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 June 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 July 31, 1994, was as follows:
Common stock, par value $2.50 per share: 115,085,651 shares
outstanding.
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General Public Utilities Corporation
Quarterly Report on Form 10-Q
June 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 26
Signatures 27
_________________________________
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
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<TABLE>
GENERAL PUBLIC UTILITIES CORPORATION AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
<CAPTION>
In Thousands
June 30, December 31,
1994 1993
(Unaudited)
<S> <C> <C>
ASSETS
Utility Plant:
In service, at original cost $8 592 187 $8 441 335
Less, accumulated depreciation 3 047 231 2 929 278
Net utility plant in service 5 544 956 5 512 057
Construction work in progress 307 760 267 381
Other, net 214 950 214 178
Net utility plant 6 067 666 5 993 616
Current Assets:
Cash and temporary cash investments 30 333 25 843
Special deposits 11 570 11 868
Accounts receivable:
Customers, net 261 721 253 186
Other 51 252 55 037
Unbilled revenues 121 718 113 960
Materials and supplies, at average cost or less:
Construction and maintenance 189 465 187 606
Fuel 50 324 51 676
Deferred energy costs 4 899 (20 787)
Deferred income taxes 9 601 29 586
Prepayments 238 535 79 490
Total current assets 969 418 787 465
Deferred Debits and Other Assets:
Three Mile Island Unit 2 deferred costs 162 328 339 672
Unamortized property losses 110 795 113 566
Deferred income taxes 427 255 275 257
Income taxes recoverable through future rates 560 728 554 590
Decommissioning funds 247 037 219 178
Other 633 901 559 943
Total deferred debits and other assets 2 142 044 2 062 206
Total Assets $9 179 128 $8 843 287
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
3
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GENERAL PUBLIC UTILITIES CORPORATION AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
<CAPTION>
In Thousands
June 30, December 31,
1994 1993
(Unaudited)
<S> <C> <C>
LIABILITIES AND CAPITAL
Capitalization:
Common stock $ 314 458 $ 314 458
Capital surplus 668 928 667 683
Retained earnings 1 715 678 1 813 490
Total 2 699 064 2 795 631
Less, reacquired common stock, at cost 183 326 185 258
Total common stockholders' equity 2 515 738 2 610 373
Cumulative preferred stock:
With mandatory redemption 150 000 150 000
Without mandatory redemption 158 242 158 242
Long-term debt 2 433 260 2 320 384
Total capitalization 5 257 240 5 238 999
Current Liabilities:
Debt due within one year 93 232 133 232
Notes payable 396 646 216 056
Obligations under capital leases 168 326 161 744
Accounts payable 261 848 300 181
Taxes accrued 115 638 140 132
Interest accrued 76 450 73 368
Other 193 031 169 976
Total current liabilities 1 305 171 1 194 689
Deferred Credits and Other Liabilities:
Deferred income taxes 1 415 125 1 389 241
Unamortized investment tax credits 160 573 170 108
Three Mile Island Unit 2 future costs 339 310 319 867
Other 701 709 530 383
Total deferred credits and other liabilities 2 616 717 2 409 599
Commitments and Contingencies (Note 1)
Total Liabilities and Capital $9 179 128 $8 843 287
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
4
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GENERAL PUBLIC UTILITIES CORPORATION AND SUBSIDIARY COMPANIES
Consolidated Statements of Income
(Unaudited)
<CAPTION>
In Thousands
(Except Per Share Data)
Three Months Six Months
Ended June 30, Ended June 30,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Operating Revenues $ 873 533 $863 236 $1 810 742 $1 744 390
Operating Expenses:
Fuel 87 391 79 805 190 698 172 020
Power purchased and interchanged 210 323 207 710 444 825 429 134
Deferral of energy costs, net (344) 21 812 (25 114) 32 276
Other operation and maintenance 368 309 227 629 601 420 427 613
Depreciation and amortization 86 301 91 984 176 114 178 576
