ML18026A240

Allegheny Electric Cooperative,Inc 1990 Annual Rept. W/ 910617 Ltr

ML18026A240
Person / Time
Site:	Susquehanna
Issue date:	12/31/1990
From:	Keiser H ALLEGHENY ELECTRIC COOPERATIVE, INC.
To:	Murley T Office of Nuclear Reactor Regulation
References
PLA-3587, NUDOCS 9106240001
Download: ML18026A240 (47)

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ACCELERATED DISTRJBUTIO&!-

DEMONSTPWTION SYSTEM~'4>'4 REGULATORY INFORMATION DISTRIBUTION SYSTEM (RIDS)ACCESSION NBR:9106240001

'OC.DATE: 90/12/31 NOTARIZED:

NO DOCKET FACIL:50-387 Susquehanna Steam Electric Station, Unit 1, Pennsylva 05000387 50-388'Susquehanna Steam Electric Station, Unit, 2, Pennsylva 05000388 AUTH.NAME AUTHOR AFFILIATION KEISER,H.W.

Allegheny Electric Cooperative, Inc.RECIP.NAME RECIPIENT AFFILIATION R MURLEY,T.E.

Office of Nuclear Reactor Regulation, Director (Post 870411 W/NOTES:LPDR 1 cy Transcripts.

LPDR 1 cy Transcripts.

~/a f.R~+4 RECIPIENT ID CODE/NAME PD1-2 PD COPIES LTTR ENCL 1 1 RECIPIENT ID CODE/NAME RALEIGH,J COPIES LTTR ENCL 1 0

SUBJECT:

"Allegheny Electric Cooperative,Inc 1990 Annual Rept." 910617 ltr.DISTRIBUTION CODE: M004D COPIES RECEIVED:LTR ENCL SIZE: TITLE: 50.71(b)Annual Financial Report D/05000387 05000388 A D D INTERNAL: AEOD/DOA EXTERNAL: NRC PDR NOTES: 1 1 1 1 2 2 G-I-LE 1 1 D NOTE TO ALL"RIDS" RECIPIENTS:

PLEASE HELP US TO REDUCE WASTE!CONTACT THE DOCUMENT CONTROL DESK, ROOM Pl-37 (EXT.20079)TO ELIMINATE YOUR NAME FROM DISTRIBUTION LISTS FOR DOCUMENTS YOU DON'T NEED!TOTAL NUMBER OF COPIES REQUIRED: LTTR 7 ENCL 6 D D 1 Pennsylvania Power&Light Company Two North Ninth Street~Allentown, PA 18101-1179

~215/774-5151 Harold W.Keiser Senior Vice President-Nuclear 215/774-4194 JUN I 7 399)Dr.Thomas E.Hurley Office of Nuclear Reactor Regulation

,'.S.Nuclear Regulatory Commission Washington, DC 20555 SUSQUEHANNA STEAM ELECTRIC STATION ALLEGHENY ELECTRIC COOPERATION ANNUAL FINANCIAL REPORT PLA-3587 FILE R41-2A

Reference:

PLA-3577, H.W.Keiser to USNRC,"Annual Financial Report", dated Hay 1, 1990

Dear Dr.Hurley:

In accordance with 10CFR50.71(b), enclosed is the 1990 Annual Report for Allegheny Electric Cooperative, Inc.Previously, the Allegheny Annual Financial Report including certified financial statements was sent to you since the enclosed 1990 Annual Report was unavailable.

Very truly yours, H.W.Keiser Enclosure cc:~NRC3)ocument Control:Desk (original.)~

NRC Region I Hr.G.Scott Barber, NRC Sr.Resident Inspector Hr.J.R.Raleigh, NRC Project Manager 9l0624000i 90i23i PDR'DOCK 05000387 I*'DR (qO(

Table of Contents A Message.~~~~~~~2 A llegheny Electnc Cooperative, Inc.........................................................4 P ower Supply....

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~o 6 Project Review..10 Financial Review.Member Revenue and Rates.18 oard of Directors.......~...

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~..~...~........

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~..~.............................20 B Doc',(et 8 P~-~w Acccseloot wu c z+o~~i n~~r.A A Message from President Jesse C.Tilton III and Chairman David F..Turner Exploring alternatives and turning challenges into opportunities.

This characterized Allegheny Electric Cooperative, Inc., in 1990.Thanks to continued aggressive problem solving, Allegheny experienced rate stability for the fourth straight year.Between 1987 and 1990, Allegheny's net power rates actually billed to our 14 member cooperatives rose an average of only 0.66 percent a year.When adjusted for inflation, the cost to member co-ops actually fell by an average 4.82 percent per year through the period.That lid on rate increases is a dramatic change compared to the nine years from 1978 to 1987 in which rates rose at an average of 11.4 percent a year.This positive develop-ment, coupled with a spate of re-tail rate increases sought by investor-owned power companies, improves our position compared to our privately-held competitors.

In addition, federal clean air legislation signed into law in 1990 will force private utilities dependent on coal-fired generating plants to further raise rates to comply with the law'requirements.

Fortunately, the tougher Clean Air Act will have minimal impact on Allegheny since 74 percent of the power we deliver to our members is produced by technologies-hydroelectric and nuclear-that do not cause the air pollution the Act is designed to clean up.Both of Allegheny's generating facilities

-the Susquehanna Steam Electric Station, a nuclear power plant, and the Raystown Hydroelectric Project-performed in strong fashion in 1990, producing electricity ahead of budgeted goals.The co-op also worked successfully during the year to optimize our resource base through bulk power transactions.

The year also brought unprecedented attacks against the rural electric program.Political ideologues at the White House Office of Management and Budget (OMB), who have for years advocated phasing out the Rural Electrification Administration (REA), publicly questioned the financial stability of rural electric cooperatives nationwide and the loan programs administered by REA.The genesis of the OMB broadside was their philosophical opposition to non-profit, consumer-owned cooperatives.

Allegheny responded to OMB's inaccurate and hackneyed attacks as they surfaced.As proof of Allegheny's strong financial footing, Moody's Investors Service affirmed the cooperative's Prime-2 rating for commercial paper as the 1990 fiscal year dawned.Allegheny was again active in fighting for equity in transmission access.Such access would provide Allegheny with a level playing field to obtain economical power and to become a full participant in the bulk llegheny Electric Cooperative, Inc.Allegheny Electric Cooperative, Inc.President Jesse C.Tilton III, Clminnan David E.Tnrner.power market.Allegheny's calls for better transmission access were picked up in the National Energy Strategy submitted to Congress by President George Bush.A major goal ofAllegheny is ensuring the economic health of our member cooperatives'ervice areas.During the year, the cooperative initiated new efforts to help its members retain existing businesses and industries and attract new employers.

These economic development activities not only help provide job opportunities, but also stabilize the economic base of rural Pennsylvania and New Jersey.The decade of the 1990s looks bright for Allegheny.

Rate stability should continue;our 10 percent share of Susquehanna power will grow in value as Mid-Atlantic power markets tighten;our demand-side management efforts will continue to provide benefits well into the 21st Century.In 1990, real progress was made towards the organization's primary long-term goal: providing rural electric cooperative consumer-members with adequate and reliable supplies of reasonably-priced electric service.

Allegheny Electric Cooperative, Inc.Allegheny Electric Cooperative, Inc., based in Harrisburg, Pennsylvania, is an electric generation and transmission (G&T)cooperative owned and operated by the 14 rural electric cooperatives in Pennsylvania and New Jersey.Allegheny is the exclusive wholesale power supplier for these distribution systems.Through them, it serves more than 600,000 rural residents and businesses.

Allegheny's 14-member board of directors-one director elected from each of its member electric cooperatives'oards of directors-conducts Allegheny's business to best serve the consumer-members of the co-ops.It is hard to fathom today, but in the 1930s, only 6 out of every 100 rural residents in America had electric service.The reason-established private power companies simply refused to serve rural areas.The investment necessary to run lines into the countryside, the power companies claimed, was not economically feasible.Federal help was needed to electrify rural America.With the creation of the Rural Electrification Administration (REA)by Presidential order in 1935, things began to change.Armed with low interest loans and technical advice from REA, rural people set themselves to the task ignored by the private power companies.

Rural electric coopera-tives began springing up, as rural residents banded together to set poles and string wire to bring electricity to their homes, farms and businesses.

But once the poles were set, rural people still needed a source of power.That source was the same private power companies whose refusal to serve rural America prompted formation of the co-ops.By 1944, leaders of Pennsylvania's budding rural electric cooperatives realized that, as small individual groups, they were still at the mercy of the large private power companies in buying electricity.

