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Forwards 1987 Annual Rept for Allegheny Electric Cooperative,Inc
	ML18040B213
Person / Time
Site:	Susquehanna
Issue date:	06/24/1988
From:	Keiser H; PENNSYLVANIA POWER & LIGHT CO.
To:	Murley T; Office of Nuclear Reactor Regulation
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ML17156A653	List: ML17156A652; ML18040B213;
References
	PLA-3049, NUDOCS 8806300016
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"" XC CELERATED IQ4UBUTION DEMONS'1OOION SYSTEM REGULATORY INFORMATION DISTRIBUTION SYSTEM (RIDS)DOCKET 05000387 05000388

SUBJECT:

Forwards 1987 annual rept for Allegheny Electric Cooperative,Inc.

DISTRIBUTION CODE: M004D COPIES RECEIVED:LTR ENCL SIZE: TITLE: 50.71(b)Annual Financial Report ACCESSION NBR:8806300016 DOC.DATE: 88/06/24 NOTARIZED:

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

Pennsylvania Power&Light Co.RECIP.NAME RECIPIENT AFFILIATION MURLEY,T.E.

Office of Nuclear Reactor Regulation, Director (Post 870411 NOTES:LPDR 2 cys Transcripts.

LPDR 2 cys Transcripts.

5w~~ghnuoc~F'<~'i&~r7 RECIPIENT COPIES RECIPIENT ID CODE/NAME LTTR ENCL ID CODE/NAME PD1-2 PD 1 1 THADANI,M COPIES LTTR ENCL 1 0 05000387 Q 05000388 I A INTERNAL: AEOD/DOA NRR/PMAS/PTSB12 REG 01 1 1 AEOD/DSP/TPAB 1 1 NUDOCS-ABSTRACT 1 1 1 1 1 1 EXTERNAL LPDR NOTES: 2 2 2 2 NRC PDR 1 1 R D S A D TOTAL NUMBER OF COPIES REQUIRED: LTTR 12 ENCL 11 Pennsylvania Power 8 Light Company Two North Ninth Street~Allentown, PA18101-1179

~215/770-5151 Harold W.Keiser Senior Vice President-Nuclear 215/770 4194 JUN 24 1988 Dr.Thomas E.Murley Office of Nuclear Reactor Regulation U.S.Nuclear Regulatory Commission Washington, DC 20555 SUSQUEHANNA STEAM ELECTRIC STATION ANNUAL FINANCIAL REPORT PLA-3049 FILE R41-2A Docket Nos.50-387 50-388

Dear Dr.Murley:

In accordance with 10CFR50.71(b), attached is the 1987 annual financial report including certified financial statements for Allegheny Electric Cooperative, Inc.The attached financial report covers the period November 1, 1986 through October 31, 1987.Allegheny's 1987'nnual Report is also attached.The 1987 annual report for Pennsylvania Power&Light Co.was forwarded on March 30, 1988 (PLA-3009)

.Very truly yours, H.W.Keiser Attachment cc:PRC Document Control Desk (original NRC Regi'on Mr.F.I.Young, NRC Sr.Resident Inspector Mr.M.C.Thadani, NRC Project Manager SS06300016 8S0624 PDR ADOCK 05000387 DCD

-NOTICE-THE ATTACHED FILES ARE OFFICIAI RE-CORDS OF THE RECORDS&REPORTS MANAGEMENT BRANCH.THEY HAVE BEEN CHARGED TO YOU FOR A LIMITED TIME PERIOD AND MUST BE RETURNED TO THE RECORDS&ARCH!VES SERVICES SECTION P1-122 WHITE FLINT.PLEASE DO NOT SEND DOCUMENTS CHARGED OUT THROUGH THE MAIL.REMOVAL OF ANY PAGE(S)FROM DOCUMENT FOR REPRO-DUCTION MUST BE REFERRED TO FILE PERSONNEL.

r~~gpss"'p~g Da-NO Allegheny Electric Cooperative, Inc.: supplying power for 170,000 consumer-members Pike%saw~yeee1 Pal~WAN~Seaonal heel napery Ceoweaeo SeNV OttWWIW Oopoiyao Mes~f Allegheny Electric Cooperative, Inc., a generation and transmission cooperative, is the wholesale power supplier for its 14 member rural electric distribution cooperatives, which serve more than 170,000 consumer-members in Pennsyl-vania and New Jersey.The cooperative belief in strength in numbers led to Allegheny's for-mation in 1946.Before that, each rural cooperative purchased power from private power companies in-dividually.

