SEC FILE NO. 70-_____
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM U-l
APPLICATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 ("Act")
PENNSYLVANIA ELECTRIC COMPANY ("Penelec")
2800 Pottsville Pike
Reading, Pennsylvania 19605
(Name of company filing this statement and address
of principal executive office)
GPU, INC. ("GPU")
(Name of top registered holding company parent of applicant)
Terrance G. Howson, Douglas E. Davidson, Esq.
Vice President and Treasurer Berlack, Israels & Liberman LLP
Mary A. Nalewako, Secretary 120 West 45th Street
Michael J. Connolly, New York, New York 10036
Assistant General Counsel
GPU Service, Inc.
300 Madison Avenue
Morristown, New Jersey 07962
Scott L. Guibord, Secretary Robert C. Gerlach, Esq.
Pennsylvania Electric Company Ballard Spahr Andrews &
2800 Pottsville Pike Ingersoll, LLP
Reading, Pennsylvania 19605 1735 Market Street - 51st Floor
Philadelphia, Pennsylvania 19103-7599
(Names and addresses of agents for service)
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ITEM 1. DESCRIPTION OF PROPOSED TRANSACTIONS.
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A. Penelec proposes to organize a special purpose business
trust under Delaware law ("Penelec Capital Trust"), which will issue and sell
from time to time in one or more series through December 31, 2000 up to $125
million aggregate liquidation value of preferred beneficial interests, in the
form of Trust Securities (having a liquidation value per interest to be
determined) (the "Trust Securities")*. Each Trust Security will represent a
cumulative preferred security (the "Preferred Securities") of a Delaware limited
partnership ("Penelec Capital L.P."), which will be a special purpose indirect
subsidiary of Penelec. Penelec also proposes to form a special purpose Delaware
corporation ("Investment Sub"), for the sole purpose of acting as general
partner of Penelec Capital L.P. The sole purpose of Penelec Capital Trust will
be to acquire the Preferred Securities and to issue the Trust Securities
evidencing the Preferred Securities. The sole purpose of Penelec Capital L.P. is
to issue one or more series of Preferred Securities and to lend the proceeds
thereof, plus the capital contribution (in an amount not to exceed $5 million)
made by Penelec in Penelec Capital L.P., to Penelec, which loan will be
evidenced by the Subordinated Debentures (defined below) issued by Penelec.
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* The transactions proposed herein are substantially the same as the
transactions approved by the Commission in Order dated June 24, 1994 (HCAR No.
35-26071) (monthly income preferred securities ("MIPS")) with the exception that
the MIPS were issued by a limited partnership subsidiary of Penelec and the
Trust Securities will be issued by a special purpose business trust subsidiary.
The trust structure is being utilized to help ensure the intended tax treatment,
as discussed below.
<PAGE>
B. Penelec will acquire the common stock of Investment Sub for
a nominal consideration and will capitalize Investment Sub with (i) a capital
contribution in the amount of up to $5 million, and (ii) a demand promissory
note in the principal amount of up to $13 million, such note to accrue interest,
compounded semi-annually, at a rate equal to the Citibank, N.A. base rate as in
effect from time to time. Investment Sub will acquire all of the general partner
interests in Penelec Capital L.P. for up to $5 million (the "L.P. Equity
Contribution").
Penelec Capital Trust will apply the proceeds from the sale of
the Trust Securities to purchase the Preferred Securities. Penelec Capital L.P.
will, in turn, use the proceeds received from the sale of the Preferred
Securities, together with the L.P. Equity Contribution, to purchase Penelec's
subordinated debentures (individually, a "Subordinated Debenture" and
collectively, the "Subordinated Debentures").
C. Penelec will also unconditionally guarantee the payment by
Penelec Capital L.P. of (A) accrued but unpaid distributions on the Preferred
Securities, if and to the extent Penelec Capital L.P. has declared such
distributions out of funds legally available therefor, (B) the redemption price
for any redemption of the Preferred Securities, (C) the aggregate liquidation
preference on the Preferred Securities, including all accrued but unpaid
distributions, whether or not declared and (D) certain additional amounts (the
"Guaranties").
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D. Each Subordinated Debenture will be issued under an
Indenture to be entered into with United States Trust Company of New York, as
trustee, and will have an initial term of up to 49 years. Prior to maturity,
Penelec will pay only interest on the Subordinated Debentures at a rate equal to
the distribution rate on the Preferred Securities. Such interest payments will
constitute Penelec Capital Trust's only income and will be used by it to pay
distributions on the Trust Securities, with any excess being distributed
indirectly to Penelec as a distribution on Penelec's investment in Penelec
Capital L.P., thereby reducing the interest cost on the Subordinated Debentures.
Distributions on the Trust Securities will be made not less than semi-annually,
and will be cumulative and must be made to the extent that Penelec Capital Trust
has legally available funds and cash sufficient for such purposes. However,
Penelec will have the right to defer payment of interest on the Subordinated
Debentures for up to five years in which event Penelec Capital Trust may
similarly defer payment of distributions on the Trust Securities, but in no
event may distributions be deferred beyond the maturity date of the Subordinated
Debentures. The distribution rates, payment dates, redemption and other similar
provisions of each series of Trust Securities will be identical to the interest
rates, payment dates, redemption and other provisions of the Subordinated
Debentures issued by Penelec with respect thereto.
E. Each Subordinated Debenture and related Guaranty will be
subordinate to all other existing and future "Senior Indebtedness," as defined
below, of Penelec and will have no
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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 Subordinated Debenture or the Guaranty. However, Penelec may
not declare and pay dividends on, or redeem or retire, its outstanding
Cumulative Preferred Stock or Common Stock unless all payments then due (whether
or not previously deferred) under the Subordinated Debentures and the Guaranties
have been made. "Senior Indebtedness" consists of (i) the principal of and
premium (if any) in respect of (A) indebtedness of Penelec for money borrowed
and (B) indebtedness evidenced by securities, debentures, bonds or other similar
instruments (including purchase money obligations) for payment of which Penelec
is responsible or liable; (ii) all capital lease obligations of Penelec; (iii)
all obligations of Penelec issued or assumed as the deferred purchase price of
property, all conditional sale obligations of Penelec and all obligations of
Penelec under any title retention agreement (but excluding trade accounts
payable arising in the ordinary course of business); (iv) certain obligations of
Penelec for the reimbursement of any obligor on any letter of credit, banker's
acceptance, security purchase facility or similar credit transaction; (v) all
obligations of the type referred to in clauses (i) through (iv) of other persons
for the payment of which Penelec is responsible or liable as obligor, guarantor
or otherwise; and (vi) all obligations of the types referred to in clauses (i)
through (v) of other persons
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secured by any lien on any property or asset of Penelec (whether or not such
obligation is assumed by Penelec), except for any such indebtedness that is by
its terms subordinated to or pari passu with the Subordinated Debentures.
F. It is expected that Penelec's interest payments on the
Subordinated Debentures will be deductible for income tax purposes and that
Penelec Capital Trust will be treated as a trust for federal income tax
purposes. Consequently, distributions from Penelec Capital Trust to the holders
of Trust Securities and indirectly to Penelec will be deemed to constitute
distributions of the interest income received by Penelec Capital Trust on the
Subordinated Debentures. Consequently, such holders and Penelec will not be
entitled to any "dividend received deduction" under the Internal Revenue Code
with respect to such distributions.
G. A series of the Trust Securities will be subject to
mandatory redemption upon redemption of the corresponding series of the
Preferred Securities. A series of Preferred Securities will be subject to
mandatory redemption upon the maturity or prior redemption of the corresponding
series of the Subordinated Debentures, but will not be subject to any mandatory
sinking fund. A series of Preferred Securities may also be redeemable at the
option of Penelec at a price equal to their liquidation value plus any accrued
and unpaid distributions plus any premium negotiated in connection with the
marketing of the Trust Securities, (i) at any time after a specified no-call
period (if any) which could be up to the life of the issuance, or
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(ii) in the event that (I) Penelec Capital L.P. is required by applicable tax
laws to withhold or deduct certain amounts in connection with distributions or
other payments, or (II) Penelec Capital L.P. or Penelec Capital Trust is subject
to federal income tax with respect to interest received on the Subordinated
Debentures, or (III) it is determined that the interest payments by Penelec on
the Subordinated Debentures are not deductible for federal income tax purposes
or (IV) Penelec Capital L.P. is subject to more than a de minimis amount of
other taxes, duties or other governmental charges, or (V) Penelec Capital L.P.
becomes subject to regulation as an "investment company" under the Investment
Company Act of 1940, as amended ("1940 Act"). Upon occurrence of any of the
events set forth in clause (ii) of the immediately preceding sentence, Penelec
Capital L.P. and Penelec Capital Trust could be dissolved and the Subordinated
Debentures distributed directly to the holders of the Trust Securities and to
Penelec on a pro rata basis, resulting in direct ownership of the Subordinated
Debentures by the holders of the Trust Securities. The Subordinated Debentures
distributed to Penelec will be canceled.
In the event that Penelec Capital Trust is required by
applicable tax laws to withhold or deduct certain amounts in connection with
distributions or other payments, Penelec Capital Trust may also have the
obligation, if the Trust Securities are not redeemed or Subordinated Debentures
are not distributed to the holders thereof as aforesaid, to "gross up" such
payments so that the Trust Securities holders will receive the same payment
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after such withholding or deduction as they would have received if no such
withholding or deduction were required. In such latter event, Penelec's
obligations under the Subordinated Debentures and the Guaranties would also
cover any such "gross up" obligations.
H. Upon receipt by Penelec Capital Trust of any distribution
from Penelec Capital L.P. upon any voluntary or involuntary liquidation,
dissolution or winding up of Penelec Capital L.P., the holders of the Trust
Securities will be entitled to receive such amounts in proportion to the
respective number of Preferred Securities represented by such Trust Securities,
out of the assets of Penelec Capital L.P. available for distribution after
satisfaction of liabilities to creditors of Penelec Capital Trust.
In the event of any voluntary or involuntary dissolution or
winding up of Penelec Capital L.P., the holders of Preferred Securities will be
entitled to receive out of the assets of Penelec Capital L.P., after
satisfaction of liabilities to creditors and before any distribution of assets
is made to the Investment Sub, the sum of their stated liquidation preference
and all accumulated and unpaid distributions to the date of payment of the
Preferred Securities. All assets of Penelec Capital L.P. remaining after payment
of the liquidation distribution to the holders of Preferred Securities will be
distributed to the Investment Sub.
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<PAGE>
Upon any liquidation, dissolution or winding up of Penelec,
the amount payable on each series of the Preferred Securities would be limited
to a pro rata portion of any amount recovered by Penelec Capital L.P. in its
capacity as a subordinated debt holder of Penelec. The Subordinated Debentures
and the payment obligations under the Guaranty will be subordinate to all other
existing and future Senior Indebtedness, except for any such indebtedness that
is by its terms subordinated to or pari passu with the Subordinated Debentures.
I. The constituent instruments of Penelec Capital Trust,
including its declaration of trust, will provide, among other things, that
Penelec Capital Trust's activities will be limited to the issuance and sale of
Trust Securities from time to time and the application of the proceeds thereof
to the purchase of the Preferred Securities. Accordingly, it is not proposed
that Penelec Capital Trust's constituent instruments include any interest or
distribution coverage or capitalization ratio restrictions on its ability to
issue and sell Trust Securities, as each such issuance will be supported by a
Subordinated Debenture and a Guaranty, and such restrictions would therefore not
be relevant or necessary for Penelec Capital Trust to maintain an appropriate
capital structure. Moreover, the issuance of Subordinated Debentures 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
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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 Trust's constituent instruments will further state
that Penelec Capital L.P will be responsible for all liabilities and obligations
of Penelec Capital Trust.
J. Penelec expects to apply the net proceeds of the sale to
Penelec Capital L.P. of Subordinated Debentures to the redemption of outstanding
senior securities pursuant to the optional redemption provisions thereof, to the
repayment of outstanding short-term debt, for construction purposes, and for
other general corporate purposes, including to reimburse Penelec's treasury for
funds previously expended therefrom for the above purposes. Penelec will not use
any of the net proceeds of the sale of Subordinated Debentures to acquire,
either directly or indirectly, any interest in any exempt wholesale generator
("EWG") or foreign utility company ("FUCO").
K. Rule 54 Analysis.
(a) As described below, GPU meets all of the conditions of
Rule 53 under the Act, except for Rule 53(a)(1). By Order dated November 5, 1997
(HCAR No. 35-26773) (the "November 5 Order"), the Commission authorized GPU to
increase to 100% of its "average consolidated retained earnings," as defined in
Rule 53, the aggregate amount which it may invest in EWGs and FUCOs. At March
31, 1998, GPU's average consolidated retained earnings was
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approximately $2.187 billion, and aggregate investment in EWGs and FUCOs was
approximately $1.283 billion or 59% of average consolidated retained earnings.
Accordingly, under the November 5 Order, GPU may invest up to an additional $904
million in EWGs and FUCOs.
(i) GPU maintains books and records to identify investments
in, and earnings from, each EWG and FUCO in which it directly or
indirectly holds an interest.
(A) For each United States EWG in which GPU directly or
indirectly holds an interest:
(1) the books and records for such EWG will be kept in
conformity with United States generally accepted
accounting principles
("GAAP");
(2) the financial statements will be prepared in accordance
with GAAP; and
(3) GPU directly or through its subsidiaries
undertakes to provide the Commission access
to such books and records and financial
statements as the Commission may request.
(B) For each FUCO or foreign EWG which is a
majority-owned subsidiary of GPU:
(1) the books and records for such subsidiary will
be kept in accordance with GAAP;
(2) the financial statements for such subsidiary will
be prepared in accordance with GAAP; and
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<PAGE>
(3) GPU directly or through its subsidiaries
undertakes to provide the Commission access
to such books and records and financial
statements, or copies thereof in English, as
the Commission may request.
(C) For each FUCO or foreign EWG in which GPU owns 50% or
less of the voting securities, GPU directly or
through its subsidiaries will proceed in good faith,
to the extent reasonable under the circumstances, to
cause:
(1) such entity to maintain books and records in
accordance with GAAP;
(2) the financial statements of
such entity to be prepared in accordance with
GAAP; and
(3) access by the Commission to such books and
records and financial statements (or copies
thereof) in English as the Commission may
request and, in any event, will provide the
Commission on request copies of such
materials as are made available to GPU and
its subsidiaries. If and to the extent that
such entity's books, records or financial
statements are not maintained in accordance
with GAAP, GPU will, upon request of the
Commission, describe and quantify each
material variation therefrom as and to the
extent required by subparagraphs (a) (2)
(iii) (A) and (a) (2) (iii) (B) of Rule 53.
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<PAGE>
(ii) No more than 2% of GPU's domestic public utility
subsidiary employees will render any services,
directly or indirectly, to any EWG or FUCO in which
GPU directly or indirectly holds an interest.
(iii) Copies of this Application on Form U-1 are being
provided to the New Jersey Board of Public Utilities
and the Pennsylvania Public Utility Commission, the
only federal, state or local regulatory agencies
having jurisdiction over the retail rates of GPU's
electric utility subsidiaries.(1) In addition, GPU
will submit to each such commission copies of any
Rule 24 certificates required hereunder, as well as a
copy of Item 9 of GPU's Form U5S and Exhibits H and I
thereof (commencing with the Form U5S to be filed for
the calendar year in which the authorization herein
requested is granted).
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(1) Penelec is also subject to retail rate regulation by the New York
Public Service Commission with respect to retail service to
approximately 3,700 customers in Waverly, New York served by Waverly
Electric Power & Light Company, a Penelec subsidiary. Waverly
Electric's revenues are immaterial, accounting for less than 1% of
Penelec's total operating revenues.
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<PAGE>
(iv) None of the provisions of paragraph (b) of Rule 53
render paragraph (a) of that Rule unavailable for the
proposed transactions.
(A) Neither GPU nor any
subsidiary of GPU having a book value
exceeding 10% of GPU's consolidated retained
earnings is the subject of any pending
bankruptcy or similar proceeding.
(B) GPU's average consolidated retained earnings
for the four most recent quarterly periods
(approximately $2.187 billion) represented
an increase of approximately $16.3 million
(or approximately 0.8%) in the average
consolidated retained earnings for the
previous four quarterly periods
(approximately $2.171 billion).
(C) GPU did not incur operating losses from
direct or indirect investments in EWGs and
FUCOs in 1997 in excess of 5% of GPU's
December 31, 1997 consolidated retained
earnings.
As described above, GPU meets all the conditions of Rule
53(a), except for clause (1). With respect to clause (1), the Commission
determined in the November 5 Order that GPU's financing of investments in EWGs
and FUCOs in an amount greater than 50% of GPU's average consolidated retained
earnings as otherwise permitted by Rule 53(a)(1) would not have either of the
adverse effects set forth in Rule 53(c).
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<PAGE>
Moreover, even if the effect of the capitalization and
earnings of subsidiary EWGs and FUCOs were considered, there is no basis for the
Commission to withhold or deny approval for the transactions proposed in this
Application (the "Transactions"). The Transactions would not, by themselves, or
even considered in conjunction with the effect of the capitalization and
earnings of GPU's subsidiary EWGs and FUCOs, have a material adverse effect on
the financial integrity of the GPU system, or an adverse impact on GPU's public
utility subsidiaries, their customers, or the ability of State commissions to
protect such public utility customers.
The November 5 Order was predicated, in part, upon the
assessment of GPU's overall financial condition which took into account, among
other factors, GPU's consolidated capitalization ratio and the recent growth
trend in GPU's retained earnings. As of June 30, 1997, the most recent quarterly
period for which financial statement information was evaluated in the November 5
Order, GPU's consolidated capitalization consisted of 49.2% equity and 50.8%
debt.
