ML18040B213

Forwards 1987 Annual Rept for Allegheny Electric Cooperative,Inc

ML18040B213
Person / Time
Site:	Susquehanna
Issue date:	06/24/1988
From:	KEISER H W PENNSYLVANIA POWER & LIGHT CO.
To:	MURLEY T E Office of Nuclear Reactor Regulation
Shared Package
ML17156A653	List: ML17156A652 ML18040B213
References
PLA-3049, NUDOCS 8806300016
Download: ML18040B213 (42)

Text

""XCCELERATEDIQ4UBUTIONDEMONS'1OOIONSYSTEMREGULATORYINFORMATIONDISTRIBUTIONSYSTEM(RIDS)DOCKET0500038705000388

SUBJECT:

Forwards1987annualreptforAlleghenyElectricCooperative,Inc.DISTRIBUTIONCODE:M004DCOPIESRECEIVED:LTRENCLSIZE:TITLE:50.71(b)AnnualFinancialReportACCESSIONNBR:8806300016DOC.DATE:88/06/24NOTARIZED:NOFACIL:50-387SusquehannaSteamElectricStation,Unit1,Pennsylva50-388SusquehannaSteamElectricStation,Unit2,PennsylvaAUTH.NAMEAUTHORAFFILIATIONKEISER,H.W.PennsylvaniaPower&LightCo.RECIP.NAMERECIPIENTAFFILIATIONMURLEY,T.E.OfficeofNuclearReactorRegulation,Director(Post870411NOTES:LPDR2cysTranscripts.LPDR2cysTranscripts.5w~~ghnuoc~F'<~'i&~r7RECIPIENTCOPIESRECIPIENTIDCODE/NAMELTTRENCLIDCODE/NAMEPD1-2PD11THADANI,MCOPIESLTTRENCL1005000387Q05000388IAINTERNAL:AEOD/DOANRR/PMAS/PTSB12REG0111AEOD/DSP/TPAB11NUDOCS-ABSTRACT111111EXTERNALLPDRNOTES:2222NRCPDR11RDSADTOTALNUMBEROFCOPIESREQUIRED:LTTR12ENCL11 PennsylvaniaPower8LightCompanyTwoNorthNinthStreet~Allentown,PA18101-1179~215/770-5151HaroldW.KeiserSeniorVicePresident-Nuclear215/7704194JUN241988Dr.ThomasE.MurleyOfficeofNuclearReactorRegulationU.S.NuclearRegulatoryCommissionWashington,DC20555SUSQUEHANNASTEAMELECTRICSTATIONANNUALFINANCIALREPORTPLA-3049FILER41-2ADocketNos.50-38750-388

DearDr.Murley:

Inaccordancewith10CFR50.71(b),attachedisthe1987annualfinancialreportincludingcertifiedfinancialstatementsforAlleghenyElectricCooperative,Inc.TheattachedfinancialreportcoverstheperiodNovember1,1986throughOctober31,1987.Allegheny's1987'nnualReportisalsoattached.The1987annualreportforPennsylvaniaPower&LightCo.wasforwardedonMarch30,1988(PLA-3009).Verytrulyyours,H.W.KeiserAttachmentcc:PRCDocumentControlDesk(originalNRCRegi'onMr.F.I.Young,NRCSr.ResidentInspectorMr.M.C.Thadani,NRCProjectManagerSS063000168S0624PDRADOCK05000387DCD

-NOTICE-THEATTACHEDFILESAREOFFICIAIRE-CORDSOFTHERECORDS&REPORTSMANAGEMENTBRANCH.THEYHAVEBEENCHARGEDTOYOUFORALIMITEDTIMEPERIODANDMUSTBERETURNEDTOTHERECORDS&ARCH!VESSERVICESSECTIONP1-122WHITEFLINT.PLEASEDONOTSENDDOCUMENTSCHARGEDOUTTHROUGHTHEMAIL.REMOVALOFANYPAGE(S)FROMDOCUMENTFORREPRO-DUCTIONMUSTBEREFERREDTOFILEPERSONNEL.r~~gpss"'p~gDa-NO AlleghenyElectricCooperative,Inc.:supplyingpowerfor170,000consumer-membersPike%saw~yeee1Pal~WAN~SeaonalheelnaperyCeoweaeoSeNVOttWWIWOopoiyaoMes~fAlleghenyElectricCooperative,Inc.,agenerationandtransmissioncooperative,isthewholesalepowersupplierforits14memberruralelectricdistributioncooperatives,whichservemorethan170,000consumer-membersinPennsyl-vaniaandNewJersey.ThecooperativebeliefinstrengthinnumbersledtoAllegheny'sfor-mationin1946.Beforethat,eachruralcooperativepurchasedpowerfromprivatepowercompaniesin-dividually.Ontheirown,theypaiddearlyforit;in1944,theRuralElec.trificationAdministrationreportedthatwholesaleratespaidbythePennsylvaniacooperativeswereamongthehighestinthenation.Withthebargainingpowerofallthecooperativesunitedbehindit,Alleghenywasabletonegotiatewholesaleratesthatsavedthecooperatives20percentontheirpowerbills.AlleghenyworkstogetherwiththePennsylvaniaRural'lectricAssociation(PREA),theserviceorganizationforthememberdistributioncooperatives.Sharingofficesandstaff,PREAsupportsAllegheny'seffortsbyworkingforfavorablelawsandagainstcostlyregulations;supportingprogramsthatbenefitruralareas,andofferingsafetyandjobtrainingtomembercooperativestaffs.Allegheny'smissionremainsun-changedfromthedaytheorganiza.tionwascreatedover40yearsago:toprovideareliablesupplyofenergyatthelowestpossibleprice.AlleghenyElectricCooperative,Inc.212LocustStreet,P.O.Box1266Harrisburg,PA17108-1266 AuditedFinancialStatementsandOtherFinancialInformationAlleghenyElectricCooperative,Inc.October31,1987-NOTICE-THEATTACHEDFILESAREOFFICIALRE-CORDSOFTHERECORDS5REPORTSMANAGEMENTBRANCH.THEYHAVEBEENCHARGEDTOYOUFORALIMITEDTIME,PERIODANDMUSTBERETURNEDTOTHERECORDS5ARCHIVESSERVICESSECTIONP1-122WHITEFLINT.PLEASEDONOTSENDDOCUMENTSCHARGEDOUTTHROUGHTHEMAIL.REMOVALOFANYPAGE(S)FROMDOCUMENTFORREPRO-DUCTIONMUSTBEREFERREDTOFILEPERSONNEL.-NOTICE-[g~mErnst&Whinney AuditedFinancialStatementsandOther-FinancialInformationALLEGHENYELECTRICCOOPERATIVE,INC.October31,1987AuditedFinancialStatementsIAuditorsReport.................................BalanceSheets...................................StatementsofOperationsandPatronageCapital...StatementsofChangesinFinancialPosition......NotestoFinancialStatements....................~~~1~~12~~~4~~~5~~~6OtherFinancialInformationAuditors'eportonOtherFinancialInformation..SchedulesofNonoperatingRentalIncome(Expense)SchedulesofAdministrativeandGeneralExpenses.~~~14~~~15~~~16 QmErnst&Whinney300LocustCourt212LocustStreetHarrisburg,Pennsylvania=17101717/232-7575BoardofDirectorsAlleghenyElectricCooperative,Inc.Harrisburg,PennsylvaniaMehaveexaminedthebalancesheetsofAlleghenyElectricCooperative,Inc.asofOctober31,1987and1986,andtherelatedstatementsofoperationsandpatronagecapi,talandchangesinfinancialpositionfortheyearsthenended.Ourexaminationsweremadeinaccordancewithgenerallyacceptedauditingstandardsand,accordingly,includedsuchtestsoftheaccountingrecordsandsuchotherauditingproceduresasweconsiderednecessaryinthecircumstances.Inouropinion,thefinancialstatementsreferredtoabovepresentfairlythefinancialpositionofAlleghenyElectricCooperative,Inc.atOctober311987and1986andtheresultsofitsoperationsandthechangesinits1financialpositionfortheyearsthenended,inconformitywithgeneralyacceptedaccountingprinciplesappliedonaconsistentbasis.Harrisburg,PennsylvaniaJanuary22,1988 BALANCESHEETSALLEGHENYELECTRICCOOPERATIVE,INC.ASSETSOctober3119871986(InThousands)ELECTRICUTILITYPLANT-NoteCInservice-NoteBConstructionworkinprocessNuclearfuelinprocessLessaccumulateddepreciationandamortization$584,815$558,09826,11223,2671747320,650628,400602,0155566238651572,738563,364OTHERASSETSANDINVESTMENTSNonutilityproperty,atcost{netofaccumulateddepreciationof$1,047in1987and$928in1986)Investmentsinassociatedorganizations-NoteDConstructionadvancesOthernoncurrentassets5,2024,39257439685,6685,0093274,30414,13615,308CURRENTASSETSCashandshort-terminvestmentsof$22,539in1987and$5,675in1986AccountsreceivablefrommembersOtheraccountsreceivableOther22,5108,4533,463428348545,2578,0222,56421316,056 EQUITIESANDLIABILITIESOctober3119871986(InThousands)EQUITIESMembershipsDonatedcapitalPatronagecapitalLONG-TERMDEBT,lesscurrentportion-NoteFCURRENTLIABILITIESNotespayable-NoteECurrentportionoflong-termdebt-NoteFAccountspayableandaccruedexpensesAccountspayabletomembersDEFERREDCREDITSDeferredincometaxbenefitsfromsafeharborlease-NoteGOther3503417434,227517,15628,4006,69013,1872,49950,7761474085,16119,56935029,59029,643494,45230,6467,74411,72220950,32115,0875.22520,312S621,728S594728Seenotestofinancialstatements.

