UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 (201) 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 July 31, 1997, was as follows:
Shares
Registrant Title Outstanding
GPU, Inc. Common Stock, $2.50 par value 120,747,290
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
June 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 Financial Statements 19
Combined Management's Discussion and Analysis
of Financial Condition and Results of
Operations 45
PART II - Other Information 67
Signatures 68
_________________________________
The financial statements (not examined by independent accountants) reflect
all adjustments (which consist of only normal recurring accruals) which are,
in the opinion of management, necessary for a fair statement of the results
for the interim periods presented.
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
<TABLE>
In Thousands
June 30, December 31,
1997 1996
(Unaudited)
<CAPTION>
<S> <C> <C>
ASSETS
Utility Plant:
In service, at original cost $ 9,814,396 $ 9,646,380
Less, accumulated depreciation 3,854,660 3,704,026
Net utility plant in service 5,959,736 5,942,354
Construction work in progress 213,248 277,440
Other, net 177,686 168,029
Net utility plant 6,350,670 6,387,823
Other Property and Investments:
GPU International Group investments, net 1,028,009 924,397
Nuclear decommissioning trusts, at market 510,974 464,011
Nuclear fuel disposal trust, at market 103,508 101,661
Other, net 53,048 51,122
Total other property and investments 1,695,539 1,541,191
Current Assets:
Cash and temporary cash investments 44,928 31,604
Special deposits 13,320 47,545
Accounts receivable:
Customers, net 256,933 270,844
Other 96,940 91,637
Unbilled revenues 154,219 114,891
Materials and supplies, at average cost or less:
Construction and maintenance 188,497 187,130
Fuel 46,678 40,207
Deferred income taxes 25,830 32,148
Prepayments 189,095 81,168
Other 271 -
Total current assets 1,016,711 897,174
Deferred Debits and Other Assets:
Regulatory assets:
Three Mile Island Unit 2 deferred costs 353,119 356,517
Income taxes recoverable through future rates 524,546 527,385
Nonutility generation contract buyout costs 244,568 242,481
Unamortized property losses 103,497 100,310
Other 439,265 426,579
Total regulatory assets 1,664,995 1,653,272
Deferred income taxes 335,643 332,828
Other 139,109 128,931
Total deferred debits and other assets 2,139,747 2,115,031
Total Assets $11,202,667 $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
June 30, December 31,
1997 1996
(Unaudited)
<CAPTION>
<S> <C> <C>
LIABILITIES AND CAPITAL
Capitalization:
Common stock $ 314,458 $ 314,458
Capital surplus 753,423 750,569
Retained earnings 2,172,288 2,068,976
Total 3,240,169 3,134,003
Less, reacquired common stock, at cost 83,795 86,416
Total common stockholders' equity 3,156,374 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 3,229,688 3,177,016
Total capitalization 6,874,040 6,735,081
Current Liabilities:
Securities due within one year 111,001 178,583
Notes payable 442,664 265,547
Obligations under capital leases 148,282 143,818
Accounts payable 351,888 354,819
Taxes accrued 20,792 25,717
Deferred energy 24,456 15,559
Interest accrued 68,269 70,370
Other 262,694 282,193
Total current liabilities 1,430,046 1,336,606
Deferred Credits and Other Liabilities:
Deferred income taxes 1,572,487 1,562,979
Unamortized investment tax credits 128,070 133,572
Three Mile Island Unit 2 future costs 439,164 430,508
Regulatory liabilities 91,419 89,815
Other 667,441 652,658
Total deferred credits and other liabilities 2,898,581 2,869,532
Commitments and Contingencies (Note 1)
Total Liabilities and Capital $11,202,667 $10,941,219
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
GPU, INC. AND SUBSIDIARY COMPANIES
Consolidated Statements of Income
(Unaudited)
In Thousands
(Except Per Share Data)
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
<CAPTION>
<S> <C> <C> <C> <C>
Operating Revenues $ 927,264 $ 912,254 $1,969,328 $1,935,188
Operating Expenses:
Fuel 86,811 88,274 181,812 186,769
Power purchased and interchanged 238,107 213,485 488,819 490,882
Deferral of energy costs, net 478 6,686 6,729 9,840
Other operation and maintenance 239,023 241,756 438,628 468,353
Depreciation and amortization 113,231 97,921 226,570 194,507
Taxes, other than income taxes 81,746 83,294 176,403 174,783
Total operating expenses 759,396 731,416 1,518,961 1,525,134
Operating Income Before Income Taxes 167,868 180,838 450,367 410,054
Income taxes 38,894 46,085 127,234 114,095
Operating Income 128,974 134,753 323,133 295,959
Other Income and Deductions:
Allowance for other funds used during
construction 313 1,255 661 2,484
Other income, net 8,518 1,271 33,021 11,580
Income taxes (1,892) 57 (2,918) (3,945)
Total other income and deductions 6,939 2,583 30,764 10,119
Income Before Interest Charges
and Preferred Dividends 135,913 137,336 353,897 306,078
Interest Charges and Preferred Dividends:
Interest on long-term debt 45,721 45,996 91,858 92,608
Other interest 10,805 8,671 18,150 12,979
Allowance for borrowed funds used
during construction (1,258) (1,962) (2,443) (3,823)
Dividends on subsidiary-obligated mandatorily
redeemable preferred securities 7,222 7,222 14,444 14,444
Preferred stock dividends of subsidiaries 3,174 3,784 6,601 7,992
Total interest charges and
preferred dividends 65,664 63,711 128,610 124,200
Net Income $ 70,249 $ 73,625 $ 225,287 $ 181,878
Earnings Per Average Common Share $ .58 $ .61 $ 1.86 $ 1.51
Average Common Shares Outstanding 120,952 120,700 120,921 120,670
Cash Dividends Paid Per Share $ .500 $ .485 $ .985 $ .955
The accompanying notes are an integral part of the consolidated financial statements.
5
</TABLE>
<PAGE>
<TABLE>
GPU, INC. AND SUBSIDIARY COMPANIES
Consolidated Statements of Cash Flows
(Unaudited)
In Thousands
Six Months
Ended June 30,
1997 1996
<CAPTION>
<S> <C> <C>
Operating Activities:
Net income $ 225,287 $ 181,878
Adjustments to reconcile income to cash provided:
Depreciation and amortization 239,640 202,995
Amortization of property under capital leases 27,642 29,689
Equity in undistributed (earnings)/losses
of affiliates (52,314) (2,596)
Nuclear outage maintenance costs, net 13,499 14,443
Deferred income taxes and investment tax
credits, net 5,188 15,181
Deferred energy costs, net 6,729 9,680
Accretion income (5,380) (5,805)
Allowance for other funds used
during construction (661) (2,484)
Changes in working capital:
Receivables (29,830) (25,244)
Materials and supplies (7,866) 3,351
Special deposits and prepayments (110,456) (186,303)
Payables and accrued liabilities (20,682) (10,992)
Nonutility generation contract buyout costs (46,550) (69,450)
Other, net (15,312) (23,024)
Net cash provided by operating activities 228,934 131,319
Investing Activities:
Cash construction expenditures (158,462) (173,018)
Contributions to decommissioning trusts (20,601) (20,515)
GPU International Group investments (87,213) (488,324)
Other, net 36,733 16,684
Net cash used for investing activities (229,543) (665,173)
Financing Activities:
Issuance of long-term debt 114,271 530,734
Increase in notes payable, net 168,206 298,352
Retirement of long-term debt (103,129) (98,706)
Capital lease principal payments (26,587) (28,698)
Redemption of preferred stock of subsidiaries (20,000) (20,000)
Dividends paid on common stock (118,828) (115,032)
Net cash provided by financing activities 13,933 566,650
Net increase in cash and temporary
cash investments from above activities 13,324 32,796
Cash and temporary cash investments, beginning of year 31,604 18,422
Cash and temporary cash investments, end of period $ 44,928 $ 51,218
Supplemental Disclosure:
Interest and preferred dividends paid $ 151,079 $ 132,441
Income taxes paid $ 112,718 $ 113,083
New capital lease obligations incurred $ 30,123 $ 28,907
Common stock dividends declared but not paid $ 60,361 $ 58,452
The accompanying notes are an integral part of the consolidated financial statements.
6
</TABLE>
<PAGE>
<TABLE>
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
Consolidated Balance Sheets
In Thousands
June 30, December 31,
1997 1996
(Unaudited)
<CAPTION>
<S> <C> <C>
ASSETS
Utility Plant:
In service, at original cost $4,610,967 $4,528,676
Less, accumulated depreciation 1,902,186 1,811,620
Net utility plant in service 2,708,781 2,717,056
Construction work in progress 90,102 106,512
Other, net 105,274 111,116
Net utility plant 2,904,157 2,934,684
Other Property and Investments:
Nuclear decommissioning trusts, at market 305,116 278,342
Nuclear fuel disposal trust, at market 103,508 101,661
Other, net 8,586 8,305
Total other property and investments 417,210 388,308
Current Assets:
Cash and temporary cash investments 8,741 1,321
Special deposits 6,927 6,939
Accounts receivable:
Customers, net 129,081 135,655
Other 30,942 33,228
Unbilled revenues 73,195 56,522
Materials and supplies, at average cost or less:
Construction and maintenance 93,059 92,761
Fuel 17,630 19,257
Deferred income taxes 21,045 22,509
Prepayments 123,356 21,150
Total current assets 503,976 389,342
Deferred Debits and Other Assets:
Regulatory assets:
Income taxes recoverable through future rates 145,249 142,726
Nonutility generation contract buyout costs 146,500 139,000
Three Mile Island Unit 2 deferred costs 117,833 126,448
Unamortized property losses 98,173 94,767
Other 320,100 326,620
Total regulatory assets 827,855 829,561
Deferred income taxes 144,187 138,903
Other 20,859 29,121
Total deferred debits and other assets 992,901 997,585
Total Assets $4,818,244 $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
June 30, December 31,
1997 1996
(Unaudited)
<CAPTION>
<S> <C> <C>
LIABILITIES AND CAPITAL
Capitalization:
Common stock $ 153,713 $ 153,713
Capital surplus 510,769 510,769
Retained earnings 872,521 825,001
Total common stockholder's equity 1,537,003 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 1,173,196 1,173,091
Total capitalization 2,964,440 2,939,315
Current Liabilities:
Securities due within one year 58,384 110,075
Notes payable 193,293 31,800
Obligations under capital leases 89,650 96,150
Accounts payable:
Affiliates 32,729 71,761
Other 96,350 94,258
Taxes accrued 1,917 2,063
Deferred energy credits 24,456 15,559
Interest accrued 27,223 28,350
Other 78,729 80,195
Total current liabilities 602,731 530,211
Deferred Credits and Other Liabilities:
Deferred income taxes 669,557 664,440
Unamortized investment tax credits 56,793 59,893
Three Mile Island Unit 2 future costs 109,816 107,652
Nuclear fuel disposal fee 130,926 127,543
Regulatory liabilities 36,912 33,250
Other 247,069 247,615
Total deferred credits and other liabilities 1,251,073 1,240,393
Commitments and Contingencies (Note 1)
Total Liabilities and Capital $4,818,244 $4,709,919
The accompanying notes are an integral part of the consolidated financial statements.
