SEC File No. 70-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM U-1
APPLICATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 ("Act")
PENNSYLVANIA ELECTRIC COMPANY ("PENELEC")
1001 Broad Street
Johnstown, Pennsylvania 15907
(Name of company filing this statement and address
of principal executive office)
GENERAL PUBLIC UTILITIES CORPORATION ("GPU")
(Name of top registered holding company parent of applicant)
Don W. Myers, Vice President and Douglas E. Davidson, Esq.
Treasurer Berlack, Israels & Liberman
M. A. Nalewako, Secretary 120 West 45th Street
GPU Service Corporation New York, New York 10036
100 Interpace Parkway
Parsippany, New Jersey 07054
William C. Matthews, Esq., Robert C. Gerlach, Esq.
Secretary Ballard Spahr Andrews &
Pennsylvania Electric Company Ingersoll
1001 Broad Street 1735 Market Street
Johnstown, Pennsylvania 15907 Philadelphia, Pennsylvania 19103
(Names and addresses of agents for service)
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ITEM 1. DESCRIPTION OF PROPOSED TRANSACTIONS.
A. Penelec proposes to organize a special purpose
subsidiary ("Penelec Capital") as either a limited liability
company under the Delaware Limited Liability Company Act (the
"LLC Act") or a limited partnership under the Delaware Revised
Uniform Limited Partnership Act. In the event that Penelec
organizes Penelec Capital as a limited liability company, Penelec
may also organize a second special purpose wholly-owned
subsidiary under the Delaware General Corporation Law
("Investment Sub") for the sole purpose of acquiring and holding
a second class of Penelec Capital common stock so as to comply
with the requirement under the LLC Act that a limited liability
company have at least two members. Penelec Capital will then
issue and sell from time to time in one or more series through
June 30, 1996 up to $125 million aggregate stated value of
Monthly Income Preferred Stock, $25 per share stated value
("MIPS").
B. Penelec and Investment Sub will acquire all of the
common stock or, alternatively, Penelec will acquire all of the
general partnership interests, as the case may be, of Penelec
Capital for up to $35 million if Penelec Capital is a limited
liability company, or up to $2 million if Penelec Capital is a
limited partnership (the aggregate of such investment being
herein referred to in either case as the "Equity Contribution").
Penelec will enter into a loan agreement with Penelec Capital
under which Penelec Capital will loan to Penelec (individually, a
"Loan" and collectively, the "Loans") both the Equity
Contribution and the proceeds from the sale of the MIPS from time
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to time, and Penelec will issue to Penelec Capital its unsecured
promissory notes (individually, a "Note" and collectively, the
"Notes") evidencing such borrowings.
C. Penelec will also unconditionally guarantee
(individually, a "Guaranty" and collectively, the "Guaranties")
(i) payment of dividends or distributions on the MIPS, if and to
the extent Penelec Capital has declared dividends or
distributions out of funds legally available therefor, and (ii)
payments to the MIPS holders of amounts due upon liquidation of
Penelec Capital or redemption of the MIPS.
D. Each Note will have an initial term of up to 30
years, and may be extended by Penelec for up to an additional 20
years, subject to certain specified conditions. Prior to
maturity, Penelec will pay only interest on the Notes at a rate
equal to the dividend rate on the related series of MIPS. Such
interest payments will constitute Penelec Capital's only income
and will be used by it to pay monthly dividends or distributions
on the MIPS and dividends or distributions on the common stock or
the general partnership interests of Penelec Capital. Dividend
payments or distributions on the MIPS will be made monthly, will
be cumulative and must be made to the extent that Penelec Capital
has legally available funds and cash sufficient for such
purposes. However, Penelec will have the right to defer payment
of interest on its Notes for up to five years, provided that if
dividends or distributions on the MIPS are not paid for eighteen
consecutive months, then the MIPS holders will have the right to
appoint a trustee to enforce Penelec Capital's other creditor
rights under the Notes and Guaranties. Penelec Capital will have
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the parallel right to defer dividend payments or distributions on
the related series of MIPS for up to five years. The dividend or
distribution rates, payment dates, redemption and other similar
provisions of each MIPS series will be identical to the interest
rates, payment dates, redemption and other provisions of the Note
issued by Penelec with respect thereto.
E. Each Note and related Guaranty will be subordinate
to all other existing and future indebtedness for borrowed money
of Penelec and will have no cross-default provisions with respect
to other Penelec indebtedness -- i.e., a default under any other
outstanding Penelec indebtedness will not result in a default
under the Note or the Guaranty. However, Penelec may not declare
and pay dividends on its outstanding Cumulative Preferred or
Common Stock unless all payments then due under the Notes and
Guaranties (without giving effect to Penelec's deferral rights
discussed above) have been made.
F. It is expected that Penelec's interest payments on
the Notes will be deductible for income tax purposes and that
Penelec Capital will be treated as a partnership for federal
income tax purposes. Consequently, MIPS holders and Penelec (and
Investment Sub) will be deemed to have received partnership
distributions in respect of their dividends or distributions from
Penelec Capital and will not be entitled to any "dividend
received deduction" under the Internal Revenue Code. The MIPS
will, however, be redeemable at the option of Penelec Capital
(with the consent of Penelec) at a price equal to their stated
value plus any accrued and unpaid dividends, (i) at any time
after five years from their date of issuance, or (ii) in the
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event that (x) Penelec Capital is required to withhold taxes on
dividend or other payments, or (y) it is determined that the
interest payments by Penelec on the Notes are not deductible by
Penelec for income tax purposes, or (z) Penelec Capital becomes
subject to regulation as an "investment company" under the
Investment Company Act of 1940. Penelec may also have the right
at any time to exchange the MIPS for junior subordinated debt of
Penelec.
G. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of Penelec Capital, the
holders of the MIPS will be entitled to receive, out of the
assets of Penelec Capital available for distribution to its
shareholders or partners, before any distribution of assets to
the common stockholders or general partner of Penelec Capital, an
amount equal to the stated value of the MIPS plus any accrued and
unpaid dividends.
H. The constituent instruments of Penelec Capital,
including its Limited Liability Company Agreement or Limited
Partnership Agreement, as the case may be, will provide, among
other things, that Penelec Capital's activities will be limited
to the issuance and sale of MIPS from time to time and the
lending to Penelec of (i) the proceeds thereof, and (ii) the
Equity Contribution. Accordingly, it is not proposed that
Penelec Capital's constituent instruments include any interest or
dividend coverage or capitalization ratio restrictions on its
ability to issue and sell MIPS as each such issuance will be
supported by a Penelec Note and Guaranty, and such restrictions
would therefore not be relevant or necessary for Penelec Capital
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to maintain an appropriate capital structure. Moreover, the
issuance of Notes by Penelec will be subject to the restriction
in Article 6th, Section 8(D) of Penelec's Restated Articles of
Incorporation which limits, without the consent of the holders of
a majority of Penelec's outstanding Cumulative Preferred Stock,
the amount of unsecured indebtedness which Penelec may have
outstanding at any one time to 20% of the aggregate of the total
outstanding principal amount of all bonds and other securities
representing secured indebtedness issued or assumed by Penelec
plus Penelec's capital stock, premiums thereon, and surplus of
Penelec as stated on its books of account.
Penelec Capital's constituent instruments will
further state that its common stock or general partnership
interests are not transferrable, that its business and affairs
will be managed and controlled by Penelec as its common
stockholder (or general partner, as the case may be), without a
separate board of directors, as permitted by Section 18-402 of
the Delaware Limited Liability Company Act, and that Penelec will
pay all expenses of Penelec Capital.
