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 September 30, 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 October 31, 1994, was as follows:
Common stock, par value $2.50 per share: 115,149,651 shares
outstanding.<PAGE>
General Public Utilities Corporation
Quarterly Report on Form 10-Q
September 30, 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 18
PART II - Other Information 25
Signatures 26
_________________________________
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.
2<PAGE>
<TABLE>
GENERAL PUBLIC UTILITIES CORPORATION AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
<CAPTION>
In Thousands
September 30, December 31,
1994 1993
(Unaudited)
<S>
ASSETS <C> <C>
Utility Plant:
In service, at original cost $8 683 173 $8 441 335
Less, accumulated depreciation 3 107 982 2 929 278
Net utility plant in service 5 575 191 5 512 057
Construction work in progress 332 250 267 381
Other, net 204 263 214 178
Net utility plant 6 111 704 5 993 616
Other Property and Investments:
Nuclear decommissioning trusts 262 371 219 178
Nonregulated investments, net 104 158 31 830
Nuclear fuel disposal fund 84 884 82 095
Other, net 30 044 29 662
Total other property and investments 481 457 362 765
Current Assets:
Cash and temporary cash investments 84 310 25 843
Special deposits 11 468 11 868
Accounts receivable:
Customers, net 257 861 253 186
Other 45 499 55 037
Unbilled revenues 93 796 113 960
Materials and supplies, at average cost or less:
Construction and maintenance 186 250 187 606
Fuel 50 857 51 676
Deferred energy costs 922 (20 787)
Deferred income taxes 5 163 29 586
Prepayments 223 216 79 490
Total current assets 959 342 787 465
Deferred Debits and Other Assets:
Three Mile Island Unit 2 deferred costs 157 630 339 672
Unamortized property losses 109 501 113 566
Deferred income taxes 436 377 275 257
Income taxes recoverable through future rates 560 521 554 590
Other 414 630 416 356
Total deferred debits and other assets 1 678 659 1 699 441
Total Assets $9 231 162 $8 843 287
The accompanying notes are an integral part of the consolidated financial statements.
3<PAGE>
GENERAL PUBLIC UTILITIES CORPORATION AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
<CAPTION>
In Thousands
September 30, December 31,
1994 1993
(Unaudited)
<S> <C> <C>
LIABILITIES AND CAPITAL
Capitalization:
Common stock $ 314 458 $ 314 458
Capital surplus 663 365 667 683
Retained earnings 1 826 928 1 813 490
Total 2 804 751 2 795 631
Less, reacquired common stock, at cost 182 068 185 258
Total common stockholders' equity 2 622 683 2 610 373
Cumulative preferred stock:
With mandatory redemption 150 000 150 000
Without mandatory redemption 133 177 158 242
Preferred securities of subsidiaries 205 000 -
Long-term debt 2 392 786 2 320 384
Total capitalization 5 503 646 5 238 999
Current Liabilities:
Debt due within one year 93 735 133 232
Notes payable 235 836 216 056
Obligations under capital leases 163 370 161 744
Accounts payable 237 336 300 181
Taxes accrued 195 222 140 132
Interest accrued 53 923 73 368
Other 132 965 169 976
Total current liabilities 1 112 387 1 194 689
Deferred Credits and Other Liabilities:
Deferred income taxes 1 421 579 1 389 241
Unamortized investment tax credits 158 632 170 108
Three Mile Island Unit 2 future costs 338 928 319 867
Other 695 990 530 383
Total deferred credits and other liabilities 2 615 129 2 409 599
Commitments and Contingencies (Note 1)
Total Liabilities and Capital $9 231 162 $8 843 287
The accompanying notes are an integral part of the consolidated financial statements.
