UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 1-6047
General Public Utilities Corporation
(Exact name of registrant as specified in its charter)
Pennsylvania 13-5516989
(State or other jurisdiction of (I.R.S. Employer)
incorporation or organization) Identification No.)
100 Interpace Parkway
Parsippany, New Jersey 07054-1149
(Address of principal executive offices) (Zip Code)
(201) 263-6500
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
The number of shares outstanding of each of the issuer's classes of
voting stock, as of April 30, 1994, was as follows:
Common stock, par value $2.50 per share: 115,024,783 shares
outstanding.
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General Public Utilities Corporation
Quarterly Report on Form 10-Q
March 31, 1994
Table of Contents
Page
PART I - Financial Information
Financial Statements:
Balance Sheets 3
Statements of Income 5
Statements of Cash Flows 6
Notes to Financial Statements 7
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 17
PART II - Other Information 22
Signatures 23
_________________________________
The financial statements (not examined by independent accountants)
reflect all adjustments (which consist of only normal recurring
accruals) which are, in the opinion of management, necessary for a
fair statement of the results for the interim periods presented,
subject to the ultimate resolution of the various matters as
discussed in Note 1 to the Consolidated Financial Statements.
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<TABLE>
GENERAL PUBLIC UTILITIES CORPORATION AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
<CAPTION>
In Thousands
March 31, December 31,
1994 1993
(Unaudited)
<S>
ASSETS <C> <C>
Utility Plant:
In service, at original cost $8 515 634 $8 441 335
Less, accumulated depreciation 2 989 600 2 929 278
Net utility plant in service 5 526 034 5 512 057
Construction work in progress 277 165 267 381
Other, net 219 749 214 178
Net utility plant 6 022 948 5 993 616
Current Assets:
Cash and temporary cash investments 70 940 25 843
Special deposits 11 332 11 868
Accounts receivable:
Customers, net 283 063 253 186
Other 138 915 55 037
Unbilled revenues 92 888 113 960
Materials and supplies, at average cost or less:
Construction and maintenance 189 885 187 606
Fuel 46 922 51 676
Deferred energy costs 3 543 (20 787)
Deferred income taxes 19 357 29 586
Prepayments 33 688 79 490
Total current assets 890 533 787 465
Deferred Debits and Other Assets:
Three Mile Island Unit 2 deferred costs 328 750 339 672
Unamortized property losses 112 121 113 566
Deferred income taxes 292 613 275 257
Income taxes recoverable through future rates 560 410 554 590
Decommissioning funds 241 280 219 178
Other 591 295 559 943
Total deferred debits and other assets 2 126 469 2 062 206
Total Assets $9 039 950 $8 843 287
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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<TABLE>
GENERAL PUBLIC UTILITIES CORPORATION AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
<CAPTION>
In Thousands
March 31, December 31,
1994 1993
(Unaudited)
<S> <C> <C>
LIABILITIES AND CAPITAL
Capitalization:
Common stock $ 314 458 $ 314 458
Capital surplus 668 328 667 683
Retained earnings 1 943 566 1 813 490
Total 2 926 352 2 795 631
Less, reacquired common stock, at cost 184 321 185 258
Total common stockholders' equity 2 742 031 2 610 373
Cumulative preferred stock:
With mandatory redemption 150 000 150 000
Without mandatory redemption 158 242 158 242
Long-term debt 2 396 399 2 320 384
Total capitalization 5 446 672 5 238 999
Current Liabilities:
Debt due within one year 133 232 133 232
Notes payable 189 905 216 056
Obligations under capital leases 157 041 161 744
Accounts payable 273 213 300 181
Taxes accrued 186 514 140 132
Interest accrued 66 351 73 368
Other 133 482 169 976
Total current liabilities 1 139 738 1 194 689
Deferred Credits and Other Liabilities:
Deferred income taxes 1 401 558 1 389 241
Unamortized investment tax credits 163 348 170 108
Three Mile Island Unit 2 future costs 319 270 319 867
Other 569 364 530 383
Total deferred credits and other liabilities 2 453 540 2 409 599
Commitments and Contingencies (Note 1)
Total Liabilities and Capital $9 039 950 $8 843 287
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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<TABLE>
GENERAL PUBLIC UTILITIES CORPORATION AND SUBSIDIARY COMPANIES
Consolidated Statements of Income
(Unaudited)
<CAPTION>
In Thousands
Three Months
Ended March 31,
1994 1993
<S> <C> <C>
Operating Revenues $937 209 $881 154
Operating Expenses:
Fuel 103 307 92 215
Power purchased and interchanged 234 502 221 424
Deferral of energy costs, net (24 770) 10 464
Other operation and maintenance 233 111 199 984
Depreciation and amortization 89 813 86 592
Taxes, other than income taxes 90 953 84 878
Total operating expenses 726 916 695 557
Operating Income Before Income Taxes 210 293 185 597
Income taxes 53 697 51 536
Operating Income 156 596 134 061
Other Income and Deductions:
Allowance for other funds used during
construction 646 1 200
Other income, net 57 609 3 429
Income taxes (23 299) (2 223)
Total other income and deductions 34 956 2 406
Income Before Interest Charges
and Preferred Dividends 191 552 136 467
Interest Charges and Preferred Dividends:
Interest on long-term debt 46 143 46 064
Other interest 18 509 3 914
Allowance for borrowed funds used
during construction (1 517) (1 528)
Preferred stock dividends of subsidiaries 5 515 8 694
Total interest charges and
preferred dividends 68 650 57 144
Net Income $122 902 $ 79 323
Earnings Per Average Share $ 1.07 $ .72
Average Common Shares Outstanding 115 065 110 859
Cash Dividends Paid Per Share $ .425 $ .40
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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<TABLE>
GENERAL PUBLIC UTILITIES CORPORATION AND SUBSIDIARY COMPANIES
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
In Thousands
Three Months
Ended March 31,
1994 1993
<S> <C> <C>
Operating Activities:
Income before preferred dividends of subsidiaries $ 128 417 $ 88 017
Adjustments to reconcile income to cash provided:
Depreciation and amortization 90 900 88 671
Amortization of property under capital leases 15 815 15 567
