-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UgkaeQFcpHxtJys59tCN06OVU5GF7V+ha9i38uMYeRXcxVCYzEzTm13AK6pBOAlo EiVTPU296qg+sZjJ353c0A== 0000040779-97-000029.txt : 19970501 0000040779-97-000029.hdr.sgml : 19970501 ACCESSION NUMBER: 0000040779-97-000029 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970430 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENERAL PUBLIC UTILITIES CORP /PA/ CENTRAL INDEX KEY: 0000040779 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 135516589 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06047 FILM NUMBER: 97592293 BUSINESS ADDRESS: STREET 1: 100 INTERPACE PKWY CITY: PARSIPPANY STATE: NJ ZIP: 07054 BUSINESS PHONE: 2012636500 FILER: COMPANY DATA: COMPANY CONFORMED NAME: JERSEY CENTRAL POWER & LIGHT CO CENTRAL INDEX KEY: 0000053456 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 210485010 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03141 FILM NUMBER: 97592294 BUSINESS ADDRESS: STREET 1: 300 MADISON AVE CITY: MORRISTOWN STATE: NJ ZIP: 079621911 BUSINESS PHONE: 2014558200 FILER: COMPANY DATA: COMPANY CONFORMED NAME: METROPOLITAN EDISON CO CENTRAL INDEX KEY: 0000065350 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 230870160 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 033-51001 FILM NUMBER: 97592295 BUSINESS ADDRESS: STREET 1: 2800 POTTSVILLE PIKE STREET 2: MUHLENBERG TOWNSHIP CITY: BERKS COUNTY STATE: PA ZIP: 19605 BUSINESS PHONE: 2159293601 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENNSYLVANIA ELECTRIC CO CENTRAL INDEX KEY: 0000077227 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 250718085 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03522 FILM NUMBER: 97592296 BUSINESS ADDRESS: STREET 1: 2800 POTTSVILLE PIKE READING STREET 2: MUHLENBERG TOWNSHIP CITY: BERKS COUNTY STATE: PA ZIP: 19640-0001 BUSINESS PHONE: 8145338111 10-Q 1 REPORT DOCUMENT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1997 OR ___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission Registrant, State of Incorporation, I.R.S. Employer File Number Address and Telephone Number Identification No. 1-6047 GPU, Inc. 13-5516989 (a Pennsylvania corporation) 100 Interpace Parkway Parsippany, New Jersey 07054-1149 Telephone (201) 263-6500 1-3141 Jersey Central Power & Light Company 21-0485010 (a New Jersey corporation) 2800 Pottsville Pike Reading, Pennsylvania 19605 Telephone (610) 929-3601 1-446 Metropolitan Edison Company 23-0870160 (a Pennsylvania corporation) 2800 Pottsville Pike Reading, Pennsylvania 19605 Telephone (610) 929-3601 1-3522 Pennsylvania Electric Company 25-0718085 (a Pennsylvania corporation) 2800 Pottsville Pike Reading, Pennsylvania 19605 Telephone (610) 929-3601 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares outstanding of each of the issuer's classes of voting stock, as of April 29, 1997, was as follows: Shares Registrant Title Outstanding GPU, Inc. Common Stock, $2.50 par value 120,659,192 Jersey Central Power & Light Company Common Stock, $10 par value 15,371,270 Metropolitan Edison Company Common Stock, no par value 859,500 Pennsylvania Electric Company Common Stock, $20 par value 5,290,596 GPU, Inc. and Subsidiary Companies Quarterly Report on Form 10-Q March 31, 1997 Table of Contents Page PART I - Financial Information Consolidated Financial Statements: GPU, Inc. Balance Sheets 3 Statements of Income 5 Statements of Cash Flows 6 Jersey Central Power & Light Company Balance Sheets 7 Statements of Income 9 Statements of Cash Flows 10 Metropolitan Edison Company Balance Sheets 11 Statements of Income 13 Statements of Cash Flows 14 Pennsylvania Electric Company Balance Sheets 15 Statements of Income 17 Statements of Cash Flows 18 Combined Notes to Financial Statements 19 Combined Management's Discussion and Analysis of Financial Condition and Results of Operations 43 PART II - Other Information 60 Signatures 61 _________________________________ The financial statements (not examined by independent accountants) reflect all adjustments (which consist of only normal recurring accruals) which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. This combined Quarterly Report on Form 10-Q is separately filed by GPU, Inc., Jersey Central Power & Light Company, Metropolitan Edison Company and Pennsylvania Electric Company. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. None of these registrants make any representations as to information relating to the other registrants. This combined Form 10-Q supplements and updates the 1996 Annual Report on Form 10-K, filed by the individual registrants with the Securities and Exchange Commission and should be read in conjunction therewith. This Form 10-Q 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. 2 GPU, INC. AND SUBSIDIARY COMPANIES Consolidated Balance Sheets
In Thousands March 31, December 31, 1997 1996 (Unaudited) ASSETS Utility Plant: In service, at original cost $ 9,721,068 $ 9,646,380 Less, accumulated depreciation 3,781,573 3,704,026 Net utility plant in service 5,939,495 5,942,354 Construction work in progress 254,138 277,440 Other, net 154,899 168,029 Net utility plant 6,348,532 6,387,823 Other Property and Investments: GPU International Group investments, net 958,033 924,397 Nuclear decommissioning trusts, at market 481,391 464,011 Nuclear fuel disposal trust, at market 102,582 101,661 Other, net 53,131 51,122 Total other property and investments 1,595,137 1,541,191 Current Assets: Cash and temporary cash investments 49,715 31,604 Special deposits 27,320 47,545 Accounts receivable: Customers, net 280,110 270,844 Other 121,468 91,637 Unbilled revenues 140,922 114,891 Materials and supplies, at average cost or less: Construction and maintenance 191,919 187,130 Fuel 42,999 40,207 Deferred income taxes 24,586 32,148 Prepayments 86,539 81,168 Other 3,617 - Total current assets 969,195 897,174 Deferred Debits and Other Assets: Regulatory assets: Three Mile Island Unit 2 deferred costs 355,852 356,517 Income taxes recoverable through future rates 524,045 527,385 Nonutility generation contract buyout costs 239,568 242,481 Unamortized property losses 105,166 100,310 Other 430,497 426,579 Total regulatory assets 1,655,128 1,653,272 Deferred income taxes 331,601 332,828 Other 135,247 128,931 Total deferred debits and other assets 2,121,976 2,115,031 Total Assets $11,034,840 $10,941,219 The accompanying notes are an integral part of the consolidated financial statements. 3 GPU, INC. AND SUBSIDIARY COMPANIES Consolidated Balance Sheets In Thousands March 31, December 31, 1997 1996 (Unaudited) LIABILITIES AND CAPITAL Capitalization: Common stock $ 314,458 $ 314,458 Capital surplus 751,583 750,569 Retained earnings 2,224,576 2,068,976 Total 3,290,617 3,134,003 Less, reacquired common stock, at cost 85,520 86,416 Total common stockholders' equity 3,205,097 3,047,587 Cumulative preferred stock: With mandatory redemption 104,000 114,000 Without mandatory redemption 66,478 66,478 Subsidiary-obligated mandatorily redeemable preferred securities 330,000 330,000 Long-term debt 3,139,631 3,177,016 Total capitalization 6,845,206 6,735,081 Current Liabilities: Securities due within one year 164,506 178,583 Notes payable 271,314 265,547 Obligations under capital leases 132,339 143,818 Accounts payable 303,791 354,819 Taxes accrued 153,531 25,717 Deferred energy 22,232 15,559 Interest accrued 57,099 70,370 Other 210,968 282,193 Total current liabilities 1,315,780 1,336,606 Deferred Credits and Other Liabilities: Deferred income taxes 1,560,197 1,562,979 Unamortized investment tax credits 130,821 133,572 Three Mile Island Unit 2 future costs 435,089 430,508 Regulatory liabilities 90,626 89,815 Other 657,121 652,658 Total deferred credits and other liabilities 2,873,854 2,869,532 Commitments and Contingencies (Note 1) Total Liabilities and Capital $11,034,840 $10,941,219 The accompanying notes are an integral part of the consolidated financial statements. 4 GPU, INC. AND SUBSIDIARY COMPANIES Consolidated Statements of Income (Unaudited) In Thousands (Except Per Share Data) Three Months Ended March 31, 1997 1996 Operating Revenues $1,042,064 $1,022,934 Operating Expenses: Fuel 95,001 98,495 Power purchased and interchanged 250,712 277,397 Deferral of energy costs, net 6,251 3,154 Other operation and maintenance 199,605 226,597 Depreciation and amortization 113,339 96,586 Taxes, other than income taxes 94,657 91,489 Total operating expenses 759,565 793,718 Operating Income Before Income Taxes 282,499 229,216 Income taxes 88,340 68,010 Operating Income 194,159 161,206 Other Income and Deductions: Allowance for other funds used during construction 348 1,229 Other income/(expense), net 24,503 10,309 Income taxes (1,026) (4,002) Total other income and deductions 23,825 7,536 Income Before Interest Charges and Preferred Dividends 217,984 168,742 Interest Charges and Preferred Dividends: Interest on long-term debt 46,137 46,612 Other interest 7,345 4,308 Allowance for borrowed funds used during construction (1,185) (1,861) Dividends on subsidiary-obligated mandatorily redeemable preferred securities 7,222 7,222 Preferred stock dividends of subsidiaries 3,427 4,208 Total interest charges and preferred dividends 62,946 60,489 Net Income $ 155,038 $ 108,253 Earnings Per Average Common Share $ 1.28 $ .90 Average Common Shares Outstanding 120,889 120,640 Cash Dividends Paid Per Share $ .485 $ .47 The accompanying notes are an integral part of the consolidated financial statements. 5 GPU, INC. AND SUBSIDIARY COMPANIES Consolidated Statements of Cash Flows (Unaudited) In Thousands Three Months Ended March 31, 1997 1996 Operating Activities: Net income $ 155,038 $ 108,253 Adjustments to reconcile income to cash provided: Depreciation and amortization 120,451 101,971 Amortization of property under capital leases 14,772 15,027 Equity in undistributed (earnings)/losses of affiliates (32,227) 645 Nuclear outage maintenance costs, net 6,920 7,575 Deferred income taxes and investment tax credits, net 2,852 (5,737) Deferred energy costs, net 6,251 2,953 Accretion income (2,690) (2,903) Allowance for other funds used during construction (348) (1,230) Changes in working capital: Receivables (66,360) (56,018) Materials and supplies (7,609) 5,697 Special deposits and prepayments (6,519) (47,737) Payables and accrued liabilities 70,639 124,637 Nonutility generation contract buyout costs (23,550) (2,049) Other, net (14,823) (19,901) Net cash provided by operating activities 222,797 231,183 Investing Activities: Cash construction expenditures (79,994) (104,470) Contributions to decommissioning trusts (10,255) (10,084) GPU International Group investments (35,045) (19,765) Other, net 20,476 12,699 Net cash used for investing activities (104,818) (121,620) Financing Activities: Issuance of long-term debt 26,698 - Increase/(Decrease) in notes payable, net (332) 103,489 Retirement of long-term debt (56,034) (51,103) Capital lease principal payments (12,329) (13,667) Dividends paid on common stock (58,493) (54,718) Net cash required by financing activities (100,490) (15,999) Effect of exchange rate changes on cash 622 221 Net increase in cash and temporary cash investments from above activities 18,111 93,785 Cash and temporary cash investments, beginning of year 31,604 18,422 Cash and temporary cash investments, end of period $ 49,715 $ 112,207 Supplemental Disclosure: Interest and preferred dividends paid $ 84,323 $ 78,313 Income taxes paid $ 4,213 $ 6,334 New capital lease obligations incurred $ 2,248 $ 21,929 Common stock dividends declared but not paid $ - $ - The accompanying notes are an integral part of the consolidated financial statements. 6 JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY Consolidated Balance Sheets In Thousands March 31, December 31, 1997 1996 (Unaudited) ASSETS Utility Plant: In service, at original cost $4,573,945 $4,528,676 Less, accumulated depreciation 1,856,502 1,811,620 Net utility plant in service 2,717,443 2,717,056 Construction work in progress 95,573 106,512 Other, net 103,217 111,116 Net utility plant 2,916,233 2,934,684 Other Property and Investments: Nuclear decommissioning trusts, at market 289,100 278,342 Nuclear fuel disposal trust, at market 102,582 101,661 Other, net 8,592 8,305 Total other property and investments 400,274 388,308 Current Assets: Cash and temporary cash investments 9,141 1,321 Special deposits 6,926 6,939 Accounts receivable: Customers, net 141,022 135,655 Other 50,268 33,228 Unbilled revenues 54,792 56,522 Materials and supplies, at average cost or less: Construction and maintenance 94,849 92,761 Fuel 19,070 19,257 Deferred income taxes 19,785 22,509 Prepayments 7,744 21,150 Total current assets 403,597 389,342 Deferred Debits and Other Assets: Regulatory assets: Income taxes recoverable through future rates 142,968 142,726 Nonutility generation contract buyout costs 139,000 139,000 Three Mile Island Unit 2 deferred costs 121,308 126,448 Unamortized property losses 99,726 94,767 Other 321,958 326,620 Total regulatory assets 824,960 829,561 Deferred income taxes 141,393 138,903 Other 21,831 29,121 Total deferred debits and other assets 988,184 997,585 Total Assets $4,708,288 $4,709,919 The accompanying notes are an integral part of the consolidated financial statements. 7 JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY Consolidated Balance Sheets In Thousands March 31, December 31, 1997 1996 (Unaudited) LIABILITIES AND CAPITAL Capitalization: Common stock $ 153,713 $ 153,713 Capital surplus 510,769 510,769 Retained earnings 860,159 825,001 Total common stockholder's equity 1,524,641 1,489,483 Cumulative preferred stock: With mandatory redemption 104,000 114,000 Without mandatory redemption 37,741 37,741 Company-obligated mandatorily redeemable preferred securities 125,000 125,000 Long-term debt 1,173,141 1,173,091 Total capitalization 2,964,523 2,939,315 Current Liabilities: Securities due within one year 65,884 110,075 Notes payable 7,900 31,800 Obligations under capital leases 89,231 96,150 Accounts payable: Affiliates 36,228 71,761 Other 87,240 94,258 Taxes accrued 88,346 2,063 Deferred energy credits 22,232 15,559 Interest accrued 29,797 28,350 Other 82,438 80,195 Total current liabilities 509,296 530,211 Deferred Credits and Other Liabilities: Deferred income taxes 665,089 664,440 Unamortized investment tax credits 58,343 59,893 Three Mile Island Unit 2 future costs 108,797 107,652 Nuclear fuel disposal fee 129,207 127,543 Regulatory liabilities 35,121 33,250 Other 237,912 247,615 Total deferred credits and other liabilities 1,234,469 1,240,393 Commitments and Contingencies (Note 1) Total Liabilities and Capital $4,708,288 $4,709,919 The accompanying notes are an integral part of the consolidated financial statements. 