4<PAGE>
GENERAL PUBLIC UTILITIES CORPORATION AND SUBSIDIARY COMPANIES
Consolidated Statements of Income
(Unaudited)
<CAPTION>
In Thousands
(Except Per Share Data)
Three Months Nine Months
Ended September 30, Ended September 30,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Operating Revenues $994 672 $990 160 $2 805 414 $2 734 550
Operating Expenses:
Fuel 96 216 101 757 286 914 273 777
Power purchased and interchanged 230 087 239 429 674 912 668 563
Deferral of energy costs, net 4 826 (17 022) (20 288) 15 254
Other operation and maintenance 244 941 224 064 846 361 651 677
Depreciation and amortization 85 519 89 186 261 633 267 762
Taxes, other than income taxes 94 193 95 265 267 761 261 874
Total operating expenses 755 782 732 679 2 317 293 2 138 907
Operating Income Before Income Taxes 238 890 257 481 488 121 595 643
Income taxes 69 876 80 834 116 811 168 127
Operating Income 169 014 176 647 371 310 427 516
Other Income and Deductions:
Allowance for other funds used during
construction 766 1 638 2 092 3 864
Other income/(expense), net 3 026 6 761 (140 973) 13 410
Income taxes (2 014) (1 768) 61 612 (5 226)
Total other income and deductions 1 778 6 631 (77 269) 12 048
Income Before Interest Charges
and Preferred Dividends 170 792 183 278 294 041 439 564
Interest Charges and Preferred Dividends:
Interest on long-term debt 46 423 46 950 138 627 141 724
Other interest 6 382 5 002 31 901 14 106
Allowance for borrowed funds used
during construction (1 797) (1 014) (4 862) (3 887)
Dividends on preferred securities of
subsidiaries 3 145 - 3 145 -
Preferred stock dividends of
subsidiaries 5 340 5 854 16 371 23 242
Total interest charges and
preferred dividends 59 493 56 792 185 182 175 185
Net Income $111 299 $126 486 $ 108 859 $ 264 379
Earnings Per Average Share $ .97 $ 1.14 $ .95 $ 2.38
Average Common Shares Outstanding 115 187 110 954 115 124 110 899
Cash Dividends Paid Per Share $ .45 $ .425 $ 1.325 $ 1.225
The accompanying notes are an integral part of the consolidated financial statements.
5<PAGE>
GENERAL PUBLIC UTILITIES CORPORATION AND SUBSIDIARY COMPANIES
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
In Thousands
Nine Months
Ended September 30,
1994 1993
<S>
Operating Activities: <C> <C>
Income before preferred stock dividends of subsidiaries $ 125 230 $ 287 621
Adjustments to reconcile income to cash provided:
Depreciation and amortization 270 401 268 526
Amortization of property under capital leases 45 523 47 358
Three Mile Island Unit 2 costs 183 944 -
Voluntary enhanced retirement program 126 964 -
Nuclear outage maintenance costs, net 5 467 (3 804)
Deferred income taxes and investment tax
credits, net (103 757) 37 926
Deferred energy costs, net (19 955) 15 554
Accretion income (11 359) (12 627)
Allowance for other funds used during construction (2 092) (3 864)
Changes in working capital:
Receivables 24 530 (29 476)
Materials and supplies 2 175 16 864
Special deposits and prepayments (143 358) (20 298)
Payables and accrued liabilities (15 341) (157 518)
Other, net 33 183 (13 917)
Net cash provided by operating activities 521 555 432 345
Investing Activities:
Cash construction expenditures (375 076) (356 867)
Contributions to decommissioning trusts (25 027) (75 481)
Nonregulated investments (61 959) (2 655)
Other, net (7 550) (7 128)
Net cash used for investing activities (469 612) (442 131)
Financing Activities:
Issuance of long-term debt 178 787 770 146
Increase in notes payable, net 20 032 123 743
Retirement of long-term debt (147 232) (499 428)
Capital lease principal payments (47 974) (41 943)
Issuance of preferred securities of subsidiaries 198 036 -
Redemption of preferred stock of subsidiaries (26 168) (163 718)
Dividends paid on common stock (152 411) (135 771)
Dividends paid on preferred stock of subsidiaries (16 546) (26 084)
Net cash provided by financing activities 6 524 26 945
Net increase in cash and temporary
cash investments from above activities 58 467 17 159
Cash and temporary cash investments, beginning of year 25 843 10 390
Cash and temporary cash investments, end of period $ 84 310 $ 27 549
Supplemental Disclosure:
Interest paid (net of amount capitalized) $ 187 141 $ 168 177
Income taxes paid $ 84 926 $ 104 394
New capital lease obligations incurred $ 40 206 $ 47 831
Common stock dividends declared but not paid $ - $ -
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
6<PAGE>
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), which
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 September 30, 1994, the Subsidiaries'
net investment in TMI-1 and Oyster Creek, including nuclear fuel, was
$636 million and $804 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, 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
prevailing design criteria 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 the 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 each plant's useful life (whether scheduled or
premature), the carrying costs of that investment and retirement costs, is not
assured (see NUCLEAR PLANT RETIREMENT COSTS). Management intends, in general,
to seek recovery of such costs through the ratemaking process, but recognizes
that recovery is not assured (see OTHER COMMITMENTS AND CONTINGENCIES -
Competition and the Changing Regulatory Environment).
7<PAGE>
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 ($560 million at the time of the accident),
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.
The insurers of TMI-2 had 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, in March 1994, that the insurers would withdraw their reservation of
rights, with respect to any award of punitive damages.
In June 1993, the Court agreed to permit pre-trial discovery on the
punitive damage claims to proceed. A trial of ten allegedly representative
cases is likely to begin in 1996. In February 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 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 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 July 1994, the Court
granted defendants' motion for interlocutory appeal of these orders, stating
that they raise questions of law that contain substantial grounds for
differences of opinion. The issues are now before the United States Court of
Appeals.
