ML18026A234
| ML18026A234 | |
| Person / Time | |
|---|---|
| Site: | Susquehanna  |
| Issue date: | 12/31/1989 |
| From: | Campbell R, Keiser H PENNSYLVANIA POWER & LIGHT CO. |
| To: | Murley T Office of Nuclear Reactor Regulation |
| References | |
| PLA-3370, NUDOCS 9004110106 | |
| Download: ML18026A234 (85) | |
Text
ACCELERATED DISTRIBUTION DEMONSHMTION. SYSTEM REGULATORY INFORMATION DIS RXBUTION SYSTEM (RIDS)
ACCESSION NBR:9004110106 - DOC.DATE 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 CAMPBELL,R.K. Pennsylvania Power 6 Light Co.
KEISER,H.W. Pennsylvania Power 6 Light Co.
RECIP.NAME RECIPIENT AFFILIATION
SUBJECT:
"Pennsylvania Power & Light Co Annual Financial Rept,1989."
DISTRIBUTION CODE: M004D COPIES RECEIVED:LTR TITLE: 50,71(b) Annual Financial Report Q ENCL f SIZE: 7~
OSOOO387 05000388' RECIPIENT COPIES RECIPIENT COPIES D ID CODE/NAME LTTR ENCL ID CODE/NAME LTTR ENCL PD1-2 PD 1 1 THADANI,M 1 ~ 0 INTERNAL: AEOD/J3OA 1 1 AEOD/DSP/TPAB 1 1 G 5'rB 1 1 1'
NOTES'1 EXTERNAL: LPDR 1 1 NRC PDR 1 I
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NOTE TO ALL "RIDS" RECIPIENTS:
PLEASE HELP US TO REDUCE WASIZl CONTACT THE.DOCUMENT CONTROL DESK, ROOM Pl-37 (EXT. 20079) TO ELIMINATEYOUR NAME FROM DISIRIBUTION LISIS FOR DOCUMENTS YOU DON'T NEED!
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Pennsylvania Power & Light Company Two North Ninth Street ~ Allentown, PA 18101 ~ 215 I 770-5151 Harold W. Keiser Senior Vice President. Nuclear 215/770 4194 APR -% 1990 Dr. Thomas E. Murley Office of Nuclear Reactor Regulation U.S. Nuclear Regulatory Commission Washington, D.C. 20555 SUSQUEHANNA STEAM ELECTRIC STATION ANNUAL FINANCIAL REPORT Docket Nos. 50-387 PLA-3370 FILE R41-2A and 50-388
Dear Dr. Murley:
In accordance with 10CFR50.71(b), enclosed is the 1989 Annual Report for Pennsylvania Power 6 Light Company. Also enclosed is the 1989 Annual Financial Report including certified financial statements for Allegheny Electric Cooperative, Inc. covering the period November 1, 1988 through October 31, 1989.
Very truly yours, H. W. Keiser Enclosures cc: NRC Document-Control--Desk-(original)-~
NRC Region I Mr. G. Scott Barber, NRC Sr. Resident Inspector Mr. M. C. Thadani, NRC Project Manager 9004il0i06 S9i23i050003S7 PDR ADOCK I PDC
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Corporate Mission, To meet our customers'ngoing needs for economical and reliable electric service in zvays that merit the trust and confidence of the Public.
Corporate Long-Term Objectives
~ Maintain the prices that consumers pay for PP&L electric service significantly below the average price of electricity paid by Pennsylvania and other regional customers and, over the long term, hold increases in the average price of PP&L electric service below the rise in the general rate of inflation.
I Achieve a quality of customer service that is among the best when compared with other major electric utilities.
~ Achieve excellence in the safe, reliable and efficient operation and support of our nuclear units that results in national recognition for having one of the best nuclear operations in the country.
~ Hold peak growth rate to a level that permits us to defer the need for additional central-station generation into the 21st century.
~ Achieve and maintain a return on average common equity that places PP&L in the top quartile of Salomon Brothers 100 Electric Utilities.
~ Achieve and maintain a double A bond rating.
o Maintain a level of availability for our generating plants that is in the top quartile of similar plants in the United States.
~ Meet applicable safety, public health and environmental standards for construction, operation and maintenance of our facilities.
4 Achieve a safety record that is the best among comparable electric mls utility companies.
~ Maintain an employee compensation structure that is consistent with I@INLlIi93(i90%8@
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N@hm 95 !bringN'hKNooo I ~ Keep FF&L's delivered price for bituminous coal below the median of the regional comparison group of utilities.
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..n Cover BLIMPLQSIW50'/ 0 0 0 0 0 0 0 0 0 0 0 0 0 Oi Lineman Barry Peters typifies the em- See page 46 for details regarding RKKISQHSRKQooooooooooo PP&L's 1990 annual meeting to be ployee attitude that helped FP&L record ELMojbEKIjS its best year ever. He and the other held April 25 on the Goodman Campus IEKjRM90ooooooooooaooooogQ employees shown on pages 10-17 relate of Lehigh University, Bethlehem, Pa.
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Highlights 1988-1989 1989 1988 %Change 1987 Operating Data(in thousands)
Total Energy Sales, Kilowatt-hours......... 34,672,o25 33,766,133 2.7 32,205,298 System Energy Sales, Kilowatt-hours(a)..... 28,402,145 27,946,511 1.6 26,336,906 Interchange Power Sales, Kilowatt-hours.... 9,919,749 11,304,024 (12.2) 13,014,796 Electricity Generated, Kilowatt-hours ...... 43,658,166 44,290,213 (1 4) 44,561,913 Net System Capacity, Kilowatts (c) (d)....... 7,s64 7,479 5.1 7,499 Winter Peak Demand, Kilowatts........... 6,ooo 5,566(b) 7.8 5,591(b)
I'inancial Data (in thousands)
Operating Revenues $ 2,356,446 $ 2,213,903 6.4 $ 2,090,244 Operating Income $ 618,850 $ 605,051 2.3 $ 590,637 Net Income $ 353,436 $ 332,042 6.4 $ 302,461 Common Dividends Declared ............ $ 215,386 $ 207,193 4.0 $ 200,003 Common Equity(c) . $ 2,139,338 $ 2,049,831 4.4 $ 1,969,971 Capital Provided by Investors (c) .......... $ 5,526,408 $ 5,547,932 (0.4) $ 5,582,757 Construction Expenditures .............. $ 279,765 $ 308,876 (9.4) $ 258,534 Construction Work in Progress(c)
......... $ 115,799 $ 177,333 (34.7) $ 141,960 Property,.Plant and Equipment Net(c)..... $ 6,866,642 $ 6,841,584 0.4 $ 6,767,214 TotalAssets(c) . $ 7,598,968 $ 7,524,648 I.o $ 7,457,346 Per Common Share Earnings .. $ 4.05 $ 3.73 8.6 $ 3.32 Dividends Declared $ 2.s6 $ 2.76 3.6 $ 2.68 Market Price(c) . $ 42~f, $ 36i/s 18.7 $ 33 Book Value (c) $ 2s.36 $ 27.23 4.1, $ 26.26 Other Information Return on Average Common Equity........ 14.62% 13.86% 5.5 12.78%
Times Interest Earned Before Income Taxes .. 2.78 2.65 49 2.62 o Number of Customers (c) . 1,143,591 1,122,628 1.9 ',097,518 Cqmmon Shares Outstanding(c) .......... 75,422,739 75,248,455 0.2 74,972,322 Number of Common Shareowners (c)....... 132,197 137,450 (3.8) 141,843 Number of Employees (c) . 8,108 8,306 (2.4) 8,301 (a) Excludes contractual sales to other utilities.
(b) Winter peaks were reached early in the subsequent year (c) Atyearend.
(d) Total generating capacity plus firm capacity purchases less firm capacitys ales.
Where the PP&L Income Dollar Went in 1989 22@ Net Cost of Energy Other Operation 10C Maintenance 8C Depreciation l
160 Taxes r
120 Interest ile Dividends Earnings Reinvested Income Includes revenues, oilier Income and Ibe allounnce forfunds used during construcuon.
Chairman's Letter A year ago, I was telling you Sales of capacity and related that 1988 was our best year ever. energy to other utility companies, Because of a lot of good PP&L which began in 1983, continue to people, 1989 was even better. be an important part of our Kilowatt-hour sales, revenues, marketing mix.
earnings and dividends for 1989 Our strong generating capacity were at their highest levels in our position allowed us to add another 69-year history. dimension to our revenues by These results give us additional entering into a number of new confidence that the strategy we bulk-power transactions with other put in place in the '80s continues utilities. These transactions added to fuel our success and leaves about S23 million to our 1989 us exceptionally well-positioned to revenues.
face the challenges of the '90s. Higher customer sales, sales to Briefly, our strategy is based other utilities, along with effective on our commitment to market- cost management and refinancing ing and economic development, of high-cost securities at a lower effective cost management and cost, combined to boost our earn-operational excellence. ings to S4.05 a share 32 cents I'l review the key principles of more than a year ago.
this strategy later in this letter.
First, I want to call your attention Marketing We set challenging goals for to the lineman on the cover and the other PP&L people pictured in ourselves in 1989 and exceeded this report. They are relating how our own expectations. In all they their efforts will help us stay com- do, our marketing and economic petitive and continue our success development people start with the into the '90s. And there are some strong sense of customer service that is the foundation of our cor-8,100 others like them in our 10,000-square-mile service area. porate mission.
Their individual pride, their pro- They market solutions to our fessionalism, and their pursuit of customers'nergy problems. /hey "Our goal is to be operational excellence at every help them find ways to use elec-level are what breathe life into our tricity to improve their standards the best electric utility strategy and allow us to report our of living. They succeeded magnifi-cently in 1989. The application of in the country." most successful year ever.
our marketing programs resulted Sales and Earnings in an increase in annualized sales We continued to market elec- of about I billion kilowatt-hours.
tricity aggressively in 1989. Our In spite of tough competition, our marketing people worked with domination of the residential businesses to solve their energy heating market continued. About needs in ways that made them 74 percent of all new dwellings in more competitive and improved our service area were all-electric.
their profits. Also, electric applica- We helped bring more than tions have helped enhance the 14,000 net new jobs to Central lifestyles of many customers. Our Eastern Pennsylvania as part of our service-area electric sales were up economic development efforts in 1.6 percent. Commercial sales led partnership with individuals, agen-the pace for a 4.5 percent increase. cies and local, regional and state Residential sales rose 2.1 percent governments.
while industrial use was down .9 Operations percent principally because of a The people who operate and 16.9 percent decline in sales to maintain our power plants kept our steel manufacturers. Excluding sales generating units among the best-to steel manufacturers, industrial performing in the nation again in sales rose 1.7 percent. 1989
The Nuclear Regulatory Commis- will not relinquish it to others. success as a marketing company.
sion again gave near-perfect marks At PP&L we consider the obliga- Achieving revenue growth by in-for operations at our Susquehanna tion to serve a privilege, which creasing rates is the option of last nuclear plant in its Systematic As- we will not compromise. resort. Indeed, as we entered 1990 sessment of Licensee Performance. ~ Second, we will stick to the our rates were still slightly lower This kind of consistent evaluation business of being an electric than they were five years ago. We ranks Susquehanna among the best utility. Our goal is to be the met our pledge to not raise base nuclear operations in the U.S. best electric utility in the coun- rates in the last-half of the '80s The two Susquehanna units com- try. Diversification into unre- and we are striving to extend that bined to generate 13.8 billion lated businesses would only pledge into 1993 and beyond.
kilowatt-hours of electricity divert our attention from the In regard to non-utility genera-almost 14 percent above their goal. mission and objectives listed on tion, we will pay no more than is This performance came in a year the inside front cover and required by law or regulation and when both units went through from what we do best. we will diligently enforce the refueling outages, which were ~ Third, we will work very hard terms and conditions of power finished ahead of schedule and to retain control of the genera- purchase agreements made under under budget. Excluding the refuel- tion and transmission system terms of the federal Public Utility ing outage, Unit 1 operated at an your dollars have helped build. Regulatory Policies Act of 1978.
87.8 percent operating capacity fac- Without that control, we cannot PP&L must retain control of its tor, while Unit 2 came in at 92.8 meet our obligation to serve. transmission system to assure percent well above expectations. ~ The fourth principle is that bulk- reliability and quality of service.
power sales to other utilities are We must work to defeat proposals an essential component of our that would make transmission ac-
"We set challenging goals efforts to maintain base-rate cess mandatory or permit special-stability. We have developed interest transmission wheeling of for ourselves in 1989 new nontraditional forms of power.
bulk-power transactions that We are in a good position to and exceeded our often have increased revenues by serve our customers effectively in expectations." about S23 million. That is on either a fully regulated or partially top of the $ 271 million in tradi- deregulated world. That's because tional contract sales to other our strategy is to continue to be CT'Qf
~ utilities. We'e seen this sales the low-cost, high-quality producer Our fossil-fueled and hydroelec-tric units also performed very well segment grow from zero per- of electric power that our cent of our revenues in 1982 to customers have come to rely on.
again last year. On the average, those units were available nearly about 12.5 percent in 1989. In any case, our adaptability will 80 percent of the time to operate These sales have become a continue to be a strong asset. We significant factor in our improv- successfully met the challenge of at their rated capacity. This is bet-ed financial performance. the '80s. We look forward to the ter than the performance of similar ~ Last, we feel state regulators are '90s with a sense of confidence of units in the industry.
in a better position than federal purpose and direction.
regulators to understand and act You have provided the invest-Outlook for the '90s on local and regional issues. To ment capital for us to build our The integrated strategic plan that this end, we'l work to shape assets to $ 7.6 billion. PP&L people is serving us so well is based on regulatory policy that is in the have used those assets well strong marketing and economic best interest of our various with a strong sense of customer development, effective cost manage- publics. service. We thank you for your ment and operational excellence. commitment. We plan to continue Behind the strategy are five key Facing Future Challenges to do the things that have brought principles that I'd like to outline We expect that the quality of us success.
for you. our service will assume even
~ First, our obligation to serve is greater importance in the '90s. Respectfully submitted,
, the foundation of everything we Satisfying customers is the essential do. The debate continues on a element of meeting our mission.
national basis on proposals to Achieving the revenue growth restructure our industry. Our that is part of our strategy depends obligation to serve our cus- on reliable service and stable rates. Robert K. Campbell tomers has unique value and we These are the key factors in our March 1, 1990
Interview with Chief I'inancial Officer Charles E. Russoli I
Question: How does PP&L's from sticking to what we do best financial strategy interrelate generating and selling with its corporate strategy of electricity.
marketing and economic development, effective cost Question: Is all this consistent management and operational with the need to increase excellence? shareowner value?
Russoli: Simply put, our financial Russoli: The record of the past strategy is to continue working to few years seems to bear this out.
enhance our financial health under By maintaining our focus on the various business conditions and electric business and not letting without base-rate increases. We see ourselves be diverted and.there financial health as a combination have been opportunities to do so of improving liquidity and earn- PP&L is healthier financially than it ings, minimizing financial risk to ever has been. Key financial indi-our investors and strengthening cators earnings, common stock our balance sheet. dividends, common stock price Good financial health is essential and book value have reached for the company to continue to their highest year-end levels ever.
provide economical and reliable As an added note, our cash flow is electric service and to permit it to among the strongest in the electric make economic decisions that are utility industry.
in the long-term interest of share-owners, customers and employees. Question: What's behind this It's the culmination of all our peo- good financial health?
ple practicing effective cost man- Russoli: The fact is, we adapted agement, pursuing operational well to changing conditions and excellence in every job and con- turned challenges to our advan-tinuing initiatives that will have tage. The foundation goes back to Charles E. Russoli, 56 is a positive effect on increasing the mid-1980s. As we completed c executive vice president and sales, staying competitive and of- our two nuclear units in 1983 qnd chief financial officer for fering the very best in customer 1985, we had generating capacity PP&L. He also serves on the service. well beyond our needs. The company's Corporate Management Committee growth projections, made before Question: What are your the 10-year construction period for and is a member of the strategic priorities?
board of directors. Hejoin- those units began, simply did not ed PAL in 1955 and serv- Russoli: We are committed to a materialize. The increase in de-ed in a. number of Finan- strategy that keeps our electric mand fell behind our ability to cial Department positions utility operations as our primary provide electric energy.
before befrtg named vice operating business. We have no in- We took that available president-Finance in 1979. tention of taking the route others generating capacity, the cost of He was appointed senior have taken to increase return, that which was not recovered in rates vice president-Financial in is, diversification into unrelated charged our customers, and 1984, and became an ex- businesses. The diversification packaged it for sale through ecutive vice president and director in 1986. record in our industry has not capacity and energy contracts and been impressive. After evaluating other nontraditional capacity-the available alternatives, we have related transactions with other concluded that our shareowners utilities. Today, this type of could have more to lose than to business with other utilities is pro-gain in this type of diversification ducing a good return and bolster-effort. ing our earnings. And, importantly, This doesn't mean that we the capacity was sold to other won't be assessing investment op- utilities under arrangements that portunities which are allied to our will return this valuable asset to us core business. But it does mean in the years ahead to meet our that we expect to benefit more customers'rowing demand.
Question: What other things an objective of not having a base- hydro gives us comfort that we are did you do in the '80s that are rate increase until the 1993-95 in a good position to withstand paying off today? period. possible dislocations of fuel sup-Russoll: We turned to aggressive plies in the '90s.
marketing and economic develop- Question: How wiii share- Question: What is your finan-ment to give us steadily increasing owners share in this success? cial exposure from the Clean revenues. We re-emphasized effec- Air proposals being considered tive cost management and Russolf: We have had a consistent record of dividend increases in the by Congress?
challenged every employee to work smarter and cut costs. Also, 1980s. Even when our liquidity Russoll: From a financial point of we took advantage of a break in was strained during the period view, we are in a much better posi-when we were financing a massive tion than we were a decade ago.
the capital markets and aggres-construction program, we borrow- Also, our asset base is $ 7.6 billion sively refinanced high-cost securities with lower-cost issues.
ed money to maintain that record. compared to about $4 billion a Our board of directors recognizes This combination increasing decade ago. Because we are work-the importance of compensating ing from a much larger base, we revenues and controlling costs investors for the funds they pro- can handle more easily the con-should keep us in a competitive vide. We plan to continue our struction costs resulting from pro-position in the 1990s.
pattern of dividend increases that posed legislation to combat acid All of these efforts have greatly are usually considered by the rain.
improved our financial health board during the first quarter of The legislation proposed by the without having to apply for in-each year. Bush administration calls for the creased base rates.
reduction of sulfur emissions in Question: What are your ca- two phases the first to be effec-tive by 1996, and the second by "Our board of directors pacity expansion and financing 2001. Compliance with the first plans for the next five years?
phase would require about a 3 per-recognizes the importance of Russoll: We don't see the need cent increase above the amount for additional large central-station our customers now pay for elec-compensating investors for generation until the next century, tricity. Costs for the second phase the funds they provide. We so there isn't the large financing translate into about an 8-10 percent 4+ requirement usually associated increase requirement beyond the 3 plan to continue our pattern with those projects. The $ 325-350 percent increase for the first phase.
million we'l be spending annually of dividend increases..." to upgrade facilities and meet new Frankly, we believe that the legislation is premature. A major customers'eeds will be paid for study of the subject, commission-with cash generated in our busi- ed by Congress and conducted at a Quest(on: What are the pros- Not having to finance this ness. cost of about $ 500 million bythe pects for price stability and a construction lowers our cost of National Acid Precipitation Assess-delay in requesting a base-rate doing business. This is just an ex-increase in the '90s? ment Program, has been under
, tension of what we are doing in way since 1980 and the final Russoll: We are setting the stage the company to keep costs down. report is expected to be released to extend our successes of the '80s There is another benefit of being this fall. We believe that any into the '90s. Our financial health in a strong generating capacity legislative effort would benefit is strongly linked to the vitality of position and not having to build from the study in its final form.
the communities we serve. To the large new generation for a while. But, of course, we'l comply with extent we can offer stable, com- This will give us time to sort out any legislation that is enacted.
petitive electric energy rates, it will new technologies and new options be a positive factor in attracting of providing generation. Many Question: Anything else on the new business and industry to our other utilities are short on genera- horizon?
service territory. That would open tion and must make important Russoll: For the time being, we up more jobs and should enhance decisions now. We are fortunate don't see any serious problems the economic base of our com- that we'l be able to benefit from headed our way that we can't han-munities. This should result in a seeing a lot of those decisions play dle. If there are some that we cycle of prosperity that will themselves out. don't see, though, I'm confident feed back into higher sales of our Additionally, our diversity of that we'l be able to adapt in the product and enable us to achieve fuels among coal, nuclear, oil and '90s as we did in the '80s.
