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 September 30, 1997
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission Registrant, State of Incorporation, I.R.S. Employer
File Number Address and Telephone Number Identification No.
- ----------- ---------------------------- ------------------
1-6047 GPU, Inc. 13-5516989
(a Pennsylvania corporation)
100 Interpace Parkway
Parsippany, New Jersey 07054-1149
Telephone (973) 263-6500
1-3141 Jersey Central Power & Light Company 21-0485010
(a New Jersey corporation)
2800 Pottsville Pike
Reading, Pennsylvania 19605
Telephone (610) 929-3601
1-446 Metropolitan Edison Company 23-0870160
(a Pennsylvania corporation)
2800 Pottsville Pike
Reading, Pennsylvania 19605
Telephone (610) 929-3601
1-3522 Pennsylvania Electric Company 25-0718085
(a Pennsylvania corporation)
2800 Pottsville Pike
Reading, Pennsylvania 19605
Telephone (610) 929-3601
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, 1997, was as follows:
Shares
Registrant Title Outstanding
- ---------- ----- -----------
GPU, Inc. Common Stock, $2.50 par value 120,792,487
Jersey Central Power & Light Company Common Stock, $10 par value 15,371,270
Metropolitan Edison Company Common Stock, no par value 859,500
Pennsylvania Electric Company Common Stock, $20 par value 5,290,596
<PAGE>
GPU, Inc. and Subsidiary Companies
Quarterly Report on Form 10-Q
September 30, 1997
Table of Contents
-----------------
Page
----
PART I - Financial Information
Consolidated Financial Statements:
GPU, Inc.
---------
Balance Sheets 3
Statements of Income 5
Statements of Cash Flows 6
Jersey Central Power & Light Company
------------------------------------
Balance Sheets 7
Statements of Income 9
Statements of Cash Flows 10
Metropolitan Edison Company
---------------------------
Balance Sheets 11
Statements of Income 13
Statements of Cash Flows 14
Pennsylvania Electric Company
-----------------------------
Balance Sheets 15
Statements of Income 17
Statements of Cash Flows 18
Combined Notes to Consolidated Financial Statements 19
Combined Management's Discussion and Analysis
of Financial Condition and Results of
Operations 46
PART II - Other Information 69
Signatures 70
---------------------------------
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 fo
the interim periods presented.
This combined Quarterly Report on Form 10-Q is separately filed by GPU,
Inc., Jersey Central Power & Light Company, Metropolitan Edison Company and
Pennsylvania Electric Company. Information contained herein relating to any
individual registrant is filed by such registrant on its own behalf. None of
these registrants make any representations as to information relating to the
other registrants. This combined Form 10-Q supplements and updates the 1996
Annual Report on Form 10-K, filed by the individual registrants with the
Securities and Exchange Commission and should be read in conjunction therewith.
This Form 10-Q contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Statements made
that are not historical facts are forward-looking and, accordingly, involve
risks and uncertainties that could cause actual results or outcomes to differ
materially from those expressed in the forward-looking statements. Although such
forward-looking statements have been based on reasonable assumptions, there is
no assurance that the expected results will be achieved. Some of the factors
that could cause actual results to differ materially include, but are not
limited to: the effects of regulatory decisions; changes in law and other
governmental actions and initiatives; the impact of deregulation and increased
competition in the industry; industry restructuring; expected outcomes of legal
proceedings; generating plant performance; fuel prices and availability; and
uncertainties involved with foreign operations including political risks and
foreign currency fluctuations.
2
<PAGE>
GPU, INC. AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
---------------------------
In Thousands
------------
September 30, December 31,
1997 1996
---- ----
(Unaudited)
ASSETS
Utility Plant:
In service, at original cost $ 9,873,012 $ 9,646,380
Less, accumulated depreciation 3,953,755 3,704,026
----------- -----------
Net utility plant in service 5,919,257 5,942,354
Construction work in progress 223,889 277,440
Other, net 170,217 168,029
----------- -----------
Net utility plant 6,313,363 6,387,823
----------- -----------
Other Property and Investments:
GPU International Group investments, net 850,315 924,397
Nuclear decommissioning trusts, at market 544,607 464,011
Nuclear fuel disposal trust, at market 107,623 101,661
Other, net 53,713 51,122
----------- -----------
Total other property and investments 1,556,258 1,541,191
----------- -----------
Current Assets:
Cash and temporary cash investments 42,523 31,604
Special deposits 29,313 47,545
Accounts receivable:
Customers, net 293,577 270,844
Other 109,675 91,637
Unbilled revenues 129,846 114,891
Materials and supplies, at average cost or less:
Construction and maintenance 185,664 187,130
Fuel 39,600 40,207
Deferred income taxes 61,031 32,148
Prepayments 112,003 81,168
Other 379 --
----------- -----------
Total current assets 1,003,611 897,174
----------- -----------
Deferred Debits and Other Assets:
Regulatory assets:
Three Mile Island Unit 2 deferred costs 345,352 356,517
Income taxes recoverable through future rates 526,623 527,385
Nonutility generation contract buyout costs 251,068 242,481
Unamortized property losses 97,281 100,310
Other 435,616 426,579
----------- -----------
Total regulatory assets 1,655,940 1,653,272
Deferred income taxes 365,234 332,828
Other 148,943 128,931
----------- -----------
Total deferred debits and other assets 2,170,117 2,115,031
----------- -----------
Total Assets $11,043,349 $10,941,219
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
GPU, INC. AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
---------------------------
In Thousands
------------
September 30, December 31,
1997 1996
---- ----
(Unaudited)
LIABILITIES AND CAPITAL
Capitalization:
Common stock $ 314,458 $ 314,458
Capital surplus 753,082 750,569
Retained earnings 2,188,770 2,068,976
----------- -----------
Total 3,256,310 3,134,003
Less, reacquired common stock, at cost 82,391 86,416
----------- -----------
Total common stockholders' equity 3,173,919 3,047,587
Cumulative preferred stock:
With mandatory redemption 91,500 114,000
Without mandatory redemption 66,478 66,478
Subsidiary-obligated mandatorily
redeemable preferred securities 330,000 330,000
Long-term debt 3,211,509 3,177,016
----------- -----------
Total capitalization 6,873,406 6,735,081
----------- -----------
Current Liabilities:
Securities due within one year 63,816 178,583
Notes payable 334,685 265,547
Obligations under capital leases 149,281 143,818
Accounts payable 348,188 354,819
Taxes accrued 33,929 25,717
Deferred energy 30,922 15,559
Interest accrued 53,908 70,370
Other 237,069 282,193
----------- -----------
Total current liabilities 1,251,798 1,336,606
----------- -----------
Deferred Credits and Other Liabilities:
Deferred income taxes 1,574,264 1,562,979
Unamortized investment tax credits 125,320 133,572
Three Mile Island Unit 2 future costs 444,175 430,508
Regulatory liabilities 92,379 89,815
Other 682,007 652,658
----------- -----------
Total deferred credits and other liabilities 2,918,145 2,869,532
----------- -----------
Commitments and Contingencies (Note 1)
Total Liabilities and Capital $11,043,349 $10,941,219
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
<TABLE>
<CAPTION>
GPU, INC. AND SUBSIDIARY COMPANIES
Consolidated Statements of Income
---------------------------------
(Unaudited)
In Thousands
(Except Per Share Data)
-----------------------
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Revenues $ 1,093,598 $ 1,058,223 $ 3,062,926 $ 2,993,411
----------- ----------- ----------- -----------
Operating Expenses:
Fuel 94,310 98,200 276,122 284,969
Power purchased and interchanged 282,694 270,867 771,513 761,749
Deferral of energy and capacity
costs, net 4,900 9,861 11,629 19,701
Other operation and maintenance 245,206 363,848 683,834 832,201
Depreciation and amortization 121,185 102,726 347,755 297,233
Taxes, other than income taxes 95,186 99,263 271,589 274,046
----------- ----------- ----------- -----------
Total operating expenses 843,481 944,765 2,362,442 2,469,899
----------- ----------- ----------- -----------
Operating Income Before Income Taxes 250,117 113,458 700,484 523,512
Income taxes 71,706 20,292 198,940 134,387
----------- ----------- ----------- -----------
Operating Income 178,411 93,166 501,544 389,125
----------- ----------- ----------- -----------
Other Income and Deductions:
Allowance for other funds used during
construction 274 (743) 935 1,741
Other income/(expense), net (162,533) 5,720 (129,512) 17,300
Income taxes 64,842 1,355 61,924 (2,590)
----------- ----------- ----------- -----------
Total other income and deductions (97,417) 6,332 (66,653) 16,451
----------- ----------- ----------- -----------
Income Before Interest Charges
and Preferred Dividends 80,994 99,498 434,891 405,576
----------- ----------- ----------- -----------
Interest Charges and Preferred Dividends:
Interest on long-term debt 45,868 45,708 137,726 138,316
Other interest 9,214 9,518 27,364 22,497
Allowance for borrowed funds used
during construction (1,104) (2,555) (3,547) (6,378)
Dividends on subsidiary-obligated mandatorily
redeemable preferred securities 7,222 7,222 21,666 21,666
Preferred stock dividends of
subsidiaries 2,890 3,784 9,491 11,776
----------- ----------- ----------- -----------
Total interest charges and
preferred dividends 64,090 63,677 192,700 187,877
----------- ----------- ----------- -----------
Net Income $ 16,904 $ 35,821 $ 242,191 $ 217,699
=========== =========== =========== ===========
Earnings Per Average Common Share $ .14 $ .29 $ 2.00 $ 1.80
=========== =========== =========== ===========
Average Common Shares Outstanding 121,049 120,791 120,964 120,710
=========== =========== =========== ===========
Cash Dividends Paid Per Share $ .50 $ .485 $ 1.485 $ 1.44
=========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
5
</TABLE>
<PAGE>
GPU, INC. AND SUBSIDIARY COMPANIES
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
In Thousands
------------
Nine Months
Ended September 30,
-------------------
1997 1996
---- ----
Operating Activities:
Net income $ 242,191 $ 217,699
Adjustments to reconcile income to cash provided:
Depreciation and amortization 370,769 315,726
Amortization of property under capital leases 36,867 42,711
Equity in undistributed (earnings)/losses
of affiliates 85,995 (15,253)
Voluntary enhanced retirement programs -- 122,739
Nuclear outage maintenance costs, net 8,685 3,597
Deferred income taxes and investment tax
credits, net (68,815) 14,664
Deferred energy and capacity costs, net 11,629 19,696
Accretion income (8,070) (8,708)
Allowance for other funds used
during construction (935) (1,741)
Changes in working capital:
Receivables (51,480) (48,788)
Materials and supplies 1,995 16,113
Special deposits and prepayments (15,808) (92,705)
Payables and accrued liabilities 1,373 (16,063)
Nonutility generation contract buyout costs (49,050) (90,450)
Other, net (25,136) (51,396)
--------- ---------
Net cash provided by operating activities 540,210 427,841
--------- ---------
Investing Activities:
Cash construction expenditures (235,941) (261,185)
Contributions to decommissioning trusts (30,764) (30,136)
GPU International Group investments (97,565) (541,587)
Other, net 49,132 3,703
--------- ---------
Net cash used for investing activities (315,138) (829,205)
--------- ---------
Financing Activities:
Issuance of long-term debt 130,471 563,762
Increase in notes payable, net 60,227 177,797
Retirement of long-term debt (166,601) (71,389)
Capital lease principal payments (38,884) (42,673)
Redemption of preferred stock of subsidiaries (20,000) (20,000)
Dividends paid on common stock (179,188) (173,484)
--------- ---------
Net cash provided/(required) by
financing activities (213,975) 434,013
--------- ---------
Effect of exchange rate changes on cash (178) 108
Net increase in cash and temporary
cash investments from above activities 10,919 32,757
Cash and temporary cash investments, beginning of year 31,604 18,422
--------- ---------
Cash and temporary cash investments, end of period $ 42,523 $ 51,179
========= =========
Supplemental Disclosure:
Interest and preferred dividends paid $ 240,524 $ 219,875
========= =========
Income taxes paid $ 187,503 $ 137,980
========= =========
New capital lease obligations incurred $ 39,306 $ 31,415
========= =========
Common stock dividends declared but not paid $ -- $ --
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE>
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
Consolidated Balance Sheets
---------------------------
In Thousands
September 30, December 31,
1997 1996
---- ----
(Unaudited)
ASSETS
Utility Plant:
In service, at original cost $4,627,088 $4,528,676
Less, accumulated depreciation 1,954,935 1,811,620
---------- ----------
Net utility plant in service 2,672,153 2,717,056
Construction work in progress 107,635 106,512
Other, net 99,682 111,116
---------- ----------
Net utility plant 2,879,470 2,934,684
---------- ----------
Other Property and Investments:
Nuclear decommissioning trusts, at market 323,817 278,342
Nuclear fuel disposal trust, at market 107,623 101,661
Other, net 8,354 8,305
---------- ----------
Total other property and investments 439,794 388,308
---------- ----------
Current Assets:
Cash and temporary cash investments 13,469 1,321
Special deposits 6,422 6,939
Accounts receivable:
Customers, net 165,410 135,655
Other 16,887 33,228
Unbilled revenues 53,636 56,522
Materials and supplies, at average cost or less:
Construction and maintenance 91,558 92,761
Fuel 15,939 19,257
Deferred income taxes 24,158 22,509
Prepayments 53,783 21,150
---------- ----------
Total current assets 441,262 389,342
---------- ----------
Deferred Debits and Other Assets:
Regulatory assets:
Income taxes recoverable through future rates 148,752 142,726
Nonutility generation contract buyout costs 143,500 139,000
Three Mile Island Unit 2 deferred costs 109,653 126,448
Unamortized property losses 92,336 94,767
Other 315,422 326,620
---------- ----------
Total regulatory assets 809,663 829,561
Deferred income taxes 149,879 138,903
Other 21,937 29,121
---------- ----------
Total deferred debits and other assets 981,479 997,585
---------- ----------
Total Assets $4,742,005 $4,709,919
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
7
<PAGE>
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
Consolidated Balance Sheets
---------------------------
In Thousands
September 30, December 31,
1997 1996
---- ----
(Unaudited)
LIABILITIES AND CAPITAL
Capitalization:
Common stock $ 153,713 $ 153,713
Capital surplus 510,769 510,769
Retained earnings 892,230 825,001
---------- ----------
Total common stockholder's equity 1,556,712 1,489,483
Cumulative preferred stock:
With mandatory redemption 91,500 114,000
Without mandatory redemption 37,741 37,741
Company-obligated mandatorily
redeemable preferred securities 125,000 125,000
Long-term debt 1,173,244 1,173,091
---------- ----------
Total capitalization 2,984,197 2,939,315
---------- ----------
Current Liabilities:
Securities due within one year 32,511 110,075
Notes payable 106,800 31,800
Obligations under capital leases 86,214 96,150
Accounts payable:
Affiliates 19,873 71,761
Other 98,166 94,258
Taxes accrued 14,654 2,063
Deferred energy credits 30,922 15,559
Interest accrued 29,385 28,350
Other 86,736 80,195
---------- ----------
Total current liabilities 505,261 530,211
---------- ----------
Deferred Credits and Other Liabilities:
Deferred income taxes 663,579 664,440
Unamortized investment tax credits 55,243 59,893
Three Mile Island Unit 2 future costs 111,069 107,652
Nuclear fuel disposal fee 132,648 127,543
Regulatory liabilities 38,722 33,250
Other 251,286 247,615
---------- ----------
Total deferred credits and other liabilities 1,252,547 1,240,393
---------- ----------
Commitments and Contingencies (Note 1)
Total Liabilities and Capital $4,742,005 $4,709,919
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
8
<PAGE>
<TABLE>
<CAPTION>
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
Consolidated Statements of Income
---------------------------------
(Unaudited)
In Thousands
------------
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Revenues $ 602,900 $ 578,274 $ 1,591,569 $ 1,583,432
--------- --------- ----------- -----------
Operating Expenses:
Fuel 27,633 29,438 73,703 81,664
Power purchased and interchanged:
Affiliates 7,513 8,673 14,719 21,896
Others 172,432 169,640 451,538 451,889
Deferral of energy and capacity costs, net 4,900 741 11,629 15,478
Other operation and maintenance 115,531 187,964 331,808 425,306
Depreciation and amortization 68,940 54,939 190,178 155,177
Taxes, other than income taxes 64,050 61,539 176,878 176,899
--------- --------- ----------- -----------
Total operating expenses 460,999 512,934 1,250,453 1,328,309
--------- --------- ----------- -----------
Operating Income Before Income Taxes 141,901 65,340 341,116 255,123
Income taxes 39,374 11,888 85,466 56,560
--------- --------- ----------- -----------
Operating Income 102,527 53,452 255,650 198,563
--------- --------- ----------- -----------
Other Income and Deductions:
Allowance for other funds used during
construction 65 (758) 332 1,224
Other income, net 1,975 2,850 2,122 4,668
Income taxes 1,583 (990) (1,244) (2,225)
--------- --------- ----------- -----------
Total other income and deductions 3,623 1,102 1,210 3,667
--------- --------- ----------- -----------
Income Before Interest Charges and
Dividends on Preferred Securities 106,150 54,554 256,860 202,230
--------- --------- ----------- -----------
Interest Charges and Dividends
on Preferred Securities:
Interest on long-term debt 22,434 22,204 67,779 66,921
Other interest 4,022 3,971 11,680 8,980
Allowance for borrowed funds used
during construction (287) (1,815) (1,491) (4,092)
Dividends on company-obligated mandatorily
redeemable preferred securities 2,675 2,675 8,025 8,025
--------- --------- ----------- -----------
Total interest charges and dividends
on preferred securities 28,844 27,035 85,993 79,834
--------- --------- ----------- -----------
Net Income 77,306 27,519 170,867 122,396
Preferred stock dividends 2,597 3,162 8,638 9,910
--------- --------- ----------- -----------
Earnings Available for Common Stock $ 74,709 $ 24,357 $ 162,229 $ 112,486
========= ========= =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
9
</TABLE>
<PAGE>
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
In Thousands
------------
Nine Months
Ended September 30,
-------------------
1997 1996
---- ----
Operating Activities:
Net income $ 170,867 $ 122,396
Adjustments to reconcile income to cash provided:
Depreciation and amortization 201,149 163,880
Amortization of property under capital leases 21,195 22,493
Voluntary enhanced retirement programs -- 62,909
Nuclear outage maintenance costs, net 10,925 (3,322)
Deferred income taxes and investment tax
credits, net (29,818) 2,475
Deferred energy and capacity costs, net 11,629 15,473
Accretion income (8,070) (8,708)
Allowance for other funds used
during construction (332) (1,224)
Changes in working capital:
Receivables (10,528) (5,173)
Materials and supplies 4,521 11,179
Special deposits and prepayments (32,116) (54,923)
Payables and accrued liabilities (14,584) (36,664)
Nonutility generation contract buyout costs (30,500) (65,000)
Other, net 4,367 (2,767)
--------- ---------
Net cash provided by operating activities 298,705 223,024
--------- ---------
Investing Activities:
Cash construction expenditures (116,026) (124,081)
Contributions to decommissioning trusts (13,502) (13,504)
Other, net (7,603) (5,643)
--------- ---------
Net cash used for investing activities (137,131) (143,228)
--------- ---------
Financing Activities:
Increase in notes payable, net 75,000 101,500
Retirement of long-term debt (80,075) (25,710)
Capital lease principal payments (20,289) (23,249)
Redemption of preferred stock (20,000) (20,000)
Dividends paid on common stock (95,000) (100,000)
Dividends paid on preferred stock (9,062) (10,334)
--------- ---------
Net cash required by financing activities (149,426) (77,793)
--------- ---------
Net increase in cash and temporary
cash investments from above activities 12,148 2,003
Cash and temporary cash investments, beginning of year 1,321 922
--------- ---------
Cash and temporary cash investments, end of period $ 13,469 $ 2,925
========= =========
Supplemental Disclosure:
Interest paid $ 83,973 $ 78,674
========= =========
Income taxes paid $ 91,518 $ 70,267
========= =========
New capital lease obligations incurred $ 10,431 $ 30,321
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
10
<PAGE>
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
---------------------------
In Thousands
------------
September 30, December 31,
1997 1996
---- ----
(Unaudited)
ASSETS
Utility Plant:
In service, at original cost $2,384,433 $2,297,100
Less, accumulated depreciation 896,917 841,398
---------- ----------
Net utility plant in service 1,487,516 1,455,702
Construction work in progress 45,407 98,171
Other, net 41,457 31,000
---------- ----------
Net utility plant 1,574,380 1,584,873
---------- ----------
Other Property and Investments:
Nuclear decommissioning trusts, at market 156,722 131,475
Other, net 11,676 11,261
---------- ----------
Total other property and investments 168,398 142,736
---------- ----------
Current Assets:
Cash and temporary cash investments 3,258 1,901
Special deposits 1,152 1,052
Accounts receivable:
Customers, net 62,810 61,522
Other 33,479 17,368
Unbilled revenues 37,299 27,019
Materials and supplies, at average cost or less:
Construction and maintenance 38,974 39,739
Fuel 9,311 11,026
Deferred income taxes -- 7,073
Prepayments 11,983 17,254
---------- ----------
Total current assets 198,266 183,954
---------- ----------
Deferred Debits and Other Assets:
Regulatory assets:
Income taxes recoverable through future rates 172,186 174,636
Three Mile Island Unit 2 deferred costs 147,141 144,782
Nonutility generation contract buyout costs 78,868 86,781
Other 66,618 56,184
---------- ----------
Total regulatory assets 464,813 462,383
Deferred income taxes 89,932 85,169
Other 18,191 13,863
---------- ----------
Total deferred debits and other assets 572,936 561,415