Nuclear outage maintenance costs, net 7 965 (11 805)
Deferred income taxes and investment tax
credits, net 25 371 16 508
Deferred energy costs, net (24 781) 10 684
Accretion income (3 922) (4 311)
Allowance for other funds used during construction (647) (1 200)
Changes in working capital:
Receivables (92 684) (19 016)
Materials and supplies 2 475 8 449
Special deposits and prepayments 46 322 (29 757)
Payables and accrued liabilities 27 400 28 926
Other, net (20 103) (9 780)
Net cash provided by operating activities 202 528 180 953
Investing Activities:
Cash construction expenditures (125 764) (112 240)
Contributions to decommissioning trust (9 030) (5 282)
Other, net (2 267) (3 735)
Net cash used for investing activities (137 061) (121 257)
Financing Activities:
Issuance of long-term debt 139 087 278 143
Decrease in notes payable, net (26 101) (17 264)
Retirement of long-term debt (64 000) (99 998)
Capital lease principal payments (14 980) (10 579)
Dividends paid on common stock (48 861) (44 327)
Dividends paid on preferred stock of subsidiaries (5 515) (8 694)
Net cash provided (required)
by financing activities (20 370) 97 281
Net increase in cash and temporary
cash investments from above activities 45 097 156 977
Cash and temporary cash investments,
beginning of year 25 843 10 390
Cash and temporary cash investments, end of period $ 70 940 $ 167 367
Supplemental Disclosure:
Interest paid (net of amount capitalized) $ 68 113 $ 50 040
Income taxes paid $ 9 067 $ 8 149
New capital lease obligations incurred $ 6 949 $ 3 459
Common stock dividends declared but not paid $ - $ -
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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General Public Utilities Corporation and Subsidiary Companies
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
General Public Utilities Corporation (the Corporation) is a holding
company registered under the Public Utility Holding Company Act of 1935. The
Corporation does not directly operate any utility properties, but owns all
the outstanding common stock of three electric utilities -- Jersey Central
Power & Light Company (JCP&L), Metropolitan Edison Company (Met-Ed) and
Pennsylvania Electric Company (Penelec) (the Subsidiaries). The Corporation
also owns all the common stock of GPU Service Corporation (GPUSC), a service
company; GPU Nuclear Corporation (GPUN), which operates and maintains the
nuclear units of the Subsidiaries; and Energy Initiatives, Inc. (EI). In
April 1994, General Portfolios Corporation (GPC) merged into EI, formally a
subsidiary of GPC. EI develops, owns and operates nonutility generating
facilities. All of these companies considered together with their
subsidiaries are referred to as the "GPU System."
These notes should be read in conjunction with the notes to consolidated
financial statements included in the 1993 Annual Report on Form 10-K. The
year-end condensed balance sheet data contained in the attached financial
statements were derived from audited financial statements. For disclosures
required by generally accepted accounting principles, see the 1993 Annual
Report on Form 10-K.
1. COMMITMENTS AND CONTINGENCIES
NUCLEAR FACILITIES
The Subsidiaries have made investments in three major nuclear projects -
- Three Mile Island Unit 1 (TMI-1) and Oyster Creek, both of which are
operational generating facilities, and Three Mile Island Unit 2 (TMI-2), which
was damaged during a 1979 accident. At March 31, 1994, the Subsidiaries' net
investment in TMI-1 and Oyster Creek, including nuclear fuel, was $659 million
and $796 million, respectively. TMI-1 and TMI-2 are jointly owned by JCP&L,
Met-Ed and Penelec in the percentages of 25%, 50% and 25%, respectively.
Oyster Creek is owned by JCP&L.
Costs associated with the operation, maintenance and retirement of
nuclear plants continue to be significant and less predictable than costs
associated with other sources of generation, in large part due to changing
regulatory requirements and safety standards and experience gained in the
construction and operation of nuclear facilities. The GPU System may also
incur costs and experience reduced output at its nuclear plants because of the
design criteria prevailing at the time of construction and the age of the
plants' systems and equipment. In addition, for economic or other reasons,
operation of these plants for the full term of their now assumed lives cannot
be assured. Also, not all risks associated with ownership or operation of
nuclear facilities may be adequately insured or insurable. Consequently, the
ability of electric utilities to obtain adequate and timely recovery of costs
associated with nuclear projects, including replacement power, any unamortized
investment at the end of the plants' useful life (whether scheduled or
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premature), the carrying costs of that investment and retirement costs, is not
assured. Management intends, in general, to seek recovery of any such costs
described above through the ratemaking process, but recognizes that recovery
is not assured.
TMI-2: The 1979 TMI-2 accident resulted in significant damage to, and
contamination of, the plant and a release of radioactivity to the environment.
The cleanup program was completed in 1990. After receiving Nuclear Regulatory
Commission (NRC) approval, TMI-2 entered into long-term monitored storage in
December 1993.
As a result of the accident and its aftermath, approximately 2,100
individual claims for alleged personal injury (including claims for punitive
damages), which are material in amount, have been asserted against the
Corporation and the Subsidiaries and the suppliers of equipment and services
to TMI-2, and are pending in the United States District Court for the Middle
District of Pennsylvania. Some of such claims also seek recovery on the basis
of alleged emissions of radioactivity before, during and after the accident.
If, notwithstanding the developments noted below, punitive damages are
not covered by insurance and are not subject to the liability limitations of
the federal Price-Anderson Act, punitive damage awards could have a material
adverse effect on the financial position of the GPU System.