8<PAGE>
In an Order issued in April 1994, the Court: (1) noted that the
plaintiffs have agreed to seek punitive damages only against the Corporation
and the Subsidiaries; and (2) stated 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.
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 1994 dollars) for TMI-1 and Oyster Creek
are $157 million and $189 million, respectively. Based on NRC studies, a
comparable funding target for TMI-2 (in 1994 dollars), which takes into
account the accident, is $250 million. The NRC continues to study 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 $225 to $309 million and $239 to $350 million, respectively
(adjusted to 1994 dollars). In addition, the studies estimated the cost of
removal of nonradiological structures and materials for TMI-1 and Oyster Creek
at $74 million and $48 million, respectively (adjusted to 1994 dollars).
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
9<PAGE>
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 TMI-2 nuclear plant decommissioning in
1990 and 1991 and expect to make further contributions beginning in 1995 for
amounts written off in 1994 described below.
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 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. Also in 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 retirement expenditures are deposited in external trusts and are
classified as Nuclear decommissioning trusts 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 $43 million for TMI-1 and $99 million for Oyster Creek at
September 30, 1994. Oyster Creek and TMI-1 retirement 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 current ratemaking process.
TMI-2:
The Corporation and its Subsidiaries have recorded a liability amounting
to $250 million as of September 30, 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. In addition, the Subsidiaries had recorded a liability in the amount
of $71 million for nonradiological cost of removal. Expenditures for such
costs through September 1994 have reduced the liability to $69 million. The
above amounts for retirement costs and monitored storage are reflected as
Three Mile Island Unit 2 Future Costs on the balance sheet.
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 was to begin when the amortization of the TMI-2 investment
ended in 1994. 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. In July 1994, the Commonwealth Court
reversed the PaPUC order; Met-Ed has requested the Pennsylvania Supreme Court
to review that decision. As a consequence of the Commonwealth Court decision,
Met-Ed recorded pre-tax charges totaling $127.6 million during the second
quarter. Penelec, which is also subject to PaPUC regulation, recorded pre-tax
charges of $56.3 million, also during the second quarter, for its share of
such costs applicable to its retail customers. These charges appear in the
10<PAGE>
Other Income and Deductions section of the Income Statement and are composed
of $121 million for radiological decommissioning costs, $48.2 million for the
nonradiological cost of removal and $14.7 million for incremental monitored
storage costs. Met-Ed and Penelec plan to begin making nonrecoverable funding
contributions to external trusts for these costs in the second half of 1995 to
fund their share of these costs. The Pennsylvania Subsidiaries will be
similarly required to charge to expense their share of future increases
(described above) in the estimate of the costs of retiring TMI-2. Future
earnings on trust fund deposits for Met-Ed and Penelec will be recorded as
income. Prior to the Commonwealth Court's decision, Met-Ed and Penelec
expensed and contributed $40 million and $20 million respectively, to external
trusts relating to their nonrecoverable shares of the accident-related portion
of the decommissioning liability. JCP&L has also expensed and made a
nonrecoverable contribution of $15 million to an external decommissioning
trust. JCP&L's share of earnings on trust fund deposits are offset against
amounts shown on the balance sheet under Three Mile Island Unit 2 Deferred
Costs as collectible from customers.
The New Jersey Board of Public Utilities (NJBPU) has granted
decommissioning revenues for JCP&L's share of the remainder of the NRC funding
target and allowances for the cost of removal of nonradiological structures
and materials. JCP&L, which is not affected by the Commonwealth Court's
ruling, 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, in late
1993, the Subsidiaries began incurring incremental annual storage costs of
approximately $1 million. The Subsidiaries estimate that incremental
monitored storage costs will total $20 million through 2014, the expected
retirement date of TMI-1. JCP&L's $5 million share of these costs has been
recognized in rates by the NJBPU.
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
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
$9.0 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
11<PAGE>
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 two operating reactors, subject to an annual maximum
payment of $10 million per incident per reactor. In July 1994, GPUN received
an exemption from the NRC to eliminate the secondary protection requirements
for TMI-2.
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 current
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 spend up to $380 million for air pollution
control equipment by the year 2000. The reduction from the previous estimate
of $590 million is primarily due to the postponement of two scrubber
installations until after the year 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 or retirement of facilities. In September
1994, the Ozone Transport Commission (OTC), consisting of representatives of
11 northeast states (including New Jersey and Pennsylvania) and the District
of Columbia proposed further reductions in nitrogen oxide (NOx) emissions it
believes necessary to meet ambient air quality standards for ozone and the
statutory deadlines set by the Clean Air Act Amendments of 1990. The
Corporation expects that the U.S. Environmental Protection Agency will approve
the proposal, and that as a result, the GPU System will spend an estimated $60
million, beginning in 1997, to meet the new standards by the 1999 deadline.
