SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1993
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 1-3522
PENNSYLVANIA ELECTRIC COMPANY
(Exact name of registrant as specified in its charter)
Pennsylvania 25-0718085
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1001 Broad Street
Johnstown, Pennsylvania 15907-2437
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (814)533-8111
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Cumulative Preferred Stock,
without par value
stated value, $100 per share:
4.40% Series B 4.50% Series F Philadelphia Stock Exchange
3.70% Series C 4.60% Series G " " "
4.05% Series D 8.36% Series H " " "
4.70% Series E " " "
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the registrant's voting stock held by
non-affiliates: None
The number of shares outstanding of each of the registrant's classes of
voting stock as of February 28, 1994 was as follows:
Common Stock, par value $20 per share: 5,290,596 shares outstanding.
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TABLE OF CONTENTS
Page
Number
Part I
Item 1. Business 1
Item 2. Properties 26
Item 3. Legal Proceedings 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 28
Item 6. Selected Financial Data 28
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 28
Item 8. Financial Statements and Supplementary Data 28
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 28
Part III
Item 10. Directors and Executive Officers of the Registrant 29
Item 11. Executive Compensation 31
Item 12. Security Ownership of Certain Beneficial Owners
and Management 35
Item 13. Certain Relationships and Related Transactions 35
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 36
Signatures 37
Index to Supplementary Data, Consolidated Financial Statements
and Financial Statement Schedules F-1
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PART I
ITEM 1. BUSINESS.
Pennsylvania Electric Company (Company), a Pennsylvania corporation
incorporated in 1919, is a subsidiary of General Public Utilities Corporation
(GPU), a holding company registered under the Public Utility Holding Company
Act of 1935 (the 1935 Act). The Company's business is the generation,
transmission, distribution and sale of electricity. The Company has two
minor wholly-owned subsidiaries.
The Company is affiliated with Jersey Central Power & Light Company
(JCP&L) and Metropolitan Edison Company (Met-Ed). The Company, JCP&L and
Met-Ed are referred to herein as the "Company and its affiliates." The
Company is also affiliated with GPU Service Corporation (GPUSC), a service
company; GPU Nuclear Corporation (GPUN), which operates and maintains the
nuclear units of the Company and its affiliates; and General Portfolios
Corporation (GPC), parent of Energy Initiatives, Inc., which develops, owns
and operates nonutility generating facilities. All of the Company's
affiliates are wholly-owned subsidiaries of GPU. The Company and its
affiliates own all of the common stock of the Saxton Nuclear Experimental
Corporation which owns a small demonstration nuclear reactor that has been
partially decommissioned. The Company and its affiliates, GPUSC, GPUN and
GPC considered together are referred to as the "GPU System."
As a subsidiary of a registered holding company, the Company is subject
to regulation by the Securities and Exchange Commission (SEC) under the 1935
Act. The Company's retail rates, conditions of service, issuance of
securities and other matters of the Company are subject to regulation by the
Pennsylvania Public Utility Commission (PaPUC). The Nuclear Regulatory
Commission (NRC) regulates the construction, ownership and operation of
nuclear generating stations. The Company is also subject to wholesale rate
and other regulation by the Federal Energy Regulatory Commission (FERC) under
the Federal Power Act.
INDUSTRY DEVELOPMENTS
The Energy Policy Act of 1992 (Energy Act) has made significant changes
to the 1935 Act and the Federal Power Act. As a result of this legislation,
the FERC is now authorized to order utilities to provide transmission or
wheeling service to third parties for wholesale power transactions provided
specified reliability and pricing criteria are met. In addition, the
legislation amends the 1935 Act to permit the development and ownership of a
broad category of independent power production facilities by utilities and
nonutilities alike without subjecting them to regulation under the 1935 Act.
These and other aspects of the Energy Act are expected to accelerate the
changing character of the electric utility industry. (See "Regulation.")
The electric utility industry appears to be undergoing a major transition
as it proceeds from a traditional rate regulated environment based on cost
recovery to some combination of a competitive marketplace and modified
regulation of certain market segments. The industry challenges resulting
from various instances of competition, deregulation and restructuring thus
far have been minor compared with the impact that is expected in the future.
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The Public Utility Regulatory Policies Act of 1978 (PURPA) facilitated the
entry of competitors into the electric generation business. Since then, more
competition has been introduced through various state actions to encourage
cogeneration and, most recently, the Energy Act. The Energy Act is intended
to promote competition among utility and nonutility generators in the
wholesale electric generation market, accelerating the industry restructuring
that has been underway since the enactment of PURPA. This legislation,
coupled with increasing customer demands for lower-priced electricity, is
generally expected to stimulate even greater competition in both the
wholesale and retail electricity markets. These competitive pressures may
create opportunities to compete for new customers and revenues, as well as
increase risk which could lead to the loss of customers.
Operating in a competitive environment will place added pressures on
utility profit margins and credit quality. Utilities with significantly
higher cost structures than supportable in the marketplace may experience
reduced earnings as they attempt to meet their customers' demands for lower-
priced electricity. This prospect of increasing competition in the electric
utility industry has already led the major credit rating agencies to address
and apply more stringent guidelines in making credit rating determinations.
Among its provisions, the Energy Act allows the FERC, subject to certain
criteria, to order owners of electric transmission systems, such as the
Company and its affiliates, to provide third parties with transmission access
for wholesale power transactions. The Energy Act did not give the FERC the
authority, however, to order retail transmission access. Movement toward
opening the transmission network to retail customers is currently under
consideration in several states.
The competitive forces have also begun to influence some retail pricing
in the industry. In a few instances, industrial customers, threatening to
pursue cogeneration, self-generation or relocation to other service
territories, have leveraged price concessions from utilities. Recent state
regulatory actions, such as in New Jersey, suggest that utilities may have
limited success with attempting to shift costs associated with such discounts
to other customers. Utilities may have to absorb, in whole or part, the
effects of price reductions designed to retain large retail customers. State
regulators may put a limit or cap on prices, especially for those customers
unable to pursue alternative supply options.
Insofar as the Company is concerned, unrecovered costs will most likely
be related to generation investment, purchased power contracts, and
"regulatory assets", which are deferred accounting transactions whose value
rests on the strength of a state regulatory decision to allow future recovery
from ratepayers. In markets where there is excess capacity (as there
currently is in the region including Pennsylvania) and many available sources
of power supply, the market price of electricity may be too low to support
full recovery of capital costs of certain existing power plants, primarily
the capital intensive plants such as nuclear units. Another significant
exposure in the transition to a competitive market results if the prices of a
utility's existing purchase power contracts, consisting primarily of
contractual obligations with nonutility generators, are higher than future
market prices. Utilities locked into expensive purchase power arrangements
may be forced to value the contracts at market prices and recognize certain
losses. A third source of exposure is regulatory assets which, if not
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supported by regulators, would have no value in a competitive market.
Financial Accounting Standard No. 71 (FAS 71), "Accounting for the Effects of
Certain Types of Regulation", applies to regulated utilities that have the
ability to recover their costs through rates established by regulators and
charged to customers. If a portion of the Company's operations continues to
be regulated, FAS 71 accounting may only be applied to that portion. Write-
offs of utility plant and regulatory assets may result for those operations
that no longer meet the requirements of FAS 71. In addition, under
deregulation, the uneconomical costs of certain contractual commitments for
purchased power and/or fuel supplies may have to be expensed. Management
believes that to the extent that the Company no longer qualifies for FAS 71
accounting treatment, a material adverse effect on its results of operations
and financial position may result. At this time, it is difficult for
management to project the future level of stranded assets or other
unrecoverable costs, if any, without knowing what the market price of
electricity will be, or if regulators will allow recovery of industry
transition costs from customers.
Corporate Realignment
In February 1994, GPU announced a corporate realignment and related
actions as a result of its ongoing strategic planning studies. GPU
Generation Corporation (GPU Generation) will be formed to operate and
maintain the fossil-fueled and hydroelectric generating units of the Company
and its affiliates; ownership of the generating assets will remain with the
Company and its affiliates. GPU Generation will also build new generation
facilities as needed by the Company and its affiliates in the future.
Involvement in the independent power generation market will continue through
Energy Initiatives, Inc. Additionally, the management and staff of the
Company and Met-Ed will be combined but the two companies will not be merged
and will retain their separate corporate existence. This action is intended
to increase effectiveness and lower cost. Included in this effort will be a
search for parallel opportunities at GPUN and JCP&L. Completion of these
realignment initiatives will be subject to various regulatory reviews and
approvals from the SEC, FERC, PaPUC and the New Jersey Board of Regulatory
Commissioners (NJBRC). The GPU System is also developing a performance
improvement and cost reduction program to help assure ongoing
competitiveness, and, among other matters, will also address workforce issues
in terms of compensation, size and skill mix. The GPU System is seeking
annual cost savings of approximately $80 million by the end of 1996 as a
result of these organizational changes.
Duquesne Transaction
In September 1990, the Company and its affiliates entered into a series
of interdependent agreements with Duquesne Light Company (Duquesne) for the
joint construction and ownership of associated high voltage bulk transmission
facilities and the purchase by JCP&L and Met-Ed of a 50% ownership interest
in Duquesne's 300 MW Phillips Generating Station. The Company and its
affiliates' share of the total cost of these agreements was estimated to be
$500 million (of which the Company's share of its participation in the
transmission line was $117 million), the major part of which was expected to
be incurred after 1994. In addition, JCP&L and Met-Ed simultaneously entered
into a related agreement with Duquesne to purchase 350 MW of capacity and
energy from Duquesne for 20 years beginning in 1997. The Company and its
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affiliates and Duquesne filed several petitions with the PaPUC and the NJBRC
seeking certain of the regulatory authorizations required for the
transactions.
In December 1993, the NJBRC denied JCP&L's request to participate in the
proposed transactions. As a result of this action and other developments,
the Company and its affiliates notified Duquesne that they were exercising
their rights under the agreements to withdraw from and thereby terminate the
agreements. Consequently, the Company wrote off the approximately $8 million
it had invested in the project.
GENERAL
The Company provides electric service within a territory located in
western, northern and south central Pennsylvania extending from the Maryland
state line northerly to the New York state line, with a population of about
1.5 million, approximately 24% of which is concentrated in ten cities and
twelve boroughs, all with populations over 5,000. The Company owns all of
the common stock of the Waverly Electric Light & Power Company, the owner of
electric distribution facilities in the village of Waverly, New York. The
Company, as lessee of the property of the Waverly Electric Light and Power
Company, also serves a population of about 13,700 in Waverly, New York and
vicinity. The Company's other wholly-owned subsidiary is Nineveh Water
Company.
The electric generating and transmission facilities of the Company,
Met-Ed and JCP&L are physically interconnected and are operated as a single
integrated and coordinated system. The transmission facilities are
physically interconnected with neighboring nonaffiliated utilities in
Pennsylvania, New Jersey, Maryland, New York and Ohio. The Company and its
affiliates are members of the Pennsylvania-New Jersey-Maryland
Interconnection (PJM) and the Mid-Atlantic Area Council, an organization
providing coordinated review of the planning by utilities in the PJM area.
The interconnection facilities are used for substantial capacity and energy
interchange and purchased power transactions as well as emergency assistance.
During 1993, residential sales accounted for about 37% of the Company's
operating revenues from customers and 30% of kilowatt-hour (KWH) sales to
customers; commercial sales accounted for about 32% of operating revenues
from customers and 30% of KWH sales to customers; industrial sales accounted
for about 27% of operating revenues from customers and 35% of KWH sales to
customers; and sales to rural electric cooperatives, municipalities
(primarily for street and highway lighting) and others accounted for about
4% of operating revenues from customers and 5% of KWH sales to customers.
The Company also makes interchange and spot market sales of electricity to
other utilities. The revenues derived from the 25 largest customers in the
aggregate accounted for approximately 12% of operating revenues from
customers for the year 1993. Reference is made to "Company Statistics" on
page F-2 for additional information concerning the Company's sales and
revenues.
The Company and its affiliates along with the other members of the PJM
power pool, experienced an electric emergency due to extremely cold
temperature from January 18 through January 20, 1994. In order to maintain
the electric system and to avoid a total black-out, intermittent black-outs
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for periods of one to two hours were instituted on January 19, 1994 to
control peak loads. In February 1994, the NJBRC, the PaPUC and the FERC
initiated investigations of the energy emergency, and forwarded data requests
to all affected utilities. In addition, the United States House of
Representatives' Energy and Power Subcommittee, among others, held hearings
on this matter. At this time, management is unable to estimate the impact,
if any, from any conclusions that may be reached by the regulators.
In May 1993, the Pennsylvania Office of Consumer Advocate (Consumer
Advocate) filed a petition for review of Met-Ed's rate order with the
Pennsylvania Commonwealth Court seeking to set aside a March 1993 decision
which allowed Met-Ed to (a) recover in the future certain Three Mile Island
Unit 2 (TMI-2) retirement costs (radiological decommissioning and
nonradiological cost of removal) and (b) defer the incremental costs
associated with the adoption of the Statement of Financial Accounting
Standards No. 106 (FAS 106) "Employers' Accounting for Postretirement
Benefits Other Than Pensions." If the 1993 Met-Ed rate order is reversed,
the Company would be required to write off a total of approximately
$50 million for TMI-2 retirement costs. In addition, the Consumer Advocate
is contesting utility deferral of FAS 106 costs in a proceeding involving
another utility. The outcome of this proceeding may affect the Company's
recovery of FAS 106 costs. This matter is pending before the court. (See
"Rate Proceedings.")
Competition in the electric utility industry has already played a
significant role in wholesale transactions, affecting the pricing of energy
sales to electric cooperatives and municipal customers. During 1993, the
Company successfully negotiated power supply agreements with several existing
GPU System wholesale customers in response to offers made by other utilities
seeking to provide electric service at rates lower than those of Met-Ed or
JCP&L. The Company has made similar offers to certain wholesale customers
now being served by other utilities. Although wholesale customers represent
a relatively small portion of Company sales, the Company will continue its
efforts to retain and add customers.
NUCLEAR FACILITIES
The Company has made investments in two major nuclear projects -- Three
Mile Island Unit 1 (TMI-1), which is an operational generating facility, and
TMI-2, which was damaged during the 1979 accident. At December 31, 1993, the
Company's net investment in TMI-1, including nuclear fuel, was $165 million.
TMI-1 and TMI-2 are jointly owned by the Company, JCP&L and Met-Ed in the
percentages of 25%, 25% and 50%, respectively.
Costs associated with the operation, maintenance and retirement of
nuclear plants have continued to increase and become less predictable, in
large part due to changing regulatory requirements and safety standards and
experience gained in the construction and operation of nuclear facilities.
The Company and its affiliates may also incur costs and experience reduced
output at their nuclear plants because of the design criteria prevailing at
the time of construction and the age of the plants' systems and equipment.
In addition, for economic or other reasons, operation of these plants for the
full term of their now assumed lives cannot be assured. Also, not all risks
associated with ownership or operation of nuclear facilities may be
adequately insured or insurable. Consequently, the ability of electric
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utilities to obtain adequate and timely recovery of costs associated with
nuclear projects, including replacement power, any unamortized investment at
the end of the plants' useful life (whether scheduled or premature), the
carrying costs of that investment and retirement costs, is not assured.
Management intends, in general, to seek recovery of any such costs described
above through the ratemaking process, but recognizes that recovery is not
assured.
TMI-1
TMI-1, a 786-MW pressurized water reactor, was licensed by the NRC in
1974 for operation through 2008. The NRC has extended the TMI-1 operating
license through April 2014, in recognition of the plant's approximate six-
year construction period. During 1993, TMI-1 operated at a capacity factor
of approximately 87%. A scheduled refueling outage that year lasted 36 days;
the next refueling outage is scheduled for late 1995.
TMI-2
The 1979 TMI-2 accident resulted in significant damage to, and
contamination of, the plant and a release of radioactivity to the
environment. The cleanup program was completed in 1990, and, after receiving
NRC approval, TMI-2 entered into long-term monitored storage in December
1993.
As a result of the accident and its aftermath, individual claims for
alleged personal injury (including claims for punitive damages), which are
material in amount, have been asserted against GPU and the Company and its
affiliates. Approximately 2,100 of such claims are pending in the
U.S. 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. Questions have not yet been
resolved as to whether the punitive damage claims are (a) subject to the
overall limitation of liability set by the Price-Anderson Act ($560 million
at the time of the accident) and (b) outside the primary insurance coverage
provided pursuant to that Act (remaining primary coverage of approximately
$80 million as of December 1993). If punitive damages are not covered by
insurance or are not subject to the Price-Anderson liability limitation,
punitive damage awards could have a material adverse effect on the financial
position of the GPU System.
In June 1993, the District Court agreed to permit pre-trial discovery on
the punitive damage claims to proceed. A trial of twelve allegedly
representative cases is scheduled to begin in October 1994. In February
1994, the Court held that the plaintiffs' claims for punitive damages are not
barred by the Price-Anderson Act to the extent that the funds to pay punitive
damages do not come out of the U.S. Treasury. The Court also denied the
defendants' motion seeking a dismissal of all cases on the grounds that the
defendants complied with applicable federal safety standards regarding
permissible radiation releases from TMI-2 and that, as a matter of law, the
defendants therefore did not breach any duty that they may have owed to the
individual plaintiffs. The Court stated that a dispute about what radiation
and emissions were released cannot be resolved on a motion for summary
judgment.
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NUCLEAR PLANT RETIREMENT COSTS
Retirement costs for nuclear plants include decommissioning the
radiological portions of the plants and the cost of removal of
nonradiological structures and materials. The disposal of spent nuclear fuel
is covered separately by contracts with the U.S. Department of Energy. See
Note 2 to consolidated financial statements for further information regarding
nuclear fuel disposal costs.
In 1990, the Company and its affiliates 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 Company and its affiliates intend to complete the
funding for TMI-1 by the end of the plant's license term, 2014. The TMI-2
funding completion date is 2014, consistent with TMI-2 remaining in long-
term storage and being decommissioned at the same time as TMI-1. Under the
NRC regulations, the funding target (in 1993 dollars) for TMI-1 is
$143 million, of which the Company's share is $36 million. Based on NRC
studies, a comparable funding target for TMI-2 (in 1993 dollars), which takes
into account the accident, is $228 million, of which the Company's share
would be $57 million. The NRC is currently studying the levels of these
funding targets. Management cannot predict the effect that the results of
this review will have on the funding targets. NRC regulations and a
regulatory guide provide mechanisms, including exemptions, to adjust the
funding targets over their collection periods to reflect increases or
decreases due to inflation and changes in technology and regulatory
requirements. The funding targets, while not actual cost estimates, are
reference levels designed to assure that licensees demonstrate adequate
financial responsibility for decommissioning. While the regulations address
activities related to the removal of the radiological portions of the plants,
they do not establish residual radioactivity limits nor do they address costs
related to the removal of nonradiological structures and materials.
In 1988, a consultant to GPUN performed a site-specific study of TMI-1
that considered various decommissioning plans and estimated the cost of
decommissioning the radiological portions of TMI-1 to range from
approximately $205 to $285 million (adjusted to 1993 dollars), of which the
Company's share would range between approximately $51 to $71 million. In
addition, the study estimated the cost of removal of nonradiological
structures and materials for TMI-1 at $72 million, of which the Company's
share would be $18 million.
The ultimate cost of retiring the Company and its affiliates' nuclear
facilities may be materially different from the funding targets and the cost
estimates contained in the site-specific studies and cannot now be more
reasonably estimated than the level of the NRC funding target because such
costs are subject to (a) the type of decommissioning plan selected, (b) the
escalation of various cost elements (including, but not limited to, general
inflation), (c) the further development of regulatory requirements governing
decommissioning, (d) the absence to date of significant experience in
decommissioning such facilities and (e) the technology available at the time
of decommissioning. The Company is charging to expense and contributing to
external trusts amounts collected from customers for nuclear plant
decommissioning and nonradiological costs. In addition, the Company has
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contributed to external trusts amounts written off for nuclear plant
decommissioning in 1991.
TMI-1
Effective October 1993, the PaPUC approved a rate change for the Company
which increased the collection of revenues for decommissioning costs for
TMI-1 based on its share of the NRC funding target and nonradiological cost
of removal as estimated in the site-specific study. Collections from
customers for decommissioning expenditures are deposited in external trusts.
These external trust funds, including the interest earned, are classified as
Decommissioning Funds on the balance sheet. Provision for the future
expenditure of these funds has been made in accumulated depreciation,
amounting to $4 million at December 31, 1993.
Management believes that TMI-1 retirement costs, in excess of those
currently recognized for ratemaking purposes, should be recoverable through
the ratemaking process.
TMI-2
The Company has recorded a liability amounting to $57 million, as of
December 31, 1993, for its share of the radiological decommissioning of TMI-
2, reflecting the NRC funding target (unadjusted for an immaterial decrease
in 1993). The Company records escalations, when applicable, in the liability
based upon changes in the NRC funding target. The Company has also recorded
a liability in the amount of $5 million, for its share of incremental costs
specifically attributable to monitored storage. Such costs are expected to
be incurred between 1994 and 2014, when decommissioning is forecast to begin.
In addition, the Company has recorded a liability in the amount of
$18 million, for its share of nonradiological cost of removal. The above
amounts for retirement costs and monitored storage are reflected as Three
Mile Island Unit 2 Future Costs on the balance sheet. The Company has made a
nonrecoverable contribution of $20 million to an external decommissioning
trust relating to its share of the accident-related portion of the
decommissioning liability.
The PaPUC has granted Met-Ed decommissioning revenues for its share of
the remainder of the NRC funding target and allowances for the cost of
removal of nonradiological structures and materials, although the PaPUC's
order has been appealed by the Consumer Advocate (see "Rate Proceedings").
The Company intends to request decommissioning revenues and an allowance for
the cost of removal of nonradiological structures and materials, equivalent
to its share of the amounts granted to Met-Ed, in its next retail base rate
filing. Management intends to seek recovery for any increases in TMI-2
retirement costs, but recognizes that recovery cannot be assured.
As a result of TMI-2's entering long-term monitored storage, the Company
is incurring incremental storage costs currently estimated at $.25 million
annually. The Company has deferred the $5 million, for its share of the
total estimated incremental costs attributable to monitored storage through
2014, the expected retirement date of TMI-1. The Company believes these
costs should be recoverable through the ratemaking process.
