SEC File No.70-____
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM U-l
APPLICATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 ("Act")
METROPOLITAN EDISON COMPANY ("Met-Ed")
2800 Pottsville Pike
Reading, Pennsylvania 19605
(Name of company filing this statement and address
of principal executive office)
GPU, INC. ("GPU")
(Name of top registered holding company parent of applicant)
Terrance G. Howson, Douglas E. Davidson, Esq.
Vice President and Treasurer Berlack, Israels & Liberman LLP
Mary A. Nalewako, Secretary 120 West 45th Street
Michael J. Connolly, New York, New York 10036
Assistant General Counsel
GPU Service, Inc.
300 Madison Avenue
Morristown, New Jersey 07962
Scott L. Guibord, Secretary W. Edwin Ogden, Esq.
Metropolitan Edison Company Jeffrey A. Franklin, Esq.
2800 Pottsville Pike Ryan, Russell, Ogden
Reading, Pennsylvania 19605 & Seltzer LLP
1100 Berkshire Boulevard,
Suite 301
Reading, Pennsylvania
19610-1221
(Names and addresses of agents for service)
<PAGE>
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTIONS.
-------------------------------------
A. Met-Ed proposes to organize a special purpose business trust
under Delaware law ("Met-Ed Capital Trust"), which will issue and sell from time
to time in one or more series through December 31, 2000 up to $125 million
aggregate liquidation value of preferred beneficial interests, in the form of
Trust Securities (having a liquidation value per interest to be determined) (the
"Trust Securities")*. Each Trust Security will represent a cumulative preferred
security (the "Preferred Securities") of a Delaware limited partnership ("Met-Ed
Capital L.P."), which will be a special purpose indirect subsidiary of Met-Ed.
Met-Ed also proposes to form a special purpose Delaware corporation ("Investment
Sub"), for the sole purpose of acting as general partner of Met-Ed Capital L.P.
The sole purpose of Met-Ed Capital Trust will be to acquire the Preferred
Securities and to issue the Trust Securities evidencing the Preferred
Securities. The sole purpose of Met-Ed Capital L.P. is to issue one or more
series of Preferred Securities and to lend the proceeds thereof, plus the
capital contribution (in an amount not to exceed $5 million) made by Met-Ed in
Met-Ed Capital L.P., to
- ------------------
* The transactions proposed herein are substantially the same as the
transactions approved by the Commission in Order dated August 11, 1994 (HCAR No.
35-26102) (monthly income preferred securities ("MIPS")) with the exception that
the MIPS were issued by a limited partnership subsidiary of Met-Ed and the Trust
Securities will be issued by a special purpose business trust subsidiary. The
trust structure is being utilized to help ensure the intended tax treatment, as
discussed below.
-1-
<PAGE>
Met-Ed, which loan will be evidenced by the Subordinated Debentures (defined
below) issued by Met-Ed.
B. Met-Ed will acquire the common stock of Investment Sub for a
nominal consideration and will capitalize Investment Sub with (i) a capital
contribution in the amount of up to $5 million, and (ii) a demand promissory
note in the principal amount of up to $13 million, such note to accrue interest,
compounded semi-annually, at a rate equal to the Citibank, N.A. base rate as in
effect from time to time. Investment Sub will acquire all of the general partner
interests in Met-Ed Capital L.P. for up to $5 million (the "L.P. Equity
Contribution").
Met-Ed Capital Trust will apply the proceeds from the sale of the
Trust Securities to purchase the Preferred Securities. Met-Ed Capital L.P. will,
in turn, use the proceeds received from the sale of the Preferred Securities,
together with the L.P. Equity Contribution, to purchase Met-Ed's subordinated
debentures (individually, a "Subordinated Debenture" and collectively, the
"Subordinated Debentures").
C. Met-Ed will also unconditionally guarantee the payment by Met-Ed
Capital L.P. of (A) accrued but unpaid distributions on the Preferred
Securities, if and to the extent Met-Ed Capital L.P. has declared such
distributions out of funds legally available therefor, (B) the redemption price
for any
-2-
<PAGE>
redemption of the Preferred Securities, (C) the aggregate liquidation preference
on the Preferred Securities, including all accrued but unpaid distributions,
whether or not declared and (D) certain additional amounts (the "Guaranties").
D. Each Subordinated Debenture will be issued under an Indenture to
be entered into with United States Trust Company of New York, as trustee, and
will have an initial term of up to 49 years. Prior to maturity, Met-Ed will pay
only interest on the Subordinated Debentures at a rate equal to the distribution
rate on the Preferred Securities. Such interest payments will constitute Met-Ed
Capital Trust's only income and will be used by it to pay distributions on the
Trust Securities, with any excess being distributed indirectly to Met-Ed as a
distribution on Met-Ed's investment in Met-Ed Capital L.P., thereby reducing the
interest cost on the Subordinated Debentures. Distributions on the Trust
Securities will be made not less than semi-annually, and will be cumulative and
must be made to the extent that Met-Ed Capital Trust has legally available funds
and cash sufficient for such purposes. However, Met-Ed will have the right to
defer payment of interest on the Subordinated Debentures for up to five years in
which event Met-Ed Capital Trust may similarly defer payment of distributions on
the Trust Securities, but in no event may distributions be deferred beyond the
maturity date of the Subordinated Debentures. The distribution rates, payment
dates,
-3-
<PAGE>
redemption and other similar provisions of each series of Trust Securities will
be identical to the interest rates, payment dates, redemption and other
provisions of the Subordinated Debentures issued by Met-Ed with respect thereto.
E. Each Subordinated Debenture and related Guaranty will be
subordinate to all other existing and future "Senior Indebtedness," as defined
below, of Met-Ed and will have no cross-default provisions with respect to other
Met-Ed indebtedness -- i.e., a default under any other outstanding Met-Ed
indebtedness will not result in a default under the Subordinated Debenture or
the Guaranty. However, Met-Ed may not declare and pay dividends on, or redeem or
retire, its outstanding Cumulative Preferred Stock or Common Stock unless all
payments then due (whether or not previously deferred) under the Subordinated
Debentures and the Guaranties have been made. "Senior Indebtedness" consists of
(i) the principal of and premium (if any) in respect of (A) indebtedness of
Met-Ed for money borrowed and (B) indebtedness evidenced by securities,
debentures, bonds or other similar instruments (including purchase money
obligations) for payment of which Met-Ed is responsible or liable; (ii) all
capital lease obligations of Met-Ed; (iii) all obligations of Met-Ed issued or
assumed as the deferred purchase price of property, all conditional sale
obligations of Met-Ed and all obligations of Met-Ed under any title retention
agreement (but excluding trade accounts payable
-4-
<PAGE>
arising in the ordinary course of business); (iv) certain obligations of Met-Ed
for the reimbursement of any obligor on any letter of credit, banker's
acceptance, security purchase facility or similar credit transaction; (v) all
obligations of the type referred to in clauses (i) through (iv) of other persons
for the payment of which Met-Ed is responsible or liable as obligor, guarantor
or otherwise; and (vi) all obligations of the types referred to in clauses (i)
through (v) of other persons secured by any lien on any property or asset of
Met-Ed (whether or not such obligation is assumed by Met-Ed), except for any
such indebtedness that is by its terms subordinated to or pari passu with the
Subordinated Debentures.
F. It is expected that Met-Ed's interest payments on the
Subordinated Debentures will be deductible for income tax purposes and that
Met-Ed Capital Trust will be treated as a trust for federal income tax purposes.
Consequently, distributions from Met-Ed Capital Trust to the holders of Trust
Securities and indirectly to Met-Ed will be deemed to constitute distributions
of the interest income received by Met-Ed Capital Trust on the Subordinated
Debentures. Consequently, such holders and Met-Ed will not be entitled to any
"dividend received deduction" under the Internal Revenue Code with respect to
such distributions.
-5-
<PAGE>
G. A series of the Trust Securities will be subject to mandatory
redemption upon redemption of the corresponding series of the Preferred
Securities. A series of Preferred Securities will be subject to mandatory
redemption upon the maturity or prior redemption of the corresponding series of
the Subordinated Debentures, but will not be subject to any mandatory sinking
fund. A series of Preferred Securities may also be redeemable at the option of
Met-Ed at a price equal to their liquidation value plus any accrued and unpaid
distributions plus any premium negotiated in connection with the marketing of
the Trust Securities, (i) at any time after a specified no-call period (if any)
which could be up to the life of the issuance, or (ii) in the event that (I)
Met-Ed Capital L.P. is required by applicable tax laws to withhold or deduct
certain amounts in connection with distributions or other payments, or (II)
Met-Ed Capital L.P. or Met-Ed Capital Trust is subject to federal income tax
with respect to interest received on the Subordinated Debentures, or (III) it is
determined that the interest payments by Met-Ed on the Subordinated Debentures
are not deductible for federal income tax purposes or (IV) Met-Ed Capital L.P.
is subject to more than a de minimis amount of other taxes, duties or other
governmental charges, or (V) Met-Ed Capital L.P. becomes subject to regulation
as an "investment company" under the Investment Company Act of 1940, as amended
("1940 Act"). Upon occurrence of any of the events set forth in clause (ii) of
the immediately preceding sentence, Met-Ed Capital L.P. and Met-Ed
-6-
<PAGE>
Capital Trust could be dissolved and the Subordinated Debentures distributed
directly to the holders of the Trust Securities and to Met-Ed on a pro rata
basis, resulting in direct ownership of the Subordinated Debentures by the
holders of the Trust Securities. The Subordinated Debentures distributed to
Met-Ed will be canceled.
In the event that Met-Ed Capital Trust is required by applicable tax
laws to withhold or deduct certain amounts in connection with distributions or
other payments, Met-Ed Capital Trust may also have the obligation, if the Trust
Securities are not redeemed or Subordinated Debentures are not distributed to
the holders thereof as aforesaid, to "gross up" such payments so that the Trust
Securities holders will receive the same payment after such withholding or
deduction as they would have received if no such withholding or deduction were
required. In such latter event, Met-Ed's obligations under the Subordinated
Debentures and the Guaranties would also cover any such "gross up" obligations.
H. Upon receipt by Met-Ed Capital Trust of any distribution from
Met-Ed Capital L.P. upon any voluntary or involuntary liquidation, dissolution
or winding up of Met-Ed Capital L.P., the holders of the Trust Securities will
be entitled to receive such amounts in proportion to the respective number of
Preferred Securities represented by such Trust
-7-
<PAGE>
Securities, out of the assets of Met-Ed Capital L.P. available for distribution
after satisfaction of liabilities to creditors of Met-Ed Capital Trust.
In the event of any voluntary or involuntary dissolution or winding
up of Met-Ed Capital L.P., the holders of Preferred Securities will be entitled
to receive out of the assets of Met-Ed Capital L.P., after satisfaction of
liabilities to creditors and before any distribution of assets is made to the
Investment Sub, the sum of their stated liquidation preference and all
accumulated and unpaid distributions to the date of payment of the Preferred
Securities. All assets of Met-Ed Capital L.P. remaining after payment of the
liquidation distribution to the holders of Preferred Securities will be
distributed to the Investment Sub.
