . . . . . . . . . . . . . . ....... . $60,199 $65,506 $77,173 $75,486 Operating Expenses and Taxes. . . . . . . . .... . 49,429 51.608 55,792 54,281 Operating income . . . . . . . . . . . . . . . . . . . . . . . , . . . . . . . . . . 10,770 13,698 21,381 ' 21,205 Other Income and Deductions. . . . . . . . .. ............ 138 208 240- 177 Net Interest. . . ................... ... ..... ...... 2,549 7,329 9,976 10,003

. Net income . . . . . . . . . . . . . . . . . . .. .. .. ......... $ 8,359 $ 6,577 $11,645 - $11,379 }

Earnings on Common Stock . . . . . . . , . . . . . . , , . . . $ 5,609 $ 3,827 $ 8,915 $ 8,642  ;

i i

22 N _,

j & eenneowen Ret. ort ofIndependent Public Accountants To the Board of Directors of Pennsylvania Dower Company:

We have audited the accompanying balance sheets and state.

ments of capitalization of Pennsylvania Power Company (a Pennsylvania corporation and wholly owned subsidiary of Ohio Edison Company) as of December 31,1989 and 1988, and the related statements of income, retained earnings, capital stock and other paid in capital, cash flows and taxes for each of the three years in the period ended December 31,1989. 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 ac.

cepted 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 Onan.

cial statements. An audit also includes assessing the account.

ing principles used and significant estimates made by manage-ment, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pennsylvania Power Company as of December 31,1989 and 1988, and the results of its operations and its cash flows for each of the three years in the period ended December 31,1989, in conformity with generally accepted accounting principles.

The continued construction of Perry Unit 2 is currently be-

.ing reviewed by the CAPCO companies. As discussed in Note 7 to the financial statements, possible alternatives being con.

sidered include indefinite suspension, resumption of work and termination of the Unit. Because the Company is unable to predict the results of the review, it cannot now predict if con.

struction of Perry Unit 2 will be terminated and, if terminated, to what extent the Company's investment will be recoverable.

As discussed in Note 7, on April 28,1988, the PPUC issued -

an Order in which it held that a portion of the costs associated with a purchase of Perry Unit 1 capacity from the Cleveland Electric illuminating Company should be disallowed. The Supreme Court of Pennsylvania has agreed to hear the Com-pany's appeal of the Commonwealth Court of Pennsylvania's affirmat;on of the PPUC order. The Company is unable to predict the ultimate disposition of this matter.

Arthur Andersen & Co.

New York, N.Y.

February 7,1990 23

[o t i i

f i

E Directors Officers H. Peter Burg Justin T. Rogers, Jr.

Senior Vice President of the Company's parent, Chairman of the Board Ohio Ediran Company, Akron, Ohio James E. Markle Robert H. Carlson President Consultant for and formerly President and Chief Executive DiTicer of Universal-Rundle Corporation, James R. Edgerly a plumbing fixture manufacturer, Vice President, Secretary and General Counsel New Castle, Pennsylvania Robert P. Wushinske James R. Edgerly Vice President and Treasurer Vice President, Secretary and General Counal of the Company, William F. Recher New Castle. Pennsylvania Vice President James E. Markle Angeline Comparone President of the Company, Assistant Secretary New Castle, Pennsylvania Francis A. Fazzone Joseph J. Nowak Amistant Treasurer Executive Vice President. Operations,  ;

Cyclops Industries, Inc., Clarence H. Kauffman- 2 a manufacturer of steel products, Assistant Treasurer Pittsburgh, Pennsylvania DIVISION MANAGER Robert P. Randall James R. Topper President of TRACO, a manufacturer Mercer County of aluminum windows and doors, Warrendale, Pennsylvania .i Mr. Rogers is president of the parent company,  ; j The principal employment of all other ofncers is William F. Recher with the Company.

i Vice President of the Company, l New Castle, Pennsylvania REGISTRAR for Preferred Stock:

First Seneca Bank and Trust Company, ]

Justin T. Rogers, Jr. Washington Centre, i

Chairman of the Board of the Company, and President New Castle, Pennsylvania 16101 1547 of its parent, Ohio Edison Company, Akron, Ohio l i

Douglas W. Tschappat TRANSFER AGENT for Preferred Stock: j Orrice of the Company,  ;

Executive Vice President of the Company's parent, New Castle, Pennsylvania 16103 2 91  !

Ohio Edison Company, Akron, Ohio

,i PRINCIPAL OFFICES: j

' 1 E. Washington Street DIRECTOR EMERITUS p.0, Box 891 New Castle, Pennsylvania 16103-0891 G. Leo Winger M12) 652-5531 i

e i

Management Changes I O. Leo Winger, a director of the Company since 1976, Pennsylvania Power Company is an '

retired from the board on March 22,1989. equal opportunity employer.

Robert P. Randall, President of TRACO, was elected to i the Company's board on November 22,1989.

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