8
</TABLE>
<PAGE>
<TABLE>
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
Consolidated Statements of Income
(Unaudited)
In Thousands
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
<CAPTION>
<S> <C> <C> <C> <C>
Operating Revenues $ 478,226 $ 475,884 $ 988,669 $1,005,158
Operating Expenses:
Fuel 21,781 23,939 46,070 52,226
Power purchased and interchanged:
Affiliates 2,839 9,640 7,206 13,223
Others 138,162 118,389 279,106 282,249
Deferral of energy and capacity costs, net 478 10,521 6,729 14,737
Other operation and maintenance 114,472 120,863 216,277 237,342
Depreciation and amortization 59,428 50,286 121,238 100,238
Taxes, other than income taxes 53,668 55,388 112,828 115,360
Total operating expenses 390,828 389,026 789,454 815,375
Operating Income Before Income Taxes 87,398 86,858 199,215 189,783
Income taxes 16,747 19,108 46,092 44,672
Operating Income 70,651 67,750 153,123 145,111
Other Income and Deductions:
Allowance for other funds used during
construction 136 979 267 1,982
Other income/(expense), net (3,310) (324) 147 1,818
Income taxes (2,418) (184) (2,827) (1,235)
Total other income and deductions (5,592) 471 (2,413) 2,565
Income Before Interest Charges and
Dividends on Preferred Securities 65,059 68,221 150,710 147,676
Interest Charges and Dividends
on Preferred Securities:
Interest on long-term debt 22,577 22,203 45,345 44,717
Other interest 5,167 4,086 7,658 5,009
Allowance for borrowed funds used
during construction (601) (1,124) (1,204) (2,277)
Dividends on company-obligated mandatorily
redeemable preferred securities 2,675 2,675 5,350 5,350
Total interest charges and dividends
on preferred securities 29,818 27,840 57,149 52,799
Net Income 35,241 40,381 93,561 94,877
Preferred stock dividends 2,879 3,162 6,041 6,748
Earnings Available for Common Stock $ 32,362 $ 37,219 $ 87,520 $ 88,129
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
9
<PAGE>
<TABLE>
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
Consolidated Statements of Cash Flows
(Unaudited)
In Thousands
Six Months
Ended June 30,
1997 1996
<CAPTION>
<S> <C> <C>
Operating Activities:
Net income $ 93,561 $ 94,877
Adjustments to reconcile income to cash provided:
Depreciation and amortization 127,837 105,803
Amortization of property under capital leases 15,294 15,924
Nuclear outage maintenance costs, net 9,487 9,938
Deferred income taxes and investment tax
credits, net (6,224) 9,598
Deferred energy and capacity costs, net 6,729 14,732
Accretion income (5,380) (5,805)
Allowance for other funds used
during construction (267) (1,982)
Changes in working capital:
Receivables (7,813) (3,800)
Materials and supplies 1,329 4,631
Special deposits and prepayments (102,194) (122,855)
Payables and accrued liabilities (33,305) (33,727)
Nonutility generation contract buyout costs (30,500) (65,000)
Other, net 4,777 (521)
Net cash provided by operating activities 73,331 21,813
Investing Activities:
Cash construction expenditures (78,509) (76,395)
Contributions to decommissioning trusts (9,016) (9,303)
Other, net (5,659) (2,984)
Net cash used for investing activities (93,184) (88,682)
Financing Activities:
Increase in notes payable, net 161,493 189,000
Retirement of long-term debt (54,191) (25,701)
Capital lease principal payments (13,705) (15,527)
Redemption of preferred stock (20,000) (20,000)
Dividends paid on common stock (40,000) (50,000)
Dividends paid on preferred stock (6,324) (7,172)
Net cash provided by financing activities 27,273 70,600
Net increase in cash and temporary
cash investments from above activities 7,420 3,731
Cash and temporary cash investments, beginning of year 1,321 922
Cash and temporary cash investments, end of period $ 8,741 $ 4,653
Supplemental Disclosure:
Interest paid $ 57,684 $ 53,116
Income taxes paid $ 63,634 $ 55,828
New capital lease obligations incurred $ 8,187 $ 27,984
The accompanying notes are an integral part of the consolidated financial statements.
10
</TABLE>
<PAGE>
<TABLE>
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
In Thousands
June 30, December 31,
1997 1996
(Unaudited)
<CAPTION>
<S> <C> <C>
ASSETS
Utility Plant:
In service, at original cost $2,371,376 $2,297,100
Less, accumulated depreciation 873,392 841,398
Net utility plant in service 1,497,984 1,455,702
Construction work in progress 42,778 98,171
Other, net 42,278 31,000
Net utility plant 1,583,040 1,584,873
Other Property and Investments:
Nuclear decommissioning trusts, at market 145,542 131,475
Other, net 11,404 11,261
Total other property and investments 156,946 142,736
Current Assets:
Cash and temporary cash investments 6,238 1,901
Special deposits 1,216 1,052
Accounts receivable:
Customers, net 54,734 61,522
Other 30,732 17,368
Unbilled revenues 37,467 27,019
Materials and supplies, at average cost or less:
Construction and maintenance 39,903 39,739
Fuel 12,835 11,026
Deferred income taxes 1,556 7,073
Prepayments 27,229 17,254
Total current assets 211,910 183,954
Deferred Debits and Other Assets:
Regulatory assets:
Income taxes recoverable through future rates 172,220 174,636
Three Mile Island Unit 2 deferred costs 147,806 144,782
Nonutility generation contract buyout costs 81,368 86,781
Other 70,723 56,184
Total regulatory assets 472,117 462,383
Deferred income taxes 88,004 85,169
Other 17,538 13,863
Total deferred debits and other assets 577,659 561,415
Total Assets $2,529,555 $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
June 30, December 31,
1997 1996
(Unaudited)
<CAPTION>
<S> <C> <C>
LIABILITIES AND CAPITAL
Capitalization:
Common stock $ 66,273 $ 66,273
Capital surplus 370,200 370,200
Retained earnings 293,958 264,044
Total common stockholder's equity 730,431 700,517
Cumulative preferred stock 12,056 12,056
Company-obligated mandatorily
redeemable preferred securities 100,000 100,000
Long-term debt 576,944 563,252
Total capitalization 1,419,431 1,375,825
Current Liabilities:
Securities due within one year 20,020 40,020
Notes payable 59,550 50,667
Obligations under capital leases 37,523 29,964
Accounts payable:
Affiliates 39,236 27,556
Other 91,038 89,857
Taxes accrued 7,564 11,222
Interest accrued 17,937 18,279
Other 41,454 45,825
Total current liabilities 314,322 313,390
Deferred Credits and Other Liabilities:
Deferred income taxes 408,701 401,104
Three Mile Island Unit 2 future costs 219,532 215,204
Unamortized investment tax credits 30,682 31,584
Nuclear fuel disposal fee 29,575 28,811
Regulatory liabilities 25,396 25,981
Other 81,916 81,079
Total deferred credits and other liabilities 795,802 783,763
Commitments and Contingencies (Note 1)
Total Liabilities and Capital $2,529,555 $2,472,978
The accompanying notes are an integral part of the consolidated financial statements.
12
</TABLE>
<PAGE>
<TABLE>
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statements of Income
(Unaudited)
In Thousands
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
<CAPTION>
<S> <C> <C> <C> <C>
Operating Revenues $ 208,554 $ 207,058 $ 463,814 $ 444,746
Operating Expenses:
Fuel 22,037 22,054 46,526 47,967
Power purchased and interchanged:
Affiliates 2,610 4,848 6,957 11,748
Others 49,560 48,849 105,200 102,274
Deferral of energy costs, net - (4,069) - (1,985)
Other operation and maintenance 57,376 55,609 103,032 106,138
Depreciation and amortization 26,098 24,301 51,931 48,303
Taxes, other than income taxes 13,054 12,445 29,754 28,032
Total operating expenses 170,735 164,037 343,400 342,477
Operating Income Before Income Taxes 37,819 43,021 120,414 102,269
Income taxes 9,516 11,892 37,998 32,748
Operating Income 28,303 31,129 82,416 69,521
Other Income and Deductions:
Allowance for other funds used during
construction 122 44 301 87
Other income/(expense), net 1,761 (52) 2,104 174
Income taxes (897) 114 (922) 81
Total other income and deductions 986 106 1,483 342
Income Before Interest Charges and
Dividends on Preferred Securities 29,289 31,235 83,899 69,863
Interest Charges and Dividends
on Preferred Securities:
Interest on long-term debt 11,040 11,470 22,294 22,937
Other interest 1,960 932 3,628 2,031
Allowance for borrowed funds used
during construction (164) (223) (411) (448)
Dividends on company-obligated mandatorily
redeemable preferred securities 2,250 2,250 4,500 4,500
Total interest charges and dividends
on preferred securities 15,086 14,429 30,011 29,020
Net Income 14,203 16,806 53,888 40,843
Preferred stock dividends 121 236 242 472
Earnings Available for Common Stock $ 14,082 $ 16,570 $ 53,646 $ 40,371
The accompanying notes are an integral part of the consolidated financial statements.