On their own, they paid dearly for it;in 1944, the Rural Elec.trification Administration reported that wholesale rates paid by the Pennsylvania cooperatives were among the highest in the nation.With the bargaining power of all the cooperatives united behind it, Allegheny was able to negotiate wholesale rates that saved the cooperatives 20 percent on their power bills.Allegheny works together with the Pennsylvania Rural'lectric Association (PREA), the service organization for the member distribution cooperatives.

Sharing offices and staff, PREA supports Allegheny's efforts by working for favorable laws and against costly regulations; supporting programs that benefit rural areas, and offering safety and job training to member cooperative staffs.Allegheny's mission remains un-changed from the day the organiza.tion was created over 40 years ago: to provide a reliable supply of energy at the lowest possible price.Allegheny Electric Cooperative, Inc.212 Locust Street, P.O.Box 1266 Harrisburg, PA 17108-1266 Audited Financial Statements and Other Financial Information Allegheny Electric Cooperative, Inc.October 31, 1987-NOTICE-THE ATTACHED FILES ARE OFFICIAL RE-CORDS OF THE RECORDS 5 REPORTS MANAGEMENT BRANCH.THEY HAVE BEEN CHARGED TO YOU FOR A LIMITED TIME, PERIOD AND MUST BE RETURNED TO THE RECORDS 5 ARCHIVES SERVICES SECTION P1-122 WHITE FLINT.PLEASE DO NOT SEND DOCUMENTS CHARGED OUT THROUGH THE MAIL.REMOVAL OF ANY PAGE(S)FROM DOCUMENT FOR REPRO-DUCTION MUST BE REFERRED TO FILE PERSONNEL.-NOTICE-[g~m Ernst&Whinney Audited Financial Statements and Other-Financial Information ALLEGHENY ELECTRIC COOPERATIVE, INC.October 31, 1987 Audited Financial Statements I Auditors Report.................................

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

Statements of Operations and Patronage Capital...