---------- ----------
Total Assets $2,513,980 $2,472,978
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
11
<PAGE>
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
---------------------------
In Thousands
------------
September 30, December 31,
1997 1996
---- ----
(Unaudited)
LIABILITIES AND CAPITAL
Capitalization:
Common stock $ 66,273 $ 66,273
Capital surplus 370,200 370,200
Retained earnings 302,500 264,044
---------- ----------
Total common stockholder's equity 738,973 700,517
Cumulative preferred stock 12,056 12,056
Company-obligated mandatorily
redeemable preferred securities 100,000 100,000
Long-term debt 576,923 563,252
---------- ----------
Total capitalization 1,427,952 1,375,825
---------- ----------
Current Liabilities:
Securities due within one year 22 40,020
Notes payable 65,056 50,667
Obligations under capital leases 40,609 29,964
Accounts payable:
Affiliates 41,852 27,556
Other 83,892 89,857
Taxes accrued 11,629 11,222
Interest accrued 10,246 18,279
Other 39,765 45,825
---------- ----------
Total current liabilities 293,071 313,390
---------- ----------
Deferred Credits and Other Liabilities:
Deferred income taxes 409,370 401,104
Three Mile Island Unit 2 future costs 222,037 215,204
Unamortized investment tax credits 30,232 31,584
Nuclear fuel disposal fee 29,964 28,811
Regulatory liabilities 24,990 25,981
Other 76,364 81,079
---------- ----------
Total deferred credits and other liabilities 792,957 783,763
---------- ----------
Commitments and Contingencies (Note 1)
Total Liabilities and Capital $2,513,980 $2,472,978
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
12
<PAGE>
<TABLE>
<CAPTION>
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statements of Income
---------------------------------
(Unaudited)
In Thousands
------------
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Revenues $ 248,161 $ 243,077 $ 711,975 $ 687,823
--------- --------- --------- ---------
Operating Expenses:
Fuel 23,472 23,645 69,998 71,612
Power purchased and interchanged:
Affiliates 5,380 4,270 12,337 16,018
Others 59,325 50,422 164,525 152,696
Deferral of energy costs, net -- 8,038 -- 6,053
Other operation and maintenance 58,219 81,871 161,251 188,009
Depreciation and amortization 26,711 24,522 78,642 72,825
Taxes, other than income taxes 15,235 19,617 44,989 47,649
--------- --------- --------- ---------
Total operating expenses 188,342 212,385 531,742 554,862
--------- --------- --------- ---------
Operating Income Before Income Taxes 59,819 30,692 180,233 132,961
Income taxes 18,105 7,117 56,103 39,865
--------- --------- --------- ---------
Operating Income 41,714 23,575 124,130 93,096
--------- --------- --------- ---------
Other Income and Deductions:
Allowance for other funds used during
construction 138 314 439 401
Other income/(expense), net 304 (105) 2,408 69
Income taxes (165) 42 (1,087) 123
--------- --------- --------- ---------
Total other income and deductions 277 251 1,760 593
--------- --------- --------- ---------
Income Before Interest Charges and
Dividends on Preferred Securities 41,991 23,826 125,890 93,689
--------- --------- --------- ---------
Interest Charges and Dividends
on Preferred Securities:
Interest on long-term debt 10,981 11,182 33,275 34,119
Other interest 1,717 2,101 5,345 4,132
Allowance for borrowed funds used
during construction (182) (89) (593) (537)
Dividends on company-obligated mandatorily
redeemable preferred securities 2,250 2,250 6,750 6,750
--------- --------- --------- ---------
Total interest charges and dividends
on preferred securities 14,766 15,444 44,777 44,464
--------- --------- --------- ---------
Net Income 27,225 8,382 81,113 49,225
Preferred stock dividends 120 236 362 708
--------- --------- --------- ---------
Earnings Available for Common Stock $ 27,105 $ 8,146 $ 80,751 $ 48,517
========= ========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
13
</TABLE>
<PAGE>
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
In Thousands
------------
Nine Months
Ended September 30,
-------------------
1997 1996
---- ----
Operating Activities:
Net income $ 81,113 $ 49,225
Adjustments to reconcile income to cash provided:
Depreciation and amortization 84,706 77,173
Amortization of property under capital leases 8,723 11,785
Voluntary enhanced retirement programs -- 26,204
Nuclear outage maintenance costs, net (1,496) 4,618
Deferred income taxes and investment tax
credits, net 8,786 8,487
Deferred energy costs, net -- 6,157
Allowance for other funds used
during construction (439) (401)
Changes in working capital:
Receivables (27,679) 5,652
Materials and supplies 2,480 1,454
Special deposits and prepayments 5,171 (15,521)
Payables and accrued liabilities 7,311 (27,692)
Nonutility generation contract buyout costs (13,550) (25,450)
Other, net (16,665) (10,641)
--------- ---------
Net cash provided by operating activities 138,461 111,050
--------- ---------
Investing Activities:
Cash construction expenditures (55,273) (52,089)
Contributions to decommissioning trusts (13,315) (12,685)
Other, net (312) (973)
--------- ---------
Net cash used for investing activities (68,900) (65,747)
--------- ---------
Financing Activities:
Issuance of long-term debt 13,577 --
Increase in notes payable, net 14,389 29,687
Retirement of long-term debt (40,020) (15,019)
Capital lease principal payments (10,672) (11,255)
Dividends paid on common stock (45,000) (45,000)
Dividends paid on preferred stock (478) (708)
--------- ---------
Net cash required by
financing activities (68,204) (42,295)
--------- ---------
Net increase in cash and temporary
cash investments from above activities 1,357 3,008
Cash and temporary cash investments, beginning of year 1,901 1,810
--------- ---------
Cash and temporary cash investments, end of period $ 3,258 $ 4,818
========= =========
Supplemental Disclosure:
Interest paid $ 51,788 $ 50,840
========= =========
Income taxes paid $ 44,652 $ 36,954
========= =========
New capital lease obligations incurred $ 18,829 $ 725
========= =========
The accompanying notes are an integral part of the consolidated financial
statements
14
<PAGE>
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
---------------------------
In Thousands
------------
September 30, December 31,
1997 1996
---- ----
(Unaudited)
ASSETS
Utility Plant:
In service, at original cost $2,776,508 $2,738,223
Less, accumulated depreciation 1,070,030 1,022,553
---------- ----------
Net utility plant in service 1,706,478 1,715,670
Construction work in progress 70,847 72,757
Other, net 27,506 22,910
---------- ----------
Net utility plant 1,804,831 1,811,337
---------- ----------
Other Property and Investments:
Nuclear decommissioning trusts, at market 64,068 54,194
Other, net 7,065 7,271
---------- ----------
Total other property and investments 71,133 61,465
---------- ----------
Current Assets:
Cash and temporary cash investments 4,236 --
Special deposits 2,637 2,348
Accounts receivable:
Customers, net 65,357 73,190
Other 33,861 15,151
Unbilled revenues 38,911 31,350
Materials and supplies, at average cost or less:
Construction and maintenance 49,587 49,007
Fuel 14,350 9,924
Deferred income taxes 466 --
Prepayments 34,960 36,930
---------- ----------
Total current assets 244,365 217,900
---------- ----------
Deferred Debits and Other Assets:
Regulatory assets:
Income taxes recoverable through future rates 205,685 210,023
Three Mile Island Unit 2 deferred costs 88,558 85,287
Other 88,653 67,128
---------- ----------
Total regulatory assets 382,896 362,438
Deferred income taxes 58,776 67,099
Other 16,273 14,826
---------- ----------
Total deferred debits and other assets 457,945 444,363
---------- ----------
Total Assets $2,578,274 $2,535,065
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
15
<PAGE>
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
---------------------------
In Thousands
------------
September 30, December 31,
1997 1996
---- ----
(Unaudited)
LIABILITIES AND CAPITAL
Capitalization:
Common stock $ 105,812 $ 105,812
Capital surplus 285,486 285,486
Retained earnings 400,669 363,702
---------- ----------
Total common stockholder's equity 791,967 755,000
Cumulative preferred stock 16,681 16,681
Company-obligated mandatorily
redeemable preferred securities 105,000 105,000
Long-term debt 676,444 656,459
---------- ----------
Total capitalization 1,590,092 1,533,140
---------- ----------
Current Liabilities:
Securities due within one year 30,011 26,010
Notes payable 83,529 107,680
Obligations under capital leases 21,096 15,881
Accounts payable:
Affiliates 20,900 20,432
Other 51,964 53,424
Taxes accrued 7,914 11,223
Interest accrued 10,272 19,192
Vacations accrued 6,193 5,172
Other 22,062 12,052
---------- ----------
Total current liabilities 253,941 271,066
---------- ----------
Deferred Credits and Other Liabilities:
Deferred income taxes 474,474 473,268
Three Mile Island Unit 2 future costs 111,069 107,652
Unamortized investment tax credits 39,845 42,095
Nuclear fuel disposal fee 14,982 14,406
Regulatory liabilities 30,099 31,694
Other 63,772 61,744
---------- ----------
Total deferred credits and other liabilities 734,241 730,859
---------- ----------
Commitments and Contingencies (Note 1)
Total Liabilities and Capital $2,578,274 $2,535,065
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
16
<PAGE>
<TABLE>
<CAPTION>
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statements of Income
---------------------------------
(Unaudited)
In Thousands
------------
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Revenues $ 257,569 $ 256,143 $ 795,184 $ 772,260
--------- --------- --------- ---------
Operating Expenses:
Fuel 43,205 45,117 132,421 131,693
Power purchased and interchanged:
Affiliates 598 166 2,672 2,245
Others 50,937 50,900 155,450 157,259
Deferral of energy costs, net -- 1,082 -- (1,830)
Other operation and maintenance 71,816 96,989 190,151 222,804
Depreciation and amortization 25,534 23,265 78,935 69,231
Taxes, other than income taxes 15,808 18,107 49,629 49,498
--------- --------- --------- ---------
Total operating expenses 207,898 235,626 609,258 630,900
--------- --------- --------- ---------
Operating Income Before Income Taxes 49,671 20,517 185,926 141,360
Income taxes 14,227 1,287 57,371 37,962
--------- --------- --------- ---------
Operating Income 35,444 19,230 128,555 103,398
--------- --------- --------- ---------
Other Income and Deductions:
Allowance for other funds used during
construction 71 (299) 164 116
Other income/(expense), net (57) 67 1,198 (735)
Income taxes (13) 14 (509) 76
--------- --------- --------- ---------
Total other income and deductions 1 (218) 853 (543)
--------- --------- --------- ---------
Income Before Interest Charges and
Dividends on Preferred Securities 35,445 19,012 129,408 102,855
--------- --------- --------- ---------
Interest Charges and Dividends
on Preferred Securities:
Interest on long-term debt 12,453 12,322 36,672 37,276
Other interest 1,961 2,179 6,204 5,448
Allowance for borrowed funds used
during construction (635) (651) (1,463) (1,749)
Dividends on company-obligated mandatorily
redeemable preferred securities 2,297 2,297 6,891 6,891
--------- --------- --------- ---------
Total interest charges and dividends
on preferred securities 16,076 16,147 48,304 47,866
--------- --------- --------- ---------
Net Income 19,369 2,865 81,104 54,989
Preferred stock dividends 173 386 491 1,158
--------- --------- --------- ---------
Earnings Available for Common Stock $ 19,196 $ 2,479 $ 80,613 $ 53,831
========= ========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
17
</TABLE>
<PAGE>
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
In Thousands
------------
Nine Months
Ended September 30,
-------------------
1997 1996
---- ----
Operating Activities:
Net income $ 81,104 $ 54,989
Adjustments to reconcile income to cash provided:
Depreciation and amortization 73,989 66,236
Amortization of property under capital leases 5,517 6,197
Voluntary enhanced retirement programs -- 33,626
Nuclear outage maintenance costs, net (744) 2,301
Deferred income taxes and investment tax
credits, net 8,373 (1,453)
Deferred energy costs, net -- (1,934)
Allowance for other funds used
during construction (164) (116)
Changes in working capital:
Receivables (18,438) 15,056
Materials and supplies (5,006) 3,565
Special deposits and prepayments 1,681 (23,068)
Payables and accrued liabilities (6,818) (46,698)
Nonutility generation contract buyout costs (5,000) --
Other, net (11,425) (1,106)
--------- ---------
Net cash provided by operating activities 123,069 107,595
--------- ---------
Investing Activities:
Cash construction expenditures (63,005) (84,119)
Contributions to decommissioning trusts (3,947) (3,947)
Other, net 417 (581)
--------- ---------
Net cash used for investing activities (66,535) (88,647)
--------- ---------
Financing Activities:
Issuance of long-term debt 49,875 --
Increase/(Decrease) in notes payable, net (24,151) 43,535
Retirement of long-term debt (26,010) (25,009)
Capital lease principal payments (6,491) (5,933)
Dividends paid on common stock (45,000) (30,000)
Dividends paid on preferred stock (521) (1,158)
--------- ---------
Net cash required by financing activities (52,298) (18,565)
--------- ---------
Net increase in cash and temporary
cash investments from above activities 4,236 383
Cash and temporary cash investments, beginning of year -- 1,367
--------- ---------
Cash and temporary cash investments, end of period $ 4,236 $ 1,750
========= =========
Supplemental Disclosure:
Interest paid $ 56,289 $ 55,499
========= =========
Income taxes paid $ 44,147 $ 42,863
========= =========
New capital lease obligations incurred $ 10,046 $ 369
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
18
<PAGE>
GPU, Inc. and Subsidiary Companies
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GPU, Inc., a Pennsylvania corporation, is a holding company registered
under the Public Utility Holding Company Act of 1935. GPU, Inc. does not
directly operate any utility properties, but owns all the outstanding common
stock of three domestic electric utilities serving customers in New Jersey --
Jersey Central Power & Light Company (JCP&L) -- and Pennsylvania -- Metropolitan
Edison Company (Met-Ed) and Pennsylvania Electric Company (Penelec). The
customer service, transmission and distribution operations of these electric
utilities are conducting business under the name GPU Energy. JCP&L, Met-Ed and
Penelec considered together are referred to as the "GPU Energy companies." The
generation operations of the GPU Energy companies are conducted by GPU
Generation, Inc. (Genco) and GPU Nuclear, Inc. (GPUN). GPU, Inc. also owns all
the common stock of GPU International, Inc., GPU Power, Inc. and GPU Electric,
Inc. which develop, own and operate generation, transmission and distribution
facilities in the United States and in foreign countries. Collectively, these
are referred to as the "GPU International Group." Other wholly owned
subsidiaries of GPU, Inc. are GPU Advanced Resources, Inc. (GPU AR), a
nonregulated subsidiary formed to engage in energy services, retail energy sales
and telecommunications services; and GPU Service, Inc. (GPUS), which provides
certain legal, accounting, financial and other services to the GPU companies.
All of these companies considered together are referred to as "GPU."
These notes should be read in conjunction with the notes to consolidated
financial statements included in the 1996 Annual Report on Form 10-K. The
December 31, 1996 balance sheet data contained in the attached financial
statements was derived from audited financial statements. For disclosures
required by generally accepted accounting principles, see the 1996 Annual Report
on Form 10-K.
1. COMMITMENTS AND CONTINGENCIES
NUCLEAR FACILITIES
------------------
The GPU Energy companies have made investments in three major nuclear
projects--Three Mile Island Unit 1 (TMI-1) and Oyster Creek, both of which are
operating generation facilities, and Three Mile Island Unit 2 (TMI-2), which was
damaged during a 1979 accident. 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. At September 30, 1997 and December 31, 1996, the GPU
Energy companies' net investment in TMI-1 and Oyster Creek, including nuclear
fuel, was as follows:
Net Investment (in millions)
----------------------------
TMI-1 Oyster Creek
----- ------------
September 30, 1997
------------------
JCP&L $156 $717
Met-Ed 302 --
Penelec 148 --
--- ---
Total $606 $717
=== ===
19
<PAGE>
GPU, Inc. and Subsidiary Companies
Net Investment (in millions)
----------------------------
TMI-1 Oyster Creek
----- ------------
December 31, 1996
-----------------
JCP&L $154 $766
Met-Ed 297 --
Penelec 146 --
--- ---
Total $597 $766
=== ===
The GPU Energy companies' net investment in TMI-2 at September 30, 1997
and December 31, 1996 was $82 million and $90 million, respectively (JCP&L $74
million and $81 million, respectively; Met-Ed $1 million and $1 million,
respectively; Penelec $7 million and $8 million, respectively). JCP&L is
collecting revenues for TMI-2 on a basis which provides for the recovery of its
remaining investment in the plant by 2008. Met-Ed and Penelec are collecting
revenues for TMI-2 related to their wholesale customers.
Costs associated with the operation, maintenance and retirement of nuclear
plants have continued to be significant and less predictable than costs
associated with other sources of generation, in large part due to changing
regulatory requirements, safety standards, availability of nuclear waste
disposal facilities and experience gained in the construction and operation of
nuclear facilities. The GPU Energy companies may also incur costs and experience
reduced output at their 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 operating licenses cannot be assured. Also, not all risks
associated with the ownership or operation of nuclear facilities may be
adequately insured or insurable. Consequently, the 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 the
Competition and the Changing Regulatory Environment section.)
In addition to the continued operation of the Oyster Creek facility, JCP&L
is exploring the sale or early retirement of the plant to mitigate costs
associated with its continued operation. JCP&L is exploring these options due to
the plant's high cost of generation compared to the current market price of
electricity. If a decision is made to retire the plant early, retirement would
likely occur in 2000. Management believes that the current rate structure would
allow for the recovery of and return on its net investment in the plant and
provide for decommissioning costs (see Competitive Environment section,
Management's Discussion and Analysis).
In response to an inquiry regarding the possible sale of Oyster Creek, the
GPU Energy companies have stated that they would also consider selling TMI-1.
Unlike Oyster Creek, however, the early retirement of TMI-1 is not being
considered because of its lower operating costs. In October 1997, the GPU Energy
companies entered into a confidentiality agreement with a potential buyer of
TMI-1 and Oyster Creek.
20
<PAGE>
GPU, Inc. and Subsidiary Companies
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. A
cleanup program was completed in 1990, and after receiving Nuclear Regulatory
Commission (NRC) approval, TMI-2 entered into long-term monitored storage in
1993.
As a result of the accident and its aftermath, individual claims for
alleged personal injury (including claims for punitive damages), which are
material in amount, were asserted against GPU, Inc. and the GPU Energy
companies. Approximately 2,100 of such claims were filed in the United States
District Court for the Middle District of Pennsylvania. Some of the claims also
seek recovery for injuries from alleged emissions of radioactivity before and
after the accident.
At the time of the TMI-2 accident, as provided for in the Price-Anderson
Act, the GPU Energy companies 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 up to an aggregate of $335 million in premium charges under such
plan, and (c) an indemnity agreement with the NRC for up to $85 million,
bringing their total financial protection up to an aggregate of $560 million.
Under the secondary level, the GPU Energy companies are subject to a
retrospective premium charge of up to $5 million per reactor, or a total of $15
million (JCP&L $7.5 million; Met-Ed $5 million; Penelec $2.5 million).
In October 1995, the U.S. Court of Appeals for the Third Circuit ruled
that the Price-Anderson Act provides coverage under its primary and secondary
levels for punitive as well as compensatory damages, but that punitive damages
could not be recovered against the Federal Government under the third level of
financial protection. In so doing, the Court of Appeals referred to the "finite
fund" (the $560 million of financial protection under the Price-Anderson Act) to
which plaintiffs must resort to recover compensatory as well as punitive
damages.
The Court of Appeals also ruled that the standard of care owed by the
defendants to a plaintiff was determined by the specific level of radiation
which was released into the environment, as measured at the site boundary,
rather than as measured at the specific site where the plaintiff was located at
the time of the accident (as the defendants proposed). The Court of Appeals also
held that each plaintiff still must demonstrate exposure to radiation released
during the TMI-2 accident and that such exposure had resulted in injuries. In
1996, the U.S. Supreme Court denied petitions filed by GPU, Inc. and the GPU
Energy companies to review the Court of Appeals' rulings.
In June 1996, the District Court granted a motion for summary judgment
filed by GPU, Inc. and the GPU Energy companies, and dismissed all of the 2,100
pending claims. The Court ruled that there was no evidence which created a
genuine issue of material fact warranting submission of plaintiffs' claims to a
jury. The plaintiffs have appealed the District Court's ruling to the Third
Circuit, before which the matter is pending. There can be no assurance as to the
outcome of this litigation.
21
<PAGE>
GPU, Inc. and Subsidiary Companies
Based on the above, GPU, Inc. and the GPU Energy companies believe that
any liability to which they might be subject by reason of the TMI-2 accident
will not exceed their financial protection under the Price-Anderson Act.
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 Department of Energy (DOE).