8 JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY Consolidated Statements of Income (Unaudited) In Thousands Three Months Ended March 31, 1997 1996 Operating Revenues $510,443 $529,274 Operating Expenses: Fuel 24,289 28,287 Power purchased and interchanged: Affiliates 4,367 3,583 Others 140,944 163,860 Deferral of energy and capacity costs, net 6,251 4,216 Other operation and maintenance 101,805 116,479 Depreciation and amortization 61,810 49,952 Taxes, other than income taxes 59,160 59,972 Total operating expenses 398,626 426,349 Operating Income Before Income Taxes 111,817 102,925 Income taxes 29,345 25,564 Operating Income 82,472 77,361 Other Income and Deductions: Allowance for other funds used during construction 131 1,003 Other income, net 3,457 2,142 Income taxes (409) (1,051) Total other income and deductions 3,179 2,094 Income Before Interest Charges and Dividends on Preferred Securities 85,651 79,455 Interest Charges and Dividends on Preferred Securities: Interest on long-term debt 22,768 22,514 Other interest 2,491 923 Allowance for borrowed funds used during construction (603) (1,153) Dividends on company-obligated mandatorily redeemable preferred securities 2,675 2,675 Total interest charges and dividends on preferred securities 27,331 24,959 Net Income 58,320 54,496 Preferred stock dividends 3,162 3,586 Earnings Available for Common Stock $ 55,158 $ 50,910 The accompanying notes are an integral part of the consolidated financial statements. 9 JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY Consolidated Statements of Cash Flows (Unaudited) In Thousands Three Months Ended March 31, 1997 1996 Operating Activities: Net income $ 58,320 $ 54,496 Adjustments to reconcile income to cash provided: Depreciation and amortization 64,153 53,629 Amortization of property under capital leases 8,364 8,137 Nuclear outage maintenance costs, net 4,866 5,342 Deferred income taxes and investment tax credits, net (2,783) (5,870) Deferred energy and capacity costs, net 6,251 4,211 Accretion income (2,690) (2,903) Allowance for other funds used during construction (131) (1,004) Changes in working capital: Receivables (20,677) 1,653 Materials and supplies (1,900) 5,220 Special deposits and prepayments 13,418 3,314 Payables and accrued liabilities 54,870 52,646 Nonutility generation contract buyout costs (15,000) - Other, net (1,944) (4,824) Net cash provided by operating activities 165,117 174,047 Investing Activities: Cash construction expenditures (43,134) (46,241) Contributions to decommissioning trusts (4,501) (4,500) Other, net (2,611) (806) Net cash used for investing activities (50,246) (51,547) Financing Activities: Decrease in notes payable, net (23,900) (800) Retirement of long-term debt (54,191) (25,701) Capital lease principal payments (5,798) (7,436) Dividends paid on common stock (20,000) - Dividends paid on preferred stock (3,162) (3,586) Net cash required by financing activities (107,051) (37,523) Net increase in cash and temporary cash investments from above activities 7,820 84,977 Cash and temporary cash investments, beginning of year 1,321 922 Cash and temporary cash investments, end of period $ 9,141 $ 85,899 Supplemental Disclosure: Interest paid $ 25,775 $ 24,642 Income taxes paid $ 211 $ 303 New capital lease obligations incurred $ 1,112 $ 21,177 The accompanying notes are an integral part of the consolidated financial statements. 10 METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES Consolidated Balance Sheets In Thousands March 31, December 31, 1997 1996 (Unaudited) ASSETS Utility Plant: In service, at original cost $2,315,120 $2,297,100 Less, accumulated depreciation 858,627 841,398 Net utility plant in service 1,456,493 1,455,702 Construction work in progress 88,571 98,171 Other, net 27,995 31,000 Net utility plant 1,573,059 1,584,873 Other Property and Investments: Nuclear decommissioning trusts, at market 135,573 131,475 Other, net 11,412 11,261 Total other property and investments 146,985 142,736 Current Assets: Cash and temporary cash investments 6,913 1,901 Special deposits 1,067 1,052 Accounts receivable: Customers, net 65,249 61,522 Other 33,948 17,368 Unbilled revenues 39,919 27,019 Materials and supplies, at average cost or less: Construction and maintenance 41,137 39,739 Fuel 10,724 11,026 Deferred income taxes 1,556 7,073 Prepayments 30,324 17,254 Total current assets 230,837 183,954 Deferred Debits and Other Assets: Regulatory assets: Income taxes recoverable through future rates 172,488 174,636 Three Mile Island Unit 2 deferred costs 148,158 144,782 Nonutility generation contract buyout costs 83,868 86,781 Other 60,155 56,184 Total regulatory assets 464,669 462,383 Deferred income taxes 86,801 85,169 Other 17,354 13,863 Total deferred debits and other assets 568,824 561,415 Total Assets $2,519,705 $2,472,978 The accompanying notes are an integral part of the consolidated financial statements. 11 METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES Consolidated Balance Sheets In Thousands March 31, December 31, 1997 1996 (Unaudited) LIABILITIES AND CAPITAL Capitalization: Common stock $ 66,273 $ 66,273 Capital surplus 370,200 370,200 Retained earnings 294,381 264,044 Total common stockholder's equity 730,854 700,517 Cumulative preferred stock 12,056 12,056 Company-obligated mandatorily redeemable preferred securities 100,000 100,000 Long-term debt 563,253 563,252 Total capitalization 1,406,163 1,375,825 Current Liabilities: Securities due within one year 40,020 40,020 Notes payable 68,542 50,667 Obligations under capital leases 27,050 29,964 Accounts payable: Affiliates 31,829 27,556 Other 81,829 89,857 Taxes accrued 27,575 11,222 Interest accrued 11,411 18,279 Other 38,473 45,825 Total current liabilities 326,729 313,390 Deferred Credits and Other Liabilities: Deferred income taxes 402,551 401,104 Three Mile Island Unit 2 future costs 217,495 215,204 Unamortized investment tax credits 31,133 31,584 Nuclear fuel disposal fee 29,187 28,811 Regulatory liabilities 25,838 25,981 Other 80,609 81,079 Total deferred credits and other liabilities 786,813 783,763 Commitments and Contingencies (Note 1) Total Liabilities and Capital $2,519,705 $2,472,978 The accompanying notes are an integral part of the consolidated financial statements. 12 METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES Consolidated Statements of Income (Unaudited) In Thousands Three Months Ended March 31, 1997 1996 Operating Revenues $255,260 $237,688 Operating Expenses: Fuel 24,489 25,913 Power purchased and interchanged: Affiliates 4,347 6,900 Others 55,640 53,425 Deferral of energy costs, net - 2,084 Other operation and maintenance 45,656 50,529 Depreciation and amortization 25,833 24,002 Taxes, other than income taxes 16,700 15,587 Total operating expenses 172,665 178,440 Operating Income Before Income Taxes 82,595 59,248 Income taxes 28,482 20,856 Operating Income 54,113 38,392 Other Income and Deductions: Allowance for other funds used during construction 179 43 Other income/(expense), net 343 226 Income taxes (25) (33) Total other income and deductions 497 236 Income Before Interest Charges and Dividends on Preferred Securities 54,610 38,628 Interest Charges and Dividends on Preferred Securities: Interest on long-term debt 11,254 11,467 Other interest 1,668 1,099 Allowance for borrowed funds used during construction (247) (225) Dividends on company-obligated mandatorily redeemable preferred securities 2,250 2,250 Total interest charges and dividends on preferred securities 14,925 14,591 Net Income 39,685 24,037 Preferred stock dividends 121 236 Earnings Available for Common Stock $ 39,564 $ 23,801 The accompanying notes are an integral part of the consolidated financial statements. 13 METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES Consolidated Statements of Cash Flows (Unaudited) In Thousands Three Months Ended March 31, 1997 1996 Operating Activities: Net income $ 39,685 $ 24,037 Adjustments to reconcile income to cash provided: Depreciation and amortization 28,512 23,381 Amortization of property under capital leases 3,790 3,941 Nuclear outage maintenance costs, net 1,368 1,491 Deferred income taxes and investment tax credits, net 6,156 (947) Deferred energy costs, net - 2,084 Allowance for other funds used during construction (179) (43) Changes in working capital: Receivables (33,207) 7,835 Materials and supplies (1,096) 952 Special deposits and prepayments (13,085) (24,410) Payables and accrued liabilities 8,507 12,246 Nonutility generation contract buyout costs (8,550) (2,049) Other, net (8,679) (4,378) Net cash provided by operating activities 23,222 44,140 Investing Activities: Cash construction expenditures (17,528) (31,449) Contributions to decommissioning trusts (4,438) (4,268) Other, net (11) (1,050) Net cash used for investing activities (21,977) (36,767) Financing Activities: Increase in notes payable, net 17,875 7,793 Capital lease principal payments (3,872) (3,449) Dividends paid on common stock (10,000) (10,000) Dividends paid on preferred stock (236) (472) Net cash provided/(required) by financing activities 3,767 (6,128) Net increase in cash and temporary cash investments from above activities 5,012 1,245 Cash and temporary cash investments, beginning of year 1,901 1,810 Cash and temporary cash investments, end of period $ 6,913 $ 3,055 Supplemental Disclosure: Interest paid $ 21,416 $ 21,363 Income taxes paid $ 1,655 $ 2,911 New capital lease obligations incurred $ 757 $ 497 The accompanying notes are an integral part of the consolidated financial statements. 14 PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES Consolidated Balance Sheets In Thousands March 31, December 31, 1997 1996 (Unaudited) ASSETS Utility Plant: In service, at original cost $2,749,150 $2,738,223 Less, accumulated depreciation 1,036,798 1,022,553 Net utility plant in service 1,712,352 1,715,670 Construction work in progress 69,994 72,757 Other, net 21,194 22,910 Net utility plant 1,803,540 1,811,337 Other Property and Investments: Nuclear decommissioning trusts, at market 56,718 54,194 Other, net 7,379 7,271 Total other property and investments 64,097 61,465 Current Assets: Cash and temporary cash investments 5,606 - Special deposits 2,390 2,348 Accounts receivable: Customers, net 73,839 73,190 Other 28,746 15,151 Unbilled revenues 46,211 31,350 Materials and supplies, at average cost or less: Construction and maintenance 50,339 49,007 Fuel 13,205 9,924 Deferred income taxes 467 - Prepayments 43,895 36,930 Total current assets 264,698 217,900 Deferred Debits and Other Assets: Regulatory assets: Income taxes recoverable through future rates 208,589 210,023 Three Mile Island Unit 2 deferred costs 86,386 85,287 Other 71,956 67,128 Total regulatory assets 366,931 362,438 Deferred income taxes 59,953 67,099 Other 17,694 14,826 Total deferred debits and other assets 444,578 444,363 Total Assets $2,576,913 $2,535,065 The accompanying notes are an integral part of the consolidated financial statements. 15 PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES Consolidated Balance Sheets In Thousands March 31, December 31, 1997 1996 (Unaudited) LIABILITIES AND CAPITAL Capitalization: Common stock $ 105,812 $ 105,812 Capital surplus 285,486 285,486 Retained earnings 391,840 363,702 Total common stockholder's equity 783,138 755,000 Cumulative preferred stock 16,681 16,681 Company-obligated mandatorily redeemable preferred securities 105,000 105,000 Long-term debt 626,456 656,459 Total capitalization 1,531,275 1,533,140 Current Liabilities: Securities due within one year 56,010 26,010 Notes payable 107,872 107,680 Obligations under capital leases 14,399 15,881 Accounts payable: Affiliates 23,003 20,432 Other 48,922 53,424 Taxes accrued 36,181 11,223 Interest accrued 11,278 19,192 Vacations accrued 4,887 5,172 Other 14,352 12,052 Total current liabilities 316,904 271,066 Deferred Credits and Other Liabilities: Deferred income taxes 467,426 473,268 Three Mile Island Unit 2 future costs 108,797 107,652 Unamortized investment tax credits 41,345 42,095 Nuclear fuel disposal fee 14,594 14,406 Regulatory liabilities 31,099 31,694 Other 65,473 61,744 Total deferred credits and other liabilities 728,734 730,859 Commitments and Contingencies (Note 1) Total Liabilities and Capital $2,576,913 $2,535,065 The accompanying notes are an integral part of the consolidated financial statements. 16 PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES Consolidated Statements of Income (Unaudited) In Thousands Three Months Ended March 31, 1997 1996 Operating Revenues $289,753 $269,329 Operating Expenses: Fuel 46,223 44,295 Power purchased and interchanged: Affiliates 1,652 1,357 Others 54,128 60,112 Deferral of energy costs, net - (3,146) Other operation and maintenance 53,888 59,899 Depreciation and amortization 25,696 22,632 Taxes, other than income taxes 18,797 15,930 Total operating expenses 200,384 201,079 Operating Income Before Income Taxes 89,369 68,250 Income taxes 30,513 21,590 Operating Income 58,856 46,660 Other Income and Deductions: Allowance for other funds used during construction 38 183 Other income/(expense), net 145 (861) Income taxes (69) (2) Total other income and deductions 114 (680) Income Before Interest Charges and Dividends on Preferred Securities 58,970 45,980 Interest Charges and Dividends on Preferred Securities: Interest on long-term debt 12,115 12,631 Other interest 1,999 1,020 Allowance for borrowed funds used during construction (335) (483) Dividends on company-obligated mandatorily redeemable preferred securities 2,297 2,297 Total interest charges and dividends on preferred securities 16,076 15,465 Net Income 42,894 30,515 Preferred stock dividends 144 386 Earnings Available for Common Stock $ 42,750 $ 30,129 The accompanying notes are an integral part of the consolidated financial statements. 17 PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES Consolidated Statements of Cash Flows (Unaudited) In Thousands Three Months Ended March 31, 1997 1996 Operating Activities: Net income $ 42,894 $ 30,515 Adjustments to reconcile income to cash provided: Depreciation and amortization 24,736 22,207 Amortization of property under capital leases 2,108 2,191 Nuclear outage maintenance costs, net 686 742 Deferred income taxes and investment tax credits, net 523 1,997 Deferred energy costs, net - (3,342) Allowance for other funds used during construction (38) (183) Changes in working capital: Receivables (29,105) 2,933 Materials and supplies (4,613) (475) Special deposits and prepayments (7,007) (28,705) Payables and accrued liabilities 18,979 (12,510) Other, net (5,622) 2,345 Net cash provided by operating activities 43,541 17,715 Investing Activities: Cash construction expenditures (19,488) (28,529) Contributions to decommissioning trusts (1,316) (1,316) Other, net - (992) Net cash used for investing activities (20,804) (30,837) Financing Activities: Increase in notes payable, net 192 61,371 Retirement of long-term debt - (25,000) Capital lease principal payments (2,149) (2,024) Dividends paid on common stock (15,000) (20,000) Dividends paid on preferred stock (174) (384) Net cash provided/(required) by financing activities (17,131) 13,963 Net increase in cash and temporary cash investments from above activities 5,606 841 Cash and temporary cash investments, beginning of year - 1,367 Cash and temporary cash investments, end of period $ 5,606 $ 2,208 Supplemental Disclosure: Interest paid $ 23,722 $ 23,539 Income taxes paid $ 2,347 $ 2,900 New capital lease obligations incurred $ 379 $ 255 The accompanying notes are an integral part of the consolidated financial statements. 18