Upon any liquidation, dissolution or winding up of Met-Ed, the
amount payable on each series of the Preferred Securities would be limited to a
pro rata portion of any amount recovered by Met-Ed Capital L.P. in its capacity
as a subordinated debt holder of Met-Ed. The Subordinated Debentures and the
payment obligations under the Guaranty will be subordinate to all other existing
and future Senior Indebtedness, except for any such indebtedness that is by its
terms subordinated to or pari passu with the Subordinated Debentures.
-8-
<PAGE>
I. The constituent instruments of Met-Ed Capital Trust, including
its declaration of trust, will provide, among other things, that Met-Ed Capital
Trust's activities will be limited to the issuance and sale of Trust Securities
from time to time and the application of the proceeds thereof to the purchase of
the Preferred Securities. Accordingly, it is not proposed that Met-Ed Capital
Trust's constituent instruments include any interest or distribution coverage or
capitalization ratio restrictions on its ability to issue and sell Trust
Securities, as each such issuance will be supported by a Subordinated Debenture
and a Guaranty, and such restrictions would therefore not be relevant or
necessary for Met-Ed Capital Trust to maintain an appropriate capital structure.
Moreover, the issuance of Subordinated Debentures by Met-Ed will be subject to
the restriction in Article 6th, Section 8(B)(b) of Met-Ed's Restated Articles of
Incorporation which limits, without the consent of the holders of a majority of
Met-Ed's outstanding Cumulative Preferred Stock, the amount of unsecured
indebtedness which Met-Ed may have outstanding at any one time to 20% of the
aggregate of the total outstanding principal amount of all bonds and other
securities representing secured indebtedness issued or assumed by Met-Ed plus
Met-Ed's capital stock, premiums thereon, and surplus of Met-Ed as stated on its
books of account. Met-Ed Capital Trust's constituent instruments will further
state that Met-Ed Capital L.P. will be responsible for all liabilities and
obligations of Met-Ed Capital Trust.
-9-
<PAGE>
J. Met-Ed expects to apply the net proceeds of the sale to Met-Ed
Capital L.P. of Subordinated Debentures to the redemption of outstanding senior
securities pursuant to the optional redemption provisions thereof, to the
repayment of outstanding short-term debt, for construction purposes, and for
other general corporate purposes, including to reimburse Met-Ed's treasury for
funds previously expended therefrom for the above purposes. Met-Ed will not use
any of the net proceeds of the sale of Subordinated Debentures to acquire,
either directly or indirectly, any interest in any exempt wholesale generator
("EWG") or foreign utility company ("FUCO").
K. Rule 54 Analysis.
(a) As described below, GPU meets all of the conditions of Rule 53
under the Act, except for Rule 53(a)(1). By Order dated November 5, 1997 (HCAR
No. 35-26773) (the "November 5 Order"), the Commission authorized GPU to
increase to 100% of its "average consolidated retained earnings," as defined in
Rule 53, the aggregate amount which it may invest in EWGs and FUCOs. At March
31, 1998, GPU's average consolidated retained earnings was approximately $2.187
billion, and aggregate investment in EWGs and FUCOs was approximately $1.283
billion or 59% of average consolidated retained earnings. Accordingly, under the
November 5 Order, GPU may invest up to an additional $904 million in EWGs and
FUCOs.
-10-
<PAGE>
(i) GPU maintains books and records to identify investments in, and
earnings from, each EWG and FUCO in which it directly or indirectly holds
an interest.
(A) For each United States EWG in which GPU directly or
indirectly holds an interest:
(1) the books and records for such EWG will be kept in
conformity with United States generally accepted
accounting principles ("GAAP");
(2) the financial statements will be prepared in
accordance with GAAP; and
(3) GPU directly or through its subsidiaries undertakes to
provide the Commission access to such books and
records and financial statements as the Commission may
request.
(B) For each FUCO or foreign EWG which is a majority-owned
subsidiary of GPU:
(1) the books and records for such subsidiary will be kept
in accordance with GAAP;
(2) the financial statements for such subsidiary will be
prepared in accordance with GAAP; and
-11-
<PAGE>
(3) GPU directly or through its subsidiaries undertakes to
provide the Commission access to such books and
records and financial statements, or copies thereof in
English, as the Commission may request.
(C) For each FUCO or foreign EWG in which GPU owns 50% or less
of the voting securities, GPU directly or through its
subsidiaries will proceed in good faith, to the extent
reasonable under the circumstances, to cause:
(1) such entity to maintain books and records in
accordance with GAAP;
(2) the financial statements of such entity to be
prepared in accordance with GAAP; and
(3) access by the Commission to such books and records
and financial statements (or copies thereof) in
English as the Commission may request and, in any
event, will provide the Commission on request copies
of such materials as are made available to GPU and its
subsidiaries. If and to the extent that such entity's
books, records or financial statements are not
maintained in accordance
-12-
<PAGE>
with GAAP, GPU will, upon request of the Commission,
describe and quantify each material variation
therefrom as and to the extent required by
subparagraphs (a) (2) (iii) (A) and (a) (2) (iii) (B)
of Rule 53.
(ii) No more than 2% of GPU's domestic public utility subsidiary
employees will render any services, directly or indirectly, to any EWG or
FUCO in which GPU directly or indirectly holds an interest.
(iii) Copies of this Application on Form U-1 are being provided to
the New Jersey Board of Public Utilities and the Pennsylvania Public
Utility Commission, the only federal, state or local regulatory agencies
having jurisdiction over the retail rates of GPU's electric utility
subsidiaries.(1) In addition, GPU will submit to each such commission
copies of any Rule 24 certificates required hereunder, as well as a copy
of Item 9 of GPU's Form U5S and Exhibits H and I thereof (commencing with
the Form U5S to be filed for the calendar year in which the authorization
herein requested is granted).
----------------------
(1) Penelec is also subject to retail rate regulation by the New York
Public Service Commission with respect to retail service to approximately
3,700 customers in Waverly, New York served by Waverly Electric Power &
Light Company, a Penelec subsidiary. Waverly Electric's revenues are
immaterial, accounting for less than 1% of Penelec's total operating
revenues.
-13-
<PAGE>
(iv) None of the provisions of paragraph (b) of Rule 53 render
paragraph (a) of that Rule unavailable for the proposed transactions.
(A) Neither GPU nor any subsidiary of GPU having a book value
exceeding 10% of GPU's consolidated retained earnings is
the subject of any pending bankruptcy or similar
proceeding.
(B) GPU's average consolidated retained earnings for the four
most recent quarterly periods (approximately $2.187
billion) represented an increase of approximately $16.3
million (or approximately 0.8%) in the average consolidated
retained earnings for the previous four quarterly periods
(approximately $2.171 billion).
(C) GPU did not incur operating losses from direct or indirect
investments in EWGs and FUCOs in 1997 in excess of 5% of
GPU's December 31, 1997 consolidated retained earnings.
As described above, GPU meets all the conditions of Rule 53(a),
except for clause (1). With respect to clause (1), the Commission determined in
the November 5 Order that GPU's financing of investments in EWGs and FUCOs in an
amount greater than 50% of GPU's average consolidated retained earnings as
-14-
<PAGE>
otherwise permitted by Rule 53(a)(1) would not have either of the adverse
effects set forth in Rule 53(c).
Moreover, even if the effect of the capitalization and earnings of
subsidiary EWGs and FUCOs were considered, there is no basis for the Commission
to withhold or deny approval for the transactions proposed in this Application
(the "Transactions"). The Transactions would not, by themselves, or even
considered in conjunction with the effect of the capitalization and earnings of
GPU's subsidiary EWGs and FUCOs, have a material adverse effect on the financial
integrity of the GPU system, or an adverse impact on GPU's public utility
subsidiaries, their customers, or the ability of State commissions to protect
such public utility customers.
The November 5 Order was predicated, in part, upon the assessment of
GPU's overall financial condition which took into account, among other factors,
GPU's consolidated capitalization ratio and the recent growth trend in GPU's
retained earnings. As of June 30, 1997, the most recent quarterly period for
which financial statement information was evaluated in the November 5 Order,
GPU's consolidated capitalization consisted of 49.2% equity and 50.8% debt.
-15-
<PAGE>
GPU's March 31, 1998 consolidated capitalization consists of 45.7%
equity and 54.3% debt. Thus, since the date of the November 5 Order, there has
been no material adverse change in GPU's consolidated capitalization ratio,
which remains within acceptable ranges and limits as evidenced by the credit
ratings of GPU's electric utility subsidiaries.(2)
GPU's consolidated retained earnings grew on average approximately
4.5% per year from 1991 through 1997. Earnings attributable to GPU's investments
in EWGs and FUCOs have contributed positively to consolidated earnings,
excluding the impact of the windfall profits tax on the Midlands Electricity plc
investment.(3)
Accordingly, since the date of the November 5 Order, the
capitalization and earnings attributable to GPU's investments in EWGs and FUCOs
have not had any adverse impact on GPU's financial integrity.
- --------------------------
(2) The debt ratings of GPU's electric utility subsidiaries have not changed
since the issuance of the November 5 Order. Moreover, on February 27, 1998,
Standard & Poor's Corporation assigned an "A-" credit rating to the A$1.925
billion senior bank debt of GPU PowerNet.
(3) As discussed in the November 5 Order, GPU incurred a loss for 1997 from its
investments in EWGs and FUCOs as a result of the windfall profits tax imposed on
Midlands Electricity, plc.
-16-
<PAGE>
Reference is made to Exhibit H filed herewith which sets forth GPU's
consolidated capitalization and earnings at March 31, 1998 and after giving
effect to the transactions proposed herein. As set forth in such exhibit, the
proposed transactions will not have a material impact on GPU's capitalization or
earnings.
ITEM 2. FEES, COMMISSIONS AND EXPENSES.
-------------------------------
The estimated fees, commission and expenses to be incurred in
connection herewith will be filed by amendment.
ITEM 3. APPLICABLE STATUTORY PROVISIONS.
-------------------------------
A. The acquisition by Met-Ed of the common stock of
Investment Sub, the acquisition by Investment Sub of the general partnership
interests of Met-Ed Capital L.P., and the acquisition by Met-Ed Capital L.P. of
the Subordinated Debentures and the Guaranties are subject to Sections 9(a), 10
and 12(b) of the Act and Rule 45 thereunder.
B. The issuance and sale of the Preferred Securities by
Met-Ed Capital L.P. and the issuance and sale of the Trust Securities by Met-Ed
Capital Trust, and the contingent distribution of Subordinated Debentures to the
Trust Securities
-17-
<PAGE>
holders, are subject to Sections 6(a) and 7 of the Act and Rule 54 thereunder.
C. Met-Ed believes that the issuance of its Subordinated
Debentures and its Guaranties to Met-Ed Capital L.P. will be exempt from the
declaration requirements of the Act by virtue of Rule 45(b) (1) thereunder.
ITEM 4. REGULATORY APPROVALS
--------------------
A. The acquisition by Met-Ed of the common stock of
Investment Sub will require approval of the Pennsylvania Public Utility
Commission ("PaPUC") under the Pennsylvania Public Utility Code ("Code"). In
addition, the issuance by Met-Ed of its Subordinated Debentures and its
Guaranties will require PaPUC approval under the Code. Met-Ed has filed with the
PaPUC a Securities Certificate (attached as an exhibit hereto) seeking such
approval. Met-Ed will file with the PaPUC an application under Section
1102(a)(4) of the Code seeking approval to acquire the common stock of
Investment Sub. It is anticipated that the PaPUC will expressly approve such
transactions.