In 1990, the GPU Energy companies 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 GPU Energy companies 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's remaining in
long-term storage and being decommissioned at the same time as TMI-1. Based on
NRC studies, a comparable funding target was developed for TMI-2 which took the
accident into account. Under the NRC regulations, the funding targets (in 1997
dollars) are as follows:
(in millions)
Oyster
TMI-1 TMI-2 Creek
----- ----- -----
JCP&L $ 44 $ 70 $230
Met-Ed 89 141 --
Penelec 44 70 --
---- ---- ----
Total $177 $281 $230
==== ==== ====
The funding targets, while not considered cost estimates, are reference levels
designed to assure that licensees demonstrate adequate financial responsibility
for decommissioning. While the NRC 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 1995, a consultant to GPUN performed site-specific studies of the TMI
site, including both Units 1 and 2, and of Oyster Creek, that considered various
decommissioning methods and estimated the cost of decommissioning the
radiological portions and the cost of removal of the nonradiological portions of
each plant, using the prompt removal/dismantlement method. GPUN management has
reviewed the methodology and assumptions used in these studies, is in agreement
with them, and believes the results are reasonable. The retirement cost
estimates under the site-specific studies are as follows (in 1997 dollars):
22
<PAGE>
GPU, Inc. and Subsidiary Companies
(in millions)
Oyster
GPU TMI-1 TMI-2 Creek
- --- ----- ----- -----
Radiological decommissioning $324 $393 $381
Nonradiological cost of removal 80 35 * 36
---- ---- ----
Total $404 $428 $417
==== ==== ====
* Net of $9.3 million spent as of September 30, 1997.
Each of the GPU Energy companies is responsible for retirement costs in
proportion to its respective ownership percentage.
The ultimate cost of retiring the GPU Energy companies' nuclear facilities
may be different from the cost estimates contained in these site-specific
studies. Such costs are subject to (a) the escalation of various cost elements
(for reasons including, but not limited to, general inflation), (b) the further
development of regulatory requirements governing decommissioning, (c) the
technology available at the time of decommissioning, and (d) the availability of
nuclear waste disposal facilities.
The GPU Energy companies charge to depreciation expense and accrue
retirement costs based on amounts being collected from customers. Currently, the
GPU Energy companies are collecting retirement costs which are less than the
retirement cost estimates in the 1995 site-specific studies, and they do not
intend to increase these accruals until increased collections from customers are
obtained. Customer collections are contributed to external trust funds. These
deposits, including the related earnings, are classified as Nuclear
Decommissioning Trusts, at Market on the Consolidated Balance Sheets. Accounting
for retirement costs may change based upon the Financial Accounting Standards
Board (FASB) Exposure Draft discussed below.
The FASB has issued an Exposure Draft titled "Accounting for Certain
Liabilities Related to Closure or Removal of Long-Lived Assets," which includes
nuclear plant retirement costs. If the Exposure Draft is adopted, Oyster Creek
and TMI-1 future retirement costs would have to be recognized as a liability
immediately, rather than the current industry practice of accruing these costs
in accumulated depreciation over the life of the plants. A regulatory asset for
amounts probable of recovery through rates would also be established. Any
amounts not probable of recovery through rates would have to be charged to
expense. (For TMI-2, a liability (in 1997 dollars) has already been recognized,
based on the 1995 site-specific study because the plant is no longer operating
(see TMI-2)). The effective date of this accounting change could be as early as
January 1, 1998.
TMI-1 and Oyster Creek:
- -----------------------
The New Jersey Board of Public Utilities (NJBPU) has granted JCP&L annual
revenues for TMI-1 and Oyster Creek retirement costs of $2.5 million and $13.5
million, respectively. These annual revenues are based on both the NRC funding
targets for radiological decommissioning costs and a site-specific study which
was performed in 1988 for nonradiological costs of removal. The
23
<PAGE>
GPU, Inc. and Subsidiary Companies
Stipulation of Final Settlement approved by the NJBPU in March 1997 allows for
JCP&L's future collection of retirement costs to increase annually to $5.2
million and $22.5 million for TMI-1 and Oyster Creek, respectively, beginning in
1998, based on the 1995 site-specific study estimates. (See discussion of
Stipulation of Final Settlement in Rate Matters section, Management's Discussion
and Analysis.)
The Pennsylvania Public Utility Commission (PaPUC) has granted Met-Ed
annual revenues for TMI-1 retirement costs of $8.5 million based on both the NRC
funding target for radiological decommissioning costs and the 1988 site-specific
study for nonradiological costs of removal. The PaPUC also granted Penelec
annual revenues of $4.2 million for its share of TMI-1 retirement costs, on a
basis consistent with that granted Met-Ed. As part of their restructuring plans
filed with the PaPUC in June 1997, Met-Ed and Penelec have requested that these
amounts be increased to reflect the estimated retirement costs contained in the
1995 site-specific study for radiological decommissioning and nonradiological
costs of removal.
The amounts charged to depreciation expense for the nine months ended
September 30, 1997 and the provisions for the future expenditure of these funds,
which have been made in accumulated depreciation, are as follows:
(in millions)
Oyster
TMI-1 Creek
----- -----
Amount expensed for the nine
months ended September 30, 1997:
JCP&L $ 2 $10
Met-Ed 6 --
Penelec 3 --
--- ---
$11 $10
=== ===
(in millions)
Oyster
TMI-1 Creek
----- -----
Accumulated depreciation
provision at September 30, 1997:
JCP&L $ 35 $204
Met-Ed 63 -
Penelec 27 -
--- ---
$125 $204
=== ===
Management believes that any TMI-1 and Oyster Creek retirement costs, in
excess of those currently recognized for ratemaking purposes, should be
recoverable from customers.
TMI-2:
- ------
The estimated liabilities for TMI-2 future retirement costs (reflected as
Three Mile Island Unit 2 Future Costs on the Consolidated Balance Sheets) as of
September 30, 1997 and December 31, 1996 are as follows:
24
<PAGE>
GPU, Inc. and Subsidiary Companies
(in millions)
GPU JCP&L Met-Ed Penelec
September 30, 1997 $444 $111 $222 $111
December 31, 1996 $431 $108 $215 $108
These amounts are based upon the 1995 site-specific study estimates (in 1997 and
1996 dollars, respectively) discussed above and an estimate for remaining
incremental monitored storage costs of $16 million (JCP&L $4 million; Met-Ed $8
million; Penelec $4 million) as of September 30, 1997 and $17 million as of
December 31, 1996, as a result of TMI-2's entering long-term monitored storage
in 1993. The GPU Energy companies are incurring annual incremental monitored
storage costs of approximately $1 million (JCP&L $250 thousand; Met-Ed $500
thousand; Penelec $250 thousand).
Offsetting the $444 million liability at September 30, 1997 is $264
million (JCP&L $37 million; Met-Ed $146 million; Penelec $81 million) which
management believes is probable of recovery from customers and included in Three
Mile Island Unit 2 Deferred Costs on the Consolidated Balance Sheets, and $208
million (JCP&L $83 million; Met-Ed $90 million; Penelec $35 million) in trust
funds for TMI-2 and included in Nuclear Decommissioning Trusts, at Market on the
Consolidated Balance Sheets. Earnings on trust fund deposits are included in
amounts shown on the Consolidated Balance Sheets under Three Mile Island Unit 2
Deferred Costs. TMI-2 decommissioning costs charged to depreciation expense
during the nine months ended September 30, 1997 amounted to $10 million (JCP&L
$2 million; Met-Ed $7 million; Penelec $1 million).
The NJBPU and PaPUC have granted JCP&L and Met-Ed, respectively, TMI-2
decommissioning revenues for the NRC funding target and allowances for the cost
of removal of nonradiological structures and materials. In addition, JCP&L is
recovering its share of TMI-2's incremental monitored storage costs. The
Stipulation of Final Settlement approved by the NJBPU in March 1997 adjusts
JCP&L's future revenues for retirement costs based on the 1995 site-specific
study estimates, beginning in 1998. Based on Met-Ed's rate order, Penelec has
recorded a regulatory asset for that portion of such costs which it believes to
be probable of recovery.
At September 30, 1997, the accident-related portion of TMI-2 radiological
decommissioning costs is considered to be $68 million (JCP&L $17 million, Met-Ed
$34 million; Penelec $17 million), which is the difference between the 1995
TMI-1 and TMI-2 site-specific study estimates (in 1997 dollars). In connection
with rate case resolutions at the time, JCP&L, Met-Ed and Penelec made
contributions to irrevocable external trusts relating to their shares of the
accident-related portions of the decommissioning liability. In 1990, JCP&L
contributed $15 million and in 1991, Met-Ed and Penelec contributed $40 million
and $20 million, respectively, to irrevocable external trusts. These
contributions were not recovered from customers and have been expensed. The GPU
Energy companies will not pursue recovery from customers for any of these
amounts contributed in excess of the $68 million accident-related portion
referred to above.
JCP&L intends to seek recovery for any increases in TMI-2 retirement
costs, and Met-Ed and Penelec intend to seek recovery for any increases in the
nonaccident-related portion of such costs, but recognize that recovery cannot be
assured.
25
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GPU, Inc. and Subsidiary Companies
INSURANCE
---------
GPU 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 GPU 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 GPU.
The decontamination liability, premature decommissioning and property
damage insurance coverage for the TMI station 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 GPU's liability to third parties for a
nuclear incident at one of its sites to approximately $8.9 billion. Coverage for
the first $200 million of such liability is provided by private insurance. The
remaining coverage, or secondary financial protection, is provided by
retrospective premiums payable by all nuclear reactor owners. Under secondary
financial protection, a nuclear incident at any licensed nuclear power reactor
in the country, including those owned by the GPU Energy companies, could result
in assessments of up to $79 million per incident for each of the GPU Energy
companies' two operating reactors, subject to an annual maximum payment of $10
million per incident per reactor. In addition to the retrospective premiums
payable under Price-Anderson, the GPU Energy companies are also subject to
retrospective premium assessments of up to $52 million (JCP&L $31 million;
Met-Ed $14 million; Penelec $7 million) in any one year under insurance policies
applicable to nuclear operations and facilities.
The GPU Energy companies have insurance coverage for incremental
replacement power costs resulting from an accident-related outage at their
nuclear plants. Coverage commences after a 17 week waiting period at $3.5
million per week, and after 23 weeks of an outage, continues for three years
beginning at $1.8 million and $2.6 million per week for the first year for
Oyster Creek and TMI-1, respectively, decreasing to 80% of such amounts for
years two and three.
26
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GPU, Inc. and Subsidiary Companies
COMPETITION AND THE CHANGING REGULATORY ENVIRONMENT
---------------------------------------------------
The Emerging Competitive Market and Stranded Costs:
- ---------------------------------------------------
The current market price of electricity being below the cost of some
utility-owned generation and power purchase commitments, combined with the
ability of some customers to choose their energy suppliers, has created the
potential for stranded costs in the electric utility industry. These stranded
costs, while potentially recoverable in a regulated environment, are at risk in
a deregulated and competitive environment. Met-Ed and Penelec estimate that
their total above-market costs related to power purchase commitments,
company-owned generation, generating plant decommissioning, regulatory assets
and transition expenses, on a present value basis at year-end 1998, are $1.4
billion and $1.3 billion, respectively. JCP&L estimates that its total
above-market costs related to power purchase commitments and company-owned
generation, on a present value basis at September 30, 1998, is $1.8 billion. The
$1.8 billion excludes above-market generation costs related to Oyster Creek. In
July 1997, JCP&L proposed, in its restructuring plans filed with the NJBPU,
recovery of its remaining Oyster Creek plant investment as a regulatory asset,
through a nonbypassable charge to customers (see Competitive Environment
section, Management's Discussion and Analysis). At September 30, 1997, JCP&L's
net investment in Oyster Creek was $717 million. These estimates are subject to
significant uncertainties including the future market price of both electricity
and other competitive energy sources, as well as the timing of when these
above-market costs become stranded due to customers choosing another supplier.
The restructuring legislation in Pennsylvania and the Energy Master Plan (NJEMP)
in New Jersey provide mechanisms for utilities to recover, subject to regulatory
approval, their above-market costs. These regulatory recovery mechanisms in
Pennsylvania and New Jersey differ, but should allow for the recovery of
non-mitigable above-market costs through either distribution charges or separate
nonbypassable charges to customers.
In June 1997, Met-Ed and Penelec filed with the PaPUC their proposed
restructuring plans to implement competition and customer choice in Pennsylvania
as required by the comprehensive restructuring legislation enacted in 1996. In
July 1997, JCP&L filed with the NJBPU its proposed restructuring plan for a
competitive electric marketplace in New Jersey as required by the NJEMP.
Highlights of these plans are presented in the Competitive Environment section
of Management's Discussion and Analysis. The PaPUC has stated that it will
review and hold hearings on Met-Ed and Penelec's restructuring plans with
decisions due by mid 1998. The NJBPU has stated that it intends to complete its
review of JCP&L's plan so as to permit retail competition to begin in October
1998. In October 1997, GPU announced that it intends to begin a process to sell,
through an auction, up to all of the fossil fuel and hydroelectric generating
facilities owned by the GPU Energy companies. The GPU Energy companies will file
supplemental information to their restructuring plans as a consequence of this
development. There can be no assurance as to the extent that stranded costs will
be recoverable in Pennsylvania and New Jersey.
In 1996, the Federal Energy Regulatory Commission (FERC) issued Order 888,
which permits electric utilities to recover their legitimate and verifiable
stranded costs incurred when a wholesale customer purchases power from another
supplier using the utility's transmission system. In addition, Pennsylvania
adopted comprehensive legislation in 1996 which provides for the restructuring
27
<PAGE>
GPU, Inc. and Subsidiary Companies
of the electric utility industry and will permit utilities the opportunity to
recover their prudently incurred stranded costs through a PaPUC-approved
competitive transition charge, subject to certain conditions, including that
utilities attempt to mitigate these costs. In 1997, the NJBPU released Phase II
of the NJEMP, which proposes that New Jersey electric utilities should have an
opportunity to recover their stranded costs associated with generating capacity
commitments and caused by electric retail competition, provided that they
attempt to mitigate these costs.
The inability of the GPU Energy companies to recover their stranded costs
in whole or in part could result in the recording of liabilities for
above-market nonutility generation (NUG) costs and writedowns of uneconomic
generation plant and regulatory assets recorded in accordance with Statement of
Financial Accounting Standards No. (FAS) 71, "Accounting for the Effects of
Certain Types of Regulation." Decommissioning costs, for which a liability may
have to be recorded (see Nuclear Plant Retirement Costs), and the corresponding
regulatory asset for amounts recoverable from customers, could also be subject
to writedowns. The inability to recover these stranded costs would have a
material adverse effect on GPU's results of operations. (See additional
discussion of stranded costs in Competitive Environment section, Management's
Discussion and Analysis.)
Nonutility Generation Agreements:
- ---------------------------------
Pursuant to the requirements of the federal Public Utility Regulatory
Policies Act (PURPA) and state regulatory directives, the GPU Energy companies
have entered into power purchase agreements with NUGs for the purchase of energy
and capacity for periods of up to 26 years (JCP&L 25 years; Met-Ed 26 years;
Penelec 25 years). The following table shows actual payments from 1994 through
1996, and estimated payments from 1997 through 2001.
Payments Under NUG Agreements
-----------------------------
(in Millions)
Total JCP&L Met-Ed Penelec
----- ----- ------ -------
* 1994 $528 $304 $101 $123
* 1995 670 381 131 158
* 1996 739 370 177 192
** 1997 736 367 173 196
1998 691 340 152 199
1999 706 344 152 210
2000 782 347 196 239
2001 805 353 225 227
* Actual.
** The 1997 amounts consist of actual payments through September 30, 1997
and estimated payments for the remainder of the year.
As of September 30, 1997, facilities covered by agreements having 1,657 MW
(JCP&L 896 MW; Met-Ed 356 MW; Penelec 405 MW) of capacity were in service. While
a few of these NUG facilities are dispatchable, most are must-run and generally
obligate the GPU Energy companies to purchase, at the contract price, the output
up to the contract limits. Substantially all unbuilt NUG facilities for which
28
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GPU, Inc. and Subsidiary Companies
the GPU Energy companies have executed agreements are fully dispatchable.
The emerging competitive generation market has created uncertainty
regarding the forecasting of the companies' energy supply needs, which has
caused the GPU Energy companies to change their supply strategy to seek
shorter-term agreements offering more flexibility. The cost of near- to
intermediate-term (i.e., one to four years) energy supply from generation
facilities now in service is currently and is expected to continue to be priced
below the costs of new supply sources, at least for some time. The projected
cost of energy from new generation supply sources has also decreased due to
improvements in power plant technologies and lower forecasted fuel prices. As a
result of these developments, the rates under virtually all of the GPU Energy
companies' NUG agreements for facilities currently in operation are
substantially in excess of current and projected prices from alternative
sources.
The GPU Energy companies are seeking to reduce the above-market costs of
these NUG agreements by: (1) attempting to convert must-run agreements to
dispatchable agreements; (2) attempting to renegotiate prices of the agreements;
(3) offering contract buyouts (see Managing Nonutility Generation section,
Management's Discussion and Analysis); and (4) initiating proceedings before
federal and state agencies, and in the courts, where appropriate. In addition,
the GPU Energy companies intend to avoid, to the maximum extent practicable,
entering into any new NUG agreements that are not needed or not consistent with
current market pricing, and are supporting legislative efforts to repeal PURPA.
These efforts may result in claims against GPU for substantial damages. There
can be no assurance as to the extent these efforts will be successful in whole
or in part.
In April 1997, Met-Ed and Penelec issued requests for proposals (RFPs) to
24 NUG projects which currently supply a total of approximately 760 MW under
power purchase agreements. The RFPs requested the NUGs to propose buyouts,
buydowns and/or restructurings of current power purchase contracts in return for
cash payments which would be funded through the issuance of PaPUC approved
securitized transition bonds (see Competitive Environment section, Management's
Discussion and Analysis). Met-Ed and Penelec are currently negotiating with two
bidders to enter into definitive buyout agreements by the end of 1997. Payments
would be made in 1998, subject to Met-Ed's and Penelec's ability to obtain the
required funding through securitization.
JCP&L has contracts through 2002 to purchase between 5,100 GWH and 5,200
GWH of electric generation per year at prices which are estimated to escalate
approximately 1.2% annually on a unit cost (cents/KWH) basis during this period.
From 2003 through 2008, JCP&L has contracts to purchase between 4,700 GWH and
5,100 GWH of electric generation per year at an average annual cost of $369
million. The prices during this period are estimated to escalate approximately
1.5% annually. After 2008, when major contracts begin to expire, purchases
steadily decline to approximately 865 GWH in 2014. The contract unit cost is
estimated to escalate approximately 4% annually from 2009 through 2014, with a
total average annual cost of $193 million during this period. All of JCP&L's
contracts will have expired by the end of 2017. During this entire period, the
NUG fuel mix is estimated to average approximately 95% natural gas.
29
<PAGE>
GPU, Inc. and Subsidiary Companies
Met-Ed has contracts through 1999 to purchase between 2,000 GWH and 2,100
GWH of electric generation per year at prices which are estimated to escalate
approximately 0.6% annually on a unit cost basis during this period. From 2000
through 2008, Met-Ed has contracts to purchase between 2,900 GWH and 4,300 GWH
of electric generation per year at an average annual cost of $241 million. The
prices during this period are estimated to escalate approximately 2.5% annually
on a unit cost basis. From 2009 through 2012, Met-Ed is forecast to purchase
between 1,500 GWH and 1,900 GWH of electric generation per year at an average
annual cost of $169 million. During this period, the prices are estimated to
escalate approximately 3.4% annually on a unit cost basis. After 2012, Met-Ed's
remaining contracts expire rapidly through 2015; thereafter, they remain
constant until the expiration of the last contract in 2020. During this entire
period, the NUG fuel mix is estimated to average approximately 50% to 75%
coal/waste coal.
Penelec has contracts through 2000 to purchase between 3,000 GWH and 4,000
GWH of electric generation per year at prices which are estimated to escalate
approximately 1.4% annually on a unit cost basis during this period. From 2001
through 2008, Penelec has contracts to purchase between 3,900 GWH and 5,000 GWH
of electric generation per year at an average annual cost of $297 million. The
prices during this period are estimated to escalate approximately 1.5% annually
on a unit cost basis. From 2009 through 2017, purchases decline from
approximately 3,000 GWH to approximately 1,500 GWH in 2017. The contract unit
cost is estimated to escalate approximately 3.4% annually from 2009 through
2017, with a total average annual cost of $211 million during this period. After
2017, Penelec's remaining contracts expire rapidly through 2020. During this
entire period, the NUG fuel mix is estimated to average approximately 65% to 95%
coal/waste coal.
In February 1997, Met-Ed and Penelec entered into revised power purchase
agreements with AES Power Corporation (AES) for 377 MW and 80 MW of capacity and
related energy, respectively, related to a combined-cycle generating facility
that AES plans to construct in Pennsylvania. Met-Ed and Penelec have paid $63.4
million and $5 million, respectively, to previous developers and AES to
terminate the original power purchase agreements. In July 1997, the PaPUC
ordered that the issue of recovery of the related buyout costs and approval of
the revised power purchase agreements with AES be considered in Met-Ed and
Penelec's restructuring proceedings. If the revised power purchase agreements
with AES are not approved by the PaPUC, Met-Ed and Penelec have agreed to pay
AES up to an additional $28 million and $5 million, respectively.