At the time of the TMI-2 accident, as provided for in the Price-Anderson
Act, the Subsidiaries had (a) primary financial protection in the form of
insurance policies with groups of insurance companies providing an aggregate
of $140 million of primary coverage, (b) secondary financial protection in the
form of private liability insurance under an industry retrospective rating
plan providing for premium charges deferred in whole or in major part under
such plan, and (c) an indemnity agreement with the NRC, bringing their total
primary and secondary insurance financial protection and indemnity agreement
with the NRC up to an aggregate of $560 million, which is the ceiling
established by the Price-Anderson Act on the aggregate public liability that
may be imposed upon them for the TMI-2 accident.
The insurers of TMI-2 have been providing a defense against all TMI-2
accident related claims against the Corporation and the Subsidiaries and their
suppliers under a reservation of rights with respect to any award of punitive
damages. However, the defendants in the TMI-2 litigation and the insurers
agreed, on March 30, 1994, that the insurers would withdraw their reservation
of rights.
In June 1993, the Court agreed to permit pre-trial discovery on the
punitive damage claims to proceed. A trial of twelve allegedly representative
cases is scheduled to begin in October 1994. On February 18, 1994, the Court
held that the plaintiffs' claims for punitive damages are not barred by the
Price-Anderson Act to the extent that the funds to pay punitive damages do not
come out of the U.S. Treasury. The Court also denied on February 18, 1994,
the defendants' motion seeking a dismissal of all cases on the grounds that
the defendants complied with applicable federal safety standards regarding
permissible radiation releases from TMI-2 and that, as a matter of law, the
defendants therefore did not breach any duty that they may have owed
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to the individual plaintiffs. The Court stated that a dispute about what
radiation and emissions were released cannot be resolved on a motion for
summary judgment.
In an Order issued April 20, 1994, the Court: (1) noted that the
plaintiffs have agreed to seek punitive damages only against the Corporation
and the Subsidiaries; and (2) denied the defendants' motions for interlocutory
appeal of the Court's Orders of February 18, 1994, stating in part that the
Court is of the opinion that any punitive damages owed must be paid out of and
limited to the amount of primary and secondary insurance under the Price-
Anderson Act and, accordingly, evidence of the defendants' net worth is not
relevant in the pending proceeding.
NUCLEAR PLANT RETIREMENT COSTS
Retirement costs for nuclear plants include decommissioning the
radiological portions of the plants and the cost of removal of nonradiological
structures and materials. The disposal of spent nuclear fuel is covered
separately by contracts with the U.S. Department of Energy (DOE).
In 1990, the Subsidiaries submitted a report, in compliance with NRC
regulations, setting forth a funding plan (employing the external sinking fund
method) for the decommissioning of their nuclear reactors. Under this plan,
the Subsidiaries intend to complete the funding for Oyster Creek and TMI-1 by
the end of the plants' license terms, 2009 and 2014, respectively. The TMI-2
funding completion date is 2014, consistent with TMI-2 remaining in long-term
storage and being decommissioned at the same time as TMI-1. Under the NRC
regulations, the funding targets (in 1993 dollars) for TMI-1 and Oyster Creek
are $143 million and $175 million, respectively. Based on NRC studies, a
comparable funding target for TMI-2 (in 1993 dollars), which takes into
account the accident, is $228 million. The NRC is currently studying the
levels of these funding targets. Management cannot predict the effect that
the results of this review will have on the funding targets. NRC regulations
and a regulatory guide provide mechanisms, including exemptions, to adjust the
funding targets over their collection periods to reflect increases or
decreases due to inflation and changes in technology and regulatory
requirements. The funding targets, while not actual cost estimates, are
reference levels designed to assure that licensees demonstrate adequate
financial responsibility for decommissioning. While the regulations address
activities related to the removal of the radiological portions of the plants,
they do not establish residual radioactivity limits nor do they address costs
related to the removal of nonradiological structures and materials.
In 1988, a consultant to GPUN performed site-specific studies of TMI-1
and Oyster Creek that considered various decommissioning plans and estimated
the cost of decommissioning the radiological portions of each plant to range
from approximately $205 to $285 million and $220 to $320 million, respectively
(adjusted to 1993 dollars). In addition, the studies estimated the cost of
removal of nonradiological structures and materials for TMI-1 and Oyster Creek
at $72 million and $47 million, respectively.
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The ultimate cost of retiring the GPU System's nuclear facilities may be
materially different from the funding targets and the cost estimates contained
in the site-specific studies and cannot now be more reasonably estimated than
the level of the NRC funding target because such costs are subject to (a) the
type of decommissioning plan selected, (b) the escalation of various cost
elements (including, but not limited to, general inflation), (c) the further
development of regulatory requirements governing decommissioning, (d) the
absence to date of significant experience in decommissioning such facilities
and (e) the technology available at the time of decommissioning. The
Subsidiaries charge to expense and contribute to external trusts amounts
collected from customers for nuclear plant decommissioning and non-
radiological costs. In addition, the Subsidiaries have contributed to
external trusts amounts written off for nuclear plant decommissioning in 1990
and 1991.
TMI-1 and Oyster Creek:
JCP&L is collecting revenues for decommissioning, which are expected to
result in the accumulation of its share of the NRC funding target for each
plant. JCP&L is also collecting revenues, based on estimates, for the cost of
removal of nonradiological structures and materials at each plant based on its
share of an estimated $15.3 million for TMI-1 and $31.6 million for Oyster
Creek. In January 1993, the Pennsylvania Public Utility Commission (PaPUC)
granted Met-Ed revenues for decommissioning costs of TMI-1 based on its share
of the NRC funding target and nonradiological cost of removal as estimated in
the site-specific study. Effective October 1993, the PaPUC approved a rate
change for Penelec which increased the collection of revenues for
decommissioning costs for TMI-1 to a basis equivalent to that granted Met-Ed.