13
</TABLE>
<PAGE>
<TABLE>
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statements of Cash Flows
(Unaudited)
In Thousands
Six Months
Ended June 30,
1997 1996
<CAPTION>
<S> <C> <C>
Operating Activities:
Net income $ 53,888 $ 40,843
Adjustments to reconcile income to cash provided:
Depreciation and amortization 56,400 46,991
Amortization of property under capital leases 7,276 7,843
Nuclear outage maintenance costs, net 2,673 3,007
Deferred income taxes and investment tax
credits, net 10,244 3,410
Deferred energy costs, net - (1,985)
Allowance for other funds used
during construction (301) (87)
Changes in working capital:
Receivables (17,024) 14,744
Materials and supplies (1,973) 1,051
Special deposits and prepayments (10,139) (25,964)
Payables and accrued liabilities 10,795 9,360
Nonutility generation contract buyout costs (11,050) (4,450)
Other, net (20,393) (12,230)
Net cash provided by operating activities 80,396 82,533
Investing Activities:
Cash construction expenditures (36,630) (37,355)
Contributions to decommissioning trusts (8,877) (8,562)
Other, net (23) (1,256)
Net cash used for investing activities (45,530) (47,173)
Financing Activities:
Issuance of long-term debt 13,577 -
Increase in notes payable, net 8,883 12,598
Retirement of long-term debt (20,000) (15,000)
Capital lease principal payments (7,632) (7,382)
Dividends paid on common stock (25,000) (25,000)
Dividends paid on preferred stock (357) (472)
Net cash required by financing activities (30,529) (35,256)
Net increase in cash and temporary cash
investments from above activities 4,337 104
Cash and temporary cash investments, beginning of year 1,901 1,810
Cash and temporary cash investments, end of period $ 6,238 $ 1,914
Supplemental Disclosure:
Interest paid $ 29,675 $ 28,550
Income taxes paid $ 30,349 $ 24,975
New capital lease obligations incurred $ 14,613 $ 611
The accompanying notes are an integral part of the consolidated financial statements.
14
</TABLE>
<PAGE>
<TABLE>
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
In Thousands
June 30, December 31,
1997 1996
(Unaudited)
<CAPTION>
<S> <C> <C>
ASSETS
Utility Plant:
In service, at original cost $2,748,510 $2,738,223
Less, accumulated depreciation 1,048,307 1,022,553
Net utility plant in service 1,700,203 1,715,670
Construction work in progress 80,368 72,757
Other, net 28,124 22,910
Net utility plant 1,808,695 1,811,337
Other Property and Investments:
Nuclear decommissioning trusts, at market 60,316 54,194
Other, net 7,488 7,271
Total other property and investments 67,804 61,465
Current Assets:
Cash and temporary cash investments 4,027 -
Special deposits 2,379 2,348
Accounts receivable:
Customers, net 73,118 73,190
Other 22,723 15,151
Unbilled revenues 43,557 31,350
Materials and supplies, at average cost or less:
Construction and maintenance 49,940 49,007
Fuel 16,213 9,924
Deferred income taxes 467 -
Prepayments 39,429 36,930
Total current assets 251,853 217,900
Deferred Debits and Other Assets:
Regulatory assets:
Income taxes recoverable through future rates 207,077 210,023
Three Mile Island Unit 2 deferred costs 87,480 85,287
Other 71,898 67,128
Total regulatory assets 366,455 362,438
Deferred income taxes 58,730 67,099
Other 16,446 14,826
Total deferred debits and other assets 441,631 444,363
Total Assets $2,569,983 $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
June 30, December 31,
1997 1996
(Unaudited)
<CAPTION>
<S> <C> <C>
LIABILITIES AND CAPITAL
Capitalization:
Common stock $ 105,812 $ 105,812
Capital surplus 285,486 285,486
Retained earnings 395,799 363,702
Total common stockholder's equity 787,097 755,000
Cumulative preferred stock 16,681 16,681
Company-obligated mandatorily
redeemable preferred securities 105,000 105,000
Long-term debt 676,455 656,459
Total capitalization 1,585,233 1,533,140
Current Liabilities:
Securities due within one year 30,010 26,010
Notes payable 85,921 107,680
Obligations under capital leases 19,600 15,881
Accounts payable:
Affiliates 28,048 20,432
Other 48,966 53,424
Taxes accrued 12,469 11,223
Interest accrued 19,426 19,192
Vacations accrued 6,178 5,172
Other 6,432 12,052
Total current liabilities 257,050 271,066
Deferred Credits and Other Liabilities:
Deferred income taxes 467,343 473,268
Three Mile Island Unit 2 future costs 109,816 107,652
Unamortized investment tax credits 40,595 42,095
Nuclear fuel disposal fee 14,788 14,406
Regulatory liabilities 30,543 31,694
Other 64,615 61,744
Total deferred credits and other liabilities 727,700 730,859
Commitments and Contingencies (Note 1)
Total Liabilities and Capital $2,569,983 $2,535,065
The accompanying notes are an integral part of the consolidated financial statements.
16
</TABLE>
<PAGE>
<TABLE>
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statements of Income
(Unaudited)
In Thousands
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
<CAPTION>
<S> <C> <C> <C> <C>
Operating Revenues $ 247,862 $ 246,788 $ 537,615 $ 516,117
Operating Expenses:
Fuel 42,993 42,281 89,216 86,576
Power purchased and interchanged:
Affiliates 422 722 2,074 2,079
Others 50,385 46,247 104,513 106,359
Deferral of energy costs, net - 234 - (2,912)
Other operation and maintenance 64,447 65,916 118,335 125,815
Depreciation and amortization 27,705 23,334 53,401 45,966
Taxes, other than income taxes 15,024 15,461 33,821 31,391
Total operating expenses 200,976 194,195 401,360 395,274
Operating Income Before Income Taxes 46,886 52,593 136,255 120,843
Income taxes 12,631 15,085 43,144 36,675
Operating Income 34,255 37,508 93,111 84,168
Other Income and Deductions:
Allowance for other funds used during
construction 55 232 93 415
Other income/(expense), net 1,110 59 1,255 (802)
Income taxes (427) 64 (496) 62
Total other income and deductions 738 355 852 (325)
Income Before Interest Charges and
Dividends on Preferred Securities 34,993 37,863 93,963 83,843
Interest Charges and Dividends
on Preferred Securities:
Interest on long-term debt 12,104 12,323 24,219 24,954
Other interest 2,244 2,249 4,243 3,269
Allowance for borrowed funds used
during construction (493) (615) (828) (1,098)
Dividends on company-obligated mandatorily
redeemable preferred securities 2,297 2,297 4,594 4,594
Total interest charges and dividends
on preferred securities 16,152 16,254 32,228 31,719
Net Income 18,841 21,609 61,735 52,124
Preferred stock dividends 174 386 318 772
Earnings Available for Common Stock $ 18,667 $ 21,223 $ 61,417 $ 51,352
The accompanying notes are an integral part of the consolidated financial statements.
17
</TABLE>
<PAGE>
<TABLE>
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statements of Cash Flows
(Unaudited)
In Thousands
Six Months
Ended June 30,
1997 1996
<CAPTION>
<S> <C> <C>
Operating Activities:
Net income $ 61,735 $ 52,124
Adjustments to reconcile income to cash provided:
Depreciation and amortization 49,396 44,681
Amortization of property under capital leases 4,079 4,415
Nuclear outage maintenance costs, net 1,339 1,498
Deferred income taxes and investment tax
credits, net 1,711 2,516
Deferred energy costs, net - (3,067)
Allowance for other funds used
during construction (93) (415)
Changes in working capital:
Receivables (19,707) (2,247)
Materials and supplies (7,222) (2,331)
Special deposits and prepayments (2,530) (34,990)
Payables and accrued liabilities 5,290 (25,950)
Nonutility generation contract buyout costs (5,000) -
Other, net (7,867) 7,667
Net cash provided by operating activities 81,131 43,901
Investing Activities:
Cash construction expenditures (41,908) (59,524)
Contributions to decommissioning trusts (2,708) (2,650)
Other, net - (979)
Net cash used for investing activities (44,616) (63,153)
Financing Activities:
Issuance of long-term debt 49,875 -
Increase/(Decrease) in notes payable, net (21,759) 82,125
Retirement of long-term debt (26,000) (25,000)
Capital lease principal payments (4,257) (4,282)
Dividends paid on common stock (30,000) (30,000)
Dividends paid on preferred stock (347) (772)
Net cash provided/(required) by
financing activities (32,488) 22,071
Net increase in cash and temporary
cash investments from above activities 4,027 2,819
Cash and temporary cash investments, beginning of year - 1,367
Cash and temporary cash investments, end of period $ 4,027 $ 4,186
Supplemental Disclosure:
Interest paid $ 31,426 $ 30,194
Income taxes paid $ 31,278 $ 30,734
New capital lease obligations incurred $ 7,323 $ 312
The accompanying notes are an integral part of the consolidated financial statements.
