SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
___ EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission Registrant, State of Incorporation, I.R.S. Employer
File Number Address and Telephone Number Identification No.
- ----------- ---------------------------- ------------------
1-6047 GPU, Inc. 13-5516989
(a Pennsylvania corporation)
300 Madison Avenue
Morristown, New Jersey 07962-1911
Telephone (973) 455-8200
1-3141 Jersey Central Power & Light Company 21-0485010
(a New Jersey corporation)
2800 Pottsville Pike
Reading, Pennsylvania 19605-2459
Telephone (610) 929-3601
1-446 Metropolitan Edison Company 23-0870160
(a Pennsylvania corporation)
2800 Pottsville Pike
Reading, Pennsylvania 19605-2459
Telephone (610) 929-3601
1-3522 Pennsylvania Electric Company 25-0718085
(a Pennsylvania corporation)
2800 Pottsville Pike
Reading, Pennsylvania 19605-2459
Telephone (610) 929-3601
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Registrant Title of each class which registered
- ---------- ------------------- ----------------
GPU, Inc. Common Stock, par value
$2.50 per share New York Stock Exchange
Jersey Central Power & Cumulative Preferred
Light Company Stock, $100 stated value
4% Series New York Stock Exchange
7.88% Series E New York Stock Exchange
Name of each exchange
Registrant Title of each class which registered
- ---------- ------------------- ----------------
Jersey Central Power & First Mortgage Bonds:
Light Company (cont.) 6 3/8% Series due 2003 New York Stock Exchange
7 1/8% Series due 2004 New York Stock Exchange
7 1/2% Series due 2023 New York Stock Exchange
6 3/4% Series due 2025 New York Stock Exchange
Monthly Income Preferred
Securities, 8.56%
Series A, $25 stated
Value (a) New York Stock Exchange
Metropolitan Edison Monthly Income Preferred
Company Securities, 9% Series A,
$25 stated value (b) New York Stock Exchange
Pennsylvania Electric Cumulative Preferred
Company Stock, $100 stated value:
4.40% Series B Philadelphia Stock Exchange
3.70% Series C Philadelphia Stock Exchange
4.05% Series D Philadelphia Stock Exchange
4.70% Series E Philadelphia Stock Exchange
4.50% Series F Philadelphia Stock Exchange
4.60% Series G Philadelphia Stock Exchange
Monthly Income Preferred
Securities, 8 3/4%
Series A, $25 stated
value (c) New York Stock Exchange
(a) Issued by JCP&L Capital, L.P., and unconditionally guaranteed by Jersey
Central Power & Light Company.
(b) Issued by Met-Ed Capital, L.P., and unconditionally guaranteed by
Metropolitan Edison Company.
(c) Issued by Penelec Capital, L.P., and unconditionally guaranteed by
Pennsylvania Electric Company.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether each registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of each registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the registrants' voting stock held by
non-affiliates based on the closing price of $39.1875 on February 2, 1998 was:
Registrant Amount
---------- ------
GPU, Inc. $4,731,285,452
The number of shares outstanding of each of the registrants' classes of
voting stock as of February 2, 1998 was as follows:
Shares
Registrant Title Outstanding
- ---------- ----- -----------
GPU, Inc. Common Stock, $2.50 par value 120,838,614
Jersey Central Power & Light Company Common Stock, $10 par value 15,371,270
Metropolitan Edison Company Common Stock, no par value 859,500
Pennsylvania Electric Company Common Stock, $20 par value 5,290,596
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for 1998 Annual Meeting of Stockholders of GPU, Inc.
(Part III)
- -----------------------------------------------------------------------------
This combined Form 10-K is separately filed by GPU, Inc., Jersey
Central Power & Light Company, Metropolitan Edison Company and Pennsylvania
Electric Company. Information contained herein relating to any individual
registrant is filed by such registrant on its own behalf. Each registrant makes
no representation as to information relating to the other registrants.
TABLE OF CONTENTS
Page
Number
------
Part I
Item 1. Business 1
Item 2. Properties 47
Item 3. Legal Proceedings 50
Item 4. Submission of Matters to a Vote of Security Holders 50
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 51
Item 6. Selected Financial Data 51
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 52
Item 8. Financial Statements and Supplementary Data 52
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 52
Part III
Item 10. Directors and Executive Officers of the Registrant 53
Item 11. Executive Compensation 58
Item 12. Security Ownership of Certain Beneficial Owners
and Management 62
Item 13. Certain Relationships and Related Transactions 63
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 64
Signatures 76
s
PART I
ITEM 1. BUSINESS.
GPU, Inc., a Pennsylvania corporation, is a holding company registered
under the Public Utility Holding Company Act of 1935 (1935 Act). 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; 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."
GPU is subject to regulation by the Securities and Exchange Commission
(SEC) under the 1935 Act. Retail rates, conditions of service, issuance of
securities and other matters relating to the GPU Energy companies are subject to
regulation in the state in which each utility operates - in New Jersey by the
New Jersey Board of Public Utilities (NJBPU) and in Pennsylvania by the
Pennsylvania Public Utility Commission (PaPUC). The Nuclear Regulatory
Commission (NRC) regulates the construction, ownership and operation of nuclear
generating stations. The GPU Energy companies are also subject to wholesale rate
and other regulation by the Federal Energy Regulatory Commission (FERC) under
the Federal Power Act. In addition, certain foreign subsidiaries and affiliates
are subject to limited rate and other regulation (see Regulation section).
Financial information with respect to the business segments of GPU is
provided in Note 14, Segment Information, of the Combined Notes to the
Consolidated Financial Statements.
This Form 10-K contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Statements made
that are not historical facts are forward-looking and, accordingly, involve
risks and uncertainties that could cause actual results or outcomes to differ
materially from those expressed in the forward-looking statements. Although such
forward-looking statements have been based on reasonable assumptions, there is
no assurance that the expected results will be achieved. Some of the factors
that could cause actual results to differ materially include, but are not
limited to: the effects of regulatory decisions; changes in law and other
governmental actions and initiatives; the impact of deregulation and increased
competition in the industry; industry restructuring; expected outcomes of legal
proceedings; generating plant performance; fuel prices and availability; and
uncertainties involved with foreign operations including political risks and
foreign currency fluctuations.
1
RECENT DEVELOPMENTS
During the past year, there were a number of major developments which are
expected to significantly affect GPU. They are as follows:
- - In November 1997, GPU Electric acquired the business of PowerNet Victoria
(subsequently renamed GPU PowerNet) from the State of Victoria, Australia
for A$2.6 billion (approximately U.S. $1.9 billion). PowerNet owns and
operates the existing high-voltage electricity transmission system in the
State of Victoria. The PowerNet transmission system serves all of Victoria
covering an area of approximately 87,900 square miles and a population of
approximately 4.5 million.
The PowerNet acquisition was financed through: (1) a senior debt credit
facility of A$1.9 billion (approximately U.S. $1.4 billion), which is
non-recourse to GPU, Inc.; (2) a five-year U.S. $450 million bank credit
agreement which is guaranteed by GPU, Inc.; and (3) an equity contribution
from GPU, Inc. of U.S. $50 million.
In February 1998, GPU, Inc. sold seven million shares of common stock. The
net proceeds of $269 million were used to reduce approximately $229 million
of indebtedness associated with the PowerNet and Midlands Electricity plc
(Midlands) acquisitions, and the balance will be applied for other
corporate purposes.
In January 1998, as a result of Victoria's cross-ownership restrictions,
GPU Electric sold its 50% stake in Solaris Power (Solaris) to The
Australian Gas Light Company for A$208 million (approximately U.S. $135.2
million) and a 10.36% stake in Allgas Energy Limited (Allgas), the natural
gas distributor in Queensland, Australia. The Allgas shares had a market
value of A$14.6 million (approximately U.S. $9.5 million) at the date of
the sale. As a result, GPU will record an after-tax gain on the sale of
U.S. $18.3 million in the first quarter of 1998. The cash proceeds from the
Solaris sale were used to reduce outstanding debt of GPU Electric.
- - In October 1997, GPU announced that it intends 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, total approximately
5,300 MW of capacity and have a net book value of approximately $1.1
billion at December 31, 1997. GPU expects to use a multi-stage competitive
bid process, similar to the generation divestiture processes used by other
utilities. 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. GPU will begin seeking
indicative bids in April 1998. It is anticipated that definitive agreements
with the purchaser(s) will be entered into by the end of 1998 and the sale
completed by mid-1999, subject to the timely receipt of the necessary
regulatory and other approvals.
In February 1998, GPU and New York State Electric & Gas (NYSEG) agreed to
jointly sell the Homer City Generating station. GPU and NYSEG each own 50%
of the facility which Genco operates. The sale will require a number of
2
federal and state regulatory approvals, which are expected to be received
in early 1999.
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. In response to an inquiry regarding
the possible sale of Oyster Creek, the GPU Energy companies have stated
that they would also consider selling TMI-1. Unlike Oyster Creek, however,
the early retirement of TMI-1 is not being considered because of its lower
operating costs.
- - Pursuant to legislation enacted in 1996, Met-Ed and Penelec in 1997 filed
with the PaPUC their proposed restructuring plans to implement competition
and customer choice in Pennsylvania. Highlights of these plans, as revised
through January 1998, include:
- One-third of retail customers would be able to choose their electric
suppliers beginning on January 1, 1999, two-thirds permitted to choose
by January 1, 2000 and all retail customers would be permitted to
choose by January 1, 2001.
- As required by the restructuring legislation, rates would be unbundled
for generation, transmission and distribution charges.
- A competitive transition charge (CTC) would provide the opportunity to
recover all of Met-Ed and Penelec's generation plant, regulatory assets
and other non-NUG related transition and stranded costs within a
seven-year time period beginning January 1, 1999.
- A "NUG Cost Rate" is being proposed to capture payments to nonutility
generation (NUGs) in excess of amounts in current rates. This clause
will provide for a full reconciliation of amounts paid to NUGs, and
recovered from customers. This will ensure that customers do not
overpay for these obligations, and it will also provide a vehicle for
flowing through to customers the full benefits of any prospective
reductions in NUG obligations that result from mitigation. At December
31, 1997, the deferred NUG balances for Met-Ed and Penelec were $10.3
million and $14.6 million, respectively, and are included in Other
Regulatory Assets on the Consolidated Balance Sheets.
- Stranded costs at the time of initial customer choice (December 31,
1998), on a present value basis, are estimated at $1.5 billion for
Met-Ed and $1.2 billion for Penelec. These stranded costs include
above-market costs related to power purchase commitments, company-owned
generation, generating plant decommissioning, regulatory assets and
transition expenses.
- Ongoing stranded cost mitigation efforts include the buyout and/or
renegotiation of several above-market NUG agreements; the planned
retirement of uneconomical generating units as well as the continuing
evaluation of remaining generating facilities; and workforce reductions
achieved primarily through voluntary retirement and severance programs.
3
- Met-Ed and Penelec have requested rate recovery of prudently incurred
costs associated with the buyout and restructuring of NUG projects that are
not currently being recovered in rates. The requested increase, based upon
a three-year recovery of the buyout costs, is $44.6 million for Met-Ed and
$19.1 million for Penelec. It is expected that these increases will be
offset by lower interest expense related to the issuance of transition
bonds. The estimated customer savings associated with these contract
buyouts/restructurings is $812 million for Met-Ed and $593 million for
Penelec.
- Met-Ed and Penelec will be the supplier of last resort for customers
who cannot or do not wish to purchase energy from an alternative
supplier.
Numerous parties have intervened in these proceedings and are actively
contesting various aspects of the filings, including the quantification of
stranded costs and the fixing of the level of generation credits for customers
who choose alternative suppliers. Evidentiary hearings have been concluded and
briefs are to be filed by mid-April. Initial decisions from the PaPUC are
expected by June 30, 1998. There can be no assurance as to the outcome of these
proceedings.
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. Among other things, the alternate plan accelerates the
pace of retail competition and reduces the amount of PECO's recoverable stranded
costs. PECO has appealed the PaPUC's decision. On January 26, 1998, PECO
announced a fourth quarter pre-tax charge to 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. There can
be no assurance as to the outcome of this matter.
The PaPUC has also issued a final order that sets forth the guidelines for
retail access pilot programs in Pennsylvania that give customers the ability to
choose their electricity supplier. These pilot programs include residential,
commercial and industrial class customers, and utilities are required to commit
about 5% of load to retail access programs and unbundle their rates to allow
customers to choose their electric generation supplier. The pilot program began
November 1, 1997 and will run until the first phase of retail competition begins
on January 1, 1999. Met-Ed and Penelec's pilot programs include approximately 5%
of each company's load.
- - Pursuant to a NJBPU directive, in 1997, JCP&L filed with the NJBPU its
proposed restructuring plan for a competitive electric marketplace in New
Jersey. Included in the plan were stranded cost, unbundled rate and
restructuring filings. Highlights of the plan, as revised through December
1997, include:
4
- Some electric retail customers would be able to choose their supplier
beginning on October 1, 1998, expanding to include all retail customers
by July 1, 2000.
- As required by the NJBPU's final Findings and Recommendations for
Restructuring the Electric Power Industry in New Jersey, JCP&L would
unbundle its rates and these rates would apply to all distribution
customers, with the exception of a Production Charge, which would be
charged only to customers who do not choose an alternative energy
supplier. The proposed unbundled rate structure would include:
-- a flat monthly Customer Charge for the costs associated with
metering, billing and customer account administration.
-- a Delivery Charge consisting of capital and O&M costs
associated with the transmission and distribution system; the
recovery of regulatory assets, including those associated with
generation; the cost of social programs; and certain costs
related to the proposed ratemaking treatment of the Oyster Creek
Nuclear Generating Station (Oyster Creek).
-- a Production Charge for the estimated average market price
for electricity (EAMPE) provided to customers who elect JCP&L as
their electric generation supplier. JCP&L would be the supplier
of last resort for customers who cannot or do not wish to
purchase energy from an alternative supplier. A deferred market
price adjustment account would be set up for the difference
between the EAMPE and the actual market price for electricity,
plus interest. The EAMPE would be calculated every six months
during the transition period and adjusted by a true-up factor.
-- a Societal Benefits Charge to recover demand-side management
costs, manufactured gas plant remediation costs, and nuclear
decommissioning costs.
-- a NUG Transition Charge (NTC) to recover ongoing above-market
NUG costs over the life of the contracts and provide a mechanism
to flow through to customers the benefits of future NUG
mitigation efforts. The NTC would be subject to an annual
true-up for actual cost escalations or reductions, changes in
availability or dispatch levels and other cost variations over
the life of each NUG project. The NTC would also be subject to
adjustment in the future to reflect additional NUG buyout or
restructuring costs and any related savings.
The unbundling plan calls for an estimated 10% rate reduction, of which
2.1% became effective as part of JCP&L's Stipulation of Final Settlement
(Final Settlement) approved by the NJBPU in March 1997. The remaining
reductions would be phased in over a two-year period beginning October 1,
1998, and would be achieved through, among other things, the proposed early
retirement of Oyster Creek for ratemaking purposes in September 2000 and,
if legislation is enacted, the securitization of certain above-market
costs. In addition to this rate reduction, JCP&L customers would receive an
additional rate reduction of approximately 6% to be
5
phased in over the next five years as a result of energy tax
legislation signed into law in July 1997.
- 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. A final
decision on the plant's future has not been reached. Nevertheless,
JCP&L has proposed that the NJBPU approve an early retirement of Oyster
Creek in September 2000, for ratemaking purposes. The ratemaking
treatment being requested for Oyster Creek is as follows:
-- The market value of Oyster Creek's generation output would be
recovered in the Production Charge.
-- The above-market operating costs would be recovered as a
component of the Delivery Charge through September 2000. If the
plant is operated beyond that date, these costs would not be
included in customer rates.
-- Existing Oyster Creek regulatory assets would, like other
regulatory assets, be recovered as part of the Delivery Charge.
-- Oyster Creek decommissioning costs would, like Three Mile
Island Unit 1 (TMI-1) decommissioning costs, be recovered as a
component of the Societal Benefits Charge.
-- JCP&L's net investment in Oyster Creek would be recovered
through the Delivery Charge as a levelized annuity, effective
October 1998 through its original expected operating life, 2009.
- Stranded costs at the time of initial customer choice (September 30,
1998), on a present value basis, are estimated at $1.6 billion, of
which $1.5 billion is for above-market NUG contracts. The $1.6 billion
excludes above-market generation costs related to Oyster Creek.
Numerous parties have intervened in this proceeding and are actively
contesting various aspects of JCP&L's filings, including, among other things,
recovery by JCP&L of plant capital additions since its last base rate case in
1992, projections of future electricity prices on which stranded cost recovery
calculations are based, the appropriate level of return and the appropriateness
of earning a return on stranded investment.
Consultants retained by the NJBPU Staff, the Division of Ratepayer
Advocate and other parties have proposed that JCP&L's stranded cost recoveries
should be substantially lower than the levels JCP&L is seeking.
In February 1998, the NJBPU issued a written order clarifying an earlier
NJBPU oral decision. In its written order, the NJBPU substantially affirmed an
Administrative Law Judge's ruling which limited the unbundling proceeding to
1992 cost of service levels, but clarified that (1) JCP&L could update its 1992
cost of service study to reflect adjustments consistent with the NJBPU approved
Final Settlement which, among other things, recognized certain increased expense
levels and reductions to base rates and (2) all of the updated post-1992 cost
information that JCP&L had submitted in the proceeding should remain in the
record, which the NJBPU will utilize in establishing a reasonable level of rates
going forward.
6
Furthermore, the NJBPU emphasized in its order that the final unbundled
rates established as a result of this proceeding will be lower than the current
bundled rates. This directive has been recognized in JCP&L's July 1997
restructuring plan which proposed annual revenue reductions totaling
approximately $185 million. The NJBPU will render final and comprehensive
decisions on the precise level of aggregate rate reductions required in order to
accomplish its primary goals of introducing retail competition and lowering
electricity costs for consumers.
If the NJBPU were to accept the positions of various parties or their
consultants, or were ultimately to deny JCP&L's request to recover post-1992
capital additions and increased expenses, it would have a material adverse
impact on JCP&L's stranded cost recovery, restructuring proceeding and future
earnings.
Discovery, evidentiary hearings and related proceedings are continuing.
The NJBPU intends to complete its review and issue final decisions in time for
retail competition to commence in October 1998. There can be no assurance as to
the outcome of these proceedings.
JCP&L has received NJBPU approval for a one-year pilot program offering
customers in Monroe Township, New Jersey, a choice of their electric energy
supplier. The pilot program began in September 1997, and can be extended until
the first phase of competition begins in October 1998. Monroe Township had been
exploring the possibility of establishing its own municipal electric system.
- - In 1997, GPU formed GPU AR, to engage in energy services and retail energy
sales and GPU Telcom, to conduct certain telecommunications related
businesses. In December 1997, GPU and The Williams Companies, Inc.
announced an agreement to form an alliance to jointly market energy and
related services at the retail level. The joint venture, which is expected
to commence operations in 1998, will offer electric, natural gas and oil
supply, as well as other related energy services, to consumers throughout
the Mid-Atlantic region.
- - In 1997, the Government of the United Kingdom imposed a windfall profits
tax on privatized utilities, including Midlands, in which the GPUI Group
has a 50% ownership interest. As a result, a one-time charge to income of
$109.3 million, or $0.90 per share, was taken. In December 1997, half of
this tax was paid; the remainder is due by December 1998.
7
INDUSTRY DEVELOPMENTS
Electric utility customers have traditionally been served by vertically
integrated regulated monopolies. The electric utility industry is moving away
from a traditional rate regulated environment based on cost recovery to some
combination of a competitive marketplace and modified regulation. The enactment
of the Public Utility Regulatory Policies Act of 1978 (PURPA) facilitated the
entry of competitors into the electric generation business. The Energy Policy
Act of 1992 (EPAct) furthered competition among utilities and NUGs in the
wholesale electric generation market, accelerating industry restructuring. The
FERC, in its Order 888 and related proceedings, has required utilities to
provide open access and comparable transmission service to third parties.
Pennsylvania adopted comprehensive legislation which provides for the
restructuring of the electric utility industry, and the NJBPU has initiated
comparable proceedings pending adoption of legislation.
Operating in a competitive environment places pressures on utility profit
margins and credit quality. Utilities with significantly higher cost structures
than are supportable in the marketplace will experience reduced earnings as they
attempt to meet their customers' demands for lower-priced electricity.
Competitive forces continue to influence some retail pricing. In some cases,
commercial and industrial customers have indicated their intention to pursue
competitively priced electricity from other providers, and in some instances
have obtained price concessions from utilities. This prospect of increasing
competition in the electric utility industry has already led the major credit
rating agencies to apply more stringent guidelines in making credit rating
determinations.
The combination of the current market price of electricity being below
that of some utility owned generation and power purchase commitments, as well as
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 recoverable in a regulated environment, are at risk in a
deregulated competitive environment. In connection with their respective
restructuring filings, stranded costs at the time of initial customer choice
(December 31, 1998), on a present value basis, are estimated at $1.5 billion for
Met-Ed and $1.2 billion for Penelec. These stranded costs include above-market
costs related to power purchase commitments, company-owned generation,
generating plant decommissioning, regulatory assets and transition expenses.
Stranded costs at the time of initial customer choice (September 30, 1998), on a
present value basis for JCP&L, are estimated at $1.6 billion, of which $1.5
billion is for above-market NUG contracts. The $1.6 billion excludes
above-market generation costs related to Oyster Creek. The estimate is 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. As discussed below, the restructuring legislation in Pennsylvania and
the proposed restructuring plan 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 will differ, but
should allow for the recovery of non-mitigable above-market costs through either
distribution charges or separate nonbypassable charges to customers.
8
In response to competitive forces and regulatory changes, GPU is
considering various strategies designed to enhance its competitive position and
to increase its ability to adapt to, and anticipate changes in, its business.
GPU has identified the following strategic objectives to guide it over the next
several years: (1) build upon GPU's core competency in regulated infrastructure
(mainly the transmission and distribution of electricity), both internationally
and domestically; (2) investigate other investment opportunities in
infrastructure (i.e. natural gas, water, telecommunications); (3) continue to
develop the contract generation business (generation for which contracts to sell
power to third parties have been executed) through the GPUI Group; and (4) build
a retail energy services and supply business.
GPU's strategies may include business combinations with other companies,
internal restructurings involving the complete or partial separation of its
wholesale and retail businesses, acquisitions of other businesses, and additions
to or dispositions of all or portions of its transmission or distribution
businesses. GPU has announced its intention to divest its fossil fuel and
hydroelectric generating plants. As a result of federal and state actions, the
GPU Energy companies will be required to implement rate unbundling for
generation, transmission and distribution services. No assurances can be given
as to whether any potential transactions of the type described above may
actually occur, or as to the ultimate effect thereof on the financial condition
or competitive position of GPU.
OTHER DEVELOPMENTS
During 1997 and early 1998, there were other developments relating to
competition within the electric utility industry which are described below:
- - Several bills have been introduced in Congress providing for a
comprehensive restructuring of the electric utility industry. These bills
propose, among other things, retail choice for all utility customers
beginning as early as January 1999, the opportunity for utilities to
recover their prudently incurred stranded costs in varying degrees, and
repeal of both PURPA and the 1935 Act.
- - In 1996, the GPU Energy companies, along with six other electric utility
members of the Pennsylvania-New Jersey-Maryland (PJM) Power Pool
(together, the supporting PJM companies), filed with the FERC a
transmission tariff and agreements (including, among other things,
establishing an independent system operator (ISO) to operate the energy
market and transmission system) that would create a new wholesale energy
market to meet the requirements of FERC Order 888, and to increase
competition in the Mid-Atlantic region. PECO, who opposed the supporting
PJM companies' proposed restructuring plan, filed its own plan with the
FERC. In February 1997, the FERC issued an order directing PJM to adopt
all recommendations proposed by the supporting PJM companies, after
certain issues were resolved regarding congestion pricing.
In addition, in November 1997 the FERC issued an order to PJM which, among
other things, directed the GPU Energy companies to implement a
single-system transmission rate, effective January 1, 1998. The
implementation of a single-system rate is not expected to effect total
transmission revenues,
9
however, it would increase the pricing for transmission service in Met-Ed
and Penelec's service territories and reduce the pricing for transmission
service in JCP&L's service territory. The GPU Energy companies have
requested the FERC to reconsider its ruling requiring a single-system
transmission rate. The FERC's ruling may also have an effect on the GPU
Energy companies' distribution rates since the PaPUC has ordered a rate
cap effective January 1, 1997 and the NJBPU has recommended a 5-10% rate
reduction effective with the implementation of customer choice. There can
be no assurance as to the outcome of this matter.
Also in 1997, the PJM Power Pool converted to a limited liability company
governed by an independent board of managers and the FERC approved the
supporting PJM companies' proposal to permit the PJM Power Pool to be
recognized as an ISO effective January 1, 1998.
- - In response to the concerns expressed by the Staff of the SEC, the
Financial Accounting Standards Board's (FASB) Emerging Issues Task Force
(EITF) agreed to discuss the issues surrounding the continued
applicability of Statement of Financial Accounting Standards No. 71 (FAS
71) to the electric utility industry. In May and July 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 for Restructuring the Electric
Power Industry in New Jersey, 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 Statement of
Financial Accounting Standards No. 121 (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
10
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. 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.
- - The GPU Energy companies and certain affiliates have contracted for an
integrated information system to help manage their business growth,
accomplish year 2000 compliance and meet the mandates of electric utility
deregulation. The system is scheduled to be fully operational in early
1999. The estimated project costs for the system are $106 million, of
which $16 million was spent in 1997. A portion of these costs will be
expensed as incurred. The GPUI Group estimates that it will cost
approximately $7 million to modify its computer systems.
THE GPU ENERGY COMPANIES
The electric generating and transmission facilities of the GPU Energy
companies are physically interconnected and are operated as a single integrated
and coordinated system serving a population of approximately five million in New
Jersey and Pennsylvania. For the year 1997, the GPU Energy companies' revenues
were about equally divided between Pennsylvania customers and New Jersey
customers. During 1997, sales to customers by customer class were as follows:
% Operating Revenues % KWH Sales
--------------------------- --------------------------
Total JCP&L Met-Ed Penelec Total JCP&L Met-Ed Penelec
----- ----- ------ ------- ----- ----- ------ -------
Residential 42 45 41 35 35 41 35 28
Commercial 35 39 29 33 33 39 28 30
Industrial 21 15 28 28 29 20 35 36
Other* 2 1 2 4 3 -- 2 6
--- --- --- --- --- --- --- ---
100 100 100 100 100 100 100 100
=== === === === === === === ===
* Rural electric cooperatives, municipalities, street and highway lighting,
and others.
The GPU Energy companies also make interchange and spot market sales of
electricity to other utilities. Reference is made to GPU Energy Companies'
Statistics and Company Statistics on pages F-3, F-112, F-122, and F-132, for
additional information concerning sales and revenues. Revenues of JCP&L, Met-Ed
and Penelec derived from their largest single customers accounted for less than
2%, 2% and 1%, respectively, of their electric operating revenues for the year
and their 25 largest customers, in the aggregate, accounted for approximately
9%, 14% and 13%, respectively, of such revenues.
11
The area served by the GPU Energy companies extends from the Atlantic
Ocean to Lake Erie, is generally comprised of small communities, rural and
suburban areas and includes a wide diversity of industrial enterprises, as well
as substantial farming areas. JCP&L provides retail service in northern, western
and east central New Jersey, having an estimated population of approximately 2.5
million. Met-Ed provides retail electric service in all or portions of 14
counties, in the eastern and south central parts of Pennsylvania, having an
estimated population of almost one million. Met-Ed also sells electricity at
wholesale to four municipalities having an estimated population of over 11,000.
Penelec provides retail and wholesale electric service within a territory
located in western, northern and south central Pennsylvania extending from the
Maryland state line northerly to the New York state line, with a population of
about 1.5 million, approximately 24% of which is concentrated in ten cities and
twelve boroughs, all with populations over 5,000. Penelec also provides
wholesale service to five municipalities in New Jersey, as well as to Allegheny
Electric Cooperative, Inc., which serves 13 rural electric cooperatives in
Pennsylvania and one in New Jersey. Penelec, as lessee of the property of the
Waverly Electric Light & Power Company, also serves a population of about 13,700
in Waverly, New York and vicinity.
The GPU Energy companies' transmission facilities are physically
interconnected with neighboring nonaffiliated utilities in Pennsylvania, New
Jersey, Maryland, New York and Ohio. The interconnection facilities are used for
substantial capacity and energy interchange and purchased power transactions, as
well as emergency assistance. The GPU Energy companies are members of the PJM
Power Pool and the Mid-Atlantic Area Council, an organization providing
coordinated review of the planning by utilities in the PJM area. In 1997, the
PJM Power Pool converted to a limited liability company governed by an
independent board of managers and the FERC approved the supporting PJM
companies' proposal to permit the PJM Power Pool to be recognized as an ISO. For
additional discussion, see Competitive Environment - Recent Regulatory Actions,
Management's Discussion and Analysis.
GPUI GROUP
The GPUI Group develops, owns and operates electric generation,
transmission and distribution facilities in the U.S. and foreign countries. It
has also made investments in certain advanced technologies related to the
electric power industry. The GPUI Group has ownership interests in transmission,
distribution and supply businesses in England and Australia. It also has
ownership interests in eight operating cogeneration plants in the U.S. totaling
847 MW (of which the GPUI Group's equity interest represents 308 MW) of
capacity, and twelve operating generating facilities located in foreign
countries totaling 3,830 MW (of which the GPUI Group's equity interest
represents 728 MW) of capacity.
The GPUI Group is continuing to pursue investment opportunities and has
commitments, both domestically and internationally, in seven generating
facilities under construction totaling 2,141 MW (of which the GPUI Group's
equity interest represents 641 MW) of capacity.
At December 31, 1997, GPU, Inc.'s aggregate investment in the GPUI Group
was $268 million; GPU, Inc. has also guaranteed up to an additional $1.3
12
billion of GPUI Group obligations. GPU, Inc. has SEC approval to finance
investments in foreign utility companies (FUCOs) and exempt wholesale generators
(EWGs) up to an aggregate amount equal to 100% of GPU's average consolidated
retained earnings, or approximately $2.2 billion as of December 31, 1997. At
December 31, 1997, GPU, Inc. has remaining authorization to finance
approximately $754 million of additional investments in FUCOs and EWGs. To the
extent the GPU Energy companies no longer meet the requirements of FAS 71 as a
result of the implementation of the GPU Energy companies' restructuring plans,
any resulting write-offs would reduce GPU's retained earnings. Such reductions
would reduce the amount of available authorization for investments in FUCOs and
EWGs. For additional information on the GPUI Group's investments, see Note 6 of
the Notes to Consolidated Financial Statements.
In 1997, the Government of the United Kingdom imposed a windfall profits
tax on privatized utilities, including Midlands, in which the GPUI Group has a
50% ownership interest. As a result, a one-time charge to income of $109.3
million, or $0.90 per share, was taken. In December 1997, half of this tax was
paid; the remainder is due by December 1998.
In 1997, GPU Electric acquired the business of PowerNet Victoria
(subsequently renamed GPU PowerNet) from the State of Victoria, Australia for
A$2.6 billion (approximately U.S. $1.9 billion). PowerNet owns and maintains the
existing high-voltage electricity transmission system in Victoria. The PowerNet
transmission system serves all of Victoria covering an area of approximately
87,900 square miles and a population of approximately 4.5 million. GPU expects
the PowerNet acquisition to contribute positively to its 1998 earnings. For
additional information, see Note 5 of the Notes to Consolidated Financial
Statements.
In January 1998, as a result of Victoria's cross-ownership restrictions,
GPU Electric sold its 50% stake in Solaris to The Australian Gas Light Company
for A$208 million (approximately U.S. $135.2 million) and a 10.36% stake in
Allgas Energy Limited (Allgas), the natural gas distributor in Queensland,
Australia. The Allgas shares had a market value of A$14.6 million (approximately
U.S. $9.5 million) at the date of sale. As a result, GPU will record an
after-tax gain on the sale of $18.3 million in the first quarter of 1998.
Management expects that the GPUI Group will provide a substantial portion
of GPU's future earnings growth and intends on making additional investments in
its business activities. The timing and amount of these investments, however,
will depend upon the availability of appropriate opportunities and financing
capabilities.
NUCLEAR FACILITIES
The GPU Energy companies have made investments in three major nuclear
projects -- Three Mile Island Unit 1 (TMI-1) and Oyster Creek, both of which are
operating generation facilities, and Three Mile Island Unit 2 (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 December 31, 1997, the GPU
13
.
Energy companies' net investment, including nuclear fuel, in TMI-1 was $602
million (JCP&L $155 million; Met-Ed $300 million; Penelec $147 million) and $701
million for Oyster Creek. The GPU Energy companies' net investment in TMI-2 at
December 31, 1997 was $80 million (JCP&L $72 million; Met-Ed $1 million; Penelec
$7 million). 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 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.
Oyster Creek
The operating license for the Oyster Creek station, a 619 MW boiling water
reactor, expires in 2009. Oyster Creek operated at a 91.0% capacity factor for
1997. The station's next refueling outage is scheduled to begin in September
1998. 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.
TMI-1
The operating license for TMI-1, a 786 MW pressurized water reactor,
expires in 2014. TMI-1 operated at a capacity factor of 83.4% for 1997. Its next
refueling outage is scheduled to begin in the fall of 1999. In response to an
inquiry regarding the possible sale of Oyster Creek, the GPU Energy companies
have stated that they would also consider selling TMI-1. Unlike Oyster Creek,
however, the early retirement of TMI-1 is not being considered because of its
lower operating costs.
TMI-2
The 1979 TMI-2 accident resulted in significant damage to, and
contamination of, the plant and a release of radioactivity to the environment. A
cleanup program was completed in 1990, and after receiving NRC approval, TMI-2
entered into long-term monitored storage in 1993.
14
As a result of the accident and its aftermath, individual claims for
alleged personal injury (including claims for punitive damages), which are
material in amount, were 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 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 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.
15
NUCLEAR PLANT RETIREMENT COSTS
Retirement costs for nuclear plants include decommissioning the
radiological portions of the plants and the cost of removal of nonradiological
structures and materials. The disposal of spent nuclear fuel is covered
separately by contracts with the U.S. Department of Energy (DOE).
In 1990, the 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 developed for TMI-2 which took the
accident into account. Under the NRC regulations, the funding targets (in 1997
dollars) are as follows:
(in millions)
Oyster
TMI-1 TMI-2 Creek
----- ----- -----
JCP&L $ 45 $ 71 $306
Met-Ed 89 142 --
Penelec 45 71 --
---- ---- ----
Total $179 $284 $306
==== ==== ====
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 1997 dollars):
(in millions)
Oyster
GPU TMI-1 TMI-2 Creek
- --- ----- ----- -----
Radiological decommissioning $328 $399 $386
Nonradiological cost of removal 81 34* 37
---- ---- ----
Total $409 $433 $423
==== ==== ====
* Net of $10.1 million spent as of December 31, 1997.
Each of the GPU Energy companies is responsible for retirement costs in
proportion to its respective ownership percentage.
16
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 trusts, at
market on the Consolidated Balance Sheets. Accounting for retirement costs may
change based upon the FASB's Exposure Draft discussed below.
The FASB has issued an Exposure Draft titled "Accounting for Certain
Liabilities Related to Closure or Removal of Long-Lived Assets," 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 1997 dollars) has already been recognized,
based on the 1995 site-specific study since 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 Final Settlement approved by the NJBPU in
March 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. (See discussion of Final Settlement in Rate Matters section,
Management's Discussion and Analysis.)
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.
17
The amounts charged to depreciation expense in 1997 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 in 1997:
JCP&L $ 2 $ 13
Met-Ed 9 -
Penelec 4 -
--- ---
Total $ 15 $ 13
=== ===
Accumulated depreciation provision
at December 31, 1997:
JCP&L $ 38 $217
Met-Ed 68 -
Penelec 29 -
--- ---
Total $135 $217
=== ===
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
December 31, 1997 and 1996 are $449 million (JCP&L $112 million; Met-Ed $225
million; Penelec $112 million) and $431 million (JCP&L $108 million; Met-Ed $215
million; Penelec $108 million), respectively. These amounts are based upon the
1995 site-specific study estimates (in 1997 and 1996 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)
for 1997 and $17 million (JCP&L $4 million; Met-Ed $8 million; Penelec $5
million) for 1996, 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 $449 million liability at December 31, 1997 is $261 million
(JCP&L $34 million; Met-Ed $145 million; Penelec $82 million), which management
believes is probable of recovery from customers and included in Three Mile
Island Unit 2 deferred costs on the Consolidated Balance Sheets, and $220
million (JCP&L $87 million; Met-Ed $96 million; Penelec $37 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
1997 amounted to $14 million (JCP&L $3 million; Met-Ed $10 million; Penelec $1
million).
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.
18
The Final Settlement approved by the NJBPU in March 1997 adjusts JCP&L's future
revenues for retirement costs based on the 1995 site-specific 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 December 31, 1997, 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 1997 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
19
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 also
subject to retrospective premium assessments of up to $44 million (JCP&L $27
million; Met-Ed $11 million; Penelec $6 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.
NONUTILITY AND OTHER POWER PURCHASES
Pursuant to the requirements of 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 728 359 165 204
1999 746 365 165 216
2000 811 370 203 238
2001 836 378 231 227
2002 857 390 240 227
* Actual.
As of December 31, 1997, 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
20
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 Managing Nonutility Generation section of The
GPU Energy Companies' Supply Plan, Management's Discussion and Analysis); 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, subject to PaPUC approval, Met-Ed and Penelec entered
into definitive buyout agreements with two bidders.
JCP&L has contracts through 2002 to purchase between 5,200 GWH and 5,550
GWH of electric generation per year at prices which are estimated to escalate
approximately 0.5% annually on a unit cost (cents/KWH) basis during this period.
From 2003 through 2008, JCP&L has contracts to purchase between 5,100 GWH and
5,400 GWH of electric generation per year at an average annual cost of $388
million. The prices during this period are estimated to escalate approximately
1.7% annually. After 2008, when major contracts begin to expire, purchases
steadily decline to approximately 1,180 GWH in 2014. The contract unit cost is
estimated to escalate approximately 5.3% annually from 2009 through 2014, with a
total average annual cost of $209 million during this period. All of JCP&L's
contracts will have expired by the end of 2020. During this entire period, the
NUG fuel mix is estimated to average approximately 94% natural gas.
Met-Ed has contracts through 1999 to purchase between 2,300 GWH and 2,350
GWH of electric generation per year at prices which are estimated to decrease
approximately 1.5% annually on a unit cost basis during this period. From 2000
through 2008, Met-Ed has contracts to purchase between 3,100 GWH and 4,600 GWH
of electric generation per year at an average annual cost of $242 million. The
prices during this period are estimated to escalate approximately 2.1% annually
on a unit cost basis. From 2009 through 2012, Met-Ed is forecast to purchase
between 1,700 GWH and 2,100 GWH of electric generation per year at an average
annual cost of $165 million. During this period, the prices are estimated to
decrease approximately 0.8% annually on a unit cost basis. After 2012, Met-Ed's
remaining contracts expire rapidly through 2016; thereafter, they remain
constant until the expiration of the last contract in 2020. During this entire
period, the NUG fuel mix is estimated to average approximately 50% to 75%
coal/waste coal.
21
Penelec has contracts through 2000 to purchase between 3,100 GWH and
3,500 GWH of electric generation per year at prices which are estimated to
escalate approximately 2.5% annually on a unit cost basis during this period.
From 2001 through 2010, Penelec has contracts to purchase between 3,100 GWH and
3,800 GWH of electric generation per year at an average annual cost of $237
million. The prices during this period are estimated to escalate approximately
2.3% annually on a unit cost basis. From 2011 through 2018, purchases decline
from approximately 2,500 GWH to approximately 1,200 GWH in 2018. The contract
unit cost is estimated to decrease approximately 0.1% annually from 2011 through
2018, with a total average annual cost of $143 million during this period. After
2018, Penelec's remaining contracts expire rapidly through 2020. During this
entire period, the NUG fuel mix is estimated to average approximately 89%
coal/waste coal.
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 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 and Other Power Purchases" 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 New Jersey Energy Master Plan 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
Competitive Environment section, Management's Discussion and Analysis for
additional discussion.)
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.
22
RATE PROCEEDINGS
Pennsylvania
In 1996, Pennsylvania adopted comprehensive legislation which provides for
the restructuring of the electric utility industry. The legislation, among other
things, permits one-third of Pennsylvania retail consumers to choose their
electric supplier beginning January 1, 1999, two-thirds permitted to choose by
January 1, 2000 and all retail consumers to do so by January 1, 2001. The
legislation requires the unbundling of rates for transmission, distribution and
generation services. Utilities would have the opportunity to recover their
prudently incurred stranded costs that result from customers choosing another
supplier through a PaPUC approved competitive transition charge, subject to
certain conditions, including that they attempt to mitigate these costs. For a
discussion of stranded costs, see the Competition and the Changing Regulatory
Environment section of Note 13 of the Notes to Consolidated Financial
Statements.
The legislation provides utilities the opportunity to reduce their
stranded costs through the issuance of transition bonds with maturities of up to
10 years. The sale proceeds could be used to buy out or buy down uneconomic NUG
contracts, to reduce capitalization, or both. Principal and interest payments on
the bonds would be paid by all distribution service customers through a
nonbypassable intangible transition charge. Reduced financing costs associated
with the sale of transition bonds would be used to provide rate reductions for
all customers. In order to securitize stranded costs, each Pennsylvania utility
is required to file with the PaPUC for a qualified rate order. Met-Ed and
Penelec expect to file for such rate orders during 1998.
Effective January 1, 1997, transmission and distribution rates charged to
Pennsylvania retail customers are generally capped for 4 1/2 years, and
generation rates are generally capped for up to nine years. Transmission and
distribution of electricity will continue as a regulated monopoly. An ISO will
be responsible for coordinating the generation and transmission of electricity
in an efficient and nondiscriminatory manner.
As part of this restructuring, Met-Ed and Penelec filed, in December 1996,
tariff supplements requesting to, among other things, include their currently
effective energy cost rates (ECRs) and State Tax Adjustment Surcharges (STAS) in
base rates, effective for all bills rendered after January 1, 1997. Since rates
that can be charged to customers for generation are capped for up to nine years,
to the extent Met-Ed and Penelec remain in the generation business, their future
earnings are subject to market volatility. Increases or decreases in fuel costs
are no longer subject to deferred accounting and are reflected in net income as
incurred. Met-Ed and Penelec will continue their efforts to manage fuel costs
and will mitigate, to the extent possible, any excessive risks.
In 1997, Met-Ed and Penelec filed with the PaPUC their proposed
restructuring plans to implement competition and customer choice in
Pennsylvania. For highlights of these plans see "Recent Developments" section.
23
New Jersey
In April 1997, the NJBPU issued final Findings and Recommendations for
Restructuring the Electric Power Industry in New Jersey and submitted the plan
to the Governor and the Legislature for their consideration. The NJBPU has
recommended, among other things, that certain electric retail customers be
permitted to choose their supplier beginning October 1998, expanding to include
all retail customers by July 1, 2000. The NJBPU also recommended a near-term
electric rate reduction of 5% to 10% with the phase-in of retail competition, as
well as additional rate reductions accomplished as a result of new energy tax
legislation, as discussed below.
The NJBPU has proposed that utilities have an opportunity to recover their
stranded costs associated with generating capacity commitments provided that
they attempt to mitigate these costs. Also, NUG contracts which cannot be
mitigated would be eligible for stranded cost recovery. The determination of
stranded cost recovery by the NJBPU would be undertaken on a case-by-case basis,
with no guaranty for full recovery of these costs. A separate MTC would be
established for each utility to allow utilities to recover stranded costs over 4
to 8 years. The MTC would be capped to ensure that customers experience the
NJBPU's recommended overall rate reduction of 5% to 10%. New Jersey is also
considering securitization as a mechanism to help mitigate stranded costs.
In addition, the NJBPU is proposing that beginning October 1998, utilities
unbundle their rates and allow customers to choose their electric generation
supplier. Transmission and distribution of electricity would continue as a
regulated monopoly and utilities would be responsible for connecting customers
to the system and for providing distribution service. Transmission service would
be provided by an ISO, which would be responsible for maintaining the
reliability of the regional power grid and would be regulated by the FERC.
In July 1997, New Jersey enacted energy tax legislation which eliminates
the 13% gross receipts and franchise tax on utility bills. Utilities will
collect from customers a 6% sales tax and pay a corporate business tax which
amounts to 1-2% of revenues. Utilities will also pay a transitional energy
facilities assessment which will phase out over five years and result in a 5-6%
rate reduction to customers.
In July 1997, JCP&L filed with the NJBPU its proposed restructuring plan
for a competitive electric marketplace in New Jersey. Included in the plan were
stranded cost, unbundled rate and restructuring filings. In December 1997, JCP&L
submitted supplemental information with the NJBPU and parties to the
restructuring proceeding regarding the proposed sale of its fossil fuel and
hydroelectric generating facilities. For highlights of the plan see "Recent
Developments" section.
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
24
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.
CAPITAL PROGRAMS
GPU Energy Companies
During 1997, the GPU Energy companies' capital spending was $356 million
(JCP&L $172 million; Met-Ed $88 million; Penelec $99 million), and was used
primarily for new customer connections and to maintain and improve existing
transmission and distribution facilities. In 1997, expenditures for maturing
obligations were $176 million (JCP&L $110 million; Met-Ed $40 million; Penelec
$26 million). Expenditures for maturing obligations are expected to total $43
million (JCP&L $13 million; Penelec $30 million) in 1998. In 1998, capital
expenditures are estimated to be $441 million, and will be used primarily for
ongoing system development and to implement an integrated information system.
Management estimates that a substantial portion of the GPU Energy companies'
1998 capital outlays will be satisfied through internally generated funds. The
GPU Energy companies' principal categories of estimated capital expenditures for
1998 are as follows:
(in millions)
Total JCP&L Met-Ed Penelec Other
Generation - Nuclear $ 29 $ 21 $ 5 $ 3 $--
Non-nuclear 36 7 9 20 --
---- ---- ---- ---- ----
Total Generation 65 28 14 23 --
Transmission & Distribution 302 153 66 83 --
Other 74 23 12 15 24
---- ---- ---- ---- ----
Total $441 $204 $ 92 $121 $ 24
==== ==== ==== ==== ====
Capital expenditures for the GPU Energy companies are estimated to be $411
million in 1999 (JCP&L $184 million; Met-Ed $97 million; Penelec $106 million;
Other $24 million). Expenditures for maturing obligations are expected to total
$83 million (JCP&L $3 million; Met-Ed $30 million; Penelec $50 million) in 1999.
GPU Energy companies estimate that a substantial portion of their anticipated
total capital needs in 1999 will be satisfied through internally generated
funds.
The GPU Energy companies' bond indentures and articles of incorporation
include provisions that limit the amount of long-term debt, preferred stock and
short-term debt the companies may issue (see Limitations on Issuing Additional
Securities section).
The GPU Energy companies' 1997 capital expenditures exclude nuclear fuel
additions provided under capital leases that amounted to $40 million (JCP&L $11
million; Met-Ed $19 million; Penelec $10 million). When consumed, the presently
leased material, which amounted to $136 million (JCP&L $79 million; Met-Ed $38
million; Penelec $19 million) at December 31, 1997, is expected to be replaced
by additional leased material at an average annual rate (which is
25
based on two full operating cycles, or four years) of between $40 million and
$55 million (JCP&L $25 million - $30 million; Met-Ed $10 million - $15 million;
Penelec $5 million - $10 million). In the event the needed nuclear fuel cannot
be leased, the associated capital requirements would have to be met by other
means.
Under traditional retail regulation, supply planning in the electric
utility industry is directly related to projected sales growth in a utility's
franchise service territory. In light of retail access legislation enacted in
Pennsylvania and proposed in New Jersey, the extent to which competition will
affect the GPU Energy companies' supply plan remains uncertain. As the GPU
Energy companies prepare to operate in a competitive environment, their supply
planning strategy will focus on providing for the needs of existing retail
customers who continue to receive energy supplied by the GPU Energy companies
and whom the GPU Energy companies continue to have an obligation to serve. With
the proposed sale of the fossil fuel and hydroelectric generation facilities and
the evolving competitive climate in which the GPU Energy companies' existing
customers will be able to choose their electric generation supplier, the GPU
Energy companies' future supply plan will likely focus on short- to
intermediate-term commitments and reliance on spot market purchases. The GPU
Energy companies' present strategy includes minimizing the financial exposure
associated with new long-term purchase commitments.
GPUI Group
The GPUI Group's capital spending was $1.9 billion in 1997, which was
principally attributable to the acquisition of PowerNet (see Note 5 of the Notes
to Consolidated Financial Statements). In 1998, the GPUI Group's capital
spending, primarily for ongoing system development, is estimated to be $141
million. Management estimates that a substantial portion of the GPUI Group's
1998 capital outlays will be satisfied through external financings. In 1997, the
GPUI Group's expenditures for maturing obligations were $3 million. Expenditures
for maturing obligations (principally related to the Midlands and PowerNet
acquisition debt) are expected to total $589 million in 1998, and $152 million
in 1999. Approximately $241 million of the 1998 maturing obligations have
already been satisfied with the proceeds from GPU's common stock sale (discussed
below) and the Solaris sale.
In addition, during 1998 and 1999, GPU, Inc. may make additional capital
contributions and provide credit support (in amounts which may be substantial)
to the GPUI Group as investment opportunities arise.
FINANCING ARRANGEMENTS
GPU, Inc.
In February 1998, GPU, Inc. sold seven million shares of common stock. The
net proceeds of $269 million will be used to reduce $229 million of indebtedness
associated with the PowerNet and Midlands acquisitions, and the balance will be
applied for other corporate purposes. In 1996, GPU, Inc. received SEC approval
to issue and sell up to $300 million of unsecured debentures through 2001.
Further significant investments by the GPUI Group, or otherwise, may require
GPU, Inc. to issue additional debt and/or common stock.
26
GPU Energy Companies
As a result of Pennsylvania legislation, Met-Ed and Penelec each plan to
sell securitized transition bonds through a separate trust or other special
purpose entity, and would use the proceeds to reduce stranded costs resulting
from customer choice, including NUG contract buyout costs, and to reduce
capitalization. The timing and amount of any sale will depend upon PaPUC
approval of restructuring plans, resolution of legal challenges, and receipt of
a favorable ruling from the Internal Revenue Service, as well as market
conditions. It is expected that similar legislation will be introduced in New
Jersey to permit the sale of securitized transition bonds.
JCP&L and Penelec have regulatory authority to issue and sell first
mortgage bonds (FMBs), including secured medium-term notes, and preferred stock
through June 1999. Met-Ed has similar authority through December 1999. Under
existing authorizations, JCP&L, Met-Ed and Penelec may issue these senior
securities in aggregate amounts of $145 million, $190 million and $70 million,
respectively, of which up to $100 million for JCP&L and Met-Ed and $70 million
for Penelec may consist of preferred stock. The GPU Energy companies also have
regulatory authority to incur short-term debt, a portion of which may be through
the issuance of commercial paper.
In 1997, the GPU Energy companies issued an aggregate of $63.7 million
(Met-Ed $13.7 million; Penelec $50 million) principal amount of FMBs. The
proceeds from these issuances were used to replace short-term financing related
to a solid waste disposal facility at the jointly owned Conemaugh station, repay
short-term debt and for other corporate purposes. The GPU Energy companies
redeemed $166.1 million (JCP&L $100.1 million; Met-Ed $40 million; Penelec $26
million) principal amount of FMBs, of which $24.2 million were redeemed by JCP&L
prior to maturity. Also in 1997, JCP&L redeemed $20 million stated value of
cumulative preferred stock pursuant to mandatory and optional sinking fund
provisions. In February 1998, Penelec redeemed at maturity $30 million principal
amount of FMBs.
The GPU Energy companies' bond indentures and articles of incorporation
include provisions that limit the amount of long-term debt, preferred stock and
short-term debt the companies may issue. The GPU Energy companies' interest and
preferred dividend coverage ratios are currently in excess of indenture and
charter restrictions. The amount of FMBs that the GPU Energy companies could
issue based on the bondable value of property additions is in excess of amounts
currently authorized.
The GPU Energy companies' cost of capital and ability to obtain external
financing are affected by their security ratings, which are periodically
reviewed by the credit rating agencies. The GPU Energy companies' FMBs are
currently rated at an equivalent of "BBB+" or higher by the major credit rating
agencies, while the preferred stock and mandatorily redeemable preferred
securities have been assigned an equivalent of "BBB" or higher. In addition, the
GPU Energy companies' commercial paper is rated as having very good credit
quality.
Current plans call for the GPU Energy companies to issue senior securities
during the next three years to fund the redemption of maturing senior
securities, refinance outstanding senior securities if economic, and finance
construction activities.
27
GPUI Group
In 1997, GPU Electric acquired the business of PowerNet from the State of
Victoria, Australia for A$2.6 billion (approximately U.S. $1.9 billion). To fund
the acquisition, subsidiaries of GPU Electric entered into a senior debt credit
facility with a syndicate of banks for A$1.9 billion (approximately U.S. $1.4
billion), which is non-recourse to GPU, Inc. and a five-year U.S. $450 million
bank credit agreement which is guaranteed by GPU, Inc. Borrowings under the bank
credit agreement are to be amortized ratably over the five-year period.
In January and February 1998, GPU reduced the borrowings outstanding under
the bank credit agreement by an aggregate of approximately $90 million, with a
portion of the proceeds from the sale of its Solaris interest and the sale of
additional common stock. Subject to obtaining favorable credit agency ratings
and market conditions, the GPUI Group intends to refinance a portion of the
PowerNet acquisition debt during 1998 through the issuance of commercial paper
and long-term debt securities.
In 1996, GPU and Cinergy Corp. formed a 50/50 joint venture to acquire
Midlands. To fund its investment in Midlands, a subsidiary of GPU Electric
entered into a GPU, Inc. guaranteed five-year (pound)350 million term loan
agreement with a syndicate of banks. As of December 31, 1997, the aggregate
borrowings outstanding under the term loan were (pound)340 million
(approximately U.S. $561 million). Borrowings under the bank agreement are to be
reduced to a maximum of (pound)280 million in May 1998 and by an additional
(pound)35 million per year until maturity on May 2001.