Collections from customers for decommissioning expenditures are deposited in
external trusts and are classified as Decommissioning Funds on the balance
sheet, which includes the interest earned on these funds. Provision for the
future expenditures of these funds has been made in accumulated depreciation,
amounting to $33 million for TMI-1 and $84 million for Oyster Creek at March
31, 1994. These decommissioning costs are accrued and charged to depreciation
expense over the expected service life of each nuclear plant.
Management believes that any TMI-1 and Oyster Creek retirement costs, in
excess of those currently recognized for ratemaking purposes, should be
recoverable through the ratemaking process.
TMI-2:
The Corporation and its Subsidiaries have recorded a liability amounting
to $229 million as of March 31, 1994, for the radiological decommissioning of
TMI-2, reflecting the NRC funding target. The Subsidiaries record
escalations, when applicable, in the liability based upon changes in the NRC
funding target. The Subsidiaries have also recorded a liability in the amount
of $20 million for incremental costs specifically attributable to monitored
storage. Such costs are expected to be incurred between 1994 and 2014, when
decommissioning is forecast to begin. In addition, the Subsidiaries had
recorded a liability in the amount of $71 million for nonradiological cost of
removal. Expenditures for such costs through March, 1994 have reduced the
liability to $70 million. The above amounts for retirement costs and
monitored storage are reflected as Three Mile Island Unit 2 Future Costs on
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the balance sheet. JCP&L has made a nonrecoverable contribution of
$15 million to an external decommissioning trust. Met-Ed and Penelec have
made nonrecoverable contributions of $40 million and $20 million,
respectively, to external decommissioning trusts relating to their shares of
the accident-related portion of the decommissioning liability. Earnings
resulting from decommissioning funds provided by customers are offset against
amounts collectible from customers in TMI Unit-2 deferred costs on the balance
sheet.
The NJBRC and the PaPUC have granted JCP&L and Met-Ed, respectively,
decommissioning revenues for the remainder of the NRC funding target and
allowances for the cost of removal of nonradiological structures and
materials. In March 1993, a PaPUC rate order for Met-Ed allowed for the
future recovery of certain TMI-2 retirement costs. The recovery of these
TMI-2 retirement costs will begin when the amortization of the TMI-2
investment ends, at the same annual amount ($6.3 million for recovery of
radiological decommissioning and $2.0 million for nonradiological cost of
removal, net of gross receipts tax). In May 1993, the Pennsylvania Office of
Consumer Advocate filed a petition for review with the Pennsylvania
Commonwealth Court seeking to set aside the PaPUC's 1993 rate order. The
matter is pending before the court. If the 1993 rate order is reversed,
Met-Ed and Penelec would be required to write off a total of approximately
$170 million for retirement costs. Penelec intends to request decommissioning
revenues and an allowance for the cost of removal of nonradiological
structures and materials, equivalent to its share of the amounts granted to
Met-Ed, in its next retail base rate filing. Management intends to seek
recovery for any increases in TMI-2 retirement costs, but recognizes that
recovery cannot be assured.
As a result of TMI-2's entering long-term monitored storage, the
Subsidiaries are incurring incremental annual storage costs of $1 million.
The Subsidiaries have deferred the $20 million for the total estimated
incremental costs attributable to monitored storage through 2014, the expected
retirement date of TMI-1. The JCP&L share of these costs has been recognized
in rates by the NJBRC. Met-Ed and Penelec believe these costs should be
recoverable through the ratemaking process.
INSURANCE
The GPU System has insurance (subject to retentions and deductibles) for
its operations and facilities including coverage for property damage,
liability to employees and third parties, and loss of use and occupancy
(primarily incremental replacement power costs). There is no assurance that
the GPU System will maintain all existing insurance coverages. Losses or
liabilities that are not completely insured, unless allowed to be recovered
through ratemaking, could have a material adverse effect on the financial
position of the GPU System.
The decontamination liability, premature decommissioning and property
damage insurance coverage for the TMI station (TMI-1 and TMI-2 are considered
one site for insurance purposes) and for Oyster Creek totals $2.7 billion per
site. In accordance with NRC regulations, these insurance policies generally
require that proceeds first be used for stabilization of the reactors and then
to pay for decontamination and debris removal expenses. Any remaining amounts
available under the policies may then be used for repair and restoration costs
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and decommissioning costs. Consequently, there can be no assurance that in
the event of a nuclear incident, property damage insurance proceeds would be
available for the repair and restoration of that station.
The Price-Anderson Act limits the GPU System's liability to third
parties for a nuclear incident at one of its sites to approximately
$9.4 billion. Coverage for the first $200 million of such liability is
provided by private insurance. The remaining coverage, or secondary
protection, is provided by retrospective premiums payable by all nuclear
reactor owners. Under secondary protection, a nuclear incident at any
licensed nuclear power reactor in the country, including those owned by the
GPU System, could result in assessments of up to $79 million per incident for
each of the GPU System's three reactors, subject to an annual maximum payment
of $10 million per incident per reactor. In 1993, GPUN requested an exemption
from the NRC to eliminate the secondary protection requirements for TMI-2.
This matter is pending before the NRC.
The GPU System has insurance coverage for incremental replacement power
costs resulting from an accident-related outage at its nuclear plants.
Coverage commences after the first 21 weeks of the outage and continues for
three years at decreasing levels beginning at $1.8 million for Oyster Creek
and $2.6 million for TMI-1, per week.
Under its insurance policies applicable to nuclear operations and
facilities, the GPU System is subject to retrospective premium assessments of
up to $51 million in any one year, in addition to those payable under the
Price-Anderson Act.
ENVIRONMENTAL MATTERS
As a result of existing and proposed legislation and regulations, and
ongoing legal proceedings dealing with environmental matters, including but
not limited to acid rain, water quality, air quality, global warming,
electromagnetic fields, and storage and disposal of hazardous and/or toxic
wastes, the GPU System may be required to incur substantial additional costs
to construct new equipment, modify or replace existing and proposed equipment,
remediate or clean up waste disposal and other sites currently or formerly
used by it, including formerly-owned manufactured gas plants and mine refuse
piles, and with regard to electromagnetic fields, postpone or cancel the
installation of, or replace or modify, utility plant, the costs of which could
be material. Management intends to seek recovery through the ratemaking
process for any additional costs, but recognizes that recovery cannot be
assured.