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INSURANCE
The GPU System has insurance (subject to retentions and deductibles) for
its operations and facilities including coverage for property damage,
liability to employees and third parties, and loss of use and occupancy
(primarily incremental replacement power costs). There is no assurance that
the GPU System will maintain all existing insurance coverages. Losses or
liabilities that are not completely insured, unless allowed to be recovered
through ratemaking, could have a material adverse effect on the financial
position of the Company.
The decontamination liability, premature decommissioning and property
damage insurance coverage for the TMI station (TMI-1 and TMI-2 are considered
one site for insurance purposes) totals $2.7 billion. 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 the stations.
The Price-Anderson Act limits the of GPU System's liability to third
parties for a nuclear incident at one of its sites to approximately
$9.4 billion. Coverage for the first $200 million of such liability is
provided by private insurance. The remaining coverage, or secondary
protection, is provided by retrospective premiums payable by all nuclear
reactor owners. Under secondary protection, a nuclear incident at any
licensed nuclear power reactor in the country, including those owned by the
GPU System, could result in assessments of up to $79 million per incident for
each of the GPU System's reactors, subject to an annual maximum payment of
$10 million per incident per reactor. In 1993, GPUN requested an exemption
from the NRC to eliminate the secondary protection requirements for TMI-2.
This matter is pending before the NRC.
The Company and its affiliates have insurance coverage for incremental
replacement power costs resulting from an accident-related outage at their
nuclear plants. Coverage for TMI-1 commences after the first 21 weeks of the
outage and continues for three years at decreasing levels beginning at a
weekly amount of $2.6 million.
Under its insurance policies applicable to nuclear operations and
facilities, the Company is subject to retrospective premium assessments of up
to $7 million in any one year, in addition to those payable under the
Price-Anderson Act.
NONUTILITY AND OTHER POWER PURCHASES
The Company has entered into power purchase agreements with
independently owned power production facilities (nonutility generators) for
the purchase of energy and capacity for periods up to 25 years. The majority
of these agreements are subject to penalties for nonperformance and other
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contract limitations. All of these facilities are must-run and generally
obligate the Company to purchase all of the power produced up to the contract
limits. The agreements have been approved by the PaPUC and permit the
Company to recover energy and demand costs from customers through its energy
clause. These agreements provide for the sale of approximately 412 MW of
capacity and energy to the Company by the mid 1990s. As of December 31,
1993, facilities covered by these agreements having 293 MW of capacity were
in service. Payments made pursuant to these agreements were $104 million for
1993 and are estimated to aggregate $121 million for 1994. The price of the
energy and capacity to be purchased under these agreements is determined by
the terms of the contracts. The rates payable under a number of these
agreements are in excess of current market prices. While the Company has
been granted full recovery of these costs from customers by the PaPUC, there
can be no assurance that the Company will continue to be able to recover
these costs throughout the term of the related contracts. The emerging
competitive market has created additional uncertainty regarding the
forecasting of the Company's energy supply needs which, in turn, has caused
the Company to change its supply strategy to seek shorter term agreements
offering more flexibility. At the same time, the Company is attempting to
renegotiate higher cost long-term nonutility generation contracts where
opportunities arise. The extent to which the Company may be able to do so,
however, or recover associated costs through rates, is uncertain. Moreover,
these efforts have led to disputes before the PaPUC, as well as to
litigation, and may result in claims against the Company for substantial
damages. There can be no assurance as to the outcome of these matters.
In July 1993, the PaPUC acted to initiate a rulemaking proceeding which,
in general, would establish a mandatory all source competitive bidding
program by which utilities would meet their future capacity and energy needs.
In November 1993, the Company filed an appeal with the Commonwealth
Court seeking to overturn a PaPUC order which directs the Company to enter
into two power purchase agreements with nonutility generators for a total of
160 MW under long-term contracts commencing in 1997 or later. The Company
believes it does not need this additional capacity and believes the costs
associated with these contracts are not in the economic interests of its
customers. The matter is pending before the Commonwealth Court.
The Company and its affiliates have entered into agreements with other
utilities for the purchase of capacity and energy for various periods through
1999. These agreements provide for up to 2,130 MW in 1994, declining to
1,307 MW in 1995 and 183 MW by 1999. Payments pursuant to these agreements
are estimated to aggregate $244 million in 1994. The price of the energy
purchased under these agreements is determined by contracts providing
generally for the recovery by the sellers of their costs.
RATE PROCEEDINGS
Pennsylvania
In March 1993, in response to a petition filed by the Company's
affiliate Met-Ed, the PaPUC modified portions of its January 1993 Met-Ed rate
order to allow for the future recovery of certain TMI-2 retirement costs
(radiological decommissioning and nonradiological cost of removal). (See
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"Nuclear Plant Retirement Costs.") In addition, the PaPUC action on the
Met-Ed petition allowed the Company to defer the incremental costs associated
with the adoption of FAS 106. In May 1993, the Consumer Advocate filed a
petition for review with the Pennsylvania Commonwealth Court seeking to set
aside the PaPUC 1993 Met-Ed rate order. The matter is pending before the
court. If the 1993 rate order is reversed, the Company would be required to
write off a total of approximately $50 million for TMI-2 retirement costs.
The Company intends to request decommissioning revenues and an allowance for
the cost of removal of nonradiological structures and materials for TMI-2,
equivalent to its share of the amounts granted to Met-Ed, in its next retail
base rate filing. Management intends to seek recovery for any increases in
TMI-2 retirement costs, but recognizes that recovery cannot be assured.
In March 1993, the PaPUC issued a generic policy statement that
permitted the deferral of FAS 106 costs for review and recovery in subsequent
base rate making. Consistent with the PaPUC's policy statement, the Company
filed a petition with the PaPUC in July 1993 for deferral of FAS 106 costs.
That petition was approved by the PaPUC in October 1993. The Consumer
Advocate is contesting utility deferral of FAS 106 costs in a proceeding
involving another utility. The outcome of this proceeding may affect the
Company's future recovery of these costs.
The PaPUC has recently completed its generic investigation into demand-
side management (DSM) cost recovery mechanisms and issued a cost recovery and
ratemaking order in December 1993. The Company is currently developing plans
which will reflect changes since its original plan was filed in 1991. In
December 1993, the Pennsylvania Industrial Energy Coalition (PIEC) appealed
to the Commonwealth Court to reverse the PaPUC Order. On February 4, 1994,
the Company and Met-Ed filed a petition seeking a stay of the PaPUC's Order
until the PIEC's appeal is resolved (See "Construction Program - Demand-Side
Management").
In March 1994, the Company made its annual filing with the PaPUC for an
increase in its Energy Cost Rate of $38.3 million. The new rate is expected
to become effective April 1, 1994.
The PaPUC is considering generic nuclear performance standards for
Pennsylvania utilities. In January 1994, the Company submitted a proposal
which, along with proposals submitted by the other Pennsylvania utilities,
may result in the PaPUC adopting a generic nuclear performance standard.
CONSTRUCTION PROGRAM
General
During 1993, the Company had gross plant additions of approximately
$168 million attributable principally to improvements and modifications to
existing generating stations, additions to the transmission and distribution
system and clean air requirements. During 1994, the Company contemplates
gross plant additions of approximately $218 million. The Company's gross
plant additions are expected to total approximately $242 million in 1995.
The anticipated increase in construction expenditures during 1995 is
principally attributable to expenditures associated with clean air
requirements. The principal categories of the 1994 anticipated expenditures,
which include an allowance for other funds used during construction, are as
follows:
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(In Millions)
1994
Generation - Nuclear $ 6
Nonnuclear 111
Total Generation 117
Transmission & Distribution 86
Other 15
Total $218
In addition, expenditures for maturing debt are expected to be
$70 million for 1994. The Company will have no expenditures for maturing
debt in 1995. Subject to market conditions, the Company intends to redeem
during these periods outstanding senior securities pursuant to optional
redemption provisions thereof should it prove economical to do so.
Management estimates that approximately one-half of the Company's total
capital needs for 1994 and 1995 will be satisfied through internally
generated funds. The Company expects to obtain the remainder of these funds
principally through the sale of first mortgage bonds and preferred stock,
subject to market conditions. The Company's bond indenture and articles of
incorporation include provisions that limit the amount of long-term debt,
preferred stock and short-term debt the Company may issue. The Company's
interest and preferred stock dividend coverage ratios are currently in excess
of indenture or charter restrictions. (see "Limitations on Issuing
Additional Securities"). Present plans call for the Company to issue long-
term debt and preferred stock during the next three years to finance
construction activities and, depending on the level of interest rates,
refinance outstanding senior securities.
The Company's 1994 construction program includes $66 million in
connection with the federal Clean Air Act Amendments of 1990 (Clean Air Act)
requirements (see "Environmental Matters-Air"). The 1995 construction
program currently includes approximately $62 million for Clean Air Act
compliance.
The Company's gross plant additions exclude nuclear fuel requirements
provided under capital leases that amounted to $11 million in 1993. When
consumed, the presently leased material, which amounted to $21 million at
December 31, 1993, is expected to be replaced by additional leased material
at an average rate of approximately $9 million annually. In the event the
replacement nuclear fuel needs cannot be leased, the associated capital
requirements would have to be met by other means.
The Company has projected increases in peak loads of approximately 275 MW
(summer rating) and 440 MW (winter rating) by the year 1998. The Company
expects to experience an average growth in sales to customers during this
period of about 2.3% annually. The Company expects to meet this growth
through existing and contracted supply sources and the utilization of
capacity of its affiliates.
In response to the increasingly competitive business climate and excess
capacity of nearby utilities, the Company's supply plan places an emphasis on
maintaining flexibility. Supply planning focuses increasingly on short to
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intermediate term commitments, reliance on "spot" markets, and avoidance of
long-term firm commitments. Through 1998, the Company's plan consists of the
continued utilization of most existing generating facilities, power purchases
and the continued promotion of economic energy conservation and load
management programs. Given the future direction of the industry, the
Company's present strategy includes minimizing the financial exposure
associated with new long-term purchase commitments and the construction of
new facilities by including projected market prices in the evaluation of
these options. The Company will resist efforts to compel it to add or
contract for new capacity at costs that may exceed future market prices. In
addition, the Company is attempting to renegotiate higher cost long-term
nonutility generation contracts where opportunities arise.
Demand-Side Management
The regulatory environment in Pennsylvania encourages the development of
new conservation and load management programs as evidenced by recent approval
of a cost recovery mechanism for DSM. DSM includes utility sponsored
activities designed to improve energy efficiency in customer end-use, and
includes load management programs (i.e., peak reduction) and conservation
programs (i.e., energy and peak reduction).
In 1990, the Company and Met-Ed jointly filed a proposal with the PaPUC
on DSM issues. The proposal recommends that the PaPUC preapprove DSM
programs of utilities to enable the collection of their costs and that the
PaPUC issue an order on a generic basis. In December 1993, the PaPUC issued
an order adopting generic guidelines for recovery of DSM expenses. Also in
December 1993, the Consumer Advocate and the Pennsylvania Energy Office filed
separate petitions for clarification and reconsideration of the PaPUC's order
and the PIEC appealed to the Commonwealth Court to reverse the PaPUC order.
On February 4, 1994, the Company and Met-Ed filed a petition seeking a stay
of the PaPUC's order until the PIEC's appeal is resolved.
FINANCING ARRANGEMENTS
The Company expects to have short-term debt outstanding from time to time
throughout the year. The peak in short-term debt outstanding is expected to
occur in the spring coinciding with normal cash requirements for revenue tax
payments.
GPU and the Company and its affiliates have $398 million of credit
facilities, which includes a Revolving Credit Agreement (Credit Agreement)
with a consortium of banks that permits total borrowing of $150 million
outstanding at any one time. The credit facilities generally provide for the
payment of a commitment fee on the unborrowed amount of 1/8 of 1% annually.
Borrowings under these credit facilities generally bear interest based on the
prime rate or money market rates. Notes issued under the Credit Agreement,
which expires April 1, 1995, are subject to various covenants and
acceleration under certain conditions.
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In 1993, the Company refinanced higher cost long-term debt in the
principal amount of $108 million resulting in an estimated annualized after-
tax savings of $1 million. Total long-term debt issued during 1993 amounted
to $120 million. In addition, the Company redeemed $25 million of high-
dividend rate preferred stock. The funds for this redemption were derived
from GPU through sales of its common stock.
In January 1994, the Company issued an aggregate of $90 million of first
mortgage bonds, of which a portion of the net proceeds were used to redeem
early $38 million principal amount of 6 5/8% series bonds in late February
1994.
The Company has regulatory authority to issue and sell first mortgage
bonds, which may be issued as secured medium-term notes, and preferred stock
for various periods through 1995. Under existing authorization, the Company
may issue senior securities in the amount of $330 million, of which $100
million may consist of preferred stock. The Company also has regulatory
authority to incur short-term debt, a portion of which may be through the
issuance of commercial paper.
Under the Company and its affiliates' nuclear fuel lease agreements with
nonaffiliated fuel trusts, up to $125 million of TMI-1 nuclear fuel costs may
be outstanding at any one time. It is contemplated that when consumed,
portions of the presently leased material will be replaced by additional
leased material. The Company and its affiliates are responsible for the
disposal costs of nuclear fuel leased under these agreements.
LIMITATIONS ON ISSUING ADDITIONAL SECURITIES
The Company's first mortgage bond indenture and/or articles of
incorporation include provisions which limit the total amount of securities
evidencing secured indebtedness, and/or unsecured indebtedness which the
Company may issue, the more restrictive of which are described below.
The Company's first mortgage bond indenture restricts the ratio of first
mortgage bonds issued to not more than 60 percent of qualified property
additions. At December 31, 1993, the Company had qualified property
additions sufficient to permit the Company to issue approximately
$270 million of additional first mortgage bonds. In addition, the indenture
generally permits the Company to issue first mortgage bonds against like
principal amount of previously retired bonds, which at December 31, 1993
totalled approximately $50 million.
The Company's mortgage indenture requires that for a period of any
twelve consecutive months out of the fifteen calendar months preceding the
issuance of additional first mortgage bonds, the Company's net earnings
(before income taxes, with other income limited to 10% of operating income
before income taxes) available for interest on first mortgage bonds shall
have been at least twice the annual interest requirements on all first
mortgage bonds to be outstanding immediately after such issuance. At
December 31, 1993, these provisions would have permitted the Company to issue
approximately $798 million principal amount of first mortgage bonds at an
assumed rate of 8.0 percent. However, as described above, under the
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Company's first mortgage bond indenture the Company had qualified property
additions along with previously retired bonds which would have permitted it
to issue only approximately $320 million of additional first mortgage bonds
at such date.
Among other restrictions, the Company's articles of incorporation provide
that without the consent of the holders of two-thirds of the outstanding
preferred stock, no additional shares of preferred stock may be issued,
unless, for a period of any twelve consecutive months out of the fifteen
calendar months preceding such issuance (a) the Company's net earnings
available for the payment of dividends on preferred stock shall have been at
least three times the annual dividend requirements on all shares of preferred
stock to be outstanding immediately after such issuance, and (b) the
Company's after tax net earnings available for the payment of interest on
indebtedness shall have been at least one and one-half times the aggregate of
(1) the annual interest charges on indebtedness and (2) the annual dividend
requirements on all shares of preferred stock to be outstanding immediately
after such issuance. At December 31, 1993, these provisions would have
permitted the Company to issue approximately $353 million stated value of
cumulative preferred stock at an assumed dividend rate of 8.0 percent.
Under the Company's articles of incorporation, without the consent of the
holders of a majority of the total voting power of the Company's outstanding
preferred stock, the Company may not issue or assume any securities
representing unsecured indebtedness (except to refund certain outstanding
unsecured securities issued or assumed by the Company or to redeem all
outstanding preferred stock) if immediately thereafter the total principal
amount of all outstanding unsecured debt securities having an initial
maturity of less than ten years issued or assumed by the Company would exceed
10 percent of the aggregate of (a) the total principal amount of all
outstanding secured indebtedness issued or assumed by the Company and (b) the
capital and surplus of the Company. At December 31, 1993, these restrictions
would have permitted the Company to have approximately $135 million of
unsecured indebtedness outstanding.
The Company has obtained authorization from the SEC to incur short-term
debt (including indebtedness under the Credit Agreement and commercial paper)
up to the Company's charter limitation.
REGULATION
As a registered holding company, GPU is subject to regulation by the SEC
under the 1935 Act. The Company, as a subsidiary of GPU, is also subject to
regulation under the 1935 Act with respect to accounting, the issuance of
securities, the acquisition and sale of utility assets, securities or any
other interest in any business, the entering into, and performance of,
service, sales and construction contracts, and certain other matters. The
SEC has determined that the electric facilities of the Company and its
affiliates constitute a single integrated public utility system under the
standards of the 1935 Act. The 1935 Act also limits the extent to which the
Company may engage in nonutility businesses. The Company's retail rates for
Pennsylvania customers, conditions of service, issuance of securities and
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other matters are subject to regulation by the PaPUC. The Company's retail
rates for New York customers are subject to regulation by the New York Public
Service Commission (NYPSC). Moreover, with respect to wholesale rates, the
transmission of electric energy, accounting, the construction and maintenance
of hydroelectric projects and certain other matters, the Company is subject
to regulation by the FERC under the Federal Power Act. The NRC regulates the
construction, ownership and operation of nuclear generating stations and
other related matters.
Although the Company does not render electric service in Maryland, the
Public Service Commission of Maryland has jurisdiction over the portion of
the Company's property located in that state. The Company has a levelized
energy cost rate for Pennsylvania retail rates and current fuel adjustment
clauses for wholesale rates and New York retail rates. The Company, as
lessee, operates the facilities serving the Village of Waverly, New York, and
the NYPSC has jurisdiction over such operations and property. (See "Electric
Generation and the Environment - Environmental Matters" for additional
regulation to which the Company is or may be subject.)
The rates charged by the Company for electric service are set by
regulators under statutory requirements that they be "just and reasonable."
As such, they are subject to adjustment, up or down, in the event they vary
from that statutory standard. In 1992, as a result of a rulemaking
proceeding, the PaPUC established quarterly financial reporting requirements
to monitor public utility earnings.
ELECTRIC GENERATION AND THE ENVIRONMENT
Fuel
Of the portion of its energy requirements supplied by its own generation,
the Company utilized fuels in the generation of electric energy during 1993
in approximately the following percentages: Coal--87%; Nuclear--12%; and
Gas, Hydro and Oil--1%. For 1994, the Company estimates that its generation
of electric energy will be supplied in approximately the same proportions.
Approximately 8% of the Company's energy requirements in 1993 was supplied by
purchases (including net interchange) from other utilities and nonutility
generators. Approximately 13% of the Company's 1994 energy requirements are
expected to be supplied by purchases (including net interchange) from other
utilities and nonutility generators.
Fossil: The Company has entered into long-term contracts with
nonaffiliated mining companies for the purchase of coal for its Homer City
generating station in which it has a fifty percent ownership interest. The
contracts, which expire between 1995 and 2003, require the purchase of fixed
amounts of coal. Under the contracts the price of coal is based on
adjustments of indexed cost components. One contract also includes a
provision for the payment of environmental and post-employment benefits. The
Company's share of the cost of coal purchased under these agreements is
expected to aggregate $55 million for 1994.
The Company's coal-fired generating stations now in service are estimated
to require an aggregate of 95 million tons of coal over the next twenty
years. Of this total requirement, approximately 8 million tons are expected
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to be supplied by a nonaffiliated mine-mouth coal company with the balance
supplied through long-term contracts and spot market purchases.
At the present time, adequate supplies of fossil fuels are readily
available to the Company, but this situation could change rapidly as a result
of actions over which it has no control.
Nuclear: Preparation of nuclear fuel for generating station use involves
various manufacturing stages for which the Company and its affiliates
contract separately. Stage I involves the mining and milling of uranium ores
to produce natural uranium concentrates. Stage II provides for the chemical
conversion of the natural uranium concentrates into uranium hexafluoride.
Stage III involves the process of enrichment to produce enriched uranium
hexafluoride from the natural uranium hexafluoride. Stage IV provides for
the fabrication of the enriched uranium hexafluoride into nuclear fuel
assemblies for use in the reactor core at the nuclear generating station.
For TMI-1, under normal operating conditions, there is, with minor
planned modifications, sufficient on-site storage capacity to accommodate
spent nuclear fuel through the end of its licensed life while maintaining the
ability to remove the entire reactor core.
Environmental Matters
The Company is subject to federal and state water quality, air quality,
solid waste disposal and employee health and safety legislation and to
environmental regulations issued by the U.S. Environmental Protection Agency
(EPA), state environmental agencies and other federal agencies. In addition,
the Company is subject to licensing of hydroelectric projects by the FERC and
of nuclear power projects by the NRC. Such licensing and other actions by
federal agencies with respect to projects of the Company are also subject to
the National Environmental Policy Act.
As a result of existing and proposed legislation and regulations, and
ongoing legal proceedings dealing with environmental matters, including but
not limited to acid rain, water quality, air quality, global warming,
electromagnetic fields, and storage and disposal of hazardous and/or toxic
wastes, the Company may be required to incur substantial additional costs to
construct new equipment, modify or replace existing and proposed equipment,
remediate or clean up waste disposal and other sites currently or formerly
used by it, including formerly owned manufactured gas plants and mine refuse
piles, and with regard to electromagnetic fields, postpone or cancel the
installation of, or replace or modify, utility plant, the costs of which
could be material. The consequences of environmental issues, which could
cause the postponement or cancellation of either the installation or
replacement of utility plant are unknown. Management believes the costs
described above should be recoverable through the ratemaking process but
recognizes that recovery cannot be assured.
Water: The federal Water Pollution Control Act (Clean Water Act)
generally requires, with respect to existing steam electric power plants, the
application of the best conventional or practicable pollutant control
technology available and compliance with state-established water quality
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standards. With respect to future plants, the Clean Water Act requires the
application of the "best available demonstrated control technology,
processes, operating methods or other alternatives" to achieve, where
practicable, no discharge of pollutants. Congress may amend the Clean Water
Act during 1994.
The EPA has adopted regulations that establish thermal and other
limitations for effluents discharged from both existing and new steam
electric generating stations. Standards of performance are developed and
enforcement of effluent limitations is accomplished through the issuance by
the EPA, or states authorized by the EPA, of discharge permits that specify
limitations to be applied. Discharge permits, which have been issued for all
of the Company's generating stations, where required, have expiration dates
ranging through 1996. Timely reapplications for such permits have been filed
as required by regulations.
