UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
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
(Address of principal executive offices) (Zip Code)
(814) 533-8111
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
The number of shares outstanding of each of the issuer's classes of
voting stock, as of April 30, 1994, was as follows:
Common stock, par value $20 per share: 5,290,596 shares outstanding.
Pennsylvania Electric Company
Quarterly Report on Form 10-Q
March 31, 1994
Table of Contents
Page
PART I - Financial Information
Financial Statements:
Balance Sheets 3
Statements of Income 5
Statements of Cash Flows 6
Notes to Financial Statements 7
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 17
PART II - Other Information 21
Signatures 22
_________________________________
The financial statements (not examined by independent accountants) reflect
all adjustments (which consist of only normal recurring accruals) which
are, in the opinion of management, necessary for a fair statement of the
results for the interim periods presented, subject to the ultimate
resolution of the various matters as discussed in Note 1 to the
Consolidated Financial Statements.
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PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
<CAPTION>
In Thousands
March 31, December 31,
1994 1993
(Unaudited)
<S> <C> <C>
ASSETS
Utility Plant:
In service, at original cost $2 452 996 $2 429 557
Less, accumulated depreciation 898 497 887 281
Net utility plant in service 1 554 499 1 542 276
Construction work in progress 83 487 81 420
Other, net 33 561 35 614
Net utility plant 1 671 547 1 659 310
Current Assets:
Cash and temporary cash investments 1 548 1 622
Special deposits 2 635 2 622
Accounts receivable:
Customers, net 70 344 64 913
Other 22 621 9 824
Unbilled revenues 25 183 28 942
Materials and supplies, at average cost or less:
Construction and maintenance 47 405 46 994
Fuel 18 158 20 590
Deferred energy costs 24 587 17 047
Deferred income taxes 1 234 790
Prepayments 22 931 6 630
Total current assets 236 646 199 974
Deferred Debits and Other Assets:
Three Mile Island Unit 2 deferred costs 64 692 64 638
Deferred income taxes 67 918 64 577
Income taxes recoverable through future rates 235 489 234 026
Decommissioning funds 26 507 24 657
Nuclear fuel disposal fee 377 486
Other 59 168 53 672
Total deferred debits and other assets 454 151 442 056
Total Assets $2 362 344 $2 301 340
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
<CAPTION>
In Thousands
March 31, December 31,
1994 1993
(Unaudited)
<S> <C> <C>
LIABILITIES AND CAPITAL
Capitalization:
Common stock $ 105 812 $ 105 812
Capital surplus 265 486 265 486
Retained earnings 361 039 328 290
Total common stockholder's equity 732 337 699 588
Cumulative preferred stock 61 842 61 842
Long-term debt 576 474 524 491
Total capitalization 1 370 653 1 285 921
Current Liabilities:
Debt due within one year 70 008 70 008
Notes payable 69 679 102 356
Obligations under capital leases 22 997 23 333
Accounts payable:
Affiliates 5 406 6 025
Others 71 641 85 254
Taxes accrued 21 272 11 978
Interest accrued 15 607 15 369
Vacations accrued 12 259 11 956
Other 16 317 13 511
Total current liabilities 305 186 339 790
Deferred Credits and Other Liabilities:
Deferred income taxes 459 441 455 076
Unamortized investment tax credits 49 844 51 775
Three Mile Island Unit 2 future costs 79 817 79 967
Nuclear fuel disposal fee 12 499 12 401
Other 84 904 76 410
Total deferred credits and other liabilities 686 505 675 629
Commitments and Contingencies (Note 1)
Total Liabilities and Capital $2 362 344 $2 301 340
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statements of Income
(Unaudited)
<CAPTION>
In Thousands
Three Months
Ended March 31,
1994 1993
<S> <C> <C>
Operating Revenues $247 180 $231 148
Operating Expenses:
Fuel 46 018 48 105
Power purchased and interchanged:
Affiliates 809 1 023
Others 44 311 25 850
Deferral of energy costs, net (7 592) 872
Other operation and maintenance 61 819 51 368
Depreciation and amortization 20 520 20 057
Taxes, other than income taxes 16 842 15 537
Total operating expenses 182 727 162 812
Operating Income Before Income Taxes 64 453 68 336
Income taxes 18 436 23 057
Operating Income 46 017 45 279
Other Income and Deductions:
Allowance for other funds used during
construction 415 -
Other income, net 12 330 (196)
Income taxes (5 206) (12)
Total other income and deductions 7 539 (208)
Income Before Interest Charges 53 556 45 071
Interest Charges:
Interest on long-term debt 11 710 11 053
Other interest 3 342 1 171
Allowance for borrowed funds used
during construction (461) (365)
Total interest charges 14 591 11 859
Net Income 38 965 33 212
Preferred stock dividends 908 1 416
Earnings Available for Common Stock $ 38 057 $ 31 796
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
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PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
In Thousands
Three Months
Ended March 31,
1994 1993
<S> <C> <C>
Operating Activities:
Income before preferred dividends $ 38 965 $ 33 212
Adjustments to reconcile income to cash provided:
Depreciation and amortization 16 977 19 525
Amortization of property under capital leases 2 008 2 252
Nuclear outage maintenance costs, net 786 675
Deferred income taxes and investment tax
credits, net 7 065 730
Deferred energy costs, net (7 540) 1 092
Accretion income (200) (200)
Allowance for other funds used during construction (416) -
Changes in working capital:
Receivables (14 469) (3 204)
Materials and supplies 2 022 4 345
Special deposits and prepayments (16 330) (20 217)
Payables and accrued liabilities 12 562 15 181
Other, net (3 777) (4 797)
Net cash provided by operating activities 37 653 48 594
Investing Activities:
Cash construction expenditures (46 498) (28 848)
Contributions to decommissioning trust (1 638) (233)
Other, net - (113)
Net cash used for investing activities (48 136) (29 194)
Financing Activities:
Issuance of long-term debt 89 400 29 820
Decrease in notes payable, net (32 663) (25 664)
Capital lease principal payments (2 420) (1 771)
Retirement of long-term debt (38 000) -
Dividends paid on common stock (5 000) (20 000)
Dividends paid on preferred stock (908) (1 416)
Net cash provided (required) by
financing activities 10 409 (19 031)
Net increase (decrease) in cash and temporary
cash investments from above activities (74) 369
Cash and temporary cash investments,
beginning of year 1 622 659
Cash and temporary cash investments, end of period $ 1 548 $ 1 028
Supplemental Disclosure:
Interest paid (net of amount capitalized) $ 14 525 $ 10 944
Income taxes paid $ 4 279 $ 4 121
New capital lease obligations incurred $ 1 342 $ 1 002
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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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 Energy Initiatives, Inc.
(EI). In April 1994, General Portfolios Corporation (GPC) merged into EI,
formerly a subsidiary of GPC. EI develops, owns, and operates nonutility
generating facilities. The Company and its affiliates including GPUSC, GPUN
and GPC considered together 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. The
year-end condensed balance sheet data contained in the attached financial
statements were derived from audited financial statements. For disclosures
required by generally accepted accounting principles, see the 1993 Annual
Report on Form 10-K.
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 March 31, 1994, the Company's net investment in TMI-1, including nuclear
fuel, was $162 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 continue to be significant and less predictable than costs
associated with other sources of generation, 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
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Pennsylvania Electric Company and Subsidiary Companies
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-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, approximately 2,100
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 the suppliers of equipment and services to TMI-
2, and are pending in the United States District Court for the Middle District
of Pennsylvania. Some of such claims also seek recovery on the basis of
alleged emissions of radioactivity before, during and after the accident.
If, notwithstanding the developments noted below, punitive damages are
not covered by insurance and are not subject to the liability limitations of
the federal Price-Anderson Act, punitive damage awards could have a material
adverse effect on the financial position of the GPU System.
At the time of the TMI-2 accident, as provided for in the federal Price-
Anderson Act, the Company and its affiliates had (a) primary financial
protection in the form of insurance policies with groups of insurance
companies providing an aggregate of $140 million of primary coverage, (b)
secondary financial protection in the form of private liability insurance
under an industry retrospective rating plan providing for premium charges
deferred in whole or in major part under such plan, and (c) an indemnity
agreement with the NRC, bringing their total primary and secondary insurance
financial protection and indemnity agreement with the NRC up to an aggregate
of $560 million, which is the ceiling established by the Price-Anderson Act on
the aggregate public liability that may be imposed upon them for the TMI-2
accident.
The insurers of TMI-2 have been providing a defense against all TMI-2
accident related claims against the Company and its affiliates and GPU and
their suppliers under a reservation of rights with respect to any award of
punitive damages. However, the defendants in the TMI-2 litigation and the
insurers agreed, on March 30, 1994, that the insurers would withdraw their
reservation of rights.
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. On February 18, 1994 the Court
held that the plaintiffs' claims for punitive damages are not barred by the
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Pennsylvania Electric Company and Subsidiary Companies
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 on February 18, 1994,
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.