GPU, Inc. and Subsidiary Companies COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GPU, Inc., a Pennsylvania corporation, is a holding company registered under the Public Utility Holding Company Act of 1935. GPU, Inc. does not directly operate any utility properties, but owns all the outstanding common stock of three domestic electric utilities serving customers in New Jersey -- Jersey Central Power & Light Company (JCP&L) -- and Pennsylvania -- Metropolitan Edison Company (Met-Ed) and Pennsylvania Electric Company (Penelec). The customer service, transmission and distribution operations of these electric utilities are conducting business under the name GPU Energy. JCP&L, Met-Ed and Penelec considered together are referred to as the "GPU Energy companies." The generation operations of 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 generation, transmission and distribution facilities and supply businesses in the United States and in foreign countries. Collectively, these are referred to as the "GPU International Group." Other wholly owned subsidiaries of GPU, Inc. are GPU Advanced Resources (GPU AR), a nonregulated subsidiary formed to engage in telecommunications services, energy services and retail energy sales; and GPU Service, Inc. (GPUS), which provides certain legal, accounting, financial and other services to the GPU companies. All of these companies considered together are referred to as "GPU." The Notes to Consolidated Financial Statements are presented below on a combined basis for all of GPU, Inc., JCP&L, Met-Ed and Penelec. 1. 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 March 31, 1997 and December 31, 1996, the GPU Energy companies' net investment in TMI-1 and Oyster Creek, including nuclear fuel, was as follows: Net Investment (in millions) TMI-1 Oyster Creek March 31, 1997 JCP&L $151 $748 Met-Ed 291 - Penelec 143 - Total $585 $748 19 GPU, Inc. and Subsidiary Companies Net Investment (in millions) TMI-1 Oyster Creek December 31, 1996 JCP&L $154 $766 Met-Ed 297 - Penelec 146 - Total $597 $766 The GPU Energy companies' net investment in TMI-2 at March 31, 1997 and December 31, 1996 was $87 million and $90 million, respectively (JCP&L $78 million and $81 million, respectively; Met-Ed $1 million and $1 million, respectively; Penelec $8 million and $8 million, respectively). JCP&L is collecting revenues for TMI-2 on a basis which provides for the recovery of its remaining investment in the plant by 2008. Met-Ed and Penelec are collecting revenues for TMI-2 related to their wholesale customers. Costs associated with the operation, maintenance and retirement of nuclear plants have continued to be significant and less predictable than costs associated with other sources of generation, in large part due to changing regulatory requirements, safety standards, availability of nuclear waste disposal facilities and experience gained in the construction and operation of nuclear facilities. The GPU Energy companies may also incur costs and experience reduced output at their nuclear plants because of the prevailing design criteria at the time of construction and the age of the plants' systems and equipment. In addition, for economic or other reasons, operation of these plants for the full term of their operating licenses cannot be assured. Also, not all risks associated with the ownership or operation of nuclear facilities may be adequately insured or insurable. Consequently, the recovery of costs associated with nuclear projects, including replacement power, any unamortized investment at the end of each plant's useful life (whether scheduled or premature), the carrying costs of that investment and retirement costs, is not assured. (See the Competition and the Changing Regulatory Environment section.) In addition to the continued operation of the Oyster Creek facility, JCP&L is exploring the sale or early retirement of the plant to mitigate costs associated with its continued operation. JCP&L is exploring these options due to the plant's high cost of generation compared to the current market price of electricity. If a decision is made to retire the plant early, retirement would likely occur in about 2000. Management believes that the current rate structure would allow for the recovery of and return on its net investment in the plant and provide for decommissioning costs. JCP&L plans to propose these options to the New Jersey Board of Public Utilities (NJBPU) as part of its July 1997 restructuring filing (See Competitive Environment, Management's Discussion and Analysis). TMI-2: The 1979 TMI-2 accident resulted in significant damage to, and contamination of, the plant and a release of radioactivity to the environment. A cleanup program was completed in 1990, and after receiving Nuclear 20 GPU, Inc. and Subsidiary Companies Regulatory Commission (NRC) approval, TMI-2 entered into long-term monitored storage in 1993. As a result of the accident and its aftermath, individual claims for alleged personal injury (including claims for punitive damages), which are material in amount, have been asserted against GPU, Inc. and the GPU Energy companies. Approximately 2,100 of such claims were filed in the United States District Court for the Middle District of Pennsylvania. Some of the claims also seek recovery for injuries from alleged emissions of radioactivity before and after the accident. At the time of the TMI-2 accident, as provided for in the Price-Anderson Act, the GPU Energy companies had (a) primary financial protection in the form of insurance policies with groups of insurance companies providing an aggregate of $140 million of primary coverage, (b) secondary financial protection in the form of private liability insurance under an industry retrospective rating plan providing for up to an aggregate of $335 million in premium charges under such plan, and (c) an indemnity agreement with the NRC for up to $85 million, bringing their total financial protection up to an aggregate of $560 million. Under the secondary level, the GPU Energy companies are subject to a retrospective premium charge of up to $5 million per reactor, or a total of $15 million (JCP&L $7.5 million; Met-Ed $5 million; Penelec $2.5 million). In October 1995, the U.S. Court of Appeals for the Third Circuit ruled that the Price-Anderson Act provides coverage under its primary and secondary levels for punitive as well as compensatory damages, but that punitive damages could not be recovered against the Federal Government under the third level of financial protection. In so doing, the Court of Appeals referred to the "finite fund" (the $560 million of financial protection under the Price- Anderson Act) to which plaintiffs must resort to get compensatory as well as punitive damages. The Court of Appeals also ruled that the standard of care owed by the defendants to a plaintiff was determined by the specific level of radiation which was released into the environment, as measured at the site boundary, rather than as measured at the specific site where the plaintiff was located at the time of the accident (as the defendants proposed). The Court of Appeals also held that each plaintiff still must demonstrate exposure to radiation released during the TMI-2 accident and that such exposure had resulted in injuries. In 1996, the U.S. Supreme Court denied petitions filed by GPU, Inc. and the GPU Energy companies to review the Court of Appeals' rulings. 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. 21 GPU, Inc. and Subsidiary Companies Based on the above, GPU, Inc. and the GPU Energy companies believe that any liability to which they might be subject by reason of the TMI-2 accident will not exceed their financial protection under the Price-Anderson Act. NUCLEAR PLANT RETIREMENT COSTS Retirement costs for nuclear plants include decommissioning the radiological portions of the plants and the cost of removal of nonradiological structures and materials. The disposal of spent nuclear fuel is covered separately by contracts with the Department of Energy (DOE). In 1990, the GPU Energy companies submitted a report, in compliance with NRC regulations, setting forth a funding plan (employing the external sinking fund method) for the decommissioning of their nuclear reactors. Under this plan, the GPU Energy companies intend to complete the funding for Oyster Creek and TMI-1 by the end of the plants' license terms, 2009 and 2014, respectively. The TMI-2 funding completion date is 2014, consistent with TMI-2's remaining in long-term storage and being decommissioned at the same time as TMI-1. Based on NRC studies, a comparable funding target was developed for TMI-2 which took the accident into account. Under the NRC regulations, the funding targets (in 1997 dollars) are as follows: (in millions) Oyster TMI-1 TMI-2 Creek JCP&L $ 43 $ 69 $224 Met-Ed 86 137 - Penelec 43 68 - Total $172 $274 $224 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 1997 dollars): 22 GPU, Inc. and Subsidiary Companies (in millions) Oyster GPU TMI-1 TMI-2 Creek Radiological decommissioning $315 $383 $371 Nonradiological cost of removal 78 35 * 35 Total $393 $418 $406 * Net of $7.5 million spent as of March 31, 1997. (in millions) Oyster JCP&L TMI-1 TMI-2 Creek Radiological decommissioning $ 79 $ 96 $371 Nonradiological cost of removal 20 9 * 35 Total $ 99 $105 $406 * Net of $1.9 million spent as of March 31, 1997. (in millions) Met-Ed TMI-1 TMI-2 Radiological decommissioning $157 $191 Nonradiological cost of removal 39 17 * Total $196 $208 * Net of $3.7 million spent as of March 31, 1997. (in millions) Penelec TMI-1 TMI-2 Radiological decommissioning $ 79 $ 96 Nonradiological cost of removal 19 9 * Total $ 98 $105 * Net of $1.9 million spent as of March 31, 1997. 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 23 GPU, Inc. and Subsidiary Companies as Nuclear Decommissioning Trusts, at Market on the Consolidated Balance Sheets. Accounting for retirement costs may change based upon the Financial Accounting Standards Board (FASB) Exposure Draft discussed below. The FASB has issued an Exposure Draft titled "Accounting for Certain Liabilities Related to Closure or Removal of Long-Lived Assets," which includes nuclear plant retirement costs. If the Exposure Draft is adopted, Oyster Creek and TMI-1 future retirement costs would have to be recognized as a liability immediately, rather than the current industry practice of accruing these costs in accumulated depreciation over the life of the plants. A regulatory asset for amounts probable of recovery through rates would also be established. Any amounts not probable of recovery through rates would have to be charged to expense. For TMI-2, a liability has already been recognized, based on the 1995 site-specific study (in 1997 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. TMI-1 and Oyster Creek: The NJBPU has granted JCP&L annual revenues for TMI-1 and Oyster Creek retirement costs of $2.5 million and $13.5 million, respectively. These annual revenues are based on both the NRC funding targets for radiological decommissioning costs and a site-specific study which was performed in 1988 for nonradiological costs of removal. The Stipulation of Final Settlement approved by the NJBPU in March 1997 allows for JCP&L's future collection of retirement costs to increase annually to $5.2 million and $22.5 million for TMI-1 and Oyster Creek, respectively, beginning in 1998, based on the 1995 site-specific study estimates. (See discussion of Stipulation of Final Settlement in Rate Matters, 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 for the first quarter of 1997 and the provisions for the future expenditure of these funds, which have been made in accumulated depreciation, are as follows: (in millions) Oyster TMI-1 Creek Amount expensed for the three months ended March 31, 1997: JCP&L $ 1 $ 3 Met-Ed 2 - Penelec 1 - $ 4 $ 3 24 GPU, Inc. and Subsidiary Companies (in millions) Oyster TMI-1 Creek Accumulated depreciation provision at March 31, 1997: JCP&L $ 31 $181 Met-Ed 54 - Penelec 22 - $107 $181 Management believes that any TMI-1 and Oyster Creek retirement costs, in excess of those currently recognized for ratemaking purposes, should be recoverable from customers. TMI-2: The estimated liabilities for TMI-2 future retirement costs (reflected as Three Mile Island Unit 2 Future Costs on the Consolidated Balance Sheets) as of March 31, 1997 and December 31, 1996 are as follows: (in millions) GPU JCP&L Met-Ed Penelec March 31, 1997 $435 $109 $217 $109 December 31, 1996 $431 $108 $215 $108 These amounts are based upon the 1995 site-specific study estimates (in 1997 and 1996 dollars, respectively) discussed above and an estimate for remaining incremental monitored storage costs of $17 million (JCP&L $4 million; Met-Ed $9 million; Penelec $4 million) as of March 31, 1997 and December 31, 1996, as a result of TMI-2's entering long-term monitored storage in 1993. The GPU Energy companies are incurring annual incremental monitored storage costs of approximately $1 million (JCP&L $250 thousand; Met-Ed $500 thousand; Penelec $250 thousand). Offsetting the $435 million liability at March 31, 1997 is $269 million (JCP&L $43 million; Met-Ed $147 million; Penelec $79 million) which is probable of recovery from customers and included in Three Mile Island Unit 2 Deferred Costs on the Consolidated Balance Sheets, and $185 million (JCP&L $75 million; Met-Ed $78 million; Penelec $32 million) in trust funds for TMI-2 and included in Nuclear Decommissioning Trusts, at Market on the Consolidated Balance Sheets. Earnings on trust fund deposits are included in amounts shown on the Consolidated Balance Sheets under Three Mile Island Unit 2 Deferred Costs. TMI-2 decommissioning costs charged to depreciation expense in the first quarter of 1997 amounted to $3 million (JCP&L $782 thousand; Met-Ed $2,471 thousand; Penelec $242 thousand). The NJBPU and PaPUC have granted JCP&L and Met-Ed, respectively, TMI-2 decommissioning revenues for the NRC funding target and allowances for the cost of removal of nonradiological structures and materials. In addition, JCP&L is recovering its share of TMI-2's incremental monitored storage costs. The Stipulation of Final Settlement approved by the NJBPU in March 1997 25 GPU, Inc. and Subsidiary Companies adjusts JCP&L's future revenues for retirement costs based on the 1995 site- specific study estimates, beginning in 1998. Based on Met-Ed's rate order, Penelec has recorded a regulatory asset for that portion of such costs which it believes to be probable of recovery. At March 31, 1997 the accident-related portion of TMI-2 radiological decommissioning costs is considered to be $68 million (JCP&L $17 million, Met-Ed $34 million; Penelec $17 million), which is the difference between the 1995 TMI-1 and TMI-2 site-specific study estimates (in 1997 dollars). In connection with rate case resolutions at the time, JCP&L, Met-Ed and Penelec made contributions to irrevocable external trusts relating to their shares of the accident-related portions of the decommissioning liability. In 1990, JCP&L contributed $15 million and in 1991, Met-Ed and Penelec contributed $40 million and $20 million, respectively, to irrevocable external trusts. These contributions were not recovered from customers and have been expensed. The GPU Energy companies will not pursue recovery from customers for any of these amounts contributed in excess of the $68 million accident-related portion referred to above. JCP&L intends to seek recovery for any increases in TMI-2 retirement costs, and Met-Ed and Penelec intend to seek recovery for any increases in the nonaccident-related portion of such costs, but recognize that recovery cannot be assured. INSURANCE GPU has insurance (subject to retentions and deductibles) for its operations and facilities including coverage for property damage, liability to employees and third parties, and loss of use and occupancy (primarily incremental replacement power costs). There is no assurance that GPU will maintain all existing insurance coverages. Losses or liabilities that are not completely insured, unless allowed to be recovered through ratemaking, could have a material adverse effect on the financial position of GPU. The decontamination liability, premature decommissioning and property damage insurance coverage for the TMI station and for Oyster Creek totals $2.7 billion per site. In accordance with NRC regulations, these insurance policies generally require that proceeds first be used for stabilization of the reactors and then to pay for decontamination and debris removal expenses. Any remaining amounts available under the policies may then be used for repair and restoration costs and decommissioning costs. Consequently, there can be no assurance that in the event of a nuclear incident, property damage insurance proceeds would be available for the repair and restoration of that station. The Price-Anderson Act limits GPU's liability to third parties for a nuclear incident at one of its sites to approximately $8.9 billion. Coverage for the first $200 million of such liability is provided by private insurance. The remaining coverage, or secondary financial protection, is provided by retrospective premiums payable by all nuclear reactor owners. Under secondary financial protection, a nuclear incident at any licensed nuclear power reactor in the country, including those owned by the GPU Energy companies, could 26 GPU, Inc. and Subsidiary Companies 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 $53 million (JCP&L $32 million; Met-Ed $14 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 a 17 week waiting period at $3.5 million per week, and after 23 weeks of an outage, continues for three years beginning at $1.8 million and $2.6 million per week for the first year for Oyster Creek and TMI-1, respectively, decreasing to 80% of such amounts for years two and three. 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 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 27 GPU, Inc. and Subsidiary Companies 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 Statement of Financial Accounting Standards No. (FAS) 71, "Accounting for the Effects of Certain Types of Regulation." Decommissioning costs, for which a liability may have to be recorded (See Nuclear Plant Retirement Costs), and corresponding regulatory asset for amounts recoverable from customers, could also be subject to writedowns. The inability to recover these stranded costs would have a material adverse effect on GPU's results of operations. (See additional discussion of stranded costs in Competitive Environment, 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. 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 702 351 157 194 1998 691 340 152 199 1999 706 344 152 210 2000 804 347 196 261 2001 873 353 225 295 * Actual. ** The 1997 amounts consist of actual payments through March 31, 1997 and estimated payments for the remainder of the year. As of March 31, 1997, facilities covered by agreements having 1,652 MW (JCP&L 896 MW; Met-Ed 356 MW; Penelec 400 MW) of capacity were in service. While a few of these NUG facilities are dispatchable, most are must-run and generally obligate the GPU Energy companies to purchase, at the contract price, the output up to the contract limits. Substantially all unbuilt NUG facilities for which the GPU Energy companies have executed agreements are fully dispatchable. 28 GPU, Inc. and Subsidiary Companies 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. In April 1997, Met-Ed and Penelec issued requests for proposals (RFPs) to 24 NUG projects which currently supply a total of approximately 760 MW under power purchase agreements. The RFPs request the NUGs to propose buyouts, buydowns and/or restructurings of current power purchase contracts in return for cash payments. Met-Ed and Penelec have targeted a total of $1 billion to carry out the buyout or buydown of these contracts, which amount may be modified based on the proposals received. Met-Ed and Penelec plan to fund the cash payments through the issuance of PaPUC approved securitized transition bonds (See Competitive Environment, Management's Discussion and Analysis). To the extent there are winning bidders, they are expected to be notified in the second quarter of 1997, and payments are expected to be made in the first half of 1998. JCP&L has contracts through 2002 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. 29 GPU, Inc. and Subsidiary Companies Met-Ed has contracts through 1999 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. Penelec has contracts through 2000 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. In February 1997, Met-Ed and Penelec entered into restructured power purchase agreements with AES Power Corporation (AES) for 377 MW and 80 MW of capacity and related energy, respectively, related to a combined-cycle generating facility that AES plans to construct in Pennsylvania. The restructured power purchase agreements are subject to PaPUC approval. Met-Ed has paid a total of $63.5 million to previous developers and AES to terminate the original power purchase agreements. 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. Penelec has entered into a restructured power purchase agreement with the developer of a proposed 80 MW coal-fired cogeneration facility. The restructured power purchase agreement is subject to PaPUC approval. Penelec has paid the developer $11.7 million to terminate the original power purchase agreement. Penelec has agreed to pay the developer up to an additional $5 million, if the PaPUC does not approve the agreement or issues an order that is not acceptable to Penelec. 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. 30 GPU, Inc. and Subsidiary Companies 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 Energy Master Plan 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.) Regulatory Assets and Liabilities: Regulatory Assets and Regulatory Liabilities, as reflected in the March 31, 1997 and December 31, 1996 Consolidated Balance Sheets in accordance with the provisions of FAS 71, "Accounting for the Effects of Certain Types of Regulation", were as follows: GPU Assets (in thousands) March 31, December 31, 1997 1996 Income taxes recoverable through future rates $ 524,045 $ 527,385 TMI-2 deferred costs 355,852 356,517 Nonutility generation contract buyout costs 239,568 242,481 Unamortized property losses 105,166 100,310 Other postretirement benefits 80,599 76,569 Environmental remediation 86,975 78,136 N.J. unit tax 44,399 45,877 Unamortized loss on reacquired debt 44,123 45,378 Load and demand-side management programs 35,853 40,770 N.J. low-level radwaste disposal 35,333 37,525 DOE enrichment facility decommissioning 35,026 36,352 Nuclear fuel disposal fee 21,653 21,552 Storm damage 20,028 20,226 Other 26,508 24,194 Total $1,655,128 $1,653,272 Liabilities (in thousands) March 31, December 31, 1997 1996 Income taxes refundable through future rates $ 86,046 $ 87,735 Other 4,580 2,080 Total $ 90,626 $ 89,815 31 GPU, Inc. and Subsidiary Companies JCP&L Assets (in thousands) March 31, December 31, 1997 1996 Income taxes recoverable through future rates $ 142,968 $ 142,726 TMI-2 deferred costs 121,308 126,448 Nonutility generation contract buyout costs 139,000 139,000 Unamortized property losses 99,726 94,767 Other postretirement benefits 45,603 44,024 Environmental remediation 57,991 55,285 N.J. unit tax 44,399 45,877 Unamortized loss on reacquired debt 30,839 31,469 Load and demand-side management programs 35,853 40,770 N.J. low-level radwaste disposal 35,333 37,525 DOE enrichment facility decommissioning 22,129 23,150 Nuclear fuel disposal fee 23,548 23,319 Storm damage 20,028 20,226 Other 6,235 4,975 Total $ 824,960 $ 829,561 Liabilities (in thousands) March 31, December 31, 1997 1996 Income taxes refundable through future rates $ 31,729 $ 32,567 Other 3,392 683 Total $ 35,121 $ 33,250 Met-Ed Assets (in thousands) March 31, December 31, 1997 1996 Income taxes recoverable through future rates $ 172,488 $ 174,636 TMI-2 deferred costs 148,158 144,782 Nonutility generation contract buyout costs 83,868 86,781 Unamortized property losses 3,004 3,113 Other postretirement benefits 34,996 32,545 Environmental remediation 4,121 2,575 Unamortized loss on reacquired debt 5,911 6,223 DOE enrichment facility decommissioning 8,598 8,801 Nuclear fuel disposal fee (1,345) (1,282) Other 4,870 4,209 Total $ 464,669 $ 462,383 32 GPU, Inc. and Subsidiary Companies Liabilities (in thousands) March 31, December 31, 1997 1996 Income taxes refundable through future rates $ 23,166 $ 23,486 Other 2,672 2,495 Total $ 25,838 $ 25,981 Penelec Assets (in thousands) March 31, December 31, 1997 1996 Income taxes recoverable through future rates $ 208,589 $ 210,023 TMI-2 deferred costs 86,386 85,287 Nonutility generation contract buyout costs 16,700 16,700 Unamortized property losses 2,436 2,430 Environmental remediation 24,863 20,276 Unamortized loss on reacquired debt 7,373 7,686 DOE enrichment facility decommissioning 4,299 4,401 Nuclear fuel disposal fee (550) (485) Other 16,835 16,120 Total $ 366,931 $ 362,438 Liabilities (in thousands) March 31, December 31, 1997 1996 Income taxes refundable through future rates $ 31,151 $ 31,682 Other (52) 12 Total $ 31,099 $ 31,694 Income taxes recoverable/refundable through future rates: Represents amounts deferred due to the implementation of FAS 109, "Accounting for Income Taxes," in 1993. TMI-2 deferred costs: Represents costs that are recoverable through rates for the GPU Energy companies' remaining investment in the plant and fuel core, radiological decommissioning and the cost of removal of nonradiological structures and materials in accordance with the 1995 site-specific study (in 1997 dollars) and JCP&L's share of long-term monitored storage costs. For additional information, see 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. 