I. Penelec believes that the proposed MIPS program
will provide substantial benefits over traditional perpetual
preferred stock issuances by Penelec. While Penelec expects that
the MIPS will carry a somewhat higher "dividend" rate than a
perpetual preferred issue, the expected tax deductibility of
interest payments on the Notes will afford Penelec with increased
cash flow and net income, and then ultimately lower customer
rates. At the same time, Penelec understands that the financial
markets will view the financing Penelec obtains through the MIPS
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program as having essentially the same equity characteristics as
would be the case if Penelec were to issue traditional perpetual
preferred stock. Penelec also understands that the rating
agencies will view the financing Penelec obtains through the MIPS
program as having equity characteristics somewhere between
sinking fund preferred stock and traditional perpetual preferred
stock. Indeed, based on an assumed dividend rate of about 7.50%
for a Penelec perpetual preferred issue and an assumed 8.00%
dividend rate for the MIPS, Penelec believes that, over the 30
year life of a $125 million MIPS issue, it could achieve
approximately $44 million of savings, on a net present value
basis. The MIPS will be carried in the capitalization section of
Penelec's balance sheet. The Notes, as inter-company
obligations, will not appear on Penelec's balance sheet.
J. Rule 54 under the Act provides, among other
things, that in determining whether to approve transactions by a
subsidiary of a registered holding company, other than with
respect to exempt wholesale generators ("EWG") or foreign utility
companies ("FUCO"), the Commission shall not consider the effect
of the capitalization or earnings of any subsidiary which is an
EWG or a FUCO upon the registered holding company system if Rules
53(a), (b) and (c) under the Act are satisfied. As demonstrated
below, each of the conditions set forth in Rules 53(a)(1) through
(a)(4) have been met, and none of the conditions described in
Rules 53 (b)(1) through (b)(3) exist.
1. The GPU System's average consolidated
retained earnings as reported for its four most recent quarterly
periods on GPU's Annual Report on Form 10-K for the year ended
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December 31, 1993 and Quarterly Reports on Form 10-Q for the
quarters ended March 31, June 30 and September 30, 1993 as filed
under the Securities Exchange Act of 1934 was approximately $1.81
billion. At the date hereof, GPU had invested, directly or
indirectly, an aggregate of $11.4 million in a foreign EWG (see
HCAR No. 35-25987). Accordingly, GPU's investment in EWGs and
FUCOs equals approximately .6% of such average consolidated
retained earnings.
2. GPU maintains books and records to identify
investments in, and earnings from, any EWG or FUCO in which it
directly or indirectly holds an interest. GPU, through its
indirect wholly-owned subsidiary Energy Initiatives, Inc. ("EI"),
owns less than 50% of the voting securities issued by the
partnership by which it holds its interest in such foreign EWG
(the "Partnership"). Accordingly, GPU through EI will proceed in
good faith, to the extent reasonable under the circumstances, to
cause:
(a) the Partnership to maintain books and
records in accordance with United States generally accepted
accounting principles ("GAAP");
(b) the financial statements of the
Partnership to be prepared according to GAAP; and
(c) access by the Commission to such books
and records and financial statements (or copies thereof) in
English as the Commission may request and, in any event,
will provide the Commission on request copies of such
materials as are made available to GPU and EI.
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If and to the extent that the Partnership books,
records or financial statements are not maintained in accordance
with GAAP, GPU and EI will, upon request of the Commission,
describe and quantify each material variation therefrom as and to
the extent required by subparagraphs (2)(iii)(A) and (2)(iii)(B)
of Rule 53.
3. None of the GPU System's domestic public
utility subsidiary employees are, at the date hereof, rendering
any services, directly or indirectly, to any EWG or FUCO in which
GPU directly or indirectly holds an interest.
4. Copies of this Application are being provided
to the Pennsylvania Public Utility Commission ("PaPUC"), the only
federal, state or local regulatory agency having jurisdiction
over the retail rates of Penelec. In addition, GPU will submit
to the PaPUC copies of any Rule 24 certificates required
hereunder, as well as a copy of Item 9 of GPU's Form U5S and
Exhibits H and I of Item 10 thereof (commencing with the Form U5S
to be filed for 1994, the year in which EI acquired its interest
in the Partnership).
5. None of the provisions of paragraph (b) of
Rule 53 render paragraph (a) of that Rule unavailable for the
proposed transactions.
(a) Neither GPU nor any subsidiary of GPU is
the subject of any pending bankruptcy or similar proceeding.
(b) GPU's average consolidated retained
earnings for the four most recent quarterly periods
(approximately $1.81 billion) represented an increase of
approximately $100 million in the average consolidated
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retained earnings for the previous four quarterly periods
(approximately $1.71 billion).
(c) GPU incurred no losses from direct or
indirect investments in EWGs and FUCOs in 1993.
K. Penelec expects to apply the net proceeds of the
Loans to the repayment of outstanding short-term debt, for
construction purposes, and for other general corporate purposes,
including the redemption of outstanding senior securities
pursuant to the optional redemption provisions thereof. Penelec
represents that it will not so redeem such outstanding securities
unless the estimated present value savings derived from the
difference between interest or dividend payments on a new issue
of comparable securities and those securities refunded is on an
after-tax basis greater than the estimated present value of all
redemption, tendering and issuing costs, assuming an appropriate
discount rate. Such discount rate will be based on meeting
Penelec's long-term capital structure goals, with appropriate
adjustments for income taxes.
ITEM 2. FEES, COMMISSIONS AND EXPENSES.
The estimated fees, commissions and expenses to be
incurred in connection herewith will be filed by amendment.
ITEM 3. APPLICABLE STATUTORY PROVISIONS.
A. The acquisition by Penelec of shares of the
capital stock or partnership interests of Penelec Capital and
shares of the capital stock of Investment Sub, the acquisition by
Investment Sub of shares of the capital stock of Penelec Capital
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and the acquisition by Penelec Capital of the Notes and
Guaranties are subject to Sections 9(a) and 10 of the Act and
Rule 45 thereunder.
B. The issuance and sale of the MIPS by Penelec
Capital are subject to Sections 6(a) and 7 of the Act and Rule 50
thereunder.
It is requested that the proposed issuance and
sale of the MIPS by Penelec Capital be exempted, pursuant to the
provisions of paragraph (a)(5) of Rule 50 under the Act, from the
competitive bidding requirements of Rule 50. Penelec Capital
intends to issue and sell the MIPS through a group of
underwriters and/or selling agents in one or more negotiated
transactions. The MIPS are a specialized and relatively new type
of security and competitive bidding would be impractical as MIPS
must be sold through investment banking firms having experience
with the security in order to successfully market the MIPS.
Under these circumstances, it is believed that compliance with
the competitive bidding requirements of Rule 50 with respect to
the proposed issuance and sale of the MIPS would not be in the
public interest or necessary for the protection of investors or
consumers.
Accordingly, Penelec requests that the Commission
in its public notice regarding the proposed transactions
authorize Penelec to begin negotiations with prospective
underwriters and/or selling agents with respect to the sale of
the MIPS.
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C. Penelec believes that the issuance of its Notes
and Guaranties to Penelec Capital will be exempt from Sections
6(a) and 7 of the Act by virtue of Rule 45(b)(1) thereunder.
ITEM 4. REGULATORY APPROVALS.
A. The issuance of the Notes and Guaranties by
Penelec to Penelec Capital will require the approval of the PaPUC
under the Pennsylvania Public Utility Code ("Code") and Penelec
will file a Securities Certificate with the PaPUC seeking such
approval. In addition, the acquisition by Penelec of the
securities of the special purpose subsidiaries referred to herein
may require approval of the PaPUC under the Code and, if
necessary, Penelec will seek such approval from the PaPUC. It is
anticipated that, if requested, the PaPUC will expressly approve
such transactions.
B. No other state commission has jurisdiction with
respect to the subject transactions and, assuming that your
Commission authorizes and approves all aspects of the subject
transactions (including the accounting therefor), no other
federal commission has jurisdiction with respect thereto.
Penelec believes that Penelec Capital will be exempt from
regulation as an investment company under the Investment Company
Act of 1940, as amended, pursuant to the "finance company"
exemption afforded by Rule 3a-5 under that act.
ITEM 5. PROCEDURE.
It is requested that the Commission issue an order with
respect to the transactions proposed herein at the earliest
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practicable date, but in any event not later than May 20, 1994.
It is further requested that (i) there not be a recommended
decision by an Administrative Law Judge or other responsible
officer of the Commission, (ii) the Office of Public Utility
Regulation be permitted to assist in the preparation of the
Commission's decision, and (iii) there be no waiting period
between the issuance of the Commission's order and the date on
which it is to become effective.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS.