18
</TABLE>
<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 June 30, 1997 and December
31, 1996, the GPU Energy companies' net investment in TMI-1 and Oyster Creek,
including nuclear fuel, was as follows:
19
<PAGE>
GPU, Inc. and Subsidiary Companies
Net Investment (in millions)
TMI-1 Oyster Creek
June 30, 1997
JCP&L $157 $732
Met-Ed 303 -
Penelec 149 -
Total $609 $732
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 June 30, 1997 and
December 31, 1996 was $85 million and $90 million, respectively (JCP&L $76
million and $81 million, respectively; Met-Ed $1 million and $1 million,
respectively; Penelec $8 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
20
<PAGE>
GPU, Inc. and Subsidiary Companies
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.
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
21
<PAGE>
GPU, Inc. and Subsidiary Companies
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. There can be no assurance as to the outcome of this
litigation.
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 U.S. 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 $ 69 $227
Met-Ed 87 139 -
Penelec 44 69 -
Total $175 $277 $227
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.
22
<PAGE>
GPU, Inc. and Subsidiary Companies
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):
(in millions)
Oyster
GPU TMI-1 TMI-2 Creek
Radiological decommissioning $320 $388 $376
Nonradiological cost of removal 79 35 * 35
Total $399 $423 $411
* Net of $8.8 million spent as of June 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 has already been recognized,
based on the 1995 site-specific study (in 1997 dollars) since the plant is no
23
<PAGE>
GPU, Inc. and Subsidiary Companies
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
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 six months ended June
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 six
months ended June 30, 1997:
JCP&L $ 1 $ 7
Met-Ed 5 -
Penelec 2 -
$ 8 $ 7
(in millions)
Oyster
TMI-1 Creek
Accumulated depreciation
provision at June 30, 1997:
JCP&L $ 33 $192
Met-Ed 58 -
Penelec 24 -
$115 $192
24
<PAGE>
GPU, Inc. and Subsidiary Companies
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 June 30, 1997 and December 31, 1996 are as follows:
(in millions)
GPU JCP&L Met-Ed Penelec
June 30, 1997 $439 $110 $219 $110
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 $17 million (JCP&L $4 million; Met-Ed
$9 million; Penelec $4 million) as of June 30, 1997 and 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 $439 million liability at June 30, 1997 is $267 million
(JCP&L $41 million; Met-Ed $146 million; Penelec $80 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 $196
million (JCP&L $79 million; Met-Ed $84 million; Penelec $33 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 six months ended June 30, 1997 amounted to $7 million
(JCP&L $1,564 thousand; Met-Ed $4,942 thousand; Penelec $485 thousand).
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 June 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
25
<PAGE>
GPU, Inc. and Subsidiary Companies
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.
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 $53 million (JCP&L $32
million; Met-Ed $14 million; Penelec $7 million) in any one year under
insurance policies applicable to nuclear operations and facilities.
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GPU, Inc. and Subsidiary Companies
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.
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 June 30, 1997,
JCP&L's net investment in Oyster Creek was $766 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 plans 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 the end of the first quarter of
1998. The NJBPU has stated that it intends to complete its review of JCP&L's
plans so as to permit retail competition to begin in October 1998. There can
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GPU, Inc. and Subsidiary Companies
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 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
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 719 355 171 193
1998 691 340 152 199
1999 706 344 152 210
2000 804 347 196 261
2001 873 353 225 295
* Actual.
** The 1997 amounts consist of actual payments through June 30, 1997 and
estimated payments for the remainder of the year.
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GPU, Inc. and Subsidiary Companies
As of June 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 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. Met-Ed and Penelec plan to fund the cash payments through
the issuance of PaPUC approved securitized transition bonds (see Competitive
Environment section, Management's Discussion and Analysis). Met-Ed and
Penelec are currently evaluating several bids and expect to notify winning
bidders in the third quarter of 1997.
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
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GPU, Inc. and Subsidiary Companies
contract unit cost is estimated to escalate approximately 4.0% 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 averages approximately 95% natural
gas.
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 averages
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
averages approximately 65% to 95% coal/waste coal.
In February 1997, Met-Ed and Penelec entered into restructured 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. In June
1997, the restructured power purchase agreements were submitted to the PaPUC
for approval and consideration of the related buyout costs were incorporated
into the restructuring proceedings by PaPUC order. Met-Ed has paid a total of
$63.5 million to previous developers and AES to terminate the original power
purchase agreements. If the restructured 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 $8.3 million, respectively.
Penelec has entered into a restructured power purchase agreement with the
developer of a proposed 80 MW coal-fired cogeneration facility. The
restructured power purchase agreement is subject to PaPUC approval. Penelec
has paid the developer $11.7 million to terminate the original power purchase
agreement. Penelec has agreed to pay the developer up to an additional $5
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GPU, Inc. and Subsidiary Companies
million, if the PaPUC does not approve the agreement or issues an order that
is not acceptable to Penelec.
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 June
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)
June 30, December 31,
1997 1996
Income taxes recoverable through
future rates $ 524,546 $ 527,385
TMI-2 deferred costs 353,119 356,517
Nonutility generation contract buyout costs 244,568 242,481
Unamortized property losses 103,497 100,310
Other postretirement benefits 84,299 76,569
Environmental remediation 89,260 78,136
N.J. unit tax 42,894 45,877
Unamortized loss on reacquired debt 42,908 45,378
Load and demand-side management programs 32,885 40,770
N.J. low-level radwaste disposal 34,073 37,525
DOE enrichment facility decommissioning 34,275 36,352
Nuclear fuel disposal fee 22,374 21,552
Storm damage 22,852 20,226
Other 33,445 24,194
Total $1,664,995 $1,653,272
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GPU, Inc. and Subsidiary Companies
Liabilities (in thousands)
June 30, December 31,
1997 1996
Income taxes refundable through
future rates $ 84,357 $ 87,735
Other 7,062 2,080
Total $ 91,419 $ 89,815
JCP&L Assets (in thousands)
June 30, December 31,
1997 1996
Income taxes recoverable through
future rates $ 145,249 $ 142,726
TMI-2 deferred costs 117,833 126,448
Nonutility generation contract buyout costs 146,500 139,000
Unamortized property losses 98,173 94,767
Other postretirement benefits 47,967 44,024
Environmental remediation 60,276 55,285
N.J. unit tax 42,894 45,877
Unamortized loss on reacquired debt 30,132 31,469
Load and demand-side management programs 32,885 40,770
N.J. low-level radwaste disposal 34,073 37,525
DOE enrichment facility decommissioning 21,683 23,150
Nuclear fuel disposal fee 24,405 23,319
Storm damage 22,852 20,226
Other 2,933 4,975
Total $ 827,855 $ 829,561
Liabilities (in thousands)
June 30, December 31,
1997 1996
Income taxes refundable through
future rates $ 30,891 $ 32,567
Other 6,021 683
Total $ 36,912 $ 33,250
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GPU, Inc. and Subsidiary Companies
Met-Ed Assets (in thousands)
June 30, December 31,
1997 1996
Income taxes recoverable through
future rates $ 172,220 $ 174,636
TMI-2 deferred costs 147,806 144,782
Nonutility generation contract buyout costs 81,368 86,781
Unamortized property losses 2,887 3,113
Other postretirement benefits 36,332 32,545
Environmental remediation 4,121 2,575
Unamortized loss on reacquired debt 5,717 6,223
DOE enrichment facility decommissioning 8,395 8,801
Nuclear fuel disposal fee (1,408) (1,282)
Other 14,679 4,209
Total $ 472,117 $ 462,383
Liabilities (in thousands)
June 30, December 31,
1997 1996
Income taxes refundable through
future rates $ 22,847 $ 23,486
Other 2,549 2,495
Total $ 25,396 $ 25,981
Penelec Assets (in thousands)
June 30, December 31,
1997 1996
Income taxes recoverable through
future rates $ 207,077 $ 210,023
TMI-2 deferred costs 87,480 85,287
Nonutility generation contract buyout costs 16,700 16,700
Unamortized property losses 2,437 2,430
Environmental remediation 24,863 20,276
Unamortized loss on reacquired debt 7,059 7,686
DOE enrichment facility decommissioning 4,197 4,401
Nuclear fuel disposal fee (623) (485)
Other 17,265 16,120
Total $ 366,455 $ 362,438
Liabilities (in thousands)
June 30, December 31,
1997 1996
Income taxes refundable through
future rates $ 30,619 $ 31,682
Other (76) 12
Total $ 30,543 $ 31,694
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GPU, Inc. and Subsidiary Companies
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 section,
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
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.
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GPU, Inc. and Subsidiary Companies
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 $828 million; Met-Ed $472 million; Penelec $366 million) in regulatory
assets in accordance with FAS 71 (see Regulatory Assets and Liabilities
section of Competition and the Changing Regulatory Environment).
In response to the continuing deregulation of the electric utility
industry, the U.S. 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 early 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
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GPU, Inc. and Subsidiary Companies
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.
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
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GPU, Inc. and Subsidiary Companies
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 (NAAQS) 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
5 4 2 1 1 10
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 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.
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 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 June 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
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GPU, Inc. and Subsidiary Companies
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
June 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
$11 million) is reflected on the Consolidated Balance Sheets at June 30, 1997.
JCP&L has requested recovery of its share of closure costs in its
restructuring plans 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 June 30, 1997.
JCP&L has entered into agreements with the New Jersey Department of
Environmental Protection (NJDEP) 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 June 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 March 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 June 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
has begun in this case.
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GPU, Inc. and Subsidiary Companies
OTHER COMMITMENTS AND CONTINGENCIES
GPU International Group:
At June 30, 1997, the GPU International Group had investments totaling
approximately $810 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 June 30, 1997, GPU, Inc.'s aggregate investment in the GPU
International Group was $218 million; GPU, Inc. has also guaranteed up to an
additional $863 million of GPU International Group obligations. Of this
amount, $674 million is included in Long-term debt on GPU's Consolidated
Balance Sheet at June 30, 1997; $30 million relates to a GPU International,
Inc. revolving credit agreement; and $159 million relates to various other
obligations of the GPU International Group.
