ITEM 1. BUSINESS.
GPU, Inc., a Pennsylvania corporation, organized in 1946, is a holding company registered under the Public Utility Holding Company Act of 1935 (1935 Act). GPU, Inc. does not operate any utility properties directly, but owns all of the outstanding common stock of three domestic electric utilities serving customers in New Jersey - Jersey Central Power & Light Company (JCP&L), incorporated under the laws of New Jersey in 1925, - and in Pennsylvania - Metropolitan Edison Company (Met-Ed), a Pennsylvania corporation incorporated in 1922, and Pennsylvania Electric Company (Penelec), a Pennsylvania corporation incorporated in 1919. In 1996, the customer service, transmission and distribution operations of these electric utilities began doing 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 these three electric utilities 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 primarily develop, own and operate electric generation, transmission and distribution facilities and supply businesses in the U.S. and foreign countries. Collectively, these are referred to as the "GPU International Group." Corporate functions are performed by GPU Service, Inc. (GPUS). All of these companies considered together are referred to as "GPU."
The GPU registered holding company system 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 GPU International Group foreign subsidiaries are subject to limited rate and other regulation (see Regulation section).
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.
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 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 purchased the outstanding shares of Midlands through a cash tender offer of 1.7 billion pounds, or 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.
At December 31, 1996, EI UK had borrowed approximately 342 million pounds, or approximately U.S. $586 million, through a GPU, Inc. guaranteed five-year bank term loan facility, to fund its investment in Holdings. At December 31, 1996, Holdings had borrowed approximately 1.1 billion pounds, or approximately U.S. $1.8 billion, through a term loan and revolving credit facility to provide for the balance of the acquisition price.
Midlands supplies and distributes electricity to 2.2 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 international generation projects and is pursuing additional international generation and transmission projects.
- 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, and all retail consumers 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.
The legislation provides utilities the opportunity to reduce their stranded costs through the sale of transition bonds by a separate trust or other similar entity, with maturities of up to 10 years. Principal and interest payments on the bonds would be paid by all distribution service customers through a nonbypassable intangible transition charge. Among other things, the sale proceeds could be used to buy out or buy down uneconomic nonutility generation (NUG) contracts, to reduce capitalization, or both. Reduced financing costs associated with the sale of transition bonds would be used to provide rate reductions for all customers.
Pennsylvania electric utilities are required to submit restructuring plans to the PaPUC between April 1, 1997 and September 30, 1997. Met-Ed and Penelec are scheduled to file their respective plans with the PaPUC on June 1, 1997. The PaPUC is required to conduct public hearings prior
to approval of these plans.
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 and the PaPUC will ensure that adequate electrical reserves exist to maintain reliable service. An independent system operator (ISO) will be responsible for coordinating the generation and transmission of electricity in an efficient and nondiscriminatory manner.
- The NJBPU released Phase II of the New Jersey Energy Master Plan (NJEMP) which recommends, among other things, that certain electric retail customers be permitted to choose their supplier beginning October 1998, expanding to include all retail customers by April 2001. The NJBPU also recommends a near-term electric rate reduction of 5% to 10% with the phase-in of retail competition, and combined with the effects of separate proposed modifications to the state's energy tax policy, an aggregate rate reduction of at least 10% to 15% over time.
The NJBPU proposes in this report 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 guarantee 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 four to eight 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 authorizing the sale of securitized transition bonds as a mechanism to help mitigate stranded costs.
In addition, the NJBPU is proposing that, beginning October 1998, utilities unbundle their rates to 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, who would be responsible for maintaining the reliability of the regional power grid.
The NJBPU intends to issue its final findings and recommendations to the Governor and the Legislature for their consideration in March 1997. The NJBPU proposes requiring electric utilities in New Jersey to file for review, by no later than July 15, 1997, complete restructuring plans, stranded cost filings and unbundled rate filings, and intends to complete its review of these filings by October 1998.
- The FERC issued Order 888, which requires utilities to provide open access to their transmission network, thereby encouraging a fully competitive wholesale electric power market. It also requires electric utilities to, among other things: (1) file nondiscriminatory open access transmission tariffs which would be available to all wholesale sellers and buyers of electricity; (2) accept service under these new tariffs for
their own wholesale transactions; and (3) be permitted to recover their legitimate and verifiable stranded costs incurred when a wholesale customer purchases power from another supplier using the utility's transmission system. While it does not require corporate unbundling (i.e. the disposing of ancillary services or creating separate affiliates to manage transmission services), Order 888 does call for functional unbundling of transmission and ancillary services.
The GPU Energy companies filed pro forma tariffs in accordance with Order 888. These tariffs became effective on July 9, 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 Order 888, and to increase competition in the Mid-Atlantic region.
In response to a FERC order, noting deficiencies and objections to their initial submission, the PJM companies submitted to the FERC a revised proposal which represents an interim solution and contains several unresolved issues for which alternate proposals were presented to the FERC for resolution. On February 28, 1997, the FERC issued an order directing PJM to adopt all recommendations proposed by the supporting PJM companies except with regard to congestion pricing, which the FERC ordered implementation of PECO Energy's proposal on an interim basis. The FERC has stated that it expects it will order PJM to adopt the supporting PJM companies' proposal on congestion pricing after certain issues are resolved concerning implementation of this proposal. PJM has begun implementation of the FERC's order and plans to have the restructured PJM Power Pool and pool-wide open access transmission tariff operational on April 1, 1997. For additional information, see Competitive Environment, Management's Discussion and Analysis.
- The GPU Energy companies have successfully bought out and/or entered into restructured power purchase agreements with all major unbuilt NUG projects with which they had executed power purchase agreements. Since early 1995, nine NUG contracts representing 950 MW (JCP&L 300 MW; Met-Ed 490 MW; Penelec 160 MW) have been bought out and/or restructured at more competitive prices. The GPU Energy companies expect these actions will save their customers approximately $5.4 billion (JCP&L $1.8 billion; Met- Ed $2.3 billion; Penelec $1.3 billion) over 25 years.
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. As discussed earlier, Pennsylvania recently adopted
comprehensive legislation which provides for the restructuring of the electric utility industry, and New Jersey has proposed similar 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 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. The GPU Energy companies estimate that their total potential above market costs relating to power purchase commitments, above market generation costs, generating plant decommissioning costs and regulatory assets at year end 1998, on a present value basis, could range from $4.5 billion to $8 billion (JCP&L $2.5 billion to $4 billion; Met-Ed $1 billion to $2 billion; Penelec $1 billion to $2 billion). 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.
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 expects that its primary strategic focus will be on the delivery infrastructure, retail supply and customer services segments of the electric power industry. To this end, GPU is actively reviewing its portfolio of assets, particularly nuclear and fossil generating facilities, for consistency with this strategic focus. GPU is aware that a number of nonaffiliated utilities in the Northeast and in California are in the process of selling some or all of their generation assets in response to regulatory and competitive pressures.
GPU's strategies may also 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 its transmission or distribution businesses. No assurance can be given as to whether or when any potential transaction 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 AND GPU INITIATIVES
During 1996 and early 1997, there were other state and federal regulatory developments and GPU initiatives relating to competition within the electric utility industry which are described below:
- The PaPUC has issued a final order that sets forth the guidelines for retail access pilot programs in Pennsylvania. These pilot programs will 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. In March 1997, Met-Ed and Penelec filed with the PaPUC their plan for a proposed pilot program that would offer approximately 51,000 (Met-Ed 23,000; Penelec 28,000) customers choice of their electric generation supplier. The pilot program, which is subject to PaPUC approval, is anticipated to begin in the fourth quarter of 1997 and will be in effect for at least one year.
- JCP&L is awaiting NJBPU approval of a plan to establish a one-year pilot program offering customers in Monroe Township, New Jersey a choice of their electric energy supplier. At the end of the first year, Monroe Township will have the option of renewing the pilot. Monroe Township had been exploring the possibility of establishing its own municipal electric system.
- In early 1997, two pieces of legislation were introduced in Congress which provide for a comprehensive restructuring of the electric utility industry, including retail choice for all utility customers beginning as early as December 2000, the opportunity for utilities to recover their prudently incurred stranded costs, and repeal of both PURPA and the 1935 Act. It is expected that other similar proposed legislation will be introduced in Congress during 1997.
- Federal legislation was enacted which, among other things, permits registered holding company systems to acquire interests in telecommunications companies. In addition, the SEC has adopted Rule 58 under the 1935 Act which permits registered holding company systems to engage in a variety of energy-related services without further SEC authorization. In February 1997, GPU formed a new, nonregulated subsidiary, GPU Advanced Resources, Inc. (AR). AR's lines of business may include telecommunications services, energy services and retail energy sales.
- GPU reduced its total workforce by 8% in 1996 through voluntary enhanced retirement programs which were accepted by 493 bargaining and 347 nonbargaining employees.
- Met-Ed and Penelec filed tariff supplements with the PaPUC requesting approval to, among other things, include their currently effective energy cost rates (ECR) and state tax adjustment surcharges (STAS) in base rates, effective for all bills rendered after January 1, 1997. On February 28, 1997, the PaPUC issued a final order approving this request.
- 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. If a portion of the GPU Energy companies' operations continues to be regulated, FAS 71 accounting may only be applied to that portion. Insofar as the GPU Energy companies are concerned, potentially unrecoverable costs will most likely be related to generation investment, power purchase contracts, and regulatory assets, which are deferred accounting transactions whose value depends on the GPU Energy companies' ability to recover such costs from their respective customers in the future.
In markets where there is excess capacity (as is currently the case in the Mid-Atlantic and surrounding regions which include New Jersey and Pennsylvania) and many available sources of power supply, the market price of electricity is expected to be lower than what would be necessary to support full recovery of the investment in the generating facilities. Also, utilities that are locked into expensive power purchase agreements may be forced to value the contracts at market prices and recognize certain losses.
Although the GPU Energy companies continue to be subject to cost-based ratemaking regulation, in the event that either all or a portion of their operations are no longer subject to FAS 71 provisions, the related regulatory assets, net of regulatory liabilities, would have to be written off and charged to expense. In addition, any above market costs of power purchase commitments would have to be expensed, and 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. The experience gained from the deregulation of the telecommunications industry indicates that substantial write-offs may result with the discontinuation of FAS 71. At this time, GPU is unable to determine when and to what extent FAS 71 will no longer be applicable.
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 1996, the GPU Energy companies' revenues were about equally divided between Pennsylvania customers and New Jersey customers. During 1996, 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 42 37 36 41 36 30 Commercial 35 39 28 33 33 39 27 30 Industrial 21 16 28 27 28 20 35 34 Other* 2 - 2 3 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,,, and, for additional information concerning GPU's sales and revenues. Revenues of JCP&L, Met-Ed and Penelec derived from their largest single customers accounted for less than 3%, 2% and 1%, respectively, of their electric operating revenues for the year and their 25 largest customers, in the aggregate, accounted for approximately 9%, 13% and 14%, respectively, of such revenues.
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. The PJM Power Pool has submitted a comprehensive restructuring proposal, which is pending before the FERC. For additional discussion, see Competitive Environment - Recent Regulatory Actions, Management's Discussion and Analysis.
GPU INTERNATIONAL GROUP
The GPU International Group has ownership interests in distribution and supply businesses in England and Australia, ten operating cogeneration plants in the U.S. totaling 895 MW (of which the GPU International Group's equity interest represents 261 MW) of capacity, and eleven operating generating facilities located in foreign countries totaling 2,686 MW (of which the GPU International Group's equity interest represents 546 MW) of capacity. It has also made investments in certain advanced technologies related to the electric power industry.
The GPU International Group is continuing to investigate investment opportunities in various other domestic and foreign power projects and foreign utility systems and has commitments, both domestically and internationally, in five generating facilities under construction totaling 3,172 MW (of which its equity interest represents 816 MW) of capacity.
At December 31, 1996, GPU, Inc.'s aggregate investment in the GPU International Group was $211 million; GPU, Inc. has also guaranteed up to $893 million of GPU International Group obligations. GPU, Inc. has SEC approval to finance investments in foreign utility companies and exempt wholesale generators up to an aggregate amount equal to 50% of GPU's average consolidated retained earnings, or approximately $1 billion. At December 31, 1996, GPU, Inc. had remaining authorization to finance an additional $25 million of such investments. A request to increase this limit to 100% of GPU's average consolidated retained earnings, or to approximately $2 billion at December 31, 1996, is pending before the SEC.
Selected financial data for the GPU International Group is as follows:
(In Millions) 1996 1995 1994
Total assets $1,075 $380 $130
Liabilities and capital: Common equity $ 232 $209 $118 Long-term debt 752 104 - Notes payable - 2 - Total capitalization 984 315 118 Minority interest 43 41 - Other liabilities 48 24 12 Total liabilities and capital $1,075 $380 $130
Purchase of investments $ 574 $165 $ 74
Net income/(loss) $ 24 $ 9 $ (3)
For additional information on the GPU International Group's investments, see GPU International Group Equity Investments, Note 7 to GPU's Consolidated Financial Statements.
With the acquisitions of Midlands in 1996 and Solaris Power (Solaris) in 1995, the GPU International Group now has 50% ownership interests in foreign utility companies having total fixed assets of approximately $1.6 billion. These foreign utility companies, which annually provide about 20 billion kilowatt-hours of electricity to 2.2 million customers in England and 240,000 customers in Australia, had operating revenues of $2.5 billion in 1996.
The Labour Party in the United Kingdom has proposed a windfall tax on privatized utilities and other companies as part of its election campaign platform. General elections in the United Kingdom are required to be held no later than May 1997. If the Labour Party wins the general election, and the tax is enacted as currently proposed, a charge to Midlands' earnings, which is estimated to range from $110 million to $350 million (GPU's 50% share being $55 million to $175 million), would be recorded in 1997, perhaps as early as the second quarter. Due to the fact that (1) the Labour Party may not win the election; (2) the windfall tax may not be enacted as currently proposed; (3) the amount of the proposed tax may change; and (4) the Labour Party may change
its current platform, there is no certainty that this tax, if levied, would be enacted as currently proposed.
In 1996, GPU Power, through a wholly-owned subsidiary, purchased the rights to acquire up to a 40% interest in a venture which plans to construct a 300 MW coal generating plant in the Philippines. GPU Power's equity contribution is expected to be approximately $40 million.
In 1996, GPU International, through a wholly-owned subsidiary, completed nonrecourse construction financing for its 300 MW Mid-Georgia project. As of December 31, 1996, GPU International had aggregate borrowings outstanding for the construction of this project of $62 million, of which $22 million is guaranteed by GPU, Inc.
In 1996, GPU International and Ballard Power Systems of Canada entered into an agreement to develop, manufacture and market stationary fuel cell power plants worldwide. Under the agreement, GPU International will invest approximately $23 million for up to a 19.3% equity interest in the new venture, of which $6 million was invested as of December 31, 1996.
Management expects that the GPU International 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 amounts of these investments, however, will depend upon the availability of appropriate opportunities and financing capabilities, including receipt of regulatory authorization from the SEC.
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, 1996, the GPU Energy companies' net investment, including nuclear fuel, in TMI-1 was $597 million (JCP&L $154 million; Met-Ed $297 million; Penelec $146 million) and $766 million for Oyster Creek. The GPU Energy companies' net investment in TMI-2 at December 31, 1996 was $90 million (JCP&L $81 million; Met-Ed $1 million; Penelec $8 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.
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 102.8% for the year. Its next refueling outage is scheduled to begin in September 1997.
Oyster Creek
The operating license for the Oyster Creek station, a 619 MW boiling water reactor, expires in 2009. Oyster Creek operated at a 79.8% capacity factor for 1996. Oyster Creek completed a 49-day scheduled refueling outage on October 23, 1996. Subsequently, the station experienced an automatic reactor shutdown. After the cause of the shutdown was identified, Oyster Creek was returned to service on November 7, 1996. The station's next refueling outage is scheduled to begin in September 1998.
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.
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.
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. 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 U.S. Department of Energy (DOE). For further information regarding nuclear fuel disposal costs, see Summary of Significant Accounting Policies - Nuclear Fuel Disposal Fee, Note 1 to GPU's Consolidated Financial Statements.
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 1996 dollars) are as follows:
(Millions) Oyster TMI-1 TMI-2 Creek
JCP&L $ 43 $ 67 $221 Met-Ed 85 135 - Penelec 42 68 - Total $170 $270 $221
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 retirement cost estimates under the site-specific studies are as follows (in 1996 dollars):
(Millions) Oyster GPU TMI-1 TMI-2 Creek
Radiological decommissioning $311 $378 $366 Nonradiological cost of removal 77 36* 35 Total $388 $414 $401
* Net of $6.5 million spent as of December 31, 1996.
(Millions) Oyster JCP&L TMI-1 TMI-2 Creek
Radiological decommissioning $78 $ 95 $366 Nonradiological cost of removal 19 9* 35 Total $97 $104 $401
* Net of $1.6 million spent as of December 31, 1996.
(Millions)
Met-Ed TMI-1 TMI-2
Radiological decommissioning $155 $189 Nonradiological cost of removal 39 18* Total $194 $207
* Net of $3.3 million spent as of December 31, 1996.
(Millions)
Penelec TMI-1 TMI-2
Radiological decommissioning $78 $ 94 Nonradiological cost of removal 19 9* Total $97 $103
* Net of $1.6 million spent as of December 31, 1996.
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. Currently, the GPU Energy companies are collecting retirement costs which are less than the retirement cost estimates in the 1995 site-specific studies, and they do not intend to increase these accruals until increased collections from customers are obtained. Customer collections are contributed to external trust funds. These deposits, including the related earnings, are classified as Nuclear Decommissioning Trusts on the 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 has already been recognized, based on the 1995 site-specific study (in 1996 dollars) since the plant is no longer operating (see TMI-2 under this section). The effective date of this accounting change could be as early as January 1, 1998.
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. A Stipulation of Final Settlement pending before the NJBPU would allow 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 Rate Matters - Final Settlement, 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.
The amounts charged to depreciation expense in 1996 and the provisions for the future expenditure of these funds, which have been made in accumulated depreciation, are as follows:
(Millions) Oyster TMI-1 Creek Amount expensed in 1996: JCP&L $ 2 $ 13 Met-Ed 9 - Penelec 4 - Total $ 15 $ 13
Accumulated depreciation provision at December 31, 1996: JCP&L $ 30 $174 Met-Ed 50 - Penelec 21 - Total $101 $174
Management believes that any TMI-1 and Oyster Creek retirement costs, in excess of those currently recognized for ratemaking purposes, should be recoverable under the current ratemaking process.
TMI-2:
The estimated liability for TMI-2 future retirement costs (reflected as Three Mile Island Unit 2 Future Costs on the Balance Sheet) as of December 31, 1996 is $431 million (JCP&L $108 million; Met-Ed $215 million; Penelec $108 million). The liability is based upon the 1995 site-specific study estimates (in 1996 dollars) discussed above and an estimate for remaining incremental monitored storage costs of $17 million (JCP&L $4 million; Met-Ed $8 million; Penelec $5 million), 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 $431 million liability at December 31, 1996 is $266 million (JCP&L $45 million; Met-Ed $143 million; Penelec $78 million), which is probable of recovery from customers and included in Three Mile Island Unit 2 Deferred Costs on the Consolidated Balance Sheet, and $181 million (JCP&L $72 million; Met-Ed $78 million; Penelec $31 million) in trust funds for TMI-2 and included in Nuclear Decommissioning Trusts on the Consolidated Balance Sheet. Earnings on trust fund deposits are included in amounts shown on the Consolidated Balance Sheet under Three Mile Island Unit 2 Deferred Costs. TMI-2 decommissioning costs charged to depreciation expense in 1996 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 Final Settlement pending before the NJBPU would adjust 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, 1996, the accident-related portion of TMI-2 radiological decommissioning costs is considered to be $67 million (JCP&L $17 million; Met- Ed $34 million; Penelec $16 million), which is the difference between the 1995 TMI-1 and TMI-2 site-specific study estimates (in 1996 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 $67 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 total $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 or to retire capital investment.
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 Price-Anderson, the GPU Energy companies are also subject to retrospective premium assessments of up to $54 million (JCP&L $32 million; Met-Ed $15 million; Penelec $7 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 the first 21 weeks of the outage and continues for three years beginning at $1.8 million for Oyster Creek and $2.6 million for TMI-1 per week for the first year, 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 periods of up to 26 years (JCP&L 25 years; Met-Ed 26 years; Penelec 25 years). The following table shows actual payments from 1994 through 1996, and estimated payments from 1997 through 2001.
Payments Under NUG Agreements (in Millions)
Total JCP&L Met-Ed Penelec
* 1994 $528 $304 $101 $123 * 1995 670 381 131 158 * 1996 739 370 177 192 1997 672 336 146 190 1998 691 340 152 199 1999 706 344 152 210 2000 804 347 196 261 2001 873 353 225 295
* Actual. The 1996 amounts are reflected in the rates currently being charged by the GPU Energy companies.
While 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. As of December 31, 1996, facilities covered by these agreements having 1,631 MW (JCP&L 891 MW; Met-Ed 340 MW; Penelec 400 MW) of capacity were in service.
The emerging competitive generation market has created uncertainty regarding the forecasting of the GPU Energy companies' energy supply needs, which has caused the companies to change their supply strategy to seek shorter-term agreements offering more flexibility. The cost of near- to intermediate-term (i.e. one to four years) energy supply from generation facilities now in service is currently and is expected to continue to be priced below the costs of new supply sources, at least for some time. 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 The GPU Energy Companies' Supply Plan - Managing Nonutility Generation, 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 have resulted and may result in additional claims against GPU for substantial damages. There can be no assurance as to the extent these efforts will be successful in whole or in part. Recent NUG actions are as follows:
JCP&L entered into an agreement with the developer of the proposed 110 MW Freehold gas-fired cogeneration project that terminates JCP&L's long-term contract to purchase power from the project.
Met-Ed and Penelec entered into restructured power purchase agreements with AES Power Corporation (AES) relating to the proposed Altoona (80 MW), Blue Mountain (150 MW) and York County (227 MW) NUG facilities. AES, which purchased the interests of the original developers, plans to construct a single, fully dispatchable, gas-fired combined-cycle facility in Southeastern Pennsylvania. These restructured power purchase agreements, which have initial eight-year terms, require PaPUC approval.
Penelec entered into a restructured power purchase agreement with the developer of a proposed 80 MW coal-fired cogeneration facility that was to be built in western Pennsylvania. The restructured power purchase agreement provides for a fully dispatchable, gas-fired combined-cycle cogeneration facility to be built. The new power purchase agreement has an initial eight- year term, with options for extension, and is subject to PaPUC approval.
From 1997 through 2002, JCP&L has contracts to purchase between 5,100 GWH and 5,200 GWH of electric generation per year at prices which are estimated to escalate approximately 1.2% annually on a unit cost (cents/KWH) basis during this period. From 2003 through 2008, JCP&L has contracts to purchase between 4,700 GWH and 5,100 GWH of electric generation per year at an average annual cost of $369 million. The prices during this period are estimated to escalate approximately 1.5% annually. After 2008, when major contracts begin to expire, purchases steadily decline to approximately 865 GWH in 2014. The contract unit cost is estimated to escalate approximately 4.0% annually from 2009 through 2014, with a total average annual cost of $193 million during this period. All of JCP&L's contracts will have expired by the end of 2017. During this entire period, the NUG fuel mix averages approximately 95% natural gas.
From 1997 through 1999, Met-Ed has contracts to purchase between 2,000 GWH and 2,100 GWH of electric generation per year at prices which are estimated to escalate approximately 0.6% annually on a unit cost basis during this period. From 2000 through 2008, Met-Ed has contracts to purchase between 2,900 GWH and 4,300 GWH of electric generation per year at an average annual cost of $241 million. The prices during this period are estimated to escalate approximately 2.5% annually on a unit cost basis. From 2009 through 2012, Met-Ed is forecast to purchase between 1,500 GWH and 1,900 GWH of electric generation per year at an average annual cost of $169 million. During this period, the prices are estimated to escalate approximately 3.4% annually on a unit cost basis. After 2012, Met-Ed's remaining contracts expire rapidly
through 2015; thereafter, they remain constant until the expiration of the last contract in 2020. During this entire period, the NUG fuel mix averages approximately 50% to 75% coal/waste coal.
From 1997 through 2000, Penelec has contracts to purchase between 3,000 GWH and 4,000 GWH of electric generation per year at prices which are estimated to escalate approximately 1.4% annually on a unit cost basis during this period. From 2001 through 2008, Penelec has contracts to purchase between 3,900 GWH and 5,000 GWH of electric generation per year at an average annual cost of $297 million. The prices during this period are estimated to escalate approximately 1.5% annually on a unit cost basis. From 2009 through 2017, purchases decline from approximately 3,000 GWH to approximately 1,500 GWH in 2017. The contract unit cost is estimated to escalate approximately 3.4% annually from 2009 through 2017, with a total average annual cost of $211 million during this period. After 2017, Penelec's remaining contracts expire rapidly through 2020. During this entire period, the NUG fuel mix averages approximately 65% to 95% coal/waste coal.