At February 28, 1998, the GPUI Group had outstanding obligations
(including guarantees) of $2.2 billion of which approximately $920 million was
guaranteed by GPU, Inc. The guaranteed amount primarily includes: $360 million
under a five-year U.S. bank credit agreement used to partially fund GPU
Electric, Inc.'s acquisition of PowerNet (see Note 5); (pound)225 million
(approximately U.S. $370 million) under a bank term loan facility used to fund
GPU Electric's investment in Midlands; and approximately $123 million related to
construction of GPU Power, Inc.'s Termobarranquilla S. A. project.
GPU has $527 million of credit facilities, which includes various lines of
credit totaling $247 million, and two Revolving Credit Agreements, as discussed
below:
Under the Credit Agreement between GPU, Inc., the GPU Energy companies and
a consortium of banks, total borrowings are limited to $250 million outstanding
at any time and are subject to various covenants. The agreement expires May 6,
2001. In addition, the credit facility limits GPU, Inc.'s outstanding
indebtedness (including guarantees) to $1.4 billion. At February 28, 1998, GPU,
Inc. had approximately $1.0 billion of such indebtedness outstanding. A facility
fee on the unborrowed amount of .15 of 1% is payable annually. Borrowing rates
and a facility fee are based on the long-term debt ratings of the GPU Energy
companies.
GPU International, Inc. has a separate Credit Agreement providing for
borrowings (guaranteed by GPU, Inc.) through June 1998 of up to $30 million
outstanding at any time, which decreases for two years thereafter. Up to
28
$15 million may be utilized to provide letters of credit. An annual facility fee
of 3/8 of 1% on the total amount of the Credit Agreement and a letter of credit
fee of 1/2 of 1% on the outstanding letters of credit are payable by GPU
International, Inc. The GPUI Group is discussing with the banks an extension and
increase of borrowing availability under this facility.
LIMITATIONS ON ISSUING ADDITIONAL SECURITIES
The GPU Energy companies' FMB indentures and/or charters contain
provisions which limit the total amount of securities evidencing secured
indebtedness and/or unsecured indebtedness which the GPU Energy companies may
issue, the more restrictive of which are discussed below.
The GPU Energy companies' FMB indentures require that, for a period of any
twelve consecutive months out of the fifteen calendar months immediately
preceding the issuance of additional FMBs, net earnings (before income taxes,
with other income limited to 5% of operating income before income taxes for
JCP&L and Met-Ed and 10% for Penelec) available for interest on FMBs shall have
been at least twice the annual interest requirements on all FMBs to be
outstanding immediately after such issuance. Moreover, the GPU Energy companies'
FMB indentures restrict the ratio of the principal amount of FMBs which may be
issued to not more than 60% of available bondable value of property additions.
In addition, the indentures, in general, permit the GPU Energy companies to
issue additional FMBs against a like principal amount of previously issued and
retired FMBs.
At December 31, 1997, the net earnings requirement under the GPU Energy
companies' FMB indentures, as described above, would have permitted JCP&L,
Met-Ed and Penelec to issue $1.7 billion, $845 million and $871 million,
respectively, principal amount of additional FMBs at an assumed 8% interest
rate. However, the GPU Energy companies had bondable value of property additions
sufficient to permit JCP&L, Met-Ed and Penelec to issue only approximately $368
million, $351 million and $215 million, respectively, principal amount of
additional FMBs. In addition, the GPU Energy companies' FMB indentures would
have permitted JCP&L, Met-Ed and Penelec to issue approximately $361 million,
$100 million and $168 million, respectively, of FMBs against retired FMBs.
In general, the FMB indentures permit the GPU Energy companies to direct
the trustee to utilize cash on deposit to purchase callable or maturing bonds
and to purchase bonds in the market at not more than 105% of their principal
amount, plus accrued interest. Penelec's FMB indenture, however, authorizes
Penelec to direct the trustee to redeem bonds (on a pro-rata basis for all bonds
outstanding) at par.
Among other restrictions, the GPU Energy companies' charters provide that
without the consent of the holders of two-thirds of the outstanding preferred
stock, no additional shares of preferred stock may be issued unless, for a
period of any twelve consecutive months out of the fifteen calendar months
immediately preceding such issuance, the after-tax net earnings available for
the payment of interest on indebtedness shall have been at least one and
one-half times the aggregate of (a) the annual interest charges on indebtedness
and (b) the annual dividend requirements on all shares of preferred stock to
29
be outstanding immediately after such issuance. At December 31, 1997, these
provisions would have permitted JCP&L, Met-Ed and Penelec to issue $1.3 billion,
$604 million and $595 million, respectively, stated value of cumulative
preferred stock at an assumed 7.5% dividend rate.
The GPU Energy companies' charters also provide that, without the consent
of the holders of a majority of the total voting power of the GPU Energy
companies' outstanding preferred stock, the GPU Energy companies may not issue
or assume any securities representing short-term unsecured indebtedness, except
to refund certain outstanding unsecured securities issued or assumed by the GPU
Energy companies or to redeem all outstanding preferred stock, if immediately
thereafter the total principal amount of all outstanding unsecured debt
securities having an initial maturity of less than ten years (or within three
years of maturity for all unsecured indebtedness having original maturities in
excess of ten years) would exceed 10% of the aggregate of (a) the total
principal amount of all outstanding secured indebtedness issued or assumed by
the GPU Energy companies and (b) the capital and surplus of the GPU Energy
companies. At December 31, 1997, these restrictions would have permitted JCP&L,
Met-Ed and Penelec to have approximately $285 million, $130 million and $151
million, respectively, of unsecured indebtedness outstanding.
The GPU Energy companies have obtained authorization from the SEC to incur
short-term debt (including indebtedness under the Credit Agreement and
commercial paper) up to the GPU Energy companies' charter limitations.
REGULATION
As a registered holding company, GPU, Inc. is subject to regulation by the
SEC under the 1935 Act. GPU is also subject to regulation under the 1935 Act
with respect to accounting, the issuance of securities, the acquisition and sale
of utility assets, securities or any other interest in any business, the
entering into, and performance of, service, sales and construction contracts,
and certain other matters. The SEC has determined that the electric facilities
of the GPU Energy companies constitute a single integrated public utility system
under the standards of the 1935 Act. The 1935 Act also limits the extent to
which GPU may engage in nonutility businesses (see Other Developments section).
Each of the GPU Energy companies' retail rates, conditions of service, issuance
of securities and other matters are subject to regulation in the state in which
each operates in New Jersey by the NJBPU and in Pennsylvania by the PaPUC.
Additionally, Penelec, as lessee, operates the facilities serving the village of
Waverly, New York. Penelec's retail rates for New York customers, as well as
Penelec's New York operations and property, are subject to regulation by the New
York Public Service Commission. Although Penelec does not render electric
service in Maryland, the Public Service Commission of Maryland has jurisdiction
over the portion of Penelec's property located in that state. Moreover, with
respect to wholesale rates, the transmission of electric energy, accounting, the
construction and maintenance of hydroelectric projects and certain other
matters, the GPU Energy companies are subject to regulation by the FERC under
the Federal Power Act. The NRC regulates the construction, ownership and
operation of nuclear generating stations and other related matters. JCP&L is
also subject, in certain respects, to regulation by the PaPUC in connection with
its participation in the ownership and operation of certain facilities located
in
30
Pennsylvania. See Electric Generation and the Environment - Environmental
Matters section, for additional information.
Midlands, the GPUI Group's electric distribution affiliate in England, is
subject to regulation by the Office of Electricity Regulation. Midlands' network
charges are subject to regulatory review every five years, with the results of
the next review scheduled for release on April 1, 2000. The supply business
franchise license currently relates only to customers having an annual maximum
demand of less than 100 KW. Customers with a higher maximum demand are able to
buy their electricity from any electricity supplier. This option will be
extended to cover all customers effective September 1, 1998.
GPU PowerNet, the GPUI Group's electric transmission company in Australia,
is subject to regulation by the Office of the Regulator General. GPU PowerNet's
network and connection charges are subject to regulatory review every five or
more years, with the next review scheduled in 2002 for application in 2003.
Empresa Guaracachi S.A., the GPUI Group's electric generation company in
Bolivia, is subject to regulation under the Electricity Law of 1994. Twice each
year, the Superintendency of Electricity recalculates the prices that Empresa
Guaracachi S.A. and other electric generators may charge for capacity based upon
an estimated cost of constructing a new generating unit. In addition, energy
prices are recalculated semi-annually based upon a projected cost of generation,
including fuel and nonfuel variable operation and maintenance costs.
ELECTRIC GENERATION AND THE ENVIRONMENT
Fuel
The GPU Energy companies utilized fuels in the generation of electric
energy during 1997 in approximately the following percentages:
1997 Actuals
------------
Total JCP&L Met-Ed Penelec
----- ----- ------ -------
Coal 62% 24% 62% 89%
Nuclear 35% 70% 36% 11%
Gas 2% 4% 1% -
Oil 1% 3% - -
Other* - (1)% 1% -
* Represents hydro and pumped storage (which is a net user of electricity).
Approximately 39% (JCP&L 55%; Met-Ed 37%; Penelec 29%) of the GPU Energy
companies' total energy requirements in 1997 was supplied by utility and NUG
purchases and interchange from other utilities. For 1998, the GPU Energy
companies estimate that their use of fuels in the generation of electric energy
will be in the following percentages:
31
1998 Estimates
--------------
Total JCP&L Met-Ed Penelec
----- ----- ------ -------
Coal 61% 24% 58% 87%
Nuclear 37% 71% 39% 13%
Gas 2% 7% 1% -
Oil - - - -
Other* - (2)% 2% -
* Represents hydro and pumped storage.
Approximately 38% (JCP&L 58%; Met-Ed 31%; Penelec 28%) of the GPU Energy
companies' 1998 energy requirements are expected to be supplied by utility and
NUG purchases and interchange from other utilities.
Fossil: 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 (JCP&L - 16.67%
ownership interest in Keystone; Met-Ed - 16.45% ownership interest in Conemaugh;
and Penelec - 50% ownership interest in Homer City). 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.
The GPU Energy companies' coal-fired generating stations now in service
are estimated to require an aggregate of 154 million tons (JCP&L 15 million
tons; Met-Ed 41 million tons; Penelec 98 million tons) of coal over the next
twenty years. Of this total requirement, approximately 6 million tons (JCP&L 2
million tons; Penelec 4 million tons) are expected to be supplied by
nonaffiliated mine-mouth coal companies with the balance supplied through short-
and long-term contracts and spot market purchases.
At the present time, adequate supplies of fossil fuels are readily
available to the GPU Energy companies, but this situation could change rapidly
as a result of actions over which they have no control.
Nuclear: The preparation of nuclear fuel for generating station use
involves various manufacturing stages for which GPU contracts separately. Stage
I involves the mining and milling of uranium ores to produce natural uranium
concentrates. Stage II provides for the chemical conversion of the natural
uranium concentrates into uranium hexafluoride. Stage III involves the process
of enrichment to produce enriched uranium hexafluoride from the natural uranium
hexafluoride. Stage IV provides for the fabrication of the enriched uranium
hexafluoride into nuclear fuel assemblies for use in the reactor core at the
nuclear generating station.
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
32
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. On November 14, 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.
Environmental Matters
GPU is subject to a broad range of federal, state and local environmental
and employee health and safety legislation and regulations. In addition, the GPU
Energy companies are subject to licensing of hydroelectric projects by the FERC
and of nuclear power projects by the NRC. Such licensing and other actions by
federal agencies with respect to projects of the GPU Energy companies are also
subject to the National Environmental Policy Act.
As a result of existing and proposed legislation and regulations, and
ongoing legal proceedings dealing with environmental matters, including but not
limited to acid rain, water quality, 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, coal mine refuse
piles and generation facilities.
GPU records liabilities (on an undiscounted basis) where it is probable
that a loss has been incurred and the amount of the loss can be reasonably
estimated, and adjusts these liabilities as required to reflect changes in
circumstances. At December 31, 1997, the GPU Energy companies have liabilities
recorded on their balance sheets for environmental matters totaling $81 million,
as follows:
Company Site Description Amount (in millions)
- ------- ---------------- --------------------
JCP&L MGP sites $46
Penelec Seward station 12
All Ash disposal and other sites 23*
---
Total $81
* (JCP&L $6; Met-Ed $5; Penelec $12)
33
For further discussion of the liabilities recorded for JCP&L's manufactured gas
plant (MGP) sites, Penelec's Seward station property and the GPU Energy
companies' ash disposal and other sites, see the Water, Residual Waste and
Hazardous/Toxic Wastes sections, respectively.
In 1997, the GPU Energy companies made capital expenditures of
approximately $5 million (JCP&L $1 million; Met-Ed $1 million; Penelec $3
million) in response to environmental considerations and have budgeted
approximately $11 million (JCP&L $1 million; Met-Ed $2 million; Penelec $8
million) for this purpose in 1998. The incremental annual operating and
maintenance costs for such equipment is not expected to be material.
Water: The federal Water Pollution Control Act (Clean Water Act) generally
requires, with respect to existing steam electric power plants, the application
of the best conventional or practicable pollutant control technology available
and compliance with state-established water quality standards. Additionally,
water quality-based effluent limits (more stringent than "technology" limits)
may be applied to utility wastewater discharges based on receiving stream
quality. With respect to future plants, the Clean Water Act requires the
application of the "best available demonstrated control technology, processes,
operating methods or other alternatives."
The U.S. Environmental Protection Agency (EPA) has adopted regulations
that establish thermal and other limitations for effluents discharged from both
existing and new steam electric generating stations. Standards of performance
are developed, and enforcement of effluent limitations is accomplished, through
the issuance of discharge permits by the EPA, or states authorized by the EPA,
which specify limitations to be applied. Discharge permits are required for all
of the GPU Energy companies' steam generating stations and other stations that
discharge wastewater to surface water bodies. JCP&L has received a discharge
permit for its Yards Creek pumped storage facility from the New Jersey
Department of Environmental Protection (NJDEP). In addition, the discharge
permits for JCP&L's Sayreville station and Met-Ed's Portland station have
expired, but the terms of both have been administratively extended pending
action by the NJDEP and Pennsylvania Department of Environmental Protection
(PaDEP), respectively. The GPU Energy companies have obtained all other required
permits for their generating facilities under the Clean Water Act.
The NJDEP has proposed thermal and other conditions for inclusion in the
discharge permit for JCP&L's Sayreville generating station which, among other
things, could require JCP&L to install cooling towers and/or modify the water
intake/discharge systems at this facility. JCP&L has objected to these
conditions and has requested an adjudicatory hearing with respect thereto.
Implementation of these permit conditions has been stayed pending action on
JCP&L's hearing request, or alternatively, through negotiation during the permit
renewal process. JCP&L has made filings with the NJDEP that, JCP&L believes,
justify the issuance of a thermal variance to permit the continued use of the
present once-through cooling system. Based on the NJDEP's review of these
demonstrations, substantial modifications may be required at this station, which
may result in material capital expenditures.
The discharge permit for the Oyster Creek station may, among other things,
require the installation of a closed-cycle cooling system, such as a
34
cooling tower, to meet New Jersey state water quality-based thermal effluent
limitations. Although construction of such a system is not required in order to
meet the EPA's regulations setting effluent limitations for the Oyster Creek
station (such regulations would accept the use of the once-through cooling
system now in operation at this station), a closed-cycle cooling system may be
required in order to comply with the water quality standards imposed by the
NJDEP for water quality certification and incorporated in the station's
discharge permit. If a cooling tower is required, the capital costs could exceed
$150 million. In October 1994, following six years of studies, the NJDEP issued
a new Discharge to Surface Water Permit for the Oyster Creek station. The new
permit grants JCP&L a variance from the New Jersey Surface Water Quality
Standards. The variance allows the continued operation of the existing
once-through cooling system without modifications such as cooling towers. The
variance is effective through October 1999. If this variance is not extended,
GPUN would retire the plant rather than construct a cooling tower. The NJDEP
could revoke the variance at any time upon failure to comply with the permit
conditions.
Pursuant to federal environmental monitoring requirements, Penelec has
reported to the 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 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 December 31, 1997. 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
Competitive Environment section, Management's Discussion and Analysis), and has
recorded a corresponding regulatory asset of approximately $12 million at
December 31, 1997.
In 1993, York Haven Power Company, a wholly-owned subsidiary of Met-Ed,
entered into an agreement with various agencies to construct a fish passage
facility at the York Haven hydroelectric project by April 2000. This agreement
is part of the FERC license. The present estimated installed cost of the
facility is $8.4 million. Construction is expected to begin in 1998.
The GPU Energy companies are also subject to environmental and water
diversion requirements adopted by the Delaware River Basin Commission and the
Susquehanna River Basin Commission, as administered by those commissions or the
PaDEP and the NJDEP.
Nuclear: Reference is made to the Nuclear Facilities section for
information regarding the TMI-2 accident, its aftermath and the GPU Energy
companies' other nuclear facilities.
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 December 31, 1997,
35
$6 million has been paid. As a result, at December 31, 1997, 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. In
February 1998, the New Jersey Low-Level Radwaste Facility Siting Board (Siting
Board) voted to suspend the siting 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.
Pennsylvania, Delaware, Maryland and West Virginia have established the
Appalachian Compact to construct a facility for the disposal of low-level
radwaste in those states, including low-level radwaste from TMI-1. To date,
pre-construction costs of $33 million, out of an estimated $88 million, have
been paid. Eleven nuclear plants have so far shared equally in the
pre-construction costs; GPUN has contributed $3 million on behalf of TMI-1. All
contributors, including nonutility radwaste producers within the compact that
make voluntary contributions, will receive certain credits against surcharges to
be paid by all depositors of waste over a ten-year period. The methodology for
the allocation of these credits has yet to be determined. In addition, $50
million of estimated construction costs will be funded by an independent
contractor and recovered by the contractor through waste disposal fees collected
during the first five years of the facility's operation. However, delays in the
facility's construction could result in additional funding requirements.
GPUN is currently shipping low-level radwaste to the Barnwell, South
Carolina radwaste disposal site. Operation of the Northeast Compact disposal
facility, initially expected to commence by the mid-1990's, is now expected to
be delayed until at least the end of 2003. The Appalachian Compact disposal
facility, which was scheduled to open in 1999, is now estimated to be
operational by 2002. Continuing delays in the completion of these disposal
facilities will require GPUN to perform an evaluation of its ability to safely
store radwaste beyond these dates.
The GPU Energy companies have provided for future contributions to the
Decontamination and Decommissioning Fund for the cleanup of uranium enrichment
plants operated by the Federal Government. GPU's total liability at December 31,
1997 amounted to $31 million (JCP&L $20 million; Met-Ed $7 million; Penelec $4
million). The remaining amount recoverable from ratepayers at December 31, 1997
is $33 million (JCP&L $21 million; Met-Ed $8 million; Penelec $4 million).
Air: With respect to air quality, the GPU-owned or operated generating
stations are subject to certain state environmental regulations of the NJDEP and
the PaDEP. The stations are also subject to certain federal environmental
regulations of the EPA. One of the major sets of regulations that governs air
quality is the Federal Clean Air Act of 1970 (CAA):
CAA Title I sets National Ambient Air Quality Standards (NAAQS) for
certain criteria pollutants. The criteria pollutants are ozone, sulfur dioxide
(SO2), nitrogen dioxide, particulate matter, carbon monoxide and lead. In
particular, this Title has established the Northeast Ozone Transport Region
(OTR), which includes 12 northeast states and the District of Columbia, to
address the transport of those pollutants leading to non-attainment of the
36
ozone NAAQS in the Northeast. Ozone control is facilitated by the control of
pollutant precursors, which are nitrogen oxide (NOx) and volatile organic
compounds (VOCs). Fossil fuel-fired electric generating stations are major
sources of NOx emissions. Pennsylvania and New Jersey are part of the OTR, and
will be required to control NOx emissions to a level that will provide for the
attainment of the ozone standard in the Northeast. As an initial step, major
stationary sources of NOx were required to implement Reasonably Available
Control Technology (RACT) by May 31, 1995. The PaDEP proposed that RACT be
determined on a case-by-case basis and thus could be different for each unit or
facility. RACT proposals were prepared and submitted to the PaDEP in 1994. GPU
has opted for the installation of low NOx burners or other control technology,
and in some cases, limitations on annual operations, in order to achieve the
reductions required by the PaDEP RACT regulations. The NJDEP's RACT regulations
establish maximum allowable emission rates for utility boilers based on fuel
used and boiler type, and on combustion turbines based on the type of fuel used.
Existing units are eligible for emissions averaging upon approval of an
averaging plan by the NJDEP. JCP&L is in compliance with NJDEP RACT regulations.
A Memorandum of Understanding (MOU) has been signed by the members of the
Ozone Transport Commission (OTC). The MOU calls for inner and outer zones, with
seasonal NOx emission reductions from 1990 emission levels of 65% and 55%,
respectively, by May 1, 1999. JCP&L, Met-Ed and Penelec will spend an estimated
$0.2 million, $2.8 million and $3.0 million, respectively, to meet the 1999
reductions set by the OTC. The MOU also calls for a 75% reduction from 1990
emission levels by May 2003. The 2003 limits will not be imposed if a scientific
demonstration to be provided by the North American Research Strategy for
Tropospheric Ozone (NARSTO) finds that less restrictive limits would be
necessary to obtain compliance with the ozone NAAQS. However, there is also the
potential that the NARSTO effort may actually recommend more severe reductions
than outlined in the MOU. A market-based NOx trading system is proposed to allow
for the transfer of excess reductions encouraging alternate compliance
strategies.
Under mandatory, routine review of the ozone NAAQS, the EPA issued new
standards in July 1997 that will significantly increase the areas in the country
which are not in attainment of the NAAQS. A timeline for implementation of the
new standards calls for attainment designations by 2000; state implementation
plans (SIP) by 2001 and 2003 for attainment and non-attainment areas,
respectively; and attainment, with possible extensions, by 2011.
The area around the Warren station has been designated as non-attainment
for the SO2 NAAQS. The EPA and the PaDEP have both approved the use of a
non-guideline air quality model, which is more representative and less
conservative than the EPA guideline model, to evaluate the ambient air quality
impacts of the station. This modeling has demonstrated attainment for the area,
with no required reduction in Warren station emissions. At Shawville station,
the approved use of the same non-guideline model shows attainment of the SO2
NAAQS within current Pennsylvania default SO2 emission limits.
The vicinity of the Chestnut Ridge Energy Complex, which includes the
Homer City, Conemaugh, Keystone and Seward stations, is officially designated as
being in attainment of the SO2 NAAQS; however, both the EPA and the PaDEP
37
have questioned the area's attainment of this standard. The EPA and the PaDEP
have both approved the use of the same non-guideline model discussed above to
evaluate the ambient air quality impacts of these generating stations. This
model will also be used in the development of a compliance strategy for all
generating stations in the Chestnut Ridge Energy Complex.
Attainment of the SO2 NAAQS has been taken into account as part of the
design of the Conemaugh station scrubbers. In addition, Met-Ed has initiated
ambient air quality modeling studies for its Portland and Titus stations, which
will take several years to complete. While the results are uncertain, these
studies may result in a revised Pennsylvania SIP with source-specific emission
limitations in order to attain NAAQS for SO2. If SO2 emissions need to be
reduced to meet the new SIP, Met-Ed will reevaluate its options available for
Portland and Titus stations.
Based on the results of the studies pursuant to compliance with NAAQS,
significant SO2 reductions may be required at one or more of these stations,
which could result in significant capital and additional operating expenditures.
Under a court ordered review of the NAAQS for particulate matter, the EPA
released new standards in July 1997, which could significantly increase the
areas in the country that are not in attainment of the standard. The particulate
matter NAAQS primarily impact NOx and SO2 emission sources. It is possible that
once attainment status is defined by the EPA and the reductions required under
other provisions of the CAA are realized, compliance with the particulate matter
NAAQS could require further reductions in NOx and/or SO2 emissions.
Certain other environmental regulations limit the amount of particulate
matter emitted into the environment. GPU has installed equipment at its
coal-fired generating stations and may find it necessary to either upgrade or
install additional equipment at certain of its stations to consistently meet
particulate emission requirements. Also, the proposed revision to the
particulate matter NAAQS could trigger reduction requirements.
Title III of the CAA deals with emissions of hazardous air pollutants
(HAPs). As part of Title III, the EPA is charged with conducting a study to
determine if fossil fuel-fired electric steam generating units pose a serious
threat to public health due to emissions of HAPs. The study will seek to
determine whether regulation of utility sources is appropriate and necessary. If
the study results prove, through risk analysis, that regulation is required, a
Maximum Achievable Control Technology standard will be developed for utility
sources. An interim study report was published in October 1996. In general, the
study did not find unacceptable health risks from utility sources, but
recommended further analysis of long-range transport of HAPs and the impact of
mercury emissions. The interim report does not include the EPA's official
recommendation as to the necessity of HAP regulation for utilities.
Title IV of the CAA requires substantial reductions to meet a national cap
in SO2 emissions beginning in the years 1995 and 2000 (Phases I and II,
respectively). As a result, it will be necessary for the GPU Energy companies to
install and operate emission control equipment, switch to slightly lower
38
sulfur coal at some of their coal-fired plants, or purchase emission allowances
in order to achieve compliance. Title IV also imposes requirements for the
installation of NOx controls. To comply with Titles I and IV of the CAA, 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 been spent as of December 31, 1997 (these
amounts include costs to meet the 1999 reductions set by the OTC, as discussed
on page 37). The capital costs of equipment are for the installation of flue gas
desulfurization systems (scrubbers), low NOx burner technology, selective
noncatalytic reduction and particulate removal upgrades.
Conemaugh, Portland and Shawville stations are Phase I affected units. The
second of two scrubbers was completed at the Conemaugh station during 1995, as
part of GPU's plans to comply with SO2 emission limitations. For the Portland
station, Met-Ed plans to meet its Phase I compliance obligation through the use
of SO2 emission allowances, including allowances allocated directly to Portland
station by the EPA and excess allowances transferred from the Conemaugh station
that result from operation of the scrubbers. The Shawville station will require
lower sulfur coal and/or the purchase of emission allowances to meet its Phase I
requirements. Since these coal fired units are Phase I affected, they are also
subject to the Title IV NOx requirements.
Homer City, Keystone and Titus stations have been declared early election
units under federal regulations (40 CFR, Part 76). This limits the Title IV NOx
requirement to the Phase I NOx emission rates until 2008. GPU's current strategy
for Phase II SO2 compliance is the use of fuel switching and the purchase of
allowances at the Keystone and the Homer City Unit 3 stations, with periodic
reviews of the cost effectiveness of the installation of scrubbers. Switching to
lower sulfur coal and/or the purchasing of allowances is currently planned for
the Titus, Seward, Portland, Shawville and Warren stations as well. Homer City
units 1 and 2 will use existing coal cleaning technology and the purchase of
allowances. Additional control modifications are not expected to be necessary
for Phase II compliance at the Conemaugh and Sayreville Stations.
Title IV of the CAA also requires Phase I and Phase II affected units to
install a continuous emission monitoring system (CEMS) and provide quality
assurance for the data related to SO2, NOx, opacity and volumetric flow. In
addition, Title VIII of the CAA requires all affected sources to monitor carbon
dioxide emissions. Monitoring systems have been installed and certified on
JCP&L, Met-Ed and Penelec's Phase I and Phase II affected units as required by
EPA, NJDEP and PaDEP regulations. Additionally, regulations within Pennsylvania
and New Jersey which implement the OTC MOU will require the reporting of NOx
emissions from affected sources which are not Title IV affected.
The PaDEP has a CEMS enforcement policy to ensure consistent compliance
with air quality regulations under federal and state statutes. The CEMS
enforcement policy includes matters such as visible emissions, SO2 emission
standards, NOx emissions and a requirement to maintain certified CEMS equipment.
In addition, this policy provides a mechanism for the payment of
39
certain prescribed amounts to the Pennsylvania Clean Air Fund (Clean Air Fund)
for air pollutant emission excess or monitoring failures. With respect to the
operation of Met-Ed and Penelec's generating stations, it is not anticipated
that payments to be made to the Clean Air Fund due to CEM penalties will be
material in amount. The CAA has also expanded the enforcement options available
to the EPA and the states and contains more stringent enforcement provisions and
penalties. Moreover, citizen suits can seek civil penalties for violations of
this Act.
CAA Title V required that comprehensive permit applications be submitted
by major stationary sources to the permitting authorities in 1995. Title V may
dramatically increase the level of effort required to track compliance and
tabulate emissions of the numerous processes regulated by the new permits once
issued. The states' Title V program also established new emission fee
structures. In 1997, the Pennsylvania stations paid $1.5 million in emissions
fees, and the New Jersey fees totaled approximately $50,000. Emission fees are
based on the level of actual emissions and are assessed on a per ton basis.
GPU continues to reassess its options for compliance with the CAA,
including those that may result from the continued development of the emission
trading allowance market. GPU's compliance strategy, especially with respect to
Phase II, could change as a result of further review, discussions with co-owners
of jointly owned stations and changes in federal and state regulatory
requirements.
In the fall of 1993, the Clinton Administration announced its Climate
Change Action Plan (Plan), intended to reduce greenhouse gas emissions to 1990
levels by the year 2000. The Plan relies heavily on voluntary action by
industry. GPU has joined approximately 630 other electric utility companies
which have signed accords or are otherwise cooperating with the DOE under the
Climate Challenge Program, which is the electric utility's response to the Plan.
As a result of this and other programs, the CO2 emissions from GPU-owned
generating facilities have been at or below 1990 levels since 1992.
In 1997, as a result of the United Nations Framework Convention on Climate
Change, over 160 countries met in Kyoto, Japan to produce a document which would
address the reduction of greenhouse gas emissions after the year 2000. The Kyoto
Protocol calls for the U.S. to reduce its CO2 emissions to 7% below 1990 levels
by 2008 to 2012. The protocol does not include commitments for reductions from
developing nations, a prerequisite for Senate approval. The President has stated
that he will not ask the Senate to ratify the agreement until the developing
nations have agreed to targets of their own.
Electromagnetic Fields: There have been a number of studies regarding the
possibility of adverse health effects from electric and power frequency magnetic
fields that are found everywhere there is electricity. While some of the studies
have indicated some association between exposure to magnetic fields and cancer,
other studies have indicated no such association. The studies have not shown any
causal relationship between exposure to magnetic fields and cancer, or any other
adverse health effects. In 1990, the EPA issued a draft report that identifies
magnetic fields as a possible carcinogen, although it acknowledged that there is
still scientific uncertainty surrounding these fields and their possible link to
adverse health
40
effects. On the other hand, a 1992 White House Office of Science and Technology
policy report states that "there is no convincing evidence in the published
literature to support the contention that exposures to extremely low frequency
electric and magnetic fields generated by sources such as household appliances,
video display terminals, and local power lines are demonstrable health hazards."
In 1994, results of a large-scale epidemiology study of electric utility workers
suggested a statistical relationship between brain cancer and the class of
workers who received the highest exposure. These findings conflicted with two
earlier large-scale studies that found no such relationship. In 1996, the
National Research Council of the National Academy of Sciences released a report
which concluded that, "Based on a comprehensive evaluation of published studies
relating to the effects of power-frequency electric and magnetic fields on
cells, tissues and organisms (including humans), ... the current body of
evidence does not show that exposure to these fields presents a human-health
hazard. Specifically, no conclusive and consistent evidence shows that exposures
to residential electric and magnetic fields produce cancer, adverse
neurobehavioral effects, or reproductive and developmental effects." Additional
studies, which may foster a better understanding of the subject, are presently
underway.
Certain parties have alleged that exposure to electric and magnetic fields
associated with the operation of transmission and distribution facilities will
produce adverse impacts upon public health and safety and upon property values.
Furthermore, regulatory actions under consideration by the NJDEP and bills
introduced in the Pennsylvania legislature could, if enacted, establish a
framework under which the intensity of the fields produced by electric
transmission and distribution lines would be limited or otherwise regulated.
The GPU Energy companies cannot determine at this time what effect, if
any, this matter will have on their respective results of operations and
financial position.
Residual Waste: PaDEP regulations governing ash disposal sites require,
among other things, groundwater assessments of landfills if existing groundwater
monitoring indicates the possibility of degradation. The assessments could
require the installation of additional monitoring wells and the evaluation of
one year's data. If the assessments show degradation of the groundwater, Penelec
and Met-Ed would be required to develop abatement plans, which may include the
lining of currently unlined facilities. To date, Penelec has not identified any
cases requiring abatement. Although Met-Ed's Titus station ash disposal site was
upgraded in 1991 and meets many of the lined facility requirements, degradation
has been identified at the site. In 1996, Met-Ed filed an abatement plan with
the PaDEP in conjunction with its re-permitting application (see discussion
below), which states that the problem will be abated once the station is closed
and projected site closure procedures have been performed. The PaDEP has since
required a more detailed groundwater assessment to evaluate the groundwater
condition at the site. Also, Met-Ed's Portland station ash disposal site
requires significant modifications. Various alternatives for upgrading the site
are being evaluated, including beneficial uses of coal ash.
In 1997, the GPU Energy companies filed with the PaDEP applications for
re-permitting seven (JCP&L - one; Met-Ed - three; Penelec - three) operating
41
ash disposal sites, including projected site closure procedures and related cost
estimates. The cost estimates for the closure of these sites range from
approximately $16 million to $29 million and a liability of $16 million (JCP&L
$1 million; Met-Ed $4 million; Penelec $11 million) is reflected on the
Consolidated Balance Sheets at December 31, 1997. 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 Competitive Environment section,
Management's Discussion and Analysis). As a result, a regulatory asset of $16
million (JCP&L $1 million; Met-Ed $4 million; Penelec $11 million) is reflected
on the Consolidated Balance Sheets at December 31, 1997.
Other PaDEP residual waste compliance requirements involve storage
impoundments, which also will eventually require groundwater monitoring systems
and potential assessments of impact on groundwater. Groundwater abatement may be
necessary at locations where pollution problems are identified. The removal of
all the residual waste ("clean closure") will be done at some impoundments to
eliminate the need for future monitoring and abatement requirements. Storage
impoundments must have implemented groundwater monitoring plans by 2002, but the
PaDEP can require this at any time prior to this date or, at its discretion,
defer full compliance beyond 2002 for some storage impoundments. A January 1997
change in the regulations required submittal of groundwater monitoring plans for
residual waste storage impoundments by July 1997. Plans have been submitted for
all stations and the PaDEP has begun to implement these plans at the Conemaugh,
Homer City and Keystone stations.
There are also a number of issues still to be resolved regarding certain
waivers related to Penelec's existing landfill and storage impoundment
compliance requirements. These waivers could significantly reduce the cost of
many of Penelec's facility compliance upgrades.
Hazardous/Toxic Wastes: Under the Toxic Substances Control Act (TSCA), the
EPA has adopted certain regulations governing the use, storage, testing,
inspection and disposal of electrical equipment that contains polychlorinated
biphenyls (PCBs). Such regulations permit the continued use and servicing of
certain electrical equipment (including transformers and capacitors) that
contain PCBs. GPU has met all requirements of the TSCA necessary to allow the
continued use of equipment containing PCBs and has taken substantive voluntary
actions to reduce the amount of PCB-containing electrical equipment.
Prior to 1953, the GPU Energy companies owned and operated MGP sites in
New Jersey and Pennsylvania. Waste contamination associated with the operation
and dismantlement of these MGP sites is, or may be, present both on-site and
off-site. Claims have been asserted against the GPU Energy companies for the
cost of investigation and remediation of these sites. The amount of such
remediation costs and penalties may be significant and may not be covered by
insurance. JCP&L has entered into agreements with the NJDEP 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 December 31, 1997, JCP&L has spent approximately $27 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
42
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
Final Settlement (see Rate Matters section, Management's Discussion and
Analysis). At December 31, 1997, JCP&L had recorded on its Consolidated Balance
Sheet a regulatory asset of $55 million, which included approximately $46
million related to expected future costs and approximately $9 million for past
remediation expenditures in excess of collections from customers (including
interest).
JCP&L is pursuing 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.
In August 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.
The Federal Resource Conservation and Recovery Act of 1976, the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
(CERCLA) and the Superfund Amendment and Reauthorization Act of 1986 authorize
the EPA to issue an order compelling responsible parties to take cleanup action
at any location that is determined to present an imminent and substantial danger
to the public or to the environment because of an actual or threatened release
of one or more hazardous substances. Pennsylvania and New Jersey have enacted
legislation giving similar authority to the PaDEP and the NJDEP, respectively.
Because of the nature of the GPU Energy companies' business, various by-products
and substances are produced and/or handled that are classified as hazardous
under one or more of these statutes. GPU generally provides for the treatment,
disposal or recycling of such substances
43
through licensed independent contractors, but these statutory provisions also
impose potential responsibility for certain cleanup costs on the generators of
the wastes. 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. A discussion of five
PRP sites, where it is probable that a loss has been incurred, follows:
JCP&L, Met-Ed and GPUN are among the more than 800 PRPs under CERCLA who
may be liable to pay for costs associated with the investigation and remediation
of the Maxey Flats disposal site, located in Fleming County, Kentucky. A
negotiated settlement among all parties has been finalized and cleanup efforts
have begun. The interim remediation work is estimated to cost $63 million, for
which all responsible parties will be jointly and severally liable. The
estimated allocation, which is based upon a percentage of the total volume of
waste believed shipped to the site, is JCP&L $1.1 million, Met-Ed $400 thousand
and GPUN $150 thousand. A liability is reflected on the Consolidated Balance
Sheets accordingly.
JCP&L has been named as a PRP by the NJDEP for allegedly disposing of
hazardous waste at the Global Landfill, a dump site located in New Jersey. JCP&L
signed a Consent Decree, along with about 50 other PRPs, to investigate the site
and conduct site remediation. The current estimated cost of the remediation is
$33 million. A final allocation of JCP&L's share has not yet been made. However,
JCP&L's interim estimated allocation is $500,000. The extent of the future
liability beyond the $500,000 cannot be estimated at this time. At December 31,
1997, JCP&L has recorded a liability of $500,000.
Met-Ed received a PRP notice from the PaDEP asserting that it had disposed
of hazardous waste at the Industrial Solvents & Chemical Company site, a former
solvents recycler. This site is being remediated under the Pennsylvania
Hazardous Sites Cleanup Act. Met-Ed has made immaterial payments to the PRP
group for the water line installation and the removal of tanks, drums and other
materials at the site. Met-Ed cannot reasonably estimate its remaining liability
until the PaDEP selects a remedy for ground water contamination.
Penelec is part of a group of 10 PRPs who have entered into a Consent
Decree with Pennsylvania and a settlement with the EPA to pay for costs
44
associated with the remediation of a dump site located in Mill Creek Township
near Erie, Pennsylvania. Penelec has paid approximately $114,000 in costs for
the settlement with Pennsylvania and $600,000 in costs for the settlement with
the EPA. Penelec's share of the remaining costs for the site is estimated to be
$500,000 (including costs to cap the site), for which a liability has been
recorded at December 31, 1997.
Penelec has been named as a PRP by the EPA, along with over 1,000 other
PRPs, for allegedly disposing of hazardous materials at the Jack's Creek/Sitken
site, a former metals recycling and smelting operation in Mifflin County,
Pennsylvania. Penelec has joined a PRP group, which is exploring a settlement
with the EPA, but cannot predict the ultimate outcome of the negotiations.
The ultimate cost of remediation of these and other hazardous waste sites
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.
FRANCHISES AND CONCESSIONS
JCP&L operates pursuant to franchises in the territory served by it and
has the right to occupy and use the public streets and ways of the state with
its poles, wires and equipment upon obtaining the consent in writing of the
owners of the soil, and also to occupy the public streets and ways underground
with its conduits, cables and equipment, where necessary, for its electric
operation. JCP&L has the requisite legal franchise for the operation of its
electric business within the State of New Jersey, including in incorporated
cities and towns where designations of new streets, public ways, etc., may be
obtained upon application to such municipalities. JCP&L holds a FERC license
expiring in 2013 authorizing it to operate and maintain the Yards Creek pumped
storage hydroelectric station in which JCP&L has a 50% ownership interest.
Met-Ed and Penelec have the necessary franchise rights to furnish electric
service in the various respective municipalities or territories in which each
company now supplies such services. These electric franchise rights, which are
generally nonexclusive rights, consist generally of (a) charter rights and (b)
certificates of public convenience issued by the PaPUC and/or "grandfather
rights". Such electric franchise rights are free from unduly burdensome
restrictions and unlimited as to time, except in a few relatively minor cases
and except as otherwise described below. The secondary franchise granted by the
Borough of Boyertown to Met-Ed contains a provision that the Borough shall have
the right at any time to purchase the electric system in the Borough at a
valuation to be fixed by appraisers. Met-Ed holds a FERC license expiring in
2014 for the continued operation and maintenance of the York Haven hydroelectric
project. Penelec holds a license from the FERC, which expires in 2002, for the
continued operation and maintenance of the Piney hydroelectric project. In
addition, Penelec and the Cleveland Electric Illuminating Company hold a license
expiring in 2015 for the Seneca Pumped Storage Hydroelectric station in which
Penelec has a 20% undivided interest. For the same station, Penelec and the
Cleveland Electric Illuminating Company hold a Limited Power Permit issued by
the Pennsylvania Water and Power Resources Board which is unlimited as to time.
For purposes of the Homer City station, Penelec and New York State Electric &
Gas Corporation hold a Limited
45
Power Permit issued by the Pennsylvania Water and Power Resources Board which
expires in 2017, but is renewable by the permittees until they have recovered
all capital invested by them in the project. Penelec also holds a Limited Power
Permit issued by the Pennsylvania Water and Power Resources Board for its
Shawville station which expires in 2003, but is renewable by Penelec until it
has recovered all capital invested in the project.
The extent to which competition in the electric utility industry will
affect the territories currently served by the GPU Energy companies and their
rights to provide electric utility service in those territories is uncertain.
Refer to Competitive Environment and The GPU Energy Companies' Supply Plan,
Management's Discussion and Analysis for further discussion.
EMPLOYEE RELATIONS
At February 28, 1998, GPU, Inc. and consolidated affiliates had 9,387
full-time employees (JCP&L 2,470; Met-Ed 2,945; Penelec 1,667; GPUI Group 478;
all other companies 1,827). The nonsupervisory production and maintenance
employees of the GPU Energy companies and certain of their nonsupervisory
clerical employees are represented for collective bargaining purposes by local
unions of the International Brotherhood of Electrical Workers (IBEW) at JCP&L,
Met-Ed and Penelec and the Utility Workers Union of America (UWUA) at Penelec.
Penelec's five-year contract with the UWUA expires on June 30, 1998.
Penelec has renegotiated a four-year contract with the IBEW, expiring on May 14,
2002. The IBEW membership has ratified the new contract subject to reaching
agreement on employee transition arrangements to be implemented upon GPU's
divestiture of its fossil fuel and hydroelectric generating facilities. JCP&L
and Met-Ed's three-year contracts with the IBEW expire on October 31, 1999 and
April 30, 2000, respectively.
46
ITEM 2. PROPERTIES.
GPU Energy Companies' Generating Stations
At December 31, 1997, the generating stations of the GPU Energy companies
had an aggregate effective capability of 6,751,000 net kilowatts (KW), as
follows:
Name of GPU Energy Year of Net KW
Station Company Installation (Summer)
------- ---------- ------------ --------
COAL-FIRED:
Homer City(a) Penelec 1969-1977 942,000
Shawville Penelec 1954-1960 597,000
Portland Met-Ed 1958-1962 401,000
Keystone(b) JCP&L 1967-1968 283,000
Conemaugh(c) Met-Ed 1970-1971 280,000
Titus Met-Ed 1951-1953 243,000
Seward Penelec 1950-1957 196,000
Warren Penelec 1948-1949 82,000
NUCLEAR:
TMI-1(d) All 1974 786,000
Oyster Creek JCP&L 1969 619,000
GAS/OIL-FIRED:
Sayreville JCP&L 1930-1958 229,000
Combustion
Turbines(e) All 1960-1997 1,444,000
Other(f) All 1968-1977 298,000
Hydroelectric(g) Met-Ed/Penelec 1905-1969 64,000
PUMPED STORAGE:(h)
Yards Creek JCP&L 1965 200,000
Seneca Penelec 1969 87,000
---------
TOTAL 6,751,000
=========
Aggregate Effective Capability of the GPU Energy Companies
Net KW
(Summer) (Winter)
JCP&L 2,729,000 3,139,000
Met-Ed 1,738,000 1,861,000
Penelec 2,284,000 2,365,000
--------- ---------
TOTAL 6,751,000 7,365,000
========= =========
(a) Represents Penelec's undivided 50% interest in the station.
(b) Represents JCP&L's undivided 16.67% interest in the station.
(c) Represents Met-Ed's undivided 16.45% interest in the station.
47
(d) Jointly owned by JCP&L, Met-Ed and Penelec in percentages of 25%, 50%
and 25%, respectively.
(e) JCP&L - 912,000 KW, Met-Ed - 400,000 KW and Penelec 132,000 KW.
(f) Consists of internal combustion and combined-cycle units (JCP&L -
290,000 KW, Met-Ed - 2,000 KW and Penelec - 6,000 KW).
(g) Consists of Met-Ed's York Haven station (19,000 KW) and Penelec's Piney
(27,000 KW) and Deep Creek stations (18,000 KW).
(h) Represents the GPU Energy companies' undivided interests in these
stations which are net users rather than net producers of electric
energy.
The GPU Energy companies' coal-fired, hydroelectric (other than the Deep
Creek station) and pumped storage stations (other than the Yards Creek station)
are located in Pennsylvania. The TMI-1 nuclear station is also located in
Pennsylvania. The GPU Energy companies' gas-fired and oil-fired stations (other
than some combustion turbines in Pennsylvania), the Yards Creek pumped storage
station and the Oyster Creek nuclear station are located in New Jersey. The Deep
Creek hydroelectric station is located in Maryland.
Substantially all of the GPU Energy companies' properties are subject to
the lien of their respective FMB indentures.
The peak loads of the GPU Energy companies were as follows:
(In KW)
Company Date Peak Load
------- ---- ---------
GPU Energy companies July 15, 1997 9,555,000*
JCP&L July 15, 1997 4,817,000
Met-Ed July 15, 1997 2,224,000
Penelec Jan. 19, 1997 2,652,000
* System peak load.
48
GPUI Group Generating Facilities
At December 31, 1997, the GPUI Group had ownership interests in 20
operating natural gas-fired cogeneration and other nonutility power production
facilities located both domestically and internationally, with an aggregate
capability of 4,676,500 KW as follows:
Name of Year of Ownership
Facility Location Installation Total KW Interest (KW)
- -------- -------- ------------ -------- -------------
U.S. Facilities
---------------
Selkirk NY 1992-94 350,000 66,900
Lake* FL 1993 110,000 109,900
Pasco* FL 1993 109,000 54,400
Onondaga* NY 1993 80,000 40,000
Syracuse* NY 1992 80,000 3,500
Marcal* NJ 1989 65,000 32,500
Camarillo* CA 1988 26,500 300
Chino* CA 1987 26,000 300
------- -------
Total 846,500 307,800
------- -------
Foreign Facilities
Teesside** England 1993 1,875,000 249,400
Redditch** England 1991 29,000 14,500
Hereford** England 1980 15,000 7,500
Humber** England 1997 750,000 70,500
Enersis Group** Portugal 1987-95 50,000 12,500
Micdos** Spain 1975-95 33,000 7,100
Crisa** Spain 1948-58 6,000 2,900
Termobarran-
quilla* Colombia 1972-96 832,000 238,000
Guaracachi* Bolivia 1975-94 161,000 80,500
Aranjuez* Bolivia 1974-94 40,000 20,000
Karachipampa* Bolivia 1982 15,000 7,500
Brooklyn Canada 1996 24,000 18,000
--------- ---------
Total 3,830,000 728,400
--------- ---------
Total capability 4,676,500 1,036,200
========= =========
* The GPUI Group has operating responsibility for these facilities.
** The GPUI Group's ownership interests in these facilities are through
its investment in Midlands.
49
Transmission and Distribution System
At December 31, 1997, the GPU Energy companies owned the following
transmission and distribution facilities:
JCP&L Met-Ed Penelec Total
----- ------ ------- -----
Transmission and Distribution
Substations 303 249 473 1,025
========== ========== ========== ==========
Aggregate Installed Transformer
Capacity of Substations
(in kilovoltamperes - KVA) 21,030,384 11,495,061 15,849,354 48,374,799
========== ========== ========== ==========
Transmission System:
Lines (In Circuit Miles):
500 KV 18 188 235 441
345 KV -- -- 149 149
230 KV 570 383 650 1,603
138 KV -- 3 11 14
115 KV 232 381 1,330 1,943
69 KV, 46 KV and
34.5 KV 1,764 469 364 2,597
---------- ---------- ---------- ----------
Total 2,584 1,424 2,739 6,747
========== ========== ========== ==========
Distribution System:
Line Transformer Capacity (KVA) 10,113,205 6,020,913 6,844,215 22,978,333
========== ========== ========== ==========
Pole Miles of Overhead Lines 15,954 12,613 22,281 50,848
========== ========== ========== ==========
Trench Miles of Underground
Cable 7,023 1,943 1,918 10,884
========== ========== ========== ==========
In addition, GPU PowerNet which serves all of Victoria, Australia
covering an area of approximately 87,900 square miles and a population of 4.5
million, owns a total of 4,000 miles of overhead and underground lines.
Midlands, which provides service to 2.3 million customers in a 5,135 square mile
area in England, owns a total of 37,905 miles of overhead and underground lines.
ITEM 3. LEGAL PROCEEDINGS.
Reference is made to Nuclear Facilities - TMI-2, Rate Proceedings, and
Electric Generation and the Environment - Environmental Matters under Item 1 and
to Commitments and Contingencies, Note 13 of the Notes to Consolidated Financial
Statements contained in Item 8 for a description of certain pending legal
proceedings involving GPU.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
50
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
All of JCP&L, Met-Ed and Penelec's outstanding common stock is owned by
GPU, Inc. During 1997, JCP&L, Met-Ed and Penelec paid dividends on their common
stock to GPU, Inc. in the following amounts: JCP&L $150 million, Met-Ed $80
million and Penelec $60 million.
In accordance with JCP&L, Met-Ed and Penelec's FMB indentures, as
supplemented, the balances of retained earnings at December 31, 1997 that are
restricted as to the payment of dividends on their common stock are as follows:
JCP&L - $1.7 million Met-Ed - $3.4 million Penelec - $10.1 million
Stock Trading
GPU, Inc. is listed as GPU on the New York Stock Exchange. On
February 4, 1998, there were 40,377 registered holders of GPU, Inc. common
stock.
Dividends
GPU, Inc. common stock dividend declaration dates are the first
Thursdays of December, April, June, and October. Dividend payment dates fall on
the last Wednesdays of February, May, August and November. Dividend declarations
and quarterly stock price ranges for 1997 and 1996 are set forth below.
Common Stock
Dividends Declared Price Ranges*
- --------------------------- ---------------------------------------------
1997 1996
1997 1996 Quarter High/Low High/Low
----- ----- ------- ---------------- ------------------
April $ .50 $.485 First $36 1/8 $32 $35 1/8 $31 1/8
June .50 .485 Second 36 7/16 30 3/4 35 1/4 30 1/8
October .50 .485 Third 36 9/16 32 3/4 35 30 1/2
December .50 .485 Fourth 42 3/4 35 3/8 34 3/8 30 3/4
* Based on New York Stock Exchange Composite Transactions as reported in the
Wall Street Journal.
ITEM 6. SELECTED FINANCIAL DATA.
See pages F-1 and F-2 for references to each registrant's Selected
Financial Data required by this item.
51
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
See pages F-1 and F-2 for references to each registrant's Management's
Discussion and Analysis of Financial Condition and Results of Operations
required by this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See pages F-1 and F-2 for references to each registrant's Financial
Statements and Quarterly Financial Data (unaudited) required by this item.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
52
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Identification of Directors
Information regarding GPU, Inc.'s directors is incorporated by
reference to pages 2 through 6 of GPU, Inc.'s Proxy Statement for the 1998
Annual Meeting of Stockholders. The current directors of JCP&L, Met-Ed and
Penelec, their ages, positions held and business experience during the past five
years are as follows:
Year First Elected
------------------
Name Age Position JCP&L Met-Ed Penelec
- ---- --- -------- ----- --------------
JCP&L/Met-Ed/Penelec:
- ---------------------
F. D. Hafer (a) 57 Chairman of the Board and 1996 1978 1994
Chief Executive Officer
D. Baldassari (b) 48 President 1982 1996 1996
D. W. Myers (c) 53 Vice President - Finance 1994 1996 1996
and Rates, and
Comptroller
C. B. Snyder (d) 52 Director 1997 1997 1997
JCP&L only:
- -----------
G. E. Persson (e) 66 Director 1983
S. C. Van Ness (f) 64 Director 1983
S. B. Wiley (g) 68 Director 1982
(a) Mr. Hafer is also Chairman, Chief Executive Officer, President and a
director of GPUS; Chairman of the Board, Chief Executive Officer and a
director of JCP&L, Met-Ed and Penelec; Chairman of the Board and a director
of GPUN; Chairman, Chief Executive Officer, and a director of Genco;
Chairman and a director of GPU International, Inc. (GPUI), GPU Power, Inc.
(GPU Power), GPU Electric, Inc. (GPU Electric), GPU AR, GPU Telcom; and a
director of Saxton Nuclear Experimental Corporation, all subsidiaries of
GPU, Inc. He is a director of Avon Energy Partners Holdings, Midlands
Electricity plc, and GPU PowerNet. Mr. Hafer also served as President of
Met-Ed from 1986 to 1996 and as President of Penelec from 1994 to 1996. Mr.
Hafer is also a director of Sovereign Bancorp Inc., Sovereign Bank, and
Utilities Mutual Insurance Company, and Chairman of the Board of the
Pennsylvania Electric Association.
(b) Mr. Baldassari was elected President of JCP&L in 1992, and President of
Met-Ed and Penelec in 1996. Prior to that, Mr. Baldassari served as Vice
President - Materials & Services of JCP&L since 1990. Mr. Baldassari is
also President, Chief Executive Officer and a director of GPU AR and GPU
Telcom; and a director of GPUN, Genco and First Morris Bank of Morristown,
NJ.