Year In Review What Made News at PP8~L in'1989.
Here are highlights of what made news at PPSL in 1989. For a detailed review of the company's financial condition and a discussion of the results of 1989 operations, please see the information beginning on page 18.
JANUARY o PP&L sells $ 125 million of new first mortgage bonds through underwriters to yield 10.07 percent. This sale provides the funding for the redemption of $ 125 million of 13.5 percent Series Bonds in April.
FEBRUARY 0 An estimated 800 people including representatives of federal, state, county and municipal agencies participate in annual nuclear emergency drill for Susquehanna plant. PPKL's ability to protect public health and safety satisfactorily demonstrated by the drill the first-ever where the exact day and time were kept from participants.
0 The company increases the quarterly common stock dividend from 69 to 71.5 cents per share in recognition of increased shareowner investment and improved earnings.
MARCH o Operators shut down Unit 1 at Susquehanna nuclear plant to begin its fourth refueling and inspection outage. The shutdown ends the unit's most successful fuel cycle, during which it generated 10.5 billion kilowatt-hours of electricity and operated at an 85 percent capacity factor.
AP RIL 0 The company announces plans for a Consolidated Customer Contact Center in the Allentown area to handle all telephone answering, accounts receivable and billing functions. The move is expected to result in an im-proved level of customer service and annual savings in excess of
$ 1 million a year.
MAY < Joining colleagues from 29 countries around the world, PPKL becomes a charter signer, in the U.S.S.R., for the establishment of the World AsSocia-tion of Nuclear Operators. Modeled on the U.S. Institute of Nuclear Power Operations, WANO is a significant step in terms of the safe and reliable operation of the world's nuclear facilities.
JUNE o PP8'cL joins the 10 other power pool member companies twice in June in reducing voltage by 5 percent on its distribution network to stretch out electric supply and protect power reserves. Although the company has plenty of power to meet its customers'eeds, hot, humid weather and in-creased air-conditioner use make for slim power reserves in areas served by the Pennsylvania-New Jersey-Maryland Interconnection.
> Susquehanna Unit 1 resumes generating electricity June 10, ending its fourth refueling and inspection outage six days ahead of schedule. During the outage, plant workers replaced about one-quarter of the 764 nuclear fuel assemblies in the reactor vessel and performed 3,400 maintenance tasks and inspections.
o The Public Utility Commission, in its annual Consumer Services Activities report, ranks PP8cL No. 1 in customer service among the state's electric utilities. The PUC's Bureau of Consu'mer Services each year measures all of Pennsylvania's utilities in various customer service categories.
JULY 0 Hot, humid weather late in July stretches power supplies thin in the power pool serving Pennsylvania, New Jersey and Maryland. PP8cL participates in 5 percent voltage reduction. The company's customers are just shy of breaking the old peak summer demand record set in 1988.
< The Institute of Nuclear Power Operations renews accreditation of the training programs at Susquehanna nuclear plant. The Susquehanna Training program was the first to be accredited and the first to have its accredita-tion renewed after a review by the accrediting board of the National Academy for Nuclear Training.
AUGUST o PP&L's first post-war generating plant turns 40 years old. Prudent planning has kept the Sunbury Steam Electric Station updated and upgraded through the years, so that today it runs virtually as well as when it was put into service. A four-year upgrade of plant controls with a modern, digital com-puter control system was completed in 1988.
SEPTEMBER o Three PP&L consumer programs are honored by the Edison Electric In-stitute in its Common Goals Award competition. The annual awards recognize utility companies that have developed outstanding consumer programs designed to find solutions to problems shared by utilities and their customers.
< Susquehanna Unit 2 shut down to begin its third refueling and inspection outage. In the second fuel cycle, which began in spring of 1988, the unit operated at a capacity factor of 93 percent and generated more than 10.3 billion kilowatt-hours of electricity.
OCTOBER o The Nuclear Regulatory Commission lauds Susquehanna plant's emphasis on a strong safety culture in its latest SALP (Systematic Assessment of Licensee Performance) report.
o PP&L sells $ 250 million of new first mortgage bonds through underwriters to yield 9.27 percent. This sale the largest sale of securities in PP&L's history provides funding for the redemption of higher-cost debt securities.
NOVEMBER o PP&L's Montour Preserve wildlife education and land management pro-grams recognized by the Pennsylvania Game Commission's annual "Work-ing Together for Wildlife" award.
o The company announces a "Fitness for Duty Program" to begin at the Sus-quehanna nuclear plant in January 1990. The new random drug and alco-hol testing program was developed in response to new NRC regulations.
O Two severe windstorms four days apart disrupt power to more than 200,000 of PP&L's 1.1 million customers in mid-November. Customer ser-vice, construction and distribution line workers perform yeoman service under trying conditions to restore electric service. Outside help was not available under mutual assistance pacts as virtually all utilities in the Northeast faced similar problems.
o Susquehanna Unit 2 returns to service two days ahead of its 11-week refueling outage goal. About one-quarter of its nuclear fuel assemblies were replaced, 3,300 maintenance and inspection tasks and 50 modifications were completed while the unit was out of service.
DECEMBER o The company's stewardship of its land holdings earns a first-place award in-the "Take Pride in Pennsylvania" program of the Pennsylvania Departinent of Environmental Resources'ureau of State Parks. The awards are made to organizations committed to ensuring wise use and protection of the commonwealth's natural, cultural, historical and recreational resources.
0 PP&L customers set four new all-time peak demand records during an unusually severe cold spell in mid-December. The new peak of 6 million kilowatts broke the mark set nearly two years ago. Because of its high con-centration of electric heat customers, PP&L is a winter-peaking company in a summer-peaking power pool.
PPRL People PP&L's sixth year of aggressive sold to other utilities through marketing and economic develop- contractual arrangements.
Continue ment activities produced goal-busting 0 More than a billion kilowatt-Award-winning statistics for the company, as well as hours in annualized new sales Performance state and national recognition. were attributable to aggressive
< Total energy sales for 1989 PP&L marketing and economic were 34.7 billion kilowatt-hours development activities.
the highest level ever. PP&L marketing specialists con-
< Sales to PP&L customers were tinued their domination of competi-28.4 billion kilowatt-hours an tions at the state and national levels.
increase of 1.6 percent over 1988. PP&L people earned two first-place
+ A record 6.3 billion kilowatt- awards and a third-place, and six hours of electric energy were others were named finalists in Director/Officer The following changes occurred < Joseph C. Krum, director-among the board of directors and of- Marketing & Economic Develop-Changes in 1989 ficers during 1989. Additional infor- ment, was named vice mation on directors and officers, in- president-Lancaster Division, cluding ages and years of service, can effective April 1, 1989.
be found on page 48. < William F. Hecht, vice presi-dent-Marketing and Customer
< Roswell Brayton Sr. and Edgar Services, was appointed vice L. Dessen retired from the president-Power Production &
board of directors on April 26, Engineering, effective May 5, 1989, the date of the company's 1989. He was appointed senior annual meeting. Mr. Brayton, vice president-System Power &
chairman of the board of Engineering and became a Woolrich, Inc., Woolrich, Pa., member of the company's Cor-had been a director since 1980. porate Management Committee, Dr. Dessen, a physician- effective Sept. 1, 1989.
radiologist in Hazleton, Pa., had < Grayson E. McNair, vice been a director since 1966.
president-System Power, was
< Clifford L. Jones, president of appointed vice president-the Pennsylvania Chamber of Marketing & Customer Services, Business and Industry, Harris- effective May 5, 1989.
burg, was elected to the board, 0 Francis A. Long, manager-effective Feb. 1, 1989.
System Planning, was appointed
< Elmer D. Gates, president and vice president-Power Supply, ef-chief executive officer of Fuller fective May 5, 1989.
Company, Bethlehem, was 0 Gennaro D. Caliendo, vice elected to the board, effective president and general counsel, Sept. 1, 1989. was appointed senior vice presi-0 William J. Flood, secretary- dent, general counsel and treasurer, director and co-owner secretary, effective June 1, of Highway Equipment Supply 1989. He also serves as a Co. of Harrisburg and Hazleton, member of the Corporate was elected to the board, effec- Management Committee.
tive Jan. 1, 1990. o Linda Curry Bartholomew, senior director and economist-Public Affairs, was appointed
< Brent vice president-Public Affairs, ef-S. Shunk, vice president-Lancaster Division, retired on fective June 1, 1989.
April 1, 1989, after a 43-year o Edward M. Nagel, vice president career with PP&L. and secretary, was appointed
the 1989 Edison Electric Institute's The Hub of America' residential marketing competition. Largest Metropolitan Marketplace In the industrial and commercial competition, company engineers Pennsylvania Power & Light Co., based in Allentown, Pa., provides received first- and third-place electric service to more than 1.1 million homes and businesses awards and nine were finalists. throughout a 10,000-square-mile area in 29 counties of Central Eastern On a state level, three out of six Pennsylvania. Principal cities in the PP&L service area are Allentown, annual awards given by the Penn- Bethlehem, Harrisburg, Hazleton, Lancaster, Scranton, Wilkes-Barre and sylvania Electric Association in the Williamsport. The area is at the heart of the nation's largest industrial residential category went to PP&L and commercial market area. More than 70 million consumers live within marketing people, along with a 300-mile radius.
seven of 13 awards in the industrial and commercial category.
Montreal ~
CANADA vice president-Federal Policy, ef-fective June 1, 1989.
ct John R. Menichini, Marketing &
Energy Services manager in Har-risburg, was appointed vice president-Harrisburg Division, ef- Toronto ~
fective Sept. 1, 1989. He suc-ceeds Charles J. Green, who died July 16. Mr. Green, had been employed by PP&L for 29 years.
Buffalo NY 0 Merlin F. Hertzog, executive'vice president-Corporate Services, and a member of the company's Corporate Management Commit-tee, concluded a 30-year career .
with PP&L when he retired for "
health reasons on Sept. 1, 1989. SCRANTON Cleveland He also retired as a member of WILLIAMSPORT~O(OQILKES.BARRE~RW~
the board of directors, on which s AZLE. ON ~ New~York he had served since 1984. OH o John T. Kauffman, executive ALLENTOWN vice president-Operations, was Pitt burgh appointed executive vice presi- HARRISBURG~
Philadelphia dent and chief operating officer, LANCASTER effective Oct. 1, 1989. NJ MD o Charles E. Russoli, executive vice president-Financial, was ap-pointed executive vice president L Baltimore~
WVA Washingto and chief financial officer, DEL effective Oct. 1, 1989.
o Edward F. Reis, director-Corporate Planning, was ap-pointed vice president-Corporate Planning, effective Jan. 1, 1990. VA ct Robert G. Byram, superintendent of Susquehanna Steam Electric Station, was appointed vice president-Nuclear Operations, effective Jan. 1, 1990.
Bill Simmendinger, Construction Lineman, Allentown
! Area l.
/
4 i <<
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i 4<<
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"It's taken long years of t) training to put me at the llll li58) controls of a S4 billion nuclear power plant. We stick to "Myjob is to help build, and )r / !g~. procedures. There's only one right way to operate bere."
repair, the high v-oltage trans Joseph Brokus, Plant Control Operator, mission lines that get electricity Susquehanna Plant from our potver plants to a "I spend more time planning local distribution system where a maintenance outage than it takes to do it. 1Vben a unit's it will be used by PP&L's cus- lost generation costs $ 200,000 a day, you don't want to lose tomers. Working high up on a time spinning your wheels."
steel tower, around lines carry- Roger Hoffman, Construction Foreman, ing high-voltage electricity, can Montour Plant be dangerous. But, we'e trained "Withoutfuel, this generating for safe production and tve unit won't run. I make sure we have a good supply of look out for each other. My big coal and coke going in this gest concern is to make sure I end, so electricity keeps com-ing out tbe other end."
get through each day safely- ~
f' v ~
CliffAukamp, Foreman-Coal Yard, and to help see that the guy Holtwood Plant working next to me does also." "A power plant is a compli-cated maze of systems and
~I I
~~
~
~
r~
(
I machinery. try to maintain every piece of equipment as gi if it belonged to me it's a very personal commitment.
Roy Burton, Senior Potver Production Engineer, Sunbury Plant
Shelley Ornz Customer Service Instructor, Allentown
"Our operating workers de-er2tiOns pend on their vehicles as much as any tool they have to get thejoh done. I make sure "PP&L last year made a com- the trucks are ready to go out whenever they're needed."
mitment to open a consolidated Donald Peters, Transportation Mechanic Customer Contact Center in Allentown 1990, in the Allentown area, to "1Pe've got to be ready with serve all of our millionplus- a new electric service when tbe customer needs it. It customers. We'l operate with doesn't happen overnight. We plan our end so we'e there extended business hours to pro when tbe customer calls."
vide an improved level of cus Donald Meyers, Distribution Technician, tomer service to those ue serve. Wllkes-Barre We'e devising training programs "Our linemen's very lives de-that'will help our people be pend on their safety equip-ment. I try to inspect and ready for any type of inquiry, if maintain it as someone in my family were going to be request for service, or emergency using it."
repair call that comes in on our Rosella Gardeckl, Lab Assistant, phones. We'l be ready when Hazleton those phones start ringing." I "The way treat our customers every day will create impressions of PAL that last for years I try to keep them satisfied that we'e there to help them."
John McCarthy, Customer Contact Representative Bloomsburg 13
John Wilt, Economic Development
- Director, Harrisburg
"1Ien people come to us for information about how to heat and cool electrically, they'e looking for solutions. My "The success of this company job is to help come up with answers that willsatisfy them."
is closely tied to the economic Allcla Orbln, Supervisor-Residential Marketing, u ell be-ing of the communities Scranton we serve We.don'just provide "Tbe people who run this power. We identify properties scbool concentrate on pro-viding educational services.
that uould be attractive to I make sure they don't have net commerce and industry. to worry about power supply problems."
We recruit businesses, assist Rudyard Cooper, Business Consultant, them in their plant location Allentown needs and make it easy for "Every time a new commer-them to move to Central cial establishment breaks ground, we'ein competition Eastern Pennsylvania. Once I with gas or oil to meet their energy needs. I'm there to con-get a chance to shou them the vince them electricity is best."
work ethic here the hospit Karen Sheehe, Power Engineer, able climate for business, and Lancaster our reliable supply of "lee're notjust out there on a electricity at a stable cost regional or national basis, looking to attract new busi-they convince themselves they nesses to our service area. I help see that we compete on should be here." an international scale."
Robert Boyle, International Director-Economic Development, Allentown 15
Joseph
- Dadura, Senior Computer Operator, Allentown
"Without this drawing a job coming up at our Martins Creek power plant just couldn't be done I'm "Time is money. No business in partnership with the crew that will do thejob."
can afford to send out bills, Gail Bartley, Senior Drafter pay invoices or keep track of Allentown millions ofpieces of data and "More than 1,800 employ-information the tray tve did a ees in our General Office count on people like me to generation ago. I'm here to provide a comfortable work-place. I help keep them tend to the electronics that productive."
take on uork tasks ue Fred Browning, Building Utilities hfechanic couldn't possibly cope tvith Allentown otheruise. My job is just as "My talents make it easier vita'l to PP&L's success as that for our engineers to do their jobs. Those of us in support lineman out there hooking up positions can see a part of in every com-a net customer... and I take ourselves
)l j pleted ob."
it just as seriously." Diane Hausman, Steno/Clerk, Allentown "No matter who calls here whether they own one share or thousands, I try to pro-vide the prompt, courteous attention deserved by i~ ~ Wl owners of our company."
j Tom Andrew, Supervisor-Investor Records, Allentown
Review of the Company's Financial Condition and Results of Operations Results of Operations Earnings and Dividends Earntngs Per Share Earnings per share of common stock were $ 4.05 in 1989, S3.73 in 1988 Dollars per Share and $ 3.32 in 1987. The improvement in 1989 earnings can be attributed to $ 4.50 the same factors that had a positive impact on earnings in recent years growth in system sales reflecting aggressive marketing and economic development programs, effective cost management and the refinancing of high-cost securities at a lower cost. In addition, the Company's strong generating capacity has enabled it to add another dimension of revenues by entering into a number of new capacity-related and transmission entitle-ment transactions in 1989 with other electric utilities.
Extremes in weather conditions can have a significant effect on earnings for a period. The extremely cold weather in December 1989 increased energy sales and earnings for the last quarter of 1989. However, with 1.50 relatively mild weather during the earlier part of the year, sales for 1989 were at about the level the Company would have experienced with normal temperatures throughout the year. By comparison, an extremely cold first quarter of 1988 and an extended period of hot weather in the summer of 1988 added about 540 million kwh to 1988 sales which increased earnings per share by about 20 cents in 1988. 0 Earnings for 1987 were reduced by about 10 cents per share due to a 85 86 87 88 89 nonrecurring accrual for the refund in 1988 of approximately $ 17.5 million collected from customers in prior periods for certain taxes and energy costs. cg Esrninss per share gg Dividends deeisred Capactty-Related and &ansnstsston Entttlensent 13 ansacttons The Company's strong generating capacity position enabled it to enter into a number of capacity-related transactions during 1989 with other elec-tric utilities. These transactions include (i) the sale of capacity credits but Earnings per sbare of $ 4.05 for 1989 uvre 5tobbigber than in 1985.
no energy to other utilities in the Pennsylvania-New Jersey-Maryland Inter-connection (PJM) to enable them to satisfy their PJM contractual capacity obligations and (ii) agreements with non-PJM utilities for the reservation of output during certain periods from the Company's Martins Creek oil-fired units with the option to purchase energy from those units. The Company Common Stock Book Value also entered into arrangements whereby other PJM utilities can purchase VS. Market PriCe (Year End) the Company's entitlements to use the PJM transmission system to import per Share 'ollars energy from utilities outside PJM. $ 50 The revenues from these transactions, other than revenues applicable to sales of energy from the Martins Creek units which serve to reduce the Company's Energy Cost Rate (ECR), amounted to $ 23.3 million in 1989, 40 and increased earnings by about 19 cents per share of common stock. The agreements relating to the reservation of output from the Martins Creek units are currently pending before the Federal Energy Regulatory Commis-sion (FERC). In addition, the Company has entered into an agreement for the sale of additional capacity credits and energy effective June I, 1990 pending state regulatory commission action and FERC approval.
The market for the capacity-related transactions is still evolving and the 20 amount of revenues from such transactions depends on many factors, in-cluding the demand for electricity on the purchasing utility's system, the ability of the transmission system to accommodate these transactions and io the availability of the purchasing utility's generating capability. The length of the arrangements varies. The Company is in the process of negotiating additional transactions, and as a result, it is difficult to predict the amount of revenue the Company will ultimately realize from these transactions. 85 86 87 88 89 However, based on contractual arrangements currently in effect or pending M Book value per share regulatory approval, the Company estimates that it will realize revenues of C3 Msrker price per shsre about S31 million from these transactions in 1990, which equates to earn-ings of about 25 cents per share of common stock.