STATEMENTSOFOPERATIONSANDPATRONAGECAPITALALLEGHENYELECTRICCOOPERATIVE,INC.YearEndedOctober3119871986(InThousands)Operatingrevenue,includingsalestomembersof$103,425in1987and$97,170in1986$135,400$139,582Operatingexpenses:PurchasedpowerTransmissionProductionFuelDepreciationTaxesAdministrativeandgeneralOPERATINGMARGINBEFOREINTERESTANDOTHERDEDUCTIONS41,2326,86314,97510,320.,8>4913,3974,52589,80345,59743,5435,98716,2457,8757,1563,148435388,30751,275Interestandotherdeductions:InterestexpenseAllowanceforfundsusedduringconstructionOtherdeductions(credits),netOPERATINGMARGINNonoperatingmargins:Netnonoperatingrentalincome(expense)Interestincome45,839(2,407)(6)43,4262,1712461,488173451,560(3,380)(43)48,1373,138(76)13651289MARGINBEFOREINCOMETAXESDeferredincometaxbenefitsfromsafeharborlease3,9056794,427729PatronagecapitalatbeginningofyearNETMARGIN4,58429,5905,15624,434PATRONAGECAPITALATENDOFYEAR$34,174$29,590Seenotestofinancialstatements.

STATEMENTSOFCHANGESINFINANCIALPOSITIONALLEGHENYELECTRICCOOPERATIVE,INC.SOURCEOFWORKINGCAPITALNetmarginCharges(credits)tomarginnotaffectingworkingcapital:DepreciationFuelamortizationDeferredincometaxbenefitsfromsafeharborleaseTOTALFROMOPERATIONS8,6268,784(679)21,3157>2916,775(729)18,493YearEndedOctober3119871986(InThousands)4,584$5,156Additionstolong-termdebtDecreaseinconstructionadvancesOthersourcesAPPLICATIONOFWORKINGCAPITALAdditionstoelectricutilityplantReductionoflong-termdebtIncreaseinconstructionadvancesOtherapplications27,49495349,76226,3184,79024764314194,9905212,27026,27425,37115,6867141128INCREASE(DECREASE)INWORKINGCAPITAL$18,343$(14,854)CHANGESINCOMPONENTSOFWORKINGCAPITALIncrease(decrease)incurrentassets:Cashandshort-terminvestmentsAccountsreceivablefrommembersOtheraccountsreceivableOther$17,253$(10,985)431814899(596)215(337)18,798(11,104)Increase(decrease)incurrentliabilities:NotespayableCurrentportionoflong-termdebtAccountspayableandaccruedexpensesAccountspayabletomembers(2,246)(1,054)1,4652,2904553,1727411,316(1,479)3,750INCREASE(DECREASE)INWORKINGCAPITAL$18,343$(14,854)Seenotestofinancialstatements.

NOTESTOFINANCIALSTATEMENTSALLEGHENYELECTRICCOOPERATIVE,INC+October31,1987NOTEA-SUGARYOFSIGNIFICANTACCOUNTINGPOLICIESAlleghenyElectricCooperative,Inc.(Allegheny)isaruralelectriccooperativeutilityestablishedunderthelawsoftheCommonwealthofPennsylvania.FinancingassistanceisprovidedbytheU.S.DepartmentofAgriculture,RuralElectrificationAdministration(REA)and,therefore,AlleghenyissubjecttocertainrulesandregulationspromulgatedforruralelectricborrowersbyREA.Alleghenyisagenerationandtransmissioncooperative,providingpowersupplytofourteenowner/memberswhoareruralelectricdistributioncooperativeutilitiesprovidingelectricpowertoconsumersincertainareasofPennsylvaniaandNewJersey.AlleghenymaintainsitsaccountingrecordsinaccordancewiththeFederalEnergyRegulatoryCommission'schartofaccountsasmodifiedandadoptedbyREA.ElectricUtilitPlantandDereciation:Theelectricutilityplantisstatedatcost,whichincludesanallowanceforfundsusedduringconstruction.Depreciationisprovidedonthemodifiedsinkingfundmethodfornuclearutilityplantproductionassetsandthestraight-linemethodforallotherassets,exceptnuclearfuel.Thecostofunitsofpropertyretiredorreplacedisremovedfromutilityplantaccountsandchargedtoaccumulateddepreciation.NuclearFuel:Nuclearfuelusageischargedtofuelexpensebasedonthequantityofheatproducedforelectricgeneration.UndertheNuclearWastePolicyActof1982,theU.S.DepartmentofEnergy(DOE)isresponsibleforthepermanentstorageanddisposalofspentnuclearfuelremovedfromnuclearreactors.AlleghenycurrentlypaystoPennsylvaniaPower&LightCompany(PP6L)',co-ownerofSusquehannaSteamElectricStation(SSES),itsportionofDOEfeesforsuchfuturedisposalservices.CostofDecommissioninNuclearPlant:Allegheny'sportionoftheestimateddecommissioningcostsofSSESischargedtooperatingexpensesovertheestimatedusefullifeoftheplant.AllowanceforFundsUsedDurinConstruction:Allowanceforfundsusedduringconstructionrepresentsthecostofdirectlyrelatedborrowedfundsusedforconstructionofelectricutilityplant.Theallowanceiscapitalizedasacomponentofthecostofelectricutilityplantwhileunderconstruction.InvestmentsinAssociatedOranizations:Investmentsinassociatedorganizationsarecarriedatcost.