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 $32 million.
In July 1997, NIMO and 16 independent power producers (IPP), including the GPU
International Group, executed agreements 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 will be 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. 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.
The Government of the United Kingdom has proposed a windfall tax on
privatized utilities, including Midlands Electricity plc (Midlands), in which
GPU has a 50% ownership interest. It is anticipated that legislation enacting
the tax will be finalized in August 1997. Under the current proposal, GPU
expects to record a one-time charge to income in the third quarter of 1997 of
approximately $110 million, or $0.91 per share. In addition, the GPU
International Group is reviewing the impact of this one-time charge, if any,
on the utilization of carryforward foreign tax credits.
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GPU, Inc. and Subsidiary Companies
Other:
GPU's construction programs, for which substantial commitments have been
incurred and which extend over several years, contemplate expenditures of $402
million (JCP&L $185 million; Met-Ed $90 million; Penelec $120 million; Other
$7 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 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 May 1997, JCP&L, Freehold Cogeneration Associates and Nestle Beverage
Company entered into a settlement agreement terminating their pending
litigation involving JCP&L's buyout of the power purchase agreement for the
Freehold cogeneration project. As a result, JCP&L recorded a charge to income
of approximately $5.5 million in the second quarter of 1997.
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
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GPU, Inc. and Subsidiary Companies
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 June 30, 1997, $6
million has been paid. As a result, at June 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 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.
Many of GPU's computer systems must be modified due to certain
programming limitations in recognizing dates beyond 1999. GPU currently
estimates that it will cost approximately $29 million to $36 million to modify
these systems. These costs will be expensed as incurred.
As of June 30, 1997, approximately 53% of GPU's workforce was represented
by unions for collective bargaining purposes. In May 1997, Met-Ed entered
into a new three-year collective bargaining agreement. Penelec and JCP&L's
collective bargaining agreements expire in 1998 and 1999, 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 the GPU's financial
position or results of operations, there can be no assurance that this will
continue to be the case.
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GPU, Inc. and Subsidiary Companies
2. 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
GPU International Group's ownership percentage to 27%. Investments accounted
for under the equity method follow:
Ownership
Investment Location of Operations Percentage
Brooklyn Energy, L.P. Canada 75%
Avon Energy Partners Holdings (owns
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%
Lake 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 6%
Project Orange Associates, L.P. United States 4%
OLS Power, L.P. United States 1%
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:
June 30, December 31,
Balance Sheet Data (in thousands) 1997 1996
Current Assets $ 536,976 $ 1,016,730
Noncurrent Assets 6,121,179 5,761,593
Current Liabilities (1,316,115) (1,207,038)
Noncurrent Liabilities (3,873,052) (4,080,475)
Net Assets $ 1,468,988 $ 1,490,810
GPU International Group's
Equity in Net Assets $ 729,240 $ 735,763
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GPU, Inc. and Subsidiary Companies
For the Six Months Ended
June 30, June 30,
Earnings Data (in thousands) 1997 1996
Revenues $ 1,517,788 $ 1,451,068
Operating Income $ 256,591 $ 208,093
Net Income $ 122,444 $ 233,321
GPU International Group's
Equity in Net Income $ 52,314 $ 2,596
As of June 30, 1997 and December 31, 1996, the amount of investments
accounted for under the equity method included goodwill, net of accumulated
amortization, of approximately $23.5 million and $23.8 million, respectively,
which is amortized to expense over periods not exceeding 40 years.
Amortization expense amounted to $0.3 million and $0.4 million for the six
months ended June 30, 1997 and 1996, respectively.
In addition, the GPU International Group's 50% ownership interest in
Empresa Guaracachi, S.A., a Bolivian electric generating company, is accounted
for as a consolidated entity in GPU's financial statements. The GPU
International Group also has a 100% ownership interest in Mid-Georgia Cogen,
L.P., a cogeneration facility under construction, which is currently accounted
for as a consolidated entity in GPU's financial statements.
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GPU, Inc. and Subsidiary Companies
3. ACCOUNTING FOR DERIVATIVE INSTRUMENTS
GPU's use of derivative financial and commodity instruments is
substantially 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 June 30, 1997, these
agreements covered approximately $370 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 six months ended June 30, 1997, fixed rate
interest expense exceeded variable rate interest by approximately $0.6
million.
Sterling Put Options:
GPU Electric uses sterling put options to protect it from exchange rate
volatility between the British pound and the U.S. dollar, relative to earnings
and dividends on 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. As such, GPU Electric's exposure to losses 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 $(0.1) million for the six months
ended June 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
COMBINED 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 second quarter ended June 30, 1997 were $70.3
million, or $0.58 per share, compared to 1996 second quarter earnings of $73.6
million, or $0.61 per share.
The decrease in earnings was due primarily to lower weather-related
residential sales resulting from cooler spring temperatures this year compared
to last, and higher depreciation expense due to plant additions. Largely
offsetting these decreases were increased GPU International Group earnings
resulting from the May 1996 acquisition of Midlands Electricity plc
(Midlands).
For the six months ended June 30, 1997, GPU's earnings were $225.3
million, or $1.86 per share, compared to earnings of $181.9 million, or $1.51
per share, for the same six month period last year. The same factors
affecting the three month results also affected the six month results. In
addition, the six month earnings were affected by 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.
OPERATING REVENUES:
Operating revenues for the second quarter of 1997 increased 1.6% to
$927.3 million, as compared to the second quarter of 1996. For the six months
ended June 30, 1997, revenues increased 1.8% to $2.0 billion as compared to
the same period last year. The components of the changes are as follows:
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GPU, Inc. and Subsidiary Companies
GPU RESULTS OF OPERATIONS (continued)
(In Millions)
Three Months Six Months
Ended Ended
June 30, 1997 June 30, 1997
Kilowatt-hour (KWH) revenues $ (5.2) $ 23.6
Energy revenues 11.5 0.6
Other revenues 8.7 9.9
Increase in revenues $ 15.0 $ 34.1
Kilowatt-hour revenues
The decrease in KWH revenues for the three month period was due primarily
to lower weather-related sales to residential customers, offset by increased
industrial customer usage and an increase in the number of commercial and
residential customers. The increase in KWH revenues for the six month period
was due primarily to the step increases recorded by Met-Ed and Penelec from
inclusion of their ECRs in base rates. 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 revenues (JCP&L only)
Changes in energy 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 higher sales to other utilities. The increase for the six
month period was due to an increased demand-side factor and higher energy cost
rates, substantially 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, such as taxes other than income
taxes, in the case of JCP&L.
OPERATING EXPENSES:
Power purchased and interchanged (PP&I)
For JCP&L, changes in the energy component of PP&I expense do not
significantly affect earnings since these cost increases or decreases are
passed through the LEAC. For Met-Ed and Penelec, such energy cost variances
are no longer subject to deferred accounting. However, Met-Ed and Penelec's
incremental nonutility generation (NUG) costs are being deferred, based on the
Pennsylvania restructuring legislation (see COMPETITIVE ENVIRONMENT). Lower
reserve capacity expense (which is a component of PP&I) contributed to
earnings for the three and six month periods.
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GPU, Inc. and Subsidiary Companies
GPU RESULTS OF OPERATIONS (continued)
Fuel and Deferral of energy costs, net
Deferral of energy costs for 1997 include amounts for JCP&L only because
Met-Ed and Penelec's ECRs were combined with base rates effective January 1,
1997 (see COMPETITIVE ENVIRONMENT). The cessation of deferred energy
accounting by Met-Ed and Penelec did not have a significant impact on earnings
for the first half of 1997. For JCP&L, fuel and deferral of energy costs do
not affect earnings as they are offset by corresponding changes in energy
revenues.
Other operation and maintenance (O&M)
The decrease in other O&M expenses for the three and six month periods
was due to decreased emergency and storm related activity, lower
postretirement benefits costs and lower production expense due to the 1996
retirement of the Werner and Gilbert generating stations.
Depreciation and amortization
The increase in depreciation and amortization expense for the three and
six 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; therefore, fluctuations
in such taxes will impact earnings (see COMPETITIVE ENVIRONMENT).
OTHER INCOME AND DEDUCTIONS:
Other income, net
The increase in other income, net for the three and six month periods was
due primarily to increased income at GPU Electric, mainly due to the effect of
the Midlands acquisition. The change for the six month period was also
affected by GPU International's gain on sale of securities in the first
quarter of 1996.
INTEREST CHARGES AND PREFERRED DIVIDENDS:
Other interest
The increase in other interest for the three and six month periods was
due primarily to higher short-term debt levels.
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GPU, Inc. and Subsidiary Companies
JCP&L RESULTS OF OPERATIONS
JCP&L's earnings for the second quarter ended June 30, 1997 were $32.3
million, compared to 1996 second quarter earnings of $37.2 million. The
decrease in earnings was due primarily to higher depreciation expense and
lower KWH sales to customers due to cooler spring temperatures this year
compared to last. Partially offsetting the effect of these decreases were
lower other O&M expenses and increased new customer sales.
For the six months ended June 30, 1997, earnings were $87.5 million,
compared to $88.1 million for the same period last year. The same factors
affecting the three month results also affected the six month results. Also,
lower reserve capacity expense partially offset the earnings decrease for the
six month period.