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 voluntarily participate in the
remediation or supply information to the EPA and state environmental
12<PAGE>
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 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 September 30, 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 NJBPU approved a mechanism similar to JCP&L's Levelized
Energy Adjustment Clause (LEAC) for the recovery of future manufactured gas
plant remediation costs when expenditures exceed prior collections. The NJBPU
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 NJBPU order. JCP&L is
pursuing reimbursement of the above costs from its insurance carriers and
intends to seek recovery of these costs from its customers, to the extent not
covered by insurance.
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 current ratemaking process.
OTHER COMMITMENTS AND CONTINGENCIES
Competition and the Changing Regulatory Environment
As a result of the Energy Policy Act of 1992 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-
13<PAGE>
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.
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 currently.
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. As of September 30, 1994,
facilities covered by these agreements having 1,198 MW (JCP&L 664 MW, Met-Ed
239 MW and Penelec 295 MW) of capacity were in service with another 215 MW
(all JCP&L) scheduled to commence operation in 1994. The estimated cost of
these agreements for 1994 is $551 million. These agreements together with
those for facilities which are not yet in operation provide for the purchase
of approximately 2,457 MW (JCP&L 1,197 MW, Met-Ed 846 MW and Penelec 414 MW)
of capacity and energy by the GPU System by the mid-to-late 1990s, at varying
prices.
The emerging competitive market has created uncertainty regarding the
forecasting of the System's energy supply needs which, in turn, has caused the
Subsidiaries to change their supply strategy to now seek shorter term
agreements offering more flexibility (see Management's Discussion and Analysis
- Competition). Due to the current availability of excess capacity, the cost
of near to intermediate-term energy supply from existing facilities (i.e., one
to eight years) is currently very competitively priced. The forecasted cost
of energy from new supply sources are now lower priced due to improvements in
power plant technologies and reduced forecast fuel prices. As a result of
14<PAGE>
these developments, the contract prices under virtually all of the
Subsidiaries' nonutility generation agreements are substantially in excess of
current and forecasted market prices. The Subsidiaries intend to initiate
actions geared toward substantially reducing these above market payments. In
addition, the Subsidiaries intend to avoid, to the maximum extent practicable,
entering into any new nonutility generation agreements that are not needed or
not consistent with current market pricing. The Subsidiaries are also
attempting to renegotiate, and in some cases buy out, high cost long-term
nonutility generation agreements. While the Subsidiaries thus far have been
granted substantial recovery of these costs from customers by the PaPUC and
NJBPU, there can be no assurance that the Subsidiaries will continue to be
able to recover these costs throughout the term of the related agreements. If
the costs under these agreements are ultimately not recoverable through
ratemaking, or in a competitive market, it could result in a material adverse
effect on the Corporation's financial position and results of operations.
Moreover, efforts to lower these costs have led to disputes before both the
NJBPU 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.
During the second quarter, the Corporation announced it was offering
voluntary enhanced retirement programs to certain employees. The enhanced
retirement programs are part of a corporate realignment 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. Approximately 82% of
eligible employees accepted the retirement programs, resulting in a pre-tax
charge to earnings of $127 million. These charges are included as Other
operation and maintenance expense on the Income Statement.
The NJBPU 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 Division of the Ratepayer Advocate (Ratepayer
Advocate), 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 NJBPU requesting that the NJBPU dismiss contentions
being made by Ratepayer Advocate that adjustments for alleged "double
recovery" in prior periods are warranted. Ratepayer Advocate 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 NJBPU ruled that the 1991 LEAC period was considered closed
but subsequent LEACs remain open for further investigation. This matter is
pending before a NJBPU Administrative Law Judge. Management estimates that
the potential exposure for LEAC periods subsequent to 1991 is approximately
$30 million through February 1995, the end of the current LEAC period.
Management is unable to predict the outcome of this proceeding.
JCP&L's two operating nuclear units are subject to the NJBPU'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
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
15<PAGE>
issue to be brought before the NJBPU 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 for the
establishment of a nuclear performance standard. Met-Ed and Penelec expect
the PaPUC to adopt a generic nuclear performance standard as a part of their
respective energy cost rate (ECR) clauses in 1995.
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 Subsidiaries recorded net income tax refunds
aggregating $17 million based on the retirement of TMI-2 for tax purposes. In
September 1994, Met-Ed and Penelec received approval from the PaPUC to reduce
charges to customers for each Company's share of the tax refund. JCP&L is
returning its portion of the tax refund amounts to its customers by reducing
the recovery period for its investment in TMI-2. Income tax amounts refunded
will have no effect on net income.
At the same time, the Subsidiaries have 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.
3. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
In March 1993, the PaPUC issued a generic policy statement permitting
the deferral of incremental expense associated with the adoption by
Pennsylvania utilities of Statement of Financial Accounting Standards No. 106
(FAS 106), "Employers' Accounting for Postretirement Benefits Other Than
Pensions."