Taxes, other than income taxes 82 615 81 731 173 568 166 609
Total operating expenses 834 595 710 671 1 561 511 1 406 228
Operating Income Before Income Taxes 38 938 152 565 249 231 338 162
Income taxes (6 762) 35 757 46 935 87 293
Operating Income 45 700 116 808 202 296 250 869
Other Income and Deductions:
Allowance for other funds used during
construction 680 1 026 1 326 2 226
Other income/(expense), net (201 608) 3 220 (143 999) 6 649
Income taxes 86 925 (1 235) 63 626 (3 458)
Total other income and deductions (114 003) 3 011 (79 047) 5 417
Income/(Loss) Before Interest Charges
and Preferred Dividends (68 303) 119 819 123 249 256 286
Interest Charges and Preferred Dividends:
Interest on long-term debt 46 061 48 710 92 204 94 774
Other interest 7 010 5 190 25 519 9 104
Allowance for borrowed funds used
during construction (1 548) (1 345) (3 065) (2 873)
Preferred stock dividends of
subsidiaries 5 516 8 694 11 031 17 388
Total interest charges and
preferred dividends 57 039 61 249 125 689 118 393
Net Income/(Loss) $(125 342) $ 58 570 $ (2 440) $ 137 893
Earnings/(Loss) Per Average Share $ (1.09) $ .52 $ (.02) $ 1.24
Average Common Shares Outstanding 115 119 110 883 115 092 110 871
Cash Dividends Paid Per Share $ .45 $ .40 $ .875 $ .80
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
5
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GENERAL PUBLIC UTILITIES CORPORATION AND SUBSIDIARY COMPANIES
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
In Thousands
Six Months
Ended June 30,
1994 1993
<S> <C> <C>
Operating Activities:
Income before preferred dividends of subsidiaries $ 8 591 $ 155 281
Adjustments to reconcile income to cash provided:
Depreciation and amortization 180 103 179 534
Amortization of property under capital leases 30 698 33 861
Three Mile Island Unit 2 costs 183 944 -
Voluntary enhanced retirement program 126 964 -
Nuclear outage maintenance costs, net 15 297 (2 635)
Deferred income taxes and investment tax
credits, net (98 835) 14 506
Deferred energy costs, net (24 908) 32 747
Accretion income (7 641) (8 469)
Allowance for other funds used during construction (1 327) (2 226)
Changes in working capital:
Receivables (12 565) (27 132)
Materials and supplies (507) 2 897
Special deposits and prepayments (158 780) (45 213)
Payables and accrued liabilities (21 997) (231 693)
Other, net (4 061) (15 784)
Net cash provided by operating activities 214 976 85 674
Investing Activities:
Cash construction expenditures (245 213) (226 546)
Contributions to decommissioning trust (16 647) (56 457)
Other, net (60 534) (9 014)
Net cash used for investing activities (322 394) (292 017)
Financing Activities:
Issuance of long-term debt 178 787 689 089
Increase in notes payable, net 180 661 62 110
Retirement of long-term debt (107 200) (377 899)
Capital lease principal payments (28 684) (24 973)
Dividends paid on common stock (100 625) (88 655)
Dividends paid on preferred stock of subsidiaries (11 031) (17 388)
Net cash provided by financing activities 111 908 242 284
Net increase in cash and temporary
cash investments from above activities 4 490 35 941
Cash and temporary cash investments,
beginning of year 25 843 10 390
Cash and temporary cash investments, end of period $ 30 333 $ 46 331
Supplemental Disclosure:
Interest paid (net of amount capitalized) $ 108 672 $ 107 130
Income taxes paid $ 34 730 $ 73 170
New capital lease obligations incurred $ 32 855 $ 34 341
Common stock dividends declared but not paid $ 51 786 $ 47 116
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
6
</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 its then
subsidiary EI. 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 June 30, 1994, the Subsidiaries' net
investment in TMI-1 and Oyster Creek, including nuclear fuel, was $648 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, 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. Management intends, in general, to seek recovery of any such costs
described above through the ratemaking process, but recognizes that recovery
is not assured.