To comply with the federal Clean Air Act Amendments (Clean Air Act) of
1990, the GPU System expects to expend up to $380 million for air pollution
control equipment by the year 2000. The GPU System reduced its estimate from
$590 million to $380 million primarily due to the postponement of two scrubber
installations until after 2000. In developing its least-cost plan to comply
with the Clean Air Act, the GPU System will continue to evaluate major capital
investments compared to participation in the emission allowance market and the
use of low-sulfur fuel. Costs associated with the capital invested in this
equipment and the increased operating costs of the affected stations should be
recoverable through the ratemaking process.
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The GPU System companies have been notified by the Environmental
Protection Agency (EPA) and state environmental authorities that they are
among the potentially responsible parties (PRPs) who may be jointly and
severally liable to pay for the costs associated with the investigation and
remediation at ten hazardous and/or toxic waste sites. In addition, the GPU
System companies have been requested to supply information to the EPA and
state environmental authorities on several other sites for which they have not
yet been named as PRPs. The Subsidiaries have also been named in lawsuits
requesting damages for hazardous and/or toxic substances allegedly released
into the environment. The ultimate cost of remediation will depend upon
changing circumstances as site investigations continue, including (a) the
existing technology required for site cleanup, (b) the remedial action plan
chosen and (c) the extent of site contamination and the portion attributed to
the GPU System companies.
JCP&L has entered into agreements with the New Jersey Department of
Environmental Protection and Energy for the investigation and remediation of
17 formerly-owned manufactured gas plant sites. One of these sites has been
repurchased by JCP&L. JCP&L has also entered into various cost sharing
agreements with other utilities for some of the sites. At March 31, 1994,
JCP&L has an estimated environmental liability of $35 million recorded on its
balance sheet relating to these sites. The estimated liability is based upon
ongoing site investigations and remediation efforts, including capping the
sites and pumping and treatment of ground water. If the periods over which
the remediation is currently expected to be performed are lengthened, JCP&L
believes that it is reasonably possible that the ultimate costs may range as
high as $60 million. Estimates of these costs are subject to significant
uncertainties as JCP&L does not presently own or control most of these sites;
the environmental standards have changed in the past and are subject to future
change; the accepted technologies are subject to further development; and the
related costs for these technologies are uncertain. If JCP&L is required to
utilize different remediation methods, the costs could be materially in excess
of $60 million.
In 1993, the NJBRC approved a mechanism for the recovery of future
manufactured gas plant remediation costs through JCP&L's Levelized Energy
Adjustment Clause (LEAC) when expenditures exceed prior collections. The
NJBRC decision provides for interest to be credited to customers until the
overrecovery is eliminated and for future costs to be amortized over seven
years with interest. JCP&L is awaiting a final NJBRC order. JCP&L is
pursuing reimbursement of the above costs from its insurance carriers, and
will seek to recover costs to the extent not covered by insurance through this
mechanism.
The GPU System companies are unable to estimate the extent of possible
remediation and associated costs of additional environmental matters. Also
unknown are the consequences of environmental issues, which could cause the
postponement or cancellation of either the installation or replacement of
utility plant. Management believes the costs described above should be
recoverable through the ratemaking process.
OTHER COMMITMENTS AND CONTINGENCIES
In April 1994, the Corporation announced it was offering a voluntary
enhanced retirement program to certain non-bargaining employees. In addition,
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in April 1994, Penelec's bargaining units were offered and accepted a similar
enhanced retirement program. JCP&L and Met-Ed are negotiating with their
respective unions with respect to possible participation of bargaining unit
employees in similar enhanced retirement programs. The enhanced retirement
programs are part of a corporate realignment that was announced in February
1994. At that time, the Corporation said that its goal was to achieve $80
million in annual cost savings by the end of 1996. If two-thirds of the
anticipated eligible bargaining and non-bargaining employees were to accept
the offer, depending upon the age and years of service of those employees, the
program could result in a 1994 pre-tax charge to earnings of between $110
million and $120 million.
The NJBRC has instituted a generic proceeding to address the appropriate
recovery of capacity costs associated with electric utility power purchases
from nonutility generation projects. The proceeding was initiated, in part,
to respond to contentions of the New Jersey Public Advocate, Division of Rate
Counsel (Rate Counsel), that by permitting utilities to recover such costs
through the LEAC, an excess or "double recovery" may result when combined with
the recovery of the utilities' embedded capacity costs through their base
rates. In 1993, JCP&L and the other New Jersey electric utilities filed
motions for summary judgment with the NJBRC requesting that the NJBRC dismiss
contentions being made by Rate Counsel that adjustments for alleged "double
recovery" in prior periods are warranted. Rate Counsel has filed a brief in
opposition to the utilities' summary judgment motions including a statement
from its consultant that in his view, the "double-recovery" for JCP&L for the
1988-92 LEAC periods would be approximately $102 million. In February 1994,
the NJBRC ruled that the 1991 LEAC period was considered closed but subsequent
LEACs remain open for further investigation. It is anticipated that the
proceeding will be transmitted to the Office of Administrative Law for further
action. Management estimates that the potential exposure for LEAC periods
subsequent to 1991 is approximately $33 million through February 1995, the end
of the current LEAC period. Management is unable to estimate the outcome of
this proceeding.