This discussion 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 have been granted recovery of their NUG costs (including certain buyout costs) from customers by the PaPUC and NJBPU and expect to continue to pursue such recovery. 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, Management's Discussion and Analysis).
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 745 MW in 1997, declining to 527 MW in 1999 and 345 MW in 2004. Payments pursuant to these agreements are estimated to be $145 million in 1997, $128 million in 1998, $104 million in 1999, $84 million in 2000, and $99 million in 2001.
In January 1996, JCP&L issued an all-supply source solicitation for the supply of energy and capacity to meet its forecasted needs. In October 1996, four potential suppliers were selected to provide capacity for four years, beginning in June 1999. Contract negotiations are currently in progress to provide for firm and optional purchases of capacity and energy from sources in New Jersey, Pennsylvania and New York.
RATE PROCEEDINGS
Pennsylvania
Pennsylvania adopted comprehensive legislation in 1996 which provides for the restructuring of the electric utility industry (see Recent Developments section). 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. Met-Ed and Penelec filed, in December 1996, tariff supplements with the PaPUC requesting approval to, among other things, include their currently effective ECR and STAS in base rates, effective for all bills rendered after January 1, 1997. On February 28, 1997, the PaPUC issued a final order approving this request. Since rates that can be charged to customers for generation are capped for up to nine years, Met-Ed's and Penelec's future earnings will be subject to market volatility. Increases or decreases in fuel costs will no longer be subject to deferred accounting and will be 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. As a result of including their ECRs in base rates and the cessation of deferred energy accounting, both effective January 1, 1997, Met-Ed and Penelec will experience step increases in reported revenues totaling approximately $25 million in the first quarter of 1997.
New Jersey
In 1996, the NJBPU approved a provisional settlement for a combined levelized energy adjustment clause (LEAC) and Demand-Side Factor (DSF) increase of $27.9 million annually.
Also in 1996, JCP&L, the staff of the NJBPU and the Division of Ratepayer Advocate reached an agreement on a variety of pending rate-related issues (Final Settlement). An Administrative Law Judge (ALJ) issued a decision recommending approval of the Final Settlement, but the NJBPU ordered additional evidentiary hearings on the recovery of buyout costs for the Freehold cogeneration project discussed below (see The GPU Energy Companies' Supply Plan - Managing Nonutility Generation, Management's Discussion and Analysis). In December 1996, the ALJ issued a further decision recommending that recovery of the Freehold buyout costs be approved, subject to possible revocation or modification, if it is determined that the project was not viable when it was bought out. On December 31, 1996, an Addendum revising the Final Settlement was agreed upon by JCP&L, the staff of the NJBPU and the Division of Ratepayer Advocate. In January 1997, the NJBPU staff recommended that rate recovery of the Freehold buyout costs be permitted. JCP&L expects the NJBPU to issue an order in the first quarter of 1997 approving the Final Settlement as revised. There can be no assurance as to the outcome of this proceeding.
Provisions of the Final Settlement, as revised by the Addendum, include a further annual increase of $7 million in the LEAC in addition to those noted above and an annual reduction of $11 million in base rates. Base rates would be frozen at that level until the year 2000, and the LEAC rate frozen through the year 1999. JCP&L could seek a LEAC rate increase if the deferred LEAC 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 would be 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.
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; 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 the second quarter of 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 would not have 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 would be used to reduce both customer rates and certain regulatory assets.
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 of the performance standard charge at a 40% capacity factor would be approximately $10 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 LEAC.
CAPITAL PROGRAMS
General
During 1996, construction expenditures for the GPU Energy companies totaled approximately $404 million (JCP&L $200 million; Met-Ed $77 million; Penelec $115 million; Other $12 million) attributable principally to new customer connections and maintenance and improvement of existing transmission and distribution facilities. In addition, the GPU International Group made investments in 1996 totaling $574 million, primarily to acquire Midlands (see GPU International Group section). Expenditures for maturing obligations totaled $131 million (JCP&L $35 million; Met-Ed $15 million; Penelec $75 million; Other $6 million) in 1996. The GPU Energy companies' principal categories of estimated construction expenditures for 1997 are as follows:
(In Millions)
Total JCP&L Met-Ed Penelec Other
Generation - Nuclear $ 35 $ 16 $13 $ 6 $ - Non-nuclear 45 10 8 27 - Total Generation 80 26 21 33 - Transmission & Distribution 275 141 59 75 - Other 47 18 10 12 7 Total $402 $185 $90 $120 $ 7
These construction expenditures are expected to be incurred primarily for ongoing system development. Construction expenditures for the GPU Energy companies are estimated to be $391 million in 1998 (JCP&L $168 million; Met-Ed $98 million; Penelec $118 million; Other $7 million). Expenditures for maturing obligations will total $179 million for 1997 (JCP&L $110 million; Met-Ed $40 million; Penelec $26 million; Other $3 million) and $139 million for 1998 (JCP&L $12 million; Penelec $30 million; Other $97 million). In addition, during 1997 and 1998, and subject to the receipt of regulatory approval, GPU, Inc. will make capital contributions and provide credit support (in amounts which may be substantial) to the GPU International Group as investment opportunities arise.
GPU and the GPU Energy companies estimate that a substantial portion of their anticipated total capital needs in 1997 and 1998 will be satisfied through internally generated funds. The GPU Energy companies expect to finance the remainder of their capital needs principally through the issuance of long-term debt, subject to market conditions. In addition, further significant investments by the GPU International Group, or otherwise, may require GPU, Inc. to issue additional debt and/or common stock.
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' 1996 construction expenditures exclude nuclear fuel additions provided under capital leases that amounted to $35 million (JCP&L $33 million; Met-Ed $1 million; Penelec $1 million). When consumed, the presently leased material, which amounted to $139 million (JCP&L $95 million; Met-Ed $29 million; Penelec $15 million) at December 31, 1996, is expected to be replaced by additional leased material at an average annual rate (which is based on two full operating cycles, or four years) of between $35 million and $50 million (JCP&L $20 million - $25 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.
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. Over the next five years, the GPU Energy companies' existing franchise service territories are expected to experience an average annual growth in sales of about 1.7% (JCP&L 1.7%; Met-Ed 1.9%; Penelec 1.7%), principally due to continued economic growth and a slight increase in the number of customers. The GPU Energy companies intend to provide for these increased energy needs, if necessary, through a mix of economic supply sources and will continue to evaluate additional economic purchase opportunities as both demand and supply market conditions evolve.
In response to this competitive climate in which it is likely a major portion of the GPU Energy companies' existing customer base will be able to choose their electric generation supplier, and the surplus capacity position of nearby utilities, the GPU Energy companies' supply plan focuses increasingly on short- to intermediate-term commitments, reliance on "spot" market purchases, and avoidance of long-term firm commitments. The GPU Energy
companies' present strategy includes minimizing the financial exposure associated with new long-term purchase commitments and the construction of new facilities by evaluating these options in terms of an unregulated power market. As part of this strategy, the GPU Energy companies are continually evaluating the future financial viability of their nuclear and fossil generation assets and will retire or otherwise dispose of plants that become uneconomical. The GPU Energy companies intend to take necessary actions to avoid adding new capacity which would result in costs that may exceed future market prices. In addition, the GPU Energy companies intend to continue to seek regulatory support to renegotiate or buy out contracts with NUGs where the pricing is in excess of projected market prices.
FINANCING ARRANGEMENTS
GPU, Inc. has received SEC approval to issue and sell up to $300 million of unsecured debentures through December 31, 2001 and up to seven million shares of additional common stock through 1998. GPU, Inc. has no current plans to issue these securities. Any sale of such securities will, among other things, depend upon future capital requirements and market conditions.
GPU has $527 million of credit facilities, including two Revolving Credit Agreements, as discussed below.
Under a 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 and acceleration under certain circumstances. The agreement expires May 6, 2001, and a commitment fee on the unborrowed amount of 1/8 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 December 1997 of up to $30 million outstanding at any time, which amount decreases for two years thereafter. Up to $15 million may be borrowed in the form of letters of credit. An annual commitment fee of 3/8 of 1% on unborrowed amounts and a letter of credit fee of 1/2 of 1% are payable by GPU International, Inc.
GPU expects to have short-term debt outstanding from time to time throughout 1997. The peak in short-term debt outstanding typically occurs in the spring, coinciding with normal cash requirements for state revenue tax payments.
As a result of the Pennsylvania restructuring legislation (see Competitive Environment, Management's Discussion and Analysis), Met-Ed and Penelec each plan to sell transition bonds through a separate trust or other similar entity, with maturities of up to 10 years. Met-Ed and Penelec would use the proceeds from such sale to reduce capitalization and further mitigate stranded costs resulting from customer choice. The timing and amount of the sale of transition bonds will depend upon PaPUC approval of restructuring plans, as well as market conditions.
The GPU Energy companies have regulatory authority to issue and sell first mortgage bonds (FMBs), including secured medium-term notes, and preferred stock through various periods into 1997. The GPU Energy companies
intend to seek regulatory approval to extend such authorizations through June 1999 for both JCP&L and Penelec, and through December 1999 for Met-Ed. Under existing authorizations, JCP&L, Met-Ed and Penelec may issue these senior securities in aggregate amounts of $145 million, $190 million and $120 million, respectively, of which up to $100 million for each company 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 1996, the GPU Energy companies issued an aggregate of $120 million (JCP&L $80 million; Penelec $40 million) principal amount of FMBs. The proceeds were used to repay short-term debt and for other corporate purposes. The GPU Energy companies redeemed $115.7 million (JCP&L $25.7 million; Met-Ed $15 million; Penelec $75 million) principal amount of FMBs with 1996 maturities.
Also in 1996, JCP&L redeemed $20 million stated value of cumulative preferred stock pursuant to mandatory and optional sinking fund provisions. In December 1996, Met-Ed and Penelec repurchased an aggregate of $11.4 million stated value and $20 million stated value, respectively, of cumulative preferred stock through cash tender offers, at a total cost of approximately $7.7 million and $14.4 million, respectively.
In January 1997, JCP&L redeemed an aggregate of $54.2 million principal amount of FMBs, of which $24.2 million were redeemed prior to maturity.
Present plans call for the GPU Energy companies to issue long-term debt during the next three years to finance construction activities, fund the redemption of maturing senior securities, and depending on interest rates, refinance outstanding senior securities. In addition, subject to the receipt of further regulatory authorization, further significant investments by the GPU International Group, or otherwise, may require GPU, Inc. to issue additional debt and/or common stock (see GPU International Group section).
In 1996, GPU Electric, through its wholly-owned subsidiary EI UK, entered into a five-year term loan agreement with a syndicate of banks which provides for borrowings of up to 350 million pounds, which are guaranteed by GPU, Inc. As of December 31, 1996, EI UK had aggregate borrowings outstanding under this facility of 342 million pounds, or approximately U.S. $586 million. The proceeds from these borrowings were used by EI UK to fund its equity investment in Midlands.
Also in 1996, GPU International, through a wholly-owned subsidiary, completed nonrecourse construction financing for its 300 MW Mid-Georgia project. As of December 31, 1996, aggregate borrowings outstanding for the construction of this project amounted to $62 million, of which $22 million has been guaranteed by GPU, Inc.
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, 1996, 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 $1.1 billion, $606 million and $556 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 $361 million, $377 million and $257 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 $261 million, $60 million and $142 million, respectively, of FMBs against retired FMBs.
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 be outstanding immediately after such issuance. At December 31, 1996, these provisions would have permitted JCP&L, Met-Ed and Penelec to issue $852 million, $419 million and $391 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 10 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, 1996, these restrictions would have permitted JCP&L, Met-Ed and Penelec to have approximately $292 million, $130 million and $145 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 and GPU Initiatives 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 Pennsylvania. See Electric Generation and the Environment - Environmental Matters section, for additional information.
Midlands, the GPU International Group's electric distribution subsidiary 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 April 1, 1998.
Solaris, the GPU International Group's electric distribution subsidiary in Australia, is subject to regulation by the Office of the Regulator General. Solaris' network and connection charges are subject to regulatory review every five years, with the next review scheduled for January 1, 2000. In addition, Solaris' franchise license becomes nonexclusive in stages through the year 2001, at which time all customers will be permitted to choose their source of electric supply.
Empresa Guaracachi S.A., the GPU International Group's electric generation subsidiary 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 1996 in approximately the following percentages:
1996 Actuals
Total JCP&L Met-Ed Penelec
Coal 60% 24% 56% 86% Nuclear 38% 70% 42% 13% Gas 1% 4% - - Oil 1% 4% 1% - Other* - (2)% 1% 1%
* Represents hydro and pumped storage (which is a net user of electricity).
Approximately 40% (JCP&L 58%; Met-Ed 34%; Penelec 29%) of the GPU Energy companies' total energy requirements in 1996 was supplied by purchases and interchange from other utilities and NUGs. For 1997, the GPU Energy companies estimate that their use of fuels in the generation of electric energy will be in the following percentages:
1997 Estimates
Total JCP&L Met-Ed Penelec
Coal 64% 24% 63% 90% Nuclear 33% 71% 33% 10% Gas 3% 10% 2% - Oil - - - - Other* - (5)% 2% -
* Represents hydro and pumped storage.
Approximately 40% (JCP&L 59%; Met-Ed 37%; Penelec 26%) of the GPU Energy companies' 1997 energy requirements are expected to be supplied by purchases and interchange from other utilities and NUGs.
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 between 1997 and 2004, require the purchase of either fixed or minimum amounts of coal. The price of the coal under the contracts is based on adjustments of indexed cost components. One of Penelec's contracts for Homer City also includes a provision for the payment of postretirement benefits costs. The GPU Energy companies' share of the cost of coal purchased under these agreements is expected to aggregate $133 million (JCP&L $23 million; Met-Ed $29 million; Penelec $81 million) for 1997.
The GPU Energy companies' coal-fired generating stations now in service are estimated to require an aggregate of 155 million tons (JCP&L 15 million
tons; Met-Ed 41 million tons; Penelec 99 million tons) of coal over the next twenty years. Of this total requirement, approximately 8 million tons (JCP&L 3 million tons; Penelec 5 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 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 has requested recommendations 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. 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. For TMI-1, under normal operating conditions, there is, with minor planned modifications, sufficient on-site storage capacity to accommodate spent nuclear fuel through the end of its licensed life, while maintaining the ability to remove the entire reactor core.
At Oyster Creek, GPUN completed the construction of an interim spent fuel dry storage facility in 1996. Currently, however, the dry storage facility at Oyster Creek is not operational. The NRC has recently raised certain quality assurance concerns regarding the vendor's quality assurance program and the manufacture of the storage components under this quality assurance program. Based on these concerns, the NRC issued a "Demand for Information" letter to the vendor in late January 1997. This letter requires the vendor to review and evaluate its program and provide a detailed response within 60 days.
In addition, GPUN had planned to use Oyster Creek's existing overhead reactor building crane to remove fuel from the spent fuel pool to the interim storage facility. The NRC has raised a safety concern regarding the use of this crane while the plant is operating, and has requested GPUN to request a license amendment addressing its use. GPUN is currently reviewing the available options for moving spent fuel to the dry storage facility.
If these issues are resolved and the interim spent fuel dry storage facility becomes operational, Oyster Creek would have sufficient on-site storage capacity to accommodate, under normal operating conditions, its spent nuclear fuel through the end of its current licensed life, while maintaining the ability to remove the entire reactor core.
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 plant (MGP) sites, coal mine refuse piles and generation facilities. With regard to electromagnetic fields, GPU may be required to postpone or cancel the installation of, or replace or modify, utility plant, the costs of which could be material. The consequences of environmental issues, which could cause the postponement or cancellation of either the installation or replacement of utility plant, are unknown. GPU believes the costs described above should be recoverable, but recognizes that recovery cannot be assured.
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, 1996, the GPU Energy companies have liabilities recorded on their balance sheets for environmental matters totaling $74 million, as follows:
Company Site Description Amount (in millions) JCP&L MGP sites $45 Penelec Seward station 12 All Ash disposal sites 9* JCP&L Various non-MGP sites 6 Met-Ed/ Penelec Various other sites 2** Total $74
* (JCP&L $1; Met-Ed $2; Penelec $6) ** (Met-Ed $1; Penelec $1)
For further discussion of the liabilities recorded for JCP&L's MGP sites, Penelec's Seward station property and the GPU Energy companies' ash disposal sites, see the Water, Residual Waste and Hazardous/Toxic Wastes sections, respectively.
In 1996, the GPU Energy companies made capital expenditures of approximately $13 million (JCP&L $3 million; Met-Ed $2 million; Penelec $8 million) in response to environmental considerations and have budgeted approximately $14 million (JCP&L $1 million; Met-Ed $2 million; Penelec $11 million) for this purpose in 1997. 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 waste water 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. JCP&L has filed an application with the New Jersey Department of Environmental Protection (NJDEP) for a discharge permit for its Yards Creek pumped storage facility. Negotiations are proceeding on this with the NJDEP through a pre-draft review process. 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. GPU has obtained all other required permits for its 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 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. 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. The refuse piles have contributed to acid mine drainage to the Conemaugh River. Penelec signed a modified Consent Order (Order), which became effective December 1996, that establishes a schedule for long-term remediation, based on future operating scenarios, including reboilering the station using fluidized bed combustion technology. The Order requires Penelec to submit a groundwater remediation plan by May 31, 1998, and also requires compliance with stormwater discharge limits contained in the Seward station's discharge permit by November 1998, if the station is repowered, or by November 1999, if the station is not repowered. In addition, the Order requires Penelec to perform an aquatic study on the Conemaugh River in order to receive a thermal variance.
Penelec currently estimates that the remediation of the Seward station property will range from $12 million to $25 million and recorded a liability of $12 million at December 31, 1996. 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 expects recovery of these remediation costs through its restructuring plan to be filed with the PaPUC (see Competitive Environment, Management's Discussion and Analysis), and has recorded a corresponding regulatory asset of approximately $12 million at December 31, 1996.
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 $7 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 Nuclear Facilities 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 (radwaste) disposal facility in New Jersey, which should commence operation by the end of 2003. Currently, the N.J. Low-Level Radwaste Disposal Facility Siting Board is looking for a volunteer community to host the site. GPUN's total share of the cost for developing, constructing, and licensing the facility is estimated to be $58 million, which will be paid through 2002. Through December 1996, GPUN has paid $6 million. As a result, at December 31, 1996, a liability of $52 million is reflected on the Consolidated Balance Sheet. JCP&L is recovering these costs from customers, and a regulatory asset has also been recorded.
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. Delays in the facility's construction could result in additional funding requirements, however.
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, 1996 amounted to $34 million (JCP&L $22 million; Met-Ed $8 million; Penelec $4 million). The remaining amount recoverable from ratepayers at December 31, 1996 is $36 million (JCP&L $23 million; Met-Ed $9 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 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 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 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 $1 million, $9 million and $7 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 proposed new standards in November 1996 that will significantly increase the areas in the country which are not in attainment of the NAAQS. The EPA is soliciting comments on the proposal and must finalize the regulation by June 1997. A timeline for implementation of the new standards calls for attainment designations by June 1999; state implementation plans (SIP) by 2000 and 2002 for attainment and non-attainment areas, respectively; and attainment, with probable 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 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 proposed new standards in November 1996, which could significantly increase the areas in the country that are not in attainment of the standard. The particulate matter NAAQS 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 (MACT) 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 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 $277 million (JCP&L $46 million; Met-Ed $117 million; Penelec $114 million) for air pollution control equipment by the year 2000, of which approximately $240 million (JCP&L $43 million; Met-Ed $95 million; Penelec $102 million) has been spent as of December 31, 1996 (these amounts include costs to meet the 1999 reductions set by the OTC, as discussed on page 33). 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. The capital costs of this equipment and the increased operating costs of the affected stations are expected to be recoverable, but recovery is not assured.
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.
GPU's current strategy for Phase II 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.
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 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 1996, the Pennsylvania stations paid $1.5 million in emissions fees, and the New Jersey fees totaled approximately $55,000. 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. GPU's greenhouse gas management program is expected to reduce, sequester, or avoid the equivalent of eight million tons of carbon dioxide emissions between 1995 and 2000.
In 1995, as a result of the United Nations Framework Convention on
Climate Change, over 160 countries began a negotiating process to produce a document which would address the reduction of greenhouse gas emissions after the year 2000. The U.S. State Department supports the negotiations and calls for all developed nations to commit to emission reductions. The State Department also supports global emissions credit banking and trading similar to the domestic SO2 allowance trading program.
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 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. Approval of the plan by the PaDEP is pending. 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.
The GPU Energy companies are required to submit applications for re- permitting seven (JCP&L- one; Met-Ed- three; Penelec- three) operating ash disposal sites to the PaDEP by July 1997, including projected site closure procedures and related cost estimates. Applications have been filed with the PaDEP for five (JCP&L- one; Met-Ed- two; Penelec- two) of these sites. The
cost estimates for the closure of these five sites range from approximately $9 million to $14 million (JCP&L $1 million; Met-Ed $2 million to $4 million; Penelec $6 million to $9 million), and a liability of $9 million (JCP&L $1 million; Met-Ed $2 million; Penelec $6 million) is reflected on the Consolidated Balance Sheet at December 31, 1996. JCP&L's share of these costs, which results from its 16.67% ownership interest in the Keystone station, has been deferred based on past rate recovery precedent, and Penelec and Met-Ed expect recovery through their restructuring plans to be filed with the PaPUC (see Competitive Environment, Management's Discussion and Analysis). As a result, a regulatory asset of $9 million (JCP&L $1 million; Met-Ed $2 million; Penelec $6 million) is reflected on the Consolidated Balance Sheet at December 31, 1996.
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.
Preliminary groundwater assessment plans have been conducted at Met-Ed's Portland and Titus stations' industrial waste treatment impoundments. The Portland station impoundments were upgraded in 1987 and meet the requirements for lined impoundments. The station's assessment plan is pending with the PaDEP. Additional data will be collected and evaluated to determine if abatement will be required. Although new groundwater monitoring wells were installed at the Titus station, the station impoundments will require significant modifications by 2002.
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. To date, JCP&L has identified 17 former MGP sites and two off-site properties where MGP waste may have been sent. JCP&L has entered into cost sharing agreements with New Jersey Natural Gas Company and
Elizabethtown Gas Company, under which JCP&L is responsible for 60% of all costs incurred in connection with the remediation of 12 of these sites. In addition, JCP&L has entered into Administrative Consent Orders (ACOs) with the NJDEP for seven of these sites and has entered into Memoranda of Agreement (MOAs) with the NJDEP for eight of these sites. JCP&L anticipates entering into MOAs for the remaining sites. The ACOs specify the agreed upon obligations of both JCP&L and the NJDEP for remediation of the sites. The MOAs afford JCP&L greater flexibility in the schedule for investigation and remediation of the sites.
As of December 31, 1996, JCP&L has spent approximately $23 million in connection with the cleanup of these sites. In addition, JCP&L has recorded an estimated environmental liability of $45 million relating to expected future costs of these sites, including the two off-site properties. This estimated liability is based upon ongoing site investigations and remediation efforts, which generally involve capping the sites and pumping and treatment of ground water. Moreover, the cost to clean up these sites could be materially in excess of $45 million due to significant uncertainties, including changes in acceptable remediation methods and technologies.
JCP&L defers these remediation expenditures and accrues interest as previously authorized by the NJBPU, and will continue to defer estimated future remediation costs. JCP&L has requested the establishment of an adjustment clause for the recovery of future remediation costs in its Remediation Adjustment Clause (RAC) filing, which is currently under NJBPU review. The Final Settlement pending before the NJBPU would allow JCP&L to continue its accounting treatment for remediation costs and would also provide for the RAC proceeding to remain open for future review.
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 has begun in this case.
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 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
5 4 2 1 1 10
In addition, certain of the GPU companies have been requested to voluntarily participate in the remediation or supply information to the EPA and state environmental authorities on several other sites for which they have not yet 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 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 Sheet 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, 1996, 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. A groundwater study to determine the extent of ground water contamination was completed in 1996 and has been submitted to the PaDEP. A feasibility study will be conducted later in 1997 to determine the extent of additional remediation needed. Met-Ed cannot reasonably estimate its remaining liability until the feasibility study results are available and 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 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, 1996.
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. GPU and the GPU Energy companies are unable to estimate the extent of possible remediation and associated costs of additional environmental matters.
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 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, 1997, GPU had 9,061 full-time employees (JCP&L 2,363; Met-Ed 2,234; Penelec 1,895; all other companies 2,569). 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 contracts with the IBEW and UWUA expire on May 14, 1998 and June 30, 1998, respectively. Met-Ed's three-year contract with the IBEW expires on April 30, 1997. Negotiations between Met-Ed and the IBEW began in March 1997. JCP&L's three-year contract with the IBEW expires on October 31, 1999.