B. No other state commission has jurisdiction with respect to
the subject transactions and, assuming that your Commission authorizes and
approves all aspects of the Transactions (including the accounting therefor), no
other
-18-
<PAGE>
federal commission has jurisdiction with respect thereto. Met-Ed believes that
Met-Ed Capital L.P. and Met-Ed Capital Trust will be exempt from regulation as
an investment company under the 1940 Act, pursuant to the "finance company"
exemption afforded by Section 6(a)(5) under the 1940 Act.
ITEM 5. PROCEDURE.
---------
It is requested that the Commission issue an order with
respect to the Transactions proposed herein at the earliest practicable date,
but in any event not later than September 14, 1998. It is further requested that
(i) there not be a recommended decision by an Administrative Law Judge or other
responsible officer of the Commission, (ii) the Office of Public Utility
Regulation be permitted to assist in the preparation of the Commission's
decision, and (iii) there be no waiting period between the issuance of the
Commission's order and the date on which it is to become effective.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS.
----------------------------------
A-1 - Certificate of Incorporation of Investment Sub
-- to be filed by amendment.
A-2 - By-Laws of Investment Sub -- to be filed by
amendment.
A-3 - Certificate of Limited Partnership of Met-Ed
Capital L.P. -- to be filed by amendment.
-19-
<PAGE>
A-4 - Form of Limited Partnership Agreement of Met-Ed
Capital L.P. -- to be filed by amendment.
A-5 - Form of Declaration of Trust of Met-Ed Capital
Trust -- to be filed by amendment.
A-6 - Form of Trust Agreement of Met-Ed Capital Trust
-- to be filed by amendment.
A-7 - Form of Trust Securities Certificate of Met-Ed
Capital Trust -- to be filed by amendment.
A-8 - Form of Met-Ed Subordinated Debenture Indenture
- to be filed by amendment.
A-9 - Form of Subordinated Debenture instrument --
incorporated by reference to Exhibit A-5.
B-1 - Form of Guaranty -- to be filed by amendment.
B-2 - Form of Underwriting Agreement -- to be filed
by amendment.
C - Registration Statement on Form S-3 under the
Securities Act of 1933 relating to the various
securities which are the subject hereof and all
amendments and exhibits thereto --
Incorporated by reference to SEC Registration
No. _________ to be assigned to such
registration statement.
D-1 - Copy of Securities Certificate filed by
Met-Ed with the PaPUC with respect to the
issuance of Subordinated Debentures and
Guaranties.
D-2 - Copy of Application under Section 1102(a)(4) of
the Code filed with the PaPUC -- to be filed by
amendment.
D-3 - Copy of PaPUC Order registering Met-Ed's
Securities Certificates -- to be filed by
amendment.
-20-
<PAGE>
D-4 - Copy of PaPUC Order approving the Application
under Section 1102(a)(4) of the Code -- to be
filed by amendment.
E - Not Applicable.
F-l - Opinion of Berlack, Israels & Liberman LLP -- to
be filed by amendment.
F-2 - Opinion of Ryan, Russell, Ogden & Seltzer, LLP
-- to be filed by amendment.
G - Proposed form of public notice.
H - GPU Actual and Pro Forma Capitalization ratios.
(b) Financial Statements:
1-A - Met-Ed Consolidated Balance Sheets, actual and
pro forma, as at March 31, 1998, and Consolidated
Statements of Income, actual and pro forma, and
Statement of Retained Earnings, for the year ended
March 31, 1998; pro forma
journal entries.
1-B - GPU Consolidated Balance Sheets, actual and pro
forma, as at March 31, 1998, and Consolidated
Statements of Income, actual and pro forma, and
Statement of Retained Earnings, for the year ended
March 31, 1998; pro forma journal entries.
2 - Reference is made to Financial Statements
included in 1 above.
3 - None.
4 - None, except as set forth in the Notes to
Financial Statements.
-21-
<PAGE>
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS.
----------------------------------------
The proposed Transactions relate to a means of financing
Met-Ed's business. Consequently, the issuance of an order by your Commission
with respect to the subject Transactions is not a major Federal action
significantly affecting the quality of the human environment.
No Federal agency has prepared or is preparing an
environmental impact statement with respect to the subject Transactions.
Reference is made to Item 4 hereof regarding regulatory approvals with respect
to the proposed Transactions.
-22-
<PAGE>
SIGNATURE
PURSUANT TO THE REQUIREMENTS OF THE PUBLIC UTILITY HOLDING COMPANY ACT OF
1935, THE UNDERSIGNED COMPANY HAS DULY CAUSED THIS STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED.
METROPOLITAN EDISON COMPANY
By: ______________________________
T. G. Howson,
Vice President and Treasurer
Dated: July 14, 1998
EXHIBITS AND FINANCIAL STATEMENTS TO BE FILED BY EDGAR
Exhibits:
D-1 - Copy of Securities Certificate filed by Met-Ed with
the PaPUC with respect to the issuance of
Subordinated Debentures and Guaranties.
G - Proposed form of public notice.
H - GPU Actual and Pro Forma Capitalization ratios.
Financial Statements:
1-A - Met-Ed Consolidated Balance Sheets, actual and pro
forma, as at March 31, 1998, and Consolidated Statements
of Income, actual and pro forma, and Statement of
Retained Earnings, for the year ended March 31, 1998;
pro forma journal entries.
1-B - GPU Consolidated Balance Sheets, actual and pro forma,
as at March 31, 1998, and Consolidated Statements of
Income, actual and pro forma, and Statement of Retained
Earnings, for the year ended March 31, 1998; pro forma
journal entries.
Exhibit D-1
BEFORE THE
PENNSYLVANIA PUBLIC UTILITY COMMISSION
In re:
SECURITIES CERTIFICATE OF :
METROPOLITAN EDISON COMPANY : Securities Certificate
IN THE MATTER OF THE ISSUANCE : No. S-
AND SALE OF UP TO $130,000,000 :
PRINCIPAL AMOUNT OF SUBORDINATED :
DEBENTURES AND EXECUTION AND :
DELIVERY OF THE GUARANTY IN :
CONNECTION WITH THE ISSUANCE :
OF TRUST SECURITIES HAVING :
AN AGGREGATE LIQUIDATION VALUE :
NOT TO EXCEED $125,000,000 BY A :
SPECIAL PURPOSE BUSINESS TRUST :
SUBSIDIARY OF METROPOLITAN :
EDISON COMPANY :
TO PENNSYLVANIA PUBLIC UTILITY COMMISSION:
1. The name and address of the public utility filing this Securities
Certificate are Metropolitan Edison Company d/b/a GPU Energy ("Met-Ed" or the
"Company"), 2800 Pottsville Pike, Muhlenberg Township, Berks County,
Pennsylvania, (mailing address: P.O. Box 16001, Reading, Pennsylvania
19640-0001).
2. The name and address of the public utility's attorneys are W. Edwin
Ogden, Jeffrey A. Franklin and Ryan, Russell, Ogden & Seltzer LLP, 1100
Berkshire Boulevard, Suite 301, Reading, Pennsylvania 19610-1221.
3. The Company, a public utility as defined in the Pennsylvania Public
Utility Code, as amended, is a corporation duly organized and existing under the
laws of the Commonwealth of Pennsylvania. It is engaged primarily in the
business of generating, purchasing, transmitting, distributing and selling
electric energy to the public in fourteen Pennsylvania counties.
4. All outstanding shares of the Company's common stock are owned by GPU,
Inc. (formerly General Public Utilities Corporation) ("GPU"), a Pennsylvania
corporation.
5. This Securities Certificate pertains to the issuance and sale by Met-Ed
of up to $130,000,000 of its subordinated debentures (the "Subordinated
Debentures") and execution and delivery of a guaranty agreement (the "Guaranty")
in connection with the issuance and sale by its subsidiaries of the Preferred
Securities and the Trust Securities (each as defined below) as described in this
Securities Certificate. Met-Ed proposes to organize a special purpose business
trust under Delaware law ("Met-Ed Capital Trust"), which will issue and sell
from time to time in one or more series through December 31, 2000 up to
$125,000,000 aggregate liquidation value of preferred beneficial interests, in
the form of Trust Securities (having a liquidation value per interest to be
determined at the time of issuance based on market conditions) (the "Trust
Securities")*. Each Trust Security will represent a cumulative preferred
security (the
- ---------------------
* The transactions proposed herein are substantially the same as the
transactions approved by the Commission in the Securities Certificate No.
S-940428 and No. A-110300F0071 in connection with monthly income preferred
securities ("MIPS"), with the exception that the MIPS were issued by a limited
partnership subsidiary of Met-Ed and the Trust Securities will be issued by a
special purpose business trust subsidiary. The trust structure is being utilized
so that the buyers of the securities receive a Form 1099 for their income tax
purposes, rather than a Form K-1.
-2-
<PAGE>
"Preferred Securities") of a Delaware limited partnership ("Met-Ed Capital
L.P."), which will be a special purpose indirect subsidiary of Met-Ed. Met-Ed
also proposes to form a special purpose Delaware corporation ("Investment Sub"),
for the sole purpose of acting as general partner of Met-Ed Capital L.P. The
sole purpose of Met-Ed Capital Trust will be to acquire the Preferred Securities
and to issue and sell the Trust Securities evidencing the Preferred Securities.
Met-Ed Capital Trust will apply the proceeds from the sale of the Trust
Securities to purchase the Preferred Securities. Met-Ed Capital L.P. will, in
turn, use the proceeds received from the sale of the Preferred Securities to
purchase Met-Ed's Subordinated Debentures. The sole purpose of Met-Ed Capital
L.P. is to issue one or more series of Preferred Securities and to lend the
proceeds thereof, plus the capital contribution (in an amount not to exceed
$5,000,000) made by Met-Ed in Met-Ed Capital L.P., to Met-Ed, which loan will be
evidenced by the Subordinated Debentures issued by Met-Ed. Met-Ed will acquire
the common stock of Investment Sub for a nominal consideration and will
capitalize Investment Sub with (i) a capital contribution in the amount of up to
$5,000,000, and (ii) a demand promissory note in the principal amount of up to
$13,000,000, such note to accrue interest, compounded semi-annually, at a rate
equal to the Citibank, N.A. base rate as in effect from time to time. Investment
Sub will acquire all of the general partner interests in Met-Ed Capital L.P. for
up to $5,000,000.
Met-Ed will execute and deliver the Guaranty for the benefit of the
holders of the Preferred Securities, pursuant to which it
-3-
will make certain payments to the holders of the Preferred Securities to the
extent not paid by Met-Ed Capital L.P. Such payment may include (A) accrued but
unpaid distributions on the Preferred Securities, if and to the extent Met-Ed
Capital L.P. has funds legally available therefor, (B) the redemption price
payable for any Preferred Securities called for redemption to the extent that
Met-Ed Capital L.P. has funds legally available therefor, (C) the aggregate
liquidation preference on the Preferred Securities, including all accrued but
unpaid distributions, whether or not declared, to the extent that Met-Ed Capital
L.P. has funds legally available therefor, and (D) certain additional amounts.