An REA report that year noted Pennsylvania's rural residents served by co-ops were paying electric rates higher than those enjoyed by most co-ops across the nation.Something had to be done.As a result, Pennsyl-vania's cooperatives in 1945 formed Allegheny Electric Cooperative, Inc.to serve as their wholesale power supplier.With the bargaining power of all the cooperatives behind it, Allegheny was able to negotiate wholesale rates that immediately saved the co-ops 20 percent on their power bills.By achieving a competitive rate for power on a short-term basis, the member co-ops of Allegheny could now continue their expansion, bringing the benefits of electricity to the 75,000 rural families still without electric service.In the early years, long-range power supply was not a priority for the relatively new cooperatives.

However, as rural llegheny Electric Cooperative, Inc.areas grew, so did the need to better insure an adequate power supply not dependent on purchases from private power companies.

In 1966, Allegheny took a major stride toward this goal when, having achieved status as a preference customer, it began purchasing hydroelectric power generated at the publicly-owned Niagara Power Project of the Power Authority of the State of New York (PASNY).To date, this extremely low-cost hydropower has saved Allegheny more than$207 million compared to the cost of power it would have needed to buy from private utilities.

In 1977, Allegheny contracted to purchase 10 percent ownership in the Susquehanna Steam Electric Station (SSES), a 2,100 megawatt, two-unit nuclear power plant located near Berwick, Pa.In 1990, the facility supplied 56 percent of Allegheny's energy needs.Allegheny officially entered a new era on June 15,1988, when the Raystown Hydroelectric Project, William F.Matson Generating Station, was declared in commercial operation.

Named for the first president of Allegheny, Matson Station is the cooperative's first wholly developed and operated generating plant.It supplies 4.5 percent of the energy delivered by Allegheny, enough for about 8/00 average rural homes.Thanks to PASNY, SSES and Raystown, a full 74 percent of the energy Allegheny supplies to its member cooperatives today does not pollute the air.Additionally, this power is generated without the use of oil, thus lessening America'dependence on foreign oil.By pursuing a balanced power supply program, Allegheny is achieving the goal it set in 1945: to provide rural electric cooperative consumers with an adequate and reliable supply of energy at the lowest possible cost.The publicly-owned Niagara Power Project of the Power Authority of the State of New York (PASNY).-

Power Supply To supply power to its 14 member distribution cooperatives, Allegheny uses a blend of its own generating facilities, supplemented by pur-chased power.Power produced at the Susquehanna Steam Electric Station (of which Allegheny owns 10 percent)and the William F.Matson Generating Station (Raystown Hydroelectric Project), is supplemented with power purchased from the Power Authority of the State of New York and five private power companies.

Susquehanna Steam Electric Station (SSES)This 2,100-megawatt, two unit, nuclear plant in Luzerne County, Pa., added to its already exceptional operating and safety performance in 1990.Allegheny owns 10 percent of SSES as well as 100 percent of approximately 42 miles of related 500-kilovolt transmission facilities.

Pennsylvania Power&Light Company (PP&L), a private power company based in Allentown, Pa., is the operator and 90 percent owner of the boiling water reactor facility.During a year in which both units experienced planned refueling and inspection outages, SSES still broke its all-time operating records.The annual capacity factor for Unit 1 was 81.3 percent;for Unit 2, 81.0 percent.When combined, this resulted in a composite capacity factor of 81.2 percent.This figure was well above budget expectations.

In comparison, the average capacity factor for boiling water reactor nuclear plants in the United States in 1989 was 60.5 percent, according to the U.S.Council for Energy Awareness.

By the end of fiscal year 1990, SSES had provided 1.1 billion kilowatt-hours of electricity to meet the needs of Allegheny's member distribution cooperatives.

This represents 56.4 percent of Allegheny's total system energy requirements.

Once again, the Nuclear Regulatory Commission ranked SSES among the best operated nuclear power plants in the nation.In its Systematic Assessment of Licensee Performance report, covering the period August 1, 1989 through November 30, 1990, the NRC gave SSES the highest possible rating in five out of seven categories-emergency preparedness, plant SSES ANNUAL GENERATION TOTAL SYSTEM REQUIREMENTS O R 100 I 50 NOV OEC JAN FEB MAR APR MAY JUN JUL AUG SEP OCT P SSES 5640%p Raystown.........4.03%

~PASNY...........13.22%

P Penetec............8.t9%

P Met-Ed.............5.43%

p West Penn.......9.30%

P JCP&L.............2.57%

~PP&L..................86%

llegheny Electric Cooperative, Inc.Matson Station Performance operations, maintenance/

surveillance, security and safeguards and safety assessment/quality verification.

In the remaining two categories

-radiological controls and engineering support-the facility received the second highest mark, a Category 2.SSES has never received a rating below Category 2 in this five-category rating system.The National Voluntary Laboratory Accreditation Program (NVLAP)assessment of the Thermal Luminescent Dosimeter Processing Program at SSES was completed in April 1990.The assessor identified no adverse findings or observations and stated that PP&L's program should be used as a benchmark for NVLAP assessors.

In July, the Cowanesque Reservoir project was completed and declared in-service.

This project will assure sufficient river water for SSES to support two-unit operation if drought conditions develop in this portion of the Susquehanna River basin.OPERATION&MAINTENANCE MANHOURS Raystown Hydroelectric Project C3 Operation...................54/o 0 Power House Maint....31

/o I Transmission Maint.....2/o C3 Rec.Facilities Malnt.....7/o Q Intake/funnel Malnt.....6/o William F.Matson Generating Station The William F.Matson Generating Station (Raystown Hydroelectric Project)is a 21-megawatt, run-of-river hydroelectric plant licensed by the Federal Energy Regulatory Commission.

The facility is located at the Raystown Lake and Dam in Huntingdon County, Pa.and generates about 4.5 percent of the energy supplied by Allegheny.

Allegheny operates the plant in close cooperation with the U.S.Army Corps of PLANT AVAILABILITY Raystown Hydroelectric Project Q Generation

............60.1'/o Q Standby................36.0/o g Forced Outages......2.3/o Q Planned Outages....1.64/o Engineers, which controls water releases from Raystown Lake, the largest lake in Pennsylvania.

Matson Station completed its second full year of operation in 1990, producing 88 million kilowatt-hours of electricity.

That was 3 percent ahead of budgeted goals, based on average hydrologic conditions.

In 1990, overall plant availability was 96.1 percent-above the average for small hydroelectric plants nationwide.

Pozoer Supply (continued)

A major accomplishment was improvement of unattended operation during the year-up to 72 percent-due to computer alarm system modifications.

As the year ended, the Corps began the second phase of a study to investigate the release of lake water during extreme drought conditions.

As the study progresses, Allegheny will assess its impact on plant operation.

Power Authorihg of the State of New York For the second year in a row, Allegheny received good news regarding its allocation of power produced at the Niagara Power Project by the Power Authority of the State of New York (PASNY).On January 12, 1990, New York Governor Mario Cuomo signed a long-term contract between Allegheny and PASNY.It extends Allegheny's rights to PASNY power through June 20, 2001.In addition, the contract permits, by mutual consent, an extension of service through October 31, 2003.In late December, the U.S.Court of Appeals for the Second Circuit rejected appeals by"paper" municipal electric systems in New York and the Vermont Department of Public Service that they should be eligible to receive preference in allocation of power generated at the publicly-owned Niagara Power Project in New York.(The systems were considered"paper" agencies since they did not own generation or distribution facilities, but simply fronted as preference customers to turn power over to for-profit, investor-owned utilities.)

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

The appeals court concurred with a July 1989 Federal Energy Regulatory The Raystown Hydroelectric Project, Allegheny's first wholly developed and operated generating fncility.

llegheny Electric Cooperative, Inc.Commission decision that the New York paper municipals were ineligible for preference power because they did not sell and distribute power directly to consumers.

Vermont's appeal was rejected because it was incapable of selling and distributing power directly to electric consumers at the retail level.The court's ruling also reaffirms provisions in the federal Niagara Redevelopment Act that non-profit rural electric cooperatives and legitimate municipal electric systems-within economical transmission distance-have first right, or preference, to 50 percent of the electric power produced at the Niagara Power Project.The Niagara project produces electricity at a low cost;in fact, it is among the least expensive in the U.S.Since Allegheny began buying it in 1966, PASNY power has saved the cooperative more than$207 million, compared to the cost of purchasing the same amount of electricity from private power companies.

In 1990, Allegheny's PASNY savings amounted to$7'i'!j rye.million.The extra 7.7 megawatt allocation alone shaves Allegheny's purchased power costs$1.6 million annually, based on current rates.Supplemental power purchases Allegheny supplements its wholesale power supply with purchases from five private power companies.