ITEM 2.
ITEM 2. PROPERTIES.
Generating Stations
At December 31, 1996, the generating stations of the GPU Energy companies had an aggregate effective capability of 6,606,000 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 1960-1996 1,299,000 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 6,606,000
Aggregate Effective Capability of the GPU Energy Companies
Net KW (Summer) (Winter) JCP&L 2,718,000 3,139,000 Met-Ed 1,604,000 1,705,000 Penelec 2,284,000 2,365,000 TOTAL 6,606,000 7,209,000
(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.
(d) Jointly owned by JCP&L, Met-Ed and Penelec in percentages of 25%, 50% and 25%, respectively.
(e) JCP&L - 901,000 KW, Met-Ed - 266,000 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. Effective June 10, 1996, the Yards Creek station was rerated from 195,000 KW.
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 Aug. 2, 1995 9,101,000 JCP&L July 9, 1993 4,564,000 Met-Ed Aug. 2, 1995 2,186,000 Penelec Dec. 11, 1995 2,589,000
GPU International Group Facilities
At December 31, 1996, the GPU International Group had ownership interests in 21 operating natural gas-fired cogeneration and other nonutility power production facilities located both domestically and internationally, with an aggregate capability of 3,581,000 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 54,900 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 FPB CA 1983 26,000 7,800 Berkeley*** CA 1987 22,500 200 Total 895,000 260,800
Non-U.S. Facilities
Teesside** England 1993 1,875,000 249,400 Redditch** England 1991 29,000 14,500 Hereford** England 1980 15,000 7,500 Enersis Group** Portugal 1987-95 50,000 12,500 Micdos** Spain 1975-95 35,000 7,500 Crisa** Spain 1948-58 6,000 2,900 Termobarran- quilla* Colombia 1972-96 434,000 124,100 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 26,000 19,500 Total 2,686,000 545,900
Total capability 3,581,000 806,700
* The GPU International Group has operating responsibility for these facilities.
** The GPU International Group's ownership interests in these facilities are through its investment in Midlands.
*** Sold in January 1997.
Transmission and Distribution System
At December 31, 1996, GPU owned the following transmission and distribution facilities:
JCP&L Met-Ed Penelec GPU Total Transmission and Distribution Substations 304 281 476 1,061
Aggregate Installed Transformer Capacity of Substations (in kilovoltamperes - KVA) 20,868,301 12,056,750 15,897,762 48,822,813
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 232 361 1,326 1,919 69 KV, 46 KV and 34.5 KV 1,764 472 364 2,600 Total 2,584 1,407 2,735 6,726
Distribution System:
Line Transformer Capacity (KVA) 9,830,763 5,807,962 6,543,254 22,181,979
Pole Miles of Overhead Lines 15,746 12,613 22,136 50,495
Trench Miles of Underground Cable 6,829 1,943 1,889 10,661
In addition, Midlands, which provides service to 2.2 million customers in a 5,000 square mile area in England, owns a total of 39,000 miles of overhead and underground lines. Solaris, which provides service to more than 240,000 customers in and around a 387 square mile area in Melbourne, Australia, owns a total of 3,809 miles of overhead and underground lines (see the GPU International Group section under Item 1).
ITEM 3.
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 14 to GPU's Consolidated Financial Statements contained in Item 8 for a description of certain pending legal proceedings involving GPU.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5.
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 1996, JCP&L, Met-Ed and Penelec paid dividends on their common stock to GPU, Inc. in the following amounts: JCP&L $135 million, Met-Ed $60 million and Penelec $40 million.
In accordance with JCP&L, Met-Ed and Penelec's FMB indentures, as supplemented, the balances of retained earnings at December 31, 1996 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 million
Stock Trading
GPU, Inc. is listed as GPU on the New York Stock Exchange. On February 3, 1997, there were approximately 43,350 registered holders of GPU, Inc. common stock.
Dividends
GPU, Inc. common stock dividend declaration dates are the first Thursdays of April, June, October and December. Dividend payment dates fall on the last Wednesdays of February, May, August and November. Dividend declarations and quarterly stock price ranges for 1996 and 1995 are set forth below.
Common Stock
Dividends Declared Price Ranges* 1996 1995 1996 1995 Quarter High/Low High/Low
April $.485 $.47 First $35 1/8 31 1/8 $30 5/8 $26 1/4 June .485 .47 Second 35 1/4 30 1/8 31 28 1/4 October .485 .47 Third 35 30 1/2 31 1/4 28 1/8 December .485 .47 Fourth 34 3/8 30 3/4 34 30 5/8
* Based on New York Stock Exchange Composite Transactions as reported in the Wall Street Journal.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
See pages and for references to each registrant's Selected Financial Data required by this item.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
See pages and for references to each registrant's Management's Discussion and Analysis of Financial Condition and Results of Operations required by this item.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See pages and for references to each registrant's Financial Statements and Quarterly Financial Data (unaudited) required by this item.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
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 1997 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: J. R. Leva (a) 64 Chairman of the Board and 1986 1992 1992 Chief Executive Officer D. Baldassari (b) 47 President 1982 1996 1996 J. G. Graham (c) 58 Vice President and 1986 1986 1986 Chief Financial Officer D. W. Myers (d) 52 Vice President - Finance 1994 1996 1996 and Rates, and Comptroller F. D. Hafer (e) 55 Director 1996 1978 1994 R. C. Arnold (f) 59 Director 1989 1989 1989
JCP&L only: G. E. Persson (g) 65 Director 1983 S. C. Van Ness (h) 63 Director 1983 S. B. Wiley (i) 67 Director 1982
(a) Mr. Leva is also Chairman and Chief Executive Officer and a director of GPUS; Chairman, Chief Executive Officer and a director of Genco; and Chairman and a director of GPUN, GPU International, Inc. (GPUI), GPU Power, Inc. (GPU Power), and GPU Electric, Inc. (GPU Electric), all subsidiaries of GPU, Inc. Mr. Leva also served as President of GPU, Inc. and GPUS from 1991 to 1996. It is anticipated that Mr. Leva will retire as Chairman and Chief Executive Officer of GPU, Inc. and other similar positions with GPU (other than director of GPU, Inc.) in May 1997. Mr. Leva is also Chairman and a director of Avon Energy Partners Holdings and Midlands Electricity plc, and a director of Utilities Mutual Insurance Company.
(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 a director of GPUS, GPUN, Genco and First Morris Bank of Morristown, NJ.
(c) Mr. Graham was elected Senior Vice President of GPU, Inc. in 1989. He 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 Genco, GPUI, GPU Power and GPU Electric. Mr. Graham is also a director of Edisto Resources, Inc., Nuclear Electric Insurance Limited, Nuclear Mutual Limited and Utilities Mutual Insurance Company.
(d) Mr. Myers was elected Vice President - Finance and Rates, and Comptroller of Met-Ed and Penelec in 1996, and also serves 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.
(e) Mr. Hafer became President, Chief Operating Officer, and a director of GPU, Inc. and President and Chief Operating Officer of GPUS in 1996. Prior to that, he was President of Penelec since 1994 and Met-Ed since 1986. It is anticipated that Mr. Hafer will be elected Chairman and Chief Executive Officer of GPU, Inc. in May 1997 upon Mr. Leva's retirement. Mr. Hafer is also a director of GPUS, GPUN, Genco, GPUI, Sovereign Bancorp Inc., Sovereign Bank, and Utilities Mutual Insurance Company.
(f) Mr. Arnold has been Executive Vice President-Power Supply of GPUS since 1990. He is also a director of GPUS and Genco.
(g) 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.
(h) 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.
(i) 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:
Year First Name Age Position Elected GPU: J. R. Leva (a) 64 Chairman, and Chief Executive 1992 Officer I. H. Jolles (b) 58 Senior Vice President and General 1990 Counsel J. G. Graham (c) 58 Senior Vice President and Chief 1987 Financial Officer F. A. Donofrio (d) 54 Vice President, Comptroller and 1985 Chief Accounting Officer P. C. Mezey (e) 57 Senior Vice President, GPUS 1992 T. G. Howson (f) 48 Vice President and Treasurer 1994 M. A. Nalewako (g) 62 Secretary 1988 T. G. Broughton (h) 51 President, GPUN 1996 R. L. Wise (i) 53 President, Genco 1994 F. D. Hafer (j) 55 President and Chief Operating Officer 1996 D. Baldassari (k) 47 President, JCP&L, Met-Ed, Penelec 1992 B. L. Levy (l) 41 President and Chief Executive 1991 Officer, GPUI, GPU Power and GPU Electric R. C. Arnold (m) 59 Executive Vice President, GPUS 1990
Year First Elected Name Age Position JCP&L Met-Ed Penelec JCP&L/Met-Ed/Penelec: J. R. Leva (a) 64 Chairman, and Chief 1992 1992 1992 Executive Officer D. Baldassari (k) 47 President 1992 1996 1996 I. H. Jolles (b) 58 Vice President and 1996 1996 1996 General Counsel J. G. Graham (c) 58 Vice President and 1987 1987 1987 Chief Financial Officer T. G. Howson (f) 48 Vice President 1994 1994 1994 and Treasurer D. J. Howe (n) 46 Vice President - Sales 1996 1996 1996 and Marketing D. W. Myers (o) 52 Vice President - 1994 1996 1996 Finance and Rates and Comptroller G. R. Repko (p) 51 Vice President - Customer 1996 1994 1986 Services C. B. Snyder (q) 51 Vice President - 1996 1994 1994 Public Affairs R. J. Toole (r) 54 Vice President - 1990 1989 1996 Generation R. S. Zechman (s) 53 Vice President - 1996 1990 1994 Corporate Services R. S. Cohen (t) 54 Vice President 1996 - - C. R. Fruehling 61 Vice President 1982 - - E. J. McCarthy (u) 58 Vice President 1982 - - D. L. O'Brien (v) 54 Vice President - 1981 1994 J. J. Westervelt(w) 56 Vice President 1982 - - S. L. Guibord (x) 48 Secretary 1996 1996 1996
(a) See Note (a) on page 49.
(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 Genco.
(c) See Note (c) on page 49.
(d) Mr. Donofrio was elected Vice President of GPU, Inc. in 1989. He is also Senior Vice President - Financial Controls of GPUS and a director of GPUS.
(e) Mr. Mezey was elected Senior Vice President - System Services of GPUS in 1992 and is a director of GPUI, GPU Power and GPU Electric. He previously served as Vice President of GPUS from January 1991 through March 1992 and President of GPUI from February 1990 through December 1991.
(f) Mr. Howson is also Vice President and Treasurer of GPUS, GPUN and Genco. He served as Vice President - Materials, Services and Regulatory Affairs and a director of JCP&L in 1992. Prior to that, he served as Vice President - Corporate Strategic Planning for GPUS since 1989.
(g) Mrs. Nalewako is also Secretary of GPUS and Genco and Assistant Secretary of GPUN, JCP&L, Met-Ed and Penelec.
(h) Mr. Broughton previously served as Executive Vice President of GPUN since September 1995. Prior to that, he served as Vice President-TMI of GPUN since 1991. Mr. Broughton is also a director of GPUS and Genco.
(i) Mr. Wise is also a director of GPUS, 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 December 1986. He is also a director of U.S. Bancorp and U.S. National Bank of Johnstown, PA.
(j) See Note (e) on page 50.
(k) See Note (b) on page 49.
(l) Mr. Levy is also a director of GPUI, GPU Power, GPU Electric and Genco. He has served as President, Chief Executive Officer and director of GPUI since 1991. Prior to that, Mr. Levy served as Vice President - Business Development of GPUI since 1985.
(m) See Note (f) on page 50.
(n) 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.
(o) See Note (d) on page 50.
(p) Mr. Repko was elected Vice President - Customer Services of JCP&L in 1996, and also serves 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) Mrs. Snyder was elected Vice President - Public Affairs of JCP&L in 1996 and also serves as Vice President - Public Affairs of Met-Ed and Penelec since 1994. Prior to that she was Regional Director of Met-Ed from 1991 to 1994, and Divisional Director of Met-Ed since 1990.
(r) Mr. Toole was also elected a Vice President and a director of Genco in 1996.
(s) Mr. Zechman was elected Vice President - Corporate Services of JCP&L in 1996 and also serves as Vice President - Corporate Services of Met-Ed and Penelec since 1994. Prior to that, he served as Vice President - Administrative Services of Met-Ed since 1992 and as Vice President - Human Resources of Met-Ed from 1990 to 1992.
(t) Mr. Cohen previously served as Secretary and Corporate Counsel for JCP&L since 1986.
(u) Mr. McCarthy served as Vice President - Customer Operations and Sales of JCP&L from 1994 to 1996. Prior to that, he served as Vice President - Customer Services of JCP&L since 1982.
(v) Mr. O'Brien previously served as Comptroller for Met-Ed and Penelec since 1994. Prior to that, he served as Comptroller of Met-Ed since 1981.
(w) Mr. Westervelt served as Vice President - Human Resources and Corporate Services of JCP&L from 1994 to 1996. Prior to that, he served as Vice President - Human Resources of JCP&L since 1982.
(x) Mr. Guibord was elected Secretary of JCP&L, Met-Ed, and Penelec in 1996. He had 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.
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.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item with respect to GPU, Inc. is incorporated by reference to pages 8 through 18 of GPU, Inc.'s Proxy Statement for the 1997 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, 1996.
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.
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. Under federal law, an employee's pension benefits that may be paid from a qualified trust under a qualified pension plan such as the GPU plans are subject to certain maximum amounts. 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 or source, cannot be paid from such a qualified trust shall be paid directly on an unfunded basis by the participant's employer.
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 1997 (computed on a single life annuity basis) to persons in specified salary and years of service classifications:
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.
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 7 of GPU, Inc.'s Proxy Statement for the 1997 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., 100 Interpace Parkway, Parsippany, NJ 07054.
The following table sets forth, as of February 1, 1997, 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.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. None.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) See pages and 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.
3-B By-Laws of GPU, as amended June 7, 1990 - Incorporated by reference to Exhibit 3-A, 1990 Annual Report on Form 10-K, SEC File No. 1-6047.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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 August 1, 1996.
10-B GPU System Companies Master Directors' Benefits Protection Trust dated November 7, 1996.
10-C GPU System Companies Master Executives' Benefits Protection Trust dated August 1, 1996.
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 August 1, 1996.
10-H Incentive Compensation Plan for Elected Officers of Met-Ed dated August 1, 1996.
10-I Incentive Compensation Plan for Elected Officers of Penelec dated August 1, 1996.
10-J Deferred Remuneration Plan for Outside Directors of JCP&L dated November 7, 1996.
10-K JCP&L Supplemental and Excess Benefits Plan dated August 1, 1996.
10-L Met-Ed Supplemental and Excess Benefits Plan dated August 1, 1996.
10-M Penelec Supplemental and Excess Benefits Plan dated August 1, 1996.
10-N Letter agreements dated November 1, 1996 relating to supplemental pension benefits for J.R. Leva.
10-O Letter agreement dated November 1, 1996 relating to terms of employment and pension benefits for I.H. Jolles.
10-P Letter agreement dated November 1, 1996 relating to supplemental pension benefits for J.G. Graham.
10-Q GPU, Inc. Restricted Stock Plan for Outside Directors dated November 7, 1996.
10-R Retirement Plan for Outside Directors of GPU, Inc. dated November 7, 1996.
10-S Deferred Remuneration Plan for Outside Directors of GPU, Inc. dated November 7, 1996.
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 August 1, 1996.
12 Statements Showing Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends.
A - GPU 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 B - JCP&L C - Met-Ed D - Penelec
27 Financial Data Schedule
A - GPU B - JCP&L C - Met-Ed D - Penelec
(b) Reports on Form 8-K:
A - GPU, Inc.
Dated October 21, 1996, under Item 5 (Other Events).
Dated December 2, 1996, under Item 5 (Other Events).
B - JCP&L
Dated October 21, 1996, under Item 5 (Other Events).
C - Met-Ed
Dated November 20, 1996, under Item 5 (Other Events).
Dated December 2, 1996, under Item 5 (Other Events).
D - Penelec
Dated November 20, 1996, under Item 5 (Other Events).
Dated December 2, 1996, under Item 5 (Other Events).
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 10, 1997 BY: /s/ J. R. Leva J. R. Leva, 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/ J. R. Leva March 10, 1997 J. R. Leva, Chairman (Chief Executive Officer) and President
/s/ F. D. Hafer March 10, 1997 F. D. Hafer, President (Chief Operating Officer) and Director
/s/ J. G. Graham March 10, 1997 J. G. Graham, Senior Vice President (Chief Financial Officer)
/s/ F. A. Donofrio March 10, 1997 F. A. Donofrio, Vice President and Comptroller (Chief Accounting Officer)
/s/ T. H. Black March 10, 1997 T. H. Black, Director
/s/ T. B. Hagen March 10, 1997 T. B. Hagen, Director
/s/ H. F. Henderson March 10, 1997 H. F. Henderson, Jr., Director
/s/ J. M. Pietruski March 10, 1997 J. M. Pietruski, Director
/s/ C. A. Rein March 10, 1997 C. A. Rein, Director
/s/ P. R. Roedel March 10, 1997 P. R. Roedel, Director
/s/ B. S. Townsend March 10, 1997 B. S. Townsend, Director
/s/ C. A. H. Trost March 10, 1997 C. A. H. Trost, Director
/s/ P. K. Woolf March 10, 1997 P. K. Woolf, Director
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 10, 1997 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/ J. R. Leva March 10, 1997 J. R. Leva, Chairman (Principal Executive Officer) and Director
/s/ D. Baldassari March 10, 1997 D. Baldassari, President (Principal Operating Officer) and Director
/s/ J. G. Graham March 10, 1997 J. G. Graham, Vice President (Principal Financial Officer) and Director
/s/ D. W. Myers March 10, 1997 D. W. Myers, Vice President-Comptroller (Principal Accounting Officer) and Director
/s/ R. C. Arnold March 10, 1997 R. C. Arnold, Director
/s/ F. D. Hafer March 10, 1997 F. D. Hafer, Director
/s/ G. E. Persson March 10, 1997 G. E. Persson, Director
/s/ S. C. Van Ness March 10, 1997 S. C. Van Ness, Director
/s/ S. B. Wiley March 10, 1997 S. B. Wiley, Director
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 10, 1997 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/ J. R. Leva March 10, 1997 J. R. Leva, Chairman (Principal Executive Officer) and Director
/s/ D. Baldassari March 10, 1997 D. Baldassari, President (Principal Operating Officer) and Director
/s/ J. G. Graham March 10, 1997 J. G. Graham, Vice President (Principal Financial Officer) and Director
/s/ D. W. Myers March 10, 1997 D. W. Myers, Vice President-Comptroller (Principal Accounting Officer) and Director
/s/ R. C. Arnold March 10, 1997 R. C. Arnold, Director
/s/ F. D. Hafer March 10, 1997 F. D. Hafer, Director
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 10, 1997 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/ J. R. Leva March 10, 1997 J. R. Leva, Chairman (Principal Executive Officer) and Director
/s/ D. Baldassari March 10, 1997 D. Baldassari, President (Principal Operating Officer) and Director
/s/ J. G. Graham March 10, 1997 J. G. Graham, Vice President (Principal Financial Officer) and Director
/s/ D. W. Myers March 10, 1997 D. W. Myers, Vice President-Comptroller (Principal Accounting Officer) and Director
/s/ R. C. Arnold March 10, 1997 R. C. Arnold, Director
/s/ F. D. Hafer March 10, 1997 F. D. Hafer, Director
INDEX TO SUPPLEMENTARY DATA, FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
GPU, INC. Page
Supplementary Data GPU Energy Companies' Statistics Selected Financial Data Quarterly Financial Data
Combined Management's Discussion and Analysis of Financial Condition and Results of Operations
Financial Statements Report of Independent Accountants Statements of Income for the Years Ended December 31, 1996, 1995 and 1994 Balance Sheets as of December 31, 1996 and 1995 Statements of Retained Earnings for the Years Ended December 31, 1996, 1995 and 1994 Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994
Combined Notes to Consolidated Financial Statements
Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts for the Years 1994-1996
JERSEY CENTRAL POWER & LIGHT COMPANY
Supplementary Data Company Statistics Selected Financial Data Quarterly Financial Data
Financial Statements Report of Independent Accountants Statements of Income for the Years Ended December 31, 1996, 1995 and 1994 Balance Sheets as of December 31, 1996 and 1995 Statements of Retained Earnings for the Years Ended December 31, 1996, 1995 and 1994 Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994
Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts for the Years 1994-1996
INDEX TO SUPPLEMENTARY DATA, FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
METROPOLITAN EDISON COMPANY
Supplementary Data Company Statistics Selected Financial Data Quarterly Financial Data
Financial Statements Report of Independent Accountants Statements of Income for the Years Ended December 31, 1996, 1995 and 1994 Balance Sheets as of December 31, 1996 and 1995 Statements of Retained Earnings for the Years Ended December 31, 1996, 1995 and 1994 Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994
Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts for the Years 1994-1996
PENNSYLVANIA ELECTRIC COMPANY
Supplementary Data Company Statistics Selected Financial Data Quarterly Financial Data
Financial Statements Report of Independent Accountants Statements of Income for the Years Ended December 31, 1996, 1995 and 1994 Balance Sheets as of December 31, 1996 and 1995 Statements of Retained Earnings for the Years Ended December 31, 1996, 1995 and 1994 Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994
Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts for the Years 1994-1996
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.
GPU, Inc. and Subsidiary Companies
COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GPU, Inc. (formerly General Public Utilities Corporation) 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). In 1996, the customer service, transmission and distribution operations of these electric utilities began doing 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 these three electric utilities are conducted by GPU Generation, Inc. (Genco) and GPU Nuclear, Inc. (GPUN). GPU, Inc. also owns all the common stock of GPU International, Inc. (formerly Energy Initiatives, Inc.), GPU Power, Inc. (formerly EI Power, Inc.) and GPU Electric, Inc. (formerly EI Energy, Inc.). Collectively, these are referred to as the "GPU International Group." Corporate functions are performed by GPU Service, Inc. (GPUS). All of these companies considered together are referred to as "GPU."
GPU RESULTS OF OPERATIONS
GPU's 1996 earnings were $298.4 million, or $2.47 per share, compared to 1995 earnings of $440.1 million, or $3.79 per share. GPU's return on average common equity was 9.8% in 1996 compared to 16.0% in 1995.
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, if nonrecurring items are excluded. Excluding these nonrecurring items, return on average common equity for 1996 and 1995 would have been 12.1% and 12.7%, respectively. The earnings increase, on this basis, was due primarily to higher GPU International Group income, mainly resulting from the earnings inclusion of Midlands Electricity plc (Midlands), in which a 50% interest was acquired in 1996. Also affecting the 1996 earnings were lower reserve capacity expense and gains associated with the reacquisition of preferred stock through cash tender offers, which were primarily offset by higher depreciation and other operation and maintenance (O&M) expenses.
The 1996 nonrecurring item consisted of a $74.5 million after-tax charge to income, or $0.62 per share, for costs related to voluntary enhanced retirement programs, which were accepted by 840 bargaining and nonbargaining employees, representing about 8% of GPU's total workforce.
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.
GPU, Inc. and Subsidiary Companies
GPU RESULTS OF OPERATIONS (continued)
Earnings in 1995 were $440.1 million, or $3.79 per share, compared to 1994 earnings of $163.7 million, or $1.42 per share. The increase in earnings was due primarily to the effect of 1995 (discussed above) and 1994 nonrecurring items. Excluding these nonrecurring items, earnings for 1995 would have been $343.6 million, or $2.95 per share, compared to 1994 earnings of $328.4 million, or $2.85 per share. Contributing to this increase were higher new customer sales, partially offset by higher depreciation and financing expenses.
The 1994 nonrecurring items included the write-off of $104.9 million after-tax, or $0.91 per share (discussed above), of certain future TMI-2 retirement costs. Also in 1994, there was a charge to income of $76.1 million after-tax, or $0.66 per share, for costs related to voluntary enhanced retirement programs; a write-off of $10.6 million after-tax, or $0.09 per share, for certain postretirement benefit (OPEB) costs; and net interest income of $26.9 million after-tax, or $0.23 per share, resulting from refunds of previously paid federal income taxes related to the tax retirement of TMI-2.
OPERATING REVENUES:
Total revenues increased 3% to $3.9 billion in 1996, after increasing 4.3% to $3.8 billion in 1995. The components of these changes are as follows:
(In Millions) 1996 1995
Kilowatt-hour (KWH) revenues (excluding energy portion) $ 24.9 $ 14.7 Energy revenues 67.8 141.6 Other revenues 20.7 (1.2) Increase in revenues $113.4 $155.1
Kilowatt-hour revenues
1996 and 1995 The 1996 and 1995 increases in KWH revenues were due primarily to increased new commercial and residential customer sales, partially offset by lower weather-related sales to residential customers.