As a result of the Energy Policy Act of 1992 (Energy Act) and actions of
regulatory commissions, the electric utility industry appears to be moving
toward a combination of competition and a modified regulatory environment. In
accordance with Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation" (FAS 71), the GPU
System's financial statements reflect assets and costs based on current cost-
based ratemaking regulations. Continued accounting under FAS 71 requires that
the following criteria be met:
a) A utility's rates for regulated services provided to its customers
are established by, or are subject to approval by, an independent
third-party regulator;
b) The regulated rates are designed to recover specific costs of
providing the regulated services or products; and
c) In view of the demand for the regulated services and the level of
competition, direct and indirect, it is reasonable to assume that
rates set at levels that will recover a utility's costs can be
charged to and collected from customers. This criteria requires
consideration of anticipated changes in levels of demand or
competition during the recovery period for any capitalized costs.
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A utility's operations can cease to meet those criteria for various
reasons, including deregulation, a change in the method of regulation, or a
change in the competitive environment for the utility's regulated services.
Regardless of the reason, a utility whose operations cease to meet those
criteria should discontinue application of FAS 71 and report that
discontinuation by eliminating from its balance sheet the effects of any
actions of regulators that had been recognized as assets and liabilities
pursuant to FAS 71 but which would not have been recognized as assets and
liabilities by enterprises in general.
If a portion of the GPU System's operations continues to be regulated
and meets the above criteria, FAS 71 accounting may only be applied to that
portion. Write-offs of utility plant and regulatory assets may result for
those operations that no longer meet the requirements of FAS 71. In addition,
under deregulation, the uneconomical costs of certain contractual commitments
for purchased power and/or fuel supplies may have to be expensed. Management
believes that to the extent that the GPU System no longer qualifies for FAS 71
accounting treatment, a material adverse effect on its results of operations
and financial position may result.
The Subsidiaries have entered into power purchase agreements with
independently owned power production facilities (nonutility generators) for
the purchase of energy and capacity for periods up to 25 years. The majority
of these agreements are subject to penalties for nonperformance and other
contract limitations. While a few of these facilities are dispatchable, most
are must-run and generally obligate the Subsidiaries to purchase all of the
power produced up to the contract limits. The agreements have been approved
by the state regulatory commissions and permit the Subsidiaries to recover
energy and demand costs from customers through their energy clauses. These
agreements provide for the sale of approximately 2,452 MW of capacity and
energy to the GPU System by the mid-to-late 1990s. As of March 31, 1994,
facilities covered by these agreements having 1,193 MW of capacity were in
service with another 215 MW scheduled to commence operation in 1994. The
estimated cost of these agreements for 1994 is $551 million. The price of the
energy and capacity to be purchased under these agreements is determined by
the terms of the contracts. The rates payable under a number of these
agreements are substantially in excess of current market prices. While the
Subsidiaries have been granted full recovery of these costs from customers by
the state commissions, there can be no assurance that the Subsidiaries will
continue to be able to recover these costs throughout the term of the related
contracts. The emerging competitive market has created additional uncertainty
regarding the forecasting of the System's energy supply needs which, in turn,
has caused the Subsidiaries to change their supply strategy to seek shorter
term agreements offering more flexibility. At the same time, the Subsidiaries
are attempting to renegotiate, and in some cases buy out, high cost long-term
nonutility generation contracts where opportunities arise. The extent to
which the Subsidiaries may be able to do so, however, or recover associated
costs through rates, is uncertain. Moreover, these efforts have led to
disputes before both the NJBRC and the PaPUC, as well as to litigation and may
result in claims against the Subsidiaries for substantial damages. There can
be no assurance as to the outcome of these matters.
JCP&L's two operating nuclear units are subject to the NJBRC's annual
nuclear performance standard. Operation of these units at an aggregate annual
generating capacity factor below 65% or above 75% would trigger a charge or
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credit based on replacement energy costs. At current cost levels, the maximum
annual effect on net income of the performance standard charge at a 40%
capacity factor would be approximately $10 million. While a capacity factor
below 40% would generate no specific monetary charge, it would require the
issue to be brought before the NJBRC for review. The annual measurement
period, which begins in March of each year, coincides with that used for the
LEAC. At the request of the PaPUC, Met-Ed and Penelec, as well as the other
Pennsylvania utilities, have supplied the PaPUC with proposals. Met-Ed and
Penelec expect the PaPUC to adopt a generic nuclear performance standard
during 1994.
During the normal course of the operation of their businesses, in
addition to the matters described above, the GPU System companies are from
time to time involved in disputes, claims and, in some cases, as defendants in
litigation in which compensatory and punitive damages are sought by customers,
contractors, vendors and other suppliers of equipment and services and by
employees alleging unlawful employment practices. It is not expected that the
outcome of these matters will have a material effect on the GPU System's
financial position or results of operations.
2. INCOME TAXES
In March 1994, as a result of a settlement of a federal income tax
refund claim for 1986, the Corporation's Subsidiaries recorded net income tax
refunds aggregating $17 million based on the retirement of TMI-2 for tax
purposes.
At the same time, the Corporation's Subsidiaries also recorded a total
of $46 million of net interest income representing net interest receivable
from the Internal Revenue Service associated with this refund settlement.
While the Subsidiaries intend to refund the tax refund amounts to their
customers, the ultimate disposition of the income tax refunds and the
associated net interest is subject to regulatory review. Income tax amounts
refunded will have no effect on net income.
In addition, in April 1994, audits of the GPU System's federal income
tax returns for years 1987 through 1989 were settled with the Internal Revenue
Service. Exclusive of the effects of the TMI-2 retirement mentioned above,
these settlements had no material effect on the financial position or results
of operations of the GPU System.
3. ACCOUNTING POLICIES
Effective January 1, 1994, the GPU System adopted Statement of Financial
Accounting Standards No. 115 (FAS 115) "Accounting for Certain Investments in
Debt and Equity Securities", which addresses the accounting and reporting for
investments in equity securities that have readily determinable fair values
and for all investments in debt securities. The adoption of FAS 115 did not
have a material effect on the financial position of the GPU System.