Electric Energy Sales Tbe market.to book ratio increased System, or service area, sales were 28.4 billion kwh in 1989, an increase 112rtb for 1985 to 1519bfor 1989.
from of 0.5 billion kwh, or 1.6%, over 1988. This increase was primarily
attributable to strong commercial sales, reflecting in part the effects of the Company's aggressive marketing and economic development programs and Sources of Energy extremely cold weather in December which resulted in a substantial in- ntttlons of li;ub crease in the use of electricity for heating. Sales to residential and commer- 50 cial customers increased 205 million kwh, or 2.1%, and 353 million kwh, or 4.5%, respectively. Sales to industrial customers decreased 76 million kwh, or 0.9%. 40 The decrease in sales to industrial customers was due to a 205 million kwh, or 16.9%, reduction in sales to customers in the steel manufacturing sector, generally reflecting reduced production due to the softening of the 30 market for steel products. Sales to other industrial customers increased 129 million kwh, or 1.7%.
One measure of the success of the Company's marketing and economic 20 development programs is the annual level of additional energy sales that are expected to be realized from these programs. These additional sales generally will be realized over at least a two-year period, and possibly longer if a major commercial or industrial customer is involved. The an- Io nual level of additional sales estimated from these programs was 640 million kwh in 1987, 862 million kwh in 1988 and 1.0 billion kwh in 1989. The goal for 1990 is annual sales of 930 million kwh.
The Company has faced increased competition from other fuel sources 85 86 87 88 89 for certain energy applications. In addition, certain large commercial and ~ Hydro and purchased power industrial customers have considered self-generation of electricity. The ca Oil flred generation Company has been successful in meeting this competition. About 74% of m Nuclear generation Cg Coal fire generation all new dwellings in the Company's service territory were all-electric in 1989. No major customers have changed their source of supply for elec-tricity during the past three years. The Company expects to continue into the 1990s the marketing and economic development activities that have Fuel dtuerslty provides greater been successful in the last several years. assurance of a reliable energy supply.
On a weather-normalized basis, the Company estimates that system sales for 1989 were 28.4 billion kwh, an increase of 1.0 billion kwh, or 3.7%
over weather-normalized system sales for 1988. The Company currently anticipates weather-normalized system sales of approximately 29.5 billion kwh for 1990, an increase of 1.1 billion kwh, or 3.7%, over 1989 weather- Disposition of Energy nofinalized system sales. tutttons of Kub Total electric energy sales, which include contractual sales to other 50 utilities, were 34.7 billion kwh, or 2.7%, higher in 1989 than in 1988.
Contractual sales to other utilities represent the energy sold to Atlantic City Electric Company (Atlantic) from the nuclear-fueled Susquehanna Steam Electric Station, the energy sold to Jersey Central Power 8c Light Company (jCP8'cL) from all of the Company's generating units and the energy sold to other utilities pursuant to agreements relating to the reservation of output 30 from the Martins Creek oil-fired units. These contractual sales were about 6.3 billion kwh in 1989, or 7.8% higher than in 1988.
OperatIng Revenues 20 Total operating revenues increased S142.5 million, or 6.4%, in 1989 over 1988. Details of changes in operating revenues from the prior year are shown in the schedule on page 20. 10 Tariffs subject to Pennsylvania Public Utility Commission (PUC) jurisdic-tion accounted for approximately 84% of the Company's revenues in 1989. The remaining 16% of revenues are regulated by the FERC. The FERC also regulates interchange power sales which are classified as a credit 85 86 87 88 89 to operating expenses. C1 Company use, line ltuscs and other Billings to customers under PUC jurisdiction include: (i) base rate Cl Interchange power sales charges; (ii) supplemental charges or credits for energy costs over or under M Contractual sales to other utlutlcs the levels included in base rates; and (iii) during 1987 and 1988, a state tax cl System sales to customers adjustment surcharge and an Income Tax Adjustment (ITA) credit which reduced retail customers'ills for the effect of lower income taxes resulting from the Tax Reform Act of 1986 (Tax Act). Effective January 1, System sales greta at a 4.2tlb annual 1989, the ITA credit associated with the current year's tax expense was rate from 1985 to 1989.
rolled into base rates.
The Company has set an objective of not increasing retail base rates for electricity until the 1993-1995 period. This price stability will help foster Cost of Long-Term Debt prosperity among communities served and, at the same time, enhance the and Preferred Company's financial strength through increased energy sales. The last base and Preference Stock rate increase for PUC jurisdictional customers went into effect in April 1985. htlltlorts of Dollars Billings to FERC jurisdictional customers, excluding contractual sales to $ 400 other utilities and capacity-related and transmission entitlement transac-tions, include base rate charges and a supplemental charge or credit for fuel costs over or under the level included in base rates. The last base rate increase for FERC jurisdictional customers went into effect in December 1988. Contractual sales to other utilities are regulated by the FERC. Sales to Atlantic and JCP&L are made at a price covering the Company's cost of service, including a return on investment, while energy sales relating to the reservation of output from the Martins Creek oil-fired units are generally made at a price equal to the cost of fuel plus an amount to reflect foregone interchange savings. Capacity-related and transmission entitlement transactions are also regulated by the FERC and are made at a price negotiated by the Company and the purchaser.
Changes in Operating Revenues 1989 1988 1987 (Nlllfotts of Dollars)
Electric 85 86 87 88 89 Wholesale rate increase.......... $ 3.3 $ 03 C3 Dividends on prcterred and preference stock Depreciation changes............ (8.6) en Interest on iong.tcrrn debt State tax adjustment surcharge and roll-in to base rates........ 2.0 16.5 S(31.0) Interest and dlvfdend costs ha pe Income tax adjustment and decreased $ 79 million from 1985 roll-in to base rates............ (7 0) (67.1) (55.2) through 1989.
Recovery of fuel and energy costs . 45.7 93 0 (50.0)
Change in customer usage........ 50.6 85.8 52.0 Contractual sales to other utilities .. 31.7 (10.6) (16.7)
Capacity-related and transmission entitlement transactions........ 23.3 Return on Other . 1.6 5.5 0.7 Average Common Equity'12 Months Ended Each Quarter)
Total electric 142.6 123.4 (100.2) pereerrr Other (0.1) 0.3 0.3 i6 Total. $ 142.5 $ 123.7 ~r(99.9 Net Cost of Energy i2 In 1989, the net cost of energy was S521 million, an increase of $ 67 million over 1988. The increase primarily was due to higher sales of elec-tricity to customers and increased purchases of energy from non-utility electric generators.
Output from the Company's generating units in 1989 was 43.7 billion kwh, a decrease of 0.6 billion kwh compared with 1988. The decrease principally is due to: (i) lower output from the Susquehanna station because both units were out of service to be refueled in 1989 while only one unit was refueled in 1988 and (ii) less output from the Martins Creek oil-fired units because of reduced demand for those units by intercon-nected utilities.
Other Operation, Maintenance and Depreciation 85 86 87 88 89 Other operation and maintenance costs increased $ 32.4 million, or 5.3%,
over 1988 primarily reflecting increases in wages and benefits, non-routine maintenance at the Company's fossil-fueled generating facilities and an in-crease in the provision for uncollectible accounts.
Higher depreciation in 1989 reflects the normal annual increase associated with the method of depreciating the Susquehanna station and Return on aperage common equity of the depreciation of new property, plant and equipment placed in service. 14.6% for 1989 sbous a substantial lm-prouement ore'985.
As approved by the PUC and FERC, the depreciation expense for the
Susquehanna station will increase annually through the year 1998. At that time, depreciation is scheduled to switch to the straight-line method at a Sources of Capital level substantially less than the atnount expected in 1998. hfuttons of Dollars S1,200 Income Taxes Total income tax expense for 1989 increased by $ 16.0 million over 1988 due to higher taxable income. The decline in total income tax expense from $ 229 million in 1987 to $ 188 million in 1988 primarily was due to the lower federal income tax rate included in the Tax Act. The reduction in income tax expense due to the Tax Act resulted in lower rates for the Company's customers.
The Tax Act also repealed the investment tax credit. At December 31, 1989, approximately $ 44 million of unused investment and payroll-based tax credits were available to offset future federal income tax liabilities.
Lower Ffnancfng Costs The retirement of high-cost securities during the years 1986-1989 with cash generated from operations and refinancing has allowed the Company to reduce interest on long-term debt and dividends on preferred and preference stock to $ 304 million in 1989 from $ 367 million in 1986, a decrease of $ 63 million in the last three years.
85 86 87 88 89 The Company expects to undertake substantially less refinancing of high-cost securities in the next few years than it did during the 1986-1989 ~ obligations)
Other (prlndpally capital lease period because the current level of interest rates would not make such CI Outside financin (sales of debt refinancings economical. As a result, the rate of decline in interest expense equity securhles) and dividends on preferred and preference stock experienced during the ~ operations internal sources (prlndpally from plus <<quity AFUDC past few years is not expected to continue. less dividends)
Funds from internal sources increased Financial Condition substantially during tbe period from 1985 through 1989.
Capftal Expendfture Requfrements The schedule below shows the Company's actual capital expenditures for electric utility operations for the years 1987-1989 and current projec-tions for the years 1990-1992. Construction expenditures during the three years 1987-1989 totaled about $ 850 million and are expected to be about Capital Requirements
$ 1.0 billion during the three years 1990-1992. hfttttons of Dollars S1,200 Capital Expenditure Requirements (a)
Actual 1987 1988 1989 Projected 1990 1991 1992 (Millions of Dollars)
Construction expenditures Generating facilities...... $ 102 $ 126 $ 109 $ 111 $ 127 $ 130 Transmission and distribution facilities ... 106 129 131 156 178 175 Environmental.......... 21 26 15 13 8 7 Other . 30 28 25 40 39 39 259 309 280 320 352 351 Nuclear fuel owned and leased 40 46 33 47 51 47 Other leased property ... 20 13 12 23 19 9 Total $ 319 $ 368 $ 325 $ 390 $ 422 $ 407 85 86 87 88 89 Cl Other (a) Capital expenditure plans arc revised from time to time to reflect changes in Ca Security retirements conditions. Actual expenditures may vary from those projected because of C) Construction, nuclear fuel and changes in plans, cost fluctuations, environmental regulations and other factors. other leased property The estimates for 1990-1992 do not include any cxpcnditurcs for compliance with possible future acid rain lcgishtion. As currently proposed by the Bush Administration, this legislation would not require the Company to make any Security retirements, including r%) lanc-ing higher cost issues, accounted for substantial capital expenditures until the mid.to.late 1990s. Construction expen-most of tbe cbanges fn capital ditures include AFUDC which is expected to be $ 15 million or less in each of requirements.
the years 1990-1992.
Financfng and Lfqufdfty During the three years 1987-1989, the Company issued about $ 800 million of securities and also incurred $ 199 million of obligations under capital leases (primarily nuclear fuel). The Company's 1989 financing program involv-ed the sale of $ 375 million of first mortgage bonds and the issuance of S7 million of common stock for the Employee Stock Ownership Plan. These funds were used primarily to retire $ 343 million of debt and $ 28 million of preferred and preference stock, with $ 329 million of those securities being redeemed early.
Internally generated funds during the next three years are expected to essentially meet the Company's needs for construction expenditures, retirement of maturing long-term debt and preferred and preference stock sinking fund requirements, which are expected to aggregate about $ 1.1 billion. Outside financing will be undertaken primarily to provide funds for the early retirement of, high-cost securities. The exact amount, nature and timing of any such sales of securities will be determined in the light of market conditions and other factors.
The Company's plans to issue securities during the next three years are not expected to be limited by earnings or other issuance tests. To enhance financing flexibility, the Company maintains a revolving credit arrangement with a group of banks. The Company can borrow up to $ 185 million under this arrangement, which is main-tained principally as a back-up for commercial paper issued by the Company. The Company also maintains bank lines of credit aggregating $ 32 million. A subsidiary maintains a $ 100 million revolving credit arrangement. No borrowings were outstanding at the end of 1989 under these arrangements.
Current Ffnancfal Condftfon The Company's overall financial condition continued to improve in 1989. Earnings per share of common stock, at $ 4.05, exceeded last year's previous record high of S3.73. The Company earned a 14.62% return on average common equity. The allowance for funds used during construction (AFUDC), a non-cash credit to income, ac-counted for only about 5% of earnings. AFUDC is expected to remain low for an extended period of time because the Company currently does not have any major long-term construction projects planned for the balance of this century.
The ratio of the Company's pre-tax income to interest charges increased slightly from 2.7 times in 1988 to 2.8 times in 1989. The Company has increased common stock dividends each year from an annual per share rate of
$ 2.68 in 1987 to $ 2.86 in 1989. The ratio of the market price to book value of common stock was 151% at the end of 1989 compared to 133% at the end of 1988.
Terntfnatfon oj'oal-Mfnfng Operatfons The Company plans to phase out subsidiary coal-mining operations in the early 1990s. The investment in coal, mining equipment and other facilities amounting to $ 50 million at December 31, 1989 is expected to be recovered through the cost of coal produced. However, the Company cannot predict whether regulatory actiqn; proposed legislation related to health care benefits for miners or other events could affect its plans for these mines, possibly resulting in an adverse impact on the Company's earnings.
Proposed Acfd Rafn Legfslatfon Under pending federal legislation proposed by the Bush Administration dealing with acid rain, the Company currently estimates that increased costs to meet specified Phase I sulfur dioxide emission levels by January 1, 1996 would require rate increases of about 3% (based on 1989 revenue levels). The Company anticipates the increased costs would be recoverable through the ECR included in the Company's PUC tariffs, the fuel adjustment clause in-cluded in the Company's FERC tariffs and pursuant to the contracts under which the Company sells capacity and energy to other utilities. An estimated 8% to 10% increase (based on 1989 revenue levels) above the 3% increase expected to result from Phase I compliance would be required to meet more stringent Phase II emission levels by January 1, 2001.
The Company currently estimates that no substantial construction expenditures would be required to comply with Phase I requirements and that construction expenditures of about S1 billion would be required between 1996 and 2000 to comply with Phase II requirements. Under current Pennsylvania law, construction work in progress for non-revenue producing assets, such as pollution control equipment, can be included in rate base. The Company will not be able to determine the exact method of compliance, or the cost thereof and its impact on customer rates, until such legislation is enacted and implementing regulations are adopted by the appropriate regulatory bodies.
Industry Restructurfng Inftfatfves The FERC and others are considering certain issues which could significantly affect the structure and com-petitive business environment of the electric utility industry. These issues include, among others, deregulation, transmission system access, voluntary bidding arrangements for providing new generating capacity and the role of independent power producers in supplying electric power. The Company is carefully monitoring these issues but is unable to predict their ultimate outcome or what impact, if any, they may have on the Company's operations.
However, the Company believes that its strong generating capacity position, competitively priced electricity and good customer service place it in a position to adapt to any changes that may arise from these initiatives.
Index of Financial Data Independent Auditors'eport . 23 Management's Report on Responsibility for Financial Statements . 24 Financial Statements Consolidated Statement of Income 25 Consolidated Balance Sheet . 26 Consolidated Statement of Cash Flows 28 Schedule of Taxes 29 Schedule of Capital Stock 30 Schedule of Long-Term Debt 32 Consolidated Statement of Earnings Reinvested . 33 Notes to Financial Statements 33 Selected Financial and Operating Data .. 42 Shareowner and Investor Information 46 Independent Auditors'eport Oeloitte a Touche
/W One World Trade Center Certified Public Accountants New York, New York 10048 To the Shareowners and Board of Directors of Pennsylvania Power R Light Company:
We have audited the accompanying consolidated balance sheets of Pennsylvania Power % Light Company and its subsidiaries as of December 31, 1989 and 1988 and the related consolidated statements of income, earnings reinvested, and of cash flows for each of the three years in the period ended December 31, 1989. These financial statements are the responsibility of the Company's 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 examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present Fairly, in all material respects, the financial position of the Pennsylvania Power 8t Light Company and its subsidiaries at December 31, 1989 and 1988 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1989 in conformity with generally accepted accounting principles.
C February 5, 1990 23
Management's Report on Responsibility for Financial Statements The management of Pennsylvania Power & Light Com- The Board of Directors, acting through its Audit Com-pany is responsible for the preparation, integrity and ob- mittee, oversees management's responsibilities in the jectivity of the financial statements and all other sections preparation of the financial statements. In performing this of this annual report. The financial statements were function, the Audit Committee, which is composed of prepared in accordance with generally accepted account- seven independent directors, meets periodically with ing principles and the Uniform System of Accounts management, the internal auditors and the independent prescribed by the Federal Energy Regulatory Commis- certified public accountants to review the work of each.
sion. In preparing the financial statements, management Deloitte &Touche and the internal auditors have free makes informed estimates and judgments of the expected access to the Audit Committee and to the Board of effects of events and transactions based upon currently Directors, without management present, to discuss available facts and circumstances. Management believes internal accounting control, auditing and financial that the financial statements are free of material misstate- reporting matters.
ment and reflect fairly the financial position, results of Management also recognizes its responsibility for operations and cash flows of the Company. fostering a strong ethical climate so that the Company's af-The Company's financial statements have been audited fairs are conducted according to the highest standards of by Deloitte &Touche, successor by merger to Deloitte personal and corporate conduct. This responsibility is Haskins & Sells, independent certified public account- characterized and reflected in the Company's Standards ants, whose report with respect to the financial of Integrity, which is publicized throughout the Com-statements appears on page 23 of this report. Deloitte pany. The Standards of Integrity addresses: the necessity Haskins & Sells'ppointment as auditors was previously of ensuringopen communication within the Company; ratified by the shareowners. Management has made potential conflicts of interest; compliance with all ap-available to Deloitte & Touche all the Company's financial plicable laws, including those relating to financial records and related data, as well as the minutes of disclosure; and the confidentiality of proprietary infor-shareowners'nd directors'eetings. Management mation. The Company maintains a systematic program to believes that all representations made to Deloitte & assess compliance with these policies.
Touche during its audit were valid and appropriate.
The Company maintains a system of internal control designed to provide reasonable, but not absolute, assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use or disposition and the prevention and detection of fraudulent financial reporting. The concept of reasonable assurance recognizes that the cost of a system of internal control should not exceed the benefits derived and that there are inherent limitations in the effectiveness of any system of internal control.
Fundamental to the control system is the selection and Robert K. Campbell, training of qualified personnel, an organizational struc- Chairman, President and Chief Executive Officer ture that provides appropriate segregation of duties, the utilization of written policies andprocedures and the con-tinual monitoring of the system for compliance. In addi-tion, the Company maintains an internal auditing pro-gram to evaluate the Company's system of internal con-trol for adequacy, application and compliance. Manage-ment considers the internal auditors'nd Deloitte &
Touche's recommendations concerning its system of in-ternal control and has taken actions which are believed to be cost-effective in the circumstances to respond ap-propriately to these recommendations. Management believes that the Company's system of internal control is adequate to accomplish the objectives discussed in C. E. Russoli, this report. Executive Vice President and Chief Financial Officer
Consolidated Statement of Income PENNSYLVANIAPOWER tL LIGHTCOMPANYAND SUBSIDIARIES 1989 1988 1987 (Thousands ofDollars)
Operating Revenues (Note 2) $ 2,356,446 $ 2,213,903 $ 2,090,244 Operating Expenses Operation Fuel 625,993 624,332 636,872 Power purchases . 171,437 111,920 101,552 Interchange power sales . (275,996) (281,501) (366,556)
Netcostofenergy . 521,434 454,751 371,868 Other 411,525 388,846 352,161 Maintenance 234,063 224,368 218,959 Depreciation(Notes 2 and 3). 2221536 234,283 222,655 Deferred depreciation (Notes 2 and 3) .. (23,475) (47,784) (52,427)
Income taxes (Note 6) . 207,189 191,245 235,689 Taxes, other than income 164,324 163,143 150,702 1,737,596 1,608,852 1,499,607 Operating Income 618,850 605,051 590,637 Other Income and (Deductions)
Allowance for equity funds used during construction(Note 1) . 2,728 4,923 3,473 Income tax credits (Note 6) . 3,514 3,570 7,136 Other net 4,227 2,210 (1,400) 10,469 10,703 9,209 Income Before Interest Charges 629,319 615,754 599,846 Interest Charges hong-term debt .. 255,223 267,430 278,732 Short-term debt and other . 31,799 26,892 30,728 Allowance for borrowed funds used during construction and interest capitalized(Note 1) (11,139) (10,610) (12,075) 275,883 283,712 297,385 Net Income 353,436 332,042 302,461 Dividends on Preferred and Preference Stock 48,418 52,177 54,426 Earnings Applicable to Common Stock $ 305,018 $ 279,865 $ 248,035 Earnings Per Share of Common Stock(a). $ 4.05 $ 3.73 $ 3.32 Average Number of Shares Outstanding (thousands) 75,314 75,071 74,644 Dividends Declared Per Share of Common Stock .. $ 2.86 $ 2.76 $ 2.68 (a) Based on average number oFshares outstanding.
