UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
-----------------------
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)
300 Madison Avenue
Morristown, New Jersey 07962-1911
Telephone (973) 455-8200
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 April 30, 1998, was as follows:
Shares
Registrant Title Outstanding
- ---------- ----- -----------
GPU, Inc. Common Stock, $2.50 par value 127,875,105
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
March 31, 1998
Table of Contents
-----------------
Page
----
PART I - Financial Information
Consolidated Financial Statements:
GPU, Inc.
---------
Balance Sheets 3
Statements of Income 5
Statements of Cash Flows 6
Jersey Central Power & Light Company
------------------------------------
Balance Sheets 7
Statements of Income 9
Statements of Cash Flows 10
Metropolitan Edison Company
---------------------------
Balance Sheets 11
Statements of Income 13
Statements of Cash Flows 14
Pennsylvania Electric Company
-----------------------------
Balance Sheets 15
Statements of Income 17
Statements of Cash Flows 18
Combined Notes to Consolidated Financial Statements 19
Combined Management's Discussion and Analysis
of Financial Condition and Results of
Operations 50
PART II - Other Information 73
Signatures 74
---------------------------------
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 1997
Annual Report on Form 10-K, filed by the individual registrants with the
Securities and Exchange Commission and should be read in conjunction therewith.
This Form 10-Q contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Statements made
that are not historical facts are forward-looking and, accordingly, involve
risks and uncertainties that could cause actual results or outcomes to differ
materially from those expressed in the forward-looking statements. Although such
forward-looking statements have been based on reasonable assumptions, there is
no assurance that the expected results will be achieved. Some of the factors
that could cause actual results to differ materially include, but are not
limited to: the effects of regulatory decisions; changes in law and other
governmental actions and initiatives; the impact of deregulation and increased
competition in the industry; industry restructuring; expected outcomes of legal
proceedings; generating plant performance; fuel prices and availability; and
uncertainties involved with foreign operations including political risks and
foreign currency fluctuations.
2
<PAGE>
GPU, INC. AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
---------------------------
In Thousands
-----------------------------
March 31, December 31,
1998 1997
------------ ------------
(Unaudited)
ASSETS
Utility Plant:
In service, at original cost $11,239,028 $11,150,677
Less, accumulated depreciation 4,165,553 4,050,165
---------- ----------
Net utility plant in service 7,073,475 7,100,512
Construction work in progress 244,498 250,050
Other, net 170,970 159,009
---------- ----------
Net utility plant 7,488,943 7,509,571
---------- ----------
Other Property and Investments:
GPUI Group equity investments 621,093 596,679
Goodwill, net 588,811 581,364
Nuclear decommissioning trusts, at market 626,884 579,673
Nuclear fuel disposal trust, at market 110,978 108,652
Other, net 135,861 252,335
---------- ----------
Total other property and investments 2,083,627 2,118,703
---------- ----------
Current Assets:
Cash and temporary cash investments 130,555 85,099
Special deposits 23,611 27,093
Accounts receivable:
Customers, net 279,673 290,247
Other 111,887 104,441
Unbilled revenues 131,271 147,162
Materials and supplies, at average cost or less:
Construction and maintenance 191,658 187,799
Fuel 40,758 40,424
Investment held for sale - 106,317
Deferred income taxes 44,669 83,962
Prepayments 104,349 55,613
Other - 1,023
---------- ----------
Total current assets 1,058,431 1,129,180
---------- ----------
Deferred Debits and Other Assets:
Regulatory assets:
Income taxes recoverable through future rates 521,780 510,680
Three Mile Island Unit 2 deferred costs 337,754 345,326
Nonutility generation contract buyout costs 240,068 245,568
Unamortized property losses 96,355 99,532
Other 425,095 448,146
---------- ----------
Total regulatory assets 1,621,052 1,649,252
Deferred income taxes 431,112 383,169
Other 150,844 134,833
---------- ----------
Total deferred debits and other assets 2,203,008 2,167,254
---------- ----------
Total Assets $12,834,009 $12,924,708
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
GPU, INC. AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
---------------------------
In Thousands
-----------------------------
March 31, December 31,
1998 1997
------------ ------------
(Unaudited)
LIABILITIES AND CAPITALIZATION
Capitalization:
Common stock $ 331,958 $ 314,458
Capital surplus 1,007,885 755,040
Retained earnings 2,274,486 2,140,712
Accumulated other comprehensive income/(loss) (14,733) (29,296)
---------- ----------
Total 3,599,596 3,180,914
Less, reacquired common stock, at cost 80,326 80,984
---------- ----------
Total common stockholders' equity 3,519,270 3,099,930
Cumulative preferred stock:
With mandatory redemption 91,500 91,500
Without mandatory redemption 66,478 66,478
Subsidiary-obligated mandatorily redeemable
preferred securities 330,000 330,000
Long-term debt 4,064,192 4,325,972
---------- ----------
Total capitalization 8,071,440 7,913,880
---------- ----------
Current Liabilities:
Securities due within one year 423,640 631,934
Notes payable 299,618 353,214
Obligations under capital leases 131,276 138,919
Accounts payable 415,629 413,791
Taxes accrued 150,782 48,304
Interest accrued 51,470 83,947
Deferred energy credits 23,984 25,645
Other 276,381 325,681
---------- ----------
Total current liabilities 1,772,780 2,021,435
---------- ----------
Deferred Credits and Other Liabilities:
Deferred income taxes 1,572,001 1,566,131
Unamortized investment tax credits 120,761 123,162
Three Mile Island Unit 2 future costs 453,596 448,808
Regulatory liabilities 102,768 101,774
Other 740,663 749,518
---------- ----------
Total deferred credits and other liabilities 2,989,789 2,989,393
---------- ----------
Commitments and Contingencies (Note 1)
Total Liabilities and Capitalization $12,834,009 $12,924,708
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
GPU, INC. AND SUBSIDIARY COMPANIES
Consolidated Statements of Income
---------------------------------
(Unaudited)
In Thousands
(Except Per Share Data)
-----------------------
Three Months
Ended March 31,
-----------------------
1998 1997
Operating Revenues $1,043,109 $1,051,012
--------- ---------
Operating Expenses:
Fuel 96,700 98,614
Power purchased and interchanged 263,279 250,712
Deferral of energy costs, net (2,020) 6,251
Other operation and maintenance 240,849 205,399
Depreciation and amortization 127,148 115,198
Taxes, other than income taxes 57,519 94,657
--------- ---------
Total operating expenses 783,475 770,831
--------- ---------
Operating Income Before Income Taxes 259,634 280,181
Income taxes 66,293 83,923
--------- ---------
Operating Income 193,341 196,258
--------- ---------
Other Income and Deductions:
Allowance for other funds used during
construction 320 348
Equity in undistributed earnings
of affiliates, net 17,651 32,227
Other income, net 44,562 5,713
Income taxes (19,431) (5,443)
--------- ---------
Total other income and deductions 43,102 32,845
--------- ---------
Income Before Interest Charges
and Preferred Dividends 236,443 229,103
--------- ---------
Interest Charges and Preferred Dividends:
Interest on long-term debt 84,052 57,109
Other interest 8,984 7,345
Allowance for borrowed funds used
during construction (1,071) (1,185)
Dividends on subsidiary-obligated mandatorily
redeemable preferred securities 7,222 7,222
Preferred stock dividends of subsidiaries 2,975 3,427
--------- ---------
Total interest charges and
preferred dividends 102,162 73,918
--------- ---------
Minority interest net income 501 147
--------- ---------
Net Income $ 133,780 $ 155,038
========= =========
Basic - Earnings Per Avg. Common Share $ 1.07 $ 1.29
========= =========
- Avg. Common Shares Outstanding (In Thousands) 124,543 120,630
========= =========
Diluted - Earnings Per Avg. Common Share $ 1.07 $ 1.28
========= =========
- Avg. Common Shares Outstanding (In Thousands) 124,823 120,896
========= =========
Cash Dividends Paid Per Share $ .500 $ .485
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
GPU, INC. AND SUBSIDIARY COMPANIES
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
In Thousands
--------------------
Three Months
Ended March 31,
--------------------
1998 1997
---- ----
Operating Activities:
Net income $ 133,780 $ 155,038
Adjustments to reconcile income to cash provided:
Depreciation and amortization 138,750 120,451
Amortization of property under capital leases 13,091 14,772
Gain on sale of investments (38,452) -
Equity in undistributed earnings
of affiliates, net of distributions received (15,775) (26,128)
Nuclear outage maintenance costs, net 5,856 6,920
Deferred income taxes and investment tax
credits, net (27,538) 2,852
Deferred energy and capacity costs, net (1,667) 6,251
Accretion income (2,460) (2,690)
Allowance for other funds used
during construction (320) (348)
Changes in working capital:
Receivables 25,788 (66,360)
Materials and supplies (4,106) (7,609)
Special deposits and prepayments (49,614) (6,519)
Payables and accrued liabilities 27,426 70,639
Nonutility generation contract buyout costs (17,500) (23,550)
Other, net 27,122 (14,823)
-------- --------
Net cash provided by operating activities 214,381 228,896
-------- --------
Investing Activities:
Capital expenditures:
GPU Energy companies (68,110) (79,994)
GPUI Group (5,542) (35,045)
Proceeds from sale of investments
146,700 -
Contributions to decommissioning trusts (11,256) (10,255)
Other, net 209 14,377
-------- --------
Net cash provided by/(used for)
investing activities 62,001 (110,917)
-------- --------
Financing Activities:
Issuance of long-term debt - 26,698
Decrease in notes payable, net (53,596) (332)
Retirement of long-term debt (375,878) (56,034)
Capital lease principal payments (12,071) (12,329)
Issuance of common stock 269,448 -
Dividends paid on common stock (60,414) (58,493)
-------- --------
Net cash required by financing activities (232,511) (100,490)
-------- --------
Effect of exchange rate changes on cash 1,585 622
-------- --------
Net increase in cash and temporary
cash investments from above activities 45,456 18,111
Cash and temporary cash investments, beginning of year 85,099 31,604
-------- --------
Cash and temporary cash investments, end of period $ 130,555 $ 49,715
======== ========
Supplemental Disclosure:
Interest and preferred dividends paid $ 112,471 $ 84,323
======== ========
Income taxes paid $ 4,786 $ 4,213
======== ========
New capital lease obligations incurred $ 5,286 $ 2,248
======== ========
Common stock dividends declared but not paid $ - $ -
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE>
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
Consolidated Balance Sheets
---------------------------
In Thousands
-----------------------------
March 31, December 31,
1998 1997
------------ --------
(Unaudited)
ASSETS
Utility Plant:
In service, at original cost $4,709,381 $4,671,568
Less, accumulated depreciation 2,067,399 2,007,427
--------- ---------
Net utility plant in service 2,641,982 2,664,141
Construction work in progress 120,898 124,887
Other, net 110,613 92,654
--------- ---------
Net utility plant 2,873,493 2,881,682
--------- ---------
Other Property and Investments:
Nuclear decommissioning trusts, at market 370,136 343,434
Nuclear fuel disposal trust, at market 110,978 108,652
Other, net 8,944 8,951
--------- ---------
Total other property and investments 490,058 461,037
--------- ---------
Current Assets:
Cash and temporary cash investments 10,898 2,994
Special deposits 6,543 6,778
Accounts receivable:
Customers, net 136,215 153,753
Other 32,157 18,225
Unbilled revenues 49,811 59,687
Materials and supplies, at average cost or less:
Construction and maintenance 92,582 90,037
Fuel 15,055 14,260
Deferred income taxes 29,902 27,536
Prepayments 9,037 14,468
--------- ---------
Total current assets 382,200 387,738
--------- ---------
Deferred Debits and Other Assets:
Regulatory assets:
Income taxes recoverable through future rates 136,853 128,111
Nonutility generation contract buyout costs 137,500 140,500
Three Mile Island Unit 2 deferred costs 102,059 109,498
Unamortized property losses 91,641 94,726
Other 280,593 312,867
--------- ---------
Total regulatory assets 748,646 785,702
Deferred income taxes 161,635 154,708
Other 20,525 19,909
--------- ---------
Total deferred debits and other assets 930,806 960,319
--------- ---------
Total Assets $4,676,557 $4,690,776
========= =========
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
---------------------------
March 31, December 31,
1998 1997
------------ --------
(Unaudited)
LIABILITIES AND CAPITALIZATION
Capitalization:
Common stock $ 153,713 $ 153,713
Capital surplus 510,769 510,769
Retained earnings 915,717 875,639
--------- ---------
Total common stockholder's equity 1,580,199 1,540,121
Cumulative preferred stock:
With mandatory redemption 91,500 91,500
Without mandatory redemption 37,741 37,741
Company-obligated mandatorily
redeemable preferred securities 125,000 125,000
Long-term debt 1,173,364 1,173,304
--------- ---------
Total capitalization 3,007,804 2,967,666
--------- ---------
Current Liabilities:
Securities due within one year 12,511 12,511
Notes payable - 115,254
Obligations under capital leases 77,616 79,419
Accounts payable:
Affiliates 4,879 27,167
Other 126,912 113,822
Taxes accrued 72,080 3,966
Deferred energy credits 23,984 25,645
Interest accrued 29,496 26,021
Other 98,082 76,529
--------- ---------
Total current liabilities 445,560 480,334
--------- ---------
Deferred Credits and Other Liabilities:
Deferred income taxes 647,751 644,562
Unamortized investment tax credits 53,375 54,675
Nuclear fuel disposal fee 136,149 134,326
Three Mile Island Unit 2 future costs 113,424 112,227
Regulatory liabilities 50,990 49,226
Other 221,504 247,760
--------- ---------
Total deferred credits and other liabilities 1,223,193 1,242,776
--------- ---------
Commitments and Contingencies (Note 1)
Total Liabilities and Capitalization $4,676,557 $4,690,776
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
8
<PAGE>
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
Consolidated Statements of Income
---------------------------------
(Unaudited)
In Thousands
---------------------
Three Months
Ended March 31,
1998 1997
Operating Revenues $472,334 $510,443
------- -------
Operating Expenses:
Fuel 19,660 24,289
Power purchased and interchanged:
Affiliates 3,115 4,367
Others 153,680 140,944
Deferral of energy and capacity costs, net (2,020) 6,251
Other operation and maintenance 100,730 101,805
Depreciation and amortization 62,994 61,810
Taxes, other than income taxes 23,857 59,160
------- -------
Total operating expenses 362,016 398,626
------- -------
Operating Income Before Income Taxes 110,318 111,817
Income taxes 32,476 29,345
------- -------
Operating Income 77,842 82,472
------- -------
Other Income and Deductions:
Allowance for other funds used during
construction 275 131
Other income, net 2,265 3,457
Income taxes (1,053) (409)
------- -------
Total other income and deductions 1,487 3,179
------- -------
Income Before Interest Charges and
Dividends on Preferred Securities 79,329 85,651
------- -------
Interest Charges and Dividends
on Preferred Securities:
Interest on long-term debt 21,792 22,768
Other interest 2,529 2,491
Allowance for borrowed funds used
during construction (483) (603)
Dividends on company-obligated mandatorily
redeemable preferred securities 2,675 2,675
------- -------
Total interest charges and dividends
on preferred securities 26,513 27,331
------- -------
Net Income 52,816 58,320
Preferred stock dividends 2,738 3,162
------- -------
Earnings Available for Common Stock $ 50,078 $ 55,158
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
9
<PAGE>
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
In Thousands
------------------
Three Months
Ended March 31,
------------------
1998 1997
---- ----
Operating Activities:
Net income $ 52,816 $ 58,320
Adjustments to reconcile income to cash provided:
Depreciation and amortization 68,725 64,153
Amortization of property under capital leases 7,065 8,364
Nuclear outage maintenance costs, net 3,549 4,866
Deferred income taxes and investment tax
credits, net (17,314) (2,783)
Deferred energy and capacity costs, net (1,667) 6,251
Accretion income (2,460) (2,690)
Allowance for other funds used
during construction (275) (131)
Changes in working capital:
Receivables 13,483 (20,677)
Materials and supplies (3,340) (1,900)
Special deposits and prepayments 5,665 13,418
Payables and accrued liabilities 54,517 54,870
Nonutility generation contract buyout costs (15,000) (15,000)
Other, net 25,544 (1,944)
-------- --------
Net cash provided by operating activities 191,308 165,117
-------- --------
Investing Activities:
Capital expenditures (40,125) (43,134)
Contributions to decommissioning trusts (6,319) (4,501)
Other, net (1,469) (2,611)
-------- --------
Net cash used for investing activities (47,913) (50,246)
-------- --------
Financing Activities:
Decrease in notes payable, net (115,254) (23,900)
Retirement of long-term debt - (54,191)
Capital lease principal payments (7,499) (5,798)
Dividends paid on common stock (10,000) (20,000)
Dividends paid on preferred stock (2,738) (3,162)
-------- --------
Net cash required by financing activities (135,491) (107,051)
-------- --------
Net increase in cash and temporary
cash investments from above activities 7,904 7,820
Cash and temporary cash investments, beginning of year 2,994 1,321
-------- --------
Cash and temporary cash investments, end of period $ 10,898 $ 9,141
======== ========
Supplemental Disclosure:
Interest and preferred dividends paid $ 25,578 $ 28,937
======== ========
Income taxes paid $ 96 $ 211
======== ========
New capital lease obligations incurred $ 5,257 $ 1,112
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
10
<PAGE>
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
---------------------------
In Thousands
-----------------------------
March 31, December 31,
1998 1997
------------ ------------
(Unaudited)
ASSETS
Utility Plant:
In service, at original cost $2,424,260 $2,411,810
Less, accumulated depreciation 945,023 919,771
--------- ---------
Net utility plant in service 1,479,237 1,492,039
Construction work in progress 44,255 45,435
Other, net 35,416 39,056