The Company is also subject to environmental and water diversion
requirements adopted by the Delaware River Basin Commission and the
Susquehanna River Basin Commission as administered by those commissions or
the Pennsylvania Department of Environmental Resources (PaDER).
Nuclear: Reference is made to "Nuclear Facilities" for information
regarding the TMI-2 accident, its aftermath and TMI-1.
Pennsylvania has established, in conjunction with several other states, a
low level radioactive waste (radwaste) compact for the construction,
licensing and operation of low level radwaste disposal facilities to service
their respective areas by the year 2000. Pennsylvania, Delaware, Maryland
and West Virginia have established the Appalachian Compact, which will build
a single facility to dispose of low level radwaste in their areas, including
low level radwaste from TMI-1. The estimated cost to license and build this
facility is approximately $60 million, of which the Company and its
affiliates' share is $12 million. These payments are considered advance
waste disposal fees and will be recovered during the facility's operation.
The Company has provided for future contributions to the Decontamination
and Decommissioning Fund (part of the Energy Act) for the cleanup of
enrichment plants operated by the Federal government. The Company's share of
the total liability at December 31, 1993 amounted to $6 million. The Company
made its initial payment in 1993. The remaining amounts recoverable from
ratepayers is $7 million at December 31, 1993.
Air: The Company is subject to certain state environmental regulations
of the PaDER. The Company is also subject to certain federal environmental
regulations of the EPA.
The PaDER and the EPA have adopted air quality regulations designed to
implement Pennsylvania and federal statutes relating to air quality.
Current Pennsylvania environmental regulations prescribe criteria that
generally limit the sulfur dioxide content of stack gas emissions from
generating stations constructed before 1972 and stations constructed after
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1971 but before 1978, to 3.7 pounds and 1.2 pounds per million BTU of heat
input, respectively. On a weighted average basis, the Company has been able
to obtain coal having a sulfur content meeting these criteria. If, and to
the extent that, the Company cannot continue to meet such limitations with
processed coal, it may be necessary to retrofit operating stations with
sulfur removal equipment that may require substantial capital expenditures as
well as substantial additional operating costs. Such retrofitting, if it
could be accomplished to permit continued reliable operation of the
facilities concerned, would take approximately five years.
As a result of the Clean Air Act, which requires substantial reductions
in sulfur dioxide and nitrogen oxide (NOx) emissions by the year 2000, it may
be necessary for the Company to install and operate emission control
equipment as well as switch to slightly lower sulfur coal at some of the
Company's coal-fired plants in order to achieve compliance. To comply with
Title IV of the Clean Air Act, the Company expects to expend up to
$295 million by the year 2000, of which approximately $35 million has been
spent as of December 31, 1993, for the installation of scrubbers, low NOx
burner technology and various precipitator upgrades. The capital costs of
this equipment and the increased operating costs of the affected stations are
expected to be recoverable through the ratemaking process.
The Company's current strategy for Phase II compliance under the Clean
Air Act is to evaluate the installation of scrubbers or fuel switching at the
Homer City Unit 3 Station. Switching to lower sulfur coal is currently
planned for the Seward and Warren Stations. Homer City Units 1 and 2 will
use existing coal cleaning technology.
The Company continues to review available options to comply with the
Clean Air Act, including those which may result from the development of an
emission allowance trading market. The Company's compliance strategy,
especially with respect to Phase II, could change as a result of further
review, discussions with co-owners of jointly-owned stations and changes in
federal and state regulatory requirements.
The ultimate impact of Title I of the Clean Air Act, which deals with the
attainment of ambient air quality standards, is highly uncertain. In
particular, this Title has established an ozone transport or emission control
region that includes 11 northeast states. Pennsylvania is part of this
transport region, and will be required to control NOx emissions to a level
that will provide for the attainment of the ozone standard in the northeast.
As an initial step, major sources of NOx will be required to implement
Reasonably Available Control Technology (RACT) by May 31, 1995. This will
affect the Company's steam generating stations. PaDER's RACT regulations
have been approved by the Environmental Quality Board and became effective in
January 1994. Large coal-fired combustion units are required to comply with
a presumptive RACT emission limitation (technology) or may elect to use a
case-by-case analysis to establish RACT requirements.
The ultimate impact of Title III of the Clean Air Act, which deals with
emissions of hazardous air pollutants, is also highly uncertain.
Specifically, the EPA has not completed a Clean Air Act study to determine
whether it is appropriate to regulate emissions of hazardous air pollutants
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from electric utility steam generating units. However, the Homer City Coal
Processing Plant is being studied to determine if it is a major stationary
source for air toxins.
Both the EPA and PaDER are questioning the attainment of National Ambient
Air Quality Standards (NAAQS) for sulfur dioxide in the vicinity of the
Chestnut Ridge Energy Complex (Homer City and Seward generating stations).
The Homer City generating station is jointly owned with New York State
Electric and Gas Corporation (NYSEG). The EPA and the PaDER have approved
the use of a nonguideline air quality model. This model is more
representative and less conservative than the EPA guideline model and will be
used in the development of a compliance strategy for all generating stations
in the Chestnut Ridge Energy Complex.
The area around the Warren generating station has been designated as
nonattainment for sulfur dioxide. An air quality model evaluation study
began in early 1993. The results of the study will be used to determine if a
nonguideline model can be used. The study results will be available in 1994.
A Consent Order and Agreement has been negotiated to allow PaDER to revise
the implementation plan for Warren Station.
A model evaluation study is also being conducted at Shawville Station.
The results of this study will be available in 1995.
Based on the results of the studies pursuant to NAAQS, significant sulfur
dioxide reductions may be required at one or more of these stations which
could result in material capital and additional operating expenditures.
Certain other environmental regulations limit the amount of particulate
matter emitted into the environment. The Company has installed equipment at
its coal-fired generating stations and may find it necessary to either
upgrade or install additional equipment at certain of its stations to
consistently meet particulate emission requirements.
In the fall of 1993, the Clinton Administration unveiled its climate
change action plan which intends to reduce greenhouse gas emissions to 1990
levels by the year 2000. The climate action plan relies heavily on voluntary
action by industry. The Company and its affiliates notified the Department
of Energy (DOE) that they support the voluntary approach proposed by the
President and expressed their intent to work with the DOE.
Title IV of the Clean Air Act requires Phase I and Phase II affected
units to install a continuous emission monitoring system (CEMS) and quality
assure the data for sulfur dioxide, nitrogen oxides, opacity and volumetric
flow. In addition, Title VIII requires all affected sources to monitor
carbon dioxide emissions. Monitoring systems have been installed and
certified on all of the Company's affected units as required by EPA and PaDER
regulations.
The PaDER has a CEMS enforcement policy to ensure consistent compliance
with air quality regulations under federal and state statutes. The CEMS
enforcement policy includes matters such as visible emissions, sulfur dioxide
emission standards, nitrogen oxide emissions and a requirement to maintain
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certified continuous emission monitoring equipment. In addition, this policy
provides a mechanism for the payment of certain prescribed amounts to the
Pennsylvania Clean Air Fund (Clean Air Fund) for air pollutant emission
excesses or monitoring failures. With respect to the operation of the
Company's generating stations for 1994, it is not anticipated that payments
to be made to the Clean Air Fund will be material in amount.
The Clean Air Act has also expanded the enforcement options available to
the EPA and the states and contains more stringent enforcement provisions and
penalties. Moreover, citizen suits can seek civil penalties for violations
of this act.
The EPA has established Best Available Retrofit Technology (BART) sulfur
dioxide emission standards to be used for the Company's Shawville and Seward
generating stations under the Good Engineering Practice stack height
regulation. Dependent upon the Chestnut Ridge Compliance Strategy and the
results of the Shawville model evaluation study mentioned above, lower sulfur
coal purchases may be necessary for compliance. Discussions with the EPA
regarding this matter are continuing.
In 1988, the Environmental Defense Fund (EDF), the New Jersey
Conservation Foundation, the Sierra Club and Pennsylvanians for Acid Rain
Control requested that the New Jersey Department of Environmental Protection
and Energy (NJDEPE) and the NJBRC seek to reduce sulfur deposition in New
Jersey, either by reducing emissions from both in-state and out-of-state
sources, or by requiring that certain electricity imported into New Jersey be
generated from facilities meeting minimum emission standards. The Company
owns coal-fired generating facilities that supply electric energy to JCP&L
and other New Jersey members of PJM. Hearings on the EDF petition were held
during 1989 and 1990, and the matter is pending before the NJDEPE and the
NJBRC.
In 1993, the Company made capital expenditures of approximately
$32 million in response to environmental considerations and has included
approximately $73 million for this purpose in its 1994 construction program.
The operating and maintenance costs, including the incremental costs of
low-sulfur fuel, for such equipment were approximately $40 million in 1993
and are expected to be approximately $39 million in 1994.
Electromagnetic Fields: There have been a number of scientific studies
regarding the possibility of adverse health effects from electric and
magnetic fields (EMF) that are found everywhere there is electricity. While
some of the studies have indicated some association between exposure to EMF
and cancer, other studies have indicated no such association. The studies
have not shown any causal relationship between exposure to EMF and cancer, or
any other adverse health effects. In 1990, the EPA issued a draft report
that identifies EMF as a possible carcinogen, although it acknowledges that
there is still scientific uncertainty surrounding these fields and their
possible link to adverse health effects. On the other hand, a 1992 White
House Office of Science and Technology policy report states that "there is no
convincing evidence in the published literature to support the contention
that exposures to extremely low frequency electric and magnetic fields
generated by sources such as household appliances, video display terminals,
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and local power lines are demonstrable health hazards." Additional studies,
which may foster a better understanding of the subject, are presently
underway.
Bills introduced in the Pennsylvania legislature could, if enacted,
establish a framework under which the intensity of EMF produced by electric
transmission and distribution lines would be limited or otherwise regulated.
The Company cannot determine at this time what effect, if any, this
matter will have on it.
Residual Waste: PaDER has finalized the residual waste regulations which
became effective in July 1992. These regulations impose additional
restrictions on operating existing ash disposal sites and for siting future
disposal sites and will increase the costs of establishing and operating
these facilities. The main objective of these regulations is to prevent
degradation of groundwater and to abate any existing degradation.
One of the first significant compliance requirements of the regulations
is conducting groundwater assessments of landfills if existing groundwater
monitoring indicates the possibility of degradation. The assessments require
the installation of additional monitoring wells and the evaluation of one
year's worth of data. All of the Company's active landfills require
assessments. If the assessments show degradation of the groundwater, then
the next step is to develop abatement plans. However, there is no specific
timetable on the implementation of abatement activities, if required. The
Company's landfills are to have preliminary permit modification applications
submitted to the PaDER by July 1994, and complete permit applications under
evaluation by July 1997. In addition, the regulations can also be enforced
at sites closed since 1980 at the PaDER's option.
Other compliance requirements that will be implemented in the future
include the lining of currently unlined disposal sites and storage
impoundments. Impoundments also will eventually require groundwater
monitoring systems and assessments of impact on groundwater. Groundwater
abatement may be necessary at locations where pollution problems are
identified. The removal of all the residual waste or "clean closed" will be
done at some impoundments to eliminate the need for future monitoring and
abatement requirements. Storage impoundments must have implemented
groundwater monitoring plans by 2002, but PaDER can require this at any time
prior to this date or defer full compliance beyond 2002 for some storage
impoundments at their discretion. Also being evaluated are the exercising of
beneficial use options authorized by the regulations, and source reductions.
There are also a number of issues still to be resolved regarding certain
waivers related to the Company's existing landfill and storage impoundment
compliance requirements. These waivers could significantly reduce the cost
of many of the Company's facility compliance upgrades.
Another aspect of the regulations deals with the storage and disposal of
polychlorinated biphenyl (PCB) wastes between 2 and 50 parts per million
(ppm). Federal regulations only deal with wastes over 50 ppm. The
compliance requirements for this regulation are currently being evaluated.
22
<PAGE>
Hazardous/Toxic Wastes: Under the Toxic Substances Control Act (TSCA),
the EPA has adopted certain regulations governing the use, storage, testing,
inspection and disposal of electrical equipment that contains PCBs. Such
regulations permit the continued use and servicing of certain electrical
equipment (including transformers and capacitors) that contain PCBs. The
Company has met all requirements of the TSCA necessary to allow the continued
use of equipment containing PCBs and has taken substantive voluntary actions
to reduce the amount of PCB containing electrical equipment in its system.
Prior to 1947, the Company owned and operated manufactured gas plants in
Pennsylvania. Wastes associated with the operation and dismantlement of
these gas manufacturing plants may have been disposed of both on-site and
off-site. Claims may be asserted against the Company for the cost of
investigation and remediation of these waste disposal sites. The amount of
such remediation costs and penalties may be significant and may not be
covered by insurance.
The federal Resource Conservation and Recovery Act of 1976, the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
(CERCLA) and the Superfund Amendment and Reauthorization Act of 1986
authorize the EPA to issue an order compelling responsible parties to take
cleanup action at any location that is determined to present an imminent and
substantial danger to the public or to the environment because of an actual
or threatened release of one or more hazardous substances. Pennsylvania has
enacted legislation giving similar authority to the PaDER. Because of the
nature of the Company's business, various by-products and substances are
produced and/or handled that are classified as hazardous under one or more of
these statutes. The Company generally provides for the treatment, disposal
or recycling of such substances through licensed independent contractors, but
these statutory provisions also impose potential responsibility for certain
cleanup costs on the generators of the wastes. The Company has been 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 two hazardous and/or toxic waste sites. In addition, the Company has been
requested to supply information to the EPA and state environmental
authorities on several other sites for which the Company has not as yet been
named as a PRP. The Company has also been named in lawsuits requesting
damages for hazardous and/or toxic substances allegedly released into the
environment.
The Company received notification in 1986 from the EPA that it is among
the more than 800 PRPs under CERCLA who may be liable to pay for the cost
associated with the investigation and remediation of the Maxey Flats disposal
site, located in Fleming County, Kentucky. The Company is alleged to have
contributed approximately .0003% of the total volume of waste shipped to the
Maxey Flats site. On September 30, 1991, the EPA issued a Record of Decision
(ROD) advising that a remedial alternative had been selected. The PRPs
estimate the cost of the remedial alternative selected and associated
activities identified in the ROD at more than $60 million, for which all
responsible parties would be jointly and severally liable.
23
<PAGE>
The EPA has initiated a suit under CERCLA and other laws for the initial
cleanup of hazardous materials deposited at a waste disposal site at Harper
Drive, Millcreek Township, Pennsylvania (Millcreek site). The Company is one
of over 50 PRPs at this site. The Company does not know whether its
insurance carriers will assume the responsibility to defend and indemnify it
in connection with this matter.
Two lawsuits involving property owners at or near the Millcreek site have
been filed against the Company and other PRPs. The Company's insurance
carriers are defending these actions but may not provide coverage in the
event compensatory damages are awarded. In addition, claims have also been
made for punitive damages which may not be covered by insurance.
The Company, together with 24 others, has been named as a third party
defendant in an action commenced under the CERCLA by the EPA in the U.S.
District Court in Ohio. The EPA is seeking to recover costs for the cleanup
of hazardous and toxic materials disposed at the New Lyme landfill site in
Ashtabula, Ohio. The Company, together with 22 others, has also been named
as a third party defendant in an action under the CERCLA by the state of Ohio
seeking to recover costs it has incurred and will incur in the future at the
New Lyme landfill site.
The ultimate cost of remediation of these sites will depend upon changing
circumstances as site investigations continue, including (a) the technology
required for site cleanup, (b) the remedial action plan chosen and (c) the
extent of site contamination and the portion attributed to the Company.
The Company is unable to estimate the extent of possible remediation and
associated costs of additional environmental matters. Management believes
the costs described above should be recoverable through the ratemaking
process.
FRANCHISES AND CONCESSIONS
The electric franchise rights of the Company which are generally
nonexclusive, consist generally of (a) charter rights to furnish electric
service, and (b) certificates of public convenience and/or "grandfather
rights," which allow the Company to furnish electric service in a specified
city, borough, town or township or part thereof. Such electric franchises
are unlimited as to time, except in a few relatively minor cases concerning
the rights mentioned in clause (a) of the preceding sentence. The Company
was granted a licensing exemption by the FERC for the operation of its Deep
Creek hydroelectric project after its current license expired in December,
1993. Instead of reapplying for a FERC license, the Company is now able to
negotiate with the Maryland Department of Natural Resources (DNR) for a
permit to operate the plant. The DNR has agreed to permit the Company to
continue operations at Deep Creek until an agreement is finalized. The
Company also holds a license, which expires in 2002, for the continued
operation and maintenance of the Piney hydroelectric project. In addition,
the Company and the Cleveland Electric Illuminating Company hold a license
expiring in 2015 for the Seneca pumped storage hydroelectric station, in
which the Company has a 20% undivided interest. For the same station, the
Company and the Cleveland Electric Illuminating Company hold a Limited Power
Permit issued by the Pennsylvania Water and Power Resources Board which is
24
<PAGE>
unlimited as to time. For purposes of the Homer City station, the Company
and NYSEG hold a Limited Power Permit issued by the Pennsylvania Water and
Power Resources Board which expires in 2017, but is renewable by the
permittees until they have recovered all capital invested by them in the
project. The Company also holds a Limited Power Permit issued by the
Pennsylvania Water and Power Resources Board for its Shawville station which
expires in 2003, but is renewable by the Company until it has recovered all
capital invested in the project.
EMPLOYEE RELATIONS
At February 28, 1994, the Company had 3,532 full-time employees. The
nonsupervisory production and maintenance employees of the Company and
certain of its nonsupervisory clerical employees are represented for
collective bargaining purposes by local unions of the International
Brotherhood of Electrical Workers (IBEW) and the Utility Workers Union of
America (UWUA).
The Company's five-year contracts with the IBEW and UWUA expire on
May 14, 1998 and June 30, 1998, respectively.
25
<PAGE>
ITEM 2. PROPERTIES
Generating Stations
At December 31, 1993, the Company's generating stations had an aggregate
effective winter capability of 2,369,000 net kilowatts (KW), as follows:
Year of
Name and Location of Station Installation Net KW
COAL-FIRED:
Homer City, Homer City, Pa. (a) 1969-1977 942,000
Shawville, Shawville, Pa. 1954-1960 618,000
Seward, Seward, Pa. 1950-1957 199,000
Warren, Warren, Pa. 1948-1949 82,000
NUCLEAR:
Three Mile Island
Unit No. 1,
Dauphin County, Pa. (b) 1974 203,000
GAS or OIL-FIRED:
Other (c) 1960-1972 191,000
HYDROELECTRIC:
Piney, Clarion, Pa. 1923-1926 28,000
Deep Creek, Oakland, Md. 1925 19,000
PUMPED STORAGE:
Seneca, Warren, Pa. (d) 1969 87,000
Total 2,369,000
(a) Represents the Company's 50% interest in this station.
(b) Represents the Company's 25% interest in this unit.
(c) Consists of combustion turbine and internal combustion units, all of
which are located in Pennsylvania.
(d) Represents the Company's 20% interest in this station which is a net
user rather than a net producer of electric energy.
Substantially all of the Company's properties are subject to the
lien of its first mortgage bond indenture.
The peak load of the Company, which occurred on January 18, 1994,
was 2,514,000 KW.
26
<PAGE>
Transmission and Distribution System
At December 31, 1993, the Company owned 649 transmission and
distribution substations that had an aggregate installed transformer
capacity of 16,008,712 kilovoltamperes (KVA), and 2,734 circuit miles of
transmission lines, of which 235 miles were operated at 500 kilovolts
(KV), 149 miles at 345 KV, 650 miles at 230 KV, 11 miles at 138 KV,
1,325 miles at 115 KV, and the balance of 364 miles at 46 KV. The
Company's distribution system included 6,036,111 KVA of line transformer
capacity, 22,145 pole miles of overhead lines and 1,704 trench miles of
underground cables.
ITEM 3. LEGAL PROCEEDINGS.
Reference is made to "Nuclear Facilities - TMI-2", "Rate Proceedings"
and "Environmental Matters" under Item 1 and to Note 1 of consolidated
financial statements for a description of certain pending legal
proceedings involving the Company. See page F-1 for reference to the
Notes to Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
27
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
All of the Company's outstanding common stock is owned by GPU.
During 1993, the Company paid $40 million in dividends on its
common stock. On February 23, 1994, the Company paid $5 million in
dividends on its common stock.
In accordance with the Company's mortgage indenture as
supplemented, $10 million of the balance of retained earnings at
December 31, 1993 is restricted as to the payment of dividends on
its common stock.
ITEM 6. SELECTED FINANCIAL DATA.
See page F-1 for reference to the Selected Financial Data
required by this item.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
See page F-1 for reference to Management's Discussion and
Analysis of Financial Condition and Results of Operations required
by this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See page F-1 for reference to Financial Statements and
Supplementary Data required by this item.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
28
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Identification of Directors
The present directors of the Company, their ages, positions held and
business experience during the past five years are as follows:
Year First
Name Age Position Elected
J. R. Leva (a) 61 Chairman and Chief 1992
Executive Officer
R. L. Wise (b) 50 President 1986
J. G. Graham (c) 55 Vice President and Chief 1986
Financial Officer
W. R. Stinson (d) 58 Vice President and 1985
Comptroller
R. C. Arnold (e) 56 Director 1989
J. G. Herbein (f) 55 Vice President 1990
G. R. Repko (g) 48 Vice President 1993
(a) Mr. Leva became Chairman of the Board and Chief Executive Officer of
the Company in 1992. He became Chairman, President and Chief
Executive Officer of GPU in 1992. He is also Chairman, President,
Chief Executive Officer and a director of GPUSC, Chairman of the
Board, Chief Executive Officer and a director of JCP&L, Met-Ed and
GPC, and Chairman of the Board and a director of GPUN. Prior to
assuming his present positions, Mr. Leva served as President of
JCP&L since 1986. He is also a director of Utilities Mutual
Insurance Company, the New Jersey Utilities Association, Chemical
Bank, NJ and Princeton Bank and Trust Company.
(b) Mr. Wise became President and a director in 1986. He is also a
director of GPUSC and GPUN. Mr. Wise is also a director of
USBANCORP, Inc. and U.S. National Bank.
(c) Mr. Graham became Senior Vice President in 1989 and Chief Financial
Officer of GPU in 1987. He is also Executive Vice President, Chief
Financial Officer and a director of GPUSC; Vice President, Chief
Financial Officer and a director of JCP&L and Met-Ed; Vice President
and Chief Financial Officer of GPUN; President and a director of GPC
and a director of Energy Initiatives, Inc.