NOTESTOFINANCIALSTATEMENTS-ContinuedALLEGHENYELECTRICCOOPERATIVE,INC.NOTEA-SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES-ContinuedPreliminarSurves:Costsofpreliminarysurveysforpotentialdevelopmentprojectsarerecordedasdeferredchargesinothernoncurrentassets.Ifconstructionofaprojectresultsfromsuchsurveys,thedeferredchargesaretransferredtothecostofthefacilities.Ifapreliminarysurveyisabandoned,thecostsincurredarewrittenoff.Short-TermInvestments:Short-terminvestmentsarecarriedatcost,plusaccruedinterest,whichapproximatesmarketvalue.IncomeTaxes:Investmenttaxcredits,otherthanthose'soldthroughthesafeharborleasearrangement,areaccountedforundertheflow-throughmethodwherebycreditsarerecognizedasareductionofincometaxexpenseintheyearinwhichthecreditisutilizedfortaxpurposes.TheTaxReformActof1986(theAct),enactedonOctober22,1986,repealedtheInvestmentTaxCreditasofJanuary1,1986.ProvisionsexistwithintheActwhichallowforinvestmenttaxcreditsoncertainpropertyreferredtoas"transitionproperty"placedinserviceafterDecember31,1985.DuringtheyearsendedOctober31,1987and1986,Alleghenyplacedinservicetransitionpropertyeligibleforinvestmenttaxcredits.Variationsinthecustomaryrelationshipbetweenpretaxaccountingincomeandincometaxexpensearetheresultofpatronagedividends.Netoperatinglossesforfinancialandtaxreportingpurposesdifferasaresultoftimingdifferencesrelatingprimarilytodepreciation.AccountinforPhase-InPlans:InAugust1987,theFinancialAccountingStandardsBoardissuedStatementNo.92,"RegulatedEnterprises-AccountingforPhase-inPlans"(Statement).TheStatementspecifiestheaccountingforexistingandfuturephase-inplansandiseffectiveforfiscalyearsbeginningafterDecember15,1987.TheStatement,ifultimatelydeterminedtobeapplicabletoAllegheny,wouldrequireAlleghenytorecognizeanimmediatechargeagainstincomeforthedifferencebetweenthemodifiedsinkingmethodofdepreciationcurrentlyusedfornuclearutilityplantproductionassetsandthestraight-linemethodofdepreciation.Thedifferencebetweenthesetwomethodsisapproximately$21.9millionatOctober31,1987andisestimatedtobeapproximately$25.8millionatOctober31,1988,theeffectivedateofthe,StatementforAllegheny.ManagementiscurrentlyevaluatingthepotentialalternativesavailabletominimizethechargeagainstincomewhichmayberequiredasaresultofthisStatement,includingmodifyingtheexistingphase-inplanorobtainingREAapprovaltoavoidhavingtoapplytheStatement.

NOTESTOFINANCIALSTATEMENTS--ContinuedALLEGHENYELECTRICCOOPERATIVE,INC.NOTEB-ELECTRICUTILITYPLANTINSERVICEElectricutilityplantinserviceconsistsofthefollowing:NuclearUtilityPlant:ProductionTransmissionGeneralplantNuclearfuelNon-NuclearUtilityPlantDepreciation/Amortization,Lives/Rates39years2.75%3%-12.5%Heatproduction3%-33%October3119871986(InThousands)$502,283$482,02130,17429,71382782950,36844,46611631,069TOTAL$584,815$558,098NOTEC-SUSQUEHANNASTEAMELECTRICSTATIONAlleghenyownsa10%undividedinterestinSSES.PP&Lownstheremaining90%.Bothparticipantsprovidetheirownfinancing.Allegheny'sportionofcostsassociatedwiththestationtotalled$605millionand$596millionatOctober31,1987and1986,respectively.Allegheny'sshareofanticipatedcostsforongoingconstructionandnuclearfuelforSSESareestimatedtobeapproximately$39.2millionoverthenextfouryears.Alleghenyreceivesaportionofthetotalstationoutputequaltoitspercentageownership.ThestatementofoperationsreflectsAllegheny'sshareoffuelandotheroperatingcostsassociatedwiththestation.NOTED-INVESTMENTSINASSOCIATEDORGANIZATIONSInvestmentsinassociatedorganizationsconsistprimari3.yofNationalRuralUtilitiesCooperativeFinanceCorporation(CFC)patronagecapital,"CapitalTermCertificates"and"SubordinateTermCertificates,"andBaltimoreBankforCooperatives(BBC)"C"stock.Certificatesbearinterestat3%andbeginmaturingin2025.Alleghenyisrequiredtomaintaintheseinvestmentspursuanttocertainloanandguaranteeagreements.NOTEE-NOTESPAYABLEAlleghenyhasshort-termlinesofcreditavailablewithbanksandCFCof$52millionofwhich$2.0millionwasoutstandingatOctober31,1986.TherewerenoamountsoutstandingatOctober31,1987'nterestratesaregenerallyatprimeplus1%.