--------- ---------
Net utility plant 1,558,908 1,576,530
--------- ---------
Other Property and Investments:
Nuclear decommissioning trusts, at market 183,168 168,110
Other, net 11,971 11,958
--------- ---------
Total other property and investments 195,139 180,068
--------- ---------
Current Assets:
Cash and temporary cash investments 3,462 6,116
Special deposits 1,109 1,055
Accounts receivable:
Customers, net 61,564 65,156
Other 27,177 29,399
Unbilled revenues 39,157 39,747
Materials and supplies, at
average cost or less:
Construction and maintenance 38,824 38,597
Fuel 10,175 11,323
Deferred income taxes 2,945 2,945
Prepayments 38,438 6,762
--------- ---------
Total current assets 222,851 201,100
--------- ---------
Deferred Debits and Other Assets:
Regulatory assets:
Income taxes recoverable through future rates 182,303 178,927
Three Mile Island Unit 2 deferred costs 145,032 146,290
Nonutility generation contract buyout costs 73,868 76,368
Other 75,986 73,297
--------- ---------
Total regulatory assets 477,189 474,882
Deferred income taxes 91,668 87,332
Other 16,688 14,069
--------- ---------
Total deferred debits and other assets 585,545 576,283
--------- ---------
Total Assets $2,562,443 $2,533,981
========= =========
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
-----------------------------
March 31, December 31,
1998 1997
----------- --------
(Unaudited)
LIABILITIES AND CAPITALIZATION
Capitalization:
Common stock $ 66,273 $ 66,273
Capital surplus 370,200 370,200
Retained earnings 273,243 268,634
Accumulated other comprehensive income 15,034 12,487
--------- ---------
Total common stockholder's equity 724,750 717,594
Cumulative preferred stock 12,056 12,056
Company-obligated mandatorily
redeemable preferred securities 100,000 100,000
Long-term debt 576,925 576,924
--------- ---------
Total capitalization 1,413,731 1,406,574
--------- ---------
Current Liabilities:
Securities due within one year 22 22
Notes payable 81,600 67,279
Obligations under capital leases 34,732 38,372
Accounts payable:
Affiliates 49,158 62,873
Other 96,074 95,589
Taxes accrued 40,100 21,455
Interest accrued 10,599 15,903
Other 30,895 33,351
--------- ---------
Total current liabilities 343,180 334,844
--------- ---------
Deferred Credits and Other Liabilities:
Deferred income taxes 420,465 412,692
Three Mile Island Unit 2 future costs 226,748 224,354
Unamortized investment tax credits 28,633 29,134
Nuclear fuel disposal fee 30,755 30,343
Regulatory liabilities 23,786 24,195
Other 75,145 71,845
--------- ---------
Total deferred credits and other liabilities 805,532 792,563
--------- ---------
Commitments and Contingencies (Note 1)
Total Liabilities and Capitalization $2,562,443 $2,533,981
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
12
<PAGE>
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statements of Income
---------------------------------
(Unaudited)
In Thousands
----------------------
Three Months
Ended March 31,
----------------------
1998 1997
---- ----
Operating Revenues $234,748 $255,260
------- -------
Operating Expenses:
Fuel 26,071 24,489
Power purchased and interchanged:
Affiliates 1,853 4,347
Others 54,885 55,640
Other operation and maintenance 52,253 45,656
Depreciation and amortization 26,263 25,833
Taxes, other than income taxes 15,549 16,700
------- -------
Total operating expenses 176,874 172,665
------- -------
Operating Income Before Income Taxes 57,874 82,595
Income taxes 17,562 28,482
------- -------
Operating Income 40,312 54,113
------- -------
Other Income and Deductions:
Allowance for other funds used during
construction 45 179
Other income, net 284 343
Income taxes (488) (25)
------- -------
Total other income and deductions (159) 497
------- -------
Income Before Interest Charges and
Dividends on Preferred Securities 40,153 54,610
------- -------
Interest Charges and Dividends
on Preferred Securities:
Interest on long-term debt 10,623 11,254
Other interest 2,753 1,668
Allowance for borrowed funds used
during construction (203) (247)
Dividends on company-obligated mandatorily
redeemable preferred securities 2,250 2,250
------- -------
Total interest charges and dividends
on preferred securities 15,423 14,925
------- -------
Net Income 24,730 39,685
Preferred stock dividends 121 121
------- -------
Earnings Available for Common Stock $ 24,609 $ 39,564
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
13
<PAGE>
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
In Thousands
----------------------
Three Months
Ended March 31,
----------------------
1998 1997
---- ----
Operating Activities:
Net income $ 24,730 $ 39,685
Adjustments to reconcile income to cash provided:
Depreciation and amortization 29,797 28,512
Amortization of property under capital leases 3,659 3,790
Nuclear outage maintenance costs, net 1,537 1,368
Deferred income taxes and investment tax
credits, net (2,546) 6,156
Allowance for other funds used
during construction (45) (179)
Changes in working capital:
Receivables 6,404 (33,207)
Materials and supplies 921 (1,096)
Special deposits and prepayments (31,730) (13,085)
Payables and accrued liabilities (5,365) 8,507
Nonutility generation contract buyout costs (2,500) (8,550)
Other, net (3,296) (8,679)
-------- --------
Net cash provided by operating activities 21,566 23,222
-------- --------
Investing Activities:
Capital expenditures (12,104) (17,528)
Contributions to decommissioning trusts (3,621) (4,438)
Other, net (12) (11)
-------- --------
Net cash used for investing activities (15,737) (21,977)
-------- --------
Financing Activities:
Increase in notes payable, net 14,321 17,875
Capital lease principal payments (2,683) (3,872)
Dividends paid on common stock (20,000) (10,000)
Dividends paid on preferred stock (121) (236)
-------- --------
Net cash provided/(required)
by financing activities (8,483) 3,767
-------- --------
Net increase in cash and temporary cash
investments from above activities (2,654) 5,012
Cash and temporary cash investments, beginning of year 6,116 1,901
-------- --------
Cash and temporary cash investments, end of period $ 3,462 $ 6,913
======== ========
Supplemental Disclosure:
Interest and preferred dividends paid $ 20,787 $ 21,652
======== ========
Income taxes paid $ 2,250 $ 1,655
======== ========
New capital lease obligations incurred $ 19 $ 757
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
14
<PAGE>
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
---------------------------
In Thousands
-----------------------------
March 31, December 31,
1998 1997
------------ --------
(Unaudited)
ASSETS
Utility Plant:
In service, at original cost $2,829,073 $2,812,720
Less, accumulated depreciation 1,114,874 1,091,965
--------- ---------
Net utility plant in service 1,714,199 1,720,755
Construction work in progress 67,157 69,089
Other, net 24,101 26,110
--------- ---------
Net utility plant 1,805,457 1,815,954
--------- ---------
Other Property and Investments:
Nuclear decommissioning trusts, at market 73,580 68,129
Other, net 7,066 7,071
--------- ---------
Total other property and investments 80,646 75,200
--------- ---------
Current Assets:
Cash and temporary cash investments 7,544 -
Special deposits 2,647 2,449
Accounts receivable:
Customers, net 75,936 71,338
Other 29,433 21,051
Unbilled revenues 42,303 47,728
Materials and supplies, at average cost
or less:
Construction and maintenance 48,853 47,853
Fuel 15,528 14,841
Deferred income taxes 7,589 7,589
Prepayments 52,180 29,856
--------- ---------
Total current assets 282,013 242,705
--------- ---------
Deferred Debits and Other Assets:
Regulatory assets:
Income taxes recoverable through future rates 202,624 203,642
Three Mile Island Unit 2 deferred costs 90,663 89,538
Nonutility generation contract buyout costs 28,700 28,700
Other 74,662 68,220
--------- ---------
Total regulatory assets 396,649 390,100
Deferred income taxes 56,203 55,698
Other 14,276 13,118
--------- ---------
Total deferred debits and other assets 467,128 458,916
--------- ---------
Total Assets $2,635,244 $2,592,775
========= =========
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
March 31, December 31,
1998 1997
------------ -----------
(Unaudited)
LIABILITIES AND CAPITALIZATION
Capitalization:
Common stock $ 105,812 $ 105,812
Capital surplus 285,486 285,486
Retained earnings 420,237 393,708
Accumulated other comprehensive income 7,605 6,332
------- -------
Total common stockholder's equity 819,140 791,338
Cumulative preferred stock 16,681 16,681
Company-obligated mandatorily
redeemable preferred securities 105,000 105,000
Long-term debt 676,445 676,444
--------- ---------
Total capitalization 1,617,266 1,589,463
--------- ---------
Current Liabilities:
Securities due within one year 11 30,011
Notes payable 116,000 77,581
Obligations under capital leases 18,087 19,939
Accounts payable:
Affiliates 27,410 24,811
Other 55,916 62,483
Taxes accrued 28,464 15,966
Interest accrued 10,118 20,902
Other 25,471 19,654
--------- ---------
Total current liabilities 281,477 271,347
--------- ---------
Deferred Credits and Other Liabilities:
Deferred income taxes 481,328 478,182
Three Mile Island Unit 2 future costs 113,424 112,227
Unamortized investment tax credits 38,753 39,353
Nuclear fuel disposal fee 15,378 15,172
Regulatory liabilities 29,424 29,785
Other 58,194 57,246
--------- ---------
Total deferred credits and other liabilities 736,501 731,965
--------- ---------
Commitments and Contingencies (Note 1)
Total Liabilities and Capitalization $2,635,244 $2,592,775
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
16
<PAGE>
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statements of Income
---------------------------------
(Unaudited)
In Thousands
----------------------
Three Months
Ended March 31,
----------------------
1998 1997
---- ----
Operating Revenues $263,655 $289,753
------- -------
Operating Expenses:
Fuel 42,434 46,223
Power purchased and interchanged:
Affiliates 244 1,652
Others 54,714 54,128
Other operation and maintenance 60,033 53,888
Depreciation and amortization 25,644 25,696
Taxes, other than income taxes 17,963 18,797
------- -------
Total operating expenses 201,032 200,384
------- -------
Operating Income Before Income Taxes 62,623 89,369
Income taxes 19,803 30,513
------- -------
Operating Income 42,820 58,856
------- -------
Other Income and Deductions:
Allowance for other funds used during
construction - 38
Other income, net 79 145
Income taxes 14 (69)
------- -------
Total other income and deductions 93 114
------- -------
Income Before Interest Charges and
Dividends on Preferred Securities 42,913 58,970
------- -------
Interest Charges and Dividends
on Preferred Securities:
Interest on long-term debt 12,112 12,115
Other interest 2,244 1,999
Allowance for borrowed funds used
during construction (385) (335)
Dividends on company-obligated mandatorily
redeemable preferred securities 2,297 2,297
------- -------
Total interest charges and dividends
on preferred securities 16,268 16,076
------- -------
Net Income 26,645 42,894
Preferred stock dividends 116 144
------- -------
Earnings Available for Common Stock $ 26,529 $ 42,750
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
17
<PAGE>
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
In Thousands
----------------------
Three Months
Ended March 31,
----------------------
1998 1997
---- ----
Operating Activities:
Net income $ 26,645 $ 42,894
Adjustments to reconcile income to cash provided:
Depreciation and amortization 26,797 24,736
Amortization of property under capital leases 2,018 2,108
Nuclear outage maintenance costs, net 770 686
Deferred income taxes and investment tax
credits, net 1,177 523
Allowance for other funds used
during construction - (38)
Changes in working capital:
Receivables (7,556) (29,105)
Materials and supplies (1,687) (4,613)
Special deposits and prepayments (22,522) (7,007)
Payables and accrued liabilities (945) 18,979
Other, net (7,501) (5,622)
-------- --------
Net cash provided by operating activities 17,196 43,541
-------- --------
Investing Activities:
Capital expenditures (15,041) (19,488)
Contributions to decommissioning trusts (1,316) (1,316)
-------- --------
Net cash used for investing activities (16,357) (20,804)
-------- --------
Financing Activities:
Increase in notes payable, net 38,419 192
Retirement of long-term debt (30,000) -
Capital lease principal payments (1,540) (2,149)
Dividends paid on common stock - (15,000)
Dividends paid on preferred stock (174) (174)
-------- --------
Net cash provided/(required)
by financing activities 6,705 (17,131)
-------- --------
Net increase in cash and temporary
cash investments from above activities 7,544 5,606
Cash and temporary cash investments, beginning of year - -
-------- ------
Cash and temporary cash investments, end of period $ 7,544 $ 5,606
======== ========
Supplemental Disclosure:
Interest and preferred dividends paid $ 27,018 $ 23,896
======== ========
Income taxes paid $ 2,285 $ 2,347
======== ========
New capital lease obligations incurred $ 10 $ 379
======== ========
The accompanying notes are an integral part of the consolidated financial
statements
18
<PAGE>
GPU, Inc. and Subsidiary Companies
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GPU, Inc., a Pennsylvania corporation, is a holding company registered
under the Public Utility Holding Company Act of 1935. GPU, Inc. does not
directly operate any utility properties, but owns all the outstanding common
stock of three domestic electric utilities serving customers in New Jersey --
Jersey Central Power & Light Company (JCP&L) -- and Pennsylvania -- Metropolitan
Edison Company (Met-Ed) and Pennsylvania Electric Company (Penelec). The
customer service, transmission and distribution operations of these electric
utilities are conducting business under the name GPU Energy. JCP&L, Met-Ed and
Penelec considered together are referred to as the "GPU Energy companies." The
generation operations of the GPU Energy companies are conducted by GPU
Generation, Inc. (Genco) and GPU Nuclear, Inc. (GPUN). GPU, Inc. also owns all
the common stock of GPU International, Inc., GPU Power, Inc. and GPU Electric,
Inc. which develop, own and operate generation, transmission and distribution
facilities in the United States and in foreign countries. Collectively, these
are referred to as the "GPUI Group." Other wholly-owned subsidiaries of GPU,
Inc. are GPU Advanced Resources, Inc. (GPU AR), a subsidiary engaging in energy
services and retail energy sales; GPU Telcom Services, Inc. (GPU Telcom), a
subsidiary engaging in certain telecommunications-related businesses; 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 1997 Annual Report on Form 10-K. The
December 31, 1997 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 1997 Annual Report
on Form 10-K.
1. COMMITMENTS AND CONTINGENCIES
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 $1.5
billion and $1.2 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 $1.6 billion. The
$1.6 billion excludes above-market generation costs related to the Oyster Creek
Nuclear Generating Station (Oyster Creek). In July 1997, JCP&L proposed, in its
restructuring plans filed with the New Jersey Board of Public
19
<PAGE>
Utilities (NJBPU), recovery of its remaining Oyster Creek plant investment as a
regulatory asset, through a nonbypassable charge to customers (see Management's
Discussion and Analysis - Competitive Environment). At March 31, 1998, JCP&L's
net investment in Oyster Creek was $710 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 Pennsylvania Public
Utility Commission (PaPUC) their proposed restructuring plans to implement
competition and customer choice in Pennsylvania as required by the comprehensive
restructuring legislation enacted in 1996. Highlights of these plans are
presented in the Competitive Environment section of Management's Discussion and
Analysis. In May 1998, an Administrative Law Judge (ALJ) issued Recommended
Decisions in Met-Ed and Penelec's restructuring proceedings. Met-Ed and Penelec
are continuing to analyze the ALJ's recommendations, which do not contain
detailed schedules recommending proposed amounts of stranded cost disallowances,
cost allocations or other rate matters. Accordingly, management is unable to
assess the full implications of the Decisions at this time. The major elements
of the ALJ's Decisions are presented in the Competitive Environment section of
Management's Discussion and Analysis. Met-Ed and Penelec intend to file
exceptions to a number of the ALJ's recommendations by May 20, 1998. The PaPUC
is scheduled to take nonbinding polls on June 4, 1998 on the Recommended
Decisions and issue final orders on June 25, 1998.
Based on preliminary review and analysis of the Recommended Decisions,
management believes that if the PaPUC were to adopt the ALJ's recommendations in
substantial part (in particular, the proposed reduction of T&D rates), it would
have a material adverse effect on Met-Ed and Penelec's stranded cost recovery
and future earnings, except to the extent offset by spending reductions. There
can be no assurance as to the outcome of these proceedings.
In July 1997, JCP&L filed with the NJBPU its proposed restructuring plan
for a competitive electric marketplace in New Jersey as required by the NJEMP.
Highlights of this plan are presented in the Competitive Environment section of
Management's Discussion and Analysis. Although the NJBPU has stated that it
intends to complete its review of JCP&L's plan so as to permit retail
competition to begin in October 1998, this would require enacting legislation
which has not yet been introduced. Management believes it is unlikely that
legislation could be enacted in time for retail competition to begin in 1998.
In October 1997, GPU announced its intention to begin a process to sell,
through a competitive bid process, up to all of the fossil-fuel and
hydroelectric generating facilities owned by the GPU Energy companies. The
current schedule, which is subject to change, calls for initial non-binding bids
due in June 1998, selection of a short list of bidders in July 1998 and final
bid submission in October 1998. It is anticipated that definitive purchase
agreements will be entered into in November 1998 and the divestiture
20
<PAGE>
completed by mid-1999, subject to the timely receipt of the necessary regulatory
and other approvals. For additional information, see Other Commitments and
Contingencies.
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. There can be no assurance as to the extent that
stranded costs will be recoverable in Pennsylvania and New Jersey. (For
additional information, see Management's Discussion and Analysis - Competitive
Environment).