(c) Mr. Myers was elected Vice President - Finance and Rates, and Comptroller
of Met-Ed and Penelec in 1996, and has also served as Vice President -
Finance and Rates, and Comptroller of JCP&L since 1994. Prior to that, he
served as Vice President and Treasurer of GPU, Inc., GPUS, JCP&L, Met-Ed
and Penelec since 1993. He served as Vice President and Comptroller of GPUN
from 1986 to 1993.
53
(d) Mrs. Snyder was elected Senior Vice President - Corporate Affairs of GPUS
in 1997. She is also a director of GPU PowerNet. Previously, she served as
Vice President - Public Affairs of JCP&L since 1996, and Vice President -
Public Affairs of Met-Ed and Penelec since 1994. Prior to 1994, she was
Regional Director of Met-Ed since 1991.
(e) Mrs. Persson serves as liaison (Special Assistant Director) between the
N.J. Division of Consumer Affairs and various State Boards. Prior to 1995,
she was owner and President of Business Dynamics Associates of Red Bank,
NJ. Mrs. Persson is a member of the United States Small Business
Administration National Advisory Board, the New Jersey Small Business
Advisory Council, the Board of Advisors of Brookdale Community College and
the Board of Advisors of Georgian Court College.
(f) Mr. Van Ness has been affiliated with the law firm of Pico, Mack, Kennedy,
Jaffe, Perrella and Yoskin of Trenton, NJ since 1990. He is also a director
of The Prudential Insurance Company of America.
(g) Mr. Wiley has been a partner in the law firm of Wiley, Malehorn and Sirota
of Morristown, NJ since 1973. He is also Chairman of First Morris Bank of
Morristown, NJ.
The directors of the GPU companies are elected at their respective annual
meetings of stockholders to serve until the next meeting of stockholders and
until their respective successors are duly elected and qualified.
There are no family relationships among the directors of the GPU companies.
Identification of Executive Officers
The current executive officers of GPU, Inc., JCP&L, Met-Ed and Penelec,
their ages, positions held and business experience during the past five years
are as follows:
54
Year First
Name Age Position Elected
---- --- -------- ---------
GPU, Inc.:
- ---------
F. D. Hafer (a) 57 Chairman, President and Chief 1996
Executive Officer
I. H. Jolles (b) 59 Senior Vice President and General 1990
Counsel
J. G. Graham (c) 59 Senior Vice President and Chief 1987
Financial Officer
F. A. Donofrio (d) 55 Vice President, Comptroller and 1985
Chief Accounting Officer
T. G. Howson (e) 49 Vice President and Treasurer 1994
M. A. Nalewako (f) 63 Secretary 1988
T. G. Broughton (g) 52 President, GPUN 1996
R. L. Wise (h) 54 President, Genco 1994
D. Baldassari (i) 48 President, JCP&L, Met-Ed, Penelec 1992
B. L. Levy (j) 42 President and Chief Executive 1991
Officer, GPUI, GPU Power and
GPU Electric
C. B. Snyder (k) 52 Senior Vice President - 1997
Corporate Affairs, GPUS
Year First Elected
Name Age Position JCP&L Met-Ed Penelec
- ---- --- -------- ----- ------ -------
JCP&L/Met-Ed/Penelec:
- --------------------
F. D. Hafer (a) 57 Chairman, and Chief 1996 1978 1994
Executive Officer
D. Baldassari (i) 48 President and Chief 1992 1996 1996
Operating Officer
I. H. Jolles (b) 59 Vice President and 1996 1996 1996
General Counsel
J. G. Graham (c) 59 Vice President and 1987 1987 1987
Chief Financial Officer
T. G. Howson (e) 49 Vice President 1994 1994 1994
and Treasurer
C. Brooks (l) 48 Vice President - Public 1997 1997 1997
Affairs
D. J. Howe (m) 47 Vice President - 1996 1996 1996
Information and Planning
C. A. Mascari (n) 50 Vice President - Power 1997 1997 1997
Services
D. W. Myers (o) 53 Vice President - 1994 1996 1996
Finance and Rates
and Comptroller
G. R. Repko (p) 52 Vice President - Customer 1996 1994 1986
Operations
R. J. Toole (q) 55 Vice President - 1990 1989 1996
Generation
R. S. Zechman (r) 54 Vice President - 1996 1990 1994
Corporate Services
S. L. Guibord (s) 49 Secretary 1996 1996 1996
55
(a) See Note (a) on page 53.
(b) Mr. Jolles is also Executive Vice President, General Counsel and a
director of GPUS, General Counsel of GPUN and Genco, and a director of
GPUI, GPU Power, GPU Electric and GPU PowerNet. He is also a director of
Utilities Mutual Insurance Company.
(c) Mr. Graham is also Executive Vice President, Chief Financial Officer and
a director of GPUS; Vice President and Chief Financial Officer of GPUN;
and a director of GPUI, GPU Power, GPU Electric, GPU AR, GPU Telcom, Avon
Energy Partners Holdings, and Midlands Electricity plc. Mr. Graham is
also a director of Nuclear Electric Insurance Limited, Nuclear Mutual
Limited and Utilities Mutual Insurance Company.
(d) Mr. Donofrio is also Senior Vice President - Financial Controls of GPUS.
(e) Mr. Howson is also Vice President and Treasurer of GPUN, GPU AR and GPU
Telcom. He served as Vice President - Materials, Services and Regulatory
Affairs and a director of JCP&L in 1992.
(f) Mrs. Nalewako is also Secretary of GPUS and Genco and Assistant Secretary
of GPUN, JCP&L, Met-Ed and Penelec.
(g) Mr. Broughton is also a director of GPUN. He previously served as
Executive Vice President of GPUN since 1995. Prior to that, he served as
Vice President - TMI of GPUN since 1991.
(h) Mr. Wise is also a director of GPUN, Genco, GPUI, GPU Power and GPU
Electric. He previously served as President, Fossil Generation - GPUS
since 1994. Prior to that, Mr. Wise served as President and a director of
Penelec since 1986. He is also a director of U.S. Bancorp and U.S.
National Bank of Johnstown, PA.
(i) See Note (b) on page 53.
(j) Mr. Levy is also a director of GPUI, GPU Power, GPU Electric, Avon Energy
Partners Holdings, Midlands Electricity plc, and GPU PowerNet. He has
served as President, Chief Executive Officer and director of GPUI since
1991.
(k) See Note (d) on page 54.
(l) Mr. Brooks previously served as Vice President - Collect and Disburse
Money of Genco since 1996. Prior to that, he was Vice President -
Materials and Services of GPUS since 1990.
(m) Mr. Howe previously served as Director of Marketing and Pricing of JCP&L
since 1994. Prior to that, he was Director of Competitive Strategies and
Initiatives of JCP&L since 1993 and served as Manager - Cogeneration of
JCP&L from 1991-1993.
(n) Mr. Mascari previously served as Vice President - System Planning of GPUS
since 1994. Prior to that, he was Vice President - Nuclear Assurance of
GPUN since 1992.
(o) See Note (c) on page 53.
56
(p) Mr. Repko has also served as Vice President - Customer Services of Met-Ed
and Penelec since 1994. Prior to that, he served as Vice President -
Division Operations of Penelec from 1986 to 1993.
(q) Mr. Toole is also a Vice President and a director of Genco.
(r) Mr. Zechman has also served as Vice President - Administrative Services
of Met-Ed since 1992 and as Vice President - Human Resources of Met-Ed
from 1990 to 1992.
(s) Mr. Guibord has also served as Corporate Compliance Auditing Director of
GPUS since 1994. Prior to that, he was a General Attorney at JCP&L. Mr.
Guibord also serves as Secretary of GPUN, GPU AR and GPU Telcom.
The executive officers of the GPU companies are elected each year by
their respective Boards of Directors at the first meeting of the Board held
following the annual meeting of stockholders. Executive officers hold office
until the next meeting of directors following the annual meeting of stockholders
and until their respective successors are duly elected and qualified. There are
no family relationships among the executive officers.
57
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item with respect to GPU, Inc. is
incorporated by reference to pages 9 through 20 of GPU, Inc.'s Proxy Statement
for the 1998 Annual Meeting of Stockholders. The following table sets forth
remuneration paid, as required by this Item, to the most highly compensated
executive officers of JCP&L, Met-Ed and Penelec for the year ended December 31,
1997.
The managements of JCP&L, Met-Ed and Penelec were combined in a 1996
reorganization. Accordingly, the amounts shown below represent the aggregate
remuneration paid to such executive officers by JCP&L, Met-Ed and Penelec during
1996 and 1997.
Remuneration of Executive Officers
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
-------------------------------- -------------------------
Other
Name and Annual All Other
Principal Compen- LTIP Compen-
Position Year Salary Bonus sation(1) Payouts(2) sation
- -------- ---- ------ ----- ------ ------- -------
J. R. Leva
Chairman of the
Board and Chief
Executive Officer
(retired May 1997) (3) (3) (3) (3) (3) (3)
F. D. Hafer
Chairman of the
Board and Chief
Executive Officer
(effective May 1997) (4) (4) (4) (4) (4) (4)
JCP&L/Met-Ed/Penelec:
D. Baldassari
President (5) (5) (5) (5) (5) (5)
G. R. Repko 1997 162,308 32,000 1,391 21,759 17,365 (6)
Vice President - 1996 154,625 44,000 615 20,085 12,562
Customer Services 1995 147,100 48,000 337 9,930 11,491
D. W. Myers 1997 162,308 32,000 1,471 23,014 15,248 (7)
Vice President - 1996 153,333 44,000 590 19,265 12,505
Finance and Rates 1995 144,000 34,000 362 10,665 10,687
D. J. Howe 1997 162,308 32,000 - - 12,702 (8)
Vice President - 1996 134,539 42,240 - - 6,582
Information and 1995 92,040 19,400 - - 4,096
Planning
<FN>
(1) Consists of earnings on "Long-Term Incentive Plan" ("LTIP") compensation
paid in the year the award vests.
(2) Consists of Performance Cash Incentive Awards paid on the 1990, 1991 and
1992 restricted stock awards which have vested under the 1990 Stock Plan.
These amounts are designed to compensate recipients of restricted
stock/unit awards for the amount of federal and state income taxes that
58
are payable upon vesting of the restricted stock/unit awards. For Mr.
Leva, this amount also includes Performance Cash Incentive Awards paid on
his 1993 and 1994 restricted stock awards and the payout for restricted
units awarded in 1995, which vested upon his retirement.
The restricted units issued in 1995, 1996 and 1997 under the 1990 Stock
Plan are performance based. The 1997 awards are shown in "Long-Term
Incentive Plans - Awards in Last Fiscal Year" table (the "LTIP table").
Dividends are paid or accrued on the aggregate restricted stock/units
awarded under the 1990 Stock Plan and reinvested.
The aggregate number and value (based on the stock price per share at
December 31, 1997) of unvested stock-equivalent restricted units
(including reinvested dividends) includes the amounts shown on the LTIP
table, and at the end of 1997 were:
Aggregate Units Aggregate Value
J. R. Leva (3) (3)
F. D. Hafer (4) (4)
D. Baldassari (5) (5)
G. R. Repko 4,668 $196,640
D. W. Myers 4,646 195,712
D. J. Howe 2,270 95,624
(3) Mr. Leva retired as Chairman and Chief Executive Officer of GPU, Inc.
and its Subsidiaries in May 1997. Mr. Leva was compensated by GPUS for
his overall service on behalf of GPU and accordingly was not
compensated directly by the other subsidiary companies for his
services. Information with respect to Mr. Leva's compensation is
included on pages 13 through 15 in GPU, Inc.'s 1998 Proxy Statement,
which is incorporated herein by reference.
(4) Mr. Hafer was compensated by GPUS for his overall service on behalf of
GPU and accordingly was not compensated directly by the other
subsidiary companies for his services. Information with respect to Mr.
Hafer's compensation is included on pages 13 through 15 in GPU, Inc.'s
1998 Proxy Statement, which is incorporated herein by reference.
(5) Information with respect to Mr. Baldassari's compensation is included
on pages 13 through 15 in GPU, Inc.'s 1998 Proxy Statement, which is
incorporated herein by reference.
(6) Consists of GPU's matching contributions under the Savings Plan
($6,400), matching contributions under the non-qualified deferred
compensation plan ($1,852), above-market interest accrued on the
retirement portion of deferred compensation ($68), and earnings on LTIP
compensation not paid in the current year ($9,045).
(7) Consists of GPU's matching contributions under the Savings Plan
($6,246) and earnings on LTIP compensation not paid in the current year
($9,002).
(8) Consists of GPU's matching contributions under the Savings Plan
($6,400), matching contributions under the non-qualified deferred
compensation plan ($1,852), above-market interest accrued on the
retirement portion of deferred compensation ($35), and earnings on LTIP
compensation not paid in the current year ($4,415).
</FN>
59
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
Performance Estimated future payouts
Number of or other under non-stock price-
shares, period until based plans(1)
units or maturation Threshold Target Maximum
Name other rights or payout (#) (#) (#)
---- ------------- --------------- --------- ------ -----
JCP&L/Met-Ed/Penelec:
- --------------------
G. R. Repko 1,180 5 year vesting 590 1,180 2,360
D. W. Myers 1,180 5 year vesting 590 1,180 2,360
D. J. Howe 1,180 5 year vesting 590 1,180 2,360
<FN>
(1) The restricted units awarded in 1997 under the 1990 Stock Plan provide
for a performance adjustment to the aggregate number of units vesting for
the recipient, including the accumulated reinvested dividends, based on
the annualized GPU Total Shareholder Return (TSR) percentile ranking
against all companies in the Standard & Poor's Electric Utility Index for
the period between the award and vesting dates. With a 55th percentile
ranking, the performance adjustment would be 100% as reflected in the
"Target" column. In the event that the percentile ranking is below the
55th percentile, the performance adjustment would be reduced in steps
reaching 0% below the 40th percentile. The minimum payout or "Threshold"
begins at the 40th percentile, which results in a payout of 50% of
target. A ranking below the 40th percentile would result in no award.
Should the TSR percentile ranking exceed the 59th percentile, then the
performance adjustment would be increased in steps reaching 200% at the
90th percentile as reflected in the "Maximum" column. Under the 1990
Stock Plan, regular quarterly dividends are reinvested in additional
units that are subject to the vesting restrictions of the award. Actual
payouts under the Plan would be based on the aggregate number of units
awarded and the units accumulated through dividend reinvestment at the
time the restrictions lapse. Information with respect to Mr. Hafer's and
Mr. Baldassari's long-term incentive plans is included on page 15 in GPU,
Inc.'s 1998 Proxy Statement, which is incorporated herein by reference.
</FN>
Proposed Remuneration of Executive Officers
None of the named executive officers in the Summary Compensation Table
has an employment contract. The compensation of executive officers is determined
from time to time by the Personnel & Compensation Committee of the GPU, Inc.
Board of Directors.
Retirement Plans
The GPU pension plans provide for pension benefits, payable for life
after retirement, based upon years of creditable service with GPU and the
employee's career average compensation as defined below. Federal law limits the
amount of an employee's pension benefits that may be paid from a qualified trust
established pursuant to a qualified pension plan (such as the GPU plans). The
GPU companies also have adopted non-qualified plans providing that the portion
of a participant's pension benefits which, by reason of such limitations, cannot
be paid from such a qualified trust shall be paid directly on an unfunded basis
by the participant's employer.
60
The following table illustrates the amount of aggregate annual pension
benefits from funded and unfunded sources resulting from employer contributions
to the qualified trust and direct payments payable upon retirement in 1998
(computed on a single life annuity basis) to persons in specified compensation
and years of service classifications:
ESTIMATED ANNUAL RETIREMENT BENEFITS (2) (3) (4) (5)
BASED UPON CAREER AVERAGE COMPENSATION
(1998 Retirement)
Career
Average
Compen- 10 Years 15 Years 20 Years 25 Years 30 Years 35 Years 40 Years 45 Years
sation(1) of Service of Service of Service of Service of Service of Service of Service of Service
$ 50,000 $ 9,297 $ 13,945 $ 18,593 $ 23,242 $ 27,890 $ 32,539 $ 36,928 $ 40,928
100,000 19,297 28,945 38,593 48,242 57,890 67,539 76,528 84,528
150,000 29,297 43,945 58,593 73,242 87,890 102,539 116,128 128,128
200,000 39,297 58,945 78,593 98,242 117,890 137,539 155,728 171,728
250,000 49,297 73,945 98,593 123,242 147,890 172,539 195,328 215,328
300,000 59,297 88,945 118,593 148,242 177,890 207,539 234,928 258,928
350,000 69,297 103,945 138,593 173,242 207,890 242,539 274,528 302,528
400,000 79,297 118,945 158,593 198,242 237,890 277,539 314,128 346,128
450,000 89,297 133,945 178,593 223,242 267,890 312,539 353,728 389,728
500,000 99,297 148,945 198,593 248,242 297,890 347,539 393,328 433,328
550,000 109,297 163,945 218,593 273,242 327,890 382,539 432,928 476,928
600,000 119,297 178,945 238,593 298,242 357,890 417,539 472,528 520,528
650,000 129,297 193,945 258,593 323,242 387,890 452,539 512,128 564,128
700,000 139,297 208,945 278,593 348,242 417,890 487,539 551,728 607,728
750,000 149,297 223,945 298,593 373,242 447,890 522,539 591,328 651,328
800,000 159,297 238,945 318,593 398,242 477,890 557,539 630,928 694,928
<FN>
(1) Career Average Compensation is the average annual compensation received
from January 1, 1984 to retirement and includes Salary and Bonus. The
career average compensation amounts for the following named executive
officers differ by more than 10% from the three year average annual
compensation set forth in the Summary Compensation Table and are as
follows: Messrs. Leva - $474,882; Hafer - $310,706; Baldassari - $208,934;
Repko - $137,114; Myers - $154,573; and Howe - $97,871.
(2) Years of Creditable Service at December 31, 1997: Messrs. Leva - 45 years
(as of May 1997); Hafer - 35 years; Baldassari - 28 years; Repko - 31
years; Myers - 17 years; and Howe - 21 years.
(3) Mr. Leva, who retired in 1997, is entitled to receive $603,730 annually
($414,727 basic pension and $189,003 under supplemental pension
agreements). Following Mr. Leva's death, his surviving spouse, if any, will
receive an annuity payable for life equal to 50% of the supplemental
pensions payable to him.
61
(4) Based on an assumed retirement at age 65 in 1998. To reduce the above
amounts to reflect a retirement benefit assuming a continual annuity to a
surviving spouse equal to 50% of the annuity payable at retirement,
multiply the above benefits by 90%. The estimated annual benefits are not
subject to any reduction for Social Security benefits or other offset
amounts.
(5) Annual retirement benefits under the basic pension per the above table
cannot exceed 55%, as defined in the pension plan, of the average
compensation during the highest paid 36 calendar months. As of December
31, 1997, none of the named executive officers exceed the 55% limit.
</FN>
Remuneration of JCP&L Directors
Nonemployee directors receive an annual retainer of $15,000, a fee of
$1,000 for each Board meeting attended, and a fee of $1,000 for each Committee
meeting attended.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item for GPU, Inc. is incorporated by
reference to page 8 of GPU, Inc.'s Proxy Statement for the 1998 Annual Meeting
of Stockholders.
All of the outstanding shares of JCP&L (15,371,270), Met-Ed (859,500) and
Penelec (5,290,596) common stock are owned beneficially and of record by their
parent, GPU, Inc., 300 Madison Avenue, Morristown, NJ 07962.
The following table sets forth, as of February 1, 1998, the beneficial
ownership of equity securities of each of the directors and each of the
executive officers named in the Summary Compensation Tables, and of all
directors and executive officers of each of the respective GPU Energy companies
as a group. The shares owned by all directors and executive officers as a group
constitute less than 1% of the total shares outstanding.
62
Amount and Nature of Beneficial Ownership
-----------------------------------------
Shares(1) Stock-Equivalent
--------- ----------------
Name Title of Security Direct Indirect Restricted Units(2)
---- ----------------- ------ -------- -------------------
JCP&L/Met-Ed/Penelec:
F. D. Hafer GPU Common Stock 7,545 139 18,563
D. Baldassari GPU Common Stock 2,900 - 13,198
G. R. Repko GPU Common Stock 1,599 - 4,668
D. W. Myers GPU Common Stock 741 - 4,646
D. J. Howe GPU Common Stock - 463 2,270
C. B. Snyder GPU Common Stock 344 - 3,868
JCP&L Only:
G. E. Persson GPU Common Stock None
S. C. Van Ness GPU Common Stock None
S. B. Wiley GPU Common Stock None
All Directors and
Executive Officers
as a Group GPU Common Stock 34,584 1,869 99,087
<FN>
(1) The number of shares owned and the nature of such ownership, not being
within the knowledge of GPU, have been furnished by each individual.
(2) Restricted units, which do not have voting rights, represent rights
(subject to vesting) to receive shares of Common Stock under the 1990
Stock Plan for Employees of GPU and Subsidiaries (the "1990 Stock Plan").
See Summary Compensation Table above.
</FN>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
63
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) See pages F-1 and F-2 for references to Financial Statements and
Financial Statement Schedules required by this item.
1. Exhibits:
3-A Articles of Incorporation of GPU, as amended through
March 27, 1990 - Incorporated by reference to Exhibit
3-A, 1989 Annual Report on Form 10-K, SEC File No.
1-6047.
3-A-1 Articles of Amendment to Articles of Incorporation of
GPU dated May 5, 1995 Incorporated by reference to
Exhibit A-4, Certificate Pursuant to Rule 24, SEC File
No.
70-8569.
3-A-2 Articles of Incorporation of GPU, Inc. as amended
August 1, 1996 - Incorporated by reference to Exhibit
3-A-2, 1996 Annual Report on Form 10-K, SEC File No.
1-6047.
3-B By-Laws of GPU, Inc. as amended December 4, 1997.
3-C Restated Certificate of Incorporation of JCP&L, as
amended - Incorporated by reference to Exhibit 3-A,
1990 Annual Report on Form 10-K, SEC File No. 1-3141.
3-C-1 Certificate of Amendment to Restated Certificate of
Incorporation of JCP&L, dated June 19, 1992 -
Incorporated by reference to Exhibit A-2(a),
Certificate Pursuant to Rule 24, SEC File No. 70-7949.
3-C-2 Certificate of Amendment to Restated Certificate of
Incorporation of JCP&L, dated June 19, 1992 -
Incorporated by reference to Exhibit A-2(a)(i),
Certificate Pursuant to Rule 24, SEC File No. 70-7949.
3-D By-Laws of JCP&L, as amended - Incorporated by
reference to Exhibit 3-B, 1993 Annual Report on Form
10-K, SEC File No. 1-3141.
3-E Restated Articles of Incorporation of Met-Ed -
Incorporated by reference to Exhibit B-18, 1991 Annual
Report of GPU on Form U5S, SEC File No. 30-126.
3-F By-Laws of Met-Ed dated July 27, 1995, as amended -
Incorporated by reference to Exhibit 3-F, 1995 Annual
Report on Form 10-K, SEC File No. 1-446.
3-G Restated Articles of Incorporation of Penelec as
amended through March 10, 1992 Incorporated by
reference to Exhibit 3A, 1991 Annual Report on Form
10-K, SEC File No.
1-3522.
64
3-H By-Laws of Penelec dated July 27 1995, as amended -
Incorporated by reference to Exhibit 3-H, 1995 Annual
Report on Form 10-K, SEC File No. 1-3522.
4-A Indenture of JCP&L, dated March 1, 1946, between JCP&L
and United States Trust Company of New York, Successor
Trustee, as amended and supplemented by eight
supplemental indentures dated December 1, 1948 through
June 1, 1960 - Incorporated by reference to JCP&L's
Instruments of Indebtedness Nos. 1 to 7, inclusive,
and 9 and 10 filed as part of Amendment No. 1 to 1959
Annual Report of GPU on Form U5S, SEC File Nos. 30-126
and 1-3292.
4-A-1 Ninth Supplemental Indenture of JCP&L, dated November
1, 1962 - Incorporated by reference to Exhibit 2-C,
Registration No. 2-20732.
4-A-2 Tenth Supplemental Indenture of JCP&L, dated October
1, 1963 - Incorporated by reference to Exhibit 2-C,
Registration No. 2-21645.
4-A-3 Eleventh Supplemental Indenture of JCP&L, dated
October 1, 1964 - Incorporated by reference to Exhibit
5-A-3, Registration No. 2-59785.
4-A-4 Twelfth Supplemental Indenture of JCP&L, dated
November 1, 1965 - Incorporated by reference to
Exhibit 5-A-4, Registration No. 2-59785.
4-A-5 Thirteenth Supplemental Indenture of JCP&L, dated
August 1, 1966 - Incorporated by reference to Exhibit
4-C, Registration No. 2-25124.
4-A-6 Fourteenth Supplemental Indenture of JCP&L, dated
September 1, 1967 - Incorporated by reference to
Exhibit 5-A-6, Registration No. 2-59785.
4-A-7 Fifteenth Supplemental Indenture of JCP&L, dated
October 1, 1968 - Incorporated by reference to Exhibit
5-A-7, Registration No. 2-59785.
4-A-8 Sixteenth Supplemental Indenture of JCP&L, dated
October 1, 1969 - Incorporated by reference to Exhibit
5-A-8, Registration No. 2-59785.
4-A-9 Seventeenth Supplemental Indenture of JCP&L, dated
June 1, 1970 - Incorporated by reference to Exhibit
5-A-9, Registration No. 2-59785.
4-A-10 Eighteenth Supplemental Indenture of JCP&L, dated
December 1, 1970 - Incorporated by reference to
Exhibit 5-A-10, Registration No. 2-59785.
4-A-11 Nineteenth Supplemental Indenture of JCP&L, dated
February 1, 1971 - Incorporated by reference to
Exhibit 5-A-11, Registration No. 2-59785.
65
4-A-12 Twentieth Supplemental Indenture of JCP&L, dated
November 1, 1971 - Incorporated by reference to
Exhibit 5-A-12, Registration No. 2-59875.
4-A-13 Twenty-first Supplemental Indenture of JCP&L, dated
August 1, 1972 - Incorporated by reference to Exhibit
5-A-13, Registration No. 2-59785.
4-A-14 Twenty-second Supplemental Indenture of JCP&L, dated
August 1, 1973 - Incorporated by reference to Exhibit
5-A-14, Registration No. 2-59785.
4-A-15 Twenty-third Supplemental Indenture of JCP&L, dated
October 1, 1973 - Incorporated by reference to
Exhibit 5-A-15, Registration No. 2-59785.
4-A-16 Twenty-fourth Supplemental Indenture of JCP&L, dated
December 1, 1973 - Incorporated by reference to
Exhibit 5-A-16, Registration No. 2-59785.
4-A-17 Twenty-fifth Supplemental Indenture of JCP&L, dated
November 1, 1974 - Incorporated by
reference to Exhibit 5-A-17, Registration No. 2-59785.
4-A-18 Twenty-sixth Supplemental Indenture of JCP&L, dated
March 1, 1975 - Incorporated by
reference to Exhibit 5-A-18, Registration No. 2-59785.
4-A-19 Twenty-seventh Supplemental Indenture of JCP&L, dated
July 1, 1975 - Incorporated by reference to Exhibit
5-A-19, Registration No. 2-59785.
4-A-20 Twenty-eighth Supplemental Indenture of JCP&L, dated
October 1, 1975 - Incorporated by reference to Exhibit
5-A-20, Registration No. 2-59785.
4-A-21 Twenty-ninth Supplemental Indenture of JCP&L, dated
February 1, 1976 - Incorporated by
reference to Exhibit 5-A-21, Registration No. 2-59785.
4-A-22 Supplemental Indenture No. 29A of JCP&L, dated May 31,
1976 - Incorporated by reference
to Exhibit 5-A-22, Registration No. 2-59785.
4-A-23 Thirtieth Supplemental Indenture of JCP&L, dated June
1, 1976 - Incorporated by reference to Exhibit 5-A-23,
Registration No. 2-59785.
4-A-24 Thirty-first Supplemental Indenture of JCP&L,
dated May 1, 1977 - Incorporated by
reference to Exhibit 5-A-24, Registration No. 2-59785.
4-A-25 Thirty-second Supplemental Indenture of JCP&L, dated
January 20, 1978 - Incorporated by reference to
Exhibit 5-A-25, Registration No. 2-60438.
66
4-A-26 Thirty-third Supplemental Indenture of JCP&L, dated
January 1, 1979 - Incorporated by reference to
Exhibit A-20(b), Certificate Pursuant to Rule 24, SEC
File No. 70-6242.
4-A-27 Thirty-fourth Supplemental Indenture of JCP&L, dated
June 1, 1979 - Incorporated by reference to Exhibit
A-28, Certificate Pursuant to Rule 24, SEC File No.
70-6290.
4-A-28 Thirty-sixth Supplemental Indenture of JCP&L, dated
October 1, 1979 - Incorporated by reference to Exhibit
A-30, Certificate Pursuant to Rule 24, SEC File No.
70-6354.
4-A-29 Thirty-seventh Supplemental Indenture of JCP&L, dated
September 1, 1984 - Incorporated by reference to
Exhibit A-1(cc), Certificate Pursuant to Rule 24, SEC
File No. 70-7001.
4-A-30 Thirty-eighth Supplemental Indenture of JCP&L, dated
July 1, 1985 - Incorporated by reference to Exhibit
A-1(dd), Certificate Pursuant to Rule 24, SEC File No.
70-7109.
4-A-31 Thirty-ninth Supplemental Indenture of JCP&L, dated
April 1, 1988 - Incorporated by reference to Exhibit
A-1(a), Certificate Pursuant to Rule 24, SEC File No.
70-7263.
4-A-32 Fortieth Supplemental Indenture of JCP&L, dated June
14, 1988 - Incorporated by reference to Exhibit
A-1(ff), Certificate Pursuant to Rule 24, SEC File No.
70-7603.
4-A-33 Forty-first Supplemental Indenture of JCP&L, dated
April 1, 1989 - Incorporated by reference to Exhibit
A-1(gg), Certificate Pursuant to Rule 24, SEC File No.
70-7603.
4-A-34 Forty-second Supplemental Indenture of JCP&L, dated
July 1, 1989 - Incorporated by reference to Exhibit
A-1(hh), Certificate Pursuant to Rule 24, SEC File No.
70-7603.
4-A-35 Forty-third Supplemental Indenture of JCP&L, dated
March 1, 1991 - Incorporated by reference to Exhibit
4-A-35, Registration No. 33-45314.
4-A-36 Forty-fourth Supplemental Indenture of JCP&L, dated
March 1, 1992 - Incorporated by reference to
Exhibit 4-A-36, Registration No. 33-49405.
4-A-37 Forty-fifth Supplemental Indenture of JCP&L, dated
October 1, 1992 - Incorporated by reference to Exhibit
4-A-37, Registration No. 33-49405.
4-A-38 Forty-sixth Supplemental Indenture of JCP&L, dated
April 1, 1993 - Incorporated by reference to Exhibit
C-15, 1992 Annual Report of GPU on Form U5S, SEC File
No. 30-126.
4-A-39 Forty-seventh Supplemental Indenture of JCP&L, dated
April 10, 1993 - Incorporated by reference to Exhibit
C-16, 1992 Annual Report of GPU on Form U5S, SEC File
No. 30-126.
67
4-A-40 Forty-eighth Supplemental Indenture of JCP&L, dated
April 15, 1993 - Incorporated by reference to Exhibit
C-17, 1992 Annual Report of GPU on Form U5S, SEC File
No. 30-126.
4-A-41 Forty-ninth Supplemental Indenture of JCP&L, dated
October 1, 1993 - Incorporated by reference to Exhibit
C-18, 1993 Annual Report of GPU on Form U5S, SEC File
No. 30-126.
4-A-42 Fiftieth Supplemental Indenture of JCP&L, dated August
1, 1994 - Incorporated by reference to Exhibit C-19,
1994 Annual Report of GPU on Form U5S, SEC File No.
30-126.
4-A-43 Fifty-first Supplemental Indenture of JCP&L, dated
August 15, 1996 - Incorporated by reference to Exhibit
4-A-43, 1996 Annual Report on Form 10-K, SEC File No.
1-6047.
4-B Indenture of Met-Ed, dated November 1, 1944 with
United States Trust Company of New York, Successor
Trustee, as amended and supplemented by fourteen
supplemental indentures dated February 1, 1947 through
May 1, 1960 - Incorporated by reference to Met-Ed's
Instruments of Indebtedness Nos. 1 to 14, inclusive
and 16, filed as part of Amendment No. 1 to 1959
Annual Report of GPU on Form U5S, SEC File Nos. 30-126
and 1-3292.
4-B-1 Supplemental Indenture of Met-Ed, dated December 1,
1962 - Incorporated by reference to
Exhibit 2-E(1), Registration No. 2-59678.
4-B-2 Supplemental Indenture of Met-Ed, dated March 20,
1964 - Incorporated by reference to
Exhibit 2-E(2), Registration No. 2-59678.
4-B-3 Supplemental Indenture of Met-Ed, dated July 1, 1965 -
Incorporated by reference to
Exhibit 2-E(3), Registration No. 2-59678.
4-B-4 Supplemental Indenture of Met-Ed, dated June 1, 1966 -
Incorporated by reference to
Exhibit 2-B-4, Registration No. 2-24883.
4-B-5 Supplemental Indenture of Met-Ed, dated March 22,
1968 - Incorporated by reference to
Exhibit 4-C-5, Registration No. 2-29644.
4-B-6 Supplemental Indenture of Met-Ed, dated September 1,
1968 - Incorporated by reference to Exhibit 2-E(6),
Registration No. 2-59678.
4-B-7 Supplemental Indenture of Met-Ed, dated August 1, 1969
- Incorporated by reference to
Exhibit 2-E(7), Registration No. 2-59678.
4-B-8 Supplemental Indenture of Met-Ed, dated November 1,
1971 - Incorporated by reference to
Exhibit 2-E(8), Registration No. 2-59678.
68
4-B-9 Supplemental Indenture of Met-Ed, dated May 1, 1972 -
Incorporated by reference to
Exhibit 2-E(9), Registration No. 2-59678.
4-B-10 Supplemental Indenture of Met-Ed, dated December 1,
1973 - Incorporated by reference to
Exhibit 2-E(10), Registration No. 2-59678.
4-B-11 Supplemental Indenture of Met-Ed, dated October 30,
1974 - Incorporated by reference to
Exhibit 2-E(11), Registration No. 2-59678.
4-B-12 Supplemental Indenture of Met-Ed, dated October 31,
1974 - Incorporated by reference to
Exhibit 2-E(12), Registration No. 2-59678.
4-B-13 Supplemental Indenture of Met-Ed, dated March 20,
1975 - Incorporated by reference to
Exhibit 2-E(13), Registration No. 2-59678.
4-B-14 Supplemental Indenture of Met-Ed, dated September 25,
1975 - Incorporated by reference to Exhibit 2-E(15),
Registration No. 2-59678.
4-B-15 Supplemental Indenture of Met-Ed, dated January 12,
1976 - Incorporated by reference to
Exhibit 2-E(16), Registration No. 2-59678.
4-B-16 Supplemental Indenture of Met-Ed, dated March 1,
1976 - Incorporated by reference to
Exhibit 2-E(17), Registration No. 2-59678.
4-B-17 Supplemental Indenture of Met-Ed, dated September 28,
1977 - Incorporated by reference to Exhibit 2-E(18),
Registration No. 2-62212.
4-B-18 Supplemental Indenture of Met-Ed, dated January 1,
1978 - Incorporated by reference to
Exhibit 2-E(19), Registration No. 2-62212.
4-B-19 Supplemental Indenture of Met-Ed, dated September 1,
1978 - Incorporated by reference to Exhibit 4-A(19),
Registration No. 33-48937.
4-B-20 Supplemental Indenture of Met-Ed, dated June 1,
1979 - Incorporated by reference to
Exhibit 4-A(20), Registration No. 33-48937.
4-B-21 Supplemental Indenture of Met-Ed, dated January 1,
1980 - Incorporated by reference to
Exhibit 4-A(21), Registration No. 33-48937.
4-B-22 Supplemental Indenture of Met-Ed, dated September 1,
1981 - Incorporated by reference to Exhibit 4-A(22),
Registration No. 33-48937.
69
4-B-23 Supplemental Indenture of Met-Ed, dated September 10,
1981 - Incorporated by reference to Exhibit 4-A(23),
Registration No. 33-48937.
4-B-24 Supplemental Indenture of Met-Ed, dated December 1,
1982 - Incorporated by reference to
Exhibit 4-A(24), Registration No. 33-48937.
4-B-25 Supplemental Indenture of Met-Ed, dated September 1,
1983 - Incorporated by reference to Exhibit 4-A(25),
Registration No. 33-48937.
4-B-26 Supplemental Indenture of Met-Ed, dated September 1,
1984 - Incorporated by reference to Exhibit 4-A(26),
Registration No. 33-48937.
4-B-27 Supplemental Indenture of Met-Ed, dated March 1,
1985 - Incorporated by reference to
Exhibit 4-A(27), Registration No. 33-48937.
4-B-28 Supplemental Indenture of Met-Ed, dated September 1,
1985 - Incorporated by reference to Exhibit 4-A(28),
Registration No. 33-48937.
4-B-29 Supplemental Indenture of Met-Ed, dated June 1,
1988 - Incorporated by reference to
Exhibit 4-A(29), Registration No. 33-48937.
4-B-30 Supplemental Indenture of Met-Ed, dated April 1,
1990 - Incorporated by reference to
Exhibit 4-A(30), Registration No. 33-48937.
4-B-31 Amendment dated May 22, 1990 to Supplemental Indenture
of Met-Ed, dated April 1, 1990 Incorporated by
reference to Exhibit 4-A(31), Registration No.
33-48937.
4-B-32 Supplemental Indenture of Met-Ed, dated September 1,
1992 - Incorporated by reference
to Exhibit 4-A(32)(a), Registration No. 33-48937.
4-B-33 Supplemental Indenture of Met-Ed, dated December 1,
1993 - Incorporated by reference to Exhibit C-58, 1993
Annual Report of GPU on Form U5S, SEC File No. 30-126.
4-B-34 Supplemental Indenture of Met-Ed dated July 15, 1995 -
Incorporated by reference to Exhibit 4-B-35, 1995
Annual Report on Form 10-K, SEC File No. 1-446.
4-B-35 Supplemental Indenture of Met-Ed dated August 15, 1996
- Incorporated by reference to Exhibit 4-B-35, 1996
Annual Report on Form 10-K, SEC File No. 1-446.
4-B-36 Supplemental Indenture of Met-Ed dated May 1, 1997.
70
4-C Mortgage and Deed of Trust of Penelec dated January 1,
1942 between Penelec and United States Trust Company
of New York, Successor Trustee, and indentures
supplemental thereto dated March 7, 1942 through May
1, 1960 - Incorporated by reference to Penelec's
Instruments of Indebtedness Nos. 1-20, inclusive,
filed as a part of Amendment No. 1 to 1959 Annual
Report of GPU on Form U5S, SEC File Nos. 30-126 and
1-3292.
4-C-1 Supplemental Indentures to Mortgage and Deed of Trust
of Penelec dated May 1, 1961 through December 1, 1977
- Incorporated by reference to Exhibit 2-D(1) to
2-D(19), Registration No. 2-61502.
4-C-2 Supplemental Indenture of Penelec dated June 1, 1978 -
Incorporated by reference to
Exhibit 4-A(2), Registration No. 33-49669.
4-C-3 Supplemental Indenture of Penelec dated June 1, 1979 -
Incorporated by reference to
Exhibit 4-A(3), Registration No. 33-49669.
4-C-4 Supplemental Indenture of Penelec dated September 1,
1984 - Incorporated by reference to Exhibit 4-A(4),
Registration No. 33-49669.
4-C-5 Supplemental Indenture of Penelec dated December 1,
1985 - Incorporated by reference to
Exhibit 4-A(5), Registration No. 33-49669.
4-C-6 Supplemental Indenture of Penelec dated December 1,
1986 - Incorporated by reference to
Exhibit 4-A(6), Registration No. 33-49669.
4-C-7 Supplemental Indenture of Penelec dated May 1, 1989 -
Incorporated by reference to
Exhibit 4-A(7), Registration No. 33-49669.
4-C-8 Supplemental Indenture of Penelec dated December 1,
1990-Incorporated by reference to
Exhibit 4-A(8), Registration No. 33-45312.
4-C-9 Supplemental Indenture of Penelec dated March 1,
1992 - Incorporated by reference to
Exhibit 4-A(9), Registration No. 33-45312.
4-C-10 Supplemental Indenture of Penelec, dated June 1, 1993
- Incorporated by reference to Exhibit C-73, 1993
Annual Report of GPU on Form U5S, SEC File No. 30-126.
4-C-11 Supplemental Indenture of Penelec dated November 1,
1995 - Incorporated by reference to Exhibit 4-C-11,
1995 Annual Report on Form 10-K, SEC File No. 1-3522.
4-C-12 Supplemental Indenture of Penelec dated August 15,
1996 - Incorporated by reference to Exhibit 4-C-12,
1996 Annual Report on Form 10-K, SEC File No. 1-3522.
71
4-D Subordinated Debenture Indenture of JCP&L dated May 1,
1995 - Incorporated by reference to Exhibit A-8(a),
Certificate Pursuant to Rule 24, SEC File No. 70-8495.
4-E Subordinated Debenture Indenture of Met-Ed dated
August 1, 1994 - Incorporated by reference to Exhibit
A-8(a), Certificate Pursuant to Rule 24, SEC File No.
70-8401.
4-F Subordinated Debenture Indenture of Penelec dated July
1, 1994 - Incorporated by reference to Exhibit A-8(a),
Certificate Pursuant to Rule 24, SEC File No. 70-8403.
4-G Amended and Restated Limited Partnership Agreement of
JCP&L Capital, L.P., dated May 11, 1995 - Incorporated
by reference to Exhibit A-5(a), Certificate Pursuant
to Rule 24, SEC File No. 70-8495.
4-H Action Creating Series A Preferred Securities of JCP&L
Capital, L.P., dated May 11, 1995 - Incorporated by
reference to Exhibit A-6(a), Certificate Pursuant to
Rule 24, SEC File No. 70-8495.
4-I Payment and Guarantee Agreement of JCP&L, dated May
18, 1995 - Incorporated by reference to Exhibit
B-1(a), Certificate Pursuant to Rule 24, SEC File No.
70-8495.
4-J Amended and Restated Limited Partnership Agreement of
Met-Ed Capital, L.P., dated August 16, 1994 -
Incorporated by reference to Exhibit A-5(a),
Certificate Pursuant to Rule 24, SEC File No. 70-8401.
4-K Action Creating Series A Preferred Securities of
Met-Ed Capital, L.P., dated August 16, 1994 -
Incorporated by reference to Exhibit A-6(a),
Certificate Pursuant to Rule 24, SEC File No. 70-8401.
4-L Payment and Guarantee Agreement of Met-Ed, dated
August 23, 1994 - Incorporated by reference to Exhibit
B-1(a), Certificate Pursuant to Rule 24, SEC File No.
70-8401.
4-M Amended and Restated Limited Partnership Agreement of
Penelec Capital, L.P., dated June 27, 1994 -
Incorporated by reference to Exhibit A-5(a),
Certificate Pursuant to Rule 24, SEC File No. 70-8403.
4-N Action Creating Series A Preferred Securities of
Penelec Capital, L.P., dated June 27, 1994 -
Incorporated by reference to Exhibit A-6(a),
Certificate Pursuant to Rule 24, SEC File No. 70-8403.
4-O Payment and Guarantee Agreement of Penelec, dated July
5, 1994 - Incorporated by reference to Exhibit B-1(a),
Certificate Pursuant to Rule 24, SEC File No. 70-8403.
10-A GPU System Companies Deferred Compensation Plan dated
June 5, 1997.
72
10-B GPU System Companies Master Directors' Benefits
Protection Trust dated February 6, 1997.
10-C GPU System Companies Master Executives' Benefits
Protection Trust dated February 6, 1997.
10-D Employee Incentive Compensation Plan of JCP&L dated
April 1, 1995 - Incorporated by reference to Exhibit
10-D, 1995 Annual Report on Form 10-K, SEC File No.
1-3141.
10-E Employee Incentive Compensation Plan of Met-Ed dated
April 1, 1995 - Incorporated by reference to Exhibit
10-E, 1995 Annual Report on Form 10-K, SEC File No.
1-446.
10-F Employee Incentive Compensation Plan of Penelec dated
April 1, 1995 - Incorporated by reference to Exhibit
10-F, 1995 Annual Report on Form 10-K, SEC File No.
1-3522.
10-G Incentive Compensation Plan for Elected Officers of
JCP&L dated February 6, 1997.
10-H Incentive Compensation Plan for Elected Officers of
Met-Ed dated February 6, 1997.
10-I Incentive Compensation Plan for Elected Officers of
Penelec dated February 6, 1997.
10-J Deferred Remuneration Plan for Outside Directors of
JCP&L dated June 5, 1997.
10-K JCP&L Supplemental and Excess Benefits Plan dated
June 5, 1997.
10-L Met-Ed Supplemental and Excess Benefits Plan dated
June 5, 1997.
10-M Penelec Supplemental and Excess Benefits Plan dated
June 5, 1997.
10-N Letter agreements dated February 6, 1997 relating to
supplemental pension benefits for J.R. Leva.
10-O Letter agreement dated August 7,1997 relating to terms
of employment and pension benefits for I.H. Jolles.
10-P Letter agreement dated August 7,1997 relating to
supplemental pension benefits for J.G. Graham.
10-Q GPU, Inc. Restricted Stock Plan for Outside Directors
dated September 4, 1997.
10-R Retirement Plan for Outside Directors of GPU, Inc.
dated June 5, 1997.
10-S Deferred Remuneration Plan for Outside Directors of
GPU, Inc. dated October 8, 1997.
73
10-T Amended and Restated Nuclear Material Lease Agreement,
dated November 17, 1995, between Oyster Creek Fuel
Corp. and JCP&L - Incorporated by reference to Exhibit
B-2(a)(i), Certificate Pursuant to Rule 24, SEC File
No. 70-7862.
10-U Amended and Restated Nuclear Material Lease Agreement,
dated November 17, 1995, between TMI-1 Fuel Corp. and
JCP&L - Incorporated by reference to Exhibit
B-2(a)(ii), Certificate Pursuant to Rule 24, SEC File
No. 70-7862.
10-V Letter Agreement, dated November 17, 1995, from JCP&L
relating to Oyster Creek Nuclear Material Lease
Agreement - Incorporated by reference to Exhibit
B-2(b)(i), Certificate Pursuant to Rule 24, SEC File
No. 70-7862.
10-W Letter Agreement, dated November 17, 1995, from JCP&L
relating to JCP&L TMI-1 Nuclear Material Lease
Agreement - Incorporated by reference to Exhibit
B-2(b)(ii), Certificate Pursuant to Rule 24, SEC File
No. 70-7862.
10-X Amended and Restated Trust Agreement, dated November
17, 1995, between United States Trust Company of New
York, as Owner Trustee, Lord Fuel Corp., as Trustor
and Beneficiary, and JCP&L, Met-Ed and Penelec -
Incorporated by reference to Exhibit B-3(i),
Certificate Pursuant to Rule 24, SEC File No. 70-7862.
10-Y Amended and Restated Nuclear Material Lease Agreement,
dated November 17, 1995, between TMI-1 Fuel Corp. and
Met-Ed - Incorporated by reference to Exhibit
B-2(a)(iii), Certificate Pursuant to Rule 24, SEC File
No. 70-7862.
10-Z Letter Agreement, dated November 17, 1995, from Met-Ed
relating to Met-Ed TMI-1 Nuclear Material Lease
Agreement - Incorporated by reference to Exhibit
B-2(b)(i), Certificate Pursuant to Rule 24, SEC File
No. 70-7862.
10-AA Amended and Restated Nuclear Material Lease Agreement,
dated November 17, 1995, between TMI-1 Fuel Corp. and
Penelec - Incorporated by reference to Exhibit
B-2(a)(iv), Certificate Pursuant to Rule 24, SEC File
No. 70-7862.
10-BB Letter Agreement, dated November 17, 1995, from
Penelec relating to Penelec Nuclear Material Lease
Agreement - Incorporated by reference to Exhibit
B-2(b)(i), Certificate Pursuant to Rule 24, SEC File
No. 70-7862.
10-CC GPU, Inc. 1990 Stock Plan for Employees of GPU, Inc.
and Subsidiaries as amended and
restated to reflect amendments through June 5, 1997.
74
12 Statements Showing Computation of Ratio of Earnings to
Combined Fixed Charges and Preferred Stock Dividends.
A - GPU, Inc. and Subsidiary Companies
B - JCP&L
C - Met-Ed
D - Penelec
21 Subsidiaries of the Registrant
A - JCP&L
B - Met-Ed
C - Penelec
23 Consent of Independent Accountants
A - GPU, Inc.
B - JCP&L
C - Met-Ed
D - Penelec
27 Financial Data Schedule
A - GPU, Inc. and Subsidiary Companies
B - JCP&L
C - Met-Ed
D - Penelec
(b) Reports on Form 8-K:
A - GPU, Inc.
Dated December 12, 1997, under Item 5 (Other Events).
Dated January 20, 1998, under Item 5 (Other Events).
Dated February 6, 1998, under Item 5 (Other Events).
Dated February 11, 1998, under Item 5 (Other Events).
Dated February 17, 1998, under Item 5 (Other Events).
75
GPU, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GPU, INC.
Dated: March 12, 1998 BY: /s/F. D. Hafer
--------------
F. D. Hafer, Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature and Title Date
------------------- ----
/s/ F. D. Hafer March 12, 1998
- ----------------------------------------------
F. D. Hafer, Chairman (Chief Executive
Officer) and President
/s/ J. G. Graham March 12, 1998
- ----------------------------------------------
J. G. Graham, Senior Vice President
(Chief Financial Officer)
/s/ F. A. Donofrio March 12, 1998
- ----------------------------------------------
F. A. Donofrio, Vice President and
Comptroller (Chief Accounting Officer)
/s/ T. H. Black March 12, 1998
- ----------------------------------------------
T. H. Black, Director
/s/ T. B. Hagen March 12, 1998
- ----------------------------------------------
T. B. Hagen, Director
/s/ H. F. Henderson, Jr. March 12, 1998
- ----------------------------------------------
H. F. Henderson, Jr., Director
/s/ J. R. Leva March 12, 1998
- ----------------------------------------------
J. R. Leva, Director
/s/ J. M. Pietruski March 12, 1998
- ----------------------------------------------
J. M. Pietruski, Director
/s/ C. A. Rein March 12, 1998
- ----------------------------------------------
C. A. Rein, Director
/s/ P. R. Roedel March 12, 1998
- ----------------------------------------------
P. R. Roedel, Director
/s/ B. S. Townsend March 12, 1998
- ----------------------------------------------
B. S. Townsend, Director
/s/ C. A. H. Trost March 12, 1998
- ----------------------------------------------
C. A. H. Trost, Director
/s/ P. K. Woolf March 12, 1998
- ----------------------------------------------
P. K. Woolf, Director
76
JERSEY CENTRAL POWER & LIGHT COMPANY
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized. The Signature of the
undersigned company shall be deemed to relate only to matters having reference
to such company and any subsidiaries thereof.
JERSEY CENTRAL POWER & LIGHT COMPANY
Dated: March 12, 1998 BY: /s/ D. Baldassari
-----------------
D. Baldassari, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature and Title Date
------------------- ----
/s/ F. D. Hafer March 12, 1998
- ----------------------------------------------
F. D. Hafer, Chairman
(Principal Executive Officer) and Director
/s/ D. Baldassari March 12, 1998
- ----------------------------------------------
D. Baldassari, President
(Principal Operating Officer) and Director
/s/ D. W. Myers March 12, 1998
- ----------------------------------------------
D. W. Myers, Vice President-Comptroller
(Principal Accounting Officer) and Director
/s/ C. B. Snyder March 12, 1998
- ----------------------------------------------
C. B. Snyder, Director
/s/ G. E. Persson March 12, 1998
- ----------------------------------------------
G. E. Persson, Director
/s/ S. C. Van Ness March 12, 1998
- ----------------------------------------------
S. C. Van Ness, Director
/s/ S. B. Wiley March 12, 1998
- ----------------------------------------------
S. B. Wiley, Director
77
METROPOLITAN EDISON COMPANY
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized. The Signature of the
undersigned company shall be deemed to relate only to matters having reference
to such company and any subsidiaries thereof.
METROPOLITAN EDISON COMPANY
Dated: March 12, 1998 BY: /s/ D. Baldassari
-----------------
D. Baldassari, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature and Title Date
------------------- ----
/s/ F. D. Hafer March 12, 1998
- ----------------------------------------------
F. D. Hafer, Chairman (Principal Executive
Officer) and Director
/s/ D. Baldassari March 12, 1998
- ----------------------------------------------
D. Baldassari, President (Principal
Operating Officer) and Director
/s/ D. W. Myers March 12, 1998
- ----------------------------------------------
D. W. Myers, Vice President-Comptroller
(Principal Accounting Officer) and Director
/s/ C. B. Snyder March 12, 1998
- ----------------------------------------------
C. B. Snyder, Director
78
PENNSYLVANIA ELECTRIC COMPANY
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized. The Signature of the
undersigned company shall be deemed to relate only to matters having reference
to such company and any subsidiaries thereof.
