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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
Shared Package
ML17156A653	List: ML17156A652; ML18040B213;
References
	PLA-3049, NUDOCS 8806300016
	Download: ML18040B213 (42)
	v • d • e

" " XC CELERATED IQ4UBUTION DEMONS'1OOION SYSTEM REGULATORY INFORMATION DISTRIBUTION SYSTEM (RIDS)

ACCESSION NBR:8806300016 DOC.DATE: 88/06/24 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. Pennsylvania Power & Light Co.

RECIP.NAME RECIPIENT AFFILIATION MURLEY,T.E. Office of Nuclear Reactor Regulation, Director (Post 870411

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 NOTES:LPDR 2 cys Transcripts. 05000387 Q LPDR 2 cys Transcripts. 05000388 5w~~ ghnuoc~ F'<~'i &~r7 I RECIPIENT COPIES RECIPIENT COPIES A ID CODE/NAME LTTR ENCL ID CODE/NAME LTTR ENCL PD1-2 PD 1 1 THADANI,M 1 0 INTERNAL: AEOD/DOA 1 1 AEOD/DSP/TPAB 1 1 NRR/PMAS/PTSB12 1 1 NUDOCS-ABSTRACT 1 1 REG 01 1 1 EXTERNAL LPDR 2 2 NRC PDR 1 1 NOTES: 2 2 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 Docket Nos. 50-387 PLA-3049 FILE R41-2A 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 MANAGEMENTBRANCH. 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.

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~f SeNV OttWWIW Oopoiyao Allegheny Electric Cooperative, Allegheny was able to negotiate Inc., a generation and transmission wholesale rates that saved the cooperative, is the wholesale power cooperatives 20 percent on their supplier for its 14 member rural power bills.

electric distribution cooperatives, Allegheny works together with which serve more than 170,000 the Pennsylvania Rural'lectric consumer-members in Pennsyl- Association (PREA), the service vania and New Jersey. organization for the member The cooperative belief in strength distribution cooperatives. Sharing in numbers led to Allegheny's for- offices and staff, PREA supports mation in 1946. Before that, each Allegheny's efforts by working for rural cooperative purchased power favorable laws and against costly from private power companies in- regulations; supporting programs dividually. On their own, they paid that benefit rural areas, and offering dearly for it; in 1944, the Rural Elec. safety and job training to member trification Administration reported cooperative staffs.

that wholesale rates paid by the Allegheny's mission remains un-Pennsylvania cooperatives were changed from the day the organiza.

among the highest in the nation. tion was created over 40 years ago:

With the bargaining power of all the to provide a reliable supply of cooperatives united behind it, 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 MANAGEMENTBRANCH. 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 Auditors I Report................................. ~ ~ ~ 1 Balance Sheets................................... ~ ~ 1 2 Statements of Operations and Patronage Capital... ~ ~ ~ 4 Statements of Changes in Financial Position...... ~ ~ ~ 5 Notes to Financial Statements.................... ~ ~ ~ 6 Other Financial Information Auditors'eport on Other Financial Information.. ~ ~ ~ 14 Schedules of Nonoperating Rental Income (Expense) ~ ~ ~ 15 Schedules of Administrative and General Expenses. ~ ~ ~ 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 financial position for the years then ended, in conformity with general 1 y accepted accounting principles applied on a consistent basis.

Harrisburg, Pennsylvania January 22, 1988

BALANCE SHEETS ALLEGHENY ELECTRIC COOPERATIVE, INC.

October 31 1987 1986 (In Thousands)

ASSETS ELECTRIC UTILITY PLANT Note C In service Note B $ 584,815 $ 558,098 Construction work in process 26,112 23,267 Nuclear fuel in process 17 473 20,650 628,400 602,015 Less accumulated depreciation and amortization 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) 5,202 5,668 Investments in associated organizations Note D 4,392 5,009 Construction advances 574 327 Other noncurrent assets 3 968 4,304 14,136 15,308 CURRENT ASSETS Cash and short-term investments of $ 22,539 in 1987 and $ 5,675 in 1986 22,510 5,257 Accounts receivable from members 8,453 8,022 Other accounts receivable 3,463 2,564 Other 428 213 34 854 16,056

October 31 1987 1986 (In Thousands)