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. 71 (FAS 71), "Accounting for the Effects of
Certain Types of Regulation." Decommissioning costs, for which a liability may
have to be recorded (see Nuclear Plant Retirement Costs), and the corresponding
regulatory asset for amounts recoverable from customers, could also be subject
to writedowns. The inability to recover these stranded costs would have a
material adverse effect on GPU's results of operations. (See additional
discussion of stranded costs in Management's Discussion and Analysis -
Competitive Environment).
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 remaining periods of up to 23 years. The following table shows
actual payments from 1995 through 1997, and estimated payments from 1998 through
2002.
Payments Under NUG Agreements
-----------------------------
(in Millions)
Total JCP&L Met-Ed Penelec
----- ----- ------ -------
1995 $670 $381 $131 $158
1996 730 370 168 192
1997 759 384 172 203
* 1998 783 393 173 217
1999 789 395 167 227
2000 860 402 208 250
2001 887 411 237 239
2002 908 423 246 239
21
<PAGE>
* The 1998 amounts consist of actual payments through March 31, 1998 and
estimated payments for the remainder of the year.
As of March 31, 1998, facilities covered by agreements having 1,666 MW
(JCP&L 905 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 GPU Energy companies'
future supply plan will likely focus on short- to intermediate-term commitments
and reliance on spot market purchases. 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 Management's Discussion and Analysis - The
GPU Energy Companies' Supply Plan,); 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 to which these efforts will be successful
in whole or in part.
In 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. In January 1998, Met-Ed and Penelec entered into definitive buyout
agreements with two bidders. The PaPUC is considering Met-Ed and Penelec's
requests for approval of these agreements as part of their pending restructuring
proceedings.
In February 1997, Met-Ed and Penelec entered into revised power purchase
agreements with AES Power Corporation (AES) for 377 MW and 80 MW of capacity and
related energy, respectively, related to a combined-cycle generating facility
that AES plans to construct in Pennsylvania. Met-Ed and Penelec have paid $63.4
million and $5 million, respectively, to previous developers and AES to
terminate the original power purchase agreements. In July 1997, the PaPUC
ordered that the issue of recovery of the related buyout costs and approval of
the revised power purchase agreements with AES be considered in Met-Ed and
Penelec's restructuring proceedings. If the revised power purchase
22
<PAGE>
agreements with AES are not approved by the PaPUC, Met-Ed and Penelec have
agreed to pay AES up to an additional $28 million and $5 million, respectively.
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 are recovering certain of their NUG costs
(including certain buyout costs) from customers. 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 Management's
Discussion and Analysis - Competitive Environment for additional discussion.)
Regulatory Assets and Liabilities:
- ----------------------------------
Regulatory Assets and Regulatory Liabilities, as reflected in the March
31, 1998 and December 31, 1997 Consolidated Balance Sheets in accordance with
the provisions of FAS 71, "Accounting for the Effects of Certain Types of
Regulation", were as follows:
GPU, Inc. and Subsidiary Companies Assets (in thousands)
- ---------------------------------- ---------------------
March 31, December 31,
1998 1997
------------- -----------
Income taxes recoverable through
future rates $ 521,780 $ 510,680
Three Mile Island Unit 2 (TMI-2) deferred costs 337,754 345,326
Nonutility generation contract buyout costs 240,068 245,568
Unamortized property losses 96,355 99,532
Other postretirement benefits 88,519 89,569
Environmental remediation 71,807 90,308
N.J. unit tax 38,204 39,797
Unamortized loss on reacquired debt 39,280 40,489
Load and demand-side management programs 18,414 23,164
N.J. low-level radwaste disposal 29,653 31,479
DOE enrichment facility decommissioning 32,377 33,472
Nuclear fuel disposal fee 20,688 21,512
Storm damage 30,215 31,097
Nonutility generation costs 32,163 24,857
Other 23,775 22,402
--------- ---------
Total $1,621,052 $1,649,252
========= =========
Liabilities (in thousands)
--------------------------
March 31, December 31,
1998 1997
---------- ----------
Income taxes refundable through
future rates $ 87,568 $ 89,247
Other 15,200 12,527
--------- ---------
Total $ 102,768 $ 101,774
========= =========
23
<PAGE>
JCP&L Assets (in thousands)
- ----- ---------------------
March 31, December 31,
1998 1997
------------ ----------
Income taxes recoverable through
future rates $ 136,853 $ 128,111
TMI-2 deferred costs 102,059 109,498
Nonutility generation contract buyout costs 137,500 140,500
Unamortized property losses 91,641 94,726
Other postretirement benefits 48,977 49,807
Environmental remediation 41,683 61,324
N.J. unit tax 38,204 39,797
Unamortized loss on reacquired debt 28,029 28,729
Load and demand-side management programs 18,414 23,164
N.J. low-level radwaste disposal 29,653 31,479
DOE enrichment facility decommissioning 20,439 21,223
Nuclear fuel disposal fee 23,045 23,781
Storm damage 30,215 31,097
Other 1,934 2,466
--------- ---------
Total $ 748,646 $ 785,702
========= =========
Liabilities (in thousands)
--------------------------
March 31, December 31,
1998 1997
------------ ----------
Income taxes refundable through
future rates $ 36,861 $ 37,759
Other 14,129 11,467
--------- ---------
Total $ 50,990 $ 49,226
========= =========
Met-Ed Assets (in thousands)
- ------ ---------------------
March 31, December 31,
1998 1997
------------- --------
Income taxes recoverable through
future rates $ 182,303 $ 178,927
TMI-2 deferred costs 145,032 146,290
Nonutility generation contract buyout costs 73,868 76,368
Unamortized property losses 2,579 2,650
Other postretirement benefits 39,542 39,762
Environmental remediation 4,121 4,121
Unamortized loss on reacquired debt 5,134 5,329
DOE enrichment facility decommissioning 7,959 8,166
Nuclear fuel disposal fee (1,540) (1,511)
Nonutility generation costs 12,602 10,265
Other 5,589 4,515
--------- ---------
Total $ 477,189 $ 474,882
========= =========
Liabilities (in thousands)
March 31, December 31,
1998 1997
------------- --------
Income taxes refundable through
future rates $ 21,393 $ 21,749
Other 2,393 2,446
--------- ---------
Total $ 23,786 $ 24,195
========= =========
24
<PAGE>
Penelec Assets (in thousands)
- ------- ---------------------
March 31, December 31,
1998 1997
------------- --------
Income taxes recoverable through
future rates $ 202,624 $ 203,642
TMI-2 deferred costs 90,663 89,538
Nonutility generation contract buyout costs 28,700 28,700
Unamortized property losses 2,135 2,156
Environmental remediation 26,003 24,863
Unamortized loss on reacquired debt 6,117 6,431
DOE enrichment facility decommissioning 3,979 4,083
Nuclear fuel disposal fee (817) (758)
Nonutility generation costs 19,561 14,592
Other 17,684 16,853
--------- ---------
Total $ 396,649 $ 390,100
========= =========
Liabilities (in thousands)
--------------------------
March 31, December 31,
1998 1997
------------- -----------
Income taxes refundable through
future rates $ 29,314 $ 29,739
Other 110 46
--------- ---------
Total $ 29,424 $ 29,785
========= =========
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
1998 dollars) and JCP&L's share of long-term monitored storage costs. For
additional information, see Nuclear Plant Retirement 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 Management's Discussion and Analysis The GPU Energy
Companies' Supply Plan).
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
(EITF) 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 Environmental Matters.
25
<PAGE>
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 and demand-side factor. 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.
Department of Energy (DOE) enrichment facility decommissioning: Represents
- -------------------------------------------------------------------
payments to the DOE over a 15-year period which began in 1994.
Nuclear fuel disposal fee: Represents amounts recoverable through rates for
- --------------------------
estimated future disposal costs for spent nuclear fuel at Oyster Creek and Three
Mile Island Unit 1 (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.
Nonutility generation costs: Represents incremental NUG operating costs incurred
- ---------------------------
above amounts reflected in Met-Ed and Penelec's current rates, for which rate
recovery is probable but has not yet been granted (see Management's Discussion
and Analysis - Competitive Environment).
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. At March
31, 1998, GPU has recorded on the Consolidated Balance Sheets $1.6 billion 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 Securities and Exchange Commission (SEC) questioned the
26
<PAGE>
continued applicability of FAS 71 by investor-owned utilities with respect to
their electric generation operations.
In response to the concerns expressed by the Staff of the SEC, the
Financial Accounting Standards Board's (FASB) EITF agreed to discuss the issues
surrounding the continued applicability of FAS 71 to the electric utility
industry. In 1997, the EITF met to discuss these issues and 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, as well as any newly established regulated assets (including
those related to generation), on their balance sheets 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
NJBPU's final findings and recommendations, 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, by no later than mid-1998 for
Met-Ed and Penelec, and October 1998 for JCP&L, the expected approval dates of
their restructuring plans filed with state regulators. Once the GPU Energy
companies are able to determine that the generation portion of their operations
is no longer subject to the provisions of FAS 71, the related regulatory assets,
net of regulatory liabilities, would, to the extent that recovery is not
provided for through their respective restructuring plans, have to be written
off and charged to expense. 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.
Additionally, the inability of the GPU Energy companies to recover their
above-market costs of power purchase commitments, in whole or in part, could
result in the recording of liabilities and corresponding charges to expense. The
amount of charges 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 position.
In December 1997, the PaPUC rejected PECO Energy Company's (PECO)
restructuring settlement and approved an alternate plan for PECO based on its
findings in that case. PECO took a pre-tax charge to 1997 income of $3.1 billion
reflecting the effects of the PaPUC order. Met-Ed and Penelec believe that the
PaPUC's decision in the PECO case was based on the specific facts and
circumstances of that proceeding. Met-Ed and Penelec further believe that they
have demonstrated in their restructuring proceedings ample evidence to
distinguish sufficiently their cases from PECO's and that the PaPUC should not,
therefore, apply its findings in the PECO case to their pending restructuring
plans. If, however, the PaPUC were to apply these findings, it would have a
material adverse impact on Met-Ed and Penelec's stranded cost recovery,
restructuring proceedings and future earnings.
27
<PAGE>
In April 1998, PECO and other parties to PECO's restructuring proceeding,
including Met-Ed and Penelec, filed a joint petition for settlement (Joint
Petition) with the PaPUC. The Joint Petition represents a comprehensive
settlement that resolves numerous issues on appeal by the parties to the
settlement, including an agreement by Met-Ed, Penelec and PECO to withdraw from
each others respective restructuring cases. Additionally, PECO has agreed not to
participate when the PaPUC reviews Met-Ed and Penelec's sale of their generating
facilities. The Joint Petition was tentatively approved by the PaPUC and the
final vote is currently scheduled for May 14, 1998. There can be no assurance as
to the outcome of this matter.
Should the restructuring proceedings in New Jersey and Pennsylvania result
in substantial disallowance of certain capital additions; the disallowance of
certain stranded costs; reduction in cost of capital allowances on certain
elements of plant and cost deferrals; and tariff rate unbundling reflecting an
allocation of costs to the transmission and distribution activities lower than
that proposed by the GPU Energy companies, management believes that the outcome
of these proceedings would have a material adverse effect on GPU's future
earnings.
FAS 121 requires that regulatory assets meet the recovery criteria of FAS
71 on an ongoing basis in order to avoid a write-down. 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.
NUCLEAR FACILITIES
------------------
The GPU Energy companies have made investments in three major nuclear
projects -- TMI-1 and Oyster Creek, both of which are operating generation
facilities, and 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 March 31, 1998 and
December 31, 1997, the GPU Energy companies' net investment in TMI-1 and Oyster
Creek, including nuclear fuel, was as follows:
Net Investment (in millions)
----------------------------
TMI-1 Oyster Creek
----- ------------
March 31, 1998
--------------
JCP&L $152 $710
Met-Ed 293 -
Penelec 143 -
--- ---
Total $588 $710
=== ===
Net Investment (in millions)
----------------------------
TMI-1 Oyster Creek
----- ------------
December 31, 1997
-----------------
JCP&L $155 $701
Met-Ed 300 -
Penelec 147 -
--- ---
Total $602 $701
=== ===
28
<PAGE>
The GPU Energy companies' net investment in TMI-2 at March 31, 1998 and
December 31, 1997 was $82 million and $84 million, respectively (JCP&L $74
million and $76 million, respectively; Met-Ed $1 million and $1 million,
respectively; Penelec $7 million and $7 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
Competition and the Changing Regulatory Environment.)
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. Although management believes that the current rate
structure would allow for the recovery of and return on its net investment in
the plant and provide for decommissioning costs, there can be no assurance that
such costs will be fully recoverable. (See Management's Discussion and Analysis
- - Competitive Environment).
The GPU Energy companies have also entered into a confidentiality
agreement with a potential purchaser of TMI-1. Unlike Oyster Creek, however, the
early retirement of TMI-1 is not being considered because of its lower operating
costs. In the event that TMI-1 is sold, there can be no assurance of full
recovery of its remaining investment.
TMI-2:
- ------
The 1979 TMI-2 accident resulted in individual claims for alleged personal
injury (including claims for punitive damages), which are material in amount,
have been 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
29
<PAGE>
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 get compensatory as well as punitive damages.
The Court of Appeals also ruled that the standard of care owed by the
defendants to a plaintiff was determined by the specific level of radiation
which was released into the environment, as measured at the site boundary,
rather than as measured at the specific site where the plaintiff was located at
the time of the accident (as the defendants proposed). The Court of Appeals also
held that each plaintiff still must demonstrate exposure to radiation released
during the TMI-2 accident and that such exposure had resulted in injuries. In
1996, the U.S. Supreme Court denied petitions filed by GPU, Inc. and the GPU
Energy companies to review the Court of Appeals' rulings.
In June 1996, the District Court granted a motion for summary judgment
filed by GPU, Inc. and the GPU Energy companies, and dismissed all of the 2,100
pending claims. The Court ruled that there was no evidence which created a
genuine issue of material fact warranting submission of plaintiffs' claims to a
jury. The plaintiffs have appealed the District Court's ruling to the Court of
Appeals for the Third Circuit, before which the matter is pending. 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 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
30
<PAGE>
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 1998 dollars) are as follows:
(in millions)
Oyster
TMI-1 TMI-2 Creek
----- ----- -----
JCP&L $ 45 $ 72 $310
Met-Ed 91 144 -
Penelec 45 72 -
--- --- ---
Total $181 $288 $310
=== === ===
The funding targets, while not considered cost estimates, are reference levels
designed to assure that licensees demonstrate adequate financial responsibility
for decommissioning. While the NRC regulations address activities related to the
removal of the radiological portions of the plants, they do not establish
residual radioactivity limits nor do they address costs related to the removal
of nonradiological structures and materials.
In 1995, a consultant to GPUN performed site-specific studies of the TMI
site, including both Units 1 and 2, and of Oyster Creek, that considered various
decommissioning methods and estimated the cost of decommissioning the
radiological portions and the cost of removal of the nonradiological portions of
each plant, using the prompt removal/dismantlement method. GPUN management has
reviewed the methodology and assumptions used in these studies, is in agreement
with them, and believes the results are reasonable. The NRC may require an
acceleration of the decommissioning funding for Oyster Creek if the plant is
retired early. The retirement cost estimates under the site-specific studies are
as follows (in 1998 dollars):
(in millions)
Oyster
TMI-1 TMI-2 Creek
----- ----- -----
Radiological decommissioning $333 $404 $391
Nonradiological cost of removal 82 33 * 38
--- --- ---
Total $415 $437 $429
=== === ===
* Net of $11.2 million spent as of March 31, 1998.
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. Customer
31
<PAGE>
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 FASB Exposure Draft discussed below.
The FASB has issued an Exposure Draft titled "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
which includes nuclear plant retirement costs. If the Exposure Draft is adopted,
Oyster Creek and TMI-1 future retirement costs would have to be recognized as a
liability immediately, rather than the current industry practice of accruing
these costs in accumulated depreciation over the life of the plants. A
regulatory asset for amounts probable of recovery through rates would also be
established. Any amounts not probable of recovery through rates would have to be
charged to expense. (For TMI-2, a liability (in 1998 dollars) has already been
recognized, based on the 1995 site-specific study because the plant is no longer
operating (see TMI-2)). The effective date of this accounting change has not yet
been established.
TMI-1 and Oyster Creek:
- -----------------------
The 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 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.
The 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 first quarter of 1998
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 three
months ended March 31, 1998:
JCP&L $ 1 $ 6
Met-Ed 2 -
Penelec 1 -
--- ---
$ 4 $ 6
=== ===
32
<PAGE>
(in millions)
Oyster
TMI-1 Creek
----- -----
Accumulated depreciation
provision at March 31, 1998:
JCP&L $ 41 $235
Met-Ed 75 -
Penelec 32 -
--- ---
$148 $235
=== ===
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
March 31, 1998 and December 31, 1997 are as follows:
(in millions)
GPU JCP&L Met-Ed Penelec
--- ----- ------ -------
March 31, 1998 $453 $113 $227 $113
December 31, 1997 $449 $112 $225 $112
These amounts are based upon the 1995 site-specific study estimates (in 1998 and
1997 dollars, respectively) discussed above and an estimate for remaining
incremental monitored storage costs of $16 million (JCP&L $4 million; Met-Ed $8
million; Penelec $4 million) as of March 31, 1998 and December 31, 1997, 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 $453 million liability at March 31, 1998 is $256 million
(JCP&L $29 million; Met-Ed $144 million; Penelec $83 million) which is probable
of recovery from customers and included in Three Mile Island Unit 2 deferred
costs on the Consolidated Balance Sheets, and $238 million (JCP&L $94 million;
Met-Ed $105 million; Penelec $39 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 in the first quarter of
1998 amounted to $3 million (JCP&L $573 thousand; Met-Ed $2,496 thousand;
Penelec $255 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 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
33
<PAGE>
recorded a regulatory asset for that portion of such costs which it believes to
be probable of recovery.