PENNSYLVANIA ELECTRIC COMPANY
Dated: March 12, 1998 BY: /s/ D. Baldassari
-----------------
D. Baldassari, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature and Title Date
------------------- ----
/s/ F. D. Hafer March 12, 1998
- ----------------------------------------------
F. D. Hafer, Chairman (Principal Executive
Officer) and Director
/s/ D. Baldassari March 12, 1998
- ----------------------------------------------
D. Baldassari, President (Principal
Operating Officer) and Director
/s/ D. W. Myers March 12, 1998
- ----------------------------------------------
D. W. Myers, Vice President-Comptroller
(Principal Accounting Officer) and Director
/s/ C. B. Snyder March 12, 1998
- ----------------------------------------------
C. B. Snyder, Director
79
INDEX TO SUPPLEMENTARY DATA, FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
GPU, INC. Page
Supplementary Data
GPU Energy Companies' Statistics F-3
Selected Financial Data F-4
Quarterly Financial Data F-5
Combined Management's Discussion and Analysis of
Financial Condition and Results of Operations F-6
Financial Statements
Report of Independent Accountants F-39
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-40
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995 F-42
Consolidated Statements of Comprehensive Income for the
Years Ended December 31, 1997, 1996 and 1995 F-43
Consolidated Statements of Retained Earnings for the
Years Ended December 31, 1997, 1996 and 1995 F-43
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1997, 1996 and 1995 F-44
Combined Notes to Consolidated Financial Statements F-45
Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts for the
Years 1995-1997 F-111
JERSEY CENTRAL POWER & LIGHT COMPANY
Supplementary Data
Company Statistics F-112
Selected Financial Data F-113
Quarterly Financial Data F-114
Financial Statements
Report of Independent Accountants F-115
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-116
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995 F-118
Consolidated Statements of Retained Earnings for the
Years Ended December 31, 1997, 1996 and 1995 F-119
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1997, 1996 and 1995 F-120
Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts for the
Years 1995-1997 F-121
F-1
INDEX TO SUPPLEMENTARY DATA, FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
METROPOLITAN EDISON COMPANY
Supplementary Data
Company Statistics F-122
Selected Financial Data F-123
Quarterly Financial Data F-124
Financial Statements
Report of Independent Accountants F-125
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-126
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995 F-128
Consolidated Statements of Comprehensive Income for the
Years Ended December 31, 1997, 1996 and 1995 F-129
Consolidated Statements of Retained Earnings for the
Years Ended December 31, 1997, 1996 and 1995 F-129
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1997, 1996 and 1995 F-130
Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts for the
Years 1995-1997 F-131
PENNSYLVANIA ELECTRIC COMPANY
Supplementary Data
Company Statistics F-132
Selected Financial Data F-133
Quarterly Financial Data F-134
Financial Statements
Report of Independent Accountants F-135
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-136
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995 F-138
Consolidated Statements of Comprehensive Income for the
Years Ended December 31, 1997, 1996 and 1995 F-139
Consolidated Statements of Retained Earnings for the
Years Ended December 31, 1997, 1996 and 1995 F-139
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1997, 1996 and 1995 F-140
Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts for the
Years 1995-1997 F-141
Schedules other than those listed above have been omitted since they are not
required, are inapplicable or the required information is presented in the
Financial Statements or Notes thereto.
F-2
GPU, Inc. and Subsidiary Companies
GPU ENERGY COMPANIES' STATISTICS
For The Years Ended December 31, 1997 1996 1995 1994 1993 1992
- -------------------------------- ---- ---- ---- ---- ---- ----
Capacity at System Peak (in MW):
Company owned 6,740 6,680 6,637 6,655 6,735 6,718
Contracted 3,930 3,536 3,604 3,416 3,236 3,360
----- ----- ----- ----- ----- -----
Total capacity (a) 10,670 10,216 10,241 10,071 9,971 10,078
====== ====== ====== ====== ===== ======
Hourly Peak Load (in MW):
Summer peak 9,555 8,497 9,101 8,521 8,533 8,067
Winter peak 7,736 7,756 7,861 7,683 7,167 7,173
Reserve at system peak (%) 11.7 20.2 12.5 18.2 16.9 24.9
Load factor (%) (b) 57.6 64.2 57.5 61.7 60.9 62.3
Sources of Energy (in thousands of MWH):
Coal 19,390 18,133 17,500 16,548 16,969 18,123
Nuclear 10,992 11,439 11,582 10,216 10,614 11,449
Gas, hydro & oil 800 812 1,019 1,071 575 409
--- --- ----- ----- --- ---
Net generation 31,182 30,384 30,101 27,835 28,158 29,981
Utility purchases and interchange 9,004 8,795 10,297 10,326 11,984 11,931
Nonutility purchases 11,119 11,046 10,712 8,810 8,383 8,070
------ ------ ------ ----- ----- -----
Total sources of energy 51,305 50,225 51,110 46,971 48,525 49,982
Company use, line loss, etc (5,437) (5,777) (5,357) (4,313) (5,166) (4,843)
------ ------ ------ ------ ------ ------
Total electric energy sales 45,868 44,448 45,753 42,658 43,359 45,139
====== ====== ====== ====== ====== ======
Fuel Expense (in millions):
Coal $ 268 $ 263 $ 251 $ 260 $ 266 $ 266
Nuclear 63 70 74 65 66 69
Gas & oil 40 38 38 39 32 21
-- -- -- -- -- --
Total $ 371 $ 371 $ 363 $ 364 $ 364 $ 356
======== ======== ======== ======== ======== ========
Power Purchased and Interchanged (in millions):
Utility purchases and interchange purchases $ 294 $ 267 $ 351 $ 367 $ 406 $ 430
Nonutility purchases, net of deferred costs 734 730 671 528 491 471
Amortization of nonutility buyout costs 19 9 -- -- -- --
-- -- -- -- -- --
Total $ 1,047 $ 1,006 $ 1,022 $ 895 $ 897 $ 901
======== ======== ======== ======== ======== ========
Electric Energy Sales (in thousands of MWH):
Residential 15,091 15,298 14,802 14,788 14,498 13,725
Commercial 14,281 14,017 13,544 13,301 12,919 12,333
Industrial 12,469 12,093 11,982 11,983 11,699 11,901
Other 1,110 1,105 1,143 1,245 1,221 1,303
----- ----- ----- ----- ----- -----
Sales to customers 42,951 42,513 41,471 41,317 40,337 39,262
Sales to other utilities 2,917 1,935 4,282 1,341 3,022 5,877
----- ----- ----- ----- ----- -----
Total 45,868 44,448 45,753 42,658 43,359 45,139
====== ====== ====== ====== ====== ======
Operating Revenues (in millions):
Residential $ 1,617 $ 1,599 $ 1,542 $ 1,503 $ 1,465 $ 1,339
Commercial 1,372 1,324 1,258 1,215 1,169 1,079
Industrial 833 803 780 774 755 752
Other 75 71 73 78 89 89
-- -- -- -- -- --
Sales to customers 3,897 3,797 3,653 3,570 3,478 3,259
Sales to other utilities 77 57 101 24 67 127
-- -- --- -- -- ---
Total electric energy sales 3,974 3,854 3,754 3,594 3,545 3,386
Other revenues 70 64 51 56 51 48
-- -- -- -- -- --
Total $ 4,044 $ 3,918 $ 3,805 $ 3,650 $ 3,596 $ 3,434
======== ======== ======== ======== ======== ========
Price per KWH (in cents):
Residential 10.64 10.51 10.35 10.18 10.07 9.73
Commercial 9.54 9.47 9.25 9.12 9.04 8.72
Industrial 6.61 6.65 6.51 6.46 6.47 6.32
Total sales to customers 9.00 8.96 8.77 8.64 8.61 8.28
Total electric energy sales 8.60 8.70 8.17 8.43 8.17 7.49
Kilowatt-hour Sales per Residential Customer 8,528 8,741 8,539 8,646 8,575 8,215
Customers at Year-End (in thousands) 2,021 1,997 1,976 1,949 1,925 1,901
<FN>
(a) Summer ratings at December 31, 1997 of owned and contracted capacity were 6,751 MW and 4,113 MW, respectively.
(b) The ratio of the average hourly load in kilowatts supplied during the year to the peak load occurring during the year.
</FN>
F-3
GPU, Inc. and Subsidiary Companies
SELECTED FINANCIAL DATA (CONSOLIDATED)
For The Years Ended December 31, 1997 (1) 1996 (2) 1995 (3) 1994 (4) 1993 1992
Common Stock Data
Basic earnings per common share $ 2.78 $ 2.48 $ 3.79 $ 1.42 $ 2.65 $ 2.27
Diluted earnings per common share $ 2.77 $ 2.47 $ 3.79 $ 1.42 $ 2.65 $ 2.27
Cash dividends paid per share $ 1.98 $ 1.92 $ 1.86 $ 1.77 $ 1.65 $ 1.575
Book value per share $ 25.59 $ 25.21 $ 24.66 $ 22.31 $ 22.69 $ 21.46
Closing market price per share $ 42 1/8 $ 33 5/8 $ 34 $ 26 1/4 $ 30 7/8 $ 27 5/8
Common shares outstanding (In Thousands):
Basic average 120,722 120,513 116,063 115,077 111,732 110,817
Diluted average 121,002 120,751 116,179 115,110 111,749 110,822
At year-end 121,081 120,870 120,619 115,315 115,041 110,857
Market price to book value at year-end 165% 133% 138% 118% 136% 129%
Price/earnings ratio 15.2 13.6 9.0 18.5 11.7 12.2
Return on average common equity 10.7% 9.8% 16.0% 6.3% 11.9% 10.7%
Financial Data (In Thousands)
Operating revenues $ 4,143,379 $ 3,970,711 $ 3,822,459 $ 3,654,211 $ 3,599,371 $ 3,444,828
Other operation and maintenance expense 993,739 1,114,854 965,054 1,085,499 914,053 861,611
Net income 335,101 298,352 440,135 163,688 295,673 251,636
Net utility plant in service 7,100,512 5,942,354 5,862,390 5,730,962 5,512,057 5,244,039
Total assets 12,924,708 10,941,219 9,849,516 9,209,777 8,829,255 7,730,738
Long-term debt 4,325,972 3,177,016 2,567,898 2,345,417 2,320,384 2,221,617
Long-term obligations under
capital leases 3,308 6,623 11,696 16,982 23,320 24,094
Subsidiary-obligated mandatorily
redeemable preferred securities 330,000 330,000 330,000 205,000 -- --
Cumulative preferred stock with
mandatory redemption 91,500 114,000 134,000 150,000 150,000 150,000
Capital Expenditures:
GPU Energy companies 356,416 403,880 461,860 585,916 495,517 460,073
GPUI Group 1,912,221 573,587 164,831 73,835 16,426 747
Employees 9,346 9,345 10,286 10,555 11,963 11,969
<FN>
(1) Results for 1997 reflect a charge to other income of $109.3 million, or
$0.90 per share, for a windfall profits tax imposed on privatized
utilities, including Midlands, by the Government of the United Kingdom.
(2) Results for 1996 reflect charges to other operation and maintenance expense
of $74.5 million (after-tax), or $0.62 per share, for costs related to
voluntary enhanced retirement programs.
(3) Results for 1995 reflect the reversal of $104.9 million (after-tax), or
$0.91 per share, of certain future TMI-2 retirement costs written off in
1994. The reversal of this write-off resulted from a 1995 Pennsylvania
Supreme Court decision that overturned a 1994 lower court order, and
restored a 1993 PaPUC order allowing for the recovery of such costs.
Partially offsetting this increase was a charge to income of $8.4 million
(after-tax), or $0.07 per share, of TMI-2 monitored storage costs deemed
not probable of recovery through ratemaking.
(4) Results for 1994 reflect a net decrease in earnings of $164.7 million
(after-tax), or $1.43 per share, due to a write-off of certain future TMI-2
retirement costs ($104.9 million, or $0.91 per share); charges for costs
related to early retirement programs ($76.1 million, or $0.66 per share); a
write-off of Penelec's postretirement benefit costs believed not probable
of recovery in rates ($10.6 million, or $0.09 per share); and net interest
income from refunds of previously paid federal income taxes related to the
tax retirement of TMI-2 ($26.9 million, or $0.23 per share).
</FN>
F-4
GPU, Inc. and Subsidiary Companies
QUARTERLY FINANCIAL DATA (UNAUDITED)
First Quarter Second Quarter
------------- --------------
In Thousands Except
Per Share Data 1997 1996 1997 1996
Operating revenues $1,051,012 $1,035,467 $ 942,783 $ 922,655
Operating income 196,258 163,257 132,809 137,478
Net income 155,038 108,253 70,249 73,625
Basic earnings per share 1.29 .90 .58 .61
Diluted earnings per share 1.28 .90 .58 .61
Third Quarter Fourth Quarter
------------- --------------
In Thousands Except
Per Share Data 1997* 1996** 1997 1996
Operating revenues $1,117,140 $1,072,718 $1,032,444 $ 939,871
Operating income 177,286 96,443 140,765 121,088
Net income 16,904 35,821 92,910 80,653
Basic earnings per share .14 .30 .77 .67
Diluted earnings per share .14 .29 .77 .67
* Results for the third quarter of 1997 reflect a charge to Other income of
$109.3 million, or $0.90 per share, for a windfall profits tax imposed on
privatized utilities, including Midlands, by the Government of the United
Kingdom.
** Results for the third quarter of 1996 reflect charges to Other
operation and maintenance expense of $74.5 million (after-tax), or $0.62
per share, for costs related to voluntary enhanced retirement programs.
F-5
COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GPU, Inc. owns all the outstanding common stock of three domestic electric
utilities -- Jersey Central Power & Light Company (JCP&L), 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; 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."
GPU RESULTS OF OPERATIONS
-------------------------
GPU's 1997 earnings were $335.1 million, compared to 1996 earnings of
$298.4 million. Earnings per share on a diluted basis were $2.77 in 1997,
compared to $2.47 per share in 1996. GPU's return on average common equity was
10.7% in 1997 compared to 9.8% in 1996. Both periods included a nonrecurring
charge.
In 1997, a nonrecurring charge of $109.3 million, or $0.90 per share, was
taken for a windfall profits tax assessed by the Government of the United
Kingdom on privatized utilities, including Midlands Electricity plc (Midlands),
in which the GPUI Group has a 50% stake. In 1996, a nonrecurring charge of $74.5
million, or $0.62 per share, was taken for costs related to voluntary enhanced
retirement programs.
Excluding the impact of these nonrecurring items, earnings for 1997 would
have been $444.4 million, compared to $372.9 million in 1996, and earnings per
share on a diluted basis for 1997 would have been $3.67, compared to $3.09 in
1996. Return on average common equity for 1997 and 1996 would have been 14.0%
and 12.1%, respectively. The 1997 earnings increase, on this basis, was mainly
due to increased earnings from the GPUI Group (including the result of GPU's
policy of accruing U.S. income tax on its worldwide operations, which reduced
GPU's federal income tax liability); reduced operation and maintenance expenses;
increased kilowatt-hour (KWH) sales to domestic utility customers; and a step
increase in unbilled revenue recorded by Met-Ed and Penelec as a result of
including their energy cost rates (ECRs) in base rates and the cessation of
deferred energy accounting, both effective January 1, 1997. These increases were
partially offset by higher depreciation and financing expenses, increased
amortizations due to a rate cap on JCP&L's earnings and the absence in 1997 of
gains associated with the 1996 reacquisition of preferred stock.
F-6
GPU RESULTS OF OPERATIONS (continued)
- -------------------------
GPU has reported to the financial community that in its view, GPU's 1997
earnings, on a "normalized" basis, to be $3.27 per share. This level of earnings
per share reflects adjustments to the reported $2.77 earnings per share for the
$0.90 per share windfall profits tax charge and the negative weather effect on
sales of $0.05 per share, offset in part by $0.14 per share of added income due
to the step increase in unbilled revenue as a result of the elimination in
Pennsylvania of the ECR and the U.S. tax benefit which reduced GPU's federal tax
liability by $0.31 per share.
GPU's 1996 earnings were $298.4 million, compared to 1995 earnings of
$440.1 million. Earnings per share on a diluted basis were $2.47 in 1996,
compared to $3.79 per share in 1995. If nonrecurring items are excluded,
earnings for 1996 would have been $372.9 million, or $3.09 per share, compared
to earnings of $343.6 million, or $2.95 per share, for 1995. The earnings
increase, on this basis, was due primarily to higher GPUI Group income, mainly
resulting from the earnings inclusion of Midlands, in which a 50% interest was
acquired in May 1996. Also affecting the 1996 earnings were lower reserve
capacity expense and gains associated with the reacquisition of preferred stock,
which were primarily offset by higher depreciation and operation and maintenance
expenses.
The 1995 nonrecurring items consisted of the reversal of a $104.9 million
after-tax expense, or $0.91 per share, for certain future Three Mile Island Unit
2 (TMI-2) retirement costs written off by Met-Ed and Penelec in 1994. This
reversal of expense resulted from a 1995 Pennsylvania Supreme Court decision
restoring a 1993 Pennsylvania Public Utility Commission (PaPUC) order allowing
Met-Ed to recover such costs from customers. Partially offsetting the effect of
this was a charge to income of $8.4 million after-tax, or $0.07 per share, for
TMI-2 monitored storage costs deemed not probable of recovery through
ratemaking.
OPERATING REVENUES:
- ------------------
Operating revenues increased 4.3% to $4.1 billion in 1997, after
increasing 3.9% to $4.0 billion in 1996. The components of these changes are
as follows:
(in millions)
1997 1996
---- ----
GPU Energy companies:
KWH revenues $ 91.1 $ 60.2
Energy-related revenues 23.3 32.5
Other revenues 11.3 20.7
---- ----
Total GPU Energy companies 125.7 113.4
GPUI Group 45.7 34.8
GPU AR 1.3 -
---- ----
Total increase in revenues $172.7 $148.2
====== ======
F-7
GPU RESULTS OF OPERATIONS (continued)
GPU Energy Companies
Kilowatt-hour revenues
1997
The increase in KWH revenues was due primarily to the step increase in
unbilled revenue recorded by Met-Ed and Penelec from inclusion of their ECRs in
base rates; higher usage by industrial customers; and an increase in the number
of commercial and residential customers. These increases were partially offset
by lower weather-related sales to residential customers. KWH revenues now
include Met-Ed and Penelec's energy and tax revenues, consistent with the
inclusion of their ECRs and State Tax Adjustment Surcharges (STAS) in base
rates, effective January 1, 1997 (see COMPETITIVE ENVIRONMENT). Prior years'
energy and tax revenues for Met-Ed and Penelec have been reclassified for
comparative purposes.
1997 KWH Customer Sales by Service Class
Residential 35%
Commercial 33%
Industrial/Other 32%
1996
The increase was due primarily to increased new commercial and residential
customer sales, partially offset by lower weather-related sales to residential
customers.
Energy-related revenues (JCP&L only)
1997 and 1996
Generally, changes in energy-related revenues do not affect earnings as
they reflect corresponding changes in JCP&L's levelized energy adjustment clause
(LEAC) billed to customers and expensed. The 1997 increase was due primarily to
higher energy cost rates and increased industrial and commercial customer sales.
The 1996 increase was due primarily to higher energy cost rates and increased
commercial and residential customer sales, partially offset by lower sales to
other utilities.
Other revenues
1997 and 1996
Generally, changes in other revenues do not affect earnings as they are
offset by corresponding changes in expense. However, increased transmission
revenues contributed to earnings in 1996.
GPUI Group
1997
The increase in revenues was due mainly to the inclusion of revenues from
PowerNet Victoria (PowerNet), which was acquired by GPU Electric in November
1997, and the effect of consolidating GPU Electric's investment in Lake Cogen,
Ltd. (Lake), beginning in June 1997.
F-8
GPU RESULTS OF OPERATIONS (continued)
1996
The increase in revenues was due primarily to the inclusion of a full year
of revenues from Empresa Guaracachi S.A., which GPU Power acquired a 50%
interest in July 1995, and increased management fees at GPU International.
GPU Advanced Resources
1997
GPU AR, which was formed in 1997, derived its 1997 revenues from energy
sales to customers who chose it as their energy supplier as part of the retail
access pilot programs in Pennsylvania (see COMPETITIVE ENVIRONMENT). Some of GPU
AR's customers are located in the GPU Energy companies' service territories.
OPERATING EXPENSES:
Power purchased and interchanged (PP&I)
1997 and 1996
Changes in the energy component of PP&I expense do not significantly
affect JCP&L's earnings since these cost variances are passed through the LEAC.
However, beginning on January 1, 1997, such cost variances for Met-Ed and
Penelec are not subject to deferred accounting and have a current impact on
earnings, except for incremental nonutility generation (NUG) costs, which are
included in Regulatory assets on the Consolidated Balance Sheets (see
COMPETITIVE ENVIRONMENT). Lower reserve capacity expense (which is a component
of PP&I) contributed to earnings for 1997 and 1996.
Fuel and Deferral of energy and capacity costs, net
1997 and 1996
For JCP&L, changes in fuel and deferral of energy and capacity costs, net
do not affect earnings as they are offset by corresponding changes in energy
revenues. Effective January 1, 1997, Met-Ed and Penelec ceased deferred energy
accounting as their ECRs were combined with base rates; therefore, cost
variances have a current impact on earnings (see COMPETITIVE ENVIRONMENT). For
Met-Ed and Penelec, the changes in fuel and energy costs did not have a
significant impact on earnings for 1997. Earnings for 1996 benefited from a $6.3
million pre-tax performance award earned by JCP&L for the efficient operation of
its nuclear generating stations.
Other operation and maintenance (O&M)
1997
The decrease in other O&M expenses was due primarily to the absence of a
$122.7 million pre-tax charge incurred in 1996, related to voluntary enhanced
retirement programs. Also contributing to the decrease were lower production
expenses due to the 1996 retirement of JCP&L's Werner and Gilbert generating
stations, decreased emergency and storm-related activity, and reductions from
work process improvements and a decrease in the number of employees. Partially
offsetting these were increased expenses related to the upgrade and modification
of certain GPU computer systems.
F-9
GPU RESULTS OF OPERATIONS (continued)
1996
The increase in other O&M was due primarily to the $122.7 million pre-tax
charge related to the 1996 voluntary enhanced retirement programs. Partially
offsetting the effect of this charge was a 1995 write-off of $14.7 million
pre-tax, for TMI-2 monitored storage costs deemed not probable of recovery
through ratemaking. Greater storm damage and emergency repairs in 1996 also
contributed to the increase.
Depreciation and amortization
1997 and 1996
The increases in depreciation and amortization expense were due primarily
to additions to plant in service and higher depreciation rates.
Taxes, other than income taxes
1997 and 1996
For JCP&L, changes in taxes other than income taxes do not significantly
affect earnings as they are substantially recovered in revenues. However,
effective January 1, 1997, Met-Ed and Penelec's STAS were combined with base
rates and are no longer subject to annual adjustment (see COMPETITIVE
ENVIRONMENT). This did not have a significant impact on 1997 earnings.
OTHER INCOME AND DEDUCTIONS:
Equity in undistributed earnings/(losses) of affiliates (GPUI Group only)
1997
The decrease in equity in undistributed earnings/(losses) of affiliates
was due to the windfall profits tax charge of $109.3 million imposed on
privatized utilities, including Midlands, by the Government of the United
Kingdom. Partially offsetting this was the inclusion in results of a full year
of Midlands' 1997 income, which GPU Electric acquired a 50% interest in May
1996.
1996
The increase in equity in undistributed earnings/(losses) of affiliates
was due primarily to the acquisition of a 50% interest in Midlands.
Other income, net
1996
The decrease in other income, net was due primarily to the reversal in
1995, of $183.9 million pre-tax, of certain future TMI-2 retirement costs
written off in 1994 by Met-Ed and Penelec. This reversal of expense resulted
from the 1995 Pennsylvania Supreme Court decision restoring a 1993 PaPUC order
allowing Met-Ed to recover such costs from customers.
Income taxes
1997
The decrease in income taxes (on other income and deductions) was
primarily related to the GPUI Group. GPU's federal income tax liability was
reduced as a result of its policy of accruing U.S. income tax on its worldwide
operations.
F-10
GPU RESULTS OF OPERATIONS (continued)
INTEREST CHARGES AND PREFERRED DIVIDENDS:
Interest on long-term debt
1997 and 1996
The increases in interest on long-term debt were due primarily to debt
associated with the Midlands and PowerNet acquisitions.
Dividends on subsidiary-obligated mandatorily redeemable preferred securities
1996
The increase was due to the issuance of $125 million stated value of
mandatorily redeemable preferred securities, by a special-purpose finance
subsidiary of JCP&L, in May 1995.
Preferred stock dividends of subsidiaries, net of gain on reacquisition
in 1996
1997 and 1996
In both 1997 and 1996, JCP&L redeemed $20 million stated value of
cumulative preferred stock. In 1996, Met-Ed and Penelec reacquired $11.4 million
stated value and $20 million stated value, respectively, of their cumulative
preferred stock, through cash tender offers, resulting in an aggregate gain of
$9.3 million.
JCP&L RESULTS OF OPERATIONS
JCP&L's 1997 earnings were $200.6 million, compared to 1996 earnings of
$143.2 million. Contributing to this earnings increase were higher
weather-related sales, higher new customer sales and lower other operation and
maintenance expenses due in part to a $39.4 million after-tax charge in 1996 for
voluntary enhanced retirement programs. JCP&L's return on average common equity
was 13.1% in 1997, compared to 9.5% in 1996.
Earnings in 1996 were $143.2 million, compared to 1995 earnings of $184.6
million. This decrease in earnings was due primarily to the charge in 1996 for
voluntary enhanced retirement programs (including JCP&L's share of costs
allocated from Genco, GPUN and GPUS), which were accepted by 341 bargaining and
non-bargaining employees of JCP&L, or about 11.5% of its workforce. Excluding
this nonrecurring item, 1996 earnings would have been $182.6 million, and return
on average common equity would have been 12%.
OPERATING REVENUES:
Total revenues increased 1.8% to $2.09 billion in 1997, after increasing
1.1% to $2.06 billion in 1996. The components of these changes are as
follows:
(in millions)
1997 1996
---- ----
KWH Revenues $ 13.0 $ (7.2)
Energy-related revenues 22.1 22.1
Other revenues 1.0 7.1
--- ---
Increase in revenues $ 36.1 $ 22.0
====== ======
F-11
JCP&L RESULTS OF OPERATIONS (continued)
Kilowatt-hour revenues
1997
The increase in KWH revenues was due to higher weather-related sales, an
increase in new residential and commercial customer sales, partially offset by
decreased usage.
1997 KWH Customer Sales by Service Class
Residential 41%
Commercial 39%
Industrial/Other 20%
1996
The decrease in KWH revenues was due to lower weather-related sales to
residential customers, partially offset by new residential and commercial
customer sales.
Energy-related revenues
1997 and 1996
Changes in energy-related revenues do not affect earnings as they reflect
corresponding changes in the LEAC billed to customers and expensed. The 1997
increase was due primarily to higher energy cost rates and increased commercial
and industrial customer sales. The 1996 increase was due primarily to higher
energy cost rates and increased commercial and residential customer sales,
partially offset by lower sales to other utilities.
Other revenues
1997 and 1996
Generally, changes in other revenues do not affect earnings as they are
offset by corresponding changes in expense.
OPERATING EXPENSES:
Power purchased and interchanged
1997 and 1996
Changes in the energy component of PP&I expense do not significantly
affect earnings since these cost variances are passed through the LEAC. However,
lower reserve capacity expense resulting primarily from reduced purchases from
Pennsylvania Power & Light Company contributed to the 1997 and 1996 earnings.
Fuel and Deferral of energy and capacity costs, net
1997 and 1996
Changes in fuel and deferral of energy and capacity costs, net do not
affect earnings as they are offset by corresponding changes in energy revenues.
However, earnings for 1996 benefited from a $6.3 million pre-tax performance
award earned by JCP&L for the efficient operation of its nuclear generating
stations.
F-12
JCP&L RESULTS OF OPERATIONS (continued)
Other operation and maintenance
1997
The decrease in other O&M expenses was due in part to the absence of a
$62.9 million pre-tax charge incurred in 1996, related to the voluntary enhanced
retirement programs. Also contributing to the decrease were lower production
expenses due to the 1996 retirement of the Werner and Gilbert generating
stations, a decrease in transmission charges from associated companies and a
decrease in storm damage and emergency repairs.
1996
The increase in other O&M expenses was due in part to the $62.9 million
pre-tax charge related to the voluntary enhanced retirement programs. Payments
associated with the use of others' transmission facilities (primarily associated
companies) and greater storm damage and emergency repairs also contributed to
the increase.
Depreciation and amortization
1997
The increase in depreciation and amortization expense was due primarily to
additions to plant in service, higher depreciation rates and higher regulatory
asset amortizations.
1996
The increase in depreciation and amortization expense was due primarily to
additions to plant in service, partially offset by lower depreciation rates; and
higher regulatory asset amortizations.
Taxes, other than income taxes
1997 and 1996
Changes in taxes other than income taxes do not significantly affect
earnings as they are substantially recovered in revenues.
OTHER INCOME AND DEDUCTIONS:
Other income, net
1997
The decrease in other income, net was due primarily to $11.0 million in
charges related to the termination of a NUG contract. Also contributing to the
decrease was a loss on the sale of fuel oil from the Gilbert generating station.
1996
The decrease in other income, net was due largely to the write-off of $3
million pre-tax of NUG buyout costs related to the Crown/Vista project (see Rate
Matters section) and the write-off of obsolete inventory in connection with the
retirements of the Werner and Gilbert generating stations.
F-13
JCP&L RESULTS OF OPERATIONS (continued)
INTEREST CHARGES AND DIVIDENDS ON PREFERRED SECURITIES:
Interest on long-term debt
1996
The decrease in interest on long-term debt was due to lower interest rates
on long-term debt.
Other interest
1997
The increase in other interest expense was due to higher short-term debt
levels.
Dividends on company-obligated mandatorily redeemable preferred securities
1996
The increase was due to the issuance of $125 million stated value of
mandatorily redeemable preferred securities, by a special-purpose finance
subsidiary, in May 1995.
Preferred stock dividends
1997 and 1996
In both 1997 and 1996, JCP&L redeemed $20 million stated value of
cumulative preferred stock.
MET-ED RESULTS OF OPERATIONS
Met-Ed's 1997 earnings were $93.0 million, compared to 1996 earnings of
$71.8 million. This increase in earnings was primarily due to a step increase in
unbilled revenue recorded by Met-Ed as a result of including its ECR in base
rates and the cessation of deferred energy accounting, both effective January 1,
1997. Also contributing to the increase was increased customer usage, higher new
customer sales and lower other operation and maintenance expenses due to a $15.4
million after-tax charge in 1996 for voluntary enhanced retirement programs.
Met-Ed's return on average common equity was 12.9% in 1997 compared to 10.3% in
1996.
Earnings in 1996 were $71.8 million, compared to 1995 earnings of $147.6
million. This decrease in earnings was due to the effect of 1996 and 1995
nonrecurring items. Excluding the nonrecurring items, earnings for 1996 would
have been $87.2 million and return on average common equity would have been
12.4%, compared to 1995 earnings of $80.5 million. The earnings increase, on
this basis, was primarily due to higher customer sales, lower reserve capacity
expense and gains associated with the reacquisition of preferred stock.
The 1996 charge for voluntary enhanced retirement programs (which includes
Met-Ed's share of costs allocated from Genco, GPUN and GPUS), reflects the
acceptance by 163 bargaining and non-bargaining employees of Met-Ed, or about
7.5% of its workforce.
F-14
MET-ED RESULTS OF OPERATIONS (continued)
The 1995 nonrecurring items consisted of the reversal of a $72.8 million
after-tax expense, for certain future TMI-2 retirement costs written off in
1994. This reversal of expense resulted from a 1995 Pennsylvania Supreme Court
decision restoring a 1993 PaPUC order allowing Met-Ed to recover such costs from
customers. Partially offsetting the effect of this was a charge to income of
$5.7 million after-tax for TMI-2 monitored storage costs deemed not probable of
recovery through ratemaking.
OPERATING REVENUES:
Total revenues increased 3.6% to $943.1 million in 1997, after increasing
6.5% to $910.4 million in 1996. The components of these changes are as
follows:
(in millions)
1997 1996
---- ----
KWH Revenues $ 27.5 $ 51.6
Other revenues 5.2 4.1
--- ---
Increase in revenues $ 32.7 $ 55.7
====== ======
Kilowatt-hour revenues
1997
The increase in KWH revenues was due to increased customer usage and an
increase in new commercial and residential customer sales, partially offset by
lower weather-related sales. Also contributing to the increase was the step
increase in unbilled revenue recorded by Met-Ed as a result of including its ECR
in base rates, amounting to $13 million. KWH revenues now includes energy and
tax revenues, consistent with the inclusion of the ECR and STAS in base rates,
effective January 1, 1997 (See COMPETITIVE ENVIRONMENT). Prior years' energy
and tax revenues have been reclassified for comparative purposes.
1997 KWH Customer Sales by Service Class
Residential 35%
Commercial 28%
Industrial/Other 37%
1996
The increase in KWH revenues was due to increased customer usage, higher
weather-related sales to residential customers and an increase in new commercial
and residential customer sales. Also contributing to the increase were higher
energy cost rates, offset by lower sales to other utilities.
Other revenues
1997 and 1996
Generally, changes in other revenues do not affect earnings as they are
offset by corresponding changes in expense.
F-15
MET-ED RESULTS OF OPERATIONS (continued)
OPERATING EXPENSES:
Fuel and Power purchased and interchanged
1997 and 1996
Effective January 1, 1997, Met-Ed ceased deferred energy accounting as its
ECR was combined with base rates. Thus, energy cost variances now have a current
impact on earnings, except for incremental NUG costs, which are included in
Regulatory assets on the Consolidated Balance Sheets (see COMPETITIVE
ENVIRONMENT). Changes in fuel and power purchased and interchanged did not have
a significant impact on earnings for 1997. However, lower reserve capacity
expense contributed to earnings for 1996.
Other operation and maintenance
1997
The decrease in other O&M expenses was due to the absence of a $26.2
million pre-tax charge incurred in 1996 related to the voluntary enhanced
retirement programs.
1996
The increase in other O&M expenses was due primarily to the $26.2 million
pre-tax charge related to the voluntary enhanced retirement programs and greater
storm damage and emergency repairs. Partially offsetting the effect of these was
a 1995 write-off of $10 million pre-tax, for TMI-2 monitored storage costs
deemed not probable of recovery through ratemaking.
Depreciation and amortization
1997
The increase in depreciation and amortization was due to additions to
plant in service and higher depreciation rates.
1996
The decrease in depreciation and amortization was due to adjustments in
1995 related to TMI-2 decommissioning. These adjustments more than offset 1996
increases in depreciation expense resulting from additions to plant in service
and higher depreciation rates.
Taxes, other than income taxes
1997 and 1996
Effective January 1, 1997, Met-Ed's STAS was combined with base rates and
is no longer subject to annual adjustment (see COMPETITIVE ENVIRONMENT). This
did not have a significant impact on 1997 earnings.
OTHER INCOME AND DEDUCTIONS:
Other income, net
1997
The increase in other income, net was due to an increase in interest
income.
F-16
MET-ED RESULTS OF OPERATIONS (continued)
1996
The decrease in other income, net was due primarily to the reversal in
1995, of $127.6 million pre-tax, of certain future TMI-2 retirement costs
written off in 1994. This reversal of expense resulted from a 1995 Pennsylvania
Supreme Court decision restoring a 1993 PaPUC order allowing Met-Ed to recover
such costs from customers.
INTEREST CHARGES AND DIVIDENDS ON PREFERRED SECURITIES:
Other interest
1997
The increase in other interest expense was due to higher short-term debt
levels.
Preferred stock dividends and Gain on preferred stock reacquisition
1997 and 1996
In 1996, Met-Ed reacquired $11.4 million stated value of its cumulative
preferred stock through cash tender offers, resulting in an aggregate gain of
$3.7 million.
PENELEC RESULTS OF OPERATIONS
Penelec's 1997 earnings were $94.4 million, compared to 1996 earnings of
$73.9 million. This increase in earnings was primarily due to a step increase in
unbilled revenue recorded by Penelec as a result of including its ECR in base
rates and the cessation of deferred energy accounting, both effective January 1,
1997. Also contributing to the increase was increased customer usage and lower
other operation and maintenance expenses due primarily to a $19.7 million
after-tax charge in 1996 for voluntary enhanced retirement programs. Penelec's
return on average common equity was 12.1% in 1997 compared to 10% in 1996.
Earnings for 1996 were $73.9 million, compared to 1995 earnings of $109.5
million. This decrease in earnings was due to the effect of 1996 and 1995
nonrecurring items. Excluding the nonrecurring items, earnings for 1996 would
have been $93.6 million and return on average common equity would have been
12.6%, compared to earnings of $80.1 million for 1995. The earnings increase, on
this basis, was due primarily to higher customer sales and gains associated with
the reacquisition of preferred stock, which were partially offset by higher
depreciation expense.
The 1996 charge for voluntary enhanced retirement programs (which includes
Penelec's share of costs allocated from Genco, GPUN and GPUS), reflects the
acceptance by 165 bargaining and non-bargaining employees of Penelec, or about
7.5% of its workforce.
The 1995 nonrecurring items consisted of the reversal of a $32.1 million
after-tax expense, for certain future TMI-2 retirement costs written off in
1994. This reversal of expense resulted from a 1995 Pennsylvania Supreme Court
decision restoring a 1993 PaPUC order allowing an affiliate (Met-Ed) to recover
such costs from customers. Partially offsetting the effect of this was a charge
to income of $2.7 million after-tax for TMI-2 monitored storage costs deemed not
probable of recovery through ratemaking.
F-17
PENELEC RESULTS OF OPERATIONS (continued)
OPERATING REVENUES:
Total revenues increased 3.3% to $1.1 billion in 1997, after increasing
3.9% to $1 billion in 1996. The components of these changes are as follows:
(in millions)
1997 1996
---- ----
KWH Revenues $ 37.7 $ 22.2
Other revenues (4.4) 16.1
---- ----
Increase in revenues $ 33.3 $ 38.3
====== ======
Kilowatt-hour revenues
1997
The increase in KWH revenues was due to increased industrial and
commercial customer usage offset by lower weather-related sales. Also
contributing to the increase was the step increase in unbilled revenue recorded
by Penelec as a result of including its ECR in base rates, amounting to $15
million. KWH revenues now includes energy and tax revenues, consistent with the
inclusion of the ECR and STAS in base rates, effective January 1, 1997 (See
COMPETITIVE ENVIRONMENT). Prior years' energy and tax revenues have been
reclassified for comparative purposes.
1997 KWH Customer Sales by Service Class
Residential 28%
Commercial 30%
Industrial 36%
Other 6%
1996
The increase in KWH revenues was due to increased new commercial and
residential customer sales, higher weather-related sales to residential
customers and higher energy cost rates, partially offset by lower sales to other
utilities.
Other revenues
1997 and 1996
Generally, changes in other revenues do not affect earnings as they are
offset by corresponding changes in expense. However, increased transmission
revenues contributed to earnings in 1996.
OPERATING EXPENSES:
Fuel and Power purchased and interchanged
1997 and 1996
Effective January 1, 1997, Penelec ceased deferred energy accounting as
its ECR was combined with base rates. Thus, energy cost variances now have a
current impact on earnings, except for incremental NUG costs, which are included
in Regulatory assets on the Consolidated Balance Sheets (see COMPETITIVE
ENVIRONMENT). Changes in fuel and power purchased and interchanged did not have
a significant impact on earnings for 1997.
F-18
PENELEC RESULTS OF OPERATIONS (continued)
Other operation and maintenance
1997
The decrease in other O&M expenses was due primarily to the absence of a
$33.6 million pre-tax charge incurred in 1996, related to the voluntary enhanced
retirement programs.
1996
The increase in other O&M expenses was due primarily to the $33.6 million
pre-tax charge related to the voluntary enhanced retirement programs. Partially
offsetting the effect of this was a 1995 write-off of $4.7 million pre-tax, for
TMI-2 monitored storage costs deemed not probable of recovery through
ratemaking.
Depreciation and amortization
1997 and 1996
The increases in depreciation and amortization expense were due to
additions to plant in service and higher depreciation rates.
Taxes, other than income taxes
1997 and 1996
Effective January 1, 1997, Penelec's STAS was combined with base rates and
is no longer subject to annual adjustment (see COMPETITIVE ENVIRONMENT). This
did not have a significant impact on 1997 earnings.
OTHER INCOME AND DEDUCTIONS:
Other income/(expense), net
1997
The increase in other income/(expense), net was due primarily to an
increase in interest income.
1996
The decrease in other income/(expense), net was due primarily to the
reversal in 1995, of $56.3 million pre-tax, of certain future TMI-2 retirement
costs written off in 1994. This reversal of expense resulted from a 1995
Pennsylvania Supreme Court decision restoring a 1993 PaPUC order allowing an
affiliate to recover such costs from customers. Partially offsetting this was a
write-off in 1995 of $2.5 million of deferred OPEB costs related to wholesale
customers, which were deemed not recoverable through ratemaking.
INTEREST CHARGES AND DIVIDENDS ON PREFERRED SECURITIES:
Preferred stock dividends and Gain on preferred stock reacquisition
1997 and 1996
In 1996, Penelec reacquired $20 million stated value of its cumulative
preferred stock through cash tender offers, resulting in an aggregate gain of
$5.6 million.
F-19
The following sections of Management's Discussion and Analysis of
Financial Condition and Results of Operations contain certain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Statements made that are not historical facts are forward-looking and,
accordingly, involve risks and uncertainties that could cause actual results or
outcomes to differ materially from those expressed in the forward-looking
statements. Although such forward-looking statements have been based on
reasonable assumptions, there is no assurance that the expected results will be
achieved. Some of the factors that could cause actual results to differ
materially include, but are not limited to: the effects of regulatory decisions;
changes in law and other governmental actions and initiatives; the impact of
deregulation and increased competition in the industry; industry restructuring;
expected outcomes of legal proceedings; generating plant performance; fuel
prices and availability; and uncertainties involved with foreign operations
including political risks and foreign currency fluctuations.
GPUI GROUP
The GPUI Group develops, owns and operates electric generation,
transmission and distribution facilities in the U.S. and foreign countries. It
has also made investments in certain advanced technologies related to the
electric power industry. The GPUI Group has ownership interests in transmission,
distribution and supply businesses in England and Australia. It also has
ownership interests in eight operating cogeneration plants in the U.S. totaling
847 megawatts (MW) (of which the GPUI Group's equity interest represents 308 MW)
of capacity, and twelve operating generating facilities located in foreign
countries totaling 3,830 MW (of which the GPUI Group's equity interest
represents 728 MW) of capacity.
The GPUI Group is continuing to pursue investment opportunities and has
commitments, both domestically and internationally, in seven generating
facilities under construction totaling 2,141 MW (of which the GPUI Group's
equity interest represents 641 MW) of capacity.
At December 31, 1997, GPU, Inc.'s aggregate investment in the GPUI Group
was $268 million; GPU, Inc. has also guaranteed up to an additional $1.3 billion
of GPUI Group obligations. GPU, Inc. has Securities and Exchange Commission
(SEC) approval to finance investments in foreign utility companies (FUCOs) and
exempt wholesale generators (EWGs) up to an aggregate amount equal to 100% of
GPU's average consolidated retained earnings, or approximately $2.2 billion. At
December 31, 1997, GPU, Inc. has remaining authorization to finance
approximately $754 million of additional investments in FUCOs and EWGs. For
additional information on the GPUI Group's investments, see Note 6 of the Notes
to Consolidated Financial Statements.
In 1997, the Government of the United Kingdom imposed a windfall profits
tax on privatized utilities, including Midlands, in which the GPUI Group has a
50% ownership interest. As a result, a one-time charge to income of $109.3
million, or $0.90 per share, was taken. In December 1997, half of this tax was
paid; the remainder is due by December 1998.
In 1997, GPU Electric acquired the business of PowerNet Victoria (PowerNet)
(subsequently renamed GPU PowerNet) from the State of Victoria, Australia for
A$2.6 billion (approximately U.S. $1.9 billion)(see Financing section of
LIQUIDITY AND CAPITAL RESOURCES). PowerNet owns and maintains the existing
high-voltage electricity transmission system in Victoria. The
F-20
PowerNet transmission system serves all of Victoria covering an area of
approximately 87,900 square miles and a population of approximately 4.5 million.
GPU expects the PowerNet acquisition to contribute positively to its 1998
earnings. For additional information, see Note 5 of the Notes to Consolidated
Financial Statements.
In January 1998, as a result of Victoria's cross-ownership restrictions,
GPU Electric sold its 50% stake in Solaris Power (Solaris) to The Australian Gas
Light Company for A$208 million (approximately U.S. $135.2 million) and 10.36%
of the outstanding common stock of Allgas Energy Limited (Allgas), the natural
gas distributor in Queensland, Australia. The Allgas shares had a market value
of A$14.6 million (approximately U.S. $9.5 million) at the date of sale. As a
result, GPU will record an after-tax gain on the sale of $18.3 million in the
first quarter of 1998.
Management expects that the GPUI Group will provide a substantial portion
of GPU's future earnings growth and intends on making additional investments in
its business activities. The timing and amount of these investments, however,
will depend upon the availability of appropriate opportunities and financing
capabilities.
Market Risk Sensitive Instruments
The GPUI Group uses interest rate swaps to manage the risk of increases in
variable interest rates. All of the agreements effectively convert variable rate
debt to fixed rate debt. None of these swap agreements are held for trading
purposes. The following summarizes the primary characteristics of swap
agreements entered into as of December 31, 1997:
(in thousands)
Fixed Variable
Swap Fair Termination Pay/Receive Interest Interest Rates
Amounts Value(a) Date Characteristics Rates at 12/31/97
------- -------- ---- --------------- ----- -----------
GPU PowerNet A$ 481,250 A$ (5,836) 11/6/00 fixed/variable 6.14% 4.96-5%
A$ 481,250 A$ (10,911) 11/6/02 fixed/variable 6.56% 4.96-5%
A$ 385,000 A$ (12,940) 11/6/04 fixed/variable 6.82% 4.96-5%
A$ 288,750 A$ (16,124) 11/6/07 fixed/variable 7.14% 4.96-5%
A$ 288,750 A$ (16,323) 11/6/07 fixed/variable 7.15% 4.96-5%
---------- ----------
A$1,925,000 A$ (62,134)
========== ==========
Midlands (pound) 75,000(pound) 995 8/7/98 fixed/variable 6.50% 7.61%
====== ===
Mid-Georgia
Cogen, L.P. $ 31,656 $ (112) 6/30/98 fixed/variable 6.40% 5.97%
$ 27,401 $ (232) 6/30/98 fixed/variable 6.78% 5.97%
(b)$ 54,500 $ (5,569) 6/30/13 fixed/variable 7.64% n/a
---------- ----------
$ 113,557 $ (5,913)
========== ==========
Solaris
Power A$ 40,000 A$ (1,051) 11/23/98 fixed/variable 7.78% 4.97%
========== ==========
<FN>
(a) Represents the amount the GPUI Group would (pay)/receive to terminate the
swap agreements prior to their scheduled termination dates.
(b) There will be no underlying debt under this swap agreement until June 1998.
</FN>
F-21
The amount of debt obligations covered by swap agreements and the
expected variable interest rates on such debt, for each of the next five years,
are as follows:
(in thousands)
GPU PowerNet Midlands Mid-Georgia
------------ -------- -----------
Expected Expected Expected
Average Variable Average Variable Average Variable
Debt Interest Debt Interest Debt Interest
Year Covered Rates Covered Rates Covered Rates
- ---- ------- ----- ------- ----- ------- -----
1998 A$1,851,164 5.1-5.2% (pound)44,795 7.7% $ 63,932 5.7%
1999 A$1,443,750 5.6-6.0% - - $ 53,193 5.8%
2000 A$1,332,997 5.9-6.6% - - $ 51,463 5.9%
2001 A$ 721,875 6.1-6.7% - - $ 49,533 6.0%
2002 A$ 611,122 6.2-6.9% - - $ 47,254 6.0%
The expected variable interest rates included above, for the years 1998
through 2002, were provided by the financial institutions with whom the swap
agreements were executed, and were derived from their proprietary models based
upon recognized financial principles. The amount of the swaps related to GPU
PowerNet and Mid-Georgia fluctuate over the terms of the respective agreements,
through 2007 and 2013, respectively.
The swap agreements resulted in actual interest expense for covered debt
of $30.6 million in 1997, as compared to $26.9 million in interest expense, had
the GPUI Group not entered into the agreements. The swap agreement related to
Solaris was terminated in January 1998, due to the GPUI Group's sale of its
interest in Solaris and repayment of the underlying debt, and a termination fee
of $0.8 million was incurred at that date. For additional information on GPU's
accounting for swap agreements, see Note 7 of the Notes to Consolidated
Financial Statements.
In 1997, GPU Electric used sterling put options to reduce its exposure to
exchange rate fluctuations between the British pound and the U.S. dollar,
relative to distributions received from Midlands. The put options expired on
December 31, 1997. GPU Electric used an Australian put option to reduce its
exposure to exchange rate fluctuations between the Australian dollar and the
U.S. dollar, relative to the net proceeds expected from the sale of its 50%
stake in Solaris. The Solaris sale was completed in January 1998. For further
discussion of these options, see Note 7 of the Notes to Consolidated Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES
Capital Expenditures
The GPU Energy companies' capital spending was $356 million (JCP&L $172
million; Met-Ed $88 million; Penelec $99 million) in 1997, and was used
primarily for new customer connections and to maintain and improve existing
transmission and distribution facilities. In 1998, capital expenditures are
estimated to be $441 million (JCP&L $204 million; Met-Ed $92 million; Penelec
$121 million; Other $24), mainly related to the GPU Energy companies and will be
used primarily for ongoing system development and to implement an integrated
information system as discussed below. In 1997, expenditures for maturing
obligations were $176 million (JCP&L $110 million; Met-Ed $40 million; Penelec
$26 million). Expenditures for maturing obligations are expected to total $43
million (JCP&L $13 million; Penelec $30 million) in
F-22
1998, and $83 million (JCP&L $3 million; Met-Ed $30 million; Penelec $50
million) in 1999. Management estimates that a substantial portion of the GPU
Energy companies' 1998 capital outlays will be satisfied through internally
generated funds.
The GPUI Group's capital spending was $1.9 billion in 1997, which was
principally attributable to the acquisition of PowerNet (see Note 5 of the Notes
to Consolidated Financial Statements). In 1997, expenditures for maturing
obligations were $3 million. Expenditures for maturing obligations are expected
to total $589 million in 1998, and $152 million in 1999. Management estimates
that a substantial portion of the GPUI Group's 1998 capital outlays will be
satisfied through external financings.
Capital Expenditures*
(in millions)
-------------
1993 1994 1995 1996 1997 1998**
---- ---- ---- ---- ---- ------
GPU Energy companies $ 496 $ 586 $ 462 $ 404 $ 356 $ 441
GPUI Group $ 16 $ 74 $ 165 $ 574 $1,912 $ 141
* Includes consolidated operations only
** Estimate
GPU's capital leases are primarily for nuclear fuel held by the GPU Energy
companies. Nuclear fuel capital leases at December 31, 1997 totaled $136 million
(JCP&L $79 million; Met-Ed $38 million; Penelec $19 million). When consumed,
portions of the presently leased material will be replaced by additional leased
material at an average annual rate (which is based on two full operating cycles,
or four years) of between $40 million and $55 million (JCP&L $25 million - $30
million; Met-Ed $10 million - $15 million; Penelec $5 million - $10 million). In
the event the needed nuclear fuel cannot be leased, the associated capital
requirements would have to be met by other means.
The GPU Energy companies and certain affiliates have contracted for an
integrated information system to help manage their business growth, accomplish
year 2000 compliance and meet the mandates of electric utility deregulation. The
system is scheduled to be fully operational in early 1999. The estimated project
costs for the system are $106 million (JCP&L $49 million; Met-Ed $25 million;
Penelec $32 million), of which $16 million (JCP&L $7 million; Met-Ed $4 million;
Penelec $5 million) was spent in 1997. A portion of these costs will be expensed
as incurred. The GPUI Group estimates that it will cost approximately $7 million
to modify its computer systems.
Financing
GPU, Inc.
GPU, Inc. has received SEC approval to issue and sell up to $300 million
of unsecured debentures through 2001. In February 1998, GPU, Inc. sold seven
million shares of common stock. The net proceeds of $269 million will be used to
reduce indebtedness associated with the PowerNet and Midlands acquisitions, and
for other corporate purposes. Further significant investments by the GPUI Group,
or otherwise, may require GPU, Inc. to issue additional debt and/or common stock
(see GPUI GROUP for a discussion of GPU, Inc.'s remaining investment
authorization).
F-23
GPU Energy Companies
As a result of Pennsylvania legislation (see COMPETITIVE ENVIRONMENT),
Met-Ed and Penelec each plan to sell securitized transition bonds through a
separate trust or other special purpose entity, and would use the proceeds to
reduce stranded costs resulting from customer choice, including NUG contract
buyout costs (see the Managing Nonutility Generation section of THE GPU ENERGY
COMPANIES' SUPPLY PLAN), and to reduce capitalization. The timing and amount of
any sale will depend upon PaPUC approval of restructuring plans, resolution of
legal challenges, and receipt of a favorable ruling from the Internal Revenue
Service, as well as market conditions. It is expected that similar legislation
will be introduced in New Jersey to permit the sale of securitized transition
bonds. See COMPETITIVE ENVIRONMENT for further discussion of these bonds.
JCP&L and Penelec have regulatory authority to issue and sell first
mortgage bonds (FMBs), including secured medium-term notes, and preferred stock
through June 1999. Met-Ed has similar authority through December 1999. Under
existing authorizations, JCP&L, Met-Ed and Penelec may issue these senior
securities in aggregate amounts of $145 million, $190 million and $70 million,
respectively, of which up to $100 million for JCP&L and Met-Ed and $70 million
for Penelec may consist of preferred stock. The GPU Energy companies also have
regulatory authority to incur short-term debt, a portion of which may be through
the issuance of commercial paper.
In 1997, the GPU Energy companies issued an aggregate of $63.7 million
(Met-Ed $13.7 million; Penelec $50 million) principal amount of FMBs. The
proceeds from these issuances were used to replace short-term financing related
to a solid waste disposal facility at the jointly owned Conemaugh station, repay
short-term debt and for other corporate purposes. The GPU Energy companies
redeemed $166.1 million (JCP&L $100.1 million; Met-Ed $40 million; Penelec $26
million) principal amount of FMBs, of which $24.2 million were redeemed by JCP&L
prior to maturity. Also in 1997, JCP&L redeemed $20 million stated value of
cumulative preferred stock pursuant to mandatory and optional sinking fund
provisions. In February 1998, Penelec redeemed at maturity $30 million principal
amount of FMBs.