(d) Mr. Stinson has been Vice President and Comptroller since 1982.
(e) Mr. Arnold became Executive Vice President-Power Supply of GPUSC in
1990. He was Senior Vice President-Power Supply from 1987 to 1989.
He is also a director of GPUSC, JCP&L and Met-Ed.
29
<PAGE>
(f) Mr. Herbein became Vice President, Generation in December 1992. He
was Vice President, Station Operations from 1982 to December 1992.
(g) Mr. Repko became Vice President, Customer Operations in April 1993.
Prior to that time he served as Vice President, Division Operations
since 1986.
The Company's directors are elected each year at the annual meeting of
shareholders to serve until the next annual meeting of shareholders and until
their respective successors are duly elected and qualified. There are no
family relations among the directors and/or executive officers of the
Company.
Identification of Executive Officers
The executive officers of the Company, their ages, positions held and
business experience during the past five years are as follows:
Year First
Name Age Position Elected
J. R. Leva (a) 61 Chairman and Chief 1992
Executive Officer
R. L. Wise (b) 50 President 1980
T. N. Elston (c) 61 Vice President 1990
J. F. Furst (d) 47 Vice President 1984
J. G. Graham (e) 55 Vice President and Chief 1987
Financial Officer
J. G. Herbein (f) 55 Vice President 1982
W. C. Matthews (g) 41 Secretary and Corporate 1990
Counsel
D. W. Myers (h) 49 Vice President and 1993
Treasurer
G. R. Repko (i) 48 Vice President 1982
W. R. Stinson (j) 58 Vice President and 1982
Comptroller
(a) See footnote (a) on page 29.
(b) See footnote (b) on page 29.
(c) Mr. Elston has been Vice President, Human Resources since March
1990. Prior to that time he served as Personnel Services
Director since 1983.
(d) Mr. Furst became Vice President, Customer Services and
Communication in April 1993. Prior to that time he served as
Vice President, Customer Services since 1984.
(e) See footnote (c) on page 29.
(f) See footnote (f) above.
30
<PAGE>
(g) Mr. Matthews has been Secretary and Corporate Counsel since November
1990. He served as Chief Counsel to the Independent Regulatory Review
Commission of the State of Pennsylvania from October 1987 to November
1990.
(h) Mr. Myers became a Vice President and Treasurer of GPU in 1993. He is
also Vice President and Treasurer of GPUSC, JCP&L, Met-Ed, GPUN and
GPC. Prior to assuming his present positions, Mr. Myers served as
Vice President and Comptroller of GPUN since 1986.
(i) See footnote (g) on page 30.
(j) See footnote (d) on page 29.
The Company's executive officers are elected each year at the first meeting
of the Board of Directors held following the annual meeting of shareholders.
Executive officers hold office until the next meeting of directors following
the annual meeting of shareholders and until their respective successors are
duly elected and qualified. There are no family relationships among the
Company's executive officers.
ITEM 11. EXECUTIVE COMPENSATION.
<TABLE>
Remuneration of Executive Officers
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term
Compensation
Awards
Other
Name and Annual Restricted All Other
Principal Compen- Stock/Unit Compens-
Position Year Salary Bonus sation(1) Awards(2) sation
<S> <C> <C> <C> <C> <C> <C>
James R. Leva (3) (3) (3) (3) (3) (3)
Chairman and Chief
Executive Officer
Robert L. Wise 1993 $278,250 $67,000 $ - $43,710 $28,753(4)
President 1992 266,250 55,000 - 42,900 21,311
1991 251,250 54,000 - 46,000 14,514
John G. Herbein 1993 142,200 25,900 - 15,190 15,338(5)
Vice President - 1992 136,500 22,100 743 15,340 10,507
Generation 1991 130,250 22,200 417 14,260 7,201
Willard R. Stinson 1993 133,247 23,400 - 13,950 7,594(6)
Vice President and 1992 128,175 20,000 - 13,780 6,691
Comptroller 1991 123,150 20,000 - 11,730 5,804
George R. Repko 1993 129,100 24,200 - 13,330 5,164(7)
31
<PAGE>
<S> <C> <C> <C> <C> <C> <C>
Vice President - 1992 120,900 19,200 - 13,520 4,836
Customer Operations 1991 116,100 19,600 - 11,270 4,644
Thomas N. Elston 1993 116,425 20,600 - 11,470 6,107(8)
Vice President - 1992 112,200 16,300 - 11,700 5,453
Human Resources 1991 108,150 16,300 - 11,500 8,053
</TABLE>
32
<PAGE>
(1) "Other Annual Compensation" is composed entirely of the above-market
interest accrued on the pre-retirement portion of deferred compensation.
(2) Number and value of aggregate restricted shares/units at the end of 1993
(dividends are paid or accrued on these restricted shares/units and
reinvested):
Aggregate Shares/Units Aggregate Value
Robert L. Wise 6,260 $159,160
John G. Herbein 1,990 $ 51,206
Willard R. Stinson 1,770 $ 45,655
George R. Repko 1,710 $ 44,094
Thomas N. Elston 1,570 $ 40,201
(3) As noted above, Mr. Leva is Chairman and Chief Executive Officer of the
Company and its affiliates, as well as Chairman and Chief Executive
Officer of GPU and GPUSC. Mr. Leva is compensated by GPUSC for his
overall service on behalf of the GPU System and accordingly is not
compensated directly by the Company for his services. Information with
respect to Mr. Leva's compensation is included on pages 13 through 15 in
GPU's 1994 definitive proxy statement, which are incorporated herein by
reference.
(4) Consists of the Company's matching contributions under the Savings Plan
($9,434), matching contributions under the non-qualified deferred
compensation plan ($1,696), the imputed interest on employer paid
premiums for split-dollar life insurance ($5,286), and above-market
interest accrued on the retirement portion of deferred compensation
($12,337).
(5) Consists of the Company's matching contributions under the Savings Plan
($4,368) and above-market interest accrued on the retirement portion of
deferred compensation ($10,970).
(6) Consists of the Company's matching contributions under the Savings Plan
($5,330) and above-market interest accrued on the retirement portion of
deferred compensation ($2,264).
(7) Consists of the Company's matching contributions under the Savings Plan.
(8) Consists of the Company's matching contributions under the Savings Plan
($4,657) and above-market interest accrued on the retirement portion of
deferred compensation ($1,450).
33
<PAGE>
<TABLE>
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
Estimated future payouts
Number of Performance or under non-stock price
shares, units other period based plans (1)
or other until maturation
Name rights or payout Target ($ or #)
<S> <C> <C> <C>
Robert L. Wise 1,410 5 years $30,474
John G. Herbein 490 5 years $10,590
Willard R. Stinson 450 5 years $ 9,726
George R. Repko 430 5 years $ 9,293
Thomas N. Elston 370 5 years $ 7,997
<FN>
(1) The 1990 Stock Plan for Employees of General Public Utilities Corporation and
Subsidiaries also provides for a Performance Cash Incentive Award in the event
that the annualized GPU Total Shareholder Return exceeds the annualized
Industry Total Return (Edison Electric Institute's Investor-Owned Electric
Utility Index) for the period between the award and vesting dates. These
payments are designed to compensate recipients of restricted stock/unit awards
for the amount of federal and state income taxes that will be payable upon the
restricted stock/units that are vesting for the recipient. The amount is
computed by multiplying the applicable gross-up percentage by the amount of
gross income the recipient recognizes for federal income tax purposes when the
restrictions lapse. The estimated amounts above are computed based on the
number of restricted units awarded for 1993 multiplied by the 1993 year-end
market value of $30.875. Actual payments would be based on the market value of
GPU common stock at the time the restrictions lapse and may be different from
those indicated above.
Proposed Remuneration of Executive Officers
No executive officer has an employment contract with the Company. The
compensation of the Company's executive officers is determined from time to time
by the Board of Directors.
Retirement Plans
The GPU System pension plans provide for pension benefits, payable for life
after retirement, based upon years of creditable service with the GPU System and
the employee's career average annual compensation as defined below. Under federal
law, an employee's pension benefits that may be paid from a qualified trust under
a qualified pension plan such as the GPU System plans are subject to certain
maximum amounts. The GPU System companies also have adopted non-qualified plans
providing that the portion of a participant's pension benefits which, by reason of
such limitations or source, cannot be paid from such a qualified trust shall be
paid directly on an unfunded basis by the participant's employer.
</TABLE>
34
<PAGE>
<TABLE>
The following table illustrates the amount of aggregate annual pension from
funded and unfunded sources resulting from employer contributions to the qualified
trust and direct payments payable upon retirement in 1994 (computed on a single
life annuity basis) to persons in specified salary and years of service
classifications:
<CAPTION>
ESTIMATED ANNUAL RETIREMENT BENEFITS
BASED UPON CAREER AVERAGE COMPENSATION(2) (3) (4)
(1994 Retirement)
Career
Average 10 Years 15 Years 20 Years 25 Years 30 Years 35 Years 40 years
Compensation(1)of Service of Service of Service of Service of Service of Service of Service
<S> <C> <C> <C> <C> <C> <C> <C>
$ 50,000 $ 9,410 $ 14,114 $ 18,819 $ 23,524 $ 28,229 $ 32,934 $ 37,356
100,000 19,410 29,114 38,819 48,524 58,229 67,934 76,956
150,000 29,410 44,114 58,819 73,524 88,229 102,934 116,556
200,000 39,410 59,114 78,819 98,524 118,229 137,934 156,156
250,000 49,410 74,114 98,819 123,524 148,229 172,934 195,756
300,000 59,410 89,114 118,819 148,524 178,229 207,934 235,356
350,000 69,410 104,114 138,819 173,524 208,229 242,934 274,956
400,000 79,410 119,114 158,819 198,524 238,229 277,934 314,556
450,000 89,410 134,114 178,819 223,524 268,229 312,934 354,156
500,000 99,410 149,114 198,819 248,524 298,229 347,934 393,756
<FN>
(1) Career Average Compensation is the average annual compensation received
from January 1, 1984 to retirement and includes Base Salary, Deferred
Compensation and Incentive Compensation Plan awards. The career average
compensation amounts for the following named executive officers differ
by more than 10% from the three year average annual compensation set
forth in the Summary Compensation Table and are as follows: Messrs.
Wise - $222,558; Herbein - $129,293; Stinson - $122,510; Repko -
$115,419; and Elston -$98,455
(2) Years of Creditable Service: Messrs. Wise - 30 years; Herbein -
28 years; Stinson - 15 years; Repko - 27 years; and Elston - 25 years.
(3) Based on an assumed retirement at age 65 in 1994. To reduce the above
amounts to reflect a retirement benefit assuming a continual annuity to
a surviving spouse equal to 50 percent of the annuity payable at
retirement, multiply the above benefits by 90 percent. The estimated
annual benefits are not subject to any reduction for Social Security
benefits or other offset amounts.
(4) Annual retirement benefit cannot exceed 55 percent of the average
compensation received during the last three years prior to retirement.
</TABLE>
35
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
All of the Company's 5,290,596 outstanding shares of common stock are owned
beneficially and of record by the Company's parent, General Public Utilities
Corporation, 100 Interpace Parkway, Parsippany, New Jersey 07054.
The following table sets forth, as of February 1, 1994, the beneficial
ownership of equity securities of the Company and other GPU System companies
of each of the Company's directors, each of the named executive officers in
the Summary Compensation Table and all directors and officers of the Company
as a group. The shares owned by all directors and officers as a group
constitute less than one percent of the total shares outstanding.
Amount and Nature of
Name Title of Security Beneficial Ownership
R. C. Arnold GPU Common Stock 6,751 shares-Direct
J. G. Graham GPU Common Stock 6,411 shares-Direct
1,780 shares-Indirect
J. G. Herbein GPU Common Stock 1,071 shares-Direct
J. R. Leva GPU Common Stock 3,912 shares-Direct
100 shares-Indirect
G. R. Repko GPU Common Stock 897 shares-Direct
W. R. Stinson GPU Common Stock 1,132 shares-Direct
R. L. Wise GPU Common Stock 5,092 shares-Direct
All Directors
and Officers
as a Group GPU Common Stock 29,174 shares-Direct
1,880 shares-Indirect
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
36
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) See page F-1 for reference to the financial statement schedules required
by this item.
1. Exhibits:
10-A 1990 Stock Plan for Employees of General Public Utilities
Corporation and Subsidiaries, incorporated by reference
to Exhibit 10-B of the GPU Annual Report on Form 10-K
for 1993 - SEC File No. 1-6047.
10-B Form of Restricted Units Agreement under the 1990 Stock
Plan, incorporated by reference to Exhibit 10-C of the
GPU Annual Report on Form 10-K for 1993 - SEC File
No. 1-6047.
10-C Incentive Compensation Plan for Officers of GPU System
Companies, incorporated by reference to Exhibit 10-E of
the GPU Annual Report on Form 10-K for 1993 - SEC File
No. 1-6047.
12 Statements Showing Computation of Ratio of Earnings to
Combined Fixed Charges and Preferred Stock Dividends
23 Consent of Independent Accountants
(b) Reports on Form 8-K:
For the month of December 1993, dated December 10, 1993, under
Item 5 (Other Events).
For the month of February 1994, dated February 16 and February 28,
1994, under Item 5 (Other Events).
37
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
PENNSYLVANIA ELECTRIC COMPANY
Dated: March 10, 1994 BY: /s/ R. L. Wise
R. L. Wise, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature and Title Date
/s/ J. R. Leva March 10, 1994
J. R. Leva, Chairman (Principal Executive
Officer) and Director
/s/ R. L. Wise March 10, 1994
R. L. Wise, President and Director
/s/ J. G. Graham March 10, 1994
J. G. Graham, Vice President (Principal
Financial Officer) and Director
/s/ W. R. Stinson March 10, 1994
W. R. Stinson, Vice President and Comptroller
(Principal Accounting Officer) and Director
/s/ R. C. Arnold March 10, 1994
R. C. Arnold, Director
/s/ J. G. Herbein March 10, 1994
J. G. Herbein, Vice President, Generation
and Director
/s/ G. R. Repko March 10, 1994
G. R. Repko, Vice President, Customer
Operations and Director
37
<PAGE>
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
INDEX TO SUPPLEMENTARY DATA, CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
PAGE
Supplementary Data
Company Statistics F-2
Selected Financial Data F-3
Management's Discussion and Analysis of Financial
Condition and Results of Operations F-4
Quarterly Financial Data F-16
Consolidated Financial Statements
Report of Independent Accountants F-17
Consolidated Statements of Income for the years ended F-18
December 31, 1993, 1992 and 1991
Consolidated Balance Sheets as of December 31, 1993 and 1992 F-19
Consolidated Statements of Retained Earnings for the years ended F-21
December 31, 1993, 1992 and 1991
Consolidated Statement of Long-Term Debt as of December 31, 1993 F-22
Consolidated Statement of Capital Stock as of December 31, 1993 F-23
Consolidated Statements of Cash Flows for the years ended F-24
December 31, 1993, 1992 and 1991
Notes to Consolidated Financial Statements F-25
Financial Statement Schedules
V - Property, Plant and Equipment for the Years 1991 to 1993 F-44
VI - Accumulated Depreciation and Amortization of Property,
Plant and Equipment for the Years 1991 to 1993 F-46
VIII - Valuation and Qualifying Accounts for the Years 1991 to 1993 F-49
IX - Short-Term Borrowings for the Years 1991 to 1993 F-50
Schedules other than those listed above have been omitted since they are not
required, are inapplicable or the required information is presented in the
financial statements or notes thereto.
F-1
<PAGE>
<TABLE>
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Company Statistics
<CAPTION>
For The Years Ended December 31, 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C>
Capacity at Company Peak (In MW):
Company owned 2 369 2 371 2 512 2 512 2 512 2 495
Contracted 636 418 224 199 256 286
Total capacity (a) 3 005 2 789 2 736 2 711 2 768 2 781
Hourly Peak Load (In MW):
Summer peak 2 208 2 140 2 153 2 078 2 079 2 195
Winter peak 2 342 2 355 2 325 2 282 2 415 2 314
Reserve at Company peak (%) 28.3 18.4 17.7 18.8 14.6 20.2
Load factor (%) (b) 70.5 69.3 70.6 71.4 67.5 70.2
Sources of Energy:
Energy sales (In Thousands of MWH):
Net generation 12 264 13 134 12 635 13 426 14 355 13 129
Power purchases and interchange 4 159 4 186 3 417 2 462 2 135 2 235
Total sources of energy 16 423 17 320 16 052 15 888 16 490 15 364
Company use, line loss, etc. (2 256) (2 289) (1 992) (2 065) (2 342) (2 120)
Total 14 167 15 031 14 060 13 823 14 148 13 244
Energy mix (%):
Coal 65 65 70 76 75 76
Nuclear 9 10 9 8 11 9
Utility purchases and interchange 14 16 14 13 11 13
Nonutility purchases 12 8 7 2 2 1
Other (gas, hydro, & oil) - 1 - 1 1 1
Total 100 100 100 100 100 100
Energy cost (In Mills per KWH):
Coal 16.52 14.84 15.09 15.73 14.83 14.69
Nuclear 5.44 5.61 6.46 6.46 6.57 6.12
Utility purchases and interchange 27.91 29.77 33.83 34.16 33.69 28.05
Nonutility purchases 53.58 52.84 50.20 51.78 58.19 50.91
Other (gas & oil) 81.46 78.14 85.68 74.26 61.73 54.23
Average 20.85 18.89 18.82 17.23 15.81 15.47
Electric Energy Sales (In Thousands of MWH):
Residential 3 715 3 590 3 553 3 489 3 466 3 427
Commercial 3 651 3 488 3 475 3 150 3 070 2 987
Industrial 4 346 4 589 4 718 5 058 4 935 5 154
Other 568 585 666 524 482 576
Sales to customers 12 280 12 252 12 412 12 221 11 953 12 144
Sales to other utilities 1 887 2 779 1 648 1 602 2 195 1 100
Total 14 167 15 031 14 060 13 823 14 148 13 244
Operating Revenues (In Millions):
Residential $ 308 $ 298 $ 290 $ 274 $ 271 $ 267
Commercial 261 248 244 215 208 202
Industrial 227 233 236 236 231 239
Other 31 27 32 29 28 32
Revenues from customers 827 806 802 754 738 740
Sales to other utilities 52 62 43 43 56 29
Total electric revenues 879 868 845 797 794 769
Other revenues 29 28 21 21 23 21
Total $ 908 $ 896 $ 866 $ 818 $ 817 $ 790
<PAGE>
Price per KWH (In Cents):
Residential 8.30 8.27 8.16 7.86 7.82 7.78
Commercial 7.17 7.11 7.01 6.83 6.80 6.77
Industrial 5.24 5.08 4.99 4.66 4.68 4.64
Total sales to customers 6.74 6.58 6.46 6.17 6.18 6.10
Total Sales 6.21 5.77 6.00 5.77 5.61 5.81
Kilowatt-hour Sales per Residential Customer 7 607 7 393 7 369 7 278 7 271 7 238
Customers at Year-End (In Thousands) 563 559 555 551 547 543
<FN>
(a) Winter ratings at December 31, 1993 of owned and contracted capacity were 2,369 MW and 636 MW,
respectively.
(b) The ratio of the average hourly load in kilowatts supplied during the year to the peak load occurring
during the year.
F-2
<PAGE>
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Selected Financial Data
_
<CAPTION> (In Thousands)
For The Years Ended December 31, 1993 1992 1991 * 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $ 908 280 $ 896 337 $ 865 552 $ 817 923 $ 816 627 $ 789 750
Other operation and maintenance
expense 241 252 226 179 234 648 230 461 234 410 255 952
Net income 95 728 99 744 106 595 108 712 104 488 98 305
Earnings available for common stock 90 741 94 080 100 406 99 898 95 674 89 491
Net utility plant in service 1 542 276 1 473 293 1 419 726 1 392 332 1 336 968 1 309 658
Cash construction expenditures 150 252 110 629 101 328 97 578 99 268 94 823
Total assets 2 301 340 1 892 715 1 862 249 1 801 522 1 786 725 1 759 674
Long-term debt 524 491 582 647 542 392 536 402 547 196 501 974
Long-term obligations under
capital leases 7 745 7 691 8 260 7 724 7 230 6 345
Return on average common equity 13.5% 14.5% 15.1% 16.4% 16.2% 15.1%
<FN>
* Results for 1991 reflect an increase in earnings of $16.2 million for an accounting change
recognizing unbilled revenues and a decrease in earnings of $16.8 million for estimated TMI-2
costs.
F-3
</TABLE>
<PAGE>
Pennsylvania Electric Company and Subsidiary Companies
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
In 1993, earnings available for common stock decreased $3.4 million to
$90.7 million. The decrease in earnings was principally the result of higher
other operation and maintenance expense, the write-off of approximately
$8 million of costs related to the cancellation of proposed energy-related
agreements, and increased depreciation expense. These items which decreased
earnings were partially offset by higher KWH revenues, the recovery of prior
period transmission service revenues and lower reserve capacity expense.
In 1992, earnings available for common stock decreased $6.3 million to
$94.1 million. The decrease in earnings was principally because of lower
kilowatt-hour revenues and decreased other income. These items which
decreased earnings were offset somewhat by the effects of tax surcharge
revenues for the 1991 state tax increases, lower interest charges on long-
term debt and lower depreciation and amortization expenses. The earnings
comparison also reflects the absence in 1992 of a nonrecurring credit with
respect to a change in accounting policy resulting in the recognition of
unbilled revenues in 1991 and a charge for certain TMI-2 costs in 1991.
The Company's return on average common equity was 13.5% for 1993 as
compared to 14.5% for 1992.
REVENUES:
Total revenues increased 1.3% to $908 million in 1993 after increasing
3.6% in 1992 to $896 million. The components of these changes are as follows:
(In Millions)
1993 1992
Kilowatt-hour (KWH) revenues $ 6.3 $(3.4)
(excluding energy portion)
Energy revenues (5.2) 22.5
Other revenues 10.8 11.7
Increase in revenues $11.9 $30.8
F-4
<PAGE>
Pennsylvania Electric Company and Subsidiary Companies
Kilowatt-hour revenues
1993
KWH revenues increased in 1993 primarily from higher KWH usage by
residential and commercial customers and higher capacity sales to associated
companies. Revenues also increased because of new sales to the Company's
principal wholesale customer. Wholesale purchases by this customer are now
resold to consumers both inside and outside the Company's service territory.