At March 31, 1998, the accident-related portion of TMI-2 radiological
decommissioning costs is considered to be $71 million (JCP&L $18 million, Met-Ed
$35 million; Penelec $18 million), which is the difference between the 1995
TMI-1 and TMI-2 site-specific study estimates (in 1998 dollars). In connection
with rate case resolutions at the time, JCP&L, Met-Ed and Penelec made
contributions to irrevocable external trusts relating to their shares of the
accident-related portions of the decommissioning liability. In 1990, JCP&L
contributed $15 million and in 1991, Met-Ed and Penelec contributed $40 million
and $20 million, respectively, to irrevocable external trusts. These
contributions were not recovered from customers and have been expensed. The GPU
Energy companies will not pursue recovery from customers for any of these
amounts contributed in excess of the $71 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 the Price-Anderson Act, the GPU Energy companies are
34
<PAGE>
also subject to retrospective premium assessments of up to $26.5 million (JCP&L
$17.0 million; Met-Ed $6.3 million; Penelec $3.2 million) in any one year under
insurance policies applicable to nuclear operations and facilities.
The GPU Energy companies have insurance coverage for incremental
replacement power costs resulting from an accident-related outage at their
nuclear plants. Coverage commences after a 17 week waiting period at $3.5
million per week, and after 23 weeks of an outage, continues for three years
beginning at $1.8 million and $2.6 million per week for the first year for
Oyster Creek and TMI-1, respectively, decreasing to 80% of such amounts for
years two and three.
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 (MGP), 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 $248
million (JCP&L $44 million; Met-Ed $98 million; Penelec $106 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.
Effective November 1997, the Pennsylvania Environmental Quality Board adopted
regulations implementing the OTC's proposed NOx reductions and in December 1997,
the New Jersey Department of Environmental Protection developed a proposal with
the electric utility industry on a plan to implement the OTC's proposed NOx
reductions. The GPU Energy companies expect that the U.S. Environmental
Protection Agency (EPA) will approve state implementation plans, including those
in Pennsylvania and New Jersey, and that as a result, they will spend an
estimated $6 million (JCP&L $0.2 million; Met-Ed $2.8 million; Penelec $3.0
million) (included in the above total), to meet the 1999 seasonal reductions
agreed upon by the OTC. The OTC has stated that it anticipates that additional
NOx reductions will be necessary to meet the Clean Air Act's 2005 National
Ambient Air Quality Standard for ozone. However, the specific requirements that
will have to be met at that time have not been finalized. In addition, in July
1997 the EPA adopted new, more stringent rules on ozone and particulate matter.
Several groups have filed suit in the U.S.
Court of Appeals to overturn these new air quality standards
35
<PAGE>
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
----- ------ ------- ---- -------- -----
7 4 2 1 1 12
In addition, certain of the GPU companies have been requested to
participate in the remediation or supply information to the EPA and state
environmental authorities on several other sites for which they have not been
formally named as PRPs, although the EPA and state authorities may nevertheless
consider them as PRPs. Certain of the GPU companies have also been named in
lawsuits requesting damages (which are material in amount) for hazardous and/or
toxic substances allegedly released into the environment. The ultimate cost of
remediation will depend upon changing circumstances as site investigations
continue, including (a) the existing technology required for site cleanup, (b)
the remedial action plan chosen and (c) the extent of site contamination and the
portion attributed to the GPU companies involved.
In 1997, the EPA filed a complaint against GPU, Inc. in the United States
District Court for the District of Delaware for enforcement of its unilateral
order issued against GPU, Inc. to clean up the former Dover Gas Light Company
(Dover) manufactured gas production site in Dover, Delaware. Dover was part of
the AGECO/AGECORP group of companies from 1929 until 1942 and GPU, Inc. emerged
from the AGECO/AGECORP reorganization proceedings. All of the common stock of
Dover was sold in 1942 by a member of the AGECO/AGECORP group to an unaffiliated
entity, and was subsequently acquired by Chesapeake Utilities Corporation.
According to the complaint, the EPA is seeking up to $0.5 million in past costs,
$4.2 million for work in connection with the cleanup of the Dover site and
approximately $19 million in penalties. GPU, Inc. has responded to the EPA
complaint stating that such claims should be dismissed because, among other
things, they are barred by the operation of the Final Decree entered by the
United States District Court for the Southern District of New York at the
conclusion of the 1946 reorganization proceedings of AGECO/AGECORP. Chesapeake
Utilities Corporation has also sued GPU, Inc. for a contribution to the cleanup
of the Dover site. In December 1997, the Court refused to dismiss the complaint;
GPU has requested that the Court reconsider its decision. There can be no
assurance as to the outcome of these proceedings.
Pursuant to federal environmental monitoring requirements, Penelec has
reported to the Pennsylvania Department of Environmental Protection (PaDEP) that
contaminants from coal mine refuse piles were identified in storm water run-off
at Penelec's Seward station property. Penelec signed a modified Consent Order,
which became effective December 1996, that establishes a
36
<PAGE>
schedule for submitting a plan for long-term remediation, based on future
operating scenarios. 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 March 31, 1998. These cost estimates are
subject to uncertainties based on continuing discussions with the PaDEP as to
the method of remediation, the extent of remediation required and available
cleanup technologies. Penelec has requested, and expects to receive, recovery of
these remediation costs in its restructuring plan filed with the PaPUC (see
Management's Discussion and Analysis - Competitive Environment), and has
recorded a corresponding regulatory asset of approximately $12 million at March
31, 1998.
In 1997, the GPU Energy companies filed with the PaDEP applications for
re-permitting seven (JCP&L - one; Met-Ed - three; Penelec - three) 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 $17 million to $22 million, and a liability of $17 million (JCP&L
$1 million; Met-Ed $4 million; Penelec $12 million) is reflected on the
Consolidated Balance Sheets at March 31, 1998. JCP&L has requested recovery of
its share of closure costs in its restructuring plan filed with the NJBPU in
July 1997. Penelec and Met-Ed expect recovery through their restructuring plans
filed with the PaPUC in June 1997 (see Management's Discussion and Analysis
Competitive Environment). As a result, a regulatory asset of $17 million is
reflected on the Consolidated Balance Sheets at March 31, 1998.
JCP&L has entered into agreements with the New Jersey Department of
Environmental Protection for the investigation and remediation of 17 formerly
owned MGP sites. JCP&L has also entered into various cost-sharing agreements
with other utilities for most of the sites. As of March 31, 1998, JCP&L has
spent approximately $28 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 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. At March 31, 1998, JCP&L had recorded on its
Consolidated Balance Sheet a regulatory asset of $35 million.
JCP&L is continuing to pursue reimbursement from its insurance carriers
for remediation costs already spent and for future estimated costs. In 1994,
JCP&L filed a complaint with the Superior Court of New Jersey against several of
its insurance carriers, relative to these MGP sites. Pretrial discovery is
continuing.
37
<PAGE>
OTHER COMMITMENTS AND CONTINGENCIES
-----------------------------------
Year 2000 Issue:
- ----------------
GPU is addressing year 2000 issues as they relate to its business, its
operations and operating systems, and its relationship with customers, banks,
partners, vendors, suppliers and service providers. Comprehensive reviews of all
computers, equipment, systems and applications are being performed; remediation
plans are being developed; and certain corrective actions have begun. GPU's
remediation plans include, among other things, the upgrade or replacement of
computers, equipment and computer software. GPU currently anticipates that its
year 2000 remediation efforts will, in all material respects, be completed by
the end of 1999. In the event corrective actions are not completed by this date,
certain computers, equipment, systems and applications may not function
properly, which could have a material adverse effect on GPU's operations.
As part of their year 2000 solution, the GPU Energy companies have
purchased and are installing an integrated information system (Project
Enterprise) that will help them manage business growth and meet the mandates of
electric utility deregulation. The system is scheduled to be fully operational
in early 1999. As a result of the planned implementation of Project Enterprise,
the GPU Energy Companies will avoid spending an estimated $8 million (JCP&L $3
million; Met-Ed $2 million; Penelec $3 million) in modifications to existing
systems to make them year 2000 compliant.
The GPU Energy Companies currently estimate they will spend an additional
$24 million (JCP&L $11 million; Met-Ed $7 million; Penelec $6 million) on year
2000 remediation of their computers, equipment and computer software. Of this
amount, approximately $7 million (JCP&L $3 million; Met-Ed $2 million; Penelec
$2 million) would have been spent in any event because of maintenance and
cyclical replacement plans that are already in place.
The GPUI Group currently estimates it will spend approximately $7 million
to become year 2000 ready, primarily to replace or modify equipment.
GPUI Group:
- -----------
At March 31, 1998, the GPUI Group had investments totaling approximately
$2.4 billion in businesses and facilities located in foreign countries. Although
management attempts to mitigate the risk of investing in certain foreign
countries by securing political risk insurance, the GPUI Group faces additional
risks inherent to operating in such locations, including foreign currency
fluctuations (see Management's Discussion and Analysis - GPUI Group).
At March 31, 1998, GPU, Inc.'s aggregate investment in the GPUI Group was
$518 million; GPU, Inc. has also guaranteed up to an additional $913 million of
GPUI Group obligations. Of this amount, $726 million is included in Long-term
debt and Securities due within one year on GPU's Consolidated Balance Sheet at
March 31, 1998; $30 million of that amount relates to a GPU International, Inc.
revolving credit agreement; and $157 million relates to various other
obligations of the GPUI 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 $28 million.
38
<PAGE>
In July 1997, NIMO and 16 independent power producers (IPP), including the GPUI
Group, executed a master agreement providing for the restructuring or
termination of 29 power purchase agreements, pursuant to which NIMO has agreed
to pay an aggregate of $3.6 billion in cash and/or debt securities, and to issue
an aggregate of 46 million shares of NIMO common stock. The specific terms of
restructured contracts that may be executed are being negotiated separately with
each IPP. In February 1998, the New York Public Service Commission approved
NIMO's restructuring agreement.
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, and other state and federal agencies;
third party consents; successful financing by NIMO; and resolution of certain
tax issues. While the parties are attempting to complete the transactions by
mid-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.
Other:
- ------
In October 1997, GPU announced its intention to begin a process to sell,
through a competitive bid process, up to all of the fossil-fuel and
hydroelectric generating facilities owned by the GPU Energy companies. These
facilities, comprised of 26 operating stations, support organizations and
development sites, total approximately 5,300 MW (JCP&L 1,900 MW; Met-Ed 1,300
MW; Penelec 2,100 MW) of capacity and have a net book value of approximately
$1.1 billion (JCP&L $288 million; Met-Ed $305 million; Penelec $546 million) at
March 31, 1998. The net proceeds from the sale would be used to reduce the
capitalization of the respective GPU Energy companies and may also be applied to
reduce short-term debt, finance further acquisitions, and to reduce acquisition
debt of the GPUI Group. In April 1998, GPU mailed Confidential Offering
Memoranda to qualified buyers. One Memorandum covers 25 fossil-fueled and
hydroelectric stations, support organizations and development sites and a second
Memorandum is for the 1,884 MW coal-fired Homer City Station, which Penelec is
selling together with its 50% joint owner, New York State Electric & Gas
Corporation.
The current schedule, which is subject to change, calls for initial
non-binding bids due in June 1998, selection of a short list of bidders in July
1998 and final bid submission in October 1998. It is anticipated that definitive
purchase agreements will be entered into in November 1998 and the divestiture
completed by mid-1999, subject to the timely receipt of the necessary regulatory
and other approvals. For the Homer City Station, initial, non-binding bids will
be due in May, with the winning bidder expected to be announced by the end of
July 1998.
GPU's capital programs, for which substantial commitments have been
incurred and which extend over several years, contemplate expenditures of $582
million (JCP&L $204 million; Met-Ed $92 million; Penelec $121 million; Other
$165 million) during 1998. As a consequence of reliability, licensing,
environmental and other requirements, additions to utility plant may be
39
<PAGE>
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 1998 and 2007, 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. The GPU Energy
companies' share of the cost of coal purchased under these agreements is
expected to aggregate $171 million (JCP&L $26 million; Met-Ed $55 million;
Penelec $90 million) for 1998.
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 614 MW in 1998, declining to 529 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 $129 million in 1998, $111 million in
1999, $83 million in 2000, $92 million in 2001, and $101 million in 2002.
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 Court of Appeals compel the DOE to begin disposing of spent nuclear
fuel beginning not later than January 31, 1998. In November 1997, the Court
declined to compel the DOE to begin disposing of spent fuel by the statutory
deadline or to authorize the utilities to cease payments into the Nuclear Waste
Fund. The DOE's inability to accept spent nuclear fuel by 1998 could have a
material impact on GPU's results of operations, as additional costs may be
incurred to build and maintain interim on-site storage at Oyster Creek. TMI-1
has sufficient on-site storage capacity to accommodate spent nuclear fuel
through the end of its licensed life. In June 1997, a consortium of electric
utilities, including GPUN, filed a license application with the NRC seeking
permission to build an interim 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 March 31, 1998, $6 million has
been paid. As a result, at March 31, 1998, 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 of Competition and the
40
<PAGE>
Changing Regulatory Environment.) In February 1998, the New Jersey Low-Level
Radwaste Facility Siting Board (Siting Board) voted to suspend the siting
process in New Jersey. The Siting Board is reviewing its legal and financial
obligations, subject to review from the Governor. GPUN cannot determine at this
time what effect, if any, this matter will have on its operations.
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 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.
At March 31, 1998, GPU, Inc. and consolidated affiliates had 9,401
employees worldwide, of which about 9,000 employees were located in the U.S. The
majority of the U.S. workforce is employed by the GPU Energy companies, of which
4,862 are represented by unions for collective bargaining purposes. JCP&L,
Met-Ed and Penelec's collective bargaining agreements with the International
Brotherhood of Electrical Workers expire in 1999, 2000 and 2002, respectively.
Penelec's five-year contract with the Utility Workers Union of America expires
on June 30, 1998, and renegotiations have begun.
During the normal course of the operation of its businesses, in addition
to the matters described above, GPU is from time to time involved in disputes,
claims and, in some cases, as a defendant in litigation in which compensatory
and punitive damages are sought by the public, customers, contractors, vendors
and other suppliers of equipment and services and by employees alleging unlawful
employment practices. While management does not expect that the outcome of these
matters will have a material effect on GPU's financial position or results of
operations, there can be no assurance that this will continue to be the case.
2. ACCOUNTING FOR DERIVATIVE INSTRUMENTS
GPU's use of derivative financial and commodity instruments is principally
limited to the GPUI Group. GPU does not hold or issue derivative financial or
commodity instruments for trading purposes.
Interest Rate Swap Agreements:
- ------------------------------
The GPUI Group uses interest rate swap agreements to manage the risk of
increases in variable interest rates. At March 31, 1998, these agreements
covered approximately $1.4 billion of debt and are scheduled to expire on
various dates through November 2007. The GPUI Group records amounts paid and
received under the agreements as adjustments to the interest expense of the
underlying debt since the swaps are related to specific assets, liabilities or
anticipated transactions of the GPUI Group. For the three months ended March 31,
1998, fixed rate interest expense exceeded variable rate interest by
approximately $4.8 million.
41
<PAGE>
3. GPUI GROUP EQUITY INVESTMENTS
The GPUI Group uses the equity method of accounting for investments in
which it has the ability to exercise significant influence over the operating
and financial policies of the investee (generally evidenced by a 20% to 50%
ownership interest). Investments accounted for under the equity method follow:
Ownership
Investment Location of Operations Percentage
- ---------- ---------------------- ----------
Midlands Electricity plc United Kingdom 50%
Mid-Georgia Cogeneration, L.P. United States 50%
Prime Energy, L.P. United States 50%
Onondaga Cogen, L.P. United States 50%
Pasco Cogen, Ltd. United States 50%
GPU Solar, Inc. United States 50%
Termobarranquilla S.A. Colombia 29%
Selkirk Cogeneration Partners, L.P. United States 19%
EnviroTech Investment Fund United States 10%
Ballard Generation Systems, Inc. Canada 10%
Project Orange Associates, L.P. United States 4%
OLS Power, L.P. United States 1%
Summarized financial information for the GPUI Group's equity method
investments (which are not consolidated in the financial statements), including
both the GPUI Group's ownership interests and the non-ownership interests, is as
follows:
Ownership
---------
Balance Sheet Data (in thousands) GPUI Group Other Owners
- ------------------ ---------- ------------
March 31, 1998
- --------------
Current Assets $ 225,502 $ 329,523
Noncurrent Assets 2,715,956 3,409,024
Current Liabilities (896,575) (953,957)
Long-Term Debt (1,191,094) (1,786,352)
Other Noncurrent Liabilities (273,504) (358,005)
--------- ---------
Equity in Net Assets $ 580,285 $ 640,233
========= =========
December 31, 1997
- -----------------
Current Assets $ 284,033 $ 391,018
Noncurrent Assets 2,918,125 3,616,461
Current Liabilities (755,499) (814,572)
Long-Term Debt (1,497,982) (2,086,257)
Other Noncurrent Liabilities (307,504) (396,675)
--------- ---------
Equity in Net Assets $ 641,173 $ 709,975
========= =========
42
<PAGE>
Ownership
---------
Earnings Data (in thousands) GPUI Group Other Owners
- ------------- ---------- ------------
For the three months ended March 31, 1998
- -----------------------------------------
Operating Revenues $ 357,584 $ 382,424
Depreciation and Amortization (19,905) (19,345)
Operating Income 49,294 56,195
Other Income and Deductions (4,664) (1,840)
Interest and Preferred Dividends (26,979) (33,500)
------- -------
Equity in Net Income $ 17,651 $ 20,855
======= =======
For the three months ended March 31, 1997
Operating Revenues $ 411,739 $ 453,103
Depreciation and Amortization (19,366) (22,686)
Operating Income 76,032 86,492
Other Income and Deductions (14,175) (13,075)
Interest and Preferred Dividends (29,630) (38,233)
------- -------
Equity in Net Income $ 32,227 $ 35,184
======= =======
For the three months ended March 31, 1998 and 1997, the GPUI Group received cash
distributions totaling $1.9 million and $6.1 million, respectively.