Each Subordinated Debenture will be issued under an Indenture to be
entered into with United States Trust Company of New York, as trustee (the
"Debenture Indenture"), and will have a maturity not to exceed 49 years. The
issuance of the Subordinated Debentures by Met-Ed will be subject to the
restriction in Article 6th, Section 8(B)(b) of Met-Ed's Restated Articles of
Incorporation which limits, without the consent of the holders of a majority of
Met-Ed's outstanding Cumulative
Preferred Stock, the amount of unsecured indebtedness which Met-Ed may
have outstanding at any one time to 20% of the aggregate of the total
outstanding principal amount of all bonds and other securities representing
secured indebtedness issued or assumed by Met-Ed, plus Met-Ed's capital stock,
premiums thereon, and surplus of Met-Ed as stated on its books of account. Prior
to maturity, Met-Ed will pay only interest on the Subordinated
-4-
<PAGE>
Debentures at a rate equal to the distribution rate on the Preferred Securities
(which distribution payments will then be distributed by Met-Ed Capital Trust to
the holders of the Trust Securities), with any excess being distributed to
Met-Ed as a distribution on Met-Ed's investment in Met-Ed Capital L.P., thereby
reducing the interest cost on the Subordinated Debentures. Each Subordinated
Debenture and Met-Ed's obligations under the Guaranty will be subordinate to all
other existing and future "Senior Indebtedness," (as defined below) of Met-Ed
and will have no cross-default provisions with respect to other Met-Ed
indebtedness -- i.e., a default under any other outstanding Met-Ed indebtedness
will not result in a default under the Subordinated Debenture or the Guaranty.
However, Met-Ed may not declare and pay dividends on, or redeem or retire, its
outstanding Cumulative Preferred Stock or Common Stock unless all payments then
due (whether or not previously deferred) under the Subordinated Debentures and
the Guaranty have been made. "Senior Indebtedness" consists of (i) the principal
of and premium (if any) in respect of (A) indebtedness of Met-Ed for money
borrowed and (B) indebtedness evidenced by securities, debentures, bonds or
other similar instruments (including purchase money obligations) for payment of
which Met-Ed is responsible or liable; (ii) all capital lease obligations of
Met-Ed; (iii) all obligations of Met-Ed issued or assumed as the deferred
purchase price of property, all conditional sale obligations of Met-Ed and all
obligations of Met-Ed under any title retention agreement (but excluding trade
accounts payable arising in the ordinary course of business); (iv) certain
obligations of Met-Ed for the
-5-
<PAGE>
reimbursement of any obligor on any letter of credit, banker's acceptance,
security purchase facility or similar credit transaction; (v) all obligations of
the type referred to in clauses (i) through (iv) of other persons for the
payment of which Met-Ed is responsible or liable as obligor, guarantor or
otherwise; and (vi) all obligations of the types referred to in clauses (i)
through (v) of other persons secured by any lien on any property or asset of
Met-Ed (whether or not such obligation is assumed by Met-Ed), except for any
such indebtedness that is by its terms subordinated to or pari passu with the
Subordinated Debentures. The Preferred Securities will be redeemed at the
maturity of the Subordinated Debentures or upon the redemption of such
Subordinated Debentures, but will not be subject to any mandatory sinking fund.
The Preferred Securities may also be subject to redemption upon the occurrence
of certain events relating to the tax treatment of the Preferred Securities
and/or Met-Ed Capital L.P. and/or the treatment of Met-Ed Capital L.P. under the
Investment Company Act of 1940, as amended (the "1940 Act"). The redemption of
the Preferred Securities will cause a mandatory redemption of the Trust
Securities.
It is expected that Met-Ed's interest payments on the Subordinated
Debentures will be deductible for income tax purposes. When implemented,
Met-Ed's consolidated balance sheet will reflect the Trust Securities as
"Met-Ed-obligated mandatorily redeemable preferred securities." The Subordinated
Debentures will not appear on Met-Ed's consolidated balance sheet because the
principal and interest on the Subordinated Debentures will be payable to a
subsidiary. For the same reason, the
<PAGE>
-6-
interest payments on the Subordinated Debentures and the distributions to Met-Ed
on Met-Ed's investment in Met-Ed Capital L.P. will not appear on Met-Ed's
consolidated balance sheet because Met-Ed Capital L.P. is a subsidiary. The
distribution payments made on the Trust Securities will be reported in Met-Ed's
consolidated income statements as "Interest Charges - Met-Ed-obligated
mandatorily redeemable preferred securities."
Met-Ed desires to maintain the flexibility to issue and sell the Trust
Securities in one or more sales either publicly, through negotiated
underwritings, or privately, through direct placements, with amounts of the
offering, annual distribution rate, redemption provisions and other terms, along
with the terms of the Subordinated Debentures to be determined later at the time
of issuance. Met-Ed believes that this flexibility will enable it to react
effectively to various changes in market conditions. Met-Ed will provide to your
Honorable Commission (the "Commission") reports, within 60 days after each
issuance of the securities described herein, listing the terms and conditions of
all the Trust Securities, Preferred Securities and the corresponding
Subordinated Debentures and the related Guaranty issued during that period
pursuant to this Securities Certificate together with a calculation of the
cumulative liquidation value of the Trust Securities and the Preferred
Securities and principal amount of Subordinated Debentures so issued.
Exact Title of Security
Trust Securities of Met-Ed Capital Trust, each representing a ___%
Cumulative Income Preferred Security, Series ___ of Met-Ed Capital L.P.; ___%
Subordinated Debentures, Series ___ of
-7-
<PAGE>
Metropolitan Edison Company; and the Guaranty Agreement executed and delivered
by Metropolitan Edison Company for the benefit of the holders of the Preferred
Securities and the payments thereunder.
Aggregate Number of Securities to be Issued and Aggregate Principal
Amount
Met-Ed Capital Trust will issue and sell up to $125,000,000 aggregate
liquidation value of the Trust Securities. The aggregate principal amount of the
Guaranty will also be up to $125,000,000, plus, in the event of a redemption or
liquidation, accrued and unpaid distributions on the Trust Securities and
certain additional amounts. Met-Ed will issue and sell up to $130,000,000
aggregate principal amount of the Subordinated Debentures. The principal amount
of the Subordinated Debentures will correspond to the aggregate liquidation
value of the Preferred Securities, plus Met-Ed's capital contribution in Met-Ed
Capital L.P. of up to $5,000,000.
Par Value
---------
Without par value.
Nominal Date(s) of Issue
------------------------
From time to time through December 31, 2000, to be determined by market
conditions.
Date of Maturity
----------------
A series of the Preferred Securities, along with the Guaranty thereof,
will be redeemed at the maturity or redemption of the corresponding series of
the Subordinated Debentures. Upon a redemption of Preferred Securities, the
corresponding Trust Securities will be redeemed. The maturity dates of the
-8-
<PAGE>
Subordinated Debentures will not exceed 49 years from the date of issuance.
Interest Rate(s) and Payment Date(s) (Subordinated Debentures)
-----------------------------------
The interest payments on the Subordinated Debentures will be Met-Ed
Capital L.P.'s sole source of funds to make distributions on the Preferred
Securities. The interest rates and payment dates on the Subordinated Debentures
will be determined at the time of issuance based on then existing market
conditions. The interest payments on the Subordinated Debentures will be at
least equal to the distribution payments on the Preferred Securities (and the
corresponding Trust Securities) and will have interest payment dates which
correspond to the distribution dates on the Preferred Securities (and the
corresponding Trust Securities). Distributions, if declared, and correspondingly
all interest payments, will be made at least semi-annually. Met-Ed will have the
ability to defer interest payments on the Subordinated Debentures to Met-Ed
Capital L.P. for a period of up to five years but not beyond the maturity date
or any redemption date of the Subordinated Debentures (the "Deferral Period"),
in which event Met-Ed Capital L.P. may similarly defer payment of distributions
on the Trust Securities. In no event may distributions be deferred beyond the
maturity date of the Subordinated Debentures. However, Met-Ed may be required to
pay interest on the deferred interest payments to the extent required by law.
Distribution Rates and Payment Dates (Trust Securities, Preferred
----------------------------------------
Securities and Guaranty)
-9-
<PAGE>
Whenever Met-Ed Capital Trust receives any cash distribution representing
a distribution on the Preferred Securities or payment under the Guaranty, Met-Ed
Capital Trust will distribute such amount to the holders of the Trust
Securities. The Preferred Securities will entitle the holders thereof to receive
cumulative distributions, paid at least semi-annually in arrears, at the amount
per security per annum fixed for the particular series. However, as stated
above, Met-Ed will have the ability to defer interest payments on the
Subordinated Debentures to Met-Ed Capital L.P. during the Deferral Period, in
which event no distributions will be made on the Preferred Securities or,
accordingly, on the Trust Securities. The payments under the Guaranty will be in
the same amounts as the distributions on the Preferred Securities, but only to
the extent such payments are not made by Met-Ed Capital L.P. from funds on hand
legally available therefor.
Extent to Which Taxes on Securities Are Assumed by the Issuer
-------------------------------------------------------------
No taxes on the Subordinated Debentures are to be assumed by Met-Ed;
however, Met-Ed may pay additional interest on the Subordinated Debentures equal
to taxes imposed on the Met-Ed Capital L.P. or Met-Ed Capital Trust. The extent
to which Met-Ed may assume taxes under the Guaranty will be negotiated at the
time of issuance subject to market conditions.
Redemption Provisions
---------------------
A series of the Trust Securities will be subject to mandatory redemption
upon redemption of the corresponding series of the Preferred Securities. A
series of the Preferred
-10-
<PAGE>
Securities will be subject to mandatory redemption upon the maturity or prior
redemption of the corresponding series of the Subordinated Debentures and may
also be redeemable at the option of Met-Ed at a price equal to their liquidation
value plus any accrued and unpaid distributions plus any premium negotiated in
connection with the marketing of the Trust Securities, (i) at any time after a
specified no-call period (if any) which could be up to the life of the issuance,
or (ii) in the event that (I) Met-Ed Capital L.P. is required by applicable tax
laws to withhold or deduct certain amounts in connection with distributions or
other payments, or (II) Met-Ed Capital L.P. or Met-Ed Capital Trust is subject
to federal income tax with respect to interest received on the Subordinated
Debentures for federal income tax purposes, or (III) it is determined that the
interest payments by Met-Ed on the Subordinated Debentures are not deductible
for federal income tax purposes or (IV) Met-Ed Capital L.P. is subject to more
than a de minimis amount of other taxes, duties or other governmental charges,
or (V) Met-Ed Capital L.P. becomes subject to regulation as an "investment
company" under the 1940 Act. Upon occurrence of any of the events set forth in
clause (ii) of the immediately preceding sentence, Met-Ed Capital Trust and
Met-Ed Capital L.P. could be dissolved and the Subordinated Debentures
distributed directly to the holders of the Trust Securities and to Met-Ed on a
pro rata basis, resulting in direct ownership of the Subordinated Debentures by
the holders of the Trust Securities. The Subordinated Debentures distributed to
Met-Ed would be canceled.
-11-
<PAGE>
Sinking Fund
------------
None.