In 1994, pursuant to a PaPUC order, Penelec entered into a power purchase
agreement with Erie Power Partners L.P. (Erie), the developer of a proposed 80
MW coal-fired cogeneration facility. In November 1996, Penelec and Erie entered
into an amended power purchase agreement and Penelec paid Erie $11.7 million to
terminate the original agreement. In September 1997, Penelec agreed to the
buyout of the amended power purchase agreement for up to an additional $12
million. Of this amount, Penelec paid $5 million to Erie in October 1997.
Penelec will pay up to the remaining $7 million to the extent the PaPUC approves
recovery. However, Penelec has agreed to pay 50% of any amount not approved by
the PaPUC. Penelec has filed with the PaPUC requesting that the issue of
recovery of the buyout costs be considered in Penelec's restructuring
proceeding.
30
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GPU, Inc. and Subsidiary Companies
This discussion of "Nonutility Generation Agreements" contains estimates
which are based on current knowledge and expectations of the outcome of future
events. The estimates are subject to significant uncertainties, including
changes in fuel prices, improvements in technology, the changing regulatory
environment and the deregulation of the electric utility industry.
The GPU Energy companies have been granted recovery of their NUG costs
(including certain buyout costs) from customers by the PaPUC and NJBPU and
expect to continue to pursue such recovery. Although the recently enacted
legislation in Pennsylvania and the NJEMP in New Jersey both include provisions
for the recovery of costs under NUG agreements and certain NUG buyout costs,
there can be no assurance that the GPU Energy companies will continue to be able
to recover similar costs which may be incurred in the future. (See Competitive
Environment section, Management's Discussion and Analysis for additional
discussion.)
Regulatory Assets and Liabilities:
- ----------------------------------
Regulatory Assets and Regulatory Liabilities, as reflected in the
September 30, 1997 and December 31, 1996 Consolidated Balance Sheets in
accordance with the provisions of FAS 71, "Accounting for the Effects of Certain
Types of Regulation", were as follows:
GPU Assets (in thousands)
- --- ---------------------
September 30, December 31,
1997 1996
---- ----
Income taxes recoverable through
future rates $ 526,623 $ 527,385
TMI-2 deferred costs 345,352 356,517
Nonutility generation contract buyout costs 251,068 242,481
Unamortized property losses 97,281 100,310
Other postretirement benefits 88,220 76,569
Environmental remediation 90,174 78,136
N.J. unit tax 41,360 45,877
Unamortized loss on reacquired debt 41,701 45,378
Load and demand-side management programs 27,365 40,770
N.J. low-level radwaste disposal 31,479 37,525
DOE enrichment facility decommissioning 32,702 36,352
Nuclear fuel disposal fee 20,273 21,552
Storm damage 28,937 20,226
Other 33,405 24,194
---------- ----------
Total $1,655,940 $1,653,272
---------- ==========
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<PAGE>
GPU, Inc. and Subsidiary Companies
Liabilities (in thousands)
--------------------------
September 30, December 31,
1997 1996
---- ----
Income taxes refundable through
future rates $82,666 $87,735
Other 9,713 2,080
------- -------
Total $92,379 $89,815
======= =======
JCP&L Assets (in thousands)
- ----- ---------------------
September 30, December 31,
1997 1996
---- ----
Income taxes recoverable through
future rates $148,752 $142,726
TMI-2 deferred costs 109,653 126,448
Nonutility generation contract buyout costs 143,500 139,000
Unamortized property losses 92,336 94,767
Other postretirement benefits 50,191 44,024
Environmental remediation 61,190 55,285
N.J. unit tax 41,360 45,877
Unamortized loss on reacquired debt 29,433 31,469
Load and demand-side management programs 27,365 40,770
N.J. low-level radwaste disposal 31,479 37,525
DOE enrichment facility decommissioning 20,414 23,150
Nuclear fuel disposal fee 22,416 23,319
Storm damage 28,937 20,226
Other 2,637 4,975
-------- --------
Total $809,663 $829,561
======== ========
Liabilities (in thousands)
--------------------------
September 30, December 31,
1997 1996
---- ----
Income taxes refundable through
future rates $30,052 $32,567
Other 8,670 683
------- -------
Total $38,722 $33,250
======= =======
Met-Ed Assets (in thousands)
- ------ ---------------------
September 30, December 31,
1997 1996
---- ----
Income taxes recoverable through
future rates $ 172,186 $ 174,636
TMI-2 deferred costs 147,141 144,782
Nonutility generation contract buyout costs 78,868 86,781
Unamortized property losses 2,769 3,113
Other postretirement benefits 38,029 32,545
Environmental remediation 4,121 2,575
Unamortized loss on reacquired debt 5,523 6,223
DOE enrichment facility decommissioning 8,192 8,801
Nuclear fuel disposal fee (1,454) (1,282)
Other 9,438 4,209
--------- ---------
Total $ 464,813 $ 462,383
========= =========
32
<PAGE>
GPU, Inc. and Subsidiary Companies
Liabilities (in thousands)
--------------------------
September 30, December 31,
1997 1996
---- ----
Income taxes refundable through
future rates $22,527 $23,486
Other 2,463 2,495
------- -------
Total $24,990 $25,981
======= =======
Penelec Assets (in thousands)
- ------- ---------------------
September 30, December 31,
1997 1996
---- ----
Income taxes recoverable through
future rates $ 205,685 $ 210,023
TMI-2 deferred costs 88,558 85,287
Nonutility generation contract buyout costs 28,700 16,700
Unamortized property losses 2,176 2,430
Environmental remediation 24,863 20,276
Unamortized loss on reacquired debt 6,745 7,686
DOE enrichment facility decommissioning 4,096 4,401
Nuclear fuel disposal fee (689) (485)
Other 22,762 16,120
--------- ---------
Total $ 382,896 $ 362,438
========= =========
Liabilities (in thousands)
--------------------------
September 30, December 31,
1997 1996
---- ----
Income taxes refundable through
future rates $30,087 $31,682
Other 12 12
------- -------
Total $30,099 $31,694
======= =======
Income taxes recoverable/refundable through future rates: Represents amounts
deferred due to the implementation of FAS 109, "Accounting for Income Taxes," in
1993.
TMI-2 deferred costs: Represents costs that are recoverable through rates for
the GPU Energy companies' remaining investment in the plant and fuel core,
radiological decommissioning and the cost of removal of nonradiological
structures and materials in accordance with the 1995 site-specific study (in
1997 dollars) and JCP&L's share of long-term monitored storage costs.
For additional information, see TMI-2 Future Costs.
Nonutility generation contract buyout costs: Represents amounts incurred for
terminating power purchase contracts with NUGs, for which rate recovery has been
granted or is probable (see Managing Nonutility Generation, in Management's
Discussion and Analysis).
Unamortized property losses: Consists mainly of costs associated with JCP&L's
Forked River project, which are included in rates.
Other postretirement benefits: Includes costs associated with the adoption of
FAS 106, "Employers' Accounting for Postretirement Benefits Other Than
33
<PAGE>
GPU, Inc. and Subsidiary Companies
Pensions," which are deferred in accordance with Emerging Issues Task Force
Issue 92-12, "Accounting for OPEB Costs by Rate-Regulated Enterprises."
Environmental remediation: Consists of amounts related to the investigation and
remediation of several manufactured gas plant sites formerly owned by JCP&L, as
well as several other JCP&L sites; Penelec's Seward station property; and future
closure costs of various ash disposal sites for the GPU Energy companies. For
additional information, see the Environmental Matters section.
N.J. unit tax: Represents certain state taxes, with interest, for which JCP&L
received NJBPU approval in 1993 to recover over a ten-year period.
Unamortized loss on reacquired debt: Represents premiums and expenses incurred
in the early redemption of long-term debt. In accordance with FERC regulations,
reacquired debt costs are amortized over the remaining original life of the
retired debt.
Load and demand-side management (DSM) programs: Consists of load management
costs and other DSM program expenditures that are currently being recovered,
with interest, through JCP&L's retail base rates. Also includes provisions for
lost revenues between base rate cases and performance incentives.
N.J. low-level radwaste disposal: Represents the estimated assessment for the
siting of a disposal facility for low-level waste from Oyster Creek, less
amortization, as allowed in JCP&L's rates.
DOE enrichment facility decommissioning: Represents payments to the DOE over a
15-year period beginning in 1994.
Nuclear fuel disposal fee: Represents amounts recoverable through rates for
estimated future disposal costs for spent nuclear fuel at Oyster Creek and TMI-1
in accordance with the Nuclear Waste Policy Act of 1982.
Storm damage: Relates to incremental noncapital costs associated with various
storms in the JCP&L service territory that are not recoverable through
insurance. These amounts were deferred based upon past rate recovery precedent.
An annual amortization amount is included in JCP&L's retail base rates and is
charged to expense.
Amounts related to the decommissioning of TMI-1 and Oyster Creek, which
are not included in Regulatory Assets on the Consolidated Balance Sheets, are
separately disclosed in the Nuclear Plant Retirement Costs section.
Accounting Matters:
- -------------------
Historically, electric utility rates have been based on a utility's costs.
As a result, the GPU Energy companies account for the economic effects of
cost-based ratemaking regulation under the provisions of FAS 71. FAS 71 requires
regulated entities, in certain circumstances, to defer as regulatory assets, the
impact on operations of costs expected to be recovered in future rates. GPU has
recorded on the Consolidated Balance Sheets $1.7 billion (JCP&L $809 million;
Met-Ed $465 million; Penelec $382 million) in regulatory assets in accordance
with FAS 71 (see Regulatory Assets and Liabilities section of Competition and
the Changing Regulatory Environment).
34
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GPU, Inc. and Subsidiary Companies
In response to the continuing deregulation of the electric utility
industry, the Securities and Exchange Commission (SEC) has questioned the
continued applicability of FAS 71 by California investor-owned utilities with
respect to their electric generation operations. The GPU Energy companies
believe that the SEC's concern also applies to them since retail access
legislation has been enacted in Pennsylvania and proposed in New Jersey.
In response to the concerns expressed by the Staff of the SEC, the FASB's
Emerging Issues Task Force (EITF) agreed to discuss the issues surrounding the
continued applicability of FAS 71 to the electric utility industry. In May and
July 1997, the EITF met to discuss these issues and they concluded that
utilities are no longer subject to FAS 71, for the generation portion of their
business, as soon as they know details of their individual transition plans. The
EITF also concluded that utilities can continue to carry previously recorded
regulated assets (including those related to generation) on their balance sheet
if regulators have guaranteed a regulated cash flow stream to recover the cost
of these assets. While the EITF's consensus must be complied with, the SEC has
the final regulatory authority for accounting by public companies.
In light of retail access legislation enacted in Pennsylvania and the
NJEMP in New Jersey, the GPU Energy companies believe they will no longer meet
the requirements for continued application of FAS 71, for the generation portion
of their business, no later than mid 1998 for Met-Ed and Penelec, and October
1998 for JCP&L, the expected approval dates of their restructuring plans filed
with state regulators. Once the GPU Energy companies are able to determine that
the generation portion of their operations is no longer subject to the
provisions of FAS 71, the related regulatory assets, net of regulatory
liabilities, would, to the extent that recovery is not granted through their
respective restructuring plans, have to be written off and charged to expense.
The above-market costs of power purchase commitments would have to be expensed,
and additional depreciation expense would have to be recorded for any
differences created by the use of a regulated depreciation method that is
different from that which would have been used under generally accepted
accounting principles for enterprises in general. In addition, write-downs of
plant assets could be required in accordance with FAS 121, "Accounting for the
Impairment of Long-Lived Assets," discussed below. The amount of write-offs
resulting from the discontinuation of FAS 71 will depend on the final outcome of
the GPU Energy companies' individual restructuring proceedings, and could have a
material adverse effect on GPU's results of operations and financial condition.
FAS 121 requires that regulatory assets meet the recovery criteria of FAS
71 on an ongoing basis in order to avoid a writedown. In addition, FAS 121
requires that long-lived assets, identifiable intangibles, capital leases and
goodwill be reviewed for impairment whenever events occur or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable. FAS 121 also requires the recognition of impairment losses when the
carrying amounts of those assets are greater than the estimated cash flows
expected to be generated from the use and eventual disposition of the assets.
The effects of FAS 121 have not been material to GPU's results of operations.
35
<PAGE>
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, ambient air quality, global warming,
electromagnetic fields, and storage and disposal of hazardous and/or toxic
wastes, GPU may be required to incur substantial additional costs to construct
new equipment, modify or replace existing and proposed equipment, remediate,
decommission or cleanup waste disposal and other sites currently or formerly
used by it, including formerly owned manufactured gas plants, coal mine refuse
piles and generation facilities.
To comply with Titles I and IV of the federal Clean Air Act Amendments of
1990 (Clean Air Act), the GPU Energy companies expect to spend up to $277
million (JCP&L $46 million; Met-Ed $117 million; Penelec $114 million) for air
pollution control equipment by the year 2000, of which approximately $242
million (JCP&L $43 million; Met-Ed $96 million; Penelec $103 million) has
already been spent. In developing their least-cost plan to comply with the Clean
Air Act, the GPU Energy companies will continue to evaluate major capital
investments compared to participation in the sulfur dioxide (SO2) emission
allowance market, the expected nitrogen oxide (NOx) emissions trading market and
the use of low-sulfur fuel or retirement of facilities. In 1994, the Ozone
Transport Commission (OTC), consisting of representatives of 12 northeast states
(including New Jersey and Pennsylvania) and the District of Columbia, proposed
reductions in NOx emissions it believes necessary to meet ambient air quality
standards for ozone and the statutory deadlines set by the Clean Air Act. The
GPU Energy companies expect that the U.S. Environmental Protection Agency (EPA)
will approve state implementation plans consistent with the proposal, and that
as a result, they will spend an estimated $17 million (JCP&L $1 million; Met-Ed
$9 million; Penelec $7 million) (included in the above total), beginning in
1997, to meet the 1999 seasonal reductions agreed upon by the OTC. The OTC has
stated that it anticipates that additional NOx reductions will be necessary to
meet the Clean Air Act's 2005 National Ambient Air Quality Standard for ozone.
However, the specific requirements that will have to be met at that time have
not been finalized. In addition, in July 1997 the EPA adopted new, more
stringent, rules on ozone and particulate matter. Several groups have filed suit
in the U.S. Court of Appeals to overturn these new air quality standards on the
grounds that, among other things, they are based on inadequate scientific
evidence. Also, legislation has been introduced in the Congress that would
impose a four-year moratorium on any new standards under the Clean Air Act. The
GPU Energy companies are unable to determine what additional costs, if any, will
be incurred if the EPA rules are upheld.
GPU has been formally notified by the EPA and state environmental
authorities that it is 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 hazardous and/or toxic waste sites in the
following number of instances (in some cases, more than one company is named for
a given site):
JCP&L MET-ED PENELEC GPUN GPU INC. TOTAL
----- ------ ------- ---- -------- -----
6 4 2 1 1 11
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GPU, Inc. and Subsidiary Companies
In addition, certain of the GPU companies have been requested to
participate in the remediation or supply information to the EPA and state
environmental authorities on several other sites for which they have not been
formally named as PRPs, although the EPA and state authorities may nevertheless
consider them as PRPs. Certain of the GPU companies have also been named in
lawsuits requesting damages (which are material in amount) 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 companies involved.
In August 1997, the EPA filed a complaint against GPU, Inc. in the United
States District Court for the District of Delaware for enforcement of its
unilateral order issued against GPU, Inc. to clean up the former Dover Gas Light
Company (Dover) manufactured gas production site in Dover, Delaware. Dover was
part of the AGECO/AGECORP group of companies from 1929 until 1942 and GPU,
Inc. emerged from the AGECO/AGECORP reorganization proceedings. All of the
common stock of Dover was sold in 1942 by a member of the AGECO/AGECORP group
to an unaffiliated entity, and was subsequently acquired by
Chesapeake Utilities Corporation. According to the complaint, the EPA is seeking
up to $500 thousand in past costs, $4.2 million for work in connection with
the cleanup of the Dover site and approximately $19 million in penalties. GPU,
Inc. has responded to the EPA complaint stating that such claims should be
dismissed because, among other things, they are barred by the operation of the
Final Decree entered by the United States District Court for the Southern
District of New York at the conclusion of the 1946 reorganization proceedings of
AGECO/AGECORP. Chesapeake Utilities has also sued GPU, Inc. for a contribution
to the cleanup of the Dover site. There can be no assurance as to the outcome
these proceedings.
Pursuant to federal environmental monitoring requirements, Penelec has
reported to the Pennsylvania Department of Environmental Protection (PaDEP) that
contaminants from coal mine refuse piles were identified in storm water run-off
at Penelec's Seward station property. Penelec signed a modified Consent Order,
which became effective December 1996, that establishes a schedule for submitting
a plan for long-term remediation, based on future operating scenarios, including
reboilering the station using fluidized bed combustion technology. Penelec
currently estimates that the remediation of the Seward station property will
range from $12 million to $20 million and has a recorded liability of $12
million at September 30, 1997. These cost estimates are subject to uncertainties
based on continuing discussions with the PaDEP as to the method of remediation,
the extent of remediation required and available cleanup technologies. Penelec
has requested, and expects to receive, recovery of these remediation costs in
its restructuring plan filed with the PaPUC (see Competitive Environment
section, Management's Discussion and Analysis), and has recorded a corresponding
regulatory asset of approximately $12 million at September 30, 1997.
In 1997, the GPU Energy companies filed with the PaDEP applications for
re-permitting seven operating ash disposal sites, including projected site
closure procedures and related cost estimates. The cost estimates for the
closure of these sites range from approximately $16 million to $29 million, and
a liability of $16 million (JCP&L $1 million; Met-Ed $4 million; Penelec
37
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GPU, Inc. and Subsidiary Companies
$11 million) is reflected on the Consolidated Balance Sheets at September 30,
1997. JCP&L has requested recovery of its share of closure costs in its
restructuring plan filed with the NJBPU in July 1997. Penelec and Met-Ed
expect recovery through their restructuring plans filed with the PaPUC
in June 1997 (see Competitive Environment section, Management's Discussion
and Analysis). As a result, a regulatory asset of $16 million is reflected
on the Consolidated Balance Sheets at September 30, 1997.
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 (MGP) sites. JCP&L has also entered into various
cost-sharing agreements with other utilities for most of the sites. As of
September 30, 1997, JCP&L has spent approximately $26 million in connection with
the cleanup of these sites. In addition, JCP&L has recorded an estimated
environmental liability of $46 million relating to expected future costs of
these sites (as well as two other properties). This estimated liability is based
upon ongoing site investigations and remediation efforts, which generally
involve capping the sites and pumping and treatment of ground water. Moreover,
the cost to clean up these sites could be materially in excess of $46 million
due to significant uncertainties, including changes in acceptable remediation
methods and technologies.
In July 1997, JCP&L's request to establish a Remediation Adjustment
Clause for the recovery of MGP remediation costs was approved by the NJBPU as
part of the Stipulation of Final Settlement (see Rate Matters section,
Management's Discussion and Analysis). At September 30, 1997, JCP&L had recorded
on its Consolidated Balance Sheet a regulatory asset of $54 million, which
included approximately $46 million related to expected future costs and
approximately $8 million for past remediation expenditures in excess of
collections from customers (including interest).
JCP&L is pursuing reimbursement from its insurance carriers for
remediation costs already spent and for future estimated costs. In 1994, JCP&L
filed a complaint with the Superior Court of New Jersey against several of its
insurance carriers, relative to these MGP sites. Pretrial discovery is
continuing.
OTHER COMMITMENTS AND CONTINGENCIES
-----------------------------------
GPU International Group:
- ------------------------
At September 30, 1997, the GPU International Group had investments
totaling approximately $625 million in facilities located in foreign countries.
Although management attempts to mitigate the risk of investing in certain
foreign countries by securing political risk insurance, the GPU International
Group faces additional risks inherent to operating in such locations, including
foreign currency fluctuations (see GPU International Group section, Management's
Discussion and Analysis).
At September 30, 1997, GPU, Inc.'s aggregate investment in the GPU
International Group was $218 million; GPU, Inc. has also guaranteed up to an
additional $842 million of GPU International Group obligations. Of this amount,
$639 million is included in Long-term debt on GPU's Consolidated Balance Sheet
at September 30, 1997; $30 million of that amount relates to a GPU
International, Inc. revolving credit agreement; and $173 million relates to
various other obligations of the GPU International Group.
38
<PAGE>
GPU International, Inc. has ownership interests in three NUG projects
which have long-term power purchase agreements with Niagara Mohawk Power
Corporation (NIMO) with an aggregate book value of approximately $31 million. In
July 1997, NIMO and 16 independent power producers (IPP), including the GPU
International Group, executed a master agreement providing for the restructuring
or termination of 29 power purchase agreements, pursuant to which NIMO has
agreed to pay an aggregate of $3.6 billion in cash and/or debt securities, and
to issue an aggregate of 46 million shares of NIMO common stock. The specific
terms of restructured contracts that may be executed are being negotiated
separately with each IPP.
Parties to the agreement must still resolve a number of important issues
and final resolution will require the execution of separate agreements for each
project; approval by NIMO shareholders, the New York Public Service Commission,
and other state and federal agencies; third party consents; successful financing
by NIMO; and resolution of certain tax issues. While the parties are attempting
to complete the transactions in early 1998, there can be no assurance as to the
outcome of this matter.
NIMO has also initiated an action in federal court seeking to invalidate
numerous NUG contracts, including the three GPU International, Inc. projects
discussed above. GPU International, Inc. has filed motions to dismiss the
complaint. This proceeding has been stayed pending the outcome of the
restructuring negotiations.