The 1992 federal Energy Policy Act (Energy Act) which allows transmission
access and competition for wholesale customers made this possible. These out
of service territory sales began during the third quarter of 1993 (See "Recent
Events"). These increases were partially offset by decreased usage of
industrial customers. One of the most significant reductions occurred because
of the phase out of operations by the Company's largest industrial customer.
1992
KWH revenues decreased in 1992 primarily from decreased KWH sales to one
principal wholesale customer and the phase out of operations of the Company's
largest industrial customer. The Company's largest industrial customer
accounted for approximately 5% of total KWH sales to customers in 1991, its
last full year of operation. These decreases were partially offset by
increased KWH sales to residential and commercial customers.
Energy revenues
1993 and 1992
Changes in energy revenues do not affect earnings as they reflect
corresponding changes in the energy cost rates (ECR's) billed to customers and
expensed. Energy revenues decreased in 1993 as a result of decreased sales to
non-associated utilities and the reclassification of certain transmission
service revenues to Other revenues. The reclassification resulted from a
favorable PaPUC Order allowing the Company to exclude these transmission
service revenues from the Company's ECR. Partially offsetting these decreases
were increased energy revenues resulting from higher energy cost rates in
effect during the current periods. Energy revenues also increased in 1992 as
a result of increased KWH sales to other utilities.
Other revenues
1993 and 1992
Earnings were favorably affected in 1993 primarily from the
reclassification of the transmission service revenues mentioned above.
Earnings were also favorably affected in 1992 as a result of a timing
difference in the receipt of Pennsylvania tax surcharge revenues received
during 1992 for state tax increases enacted in the third quarter of 1991. For
both periods other revenues reflect increased wheeling revenues.
F-5
<PAGE>
Pennsylvania Electric Company and Subsidiary Companies
OPERATING EXPENSES:
Power purchased and interchanged
1993
Power purchased and interchanged with affiliated companies decreased in
1993 primarily as a result of lower capacity costs. The decrease in expense
favorably affected earnings because capacity costs are not recovered through
energy revenues. Power purchased and interchanged with nonaffiliated
companies increased in 1993 primarily from increased nonutility generation
purchases. This increase was partially offset by lower purchases from other
utilities. The increase in expense related to nonaffiliated purchases had
little effect on earnings in 1993 because this increase was primarily
comprised of energy costs which are generally recovered through energy
revenues.
1992
Power purchased and interchanged increased in 1992 as a result of an
increase in nonutility generation purchases and purchases from other
utilities. This increase in expense had little effect on earnings in 1992
because it was comprised primarily of energy costs.
Other operation and maintenance
1993
The increase in other operation and maintenance expense is due largely to
higher outage activity at several of the Company's coal fired generating
stations, higher payroll and higher tree trimming expenses. These increases
were partially offset by the recognition of proceeds from the settlement of a
property insurance claim.
1992
The decrease in other operation and maintenance expense is due largely to
the absence of $9.0 million of estimated costs recognized in 1991 for
preparing the TMI-2 plant for long-term monitored storage. Excluding that
amount, other operation and maintenance expense remained relatively stable in
1992.
Depreciation and amortization
1993
Depreciation and amortization expense increased in 1993 primarily from
higher cost of removal charges and a $3.6 million charge for TMI-2 non-
radiological costs not considered likely to be recovered through ratemaking.
F-6
<PAGE>
Pennsylvania Electric Company and Subsidiary Companies
1992
Depreciation and amortization expense decreased $3.9 million in 1992
primarily because of a change in depreciation rates for the year, exclusive of
a $20 million charge in 1991 for the Company's share of radiological TMI-2
decommissioning costs which are not considered likely to be recovered through
ratemaking.
Taxes, other than income taxes
1993 and 1992
Generally, changes in taxes other than income taxes do not significantly
affect earnings as they are substantially recovered in revenues.
OTHER INCOME AND DEDUCTIONS:
Other income, net
1993
The reduction in Other income, net is principally because of the write-
off of approximately $8 million which represents the Company's share of costs
related to the cancellation of proposed power supply and transmission
facilities agreements between the Company and its affiliates and Duquesne
Light Company (Duquesne).
1992
The decrease is mainly attributable to a reduction in interest income
resulting from the 1991 collection of federal income tax refunds.
INTEREST CHARGES AND PREFERRED DIVIDENDS:
1993
Interest on long-term debt increased in 1993 primarily from the issuance
of additional long-term debt, offset partially by decreases associated with
the refinancing of higher cost debt at lower interest rates. Other interest
decreased primarily as a result of lower interest rates and lower interest on
ECR overcollections resulting from the reclassification in 1993 of certain
transmission service revenues (See "Energy revenues").
1992
Interest on long-term debt decreased primarily because of the refinancing
of higher cost debt at lower available interest rates in 1992.
Preferred dividends decreased for both periods as a result of redemptions
of preferred stock in 1993 and 1991 of $25 million and $35 million,
respectively.
F-7
<PAGE>
Pennsylvania Electric Company and Subsidiary Companies
LIQUIDITY AND CAPITAL RESOURCES
CAPITAL NEEDS:
The Company's capital needs were $150 million in 1993, consisting of cash
construction expenditures. During 1993, construction funds were primarily
used to continue to maintain and improve existing generating facilities, add
to the transmission and distribution system and clean air act requirements.
Construction expenditures are estimated to be $218 million in 1994, consisting
mainly of $136 million for ongoing system development and $66 million for
clean air requirements. Expenditures for maturing debt are expected to be $70
million for 1994. The Company will not have expenditures for maturing debt in
1995. In the mid 1990s, construction expenditures may include substantial
amounts for clean air requirements and other system needs. Management
estimates that approximately one-half of the Company's 1994 capital needs will
be satisfied through internally generated funds.
The Company and its affiliates' capital leases consist primarily of
leases for nuclear fuel. These nuclear fuel leases are renewable annually,
subject to certain conditions. An aggregate of up to $125 million of nuclear
fuel costs may be outstanding at any one time for TMI-1. The Company's share
of the nuclear fuel capital leases at December 31, 1993 totaled $21 million.
When consumed, portions of the presently leased material will be replaced by
additional leased material at a rate of approximately $9 million annually.
In the event these nuclear fuel needs cannot be leased, the associated capital
requirements would have to be met by other means.
FINANCING:
In 1993, the Company refinanced higher cost long-term debt in the
principal amount of $108 million resulting in an estimated annualized after-
tax savings of $1 million. Total long-term debt issued during 1993 amounted
to $120 million. In addition, the Company redeemed $25 million of high-
dividend rate preferred stock.
In January 1994, the Company issued an aggregate of $90 million of first
mortgage bonds, of which a portion of the net proceeds were used to redeem
early $38 million principal amount of 6 5/8% series bonds in late February
1994.
The Company has regulatory authority to issue and sell first mortgage
bonds, which may be issued as secured medium-term notes, and preferred stock
for various periods through 1995. Under existing authorization, the Company
may issue senior securities in the amount of $330 million, of which
$100 million may consist of preferred stock. The Company also has regulatory
authority to incur short-term debt, a portion of which may be through the
issuance of commercial paper.
F-8
<PAGE>
Pennsylvania Electric Company and Subsidiary Companies
The Company's cost of capital and ability to obtain external financing is
affected by its security ratings, which continue to remain well above minimum
investment grade. The Company's first mortgage bonds are currently rated at
an equivalent of an A rating by the three major credit rating agencies, while
an equivalent of an A- rating is assigned to the preferred stock issues. In
addition, the Company's commercial paper is rated as having a high credit
quality.
During 1993, Standard & Poor's revised its financial benchmarking
standards for rating the debt of electric utilities to reflect the changing
risk profiles resulting primarily from the intensifying competitive pressures
in the industry. These guidelines now include an assessment of each company's
business risk. Standard & Poor's new rating structure changed the business
outlook for the debt ratings of approximately one-third of the industry, which
moved from "A-stable" to "A-negative", meaning their credit ratings may be
lowered. The Company was classified as having an "average" business risk
position. Moody's announced that it expects to reduce its average credit
ratings for the electric utility industry within the next three years to take
into account the effects of the new competitive environment. Duff & Phelps
also indicated that it intends to introduce a forecast element to its
quantitative analysis to, among other things, "alert investors to the
possibility of equity value reduction and credit quality deterioration."
The Company's bond indenture and articles of incorporation include
provisions that limit the amount of long-term debt, preferred stock and short-
term debt it may issue. The Company's interest and preferred stock coverage
ratios are currently in excess of indenture or charter restrictions. The
ability to issue securities in the future will depend on coverages at that
time. Present plans call for the Company to issue long-term debt and
preferred stock during the next three years to finance construction activities
and, depending on the level of interest rates, refinance outstanding senior
securities.
CAPITALIZATION:
The Company supports its credit quality rating by maintaining
capitalization ratios that permit access to capital markets at a competitive
cost. Recent evaluations of the industry by credit rating agencies indicate
that the Company may have to increase its equity ratio to maintain its current
credit rating. The targets and actual capitalization ratios are as follows:
Capitalization
Target Range 1993 1992 1991
Common equity 44-47% 48% 46% 49%
Preferred stock 8-10 4 7 7
Notes payable and
long-term debt 48-43 48 47 44
100% 100% 100% 100%
F-9
<PAGE>
Pennsylvania Electric Company and Subsidiary Companies
COMPETITIVE ENVIRONMENT:
The Push Toward Competition
The electric utility industry appears to be undergoing a major
transition as it proceeds from a traditional rate regulated environment based
on cost recovery to some combination of competitive marketplace and modified
regulation of certain market segments. The industry challenges resulting from
various instances of competition, deregulation and restructuring thus far have
been minor compared with the impact that is expected in the future. The
Public Utility Regulatory Policies Act of 1978 (PURPA) facilitated the entry
of competitors into the electric generation business. Since then, more
competition has been introduced through various state actions to encourage
cogeneration and, most recently, the Energy Act. The Energy Act is intended
to promote competition among utility and nonutility generators in the
wholesale electric generation market, accelerating the industry restructuring
that has been underway since the enactment of PURPA. This legislation,
coupled with increasing customer demands for lower-priced electricity, is
generally expected to stimulate even greater competition in both the wholesale
and retail electricity markets. These competitive pressures may create
opportunities to compete for new customers and revenues, as well as increase
risk which could lead to the loss of customers.
Operating in a competitive environment will place added pressures on
utility profit margins and credit quality. Utilities with significantly
higher cost structures than supportable in the marketplace may experience
reduced earnings as they attempt to meet their customers' demands for lower-
priced electricity. This prospect of increasing competition in the electric
utility industry has already led the credit rating agencies to address and
apply more stringent guidelines in making credit rating determinations.
Among its provisions, the Energy Act allows the Federal Energy
Regulatory Commission (FERC), subject to certain criteria, to order owners of
electric transmission systems, such as the Company, to provide third parties
transmission access for wholesale power transactions. The Energy Act did not
give the FERC the authority, however, to order retail transmission access.
That authority lies with the individual states and movement toward opening the
transmission network to retail customers is currently under consideration in
several states.
Recent Events
Competition in the electric utility industry has already played a
significant role in wholesale transactions, affecting the pricing of energy
sales to electric cooperatives and municipal customers. During 1993, the
Company successfully negotiated power supply agreements with several existing
GPU System wholesale customers in response to offers made by other utilities
seeking to provide electric service at rates lower than those of Met-Ed or
JCP&L. The Company has made similar offers to certain wholesale customers now
being served by other utilities. Although wholesale customers represent a
relatively small portion of Company's sales, the Company will continue its
efforts to retain and add customers by offering competitive rates.
F-10
<PAGE>
Pennsylvania Electric Company and Subsidiary Companies
The competitive forces have also begun to influence some retail pricing
in the industry. In a few instances, industrial customers, threatening to
pursue cogeneration, self-generation or relocation to other service
territories, have leveraged price concessions from utilities. Recent state
regulatory actions, such as in New Jersey, suggest that utilities may have
limited success with attempting to shift costs associated with such discounts
to other customers. Utilities may have to absorb, in whole or part, the
effects of price reductions designed to retain large retail customers. State
regulators may put a limit or cap on prices, especially for those customers
unable to pursue alternative supply options.
Financial Exposure
In the transition from a regulated to competitive environment, there can
be a significant change in the economic value of a utility's assets.
Traditional utility regulation provides an opportunity for recovery of the
cost of plant assets, along with a return on investment, through ratemaking.
In a competitive market, the value of an asset may be determined by the market
price of the services derived from that asset. If the cost of operating
existing assets results in above market prices, a utility may be unable to
recover all of its costs, resulting in "stranded assets" and other
unrecoverable costs. This may result in write-downs to remove stranded assets
from a utility's balance sheet in recognition of their reduced economic value
and the recognition of other losses.
Unrecovered costs will most likely be related to generation investment,
purchase power contracts, and "regulatory assets", which are deferred
accounting transactions whose value rests on the strength of a state
regulatory decision to allow future recovery from ratepayers. In markets
where there is excess capacity (as there currently is in the region including
Pennsylvania) and many available sources of power supply, the market price of
electricity may be too low to support full recovery of capital costs of
certain existing power plants, primarily the capital intensive plants such as
nuclear units. Another significant exposure in the transition to a
competitive market results if the prices of a utility's existing purchase
power contracts, consisting primarily of contractual obligations with
nonutility generators, are higher than future market prices. Utilities locked
into expensive purchase power arrangements may be forced to value the
contracts at market prices and recognize certain losses. A third source of
exposure is regulatory assets which if not supported by regulators would have
no value in a competitive market. Financial Accounting Standard No. 71
(FAS 71), "Accounting for the Effects of Certain Types of Regulation", applies
to regulated utilities that have the ability to recover their costs through
rates established by regulators and charged to customers. If a portion of the
Company's operations continues to be regulated, FAS 71 accounting may only be
applied to that portion. Write-offs of utility plant and regulatory assets
may result for those operations that no longer meet the requirements of
FAS 71. In addition, under deregulation, the uneconomical costs of certain
contractual commitments for purchased power and/or fuel supplies may have to
be expensed. Management believes that to the extent that the Company no
longer qualifies for FAS 71 accounting treatment, a material adverse effect on
F-11
<PAGE>
Pennsylvania Electric Company and Subsidiary Companies
its results of operations and financial position may result. At this time, it
is difficult for management to project the future level of stranded assets or
other unrecoverable costs, if any, without knowing what the market price of
electricity will be, or if regulators will allow recovery of industry
transition costs from customers.
Positioning the GPU System
The typical electric utility today is vertically integrated, operating
its plant assets to serve all customers within a franchised service territory.
In the future, franchised service territories may be replaced by markets whose
boundaries are defined by price, available capacity and transmission access.
This may result in changes to the organizational structure of utilities and an
emphasis on certain segments of the business among generation, transmission
and distribution.
In order to achieve a strong competitive position in a less regulated
future, the GPU System has in place a strategic planning process. In the
initial phases of the program, task forces are defining the principal
challenges facing GPU, exploring opportunities and risks, and defining and
evaluating strategic alternatives.
Management is now analyzing issues associated with various competition
and regulatory scenarios to determine how best to position the GPU System for
a competitive environment. An initial outcome of the GPU System ongoing
strategic planning process was a realignment proposed in February 1994, of
certain system operations. Subject to necessary regulatory approval, a new
subsidiary, GPU Generation Corporation, will be formed to operate and maintain
the GPU System's fossil-fueled and hydroelectric generating stations, which
are now owned and operated by the Company and its affiliates. It is also
intended to combine the remaining operations of the Company and Met-Ed without
merging the two companies. GPU is also developing a performance improvement
and cost reduction program to help assure ongoing competitiveness, and, among
other matters, will also address workforce issues in terms of compensation,
size and skill mix.
MEETING ENERGY DEMANDS:
In response to the increasingly competitive business climate and excess
capacity of nearby utilities, the Company's supply plan places an emphasis on
maintaining flexibility. Supply planning focuses increasingly on short to
intermediate term commitments, reliance on "spot" markets, and avoidance of
long-term firm commitments. The Company is expected to experience an average
growth rate in sales to customers through 1998 of about 1.7% annually. The
Company will also have higher sales as a result of adding former JCP&L
municipal customers and other load formerly serviced by JCP&L and Met-Ed,
resulting in a total average growth of 2.3%. The Company also expects to
experience peak load growth although at a somewhat lesser rate. Through
1998, the Company's plan consists of the continued utilization of existing
F-12
<PAGE>
Pennsylvania Electric Company and Subsidiary Companies
generating facilities combined with present commitments for power purchases
and the utilization of capacity of its affiliates. The plan also includes the
continued promotion of economic energy conservation and load management
programs. Given the future direction of the industry, the Company's present
strategy includes minimizing the financial exposure associated with new long-
term purchase commitments and the construction of new facilities by evaulating
these options in terms of an unregulated power market. The Company will resist
efforts to compel it to add new capacity at costs that may exceed future
market prices. The Company is attempting to renegotiate higher cost long-
term nonutility generation contracts where opportunities arise.
New Energy Supplies
The Company's supply plan includes the addition of 119 MW of presently
contracted capacity by 1998 from nonutility generation suppliers.
In July 1993, the Pennsylvania Public Utility Commission (PaPUC) acted
to initiate a rulemaking proceeding which, in general, would establish a
mandatory all source competitive bidding program by which utilities would meet
their future capacity and energy needs.
In November 1993, the Company filed an appeal with the Commonwealth
Court seeking to overturn a PaPUC order which directs the Company to enter
into two power purchase agreements with nonutility generators for a total of
160 MW under long-term contracts commencing in 1997 or later. The Company
does not need this additional capacity and believes the costs associated with
these contracts are not in the economic interests of its customers.
In December 1993, the New Jersey Board of Regulatory Commissioners
(NJBRC) denied JCP&L's petition to participate in the proposed power supply
and transmission facilities agreements between the Company and its affiliates
and Duquesne. As a result of this action and other developments, the Company
and its affiliates notified Duquesne that they were exercising their rights
under the agreements to withdraw from and thereby terminate the agreements.
The capital costs of these transactions would have totaled approximately
$500 million, of which the Company's share would have been approximately
$117 million.
Conservation and Load Management
The regulatory environment in Pennsylvania encourages the development of
new conservation and load management programs as evidenced by recent approval
of a cost recovery mechanism for demand-side management (DSM) incentive
regulations. DSM includes utility sponsored activities designed to improve
energy efficiency in customer end-use, and includes load management programs
(i.e., peak reduction) and conservation programs (i.e., energy and peak
reduction).
F-13
<PAGE>
Pennsylvania Electric Company and Subsidiary Companies
The PaPUC has recently completed its generic investigation into DSM cost
recovery mechanisms and issued a cost recovery and ratemaking order in
December 1993. The Company is currently developing plans which will reflect
changes since its original plan was filed in 1991. New targets for DSM
initiatives are currently being determined and will be identified when the new
DSM plan is filed in the first quarter of 1994.
ENVIRONMENTAL ISSUES:
The Company is committed to complying with all applicable environmental
regulations in a responsible manner. Compliance with the federal Clean Air
Act Amendments of 1990 (Clean Air Act) and other environmental needs will
present a major challenge to the Company through the late 1990s.
The Clean Air Act will require substantial reductions in sulfur dioxide
and nitrogen oxide emissions by the year 2000. The Company's current plan
includes installing and operating emission control equipment at some of its
coal-fired plants as well as switching to lower sulfur coal at other coal-
fired plants. To comply with the Clean Air Act, the Company expects to expend
up to $295 million by the year 2000 for air pollution control equipment. The
Company reviews its plans and alternatives to comply with the Clean Air Act on
a least-cost basis taking into account advances in technology and the emission
allowance market and assesses the risk of recovering capital investments in a
competitive environment. The Company may be able to defer substantial capital
investments while attaining the required level of compliance if an alternative
such as increased participation in the emission allowance market is determined
to result in the least-cost plan. This and other compliance alternatives may
result in the substitution of increased operating expenses for capital costs.
At this time, costs associated with the capital invested in this pollution
control equipment and the increased operating costs of the affected stations
are expected to be recoverable through the ratemaking process, but management
recognizes that recovery is not assured.
For more information, see the Environmental Matters section of Note 1 to
the consolidated financial statements.
LEGAL MATTERS - TMI-2 ACCIDENT CLAIMS:
As a result of the TMI-2 accident and its aftermath, individual claims
for alleged personal injury (including claims for punitive damages), which are
material in amount, have been asserted against the Company and its affiliates
and GPU and are still pending. For more information, see Note 1 to the
consolidated financial statements.
F-14
<PAGE>
Pennsylvania Electric Company and Subsidiary Companies
EFFECTS OF INFLATION:
The Company is affected by inflation since the regulatory process
results in a time lag during which increased operating expenses are not fully
recovered in rates. Inflation may have an even greater effect in a period of
increasing competition and deregulation as the Company and the utility
industry attempt to keep rates competitive.
Inflation also affects the Company in the form of higher replacement
costs of utility plant. In the past, the Company anticipated the recovery of
these cost increases through the ratemaking process. However, as competition
and deregulation accelerate throughout the industry, there can be no assurance
of the recovery of these increased costs.
The Company is committed to long-term cost control and is continuing to
seek measures to reduce or limit the growth in operating expenses. The
prudent expenditure of capital and debt refinancing programs have kept down
increases in debt levels and capital costs.
ACCOUNTING ISSUES:
In May 1993, the Financial Accounting Standards Board issued FAS 115,
"Accounting for Certain Investments in Debt and Equity Securities", which is
effective for fiscal years beginning after December 15, 1993. FAS 115
requires the recording of unrealized gains and losses with a corresponding
offsetting entry to earnings or shareholder's equity. The impact on the
Company's financial position is expected to be immaterial and there will be no
impact on the results of operations. FAS 115 will be implemented in 1994.
F-15
<PAGE>
Pennsylvania Electric Company and Subsidiary Companies
QUARTERLY FINANCIAL DATA (UNAUDITED)
First Quarter Second Quarter
In Thousands 1993 1992 1993 1992
Operating revenues $231,148 $237,784 $219,232 $214,108
Operating income 45,279 40,832 32,357 29,356
Net income 33,212 29,832 20,246 17,870
Earnings available for common
stock 31,796 28,416 18,830 16,454
Third Quarter Fourth Quarter
In Thousands 1993 1992 1993 * 1992
Operating revenues $229,447 $215,750 $228,453 $228,695
Operating income 42,835 38,013 26,566 39,107
Net income 31,714 25,281 10,556 26,761
Earnings available for common stock 30,467 23,865 9,648 25,345
* Results for the fourth quarter of 1993 reflect a decrease in earnings of
$4.6 million (net of income taxes of $2.7 million) for the write-off of the
Duquesne transactions.