GPU's March 31, 1998 consolidated capitalization consists of
45.7% equity and 54.3% debt. Thus, since the date of the November 5 Order, there
has been no material adverse change in GPU's consolidated capitalization ratio,
which remains within acceptable ranges and limits as evidenced by the credit
ratings of GPU's electric utility subsidiaries.(2)
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(2) The debt ratings of GPU's electric utility subsidiaries have not
changed since the issuance of the November 5 Order. Moreover, on
February 27, 1998, Standard & Poor's Corporation assigned an "A-"
credit rating to the A$1.925 billion senior bank debt of GPU PowerNet.
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<PAGE>
GPU's consolidated retained earnings grew on average
approximately 4.5% per year from 1991 through 1997. Earnings attributable to
GPU's investments in EWGs and FUCOs have contributed positively to consolidated
earnings, excluding the impact of the windfall profits tax on the Midlands
Electricity plc investment.(3)
Accordingly, since the date of the November 5 Order, the
capitalization and earnings attributable to GPU's investments in EWGs and FUCOs
have not had any adverse impact on GPU's financial integrity.
Reference is made to Exhibit H filed herewith which sets forth
GPU's consolidated capitalization and earnings at March 31, 1998 and after
giving effect to the transactions proposed herein. As set forth in such exhibit,
the proposed transactions will not have a material impact on GPU's
capitalization or earnings.
ITEM 2. FEES, COMMISSIONS AND EXPENSES.
The estimated fees, commission and expenses to be
incurred in connection herewith will be filed by amendment.
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(3) As discussed in the November 5 Order, GPU incurred a loss for 1997 from
its investments in EWGs and FUCOs as a result of the windfall profits
tax imposed on Midlands Electricity, plc.
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<PAGE>
ITEM 3. APPLICABLE STATUTORY PROVISIONS.
--------------------------------
A. The acquisition by Penelec of the common stock of
Investment Sub, the acquisition by Investment Sub of the general partnership
interests of Penelec Capital L.P., and the acquisition by Penelec Capital L.P.
of the Subordinated Debentures and the Guaranties are subject to Sections 9(a),
10 and 12(b) of the Act and Rule 45 thereunder.
B. The issuance and sale of the Preferred Securities by
Penelec Capital L.P. and the issuance and sale of the Trust Securities by
Penelec Capital Trust, and the contingent distribution of Subordinated
Debentures to the Trust Securities holders, are subject to Sections 6(a) and 7
of the Act and Rule 54 thereunder.
C. Penelec believes that the issuance of its Subordinated
Debentures and its Guaranties to Penelec Capital L.P. will be exempt from the
declaration requirements of the Act by virtue of Rule 45(b) (1) thereunder.
ITEM 4. REGULATORY APPROVALS
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A. The acquisition by Penelec of the common stock of Investment
Sub will require approval of the Pennsylvania Public Utility Commission("PaPUC")
under the Pennsylvania Public Utility Code ("Code"). In
addition, the issuance by Penelec of its Subordinated Debentures and its
Guaranties will require PaPUC approval under the Code. Penelec has filed with
the PaPUC a Securities Certificate (attached as an exhibit hereto) seeking such
approval. Penelec will file with the PaPUC an application
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<PAGE>
under Section 1102(a)(4) of the Code seeking approval to acquire the common
stock of Investment Sub. It is anticipated that the PaPUC will expressly approve
such transactions.
B. No other state commission has jurisdiction with
respect to the subject transactions and, assuming that your Commission
authorizes and approves all aspects of the Transactions (including the
accounting therefor), no other federal commission has jurisdiction with respect
thereto. Penelec believes that Penelec Capital L.P. and Penelec Capital Trust
will be exempt from regulation as an investment company under the 1940 Act,
pursuant to the "finance company" exemption afforded by Section 6(a)(5) under
the 1940 Act.
ITEM 5. PROCEDURE.
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It is requested that the Commission issue an order
with respect to the Transactions proposed herein at the earliest practicable
date, but in any event not later than September 14, 1998. It is further
requested that (i) there not be a recommended decision by an Administrative Law
Judge or other responsible officer of the Commission, (ii) the Office of Public
Utility Regulation be permitted to assist in the preparation of the Commission's
decision, and (iii) there be no waiting period between the issuance of the
Commission's order and the date on which it is to become effective.
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<PAGE>
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS.A-1 -
Certificate of Incorporation of Investment Sub -- to be filed by amendment.
A-2 - By-Laws of Investment Sub -- to be filed by amendment.
A-3 - Certificate of Limited Partnership of Penelec Capital
L.P. -- to be filed by amendment.
A-4 - Form of Limited Partnership Agreement of Penelec Capital
L.P. -- to be filed by amendment.
A-5 - Form of Declaration of Trust of Penelec Capital Trust --
to be filed by amendment.
A-6 - Form of Trust Agreement of Penelec Capital Trust -- to
be filed by amendment.
A-7 - Form of Trust Securities Certificate of Penelec Capital
Trust -- to be filed by amendment.
A-8 - Form of Penelec Subordinated Debenture Indenture - to be
filed by amendment.
A-9 - Form of Subordinated Debenture instrument--incorporated
by reference to Exhibit A-5.
B-1 - Form of Guaranty -- to be filed by amendment.
B-2 - Form of Underwriting Agreement -- to be filed by
amendment.
C - Registration Statement on Form S-3
under the Securities Act of 1933
relating to the various securities
which are the subject hereof and all
amendments and exhibits thereto --
Incorporated by reference to SEC
Registration No. _________ to be
assigned to such registration
statement.
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<PAGE>
D-1 - Copy of Securities Certificate filed by Penelec with
the PaPUC with respect to the issuance of Subordinated
Debentures and Guaranties.
D-2 - Copy of Application under Section 1102(a)(4) of the Code
filed with the PaPUC -- to be filed by amendment.
D-3 - Copy of PaPUC Order registering Penelec's Securities
Certificates -- to be filed by amendment.
D-4 - Copy of PaPUC Order approving the Application under
Section 1102(a)(4) of the Code -- to be filed by
amendment.
E - Not Applicable.
F-l - Opinion of Berlack, Israels & Liberman LLP -- to be
filed by amendment.
F-2 - Opinion of Ballard Spahr Andrews & Ingersoll, LLP --
to be filed by amendment.
G - Proposed form of public notice.
H - GPU Actual and Pro Forma Capitalization ratios.
(b) Financial Statements:
1-A - Penelec Consolidated Balance
Sheets, actual and pro forma, as at
March 31, 1998, and Consolidated
Statements of Income, actual and pro
forma, and Statement of Retained
Earnings, for the year ended March
31, 1998; pro forma journal entries.
1-B - GPU Consolidated Balance Sheets,
actual and pro forma, as at March
31, 1998, and Consolidated
Statements of Income, actual and pro
forma, and Statement of Retained
Earnings, for the year ended March
31, 1998; pro forma journal entries.
2 - Reference is made to Financial Statements included in
1 above.
3 - None.
4 - None, except as set forth in the Notes to Financial
Statements.
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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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<PAGE>
SIGNATURE
PURSUANT TO THE REQUIREMENTS OF THE PUBLIC UTILITY HOLDING COMPANY ACT
OF 1935, THE UNDERSIGNED COMPANY HAS DULY CAUSED THIS STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED.
PENNSYLVANIA ELECTRIC COMPANY
By:______________________________
T. G. Howson,
Vice President and Treasurer
Dated: July 13, 1998
EXHIBITS AND FINANCIAL STATEMENT TO BE FILED BY EDGAR
Exhibits:
D-1 - Copy of Securities Certificate filed by Penelec with the PaPUC
with respect to the issuance of Subordinated Debentures and
Guaranties.
G - Proposed form of public notice.
H - GPU Actual and Pro Forma Capitalization ratios.
Financial Statements:
1-A - Penelec Consolidated Balance Sheets, actual and pro
forma, as at March 31, 1998, and Consolidated
Statements of Income, actual and pro forma, and
Statement of Retained Earnings, for the year ended
March 31, 1998; pro forma journal entries.
1-B - GPU Consolidated Balance Sheets, actual and pro
forma, as at March 31, 1998, and Consolidated
Statements of Income, actual and pro forma, and
Statement of Retained Earnings, for the year ended
March 31, 1998; pro forma journal entries.
Exhibit D-1
BEFORE THE
PENNSYLVANIA PUBLIC UTILITY COMMISSION
In re:
SECURITIES CERTIFICATE OF PENNSYLVANIA )
ELECTRIC COMPANY IN THE MATTER OF THE ) SECURITIES
ISSUANCE AND SALE OF UP TO $130,000,000 ) CERTIFICATE
PRINCIPAL AMOUNT OF SUBORDINATED ) NO.
DEBENTURES AND EXECUTION AND DELIVERY )
OF THE GUARANTY IN CONNECTION WITH THE )
ISSUANCE OF TRUST SECURITIES HAVING )
AN AGGREGATE LIQUIDATION VALUE NOT TO )
EXCEED $125,000,000 BY A SPECIAL PURPOSE )
BUSINESS TRUST SUBSIDIARY OF PENNSYLVANIA )
ELECTRIC COMPANY )
TO PENNSYLVANIA PUBLIC UTILITY COMMISSION:
1. The name and address of the public utility filing this Securities
Certificate are:
Pennsylvania Electric Company ("Penelec")
2800 Pottsville Pike
Reading, Pennsylvania 19605
2. The names and addresses of the public utility's attorneys are:
Scott L. Guibord
Secretary
Pennsylvania Electric Company
2800 Pottsville Pike
Reading, Pennsylvania 19605
Robert C. Gerlach, Esquire
Ballard Spahr Andrews & Ingersoll, LLP
1735 Market Street - 51st Floor
Philadelphia, Pennsylvania 19103-7599
<PAGE>
3. Penelec is a public utility as defined in the Pennsylvania
Public Utility Code, as amended. Penelec was incorporated under the
laws of the Commonwealth of Pennsylvania on June 11, 1919, is
governed by the Pennsylvania Business Corporation Law of 1988 and
pursuant to such law has corporate power and authority to, among other
things, render to the public, electric and steam heat service
throughout Pennsylvania. Penelec renders electric service to the
public in numerous municipalities in thirty-one counties in western,
northern and south-central Pennsylvania.
4. All the outstanding Common Stock of Penelec is owned by GPU,
Inc. (formerly known as General Public Utilities
Corporation), a Pennsylvania corporation.
5. This Securities Certificate pertains to the issuance and sale by
Penelec of up to $130,000,000 of its subordinated debentures (the
"Subordinated Debentures") and execution and delivery of a guaranty
agreement (the "Guaranty") in connection with the issuance and sale by
its subsidiaries of the Preferred Securities and the Trust Securities
(each as defined below) as described in this Securities Certificate.
Penelec proposes to organize a special purpose business trust under
Delaware law ("Penelec Capital Trust"), which will issue and sell from
time to time in one or more series through December 31, 2000 up to
-2-
<PAGE>
$125,000,000 aggregate liquidation value of preferred beneficial
interests, in the form of Trust Securities (having a liquidation value
per interest to be determined at the time of issuance based on market
conditions) (the "Trust Securities")*. Each Trust Security will
represent a cumulative preferred security (the "Preferred Securities")
of a Delaware limited partnership ("Penelec Capital L.P."), which will
be a special purpose indirect subsidiary of Penelec. Penelec also
proposes to form a special purpose Delaware corporation ("Investment
Sub"), for the sole purpose of acting as general partner of Penelec
Capital L.P. The sole purpose of Penelec Capital Trust will be to
acquire the Preferred Securities and to issue and sell the Trust
Securities evidencing the Preferred Securities. Penelec Capital Trust
will apply the proceeds from the sale of the Trust Securities to
purchase the Preferred Securities. Penelec Capital L.P. will, in turn,
use the proceeds received from the sale of the Preferred Securities to
purchase Penelec's Subordinated Debentures. The sole purpose of Penelec
Capital L.P. is to issue one or more series of Preferred Securities and
to lend the proceeds thereof, plus
----------------
* The transactions proposed herein are substantially the same as the
transactions approved by the Commission in the Securities Certificate
No. S-940427 and No. A-110400F0026 in connection with monthly income
preferred securities ("MIPS"), with the exception that the MIPS were
issued by a limited partnership subsidiary of Penelec and the Trust
Securities will be issued by a special purpose business trust
subsidiary. The trust structure is being utilized so that the buyers of
the securities receive a Form 1099 for their income tax purposes,
rather than a Form K-1.
-3-
<PAGE>
the capital contribution (in an amount not to exceed $5,000,000) made
by Penelec in Penelec Capital L.P., to Penelec, which loan will be
evidenced by the Subordinated Debentures issued by Penelec. Penelec
will acquire the common stock of Investment Sub for a nominal
consideration and will capitalize Investment Sub with (i) a capital
contribution in the amount of up to $5,000,000, and (ii) a demand
promissory note in the principal amount of up to $13,000,000, such note
to accrue interest, compounded semi-annually, at a rate equal to the
Citibank, N.A. base rate as in effect from time to time. Investment Sub
will acquire all of the general partner interests in Penelec Capital
L.P. for up to $5,000,000. Penelec will execute and deliver the
Guaranty for the benefit of the holders of the Preferred Securities,
pursuant to which it will make certain payments to the holders of the
Preferred Securities to the extent not paid by Penelec Capital L.P.
Such payment may include (A) accrued but unpaid distributions on the
Preferred Securities, if and to the extent Penelec Capital L.P. has
funds legally available therefor, (B) the redemption price payable for
any Preferred Securities called for redemption to the extent that
Penelec Capital L.P. has funds legally available therefor, (C) the
aggregate liquidation preference on the Preferred Securities, including
all accrued but unpaid distributions, whether or not declared, to the
extent that Penelec Capital L.P. has funds legally available therefor,
and (D) certain additional amounts.
-4-
Each Subordinated Debenture will be issued under an Indenture to be
entered into with United States Trust Company of New York, as trustee
(the "Debenture Indenture"), and will have a maturity not to exceed 49
years. The issuance of the Subordinated Debentures by 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. Prior to maturity, Penelec will pay
only interest on the Subordinated Debentures at a rate equal to the
distribution rate on the Preferred Securities (which distribution
payments will then be distributed by Penelec Capital Trust to the
holders of the Trust Securities), with any excess being distributed to
Penelec as a distribution on Penelec's investment in Penelec Capital
L.P., thereby reducing the interest cost on the Subordinated
Debentures. Each Subordinated Debenture and Penelec's obligations under
the Guaranty will be subordinate to all other existing and future
"Senior Indebtedness," (as defined below) of Penelec
-5-
<PAGE>
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 Subordinated
Debenture or the Guaranty. However, Penelec may not declare and pay
dividends on, or redeem or retire, its outstanding Cumulative Preferred
Stock or Common Stock unless all payments then due (whether or not
previously deferred) under the Subordinated Debentures and the Guaranty
have been made. "Senior Indebtedness" consists of (i) the principal of
and premium (if any) in respect of (A) indebtedness of Penelec for
money borrowed and (B) indebtedness evidenced by securities,
debentures, bonds or other similar instruments (including purchase
money obligations) for payment of which Penelec is responsible or
liable; (ii) all capital lease obligations of Penelec; (iii) all
obligations of Penelec issued or assumed as the deferred purchase price
of property, all conditional sale obligations of Penelec and all
obligations of Penelec under any title retention agreement (but
excluding trade accounts payable arising in the ordinary course of
business); (iv) certain obligations of Penelec for the reimbursement of
any obligor on any letter of credit, banker's acceptance, security
purchase facility or similar credit transaction; (v) all obligations of
the type referred to in clauses (i) through (iv) of other persons for
the payment of which Penelec is responsible or liable as obligor,
guarantor or otherwise; and (vi) all obligations of the types referred
to in clauses
-6-
<PAGE>
(i) through (v) of other persons secured by any lien on any property or
asset of Penelec (whether or not such obligation is assumed by
Penelec), except for any such indebtedness that is by its terms
subordinated to or pari passu with the Subordinated Debentures. The
Preferred Securities will be redeemed at the maturity of the
Subordinated Debentures or upon the redemption of such Subordinated
Debentures, but will not be subject to any mandatory sinking fund. The
Preferred Securities may also be subject to redemption upon the
occurrence of certain events relating to the tax treatment of the
Preferred Securities and/or Penelec Capital L.P. and/or the treatment
of Penelec Capital L.P. under the Investment Company Act of 1940, as
amended (the "1940 Act"). The redemption of the Preferred Securities
will cause a mandatory redemption of the Trust Securities. It is
expected that Penelec's interest payments on the Subordinated
Debentures will be deductible for income tax purposes. When
implemented, Penelec's consolidated balance sheet will reflect the
Trust Securities as "Penelec-obligated mandatorily redeemable preferred
securities." The Subordinated Debentures will not appear on Penelec's
consolidated balance sheet because the principal and interest on the
Subordinated Debentures will be payable to a subsidiary. For the same
reason, the interest payments on the Subordinated Debentures and the
distributions to Penelec on Penelec's investment in Penelec Capital
L.P. will not
-7-
<PAGE>
appear on Penelec's consolidated balance sheet because Penelec Capital
L.P. is a subsidiary. The distribution payments made on the Trust
Securities will be reported in Penelec's consolidated income statements
as "Interest Charges - Penelec-obligated mandatorily redeemable
preferred securities." Penelec desires to maintain the flexibility to
issue and sell the Trust Securities in one or more sales either
publicly, through negotiated underwritings, or privately, through
direct placements, with amounts of the offering, annual distribution
rate, redemption provisions and other terms, along with the terms of
the Subordinated Debentures to be determined later at the time of
issuance. Penelec believes that this flexibility will enable it to
react effectively to various changes in market conditions. Penelec will
provide to your Honorable Commission (the "Commission") reports, within
60 days after each issuance of the securities described herein, listing
the terms and conditions of all the Trust Securities, Preferred
Securities and the corresponding Subordinated Debentures and the
related Guaranty issued during that period pursuant to this Securities
Certificate together with a calculation of the cumulative liquidation
value of the Trust Securities and the Preferred Securities and
principal amount of Subordinated Debentures so issued.