See accompanying Schedules and)Votes to Financial Statements.
25
Consolidated Balance Sheet at December 31 PENNSYLVANIAPOWER & LIGHTCOMPANYANDSUBSIDIARIES Assets 1989 1988 (Thousands ofDollars)
Property, Plant and Equipment Electric utilityplant in service at original cost $ 7,885,110 $ 7,590,085 Accumulated depreciation(Notes 2 and 3) .. (1,963,658) (1,787,284)
Deferred depreciation (Notes 2 and 3) . 277,241 253,922 6, 198,693 6,056,723 Construction work in progress at cost 115,799 177,333 Nuclear fuel owned and leased net of amortization(Note 8) . 264,008 303,620 Other leased property net of amortization(Note 8)........ 74,902 78,770 Electric utilityplant net 6,653,402 6,616,446 Other property net of depreciation, amortization and depletion(1989, $ 127,113; 1988, $ 114,054)......... 213,240 225,138 6,s66,642 6,841,584 Investments Associated company at equity .. 20,211 20,171 Nuclear plant decommissioning trust fund (Note 1) 37,393 28,181 Other at cost or less 20,816 16,345 78,420 64,697 Current Assets Cash and cash equivalents (Note 1) 8,260 6,091 Accounts receivable(less reserve: 1989, $ 21,793; 1988, $ 14,765)
Customers . 189,253 179,631 Interchange power sales . 17,578 29,656 Other 15,600 12,305 Unbilled revenues .. 84,206 68,'836 Fuel (coal and oil) at average cost .. 99>879 106,324 Materials and supplies at average cost 34,63s 35,137 Common stock held for dividend reinvestment plan at cost(Note 7) 9,967 9,524 Other 50,660 36,527 510,041 484,0>>
Deferred Debits Utilityplant carrying charges net ofamortization(Note 1) .. 27,190 27,826 Unamortized debt expense and reacquired debt costs...... 65,265 49,768 Mine development costs net of amortization 13,454 20,034 Other 37,956 36,708 143,865 134,336
$ 7,598,968 $ 7,524,648 See accompanying Schedules and Notes to Financial Statements.
Liabilities 1989 1988 P'bousands ofDollars)
Capitalization Common equity Common stock S1,340,224 S1,334,424 Capital stock expense (12,596) (12,672)
Earnings reinvested . 811,710 728,079 2,139,338 2,049,831 Preferred and preferencestock With sinking fund requirements 409,990 438,290 Without sinking fund requirements . 231,375 231,375 Long-term debt 2,622,907 2,599,840 5,403,610 5,319,336 Current Liabilities Commercial paper .. 10,000 93,000 Bank loans and other notes . 85,429 108,652 Long-term debt due within one year. 27,369 26,944 Capital lease obligations due within one year (Note 8) . 87,736 74,275 Accounts payable . 107,079 113,536 Taxesaccrued 39,908 29,387 Interest accrued 74,291 70,950 Dividends payable 65,836 64,434 Energy revenues to be refunded .. 63,095 70,652 Other..... 90,614 98,030 651,357 749,860 Deferred Credits and Other Noncurrent Liabilities Deferred investment tax credits (Note 6) 263,754 238,112 Deferred income taxes(Note 6) .. 913,700 821,054 Capital lease obligations (Note 8) . 255,176 298,531 Accrued nuclear plant decommissioning costs (Note 1) 38,624 29,293 Other 72,747 68,462 1,544,001 1,455,452 Commitments and Contingent Liabilities (Note 14)
$ 7,598,968 $ 7,524,648 See accompanying Schedules and Notes to Ffnancial Statentents.
Consolidated Statement of Cash Plows PENNSYLVANIAPOWER & LIGHTCOMPANY AND SUBSIDIARIES 1989 1988 1987 (Thousands ofDollars)
Cash Flows From Operating Activities Net income $ 353,436 $ 332,042 $ 302,461 Adjustments to reconcile net income to net cash provided by operating activities Depreciation. 220,375 204,687 188,246 Amortization of property under capital leases 82,138 85,655 88,267 Deferred income taxes and investment tax credits .......... 106,693 101,944 148,683 Equity component of AFUDC (2,728) (4,923) (3,473)
Change in current assets and current liabilities excluding cash Accounts receivable . (1,788) (10,210) (4,678)
Unbilled and refundable electric revenues (22,927) 22,962 69,338 Materialsandsupplies .. 499 1,587 (4,203)
Fuel inventories 6,445 42,231 (2,901)
Accounts payable (6,457) 10,595 8,010 Accrued interest and taxes . 13,862 (10,533) (30,006)
Other (24,380) 4 344 239 Other operating activities net .. 25,790 9,194 (99)
Net cash provided by operating activities ............. 750,958 789,575 759,884 Cash Plows From Investing Activities Property, plant and equipment expenditures .. (307,688) (341,577) (292,195)
Proceeds from sales of nuclear fuel to trust 31,809 21,669 63,154 Proceeds from contractsettlement .. 8,730 Other investing activities net 5,715 1,609 6,23s Net cash used in investing activities .. (270,164) (318,299) (214,073)
Cash Flows From Pinancing Activities Issuance of long-term debt 375,000 250,000 Issuance of preferred stock . 150,VOO Issuance of common stock 6,884 9,6s6 16,387 Retirement of long-term debt .. (350,300) (210,295) (265,687)
Retirement of preferred and preference stock . (28,300) (57,300) (129,649)
Payments on capital lease obligations . (85,697) (89,123) (93,488)
Dividends paid . (262,401) (259,223) (251,497)
Netincrease(decrease)inshort-termdebt .. (106,223) (96,669) 54,733 Costs associated with issuance and retirement of securities . (27,308) (17,461) (25,471)
Other financing activities net (280) (237) 55 Net cash used in financing activities (478,625) (470,622) (544,617)
Net Increase In Cash and Cash Equivalents . 2,169 654 1,194 Cash and Cash Equivalents at Beginning of Period 6,091 5,437 4,243 Cash and Cash Equivalents at End of Period $ 8,260 $ 6,091 $ 5,437 Supplemental Disclosures of Cash Flow Information Cash paid during the year for Interest(net ofamount capitalized) . $ 255,425 $ 272,064 $ 296,744 Income taxes $ 86,837 $ 95,494 $ 99,836 See acco>npanying Schedules and Notes to Flnanclal Statements.
Schedule of Taxes PENNSYLVANIAPOWER & LIGHTCOMPANYANDSUBSIDIARIES 1989 1988 1987 (TI>ousands ofDollars)
Income Tax Expense (Note 6)
Included in operating expenses Provision Federal . $ s5,634 $ 62,285 $ 63,468 State .. 30,853 27,328 23,680 116,487 89,613 87,148 Deferred Federal . 75,418 73,184 112,185 State... 1,368 975 6,338 76,786 74,159 118,523 Investment tax credit, net Federal 13,916 27,473 30,018 207,189 191,245 235,689 Included in other income and deductions Provision(credit) Federal .. (18,661) (3,139) (6,127)
State .. (844) (743) (1,151)
(19,505) (3,882) (7,278)
Deferred Federal 15,853 301 (201)
State . 138 11 343 15,991 312 142 (3 514) (3 570) (7 136)
Total income tax expense Federal 172,160 160,104 199,343 State 31,515 27,571 29,210
$ 203,675 $ 187,675 $ 228,553 Detail of deferred taxes in operating expenses Tax depreciation $ 95,475 $ 93,119 $ 107,249 Reacquired debt costs .. 6,148 3,248 5,801 Unbilled revenues
".'Other
.................... (8,142) (8,142) (6,500)
. (16,695) (14,066) 11,973
$ 76,786 $ 74,159 $ 118,523 Reconciliation of Income Tax Expense Indicated federal income tax on pre-tax income at statutory tax rate (1989, 349o,'988, 34 Jo,'1987, 39.959o) $ 189,418 $ 176,704 $ 212,140 Increase (decrease) due to:
State income taxes . 22,205 19,310 19,478 Depreciation differences not normalized . 9,497 10,227 10,258 Amortization of investment tax credit (13,017) (9,954) (8,477)
AFUDC (Note 1) (927) (1,674) (1,388)
Other . (3,501) (6,938) (3,458) 14,257 10,971 16,413 Total income tax expense $ 187,675 $ 228,553 Effective income tax rate 36.6'6.1 ~io 43.0'203,675 Taxes, Other Than Income State gross receipts $ 83,804 $ 83,847 $ 83,203 State utilityrealty . 34,782 35,294 26,513 State capital stock 23,795 23,379 21,827 Social security and other 21,943 20,623 19,159
$ 164,324 $ 163,143 $ 150,702 See accompanying Notes to Financial Statements.
29
Schedule of Capital Stock at December 31 PENNSYLVANIAPOWER & LIGHTCOMPANYAND SUBSIDIARIES Shares Outstanding Outstanding Shares 1989 1988 1989 Authorized (Thousands ofDollars)
Preferred Stock $ 100 par, cumulative (a) 4' $ 53,019 463,146
$ 53,019 481,246 530,189 4,631,456 629,936 10,000,000 Series .
$ 516,165 $ 534,265 Preference Stock no par, cumulative (a).......... $ 125,200 $ 135,400 1,252,000 5,000,000 CommonStock nopar(a) .. $ 1,340,224 $ 1,333,339 75,422,739 85,000,000 Employee Subscriptions (employee stock ownership plan) 1,085
$ 1,340,224 $ 1,334,424 Details of Preferred and Preference Stock (b)
Optional Sinking Fund Redemption Provisions (c)
Shares Price Per Shares to be Outstanding Outstanding Share Redeemed Redemption 1989 1988 1989 1989 Annually Period l (Thousands ofDollars)
With Sinking Fund Requirements Series Preferred 6.875% (d) .. $ 50,000 $ 50,000 500,000 $ 106.88 100,000 '993-1997 7.00% (d) . 100,000 100,000 1,000,000 107.00 200,000 1993-1997 7.375% (d) 50,000 50,000 500,000 107.38 25,000 1993-2012 7.40% 22,400 24,000 224,000 102.66 16,000 1990-2003 7.82% (d) . 50,000 50,000 500,000 107.82 100,000 1993-1997 7.927% (e) 12,000 15,000 120,000 100.00 30,000 1990-1993 8.00% 32,500 35,000 325,000 103.20 25,000 1990-2002 8.00%, Second ............ 2,000 1990-2004 8.75% (d) . 45,ooo 48,'ooo 45o,ooo 104.77 30,000 9.24% (d) . 37,890 43,890 378,900 103.00 30,000 1990-20(}2 Preference
$ 8.625 (e) . 10,200 20,400 102,000 None 102,000 1990
$ 409,990 $ 438,290 Without Sinking Fund Requirements 4~/z% Preferred.............. $ 53,019 $ 53,019 530,189 $ 110.00 Series Preferred 3.35% . 4,178 4)178 41,783 103.50 4.40' 22,878 22,878 228,773 102.00 4.60% . 6,300 6,300 63,000 103.00 8.60% . 22 j237 22 237 222,370 104.00 9.00% . 7,763 7,763 77,630 104.00 Preference
$ 8.00 .. 35,000 35,000 350,000 101.00
$ 8.40 .. 4o,ooo 40,000 400,000 101.00
$ 8.70 .. 4o,ooo 40,000 400,000 101.00
$ 231,375 $ 231,375 See accompanying Notes to Financtal Statements.
Increases (Decreases) in Capital Stock (Thousands ofDollars) 1989 1988 1987 Shares Amount Shares Amount Shares Amount Common Stock issued under employee stock ownership plan........... 174,284 S 6,885 276,133 $ 9,686 459,525 8 16,387 Series Preferred Stock 6.875/o .. 500,000 7.375oo .. 500,000 7.40oo (16,000) (1,600) (16,000) (1,600) (16,000) 7.75 Jo (120,000) (12,000) (120,000) 7.82 ohio 500,000 7.927oio'. (30,000) (3,000) 8.00oo (25,000) (2,500) (25,000) (2,500) (25,000) 8.00%, Second 8.25'io
........... (20,000) (2,000) (20,000) (2,000) (20,000)
(200,000) (20,000) (100,000) 8 75 ohio (30 000) (3,000) (30,000) (3,000) (30,000) 9 24o/o (60',000) (6,'000) (60,000) (6,'000) (60,000)
Preference Stock
$ 8.625
$ 11.00
.............. (102,000) (10,200) (102,000) (10,200) (102,000) (10,200)
(323,492) (32,349)
S11.60 (500,000) (50,000)
Decreases in Preferred and Preference Stocks represent: (i) the redemption of stock pursuant to sinking fund requirements, or (ii) shares redeemed pursuant to optional redemption provisions.
(a) Each share of preferred, preference and common stock entitles the holders to one vote on any question presented to any shareowners'eeting.
(b) The involuntary liquidation price of the preferred and preference stock is $ 100 per sharc. The optional voluntary liquidation price tl,is the optional rcdcmption price per share in effect, except for the 4 Yi 9o Preferred and the $ 8.625 Series Preference Stocks for which such price is $ 100 per share (plus in each case any unpaid dividends). Liquidation payments on preferred stock have priority to such payments on the preference stock.
(c) The aggregate amount of sinking fund redemption requirements through 1994 arc (thousands of dollars): 1990, $ 22,190; 1991,
$ 13,100; 1992, $ 13,100; 1993, $ 55,600; 1994, $ 52,600.
(d) On certain sinking fund redemption dates, additional shares may be redeemed up to the number of shares required to be redeemed annually.
(e) Because certain federal income tax benefits have been lost to corporate holders of these stocks, the Company may be required to make indemnity payments sufficient to provide the holders with an agreed upon effect ivc yield after federal income taxes. After giving cffcct to a $ 1.2 mil!ion indemnity payment made in connection with the January 1, 1990 redemption of the $ 8.625 Series Preference Stock, the Company estimates that future indemnity payments that could be claimed are less than $ 1 million.
See accompanying Notes to Financial Statements.
Schedule of Iong-Term Debt at December 31 PENNSYLVANIAPOW'ER & LIGHTCOMPANY AND SUBSIDIARIES Outstanding 1989 1988 Maturity (b)
Company P'bousands ofDollars)
First Mortgage Bonds (a) 12/e% ~ ~ $ 10,000 February 1, 1989 16t/a% .. 7,000 August 1, 1989 12/e% ~ ~ $ 10,000 10,000 February 1, 1990 16/$ % .. 8,500 8,500 August 1, 1990 12/s% (C) 10,000 10,000 February 1, 1991 4>/% 30,000 30,000 December 1, 1991 12/e% (C) 10,000 10,000 February 1, 1992 12 t/s% (C) 10,000 10,000 February 1, 1993 4>/e% 30,000 30,000 March 1, 1994 13/a% (d) 125,000 April 1, 1994 5$/s% to 9/s% ~ ~ 515,000 515,000 1995-1999 7/4% to 9/<% .. 345,000 345,000 2000-2004 8/4% to 9/% .. 475,000 475,000 2005-2009 12~/4% (e) 125,000 2010-2014 9% to 12% 875,000 500,000 2015-2019 First Mortgage Pollution Control Bonds (a) 5$/s% Series A 16,595 17,495 (f) 77/s% to8i/,% Series C .. 20,000 20,000 (f) 1 1 t/4% to 111/,% Series D 70,000 70,000 (f) 10$/~% Series E. 37,750 37,750 March 1, 2014 10$/,% Series F . 115,500 115,500 September 1, 2014 9$/s% Series G . 55,000 55,000 July 1, 2015 2,633,345 2,526,245 Other Long-Term Debt Secured term notes (g) 75,000 March 31, 1991 Miscellaneous promissory notes . 232 346 1990-1995 2,633,577 2,601,591 Unamortized(discount) and premium net .. (22,576) (21,511) 2,611,001 2,580,080 Less amount due within one year 18,539 17,114 2,592,462 2,562,966 Subsidiaries Notes(h) 39,275 46,704 1990-1996 Less amount due within one year 8,830 9,830 30,445 36,874 Total long-term debt $ 2,622,907 $ 2,599,840
( a ) Substantially all owned electric utilityplant is subject to the lien of the Company's first mortgage.
(b) Aggregate long term debt maturities through 1994 are (thousands of dollars): 1990, $ 27369; 1991, $ 46 469; 1992, $ 16 650; 1993,
$ 17,339; 1994, $ 33,338. Maximum sinking fund requirements aggregate $ 31.1 million through 1994 and may be met with property additions or retirement of bonds.
c) In February 1990, the Company redeemed $ 30 millionprincipal amount of First Mortgage Bonds, 12i/% Series due 1991-1993.
d) In April 1989, the Company redeemed $ 125 million principal amount of First Mortgage Bonds, 13 i/,% Series due 1994.
(e) In December 1989, the Company redeemed $ 125 mill!on principal amount of First Mortgage Bonds, 12/% Series due 2014.
( f ) Bonds mature annually as follows(thousands of dollars): (I) Series A on May I, 1992, $ 195; 1993-2002, $ 900; 2003, $ 7,400(ii) Series C on April I, 2000, $ 4,000; 2006 2009, $ 2,000; 2010, $ 8 000(iii) Series D on November 1,2002, $ 15,000; 2012, $ 55,000.
( g) In November 1989, the Company prepaid the remaining $ 75 millionofsecured term notes and the mortgage securing those notes has been satisfied.
(h) Various fixed rates ranging from 6% to 12%. During 1989, subsidiary companies retired $ 7.4 millionof maturing notes.
See acco>npanylng Notes to Ffnancial Statements.
Co'hsolidated Statement of Earnings Reinvested PENNSYLVANIAPo'WER K LIGHTCOMPANYAND SUBSIDIARIES 1989 1988 1987 (Tl>ousands ofDollars)
Balance, January 1 . $ 728,079 $ 657,383 $ 622,537 Add Net Income 353,436 332,042 302,461 1,081,515 989,425 924,998 Deduct Cash dividends declared Preferred stock at required annual rates . 37,898 40,777 40,368 Preference stock at required annual rates. 10,520 11,400 14,058 Common stock per share: 1989, $ 2.86; 1988, $ 2.76; 1987, $ 2.68 . 215,386 207,193 200,003 Costs associated with the redemption of stock(Note 13) ......... 6,001 1,976 13,186 269,805 261,346 267,615 Balance, December 31 $ 811,710 $ 728,079 $ 657,383 See accontpanyfng Schedules and fvotes to Ffnancfal Statentents.