1996 KWH Customer Sales by Service Class
Residential 36% Commercial 33% Industrial/Other 31%
GPU, Inc. and Subsidiary Companies
GPU RESULTS OF OPERATIONS (continued)
Energy revenues
1996 and 1995 Changes in energy revenues do not affect earnings as they reflect corresponding changes in the energy cost rates billed to customers and expensed. The 1996 increase was due primarily to higher energy cost rates in effect and increased commercial and residential customer sales, partially offset by lower sales to other utilities. Energy revenues in 1995 increased primarily from additional sales to other utilities and higher energy cost rates.
Other revenues
1996 and 1995 Generally, changes in other revenues do not affect earnings as they are offset by corresponding changes in expense, such as taxes other than income taxes. However, increased transmission revenues contributed to earnings in 1996.
OPERATING EXPENSES:
Power purchased and interchanged (PP&I)
1996 and 1995 Generally, changes in the energy component of PP&I expense do not significantly affect earnings since these cost increases are substantially recovered through the GPU Energy companies' energy adjustment clauses. However, lower reserve capacity expense, which is a component of PP&I, contributed to earnings in 1996.
Fuel and Deferral of energy costs, net
1996 and 1995 Generally, changes in fuel expense and deferral of energy costs do not affect earnings as they are offset by corresponding changes in energy revenues. However, earnings for 1996 benefitted 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
The 1996 increase in other O&M expenses was due primarily to a $122.7 million pre-tax charge related to the early retirement programs. Partially offsetting the effect of these 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.
GPU, Inc. and Subsidiary Companies
GPU RESULTS OF OPERATIONS (continued)
The 1995 decrease in other O&M expenses was due to a $127 million pre-tax charge in 1994 related to early retirement programs. Partially offsetting the effect of these was the 1995 write-off of $14.7 million for TMI-2 monitored storage costs.
Depreciation and amortization
The 1996 increase in depreciation and amortization expense was due primarily to additions to plant in service and higher depreciation rates for Met-Ed and Penelec.
The 1995 increase in depreciation and amortization expense was due primarily to additions to plant in service.
Taxes, other than income taxes
1996 and 1995 Generally, changes in taxes other than income taxes do not significantly affect earnings as they are substantially recovered in revenues.
OTHER INCOME AND DEDUCTIONS:
Other income/(expense), net
The 1996 decrease in other income/(expense) 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 a 1995 Pennsylvania Supreme Court decision restoring a 1993 PaPUC order allowing Met-Ed to recover such costs from customers. This was partially offset by higher GPU International Group income, due primarily to the inclusion of Midlands' income (see Note 6 to GPU's Consolidated Financial Statements).
The 1995 increase in other income/(expense) was due largely to the reversal of TMI-2 retirement costs written off in 1994. Also, in 1994 Penelec expensed $18.6 million pre-tax for certain OPEB costs believed not probable of recovery in rates. Of this amount, $14.6 million was written off as a result of a PaPUC order disallowing the collection of such costs by a nonaffiliated utility, and $4 million was charged to expense for OPEB costs related to employees who participated in the 1994 early retirement programs. Increased GPU International Group income in 1995, due primarily to gains on the sale of investment securities totaling $11.8 million pre-tax, also contributed to the increase. Partially offsetting these was interest income in 1994 of $59.4 million pre-tax resulting from refunds of previously paid federal income taxes related to the tax retirement of TMI-2.
GPU, Inc. and Subsidiary Companies
GPU RESULTS OF OPERATIONS (continued)
INTEREST CHARGES AND PREFERRED DIVIDENDS:
Other interest
The 1995 decrease in other interest was due primarily to the GPU Energy companies recognizing in 1994 interest expense related to the tax retirement of TMI-2. The tax retirement of TMI-2 resulted in a $13.8 million pre-tax charge to interest expense on additional amounts owed for tax years in which depreciation deductions with respect to TMI-2 had been taken.
Dividends on subsidiary-obligated mandatorily redeemable preferred securities
1996 and 1995 The 1996 increase was due to JCP&L issuing in May 1995, through a special-purpose finance subsidiary, $125 million stated value of mandatorily redeemable preferred securities. The 1995 increase was due to Met-Ed and Penelec issuing in 1994, through special-purpose finance subsidiaries, $100 million and $105 million, respectively, of these securities.
Gain on preferred stock reacquisition
The 1996 increase was due to gains associated with Met-Ed and Penelec reacquiring, through cash tender offers, portions of their preferred stock.
JCP&L RESULTS OF OPERATIONS
JCP&L's 1996 earnings were $143.2 million, compared to 1995 earnings of $184.6 million. The decrease in earnings was due primarily to a $39.4 million after-tax charge in 1996 for voluntary enhanced retirement programs (includes 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. JCP&L's return on average common equity was 9.5% in 1996 compared to 13.1% in 1995. Excluding this nonrecurring item, 1996 earnings would have been $182.6 million and return on average common equity, on this basis, would have been 12%.
Earnings in 1995 were $184.6 million, compared to 1994 earnings of $148 million. Contributing to this earnings increase were a $30.4 million after- tax charge in 1994 for early retirement programs, lower other O&M expenses, and higher new customer sales, partially offset by lower weather-related sales. Also, in 1994 JCP&L recognized net interest income of $7.4 million after-tax resulting from refunds of previously paid federal income taxes related to the tax retirement of TMI-2.
GPU, Inc. and Subsidiary Companies
JCP&L RESULTS OF OPERATIONS (continued)
OPERATING REVENUES:
Total revenues increased 1.1% to $2.06 billion in 1996, after increasing 4.3% to $2.04 billion in 1995. The components of these changes are as follows:
(In Millions) 1996 1995
Kilowatt-hour revenues (excluding energy portion) $ (7.2) $ 11.4 Energy revenues 22.1 72.3 Other revenues 7.1 (0.2) Increase in revenues $ 22.0 $ 83.5
Kilowatt-hour revenues
The 1996 decrease in KWH revenues was due to lower weather-related sales to residential customers, partially offset by new residential and commercial customer sales.
1996 KWH Customer Sales by Service Class
Residential 41% Commercial 39% Industrial/Other 20%
The 1995 increase in KWH revenues was due to increases in new residential and commercial customer sales, partially offset by lower weather-related sales.
Energy revenues
1996 and 1995 Changes in energy revenues do not affect earnings as they reflect corresponding changes in the energy cost rates billed to customers and expensed. The 1996 increase in energy revenues was due primarily to higher energy cost rates in effect and increased commercial customer sales, partially offset by lower sales to other utilities. The 1995 increase was primarily due to additional sales to other utilities and higher energy cost rates.
Other revenues
1996 and 1995 Generally, changes in other revenues do not affect earnings as they are offset by corresponding changes in expense, such as taxes other than income taxes.
GPU, Inc. and Subsidiary Companies
JCP&L RESULTS OF OPERATIONS (continued)
OPERATING EXPENSES:
Power purchased and interchanged
Generally, changes in the energy component of PP&I expense do not significantly affect earnings since these cost increases are substantially recovered through the energy adjustment clause. However, lower reserve capacity expense resulting primarily from reduced purchases from Pennsylvania Power & Light Company contributed to the 1996 earnings.
Earnings in 1995 were negatively affected by higher reserve capacity expense resulting primarily from a Pennsylvania-New Jersey-Maryland Interconnection (PJM Power Pool) prior year adjustment and one-time net charges of $3.6 million pre-tax from another utility.
Fuel and Deferral of energy and capacity costs, net
1996 and 1995 Generally, changes in fuel expense and deferral of energy and capacity costs do not affect earnings as they are offset by corresponding changes in energy revenues. However, earnings for 1996 benefitted 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
The 1996 increase in other O&M expenses was due in part to a $62.9 million pre-tax charge related to the early 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.
The 1995 decrease in other O&M expenses was due primarily to the effect of a $46.9 million pre-tax charge in 1994 related to early retirement programs and lower 1995 storm damage and emergency repairs.
Depreciation and amortization
The 1996 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.
The 1995 increase in depreciation and amortization expense was due primarily to additions to plant in service, partially offset by lower regulatory asset amortizations.
GPU, Inc. and Subsidiary Companies
JCP&L RESULTS OF OPERATIONS (continued)
Taxes, other than income taxes
1996 and 1995 Generally, changes in taxes other than income taxes do not significantly affect earnings as they are substantially recovered in revenues.
OTHER INCOME AND DEDUCTIONS:
Other income, net
The 1996 decrease in other income was due largely to the write-off of $3 million pre-tax of nonutility generation (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.
The 1995 decrease was due to the recognition in 1994 of interest income of $14.7 million pre-tax resulting from refunds of previously paid federal income taxes related to the tax retirement of TMI-2. Partially offsetting the effect of this was a 1994 write-off of $4.2 million pre-tax for a cancelled project.
INTEREST CHARGES AND DIVIDENDS ON PREFERRED SECURITIES:
Interest on long-term debt
The decrease in interest on long-term debt was due to lower interest rates on long-term debt.
Dividends on company-obligated mandatorily redeemable preferred securities
1996 and 1995 The 1996 increase was due to JCP&L issuing in May 1995, through a special-purpose finance subsidiary, $125 million stated value of mandatorily redeemable preferred securities.
MET-ED RESULTS OF OPERATIONS
Met-Ed's 1996 earnings were $71.8 million, compared to 1995 earnings of $147.6 million. The decrease in earnings was due primarily to the effect of 1996 and 1995 nonrecurring items. Met-Ed's return on average common equity was 10.3% in 1996 compared to 23.5% in 1995.
GPU, Inc. and Subsidiary Companies
MET-ED RESULTS OF OPERATIONS (continued)
Excluding these nonrecurring items, earnings would have been $87.2 million, compared to earnings of $80.5 million for 1995. Return on average common equity for 1996 and 1995, on this basis, would have been 12.4% and 13.4%, respectively. The earnings increase, on this basis, was due to primarily higher customer sales, lower reserve capacity expense and gains associated with the reacquisition of preferred stock.
The 1996 nonrecurring item consisted of a charge to income of $15.4 million after-tax for voluntary enhanced retirement programs (includes Met- Ed's share of costs allocated from Genco, GPUN and GPUS), which were accepted by 163 bargaining and non-bargaining employees of Met-Ed, or about 7.5% of its workforce.
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.
Earnings in 1995 were $147.6 million, compared to a net loss of $2.2 million for 1994. The increase in earnings was due primarily to the net effect of 1995 (discussed above) and 1994 nonrecurring items. Excluding these nonrecurring items, earnings for 1995 would have been $80.5 million, compared to 1994 earnings of $77.7 million. Contributing to this increase were higher customer sales and lower other O&M expenses, partially offset by higher depreciation and financing expenses.
The 1994 nonrecurring items included the above mentioned TMI-2 write-off of $72.8 million after-tax. Also, in 1994 there was a charge to income of $20.1 million after-tax, for costs related to voluntary enhanced retirement programs; and net interest income of $13 million after-tax resulting from refunds of previously paid federal income taxes related to the tax retirement of TMI-2.
OPERATING REVENUES:
Total revenues increased 6.5% to $910.4 million in 1996, after increasing 6.7% to $854.7 million in 1995. The components of these changes are as follows: (In Millions) 1996 1995
Kilowatt-hour revenues (excluding energy portion) $ 21.5 $ 4.8 Energy revenues 30.1 46.4 Other revenues 4.1 2.2 Increase in revenues $ 55.7 $ 53.4
GPU, Inc. and Subsidiary Companies
MET-ED RESULTS OF OPERATIONS (continued)
Kilowatt-hour revenues
The 1996 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.
1996 KWH Customer Sales by Service Class
Residential 36% Commercial 27% Industrial/Other 37%
The 1995 increase in KWH revenues was due to an increase in new residential and commercial customer sales and higher industrial customer usage, partially offset by lower weather-related sales.
Energy revenues
1996 and 1995 Changes in energy revenues do not affect earnings as they reflect corresponding changes in the energy cost rates billed to customers and expensed. The 1996 increase in energy revenues was due primarily to higher energy cost rates in effect and increased commercial and residential customer sales, partially offset by lower sales to other utilities. The 1995 increase was due to higher energy cost rates and additional sales to other utilities.
Other revenues
1996 and 1995 Generally, changes in other revenues do not affect earnings as they are offset by corresponding changes in expense, such as taxes other than income taxes.
OPERATING EXPENSES:
Power purchased and interchanged
1996 and 1995 Generally, changes in the energy component of PP&I expense do not significantly affect earnings since these cost increases are substantially recovered through the energy adjustment clause. However, lower reserve capacity expense contributed to the 1996 and 1995 earnings.
Fuel and Deferral of energy costs, net
1996 and 1995 Generally, changes in fuel expense and deferral of energy costs do not affect earnings as they are offset by corresponding changes in energy revenues.
GPU, Inc. and Subsidiary Companies
MET-ED RESULTS OF OPERATIONS (continued)
Other operation and maintenance
The 1996 increase in other O&M expenses was due primarily to a $26.2 million pre-tax charge related to the early 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.
The 1995 decrease in other O&M expenses was due primarily to a $35.2 million pre-tax charge in 1994 related to early retirement programs. Partially offsetting the effect of this was a 1995 write-off of $10 million pre-tax for TMI-2 monitored storage costs.
Depreciation and amortization
The 1996 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.
The 1995 increase in depreciation and amortization expense was due primarily to additions to plant in service and adjustments for TMI-2 decommissioning.
Taxes, other than income taxes
1996 and 1995 Generally, changes in taxes other than income taxes do not significantly affect earnings as they are substantially recovered in revenues.
OTHER INCOME AND DEDUCTIONS:
Other income/(expense), net
The 1996 decrease in other income/(expense) 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.
The 1995 increase in other income/(expense) was due largely to the reversal of TMI-2 retirement costs written off in 1994. Partially offsetting
GPU, Inc. and Subsidiary Companies
MET-ED RESULTS OF OPERATIONS (continued)
the effect of this was interest income in 1994 of $29.8 million pre-tax resulting from refunds of previously paid federal income taxes related to the tax retirement of TMI-2.
INTEREST CHARGES AND DIVIDENDS ON PREFERRED SECURITIES:
Dividends on company-obligated mandatorily redeemable preferred securities
The 1995 increase was due to Met-Ed issuing in August 1994, through a special-purpose finance subsidiary, $100 million stated value of mandatorily redeemable preferred securities.
Gain on preferred stock reacquisition
The 1996 increase was due to gains associated with Met-Ed reacquiring, through cash tender offers, portions of its preferred stock.
PENELEC RESULTS OF OPERATIONS
Penelec's 1996 earnings were $73.9 million, compared to 1995 earnings of $109.5 million. The decrease in earnings was due primarily to the effect of 1996 and 1995 nonrecurring items. Penelec's return on average common equity was 10% in 1996 compared to 15.8% in 1995.
Excluding these nonrecurring items, earnings would have been $93.6 million compared to earnings of $80.1 million for 1995. Return on average common equity for 1996 and 1995, on this basis, would have been 12.6% and 11.8%, respectively. 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 nonrecurring item consisted of a charge to income of $19.7 million after-tax for voluntary enhanced retirement programs (includes Penelec's share of costs allocated from Genco, GPUN and GPUS), which were accepted 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.
GPU, Inc. and Subsidiary Companies
PENELEC RESULTS OF OPERATIONS (continued)
Earnings in 1995 were $109.5 million, compared to 1994 earnings of $28.9 million. The increase in earnings was due primarily to the net effect of 1995 (discussed above) and 1994 nonrecurring items. Excluding these nonrecurring items, earnings for 1995 would have been $80.1 million, compared to 1994 earnings of $90.7 million. Contributing to this earnings decrease were higher other O&M expenses and increased financing expenses.
The 1994 nonrecurring items included the above mentioned TMI-2 write-off of $32.1 million after-tax. Also in 1994, there was a charge to income of $25.6 million after-tax, for costs related to voluntary enhanced retirement programs; a write-off of $10.6 million after-tax for certain OPEB costs; and net interest income of $6.5 million after-tax resulting from refunds of previously paid federal income taxes related to the tax retirement of TMI-2.
OPERATING REVENUES:
Total revenues increased 3.9% to $1 billion in 1996, after increasing 3.9% to $981.3 million in 1995. The components of these changes are as follows:
(In Millions) 1996 1995
Kilowatt-hour revenues (excluding energy portion) $ 7.5 $ 1.7 Energy revenues 14.7 32.3 Other revenues 16.1 2.6 Increase in revenues $ 38.3 $ 36.6
Kilowatt-hour revenues
1996 and 1995 The 1996 and 1995 increases in KWH revenues were due primarily to increased new commercial and residential customer sales. Higher weather- related sales to residential customers also contributed to the 1996 increase.
1996 KWH Customer Sales by Service Class
Residential 29% Commercial 31% Industrial 34% Other 6%
Energy revenues
1996 and 1995 Changes in energy revenues do not affect earnings as they reflect corresponding changes in the energy cost rates billed to customers and expensed. The 1996 increase in energy revenues was due primarily to higher energy cost rates in effect and increased commercial and residential customer
GPU, Inc. and Subsidiary Companies
PENELEC RESULTS OF OPERATIONS (continued)
sales, partially offset by lower sales to other utilities. The 1995 increase was due primarily to additional sales to other utilities and higher energy cost rates.
Other revenues
1996 and 1995 Generally, changes in other revenues do not affect earnings as they are offset by corresponding changes in expense, such as taxes other than income taxes. However, increased transmission revenues contributed to earnings in 1996.
OPERATING EXPENSES:
Power purchased and interchanged
1996 and 1995 Generally, changes in the energy component of PP&I expense do not significantly affect earnings since these cost increases are substantially recovered through the energy adjustment clause.
Fuel and Deferral of energy costs, net
1996 and 1995 Generally, changes in fuel expense and deferral of energy costs do not affect earnings as they are offset by corresponding changes in energy revenues.
Other operation and maintenance
The 1996 increase in other O&M expenses was due to a $33.6 million pre-tax charge related to the early 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.
The 1995 decrease in other O&M expenses was due to a $44.9 million pre-tax charge in 1994 related to early retirement programs. Partially offsetting the effect of this were a 1995 write-off of $4.7 million pre-tax for TMI-2 monitored storage costs, and employee severance payments associated with the management combination with Met-Ed in 1995.
Depreciation and amortization
1996 and 1995 The 1996 increase in depreciation and amortization expense was due to additions to plant in service and higher depreciation rates. The 1995 increase was due primarily to additions to plant in service.
GPU, Inc. and Subsidiary Companies
PENELEC RESULTS OF OPERATIONS (continued)
Taxes, other than income taxes
1996 and 1995 Generally, changes in taxes other than income taxes do not significantly affect earnings as they are substantially recovered in revenues.
OTHER INCOME AND DEDUCTIONS:
Other income/(expense), net
The 1996 decrease in other income/(expense) 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.
The 1995 increase in other income/(expense) was due largely to the reversal of TMI-2 retirement costs of $56.3 million pre-tax written off in 1994. In 1994, Penelec expensed $18.6 million pre-tax for certain OPEB costs believed not probable of recovery in rates. Of this amount, $14.6 million was written off as a result of a PaPUC order disallowing a nonaffiliated utility to collect such costs, and $4 million was charged to expense for OPEB costs related to employees who participated in the early retirement programs. Also, Penelec recorded interest income of $14.9 million pre-tax resulting from refunds of previously paid federal income taxes related to the tax retirement of TMI-2.
INTEREST CHARGES AND DIVIDENDS ON PREFERRED SECURITIES:
Dividends on company-obligated mandatorily redeemable preferred securities
The 1995 increase was due to Penelec issuing in July 1994, through a special-purpose finance subsidiary, $105 million stated value of mandatorily redeemable preferred securities.
Gain on preferred stock reacquisition
The 1996 increase was due to gains associated with Penelec reacquiring, through cash tender offers, portions of its preferred stock.
GPU, Inc. and Subsidiary Companies
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.
GPU INTERNATIONAL GROUP
The GPU International Group develops, owns and operates electric generation, transmission and distribution facilities and supply businesses in the U.S. and foreign countries. It has also made investments in certain advanced technologies related to the electric power industry. The GPU International Group has ownership interests in distribution and supply businesses in England and Australia, ten operating cogeneration plants in the U.S. totaling 895 MW (of which the GPU International Group's equity interest represents 261 MW) of capacity, and eleven operating generating facilities located in foreign countries totaling 2,686 MW (of which the GPU International Group's equity interest represents 546 MW) of capacity.
The GPU International Group is continuing to pursue investment opportunities and has commitments, both domestically and internationally, in five generating facilities under construction totaling 3,172 MW (of which the GPU International Group's equity interest represents 816 MW) of capacity.
At December 31, 1996, GPU, Inc.'s aggregate investment in the GPU International Group was $211 million; GPU, Inc. has also guaranteed up to an additional $893 million of GPU International Group obligations. GPU, Inc. has Securities and Exchange Commission (SEC) approval to finance investments in foreign utility companies and exempt wholesale generators up to an aggregate amount equal to 50% of GPU's average consolidated retained earnings, or approximately $1 billion. At December 31, 1996, GPU, Inc. had remaining authorization to finance an additional $25 million of such investments. A request to increase this limit to 100% of GPU's average consolidated retained earnings, or to approximately $2 billion at December 31, 1996, is pending.
Selected financial data for the GPU International Group is as follows:
GPU, Inc. and Subsidiary Companies
(In Millions) 1996 1995 1994
Total assets $1,075 $380 $130
Liabilities and capital: Common equity $ 232 $209 $118 Long-term debt 752 104 - Notes payable - 2 - Total capitalization 984 315 118 Minority interest 43 41 - Other liabilities 48 24 12 Total liabilities and capital $1,075 $380 $130
Purchase of investments $ 574 $165 $ 74
Net income/(loss) $ 24 $ 9 $ (3)
For additional information on the GPU International Group's investments, see Note 7 to GPU's Consolidated Financial Statements.
In 1996, GPU and Cinergy Corp. (Cinergy) formed Avon Energy Partners Holdings (Holdings), a 50/50 joint venture, to acquire Midlands (see Note 6 to GPU's Consolidated Financial Statements), an English regional electric company. A wholly-owned subsidiary of Holdings purchased the outstanding shares of Midlands through a cash tender offer of 1.7 billion pounds, or 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.
The Labour Party in the United Kingdom has proposed a windfall tax on privatized utilities and other companies as part of its election campaign platform. General elections in the United Kingdom are required to be held no later than May 1997. If the Labour Party wins the general election, and the tax is enacted as currently proposed, a charge to Midlands' earnings, which is estimated to range from $110 million to $350 million (GPU's 50% share being $55 million to $175 million), would be recorded in 1997, perhaps as early as the second quarter. Due to the fact that (1) the Labour Party may not win the election; (2) the windfall tax may not be enacted as currently proposed; (3) the amount of the proposed tax may change; and (4) the Labour Party may change its current platform, there is no certainty that this tax, if levied, would be enacted as currently proposed.
With the acquisitions of Midlands in 1996 and Solaris Power in 1995, the GPU International Group now has 50% ownership interests in foreign utility companies having total fixed assets of approximately $1.6 billion. These foreign utility companies annually provide about 20 billion kilowatt-hours of electricity to 2.2 million customers in England and 240,000 customers in Australia, with operating revenues of $2.5 billion in 1996.
In 1996, GPU Power, through a wholly-owned subsidiary, purchased the rights to acquire up to a 40% interest in a venture which plans to construct a 300 MW coal generating plant in the Philippines. GPU Power's equity contribution is expected to be approximately $40 million.
GPU, Inc. and Subsidiary Companies
In 1996, GPU International and Ballard Power Systems of Canada agreed to a business venture to develop, manufacture and market stationary fuel cell power plants worldwide. Under the agreement, GPU International will invest approximately $23 million for up to a 19.3% equity interest in the new venture, of which $6 million was invested as of December 31, 1996.
Management expects that the GPU International 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 amounts of these investments, however, will depend upon the availability of appropriate opportunities and financing capabilities.
LIQUIDITY AND CAPITAL RESOURCES
Capital Needs
The GPU Energy companies' capital needs were $535 million (JCP&L $235 million; Met-Ed $92 million; Penelec $190 million; Other $18 million) in 1996, consisting of cash construction expenditures of $404 million (JCP&L $200 million; Met-Ed $77 million; Penelec $115 million; Other $12 million) and amounts for maturing obligations of $131 million (JCP&L $35 million; Met-Ed $15 million; Penelec $75 million; Other $6 million). In addition, the GPU International Group made investments in 1996 totaling $574 million, due primarily to the acquisition of Midlands (see Note 6 to GPU's Consolidated Financial Statements).