-8-
<PAGE>
Exact Title of Security
-----------------------
Trust Securities of Penelec Capital Trust, each representing a ___%
Cumulative Income Preferred Security, Series ___ of Penelec Capital L.P.; ___%
Subordinated Debentures, Series ___ of Pennsylvania Electric Company; and the
Guaranty Agreement executed and delivered by Pennsylvania Electric Company for
the benefit of the holders of the Preferred Securities and the payments
thereunder.
Aggregate Number of Securities to be Issued and Aggregate Principal Amount
--------------------------------------------------------------------------
Penelec Capital Trust will issue and sell up to $125,000,000 aggregate
liquidation value of the Trust Securities. The aggregate principal amount of the
Guaranty will also be up to $125,000,000, plus, in the event of a redemption or
liquidation, accrued and unpaid distributions on the Trust Securities and
certain additional amounts. Penelec will issue and sell up to $130,000,000
aggregate principal amount of the Subordinated Debentures. The principal amount
of the Subordinated Debentures will correspond to the aggregate liquidation
value of the Preferred Securities, plus Penelec's capital contribution in
Penelec Capital L.P. of up to $5,000,000.
Par Value
---------
Without par value.
Nominal Date(s) of Issue
------------------------
From time to time through December 31, 2000, to be determined by market
conditions.
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<PAGE>
Date of Maturity
----------------
A series of the Preferred Securities, along with the Guaranty thereof,
will be redeemed at the maturity or redemption of the corresponding series of
the Subordinated Debentures. Upon a redemption of Preferred Securities, the
corresponding Trust Securities will be redeemed. The maturity dates of the
Subordinated Debentures will not exceed 49 years from the date of issuance.
Interest Rate(s) and Payment Date(s) (Subordinated Debentures)
-----------------------------------
The interest payments on the Subordinated Debentures will be Penelec
Capital L.P.'s sole source of funds to make distributions on the Preferred
Securities. The interest rates and payment dates on the Subordinated Debentures
will be determined at the time of issuance based on then existing market
conditions. The interest payments on the Subordinated Debentures will be at
least equal to the distribution payments on the Preferred Securities (and the
corresponding Trust Securities) and will have interest payment dates which
correspond to the distribution dates on the Preferred Securities (and the
corresponding Trust Securities). Distributions, if declared, and correspondingly
all interest payments, will be made at least semi-annually. Penelec will have
the ability to defer interest payments on the Subordinated Debentures to Penelec
Capital L.P. for a period of up to five years but not beyond the maturity date
or any redemption date of the Subordinated Debentures (the "Deferral Period"),
in which event Penelec Capital L.P. may similarly defer payment of distributions
on the Trust Securities. In no event may
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distributions be deferred beyond the maturity date of the Subordinated
Debentures. However, Penelec may be required to pay interest on the deferred
interest payments to the extent required by law.
Distribution Rates and Payment Dates (Trust Securities, Preferred
------------------------------------
Securities and Guaranty)
Whenever Penelec Capital Trust receives any cash distribution
representing a distribution on the Preferred Securities or payment under the
Guaranty, Penelec Capital Trust will distribute such amount to the holders of
the Trust Securities. The Preferred Securities will entitle the holders thereof
to receive cumulative distributions, paid at least semi-annually in arrears, at
the amount per security per annum fixed for the particular series. However, as
stated above, Penelec will have the ability to defer interest payments on the
Subordinated Debentures to Penelec Capital L.P. during the Deferral Period, in
which event no distributions will be made on the Preferred Securities or,
accordingly, on the Trust Securities. The payments under the Guaranty will be in
the same amounts as the distributions on the Preferred Securities, but only to
the extent such payments are not made by Penelec Capital L.P. from funds on hand
legally available therefor.
Extent to Which Taxes on Securities Are Assumed by the Issuer
-------------------------------------------------------------
No taxes on the Subordinated Debentures are to be assumed by Penelec;
however, Penelec may pay additional interest on the Subordinated Debentures
equal to taxes imposed on the Penelec Capital L.P. or Penelec Capital Trust.
The extent to which
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Penelec may assume taxes under the Guaranty will be negotiated at the time of
issuance subject to market conditions.
Redemption Provisions
---------------------
A series of the Trust Securities will be subject to mandatory
redemption upon redemption of the corresponding series of the Preferred
Securities. A series of the Preferred Securities will be subject to mandatory
redemption upon the maturity or prior redemption of the corresponding series of
the Subordinated Debentures and may also be redeemable at the option of Penelec
at a price equal to their liquidation value plus any accrued and unpaid
distributions plus any premium negotiated in connection with the marketing of
the Trust Securities, (i) at any time after a specified no-call period (if any)
which could be up to the life of the issuance, or (ii) in the event that (I)
Penelec Capital L.P. is required by applicable tax laws to withhold or deduct
certain amounts in connection with distributions or other payments, or (II)
Penelec Capital L.P. or Penelec Capital Trust is subject to federal income tax
with respect to interest received on the Subordinated Debentures for federal
income tax purposes, or (III) it is determined that the interest payments by
Penelec on the Subordinated Debentures are not deductible for federal income tax
purposes or (IV) Penelec Capital L.P. is subject to more than a de minimis
amount of other taxes, duties or other governmental charges, or (V) Penelec
Capital L.P. becomes subject to regulation as an "investment company" under the
1940 Act. Upon occurrence of any of the events set forth in clause (ii) of the
immediately preceding sentence, Penelec Capital Trust and Penelec Capital L.P.
-12-
could be dissolved and the Subordinated Debentures distributed directly to the
holders of the Trust Securities and to Penelec on a pro rata basis, resulting in
direct ownership of the Subordinated Debentures by the holders of the Trust
Securities. The Subordinated Debentures distributed to Penelec would be
canceled.
Sinking Fund
------------
None.
Liquidation Value (Trust Securities and Preferred Securities)
-----------------
The liquidation value of the Trust Securities and the Preferred
Securities will be determined at the time of issuance . Upon receipt by Penelec
Capital Trust of any distribution from Penelec Capital L.P. upon any voluntary
or involuntary liquidation, dissolution or winding up of Penelec Capital L.P.,
the holders of the Trust Securities will be entitled to receive such amounts in
proportion to the respective number of Preferred Securities represented by such
Trust Securities, out of the assets of Penelec Capital L.P. available for
distribution after satisfaction of creditors of Penelec Capital Trust as
required by law. However, the holders of the Trust Securities would not be
entitled to share further in the assets of Penelec Capital Trust.
Upon voluntary or involuntary dissolution or winding up of Penelec
Capital L.P., the holders of Preferred Securities will be entitled to receive
out of the assets of Penelec Capital L.P., after satisfaction of liabilities to
creditors and before any
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distribution of assets is made to holders of its general partner interests, the
sum of their stated liquidation preference and all accumulated and unpaid
distributions to the date of payment of the Preferred Securities. All assets of
Penelec Capital L.P. remaining after payment of the liquidation distribution to
the holders of Preferred Securities will be distributed to the General Partner.
Upon any liquidation, dissolution or winding up of Penelec, the amount
payable on each series of the Preferred Securities would be limited to a pro
rata portion of any amount recovered by Penelec Capital L.P. in its capacity as
a subordinated debt holder of Penelec. The Subordinated Debentures and the
payment obligations under the Guaranty will be subordinate to all other existing
and future Senior Indebtedness, except for any such indebtedness that is by its
terms subordinated to or pari passu with the Subordinated Debentures.
Name and Address of Trustee and Whether Affiliated
--------------------------------------------------
The Subordinated Debentures will be issued under the Debenture
Indenture with United States Trust Company of New York, as trustee. United
States Trust Company of New York is not and will not be affiliated with either
Penelec, Penelec Capital L.P. or Penelec Capital Trust.
6. (i) Subject to the receipt from the Commission of a Notice of
Registration with respect to this Securities Certificate and of orders from the
Securities and Exchange Commission ("SEC") declaring effective the Application
on Form U-1 and the Registration Statement referred to in Item 8 hereof, in
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the case of a public offering, Penelec proposes to issue and sell the Trust
Securities either (a) in one or more public sales through negotiated
underwritings to or through non-affiliated underwriters, purchasers or agents,
or (b) in one or more private placement sales through non-affiliated banks or
investment banking firms acting as agents of Penelec or directly to
non-affiliated agents, purchasers or underwriters. The names of the
underwriters, purchasers or agents will be included in the Underwriting
Agreement or Purchase Agreement and will be filed at a later time. To the best
of Penelec's knowledge and belief, there is no person, firm or corporation
ordinarily engaged in underwriting securities or acting as an agent for the sale
of securities, which is an "affiliated interest" of Penelec, nor is Penelec an
"affiliated interest" of any such person, firm or corporation as the term is
defined in Section 2101 of the Pennsylvania Public Utility Code, as amended.
Penelec expects that the commissions payable to the underwriters or
selling agents for selling the Trust Securities will be approximately 1% of the
liquidation value of the Trust Securities sold through such agents or
underwriters for an institutional offering and approximately 3.15% of the
liquidation value of the Trust Certificates sold through such agents or
underwriters for a retail offering.
(ii) An estimate of the expenses of issuance of the various
securities described in this Securities Certificate and the Securities
Certificate relating to the issuance of the Senior
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Notes, described in another Securities Certificate being filed concurrently, all
of which are proposed to be issued and sold under a new financing program,
assuming that an aggregate principal amount of $725,000,000 of such securities
is sold, is as follows:
Filing Fees - SEC $240,000
Printing Fees 25,000
New York Stock Exchange Fees 50,000
Legal Fees 300,000
Trustee Fees and Expenses 30,000
Rating Agencies Fees and Expenses 50,000
Accounting Fees 25,000
Miscellaneous Expenses 20,000
--------
Total $740,000
The expenses incurred in connection with issuance and sale of
each series of the Trust Securities, together with the terms and conditions of
the corresponding series of the Preferred Securities and the Senior Notes, will
be provided to the Commission within 60 days after issuance of such series.
7. The net proceeds (after deduction of underwriting discounts and
commissions and the expenses of the offering) of the Trust Securities will be
applied by Penelec: (i) to redeem other outstanding securities of Penelec,
including preferred securities, preferred stock and first mortgage bonds, (ii)
to repay outstanding short-term bank loans or other unsecured indebtedness,
(iii) for construction purposes (see Penelec's 1998 Construction Budget attached
as Exhibit M), (iv) for other corporate purposes and (v) to reimburse Penelec's
treasury for funds previously expended therefrom for the above purposes.
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<PAGE>
8. An Application on Form U-1 will be filed and one or more
Registration Statements will be filed with the SEC with respect to the issuance
and sale of the Trust Securities, the related securities and the related
transactions.
Concurrently with the filing of this Securities Certificate, Penelec is
filing another Securities Certificate with the Commission relating to the
proposed issuance and sale of Senior Notes secured by "fall away" first mortgage
bonds. The securities of Penelec described in these Securities Certificates are
proposed to be issued as a part of Penelec's new financing program, pursuant to
which program Penelec contemplates the issuance and sale of either the Senior
Notes and/or Subordinated Debentures and execution and delivery of the Guaranty
described in this Securities Certificate in one or more series; provided,
however, that the total principal amount of the Senior Notes and total
liquidation value of the Trust Securities to be issued and sold may not in the
aggregate exceed $725,000,000; and provided, further, that the total principal
amount of the Trust Securities may not in the aggregate exceed $125,000,000.
Accordingly, Penelec requests that the Commission take action on both Securities
Certificates simultaneously.
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<PAGE>
9. There are appended hereto and made part hereof the following
Exhibits:
Exhibit A - Balance Sheet of Penelec per books as at March 31, 1998.
Exhibit B-1 - Statement of Income of Penelec for the 12 months
ended March 31, 1998.
Exhibit B-2 - Statement of Retained Earnings and Statement of
Capital Surplus of Penelec for the 12 months ended
March 31, 1998.
Exhibit C - Statement of Utility Plant by Classified Accounts of
Penelec as at March 31, 1998.
Exhibit D - Statement of Securities of Other Corporations Owned
by Penelec as at March 31, 1998.
Exhibit E - Statement of Status of Funded Debt Outstanding of
Penelec as at March 31, 1998.
Exhibit F - Statement of Status of Capital Stock Outstanding of
Penelec as at March 31, 1998.
Exhibit G-1 - Copy of Registration Statements filed
by Penelec on Form S-3 with the SEC under
the Securities Act of 1933, as amended, with
respect to the proposed issuance and sale
of, among other things, the Trust
Securities, the Preferred Securities, the
Guaranty and the Subordinated Debentures (to
be filed supplementally).
Exhibit G-2- Copy of the Application on Form U-1 with the SEC
under the Public Utility Holding Company Act of 1935
(to be filed supplementally).
Exhibit H - Not applicable.
Exhibit I - Copy of Resolutions of the Board of Directors of
Penelec authorizing, among other things, the proposed
issuance and sale of the
Subordinated Debentures and the Guaranty.
Exhibit J-1 - Proposed form of Underwriting Agreement
(to be filed supplementally).
Exhibit J-2 - Proposed form of Trust Agreement for Penelec
Capital Trust (to be filed supplementally).
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<PAGE>
Exhibit J-3 - Proposed form of Guaranty by Penelec (to be filed
supplementally).
Exhibit J-4 - Proposed form of Subordinated Debenture Indenture,
including the form of the Subordinated Debentures
(to be filed supplementally).
Exhibit K - Journal Entries of Penelec, showing all charges and
credits to be made on the books of account of Penelec
as a result of the issuance of securities described
herein.
Exhibit L - Source and Application Funds.
Exhibit M - Penelec=s 1998 Construction Budget.
-19-
<PAGE>
WHEREFORE, Pennsylvania Electric Company prays your Honorable
Commission to register this Securities Certificate pursuant to Chapter 19 of the
Public Utility Code, as amended, and to grant any other approvals your
Commission deems appropriate to further the consummation of the financing
program described herein.
PENNSYLVANIA ELECTRIC COMPANY
Dated: June 30, 1998
By: _________________________
Vice President
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<PAGE>
STATE OF NEW JERSEY )
) ss.:
COUNTY OF MORRIS )
______________________, being duly sworn according to law, deposes and
says that he is a ___________________ of Pennsylvania Electric Company, that he
is authorized to and does make this affidavit for it; and that the facts set
forth above are true and correct (or are true and correct to the best of his
knowledge, information and belief) and he expects the said Pennsylvania Electric
Company to be able to prove the same at any hearing hereof.
PENNSYLVANIA ELECTRIC COMPANY
By:_________________________________
Sworn to and subscribed before me this ___ day of ______, 1998.
- --------------------------------
Notary Public
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EXHIBIT G
SECURITIES AND EXCHANGE COMMISSION
(RELEASE NO. 35-_________; 70-____)
PENNSYLVANIA EDISON COMPANY
Pennsylvania Edison Company ("Penelec"), 2800 Pottsville Pike,
Reading, Pennsylvania, an electric utility subsidiary of GPU, Inc., a registered
holding company, has filed an application pursuant to Sections 6(a), 7, 9(a), 10
and 12(b) of the Public Utility Holding Company Act of 1935 and Rules 45 and 54
thereunder.
Penelec proposes to organize a special purpose business trust
under Delaware law ("Penelec Capital Trust"), which will issue and sell from
time to time in one or more series through December 31, 2000 up to $125 million
aggregate liquidation value of preferred beneficial interests, in the form of
Trust Securities (having a liquidation value per interest to be determined) (the
"Trust Securities")*. Each Trust Security will represent a cumulative preferred
security (the "Preferred Securities") of a Delaware limited partnership
("Penelec Capital
- -----------------
* The transactions proposed herein are substantially the same as the
transactions approved by the Commission in Order dated June 24, 1997 (HCAR No.
35-26071) (monthly income preferred securities ("MIPS")) with the exception that
the MIPS were issued by a limited partnership subsidiary of Penelec and the
Trust Securities will be issued by a special purpose business trust subsidiary.
The trust structure is being utilized to help ensure the intended tax treatment,
as discussed below.
-1-
L.P."), which will be a special purpose indirect subsidiary of Penelec. Penelec
also proposes to form a special purpose Delaware corporation ("Investment Sub"),
for the sole purpose of acting as general partner of Penelec Capital L.P. The
sole purpose of Penelec Capital Trust will be to acquire the Preferred
Securities and to issue the Trust Securities evidencing the Preferred
Securities. The sole purpose of Penelec Capital L.P. is to issue one or more
series of Preferred Securities and to lend the proceeds thereof, plus the
capital contribution (in an amount not to exceed $5 million) made by Penelec in
Penelec Capital L.P., to Penelec, which loan will be evidenced by the
Subordinated Debentures (defined below) issued by Penelec.
Penelec will acquire the common stock of Investment Sub for a
nominal consideration and will capitalize Investment Sub with (i) a capital
contribution in the amount of up to $5 million, and (ii) a demand promissory
note in the principal amount of up to $13 million, such note to accrue interest,
compounded semi-annually, at a rate equal to the Citibank, N.A. base rate as in
effect from time to time. Investment Sub will acquire all of the general partner
interests in Penelec Capital L.P. for up to $5 million (the "L.P. Equity
Contribution").
Penelec Capital Trust will apply the proceeds from the sale
of the Trust Securities to purchase the Preferred Securities. Penelec Capital
L.P. will, in turn, use the proceeds received from the sale of the Preferred
Securities, together with the L.P. Equity Contribution, to purchase Penelec's
subordinated
-2-
<PAGE>
debentures (individually, a "Subordinated Debenture" and collectively, the
"Subordinated Debentures").
Penelec will also unconditionally guarantee the payment by
Penelec Capital L.P. of (A) accrued but unpaid distributions on the Preferred
Securities, if and to the extent Penelec Capital L.P. has declared such
distributions out of funds legally available therefor, (B) the redemption price
for any redemption of the Preferred Securities, (C) the aggregate liquidation
preference on the Preferred Securities, including all accrued but unpaid
distributions, whether or not declared and (D) certain additional amounts (the
"Guaranties").