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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 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 now scheduled to begin in April 1995. 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 in February 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
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. On July 13, 1994, however, the Court granted defendant's
motion for interlocutory appeal of its February 1994 order, stating that the
punitive damage claims and the duty owed by the defendants raise questions of
law that contain substantial grounds for differences of opinion.
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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
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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 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 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
$38 million for TMI-1 and $93 million for Oyster Creek at June 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 ratemaking process.
TMI-2:
The Corporation and its Subsidiaries have recorded a liability amounting
to $250 million as of June 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. 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 June 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
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seeking to set aside the PaPUC's 1993 rate order. On July 11, 1994, the
Commonwealth Court reversed the PaPUC order. Met-Ed plans to petition the
Pennsylvania Supreme Court to review the decision. As a consequence of the
Commonwealth Court decision, Met-Ed recorded pre-tax charges totaling $127.6
million. Penelec, because it is also subject to PaPUC regulation, recorded
pre-tax charges of $56.3 million for its share of such costs applicable to its
retail customers. These charges appear in the Other Income and Deductions
section of the Income Statement and are composed of $121.0 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), formerly the New
Jersey Board of Regulatory Commissioners, 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
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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
$9.1 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 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 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 has reduced its previous
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
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allowance market and the use of low-sulfur fuel or retirement of facilities.
Management believes that 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.
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 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 June 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 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.
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OTHER COMMITMENTS AND CONTINGENCIES
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 have 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 Office 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. 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 $28 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 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 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. 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 2,457 MW of capacity and
energy to the GPU System by the mid-to-late 1990s. As of June 30, 1994,
facilities covered by these agreements having 1,198 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 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.
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
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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 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 during the latter part of 1994 or
early 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.
Met-Ed and Penelec have requested the PaPUC to approve reduced charges to
customers for their respective shares of the tax refund over the twelve-month
period beginning September 1, 1994. JCP&L intends to refund 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 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.
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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. On May 26, 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.
Under these circumstances, management has determined that continued
deferral by Penelec of incremental FAS 106 expense is 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, however, the OCA has 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.
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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
GPU experienced a net loss for the three months ended June 30, 1994
amounting to $125.3 million, or a $1.09 loss per share, compared with net
income of $58.6 million, or earnings per share of $0.52, for the three months
ended June 30, 1993. For the six months ended June 30, 1994, GPU realized a
$2.4 million net loss, or a $0.02 loss per share, compared with net income of
$137.9 million, or earnings per share of $1.24, for the comparable 1993
period.
Net income for the three months ended June 30, 1994 would have been
$66.3 million, or $0.57 per share, if not for certain second quarter charges
to income totaling $329.5 million ($191.6 million after taxes), or $1.66 per
share.
Earnings for the three months ended June 30, 1994 were negatively
affected by a $183.9 million write-off of certain estimated TMI-2 future costs
resulting from an unfavorable Pennsylvania Commonwealth Court order, a
$127.0 million charge to income for costs related to the Voluntary Enhanced
Retirement Programs, and a $18.6 million write-off of postretirement benefit
costs not considered likely to be recovered through ratemaking. The same
factors affecting the quarterly results also affected results for the six
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 six month period.
The effect of these losses 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, and increased revenues
resulting from the continued positive effects of a February 1993 retail base
rate increase at JCP&L.