(a) Exhibits:
A-1 Form of Certificate of Formation of
Penelec Capital -- to be filed by
amendment.
A-2 Form of Limited Liability Company
Agreement of Penelec Capital -- to be
filed by amendment.
A-3 Form of Common Stock Certificate of
Penelec Capital -- to be filed by
amendment.
A-4 Form of Preferred Stock Certificate of
Penelec Capital -- to be filed by
amendment.
A-5 Form of Limited Partnership Agreement of
Penelec Capital -- to be filed by
amendment.
A-6 Form of preferred limited partnership
units -- incorporated by reference to
Exhibit A-5.
A-7 Form of Indenture for Penelec Junior
Subordinated Debt -- to be filed by
amendment.
A-8 Form of Penelec Junior Subordinated Debt
instrument -- incorporated by reference
to Exhibit A-7.
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B-1 Form of Loan Agreement -- to be filed by
amendment.
B-2 Form of Note to be issued by Penelec to
Penelec Capital -- incorporated by
reference to Exhibit B-1.
B-3 Form of Guaranty -- to be filed by
amendment.
B-4 Form of Underwriting Agreement -- to be
filed by amendment.
C Registration Statement on Form S-3 under
the Securities Act of 1933 relating to
the various securities which are the
subject hereof and all amendments and
exhibits thereto -- Incorporated by
reference to the SEC Registration No. to
be assigned to such registration
statement.
D-1 Copy of Securities Certificate filed by
Penelec with the PaPUC -- to be filed by
amendment.
D-2 Copy of PaPUC Order registering
Penelec's Securities Certificate -- to
be filed by amendment.
E Not applicable.
F-1 Opinion of Berlack, Israels & Liberman-
-to be filed by amendment.
F-2 Opinion of Ballard Spahr Andrews &
Ingersoll -- to be filed by amendment.
G Proposed form of public notice.
H Capitalization and Capitalization
Ratios.
(b) Financial Statements:
1-A Penelec Consolidated Balance Sheets,
actual and pro forma, as at December 31,
1993, and Consolidated Statements of
Income, actual and pro forma, and
Statement of Retained Earnings, for the
year ended December 31, 1993; pro forma
journal entries.
1-B GPU Consolidated Balance Sheets, actual
and pro forma, as at December 31, 1993,
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and Consolidated Statements of Income,
actual and pro forma, and Statement of
Retained Earnings, for the year ended
December 31, 1993; pro forma journal
entries.
2 Reference is made to Financial
Statements included in 1 above.
3 None.
4 None, as except as set forth in the
Notes to Financial Statements.
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS.
The proposed transactions relate to a means of
financing Penelec's business. Consequently, the issuance of an
order by your Commission with respect to the subject transactions
is not a major Federal action significantly affecting the quality
of the human environment.
No Federal agency has prepared or is preparing an
environmental impact statement with respect to the subject
transactions. Reference is made to Item 4 hereof regarding
regulatory approvals with respect to the proposed transactions.
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SIGNATURE
PURSUANT TO THE REQUIREMENTS OF THE PUBLIC UTILITY
HOLDING COMPANY ACT OF 1935, THE UNDERSIGNED COMPANY HAS DULY
CAUSED THIS STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
PENNSYLVANIA ELECTRIC COMPANY
By:
Don W. Myers, Vice President and
Treasurer
Date: March 30, 1994
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EXHIBITS AND FINANCIAL STATEMENTS TO BE FILED BY EDGAR
Exhibits:
G Proposed form of public notice.
H Capitalization and Capitalization
Ratios.
Financial Statements:
1-A Penelec Consolidated Balance Sheets,
actual and pro forma, as at December 31,
1993, and Consolidated Statements of
Income, actual and pro forma, and
Statement of Retained Earnings, for the
year ended December 31, 1993; pro forma
journal entries.
1-B GPU Consolidated Balance Sheets, actual
and pro forma, as at December 31, 1993,
and Consolidated Statements of Income,
actual and pro forma, and Statement of
Retained Earnings, for the year ended
December 31, 1993; pro forma journal
entries.
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EXHIBIT G
SECURITIES AND EXCHANGE COMMISSION
(Release No. 35- ; 70- )
PENNSYLVANIA ELECTRIC COMPANY
PENNSYLVANIA ELECTRIC COMPANY, 1001 Broad Street,
Johnstown, Pennsylvania 15907 ("Penelec"), a subsidiary of
GENERAL PUBLIC UTILITIES CORPORATION, 100 Interpace Parkway,
Parsippany, New Jersey 07054, a Pennsylvania corporation and
registered holding company, has filed an Application pursuant to
Sections 6(a), 7, 9(a) and 10 of the Public Utility Holding
Company Act of 1935 (the "Act") and Rules 45 and 50 thereunder.
Penelec proposes to organize a special purpose
subsidiary ("Penelec Capital") as either a limited liability
company under the Delaware Limited Liability Company Act (the
"LLC Act") or a limited partnership under the Delaware Revised
Uniform Limited Partnership Act. In the event that Penelec
organizes Penelec Capital as a limited liability company, Penelec
may also organize a second special purpose wholly-owned
subsidiary under the Delaware General Corporation Law
("Investment Sub") for the sole purpose of acquiring and holding
a second class of Penelec Capital common stock so as to comply
with the requirement under the LLC Act that a limited liability
company have at least two members. Penelec Capital will then
issue and sell from time to time in one or more series through
June 30, 1996 up to $125 million aggregate stated value of
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Monthly Income Preferred Stock, $25 per share stated value
("MIPS").
Penelec and Investment Sub will acquire all of the
common stock or, alternatively, Penelec will acquire all of the
general partnership interests, as the case may be, of Penelec
Capital for up to $35 million if Penelec Capital is a limited
liability company, or up to $2 million if Penelec Capital is a
limited partnership (the aggregate of such investment being
herein referred to in either case as the "Equity Contribution").
Penelec will enter into a loan agreement with Penelec Capital
under which Penelec Capital will loan to Penelec (individually, a
"Loan" and collectively, the "Loans") both the Equity
Contribution and the proceeds from the sale of the MIPS from time
to time, and Penelec will issue to Penelec Capital its unsecured
promissory notes (individually, a "Note" and collectively, the
"Notes") evidencing such borrowings.
Penelec will also unconditionally guarantee
(individually, a "Guaranty" and collectively, the "Guaranties")
(i) payment of dividends or distributions on the MIPS, if and to
the extent Penelec Capital has declared dividends or
distributions out of funds legally available therefor, and (ii)
payments to the MIPS holders of amounts due upon liquidation of
Penelec Capital or redemption of the MIPS.
Each Note will have an initial term of up to 30 years,
and may be extended by Penelec for up to an additional 20 years,
subject to certain specified conditions. Prior to maturity,
Penelec will pay only interest on the Notes at a rate equal to
the dividend rate on the related series of MIPS. Such interest
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payments will constitute Penelec Capital's only income and will
be used by it to pay monthly dividends or distributions on the
MIPS and dividends or distributions on the common stock or the
general partnership interests of Penelec Capital. Dividend
payments or distributions on the MIPS will be made monthly, will
be cumulative and must be made to the extent that Penelec Capital
has legally available funds and cash sufficient for such
purposes. However, Penelec will have the right to defer payment
of interest on its Notes for up to five years, provided that if
dividends or distributions on the MIPS are not paid for eighteen
consecutive months, then the MIPS holders will have the right to
appoint a trustee to enforce Penelec Capital's other creditor
rights under the Notes and Guaranties. Penelec Capital will have
the parallel right to defer dividend payments or distributions on
the related series of MIPS for up to five years. The dividend or
distribution rates, payment dates, redemption and other similar
provisions of each MIPS series will be identical to the interest
rates, payment dates, redemption and other provisions of the Note
issued by Penelec with respect thereto.
Each Note and related Guaranty will be subordinate to
all other existing and future indebtedness for borrowed money of
Penelec and will have no cross-default provisions with respect to
other Penelec indebtedness. However, Penelec may not declare and
pay dividends on its outstanding Cumulative Preferred or Common
Stock unless all payments then due under the Notes and Guaranties
(without giving effect to Penelec's deferral rights discussed
above) have been made.