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General Public Utilities Corporation and Subsidiary Companies
Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following is management's discussion of significant factors that
affected the Corporation's interim financial condition and results of
operations. This should be read in conjunction with Management's Discussion
and Analysis of Financial Condition and Results of Operations included in the
Corporation's 1993 Annual Report on Form 10-K.
RESULTS OF OPERATIONS
Net income for the first quarter ended March 31, 1994, was
$122.9 million, or $1.07 per share, compared with $79.3 million, or $0.72 per
share, for the first quarter of 1993. The increase in earnings for the
quarter was principally due to increased revenues resulting from a February
1993 retail base rate increase at Jersey Central Power & Light Company
(JCP&L), increased sales due to colder-than-normal winter weather as compared
to last year and nonrecurring interest income resulting from refunds of
previously paid federal income taxes related to the tax retirement of Three
Mile Island Unit 2 (TMI-2). These increases were partially offset by
increased operation and maintenance expenses due primarily to higher emergency
and storm repairs caused by winter storms.
REVENUES:
Total revenues for the first quarter of 1994 increased 6.4% to $937.2
million as compared to the first quarter of 1993. The components of the
changes are as follows:
(In Millions)
Kilowatt-hour (KWH) revenues
(excluding energy portion) $ 26.7
Rate increases 20.8
Energy revenues 2.0
Other revenues 6.5
Increase in revenues $ 56.0
Kilowatt-hour revenues
KWH revenues increased for the quarter ended March 31, 1994, primarily
due to increased sales resulting from the significantly colder-than-normal
winter temperatures as compared to last year. An increase in new customers,
particularly in New Jersey, also contributed to the increase.
Energy revenues
Changes in energy revenues do not affect net income as they reflect
corresponding changes in the energy cost rates billed to customers and
expensed. Energy revenues increased as a result of increases in electric
sales.
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Other revenues
Generally, changes in other revenues do not affect net income as they are
offset by corresponding changes in expense, such as taxes other than income
taxes.
OPERATING EXPENSES:
Power purchased and interchanged
Generally, changes in the energy component of power purchased and
interchanged expense do not significantly affect earnings as they are
substantially recovered through the Subsidiaries' energy clauses. However,
earnings for the first quarter were favorably impacted by a reduction in
reserve capacity expense primarily resulting from the expiration of a purchase
contract with another utility.
Other operation and maintenance
Other operation and maintenance expense increased primarily due to higher
emergency and storm repairs caused by winter storms.
Taxes, other than income taxes
Generally, changes in taxes other than income taxes do not significantly
affect earnings as they are substantially recovered in revenues.
OTHER INCOME AND DEDUCTIONS:
Other income, net
The increase in Other income, net is attributable to interest income
resulting from refunds of previously paid federal income taxes related to the
tax retirement of TMI-2. The tax retirement of TMI-2 resulted in a refund for
the tax years in which TMI-2 was retired while resulting in additional amounts
owed for subsequent tax years in which depreciation deductions with respect to
TMI-2 had been taken. The net effect on pre-tax earnings of these refunds for
the tax retirement of TMI-2 was an increase of $45.6 million resulting from an
increase in interest income of $59.4 million partially offset by an increase
in interest expense of $13.8 million.
INTEREST CHARGES and PREFERRED DIVIDENDS:
Other interest increased primarily due to the tax retirement of TMI-2
which resulted in an increase in interest expense on additional amounts owed
for tax years in which depreciation deductions with respect to TMI-2 had been
taken.
LIQUIDITY AND CAPITAL RESOURCES
CAPITAL NEEDS:
The GPU System's capital needs for the first quarter of 1994 consisted of
cash construction expenditures of $126 million. Construction expenditures for
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the year are currently forecasted to be $643 million. Construction estimates
for ongoing system development are expected to remain stable over the next
five years. Expenditures for maturing debt are expected to be $133 million
for 1994. Management estimates that approximately one-half of the capital
needs in 1994 will be satisfied through internally generated funds.
FINANCING:
The Subsidiaries have regulatory authority to issue and sell first
mortgage bonds, which may be issued as secured medium-term notes, and
preferred stock for various periods through 1995. Under existing
authorization, JCP&L, Met-Ed and Penelec may issue senior securities in the
amount of $275 million, $250 million and $330 million, respectively, of which
$100 million for each Subsidiary may consist of preferred stock.
CAPITALIZATION:
On April 7, 1994, the Board of Directors of the Corporation declared a
quarterly dividend on the common stock of 45 cents per share, an increase of
5.9%. The increased dividend is payable May 25, 1994 to the shareholders of
record April 29, 1994. The Corporation has set a target payout ratio of 70%
to 75% to be reached over the next few years.
NONUTILITY BUSINESS:
In April 1994, General Portfolios Corporation (GPC) merged into Energy
Initiatives, Inc. (EI), formally a subsidiary of GPC. EI is in the business
of developing, operating and investing in cogeneration and other nonutility
power production facilities. In March 1994, EI entered into an agreement to
acquire North Canadian Power, Inc. (NCP) for approximately $72 million and
deposited the estimated purchase price in escrow. NCP owns interests in five
operating natural gas-fired cogeneration facilities in the United States with
a total generating capacity of 360 megawatts (MW). EI owns and operates five
generating facilities which are currently in-service having a combined
capacity of 223 MW and has minority ownership interests in three other
facilities, in-service and under construction, with a combined capacity of
372 MW.
COMPETITION:
In April 1994, the Corporation announced it was offering a voluntary
enhanced retirement program to certain non-bargaining employees. In addition,
in April 1994, Penelec's bargaining units were offered and accepted a similar
enhanced retirement program. JCP&L and Met-Ed are negotiating with their
respective unions with respect to possible participation of bargaining unit
employees in similar enhanced retirement programs. The enhanced retirement
programs are part of a corporate realignment that was announced in February
1994. At that time, the Corporation said that its goal was to achieve $80
million in annual cost savings by the end of 1996. If two-thirds of the
anticipated eligible bargaining and non-bargaining employees were to accept
the offer, depending upon the age and years of service of those employees, the
program could result in a 1994 pre-tax charge to earnings of between $110
million and $120 million.