Each Subordinated Debenture will be issued under an Indenture
to be entered into with United States Trust Company of New York, as trustee, and
will have an initial term of up to 49 years. Prior to maturity, Penelec will pay
only interest on the Subordinated Debentures at a rate equal to the distribution
rate on the Preferred Securities. Such interest payments will constitute Penelec
Capital Trust's only income and will be used by it to pay distributions on the
Trust Securities, with any excess being distributed indirectly to Penelec as a
distribution on Penelec's investment in Penelec Capital L.P., thereby reducing
the interest cost on the Subordinated Debentures. Distributions on the Trust
Securities will be made not less than semi-annually, and will be cumulative and
must be made to the extent that Penelec Capital Trust has legally available
funds and cash sufficient for such purposes. However, Penelec will have the
-3-
right to defer payment of interest on the Subordinated Debentures for up to five
years in which event Penelec Capital Trust may similarly defer payment of
distributions on the Trust Securities, but in no event may distributions be
deferred beyond the maturity date of the Subordinated Debentures. The
distribution rates, payment dates, redemption and other similar provisions of
each series of Trust Securities will be identical to the interest rates, payment
dates, redemption and other provisions of the Subordinated Debentures issued by
Penelec with respect thereto.
Each Subordinated Debenture and related Guaranty will be
subordinate to all other existing and future "Senior Indebtedness," as defined
below, 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 Subordinated
Debenture or the Guaranty. However, Penelec may not declare and pay dividends
on, or redeem or retire, its outstanding Cumulative Preferred Stock or Common
Stock unless all payments then due (whether or not previously deferred) under
the Subordinated Debentures and the Guaranties have been made. "Senior
Indebtedness" consists of (i) the principal of and premium (if any) in respect
of (A) indebtedness of Penelec for money borrowed and (B) indebtedness evidenced
by securities, debentures, bonds or other similar instruments (including
purchase money obligations) for payment of which Penelec is responsible or
liable; (ii) all capital lease obligations of Penelec; (iii) all obligations of
Penelec issued or assumed as
-4-
the deferred purchase price of property, all conditional sale obligations of
Penelec and all obligations of Penelec under any title retention agreement (but
excluding trade accounts payable arising in the ordinary course of business);
(iv) certain obligations of Penelec for the reimbursement of any obligor on any
letter of credit, banker's acceptance, security purchase facility or similar
credit transaction; (v) all obligations of the type referred to in clauses (i)
through (iv) of other persons for the payment of which Penelec is responsible or
liable as obligor, guarantor or otherwise; and (vi) all obligations of the types
referred to in clauses (i) through (v) of other persons secured by any lien on
any property or asset of Penelec (whether or not such obligation is assumed by
Penelec), except for any such indebtedness that is by its terms subordinated to
or pari passu with the Subordinated Debentures.
It is expected that Penelec's interest payments on the
Subordinated Debentures will be deductible for income tax purposes and that
Penelec Capital Trust will be treated as a trust for federal income tax
purposes. Consequently, distributions from Penelec Capital Trust to the holders
of Trust Securities and indirectly to Penelec will be deemed to constitute
distributions of the interest income received by Penelec Capital Trust on the
Subordinated Debentures. Consequently, such holders and Penelec will not be
entitled to any "dividend received deduction" under the Internal Revenue Code
with respect to such distributions.
-5-
A series of the Trust Securities will be subject to mandatory
redemption upon redemption of the corresponding series of the Preferred
Securities. A series of Preferred Securities will be subject to mandatory
redemption upon the maturity or prior redemption of the corresponding series of
the Subordinated Debentures, but will not be subject to any mandatory sinking
fund. A series of Preferred Securities may also be redeemable at the option of
Penelec at a price equal to their liquidation value plus any accrued and unpaid
distributions plus any premium negotiated in connection with the marketing of
the Trust Securities, (i) at any time after a specified no-call period (if any)
which could be up to the life of the issuance, or (ii) in the event that (I)
Penelec Capital L.P. is required by applicable tax laws to withhold or deduct
certain amounts in connection with distributions or other payments, or (II)
Penelec Capital L.P. or Penelec Capital Trust is subject to federal income tax
with respect to interest received on the Subordinated Debentures, or (III) it is
determined that the interest payments by Penelec on the Subordinated Debentures
are not deductible for federal income tax purposes or (IV) Penelec Capital L.P.
is subject to more than a de minimis amount of other taxes, duties or other
governmental charges, or (V) Penelec Capital L.P. becomes subject to regulation
as an "investment company" under the Investment Company Act of 1940, as amended
("1940 Act"). Upon occurrence of any of the events set forth in clause (ii) of
the immediately preceding sentence, Penelec Capital L.P. and Penelec Capital
Trust could be dissolved and the Subordinated Debentures distributed directly to
the holders of the Trust Securities and
-6-
to Penelec on a pro rata basis, resulting in direct ownership of the
Subordinated Debentures by the holders of the Trust Securities. The Subordinated
Debentures distributed to Penelec will be canceled.
In the event that Penelec Capital Trust is required by
applicable tax laws to withhold or deduct certain amounts in connection with
distributions or other payments, Penelec Capital Trust may also have the
obligation, if the Trust Securities are not redeemed or Subordinated Debentures
are not distributed to the holders thereof as aforesaid, to "gross up" such
payments so that the Trust Securities holders will receive the same payment
after such withholding or deduction as they would have received if no such
withholding or deduction were required. In such latter event, Penelec's
obligations under the Subordinated Debentures and the Guaranties would also
cover any such "gross up" obligations.
Upon receipt by Penelec Capital Trust of any distribution from
Penelec Capital L.P. upon any voluntary or involuntary liquidation, dissolution
or winding up of Penelec Capital L.P., the holders of the Trust Securities will
be entitled to receive such amounts in proportion to the respective number of
Preferred Securities represented by such Trust Securities, out of the assets of
Penelec Capital L.P. available for distribution after satisfaction of
liabilities to creditors of Penelec Capital Trust.
-7-
<PAGE>
In the event of any voluntary or involuntary dissolution or
winding up of Penelec Capital L.P., the holders of Preferred Securities will be
entitled to receive out of the assets of Penelec Capital L.P., after
satisfaction of liabilities to creditors and before any distribution of assets
is made to the Investment Sub, the sum of their stated liquidation preference
and all accumulated and unpaid distributions to the date of payment of the
Preferred Securities. All assets of Penelec Capital L.P. remaining after payment
of the liquidation distribution to the holders of Preferred Securities will be
distributed to the Investment Sub.
Upon any liquidation, dissolution or winding up of Penelec,
the amount payable on each series of the Preferred Securities would be limited
to a pro rata portion of any amount recovered by Penelec Capital L.P. in its
capacity as a subordinated debt holder of Penelec. The Subordinated Debentures
and the payment obligations under the Guaranty will be subordinate to all other
existing and future Senior Indebtedness, except for any such indebtedness that
is by its terms subordinated to or pari passu with the Subordinated Debentures.
The constituent instruments of Penelec Capital Trust,
including its declaration of trust, will provide, among other things, that
Penelec Capital Trust's activities will be limited to the issuance and sale of
Trust Securities from time to time and the application of the proceeds thereof
to the purchase of the Preferred Securities. Accordingly, it is not proposed
that
-8-
Penelec Capital Trust's constituent instruments include any interest or
distribution coverage or capitalization ratio restrictions on its ability to
issue and sell Trust Securities, as each such issuance will be supported by a
Subordinated Debenture and a Guaranty, and such restrictions would therefore not
be relevant or necessary for Penelec Capital Trust to maintain an appropriate
capital structure. Moreover, the issuance of Subordinated Debentures 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 Trust's constituent
instruments will further state that Penelec Capital L.P will be responsible for
all liabilities and obligations of Penelec Capital Trust.
Penelec expects to apply the net proceeds of the sale to
Penelec Capital L.P. of Subordinated Debentures to the redemption of outstanding
senior securities pursuant to the optional redemption provisions thereof, to the
repayment of outstanding short-term debt, for construction purposes, and for
other general corporate purposes, including to reimburse Penelec's treasury for
funds previously expended therefrom for
-9-
the above purposes. Penelec will not use any of the net proceeds of the sale of
Subordinated Debentures to acquire, either directly or indirectly, any interest
in any exempt wholesale generator ("EWG") or foreign utility company ("FUCO").
The Application and any amendments thereto are available for
public inspection through the Commission's Office of Public Reference.
Interested persons wishing to comment or request a hearing should submit their
views in writing by _________, 1998 to the Secretary, Securities and Exchange
Commission, Washington, D.C. 20549, and serve a copy on the applicant at the
address specified above. Proof of service (by affidavit, or in case of an
attorney at law, by certificate) should be filed with the request. Any request
for a hearing shall identify specifically the issues of fact or law that are
disputed. A person who so requests will be notified of any hearing, if ordered,
and will receive a copy of any notice or order issued in this matter. After said
date, the Application, as it may be amended, may be granted.
-10-
EXHIBIT
Item 6 H
CAPITALIZATION AND CAPITALIZATION RATIOS
----------------------------------------
(IN THOUSANDS)
The capitalization of GPU, Inc. at March 31, 1998 and pro forma is as
follows:
Actual Pro Forma
------ ---------
Amount % Amount %
----- ---- ------ ----
Long-term debt(1) $4 475 332 50.9 $4 475 332 49.5
Notes payable 299 618 3.4 299 618 3.3
Preferred stock (2) 170 478 1.9 170 478 1.9
Subsidiary-obligated
mandatorily redeemable
preferred securities 330 000 3.8 330 000 3.7
Trust originated
preferred securities - - 250 000 2.8
Common equity 3 519 270 40.0 3 506 489 38.8
--------- ----- --------- -----
$8 794 698 100.0 $9 031 917 100.0
(1) Includes securities due within one year of $411 140.
(2) Includes securities due within one year of $12 500.
<PAGE>
Financial Statements
Item 6(b) 1-A
Page 1 of 35
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
ACTUAL (UNAUDITED) AND PRO FORMA
AT MARCH 31, 1998
-----------------
(IN THOUSANDS)
Actual Adjustments
(Unaudited) (See pages 5-6) Pro Forma
----------- --------------- ---------
ASSETS
Utility Plant:
In Service, at original cost $2 829 073 $ - $2 829 073
Less, accumulated depreciation 1 114 874 - 1 114 874
--------- ------- ---------
Net utility plant in service 1 714 199 - 1 714 199
Construction work in progress 67 157 - 67 157
Other, net 24 101 7 730 31 831
--------- ------- ---------
Net utility plant 1 805 457 7 730 1 813 187
--------- ------- ---------
Other Property and Investments:
Nuclear decommissioning
trusts, at market 73 580 - 73 580
Other, net 7 066 - 7 066
--------- --------- ---------
Total other property
and investments 80 646 - 80 646
--------- --------- ---------
Current Assets:
Cash and temporary
cash investments 7 544 113 476 121 020
Special deposits 2 647 - 2 647
Accounts receivable:
Customers, net 75 936 - 75 936
Other 29 433 - 29 433
Unbilled revenues 42 303 - 42 303
Materials and supplies,
at average cost or less:
Construction and maintenance 48 853 - 48 853
Fuel 15 528 - 15 528
Deferred income taxes 7 589 - 7 589
Prepayments 52 180 - 52 180
--------- -------- ---------
Total current assets 282 013 113 476 395 489
--------- -------- ---------
Deferred Debits and Other Assets:
Regulatory assets:
Income taxes recoverable
through future rates 202 624 - 202 624
Three Mile Island Unit 2
deferred costs 90 663 - 90 663
Nonutility generation
contract buyout costs 28 700 - 28 700
Other 74 662 - 74 662
--------- -------- ---------
Total regulatory assets 396 649 - 396 649
Deferred income taxes 56 203 - 56 203
Other 14 276 1 949 16 225
--------- -------- ---------
Total deferred debits and
other assets 467 128 1 949 469 077
--------- -------- ---------
Total Assets $2 635 244 $ 123 155 $2 758 399
========= ======== =========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Financial Statements
Item 6(b) 1-A
Page 2 of 35
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
ACTUAL (UNAUDITED) AND PRO FORMA
AT MARCH 31, 1998
-----------------
(IN THOUSANDS)
Actual Adjustments
(Unaudited) (See pages 5-6) Pro Forma
----------- -------------- --------
LIABILITIES AND CAPITALIZATION
Capitalization:
Common stock $ 105 812 $ - $ 105 812
Capital surplus 285 486 - 285 486
Retained earnings 420 237 (5 502) 414 735
Accumulated other
comprehensive income 7 605 - 7 605
--------- -------- ---------
Total common stockholder's
equity 819 140 (5 502) 813 638
Cumulative preferred stock 16 681 - 16 681
Company-obligated mandatorily
redeemable preferred securities 105 000 - 105 000
Trust originated preferred
securities - 125 000 125 000
Long-term debt 676 445 - 676 445
--------- -------- ---------
Total capitalization 1 617 266 119 498 1 736 764
--------- -------- ---------
Current Liabilities:
Securities due within one year 11 - 11
Notes payable 116 000 - 116 000
Obligations under capital leases 18 087 7 730 25 817
Accounts payable:
Affiliates 27 410 27 410
Other 55 916 55 916
Taxes accrued 28 464 (4 073) 24 391
Interest accrued 10 118 - 10 118
Other 25 471 - 25 471
--------- -------- ---------
Total current liabilities 281 477 3 657 285 134
--------- -------- ---------
Deferred Credits and Other
Liabilities:
Deferred income taxes 481 328 - 481 328
Three Mile Island Unit 2
future costs 113 424 - 113 424
Unamortized investment tax
credits 38 753 - 38 753
Nuclear fuel disposal fee 15 378 - 15 378
Regulatory liabilities 29 424 - 29 424
Other 58 194 - 58 194
--------- -------- ---------
Total deferred credits
and other liabilities 736 501 - 736 501
--------- -------- ---------
Total Liabilities and
Capitalization $2 635 244 $ 123 155 $2 758 399
========= ======== =========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Financial Statements
Item 6(b) 1-A
Page 3 of 35
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
ACTUAL (UNAUDITED) AND PRO FORMA
FOR THE TWELVE MONTHS ENDED MARCH 31, 1998
------------------------------------------
(IN THOUSANDS)
Actual Adjustments
(Unaudited) (See pages 5-6) Pro Forma
---------- ---------------- ---------
Operating Revenues $1 026 838 $ - $1 026 838
--------- ------- ---------
Operating Expenses:
Fuel 173 467 464 173 931
Power purchased and
interchanged:
Affiliates 1 844 - 1 844
Others 212 752 - 212 752
Other operation and maintenance 264 561 7 264 568
Depreciation and amortization 107 059 - 107 059
Taxes, other than income taxes 65 561 - 65 561
--------- ------- ---------
Total operating expenses 825 244 471 825 715
--------- ------- ---------
Operating Income Before Income Taxes 201 594 (471) 201 123
Income taxes 59 680 (4 073) 55 607
--------- ------- ---------
Operating income 141 914 3 602 145 516
--------- ------- ---------
Other Income and Deductions:
Allowance for other funds
used during construction (38) - (38)
Other income, net 2 403 - 2 403
Income taxes (826) - (826)
--------- ------- ---------
Total other income and
deductions 1 539 - 1 539
--------- ------- ---------
Income Before Interest Charges and
Dividends on Preferred Dividends 143 453 3 602 147 055
--------- ------- ---------
Interest Charges and Dividends
on Preferred Securities:
Interest on long-term debt 49 122 - 49 122
Other interest 8 583 41 8 624
Allowance for borrowed funds
used during construction (2 214) - (2 214)
Dividends on company-obligated
mandatorily redeemable
preferred securities 9 188 - 9 188
Dividends on trust originated
preferred securities - 9 063 9 063
--------- ------- ---------
Total interest charges and
dividends on preferred securities 64 679 9 104 73 783
--------- ------- ---------
Net Income $ 78 774 $ (5 502) $ 73 272
Preferred stock dividends 637 - 637
--------- ------- --------
Earnings Available for Common Stock $ 78 137 $ (5 502) $ 72 635
========= ======= ========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Financial Statements
Item 6(b) 1-A
Page 4 of 35
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
ACTUAL (UNAUDITED) AND PRO FORMA
FOR THE TWELVE MONTHS ENDED MARCH 31, 1998
------------------------------------------
(IN THOUSANDS)
Actual Adjustments
(Unaudited) (See pages 5-6) Pro Forma
---------- ---------------- --------
Balance at beginning of period $ 387 123 $ - $ 387 123
Net income 78 774 (5 502) 73 272
Cash dividends declared on common stock (45 000) - (45 000)
Cash dividends declared on cumulative
preferred stock (637) - (637)
Other adjustments, net (23) - (23)
--------- ------- ---------
Balance at end of period $ 420 237 $ (5 502) $ 414 735
========= ======= =========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Financial Statements
Item 6(b) 1-A
Page 5 of 35
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
PRO FORMA JOURNAL ENTRIES
AT MARCH 31, 1998
-------------------------------------------------------
(IN THOUSANDS)
(1)
Cash and temporary cash investments $125 000
Trust originated preferred securities $125 000
To reflect the proposed issuance of
$125 million trust originated preferred
securities from time to time through
December 31, 2000 by Penelec Capital
Trust. The trust originated preferred
securities and dividend payments are
to be unconditionally guaranteed by
Pennsylvania Electric Company.
(2)
Other deferred debits $ 1 990
Cash and temporary cash investments $ 1 990
To reflect the underwriters compensation
and offering expenses paid in accordance
with the Underwriting Agreements
for Penelec Capital Trust.
(3)
Other interest $ 41
Other deferred debits $ 41
To reflect the annual amortization
of the deferred underwriters
compensation and offering expenses
which are being amortized over 49
years.
(4)
Dividends on trust originated preferred securities $ 9 063
Cash and temporary cash investments $ 9 063
To reflect the annual dividends
paid on the trust originated preferred
securities by Penelec Capital Trust at
an assumed rate of 7.25%.
<PAGE>
Financial Statements
Item 6(b) 1-A
Page 6 of 35
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
PRO FORMA ADJUSTMENTS
AT MARCH 31, 1998
------------------------------------------------------
(IN THOUSANDS)
(5)
Other Utility Plant, net $ 7 730
Obligations Under Capital Leases $ 7 730
To record the potential incremental
nuclear fuel to be leased for TMI-1
(proposed $25,000 limit less $17,270
of nuclear fuel subject to lease at March
31, 1998) (SEC File No. 70-8223).