Liquidation Value (Trust Securities and Preferred Securities)
-----------------
The liquidation value of the Trust Securities and the Preferred
Securities will be determined at the time of issuance . Upon receipt by Met-Ed
Capital Trust of any distribution from Met-Ed Capital L.P. upon any voluntary or
involuntary liquidation, dissolution or winding up of Met-Ed Capital L.P., the
holders of the Trust Securities will be entitled to receive such amounts in
proportion to the respective number of Preferred Securities represented by such
Trust Securities, out of the assets of Met-Ed Capital L.P. available for
distribution after satisfaction of creditors of Met-Ed Capital Trust as required
by law. However, the holders of the Trust Securities would not be entitled to
share further in the assets of Met-Ed Capital Trust.
Upon voluntary or involuntary dissolution or winding up of Met-Ed Capital
L.P., the holders of Preferred Securities will be entitled to receive out of the
assets of Met-Ed Capital L.P., after satisfaction of liabilities to creditors
and before any distribution of assets is made to holders of its general partner
interests, the sum of their stated liquidation preference and all accumulated
and unpaid distributions to the date of payment of the Preferred Securities. All
assets of Met-Ed Capital L.P. remaining after payment of the liquidation
distribution to the holders of Preferred Securities will be distributed to the
general partner.
-12-
<PAGE>
Upon any liquidation, dissolution or winding up of Met-Ed, the amount
payable on each series of the Preferred Securities would be limited to a pro
rata portion of any amount recovered by Met-Ed Capital L.P. in its capacity as a
subordinated debt holder of Met-Ed. The Subordinated Debentures and the payment
obligations under the Guaranty will be subordinate to all other existing and
future Senior Indebtedness, except for any such indebtedness that is by its
terms subordinated to or pari passu with the Subordinated Debentures.
Name and Address of Trustee and Whether Affiliated
The Subordinated Debentures will be issued under the Debenture
Indenture with United States Trust Company of New York, as trustee. United
States Trust Company of New York is not and will not be affiliated with
either Met-Ed, Met-Ed Capital L.P. or Met-Ed Capital Trust.
6. (i) Subject to the receipt from the Commission of a Notice of
Registration with respect to this Securities Certificate and of orders from the
Securities and Exchange Commission ("SEC") declaring effective the Application
on Form U-1 and the Registration Statement referred to in Item 8 hereof, in the
case of a public offering, Met-Ed proposes to issue and sell the Trust
Securities either (a) in one or more public sales through negotiated
underwritings to or through non-affiliated underwriters, purchasers or agents,
or (b) in one or more private placement sales through non-affiliated banks or
investment banking firms acting as agents of Met-Ed or directly to
non-affiliated agents, purchasers or underwriters. The names of the
underwriters, purchasers or agents will be included in the
-13-
<PAGE>
Underwriting Agreement or Purchase Agreement and will be filed at a later time.
To the best of Met-Ed's knowledge and belief, there is no person, firm or
corporation ordinarily engaged in underwriting securities or acting as an agent
for the sale of securities, which is an "affiliated interest" of Met-Ed, nor is
Met-Ed an "affiliated interest" of any such person, firm or corporation as the
term is defined in Section 2101 of the Pennsylvania Public Utility Code, as
amended.
Met-Ed expects that the commissions payable to the underwriters or selling
agents for selling the Trust Securities will be approximately 1% of the
liquidation value of the Trust Securities sold through such agents or
underwriters for an institutional offering and approximately 3.15% of the
liquidation value of the Trust Certificates sold through such agents or
underwriters for a retail offering.
(ii) An estimate of the expenses of issuance of the various
securities described in this Securities Certificate and the Securities
Certificate relating to the issuance of the Senior Notes, described in another
Securities Certificate being filed concurrently, all of which are proposed to be
issued and sold under a new financing program, assuming that an aggregate
principal amount of $250,000,000 of such securities is sold, is as follows:
Filing Fees - SEC $ 85,000
Printing Fees 25,000
New York Stock Exchange Fees 50,000
Legal Fees 300,000
Trustee Fees and Expenses 30,000
Rating Agencies Fees and Expenses 30,000
Accounting Fees 25,000
Miscellaneous Expenses 20,000
---------
Total $ 565,000
-14-
<PAGE>
The expenses incurred in connection with issuance and sale of each
series of the Trust Securities, together with the terms and conditions of the
corresponding series of the Preferred Securities and the Senior Notes, will be
provided to the Commission within 60 days after issuance of such series.
7. The net proceeds (after deduction of underwriting discounts and
commissions and the expenses of the offering) of the Trust Securities will be
applied by Met-Ed: (i) to redeem other outstanding securities of Met-Ed,
including preferred securities, preferred stock and first mortgage bonds, (ii)
to repay outstanding short-term bank loans or other unsecured indebtedness,
(iii) for construction purposes (see Met-Ed's 1998 Construction Budget attached
as Exhibit M), (iv) for other corporate purposes and (v) to reimburse Met-Ed's
treasury for funds previously expended therefrom for the above purposes.
8. An Application on Form U-1 will be filed and one or more Registration
Statements will be filed with the SEC with respect to the issuance and sale of
the Trust Securities, the related securities and the related transactions.
Concurrently with the filing of this Securities Certificate, Met-Ed is
filing another Securities Certificate with the Commission relating to the
proposed issuance and sale of Senior Notes secured by "fall away" first mortgage
bonds. The securities of Met-Ed described in these Securities Certificates are
proposed to be issued as a part of Met-Ed's new financing program, pursuant to
which program Met-Ed contemplates the issuance and sale of either the Senior
Notes and/or Subordinated Debentures and execution and delivery of the Guaranty
described
-15-
<PAGE>
in this Securities Certificate in one or more series; provided, however, that
the total principal amount of the Senior Notes and total liquidation value of
the Trust Securities to be issued and sold may not in the aggregate exceed
$250,000,000; and provided, further, that the total principal amount of the
Trust Securities may not in the aggregate exceed $125,000,000. Accordingly,
Met-Ed requests that the Commission take action on both Securities Certificates
simultaneously.
9. There are appended hereto and made part hereof the following Exhibits:
Exhibit A - Balance Sheet of Met-Ed per books as at March 31, 1998.
Exhibit B-1 - Statement of Income of Met-Ed for the 12 months ended
March 31, 1998.
Exhibit B-2 - Statement of Retained Earnings and Statement of
Capital Surplus of Met-Ed for the 12 months ended March
31, 1998.
Exhibit C - Statement of Utility Plant by Classified Accounts of
Met-Ed as at March 31, 1998.
Exhibit D - Statement of Securities of Other Corporations Owned
by Met-Ed as at March 31, 1998.
Exhibit E - Statement of Status of Funded Debt Outstanding of
Met-Ed as at March 31, 1998.
Exhibit F - Statement of Status of Capital Stock Outstanding of
Met-Ed as at March 31, 1998.
Exhibit G-1 - Copy of Registration Statements filed by Met-Ed on
Form S-3 with the SEC under the Securities Act of
1933, as amended, with respect to the proposed
issuance and sale of, among other things, the Trust
Securities, the Preferred Securities, the Guaranty
and the Subordinated Debentures (to be filed
supplementally).
Exhibit G-2 - Copy of the Application on Form U-1 with the SEC
under the Public Utility Holding Company Act of 1935 (to
be filed supplementally).
-16-
<PAGE>
Exhibit H - Not applicable.
Exhibit I - Copy of Resolutions of the Board of Directors of
Met-Ed authorizing, among other things, the proposed
issuance and sale of the Subordinated Debentures and the
Guaranty.
Exhibit J-1 - Proposed form of Underwriting Agreement (to be
filed supplementally).
Exhibit J-2 - Proposed form of Trust Agreement for Met-Ed
Capital Trust (to be filed supplementally).
Exhibit J-3 - Proposed form of Guaranty by Met-Ed (to be filed
supplementally).
Exhibit J-4 - Proposed form of Subordinated Debenture Indenture,
including the form of the Subordinated Debentures (to be
filed supplementally).
Exhibit K - Journal Entries of Met-Ed, showing all charges and
credits to be made on the books of account of Met-Ed as
a result of the issuance of securities described herein.
Exhibit L - Source and Application Funds.
Exhibit M - Met-Ed=s 1998 Construction Budget.
-17-
EXHIBIT G
SECURITIES AND EXCHANGE COMMISSION
(RELEASE NO. 35-_________; 70-____)
METROPOLITAN EDISON COMPANY
Metropolitan Edison Company ("Met-Ed"), 2800 Pottsville Pike,
Reading, Pennsylvania, an electric utility subsidiary of GPU, Inc., a registered
holding company, has filed an application pursuant to Sections 6(a), 7, 9(a), 10
and 12(b) of the Public Utility Holding Company Act of 1935 and Rules 45 and 54
thereunder.
Met-Ed proposes to organize a special purpose business trust under
Delaware law ("Met-Ed Capital Trust"), which will issue and sell from time to
time in one or more series through December 31, 2000 up to $125 million
aggregate liquidation value of preferred beneficial interests, in the form of
Trust Securities (having a liquidation value per interest to be determined) (the
"Trust Securities")*. Each Trust Security will represent a cumulative preferred
security (the "Preferred Securities") of a Delaware limited partnership ("Met-Ed
Capital L.P."), which will be a special purpose indirect subsidiary of
- ---------------------------
* The transactions proposed herein are substantially the same as the
transactions approved by the Commission in Order dated August 11, 1994 (HCAR No.
35-26102) (monthly income preferred securities ("MIPS")) with the exception that
the MIPS were issued by a limited partnership subsidiary of Met-Ed and the Trust
Securities will be issued by a special purpose business trust subsidiary. The
trust structure is being utilized to help ensure the intended tax treatment, as
discussed below.
-1-
<PAGE>
Met-Ed. Met-Ed also proposes to form a special purpose Delaware corporation
("Investment Sub"), for the sole purpose of acting as general partner of Met-Ed
Capital L.P. The sole purpose of Met-Ed Capital Trust will be to acquire the
Preferred Securities and to issue the Trust Securities evidencing the Preferred
Securities. The sole purpose of Met-Ed Capital L.P. is to issue one or more
series of Preferred Securities and to lend the proceeds thereof, plus the
capital contribution (in an amount not to exceed $5 million) made by Met-Ed in
Met-Ed Capital L.P., to Met-Ed, which loan will be evidenced by the Subordinated
Debentures (defined below) issued by Met-Ed.
Met-Ed will acquire the common stock of Investment Sub for a nominal
consideration and will capitalize Investment Sub with (i) a capital contribution
in the amount of up to $5 million, and (ii) a demand promissory note in the
principal amount of up to $13 million, such note to accrue interest, compounded
semi-annually, at a rate equal to the Citibank, N.A. base rate as in effect from
time to time. Investment Sub will acquire all of the general partner interests
in Met-Ed Capital L.P. for up to $5 million (the "L.P. Equity Contribution").
Met-Ed Capital Trust will apply the proceeds from the sale of the
Trust Securities to purchase the Preferred Securities. Met-Ed Capital L.P. will,
in turn, use the proceeds received from the sale of the Preferred Securities,
together with the L.P. Equity Contribution, to purchase Met-Ed's subordinated
debentures (individually, a "Subordinated Debenture" and collectively, the
"Subordinated Debentures").