In August 1997, the Government of the United Kingdom imposed a windfall
profits tax on privatized utilities, including Midlands Electricity plc
(Midlands), in which GPU has a 50% ownership interest. As a result, GPU recorded
a one-time charge to income in the third quarter of 1997 of $109.3 million, or
$0.90 per share. The tax is payable in two equal installments by December 1,
1997 and 1998.
Other:
- ------
In October 1997, GPU announced that it intends to begin a process to sell,
through an auction, up to all of the fossil fuel and hydroelectric generating
facilities owned by the GPU Energy companies. These facilities total
approximately 5,300 MW of capacity and have a net book value of approximately
$1.1 billion at September 30, 1997. The net proceeds from the sale would be used
to reduce the capitalization of the respective GPU Energy companies. It is
anticipated that it will take approximately twelve to eighteen months to
complete the sale.
GPU's construction programs, for which substantial commitments have been
incurred and which extend over several years, contemplate expenditures of $364
million (JCP&L $171 million; Met-Ed $84 million; Penelec $104 million; Other $5
million) during 1997. As a consequence of reliability, licensing, environmental
and other requirements, additions to utility plant may be required relatively
late in their expected service lives. If such additions are made, current
depreciation allowance methodology may not make adequate provision for the
recovery of such investments during their remaining lives.
The GPU Energy companies have entered into long-term contracts with
nonaffiliated mining companies for the purchase of coal for certain generating
stations in which they have ownership interests. The contracts, which expire at
various dates between 1997 and 2004, require the purchase of either fixed or
39
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GPU, Inc. and Subsidiary Companies
minimum amounts of the stations' coal requirements. The price of the coal under
the contracts is based on adjustments of indexed cost components. One of
Penelec's contracts for the Homer City station also includes a provision for the
payment of postretirement benefit costs. The GPU Energy companies' share of the
cost of coal purchased under these agreements is expected to aggregate $133
million (JCP&L $23 million; Met-Ed $29 million; Penelec $81 million) for 1997.
JCP&L has entered into agreements with other utilities to purchase
capacity and energy for various periods through 2004. These agreements will
provide for up to 745 MW in 1997, declining to 527 MW in 1999 and 345 MW in
2000, through the expiration of the final agreement in 2004. Payments pursuant
to these agreements are estimated to be $145 million in 1997, $128 million in
1998, $104 million in 1999, $84 million in 2000 and $99 million in 2001.
In accordance with the Nuclear Waste Policy Act of 1982 (NWPA), the GPU
Energy companies have entered into contracts with, and have been paying fees to,
the DOE for the future disposal of spent nuclear fuel in a repository or interim
storage facility. In December 1996, the DOE notified the GPU Energy companies
and other standard contract holders that it will be unable to begin acceptance
of spent nuclear fuel for disposal by 1998, as mandated by the NWPA. The DOE
requested recommendations from contract holders for handling the delay. In
January 1997, the GPU Energy companies, along with other electric utilities and
state agencies, petitioned the U.S. Court of Appeals to, among other things,
permit utilities to cease payments into the Federal Nuclear Waste Fund until the
DOE complies with the NWPA. In May 1997, a joint petition was filed requesting
that the U.S. Court of Appeals compel the DOE to comply with a 1996 decision in
which the Court held that the DOE has an unconditional obligation under the NWPA
to begin accepting spent nuclear fuel beginning not later than January 31, 1998.
The DOE's inability to accept spent nuclear fuel by 1998 could have a material
impact on GPU's results of operations, as additional costs may be incurred to
build and maintain interim on-site storage at Oyster Creek. TMI-1 has sufficient
on-site storage capacity to accommodate spent nuclear fuel through the end of
its licensed life. In July 1997, a consortium of electric utilities, including
GPUN, filed a license application with the NRC seeking permission to build a
temporary above-ground disposal facility for spent nuclear fuel in northwestern
Utah. There can be no assurance as to the outcome of these matters.
New Jersey and Connecticut have established the Northeast Compact, to
construct a low-level radioactive waste disposal facility in New Jersey, which
should commence operation by the end of 2003. GPUN's total share of the cost for
developing, constructing, and site licensing the facility is estimated to be $58
million, which will be paid through 2002. Through September 30, 1997, $6 million
has been paid. As a result, at September 30, 1997, a liability of $52 million is
reflected on the Consolidated Balance Sheets. JCP&L is recovering these costs
from customers, and a regulatory asset has also been recorded. (See the
Regulatory Assets and Liabilities section.)
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 $11.7 million before tax. While a capacity factor
below 40% would generate no specific monetary charge, it would require the issue
40
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GPU, Inc. and Subsidiary Companies
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 Levelized Energy
Adjustment Clause.
GPU has contracted for an integrated information system to manage the
company's business growth, accomplish year 2000 compliance and meet the mandates
of electric utility deregulation. The system is scheduled to be fully
operational in early 1999. The estimated annual project costs of the system for
the years 1997 through 1999 are $21 million, $61 million and $24 million
respectively.
As of September 30, 1997, approximately 53% of GPU's workforce was
represented by unions for collective bargaining purposes. Penelec, JCP&L, and
Met-Ed's collective bargaining agreements expire in 1998, 1999 and 2000,
respectively.
During the normal course of the operation of its businesses, in addition
to the matters described above, GPU is from time to time involved in disputes,
claims and, in some cases, as a defendant in litigation in which compensatory
and punitive damages are sought by the public, customers, contractors, vendors
and other suppliers of equipment and services and by employees alleging unlawful
employment practices. While management does not expect that the outcome of these
matters will have a material effect on GPU's financial position or results of
operations, there can be no assurance that this will continue to be the case.
41
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GPU, Inc. and Subsidiary Companies
2. ACQUISITION OF POWERNET
In November 1997, GPU Electric acquired the business of PowerNet Victoria
(PowerNet) from the State of Victoria, Australia for A$2.6 billion
(approximately U.S. $1.9 billion). PowerNet owns and maintains the existing high
voltage electricity transmission system in the State of Victoria. The PowerNet
transmission system serves all of Victoria covering an area of approximately
87,900 square miles and a population of approximately 4.5 million.
The PowerNet acquisition is being financed through: (1) a senior debt
facility of A$1.9 billion (approximately U.S. $1.4 billion), which is
non-recourse to GPU, Inc.; (2) a five-year U.S. $450 million equity loan which
is guaranteed by GPU, Inc.; and (3) an equity contribution from GPU, Inc. of
U.S. $50 million. In early 1998, GPU, Inc. expects to issue and sell up to
seven million shares of common stock, the net proceeds of which will be used to
reduce indebtedness associated with the PowerNet and Midlands acquisitions.
Pursuant to the PowerNet acquisition, the GPU International Group entered
into various interest rate swap agreements to mitigate the risk of increases in
variable interest rates on the A$1.9 billion (approximately U.S. $1.4 billion)
senior debt facility. These swaps became effective on November 6, 1997, and are
scheduled to expire on various dates through November 2007. The GPU
International Group expects to record amounts paid and received under the
agreements as adjustments to the interest expense of the underlying debt.
The acquisition of PowerNet will be accounted for under the purchase
method of accounting. The total acquisition costs exceed the preliminary
estimated value of net assets by approximately U.S. $880 million. This excess
amount is considered goodwill and will be amortized on a straight-line basis
over 40 years. The amount of goodwill will be revised within twelve months when
the final valuation of net assets is completed.
GPU Electric owns a 50% interest in Solaris Power (Solaris), an
Australian distribution company serving customers in and around Melbourne, which
was acquired in 1995. Under Victoria's cross-ownership restrictions, GPU
Electric is required to reduce its ownership interest in Solaris to not more
than 20% within six months. GPU Electric plans to sell all of its ownership
interest in Solaris and will use the net proceeds to repay debt associated with
the Solaris acquisition (U.S. $57 million) and the balance to repay a portion of
the PowerNet equity loan.
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GPU, Inc. and Subsidiary Companies
3. GPU INTERNATIONAL GROUP EQUITY INVESTMENTS
The GPU International Group has investments in joint ventures and
affiliates involved in power production, transmission and distribution in the
United States and foreign countries. The GPU International Group uses the equity
method of accounting for its investments in which it has the ability to exercise
significant influence. Brooklyn Energy, L.P. is being accounted for under the
equity method of accounting in anticipation of a reduction of the percentage to
27%. Investments accounted for under the equity method follow:
Ownership
Investment Location of Operations Percentage
- ---------- ---------------------- ----------
Brooklyn Energy, L.P. Canada 75%
Midlands Electricity plc United Kingdom 50%
Solaris Power Australia 50%
Prime Energy, L.P. United States 50%
Onondaga Cogen, L.P. United States 50%
Pasco Cogen, Ltd. United States 50%
Termobarranquilla S.A Colombia 29%
Polsky Energy Corporation * United States & Canada 25%
Selkirk Cogeneration Partners, L.P. United States 19%
EnviroTech Investment Fund United States 10%
Ballard Generation Systems, Inc. Canada 8%
Project Orange Associates, L.P. United States 4%
OLS Power, L.P. United States 1%
* Sold on September 19, 1997
Summarized financial information for the GPU International Group's equity
investments (which are not consolidated in the financial statements), including
both the GPU International Group's ownership interests and the non-ownership
interests, is as follows:
September 30, December 31,
Balance Sheet Data (in thousands) 1997 1996
- ------------------- ---- ----
Current Assets $ 541,699 $ 1,016,730
Noncurrent Assets 5,977,573 5,761,593
Current Liabilities (1,522,424) (1,207,038)
Noncurrent Liabilities (3,864,122) (4,080,475)
----------- -----------
Net Assets $ 1,132,726 $ 1,490,810
=========== ===========
GPU International Group's
Equity in Net Assets $ 563,358 $ 735,763
=========== ===========
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GPU, Inc. and Subsidiary Companies
For the Nine Months Ended
-------------------------
September 30, September 30,
Earnings Data (in thousands) 1997 1996
- -------------- ---- ----
Revenues $ 1,972,406 $1,270,796
Operating Income $ 350,892 $ 181,168
Net Income/(Loss) $ (85,327) $ 40,418
GPU International Group's
Equity in Net Income/(Loss) $ (94,195) $ 15,252
As of September 30, 1997 and December 31, 1996, the amount of investments
accounted for under the equity method included goodwill, net of accumulated
amortization, of approximately $45.1 million and $50.9 million, respectively,
which is amortized to expense over periods not exceeding 40 years. Amortization
expense amounted to $3.4 million and $1.9 million for the nine months ended
September 30, 1997 and 1996, respectively. In September 1997, the GPU
International Group recorded a net reduction of approximately $2.4 million in
goodwill attributed primarily to the sale of an equity investment.
At September 30, 1997, the GPU International Group investments in Lake
Cogen Ltd.; Mid-Georgia Cogen, L.P., a cogeneration facility under construction;
and Empresa Guaracachi S.A., a Bolivian electric generating company, have been
consolidated in GPU's financial statements.
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GPU, Inc. and Subsidiary Companies
4. ACCOUNTING FOR DERIVATIVE INSTRUMENTS
GPU's use of derivative financial and commodity instruments is principally
limited to the GPU International Group. GPU does not hold or issue derivative
financial or commodity instruments for trading purposes.
Interest Rate Swap Agreements:
- ------------------------------
The GPU International Group uses interest rate swap agreements to manage
the risk of increases in variable interest rates. At September 30, 1997, these
agreements covered approximately $218 million of debt and are scheduled to
expire on various dates through November 1998. The GPU International Group
records amounts paid and received under the agreements as adjustments to the
interest expense of its underlying debt since the swaps are related to specific
assets, liabilities or anticipated transactions of the GPU International Group.
For the nine months ended September 30, 1997, fixed rate interest expense
exceeded variable rate interest by approximately $1.3 million.
Sterling Put Options:
- ---------------------
GPU Electric uses sterling put options to reduce exposure to exchange rate
fluctuations between the British pound and the U.S. dollar relative to its
investment in Midlands. These put options give GPU Electric the right, but not
the obligation, to sell sterling and buy U.S. dollars at a specific price. GPU
Electric's exposure to losses from changes in the relative values of these
currencies is limited to its initial investment in the put options, which was
$0.6 million. Mark-to-market accounting is followed for these put options, which
are recorded in Other Current Assets in the Consolidated Balance Sheets. Monthly
mark-to-market gains and losses, gains from exercising the put options and
amortization of expiring options totaled $40.6 thousand for the nine months
ended September 30, 1997, and are included in Other Income, Net in the
Consolidated Statements of Income. The put options were purchased on January 3,
1997 and expire on December 31, 1997.
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GPU, Inc. and Subsidiary Companies
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GPU, Inc. owns all the outstanding common stock of three domestic electric
utilities -- Jersey Central Power & Light Company (JCP&L), Metropolitan Edison
Company (Met-Ed) and Pennsylvania Electric Company (Penelec). The customer
service, transmission and distribution operations of these electric utilities
are conducting business under the name GPU Energy. JCP&L, Met-Ed and Penelec
considered together are referred to as the "GPU Energy companies." The
generation operations of the GPU Energy companies are conducted by GPU
Generation, Inc. (Genco) and GPU Nuclear, Inc. (GPUN). GPU, Inc. also owns all
the common stock of GPU International, Inc., GPU Power, Inc. and GPU Electric,
Inc., which develop, own and operate generation, transmission and distribution
facilities in the United States and in foreign countries. Collectively, these
are referred to as the "GPU International Group." Other wholly owned
subsidiaries of GPU, Inc. are GPU Advanced Resources, Inc. (GPU AR), a
nonregulated subsidiary formed to engage in energy services, retail energy sales
and telecommunications services; and GPU Service, Inc. (GPUS), which provides
certain legal, accounting, financial and other services to the GPU companies.
All of these companies considered together are referred to as "GPU."
GPU RESULTS OF OPERATIONS
-------------------------
GPU's earnings for the third quarter ended September 30, 1997 were $16.9
million, or $0.14 per share, compared to 1996 third quarter earnings of $35.8
million, or $0.29 per share. Both periods included a non-recurring charge.
In 1997, a non-recurring charge of $109.3 million, or $0.90 per share, was
taken for a windfall profits tax imposed on privatized utilities by the
Government of the United Kingdom. In 1996, a non-recurring charge of $74.5
million, or $0.62 per share, was taken for costs related to voluntary enhanced
retirement programs.
Earnings for the three months ended September 30, 1997 would have been
$126.2 million, or $1.04 per share, compared to earnings of $110.3 million, or
$0.91 per share for the same period in 1996, excluding the impact of third
quarter 1997 and 1996 non-recurring items. This increase in earnings was due
primarily to higher weather-related sales this year compared to last.
For the nine months ended September 30, 1997, GPU's earnings were $242.2
million, or $2.00 per share, compared to earnings of $217.7 million, or $1.80
per share, for the same nine month period last year. Excluding the non-recurring
items, earnings for the nine months ended September 30, 1997 would have been
$351.5 million, or $2.90 per share, compared with earnings of $292.2 million, or
$2.42 per share for the same period in 1996.
The same factors affecting the three month earnings comparison also
affected the nine month comparison. In addition, the nine month 1997 results
were affected by increased earnings from GPU's May 1996 acquisition of Midlands
Electricity plc (Midlands), the recording of step increases in operating revenue
by Met-Ed and Penelec as a result of including their energy cost rates (ECRs) in
base rates and the cessation of deferred energy accounting, both effective
January 1, 1997.
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GPU, Inc. and Subsidiary Companies
GPU RESULTS OF OPERATIONS (continued)
- -------------------------
OPERATING REVENUES:
- -------------------
Operating revenues for the third quarter of 1997 increased 3.3% to $1.09
billion, as compared to the third quarter of 1996. For the nine months ended
September 30, 1997, revenues increased 2.3% to $3.06 billion as compared to the
same period last year. The components of the changes are as follows:
(In Millions)
-------------
Three Months Nine Months
Ended Ended
September 30, 1997 September 30, 1997
------------------ ------------------
Kilowatt-hour (KWH) revenues $ 26.0 $ 49.6
Energy related revenues 12.1 12.7
Other revenues (2.7) 7.2
----- -----
Increase in revenues $ 35.4 $ 69.5
===== =====
Kilowatt-hour revenues
- ----------------------
The increase in KWH revenues for the three month period was due primarily
to higher weather-related sales to residential customers and an increase in the
number of customers, partially offset by lower residential and commercial
customer usage. The increase in KWH revenues for the nine month period was due
primarily to the step increases recorded by Met-Ed and Penelec from inclusion of
their ECRs in base rates and an increase in the number of customers. KWH
revenues now includes Met-Ed and Penelec's energy and tax revenues, consistent
with the inclusion of their ECRs and State Tax Adjustment Surcharges (STAS) in
base rates, effective January 1, 1997 (See COMPETITIVE ENVIRONMENT). Met-Ed and
Penelec's energy and tax revenues for the prior year have been reclassified for
comparative purposes.
Energy related revenues (JCP&L only)
- ------------------------------------
Generally, changes in energy related revenues do not affect earnings as
they reflect corresponding changes in JCP&L's levelized energy adjustment clause
(LEAC) billed to customers and expensed. The increase for the three month period
was due primarily to increased residential and commercial customer sales and
higher energy cost rates. The increase for the nine month period was due
primarily to higher energy cost rates, partially offset by lower sales to other
utilities.
Other revenues
- --------------
Generally, changes in other revenues do not affect earnings as they are
offset by corresponding changes in expense.
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GPU, Inc. and Subsidiary Companies
GPU RESULTS OF OPERATIONS (continued)
- -------------------------
OPERATING EXPENSES:
- -------------------
Power purchased and interchanged (PP&I)
- ---------------------------------------
Changes in the energy component of PP&I expense do not significantly
affect JCP&L's earnings since these cost variances are passed through the LEAC.
For Met-Ed and Penelec, such cost variances are not subject to deferred
accounting and have a current impact on earnings, except for incremental
nonutility generation (NUG) costs, which are being deferred (see COMPETITIVE
ENVIRONMENT). Lower reserve capacity expense (which is a component of PP&I)
contributed to earnings for the three and nine month periods.
Fuel and Deferral of energy and capacity costs, net
- ---------------------------------------------------
For JCP&L, changes in fuel and deferral of energy and capacity costs do
not affect earnings as they are offset by corresponding changes in energy
revenues. Effective January 1, 1997, Met-Ed and Penelec ceased deferred energy
accounting as their ECRs were combined with base rates, therefore cost variances
have a current impact on earnings (see COMPETITIVE ENVIRONMENT). For Met-Ed and
Penelec, the changes in fuel and deferral of energy costs did not have a
significant impact on earnings for the first nine months of 1997.
Other operation and maintenance (O&M)
- -------------------------------------
The decrease in other O&M expenses for the three and nine month periods
was due primarily to a $122.7 million pre-tax charge in 1996 related to
voluntary enhanced retirement programs. Lower production expense due to the 1996
retirement of JCP&L's Werner and Gilbert generating stations, and decreased
emergency and storm related activity, partially offset by increased expenses
related to the upgrade and modification of certain GPU computer systems also
contributed to the decrease in other O&M expenses for the three and nine month
periods.
Depreciation and amortization
- -----------------------------
The increase in depreciation and amortization expense for the three and
nine month periods was due primarily to additions to plant in service. Taxes,
other than income taxes
For JCP&L, changes in taxes other than income taxes do not significantly
affect earnings as they are substantially recovered in revenues. However,
effective January 1, 1997, Met-Ed and Penelec's STAS were combined with base
rates and are no longer subject to annual adjustment (see COMPETITIVE
ENVIRONMENT). This did not have a significant impact on earnings for the first
nine months of 1997.
OTHER INCOME AND DEDUCTIONS:
- ----------------------------
Other income/(expense), net
- ---------------------------
The decrease in other income/(expense), net for the three and nine month
periods was due primarily to the windfall profits tax of $109.3 million imposed
by the Government of the United Kingdom.
48
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GPU, Inc. and Subsidiary Companies
GPU RESULTS OF OPERATIONS (continued)
- -------------------------
Income taxes
- ------------
The decrease in income taxes on other income for the three and nine month
periods was due primarily to a reduction of GPU's U.S. income tax liability due
to lower foreign taxable income on its worldwide operations.
INTEREST CHARGES AND PREFERRED DIVIDENDS:
- -----------------------------------------
Other interest
- --------------
The increase in other interest for the nine month period was due
primarily to higher short-term debt levels.
JCP&L RESULTS OF OPERATIONS
---------------------------
JCP&L's earnings for the third quarter ended September 30, 1997 were $74.7
million, compared to 1996 third quarter earnings of $24.4 million. The 1996
results include a $39.4 million after-tax charge for voluntary enhanced
retirement programs. Excluding this non-recurring item, earnings for the third
quarter of 1996 would have been $63.8 million. This earnings increase was due
primarily to higher weather-related sales and increased new customer sales.
For the nine months ended September 30, 1997, earnings were $162.2
million, compared to $112.5 million for the same period last year. The same
non-recurring item affecting the quarterly results also affected the results for
the nine month period. Excluding the 1996 charge for the retirement programs,
earnings for the nine months ended September 30, 1996 would have been $151.9
million. The same factors affecting the three month results also affected the
nine month results.