Consistent with the PaPUC policy statement, in 1993 Penelec filed a
petition with and the PaPUC issued a declaratory order approving the annual
deferral of such FAS 106 incremental expense until such expense can be
recognized in Penelec's base rates.
In a proceeding involving an unaffiliated Pennsylvania utility, the
Pennsylvania Office of the Consumer Advocate (OCA) appealed a PaPUC
declaratory order permitting that utility to defer its incremental FAS 106
expense pending its next base rate order. In May 1994, the Pennsylvania
Commonwealth Court reversed the PaPUC's declaratory order stating that FAS 106
expense incurred after January 1, 1993 (the effective date for the FAS 106
accounting change) but prior to its next base rate case could not be deferred
for future recovery as part of a later base rate case order, and that to
assure such future recovery constituted unlawful retroactive ratemaking.
16<PAGE>
Under these circumstances, management determined that continued deferral
by Penelec of incremental FAS 106 expense was no longer appropriate.
Therefore, during the second quarter Penelec wrote off $14.6 million of such
expense deferred since January 1, 1993. In addition, $4.0 million of
Penelec's FAS 106 unrecognized transition obligation resulting from employees
who have elected to participate in the voluntary enhanced retirement programs,
was also written off during the second quarter. These charges appear in the
Other Income and Deductions section of the Income Statement. Moreover,
Penelec will annually charge to income approximately $9.6 million for the
incremental FAS 106 expense, currently applicable to retail customers.
The Court's ruling in this case does not affect Met-Ed, which had
earlier received PaPUC authorization as part of a 1993 retail base rate order
to defer incremental FAS 106 expense. In addition, the Court affirmed in June
1994 a PaPUC base rate order granting an unaffiliated water utility recovery
in current rates of its transition obligation resulting from the adoption of
FAS 106. The OCA has, however, filed a petition with the Pennsylvania Supreme
Court to review the Commonwealth Court's decision. The NJBPU provided rate
treatment for incremental postretirement benefit costs, pursuant to FAS 106,
in JCP&L's 1993 retail base rate order.
17<PAGE>
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 three months ended September 30, 1994 was
$111.3 million, or $0.97 per share, compared with $126.5 million, or $1.14 per
share for the third quarter of 1993. Net income for the nine months ended
September 30, 1994, was $108.9 million, or $0.95 per share, compared with net
income of $264.4 million, or $2.38 per share for the comparable 1993 period.
The decrease in earnings for the three months ended September 30, 1994
was primarily the result of increased operation and maintenance expenses. The
absence of one-time benefits from the recognition of prior period transmission
service revenues and proceeds from the settlement of a property insurance
claim recognized in the third quarter of 1993, also contributed to the
decrease in earnings from the same period last year.
Earnings for the nine months ended September 30, 1994 continue to be
negatively affected by a $183.9 million second quarter write-off of certain
estimated TMI-2 future costs, a $127.0 million second quarter charge to income
for costs related to the Voluntary Enhanced Retirement Programs, and a
$18.6 million second quarter write-off of postretirement benefit costs. The
same factors affecting the quarterly results also affected results for the
nine month period. Increased other operation and maintenance expenses, which
included higher emergency and winter storm repair costs, also contributed to
the earnings reduction in the current nine month period.
The effect of these losses for the nine months ended September 30 ,1994
was partially offset by nonrecurring interest income resulting from refunds of
previously paid federal income taxes related to the tax retirement of TMI-2,
increased sales due primarily to the colder-than-normal winter weather as
compared to last year, an increase in the number of customers and increased
revenues resulting from the continued positive effects of a February 1993
retail base rate increase at JCP&L.
OPERATING REVENUES:
Revenues increased 0.5% to $994.7 million in the three months ended
September 30, 1994 as compared with the same period in 1993. For the nine
months ended September 30, 1994, revenues increased 2.6% to $2.8 billion as
compared to the year ago period. The components of the changes are as
follows:
18<PAGE>
(In Millions)
Three Months Nine Months
Ended Ended
September 30, 1994 September 30, 1994
Kilowatt-hour (KWH) revenues
(excluding energy portion) $ .2 $ 42.9
Rate increase - 20.8
Energy revenues 11.4 3.5
Other revenues (7.1) 3.7
Increase in revenues $ 4.5 $ 70.9
Kilowatt-hour revenues
The increase in KWH revenues in the nine months ended September 30, 1994
was principally due to increased sales resulting from seasonal weather
effects, particularly the colder-than-normal winter weather as compared to
last year, and new customer additions, mostly in New Jersey.
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 in each period due to increases in the
Pennsylvania energy cost rates in effect.
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. However, earnings were affected by the absence of a one-time benefit
from prior period transmission service revenues recognized in the third
quarter of 1993.