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The MIPS will be redeemable at the option of Penelec
Capital (with the consent of Penelec) at a price equal to their
stated value plus any accrued and unpaid dividends, (i) at any
time after five years from their date of issuance, or (ii) upon
the occurrence of certain events (y) relating to the tax
treatment of the MIPS and Notes, or (z) subjecting Penelec
Capital to regulation as an "investment company" under the
Investment Company Act of 1940. Penelec may also have the right
at any time to exchange the MIPS for junior subordinated debt of
Penelec.
In the event of any voluntary or involuntary
liquidation, dissolution or winding up of Penelec Capital, the
holders of the MIPS will be entitled to receive, out of the
assets of Penelec Capital available for distribution to its
shareholders or partners, before any distribution of assets to
the common stockholders or general partner of Penelec Capital, an
amount equal to the stated value of the MIPS plus any accrued and
unpaid dividends.
The constituent instruments of Penelec Capital,
including its Limited Liability Company Agreement or Limited
Partnership Agreement, as the case may be, will provide, among
other things, that Penelec Capital's activities will be limited
to the issuance and sale of MIPS from time to time and the
lending to Penelec of (i) the proceeds thereof, and (ii) the
Equity Contribution. The issuance of Notes by Penelec will be
subject to the restrictions on the issuance of unsecured
indebtedness contained in Penelec's Restated Articles of
Incorporation.
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Penelec Capital's constituent instruments will further
state that its common stock or general partnership interests are
not transferrable, that its business and affairs will be managed
and controlled by Penelec as its common stockholder (or general
partner, as the case may be), without a separate board of
directors, as permitted by Section 18-402 of the Delaware Limited
Liability Company Act, and that Penelec will pay all expenses of
Penelec Capital.
Penelec has requested that the proposed issuance and
sale of the MIPS pursuant to negotiated transactions through one
or more underwriters and/or selling agents be exempted from the
competitive bidding requirements of Rule 50.
Penelec has also requested that it be authorized to
begin negotiations with prospective underwriters and/or selling
agents with respect to the sale of the MIPS. It may do so.
Penelec expects to apply the net proceeds of the Loans
to the repayment of outstanding short-term debt, for construction
purposes, and for other general corporate purposes, including the
redemption of outstanding senior securities pursuant to the
optional redemption provisions thereof. Penelec represents that
it will not so redeem such outstanding securities unless the
estimated present value savings derived from the difference
between interest or dividend payments on a new issue of
comparable securities and those securities refunded is on an
after-tax basis greater than the estimated present value of all
redemption, tendering and issuing costs, assuming an appropriate
discount rate. Such discount rate will be based on meeting
5
<PAGE>
Penelec's long-term capital structure goals, with appropriate
adjustments for income taxes.
The Application and any amendments thereto are
available for public inspection through the Commission's Office
of Public Reference. Interested persons wishing to comment or
request a hearing should submit their views in writing by May 17,
1994 to the Secretary, Securities and Exchange Commission,
Washington, D.C. 20549, and serve a copy on the applicant at the
address specified above. Proof of service (by affidavit or, in
case of an attorney at law, by certificate) should be filed with
the request. Any request for a hearing shall identify
specifically the issues of fact or law that are disputed. A
person who so requests will be notified of any hearing, if
ordered, and will receive a copy of any notice or order issued in
this matter. After said date, the Application, as amended or as
it may be further amended, may be granted.
For the Commission, by the Division of Investment
Management, pursuant to delegated authority.
Jonathan G. Katz
Secretary
6
<PAGE>
EXHIBIT 6(a) H
CAPITALIZATION AND CAPITALIZATION RATIOS
(IN THOUSANDS)
The consolidated capitalization of General Public Utilities Corporation
and Pennsylvania Electric Company at December 31, 1993 and pro forma is as
follows:
Actual Pro Forma
Amount % Amount %
GPU Consolidated
Long-term debt $2,453,616 45.7 $2,453,616 44.1
Preferred stock 308,242 5.7 558,242 10.0
Common equity 2,610,373 48.6 2,553,791 45.9
Total $5,372,231 100.0 $5,565,649 100.0
Penelec
Long-term debt $ 594,499 43.8 $ 594,499 39.2
Preferred stock 61,842 4.6 186,842 12.3
Common equity 699,588 51.6 735,361 48.5
Total $1,355,929 100.0 $1,516,702 100.0
<PAGE>
<TABLE>
Financial Statements
Item 6(b) 1-A
Page 1 of 24
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
ACTUAL AND PRO FORMA
AT DECEMBER 31, 1993
(In Thousands)
<CAPTION>
Adjustments
Actual (See pages 4 - 6) Pro Forma
<S> <C> <C> <C>
ASSETS
Utility Plant:
In service, at original cost $2 429 557 - $2 429 557
Less, accumulated depreciation 887 281 - 887 281
Net utility plant in service 1 542 276 - 1 542 276
Construction work in progress 81 420 - 81 420
Other, net 35 614 - 35 614
Net utility plant 1 659 310 - 1 659 310
Current Assets:
Cash and temporary cash investments 1 622 160 589 162 211
Special deposits 2 622 - 2 622
Accounts receivable:
Customers, net 64 913 - 64 913
Other 9 824 - 9 824
Unbilled revenues 28 942 - 28 942
Materials and supplies, at average cost or less:
Construction and maintenance 46 994 - 46 994
Fuel 20 590 - 20 590
Deferred energy costs 17 047 - 17 047
Deferred income taxes 790 - 790
Prepayments 6 630 - 6 630
Total current assets 199 974 160 589 360 563
Deferred Debits and Other Assets:
Three Mile Island Unit 2 deferred costs 64 638 - 64 638
Deferred income taxes 64 577 - 64 577
Income taxes recoverable through future rates 234 026 - 234 026
Decommissioning funds 24 657 - 24 657
Nuclear fuel disposal fee 486 - 486
Other 53 672 4 096 57 768
Total deferred debits and other assets 442 056 4 096 446 152
Total Assets $2 301 340 $164 685 $2 466 025
The accompanying notes are an integral part of the consolidated financial statements.
<PAGE>
Financial Statements
Item 6(b) 1-A
Page 2 of 24
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
ACTUAL AND PRO FORMA
AT DECEMBER 31, 1993
(In Thousands)
Adjustments
Actual (See pages 4 - 6) Pro Forma
LIABILITIES AND CAPITAL
Capitalization:
Common stock $ 105 812 $ - $ 105 812
Capital surplus 265 486 50 000 315 486
Retained earnings 328 290 (14 227) 314 063
Total common stockholder's equity 699 588 35 773 735 361
Cumulative preferred stock 61 842 125 000 186 842
Long-term debt 524 491 - 524 491
Total capitalization 1 285 921 160 773 1 446 694
Current Liabilities:
Debt due within one year 70 008 - 70 008
Notes payable 102 356 15 000 117 356
Obligations under capital leases 23 333 - 23 333
Accounts payable:
Affiliates 6 025 - 6 025
Others 85 254 - 85 254
Taxes accrued 11 978 (11 088) 890
Interest accrued 15 369 - 15 369
Vacations accrued 11 956 - 11 956
Other 13 511 - 13 511
Total current liabilities 339 790 3 912 343 702
Deferred Credits and Other Liabilities:
Deferred income taxes 455 076 - 455 076
Unamortized investment tax credits 51 775 - 51 775
Three Mile Island Unit 2 future costs 79 967 - 79 967
Nuclear fuel disposal fee 12 401 - 12 401
Other 76 410 - 76 410
Total deferred credits and other liabilities 675 629 - 675 629
Total Liabilities and Capital $2 301 340 $164 685 $2 466 025
The accompanying notes are an integral part of the consolidated financial statements.