In 1990, purchases were made from the Pennsylvania Electric Company, West Penn Power Company, Metropolitan Edison Company, Jersey Central Power&Light Company and Pennsylvania Power&Light Company.Allegheny's Principal engineer, Rates&Forecasting Joseph Znllo.Power Sales On June 22, the Allegheny board approved a short-term bulk power sale to Baltimore Gas&Electric Company.The sale allowed Allegheny to market its projected excess summer energy from the Susquehanna Steam Electric Station and provide net benefits to Allegheny's members.More importantly, however, the sale firmly established Allegheny as a player in the wholesale power market.In late August, Allegheny extended the sales agreement through May 1991, with additional anticipated savings.

Project Review In 1990, Allegheny continued to implement and ex-pand programs designed to manage electric use, increase kilowatt-hour sales and ensure reliable transmission systems, as well as explore potential gener-ating projects.Load management By shifting electrical use of residential water heaters, electric thermal storage and dual-fuel home heating systems from peak demand periods to times of lesser demand, the Coordinated Load Management System improves system efficiency, lessens the costly demand charges Allegheny must pay for purchased power and reduces the need for new generating capacity.Allegheny and its member cooperatives launched the Coordinated Load Management System in late 1986, using load management equip-ment to reduce peak demand at individual substations.

Currently, 100 substations are connected to the system.By the end of 1990, more than 21,000 load control receivers (which switch off the heating element in water heaters during peak hours)had been installed in the homes of volunteer consumer-members.

Participating cooperatives reported gross power cost savings of$1.8 million during the year.Load management coordinating system computers were installed in Allegheny headquarters in October 1989.The coordinating system receives electric use and climate data from cooperative member systems.Allegheny technicians use this data for load forecasting and systemwide load control.Marketing and research Allegheny continued its rebate program and provided assistance on research, promotion; rate design and computer modeling services to its member co-ops.Several energy surveys of non-residential members'acilities were conducted, with energy and load-saving recommendations made.As part of its research commitment, Allegheny participated in funding research as part of its membership in the Pennsylvania Electric Energy Research Council (PEERC).Results of this research will improve environmental quality, improve the efficiency of existing generation plants and broaden the wise use of electricity.

PEERC already has an ongoing project to protect steam boiler tubes in coal-Pictured to the right, the Coordinated Load Management system improves system efficiency, lessens costly demand charges for purchased power and reduces the need for new generating capacity.10 llegheny Electric Cooperative, Inc.burning plants by the development of tube coatings.Projects are also underway to study power quality effects of energy-conserving variable speed drives and to develop an industrial heat pump capable of concentrating industrial waste for more efficient disposal.In 1990, Allegheny continued awarding rebates to member cooperatives which offer load-building incentive programs to their consumer-members.

This policy encourages increased electric water heating and the installation of electric thermal storage (ETS)units and energy-efficient heat pumps.The cooperatives partic-ipating in the rebate program received a total of$57,000.Their initiatives resulted in the installation of 1,417 water heaters, 1,103 kilowatts of ETS and 95 heat pumps.Virtually all the water heaters are or can be load-controlled.

This provides the double benefit of a substantial increase in, or retainage of, energy sales, with no contribution to billing demand.Allegheny's member cooperatives reported spending$230/24 on all forms of marketing incentives in 1990.Transmission Projects Allegheny marked a major milestone on July 10 with the energization of the Fairfield-Mill Creek transmission line and Project Revieur (continued) substation in east-central Lycoming County, Pa.The project was the first transmission line built and owned by Allegheny and will remedy service dif-ficulties previously experienced by about 2,000 consumer-members of Sullivan County Rural Electric Cooperative, an Allegheny member.The new 5.5 mile, 69-kilo-volt transmission line replaces a longer Pennsylvania Electric Company transmission line that ran through rugged terrain.The new Allegheny line interconnects with Pennsylvania Power&Light Company facilities.

In the planning and procurement stage is the Donegal-Seven Springs Transmission Project in Fayette County, Pa., which will provide additional service to Somerset Rural Electric Cooperative.

Adequacy of power from current transmission facilities, coupled with rapid growth in the Seven Springs Mountain Resort area, necessitated the project.Efforts include construction of 7.4 miles of 138-kilovolt transmission line and a step-down substation.

As the fiscal year wound to a close, Allegheny was also reviewing requests to provide additional transmission services to member cooperatives.

Allegheny River Locks and Dams No.8 and No.9 Hydroelectric Projects During 1990, Allegheny received$1.4 million from Sithe Energies U.S.A.as the third and final payment for the transfer of development rights for the proposed Allegheny River Locks and Dams 8 and 9 Hydroelectric Prolects.In July 1987, after careful study of the project by co-op staff and private consultants, the Allegheny board of directors voted to transfer the development rights to Sithe.The sales agree-ment provided for Allegheny to receive three payments totalling$2.5 million and gives the cooperative the right to partic-ipate actively in all major development decisions.

Allegheny also has the option to buy the hydroelectric plants for$1 in the year 2030.The projects began gen-erating power in October 1990.Pictured to the right is the Fairfi'eld-Mill Creek transmission line and substation, Allegheny's first wholly-owned and developed transmission project.

~~llegheny Electric Cooperative, Inc.~t~, g h I I 1 1 h I ,tCJ ,1~'r~cI t-.lcÃ>&A'~gg~i-k'g~IKRM+I/~h 1 Financial Review As the fiscal year 1990 dawned, Allegheny was the recipient of most welcome news.Moody's Investors Service, one of Wall Street's major bond-rating firms, confirmed Allegheny's Prime-2 rating for commercial paper.The rating confirmation followed Moody's review of the credit risks of nine generation and transmission (G&T)cooperatives.

Allegheny was one of only two G&Ts to successfully pass Moody's review.According to Moody's, Allegheny's Prime-2 rating is supported by the cooperative's manageable capital and rate increase requirements during the next several years, an adequate power supply and strong liquidity.

Moody's was impressed that Allegheny required no drastic rate increases for phasing in the remainder of its Susquehanna Steam Electric Station (SSES)capacity.Also cited as a plus was the Allegheny board of director's solution to the Financial Accounting Standards Board's Statement No.92, the accounting procedures which affect the way the cooperative depreciates its SSES investment.

In addition, Moody's praised Allegheny's working relationship with member co-ops and its sensitivity to member needs to keep retail rates competitive with other utilities.

During February, Allegheny's board voted to name Mellon Bank as trustee and National Investment Services of America, Inc., as manager of the cooperative's nuclear decommissioning reserve fund.This came in response to a Nuclear Regulatory Commission (NRC)mandate that licensees of nuclear power plants ensure sufficient funds are available to decommission the facilities at the end of their useful lives.Allegheny submitted a plan to cover its 10 percent share of SSES decommissioning costs to the NRC in June 1990.Margins In 1987, the Financial Accounting Standards Board (FASB)issued Statement No.92, which established new accounting rules relative to cost phase-in plans of utilities, such as Allegheny's modified sinking fund depreciation method used on certain SSES assets.FASB 92 requires Allegheny to change the method of depreciation used on SSES to a straight line method by the year 2000.In addition, Allegheny has to recognize depreciation expense that were deferred through 1989.This was done in1990by a one-time lump sum write-off of$31,057495.

Net year-end margins prior to the FASB 92 write-off were$8,997,913.

Of this,$6,416,815 will flow back to member cooperatives in 1991 through Allegheny's margin stabilization plan.The remaining pre-write-off margin of$2,581,098 met Allegheny's Times Interest Earned Ratio (TIER)goal for 1991 of 1.06.Financing The largest single expense item for Allegheny is interest payments, accounting for more than 32 percent of its total expenses.Since 1978, the cooperative has borrowed a total of$555 million from REA, repaid$73 million and paid a total of$482 million in interest.To control interest costs, Allegheny makes every effort to use the lowest-cost financing vehicles available.

In fiscal 1990, llegheny Electric Cooperative, Inc.these included pollution control bonds, commercial paper, lines of credit, REA guaranteed and insured loans, plus a leveraged lease.Pollution control bonds: Use of tax-exempt var-iable rate bonds to finance some of the pollution control facilities at SSES have allowed Allegheny to net very attractive interest rates.In 1990, the average yield on the bonds, which bear interest at weekly and monthly variable rates, was under 6.2 percent.Issued through the Lehigh County Industrial Development Authority, the bonds are backed by irrevocable letters of credit.Commercial paper: Allegheny maintains a$52 million commercial paper program.When needed, commer-cial paper is used to supplement short-term project financing.

Allegheny did not need to utilize the commercial paper program during 1990.Lines of credit: Allegheny has several bank lines of credit, with a$23 million limit available.