F-16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Pennsylvania Electric Company
We have audited the accompanying consolidated financial statements and
the financial statement schedules of Pennsylvania Electric Company and
Subsidiary Companies listed in the Index on page F-1 and set forth on pages
F-18 to F-50, inclusive, of this Form 10-K. These consolidated financial
statements and financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining on a test basis, evidence
supporting the amounts and the disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Pennsylvania Electric Company and Subsidiary Companies as of December 31,
1993 and 1992 and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1993 in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedules referred to above, when considered
in relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
As more fully discussed in Note 1 to consolidated financial statements,
the Company and its affiliates are unable to determine the ultimate
consequences of certain contingencies which have resulted from the accident at
Unit 2 of the Three Mile Island Nuclear Generating Station (TMI-2). The
matters which remain uncertain are (a) the extent to which the retirement
costs of TMI-2 could exceed amounts currently recognized for ratemaking
purposes or otherwise accrued, and (b) the excess, if any, of amounts which
might be paid in connection with claims for damages resulting from the
accident over available insurance proceeds.
As discussed in Notes 5 and 7 to the consolidated financial statements,
the Company was required to adopt the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes," and the provisions of SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions" in
1993. Also, as discussed in Note 2 to the financial statements, the Company
changed its method of accounting for unbilled revenues in 1991.
Coopers & Lybrand
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 2, 1994
F-17
<PAGE>
<TABLE>
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statements of Income
<CAPTION>
(In Thousands)
For The Years Ended December 31, 1993 1992 1991
<S> <C> <C> <C>
Operating Revenues $908 280 $896 337 $865 552
Operating Expenses:
Fuel 182 923 178 528 179 181
Power purchased and interchanged:
Affiliates 3 606 15 078 9 723
Others 131 791 113 333 96 336
Deferral of energy costs, net (23 145) (44) (4 183)
Other operation and maintenance 241 252 226 179 234 648
Depreciation and amortization 90 463 84 227 108 092
Taxes, other than income taxes 61 697 61 177 60 912
Total operating expenses 688 587 678 478 684 709
Operating Income Before Income Taxes 219 693 217 859 180 843
Income taxes 72 656 70 551 44 881
Operating Income 147 037 147 308 135 962
Other Income and Deductions:
Allowance for other funds used during
construction 869 - 1 393
Other income, net (7 021) (179) 6 603
Income taxes 3 420 (6) (3 567)
Total other income and deductions (2 732) (185) 4 429
Income Before Interest Charges 144 305 147 123 140 391
Interest Charges:
Interest on long-term debt 44 714 42 615 45 289
Other interest 5 255 6 415 6 744
Allowance for borrowed funds used during
construction (1 392) (1 651) (2 003)
Total interest charges 48 577 47 379 50 030
Income Before Cumulative Effect of
Accounting Change 95 728 99 744 90 361
Cumulative effect as of January 1, 1991 of
accounting change for unbilled revenues,
net of income taxes of $10,648 - - 16 234
Net Income 95 728 99 744 106 595
Preferred stock dividends 4 987 5 664 6 189
Earnings Available for Common Stock $ 90 741 $ 94 080 $100 406
The accompanying notes are an integral part of the consolidated financial statements.
F-18
<PAGE>
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
<CAPTION>
(In Thousands)
December 31, 1993 1992
<S> <C> <C>
ASSETS
Utility Plant:
In service, at original cost $2 429 557 $2 309 823
Less, accumulated depreciation 887 281 836 530
Net utility plant in service 1 542 276 1 473 293
Construction work in progress 81 420 54 256
Other, net 35 614 29 690
Net utility plant 1 659 310 1 557 239
Current Assets:
Cash and temporary cash investments 1 622 659
Special deposits 2 622 3 464
Accounts receivable:
Customers, net 64 913 57 442
Other 9 824 9 302
Unbilled revenues 28 942 29 129
Materials and supplies, at average cost or less:
Construction and maintenance 46 994 48 861
Fuel 20 590 32 388
Deferred energy costs 17 047 (7 252)
Deferred income taxes 790 2 235
Prepayments 6 630 4 186
Total current assets 199 974 180 414
Deferred Debits and Other Assets:
Three Mile Island Unit 2 deferred costs 64 638 79 659
Deferred income taxes 64 577 30 013
Income taxes recoverable through future rates 234 026 -
Decommissioning funds 24 657 4 350
Nuclear fuel disposal fee 486 903
Other 53 672 40 137
Total deferred debits and other assets 442 056 155 062
Total Assets $2 301 340 $1 892 715
The accompanying notes are an integral part of the consolidated financial statements.
F-19
<PAGE>
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
(In Thousands)
December 31, 1993 1992
LIABILITIES AND CAPITAL
Capitalization:
Common stock $ 105 812 $ 105 812
Capital surplus 265 486 265 486
Retained earnings 328 290 278 482
Total common stockholder's equity 699 588 649 780
Cumulative preferred stock 61 842 86 923
Long-term debt 524 491 582 647
Total capitalization 1 285 921 1 319 350
Current Liabilities:
Debt due within one year 70 008 7
Notes payable 102 356 48 223
Obligations under capital leases 23 333 19 219
Accounts payable:
Affiliates 6 025 10 826
Others 85 254 61 214
Taxes accrued 11 978 9 134
Interest accrued 15 369 12 985
Vacations accrued 11 956 10 777
Other 13 511 8 595
Total current liabilities 339 790 180 980
Deferred Credits and Other Liabilities:
Deferred income taxes 455 076 215 888
Unamortized investment tax credits 51 775 55 510
Three Mile Island Unit 2 future costs 79 967 80 000
Nuclear fuel disposal fee 12 401 12 024
Other 76 410 28 963
Total deferred credits and other liabilities 675 629 392 385
Commitments and Contingencies (Note 1)
Total Liabilities and Capital $2 301 340 $1 892 715
The accompanying notes are an integral part of the consolidated financial statements.
F-20
</TABLE>
<PAGE>
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statements of Retained Earnings
(In Thousands)
For The Years Ended December 31, 1993 1992 1991
Balance, beginning of year $278 482 $289 402 $265 358
Add, net income 95 728 99 744 106 595
Total 374 210 389 146 371 953
Deduct, cash dividends on capital stock:
Cumulative preferred stock (at the annual
rates indicated below):
4.40% Series B ($ 4.40 a share) 250 250 250
3.70% Series C ($ 3.70 a share) 359 359 359
4.05% Series D ($ 4.05 a share) 258 258 258
4.70% Series E ($ 4.70 a share) 135 135 135
4.50% Series F ($ 4.50 a share) 193 194 194
4.60% Series G ($ 4.60 a share) 349 348 348
8.36% Series H ($ 8.36 a share) 2 090 2 090 2 090
8.12% Series I ($ 8.12 a share) 1 353 2 030 2 030
9.00% Series L ($ 2.25 a share) - - 525
Common stock (not declared on a per
share basis) 40 000 105 000 75 000
Total 44 987 110 664 81 189
Deduct, other adjustments 933 - 1 362
Balance, end of year $328 290 $278 482 $289 402
The accompanying notes are an integral part of the consolidated financial
statements.
F-21
<PAGE>
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statement of Long-Term Debt
December 31, 1993 (In Thousands)
First Mortgage Bonds-Series as noted (a)(b):
9.35 %, due 1994 $40 000 7.92 %, due 2002 $10 000
8.50 %, due 1994 30 000 7.40 %, due 2003 10 000
7.45 %, due 1996 30 000 6.60 %, due 2003 30 000
6 1/4%, due 1996 25 000 7.48 %, due 2004 40 000
6.80 %, due 1996 20 000 6.10 %, due 2004 30 000
6 1/4%, due 1997 26 000 7 3/4%, due 2006 12 000
6 5/8%, due 1998 38 000 8.05 %, due 2006 10 000
8.72 %, due 1999 30 000 6 1/8%, due 2007 16 420
6.15 %, due 2000 30 000 8 3/8%, due 2015 20 000 (c)
8.70 %, due 2001 30 000 6 1/2%, due 2016 25 000 (c)
7.40 %, due 2002 10 000 8.33 %, due 2022 20 000
7.43 %, due 2002 30 000 7.49 %, due 2023 30 000
Subtotal $592 420
Maturities and sinking fund requirements due within one year (70 000)
522 420
Other long-term debt 3 084
Other current obligations (8)
Subtotal 3 076
Unamortized net discount on long-term debt (1 005)
Total long-term debt $524 491
(a) Substantially all of the properties owned by the Company are subject to the
lien of the mortgage.
(b) For the years 1994, 1996, 1997 and 1998, the Company has total long-term
debt maturities of $70.0 million, $75.0 million, $26.0 million and
$38.0 million, respectively. The Company has no long-term debt maturities
in 1995.
(c) Effective as of any June 1 or December 1, the interest rate may be
converted, at the option of the registered holder thereof, to a variable
rate.
The accompanying notes are an integral part of the consolidated financial
statements.
F-22
<PAGE>
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statement of Capital Stock
December 31, 1993 (In Thousands)
Cumulative preferred stock, without par value, 11,435,000 shares
authorized, 615,000 shares issued and outstanding, without
mandatory redemption (a)&(b):
56 810 shares, 4.40% Series B (callable at $108.25 per share) $ 5 681
97 054 shares, 3.70% Series C (callable at $105.00 per share) 9 705
63 696 shares, 4.05% Series D (callable at $104.53 per share) 6 370
28 739 shares, 4.70% Series E (callable at $105.25 per share) 2 874
42 969 shares, 4.50% Series F (callable at $104.27 per share) 4 297
75 732 shares, 4.60% Series G (callable at $104.25 per share) 7 573
250 000 shares, 8.36% Series H (callable at $104.09 per share) 25 000
Subtotal - Cumulative preferred stock issued 61 500
Premium on cumulative preferred stock 342
Total cumulative preferred stock $ 61 842
Common stock, par value $20 per share, 5,400,000 shares
authorized, 5,290,596 shares issued and outstanding $105 812
(a) If dividends upon any shares of preferred stock are in arrears in an amount
equal to the annual dividend, the holders of preferred stock, voting as a
class, are entitled to elect a majority of the board of directors until all
dividends in arrears have been paid. No redemptions of preferred stock may
be made unless dividends on all preferred stock for all past quarterly
dividend periods have been paid or declared and set aside for payment.
Stated value of the Company's cumulative preferred stock is $100 per share.
(b) No shares of capital stock have been sold during the three years ended
December 31, 1993. All of the issued and outstanding shares of the 9%
Series L (1,400,000 shares, stated value $35,000,000) and the 8.12%
Series I (250,000 shares, stated value $25,000,000) cumulative preferred
stock were redeemed on May 1, 1991 and September 17, 1993, respectively.
The 1991 redemption of the 9% Series L and the 1993 redemption of the 8.12%
Series I cumulative preferred stock resulted in charges to Retained
Earnings of $1.4 million and $.9 million, respectively. No shares of
capital stock were redeemed or repurchased during 1992.
The accompanying notes are an integral part of the consolidated financial
statements.
F-23
<PAGE>
<TABLE>
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statements of Cash Flows
<CAPTION>
(In Thousands)
For The Years Ended December 31, 1993 1992 1991
<S> <C> <C> <C>
Operating Activities:
Income before preferred dividends $ 95 728 $ 99 744 $ 106 595
Adjustments to reconcile income to cash provided:
Depreciation and amortization 82 951 78 431 101 061
Amortization of property under capital leases 8 183 9 226 8 558
Cumulative effect of accounting change - - (16 234)
Nuclear outage maintenance costs, net (2 195) 2 532 (2 129)
Deferred income taxes and investment tax
credits, net 18 612 10 376 (11 411)
Deferred energy costs, net (23 097) 867 (3 188)
Accretion income (800) (1 600) (3 100)
Allowance for other funds used
during construction (869) - (1 393)
Changes in working capital:
Receivables (7 894) 12 370 42 120
Materials and supplies 13 664 1 899 492
Special deposits and prepayments (1 777) 6 766 6 744
Payables and accrued liabilities 1 356 (23 158) 2 158
Other, net (5 798) (3 906) (5 324)
Net cash provided by operating activities 178 064 193 547 224 949
Investing Activities:
Cash construction expenditures (150 252) (110 629) (101 328)
Contributions to decommissioning trust (19 411) (1 139) (326)
Other, net 5 806 (191) (278)
Net cash used for investing activities (163 857) (111 959) (101 932)
Financing Activities:
Issuance of long-term debt 119 220 109 288 99 430
Increase in notes payable, net 54 205 3 493 6 670
Retirement of long-term debt (108 008) (75 207) (103 045)
Capital lease principal payments (7 492) (8 431) (8 337)
Redemption of preferred stock (26 013) - (36 363)
Dividends paid on common stock (40 000) (105 000) (75 000)
Dividends paid on preferred stock (5 156) (5 664) (6 451)
Net cash required by financing activities (13 244) (81 521) (123 096)
Net increase (decrease) in cash and temporary
cash investments from above activities 963 67 (79)
Cash and temporary cash investments, beginning
of year 659 592 671
Cash and temporary cash investments, end of year $ 1 622 $ 659 $ 592
Supplemental Disclosure:
Interest paid (net of amount capitalized) $ 45 939 $ 46 370 $ 56 758
Income taxes paid $ 52 565 $ 65 762 $ 41 507
New capital lease obligations incurred $ 13 317 $ 3 098 $ 13 959
The accompanying notes are an integral part of the consolidated financial statements.
F-24
</TABLE>
<PAGE>
Pennsylvania Electric Company and Subsidiary Companies
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pennsylvania Electric Company (Company), a Pennsylvania corporation
incorporated in 1919, is a wholly-owned subsidiary of General Public Utilities
Corporation (GPU), a holding company registered under the Public Utility
Holding Company Act of 1935. The Company has two minor wholly-owned
subsidiaries.
The Company is affiliated with Jersey Central Power & Light Company
(JCP&L) and Metropolitan Edison Company (Met-Ed). The Company, JCP&L and
Met-Ed are referred to herein as the "Company and its affiliates". The
Company is also affiliated with GPU Service Corporation (GPUSC), a service
company; GPU Nuclear Corporation (GPUN), which operates and maintains the
nuclear units of the Company and its affiliates; and General Portfolios
Corporation (GPC), parent of Energy Initiatives, Inc., which develops, owns,
and operates nonutility generating facilities. The Company and its affiliates,
GPUSC, GPUN and GPC considered together are referred to as the "GPU System."
1. COMMITMENTS AND CONTINGENCIES
NUCLEAR FACILITIES
The Company has made investments in two major nuclear projects -- Three
Mile Island Unit 1 (TMI-1), which is an operational generating facility, and
Three Mile Island Unit 2 (TMI-2), which was damaged during a 1979 accident.
At December 31, 1993, the Company's net investment in TMI-1, including nuclear
fuel, was $165 million. TMI-1 and TMI-2 are jointly owned by the Company,
JCP&L and Met-Ed in the percentages of 25%, 25% and 50%, respectively.
Costs associated with the operation, maintenance and retirement of
nuclear plants have continued to increase and become less predictable, in
large part due to changing regulatory requirements and safety standards and
experience gained in the construction and operation of nuclear facilities.
The Company and its affiliates may also incur costs and experience reduced
output at their nuclear plants because of the design criteria prevailing at
the time of construction and the age of the plants' systems and equipment. In
addition, for economic or other reasons, operation of these plants for the
full term of their now assumed lives cannot be assured. Also, not all risks
associated with ownership or operation of nuclear facilities may be adequately
insured or insurable. Consequently, the ability of electric utilities to
obtain adequate and timely recovery of costs associated with nuclear projects,
including replacement power, any unamortized investment at the end of the
plants' useful life (whether scheduled or premature), the carrying costs of
that investment and retirement costs, is not assured. Management intends, in
general, to seek recovery of any such costs described above through the
ratemaking process, but recognizes that recovery is not assured.
F-25
<PAGE>
Pennsylvania Electric Company and Subsidiary Companies
TMI-2:
The 1979 TMI-2 accident resulted in significant damage to, and
contamination of, the plant and a release of radioactivity to the environment.
The cleanup program was completed in 1990. After receiving Nuclear Regulatory
Commission (NRC) approval, TMI-2 entered into long-term monitored storage in
December 1993.
As a result of the accident and its aftermath, individual claims for
alleged personal injury (including claims for punitive damages), which are
material in amount, have been asserted against GPU and the Company and its
affiliates. Approximately 2,100 of such claims are pending in the
U.S. 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. Questions have not yet been resolved as to
whether the punitive damage claims are (a) subject to the overall limitation
of liability set by the Price-Anderson Act ($560 million at the time of the
accident) and (b) outside the primary insurance coverage provided pursuant
to that Act (remaining primary coverage of approximately $80 million as of
December 31, 1993). If punitive damages are not covered by insurance or are
not subject to the Price-Anderson liability limitation, punitive damage awards
could have a material adverse effect on the financial position of the GPU
System.
In June 1993, the District Court agreed to permit pre-trial discovery on
the punitive damage claims to proceed. A trial of twelve allegedly
representative cases is scheduled to begin in October 1994. In February 1994,
the Court held that the plaintiffs' claims for punitive damages are not barred
by the Price-Anderson Act to the extent that the funds to pay punitive damages
do not come out of the U.S. Treasury. The Court also denied the defendants'
motion seeking a dismissal of all cases on the grounds that the defendants
complied with applicable federal safety standards regarding permissible
radiation releases from TMI-2 and that, as a matter of law, the defendants
therefore did not breach any duty that they may have owed to the individual
plaintiffs. The Court stated that a dispute about what radiation and
emissions were released cannot be resolved on a motion for summary judgment.
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. As described in the Nuclear Fuel Disposal Fee
section of Note 2, the disposal of spent nuclear fuel is covered separately by
contracts with the U.S. Department of Energy (DOE).
In 1990, the Company and its affiliates 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 Company and its affiliates intend to complete
the funding for TMI-1 by the end of the plant's license term, 2014. The TMI-
2 funding completion date is 2014, consistent with TMI-2 remaining in long-
term storage and being decommissioned at the same time as TMI-1. Under
F-26
<PAGE>
Pennsylvania Electric Company and Subsidiary Companies
the NRC regulations, the funding target (in 1993 dollars) for TMI-1 is
$143 million, of which the Company's share is $36 million. Based on NRC
studies, a comparable funding target for TMI-2 (in 1993 dollars), which takes
into account the accident, is $228 million, of which the Company's share would
be $57 million. The NRC is currently studying the levels of these funding
targets. Management cannot predict the effect that the results of this review
will have on the funding targets. NRC regulations and a regulatory guide
provide mechanisms, including exemptions, to adjust the funding targets over
their collection periods to reflect increases or decreases due to inflation
and changes in technology and regulatory requirements. The funding targets,
while not actual cost estimates, are reference levels designed to assure that
licensees demonstrate adequate financial responsibility for decommissioning.
While the regulations address activities related to the removal of the
radiological portions of the plants, they do not establish residual
radioactivity limits nor do they address costs related to the removal of
nonradiological structures and materials.
In 1988, a consultant to GPUN performed a site-specific study of TMI-1
that considered various decommissioning plans and estimated the cost of
decommissioning the radiological portions of TMI-1 to range from approximately
$205 to $285 million (adjusted to 1993 dollars), of which the Company's share
would range between approximately $51 to $71 million. In addition, the study
estimated the cost of removal of nonradiological structures and materials for
TMI-1 at $72 million, of which the Company's share would be $18 million.
The ultimate cost of retiring the Company and its affiliates' nuclear
facilities may be materially different from the funding targets and the cost
estimates contained in the site-specific studies and cannot now be more
reasonably estimated than the level of the NRC funding target because such
costs are subject to (a) the type of decommissioning plan selected, (b) the
escalation of various cost elements (including, but not limited to, general
inflation), (c) the further development of regulatory requirements governing
decommissioning, (d) the absence to date of significant experience in
decommissioning such facilities and (e) the technology available at the time
of decommissioning. The Company is charging to expense and contributing to
external trusts amounts collected from customers for nuclear plant
decommissioning and nonradiological costs. In addition, the Company has
contributed to external trusts amounts written off for nuclear plant
decommissioning in 1991.
TMI-1:
Effective October 1993, the Pennsylvania Public Utility Commission
(PaPUC) approved a rate change for the Company which increased the collection
of revenues for decommissioning costs for TMI-1 based on its share of the NRC
funding target and nonradiological cost of removal as estimated in the site-
specific study. Collections from customers for decommissioning expenditures
are deposited in external trusts and are classified as Decommissioning Funds
on the balance sheet, which includes the interest earned on these funds.
Provision for the future expenditure of these funds has been made in
accumulated depreciation, amounting to $4 million at December 31, 1993.
F-27
<PAGE>
Pennsylvania Electric Company and Subsidiary Companies
Management believes that any TMI-1 retirement costs, in excess of those
currently recognized for ratemaking purposes, should be recoverable through
the ratemaking process.
TMI-2:
The Company and its affiliates have recorded a liability amounting to
$229 million (of which the Company's share was $57 million) as of December 31,
1993, for the radiological decommissioning of TMI-2, reflecting the NRC funding
target (unadjusted for an immaterial decrease in 1993). The Company and its
affiliates record escalations, when applicable, in the liability based upon
changes in the NRC funding target. The Company and its affiliates have also
recorded a liability in the amount of $20 million (of which the Company's
share was $5 million) for incremental costs specifically attributable to
monitored storage. Such costs are expected to be incurred between 1994 and
2014, when decommissioning is forecast to begin. In addition, the Company and
its affiliates have recorded a liability in the amount of $71 million (of
which the Company's share was $18 million) for nonradiological cost of
removal. The above amounts for retirement costs and monitored storage are
reflected as Three Mile Island Unit 2 Future Costs on the balance sheet. The
Company has made a nonrecoverable contribution of $20 million to an external
decommissioning trust relating to its share of the accident-related portion of
the decommissioning liability.