<PAGE>
Financial Statements
Item 6(b) 1-A
Page 3 of 24
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
ACTUAL AND PRO FORMA
FOR TWELVE MONTHS ENDED DECEMBER 31, 1993
(In Thousands)
<CAPTION>
Adjustments
Actual (See pages 4 - 6) Pro Forma
<S> <C> <C> <C>
Operating Revenues $908 280 $ 1 528 $909 808
Operating Expenses:
Fuel 182 923 - 182 923
Power purchased and interchanged 135 397 - 135 397
Deferral of energy costs, net (23 145) - (23 145)
Other operation and maintenance 241 252 16 702 257 954
Depreciation and amortization 90 463 - 90 463
Taxes, other than income taxes 61 697 - 61 697
Total operating expenses 688 587 16 702 705 289
Operating Income Before Income Taxes 219 693 (15 174) 204 519
Income taxes 72 656 (11 088) 61 568
Operating Income 147 037 ( 4 086) 142 951
Other Income and Deductions:
Allowance for other funds used during
construction 869 - 869
Other income, net (7 021) - (7 021)
Income taxes 3 420 - 3 420
Total other income and deductions (2 732) - (2 732)
Income Before Interest Charges and
Preferred Dividends of Subsidiary 144 305 ( 4 086) 140 219
Interest Charges and Preferred Dividends
of Subsidiary:
Interest on long-term debt 44 714 - 44 714
Other interest 5 255 141 5 396
Allowance for borrowed funds used
during construction (1 392) - (1 392)
Preferred stock dividends of subsidiary - 10 000 10 000
Total interest charges and preferred
dividends of subsidiary 48 577 10 141 58 718
Net Income 95 728 (14 227) 81 501
Preferred Stock Dividends 4 987 - 4 987
Earnings Available for Common Stock $ 90 741 $(14 227) $ 76 514
Retained Earnings:
Balance, beginning of period $278 482 $ - $278 482
Add, net income 95 728 (14 227) 81 501
Deduct, cash dividends on cumulative
preferred stock 4 987 - 4 987
Deduct, cash dividend on common stock 40 000 - 40 000
Deduct, other adjustments 933 - 933
Balance, end of period $328 290 $(14 227) $314 063
The accompanying notes are an integral part of the consolidated financial statements.
<PAGE>
Financial Statements
Item 6(b) 1-A
Page 4 of 24
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
PRO FORMA ADJUSTMENTS
AT DECEMBER 31, 1993
(IN THOUSANDS)
(1)
<S> <C> <C>
Cash and temporary cash investments $125 000
Preferred stock $125 000
To reflect the proposed issuance of
$25 per share stated value of monthly
income preferred shares from time to
time through June 30, 1996 by Penelec
Capital. The preferred shares plus
dividend payments are to be unconditionally
guaranteed by GPU.
(2)
Other deferred debits $ 4 237
Cash and temporary cash investments $ 4 237
To reflect the underwriters compensation
and offering expenses paid in accordance with
the Underwriting Agreements for Penelec Capital.
(3)
Other interest $ 141
Other deferred debits $ 141
To reflect the annual amortization of the
deferred underwriters compensation and offering
expenses being amortized over the 30 year loan
period for the loans by Penelec Capital to Penelec.
(4)
Other operation and maintenance $ 125
Cash and temporary cash investments $ 125
To reflect the annual expenses for the
distribution of IRS Form K-1 to preferred
stockholders.
<PAGE>
Financial Statements
Item 6(b) 1-A
Page 5 of 24
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
PRO FORMA ADJUSTMENTS
AT DECEMBER 31, 1993
(IN THOUSANDS)
(5)
Preferred stock dividends of subsidiary $ 10 000
Cash and temporary cash investments $ 10 000
To reflect the annual dividends paid on the
monthly income preferred shares of Penelec Capital
(8%).
(6)
Cash and temporary cash investments $ 50 000
Capital surplus $ 50 000
To record the cash capital contributions
to be made, from time to time during the period,
beginning with the effectiveness of the
authorization sought and ending December 31,
1996 in amounts up to an aggregate of
$50 million. (SEC File No. 70-7933)
(7)
Other operation and maintenance $ 15 000
Notes payable to banks $ 15 000
To reflect an increase in the Company's
operation and maintenance expense for the
maximum amount of costs of potential
non-performance under Letters of
Credit (The requested authority of the
U-1 filing was for a maximum amount
of $20 million in the aggregate for GPU not
to exceed $15 million per Penelec or Met-Ed.
For the purpose of reflecting pro forma
adjustments, the maximum exposure for both
Penelec and Met-Ed has been reflected.)
(SEC File No. 70-8141)
<PAGE>
Financial Statements
Item 6(b) 1-A
Page 6 of 24
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
PRO FORMA ADJUSTMENTS
AT DECEMBER 31, 1993
(IN THOUSANDS)
(8)
Other operation and maintenance $ 1 500
Cash and temporary cash investments $ 1 500
To reflect the Letters of Credit
fees for up to $15 million at 1% annually
of face value through December 31, 2003.
(SEC File No. 70-8141)
(9)
Cash and temporary cash investments $ 1 528
Operating revenues $ 1 528
To reflect the Company's 38.2% share
of the anticipated annual revenues and cash
derived from the leasing of excess fiber
optic system capacity to nonaffiliates.
(SEC File No. 70-7850)
(10)
Other operation and maintenance $ 77
Cash and temporary cash investments $ 77
To reflect the Company's 38.2% share
of the anticipated annual administrative
costs associated with entering into the
leases of excess fiber optic system
capacity to nonaffiliates.
(SEC File No. 70-7850)
(11)
Taxes accrued $ 11 088
Income taxes $ 11 088
To reflect the net decrease in the
provision for federal and state income taxes
attributable to (1) issuance of monthly
income preferred stock (2) licensing of
excess fiber optic capacity and (3) Letters
of Credit.
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 7 of 24
GENERAL PUBLIC UTILITIES CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
ACTUAL AND PRO FORMA
AT DECEMBER 31, 1993
(IN THOUSANDS)
<CAPTION>
Adjustments
Actual (See pages 10-14) Pro Forma
<S> <C> <C> <C>
ASSETS
Utility Plant:
In Service, at original cost $8 441 335 $ - $8 441 335
Less, accumulated depreciation 2 929 278 - 2 929 278
Net utility plant in service 5 512 057 - 5 512 057
Construction work in progress 267 381 - 267 381
Other, net 214 178 - 214 178
Net utility plant 5 993 616 - 5 993 616
Current Assets:
Cash and temporary cash investments 25 843 151 662 177 505
Special deposits 11 868 - 11 868
Accounts receivable:
Customers, net 253 186 - 253 186
Other 55 037 - 55 037
Unbilled revenues 113 960 - 113 960
Materials and supplies, at average cost or less:
Construction and maintenance 187 606 - 187 606
Fuel 51 676 - 51 676
Deferred income taxes 34 219 - 34 219
Prepayments 79 490 - 79 490
Total current assets 812 885 151 662 964 547
Deferred Debits and Other Assets:
Three Mile Island Unit 2 deferred costs 339 672 - 339 672
Unamortized property losses 113 566 - 113 566
Deferred income taxes 275 257 - 275 257
Income taxes recoverable through future rates 554 590 - 554 590
Decommissioning funds 219 178 - 219 178
Other 559 943 78 192 638 135
Total deferred debits and other assets 2 062 206 78 192 2 140 398
Total Assets $8 868 707 $ 229 854 $9 098 561
The accompanying notes are an integral part of the consolidated financial statements.
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 8 of 24
GENERAL PUBLIC UTILITIES CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
ACTUAL AND PRO FORMA
AT DECEMBER 31, 1993
(IN THOUSANDS)
Adjustments
Actual (See pages 10-14) Pro Forma
LIABILITIES AND CAPITAL
Capitalization:
Common stock $ 314 458 $ - $ 314 458
Capital surplus 667 683 - 667 683
Retained earnings 1 813 490 (56 582) 1 756 908
Total 2 795 631 (56 582) 2 739 049
Less, reacquired common stock, at cost 185 258 - 185 258
Total common stockholders' equity 2 610 373 (56 582) 2 553 791
Cumulative preferred stock:
With mandatory redemption 150 000 - 150 000
Without mandatory redemption 158 242 250 000 408 242
Long-term debt 2 320 384 - 2 320 384
Total capitalization 5 238 999 193 418 5 432 417
Current Liabilities:
Debt due within one year 133 232 - 133 232
Notes payable 216 056 70 000 286 056
Obligations under capital leases 161 744 - 161 744
Accounts payable 300 181 - 300 181
Taxes accrued 140 132 (36 064) 104 068
Deferred energy credits 20 787 - 20 787
Interest accrued 73 368 2 500 75 868
Other 174 609 - 174 609
Total current liabilities 1 220 109 36 436 1 256 545
Deferred Credits and Other Liabilities:
Deferred income taxes 1 389 241 - 1 389 241
Unamortized investment tax credits 170 108 - 170 108
Three Mile Island Unit 2 future costs 319 867 - 319 867
Other 530 383 - 530 383
Total deferred credits and other liabilities 2 409 599 - 2 409 599
Total Liabilities and Capital $8 868 707 $ 229 854 $9 098 561
The accompanying notes are an integral part of the consolidated financial statements.