The coop-erative did not draw on these funds in 1990.REA guaranteed and insured loans: A blend of traditional REA-guaranteed and REA-insured loans continued as the mainstay of Allegheny's debt portfolio.

Allegheny used REA guaranteed loans issued by the Federal Financing Bank (FFB)for the Susquehanna Steam Electric Station and kept approximately 18.7 percent of its debt on a short-term basis with FFB.At 5 percent interest, REA insured loans are the lowest-cost loans available and Allegheny used them in part for its trans-mission and load management

.projects.A total of$13,943,000 in REA guaranteed and insured loans were advanced to the cooperative in 1990.Leveraged Lease: Execution of a leveraged lease on the Raystown Hydroelectric Project in 1988 allowed Allegheny to immediate-ly make the cost of power from OPERATING EXPENSES FINANCING SOURCES 0 SSES----------.

63.07%Q Raystown................1.92%

Q Purchased Power..24.08%

Q Wheeling.......,.........6.94%

Q Administration

........3.99%

soo 200 5 Q I I h Rgm 15 Financial Reviezo (conan'ued) the plant to its member cooperatives lower than the purchased power it replaced.Compared to traditional financing, the lease is expected to yield significant savings over the life of the project.Under the sale/leaseback arrangement, Allegheny transferred its interest in the plant to a firm able to utilize the available tax advantages.

The cooperative then used the proceeds to repay construction debt.Allegheny will make semiannual payments throughout the term of the 30-year lease and has the option to repurchase the project at a capped market price when the lease expires.Allegheny retains all operating and maintenance responsibility under the agreement.

The arrangement also allows the cooperative to reduce financing costs over the lifetime of the project and accelerate benefits to the early years.CFC: In addition to a line of credit, the National Rural Utilities Cooperative Finance Corporation (CFC)provided a concurrent loan of$693,000 for the load management project, as well as financing for Allegheny's headquarters

-the Locust Court Building.Taxabi liter Allegheny has a private letter ruling from the Internal Revenue Service providing for the cooperative to remain taxable until an application is made to become a tax-exempt organization again.Allegheny expects to have tax losses to carry forward to offset estimated tax liability for the foreseeable future.Operations Regulation Unlike for-profit, investor-owned utilities, Allegheny and its member cooperatives are consumer-owned and non-profit.

They are regulated by their consumer-members acting through a member-elected board of directors and are not under the jurisdiction of the Pennsylvania Public Utility Commission or the New Jersey Board of Public Utilities.

However, REA does approve the cooperative's rate'I making and reviews operating practices.

Allegheny's board of directors is democratically elected.One director is selected from each of Allegheny's member cooperatives.

The board governs all policies, including the establishment of rates.Board review of the rate-making process and approval of each rate change assures the member cooperatives that the price they pay for electricity is fair and reasonable.

All-Requirements Contract Each of the 14 coopera-tives served by Allegheny has entered into a Wholesale Power and Power Cost Pooling Contract, commonly referred to as an All-Requirements Contract.As a condition for approval of loans to Allegheny, REA required Allegheny's members to execute these contracts.

All generation and transmission cooperatives borrowing money from REA are required to have substantially similar contracts signed by their member distribution cooperatives.

llegheny Electric Cooperative, Inc.Meeting of the Allegheny Electnc Cooperative board of directors.

By signing this contract, Allegheny's member distribution cooperatives agree to purchase all their power supply needs from Allegheny.

They also agree to adjust their retail rates to meet all costs and TIER requirements.

In January 1977, each of Allegheny's member cooperatives executed an amendment to the original 1965 contract to cover Allegheny's purchase of 10 percent of the Susquehanna Steam Electric Station.The amendment extended the contract to December 31, 2025 to cover the life of the plant.Territorial Integrity The Unincorporated Area Certified Territory Law of 1990, originally signed into law in July 1975 and codified in 1990, assigns exclusive territories for all of Pennsylvania's rural electric coop-eratives and private power companies.

The law states that each electric supplier has the exclusive right and duty to provide service within its own territory.

This law helps avoid cost-ly duplication of facilities, waste of materials and natural resources, plus it improves efficiency.

It also allows cooperatives to retain large loads such as businesses, factories and retail centers that move into co-op territory.

These additional loads help the cooperatives, which primarily serve sparsely-populated areas, to moderate rates by spreading their costs over greater sales.17 Member Revenue and Rates Allegheny's total whole-sale revenue from power sales to its 14 member cooperatives in 1990 was$115.1 million.This is after a$6.4 million reduction for the Cost of Service Billing Adjustment to be returned to the member co-ops during fiscal 1991.The$115.1 million represents a revenue increase of$0.7 million, or 0.61 percent, over that of 1989.The majority of this increase was due to the addition of 10 megawatts of Susquehanna Steam Electric Station (SSES)capacity to Allegheny's rate base as planned under the Allegheny/

Pennsylvania Power&Light (PP&L)buyback agreement.

The remaining part of the revenue boost was due to normal system load growth.On an average cost basis, with the 1990 and 1989 Cost of Service Billing Adjustments considered, Allegheny's rate to its members actually decreased by 1.05 mills or 1.8 percent.Even without the billing adjustments, the average rate decreased by 0.35 mills, or 0.59 percent.By comparison, Pennsyl-vania Electric Company, Metropolitan Edison and PP&L increased their energy cost rates in 1990, which translate into retail rate increases of 1.8, 4.8 and 2.8 percent, respectively.

West Penn Power filed for a base retail rate increase of 10.8 percent and was eventually granted a 6.7 percent boost;Duquesne Power and Light implemented a 9.2 percent rate increase.In December 1990, the New Jersey Board of Public Utilities approved a settlement which increases Jersey Central Power&Light Company's retail electric rates by 6.1 percent.Member cooperatives had more reasons to smile at year'end as well.For 1991, Allegheny's projected wholesale billing rate to its members calls for a 0.78 percent reduction compared to 1990.When expressed on an average cost basis, the rate decrease amounts to 0.46 mills per kilowatt-hour to the member'ooperatives.

This decrease comes despite significant expected increases in the cost of supplemental power purchased from Jersey Central Power&Light and Metropolitan Edison.The excellent operation of both SSES and the William F.Matson Generating Station during 1990, coupled with the implementation of an extended bulk power sale with Baltimore Gas&Electric Company, greatly contributed to the control of rates forecast for 1991.SSES produced 1.123 billion kilowatt-hours of electricity in 1990-1.6 percent ahead of budget.Matson Station provided 88 million kilowatt-hours-3 percent above projections.

As a result, member cooperatives began receiving monthly credits on Allegheny's power billings early in fiscal 1991.These Cost of Service Billing Adjustment credits to member cooperatives

-which total$6.4, million-follow the$4.9 million returned in 1990.Non-member revenue Allegheny's non-member revenue has been historically generated by its SSES buy-back agreement with Pennsylvania Power&Light Company (PP&L)and from the sale of PASNY hydropower to eight'municipal electric systems and four private power companies.

Under the terms of the agreement with PP&L, each year PP&L"buys back" a portion of SSES power to which Allegheny is entitled.Taking power in incre-Allegheny Electric Cooperative, Inc.Board of Directors Board of Directors k,(~, Harold Hines Northwestern Rural Electric Cooperative Assoc.David Turner Warren Electric Coo erative Alston Teeter Tri-County Rural Electric Cooperative Donald J.Songer United Electric Cooperative, Inc.Winston Donaldson Central Electric Cooperative Donald Streams Southwest Central Rural Electric Cooperative Corp.Harold Ritehey Valley Rural Electric Cooperative

'g Lowell Friedline Ralph Fischer John Ritehey Somerset Rural Bedford Rural Electric New Enterprise Rural Electric Coo erative Coo erative.Electric Cooperative lleglteny Electric Cooperative, Inc.John Anstadt Sullivan County Rural Electric Cooperative John B.Drake Claverack Rural Electric Cooperative James Henderson Susser Rural Electric Cooperative John Looser Adams Electric Cooperative llegheny Electric Cooperative, Inc.ments has allowed Allegheny to largely avoid the rate shock many other utilities have faced when a new generating facility comes on line.The agreement ends in February 1991, when Allegheny will retain 210 megawatts, its full 10 percent share of SSES.In 1990, Allegheny's recapture of SSES Unit 2 rose to 90 megawatts.

The Unit 1 sellback was completed in June 1989.Allegheny's second source of non-member revenue comes from its role as Pennsylvania bargaining agent to the Power Authority of the State of New York (PASNY), operators of the Niagara and St.Lawrence power projects.Allegheny was appointed PASNY bargaining agent by the Governor of Pennsylvania.