The GPU Energy companies' bond indentures and articles of incorporation
include provisions that limit the amount of long-term debt, preferred stock and
short-term debt the companies may issue. The GPU Energy companies' interest and
preferred dividend coverage ratios are currently in excess of indenture and
charter restrictions. The amount of FMBs that the GPU Energy companies could
issue based on the bondable value of property additions is in excess of amounts
currently authorized.
The GPU Energy companies' cost of capital and ability to obtain external
financing are affected by their security ratings, which are periodically
reviewed by the credit rating agencies. The GPU Energy companies' FMBs are
currently rated at an equivalent of "BBB+" or higher by the major credit rating
agencies, while the preferred stock and mandatorily redeemable preferred
securities have been assigned an equivalent of "BBB" or higher. In addition, the
GPU Energy companies' commercial paper is rated as having very good credit
quality.
Current plans call for the GPU Energy companies to issue senior securities
during the next three years to fund the redemption of maturing senior
securities, refinance outstanding senior securities if economic, and finance
construction activities.
F-24
GPUI Group
In 1997, GPU Electric acquired the business of PowerNet from the State of
Victoria, Australia for A$2.6 billion (approximately U.S. $1.9 billion). To fund
the acquisition, subsidiaries of GPU Electric entered into a senior debt credit
facility with a syndicate of banks for A$1.9 billion (approximately U.S. $1.4
billion), which is non-recourse to GPU, Inc. and a five-year U.S. $450 million
bank credit agreement which is guaranteed by GPU, Inc. Borrowings under the bank
credit agreement are to be amortized ratably over the five-year period.
In 1996, GPU and Cinergy formed a 50/50 joint venture to acquire Midlands.
To fund its investment in Midlands, a subsidiary of GPU Electric entered into a
GPU, Inc. guaranteed five-year (pound)350 million term loan agreement with a
syndicate of banks. As of December 31, 1997, the aggregate borrowings
outstanding under the term loan were (pound)340 million (approximately U.S. $561
million).
In January 1998, as a result of Victoria's cross-ownership restrictions,
GPU Electric sold its 50% stake in Solaris for A$208 million (approximately U.S.
$135.2 million) and a 10.36% stake in Allgas valued at A$14.6 million
(approximately U.S. $9.5 million) at the date of sale. Approximately U.S. $52
million of the net sales proceeds were used to extinguish Solaris acquisition
debt and approximately U.S. $60 million was used to reduce PowerNet acquisition
debt. The balance of the proceeds will be applied for other corporate purposes.
In 1998, GPU plans to reduce a portion of the Midlands and PowerNet
acquisition debt from proceeds provided by the sale of GPU common stock. In
addition, GPU announced that it intends to begin a process to sell up to all of
the GPU Energy companies' fossil fuel and hydroelectric generating facilities
(see Managing the Transition section of COMPETITIVE ENVIRONMENT). A portion of
the proceeds from the sale of these assets, which is expected to be finalized by
mid-1999, may be used to further reduce acquisition debt of the GPUI Group.
Capitalization
Each of the GPU companies' target capitalization ratios are designed to
provide credit quality ratings that permit capital market access at reasonable
costs. The target capitalization ratios vary by subsidiary depending upon their
business and financial risk. The GPU companies' actual capitalization ratios at
December 31, were as follows:
GPU, Inc. and Subsidiary Companies 1997 1996 1995
- ---------------------------------- ---- ---- ----
Common equity 35% 43% 47%
Preferred equity 6 7 9
Notes payable and long-term debt 59 50 44
-- -- --
100% 100% 100%
=== === ===
JCP&L 1997 1996 1995
- ----- ---- ---- ----
Common equity 50% 48% 49%
Preferred equity 9 9 10
Notes payable and long-term debt 41 43 41
-- -- --
100% 100% 100%
=== === ===
F-25
Met-Ed 1997 1996 1995
- ------ ---- ---- ----
Common equity 49% 48% 47%
Preferred equity 7 8 9
Notes payable and long-term debt 44 44 44
-- -- --
100% 100% 100%
=== === ===
Penelec 1997 1996 1995
- ------- ---- ---- ----
Common equity 47% 45% 45%
Preferred equity 7 7 9
Notes payable and long-term debt 46 48 46
-- -- --
100% 100% 100%
=== === ===
In 1997, the quarterly dividend on GPU, Inc.'s common stock was increased
by 3.1% to an annualized rate of $2.00 per share. GPU, Inc.'s payout rate in
1997 was 54% of earnings (excluding the nonrecurring item). Management will
continue to review GPU, Inc.'s dividend policy to determine how to best serve
the long-term interests of shareholders.
COMPETITIVE ENVIRONMENT
Managing the Transition
As competition in the electric utility industry increases, the price of
electricity and quality of customer service will be critical. GPU has been
active both on the federal and state levels in helping to shape electric
industry restructuring while seeking to protect the interests of its
shareholders and customers, and is attempting to assess the impact that these
competitive pressures and other changes will have on its financial condition and
results of operations.
In October 1997, GPU announced that it intends 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, 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 $280 million; Met-Ed $300
million; Penelec $495 million) at December 31, 1997. GPU expects to use a
multi-stage competitive bid process, similar to the generation divestiture
processes used by other utilities. 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. GPU currently anticipates that it
will begin seeking indicative bids in mid-April 1998. It is anticipated that
definitive agreements with the purchaser(s) will be entered into by the end of
1998 and the sale completed by mid-1999, subject to the timely receipt of the
necessary regulatory and other approvals.
In addition to the continued operation of the Oyster Creek Nuclear
Generating Station (Oyster Creek), JCP&L is exploring the sale or early
retirement of the plant to mitigate costs associated with its continued
operation. In response to an inquiry regarding the possible sale of Oyster
Creek, the GPU Energy companies have stated that they would also consider
selling Three Mile Island Unit 1 (TMI-1). Unlike Oyster Creek, however, the
early retirement of TMI-1 is not being considered because of its lower operating
costs.
F-26
In December 1997, GPU and The Williams Companies, Inc. announced an
agreement to form an alliance to jointly market energy and related services at
the retail level. The joint venture, which is expected to commence operations in
1998, will offer electric, natural gas and oil supply, as well as other related
energy services, to consumers throughout the Mid-Atlantic region.
As part of its strategy of achieving earnings growth, GPU is continuing to
investigate investment opportunities in various domestic and foreign power
projects and foreign utility systems, and intends on making additional
investments which would be financed with new debt or new equity. While GPU
recognizes that there are risks inherent in making these investments, it
believes the best long-term approach to managing these risks is through
portfolio diversification.
GPU has identified the following strategic objectives to guide it over the
next several years: (1) build upon GPU's core competency in regulated
infrastructure (mainly the transmission and distribution of electricity), both
internationally and domestically; (2) investigate other investment opportunities
in infrastructure (i.e. natural gas, water, telecommunications); (3) continue to
develop the contract generation business (generation for which contracts to sell
power to third parties have been executed) through the GPUI Group; and (4) build
a retail energy services and supply business.
GPU's strategies may include business combinations with other companies,
internal restructurings involving the complete or partial separation of its
wholesale and retail businesses, acquisitions of other businesses, and additions
to or dispositions of all or portions of its generation, transmission or
distribution businesses. As a result of federal and state actions noted below,
the GPU Energy companies will be required to implement rate unbundling for
generation, transmission and distribution services. No assurances can be given
as to whether any potential transactions of the type described above may
actually occur, or as to the ultimate effect thereof on the financial condition
or competitive position of GPU.
Recent Regulatory Actions
Pennsylvania
In 1996, Pennsylvania adopted comprehensive legislation which provides for
the restructuring of the electric utility industry. The legislation, among other
things, permits one-third of Pennsylvania retail consumers to choose their
electric supplier beginning January 1, 1999, two-thirds permitted to choose by
January 1, 2000 and all retail consumers to do so by January 1, 2001. The
legislation requires the unbundling of rates for transmission, distribution and
generation services. Utilities would have the opportunity to recover their
prudently incurred stranded costs that result from customers choosing another
supplier through a PaPUC approved competitive transition charge, subject to
certain conditions, including that they attempt to mitigate these costs. For a
discussion of stranded costs, see the Competition and the Changing Regulatory
Environment section of Note 13 of the Notes to Consolidated Financial
Statements.
The legislation provides utilities the opportunity to reduce their
stranded costs through the issuance of transition bonds with maturities of up to
10 years. The sale proceeds could be used to buy out or buy down uneconomic NUG
contracts, to reduce capitalization, or both. Principal and interest payments on
the bonds would be paid by all distribution service
F-27
customers through a nonbypassable intangible transition charge. Reduced
financing costs associated with the sale of transition bonds would be used to
provide rate reductions for all customers. In order to securitize stranded
costs, each Pennsylvania utility is required to file with the PaPUC for a
qualified rate order. Met-Ed and Penelec expect to file for such rate orders
during 1998.
Effective January 1, 1997, transmission and distribution rates charged to
Pennsylvania retail customers are generally capped for 4 1/2 years, and
generation rates are generally capped for up to nine years. Transmission and
distribution of electricity will continue as a regulated monopoly. An
independent system operator (ISO) will be responsible for coordinating the
generation and transmission of electricity in an efficient and nondiscriminatory
manner.
As part of this restructuring, Met-Ed and Penelec filed, in December 1996,
tariff supplements requesting approval to, among other things, include their
currently effective ECRs and STAS in base rates, effective for all bills
rendered after January 1, 1997. In February 1997, the PaPUC approved this
request. Since rates that can be charged to customers for generation are capped
for up to nine years, to the extent Met-Ed and Penelec remain in the generation
business, their future earnings are subject to market volatility. Increases or
decreases in fuel costs are no longer subject to deferred accounting and are
reflected in net income as incurred. Met-Ed and Penelec will continue their
efforts to manage fuel costs and will mitigate, to the extent possible, any
excessive risks.
In June 1997, Met-Ed and Penelec filed with the PaPUC their proposed
restructuring plans to implement competition and customer choice in
Pennsylvania. Highlights of these plans, as revised through January 1998,
include:
- - One-third of electric retail customers would be able to choose their
supplier beginning on January 1, 1999, expanding to include all customers
by January 1, 2001.
- - As required by the restructuring legislation, rates would be unbundled for
generation, transmission and distribution charges.
- - A competitive transition charge (CTC) would provide the opportunity to
recover all of Met-Ed and Penelec's generation plant, regulatory assets and
other non-NUG related transition and stranded costs within a seven-year
time period beginning January 1, 1999.
- - A "NUG Cost Rate" is being proposed to capture payments to NUGs in excess
of amounts in current rates. This clause will provide for a full
reconciliation of amounts paid to NUGs, and recovered from customers. This
will ensure that customers do not overpay for these obligations, and it
will also provide a vehicle for flowing through to customers the full
benefits of any prospective reductions in NUG obligations that result from
mitigation. At December 31, 1997, the deferred NUG balances for Met-Ed and
Penelec were $10.3 million and $14.6 million, respectively, and are
included in Other Regulatory Assets on the Consolidated Balance Sheets.
- - Stranded costs at the time of initial customer choice (December 31, 1998),
on a present value basis, are estimated at $1.5 billion for Met-Ed and $1.2
billion for Penelec. These stranded costs include above-market costs
F-28
related to power purchase commitments, company-owned generation, generating
plant decommissioning, regulatory assets and transition expenses.
- - Ongoing stranded cost mitigation efforts include the buyout and/or
renegotiation of several above-market NUG agreements; the planned
retirement of uneconomical generating units as well as the continuing
evaluation of remaining generating facilities; and workforce reductions
achieved primarily through voluntary retirement and severance programs.
- - Met-Ed and Penelec have requested rate recovery of prudently incurred costs
associated with the buyout and restructuring of NUG projects that are not
currently being recovered in rates. The requested increase, based upon a
three-year recovery of the buyout costs, is $44.6 million for Met-Ed and
$19.1 million for Penelec. It is expected that these increases will be
offset by lower interest expense related to the issuance of transition
bonds. The estimated customer savings associated with these contract
buyouts/restructurings is $812 million for Met-Ed and $593 million for
Penelec.
- - Met-Ed and Penelec will be the supplier of last resort for customers who
cannot or do not wish to purchase energy from an alternative supplier.
Numerous parties have intervened in these proceedings and are actively
contesting various aspects of the filings, including the quantification of
stranded costs and the fixing of the level of generation credits for customers
who choose alternative suppliers. Discovery, evidentiary hearings and related
proceedings are continuing. Initial decisions from the PaPUC are expected by
June 30, 1998. There can be no assurance as to the outcome of these proceedings.
The PaPUC has also issued a final order that sets forth the guidelines for
retail access pilot programs in Pennsylvania that give customers the ability to
choose their electricity supplier. These pilot programs include residential,
commercial and industrial class customers, and utilities are required to commit
about 5% of load to retail access programs and unbundle their rates to allow
customers to choose their electric generation supplier. The pilot program began
November 1, 1997 and will run until the first phase of retail competition begins
on January 1, 1999. Met-Ed and Penelec's pilot programs include approximately 5%
of each company's load.
New Jersey
In April 1997, the New Jersey Board of Public Utilities (NJBPU) issued
final Findings and Recommendations for Restructuring the Electric Power Industry
in New Jersey and submitted the plan to the Governor and the Legislature for
their consideration. The NJBPU has recommended, among other things, that certain
electric retail customers be permitted to choose their supplier beginning
October 1998, expanding to include all retail customers by July 1, 2000. The
NJBPU also recommended a near-term electric rate reduction of 5% to 10% with the
phase-in of retail competition, as well as additional rate reductions
accomplished as a result of new energy tax legislation, as discussed below.
The NJBPU has proposed that utilities have an opportunity to recover their
stranded costs associated with generating capacity commitments provided that
they attempt to mitigate these costs. Also, NUG contracts which cannot be
mitigated would be eligible for stranded cost recovery. The determination
F-29
of stranded cost recovery by the NJBPU would be undertaken on a case-by-case
basis, with no guaranty for full recovery of these costs. A separate market
transition charge (MTC) would be established for each utility to allow utilities
to recover stranded costs over 4 to 8 years. The MTC would be capped to ensure
that customers experience the NJBPU's recommended overall rate reduction of
5-10%. New Jersey is also considering securitization as a mechanism to help
mitigate stranded costs.
In addition, the NJBPU is proposing that beginning October 1998, utilities
unbundle their rates and allow customers to choose their electric generation
supplier. Transmission and distribution of electricity would continue as a
regulated monopoly and utilities would be responsible for connecting customers
to the system and for providing distribution service. Transmission service would
be provided by an ISO, which would be responsible for maintaining the
reliability of the regional power grid and would be regulated by the Federal
Energy Regulatory Commission (FERC).
In July 1997, New Jersey enacted energy tax legislation which eliminates
the 13% gross receipts and franchise tax on utility bills. Utilities will
collect from customers a 6% sales tax and pay a corporate business tax which
amounts to 1-2% of revenues. Utilities will also pay a transitional energy
facilities assessment which will phase out over five years and result in a 5-6%
rate reduction to customers.
In July 1997, JCP&L filed with the NJBPU its proposed restructuring plan
for a competitive electric marketplace in New Jersey. Included in the plan were
stranded cost, unbundled rate and restructuring filings. In December 1997, JCP&L
submitted supplemental information with the NJBPU and parties to the
restructuring proceeding regarding the proposed sale of its fossil fuel and
hydroelectric generating facilities (see Managing the Transition). Highlights of
the plan include:
- - Some electric retail customers would be able to choose their supplier
beginning on October 1, 1998, expanding to include all retail customers by
July 1, 2000.
- - As required by the NJBPU's final findings and recommendations, JCP&L would
unbundle its rates and these rates would apply to all distribution
customers, with the exception of a Production Charge, which would be
charged only to customers who do not choose an alternative energy supplier.
The proposed unbundled rate structure would include:
-- a flat monthly Customer Charge for the costs associated with
metering, billing and customer account administration.
-- a Delivery Charge consisting of capital and O&M costs
associated with the transmission and distribution system; the
recovery of regulatory assets, including those associated with
generation; the cost of social programs; and certain costs
related to the proposed ratemaking treatment of Oyster Creek.
-- a Production Charge for the estimated average market price for
electricity (EAMPE) provided to customers who elect JCP&L as
their electric generation supplier. JCP&L would be the
supplier of last resort for customers who cannot or do not
wish to purchase energy from an alternative supplier. A
deferred market price adjustment account would be set up for
the difference between the EAMPE and
F-3O
the actual market price for electricity, plus interest. The
EAMPE would be calculated every six months during the
transition period and adjusted by a true-up factor.
-- a Societal Benefits Charge to recover demand-side management
costs, manufactured gas plant remediation costs, and nuclear
decommissioning costs.
-- a MTC to recover non-NUG stranded generation costs. This
charge would include both owned generation and utility
purchase power commitments. It is expected that the MTC would
be in effect for less than a three-year period.
-- a NUG Transition Charge (NTC) to recover ongoing above-market
NUG costs over the life of the contracts and provide a
mechanism to flow through to customers the benefits of future
NUG mitigation efforts. The NTC would be subject to an annual
true-up for actual cost escalations or reductions, changes in
availability or dispatch levels and other cost variations over
the life of each NUG project. The NTC would also be subject to
adjustment in the future to reflect additional NUG buyout or
restructuring costs and any related savings.
- - The unbundling plan calls for an estimated 10% rate reduction, of which
2.1% became effective as part of JCP&L's Stipulation of Final Settlement
(Final Settlement) approved by the NJBPU in March 1997 (see RATE MATTERS).
The remaining reductions would be phased in over a two-year period
beginning October 1, 1998, and would be achieved through, among other
things, the proposed early retirement of Oyster Creek for ratemaking
purposes in September 2000 and, if legislation is enacted, the
securitization of certain above-market costs. In addition to this rate
reduction, JCP&L customers would receive an additional rate reduction of
approximately 6% to be phased in over the next five years as a result of
energy tax legislation signed into law in July 1997.
- - 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. A final decision on the plant's
future has not been reached. Nevertheless, JCP&L has proposed that the
NJBPU approve an early retirement of Oyster Creek in September 2000, for
ratemaking purposes. The ratemaking treatment being requested for Oyster
Creek is as follows:
-- The market value of Oyster Creek's generation output would be
recovered in the Production Charge.
-- The above-market operating costs would be recovered as a
component of the Delivery Charge through September 2000. If
the plant is operated beyond that date, these costs would not
be included in customer rates.
-- Existing Oyster Creek regulatory assets would, like other
regulatory assets, be recovered as part of the Delivery
Charge.
-- Oyster Creek decommissioning costs would, like TMI-1
decommissioning costs, be recovered as a component of the
Societal Benefits Charge.
F-31
-- JCP&L's net investment in Oyster Creek would be recovered
through the Delivery Charge as a levelized annuity, effective
October 1998 through its original expected operating life,
2009.
- - Stranded costs at the time of initial customer choice (September 30, 1998),
on a present value basis, are estimated at $1.6 billion, of which $1.5
billion is for above-market NUG contracts. The $1.6 billion excludes
above-market generation costs related to Oyster Creek.
- - Ongoing stranded cost mitigation efforts have included the buyout and/or
renegotiation of several above-market NUG agreements; the retirement of
uneconomical steam generating units at Gilbert and Werner stations in 1996;
the planned retirement of additional units at Sayreville station in 1999 as
well as the continuing evaluation of remaining generating facilities; and
workforce reductions achieved primarily through voluntary retirement and
severance programs.
- - JCP&L fully supports securitization of above-market costs in the
restructuring process. JCP&L expects to request securitization, if
legislation is enacted, of certain costs associated with generation assets,
regulatory assets and the buyout or renegotiation of NUG contracts.
Numerous parties have intervened in this proceeding and are actively
contesting various aspects of JCP&L's filings, including, among other things,
recovery by JCP&L of plant capital additions since its last base rate case in
1992, projections of future electricity prices on which stranded cost recovery
calculations are based, the appropriate level of return and the appropriateness
of earning a return on stranded investment.
Consultants retained by the NJBPU Staff, the Division of Ratepayer
Advocate and other parties have proposed that JCP&L's stranded cost recoveries
should be substantially lower than the levels JCP&L is seeking.
In February 1998, the NJBPU issued a written order clarifying an earlier
NJBPU oral decision. In its written order, the NJBPU substantially affirmed an
Administrative Law Judge's ruling which limited the unbundling proceeding to
1992 cost of service levels, but clarified that (1) JCP&L could update its 1992
cost of service study to reflect adjustments consistent with the NJBPU approved
Final Settlement which, among other things, recognized certain increased expense
levels and reductions to base rates and (2) all of the updated post-1992 cost
information that JCP&L had submitted in the proceeding should remain in the
record, which the NJBPU will utilize in establishing a reasonable level of rates
going forward.
Furthermore, the NJBPU emphasized in its order that the final unbundled
rates established as a result of this proceeding will be lower than the current
bundled rates. This directive has been recognized in JCP&L's July 1997
restructuring plan which proposed annual revenue reductions totaling
approximately $185 million. The NJBPU will render final and comprehensive
decisions on the precise level of aggregate rate reductions required in order to
accomplish its primary goals of introducing retail competition and lowering
electricity costs for consumers.
If the NJBPU were to accept the positions of various parties or their
consultants, or were ultimately to deny JCP&L's request to recover post-1992
capital additions and increased expenses, it would have a material adverse
impact on JCP&L's stranded cost recovery, restructuring proceeding and future
earnings.
F-32
Discovery, evidentiary hearings and related proceedings are continuing.
The NJBPU intends to complete its review and issue final decisions in time for
retail competition to commence in October 1998. There can be no assurance as to
the outcome of these proceedings.
JCP&L has received NJBPU approval for a one-year pilot program offering
customers in Monroe Township, New Jersey, a choice of their electric energy
supplier. The pilot program began in September 1997, and can be extended until
the first phase of competition begins in October 1998. Monroe Township had been
exploring the possibility of establishing its own municipal electric system.
Other
In 1996, the GPU Energy companies, along with six other electric utility
members of the Pennsylvania-New Jersey-Maryland (PJM) Power Pool (together, the
supporting PJM companies), filed with the FERC a transmission tariff and
agreements (including, among other things, establishing an ISO to operate the
energy market and transmission system) that would create a new wholesale energy
market to meet the requirements of FERC Order 888, and to increase competition
in the Mid-Atlantic region. PECO Energy Company, who opposed the supporting PJM
companies' proposed restructuring plan, filed its own plan with the FERC. In
February 1997, the FERC issued an order directing PJM to adopt all
recommendations proposed by the supporting PJM companies, after certain issues
were resolved regarding congestion pricing.
In addition, in November 1997 the FERC issued an order to PJM which, among
other things, directed the GPU Energy companies to implement a single-system
transmission rate, effective January 1, 1998. The implementation of a
single-system rate is not expected to effect total transmission revenues,
however, it would increase the pricing for transmission service in Met-Ed and
Penelec's service territories and reduce the pricing for transmission service in
JCP&L's service territory. The GPU Energy companies have requested the FERC to
reconsider its ruling requiring a single-system transmission rate. The FERC's
ruling may also have an effect on the GPU Energy companies' distribution rates
since the PaPUC has ordered a rate cap effective January 1, 1997 and the NJBPU
has recommended a 5-10% rate reduction effective with the implementation of
customer choice. There can be no assurance as to the outcome of this matter.
Also in 1997, the PJM Power Pool converted to a limited liability company
governed by an independent board of managers and the FERC approved the
supporting PJM companies' application to permit the PJM Interconnection to be
recognized as an ISO.
Several bills have been introduced in Congress providing for a
comprehensive restructuring of the electric utility industry. These bills
propose, among other things, retail choice for all utility customers beginning
as early as January 1999, the opportunity for utilities to recover their
prudently incurred stranded costs in varying degrees, and repeal of both the
Public Utility Regulatory Policies Act (PURPA) and the Public Utility Holding
Company Act of 1935.
F-33
Nonutility Generation Agreements
Pursuant to the requirements of 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.
Although a few of these 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. While the GPU Energy companies thus far
have been granted recovery of their NUG costs from customers by the PaPUC and
NJBPU, there can be no assurance that they will continue to be able to recover
these costs throughout the terms of the related agreements. As of December 31,
1997, facilities covered by these agreements having 1,666 MW (JCP&L 905 MW;
Met-Ed 356 MW; Penelec 405 MW) of capacity were in service.
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 continue to support legislative
efforts to repeal PURPA. They are also attempting to renegotiate, and in some
cases buy out, existing high cost long-term NUG agreements (see Managing
Nonutility Generation section of THE GPU ENERGY COMPANIES' SUPPLY PLAN).
RATE MATTERS
Pennsylvania adopted comprehensive legislation in 1996 which provides for
the restructuring of the electric utility industry. For additional information
and related rate matters, see COMPETITIVE ENVIRONMENT.
In 1996, the NJBPU approved a provisional settlement for a combined LEAC
and Demand-Side Factor (DSF) increase of $27.9 million annually. The DSF is
applied to customer rates so electric utilities can recover their demand-side
management program costs, which include activities designed to improve
efficiency in customer electricity use and load-management programs that reduce
peak demand.
In March 1997, the NJBPU approved a Final Settlement, including the
recovery of costs associated with the buyout of the Freehold Cogeneration
project. The Freehold cost recovery was granted on an interim basis subject to
refund, pending further review by the NJBPU, before which the matter is pending.
Provisions of the Final Settlement include a further annual increase of $7
million in the LEAC in addition to that noted above and an annual reduction of
$11 million in base rates. Base rates are frozen at that level until the year
2000, and the LEAC rate is frozen through the year 1999. The Final Settlement
provides for the establishment of a remediation adjustment clause (RAC) for the
recovery of manufactured gas plant remediation costs. JCP&L could seek a
LEAC/DSF/RAC rate increase if the combined LEAC/DSF/RAC balance is projected to
exceed $40 million, or a base rate increase under certain other conditions, such
as a major change in the current regulatory environment. The Final Settlement
provides for recovery in base rates, beginning in 1998, of all postretirement
benefit costs recorded in accordance with Statement of Financial Accounting
Standards No. 106, including amounts previously deferred, and an increase in
decommissioning expense to reflect the radiological decommissioning and
nonradiological removal costs estimated in the 1995 site-specific studies
performed for GPUN. Also, included in base rates is recovery of the remaining
investments in the 58 MW Werner Unit 4 and 72 MW Gilbert Unit 3 generating
plants, which were retired in 1996.
F-34
The Final Settlement also provides for recovery through the LEAC of: (1)
buyout costs up to $130 million, and 50% of any costs from $130 million to $140
million, over a seven-year period for the termination of the Freehold power
purchase agreement (such recovery is interim and is subject to refund, pending
further review); and (2) $14 million of the $17 million buyout costs, over a
two-year period, for the termination of the agreement to purchase power from the
proposed 200 MW Crown/Vista project. JCP&L wrote-off the remaining $3 million of
buyout costs for the Crown/Vista project in 1996.
In addition, the Final Settlement resolves the NJBPU's generic proceeding
regarding recovery of capacity costs associated with electric power purchases
from NUG projects which the Division of the Ratepayer Advocate claimed to result
in a double recovery. JCP&L is not required to refund any amounts previously
collected. The Final Settlement provides annual allowances for the recovery of
forecasted additions to nuclear plant. The Final Settlement also provides that
if JCP&L's return on equity exceeds 12.2%, excluding demand-side management and
nuclear performance incentives, the excess will be used to reduce both customer
rates and certain regulatory assets.
THE GPU ENERGY COMPANIES' SUPPLY PLAN
Under traditional retail regulation, supply planning in the electric
utility industry is directly related to projected sales growth in a utility's
franchise service territory. In light of retail access legislation enacted in
Pennsylvania and proposed in New Jersey, the extent to which competition will
affect the GPU Energy companies' supply plan remains uncertain (see COMPETITIVE
ENVIRONMENT). As the GPU Energy companies prepare to operate in a competitive
environment, their supply planning strategy will focus on providing for the
needs of existing retail customers who continue to receive energy supplied by
the GPU Energy companies and whom the GPU Energy companies continue to have an
obligation to serve.
The GPU Energy companies' capacity (in megawatts) and sources of energy
(in gigawatt-hours) for 1997 are as follows:
Capacity Sources of Energy
-------- -----------------
MW % GWH %
-- - --- -
Coal 3,024 28 19,390 38
Nuclear 1,405 13 10,992 21
Gas, hydro & oil 2,322 21 808 2
Nonutility generation 1,666 15 11,119 22
Utility contracts 2,447 23 5,242 10
Spot market & interchange purchases - - 3,762 7
----- -- ----- -
Total 10,864 100 51,313 100
====== === ====== ===
With the proposed sale of the fossil fuel and hydroelectric generation
facilities and the evolving competitive climate in which the GPU Energy
companies' existing customers will be able to choose their electric generation
supplier, the GPU Energy companies' future supply plan will likely focus on
short- to intermediate-term commitments and reliance on spot market purchases.
The GPU Energy companies' present strategy includes minimizing the financial
exposure associated with new long-term purchase commitments.
F-35
Managing Nonutility Generation
The GPU Energy companies are seeking to reduce the above-market costs of
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; 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, however, be
no assurance as to what extent 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, subject to PaPUC approval, Met-Ed and Penelec entered
into definitive buyout agreements with two bidders.
In 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. The PaPUC ordered that the issue of recovery
of the related buyout costs and approval of the revised power purchase
agreements with AES be considered in Met-Ed and Penelec's restructuring
proceedings. If the revised power purchase agreements with AES are not approved
by the PaPUC, Met-Ed and Penelec have agreed to pay AES up to an additional $28
million and $5 million, respectively.
In 1994, pursuant to a PaPUC order, Penelec entered into a power purchase
agreement with Erie Power Partners L.P. (Erie), the developer of a proposed 80
MW coal-fired cogeneration facility. In 1996, Penelec and Erie entered into an
amended power purchase agreement and Penelec paid Erie $11.7 million to
terminate the original agreement. In 1997, Penelec agreed to the buyout of the
amended power purchase agreement for up to an additional $12 million. Of this
amount, Penelec paid $5 million to Erie in 1997. Penelec will pay up to the
remaining $7 million to the extent the PaPUC approves recovery and has agreed to
pay 50% of any amount not approved. The PaPUC has issued an order consolidating
Penelec's request for recovery of the buyout costs with its restructuring
proceeding.
ENVIRONMENTAL MATTERS
The federal Clean Air Act Amendments of 1990 (Clean Air Act) require
substantial reductions in sulfur dioxide (SO2) and nitrogen oxide (NOX)
emissions by the year 2000. The GPU Energy companies plan to install and operate
emission control equipment at some coal-fired facilities and switch to lower
sulfur coal in conjunction with the purchase of SO2 and NOX allowances at other
coal-fired facilities.
To comply with the 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
F-36
approximately $242 million (JCP&L $43 million; Met-Ed $96 million; Penelec $103
million) has already been spent.
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 reached agreement 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 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 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.
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 SO2 emission allowance market, the expected NOX
emissions trading market and the use of low-sulfur fuel or retirement of
facilities. These and other compliance alternatives may result in the
substitution of increased operating expenses for capital costs.
For more information, see the Environmental Matters section of Note 13 of
the Notes to Consolidated Financial Statements.
LEGAL MATTERS - TMI-2 ACCIDENT CLAIMS
In 1996, a U.S. District Court granted a motion for summary judgment filed
by GPU, Inc. and the GPU Energy companies, dismissing all of the 2,100 pending
claims for alleged personal injury and punitive damages filed as a result of the
TMI-2 accident in March 1979. 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 Third Circuit, before which the matter is pending. There can be no assurance
as to the outcome of this litigation. For more information, see the Nuclear
Facilities section of Note 13 of the Notes to Consolidated Financial Statements.
F-37
EFFECTS OF INFLATION
Since the regulatory process results in a time lag during which increased
operating costs are not fully recovered in rates, the GPU Energy companies are
affected by even modest inflation. Also, as competition and deregulation
accelerate, there can be no assurance as to the future recovery of increased
operating costs for generation. Inflation also affects the GPU Energy companies
in the form of increased replacement costs of utility plant, which are
significantly higher than the historical cost reflected in the financial
statements. General inflation has not had a significant impact on GPU over the
last three years.
ACCOUNTING MATTERS
Statement of Financial Accounting Standards No. 71 (FAS 71), "Accounting
for the Effects of Certain Types of Regulation," applies to regulated utilities
that have the ability to recover their costs through rates established by
regulators and charged to customers. In response to the continuing deregulation
of the electric utility industry, the SEC has questioned the continued
applicability of FAS 71 by investor-owned utilities with respect to their
electric generation operations. In May and July 1997, the Financial Accounting
Standards Board's Emerging Issues Task Force (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.
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,
writedowns of plant assets could be required in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets."
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.
F-38
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
GPU, Inc.
Morristown, New Jersey
We have audited the consolidated financial statements and financial statement
schedule of GPU, Inc. and Subsidiary Companies as listed in the index on page
F-1 of this Form 10-K. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of GPU, Inc. and
Subsidiary Companies as of December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule referred to above, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
New York, New York
February 4, 1998
F-39
GPU, Inc. and Subsidiary Companies
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31, 1997 1996
ASSETS
Utility Plant:
In service, at original cost $11,150,677 $ 9,646,380
Less, accumulated depreciation 4,050,165 3,704,026
--------- ---------
Net utility plant in service 7,100,512 5,942,354
Construction work in progress 250,050 277,440
Other, net 159,009 168,029
------- -------
Net utility plant 7,509,571 6,387,823
--------- ---------
Other Property and Investments:
GPUI Group equity investments (Note 6) 596,679 794,588
Goodwill, net (Note 5) 581,364 23,808
Nuclear decommissioning trusts, at market (Note 13) 579,673 464,011
Nuclear fuel disposal trust, at market 108,652 101,661
Other, net 252,335 157,123
------- -------
Total other property and investments 2,118,703 1,541,191
--------- ---------
Current Assets:
Cash and temporary cash investments 85,099 31,604
Special deposits 27,093 47,545
Accounts receivable:
Customers, net 290,247 270,844
Other 104,441 91,637
Unbilled revenues 147,162 114,891
Materials and supplies, at average cost or less:
Construction and maintenance 187,799 187,130
Fuel 40,424 40,207
Investment held for sale (Note 6) 106,317 --
Deferred income taxes (Note 8) 83,962 32,148
Prepayments 55,613 81,168
Other 1,023 --
----- -----
Total current assets 1,129,180 897,174
--------- -------
Deferred Debits and Other Assets:
Regulatory assets: (Note 13)
Income taxes recoverable through future rates 510,680 527,385
Three Mile Island Unit 2 deferred costs 345,326 356,517
Nonutility generation contract buyout costs 245,568 242,481
Unamortized property losses 99,532 100,310
Other 448,146 426,579
------- -------
Total regulatory assets 1,649,252 1,653,272
Deferred income taxes (Note 8) 383,169 332,828
Other 134,833 128,931
------- -------
Total deferred debits and other assets 2,167,254 2,115,031
--------- ---------
Total Assets $12,924,708 $10,941,219
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-40
GPU, Inc. and Subsidiary Companies
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31, 1997 1996
LIABILITIES AND CAPITALIZATION
Capitalization:
Common stock (Note 4) $ 314,458 $ 314,458
Capital surplus 755,040 750,569
Retained earnings 2,140,712 2,054,222
Accumulated other comprehensive income/(loss) (Note 4) (29,296) 14,754
------- ------
Total 3,180,914 3,134,003
Less, reacquired common stock, at cost 80,984 86,416
------ ------
Total common stockholders' equity 3,099,930 3,047,587
Cumulative preferred stock: (Note 4)
With mandatory redemption 91,500 114,000
Without mandatory redemption 66,478 66,478
Subsidiary-obligated mandatorily redeemable
preferred securities (Note 4) 330,000 330,000
Long-term debt (Note 3) 4,325,972 3,177,016
--------- ---------
Total capitalization 7,913,880 6,735,081
--------- ---------
Current Liabilities:
Securities due within one year 631,934 178,583
Notes payable (Note 2) 353,214 265,547
Obligations under capital leases (Note 12) 138,919 143,818
Accounts payable 413,791 354,819
Taxes accrued 48,304 25,717
Interest accrued 83,947 70,370
Deferred energy 25,645 15,559
Other 325,681 282,193
------- -------
Total current liabilities 2,021,435 1,336,606
--------- ---------
Deferred Credits and Other Liabilities:
Deferred income taxes (Note 8) 1,566,131 1,562,979
Unamortized investment tax credits 123,162 133,572
Three Mile Island Unit 2 future costs 448,808 430,508
Regulatory liabilities (Note 13) 101,774 89,815
Other 749,518 652,658
------- -------
Total deferred credits and other liabilities 2,989,393 2,869,532
--------- ---------
Commitments and Contingencies (Note 13)
Total Liabilities and Capitalization $12,924,708 $10,941,219
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-41
GPU, Inc. and Subsidiary Companies
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands)
For The Years Ended December 31, 1997 1996 1995
Operating Revenues $4,143,379 $3,970,711 $3,822,459
---------- ---------- ----------
Operating Expenses:
Fuel 400,329 389,569 369,204
Power purchased and interchanged 1,046,906 1,005,630 1,022,361
Deferral of energy and capacity costs, net 6,043 19,788 (5,902)
Other operation and maintenance 993,739 1,114,854 965,054
Depreciation and amortization 467,714 407,672 380,664
Taxes, other than income taxes 357,913 355,283 349,233
------- ------- -------
Total operating expenses 3,272,644 3,292,796 3,080,614
--------- --------- ---------
Operating Income Before Income Taxes 870,735 677,915 741,845
Income taxes (Note 8) 223,617 159,649 175,808
------- ------- -------
Operating Income 647,118 518,266 566,037
------- ------- -------
Other Income and Deductions:
Allowance for other funds used during construction 75 2,249 5,113
Equity in undistributed earnings/(losses)
of affiliates (Note 6) (27,100) 33,981 (3,597)
Other income, net 5,585 23,490 215,007
Income taxes (Note 8) 30,081 (7,070) (88,898)
------ ------ -------
Total other income and deductions 8,641 52,650 127,625
----- ------ -------
Income Before Interest Charges and
Preferred Dividends 655,759 570,916 693,662
------- ------- -------
Interest Charges and Preferred Dividends:
Interest on long-term debt 246,935 213,544 189,541
Other interest 36,482 29,623 30,861
Allowance for borrowed funds used during
construction (5,508) (8,423) (9,558)
Dividends on subsidiary-obligated mandatorily
redeemable preferred securities 28,888 28,888 24,816
Preferred stock dividends of subsidiaries, net of
gain on reacquisition of $9,288 in 1996 12,524 6,231 16,945
------ ----- ------
Total interest charges and preferred dividends 319,321 269,863 252,605
------- ------- -------
Minority interest net income 1,337 2,701 922
----- ----- ---
Net Income $ 335,101 $ 298,352 $ 440,135
========== ========== ==========
Basic - Earnings Per Average Common Share $ 2.78 $ 2.48 $ 3.79
========== ========== ==========
- Average Common Shares Outstanding(In Thousands) 120,722 120,513 116,063
======= ======= =======
Diluted - Earnings Per Average Common Share $ 2.77 $ 2.47 $ 3.79
========== ========== ==========
- Average Common Shares Outstanding(In Thousands) 121,002 120,751 116,179
======= ======= =======
Cash Dividends Paid Per Share $ 1.985 $ 1.925 $ 1.86
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-42
GPU, Inc. and Subsidiary Companies
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
For The Years Ended December 31, 1997 1996 1995
Net income $ 335,101 $ 298,352 $ 440,135
--------- --------- ---------
Other comprehensive income/(loss), net of tax: (Note 4)
Net unrealized gains on investments 6,374 704 5,731
Foreign currency translation (48,929) 3,054 959
Minimum pension liability (1,495) (2,175) 632
------ ------ ---
Total other comprehensive income/(loss) (44,050) 1,583 7,322
------- ----- -----
Comprehensive income $ 291,051 $ 299,935 $ 447,457
========= ========= =========
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(In Thousands)
For The Years Ended December 31, 1997 1996 1995
Balance at beginning of year $ 2,054,222 $ 1,991,599 $ 1,769,910
Net income 335,101 298,352 440,135
Cash dividends declared on common stock (241,517) (235,731) (218,288)
Other adjustments, net (7,094) 2 (158)
------ - ----
Balance at end of year $ 2,140,712 $ 2,054,222 $ 1,991,599
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-43
GPU, Inc. and Subsidiary Companies
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
For The Years Ended December 31, 1997 1996 1995
Operating Activities:
Net income $ 335,101 $ 298,352 $ 440,135
Adjustments to reconcile income to cash provided:
Depreciation and amortization 487,962 422,506 381,618
Amortization of property under capital leases 50,108 55,642 57,324
Equity in undistributed (earnings)/losses
of affiliates, net of distributions received 69,862 (23,994) 6,880
Three Mile Island Unit 2 costs -- -- (170,005)
Voluntary enhanced retirement programs -- 122,739 --
Nuclear outage maintenance costs, net 2,374 (6,078) 7,407
Deferred income taxes and investment tax
credits, net (29,248) 57,144 115,278
Deferred energy and capacity costs, net 8,193 19,719 (6,061)
Accretion income (10,760) (11,610) (12,520)
Allowance for other funds used during
construction (75) (2,249) (5,113)
Changes in working capital:
Receivables (76,178) 2,893 (54,993)
Materials and supplies 4,803 6,604 9,323
Special deposits and prepayments 28,371 (36,294) 14,401
Payables and accrued liabilities 49,025 (103,221) (18,651)
Nonutility generation contract buyout costs (56,550) (120,018) (38,499)
Other, net (18,725) (29,479) (58,008)
------- ------- -------
Net cash provided by operating activities 844,263 652,656 668,516
------- ------- -------
Investing Activities:
Cash construction expenditures (356,416) (403,880) (461,860)
GPUI Group investments (1,912,221) (573,587) (164,831)
Contributions to decommissioning trusts (40,283) (40,324) (37,541)
Other, net 34,500 (26,238) (7,117)
------ ------- ------
Net cash used for investing activities (2,274,420) (1,044,029) (671,349)
---------- ---------- --------
Financing Activities:
Issuance of long-term debt 1,893,219 743,596 403,656
Increase/(Decrease) in notes payable, net 87,667 141,657 (223,962)
Retirement of long-term debt (184,015) (150,763) (192,664)
Capital lease principal payments (49,560) (56,217) (50,611)
Issuance of common stock -- -- 157,545
Issuance of subsidiary-obligated mandatorily
redeemable preferred securities -- -- 121,063
Redemption of preferred stock of subsidiaries (20,000) (42,347) (6,049)
Dividends paid on common stock (239,597) (231,956) (215,413)
-------- -------- --------
Net cash provided/(required) by
financing activities 1,487,714 403,970 (6,435)
--------- ------- ------
Effect of exchange rate changes on cash (4,062) 585 959
------ --- ---
Net increase/(decrease) in cash and temporary cash
investments from above activities 53,495 13,182 (8,309)
Cash and temporary cash investments, beginning of year 31,604 18,422 26,731
------ ------ ------
Cash and temporary cash investments, end of year $ 85,099 $ 31,604 $ 18,422
=========== =========== ===========
Supplemental Disclosure:
Interest and preferred dividends paid $ 307,064 $ 281,057 $ 254,906
=========== =========== ===========
Income taxes paid $ 229,373 $ 153,599 $ 187,361
=========== =========== ===========
New capital lease obligations incurred $ 41,898 $ 34,826 $ 54,478
=========== =========== ===========
Common stock dividends declared but not paid $ 60,414 $ 58,493 $ 54,718
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-44
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; 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."
The Notes to Consolidated Financial Statements are presented below on a
combined basis for all of GPU, Inc., JCP&L, Met-Ed and Penelec.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and revenues and expenses during the reporting period. Actual
results could differ from those estimates.
SYSTEM OF ACCOUNTS
Certain reclassifications of prior years' data have been made to conform
with the current presentation. The GPU Energy companies' accounting records are
maintained in accordance with the Uniform System of Accounts prescribed by the
Federal Energy Regulatory Commission (FERC) and adopted by the Pennsylvania
Public Utility Commission (PaPUC) and the New Jersey Board of Public Utilities
(NJBPU), and also comply with the Securities and Exchange Commission's rules and
regulations.
CONSOLIDATION
The consolidated financial statements include the accounts of all
subsidiaries. All significant intercompany transactions and accounts are
eliminated in consolidation. GPU consolidates the accounts of its wholly-
F-45
owned subsidiaries and any affiliates in which it has a controlling financial
interest (generally evidenced by a greater than 50% ownership interest). GPU
also uses the equity method of accounting for investments in affiliates in which
it has the ability to exercise significant influence. (For further information,
see Note 6, GPUI Group Equity Investments.)
REGULATORY ACCOUNTING
In accordance with Statement of Financial Accounting Standards No. 71 (FAS
71), "Accounting for the Effects of Certain Types of Regulation," the
consolidated financial statements reflect assets and costs in accordance with
current cost-based ratemaking regulation. Continued accounting under FAS 71
requires that the following criteria be met:
a) A utility's rates for regulated services provided to its customers
are established by, or are subject to approval by, an independent
third-party regulator;
b) The regulated rates are designed to recover specific costs of
providing the regulated services or products; and
c) In view of the demand for the regulated services and the level of
competition, direct and indirect, it is reasonable to assume that
rates set at levels that will recover a utility's costs can be
charged to and collected from customers. This criteria requires
consideration of anticipated changes in levels of demand or
competition during the recovery period for any capitalized costs.
In accordance with the provisions of FAS 71, the GPU Energy companies have
deferred certain costs pursuant to actions of the NJBPU, PaPUC and FERC, and are
recovering or expect to recover such costs in electric rates charged to
customers. Regulatory assets are reflected in the Deferred Debits and Other
Assets section of the Consolidated Balance Sheets, and regulatory liabilities
are reflected in the Deferred Credits and Other Liabilities section of the
Consolidated Balance Sheets. (For further information about regulatory assets
and liabilities, see Note 13, Commitments and Contingencies.)
CURRENCY TRANSLATION
In accordance with Statement of Financial Accounting Standards No. 52 (FAS
52), "Foreign Currency Translation," balance sheet accounts of the GPUI Group's
foreign operations are translated from foreign currencies into U.S. dollars at
either year-end rates or historical rates, while income statement accounts are
translated at the weighted average exchange rates for the relevant period. The
resulting translation adjustments are included in Accumulated other
comprehensive income/(loss) on the Consolidated Balance Sheets. Gains and losses
resulting from foreign currency transactions are included in Net Income.
F-46
REVENUES
GPU recognizes electric operating revenues for services rendered
(including an estimate of unbilled revenues) to the end of the relevant
accounting period.
DEFERRED ENERGY COSTS
Energy costs are recognized in the period in which the related energy
clause revenues are billed. Through December 31, 1996, Met-Ed and Penelec
recovered energy costs through the Energy Cost Rate (ECR) mechanism and deferred
any differences between actual energy costs and amounts recovered. Comprehensive
legislation adopted in Pennsylvania in 1996, which provides for the
restructuring of the electric utility industry in the state, capped rates that
can be charged to customers for generation for up to nine years. In December
1996, Met-Ed and Penelec filed a request with the PaPUC and received a tentative
order, effective for all bills rendered after January 1, 1997, which allows
their currently effective ECRs to be included in base rates. As a result,
effective January 1, 1997, Met-Ed and Penelec will no longer defer energy costs.
(For further information, see Competitive Environment section, Management's
Discussion and Analysis.) JCP&L continues to recover energy- related costs
through the Levelized Energy Adjustment Clause (LEAC).
UTILITY PLANT
It is the policy of GPU to record additions to utility plant (material,
labor, overhead and an allowance for funds used during construction) at cost.
The cost of current repairs and minor replacements is charged to appropriate
operating and maintenance expense and clearing accounts, and the cost of
renewals is capitalized. The original cost of utility plant retired or otherwise
disposed of is charged to accumulated depreciation.
DEPRECIATION
GPU provides for depreciation at annual rates determined and revised
periodically, on the basis of studies, to be sufficient to depreciate the
original cost of depreciable property over estimated remaining service lives,
which are generally longer than those employed for tax purposes. These rates, on
an aggregate composite basis, were as follows:
GPU JCP&L Met-Ed Penelec
1997 3.34% 3.60% 3.39% 3.08%
1996 3.31% 3.58% 3.27% 2.82%
1995 3.22% 3.64% 3.07% 2.61%
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFUDC)
The Uniform System of Accounts defines AFUDC as "the net cost for the
period of construction of borrowed funds used for construction purposes and a
reasonable rate on other funds when so used." The GPU Energy companies record
F-47
AFUDC as a charge to construction work in progress, and the equivalent credits
are to interest charges for the pre-tax cost of borrowed funds and to other
income for the allowance for other funds. While AFUDC results in an increase in
utility plant and represents current earnings, it is realized in cash through
depreciation or amortization allowances only when the related plant is
recognized in rates. These rates, on an aggregate composite basis, were as
follows:
GPU JCP&L Met-Ed Penelec
1997 6.38% 6.48% 6.12% 6.41%
1996 6.79% 6.88% 8.11% 6.15%
1995 8.05% 8.04% 8.62% 7.78%
AMORTIZATION POLICIES
Accounting for TMI-2 and Forked River Investments:
JCP&L is collecting annual revenues for the amortization of Three Mile
Island Unit 2 (TMI-2) of $9.6 million. This level of revenue will be sufficient
to recover the remaining investment by 2008. Met-Ed and Penelec have collected
all of their TMI-2 investment attributable to retail customers. At December 31,
1997, $74 million is included in Unamortized property losses on the Consolidated
Balance Sheets for JCP&L's Forked River project. JCP&L is collecting annual
revenues for the amortization of this project of $11.2 million, which will be
sufficient to recover its remaining investment by the year 2006. Because the GPU
Energy companies have not been provided revenues for a return on the unamortized
balances of the damaged TMI-2 facility and the cancelled Forked River project,
these investments are being carried at their discounted present values. The
related annual accretion, which represents the increase in carrying amounts that
are recorded as the asset is written up from its discounted value, is recorded
in Other income, net on the Income Statement in accordance with Statement of
Financial Accounting Standards No. 90, "Regulated Enterprises- Accounting for
Abandonments and Disallowances of Plant Costs."
Nuclear Fuel:
The GPU Energy companies amortize nuclear fuel on a unit-of-production
basis. Rates are determined and periodically revised to amortize the cost of the
fuel over its useful life.
At December 31, 1997 and 1996, the liability of the GPU Energy companies
for future contributions to the Federal Decontamination and Decommissioning Fund
for the cleanup of uranium enrichment plants operated by the Federal Government
amounted to $31 million (JCP&L $20 million; Met-Ed $7 million; Penelec $4
million) and $34 million (JCP&L $22 million; Met-Ed $8 million; Penelec $4
million), respectively, and was primarily reflected in Deferred Credits and
Other Liabilities-Other. Annual contributions, which began in 1993, are being
made over a 15-year period and are being recovered from customers. At December
31, 1997 and 1996, $33 million (JCP&L $21 million; Met-Ed $8 million; Penelec $4
million) and $36 million (JCP&L $23 million;
F-48
Met-Ed $9 million; Penelec $4 million), respectively, was recorded on the
Consolidated Balance Sheets in Regulatory assets-Other.
Intangibles:
The GPUI Group records goodwill for any amount paid over the fair value of
net tangible assets it acquires, and other intangible assets for the right to
perform management services. As of December 31, 1997 and 1996, the GPUI Group
had goodwill and other intangibles, net of accumulated amortization, of
approximately $581 million and $24 million, respectively. Goodwill and other
intangibles are amortized on a straight-line basis over a period of 40 years.
Amortization expense, in the aggregate, amounted to $2.8 million and $0.8
million for the years ended December 31, 1997 and 1996, respectively. The GPUI
Group periodically reviews projections of future cash flows from operations to
assess any potential intangible impairment. An impairment, if identified, would
be recorded based upon discounted projected cash flows.
A discussion of the goodwill related to the GPUI Group's purchase of
PowerNet, and other acquisitions is included in Note 5 , "Acquisitions" and Note
6, "GPUI Group Equity Investments."
NUCLEAR OUTAGE MAINTENANCE COSTS
The GPU Energy companies accrue incremental nuclear outage maintenance
costs anticipated to be incurred during scheduled nuclear plant refueling
outages to provide a proper matching of revenues to expenses.
NUCLEAR FUEL DISPOSAL FEE
The GPU Energy companies are providing 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. The GPU Energy companies
entered into contracts in 1983 with the U.S. Department of Energy (DOE) for the
disposal of spent nuclear fuel. The total liability under these contracts,
including interest, at December 31, 1997, all of which relates to spent nuclear
fuel from nuclear generation through April 1983, amounted to $179 million (JCP&L
$134 million; Met-Ed $30 million; Penelec $15 million), and is reflected in
Deferred Credits and Other Liabilities Other. As the actual liability is
substantially in excess of the amount recovered to date from ratepayers, the GPU
Energy companies have reflected such excess of $21.5 million (JCP&L $23.7
million; Met-Ed $(1.5) million; Penelec $(0.7) million) at December 31, 1997 in
Regulatory assets-Other. The rates presently charged to customers provide for
the collection of these costs, plus interest, over remaining periods of nine
years for JCP&L and Met-Ed.
The GPU Energy companies are collecting one mill per kilowatt-hour from
their customers for spent nuclear fuel disposal costs resulting from nuclear
generation subsequent to April 1983. These amounts are remitted quarterly to the
DOE. (See Note 13, Commitments and Contingencies, for a discussion of the DOE's
current inability to begin acceptance of spent nuclear fuel from the GPU Energy
companies and other standard contract holders.)
F-49
INCOME TAXES
GPU files a consolidated federal income tax return. All participants are
jointly and severally liable for the full amount of any tax, including penalties
and interest, which may be assessed against the group.
Deferred income taxes, which result primarily from liberalized
depreciation methods, deferred energy costs, decommissioning funds and
discounted Forked River and TMI-2 investments, reflect the impact of temporary
differences between the amounts of assets and liabilities recognized for
financial reporting purposes and the amounts recognized for tax purposes.
Investment tax credits (ITC) are amortized over the estimated service lives of
the related facilities.