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 9 of 24
GENERAL PUBLIC UTILITIES CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
ACTUAL AND PRO FORMA
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1993
(IN THOUSANDS)
<CAPTION>
Adjustments
Actual (See pages 10-14) Pro Forma
<S> <C> <C> <C>
Operating Revenues $3 596 090 $ 4 000 $3 600 090
Operating Expenses:
Fuel 363 643 - 363 643
Power purchased and interchanged, net 897 185 - 897 185
Deferral of energy costs, net (6 598) - (6 598)
Other operation and maintenance 909 786 48 550 958 336
Depreciation and amortization 359 898 - 359 898
Taxes, other than income taxes 344 221 - 344 221
Total operating expenses 2 868 135 48 550 2 916 685
Operating Income Before Income Taxes 727 955 (44 550) 683 405
Income taxes 200 179 (26 439) 173 740
Operating income 527 776 (18 111) 509 665
Other Income and Deductions:
Allowance for other funds used during
construction 4 831 - 4 831
Other income, net (7 579) (27 500) (35 079)
Income taxes 2 756 9 625 12 381
Total other income and deductions 8 (17 875) (17 867)
Income Before Interest Charges and
Preferred Dividends 527 784 (35 986) 491 798
Interest Charges and Preferred Dividends:
Interest on long-term debt 187 847 - 187 847
Other interest 20 612 283 20 895
Allowance for borrowed funds used during
construction (5 105) - (5 105)
Preferred stock dividends of subsidiaries 28 757 20 313 49 070
Total interest charges and preferred
dividends 232 111 20 596 252 707
Net Income $ 295 673 $(56 582) $ 239 091
Retained Earnings:
Balance at beginning of period $1 716 196 $ - $1 716 196
Add - Net income 295 673 (56 582) 239 091
Deduct - Cash dividends declared on common stock 189 150 - 189 150
Other adjustments 9 229 - 9 229
Balance at end of period $1 813 490 $(56 582) $1 756 908
The accompanying notes are an integral part of the consolidated financial statements.
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 10 of 24
GENERAL PUBLIC UTILITIES CORPORATION AND SUBSIDIARY COMPANIES
PRO FORMA ADJUSTMENTS
AT DECEMBER 31, 1993
(IN THOUSANDS)
(1)
<S> <C> <C>
Cash and temporary cash investments $250 000
Preferred stock $250 000
To reflect the proposed issuance of
$25 per share stated value of monthly
income preferred shares from time to
time through June 30, 1996 by Met-Ed
Capital ($125 000) and Penelec Capital
($125 000). The preferred shares plus
dividend payments are to be
unconditionally guaranteed by GPU.
(2)
Other deferred debits $ 8 475
Cash and temporary cash investments $ 8 475
To reflect the underwriters' compensation
and offering expenses paid in accordance with
the Underwriting Agreements for Met-Ed Capital
and Penelec Capital.
(3)
Other interest $ 283
Other deferred debits $ 283
To reflect the annual amortization of the
deferred underwriters compensation and offering
expenses being amortized over the 30-year loan
period for the loans by Met-Ed Capital to Met-Ed
and Penelec Capital to Penelec.
(4)
Other operation and maintenance $ 250
Cash and temporary cash investments $ 250
To reflect the annual expenses for the
distribution of IRS Form K-1 to preferred
stockholders.
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 11 of 24
GENERAL PUBLIC UTILITIES CORPORATION AND SUBSIDIARY COMPANIES
PRO FORMA ADJUSTMENTS
AT DECEMBER 31, 1993
(IN THOUSANDS)
(5)
Preferred stock dividends of subsidiaries $ 20 313
Cash and temporary cash investments $ 20 313
To reflect the annual dividends paid on the
monthly income preferred shares of Met-Ed Capital
(8.25%) and Penelec Capital (8%).
(6)
Special deposits - escrow $ 80 000
Cash and temporary cash investments $ 80 000
To reflect the cash deposit of $80 million into
escrow, representing the maximum purchase price under
the "Stock Purchase Agreement". The $80 million will
be financed by GPU primarily from short-term bank
borrowings previously or subsequently authorized by
the Commission (SEC File No. 70-8369).
(7)
Investments (Other deferred debits) $ 80 000
Special deposits - escrow $ 80 000
To reflect the purchase of all the common stock
of Cogen Corp. by December 31, 1995 for a total
cash consideration not to exceed $80 million
(SEC File No. 70-8369).
(8)
Cash and temporary cash investments $ 10 000
Investments (Other deferred debits) $ 10 000
To reflect the sale of a 50% ownership
interest in Project No. 1 for $10 million in
order to comply with the FERC's 50% limitation
on electric utility ownership under PURPA (SEC
File No. 70-8369).
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 12 of 24
GENERAL PUBLIC UTILITIES CORPORATION AND SUBSIDIARY COMPANIES
PRO FORMA ADJUSTMENTS
AT DECEMBER 31, 1993
(IN THOUSANDS)
(9)
Cash and temporary cash investments $ 25 000
Notes payable $ 25 000
To reflect the issuance of promissory notes
from time to time through December 31, 1995 to
one or more commercial banks for an aggregate
principal amount not to exceed $25 million.
The borrowings plus interest payments are to be
unconditionally guaranteed by GPU (SEC File
No. 70-8369).
(10)
Other income, net $ 25 000
Cash and temporary cash investments $ 25 000
To reflect the maximum exposure to GPU under
the "Assumption Agreements" in which GPU and/or
EI could be obligated to make payments under the
Rent Guarantee, the Foundation Guarantee, the
Tax Guarantee, the Catalyst Guarantee and the
Repurchase Guarantee in an aggregate amount not
to exceed $25 million (SEC File No. 70-8369).
(11)
Other income, net $ 2 500
Interest accrued $ 2 500
To reflect the annual interest expense
resulting from the issuance of $25 million of
promissory notes at an assumed interest rate
not to exceed 10% (SEC File No. 70-8369).
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 13 of 24
GENERAL PUBLIC UTILITIES CORPORATION AND SUBSIDIARY COMPANIES
PRO FORMA ADJUSTMENTS
AT DECEMBER 31, 1993
(IN THOUSANDS)
(12)
Other operation and maintenance $ 10 000
Notes payable $ 10 000
To reflect the maximum exposure to GPU
under Guarantee obligations to secure EI
short-term borrowings. The total principal
amount guaranteed by GPU would not exceed
$10 million, and would be in addition to the
amount which GPU is otherwise authorized to
guarantee on behalf of EI (SEC File
No. 70-7727).
(13)
Other operation and maintenance $ 35 000
Notes payable $ 35 000
To reflect an increase in the Company's
operation and maintenance expense for
the maximum amount of costs of potential
non-performance under New Letters of Credit
(SEC File No. 70-8141 and SEC File No. 70-8323).
(14)
Other operation and maintenance $ 3 100
Cash and temporary cash investments $ 3 100
To reflect the (1) New Letters of Credit
fees for up to $20 million at 1% annually of
face value through December 31, 2003
(SEC File No. 70-8141) and (2) New Letters of
Credit fees for up to $15 million at 1% annually
of face value through December 31, 1999 (SEC
File No. 70-8323).
(15)
Cash and temporary cash investments $ 4 000
Operating revenues $ 4 000
To reflect the anticipated annual revenues
and cash derived from the leasing of excess
fiber optic system capacity to nonaffiliates
(SEC File No. 70-7850).