EQUITIES AND LIABILITIES EQUITIES Memberships 3 3 Donated capital 50 50 Patronage capital 34 174 29,590 34,227 29,643 LONG-TERM DEBT, less current portion Note F 517,156 494,452 CURRENT LIABILITIES Notes payable Note E 28,400 30,646 Current portion of long-term debt Note F 6,690 7,744 Accounts payable and accrued expenses 13,187 11,722 Accounts payable to members 2,499 209 50,776 50,321 DEFERRED CREDITS Deferred income tax benefits from safe

harbor lease Note G 14 7408 15,087 Other 5,161 5.225 19,569 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 41,232 43,543 Transmission 6,863 5,987 Production 14,975 16,245 Fuel 10,320 7,875 Depreciation .,8 >491 7,156 Taxes 3,397 3,148 Administrative and general 4,525 4 353 89,803 88,307 OPERATING MARGIN BEFORE INTEREST AND OTHER DEDUCTIONS 45,597 51,275 Interest and other deductions:

Interest expense 45,839 51,560 Allowance for funds used during construction (2,407) (3,380)

Other deductions (credits), net (6) (43) 43,426 48,137 OPERATING MARGIN 2,171 3,138 Nonoperating margins:

Net nonoperating rental income (expense) 246 (76)

Interest income 1,488 1 365 1 734 1 289 MARGIN BEFORE INCOME TAXES 3,905 4,427 Deferred income tax benefits from safe harbor lease 679 729 NET MARGIN 4,584 5, 156 Patronage capital at beginning of year 29,590 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.

Year Ended October 31 1987 1986 (In Thousands)

SOURCE OF WORKING CAPITAL Net margin 4,584 $ 5,156 Charges (credits) to margin not affecting working capital:

Depreciation 8,626 7>291 Fuel amortization 8,784 6,775 Deferred income tax benefits from safe harbor lease (679) (729)

TOTAL FROM OPERATIONS 21,315 18,493 Additions to long-term debt 27,494 4,990 Decrease in construction advances 521 Other sources 953 2,270 49,762 26,274 APPLICATION OF WORKING CAPITAL Additions to electric utility plant 26,318 25,371 Reduction of long-term debt 4,790 15,686 Increase in construction advances 247 Other applications 64 71 31 419 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 $ 17,253 $ (10,985)

Accounts receivable from members 431 814 Other accounts receivable 899 (596)

Other 215 (337) 18,798 (11,104)

Increase (decrease) in current liabilities:

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

Depreciation/

Amortization, October 31 Lives/Rates 1987 1986 (In Thousands)

Nuclear Utility Plant:

Production 39 years $ 502,283 $ 482,021 Transmission 2.75% 30,174 29,713 General plant 3% 12.5% 827 829 Nuclear fuel Heat production 50,368 44,466 Non-Nuclear Utility Plant 3% 33% 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 DEBTContinued October 31 1987 -

1986 (In Thousands) 5% mortgage notes payable to REA due in varying amounts through 2015 $ 2,505 $ 417 Commercial paper with interest at 8.275% 19,300 Other 79 98 523,846 502,196 Less current portion 6 690 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 $ 7,165 1990 9,120 1991 10,473 1992 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 ICOMMITMENTS 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 ICOMMITMENTS 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, Allegheny will have the option to purchase the Facility for an amount equal to the Facility's fair market value. Allegheny also has the option to renew the lease 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.

[gIIjErnst &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 d inn thee p receding section of this report. The information presented i ft i h ere na er s for purposes of additional analysis and is not o req uired for a re fair presentat t tion o the financial position, results of operations, on of s or , chan g es in financial position of the Cooperative. Such information hass been een sub j ected h diti rocedures applied in our examination of the financial statements and, in our opinion, is fairly stated in all materia 1 res r p 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 739 709 Rental-parking 58 51 797 760 EXPENSES:

Utilities 192 182 Payroll and employee benefits 39 37 Management and leasing fees 25 22 Office and administrative expenses 12 6 Maintenance and repairs 80 81 Real estate taxes 151 138 Insurance 45 40 Interest 170 196 Depreciation 135 135 Gain on property disposal (298) (1) 551 836 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 151 112 Travel, conventions, and meetings 106 104 Payroll and employee benefits 1,225 1,103 Legal, auditing, and engineering 865 1,316 Association membership dues 31 (34)

Experimental and general research 362 223 Board meetings, directors'ees, and travel 116 116 Penn Lines 96 91 Information programs 341 195 Rent 150 143 Payroll taxes 91 89 Insurance 60 30

Insurance SSES 854 818 Miscellaneous 77 47 TOTAL ADMINISTRATIVE AND GENERAL EXPENSES $ 4,525 $ 4,353