The PaPUC has granted Met-Ed decommissioning revenues for its share of
the remainder of the NRC funding target and allowances for its share of the
cost of removal of nonradiological structures and materials. In March 1993, a
PaPUC rate order for Met-Ed allowed for the future recovery of certain TMI-2
retirement costs. In May 1993, the Pennsylvania Office of Consumer Advocate
filed a petition for review with the Pennsylvania Commonwealth Court seeking
to set aside the PaPUC's 1993 Met-Ed rate order. The matter is pending before
the court. If the 1993 rate order is reversed, the Company would be required
to write off a total of approximately $50 million for retirement costs. The
Company intends to request decommissioning revenues and an allowance for the
cost of removal of nonradiological structures and materials, equivalent to its
share of the amounts granted to Met-Ed, in its next retail base rate filing.
Management intends to seek recovery for any increases in TMI-2 retirement
costs, but recognizes that recovery cannot be assured.
Upon TMI-2's entering long-term monitored storage, the Company and its
affiliates will incur currently estimated incremental annual storage costs of
$1 million (of which the Company's share will be $.25 million). The Company
and its affiliates have deferred the $20 million (of which the Company's share
was $5 million) for the total estimated incremental costs attributable to
monitored storage. The Company believes these costs should be recoverable
through the ratemaking process.
F-28
<PAGE>
Pennsylvania Electric Company and Subsidiary Companies
INSURANCE
The GPU System has insurance (subject to retentions and deductibles) for
its operations and facilities including coverage for property damage,
liability to employees and third parties, and loss of use and occupancy
(primarily incremental replacement power costs). There is no assurance that
the GPU System will maintain all existing insurance coverages. Losses or
liabilities that are not completely insured, unless allowed to be recovered
through ratemaking, could have a material adverse effect on the financial
position of the Company.
The decontamination liability, premature decommissioning and property
damage insurance coverage for the TMI station (TMI-1 and TMI-2 are considered
one site for insurance purposes) totals $2.7 billion. 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 the stations.
The Price-Anderson Act limits the GPU System's liability to third parties
for a nuclear incident at one of its sites to approximately $9.4 billion.
Coverage for the first $200 million of such liability is provided by private
insurance. The remaining coverage, or secondary protection, is provided by
retrospective premiums payable by all nuclear reactor owners. Under secondary
protection, a nuclear incident at any licensed nuclear power reactor in the
country, including those owned by the GPU System, could result in assessments
of up to $79 million per incident for each of the GPU System's reactors,
subject to an annual maximum payment of $10 million per incident per reactor.
In 1993, GPUN requested an exemption from the NRC to eliminate the secondary
protection requirements for TMI-2. This matter is pending before the NRC.
The Company and its affiliates have insurance coverage for incremental
replacement power costs resulting from an accident-related outage at their
nuclear plants. Coverage for TMI-1 commences after the first 21 weeks of the
outage and continues for three years at decreasing levels beginning at a
weekly amount of $2.6 million.
Under its insurance policies applicable to nuclear operations and
facilities, the Company and its affiliates are subject to retrospective premium
assessments of up to $52 million in any one year (of which the Company's share
is $7 million), in addition to those payable under the Price-Anderson Act.
F-29
<PAGE>
Pennsylvania Electric Company and Subsidiary Companies
ENVIRONMENTAL MATTERS
As a result of existing and proposed legislation and regulations, and
ongoing legal proceedings dealing with environmental matters, including but
not limited to acid rain, water quality, air quality, global warming,
electromagnetic fields, and storage and disposal of hazardous and/or toxic
wastes, the Company may be required to incur substantial additional costs to
construct new equipment, modify or replace existing and proposed equipment,
remediate or clean up waste disposal and other sites currently or formerly
used by it, including formerly owned manufactured gas plants and mine refuse
piles, and with regard to electromagnetic fields, postpone or cancel the
installation of, or replace or modify, utility plant, the costs of which could
be material. Management intends to seek recovery through the ratemaking
process for any additional costs, but recognizes that recovery cannot be
assured.
To comply with the federal Clean Air Act Amendments of 1990, the Company
expects to expend up to $295 million for air pollution control equipment by
the year 2000. Costs associated with the capital invested in this equipment
and the increased operating costs of the affected stations should be
recoverable through the ratemaking process.
The Company has been notified by the Environmental Protection Agency
(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 two hazardous
and/or toxic waste sites. In addition, the Company has been requested to
supply information to the EPA and state environmental authorities on several
other sites for which it has not as yet been named a PRP. The Company has
also been named in lawsuits requesting damages for hazardous and/or toxic
substances allegedly released into the environment. The ultimate cost of
remediation will depend upon changing circumstances as site investigations
continue, including (a) the existing technology required for site cleanup,
(b) the remedial action plan chosen and (c) the extent of site contamination
and the portion attributed to the Company.
The Company is unable to estimate the extent of possible remediation and
associated costs of additional environmental matters. Also unknown are the
consequences of environmental issues, which could cause the postponement or
cancellation of either the installation or replacement of utility plant.
Management believes the costs described above should be recoverable through
the ratemaking process.
OTHER COMMITMENTS AND CONTINGENCIES
The PaPUC is considering generic nuclear performance standards for
Pennsylvania utilities. At the request of the PaPUC, the Company,
F-30
<PAGE>
Pennsylvania Electric Company and Subsidiary Companies
as well as the other Pennsylvania utilities, have supplied the PaPUC
with proposals which may result in the PaPUC adopting a generic nuclear
performance standard in the future.
In December 1993, the NJBRC denied JCP&L's request to participate in the
proposed power supply and transmission facilities agreements between the
Company and its affiliates and Duquesne Light Company (Duquesne). As a result
of this action and other developments, the Company and its affiliates notified
Duquesne that they were exercising their rights under the agreements to
withdraw from and thereby terminate the agreements. Consequently, the Company
wrote off the approximately $8 million it had invested in the project.
The Company's construction program, for which substantial commitments
have been incurred and which extends over several years, contemplate
expenditures of approximately $218 million during 1994. As a consequence of
reliability, licensing, environmental and other requirements, substantial
additions to utility plant may be required relatively late in their expected
service lives. If such additions are made, current depreciation allowance
methodology may not make adequate provision for the recovery of such
investments during their remaining lives. Management intends to seek recovery
of any such costs through the ratemaking process, but recognizes that recovery
is not assured.
As a result of the Energy Policy Act of 1992 (Energy Act) and actions of
regulatory commissions, the electric utility industry appears to be moving
toward a combination of competition and a modified regulatory environment. In
accordance with Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation" (FAS 71), the
Company's financial statements reflect assets and costs based on current cost-
based ratemaking regulations. Continued accounting under FAS 71 requires that
the following criteria be met:
a) A utility's rates for regulated services provided to its customers
are established by, or are subject to approval by, an independent
third-party regulator;
b) The regulated rates are designed to recover specific costs of
providing the regulated services or products; and
c) In view of the demand for the regulated services and the level of
competition, direct and indirect, it is reasonable to assume that
rates set at levels that will recover a utility's costs can be
charged to and collected from customers. This criteria requires
consideration of anticipated changes in levels of demand or
competition during the recovery period for any capitalized costs.
F-31
<PAGE>
Pennsylvania Electric Company and Subsidiary Companies
A utility's operations can cease to meet those criteria for various reasons,
including deregulation, a change in the method of regulation, or a change in
the competitive environment for the utility's regulated services. Regardless
of the reason, a utility whose operations cease to meet those criteria should
discontinue application of FAS 71 and report that discontinuation by
eliminating from its balance sheet the effects of any actions of regulators
that had been recognized as assets and liabilities pursuant to FAS 71 but
which would not have been recognized as assets and liabilities by enterprises
in general.
If a portion of the Company's operations continues to be regulated and
meets the above criteria, FAS 71 accounting may only be applied to that
portion. Write-offs of utility plant and regulatory assets may result for
those operations that no longer meet the requirements of FAS 71. In addition,
under deregulation, the uneconomical costs of certain contractual commitments
for purchased power and/or fuel supplies may have to be expensed. Management
believes that to the extent that the Company no longer qualifies for FAS 71
accounting treatment, a material adverse effect on its results of operations
and financial position may result.
The Company has entered into long-term contracts with nonaffiliated
mining companies for the purchase of coal for its Homer City generating
station in which it has a fifty percent ownership interest. The contracts,
which expire between 1995 and 2003, require the purchase of fixed amounts of
coal. Under the contracts the price of coal is based on adjustments of
indexed cost components. One contract also includes a provision for the
payment of environmental and post-employment benefits. The Company's share of
the cost of coal purchased under these agreements is expected to aggregate
$55 million for 1994.
The Company and its affiliates have entered into agreements with other
utilities for the purchase of capacity and energy for various periods through
1999. These agreements provide for up to 2,130 MW in 1994, declining to
1,307 MW in 1995 and 183 MW by 1999. Payments pursuant to these agreements are
estimated to aggregate $244 million in 1994. The price of the energy
purchased under these agreements is determined by contracts providing
generally for the recovery by the sellers of their costs.
The Company has also entered into power purchase agreements with
independently owned power production facilities (nonutility generators) for
the purchase of energy and capacity for periods up to 25 years. The majority
of these agreements are subject to penalties for nonperformance and other
contract limitations. All of these facilities are must-run and generally
obligate the Company to purchase all of the power produced up to the contract
limits. The agreements have been approved by the PaPUC and permit the Company
to recover energy and demand costs from customers through its energy clause.
These agreements provide for the sale of approximately 412 MW of capacity and
energy to the Company by the mid 1990s. As of December 31, 1993, facilities
covered by these agreements having 293 MW of capacity were in service.
F-32
<PAGE>
Pennsylvania Electric Company and Subsidiary Companies
Payments made pursuant to these agreements were $104 million, $77 million and
$61 million for 1993, 1992 and 1991, respectively, and are estimated to
aggregate $121 million for 1994. The price of the energy and capacity to be
purchased under these agreements is determined by the terms of the contracts.
The rates payable under a number of these agreements are in excess of current
market prices. While the Company has been granted full recovery of these
costs from customers by the PaPUC, there can be no assurance that the Company
will continue to be able to recover these costs throughout the term of the
related contracts. The emerging competitive market has created additional
uncertainty regarding the forecasting of the Company's energy supply needs
which, in turn, has caused the Company to change its supply strategy to seek
shorter term agreements offering more flexibility. At the same time, the
Company is attempting to renegotiate presently higher cost long-term nonutility
generation contracts where opportunities arise. The extent to which the
Company may be able to do so, however, or recover associated costs through
rates, is uncertain. Moreover, these efforts have led to disputes before the
PaPUC, as well as to litigation, and may result in claims against the Company
for substantial damages. There can be no assurance as to the outcome of these
matters.
During the normal course of the operation of its business, in addition
to the matters described above, the Company is from time to time involved in
disputes, claims and, in some cases, as defendants in litigation in which
compensatory damages are sought by customers, contractors, vendors and other
suppliers of equipment and services and by employees alleging unlawful
employment practices. It is not expected that the outcome of these matters
will have a material effect on the Company's financial position or results of
operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SYSTEM OF ACCOUNTS
The consolidated financial statements include the accounts of the
Company and its subsidiaries. Certain reclassifications of prior years' data
have been made to conform with current presentation. The Company's accounting
records are maintained in accordance with the Uniform System of Accounts
prescribed by the Federal Energy Regulatory Commission (FERC) and adopted by
the PaPUC.
REVENUES
The Company recognizes electric operating revenues for services rendered
and, beginning in 1991, an estimate of unbilled revenues to record services
provided to the end of the respective accounting period.
DEFERRED ENERGY COSTS
Energy costs are recognized in the period in which the related energy
clause revenues are billed.
F-33
<PAGE>
Pennsylvania Electric Company and Subsidiary Companies
UTILITY PLANT
It is the policy of the Company to record additions to utility plant
(material, labor, overhead and an allowance for funds used during
construction) at cost. The cost of current repairs and minor replacements is
charged to appropriate operating and maintenance expense and clearing accounts
and the cost of renewals is capitalized. The original cost of utility plant
retired or otherwise disposed of is charged to accumulated depreciation.
DEPRECIATION
The Company provides for depreciation at annual rates determined and
revised periodically, on the basis of studies, to be sufficient to depreciate
the original cost of depreciable property over estimated remaining service
lives, which are generally longer than those employed for tax purposes. The
Company used depreciation rates which, on an aggregate composite basis,
resulted in annual rates of 2.74%, 2.86% and 3.08% for the years 1993, 1992
and 1991, respectively.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFUDC)
The Uniform System of Accounts defines AFUDC as "the net cost for the
period of construction of borrowed funds used for construction purposes and a
reasonable rate on other funds when so used." AFUDC is recorded as a charge
to construction work in progress, and the equivalent credits are to interest
charges for the pretax cost of borrowed funds and to other income for the
allowance for other funds. While AFUDC results in an increase in utility
plant and represents current earnings, it is realized in cash through
depreciation or amortization allowances only when the related plant is
recognized in rates. On an aggregate composite basis, the annual rates
utilized were 4.91%, 4.15% and 8.50% for the years 1993, 1992 and 1991,
respectively.
AMORTIZATION POLICIES
Accounting for TMI-2 Investment:
The Company has collected all of its TMI-2 investment attributable to
its retail customers. Because the Company had not been provided revenues for
a return on the unamortized balance of its share of the damaged TMI-2
facility, this investment was carried at its discounted present value. The
related annual accretion, which represents the carrying charges that are
accrued as the asset is written up from its discounted value, is recorded in
Other Income, Net.
Nuclear Fuel:
Nuclear fuel is amortized on a unit of production basis. Rates are
determined and periodically revised to amortize the cost over the useful life.
F-34
<PAGE>
Pennsylvania Electric Company and Subsidiary Companies
The Company has provided for future contributions to the Decontamination
and Decommissioning Fund (part of the Energy Act) for the cleanup of
enrichment plants operated by the federal government. The total liability at
December 31, 1993 amounted to $6 million and is primarily reflected in
Deferred Credits and Other Liabilities - Other. Utilities with nuclear plants
will contribute a total of $150 million annually, based on an assessment
computed on prior enrichment purchases, over a 15 year period up to a total of
$2.3 billion (in 1993 dollars). The Company made its initial payment to this
fund in 1993. The Company has recorded an asset for remaining amounts
recoverable from ratepayers of $7 million at December 31, 1993 in Deferred
Debits and Other Assets - Other.
NUCLEAR OUTAGE MAINTENANCE COSTS
The Company accrues its share of incremental nuclear outage maintenance
costs anticipated to be incurred during scheduled nuclear plant refueling
outages.
NUCLEAR FUEL DISPOSAL FEE
The Company is providing for its share of the estimated future disposal
costs for spent nuclear fuel at TMI-1 in accordance with the Nuclear Waste
Policy Act of 1982. The Company entered into a contract in 1983 with the DOE
for the disposal of spent nuclear fuel. The total liability under this
contract, including interest, at December 31, 1993, all of which relates to
spent nuclear fuel from nuclear generation through April 1983, amounts to
$12 million, and is reflected in Deferred Credits and Other Liabilities-
Other. As the actual liability is in excess of the amount recovered to date
from ratepayers, the Company has reflected such excess of $.5 million at
December 31, 1993 in Deferred Debits and Other Assets-Other. The rates
presently charged to customers provide for the collection of these costs, plus
interest, over a remaining period of four years.
The Company is collecting 1 mill per kilowatt-hour from its customers
for spent nuclear fuel disposal costs resulting from nuclear generation
subsequent to April 1983. These amounts are remitted quarterly to the DOE.
INCOME TAXES
The GPU System files a consolidated federal income tax return and all
participants are jointly and severally liable for the full amount of any tax,
including penalties and interest, which may be assessed against the group.
Each subsidiary is allocated the tax reduction attributable to GPU expenses in
proportion to the average common stock equity investment of GPU in such
subsidiary, during the year. In addition, each subsidiary will receive in
current cash payments the benefit of its own net operating loss carrybacks to
the extent that the other subsidiaries can utilize such net operating loss
carrybacks to offset the tax liability they would otherwise have on a separate
return basis (after taking into account any investment tax credits they could
utilize on a separate return basis). This method of allocation does not allow
any subsidiary to pay more than its separate return liability.
F-35
<PAGE>
Pennsylvania Electric Company and Subsidiary Companies
Deferred income taxes, which result primarily from liberalized
depreciation methods and deferred energy costs, are provided for differences
between book and taxable income. Investment tax credits (ITC) are amortized
over the estimated service lives of the related facilities.
Effective January 1, 1993, the Company implemented Statement of
Financial Accounting Standards No. 109 (FAS 109), "Accounting for Income
Taxes" which requires the use of the liability method of financial accounting
and reporting for income taxes. Under FAS 109, deferred income taxes reflect
the impact of temporary differences between the amount of assets and
liabilities recognized for financial reporting purposes and the amounts
recognized for tax purposes.
STATEMENTS OF CASH FLOWS
For the purpose of the consolidated statements of cash flows, temporary
investments include all unrestricted liquid assets, such as cash deposits and
debt securities, with maturities generally of three months or less.
3. SHORT-TERM BORROWING ARRANGEMENTS
At December 31, 1993, the Company had $102 million of short-term notes
outstanding, of which $37 million was commercial paper and the remainder was
issued under bank lines of credit (credit facilities).
GPU and the Company and its affiliates have $398 million of credit
facilities, which includes a Revolving Credit Agreement (Credit Agreement)
with a consortium of banks that permits total borrowing of $150 million
outstanding at any one time. The credit facilities generally provide for the
payment of a commitment fee on the unborrowed amount of 1/8 of 1% annually.
Borrowings under these credit facilities generally bear interest based on the
prime rate or money market rates. Notes issued under the Credit Agreement
which expires April 1, 1995, are subject to various covenants and acceleration
under certain conditions.
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's long-term debt, as of
December 31, 1993 and 1992 is as follows:
(In Thousands)
Carrying Fair
Amount Value
1993 $524,491 $550,751
1992 582,647 601,810
The fair value of the Company's long-term debt is estimated based on the
quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities.
F-36
<PAGE>
Pennsylvania Electric Company and Subsidiary Companies
5. INCOME TAXES
Effective January 1, 1993, the Company implemented FAS 109 "Accounting
for Income Taxes". In 1993, the cumulative effect on net income of this
accounting change was immaterial. Also in 1993, the federal income tax rate
changed from 34% to 35%, retroactive to January 1, 1993, resulting in an
increase in the deferred tax assets of $2 million and an increase in the
deferred tax liabilities of $16 million. The tax rate change did not have a
material effect on net income as the changes in deferred taxes were
substantially offset by the recording of regulatory assets and liabilities.
The balance sheet effect as of December 31, 1993 of implementing FAS 109
resulted in a regulatory asset for income taxes recoverable through future
rates of $234 million (related to liberalized depreciation), and a regulatory
liability for income taxes refundable through future rates of $39 million
(related to unamortized ITC), substantially due to the recognition of amounts
not previously recorded.
A summary of the components of deferred taxes as of December 31, 1993
follows:
(In Millions)
Deferred Tax Assets Deferred Tax Liabilities
Current: Current:
Unbilled revenue $ 1 Deferred energy $ 7
Noncurrent: Noncurrent:
Unamortized ITC $39 Liberalized
Decommissioning 11 depreciation:
Contribution in aid previously flowed
of construction 3 through $134
Other 12 future revenue
Total $65 requirements 100 $234
Liberalized
depreciation 205
Other 16
Total $455
F-37
<PAGE>
Pennsylvania Electric Company and Subsidiary Companies
The reconciliations from net income to book income subject to tax and
from the federal statutory rate to combined federal and state effective tax
rates are as follows:
(In Millions)
1993 1992 1991
Net income $ 96 $ 99 $106
Income tax expense 69 71 59
Book income subject to tax $165 $170 $165
Federal statutory rate 35% 34% 34%
Effect of difference between tax
and book depreciation for which
deferred taxes were not provided 2 3 4
Amortization of ITC (2) (2) (3)
State tax, net of federal benefit 7 7 6
Other - (1) (5)
Effective income tax rate 42% 41% 36%
Federal and state income tax expense is comprised of the following:
(In Millions)
1993 1992 1991
Provisions for taxes currently payable $ 51 $ 60 $ 59
Deferred income taxes:
Liberalized depreciation 8 7 9
Decommissioning - - (8)
Deferral of energy costs 11 (1) 1
Accretion income - 1 1
Unbilled revenues (1) 2 8
Nuclear outage maintenance costs 1 (1) -
TMI-2 pre-monitored storage costs - 2 (4)
Interest on prior years' taxes - - (4)
Other 3 4 2
Deferred income taxes, net 22 14 5
Amortization of ITC, net (4) (3) (5)
Income tax expense $ 69 $ 71 $ 59
The Internal Revenue Service has completed its examinations of the GPU
System's federal income tax returns through 1986. The GPU System and the
Internal Revenue Service have reached an agreement to settle GPU's claim that
TMI-2 has been retired for tax purposes. When approved by the Joint
Congressional Committee on Taxation, this settlement will provide refunds for
previously paid taxes. GPU estimates that the Company would receive net
refunds totaling $4 million, which would be credited to its customers. The
Company would also be entitled to receive net interest estimated to total
$11 million (before income taxes) through December 31, 1993, which would be
credited to income. The years 1987, 1988 and 1989 are currently under audit.
F-38
<PAGE>
Pennsylvania Electric Company and Subsidiary Companies
6. SUPPLEMENTARY INCOME STATEMENT INFORMATION
Maintenance expense and other taxes charged to operating expenses
consisted of the following:
(In Millions)
1993 1992 1991
Maintenance $81 $70 $66
Other taxes:
State gross receipts $36 $35 $35
Capital stock 9 10 10
Real estate and personal property 8 8 8
Other 9 8 8
Total $62 $61 $61
For the years 1993, 1992, and 1991, the cost to the Company of services
rendered to it by GPUSC amounted to approximately $37 million, $35 million and
$33 million, respectively, of which approximately $25 million, $24 million and
$23 million, respectively, were charged to income. For the years 1993, 1992,
and 1991, the cost to the Company of services rendered to it by GPUN amounted
to approximately $46 million, $40 million and $42 million, respectively, of
which approximately $38 million, $31 million and $34 million, respectively,
were charged to income.
7. EMPLOYEE BENEFITS
Pension Plans:
The Company maintains defined benefit pension plans covering
substantially all employees. The Company's policy is to currently fund net
pension costs within the deduction limits permitted by the Internal Revenue
Code.