During 1996, construction expenditures were used primarily for new customer connections and to maintain and improve existing transmission and distribution facilities. In 1997, construction expenditures for the GPU Energy companies are estimated to be $402 million (JCP&L $185 million; Met-Ed $90 million; Penelec $120 million; Other $7 million), consisting primarily of $391 million (JCP&L $179 million; Met-Ed $88 million; Penelec $117 million; Other $7 million) for ongoing system development. Expenditures for maturing obligations will total $179 million (JCP&L $110 million; Met-Ed $40 million; Penelec $26 million; Other $3 million) in 1997, and $139 million (JCP&L $12 million; Penelec $30 million; Other $97 million) in 1998. Management estimates that a substantial portion of GPU's and the GPU Energy companies' 1997 capital needs will be satisfied through internally generated funds.
Cash Construction Expenditures (In millions of dollars) 1992 1993 1994 1995 1996 1997* GPU $460 $496 $586 $462 $404 $402
JCP&L $219 $197 $244 $218 $200 $185 Met-Ed 131 142 160 113 77 90 Penelec 110 150 174 131 115 120 Other - 7 8 - 12 7
* Estimate
The GPU Energy companies' capital leases are primarily for nuclear fuel.
GPU, Inc. and Subsidiary Companies
Nuclear fuel capital leases at December 31, 1996 totaled $139 million (JCP&L $95 million; Met-Ed $29 million; Penelec $15 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 $35 million and $50 million (JCP&L $20 million - $25 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.
Financing
GPU, Inc. has received SEC approval to issue and sell up to $300 million of unsecured debentures through December 31, 2001 and up to seven million shares of additional common stock through 1998. GPU, Inc. has no current plans to issue these securities. Any sale of such securities will, among other things, depend upon future capital requirements and market conditions.
As a result of Pennsylvania legislation (see Competitive Environment section), Met-Ed and Penelec each plan to sell securitized transition bonds through a separate trust or other similar entity, and would use the proceeds to reduce capitalization and further mitigate stranded costs resulting from customer choice. The timing and amount of any sale will depend upon PaPUC approval of restructuring plans, as well as market conditions.
The GPU Energy companies have regulatory authority to issue and sell first mortgage bonds (FMBs), including secured medium-term notes, and preferred stock through various periods into 1997. JCP&L and Penelec intend to seek regulatory approval to extend such authorizations through June 1999. Under existing authorizations, JCP&L, Met-Ed and Penelec may issue these senior securities in aggregate amounts of $145 million, $190 million and $120 million, respectively, of which up to $100 million for each company 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 1996, the GPU Energy companies issued an aggregate of $120 million (JCP&L $80 million; Penelec $40 million) principal amount of FMBs. The proceeds from these issuances were used to repay short-term debt and for other corporate purposes. The GPU Energy companies redeemed $115.7 million (JCP&L $25.7 million; Met-Ed $15 million; Penelec $75 million) principal amount of FMBs with 1996 maturities.
Also in 1996, JCP&L redeemed $20 million stated value of cumulative preferred stock pursuant to mandatory and optional sinking fund provisions. In December 1996, Met-Ed and Penelec repurchased an aggregate of $11.4 million stated value and $20 million stated value, respectively, of cumulative preferred stock, through cash tender offers, at a total cost of approximately $7.7 million and $14.4 million, respectively.
In January 1997, JCP&L redeemed an aggregate of $54.2 million principal amount of FMBs, of which $24.2 million were redeemed prior to maturity.
GPU, Inc. and Subsidiary Companies
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.
GPU's cost of capital and ability to obtain external financing are affected by its 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 good to high credit quality.
The Standard & Poor's (S&P) rating outlook is used to assess the potential direction of an issuer's long-term debt rating over the intermediate to longer-term. The rating outlook for the GPU Energy companies remained constant in 1996. Met-Ed's "positive" rating outlook reflects expectations of steady financial improvement based on economic growth, the successful buyout of expensive NUG contracts, and continued strong nuclear operations. JCP&L's and Penelec's "stable" rating outlooks reflect manageable construction programs, minimal rate relief requirements and expectations of modest strengthening in the service area economies. The S&P business position is a financial benchmarking standard for rating the debt of electric utilities to reflect the changing risk profiles resulting primarily from the intensifying competitive pressures in the industry. The business position currently assigned to the GPU Energy companies is "low average" to "average"; in 1996, the business position for Met-Ed was raised to "average."
Present plans call for the GPU Energy companies to issue long-term debt during the next three years to finance construction activities, fund the redemption of maturing senior securities, and depending on interest rates, refinance outstanding senior securities. In addition, further significant investments by the GPU International Group, or otherwise, may require GPU, Inc. to issue additional debt and/or common stock (see GPU International Group section for a discussion of GPU, Inc.'s remaining investment authorization).
In 1996, GPU Electric, through its wholly-owned subsidiary EI UK, entered into a five-year term loan agreement with a syndicate of banks which provides for borrowings of up to 350 million pounds. As of December 31, 1996, EI UK had aggregate borrowings outstanding under the GPU, Inc. guaranteed term loan of 342 million pounds, or approximately U.S. $586 million. The proceeds from these borrowings were used by EI UK to fund the acquisition of Midlands.
Also in 1996, GPU International, through a wholly-owned subsidiary, completed nonrecourse construction financing for its 300 MW Mid-Georgia project. As of December 31, 1996, GPU International had aggregate borrowings outstanding for the construction of this project of $62 million, of which $22 million is guaranteed by GPU, Inc.
GPU, Inc. and Subsidiary Companies
Capitalization
GPU's target capitalization ratios are designed to provide credit quality ratings that permit capital market access at reasonable costs. The targets and actual capitalization ratios are as follows:
GPU Target Range 1996 1995 1994 Common equity 45-48% 43% 47% 44% Preferred equity 7-9 7 9 8 Notes payable and long-term debt 48-43 50 44 48 100% 100% 100% 100%
JCP&L Target Range 1996 1995 1994 Common equity 48-51% 48% 49% 47% Preferred equity 8-10 9 10 7 Notes payable and long-term debt 44-39 43 41 46 100% 100% 100% 100%
Met-Ed Target Range 1996 1995 1994 Common equity 47-50% 48% 47% 46% Preferred equity 8-10 8 9 10 Notes payable and long-term debt 45-40 44 44 44 100% 100% 100% 100%
Penelec Target Range 1996 1995 1994 Common equity 45-48% 45% 45% 43% Preferred equity 8-10 7 9 9 Notes payable and long-term debt 47-42 48 46 48 100% 100% 100% 100%
In 1996, the quarterly dividend on GPU, Inc.'s common stock was increased by 3.2% to an annualized rate of $1.94 per share. GPU, Inc.'s payout rate in 1996 was 62% of earnings (excluding the nonrecurring items). Management will continue to review GPU, Inc.'s dividend policy to determine how to best serve the long-term interests of shareholders.
COMPETITIVE ENVIRONMENT
The GPU Energy companies estimate that their total potential above market costs relating to power purchase commitments, above market generation costs, generating plant decommissioning costs and regulatory assets at year end 1998, on a present value basis, could range from $4.5 billion to $8 billion (JCP&L $2.5 billion to $4 billion; Met-Ed $1 billion to $2 billion; Penelec $1 billion to $2 billion). The estimate is subject to significant uncertainties including the future market price of both electricity and other competitive
GPU, Inc. and Subsidiary Companies
energy sources, as well as the timing of when these above market costs become stranded due to customers choosing another supplier. As discussed below, both 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.
Recent Regulatory Actions
Since the enactment of the federal Public Utility Regulatory Policies Act of 1978 (PURPA), market forces combined with state and federal actions have led to increased competition in the electric utility industry. During 1996, state and federal actions continued to move the electric utility industry in this direction.
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, and all retail consumers by January 1, 2001. The legislation requires the unbundling of rates for transmission, distribution and generation services. Utilities would have the opportunity to recover up to 100% of 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 14 to GPU's 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.
Pennsylvania electric utilities are required to submit restructuring plans to the PaPUC between April 1, 1997 and September 30, 1997. Met-Ed and Penelec are scheduled to file their respective plans with the PaPUC on June 1, 1997. The PaPUC is required to conduct public hearings prior to its approval of these plans.
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 and the PaPUC will ensure that adequate electrical reserves exist to maintain reliable service. An independent system operator (ISO) will be responsible for coordinating the generation and transmission of electricity in an efficient and nondiscriminatory manner.
GPU, Inc. and Subsidiary Companies
As part of this restructuring, Met-Ed and Penelec filed, in December 1996, tariff supplements with the PaPUC requesting approval to, among other things, include their currently effective energy cost rates (ECR) and state tax adjustment surcharges (STAS) in base rates, effective for all bills rendered after January 1, 1997. The PaPUC has issued a tentative order approving this request. Since rates that can be charged to customers for generation are capped for up to nine years, Met-Ed's and Penelec's future earnings will be subject to market volatility. Increases or decreases in fuel costs will no longer be subject to deferred accounting and will be 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. As a result of including their ECRs in base rates and the cessation of deferred energy accounting, both effective January 1, 1997, Met-Ed and Penelec will experience step increases in reported revenues totaling approximately $25 million (Met-Ed $10 million; Penelec $15 million) in the first quarter of 1997.
The PaPUC has also issued a final order that sets forth the guidelines for retail access pilot programs in Pennsylvania. These pilot programs shall 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. Met-Ed and Penelec expect to file with the PaPUC in the first quarter of 1997 their plan for a proposed pilot program that would offer certain customers choice of their electric generation supplier.
In January 1997, the New Jersey Board of Public Utilities (NJBPU) released Phase II of the New Jersey Energy Master Plan which recommends, among other things, that certain electric retail customers be permitted to choose their supplier beginning October 1998, expanding to include all retail customers by April 2001. The NJBPU also recommends a near-term electric rate reduction of 5% to 10% with the phase in of retail competition, and combined with the effects of separate proposed modifications to the state's energy tax policy, an aggregate rate reduction of at least 10% to 15% over time.
The NJBPU proposes in this report 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 will 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 guarantee 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% 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 to 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, who would be responsible for
GPU, Inc. and Subsidiary Companies
maintaining the reliability of the regional power grid and would be regulated by the Federal Energy Regulatory Commission (FERC).
The NJBPU intends to issue its final findings and recommendations to the Governor and the Legislature for their consideration in March 1997. The NJBPU proposes requiring electric utilities in New Jersey to file for review, by no later than July 15, 1997, complete restructuring plans, stranded cost filings and unbundled rate filings. The NJBPU intends to complete its review of these filings by October 1998.
JCP&L is awaiting NJBPU approval of a plan to establish a one-year pilot program offering customers in Monroe Township, New Jersey a choice of their electric energy supplier. At the end of the first year, Monroe Township will have the option of renewing the pilot. Monroe Township had been exploring the possibility of establishing its own municipal electric system.
In 1996, FERC issued Order 888, which requires utilities to provide open access to their transmission network, thereby encouraging a fully competitive wholesale electric power market. It also requires electric utilities to, among other things: (1) file nondiscriminatory open access transmission tariffs which would be available to all wholesale sellers and buyers of electricity; (2) accept service under these new tariffs for their own wholesale transactions; and (3) be permitted to recover their legitimate and verifiable stranded costs incurred when a wholesale customer purchases power from another supplier using the utility's transmission system. While it does not require corporate unbundling, which the FERC defines as the disposing of ancillary services or creating separate affiliates to manage transmission services, Order 888 does call for functional unbundling of transmission and ancillary services.
In July 1996, the GPU Energy companies filed pro forma tariffs in accordance with Order 888. These tariffs became effective on July 9, 1996.
In 1996, the GPU Energy companies, along with six other electric utility members of the PJM Power Pool (together, the supporting PJM companies), filed with the FERC a transmission tariff and agreements that would create a new wholesale energy market to meet the requirements of Order 888, and to increase competition in the Mid-Atlantic region. The Mid-Atlantic energy agreements include: (1) the requirements and standards under which an ISO will operate the energy market and transmission system; (2) a transmission owners agreement and tariff that provides pool-wide transmission service with ten zones, each reflecting an existing PJM company's transmission costs, and an average transmission rate for service across or out of the power pool; (3) establishment of a Mid-Atlantic spot energy market; and (4) requiring the ownership of, or contracting for, sufficient transmission and generation capacity, including the sharing of generating capacity reserves, to meet reliability requirements. The proposed PJM tariff and agreements would supersede the tariffs filed by the GPU Energy companies in July 1996. PECO Energy Company (PECO), which opposes the supporting PJM companies' proposed restructuring plan, has filed its own plan with the FERC.
A number of parties, including PECO, have intervened in this proceeding. Among other things, the interveners contend that the proposal would leave
GPU, Inc. and Subsidiary Companies
excessive control of the transmission system to the PJM member utilities and that the plan's ten zone transmission pricing is anticompetitive and preserves utility market power.
In a November 1996 order the FERC directed the PJM companies to develop a new ISO proposal. According to the FERC, the proposals failed to satisfy Order 888, particularly the requirement that ISOs be independent. Among other things, the FERC noted that all stakeholders should participate in the formation of an ISO, no party should exercise undue influence on its board of directors, and no administrative oversight committee should control the actions of the ISO, which should be able to develop its own operating procedures. In December 1996, the PJM companies, including PECO, submitted to the FERC a joint filing they believe is in compliance with Order 888. The joint filing represents an interim solution and contains several unresolved issues for which alternate proposals were presented to the FERC for resolution. The joint filing includes a pool-wide pro forma tariff and amendments to the PJM Interconnection Agreement to modify membership and governance provisions.
As part of the joint compliance filing, the supporting PJM companies and PECO filed separate briefs supporting their positions on a number of other unresolved issues involving PJM restructuring, principally concerning transmission tariff design and congestion pricing. The PJM companies hope to reach consensus among themselves and with other stakeholders on all the issues and file a new pro forma tariff and other agreements by no later than May 31, 1997.
In January 1997, legislation was introduced in Congress which provides for a comprehensive restructuring of the electric utility industry, including, retail choice for all utility customers beginning December 2003, the opportunity for utilities to recover their prudently incurred stranded costs, and repeal of both PURPA and the Public Utility Holding Company Act. It is expected that other similar proposed legislation will be introduced in Congress during 1997.
Managing the Transition
As competition in the electric utility industry increases, the price of electricity and quality of customer services will be critical. GPU has been active both on the federal and state levels in helping to shape electric industry restructuring while protecting 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.
GPU has identified the following strategic objectives to guide it over the next several years: (1) strengthen and expand the distribution business; (2) maximize existing generation asset values consistent with competitive market economics; (3) internally and externally position GPU for industry deregulation and restructuring; and (4) seek earnings growth from new core- related business initiatives, including making investments in the GPU International Group.
GPU, Inc. and Subsidiary Companies
As part of its strategic planning, 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 equity (see GPU International Group section for a discussion of GPU, Inc.'s remaining investment authorization). GPU believes it can achieve earnings growth by making these kinds of investments and also gain operating experience in businesses that are already operating in a competitive environment.
While GPU recognizes that there are risks inherent in making these investments and that investment risk cannot be mitigated entirely, GPU believes the best long-term approach to managing these risks is through portfolio diversification. GPU's diversification policy is to reduce its overall investment risk by: (1) investing in diverse electric businesses; (2) achieving a balance between new development and construction of electric facilities, and acquisitions of assets already in operation (thereby producing near-term earnings without significant development or construction risk); and (3) investing in diverse geographic regions.
In 1996, 493 bargaining employees (JCP&L 265; Met-Ed 90; Penelec 133; Other 5) and 347 nonbargaining employees (JCP&L 76; Met-Ed 73; Penelec 32; Other 166) accepted voluntary enhanced retirement programs, resulting in an 8% reduction in GPU's total workforce and a third quarter pre-tax charge to earnings of $122.7 million (JCP&L $62.9 million; Met-Ed $26.2 million; Penelec $33.6 million). GPU funded the cost of these retirement programs in 1996.
In response to competitive forces and regulatory changes, GPU has from time to time considered, and expects to continue to consider, various strategies designed to enhance its competitive position and to increase its ability to adapt to, and anticipate changes in, its business. GPU is aware that a number of nonaffiliated utilities in the Northeast and in California are in the process of selling some or all of their generation assets in response to regulatory and competitive pressures.
The GPU Energy companies are continually evaluating the future financial viability of their nuclear and fossil generation assets and will retire or otherwise attempt to dispose of plants that become uneconomical. In 1996, JCP&L retired its 58 MW Werner Unit 4 and 72 MW Gilbert Unit 3 generating plants because of high operating costs. See the Rate Matters section regarding the recovery of JCP&L's remaining investment in these plants.
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 above, 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 transaction of the type described above may actually occur, or as to the ultimate effect thereof on the financial condition or competitive position of GPU.
GPU, Inc. and Subsidiary Companies
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 periods of up to 26 years (JCP&L 25 years; Met-Ed 26 years; Penelec 25 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, 1996, facilities covered by these agreements having 1,631 MW (JCP&L 891 MW; Met-Ed 340 MW; Penelec 400 MW) of capacity were in service.
Due to the current availability of excess capacity in the marketplace, the cost of near- to intermediate-term (i.e., one to four years) energy supply from generation facilities now in service is currently and is expected to continue to be priced below the costs of new supply sources, at least for some time. 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.
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).
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 the Competitive Environment section.
In 1996, the NJBPU approved a provisional settlement for a combined levelized energy adjustment clause (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.
Also in 1996, JCP&L, the staff of the NJBPU and the Division of Ratepayer Advocate reached an agreement on a variety of pending rate-related issues (Final Settlement). An Administrative Law Judge (ALJ) issued a decision recommending approval of the Final Settlement, but the NJBPU ordered additional evidentiary hearings on the recovery of buyout costs for the Freehold cogeneration project discussed below (see Managing Nonutility Generation section). In December 1996, the ALJ issued a further decision recommending that recovery of the Freehold buyout costs be approved, subject to possible revocation or modification, if it is determined that the project
GPU, Inc. and Subsidiary Companies
was not viable when it was bought out. On December 31, 1996, an Addendum revising the Final Settlement was agreed upon by JCP&L, the staff of the NJBPU and the Division of Ratepayer Advocate. In January 1997, the NJBPU staff recommended that rate recovery of the Freehold buyout costs be permitted. JCP&L expects the NJBPU to issue an order in the first quarter of 1997 approving the Final Settlement as revised. There can be no assurance as to the outcome of this proceeding.
Provisions of the Final Settlement, as revised by the Addendum, include a further annual increase of $7 million in the LEAC in addition to those noted above and an annual reduction of $11 million in base rates. Base rates would be frozen at that level until the year 2000, and the LEAC rate frozen through the year 1999. JCP&L could seek a LEAC rate increase if the deferred LEAC 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 OPEB 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 (see Nuclear Plant Retirement Costs section of Note 14 to GPU's Consolidated Financial Statements). Also, included in base rates would be 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.
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; 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 the second quarter of 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 would not have 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 would 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 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
GPU, Inc. and Subsidiary Companies
Competitive Environment section). As the GPU Energy companies prepare to operate in a competitive environment, its supply planning strategy is being modified. One planning effort is focused on providing for the needs of existing retail customers who continue to receive energy supplied by the GPU Energy companies and to whom the GPU Energy companies will continue to have an obligation to serve. The second planning effort will focus on those new customers who may choose the GPU Energy companies as their alternative supplier.
Over the next five years, the GPU Energy companies' existing franchise service territories are expected to experience an average annual growth in sales of about 1.7% (JCP&L 1.7%; Met-Ed 1.9%; Penelec 1.7%), principally due to continued economic growth and a slight increase in the number of customer. To be able to meet this growth, if necessary, actual and projected capacity and sources of energy are as follows:
Capacity 1996 2001 MW % MW % Coal 3,024 29 2,746 25 Nuclear 1,405 13 1,405 13 Gas, hydro & oil 2,177 21 2,082 19 Contracted purchases 3,901 37 3,763 34 Uncommitted sources - - 1,021 9 Total 10,507 100 11,017 100
Sources of Energy 1996 2001 GWH % GWH % Coal 18,133 36 18,581 36 Nuclear 11,439 23 10,338 20 Gas, hydro & oil 812 2 855 2 Contracted purchases 16,365 32 18,226 36 Spot market & interchange purchases 3,476 7 3,279 6 Total 50,225 100 51,279 100
In response to this competitive climate in which it is likely a major portion of the GPU Energy companies' existing customer base will be able to choose their electric generation supplier, and the surplus capacity position of nearby utilities, the GPU Energy companies' supply plan focuses increasingly on short- to intermediate-term commitments, reliance on "spot" market purchases, and avoidance of long-term firm commitments. The GPU Energy companies' present strategy includes minimizing the financial exposure associated with new long-term purchase commitments and the construction of new facilities by evaluating these options in terms of an unregulated power market. As part of this strategy, the GPU Energy companies are continually evaluating the future financial viability of their nuclear and fossil generation assets and will retire or otherwise dispose of plants that become uneconomical. The GPU Energy companies intend to take necessary actions to avoid adding new capacity which would result in costs that may exceed future market prices. In addition, the GPU Energy companies intend to continue to
GPU, Inc. and Subsidiary Companies
seek regulatory support to renegotiate or buy out contracts with NUGs where the pricing is in excess of projected market prices.
New Energy Supplies
The GPU Energy companies' supply plan includes contracted capacity from NUGs, the replacement of expiring utility purchase contracts, the construction of new peaking units, and the continued promotion of economic energy-conservation and load-management programs. The supply plan also includes the addition of approximately 1,021 MW (JCP&L 816 MW; Met-Ed 78 MW; Penelec 127 MW) of currently uncommitted capacity.
JCP&L has constructed a 141 MW gas-fired combustion turbine at its Gilbert generating station at a cost of approximately $50 million. The facility was placed in service in July 1996.
In January 1996, JCP&L issued an all-supply source solicitation for the supply of energy and capacity to meet its forecasted needs. In October 1996, four potential suppliers were selected to provide capacity for four years, beginning in June 1999. Contract negotiations are currently in progress to provide for firm and optional purchases of capacity and energy from sources in New Jersey, Pennsylvania and New York.
The GPU Energy companies will continue to evaluate additional economic purchase opportunities as both demand and supply market conditions evolve. If warranted, the GPU Energy companies will conduct further solicitations to fill a part of their uncommitted supply needs.
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 1996, JCP&L entered into an agreement with Freehold Cogeneration Associates (Freehold), the developer of a proposed 110 MW gas-fired cogeneration project, that terminates JCP&L's long-term obligation to purchase power from the project. JCP&L expects that the buyout will save customers $1.1 billion over the term of the power purchase contract based on the projected cost of alternative sources of energy. JCP&L has agreed to pay Freehold $125 million, of which $65 million was paid in 1996 and the remainder to be paid over a three-year period. Associated with this buyout are certain payments to third parties, which could be material in amount. As part of the Final Settlement (see Rate Matters section), JCP&L would recover buyout costs of up to $130 million, and 50% of any costs from $130 million to $140 million,
GPU, Inc. and Subsidiary Companies
over a seven-year period.
In October 1996, JCP&L was named as a defendant in a breach of contract lawsuit against Freehold brought by Nestle Beverage Company (Nestle) in New Jersey Superior Court. Nestle is seeking damages of at least $75 million for Freehold's alleged breach of the steam sales agreement and approximately $412 million in damages against JCP&L for alleged unlawful interference with that agreement. Nestle has also requested punitive damages in an unspecified amount. JCP&L believes the claims against it are without merit (see Other Commitments and Contingencies section of Note 14 to GPU's Consolidated Financial Statements).
In February 1997, Met-Ed and Penelec entered into restructured power purchase agreements with AES Power Corporation (AES) for 377 MW and 80 MW, respectively, relating to a gas-fired combined-cycle facility that AES plans to construct in Southeastern Pennsylvania. In 1996, AES purchased the interests of the developers of the proposed Altoona, Blue Mountain and York County NUG facilities and plans to construct a single fully dispatchable NUG facility. The restructured power purchase agreements, which are subject to PaPUC approval, are for an initial eight-year term, with options for extensions. Met-Ed has paid $63.5 million to terminate the power purchase agreements it had for the Blue Mountain and York County facilities. If the restructured 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 $8.3 million, respectively. Met-Ed has received approval to recover up to $35 million in buyout costs for the proposed York County project through its ECR over three years, beginning in 1997 and intends to seek recovery of buyout costs for the Blue Mountain project.
Penelec also entered into an agreement in 1996 with the developer of a proposed 80 MW coal-fired cogeneration facility that was to be built in western Pennsylvania. Under the agreement, Penelec paid the developer $11.7 million to cancel the project and both parties agreed to attempt to negotiate a new, competitively priced power purchase agreement. In November 1996, the power purchase agreement was amended to provide for a fully dispatchable gas-fired combined-cycle cogeneration facility. The agreement, which is subject to PaPUC approval, is for an initial eight-year term, with options for extension. Penelec intends to seek recovery of the $11.7 million in buyout costs.
In December 1996, Met-Ed and Penelec requested PaPUC approval to, among other things, include their currently effective ECR in base rates including NUG buyout costs already in the ECR, effective January 1, 1997, and defer for possible future rate recovery NUG buyout costs not yet reflected in rates. In January 1997, the PaPUC issued a tentative order approving this request. For additional information, see the Competitive Environment section.