Since 1985, Allegheny has purchased PASNY power and wheeling services for the eight municipal electric systems and four private power companies that receive part of PASNY's allocation.

During 1990, a third source of non-member revenue was obtained from a short-term bulk power sale.Allegheny also continued to emphasize its cash manage-ment program.Throughout the year, the cooperative kept its funds working in order to optimize the use of each available dollar.Allegheny's interest income in 1990 was$4.6 million, as compared to$4.3 million in 1989-an increase of 7.1 percent.Energy sales Allegheny's total system energy sales for fiscal 1990 were 1,991 gigawatt-hours, while peak demand reached a record high of 450 megawatts in January.When compared to 1989, energy sales increased by 47 million kilowatt-hours, or 2.4 percent, with peak demand rising by 17.7 megawatts or 4.1 percent.The increase in total system energy sales resulted primarily from normal (fore-casted)residential load growth, although the record high peak demand resulted from extremely cold weather during the last two weeks of December 1989.TOTAL ALLEGHENY POWER REQUIRMENTS PEAK DEMAND ENERGY SALES Ol g 5 5 g y I g 59~Q$EVi 1500 CI I I 1000'81'82'83'84'85'86'87'88'89'90'81'82'83'88'85 86'87'88'89'90 19 Financial Pages Audited Financial Statements and Qther Financial Information Audited Financial Statements Five-Year Financial Statement..Five-Year Statement of Revenue&Expenses.alance Sheets...~.....~~....~.~...~....

~..~~~~..~..~..~......~.~..~..~.~....~.~~.B Equities and Liabilities.

Statements of Operations tatements of Equities~.~......S 24.25~~~~~~~~~~~~~~~~~~o 26 27 28~~~~~~~~~~~~~~~~~o 29 tatements of Cash Flows.............................................................................30 S Financial Notes Notes to Financial Statements Report of Independent Auditors.Summary of Operations