OPERATING REVENUES:
Operating revenues for the second quarter of 1997 increased 0.5% to
$478.2 million, as compared to the second quarter of 1996. For the six months
ended June 30, 1997, revenues decreased 1.6% to $988.7 million as compared to
the same period last year. The components of the changes are as follows:
(In Millions)
Three Months Six Months
Ended Ended
June 30, 1997 June 30, 1997
Kilowatt-hour (KWH) revenues $ (9.2) $(14.7)
Energy revenues 11.0 (1.9)
Other revenues 0.5 0.1
Increase (decrease) in revenues $ 2.3 $(16.5)
Kilowatt-hour revenues
The decrease in KWH revenues for the three and six month periods was due
to lower weather-related sales to residential customers partially offset by
increased new customer sales. Also contributing to the decrease for the six
months 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 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 months was due to
an increase in sales to other utilities.
Other revenues
Generally, changes in other revenues do not affect earnings as they are
offset by corresponding changes in expense, such as taxes other than income
taxes.
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GPU, Inc. and Subsidiary Companies
JCP&L RESULTS OF OPERATIONS (continued)
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 energy adjustment clause. 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 six 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 six month periods
were primarily due to decreased storm and emergency related activity and lower
production expense due to the 1996 retirement of the Werner and Gilbert
generating stations.
Depreciation and amortization
The increase in depreciation and amortization expense for the three month
period was due primarily to additions to plant in service. Also affecting the
three and six month periods 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, 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/(expense), net
The decrease in other income/(expense), net for the three month period
was due to a $5.5 million charge to settle a lawsuit related to the
termination of the Freehold NUG contract (See the Managing Nonutility
Generation section of THE GPU ENERGY COMPANIES' SUPPLY PLAN). For the six
month period, the decrease was partially offset by the effect of a 1996 write-
off of $2.4 million of inventory in connection with the retirement of the
Werner and Gilbert generating stations.
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GPU, Inc. and Subsidiary Companies
JCP&L RESULTS OF OPERATIONS (continued)
INTEREST CHARGES AND DIVIDENDS ON PREFERRED SECURITIES:
Other Interest
The increase in other interest expense for the three and six month
periods is due to higher short-term debt levels.
MET-ED RESULTS OF OPERATIONS
Met-Ed's earnings for the second quarter ended June 30, 1997 were $14.0
million, compared to 1996 second quarter earnings of $16.6 million. The
decrease in earnings was due primarily to lower weather-related residential
sales resulting from cooler spring weather this year as compared to last year.
For the six months ended June 30, 1997 earnings were $53.6 million,
compared to $40.4 million for the same period last year. The increase was
primarily due to the step increase in operating revenue resulting from the
inclusion of the ECR in base rates and the cessation of deferred energy
accounting, effective January 1, 1997 (See COMPETITIVE ENVIRONMENT). Also
affecting the six month results were the same factors affecting the three
months.
OPERATING REVENUES:
Operating revenues for the second quarter of 1997 increased 0.7% to
$208.6 million as compared to the second quarter of 1996. For the six months
ended June 30, 1997, revenues increased 4.3% to $463.8 million as compared to
the same period last year. The components of the changes are as follows:
(In Millions)
Three Months Six Months
Ended Ended
June 30, 1997 June 30, 1997
Kilowatt-hour (KWH) revenues $ (1.6) $ 15.3
Other revenues 3.1 3.8
Increase in revenues $ 1.5 $ 19.1
Kilowatt-hour revenues
The decrease in KWH revenues for the three month period was due primarily
to lower weather-related residential sales. The increase in KWH revenues for
the six month period was due primarily to the step increase resulting from the
inclusion of energy cost rates in base rates, amounting to $13 million. Also
contributing to the increase for the six months were increased customer usage
and new customer sales, partially offset by lower weather-related residential
sales.
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GPU, Inc. and Subsidiary Companies
MET-ED RESULTS OF OPERATIONS (continued)
Other revenues
Generally, changes in other revenues do not affect earnings as they are
offset by corresponding changes in expense, such as taxes other than income
taxes.
OPERATING EXPENSES:
Fuel and Power purchased and interchanged
Effective January 1, 1997, Met-Ed no longer defers energy costs, due to
the inclusion of the ECR in base rates and the cessation of deferred energy
accounting. However, incremental nonutility generation (NUG) costs are being
deferred, based on the Pennsylvania restructuring legislation (see COMPETITIVE
ENVIRONMENT). This did not have a significant impact on earnings for the
three and six month periods.
Other operation and maintenance
The decrease in other O&M expenses for the six month period was due
primarily to a reduction in storm and emergency related activity, and a
decrease in postretirement benefits costs.
Depreciation and amortization
The increase in depreciation and amortization for the three and six month
periods was due to additions to plant in service, and an increase in
depreciation rates.
Taxes, other than income taxes
The increase in taxes other than income taxes for the six month period
was primarily due to the step increase from inclusion of the ECR in base
rates, which resulted in increased accruals for Pennsylvania gross receipts
tax, along with a corresponding increase in revenues. Such revenues are now
included with KWH revenues, since the STAS is included with base rates
effective January 1, 1997 (see COMPETITIVE ENVIRONMENT).
OTHER INCOME AND DEDUCTIONS:
Other income/(expense), net
The increase in other income/(expense), net for the three and six month
periods was due to an increase in interest income.
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GPU, Inc. and Subsidiary Companies
MET-ED RESULTS OF OPERATIONS (continued)
INTEREST CHARGES AND DIVIDENDS ON PREFERRED SECURITIES:
Other Interest
The increase in other interest expense for the three and six month
periods is due to higher short-term debt levels.
PENELEC RESULTS OF OPERATIONS
Penelec's earnings for the second quarter ended June 30, 1997 were $18.6
million, compared to 1996 second quarter earnings of $21.2 million. The
decrease in earnings was due primarily to increased depreciation due to
additions to plant in service and higher depreciation rates.
For the six months ended June 30, 1997 earnings were $61.4 million,
compared to $51.4 million for the same period last year. The increase was
primarily due to the step increase in operating revenue resulting from the
inclusion of the ECR in base rates and the cessation of deferred energy
accounting, effective January 1, 1997 (See COMPETITIVE ENVIRONMENT). Also
affecting the six month results were higher sales due to increased customer
usage and lower O&M expense, partially offset by increased depreciation
expense.
OPERATING REVENUES:
Operating revenues for the second quarter of 1997 increased 0.4% to
$247.9 million, as compared to the second quarter of 1996. For the six months
ended June 30, 1997, revenues increased 4.2% to $537.6 million as compared to
the same period last year. The components of the changes are as follows:
(In Millions)
Three Months Six Months
Ended Ended
June 30, 1997 June 30, 1997
Kilowatt-hour (KWH) revenues $ (1.9) $ 15.5
Other revenues 3.0 6.0
Increase in revenues $ 1.1 $ 21.5
Kilowatt-hour revenues
The increase in KWH revenues for the six month period was due primarily
to the step increase resulting from the inclusion of the energy cost rates in
base rates, amounting to $15 million. Also affecting the six month results
was increased industrial customer usage offset by lower sales to other
utilities.
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PENELEC RESULTS OF OPERATIONS (continued)
Other revenues
Generally, changes in other revenues do not affect earnings as they are
offset by corresponding changes in expense, such as taxes other than income
taxes. Higher transmission revenues contributed to the increase for the six
month period.
OPERATING EXPENSES:
Fuel and Power purchases and interchanged
Effective January 1, 1997, Penelec no longer defers energy costs, due to
the inclusion of the ECR in base rates and the cessation of deferred energy
accounting. However, incremental NUG costs are being deferred, based on the
Pennsylvania restructuring legislation (see COMPETITIVE ENVIRONMENT). This
did not have a significant impact on earnings for the three and six month
periods.
Other operation and maintenance
The decrease in other O&M expenses for the six month period was due to a
reduction in postretirement benefit costs.
Depreciation and amortization
The increase in depreciation and amortization expense for the three and
six month periods was due to additions to plant in service, and an increase in
depreciation rates.
Taxes, other than income taxes
The increase in taxes other than income taxes for the six month period
was primarily due to the step increase from inclusion of the ECR in base
rates, which resulted in increased accruals for Pennsylvania gross receipts
tax, along with a corresponding increase in revenues. Such revenues are now
included with KWH revenues, since the STAS is included with base rates
effective January 1, 1997 (see COMPETITIVE ENVIRONMENT).
OTHER INCOME AND DEDUCTIONS:
Other income/(expense), net
The increase in other income/(expense), net for the three and six month
periods was due to an increase in interest income.
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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 253 MW) of
capacity, and twelve operating generating facilities located in foreign
countries totaling 3,483 MW (of which the GPU International Group's equity
interest represents 654 MW) of capacity.
The GPU International Group is continuing to pursue investment
opportunities and has commitments, both domestically and internationally, in
five generating facilities under construction totaling 2,333 MW (of which the
GPU International Group's equity interest represents 670 MW) of capacity.
At June 30, 1997, GPU, Inc.'s aggregate investment in the GPU
International Group was $218 million; GPU, Inc. has also guaranteed up to an
additional $863 million of GPU International Group obligations. GPU, Inc. has
Securities and Exchange Commission (SEC) approval to finance investments in
foreign utility companies and exempt wholesale generators up to an aggregate
amount equal to 50% of GPU's average consolidated retained earnings, or
approximately $1 billion. At June 30, 1997, GPU, Inc. had remaining
authorization to finance an additional $117 million of such investments. A
request to increase this limit to 100% of GPU's average consolidated retained
earnings, or to approximately $2 billion at June 30, 1997, is pending.
The Government of the United Kingdom has proposed a windfall tax on
privatized utilities, including Midlands, in which GPU has a 50% ownership
interest. It is anticipated that legislation enacting the tax will be
finalized in August 1997. Under the current proposal, GPU expects to record a
one-time charge to income in the third quarter of 1997 of approximately $110
million, or $0.91 per share. In addition, the GPU International Group is
reviewing the impact of this one-time charge, if any, on the utilization of
carryforward foreign tax credits.
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, including receipt of regulatory
authorization from the SEC.