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
GPU, Inc. and Subsidiary Companies
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 $277 million (JCP&L $46 million; Met-Ed $117 million; Penelec $114 million) for air pollution control equipment by the year 2000, of which approximately $240 million (JCP&L $43 million; Met-Ed $95 million; Penelec $102 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. The GPU Energy companies expect that the U.S. Environmental Protection Agency (EPA) will approve state implementation plans consistent with the proposal, and that as a result, they will spend an estimated $17 million (JCP&L $1 million; Met-Ed $9 million; Penelec $7 million) (included in the Clean Air Act total), beginning in 1997, 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 (NAAQS) for ozone. However, the specific requirements that will have to be met at that time have not been finalized. In addition, the EPA has recently proposed changes to the NAAQS for ozone, particulate matter and regional haze. The GPU Energy companies are unable to determine what additional costs, if any, will be incurred.
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 and NOx emission allowance 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 14 to GPU's 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 plaintiffs have appealed the District Court's ruling to the Court of Appeals for the Third Circuit. There can be no assurance as to the outcome of this litigation. For more information, see the Nuclear Facilities section of Note 14 to GPU's Consolidated Financial Statements.
GPU, Inc. and Subsidiary Companies
EFFECTS OF INFLATION
As competition and deregulation accelerate, there can be no assurance as to the future recovery of increased operating expenses or utility plant investments through traditional ratemaking. As a result, the GPU Energy companies are focusing less on the ratemaking process, and are actively trying to find new ways to increase revenues, improve performance and reduce operating costs to facilitate the competitive pricing of their products and services.
ACCOUNTING MATTERS
In June 1996, the Financial Accounting Standards Board issued Financial Accounting Standard No. 125 (FAS 125), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which is effective for transactions occurring after December 31, 1996. The accounting for the GPU Energy companies' securitization of stranded costs is expected to be covered by this statement. In February 1997, the staff of the SEC Chief Accountant's Office concluded that in applying FAS 125 with respect to several California utilities' securitization plans, the enforceable right of these utilities to recover the cost of their "stranded assets" was not a contractual right and therefore not a financial asset as defined by FAS 125. Under this basis, a utility would not be able to remove the related "stranded assets" from its balance sheet. The accounting for securitizations by other utilities will be based on specific facts and circumstances of the individual utility, including the legislation enacted in its state and the particular securitization structure.
GPU, Inc. and Subsidiary Companies
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors GPU, Inc. Parsippany, 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 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. Those 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, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 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 5, 1997
GPU, Inc. and Subsidiary Companies
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GPU, Inc. (formerly General Public Utilities Corporation), 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). In 1996, the customer service, transmission and distribution operations of these electric utilities began doing business under the name GPU Energy. JCP&L, Met-Ed and Penelec considered together are referred to as the "GPU Energy companies." The fossil-fuel and hydroelectric generating facilities owned by these utilities are operated and maintained by GPU Generation, Inc. (Genco), and the nuclear generating units are operated and maintained by GPU Nuclear, Inc. (GPUN). GPU, Inc. also owns all of the common stock of GPU International, Inc., GPU Power, Inc. and GPU Electric, Inc. These three companies (collectively, the GPU International Group) develop, own and operate generation, transmission and distribution facilities and supply businesses in the United States and in foreign countries. GPU Service, Inc. (GPUS), a service company, is also a wholly-owned subsidiary of GPU, Inc. 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- owned subsidiaries and any affiliates in which it has a controlling financial
GPU, Inc. and Subsidiary Companies
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 7, GPU International 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 14, 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 GPU International 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 not material and are included in Retained Earnings. Gains and losses resulting from foreign currency transactions are included in Net Income.
REVENUES
The GPU Energy companies recognize electric operating revenues for services rendered (including an estimate of unbilled revenues) to the end of the relevant accounting period.
GPU, Inc. and Subsidiary Companies
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, 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 the GPU Energy companies 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
1996 3.31% 3.58% 3.27% 2.82% 1995 3.22% 3.64% 3.07% 2.61% 1994 3.16% 3.62% 3.04% 2.49%
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFUDC)
The Uniform System of Accounts defines AFUDC as "the net cost for the period of construction of borrowed funds used for construction purposes and a reasonable rate on other funds when so used." AFUDC is recorded as a charge to construction work in progress, and the equivalent credits are to interest charges for the 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, Inc. and Subsidiary Companies
GPU JCP&L Met-Ed Penelec
1996 6.79% 6.88% 8.11% 6.15% 1995 8.05% 8.04% 8.62% 7.78% 1994 6.45% 5.35% 7.31% 7.19%
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, 1996, $81 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 carrying charges that are accrued as the asset is written up from its discounted value, is recorded in Other Income/(Expense), 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:
Nuclear fuel is amortized 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, 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 $34 million (JCP&L $22 million; Met-Ed $8 million; Penelec $4 million), 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, 1996, $36 million (JCP&L $23 million; Met-Ed $9 million; Penelec $4 million) was recorded on the Consolidated Balance Sheets in Regulatory assets-Other.
Intangibles:
The GPU International Group records goodwill for any amount paid over the fair value of net assets it acquires, and other intangible assets for the right to perform management services. As of December 31, 1996 and 1995, the GPU International Group had goodwill and other intangibles, net of accumulated amortization, of approximately $24 million and $32 million, respectively. Goodwill and other intangibles are amortized on a straight-line basis over a
GPU, Inc. and Subsidiary Companies
period of 40 years. Amortization expense, in the aggregate, amounted to $0.8 million and $0.9 million for the years ended December 31, 1996 and 1995, respectively. The GPU International 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.
Goodwill related to the GPU International Group's purchase of Midlands Electricity plc and the other investments accounted for under the equity method is discussed in Note 6, Acquisition of Midlands Electricity plc and Note 7, GPU International 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, 1996, all of which relates to spent nuclear fuel from nuclear generation through April 1983, amounted to $171 million (JCP&L $128 million; Met-Ed $29 million; Penelec $14 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 $21.6 million (JCP&L $23.3 million; Met-Ed $(1.2) million; Penelec $(0.5) million) at December 31, 1996 in Regulatory assets - Other. The rates presently charged to customers provide for the collection of these costs, plus interest, over remaining periods of 10 years for JCP&L and Met-Ed and one year for Penelec.
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 14, 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.)
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
GPU, Inc. and Subsidiary Companies
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, 1996, the Consolidated Balance Sheets included $47 million in restricted cash, related to the GPU International Group'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.
GPU has $527 million of credit facilities, including 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 and acceleration under certain circumstances. The agreement expires May 6, 2001, and a commitment fee on the unborrowed amount of 1/8 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 December 1997 of up to $30 million outstanding at any time, which decreases for two years thereafter. Up to $15 million may be borrowed in the form of letters of credit. An annual commitment fee of 3/8 of 1% on unborrowed amounts and a letter of credit fee of 1/2 of 1% are payable by GPU International, Inc.
GPU, Inc. and Subsidiary Companies
3. LONG-TERM DEBT
At December 31, 1996 and 1995, long-term debt outstanding was as follows:
GPU, Inc. and Subsidiary Companies
At December 31, 1996, the GPU International Group had long-term debt outstanding of approximately $752 million (included in the table above under "Other long-term debt"). Of this amount, approximately $680 million was guaranteed by GPU, Inc. The guaranteed amount consisted of the following: 342 million pounds (approximately U.S. $586 million at December 31, 1996) under a bank term loan facility used to fund EI UK Holdings, Inc.'s investment in Avon Energy Partners Holdings (see Note 6); A$90 million (approximately U.S. $72 million at December 31, 1996 and U.S. $68 million at December 31, 1995) through a bank term loan facility used to fund a GPU Electric, Inc. subsidiary's purchase of its interest in Solaris Power; and approximately $22 million through a bank term loan facility used to fund a GPU International, Inc. subsidiary's investment in Mid-Georgia Cogen, L.P.
For the years 1997, 1998, 1999, 2000 and 2001, GPU has long-term debt maturities for first mortgage bonds and other long-term debt as follows: (in millions) Company 1997 1998 1999 2000 2001
JCP&L $100 $ - $ - $ 40 $ 40 Met-Ed 40 - 30 50 - Penelec 26 30 - 30 50 GPU International Group 3 97 3 589 3 GPUS - - - - 35 Total $169 $127 $ 33 $709 $128
The estimated fair value of GPU's long-term debt, as of December 31, 1996 and 1995 was as follows:
(in thousands) 1996 1995 Carrying Fair Carrying Fair Amount Value Amount Value
JCP&L $1,173,091 $1,177,544 $1,192,945 $1,260,502 Met-Ed 563,252 567,075 603,268 644,838 Penelec 656,459 640,274 642,487 677,564 GPU International Group 749,214 742,126 101,698 101,698 GPUS 35,000 35,000 27,500 27,500 Total $3,177,016 $3,162,019 $2,567,898 $2,712,102
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.
4. 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,
GPU, Inc. and Subsidiary Companies
respectively, which, in turn, issued their deferrable interest subordinated debentures to the partnerships. The following issues of Preferred Securities were outstanding at December 31, 1996 and 1995:
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, 1996 and 1995 was $337 million (JCP&L $127 million; Met-Ed $103 million; Penelec $107 million) and $347 million (JCP&L $131 million; Met-Ed $106 million; Penelec $110 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 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. CAPITAL STOCK
At December 31, 1996 and 1995, GPU had the following issues of capital stock outstanding:
GPU, Inc.
Common stock, par value $2.50 a share; 350,000,000 shares authorized in both 1996 and 1995; 125,783,338 shares issued in both 1996 and 1995; and 120,611,137 and 120,423,341 shares outstanding in 1996 and 1995, respectively (a), (b), (c)
(in thousands) 1996 1995
Common Stock $314,458 $314,458
GPU, Inc. and Subsidiary Companies
JCP&L
Cumulative preferred stock, without par value, 15,600,000 shares authorized, 1,615,000 and 1,815,000 shares issued and outstanding in 1996 and 1995, respectively (f): (in thousands) 1996 1995 Cumulative preferred stock - without mandatory redemption (g): 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 (d), (e), (h): 8.48% Series I, 300,000 shares in 1996 and 500,000 shares in 1995 $ 30,000 $ 50,000 8.65% Series J, 500,000 shares 50,000 50,000 7.52% Series K, 440,000 shares 44,000 44,000 Subtotal 124,000 144,000 Amount due in one year (h) (10,000) (10,000) Total cumulative preferred stock - with mandatory redemption $114,000 $134,000
Common stock, par value $10 a share, 16,000,000 shares authorized, 15,371,270 shares issued and outstanding $153,713 $153,713
Met-Ed
Cumulative preferred stock, without par value, 10,000,000 shares authorized, 119,475 and 233,912 shares issued and outstanding in 1996 and 1995, without mandatory redemption (f), (g), (i): (in thousands) 1996 1995 3.90% Series, 64,384 shares in 1996 and 117,729 shares in 1995, callable at $105.625 a share $ 6,439 $ 11,773 4.35% Series, 22,517 shares in 1996 and 33,429 shares in 1995, callable at $104.25 a share 2,252 3,325 3.85% Series, 9,252 shares in 1996 and 29,175 shares in 1995, callable at $104.00 a share 925 2,917 3.80% Series, 7,982 shares in 1996 and 18,122 shares in 1995, callable at $104.70 a share 798 1,812 4.45% Series, 15,340 shares in 1996 and 35,637 shares in 1995, callable at $104.25 a share 1,534 3,564 Subtotal 11,948 23,391 Premium on cumulative preferred stock 108 207 Total cumulative preferred stock $ 12,056 $ 23,598
Common stock, no par value, 900,000 shares authorized, 859,500 shares issued and outstanding $ 66,273 $ 66,273
GPU, Inc. and Subsidiary Companies
Penelec Cumulative preferred stock, without par value, 11,435,000 shares authorized, 167,485 and 365,000 shares issued and outstanding in 1996 and 1995, no mandatory redemption (f), (g), (i):
(in thousands) 1996 1995 4.40% Series B, 29,678 shares in 1996 and 56,810 shares in 1995, callable at $108.25 per share $ 2,968 $ 5,681 3.70% Series C, 49,568 shares in 1996 and 97,054 shares in 1995, callable at $105.00 per share 4,957 9,705 4.05% Series D, 28,219 shares in 1996 and 63,696 shares in 1995, callable at $104.53 per share 2,822 6,370 4.70% Series E, 14,103 shares in 1996 and 28,739 shares in 1995, callable at $105.25 per share 1,410 2,874 4.50% Series F, 17,081 shares in 1996 and 42,969 shares in 1995, callable at $104.27 per share 1,708 4,297 4.60% Series G, 26,836 shares in 1996 and 75,732 shares in 1995, callable at $104.25 per share 2,684 7,573 Subtotal 16,549 36,500 Premium on cumulative preferred stock 132 277 Total cumulative preferred stock $ 16,681 $ 36,777
Common stock, par value $20 per share, 5,400,000 shares authorized, 5,290,596 shares issued and outstanding $105,812 $105,812
Total - GPU. Inc. and Subsidiary Companies
(in thousands) 1996 1995 Cumulative preferred stock: With mandatory redemption $114,000 $134,000 Without mandatory redemption 66,478 $ 98,116 Total cumulative preferred stock $180,478 $232,116
(a) 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. No shares of common stock were reacquired in 1996, 1995 or 1994. In 1996, 1995 and 1994, under GPU Inc.'s Dividend Reinvestment Plan, capital surplus was credited $3.0 million, $2.7 million and $2.3 million, respectively, for shares sold. There were 5,172,201 and 5,359,997 reacquired shares outstanding at December 31, 1996 and 1995, respectively.
(b) In 1996, 1995 and 1994, pursuant to the 1990 Restricted Stock Plan, GPU, Inc. issued restricted units to officers representing rights to
GPU, Inc. and Subsidiary Companies
receive shares of common stock, on a one-for-one basis, at the end of the 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. The units are considered common stock equivalents and therefore are reflected in the computation of earnings per share shown on the income statement. The units accrue dividend equivalents on a quarterly basis, which are invested in additional equivalent units. In 1996, 1995 and 1994, GPU, Inc. awarded to plan participants 63,206, 83,600 and 34,595 restricted units, respectively. In 1996, 1995 and 1994, GPU, Inc. issued a total of 37,253, 30,558 and 6,275 shares, respectively, from previously reacquired shares. There were 258,705 and 195,499 restricted units outstanding at December 31, 1996 and 1995, respectively.
(c) 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 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.
(d) 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.
(e) During 1996, 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.
(f) At December 31, 1996 and 1995, the GPU Energy companies were authorized to issue 37,035,000 shares of cumulative preferred stock. If dividends
GPU, Inc. and Subsidiary Companies
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.
(g) The outstanding shares of preferred stock without mandatory redemption are callable at various prices above their stated values. At December 31, 1996, 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).
(h) The outstanding shares with mandatory redemption have the following redemption requirements over the next five years: $10.0 million in 1997; $12.5 million in 1998 and 1999; and $10.8 million in 2000 and 2001. The fair value of the preferred stock with mandatory redemption, based on market price quotations at December 31, 1996 and 1995, was $123.4 million and $146.6 million, respectively.
(i) 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 earnings per share of $0.08. During 1994, Met-Ed and Penelec redeemed their 7.68% (aggregate stated value of $35 million) and 8.36% (aggregate stated value of $25 million) cumulative preferred stock, respectively. Met-Ed's total redemption cost was $36 million, which resulted in a $1.2 million charge to Retained Earnings. Penelec's total cost of the redemption was $26 million, resulting in a $1.1 million charge to Retained Earnings.
6. ACQUISITION OF MIDLANDS ELECTRICITY PLC
In 1996, GPU, Inc. 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 1.7 billion pounds, or 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.
At December 31, 1996, EI UK has borrowed approximately 342 million pounds, or approximately U.S. $586 million, through a GPU, Inc. guaranteed five-year bank term loan facility, to fund its investment in Holdings. At December 31, 1996, Holdings has borrowed approximately 1.1 billion pounds, or approximately U.S. $1.8 billion, through a term loan and revolving credit facility to provide for the balance of the acquisition price.
Midlands supplies and distributes electricity to 2.2 million customers in England in an area with a population of five million. Midlands also owns a
GPU, Inc. and Subsidiary Companies
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 international generation projects and is pursuing additional international generation and transmission projects.
EI UK accounts for its 50% investment in Holdings using the equity method of accounting (see Note 7, GPU International Group Equity Investments). Accordingly, EI UK's investment is reported on the Consolidated Balance Sheets in GPU International Group investments, net, and its proportionate share of earnings from Holdings is reflected on the Consolidated Income Statements in Other Income and Deductions. EI UK has recorded its proportionate share of Holdings' income (from the Midlands' acquisition date), which is reflected in GPU's results of operations.
The acquisition of Midlands by Avon is accounted for under the purchase method of accounting. The total acquisition cost exceeds the preliminary estimated value of net assets by 1.4 billion pounds, or approximately U.S. $2.1 billion. This excess amount is considered goodwill and is amortized to expense on a straight-line basis over 40 years.
7. GPU INTERNATIONAL GROUP EQUITY INVESTMENTS
The GPU International Group has investments in joint ventures and affiliates involved in power production, transmission and distribution in the United States and foreign countries. The GPU International Group uses the equity method of accounting for its investments in which it has the ability to exercise significant influence. Brooklyn Energy, L.P. is being accounted for under the equity method of accounting in anticipation of a reduction of the percentage to 27%. Investments accounted for under the equity method follow: Ownership Investment Location of Operations Percentage
Brooklyn Energy, L.P. Canada 75% Avon Energy Partners Holdings (owns Midlands) 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% Lake Cogen, Ltd. United States 50% FPB Cogeneration Partners, L.P. United States 30% Termobarranquilla S.A. Colombia 29% Polsky Energy Corporation United States & Canada 25% Selkirk Cogeneration Partners, L.P. United States 19% EnviroTech Investment Fund United States 10% Ballard Generation Systems, Inc. Canada 6% Project Orange Associates, L.P. United States 4% OLS Power, L.P. United States 1%
Summarized financial information for the GPU International Group's equity investments (which are not consolidated in the financial statements), including both the GPU International Group's ownership interests and the non- ownership interests, is as follows:
GPU, Inc. and Subsidiary Companies
December 31, December 31, Balance Sheet Data (in thousands) 1996 1995
Current Assets $ 1,016,730 $ 248,012 Noncurrent Assets 5,761,593 1,962,238 Current Liabilities (1,207,038) (220,796) Noncurrent Liabilities (4,080,475) (1,693,669) Net Assets $ 1,490,810 $ 295,785
GPU International Group's Equity in Net Assets $ 735,763 $ 25,341
For the Year Ended December 31, Earnings Data (in thousands) 1996 1995
Revenues $ 1,869,038 $ 680,617 Operating Income $ 299,161 $ 102,817 Net Income/(Loss) $ 70,346 $ (140)
GPU International Group's Equity in Net Income/(Loss) $ 33,981 $ (3,597)
As of December 31, 1996 and 1995, the amount of investments accounted for under the equity method included goodwill, net of accumulated amortization, of approximately $23 million and $29 million, respectively, which is amortized to expense over periods not exceeding 40 years. Amortization expense amounted to $0.8 million for each of the years ended December 31, 1996 and 1995. In 1996, the GPU International Group recorded a net reduction of $5 million in goodwill attributed primarily to the sale of a partnership interest.
In addition, the GPU International Group's 50% ownership interest in Empresa Guaracachi, S.A., a Bolivian electric generating company, is accounted for as a consolidated entity in GPU's financial statements. The GPU International Group also has a 100% ownership interest in Mid-Georgia Cogen, L.P., a cogeneration facility under construction, which is currently accounted for as a consolidated entity in GPU's financial statements.
8. DERIVATIVE FINANCIAL INSTRUMENTS
The GPU International Group uses interest rate swap agreements as hedges to manage the risk of increases in interest rates. These swap agreements effectively convert variable-rate debt into fixed-rate debt. At December 31, 1996, these agreements covered approximately $329 million of debt and were scheduled to expire at various dates through 1998. Amounts paid and received under these agreements are recorded as adjustments to the interest expense of the underlying debt. During 1996, fixed interest expense exceeded variable- rate interest by approximately $0.6 million.
GPU, Inc. and Subsidiary Companies
9. INCOME TAXES
As of December 31, 1996 and 1995, 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) 1996 1995 Income Taxes Recoverable Through Future Rates: JCP&L $143 $135 Met-Ed 174 179 Penelec 210 214 Total $527 $528
Income Taxes Refundable Through Future Rates: JCP&L $ 33 $ 36 Met-Ed 23 25 Penelec 32 34 Total $ 88 $ 95
Summaries of the components of deferred taxes as of December 31, 1996 and 1995 are as follows:
GPU, Inc. and Subsidiary Companies:
(in millions) Deferred Tax Assets Deferred Tax Liabilities
1996 1995 1996 1995 Current: Current: Unbilled revenue $ 23 $ 23 Revenue taxes $ 12 $ 16 Other 9 (3) Total $ 32 $ 20
Noncurrent: Noncurrent: Unamortized ITC $ 88 $ 95 Liberalized Decommissioning 75 62 depreciation: Contributions in aid previously flowed of construction 24 23 through $ 292 $ 301 Other 146 150 future revenue Total $333 $330 requirements 203 209 Subtotal 495 510 Liberalized depreciation 859 817 Other 209 139 Total $1,563 $1,466
GPU, Inc. and Subsidiary Companies
JCP&L:
(in millions) Deferred Tax Assets Deferred Tax Liabilities
1996 1995 1996 1995 Current: Current: Unbilled revenue $ 18 $ 12 Revenue taxes $ 12 $ 16 Deferred energy 5 (3) Total $ 23 $ 9
Noncurrent: Noncurrent: Unamortized ITC $ 33 $ 36 Liberalized Decommissioning 32 26 depreciation: Contributions in aid previously flowed of construction 19 19 through $ 76 $ 77 Other 55 41 future revenue Total $139 $122 requirements 42 42 Subtotal 118 119 Liberalized depreciation 412 393 Forked River 9 11 Other 125 84 Total $664 $607
Met-Ed:
(in millions) Deferred Tax Assets Deferred Tax Liabilities
1996 1995 1996 1995 Noncurrent: Current: Liberalized Unbilled revenue $ 5 $ 6 depreciation: Other 2 2 previously flowed Total $ 7 $ 8 through $ 95 $100 future revenue Noncurrent: requirements 73 76 Unamortized ITC $ 24 $ 25 Decommissioning 28 23 Subtotal 168 176 Contributions in aid Liberalized of construction 2 2 depreciation 185 182 Other 31 41 Other 48 22 Total $ 85 $ 91 Total $401 $380
GPU, Inc. and Subsidiary Companies
Penelec: (in millions) Deferred Tax Assets Deferred Tax Liabilities
1996 1995 1996 1995 Current: Current: Unbilled revenue $ - $ 5 Deferred energy $ - $ 4
Noncurrent: Noncurrent: Unamortized ITC $ 32 $ 34 Liberalized Decommissioning 15 13 depreciation: Contributions in aid previously flowed of construction 3 3 through $119 $121 Other 17 29 future revenue Total $ 67 $ 79 requirements 89 91 Subtotal 208 212 Liberalized depreciation 239 229 Other 26 21 Total $473 $462
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) 1996 1995 1994
Net income $298 $440 $164 Preferred stock dividends 16 17 21 Gain on preferred stock reacquisition (9) - - Income tax expense 184 265 86 Book income subject to tax $489* $722 $271
Federal statutory rate 35% 35% 35% State tax, net of federal benefit 3 4 - Other - (2) (3) Effective income tax rate 38% 37% 32%
* Includes pre-tax foreign operations income of $58 million, of which $54 million relates to equity method investments, which is reflected in Other income, net in the Consolidated Statement of Income.
GPU, Inc. and Subsidiary Companies
Federal and state income tax expense is comprised of the following:
(in millions) 1996 1995 1994
Provisions for taxes currently payable: Domestic $108 $154 $162 Foreign 11 - - Total provision for taxes $119 $154 $162
Deferred income taxes: Liberalized depreciation 27 31 31 New Jersey revenue tax (3) (2) 32 Deferral of energy costs (8) 1 12 Foreign deferred taxes 7 - - Accretion income 5 5 11 Decommissioning (9) 71 (76) Voluntary Enhanced Retirement Programs (VERP) 15 24 (51) Nonutility generation contract buyout costs 41 15 - Other 2 (23) (21) Deferred income taxes, net 77 122 (62) Amortization of ITC, net (12) (11) (14) Income tax expense $184 $265 $ 86
The foreign taxes in the above table for 1996, which primarily relate to equity method investees, total $17 million ($10 million- Current; $7 million- Deferred), and are included in Other income, net in the Consolidated Statements of Income.