33 GPU, Inc. and Subsidiary Companies 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." Environmental remediation: Consists of amounts related to the investigation and remediation of several manufactured gas plant sites formerly owned by JCP&L, as well as several other JCP&L sites; Penelec's Seward station property; and future closure costs of various ash disposal sites for the GPU Energy companies. For additional information, see the Environmental Matters section. N.J. unit tax: Represents certain state taxes, with interest, for which JCP&L received NJBPU approval in 1993 to recover over a ten-year period. Unamortized loss on reacquired debt: Represents premiums and expenses incurred in the early redemption of long-term debt. In accordance with FERC regulations, reacquired debt costs are amortized over the remaining original life of the retired debt. Load and demand-side management (DSM) programs: Consists of load management costs and other DSM program expenditures that are currently being recovered, with interest, through JCP&L's retail base rates. Also includes provisions for lost revenues between base rate cases and performance incentives. N.J. low-level radwaste disposal: Represents the estimated assessment for the siting of a disposal facility for low-level waste from Oyster Creek, less amortization, as allowed in JCP&L's rates. DOE enrichment facility decommissioning: Represents payments to the DOE over a 15-year period beginning in 1994. Nuclear fuel disposal fee: Represents amounts recoverable through rates for estimated future disposal costs for spent nuclear fuel at Oyster Creek and TMI-1 in accordance with the Nuclear Waste Policy Act of 1982. Storm damage: Relates to incremental noncapital costs associated with various storms in the JCP&L service territory that are not recoverable through insurance. These amounts were deferred based upon past rate recovery precedent. An annual amortization amount is included in JCP&L's retail base rates and is charged to expense. Amounts related to the decommissioning of TMI-1 and Oyster Creek, which are not included in Regulatory Assets on the Consolidated Balance Sheets, are separately disclosed in the Nuclear Plant Retirement Costs section. Accounting Matters: Historically, electric utility rates have been based on a utility's costs. As a result, the GPU Energy companies account for the economic effects of cost-based ratemaking regulation under the provisions of FAS 71. FAS 71 requires regulated entities, in certain circumstances, to defer as regulatory assets, the impact on operations of costs expected to be recovered in future 34 GPU, Inc. and Subsidiary Companies rates. GPU has recorded on the Consolidated Balance Sheets $1.7 billion (JCP&L $825 million; Met-Ed $465 million; Penelec $367 million) in regulatory assets in accordance with FAS 71 (See Regulatory Assets and Liabilities section of Competition and the Changing Regulatory Environment). FAS 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. Although the GPU Energy companies currently believe they meet the requirements for continued application of FAS 71, 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. FAS 121, "Accounting for the Impairment of Long-Lived Assets," 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. In response to the continuing deregulation of the electric utility industry, the U.S. Securities and Exchange Commission (SEC) has questioned the continued applicability of FAS 71 by California investor-owned utilities with respect to their electric generation operations. The GPU Energy companies believe that the SEC's concern may also apply to them since retail access legislation has been enacted in Pennsylvania and proposed in New Jersey. In the event that the application of FAS 71 is discontinued for electric generation operations, a noncash write-off of previously established regulatory assets and liabilities related to the affected operations would be required. In addition, write-downs of plant assets could be required in accordance with FAS 121, "Accounting for the Impairment of Long-Lived Assets," including a write-off of any loss from the divestiture or abandonment of generation assets. The amount of any write-offs could have a material adverse effect on GPU's results of operations and financial condition. The FASB's Emerging Issues Task Force has agreed to address this issue during the second quarter of 1997. At this time, GPU is unable to determine when and to what extent FAS 71 will no longer be applicable. 35 GPU, Inc. and Subsidiary Companies 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 Titles I and IV of the federal Clean Air Act Amendments of 1990 (Clean Air Act), the GPU Energy companies expect to spend up to $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 $241 million (JCP&L $43 million; Met-Ed $96 million; Penelec $102 million) has already been spent. In developing their least-cost plan to comply with the Clean Air Act, the GPU Energy companies will continue to evaluate major capital investments compared to participation in the sulfur dioxide (SO2) emission allowance market, the expected nitrogen oxide (NOx) emissions trading market and the use of low-sulfur fuel or retirement of facilities. In 1994, the Ozone Transport Commission (OTC), consisting of representatives of 12 northeast states (including New Jersey and Pennsylvania) and the District of Columbia, proposed reductions in NOx emissions it believes necessary to meet ambient air quality standards for ozone and the statutory deadlines set by the Clean Air Act. 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 above 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. 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 36 GPU, Inc. and Subsidiary Companies 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 $20 million and has a recorded liability of $12 million at March 31, 1997. These cost estimates are subject to uncertainties based on continuing discussions with the PaDEP as to the method of remediation, the extent of remediation required and available cleanup technologies. Penelec 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 March 31, 1997. 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 all of these sites. The cost estimates for the closure of these sites range from approximately $15 million to $29 million, and a liability of $15 million (JCP&L $1 million; Met-Ed $4 million; Penelec $10 million) is reflected on the Consolidated Balance Sheets at March 31, 1997. JCP&L's share of these costs is 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 $15 million is reflected on the Consolidated Balance Sheets at March 31, 1997. 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 March 31, 1997, JCP&L has spent approximately $26 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 37 GPU, Inc. and Subsidiary Companies excess of $45 million due to significant uncertainties, including changes in acceptable remediation methods and technologies. In March 1997, JCP&L's request to establish a Remediation Adjustment Clause for the recovery of MGP remediation costs was approved by the NJBPU as part of the Stipulation of Final Settlement (See Rate Matters section, Management's Discussion and Analysis). At March 31, 1997, JCP&L had recorded on its Consolidated Balance Sheet a regulatory asset of $52 million, which included approximately $45 million related to expected future costs and approximately $7 million for past remediation expenditures in excess of collections from customers (including interest) (See Regulatory Assets and Liabilities). 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 March 31, 1997, the GPU International Group had investments totaling approximately $790 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 locations, including foreign currency fluctuations (see GPU International Group in Management's Discussion and Analysis). At March 31, 1997, GPU, Inc.'s aggregate investment in the GPU International Group was $211 million; GPU, Inc. has also guaranteed up to an additional $857 million of GPU International Group obligations. Of this amount, $656 million is included in Long-term debt on GPU's Consolidated Balance Sheet at March 31, 1997; $30 million relates to a GPU International, Inc. revolving credit agreement; and $171 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 in three NUG projects which have long-term power purchase agreements with NIMO with an aggregate book value of approximately $34 million. In March 1997, NIMO and 19 independent power producers (IPP), including the GPU International Group, agreed in principle to restructure or terminate their 44 power purchase agreements. NIMO is offering $3.6 billion in cash and/or debt securities, and 46 million shares of NIMO common stock to either restructure or terminate these power purchase agreements. The specific terms of restructured contracts that may be executed will be negotiated separately with each IPP. 38 GPU, Inc. and Subsidiary Companies Parties to the agreement must still resolve a number of important issues and final resolution will require the execution of separate agreements for each project; approval by NIMO shareholders, the New York Public Service Commission, and other state and federal agencies; third party consents; successful financing by NIMO; and resolution of certain tax issues. The parties are attempting to complete the transactions by the end of 1997. There can be no assurance as to the outcome of this matter. NIMO has also initiated an action in federal court seeking to invalidate numerous NUG contracts, including the three GPU International, Inc. projects discussed above. GPU International, Inc. has filed motions to dismiss the complaint. 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 scheduled to be held on May 1, 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; and (3) the amount of the proposed tax may change, there is no certainty that this tax, if levied, would be enacted as currently proposed. Other: GPU's construction programs, for which substantial commitments have been incurred and which extend over several years, contemplate expenditures of $402 million (JCP&L $185 million; Met-Ed $90 million; Penelec $120 million; Other $7 million) during 1997. As a consequence of reliability, licensing, environmental and other requirements, additions to utility plant may be required relatively late in their expected service lives. If such additions are made, current depreciation allowance methodology may not make adequate provision for the recovery of such investments during their remaining lives. 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 (JCP&L $23 million; Met-Ed $29 million; Penelec $81 million) for 1997. 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 2000, through the expiration of the final agreement in 2004. Payments pursuant to these agreements are estimated to be $145 million in 1997, $128 39 GPU, Inc. and Subsidiary Companies 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 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. 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 site licensing the facility is estimated to be $58 million, which will be paid through 2002. Through March 31, 1997, $6 million has been paid. As a result, at March 31, 1997, a liability of $52 million is reflected on the Consolidated Balance Sheets. JCP&L is recovering these costs from customers, and a regulatory asset has also been recorded. (See the Regulatory Assets and Liabilities section.) 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. 40 GPU, Inc. and Subsidiary Companies 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 March 31, 1997, approximately 53% of GPU's workforce was represented by unions for collective bargaining purposes. Met-Ed, Penelec and JCP&L's collective bargaining agreements expire in 1997, 1998 and 1999, 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. 2. 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% 41 GPU, Inc. and Subsidiary Companies 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: March 31, December 31, Balance Sheet Data (in thousands) 1997 1996 Current Assets $ 953,689 $ 1,016,730 Noncurrent Assets 5,520,004 5,761,593 Current Liabilities (1,094,488) (1,207,038) Noncurrent Liabilities (3,982,047) (4,080,475) Net Assets $ 1,397,158 $ 1,490,810 GPU International Group's Equity in Net Assets $ 689,773 $ 735,763 For the Three Months Ended March 31, March 31, Earnings Data (in thousands) 1997 1996 Revenues $ 1,824,884 $ 173,020 Operating Income $ 185,828 $ 32,482 Net Income $ 48,145 $ 3 GPU International Group's Equity in Net Income/(Loss) $ 32,227 $ (645) As of March 31, 1997 and December 31, 1996, the amount of investments accounted for under the equity method included goodwill, net of accumulated amortization, of approximately $23.7 million and $23.8 million, respectively, which is amortized to expense over periods not exceeding 40 years. Amortization expense amounted to $0.1 million and $0.2 million for the three months ended March 31, 1997 and 1996, respectively. 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. 