In an Order issued April 20, 1994, the Court: (1) noted that the
plaintiffs have agreed to seek punitive damages only against the Company and
its affiliates and GPU; and (2) denied the defendants' motions for
interlocutory appeal of the Court's Orders of February 18, 1994, stating in
part that the Court is of the opinion that any punitive damages owed must be
paid out of and limited to the amount of primary and secondary insurance under
the Price-Anderson Act and, accordingly, evidence of the defendants' net worth
is not relevant in the pending proceeding.
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 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.
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Pennsylvania Electric Company and Subsidiary Companies
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 $5 million at March 31, 1994. These
decommissioning costs are accrued and charged to depreciation expense over the
expected service life of each nuclear plant.
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 March 31,
1994, 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
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Pennsylvania Electric Company and Subsidiary Companies
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 a remaining liability in the amount of $70 million (of
which the Company's share is $17.5 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. Earnings resulting from decommissioning funds
provided by customers are offset against amounts collectible from customers in
Three Mile Island Unit 2 Deferred Costs on the balance sheet.
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.
As a result of TMI-2's entering long-term monitored storage, the Company
and its affiliates are incurring incremental annual storage costs of
$1 million (of which the Company's share is $.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 through 2014, the expected retirement date of TMI-1. The
Company believes 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 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
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Pennsylvania Electric Company and Subsidiary Companies
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 $2.6
million per week.
Under its insurance policies applicable to nuclear operations and
facilities, the Company and its affiliates are subject to retrospective
premium assessments of up to $51 million in any one year (of which the
Company's share is $7 million), in addition to those payable under the
Price-Anderson Act.
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.
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Pennsylvania Electric Company and Subsidiary Companies
To comply with the federal Clean Air Act Amendments of 1990 (Clean Air
Act), the Company expects to expend up to $177 million for air pollution
control equipment by the year 2000. The Company reduced its estimate from
$295 million to $177 million primarily due to the postponement of a scrubber
installation until after 2000. In developing its least-cost plan to comply
with the Clean Air Act, the Company will continue to evaluate major capital
investments compared to participation in the emission allowance market and the
use of low-sulfur fuel. 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 three 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
In April 1994, GPU announced it was offering a voluntary enhanced
retirement program to certain non-bargaining employees. In addition, in April
1994, the Company's bargaining units were offered, and accepted, a similar
enhanced retirement program. The Company's affiliates, JCP&L and Met-Ed, are
negotiating with their respective unions with respect to possible
participation of bargaining unit employees in similar enhanced retirement
programs. The enhanced retirement programs are part of a corporate
realignment that was announced in February 1994. At that time, GPU said that
its goal was to achieve $80 million in annual cost savings by the end of 1996.
If two-thirds of the anticipated eligible bargaining and
non-bargaining employees were to accept the offer, depending upon the age and
years of service of those employees, the program could result in a 1994 pre-
tax charge to earnings for the GPU System of between $110 million and $120
million.
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
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Pennsylvania Electric Company and Subsidiary Companies
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.
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 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 megawatts (MW) of
capacity and energy to the Company by the mid 1990s. As of March 31, 1994,
facilities covered by these agreements having 293 MW of capacity were in
service. The estimated cost of these agreements for 1994 is $121 million.
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<PAGE>
Pennsylvania Electric Company and Subsidiary Companies
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.
The PaPUC is considering generic nuclear performance standards for
Pennsylvania utilities. At the request of the PaPUC, the Company, as well as
the other Pennsylvania utilities, have supplied the PaPUC with proposals. The
Company expects the PaPUC to adopt a generic nuclear performance standard
during 1994.
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. INCOME TAXES
In March 1994, as a result of a settlement of a federal income tax
refund claim for 1986, the Company recorded net income tax refunds aggregating
$4 million based on its share of the retirement of TMI-2 for tax purposes.
At the same time, the Company also recorded a total of $11.5 million of
net interest income representing its share of net interest receivable from the
Internal Revenue Service (IRS) associated with this refund settlement. While
the Company intends to refund the tax refund amounts to its customers, the
ultimate disposition of the income tax refunds and the associated net interest
is subject to regulatory review. Income tax amounts refunded will have no
effect on net income.
In addition, in April 1994, audits of the GPU System's federal income
tax returns for years 1987 through 1989 were settled with the IRS. Exclusive
of the effects of the TMI-2 retirement mentioned above, these settlements had
no material effect on the financial position or results of operations of the
Company.
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<PAGE>
Pennsylvania Electric Company and Subsidiary Companies
3. ACCOUNTING POLICIES
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115 (FAS 115) "Accounting for Certain Investments in
Debt and Equity Securities", which addresses the accounting and reporting for
investments in equity securities that have readily determinable fair values
and for all investments in debt securities. The adoption of FAS 115 did not
have a significant impact on the financial position of the Company.