-2-
<PAGE>
Met-Ed will also unconditionally guarantee the payment by Met-Ed
Capital L.P. of (A) accrued but unpaid distributions on the Preferred
Securities, if and to the extent Met-Ed Capital L.P. has declared such
distributions out of funds legally available therefor, (B) the redemption price
for any redemption of the Preferred Securities, (C) the aggregate liquidation
preference on the Preferred Securities, including all accrued but unpaid
distributions, whether or not declared and (D) certain additional amounts (the
"Guaranties").
Each Subordinated Debenture will be issued under an Indenture to be
entered into with United States Trust Company of New York, as trustee, and will
have an initial term of up to 49 years. Prior to maturity, Met-Ed will pay only
interest on the Subordinated Debentures at a rate equal to the distribution rate
on the Preferred Securities. Such interest payments will constitute Met-Ed
Capital Trust's only income and will be used by it to pay distributions on the
Trust Securities, with any excess being distributed indirectly to Met-Ed as a
distribution on Met-Ed's investment in Met-Ed Capital L.P., thereby reducing the
interest cost on the Subordinated Debentures. Distributions on the Trust
Securities will be made not less than semi-annually, and will be cumulative and
must be made to the extent that Met-Ed Capital Trust has legally available funds
and cash sufficient for such purposes. However, Met-Ed will have the right to
defer payment of interest on the Subordinated Debentures for up to five years in
which event Met-Ed Capital Trust may similarly defer payment of distributions on
the Trust Securities, but in no event
-3-
<PAGE>
may distributions be deferred beyond the maturity date of the Subordinated
Debentures. The distribution rates, payment dates, redemption and other similar
provisions of each series of Trust Securities will be identical to the interest
rates, payment dates, redemption and other provisions of the Subordinated
Debentures issued by Met-Ed with respect thereto.
Each Subordinated Debenture and related Guaranty will be subordinate
to all other existing and future "Senior Indebtedness," as defined below, of
Met-Ed and will have no cross-default provisions with respect to other Met-Ed
indebtedness -- i.e., a default under any other outstanding Met-Ed indebtedness
will not result in a default under the Subordinated Debenture or the Guaranty.
However, Met-Ed may not declare and pay dividends on, or redeem or retire, its
outstanding Cumulative Preferred Stock or Common Stock unless all payments then
due (whether or not previously deferred) under the Subordinated Debentures and
the Guaranties have been made. "Senior Indebtedness" consists of (i) the
principal of and premium (if any) in respect of (A) indebtedness of Met-Ed for
money borrowed and (B) indebtedness evidenced by securities, debentures, bonds
or other similar instruments (including purchase money obligations) for payment
of which Met-Ed is responsible or liable; (ii) all capital lease obligations of
Met-Ed; (iii) all obligations of Met-Ed issued or assumed as the deferred
purchase price of property, all conditional sale obligations of Met-Ed and all
obligations of Met-Ed under any title retention agreement (but excluding trade
accounts payable
-4-
<PAGE>
arising in the ordinary course of business); (iv) certain obligations of Met-Ed
for the reimbursement of any obligor on any letter of credit, banker's
acceptance, security purchase facility or similar credit transaction; (v) all
obligations of the type referred to in clauses (i) through (iv) of other persons
for the payment of which Met-Ed is responsible or liable as obligor, guarantor
or otherwise; and (vi) all obligations of the types referred to in clauses (i)
through (v) of other persons secured by any lien on any property or asset of
Met-Ed (whether or not such obligation is assumed by Met-Ed), except for any
such indebtedness that is by its terms subordinated to or pari passu with the
Subordinated Debentures.
It is expected that Met-Ed's interest payments on the Subordinated
Debentures will be deductible for income tax purposes and that Met-Ed Capital
Trust will be treated as a trust for federal income tax purposes. Consequently,
distributions from Met-Ed Capital Trust to the holders of Trust Securities and
indirectly to Met-Ed will be deemed to constitute distributions of the interest
income received by Met-Ed Capital Trust on the Subordinated Debentures.
Consequently, such holders and Met-Ed will not be entitled to any "dividend
received deduction" under the Internal Revenue Code with respect to such
distributions.
A series of the Trust Securities will be subject to mandatory
redemption upon redemption of the corresponding series of the Preferred
Securities. A series of Preferred Securities will be subject to mandatory
redemption upon the maturity or
-5-
<PAGE>
prior redemption of the corresponding series of the Subordinated Debentures, but
will not be subject to any mandatory sinking fund. A series of Preferred
Securities may also be redeemable at the option of Met-Ed at a price equal to
their liquidation value plus any accrued and unpaid distributions plus any
premium negotiated in connection with the marketing of the Trust Securities, (i)
at any time after a specified no-call period (if any) which could be up to the
life of the issuance, or (ii) in the event that (I) Met-Ed Capital L.P. is
required by applicable tax laws to withhold or deduct certain amounts in
connection with distributions or other payments, or (II) Met-Ed Capital L.P. or
Met-Ed Capital Trust is subject to federal income tax with respect to interest
received on the Subordinated Debentures, or (III) it is determined that the
interest payments by Met-Ed on the Subordinated Debentures are not deductible
for federal income tax purposes or (IV) Met-Ed Capital L.P. is subject to more
than a de minimis amount of other taxes, duties or other governmental charges,
or (V) Met-Ed Capital L.P. becomes subject to regulation as an "investment
company" under the Investment Company Act of 1940, as amended ("1940 Act"). Upon
occurrence of any of the events set forth in clause (ii) of the immediately
preceding sentence, Met-Ed Capital L.P. and Met-Ed Capital Trust could be
dissolved and the Subordinated Debentures distributed directly to the holders of
the Trust Securities and to Met-Ed on a pro rata basis, resulting in direct
ownership of the Subordinated Debentures by the holders of the Trust Securities.
The Subordinated Debentures distributed to Met-Ed will be canceled.
-6-
<PAGE>
In the event that Met-Ed Capital Trust is required by applicable tax
laws to withhold or deduct certain amounts in connection with distributions or
other payments, Met-Ed Capital Trust may also have the obligation, if the Trust
Securities are not redeemed or Subordinated Debentures are not distributed to
the holders thereof as aforesaid, to "gross up" such payments so that the Trust
Securities holders will receive the same payment after such withholding or
deduction as they would have received if no such withholding or deduction were
required. In such latter event, Met-Ed's obligations under the Subordinated
Debentures and the Guaranties would also cover any such "gross up" obligations.
Upon receipt by Met-Ed Capital Trust of any distribution from Met-Ed
Capital L.P. upon any voluntary or involuntary liquidation, dissolution or
winding up of Met-Ed Capital L.P., the holders of the Trust Securities will be
entitled to receive such amounts in proportion to the respective number of
Preferred Securities represented by such Trust Securities, out of the assets of
Met-Ed Capital L.P. available for distribution after satisfaction of liabilities
to creditors of Met-Ed Capital Trust.
In the event of any voluntary or involuntary dissolution or winding
up of Met-Ed Capital L.P., the holders of Preferred Securities will be entitled
to receive out of the assets of Met-Ed Capital L.P., after satisfaction of
liabilities to creditors and before any distribution of assets is made to the
Investment Sub, the sum of their stated liquidation preference
-7-
<PAGE>
and all accumulated and unpaid distributions to the date of payment of the
Preferred Securities. All assets of Met-Ed Capital L.P. remaining after payment
of the liquidation distribution to the holders of Preferred Securities will be
distributed to the Investment Sub.
Upon any liquidation, dissolution or winding up of Met-Ed, the
amount payable on each series of the Preferred Securities would be limited to a
pro rata portion of any amount recovered by Met-Ed Capital L.P. in its capacity
as a subordinated debt holder of Met-Ed. The Subordinated Debentures and the
payment obligations under the Guaranty will be subordinate to all other existing
and future Senior Indebtedness, except for any such indebtedness that is by its
terms subordinated to or pari passu with the Subordinated Debentures.
The constituent instruments of Met-Ed Capital Trust, including its
declaration of trust, will provide, among other things, that Met-Ed Capital
Trust's activities will be limited to the issuance and sale of Trust Securities
from time to time and the application of the proceeds thereof to the purchase of
the Preferred Securities. Accordingly, it is not proposed that Met-Ed Capital
Trust's constituent instruments include any interest or distribution coverage or
capitalization ratio restrictions on its ability to issue and sell Trust
Securities, as each such issuance will be supported by a Subordinated Debenture
and a Guaranty, and such restrictions would therefore not be relevant or
necessary for Met-Ed Capital Trust to maintain an appropriate capital structure.
Moreover, the issuance of Subordinated
-8-
<PAGE>
Debentures by Met-Ed will be subject to the restriction in Article 6th, Section
8(B)(b) of Met-Ed's Restated Articles of Incorporation which limits, without the
consent of the holders of a majority of Met-Ed's outstanding Cumulative
Preferred Stock, the amount of unsecured indebtedness which Met-Ed may have
outstanding at any one time to 20% of the aggregate of the total outstanding
principal amount of all bonds and other securities representing secured
indebtedness issued or assumed by Met-Ed plus Met-Ed's capital stock, premiums
thereon, and surplus of Met-Ed as stated on its books of account. Met-Ed Capital
Trust's constituent instruments will further state that Met-Ed Capital L.P. will
be responsible for all liabilities and obligations of Met-Ed Capital Trust.
Met-Ed expects to apply the net proceeds of the sale to Met-Ed
Capital L.P. of Subordinated Debentures to the redemption of outstanding senior
securities pursuant to the optional redemption provisions thereof, to the
repayment of outstanding short-term debt, for construction purposes, and for
other general corporate purposes, including to reimburse Met-Ed's treasury for
funds previously expended therefrom for the above purposes. Met-Ed will not use
any of the net proceeds of the sale of Subordinated Debentures to acquire,
either directly or indirectly, any interest in any exempt wholesale generator
("EWG") or foreign utility company ("FUCO").
The Application and any amendments thereto are available for
public inspection through the Commission's Office
-9-
<PAGE>
of Public Reference. Interested persons wishing to comment or request a hearing
should submit their views in writing by _________, 1998 to the Secretary,
Securities and Exchange Commission, Washington, D.C. 20549, and serve a copy on
the applicant at the address specified above. Proof of service (by affidavit, or
in case of an attorney at law, by certificate) should be filed with the request.
Any request for a hearing shall identify specifically the issues of fact or law
that are disputed. A person who so requests will be notified of any hearing, if
ordered, and will receive a copy of any notice or order issued in this matter.
After said date, the Application, as it may be amended, may be granted.
-10-
EXHIBIT H
Item 6
CAPITALIZATION AND CAPITALIZATION RATIOS
----------------------------------------
(IN THOUSANDS)
The capitalization of GPU, Inc. at March 31, 1998 and pro forma is as
follows:
Actual Pro Forma
------ ---------
Amount % Amount %
------ - ------ -
Long-term debt(1) $4 475 332 50.9 $4 475 332 49.5
Notes payable 299 618 3.4 299 618 3.3
Preferred stock (2) 170 478 1.9 170 478 1.9
Subsidiary-obligated
mandatorily redeemable
preferred securities 330 000 3.8 330 000 3.7
Trust originated
preferred securities - - 250 000 2.8
Common equity 3 519 270 40.0 3 506 489 38.8
--------- ----- --------- -----
$8 794 698 100.0 $9 031 917 100.0
(1) Includes securities due within one year of $411 140.