42 GPU, Inc. and Subsidiary Companies COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GPU, Inc. owns all the outstanding common stock of three domestic electric utilities -- Jersey Central Power & Light Company (JCP&L), Metropolitan Edison Company (Met-Ed) and Pennsylvania Electric Company (Penelec). The customer service, transmission and distribution operations of these electric utilities are conducting business under the name GPU Energy. JCP&L, Met-Ed and Penelec considered together are referred to as the "GPU Energy companies." The generation operations of 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 generation, transmission and distribution facilities and supply businesses in the United States and in foreign countries. Collectively, these are referred to as the "GPU International Group." GPU Service, Inc. provides certain legal, accounting, financial and other services to the GPU companies. In February 1997, GPU formed GPU Advanced Resources, Inc. (GPU AR) to engage in telecommunications services, energy services and retail energy sales. All of these companies considered together are referred to as "GPU." GPU RESULTS OF OPERATIONS GPU's earnings for the first quarter ended March 31, 1997 were $155.0 million, or $1.28 per share, compared to 1996 first quarter earnings of $108.3 million, or $0.90 per share. The increase in earnings was due primarily to higher GPU International Group income, resulting mainly from the May 1996 acquisition of Midlands Electricity plc (Midlands); the recording of step increases in operating revenue by Met-Ed and Penelec as a result of including their energy cost rates (ECRs) in base rates and the cessation of deferred energy accounting, both effective January 1, 1997; and lower operation and maintenance expenses. Partially offsetting these items were certain charges in connection with the New Jersey Board of Public Utilities' (NJBPU) approval of a Stipulation of Final Settlement (Final Settlement) (See RATE MATTERS), and a gain on sale of securities in 1996. Also affecting the first quarter's results were lower weather related residential sales due to warmer winter weather this year as compared to last year, offset by increased industrial and commercial customer usage. OPERATING REVENUES: Total revenues for the first quarter of 1997 increased 1.9% to $1.0 billion, as compared to the first quarter of 1996. The components of the changes are as follows: 43 GPU, Inc. and Subsidiary Companies GPU RESULTS OF OPERATIONS (continued) (In Millions) Kilowatt-hour (KWH) revenues $ 28.8 Energy revenues (10.9) Other revenues 1.2 Increase in revenues $ 19.1 Kilowatt-hour revenues The increase in KWH revenues for the three month period was due primarily to the step increases recorded by Met-Ed and Penelec from inclusion of their ECRs in base rates, and increased usage by commercial and industrial customers offset by the warmer winter weather in the first quarter of 1997 as compared to the first quarter of 1996. KWH revenues now includes Met-Ed and Penelec's energy and tax revenues, consistent with the inclusion of their ECRs and State Tax Adjustment Surcharges (STAS) in base rates, effective January 1, 1997 (See COMPETITIVE ENVIRONMENT). Met-Ed and Penelec's energy and tax revenues for the prior year have been reclassified for comparative purposes. Energy revenues (JCP&L only) Changes in energy revenues do not affect earnings as they reflect corresponding changes in JCP&L's levelized energy adjustment clause (LEAC) billed to customers and expensed. The decrease was due primarily to a decrease in sales to other utilities. Other revenues Generally, changes in other revenues do not affect earnings as they are offset by corresponding changes in expense, such as taxes other than income taxes, in the case of JCP&L. OPERATING EXPENSES: Power purchased and interchanged (PP&I) For JCP&L, changes in the energy component of PP&I expense do not significantly affect earnings since cost increases or decreases are passed through the LEAC. For Met-Ed and Penelec, such energy cost variances are no longer subject to deferred accounting. However, Met-Ed and Penelec's incremental nonutility generation (NUG) costs are being deferred, based on the Pennsylvania restructuring legislation (see COMPETITIVE ENVIRONMENT). Lower reserve capacity expense (which is a component of PP&I) contributed to earnings for the first quarter of 1997. Fuel and Deferral of energy costs, net Deferral of energy costs for 1997 only include amounts for JCP&L because Met-Ed and Penelec's ECRs were combined with base rates effective January 1, 1997 (see COMPETITIVE ENVIRONMENT). The cessation of deferred energy 44 GPU, Inc. and Subsidiary Companies GPU RESULTS OF OPERATIONS (continued) accounting by Met-Ed and Penelec did not have a significant impact on earnings for the first quarter of 1997. For JCP&L, fuel and deferral of energy costs do not affect earnings as they are offset by corresponding changes in energy revenues. Other operation and maintenance (O&M) The decrease in other O&M expenses for the three month period was due primarily to a decrease in winter storm repair work, and a decrease in insurance costs. Depreciation and amortization The increase in depreciation and amortization expense for the three month period was due primarily to additions to plant in service. Taxes, other than income taxes For JCP&L, changes in taxes other than income taxes do not significantly affect earnings as they are substantially recovered in revenues. However, effective January 1, 1997, Met-Ed and Penelec's STAS were combined with base rates, and are no longer subject to annual adjustment. Therefore, fluctuations in such taxes can impact earnings (see COMPETITIVE ENVIRONMENT). OTHER INCOME AND DEDUCTIONS: Other income/(expense), net The increase in other income/(expense) was due primarily to increased income at GPU Electric of approximately $24 million, mainly due to the inclusion of Midlands, partially offset by GPU International's sale of securities in the first quarter of 1996, which resulted in a gain of $9.5 million (pre tax). INTEREST CHARGES AND PREFERRED DIVIDENDS: Other interest The increase in other interest for the three month period was due primarily to higher short-term debt levels. 45 GPU, Inc. and Subsidiary Companies JCP&L RESULTS OF OPERATIONS JCP&L's earnings for the first quarter ended March 31, 1997 were $55.2 million, compared to 1996 first quarter earnings of $50.9 million. The increase in earnings was due primarily to a reduction in purchased power and other O&M expenses, partially offset by lower weather-related residential sales and certain charges in connection with the NJBPU's approval of the Final Settlement (See RATE MATTERS). OPERATING REVENUES: Total revenues for the first quarter of 1997 decreased 3.6% to $510 million, as compared to the first quarter of 1996. The components of the changes are as follows: (In Millions) Kilowatt-hour revenues (excluding energy portion) $ (5.5) Energy revenues (12.9) Other revenues (0.4) Decrease in revenues $(18.8) Kilowatt-hour revenues The decrease in KWH revenues was due to reduced sales to residential customers due to warmer winter weather this year as compared to last year, partially offset by increased usage by existing commercial and industrial customers, and a slight increase in the number of residential and commercial customers. Also contributing to the decrease was a charge related to JCP&L's final settlement (see RATE MATTERS), representing the portion of JCP&L's return on equity which exceeds the maximum amount allowed, and must be applied against customers' base rates. Energy revenues Changes in energy revenues do not affect earnings as they reflect corresponding changes in the energy cost rates billed to customers and expensed. The decrease in energy revenues was due primarily to a decrease in sales to other utilities, and to residential customers due to the warmer winter weather, partially offset by higher energy cost rates in effect. Other revenues Generally, changes in other revenues do not affect earnings as they are offset by corresponding changes in expense, such as taxes other than income taxes. 46 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 (which is a component of PP&I) due to reduced purchases from Pennsylvania Power & Light contributed to earnings for the first quarter of 1997. Fuel and Deferral of energy and capacity costs, net 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. Other operation and maintenance The decrease in other O&M expenses was primarily due to decreases in project expenses at Oyster Creek, and a decrease in storm and emergency related activity. Depreciation and amortization The increase in depreciation and amortization expense was due primarily to charges related to JCP&L's Final Settlement (see RATE MATTERS). One of the charges represents the portion of JCP&L's return on equity which exceeds the maximum amount allowed, and must be applied against JCP&L's stranded costs. The other charge represents an allowance for forecasted nuclear additions. Taxes, other than income taxes Generally, changes in taxes other than income taxes do not significantly affect earnings as they are substantially recovered in revenues. OTHER INCOME AND DEDUCTIONS: Other income, net The increase in other income, net was due largely to the first quarter 1996 write-off of $2.4 million of inventory in connection with the retirement of the Werner and Gilbert generating stations. 47 GPU, Inc. and Subsidiary Companies JCP&L RESULTS OF OPERATIONS (continued) INTEREST CHARGES AND DIVIDENDS ON PREFERRED SECURITIES: Other Interest The increase in other interest expense is due to higher short-term debt levels. MET-ED RESULTS OF OPERATIONS Met-Ed's earnings for the first quarter ended March 31, 1997 were $39.6 million, compared to 1996 first quarter earnings of $23.8 million. The increase in earnings was due primarily to the step increase in operating revenue resulting from the inclusion of the ECR in base rates and the cessation of deferred energy accounting, effective January 1, 1997 (See COMPETITIVE ENVIRONMENT). Also affecting the first quarter's results were lower weather related residential sales due to warmer winter weather this year as compared to last year, offset by increased usage by customers and lower operation and maintenance expenses. OPERATING REVENUES: Total revenues for the first quarter of 1997 increased 7.4% to $255 million as compared to the first quarter of 1996. The components of the changes are as follows: (In Millions) Kilowatt-hour revenues $ 16.9 Other revenues 0.7 Increase in revenues $ 17.6 Kilowatt-hour revenues The increase in KWH revenues was due primarily to the step increase resulting from the inclusion of the energy cost rates in base rates, amounting to $13 million. Also contributing to the increase was increased usage by customers and a slight increase in the number of customers. Partially offsetting these items were lower weather related sales due to warmer winter weather this year as compared to last year, and reduced sales to other utilities. OPERATING EXPENSES: Fuel and Deferral of energy costs, net Effective January 1, 1997, Met-Ed no longer defers energy costs, due to the inclusion of the ECR in base rates and the cessation of deferred energy accounting. 48 GPU, Inc. and Subsidiary Companies MET-ED RESULTS OF OPERATIONS (continued) Other operation and maintenance The decrease in other O&M expenses was due primarily to a reduction in storm and emergency related activity, and a decrease in property and liability insurance costs. Depreciation and amortization The increase in depreciation and amortization was due to additions to plant in service. Taxes, other than income taxes The increase in taxes other than income taxes was primarily due to the step increase from inclusion of the ECR in base rates, which resulted in increased accruals for Pennsylvania gross receipts tax, along with a corresponding increase in revenues. Such revenues are now included with KWH revenues, since the STAS is included with base rates effective January 1, 1997 (see COMPETITIVE ENVIRONMENT). PENELEC RESULTS OF OPERATIONS Penelec's earnings for the first quarter ended March 31, 1997 were $42.8 million, compared to 1996 first quarter earnings of $30.1 million. The increase in earnings was due primarily to the step increase in operating revenue resulting from the inclusion of the energy cost rates in base rates and the cessation of deferred energy accounting, effective January 1, 1997 (See COMPETITIVE ENVIRONMENT). Also contributing to the increase were lower operation and maintenance expenses, and increased usage by customers. These items were partially offset by lower weather related residential sales due to warmer winter weather this year as compared to last year. OPERATING REVENUES: Total revenues for the first quarter of 1997 increased 7.6% to $290 million, as compared to the first quarter of 1996. The components of the changes are as follows: (In Millions) Kilowatt-hour revenues $ 17.4 Other revenues 3.0 Increase in revenues $ 20.4 49 GPU, Inc. and Subsidiary Companies PENELEC RESULTS OF OPERATIONS (continued) Kilowatt-hour revenues The increase in KWH revenues was due primarily to the step increase resulting from the inclusion of the energy cost rates in base rates, amounting to $15 million; and increased usage by customers. Partially offsetting these items were lower weather related sales due to warmer winter weather this year as compared to last year, and reduced sales to other utilities. OPERATING EXPENSES: Power purchased and interchanged The decrease in PP&I is due to decreased purchases from other utilities and power marketers. Effective January 1, 1997, these energy cost variances are no longer subject to deferred accounting. However, incremental NUG costs are being deferred, based on the Pennsylvania restructuring legislation (see COMPETITIVE ENVIRONMENT). Fuel and Deferral of energy costs, net Effective January 1, 1997, Penelec no longer defers energy costs, due to the inclusion of the ECR in base rates and the cessation of deferred energy accounting. Other operation and maintenance The decrease in other O&M expenses was due to a reduction in pension and employee insurance costs, primarily a result of the reduced number of employees following the voluntary enhanced retirement program in 1996. Depreciation and amortization The increase in depreciation and amortization expense was due to additions to plant in service, and an increase in depreciation rates. Taxes, other than income taxes The increase in taxes other than income taxes was primarily due to the step increase from inclusion of the ECR in base rates, which resulted in increased accruals for Pennsylvania gross receipts tax, along with a corresponding increase in revenues. Such revenues are now included with KWH revenues, since the STAS is included with base rates effective January 1, 1997 (see COMPETITIVE ENVIRONMENT). 50 GPU, Inc. and Subsidiary Companies 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, nine operating cogeneration plants in the U.S. totaling 873 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 2,620 MW (of which the GPU International Group's equity interest represents 527 MW) of capacity. The GPU International Group is continuing to pursue investment opportunities and has commitments, both domestically and internationally, in 5 generating facilities under construction totaling 3,172 MW (of which the GPU International Group's equity interest represents 816 MW) of capacity. At March 31, 1997, GPU, Inc.'s aggregate investment in the GPU International Group was $211 million; GPU, Inc. has also guaranteed up to an additional $857 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 March 31, 1997, GPU, Inc. had remaining authorization to finance an additional $44 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 March 31, 1997, is pending. 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 scheduled to be held on May 1, 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; and (3) the amount of the proposed tax may change, there is no certainty that this tax, if levied, would be enacted as currently proposed. 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. For additional information on the GPU International Group's investments, see Note 2 to GPU's Consolidated Financial Statements. 