CARRYING AMOUNTS OF FINANCIAL INSTRUMENTS
The carrying amounts of Temporary cash investments, Special deposits,
Securities due within one year and Notes payable on the Consolidated Balance
Sheets approximate fair value due to the short period to maturity. The carrying
amounts of the Nuclear decommissioning trusts and Nuclear fuel disposal trust,
whose assets are invested in cash equivalents and debt and equity securities,
also approximate fair value. At December 31, 1997, Deferred Debits and Other
Assets - Other on the Consolidated Balance Sheets included $47 million of
restricted cash, related to GPU Power's 50% ownership interest in Empresa
Guaracachi S.A.
ENVIRONMENTAL LIABILITIES
GPU may be subject to loss contingencies resulting from environmental laws
and regulations, which include obligations to mitigate the effects on the
environment of the disposal or release of certain hazardous wastes and
substances at various sites. GPU records liabilities (on an undiscounted basis)
for hazardous waste sites where it is probable that a loss has been incurred and
the amount of the loss can be reasonably estimated and adjusts these liabilities
as required to reflect changes in circumstances.
STATEMENTS OF CASH FLOWS
For the purpose of the consolidated statements of cash flows, temporary
investments include all unrestricted liquid assets, such as cash deposits and
debt securities, with maturities generally of three months or less.
F-50
2. SHORT-TERM BORROWING ARRANGEMENTS
At December 31, 1997 and 1996, GPU had short-term notes outstanding as
follows:
1997 1996
---- ----
Balance Weighted Balance Weighted
Company Facility Outstanding Avg. Rate Outstanding Avg. Rate
- ------- -------- ----------- --------- ----------- ---------
(in millions) (in millions)
GPU, Inc. Bank Lines of Credit $ 92 6.6% $ 75 5.7%
JCP&L Bank Lines of Credit 96 6.5 32 6.5
Commercial Paper 19 6.5 - -
Met-Ed Bank Lines of Credit 49 6.7 51 5.9
Commercial Paper 18 6.9 - -
Penelec Bank Lines of Credit 61 6.7 99 6.1
Commercial Paper 17 6.9 9 5.8
GPU International Bank Lines of Credit 1 6.2 - -
- --- -- ---
Total $353 6.6% $266 6.0%
==== === ==== ===
GPU has $527 million of credit facilities, which includes various lines of
credit totaling $247 million, and two Revolving Credit Agreements, as discussed
below:
Under the Credit Agreement between GPU, Inc., the GPU Energy companies and
a consortium of banks, total borrowings are limited to $250 million outstanding
at any time and are subject to various covenants. The agreement expires May 6,
2001. A facility fee on the unborrowed amount of .15 of 1% is payable annually.
Borrowing rates and a facility fee are based on the long-term debt ratings of
the GPU Energy companies.
GPU International, Inc. has a separate Credit Agreement providing for
borrowings (guaranteed by GPU, Inc.) through June 1998 of up to $30 million
outstanding at any time, which decreases for two years thereafter. Up to $15
million may be utilized to provide letters of credit. An annual facility fee of
3/8 of 1% on the total amount of the Credit Agreement and a letter of credit fee
of 1/2 of 1% on the outstanding letters of credit are payable by GPU
International, Inc.
F-51
3. LONG-TERM DEBT
At December 31, 1997 and 1996, long-term debt outstanding was as follows:
(in thousands)
GPU, Inc. and Subsidiary Companies
- ----------------------------------
1997 1996
---- ----
First Mortgage Bonds (GPU Energy Companies)(a) $2,447,810 $2,550,185
Amounts due within one year (30,000) (166,065)
Unamortized net discount (3,284) (3,508)
------ ------
Total 2,414,526 2,380,612
Other long-term debt:
GPUI Group (excludes amounts due within one year
of $589,390 for 1997 and $2,478 for 1996) 1,877,300 749,214
Other (excludes amounts due within one year
of $44 for 1997 and $40 for 1996) 34,146 47,190
------ ------
Total long-term debt $4,325,972 $3,177,016
========== ==========
(in thousands)
JCP&L
- -----
First Mortgage Bonds - Series as noted (a):
1997 1996 1997 1996
---- ---- ---- ----
6.90% due 1997 $ - $ 30,000 7.90% due 2007 $ 40,000 $ 40,000
6 5/8% due 1997 - 25,874 7 1/8% due 2009 6,300 6,300
6.70% due 1997 - 20,000 7.10% due 2015 12,200 12,200
7 1/4% due 1998 - 24,191 9.20% due 2021 50,000 50,000
6.04% due 2000 40,000 40,000 8.55% due 2022 30,000 30,000
6.45% due 2001 40,000 40,000 8.82% due 2022 12,000 12,000
9% due 2002 50,000 50,000 8.85% due 2022 38,000 38,000
6 3/8% due 2003 150,000 150,000 8.32% due 2022 40,000 40,000
7 1/8% due 2004 160,000 160,000 7.98% due 2023 40,000 40,000
6.78% due 2005 50,000 50,000 7 1/2% due 2023 125,000 125,000
8 1/4% due 2006 50,000 50,000 8.45% due 2025 50,000 50,000
6.85% due 2006 40,000 40,000 6 3/4% due 2025 150,000 150,000
------- -------
Subtotal 1,173,500 1,273,565
Amounts due within one year - (100,065)
Unamortized net discount (3,233) (3,457)
------ ------
Total 1,170,267 1,170,043
Other long-term debt (excludes amounts due within one year
of $11 for 1997 and $10 for 1996) 3,037 3,048
----- -----
Total long-term debt $1,173,304 $1,173,091
========== ==========
F-52
(in thousands)
Met-Ed
- ------
First Mortgage Bonds - Series as noted (a):
1997 1996 1997 1996
---- ---- ---- ----
7.47% due 1997 $ - $ 20,000 7.35% due 2005 $ 20,000 $ 20,000
9.2% due 1997 - 20,000 6.36% due 2006 17,000 17,000
7.05% due 1999 30,000 30,000 6.40% due 2006 33,000 33,000
6.2% due 2000 30,000 30,000 6.00% due 2008 8,700 8,700
9.48% due 2000 20,000 20,000 6.1% due 2021 28,500 28,500
8.05% due 2002 30,000 30,000 8.6% due 2022 30,000 30,000
6.6% due 2003 20,000 20,000 8.8% due 2022 30,000 30,000
7.22% due 2003 40,000 40,000 6.97% due 2023 30,000 30,000
9.1% due 2003 30,000 30,000 7.65% due 2023 30,000 30,000
6.34% due 2004 40,000 40,000 8.15% due 2023 60,000 60,000
6.77% due 2005 30,000 30,000 5.95% due 2027 13,690 -
------ -------
Subtotal 570,890 597,200
Amounts due within one year - (40,000)
Unamortized net discount (39) (43)
--- ---
Total $ 570,851 $ 557,157
Other long-term debt (excludes amounts due within one year
of $22 for 1997 and $20 for 1996) 6,073 6,095
----- -----
Total long-term debt $ 576,924 $ 563,252
========= =========
(in thousands)
Penelec
- -------
First Mortgage Bonds - Series as noted (a):
1997 1996 1997 1996
---- ---- ---- ----
6 1/4% due 1997 $ - $ 26,000 6.7% due 2005 $ 30,000 $ 30,000
7 7/8% due 1998 30,000 30,000 6.35% due 2006 40,000 40,000
5.99% due 1999 50,000 - 8.05% due 2006 10,000 10,000
6.15% due 2000 30,000 30,000 6 1/8% due 2007 4,110 4,110
6.8% due 2001 20,000 20,000 6.55% due 2009 50,000 50,000
8.70% due 2001 30,000 30,000 5.35% due 2010 12,310 12,310
7.40% due 2002 10,000 10,000 5.35% due 2010 12,000 12,000
7.43% due 2002 30,000 30,000 5.80% due 2020 20,000 20,000
7.92% due 2002 10,000 10,000 8.33% due 2022 20,000 20,000
7.40% due 2003 10,000 10,000 7.49% due 2023 30,000 30,000
6.60% due 2003 30,000 30,000 8.38% due 2024 40,000 40,000
7.02% due 2003 20,000 20,000 8.61% due 2025 30,000 30,000
7.48% due 2004 40,000 40,000 7.53% due 2025 40,000 40,000
6.10% due 2004 30,000 30,000 6.05% due 2025 25,000 25,000
------ ------
Subtotal 703,420 679,420
Amounts due within one year (30,000) (26,000)
Unamortized net discount (12) (8)
--- --
Total 673,408 653,412
Other long-term debt (excludes amounts due within one year
of $11 for 1997 and $10 for 1996) 3,036 3,047
----- -----
Total long-term debt $ 676,444 $ 656,459
========= ==========
<FN>
(a) Substantially all of the utility plant owned by the GPU Energy companies is
subject to the lien of their respective mortgages.
</FN>
F-53
For the years 1998, 1999, 2000, 2001 and 2002 GPU has long-term debt
maturities for first mortgage bonds and other long-term debt as follows:
(in millions)
Company 1998 1999 2000 2001 2002
- ------- ---- ---- ---- ---- ----
JCP&L $ - $ - $ 40 $ 40 $ 50
Met-Ed - 30 50 - 30
Penelec 30 50 30 50 50
GPUI Group 589 152 622 441 564
GPUS - - - 22 -
--- --- --- --- ---
Total $619 $232 $742 $553 $694
==== ==== ==== ==== ====
The estimated fair value of GPU's long-term debt, including amounts due
within one year, as of December 31, 1997 and 1996 was as follows:
(in thousands)
1997 1996
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
JCP&L $1,173,315 $1,231,766 $1,273,166 $1,277,853
Met-Ed 576,946 607,336 603,272 607,588
Penelec 706,455 736,031 682,469 666,292
GPUI Group 2,466,690 2,467,286 751,692 744,605
GPUS 22,000 22,000 35,000 35,000
------ ------ ------ ------
Total $4,945,406 $5,064,419 $3,345,599 $3,331,338
========== ========== ========== ==========
The fair value of long-term debt is estimated based on the quoted market
prices for the same or similar issues or on the current rates offered to GPU for
debt of the same remaining maturities and credit qualities.
At December 31, 1997, the GPUI Group had long-term debt outstanding of
$2.5 billion of which approximately $1.1 billion was guaranteed by GPU, Inc. The
guaranteed amount consisted of the following: $450 million under a five-year
U.S. bank credit agreement used to partially fund GPU Electric, Inc.'s
acquisition of PowerNet (see Note 5); (pound)340 million (approximately U.S.
$561 million at December 31, 1997) under a bank term loan facility used to fund
GPU Electric, Inc.'s investment in Midlands; A$80 million (approximately U.S.
$52 million at December 31, 1997) through a bank term loan facility used to fund
GPU Electric, Inc.'s purchase of its interest in Solaris Power; and
approximately $32 million through a bank term loan facility used to fund
construction of GPU International Inc.'s Mid-Georgia Cogen, L.P. project.
F-54
4. STOCKHOLDERS' EQUITY
COMMON EQUITY
Common Stock:
GPU, Inc.
The following table presents information relating to the common stock
($2.50 par value) of GPU, Inc.:
1997 1996 1995
---- ---- ----
Authorized shares 350,000,000 350,000,000 350,000,000
Issued shares 125,783,338 125,783,338 125,783,338
Reacquired shares 4,950,727 5,172,201 5,359,997
Outstanding shares 120,832,611 120,611,137 120,423,341
Outstanding restricted units 248,883 258,705 195,499
In 1995, GPU, Inc. sold five million additional shares of common stock,
for net proceeds of $157.5 million. The issuance resulted in a credit to capital
surplus totaling $71.9 million. In 1997, 1996 and 1995, under GPU, Inc.'s
Dividend Reinvestment Plan, capital surplus was credited $3.0 million, $3.0
million and $2.7 million, respectively, for shares sold.
In 1997, 1996 and 1995, pursuant to the 1990 Restricted Stock Plan, GPU,
Inc. issued restricted units to officers representing rights to receive shares
of common stock, on a one-for-one basis, at the end of the five-year vesting or
restriction period. Beginning with awards in 1995, the number of shares
eventually issued will vary from the number of units awarded according to the
degree that GPU, Inc.'s performance goals have been met for the restriction
period. The shares issuable at the end of the period could range from 0% to 200%
of the originally awarded units. In 1997, GPU, Inc. also issued restricted units
to outside directors representing rights to receive shares of common stock, on a
one-for-one basis, under the Deferred Stock Unit Plan for Outside Directors. In
1997, GPU adopted Statement of Financial Accounting Standards No. 128 (FAS 128),
"Earnings Per Share," which requires a dual presentation of earnings per share
for companies that have common stock equivalents. GPU's basic and diluted
earnings per share in accordance with FAS 128 are not materially different. The
restricted units are considered common stock equivalents and accordingly, are
reflected in the computation of diluted earnings per share shown on the income
statement. The restricted units accrue dividend equivalents on a quarterly
basis, which are invested in additional equivalent units. In 1997, 1996 and
1995, GPU, Inc. awarded to plan participants 64,941, 63,206 and 83,600
restricted units, respectively. In 1997, 1996 and 1995, GPU, Inc. issued a total
of 54,491, 37,253 and 30,558 shares, respectively, from previously reacquired
shares.
In 1996, GPU adopted Statement of Financial Accounting Standards No. 123
(FAS 123), "Accounting for Stock-Based Compensation," which establishes a fair
value-based method of accounting for employee stock-based compensation. Under
this method, compensation cost is measured at the grant date, based on the
market price of the stock at that date, and is recognized as expense over the
F-55
restricted period. FAS 123 permits companies to continue to follow the
accounting prescribed by Accounting Principles Board Opinion No. 25 (APB No.
25), provided that pro forma disclosures of net income are made as if the fair
value-based method of accounting had been applied. GPU has elected to continue
accounting for stock-based compensation in accordance with APB No. 25, which
contains provisions for subsequent adjustments to compensation cost based on
market price fluctuations of the stock after the grant date. The pro forma
effects on net income resulting from the application of the fair value-based
method of accounting defined in FAS 123 are immaterial.
At December 31, 1997 and 1996, the following issues of common stock were
outstanding:
(in thousands)
GPU, Inc. 1997 1996
- --------- ---- ----
Common stock, par value $2.50 per share $314,458 $314,458
======== ========
JCP&L
- -----
Common stock, par value $10 per share,
16,000,000 shares authorized, 15,371,270
shares issued and outstanding $153,713 $153,713
======== ========
Met-Ed
- ------
Common stock, no par value, 900,000 shares
authorized, 859,500 shares issued
and outstanding $ 66,273 $ 66,273
======== ========
Penelec
- -------
Common stock, par value $20 per share,
5,400,000 shares authorized, 5,290,596
shares issued and outstanding $105,812 $105,812
======== ========
Accumulated Other Comprehensive Income/(Loss):
In 1997, GPU adopted Statement of Financial Accounting Standards No. 130
(FAS 130), "Reporting Comprehensive Income," which required GPU to reclassify,
for financial reporting purposes only, certain amounts shown below which were
previously included in Retained Earnings, and are now included in Accumulated
other comprehensive income/(loss) on the Consolidated Balance Sheets. After
making these balance sheet reclassifications, the following amounts were
included in Accumulated other comprehensive income/(loss) at December 31, 1997
and December 31, 1996:
GPU, Inc. and Subsidiary Companies (in thousands)
- ----------------------------------
1997 1996
---- ----
Net unrealized gains on investments $ 19,358 $ 12,984
Foreign currency translation (44,916) 4,013
Minimum pension liability (3,738) (2,243)
------ ------
Accumulated other comprehensive income/(loss) $(29,296) $ 14,754
======== ========
F-56
Met-Ed (in thousands)
- ------
1997 1996
---- ----
Net unrealized gains on investments $ 12,906 $ 8,657
Minimum pension liability (419) (262)
---- ----
Accumulated other comprehensive income $ 12,487 $ 8,395
======== ========
Penelec
- -------
Net unrealized gains on investments $ 6,454 $ 4,329
Minimum pension liability (122) -
---- -----
Accumulated other comprehensive income $ 6,332 $ 4,329
======== ========
The components of other comprehensive income/(loss), and the related tax
effects, for the years 1997, 1996 and 1995 are as follows:
(in thousands)
GPU, Inc. and Subsidiary Companies Amount Income Tax Amount
Before (Expense) Net of
1997 Taxes Benefit Taxes
- ---- ----- ------- -----
Unrealized gains on investments:
Gains on investments during the year $ 10,895 $ (4,521) $ 6,374
Less: Realized gains in net income - - -
------- ------- ------
Net unrealized gains on investments 10,895 (4,521) 6,374
Foreign currency translation (73,115) 24,186 (48,929)
Minimum pension liability (2,541) 1,046 (1,495)
------ ----- ------
Total other comprehensive income/(loss) $(64,761) $ 20,711 $(44,050)
======== ======== ========
1996
- ----
Unrealized gains on investments:
Gains on investments during the year $ 10,797 $ (3,922) $ 6,875
Less: Realized gains in net income (9,494) 3,323 (6,171)
------ ----- ------
Net unrealized gains on investments 1,303 (599) 704
Foreign currency translation 3,054 - 3,054
Minimum pension liability (3,706) 1,531 (2,175)
------ ----- ------
Total other comprehensive income $ 651 $ 932 $ 1,583
======== ======== ========
1995
- ----
Unrealized gains on investments:
Gains on investments during the year $ 22,692 $ (9,307) $ 13,385
Less: Realized gains in net income (11,775) 4,121 (7,654)
------- ----- ------
Net unrealized gains on investments 10,917 (5,186) 5,731
Foreign currency translation 959 - 959
Minimum pension liability 1,094 (462) 632
----- ---- ---
Total other comprehensive income $ 12,970 $ (5,648) $ 7,322
======== ======== ========
F-57
(in thousands)
Met-Ed Amount Income Tax Amount
- ------ Before (Expense) Net of
1997 Taxes Benefit Taxes
- ---- ----- ------- -----
Net unrealized gains on investments $ 7,263 $(3,014) $ 4,249
Minimum pension liability (267) 110 (157)
---- --- ----
Total other comprehensive income $ 6,996 $(2,904) $ 4,092
======= ======= =======
1996
- ----
Net unrealized gains on investments $ 6,883 $(2,856) $ 4,027
Minimum pension liability (448) 186 (262)
---- --- ----
Total other comprehensive income $ 6,435 $(2,670) $ 3,765
======= ======= =======
1995
- ----
Net unrealized gains on investments $ 8,768 $(3,649) $ 5,119
Minimum pension liability - - -
----- ----- -----
Total other comprehensive income $ 8,768 $(3,649) $ 5,119
======= ======= =======
Penelec
- -------
1997
- ----
Net unrealized gains on investments $ 3,632 $(1,507) $ 2,125
Minimum pension liability (209) 87 (122)
---- -- ----
Total other comprehensive income $ 3,423 $(1,420) $ 2,003
======= ======= =======
1996
- ----
Net unrealized gains on investments $ 3,442 $(1,428) $ 2,014
Minimum pension liability - - -
----- ----- -----
Total other comprehensive income $ 3,442 $(1,428) $ 2,014
======= ======= =======
1995
- ----
Net unrealized gains on investments $ 4,384 $(1,791) $ 2,593
Minimum pension liability - - -
----- ----- -----
Total other comprehensive income $ 4,384 $(1,791) $ 2,593
======= ======= =======
F-58
PREFERRED EQUITY
Cumulative Preferred Stock:
At December 31, 1997 and 1996, the following issues of cumulative preferred
stock were outstanding:
GPU, Inc. and Subsidiary Companies
- ----------------------------------
(in thousands)
1997 1996
---- ----
Cumulative preferred stock (a):
With mandatory redemption (d) $ 104,000 $ 124,000
Amounts due within one year (e) (12,500) (10,000)
------- -------
Total cumulative preferred stock
with mandatory redemption $ 91,500 $ 114,000
========= =========
Without mandatory redemption (b), (f) $ 65,996 $ 65,996
Premium on cumulative preferred stock 482 482
--- ---
Total cumulative preferred stock
without mandatory redemption $ 66,478 $ 66,478
========= =========
JCP&L
- -----
Cumulative preferred stock, without par value, 15,600,000 shares authorized,
1,415,000 and 1,615,000 shares issued and outstanding in 1997 and 1996,
respectively (a):
(in thousands)
1997 1996
---- ----
Cumulative preferred stock -
without mandatory redemption (b):
4% Series, 125,000 shares,
callable at $106.50 a share $ 12,500 $ 12,500
7.88% Series E, 250,000 shares,
callable at $103.65 a share 25,000 25,000
------ ------
Subtotal 37,500 37,500
Premium on cumulative preferred stock 241 241
--- ---
Total cumulative preferred stock -
without mandatory redemption $ 37,741 $ 37,741
======== ========
Cumulative preferred stock -
with mandatory redemption (c), (d), (e):
8.48% Series I, 100,000 shares in 1997
and 300,000 shares in 1996 $ 10,000 $ 30,000
8.65% Series J, 500,000 shares 50,000 50,000
7.52% Series K, 440,000 shares 44,000 44,000
------ ------
Subtotal 104,000 124,000
Amounts due within one year (e) (12,500) (10,000)
------- -------
Total cumulative preferred stock -
with mandatory redemption $ 91,500 $114,000
======== ========
F-59
Met-Ed
- ------
Cumulative preferred stock, without par value, 10,000,000 shares authorized,
119,475 shares issued and outstanding in 1997 and 1996, without mandatory
redemption (a), (b), (f):
(in thousands)
1997 1996
---- ----
3.90% Series, 64,384 shares in 1997 and
1996, callable at $105.625 a share $ 6,438 $ 6,438
4.35% Series, 22,517 shares in 1997 and
1996, callable at $104.25 a share 2,252 2,252
3.85% Series, 9,252 shares in 1997 and
1996, callable at $104.00 a share 925 925
3.80% Series, 7,982 shares in 1997 and
1996, callable at $104.70 a share 798 798
4.45% Series, 15,340 shares in 1997 and
1996, callable at $104.25 a share 1,534 1,534
----- -----
Subtotal 11,947 11,947
Premium on cumulative preferred stock 109 109
--- ---
Total cumulative preferred stock $ 12,056 $ 12,056
======== ========
Penelec
- -------
Cumulative preferred stock, without par value, 11,435,000 shares authorized,
165,485 shares issued and outstanding in 1997 and 1996, without mandatory
redemption (a), (b), (f):
(in thousands)
1997 1996
---- ----
4.40% Series B, 29,678 shares in 1997 and
1996, callable at $108.25 per share $ 2,968 $ 2,968
3.70% Series C, 49,568 shares in 1997 and
1996, callable at $105.00 per share 4,957 4,957
4.05% Series D, 28,219 shares in 1997 and
1996, callable at $104.53 per share 2,822 2,822
4.70% Series E, 14,103 shares in 1997 and
1996, callable at $105.25 per share 1,410 1,410
4.50% Series F, 17,081 shares in 1997 and
1996, callable at $104.27 per share 1,708 1,708
4.60% Series G, 26,836 shares in 1997 and
1996, callable at $104.25 per share 2,684 2,684
----- -----
Subtotal 16,549 16,549
Premium on cumulative preferred stock 132 132
--- ---
Total cumulative preferred stock $ 16,681 $ 16,681
======== ========
(a) At December 31, 1997 and 1996, the GPU Energy companies were authorized
to issue 37,035,000 shares of cumulative preferred stock. If dividends on
any of the preferred stock are in arrears for four quarters, the holders
of preferred stock, voting as a class, are entitled to elect a majority
of the board of directors of that company until all dividends in arrears
have been paid. A GPU Energy company may not redeem preferred stock
unless dividends on all of its preferred stock for all past quarterly
dividend periods have been paid or declared and set aside for payment.
F-60
(b) The outstanding shares of preferred stock without mandatory redemption
are callable at various prices above their stated values. At December 31,
1997, the aggregate amount at which these shares could be called by the
GPU Energy companies was $69 million (JCP&L $39 million; Met-Ed $13
million; Penelec $17 million).
(c) The 7.52% and 8.65% Series are callable at various prices above their
stated values beginning in 2002 and 2000, respectively. The 7.52% Series
is to be redeemed ratably over twenty years beginning in 1998. The 8.65%
Series is to be redeemed ratably over six years beginning in 2000. The
8.48% Series is not callable and is to be redeemed ratably over a
five-year period which began in 1996.
(d) During 1997, JCP&L redeemed $20 million stated value of 8.48% cumulative
preferred stock pursuant to mandatory and optional sinking fund
provisions. JCP&L's total redemption cost was $20 million. During 1995,
JCP&L repurchased in the market 60,000 shares of its 7.52% cumulative
preferred stock with mandatory redemption, with a stated value of $6
million. JCP&L's total redemption cost was $6.1 million, which resulted
in a $0.1 million charge to Retained Earnings.
(e) The outstanding shares with mandatory redemption have the following
redemption requirements over the next five years: $12.5 million in 1998,
$2.5 million in 1999, and $10.8 million in 2000, 2001 and 2002. The fair
value of the preferred stock with mandatory redemption, including amounts
due within one year, based on market price quotations at December 31,
1997 and 1996, was $109.9 million and $133.9 million, respectively.
(f) During 1996, Met-Ed and Penelec reacquired, pursuant to cash tender
offers, preferred shares for a total cost of $7.7 million and $14.4
million, respectively. A reacquisition gain of $3.7 million and $5.6
million was recorded for Met-Ed and Penelec, respectively, which resulted
in an increase in GPU, Inc.'s 1996 diluted earnings per share of $0.08.
Subsidiary-Obligated Mandatorily Redeemable Preferred Securities:
JCP&L Capital, L.P., Met-Ed Capital, L.P. and Penelec Capital, L.P., are
special-purpose partnerships in which a subsidiary of JCP&L, Met-Ed and Penelec,
respectively, is the sole general partner. In 1995, JCP&L Capital, L.P. issued
$125 million of mandatorily redeemable preferred securities (Preferred
Securities) and in 1994, Met-Ed Capital, L.P. and Penelec Capital, L.P. issued
$100 million and $105 million, respectively, of Preferred Securities. The
proceeds were then lent to JCP&L, Met-Ed and Penelec, respectively, which, in
turn, issued their deferrable interest subordinated debentures to the
partnerships. The following issues of Preferred Securities were outstanding at
December 31, 1997 and 1996:
F-61
Issue Securities Total
Company Series Price Outstanding (in thousands)
- ------- ------ ----- ----------- --------------
JCP&L Capital, L.P. 8.56% $25 5,000,000 $125,000
Met-Ed Capital, L.P. 9.00% $25 4,000,000 100,000
Penelec Capital, L.P. 8.75% $25 4,200,000 105,000
-------
Total $330,000
========
The fair value of the Preferred Securities based on market price
quotations at December 31, 1997 and 1996 was $341 million (JCP&L $128 million;
Met-Ed $104 million; Penelec $109 million) and $337 million (JCP&L $127 million;
Met-Ed $103 million; Penelec $107 million), respectively.
The Preferred Securities of JCP&L Capital, L.P. mature in 2044, while
those of Met-Ed Capital, L.P. and Penelec Capital, L.P. mature in 2043. Their
respective Preferred Securities are redeemable at the option of JCP&L beginning
in 2000, and at the option of Met-Ed and Penelec beginning in 1999, at 100% of
their principal amount, or earlier under certain limited circumstances,
including the loss of the federal tax deduction for interest paid on the
subordinated debentures. JCP&L, Met-Ed and Penelec have fully and
unconditionally guaranteed payment of distributions, to the extent there is
sufficient cash on hand to permit such payments and legally available funds, and
payments on liquidation or redemption of their respective Preferred Securities.
Distributions on the Preferred Securities (and interest on the subordinated
debentures) may be deferred for up to 60 months, but JCP&L, Met-Ed and Penelec
may not pay dividends on, or redeem or acquire, any of their preferred or common
stock until deferred payments on their respective subordinated debentures are
paid in full.
5. ACQUISITIONS
POWERNET
In November 1997, GPU Electric acquired the business of PowerNet Victoria
(PowerNet) from the State of Victoria, Australia for A$2.6 billion
(approximately U.S. $1.9 billion). The fair value of the assets acquired totaled
approximately U.S. $2 billion and the amount of liabilities assumed totaled
approximately U.S. $135.7 million. PowerNet owns and operates the existing
high-voltage electricity transmission system in the State of Victoria. The
PowerNet transmission system serves all of Victoria covering an area of
approximately 87,900 square miles and a population of approximately 4.5 million.
The PowerNet acquisition was financed through: (1) a senior debt credit
facility of A$1.9 billion (approximately U.S. $1.4 billion), which is
non-recourse to GPU, Inc.; (2) a five-year U.S. $450 million bank credit
agreement which is guaranteed by GPU, Inc.; and (3) an equity contribution from
GPU, Inc. of U.S. $50 million. In early 1998, GPU, Inc. expects to issue and
sell up to seven million shares of common stock, the net proceeds of which will
be used to reduce indebtedness associated with the PowerNet and Midlands
acquisitions.
F-62
As part of the PowerNet acquisition, the GPUI Group entered into various
interest rate swap agreements to mitigate the risk of increases in variable
interest rates on the senior debt credit facility. These swaps became effective
on November 6, 1997, and are scheduled to expire on various dates through
November 2007. The GPUI Group expects to record amounts paid and received under
the agreements as adjustments to the interest expense of the underlying debt.
The acquisition of PowerNet will be accounted for under the purchase
method of accounting. The total acquisition costs exceed the preliminary
estimated value of net assets by A$862 million (approximately U.S. $560
million). This excess amount is considered goodwill and will be amortized on a
straight-line basis over 40 years. The amount of goodwill will be revised within
twelve months when the final valuation of net assets is completed and is not
expected to be materially different.
PowerNet has been included in the consolidated financial statements since
its purchase on November 6, 1997. The following unaudited pro forma consolidated
results of operations for the years 1997 and 1996 have been prepared in
accordance with Accounting Principles Board Opinion No. 16 assuming the
acquisition date was effective January 1, 1996 with debt financing. The pro
forma results are not necessarily indicative of the actual results that would
have been realized had the acquisition occurred on the assumed date of January
1, 1996, nor are they necessarily indicative of future results. The pro forma
consolidated operating results are for information purposes only and are as
follows:
(Unaudited)
1997 1996
(in thousands except As As
per share amounts) Reported Pro Forma Reported Pro Forma
Operating revenues $ 4,143,379 $ 4,316,452 $ 3,970,711 $ 4,184,661
Net income $ 335,101 $ 326,742 $ 298,352 $ 282,494
Basic earnings per share $ 2.78 $ 2.71 $ 2.48 $ 2.34
Diluted earnings per share $ 2.77 $ 2.70 $ 2.47 $ 2.34
F-63
MIDLANDS ELECTRICITY plc
In 1996, GPU and Cinergy Corp. (Cinergy) formed Avon Energy Partners
Holdings (Holdings), a 50/50 joint venture, to acquire Midlands Electricity plc
(Midlands), an English regional electric company. A wholly-owned subsidiary of
Holdings, Avon, purchased the outstanding shares of Midlands through a cash
tender offer of (pound)1.7 billion (approximately U.S. $2.6 billion). GPU's 50%
interest in Holdings is held by EI UK Holdings, Inc. (EI UK), a wholly-owned
subsidiary of GPU Electric, Inc.
Midlands supplies and distributes electricity to 2.3 million customers in
England in an area with a population of five million. Midlands also owns a
generation business that produces electricity domestically and internationally
and a gas supply company that provides natural gas to 8,000 customers in
England. In addition, Midlands owns and has under development a number of
international generation projects.
EI UK borrowed approximately (pound)342 million (approximately U.S. $586
million) through a GPU, Inc. guaranteed five-year bank term loan facility to
fund its investment in Holdings. Holdings borrowed approximately (pound)1.1
billion (approximately U.S. $1.8 billion) through a term loan and revolving
credit facility to provide for the balance of the acquisition price.
EI UK accounts for its 50% investment in Holdings using the equity method
of accounting (see Note 6, GPUI Group Equity Investments). Accordingly, EI UK's
investment is reported on the Consolidated Balance Sheets in GPUI Group equity
investments, and its proportionate share of earnings from Holdings is reflected
in Equity in undistributed earnings/(losses) of affiliates in the Consolidated
Statements of Income. EI UK has recorded its proportionate share of Holdings'
income/(loss) from the acquisition date.
The acquisition of Midlands by Avon is accounted for under the purchase
method of accounting. The total acquisition cost exceeded the estimated value of
net assets by (pound)1.4 billion (approximately U.S. $2.1 billion). This excess
amount is considered goodwill and is being amortized to expense on a
straight-line basis over 40 years.
F-64
6. GPUI GROUP EQUITY INVESTMENTS
The GPUI Group uses the equity method of accounting for investments in
which it has the ability to exercise significant influence over the operating
and financial policies of the investee (generally evidenced by a 20% to 50%
ownership interest). Investments accounted for under the equity method follow:
Ownership
Investment Location of Operations Percentage
- ---------- ---------------------- ----------
Brooklyn Energy, L.P. * Canada 75%
Midlands Electricity plc United Kingdom 50%
Solaris Power ** Australia 50%
Prime Energy, L.P. United States 50%
Onondaga Cogen, L.P. United States 50%
Pasco Cogen, Ltd. United States 50%
GPU Solar, Inc. United States 50%
Termobarranquilla S.A Colombia 29%
Selkirk Cogeneration Partners, L.P. United States 19%
EnviroTech Investment Fund United States 10%
Ballard Generation Systems, Inc. Canada 10%
Project Orange Associates, L.P. United States 4%
OLS Power, L.P. United States 1%
* Accounted for under the equity method in anticipation of a reduction in
ownership to 27%.
** Sold in January 1998.
Summarized financial information for the GPUI Group's equity method investments
(which are not consolidated in the financial statements), including both the
GPUI Group's ownership interests and the non-ownership interests, is as follows:
Ownership
---------
Balance Sheet Data (in thousands) GPUI Group Other Owners
- ------------------ ---------- ------------
1997
Current Assets $ 284,033 $ 391,018
Noncurrent Assets 2,918,125 3,616,461
Current Liabilities (755,499) (814,572)
Long-Term Debt (1,497,982) (2,086,257)
Other Noncurrent Liabilities (307,504) (396,675)
-------- --------
Equity in Net Assets $ 641,173 $ 709,975
=========== ===========
1996
Current Assets $ 457,936 $ 560,900
Noncurrent Assets 2,689,340 3,302,994
Current Liabilities (581,140) (642,459)
Long-Term Debt (1,544,598) (2,045,646)
Other Noncurrent Liabilities (287,141) (419,198)
-------- --------
Equity in Net Assets $ 734,397 $ 756,591
=========== ===========
F-65
Ownership
---------
Earnings Data (in thousands) GPUI Group Other Owners
- ------------- ---------- ------------
1997
Operating Revenues $ 1,379,049 $ 1,552,016
Depreciation and Amortization (52,860) (77,899)
Operating Income 186,069 224,148
Other Income and Deductions (78,644) (72,708)
Interest and Preferred Dividends (124,222) (163,123)
Net Income Loss $ (16,797) $ (11,683)
GPUI Group's Equity in
Net Income/(Loss) $ (27,100)
===========
1996
Operating Revenues $ 841,757 $ 1,027,281
Depreciation and Amortization (35,642) (53,279)
Operating Income 108,011 158,326
Other Income and Deductions 4,037 632
Interest and Preferred Dividends (79,786) (120,874)
Net Income $ 32,262 $ 38,084
GPUI Group's Equity in
Net Income/(Loss) $ 33,981
===========
1995
Operating Revenues $ 262,044 $ 418,573
Depreciation and Amortization (9,852) (25,837)
Operating Income 34,527 63,018
Other Income and Deductions (401) (526)
Interest and Preferred Dividends (31,189) (66,621)
Net Income $ 2,937 $ 3,077
GPUI Group's Equity in
Net Income/(Loss) $ (3,597)
===========
For the years 1997, 1996 and 1995, the GPUI Group received cash distributions
totaling $42.8 million, $10 million and $3.3 million, respectively.
As of December 31, 1997 and 1996, GPUI Group equity investments on the
Consolidated Balance Sheets included goodwill (net of accumulated amortization)
of approximately $66 million and $34 million, respectively, which is amortized
to expense over periods not exceeding 40 years. Amortization expense for the
years ended December 31, 1997, 1996 and 1995 amounted to $3.6 million, $1.6
million and $1.3 million, respectively. In 1997, the GPUI Group recorded a net
increase in goodwill of $35.6 million due primarily to franchise fees associated
with the Solaris Power (Solaris) investment.
F-66
In January 1998, as a result of Victoria's cross-ownership
restrictions, GPU Electric sold its 50% stake in Solaris to The Australian Gas
Light Company for A$208 million (approximately U.S. $135.2 million) and a 10.36%
stake in Allgas Energy Limited (Allgas), the natural gas distributor in
Queensland, Australia. The Allgas shares had a market value of A$14.6 million
(approximately U.S. $9.5 million) at the date of the sale. As a result, GPU will
record an after-tax gain on the sale of U.S. $18.3 million in the first quarter
of 1998.
7. ACCOUNTING FOR DERIVATIVE INSTRUMENTS
GPU's use of derivative financial and commodity instruments is
principally limited to the GPUI Group. GPU does not hold or issue derivative
financial or commodity instruments for trading purposes.
Interest Rate Swap Agreements:
The GPUI Group uses interest rate swap agreements to manage the risk of
increases in variable interest rates. At December 31, 1997, these agreements
covered approximately $1.5 billion of debt and are scheduled to expire on
various dates through November 2007. The GPUI Group records amounts paid and
received under the agreements as adjustments to the interest expense of the
underlying debt since the swaps are related to specific assets, liabilities or
anticipated transactions of the GPUI Group. For the year ended December 31,
1997, fixed rate interest expense exceeded variable rate interest by
approximately $3.7 million. (For additional information, see GPUI Group section,
Management's Discussion and Analysis.)
Sterling Put Options:
GPU Electric uses sterling put options to reduce exposure to exchange
rate fluctuations between the British pound and the U.S. dollar relative to
distributions received from Midlands. These put options give GPU Electric the
right, but not the obligation, to sell sterling and buy U.S. dollars at a
specific price. GPU Electric's exposure to losses from changes in the relative
values of these currencies is limited to its initial investment in the put
options, which was $0.6 million. Mark-to-market accounting is followed for these
put options, which are recorded in Other Current Assets in the Consolidated
Balance Sheets. Monthly mark-to-market gains and losses, gains from exercising
the put options and amortization of expiring options totaled $325 thousand for
the year ended December 31, 1997, and are included in Other Income, Net in the
Consolidated Statements of Income. The put options were purchased on January 3,
1997 and expired on December 31, 1997.
Australian Dollar Put Options:
GPU Electric used an Australian dollar put option to reduce its exposure
to exchange rate fluctuations between the Australian dollar and the U.S. dollar,
relative to the net proceeds to be received from the sale of its 50% stake in
Solaris. The put option gave GPU Electric the right, but not the obligation, to
sell Australian dollars and buy U.S. dollars at a specific
F-67
price. GPU Electric's exposure to losses from changes in the relative values of
these currencies was limited to its initial investment in the put option, which
was $1.0 million. This put option was recorded as an asset when it was purchased
in 1997, and was charged to expense when Solaris was sold in January 1998.
8. INCOME TAXES
As of December 31, 1997 and 1996, the Consolidated Balance Sheets
reflected income taxes recoverable through future rates (primarily related to
liberalized depreciation), and a regulatory liability for income taxes
refundable through future rates (related to unamortized ITC), substantially due
to the recognition of amounts not previously recorded with the adoption of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" in 1993, as follows:
(in millions)
1997 1996
---- ----
Income Taxes Recoverable Through Future Rates:
JCP&L $128 $143
Met-Ed 179 174
Penelec 204 210
--- ---
Total $511 $527
==== ====
Income Taxes Refundable Through Future Rates:
JCP&L $ 37 $ 33
Met-Ed 22 23
Penelec 30 32
-- --
Total $ 89 $ 88
==== ====
F-68
Summaries of the components of deferred taxes as of December 31, 1997 and
1996 are as follows:
GPU, Inc. and Subsidiary Companies:
- -----------------------------------
(in millions)
Deferred Tax Assets Deferred Tax Liabilities
- ------------------- ------------------------
1997 1996 1997 1996
---- ---- ---- ----
Current: Current:
Unbilled revenue $ 31 $ 23 Revenue taxes $ 10 $ 12
====== ======
Deferred energy 7 -
Other 46 9
-- -
Total $ 84 $ 32
==== ====
Noncurrent: Noncurrent:
Unamortized ITC $ 89 $ 88 Liberalized
Decommissioning 74 75 depreciation:
Contributions in aid previously flowed
of construction 24 24 through $ 263 $ 292
Other 196 146 future revenue
--- ---
Total $383 $333 requirements 193 203
==== ==== --- ---
Subtotal 456 495
Liberalized
depreciation 860 859
Other 250 209
--- ---
Total $1,566 $1,563
====== ======
JCP&L:
- ------
(in millions)
Deferred Tax Assets Deferred Tax Liabilities
- ------------------- ------------------------
1997 1996 1997 1996
---- ---- ---- ----
Current: Current:
Unbilled revenue $ 21 $ 18 Revenue taxes $ 10 $ 12
==== ====
Deferred energy 7 5
-- --
Total $ 28 $ 23
==== ====
Noncurrent: Noncurrent:
Unamortized ITC $ 38 $ 33 Liberalized
Decommissioning 33 32 depreciation:
Contributions in aid previously flowed
of construction 19 19 through $ 52 $ 76
Other 65 55 future revenue
-- -- requirements 36 41
Total $155 $139 -- --
==== ====
Subtotal 88 118
Liberalized
depreciation 411 412
Forked River 7 9
Other 138 125
--- ---
Total $644 $664
==== ====
F-69
Met-Ed:
- -------
(in millions)
Deferred Tax Assets Deferred Tax Liabilities
1997 1996 1997 1996
---- ---- ---- ----
Noncurrent:
Current: Liberalized
Unbilled revenue $ 3 $ 5 depreciation:
Other - 2 previously flowed
-- --
Total $ 3 $ 7 through $ 97 $ 95
==== ====
future revenue
Noncurrent: requirements 72 73
-- --
Unamortized ITC $ 22 $ 24
Decommissioning 27 28 Subtotal 169 168
Contributions in aid Liberalized
of construction 2 2 depreciation 191 185
Other 36 31 Other 53 48
-- -- -- --
Total $ 87 $ 85 Total $413 $401
==== ==== ==== ====
Penelec:
- --------
(in millions)
Deferred Tax Assets Deferred Tax Liabilities
1997 1996 1997 1996
---- ---- ---- ----
Noncurrent:
Current: Liberalized
Unbilled revenue $ 8 $ - depreciation:
==== ====
previously flowed
Noncurrent: through $114 $119
Unamortized ITC $ 30 $ 32 future revenue
Decommissioning 14 15 requirements 85 89
-- --
Contributions in aid
of construction 3 3 Subtotal 199 208
Other 9 17 Liberalized
-- -- depreciation 245 239
Total $ 56 $ 67 Other 34 26
==== ==== -- --
Total $478 $473
==== ====
F-70
The reconciliations from net income to book income subject to tax and from
the federal statutory rate to combined federal and state effective tax rates are
as follows:
GPU, Inc. and Subsidiary Companies:
- -----------------------------------
(in millions)
1997 1996 1995
---- ---- ----
Net income $335 $298 $440
Preferred stock dividends 13 16 17
Gain on preferred stock reacquisition - (9) -
Income tax expense 234 184 265
--- --- ---
Book income subject to tax $582* $489* $722
==== ==== ====
Federal statutory rate 35% 35% 35%
State tax, net of federal benefit 4 3 4
Other 1 - (2)
-- -- --
Effective income tax rate 40% 38% 37%
== == ==
* Includes pre-tax foreign operations income of $34 million and $58 million,
of which $20 million and $54 million, respectively, are included in Equity
in undistributed earnings/(losses) of affiliates in the Consolidated
Statements of Income.
JCP&L:
- ------
(in millions)
1997 1996 1995
---- ---- ----
Net income $212 $156 $199
Income tax expense 112 74 97
--- -- --
Book income subject to tax $324 $230 $296
==== ==== ====
Federal statutory rate 35% 35% 35%
Other - (3) (2)
-- -- --
Effective income tax rate 35% 32% 33%
== == ==
Met-Ed:
- -------
(in millions)
1997 1996 1995
---- ---- ----
Net income $ 93 $ 69 $149
Income tax expense 66 50 92
-- -- --
Book income subject to tax $159 $119 $241
==== ==== ====
Federal statutory rate 35% 35% 35%
State tax, net of federal benefit 6 5 6
Amortization of ITC - (2) (1)
Other - 4 (2)
-- -- --
Effective income tax rate 41% 42% 38%
== == ==
F-71
Penelec: (in millions)
- -------- -------------
1997 1996 1995
---- ---- ----
Net income $ 95 $ 70 $111
Income tax expense 71 45 70
-- -- --
Book income subject to tax $166 $115 $181
==== ==== ====
Federal statutory rate 35% 35% 35%
State tax, net of federal benefit 6 6 6
Other 2 ( 2) ( 2)
-- -- --
Effective income tax rate 43% 39% 39%
== == ==
Federal and state income tax expense is comprised of the following:
GPU, Inc. and Subsidiary Companies:
- -----------------------------------
(in millions)
1997 1996 1995
---- ---- ----
Provisions for taxes currently payable:
Domestic $206 $108 $154
Foreign 40 11 -
-- -- --
Total provision for taxes $246 $119 $154
==== ==== ====
Deferred income taxes:
Liberalized depreciation 9 27 31
Deferral of energy costs (3) (8) 1
Accretion income 4 5 5
Decommissioning (5) (9) 71
Pension expense/Voluntary Enhanced
Retirement Programs (10) 15 24
Nonutility generation contract buyout costs 5 41 15
Other (2) 6 (25)
-- -- ---
Deferred income taxes, net (2) 77 122
-- -- ---
Amortization of ITC, net (10) (12) (11)
--- --- ---
Income tax expense $234 $184 $265
==== ==== ====
The foreign taxes in the above table for 1997 and 1996, include $41
million ($37 million Current; $4 million Deferred) and $17 million ($10 million
Current; $7 million Deferred) in foreign tax expense which is netted in Equity
in undistributed earnings/(losses) of affiliates in the Consolidated Statements
of Income.
F-72
JCP&L:
- ------
(in millions)
1997 1996 1995
---- ---- ----
Provisions for taxes currently payable $139 $ 70 $100
---- ---- ----
Deferred income taxes:
Liberalized depreciation (3) 1 8
Nonutility generation contract buyout costs 6 22 6
Gain/Loss on reacquired debt (1) - -
New Jersey revenue tax (3) (3) (2)
Deferral of energy costs (2) (8) 1
Abandonment loss - Forked River (5) (4) (4)
Nuclear outage maintenance costs (4) 5 (6)
Accretion income 4 5 5
Unbilled revenue (3) (5) (2)
Pension expense/VERP (5) 4 3
Decommissioning (3) (2) (2)
Demand-side management (3) (4) 2
Other postemployment benefits 2 - 1
Other (2) - (7)
--- -- ---
Deferred income taxes, net (22) 11 3
--- -- --
Amortization of ITC, net (5) (7) (6)
-- -- --
Income tax expense $ 112 $ 74 $ 97
===== ===== =====
Met-Ed:
- -------
(in millions)
1997 1996 1995
---- ---- ----
Provisions for taxes currently payable $ 63 $ 25 $ 23
---- ---- ----
Deferred income taxes:
Liberalized depreciation 6 10 10
Deferral of energy costs - 5 -
Decommissioning (2) (3) 46
Pension expense/VERP (3) 5 8
Unbilled revenue 3 - (4)
Nonutility generation contract buyout costs (6) 14 8
Nuclear outage maintenance costs 3 (3) 3
Nonutility generation contract
over/(under) collections 4 - -
Other postemployment benefits (1) 2 -
Other 1 (3) -
-- -- --
Deferred income taxes, net 5 27 71
- -- --
Amortization of ITC, net (2) (2) (2)
-- -- --
Income tax expense $ 66 $ 50 $ 92
==== ==== ====
F-73
Penelec:
- --------
(in millions)
1997 1996 1995
---- ---- ----
Provisions for taxes currently payable $ 61 $ 26 $ 28
---- ---- ----
Deferred income taxes:
Liberalized depreciation 6 8 12
Deferral of energy costs (1) - -
Accretion income - - -
Decommissioning - (1) 21
Pension expense/VERP (2) 7 13
Unbilled revenue (7) 5 (2)
Nonutility generation contract buyout costs 5 5 -
Nuclear outage maintenance costs 1 (1) 1
Nonutility generation contract
over/(under)collections 6 - -
Other postemployment benefits 3 (1) 5
Other 2 - (5)
-- -- --
Deferred income taxes, net 13 22 45
-- -- --
Amortization of ITC, net (3) (3) (3)
-- -- --
Income tax expense $ 71 $ 45 $ 70
==== ==== ====
The Internal Revenue Service (IRS) has completed its examinations of
GPU's federal income tax returns through 1992. The years 1993 through 1995 are
currently being audited.
9. SUPPLEMENTARY INCOME STATEMENT INFORMATION
Maintenance expense and other taxes charged to operating expenses
consisted of the following:
(in millions)
1997 1996 1995
---- ---- ----
Maintenance:
JCP&L $102 $120 $128
Met-Ed 46 50 54
Penelec 68 65 71
-- -- --
Total Maintenance $216 $235 $253
==== ==== ====
Other Taxes:
New Jersey Unit Tax (JCP&L) $211 $208 $209
---- ---- ----
Pennsylvania State Gross Receipts:
Met-Ed $ 39 $ 38 $ 35
Penelec 42 40 39
-- -- --
Total $ 81 $ 78 $ 74
---- ---- ----
F-74
(in millions)
1997 1996 1995
---- ---- ----
Real Estate and Personal Property:
JCP&L $ 9 $ 8 $ 8
Met-Ed 8 8 7
Penelec 10 9 8
-- -- --
Total $ 27 $ 25 $ 23
---- ---- ----
Other:
JCP&L $ 12 $ 13 $ 10
Met-Ed 12 15 13
Penelec 15 16 20
-- -- --
Total $ 39 $ 44 $ 43
---- ---- ----
Total Other Taxes $358 $355 $349
==== ==== ====
The cost of services rendered to the GPU Energy companies by their
affiliates is as follows:
(in millions)
1997 1996 1995
---- ---- ----
JCP&L:
- ------
Cost of services rendered by GPUN $156 $221 $186
Cost of services rendered by GPUS 31 44 43
Cost of services rendered by Genco 52 85 -
-- -- --
Total $239 $350 $229
==== ==== ====
Amount Charged to Income $228 $293 $183
==== ==== ====
Met-Ed:
- -------
Cost of services rendered by GPUN $ 78 $ 67 $ 81
Cost of services rendered by GPU 31 29 27
Cost of services rendered by Genco 91 85 -
-- -- --
Total $200 $181 $108
==== ==== ====
Amount Charged to Income $179 $153 $ 92
==== ==== ====
Penelec:
- --------
Cost of services rendered by GPUN $ 40 $ 34 $ 41
Cost of services rendered by GPUS 19 31 38
Cost of services rendered by Genco 162 159 -
--- --- ---
Total $221 $224 $ 79
==== ==== ====
Amount Charged to Income $195 $181 $ 67
==== ==== ====
For the years 1997, 1996 and 1995, JCP&L purchased $24 million, $21
million and $23 million, respectively, of energy from a cogeneration project in
which an affiliate has a 50% partnership interest.
F-75
10. EMPLOYEE BENEFITS
Pension Plans
GPU maintains defined benefit pension plans covering substantially all
employees. GPU's policy is to currently fund net pension costs within the
deduction limits permitted by the Internal Revenue Code.
Summaries of the components of net periodic pension cost follow:
(in millions)
GPU, Inc. and Subsidiary Companies 1997 1996 1995
- ---------------------------------- ---- ---- ----
Service cost-benefits earned during the period $ 31.1 $ 36.1 $ 30.0
Interest cost on projected benefit obligation 122.2 112.1 109.8
Less: Expected return on plan assets (131.5) (123.2) (112.9)
Amortization (0.3) (1.1) (1.4)
------ ------ ------
Net periodic pension cost $ 21.5 $ 23.9 $ 25.5
====== ====== ======
JCP&L
Service cost-benefits earned during the period $ 6.1 $ 8.0 $ 7.3
Interest cost on projected benefit obligation 34.2 32.1 32.9
Less: Expected return on plan assets (37.5) (36.3) (35.2)
Amortization (0.2) (0.3) (0.3)
------ ------ ------
Net periodic pension cost $ 2.6 $ 3.5 $ 4.7
====== ====== ======
Met-Ed
Service cost-benefits earned during the period $ 4.3 $ 4.5 $ 4.4
Interest cost on projected benefit obligation 21.8 19.6 20.2
Less: Expected return on plan assets (22.3) (21.3) (20.3)
Amortization 0.5 - (0.1)
------ ------ ------
Net periodic pension cost $ 4.3 $ 2.8 $ 4.2
====== ====== ======
Penelec
Service cost-benefits earned during the period $ 3.3 $ 6.0 $ 8.9
Interest cost on projected benefit obligation 26.2 29.3 34.9
Less: Expected return on plan assets (29.7) (32.3) (35.6)
Amortization 0.5 0.3 0.3
------ ------ ------
Net periodic pension cost $ 0.3 $ 3.3 $ 8.5
====== ====== ======
The above amounts for 1996 exclude pre-tax charges to earnings of $71
million (JCP&L $37 million; Met-Ed $17 million; Penelec $17 million) resulting
from early retirement programs in that year. At December 31, 1996, GPU had
funded the entire cost of its retirement programs.