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

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

~~~1~~1 2~~~4~~~5~~~6 Other Financial Information Auditors'eport on Other Financial Information..

Schedules of Nonoperating Rental Income (Expense)Schedules of Administrative and General Expenses.~~~14~~~15~~~16 Qm Ernst&Whinney 300 Locust Court 212 Locust Street Harrisburg, Pennsylvania=

17101 717/232-7575 Board of Directors Allegheny Electric Cooperative, Inc.Harrisburg, Pennsylvania Me have examined the balance sheets of Allegheny Electric Cooperative, Inc.as of October 31, 1987 and 1986, and the related statements of operations and patronage capi,tal and changes in financial position for the years then ended.Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

In our opinion, the financial statements referred to above present fairly the financial position of Allegheny Electric Cooperative, Inc.at October 31 1987 and 1986 and the results of its operations and the changes in its 1 financial position for the years then ended, in conformity with general y accepted accounting principles applied on a consistent basis.Harrisburg, Pennsylvania January 22, 1988 BALANCE SHEETS ALLEGHENY ELECTRIC COOPERATIVE, INC.ASSETS October 31 1987 1986 (In Thousands)

ELECTRIC UTILITY PLANT-Note C In service-Note B Construction work in process Nuclear fuel in process Less accumulated depreciation and amortization

$584,815$558,098 26,112 23,267 17 473 20,650 628,400 602,015 55 662 38 651 572,738 563,364 OTHER ASSETS AND INVESTMENTS Nonutility property, at cost{net of accumulated depreciation of$1,047 in 1987 and$928 in 1986)Investments in associated organizations

-Note D Construction advances Other noncurrent assets 5,202 4,392 574 3 968 5,668 5,009 327 4,304 14,136 15,308 CURRENT ASSETS Cash and short-term investments of$22,539 in 1987 and$5,675 in 1986 Accounts receivable from members Other accounts receivable Other 22,510 8,453 3,463 428 34 854 5,257 8,022 2,564 213 16,056 EQUITIES AND LIABILITIES October 31 1987 1986 (In Thousands)

EQUITIES Memberships Donated capital Patronage capital LONG-TERM DEBT, less current portion-Note F 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 3 50 34 174 34,227 517,156 28,400 6,690 13,187 2,499 50,776 14 7408 5,161 19,569 3 50 29,590 29,643 494,452 30,646 7,744 11,722 209 50,321 15,087 5.225 20,312 S 621,728 S 594 728 See notes to financial statements.

STATEMENTS OF OPERATIONS AND PATRONAGE CAPITAL ALLEGHENY ELECTRIC COOPERATIVE, INC.Year Ended October 31 1987 1986 (In Thousands)

Operating revenue, including sales to members of$103,425 in 1987 and$97,170 in 1986$135,400$139,582 Operating expenses: Purchased power Transmission Production Fuel Depreciation Taxes Administrative and general OPERATING MARGIN BEFORE INTEREST AND OTHER DEDUCTIONS 41,232 6,863 14,975 10,320.,8>491 3,397 4,525 89,803 45,597 43,543 5,987 16,245 7,875 7,156 3,148 4 353 88,307 51,275 Interest and other deductions:

Interest expense Allowance for funds used during construction Other deductions (credits), net OPERATING MARGIN Nonoperating margins: Net nonoperating rental income (expense)Interest income 45,839 (2,407)(6)43,426 2,171 246 1,488 1 734 51,560 (3,380)(43)48,137 3,138 (76)1 365 1 289 MARGIN BEFORE INCOME TAXES Deferred income tax benefits from safe harbor lease 3,905 679 4,427 729 Patronage capital at beginning of year NET MARGIN 4,584 29,590 5, 156 24,434 PATRONAGE CAPITAL AT END OF YEAR$34,174$29,590 See notes to financial statements.

STATEMENTS OF CHANGES IN FINANCIAL POSITION ALLEGHENY ELECTRIC COOPERATIVE, INC.SOURCE OF WORKING CAPITAL Net margin Charges (credits)to margin not affecting working capital: Depreciation Fuel amortization Deferred income tax benefits from safe harbor lease TOTAL FROM OPERATIONS 8,626 8,784 (679)21,315 7>291 6,775 (729)18,493 Year Ended October 31 1987 1986 (In Thousands) 4,584$5,156 Additions to long-term debt Decrease in construction advances Other sources APPLICATION OF WORKING CAPITAL Additions to electric utility plant Reduction of long-term debt Increase in construction advances Other applications 27,494 953 49,762 26,318 4,790 247 64 31 419 4,990 521 2,270 26,274 25,371 15,686 71 41 128 INCREASE (DECREASE)

IN WORKING CAPITAL$18,343$(14,854)CHANGES IN COMPONENTS OF WORKING CAPITAL Increase (decrease) in current assets: Cash and short-term investments Accounts receivable from members Other accounts receivable Other$17,253$(10,985)431 814 899 (596)215 (337)18,798 (11,104)Increase (decrease) in current liabilities:

Notes payable Current portion of long-term debt Accounts payable and accrued expenses Accounts payable to members (2,246)(1,054)1,465 2,290 455 3,172 741 1,316 (1,479)3,750 INCREASE (DECREASE)

IN WORKING CAPITAL$18,343$(14,854)See notes to financial statements.

NOTES TO FINANCIAL STATEMENTS ALLEGHENY ELECTRIC COOPERATIVE, INC+October 31, 1987 NOTE A-SUGARY OF SIGNIFICANT ACCOUNTING POLICIES Allegheny Electric Cooperative, Inc.(Allegheny) is a rural electric cooperative utility established under the laws of the Commonwealth of Pennsylvania.

Financing assistance is provided by the U.S.Department of Agriculture, Rural Electrification Administration (REA)and, therefore, Allegheny is subject to certain rules and regulations promulgated for rural electric borrowers by REA.Allegheny is a generation and transmission cooperative, providing power supply to fourteen owner/members who are rural electric distribution cooperative utilities providing electric power to consumers in certain areas of Pennsylvania and New Jersey.Allegheny maintains its accounting records in accordance with the Federal Energy Regulatory Commission's chart of accounts as modified and adopted by REA.Electric Utilit Plant and De reciation:

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

Depreciation is provided on the modified sinking fund method for nuclear utility plant production assets and the straight-line method for all other assets, except nuclear fuel.The cost of units of property retired or replaced is removed from utility plant accounts and charged to accumulated depreciation.

Nuclear Fuel: Nuclear fuel usage is charged to fuel expense based on the quantity of heat produced for electric 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 (PP6L)', co-owner of Susquehanna Steam Electric Station (SSES), its portion of DOE fees for such future disposal services.Cost of Decommissionin Nuclear Plant: Allegheny's portion of the estimated decommissioning costs of SSES is charged to operating expenses over the estimated useful life of the plant.Allowance for Funds Used Durin Construction:

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

Investments in Associated Or anizations:

Investments in associated organizations are carried at cost.

NOTES TO FINANCIAL STATEMENTS

-Continued ALLEGHENY ELECTRIC COOPERATIVE, INC.NOTE A-

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES-Continued Preliminar Surve s: Costs of preliminary surveys for potential development projects are recorded as deferred charges in other noncurrent assets.If construction of a project results from such surveys, the deferred charges are transferred to the cost of the facilities.

If a preliminary survey is abandoned, the costs incurred are written off.Short-Term Investments:

Short-term investments are carried at cost, plus accrued interest, which approximates market value.Income Taxes: Investment tax credits, other than those'sold through the safe harbor lease arrangement, are accounted for under the flow-through method whereby credits are recognized as a reduction of income tax expense in the year in which the credit is utilized for tax purposes.The Tax Reform Act of 1986 (the Act), enacted on October 22, 1986, repealed the Investment Tax Credit as of January 1, 1986.Provisions exist within the Act which allow for investment tax credits on certain property referred to as"transition property" placed in service after December 31, 1985.During the years ended October 31, 1987 and 1986, Allegheny placed in service transition property eligible for investment tax credits.Variations in the customary relationship between pretax accounting income and income tax expense are the result of patronage dividends.

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

Accountin for Phase-In Plans: In August 1987, the Financial Accounting Standards Board issued Statement No.92,"Regulated Enterprises

-Accounting for Phase-in Plans" (Statement).

The Statement specifies the accounting for existing and future phase-in plans and is effective for fiscal years beginning after December 15, 1987.The Statement, if ultimately determined to be applicable to Allegheny, would require Allegheny to recognize an immediate charge against income for the difference between the modified sinking method of depreciation currently used for nuclear utility plant production assets and the straight-line method of depreciation.

The difference between these two methods is approximately

$21.9 million at October 31, 1987 and is estimated to be approximately

$25.8 million at October 31, 1988, the effective date of the , Statement for Allegheny.