51 GPU, Inc. and Subsidiary Companies LIQUIDITY AND CAPITAL RESOURCES Capital Needs GPU's cash construction expenditures for the three months ended March 31, 1997 were $80 million (JCP&L $43 million; Met-Ed $18 million; Penelec $19 million). Construction expenditures for the year are forecasted to be $402 million (JCP&L $185 million; Met-Ed $90 million; Penelec $120 million; Other $7 million), Expenditures for maturing obligations will total $179 million (JCP&L $110 million; Met-Ed $40 million; Penelec $26 million; Other $3 million) in 1997. GPU and the GPU Energy companies estimate that a substantial portion of their 1997 capital needs will be satisfied through internally generated funds. Financing GPU, Inc. has received SEC approval to issue and sell up to $300 million of unsecured debentures through 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. Met-Ed and Penelec plan to use securitization proceeds to fund any cash payments expected to be made under the NUG Request for Proposals (RFPs), should proposals materialize that are economically justified (See the Managing Nonutility Generation section of THE GPU ENERGY COMPANIES' SUPPLY PLAN). The timing and amount of any sale will depend upon PaPUC approval of restructuring plans, as well as market conditions. See COMPETITIVE ENVIRONMENT for further discussion of these bonds. 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. In March 1997, JCP&L filed a request with the NJBPU to extend such authorization to June 1999. Met-Ed and Penelec also intend to seek regulatory approval in 1997 to extend their authorizations for a two year period. 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 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. Met-Ed is planning to issue $13.7 million of tax-exempt FMBs through the Indiana County Industrial Development Authority in June 1997 to replace short-term financing currently in place, related to a solid waste disposal facility at the jointly owned Conemaugh station. 52 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. Capitalization On April 3, 1997, the quarterly dividend on GPU, Inc.'s common stock was increased by 3.1% to an annualized rate of $2.00 per share. The dividend is payable May 28, 1997 to shareholders of record April 25, 1997. 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, 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. 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 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 1 to GPU's Consolidated Financial Statements. Met-Ed and Penelec are scheduled to file their respective restructuring plans with the PaPUC on June 2, 1997. The PaPUC is required to conduct public hearings prior to its approval of these plans. 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 53 GPU, Inc. and Subsidiary Companies uneconomic NUG contracts, to reduce capitalization, or both. Principal and interest payments on the bonds would be paid by all distribution service customers through a nonbypassable intangible transition charge. Reduced financing costs associated with the sale of transition bonds would be used to provide rate reductions for all customers. In order to securitize stranded costs, each Pennsylvania utility is required to file with the PaPUC for a qualified rate order. Met-Ed and Penelec expect to file for such rate orders during 1997. 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. As part of this restructuring, Met-Ed and Penelec filed, in December 1996, tariff supplements requesting approval to, among other things, include their currently effective ECRs and STAS in base rates, effective for all bills rendered after January 1, 1997. In February 1997 the PaPUC approved this request. Since rates that can be charged to customers for generation are capped for up to nine years, Met-Ed and Penelec's future earnings are subject to market volatility. Increases or decreases in fuel costs are no longer subject to deferred accounting and are reflected in net income as incurred. Met-Ed and Penelec will continue their efforts to manage fuel costs and will mitigate, to the extent possible, any excessive risks. 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 experienced step increases in reported revenues totaling approximately $28 million (Met-Ed $13 million; Penelec $15 million) in the first quarter of 1997. In March 1997 a State Senator and several consumer groups filed a lawsuit with the Commonwealth Court of Pennsylvania challenging the constitutionality of the procedure used to enact the Pennsylvania restructuring legislation. The lawsuit asks the court to void the legislation and permanently enjoin the PaPUC from taking any action thereunder. There can be no assurance as to the outcome of this proceeding. 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. In March 1997, Met-Ed and Penelec filed with the PaPUC their plan for a pilot program that would offer approximately 51,000 (Met-Ed 23,000; Penelec 28,000) customers the ability to choose their electric generation supplier. The pilot program, which is subject to PaPUC approval, is anticipated to begin in the fourth quarter of 1997 and to be in effect for at least one year. 54 GPU, Inc. and Subsidiary Companies In April 1997, the NJBPU issued its final findings and recommendations for restructuring the electric utility industry in New Jersey. The NJBPU intends to submit the plan to the Governor and the Legislature in May 1997 for their consideration . The NJBPU 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 July 1, 2000. 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 legislation which modifies the state's energy tax policy, an aggregate rate reduction of at least 10% to 15% over time. The NJBPU proposes 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 maintaining the reliability of the regional power grid and would be regulated by the Federal Energy Regulatory Commission (FERC). The NJBPU proposes requiring electric utilities in New Jersey to file by 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. In addition to the continued operation of the Oyster Creek facility, JCP&L is exploring the sale or early retirement of the plant to mitigate costs associated with its continued operation. JCP&L is exploring these options due to the plant's high cost of generation compared to the current market price of electricity. If a decision is made to retire the plant early, retirement would likely occur in about 2000. Management believes that the current rate structure would allow for the recovery of and return on its net investment in the plant and provide for decommissioning costs. JCP&L plans to propose these options to the NJBPU as part of its July 1997 restructuring filing. JCP&L is seeking NJBPU approval of a one-year pilot program offering customers in Monroe Township, New Jersey a choice of their electric energy supplier. The pilot program is scheduled to begin in July 1997; customer education forums for township residents and businesses were held in March 55 GPU, Inc. and Subsidiary Companies 1997. 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 1997, several bills were introduced in Congress providing for a comprehensive restructuring of the electric utility industry. These bills propose, among other things, retail choice for all utility customers beginning as early as January 1999, the opportunity for utilities to recover their prudently incurred stranded costs in varying degrees, and repeal of both the Public Utility Regulatory Policies Act (PURPA) and the Public Utility Holding Company Act of 1935. In 1996, the GPU Energy companies, along with six other electric utility members of the Pennsylvania-New Jersey-Maryland (PJM) Power Pool (together, the supporting PJM companies), filed with the FERC a transmission tariff and agreements (including, among other things, establishing an ISO to operate the energy market and transmission system), that would create a new wholesale energy market to meet the requirements of FERC Order 888, and to increase competition in the Mid-Atlantic region. 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. Effective March 31, 1997, the PJM Power Pool converted to a limited liability corporation governed by an independent board of managers; an ISO is expected to eventually be formed to operate the PJM power pool. 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 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. 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). 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 was determined that the project was not viable when it was 56 GPU, Inc. and Subsidiary Companies bought out. In December 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. On March 24, 1997, the NJBPU approved the Final Settlement, including the recovery of Freehold buyout costs. However, the Freehold cost recovery was granted on an interim basis, subject to refund, pending further review. Currently, no date has been set for this additional review. 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 are frozen at that level until the year 2000, and the LEAC rate is frozen through the year 1999. The final settlement provides for the establishment of a remediation adjustment clause (RAC) for the recovery of manufactured gas plant remediation costs. JCP&L could seek a LEAC/DSF/RAC rate increase if the combined LEAC/DSF/RAC balance is projected to exceed $40 million, or a base rate increase under certain other conditions, such as a major change in the current regulatory environment. The Final Settlement provides for recovery in base rates, beginning in 1998, of all postretirement benefit costs recorded in accordance with Statement of Financial Accounting Standards No. 106 including amounts previously deferred and an increase in decommissioning expense to reflect the radiological decommissioning and nonradiological removal costs estimated in the 1995 site-specific studies performed for GPUN. Also, included in base rates is recovery of the remaining investments in the 58 MW Werner Unit 4 and 72 MW Gilbert Unit 3 generating plants, which were retired in 1996. The Final Settlement also provides for recovery through the LEAC of: (1) buyout costs up to $130 million, and 50% of any costs from $130 million to $140 million, over a seven-year period for the termination of the Freehold power purchase agreement (such recovery is interim and is subject to refund, pending further review); and (2) $14 million of the $17 million buyout costs, over a two year period, for the termination of the agreement to purchase power from the proposed 200 MW Crown/Vista project. JCP&L wrote-off the remaining $3 million of buyout costs for the Crown/Vista project in 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 is not required to refund any amounts previously collected. The Final Settlement provides annual allowances for the recovery of forecasted additions to nuclear plant. The Final Settlement also provides that if JCP&L's return on equity exceeds 12.2%, excluding demand-side management and nuclear performance incentives, the excess will be used to reduce both customer rates and certain regulatory assets. 57 GPU, Inc. and Subsidiary Companies THE GPU ENERGY COMPANIES' SUPPLY PLAN Managing Nonutility Generation The GPU Energy companies have contracts and anticipated commitments with NUG suppliers under which a total of 1,652 MW (JCP&L 896 MW; Met-Ed 356 MW; Penelec 400 MW) of capacity are currently in service. For information on NUG costs, see the Competition and the Changing Regulatory Environment section of Note 1 to GPU's Consolidated Financial Statements. 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 $80 million has been paid through March 1997, and the remainder will be paid in 1998 and 1999. 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 has been granted recovery of buyout costs, on an interim basis, of up to $130 million, and 50% of any costs from $130 million to $140 million, 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 1 to GPU's Consolidated Financial Statements). In December 1996, Met-Ed and Penelec requested PaPUC approval to, among other things, include their currently effective ECRs in base rates including NUG buyout costs already in the ECR, effective January 1, 1997, and defer for future rate recovery NUG buyout costs not yet reflected in rates. The PaPUC has approved this request. For additional information, see the Competitive Environment section. 58 GPU, Inc. and Subsidiary Companies In April 1997, Met-Ed and Penelec issued RFPs to 24 NUG projects which currently supply a total of approximately 760 MW under power purchase agreements. The RFPs request the NUGs to propose buyouts, buydowns and/or restructurings of current power purchase contracts in return for cash payments. Met-Ed and Penelec have targeted a total of $1 billion to carry out the buyout or buydown of these contracts, which amount may be modified based on the proposals received. Met-Ed and Penelec plan to fund the cash payments through the issuance of PaPUC approved securitized transition bonds (See Competitive Environment). To the extent there are winning bidders, they are expected to be notified in the second quarter of 1997, and payments are expected to be made in the first half of 1998. ACCOUNTING MATTERS In response to the continuing deregulation of the electric utility industry, the SEC has questioned the continued applicability of FAS 71 by California investor-owned utilities with respect to their electric generation operations. The GPU Energy companies believe that the SEC's concern may also apply to them, since retail access legislation has been enacted in Pennsylvania and proposed in New Jersey. In the event that the application of FAS 71 is discontinued for electric generation operations, a noncash write-off of previously established regulatory assets and liabilities related to the affected operations would be required. In addition, write-downs of plant assets could be required in accordance with FAS 121, "Accounting for the Impairment of Long-Lived Assets," including a write-off of any loss from a potential divestiture or abandonment of generation assets. The amount of any write-offs could have a material adverse effect on GPU's results of operations and financial condition. The FASB's Emerging Issues Task Force has agreed to address this issue during the second quarter of 1997. In March 1997, Statement of Financial Accounting Standards No. 128 (FAS 128), "Earnings Per Share", was issued. FAS 128 requires a dual presentation of basic and diluted earnings per share for companies that have common stock equivalents, including GPU. The two earnings per share computations for GPU are not expected to be materially different from one another. FAS 128 will be effective for year-end 1997 reporting. 