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 three and nine months ended September 30, 1994 were favorably
impacted by a reduction in reserve capacity expense primarily resulting from
the replacement of expiring utility purchase contracts at lower rates.
Other operation and maintenance
The increase in other operation and maintenance (O&M) expense for the
three months ended September 30, 1994 is primarily due to higher storm and
emergency repairs. The increase in O&M expense for the nine months ended
September 30, 1994 is largely attributable to a $127.0 million charge for
costs related to the Voluntary Enhanced Retirement Programs. Other O&M
expense also increased in the nine month period due to higher emergency and
winter storm repairs.
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.
19<PAGE>
OTHER INCOME AND DEDUCTIONS:
Other income/(expense), net
The decrease for the nine months ended September 30, 1994 is principally
related to the second quarter 1994 write-off of estimated TMI-2 future costs
and postretirement benefit costs. The effect of these write-offs was
partially offset in the nine month period by nonrecurring interest income
resulting from refunds of previously paid federal income taxes related to the
tax retirement of TMI-2.
On July 11, 1994, the Pennsylvania Commonwealth Court overturned a 1993
Pennsylvania Public Utility Commission (PaPUC) order that permitted Met-Ed to
recover estimated TMI-2 future costs from customers. As a result, second
quarter charges were taken at Met-Ed totaling $127.6 million. Penelec
recorded charges of $56.3 million for their share of such costs. These
charges were composed of $169.2 million for retirement costs and $14.7 million
for monitored storage costs. For more information concerning these charges,
see Note 1 to the consolidated financial statements.
In the second quarter of 1994, Penelec wrote-off $14.6 million in
deferred postretirement benefit costs related to the adoption of Statement of
Financial Accounting Standards No. 106 as a result of a Commonwealth Court
decision reversing a PaPUC order that allowed a nonaffiliated utility, outside
a base rate case, to defer certain postretirement benefit costs for future
recovery from customers. Penelec had deferred such costs under a similar
accounting order issued by the PaPUC. In addition, Penelec wrote-off $4.0
million for the remaining transition obligation related to postretirement
benefit costs for the employees who participated in the Voluntary Enhanced
Retirement Programs. For additional information concerning this charge
totaling $18.6 million, see Note 3 to the consolidated financial statements.
INTEREST CHARGES and PREFERRED DIVIDENDS:
Other interest increased in the nine month period 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 nine months ended September 30,
1994 consisted of $375 million for cash construction expenditures and
$83 million for maturing obligations. The GPU System's construction forecast
for 1994 is currently $586 million. Expenditures for maturing debt are
expected to be $133 million for 1994. Management estimates that approximately
one-half of the 1994 capital needs will be satisfied through internally
generated funds.
FINANCING:
In August 1994, Met-Ed Capital L.P., a special purpose finance subsidiary
of Met-Ed, issued $100 million of Monthly Income Preferred Securities. Met-Ed
Capital L.P. then loaned the proceeds to Met-Ed with Met-Ed issuing its
deferrable interest subordinated debentures to Met-Ed Capital L.P. Met-Ed is
20<PAGE>
taking a tax deduction for interest paid on the subordinated debentures and
will receive some preferred equity recognition by the credit rating agencies
for the Monthly Income Preferred Securities.
GPU has requested authorization from the Securities and Exchange
Commission (SEC) to issue up to 5 million shares of additional common stock
through 1996. The proceeds from the sale of such additional common stock
would be principally used to increase the Subsidiaries' common equity ratios.
In October 1994, JCP&L requested regulatory authorization to issue up to
$125 million of Monthly Income Preferred Securities through a special purpose
finance subsidiary. The proceeds from the sale of the Monthly Income Preferred
Securities will be loaned to JCP&L and JCP&L will issue its deferrable
interest subordinated debentures to its subsidiary. JCP&L will take a tax
deduction for interest paid on the subordinated debentures and will receive
some preferred equity recognition by the credit rating agencies for the
Monthly Income Preferred Securities.
In the third quarter of 1994, JCP&L redeemed at maturity $20 million of
8.70% series first mortgage bonds (FMBs) and $20 million of 8.85% series FMBs.
In October 1994, JCP&L redeemed at maturity $20 million of 8.65% series FMBs.
In November 1994, Penelec redeemed at maturity $30 million of 8.50% series
FMBs.
In the third quarter, Penelec redeemed $25 million of 8.36% preferred
stock with a portion of the proceeds from the issuance of Monthly Income
Preferred Securities in July 1994. In October 1994, Met-Ed redeemed
$35 million of 7.68% preferred stock with a portion of the proceeds from the
issuance of Monthly Income Preferred Securities in August 1994.