A summary of the components of net periodic pension cost follows:
(In Millions)
1993 1992 1991
Service cost-benefits earned during the period $ 8.0 $ 6.9 $ 8.7
Interest cost on projected benefit obligation 29.9 29.5 26.8
Less: Expected return on plan assets (30.4) (28.9) (27.2)
Add: Amortization .1 - -
Net periodic pension cost $ 7.6 $ 7.5 $ 8.3
The actual return on the plans' assets for the years 1993, 1992 and 1991
were gains of $46.1 million, $16.9 million and $61.3 million, respectively.
F-39
<PAGE>
Pennsylvania Electric Company and Subsidiary Companies
The funded status of the plans and related assumptions at December 31,
1993 and 1992 were as follows:
(In Millions)
1993 1992
Accumulated benefit obligation (ABO):
Vested benefits $ 315.8 $ 272.0
Nonvested benefits 40.5 33.6
Total ABO 356.3 305.6
Effect of future compensation levels 63.6 57.8
Projected benefit obligation (PBO) $ 419.9 $ 363.4
PBO $ (419.9) $ (363.4)
Plan assets at fair value 402.9 369.4
PBO (in excess of) less than plan assets (17.0) 6.0
Unrecognized net loss (gain) 10.7 (7.9)
Unrecognized prior service credits (costs) 1.7 (4.2)
Unrecognized net transition obligation 4.0 4.4
Accrued pension liability $ (.6) $ (1.7)
Principal actuarial assumptions(%):
Annual long-term rate of return on plan assets 8.5 8.5
Discount rate 7.5 8.5
Annual increase in compensation levels 5.0 6.0
Changes in assumptions in 1993 primarily due to reducing the discount
rate assumption from 8.5% to 7.5%, resulted in a $38 million change in the PBO
as of December 31, 1993. The assets of the plans are held in a Master Trust
and generally invested in common stocks, fixed income securities and real
estate equity investments. The unrecognized net loss represents actual
experience different from that assumed, which is deferred and not included in
the determination of pension cost until it exceeds certain levels. The
unrecognized prior service credit or cost resulting from retroactive changes
in benefits is being amortized as a charge or credit, respectively, to pension
cost over the average remaining service periods for covered employees. The
unrecognized net transition obligation arising out of the adoption of
Statement of Financial Accounting Standards No. 87 is being amortized as a
charge to pension cost over the average remaining service periods for covered
employees.
Savings Plans:
The Company also maintains savings plans for substantially all employees.
These plans provide for employee contributions up to specified limits. The
Company's savings plans provide for various levels of matching contributions.
The matching contributions for the Company for 1993, 1992 and 1991 were
$3.0 million, $2.8 million and $2.6 million, respectively.
F-40
<PAGE>
Pennsylvania Electric Company and Subsidiary Companies
Postretirement Benefits Other than Pensions:
The Company provides certain retiree health care and life insurance
benefits for substantially all employees who reach retirement age while
working for the Company. Health care benefits are administered by various
organizations. A portion of the costs are borne by the participants. For
1992 and 1991, the annual premium costs associated with providing these
benefits totaled approximately $6.2 million and $5.8 million, respectively.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106 (FAS 106), "Employers' Accounting for
Postretirement Benefits Other Than Pensions." FAS 106 requires that the
estimated cost of these benefits, which are primarily for health care, be
accrued during the employee's active working career. The Company has elected
to amortize the unfunded transition obligation existing at January 1, 1993,
over a period of 20 years.
A summary of the components of the net periodic postretirement benefit
cost for 1993 follows:
(In Millions)
Service cost-benefits attributed to service
during the period $ 3.6
Interest cost on the accumulated postretirement
benefit obligation 12.2
Expected return on plan assets (1.2)
Amortization of transition obligation 6.5
Net periodic postretirement benefit cost 21.1
Less, deferred for future recovery (10.1)
Postretirement benefit cost, net of deferrals $ 11.0
The actual return on the plans' assets for the year 1993 was a gain of
$1.3 million.
The funded status of the plans at December 31, 1993, was as follows:
(In Millions)
Accumulated Postretirement Benefit Obligation:
Retirees $ 83.8
Fully eligible active plan participants 23.0
Other active plan participants 75.7
Total accumulated postretirement
benefit obligation (APBO) $ 182.5
APBO $(182.5)
Plan assets at fair value 18.6
APBO (in excess of) plan assets (163.9)
Less: Unrecognized net loss 25.3
Unrecognized prior service cost 2.9
Unrecognized transition obligation 123.7
Accrued postretirement benefit liability $ (12.0)
Principal actuarial assumptions (%):
Annual long-term rate of return on plan assets 8.5
Discount rate 7.5
F-41
<PAGE>
Pennsylvania Electric Company and Subsidiary Companies
The Company intends to fund amounts for postretirement benefits with an
independent trustee, as deemed appropriate from time to time. The plan assets
include equities and fixed income securities.
The Company has begun to defer the incremental postretirement benefit
costs, charged to expense, associated with the adoption of FAS 106 and in
accordance with Emerging Issues Task Force (EITF) Issue Number 92-12,
"Accounting for OPEB Costs by Rate-Regulated Enterprises", as authorized by
the PaPUC in 1993. A portion of the increase in annual costs recognized under
FAS 106 of $10.1 million is being deferred and should be recoverable through
the ratemaking process. The Consumer Advocate in Pennsylvania is contesting
utility deferral of FAS 106 costs in a proceeding involving another utility.
The outcome of this proceeding may affect the Company's recovery of deferred
FAS 106 costs.
The accumulated postretirement benefits obligation was determined by
application of the terms of the medical and life insurance plans, including
the effects of established maximums on covered costs, together with relevant
actuarial assumptions and health-care cost trend rates of 14% for those not
eligible for Medicare and 11% for those eligible for Medicare for 1994,
decreasing gradually to 7% in 2000 and thereafter. These costs also reflect
the implementation of a cost cap of 6% for individuals who retire after
December 1, 1995. The effect of a 1% annual increase in these assumed cost
trend rates would increase the accumulated postretirement benefit obligation
by approximately $18 million and the aggregate of the service and interest
cost components of net postretirement health-care cost for 1994 by
approximately $2 million.
Postemployment Benefits:
In November 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 112, "Employers' Accounting
for Postemployment Benefits" (FAS 112) which addresses accounting by employers
who provide benefits to former or inactive employees after employment but
before retirement, which is effective for fiscal years beginning after
December 15, 1993. The Company adopted the accrual method required under FAS
112 during 1993, which did not have a material impact on the financial
position or results of operations of the Company.
F-42
<PAGE>
Pennsylvania Electric Company and Subsidiary Companies
8. JOINTLY OWNED STATIONS
Each participant in a jointly owned station finances its portion of the
investment and charges its share of operating expenses to the appropriate
expense accounts. The Company participated with affiliated and nonaffiliated
utilities in the following jointly owned stations at December 31, 1993:
Balance (In Millions)
% Accumulated
Station Ownership Investment Depreciation
Homer City 50 $428.9 $151.3
Three Mile Island Unit 1 25 206.2 64.4
Seneca 20 16.5 4.4
9. LEASES
The Company's capital leases consist primarily of leases for nuclear
fuel. Nuclear fuel capital leases at December 31, 1993 and 1992 totaled
$21 million and $17 million, respectively (net of amortization of $20 million
and $15 million, respectively). The recording of capital leases has no effect
on net income because all leases, for ratemaking purposes, are considered
operating leases.
The Company and its affiliates have nuclear fuel lease agreements with
nonaffiliated fuel trusts. An aggregate of up to $125 million of nuclear fuel
costs may be outstanding at any one time for TMI-1. It is contemplated that
when consumed, portions of the presently leased material will be replaced by
additional leased material. The Company and its affiliates are responsible
for the disposal costs of nuclear fuel leased under these agreements. These
nuclear fuel leases are renewable annually. Lease expense consists of an
amount designed to amortize the cost of the nuclear fuel as consumed plus
interest costs. For the years ended December 31, 1993, 1992 and 1991 the
Company's share of these amounts were $7 million, $8 million and $8 million,
respectively. The leases may be terminated at any time with at least five
months notice by either party prior to the end of the current period. Subject
to certain conditions of termination, the Company and its affiliates are
required to purchase all nuclear fuel then under lease at a price that will
allow the lessor to recover its net investment.
F-43
<PAGE>
<TABLE>
PENNSYLVANIA ELECTRIC COMPANY
AND SUBSIDIARY COMPANIES
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
(In Thousands)
<CAPTION>
For the Years Ended
December 31,
1991 1992 (a) 1993
Column A Column F
Classification Balance at end of period
<S> <C> <C> <C>
Utility Plant (at original cost):
Electric
Plant in service:
Intangibles $ 343 $ 343 $ 343
Production:
Steam 683 514 712 356 747 758
Nuclear 186 156 194 447 203 345
Hydro 32 163 34 789 35 848
Combustion 16 984 17 276 17 669
Total Production 918 817 958 868 1 004 620
Transmission 242 654 244 497 248 823
Distribution 889 023 938 449 994 736
General 155 851 166 634 180 003
Construction work in progress 58 762 54 256 81 420
Held for future use 2 804 2 776 2 624
2 268 254 2 365 823 2 512 569
Nuclear fuel 107 4 1 946
Total electric 2 268 361 2 365 827 2 514 515
Water
Plant in service:
Intangible 1 1 1
Collection 819 819 819
Purification 10 10 10
Transmission 202 202 202
Total water 1 032 1 032 1 032
Property under capital leases, net 33 420 26 910 31 078
Total utility plant 2 302 813 2 393 769 2 546 625
Other physical property (at original cost) 1 301 1 701 2 593
Total property, plant and equipment $2 304 114 $2 395 470 $2 549 218
See footnotes on the following page.
F-44
<PAGE>
PENNSYLVANIA ELECTRIC COMPANY
AND SUBSIDIARY COMPANIES
SCHEDULE V - PROPERTY, PLANT & EQUIPMENT
(In Thousands)
<FN>
The information required by Columns B, C, D, and E has been omitted since
neither the total additions nor the total deductions during the period amount
to more than 10% of the closing balance of total property, plant and equipment.
1991 1992 1993
Total Total Total
Column C, Additions, at Cost... $102,026 $113,868 $167,514
Column D, Retirements.......... 86,179 16,266 15,049
Column E, Other Changes........ 5,369 (b) (6,246) (c) 1,283 (d)
See Note 2 to Consolidated Financial Statements for information concerning the
cost of property, plant and equipment and the depreciation and amortization
methods used during the three years ended December 31, 1993. Also, see Note
to Consolidated Financial Statements for information concerning the capital
lease agreements.
(a) Reflects a reclassification of $9,525 of nuclear fuel costs associated
with decontamination of the government's enrichment plants to Deferred
Debits and Other Assets-Other to conform with current presentation.
(b) Includes an increase in property under capital leases of $5,069, which
is primarily comprised of additions and amortization of $13,959, and
$8,558, respectively.
(c) Includes a reduction in property under capital leases of $6,510, which
is primarily comprised of additions and amortization of $3,098, and
$9,226, respectively.
(d) Includes an increase in property under capital leases of $4,168, which
is primarily comprised of additions and amortization of $13,317, and
$8,183, respectively, and a decrease of $4,250 due to the write-off of
prior years' expenditures related to the Duquesne Project.
F-45
<PAGE>
PENNSYLVANIA ELECTRIC COMPANY
AND SUBSIDIARY COMPANIES
SCHEDULE VI - ACCUMULATED DEPRECIATION AND AMORTIZATION
OF PROPERTY, PLANT AND EQUIPMENT
For the Year Ended December 31, 1991
(In Thousands)
<CAPTION>
Column A Column B Column C Column D Column E Column F
Balance Additions Other Balance
at Charged to Changes at
Beginning Costs and Add End
Description of Period Expenses Retirements (Deduct) of Period
<S> <C> <C> <C> <C> <C>
ACCUMULATED DEPRECIATION
AND AMORTIZATION OF
UTILITY PLANT:
Electric $806 425 $66 668 $86 173 $896 $787 816
Water 166 12 - - 178
Total $806 591 $66 680 (a) $86 173 $896 (b) $787 994
ACCUMULATED DEPRECIATION
OF OTHER PHYSICAL PROPERTY $ 25 $ 1 $ - $ - $ 26
<FN>
(a) Reconciliation to depreciation and amortization expense in consolidated
statements of income:
Total additions charged to depreciation $ 66 680
Decommissioning expense 20 278
Amortization of property losses 12 650
Cost of removal (less salvage) charged
directly to depreciation expense 8 386
Amortization on Piney Dam restoration 79
Amortization of Design Basis Document 19
Total $108 092
(b) Other Changes:
Decommissioning Trust 345
Charged to clearing accounts 551
Total $ 896
F-46
<PAGE>
PENNSYLVANIA ELECTRIC COMPANY
AND SUBSIDIARY COMPANIES
SCHEDULE VI - ACCUMULATED DEPRECIATION AND AMORTIZATION
OF PROPERTY, PLANT AND EQUIPMENT
For the Year Ended December 31, 1992
(In Thousands)
<CAPTION>
Column A Column B Column C Column D Column E Column F
Balance Additions Other Balance
at Charged to Changes at
Beginning Costs and Add End
Description of Period Expenses Retirements (Deduct) of Period
<S> <C> <C> <C> <C> <C>
ACCUMULATED DEPRECIATION
AND AMORTIZATION OF
UTILITY PLANT:
Electric $787 816 $63 736 $15 874 $ 662 $836 340
Water 178 12 - - 190
Total $787 994 $63 748 (a) $15 874 $ 662 (b)$836 530
ACCUMULATED DEPRECIATION
OF OTHER PHYSICAL PROPERTY $ 26 $ 6 $ - $ 100 (c)$ 132
<FN>
(a) Reconciliation to depreciation and amortization expense in consolidated statements
of income:
Total additions charged to depreciation $ 63 748
Decommissioning expense 143
Amortization of property losses 12 615
Cost of removal (less salvage) charged
directly to depreciation expense 7 619
Amortization on Piney Dam restoration 79
Amortization of Design Basis Document 23
Total $ 84 227
(b) Other Changes:
Decommissioning Trust $ 265
Charged to clearing accounts 497
Transfer of nonutility property (100)
Total $ 662
(c) Other Changes:
Transfer of nonutility property $ 100
F-47
<PAGE>
PENNSYLVANIA ELECTRIC COMPANY
AND SUBSIDIARY COMPANIES
SCHEDULE VI - ACCUMULATED DEPRECIATION AND AMORTIZATION
OF PROPERTY, PLANT AND EQUIPMENT
For the Year Ended December 31, 1993
(In Thousands)
<CAPTION>
Column A Column B Column C Column D Column E Column F
Balance Additions Other Balance
at Charged to Changes at
Beginning Costs and Add End
Description of Period Expenses Retirements (Deduct) of Period
<S> <C> <C> <C> <C> <C>
ACCUMULATED DEPRECIATION
AND AMORTIZATION OF
UTILITY PLANT:
Electric $836 340 $63 816 $14 525 $ 1 448 $887 079
Water 190 12 - - 202
Total $836 530 $63 828 (a) $14 525 $ 1 448 (b)$887 281
ACCUMULATED AMORTIZATION
OF NUCLEAR FUEL $ - $ 34 (c) $ - $ - $ 34
ACCUMULATED DEPRECIATION
OF OTHER PHYSICAL PROPERTY $ 132 $ 8 $ - $ 8 (d)$ 148
<FN>
(a) Reconciliation to depreciation and amortization expense in consolidated statements
of income:
Total additions charged to depreciation $ 63 828
Decommissioning expense 4 463
Amortization of property losses 12 220
Cost of removal (less salvage) charged
directly to depreciation expense 9 915
Amortization on Piney Dam restoration 79
Amortization of Design Basis Document (42)
Total $ 90 463
(b) Other Changes:
Decommissioning Trust $ 1 168
Charged to clearing accounts 525
Sale of nonutility property (237)
Transfer of nonutility property (8)
Total $ 1 448
(c) See Note 2 to Consolidated Financial Statements
(d) Other Changes:
Transfer of nonutility property $ 8
F-48
<PAGE>
PENNSYLVANIA ELECTRIC COMPANY
AND SUBSIDIARY COMPANIES
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
<CAPTION>
Column A Column B Column C Column D Column E
Additions
Balance (1) (2)
at Charged to Charged Balance
Beginning Costs and to Other at End
Description of Period Expenses Accounts Deductions of Period
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1993
Allowance for doubtful
accounts $1 224 $3 234 $1 337 (a) $4 466 (b) $1 329
Allowance for inventory
obsolescence 365 365 (c)
Year ended December 31, 1992
Allowance for doubtful
accounts 1 836 3 018 1 436 (a) 5 066 (b) 1 224
Allowance for inventory
obsolescence 3 726 3 361 (c) 365
Year ended December 31, 1991
Allowance for doubtful
accounts 1 601 3 081 1 101 (a) 3,947 (b) 1 836
Allowance for inventory
obsolescence 6 600 2 874 (c) 3 726
<FN>
(a) Recovery of accounts previously written off.
(b) Accounts receivable written off.
(c) Inventory written off.
F-49
<PAGE>
PENNSYLVANIA ELECTRIC COMPANY
AND SUBSIDIARY COMPANIES
SCHEDULE IX - SHORT-TERM BORROWINGS
(In Thousands)
<CAPTION>
Column A Column B Column C Column D Column E Column F
Maximum Average Weighted
Balance Weighted amount amount average
at end average outstanding outstanding interest
Category of Aggregate of interest during the during the rate during
Short-Term Borrowings(a) Period rate (d) period (b) period (c) the period(d)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1993
Notes payable to banks $ 65,000 3.4% $ 73,200 $ 23,937 3.3%
Commercial paper 37,356 3.4 47,945 24,845 3.3
Year ended December 31, 1992
Notes payable to banks 23,500 3.6 42,700 17,237 4.1
Commercial paper 24,723 3.7 73,710 42,100 3.9
Year ended December 31, 1991
Notes payable to banks 34,600 5.3 34,600 13 765 6.3
Commercial paper 9,984 6.3 33,524 16,616 6.3
<FN>
(a) See Note 5 to Consolidated Financial Statements.
(b) Maximum amount outstanding at any month-end.
(c) Computed by dividing the total of the daily outstanding balances for the year by
the number of days in the year.
(d) Column C is computed by dividing the annualized interest expense on the year-end
balance by the outstanding year-end balance. Column F is computed by dividing
total interest expense for the year by the average daily balance outstanding.
Rate excludes the commitment fees on the Revolving Credit Agreement which were
$107,000, $101,000, and $115,000 for the years 1993, 1992, and 1991,
respectively. Rate also excludes the commitment fees on bank lines of credit,
which were $52,000, $37,000, and $27,000 for the years 1993, 1992, and 1991,
respectively.
F-50
</TABLE>
<PAGE>
Exhibit to be Filed by EDGAR
12 Statements Showing Computation of Ratio of Earnings to
Combined Fixed Charges and Preferred Stock Dividends.
23 Consent of Independent Accountants.
<PAGE>
<TABLE> Exhibit 12
PENNSYLVANIA ELECTRIC COMPANY
AND SUBSIDIARY COMPANIES
STATEMENTS SHOWING COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS BASED ON SEC REGULATION S-K, ITEM 503
(In Thousands)
<CAPTION>
Twelve Months Ended December 31,
1989 1990 1991 1992 1993
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES $816 627 $817 923 $865 552 $896 337 $908 280
OPERATING EXPENSES 613 569 615 852 684 709 678 478 688 587
Interest portion of rentals (A) 5 085 5 412 4 149 3 945 3 406
Net expense 608 484 610 440 680 560 674 533 685 181
OTHER INCOME:
Allowance for funds used during
construction 5 738 5 902 3 396 1 651 2 261
Other income, net 11 024 10 029 6 603 (179) (7 021)
Total other income 16 762 15 931 9 999 1 472 (4 760)
EARNINGS AVAILABLE FOR FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
(excluding taxes based on income) $224 905 $223 414 $194 991 $223 276 $218 339
FIXED CHARGES:
Interest on funded indebtedness $ 41 935 $ 44 370 $ 45 289 $ 42 615 $ 44 714
Other interest 8 738 7 232 6 744 6 415 5 255
Interest portion of rentals (A) 5 085 5 412 4 149 3 945 3 406
Total fixed charges $ 55 758 $ 57 014 $ 56 182 $ 52 975 $ 53 375
RATIO OF EARNINGS TO FIXED CHARGES 4.03 3.92 3.47 4.21 4.09
Preferred stock dividend requirement 8 814 8 814 6 189 5 664 4 987
Ratio of income before provision for
income taxes to net income (B) 161.9% 153.1% 153.6% 170.7% 172.3%
Preferred stock dividend requirement
on a pretax basis 14 268 13 491 9 507 9 671 8 594
Fixed charges, as above 55 758 57 014 56 182 52 975 53 375
Total fixed charges and
preferred stock dividends 70 026 70 505 65 689 62 646 61 969
RATION OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED STOCK DIVIDENDS 3.21 3.17 2.97 3.56 3.52
<FN>
Notes:
(A) The Company has included the equivalent of the interest portion of all rentals charged to
income as fixed charges for this statement and has excluded such components from Operating
Expenses.
(B) Represents income before provision for income taxes divided by income before cumulative
effect of accounting change as follows:
<CAPTION>
Twelve Months Ended December 31,
1989 1990 1991 1992 1993
<S> <C> <C> <C> <C> <C>
Income before provision
for income taxes 169,147 166,400 138,809 170,301 164,964
Income before cumulative effect
of accounting changes 104,488 108,712 90,361 99,744 95,728
<PAGE>
</TABLE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration
Statement of Pennsylvania Electric Company on Form S-3 (File No. 33-49669) of
our report dated February 2, 1994, on our audits of the consolidated financial
statements and financial statement schedules of Pennsylvania Electric Company
and Subsidiary Companies as of December 31, 1993 and 1992, and for each of the
three years in the period ended December 31, 1993, which report is included in
this Annual Report on Form 10-K. Our report on the audits of consolidated
financial statements and financial statement schedules of Pennsylvania
Electric Company and Subsidiary Companies as of December 31, 1993 and 1992,
and for each of the three years in the period ended December 31, 1993 contains
explanatory paragraphs related to certain contingencies which have resulted
from the accident at Unit 2 of the Three Mile Island Nuclear Generating
Station; the adoption of the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards ("SFAS") No. 109
"Accounting for Income Taxes," and the provisions of SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" in 1993; and the
change in the method of accounting for unbilled revenues in 1991.
COOPERS & LYBRAND
2400 Eleven Penn Center
Philadelphia, PA
March 10, 1994
<PAGE>