JCP&L:
The reconciliations from net income to book income subject to tax and from the federal statutory rate to combined federal and state effective tax rates are as follows: (in millions) 1996 1995 1994
Net income $156 $199 $163 Income tax expense 74 97 85 Book income subject to tax $230 $296 $248
Federal statutory rate 35% 35% 35% Other (3) (2) (1) Effective income tax rate 32% 33% 34%
GPU, Inc. and Subsidiary Companies
Federal and state income tax expense is comprised of the following:
(in millions) 1996 1995 1994
Provisions for taxes currently payable $ 70 $100 $ 50
Deferred income taxes: Liberalized depreciation 1 8 13 Nonutility generation contract buyout costs 22 6 - Gain/Loss on reacquired debt - - 6 New Jersey revenue tax (3) (2) 32 Deferral of energy costs (8) 1 9 Abandonment loss - Forked River (4) (4) (5) Nuclear outage maintenance costs 5 (6) 6 Accretion income 5 5 6 Unbilled revenue (5) (2) 2 Pension expense/VERP 4 3 (15) Other (6) (6) (12) Deferred income taxes, net 11 3 42 Amortization of ITC, net ( 7) ( 6) ( 7) Income tax expense $ 74 $ 97 $ 85
Met-Ed:
The reconciliations from net income to book income subject to tax and from the federal statutory rate to combined federal and state effective tax rates are as follows:
(in millions) 1996 1995 1994
Net income $ 69 $149 $ 1 Income tax expense 50 92 (9) Book income subject to tax $119 $241 $ (8)
Federal statutory rate 35% 35% 35% State tax, net of federal benefit 5 6 32 Amortization of ITC (2) (1) 22 Other 4 (2) 20 Effective income tax rate 42% 38% 109%
GPU, Inc. and Subsidiary Companies
Federal and state income tax expense is comprised of the following:
(in millions) 1996 1995 1994
Provisions for taxes currently payable $ 25 $ 23 $ 45
Deferred income taxes: Liberalized depreciation 10 10 6 Deferral of energy costs 5 - 6 Decommissioning (3) 46 (52) Pension expense/VERP 5 8 (15) Unbilled revenue - (4) 2 Nonutility generation contract buyout costs 14 8 - Other (4) 3 2 Deferred income taxes, net 27 71 (51) Amortization of ITC, net (2) (2) (3) Income tax expense $ 50 $ 92 $ (9)
Penelec:
The reconciliations from net income to book income subject to tax and from the federal statutory rate to combined federal and state effective tax rates are as follows: (in millions) 1996 1995 1994
Net income $ 70 $111 $32 Income tax expense 45 70 11 Book income subject to tax $115 $181 $43
Federal statutory rate 35% 35% 35% State tax, net of federal benefit 6 6 1 Other ( 2) ( 2) (10) Effective income tax rate 39% 39% 26%
Federal and state income tax expense is comprised of the following:
(in millions) 1996 1995 1994
Provisions for taxes currently payable $ 26 $ 28 $ 61
Deferred income taxes: Liberalized depreciation 8 12 12 Deferral of energy costs - - (3) Accretion income - - 5 Decommissioning (1) 21 (24) Pension expense/VERP 7 13 (21) Unbilled revenue 5 (2) - Nonutility generation contract buyout costs 5 - - Other (2) 1 (15) Deferred income taxes, net 22 45 (46) Amortization of ITC, net (3) (3) (4) Income tax expense $ 45 $ 70 $ 11
GPU, Inc. and Subsidiary Companies
In 1994, GPU and the Internal Revenue Service (IRS) reached an agreement to settle GPU's claim for 1986 that TMI-2 has been retired for tax purposes. The GPU Energy companies received net refunds totaling $17 million (JCP&L $4 million; Met-Ed $9 million; Penelec $4 million), which have been credited to their customers. Also in 1994, GPU received net interest from the IRS totaling $46 million (JCP&L $11.5 million; Met-Ed $23 million; Penelec $11.5 million), before income taxes, associated with the refund settlement, which was credited to income. The IRS has completed its examinations of GPU's federal income tax returns through 1992. The years 1993 through 1995 are currently being audited.
10. SUPPLEMENTARY INCOME STATEMENT INFORMATION
Maintenance expense and other taxes charged to operating expenses consisted of the following:
(in millions) 1996 1995 1994
Maintenance: JCP&L $120 $128 $132 Met-Ed 50 54 59 Penelec 65 71 80 Total Maintenance $235 $253 $271
Other Taxes: New Jersey Unit Tax (JCP&L) $208 $209 $204
Pennsylvania State Gross Receipts: Met-Ed $ 38 $ 35 $ 32 Penelec 40 39 38 Total $ 78 $ 74 $ 70
Real Estate and Personal Property: JCP&L $ 8 $ 8 $ 7 Met-Ed 8 7 6 Penelec 9 8 8 Total $ 25 $ 23 $ 21
Other: JCP&L $ 13 $ 10 $ 20 Met-Ed 15 13 14 Penelec 16 20 20 Total $ 44 $ 43 $ 54
Total Other Taxes $355 $349 $349
GPU, Inc. and Subsidiary Companies
The cost of services rendered to the GPU Energy companies by their affiliates is as follows:
(in millions) 1996 1995 1994
JCP&L: Cost of services rendered by GPUN $221 $186 $268 Cost of services rendered by GPUS 44 43 48 Cost of services rendered by Genco 85 - - Total $350 $229 $316
Amount Charged to Income $293 $183 $242
Met-Ed: Cost of services rendered by GPUN $ 67 $ 81 $ 77 Cost of services Rendered by GPUS 29 27 27 Cost of services rendered by Genco 85 - - Total $181 $108 $104
Amount Charged to Income $153 $ 92 $ 87
Penelec: Cost of services rendered by GPUN $ 34 $ 41 $ 40 Cost of services rendered by GPUS 31 38 40 Cost of services rendered by Genco 159 - - Total $224 $ 79 $ 80
Amount Charged to Income $181 $ 67 $ 64
For the years 1996, 1995 and 1994, JCP&L purchased $21 million, $23 million and $22 million, respectively, in energy from a cogeneration project in which an affiliate has a 50% partnership interest.
11. 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 1996 1995 1994
Service cost-benefits earned during the period $ 36.1 $ 30.0 $ 34.8 Interest cost on projected benefit obligation 112.1 109.8 95.4 Less: Expected return on plan assets (123.2) (112.9) (104.4) Amortization (1.1) (1.4) (1.4) Net periodic pension cost $ 23.9 $ 25.5 $ 24.4
GPU, Inc. and Subsidiary Companies
(in millions) JCP&L 1996 1995 1994
Service cost-benefits earned during the period $ 8.0 $ 7.3 $ 8.8 Interest cost on projected benefit obligation 32.1 32.9 29.0 Less: Expected return on plan assets (36.3) (35.2) (33.3) Amortization (0.3) (0.3) (0.5) Net periodic pension cost $ 3.5 $ 4.7 $ 4.0
(in millions) Met-Ed 1996 1995 1994
Service cost-benefits earned during the period $ 4.5 $ 4.4 $ 4.7 Interest cost on projected benefit obligation 19.6 20.2 17.7 Less: Expected return on plan assets (21.3) (20.3) (19.1) Amortization - (0.1) (0.3) Net periodic pension cost $ 2.8 $ 4.2 $ 3.0
(in millions) Penelec 1996 1995 1994
Service cost-benefits earned during the period $ 6.0 $ 8.9 $ 10.2 Interest cost on projected benefit obligation 29.3 34.9 30.6 Less: Expected return on plan assets (32.3) (35.6) (32.4) Amortization 0.3 0.3 0.5 Net periodic pension cost $ 3.3 $ 8.5 $ 8.9
The above amounts for 1996 and 1994 do not include pre-tax charges to earnings of $71 million (JCP&L $37 million; Met-Ed $17 million; Penelec $17 million) and $97 million (JCP&L $38 million; Met-Ed $26 million; Penelec $33 million), respectively, resulting from early retirement programs in both of those years. At December 31, 1996, GPU has funded the entire cost of its retirement programs.
The actual return on the plans' assets for the years 1996, 1995 and 1994 resulted in gains as follows:
(in millions) Company 1996 1995 1994
JCP&L $ 66.0 $101.3 $ 4.4 Met-Ed 39.6 59.4 2.5 Penelec 53.5 100.3 4.2 Other 69.9 61.0 2.7 Total $229.0 $322.0 $ 13.8
GPU, Inc. and Subsidiary Companies
The funded status of the plans and related assumptions at December 31, 1996 and 1995 were as follows:
(in millions) GPU, Inc. and Subsidiary Companies 1996 1995
Accumulated benefit obligation (ABO): Vested benefits $ 1,338.5 $ 1,172.8 Nonvested benefits 137.8 133.7 Total ABO 1,476.3 1,306.5 Effect of future compensation levels 215.1 237.7 Projected benefit obligation (PBO) $ 1,691.4 $ 1,544.2
Plan assets at fair value $ 1,801.8 $ 1,596.1 PBO (1,691.4) (1,544.2) Plan assets in excess of PBO 110.4 51.9 Less: Unrecognized net gain (143.8) (64.9) Unrecognized prior service cost 5.7 5.2 Unrecognized net transition asset (3.0) (5.8) Adjustment required to recognize minimum liability (3.8) (0.2) Accrued pension liability $ (34.5) $ (13.8)
(in millions) JCP&L 1996 1995
ABO: Vested benefits $ 391.9 $ 359.8 Nonvested benefits 27.8 30.4 Total ABO 419.7 390.2 Effect of future compensation levels 53.8 69.9 PBO $ 473.5 $ 460.1
Plan assets at fair value $ 514.5 $ 494.4 PBO (473.5) (460.1) Plan assets in excess of PBO 41.0 34.3 Less: Unrecognized net gain (45.7) (32.2) Unrecognized prior service cost 2.2 2.4 Unrecognized net transition asset (1.5) (2.1) (Accrued) prepaid pension cost $ (4.0) $ 2.4
GPU, Inc. and Subsidiary Companies
(in millions) Met-Ed 1996 1995
ABO: Vested benefits $ 240.7 $ 220.9 Nonvested benefits 24.4 24.0 Total ABO 265.1 244.9 Effect of future compensation levels 37.4 42.4 PBO $ 302.5 $ 287.3
Plan assets at fair value $ 309.9 $ 293.1 PBO (302.5) (287.3) Plan assets in excess of PBO 7.4 5.8 Less: Unrecognized net gain (7.1) (7.6) Unrecognized prior service cost 2.8 3.5 Unrecognized net transition asset (0.6) (1.3) Adjustment required to recognize minimum liability (0.4) - Prepaid pension cost $ 2.1 $ 0.4
(in millions) Penelec 1996 1995
ABO: Vested benefits $ 303.6 $ 364.4 Nonvested benefits 24.3 44.1 Total ABO 327.9 408.5 Effect of future compensation levels 39.1 73.3 PBO $ 367.0 $ 481.8
Plan assets at fair value $ 411.8 $ 496.8 PBO (367.0) (481.8) Plan assets in excess of PBO 44.8 15.0 Less: Unrecognized net gain (35.2) (18.8) Unrecognized prior service cost 3.4 3.8 Unrecognized net transition obligation 2.1 3.0 Prepaid pension cost $ 15.1 $ 3.0
Principal actuarial assumptions (%): Annual long-term rate of return on plan assets 8.5 8.5 Discount rate 7.5 7.5 Annual increase in compensation levels 5.5 5.5
GPU, Inc. and Subsidiary Companies
In 1996, the PBO increased by $92 million (JCP&L $28 million; Met-Ed $16 million; Penelec $14 million; Other $34 million) as a result of the VERP. 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/obligation 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, 1996, 1995 and 1994, GPU had accumulated pension obligations in excess of amounts accrued; as a result, additional minimum liabilities in the amounts of $2.2 million (Met-Ed $0.3 million; GPUS $1.8 million; Genco $0.1 million), $0.1 million (GPUS) and $0.7 million (GPUS), respectively, net of deferred income taxes of $1.6 million (Met-Ed $0.2 million; GPUS $1.3 million; Genco $0.1 million), $0.1 million (GPUS) and $0.5 million (GPUS), respectively, are reflected as reductions in Retained Earnings in accordance with FAS 87.
Savings Plans
GPU also maintains savings plans for substantially all employees. These plans provide for employee contributions up to specified limits. GPU's savings plans provide for various levels of matching contributions. The matching contributions for GPU were as follows:
(in millions) Company 1996 1995 1994
JCP&L $ 2.8 $ 3.2 $ 2.4 Met-Ed 3.2 2.7 2.2 Penelec 1.4 2.5 3.0 Other 6.7 5.0 5.1 Total $ 14.1 $ 13.4 $ 12.7
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 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.
GPU, Inc. and Subsidiary Companies
Summaries of the components of the net periodic postretirement benefit cost for 1996, 1995 and 1994 follows:
(in millions) GPU, Inc. and Subsidiary Companies 1996 1995 1994
Service cost-benefits attributed to service during the period $ 14.3 $ 13.4 $ 14.6 Interest cost on the accumulated postretirement benefit obligation 45.7 43.4 37.0 Expected return on plan assets (13.8) (11.0) (7.0) Amortization of transition obligation 17.4 17.4 18.1 Other amortization, net 2.9 1.3 2.1 Net periodic postretirement benefit cost 66.5 64.5 64.8 Less, deferred for future recovery (18.2) (15.0) (15.8) Postretirement benefit cost, net of deferrals $ 48.3 $ 49.5 $ 49.0
The above amounts for 1996 and 1994 do not include pre-tax charges to earnings of $52 million and $30 million, respectively, relating to early retirement programs in both of those years. At December 31, 1996, GPU has funded the entire cost of its retirement programs.
(in millions) JCP&L 1996 1995 1994
Service cost-benefits attributed to service during the period $ 2.8 $ 3.0 $ 3.3 Interest cost on the accumulated postretirement benefit obligation 11.4 11.2 9.4 Expected return on plan assets (2.8) (2.3) (1.7) Amortization of transition obligation 4.8 5.0 5.2 Other amortization, net 0.7 0.5 0.4 Net periodic postretirement benefit cost 16.9 17.4 16.6 Less, deferred for future recovery (4.4) (4.0) ( 7.8) Postretirement benefit cost, net of deferrals $ 12.5 $ 13.4 $ 8.8
The above amounts for 1996 and 1994 do not include pre-tax charges to earnings of $26 million and $9 million, respectively, relating to early retirement programs in both of those years. The amount deferred for future recovery does not include $7.2 million of allocated postretirement benefit costs from affiliates for 1996.
GPU, Inc. and Subsidiary Companies
(in millions) Met-Ed 1996 1995 1994
Service cost-benefits attributed to service during the period $ 1.9 $ 2.0 $ 2.3 Interest cost on the accumulated postretirement benefit obligation 8.6 8.3 7.1 Expected return on plan assets (1.6) (1.4) (1.2) Amortization of transition obligation 3.2 3.4 3.4 Other amortization, net 0.7 0.3 0.5 Net periodic postretirement benefit cost 12.8 12.6 12.1 Less, deferred for future recovery (4.1) (5.6) (8.3) Postretirement benefit cost, net of deferrals $ 8.7 $ 7.0 $ 3.8
The above amounts for 1996 and 1994 do not include a pre-tax charge to earnings of $13 million and $9 million, respectively, relating to early retirement programs in both of those years. The amount deferred for future recovery does not include $2.5 million of allocated postretirement benefit costs from affiliates for 1996.
(in millions) Penelec 1996 1995 1994
Service cost-benefits attributed to service during the period $ 2.7 $ 4.3 $ 4.6 Interest cost on the accumulated postretirement benefit obligation 14.1 15.6 13.4 Expected return on plan assets (4.6) (4.3) (2.3) Amortization of transition obligation 5.4 6.2 6.5 Other amortization, net 0.9 0.5 0.8 Net periodic postretirement benefit cost 18.5 22.3 23.0 Net write-off - 1.3 9.0 Postretirement benefit cost $ 18.5 $ 23.6 $ 32.0
The above amounts for 1996 and 1994 do not include a pre-tax charge to earnings of $13 million and $12 million, respectively, relating to early retirement programs in both of those years.
The actual return on the plans' assets for the years 1996, 1995 and 1994 resulted in gains as follows:
(in millions) Company 1996 1995 1994
JCP&L $ 8.0 $ 5.7 $ 0.6 Met-Ed 3.6 3.3 0.4 Penelec 14.7 11.1 0.8 Other 12.3 7.8 0.5 Total $ 38.6 $ 27.9 $ 2.3
GPU, Inc. and Subsidiary Companies
The funded status of the plans at December 31, 1996 and 1995, was as follows:
(in millions) GPU, Inc. and Subsidiary Companies 1996 1995
Accumulated Postretirement Benefit Obligation: Retirees $ 452.7 $ 361.6 Fully eligible active plan participants 17.1 32.4 Other active plan participants 236.2 232.4 Total accumulated postretirement benefit obligation (APBO) $ 706.0 $ 626.4
APBO $(706.0) $(626.4) Plan assets at fair value 303.6 191.3 APBO in excess of plan assets (402.4) (435.1) Less: Unrecognized net loss 56.6 65.0 Unrecognized prior service cost 1.9 2.3 Unrecognized transition obligation 268.6 295.9 Accrued postretirement benefit liability $ (75.3) $ (71.9)
(in millions) JCP&L 1996 1995
APBO: Retirees $ 120.2 $ 89.2 Fully eligible active plan participants 7.7 18.9 Other active plan participants 52.0 53.4 Total APBO $ 179.9 $ 161.5
APBO $(179.9) $(161.5) Plan assets at fair value 70.7 39.7 APBO in excess of plan assets (109.2) (121.8) Less: Unrecognized net loss 14.1 12.9 Unrecognized transition obligation 74.4 85.3 Accrued postretirement benefit liability $ (20.7) $ (23.6)
(in millions) Met-Ed 1996 1995
APBO: Retirees $ 84.7 $ 80.2 Fully eligible active plan participants 2.1 3.5 Other active plan participants 37.4 39.2 Total APBO $ 124.2 $ 122.9
APBO $(124.2) $(122.9) Plan assets at fair value 34.7 21.9 APBO in excess of plan assets (89.5) (101.0) Less: Unrecognized net loss 19.6 17.7 Unrecognized transition obligation 44.7 57.4 Accrued postretirement benefit liability $ (25.2) $ (25.9)
GPU, Inc. and Subsidiary Companies
(in millions) Penelec 1996 1995
APBO: Retirees $ 145.5 $ 139.7 Fully eligible active plan participants 3.7 6.0 Other active plan participants 54.8 79.6 Total APBO $ 204.0 $ 225.3
APBO $(204.0) $(225.3) Plan assets at fair value 95.6 75.3 APBO in excess of plan assets (108.4) (150.0) Less: Unrecognized net loss 13.2 25.0 Unrecognized prior service cost 1.6 2.3 Unrecognized transition obligation 83.2 106.1 Accrued postretirement benefit liability $ (10.4) $ (16.6)
Principal actuarial assumptions (%): Annual long-term rate of return on plan assets 8.5 8.5 Discount rate 7.5 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 1996, the APBO increased by $45 million (JCP&L $15 million; Met-Ed $8 million; Penelec $8 million; Other $14 million) as a result of the VERP. 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 11% for those not eligible for Medicare and 8% for those eligible for Medicare, then decreasing gradually to 6% in 2000 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 $60 million (JCP&L $14 million; Met-Ed $10 million; Penelec $16 million; Other $20 million) as of December 31, 1996 and the aggregate of the service and interest cost components of net periodic postretirement health-care cost by approximately $5 million (JCP&L $1 million; Met-Ed $1 million; Penelec $2 million; Other $1 million).
In JCP&L's 1993 base rate proceeding, the NJBPU allowed JCP&L to collect $3 million annually of the incremental postretirement benefit costs, charged to expense, 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 is deferring the amounts above that level. A Stipulation of Final Settlement (Final Settlement), pending before the NJBPU, would allow JCP&L to recover and amortize the deferred balance at December 31, 1997 over a fifteen-year period. In addition, the Final Settlement would allow 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, Management's Discussion and Analysis.) In January 1997, the NJBPU issued a generic order providing certain options for recovery of postretirement costs. This generic order would affect JCP&L only if the Final Settlement is not
GPU, Inc. and Subsidiary Companies
approved. Met-Ed is deferring the incremental postretirement benefit costs, charged to expense, associated 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 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 likely to be recovered and charged $18.8 million to expense. In addition, $4 million of Penelec's unrecognized transition obligation resulting from employees who elected to participate in the VERP was also written off in 1994. In 1996 and 1995, Penelec recorded charges to income of approximately $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.
12. 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, 1996:
Balance (in millions) % Accumulated Station Owner Ownership Investment Depreciation
Homer City Penelec 50 $453.7 $157.3 Conemaugh Met-Ed 16.45 146.1 40.7 Keystone JCP&L 16.67 90.3 22.5 Yards Creek JCP&L 50 29.9 6.5 Seneca Penelec 20 16.0 5.1
13. LEASES
GPU's capital leases consist primarily of leases for nuclear fuel. 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). Nuclear fuel capital leases at December 31, 1995 totaled $152 million (JCP&L $88 million; Met-Ed $43 million; Penelec $21 million), net of amortization of $160 million (JCP&L $98 million; Met-Ed $41 million; Penelec $21 million). The recording of capital leases has no effect on net income because all leases, for ratemaking purposes, are considered operating leases.
GPU, Inc. and Subsidiary Companies
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, 1996, 1995 and 1994, these amounts were as follows:
(in millions) Company 1996 1995 1994
JCP&L $ 32 $ 35 $ 28 Met-Ed 16 15 15 Penelec 8 7 7 Total $ 56 $ 57 $ 50
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.
14. COMMITMENTS AND CONTINGENCIES
NUCLEAR FACILITIES
The GPU Energy companies have made investments in three major nuclear projects--TMI-1 and Oyster Creek, both of which are operating generation facilities, and TMI-2, which was damaged during a 1979 accident. TMI-1 and TMI-2 are jointly owned by JCP&L, Met-Ed and Penelec in the percentages of 25%, 50% and 25%, respectively. Oyster Creek is owned by JCP&L. At December 31, 1996 and December 31, 1995, the GPU Energy companies' net investment in TMI-1 and Oyster Creek, including nuclear fuel, was as follows:
Net Investment (in millions) TMI-1 Oyster Creek
JCP&L $154 $766 Met-Ed 297 - Penelec 146 - Total $597 $766
GPU, Inc. and Subsidiary Companies
Net Investment (in millions) TMI-1 Oyster Creek
JCP&L $166 $782 Met-Ed 318 - Penelec 156 - Total $640 $782
The GPU Energy companies' net investment in TMI-2 at December 31, 1996 and 1995 was $90 million and $95 million, respectively (JCP&L $81 million and $85 million, respectively; Met-Ed $1 million and $2 million, respectively; Penelec $8 million in both years). 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.)
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
GPU, Inc. and Subsidiary Companies
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 Court of Appeals for the Third Circuit. 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. As described in the Nuclear Fuel Disposal Fee section of Note 1, the disposal of spent nuclear fuel is covered separately by contracts with the DOE.
In 1990, the GPU Energy companies submitted a report, in compliance with
GPU, Inc. and Subsidiary Companies
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 1996 dollars) are as follows:
(in millions) Oyster TMI-1 TMI-2 Creek
JCP&L $ 43 $ 67 $221 Met-Ed 85 135 - Penelec 42 68 - $170 $270 $221
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 retirement cost estimates under the site-specific studies are as follows (in 1996 dollars):
(in millions) Oyster GPU TMI-1 TMI-2 Creek
Radiological decommissioning $311 $378 $366 Nonradiological cost of removal 77 36 * 35 Total $388 $414 $401
* Net of $6.5 million spent as of December 31, 1996.
(in millions) Oyster JCP&L TMI-1 TMI-2 Creek
Radiological decommissioning $ 78 $ 95 $366 Nonradiological cost of removal 19 9 * 35 Total $ 97 $104 $401
* Net of $1.6 million spent as of December 31, 1996.
GPU, Inc. and Subsidiary Companies
(in millions) Met-Ed TMI-1 TMI-2
Radiological decommissioning $155 $189 Nonradiological cost of removal 39 18 * Total $194 $207
* Net of $3.3 million spent as of December 31, 1996.
(in millions) Penelec TMI-1 TMI-2
Radiological decommissioning $ 78 $ 94 Nonradiological cost of removal 19 9 * Total $ 97 $103
* Net of $1.6 million spent as of December 31, 1996.
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. Currently, the GPU Energy companies are collecting retirement costs which are less than the retirement cost estimates in the 1995 site-specific studies, and they do not intend to increase these accruals until increased collections from customers are obtained. Customer collections are contributed to external trust funds. These deposits, including the related earnings, are classified as Nuclear Decommissioning Trusts on the 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 has already been recognized, based on the 1995 site-specific study (in 1996 dollars) since the plant is no longer operating (see TMI-2). The effective date of this accounting change could be as early as January 1, 1998.