. Notes to Financial Statements
- 1. Summary of Significant Accounting P olicies Aciounting Records UtilityPlant and Depreciation Accounting records for utility operations are main- Additions to utility plant and replacement of units tained in accordance with the Uniform System of Ac- of property are capitalized at cost. The cost of units counts prescribed by the Federal Energy Regulatory of property retired or replaced is removed from utility Commission (FERC) and adopted by'the Pennsylvania plant accounts and charged to accumulated deprecia-Public Utility Commission (PUC). tion. Expenditures for maintenance and repairs of property and the cost of replacing items determined Principles of Consondatlon to be less than units of property are charged to All wholly owned subsidiaries (principally involved operating expense.
in coal mining, holding coal reserves and oil pipeline For financial statement purposes, depreciation is be-operations) have been consolidated in the accompany- ing provided over the estimated useful lives of proper-ing financial statements and all significant intercom- ty and is computed using a straight-line method for all pany transactions have been eliminated. Income and property except the Susquehanna Steam Electric Sta-expenses of subsidiaries not related to utility opera- tion. Current PUC and FERC rate orders provide for tions have been classified under other income and an increasing amount of annual depreciation for the deductions on the Consolidated Statement of Income. Susquehanna station until the late 1990s, at which The investment in Safe Harbor Water Power time depreciation is scheduled to switch to the Corporation (Safe Harbor), of which the Company straight-line method. Provisions for depreciation, as a owns one-third of the outstanding capital stock percent of average depreciable property, approx-representing one-half of the voting securities, is imated 2.7'n 1989, 2.69'n 1988 and 2.5%
recorded using the equity method of accounting. The in 1987.
Company's principal transaction with Safe Harbor is Based on PUC and FERC rate orders, the annual the purchase of electricity amounting to (millions of depreciation charge for Susquehanna was increased ef-dollars): 1989, $ 9.6; 1988, $ 9.5 and 1987, $ 11.8. fective December 1, 1988 for wholesale customers Under equity accounting, the operations of Safe Har- and effective January I, 1989 for retail customers to bor resulted in additional income to the Company of comply with the phase-in plan accounting rules as (millions of dollars): 1989, $ 2.6; 1988, $ 2.6 and adopted by the Financial Accounting Standards Board 1987, $ 3.3. (FASB). Straight-line depreciation is used for property 33
Notes Continued placed in service at Susquehanna after December 31, Revenues 1988. The Company also lengthened the depreciable Electric revenues are recorded based on the lives of certain fossil-fueled generating stations and amounts of electricity delivered to customers through adopted the remaining life depreciation technique in the end of each accounting period. This includes its PUC rate filing. (See Notes 2 and 3.) amounts customers will be billed for electricity delivered from the time meters were last read to the UtilityPlant Carrying Charges end of the respective period.
Carrying charge accruals on certain facilities for the The Company's PUC tariffs contain an Energy Cost Susquehanna and Martins Creek generating stations are Rate (ECR) under which customers are billed an recorded as deferred debits in accordance with a estimated amount for fuel and other energy costs. Any FERC order. These amounts are being amortized to difference between the actual and estimated amount expense over the remaining lives of the stations. for such costs is collected from or refunded to customers in a subsequent period. Revenues ap-Nuclear Decommissioning and Fuel Disposal plicable to ECR billings are recorded at the level of ac-tual energy costs and the difference is recorded as An annual provision for decommissioning costs of payable to or receivable from customers.
the Susquehanna station, equal to the amount allowed for ratemaking purposes, is charged to operating ex- The Company applied an Income Tax Adjustment pense. Such amounts are invested in a trust fund (ITA) credit to PUC customers'ills to reflect the reduction in income tax expense due to the Tax which can be used only for future decommissioning Reform Act of 1986 (Tax Act) during 1987 and 1988.
costs.
Effective January 1, 1989, the ITA credit applied to The U.S. Department of Energy (DOE) is responsible customers'ills for the reduction in the current year' for the permanent storage and disposal of spent tax expense was rolled into base rates. (See Note 2.)
nuclear fuel removed from nuclear reactors. The Com-pany currently pays DOE a fee for future disposal ser-vices and recovers such costs in customer rates. Income Taxes The Company and its wholly owned subsidiaries file Premium on Reacquired Long-Term Debt a consolidated federal income tax return. Income As provided in the Uniform System of Accounts, the taxes are allocated to operating expenses and other in-premium paid and expenses incurred to redeem long- come and deductions on the Consolidated Statement term debt are deferred and amortized over the life of of Income.
the new debt issue or the remaining life of the retired Deferred income taxes are recorded for timing dif-debt when the redemption is not financed by a new ferences between book and taxable income to the ex-issue. tent they are permitted in rate determinations by regulatory agencies. The principal item for Allowance for Funds Used During Construction taxes are not currently recorded is the dif-which'eferred As provided in the Uniform System of Accounts, the ference between tax depreciation and book deprecia-cost of funds used to finance construction projects is tion related to property placed in service prior capitalized as part of construction cost. The com- to 1981.
ponents of allowance for funds used during construc- Investment and payroll-based tax credits result in a tion (AFUDC) shown on the Consolidated Statement reduction of federal income taxes payable. The invest-of Income under other income and deductions and in- ment tax credits are deferred when utilized and amor-terest charges are non-cash items equal to the cost of tized over the average lives of the related property.
funds capitalized during the period. The Company The Tax Act repealed the investment tax credit effec-records deferred income taxes for the tax effect of the tive December 31, 1985, except for tax credits ap-difference between the amount of construction in- plicable to transition property, and also repealed the terest capitalized through AFUDC and the amount payroll-based tax credit for years after 1986.
capitalized for tax purposes. In December 1987, the FASB issued new accounting AFUDC serves to offset on the Consolidated State- rules that will affect deferred income taxes recorded ment of Income the interest charges on debt and by the Company. These rules are effective for fiscal dividends on preferred and preference stock incurred years beginning after December 15, 1991. (See to finance construction. In addition, a return on com- Note 6.)
mon equity used to finance construction is imputed.
Pension Plan Capital Leases The Company has a noncontributory pension plan Leased property capitalized on the Consolidated covering substantially all employees and subsidiary Balance Sheet is recorded at the present value of mining companies have noncontributory pension future lease payments and is amortized so that the plans for substantially all non-bargaining full-time total of interest on the lease obligation and amortiza- employees. Funding is based upon actuarially deter-tion of the leased property equals the rental expense mined computations that take into account the allowed for ratemaking purposes. (See Note 8.) amount deductible for income tax purposes and the
minimum contribution required under the Employee months or less to be cash equivalents for purposes of Retirement Income Security Act of 1974. (See the Consolidated Statement of Cash Flows.
Note 11.)
Reclasstficatlon Cash Equivalents Certain amounts from prior years'inancial The Company considers all highly liquid debt in- statements have been reclassified to conform to the struments purchased with original maturities of three current year presentation.
- 2. Rate Matters In March 1989, the PUC permitted the Company's In December 1988, the PUC approved two rate fil-1989-90 ECR to become effective, as filed, on April 1, ings made by the Company related to changes in 1989. A group of industrial customers filed a com- depreciation and State Tax Adjustment Surcharge plaint with respect to the 1989 ECR filing generally (STAS) and ITA tax issues. These changes produced an opposing the Company's recovery on a current basis overall net reduction in operating expenses which in through the ECR of the cost of power purchased from turn produced a corresponding net reduction in the certain non-utility generating companies. In June Company's annual retail rates of approximately $ 13.6 1989, a PUC Administrative Law Judge (ALJ) issued a million effective January 1, 1989.
recommended decision granting the Company's mo- The depreciation changes approved by the PUC tion to dismiss the complaint. In August, the PUC in a were principally: (i) an increase in annual depreciation 2 to 2 tie vote was unable to decide whether to ac- for the Susquehanna station to comply with the provi-cept the ALJ's recommended decision and the com- sions of SFAS 92 and (ii) a deCrease in annual depre-plaint remains pending before the PUC. The Company ciation associated with a lengthening of the depre-cannot predict the ultimate outcome of this ciable lives of certain fossil-fueled generating plants to proceeding. reflect the Company's commitment to continue the In November 1988, the FERC accepted for filing a operation of these plants beyond the depreciable lives
$ 3.5 million rate increase request for wholesale cus- previously reflected in rates.
tomers effective December 1, 1988. The new rates The PUC also approved the Company's request to reflect a change in the depreciation of the Susquehan- roll into base rates part of the STAS credit and the na station to comply with the provisions of Statement ITA credit associated with the current year's tax ex-of'Financial Accounting Standards (SFAS) 92, "Regu- pense. An ITA credit to refund a 1988 overcollection lated Enterprises Accounting for Phase-in Plans," (see terminated at the end of 1989.
Note 3) with respect to wholesale tariffs.
- 3. Rate Phase-in Plan In the fourth quarter of 1988, the PUC and the for financial reporting purposes. The difference be-FERC accepted the Company's requests to increase tween straight-line depreciation and the amount of the annual depreciation for the Susquehanna station to depreciation for Susquehanna reflected in electric rates comply with SFAS 92, which established new account- is shown as deferred depreciation on the Consolidated ing rules for rate phase-in plans associated with a ma- Statement of Income and the Consolidated Balance jor newly constructed generating plant. As a result, in Sheet. The adoption of SFAS 92 had no effect on net 1988 the Company adopted application of SFAS 92 income or common equity.
- 4. Deferral of Susquehanna Operating and Carrying Costs In accordance with orders of the PUC, the Com- plus related deferred income taxes totaled $ 39.2 pany deferred certain operating and capital costs, net million at December 31, 1989. The Company expects of energy savings, associated with Units 1 and 2 at the to ultimately recover this amount in rates charged to Susquehanna station. The costs deferred were incurred customers. Such recovery will be subject to PUC from the date the units were placed in commercial review and approval. No return is being accrued on operation until the effective dates of the rate increases the deferred costs.
reflecting operation of the units. The deferred costs 35
Notes Continued
- 5. Sales to Other Electric Utilities The Company provides Atlantic City Electric Com- sales is based on a percentage of the rate the utilities pany (Atlantic) with 125,000 kilowatts of capacity and would have paid to purchase installed capacity under energy from the Susquehanna station and Jersey Cen- the PJM arrangement.
tral Power and Light Company QCP&L) with 945,000 The maximum amount of capacity credits to be sold kilowatts of generating capacity and energy from all of to BG&E varies from time to time through the year the Company's generating units. Sales to Atlantic 2001, and the amount sold will depend on BG&E's began in 1983 and expire in 1991, when another needs. GPU has agreed to purchase 293,000 kilowatts agreement provides Atlantic with 125,000 kilowatts of of capacity credits from June 1, 1990 through May 31, capacity and energy from the Company's coat-fired 1991 and 390,000 kilowatts from June 1, 1991 stations until the year 2000. Sales to JCP&L began in through May 31, 1995. The agreement with GPU will 1985 and will continue at the 945,000 kilowatt level become effective upon compliance with certain condi-through 1995, with the amount then declining tions, including no adverse determinations by state uniformly each year until the end of the agreement regulatory commissions and acceptance of the agree-in 1999. ment by the FERC.
The Company has an agreement with Baltimore Gas The Company has also entered into arrangements and Electric Company (BG&E) under which BG&E with several utilities outside the PJM for the reserva-will purchase 125,000 kilowatts of the Company's tion of output from the oil-fire units at the Com-share of capacity and related energy from the Sus- pany's Martins Creek station during certain periods of quehanna station. Sales to BG&E will begin in Oc- time. Specific deliveries of energy are requested by tober 1991, immediately following the expiration of the purchasing utility as needed during the reserva-the current agreement with Atlantic, and will continue tion period.
through May 2001. Arrangements have been entered into whereby These three agreements provide that sales are to be other PJM utilities can purchase the Company's en-made at a price equal to the Company's cost of pro- titlements to use the PJM transmission system to im-viding service, which includes a return on the Com- port energy from utilities outside PJM. These sales pany's investment in generating capacity. generally occurred through monthly auctions in 1989, In addition to these bulk power contractual sales, but the Company has recently entered into agree-the Company has entered into agreements with BG&E ments which provide for the sale of transmission and General Public Utilities Service Corporation (GPU) entitlements to other utilities for extended periods of for the sale of capacity credits from the Company's time at negotiated prices.
system capacity. These capacity credits are used by During 1989, revenue from the sale of capacity the other utilities to meet their installed capacity credits, the reservation of output from the Martins, obligation in the Pennsylvania-New Jersey-Maryland Creek oil-fire units and the sale of transmission en-Interconnection (PJM). The price received for these titlements totaled $ 23.3 million.
- 6. Income Taxes Total federal income tax expense was reduced in In December 1987, the FASB issued SFAS 96, "Ac-1987 and further reduced in 1988 primarily as a result counting for Income Taxes," which established new of the lower federal income tax rate included in the accounting rules that will change the manner in which Tax Act. The net reduction in federal income tax ex- income tax expense is determined for accounting pur-pense due to the Tax Act has been reflected in lower poses. Prior accounting rules utilized a deferred rates to the Company's customers. method while SFAS 96 utilizes a liability method The Company estimates that approximately $ 40 under which deferred tax liabilities are recorded and million of investment and $ 4 million of payroll-based adjusted for the effect of a change in tax law or rates.
tax credits will be available to reduce federal income The FASB has delayed the effective date for SFAS 96 tax liabilities in 1990 and future years. The carryfor- to fiscal years beginning after December 15, 1991.
ward period for the unused credits at December 31, The Company does not intend to adopt SFAS 96 until 1989 expires in the years 1999 to 2004. the revised effective date because the FASB is con-In accordance with PUC rate treatment, the Com- sidering amendments that could affect implementation pany has not recorded deferred income taxes for cer- of the statement.
tain timing differences. The cumulative net amount of It is expected that when the Company adopts SFAS such timing differences for which deferred income 96, an increase in the deferred tax liability will be taxes have not been recorded approximated $ 556 recorded for tax benefits previously flowed through million at December 31, 1989. The Company would to customers and for other temporary tax differences.
expect to recover through electric revenues the taxes The increased tax liability will be offset by a cor-when due in future years. responding asset representing the future revenue ex-
pected to be provided through the ratemaking process prohibits utilities from adjusting, to the 34/o tax rate, to pay for the tax liability. certain deferred tax reserves related to depreciation.
Because the Tax Act lowered the maximum cor- As a result, when the Company adopts SFAS 96, no porate federal income tax rate from 46% to 34Fo, substantial reduction in existing deferred income tax most entities when adopting SFAS 96 will be required reserves is expected because of the lower federal to adjust their deferred income tax reserves to reflect tax rate.
the lower tax rate. However, the Tax Act essentially
- 7. Stock Held For Dividend Reinvestment Plan At December 31, 1989, the Company temporarily ticipants in the Dividend Reinvestment Plan in held 234,228 shares of Common Stock which were January 1990.
acquired in the open market and distributed to par-
- 8. Leases The Company and a subsidiary have entered into capital leases consisting of the following (thousands of dollars):
December 31 1989 1988 Nuclear fuel, net of accumulated amortization (1989, $ 176,695; 1988, $ 190,645) .. $ 263,477 $ 288,834 Vehicles, oil storage tanks and other property, net of accumulated amortization (1989, $ 67,920; 1988, $ 64,451). 79,434 83,972 Net property under capital leases $ 342,911 $ 372,806 Capital lease obligations incurred for the acquisition million in imputed interest. During the five years end-of nuclear fuel and other property were (millions of ing 1994, such payments would decrease from $ 22.5 dollars): 1989, $ 55.8; 1988, $ 46.7 and 1987, $ 96.8. million per year to $ 10.5 million per year.
Nuclear fuel lease payments, which are. charged to Interest on capital lease obligations was recorded as expense as the fuel is used for the generation of elec- operating expenses on the Consolidated Statement of tricity, were (millions of dollars): 1989, $ 86.1; 1988, Income in the following amounts (millions of dollars):
S84.5 and 1987, $ 86.7. Future nuclear fuel lease 1989, $ 25.2; 1988, $ 20.3 and 1987, $ 19.2.
payments will be based on the quantity of electricity Generally, capital leases contain renewal options produced by the Susquehanna units. The maximum and obligate the Company and a subsidiary to pay amount of unamortized nuclear fuel leasable under maintenance, insurance and other related costs.
current arrangements is S350 million. Various operating leases have also been entered into Future minimum lease payments under capital leases which are not material with respect to the Company's in effect at December 31, 1989 (excluding nuclear financial position.
fuel) would aggregate $ 103.2 million, including $ 23.7
- 9. Coal-Mining Operations The Company purchased approximately $ 163 of coal purchased from other sources.
million of coal from certain subsidiary companies in All the coal produced at the Greenwich mines is 1989 at prices equal to the cost of mining. The cost delivered to the Company's Montour generating sta-of coal purchased is included in the energy costs col- tion and currently accounts for approximately 45 Jo of lected from customers. The cost of coal purchased the coal delivered to Montour. The PUC has adopted from subsidiaries (particularly coal from the Green- a standard based on the cost of coal purchased by wich mines) has generally been higher than the cost other Pennsylvania electric utilities against which the 37 '
Notes Continued cost of all coal delivered to Montour is measured. The vestments in coal, mining equipment and other standard covers the two-year period from April 1, facilities will be recovered and that coal will be pro-1988 through March 1990. Unless the standard is con- duced at prices that will be recovered in electric rates.
tinued beyond March 1990, the net amount of any However, the Company cannot predict whether costs in excess of the standard during this two-year regulatory action, proposed legislation related to period will be returned to PUC customers through the health care benefits for miners or other events could Company's 1991-1992 ECR. Data as to the standard is affect its plans for these mines, possibly resulting in available for the period April 1, 1988 through August an adverse impact on the Company's earnings.
31, 1989. For this period, the cost of coal delivered to At December 31, 1989, the capital investment in Montour was less than the standard. subsidiary coal-mining operations amounted to about Plans have been adopted which will result in phas- $ 50 million, a decrease of about $ 14 million from the ing out subsidiary coal-mining operations in the early end of 1988.
1990s. The Company expects that over this period in-
- 10. Credit Arrangements The Company issues commercial paper and, from has a revolving credit arrangement with a group of time to time, borrows from banks to provide short- banks as a back-up for short-term borrowings. The term funds required for general corporate purposes. banks have agreed to lend the subsidiary up to $ 100 In addition, certain subsidiaries also borrow from million on a revolving basis in return for the payment banks to provide short-term funds. Bank borrowings of commitment fees. Interest rates for borrowings generally bear interest at rates negotiated at the time would be based on the London interbank offered rate of the borrowing. in effect at the time of the borrowing. No borrowings Revolving credit arrangements are maintained with a were outstanding at December 31, 1989 under these group of banks in return for the payment of commit- revolving credit arrangements.
ment fees. The line of credit is maintained principally The Company also maintains lines of credit aggre-as a back-up for the Company's commercial paper. gating $ 32 million with various banks in return for the Effective November 1, 1989, the Company reduced maintenance of compensating balances or the pay-the line of credit from $ 200 million to $ 185 million. ment of commitment fees. No borrowings were Any loans made under these credit arrangements outstanding at the end of 1989 under these would mature on June 30, 1992 and, at the option of credit lines.
the Company, interest rates would be based upon cer- Commitment fees incurred were (millions of tificate of deposit rates, Eurodollar deposit rates or the dollars): 1989, $ 0.5; 1988, $ 0.6 and 1987, $ 0.7.
prime rate. In addition, a subsidiary of the Company
- 11. Pension Plan and Other Postemployment Benefits The Company has a noncontributory defined SERP is a non-qualified plan under the Internal benefit pension plan (Plan) covering substantially all Revenue Code and has no advanced funding. Benefit employees. Benefits are based upon a participant's payments are made directly by the Company to earnings and length of participation in the Plan, sub- retired employees or their beneficiaries. At December ject to meeting certain minimum requirements. 31, 1989, the projected benefit obligation of the SERP The Company also has a Supplemental Executive was approximately $ 6.9 million.