OPERATING REVENUES:
Revenues increased 1.2% to $873.5 million in the three months ended June
30, 1994 as compared with the same period in 1993. For the six months ended
June 30, 1994, revenues increased 3.8% to $1.8 billion as compared to the year
ago period. The components of the changes are as follows:
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(In Millions)
Three Months Six Months
Ended Ended
June 30, 1994 June 30, 1994
Kilowatt-hour (KWH) revenues
(excluding energy portion) $ 16.0 $ 42.7
Rate increase - 20.8
Energy revenues (10.0) (8.0)
Other revenues 4.3 10.8
Increase in revenues $ 10.3 $ 66.3
Kilowatt-hour revenues
KWH revenues increased in the three and six months ended June 30, 1994
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, which mostly occurred 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 decreased in each period due to a reduction in
sales to other utilities offset slightly by 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.
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 six months ended June 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 and six months ended June 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 six month period due to
higher emergency and winter storm repairs.
For more information concerning charges for the Voluntary Enhanced
Retirement Programs and their affect on the GPU System, see Competition in the
Liquidity and Capital Resources section.
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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/(expense), net
The decrease in both periods is principally related to the write-off of
estimated TMI-2 future costs and postretirement benefit costs. The effect of
these write-offs was partially offset in the six 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 six 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 six months ended June 30, 1994
consisted of $245 million for cash construction expenditures and $43 million
for maturing obligations. Construction expenditures for the year were
originally forecasted to be $663 million, and totaled $1.3 billion for the
1994/1995 period. In conjunction with the GPU System's plans to enhance its
competitive position, the 1994/1995 construction forecast had been reduced to
$1.2 billion. As a result of the adverse Pennsylvania rate treatment of TMI-2
retirement costs, the GPU System's goal is to further reduce its construction
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spending by $100 million, bringing the 1994/1995 construction forecast to $1.1
billion. The GPU System's latest construction forecast for 1994 reflects a
reduced spending level of $586 million. In addition, Met-Ed and Penelec plan
to begin making nonrecoverable funding contributions to external trusts in the
second half of 1995 to fund their share of the TMI-2 retirement costs.
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 the second quarter of 1994, Penelec issued $40 million of 8.38% series
first mortgage bonds (FMBs), the net proceeds from which were used to redeem
$40 million principal amount of 9.35% series bonds that matured in May 1994.
In July 1994, Penelec issued $105 million of Monthly Income Preferred
Securities (MIPS) through Penelec Capital, a special purpose finance
subsidiary. Penelec Capital then loaned the proceeds to Penelec with Penelec
issuing its deferrable interest subordinated debentures to Penelec Capital.
Penelec will take a tax deduction for interest paid on the subordinated
debentures and, at the same time, receive some preferred equity recognition by
the credit rating agencies for the MIPS. Penelec, through this subsidiary,
has authority to issue an additional $20 million of MIPS.
Met-Ed has PaPUC approval, and is awaiting Securities and Exchange
Commission (SEC) approval, for a $125 million MIPS program. Depending upon
market conditions, Met-Ed expects to issue MIPS in the third quarter of 1994.
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 $290 million, respectively, of which
$100 million for each Subsidiary may consist of preferred stock. 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. Penelec has sufficient coverage to
issue only up to $80 million of FMBs and $12 million of preferred stock at an
assumed 9% interest and dividend rate through June 1995. In addition, Penelec
will have the ability to issue $68 million of FMBs on the basis of previously
issued and retired bonds. The ability of Met-Ed and Penelec to issue MIPS,
which have no such coverage restrictions, is not affected by these write-
offs. JCP&L currently has the ability to issue $258 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.
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GPU plans to seek regulatory approval to issue up to approximately $125
million of additional common stock through 1995. The sale of such additional
common stock would be principally designed to restore the Subsidiaries' common
equity ratios and maintain their current bond ratings in light of the
substantial second quarter 1994 write-offs.
The GPU System's ability to obtain external financing is reflected in the
Subsidiaries' security ratings, which are periodically reviewed by the three
major credit rating agencies. In June 1994, Standard & Poor's (S&P) and Duff
& Phelps (D&P) lowered the security ratings of JCP&L citing relatively high
customer rates and a perceived credit risk associated with large purchase
power commitments. As a result of these actions, S&P and D&P assigned JCP&L's
first mortgage bonds a BBB+ rating, preferred stock a BBB rating, and
commercial paper a Duff 2 rating.