NOTESTOFINANCIALSTATEMENTS--ContinuedALLEGHENYELECTRICCOOPERATIVE,INC.NOTEE-NOTESPAYABLE-ContinuedNotespayableof$28.4millionand$28.6millionwereoutstandingatOctober31,1987and1986,respectively,relatingtoPollutionControlRevenueBondsissuedbyanIndustrialDevelopmentAuthorityonAllegheny'sbehalf.Thebondsaresubjecttopurchaseondemandoftheholderandremarketingona"bestefforts"basis.Sinkingfundredemptionisscheduledinvaryingamountsthrough2014,andinterestisduemonthlyatvariablerates(3.4%to6.8%for1987and4.0%to8.3%for1986)~ThebondsareconvertibletoafixedinterestrateandfixedtermatAllegheny'soption.$1.8millionofinvestmentsincludedinothernoncurrentassetsatbothOctober31,1987and1986relatetoadebtservicereservefundrequiredunderthebondindenture.Restrictionsareimposedundercertainshort-termcreditarrangementsincluding,amongotherthings,maintenanceofratiorequirementsunderexistinglong-termdebtarrangementsandlimitationoftotalshort-termindebtednessoutstandingtoanamountnottoexceedtheremainingunadvancedportionofcertainexistingREAlong-termloancommitments($60millionatOctober31,1987).NOTEF-LONG-TERMDEBTLong-termdebtconsistsprincipallyofmortgagenotespayablefortheelectricutilityplanttoREAandtotheUnitedStatesofAmericaactingthroughtheFederalFinancingBank(FFB)andguaranteedbyREA,amortgageloanpayabletoCFCrelatingtononutilityproperty,andcommercialpaperissuedbyAlleghenyfortemporaryconstructionfinancing.SubstantiallyalltheassetsofAlleghenyarepledgedascollateral.Long-termdebtconsistsofthefollowing:October3119871986(InThousands)MortgagenotespayabletoFFBatinterestratesvaryingfrom6.473%to13.820%,dueinvaryingamountsthrough2021$499,877$499,575MortgageloanpayabletoCFC,payableinvariousquarterlyinstallments,includinginterestthroughJanuary2015.Theinterestratewasconvertedduring1987fromafixedrateof9.25%toavariablerate.Variableratesrangedfrom7.38%to9.00%for19872,0852,106 NOTESTOFINANCIALSTATEMENTS--ContinuedALLEGHENYELECTRICCOOPERATIVE,INC.NOTEF-LONG-TERMDEBT-ContinuedOctober311987-1986(InThousands)5%mortgagenotespayabletoREAdueinvaryingamountsthrough2015Commercialpaperwithinterestat8.275%OtherLesscurrentportion$2,505$19,30079523,846669041798502,1967744$Alleghenyhassignedaletterofintenttoenterintoaleasefinancingarrangementwithanoutsideparty(seeNoteJ)andintendstouseaportionoftheproceedsreceivedunderthearrangementtoretireitsoutstandingcommercialpaperinApri.l1988.Ifthearrangementisnotconsummated,AlleghenyintendstoretiretheoutstandingcommercialpaperinApril1988throughproceedsfromlong-termborrowingsavailableunderanexistingfinancingagreementwithREAwhichprovidesforadvancesupto$41.5million.Accordingly,the$19.3millionofcommercialpaperhasbeenclassifiedaslong-termdebtatOctober31,1987.AlleghenyhastheoptiononFFBpromissorynoteadvancestoelect(subjecttoREAapproval)interimmaturitydatesofnotlessthantwoyearsnormorethansevenyearsafterthedateoftheadvance.Atthedateoftheadvanceoronthematurityofaninterimadvance,Alleghenymayalsodesignatethatitdesiresalong-termmaturityof34yearsaftertheendofthecalendaryearinwhichtheadvancewasmade.AtOctober31,1987,Alleghenyhad$34millionofadvancesmaturingwithinoneyearwhichitintendstorefinancefor34years.Aggregatematuritiesoflong-termdebtforthefouryearssubsequenttoOctober31,1988areasfollows(inthousands):1989199019911992$7,1659,12010,47312,849Theabovematurityschedulereflectsmanagement'sintenttoconvertFFBadvanceswithinterimmaturitydatestolong-termdebt.Alleghenyhasusedaninterestrateitestimatestobeanappropriatelong-termrate,basedontheOctober31,1987interestrate,tocomputetheannualprincipalrequirements'lleghenyisrequiredbymortgagecovenantstomaintaincertainlevelsofinterestcoverageandannualdebtservicecoverage.AlleghenywasincompliancewithsuchrequirementsatOctober31,1987.-10-NOTESTOFINANCIALSTATEMENTS-ContinuedALLEGHENYELECTRICCOOPERATIVE,INC.NOTEG-INCOMETAXESAtOctober31,1987,Alleghenyhadavailablenetoperatinglosscarryforwardsof$2.9millionforfinancialreportingpurposesand$256.1mi'llionfortaxreportingpurposes,andinvestmenttaxcreditcarryforwardsofapproximately$33.5millionforbothfinancialandtaxreportingpurposes,expiringthrough2002.UndertheTaxReformActof1986,theamountofinvestmenttaxcreditallowableasaresultofacarryforwardmustbereducedby35/.In1983,Alleghenysoldcertaininvestmentandenergytaxcreditsanddepreciationdeductionspursuanttoasafeharborlease.Theproceedsfromthesale,includinginterestearnedthereon,havebeendeferredandarebeingrecognizedoverthetermofthelease(30years).ThenetproceedsandrelatedinterestwererequiredbyREAtobeusedtoretireoutstandingFFBdebt.Underthetermsofthesafeharborlease,Alleghenyiscontingentlyliableinvaryingamountsintheeventthelessor'staxbenefitsaredisallowedandintheeventofcertainotheroccurrences.ThemaximumamountforwhichAlleghenywascontingentlyliableapproximated$21millionatOctober31,1987.PaymentofthiscontingentliabilityhasbeenguaranteedbyCFC.NOTEH-RELATEDPARTYTRANSACTIONSAlleghenyhasanarrangementwithanassociatedorganization,Pennsylvani.aRuralElectricAssociation(PREA),underwhichPREAprovidesAlleghenywithcertainmanagement,general,andadministrativeservicesonacostreimbursementbasis.TotalcostsfortheservicesprovidedfortheyearsendedOctober31,1987and1986,were$1.8millionand$2.1million,respectively.NOTEI-COMMITMENTSANDCONTINGENCIESAlleghenyandPPSLaremembersofcertaininsuranceprogramswhichprovidecoverageforpropertydamagetomembers'ucleargeneratingplants.Allegheny'sportionofthefacilitiesatSSESisinsuredagainstpropertydamagelossesupto$139.5millionundertheseprograms.Alleghenyisalsoamemberofaninsuranceprogramwhichprovidescoverageforthecostofreplacementpowerduringprolongedoutagesofnuclearunitscausedbycertainspecifiedconditions.Underthepropertyandreplacementpowerinsuranceprograms,Alleghenycouldbeassessedretrospectivepremiumsintheeventtheinsurers'ossesexceedtheirreserves.ThemaximumamountAlleghenycouldbeassessedundertheseprogramsduringthecurrentpolicyyearis$1.5million.

NbTESTOFINANCIALSTATEMENTS-ContinuedALLEGHENYELECTRICCOOPERATIVE,INC.NOTEI-COMMITMENTSANDCONTINGENCIES-ContinuedAllegheny'spublicliabilityforclaimsresultingfromanuclearincidentiscurrentlylimitedto$72millionunderprovisionsofthePrice-AndersonAct(Act).Alleghenyisprotectedagainstthispotentialliabilitybyacombinationofcommercialinsuranceandanindustryretrospectiveassessmentprogram.IntheeventofanuclearincidentatanyofthefacilitiesownedbyothersandcoveredbytheAct,Alleghenycouldbeassessedupto$1millionperincident,butnotmorethan$2millioninacalendaryearintheeventmorethanoneincidentisexperienced.CongressisintheprocessofamendingtheAct.Theproposedamendmentsgenerallyincludeprovisionswhichwouldincreasethepublicliabilitylimitofutilitiesintheeventofanuclearincident.ManagementisunabletopredictwhatactionCongressmightultimatelytakeregardingtheActandwhateffectsuchactionmighthaveonAllegheny'spotentialliability.AlleghenyiscurrentlyconstructingahydroelectricgenerationfacilityatRaystownDam(theFacility)withoperationsexpectedtobeginin1988.Inaddition,Alleghenyisalsopurchasingequipmentforaprojecttoreducepeakpowerdemand(LoadManagementProject).TemporaryconstructionfinancingfortheFacilityisbeingmadethroughshort-termcommercialpaperissuedbyAllegheny(seeNotesFandJ).FinancingfortheLoadManagementProjecthasbeenarrangedwithREA($7.3million)andCFC($3.2million).AtOctober31,1987,totalprojectcostsoftheFacilityandLoadManagementProjectwereestimatedat$33millionand$11.4million,respectively.CostsincurredthroughOctober31,1987were$20.8millionfortheFacilityand$4.7millionfortheLoadManagementProject.OnJuly31,1987,AlleghenyenteredintoanagreementwithSitheEnergiesUSA,Inc.(Sithe)totransferitsinterestsinthedevelopmentoftheAlleghenyRiverLocksandDamsNumber8and9HydroelectricProjecttoSithe.IntereststobetransferredincludedAllegheny'slicensegrantedbytheFederalEnergyRegulatoryCommission(FERC)toconstructthehydroelectricproject.TheagreementcallsforthreepaymentstobemadebySithe.Thefirstpayment,intheamountof$250,000,wasreceivedandrecordedbyAlleghenyinNovember1987inexchangefordeliveranceofevidenceofreleaseofanyliensorclaimsagainsttheFERClicense.Thesecondandthirdpaymentsarecontingentuponcertaineventsasfollows.Thesepaymentswillberecordedwhentheamountsbecomepayableunderthetermsoftheagreement.$1.4millionpayableupontheexecutionbySitheofapowerpurchaseagreementforsaleofallorpartoftheenergyandcapacityproducedbytheproject.$800thousandpayableuponconsummationofconstructionfinancingor12monthssubsequenttothedateofexecutionoftheaforementionedpowerpurchaseagreement.-12-NOTESTOFINANCIALSTATEMENTS-ContinuedALLEGHENYELECTRICCOOPERATIVE,INC.NOTEI--COMMITMENTSANDCONTINGENCIES-ContinuedInaddition,FERCrequiresthatconstructionmustbeginbyMarch1989.TitletotheprojectrevertsbacktoAlleghenyafter40yearsofoperationoronAugust24,2030,whicheverisearlier.NOTEJ-LEASEFINANCINGARRANGEMENTOnSeptember23,1987,AlleghenysignedaletterofintenttoenterintoaleasefinancingarrangementwithFordMotorCreditCompany(Ford)fortheFacility(seeNoteI).Undertermsofthearrangement,AlleghenywillselltheFacilitytoFordforanamountequaltoitsfairmarketvalue,nottoexceed930millionplusorminustenpercent.TheFacilitywillthenbeleasedbacktoAlleghenyforaninitialtermof30years.Thearrangementisexpectedtoqualifyfortreatmentasanoperatinglease.Attheendofthe30-yearterm,AlleghenywillhavetheoptiontopurchasetheFacilityforanamountequaltotheFacility'sfairmarketvalue.Alleghenyalsohastheoptiontorenewtheleaseasprovidedinthearrangement.Alleghenywillretainco-licenseestatusfortheFacilitythroughoutthetermofthearrangement.Inaccordancewiththeletterofintent,AlleghenymadeacommitmentdeposittoFordonNovember11,1987intheamountof$150,000.ThedepositwillbeappliedtoAllegheny'sfirstrentalpayment.ThearrangementisexpectedtobeconsummatedinApril1988.-13-