OPERATING REVENUES:
- -------------------
Operating revenues for the third quarter of 1997 increased 4.3% to $602.9
million, as compared to the third quarter of 1996. For the nine months ended
September 30, 1997, operating revenues increased 0.5% to $1.6 billion as
compared to the same period last year. The components of the changes are as
follows:
(In Millions)
-------------
Three Months Nine Months
Ended Ended
September 30, 1997 September 30, 1997
------------------ ------------------
Kilowatt-hour (KWH) revenues $ 12.0 $ (2.7)
Energy related revenues 12.3 10.4
Other revenues 0.3 0.4
----- -----
Increase in revenues $ 24.6 $ 8.1
===== =====
49
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GPU, Inc. and Subsidiary Companies
JCP&L RESULTS OF OPERATIONS (continued)
- ---------------------------
Kilowatt-hour revenues
- ----------------------
The increase in KWH revenues for the three month period was due to higher
weather-related sales to residential customers and increased new customer sales.
The decrease in KWH revenues for the nine month period was due to lower usage
offset by higher weather-related sales and increased new customer sales. Also
contributing to the decrease for the nine month period was a charge related to
JCP&L's Final Settlement (see RATE MATTERS), representing the portion of JCP&L's
return on equity which exceeds the maximum amount allowed, and must be applied
against customers' base rates.
Energy related revenues
- -----------------------
Changes in energy revenues do not affect earnings as they reflect
corresponding changes in the energy cost rates billed to customers and expensed.
The increase in energy revenues for the three and nine month periods was due to
an increase in weather-related sales.
Other revenues
- --------------
Generally, changes in other revenues do not affect earnings as they are
offset by corresponding changes in expense.
OPERATING EXPENSES:
- -------------------
Power purchased and interchanged
- --------------------------------
Generally, changes in the energy component of PP&I expense do not
significantly affect earnings since these cost increases are substantially
recovered through the LEAC. However, lower reserve capacity expense (which is a
component of PP&I) due to reduced purchases from Pennsylvania Power & Light
contributed to earnings for the three and nine month periods.
Fuel and Deferral of energy and capacity costs, net
- ---------------------------------------------------
Generally, changes in fuel expense and deferral of energy and capacity
costs do not affect earnings as they are offset by corresponding changes in
energy revenues.
Other operation and maintenance
- -------------------------------
The decrease in other O&M expenses for the three and nine month periods
was primarily due to a $62.9 million pre-tax charge in 1996 related to voluntary
enhanced retirement programs. A decrease in transmission charges from associated
companies and lower production expenses due to the 1996 retirement of the Werner
and Gilbert generating stations also contributed to the decrease.
50
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GPU, Inc. and Subsidiary Companies
JCP&L RESULTS OF OPERATIONS (continued)
- ---------------------------
Depreciation and amortization
- -----------------------------
The increase in depreciation and amortization expense for the three and
nine month period was due primarily to additions to plant in service. Also
contributing to the increase were charges related to JCP&L's Final Settlement
(see RATE MATTERS). One of the charges represents the portion of JCP&L's return
on equity which exceeds the maximum amount allowed in accordance with the Final
Settlement, and must be applied against JCP&L's stranded costs. Another charge
represents an allowance for forecasted nuclear additions.
Taxes, other than income taxes
- ------------------------------
Generally, changes in taxes other than income taxes do not significantly
affect earnings as they are substantially recovered in revenues.
OTHER INCOME AND DEDUCTIONS:
- ----------------------------
Other income, net
- -----------------
The decrease in other income, net for the nine month period was due to a
$5.5 million charge in the second quarter of 1997 to settle a lawsuit related to
the termination of a NUG contract. The decrease was partially offset by the
effect of a 1996 writeoff of $2.4 million of inventory in connection with the
retirement of the Werner and Gilbert generating stations.
INTEREST CHARGES AND DIVIDENDS ON PREFERRED SECURITIES:
- -------------------------------------------------------
Other Interest
- --------------
The increase in other interest expense for the nine month period was due
to higher short-term debt levels.
MET-ED RESULTS OF OPERATIONS
----------------------------
Met-Ed's earnings for the third quarter ended September 30, 1997 were
$27.1 million, compared to 1996 third quarter earnings of $8.1 million. The 1996
results include a $15.4 million after-tax charge for voluntary enhanced
retirement programs. Excluding this non-recurring item, earnings for the third
quarter 1996 would have been $23.5 million. This earnings increase was due
primarily to increased customer usage, new customer sales and an increase in
sales to other utilities.
For the nine months ended September 30, 1997 earnings were $80.8 million,
compared to $48.5 million for the same period last year. The same non-recurring
item affecting the quarterly results also affected the results for the nine
month period. Excluding the 1996 charge for the retirement programs, earnings
for the nine months ended September 30, 1996 would have been $63.9 million. This
increase was primarily due to the recording of a step increase
51
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GPU, Inc. and Subsidiary Companies
MET-ED RESULTS OF OPERATIONS (continued)
- ----------------------------
in operating revenue resulting from the inclusion of energy cost rates in base
rates and the cessation of deferred energy accounting, effective January 1, 1997
(See COMPETITIVE ENVIRONMENT). Also affecting the nine month results were the
same factors affecting the three month results.
OPERATING REVENUES:
- -------------------
Operating revenues for the third quarter of 1997 increased 2.1% to $248.2
million as compared to the third quarter of 1996. For the nine months ended
September 30, 1997, revenues increased 3.5% to $712.0 million as compared to the
same period last year. The components of the changes are as follows:
(In Millions)
-------------
Three Months Nine Months
Ended Ended
September 30, 1997 September 30, 1997
------------------ ------------------
Kilowatt-hour (KWH) revenues $ 6.2 $ 21.5
Other revenues (1.2) 2.6
---- -----
Increase in revenues $ 5.0 $ 24.1
==== =====
Kilowatt-hour revenues
- ----------------------
The increase in KWH revenues for the three and nine month periods was due
primarily to increased customer usage, new customer sales, and an increase in
sales to other utilities. Partially offsetting these items were lower
weather-related residential sales. Also contributing to the increase for the
nine months was the step increase resulting from the inclusion of energy cost
rates in base rates, amounting to $13 million.
Other revenues
- --------------
Generally, changes in other revenues do not affect earnings as they are
offset by corresponding changes in expense.
OPERATING EXPENSES:
- -------------------
Fuel and Power purchased and interchanged
- -----------------------------------------
Effective January 1, 1997, Met-Ed ceased deferred energy accounting as its
energy cost rates were combined with base rates. Thus, energy cost variances now
have a current impact on earnings, except for incremental nonutility generation
(NUG) costs, which are being deferred (see COMPETITIVE ENVIRONMENT). Changes in
fuel and power purchased and interchanged did not have a significant impact on
earnings for the first nine months of 1997.
52
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GPU, Inc. and Subsidiary Companies
MET-ED RESULTS OF OPERATIONS (continued)
- ----------------------------
Other operation and maintenance
- -------------------------------
The decrease in other O&M expenses for the three and nine month periods
was due to a $26.2 million pre-tax charge in 1996 related to voluntary enhanced
retirement programs.
Depreciation and amortization
- -----------------------------
The increase in depreciation and amortization expense for the three and
nine month periods was due to additions to plant in service, and an increase in
depreciation rates.
Taxes, other than income taxes
- ------------------------------
Effective January 1, 1997, Met-Ed's STAS is included with base rates and
is no longer subject to annual adjustment. (see COMPETITIVE ENVIRONMENT) The
changes for the three and nine month periods did not have a significant impact
on earnings.
OTHER INCOME AND DEDUCTIONS:
- ----------------------------
Other income/(expense), net
- ---------------------------
The increase in other income/(expense), net for the nine month period was
due to an increase in interest income.
INTEREST CHARGES AND DIVIDENDS ON PREFERRED SECURITIES:
- -------------------------------------------------------
Other Interest
- --------------
The increase in other interest expense for the nine month period was due
to higher short-term debt levels.
53
<PAGE>
PENELEC RESULTS OF OPERATIONS
-----------------------------
Penelec's earnings for the third quarter ended September 30, 1997 were
$19.2 million, compared to 1996 third quarter earnings of $2.4 million. The 1996
results include a $19.7 million after-tax charge for voluntary enhanced
retirement programs. Excluding this non-recurring item, earnings for the third
quarter 1996 would have been $22.1 million. This earnings decrease was due
primarily to increased depreciation expense due to additions to plant in service
and higher depreciation rates.
For the nine months ended September 30, 1997 earnings were $80.6 million,
compared to $53.8 million for the same period last year. The same non-recurring
item affecting the quarterly results also affected the results for the nine
month period. Excluding the 1996 charge for the retirement programs, earnings
for the nine months ended September 30, 1996 would have been $73.5 million. This
increase was primarily due to the step increase in operating revenue resulting
from the inclusion of the energy cost rates in base rates and the cessation of
deferred energy accounting, effective January 1, 1997 (See COMPETITIVE
ENVIRONMENT). Also affecting the nine month results were increased sales to
other utilities, partially offset by increased depreciation expense.
OPERATING REVENUES:
- -------------------
Operating revenues for the third quarter of 1997 increased 0.6% to $257.6
million, as compared to the third quarter of 1996. For the nine months ended
September 30, 1997, revenues increased 3.0% to $795.2 million as compared to the
same period last year. The components of the changes are as follows:
(In Millions)
-------------
Three Months Nine Months
Ended Ended
September 30, 1997 September 30, 1997
------------------ ------------------
Kilowatt-hour (KWH) revenues $ 7.2 $ 22.7
Other revenues (5.8) 0.2
Increase in revenues $ 1.4 $ 22.9
Kilowatt-hour revenues
- ----------------------
The increase in KWH revenues for the three and nine month periods was due
to increased sales to other utilities. Also affecting the nine month results was
the step increase resulting from the inclusion of energy cost rates in base
rates, amounting to $15 million.
Other revenues
- --------------
Generally, changes in other revenues do not affect earnings as they are
offset by corresponding changes in expense. Lower transmission revenues
contributed to the decrease for the three month period.
54
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GPU, Inc. and Subsidiary Companies
PENELEC RESULTS OF OPERATIONS (continued)
- -----------------------------
OPERATING EXPENSES:
- -------------------
Fuel and Power purchases and interchanged
- -----------------------------------------
Effective January 1, 1997, Penelec ceased deferred energy accounting as
its energy cost rates were combined with base rates. Thus, energy cost variances
now have a current impact on earnings, except for incremental nonutility
generation (NUG) costs, which are being deferred (see COMPETITIVE ENVIRONMENT).
Changes in fuel and power purchased and interchanged did not have a significant
impact on earnings for the first nine months of 1997.
Other operation and maintenance
- -------------------------------
The decrease in other O&M expenses for the three and nine month periods
was due to a $33.6 million pre-tax charge in 1996 related to voluntary enhanced
retirement programs.
Depreciation and amortization
- -----------------------------
The increase in depreciation and amortization expense for the three and
nine month periods was due to additions to plant in service, and an increase in
depreciation rates. Taxes, other than income taxes
Effective January 1, 1997, Penelec's STAS is included with base rates and
is no longer subject to annual adjustment. (see COMPETITIVE ENVIRONMENT) The
changes for the three and nine month periods did not have a significant impact
on earnings.
OTHER INCOME AND DEDUCTIONS:
- ----------------------------
Other income/(expense), net
- ---------------------------
The increase in other income/(expense), net for the nine month period was
due to an increase in interest income.
PREFERRED STOCK DIVIDENDS:
- --------------------------
The decrease in preferred stock dividends for the nine month period was
due to Penelec reacquiring portions of its preferred stock in 1996.
55
<PAGE>
GPU, Inc. and Subsidiary Companies
GPU INTERNATIONAL GROUP
-----------------------
The GPU International Group develops, owns and operates electric
generation, transmission and distribution facilities in the U.S. and foreign
countries. It has also made investments in certain advanced technologies related
to the electric power industry. The GPU International Group has ownership
interests in distribution and supply businesses in England and Australia, eight
operating cogeneration plants in the U.S. totaling 847 MW (of which the GPU
International Group's equity interest represents 308 MW) of capacity, and twelve
operating generating facilities located in foreign countries totaling 3,662 MW
(of which the GPU International Group's equity interest represents 704 MW) of
capacity.
In November 1997, GPU Electric acquired the business of PowerNet
Victoria (PowerNet) from the State of Victoria, Australia for A$2.6 billion
(approximately U.S. $1.9 billion)(see Financing section of LIQUIDITY AND CAPITAL
RESOURCES). PowerNet owns and maintains the existing high voltage electricity
transmission system in the State of Victoria. The PowerNet transmission system
serves all of Victoria covering an area of approximately 87,900 square miles and
a population of approximately 4.5 million. GPU expects the PowerNet acquisition
to be accretive to its 1998 earnings. For additional information, see Note 2 of
the Combined Notes to Consolidated Financial Statements.
The GPU International Group is continuing to pursue investment
opportunities and has commitments, both domestically and internationally, in six
generating facilities under construction totaling 2,118 MW (of which the GPU
International Group's equity interest represents 609 MW) of capacity.
At September 30, 1997, GPU, Inc.'s aggregate investment in the GPU
International Group was $218 million; GPU, Inc. has also guaranteed up to an
additional $842 million of GPU International Group obligations. At September 30,
1997, GPU, Inc. had Securities and Exchange Commission (SEC) approval to finance
investments in foreign utility companies (FUCOs) and exempt wholesale generators
(EWGs) up to an aggregate amount equal to 50% of GPU's average consolidated
retained earnings, or approximately $1.1 billion. In November 1997, GPU, Inc.
received SEC approval to increase this limit to 100% of its average consolidated
retained earnings, or to approximately $2.2 billion. As a result, after
including the effect of the PowerNet acquisition, GPU, Inc. has remaining
authorization to finance approximately $730 million of additional investments in
FUCOs and EWGs.
In August 1997, the Government of the United Kingdom imposed a windfall
profits tax on privatized utilities, including Midlands, in which GPU has a 50%
ownership interest. As a result, GPU recorded a one-time charge to income in the
third quarter of 1997 of $109.3 million, or $0.90 per share. The tax is payable
in two equal installments by December 1, 1997 and 1998.
Management expects that the GPU International Group will provide a
substantial portion of GPU's future earnings growth and intends on making
additional investments in its business activities. The timing and amounts of
these investments, however, will depend upon the availability of appropriate
opportunities and financing capabilities.
For additional information on the GPU International Group's
investments, see Note 3 of the Combined Notes to Consolidated Financial
Statements.
56
<PAGE>
GPU, Inc. and Subsidiary Companies
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Capital Needs
- -------------
GPU's cash construction expenditures for the nine months ended September
30, 1997 were $236 million (JCP&L $116 million; Met-Ed $55 million; Penelec $63
million; Other $2 million). Construction expenditures for the year are
forecasted to be $364 million (JCP&L $171 million; Met-Ed $84 million; Penelec
$104 million; Other $5 million). Expenditures for maturing obligations will
total $179 million (JCP&L $110 million; Met-Ed $40 million; Penelec $26 million;
Other $3 million) in 1997. GPU and the GPU Energy companies estimate that a
substantial portion of their 1997 capital needs will be satisfied through
internally generated funds.
Financing
- ---------
GPU, Inc. has received SEC approval to issue and sell up to $300 million
of unsecured debentures through 2001 and up to seven million shares of
additional common stock through 1998. In early 1998, GPU, Inc. expects to issue
and sell up to the seven million shares of common stock, the net proceeds of
which will be used to reduce indebtedness associated with the PowerNet and
Midlands acquisitions.
In November 1997, GPU Electric acquired the Australian business, PowerNet,
which owns and maintains the transmission system in the State of Victoria for
A$2.6 billion (approximately U.S. $1.9 billion). The acquisition is being
financed through: (1) a senior debt facility of A$1.9 billion (approximately
U.S. $1.4 billion), which is non-recourse to GPU, Inc.; (2) a five-year U.S.
$450 million equity loan which is guaranteed by GPU, Inc.; and (3) an equity
contribution from GPU, Inc. of U.S. $50 million. See Note 2 to Combined Notes to
Consolidated Financial Statements for further discussion of the PowerNet
acquisition.
As a result of Pennsylvania legislation (see COMPETITIVE ENVIRONMENT),
Met-Ed and Penelec each plan to sell securitized transition bonds through a
separate trust or other similar entity, and would use the proceeds to reduce
capitalization and further mitigate stranded costs resulting from customer
choice. Met-Ed and Penelec plan to use securitization proceeds to fund NUG
contract buyout costs (see the Managing Nonutility Generation section of THE GPU
ENERGY COMPANIES' SUPPLY PLAN). The timing and amount of any sale will depend
upon PaPUC approval of restructuring plans and an Internal Revenue Service
private letter ruling on certain tax issues, as well as market conditions.
Similarly, JCP&L fully supports the enactment of New Jersey legislation which
would provide for securitization as part of the restructuring process. See
COMPETITIVE ENVIRONMENT for further discussion of these bonds.
JCP&L and Penelec have regulatory authority to issue and sell first
mortgage bonds (FMBs), including secured medium-term notes, and preferred stock
through June 1999. Met-Ed has similar authority through December 1997. Met-Ed
has requested PaPUC approval to extend this authorization for an additional
two-year period. Under existing authorizations, JCP&L, Met-Ed and Penelec may
issue these senior securities in aggregate amounts of $145 million, $190 million
57
<PAGE>
GPU, Inc. and Subsidiary Companies
and $70 million, respectively, of which up to $100 million for JCP&L and Met-Ed
and $70 million for Penelec may consist of preferred stock. The GPU Energy
companies also have regulatory authority to incur short-term debt, a portion of
which may be through the issuance of commercial paper.
On September 1, 1997, JCP&L redeemed at maturity $25.9 million principal
amount of 6 5/8% FMBs. On September 11, 1997, Met-Ed redeemed at maturity $20
million principal amount of 9.2% FMBs.
The GPU Energy companies' bond indentures and articles of incorporation
include provisions that limit the amount of long-term debt, preferred stock and
short-term debt the companies may issue. The GPU Energy companies' interest and
preferred dividend coverage ratios are currently in excess of indenture and
charter restrictions. The amount of FMBs that the GPU Energy companies could
issue based on the bondable value of property additions is in excess of amounts
currently authorized.
COMPETITIVE ENVIRONMENT
-----------------------
Pennsylvania
- ------------
In 1996, Pennsylvania adopted comprehensive legislation which provides for
the restructuring of the electric utility industry. The legislation, among other
things, permits one-third of Pennsylvania retail consumers to choose their
electric supplier beginning January 1, 1999, and all retail consumers by January
1, 2001. The legislation requires the unbundling of rates for transmission,
distribution and generation services. Utilities would have the opportunity to
recover their prudently incurred stranded costs that result from customers
choosing another supplier through a PaPUC approved competitive transition
charge, subject to certain conditions, including that they attempt to mitigate
these costs. For a discussion of stranded costs, see the Competition and the
Changing Regulatory Environment section of Note 1 of the Combined Notes to
Consolidated Financial Statements.
The legislation provides utilities the opportunity to reduce their
stranded costs through the issuance of transition bonds with maturities of up to
10 years. The sale proceeds could be used to buy out or buy down uneconomic NUG
contracts, to reduce capitalization, or both. Principal and interest payments on
the bonds would be paid by all distribution service customers through a
nonbypassable intangible transition charge. Reduced financing costs associated
with the sale of transition bonds would be used to provide rate reductions for
all customers. In order to securitize stranded costs, each Pennsylvania utility
is required to file with the PaPUC for a qualified rate order. Met-Ed and
Penelec expect to file for such rate orders during 1998.
Effective January 1, 1997, transmission and distribution rates charged to
Pennsylvania retail customers are generally capped for 4 1/2 years, and
generation rates are generally capped for up to nine years. Transmission and
distribution of electricity will continue as a regulated monopoly and the PaPUC
will ensure that adequate electrical reserves exist to maintain reliable
service. An independent system operator (ISO) will be responsible for
58
<PAGE>
GPU, Inc. and Subsidiary Companies
coordinating the generation and transmission of electricity in an efficient and
nondiscriminatory manner.
As part of this restructuring, Met-Ed and Penelec filed, in December 1996,
tariff supplements requesting approval to, among other things, include their
currently effective ECRs and STAS in base rates, effective for all bills
rendered after January 1, 1997. In February 1997 the PaPUC approved this
request. Since rates that can be charged to customers for generation are capped
for up to nine years, to the extent Met-Ed and Penelec remain in the generation
business, their future earnings are subject to market volatility. Increases or
decreases in fuel costs are no longer subject to deferred accounting and are
reflected in net income as incurred. Met-Ed and Penelec will continue their
efforts to manage fuel costs and will mitigate, to the extent possible, any
excessive risks.
In June 1997, Met-Ed and Penelec filed with the PaPUC their proposed
restructuring plans to implement competition and customer choice in
Pennsylvania. Highlights of these plans include:
- - One-third of electric retail customers would be able to choose their
supplier beginning on January 1, 1999, expanding to include all customers
by January 1, 2001.
- - As required by the restructuring legislation, rates would be unbundled for
generation, transmission and distribution charges.
- - A competitive transition charge (CTC) would recover all of Met-Ed and
Penelec's generation plant, regulatory assets and other non-NUG related
transition and stranded costs within a seven-year time period beginning
January 1, 1999.
- - A "NUG Cost Rate" is being proposed to capture future payments to NUGs.