The S&P rating outlook, which is a financial benchmarking standard for
rating the debt of electric utilities to reflect the changing risk profiles
resulting primarily from the intensifying competitive pressures in the
industry, was also revised for each of the Subsidiaries. JCP&L was revised to
"stable" from "negative" since S&P thought the newly assigned BBB+ bond rating
should be sustainable going forward without further decline presently
anticipated. Met-Ed and Penelec's rating outlooks were lowered from "stable"
to "negative". Met-Ed was adversely effected due to projected cost increases
associated with currently committed future nonutility generation power
sources. Penelec, though their position was recognized as strong, was given a
negative outlook due to S&P's judgement that there has been a general
weakening of overall System credit quality.
Following a review that was prompted by the Commonwealth Court's order
denying recovery of TMI-2 future costs, Moody's downgraded the Subsidiaries'
credit ratings in August 1994 citing Met-Ed and Penelec's weakened financial
flexibility and constraints on GPU's plans to strengthen the Subsidiaries'
financial profiles to meet competitive challenges. Moody's now assigns the
FMBs of Met-Ed and JCP&L an equivalent BBB+ rating, and Penelec an equivalent
A- rating; preferred stock of Met-Ed and JCP&L an equivalent BBB rating, and
Penelec an equivalent BBB+ rating; and commercial paper for each of the
Subsidiaries a Prime 2 rating. Though unaffected by the Court's order,
JCP&L's credit ratings were reduced for similar System and industry reasons.
Met-Ed and Penelec's credit ratings were reaffirmed by D&P. S&P has indicated
that the effect of the Court's order on Met-Ed and Penelec's credit ratings is
uncertain pending its review of a more detailed strategy from management to
deal with the ruling's financial implications. S&P determined that JCP&L's
rating outlook will be unaffected by the Court order. Although credit quality
has been reduced, the Subsidiaries' credit ratings remain above investment
grade.
In June 1994, Moody's announced that it developed a new method to
calculate the minimum price an electric utility must charge its customers in
order to recover all of its generation costs. Moody's believes that an
assessment of relative cost position will become increasingly critical to the
credit analysis of electric utilities in a competitive marketplace. Specific
rating actions are not anticipated, however, until the pace and implications
of utility market deregulation are more certain.
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NONUTILITY BUSINESS:
In June 1994, Energy Initiatives, Inc. (EI) completed its acquisition of
North Canadian Power, Inc. (NCP) together with four of the five NCP operating
projects. It is anticipated that the necessary consents will be obtained to
acquire the remaining project during the third quarter of 1994.
GPU GENERATION CORPORATION:
In March 1994, the Subsidiaries filed applications seeking regulatory
approval to enter into operating agreements with GPU Generation Corporation
(GPUGC) pursuant to GPU's reorganization plan announced in February 1994. If
approved, 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. The Subsidiaries'
applications are pending before the New Jersey Board of Public Utilities
(NJBPU), the PaPUC and the SEC. One of Penelec's municipal wholesale
customers has requested that the SEC hold an evidentiary hearing on the
Subsidiaries' application.
COMPETITION:
In April 1994, GPU announced that it offered Voluntary Enhanced
Retirement Programs to certain bargaining and non-bargaining employees as part
of a corporate realignment plan designed to reduce costs and enhance GPU's
future competitive position in the changing electric utility industry.
Results for the three months ended June 30, 1994 reflect the acceptance by
approximately 1,350 employees, representing about 11% of the GPU System work
force. The future payroll savings expected from the retirement program are
estimated to be $59 million annually. The early retirement costs will be paid
from pension and postretirement benefit plan trusts. Savings from the
Programs reflect limiting the replacement of employees to 10% and are expected
to begin in the third quarter of 1994.