For additional information on the GPU International Group's investments,
see Note 2 to GPU's Consolidated Financial Statements.
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LIQUIDITY AND CAPITAL RESOURCES
Capital Needs
GPU's cash construction expenditures for the six months ended June 30,
1997 were $158 million (JCP&L $79 million; Met-Ed $37 million; Penelec $42
million). Construction expenditures for the year are forecasted to be $402
million (JCP&L $185 million; Met-Ed $90 million; Penelec $120 million; Other
$7 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. GPU, Inc. has no current plans to issue
these securities. Any sale of such securities will, among other things,
depend upon future capital requirements and market conditions.
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 any
cash payments expected to be made under the NUG Requests for Proposals (RFPs),
should proposals materialize that are economically justified (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, 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 intends to seek regulatory approval in 1997 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 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 May 1, 1997, JCP&L redeemed $20 million stated value of 8.48%
cumulative preferred stock pursuant to mandatory and optional sinking fund
provisions.
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GPU, Inc. and Subsidiary Companies
On April 15, 1997, Met-Ed redeemed at maturity, $20 million principal
amount of 7.47% FMBs. On June 1, 1997, Penelec redeemed at maturity, $26
million principal amount of 6.25% FMBs.
In May 1997, Met-Ed issued $13.7 million principal amount of 5.95% tax-
exempt FMBs through the Indiana County Industrial Development Authority to
replace short-term financing that matured in June 1997, related to a solid
waste disposal facility at the jointly owned Conemaugh station.
In June 1997, Penelec issued $50 million principal amount of variable
rate FMBs. The net proceeds from this issuance were used by Penelec to reduce
short-term debt and for other corporate purposes.
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 to
GPU's 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 1997.
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GPU, Inc. and Subsidiary Companies
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
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, Met-Ed and Penelec's 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 RFPs or other future
NUG mitigation. At June 30, 1997, the deferred NUG balances for Met-Ed
and Penelec were $11.3 million and $1.7 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.
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GPU, Inc. and Subsidiary Companies
. 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.
. 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 are exploring a variety of options for their
generating facilities including the early retirement of Penelec's Warren
and Seward Generating Stations by the year 2000 and Met-Ed's Portland and
Titus Generating Stations by the year 2004.
. 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.
The PaPUC will review and hold hearings on the restructuring plans, and
has stated that a decision is expected by the end of the first quarter of
1998.
In March 1997 a State Senator and several consumer groups filed a lawsuit
with the Commonwealth Court of Pennsylvania challenging the constitutionality
of the procedure used to enact the Pennsylvania restructuring legislation. The
lawsuit asks the court to void the legislation and permanently enjoin the
PaPUC from taking any action thereunder. There can be no assurance as to the
outcome of this proceeding.
The PaPUC has also issued a final order that sets forth the guidelines
for retail access pilot programs in Pennsylvania. 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.
In March 1997, Met-Ed and Penelec filed with the PaPUC their plan for a pilot
program that would offer approximately 51,000 (Met-Ed 23,000; Penelec 28,000)
customers the ability to choose their electric generation supplier. The pilot
program, which is subject to PaPUC approval, is anticipated to begin in early
1998 and to be in effect for at least one year.
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GPU, Inc. and Subsidiary Companies
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.
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 guarantee 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 plans
for a competitive electric marketplace in New Jersey. Included in these plans
were stranded cost and unbundled rate filings. Highlights of these plans
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
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GPU, Inc. and Subsidiary Companies
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 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.
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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. 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.
- 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.
The NJBPU intends to complete its review and approval of these plans 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 is currently scheduled to begin later in 1997,
subject to the resolution of certain matters. At the end of the first year,
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GPU, Inc. and Subsidiary Companies
Monroe Township will have the option of renewing the pilot. Monroe Township
had been exploring the possibility of establishing its own municipal electric
system.
Other
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.
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.
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GPU, Inc. and Subsidiary Companies
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.
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
(see the Managing Nonutility Generation section of THE GPU ENERGY COMPANIES'
SUPPLY PLAN). 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.
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GPU, Inc. and Subsidiary Companies
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 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 to GPU's 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 1996, JCP&L entered into an agreement with Freehold Cogeneration
Associates (Freehold), the developer of a proposed 110 MW gas-fired
cogeneration project, that terminates JCP&L's long-term obligation to purchase
power from the project. JCP&L expects that the buyout will save customers
$1.1 billion over the term of the power purchase contract based on the
projected cost of alternative sources of energy. JCP&L has agreed to pay
Freehold $125 million, of which $80 million has been paid through June 1997,
and the remainder will be paid in 1998 and 1999. Associated with this buyout
are certain payments to third parties, which could be material in amount. As
part of the Final Settlement (see RATE MATTERS), JCP&L has been granted
recovery of buyout costs, on an interim basis, of up to $130 million, and 50%
of any costs from $130 million to $140 million, over a seven-year period.
In May 1997, JCP&L, Freehold Cogeneration Associates and Nestle Beverage
Company (Nestle) entered into a settlement agreement terminating their pending
litigation involving JCP&L's buyout of the power purchase agreement for the
Freehold cogeneration project. As a result, JCP&L recorded a charge to income
of approximately $5.5 million in the second quarter of 1997. (See Other
Commitments and Contingencies section of Note 1 to GPU's Consolidated
Financial Statements.)
64
<PAGE>
GPU, Inc. and Subsidiary Companies
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 request the NUGs to propose buyouts, buydowns and/or
restructurings of current power purchase contracts in return for cash
payments. Met-Ed and Penelec plan to fund the cash payments through the
issuance of PaPUC approved securitized transition bonds (see COMPETITIVE
ENVIRONMENT). Met-Ed and Penelec are currently evaluating several bids and to
the extent there are winning bidders, they are expected to be notified in the
third quarter of 1997.
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 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 early 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."
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.
65
<PAGE>
GPU, Inc. and Subsidiary Companies
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 in which a company holds material assets and reports revenues, its
major customers and disclosure of selected segment information in quarterly
reports issued to shareholders. 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.
66
<PAGE>
GPU, Inc. and Subsidiary Companies
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 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 May 7, 1997, under Item 5 (Other Events).
Jersey Central Power & Light Company:
Dated May 7, 1997, under Item 5 (Other Events).
Metropolitan Edison Company:
Dated May 7, 1997, under Item 5 (Other Events).
Pennsylvania Electric Company:
Dated May 7, 1997, under Item 5 (Other Events).
67
<PAGE>
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.
August 7, 1997 By: /s/ J. G. Graham
J. G. Graham, Senior Vice President
(Chief Financial Officer)
August 7, 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
August 7, 1997 By: /s/ D. Baldassari
D. Baldassari, President
August 7, 1997 By: /s/ D. W. Myers
D. W. Myers, Vice President -
Finance and Rates & Comptroller
(Principal Accounting Officer)
68
<PAGE>
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
Six Months Ended
June 30, June 30,
1997 1996
OPERATING REVENUES $1,969,328 $1,935,188
OPERATING EXPENSES 1,518,961 1,525,134
Interest portion of rentals (A) 11,814 13,245
Fixed charges of service company
subsidiaries (B) 1,417 1,637
Net expense 1,505,730 1,510,252
OTHER INCOME AND DEDUCTIONS:
Allowance for funds used
during construction 3,104 6,307
Other income, net 33,021 11,580
Fixed charges of the GPU
International Group (C) 23,008 7,499
Total other income and deductions 59,133 25,386
EARNINGS AVAILABLE FOR FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS (excluding
taxes based on income) $ 522,731 $ 450,322
FIXED CHARGES:
Interest on funded indebtedness $ 115,916 $ 101,093
Other interest (D) 32,961 28,074
Preferred stock dividends of
subsidiaries on a pretax basis (F) 10,304 12,963
Interest portion of rentals (A) 11,814 13,245
Total fixed charges $ 170,995 $ 155,375
RATIO OF EARNINGS TO FIXED CHARGES 3.06 2.90
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS (E) 3.06 2.90
<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 $14,444 and $14,444 for the six month periods
ended June 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:
Six Months Ended
June 30, June 30,
1997 1996
Income before provision for income taxes and
preferred stock dividends of subsidiaries
and gain on preferred stock reacquisition $362,040 $307,910
Income before preferred stock dividends of
subsidiaries and gain on preferred stock
reacquisition 231,888 189,870
Pretax earnings ratio 156.1% 162.2%
Preferred stock dividends of subsidiaries 6,601 7,992
Preferred stock dividends of subsidiaries on
a pretax basis 10,304 12,963
<PAGE>
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
Six Months Ended
June 30, June 30,
1997 1996
OPERATING REVENUES $988,669 $1,005,158
OPERATING EXPENSES 789,454 815,375
Interest portion of rentals (A) 5,381 5,761
Net expense 784,073 809,614
OTHER INCOME:
Allowance for funds used
during construction 1,471 4,259
Other income, net 147 1,818
Total other income 1,618 6,077
EARNINGS AVAILABLE FOR FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS (excluding
taxes based on income) $206,214 $201,621
FIXED CHARGES:
Interest on funded indebtedness $ 45,345 $ 44,717
Other interest (B) 13,008 10,359
Interest portion of rentals (A) 5,381 5,761
Total fixed charges $ 63,734 $ 60,837
RATIO OF EARNINGS TO FIXED CHARGES 3.24 3.31
Preferred stock dividend requirement $ 6,041 $ 6,748
Ratio of income before provision for
income taxes to net income (C) 152.3% 148.4%
Preferred stock dividend requirement
on a pretax basis 9,200 10,014
Fixed charges, as above 63,734 60,837
Total fixed charges and
preferred stock dividends $ 72,934 $ 70,851
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS 2.83 2.85
<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 $5,350 for the six month periods ended June 30, 1997 and
1996, respectively.