Management is currently evaluating the potential alternatives available to minimize the charge against income which may be required as a result of this Statement, including modifying the existing phase-in plan or obtaining REA approval to avoid having to apply the Statement.

NOTES TO FINANCIAL STATEMENTS--Continued ALLEGHENY ELECTRIC COOPERATIVE, INC.NOTE B-ELECTRIC UTILITY PLANT IN SERVICE Electric utility plant in service consists of the following:

Nuclear Utility Plant: Production Transmission General plant Nuclear fuel Non-Nuclear Utility Plant Depreciation/

Amortization, Lives/Rates 39 years 2.75%3%-12.5%Heat production 3%-33%October 31 1987 1986 (In Thousands)

$502,283$482,021 30,174 29,713 827 829 50,368 44,466 1 163 1,069 TOTAL$584,815$558,098 NOTE C-SUSQUEHANNA STEAM ELECTRIC STATION 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 associated with the station totalled$605 million and$596 million at October 31, 1987 and 1986, respectively.

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

$39.2 million over the next four 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 primari3.y of National Rural Utilities Cooperative Finance Corporation (CFC)patronage capital,"Capital Term Certificates" and"Subordinate Term Certificates," and Baltimore Bank for Cooperatives (BBC)"C" stock.Certificates bear interest at 3%and begin maturing in 2025.Allegheny is required to maintain these investments pursuant to certain loan and guarantee agreements.

NOTE E-NOTES PAYABLE Allegheny has short-term lines of credit available with banks and CFC of$52 million of which$2.0 million was outstanding at October 31, 1986.There were no amounts outstanding at October 31, 1987'nterest rates are generally at prime plus 1%.

NOTES TO FINANCIAL STATEMENTS--Continued ALLEGHENY ELECTRIC COOPERATIVE, INC.NOTE E-NOTES PAYABLE-Continued Notes payable of$28.4 million and$28.6 million were outstanding at October 31, 1987 and 1986, respectively, relating to Pollution Control Revenue Bonds issued by an Industrial Development Authority on Allegheny's behalf.The bonds are subject to purchase on demand of the holder and remarketing on a"best efforts" basis.Sinking fund redemption is scheduled in varying amounts through 2014, and interest is due monthly at variable rates (3.4%to 6.8%for 1987 and 4.0%to 8.3%for 1986)~The bonds are convertible to a fixed interest rate and fixed term at Allegheny's option.$1.8 million of investments included in other noncurrent assets at both October 31, 1987 and 1986 relate to a debt service reserve fund required under the bond indenture.

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

($60 million at October 31, 1987).NOTE F-LONG-TERM DEBT Long-term debt consists principally of mortgage notes payable for the electric utility plant to REA and to the United States of America acting through the Federal Financing Bank (FFB)and guaranteed by REA, a mortgage loan payable to CFC relating to nonutility property, and commercial paper issued by Allegheny for temporary construction financing.

Substantially all the assets of Allegheny are pledged as collateral.

Long-term debt consists of the following:

October 31 1987 1986 (In Thousands)

Mortgage notes payable to FFB at interest rates varying from 6.473%to 13.820%, due in varying amounts through 2021$499,877$499,575 Mortgage loan payable to CFC, payable in various quarterly installments, including interest through January 2015.The interest rate was converted during 1987 from a fixed rate of 9.25%to a variable rate.Variable rates ranged from 7.38%to 9.00%for 1987 2,085 2,106 NOTES TO FINANCIAL STATEMENTS--Continued ALLEGHENY ELECTRIC COOPERATIVE, INC.NOTE F-LONG-TERM DEBT-Continued October 31 1987-1986 (In Thousands) 5%mortgage notes payable to REA due in varying amounts through 2015 Commercial paper with interest at 8.275%Other Less current portion$2,505$19,300 79 523,846 6 690 417 98 502,196 7 744$Allegheny has signed a letter of intent to enter into a lease financing arrangement with an outside party (see Note J)and intends to use a portion of the proceeds received under the arrangement to retire its outstanding commercial paper in Apri.l 1988.If the arrangement is not consummated, Allegheny intends to retire the outstanding commercial paper in April 1988 through proceeds from long-term borrowings available under an existing financing agreement with REA which provides for advances up to$41.5 million.Accordingly, the$19.3 million of commercial paper has been classified as long-term debt at October 31, 1987.Allegheny has the option on FFB promissory note advances to elect (subject to REA approval)interim maturity dates of not less than two years nor more than seven years after the date of the advance.At the date of the advance or on the maturity of an interim advance, Allegheny may also designate that it desires a long-term maturity of 34 years after the end of the calendar year in which the advance was made.At October 31, 1987, Allegheny had$34 million of advances maturing within one year which it intends to refinance for 34 years.Aggregate maturities of long-term debt for the four years subsequent to October 31, 1988 are as follows (in thousands):