In April 1994, the PaPUC initiated an investigation into the role of
competition in Pennsylvania's electric utility industry. The PaPUC directed
that all interested parties file comments within five months on such issues
as: whether the electric transmission and generation systems should be opened
to retail wheeling, and what would be the effects on the Pennsylvania economy;
the appropriate pricing methodology for wheeling services; treatment of
stranded investment; the benefits, if any, for the customer; the impact on the
obligation to serve and the public policy goal of universal service; the
impact of retail wheeling on transmission safety and reliability; utility
financial health; and, ratemaking and legal issues. Following the initial
comment period, parties would have an additional month to file replies. A
PaPUC Staff report is expected to be issued in early 1995, following which the
PaPUC is to decide whether to conduct a rulemaking proceeding.
In May 1994, the NJBPU approved JCP&L's request to enter into individual
contracts to provide electric service to large commercial and industrial
customers.
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In June 1994, the Federal Energy Regulatory Commission (FERC) issued a
Notice of Proposed Rulemaking regarding the recovery by utilities of
legitimate and verifiable stranded costs. Among other things, the FERC has
proposed that utilities be allowed to recover such stranded costs associated
with existing wholesale requirements contracts, but not under new wholesale
contracts unless expressly provided for in the contract. With respect to so-
called retail stranded costs, while it stated a "strong" policy preference
that state regulatory agencies address recovery of these costs, the FERC also
set forth alternative proposals for how it would address the matter if the
states failed to do so. Subsequent to FERC's Notice of Proposed Rulemaking,
however, the U.S. Court of Appeals for the District of Columbia in an
unrelated case questioned the FERC's authority to permit utilities to recover
stranded costs. The Court directed that the FERC conduct an evidentiary
hearing in the case to determine whether permitting stranded cost recovery was
so inherently anticompetitive as to violate antitrust laws.
MEETING ENERGY DEMANDS:
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, the NJBPU 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 were unable to reach an agreement and pursuant to a NJBPU order,
hearings on this matter 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.
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 appealed the NJBPU's decision to the Appellate Division of the
New Jersey Superior Court in June 1994. 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. 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 received bids and is
continuing the evaluation process, which is expected to be completed during
the third quarter of 1994.
JCP&L is contesting before the NJBPU the request of one nonutility
generation developer to unilaterally extend the project's commercial operation
date and has opposed the request of another potential developer for a long-
term contract to sell JCP&L 200 MW of energy annually. In June 1994, the
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NJBPU denied the first developer's petition. The NJBPU has transmitted the
other developer's petition to the Administrative Law Office as a contested
case for evidentiary hearings.
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. Two nonutility
generators seeking to sell Met-Ed baseload capacity have formally opposed the
PaPUC application approval and have requested review of the PaPUC order by the
Commonwealth Court. In addition, in April 1994, one of these nonutility
generators filed another 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.
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.
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. Met-Ed and Penelec are awaiting a PaPUC decision.
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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 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. Lacey Township has issued a construction
permit and construction of the estimated $16 million dry storage
facility commenced during July 1994. On May 19, 1994, however,
Berkeley Township and other parties appealed the use variance
granted by the Lacey Township Zoning Board. The appeal, which is
pending in the New Jersey Supreme Court, is not expected to delay
the construction schedule for the storage facility.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(b) Reports on Form 8-K:
(1) For the month of May 1994, dated June 10, 1994 under
Item 5 (Other Events).
(2) For the month of July 1994, dated July 12, 1994 under
Item 5 (Other Events).
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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
August 8, 1994 By: /s/ J. G. Graham
J. G. Graham, Senior Vice President
(Chief Financial Officer)
August 8, 1994 By: /s/ F. A. Donofrio
F. A. Donofrio, Vice President
and Comptroller
(Chief Accounting Officer)
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