[gIIjErnst&Whinney300LocustCourt212LocustStreetHarrisburg,Pennsylvania17101717/232-757SAlleghenyElectricCooperative,Inc.Harrisburg,PennsylvaniaTheauditedfinancialstatementsoftheCooperativeandourreportthereonarepresentenepdintherecedingsectionofthisreport.Theinformationpresentedhiftiforpurposesofadditionalanalysisandisnotreqoreuiredforaerenaerssorchanesfairpresentatonottionofthefinancialposition,resultsofoperations,,gsbeensubectedinfinancialpositionoftheCooperative.Suchinformationhaseenjhditiroceduresappliedinourexaminationofthefinancialstatementsand,inouropinion,isfairlystatedinallmateriarp1resectsinrelationtothefinancialstatementstakenasawhole.Harrisburg,PennsylvaniaJanuary22,1988-14-SCHEDULESOFNONOPERATINGRENTALINCOME(EXPENSE)ALLEGHENYELECTRICCOOPERATIVE,INC.YearEndedOctober3119871986(InThousands)INCOME'ental-buildingRental-parking7395879770951760EXPENSES:UtilitiesPayrollandemployeebenefitsManagementandleasingfeesOfficeandadministrativeexpensesMaintenanceandrepairsRealestatetaxesInsuranceInterestDepreciationGainonpropertydisposal1923925128015145170135(298)551182372268113840196135(1)836NETNONOPERATINGRENTALINCOME(EXPENSE)$246$(76)-15-SCHEDULESOFADMINISTRATIVEANDGENERALEXPENSESALLEGHENYELECTRICCOOPERATIVE,INC.YearEndedOctober3119871986(InThousands)OfficesuppliesTravel,conventions,andmeetingsPayrollandemployeebenefitsLegal,auditing,andengineeringAssociationmembershipduesExperimentalandgeneralresearchBoardmeetings,directors'ees,andtravelPennLinesInformationprogramsRentPayrolltaxesInsuranceInsurance-SSESMiscellaneous1511061,22586531362116963411509160854771121041,1031,316(34)22311691195143893081847TOTALADMINISTRATIVEANDGENERALEXPENSES$4,525$4,353-16-AuditedFinancialStatementsandOtherFinancialInformationAlleghenyElectricCooperative,Inc.October31,1987-NOTICE-THEATTACHEDFILESAREOFFICIALRE-CORDSOFTHERECORDS5REPORTSMANAGEMENTBRANCH.THEYHAVEBEENCHARGEDTOYOUFORALIMITEDTIME,PERIODANDMUSTBERETURNEDTOTHERECORDS5ARCHIVESSERVICESSECTIONP1-122WHITEFLINT.PLEASEDONOTSENDDOCUMENTSCHARGEDOUTTHROUGHTHEMAIL.REMOVALOFANYPAGE(S)FROMDOCUMENTFORREPRO-DUCTIONMUSTBEREFERREDTOFILEPERSONNEL.-NOTICE-[g~mErnst&Whinney AuditedFinancialStatementsandOther-FinancialInformationALLEGHENYELECTRICCOOPERATIVE,INC.October31,1987AuditedFinancialStatementsIAuditorsReport.................................BalanceSheets...................................StatementsofOperationsandPatronageCapital...StatementsofChangesinFinancialPosition......NotestoFinancialStatements....................~~~1~~12~~~4~~~5~~~6OtherFinancialInformationAuditors'eportonOtherFinancialInformation..SchedulesofNonoperatingRentalIncome(Expense)SchedulesofAdministrativeandGeneralExpenses.~~~14~~~15~~~16 QmErnst&Whinney300LocustCourt212LocustStreetHarrisburg,Pennsylvania=17101717/232-7575BoardofDirectorsAlleghenyElectricCooperative,Inc.Harrisburg,PennsylvaniaMehaveexaminedthebalancesheetsofAlleghenyElectricCooperative,Inc.asofOctober31,1987and1986,andtherelatedstatementsofoperationsandpatronagecapi,talandchangesinfinancialpositionfortheyearsthenended.Ourexaminationsweremadeinaccordancewithgenerallyacceptedauditingstandardsand,accordingly,includedsuchtestsoftheaccountingrecordsandsuchotherauditingproceduresasweconsiderednecessaryinthecircumstances.Inouropinion,thefinancialstatementsreferredtoabovepresentfairlythefinancialpositionofAlleghenyElectricCooperative,Inc.atOctober311987and1986andtheresultsofitsoperationsandthechangesinits1financialpositionfortheyearsthenended,inconformitywithgeneralyacceptedaccountingprinciplesappliedonaconsistentbasis.Harrisburg,PennsylvaniaJanuary22,1988 BALANCESHEETSALLEGHENYELECTRICCOOPERATIVE,INC.ASSETSOctober3119871986(InThousands)ELECTRICUTILITYPLANT-NoteCInservice-NoteBConstructionworkinprocessNuclearfuelinprocessLessaccumulateddepreciationandamortization$584,815$558,09826,11223,2671747320,650628,400602,0155566238651572,738563,364OTHERASSETSANDINVESTMENTSNonutilityproperty,atcost{netofaccumulateddepreciationof$1,047in1987and$928in1986)Investmentsinassociatedorganizations-NoteDConstructionadvancesOthernoncurrentassets5,2024,39257439685,6685,0093274,30414,13615,308CURRENTASSETSCashandshort-terminvestmentsof$22,539in1987and$5,675in1986AccountsreceivablefrommembersOtheraccountsreceivableOther22,5108,4533,463428348545,2578,0222,56421316,056 EQUITIESANDLIABILITIESOctober3119871986(InThousands)EQUITIESMembershipsDonatedcapitalPatronagecapitalLONG-TERMDEBT,lesscurrentportion-NoteFCURRENTLIABILITIESNotespayable-NoteECurrentportionoflong-termdebt-NoteFAccountspayableandaccruedexpensesAccountspayabletomembersDEFERREDCREDITSDeferredincometaxbenefitsfromsafeharborlease-NoteGOther3503417434,227517,15628,4006,69013,1872,49950,7761474085,16119,56935029,59029,643494,45230,6467,74411,72220950,32115,0875.22520,312S621,728S594728Seenotestofinancialstatements.

STATEMENTSOFOPERATIONSANDPATRONAGECAPITALALLEGHENYELECTRICCOOPERATIVE,INC.YearEndedOctober3119871986(InThousands)Operatingrevenue,includingsalestomembersof$103,425in1987and$97,170in1986$135,400$139,582Operatingexpenses:PurchasedpowerTransmissionProductionFuelDepreciationTaxesAdministrativeandgeneralOPERATINGMARGINBEFOREINTERESTANDOTHERDEDUCTIONS41,2326,86314,97510,320.,8>4913,3974,52589,80345,59743,5435,98716,2457,8757,1563,148435388,30751,275Interestandotherdeductions:InterestexpenseAllowanceforfundsusedduringconstructionOtherdeductions(credits),netOPERATINGMARGINNonoperatingmargins:Netnonoperatingrentalincome(expense)Interestincome45,839(2,407)(6)43,4262,1712461,488173451,560(3,380)(43)48,1373,138(76)13651289MARGINBEFOREINCOMETAXESDeferredincometaxbenefitsfromsafeharborlease3,9056794,427729PatronagecapitalatbeginningofyearNETMARGIN4,58429,5905,15624,434PATRONAGECAPITALATENDOFYEAR$34,174$29,590Seenotestofinancialstatements.