The Subsidiaries have regulatory authority to issue and sell FMBs, 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
$290 million, respectively, of which $100 million for each Subsidiary may
consist of preferred stock. Met-Ed and Penelec, through their subsidiaries
Met-Ed Capital L.P. and Penelec Capital L.P., have remaining authority to
issue an additional $25 million and $20 million of Monthly Income Preferred
Securities, respectively. The Subsidiaries also have regulatory authority to
incur short-term debt, a portion of which may be through the issuance of
commercial paper.
As a result of the TMI-2 future costs write-offs, together with certain
other costs recognized in the second quarter of 1994, Met-Ed will be unable to
meet the interest and preferred dividend coverage requirements in its
indenture and charter, respectively, until the third quarter of 1995.
Therefore, Met-Ed's ability to issue senior securities through June 1995 will
be limited to the issuance of FMBs on the basis of previously issued and
retired bonds amounting to $65 million. For similar reasons, Penelec has
sufficient coverage to issue only $11 million of FMBs, plus an additional
$68 million of FMBs on the basis of previously issued and retired bonds.
Penelec will be unable to meet the coverage requirements for issuing preferred
stock until the first quarter of 1995. The ability of Met-Ed and Penelec to
issue their remaining authorized Monthly Income Preferred Securities, which
have no such coverage restrictions, is not affected by these write-offs.
JCP&L currently has the ability to issue $318 million of FMBs on the basis of
previously issued and retired bonds and has interest and dividend coverage
ratios currently well in excess of indenture and charter restrictions.
21<PAGE>
On August 9, 1994, Standard & Poor's (S&P) reduced the credit ratings of
Met-Ed's and Penelec's senior securities citing the implications of the
Pennsylvania Commonwealth Court order denying recovery of TMI-2 future costs.
S&P now assigns Met-Ed's FMBs a BBB+ rating, Met-Ed's preferred stock and
Monthly Income Preferred Securities a BBB rating, Penelec's FMBs a A- rating
and Penelec's preferred stock and Monthly Income Preferred Securities a BBB+
rating. S&P also revised its outlooks for both Met-Ed and Penelec from
"negative" to "stable".
GPU GENERATION CORPORATION:
In the third quarter of 1994, the PaPUC authorized Met-Ed and Penelec to
enter into an operating agreement with the proposed GPU Generation Corporation
(GPUGC) whereby GPUGC would undertake responsibility for the operation,
maintenance and rehabilitation of all non-nuclear generation facilities owned
and operated by the Subsidiaries as well as the responsibility for the design,
construction, start-up and testing of any new non-nuclear generation
facilities which the Subsidiaries may need in the future. Similar
applications for regulatory approval are pending with the New Jersey Board of
Public Utilities (NJBPU) and the SEC.
COMPETITION:
Due to the current availability of excess capacity, the cost of near to
intermediate-term energy supply from existing facilities (i.e., one to eight
years) is currently very competitively priced as evidenced by the results of
the JCP&L all source competitive supply solicitation conducted in 1994. In
addition to the energy purchase opportunities from existing facilities, the
forecasted cost of energy from new supply sources is now lower than the
forecasted price in prior years due to improvements in power plant
technologies and reduced forecast fuel prices. As a result of these
developments, the contract prices payable under virtually all of the
Subsidiaries' nonutility generation agreements are substantially in excess of
current and forecasted market prices. The current and anticipated above-
market payments for nonutility generation (NUG) contracted power is likely to
adversely impact the competitive position of the Subsidiaries. In addition,
if the costs under these agreements are ultimately not recoverable through
ratemaking, or in a competitive market, it could result in a material adverse
effect on the Corporation's financial position and results of operations.
Therefore, GPU plans on initiating actions to either eliminate or
substantially reduce the above-market payments under NUG contracts. GPU
intends to communicate with legislators, regulators and customers as to the
adverse economic impacts of these above-market contracts; initiate regulatory
and legislative actions to mitigate the future economic impact of these
contracts; and aggressively pursue NUG contract restructurings including
contract buyouts. As part of the program to reduce above-market payments
under NUG agreements, the Subsidiaries intend to implement a program under
which the natural gas fuel and transportation for the Subsidiaries' gas-fired
facilities, as well as up to approximately 1,100 megawatts of NUG contract
capacity, would be pooled and managed by a non-affiliated fuel manager. The
Subsidiaries are in the process of initiating discussions with the NUGs
involved, negotiating a management agreement with a fuel manager and reviewing
the extent to which state and federal regulatory approvals may be necessary.
For more information concerning NUG purchased power, see Note 1, Other
Commitments and Contingencies - Competition and the changing regulatory
environment to the consolidated financial statements.
22<PAGE>
MEETING ENERGY DEMANDS:
In 1993, Penelec filed an appeal with the Commonwealth Court to overturn
a PaPUC order which directs Penelec to enter into two power purchase
agreements with nonutility generators for a total 160 MW under long-term
contracts commencing in 1997 or later. Penelec does not need this additional
capacity and believes the costs associated with these contracts are not in the
economic interests of its customers. In August 1994, the Commonwealth Court
denied Penelec's appeal to overturn the PaPUC order. Penelec intends to seek
review of this decision by the Pennsylvania Supreme Court.