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 14 of 24
GENERAL PUBLIC UTILITIES CORPORATION AND SUBSIDIARY COMPANIES
PRO FORMA ADJUSTMENTS
AT DECEMBER 31, 1993
(IN THOUSANDS)
(16)
Other operation and maintenance $ 200
Cash and temporary cash investments $ 200
To reflect the anticipated annual
administrative costs associated with entering
into the leasing of excess fiber optic system
capacity to nonaffiliates (SEC File No. 70-7850).
(17)
Taxes accrued $ 9 625
Income taxes (Other income) $ 9 625
To reflect the decrease in the provision for
federal income taxes attributable to the (1) increase
in costs resulting from the "Assumption Agreements"
and (2) increase in costs resulting from interest on
new debt issuances (SEC File No. 70-8369).
(18)
Taxes accrued $ 26 439
Income taxes $ 26 439
To reflect the net decrease in the provision for
federal and state income taxes attributable to the
(1) issuance of monthly income preferred stock
(2) potential expense resulting from the fulfilling
of Guarantee obligations to secure EI short-term
borrowings (SEC File No. 70-7727)(3) increase in
operating income before income taxes derived from
the leasing of excess fiber optic system capacity
(SEC File No. 70-7850) and (4) increase in costs
resulting from the New Letters of Credit (SEC File
No. 70-8141 and SEC File No. 70-8323).
Note: The pro forma journal entries do not give effect to a "stipulated damage
amount" of up to $7 million in the event the Closing does not occur by August
15, 1994 due to the failure of a specified condition as set forth in the Stock
Purchase Agreement (SEC File No. 70-8369).
</TABLE>
<PAGE>
Financial Statements
Item 6(b)
Page 15 of 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
General Public Utilities Corporation (the Corporation) is a holding
company registered under the Public Utility Holding Company Act of 1935. The
Corporation does not directly operate any utility properties, but owns all
the outstanding common stock of three electric utilities -- Jersey Central
Power & Light Company (JCP&L), Metropolitan Edison Company (Met-Ed) and
Pennsylvania Electric Company (Penelec) (the Subsidiaries). The Corporation
also owns all the common stock of GPU Service Corporation (GPUSC), a service
company; GPU Nuclear Corporation (GPUN), which operates and maintains the
nuclear units of the Subsidiaries; and General Portfolios Corporation (GPC),
parent of Energy Initiatives, Inc., which develops, owns and operates
nonutility generating facilities. All of these companies considered together
with their subsidiaries are referred to as the "GPU System."
These notes should be read in conjunction with the notes to consolidated
financial statements included in the 1993 Annual Report on Form 10-K. For
disclosures required by generally accepted accounting principles, see the 1993
Annual Report on Form 10-K.
1. COMMITMENTS AND CONTINGENCIES
NUCLEAR FACILITIES
The Subsidiaries have made investments in three major nuclear
projects -- Three Mile Island Unit 1 (TMI-1) and Oyster Creek, both of which
are operational generating facilities, and Three Mile Island Unit 2 (TMI-2),
which was damaged during a 1979 accident. At December 31, 1993, the
Subsidiaries' net investment in TMI-1 and Oyster Creek, including nuclear
fuel, was $670 million and $784 million, respectively. TMI-1 and TMI-2 are
jointly owned by JCP&L, Met-Ed and Penelec in the percentages of 25%, 50% and
25%, respectively. Oyster Creek is owned by JCP&L.
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 GPU
System may also incur costs and experience reduced output at its 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.
<PAGE>
Financial Statements
Item 6(b)
Page 16 of 24
1. COMMITMENTS AND CONTINGENCIES (Continued)
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 the Corporation and the
Subsidiaries. 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 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. The disposal of spent nuclear fuel is covered
separately by contracts with the U.S. Department of Energy (DOE).
In 1990, the Subsidiaries 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 Subsidiaries intend to complete the funding for Oyster Creek and TMI-1 by
the end of the plants' license terms, 2009 and 2014, respectively. The TMI-2
funding completion date is 2014, consistent with TMI-2 remaining in long-term
storage and being decommissioned at the same time as TMI-1. Under the NRC
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1. COMMITMENTS AND CONTINGENCIES (Continued)
regulations, the funding targets (in 1993 dollars) for TMI-1 and Oyster Creek
are $143 million and $175 million, respectively. Based on NRC studies, a
comparable funding target for TMI-2 (in 1993 dollars), which takes into
account the accident, is $228 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 site-specific studies of TMI-1 and
Oyster Creek that considered various decommissioning plans and estimated the
cost of decommissioning the radiological portions of each plant to range from
approximately $205 to $285 million and $220 to $320 million, respectively
(adjusted to 1993 dollars). In addition, the studies estimated the cost of
removal of nonradiological structures and materials for TMI-1 and Oyster Creek
at $72 million and $47 million, respectively.
The ultimate cost of retiring the GPU System's 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
Subsidiaries charge to expense and contribute to external trusts amounts
collected from customers for nuclear plant decommissioning and nonradiological
costs. In addition, the Subsidiaries have contributed to external trusts
amounts written off for nuclear plant decommissioning in 1990 and 1991.
TMI-1 and Oyster Creek:
JCP&L is collecting revenues for decommissioning, which are expected to
result in the accumulation of its share of the NRC funding target for each
plant. JCP&L is also collecting revenues based on estimates, adopted in rate
orders issued in 1991 and 1993 by the New Jersey Board of Regulatory
Commissioners (NJBRC), for the cost of removal of nonradiological structures
and materials at each plant based on its share of an estimated $15.3 million
for TMI-1 and $31.6 million for Oyster Creek. In January 1993, the
Pennsylvania Public Utility Commission (PaPUC) granted Met-Ed revenues for
decommissioning costs of TMI-1 based on its share of the NRC funding target
and nonradiological cost of removal as estimated in the site-specific study.
Effective October 1993, the PaPUC approved a rate change for Penelec which
increased the collection of revenues for decommissioning costs for TMI-1 to a
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1. COMMITMENTS AND CONTINGENCIES (Continued)
basis equivalent to that granted Met-Ed. 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 $29 million for
TMI-1 and $80 million for Oyster Creek at December 31, 1993.
Management believes that any TMI-1 and Oyster Creek retirement costs, in
excess of those currently recognized for ratemaking purposes, should be
recoverable through the ratemaking process.
TMI-2:
The Corporation and its Subsidiaries have recorded a liability amounting
to $229 million as of December 31, 1993, for the radiological decommissioning
of TMI-2, reflecting the NRC funding target. The Subsidiaries record
escalations, when applicable, in the liability based upon changes in the NRC
funding target. The Subsidiaries have also recorded a liability in the amount
of $20 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 Subsidiaries have
recorded a liability in the amount of $71 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.
JCP&L has made a nonrecoverable contribution of $15 million to an external
decommissioning trust. Met-Ed and Penelec have made nonrecoverable
contributions of $40 million and $20 million, respectively, to external
decommissioning trusts relating to their shares of the accident-related
portion of the decommissioning liability.
The NJBRC and the PaPUC have granted JCP&L and Met-Ed, respectively,
decommissioning revenues for the remainder of the NRC funding target and
allowances for 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. The recovery of these
TMI-2 retirement costs will begin when the amortization of the TMI-2
investment ends, at the same annual amount ($6.3 million for recovery of
radiological decommissioning and $2.0 million for nonradiological cost of
removal, net of gross receipts tax). 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 rate order. The
matter is pending before the court. If the 1993 rate order is reversed,
Met-Ed and Penelec would be required to write off a total of approximately
$170 million for retirement costs. Penelec 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 Subsidiaries will
incur currently estimated incremental annual storage costs of $1 million. The
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1. COMMITMENTS AND CONTINGENCIES (Continued)
Subsidiaries have deferred the $20 million for the total estimated incremental
costs attributable to monitored storage. The JCP&L share of these costs has
been recognized in rates by the NJBRC. Met-Ed and Penelec believe these costs
should be recoverable through the ratemaking process.
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 GPU System.