STATEMENTSOFCHANGESINFINANCIALPOSITIONALLEGHENYELECTRICCOOPERATIVE,INC.SOURCEOFWORKINGCAPITALNetmarginCharges(credits)tomarginnotaffectingworkingcapital:DepreciationFuelamortizationDeferredincometaxbenefitsfromsafeharborleaseTOTALFROMOPERATIONS8,6268,784(679)21,3157>2916,775(729)18,493YearEndedOctober3119871986(InThousands)4,584$5,156Additionstolong-termdebtDecreaseinconstructionadvancesOthersourcesAPPLICATIONOFWORKINGCAPITALAdditionstoelectricutilityplantReductionoflong-termdebtIncreaseinconstructionadvancesOtherapplications27,49495349,76226,3184,79024764314194,9905212,27026,27425,37115,6867141128INCREASE(DECREASE)INWORKINGCAPITAL$18,343$(14,854)CHANGESINCOMPONENTSOFWORKINGCAPITALIncrease(decrease)incurrentassets:Cashandshort-terminvestmentsAccountsreceivablefrommembersOtheraccountsreceivableOther$17,253$(10,985)431814899(596)215(337)18,798(11,104)Increase(decrease)incurrentliabilities:NotespayableCurrentportionoflong-termdebtAccountspayableandaccruedexpensesAccountspayabletomembers(2,246)(1,054)1,4652,2904553,1727411,316(1,479)3,750INCREASE(DECREASE)INWORKINGCAPITAL$18,343$(14,854)Seenotestofinancialstatements.

NOTESTOFINANCIALSTATEMENTSALLEGHENYELECTRICCOOPERATIVE,INC+October31,1987NOTEA-SUGARYOFSIGNIFICANTACCOUNTINGPOLICIESAlleghenyElectricCooperative,Inc.(Allegheny)isaruralelectriccooperativeutilityestablishedunderthelawsoftheCommonwealthofPennsylvania.FinancingassistanceisprovidedbytheU.S.DepartmentofAgriculture,RuralElectrificationAdministration(REA)and,therefore,AlleghenyissubjecttocertainrulesandregulationspromulgatedforruralelectricborrowersbyREA.Alleghenyisagenerationandtransmissioncooperative,providingpowersupplytofourteenowner/memberswhoareruralelectricdistributioncooperativeutilitiesprovidingelectricpowertoconsumersincertainareasofPennsylvaniaandNewJersey.AlleghenymaintainsitsaccountingrecordsinaccordancewiththeFederalEnergyRegulatoryCommission'schartofaccountsasmodifiedandadoptedbyREA.ElectricUtilitPlantandDereciation:Theelectricutilityplantisstatedatcost,whichincludesanallowanceforfundsusedduringconstruction.Depreciationisprovidedonthemodifiedsinkingfundmethodfornuclearutilityplantproductionassetsandthestraight-linemethodforallotherassets,exceptnuclearfuel.Thecostofunitsofpropertyretiredorreplacedisremovedfromutilityplantaccountsandchargedtoaccumulateddepreciation.NuclearFuel:Nuclearfuelusageischargedtofuelexpensebasedonthequantityofheatproducedforelectricgeneration.UndertheNuclearWastePolicyActof1982,theU.S.DepartmentofEnergy(DOE)isresponsibleforthepermanentstorageanddisposalofspentnuclearfuelremovedfromnuclearreactors.AlleghenycurrentlypaystoPennsylvaniaPower&LightCompany(PP6L)',co-ownerofSusquehannaSteamElectricStation(SSES),itsportionofDOEfeesforsuchfuturedisposalservices.CostofDecommissioninNuclearPlant:Allegheny'sportionoftheestimateddecommissioningcostsofSSESischargedtooperatingexpensesovertheestimatedusefullifeoftheplant.AllowanceforFundsUsedDurinConstruction:Allowanceforfundsusedduringconstructionrepresentsthecostofdirectlyrelatedborrowedfundsusedforconstructionofelectricutilityplant.Theallowanceiscapitalizedasacomponentofthecostofelectricutilityplantwhileunderconstruction.InvestmentsinAssociatedOranizations:Investmentsinassociatedorganizationsarecarriedatcost.

NOTESTOFINANCIALSTATEMENTS-ContinuedALLEGHENYELECTRICCOOPERATIVE,INC.NOTEA-SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES-ContinuedPreliminarSurves:Costsofpreliminarysurveysforpotentialdevelopmentprojectsarerecordedasdeferredchargesinothernoncurrentassets.Ifconstructionofaprojectresultsfromsuchsurveys,thedeferredchargesaretransferredtothecostofthefacilities.Ifapreliminarysurveyisabandoned,thecostsincurredarewrittenoff.Short-TermInvestments:Short-terminvestmentsarecarriedatcost,plusaccruedinterest,whichapproximatesmarketvalue.IncomeTaxes:Investmenttaxcredits,otherthanthose'soldthroughthesafeharborleasearrangement,areaccountedforundertheflow-throughmethodwherebycreditsarerecognizedasareductionofincometaxexpenseintheyearinwhichthecreditisutilizedfortaxpurposes.TheTaxReformActof1986(theAct),enactedonOctober22,1986,repealedtheInvestmentTaxCreditasofJanuary1,1986.ProvisionsexistwithintheActwhichallowforinvestmenttaxcreditsoncertainpropertyreferredtoas"transitionproperty"placedinserviceafterDecember31,1985.DuringtheyearsendedOctober31,1987and1986,Alleghenyplacedinservicetransitionpropertyeligibleforinvestmenttaxcredits.Variationsinthecustomaryrelationshipbetweenpretaxaccountingincomeandincometaxexpensearetheresultofpatronagedividends.Netoperatinglossesforfinancialandtaxreportingpurposesdifferasaresultoftimingdifferencesrelatingprimarilytodepreciation.AccountinforPhase-InPlans:InAugust1987,theFinancialAccountingStandardsBoardissuedStatementNo.92,"RegulatedEnterprises-AccountingforPhase-inPlans"(Statement).TheStatementspecifiestheaccountingforexistingandfuturephase-inplansandiseffectiveforfiscalyearsbeginningafterDecember15,1987.TheStatement,ifultimatelydeterminedtobeapplicabletoAllegheny,wouldrequireAlleghenytorecognizeanimmediatechargeagainstincomeforthedifferencebetweenthemodifiedsinkingmethodofdepreciationcurrentlyusedfornuclearutilityplantproductionassetsandthestraight-linemethodofdepreciation.Thedifferencebetweenthesetwomethodsisapproximately$21.9millionatOctober31,1987andisestimatedtobeapproximately$25.8millionatOctober31,1988,theeffectivedateofthe,StatementforAllegheny.ManagementiscurrentlyevaluatingthepotentialalternativesavailabletominimizethechargeagainstincomewhichmayberequiredasaresultofthisStatement,includingmodifyingtheexistingphase-inplanorobtainingREAapprovaltoavoidhavingtoapplytheStatement.