This clause will provide for a full reconciliation of amounts paid to NUGs,
and recovered from customers. This will ensure that customers do not
overpay for these obligations, and it will also provide a vehicle for
flowing through to customers the full benefits of any prospective
reductions in NUG obligations that result from the requests for proposals
(RFPs) or other future NUG mitigation. At September 30, 1997, the deferred
NUG balances for Met-Ed and Penelec were $6.4 million and $7.4 million,
respectively, and are included in Other Regulatory Assets on the
Consolidated Balance Sheet.
- - Stranded costs at the time of initial customer choice (December 31, 1998),
on a present value basis, are estimated at $1.4 billion for Met-Ed and $1.3
billion for Penelec. These stranded costs include above-market costs
related to power purchase commitments, company owned generation, generating
plant decommissioning, regulatory assets and transition expenses.
- - Ongoing stranded cost mitigation efforts include the buyout and/or
renegotiation of several above-market NUG agreements; the planned
retirement of uneconomical generating units as well as the continuing
evaluation of remaining generating facilities; and workforce reductions
achieved primarily through voluntary retirement and severance programs.
59
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GPU, Inc. and Subsidiary Companies
- - Met-Ed and Penelec have requested rate recovery of prudently incurred and
previously approved costs associated with the buyout and restructuring of
NUG projects that are not currently being recovered in rates. The requested
increase, based upon a three-year recovery of the buyout costs, is $10.5
million for Met-Ed and $1.7 million for Penelec. It is expected that these
increases will be offset by lower interest expense related to the issuance
of transition bonds. The estimated customer savings associated with these
contract buyouts/restructurings is $900 million for Met-Ed and $500 million
for Penelec.
- - Met-Ed and Penelec support securitization as a mechanism to help mitigate
stranded costs and have initiated a RFP which is expected to use
securitization proceeds to reduce above-market NUG costs. (See THE GPU
ENERGY COMPANIES' SUPPLY PLAN.)
- - Met-Ed and Penelec will be the supplier of last resort for customers who
cannot or do not wish to purchase energy from an alternative supplier.
Met-Ed and Penelec will file supplemental information to their
restructuring plans to reflect the recent announcement regarding the proposed
sale of their generating facilities. (See additional discussion under the Other
heading of this section.) The PaPUC continues to review and hold hearings on the
restructuring plans, and has stated that a decision is expected by mid 1998.
The PaPUC has also issued a final order that sets forth the guidelines for
retail access pilot programs in Pennsylvania that give customers the ability to
choose their electricity supplier. These pilot programs include residential,
commercial and industrial class customers, and utilities are required to commit
about 5% of load to retail access programs and unbundle their rates to allow
customers to choose their electric generation supplier. The pilot program began
November 1, 1997 and will run until the first phase of retail competition begins
on January 1, 1999. Met-Ed and Penelec's pilot programs include approximately
51,000 (Met-Ed 23,000; Penelec 28,000) customers.
In August 1997, PECO Energy Company reached a partial settlement, subject
to PaPUC approval, in its restructuring proceeding. Among other things, this
settlement provides for a 10% retail rate reduction beginning in September 1998.
It is not known what effect, if any, this settlement will have on Met-Ed and
Penelec's restructuring proceedings.
New Jersey
- ----------
In April 1997, the NJBPU issued final findings and recommendations for
restructuring the electric utility industry in New Jersey and submitted the plan
to the Governor and the Legislature for their consideration. The NJBPU has
recommended, among other things, that certain electric retail customers be
permitted to choose their supplier beginning October 1998, expanding to include
all retail customers by July 1, 2000. The NJBPU also recommends a near-term
electric rate reduction of 5% to 10% with the phase in of retail competition, as
well as additional rate reductions accomplished as a result of new energy tax
legislation, as discussed below.
60
<PAGE>
GPU, Inc. and Subsidiary Companies
The NJBPU has proposed that utilities have an opportunity to recover their
stranded costs associated with generating capacity commitments provided that
they attempt to mitigate these costs. Also, NUG contracts which cannot be
mitigated would be eligible for stranded cost recovery. The determination of
stranded cost recovery by the NJBPU would be undertaken on a case-by-case basis,
with no guaranty for full recovery of these costs. A separate market transition
charge (MTC) would be established for each utility to allow utilities to recover
stranded costs over 4 to 8 years. The MTC would be capped to ensure that
customers experience the NJBPU's recommended overall rate reduction of 5% to
10%. New Jersey is also considering securitization as a mechanism to help
mitigate stranded costs.
In addition, the NJBPU is proposing that beginning October 1998, utilities
unbundle their rates and allow customers to choose their electric generation
supplier. Transmission and distribution of electricity would continue as a
regulated monopoly and utilities would be responsible for connecting customers
to the system and for providing distribution service. Transmission service would
be provided by an ISO, who would be responsible for maintaining the reliability
of the regional power grid and would be regulated by the Federal Energy
Regulatory Commission (FERC).
In July 1997, New Jersey enacted energy tax legislation which eliminates
the 13% gross receipts and franchise tax on utility bills. Utilities will
collect from customers a 6% sales tax and pay a corporate business tax which
amounts to 1-2% of revenues. Utilities will also collect a transitional energy
facilities assessment which will phase out over five to seven years and result
in a 6% rate reduction to customers.
In July 1997, JCP&L filed with the NJBPU its proposed restructuring plan
for a competitive electric marketplace in New Jersey. Included in the plan were
stranded cost and unbundled rate filings. Highlights of the plan include:
- - Some electric retail customers would be able to choose their supplier
beginning on October 1, 1998, expanding to include all retail customers by
July 1, 2000.
- - As required by the New Jersey Energy Master Plan, JCP&L would unbundle its
rates and these rates would apply to all distribution customers, with the
exception of a Production Charge, which would be charged to customers who
do not choose an alternative energy supplier. The unbundled rate structure
would include:
-- a flat monthly Customer Charge for the costs associated with
metering, billing and customer account administration.
-- a Delivery Charge consisting of capital and O&M costs
associated with the transmission and distribution system; the
recovery of regulatory assets, including those associated with
generation; the cost of social programs; and certain costs
related to the proposed ratemaking treatment of Oyster Creek.
-- a Production Charge for the estimated average market price for
electricity (EAMPE) provided to customers who elect JCP&L as
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GPU, Inc. and Subsidiary Companies
their electric generation supplier. JCP&L would be the
supplier of last resort for customers who cannot or do not
wish to purchase energy from an alternative supplier. A
deferred market price adjustment account will be set up for
the difference between the EAMPE and the actual market price
for electricity, plus interest. The EAMPE will be calculated
every six months during the transition period and adjusted by
a true-up factor.
-- a Societal Benefits Charge to recover demand side management
costs, remediation adjustment costs, and nuclear
decommissioning costs.
-- a Market Transition Charge (MTC) to recover non-NUG stranded
generation costs. This charge would include both owned
generation and utility purchase power commitments. It is
expected that the MTC would be in effect for approximately a
four-year period.
-- a NUG Transition Charge (NTC) to recover ongoing above-market
NUG costs over the life of the contracts and provide a
mechanism to flow through to customers the benefits of future
NUG mitigation efforts. The NTC would be subject to an annual
true-up for actual cost escalations or reductions, changes in
availability or dispatch levels and other cost variations over
the life of each NUG project. The NTC would also be subject to
adjustment in the future to reflect additional NUG buyout or
restructuring costs and any related savings.
- - The unbundling plan calls for an estimated 10% rate reduction, of which
2.1% became effective as part of JCP&L's global rate settlement approved by
the NJBPU in April 1997 (see RATE MATTERS). The remaining reductions would
be phased in over a two-year period beginning October 1, 1998, and would be
achieved through, among other things, the proposed early retirement of
Oyster Creek for ratemaking purposes in September 2000 and, if legislation
is enacted, the securitization of above-market costs. In addition to this
rate reduction, JCP&L customers would receive an additional rate reduction
of approximately 6% to be phased in over the next five to seven years as a
result of energy tax legislation signed into law in July 1997.
- - In addition to the continued operation of the Oyster Creek facility, JCP&L
is exploring the sale or early retirement of the plant to mitigate costs
associated with its continued operation. A final decision on the plant's
future has not been reached. Nevertheless, JCP&L has proposed that the
NJBPU approve an early retirement of Oyster Creek in September 2000, for
ratemaking purposes. The ratemaking treatment being requested for Oyster
Creek is as follows:
-- The market value of Oyster Creek's generation output would be
recovered in the Production Charge.
-- The above-market operating costs would be recovered as a
component of the Delivery Charge through September 2000. If
the plant is operated beyond that date, these costs would not
be included in customer rates.
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GPU, Inc. and Subsidiary Companies
-- Existing Oyster Creek regulatory assets would, like other
regulatory assets, be recovered as part of the Delivery
Charge.
-- Oyster Creek decommissioning costs would, like TMI-1
decommissioning costs, be recovered as a component of the
Societal Benefits Charge.
-- JCP&L's net investment in Oyster Creek would be recovered
through the Delivery Charge as a levelized annuity, effective
October 1998 through its original expected operating life,
2009.
- - Stranded costs at the time of initial customer choice (September 30, 1998),
on a present value basis, are estimated at $1.8 billion, of which $1.6
billion is for above-market NUG contracts. The $1.8 billion excludes
above-market generation costs related to Oyster Creek.
- - Ongoing stranded cost mitigation efforts have included the buyout and/or
renegotiation of several above-market NUG agreements; the retirement of
uneconomical steam generating units at Gilbert and Werner stations in 1996;
the planned retirement of additional units at Sayreville station in 1999 as
well as the continuing evaluation of remaining generating facilities; and
workforce reductions achieved primarily through voluntary retirement and
severance programs.
- - JCP&L fully supports securitization of above-market costs in the
restructuring process. JCP&L expects to request securitization, if
legislation is enacted, of certain costs associated with generation assets,
regulatory assets and the buyout or renegotiation of NUG contracts.
JCP&L will file supplemental information to its restructuring plan to
reflect the recent announcement regarding the proposed sale of its generating
facilities. (See additional discussion under the Other heading of this section.)
The NJBPU intends to complete its review and approval of this plan so as to
permit retail competition to begin in October 1998.
JCP&L has received NJBPU approval of a one-year pilot program offering
customers in Monroe Township, New Jersey a choice of their electric energy
supplier. The pilot program began in September 1997, and can be extended until
the first phase of competition begins in October 1998. Monroe Township had been
exploring the possibility of establishing its own municipal electric system.
Other
- -----
In October 1997, GPU announced that it intends to begin a process to sell,
through an auction, up to all of the fossil fuel and hydroelectric generating
facilities owned by the GPU Energy companies. These facilities total
approximately 5,300 MW of capacity and have a net book value of approximately
$1.1 billion at September 30, 1997. The net proceeds from the sale would be used
to reduce the capitalization of the respective GPU Energy companies. It is
anticipated that it will take approximately twelve to eighteen months to
complete the sale. The GPU Energy companies will file supplemental information
to their restructuring plans in Pennsylvania and New Jersey to reflect the sale
of these assets.
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GPU, Inc. and Subsidiary Companies
In addition to the continued operation of the Oyster Creek facility, JCP&L
is exploring the sale or early retirement of the plant to mitigate costs
associated with its continued operation. In response to an inquiry regarding the
possible sale of Oyster Creek, the GPU Energy companies have stated that they
would also consider selling TMI-1. Unlike Oyster Creek, however, the early
retirement of TMI-1 is not being considered because of its lower operating
costs. In October 1997, the GPU Energy companies entered into a confidentiality
agreement with a potential buyer of these facilities.
Several bills have been introduced in Congress providing for a
comprehensive restructuring of the electric utility industry. These bills
propose, among other things, retail choice for all utility customers beginning
as early as January 1999, the opportunity for utilities to recover their
prudently incurred stranded costs in varying degrees, and repeal of both the
Public Utility Regulatory Policies Act (PURPA) and the Public Utility Holding
Company Act of 1935.
In 1996, the GPU Energy companies, along with six other electric utility
members of the Pennsylvania-New Jersey-Maryland (PJM) Power Pool (together, the
supporting PJM companies), filed with the FERC a transmission tariff and
agreements (including, among other things, establishing an ISO to operate the
energy market and transmission system), that would create a new wholesale energy
market to meet the requirements of FERC Order 888, and to increase competition
in the Mid-Atlantic region. Also in 1996, PECO Energy Company (PECO), which
opposes the supporting PJM companies' proposed restructuring plan, filed its own
plan with the FERC. Although the PJM companies are continuing with their efforts
to operate as an ISO, there still remain a number of unresolved issues.
In February 1997, the FERC issued an order directing PJM to adopt all
recommendations proposed by the supporting PJM companies except with regard to
congestion pricing, as to which the FERC ordered implementation of PECO's
proposal on an interim basis. The FERC has stated that it expects it will order
PJM to adopt the supporting PJM companies' proposal on congestion pricing after
certain issues are resolved concerning implementation of this proposal.
Effective March 31, 1997, the PJM Power Pool converted to a limited liability
company governed by an independent board of managers; in June 1997, the
supporting PJM companies filed with the FERC an application to permit the PJM
Interconnection to be recognized as an ISO.
RATE MATTERS
------------
Pennsylvania adopted comprehensive legislation in 1996 which provides for
the restructuring of the electric utility industry. For additional information
and related rate matters, see COMPETITIVE ENVIRONMENT.
In 1996, the NJBPU approved a provisional settlement for a combined LEAC
and Demand-Side Factor (DSF) increase of $27.9 million annually. The DSF is
applied to customer rates so electric utilities can recover their demand-side
management program costs, which include activities designed to improve
efficiency in customer electricity use and load-management programs that reduce
peak demand.
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GPU, Inc. and Subsidiary Companies
Also in 1996, JCP&L, the staff of the NJBPU and the Division of Ratepayer
Advocate reached an agreement on a variety of pending rate-related issues. An
Administrative Law Judge (ALJ) issued a decision recommending approval of the
Final Settlement, but the NJBPU ordered additional evidentiary hearings on the
recovery of buyout costs for the Freehold cogeneration project discussed below.
In December 1996, the ALJ issued a further decision recommending that recovery
of the Freehold buyout costs be approved, subject to possible revocation or
modification, if it was determined that the project was not viable when it was
bought out. In December 1996, an Addendum revising the Final Settlement was
agreed upon by JCP&L, the staff of the NJBPU and the Division of Ratepayer
Advocate. In January 1997, the NJBPU staff recommended that rate recovery of the
Freehold buyout costs be permitted. In March 1997, the NJBPU approved the Final
Settlement, including the recovery of Freehold buyout costs. However, the
Freehold cost recovery was granted on an interim basis, subject to refund,
pending further review by the NJBPU. There can be no assurance as to the outcome
of this matter.
Provisions of the Final Settlement, as revised by the Addendum, include a
further annual increase of $7 million in the LEAC in addition to those noted
above and an annual reduction of $11 million in base rates. Base rates are
frozen at that level until the year 2000, and the LEAC rate is frozen through
the year 1999. The final settlement provides for the establishment of a
remediation adjustment clause (RAC) for the recovery of manufactured gas plant
remediation costs. JCP&L could seek a LEAC/DSF/RAC rate increase if the combined
LEAC/DSF/RAC balance is projected to exceed $40 million, or a base rate increase
under certain other conditions, such as a major change in the current regulatory
environment. The Final Settlement provides for recovery in base rates, beginning
in 1998, of all postretirement benefit costs recorded in accordance with
Statement of Financial Accounting Standards No. 106, including amounts
previously deferred, and an increase in decommissioning expense to reflect the
radiological decommissioning and nonradiological removal costs estimated in the
1995 site-specific studies performed for GPUN. Also, included in base rates is
recovery of the remaining investments in the 58 MW Werner Unit 4 and 72 MW
Gilbert Unit 3 generating plants, which were retired in 1996.
The Final Settlement also provides for recovery through the LEAC of: (1)
buyout costs up to $130 million, and 50% of any costs from $130 million to $140
million, over a seven-year period for the termination of the Freehold power
purchase agreement (such recovery is interim and is subject to refund, pending
further review); and (2) $14 million of the $17 million buyout costs, over a
two-year period, for the termination of the agreement to purchase power from the
proposed 200 MW Crown/Vista project. JCP&L wrote-off the remaining $3 million of
buyout costs for the Crown/Vista project in the second quarter of 1996.
In addition, the Final Settlement resolves the NJBPU's generic proceeding
regarding recovery of capacity costs associated with electric power purchases
from NUG projects which the Division of the Ratepayer Advocate claimed to result
in a double recovery. JCP&L is not required to refund any amounts previously
collected. The Final Settlement provides annual allowances for the recovery of
forecasted additions to nuclear plant. The Final Settlement also provides that
if JCP&L's return on equity exceeds 12.2%, excluding demand-side management and
65
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GPU, Inc. and Subsidiary Companies
nuclear performance incentives, the excess will be used to reduce both customer
rates and certain regulatory assets.
THE GPU ENERGY COMPANIES' SUPPLY PLAN
-------------------------------------
Managing Nonutility Generation
- ------------------------------
The GPU Energy companies have contracts and anticipated commitments with
NUG suppliers under which a total of 1,657 MW (JCP&L 896 MW; Met-Ed 356 MW;
Penelec 405 MW) of capacity are currently in service. For information on NUG
costs, see the Competition and the Changing Regulatory Environment section of
Note 1 of the Combined Notes to Consolidated Financial Statements.
The GPU Energy companies are seeking to reduce the above-market costs of
NUG agreements by: (1) attempting to convert must-run agreements to dispatchable
agreements; (2) attempting to renegotiate prices of the agreements; (3) offering
contract buyouts; and (4) initiating proceedings before federal and state
agencies, and in the courts, where appropriate. In addition, the GPU Energy
companies intend to avoid, to the maximum extent practicable, entering into any
new NUG agreements that are not needed or not consistent with current market
pricing and are supporting legislative efforts to repeal PURPA. These efforts
may result in claims against GPU for substantial damages. There can, however, be
no assurance as to what extent these efforts will be successful in whole or in
part.
In April 1997, Met-Ed and Penelec issued RFPs to 24 NUG projects which
currently supply a total of approximately 760 MW under power purchase
agreements. The RFPs requested the NUGs to propose buyouts, buydowns and/or
restructurings of current power purchase contracts in return for cash payments
which would be funded through the issuance of PaPUC approved securitized
transition bonds (see COMPETITIVE ENVIRONMENT). Met-Ed and Penelec are currently
negotiating with two bidders to enter into definitive buyout agreements by the
end of 1997. Payments would be made in 1998, subject to Met-Ed's and Penelec's
ability to obtain the required funding through securitization.
ACCOUNTING MATTERS
------------------
Statement of Financial Accounting Standards No. 71 (FAS 71), "Accounting
for the Effects of Certain Types of Regulation," applies to regulated utilities
that have the ability to recover their costs through rates established by
regulators and charged to customers. In response to the continuing deregulation
of the electric utility industry, the SEC has questioned the continued
applicability of FAS 71 by California investor-owned utilities with respect to
their electric generation operations. The GPU Energy companies believe that the
SEC's concern also applies to them, since retail access legislation has been
enacted in Pennsylvania and proposed in New Jersey. In May and July 1997, the
FASB's Emerging Issues Task Force (EITF) met to discuss these issues and they
66
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GPU, Inc. and Subsidiary Companies
concluded that utilities are no longer subject to FAS 71, for the generation
portion of their business, as soon as they know details of their individual
transition plans. The EITF also concluded that utilities can continue to carry
previously recorded regulated assets (including those related to generation) on
their balance sheet if regulators have guaranteed a regulated cash flow stream
to recover the cost of these assets. While the EITF's consensus must be complied
with, the SEC has the final regulatory authority for accounting by public
companies.
In light of retail access legislation enacted in Pennsylvania and the New
Jersey Energy Master Plan in New Jersey, the GPU Energy companies believe they
will no longer meet the requirements for continued application of FAS 71 for the
generation portion of their business, no later than mid 1998 for Met-Ed and
Penelec, and October 1998 for JCP&L, the expected approval dates of their
restructuring plans filed with state regulators. Once the GPU Energy companies
are able to determine that the generation portion of their operations is no
longer subject to the provisions of FAS 71, the related regulatory assets, net
of regulatory liabilities, would, to the extent that recovery is not granted
through their respective restructuring plans, have to be written off and charged
to expense. The above-market costs of power purchase commitments would have to
be expensed, and additional depreciation expense would have to be recorded for
any differences created by the use of a regulated depreciation method that is
different from that which would have been used under generally accepted
accounting principles for enterprises in general. In addition, writedowns of
plant assets could be required in accordance with FAS 121, "Accounting for the
Impairment of Long-Lived Assets." The amount of writeoffs resulting from the
discontinuation of FAS 71 will depend on the final outcome of the GPU Energy
companies' individual restructuring proceedings, and could have a material
adverse effect on GPU's results of operations and financial condition.
In March 1997, Statement of Financial Accounting Standards No. 128 (FAS
128), "Earnings Per Share", was issued. FAS 128 requires a dual presentation of
basic and diluted earnings per share for companies that have common stock
equivalents, including GPU. The two earnings per share computations for GPU are
not expected to be materially different from one another. FAS 128 will be
effective for year-end reporting.
In June 1997, Statement of Financial Accounting Standards No. 130 (FAS
130), "Reporting Comprehensive Income", was issued to establish standards for
reporting and displaying comprehensive income. This statement requires
disclosure of the components of comprehensive income including, among other
things, foreign currency translation adjustments, minimum pension liability
items and unrealized gains or losses on decommissioning and other trust fund
assets. GPU will be required to show components of comprehensive income in a
financial statement displayed as prominently as the other required financial
statements. The statement is effective for fiscal years beginning after December
15, 1997.