(2) Includes securities due within one year of $12 500.
<PAGE>
<TABLE>
Financial Statements
Item 6(b) 1-A
Page 1 of 35
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
ACTUAL (UNAUDITED)AND PRO FORMA
AT MARCH 31, 1998
-----------------
(IN THOUSANDS)
<CAPTION>
Actual Adjustments
(Unaudited) (See pages 5-6) Pro Forma
----------- --------------- ---------
<S> <C> <C> <C>
ASSETS
Utility Plant:
In Service, at original cost $2 424 260 $ - $2 424 260
Less, accumulated depreciation 945 023 - 945 023
--------- ------- ---------
Net utility plant in service 1 479 237 - 1 479 237
Construction work in progress 44 255 - 44 255
Other, net 35 416 15 476 50 892
--------- ------- ---------
Net utility plant 1 558 908 15 476 1 574 384
--------- ------- ---------
Other Property and Investments:
Nuclear decommissioning trusts, at market 183 168 - 183 168
Other, net 11 971 - 11 971
--------- ------- ---------
Total other property and investments 195 139 - 195 139
--------- ------- ---------
Current Assets:
Cash and temporary cash investments 3 462 113 178 116 640
Special deposits 1 109 - 1 109
Accounts receivable:
Customers, net 61 564 - 61 564
Other 27 177 - 27 177
Unbilled revenues 39 157 - 39 157
Materials and supplies, at average cost or less:
Construction and maintenance 38 824 - 38 824
Fuel 10 175 - 10 175
Deferred income taxes 2 945 - 2 945
Prepayments 38 438 - 38 438
--------- -------- ---------
Total current assets 222 851 113 178 336 029
--------- -------- ---------
Deferred Debits and Other Assets:
Regulatory assets:
Income taxes recoverable through future rates 182 303 - 182 303
Three Mile Island Unit 2 deferred costs 145 032 - 145 032
Nonutility generation contract buyout costs 73 868 - 73 868
Other 75 986 - 75 986
--------- -------- ---------
Total regulatory assets 477 189 - 477 189
Deferred income taxes 91 668 - 91 668
Other 16 688 1 778 18 466
--------- -------- ---------
Total deferred debits and other assets 585 545 1 778 587 323
--------- -------- ---------
Total Assets $2 562 443 $ 130 432 $2 692 875
========= ======== =========
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Financial Statements
Item 6(b) 1-A
Page 2 of 35
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
ACTUAL (UNAUDITED)AND PRO FORMA
AT MARCH 31, 1998
-----------------
(IN THOUSANDS)
<CAPTION>
Actual Adjustments
(Unaudited) (See pages 5-6) Pro Forma
----------- --------------- ---------
LIABILITIES AND CAPITAL
Capitalization:
<S> <C> <C> <C>
Common stock $ 66 273 $ - $ 66 273
Capital surplus 370 200 - 370 200
Retained earnings 273 243 (5 776) 267 467
Accumulated other comprehensive income 15 034 - 15 034
--------- -------- ---------
Total common stockholders' equity 724 750 (5 776) 718 974
Cumulative preferred stock 12 056 - 12 056
Company-obligated mandatorily
redeemable preferred securities 100 000 - 100 000
Trust originated preferred securities - 125 000 125 000
Long-term debt 576 925 - 576 925
--------- -------- ---------
Total capitalization 1 413 731 119 224 1 532 955
--------- -------- ---------
Current Liabilities:
Securities due within one year 22 - 22
Notes payable 81 600 - 81 600
Obligations under capital leases 34 732 15 476 50 208
Accounts payable:
Affiliates 49 158 - 49 158
Other 96 074 - 96 074
Taxes accrued 40 100 (4 268) 35 832
Interest accrued 10 599 - 10 599
Other 30 895 - 30 895
--------- -------- ---------
Total current liabilities 343 180 11 208 354 388
--------- -------- ---------
Deferred Credits and Other Liabilities:
Deferred income taxes 420 465 - 420 465
Three Mile Island Unit 2 future costs 226 748 - 226 748
Unamortized investment tax credits 28 633 - 28 633
Nuclear fuel disposal fee 30 755 - 30 755
Regulatory liabilities 23 786 - 23 786
Other 75 145 - 75 145
--------- -------- ---------
Total deferred credits and other liabilities 805 532 - 805 532
--------- -------- ---------
Total Liabilities and Capital $2 562 443 $ 130 432 $2 692 875
========= ======== =========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Financial Statements
Item 6(b) 1-A
Page 3 of 35
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF INCOME
ACTUAL (UNAUDITED)AND PRO FORMA
FOR THE TWELVE MONTHS ENDED MARCH 31, 1998
------------------------------------------
(IN THOUSANDS)
<CAPTION>
Actual Adjustments
(Unaudited) (See pages 5-6) Pro Forma
----------- --------------- ---------
<S> <C> <C> <C>
Operating Revenues $ 922 597 $ - $ 922 597
--------- ------- ---------
Operating Expenses:
Fuel 94 308 929 95 237
Power purchased and interchanged:
Affiliates 15 442 - 15 442
Other 223 193 - 223 193
Other operation and maintenance 234 855 15 234 870
Depreciation and amortization 106 867 - 106 867
Taxes, other than income taxes 58 188 - 58 188
--------- ------- ---------
Total operating expenses 732 853 944 733 797
--------- ------- ---------
Operating Income Before Income Taxes 189 744 (944) 188 800
Income taxes 53 394 (4 268) 49 126
--------- ------- ---------
Operating income 136 350 3 324 139 674
--------- ------- ---------
Other Income and Deductions:
Allowance for other funds used during
construction (59) - (59)
Other income, net 3 312 - 3 312
Income taxes (1 918) - (1 918)
--------- ------- ---------
Total other income and deductions 1 335 - 1 335
--------- ------- ---------
Income Before Interest Charges and
Dividends on Preferred Securities 137 685 3 324 141 009
--------- ------- ---------
Interest Charges and Dividends
on Preferred Securities:
Interest on long-term debt 43 254 - 43 254
Other interest 7 850 37 7 887
Allowance for borrowed funds used during
construction (981) - (981)
Dividends on company-obligated mandatorily
redeemable preferred securities 9 000 - 9 000
Dividends on trust originated preferred
securities - 9 063 9 063
--------- ------- ---------
Total interest charges and dividends
on preferred securities 59 123 9 100 68 223
--------- ------- ---------
Net Income 78 562 (5 776) 72 786
Preferred stock dividends 483 - 483
--------- ------- ---------
Earnings Available for Common Stock $ 78 079 $ (5 776) $ 72 303
========= ======== =========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
</TABLE>
<TABLE>
Financial Statements
Item 6(b) 1-A
Page 4 of 35
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
ACTUAL AND PRO FORMA
FOR THE TWELVE MONTHS ENDED MARCH 31, 1998
------------------------------------------
(IN THOUSANDS)
<CAPTION>
Actual Adjustments
(Unaudited) (See pages 5-6) Pro Forma
----------- --------------- ---------
<S> <C> <C> <C>
Balance at beginning of period $ 285 213 $ - $ 285 213
Net income 78 562 (5 776) 72 786
Cash dividends declared on common stock (90 000) - (90 000)
Cash dividends declared on cumulative
preferred stock (483) - (483)
Other adjustments, net (49) - (49)
--------- ------- ---------
Balance at end of period $ 273 243 $ (5 776) $ 267 467
========= ======= =========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
Financial Statements
Item 6(b) 1-A
Page 5 of 35
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
PRO FORMA JOURNAL ENTRIES
AT MARCH 31, 1998
-----------------
(IN THOUSANDS)
(1)
Cash and temporary cash investments $125 000
Trust originated preferred securities $125 000
To reflect the proposed issuance of
$ 125 million trust originated preferred
securities from time to time through
December 31, 2000 by Met-Ed Capital Trust.
The trust originated preferred securities
and dividend payments are to be
unconditionally guaranteed by
Metropolitan Edison Company.
(2)
Other deferred debits $ 1 815
Cash and temporary cash investments $ 1 815
To reflect the underwriters compensation
and offering expenses paid in
accordance with the Underwriting Agreements
for Met-Ed Capital Trust.
(3)
Other interest $ 37
Other deferred debits $ 37
To reflect the annual amortization of the
deferred underwriters compensation and
offering expenses which are being
amortized over 49 years
(4)
Dividends on trust originated preferred securities $ 9 063
Cash and temporary cash investments $ 9 063
To reflect the annual dividends
paid on the trust originated preferred
securities by Met-Ed Capital Trust at
an assumed rate of 7.25%.
<PAGE>
Financial Statements
Item 6(b) 1-A
Page 6 of 35
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
PRO FORMA JOURNAL ENTRIES
AT MARCH 31, 1998
-----------------
(IN THOUSANDS)
(5)
Other Utility Plant, net $15 476
Obligations Under Capital Leases $15 476
To record the potential incremental
nuclear fuel to be leased for TMI-1
(proposed $50,000 limit less $34,524 of
nuclear fuel subject to lease at March 31, 1998)
(SEC File No.70-8223).
(6)
Fuel Expense $ 929
Cash $ 929
To record incremental rent expense on
the proposed nuclear fuel lease at an
annual rate of 6.0% (SEC File No.70-8223).
(7)
Other operation and maintenance $ 15
Cash $ 15
To record annual fees associated with
the proposed nuclear fuel lease (SEC File
No.70-8223).
(8)
Taxes accrued $ 4 268
Income taxes $ 4 268
To reflect the net decrease in the
provision for Federal and State income taxes
at the rate of 41.5% attributable to
interest payments on the proposed issuance
of $128,866 subordinated debentures by
Metropolitan Electric Company to Met-Ed
Capital L.P. and to record the decrease
in income taxes associated with the
proposed nuclear fuel lease (SEC File No.70-8223).