F-76
The actual return on the plans' assets for the years 1997, 1996 and 1995
resulted in gains as follows:
(in millions)
Company 1997 1996 1995
- ------- ---- ---- ----
JCP&L $ 97.8 $ 66.0 $101.3
Met-Ed 63.1 39.6 59.4
Penelec 81.1 53.5 100.3
Other 99.4 69.9 61.0
----- ----- -----
Total $341.4 $229.0 $322.0
===== ===== =====
The funded status of the plans and related assumptions at December 31,
1997 and 1996 were as follows:
(in millions)
GPU, Inc. and Subsidiary Companies 1997 1996
- ---------------------------------- ---- ----
Accumulated benefit obligation (ABO):
Vested benefits $ 1,422.1 $ 1,338.5
Nonvested benefits 161.6 137.8
-------- --------
Total ABO 1,583.7 1,476.3
Effect of future compensation levels 208.0 215.1
-------- --------
Projected benefit obligation (PBO) $ 1,791.7 $ 1,691.4
======== ========
Plan assets at fair value $ 2,033.3 $ 1,801.8
PBO (1,791.7) (1,691.4)
-------- --------
Plan assets in excess of PBO 241.6 110.4
Less: Unrecognized net gain (282.8) (143.8)
Unrecognized prior service cost 19.2 5.7
Unrecognized net transition asset (2.5) (3.0)
Adjustment required to recognize
minimum liability (6.4) (3.8)
-------- --------
Accrued pension liability $ (30.9) $ (34.5)
======== ========
JCP&L
ABO:
Vested benefits $ 413.9 $ 391.9
Nonvested benefits 27.1 27.8
------ ------
Total ABO 441.0 419.7
Effect of future compensation levels 55.6 53.8
------ ------
PBO $ 496.6 $ 473.5
====== ======
Plan assets at fair value $ 577.1 $ 514.5
PBO (496.6) (473.5)
------ ------
Plan assets in excess of PBO 80.5 41.0
Less: Unrecognized net gain (87.7) (45.7)
Unrecognized prior service cost 9.3 2.2
Unrecognized net transition asset (1.2) (1.5)
------ ------
Prepaid (accrued) pension cost $ 0.9 $ (4.0)
====== ======
F-77
(in millions)
Met-Ed 1997 1996
- ------ ---- ----
ABO:
Vested benefits $ 267.1 $ 240.7
Nonvested benefits 35.6 24.4
------ ------
Total ABO 302.7 265.1
Effect of future compensation levels 43.2 37.4
------ ------
PBO $ 345.9 $ 302.5
====== ======
Plan assets at fair value $ 373.2 $ 309.9
PBO (345.9) (302.5)
------ ------
Plan assets in excess of PBO 27.3 7.4
Less: Unrecognized net gain (32.8) (7.1)
Unrecognized prior service cost 5.0 2.8
Unrecognized net transition asset (0.8) (0.6)
Adjustment required to recognize
minimum liability (0.7) (0.4)
------ ------
Prepaid (accrued) pension cost $ (2.0) $ 2.1
====== ======
Penelec
ABO:
Vested benefits $ 332.5 $ 303.6
Nonvested benefits 29.0 24.3
------ ------
Total ABO 361.5 327.9
Effect of future compensation levels 42.9 39.1
------ ------
PBO $ 404.4 $ 367.0
====== ======
Plan assets at fair value $ 486.8 $ 411.8
PBO (404.4) (367.0)
------ ------
Plan assets in excess of PBO 82.4 44.8
Less: Unrecognized net gain (69.8) (35.2)
Unrecognized prior service cost 7.5 3.4
Unrecognized net transition obligation 1.5 2.1
Adjustment required to recognize
minimum liability (0.2) -
------ ------
Prepaid pension cost $ 21.4 $ 15.1
====== ======
Principal actuarial assumptions (%):
Annual long-term rate of return on plan assets 8.5 8.5
=== ===
Discount rate 7.0 7.5
=== ===
Annual increase in compensation levels 5.0 5.5
=== ===
F-78
In 1997, changes in assumptions, primarily the decrease in the discount
rate assumption from 7.5% to 7%, resulted in a $63 million increase (JCP&L $16
million; Met-Ed $10 million; Penelec $12 million; Other $25 million) in the PBO
as of December 31, 1997. The assets of the plans are held in a Master Trust and
generally invested in common stocks and fixed income securities. The
unrecognized net gain represents actual experience different from that assumed,
which is deferred and not included in the determination of pension cost until it
exceeds certain levels. Both the unrecognized prior service cost resulting from
retroactive changes in benefits and the unrecognized net transition asset
arising out of the adoption of Statement of Financial Accounting Standards No.
87 (FAS 87), "Employers' Accounting for Pensions," are being amortized to
pension cost over the average remaining service periods for covered employees.
At December 31, 1997, 1996 and 1995, GPU had accumulated pension
obligations in excess of amounts accrued; as a result, additional minimum
liabilities in the amounts of $3.7 million (Met-Ed $0.4 million; Penelec $0.1
million; Other $3.2 million), $2.2 million (Met-Ed $0.3 million; Other $1.9
million) and $0.1 million (Other), respectively, net of deferred income taxes of
$2.7 million (Met-Ed $0.3 million; Penelec $0.1 million; Other $2.3 million),
$1.6 million (Met-Ed $0.2 million; Other $1.4 million) and $0.1 million (Other),
respectively, are reflected as reductions in Accumulated other comprehensive
income/(loss).
Savings Plans
GPU also maintains savings plans for substantially all employees. These
plans provide for employee contributions up to specified limits and for various
levels of employer matching contributions. The matching contributions for GPU
were as follows:
(in millions)
Company 1997 1996 1995
- ------- ---- ---- ----
JCP&L $ 2.4 $ 2.8 $ 3.2
Met-Ed 3.1 3.2 2.7
Penelec 1.3 1.4 2.5
Other 5.8 6.7 5.0
------- ------- -------
Total $ 12.6 $ 14.1 $ 13.4
======= ======= =======
Postretirement Benefits Other Than Pensions
GPU provides certain retiree health care and life insurance benefits for
substantially all employees who reach retirement age while working for GPU.
Health-care benefits are administered by various organizations. A portion of the
costs are borne by the participants. Effective January 1, 1993, GPU adopted
Statement of Financial Accounting Standards No. 106 (FAS 106), "Employers'
Accounting for Postretirement Benefits Other Than Pensions." FAS 106 requires
that the estimated cost of these benefits, which are primarily for health care,
be accrued during the employee's active working career. GPU has elected to
amortize the unfunded transition obligation existing at January 1, 1993 over a
period of 20 years. The unrecognized net loss represents actual experience
different from that assumed, which is deferred and not included in the
determination of postretirement benefit cost
F-79
until it exceeds certain levels. The unrecognized prior service cost resulting
from retroactive changes in benefits is being amortized to postretirement
benefit cost over the average remaining service periods for covered employees.
Summaries of the components of the net periodic postretirement benefit
cost for 1997, 1996 and 1995 follows:
(in millions)
GPU, Inc. and Subsidiary Companies 1997 1996 1995
- ---------------------------------- ---- ---- ----
Service cost-benefits attributed to service
during the period $ 10.7 $ 14.3 $ 13.4
Interest cost on the accumulated postretirement
benefit obligation 51.7 45.7 43.4
Expected return on plan assets (23.7) (13.8) (11.0)
Amortization of transition obligation 16.8 17.4 17.4
Other amortization, net 2.3 2.9 1.3
----- ----- -----
Net periodic postretirement benefit cost 57.8 66.5 64.5
Less, deferred for future recovery (13.0) (18.2) (15.0)
----- ----- -----
Postretirement benefit cost, net of deferrals $ 44.8 $ 48.3 $ 49.5
===== ===== =====
The above amount for 1996 does not include pre-tax charges to earnings of
$52 million relating to early retirement programs. At December 31, 1996, GPU had
funded the entire cost of its retirement programs.
(in millions)
JCP&L 1997 1996 1995
- ----- ---- ---- ----
Service cost-benefits attributed to service
during the period $ 1.5 $ 2.8 $ 3.0
Interest cost on the accumulated postretirement
benefit obligation 13.2 11.4 11.2
Expected return on plan assets (5.7) (2.8) (2.3)
Amortization of transition obligation 4.7 4.8 5.0
Other amortization, net 0.6 0.7 0.5
----- ----- -----
Net periodic postretirement benefit cost 14.3 16.9 17.4
Less, deferred for future recovery (0.8) (4.4) (4.0)
----- ----- -----
Postretirement benefit cost, net of deferrals $ 13.5 $ 12.5 $ 13.4
===== ===== =====
The above amount for 1996 does not include pre-tax charges to earnings
of $26 million relating to early retirement programs. The amount deferred for
future recovery does not include $5.0 million of allocated postretirement
benefit costs from affiliates for 1997.
F-80
(in millions)
Met-Ed 1997 1996 1995
- ------ ---- ---- ----
Service cost-benefits attributed to service
during the period $ 1.5 $ 1.9 $ 2.0
Interest cost on the accumulated postretirement
benefit obligation 10.0 8.6 8.3
Expected return on plan assets (3.1) (1.6) (1.4)
Amortization of transition obligation 3.2 3.2 3.4
Other amortization, net 0.8 0.7 0.3
----- ----- -----
Net periodic postretirement benefit cost 12.4 12.8 12.6
Less, deferred for future recovery (5.1) (4.1) (5.6)
----- ----- -----
Postretirement benefit cost, net of deferrals $ 7.3 $ 8.7 $ 7.0
===== ===== =====
The above amount for 1996 does not include a pre-tax charge to earnings of
$13 million relating to early retirement programs. The amount deferred for
future recovery does not include $2.1 million of allocated postretirement
benefit costs from affiliates for 1997.
(in millions)
Penelec 1997 1996 1995
- ------- ---- ---- ----
Service cost-benefits attributed to service
during the period $ 1.5 $ 2.7 $ 4.3
Interest cost on the accumulated postretirement
benefit obligation 13.7 14.1 15.6
Expected return on plan assets (6.6) (4.6) (4.3)
Amortization of transition obligation 4.8 5.4 6.2
Other amortization, net 0.6 0.9 0.5
----- ----- -----
Net periodic postretirement benefit cost 14.0 18.5 22.3
Net write-off -- -- 1.3
----- ----- -----
Postretirement benefit cost $ 14.0 $ 18.5 $ 23.6
===== ===== =====
The above amount for 1996 does not include a pre-tax charge to earnings
of $13 million relating to early retirement programs.
The actual return on the plans' assets for the years 1997, 1996 and 1995
resulted in gains as follows:
(in millions)
Company 1997 1996 1995
- ------- ---- ---- ----
JCP&L $ 17.4 $ 8.0 $ 5.7
Met-Ed 8.6 3.6 3.3
Penelec 21.5 14.7 11.1
Other 19.4 12.3 7.8
----- ----- -----
Total $ 66.9 $ 38.6 $ 27.9
===== ===== =====
F-81
The funded status of the plans at December 31, 1997 and 1996, was as
follows:
(in millions)
GPU, Inc. and Subsidiary Companies 1997 1996
- ---------------------------------- ---- ----
Accumulated postretirement benefit obligation (APBO):
Retirees $ 490.1 $ 452.7
Fully eligible active plan participants 20.4 17.1
Other active plan participants 287.5 236.2
------ ------
Total APBO $ 798.0 $ 706.0
====== ======
APBO $(798.0) $(706.0)
Plan assets at fair value 403.0 303.6
------ ------
APBO in excess of plan assets (395.0) (402.4)
Less: Unrecognized net loss 73.3 56.6
Unrecognized prior service cost 6.6 1.9
Unrecognized transition obligation 238.0 268.6
------ ------
Accrued postretirement benefit liability $ (77.1) $ (75.3)
====== ======
JCP&L
APBO:
Retirees $ 135.0 $ 120.2
Fully eligible active plan participants 8.5 7.7
Other active plan participants 60.3 52.0
------ ------
Total APBO $ 203.8 $ 179.9
====== ======
APBO $(203.8) $(179.9)
Plan assets at fair value 99.0 70.7
------ ------
APBO in excess of plan assets (104.8) (109.2)
Less: Unrecognized net loss 15.7 14.1
Unrecognized prior service cost 0.6 -
Unrecognized transition obligation 66.9 74.4
------ ------
Accrued postretirement benefit liability $ (21.6) $ (20.7)
====== ======
Met-Ed
APBO:
Retirees $ 94.4 $ 84.7
Fully eligible active plan participants 2.9 2.1
Other active plan participants 55.2 37.4
------ ------
Total APBO $ 152.5 $ 124.2
====== ======
APBO $(152.5) $(124.2)
Plan assets at fair value 49.5 34.7
------ ------
APBO in excess of plan assets (103.0) (89.5)
Less: Unrecognized net loss 34.1 19.6
Unrecognized prior service cost 1.2 -
Unrecognized transition obligation 42.1 44.7
------ ------
Accrued postretirement benefit liability $ (25.6) $ (25.2)
====== ======
F-82
(in millions)
Penelec 1997 1996
- ------- ---- ----
APBO:
Retirees $ 163.7 $ 145.5
Fully eligible active plan participants 5.1 3.7
Other active plan participants 67.3 54.8
------ ------
Total APBO $ 236.1 $ 204.0
====== ======
APBO $(236.1) $(204.0)
Plan assets at fair value 130.4 95.6
------ ------
APBO in excess of plan assets (105.7) (108.4)
Less: Unrecognized net loss 21.0 13.2
Unrecognized prior service cost 1.8 1.6
Unrecognized transition obligation 77.0 83.2
------ ------
Accrued postretirement benefit liability $ (5.9) $ (10.4)
====== ======
Principal actuarial assumptions (%):
Annual long-term rate of return on plan assets 8.5 8.5
=== ===
Discount rate 7.0 7.5
=== ===
GPU intends to continue funding amounts for postretirement benefits with
an independent trustee, as deemed appropriate from time to time. The plan assets
include equities and fixed income securities.
In 1997, changes in assumptions, primarily the decrease in the discount
rate assumption from 7.5% to 7%, resulted in $22 million increase (JCP&L $5
million; Met-Ed $6 million; Penelec $6 million; Other $5 million) in the APBO as
of December 31, 1997. The APBO was determined by application of the terms of the
medical and life insurance plans, including the effects of established maximums
on covered costs, together with relevant actuarial assumptions and health-care
cost trend rates of 8% for those not eligible for Medicare and 6% for those
eligible for Medicare, then decreasing gradually to 5.5% in 2003 and thereafter.
These costs also reflect the implementation of a cost cap of 6% for individuals
who retire after December 31, 1995 and reach age 65. The effect of a 1% annual
increase in these assumed cost trend rates would increase the APBO by
approximately $68 million (JCP&L $16 million; Met-Ed $13 million; Penelec $19
million; Other $20 million) as of December 31, 1997 and the aggregate of the
service and interest cost components of net periodic postretirement health-care
cost by approximately $7 million (JCP&L $2 million; Met-Ed $1 million; Penelec
$2 million; Other $2 million).
In JCP&L's 1993 base rate proceeding, the NJBPU allowed JCP&L to collect
$3 million annually for incremental postretirement benefit costs, charged to
expense and recognized as a result of FAS 106. Based on the final order and in
accordance with Emerging Issues Task Force (EITF) Issue 92-12, "Accounting for
OPEB Costs by Rate-Regulated Enterprises," JCP&L has deferred the amounts above
that level. A 1997 Stipulation of Final Settlement (Final Settlement) allows
JCP&L to recover and amortize the deferred balance at December 31, 1997 over a
fifteen-year period. In addition, the Final Settlement allows JCP&L to recover
current amounts accrued pursuant to FAS 106, including amortization of the
transition obligation. (See discussion of the Final Settlement in Rate Matters
section, Management's Discussion and Analysis.) Met-Ed has deferred the
incremental postretirement benefit costs, charged to expense, associated
F-83
with the adoption of FAS 106 and in accordance with EITF Issue 92-12, as
authorized by the PaPUC in its 1993 base rate order. In accordance with EITF
Issue 92-12, effective January 1998, Met-Ed will no longer defer these costs.
Recovery of the deferred balance at December 31, 1997 is being sought through
proposed restructuring plans filed with the PaPUC in June 1997. (See discussion
of the proposed restructuring plans in Recent Regulatory Actions section of
Competitive Environment, Management's Discussion and Analysis.)
In 1994, the Pennsylvania Commonwealth Court reversed a PaPUC order that
allowed a nonaffiliated utility, outside a base rate proceeding, to defer
certain incremental postretirement benefit costs for future recovery from
customers. As a result of the Court's decision, in 1994, Penelec determined that
its FAS 106 costs, including costs deferred since January 1993, were not
probable of recovery and charged those deferred costs to expense. In 1997, 1996
and 1995, Penelec recorded charges to income of approximately $8 million, $12
million and $9 million, respectively, which represent continued amortization of
the transition obligation along with current accruals of FAS 106 expense for
active employees.
11. JOINTLY OWNED STATIONS
Each participant in a jointly owned station finances its portion of the
investment and charges its share of operating expenses to the appropriate
expense accounts. The GPU Energy companies participated with nonaffiliated
utilities in the following jointly owned stations at December 31, 1997:
Balance (in millions)
---------------------
% Accumulated
Station Owner Ownership Investment Depreciation
- ------- ----- --------- ---------- ------------
Homer City Penelec 50 $449.6 $168.5
Conemaugh Met-Ed 16.45 145.2 47.0
Keystone JCP&L 16.67 90.2 24.4
Yards Creek JCP&L 50 29.3 6.3
Seneca Penelec 20 16.3 5.2
12. LEASES
The GPU Energy companies' capital leases consist primarily of leases for
nuclear fuel. Nuclear fuel capital leases at December 31, 1997 totaled $136
million (JCP&L $79 million; Met-Ed $38 million; Penelec $19 million), net of
amortization of $251 million (JCP&L $151 million; Met-Ed $67 million; Penelec
$33 million). Nuclear fuel capital leases at December 31, 1996 totaled $139
million (JCP&L $95 million; Met-Ed $29 million; Penelec $15 million), net of
amortization of $208 million (JCP&L $124 million; Met-Ed $56 million; Penelec
$28 million). The recording of capital leases has no effect on net income
because all leases, for ratemaking purposes, are considered operating leases.
F-84
The GPU Energy companies have nuclear fuel lease agreements with
nonaffiliated fuel trusts. In 1995, the GPU Energy companies refinanced the
Oyster Creek and TMI-1 nuclear fuel leases to provide for aggregate borrowings
of up to $210 million ($100 million for Oyster Creek and $110 million for TMI-1)
outstanding at any one time. Reductions in nuclear fuel financing costs are
expected through the new credit facilities. It is contemplated that when
consumed, portions of the presently leased material will be replaced by
additional leased material. The GPU Energy companies are responsible for the
disposal costs of nuclear fuel leased under these agreements. These nuclear fuel
leases have initial terms of three years expiring in November 1998, and are
renewable annually thereafter at the lender's option for a period up to 20
years. Subject to certain conditions of termination, the GPU Energy companies
are required to purchase all nuclear fuel then under lease at a price that will
allow the lessor to recover its net investment. Lease expense consists of an
amount designed to amortize the cost of the nuclear fuel as consumed plus
interest costs. For the years ended December 31, 1997, 1996 and 1995, these
amounts were as follows:
(in millions)
Company 1997 1996 1995
- ------- ---- ---- ----
JCP&L $ 31 $ 32 $ 35
Met-Ed 12 16 15
Penelec 6 8 7
----- ----- -----
Total $ 49 $ 56 $ 57
===== ===== =====
JCP&L and Met-Ed have sold and leased back substantially all of their
respective ownership interests in the Merrill Creek Reservoir project. The
minimum lease payments under these operating leases, which have remaining terms
of 36 years, average approximately $3 million annually for each company.
A subsidiary of GPU International, Inc. has sold and leased back an
electric cogeneration facility for an initial term of eleven years. For the
years 1997, 1996 and 1995, the annual lease payments under this operating lease
were approximately $10 million, $10 million and $9 million, respectively. The
lease payments escalate annually, increasing to $16 million in year eleven.
13. COMMITMENTS AND CONTINGENCIES
NUCLEAR FACILITIES
The GPU Energy companies have made investments in three major nuclear
projects-Three Mile Island Unit 1 (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 December 31, 1997 and December 31, 1996, the GPU Energy companies' net
investment in TMI-1 and Oyster Creek, including nuclear fuel, was as follows:
F-85
Net Investment (in millions)
----------------------------
TMI-1 Oyster Creek
----- ------------
1997
----
JCP&L $155 $701
Met-Ed 300 -
Penelec 147 -
--- --
Total $602 $701
=== ===
1996
----
JCP&L $154 $766
Met-Ed 297 -
Penelec 146 -
--- --
Total $597 $766
=== ===
The GPU Energy companies' net investment in TMI-2 at December 31, 1997 and
1996 was $80 million and $90 million, respectively (JCP&L $72 million and $81
million, respectively; Met-Ed $1 million and $1 million, respectively; Penelec
$7 million and $8 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 the
Competition and the Changing Regulatory Environment section.)
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. 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.
F-86
In response to an inquiry regarding the possible sale of Oyster Creek, the
GPU Energy companies have stated that they would also consider selling TMI-1.
Unlike Oyster Creek, however, the early retirement of TMI-1 is not being
considered because of its lower operating costs. (See Competitive Environment
section, Management's Discussion and Analysis.)
TMI-2:
The 1979 TMI-2 accident resulted in significant damage to, and
contamination of, the plant and a release of radioactivity to the environment. A
cleanup program was completed in 1990, and after receiving Nuclear Regulatory
Commission (NRC) approval, TMI-2 entered into long-term monitored storage in
1993.
As a result of the accident and its aftermath, individual claims for
alleged personal injury (including claims for punitive damages), which are
material in amount, have been asserted against GPU, 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 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.
F-87
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 Department of Energy (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 developed for TMI-2 which took the
accident into account. Under the NRC regulations, the funding targets (in 1997
dollars) are as follows:
(in millions)
Oyster
TMI-1 TMI-2 Creek
----- ----- -----
JCP&L $ 45 $ 71 $306
Met-Ed 89 142 -
Penelec 45 71 -
--- --- ---
Total $179 $284 $306
=== === ===
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
F-88
plant is retired early. The retirement cost estimates under the site-specific
studies are as follows (in 1997 dollars):
(in millions)
Oyster
TMI-1 TMI-2 Creek
----- ----- -----
Radiological decommissioning $328 $399 $386
Nonradiological cost of removal 81 34 * 37
--- --- ---
Total $409 $433 $423
=== === ===
* Net of $10.1 million spent as of December 31, 1997.
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 trusts, at
market on the Consolidated Balance Sheets. Accounting for retirement costs may
change based upon the Financial Accounting Standards Board (FASB) Exposure Draft
discussed below.
The FASB has issued an Exposure Draft titled "Accounting for Certain
Liabilities Related to Closure or Removal of Long-Lived Assets," 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 1997 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 March 1997 allows for JCP&L's future collection of
F-89
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. (See discussion of Stipulation of Final
Settlement in Rate Matters section, Management's Discussion and Analysis.)
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 in 1997 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 in 1997:
JCP&L $ 2 $ 13
Met-Ed 9 -
Penelec 4 -
--- ---
Total $ 15 $ 13
=== ===
Accumulated depreciation provision at December 31, 1997:
JCP&L $ 38 $217
Met-Ed 68 -
Penelec 29 -
--- ---
Total $135 $217
=== ===
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
December 31, are as follows:
F-90
(in millions)
Total JCP&L Met-Ed Penelec
1997 $449 $112 $225 $112
1996 $431 $108 $215 $108
These amounts are based upon the 1995 site-specific study estimates (in 1997 and
1996 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) for 1997 and $17 million (JCP&L $4 million; Met-Ed
$8 million; Penelec $5 million) for 1996, 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 $449 million liability at December 31, 1997 is $261
million (JCP&L $34 million; Met-Ed $145 million; Penelec $82 million) which is
probable of recovery from customers and included in Three Mile Island Unit 2
deferred costs on the Consolidated Balance Sheets, and $220 million (JCP&L $87
million; Met-Ed $96 million; Penelec $37 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 1997 amounted to
$14 million (JCP&L $3 million; Met-Ed $10 million; Penelec $1 million).
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 March 1997 adjusts
JCP&L's future revenues for retirement costs based on the 1995 site-specific
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 December 31, 1997 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 1997 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.
F-91
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 also subject
to retrospective premium assessments of up to $44 million (JCP&L $27 million;
Met-Ed $11 million; Penelec $6 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.
F-92
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-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 Oyster Creek. In
July 1997, JCP&L proposed, in its restructuring plans filed with the NJBPU,
recovery of its remaining Oyster Creek plant investment as a regulatory asset,
through a nonbypassable charge to customers (see Competitive Environment
section, Management's Discussion and Analysis). At December 31, 1997, JCP&L's
net investment in Oyster Creek was $701 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 PaPUC their proposed
restructuring plans to implement competition and customer choice in Pennsylvania
as required by the comprehensive restructuring legislation enacted in 1996. 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 these plans are presented in the Competitive Environment section
of Management's Discussion and Analysis. The PaPUC has stated that it will
review and hold hearings on Met-Ed and Penelec's restructuring plans with
decisions due by mid-1998. 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. In October 1997, GPU announced that it intends to begin a process to sell,
through a competive bid process, up to all of the fossil fuel and hydroelectric
generating facilities owned by the GPU Energy companies. It is anticipated that
definitive agreements with the purchaser(s) will be entered into by the end of
1998 and the sale completed by mid-1999, subject to the timely receipt of the
necessary regulatory and other approvals. There can be no assurance as to the
extent that stranded costs will be recoverable in Pennsylvania and New Jersey.
(For additional information, see Competitive Environment section, Management's
Discussion and Analysis.)
F-93
In 1996, 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.
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 Competitive Environment section, Management's
Discussion and Analysis.)
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 728 359 165 204
1999 746 365 165 216
2000 811 370 203 238
2001 836 378 231 227
2002 857 390 240 227
* Actual.
F-94
As of December 31, 1997, 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 Managing Nonutility Generation section of The
GPU Energy Companies' Supply Plan, Management's Discussion and Analysis); 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, subject to PaPUC approval, Met-Ed and Penelec entered
into definitive buyout agreements with two bidders.
JCP&L has contracts through 2002 to purchase between 5,200 GWH and 5,550
GWH of electric generation per year at prices which are estimated to escalate
approximately 0.5% annually on a unit cost (cents/KWH) basis during this period.
From 2003 through 2008, JCP&L has contracts to purchase between 5,100 GWH and
5,400 GWH of electric generation per year at an average annual cost of $388
million. The prices during this period are estimated to escalate approximately
1.7% annually. After 2008, when major contracts begin to expire, purchases
steadily decline to approximately 1,180 GWH in 2014. The contract unit cost is
estimated to escalate approximately 5.3% annually from 2009 through 2014, with a
total average annual cost of $209 million during this period. All of JCP&L's
contracts will have expired by the end of 2020.
F-95
During this entire period, the NUG fuel mix is estimated to average
approximately 94% natural gas.
Met-Ed has contracts through 1999 to purchase between 2,300 GWH and 2,350
GWH of electric generation per year at prices which are estimated to decrease
approximately 1.5% annually on a unit cost basis during this period. From 2000
through 2008, Met-Ed has contracts to purchase between 3,100 GWH and 4,600 GWH
of electric generation per year at an average annual cost of $242 million. The
prices during this period are estimated to escalate approximately 2.1% annually
on a unit cost basis. From 2009 through 2012, Met-Ed is forecast to purchase
between 1,700 GWH and 2,100 GWH of electric generation per year at an average
annual cost of $165 million. During this period, the prices are estimated to
decrease approximately 0.8% annually on a unit cost basis. After 2012, Met-Ed's
remaining contracts expire rapidly through 2016; thereafter, they remain
constant until the expiration of the last contract in 2020. During this entire
period, the NUG fuel mix is estimated to average approximately 50% to 75%
coal/waste coal.
Penelec has contracts through 2000 to purchase between 3,100 GWH and 3,500
GWH of electric generation per year at prices which are estimated to escalate
approximately 2.5% annually on a unit cost basis during this period. From 2001
through 2010, Penelec has contracts to purchase between 3,100 GWH and 3,800 GWH
of electric generation per year at an average annual cost of $237 million. The
prices during this period are estimated to escalate approximately 2.3% annually
on a unit cost basis. From 2011 through 2018, purchases decline from
approximately 2,500 GWH to approximately 1,200 GWH in 2018. The contract unit
cost is estimated to decrease approximately 0.1% annually from 2011 through
2018, with a total average annual cost of $143 million during this period. After
2018, Penelec's remaining contracts expire rapidly through 2020. During this
entire period, the NUG fuel mix is estimated to average approximately 89%
coal/waste coal.
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 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.
F-96
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 Competitive
Environment section, Management's Discussion and Analysis for additional
discussion.)
Regulatory Assets and Liabilities:
Regulatory assets and Regulatory liabilities, as reflected in the
December 31, 1997 and December 31, 1996 Consolidated Balance Sheets in
accordance with the provisions of FAS 71 were as follows:
GPU, Inc. and Subsidiary Companies Assets (in thousands)
December 31, December 31,
1997 1996
------------- --------
Income taxes recoverable through
future rates $ 510,680 $ 527,385
TMI-2 deferred costs 345,326 356,517
Nonutility generation contract buyout costs 245,568 242,481
Unamortized property losses 99,532 100,310
Other postretirement benefits 89,569 76,569
Environmental remediation 90,308 78,136
N.J. unit tax 39,797 45,877
Unamortized loss on reacquired debt 40,489 45,378
Load and demand-side management programs 23,164 40,770
N.J. low-level radwaste disposal 31,479 37,525
DOE enrichment facility decommissioning 33,472 36,352
Nuclear fuel disposal fee 21,512 21,552
Storm damage 31,097 20,226
Nonutility generation costs 24,857 -
Other 22,402 24,194
--------- ---------
Total $1,649,252 $1,653,272
========= =========
Liabilities (in thousands)
December 31, December 31,
1997 1996
------------- --------
Income taxes refundable through
future rates $ 89,247 $ 87,735
Other 12,527 2,080
--------- ---------
Total $ 101,774 $ 89,815
========= =========
F-97
JCP&L Assets (in thousands)
December 31, December 31,
1997 1996
------------- --------
Income taxes recoverable through
future rates $ 128,111 $ 142,726
TMI-2 deferred costs 109,498 126,448
Nonutility generation contract buyout costs 140,500 139,000
Unamortized property losses 94,726 94,767
Other postretirement benefits 49,807 44,024
Environmental remediation 61,324 55,285
N.J. unit tax 39,797 45,877
Unamortized loss on reacquired debt 28,729 31,469
Load and demand-side management programs 23,164 40,770
N.J. low-level radwaste disposal 31,479 37,525
DOE enrichment facility decommissioning 21,223 23,150
Nuclear fuel disposal fee 23,781 23,319
Storm damage 31,097 20,226
Other 2,466 4,975
--------- ---------
Total $ 785,702 $ 829,561
========= =========
Liabilities (in thousands)
December 31, December 31,
1997 1996
------------- --------
Income taxes refundable through
future rates $ 37,759 $ 32,567
Other 11,467 683
---------- ---------
Total $ 49,226 $ 33,250
========== =========
Met-Ed Assets (in thousands)
December 31, December 31,
1997 1996
------------- --------
Income taxes recoverable through
future rates $ 178,927 $ 174,636
TMI-2 deferred costs 146,290 144,782
Nonutility generation contract buyout costs 76,368 86,781
Unamortized property losses 2,650 3,113
Other postretirement benefits 39,762 32,545
Environmental remediation 4,121 2,575
Unamortized loss on reacquired debt 5,329 6,223
DOE enrichment facility decommissioning 8,166 8,801
Nuclear fuel disposal fee (1,511) (1,282)
Nonutility generation costs 10,265 -
Other 4,515 4,209
--------- ---------
Total $ 474,882 $ 462,383
========= =========
Liabilities (in thousands)
December 31, December 31,
1997 1996
------------- --------
Income taxes refundable through
future rates $ 21,749 $ 23,486
Other 2,446 2,495
---------- ---------
Total $ 24,195 $ 25,981
========== =========
F-98
Penelec Assets (in thousands)
December 31, December 31,
1997 1996
------------- --------
Income taxes recoverable through
future rates $ 203,642 $ 210,023
TMI-2 deferred costs 89,538 85,287
Nonutility generation contract buyout costs 28,700 16,700
Unamortized property losses 2,156 2,430
Environmental remediation 24,863 20,276
Unamortized loss on reacquired debt 6,431 7,686
DOE enrichment facility decommissioning 4,083 4,401
Nuclear fuel disposal fee (758) (485)
Nonutility generation costs 14,592 -
Other 16,853 16,120
--------- ---------
Total $ 390,100 $ 362,438
========= =========
Liabilities (in thousands)
December 31, December 31,
1997 1996
------------- --------
Income taxes refundable through
future rates $ 29,739 $ 31,682
Other 46 12
---------- ---------
Total $ 29,785 $ 31,694
========== =========
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
1997 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 Managing Nonutility Generation section of The GPU
Energy Companies' Supply Plan, Management's Discussion and Analysis).
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 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
F-99
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 the Environmental Matters section.
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.
DOE enrichment facility decommissioning: Represents payments to the DOE over a
15-year period beginning in 1994.
Nuclear fuel disposal fee: Represents amounts recoverable through rates for
estimated future disposal costs for spent nuclear fuel at Oyster Creek and 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 Competitive Environment
section, Management's Discussion and Analysis).
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
F-100
rates. At December 31, 1997, 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).
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 FASB's
EITF agreed to discuss the issues surrounding the continued applicability of FAS
71 to the electric utility industry. In May and July 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. Among other things, the alternate plan accelerates the
F-101
pace of retail competition in Pennsylvania and reduces the amount of PECO's
recoverable stranded costs. PECO has appealed the PaPUC's decision. On January
26, 1998, PECO announced it had taken a fourth quarter pre-tax charge to 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. There can
be no assurance as to the outcome of this matter.
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.
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
F-102
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 reached
agreement 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 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 August 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
F-103
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 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 December 31, 1997. 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 Competitive Environment
section, Management's Discussion and Analysis), and has recorded a corresponding
regulatory asset of approximately $12 million at December 31, 1997.
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 $16 million to $29 million, and a liability of $16 million (JCP&L
$1 million; Met-Ed $4 million; Penelec $11 million) is reflected on the
Consolidated Balance Sheets at December 31, 1997. 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 Competitive Environment section,
Management's Discussion and Analysis). As a result, a regulatory asset of $16
million is reflected on the Consolidated Balance Sheets at December 31, 1997.
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 December 31, 1997, JCP&L has
spent approximately $27 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
F-104
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 (see Rate Matters section, Management's
Discussion and Analysis). At December 31, 1997, JCP&L had recorded on its
Consolidated Balance Sheet a regulatory asset of $55 million, which included
approximately $46 million related to expected future costs and approximately $9
million for past remediation expenditures in excess of collections from
customers (including interest).
JCP&L is pursuing 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.
OTHER COMMITMENTS AND CONTINGENCIES
GPUI Group:
At December 31, 1997, the GPUI Group had investments totaling
approximately $2.5 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 GPUI Group section, Management's Discussion
and Analysis).
At December 31, 1997, GPU, Inc.'s aggregate investment in the GPUI Group
was $268 million; GPU, Inc. has also guaranteed up to an additional $1.3 billion
of GPUI Group obligations. Of this amount, $1.1 billion is included in Long-term
debt and Securities due within one year on GPU's Consolidated Balance Sheet at
December 31, 1997; $30 million of that amount relates to a GPU International,
Inc. revolving credit agreement; and $171 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 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.
F-105
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, the New York Public Service Commission,
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 in early 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.
In 1997, the Government of the United Kingdom imposed a windfall profits
tax on privatized utilities, including Midlands, in which the GPUI Group has a
50% ownership interest. As a result, a one-time charge to income of $109.3
million, or $0.90 per share, was taken. In December 1997, half of this tax was
paid; the remainder is due by December 1998.
Many of the GPUI Group's computer systems must be modified to accomplish
year 2000 compliance. The GPUI Group estimates that it will cost approximately
$7 million to modify its computer systems.
Other:
In October 1997, GPU announced that it intends 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, 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 $280 million; Met-Ed $300
million; Penelec $495 million) at December 31, 1997. GPU expects to use a
multi-stage competitive bid process, similar to the generation divestiture
processes used by other utilities. 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. GPU currently anticipates that it
will begin seeking indicative bids in mid-April 1998. It is anticipated that
definitive agreements with the purchaser(s) will be entered into by the end of
1998 and the sale completed by mid-1999, subject to the timely receipt of the
necessary regulatory and other approvals.
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 are made,
current depreciation allowance methodology may not make adequate provision for
the recovery of such investments during their remaining lives.
F-106
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. On November 14, 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 December 31, 1997, $6 million
has been paid. As a result, at December 31, 1997, 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.)
F-107
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.
The GPU Energy companies and certain affiliates have contracted for an
integrated information system to help manage their business growth, accomplish
year 2000 compliance and meet the mandates of electric utility deregulation. The
system is scheduled to be fully operational in early 1999. The estimated project
costs for the system are $106 million (JCP&L $49 million; Met-Ed $25 million;
Penelec $32 million), of which $16 million (JCP&L $7 million; Met-Ed $4 million;
Penelec $5 million) was spent in 1997.
At December 31, 1997, GPU, Inc. and consolidated affiliates had 9,346
employees worldwide, of which about 8,980 employees were located in the U.S. The
majority of the U.S. workforce is employed by the GPU Energy companies, of which
4,764 are represented by unions for collective bargaining purposes. Penelec,
JCP&L and Met-Ed's collective bargaining agreements expire in 1998, 1999 and
2000, respectively.
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.
14. SEGMENT INFORMATION
In 1997, GPU adopted Statement of Financial Accounting Standards No. 131
(FAS 131), "Disclosures about Segments of an Enterprise and Related
Information," which requires the reporting of certain financial information by
business segment and geographic area. For the purpose of providing segment
information, the GPU Energy companies consist of the three domestic electric
utility companies serving customers in Pennsylvania and New Jersey, as well as
Genco, GPUN and GPUS. The GPUI Group primarily develops, owns and operates
generation, transmission and distribution facilities in the United States and in
foreign countries. For information related to the GPUI Group's acquisitions, see
Note 5, Acquisitions. GPU AR is engaged in energy services and retail energy
sales. Corporate represents the activities of GPU, Inc., a registered holding
company. GPU's reportable segments are strategic business units that are managed
separately due to their different operating and regulatory environments. GPU's
segment information is as follows:
F-108
Balance Sheet Segment Data (in thousands)
Current Noncurrent Current
1997 Assets Assets Liabilities
- ---- ------ ------ -----------
Domestic:
GPU Energy companies $ 831,269 $ 9,117,687 $ 1,140,492
GPUI Group* 81,027 352,139 90,097
Less: GPUI Group equity investments
included above (43,777) (182,384) (21,360)
Add: Original equity investment and
income/(loss) less dividends to date -- 79,458 --
GPU AR 4,961 161 3,301
Corporate 165 6,313 155,977
------------ ------------ ------------
Subtotal 873,645 9,373,374 1,368,507
------------ ------------ ------------
Foreign: (GPUI Group only)
Australia* 86,226 2,091,619 558,496
United Kingdom* 188,462 2,152,977 785,152
Other* 114,786 396,078 43,419
Less: GPUI Group equity investments
included above (240,256) (2,735,741) (734,139)
Add: Original equity investment and
income/(loss) less dividends to date 106,317 517,221 --
------------ ------------ ------------
Subtotal 255,535 2,422,154 652,928
------------ ------------ ------------
Consolidated Total $ 1,129,180 $ 11,795,528 $ 2,021,435
============ ============ ============
Other Cash
Long-Term Noncurrent Capital
1997 Debt Liabilities Expenditures
- ---- ---- ----------- ------------
Domestic:
GPU Energy companies $ 2,448,672 $ 2,823,301 $ 356,416
GPUI Group* 263,378 46,880 111,125
Less: GPUI Group equity investments
included above (171,665) (12,321) (120)
Add: Original equity investment and
income/(loss) less dividends to date -- -- --
GPU AR -- -- --
Corporate -- 1,418 --
----------- ----------- -----------
Subtotal 2,540,385 2,859,278 467,421
----------- ----------- -----------
Foreign: (GPUI Group only)
Australia* 1,485,639 115,390 1,811,921
United Kingdom* 1,367,471 245,105 77,706
Other* 258,794 64,803 1,213
Less: GPUI Group equity investments
included above (1,326,317) (295,183) (89,624)
Add: Original equity investment and
income/(loss) less dividends to date -- -- --
----------- ----------- -----------
Subtotal 1,785,587 130,115 1,801,216
----------- ----------- -----------
Consolidated Total $ 4,325,972 $ 2,989,393 $ 2,268,637
=========== =========== ===========
* Includes the effect of consolidating the GPUI Group's ownership interest in
investments accounted for under the equity method (pro-rata consolidation),
which are not consolidated in the audited consolidated financial statements.
F-109a
Balance Sheet Segment Data (in thousands)(continued)
Current Noncurrent Current
1996 Assets Assets Liabilities
- ---- ------ ------ -----------
Domestic:
GPU Energy companies $ 807,551 $ 9,045,776 $ 1,174,250
GPUI Group* 97,494 274,648 41,982
Less: GPUI Group equity investments
included above (48,970) (195,453) (32,910)
Add: Original equity investment and
income/(loss) less dividends to date -- 68,779 --
GPU AR -- -- --
Corporate 7,535 5,792 138,381
------------ ------------ ------------
Subtotal 863,610 9,199,542 1,321,703
------------ ------------ ------------
Foreign: (GPUI Group only)
Australia* 38,822 385,997 33,527
United Kingdom* 356,646 1,935,287 507,879
Other* 47,062 291,297 21,727
Less: GPUI Group equity investments
included above (408,966) (2,493,887) (548,230)
Add: Original equity investment and
income/(loss) less dividends to date -- 725,809 --
------------ ------------ ------------
Subtotal 33,564 844,503 14,903
------------ ------------ ------------
Consolidated Total $ 897,174 $ 10,044,045 $ 1,336,606
============ ============ ============
Other Cash
Long-Term Noncurrent Capital
1996 Debt Liabilities Expenditures
- ---- ---- ----------- ------------
Domestic:
GPU Energy companies $ 2,427,802 $ 2,799,221 $ 403,880
GPUI Group* 242,038 32,494 56,180
Less: GPUI Group equity investments
included above (179,738) (15,836) (301)
Add: Original equity investment and
income/(loss) less dividends to date -- -- --
GPU AR -- -- --
Corporate -- 1,412 --
----------- ----------- -----------
Subtotal 2,490,102 2,817,291 459,759
----------- ----------- -----------
Foreign: (GPUI Group only)
Australia* 336,957 4,490 9,952
United Kingdom* 1,538,342 238,207 567,407
Other* 176,475 80,849 51,714
Less: GPUI Group equity investments
included above (1,364,860) (271,305) (111,365)
Add: Original equity investment and
income/(loss) less dividends to date -- -- --
----------- ----------- -----------
Subtotal 686,914 52,241 517,708
----------- ----------- -----------
Consolidated Total $ 3,177,016 $ 2,869,532 $ 977,467
=========== =========== ===========
* Includes the effect of consolidating the GPUI Group's ownership interest in
investments accounted for under the equity method (pro-rata consolidation),
which are not consolidated in the audited consolidated financial statements.
F-109b
Balance Sheet Segment Data (in thousands)(continued)
Current Noncurrent Current
1995 Assets Assets Liabilities
- ---- ------ ------ -----------
Domestic:
GPU Energy companies $ 773,092 $ 8,683,308 $ 944,070
GPUI Group* 64,826 286,810 42,046
Less: GPUI Group equity investments
included above (51,618) (238,149) (33,052)
Add: Original equity investment and
income/(loss) less dividends to date -- 69,492 --
GPU AR -- -- --
Corporate 8,573 4,837 130,753
----------- ----------- -----------
Subtotal 794,873 8,806,298 1,083,817
----------- ----------- -----------
Foreign: (GPUI Group only)
Australia* 33,468 350,843 19,761
Other* 24,477 245,552 31,432
Less: GPUI Group equity investments
included above (44,954) (473,214) (46,748)
Add: Original equity investment and
income/(loss) less dividends to date -- 112,173 --
----------- ----------- -----------
Subtotal 12,991 235,354 4,445
----------- ----------- -----------
Consolidated Total $ 807,864 $ 9,041,652 $ 1,088,262
=========== =========== ===========
Other Cash
Long-Term Noncurrent Capital
1995 Debt Liabilities Expenditures
- ---- ---- ----------- ------------
Domestic:
GPU Energy companies $ 2,466,200 $ 2,599,332 $ 461,860
GPUI Group* 184,938 60,655 5,965
Less: GPUI Group equity investments
included above (184,938) (49,410) (1,253)
Add: Original equity investment and
income/(loss) less dividends to date -- -- --
GPU AR -- -- --
Corporate -- 1,213 --
----------- ----------- -----------
Subtotal 2,466,200 2,611,790 466,572
----------- ----------- -----------
Foreign: (GPUI Group only)
Australia* 317,569 4,435 112,173
Other* 131,008 55,760 121,000
Less: GPUI Group equity investments
included above (346,879) (16,077) (73,054)
Add: Original equity investment and
income/(loss) less dividends to date -- -- --
----------- ----------- -----------
Subtotal 101,698 44,118 160,119
----------- ----------- -----------
Consolidated Total $ 2,567,898 $ 2,655,908 $ 626,691
=========== =========== ===========
* Includes the effect of consolidating the GPUI Group's ownership interest in
investments accounted for under the equity method (pro-rata consolidation),
which are not consolidated in the audited consolidated financial statements.
F-109c
Earnings Segment Data (in thousands)
Depreciation
Operating and Operating
1997 Revenues Amortization Income
- ---- -------- ------------ ------
Domestic:
GPU Energy companies $ 4,043,800 $ 451,009 $ 632,951
GPUI Group* 143,660 8,047 16,794
Less: GPUI Group equity investments
included above (104,933) (7,269) (20,691)
Add: Equity in undistributed earnings/(losses)
of affiliates -- -- --
GPU AR 1,339 -- (4,785)
Corporate -- -- (8,493)
----------- ----------- -----------
Subtotal 4,083,866 451,787 615,776
----------- ----------- -----------
Foreign: (GPUI Group only)
Australia* 174,350 16,192 60,814
United Kingdom* 1,105,503 27,930 139,322
Other* 53,776 17,396 (3,416)
Less: GPUI Group equity investments
included above (1,274,116) (45,591) (165,378)
Add: Equity in undistributed earnings/(losses)
of affiliates -- -- --
----------- ----------- -----------
Subtotal 59,513 15,927 31,342
----------- ----------- -----------
Consolidated Total $ 4,143,379 $ 467,714 $ 647,118
=========== =========== ===========
Other Interest and
Income and Preferred
1997 Deductions Dividends Net Income
- ---- ---------- --------- ----------
Domestic:
GPU Energy companies $ 4,094 $ 249,015 $ 388,030
GPUI Group* (1,699) 17,769 (2,674)
Less: GPUI Group equity investments
included above (3,104) (17,169) (6,626)
Add: Equity in undistributed earnings/(losses)
of affiliates (5,804) -- (5,804)
GPU AR 3 -- (4,782)
Corporate (136) 5,649 (14,278)
--------- --------- ---------
Subtotal (6,646) 255,264 353,866
--------- --------- ---------
Foreign: (GPUI Group only)
Australia* (3,646) 46,025 11,143
United Kingdom* (94,768) 117,624 (73,070)
Other* 53,249 7,461 41,035
Less: GPUI Group equity investments
included above 81,748 (107,053) 23,423
Add: Equity in undistributed earnings/(losses)
of affiliates (21,296) -- (21,296)
--------- --------- ---------
Subtotal 15,287 64,057 (18,765)
--------- --------- ---------
Consolidated Total $ 8,641 $ 319,321 $ 335,101
========= ========= =========
* Includes the effect of consolidating the GPUI Group's ownership interest in
investments accounted for under the equity method (pro-rata consolidation),
which are not consolidated in the audited consolidated financial statements.
F-110a
Earnings Segment Data (in thousands)(continued)
Depreciation
Operating and Operating
1996 Revenues Amortization Income
- ---- -------- ------------ ------
Domestic:
GPU Energy companies $ 3,918,089 $ 400,253 $ 517,915
GPUI Group* 121,721 9,229 23,652
Less: GPUI Group equity investments
included above (104,890) (8,327) (21,605)
Add: Equity in undistributed earnings/(losses)
of affiliates -- -- --
GPU AR -- -- --
Corporate -- -- (9,636)
----------- ----------- -----------
Subtotal 3,934,920 401,155 510,326
----------- ----------- -----------
Foreign: (GPUI Group only)
Australia* 150,044 9,048 25,639
United Kingdom* 570,042 15,628 58,474
Other* 52,572 9,156 10,233
Less: GPUI Group equity investments
included above (736,867) (27,315) (86,406)
Add: Equity in undistributed earnings/(losses)
of affiliates -- -- --
----------- ----------- -----------
Subtotal 35,791 6,517 7,940
----------- ----------- -----------
Consolidated Total $ 3,970,711 $ 407,672 $ 518,266
=========== =========== ===========
Other Interest and
Income and Preferred
1996 Deductions Dividends Net Income
- ---- ---------- --------- ----------
Domestic:
GPU Energy companies $ 6,099 $ 235,066 $ 288,948
GPUI Group* 2,560 18,415 7,797
Less: GPUI Group equity investments
included above 4,614 (17,601) 610
Add: Equity in undistributed earnings/(losses)
of affiliates (1,993) -- (1,993)
GPU AR -- -- --
Corporate 413 5,114 (14,337)
--------- --------- ---------
Subtotal 11,693 240,994 281,025
--------- --------- ---------
Foreign: (GPUI Group only)
Australia* (930) 25,311 (602)
United Kingdom* 10,166 59,862 8,778
Other* 4,398 5,881 6,049
Less: GPUI Group equity investments
included above (8,651) (62,185) (32,872)
Add: Equity in undistributed earnings/(losses)
of affiliates 35,974 -- 35,974
--------- --------- ---------
Subtotal 40,957 28,869 17,327
--------- --------- ---------
Consolidated Total $ 52,650 $ 269,863 $ 298,352
========= ========= =========
*Includes the effect of consolidating the GPUI Group's ownership interest in
investments accounted for under the equity method (pro-rata
consolidation), which are not consolidated in the audited consolidated
financial statements.
F-110b
Earnings Segment Data (in thousands)(continued)
Depreciation
Operating and Operating
1995 Revenues Amortization Income
- ---- -------- ------------ ------
Domestic:
GPU Energy companies $ 3,804,656 $ 377,650 $ 565,086
GPUI Group* 129,500 10,470 26,148
Less: GPUI Group equity investments
included above (123,475) (9,462) (22,341)
Add: Equity in undistributed earnings/(losses)
of affiliates -- -- --
GPU AR -- -- --
Corporate -- -- (4,535)
----------- ----------- -----------
Subtotal 3,810,681 378,658 564,358
----------- ----------- -----------
Foreign: (GPUI Group only)
Australia* 137,562 -- 12,505
Other* 12,785 2,396 1,360
Less: GPUI Group equity investments
included above (138,569) (390) (12,186)
Add: Equity in undistributed earnings/(losses)
of affiliates -- -- --
----------- ----------- -----------
Subtotal 11,778 2,006 1,679
----------- ----------- -----------
Consolidated Total $ 3,822,459 $ 380,664 $ 566,037
=========== =========== ===========
Other Interest and
Income and Preferred
1995 Deductions Dividends Net Income
- ---- ---------- --------- ----------
Domestic:
GPU Energy companies $ 120,416 $ 243,808 $ 441,694
GPUI Group* 9,139 22,148 13,139
Less: GPUI Group equity investments
included above (18) (21,651) (708)
Add: Equity in undistributed earnings/(losses)
of affiliates (3,597) -- (3,597)
GPU AR -- -- --
Corporate 848 7,080 (10,767)
--------- --------- ---------
Subtotal 126,788 251,385 439,761
--------- --------- ---------
Foreign: (GPUI Group only)
Australia* (946) 7,944 3,615
Other* 1,364 2,814 (1,012)
Less: GPUI Group equity investments
included above 419 (9,538) (2,229)
Add: Equity in undistributed earnings/(losses)
of affiliates -- -- --
--------- --------- ---------
Subtotal 837 1,220 374
--------- --------- ---------
Consolidated Total $ 127,625 $ 252,605 $ 440,135
========= ========= =========
* Includes the effect of consolidating the GPUI Group's ownership interest in
investments accounted for under the equity method (pro-rata consolidation),
which are not consolidated in the audited consolidated financial
statements.
F-110c
GPU, Inc. and Subsidiary Companies
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
-------------------
Balance (1) (2)
at Charged to Charged Balance
Beginning Costs and to Other at End
Description of Period Expenses Accounts Deductions of Period
----------- --------- -------- -------- ---------- ---------
Year ended December 31, 1997
Allowance for doubtful
accounts $ 8,660 $17,984 $ 6,069(a) $24,626(b) $ 8,087
Allowance for inventory
obsolescence 2,256 -- 8(e) 780(c) 1,484
Year ended December 31, 1996
Allowance for doubtful
accounts $ 8,182 $17,501 $ 5,304(a) $22,327(b) $ 8,660
Allowance for inventory
obsolescence 3,373 650 2,207(d) 3,974(c) 2,256
Year ended December 31, 1995
Allowance for doubtful
accounts $ 7,430 $14,634 $ 5,789(a) $19,671(b) $ 8,182
Allowance for inventory
obsolescence 4,923 -- -- 1,550(c) 3,373
<FN>
(a) Recovery of accounts previously written off.
(b) Accounts receivable written off.
(c) Inventory written off.
(d) Sale of inventory previously written off by Met-Ed ($4) and JCP&L ($4)
and reestablishment of zero value inventory by JCP&L ($2,199).
(e) Sale of inventory previously written off by Met-Ed ($7) and JCP&L ($1).