GPU, Inc. and Subsidiary Companies
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 pending before the NJBPU would allow 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, 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.
The amounts charged to depreciation expense in 1996 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 1996: JCP&L $ 2 $ 13 Met-Ed 9 - Penelec 4 - $ 15 $ 13
(in millions) Oyster TMI-1 Creek Accumulated depreciation provision at December 31, 1996: JCP&L $ 30 $174 Met-Ed 50 - Penelec 21 - $101 $174
Management believes that any TMI-1 and Oyster Creek retirement costs, in excess of those currently recognized for ratemaking purposes, should be recoverable under the current ratemaking process.
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:
GPU, Inc. and Subsidiary Companies
(in millions)
GPU JCP&L Met-Ed Penelec
1996 $431 $108 $215 $108 1995 $413 $103 $207 $103
These amounts are based upon the 1995 site-specific study estimates (in 1996 and 1995 dollars, respectively) discussed above and an estimate for remaining incremental monitored storage costs of $17 million (JCP&L $4 million; Met-Ed $8 million; Penelec $5 million) for 1996 and $18 million (JCP&L $4 million; Met-Ed $9 million; Penelec $5 million) for 1995, 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 $431 million liability at December 31, 1996 is $266 million (JCP&L $45 million; Met-Ed $143 million; Penelec $78 million) which is probable of recovery from customers and included in Three Mile Island Unit 2 deferred costs on the Consolidated Balance Sheets, and $181 million (JCP&L $72 million; Met-Ed $78 million; Penelec $31 million) in trust funds for TMI-2 and included in Nuclear decommissioning trusts 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 1996 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 Final Settlement pending before the NJBPU would adjust 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, 1996 the accident-related portion of TMI-2 radiological decommissioning costs is considered to be $67 million (JCP&L $17 million, Met- Ed $34 million; Penelec $16 million), which is the difference between the 1995 TMI-1 and TMI-2 site-specific study estimates (in 1996 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 $67 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.
GPU, Inc. and Subsidiary Companies
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 Price-Anderson, the GPU Energy companies are also subject to retrospective premium assessments of up to $54 million (JCP&L $32 million; Met-Ed $15 million; Penelec $7 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 the first 21 weeks of the outage and continues for three years beginning at $1.8 million for Oyster Creek and $2.6 million for TMI-1 per week for the first year, decreasing to 80% of such amounts for years two and three.
COMPETITION AND THE CHANGING REGULATORY ENVIRONMENT
The Emerging Competitive Market and Stranded Costs:
The combination of the current market price of electricity being below that of utility-owned generation and purchase power 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 and competitive environment. The GPU Energy companies estimate that their total potential above market costs relating to power purchase
GPU, Inc. and Subsidiary Companies
commitments, above market generation costs, generating plant decommissioning costs and regulatory assets at year end 1998, on a present value basis, could range from $4.5 billion to $8 billion (JCP&L $2.5 billion to $4 billion; Met- Ed $1 billion to $2 billion; Penelec $1 billion to $2 billion). 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. 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.
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 New Jersey Energy Master Plan (NJEMP), which proposes that New Jersey electric utilities should have an opportunity to recover their stranded costs associated with generating capacity commitments and caused by electric retail competition, provided that they attempt to mitigate these costs. There can be no assurance as to the extent that stranded costs will be recoverable. 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 FAS 71. Decommissioning costs, for which a liability and corresponding regulatory asset is recorded 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, 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 periods of up to 26 years (JCP&L 25 years; Met-Ed 26 years; Penelec 25 years). The following table shows actual payments from 1994 through 1996, and estimated payments from 1997 through 2001.
GPU, Inc. and Subsidiary Companies
Payments Under NUG Agreements (in Millions)
Total JCP&L Met-Ed Penelec
* 1994 $528 $304 $101 $123 * 1995 670 381 131 158 * 1996 739 370 177 192 1997 672 336 146 190 1998 691 340 152 199 1999 706 344 152 210 2000 804 347 196 261 2001 873 353 225 295
* Actual. The 1996 amounts are reflected in the rates currently being charged by the GPU Energy companies.
While 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. As of December 31, 1996, facilities covered by these agreements having 1,631 MW (JCP&L 891 MW; Met-Ed 340 MW; Penelec 400 MW) of capacity were in service.
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 cost of near- to intermediate-term (i.e., one to four years) energy supply from generation facilities now in service is currently and is expected to continue to be priced below the costs of new supply sources, at least for some time. 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, 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 these efforts will be successful in whole or in part.
From 1997 through 2002, JCP&L has contracts to purchase between 5,100 GWH and 5,200 GWH of electric generation per year at prices which are estimated to escalate approximately 1.2% annually on a unit cost (cents/KWH) basis during this period. From 2003 through 2008, JCP&L has contracts to purchase between 4,700 GWH and 5,100 GWH of electric generation per year at an average annual
GPU, Inc. and Subsidiary Companies
cost of $369 million. The prices during this period are estimated to escalate approximately 1.5% annually. After 2008, when major contracts begin to expire, purchases steadily decline to approximately 865 GWH in 2014. The contract unit cost is estimated to escalate approximately 4.0% annually from 2009 through 2014, with a total average annual cost of $193 million during this period. All of JCP&L's contracts will have expired by the end of 2017. During this entire period, the NUG fuel mix averages approximately 95% natural gas.
From 1997 through 1999, Met-Ed has contracts to purchase between 2,000 GWH and 2,100 GWH of electric generation per year at prices which are estimated to escalate approximately 0.6% annually on a unit cost basis during this period. From 2000 through 2008, Met-Ed has contracts to purchase between 2,900 GWH and 4,300 GWH of electric generation per year at an average annual cost of $241 million. The prices during this period are estimated to escalate approximately 2.5% annually on a unit cost basis. From 2009 through 2012, Met-Ed is forecast to purchase between 1,500 GWH and 1,900 GWH of electric generation per year at an average annual cost of $169 million. During this period, the prices are estimated to escalate approximately 3.4% annually on a unit cost basis. After 2012, Met-Ed's remaining contracts expire rapidly through 2015; thereafter, they remain constant until the expiration of the last contract in 2020. During this entire period, the NUG fuel mix averages approximately 50% to 75% coal/waste coal.
From 1997 through 2000, Penelec has contracts to purchase between 3,000 GWH and 4,000 GWH of electric generation per year at prices which are estimated to escalate approximately 1.4% annually on a unit cost basis during this period. From 2001 through 2008, Penelec has contracts to purchase between 3,900 GWH and 5,000 GWH of electric generation per year at an average annual cost of $297 million. The prices during this period are estimated to escalate approximately 1.5% annually on a unit cost basis. From 2009 through 2017, purchases decline from approximately 3,000 GWH to approximately 1,500 GWH in 2017. The contract unit cost is estimated to escalate approximately 3.4% annually from 2009 through 2017, with a total average annual cost of $211 million during this period. After 2017, Penelec's remaining contracts expire rapidly through 2020. During this entire period, the NUG fuel mix averages approximately 65% to 95% coal/waste coal.
This discussion of "Nonutility Generation Agreements" contains estimates which are based on current knowledge and expectations of the outcome of future events. The estimates are subject to significant uncertainties, including changes in fuel prices, improvements in technology, the changing regulatory environment and the deregulation of the electric utility industry.
The GPU Energy companies have been granted recovery of their NUG costs (including certain buyout costs) from customers by the PaPUC and NJBPU and expect to continue to pursue such recovery. 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, Management's Discussion and Analysis for additional discussion.)
GPU, Inc. and Subsidiary Companies
Regulatory Assets and Liabilities:
Regulatory assets and liabilities, as reflected in the December 31, 1996 and 1995 Consolidated Balance Sheets in accordance with the provisions of FAS 71, were as follows:
GPU Assets (in thousands) December 31, December 31, 1996 1995 Income taxes recoverable through future rates $ 527,385 $ 527,584 TMI-2 deferred costs 356,517 368,712 Nonutility generation contract buyout costs 242,481 84,132 Unamortized property losses 100,310 105,729 Other postretirement benefits 76,569 58,362 Manufactured gas plant (MGP) remediation 49,596 29,608 N.J. unit tax 45,877 51,518 Unamortized loss on reacquired debt 45,378 50,198 Load and demand-side management programs 40,770 48,071 N.J. low-level radwaste disposal 37,525 21,778 DOE enrichment facility decommissioning 36,352 38,519 Nuclear fuel disposal fee 21,552 21,946 Environmental remediation (non-MGP sites) 20,864 - Storm damage 20,226 18,294 Other 31,870 15,257 Total $1,653,272 $1,439,708
Liabilities (in thousands) December 31, December 31, 1996 1995 Income taxes refundable through future rates $ 87,735 $ 94,931 Other 2,080 3,068 Total $ 89,815 $ 97,999
GPU, Inc. and Subsidiary Companies
JCP&L Assets (in thousands) December 31, December 31, 1996 1995 Income taxes recoverable through future rates $ 142,726 $ 134,787 TMI-2 deferred costs 126,448 138,472 Nonutility generation contract buyout costs 139,000 17,482 Unamortized property losses 94,767 100,176 Other postretirement benefits 44,024 32,390 Manufactured gas plant (MGP) remediation 49,596 29,608 N.J. unit tax 45,877 51,518 Unamortized loss on reacquired debt 31,469 34,285 Load and demand-side management programs 40,770 48,071 N.J. low-level radwaste disposal 37,525 21,778 DOE enrichment facility decommissioning 23,150 24,503 Nuclear fuel disposal fee 23,319 23,165 Environmental remediation (non-MGP sites) 698 - Storm damage 20,226 18,294 Other 9,966 10,199 Total $ 829,561 $ 684,728
Liabilities (in thousands) December 31, December 31, 1996 1995 Income taxes refundable through future rates $ 32,567 $ 36,343 Other 683 1,254 Total $ 33,250 $ 37,597
Met-Ed Assets (in thousands) December 31, December 31, 1996 1995 Income taxes recoverable through future rates $ 174,636 $ 178,513 TMI-2 deferred costs 144,782 149,004 Nonutility generation contract buyout costs 86,781 66,650 Unamortized property losses 3,113 3,273 Other postretirement benefits 32,545 25,972 Unamortized loss on reacquired debt 6,336 6,945 DOE enrichment facility decommissioning 8,801 9,344 Nuclear fuel disposal fee (1,282) (1,025) Environmental remediation (non-MGP sites) 2,575 - Other 4,096 1,299 Total $ 462,383 $ 439,975
Liabilities (in thousands) December 31, December 31, 1996 1995 Income taxes refundable through future rates $ 23,486 $ 24,765 Other 2,495 1,696 Total $ 25,981 $ 26,461
GPU, Inc. and Subsidiary Companies
Penelec Assets (in thousands) December 31, December 31, 1996 1995 Income taxes recoverable through future rates $ 210,023 $ 214,284 TMI-2 deferred costs 85,287 81,236 Nonutility generation contract buyout costs 16,700 - Unamortized property losses 2,430 2,280 Other postretirement benefits - - Unamortized loss on reacquired debt 7,686 8,968 DOE enrichment facility decommissioning 4,401 4,672 Nuclear fuel disposal fee (485) (194) Environmental remediation (non-MGP sites) 17,591 - Other 18,805 3,759 Total $ 362,438 $ 315,005
Liabilities (in thousands) December 31, December 31, 1996 1995 Income taxes refundable through future rates $ 31,682 $ 33,823 Other 12 118 Total $ 31,694 $ 33,941
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 1996 dollars) and JCP&L's share of long-term monitored storage costs. For additional information, see TMI-2 Future 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, in 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 Emerging Issues Task Force Issue 92-12, "Accounting for OPEB Costs by Rate-Regulated Enterprises."
Manufactured gas plant remediation: Consists of costs which are probable of recovery, with interest, associated with the investigation and remediation of several gas manufacturing plants. For additional information, see the Environmental Matters section.
GPU, Inc. and Subsidiary Companies
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. 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. For additional information, see Note 1, Summary of Significant Accounting Policies.
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.
Environmental remediation: Represents amounts related to the remediation of Penelec's Seward station property and various ash disposal sites for all three GPU Energy companies (see the Environmental Matters section).
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.
Amounts related to the decommissioning of TMI-1 and Oyster Creek, which are not included in Regulatory Assets on the Balance Sheet, are separately disclosed in the Nuclear Plant Retirement Costs section.
Accounting Matters:
Statement of Financial Accounting Standards No. 101, "Regulated Enterprises- Accounting for the Discontinuation of Application of FASB Statement No. 71", applies when a utility fails to continue to meet the provisions of FAS 71. (See Regulatory Accounting under Note 1 and Regulatory Assets and Liabilities above.) Although the GPU Energy companies continue to be subject to cost-based ratemaking regulation, in the event that either all or a portion of their operations are no longer subject to FAS 71 provisions, the related regulatory assets, net of regulatory liabilities, would have to be written off and charged to expense. In addition, any above market costs of power purchase commitments would have to be expensed, and 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. The experience gained from the deregulation of the
GPU, Inc. and Subsidiary Companies
telecommunications industry indicates that substantial write-offs may result with the discontinuation of FAS 71. At this time, GPU is unable to determine when and to what extent FAS 71 will no longer be applicable.
In 1995, the FASB issued Statement of Financial Accounting Standards No. 121 (FAS 121), "Accounting for the Impairment of Long-Lived Assets," which requires that regulatory assets meet the recovery criteria of FAS 71 on an ongoing basis in order to avoid a writedown. 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. However, as GPU enters a more competitive environment, some assets could be subject to impairment, thereby necessitating writedowns, which could have a material adverse effect on GPU's results of operations and financial condition.
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, coal mine refuse piles and generation facilities. With regard to electromagnetic fields, GPU may be required to postpone or cancel the installation of, or replace or modify, utility plant, the costs of which could be material.
To comply with the federal Clean Air Act Amendments of 1990 (Clean Air Act), the GPU Energy companies expect to spend up to $277 million for air pollution control equipment by the year 2000 (JCP&L $46 million; Met-Ed $117 million; Penelec $114 million), of which approximately $240 million has already been spent (JCP&L $43 million; Met-Ed $95 million; Penelec $102 million). In developing their least-cost plan to comply with the Clean Air Act, the GPU Energy companies will continue to evaluate major capital investments compared to participation in the sulfur dioxide (SO2) emission allowance market, the expected nitrogen oxide (NOx) emissions trading market and the use of low-sulfur fuel or retirement of facilities. In 1994, the Ozone Transport Commission (OTC), consisting of representatives of 12 northeast states (including New Jersey and Pennsylvania) and the District of Columbia, proposed reductions in NOx emissions it believes necessary to meet ambient air quality standards for ozone and the statutory deadlines set by the Clean Air Act. The GPU Energy companies expect that the U.S. Environmental Protection Agency (EPA) will approve state implementation plans consistent with the proposal, and that as a result, they will spend an estimated $17 million (included in the Clean Air Act total), beginning in 1997, to meet the 1999 seasonal reductions agreed upon by the OTC (JCP&L $1 million; Met-Ed $9 million; Penelec $7 million). The OTC has stated that it anticipates that additional NOx reductions will be necessary to meet the Clean Air Act's 2005
GPU, Inc. and Subsidiary Companies
National Ambient Air Quality Standard (NAAQS) for ozone. However, the specific requirements that will have to be met at that time have not been finalized. In addition, the EPA has recently proposed changes to the NAAQS for ozone, particulate matter and regional haze. The GPU Energy companies are unable to determine what additional costs, if any, will be incurred.
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
5 4 2 1 1 10
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 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.
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 long-term remediation, based on future operating scenarios, including reboilering the station using fluidized bed combustion technology. Penelec currently estimates that the remediation of the Seward station property will range from $12 to $25 million and has recorded a liability of $12 million at December 31, 1996. 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 will seek, and expects, recovery of these remediation costs in its restructuring plan to be filed with the PaPUC (see Competitive Environment, Management's Discussion and Analysis), and has recorded a corresponding regulatory asset of approximately $12 million at December 31, 1996.
The GPU Energy companies are required to submit applications for re- permitting seven operating ash disposal sites to the PaDEP by July 1997, including projected site closure procedures and related cost estimates. Applications have been filed with the PaDEP for five of these sites. The cost estimates for the closure of these five sites range from approximately $9 million to $14 million, and a liability of $9 million (JCP&L $1 million; Met- Ed $2 million; Penelec $6 million) is reflected in the Consolidated Balance Sheet at December 31, 1996. JCP&L's share of these costs is deferred based on
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past rate recovery precedent, and Penelec and Met-Ed expect recovery through their restructuring plans to be filed with the PaPUC (see Competitive Environment, Management's Discussion and Analysis). As a result, a regulatory asset of $9 million is reflected in the Consolidated Balance Sheet at December 31, 1996.
JCP&L has entered into agreements with the New Jersey Department of Environmental Protection (NJDEP) for the investigation and remediation of 17 formerly owned manufactured gas plant (MGP) sites. JCP&L has also entered into various cost-sharing agreements with other utilities for most of the sites. As of December 31, 1996, JCP&L has spent approximately $23 million in connection with the cleanup of these sites. In addition, JCP&L has recorded an estimated environmental liability of $45 million relating to expected future costs of these sites (as well as two other properties). This estimated liability is based upon ongoing site investigations and remediation efforts, which generally involve capping the sites and pumping and treatment of ground water. Moreover, the cost to clean up these sites could be materially in excess of $45 million due to significant uncertainties, including changes in acceptable remediation methods and technologies.
In 1994, the NJBPU approved a mechanism similar to JCP&L's LEAC for the recovery of future MGP remediation costs. However, the NJBPU has also directed that recovery of MGP remediation costs cease until such expenditures equaled the funds already collected from customers. At December 31, 1996, JCP&L had recorded on its Balance Sheet a regulatory asset of $49.6 million, which included approximately $45 million related to expected future costs discussed above and approximately $4 million for remediation expenditures in excess of collections from customers (including interest) (see Regulatory Assets and Liabilities). JCP&L is continuing to defer these remediation expenditures and accrue interest as previously authorized by the NJBPU, and is continuing to defer estimated future remediation costs. JCP&L has requested the establishment of an adjustment clause for the recovery of future remediation costs in its Remediation Adjustment Clause (RAC) filing, which is currently under NJBPU review. The Final Settlement pending before the NJBPU would allow JCP&L to continue its accounting treatment for remediation costs and would also provide for the RAC proceeding to remain open for future review.
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 has begun in this case.
OTHER COMMITMENTS AND CONTINGENCIES
GPU International Group:
At December 31, 1996, the GPU International Group had investments totaling approximately $787 million in facilities located in foreign countries. Although management attempts to mitigate the risk of investing in certain foreign countries by securing political risk insurance, the GPU International Group faces additional risks inherent to operating in such
GPU, Inc. and Subsidiary Companies
locations, including foreign currency fluctuations (see GPU International Group in Management's Discussion and Analysis).
At December 31, 1996, GPU, Inc.'s aggregate investment in the GPU International Group was $211 million; GPU, Inc. has also guaranteed up to an additional $893 million of GPU International Group obligations. Of this amount, $680 million is included in Long-term debt in the Consolidated Balance Sheet at December 31, 1996 (see Note 3, Long-Term Debt); $30 million relates to a GPU International, Inc. revolving credit agreement (see Note 2, Short- Term Borrowing Arrangements); and $183 million relates to various other obligations of the GPU International Group.
Niagara Mohawk Power Corporation (NIMO) has filed with the New York Public Service Commission a proposed restructuring plan that it claims may be needed to avoid seeking reorganization under Chapter XI of the Bankruptcy Code. GPU International, Inc. has ownership interests, with an aggregate book value of approximately $36 million, in three NUG projects which have long-term power purchase agreements with NIMO. In August 1996, NIMO proposed to buy out or restructure 44 of its NUG power purchase agreements, including those for the three GPU International, Inc. projects. GPU International, Inc., in conjunction with the other NUG developers, is discussing the proposal with NIMO. 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 those for the GPU International, Inc. projects. GPU International, Inc. has filed motions to dismiss the complaint. There can be no assurance as to the outcome of these proceedings.
The Labour Party in the United Kingdom has proposed a windfall tax on privatized utilities and other companies as part of its election campaign platform. General elections in the United Kingdom are required to be held no later than May 1997. If the Labour Party wins the general election, and the tax is enacted as currently proposed, a charge to Midlands' earnings, which is estimated to range from $110 million to $350 million (GPU's 50% share being $55 million to $175 million), would be recorded in 1997, perhaps as early as the second quarter. Due to the fact that (1) the Labour Party may not win the election; (2) the windfall tax may not be enacted as currently proposed; (3) the amount of the proposed tax may change; and (4) the Labour Party may change its current platform, there is no certainty that this tax, if levied, would be enacted as currently proposed.
Other:
In 1996, 493 bargaining employees (JCP&L 265; Met-Ed 90; Penelec 133; Other 5) and 347 nonbargaining employees (JCP&L 76; Met-Ed 73; Penelec 32; Other 166) accepted voluntary enhanced retirement programs, resulting in an 8% reduction in GPU's total workforce and a third quarter pre-tax charge to earnings of $122.7 million (JCP&L $62.9 million; Met-Ed $26.2 million; Penelec $33.6 million). The charges for these programs are included in Other Operation and Maintenance on the Income Statement.
GPU's construction programs, for which substantial commitments have been incurred and which extend over several years, contemplate expenditures of $402 million during 1997 (JCP&L $185 million; Met-Ed $90 million; Penelec $120 million; Other $7 million). As a consequence of reliability, licensing,
GPU, Inc. and Subsidiary Companies
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.
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 1997 and 2004, 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. One of Penelec's contracts for the Homer City station also includes a provision for the payment of postretirement benefit costs. The GPU Energy companies' share of the cost of coal purchased under these agreements is expected to aggregate $133 million for 1997 (JCP&L $23 million; Met-Ed $29 million; Penelec $81 million).
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 745 MW in 1997, declining to 527 MW in 1999 and 345 MW in 2004. Payments pursuant to these agreements are estimated to be $145 million in 1997, $128 million in 1998, $104 million in 1999, $84 million in 2000 and $99 million in 2001.
In October 1996, JCP&L was named as a defendant in a breach of contract lawsuit against Freehold Cogeneration Associates (Freehold) brought by Nestle Beverage Company (Nestle) in the New Jersey Superior Court. The lawsuit relates to the April 1996 agreement under which JCP&L agreed to buy out the power purchase agreement for the proposed 110 MW Freehold cogeneration project. Nestle is seeking damages of at least $75 million for Freehold's alleged breach of its steam sales agreement with Nestle and approximately $412 million in damages against JCP&L for alleged unlawful interference with that agreement. Nestle has also requested punitive damages in an unspecified amount. JCP&L believes the claims against it are without merit. There can be no assurance as to the outcome of this matter.
In 1993, the NJBPU instituted a generic proceeding to respond to contentions of the Division of the Ratepayer Advocate that by permitting utilities to recover NUG capacity costs through the LEAC, an excess or "double" recovery may result when combined with the recovery of the utilities' embedded capacity costs through their base rates. In 1994, the NJBPU ruled that LEAC periods after March 1991 were open for further investigation. JCP&L estimates that the potential refund liability through February 1997, the end of the most recent LEAC period, is $45 million. The Final Settlement which is now pending before the NJBPU would resolve all remaining issues in this proceeding. (See Rate Matters in Management's Discussion and Analysis).
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
GPU, Inc. and Subsidiary Companies
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 has requested recommendations 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. 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. There can be no assurance as to the outcome of this matter.
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 licensing the facility is estimated to be $58 million, which will be paid through 2002. Through December 1996, $6 million has been paid. As a result, at December 31, 1996, a liability of $52 million is reflected on the Consolidated Balance Sheet. JCP&L is recovering these costs from customers, and a regulatory asset has also been recorded. (See the Regulatory Assets and Liabilities 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 $11.7 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 LEAC.
Many of GPU's computer systems must be modified due to certain programming limitations in recognizing dates beyond 1999. GPU currently estimates that it will cost approximately $20 million to $35 million to modify these systems. These costs will be expensed as incurred.
As of December 31, 1996, approximately 52% of GPU's workforce was represented by unions for collective bargaining purposes. In 1996, JCP&L entered into a new collective bargaining agreement, which expires in 1999. Met-Ed and Penelec's collective bargaining agreements expire in 1997 and 1998, 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 the GPU's financial position or results of operations, there can be no assurance that this will continue to be the case.
GPU, Inc. and Subsidiary Companies
Jersey Central Power & Light Company and Subsidiary Company
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 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. Those 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, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 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 5, 1997
Metropolitan Edison Company and Subsidiary Companies
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 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. Those 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, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 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 5, 1997
Pennsylvania Electric Company and Subsidiary Companies
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 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. Those 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, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 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 5, 1997