1989 1990 1991 1992$7,165 9,120 10,473 12,849 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, 1987 interest rate, to compute the annual principal requirements'llegheny 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, 1987.

NOTES TO FINANCIAL STATEMENTS

-Continued ALLEGHENY ELECTRIC COOPERATIVE, INC.NOTE G-INCOME TAXES At October 31, 1987, Allegheny had available net operating loss carryforwards of$2.9 million for financial reporting purposes and$256.1 mi'llion for tax reporting purposes, and investment tax credit carryforwards of approximately

$33.5 million for both financial and tax reporting purposes, expiring through 2002.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 terms of the safe harbor lease, Allegheny is contingently liable in varying amounts in the event the lessor's tax benefits are disallowed and in the event of certain other occurrences.

The maximum amount for which Allegheny was contingently liable approximated

$21 million at October 31, 1987.Payment of this contingent liability has been guaranteed by CFC.NOTE H-RELATED PARTY TRANSACTIONS Allegheny has an arrangement with an associated organization, Pennsylvani.a Rural Electric Association (PREA), under which PREA provides Allegheny with certain management, general, and administrative services on a cost reimbursement basis.Total costs for the services provided for the years ended October 31, 1987 and 1986, were$1.8 million and$2.1 million, respectively.

NOTE I-COMMITMENTS AND CONTINGENCIES Allegheny and PPSL 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$139.5 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 programs during the current policy year is$1.5 million.

NbTES TO FINANCIAL STATEMENTS

-Continued ALLEGHENY ELECTRIC COOPERATIVE, INC.NOTE I-COMMITMENTS AND CONTINGENCIES

-Continued Allegheny's public liability for claims resulting from a nuclear incident is currently limited to$72 million under provisions of the Price-Anderson Act (Act).Allegheny is protected against this potential liability by a combination of commercial insurance and an industry retrospective assessment program.In the event of a nuclear incident at any of the facilities owned by others and covered by the Act, Allegheny could be assessed up to$1 million per incident, but not more than$2 million in a calendar year in the event more than one incident is experienced.

Congress is in the process of amending the Act.The proposed amendments generally include provisions which would increase the public liability limit of utilities in the event of a nuclear incident.Management is unable to predict what action Congress might ultimately take regarding the Act and what effect such action might have on Allegheny's potential liability.

Allegheny is currently constructing a hydroelectric generation facility at Raystown Dam (the Facility)with operations expected to begin in 1988.In addition, Allegheny is also purchasing equipment for a project to reduce peak power demand (Load Management Project).Temporary construction financing for the Facility is being made through short-term commercial paper issued by Allegheny (see Notes F and J).Financing for the Load Management Project has been arranged with REA ($7.3 million)and CFC ($3.2 million).At October 31, 1987, total project costs of the Facility and Load Management Project were estimated at$33 million and$11.4 million, respectively.

Costs incurred through October 31, 1987 were$20.8 million for the Facility and$4.7 million for the Load Management Project.On July 31, 1987, Allegheny entered into an agreement with Sithe Energies USA, Inc.(Sithe)to transfer its interests in the development of the Allegheny River Locks and Dams Number 8 and 9 Hydroelectric Project to Sithe.Interests to be transferred included Allegheny's license granted by the Federal Energy Regulatory Commission (FERC)to construct the hydroelectric project.The agreement calls for three payments to be made by Sithe.The first payment, in the amount of$250,000, was received and recorded by Allegheny in November 1987 in exchange for deliverance of evidence of release of any liens or claims against the FERC license.The second and third payments are contingent upon certain events as follows.These payments will be recorded when the amounts become payable under the terms of the agreement.