-Allegheny Member Systems...............

~~~~~~~32.41.....42 Five-1'ear Financial Statement Assets General plant Construction work in progress Total plant Accumulated provision for depreciation

&amortization Net Plant Non-utility property-net Capital credits-NRUCFC Investm'ents in associated organizations Other investments Cash-general funds Cash-construdion fund Temporary investments Special funds Notes receivable Accounts receivable Prepayments Other current&accrued assets Deferred debits Total assets Liabilities Memberships Patronage capital Donated capital Long-term debt-REA Long-term debt-other Notes payable Accounts payable Cost of service adjustment Accrued taxes Accrued interest Other current&accrued liabilities Deferred credits Total liabilities Member revenues Adams Bedford Central Chverack New Enterprises Northwestern Somerset Southwest Central Sullivan Sussex Tri~unty United Valley Warren Total member revenues 24 1990 633,120,217 5,903~1 639P23~137P81%7 501~121 4,970~296,167 3+79~1 4,012,303 487 12,103 47P19,705 1,901,112 4,148,632 1IP49+90 1,113,921 57~.499/00 581+18+98 2/00 3~50,730 S,715P56 526310+77 15/45~2 6/16+15 545+74 3~011 683@32 19@41@85 581+18+98 1990 16,920P11 4,948@32 11,170@$2 8,739,960~4+18 10+23,184 8,737@37 14+25~4~5,952 6+12,906 7,199~7~18 10~,759 3P84,646 115,137,651 1989 616,987/94 9/40/32 626/27~88,725,714 537~1,912 5P55,971 3~1+6 35P78$14 1,903/23 13,734~1P52P28 342P28 1/50,929 599,7651 2/00 38,941/10 S0,730 4P1 0/92 52?+11/95 4@87,707 4/93/35 551~3@48/15 664/08 20@2@25 599,7651 1989 16~~4,934P84 11,123~8/78,763 2,183+2 10/75,739 8,77486 14~,709 2@44,198 6@33/50 7,194~7 7P14$9S 10~~9 3,114P60 114~,195 1988 609,034,277 6,938~4 615,972/51 70/28,954 54S,143P97 SPBP43 344,133 3/11,153 1/96/72 251~39~,723 2P71,952 14+11P35 1P30P83 333478 848/ii 614/93,944 2~36~~50,730 S011,153 30/18,791 5,180P00 8/01,704 SP30~346/21 3m.179 12,751 22P4,732 614/03,994 1988 15~/24 4,717/74 10,795,933 8~~2P66/95 9,994,179 8~1~'14P05~2,193@27 6P04349 6/87/05 7,709+$9,955,957 3P51 398~109~2@08 1987 602,287,851 26,11~71 SSW1N2 572,738,790 5$D1,705 3330/10 3P10P55 543,990 1PN~18~2,173/10 11,915r$66 988,752 109+12 1396~621,728P76 248 34,174/53 492 502/82/63 30~$78 19$00P00 8,923~~$73 513@00 3~~85,971 19~9/16 621,728P76 1987 13,940P70 4~,952 10$39P08 7,971,779 1,994/46 9,721/37 7~$96 13'~2,105~5~,934 6~,977 7~9,177@31 2,974,793 103~$95 1986 578,747,706 23/66/27 602P14~563/63@79 5~318 323/92 3/1 0P55-91@8 1P00 51515 2,782+1 10~$97 203,773 22P67 2@97/11 594,727/10 2/00 29/90+43 49N2 499,991/17 30/64,736 2P46,000 7/67/72 564/63 3,965r61 133,179 20$11$37 594,727/10 1986 13P44~1 4/62~9~/22 7%7m 1/60/82 9/25,703 7/19,154 1~,752 1,994~SP82,148 6,195/84 7,137,799 8~9@28 2,741810 97,170@75 Tive-Year Statement Of Revenue&Expenses 1990 1989 1988 1987 1986 Electric energy sales: Members Non-members 115,108,723 14,138+82 114,434,195 109/32/08 16,057,630 24/47,984 103,425395 31,974501 97,170375 42,411,238 Total receipts 129,247,605 130,491,825 133,880,792 135399g96 139/81,613 Cost of power Wheeling Raystown: Generation Operation&Maintenance Interest Transmission Taxes Other projects: Operation&maintenance Transmission Depreciation 32,085,914 9,249,841 2,560,147 183,550 19@85 123,663 24,052 466,190 2+46,261 200+21 16,884 736,696 116,970 33+58,887 40,119,659 8+45,773 7,441,025 41,231,647 6,668+17 43+42+73 5,786,049 SSES: Generation Operation&maintenance Fuel Depreciation Taxes Transmission Maintenance Depreciation Interest Interest charged to Construction

-Credit General&administrative 18,024,408 9,512,667 9,034,865 3,437,242 216,007 804,907 43,018,285

-909,146 5,315,694 18+18,905 9,413,177 9+76,144 3,429,845 317,266 804,768 42,724,066

-1,233,918 5,153,748 19,490,190 8,634@41 8,694,096 3,608,751 207,431 804,477 44,147,039

-2+18+73 3,980,637 14,987,966 10@20,233 7+76,680 3+90,699 194+45 800,450 45,839,094

-2,407,405 4,421@41 16,257,078 7,874,925 6,284+11 3,140,926 200,626 780,191 51389,042-3+80,029 4,251,885 Total operation expense 133,167,671 132.772327 135,662,439 133,023567 136,128,077 Depreciation Taxes Other deductions 131+97 136,143 30817,247 134,988 109,750-701,433 120/33 102,094 472@83 113%2 97,266~,214 92,264 95,054 412,172 Total expenses Operating margins Interest income Other-profit/(loss) net Other capital credits 163+52,458

-34,604+53 4,636,182 1+62,261 29,912 132@15,632

-1$23gV 4/28,040 28,940 21,184 135+12,683

-1$31$91 2,924/68 596398 23/25 132,601,451 2,798~5 1/22,193 245,604 17,668 135,903,223 3,678/90 1/98~0-76,186 55,254 Net margins-28,476+98 2~~7 2313,200 4/83,910 5,155,988 Balance Sheets October 31 1990 1989 (In Thousands)

ASSETS Electric Utility Plant-Note C In service-Note B Construction work in process Nuclear fuel in process Less accumulated depreciation and amortization

$624,880 5,903 8,240 639,023,, 137,581 501,442'$610308 10,274 6,679 627,261 88,725 538,536 OTHER ASSETS AND INVESTMENTS Nonutility property, at cost (net of accumulated depreciation of$1,483 in 1990 and$1@23 in 1989)Investments in associated organizations

-Note D Other investments

-Note A Other noncurrent assets 4,971 4,250 5,812 1,352 16,385 5,056 4,277 1,800 889 12,022 CURRENT ASSETS Cash and short-term investments of$47,288 in 1990 and$35,144 in 1989 Accounts receivable from members Other accounts receivable Other current assets 47,031 11,045 4,653 862 63,591 34,735 9329 5,069 738 49,871$581,418$600,429 26

~~Equities and Liabilities October 31 1990 1989 (InThousands)

EQUITIES Memberships Donated capital Patronage capital Other margins and equities-Note K Unrealized loss on marketable equity securities LONG-TERM DEBT, less current portion-Note F 3$51 38,574 (28,476)(177)9,975 495,031 3 51 38,940 38,994 489,919 CURRENT LIABILITIES Notes payable-Note E Current portion of long-term debt-Note F Accounts payable and accrued expenses Accounts payable to members DEFERRED CREDITS Deferred income tax benefits from safe harbor lease-Note G Other deferred credits 27,400 9,695 13,435 6,540 57,070 12,166 7,176 19@42 27,800 8,803 9,407 5,003 51,013 12,942 7561 20/03$581,418$600,429 See notes to financial statements.

27 Statements of Qperations Year Ended October 31 1990 1989 (In Thousands)

Operating revenue, including sales to members of$115,138 in 1990 and$114,434 in 1989$129,277$130,492 Operating expenses: Purchased power Transmission Production Fuel Depreciation Taxes Administrative and general OPERATING MARGIN BEFORE INTEREST AND OTHER DEDUCTIONS Interest and other deductions:

Interest expense Allowance for funds used during construction Other deductions (credits), net OPERATING MARGIN (DEFICIT)32,086 9,646 20,612 9,513 10,437 3,484 5+96 91+74 37,903'3,018 (909)52 42,161 (4,258)33359 8,864 20,865 9,413 10,316 3,454 5,256 91/27 38,965 42,724 (1,234)(9)41,481 (2/16)Nonoperating margins: Net nonoperating rental income (loss)Interest income Other 2 4,602 1,460 6,064 (23)4,293 52 MARGIN BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE Deferred income tax benefits from safe harbor lease 1,806 1,806 747 MARGIN BEFORE CUMULATIVE EFFECT'F CHANGE IN ACCOUNTING PRINCIPLE Cumulative effect of change in accounting principle-Note K 2,582 (31,058)2/53 See notes to financial statements.

NET MARGIN (DEFICIT)$(28,478)$2+53 28

~~Statements of Equities Donated Patronage Memberships Capital Capital Other Margins and Equities Unrealized Loss on Marketable Equity Securities Total (In Thousands)

Balance at November 1, 1988 Net margin 2553 2453 3$51$36@87$-$-$36,441 Balance at October 31, 1989 Change in unrealized loss on marketable equity securities Net margin (deficit)Retirement of capital credits 51 38,940 (366)(28,476)(177)38,994 (177)(28,476)(366)BALANCE AT OCTOBER 3L 3990$3$51$38,574$(28,476)$(177)$9,975 See notes to financial statements.

29 Statements of Cash Flows Year Ended October 31 1990 1989 (InThousands)

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

Depreciation and fuel amortization Amortization of gain on sale of electric utility plant Deferred income tax benefits from safe harbor lease Cumulative effect of change in accounting principle Changes in operating assets and liabilities: (Increase) decrease in operating assets: Noncurrent assets Accounts receivable from members Other accounts receivable Other current assets Increase (decrease) in operating liabilities:

Accounts payable and accrued expenses Accounts payable to members Other deferred credits NET CASH PROVIDED BY OPERATING ACTIVITIES 18,628 (58)(776)31,058 18,480 (44)(747)(463)(1,716)416 (124)4,028 1,537 (327)23.727 2300 (65)78 (88)(3,258)(400)(1301)17508$(28,476)$2853 INVESTING ACTIVITIES Additions to electric utility plant (Increase) reduction in investments in associated organizations Purchase of other investments Proceeds from sale of other investments Proceeds from sales of utility and nonutility property NET CASH USED IN INVESTING ACTIVITIES (12,565)27 (13,191)9,002 58 (16,669)(11,876)(30)32 (11,874)FINANCING ACTIVITIES Proceeds from long-term debt Payments on notes payable and long-term debt Retirement of capital credits 13,944 (8,340)(366)2,259 (12,837)NET CASH PROVIDED BY (USED IN)FINANCING ACTIVITIES INCREASE (DECREASE)

IN CASH AND CASH EQUIVALENTS 5,238 (10+78)12,296 (4,944)Cash and cash equivalents at beginning of year 34,735 39,679 CASH AND CASH EQUIVALENTS AT END OF YEAR$47,031$34,735 See notes to financial statements.

30 Financial¹tes

¹tes to Financial Statements 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 genera-tion and transmission cooperative, providing power supply to fourteen owner/members who are rural electric distribution cooperative utilities providing electric power to consumers in certain areas of Pennsylvania and New Jersey.Allegheny maintains its accounting records in accordance with the Federal Energy Regulatory Commission's chart of accounts as modified and adopted by REA.Electric Utility Plant and Depreciation:

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

Depreciation for nuclear utility plant production assets is provided on the modified sinking fund method under the amended phase-in plan adopted to conform to Financial Accounting Standards Board (FASB)Statement No.92 for 1990, and, for 1989, on the modified sinking fund method under the original phase-in plan adopted prior to application of FASB Statement No.92 (see Note K).The straight-line method is used for all other assets, except nuclear fuel.The cost of units of property retired or replaced is re-moved 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 Decommissioning 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.As required by the Nuclear Regulatory Commission, in 1990 Allegheny established a Decommissioning Trust Fund (Trust)which is restricted for use to ultimately decommission SSES.No payments were required to be made to the Trust in 1990.Included in other investments is$4.1 million of funds which , Allegheny's Board of Directors has restricted for future payments to the Trust.32