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<PAGE>
Pennsylvania Electric Company and Subsidiary Companies
Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following is management's discussion of significant factors that
affected the Company's interim financial condition and results of operations.
This should be read in conjunction with Management's Discussion and Analysis
of Financial Condition and Results of Operations included in the Company's
1993 Annual Report on Form 10-K.
RESULTS OF OPERATIONS
Earnings available for common stock for the first quarter ended
March 31, 1994 were $38.1 million compared with $31.8 million for the first
quarter of 1993. The increase in earnings was principally the result of
nonrecurring interest income resulting from refunds of previously paid federal
income taxes related to the tax retirement of Three Mile Island Unit 2
(TMI-2) and higher kilowatt-hour revenues. These increases in earnings were
partially offset by increased other operation and maintenance expense.
REVENUES:
Total revenues for the first quarter of 1994 increased 6.9% to
$247.2 million as compared to the first quarter of 1993. The components of
the changes are as follows:
(In Millions)
Kilowatt-hour (KWH) revenues
(excluding energy portion) $ 7.3
Energy revenues 6.8
Other revenues 1.9
Increase in revenues $16.0
Kilowatt-hour revenues
KWH revenues increased for the three month period ending March 31, 1994
primarily from higher usage by the Company's principal wholesale customer and
higher usage by municipal wholesale customers. Wholesale purchases by these
customers are now resold to consumers both inside and outside the Company's
service territory. The 1992 federal Energy Policy Act which allows
transmission access and competition for wholesale customers made this
possible. 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 the Company's affiliates, Met-Ed and JCP&L. KWH revenues
also increased from higher KWH usage by residential customers.
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<PAGE>
Energy Revenues
Changes in energy revenues do not normally affect net income as they
reflect corresponding changes in the energy cost rates billed to customers and
expensed. Energy revenues increased for the three month period ended
March 31, 1994 because of higher energy cost rates in effect during the
current period and higher KWH sales.
Other Revenues
Generally, changes in other revenues do not affect earnings as they are
offset by corresponding changes in expense, such as taxes other than income
taxes.
OPERATING EXPENSES:
Power purchased and interchanged
Changes in power purchased and interchanged expense related to energy do
not normally affect earnings as they are billed to customers through the
energy cost rate. However, earnings for the first quarter were affected
because of energy costs relative to nonutility purchases not being recovered
in wholesale rates. The wholesale portion of these costs increased because of
higher nonutility generation purchases and an increase in the Company's sales
to wholesale customers.
Other operation and maintenance
Other operation and maintenance expense increased for the three month
period primarily as a result of higher costs related to increased outage
activity at three of the Company's coal fired generating stations and higher
payroll costs resulting primarily from emergency and storm repairs caused by
winter storms.
Depreciation and amortization
Depreciation and amortization expense increased slightly for the three
month period despite the absence, in 1994, of TMI-2 amortization attributable
to its retail customers. The Company had collected all of its TMI-2
investment attributable to its retail customers in 1993. The net increase
resulted primarily from higher cost of removal charges.
Taxes, other than income taxes
Generally, changes in taxes other than income taxes do not significantly
affect earnings as they are substantially recovered in revenues.
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<PAGE>
OTHER INCOME AND DEDUCTIONS:
Other income, net
The increase in Other income, net is attributable to interest income
resulting from refunds of previously paid federal income taxes related to the
tax retirement of TMI-2. The tax retirement of TMI-2 resulted in a refund for
the tax years in which TMI-2 was retired while resulting in additional amounts
owed for subsequent tax years in which depreciation deductions with respect to
TMI-2 had been taken. The net effect on pre-tax earnings of these refunds for
the tax retirement of TMI-2 was an increase of $11.5 million resulting from an
increase in interest income of $14.9 million partially offset by an increase
in interest expense of $3.4 million.
INTEREST CHARGES:
The increase in Other interest for the three month period was primarily
the result of the tax retirement of TMI-2 which resulted in an increase in
interest expense on additional amounts owed for tax years in which
depreciation deductions with respect to TMI-2 had been taken.
PREFERRED STOCK DIVIDENDS:
Preferred stock dividends decreased because of the redemption of $25
million of high-dividend rate preferred stock in September 1993.
LIQUIDITY AND CAPITAL RESOURCES
CAPITAL NEEDS:
The Company's capital needs for the first quarter of 1994 consisted of
cash construction expenditures of $46 million. Construction expenditures for
the year are currently forecasted to be $203 million. Construction estimates
for ongoing system developments are expected to remain stable over the next
five years. Expenditures for maturing debt are expected to be $70 million in
1994. Management estimates that approximately one-half of the capital needs
in 1994 will be satisfied through internally generated funds.