As of March 31, 1998 and December 31, 1997, GPUI Group equity investments
on the Consolidated Balance Sheets included goodwill (net of accumulated
amortization) of approximately $24 million and $66 million, respectively, which
is amortized to expense over periods not exceeding 40 years. Amortization
expense for the three months ended March 31, 1998 and 1997 amounted to $0.4
million and $0.1 million, respectively.
In January 1998, as a result of the Australian State of Victoria's
cross-ownership restrictions, GPU Electric sold its 50% stake in Solaris Power
(Solaris) to The Australian Gas Light Company for A$208 million (approximately
U.S. $135.2 million) and a 10.36% stake in Allgas Energy Limited (Allgas), the
natural gas distributor in Queensland, Australia. The Allgas shares had a market
value of A$14.6 million (approximately U.S. $9.5 million) at the date of the
sale. As a result, GPU recorded an after-tax gain on the sale of U.S. $18.3
million in the first quarter of 1998.
43
<PAGE>
4. SEGMENT INFORMATION
In 1997, GPU adopted Statement of Financial Accounting Standards No. 131
(FAS 131), "Disclosures about Segments of an Enterprise and Related
Information," which requires the reporting of certain financial information by
business segment and geographic area. For the purpose of providing segment
information, the GPU Energy companies consist of the three domestic electric
utility companies serving customers in Pennsylvania and New Jersey, as well as
Genco, GPUN, GPU Telcom and GPUS. The GPUI Group primarily develops, owns and
operates generation, transmission and distribution facilities in the United
States and in foreign countries. GPU AR is engaged in energy services and retail
energy sales. Corporate represents the activities of GPU, Inc., a registered
holding company. GPU's reportable segments are strategic business units that are
managed separately due to their different operating and regulatory environments.
GPU's segment information is as follows:
44
<PAGE>
<TABLE>
Balance Sheet Segment Data (in thousands)
<CAPTION>
Current Noncurrent Current
March 31, 1998 Assets Assets Liabilities
- -------------- ------- ---------- -----------
<S> <C> <C> <C>
Domestic:
GPU Energy companies $ 879,850 $ 9,128,474 $1,125,665
GPUI Group* 77,931 291,975 59,328
Less: GPUI Group equity investments
included above (43,346) (249,906) (36,871)
Add: Original equity investment and
income/(loss) less dividends to date - 68,903 -
GPU AR 3,001 13 658
Corporate 885 6,261 108,336
--------- ---------- ---------
Subtotal 918,321 9,245,720 1,257,116
--------- ---------- ---------
Foreign: (GPUI Group only)
Australia* 84,880 1,855,273 503,220
United Kingdom* 178,536 2,212,451 838,488
Other* 58,850 375,994 33,660
Less: GPUI Group equity investments
included above (182,156) (2,466,050) (859,704)
Add: Original equity investment and
income/(loss) less dividends to date - 552,190 -
--------- ---------- ---------
Subtotal 140,110 2,529,858 515,664
--------- ---------- ---------
Consolidated Total $1,058,431 $11,775,578 $1,772,780
========= ========== =========
Other Cash
Long-Term Noncurrent Capital
March 31, 1998 Debt Liabilities Expenditures
- -------------- ---- ----------- ------------
Domestic:
GPU Energy companies $2,448,734 $2,822,114 $ 68,110
GPUI Group* 221,583 55,425 1,123
Less: GPUI Group equity investments
included above (221,583) (16,081) (774)
Add: Original equity investment and
income/(loss) less dividends to date - - -
GPU AR - - -
Corporate - 1,405 -
--------- --------- ---------
Subtotal 2,448,734 2,862,863 68,459
--------- --------- ---------
Foreign: (GPUI Group only)
Australia* 1,215,619 75,463 1,316
United Kingdom* 1,133,536 245,791 29,947
Other* 235,814 63,095 8,516
Less: GPUI Group equity investments
included above (969,511) (257,423) (34,586)
Add: Original equity investment and
income/(loss) less dividends to date - - -
--------- --------- ---------
Subtotal 1,615,458 126,926 5,193
--------- --------- ---------
Consolidated Total $4,064,192 $2,989,789 $ 73,652
========= ========= =========
</TABLE>
Includes the effect of consolidating the GPUI Group's ownership interest in
investments accounted for under the equity method (pro-rata consolidation),
which are not consolidated in the audited consolidated financial
statements.
45
<PAGE>
<TABLE>
Balance Sheet Segment Data (in thousands) (continued)
<CAPTION>
Current Noncurrent Current
December 31, 1997 Assets Assets Liabilities
- ----------------- ------- ----------- -----------
<S> <C> <C> <C>
Domestic:
GPU Energy companies $ 831,269 $ 9,117,687 $1,140,492
GPUI Group* 81,027 352,139 90,097
Less: GPUI Group equity investments
included above (43,777) (182,384) (21,360)
Add: Original equity investment and
income/(loss) less dividends to date - 79,458 -
GPU AR 4,961 161 3,301
Corporate 165 6,313 155,977
--------- ---------- ---------
Subtotal 873,645 9,373,374 1,368,507
--------- ---------- ---------
Foreign: (GPUI Group only)
Australia* 86,226 2,091,619 558,496
United Kingdom* 188,462 2,152,977 785,152
Other* 114,786 396,078 43,419
Less: GPUI Group equity investments
included above (240,256) (2,735,741) (734,139)
Add: Original equity investment and
income/(loss) less dividends to date 106,317 517,221 -
--------- ---------- ---------
Subtotal 255,535 2,422,154 652,928
--------- ---------- ---------
Consolidated Total $1,129,180 $11,795,528 $2,021,435
========= ========== =========
Other Cash
Long-Term Noncurrent Capital
December 31, 1997 Debt Liabilities Expenditures
- ----------------- ---- ----------- ------------
Domestic:
GPU Energy companies $2,448,672 $2,823,301 $ 356,416
GPUI Group* 263,378 46,880 111,125
Less: GPUI Group equity investments
included above (171,665) (12,321) (120)
Add: Original equity investment and
income/(loss) less dividends to date - - -
GPU AR - - -
Corporate - 1,418 -
--------- --------- ---------
Subtotal 2,540,385 2,859,278 467,421
--------- --------- ---------
Foreign: (GPUI Group only)
Australia* 1,485,639 115,390 1,811,921
United Kingdom* 1,367,471 245,105 77,706
Other* 258,794 64,803 1,213
Less: GPUI Group equity investments
included above (1,326,317) (295,183) (89,624)
Add: Original equity investment and
income/(loss) less dividends to date - - -
--------- --------- ---------
Subtotal 1,785,587 130,115 1,801,216
--------- --------- ---------
Consolidated Total $4,325,972 $2,989,393 $2,268,637
========= ========= =========
</TABLE>
Includes the effect of consolidating the GPUI Group's ownership interest in
investments accounted for under the equity method (pro-rata consolidation),
which are not consolidated in the audited consolidated financial
statements.
46
<PAGE>
<TABLE>
Earnings Segment Data (in thousands)
<CAPTION>
Depreciation
For the three months Operating and Operating
ended March 31, 1998 Revenues Amortization Income
- -------------------- -------- ------------ ------
<S> <C> <C> <C>
Domestic:
GPU Energy companies $ 968,888 $ 114,901 $ 161,796
GPUI Group* 46,036 2,512 7,064
Less: GPUI Group equity investments
included above (29,337) (2,334) (7,861)
Add: Equity in undistributed earnings
of affiliates, net - - -
GPU AR 1,925 - (815)
Corporate - - (1,001)
--------- ------- -------
Subtotal 987,512 115,079 159,183
--------- ------- -------
Foreign: (GPUI Group only)
Australia* 48,243 10,496 32,126
United Kingdom* 322,735 14,198 43,493
Other* 12,866 4,946 (28)
Less: GPUI Group equity investments
included above (328,247) (17,571) 41,433)
Add: Equity in undistributed earnings
of affiliates, net - - -
--------- ------- -------
Subtotal 55,597 12,069 34,158
--------- ------- -------
Consolidated Total $1,043,109 $ 127,148 $ 193,341
========= ======= =======
Other Interest and
For the three months Income and Preferred
ended March 31, 1998 Deductions Dividends Net Income
- -------------------- ---------- --------- ----------
Domestic:
GPU Energy companies $ 1,421 $ 61,179 $ 102,038
GPUI Group* 4,413 4,850 6,627
Less: GPUI Group equity investments
included above 1,224 (4,714) (1,923)
Add: Equity in undistributed earnings
of affiliates, net 1,923 - 1,923
GPU AR 21 - (794)
Corporate 26 1,458 (2,433)
------ ------- -------
Subtotal 9,028 62,773 105,438
------ ------- -------
Foreign: (GPUI Group only)
Australia* 17,154 29,785 19,495
United Kingdom* (2,779) 30,693 10,021
Other* 531 1,176 (1,174)
Less: GPUI Group equity investments
included above 3,440 (22,265) (15,728)
Add: Equity in undistributed earnings
of affiliates, net 15,728 - 15,728
------ ------- -------
Subtotal 34,074 39,389 28,342
------ ------- -------
Consolidated Total $ 43,102 $ 102,162 $ 133,780
====== ======= =======
</TABLE>
* Includes the effect of consolidating the GPUI Group's ownership interest in
investments accounted for under the equity method (pro-rata consolidation),
which are not consolidated in the audited consolidated financial statements.
47
<PAGE>
<TABLE>
Earnings Segment Data (in thousands)(continued)
<CAPTION>
Depreciation
For the three months Operating and Operating
ended March 31, 1997 Revenues Amortization Income
- -------------------- --------- ------------ -------
<S> <C> <C> <C>
Domestic:
GPU Energy companies $1,042,064 $ 113,339 $ 195,441
GPUI Group* 36,909 2,361 5,884
Less: GPUI Group equity investments
included above (35,108) (2,199) (7,344)
Add: Equity in undistributed earnings/
(losses) of affiliates, net - - -
GPU AR - - -
Corporate - - (1,282)
--------- ------- -------
Subtotal 1,043,865 113,501 192,699
--------- ------- -------
Foreign: (GPUI Group only)
Australia* 35,949 2,458 9,378
United Kingdom* 336,505 13,967 63,273
Other* 11,324 2,439 (404)
Less: GPUI Group equity investments
included above (376,631) (17,167) (68,688)
Add: Equity in undistributed earnings/
of affiliates, net - - -
--------- ------- -------
Subtotal 7,147 1,697 3,559
--------- ------- -------
Consolidated Total $1,051,012 $ 115,198 $ 196,258
========= ======= =======
Other Interest and
For the three months Income and Preferred
ended March 31, 1997 Deductions Dividends Net Income
- -------------------- ---------- ----------- ----------
Domestic:
GPU Energy companies $ 3,790 $ 61,759 $ 137,472
GPUI Group* (1,657) 5,451 (1,224)
Less: GPUI Group equity investments
included above 2,337 (5,084) 77
Add: Equity in undistributed earnings/
(losses) of affiliates, net (77) - (77)
GPU AR - - -
Corporate (208) 1,187 (2,677)
------ ------ -------
Subtotal 4,185 63,313 133,571
------ ------ -------
Foreign: (GPUI Group only)
Australia* (1,585) 6,018 1,775
United Kingdom* (14,851) 27,402 21,020
Other* 954 1,731 (1,328)
Less: GPUI Group equity investments
included above 11,838 (24,546) (32,304)
Add: Equity in undistributed earnings
of affiliates, net 32,304 - 32,304
------ ------ -------
Subtotal 28,660 10,605 21,467
------ ------ -------
Consolidated Total $ 32,845 $ 73,918 $ 155,038
====== ====== =======
</TABLE>
Includes the effect of consolidating the GPUI Group's ownership interest in
investments accounted for under the equity method (pro-rata consolidation),
which are not consolidated in the audited consolidated financial
statements.
48
<PAGE>
5. COMPREHENSIVE INCOME
For the three months ended March 31, 1998 and 1997, comprehensive income
was as follows:
(in thousands)
Three months
Ended March 31,
---------------
GPU, Inc. and Subsidiary Companies 1998 1997
- ---------------------------------- ---- ----
Net income $133,780 $155,038
------- -------
Other comprehensive income, net of tax:
Net unrealized gains on investments 3,820 1,161
Foreign currency translation 10,743 (593)
------- -------
Total other comprehensive income 14,563 568
------- -------
Comprehensive income $148,343 $155,606
======= =======
Met-Ed
- ------
Net income $ 24,730 $ 39,685
------- -------
Other comprehensive income, net of tax:
Net unrealized gains on investments 2,547 773
------- -------
Comprehensive income $ 27,277 $ 40,458
======= =======
Penelec
- -------
Net income $ 26,645 $ 42,894
------- -------
Other comprehensive income, net of tax:
Net unrealized gains on investments 1,273 388
------- -------
Comprehensive income $ 27,918 $ 43,282
======= =======
49
<PAGE>
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 "GPUI Group." Other wholly-owned subsidiaries of GPU,
Inc. are GPU Advanced Resources, Inc. (GPU AR), a subsidiary engaging in energy
services and retail energy sales; GPU Telcom Services, Inc. (GPU Telcom), a
subsidiary engaging in certain telecommunications-related businesses; 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 first quarter ended March 31, 1998 were $133.8
million, compared to 1997 first quarter earnings of $155.0 million. Earnings per
share on a diluted basis were $1.07 in 1998, compared to $1.28 per share in
1997.
The first quarter earnings decrease was due to lower income from GPU's
domestic utility operations, which are conducted by GPU Energy. GPU Energy's
earnings reduction versus the first quarter of last year was due to the absence
in the current quarter's results of the step increase in unbilled revenue
recorded 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; lower weather-related sales due to milder winter
temperatures this year compared to last; and increased expenses primarily
related to the reengineering of business processes to position GPU for
deregulation.
Partially offsetting the earnings reduction was increased GPUI Group
income due to gains on the sales of its interest in Solaris Power (Solaris),
half its interest in the Mid-Georgia cogeneration project and Midlands
Electricity plc (Midlands) generation development projects. These gains were
partially offset by lower Midlands earnings due in part to lower weather-related
sales. The business of the GPUI Group includes investment, development and
operation of global businesses and, when appropriate, purchase and sale of
interests in particular businesses.
50
<PAGE>
GPU RESULTS OF OPERATIONS (continued)
- -------------------------
OPERATING REVENUES:
- -------------------
Operating revenues for the first quarter of 1998 decreased 0.8% to $1.04
billion, as compared to the first quarter of 1997. The components of the changes
are as follows:
(in millions)
-------------
GPU Energy companies:
Kilowatt-hour (KWH) revenues $(38.7)
Energy-related revenues 1.9
GPU Telcom revenues 4.9
Other revenues (41.2)
-----
Total GPU Energy companies (73.1)
GPUI Group 63.3
GPU AR 1.9
-----
Total decrease in revenues $ (7.9)
=====
GPU Energy Companies
Kilowatt-hour revenues
- ----------------------
The decrease in KWH revenues for the three month period was due primarily
to the absence in the first quarter of 1998 of the step increase in unbilled
revenue recorded by Met-Ed and Penelec as a result of including their ECRs in
base rates. KWH revenues now include 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). Also contributing to the decrease were lower weather-related sales
due to milder winter temperatures this year compared to last, and decreased
usage by residential and commercial customers.
Energy-related revenues (JCP&L only)
- ------------------------------------
Generally, changes in energy-related revenues do not affect earnings as
they reflect corresponding changes in JCP&L's levelized energy adjustment clause
(LEAC) billed to customers and expensed. The increase for the three month period
was due primarily to increased sales to other utilities, partially offset by
lower residential, commercial and industrial customer sales and lower energy
cost rates.
GPU Telcom revenues
- -------------------
GPU Telcom, a subsidiary engaged in certain telecommunication related
businesses, was formed in 1997. Its 1998 revenues were derived from contracts
for the leasing and construction of telecommunication infrastructure.
Other revenues
- --------------
Generally, changes in other revenues do not affect earnings as they are
offset by corresponding changes in expense.
51
<PAGE>
GPU RESULTS OF OPERATIONS (continued)
- -------------------------------------
GPUI Group
The increase in GPUI Group revenues was due mainly to the inclusion of
revenues from GPU PowerNet (PowerNet), which was acquired by GPU Electric in
November 1997.
GPU AR
GPU AR, which was formed in the second quarter of 1997, derived its
revenues from energy sales to customers who chose it as their energy supplier as
part of the retail access pilot programs in Pennsylvania (see COMPETITIVE
ENVIRONMENT). Some of GPU AR's customers are located in the GPU Energy
companies' service territories.
OPERATING EXPENSES:
- -------------------
Power purchased and interchanged (PP&I)
- ---------------------------------------
Changes in the energy component of PP&I expense do not significantly
affect JCP&L's earnings since these cost variances are passed through the LEAC.
However, beginning on January 1, 1997, such cost variances for Met-Ed and
Penelec are not subject to deferred accounting and have a current impact on
earnings, except for incremental nonutility generation (NUG) costs, which are
included in Regulatory assets on the Consolidated Balance Sheets (see
COMPETITIVE ENVIRONMENT). Lower reserve capacity expense (which is a component
of PP&I) contributed to earnings for the first three months of 1998.