NOTESTOFINANCIALSTATEMENTS--ContinuedALLEGHENYELECTRICCOOPERATIVE,INC.NOTEB-ELECTRICUTILITYPLANTINSERVICEElectricutilityplantinserviceconsistsofthefollowing:NuclearUtilityPlant:ProductionTransmissionGeneralplantNuclearfuelNon-NuclearUtilityPlantDepreciation/Amortization,Lives/Rates39years2.75%3%-12.5%Heatproduction3%-33%October3119871986(InThousands)$502,283$482,02130,17429,71382782950,36844,46611631,069TOTAL$584,815$558,098NOTEC-SUSQUEHANNASTEAMELECTRICSTATIONAlleghenyownsa10%undividedinterestinSSES.PP&Lownstheremaining90%.Bothparticipantsprovidetheirownfinancing.Allegheny'sportionofcostsassociatedwiththestationtotalled$605millionand$596millionatOctober31,1987and1986,respectively.Allegheny'sshareofanticipatedcostsforongoingconstructionandnuclearfuelforSSESareestimatedtobeapproximately$39.2millionoverthenextfouryears.Alleghenyreceivesaportionofthetotalstationoutputequaltoitspercentageownership.ThestatementofoperationsreflectsAllegheny'sshareoffuelandotheroperatingcostsassociatedwiththestation.NOTED-INVESTMENTSINASSOCIATEDORGANIZATIONSInvestmentsinassociatedorganizationsconsistprimari3.yofNationalRuralUtilitiesCooperativeFinanceCorporation(CFC)patronagecapital,"CapitalTermCertificates"and"SubordinateTermCertificates,"andBaltimoreBankforCooperatives(BBC)"C"stock.Certificatesbearinterestat3%andbeginmaturingin2025.Alleghenyisrequiredtomaintaintheseinvestmentspursuanttocertainloanandguaranteeagreements.NOTEE-NOTESPAYABLEAlleghenyhasshort-termlinesofcreditavailablewithbanksandCFCof$52millionofwhich$2.0millionwasoutstandingatOctober31,1986.TherewerenoamountsoutstandingatOctober31,1987'nterestratesaregenerallyatprimeplus1%.

NOTESTOFINANCIALSTATEMENTS--ContinuedALLEGHENYELECTRICCOOPERATIVE,INC.NOTEE-NOTESPAYABLE-ContinuedNotespayableof$28.4millionand$28.6millionwereoutstandingatOctober31,1987and1986,respectively,relatingtoPollutionControlRevenueBondsissuedbyanIndustrialDevelopmentAuthorityonAllegheny'sbehalf.Thebondsaresubjecttopurchaseondemandoftheholderandremarketingona"bestefforts"basis.Sinkingfundredemptionisscheduledinvaryingamountsthrough2014,andinterestisduemonthlyatvariablerates(3.4%to6.8%for1987and4.0%to8.3%for1986)~ThebondsareconvertibletoafixedinterestrateandfixedtermatAllegheny'soption.$1.8millionofinvestmentsincludedinothernoncurrentassetsatbothOctober31,1987and1986relatetoadebtservicereservefundrequiredunderthebondindenture.Restrictionsareimposedundercertainshort-termcreditarrangementsincluding,amongotherthings,maintenanceofratiorequirementsunderexistinglong-termdebtarrangementsandlimitationoftotalshort-termindebtednessoutstandingtoanamountnottoexceedtheremainingunadvancedportionofcertainexistingREAlong-termloancommitments($60millionatOctober31,1987).NOTEF-LONG-TERMDEBTLong-termdebtconsistsprincipallyofmortgagenotespayablefortheelectricutilityplanttoREAandtotheUnitedStatesofAmericaactingthroughtheFederalFinancingBank(FFB)andguaranteedbyREA,amortgageloanpayabletoCFCrelatingtononutilityproperty,andcommercialpaperissuedbyAlleghenyfortemporaryconstructionfinancing.SubstantiallyalltheassetsofAlleghenyarepledgedascollateral.Long-termdebtconsistsofthefollowing:October3119871986(InThousands)MortgagenotespayabletoFFBatinterestratesvaryingfrom6.473%to13.820%,dueinvaryingamountsthrough2021$499,877$499,575MortgageloanpayabletoCFC,payableinvariousquarterlyinstallments,includinginterestthroughJanuary2015.Theinterestratewasconvertedduring1987fromafixedrateof9.25%toavariablerate.Variableratesrangedfrom7.38%to9.00%for19872,0852,106 NOTESTOFINANCIALSTATEMENTS--ContinuedALLEGHENYELECTRICCOOPERATIVE,INC.NOTEF-LONG-TERMDEBT-ContinuedOctober311987-1986(InThousands)5%mortgagenotespayabletoREAdueinvaryingamountsthrough2015Commercialpaperwithinterestat8.275%OtherLesscurrentportion$2,505$19,30079523,846669041798502,1967744$Alleghenyhassignedaletterofintenttoenterintoaleasefinancingarrangementwithanoutsideparty(seeNoteJ)andintendstouseaportionoftheproceedsreceivedunderthearrangementtoretireitsoutstandingcommercialpaperinApri.l1988.Ifthearrangementisnotconsummated,AlleghenyintendstoretiretheoutstandingcommercialpaperinApril1988throughproceedsfromlong-termborrowingsavailableunderanexistingfinancingagreementwithREAwhichprovidesforadvancesupto$41.5million.Accordingly,the$19.3millionofcommercialpaperhasbeenclassifiedaslong-termdebtatOctober31,1987.AlleghenyhastheoptiononFFBpromissorynoteadvancestoelect(subjecttoREAapproval)interimmaturitydatesofnotlessthantwoyearsnormorethansevenyearsafterthedateoftheadvance.Atthedateoftheadvanceoronthematurityofaninterimadvance,Alleghenymayalsodesignatethatitdesiresalong-termmaturityof34yearsaftertheendofthecalendaryearinwhichtheadvancewasmade.AtOctober31,1987,Alleghenyhad$34millionofadvancesmaturingwithinoneyearwhichitintendstorefinancefor34years.Aggregatematuritiesoflong-termdebtforthefouryearssubsequenttoOctober31,1988areasfollows(inthousands):1989199019911992$7,1659,12010,47312,849Theabovematurityschedulereflectsmanagement'sintenttoconvertFFBadvanceswithinterimmaturitydatestolong-termdebt.Alleghenyhasusedaninterestrateitestimatestobeanappropriatelong-termrate,basedontheOctober31,1987interestrate,tocomputetheannualprincipalrequirements'lleghenyisrequiredbymortgagecovenantstomaintaincertainlevelsofinterestcoverageandannualdebtservicecoverage.AlleghenywasincompliancewithsuchrequirementsatOctober31,1987.-10-NOTESTOFINANCIALSTATEMENTS-ContinuedALLEGHENYELECTRICCOOPERATIVE,INC.NOTEG-INCOMETAXESAtOctober31,1987,Alleghenyhadavailablenetoperatinglosscarryforwardsof$2.9millionforfinancialreportingpurposesand$256.1mi'llionfortaxreportingpurposes,andinvestmenttaxcreditcarryforwardsofapproximately$33.5millionforbothfinancialandtaxreportingpurposes,expiringthrough2002.UndertheTaxReformActof1986,theamountofinvestmenttaxcreditallowableasaresultofacarryforwardmustbereducedby35/.In1983,Alleghenysoldcertaininvestmentandenergytaxcreditsanddepreciationdeductionspursuanttoasafeharborlease.Theproceedsfromthesale,includinginterestearnedthereon,havebeendeferredandarebeingrecognizedoverthetermofthelease(30years).ThenetproceedsandrelatedinterestwererequiredbyREAtobeusedtoretireoutstandingFFBdebt.Underthetermsofthesafeharborlease,Alleghenyiscontingentlyliableinvaryingamountsintheeventthelessor'staxbenefitsaredisallowedandintheeventofcertainotheroccurrences.ThemaximumamountforwhichAlleghenywascontingentlyliableapproximated$21millionatOctober31,1987.PaymentofthiscontingentliabilityhasbeenguaranteedbyCFC.NOTEH-RELATEDPARTYTRANSACTIONSAlleghenyhasanarrangementwithanassociatedorganization,Pennsylvani.aRuralElectricAssociation(PREA),underwhichPREAprovidesAlleghenywithcertainmanagement,general,andadministrativeservicesonacostreimbursementbasis.TotalcostsfortheservicesprovidedfortheyearsendedOctober31,1987and1986,were$1.8millionand$2.1million,respectively.NOTEI-COMMITMENTSANDCONTINGENCIESAlleghenyandPPSLaremembersofcertaininsuranceprogramswhichprovidecoverageforpropertydamagetomembers'ucleargeneratingplants.Allegheny'sportionofthefacilitiesatSSESisinsuredagainstpropertydamagelossesupto$139.5millionundertheseprograms.Alleghenyisalsoamemberofaninsuranceprogramwhichprovidescoverageforthecostofreplacementpowerduringprolongedoutagesofnuclearunitscausedbycertainspecifiedconditions.Underthepropertyandreplacementpowerinsuranceprograms,Alleghenycouldbeassessedretrospectivepremiumsintheeventtheinsurers'ossesexceedtheirreserves.ThemaximumamountAlleghenycouldbeassessedundertheseprogramsduringthecurrentpolicyyearis$1.5million.