</FN>
F-111
Jersey Central Power & Light Company and Subsidiary Company
COMPANY STATISTICS
For The Years Ended December 31, 1997 1996 1995 1994 1993 1992
Capacity at Company Peak (in MW):
Company owned 2,718 2,850 2,749 2,765 2,839 2,826
Contracted 2,794 2,497 2,462 2,403 2,033 2,364
----- ----- ----- ----- ----- -----
Total capacity (a) 5,512 5,347 5,211 5,168 4,872 5,190
===== ===== ===== ===== ===== =====
Hourly Peak Load (in MW):
Summer peak 4,817 4,130 4,554 4,292 4,564 4,149
Winter peak 3,168 3,173 3,260 3,242 3,129 3,135
Reserve at company peak (%) 14.4 29.5 14.4 20.4 6.7 25.1
Load factor (%) (b) 46.5 53.9 47.1 50.8 49.1 51.7
Sources of Energy (in thousands of MWH):
Coal 2,215 2,105 1,929 1,738 1,983 1,985
Nuclear 6,553 6,114 6,791 5,275 6,151 6,259
Gas, hydro & oil 548 535 861 757 460 270
------ ------ ------ ------ ------ ------
Net generation 9,316 8,754 9,581 7,770 8,594 8,514
Utility purchases and interchange 6,044 6,608 6,304 6,966 7,253 7,173
Nonutility purchases 5,342 5,439 5,850 4,920 4,820 5,274
------ ------ ------ ------ ------ ------
Total sources of energy 20,702 20,801 21,735 19,656 20,667 20,961
Company use, line loss, etc. (1,794) (2,127) (1,749) (1,405) (2,026) (2,075)
------ ------ ------ ------ ------ ------
Total electric energy sales 18,908 18,674 19,986 18,251 18,641 18,886
====== ====== ====== ====== ====== ======
Fuel Expense (in millions):
Coal $ 28 $ 30 $ 26 $26 $28 $26
Nuclear 39 40 44 35 42 41
Gas & oil 34 31 31 34 29 18
--- --- --- -- -- --
Total $101 $101 $101 $95 $99 $85
=== === === == == ==
Power Purchased and Interchanged (in millions):
Utility purchases and interchange purchases $234 $246 $279 $295 $310 $325
Nonutility purchases 384 370 382 304 292 316
Amortization of nonutility buyout costs 9 - - - - -
--- --- --- --- --- ---
Total $627 $616 $661 $599 $602 $641
=== === === === === ===
Electric Energy Sales (in thousands of MWH):
Residential 7,256 7,266 7,112 7,094 6,983 6,568
Commercial 6,974 6,829 6,611 6,586 6,474 6,207
Industrial 3,536 3,497 3,562 3,673 3,689 3,723
Other 79 78 77 76 369 389
------ ------ ------ ------ ------ ------
Sales to customers 17,845 17,670 17,362 17,429 17,515 16,887
Sales to other utilities 1,063 1,004 2,624 822 1,126 1,999
------ ------ ------ ------ ------ ------
Total 18,908 18,674 19,986 18,251 18,641 18,886
====== ====== ====== ====== ====== ======
Operating Revenues (in millions):
Residential $ 907 $ 895 $ 881 $ 855 $ 835 $ 735
Commercial 797 775 742 721 699 630
Industrial 313 311 315 322 321 306
Other 21 21 21 21 40 40
----- ----- ----- ----- ----- -----
Sales to customers 2,038 2,002 1,959 1,919 1,895 1,711
Sales to other utilities 36 35 62 19 31 53
----- ----- ----- ----- ----- -----
Total electric energy sales 2,074 2,037 2,021 1,938 1,926 1,764
Other revenues 20 21 15 15 10 10
----- ----- ----- ----- ----- -----
Total $2,094 $2,058 $2,036 $1,953 $1,936 $1,774
===== ===== ===== ===== ===== =====
Price per KWH (in cents):
Residential 12.47 12.40 12.31 12.06 11.90 11.15
Commercial 11.42 11.38 11.20 10.92 10.78 10.08
Industrial 8.85 8.92 8.45 8.78 8.70 8.20
Total sales to customers 11.41 11.38 11.24 11.00 10.80 10.09
Total electric energy sales 10.96 10.96 10.08 10.61 10.31 9.30
Kilowatt-hour Sales per Residential Customer 8,493 8,637 8,559 8,690 8,669 8,264
Customers at Year-End (in thousands) 969 954 940 924 911 897
<FN>
(a) Summer ratings at December 31, 1997 of owned and contracted capacity were
2,729 MW and 2,483 MW, respectively.
(b) The ratio of the average hourly load in kilowatts supplied during the year
to the peak load occurring during the year.
</FN>
F-112
Jersey Central Power & Light Company and Subsidiary Company
SELECTED FINANCIAL DATA
(In Thousands)
For the Years Ended December 31, 1997 1996 (1) 1995 1994 (2) 1993 1992
Operating revenues $2,093,972 $2,057,918 $2,035,928 $1,952,425 $1,935,909 $1,774,071
Other operation and maintenance expense 454,991 556,086 475,448 526,623 460,128 424,285
Net income 212,014 156,303 199,089 162,841 158,344 117,361
Earnings available for common stock 200,638 143,231 184,632 148,046 141,534 96,757
Net utility plant in service 2,664,141 2,717,056 2,641,565 2,620,212 2,558,160 2,429,756
Total assets 4,690,776 4,709,919 4,456,389 4,336,640 4,269,155 3,886,904
Long-term debt 1,173,304 1,173,091 1,192,945 1,168,444 1,215,674 1,116,930
Long-term obligations under
capital leases 6 933 2,402 4,362 6,966 4,645
Company-obligated mandatorily
redeemable preferred securities 125,000 125,000 125,000 - - -
Cumulative preferred stock with
mandatory redemption 91,500 114,000 134,000 150,000 150,000 150,000
Capital expenditures 172,243 199,823 217,805 243,878 197,059 218,874
Return on average common equity 13.1% 9.5% 13.1% 11.2% 11.1% 8.0%
Employees 2,509 2,538 3,111 3,077 3,447 3,434
<FN>
(1) Results for 1996 reflect a decrease in earnings of $39.4 million
(after-tax) for costs related to voluntary enhanced retirement
programs.
(2) Results for 1994 reflect a net decrease in earnings of $23.0 million
(after-tax) due to charges for costs related to early retirement programs
($30.4 million); and net interest income from refunds of previously paid
federal income taxes related to the tax retirement of TMI-2 ($7.4 million).
</FN>
F-113
Jersey Central Power & Light Company and Subsidiary Company
QUARTERLY FINANCIAL DATA (UNAUDITED)
First Quarter Second Quarter
------------- --------------
In Thousands 1997 1996 1997 1996
Operating revenues $510,443 $529,274 $478,226 $475,884
Operating income 82,472 77,361 70,651 67,750
Net income 58,320 54,496 35,241 40,381
Earnings available for common stock 55,158 50,910 32,362 37,219
Third Quarter Fourth Quarter
------------- --------------
In Thousands 1997 1996* 1997 1996
Operating revenues $602,900 $578,274 $502,403 $474,486
Operating income 102,527 53,452 69,200 58,743
Net income 77,306 27,519 41,147 33,907
Earnings available for common stock 74,709 24,357 38,409 30,745
* Results for the third quarter of 1996 reflect charges to Other operation
and maintenance expense of $39.4 million (after-tax) for costs related to
voluntary enhanced retirement programs.
F-114
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Jersey Central Power & Light Company
Reading, Pennsylvania
We have audited the consolidated financial statements and financial statement
schedule of Jersey Central Power & Light Company and Subsidiary Company as
listed in the index on page F-1 of this Form 10-K. These financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Jersey Central
Power & Light Company and Subsidiary Company as of December 31, 1997 and 1996,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
New York, New York
February 4, 1998
F-115
Jersey Central Power & Light Company and Subsidiary Company
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31, 1997 1996
ASSETS
Utility Plant:
In service, at original cost $4,671,568 $4,528,676
Less, accumulated depreciation 2,007,427 1,811,620
--------- ---------
Net utility plant in service 2,664,141 2,717,056
Construction work in progress 124,887 106,512
Other, net 92,654 111,116
--------- ---------
Net utility plant 2,881,682 2,934,684
--------- ---------
Other Property and Investments:
Nuclear decommissioning trusts, at market (Note 13) 343,434 278,342
Nuclear fuel disposal trust, at market 108,652 101,661
Other, net 8,951 8,305
--------- ---------
Total other property and investments 461,037 388,308
--------- ---------
Current Assets:
Cash and temporary cash investments 2,994 1,321
Special deposits 6,778 6,939
Accounts receivable:
Customers, net 153,753 135,655
Other 18,225 33,228
Unbilled revenues 59,687 56,522
Materials and supplies, at average cost or less:
Construction and maintenance 90,037 92,761
Fuel 14,260 19,257
Deferred income taxes (Note 8) 27,536 22,509
Prepayments 14,468 21,150
--------- ---------
Total current assets 387,738 389,342
--------- ---------
Deferred Debits and Other Assets:
Regulatory assets: (Note 13)
Nonutility generation contract buyout costs 140,500 139,000
Income taxes recoverable through future rates 128,111 142,726
Three Mile Island Unit 2 deferred costs 109,498 126,448
Unamortized property losses 94,726 94,767
Other 312,867 326,620
--------- ---------
Total regulatory assets 785,702 829,561
Deferred income taxes (Note 8) 154,708 138,903
Other 19,909 29,121
--------- ---------
Total deferred debits and other assets 960,319 997,585
--------- ---------
Total Assets $4,690,776 $4,709,919
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-116
Jersey Central Power & Light Company and Subsidiary Company
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31, 1997 1996
LIABILITIES AND CAPITALIZATION
Capitalization:
Common stock (Note 4) $ 153,713 $ 153,713
Capital surplus 510,769 510,769
Retained earnings 875,639 825,001
--------- ---------
Total common stockholder's equity 1,540,121 1,489,483
Cumulative preferred stock: (Note 4)
With mandatory redemption 91,500 114,000
Without mandatory redemption 37,741 37,741
Company-obligated mandatorily redeemable
preferred securities (Note 4) 125,000 125,000
Long-term debt (Note 3) 1,173,304 1,173,091
--------- ---------
Total capitalization 2,967,666 2,939,315
--------- ---------
Current Liabilities:
Securities due within one year 12,511 110,075
Notes payable (Note 2) 115,254 31,800
Obligations under capital leases (Note 12) 79,419 96,150
Accounts payable:
Affiliates 27,167 71,761
Other 113,822 94,258
Taxes accrued 3,966 2,063
Interest accrued 26,021 28,350
Deferred energy credits 25,645 15,559
Other 76,529 80,195
--------- ---------
Total current liabilities 480,334 530,211
--------- ---------
Deferred Credits and Other Liabilities:
Deferred income taxes (Note 8) 644,562 664,440
Unamortized investment tax credits 54,675 59,893
Nuclear fuel disposal fee 134,326 127,543
Three Mile Island Unit 2 future costs 112,227 107,652
Regulatory liabilities (Note 13) 49,226 33,250
Other 247,760 247,615
--------- ---------
Total deferred credits and other liabilities 1,242,776 1,240,393
--------- ---------
Commitments and Contingencies (Note 13)
Total Liabilities and Capitalization $4,690,776 $4,709,919
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-117
Jersey Central Power & Light Company and Subsidiary Company
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands)
For The Years Ended December 31, 1997 1996 1995
Operating Revenues $2,093,972 $2,057,918 $2,035,928
--------- --------- ---------
Operating Expenses:
Fuel 101,030 101,357 101,110
Power purchased and interchanged:
Affiliates 15,979 27,058 17,950
Others 610,792 589,396 642,858
Deferral of energy and capacity costs, net 6,043 19,441 (5,949)
Other operation and maintenance 454,991 556,086 475,448
Depreciation and amortization 237,461 207,309 194,976
Taxes, other than income taxes 232,086 228,885 226,994
--------- --------- ---------
Total operating expenses 1,658,382 1,729,532 1,653,387
--------- --------- ---------
Operating Income Before Income Taxes 435,590 328,386 382,541
Income taxes (Note 8) 110,740 71,080 91,321
--------- --------- ---------
Operating Income 324,850 257,306 291,220
--------- --------- ---------
Other Income and Deductions:
Allowance for other funds used during construction - 1,536 1,803
Other income, net 1,919 7,202 14,889
Income taxes (Note 8) (1,376) (3,357) (5,905)
--------- --------- ---------
Total other income and deductions 543 5,381 10,787
--------- --------- ---------
Income Before Interest Charges and
Dividends on Preferred Securities 325,393 262,687 302,007
--------- --------- ---------
Interest Charges and Dividends
on Preferred Securities:
Interest on long-term debt 89,869 89,648 92,602
Other interest 15,129 11,147 9,709
Allowance for borrowed funds used during
construction (2,319) (5,111) (6,021)
Dividends on company-obligated mandatorily
redeemable preferred securities 10,700 10,700 6,628
--------- --------- ---------
Total interest charges and dividends
on preferred securities 113,379 106,384 102,918
--------- --------- ---------
Net Income 212,014 156,303 199,089
Preferred stock dividends 11,376 13,072 14,457
--------- --------- ---------
Earnings Available for Common Stock $ 200,638 $ 143,231 $ 184,632
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-118
Jersey Central Power & Light Company and Subsidiary Company
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(In Thousands)
For The Years Ended December 31, 1997 1996 1995
Balance at beginning of year $ 825,001 $ 816,770 $ 772,240
Net income 212,014 156,303 199,089
--------- --------- ---------
Total 1,037,015 973,073 971,329
--------- --------- ---------
Cash dividends on capital stock:
Cumulative preferred stock
(at the annual rates indicated below):
4% Series ($4.00 a share) (500) (500) (500)
7.88% Series E ($7.88 a share) (1,970) (1,970) (1,970)
8.48% Series I ($8.48 a share) (1,272) (2,968) (4,240)
8.65% Series J ($8.65 a share) (4,325) (4,325) (4,325)
7.52% Series K ($7.52 a share) (3,309) (3,309) (3,422)
Common stock (not declared on a
per share basis) (150,000) (135,000) (140,000)
--------- --------- ---------
Total (161,376) (148,072) (154,457)
--------- --------- ---------
Other adjustments, net - - (102)
--------- --------- ---------
Balance at end of year $ 875,639 $ 825,001 $ 816,770
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-119
Jersey Central Power & Light Company and Subsidiary Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
For The Years Ended December 31, 1997 1996 1995
Operating Activities:
Net income $ 212,014 $ 156,303 $ 199,089
Adjustments to reconcile income to cash provided:
Depreciation and amortization 253,278 217,225 212,609
Amortization of property under capital leases 28,703 28,339 31,963
Voluntary enhanced retirement programs -- 62,909 --
Nuclear outage maintenance costs, net 11,615 (15,392) 16,239
Deferred income taxes and investment tax
credits, net (27,449) 4,056 (3,264)
Deferred energy and capacity costs, net 8,193 19,436 (6,511)
Accretion income (10,760) (11,610) (12,520)
Allowance for other funds used during
construction -- (1,536) (1,803)
Changes in working capital:
Receivables (6,261) 12,897 (35,318)
Materials and supplies 7,721 2,624 (2,642)
Special deposits and prepayments 6,844 138 22,261
Payables and accrued liabilities (31,854) (62,157) (47,634)
Nonutility generation contract buyout costs (30,500) (65,000) (17,000)
Other, net 6,281 (6,334) (12,816)
--------- --------- ---------
Net cash provided by operating activities 427,825 341,898 342,653
--------- --------- ---------
Investing Activities:
Cash construction expenditures (172,243) (199,823) (217,805)
Contributions to decommissioning trusts (18,003) (18,004) (18,793)
Other, net (10,989) (10,253) (7,114)
--------- --------- ---------
Net cash used for investing activities (201,235) (228,080) (243,712)
--------- --------- ---------
Financing Activities:
Issuance of long-term debt -- 79,550 49,625
Increase/(Decrease) in notes payable, net 83,454 31,000 (109,700)
Retirement of long-term debt (100,075) (25,710) (47,439)
Capital lease principal payments (26,496) (29,763) (26,991)
Issuance of company-obligated mandatorily
redeemable preferred securities -- -- 121,063
Redemption of preferred stock (20,000) (20,000) (6,049)
Dividends paid on preferred stock (11,800) (13,496) (14,569)
Dividends paid on common stock (150,000) (135,000) (140,000)
Contribution from parent corporation -- -- 75,000
--------- --------- ---------
Net cash required by financing activities (224,917) (113,419) (99,060)
--------- --------- ---------
Net increase/(decrease) in cash and temporary cash
investments from above activities 1,673 399 (119)
Cash and temporary cash investments, beginning of year 1,321 922 1,041
--------- --------- ---------
Cash and temporary cash investments, end of year $ 2,994 $ 1,321 $ 922
========= ========= =========
Supplemental Disclosure:
Interest paid $ 114,423 $ 106,264 $ 106,673
========= ========= =========
Income taxes paid $ 133,689 $ 90,960 $ 93,662
========= ========= =========
New capital lease obligations incurred $ 11,048 $ 32,694 $ 18,264
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-120
Jersey Central Power & Light Company and Subsidiary Company
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
Column A Column B Column C Column D Column E
- ---------------------------- --------- -------- -------- --------
Additions
Balance (1) (2)
at Charged to Charged Balance
Beginning Costs and to Other at End
Description of Period Expenses Accounts Deductions of Period
Year ended December 31, 1997
Allowance for doubtful
accounts $1,670 $4,976 $1,939 $7,171(b) $1,414
Allowance for inventory
obsolescence 206 - 1(e) 223(c) (16)
Year ended December 31, 1996
Allowance for doubtful
accounts $1,958 $5,080 $1,680(a) $7,048(b) $1,670
Allowance for inventory
obsolescence 197 - 4(e) 2,194(c) 206
2,199(d)
Year ended December 31, 1995
Allowance for doubtful
accounts $1,359 $5,076 $2,480(a) $6,957(b) $1,958
Allowance for inventory
obsolescence 348 - - 151(c) 197
<FN>
_____________________________________
(a) Recovery of accounts previously written off.
(b) Accounts receivable written off.
(c) Inventory written off.
(d) Reestablishment of zero value inventory.
(e) Sale of inventory previously written off.
</FN>
F-121
Metropolitan Edison Company and Subsidiary Companies
COMPANY STATISTICS
For The Years Ended December 31, 1997 1996 1995 1994 1993 1992
Capacity at Company Peak (in MW):
Company owned 1,738 1,705 1,604 1,602 1,602 1,602
Contracted 507 853 492 499 676 609
----- ----- ----- ----- ----- -----
Total capacity (a) 2,245 2,558 2,096 2,101 2,278 2,211
===== ===== ===== ===== ===== =====
Hourly Peak Load (in MW):
Summer peak 2,224 2,017 2,186 2,000 1,944 1,845
Winter peak 2,054 2,114 2,012 1,954 1,940 1,834
Reserve at company peak (%) .9 21.0 (4.1) 5.1 17.2 19.8
Load factor (%) (b) 63.5 66.3 61.4 66.6 67.2 67.6
Sources of Energy (in thousands of MWH):
Coal 5,203 4,760 4,334 4,547 4,283 4,809
Nuclear 2,959 3,550 3,194 3,294 2,975 3,460
Gas, hydro & oil 204 182 253 194 42 64
------ ------ ------ ------ ------ ------
Net generation 8,366 8,492 7,781 8,035 7,300 8,333
Utility purchases and interchange 2,424 2,021 3,087 2,295 3,398 3,319
Nonutility purchases 2,481 2,406 2,066 1,654 1,623 1,333
------ ------ ------ ------ ------ ------
Total sources of energy 13,271 12,919 12,934 11,984 12,321 12,985
Company use, line loss, etc. (790) (718) (856) (660) (884) (479)
------ ------ ------ ------ ------ ------
Total electric energy sales 12,481 12,201 12,078 11,324 11,437 12,506
====== ====== ====== ====== ====== ======
Fuel Expense (in millions):
Coal $72 $69 $61 $71 $64 $72
Nuclear 16 20 20 20 16 19
Gas & oil 4 5 6 3 2 2
-- -- -- -- -- --
Total $92 $94 $87 $94 $82 $93
== == == == == ==
Power Purchased and Interchanged (in millions):
Utility purchases and interchange purchases $ 70 $ 54 $ 84 $ 80 $108 $105
Nonutility purchases, net of deferred costs 162 168 131 101 95 78
Amortization of nonutility buyout costs 10 9 - - - -
--- --- --- --- --- ---
Total $242 $231 $215 $181 $203 $183
=== === === === === ===
Electric Energy Sales (in thousands of MWH):
Residential 4,034 4,135 3,925 3,921 3,800 3,567
Commercial 3,209 3,144 3,011 2,921 2,794 2,638
Industrial 4,098 4,033 3,957 3,861 3,664 3,589
Other 210 213 209 211 284 329
------ ------ ------ ------ ------ ------
Sales to customers 11,551 11,525 11,102 10,914 10,542 10,123
Sales to other utilities 930 676 976 410 895 2,383
------ ------ ------ ------ ------ ------
Total 12,481 12,201 12,078 11,324 11,437 12,506
====== ====== ====== ====== ====== ======
Operating Revenues (in millions):
Residential $368 $365 $339 $327 $322 $306
Commercial 259 247 229 215 209 201
Industrial 253 243 228 215 207 213
Other 14 14 13 12 18 22
--- --- --- --- --- ---
Sales to customers 894 869 809 769 756 742
Sales to other utilities 24 20 26 12 27 63
--- --- --- --- --- ---
Total electric energy sales 918 889 835 781 783 805
Other revenues 25 21 20 20 18 17
--- --- --- --- --- ---
Total $943 $910 $855 $801 $801 $822
=== === === === === ===
Price per KWH (in cents):
Residential 9.04 8.90 8.54 8.39 8.42 8.60
Commercial 7.93 7.88 7.54 7.38 7.46 7.63
Industrial 6.07 6.04 5.74 5.55 5.68 5.95
Total sales to customers 7.63 7.58 7.23 7.07 7.16 7.34
Total electric energy sales 7.25 7.33 6.86 6.92 6.83 6.45
Kilowatt-hour Sales per Residential Customer 9,644 10,012 9,609 9,741 9,573 9,139
Customers at Year-End (in thousands) 477 470 465 458 451 445
<FN>
(a) Summer ratings at December 31, 1997 of owned and contracted capacity were
1,738 MW and 796 MW, respectively.
(b) The ratio of the average hourly load in kilowatts supplied during the year
to the peak load occurring during the year.
</FN>
F-122
Metropolitan Edison Company and Subsidiary Companies
SELECTED FINANCIAL DATA
(In Thousands)
For the Years Ended December 31, 1997 1996 (1) 1995 (2) 1994 (3) 1993 1992
Operating revenues $ 943,109 $ 910,408 $ 854,674 $ 801,303 $ 801,487 $ 821,823
Other operation and maintenance expense 228,258 249,993 229,559 258,656 210,822 208,756
Net income 93,517 69,067 148,540 731 77,875 73,077
Earnings available for common stock 93,034 71,845 147,596 (2,229) 70,915 62,788
Net utility plant in service 1,492,039 1,455,702 1,477,030 1,437,250 1,361,409 1,290,628
Total assets 2,533,981 2,472,978 2,437,165 2,236,279 2,172,543 1,811,689
Long-term debt 576,924 563,252 603,268 529,783 546,319 496,440
Long-term obligations under
capital leases 30 380 1,032 2,174 3,557 2,643
Company-obligated mandatorily
redeemable preferred securities 100,000 100,000 100,000 100,000 - -
Capital expenditures 87,613 76,660 112,554 159,717 142,380 130,641
Return on average common equity 12.9% 10.3% 23.5% (0.4%) 12.2% 11.8%
Employees 2,498 2,093 2,166 2,000 2,322 2,328
<FN>
(1) Results for 1996 reflect a decrease in earnings of $15.4 million
(after-tax) for costs related to voluntary enhanced retirement
programs.
(2) Results for 1995 reflect the reversal of $72.8 million (after-tax) of
certain future TMI-2 retirement costs written off in 1994. The reversal
of this write-off resulted from a 1995 Pennsylvania Supreme Court
decision that overturned a 1994 lower court order, and restored a 1993
PaPUC order allowing for the recovery of such costs. Partially offsetting
this increase was a charge to income of $5.7 million (after-tax) of TMI-2
monitored storage costs deemed not probable of recovery through
ratemaking.
(3) Results for 1994 reflect a net decrease in earnings of $79.9 million
(after-tax) due to a write-off of certain future TMI-2 retirement costs
($72.8 million); charges for costs related to early retirement programs
($20.1 million); and net interest income from refunds of previously paid
federal income taxes related to the tax retirement of TMI-2 ($13.0
million).
</FN>
F-123
Metropolitan Edison Company and Subsidiary Companies
QUARTERLY FINANCIAL DATA (UNAUDITED)
First Quarter Second Quarter
In Thousands 1997 1996 1997 1996
Operating revenues $255,260 $237,688 $208,554 $207,058
Operating income 54,113 38,392 28,303 31,129
Net income 39,685 24,037 14,203 16,806
Earnings available for common stock 39,564 23,801 14,082 16,570
Third Quarter Fourth Quarter
In Thousands 1997 1996* 1997 1996
Operating revenues $248,161 $243,077 $231,134 $222,585
Operating income 41,714 23,575 26,021 33,804
Net income 27,225 8,382 12,404 19,842
Earnings available for common stock 27,105 8,146 12,283 23,328
<FN>
* Results for the third quarter of 1996 reflect charges to Other operation and
maintenance of $15.4 million (after-tax) for costs related to voluntary
enhanced retirement programs.
</FN>
F-124
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Metropolitan Edison Company
Reading, Pennsylvania
We have audited the consolidated financial statements and financial statement
schedule of Metropolitan Edison Company and Subsidiary Companies as listed in
the index on page F-1 of this Form 10-K. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Metropolitan
Edison Company and Subsidiary Companies as of December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
New York, New York
February 4, 1998
F-125
Metropolitan Edison Company and Subsidiary Companies
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31, 1997 1996
ASSETS
Utility Plant:
In service, at original cost $2,411,810 $2,297,100
Less, accumulated depreciation 919,771 841,398
---------- ----------
Net utility plant in service 1,492,039 1,455,702
Construction work in progress 45,435 98,171
Other, net 39,056 31,000
---------- ----------
Net utility plant 1,576,530 1,584,873
---------- ----------
Other Property and Investments:
Nuclear decommissioning trusts, at market (Note 13) 168,110 131,475
Other, net 11,958 11,261
---------- ----------
Total other property and investments 180,068 142,736
---------- ----------
Current Assets:
Cash and temporary cash investments 6,116 1,901
Special deposits 1,055 1,052
Accounts receivable:
Customers, net 65,156 61,522
Other 29,399 17,368
Unbilled revenues 39,747 27,019
Materials and supplies, at average cost or less:
Construction and maintenance 38,597 39,739
Fuel 11,323 11,026
Deferred income taxes (Note 8) 2,945 7,073
Prepayments 6,762 17,254
---------- ----------
Total current assets 201,100 183,954
---------- ----------
Deferred Debits and Other Assets:
Regulatory assets:(Note 13)
Income taxes recoverable through future rates 178,927 174,636
Three Mile Island Unit 2 deferred costs 146,290 144,782
Nonutility generation contract buyout costs 76,368 86,781
Other 73,297 56,184
---------- ----------
Total regulatory assets 474,882 462,383
Deferred income taxes (Note 8) 87,332 85,169
Other 14,069 13,863
---------- ----------
Total deferred debits and other assets 576,283 561,415
---------- ----------
Total Assets $2,533,981 $2,472,978
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-126
Metropolitan Edison Company and Subsidiary Companies
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31, 1997 1996
LIABILITIES AND CAPITALIZATION
Capitalization:
Common stock (Note 4) $ 66,273 $ 66,273
Capital surplus 370,200 370,200
Retained earnings 268,634 255,649
Accumulated other comprehensive income (Note 4) 12,487 8,395
---------- ----------
Total common stockholder's equity 717,594 700,517
Cumulative preferred stock (Note 4) 12,056 12,056
Company-obligated mandatorily redeemable
preferred securities (Note 4) 100,000 100,000
Long-term debt (Note 3) 576,924 563,252
---------- ----------
Total capitalization 1,406,574 1,375,825
---------- ----------
Current Liabilities:
Securities due within one year 22 40,020
Notes payable (Note 2) 67,279 50,667
Obligations under capital leases (Note 12) 38,372 29,964
Accounts payable
Affiliates 62,873 27,556
Other 95,589 89,857
Taxes accrued 21,455 11,222
Interest accrued 15,903 18,279
Other 33,351 45,825
---------- ----------
Total current liabilities 334,844 313,390
---------- ----------
Deferred Credits and Other Liabilities:
Deferred income taxes (Note 8) 412,692 401,104
Unamortized investment tax credits 29,134 31,584
Three Mile Island Unit 2 future costs 224,354 215,204
Nuclear fuel disposal fee 30,343 28,811
Regulatory liabilities (Note 13) 24,195 25,981
Other 71,845 81,079
---------- ----------
Total deferred credits and other liabilities 792,563 783,763
---------- ----------
Commitments and Contingencies (Note 13)
Total Liabilities and Capitalization $2,533,981 $2,472,978
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-127
Metropolitan Edison Company and Subsidiary Companies
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands)
For The Years Ended December 31, 1997 1996 1995
Operating Revenues $ 943,109 $ 910,408 $ 854,674
--------- --------- ---------
Operating Expenses:
Fuel 92,726 93,881 87,477
Power purchased and interchanged:
Affiliates 17,936 20,724 31,411
Others 223,948 209,831 184,319
Deferral of energy costs, net -- (448) (1,041)
Other operation and maintenance 228,258 249,993 229,559
Depreciation and amortization 106,437 98,364 99,588
Taxes, other than income taxes 59,339 61,319 54,870
--------- --------- ---------
Total operating expenses 728,644 733,664 686,183
--------- --------- ---------
Operating Income Before Income Taxes 214,465 176,744 168,491
Income taxes (Note 8) 64,314 49,844 36,686
--------- --------- ---------
Operating Income 150,151 126,900 131,805
--------- --------- ---------
Other Income and Deductions:
Allowance for other funds used during construction 75 540 1,304
Other income, net 3,371 1,220 129,660
Income taxes (Note 8) (1,455) (489) (55,364)
--------- --------- ---------
Total other income and deductions 1,991 1,271 75,600
--------- --------- ---------
Income Before Interest Charges and
Dividends on Preferred Securities 152,142 128,171 207,405
--------- --------- ---------
Interest Charges and Dividends
on Preferred Securities:
Interest on long-term debt 43,885 45,373 45,844
Other interest 6,765 5,436 5,147
Allowance for borrowed funds used during
construction (1,025) (705) (1,126)
Dividends on company-obligated mandatorily
redeemable preferred securities 9,000 9,000 9,000
--------- --------- ---------
Total interest charges and dividends
on preferred securities 58,625 59,104 58,865
--------- --------- ---------
Net Income 93,517 69,067 148,540
Preferred stock dividends 483 944 944
Gain on preferred stock reacquisition -- 3,722 --
--------- --------- ---------
Earnings Available for Common Stock $ 93,034 $ 71,845 $ 147,596
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-128
Metropolitan Edison Company and Subsidiary Companies
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
For The Years Ended December 31, 1997 1996 1995
Net income $ 93,517 $ 69,067 $148,540
-------- -------- --------
Other comprehensive income/(loss),
net of tax: (Note 4)
Net unrealized gains on investments 4,249 4,027 5,119
Minimum pension liability (157) (262) --
-------- -------- --------
Total other comprehensive income 4,092 3,765 5,119
-------- -------- --------
Comprehensive income $ 97,609 $ 72,832 $153,659
======== ======== ========
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(In Thousands)
For The Years Ended December 31, 1997 1996 1995
Balance at beginning of year $ 255,649 $ 243,804 $ 191,231
Net income 93,517 69,067 148,540
--------- --------- ---------
Total 349,166 312,871 339,771
--------- --------- ---------
Cash dividends on capital stock:
Cumulative preferred stock
(at the annual rates indicated below):
3.90% Series ($3.90 a share) (251) (459) (459)
4.35% Series ($4.35 a share) (98) (145) (145)
3.85% Series ($3.85 a share) (36) (112) (112)
3.80% Series ($3.80 a share) (30) (69) (69)
4.45% Series ($4.45 a share) (68) (159) (159)
Common stock (not declared on a
per share basis) (80,000) (60,000) (95,000)
--------- --------- ---------
Total (80,483) (60,944) (95,944)
--------- --------- ---------
Gain on preferred stock reacquisition -- 3,722 --
Other adjustments, net (49) -- (23)
--------- --------- ---------
Balance at end of year $ 268,634 $ 255,649 $ 243,804
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-129
Metropolitan Edison Company and Subsidiary Companies
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
For The Years Ended December 31, 1997 1996 1995
Operating Activities:
Net income $ 93,517 $ 69,067 $ 148,540
Adjustments to reconcile income to cash provided:
Depreciation and amortization 113,662 104,820 84,848
Amortization of property under capital leases 11,637 15,704 13,667
Three Mile Island Unit 2 costs -- -- (118,209)
Voluntary enhanced retirement programs -- 26,204 --
Nuclear outage maintenance costs, net (6,169) 6,215 (5,931)
Deferred income taxes and investment tax
credits, net 3,137 25,168 68,827
Deferred energy costs, net -- (448) (1,041)
Allowance for other funds used during
construction (75) (540) (1,304)
Changes in working capital:
Receivables (28,393) 8,490 (19,130)
Materials and supplies 845 (1,611) 7,053
Special deposits and prepayments 10,489 (10,501) 1,615
Payables and accrued liabilities 47,819 (17,714) 11,478
Nonutility generation contract buyout costs (16,050) (43,318) (21,499)
Other, net (17,942) (15,964) (36,318)
--------- --------- ---------
Net cash provided by operating activities 212,477 165,572 132,596
--------- --------- ---------
Investing Activities:
Cash construction expenditures (87,613) (76,660) (112,554)
Contributions to decommissioning trusts (16,992) (17,057) (13,485)
Other, net (363) (1,087) (300)
--------- --------- ---------
Net cash used for investing activities (104,968) (94,804) (126,339)
--------- --------- ---------
Financing Activities:
Issuance of long-term debt 13,577 -- 87,911
Increase in notes payable, net 16,612 28,277 22,390
Retirement of long-term debt (40,020) (15,019) (40,519)
Capital lease principal payments (12,744) (15,171) (12,531)
Redemption of preferred stock -- (7,820) --
Dividends paid on preferred stock (719) (944) (944)
Dividends paid on common stock (80,000) (60,000) (95,000)
Contribution from parent corporation -- -- 25,000
--------- --------- ---------
Net cash required by financing activities (103,294) (70,677) (13,693)
--------- --------- ---------
Net increase/(decrease) in cash and temporary cash
investments from above activities 4,215 91 (7,436)
Cash and temporary cash investments, beginning of year 1,901 1,810 9,246
--------- --------- ---------
Cash and temporary cash investments, end of year $ 6,116 $ 1,901 $ 1,810
========= ========= =========
Supplemental Disclosure:
Interest paid $ 59,819 $ 59,697 $ 57,606
========= ========= =========
Income taxes paid $ 55,375 $ 39,278 $ 47,343
========= ========= =========
New capital lease obligations incurred $ 19,695 $ 1,417 $ 22,316
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-130
Metropolitan Edison Company and Subsidiary Companies
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
Column A Column B Column C Column D Column E
- ---------------------------- --------- -------- -------- --------
Additions
-------------------------
Balance (1) (2)
at Charged to Charged Balance
Beginning Costs and to Other at End
Description of Period Expenses Accounts Deductions of Period
----------- --------- -------- -------- ---------- ---------
Year ended December 31, 1997
Allowance for doubtful
accounts $3,172 $6,644 $1,944(a) $8,613(b) $3,147
Allowance for inventory
obsolescence 1,864 - 7(c) 438(d) 1,433
Year ended December 31, 1996
Allowance for doubtful
accounts $3,072 $6,460 $1,651(a) $8,011(b) $3,172
Allowance for inventory
obsolescence 3,176 - 4(c) 1,316(d) 1,864
Year ended December 31, 1995
Allowance for doubtful
accounts $4,889 $3,040 $1,793(a) $6,650(b) $3,072
Allowance for inventory
obsolescence 4,575 - - 1,399(d) 3,176
<FN>
_______________________________
(a) Recovery of accounts previously written off.
(b) Accounts receivable written off.
(c) Sale of inventory previously written off.
(d Inventory written off.
</FN>
F-131
Pennsylvania Electric Company and Subsidiary Companies
COMPANY STATISTICS
For The Years Ended December 31, 1997 1996 1995 1994 1993 1992
Capacity at Company Peak (in MW):
Company owned 2,365 2,365 2,365 2,369 2,369 2,371
Contracted 867 782 868 778 636 418
----- ----- ----- ----- ----- -----
Total capacity (a) 3,232 3,147 3,233 3,147 3,005 2,789
===== ===== ===== ===== ===== =====
Hourly Peak Load (in MW):
Summer peak 2,535 2,410 2,495 2,309 2,208 2,140
Winter peak 2,652 2,574 2,589 2,514 2,342 2,355
Reserve at company peak (%) 21.9 22.3 24.9 25.2 28.3 18.4
Load factor (%) (b) 69.7 71.1 67.6 69.4 70.5 69.3
Sources of Energy (in thousands of MWH):
Coal1 1,972 11,268 11,237 10,263 10,703 11,329
Nuclear 1,480 1,775 1,597 1,647 1,488 1,730
Gas, hydro & oil 48 95 (95) 120 73 75
------ ------ ------ ------ ------ ------
Net generation 13,500 13,138 12,739 12,030 12,264 13,134
Utility purchases and interchange 2,297 2,268 3,071 2,468 2,219 2,723
Nonutility purchases 3,296 3,201 2,796 2,236 1,940 1,463
------ ------ ------ ------ ------ ------
Total sources of energy 19,093 18,607 18,606 16,734 16,423 17,320
Company use, line loss, etc. (2,853) (2,932) (2,751) (2,248) (2,256) (2,289)
------ ------ ------ ------ ------ ------
Total electric energy sales 16,240 15,675 15,855 14,486 14,167 15,031
====== ====== ====== ====== ====== ======
Fuel Expense (in millions):
Coal $168 $164 $164 $163 $174 $168
Nuclear 8 10 10 10 8 9
Gas & oil 2 2 1 2 1 1
--- --- --- --- --- ---
Total $178 $176 $175 $175 $183 $178
=== === === === === ===
Power Purchased and Interchanged (in millions):
Utility purchases and interchange purchases $ 27 $ 18 $ 43 $ 35 $ 31 $ 51
Nonutility purchases, net of deferred costs 188 192 158 123 104 77
--- --- --- --- --- ---
Total $215 $210 $201 $158 $135 $128
=== === === === === ===
Electric Energy Sales (in thousands of MWH):
Residential 3,801 3,897 3,765 3,773 3,715 3,590
Commercial 4,098 4,044 3,922 3,794 3,651 3,488
Industrial 4,835 4,563 4,463 4,449 4,346 4,589
Other 821 814 857 958 568 585
------ ------ ------ ------ ------ ------
Sales to customers 13,555 13,318 13,007 12,974 12,280 12,252
Sales to other utilities 2,685 2,357 2,848 1,512 1,887 2,779
------ ------ ------ ------ ------ ------
Total 16,240 15,675 15,855 14,486 14,167 15,031
====== ====== ====== ====== ====== ======
Operating Revenues (in millions):
Residential $ 342 $ 339 $322 $321 $308 $298
Commercial 316 302 287 279 261 248
Industrial 267 249 237 237 227 233
Other 40 36 39 45 31 27
----- ----- --- --- --- ---
Sales to customers 965 926 885 882 827 806
Sales to other utilities 54 53 68 36 52 62
----- ----- --- --- --- ---
Total electric energy sales 1,019 979 953 918 879 868
Other revenues 34 41 28 27 29 28
----- ----- --- --- --- ---
Total $1,053 $1,020 $981 $945 $908 $896
===== ===== === === === ===
Price per KWH (in cents):
Residential 8.84 8.70 8.52 8.51 8.30 8.27
Commercial 7.58 7.48 7.29 7.34 7.17 7.11
Industrial 5.42 5.44 5.33 5.32 5.24 5.08
Total sales to customers 7.00 6.95 6.79 6.80 6.74 6.58
Total electric energy sales 6.18 6.24 6.00 6.34 6.21 5.77
Kilowatt-hour Sales per Residential Customer 7,648 7,857 7,620 7,678 7,607 7,393
Customers at Year-End (in thousands) 575 573 571 567 563 559
<FN>
(a) Winter ratings at December 31, 1997 of owned and contracted capacity were
2,365 MW and 848 MW, respectively.
(b) The ratio of the average hourly load in kilowatts supplied during the year
to the peak load occurring during the year.
</FN>
F-132
Pennsylvania Electric Company and Subsidiary Companies
SELECTED FINANCIAL DATA
(In Thousands)
For the Years Ended December 31, 1997 1996 (1) 1995 (2) 1994 (3) 1993 1992
Operating revenues $1,052,936 $1,019,645 $ 981,329 $ 944,744 $ 908,280 $ 896,337
Other operation and maintenance expense 258,416 293,868 266,347 294,316 241,252 226,179
Net income 95,023 69,809 111,010 31,799 95,728 99,744
Earnings available for common stock 94,358 73,872 109,466 28,862 90,741 94,080
Net utility plant in service 1,720,755 1,715,670 1,692,850 1,621,818 1,542,276 1,473,293
Total assets 2,592,775 2,535,065 2,473,570 2,381,054 2,301,340 1,892,715
Long-term debt 676,444 656,459 642,487 616,490 524,491 582,647
Long-term obligations under
capital leases 3,272 4,129 5,277 6,741 7,745 7,691
Company-obligated mandatorily
redeemable preferred securities 105,000 105,000 105,000 105,000 - -
Capital expenditures 99,074 114,672 130,512 174,464 150,252 110,629
Return on average common equity 12.1% 10.0% 15.8% 4.2% 13.5% 14.5%
Employees 1,539 2,071 2,665 3,031 3,539 3,551
<FN>
(1) Results for 1996 reflect a decrease in earnings of $19.7 million
(after-tax) for costs related to voluntary enhanced retirement programs.
(2) Results for 1995 reflect a the reversal of $32.1 million (after-tax) of
certain future TMI-2 retirement costs written off in 1994. The reversal
of this write-off resulted from a 1995 Pennsylvania Supreme Court
decision that overturned a 1994 lower court order, and restored a 1993
PaPUC order allowing for the recovery of such costs. Partially offsetting
this increase was a charge to income of $2.7 million (after-tax) of TMI-2
monitored storage costs deemed not probable of recovery through
ratemaking.
(3) Results for 1994 reflect a net decrease in earnings of $61.8 million
(after-tax) due to a write-off of certain future TMI-2 retirement costs
($32.1 million); charges for costs related to early retirement programs
($25.6 million); a write-off of postretirement benefit costs believed not
probable of recovery in rates ($10.6 million); and net interest income
from refunds of previously paid federal income taxes related to the tax
retirement of TMI-2 ($6.5 million).
</FN>
F-133
Pennsylvania Electric Company and Subsidiary Companies
QUARTERLY FINANCIAL DATA (UNAUDITED)
First Quarter Second Quarter
------------- --------------
In Thousands 1997 1996 1997 1996
Operating revenues $289,753 $269,329 $247,862 $246,788
Operating income 58,856 46,660 34,255 37,508
Net income 42,894 30,515 18,841 21,609
Earnings available for common stock 42,750 30,129 18,667 21,223
Third Quarter Fourth Quarter
------------- --------------
In Thousands 1997 1996* 1997 1996
Operating revenues $257,569 $256,143 $257,752 $247,385
Operating income 35,444 19,230 29,395 30,311
Net income 19,369 2,865 13,919 14,820
Earnings available for common stock 19,196 2,479 13,745 20,041
* Results for the third quarter of 1996 reflect charges to Other operation
and maintenance expense of $19.7 million (after-tax) for costs related to
voluntary enhanced retirement programs.
F-134
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Pennsylvania Electric Company
Reading, Pennsylvania
We have audited the consolidated financial statements and financial statement
schedule of Pennsylvania Electric Company and Subsidiary Companies as listed in
the index on page F-1 of this Form 10-K. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Pennsylvania
Electric Company and Subsidiary Companies as of December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
New York, New York
February 4, 1998
F-135
Pennsylvania Electric Company and Subsidiary Companies
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31, 1997 1996
ASSETS
Utility Plant:
In service, at original cost $2,812,720 $2,738,223
Less, accumulated depreciation 1,091,965 1,022,553
---------- ----------
Net utility plant in service 1,720,755 1,715,670
Construction work in progress 69,089 72,757
Other, net 26,110 22,910
---------- ----------
Net utility plant 1,815,954 1,811,337
---------- ----------
Other Property and Investments:
Nuclear decommissioning trusts, at market(Note 13) 68,129 54,194
Other, net 7,071 7,271
---------- ----------
Total other property and investments 75,200 61,465
---------- ----------
Current Assets:
Cash and temporary cash investments -- --
Special deposits 2,449 2,348
Accounts receivable:
Customers, net 71,338 73,190
Other 21,051 15,151
Unbilled revenues 47,728 31,350
Materials and supplies, at average cost or less:
Construction and maintenance 47,853 49,007
Fuel 14,841 9,924
Deferred income taxes (Note 8) 7,589 --
Prepayments 29,856 36,930
---------- ----------
Total current assets 242,705 217,900
---------- ----------
Deferred Debits and Other Assets:
Regulatory assets: (Note 13)
Income taxes recoverable through future rates 203,642 210,023
Three Mile Island Unit 2 deferred costs 89,538 85,287
Nonutility generation contract buyout costs 28,700 16,700
Other 68,220 50,428
---------- ----------
Total regulatory assets 390,100 362,438
Deferred income taxes (Note 8) 55,698 67,099
Other 13,118 14,826
---------- ----------
Total deferred debits and other assets 458,916 444,363
---------- ----------
Total Assets $2,592,775 $2,535,065
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-136
Pennsylvania Electric Company and Subsidiary Companies
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31, 1997 1996
LIABILITIES AND CAPITALIZATION
Capitalization:
Common stock (Note 4) $ 105,812 $ 105,812
Capital surplus 285,486 285,486
Retained earnings 393,708 359,373
Accumulated other comprehensive income (Note 4) 6,332 4,329
---------- ----------
Total common stockholder's equity 791,338 755,000
Cumulative preferred stock (Note 4) 16,681 16,681
Company-obligated mandatorily redeemable
preferred securities (Note 4) 105,000 105,000
Long-term debt (Note 3) 676,444 656,459
---------- ----------
Total capitalization 1,589,463 1,533,140
---------- ----------
Current Liabilities:
Securities due within one year 30,011 26,010
Notes payable (Note 2) 77,581 107,680
Obligations under capital leases (Note 12) 19,939 15,881
Accounts payable:
Affiliates 24,811 20,432
Other 62,483 53,424
Taxes accrued 15,966 11,223
Interest accrued 20,902 19,192
Other 19,654 17,224
---------- ----------
Total current liabilities 271,347 271,066
---------- ----------
Deferred Credits and Other Liabilities:
Deferred income taxes (Note 8) 478,182 473,268
Unamortized investment tax credits 39,353 42,095
Three Mile Island Unit 2 future costs 112,227 107,652
Regulatory liabilities (Note 13) 29,785 31,694
Nuclear fuel disposal fee 15,172 14,406
Other 57,246 61,744
---------- ----------
Total deferred credits and other liabilities 731,965 730,859
---------- ----------
Commitments and Contingencies (Note 13)
Total Liabilities and Capitalization $2,592,775 $2,535,065
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-137
Pennsylvania Electric Company and Subsidiary Companies
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands)
For The Years Ended December 31, 1997 1996 1995
Operating Revenues $ 1,052,936 $ 1,019,645 $ 981,329
----------- ----------- -----------
Operating Expenses:
Fuel 177,256 176,158 174,624
Power purchased and interchanged:
Affiliates 3,252 3,529 5,927
Others 212,166 206,403 195,184
Deferral of energy costs, net -- 795 1,088
Other operation and maintenance 258,416 293,868 266,347
Depreciation and amortization 107,111 94,580 83,086
Taxes, other than income taxes 66,395 64,955 67,064
----------- ----------- -----------
Total operating expenses 824,596 840,288 793,320
----------- ----------- -----------
Operating Income Before Income Taxes 228,340 179,357 188,009
Income taxes (Note 8) 70,390 45,648 45,948
----------- ----------- -----------
Operating Income 157,950 133,709 142,061
----------- ----------- -----------
Other Income and Deductions:
Allowance for other funds used during construction -- 173 2,006
Other income/(expense), net 2,469 (825) 56,454
Income taxes (Note 8) (909) 99 (24,431)
----------- ----------- -----------
Total other income and deductions 1,560 (553) 34,029
----------- ----------- -----------
Income Before Interest Charges and
Dividends on Preferred Securities 159,510 133,156 176,090
----------- ----------- -----------
Interest Charges and Dividends
on Preferred Securities:
Interest on long-term debt 49,125 49,654 49,875
Other interest 8,338 7,112 8,428
Allowance for borrowed funds used during
construction (2,164) (2,607) (2,411)
Dividends on company-obligated mandatorily
redeemable preferred securities 9,188 9,188 9,188
----------- ----------- -----------
Total interest charges and dividends
on preferred securities 64,487 63,347 65,080
----------- ----------- -----------
Net Income 95,023 69,809 111,010
Preferred stock dividends 665 1,503 1,544
Gain on preferred stock reacquisition -- 5,566 --
----------- ----------- -----------
Earnings Available for Common Stock $ 94,358 $ 73,872 $ 109,466
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-138
Pennsylvania Electric Company and Subsidiary Companies
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
For The Years Ended December 31, 1997 1996 1995
Net income $ 95,023 $ 69,809 $111,010
-------- -------- --------
Other comprehensive income/(loss),
net of tax: (Note 4)
Net unrealized gains on investments 2,125 2,014 2,593
Minimum pension liability (122) -- --
-------- -------- --------
Total other comprehensive income 2,003 2,014 2,593
-------- -------- --------
Comprehensive income $ 97,026 $ 71,823 $113,603
======== ======== ========
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(In Thousands)
For The Years Ended December 31, 1997 1996 1995
Balance at beginning of year $ 359,373 $ 325,499 $ 291,064
Net income 95,023 69,809 111,010
--------- --------- ---------
Total 454,396 395,308 402,074
--------- --------- ---------
Cash dividends on capital stock:
Cumulative preferred stock
(at the annual rates indicated below):
4.40% Series B ($4.40 a share) (125) (244) (250)
3.70% Series C ($3.70 a share) (174) (351) (359)
4.05% Series D ($4.05 a share) (109) (251) (258)
4.70% Series E ($4.70 a share) (64) (132) (135)
4.50% Series F ($4.50 a share) (74) (188) (193)
4.60% Series G ($4.60 a share) (119) (337) (349)
Common stock (not declared on a
per share basis) (60,000) (40,000) (75,000)
--------- --------- ---------
Total (60,665) (41,503) (76,544)
--------- --------- ---------
Gain on preferred stock reacquisition -- 5,566 --
Other adjustments, net (23) 2 (31)
--------- --------- ---------
Balance at end of year $ 393,708 $ 359,373 $ 325,499
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-139
Pennsylvania Electric Company and Subsidiary Companies
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
For The Years Ended December 31, 1997 1996 1995
Operating Activities:
Net income $ 95,023 $ 69,809 $ 111,010
Adjustments to reconcile income to cash provided:
Depreciation and amortization 99,688 89,021 77,635
Amortization of property under capital leases 7,954 8,733 7,777
Three Mile Island Unit 2 costs -- -- (51,796)
Voluntary enhanced retirement programs -- 33,626 --
Nuclear outage maintenance costs, net (3,072) 3,099 (2,901)
Deferred income taxes and investment tax
credits, net 10,193 19,208 42,514
Deferred energy costs, net -- 731 1,491
Allowance for other funds used during
construction -- (173) (2,006)
Changes in working capital:
Receivables (20,426) 7,648 (7,713)
Materials and supplies (3,763) 5,591 4,912
Special deposits and prepayments 6,973 (26,232) (5,078)
Payables and accrued liabilities 19,736 (52,958) 8,241
Nonutility generation contract buyout costs (10,000) (11,700) --
Other, net (22,963) (7,746) 1,178
--------- --------- ---------
Net cash provided by operating activities 179,343 138,657 185,264
--------- --------- ---------
Investing Activities:
Cash construction expenditures (99,074) (114,672) (130,512)
Contributions to decommissioning trusts (5,288) (5,263) (5,263)
Other, net 454 (684) (323)
--------- --------- ---------
Net cash used for investing activities (103,908) (120,619) (136,098)
--------- --------- ---------
Financing Activities:
Issuance of long-term debt 49,875 39,513 197,997
Increase/(Decrease) in notes payable, net (30,099) 80,580 (83,952)
Retirement of long-term debt (26,010) (75,009) (99,319)
Capital lease principal payments (8,506) (8,418) (7,172)
Redemption of preferred stock -- (14,527) --
Dividends paid on preferred stock (695) (1,544) (1,544)
Dividends paid on common stock (60,000) (40,000) (75,000)
Contribution from parent corporation -- -- 20,000
--------- --------- ---------
Net cash required by financing activities (75,435) (19,405) (48,990)
--------- --------- ---------
Net increase/(decrease) in cash and temporary cash
investments from above activities -- (1,367) 176
Cash and temporary cash investments, beginning of year -- 1,367 1,191
--------- --------- ---------
Cash and temporary cash investments, end of year $ -- $ -- $ 1,367
========= ========= =========
Supplemental Disclosure:
Interest paid $ 61,819 $ 63,162 $ 60,524
========= ========= =========
Income taxes paid $ 48,348 $ 43,098 $ 43,685
========= ========= =========
New capital lease obligations incurred $ 11,155 $ 715 $ 11,160
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-140
Pennsylvania Electric Company and Subsidiary Companies
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
Column A Column B Column C Column D Column E
- ---------------------------- --------- -------- -------- --------
Additions
--------------------------
Balance (1) (2)
at Charged to Charged Balance
Beginning Costs and to Other at End
Description of Period Expenses Accounts Deductions of Period
----------- --------- -------- -------- ---------- ---------
Year ended December 31, 1997
Allowance for doubtful
accounts $3,818 $6,364 $2,186(a) $8,842(b) $3,526
Allowance for inventory
obsolescence 186 - - 119(c) 67
Year ended December 31, 1996
Allowance for doubtful
accounts $3,152 $5,961 $1,973(a) $7,268(b) $3,818
Allowance for inventory
obsolescence - 650 - 464(c) 186
Year ended December 31, 1995
Allowance for doubtful
accounts $1,182 $6,518 $1,516(a) $6,064(b) $3,152
Allowance for inventory
obsolescence - - - - -
<FN>
(a) Recovery of accounts previously written off.
(b) Accounts receivable written off.
(c) Inventory written off.
</FN>
F-141