Fuel and Deferral of energy and capacity costs, net
- ---------------------------------------------------
For JCP&L, changes in fuel and deferral of energy and capacity costs, net
do not affect earnings as they are offset by corresponding changes in energy
revenues. Effective January 1, 1997, Met-Ed and Penelec ceased deferred energy
accounting as their ECRs were combined with base rates; therefore, cost
variances have a current impact on earnings (see COMPETITIVE ENVIRONMENT). For
Penelec, lower fuel costs contributed to earnings for the first three months of
1998.
Other operation and maintenance (O&M)
- -------------------------------------
The increase in other O&M expenses for the three month period was due to
increased GPUI Group O&M expenses resulting from the inclusion of PowerNet and
the effect of consolidating its investment in Lake Cogen, Ltd. beginning in June
1997. Also contributing to the increase were expenses related to the
reengineering of business processes to position GPU for deregulation, and the
inclusion of O&M expenses for GPU Telcom, and GPU AR.
52
<PAGE>
GPU RESULTS OF OPERATIONS (continued)
- -------------------------
Depreciation and amortization
- -----------------------------
The increase in depreciation and amortization expense for the three month
period was due mainly to the inclusion of PowerNet, as well as additions to GPU
Energy's plant in service and higher depreciation rates.
Taxes, other than income taxes
- ------------------------------
For JCP&L, changes in taxes other than income taxes do not significantly
affect earnings as they are substantially recovered in revenues. However,
effective January 1, 1997, Met-Ed and Penelec's STAS were combined with base
rates and are no longer subject to annual adjustment (see COMPETITIVE
ENVIRONMENT). This did not have a significant impact on earnings for the first
three months of 1998.
OTHER INCOME AND DEDUCTIONS:
- ----------------------------
Equity in undistributed earnings of affiliates, net
- ---------------------------------------------------
The decrease in equity in undistributed earnings of affiliates, net for
the three month period was due to lower Midlands earnings due in part to lower
weather-related sales.
Other income, net
- -----------------
The increase in other income, net for the three month period was due
primarily to gains realized by the GPUI Group from the sales of its interest in
Solaris, half its interest in the Mid-Georgia cogeneration project and Midlands
generation development projects.
INTEREST CHARGES AND PREFERRED DIVIDENDS:
- -----------------------------------------
Interest on long-term debt
- --------------------------
The increase in interest on long-term debt for the three month period was
due primarily to debt associated with the PowerNet acquisition. A portion of
this debt was reduced in the first quarter of 1998 from proceeds received from
GPU Electric's sale of its interest in Solaris and the sale of GPU, Inc. common
stock.
Other interest
- --------------
The increase in other interest for the three month period was due to
higher Met-Ed and Penelec short-term debt levels.
53
<PAGE>
JCP&L RESULTS OF OPERATIONS
---------------------------
JCP&L's earnings for the first quarter ended March 31, 1998 were $50.1
million, compared to 1997 first quarter earnings of $55.2 million. The decrease
in earnings was due primarily to lower sales to customers due to decreased usage
and lower weather-related sales.
OPERATING REVENUES:
- -------------------
Operating revenues for the first quarter of 1998 decreased 7.5% to $472.3
million, as compared to the first quarter of 1997. The components of the changes
are as follows:
(in millions)
-------------
KWH revenues $ (2.2)
Energy-related revenues 1.5
Other revenues (37.4)
-----
Decrease in revenues $(38.1)
Kilowatt-hour revenues
- ----------------------
The decrease in KWH revenues for the three month period was due to lower
usage by residential and commercial customers and lower weather-related sales to
residential customers, partially offset by an increase in the number of
commercial customers.
Energy-related revenues
- -----------------------
Changes in energy-related revenues do not affect earnings as they reflect
corresponding changes in the LEAC billed to customers and expensed. The increase
for the three month period was due primarily to increased sales to other
utilities, partially offset by lower residential, commercial and industrial
sales and lower energy cost rates.
Other revenues
- --------------
Generally, changes in other revenues do not affect earnings as they are
offset by corresponding changes in expense.
OPERATING EXPENSES:
- -------------------
Power purchased and interchanged
- --------------------------------
Changes in the energy component of PP&I expense do not significantly
affect earnings since these cost variances are passed through the LEAC. However,
lower reserve capacity expense resulting primarily from reduced purchases from
Pennsylvania Power & Light Company contributed to earnings for the three month
period.
54
<PAGE>
JCP&L RESULTS OF OPERATIONS (continued)
- ---------------------------------------
Fuel and Deferral of energy and capacity costs, net
- ---------------------------------------------------
Changes in fuel and deferral of energy and capacity costs, net 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 month period was
primarily due to lower costs at the Oyster Creek facility, partially offset by
higher expenses related to the reengineering of business processes to position
the company for deregulation.
Depreciation and amortization
- -----------------------------
The increase in depreciation and amortization expense for the three month
period was due primarily to additions to plant in service and slightly higher
depreciation rates.
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.
MET-ED RESULTS OF OPERATIONS
----------------------------
Met-Ed's earnings for the first quarter ended March 31, 1998 were $24.6
million, compared to 1997 first quarter earnings of $39.6 million. This decrease
was primarily due to the absence in the first quarter of 1998 of the step
increase in unbilled revenue as a result of the company including its ECR in
base rates and the cessation of deferred energy accounting, both effective
January 1, 1997 (See COMPETITIVE ENVIRONMENT).
OPERATING REVENUES:
- -------------------
Operating revenues for the first quarter of 1998 decreased 8.0% to $234.7
million as compared to the first quarter of 1997. The components of the changes
are as follows:
(in millions)
-------------
KWH revenues $(19.5)
Other revenues (1.0)
----
Decrease in revenues $(20.5)
======
Kilowatt-hour revenues
- ----------------------
The decrease in KWH revenues for the three month period was due primarily
to the absence in the first quarter of 1998 of the step increase in unbilled
revenue as a result of the company including its ECR in base rates, amounting
55
<PAGE>
MET-ED RESULTS OF OPERATIONS (continued)
- ----------------------------------------
to $13 million. Also contributing to the decrease were lower weather-related
sales and lower usage by residential and commercial customers.
Other revenues
- --------------
Generally, changes in other revenues do not affect earnings as they are
offset by corresponding changes in expense.
OPERATING EXPENSES:
- -------------------
Fuel and Power purchased and interchanged
- -----------------------------------------
Effective January 1, 1997, Met-Ed ceased deferred energy accounting as
its ECR was combined with base rates. Thus, energy cost variances now have a
current impact on earnings, except for incremental NUG costs, which are included
in Regulatory assets on the Consolidated Balance Sheets (see COMPETITIVE
ENVIRONMENT). Changes in fuel and power purchased and interchanged did not have
a significant impact on earnings for the first three months of 1998.
Other operation and maintenance
- -------------------------------
The increase in other O&M expenses was due to increased expenses related
to the reengineering of business processes to position the company for
deregulation and for maintenance of substation equipment and overhead lines.
Taxes, other than income taxes
- ------------------------------
Effective January 1, 1997, Met-Ed's STAS was combined with base rates and
is no longer subject to annual adjustment. (see COMPETITIVE ENVIRONMENT) The
change for the three month period did not have a significant impact on earnings.
INTEREST CHARGES AND DIVIDENDS ON PREFERRED SECURITIES:
- -------------------------------------------------------
Other interest
- --------------
The increase in other interest expense for the three month period was due
to higher short-term debt levels.
PENELEC RESULTS OF OPERATIONS
-----------------------------
Penelec's earnings for the first quarter ended March 31, 1998 were $26.5
million, compared to 1997 first quarter earnings of $42.8 million. This decrease
was primarily due to the absence in the first quarter of 1998 of the step
increase in unbilled revenue as a result of the company including its ECR in
base rates and the cessation of deferred energy accounting, both effective
January 1, 1997 (See COMPETITIVE ENVIRONMENT).
56
<PAGE>
PENELEC RESULTS OF OPERATIONS (continued)
- -----------------------------------------
OPERATING REVENUES:
- -------------------
Operating revenues for the first quarter of 1998 decreased 9.0% to $263.7
million, as compared to the first quarter of 1997. The components of the changes
are as follows:
(in millions)
-------------
KWH revenues $(21.8)
Other revenues (4.3)
----
Decrease in revenues $(26.1)
======
Kilowatt-hour revenues
- ----------------------
The decrease in KWH revenues for the three month period was due to the
absence in the first quarter of 1998 of the step increase in unbilled revenue as
a result of the company including its ECR in base rates, amounting to $15
million. Also contributing to the decrease were lower weather-related sales to
residential and commercial customers.
Other revenues
- --------------
Generally, changes in other revenues do not affect earnings as they are
offset by corresponding changes in expense. The decrease for the three month
period was partially due to lower transmission revenues.
OPERATING EXPENSES:
- -------------------
Fuel and Power purchased and interchanged
- -----------------------------------------
Effective January 1, 1997, Penelec ceased deferred energy accounting as
its ECR was combined with base rates. Thus, energy cost variances now have a
current impact on earnings, except for incremental NUG costs, which are included
in Regulatory assets on the Consolidated Balance Sheets (see COMPETITIVE
ENVIRONMENT). Lower fuel costs and reserve capacity expense contributed to
earnings for the first three months of 1998.
Other operation and maintenance
- -------------------------------
The increase in other O&M expenses for the three month period was due to
increased expenses related to the reengineering of business processes to
position the company for deregulation.
Taxes, other than income taxes
- ------------------------------
Effective January 1, 1997, Penelec's STAS was combined with base rates
and is no longer subject to annual adjustment. (see COMPETITIVE ENVIRONMENT) The
change for the three month period did not have a significant impact on earnings.
57
<PAGE>
GPUI GROUP
----------
The GPUI 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 GPUI Group has ownership interests in transmission,
distribution and supply businesses in England and Australia. It also has
ownership interests in eight operating cogeneration plants in the U.S. totaling
847 megawatts (MW) (of which the GPUI Group's equity interest represents 308 MW)
of capacity, and ten operating generating facilities located in foreign
countries totaling 3,820 MW (of which the GPUI Group's equity interest
represents 713 MW) of capacity. It also has investments in six generating
facilities under construction totaling 2,131 MW (of which the GPUI Group's
equity interest represents 488 MW) of capacity. The business of the GPUI Group
includes investment, development and operation of these businesses and, when
appropriate, purchase and sale of interests in particular businesses.
At March 31, 1998, GPU, Inc.'s aggregate investment in the GPUI Group was
$518 million; GPU, Inc. has also guaranteed up to an additional $913 million of
GPUI Group obligations. GPU, Inc. has Securities and Exchange Commission (SEC)
approval to finance investments in foreign utility companies (FUCOs) and exempt
wholesale generators (EWGs) up to an aggregate amount equal to 100% of GPU's
average consolidated retained earnings, or approximately $2.2 billion as of
March 31, 1998. At March 31, 1998, GPU, Inc. has remaining authorization to
finance approximately $904 million of additional investments in FUCOs and EWGs.
To the extent the GPU Energy companies no longer meet the requirements of FAS 71
as a result of regulatory action with respect to the GPU Energy companies'
restructuring plans, any resulting write-offs would reduce GPU's retained
earnings. Such reductions would reduce the amount of available authorization for
investments in FUCOs and EWGs.
In January 1998, as a result of the Australian State of Victoria's
cross-ownership restrictions, GPU Electric sold its 50% stake in Solaris to The
Australian Gas Light Company for A$208 million (approximately U.S. $135.2
million) and 10.36% of the outstanding common stock of Allgas Energy Limited
(Allgas), the natural gas distributor in Queensland, Australia. The Allgas
shares had a market value of A$14.6 million (approximately U.S. $9.5 million) at
the date of sale. As a result, GPU recorded an after-tax gain on the sale of
$18.3 million in the first quarter of 1998.
In February 1998, GPU International, Inc. sold half of its interest in
the Mid-Georgia cogeneration project (Mid-Georgia). As a result, GPU recorded an
after-tax gain on the sale of $5.8 million in the first quarter of 1998. The 300
MW Mid-Georgia cogeneration facility, located in Kathleen, Georgia, is scheduled
to enter commercial operation in the second quarter of 1998 subject to obtaining
waivers of certain air emission requirements.
Management expects that the GPUI 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 amount of these investments, however,
will depend upon the availability of appropriate opportunities and financing
capabilities.
58
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Year 2000 Issue
- ---------------
GPU is addressing year 2000 issues as they relate to its business, its
operations and operating systems, and its relationship with customers, banks,
partners, vendors, suppliers and service providers. Comprehensive reviews of all
computers, equipment, systems and applications are being performed; remediation
plans are being developed; and certain corrective actions have begun. GPU's
remediation plans include, among other things, the upgrade or replacement of
computers, equipment and computer software. GPU currently anticipates that its
year 2000 remediation efforts will, in all material respects, be completed by
the end of 1999. In the event corrective actions are not completed by this date,
certain computers, equipment, systems and applications may not function
properly, which could have a material adverse effect on GPU's operations.
As part of their year 2000 solution, the GPU Energy companies have
purchased and are installing an integrated information system (Project
Enterprise) that will help them manage business growth and meet the mandates of
electric utility deregulation. The system is scheduled to be fully operational
in early 1999. As a result of the planned implementation of Project Enterprise,
the GPU Energy Companies will avoid spending an estimated $8 million (JCP&L $3
million; Met-Ed $2 million; Penelec $3 million) in modifications to existing
systems to make them year 2000 compliant.
The GPU Energy Companies currently estimate they will spend an additional
$24 million (JCP&L $11 million; Met-Ed $7 million; Penelec $6 million) on year
2000 remediation of their computers, equipment and computer software. Of this
amount, approximately $7 million (JCP&L $3 million; Met-Ed $2 million; Penelec
$2 million) would have been spent in any event because of maintenance and
cyclical replacement plans that are already in place.
The GPUI Group currently estimates it will spend approximately $7 million
to become year 2000 ready, primarily to replace or modify equipment.
Capital Expenditures
- --------------------
GPU Energy Companies
The GPU Energy companies' capital spending for the three months ended
March 31, 1998 was $68 million (JCP&L $40 million; Met-Ed $12 million; Penelec
$15 million; Other $1 million), and was used primarily for new customer
connections and to maintain and improve existing transmission and distribution
facilities. For 1998 capital expenditures are forecasted to be $441 million
(JCP&L $204 million; Met-Ed $92 million; Penelec $121 million; Other $24),
mainly related to the GPU Energy companies and will be used primarily for
ongoing system development and to implement Project Enterprise. Expenditures for
maturing obligations will total $43 million (JCP&L $13 million; Penelec $30
million) in 1998. Management estimates that a substantial portion of the GPU
Energy companies' 1998 capital outlays will be satisfied through internally
generated funds.
59
<PAGE>
GPUI Group
The GPUI Group's capital spending was $6 million for the three months
ended March 31, 1998. For 1998, capital expenditures are forecasted to be $141
million. Expenditures for maturing obligations will total $589 million in 1998.
Management estimates that a substantial portion of the GPUI Group's 1998 capital
outlays will be satisfied through external financings.
Financing
- ---------
GPU, Inc.
In February 1998, GPU, Inc. sold seven million shares of common stock.
The net proceeds of $269 million were used primarily to reduce indebtedness
associated with the PowerNet and Midlands acquisitions, and the balance was used
for other corporate purposes. GPU, Inc. has received SEC approval to issue and
sell up to $300 million of unsecured debentures through 2001. Further
significant investments by the GPUI Group, or otherwise, may require GPU, Inc.
to issue additional debt and/or common stock (see GPUI GROUP for a discussion of
GPU, Inc.'s remaining investment authorization).
GPU Energy Companies
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 special purpose entity, and would use the proceeds to
reduce stranded costs resulting from customer choice, including NUG contract
buyout costs (see THE GPU ENERGY COMPANIES' SUPPLY PLAN), and to reduce
capitalization. The timing and amount of any sale will depend upon Pennsylvania
Public Utility Commission (PaPUC) approval of restructuring plans, resolution of
legal challenges, and receipt of a favorable ruling from the Internal Revenue
Service, as well as market conditions. It is expected that similar legislation
will be introduced in New Jersey to permit the sale of securitized transition
bonds. See COMPETITIVE ENVIRONMENT for further discussion of these bonds.
In February 1998, Penelec redeemed at maturity $30 million principal
amount of FMBs. On May 1, 1998, JCP&L redeemed $10 million stated value of
cumulative preferred stock pursuant to mandatory sinking fund provisions.
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 1999. 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.
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'
60
<PAGE>
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.
Current plans call for the GPU Energy companies to issue senior
securities during the next three years to fund the redemption of maturing senior
securities, refinance outstanding senior securities if economic, and finance
construction activities.
GPUI Group
In January 1998, as a result of Victoria's cross-ownership restrictions,
GPU Electric sold its 50% stake in Solaris for A$208 million (approximately U.S.
$135.2 million) and a 10.36% stake in Allgas valued at A$14.6 million
(approximately U.S. $9.5 million) at the date of sale. Approximately U.S. $52
million of the net sales proceeds were used to extinguish Solaris acquisition
debt and approximately U.S. $60 million was used to reduce PowerNet acquisition
debt. The balance of the proceeds was applied for other corporate purposes.
In the first quarter of 1998, the GPUI Group reduced PowerNet and
Midlands acquisition debt by $40 million and $189 million, respectively, from
proceeds provided by the sale of GPU, Inc. common stock. The GPUI Group may
further reduce Midlands and PowerNet acquisition debt with a portion of the
proceeds from the proposed sale of the GPU Energy companies' fossil-fueled and
hydroelectric generating facilities, which is expected to be completed in
mid-1999. (see Managing the Transition section of COMPETITIVE ENVIRONMENT).