<PAGE>
<TABLE>
Financial Statements
Item 6(b) 1-B
Page 7 of 35
GPU, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
ACTUAL (UNAUDITED) AND PRO FORMA
AT MARCH 31, 1998
-----------------
(IN THOUSANDS)
<CAPTION>
Actual Adjustments
(Unaudited) (See pages 11-12) Pro Forma
----------- ----------------- ---------
ASSETS
Utility Plant:
<S> <C> <C> <C>
In Service, at original cost $11 239 028 $ - $11 239 028
Less, accumulated depreciation 4 165 553 - 4 165 553
---------- ----- ----------
Net utility plant in service 7 073 475 - 7 073 475
Construction work in progress 244 498 - 244 498
Other, net 170 970 61 193 232 163
---------- -------- ----------
Net utility plant 7 488 943 61 193 7 550 136
---------- -------- ----------
Other Property and Investments:
GPUI Group equity investments 621 093 - 621 093
Goodwill, net 588 811 - 588 811
Nuclear decommissioning trusts, at market 626 884 - 626 884
Nuclear fuel disposal trust, at market 110 978 - 110 978
Other, net 135 861 - 135 861
---------- ------ ----------
Total other property and investments 2 083 627 - 2 083 627
---------- ------ ----------
Current Assets:
Cash and temporary cash investments 130 555 224 341 354 896
Special deposits 23 611 - 23 611
Accounts receivable:
Customers, net 279 673 - 279 673
Other 111 887 - 111 887
Unbilled revenues 131 271 - 131 271
Materials and supplies, at average cost or less:
Construction and maintenance 191 658 - 191 658
Fuel 40 758 - 40 758
Deferred income taxes 44 669 - 44 669
Prepayments 104 349 - 104 349
---------- -------- ----------
Total current assets 1 058 431 224 341 1 282 772
---------- -------- ----------
Deferred Debits and Other Assets:
Regulatory assets:
Income taxes recoverable through future
rates 521 780 - 521 780
Three Mile Island Unit 2 deferred costs 337 754 - 337 754
Nonutility generation contract buyout costs 240 068 - 240 068
Unamortized property losses 96 355 - 96 355
Other 425 095 - 425 095
---------- -------- ---------
Total regulatory assets 1 621 052 - 1 621 052
Deferred income taxes 431 112 - 431 112
Other 150 844 3 727 154 571
---------- -------- ---------
Total deferred debits and other assets 2 203 008 3 727 2 206 735
---------- -------- ---------
Total Assets $12 834 009 $ 289 261 $13 123 270
========== ======== ==========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Financial Statements
Item 6(b) 1-B
Page 8 of 35
GPU, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
ACTUAL (UNAUDITED) AND PRO FORMA
AT MARCH 31, 1998
-----------------
(IN THOUSANDS)
<CAPTION>
Actual Adjustments
(Unaudited) (See pages 11-12) Pro Forma
----------- ---------------- ---------
LIABILITIES AND CAPITAL
<S> <C> <C> <C>
Capitalization:
Common stock $ 331 958 $ - $ 331 958
Capital surplus 1 007 885 - 1 007 885
Retained earnings 2 274 486 (12 781) 2 261 705
Accumulated other comprehensive income/(loss) (14 733) - (14 733)
---------- -------- ---------
Total 3 599 596 (12 781) 3 586 815
Less, reacquired common stock, at cost 80 326 - 80 326
---------- -------- ----------
Total common stockholders' equity 3 519 270 (12 781) 3 506 489
Cumulative preferred stock:
With mandatory redemption 91 500 - 91 500
Without mandatory redemptiom 66 478 - 66 478
Subsidiary-obligated mandatorily redeemable
preferred securities 330 000 - 330 000
Trust originated preferred securities - 250 000 250 000
Long-term debt 4 064 192 - 4 064 192
---------- -------- ----------
Total capitalization 8 071 440 237 219 8 308 659
---------- -------- ----------
Current Liabilities:
Securities due within one year 423 640 - 423 640
Notes payable 299 618 - 299 618
Obligations under capital leases 131 276 61 193 192 469
Accounts payable 415 629 - 415 629
Taxes accrued 150 782 (9 151) 141 631
Interest accrued 51 470 - 51 470
Deferred energy credits 23 984 - 23 984
Other 276 381 - 276 381
---------- -------- ----------
Total current liabilities 1 772 780 52 042 1 824 822
---------- -------- ----------
Deferred Credits and Other Liabilities:
Deferred income taxes 1 572 001 - 1 572 001
Unamortized investment tax credits 120 761 - 120 761
Three Mile Island Unit 2 future costs 453 596 - 453 596
Regulatory liabilities 102 768 - 102 768
Other 740 663 - 740 663
Total deferred credits and other liabilities 2 989 789 - 2 989 789
---------- -------- ----------
Total Liabilities and Capitalization $12 834 009 $ 289 261 $13 123 270
========== ======== ==========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Financial Statements
Item 6(b) 1-B
Page 9 of 35
GPU, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF INCOME
ACTUAL (UNAUDITED) AND PRO FORMA
FOR THE TWELVE MONTHS ENDED MARCH 31, 1998
------------------------------------------
(IN THOUSANDS)
<CAPTION>
Actual Adjustments
(Unaudited) (See pages 11-12) Pro Forma
---------- ----------------- ---------
<S> <C> <C> <C>
Operating Revenues $4 136 909 $ - $4 136 909
---------- ----------- ---------
Operating Expenses:
Fuel 398 415 3 672 402 087
Power purchased and interchanged, net 1 059 473 - 1 059 473
Deferral of energy and capacity costs, net (2 228) - (2 228)
Other operation and maintenance 1 030 622 56 1 030 678
Depreciation and amortization 479 664 - 479 664
Taxes, other than income taxes 320 775 - 320 775
---------- ----------- ---------
Total operating expenses 3 286 721 3 728 3 290 449
---------- ----------- ---------
Operating income before income taxes 850 188 (3 728) 846 460
Income taxes 205 987 (9 151) 196 836
---------- ---------- ---------
Operating income 644 201 5 423 649 624
---------- ---------- ----------
Other Income and Deductions:
Allowance for other funds used during
construction 47 - 47
Equity in undistributed earnings/(losses) of
affiliates (41 676) - (41 676)
Other income, net 44 434 - 44 434
Income taxes 16 093 - 16 093
---------- ---------- ----------
Total other income and deductions 18 898 - 18 898
---------- ---------- ----------
Income Before Interest Charges and
Preferred Dividends 663 099 5 423 668 522
---------- ---------- ----------
Interest Charges and Preferred Dividends:
Interest on long-term debt 274 479 - 274 479
Other interest 37 520 78 37 598
Allowance for borrowed funds used during
construction (5 394) - (5 394)
Dividends on company-obligated mandatorily
redeemable preferred securities 28 888 - 28 888
Dividends on trust originated preferred
securities - 18 126 18 126
Preferred stock dividends of subsidiaries, net
of gain on reacquisition 12 072 - 12 072
---------- ---------- ----------
Total interest charges and preferred
Dividends 347 565 18 204 365 769
---------- ---------- ----------
Minority interest net (income)/loss 1 691 - 1 691
---------- ---------- ----------
Net Income $ 313 843 $ (12 781) $ 301 062
========= ========== =========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Financial Statements
Item 6(b) 1-B
Page 10 of 35
GPU, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
ACTUAL AND PRO FORMA
FOR THE TWELVE MONTHS ENDED MARCH 31, 1998
------------------------------------------
(IN THOUSANDS)
<CAPTION>
Actual Adjustments
(Unaudited) (See pages 11-12) Pro Forma
----------- ----------------- ----------
<S> <C> <C> <C>
Balance at beginning of period $2 209 254 $ - $2,209 254
Net income 313 843 (12 781) 301 062
Cash dividends declared on common stock (241 517) - (241 517)
Other adjustments, net (7 094) - (7 094)
---------- ------- ----------
Balance at end of period $2 274 486 $ (12 781) $2 261 705
========== ======== ==========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 11 of 35
GPU, INC. AND SUBSIDIARY COMPANIES
PRO FORMA JOURNAL ENTRIES
AT MARCH 31, 1998
-----------------
(IN THOUSANDS)
(1)
Cash and temporary cash investments $250 000
Trust originated preferred securities $250 000
To reflect the proposed issuance of
$125 million trust originated preferred
securities from time to time through
December 31, 2000 by Met-Ed Capital Trust
and Penelec Capital Trust, respectively.
The trust originated preferred
securities and dividend payments are
to be unconditionally guaranteed by
Metropolitan Electric Company and
Pennsylvania Electric Company.
(2)
Other deferred debits $ 3 805
Cash and temporary cash investments $ 3 805
To reflect the underwriters compensation
and offering expenses paid in
accordance with the Underwriting Agreements
for Met-Ed Capital Trust
and Penelec Capital Trust.
(3)
Other interest $ 78
Other deferred debits $ 78
To reflect the annual amortization of the
deferred underwriters compensation and
offering expenses which are being amortized
over 49 years.
(4)
Dividends on trust originated preferred securities $18 126
Cash and temporary cash investments $18 126
To reflect the annual dividends paid on
the trust originated preferred
securities of Met-Ed Capital Trust (7.25%)
and Penelec Capital Trust (7.25%).
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 12 of 35
GPU, INC. AND SUBSIDIARY COMPANIES
PRO FORMA JOURNAL ENTRIES
AT MARCH 31, 1998
-----------------
(IN THOUSANDS)
(5)
Other Utility Plant, net $61 193
Obligations Under Capital Leases $61 193
To record the potential incremental nuclear fuel
to be leased for TMI-1 and Oyster Creek (proposed
$190,000 limit less $128,807 of nuclear fuel subject to
lease at March 31, 1998) (SEC File No.70-8223).
(6)
Fuel Expense $ 3 672
Cash $ 3 672
To record incremental rent expense on the proposed
nuclear fuel lease at an annual rate of 6.0%
(SEC File No.70-8223).
(7)
Other operation and maintenance $ 56
Cash $ 56
To record annual fees associated with the proposed
nuclear fuel lease (SEC File No.70-8223).
(8)
Taxes accrued $ 9 151
Income taxes $ 9 151
To reflect the net decrease in the provision
for Federal and State income taxes at the rate of
41.5% attributable to interest payments on the
proposed issuance of $257,732 subordinated debentures
by Metropolitan Electric Company and Pennsylvania
Electric Company to Met-Ed Capital L.P. and Penelec
Capital L.P., respectively, and to record the decrease
in income taxes associated with the
proposed nuclear fuel lease (SEC File No.70-8223).
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 13 of 35
GPU, INC.
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-
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 14 of 35
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 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
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 15 of 35
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 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
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 16 of 35
2000 860 402 208 250
2001 887 411 237 239
2002 908 423 246 239
* 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
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 17 of 35
PaPUC ordered that the issue of recovery of the related buyout costs and
approval of the revised power purchase agreements with AES be considered in
Met-Ed and Penelec's restructuring proceedings. If the revised power purchase
agreements with AES are not approved by the PaPUC, Met-Ed and Penelec have
agreed to pay AES up to an additional $28 million and $5 million, respectively.
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
========= =========
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 18 of 35
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
========= =========
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 19 of 35
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.
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 20 of 35
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).
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 21 of 35
In response to the continuing deregulation of the electric utility
industry, the Securities and Exchange Commission (SEC) questioned the 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.
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 22 of 35
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
=== ===
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 23 of 35
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 aggregate
of $140 million of primary coverage, (b) secondary financial
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 24 of 35
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 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
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 25 of 35
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
collections are contributed to external trust funds. These deposits, including
the related earnings, are classified as Nuclear decommissioning
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 26 of 35
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
=== ===
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 27 of 35
(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
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 28 of 35
study estimates, beginning in 1998. Based on Met-Ed's rate order, Penelec has
recorded a regulatory asset for that portion of such costs which it believes to
be probable of recovery.
At 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
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 29 of 35
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 on the grounds that, among other things, they are
based on inadequate
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 30 of 35
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 schedule for submitting
a plan for long-term remediation, based on future
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 31 of 35
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.
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 32 of 35
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. In
July 1997, NIMO and 16 independent power producers (IPP), including the
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 33 of 35
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 required
relatively late in their expected service lives. If such additions
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 34 of 35
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 Changing
Regulatory Environment.) In February 1998, the New Jersey Low-Level Radwaste
Facility Siting Board (Siting Board) voted to suspen the siting
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 35 of 35
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.