In 1993, the NJBPU 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, at the NJBPU's direction, JCP&L and the
developer attempted to negotiate contract repricing to a level more consistent
with JCP&L's current avoided cost projections or a contract buy out but were
unable to reach agreement. Pursuant to a NJBPU order, hearings on whether the
NJBPU should revoke or modify its 1992 order approving the power purchase
agreement are being held. The developer has contested the NJBPU's authority
in this matter in the federal courts. In March 1994, the U.S. District Court
granted JCP&L's motion to dismiss the developer's complaint, holding that the
federal courts did not have jurisdiction. The developer has appealed the
decision to the U.S. Court of Appeals. Oral argument has been held and a
decision is pending.
In January 1994, the NJBPU issued an order granting two nonutility
generators, having a total of 200 MW under contract with JCP&L, an extension
in the in-service date for projects originally scheduled to be operational in
1997. JCP&L believes these contracts provide for payments substantially in
excess of current and future avoided cost projections and in June 1994
appealed the NJBPU's decision to the Appellate Division of the New Jersey
Superior Court. The NJBPU order extends the in-service date for one year plus
the period until JCP&L's appeals are decided.
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. This solicitation
is expected to fulfill a significant part of the uncommitted sources
identified in GPU's supply plan at a cost significantly below the cost of both
replacement power and new generation. JCP&L has evaluated the bids and has
commenced contract negotiations.
In March 1994, a nonutility generation developer petitioned the NJBPU for
an order directing JCP&L to enter into a long-term contract to sell JCP&L
200 MW of energy annually. JCP&L has appealed this petition and the NJBPU has
referred the matter to an Administrative Law Judge for evidentiary hearings
which have not yet begun.
In February 1994, the 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. A nonutility
generator seeking to sell Met-Ed baseload capacity has formally opposed the
PaPUC application approval and has requested review of the PaPUC order by the
Commonwealth Court. The matter is pending.
23<PAGE>
In April 1994, another nonutility generator filed a petition with the
PaPUC to obtain a long-term contract from Met-Ed for the sale of energy and
capacity. Met-Ed filed an opposition to this request along with an additional
request for dismissal based upon the PaPUC's May 10, 1994 order, in a separate
proceeding, granting Met-Ed's and Penelec's request to obtain any additional
nonutility purchases through competitive bidding until new PaPUC regulations
have been adopted. In August 1994, the PaPUC filed an application with the
Commonwealth Court requesting authority to revise its May 1994 order. The
purpose is to reexamine whether the NUG developer has secured the right to
sell power to Met-Ed in light of its April 1994 petition. The Commonwealth
Court issued an order granting the PaPUC's request for a limited remand of the
May 1994 order. These matters are pending.
The Subsidiaries have contracts and anticipated commitments with
nonutility generation suppliers under which a total of 1,198 MW of capacity is
currently in service and an additional 1,259 MW are currently scheduled or
anticipated to be in service by 1999.
24<PAGE>
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
In July 1994, the Nuclear Regulatory Commission (NRC) ordered all
boiling water reactor (BWR) owners to inspect, during their next
outage, the shroud inside the reactor vessel. Certain welds in
the shroud, which directs the flow of cooling water through the
fuel core, may be susceptible to cracking. On September 10, 1994,
the Oyster Creek generating station was taken out of service for a
scheduled maintenance and refueling outage. Examination during
the outage has identified significant cracks. The necessary
modifications are estimated to cost $6 million and is expected to
extend the outage by up to three weeks.
As previously reported, GPUN believes that the Oyster Creek
nuclear station will require additional on-site storage capacity,
beginning in 1996, in order to maintain its full core reserve
margin. Loss of the full core reserve margin would mean that off-
loading the entire core would not be possible to conduct certain
maintenance or repairs, when necessary, in order to restore
operation of the plant. In March 1994, the Lacey Township Zoning
Board of Adjustment issued a use variance for the facility. In May
1994, however, Berkeley Township and other parties appealed to the
New Jersey Superior Court to overturn the decision. The Court has
scheduled a trial for December 8, 1994. Construction of the
facility, which is scheduled for completion in September 1995, is
continuing during the appeal process.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K:
(1) For the month of August 1994, dated August 9, 1994 under
Item 5 (Other Events).
25<PAGE>
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
November 4, 1994 By: /s/ J. G. Graham
J. G. Graham, Senior Vice President
(Chief Financial Officer)
November 4, 1994 By: /s/ F. A. Donofrio
F. A. Donofrio, Vice President
and Comptroller
(Chief Accounting Officer)
26<PAGE>
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