FINANCING:
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.
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<PAGE>
COMPETITION:
In April 1994, GPU announced it was offering a voluntary enhanced
retirement program to certain non-bargaining employees. In addition, in April
1994, the Company's bargaining units were offered and accepted a similar
enhanced retirement program. The Company's affiliates, JCP&L and Met-Ed, are
negotiating with their respective unions with respect to possible
participation of bargaining unit employees in similar enhanced retirement
programs. The enhanced retirement programs are part of a corporate
realignment that was announced in February 1994. At that time, GPU said that
its goal was to achieve $80 million in annual cost savings by the end of 1996.
If two-thirds of the anticipated eligible bargaining and non-bargaining
employees were to accept the offer, depending upon the age and years of
service of those employees, the program could result in a 1994 pre-tax charge
to earnings for the GPU System of between $110 million and $120 million.
MEETING ENERGY DEMANDS:
The Company has contracts and anticipated commitments with nonutility
generation suppliers under which a total of 293 megawatts (MW) of capacity is
currently in service and an additional 119 MW are currently scheduled or
anticipated to be in service by the mid-1990s.
CONSERVATION AND LOAD MANAGEMENT:
The PaPUC completed its generic investigation into demand-side management
(DSM) cost recovery mechanisms and issued a cost recovery and ratemaking order
in December 1993. In April 1994, the Company filed a new DSM plan which
includes DSM initiatives totaling approximately 19 MW over a five-year period.
ENVIRONMENTAL ISSUES:
To comply with the federal Clean Air Act Amendments of 1990 (Clean Air
Act), the Company expects to expend up to $177 million for air pollution
control equipment by the year 2000. The estimates were reduced from $295
million primarily due to the postponement of a scrubber installation until
after 2000. In developing its least-cost plan to comply with the Clean Air
Act, the Company will continue to evaluate major capital investments compared
to participation in the emission allowance market and the use of low-sulfur
fuel. Costs associated with the capital invested in this equipment and the
increased operating costs of the affected stations are expected to be
recoverable through the ratemaking process.
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<PAGE>
PART II
ITEM 1 - LEGAL PROCEEDINGS
Information concerning the current status of certain legal
proceedings instituted against the Company and its affiliates and GPU
as a result of the March 28, 1979 nuclear accident at Unit 2 of the
Three Mile Island nuclear generating station discussed in Part I of
this report in Notes to Consolidated Financial Statements is
incorporated herein by reference and made a part hereof.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(12) Statements Showing Computation of Ratio of Earnings
to combined Fixed Charges and Preferred Stock Dividends.
(b) Reports on Form 8-K:
None
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<PAGE>
Signatures
Pursuant to the requirements 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
May 5, 1994 By: \s\ F. D. Hafer
F. D. Hafer
President
May 5, 1994 By: \s\ Willard R. Stinson
Willard R. Stinson
Vice President and Comptroller
(Principal Accounting Officer)
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<PAGE>
<TABLE>
Exhibit 12
Page 1 of 2
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)
UNAUDITED
<CAPTION>
Three Months Ended
March 31, March 31,
1994 1993
<S> <C> <C>
OPERATING REVENUES $247 180 $231 148
OPERATING EXPENSES 182 727 162 812
Interest portion of rentals (A) 902 917
Net expense 181 825 161 895
OTHER INCOME:
Allowance for funds used
during construction 876 365
Other income, net 12 330 (196)
Total other income 13 206 169
EARNINGS AVAILABLE FOR FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS (excluding
taxes based on income) $ 78 561 $ 69 422
FIXED CHARGES:
Interest on funded indebtedness $ 11 710 $ 11 053
Other interest 3 342 1 171
Interest portion of rentals (A) 902 917
Total fixed charges $ 15 954 $ 13 141
RATIO OF EARNINGS TO FIXED CHARGES 4.92 5.28
Preferred stock dividend requirement 908 1 416
Ratio of income before provision for
income taxes to net income (B) 160.7% 169.5%
Preferred stock dividend requirement
on a pretax basis 1 459 2 400
Fixed charges, as above 15 954 13 141
Total fixed charges and
preferred stock dividends $ 17 413 $ 15 541
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS 4.51 4.47
<PAGE>
Exhibit 12
Page 2 of 2
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)
UNAUDITED
<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 of $62,607 and
$56,281, for the three months ended March 31, 1994 and March 31, 1993,
respectively, divided by net income of $38,965 and $33,212,
respectively.
<PAGE>
</TABLE>