(6)
Fuel Expense $ 464
Cash $ 464
To record incremental rent expense
on the Proposed nuclear fuel lease at an
annual rate of 6.0% (SEC File No. 70-8223).
(7)
Other operation and maintenance $ 7
Cash $ 7
To record annual fees associated with
the proposed nuclear fuel lease (SEC File
No. 70-8223).
(8)
Taxes accrued $ 4 073
Income taxes $ 4 073
To reflect the net decrease in the
provision for Federal and State income
taxes at the rate of 41.5% attributable
to interest payments on the
proposed issuance of $128,866 subordinated
debentures by Pennsylvania Electric Company to
Penelec Capital L.P. and to record the decrease
in income taxes associated with the proposed
nuclear fuel lease (SEC File No. 70-8223).
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 7 of 35
GPU, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
ACTUAL (UNAUDITED) AND PRO FORMA
AT MARCH 31, 1998
----------------------------------
(IN THOUSANDS)
Actual Adjustments
(Unaudited)(See pages 11-12) Pro Forma
ASSETS
Utility Plant:
In Service, at original cost $11 239 028 $ - $11 239 028
Less, accumulated depreciation 4 165 553 - 4 165 553
---------- ---------- -----------
Net utility plant in service 7 073 475 - 7 073 475
Construction work in progress 244 498 - 244 498
Other, net 170 970 61 193 232 163
------- ------ -------
Net utility plant 7 488 943 61 193 7 550 136
--------- ------ ---------
Other Property and Investments:
GPUI Group equity investments 621 093 - 621 093
Goodwill, net 588 811 - 588 811
Nuclear decommissioning trusts,
at market 626 884 - 626 884
Nuclear fuel disposal trust, at
market 110 978 - 110 978
Other, net 135 861 - 135 861
---------- ------- - -------
Total other property
and investments 2 083 627 - 2 083 627
--------- --------- ---------
Current Assets:
Cash and temporary cash
investments 130 555 224 341 354 896
Special deposits 23 611 - 23 611
Accounts receivable:
Customers, net 279 673 - 279 673
Other 111 887 - 111 887
Unbilled revenues 131 271 - 131 271
Materials and supplies, at
average cost or less:
Construction and maintenance 191 658 - 191 658
Fuel 40 758 - 40 758
Deferred income taxes 44 669 - 44 669
Prepayments 104 349 - 104 349
--------- ------- ----------
Total current assets 1 058 431 224 341 1 282 772
--------- ------- ----------
Deferred Debits and Other Assets:
Regulatory assets:
Income taxes recoverable
through future rates 521 780 - 521 780
Three Mile Island Unit 2
deferred costs 337 754 - 337 754
Nonutility generation contract
buyout costs 240 068 - 240 068
Unamortized property losses 96 355 - 96 355
Other 425 095 - 425 095
--------- ------- ----------
Total regulatory assets 1 621 052 - 1 621 052
Deferred income taxes 431 112 - 431 112
Other 150 844 3 727 154 571
--------- ------- ----------
Total deferred debits and
other assets 2 203 008 3 727 2 206 735
--------- ------- ----------
Total Assets $12 834 009 $ 289 261 $13 123 270
========== ======== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 8 of 35
GPU, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
ACTUAL (UNAUDITED) AND PRO FORMA
AT MARCH 31, 1998
-----------------
(IN THOUSANDS)
Actual Adjustments
(Unaudited) (See pages 11-12) Pro Forma
---------- ----------------- ---------
LIABILITIES AND CAPITAL
Capitalization:
Common stock $ 331 958 $ - $ 331 958
Capital surplus 1 007 885 - 1 007 885
Retained earnings 2 274 486 (12 781) 2 261 705
Accumulated other
comprehensive income/(loss) (14 733) - (14 733)
---------- ----- ---------
Total 3 599 596 (12 781) 3 586 815
Less, reacquired common
stock, at cost 80 326 - 80 326
---------- ----- --------
Total common stockholders'
equity 3 519 270 (12 781) 3 506 489
Cumulative preferred stock:
With mandatory redemption 91 500 - 91 500
Without mandatory redemptiom 66 478 - 66 478
Subsidiary-obligated
mandatorily redeemable
preferred securities 330 000 - 330 000
Trust originated preferred
securities - 250 000 250 000
Long-term debt 4 064 192 - 4 064 192
---------- -------- ---------
Total capitalization 8 071 440 237 219 8 308 659
---------- -------- ---------
Current Liabilities:
Securities due within one year 423 640 - 423 640
Notes payable 299 618 - 299 618
Obligations under capital leases 131 276 61 193 192 469
Accounts payable 415 629 - 415 629
Taxes accrued 150 782 (9 151) 141 631
Interest accrued 51 470 - 51 470
Deferred energy credits 23 984 - 23 984
Other 276 381 - 276 381
---------- ----- --------
Total current liabilities 1 772 780 52 042 1 824 822
---------- -------- ----------
Deferred Credits and Other
Liabilities:
Deferred income taxes 1 572 001 - 1 572 001
Unamortized investment tax credits 120 761 - 120 761
Three Mile Island Unit 2
future costs 453 596 - 453 596
Regulatory liabilities 102 768 - 102 768
Other 740 663 - 740 663
---------- ----- ---------
Total deferred credits and
other liabilities 2 989 789 - 2 989 789
---------- -------- ---------
Total Liabilities and
Capitalization $12 834 009 $ 289 261 $13 123 270
========== ======== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 9 of 35
GPU, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF INCOME
ACTUAL (UNAUDITED) AND PRO FORMA
FOR THE TWELVE MONTHS ENDED MARCH 31, 1998
------------------------------------------
(IN THOUSANDS)
Actual Adjustments
(Unaudited) (See pages 11-12)Pro Forma
Operating Revenues $4 136 909 $ - $4 136 909
--------- ---- ---------
Operating Expenses:
Fuel 398 415 3 672 402 087
Power purchased and
interchanged, net 1 059 473 - 1 059 473
Deferral of energy and capacity
costs, net (2 228) - (2 228)
Other operation and maintenance 1 030 622 56 1 030 678
Depreciation and amortization 479 664 - 479 664
Taxes, other than income taxes 320 775 - 320 775
--------- ------- ---------
Total operating expenses 3 286 721 3 728 3 290 449
--------- ------- ----------
Operating income before income taxes 850 188 (3 728) 846 460
Income taxes 205 987 (9 151) 196 836
--------- ------- ----------
Operating income 644 201 5 423 649 624
--------- ------- ----------
Other Income and Deductions:
Allowance for other funds
used during construction 47 - 47
Equity in undistributed
earnings/(losses) of
affiliates (41 676) - (41 676)
Other income, net 44 434 - 44 434
Income taxes 16 093 - 16 093
--------- ------- ----------
Total other income and
deductions 18 898 - 18 898
---------- ------- ----------
Income Before Interest Charges and
Preferred Dividends 663 099 5 423 668 522
---------- ------- ----------
Interest Charges and Preferred
Dividends:
Interest on long-term debt 274 479 - 274 479
Other interest 37 520 78 37 598
Allowance for borrowed funds used
during construction (5 394) - (5 394)
Dividends on company-obligated
mandatorily redeemable
preferred securities 28 888 - 28 888
Dividends on trust originated
preferred securities - 18 126 18 126
Preferred stock dividends
of subsidiaries, net of
gain on reacquisition 12 072 - 12 072
--------- ------- ----------
Total interest charges
and preferred dividends 347 565 18 204 365 769
--------- -------- ----------
Minority interest net
(income)/loss 1 691 - 1 691
--------- -------- ---------
Net Income $ 313 843 $ (12 781)$ 301 062
========= ======= =========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 10 of 35
GPU, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
ACTUAL AND PRO FORMA
FOR THE TWELVE MONTHS ENDED MARCH 31, 1998
------------------------------------------
(IN THOUSANDS)
Actual Adjustments
(Unaudited) (See pages 11-12) Pro Forma
Balance at beginning of period $2 209 254 $ - $2,209 254
Net income 313 843 (12 781) 301 062
Cash dividends declared
on common stock (241 517) - (241 517)
Other adjustments, net (7 094) - (7 094)
-------- --------- ---------
Balance at end of period $2 274 486 $ (12 781) $ $2 261 705
========= ======= =========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 11 of 35
GPU, INC. AND SUBSIDIARY COMPANIES
PRO FORMA JOURNAL ENTRIES
AT MARCH 31, 1998
-----------------
(IN THOUSANDS)
(1)
Cash and temporary cash investments $250 000
Trust originated preferred securities $250 000
To reflect the proposed issuance of $125
million trust originated preferred
securities from time to time through
December 31, 2000 by Met-Ed Capital Trust
and Penelec Capital Trust, respectively.
The trust originated preferred
securities and dividend payments
are to be unconditionally guaranteed by
Metropolitan Electric Company and
Pennsylvania Electric Company.
(2)
Other deferred debits $ 3 805
Cash and temporary cash investments $ 3 805
To reflect the underwriters
compensation and offering expenses
paid in accordance with the
Underwriting Agreements for Met-Ed
Capital Trust and Penelec Capital Trust.
(3)
Other interest $ 78
Other deferred debits $ 78
To reflect the annual amortization
of the deferred underwriters compensation and
offering expenses which are being
amortized over 49 years.
(4)
Dividends on trust originated preferred securities $ 18 126
Cash and temporary cash investments $ 18 126
To reflect the annual dividends
paid on the trust originated preferred
securities of Met-Ed Capital Trust (7.25%)
and Penelec Capital Trust (7.25%).
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 12 of 35
GPU, INC. AND SUBSIDIARY COMPANIES
PRO FORMA JOURNAL ENTRIES
AT MARCH 31, 1998
-----------------
(IN THOUSANDS)
(5)
Other Utility Plant, net $61 193
Obligations Under Capital Leases $61 193
To record the potential incremental
nuclear fuel to be leased for TMI-1 and
Oyster Creek (proposed $190,000 limit
less $128,807 of nuclear fuel subject to
lease at March 31, 1998) (SEC File No.70-8223).
(6)
Fuel Expense $ 3 672
Cash $ 3 672
To record incremental rent expense on
the proposed nuclear fuel lease at an
annual rate of 6.0% (SEC File No.70-8223).
(7)
Other operation and maintenance $ 56
Cash $ 56
To record annual fees associated with
the proposed nuclear fuel lease (SEC File
No.70-8223).
(8)
Taxes accrued $ 9 151
Income taxes $ 9 151
To reflect the net decrease in the
provision for Federal and State income taxes
at the rate of 41.5% attributable to
interest payments on the proposed issuance
of $257,732 subordinated debentures by
Metropolitan Electric Company and
Pennsylvania Electric Company to
Met-Ed Capital L.P. and Penelec Capital L.P.,
respectively, and to record the
decrease in income taxes associated with the
proposed nuclear fuel lease (SEC File No.70-8223).
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 13 of 35
GPU, INC.
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------------
GPU, Inc., a Pennsylvania corporation, is a holding company registered
under the Public Utility Holding Company Act of 1935. GPU, Inc. does not
directly operate any utility properties, but owns all the outstanding common
stock of three domestic electric utilities serving customers in New Jersey --
Jersey Central Power & Light Company (JCP&L) -- and Pennsylvania -- Metropolitan
Edison Company (Met-Ed) and Pennsylvania Electric Company (Penelec). The
customer service, transmission and distribution operations of these electric
utilities are conducting business under the name GPU Energy. JCP&L, Met-Ed and
Penelec considered together are referred to as the "GPU Energy companies." The
generation operations of the GPU Energy companies are conducted by GPU
Generation, Inc. (Genco) and GPU Nuclear, Inc. (GPUN). GPU, Inc. also owns all
the common stock of GPU International, Inc., GPU Power, Inc. and GPU Electric,
Inc. which develop, own and operate generation, transmission and distribution
facilities in the United States and in foreign countries. Collectively, these
are referred to as the "GPUI Group." Other wholly-owned subsidiaries of GPU,
Inc. are GPU Advanced Resources, Inc. (GPU AR), a subsidiary engaging in energy
services and retail energy sales; GPU Telcom Services, Inc. (GPU Telcom), a
subsidiary engaging in certain telecommunications-related businesses; and GPU
Service, Inc. (GPUS), which provides certain legal, accounting, financial and
other services to the GPU companies. All of these companies considered together
are referred to as "GPU."
These notes should be read in conjunction with the notes to consolidated
financial statements included in the 1997 Annual Report on Form 10-K. The
December 31, 1997 balance sheet data contained in the attached financial
statements was derived from audited financial statements. For disclosures
required by generally accepted accounting principles, see the 1997 Annual Report
on Form 10-K.
1. COMMITMENTS AND CONTINGENCIES
COMPETITION AND THE CHANGING REGULATORY ENVIRONMENT
---------------------------------------------------
The Emerging Competitive Market and Stranded Costs:
- ---------------------------------------------------
The current market price of electricity being below the cost of some
utility-owned generation and power purchase commitments, combined with the
ability of some customers to choose their energy suppliers, has created the
potential for stranded costs in the electric utility industry. These stranded
costs, while potentially recoverable in a regulated environment, are at risk in
a deregulated and competitive environment. Met-Ed and Penelec estimate that
their total above-market costs related to power purchase commitments,
company-owned generation, generating plant decommissioning, regulatory assets
and transition expenses, on a present value basis at year-end 1998, are $1.5
billion and $1.2 billion, respectively. JCP&L estimates that its total above-
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 14 of 35
market costs related to power purchase commitments and company-owned generation,
on a present value basis at September 30, 1998, is $1.6 billion. The $1.6
billion excludes above-market generation costs related to the Oyster Creek
Nuclear Generating Station (Oyster Creek). In July 1997, JCP&L proposed, in its
restructuring plans filed with the New Jersey Board of Public Utilities (NJBPU),
recovery of its remaining Oyster Creek plant investment as a regulatory asset,
through a nonbypassable charge to customers (see Management's Discussion and
Analysis - Competitive Environment). At March 31, 1998, JCP&L's net investment
in Oyster Creek was $710 million. These estimates are subject to significant
uncertainties including the future market price of both electricity and other
competitive energy sources, as well as the timing of when these above-market
costs become stranded due to customers choosing another supplier. The
restructuring legislation in Pennsylvania and the Energy Master Plan (NJEMP) in
New Jersey provide mechanisms for utilities to recover, subject to regulatory
approval, their above-market costs. These regulatory recovery mechanisms in
Pennsylvania and New Jersey differ, but should allow for the recovery of
non-mitigable above-market costs through either distribution charges or separate
nonbypassable charges to customers.
In June 1997, Met-Ed and Penelec filed with the Pennsylvania Public Utility
Commission (PaPUC) their proposed restructuring plans to implement competition
and customer choice in Pennsylvania as required by the comprehensive
restructuring legislation enacted in 1996. Highlights of these plans are
presented in the Competitive Environment section of Management's Discussion and
Analysis. In May 1998, an Administrative Law Judge (ALJ) issued Recommended
Decisions in Met-Ed and Penelec's restructuring proceedings. Met-Ed and Penelec
are continuing to analyze the ALJ's recommendations, which do not contain
detailed schedules recommending proposed amounts of stranded cost disallowances,
cost allocations or other rate matters. Accordingly, management is unable to
assess the full implications of the Decisions at this time. The major elements
of the ALJ's Decisions are presented in the Competitive Environment section of
Management's Discussion and Analysis. Met-Ed and Penelec intend to file
exceptions to a number of the ALJ's recommendations by May 20, 1998. The PaPUC
is scheduled to take nonbinding polls on June 4, 1998 on the Recommended
Decisions and issue final orders on June 25, 1998.
Based on preliminary review and analysis of the Recommended Decisions,
management believes that if the PaPUC were to adopt the ALJ's recommendations in
substantial part (in particular, the proposed reduction of T&D rates), it would
have a material adverse effect on Met-Ed and Penelec's stranded cost recovery
and future earnings, except to the extent offset by spending reductions. There
can be no assurance as to the outcome of these proceedings.
In July 1997, JCP&L filed with the NJBPU its proposed restructuring plan
for a competitive electric marketplace in New Jersey as required by the NJEMP.
Highlights of this plan are presented in the Competitive Environment section of
Management's Discussion and Analysis. Although the NJBPU has stated that it
intends to complete its review of JCP&L's plan so as to permit retail
competition to begin in October 1998, this would require enacting legislation
which has not yet been introduced. Management believes it is unlikely that
legislation could be enacted in time for retail competition to begin in 1998.
In October 1997, GPU announced its intention to begin a process to sell,
through a competitive bid process, up to all of the fossil-fuel and
hydroelectric generating facilities owned by the GPU Energy companies. The
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 15 of 35
current schedule, which is subject to change, calls for initial non-binding bids
due in June 1998, selection of a short list of bidders in July 1998 and final
bid submission in October 1998. It is anticipated that definitive purchase
agreements will be entered into in November 1998 and the divestiture completed
by mid-1999, subject to the timely receipt of the necessary regulatory and other
approvals. For additional information, see Other Commitments and Contingencies.
In 1996, the Federal Energy Regulatory Commission (FERC) issued Order 888,
which permits electric utilities to recover their legitimate and verifiable
stranded costs incurred when a wholesale customer purchases power from another
supplier using the utility's transmission system. In addition, Pennsylvania
adopted comprehensive legislation in 1996 which provides for the restructuring
of the electric utility industry and will permit utilities the opportunity to
recover their prudently incurred stranded costs through a PaPUC-approved
competitive transition charge, subject to certain conditions, including that
utilities attempt to mitigate these costs. In 1997, the NJBPU released Phase II
of the NJEMP, which proposes that New Jersey electric utilities should have an
opportunity to recover their stranded costs associated with generating capacity
commitments and caused by electric retail competition, provided that they
attempt to mitigate these costs. There can be no assurance as to the extent that
stranded costs will be recoverable in Pennsylvania and New Jersey. (For
additional information, see Management's Discussion and Analysis - Competitive
Environment).