(C) Represents income before provision for income taxes of $142,480 and
$140,784 for the six month periods ended June 30, 1997 and 1996,
respectively, divided by net income of $93,561 and $94,877, respectively
for the same periods.
<PAGE>
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
Six Months Ended
June 30, June 30,
1997 1996
OPERATING REVENUES $463,814 $444,746
OPERATING EXPENSES 343,400 342,477
Interest portion of rentals (A) 2,503 2,700
Net expense 340,897 339,777
OTHER INCOME AND DEDUCTIONS:
Allowance for funds used
during construction 712 535
Other income/(expense), net 2,104 174
Total other income and deductions 2,816 709
EARNINGS AVAILABLE FOR FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS (excluding
taxes based on income) $125,733 $105,678
FIXED CHARGES:
Interest on funded indebtedness $ 22,294 $ 22,937
Other interest (B) 8,128 6,531
Interest portion of rentals (A) 2,503 2,700
Total fixed charges $ 32,925 $ 32,168
RATIO OF EARNINGS TO FIXED CHARGES 3.82 3.29
Preferred stock dividend requirement $ 242 $ 472
Ratio of income before provision for
income taxes to net income (C) 172.2% 180.0%
Preferred stock dividend requirement
on a pretax basis 417 850
Fixed charges, as above 32,925 32,168
Total fixed charges and
preferred stock dividends $ 33,342 $ 33,018
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS 3.77 3.20
<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 $4,500 for the six month periods ended June 30, 1997 and
1996, respectively.
(C) Represents income before provision for income taxes of $92,808 and
$73,510 for the six month periods ended June 30, 1997 and 1996,
respectively, divided by net income of $53,888 and $40,843, respectively
for the same periods.
<PAGE>
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
Six Months Ended
June 30, June 30,
1997 1996
OPERATING REVENUES $537,615 $516,117
OPERATING EXPENSES 401,360 395,274
Interest portion of rentals (A) 2,166 2,468
Net expense 399,194 392,806
OTHER INCOME AND DEDUCTIONS:
Allowance for funds used
during construction 921 1,513
Other income/(expense), net 1,255 (802)
Total other income and deductions 2,176 711
EARNINGS AVAILABLE FOR FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS (excluding
taxes based on income) $140,597 $124,022
FIXED CHARGES:
Interest on funded indebtedness $ 24,219 $ 24,954
Other interest (B) 8,837 7,863
Interest portion of rentals (A) 2,166 2,468
Total fixed charges $ 35,222 $ 35,285
RATIO OF EARNINGS TO FIXED CHARGES 3.99 3.52
Preferred stock dividend requirement $ 318 $ 772
Ratio of income before provision for
income taxes to net income (C) 170.7% 170.2%
Preferred stock dividend requirement
on a pretax basis 543 1,314
Fixed charges, as above 35,222 35,285
Total fixed charges and
preferred stock dividends $ 35,765 $ 36,599
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS 3.93 3.39
<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 $4,594 for the six month periods ended June 30, 1997 and
1996, respectively.
(C) Represents income before provision for income taxes of $105,375 and
$88,737 for the six month periods ended June 30, 1997 and 1996,
respectively, divided by net income of $61,735 and $52,124, respectively
for the same periods.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000040779
<NAME> GPU, INC.
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
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<PERIOD-START> JAN-01-1997
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<TOTAL-DEFERRED-CHARGES> 2,139,747
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421,500 <F2>
66,478
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12,500
<CAPITAL-LEASE-OBLIGATIONS> 4,638
<LEASES-CURRENT> 148,282
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0
<EARNINGS-AVAILABLE-FOR-COMM> 225,287
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<FN>
<F1> INCLUDES REACQUIRED COMMON STOCK OF $83,795.
<F2> INCLUDES SUBSIDIARY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED
<F2> SECURITIES OF $330,000.
<F3> INCLUDES DIVIDENDS ON SUBSIDIARY-OBLIGATED MANDATORILY REDEEMABLE
<F3> PREFERRED SECURITIES OF $14,444 AND PREFERRED STOCK DIVIDENDS OF
<F3> SUBSIDIARIES OF $6,601.
</FN>
<PAGE>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000053456
<NAME> JERSEY CENTRAL POWER & LIGHT COMPANY
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 2,904,157
<OTHER-PROPERTY-AND-INVEST> 417,210
<TOTAL-CURRENT-ASSETS> 503,976
<TOTAL-DEFERRED-CHARGES> 992,901
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 4,818,244
<COMMON> 153,713
<CAPITAL-SURPLUS-PAID-IN> 510,769
<RETAINED-EARNINGS> 872,521
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,537,003
216,500 <F1>
37,741
<LONG-TERM-DEBT-NET> 1,173,196
<SHORT-TERM-NOTES> 47,400
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 145,893
<LONG-TERM-DEBT-CURRENT-PORT> 45,884
12,500
<CAPITAL-LEASE-OBLIGATIONS> 325
<LEASES-CURRENT> 89,650
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,512,152
<TOT-CAPITALIZATION-AND-LIAB> 4,818,244
<GROSS-OPERATING-REVENUE> 988,669
<INCOME-TAX-EXPENSE> 46,092
<OTHER-OPERATING-EXPENSES> 789,454
<TOTAL-OPERATING-EXPENSES> 835,546
<OPERATING-INCOME-LOSS> 153,123
<OTHER-INCOME-NET> (2,413)
<INCOME-BEFORE-INTEREST-EXPEN> 150,710
<TOTAL-INTEREST-EXPENSE> 57,149 <F2>
<NET-INCOME> 93,561
6,041
<EARNINGS-AVAILABLE-FOR-COMM> 87,520
<COMMON-STOCK-DIVIDENDS> 40,000 <F3>
<TOTAL-INTEREST-ON-BONDS> 90,276
<CASH-FLOW-OPERATIONS> 73,331
<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 $5,350.
<F3> REPRESENTS COMMON STOCK DIVIDENDS PAID TO PARENT CORPORATION.
</FN>
<PAGE>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000065350
<NAME> METROPOLITAN EDISON COMPANY
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,583,040
<OTHER-PROPERTY-AND-INVEST> 156,946
<TOTAL-CURRENT-ASSETS> 211,910
<TOTAL-DEFERRED-CHARGES> 577,659
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 2,529,555
<COMMON> 66,273
<CAPITAL-SURPLUS-PAID-IN> 370,200
<RETAINED-EARNINGS> 293,958
<TOTAL-COMMON-STOCKHOLDERS-EQ> 730,431
100,000 <F1>
12,056
<LONG-TERM-DEBT-NET> 576,944
<SHORT-TERM-NOTES> 29,300
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 30,250
<LONG-TERM-DEBT-CURRENT-PORT> 20,020
0
<CAPITAL-LEASE-OBLIGATIONS> 158
<LEASES-CURRENT> 37,523
<OTHER-ITEMS-CAPITAL-AND-LIAB> 992,873
<TOT-CAPITALIZATION-AND-LIAB> 2,529,555
<GROSS-OPERATING-REVENUE> 463,814
<INCOME-TAX-EXPENSE> 37,998
<OTHER-OPERATING-EXPENSES> 343,400
<TOTAL-OPERATING-EXPENSES> 381,398
<OPERATING-INCOME-LOSS> 82,416
<OTHER-INCOME-NET> 1,483
<INCOME-BEFORE-INTEREST-EXPEN> 83,899
<TOTAL-INTEREST-EXPENSE> 30,011 <F2>
<NET-INCOME> 53,888
242
<EARNINGS-AVAILABLE-FOR-COMM> 53,646
<COMMON-STOCK-DIVIDENDS> 25,000 <F3>
<TOTAL-INTEREST-ON-BONDS> 44,730
<CASH-FLOW-OPERATIONS> 80,396
<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 $4,500.
<F3> REPRESENTS COMMON STOCK DIVIDENDS PAID TO PARENT CORPORATION.
</FN>
<PAGE>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000077227
<NAME> PENNSYLVANIA ELECTRIC COMPANY
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,808,695
<OTHER-PROPERTY-AND-INVEST> 67,804
<TOTAL-CURRENT-ASSETS> 251,853
<TOTAL-DEFERRED-CHARGES> 441,631
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 2,569,983
<COMMON> 105,812
<CAPITAL-SURPLUS-PAID-IN> 285,486
<RETAINED-EARNINGS> 395,799
<TOTAL-COMMON-STOCKHOLDERS-EQ> 787,097
105,000 <F1>
16,681
<LONG-TERM-DEBT-NET> 676,455
<SHORT-TERM-NOTES> 67,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 18,921
<LONG-TERM-DEBT-CURRENT-PORT> 30,010
0
<CAPITAL-LEASE-OBLIGATIONS> 3,654
<LEASES-CURRENT> 19,600
<OTHER-ITEMS-CAPITAL-AND-LIAB> 845,565
<TOT-CAPITALIZATION-AND-LIAB> 2,569,983
<GROSS-OPERATING-REVENUE> 537,615
<INCOME-TAX-EXPENSE> 43,144
<OTHER-OPERATING-EXPENSES> 401,360
<TOTAL-OPERATING-EXPENSES> 444,504
<OPERATING-INCOME-LOSS> 93,111
<OTHER-INCOME-NET> 852
<INCOME-BEFORE-INTEREST-EXPEN> 93,963
<TOTAL-INTEREST-EXPENSE> 32,228 <F2>
<NET-INCOME> 61,735
318
<EARNINGS-AVAILABLE-FOR-COMM> 61,417
<COMMON-STOCK-DIVIDENDS> 30,000 <F3>
<TOTAL-INTEREST-ON-BONDS> 48,919
<CASH-FLOW-OPERATIONS> 81,131
<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 $4,594.
<F3> REPRESENTS COMMON STOCK DIVIDENDS PAID TO PARENT CORPORATION.
</FN>
<PAGE>
</TABLE>