59 GPU, Inc. and Subsidiary Companies PART II ITEM 1 - LEGAL PROCEEDINGS Information concerning the current status of certain legal proceedings instituted against the Company and the GPU Energy companies as a result of the March 28, 1979 nuclear accident at Unit 2 of the Three Mile Island nuclear generating station discussed in Part I of this report in Notes to Consolidated Financial Statements is incorporated herein by reference and made a part hereof. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (12) Statements Showing Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends Based on SEC Regulation S-K, Item 503 (27) Financial Data Schedule (b) Reports on Form 8-K: GPU, Inc.: Dated April 2, 1997, under Item 5 (Other Events). Dated April 11, 1997, under Item 5 (Other Events). Jersey Central Power & Light Company: Dated April 2, 1997, under Item 5 (Other Events). Dated April 11, 1997, under Item 5 (Other Events). 60 GPU, Inc. and Subsidiary Companies Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized. GPU, INC. April 30, 1997 By: /s/ J. G. Graham J. G. Graham, Senior Vice President (Chief Financial Officer) April 30, 1997 By: /s/ F. A. Donofrio F. A. Donofrio, Vice President and Comptroller (Chief Accounting Officer) JERSEY CENTRAL POWER & LIGHT COMPANY METROPOLITAN EDISON COMPANY PENNSYLVANIA ELECTRIC COMPANY April 30, 1997 By: /s/ D. Baldassari D. Baldassari, President April 30, 1997 By: /s/ D. W. Myers D. W. Myers, Vice President - Finance and Rates & Comptroller (Principal Accounting Officer) 61 Exhibit 12A Page 1 of 2 GPU, INC. AND SUBSIDIARY COMPANIES STATEMENTS SHOWING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS BASED ON SEC REGULATION S-K, ITEM 503 (In Thousands) UNAUDITED
Three Months Ended March 31, March 31, 1997 1996 OPERATING REVENUES $1,042,064 $1,022,934 OPERATING EXPENSES 759,565 793,718 Interest portion of rentals (A) 5,958 6,391 Fixed charges of service company subsidiaries (B) 690 896 Net expense 766,213 801,005 OTHER INCOME AND DEDUCTIONS: Allowance for funds used during construction 1,533 3,090 Other income, net 24,503 10,309 Fixed charges of the GPU International Group (C) 10,964 1,647 Total other income and deductions 37,000 15,046 EARNINGS AVAILABLE FOR FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (excluding taxes based on income) $ 312,851 $ 236,975 FIXED CHARGES: Interest on funded indebtedness $ 57,615 $ 48,958 Other interest (D) 14,743 11,727 Preferred stock dividends of subsidiaries on a pretax basis (F) 5,360 6,901 Interest portion of rentals (A) 5,958 6,391 Total fixed charges $ 83,676 $ 73,977 RATIO OF EARNINGS TO FIXED CHARGES 3.74 3.20 RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (E) 3.74 3.20 Exhibit 12A Page 2 of 2 GPU, INC. AND SUBSIDIARY COMPANIES STATEMENTS SHOWING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS BASED ON SEC REGULATION S-K, ITEM 503 (In Thousands) UNAUDITED NOTES: (A) The Company has included the equivalent of the interest portion of all rentals charged to income as fixed charges for this statement and has excluded such components from Operating Expenses. (B) Represents fixed charges of GPU Service, Inc. and GPU Nuclear, Inc. which are accounted for as operating expenses in the Company's consolidated income statement. The Company has removed the fixed charges from operating expenses and included such amounts in fixed charges as interest on funded indebtedness and other interest for this statement. (C) Represents fixed charges of the GPU International Group which are accounted for as other income and deductions in the Company's consolidated income statement. The Company has removed the fixed charges from other income and deductions and included such amounts in fixed charges as interest on funded indebtedness and other interest for this statement. (D) Includes dividends on subsidiary-obligated mandatorily redeemable preferred securities of $7,222 and $7,222 for the three month periods ended March 31, 1997 and 1996, respectively. (E) GPU, Inc., the parent holding company, does not have any preferred stock outstanding, therefore, the ratio of earnings to combined fixed charges and preferred stock dividends is the same as the ratio of earnings to fixed charges. (F) Calculation of preferred stock dividends of subsidiaries on a pretax basis is as follows: Three Months Ended March 31, March 31, 1997 1996 Income before provision for income taxes and preferred stock dividends of subsidiaries and gain on preferred stock reacquisition $247,831 $184,473 Income before preferred stock dividends of subsidiaries and gain on preferred stock reacquisition 158,465 112,461 Pretax earnings ratio 156.4% 164.0% Preferred stock dividends of subsidiaries 3,427 4,208 Preferred stock dividends of subsidiaries on a pretax basis 5,360 6,901 Exhibit 12B Page 1 of 2 JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY STATEMENTS SHOWING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS BASED ON SEC REGULATION S-K, ITEM 503 (In Thousands) UNAUDITED Three Months Ended March 31, March 31, 1997 1996 OPERATING REVENUES $510,443 $529,274 OPERATING EXPENSES 398,626 426,349 Interest portion of rentals (A) 2,695 2,762 Net expense 395,931 423,587 OTHER INCOME: Allowance for funds used during construction 734 2,156 Other income, net 3,457 2,142 Total other income 4,191 4,298 EARNINGS AVAILABLE FOR FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (excluding taxes based on income) $118,703 $109,985 FIXED CHARGES: Interest on funded indebtedness $ 22,768 $ 22,514 Other interest (B) 5,166 3,598 Interest portion of rentals (A) 2,695 2,762 Total fixed charges $ 30,629 $ 28,874 RATIO OF EARNINGS TO FIXED CHARGES 3.88 3.81 Preferred stock dividend requirement $ 3,162 $ 3,586 Ratio of income before provision for income taxes to net income (C) 151.0% 148.8% Preferred stock dividend requirement on a pretax basis 4,775 5,336 Fixed charges, as above 30,629 28,874 Total fixed charges and preferred stock dividends $ 35,404 $ 34,210 RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS 3.35 3.21 Exhibit 12B Page 2 of 2 JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY STATEMENTS SHOWING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS BASED ON SEC REGULATION S-K, ITEM 503 (In Thousands) UNAUDITED NOTES: (A) The Company has included the equivalent of the interest portion of all rentals charged to income as fixed charges for this statement and has excluded such components from Operating Expenses. (B) Includes dividends on company-obligated mandatorily redeemable preferred securities of $2,675 for the three month period ended March 31, 1997. (C) Represents income before provision for income taxes of $88,074 and $81,111 for the three month periods ended March 31, 1997 and 1996, respectively, divided by net income of $58,320 and $54,496, respectively for the same periods. Exhibit 12C Page 1 of 2 METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES STATEMENTS SHOWING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS BASED ON SEC REGULATION S-K, ITEM 503 (In Thousands) UNAUDITED Three Months Ended March 31, March 31, 1997 1996 OPERATING REVENUES $255,260 $237,688 OPERATING EXPENSES 172,665 178,440 Interest portion of rentals (A) 1,155 1,179 Net expense 171,510 177,261 OTHER INCOME AND DEDUCTIONS: Allowance for funds used during construction 426 268 Other income/(expense), net 343 226 Total other income and deductions 769 494 EARNINGS AVAILABLE FOR FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (excluding taxes based on income) $ 84,519 $ 60,921 FIXED CHARGES: Interest on funded indebtedness $ 11,254 $ 11,467 Other interest (B) 3,918 3,349 Interest portion of rentals (A) 1,155 1,179 Total fixed charges $ 16,327 $ 15,995 RATIO OF EARNINGS TO FIXED CHARGES 5.18 3.81 Preferred stock dividend requirement $ 121 $ 236 Ratio of income before provision for income taxes to net income (C) 171.8% 186.9% Preferred stock dividend requirement on a pretax basis 208 441 Fixed charges, as above 16,327 15,995 Total fixed charges and preferred stock dividends $ 16,535 $ 16,436 RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS 5.11 3.71 Exhibit 12C Page 2 of 2 METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES STATEMENTS SHOWING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS BASED ON SEC REGULATION S-K, ITEM 503 (In Thousands) UNAUDITED NOTES: (A) The Company has included the equivalent of the interest portion of all rentals charged to income as fixed charges for this statement and has excluded such components from Operating Expenses. (B) Includes dividends on company-obligated mandatorily redeemable preferred securities of $2,250 for the three month periods ended March 31, 1997 and 1996, respectively. (C) Represents income before provision for income taxes of $68,192 and $44,926 for the three month periods ended March 31, 1997 and 1996, respectively, divided by net income of $39,685 and $24,037, respectively for the same periods. Exhibit 12D Page 1 of 2 PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES STATEMENTS SHOWING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS BASED ON SEC REGULATION S-K, ITEM 503 (In Thousands) UNAUDITED Three Months Ended March 31, March 31, 1997 1996 OPERATING REVENUES $289,753 $269,329 OPERATING EXPENSES 200,384 201,079 Interest portion of rentals (A) 1,070 1,329 Net expense 199,314 199,750 OTHER INCOME AND DEDUCTIONS: Allowance for funds used during construction 373 666 Other income/(expense), net 145 (861) Total other income and deductions 518 (195) EARNINGS AVAILABLE FOR FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (excluding taxes based on income) $ 90,957 $ 69,384 FIXED CHARGES: Interest on funded indebtedness $ 12,115 $ 12,631 Other interest (B) 4,296 3,317 Interest portion of rentals (A) 1,070 1,329 Total fixed charges $ 17,481 $ 17,277 RATIO OF EARNINGS TO FIXED CHARGES 5.20 4.02 Preferred stock dividend requirement $ 144 $ 386 Ratio of income before provision for income taxes to net income (C) 171.3% 170.8% Preferred stock dividend requirement on a pretax basis 247 659 Fixed charges, as above 17,481 17,277 Total fixed charges and preferred stock dividends $ 17,728 $ 17,936 RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS 5.13 3.87 Exhibit 12D Page 2 of 2 PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES STATEMENTS SHOWING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS BASED ON SEC REGULATION S-K, ITEM 503 (In Thousands) UNAUDITED NOTES: (A) The Company has included the equivalent of the interest portion of all rentals charged to income as fixed charges for this statement and has excluded such components from Operating Expenses. (B) Includes dividends on company-obligated mandatorily redeemable preferred securities of $2,297 for the three month periods ended March 31, 1997 and 1996, respectively. (C) Represents income before provision for income taxes of $73,476 and $52,107 for the three month periods ended March 31, 1997 and 1996, respectively, divided by net income of $42,894 and $30,515, respectively for the same periods.
EX-27.A 2 GPU FINANCIAL DATA SCHEDULE
UT 0000040779 GPU, INC. 1,000 US DOLLARS 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 1 PER-BOOK 6,348,532 1,595,137 969,195 2,121,976 0 11,034,840 314,458 751,583 2,224,576 3,205,097 434,000 66,478 3,139,631 203,590 0 67,724 144,506 20,000 5,577 132,339 3,615,898 11,034,840 1,042,064 88,340 759,565 847,905 194,159 23,825 217,984 62,946 155,038 0 155,038 58,493 184,200 222,797 1.28 1.28 INCLUDES REACQUIRED COMMON STOCK OF $85,520. INCLUDES SUBSIDIARY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF $330,000. INCLUDES DIVIDENDS ON SUBSIDIARY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF $7,222 AND PREFERRED STOCK DIVIDENDS OF SUBSIDIARIES OF $3,427.
EX-27.B 3 JCPL FINANCIAL DATA SCHEDULE
UT 0000053456 JERSEY CENTRAL POWER & LIGHT COMPANY 1,000 US DOLLARS 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 1 PER-BOOK 2,916,233 400,274 403,597 988,184 0 4,708,288 153,713 510,769 860,159 1,524,641 229,000 37,741 1,173,141 7,900 0 0 45,884 20,000 600 89,231 1,580,150 4,708,288 510,443 29,345 398,626 427,971 82,472 3,179 85,651 27,331 58,320 3,162 55,158 20,000 89,902 165,117 0 0 INCLUDES COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF $125,000. INCLUDES DIVIDENDS ON COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF $2,675. REPRESENTS COMMON STOCK DIVIDENDS PAID TO PARENT CORPORATION.
EX-27.C 4 MED ED FINANCIAL DATA SCHEDULE
UT 0000065350 METROPOLITAN EDISON COMPANY 1,000 US DOLLARS 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 1 PER-BOOK 1,573,059 146,985 230,837 568,824 0 2,519,705 66,273 370,200 294,381 730,854 100,000 12,056 563,253 35,290 0 33,252 40,020 0 261 27,050 977,669 2,519,705 255,260 28,482 172,665 201,147 54,113 497 54,610 14,925 39,685 121 39,564 10,000 45,160 23,222 0 0 REPRESENTS COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES. INCLUDES DIVIDENDS ON COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF $2,250. REPRESENTS COMMON STOCK DIVIDENDS PAID TO PARENT CORPORATION.
EX-27.D 5 PENNSYLVANIA ELECTRIC CO. FINANCIAL DATA SCHEDULE
UT 0000077227 PENNSYLVANIA ELECTRIC COMPANY 1,000 US DOLLARS 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 1 PER-BOOK 1,803,540 64,097 264,698 444,578 0 2,576,913 105,812 285,486 391,840 783,138 105,000 16,681 626,456 73,400 0 34,472 56,010 0 3,882 14,399 863,475 2,576,913 289,753 30,513 200,384 230,897 58,856 114 58,970 16,076 42,894 144 42,750 15,000 49,138 43,541 0 0 REPRESENTS COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF $105,000 INCLUDES DIVIDENDS ON COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF $2,297. REPRESENTS COMMON STOCK DIVIDENDS PAID TO PARENT CORPORATION.
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