Retirement Plan (SERP) for certain management The components of the Company's net periodic employees. Benefits are based on the employees'er- pension cost were (thousands of dollars):
vice and earnings as defined in the SERP. The 1989 1988 1987 Service cost benefits earned during the period $ 25,542 $ 23)510 $ 23,578 Interest cost 33,895 30,682 27,453 Actual return on plan assets ........ (119,572) (56,381) (21,365)
Net amortization and deferral ....... 77,420 19,528 ~)2,217)
Net periodic pension cost $ 17,285 $ 17,339 $ 17,449
The net periodic pension cost charged to operating construction and other accounts.
expenses was $ 10.8 million in 1989 and $ 10.9 million The funded status of the Company's Plan was each in 1988 and 1987. The balance was charged to (thousands of dollars):
December 31 1989 1988 Fair value of plan assets $ 668,125 $ 567,192 Actuarial present value of benefit obligations:
Vested benefits 308,454 285,417 Nonvested benefits. 1,862 2,012 Accumulated benefit obligation 310,316 287,429 Effect of projected future compensation .... 156,938 140,238 Projected benefit obligation . 467,254 427,667 Plan assets in excess of projected benefit obligation 200,871 139,525 Unrecognized transition assets (being amortized over 23 years) (90,395) (94,915)
Unrecognized prior service cost 5,085 (591)
Unrecognized net gain (129,937) ~42,030)
(Accrued) prepaid expense $ (14,396) $ 1,989 The weighted average discount rate and rate of in- employees when premiums are paid. However, the crease in future compensation used in determining the subsidiary mining companies include in an accrual for 1989 actuarial present value of the projected benefit future mine closing costs an amount to pay for such obligation were 7.5% and 6.4%, respectively. The ex- benefits after mining operations have ended. The cost pected long-term rate of return on Plan assets was of retiree health and life insurance benefits recognized 7.5%. Plan assets consist primarily of common stocks, as expense by the Company and its subsidiaries was gpyernment and corporate bonds and temporary cash approximately (millions of dollars): 1989, $ 4.7; 1988, invhstments. $ 4.7 and 1987, $ 3.6.
Subsidiary mining companies have noncontributory In February 1989, the FASB proposed new rules for defined benefit pension plans covering substantially all, accounting for the costs of these benefits. The FASH non-bargaining, full-time employees which are fully proposal would require accrual, during the years that funded primarily by group annuity contracts with in- the employees render the necessary service, of the ex-surance companies. Substantially all union employees pected cost of providing those benefits. The Company of these subsidiaries are covered by a pension plan cannot predict what final accounting rules the FASB administered by the Trustees of the United Mine may adopt; however, based on the Company's current Workers of America (UMWA) Health and Retirement postretirement health care benefits, the proposed ac-Funds. The pension cost for non-bargaining em- counting rules would increase the annual cost of pro-ployees together with contributions to the UMWA viding for these benefits by an amount which has not Health and Retirement Funds for 1989, 1988 and 1987 been determined, but could be substantial.
aggregated $ 3.7 million, $ 3.8 million and $ 7 4 million, The Company has an Employee Stock Ownership respectively. Unfunded vested benefits of employees Plan (ESOP) for all full-time employees having more participating in the UMWA Health and Retirement than one year of service. Contributions to the ESOP Funds have not been determined. through 1989 were funded with investment tax Subsidiary mining companies are liable under credits previously available to the Company under federal and state laws to pay black lung benefits to Federal law to acquire shares of the Company's Com-claimants and dependents, with respect to approved mon Stock. The Company expects that the allocation claims, and are members of a trust which was of shares purchased with these tax credits will be established to facilitate payment of such liabilities. The substantially completed in 1991. The ESOP was actuarially determined expense for black lung benefits amended, effective January 1, 1990, to require that for 1989, 1988 and 1987 was $ 0.5 million, $ 1.2 dividends on shares credited to participants'ccounts million and $ 3.7 million, respectively. be paid in cash. This will permit the Company to Substantially all employees of the Company and its deduct the amount of those dividends for income tax subsidiaries will become eligible for certain health care purposes and to contribute to the ESOP shares having and life insurance benefits upon retirement. The Com- a cost equal to the tax savings resulting from that pany recognizes the cost of these benefits for retired deduction and contribution.
39
Notes Continued
- 12. Jointly Owned Facilities At December 31, 1989, the Company individually in the following facilities (millions of dollars):
or through a subsidiary owned undivided interests Merrill Generating Stations Creek Susquehanna Keystone Conemaugh Reservoir Ownership interest 90.00% 12.34% 11.39% 8.37%
Electric utility plant in service ... $ 3,919 $ 43 $ 44 Other property . $ 20 Accumulated depreciation....... 262 19 18 1 Construction work in progress... 15 3 1 1 Each participant in these facilities provides its own is reflected on the Consolidated Statement of Income.
financing. The Company receives a portion of the The Merrill Creek Reservoir provides water during total output of the generating stations equal to its periods of low river flow to replace water from the percentage ownership. The Company's share of fuel Delaware River used by the Company and other and other operating costs associated with the stations utilities in the production of electricity.
- 13. Preferred Stock Litigation Settlement As of July 1989, the claims of certain former ly $ 4 million to the former holders which was holders of the 10.75%, 11.00% and 14.00% Series substantially less than the redemption premiums the Preferred Stock related to the redemption of those holders claimed the Company was liable to pay. $ hese shares in December 1986 were settled and legal pro- payments were charged to retained earnings as a cost ceedings instituted against the Company by those of redeeming the stock and accordingly, had no effect holders were dismissed. The settlements provided for on earnings applicable to common stock.
the Company to make payments totaling approximate-
- 14. Commitments and Contingent Liabilities The Company's construction expenditures are members'uclear generating plants. Facilities at the estimated to aggregate $ 320 million in 1990, $ 352 Susquehanna station are insured against property million in 1991 and $ 351 million in 1992, including damage losses up to $ 2.0 billion under these pro-AFUDC. See "Capital Expenditure Requirements" on grams. The Company is also a member of an in-page 21 for additional information. surance program which provides insurance coverage The Company is a member of certain insurance pro- for the cost of replacement power during prolonged grams which provide coverage for property damage to outages of nuclear units caused by certain specified
conditions. Under the property and replacement switching to low sulfur coal processed through coal power insurance programs, the Company could be cleaning plants. In addition, the Company may have assessed retrospective premiums in the event the in- to limit the capacity factors of certain of its affected surers'osses exceed their reserves. The maximum units and, to the extent permitted by the legislation, amount the Company could be assessed under these take advantage of trading emission allowances among programs at December 31, 1989 was about $ 12 its generating units or with other utility companies.
million. The Company estimates that the cost of compliance In 1987, the Nuclear Regulatory Commission (NRC) with the proposed Phase I standards would require an amended its regulations to require that any proceeds increase in customer rates of about 3% (based on of property damage insurance be segregated and used, 1989 revenue levels) and anticipates that the increased first, to place and maintain the reactor in a safe and costs would be recoverable through the ECR included stable condition and, second, to complete required in the Company's PUC tariffs, the fuel adjustment decontamination operations before any insurance pro- clause included in the Company's FERC tariffs and ceeds would be made available to the Company or pursuant to the contracts under which the Company the trustee under the mortgage. Under these regula- sells capacity and energy to other utilities.
tions, such requirements were to be incorporated in To meet the Phase II sulfur dioxide standards, the the Company's on-site property damage insurance Company expects it would be required to install policies for the Susquehanna station before October scrubbers on about 75% of its coal-fired generating 1988. The NRC, however, is in the process of revising capacity as well as to continue its Phase I compliance its regulations to postpone the implementation of activities on the balance of its coal-fired generating these requirements to April 1990. In the interim, the capacity. In addition, low-nitrogen oxide burners may NRC has granted an extension for compliance under have to be installed on all of the Company's coal-fired the existing regulations. The Company is unable to generating units to meet the as yet unspecified predict what effect the revised regulations may have nitrogen oxide emission limitations contemplated by at the time insurance proceeds would be paid. the proposed legislation. The cost of compliance with The Company's public liability for claims resulting the proposed Phase II standards is currently estimated from a nuclear incident at the Susquehanna plant is to require an increase in customer rates (based on limited to about $ 7.8 billion under provisions of The 1989 revenue levels) of 8Ão to 10'bove the 3% in-Price Anderson Amendments Act of 1988 (the Act). crease expected to result from Phase I compliance.
The Company is protected against this liability by a Under current Pennsylvania law, construction work in combination of commercial insurance and an industry progress for nonrevenue producing assets, such as assessment program. A utility's liability under the capital expenditures for pollution control equipment, assessment program will be indexed not less than can be claimed in rate base.
qnce during each five year period for inflation and In addition to the legislation being proposed by the will be subject to an additional surcharge of 5 in Bush Administration, there are other bills currently the event the total amount of public claims and costs pendihg in Congress dealing with clean air issues, in-exceeds the basic assessment. In the event of a cluding acid rain. The Company will not be able to nuclear incident at any of the reactors covered by the determine the exact method of compliance, or the Act, the Company could be assessed up to $ 126 cost thereof and its impact on customer rates, until million per incident, payable at a rate of $ 20 million legislation is enacted and implementing regulations are per year, plus the additional 5% surcharge, if adopted by the appropriate regulatory bodies.
applicable. In complying with statutes, regulations and actions There is currently pending in Congress legislation by regulatory bodies involving environmental matters, sponsored by the Bush Administration dealing with including the areas of water and air quality, hazardous acid rain. Under the Bush Administration proposal, and solid waste handling and disposal and toxic sulfur dioxide emissions must meet specified substances, the Company may be required to modify, Phase I levels by January I, 1996 and must meet more replace or cease operating certain of its facilities. The stringent Phase II emission levels by January 1, 2001. Company may also incur substantial capital expen-In addition, currently unspecified reductions of nitro- ditures and operating expenses in amounts which are gen oxide emission levels must be made by the Janu- not now determinable.
ary I, 2001 compliance date proposed for Phase II. At December 31, 1989, the Company had The Company currently expects that it will be able guaranteed $ 18 million of obligations of certain un-to meet the Phase I sulfur dioxide standards by consolidated companies.
Selected Financial and Operating Data 1989 1988 1987 1986 CONSOLIDATED OPERATIONS Income Items thousands Operating revenues . $ 2,356,446 $ 2,213,903 $ 2,090,244 $ 2,190,128 Operating income 618,850 6o5,o51 590,637 597,529 Net income(a) . 353,436 332,o42 302,461 300,108 Earnings applicable to common stock (a).......... 305,018 279,865 248I035 231,051 Balance Sheet Items thousands(b)
Electric utilityplant in service net.............. $ 6,198,693 $ 6,056,723 $ 5,970,000 $ 5,815,838 Construction work in progress . 115,799 177,333 141,960 224,426 Other property, plant and equipment net........ 552,150 607,528 655,254 691,820 Total assets. 7,598,968 7,524,648 7,457,346 7,413,105 Long-term debt 2,650,276 2,626,784 2,587,500 2,849,972 Preferred and preference stock With sinking fund requirements. 409,990 438,290 495,590 475,239 Without sinking fund requirements............ 231,375 231,375 231,375 231,375 Common equity 2,139,338 2,049,831 1,969,971 1,915,649 Short-term debt 95,429 201,652 298,321 243,588 Total capital provided by investors .............. 5,526,408 5,547,932 5,582,757 5,715,823 Financial Ratios Return on average common equity % (a)......... 14.62 13.86 12.78 12.11 Embedded cost rates(b)
Long-term debt % . 9.80 10.15 10.31 10.53 Preferred and preference stock %............ 7.62 7.66 7.77 8.33 Times interestearned before income taxes
........ 2.78 2.65 2.62 2.69 Ratio of earnings to fixed charges total enterprise basis(c) . 2.69 2.57 2.53 2.58 Depreciation as % of average depreciable property .. 2.7 2.6 2.5 23 Common Stock Data Number ofshares outstanding thousands Year-end ... 75,423 75,248 74 972 74,513 Average .................................
Earnings per share (a) .
75,314
$ 4.05 75,071 74,644 74,513
$ 3.73 $ 3.32 $ 3.10 Dividends declared per share $ 2.s6 $ 2.76 $ 2.68 $ 2.58 Book value per share (b) . $ 28.36 $ 27.23 $ 26.26 $ 25.71 Market price per share (b) $ 427/s $ 36i/ $ 33 $ 36i/,
Dividend payout rate % (a) 71 74 81 83 Dividend yield % (d) .
7.33 7.70 737 7.30 Price earnings ratio (a) (d) 9.63 9.61 10.95 11.39 ELECTRIC OPERATIONS Revenue Data By class of service thousands Residential $ 768,051 $ 737 o66 $ 714,753 Commercial . 592,023 572,623 557,216 Industrial . 495,968 492,491 473,4ss Other energy sales 75,507 74,228 74,o47 System sales . 1,931,549 1,876,408 1,819,504 Contractual sales to other utilities............... 264,76o 275,339 292,o44 Total from energy sales billed 2,254,769 2,196,309 2,151,747 2,111,548 Unbilled revenues net . 39,628 (18,187) 's4',sss) 52,344 Other operating revenues . 60,373 34,o73 21,900 25,033 Total electric operating revenues............. $ 2,212,195 $ 2,088,759 '$2,188,925 Average price per kwh billed cents Residential 7.72 7.79 8.05 8.15 Commercial . 7.4o 7.46 7.6s 7.78 Industrial . 5.6o 5.64 5.84 5.93 Total for ultimate customers 6.97 7.02 723 7.34 Total for all customers 6.5o 6.5o 6.6s 6.94 Total forsystem sales . 6.89 6.91 7.12 7.25
( a ) 1981 net income and earnings app! icable to common stock include a nonrecurring credit related to an accounting change, while indicated financial ratios and common stock data for that year are computed excluding the nonrecurring credit from earnings.
(b) Year-end.
i>
c.
1979-1989 1985 1984 1983 1982 1981 1980 1979 % Change
$ 1,977,981 $ 1,564,542 $ 1,250,071 $ 1,221,379 $ 1,134,903 $ 886,727 $ 861,985 173.4 536,115 418,689 300,563 236,430 227,044 180,782 194,026 219.0 290,613 318,903 296,011 278,886 244,077 179,759 182,198 94.0 199,327 226,758 210,173 210,572 183,182 120,384 133,532 128.4
$ 5,776,687 $ 3,856,738 $ 3,842,826 $ 2,107,651 $ 2,049,418 $ 1,949,904 $ 1,881,006 229.5 161,684 2,020,780 1,730,223 2,923,744 2>312,289 1>874,397 1,473,187 (92.1) 699,448 733,002 670,239 582,740 496,739 394,003 346,263 59.5 7,255,918 7,231,058 6,744,180 6,152,976 5,410,245 4,654,055 4,087,511 85.9 2,664,564 2,674,036 2,477>700 2,417,244 2,261,767 1,920,269 1,656,286 60.0 691,010 738,027 714,830 621,634 544,231 510,800 441,400 (7 1) 231,375 231,375 231,375 231,375 231,375 231,375 231,375 1,905,700 1,896,987 1,767,949 1,643,695 1,435,437 1,250,717 1,113,441 92.1 247,260 278,652 351,194 324,664 321,481 162,315 101,884 (6.3) 5,739,909 5,819,077 5,543,048 5,238,612 4,794,291 4,075,476 3,544,386 55.9 10.42 12.30 12.29 >>.60 12.74 10.38 12.91 13.2 11.23 11.11 10.98 10.80 10.84 10.71 9.32 5.2 10.02 9.94 9.66 9.41 893 8.49 8.43 (9 6) 2.28 2.24 2.20 1.94 1.79 1.92 2.42 14.9 2.19 2.06 2.05 1.81 1.77 1.90 2.40 12.1 23 2.7 2.9 34 34 3.3 3.3 (18.2) 74,513 74,513 70,335 66,461 58,447 50,627 43,497 73.4 74,513 72,767 68,642 62,809 53,912 45,598 40,231 87.2
$ 2.68 $ 3.12 $ 3.06 $ 3.35 $ 3.17 $ 2.64 $ 3.32 22.0
$ 2.56 $ 2.48 $ 2.40 $ 2.32 $ 2.24 $ 2.12 $ 2.04 40.2
$ 25.58 $ 25.46 $ 25.12 $ 24.71 $ 24.52 $ 24.68 $ 25.57 10.9
$ 28$ $ 25i/s $ 20s/s $ 21 $ 17/, $ 15/s $ 174 141.5
- 9) 80 79 70 72 82 14.5 9.81 11.00 10.48 11.95 13.34 12.01 10.38 (29.4) 9.76 7.24 7.48 5.79 5.30 6.68 5.92 62.7
$ 634,669 $ 591,922 $ 529,911 $ 503,557 $ 411,668 $ 349,714 $ 341,987 127.1 492,686 441,651 386,617 363,233 292,984 246,024 232,610 163.4 438,427 411,533 367,950 347,726 295,006 245,513 244,265 100.1 64,223 59,526 47,275 47,731 39,484 28,480 27,664 189.7 1,630,005 1,504,632 1,331,753 1,262,247 1,039,142 869,731 846,526 131.3 232,598 31,809 18,494 1,862,603 1,536,441 1,350,247 1,262>247 1,039,142 869,731 846,526 166.4 78,545 (9,725) (119,539) (61,652) 76,884 30,059 29,960 12,972 12,708 10,142 10,595 9,941 507 3
$ 1,971,207 $ 1,556,676 $ 1,243,680 $ 1,213,303 $ 1,126,168 $ 880,326 $ 856,467 174.9 7.60 7.00 6.51 6.26 5.09 434 4.24 82.1 732 6.77 6.32 6.11 4.97 4.28 4.19 76.6 5.55 5.07 4.83 4 75 3.70 3.10 3.00 86.7 6.85 6.30 591 5.74 4.59 3.90 3.79 83.9 6.62 6.27 5.86 5.66 4.53 3.87 3.75 733 6.77 6.23 5.83 5.66 4.53 3.87 3.75 83.7
( c) Computed using earnings and fixed charges of the Company and all of its afBUated companies. Fixed charges consist of interest on short-and long. term debt, other interest charges, interest on capital lease obligations and the estimated interest component ofother rentals.
(d) Based on avenge of month~nd market prices.
43
Selected Financial and Operating Data 1989 1988 1987 1986 ELECTRIC OPERATIONS (Continued)
Sales Data Customers (a) 1,143,591 1,122,628 1,097,518 1,073,146 Average annual residential kwh use.........