$1.4 million payable upon the execution by Sithe of a power purchase agreement for sale of all or part of the energy and capacity produced by the project.$800 thousand payable upon consummation of construction financing or 12 months subsequent to the date of execution of the aforementioned power purchase agreement.

NOTES TO FINANCIAL STATEMENTS

-Continued ALLEGHENY ELECTRIC COOPERATIVE, INC.NOTE I--COMMITMENTS AND CONTINGENCIES

-Continued In addition, FERC requires that construction must begin by March 1989.Title to the project reverts back to Allegheny after 40 years of operation or on August 24, 2030, whichever is earlier.NOTE J-LEASE FINANCING ARRANGEMENT On September 23, 1987, Allegheny signed a letter of intent to enter into a lease financing arrangement with Ford Motor Credit Company (Ford)for the Facility (see Note I).Under terms of the arrangement, Allegheny will sell the Facility to Ford for an amount equal to its fair market value, not to exceed 930 million plus or minus ten percent.The Facility will then be leased back to Allegheny for an initial term of 30 years.The arrangement is expected to qualify for treatment as an operating lease.At the end of the 30-year term, Alleghenywill have the option to purchase the Facility for an amount equal to the Facility's fair market value.Allegheny also has the option to renew the lease as provided in the arrangement.

Allegheny will retain co-licensee status for the Facility throughout the term of the arrangement.

In accordance with the letter of intent, Allegheny made a commitment deposit to Ford on November 11, 1987 in the amount of$150,000.The deposit will be applied to Allegheny's first rental payment.The arrangement is expected to be consummated in April 1988.

[gIIj Ernst&Whinney 300 Locust Court 212 Locust Street Harrisburg, Pennsylvania 17101 717/232-757S Allegheny Electric Cooperative, Inc.Harrisburg, Pennsylvania The audited financial statements of the Cooperative and our report thereon are presente n e p d in the receding section of this report.The information presented h i ft i for purposes of additional analysis and is not req o re uired for a ere na er s s or chan es fair presentat on o t tion of the financial position, results of operations, , g s been sub ected in financial position of the Cooperative.

Such information has een j h diti rocedures applied in our examination of the financial statements and, in our opinion, is fairly stated in all materia r p 1 res ects in relation to the financial statements taken as a whole.Harrisburg, Pennsylvania January 22, 1988 SCHEDULES OF NONOPERATING RENTAL INCOME (EXPENSE)ALLEGHENY ELECTRIC COOPERATIVE, INC.Year Ended October 31 1987 1986 (In Thousands)

INCOME'ental-building Rental-parking 739 58 797 709 51 760 EXPENSES: Utilities Payroll and employee benefits Management and leasing fees Office and administrative expenses Maintenance and repairs Real estate taxes Insurance Interest Depreciation Gain on property disposal 192 39 25 12 80 151 45 170 135 (298)551 182 37 22 6 81 138 40 196 135 (1)836 NET NONOPERATING RENTAL INCOME (EXPENSE)$246$(76)

SCHEDULES OF ADMINISTRATIVE AND GENERAL EXPENSES ALLEGHENY ELECTRIC COOPERATIVE, INC.Year Ended October 31 1987 1986 (In Thousands)

Office supplies Travel, conventions, and meetings Payroll and employee benefits Legal, auditing, and engineering Association membership dues Experimental and general research Board meetings, directors'ees, and travel Penn Lines Information programs Rent Payroll taxes Insurance Insurance-SSES Miscellaneous 151 106 1,225 865 31 362 116 96 341 150 91 60 854 77 112 104 1,103 1,316 (34)223 116 91 195 143 89 30 818 47 TOTAL ADMINISTRATIVE AND GENERAL EXPENSES$4,525$4,353 Audited Financial Statements and Other Financial Information Allegheny Electric Cooperative, Inc.October 31, 1987-NOTICE-THE ATTACHED FILES ARE OFFICIAL RE-CORDS OF THE RECORDS 5 REPORTS MANAGEMENT BRANCH.THEY HAVE BEEN CHARGED TO YOU FOR A LIMITED TIME, PERIOD AND MUST BE RETURNED TO THE RECORDS 5 ARCHIVES SERVICES SECTION P1-122 WHITE FLINT.PLEASE DO NOT SEND DOCUMENTS CHARGED OUT THROUGH THE MAIL.REMOVAL OF ANY PAGE(S)FROM DOCUMENT FOR REPRO-DUCTION MUST BE REFERRED TO FILE PERSONNEL.-NOTICE-[g~m Ernst&Whinney Audited Financial Statements and Other-Financial Information ALLEGHENY ELECTRIC COOPERATIVE, INC.October 31, 1987 Audited Financial Statements I Auditors Report.................................