The inability of the GPU Energy companies to recover their stranded costs
in whole or in part could result in the recording of liabilities for
above-market nonutility generation (NUG) costs and writedowns of uneconomic
generation plant and regulatory assets recorded in accordance with Statement of
Financial Accounting Standards No. 71 (FAS 71), "Accounting for the Effects of
Certain Types of Regulation." Decommissioning costs, for which a liability may
have to be recorded (see Nuclear Plant Retirement Costs), and the corresponding
regulatory asset for amounts recoverable from customers, could also be subject
to writedowns. The inability to recover these stranded costs would have a
material adverse effect on GPU's results of operations. (See additional
discussion of stranded costs in Management's Discussion and Analysis -
Competitive Environment).
Nonutility Generation Agreements:
Pursuant to the requirements of the federal Public Utility Regulatory
Policies Act (PURPA) and state regulatory directives, the GPU Energy companies
have entered into power purchase agreements with NUGs for the purchase of energy
and capacity for remaining periods of up to 23 years. The following table shows
actual payments from 1995 through 1997, and estimated payments from 1998 through
2002.
Payments Under NUG Agreements
(in Millions)
Total JCP&L Met-Ed Penelec
1995 $670 $381 $131 $158
1996 730 370 168 192
1997 759 384 172 203
* 1998 783 393 173 217
1999 789 395 167 227
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 16 of 35
2000 860 402 208 250
2001 887 411 237 239
2002 908 423 246 239
* The 1998 amounts consist of actual payments through March 31, 1998 and
estimated payments for the remainder of the year.
As of March 31, 1998, facilities covered by agreements having 1,666 MW
(JCP&L 905 MW; Met-Ed 356 MW; Penelec 405 MW) of capacity were in service. While
a few of these NUG facilities are dispatchable, most are must-run and generally
obligate the GPU Energy companies to purchase, at the contract price, the output
up to the contract limits. Substantially all unbuilt NUG facilities for which
the GPU Energy companies have executed agreements are fully dispatchable.
The emerging competitive generation market has created uncertainty
regarding the forecasting of the companies' energy supply needs, which has
caused the GPU Energy companies to change their supply strategy to seek
shorter-term agreements offering more flexibility. The GPU Energy companies'
future supply plan will likely focus on short- to intermediate-term commitments
and reliance on spot market purchases. The projected cost of energy from new
generation supply sources has also decreased due to improvements in power plant
technologies and lower forecasted fuel prices. As a result of these
developments, the rates under virtually all of the GPU Energy companies' NUG
agreements for facilities currently in operation are substantially in excess of
current and projected prices from alternative sources.
The GPU Energy companies are seeking to reduce the above-market costs of
these NUG agreements by: (1) attempting to convert must-run agreements to
dispatchable agreements; (2) attempting to renegotiate prices of the agreements;
(3) offering contract buyouts (see Management's Discussion and Analysis - The
GPU Energy Companies' Supply Plan,); and (4) initiating proceedings before
federal and state agencies, and in the courts, where appropriate. In addition,
the GPU Energy companies intend to avoid, to the maximum extent practicable,
entering into any new NUG agreements that are not needed or not consistent with
current market pricing, and are supporting legislative efforts to repeal PURPA.
These efforts may result in claims against GPU for substantial damages. There
can be no assurance as to the extent to which these efforts will be successful
in whole or in part.
In 1997, Met-Ed and Penelec issued requests for proposals (RFPs) to 24 NUG
projects which currently supply a total of approximately 760 MW under power
purchase agreements. The RFPs requested the NUGs to propose buyouts, buydowns
and/or restructurings of current power purchase contracts in return for cash
payments. In January 1998, Met-Ed and Penelec entered into definitive buyout
agreements with two bidders. The PaPUC is considering Met-Ed and Penelec's
requests for approval of these agreements as part of their pending restructuring
proceedings.
In February 1997, Met-Ed and Penelec entered into revised power purchase
agreements with AES Power Corporation (AES) for 377 MW and 80 MW of capacity and
related energy, respectively, related to a combined-cycle generating facility
that AES plans to construct in Pennsylvania. Met-Ed and Penelec have paid $63.4
million and $5 million, respectively, to previous developers and AES to
terminate the original power purchase agreements. In July 1997, the PaPUC
ordered that the issue of recovery of the related buyout costs and
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 17 of 35
approval of the revised power purchase agreements with AES be considered in
Met-Ed and Penelec's restructuring proceedings. If the revised power purchase
agreements with AES are not approved by the PaPUC, Met-Ed and Penelec have
agreed to pay AES up to an additional $28 million and $5 million, respectively.
This discussion of "Nonutility Generation Agreements" contains estimates
which are based on current knowledge and expectations of the outcome of future
events. The estimates are subject to significant uncertainties, including
changes in fuel prices, improvements in technology, the changing regulatory
environment and the deregulation of the electric utility industry.
The GPU Energy companies are recovering certain of their NUG costs
(including certain buyout costs) from customers. Although the recently enacted
legislation in Pennsylvania and the NJEMP in New Jersey both include provisions
for the recovery of costs under NUG agreements and certain NUG buyout costs,
there can be no assurance that the GPU Energy companies will continue to be able
to recover similar costs which may be incurred in the future. (See Management's
Discussion and Analysis - Competitive Environment for additional discussion.)
Regulatory Assets and Liabilities:
Regulatory Assets and Regulatory Liabilities, as reflected in the March 31,
1998 and December 31, 1997 Consolidated Balance Sheets in accordance with the
provisions of FAS 71, "Accounting for the Effects of Certain Types of
Regulation", were as follows:
GPU, Inc. and Subsidiary Companies Assets (in thousands)
- ---------------------------------- ---------------------
March 31, December 31,
1998 1997
------------- --------
Income taxes recoverable through
future rates $ 521,780 $ 510,680
Three Mile Island Unit 2 (TMI-2) deferred costs 337,754 345,326
Nonutility generation contract buyout costs 240,068 245,568
Unamortized property losses 96,355 99,532
Other postretirement benefits 88,519 89,569
Environmental remediation 71,807 90,308
N.J. unit tax 38,204 39,797
Unamortized loss on reacquired debt 39,280 40,489
Load and demand-side management programs 18,414 23,164
N.J. low-level radwaste disposal 29,653 31,479
DOE enrichment facility decommissioning 32,377 33,472
Nuclear fuel disposal fee 20,688 21,512
Storm damage 30,215 31,097
Nonutility generation costs 32,163 24,857
Other 23,775 22,402
--------- ---------
Total $1,621,052 $1,649,252
========= =========
Liabilities (in thousands)
--------------------------
March 31, December 31,
1998 1997
---------- -------
Income taxes refundable through
future rates $ 87,568 $ 89,247
Other 15,200 12,527
--------- ---------
Total $ 102,768 $ 101,774
========= =========
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 18 of 35
JCP&L Assets (in thousands)
- ----- ---------------------
March 31, December 31,
1998 1997
------------- --------
Income taxes recoverable through
future rates $ 136,853 $ 128,111
TMI-2 deferred costs 102,059 109,498
Nonutility generation contract buyout costs 137,500 140,500
Unamortized property losses 91,641 94,726
Other postretirement benefits 48,977 49,807
Environmental remediation 41,683 61,324
N.J. unit tax 38,204 39,797
Unamortized loss on reacquired debt 28,029 28,729
Load and demand-side management programs 18,414 23,164
N.J. low-level radwaste disposal 29,653 31,479
DOE enrichment facility decommissioning 20,439 21,223
Nuclear fuel disposal fee 23,045 23,781
Storm damage 30,215 31,097
Other 1,934 2,466
--------- ---------
Total $ 748,646 $ 785,702
========= =========
Liabilities (in thousands)
March 31, December 31,
1998 1997
------------- --------
Income taxes refundable through
future rates $ 36,861 $ 37,759
Other 14,129 11,467
--------- ---------
Total $ 50,990 $ 49,226
========= =========
Met-Ed Assets (in thousands)
- ------ ---------------------
March 31, December 31,
1998 1997
------------- --------
Income taxes recoverable through
future rates $ 182,303 $ 178,927
TMI-2 deferred costs 145,032 146,290
Nonutility generation contract buyout costs 73,868 76,368
Unamortized property losses 2,579 2,650
Other postretirement benefits 39,542 39,762
Environmental remediation 4,121 4,121
Unamortized loss on reacquired debt 5,134 5,329
DOE enrichment facility decommissioning 7,959 8,166
Nuclear fuel disposal fee (1,540) (1,511)
Nonutility generation costs 12,602 10,265
Other 5,589 4,515
--------- ---------
Total $ 477,189 $ 474,882
========= =========
Liabilities (in thousands)
March 31, December 31,
1998 1997
------------- --------
Income taxes refundable through
future rates $ 21,393 $ 21,749
Other 2,393 2,446
--------- ---------
Total $ 23,786 $ 24,195
========= =========
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 19 of 35
Penelec Assets (in thousands)
- ------- ---------------------
March 31, December 31,
1998 1997
------------- --------
Income taxes recoverable through
future rates $ 202,624 $ 203,642
TMI-2 deferred costs 90,663 89,538
Nonutility generation contract buyout costs 28,700 28,700
Unamortized property losses 2,135 2,156
Environmental remediation 26,003 24,863
Unamortized loss on reacquired debt 6,117 6,431
DOE enrichment facility decommissioning 3,979 4,083
Nuclear fuel disposal fee (817) (758)
Nonutility generation costs 19,561 14,592
Other 17,684 16,853
--------- ---------
Total $ 396,649 $ 390,100
========= =========
Liabilities (in thousands)
March 31, December 31,
1998 1997
------------- --------
Income taxes refundable through
future rates $ 29,314 $ 29,739
Other 110 46
--------- ---------
Total $ 29,424 $ 29,785
========= =========
Income taxes recoverable/refundable through future rates: Represents amounts
deferred due to the implementation of FAS 109, "Accounting for Income Taxes," in
1993.
TMI-2 deferred costs: Represents costs that are recoverable through rates for
the GPU Energy companies' remaining investment in the plant and fuel core,
radiological decommissioning and the cost of removal of nonradiological
structures and materials in accordance with the 1995 site-specific study (in
1998 dollars) and JCP&L's share of long-term monitored storage costs. For
additional information, see Nuclear Plant Retirement Costs.
Nonutility generation contract buyout costs: Represents amounts incurred for
terminating power purchase contracts with NUGs, for which rate recovery has been
granted or is probable (see Management's Discussion and Analysis - The GPU
Energy Companies' Supply Plan).
Unamortized property losses: Consists mainly of costs associated with JCP&L's
Forked River project, which are included in rates.
Other postretirement benefits: Includes costs associated with the adoption of
FAS 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," which are deferred in accordance with Emerging Issues Task Force
(EITF) Issue 92-12, "Accounting for OPEB Costs by Rate-Regulated
Enterprises."
Environmental remediation: Consists of amounts related to the investigation and
remediation of several manufactured gas plant sites formerly owned by JCP&L, as
well as several other JCP&L sites; Penelec's Seward station property; and future
closure costs of various ash disposal sites for the GPU Energy companies. For
additional information, see Environmental Matters.
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 20 of 35
N.J. unit tax: Represents certain state taxes, with interest, for which JCP&L
received NJBPU approval in 1993 to recover over a ten-year period.
Unamortized loss on reacquired debt: Represents premiums and expenses incurred
in the early redemption of long-term debt. In accordance with FERC regulations,
reacquired debt costs are amortized over the remaining original life of the
retired debt.
Load and demand-side management (DSM) programs: Consists of load management
costs and other DSM program expenditures that are currently being recovered,
with interest, through JCP&L's retail base rates and demand-side factor. Also
includes provisions for lost revenues between base rate cases and performance
incentives.
N.J. low-level radwaste disposal: Represents the estimated assessment for the
siting of a disposal facility for low-level waste from Oyster Creek, less
amortization, as allowed in JCP&L's rates.
Department of Energy (DOE) enrichment facility decommissioning: Represents
payments to the DOE over a 15-year period which began in 1994.
Nuclear fuel disposal fee: Represents amounts recoverable through rates for
estimated future disposal costs for spent nuclear fuel at Oyster Creek and Three
Mile Island Unit 1 (TMI-1) in accordance with the Nuclear Waste Policy Act of
1982.
Storm damage: Relates to incremental noncapital costs associated with various
storms in the JCP&L service territory that are not recoverable through
insurance. These amounts were deferred based upon past rate recovery precedent.
An annual amortization amount is included in JCP&L's retail base rates and is
charged to expense.
Nonutility generation costs: Represents incremental NUG operating costs incurred
above amounts reflected in Met-Ed and Penelec's current rates, for which rate
recovery is probable but has not yet been granted (see Management's Discussion
and Analysis - Competitive Environment).
Amounts related to the decommissioning of TMI-1 and Oyster Creek, which are
not included in Regulatory assets on the Consolidated Balance Sheets, are
separately disclosed in the Nuclear Plant Retirement Costs section.
Accounting Matters:
- -------------------
Historically, electric utility rates have been based on a utility's costs.
As a result, the GPU Energy companies account for the economic effects of
cost-based ratemaking regulation under the provisions of FAS 71. FAS 71 requires
regulated entities, in certain circumstances, to defer as regulatory assets, the
impact on operations of costs expected to be recovered in future rates. At March
31, 1998, GPU has recorded on the Consolidated Balance Sheets $1.6 billion in
regulatory assets in accordance with FAS 71 (see Regulatory Assets and
Liabilities section of Competition and the Changing Regulatory Environment).
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 21 of 35
In response to the continuing deregulation of the electric utility
industry, the Securities and Exchange Commission (SEC) questioned the continued
applicability of FAS 71 by investor-owned utilities with respect to their
electric generation operations.
In response to the concerns expressed by the Staff of the SEC, the
Financial Accounting Standards Board's (FASB) EITF agreed to discuss the issues
surrounding the continued applicability of FAS 71 to the electric utility
industry. In 1997, the EITF met to discuss these issues and concluded that
utilities are no longer subject to FAS 71, for the generation portion of their
business, as soon as they know details of their individual transition plans. The
EITF also concluded that utilities can continue to carry previously recorded
regulated assets, as well as any newly established regulated assets (including
those related to generation), on their balance sheets if regulators have
guaranteed a regulated cash flow stream to recover the cost of these assets.
While the EITF's consensus must be complied with, the SEC has the final
regulatory authority for accounting by public companies.
In light of retail access legislation enacted in Pennsylvania and the
NJBPU's final findings and recommendations, the GPU Energy companies believe
they will no longer meet the requirements for continued application of FAS 71,
for the generation portion of their business, by no later than mid-1998 for
Met-Ed and Penelec, and October 1998 for JCP&L, the expected approval dates of
their restructuring plans filed with state regulators. Once the GPU Energy
companies are able to determine that the generation portion of their operations
is no longer subject to the provisions of FAS 71, the related regulatory assets,
net of regulatory liabilities, would, to the extent that recovery is not
provided for through their respective restructuring plans, have to be written
off and charged to expense. Additional depreciation expense would have to be
recorded for any differences created by the use of a regulated depreciation
method that is different from that which would have been used under generally
accepted accounting principles for enterprises in general. In addition,
write-downs of plant assets could be required in accordance with FAS 121,
"Accounting for the Impairment of Long-Lived Assets," discussed below.
Additionally, the inability of the GPU Energy companies to recover their
above-market costs of power purchase commitments, in whole or in part, could
result in the recording of liabilities and corresponding charges to expense. The
amount of charges resulting from the discontinuation of FAS 71 will depend on
the final outcome of the GPU Energy companies' individual restructuring
proceedings, and could have a material adverse effect on GPU's results of
operations and financial position.
In December 1997, the PaPUC rejected PECO Energy Company's (PECO)
restructuring settlement and approved an alternate plan for PECO based on its
findings in that case. PECO took a pre-tax charge to 1997 income of $3.1 billion
reflecting the effects of the PaPUC order. Met-Ed and Penelec believe that the
PaPUC's decision in the PECO case was based on the specific facts and
circumstances of that proceeding. Met-Ed and Penelec further believe that they
have demonstrated in their restructuring proceedings ample evidence to
distinguish sufficiently their cases from PECO's and that the PaPUC should not,
therefore, apply its findings in the PECO case to their pending restructuring
plans. If, however, the PaPUC were to apply these findings, it would have a
material adverse impact on Met-Ed and Penelec's stranded cost recovery,
restructuring proceedings and future earnings.
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 22 of 35
In April 1998, PECO and other parties to PECO's restructuring proceeding,
including Met-Ed and Penelec, filed a joint petition for settlement (Joint
Petition) with the PaPUC. The Joint Petition represents a comprehensive
settlement that resolves numerous issues on appeal by the parties to the
settlement, including an agreement by Met-Ed, Penelec and PECO to withdraw from
each others respective restructuring cases. Additionally, PECO has agreed not to
participate when the PaPUC reviews Met-Ed and Penelec's sale of their generating
facilities. The Joint Petition was tentatively approved by the PaPUC and the
final vote is currently scheduled for May 14, 1998. There can be no assurance as
to the outcome of this matter.
Should the restructuring proceedings in New Jersey and Pennsylvania result
in substantial disallowance of certain capital additions; the disallowance of
certain stranded costs; reduction in cost of capital allowances on certain
elements of plant and cost deferrals; and tariff rate unbundling reflecting an
allocation of costs to the transmission and distribution activities lower than
that proposed by the GPU Energy companies, management believes that the outcome
of these proceedings would have a material adverse effect on GPU's future
earnings.
FAS 121 requires that regulatory assets meet the recovery criteria of FAS
71 on an ongoing basis in order to avoid a write-down. In addition, FAS 121
requires that long-lived assets, identifiable intangibles, capital leases and
goodwill be reviewed for impairment whenever events occur or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable. FAS 121 also requires the recognition of impairment losses when the
carrying amounts of those assets are greater than the estimated cash flows
expected to be generated from the use and eventual disposition of the assets.