~~A NOTE A-(continued)

Alloroance for Funds Used During'onstruction:

Allowance for funds used during construction represents the cost of directly related borrowed funds used for construction of or additions to an electric utility plant.The allowance is capitalized as a component of the cost of electric utility plant while under construction.

Investments in Associated Organizations:

Investments in associated organizations are carried at cost.Preliminary Surveys: Costs of preliminary surveys for potential development projects are recorded as deferred charges in other noncurrent assets.If construction of a project results from such surveys, the deferred charges are transferred to the cost of the facilities.

If a preliminary survey is abandoned, the costs incurred are written off.Cash Equivalents:

For purposes of the statements of cash flows, Allegheny consid-ers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

Short-Tenn Investments:

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

Other investments include United States government obliga-tions, corporate obligations, and Common Stocks (marketable equity securities).

The U.S.government and corporate obligations are stated at cost which approxi-mates market value.Marketable equity securities are carried at the lower of their aggregate cost or market value.As of October 31, 1990, their cost was$984,000 and their market value was$807,000.Changes in net unrealized losses on noncurrent marketable equity securities are recorded directly in a separate equities'ccount and are not included in the determination of net margin.The change in net unreal-ized loss reflected in the equities section for the year ended October 31, 1990 is$177,000.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.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.

33

¹tes to Financial Statements (continued)

NOTE A-(continued)

Margin Stabilization Plan: Allegheny has established a margin stabilization plan which has been approved by REA.Under the provisions of the plan, Allegheny develops a budgeted margin each year based on a targeted Times Interest Earned Ratio (TIER)of 1.06.If the actual margin realized is in excess of the TIER, Allegh-eny records the difference as a reduction of the current year's operating revenues and as a liability to its members.Conversely, if the actual margin realized is less than the TIER, Allegheny records the difference as an addition to the current year'operating revenues and as a receivable from its members.The liability or receivable l recorded at the end of each year is incorporated into Allegheny's rate structure for the following year through a cost-of-service billing adjustment made by Allegheny to its members.During the years ended October 31, 1990 and 1989, operating revenues were reduced by$6.4 million and$4.9 million, respectively, due to actual margins exceeding the TIER.These amounts are included in accounts payable to members at October 31, 1990 and 1989.The aforementioned margin stablization plan will remain in effect through October 31, 1991.Reclassification:

The$1.8 million of investments included in other noncurrent assets in the 1989 financial statements has been reclassified to other investments to conform with the 1990 presentation.

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

Depreciation/

Amortization, Lives/Rates October 31 1990 1989 (In Thousands)

Nuclear Utility Plant: Production Transmission General plant Nuclear fuel 39 years$513,408 2.75%32,201 3%-12.5%825 Heat production 71,921$509,469 30,191 826 68,388 Non-Nuclear Utility Plant 3%-33%6/25 1,434'OTAL

$636,880$610,308 NOTE C-SUSQUEHANNA STEAM ELECTRIC S'FATION I Allegheny owns a 10%undivided interest in SSES.PP&L owns the remaining 90%.Both participants provide their own financing.

Allegheny's portion of costs associ-ated with the station totalled$629 million and$618 million at October 31, 1990 and 1989, respectively.

Allegheny's share of anticipated costs for ongoing construction and nuclear fuel for SSES is estimated to be approximately

$60 million over the next five 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 Utili-ties Cooperative Finance Corporation (CFC)patronage capital,"Capital Term Certificates" and"Subordinate Term Certificates," and National Bank for Coopera-tives (CoBank)"C" stock and"E" 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.

NOTE E-NOTES PAYABLE Allegheny has a short-term line of credit available with CFC of$21.4 million.There were no amounts outstanding at October 31, 1990 or 1989.The interest rate is generally at prime plus 1%.Restrictions are imposed under the line of credit arrangement 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

($43.0 million at October 31, 1990).Notes payable at October 31, 1990 and 1989 consist of Pollution Control Revenue Bonds issued by an Industrial Development Authority on Allegheny's behalf.The bonds are subject to purchase on demand of the holder and remarketing on a"best efforts" basis.Sinking fund redemption is scheduled in varying amounts through 2014, and interest is due monthly at variable rates (5.5%to 7.1%for 1990 and 5.9%to 8.0%for 1989).The bonds are convertible to a fixed interest rate and fixed term at Allegheny's option.$1.8 million of investments included in other investments at both October 31, 1990 and 1989 relate to a debt service reserve fund required under the bond indenture.

35 Notes to Financial Statements (continued)

NOTE F-LONG-TERM DEBT Long-term debt consists principally of mortgage notes payable for electric utility plant to REA and to the United States of America acting through the Federal Financing Bank (FFB)and guaranteed by REA.Substantially all the assets of Allegheny are pledged as collateral.

Long-term debt consists of the following:

Mortgage notes payable to FFB at interest rates varying from 7.338%to 13.820%in 1990 and 7.329%to 13.820%in 1989, due in varying amounts through 2021 October 31 1990 1989 (In Thousands)

$493,860$491,942 Mortgage loan payable to CFC, payable in various quarterly installments, including interest through January 2015.Variable rates ranged from 9.125%to 9.75%in 1990 and 9.25%to 11.00%in 1989$2,004$2,033 Notes payable to CFC, payable in various quarterly installments, including interest through October 2019.Variable rates ranged from 9.125%to 9.75%in 1990 and 9.5%to 11.00%in 1989$3,123$693 5%mortgage notes payable to REA due in varying amounts through 2019 Other Less current portion$5,719$4,015$20$39$504,726$498,722 9,695 8,803$495,031$489,919 Allegheny has the option on FFB promissory note advances to elect (subject to REA approval)an interim maturity date of two 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 up to a maximum of 34 years from the end of the calendar year in which the note was issued.At October 31, 1990, Allegheny had$25.8 million of advances maturing within one year which it, intends to convert to long-term obligations, either by rolling them over for addi-tional two-year periods or extending them to facility life-time financing, in accor-dance with the mortgage agreement.

36

.~'~~,~NOTE F-(continued)

Aggregate maturities of long-term debt for the four years subsequent to October 31, 1991 are as follows (in thousands):

1992 1993 1994 1995$10,912 11,661 12,102 12,496 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, 1990 interest rate, to compute the annual principal requirements.

Allegheny is required by mortgage covenants to maintain certain levels of interest coverage and annual debt service coverage.Allegheny was in compliance with such requirements at October 31, 1990.During 1990 and 1989, Allegheny incurred interest costs of$43.0 million and$42.7 million, respectively.

Interest paid, net of amounts capitalized, was$41.9 million and$41.7 million, respectively.

NOTE G-INCOME TAXES At October 31, 1990, Allegheny had available nonmember net operating loss carryforwards of$16.9 million for financial reporting purposes and$158.5 million for tax reporting purposes expiring through 2005 and investment tax credit carryforwards of approximately

$33.8 million for both financial and tax reporting purposes, expiring through 2003.Allegheny also had operating loss carryforwards attributable to member activities of$19.2 million for financial reporting purposes and$155;0 million for tax reporting purposes which may be carried forward indefinitely.

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 related interest were required by REA to be used to retire outstanding FFB debt.Under the term 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

$20 million at October 31, 1990.Payment of this contingent liability has been guaranteed by CFC.37 Notes to Financial Statements (continued)

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 Ocotober 31, 1990 and 1989 were$3.1 million and$2.6 million, respectively.

NOTE I-COMMITMENTS AND CONTINGENCIES Allegheny and PP&L are members of certain insurance programs which provide coverage for property damage to members'uclear generating plants.Allegheny's portion of the facilities at SSES is insured against property damage losses up to$218.5 million under these programs.Allegheny is also a member of an insurance program which provides coverage for the cost of replacement power during prolonged outages of nuclear units caused by certain specified conditions.

Under the property and replacement power insurance programs, Allegheny could be assessed retrospective premiums in the event the insurers'osses exceed their reserves.The maximum amount Allegheny could be assessed under these pro-grams during the current policy year is$.7 million.Allegheny's public liability for claims resulting fro'm a nuclear incident is currently limited to$780.7 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 insur-ance and an industry retrospective assessment program.In the event of a nuclear incident at any of the facilities owned by others and covered by'he 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 constructing a transmission facility which is estimated to cost a total of$2 million.Financing is being provided by REA ($1.4 million)and CFC ($.6 million).NOTE J-SALE/LEASEBACK ARRANGEMENT On June 30, 1988, Allegheny completed the sale and simultaneous leaseback of its'ydroelectric generation facility at the Raystown Dam (the Facility).