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) and for Oyster Creek totals $2.7 billion per
site. In accordance with NRC regulations, these insurance policies generally
require that proceeds first be used for stabilization of the reactors and then
to pay for decontamination and debris removal expenses. Any remaining amounts
available under the policies may then be used for repair and restoration costs
and decommissioning costs. Consequently, there can be no assurance that in
the event of a nuclear incident, property damage insurance proceeds would be
available for the repair and restoration of 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 three 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 GPU System has insurance coverage for incremental replacement power
costs resulting from an accident-related outage at its nuclear plants.
Coverage commences after the first 21 weeks of the outage and continues for
three years at decreasing levels beginning at $1.8 million for Oyster Creek
and $2.6 million for TMI-1, per week.
Under its insurance policies applicable to nuclear operations and
facilities, the GPU System is subject to retrospective premium assessments of
up to $52 million in any one year, in addition to those payable under the
Price-Anderson Act.
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1. COMMITMENTS AND CONTINGENCIES (Continued)
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 GPU System 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 GPU
System expects to expend up to $590 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 GPU System companies have been notified by the Environmental
Protection Agency (EPA) and state environmental authorities that they are
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 ten hazardous and/or toxic waste sites. In addition, the GPU
System companies have been requested to supply information to the EPA and
state environmental authorities on several other sites for which they have not
yet been named as PRPs. The Subsidiaries have also been named in lawsuits
requesting damages for hazardous and/or toxic substances allegedly released
into the environment. The ultimate cost of remediation will depend upon
changing circumstances as site investigations continue, including (a) the
existing technology required for site cleanup, (b) the remedial action plan
chosen and (c) the extent of site contamination and the portion attributed to
the GPU System companies.
JCP&L has entered into agreements with the New Jersey Department of
Environmental Protection and Energy for the investigation and remediation of
17 formerly-owned manufactured gas plant sites. One of these sites has been
repurchased by JCP&L. JCP&L has also entered into various cost sharing
agreements with other utilities for some of the sites. At December 31, 1993,
JCP&L has an estimated environmental liability of $35 million recorded on its
balance sheet relating to these sites. The estimated liability is based upon
ongoing site investigations and remediation efforts, including capping the
sites and pumping and treatment of ground water. If the periods over which
the remediation is currently expected to be performed are lengthened, JCP&L
believes that it is reasonably possible that the ultimate costs may range as
high as $60 million. Estimates of these costs are subject to significant
uncertainties as JCP&L does not presently own or control most of these sites;
the environmental standards have changed in the past and are subject to future
change; the accepted technologies are subject to further development; and the
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Financial Statements
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Page 21 of 24
1. COMMITMENTS AND CONTINGENCIES (Continued)
related costs for these technologies are uncertain. If JCP&L is required to
utilize different remediation methods, the costs could be materially in excess
of $60 million.
In June 1993, the NJBRC approved a mechanism for the recovery of future
manufactured gas plant remediation costs through JCP&L's Levelized Energy
Adjustment Clause (LEAC) when expenditures exceed prior collections. The
NJBRC decision provides for interest to be credited to customers until the
overrecovery is eliminated and for future costs to be amortized over seven
years with interest. JCP&L is currently awaiting a final NJBRC order. JCP&L
is pursuing reimbursement of the above costs from its insurance carriers, and
will seek to recover costs to the extent not covered by insurance through this
mechanism.
The GPU System companies are 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 NJBRC has instituted a generic proceeding to address the appropriate
recovery of capacity costs associated with electric utility power purchases
from nonutility generation projects. The proceeding was initiated, in part,
to respond to contentions of the New Jersey Public Advocate, Division of Rate
Counsel (Rate Counsel), that by permitting utilities to recover such costs
through the LEAC, an excess or "double recovery" may result when combined with
the recovery of the utilities' embedded capacity costs through their base
rates. In September 1993, JCP&L and the other New Jersey electric utilities
filed motions for summary judgment with the NJBRC requesting that the NJBRC
dismiss contentions being made by Rate Counsel that adjustments for alleged
"double recovery" in prior periods are warranted. Rate Counsel has filed a
brief in opposition to the utilities' summary judgment motions including a
statement from its consultant that in his view, the "double recovery" for
JCP&L for the 1988-92 period would be approximately $102 million. Management
believes that the position of Rate Counsel is without merit. This matter is
pending before the NJBRC.
JCP&L's two operating nuclear units are subject to the NJBRC's annual
nuclear performance standard. Operation of these units at an aggregate annual
generating capacity factor below 65% or above 75% would trigger a charge or
credit based on replacement energy costs. At current cost levels, the maximum
annual effect on net income of the performance standard charge at a 40%
capacity factor would be approximately $10 million. While a capacity factor
below 40% would generate no specific monetary charge, it would require the
issue to be brought before the NJBRC for review. The annual measurement
period, which begins in March of each year, coincides with that used for the
LEAC. At the request of the PaPUC, Met-Ed and Penelec, as well as the other
Pennsylvania utilities, have supplied the PaPUC with proposals which may
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Page 22 of 24
1. COMMITMENTS AND CONTINGENCIES (Continued)
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
Subsidiaries and Duquesne Light Company (Duquesne). As a result of this
action and other developments, the Subsidiaries notified Duquesne that they
were exercising their rights under the agreements to withdraw from and thereby
terminate the agreements. Consequently, the Subsidiaries wrote off the $25
million they had invested in the project.
The GPU System's construction programs, for which substantial commitments
have been incurred and which extend over several years, contemplate
expenditures of $663 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 GPU
System'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.
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
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1. COMMITMENTS AND CONTINGENCIES (Continued)
which would not have been recognized as assets and liabilities by enterprises
in general.
If a portion of the GPU System'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 GPU System no longer qualifies for FAS 71
accounting treatment, a material adverse effect on its results of operations
and financial position may result.
The Subsidiaries have entered into long-term contracts with nonaffiliated
mining companies for the purchase of coal for certain generating stations in
which they have ownership interests. The contracts, which expire between 1994
and the end of the expected service lives of the generating stations, require
the purchase of either fixed or minimum amounts of the stations' coal
requirements. The price of the coal is determined by formulas providing for
the recovery by the mining companies of their costs of production. The
Subsidiaries' share of the cost of coal purchased under these agreements is
expected to aggregate $89 million for 1994.
The Subsidiaries 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 Subsidiaries have 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. While a few of these facilities are dispatchable, most
are must-run and generally obligate the Subsidiaries to purchase all of the
power produced up to the contract limits. The agreements have been approved
by the state regulatory commissions and permit the Subsidiaries to recover
energy and demand costs from customers through their energy clauses. These
agreements provide for the sale of approximately 2,452 MW of capacity and
energy to the GPU System by the mid-to-late 1990s. As of December 31, 1993,
facilities covered by these agreements having 1,193 MW of capacity were in
service, and 215 MW were scheduled to commence operation in 1994. Payments
made pursuant to these agreements were $491 million, $471 million and $343
million for 1993, 1992 and 1991, respectively, and are estimated to aggregate
$551 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 substantially in excess of
current market prices. While the Subsidiaries have been granted full recovery
of these costs from customers by the state commissions, there can be no
assurance that the Subsidiaries will continue to be able to recover these
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Financial Statements
Item 6(b)
Page 24 of 24
1. COMMITMENTS AND CONTINGENCIES (Continued)
costs throughout the term of the related contracts. The emerging competitive
market has created additional uncertainty regarding the forecasting of the
System's energy supply needs which, in turn, has caused the Subsidiaries to
change their supply strategy to seek shorter term agreements offering more
flexibility. At the same time, the Subsidiaries are attempting to
renegotiate, and in some cases buy out, high cost long-term nonutility
generation contracts where opportunities arise. The extent to which the
Subsidiaries may be able to do so, however, or recover associated costs
through rates, is uncertain. Moreover, these efforts have led to disputes
before both the NJBRC and the PaPUC, as well as to litigation, and may result
in claims against the Subsidiaries for substantial damages. There can be no
assurance as to the outcome of these matters.
During the normal course of the operation of their businesses, in addition
to the matters described above, the GPU System companies are from time to time
involved in disputes, claims and, in some cases, as defendants in litigation
in which compensatory and punitive 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 GPU System's
financial position or results of operations.
<PAGE>