The effects of FAS 121 have not been material to GPU's results of operations.
NUCLEAR FACILITIES
The GPU Energy companies have made investments in three major nuclear
projects -- TMI-1 and Oyster Creek, both of which are operating generation
facilities, and TMI-2, which was damaged during a 1979 accident. TMI-1 and TMI-2
are jointly owned by JCP&L, Met-Ed and Penelec in the percentages of 25%, 50%
and 25%, respectively. Oyster Creek is owned by JCP&L. At March 31, 1998 and
December 31, 1997, the GPU Energy companies' net investment in TMI-1 and Oyster
Creek, including nuclear fuel, was as follows:
Net Investment (in millions)
----------------------------
TMI-1 Oyster Creek
----- ------------
March 31, 1998
JCP&L $152 $710
Met-Ed 293 -
Penelec 143 -
--- ---
Total $588 $710
=== ===
Net Investment (in millions)
----------------------------
TMI-1 Oyster Creek
----- ------------
December 31, 1997
JCP&L $155 $701
Met-Ed 300 -
Penelec 147 -
--- ---
Total $602 $701
=== ===
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 23 of 35
The GPU Energy companies' net investment in TMI-2 at March 31, 1998 and
December 31, 1997 was $82 million and $84 million, respectively (JCP&L $74
million and $76 million, respectively; Met-Ed $1 million and $1 million,
respectively; Penelec $7 million and $7 million, respectively). JCP&L is
collecting revenues for TMI-2 on a basis which provides for the recovery of its
remaining investment in the plant by 2008. Met-Ed and Penelec are collecting
revenues for TMI-2 related to their wholesale customers.
Costs associated with the operation, maintenance and retirement of nuclear
plants have continued to be significant and less predictable than costs
associated with other sources of generation, in large part due to changing
regulatory requirements, safety standards, availability of nuclear waste
disposal facilities and experience gained in the construction and operation of
nuclear facilities. The GPU Energy companies may also incur costs and experience
reduced output at their nuclear plants because of the prevailing design criteria
at the time of construction and the age of the plants' systems and equipment. In
addition, for economic or other reasons, operation of these plants for the full
term of their operating licenses cannot be assured. Also, not all risks
associated with the ownership or operation of nuclear facilities may be
adequately insured or insurable. Consequently, the recovery of costs associated
with nuclear projects, including replacement power, any unamortized investment
at the end of each plant's useful life (whether scheduled or premature), the
carrying costs of that investment and retirement costs, is not assured. (See
Competition and the Changing Regulatory Environment.)
In addition to the continued operation of the Oyster Creek facility, JCP&L
is exploring the sale or early retirement of the plant to mitigate costs
associated with its continued operation. JCP&L is exploring these options due to
the plant's high cost of generation compared to the current market price of
electricity. If a decision is made to retire the plant early, retirement would
likely occur in 2000. Although management believes that the current rate
structure would allow for the recovery of and return on its net investment in
the plant and provide for decommissioning costs, there can be no assurance that
such costs will be fully recoverable. (See Management's Discussion and Analysis
- - Competitive Environment).
The GPU Energy companies have also entered into a confidentiality agreement
with a potential purchaser of TMI-1. Unlike Oyster Creek, however, the early
retirement of TMI-1 is not being considered because of its lower operating
costs. In the event that TMI-1 is sold, there can be no assurance of full
recovery of its remaining investment.
TMI-2:
The 1979 TMI-2 accident resulted in individual claims for alleged personal
injury (including claims for punitive damages), which are material in amount,
have been asserted against GPU, Inc. and the GPU Energy companies. Approximately
2,100 of such claims were filed in the United States District Court for the
Middle District of Pennsylvania. Some of the claims also seek recovery for
injuries from alleged emissions of radioactivity before and after the accident.
At the time of the TMI-2 accident, as provided for in the Price-Anderson
Act, the GPU Energy companies had (a) primary financial protection in the form
of insurance policies with groups of insurance companies providing an aggregate
of $140 million of primary coverage, (b) secondary financial
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 24 of 35
protection in the form of private liability insurance under an industry
retrospective rating plan providing for up to an aggregate of $335 million in
premium charges under such plan, and (c) an indemnity agreement with the NRC for
up to $85 million, bringing their total financial protection up to an aggregate
of $560 million. Under the secondary level, the GPU Energy companies are subject
to a retrospective premium charge of up to $5 million per reactor, or a total of
$15 million (JCP&L $7.5 million; Met-Ed $5 million; Penelec $2.5 million).
In October 1995, the U.S. Court of Appeals for the Third Circuit ruled that
the Price-Anderson Act provides coverage under its primary and secondary levels
for punitive as well as compensatory damages, but that punitive damages could
not be recovered against the Federal Government under the third level of
financial protection. In so doing, the Court of Appeals referred to the "finite
fund" (the $560 million of financial protection under the Price-Anderson Act) to
which plaintiffs must resort to get compensatory as well as punitive damages.
The Court of Appeals also ruled that the standard of care owed by the
defendants to a plaintiff was determined by the specific level of radiation
which was released into the environment, as measured at the site boundary,
rather than as measured at the specific site where the plaintiff was located at
the time of the accident (as the defendants proposed). The Court of Appeals also
held that each plaintiff still must demonstrate exposure to radiation released
during the TMI-2 accident and that such exposure had resulted in injuries. In
1996, the U.S. Supreme Court denied petitions filed by GPU, Inc. and the GPU
Energy companies to review the Court of Appeals' rulings.
In June 1996, the District Court granted a motion for summary judgment
filed by GPU, Inc. and the GPU Energy companies, and dismissed all of the 2,100
pending claims. The Court ruled that there was no evidence which created a
genuine issue of material fact warranting submission of plaintiffs' claims to a
jury. The plaintiffs have appealed the District Court's ruling to the Court of
Appeals for the Third Circuit, before which the matter is pending. There can be
no assurance as to the outcome of this litigation.
Based on the above, GPU, Inc. and the GPU Energy companies believe that any
liability to which they might be subject by reason of the TMI-2 accident will
not exceed their financial protection under the Price-Anderson Act.
NUCLEAR PLANT RETIREMENT COSTS
------------------------------
Retirement costs for nuclear plants include decommissioning the
radiological portions of the plants and the cost of removal of nonradiological
structures and materials. The disposal of spent nuclear fuel is covered
separately by contracts with the DOE.
In 1990, the GPU Energy companies submitted a report, in compliance with
NRC regulations, setting forth a funding plan (employing the external sinking
fund method) for the decommissioning of their nuclear reactors. Under this plan,
the GPU Energy companies intend to complete the funding for Oyster Creek and
TMI-1 by the end of the plants' license terms, 2009 and 2014, respectively. The
TMI-2 funding completion date is 2014, consistent with TMI-2's remaining in
long-term storage and being decommissioned at the same time as TMI-1. Based on
NRC studies, a comparable funding target was
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 25 of 35
developed for TMI-2 which took the accident into account. Under the NRC
regulations, the funding targets (in 1998 dollars) are as follows:
(in millions)
Oyster
TMI-1 TMI-2 Creek
----- ----- -----
JCP&L $ 45 $ 72 $310
Met-Ed 91 144 -
Penelec 45 72 -
--- --- ---
Total $181 $288 $310
=== === ===
The funding targets, while not considered cost estimates, are reference levels
designed to assure that licensees demonstrate adequate financial responsibility
for decommissioning. While the NRC regulations address activities related to the
removal of the radiological portions of the plants, they do not establish
residual radioactivity limits nor do they address costs related to the removal
of nonradiological structures and materials.
In 1995, a consultant to GPUN performed site-specific studies of the TMI
site, including both Units 1 and 2, and of Oyster Creek, that considered various
decommissioning methods and estimated the cost of decommissioning the
radiological portions and the cost of removal of the nonradiological portions of
each plant, using the prompt removal/dismantlement method. GPUN management has
reviewed the methodology and assumptions used in these studies, is in agreement
with them, and believes the results are reasonable. The NRC may require an
acceleration of the decommissioning funding for Oyster Creek if the plant is
retired early. The retirement cost estimates under the site-specific studies are
as follows (in 1998 dollars):
(in millions)
Oyster
TMI-1 TMI-2 Creek
----- ----- -----
Radiological decommissioning $333 $404 $391
Nonradiological cost of removal 82 33 * 38
--- --- ---
Total $415 $437 $429
=== === ===
* Net of $11.2 million spent as of March 31, 1998.
Each of the GPU Energy companies is responsible for retirement costs in
proportion to its respective ownership percentage.
The ultimate cost of retiring the GPU Energy companies' nuclear facilities
may be different from the cost estimates contained in these site-specific
studies. Such costs are subject to (a) the escalation of various cost elements
(for reasons including, but not limited to, general inflation), (b) the further
development of regulatory requirements governing decommissioning, (c) the
technology available at the time of decommissioning, and (d) the availability of
nuclear waste disposal facilities.
The GPU Energy companies charge to depreciation expense and accrue
retirement costs based on amounts being collected from customers. Customer
collections are contributed to external trust funds. These deposits, including
the related earnings, are classified as Nuclear decommissioning
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 26 of 35
trusts, at market on the Consolidated Balance Sheets. Accounting for retirement
costs may change based upon the FASB Exposure Draft discussed below.
The FASB has issued an Exposure Draft titled "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which
includes nuclear plant retirement costs. If the Exposure Draft is adopted,
Oyster Creek and TMI-1 future retirement costs would have to be recognized as a
liability immediately, rather than the current industry practice of accruing
these costs in accumulated depreciation over the life of the plants. A
regulatory asset for amounts probable of recovery through rates would also be
established. Any amounts not probable of recovery through rates would have to be
charged to expense. (For TMI-2, a liability (in 1998 dollars) has already been
recognized, based on the 1995 site-specific study because the plant is no longer
operating (see TMI-2)). The effective date of this accounting change has not yet
been established.
TMI-1 and Oyster Creek:
The NJBPU has granted JCP&L annual revenues for TMI-1 and Oyster Creek
retirement costs of $2.5 million and $13.5 million, respectively. These annual
revenues are based on both the NRC funding targets for radiological
decommissioning costs and a site-specific study which was performed in 1988 for
nonradiological costs of removal. The Stipulation of Final Settlement approved
by the NJBPU in 1997 allows for JCP&L's future collection of retirement costs to
increase annually to $5.2 million and $22.5 million for TMI-1 and Oyster Creek,
respectively, beginning in 1998, based on the 1995 site-specific study
estimates.
The PaPUC has granted Met-Ed annual revenues for TMI-1 retirement costs of
$8.5 million based on both the NRC funding target for radiological
decommissioning costs and the 1988 site-specific study for nonradiological costs
of removal. The PaPUC also granted Penelec annual revenues of $4.2 million for
its share of TMI-1 retirement costs, on a basis consistent with that granted
Met-Ed. As part of their restructuring plans filed with the PaPUC in June 1997,
Met-Ed and Penelec have requested that these amounts be increased to reflect the
estimated retirement costs contained in the 1995 site-specific study for
radiological decommissioning and nonradiological costs of removal.
The amounts charged to depreciation expense for the first quarter of 1998
and the provisions for the future expenditure of these funds, which have been
made in accumulated depreciation, are as follows:
(in millions)
-------------
Oyster
TMI-1 Creek
----- -----
Amount expensed for the three
months ended March 31, 1998:
JCP&L $ 1 $ 6
Met-Ed 2 -
Penelec 1 -
--- ---
$ 4 $ 6
=== ===
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 27 of 35
(in millions)
Oyster
TMI-1 Creek
----- -----
Accumulated depreciation
provision at March 31, 1998:
JCP&L $ 41 $235
Met-Ed 75 -
Penelec 32 -
--- ---
$148 $235
Management believes that any TMI-1 and Oyster Creek retirement costs, in
excess of those currently recognized for ratemaking purposes, should be
recoverable from customers.
TMI-2:
The estimated liabilities for TMI-2 future retirement costs (reflected as
Three Mile Island Unit 2 Future Costs on the Consolidated Balance Sheets) as of
March 31, 1998 and December 31, 1997 are as follows:
(in millions)
GPU JCP&L Met-Ed Penelec
--- ----- ------ -------
March 31, 1998 $453 $113 $227 $113
December 31, 1997 $449 $112 $225 $112
These amounts are based upon the 1995 site-specific study estimates (in
1998 and 1997 dollars, respectively) discussed above and an estimate for
remaining incremental monitored storage costs of $16 million (JCP&L $4 million;
Met-Ed $8 million; Penelec $4 million) as of March 31, 1998 and December 31,
1997, as a result of TMI-2's entering long-term monitored storage in 1993. The
GPU Energy companies are incurring annual incremental monitored storage costs of
approximately $1 million (JCP&L $250 thousand; Met-Ed $500 thousand; Penelec
$250 thousand).
Offsetting the $453 million liability at March 31, 1998 is $256 million
(JCP&L $29 million; Met-Ed $144 million; Penelec $83 million) which is probable
of recovery from customers and included in Three Mile Island Unit 2 deferred
costs on the Consolidated Balance Sheets, and $238 million (JCP&L $94 million;
Met-Ed $105 million; Penelec $39 million) in trust funds for TMI-2 and included
in Nuclear decommissioning trusts, at market on the Consolidated Balance Sheets.
Earnings on trust fund deposits are included in amounts shown on the
Consolidated Balance Sheets under Three Mile Island Unit 2 deferred costs. TMI-2
decommissioning costs charged to depreciation expense in the first quarter of
1998 amounted to $3 million (JCP&L $573 thousand; Met-Ed $2,496 thousand;
Penelec $255 thousand).
The NJBPU and PaPUC have granted JCP&L and Met-Ed, respectively, TMI-2
decommissioning revenues for the NRC funding target and allowances for the cost
of removal of nonradiological structures and materials. In addition, JCP&L is
recovering its share of TMI-2's incremental monitored storage costs. The
Stipulation of Final Settlement approved by the NJBPU in 1997 adjusts JCP&L's
future revenues for retirement costs based on the 1995 site-specific
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 28 of 35
study estimates, beginning in 1998. Based on Met-Ed's rate order, Penelec has
recorded a regulatory asset for that portion of such costs which it believes to
be probable of recovery.
At March 31, 1998, the accident-related portion of TMI-2 radiological
decommissioning costs is considered to be $71 million (JCP&L $18 million, Met-Ed
$35 million; Penelec $18 million), which is the difference between the 1995
TMI-1 and TMI-2 site-specific study estimates (in 1998 dollars). In connection
with rate case resolutions at the time, JCP&L, Met-Ed and Penelec made
contributions to irrevocable external trusts relating to their shares of the
accident-related portions of the decommissioning liability. In 1990, JCP&L
contributed $15 million and in 1991, Met-Ed and Penelec contributed $40 million
and $20 million, respectively, to irrevocable external trusts. These
contributions were not recovered from customers and have been expensed. The GPU
Energy companies will not pursue recovery from customers for any of these
amounts contributed in excess of the $71 million accident-related portion
referred to above.
JCP&L intends to seek recovery for any increases in TMI-2 retirement costs,
and Met-Ed and Penelec intend to seek recovery for any increases in the
nonaccident-related portion of such costs, but recognize that recovery cannot be
assured.
INSURANCE
---------
GPU has insurance (subject to retentions and deductibles) for its
operations and facilities including coverage for property damage, liability to
employees and third parties, and loss of use and occupancy (primarily
incremental replacement power costs). There is no assurance that GPU will
maintain all existing insurance coverages. Losses or liabilities that are not
completely insured, unless allowed to be recovered through ratemaking, could
have a material adverse effect on the financial position of GPU.
The decontamination liability, premature decommissioning and property
damage insurance coverage for the TMI station and for Oyster Creek totals $2.7
billion per site. In accordance with NRC regulations, these insurance policies
generally require that proceeds first be used for stabilization of the reactors
and then to pay for decontamination and debris removal expenses. Any remaining
amounts available under the policies may then be used for repair and restoration
costs and decommissioning costs. Consequently, there can be no assurance that in
the event of a nuclear incident, property damage insurance proceeds would be
available for the repair and restoration of that station.
The Price-Anderson Act limits GPU's liability to third parties for a
nuclear incident at one of its sites to approximately $8.9 billion. Coverage for
the first $200 million of such liability is provided by private insurance. The
remaining coverage, or secondary financial protection, is provided by
retrospective premiums payable by all nuclear reactor owners. Under secondary
financial protection, a nuclear incident at any licensed nuclear power reactor
in the country, including those owned by the GPU Energy companies, could result
in assessments of up to $79 million per incident for each of the GPU Energy
companies' two operating reactors, subject to an annual maximum payment of $10
million per incident per reactor. In addition to the retrospective premiums
payable under the Price-Anderson Act, the GPU Energy companies are
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 29 of 35
also subject to retrospective premium assessments of up to $26.5 million (JCP&L
$17.0 million; Met-Ed $6.3 million; Penelec $3.2 million) in any one year under
insurance policies applicable to nuclear operations and facilities.
The GPU Energy companies have insurance coverage for incremental
replacement power costs resulting from an accident-related outage at their
nuclear plants. Coverage commences after a 17 week waiting period at $3.5
million per week, and after 23 weeks of an outage, continues for three years
beginning at $1.8 million and $2.6 million per week for the first year for
Oyster Creek and TMI-1, respectively, decreasing to 80% of such amounts for
years two and three.
ENVIRONMENTAL MATTERS
---------------------
As a result of existing and proposed legislation and regulations, and
ongoing legal proceedings dealing with environmental matters, including but not
limited to acid rain, water quality, ambient air quality, global warming,
electromagnetic fields, and storage and disposal of hazardous and/or toxic
wastes, GPU may be required to incur substantial additional costs to construct
new equipment, modify or replace existing and proposed equipment, remediate,
decommission or cleanup waste disposal and other sites currently or formerly
used by it, including formerly owned manufactured gas plants (MGP), coal mine
refuse piles and generation facilities.