Capitalization
- --------------
On April 2, 1998, the GPU Board of Directors raised the quarterly common
stock dividend by 3%. On an annualized basis, the dividend would be $2.06 per
share.
COMPETITIVE ENVIRONMENT
-----------------------
Managing the Transition
- -----------------------
As competition in the electric utility industry increases, the price of
electricity and quality of customer service will be critical. GPU has been
active both on the federal and state levels in helping to shape electric
industry restructuring while seeking to protect the interests of its
shareholders and customers, and is attempting to assess the impact that these
competitive pressures and other changes will have on its financial condition and
results of operations.
In October 1997, GPU announced its intention to begin a process to sell,
through a competitive bid process, up to all of the fossil-fuel and
hydroelectric generating facilities owned by the GPU Energy companies. These
facilities, comprised of 26 operating stations, support organizations and
development sites, total approximately 5,300 MW (JCP&L 1,900 MW; Met-Ed 1,300
61
<PAGE>
MW; Penelec 2,100 MW) of capacity and have a net book value of approximately
$1.1 billion (JCP&L $288 million; Met-Ed $305 million; Penelec $546 million) at
March 31, 1998. The net proceeds from the sale would be used to reduce the
capitalization of the respective GPU Energy companies and may also be applied to
reduce short-term debt, finance further acquisitions, and to reduce acquisition
debt of the GPUI Group. In April 1998, GPU mailed Confidential Offering
Memoranda to qualified buyers. One Memorandum covers 25 fossil-fueled and
hydroelectric stations, support organizations and development sites and a second
Memorandum is for the 1,884 MW coal-fired Homer City Station, which Penelec is
selling together with its 50% joint owner, New York State Electric & Gas
Corporation.
The current schedule, which is subject to change, calls for initial
non-binding bids due in June 1998, selection of a short list of bidders in July
1998 and final bid submission in October 1998. It is anticipated that definitive
purchase agreements will be entered into in November 1998 and the divestiture
completed by mid-1999, subject to the timely receipt of the necessary regulatory
and other approvals. For the Homer City Station, initial, non-binding bids will
be due in May, with the winning bidder expected to be announced by the end of
July 1998.
In addition to the continued operation of the Oyster Creek Nuclear
Generating Station (Oyster Creek), JCP&L is exploring the sale or early
retirement of the plant to mitigate costs associated with its continued
operation. The GPU Energy companies have also entered into a confidentiality
agreement with a potential purchaser of Three Mile Island Unit 1 (TMI-1). Unlike
Oyster Creek, however, the early retirement of TMI-1 is not being considered
because of its lower operating costs. In the event that TMI-1 is sold, there can
be no assurance of full recovery of GPU's remaining investment.
Recent Regulatory Actions
- -------------------------
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, two-thirds to choose by January 1,
2000 and all retail consumers to do so 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 Note 1 of the Notes to Consolidated Financial
Statements Competition and the Changing Regulatory Environment.
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
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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 1999.
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. An
independent system operator (ISO) will be responsible for coordinating the
generation and transmission of electricity in an efficient and nondiscriminatory
manner.
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, as revised through January 1998,
include:
- - One-third of retail customers would be able to choose their electric
suppliers beginning on January 1, 1999, two-thirds by January 1, 2000 and
all retail 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 provide the opportunity to
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 payments to NUGs in excess
of amounts in current rates. This clause would provide for a full
reconciliation of amounts paid to NUGs, and recovered from customers.
This would ensure that customers do not overpay for these obligations,
and it would also provide a vehicle for flowing through to customers the
full benefits of any prospective reductions in NUG obligations that
result from mitigation. At March 31, 1998, the deferred NUG balances for
Met-Ed and Penelec were $12.6 million and $19.6 million, respectively,
and are included in Other Regulatory Assets on the Consolidated Balance
Sheets.
- - Stranded costs at the time of initial customer choice (December 31,
1998), on a present value basis, are estimated at $1.5 billion for Met-Ed
and $1.2 billion for Penelec. These stranded costs include above-market
costs related to power purchase commitments, company-owned generation,
generating plant decommissioning, regulatory assets and transition
expenses.
- - Ongoing stranded cost mitigation efforts include the buyout and/or
renegotiation of several above-market NUG agreements; the planned
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- - 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
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 $44.6 million for
Met-Ed and $19.1 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 $812 million for Met-Ed and $593
million for Penelec.
- - 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.
Numerous parties have intervened in these proceedings and are actively
contesting various aspects of the filings, including the quantification of
stranded costs and the fixing of the level of generation credits for customers
who choose alternative suppliers. Evidentiary hearings have been concluded and
briefs were filed in April.
In May 1998, an ALJ issued Recommended Decisions in Met-Ed and Penelec's
restructuring proceedings. Met-Ed and Penelec are continuing to analyze the
ALJ's recommendations, which do not contain detailed schedules recommending
proposed amounts of stranded cost disallowances, cost allocations or other rate
matters. Accordingly, management is unable to assess the full implications of
the Decisions at this time. The following, however, are the major elements of
the ALJ's recommendations:
- - The ALJ, while recommending no overall rate reductions, has recommended
the adoption of lower unbundled transmission and distribution (T&D) rates
than the companies requested, by reallocating certain T&D costs to
generation.
- - The ALJ rejected the proposed use of a NUG Cost Rate to recover payments
to NUGs in excess of amounts in current rates. The ALJ has proposed a
one-time determination of above-market NUG costs which would be recovered
through a CTC over seven years (the recommended transition period),
beginning January 1, 1999.
- - The ALJ accepted Met-Ed and Penelec's proposed two stage ratemaking
process for their fossil-fuel and hydro generation asset divestiture (See
Managing the Transition) whereby the ultimate level of stranded costs and
resulting CTC rates would be determined after the actual net divestiture
proceeds are known. Interim CTC rates would be established based upon the
level of stranded costs approved in stage one.
- - The ALJ has endorsed a market line higher than that recommended by
Met-Ed and Penelec.
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- - The ALJ rejected Met-Ed and Penelec's proposal to adopt a levelized
generation credit (shopping credit) for customers who choose alternative
suppliers. Instead, the ALJ recommended a shopping credit that rises over
time consistent with the recommended market line determination.
- - The ALJ approved Met-Ed and Penelec's NUG buyout costs, but rejected
their request for rate cap exceptions.
- - The ALJ accepted Met-Ed and Penelec's proposed level of funding for
nuclear decommissioning costs which would be recovered through T&D rates.
- - Met-Ed and Penelec will remain the provider of last resort for customers
who cannot or do not wish to purchase energy from an alternative
supplier, but the ALJ has recommended a competitive bid process for
provider of last resort customers.
Met-Ed and Penelec intend to file exceptions to a number of the ALJ's
recommendations by May 20, 1998. The PaPUC is scheduled to take nonbinding polls
on June 4, 1998 on the Recommended Decisions and issue final orders on June 25,
1998.
Based on preliminary review and analysis of the Recommended Decisions,
management believes that if the PaPUC were to adopt the ALJ's recommendations in
substantial part (in particular, the proposed reduction of T&D rates), it would
have a material adverse effect on Met-Ed and Penelec's stranded cost recovery
and future earnings, except to the extent offset by spending reductions. There
can be no assurance as to the outcome of these proceedings.
In December 1997, the PaPUC rejected PECO Energy Company's (PECO)
restructuring settlement and approved an alternate plan for PECO based on its
findings in that case. Among other things, the alternate plan accelerates the
pace of retail competition in Pennsylvania and reduces the amount of PECO's
recoverable stranded costs. PECO has appealed the PaPUC's decision. PECO took a
pre-tax charge to 1997 income of $3.1 billion reflecting the effects of the
PaPUC order. Met-Ed and Penelec believe that the PaPUC's decision in the PECO
case was based on the specific facts and circumstances of that proceeding.
Met-Ed and Penelec further believe that they have demonstrated in their
restructuring proceedings ample evidence to distinguish sufficiently their cases
from PECO's and that the PaPUC should not, therefore, apply its findings in the
PECO case to their pending restructuring plans. If, however, the PaPUC were to
apply these findings, it would have a material adverse impact on Met-Ed and
Penelec's stranded cost recovery, restructuring proceedings and future earnings.
In April 1998, PECO and other parties to PECO's restructuring proceeding,
including Met-Ed and Penelec, filed a joint petition for settlement (Joint
Petition) with the PaPUC. The Joint Petition represents a comprehensive
settlement that resolves numerous issues on appeal by the parties to the
settlement, including an agreement by Met-Ed, Penelec and PECO to withdraw from
each others respective restructuring cases. Additionally, PECO has agreed not to
participate when the PaPUC reviews Met-Ed and Penelec's sale of their generating
facilities. The Joint Petition was tentatively approved by
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the PaPUC and the final vote is currently scheduled for May 14, 1998. There can
be no assurance as to the outcome of this matter.
The PaPUC has also issued a final order that sets forth the guidelines for
retail access pilot programs in Pennsylvania that give customers the ability to
choose their electricity supplier. These pilot programs include residential,
commercial and industrial class customers, and utilities are required to commit
about 5% of load to retail access programs and unbundle their rates to allow
customers to choose their electric generation supplier. The pilot program began
November 1, 1997 and will run until the first phase of retail competition begins
on January 1, 1999. Met-Ed and Penelec's pilot programs include approximately 5%
of each company's load.
New Jersey
- ----------
In April 1997, the New Jersey Board of Public Utilities (NJBPU) issued
final Findings and Recommendations for Restructuring the Electric Power 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 recommended 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 guaranty for full recovery of these costs. A separate market transition
charge (MTC) would be established for each utility to allow utilities to recover
stranded costs over 4 to 8 years. The MTC would be capped to ensure that
customers experience the NJBPU's recommended overall rate reduction of 5-10%.
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, which 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 pay a transitional energy
facilities assessment which will phase out over five years and result in a 5-6%
rate reduction to customers.
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In July 1997, JCP&L filed with the NJBPU its proposed restructuring plan
for a competitive electric marketplace in New Jersey. Included in the plan were
stranded cost, unbundled rate and restructuring filings. In December 1997, JCP&L
submitted supplemental information with the NJBPU and parties to the
restructuring proceeding regarding the proposed sale of its fossil-fuel and
hydroelectric generating facilities (see Managing the Transition). Highlights of
the plan include:
- - Some electric retail customers would be able to choose their supplier
beginning on October 1, 1998, expanding to include all retail customers by
July 1, 2000.
- - As required by the NJBPU's final findings and recommendations, 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 only to customers who do not choose an alternative energy supplier.
The proposed 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 Market Energy and Capacity (MEC) Charge would be established
on a monthly basis for a six-month period for electricity
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. The MEC would be based
upon competitively "bidding out" the discrepancy between
projected needs and projected resources. JCP&L would true-up
the MEC charges for sales differences against its actual cost
to provide that power, plus interest. The true-up would be
recovered from, or credited to, the customers who were
customers during that period, based upon their usage during
such period. The MEC would be established every six months.
-- a Societal Benefits Charge to recover demand-side management
costs, manufactured gas plant remediation costs, and nuclear
decommissioning costs.
-- a 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 less than a three-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
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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 Stipulation of Final Settlement
(Final Settlement) approved by the NJBPU in 1997. 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 certain 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 years as a result of energy tax legislation signed into law in
July 1997.
- - In addition to the continued operation of the Oyster Creek facility, JCP&L
is exploring the sale or early retirement of the plant to mitigate costs
associated with its continued operation. A final decision on the plant's
future has not been reached. Nevertheless, JCP&L has proposed that the
NJBPU approve an early retirement of Oyster Creek in September 2000, for
ratemaking purposes. The ratemaking treatment being requested for Oyster
Creek is as follows:
-- The market value of Oyster Creek's generation output would be
recovered in the Production Charge.
-- The above-market operating costs would be recovered as a
component of the Delivery Charge through September 2000. If
the plant is operated beyond that date, these costs would not
be included in customer rates.
-- 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 $1.6 billion, of which $1.5
billion is for above-market NUG contracts. The $1.6 billion excludes
above-market generation costs related to Oyster Creek.
Numerous parties have intervened in this proceeding and are actively
contesting various aspects of JCP&L's filings, including, among other things,
recovery by JCP&L of plant capital additions since its last base rate case in
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1992, projections of future electricity prices on which stranded cost recovery
calculations are based, the appropriate level of return and the appropriateness
of earning a return on stranded investment.
Consultants retained by the NJBPU Staff, the Division of Ratepayer
Advocate and other parties have proposed that JCP&L's stranded cost recoveries
should be substantially lower than the levels JCP&L is seeking.
In a February 1998 order, the NJBPU substantially affirmed an ALJ ruling
which required that rates be unbundled based on the 1992 cost of service levels
which were the basis for JCP&L's last base rate case, but clarified that (1)
JCP&L could update its 1992 cost of service study to reflect adjustments
consistent with the NJBPU approved Final Settlement which, among other things,
recognized certain increased expense levels and reductions to base rates and (2)
all of the other updated post-1992 cost information that JCP&L had submitted in
the proceeding should remain in the record, which the NJBPU will utilize after
issuance of the ALJ's initial decision to establish a reasonable level of rates
going forward.
Furthermore, the NJBPU emphasized in its order that the final unbundled
rates established as a result of this proceeding will be lower than the current
bundled rates. This directive has been recognized in JCP&L's July 1997
restructuring plan which proposed annual revenue reductions totaling
approximately $185 million. The NJBPU will render final and comprehensive
decisions on the precise level of aggregate rate reductions required in order to
accomplish its primary goals of introducing retail competition and lowering
electricity costs for consumers.
If the NJBPU were to accept the positions of various parties or their
consultants, or were ultimately to deny JCP&L's request to recover post-1992
capital additions and increased expenses, it would have a material adverse
impact on JCP&L's stranded cost recovery, restructuring proceeding and future
earnings.
Hearings with respect to the stranded cost and unbundled rate filings are
completed and pending before the ALJ. Discovery, evidentiary hearings and
related proceedings with respect to the restructuring filing are continuing.
Although, the NJBPU intends to complete its review and issue final decisions in
time for retail competition to commence in October 1998, this would require
enacting legislation which has not yet been introduced. Management believes it
is unlikely that legislation could be enacted in time for retail competition to
begin in 1998. There can be no assurance as to the outcome of these proceedings.
JCP&L has received NJBPU approval for a one-year pilot program offering
customers in Monroe Township, New Jersey, a choice of their electric energy
supplier. The pilot program began in September 1997, and can be extended until
the first phase of competition begins in October 1998. Monroe Township had been
exploring the possibility of establishing its own municipal electric system.
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Other
- -----
In November 1997, the FERC issued an order to the Pennsylvania-New
Jersey-Maryland (PJM) Power Pool which, among other things, directed the GPU
Energy companies to implement a single-system transmission rate, effective
January 1, 1998. The implementation of a single-system rate is not expected to
effect total transmission revenues. It would, however, increase the pricing for
transmission service in Met-Ed and Penelec's service territories and reduce the
pricing for transmission service in JCP&L's service territory.
The GPU Energy companies have requested the FERC to reconsider its ruling
requiring a single-system transmission rate. The FERC's ruling may also have an
effect on the GPU Energy companies' distribution rates since the PaPUC has
ordered a rate cap effective January 1, 1997 and the NJBPU has recommended a
5-10% rate reduction effective with the implementation of customer choice. There
can be no assurance as to the outcome of this matter.
Also in 1997, the PJM Power Pool converted to a limited liability company
governed by an independent board of managers and the FERC approved the
supporting PJM companies' application to permit the PJM Interconnection to be
recognized as an ISO.
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 (PUHCA).
The Clinton administration announced a Comprehensive Electricity
Competition Plan which proposes, among other things, customer choice by January
1, 2003, stranded cost recovery, reliability standards, environmental
provisions, and the repeal of both PURPA and PUHCA. The plan does, however,
allow states to opt out of the mandate if they believe consumers would be better
served by an alternative policy. The administration's plan has not yet been
introduced in Congress.
Nonutility Generation Agreements
- --------------------------------
Pursuant to the requirements of 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 remaining periods of up to 23 years.
Although a few of these 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. While the GPU Energy companies thus far
have been granted recovery of their NUG costs from customers by the PaPUC and
NJBPU, there can be no assurance that they will continue to be able to recover
these costs throughout the terms of the related agreements. As of March 31,
1998, facilities covered by these agreements having 1,666 MW (JCP&L 905 MW;
Met-Ed 356 MW; Penelec 405 MW) of capacity were in service.
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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 continue to support legislative
efforts to repeal PURPA. They are also attempting to renegotiate, and in some
cases buy out, existing high cost long-term NUG agreements (see THE GPU ENERGY
COMPANIES' SUPPLY PLAN).
THE GPU ENERGY COMPANIES' SUPPLY PLAN
-------------------------------------
Managing Nonutility Generation
- ------------------------------
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 1997, the NJBPU approved a Stipulation of Final Settlement which, among
other things, provides for the recovery of costs associated with the buyout of
the Freehold Cogeneration project. The Final Settlement 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. The Freehold cost recovery was granted
on an interim basis subject to refund, pending further review by the NJBPU,
before which the matter is pending.
In 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. In January 1998, Met-Ed and Penelec entered into definitive buyout
agreements with two bidders. The PaPUC is considering Met-Ed and Penelec's
requests for approval of these agreements as part of their pending restructuring
proceedings.