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MEETING ENERGY DEMANDS:
In 1993, the New Jersey Board of Regulatory Commissioners (NJBRC) asked
all electric utilities in the state to assess the economics of their purchase
power contracts with nonutility generators to determine whether there are any
candidates for potential buy out or other remedial measures. JCP&L identified
a 100 MW project now under development, which it believes is economically
undesirable based on current cost projections. In November 1993, the NJBRC
directed JCP&L and the developer to attempt to negotiate contract repricing to
a level more consistent with JCP&L's current avoided cost projections or a
contract buy out. JCP&L and the developer have not been able to reach an
agreement and pursuant to a NJBRC order, hearings on this matter are being
held. The developer is contesting the NJBRC's jurisdiction in this matter in
the federal courts.
In January 1994, the NJBRC issued an order granting two nonutility
generators, having a total of 200 MW under contract with JCP&L, a one-year
extension in the in-service date for projects originally scheduled to be
operational in 1997. JCP&L has filed a motion for reconsideration of that
order which is pending before the NJBRC. JCP&L intends to appeal the order if
its motion is not granted.
In January 1994, JCP&L issued an all source solicitation for the short-
term supply of energy and/or capacity to determine and evaluate the
availability of competitively priced power supply options. JCP&L is seeking
proposals from utility and nonutility generation suppliers for periods of one
to eight years in length and capable of delivering electric power in 1996.
This solicitation is expected to fulfill a significant part of the uncommitted
sources identified in GPU's supply plan. JCP&L has received bids and has
begun the evaluation process.
The NJBRC has approved an agreement between JCP&L, the NJBRC staff, and a
nonutility generator under which JCP&L has agreed to buy out a power purchase
agreement for $2 million. In its order, the NJBRC has allowed JCP&L to
recover $1.2 million of the purchase price, together with a return thereon,
through its Levelized Energy Adjustment Clause.
In February 1994, the Pennsylvania Public Utility Commission (PaPUC)
approved the application filed by Met-Ed for construction of a 134 MW gas-
fired combustion turbine adjacent to its Portland Generating Station at an
estimated cost of $50 million. In March 1994, a nonutility generator seeking
to sell Met-Ed an equivalent amount of baseload capacity filed a petition with
the Pennsylvania Commonwealth Court for review of the PaPUC order. The matter
is pending before the court. Subsequently, in April 1994, the nonutility
generator filed a petition with the PaPUC seeking a declaratory order
directing Met-Ed to enter into a contract for its 322 MW facility. Met-Ed
intends to oppose this request and the matter is pending.
The Subsidiaries have contracts and anticipated commitments with
nonutility generation suppliers under which a total of 1,193 MW of capacity is
currently in service and an additional 1,259 MW are currently scheduled or
anticipated to be in service by 1998.
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CONSERVATION AND LOAD MANAGEMENT:
The PaPUC completed its generic investigation into demand-side management
(DSM) cost recovery mechanisms and issued a cost recovery and ratemaking order
in December 1993. In April 1994, Met-Ed and Penelec each filed new DSM plans
which include DSM initiatives totaling approximately 42 MW over a five-year
period.
ENVIRONMENTAL ISSUES:
To comply with the federal Clean Air Act Amendments of 1990 (Clean Air
Act), the GPU System expects to expend up to $380 million for air pollution
control equipment by the year 2000. The estimates were reduced from
$590 million primarily due to the postponement of two scrubber installations
until after 2000. In developing its least-cost plan to comply with the Clean
Air Act, GPU will continue to evaluate major capital investments compared to
participation in the emission allowance market and the use of low-sulfur fuel.
Costs associated with the capital invested in this equipment and the increased
operating costs of the affected stations are expected to be recoverable
through the ratemaking process.
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PART II
ITEM 1 - LEGAL PROCEEDINGS
Information concerning the current status of certain legal
proceedings instituted against the Corporation and its
subsidiaries as a result of the March 28, 1979 nuclear accident
at Unit 2 of the Three Mile Island nuclear generating station
discussed in Part I of this report in Notes to Consolidated
Financial Statements is incorporated herein by reference and made
a part hereof.
ITEM 5 - OTHER EVENTS
As previously reported, GPUN believes that JCP&L's Oyster Creek
nuclear station currently has sufficient on-site storage capacity
to accommodate, under normal operating conditions, it's spent
nuclear fuel while maintaining the ability to remove the entire
reactor core, but that additional on-site storage capacity will
be required beginning in 1996 in order to maintain the full core
reserve margin. Loss of the full core reserve margin means that
off-loading the entire core will not be possible to conduct
certain maintenance or repairs, when necessary, in order to
restore operation of the plant. Contract commitments with an
outside vendor have been made for the construction of incremental
spent fuel dry storage capacity need for the period 1996 to 1998
at an estimated cost of $16 million. In March 1994, GPUN
received approval from the Lacey Township Zoning Board to build
the storage facility. The construction proposal is also
contingent upon GPUN meeting certain other requirements including
Nuclear Regulatory Commission approval and licensing. GPUN
expects to receive the remaining authorizations necessary by
October 1994.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(b) Reports on Form 8-K:
(1) For the month of April 1994, dated April 13, 1994,
under Item 5 (Other Events) and Item 7 (Financial
Statements, Pro Forma Financial Information and
Exhibits).
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENERAL PUBLIC UTILITIES CORPORATION
May 5, 1994 By: /s/ D. W. Myers
D. W. Myers, Vice President
and Treasurer
May 5, 1994 By: /s/ F. A. Donofrio
F. A. Donofrio, Vice President
and Comptroller
(Chief Accounting Officer)
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