In June 1997, Statement of Financial Accounting Standards No. 131 (FAS
131) "Disclosures about Segments of an Enterprise and Related Information", was
issued. FAS 131 requires that companies disclose segment information based on
how management makes decisions about allocating resources to segments and
measures segment performance. Also required are disclosures about the countries
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GPU, Inc. and Subsidiary Companies
in which a company holds material assets and reports revenues, its major
customers, and disclosure of segment information. The Statement will supersede
FAS 14, "Financial Reporting for Segments of a Business Enterprise," and is
effective for fiscal years beginning after December 15, 1997.
68
<PAGE>
PART II
ITEM 1 - LEGAL PROCEEDINGS
-----------------
Information concerning the current status of certain legal
proceedings instituted against the Company and the GPU Energy
companies 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 Combined Notes to
Consolidated Financial Statements is incorporated herein by
reference and made a part hereof.
ITEM 5 - OTHER EVENTS
------------
Information concerning the acquisition of PowerNet Victoria
discussed in Note 2 of Combined Notes to Consolidated
Financial Statements is incorporated herein by reference and
made a part hereof.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
(12) Statements Showing Computation of Ratio of Earnings
to Fixed Charges and Ratio of Earnings to Combined
Fixed Charges and Preferred Stock Dividends Based
on SEC Regulation S-K, Item 503
(27) Financial Data Schedule
(b) Reports on Form 8-K:
GPU, Inc.:
----------
Dated October 15, 1997, under Item 5 (Other Events).
69
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GPU, Inc. and Subsidiary Companies
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
GPU, INC.
---------
November 12, 1997 By: /s/ J. G. Graham
-----------------
J. G. Graham, Senior Vice President
(Chief Financial Officer)
November 12, 1997 By: /s/ F. A. Donofrio
-------------------
F. A. Donofrio, Vice President
and Comptroller
(Chief Accounting Officer)
JERSEY CENTRAL POWER & LIGHT COMPANY
METROPOLITAN EDISON COMPANY
PENNSYLVANIA ELECTRIC COMPANY
November 12, 1997 By: /s/ D. Baldassari
-----------------
D. Baldassari, President
November 12, 1997 By: /s/ D. W. Myers
----------------
D. W. Myers, Vice President -
Finance and Rates &Comptroller
(Principal Accounting Officer)
70
Exhibit 12A
Page 1 of 2
GPU, INC. AND SUBSIDIARY COMPANIES
STATEMENTS SHOWING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS BASED ON SEC REGULATION S-K, ITEM 503
(In Thousands)
--------------
UNAUDITED
Nine Months Ended
-----------------
September 30, September 30,
1997 1996
---- ----
OPERATING REVENUES $ 3,062,926 $2,993,411
----------- ----------
OPERATING EXPENSES 2,362,442 2,469,899
Interest portion of rentals (A) 18,225 19,061
Fixed charges of service company
subsidiaries (B) 2,160 2,912
----------- ----------
Net expense 2,342,057 2,447,926
----------- ----------
OTHER INCOME AND DEDUCTIONS:
Allowance for funds used
during construction 4,482 8,119
Other income/(expense), net (129,512) 17,300
Fixed charges of the GPU
International Group (C) 35,087 17,799
----------- ----------
Total other income and deductions (89,943) 43,218
----------- ----------
EARNINGS AVAILABLE FOR FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS (excluding
taxes based on income) $ 630,926 $ 588,703
=========== ==========
FIXED CHARGES:
Interest on funded indebtedness $ 174,407 $ 157,919
Other interest (D) 49,596 45,271
Preferred stock dividends of
subsidiaries on a pretax basis (F) 14,654 18,806
Interest portion of rentals (A) 18,225 19,061
----------- ----------
Total fixed charges $ 256,882 $ 241,057
=========== ==========
RATIO OF EARNINGS TO FIXED CHARGES 2.46 2.44
=========== ==========
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS (E) 2.46 2.44
=========== ==========
<PAGE>
Exhibit 12A
Page 2 of 2
GPU, INC. AND SUBSIDIARY COMPANIES
STATEMENTS SHOWING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS BASED ON SEC REGULATION S-K, ITEM 503
(In Thousands)
--------------
UNAUDITED
- ----------
NOTES:
(A) The Company has included the equivalent of the interest portion of all
rentals charged to income as fixed charges for this statement and has
excluded such components from Operating Expenses.
(B) Represents fixed charges of GPU Service, Inc. and GPU Nuclear, Inc.
which are accounted for as operating expenses in the Company's
consolidated income statement. The Company has removed the fixed
charges from operating expenses and included such amounts in fixed
charges as interest on funded indebtedness and other interest for this
statement.
(C) Represents fixed charges of the GPU International Group which are
accounted for as other income and deductions in the Company's
consolidated income statement. The Company has removed the fixed
charges from other income and deductions and included such amounts in
fixed charges as interest on funded indebtedness and other interest for
this statement.
(D) Includes dividends on subsidiary-obligated mandatorily redeemable
preferred securities of $21,666 and $21,666 for the nine month periods
ended September 30, 1997 and 1996, respectively.
(E) GPU, Inc., the parent holding company, does not have any preferred
stock outstanding, therefore, the ratio of earnings to combined fixed
charges and preferred stock dividends is the same as the ratio of
earnings to fixed charges.
(F) Calculation of preferred stock dividends of subsidiaries on a pretax
basis is as follows:
Nine Months Ended
-----------------
September 30, September 30,
1997 1996
---- ----
Income before provision for income taxes and
preferred stock dividends of subsidiaries
and gain on preferred stock reacquisition $388,698 $366,452
Income before preferred stock dividends of
subsidiaries and gain on preferred stock
reacquisition 251,682 229,475
Pretax earnings ratio 154.4% 159.7%
Preferred stock dividends of subsidiaries 9,491 11,776
Preferred stock dividends of subsidiaries on
a pretax basis 14,654 18,806
Exhibit 12B
Page 1 of 2
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
STATEMENTS SHOWING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS BASED ON SEC REGULATION S-K, ITEM 503
(In Thousands)
--------------
UNAUDITED
Nine Months Ended
September 30, September 30,
1997 1996
---- ----
OPERATING REVENUES $1,591,569 $1,583,432
---------- ----------
OPERATING EXPENSES 1,250,453 1,328,309
Interest portion of rentals (A) 8,039 8,299
---------- ----------
Net expense 1,242,414 1,320,010
---------- ----------
OTHER INCOME:
Allowance for funds used
during construction 1,823 5,316
Other income, net 2,122 4,668
---------- ----------
Total other income 3,945 9,984
---------- ----------
EARNINGS AVAILABLE FOR FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS (excluding
taxes based on income) $ 353,100 $ 273,406
========== ==========
FIXED CHARGES:
Interest on funded indebtedness $ 67,779 $ 66,921
Other interest (B) 19,705 17,005
Interest portion of rentals (A) 8,039 8,299
---------- ----------
Total fixed charges $ 95,523 $ 92,225
========== ==========
RATIO OF EARNINGS TO FIXED CHARGES 3.70 2.96
========== ==========
Preferred stock dividend requirement $ 8,638 $ 9,910
Ratio of income before provision for
income taxes to net income (C) 150.7% 148.0%
---------- ----------
Preferred stock dividend requirement
on a pretax basis 13,017 14,667
Fixed charges, as above 95,523 92,225
---------- ----------
Total fixed charges and
preferred stock dividends $ 108,540 $ 106,892
========== ==========
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS 3.25 2.56
========== ==========
<PAGE>
Exhibit 12B
Page 2 of 2
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
STATEMENTS SHOWING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS BASED ON SEC REGULATION S-K, ITEM 503
(In Thousands)
--------------
UNAUDITED
- ----------
NOTES:
(A) The Company has included the equivalent of the interest portion of all
rentals charged to income as fixed charges for this statement and has
excluded such components from Operating Expenses.
(B) Includes dividends on company-obligated mandatorily redeemable
preferred securities of $8,025 for the nine month periods ended
September 30, 1997 and 1996, respectively.
(C) Represents income before provision for income taxes of $257,577 and
$181,181 for the nine month periods ended September 30, 1997 and 1996,
respectively, divided by net income of $170,867 and $122,396,
respectively for the same periods.
Exhibit 12C
Page 1 of 2
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
STATEMENTS SHOWING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS BASED ON SEC REGULATION S-K, ITEM 503
(In Thousands)
--------------
UNAUDITED
Nine Months Ended
-----------------
September 30, September 30,
1997 1996
---- ----
OPERATING REVENUES $711,975 $687,823
-------- --------
OPERATING EXPENSES 531,742 554,862
Interest portion of rentals (A) 4,195 3,858
-------- --------
Net expense 527,547 551,004
-------- --------
OTHER INCOME AND DEDUCTIONS:
Allowance for funds used
during construction 1,032 938
Other income/(expense), net 2,408 69
-------- --------
Total other income and deductions 3,440 1,007
-------- --------
EARNINGS AVAILABLE FOR FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS (excluding
taxes based on income) $187,868 $137,826
======== ========
FIXED CHARGES:
Interest on funded indebtedness $ 33,275 $ 34,119
Other interest (B) 12,095 10,882
Interest portion of rentals (A) 4,195 3,858
-------- --------
Total fixed charges $ 49,565 $ 48,859
======== ========
RATIO OF EARNINGS TO FIXED CHARGES 3.79 2.82
======== ========
Preferred stock dividend requirement $ 362 $ 708
Ratio of income before provision for
income taxes to net income (C) 170.5% 180.7%
-------- --------
Preferred stock dividend requirement
on a pretax basis 617 1,279
Fixed charges, as above 49,565 48,859
-------- --------
Total fixed charges and
preferred stock dividends $ 50,182 $ 50,138
======== ========
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS 3.74 2.75
======== ========
<PAGE>
Exhibit 12C
Page 2 of 2
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
STATEMENTS SHOWING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS BASED ON SEC REGULATION S-K, ITEM 503
(In Thousands)
--------------
UNAUDITED
- ----------
NOTES:
(A) The Company has included the equivalent of the interest portion of all
rentals charged to income as fixed charges for this statement and has
excluded such components from Operating Expenses.
(B) Includes dividends on company-obligated mandatorily redeemable
preferred securities of $6,750 for the nine month periods ended
September 30, 1997 and 1996, respectively.
(C) Represents income before provision for income taxes of $138,303 and
$88,967 for the nine month periods ended September 30, 1997 and 1996,
respectively, divided by net income of $81,113 and $49,225,
respectively for the same periods.
Exhibit 12D
Page 1 of 2
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
STATEMENTS SHOWING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS BASED ON SEC REGULATION S-K, ITEM 503
(In Thousands)
--------------
UNAUDITED
Nine Months Ended
-----------------
September 30, September 30,
1997 1996
---- ----
OPERATING REVENUES $795,184 $ 772,260
-------- ---------
OPERATING EXPENSES 609,258 630,900
Interest portion of rentals (A) 3,120 3,454
-------- ---------
Net expense 606,138 627,446
-------- ---------
OTHER INCOME AND DEDUCTIONS:
Allowance for funds used
during construction 1,627 1,865
Other income/(expense), net 1,198 (735)
-------- ---------
Total other income and deductions 2,825 1,130
-------- ---------
EARNINGS AVAILABLE FOR FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS (excluding
taxes based on income) $191,871 $ 145,944
======== =========
FIXED CHARGES:
Interest on funded indebtedness $ 36,672 $ 37,276
Other interest (B) 13,095 12,339
Interest portion of rentals (A) 3,120 3,454
-------- ---------
Total fixed charges $ 52,887 $ 53,069
======== =========
RATIO OF EARNINGS TO FIXED CHARGES 3.63 2.75
======== =========
Preferred stock dividend requirement $ 491 $ 1,158
Ratio of income before provision for
income taxes to net income (C) 171.4% 168.9%
-------- ---------
Preferred stock dividend requirement
on a pretax basis 842 1,956
Fixed charges, as above 52,887 53,069
-------- ---------
Total fixed charges and
preferred stock dividends $ 53,729 $ 55,025
======== =========
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS 3.57 2.65
======== =========
<PAGE>
Exhibit 12D
Page 2 of 2
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
STATEMENTS SHOWING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS BASED ON SEC REGULATION S-K, ITEM 503
(In Thousands)
--------------
UNAUDITED
- ----------
NOTES:
(A) The Company has included the equivalent of the interest portion of all
rentals charged to income as fixed charges for this statement and has
excluded such components from Operating Expenses.
(B) Includes dividends on company-obligated mandatorily redeemable
preferred securities of $6,891 for the nine month periods ended
September 30, 1997 and 1996, respectively.
(C) Represents income before provision for income taxes of $138,984 and
$92,875 for the nine month periods ended September 30, 1997 and 1996,
respectively, divided by net income of $81,104 and $54,989,
respectively for the same periods.
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000040779
<NAME> GPU, INC.
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 6,313,363
<OTHER-PROPERTY-AND-INVEST> 1,556,258
<TOTAL-CURRENT-ASSETS> 1,003,611
<TOTAL-DEFERRED-CHARGES> 2,170,117
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 11,043,349
<COMMON> 314,458
<CAPITAL-SURPLUS-PAID-IN> 753,082
<RETAINED-EARNINGS> 2,188,770
<TOTAL-COMMON-STOCKHOLDERS-EQ> 3,173,919 <F1>
421,500 <F2>
66,478
<LONG-TERM-DEBT-NET> 3,211,509
<SHORT-TERM-NOTES> 243,300
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 91,385
<LONG-TERM-DEBT-CURRENT-PORT> 51,316
12,500
<CAPITAL-LEASE-OBLIGATIONS> 3,815
<LEASES-CURRENT> 149,281
<OTHER-ITEMS-CAPITAL-AND-LIAB> 3,618,346
<TOT-CAPITALIZATION-AND-LIAB> 11,043,349
<GROSS-OPERATING-REVENUE> 3,062,926
<INCOME-TAX-EXPENSE> 198,940
<OTHER-OPERATING-EXPENSES> 2,362,442
<TOTAL-OPERATING-EXPENSES> 2,561,382
<OPERATING-INCOME-LOSS> 501,544
<OTHER-INCOME-NET> (66,653)
<INCOME-BEFORE-INTEREST-EXPEN> 434,891
<TOTAL-INTEREST-EXPENSE> 192,700 <F3>
<NET-INCOME> 242,191
0
<EARNINGS-AVAILABLE-FOR-COMM> 242,191
<COMMON-STOCK-DIVIDENDS> 179,188
<TOTAL-INTEREST-ON-BONDS> 184,085
<CASH-FLOW-OPERATIONS> 540,210
<EPS-PRIMARY> 2.00
<EPS-DILUTED> 2.00
<FN>
<F1> INCLUDES REACQUIRED COMMON STOCK OF $82,391.
<F2> INCLUDES SUBSIDIARY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED
<F2> SECURITIES OF $330,000.
<F3> INCLUDES DIVIDENDS ON SUBSIDIARY-OBLIGATED MANDATORILY REDEEMABLE
<F3> PREFERRED SECURITIES OF $21,666 AND PREFERRED STOCK DIVIDENDS OF
<F3> SUBSIDIARIES OF $9,491.
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 00000053456
<NAME> JERSEY CENTRAL POWER & LIGHT COMPANY
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 2,879,470
<OTHER-PROPERTY-AND-INVEST> 439,794
<TOTAL-CURRENT-ASSETS> 441,262
<TOTAL-DEFERRED-CHARGES> 981,479
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 4,742,005
<COMMON> 153,713
<CAPITAL-SURPLUS-PAID-IN> 510,769
<RETAINED-EARNINGS> 892,230
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,556,712
216,500 <F1>
37,741
<LONG-TERM-DEBT-NET> 1,173,244
<SHORT-TERM-NOTES> 106,800
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 20,011
12,500
<CAPITAL-LEASE-OBLIGATIONS> 102
<LEASES-CURRENT> 86,214
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,532,181
<TOT-CAPITALIZATION-AND-LIAB> 4,742,005
<GROSS-OPERATING-REVENUE> 1,591,569
<INCOME-TAX-EXPENSE> 85,466
<OTHER-OPERATING-EXPENSES> 1,250,453
<TOTAL-OPERATING-EXPENSES> 1,335,919
<OPERATING-INCOME-LOSS> 255,650
<OTHER-INCOME-NET> 1,210
<INCOME-BEFORE-INTEREST-EXPEN> 256,860
<TOTAL-INTEREST-EXPENSE> 85,993 <F2>
<NET-INCOME> 170,867
8,638
<EARNINGS-AVAILABLE-FOR-COMM> 162,229
<COMMON-STOCK-DIVIDENDS> 95,000 <F3>
<TOTAL-INTEREST-ON-BONDS> 90,506
<CASH-FLOW-OPERATIONS> 298,705
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> INCLUDES COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED
<F1> SECURITIES OF $125,000.
<F2> INCLUDES DIVIDENDS ON COMPANY-OBLIGATED MANDATORILY REDEEMABLE
<F2> PREFERRED SECURITIES OF $8,025.
<F3> REPRESENTS COMMON STOCK DIVIDENDS PAID TO PARENT CORPORATION.
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 00000065350
<NAME> METROPOLITAN EDISON COMPANY
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,574,380
<OTHER-PROPERTY-AND-INVEST> 168,398
<TOTAL-CURRENT-ASSETS> 198,266
<TOTAL-DEFERRED-CHARGES> 572,936
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 2,513,980
<COMMON> 66,273
<CAPITAL-SURPLUS-PAID-IN> 370,200
<RETAINED-EARNINGS> 302,500
<TOTAL-COMMON-STOCKHOLDERS-EQ> 738,973
100,000 <F1>
12,056
<LONG-TERM-DEBT-NET> 576,923
<SHORT-TERM-NOTES> 23,900
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 41,156
<LONG-TERM-DEBT-CURRENT-PORT> 22
0
<CAPITAL-LEASE-OBLIGATIONS> 60
<LEASES-CURRENT> 40,609
<OTHER-ITEMS-CAPITAL-AND-LIAB> 980,281
<TOT-CAPITALIZATION-AND-LIAB> 2,513,980
<GROSS-OPERATING-REVENUE> 711,975
<INCOME-TAX-EXPENSE> 56,103
<OTHER-OPERATING-EXPENSES> 531,742
<TOTAL-OPERATING-EXPENSES> 587,845
<OPERATING-INCOME-LOSS> 124,130
<OTHER-INCOME-NET> 1,760
<INCOME-BEFORE-INTEREST-EXPEN> 125,890
<TOTAL-INTEREST-EXPENSE> 44,777 <F2>
<NET-INCOME> 81,113
362
<EARNINGS-AVAILABLE-FOR-COMM> 80,751
<COMMON-STOCK-DIVIDENDS> 45,000 <F3>
<TOTAL-INTEREST-ON-BONDS> 44,529
<CASH-FLOW-OPERATIONS> 138,461
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> REPRESENTS COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED
<F1> SECURITIES.
<F2> INCLUDES DIVIDENDS ON COMPANY-OBLIGATED MANDATORILY REDEEMABLE
<F2> PREFERRED SECURITIES OF $6,750.
<F3> REPRESENTS COMMON STOCK DIVIDENDS PAID TO PARENT CORPORATION.
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000077227
<NAME> PENNSYLVANIA ELECTRIC COMPANY
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,804,831
<OTHER-PROPERTY-AND-INVEST> 71,133
<TOTAL-CURRENT-ASSETS> 244,365
<TOTAL-DEFERRED-CHARGES> 457,945
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 2,578,274
<COMMON> 105,812
<CAPITAL-SURPLUS-PAID-IN> 285,486
<RETAINED-EARNINGS> 400,669
<TOTAL-COMMON-STOCKHOLDERS-EQ> 791,967
105,000 <F1>
16,681
<LONG-TERM-DEBT-NET> 676,444
<SHORT-TERM-NOTES> 33,300
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 50,229
<LONG-TERM-DEBT-CURRENT-PORT> 30,011
0
<CAPITAL-LEASE-OBLIGATIONS> 3,443
<LEASES-CURRENT> 21,096
<OTHER-ITEMS-CAPITAL-AND-LIAB> 850,103
<TOT-CAPITALIZATION-AND-LIAB> 2,578,274
<GROSS-OPERATING-REVENUE> 795,184
<INCOME-TAX-EXPENSE> 57,371
<OTHER-OPERATING-EXPENSES> 609,258
<TOTAL-OPERATING-EXPENSES> 666,629
<OPERATING-INCOME-LOSS> 128,555
<OTHER-INCOME-NET> 853
<INCOME-BEFORE-INTEREST-EXPEN> 129,408
<TOTAL-INTEREST-EXPENSE> 48,304 <F2>
<NET-INCOME> 81,104
491
<EARNINGS-AVAILABLE-FOR-COMM> 80,613
<COMMON-STOCK-DIVIDENDS> 45,000 <F3>
<TOTAL-INTEREST-ON-BONDS> 49,050
<CASH-FLOW-OPERATIONS> 123,069
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> REPRESENTS COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED
<F1> SECURITIES OF $105,000.
<F2> INCLUDES DIVIDENDS ON COMPANY-OBLIGATED MANDATORILY REDEEMABLE
<F2> PREFERRED SECURITIES OF $6,891.
<F3> REPRESENTS COMMON STOCK DIVIDENDS PAID TO PARENT CORPORATION.
</FN>
</TABLE>