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 investor-owned utilities with respect to their
electric generation operations. In 1997, the Financial Accounting Standards
Board's Emerging Issues Task Force (EITF) met to discuss
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these issues and 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, as well as any newly established
regulated assets (including those related to generation), on their balance
sheets if regulators have guaranteed a regulated cash flow stream to recover the
cost of these assets.
In light of retail access legislation enacted in Pennsylvania and the
NJBPU's final findings and recommendations, 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, by no later than mid-1998 for
Met-Ed and Penelec, and October 1998 for JCP&L, the expected approval dates of
their restructuring plans filed with state regulators. Once the GPU Energy
companies are able to determine that the generation portion of their operations
is no longer subject to the provisions of FAS 71, the related regulatory assets,
net of regulatory liabilities, would, to the extent that recovery is not
provided for through their respective restructuring plans, have to be written
off and charged to expense. Additional depreciation expense would have to be
recorded for any differences created by the use of a regulated depreciation
method that is different from that which would have been used under generally
accepted accounting principles for enterprises in general. In addition,
writedowns of plant assets could be required in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets."
Additionally, the inability of the GPU Energy companies to recover their
above-market costs of power purchase commitments, in whole or in part, could
result in the recording of liabilities and corresponding charges to expense. The
amount of charges 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 position.
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PART II
ITEM 1 - LEGAL PROCEEDINGS
-----------------
Information concerning the current status of certain legal
proceedings instituted against GPU, Inc. and the GPU Energy
companies discussed in Part I of this report in Combined Notes
to Consolidated Financial Statements is incorporated herein by
reference and made a part hereof.
ITEM 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
A - GPU, Inc. and Subsidiary Companies
B - JCP&L
C - Met-Ed
D - Penelec
(27) Financial Data Schedules
A - GPU, Inc. and Subsidiary Companies
B - JCP&L
C - Met-Ed
D - Penelec
(b) Reports on Form 8-K:
None.
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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.
May 14, 1998 By: /s/ J. G. Graham
-----------------
J. G. Graham, Senior Vice President
(Chief Financial Officer)
May 14, 1998 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
May 14, 1998 By: /s/ D. Baldassari
-----------------
D. Baldassari, President
May 14, 1998 By: /s/ D. W. Myers
----------------
D. W. Myers, Vice President -
Finance and Rates &Comptroller
(Principal Accounting Officer)
74
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
Three Months Ended
------------------
March 31, March 31,
1998 1997
------------ --------
OPERATING REVENUES $1,043,109 $1,051,012
--------- ---------
OPERATING EXPENSES 783,475 770,831
Interest portion of rentals (A) 6,889 5,958
Fixed charges of service company
subsidiaries (B) 531 690
--------- --------
Net expense 776,055 764,183
--------- --------
OTHER INCOME AND DEDUCTIONS:
Allowance for funds used
during construction 1,391 1,533
Equity in undistributed earnings
of affiliates, net 17,651 32,227
Other income, net 44,562 5,713
Minority interest net income (501) (147)
--------- --------
Total other income and deductions 63,103 39,326
--------- --------
EARNINGS AVAILABLE FOR FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS (excluding
taxes based on income) $ 330,157 $ 326,155
========= =========
FIXED CHARGES:
Interest on funded indebtedness $ 84,396 $ 57,623
Other interest (C) 16,393 14,743
Preferred stock dividends of
subsidiaries on a pretax basis (E) 4,840 5,360
Interest portion of rentals (A) 6,889 5,958
--------- ---------
Total fixed charges $ 112,518 $ 83,684
========= =========
RATIO OF EARNINGS TO FIXED CHARGES 2.93 3.90
==== ====
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS (D) 2.93 3.90
==== ====
<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) GPU 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 GPU's consolidated
income statement. GPU 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) Includes dividends on subsidiary-obligated mandatorily redeemable
preferred securities of $7,222 for the three month periods ended March
31, 1998 and 1997, respectively.
(D) 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.
(E) Calculation of preferred stock dividends of subsidiaries on a pretax
basis is as follows:
Three Months Ended
------------------
March 31, March 31,
1998 1997
--------- -------
Income before provision for income taxes and
preferred stock dividends of subsidiaries $222,479 $247,831
Income before preferred stock dividends of
subsidiaries 136,755 158,465
Pretax earnings ratio 162.7% 156.4%
Preferred stock dividends of subsidiaries 2,975 3,427
Preferred stock dividends of subsidiaries on
a pretax basis 4,840 5,360
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
Three Months Ended
------------------
March 31, March 31,
1998 1997
----------- --------
OPERATING REVENUES $472,334 $510,443
------- -------
OPERATING EXPENSES 362,016 398,626
Interest portion of rentals (A) 2,764 2,695
------- -------
Net expense 359,252 395,931
------- -------
OTHER INCOME:
Allowance for funds used
during construction 758 734
Other income, net 2,265 3,457
------- -------
Total other income 3,023 4,191
------- -------
EARNINGS AVAILABLE FOR FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS (excluding
taxes based on income) $116,105 $118,703
======= =======
FIXED CHARGES:
Interest on funded indebtedness $ 21,792 $ 22,768
Other interest (B) 5,204 5,166
Interest portion of rentals (A) 2,764 2,695
------- -------
Total fixed charges $ 29,760 $ 30,629
======= =======
RATIO OF EARNINGS TO FIXED CHARGES 3.90 3.88
==== ====
Preferred stock dividend requirement $ 2,738 $ 3,162
Ratio of income before provision for
income taxes to net income (C) 163.5% 151.0%
------- -------
Preferred stock dividend requirement
on a pretax basis 4,477 4,775
Fixed charges, as above 29,760 30,629
------- -------
Total fixed charges and
preferred stock dividends $ 34,237 $ 35,404
======= =======
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS 3.39 3.35
==== ====
<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) JCP&L 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 $2,675 for the three month periods ended March
31, 1998 and 1997, respectively.
(C) Represents income before provision for income taxes of $86,345 and
$88,074 for the three month periods ended March 31, 1998 and 1997,
respectively, divided by net income of $52,816 and $58,320,
respectively for the same periods.
Exhibit 12C
Page 1 of 2
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
STATEMENTS SHOWING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS BASED ON SEC REGULATION S-K, ITEM 503
(In Thousands)
----------------------------------------------------------------------
UNAUDITED
Three Months Ended
------------------
March 31, March 31,
1998 1997
---------- --------
OPERATING REVENUES $234,748 $255,260
------- -------
OPERATING EXPENSES 176,874 172,665
Interest portion of rentals (A) 2,050 1,155
------- -------
Net expense 174,824 171,510
------- -------
OTHER INCOME AND DEDUCTIONS:
Allowance for funds used
during construction 248 426
Other income, net 284 343
------- -------
Total other income and deductions 532 769
------- -------
EARNINGS AVAILABLE FOR FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS (excluding
taxes based on income) $ 60,456 $ 84,519
======= =======
FIXED CHARGES:
Interest on funded indebtedness $ 10,623 $ 11,254
Other interest (B) 5,003 3,918
Interest portion of rentals (A) 2,050 1,155
------- -------
Total fixed charges $ 17,676 $ 16,327
======= =======
RATIO OF EARNINGS TO FIXED CHARGES 3.42 5.18
==== ====
Preferred stock dividend requirement $ 121 $ 121
Ratio of income before provision for
income taxes to net income (C) 173.0% 171.8%
------- -------
Preferred stock dividend requirement
on a pretax basis 209 208
Fixed charges, as above 17,676 16,327
------- -------
Total fixed charges and
preferred stock dividends $ 17,885 $ 16,535
======= =======
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS 3.38 5.11
==== ====
<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) Met-Ed 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 $2,250 for the three month periods ended March
31, 1998 and 1997, respectively.
(C) Represents income before provision for income taxes of $42,780 and
$68,192 for the three month periods ended March 31, 1998 and 1997,
respectively, divided by net income of $24,730 and $39,685,
respectively for the same periods.
Exhibit 12D
Page 1 of 2
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
STATEMENTS SHOWING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS BASED ON SEC REGULATION S-K, ITEM 503
(In Thousands)
-----------------------------------------------------------------------
UNAUDITED
Three Months Ended
------------------
March 31, March 31,
1998 1997
----------- --------
OPERATING REVENUES $263,655 $289,753
------- -------
OPERATING EXPENSES 201,032 200,384
Interest portion of rentals (A) 1,256 1,070
------- -------
Net expense 199,776 199,314
------- -------
OTHER INCOME AND DEDUCTIONS:
Allowance for funds used
during construction 385 373
Other income, net 79 145
------- -------
Total other income and deductions 464 518
------- -------
EARNINGS AVAILABLE FOR FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS (excluding
taxes based on income) $ 64,343 $ 90,957
======= =======
FIXED CHARGES:
Interest on funded indebtedness $ 12,112 $ 12,115
Other interest (B) 4,541 4,296
Interest portion of rentals (A) 1,256 1,070
------- -------
Total fixed charges $ 17,909 $ 17,481
======= =======
RATIO OF EARNINGS TO FIXED CHARGES 3.59 5.20
==== ====
Preferred stock dividend requirement $ 116 $ 144
Ratio of income before provision for
income taxes to net income (C) 174.3% 171.3%
------- -------
Preferred stock dividend requirement
on a pretax basis 202 247
Fixed charges, as above 17,909 17,481
------- -------
Total fixed charges and
preferred stock dividends $ 18,111 $ 17,728
======= =======
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS 3.55 5.13
==== ====
<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) Penelec 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 $2,297 for the three month periods ended March
31, 1998 and 1997, respectively.
(C) Represents income before provision for income taxes of $46,434 and
$73,476 for the three month periods ended March 31, 1998 and 1997,
respectively, divided by net income of $26,645 and $42,894,
respectively for the same periods.
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000040779
<NAME> GPU, INC.
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 7,488,943
<OTHER-PROPERTY-AND-INVEST> 2,083,627
<TOTAL-CURRENT-ASSETS> 1,058,431
<TOTAL-DEFERRED-CHARGES> 2,203,008
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 12,834,009
<COMMON> 331,958
<CAPITAL-SURPLUS-PAID-IN> 1,007,885
<RETAINED-EARNINGS> 2,259,753 <F1>
<TOTAL-COMMON-STOCKHOLDERS-EQ> 3,519,270 <F2>
421,500 <F3>
66,478
<LONG-TERM-DEBT-NET> 4,064,192
<SHORT-TERM-NOTES> 299,618
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 411,140
12,500
<CAPITAL-LEASE-OBLIGATIONS> 3,145
<LEASES-CURRENT> 131,276
<OTHER-ITEMS-CAPITAL-AND-LIAB> 3,904,890
<TOT-CAPITALIZATION-AND-LIAB> 12,834,009
<GROSS-OPERATING-REVENUE> 1,043,109
<INCOME-TAX-EXPENSE> 66,293
<OTHER-OPERATING-EXPENSES> 783,475
<TOTAL-OPERATING-EXPENSES> 849,768
<OPERATING-INCOME-LOSS> 193,341
<OTHER-INCOME-NET> 43,102
<INCOME-BEFORE-INTEREST-EXPEN> 236,443
<TOTAL-INTEREST-EXPENSE> 102,162 <F4>
<NET-INCOME> 133,780 <F5>
0
<EARNINGS-AVAILABLE-FOR-COMM> 133,780
<COMMON-STOCK-DIVIDENDS> 60,414
<TOTAL-INTEREST-ON-BONDS> 274,479
<CASH-FLOW-OPERATIONS> 214,381
<EPS-PRIMARY> 1.07
<EPS-DILUTED> 1.07
<FN>
<F1> INCLUDES ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS) OF
<F1> ($14,733).
<F2> INCLUDES REACQUIRED COMMON STOCK OF $80,326.
<F3> INCLUDES SUBSIDIARY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED
<F3> SECURITIES OF $330,000.
<F4> INCLUDES DIVIDENDS ON SUBSIDIARY-OBLIGATED MANDATORILY REDEEMABLE
<F4> PREFERRED SECURITIES OF $7,222 AND PREFERRED STOCK DIVIDENDS OF
<F4> SUBSIDIARIES OF $2,975.
<F5> INCLUDES MINORITY INTEREST NET (INCOME)/LOSS OF ($501).
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000053456
<NAME> JERSEY CENTRAL POWER & LIGHT COMPANY
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 2,873,493
<OTHER-PROPERTY-AND-INVEST> 490,058
<TOTAL-CURRENT-ASSETS> 382,200
<TOTAL-DEFERRED-CHARGES> 930,806
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 4,676,557
<COMMON> 153,713
<CAPITAL-SURPLUS-PAID-IN> 510,769
<RETAINED-EARNINGS> 915,717
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,580,199
216,500 <F1>
37,741
<LONG-TERM-DEBT-NET> 1,173,364
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 11
12,500
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 77,616
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,578,626
<TOT-CAPITALIZATION-AND-LIAB> 4,676,557
<GROSS-OPERATING-REVENUE> 472,334
<INCOME-TAX-EXPENSE> 32,476
<OTHER-OPERATING-EXPENSES> 362,016
<TOTAL-OPERATING-EXPENSES> 394,492
<OPERATING-INCOME-LOSS> 77,842
<OTHER-INCOME-NET> 1,487
<INCOME-BEFORE-INTEREST-EXPEN> 79,329
<TOTAL-INTEREST-EXPENSE> 26,513 <F2>
<NET-INCOME> 52,816
2,738
<EARNINGS-AVAILABLE-FOR-COMM> 50,078
<COMMON-STOCK-DIVIDENDS> 10,000 <F3>
<TOTAL-INTEREST-ON-BONDS> 88,893
<CASH-FLOW-OPERATIONS> 191,308
<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 $2,675.
<F3> REPRESENTS COMMON STOCK DIVIDENDS PAID TO PARENT CORPORATION.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000065350
<NAME> METROPOLITAN EDISON COMPANY
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,558,908
<OTHER-PROPERTY-AND-INVEST> 195,139
<TOTAL-CURRENT-ASSETS> 222,851
<TOTAL-DEFERRED-CHARGES> 585,545
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 2,562,443
<COMMON> 66,273
<CAPITAL-SURPLUS-PAID-IN> 370,200
<RETAINED-EARNINGS> 288,277 <F1>
<TOTAL-COMMON-STOCKHOLDERS-EQ> 724,750
100,000 <F2>
12,056
<LONG-TERM-DEBT-NET> 576,925
<SHORT-TERM-NOTES> 81,600
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 22
0
<CAPITAL-LEASE-OBLIGATIONS> 30
<LEASES-CURRENT> 34,732
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,032,328
<TOT-CAPITALIZATION-AND-LIAB> 2,562,443
<GROSS-OPERATING-REVENUE> 234,748
<INCOME-TAX-EXPENSE> 17,562
<OTHER-OPERATING-EXPENSES> 176,874
<TOTAL-OPERATING-EXPENSES> 194,436
<OPERATING-INCOME-LOSS> 40,312
<OTHER-INCOME-NET> (159)
<INCOME-BEFORE-INTEREST-EXPEN> 40,153
<TOTAL-INTEREST-EXPENSE> 15,423 <F3>
<NET-INCOME> 24,730
121
<EARNINGS-AVAILABLE-FOR-COMM> 24,609
<COMMON-STOCK-DIVIDENDS> 20,000 <F4>
<TOTAL-INTEREST-ON-BONDS> 43,254
<CASH-FLOW-OPERATIONS> 21,566
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> INCLUDES ACCUMULATED OTHER COMPREHENSIVE INCOME OF $15,034.
<F2> REPRESENTS COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED
<F2> SECURITIES.
<F3> INCLUDES DIVIDENDS ON COMPANY-OBLIGATED MANDATORILY REDEEMABLE
<F3> PREFERRED SECURITIES OF $2,250.
<F4> REPRESENTS COMMON STOCK DIVIDENDS PAID TO PARENT CORPORATION.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000077227
<NAME> PENNSYLVANIA ELECTRIC COMPANY
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,805,457
<OTHER-PROPERTY-AND-INVEST> 80,646
<TOTAL-CURRENT-ASSETS> 282,014
<TOTAL-DEFERRED-CHARGES> 467,128
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 2,635,245
<COMMON> 105,812
<CAPITAL-SURPLUS-PAID-IN> 285,487
<RETAINED-EARNINGS> 427,842 <F1>
<TOTAL-COMMON-STOCKHOLDERS-EQ> 819,141
105,000 <F2>
16,681
<LONG-TERM-DEBT-NET> 676,445
<SHORT-TERM-NOTES> 116,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 11
0
<CAPITAL-LEASE-OBLIGATIONS> 3,115
<LEASES-CURRENT> 18,087
<OTHER-ITEMS-CAPITAL-AND-LIAB> 880,765
<TOT-CAPITALIZATION-AND-LIAB> 2,635,245
<GROSS-OPERATING-REVENUE> 263,655
<INCOME-TAX-EXPENSE> 19,803
<OTHER-OPERATING-EXPENSES> 201,032
<TOTAL-OPERATING-EXPENSES> 220,835
<OPERATING-INCOME-LOSS> 42,820
<OTHER-INCOME-NET> 93
<INCOME-BEFORE-INTEREST-EXPEN> 42,913
<TOTAL-INTEREST-EXPENSE> 16,268 <F3>
<NET-INCOME> 26,645
116
<EARNINGS-AVAILABLE-FOR-COMM> 26,529
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 49,122
<CASH-FLOW-OPERATIONS> 17,196
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> INCLUDES ACCUMULATED OTHER COMPREHENSIVE INCOME OF $7,605.
<F2> REPRESENTS COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED
<F2> SECURITIES.
<F3> INCLUDES DIVIDENDS ON COMPANY-OBLIGATED MANDATORILY REDEEMABLE
<F3> PREFERRED SECURITIES OF $2,297.
</FN>
</TABLE>