The Facility was sold to a trustee bank representing Ford Motor Credit Company (Ford)for$32 million in cash.Under terms of the arrangement, Allegheny is leasing the Facility'rom Ford's trustee for an initial term of 30 years.Payments under the lease are due in semiannual installments which commenced January 10, 1989.At the end'of the 30-year term, Allegheny will have the option to purchase the Facility for an am'ount equal to the Facility's fair market value.38 NOTE J-(continued)

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 gain of$1.9 million related to the sale is being recognized over the lease term in the same proportion that the annual rental payments relate to total rental payments.The payments by Allegheny under this lease were determined in part on the assumption that Ford will be entitled to certain income tax benefits as a result 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.

As of October 31, 1990, future minimum lease payments under this lease, which can vary based on the interest paid on the debt used by Ford to finance the transac-tion, are estimated as follows (in thousands):

1991 1992 1993 1994 1995 Thereafter

$1,932 1,932 2@61 2361 2@61 55,052 Total Minimum Lease Payments$65,999 The future minimum lease payments shown above are for the initial lease term and the five-year renewal period.These payments are based on an assumed interest rate of 8.8%and may fluctuate based on differences between the future interest rate and the assumed interest rate.Rental expense for this lease totalled$2.1 million for the year ended October 31, 1990 and$2.0 million for the year ended October 31, 1989.NOTE K-CHANGE IN ACCOUNTING PRINCIPLE Effective November 1, 1989, Allegheny adopted Statement of Financial Accounting Standards No.92,"Regulated Enterprises

-Accounting for Phase-in Plans." Under Statement No.92, a utility may capitalize on its balance sheet the costs deferred under a rate phase-in plan if the plan meets specific criteria including the require-ment that such costs are recovered within 10 years of the date the deferrals began.Otherwise, the deferred costs must be charged to expense in the period incurred.39 Notes to Financial Statements (continued)

NOTE K-(continued)

Under the method of depreciation used by Allegheny for nuclear utility plant production assets prior to November 1, 1989, which was previously approved by REA, the amount of depreciation included in electric rates during the first 10 years of the related assets'ives was substantially less than the amount that would have been included using straight-line depreciation.

Accordingly, this method of depre-ciation used for such assets was considered to be a phase-in plan under FASB Statement No.92 that did not meet the 10-year recovery period established by FASB Statement No.92.In order to comply with FASB Statement No.92, Allegheny amended its phase-in plan.Under the amended phase-in plan, which has received REA approval, depreciation of nuclear utility plant production assets is based one modified sinking fund method over a 10-year period commencing with 1990 and ending in 1999.The modified sinking fund method will result in the cumulative depreciation for the 10-year period being equal to straight-line depreciation over the same 10-year period.Commencing in the year 2000, the straight-line method will be used by Allegheny for the remaining life of the assets.The net amount of costs deferred at October 31, 1990 under the phase-in plan amended to comply with FASB Statement No.92 was$4.5 million.Allegheny was also required to record a charge against income in 1990 for the cumulative effect of a change in accounting principle in the amount of$31.1 million representing the difference in depreciation for nuclear utility plant production assets used by Allegheny under its previous phase-in plan and the straight-line method of depreciation.

This charge against income has been recorded as a defi-ciency in an unallocated equity account as of October 31, 1990, since the amount is not allocable to Allegheny's members.Beginning in 1990, all margins recognized by Allegheny are required to be used to reduce this deficiency.

In addition, the current year, margin stabilization adjustment (see Note A)was calculated prior to the cumulative effect adjustment.

The adoption of FASB Statement No.92 resulted in an increase in the 1990 margin before cumulative effect of change in accounting principle of$1.1 million.Pro forma amounts of operations for 1989, as if FASB Statement No.92 would have been adopted in 1989, approximate the actual operating results reported for 1989.40 H~ERNsTdk VoUNc 0 300 Locust Court 212 Locust Street Harrisburg, Pennsylvania 17101 0 Phone: 7172327575 Report of Independent Auditors Board of Directors Allegheny Electric Cooperative, Inc.We have audited the accompanying balance sheets of Allegheny.

Electric Cooperative, Inc.as of October 31, 1990 and 1989, and the related statements of operations, equities, and cash flows for the years then ended.These financial statements are the responsibility of manage-ment.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 exam-ining, 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, the financial statements referred to above present fairly, in all material respects, the financial position of Allegheny Electric Cooperative, Inc.at October 31, 1990 and 1989, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.

As discussed in Note K to the financial statements, in 1990 Allegheny Electric Cooperative, Inc.adopted Financial Accounting Standards Board Statement No.92,"Regulated Enterprises

-Accounting for Phase-in Plans." January 11, 1991 Summary of Qperations

-Allegheny Member Systems Adams EC, Inc.David J.Cowan President 8edford REC, Inc.Ralph W.Fischer President Central EC, Inc.William E Yerwilliger President Claverack REC, Inc.Albert J.Wyda President New Enterprise REC, Inc.John W.Ritchey President Northwestern RECA, Inc.Harold Hines President

SUMMARY

OF OPERATIONS Operating Revenue OPERATING EXPENSES$26,035,688

$7@65+60$18,170,446

$14,718,600

$2,958,010$17,277,659 Purchased power Operations

&maintenance Depreciation Taxes Interest Cost of electric service Operating margins Non-operating margins&capital credits Net margins ASSETS$17,159,192

$4+62,783$1,476,499$209,776$1+12,887$25,221,136

$814/51$661,161$1,475,712$5,013,184$1538,676$336+11$63+15$332,473$7,284,659$80,700$251,610$332+10$11,180,716

$4,189~2$883,963$136557$1,089,880$17,480,498

$689,948$505,697$1,195,645$8W5,985$3~,931$962,027$203,011$848,874$14+24,828$293,772$313,690$607,462$2,244,871$785+20$162,000$22/83$0$3,214,774 ($256,763)$51,909 ($204,854)$11,160,167

$3+92,215$837,901$219,288$819,171$16,928,742

$348,917$402,615$751~2 Total utility plant Less accumulated depredation Net utility plant Other property&investments Current&accrued assets Deferred debits Total assets LIABILITIES

$46,893,466

$10,823+60$36,069,605

$7/15@90$7,280,919$142,968$51,008+82$13/99,826$4,260,435$9,139+91$2,281,104$2,255,977'$71,145$13,747,616

$33~9,864$8,890/85$24,659,279

$5@36,436$4,967,988$37/87$35,001,290

$31,752,111

$7+74,973$23,877,138

$4,086,846$1,020,060$118+22$29,102/66$3,187,689$1,772+93$1,415,096$750,600$284,823$0$2,450818$31,183,630

$8,802,884$22380,745$5,766,719$2370555$478,784$30,996,804 Margins&equities Long-term debt Current&accrued liabilities Other credits&reserves Total liabilities OTHER STATISTICS

$19,117,760

$29',754$2,042@68$12,000$51,008,882

$6~9,177$6,165,409$756,011$277,019$13,747,616

$14,150,087

$18,678,850

$1,956/95$215,758$35,001,290

$11,019,618

$15g27+18$2,197/24$58,106$29,102@66$2,271,780$0$178,738$0$2,450+18$14,012,080

$15303,106$1,678,152$3,467$30,996,804 Miles of line Consumers served Consumers per mile Kwh sold per consumer Mwh sales Annual revenue per consumer Plant investment per consumer Revenue per mile of line 42 2,435 21383 8.8 12,990 279,055.8$1,212$1,679$10,692 1.133 7,628 6.7 10,438 79,621.6$966$1,198$6500 2,911 21,719 7.5 8,151 177,038.4$837$1,135$6,242 2+78 14,869 6.3 9,267 137,7913$990$1,606$6,189 323 2,866 8.9 1'1,688 33,498.7$1,032$494$9,158 2332 16,074 6.9 10,625 170,784.5$1,075$1+92$7,409 Somerset REC, Inc.Dalton B.Walker President Southwest Central RECC Donald Streams President Sullivan County REC, Inc.Wayne Gavitt President Sussex REC James L Henderson President Triton ty REC, Inc.Alston A.Teeter President United EC, Inc.James R.Young President Valley REC, Inc.Harold E.Ritchey President Warren EC, Inc.Dave Turner President TOTAL$12,133,277

$20,146,011

$3,776,838$12,083,769

$12,722,087

$13,086/57$15+48+52$5,1S3,249$8/18,299$1,934/51$538,269$133,629$693,100$11,817,848

$315,429$443,145$758874$1S,029,625

$2498,095$865,788$131,878$1,019/32$19,644,718

$501,293$471,784$973,077$2,438,903$755~0$231/31$36,436$225,612$3,688+22$88/15$102,136$190,651$6393,898$2355,246$705+14$1,406,412$757,234$11,618,604

$465,165$312,697$777+62$7@44,427$3,146,990$808,778$135,909$1,035,215$12,471/19$250,768$341,857$592,625$7,757,247$2,837,163$867,776$82,986$1,166,724$12,711,896

$374,961$403,125$778,086$10,778,094

$2,911/19$916~9$140,036$683,020$15,429,218

$419333$496+98$915,931$3,123,740$1,071,168$293,684$46,849$146/23$4,682,263$470,986$134/86$605/72$116,998+49

$36,433,779

$9,887@89$2,968,964$10@30@45$176,618,826

$4857,576$4,892,610$9,750,186$21458,449$4,845,244$16,713@05$4,203@00$4+31,858$6,051$25,254,414

$32+19/95$5+75,046$26,944~9$6,173,098$1+42,160$59,404$35,019@11$8/63,183$2/20,069$5,743,113$1,231,722$461,625$14,680$7,451,140$21,268,119

$4,734,210$16+33,909$2,683,247$3~,134$167,010$22W8P00$31,827,143

$7,994/36$23+32,607$3,696,995$3,624,714 ($15,012)$31,139/04$32,945,989

$8,737/91$24,208,098

$4,488,936$2555,205$130,293$31@82/32$33,122/04$9,234,254$23',950$4,654,702$3~9,123$22+27$31,954,102

$10,798,660

$3,627,498$7,171,162$1,608,688$1,003,638$480,021$10,263/08$352@69,926

$89,794,079

$262+75,848

$54 477 782$38,892,779

$1,713,579$357,659,988

$10,644,913

$13,479,889

$976,093$153/19$25,254,414

$16/64,143$16,904,441

$1,471,081$79~6$35,019,211

$2,839,467$4/21,764$289,463$446$7,451,140$7+50,794$12,779,734

$2,434,727$123,045$22,888300$11,188/87$19,109,667

$754,650$86,400$31,139304$10,617,834

$19,624+78$1,139,848$272$31382532$17,180,687

$12,462,001

$1,953588$357+27$31,954,102

$6584,833$3,268,067$158,628$251,980$10,263508$150,291,761

$187,761,578

$17,987,266

$1,619@84$357,659,988 1/30 10,936 6.0 12,629 138,113.4$1,109$1/28$6,630 2,416 19,269 8.0 12,007 231@55.4$1,046$1/98$8$39 787 4,881 6.2 7/20 36,703.7$774$1,177$4,798 604 9,734 16.1 10,473 101,948.7$1,241$1,699$20,000 2~'15,669 S.5 6/92 107,991.2$812$1+21$4,489 2,605 15,813 6.1 7,296 115/64.4$828$1+31$5,023 2356 17,288 7.3 9,738 168@50.2$917$1,382$6,727 1,009 8,437 8.4 5,656 47,718.5$611$850$S,108 25,953 186,666 7.2 9,779 1,825@36.0

$972$1,407$6,992 43 0 S