To comply with Titles I and IV of the federal Clean Air Act Amendments of
1990 (Clean Air Act), the GPU Energy companies expect to spend up to $248
million (JCP&L $44 million; Met-Ed $98 million; Penelec $106 million) for air
pollution control equipment by the year 2000, of which approximately $242
million (JCP&L $43 million; Met-Ed $96 million; Penelec $103 million) has
already been spent. In developing their least-cost plan to comply with the Clean
Air Act, the GPU Energy companies will continue to evaluate major capital
investments compared to participation in the sulfur dioxide (SO2) emission
allowance market, the expected nitrogen oxide (NOx) emissions trading market and
the use of low-sulfur fuel or retirement of facilities. In 1994, the Ozone
Transport Commission (OTC), consisting of representatives of 12 northeast states
(including New Jersey and Pennsylvania) and the District of Columbia, proposed
reductions in NOx emissions it believes necessary to meet ambient air quality
standards for ozone and the statutory deadlines set by the Clean Air Act.
Effective November 1997, the Pennsylvania Environmental Quality Board adopted
regulations implementing the OTC's proposed NOx reductions and in December 1997,
the New Jersey Department of Environmental Protection developed a proposal with
the electric utility industry on a plan to implement the OTC's proposed NOx
reductions. The GPU Energy companies expect that the U.S. Environmental
Protection Agency (EPA) will approve state implementation plans, including those
in Pennsylvania and New Jersey, and that as a result, they will spend an
estimated $6 million (JCP&L $0.2 million; Met-Ed $2.8 million; Penelec $3.0
million) (included in the above total), to meet the 1999 seasonal reductions
agreed upon by the OTC. The OTC has stated that it anticipates that additional
NOx reductions will be necessary to meet the Clean Air Act's 2005 National
Ambient Air Quality Standard for ozone. However, the specific requirements that
will have to be met at that time have not been finalized. In addition, in July
1997 the EPA adopted new, more stringent rules on ozone and particulate matter.
Several groups have filed suit in the U.S. Court of Appeals to overturn these
new air quality standards on the grounds that, among other things, they are
based on inadequate
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 30 of 35
scientific evidence. Also, legislation has been introduced in the Congress that
would impose a four-year moratorium on any new standards under the Clean Air
Act. The GPU Energy companies are unable to determine what additional costs, if
any, will be incurred if the EPA rules are upheld.
GPU has been formally notified by the EPA and state environmental
authorities that it is among the potentially responsible parties (PRPs) who may
be jointly and severally liable to pay for the costs associated with the
investigation and remediation at hazardous and/or toxic waste sites in the
following number of instances (in some cases, more than one company is named for
a given site):
JCP&L MET-ED PENELEC GPUN GPU INC. TOTAL
7 4 2 1 1 12
In addition, certain of the GPU companies have been requested to
participate in the remediation or supply information to the EPA and state
environmental authorities on several other sites for which they have not been
formally named as PRPs, although the EPA and state authorities may nevertheless
consider them as PRPs. Certain of the GPU companies have also been named in
lawsuits requesting damages (which are material in amount) for hazardous and/or
toxic substances allegedly released into the environment. The ultimate cost of
remediation will depend upon changing circumstances as site investigations
continue, including (a) the existing technology required for site cleanup, (b)
the remedial action plan chosen and (c) the extent of site contamination and the
portion attributed to the GPU companies involved.
In 1997, the EPA filed a complaint against GPU, Inc. in the United States
District Court for the District of Delaware for enforcement of its unilateral
order issued against GPU, Inc. to clean up the former Dover Gas Light Company
(Dover) manufactured gas production site in Dover, Delaware. Dover was part of
the AGECO/AGECORP group of companies from 1929 until 1942 and GPU, Inc. emerged
from the AGECO/AGECORP reorganization proceedings. All of the common stock of
Dover was sold in 1942 by a member of the AGECO/AGECORP group to an unaffiliated
entity, and was subsequently acquired by Chesapeake Utilities Corporation.
According to the complaint, the EPA is seeking up to $0.5 million in past costs,
$4.2 million for work in connection with the cleanup of the Dover site and
approximately $19 million in penalties. GPU, Inc. has responded to the EPA
complaint stating that such claims should be dismissed because, among other
things, they are barred by the operation of the Final Decree entered by the
United States District Court for the Southern District of New York at the
conclusion of the 1946 reorganization proceedings of AGECO/AGECORP. Chesapeake
Utilities Corporation has also sued GPU, Inc. for a contribution to the cleanup
of the Dover site. In December 1997, the Court refused to dismiss the complaint;
GPU has requested that the Court reconsider its decision. There can be no
assurance as to the outcome of these proceedings.
Pursuant to federal environmental monitoring requirements, Penelec has
reported to the Pennsylvania Department of Environmental Protection (PaDEP) that
contaminants from coal mine refuse piles were identified in storm water run-off
at Penelec's Seward station property. Penelec signed a modified Consent Order,
which became effective December 1996, that establishes a schedule for submitting
a plan for long-term remediation, based on future
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 31 of 35
operating scenarios. Penelec currently estimates that the remediation of the
Seward station property will range from $12 million to $20 million and has a
recorded liability of $12 million at March 31, 1998. These cost estimates are
subject to uncertainties based on continuing discussions with the PaDEP as to
the method of remediation, the extent of remediation required and available
cleanup technologies. Penelec has requested, and expects to receive, recovery of
these remediation costs in its restructuring plan filed with the PaPUC (see
Management's Discussion and Analysis - Competitive Environment), and has
recorded a corresponding regulatory asset of approximately $12 million at March
31, 1998.
In 1997, the GPU Energy companies filed with the PaDEP applications for
re-permitting seven (JCP&L - one; Met-Ed - three; Penelec - three) operating ash
disposal sites, including projected site closure procedures and related cost
estimates. The cost estimates for the closure of these sites range from
approximately $17 million to $22 million, and a liability of $17 million (JCP&L
$1 million; Met-Ed $4 million; Penelec $12 million) is reflected on the
Consolidated Balance Sheets at March 31, 1998. JCP&L has requested recovery of
its share of closure costs in its restructuring plan filed with the NJBPU in
July 1997. Penelec and Met-Ed expect recovery through their restructuring plans
filed with the PaPUC in June 1997 (see Management's Discussion and Analysis -
Competitive Environment). As a result, a regulatory asset of $17 million is
reflected on the Consolidated Balance Sheets at March 31, 1998.
JCP&L has entered into agreements with the New Jersey Department of
Environmental Protection for the investigation and remediation of 17 formerly
owned MGP sites. JCP&L has also entered into various cost-sharing agreements
with other utilities for most of the sites. As of March 31, 1998, JCP&L has
spent approximately $28 million in connection with the cleanup of these sites.
In addition, JCP&L has recorded an estimated environmental liability of $46
million relating to expected future costs of these sites (as well as two other
properties). This estimated liability is based upon ongoing site investigations
and remediation efforts, which generally involve capping the sites and pumping
and treatment of ground water. Moreover, the cost to clean up these sites could
be materially in excess of $46 million due to significant uncertainties,
including changes in acceptable remediation methods and technologies.
In 1997, JCP&L's request to establish a Remediation Adjustment Clause for
the recovery of MGP remediation costs was approved by the NJBPU as part of the
Stipulation of Final Settlement. At March 31, 1998, JCP&L had recorded on its
Consolidated Balance Sheet a regulatory asset of $35 million.
JCP&L is continuing to pursue reimbursement from its insurance carriers for
remediation costs already spent and for future estimated costs. In 1994, JCP&L
filed a complaint with the Superior Court of New Jersey against several of its
insurance carriers, relative to these MGP sites. Pretrial discovery is
continuing.
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 32 of 35
OTHER COMMITMENTS AND CONTINGENCIES
-----------------------------------
Year 2000 Issue:
GPU is addressing year 2000 issues as they relate to its business, its
operations and operating systems, and its relationship with customers, banks,
partners, vendors, suppliers and service providers. Comprehensive reviews of all
computers, equipment, systems and applications are being performed; remediation
plans are being developed; and certain corrective actions have begun. GPU's
remediation plans include, among other things, the upgrade or replacement of
computers, equipment and computer software. GPU currently anticipates that its
year 2000 remediation efforts will, in all material respects, be completed by
the end of 1999. In the event corrective actions are not completed by this date,
certain computers, equipment, systems and applications may not function
properly, which could have a material adverse effect on GPU's operations.
As part of their year 2000 solution, the GPU Energy companies have
purchased and are installing an integrated information system (Project
Enterprise) that will help them manage business growth and meet the mandates of
electric utility deregulation. The system is scheduled to be fully operational
in early 1999. As a result of the planned implementation of Project Enterprise,
the GPU Energy Companies will avoid spending an estimated $8 million (JCP&L $3
million; Met-Ed $2 million; Penelec $3 million) in modifications to existing
systems to make them year 2000 compliant.
The GPU Energy Companies currently estimate they will spend an additional
$24 million (JCP&L $11 million; Met-Ed $7 million; Penelec $6 million) on year
2000 remediation of their computers, equipment and computer software. Of this
amount, approximately $7 million (JCP&L $3 million; Met-Ed $2 million; Penelec
$2 million) would have been spent in any event because of maintenance and
cyclical replacement plans that are already in place.
The GPUI Group currently estimates it will spend approximately $7 million
to become year 2000 ready, primarily to replace or modify equipment.
GPUI Group:
At March 31, 1998, the GPUI Group had investments totaling approximately
$2.4 billion in businesses and facilities located in foreign countries. Although
management attempts to mitigate the risk of investing in certain foreign
countries by securing political risk insurance, the GPUI Group faces additional
risks inherent to operating in such locations, including foreign currency
fluctuations (see Management's Discussion and Analysis - GPUI Group).
At March 31, 1998, GPU, Inc.'s aggregate investment in the GPUI Group was
$518 million; GPU, Inc. has also guaranteed up to an additional $913 million of
GPUI Group obligations. Of this amount, $726 million is included in Long-term
debt and Securities due within one year on GPU's Consolidated Balance Sheet at
March 31, 1998; $30 million of that amount relates to a GPU International, Inc.
revolving credit agreement; and $157 million relates to various other
obligations of the GPUI Group.
GPU International, Inc. has ownership interests in three NUG projects which
have long-term power purchase agreements with Niagara Mohawk Power Corporation
(NIMO) with an aggregate book value of approximately $28 million. In July 1997,
NIMO and 16 independent power producers (IPP), including the
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GPUI Group, executed a master agreement providing for the restructuring or
termination of 29 power purchase agreements, pursuant to which NIMO has agreed
to pay an aggregate of $3.6 billion in cash and/or debt securities, and to issue
an aggregate of 46 million shares of NIMO common stock. The specific terms of
restructured contracts that may be executed are being negotiated separately with
each IPP. In February 1998, the New York Public Service Commission approved
NIMO's restructuring agreement.
Parties to the agreement must still resolve a number of important issues
and final resolution will require the execution of separate agreements for each
project; approval by NIMO shareholders, and other state and federal agencies;
third party consents; successful financing by NIMO; and resolution of certain
tax issues. While the parties are attempting to complete the transactions by
mid-1998, there can be no assurance as to the outcome of this matter.
NIMO has also initiated an action in federal court seeking to invalidate
numerous NUG contracts, including the three GPU International, Inc. projects
discussed above. GPU International, Inc. has filed motions to dismiss the
complaint. This proceeding has been stayed pending the outcome of the
restructuring negotiations.
Other:
In October 1997, GPU announced its intention to begin a process to sell,
through a competitive bid process, up to all of the fossil-fuel and
hydroelectric generating facilities owned by the GPU Energy companies. These
facilities, comprised of 26 operating stations, support organizations and
development sites, total approximately 5,300 MW (JCP&L 1,900 MW; Met-Ed 1,300
MW; Penelec 2,100 MW) of capacity and have a net book value of approximately
$1.1 billion (JCP&L $288 million; Met-Ed $305 million; Penelec $546 million) at
March 31, 1998. The net proceeds from the sale would be used to reduce the
capitalization of the respective GPU Energy companies and may also be applied to
reduce short-term debt, finance further acquisitions, and to reduce acquisition
debt of the GPUI Group. In April 1998, GPU mailed Confidential Offering
Memoranda to qualified buyers. One Memorandum covers 25 fossil-fueled and
hydroelectric stations, support organizations and development sites and a second
Memorandum is for the 1,884 MW coal-fired Homer City Station, which Penelec is
selling together with its 50% joint owner, New York State Electric & Gas
Corporation.
The current schedule, which is subject to change, calls for initial
non-binding bids due in June 1998, selection of a short list of bidders in July
1998 and final bid submission in October 1998. It is anticipated that definitive
purchase agreements will be entered into in November 1998 and the divestiture
completed by mid-1999, subject to the timely receipt of the necessary regulatory
and other approvals. For the Homer City Station, initial, non-binding bids will
be due in May, with the winning bidder expected to be announced by the end of
July 1998.
GPU's capital programs, for which substantial commitments have been
incurred and which extend over several years, contemplate expenditures of $582
million (JCP&L $204 million; Met-Ed $92 million; Penelec $121 million; Other
$165 million) during 1998. As a consequence of reliability, licensing,
environmental and other requirements, additions to utility plant may be required
relatively late in their expected service lives. If such additions
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are made, current depreciation allowance methodology may not make adequate
provision for the recovery of such investments during their remaining lives.
The GPU Energy companies have entered into long-term contracts with
nonaffiliated mining companies for the purchase of coal for certain generating
stations in which they have ownership interests. The contracts, which expire at
various dates between 1998 and 2007, require the purchase of either fixed or
minimum amounts of the stations' coal requirements. The price of the coal under
the contracts is based on adjustments of indexed cost components. The GPU Energy
companies' share of the cost of coal purchased under these agreements is
expected to aggregate $171 million (JCP&L $26 million; Met-Ed $55 million;
Penelec $90 million) for 1998.
JCP&L has entered into agreements with other utilities to purchase capacity
and energy for various periods through 2004. These agreements will provide for
up to 614 MW in 1998, declining to 529 MW in 1999 and 345 MW in 2000, through
the expiration of the final agreement in 2004. Payments pursuant to these
agreements are estimated to be $129 million in 1998, $111 million in 1999, $83
million in 2000, $92 million in 2001, and $101 million in 2002.
In accordance with the Nuclear Waste Policy Act of 1982 (NWPA), the GPU
Energy companies have entered into contracts with, and have been paying fees to,
the DOE for the future disposal of spent nuclear fuel in a repository or interim
storage facility. In December 1996, the DOE notified the GPU Energy companies
and other standard contract holders that it will be unable to begin acceptance
of spent nuclear fuel for disposal by 1998, as mandated by the NWPA. The DOE
requested recommendations from contract holders for handling the delay. In
January 1997, the GPU Energy companies, along with other electric utilities and
state agencies, petitioned the U.S. Court of Appeals to, among other things,
permit utilities to cease payments into the Federal Nuclear Waste Fund until the
DOE complies with the NWPA. In May 1997, a joint petition was filed requesting
that the Court of Appeals compel the DOE to begin disposing of spent nuclear
fuel beginning not later than January 31, 1998. In November 1997, the Court
declined to compel the DOE to begin disposing of spent fuel by the statutory
deadline or to authorize the utilities to cease payments into the Nuclear Waste
Fund. The DOE's inability to accept spent nuclear fuel by 1998 could have a
material impact on GPU's results of operations, as additional costs may be
incurred to build and maintain interim on-site storage at Oyster Creek. TMI-1
has sufficient on-site storage capacity to accommodate spent nuclear fuel
through the end of its licensed life. In June 1997, a consortium of electric
utilities, including GPUN, filed a license application with the NRC seeking
permission to build an interim above-ground disposal facility for spent nuclear
fuel in northwestern Utah. There can be no assurance as to the outcome of these
matters.
New Jersey and Connecticut have established the Northeast Compact, to
construct a low-level radioactive waste disposal facility in New Jersey, which
should commence operation by the end of 2003. GPUN's total share of the cost for
developing, constructing and site licensing the facility is estimated to be $58
million, which will be paid through 2002. Through March 31, 1998, $6 million has
been paid. As a result, at March 31, 1998, a liability of $52 million is
reflected on the Consolidated Balance Sheets. JCP&L is recovering these costs
from customers, and a regulatory asset has also been recorded. (See the
Regulatory Assets and Liabilities section of Competition and the Changing
Regulatory Environment.) In February 1998, the New Jersey Low-Level Radwaste
Facility Siting Board (Siting Board) voted to suspend the siting
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process in New Jersey. The Siting Board is reviewing its legal and financial
obligations, subject to review from the Governor. GPUN cannot determine at this
time what effect, if any, this matter will have on its operations.
JCP&L's two operating nuclear units are subject to the NJBPU's annual
nuclear performance standard. Operation of these units at an aggregate annual
generating capacity factor below 65% or above 75% would trigger a charge or
credit based on replacement energy costs. At current cost levels, the maximum
annual effect on net income of the performance standard charge at a 40% capacity
factor would be approximately $11 million before tax. While a capacity factor
below 40% would generate no specific monetary charge, it would require the issue
to be brought before the NJBPU for review. The annual measurement period, which
begins in March of each year, coincides with that used for the Levelized Energy
Adjustment Clause.
At March 31, 1998, GPU, Inc. and consolidated affiliates had 9,401
employees worldwide, of which about 9,000 employees were located in the U.S. The
majority of the U.S. workforce is employed by the GPU Energy companies, of which
4,862 are represented by unions for collective bargaining purposes. JCP&L,
Met-Ed and Penelec's collective bargaining agreements with the International
Brotherhood of Electrical Workers expire in 1999, 2000 and 2002, respectively.
Penelec's five-year contract with the Utility Workers Union of America expires
on June 30, 1998, and renegotiations have begun.
During the normal course of the operation of its businesses, in addition to
the matters described above, GPU is from time to time involved in disputes,
claims and, in some cases, as a defendant in litigation in which compensatory
and punitive damages are sought by the public, customers, contractors, vendors
and other suppliers of equipment and services and by employees alleging unlawful
employment practices. While management does not expect that the outcome of these
matters will have a material effect on GPU's financial position or results of
operations, there can be no assurance that this will continue to be the case.