Electric energy sales billed millions of kwh 10,064 10,059 9,565 9 344 Residential 10,061 9,856 9,157 8,771 Commercial 8,285 7,932 7,457 7,159 Industrial 8,723 8,799 8,438 7,986 Other 1,333 1,36o 1,285 1,170 System sales 28,402 27,947 26,337 25,086 Contractual sales to other utilities......... 6,27o 5,819 5,s6s 5,339 Total electric energy sales billed........ 34,672 33,766 32,205 30,425 Sources of energy sold millions of kwh Generated Coal-fired steam stations 27,104 26,6o7 26,465 25,151 Nuclear steam station (b) .. 11,916 12,867 13,285 10,151 Oil-fired steam station. 3,817 4,1s6 4,095 5,453 Combustion turbines and diesels(oil).... 107 57 28 17 Hydroelectric stations . 714 573 689 739 43,658 44,29o 44,562 41,511 Power purchases .. 3,586 3,027 2,707 2,032 Interchange power sales . (9~920) (11,304) (13,015) (11,281)
Company use, line losses and other . (2,652) (2,247) (2,049) (1,837)
Total electric energy sales billed .. 34,672 33,766 32,205 30,425 Generation Data Net system capacity thousands of kw (a) (c)..... 7,s64 7,479 7,499 7,519 Winter peak demand thousands of kw (d)...... 6',ooo 5,566 5,591 5,154 Generation by fuel source %
Coal . 62.1 6o.l 594 6o.6 Nuclear(b) . 27.3 29.0 29.8 244 Oil .. 9.0 9.6 9.3 13.2 Hydroelectric 1.6 1.3 1.5 1.8 Steam station availability %
Coal-fired 81.1 81.3 83.3 7$ .8 Nuclear(b) . 72.1 77.7 so.4 61.7 Oil-fired . 76.3 90.1 84.7 s4.7 Steam station capacity factor %
Coal-fired 74.6 73 1 72.9 69.3 Nuclear(b) . 72.0 77.7 80.5 61.3 Oil-fired 26.6 29.1 28.5 38.0 Fuel Cost Data Cost per kwh generated cents Coal-fired steam stations . 1.61 1.64 1.63 1.67 Nuclear steam station (b) . 0.58 o.56 o.56 0.58 Oil-fired steam station . 3.03 2.76 3.23 2.96 Combustion turbines and diesels (oil)......... 5.95 5.89 6.51 7.81 Average .. 1.46 1.44 1.46 1.57 Cost of fossil fuel received at steam stations Coal per ton. $ 39.04 839 52 839.30 $ 40.17 Crude and residual oil per barrel ........... $ 17.71 $ 15.95 818.51 $ 16.83 Capitalization Ratios %
Long-term debt . 4s.3 479 469 50.4 Short-term debt . 0.2 1.7 3.1 2.1 Preferred and preference stock . 11.9 12.4 13.5 12.8 Common equity. 39.6 38.0 36.5 34.7 Times Interest Earned Before Income Taxes... 2.88 2 73 2.71 2.80 Employees(a) . 8,108 8,306 8,301 8,339 a) Year-end.
b) The Company's first nuclear unit was placed ln commercial operation on June 8, 1983 and the second unit on February 12, 1985.
1979-1989 1985 1984 1983 1982 1981 1980 1979 %Change 1,055,546 1,039,381 1,026,144 1,013,623 1,006,570 999,525 987,005 15.9 9,034 9,282 9,051 9,039 9,157 9,205 9,353 7.6 8,354 8,454 8,138 8,045 8,088 8,056 8,066 24.7 6,728 6,527 6,119 5,946 5,893 5,743 5,554 49.2 7,907 8,117 7,623 7,324 7,968 7,910 8,135 7.2 1,082 1,043 968 982 1,005 784 800 66.6 24,071 24,141 22,848 22)297 22,954 22,493 22,555 25.9 4,048 357 209 28,119 24,498 23,057 22,297 22,954 22,493 22,555 53.7 26,237 26,695 26,885 25,477 24,841 26,596 26,487 11>534 6,295 4,509 293 4,316 '4,121 5,581 3,186 4,705 5,692 5,777 (33.9) 18 32 45 13 32 33 37 189.2 612 747 700 612 622 533 799 (10.6) 42,717 37,890 37,720 29,581 30,200 32,854 33,100 319 3,716 3,765 3,880 1,414 744 1,415 2,124 68.8 (16,235) (15,377) (16,405) (6,900) (6,274) (9,798) (11,089) (10.5)
(2,079) (1,780) (2,138) (1,798) (1,716) (1,978) (1,580) 67.8 28,119 24,498 23,057 22,297 22,954 22,493 22,555 53.7 7,513 7,484 7,494 6,546 6,546 6,546 6,546 20.1 4,981 5,519 4,869 4,489 5,207 4 945 4,427 35.5 61.4 70.4 71.3 86.1 82.2 81.0 80.0 (22.4) 27.0 16.6 11.9 1.0 10.2 11.0 14.9 10.8 15.7 17.4 17.6 (48.9) 1.4 2.0 1.9 2.1 2.1 1.6 2.4 (33.3) iD
<<>+,, 78.6 75.2 78.8 79.1 74.7 78.7 76.6 5.9 70.7 66.7 67.7 87.2 68.0 75.8 80.4 73 4 79.6 80.0 (4.6) 72.3 733 74.0 70.2 68.4 73.0 73.1 2.1 70.5 65.7 67.5 30.0 28.6 38.8 22.2 32.8 39.5 40.2 (33.8) 1.78 1.75 1.68 1.77 1.64 1.40 1.30 23.8 0.61 0.54 0.66 5.02 5.31 5.23 5.62 5.75 4.55 3.20 (5.3) 931 9.82 10.21 10.74 10.51 7.89 4.68 27.1 1.81 1.98 2.15 2.20 2.30 1.96 1.65 (1 1.5)
$ 42.00 $ 42.75 $ 39.37 $ 42.32 $ 39.59 $ 33.78 $ 30.70 27.2
$ 28.42 $ 31.32 $ 29.79 $ 30.94 $ 33.47 $ 26.44 $ 18.81 (5 8) 47.1 46.7 45.1 46.7 47.6 469 46.2 45 1.7 1.9 3.6 3.2 39 1.5 0.9 (77.8) 16.7 17.4 17.9 17.1 17.0 19.2 199 (40.2) 34.5 34.0 33.4 33.0 31.5 32.4 330 20.0 2.37 2.35 2.29 2.05 1.91 2.06 2.64 9.1 8,433 8,386 8,160 8,208 7,999 7,702 7,590 6.8
( c ) Total generating capacity plus firm capacity purchases less firm capacity sales.
(d) The winter peaks shown were reached early in the subsequent year for years except 1989.
45
Shareowner and Investor Information The following information is Record Dates: The 1990 record Lost Stock or Bond Certificates:
provided as a service to share- dates for dividends are March 9, Please call or write to Investor owners and other investors. For June 8, September 10 and Decem- Services for an explanation of the any questions you may have ber 10. procedure to replace lost stock or or additional information you bond certificates.
may require about PP &Lor Direct Deposit of Dividends: Publications: Several publica-your investments in the com- Shareowners may choose to have tions are prepared each year and pany, please feel free to call their dividend checks deposited sent to all investors of record and the toll-free number listed directly into their checking or to others who request their names below, or write to: savings account. Quarterly divi- be placed on our mailing lists.
George I. Kline, hfanager dend payments are electronically These publications are:
Investor Services Department credited on the dividend date, or the first business day thereafter.
Annual Report published and Pennsylvania Power &LightCo. mailed to all shareowners of Two North Ninth Street Dividend Reinvestment Plan: record in mid-March.
Allentown, Pa. 18101 Shareowners may choose to have Sbareowners'Newsletter an Toll-Free Phone Number: For easy-to-read newsletter containing information regarding your in- dividends on their common, preferred or preference stocks current items of interest to share-vestor account, or other inquiries, reinvestedin PP&Lcommonstock owners published and mailed call toll-free: 800-322-9532 when at the beginning of each quarter.
calling from inside Pennsylvania, instead of receiving the dividend by check. Additionally, a special year-end or 800-345-3085 when calling from edition containing unaudited outside Pennsylvania. Certificate Safekeeping: results of the year's operations is Annual Meeting: The annual Shareowners participating in the mailed in early February.
meeting of shareowners is held Dividend Reinvestment Plan may Quarterly Review published each year on the fourth Wednes- choose to have their common in May, August and November to day of April. The 1990 annual stock certificates forwarded to the provide quarterly financial meeting willbe held at 1:30 p.m. company for safekeeping. These information to investors.
on Wednesday, April25, 1990, at shares willbe registered in the Periodic Mailings: Letters from Lehigh University's Stabler Arena name of the company as agent for the company regarding new in-located on the Lower Saucon Valley plan participants and willbe vestor programs, special items of o Goodman Campus complex credited to the participant's interest, or other pertinent infer>.
south of Bethlehem and west of account. Dividends paid on any mation are mailed on a non-Hellertown, Pa. A reservation shares held in the plan willbe scheduled basis as necessary.
card for meeting attendance is reinvested. Duplicate Mailings: Annual re-included with ports and other investor publica-Lost Dividend or Interest shareowners'roxy material. tions are mailed to each investor Proxy Material: A proxy state- Checks: Dividend or interest account. Ifyou have more than checks lost by investors, or those ment, a proxy and a reservation one account, or there is more than card for the company's annual which may be lost in the mail, will one investor in your household, be replaced ifthe check has not meeting are mailed in a package you may call or write to request been located by the 10th business which includes the annual report. that only one publication be This material was mailed begin- day following the payment date. delivered to your address. Please ning March 15, 1990, to all share- Transfer of Stock or Bonds: provide account numbers for all owners of record as of March Stock or bonds maybe transferred duplicate mailings.
9, 1990. from one name to another or to a Form 10-K and PP &LProfile:
Dividends: For 1990, the declara- new account in the name of an- The company's annual report filed tion of dividends is considered by other person. Please call or write with the Securities and Exchange the board or its executive commit- regarding transfer instructions. Commission on Form 10-Kisavail-tee, on February 28, May 23, August able about mid-March. The PP &L 22 and November 28, for payment Bondholder Information: Profile, a 10-yearstatistical review on April 1,July 1 and October 1, Muchof theinformationandmany containing in-depth information 1990, and January 1, 1991, respec- of the procedures detailedhere for about the company, is available in tively. Dividend checks are mailed shareowners also apply to bond- May. Investors may obtaina copy of ahead of those dates with the holders. Questions related to these publications, at no cost, by intention they arrive as close as bondholder accounts should be calling or writing to Investor possible to the payment dates. directed to Investor Services. Services.
Listed Securities: Fiscal Agents:
New York Stock Exchange Pbfladelpbia Stock Excbange Stock Transfer Agents and Common Stock(Code: PPL) Common Stock Registrars 4t/,% Preferred Stock 4t/,96 Preferred Stock First Chicago Trust Company (Code: PPLPRB) 3.359o Series Preferred Stock ofNew York 4.40 /o Series Preferred Stock 4.40'ro Series Preferred Stock 30 tP'est Broadway 4.60'ro Series Preferred Stock New York, New York 10007-2192 (Code: PPLPRA) 8.60% Series Preferred Stock 8.60% Series Preferred Stock Pennsylvania Power 6 Light Co.
(Code: PPLPRG) 9% Series Preferred Stock Investor Services-Stock Transfer 9.24 Jo Series Preferred Stock 9.24% Series Preferred Stock Dividend Disbursing Office and (Code: PPLPRM) Preference Stock, $ 8.00 Series Dividend Reinvestntent Plan Preference Stock, $ 8.00 Series Preference Stock, $ 8.40 Series Agent (Code: PPLPRJ) Preference Stock, $ 8.70 Series Pennsylvania Power &LightCo.
Preference Stock, $ 8.40 Series Vice President and Treasurer (Code: PPLPRH) Mortgage Bond Trustee Preference Stock, $ 8.70 Series Morgan Guaranty Trust Company (Code: PPLPRI) ofNew York clo First Chicago Trust Company ofNew York 30 liest Broadway Netv York, New York 10007-2I92 Bond Interest Paying Agent Pennsylvania Power &Light Co.
Ittvestor Services Department Quarterly Financial, Common Stock Price and Dividend Data (Unaudited)
For the Quarters Ended (a)
March31 June30 Sept.30 Dec.31 (Thousands ofDollars, Except Per Sbare Amounts) cti~ 1989 Operating revenues .. $ 613,068 $ 532,767 $ 548,584 $ 662,027 Operating income 168,319 131,514 145,898 173,119 Net income 101,249 64,720 79,405 108,062 Earnings applicable to common stock 88,957 52,527 67,380 96,154 Earnings per common share (b) 1.18 0.70 0.89 1.27 Dividends declared per common share(c) . 0.715 0.715 0.715 0.715 Price per common share High ..
Low ..
36$
34t/4
/ 39$/s 345/
41 t/4 38t/4 427/s 40t/,
1988 Operating revenues .. $ 607,353 $ 521,601 $ 532,851 $ 552,098 Operating income 180,143 135,921 145,366 143,621 Net income 111,637 68,421 76,217 75,767 Earnings applicable to common stock .. 98,041 54,980 63,590 63,254 Earnings per common share (b) 1.31 0.73 0.85 0.84 Dividends declared per common share(c)............. 0.69 0.69 0.69 0.69 Price per common share High........................ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 37/s 37/z 36$/s 37 I.ow ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 33/s 33/s 33/4
( a ) The Company's electric utilitybusiness is seasonal in nature with peak sales periods generally occurring in the winter months. Accordingly, com-parisons among quarters ofa year may not be indicative of overall trends and changes in operations.
(b) The sum of the quarterly amounts may not equal annual earnings per share due to changes in the number ofcommon shares outstanding during the year or rounding.
( c) The Company has paid quarterly cash dividends on its common stock in every year since 1946. The dividends paid per share in 1989 and 1988 were $ 2.835 and $ 2.74, respectively. The most recent regular quarterly dividend paid by the Company was 71~/ cents per share (equivalent to
$ 2.86 per annum) paid January 1, 1990. Future dividends willbe dependent upon future earnings, financial requirements and other factors.
Officers and Directors Officers ROBERT K. CAMPBELL 59 (13), Cbairman, Presfdent and Cbfef Execulive Officer JOHN T. KAUFFMAN63 (39), Executiue Vice President and Cbtcf Operatbig Officer CHARLES E. RUSSOLI 56 (34), Executive Vlcc President and Cbief Financfal Officer GENNARO D. CALIENDO, 49 (21), Senior Vlcc President, General Counsel and Secretary WILLIAMF. HECHT 46 (25), Senior Vtce President-System Power 6 Engineering HAROLD W. KEISER 46 (9), Senior V/ce President-Nuclear BRUCE D. KENYON 46 (13), Senior Vice President.Dlvlslon Operarlons LINDA CURRY BARTHOLOMEW 41 (19), Vlcc President.Public Affairs JOHN R. BIGGAR 45 (20), Vlcc President-Finance ROBERT G. BYRAM 44 (13), Vice President-Nuclear Operations JOHN M. CHAPPELEAR 51 (11), Vice President-Invesunents and Pensions ROBERT S. GOMBOS 46 (24), Vice President.Human Resource 6 Development RONALD E. HILL 47 (25), Vlcc Prcsldent and Comptroller JOHN P. KIERZKOWSKI 50 (18), Vlcc President and Treasurer JOSEPH C. KRUM 52 (30), Vtce President-Lancaster Divis/on FRANCIS A. LONG 49 (26), Vice President-Power Supply CARL R. MAIO 63 (40), Vice President-Lebtgb Dlulslon GRAYSON E. McNAIR 49 (27), vice President-hfarkcttng 6 Customer Serv/ccs JOHN R. MENICHINI 42 (21), Vlcc President-Harrisburg Division EDWARD M. NAGEL 63 (37)) Vice President-Federal Policy HERBERT D. NASH JR. 63 (41), Vice President-Central Division CLAIR W. NOLL 56 (29), V/ce President.Procurement 6 Computer Scrvlccs EDWARD F. REIS 59 (33), Vice President-Corporate Planning JOHN E. ROTH 61 (35), Vice President-Nortbern Division Corporate Management Committee) Robert JOHN H. SAEGER 51 (29), V/ce President-Susqucbanna Diuislon K. Campbell, chairman; John T. Kauffman, Charles E. Russoll, Gennaro D. Ca! lendo, Wlglam JEAN A. SMOLICK 55 (37), Assistant Sccreiary F. Hecht, ltarotd W. Kelter and Bruce D. Kenyon, PAULINE L. VETOVITZ 43 (25), Assistant Secretary with Edward F. Rels serving as the commluee's HELEN J. WOLFER 61 (42), Assistant Secretary and Asststant Treasurer executive secretary.
Numbers indicate age and years of service ( ) as of March l, 1990.
Directors CLIFFORD L. ALEXANDERJR. 56 (14), Washington, D.C., President, Afexatc./er 6 Associates Inc. Consuliants to business, gouernment and bidustry JEFFREY J. BURDGE 67 (7), Camp Hill, Cbairman of tbe Board, Harsco Corporation.
hfanufacturer of processed andfabrtcated metals ROBERT K. CAMPBELL 59 (13), Allentown, Cbatrman, iresidenr and Cblef Executive Officer EDWARD DONLEY 68 (7), Allentown, Cbairman, Exccridve Committee, Atr Productsand Cbemlcals Inc. hfamifacturcr of industrial and commerctal gases and chemicals WILLIAMJ. FLOOD 54 ('), Hazleton, Secretary-Treasurer, Highway Equipment 6Supply Co. Supplier of bcauy equipment for blgbw)ay constructton and industry REV. DANIEL G. GAMBET, O.S.F.S. 60 (3), Center Valley, Prcstd'ent, Allentown College of St. Francis de Sales ELMER D. GATES 60 ('), Bethlehem, President and Cblef Executive Officer, Fuller Company. hfanufacturer of plants, macbbiery and equipment for industry HARRY A. JENSEN 71 (14), Lancaster, former Director andformer Chief Executive Officer, Armstrong World Industries Inc. hfanufacturer of interior fiirnisbings and specialty producls Executive Committee) Robert K. Campbell, CLIFFORD L. JONES 62 (I), Harrisburg, President, Pennsylvania Chamber of Business chairman; ClNord L. Alexander, Jr., Harry A. and Indristry Jensen and Norman Robertson JOHN T. KAUFFMAN63 (11), Allentown, Executive Vlcc President and Chief Operating Audit Committee) David L. Tressler, chairman; Officer Clilford L Alexander, Jr., William J. Flood, RUTH LEVENTHAL 49 (I), Middletown, Provost and Dean, Penn State Daniel G. Gambet, Elmer D. Gates, Ruth Harrisburg (Tbe Capital College)
Leventhal and Ralph W. Richardson, Jr.
Corporate Responsibility Committee) Jeffrey RALPH W. RICHARDSON JR. 72 (10), State College, Consultant, agricultural and environmenial scfences J. Burdge, chairman; Daniel G. Camber, Clifford L. Jones, Ruth Leventhal and David L Tressler. NORMAN ROBERTSON 62 (20), Pittsburgh, Senior Vice President and Chief Economist, Management Development and Compensa- hfellon Bank, N.A.
tion Committee) Edward Donley, chairman; CHARLES E. RUSSOLI 56 (3), Allentown, Executtve Vice Preside/it and Cbief Financial Clifford L. Alexander, Jr., Jeffrey J. Burdge, Officer Elmer D. Gates and Norman Robertson.
DAVIDL. TRESSLER 53 (8), Scranton, Cbatnnan of tbe Board and Cbief Execrative Officer, Nominating Commlnee) Ralph W. Richardson, Northeastern Bank of Pennsylvania Jr., chairman; Jeffrey J. Burdge, Edward Donley, WilliamJ. Flood, Harry h. Jensen and Clifford L. Numbers indicate age and years of service ( ) on PP&L board as of March l, 1990.
Jones. 'Less than one year.
Board of Directors Pictured here are the outside, non-employee members of PP&L's board.
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Triple A minor league baseball arrived in Scranton in a major way in 1989. The completion in April of the new 8,600-seat Lacka-wanna County multi-purpose stadium brought one step closer the dream of a business and recreation renaissance for the Scranton-Wilkes-Barre area of the Susquehanna River Valley. 1Pi'th a home stand of 73 games played under the lights, the Scranton Red Barons fartn team for the Philadelphia Phillies proved a formidable force in tninor league baseball. The stadium also hosted 100 other sports and entertainment events in 1989. v" ~
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I
Audited Financial Statements and Other Financial Information ALLEGHENY ELECTRIC COOPERATIVE, INC.
October 31, 1989 Audited Financial Statements Report of Independent Auditors........ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 1 Balance Sheets........................ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 2 Statements of Operations and Patronage Capitalo ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 0 ~ ~ ~ ~ ~ AORS 4 Statements of Cash Flows.............. ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 5 Notes to Financial Statements......... ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ t~ ~ ~ ~ ~ ~ ~ ~ ~ ~ t~~ ~ ~ ~ 6 Other Financial Information Report of Independent Auditors on Other Financial Information.......... 15 Schedules of Nonoperating Rental Income (Loss)......................... 16 Schedules of Administrative and General Expenses....................... 17
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Krnst &Young 300 Locust Court 212 Locust Street Harrisburg, Pennsylvania 17101 Telephone: (717) 232.7575
'EPORT OF INDEPENDENT AUDITORS Board of Directors Allegheny Electric Cooperative, Inc.