NbTESTOFINANCIALSTATEMENTS-ContinuedALLEGHENYELECTRICCOOPERATIVE,INC.NOTEI-COMMITMENTSANDCONTINGENCIES-ContinuedAllegheny'spublicliabilityforclaimsresultingfromanuclearincidentiscurrentlylimitedto$72millionunderprovisionsofthePrice-AndersonAct(Act).Alleghenyisprotectedagainstthispotentialliabilitybyacombinationofcommercialinsuranceandanindustryretrospectiveassessmentprogram.IntheeventofanuclearincidentatanyofthefacilitiesownedbyothersandcoveredbytheAct,Alleghenycouldbeassessedupto$1millionperincident,butnotmorethan$2millioninacalendaryearintheeventmorethanoneincidentisexperienced.CongressisintheprocessofamendingtheAct.Theproposedamendmentsgenerallyincludeprovisionswhichwouldincreasethepublicliabilitylimitofutilitiesintheeventofanuclearincident.ManagementisunabletopredictwhatactionCongressmightultimatelytakeregardingtheActandwhateffectsuchactionmighthaveonAllegheny'spotentialliability.AlleghenyiscurrentlyconstructingahydroelectricgenerationfacilityatRaystownDam(theFacility)withoperationsexpectedtobeginin1988.Inaddition,Alleghenyisalsopurchasingequipmentforaprojecttoreducepeakpowerdemand(LoadManagementProject).TemporaryconstructionfinancingfortheFacilityisbeingmadethroughshort-termcommercialpaperissuedbyAllegheny(seeNotesFandJ).FinancingfortheLoadManagementProjecthasbeenarrangedwithREA($7.3million)andCFC($3.2million).AtOctober31,1987,totalprojectcostsoftheFacilityandLoadManagementProjectwereestimatedat$33millionand$11.4million,respectively.CostsincurredthroughOctober31,1987were$20.8millionfortheFacilityand$4.7millionfortheLoadManagementProject.OnJuly31,1987,AlleghenyenteredintoanagreementwithSitheEnergiesUSA,Inc.(Sithe)totransferitsinterestsinthedevelopmentoftheAlleghenyRiverLocksandDamsNumber8and9HydroelectricProjecttoSithe.IntereststobetransferredincludedAllegheny'slicensegrantedbytheFederalEnergyRegulatoryCommission(FERC)toconstructthehydroelectricproject.TheagreementcallsforthreepaymentstobemadebySithe.Thefirstpayment,intheamountof$250,000,wasreceivedandrecordedbyAlleghenyinNovember1987inexchangefordeliveranceofevidenceofreleaseofanyliensorclaimsagainsttheFERClicense.Thesecondandthirdpaymentsarecontingentuponcertaineventsasfollows.Thesepaymentswillberecordedwhentheamountsbecomepayableunderthetermsoftheagreement.$1.4millionpayableupontheexecutionbySitheofapowerpurchaseagreementforsaleofallorpartoftheenergyandcapacityproducedbytheproject.$800thousandpayableuponconsummationofconstructionfinancingor12monthssubsequenttothedateofexecutionoftheaforementionedpowerpurchaseagreement.-12-NOTESTOFINANCIALSTATEMENTS-ContinuedALLEGHENYELECTRICCOOPERATIVE,INC.NOTEI--COMMITMENTSANDCONTINGENCIES-ContinuedInaddition,FERCrequiresthatconstructionmustbeginbyMarch1989.TitletotheprojectrevertsbacktoAlleghenyafter40yearsofoperationoronAugust24,2030,whicheverisearlier.NOTEJ-LEASEFINANCINGARRANGEMENTOnSeptember23,1987,AlleghenysignedaletterofintenttoenterintoaleasefinancingarrangementwithFordMotorCreditCompany(Ford)fortheFacility(seeNoteI).Undertermsofthearrangement,AlleghenywillselltheFacilitytoFordforanamountequaltoitsfairmarketvalue,nottoexceed930millionplusorminustenpercent.TheFacilitywillthenbeleasedbacktoAlleghenyforaninitialtermof30years.Thearrangementisexpectedtoqualifyfortreatmentasanoperatinglease.Attheendofthe30-yearterm,AlleghenywillhavetheoptiontopurchasetheFacilityforanamountequaltotheFacility'sfairmarketvalue.Alleghenyalsohastheoptiontorenewtheleaseasprovidedinthearrangement.Alleghenywillretainco-licenseestatusfortheFacilitythroughoutthetermofthearrangement.Inaccordancewiththeletterofintent,AlleghenymadeacommitmentdeposittoFordonNovember11,1987intheamountof$150,000.ThedepositwillbeappliedtoAllegheny'sfirstrentalpayment.ThearrangementisexpectedtobeconsummatedinApril1988.-13-

[gIIjErnst&Whinney300LocustCourt212LocustStreetHarrisburg,Pennsylvania17101717/232-757SAlleghenyElectricCooperative,Inc.Harrisburg,PennsylvaniaTheauditedfinancialstatementsoftheCooperativeandourreportthereonarepresentenepdintherecedingsectionofthisreport.Theinformationpresentedhiftiforpurposesofadditionalanalysisandisnotreqoreuiredforaerenaerssorchanesfairpresentatonottionofthefinancialposition,resultsofoperations,,gsbeensubectedinfinancialpositionoftheCooperative.Suchinformationhaseenjhditiroceduresappliedinourexaminationofthefinancialstatementsand,inouropinion,isfairlystatedinallmateriarp1resectsinrelationtothefinancialstatementstakenasawhole.Harrisburg,PennsylvaniaJanuary22,1988-14-SCHEDULESOFNONOPERATINGRENTALINCOME(EXPENSE)ALLEGHENYELECTRICCOOPERATIVE,INC.YearEndedOctober3119871986(InThousands)INCOME'ental-buildingRental-parking7395879770951760EXPENSES:UtilitiesPayrollandemployeebenefitsManagementandleasingfeesOfficeandadministrativeexpensesMaintenanceandrepairsRealestatetaxesInsuranceInterestDepreciationGainonpropertydisposal1923925128015145170135(298)551182372268113840196135(1)836NETNONOPERATINGRENTALINCOME(EXPENSE)$246$(76)-15-SCHEDULESOFADMINISTRATIVEANDGENERALEXPENSESALLEGHENYELECTRICCOOPERATIVE,INC.YearEndedOctober3119871986(InThousands)OfficesuppliesTravel,conventions,andmeetingsPayrollandemployeebenefitsLegal,auditing,andengineeringAssociationmembershipduesExperimentalandgeneralresearchBoardmeetings,directors'ees,andtravelPennLinesInformationprogramsRentPayrolltaxesInsuranceInsurance-SSESMiscellaneous1511061,22586531362116963411509160854771121041,1031,316(34)22311691195143893081847TOTALADMINISTRATIVEANDGENERALEXPENSES$4,525$4,353-16-