Harrisburg, Pennsylvania We have audited the accompanying balance sheets of Allegheny Electric Cooperative, Inc. as of October 31, 1989 and 1988, and the related statements of operations and patronage capital and cash flows for the years then ended. These financial statements are the. responsibility of management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for 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, 1989 and 1988, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.
Harrisburg, Pennsylvania January 12, 1990-
BALANCE SHEETS ALLEGHENY ELECTRIC COOPERATIVE, INC.
October 31 1989 1988 (In Thousands)
ASSETS ELECTRIC UTILITY PLANT Note C In service Note B 610,308 $ 595,959 Construction work in process 10,274 6,939 Nuclear fuel in process 6 679 13 075 627,261 615,973 Less accumulated depreciation and amortization 88 725 70 829 538~ 536 545~ 144 OTHER ASSETS AND INVESTMENTS Nonutility property, at cost (net of accumulated depreciation of $ 1,323 in 1989 and $ 1,183 in 1988) 5,056 5,084 Investments in associated organizations Note D 4,277 4,247 Other noncurrent assets 2 689 4 989 12,022 14,320 CURRENT ASSETS Cash and short-term investments of $ 35,144 in 1989 and $ 39,668 in 1988 34,735 39,679 Accounts receivable from members 9,329 9,264 Other accounts receivable 5,069 5,147 Other, current assets 738 650 49 871 54 740
l I
l
October 31 1989 1988 (In Thousands)
EQUITIES AND LIABILITIES EQUITIES Memberships 3 S 3 Donated capital 51 51 Patronage capital 38 940 36 387 38,994 36,441 LONG-TERM DEBT, less current portion Note F 489,919 496,569 CURRENT LIABILITIES Notes payable Note E 27,800 .33,380 Current portion of long-term debt Note F 8,803 75151 Accounts payable and accrued expenses 9,407 12,665 Accounts payable to members 5 003 5 403 51,013 58,599 DEFERRED CREDITS Deferred income tax benefits from safe harbor lease Note G 12,942 137689 Other deferred credits 7 561 8 906 20,503 22,595 I I See notes to financial statements.
STATEMENTS OF OPERATIONS AND PATRONAGE CAPITAL ALLEGHENY ELECTRIC COOPERATIVE, INC+
Year Ended October 31 1989 1988 (In Thousands)
Operating revenue, including sales to members of $ 114,434 in 1989 and $ 109,533 in 1988 $ 130,492 $ 133,881 Operating expenses:
Purchased power 33,359 407120 Transmission 8,864 7,650 Production 20,865 20,226 Fuel 9,413 8,634 Depreciation 10,316 9,619 Taxes 3,454 3,609 Administrative and general 5 256 4 083 91 527 93 941 OPERATING MARGIN BEFORE INTEREST AND OTHER DEDUCTIONS 38,965 39,940 Interest and other deductions:
Interest expense 42,724 44,264 Allowance for funds used during construction Other deductions (credits), net '9)
(1,234) (2,319)
(7) 41 481 41 938 OPERATING MARGIN (DEFICIT) (2,516) (1,998)
Nonoperating margins:
Net nonoperating rental income (loss) (23) (1)
Interest income 4,293 2,891 Other Note I 52 602 4 322 3 492 MARGIN BEFORE INCOME TAXES 1,806 1,494 Deferred income tax benefits from safe harbor lease 747 719 NET MARGIN 2,553 2,213 Patronage capital at beginning of year 36 387 34 174 PATRONAGE CAPITAL AT See notes to financial statements.
l I
STATEMENTS OF CASH FLOWS ALLEGHENY ELECTRIC COOPERATIVE, Year Ended October 31 1989 1988 (In IN'PERATING Thousands)
ACTIVITIES Net margin $ 2,553 9 2,213 Adjustments to reconcile net margin to net cash provided by operating activities:
Depreciation and fuel amortization 18,480 17,070 Amortization of gain on sale of electric utility plant (44) (20)
Deferred income tax benefits from safe harbor lease (747) (719)
Changes in operating assets and liabilities:
(Increase) decrease in operating assets:
Noncurrent assets 2,300 (447)
Accounts receivable from members (65) (811)
Other accounts receivable 78 (1,684)
Other current assets (88) (222)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses (3,258) (522)
Accounts payable to members (400) 2,904 Other deferred credits (1 301) 303 NET CASH PROVIDED BY OPERATING ACTIVITIES 17,508 18,065 INVESTING ACTIVITIES Additions to electric utility plant (11,876) (16,785)
Proceeds from sale of electric utility plant, net of expenses 30,889 (Increase) reduction in investments in associated organizations (30) 145 Proceeds from sales of utility and nonutility property 32 NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (11,874) 14,249 FINANCING ACTIVITIES Proceeds from long-term debt 2,259 12,293 Payments on notes payable and long-term debt ,(12>837) (27,439)
Donated capital 1 NET CASH USED IN FINANCING ACTIVITIES (10 578) (15 145)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,944) 17,169 Cash and cash equivalents at beginning of year 39 679 22 510 CASH AND CASH EQUIVALENTS See notes to financial statements.
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NOTES TO FINANCIAL STATEMENTS ALLEGHENY ELECTRIC COOPERATIVE, IN'ctober 31, 1989 NOTE A
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES Allegheny Electric Cooperative, Inc. (Allegheny) is a rural electric cooperative utility established under the laws of the Commonwealth of Pennsylvania. Financing assistance is provided by the U. S. Department of Agriculture, Rural Electrification Administration (REA) and, therefore, Allegheny is subject to certain rules and regulations promulgated for rural electric borrowers by REA. Allegheny is a generation and transmission cooperative, providing power supply to fourteen owner/members who are rural electric distribution cooperative utilities providing electric power to consumers in certain areas of Pennsylvania and New Jersey.
Allegheny maintains its accounting records in accordance with the Federal Energy Regulatory Commission's chart of accounts as modified and adopted by REA.
Electric Utilit Plant and De reciation: The electric utility plant is stated at cost, which includes an allowance for funds used during construction.
Depreciation is provided on the modified sinking fund method for nuclear utility plant production assets and the straight-line method 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 (PP&L), co-owner of Susquehanna Steam Electric Station (SSES), its portion of DOE fees for such future disposal services.
Cost of'Decommissionin Nuclear Plant: Allegheny's portion of the estimated decommissioning costs of SSES is charged to operating expenses over the estimated useful life of the plant.
Allowance for Funds Used Durin Construction: Allowance for funds used during construction represents the cost of directly related borrowed funds used for construction of electric utility plant. The allowance is capitalized as a component of the cost of electric utility plant while under construction.
Investments in Associated Or anizations: Investments in associated organizations are carried at cost.
NOTES TO FINANCIAL STATEMENTS Continued ALLEGHENY ELECTRIC COOPERATIVE, INC.
NOTE A
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES Continued Preliminar Surve s: Costs of preliminary surveys for potential development projects are recorded as deferred charges in other noncurrent assets. If construction of a project results from such surveys, the deferred charges are transferred to the cost of the facilities. If a preliminary survey is abandoned, the costs incurred are written off.
Cash E uivalents: For purposes of the statements of cash flows, Allegheny considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Short-Term Investments: Short-term investments are carried at cost, plus accrued interest, which approximates market value.
Income Taxes: Investment tax credits, other than those sold through the safe .
harbor lease arrangement, are accounted for under the flow-through method whereby credits are recognized as a reduction of income tax expense in the year in which the credit is utilized for tax purposes.
The Tax Reform Act of 1986 (the Act), enacted on October 22, 1986, repealed the Investment Tax Credit as of January 1, 1986. Provisions exist within the Act which allow for investment tax credits on certain property referred to as "transition property" placed in service after December 31, 1985. During the years ended October 31, 1989 and 1988, 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). Use of the modified sinking fund method of depreciation for nuclear utility plant production assets by Allegheny is considered a "phase-in plan" subject to the provisions of the Statement. The Statement will require Allegheny to either recognize an immediate charge against income or retroactively reduce equity for the difference between the modified sinking fund 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 $ 31.1 mi.llion at October 31, 1989. Allegheny has requested approval from REA to amend its existing phase-in plan to conform to the requirements of the Statement.
Adoption of the Statement is required to occur when REA approval is received.
Such approval is expected early in 1990.
l 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 1989 1988 (In Thousands)
Nuclear Utility Plant:
Production 39 years 509,469 $ 505,920 Transmission 2. 75% 30,191 30,176 General plant 3% 12.5% 826 827 Nuclear fuel Heat production 68,388 57,818 Non-Nuclear Utility Plant 3% 33% 1,434 1 218 TOTAL $ 610,308 $ 595 959 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 $ 621 million and $ 612 million at October 31, 1989 and 1988, respectively. Allegheny's share of anticipated costs for ongoing construction and nuclear fuel for SSES are estimated to be approximately $ 55.6 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 Utilities Cooperative Finance Corporation (CFC) patronage capital, "Capital Term Certificates" and "Subordinate Term Certificates," and National Bank for Cooperatives (Co Bank) "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.
NOTES TO FINANCIAL STATEMENTS Continued ALLEGHENY ELECTRIC COOPERATIVE, INC.
NOTE E NOTES PAYABLE Allegheny has short-term lines of credit available with banks and CFC of $ 52 million. There were no amounts outstanding at October 31, 1989 or 1988.
Interest rates are generally at prime plus 1%.
Notes payable at October 31, 1989 and October 31, 1988 includes $ 27.8 million and $ 28.2 million, 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 (5.9% to 8.0% for 1989 and 4.7% to 8.5% for 1988) ~ 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, 1989 and 1988 relate to a debt service reserve fund required under the bond indenture.
The notes payable balance at October 31, 1988 also included'5.2 million of unsecured commercial paper which matured on January 20, 1989.
Restrictions are imposed under certain short-term credit arrangements including, among other things, maintenance of ratio requirements under existing long-term debt arrangements and limitation of total short-term indebtedness outstanding to an amount not to exceed the remaining unadvanced portion of certain existing REA long-term loan commitments ($ 52.7 million at October 31, 1989).
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 and a mortgage loan payable to CFC relating to nonutility property. Substantially all the assets of Allegheny are pledged as collateral. Long-term debt consists of the following:
October 31 1989 1988 (In Thousands)
Mortgage notes payable to FFB at interest rates varying from 7.329%
to 13.820% in 1989 and 7.281% to 13.820% in 1988, due in varying amounts through 2021 $ 491,942 $ 499,103
I NOTES TO FINANCIAL STATEMENTS Continued ALLEGHENY ELECTRIC COOPERATIVE>> INC+
NOTE F LONG-TERM DEBTContinued October 31 1989 1988 (In Thousands)
Mortgage loan payable to CFC, payable in various quarterly installments, including interest through January 2015.
Variable rates ranged from 9.25% to 11.00% in 1989 and 7.75% to 9.25% in 1988 2,033 $ 2,060 Note payable to CFC, payable in various quarterly installments, including interest through October 2019. Variable rates ranged from 9.5% to 11.0% in 1989 693 5% mortgage notes payable to REA due in varying amounts through 2019 4,015 2,498 Other 39 59 498,722 5035720 Less current portion 8 803 7 151 I >> I Allegheny has the option on FFB promissory note advances to elect (subject to REA approval) interim maturity dates of not less than two years nor more than seven years after the date of the advance. At the date of the advance or on the maturity of an interim advance, Allegheny may also designate that it desires a long-term maturity of 34 years after the end of the calendar year in which the advance was made. At October 31, 1989, Allegheny had $ 44.0 million of advances maturing within one year which it intends to convert to long-term obligations, either by rolling them over for additional two-year periods or extending them to facility life-time financing, in accordance with the mortgage agreement.
Aggregate maturities of long-term debt for the four years subsequent to October 31, 1989 are as follows (in thousands):
1991 S 10,106 1992 11,316 1993 12,058 1994 12,590 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, 1989 interest rate, to compute the annual principal requirements.
NOTES TO FINANCIAL STATEMENTS Continued ALLEGHENY ELECTRIC COOPERATIVE, INC.
NOTE F LONG-TERM DEBTContinued Allegheny is required by mortgage covenants to maintain certain levels of interest coverage and annual debt service coverage. Allegheny was in compliance with such requirements at October 31, 1989.
During 1989 and 1988, Allegheny incurred interest costs of $ 42.7 million and
$ 44.3 million, respectively. Interest paid was $ 42.9 million and $ 44.4 million, respectively.
NOTE G INCOME TAXES At October 31, 1989, Allegheny had available nonmember net operating loss carryforwards of $ 2.2 million for financial reporting purposes and $ 155.2 million for tax reporting purposes and investment tax credit carryforwards of approximately $ 34.1 million for both financial and tax reporting purposes, expiring through 2004. Allegheny also had operating loss carryforwards attributable to member activities of $ 2.1 million for financial reporting purposes and $ 152.7 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 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, l989. Payment of this contingent liability has been guaranteed by CFC.
NOTE H RELATED PARTY TRANSACTIONS Allegheny has an arrangement with an associated organization, Pennsylvania Rural Electric Association (PREA), under which PREA provides Allegheny with certain management, general, and administrative services on a cost reimbursement basis. Total costs for the services provided for the years ended October 31, 1989 and 1988 were $ 2.6 million and $ 2.2 million, respectively.
NOTES TO FINANCIAL STATEMENTS Continued ALLEGHENY ELECTRIC COOPERATIVE, INC.
NOTE ICOMMITMENTS AND CONTINGENCIES Allegheny and PP&L are members of certain insurance programs which provide coverage for property damage to members'uclear generating plants.
Allegheny's portion of the facilities at SSES is insured against property damage losses up to $ 203.5 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 condi.tions. 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 $ .5 million.
Allegheny's public liability for claims resulting from 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 insurance and an industry retrospective assessment program.
In the event of a nuclear incident at any of the facilities owned by others and covered by the Act, Allegheny could be assessed up to $ 12.6 million per incident, but not more than $ 2 million in a calendar year.
Allegheny is currently constructing two transmission facilities which are estimated to cost a total of $ 4.3 million. Financing is being provided by REA ($ 3.0 million) and CFC ($ 1.3 million).
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'y 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.
NOTES TO FINANCIAL STATEMENTS Continued ALLEGHENY ELECTRIC COOPERATIVE, INC.
NOTE ICOMMITMENTS AND CONTINGENCIES Continued The second payment, in the amount of $ 822,000, was accrued at October 31, 1988 and received by Allegheny in April 1989, twelve months subsequent to the date of the execution by Sithe of a power purchase agreement as described below.
The third payment, in the amount of $ 1.4 million, was contingent upon the execution by Sithe of a power purchase agreement for sale of all or part of the energy and capaci,ty produced by the project and all necessary wheeling and transmission agreements required to effectuate the delivery of the project's power and energy to its purchaser. While Sithe signed a power purchase agreement during 1988, they did not finalize the necessary wheeling and transmission agreements until January 1990. Accordingly, this payment was received and recorded by Allegheny in January 1990 upon finalization of such agreements.
Total payments received and accrued by Allegheny during 1988 under this agreement, net of related costs, resulted in a gain of approximately $ 582,000, which is included in the 1988 statement of operations. The final payment of
$ 1.4 million will be reported in the 1990 statement of operations.
NOTE J SALE/LEASEBACK ARRANGEMENT Jl On June 30, 1988, Allegheny completed the sale and simultaneous leaseback of its hydroelectric generation facility at the Raystown Dam (the Facility). The Facility was sold to Ford Motor Credit Company (Ford) for $ 32 million in cash.
Under terms of the arrangement, Allegheny will lease the Facility from Ford for an initial term of thirty years. Payments under the lease are due in semiannual installments commencing January 10, 1989. At the end of the thirty-year term, Allegheny will have the option to purchase the Facility for an amount equal to the Facility's fair market value. Allegheny also has the option to renew the lease for a five-year fixed 'rate renewal and three fair market renewal periods, each of which may not be for a tern 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. In 1988, Allegheny originally reported a gain of $ 3.5 million related to the sale. However, during 1989, Allegheny incurred additional costs totalling
$ 1.6 million which reduced the gain from $ 3.5 million to $ 1.9 million. The adjusted gain of $ 1.9 million will be recognized over the lease term in the same proportion that the annual rental payments relate to total rental payments.
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NOTES TO FINANCIAL STATEMENTS Continued ALLEGHENY ELECTRIC COOPERATIVE, INC.
NOTE J SALE/LEASEBACK ARRANGEMENTContinued Cash proceeds from the sale were used by Allegheny to retire $ 20.6 million of commercial paper, the proceeds of which had been used to partially finance the construction of the Facility, and $ 1.3 million of mortgage notes payable to FFB.
The payments by Allegheny under this lease were determined in part on the assumption that Ford will be entitled to certain income tax benefits as a result of the sale and leaseback of the Facility. In the event that Ford were to lose all or any portion of such tax benefits, Allegheny would be required to indemnify Ford for the amount of the additional federal income tax payable by Ford as a result of any such loss.
The leaseback of the Facility is accounted for as an operating lease by Allegheny. Future minimum lease payments under this lease, which can vary based on the interest paid on the debt used by Ford to finance the transaction, as of October 31, 1989 are estimated as follows (in thousands):
1990 1,931 1991 1,931 1992 19931 1993 29361 1994 2,361 Thereafter 57,414 Total Minimum Lease Payments 967 929 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 $ 2.0 million for the year ended October 31, 1989 and $ 6699000 for the year ended October 31, 1988.
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Ernst &Young 300 Locust Court 212 Locust Street Harrisburg, Pennsylvania 17101 Telephone; (717) 232.7575 REPORT OF INDEPENDENT AUDITORS ON OTHER FINANCIAL INFORMATION Allegheny Elect ri c Coopera tive, Inc.
Harrisburg, Pennsylvania The audited financial statements of Allegheny Electric Cooperative, Inc.
(Allegheny) and our report thereon are presented in the preceding section of this report. The following financial information is presented for purposes of additional analysis and is not a required part of the financial statements of Allegheny. Such information has been subjected to the auditing procedures applied in our audits of the financial statements and, in our opinion, is fairly stated in all material respects in relation to the financial statements taken as a whole.
Harrisburg, Pennsylvania January 12, 1990 I
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SCHEDULES OF NONOPERATING RENTAL INCOME (LOSS)
ALLEGHENY ELECTRIC COOPERATIVE, INC Year Ended October 31 1989 1988 (In Thousands)
INCOME:
Rental-building 855 818 Rental-parking 63 86 918 904 EXPENSES:
Utilities 198 207 Payroll and employee benefits 30 35 Management and leasing fees 26 26 Office and administrative expenses 44 50 Maintenance and repai.rs 73 66 Real estate taxes 179 169 Insurance 41 43 Interest 209 173 Depreciation 141 136 941 905 NET NONOPERATING RENTAL INCOME (LOSS) $ (23) S SCHEDULES OF ADMINISTRATIVE AND GENERAL EXPENSES ALLEGHENY ELECTRIC COOPERATIVE, INC.
Year Ended October 31 1989 1988 (In Thousands)
Office supplies 189 116 Travel, conventions, and meetings 233 172 Payroll and employee benefits 1,480 1,256 Legal, auditing, and engineering 1,036 851 Association membership dues 45 42 Board meetings, directors'ees, and travel 108 123 Penn Lines 121 100 Information programs 158 91 Rent 203 189 Payroll taxes 102 102 Insurance 54 59.
Insurance SSES 839 869 Insurance Raystown 140 63 Writeoff of preliminary survey charges 444 Miscellaneous 104 50 I
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