-----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, UaZM7j0v3+IvoEGmeRkeVaGuIXuNfokUlRfXNEq7uV3FakpyOxCLhWprY2Y91l/w BKf5GJP0rtCw9TxEgAyJ1A== 0000040779-98-000032.txt : 19980515 0000040779-98-000032.hdr.sgml : 19980515 ACCESSION NUMBER: 0000040779-98-000032 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980514 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GPU INC /PA/ CENTRAL INDEX KEY: 0000040779 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 135516989 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06047 FILM NUMBER: 98620320 BUSINESS ADDRESS: STREET 1: C/O GPU SERVICE INC STREET 2: 300 MADISON AVE CITY: MORRISTOWN STATE: NJ ZIP: 07962 BUSINESS PHONE: 9734558200 MAIL ADDRESS: STREET 1: C/O GPU SERVICE INC STREET 2: 300 MADISON AVE CITY: MORRISTOWN STATE: NJ ZIP: 07962 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: SEC FILE NUMBER: 001-03141 FILM NUMBER: 98620321 BUSINESS ADDRESS: STREET 1: 300 MADISON AVE CITY: MORRISTOWN STATE: NJ ZIP: 079621911 BUSINESS PHONE: 2014558200 MAIL ADDRESS: STREET 1: C/O GPU ENERGY STREET 2: 2800 POTTSVILLE PIKE CITY: READING STATE: PA ZIP: 19605-2459 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: SEC FILE NUMBER: 033-51001 FILM NUMBER: 98620322 BUSINESS ADDRESS: STREET 1: 2800 POTTSVILLE PIKE STREET 2: MUHLENBERG TOWNSHIP CITY: BERKS COUNTY STATE: PA ZIP: 19605 BUSINESS PHONE: 2159293601 MAIL ADDRESS: STREET 1: C/O ENERGY GPU ENERGY STREET 2: 2800 POTTERVILLE CITY: READING STATE: PA ZIP: 19605-2459 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: SEC FILE NUMBER: 001-03522 FILM NUMBER: 98620323 BUSINESS ADDRESS: STREET 1: 2800 POTTSVILLE PIKE READING STREET 2: MUHLENBERG TOWNSHIP CITY: BERKS COUNTY STATE: PA ZIP: 19640-0001 BUSINESS PHONE: 8145338111 MAIL ADDRESS: STREET 1: C/O GPU ENERGY STREET 2: 2800 POTTSVILLE PIKE CITY: READING STATE: PA ZIP: 19605-2459 10-Q 1 GPU REPORT 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, 1998 ----------------------- OR ___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission Registrant, State of Incorporation, I.R.S. Employer File Number Address and Telephone Number Identification No. - ----------- ---------------------------- ------------------ 1-6047 GPU, Inc. 13-5516989 (a Pennsylvania corporation) 300 Madison Avenue Morristown, New Jersey 07962-1911 Telephone (973) 455-8200 1-3141 Jersey Central Power & Light Company 21-0485010 (a New Jersey corporation) 2800 Pottsville Pike Reading, Pennsylvania 19605 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 30, 1998, was as follows: Shares Registrant Title Outstanding - ---------- ----- ----------- GPU, Inc. Common Stock, $2.50 par value 127,875,105 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, 1998 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 Consolidated Financial Statements 19 Combined Management's Discussion and Analysis of Financial Condition and Results of Operations 50 PART II - Other Information 73 Signatures 74 --------------------------------- 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 1997 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, 1998 1997 ------------ ------------ (Unaudited) ASSETS Utility Plant: In service, at original cost $11,239,028 $11,150,677 Less, accumulated depreciation 4,165,553 4,050,165 ---------- ---------- Net utility plant in service 7,073,475 7,100,512 Construction work in progress 244,498 250,050 Other, net 170,970 159,009 ---------- ---------- Net utility plant 7,488,943 7,509,571 ---------- ---------- Other Property and Investments: GPUI Group equity investments 621,093 596,679 Goodwill, net 588,811 581,364 Nuclear decommissioning trusts, at market 626,884 579,673 Nuclear fuel disposal trust, at market 110,978 108,652 Other, net 135,861 252,335 ---------- ---------- Total other property and investments 2,083,627 2,118,703 ---------- ---------- Current Assets: Cash and temporary cash investments 130,555 85,099 Special deposits 23,611 27,093 Accounts receivable: Customers, net 279,673 290,247 Other 111,887 104,441 Unbilled revenues 131,271 147,162 Materials and supplies, at average cost or less: Construction and maintenance 191,658 187,799 Fuel 40,758 40,424 Investment held for sale - 106,317 Deferred income taxes 44,669 83,962 Prepayments 104,349 55,613 Other - 1,023 ---------- ---------- Total current assets 1,058,431 1,129,180 ---------- ---------- Deferred Debits and Other Assets: Regulatory assets: Income taxes recoverable through future rates 521,780 510,680 Three Mile Island Unit 2 deferred costs 337,754 345,326 Nonutility generation contract buyout costs 240,068 245,568 Unamortized property losses 96,355 99,532 Other 425,095 448,146 ---------- ---------- Total regulatory assets 1,621,052 1,649,252 Deferred income taxes 431,112 383,169 Other 150,844 134,833 ---------- ---------- Total deferred debits and other assets 2,203,008 2,167,254 ---------- ---------- Total Assets $12,834,009 $12,924,708 ========== ========== 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, 1998 1997 ------------ ------------ (Unaudited) LIABILITIES AND CAPITALIZATION Capitalization: Common stock $ 331,958 $ 314,458 Capital surplus 1,007,885 755,040 Retained earnings 2,274,486 2,140,712 Accumulated other comprehensive income/(loss) (14,733) (29,296) ---------- ---------- Total 3,599,596 3,180,914 Less, reacquired common stock, at cost 80,326 80,984 ---------- ---------- Total common stockholders' equity 3,519,270 3,099,930 Cumulative preferred stock: With mandatory redemption 91,500 91,500 Without mandatory redemption 66,478 66,478 Subsidiary-obligated mandatorily redeemable preferred securities 330,000 330,000 Long-term debt 4,064,192 4,325,972 ---------- ---------- Total capitalization 8,071,440 7,913,880 ---------- ---------- Current Liabilities: Securities due within one year 423,640 631,934 Notes payable 299,618 353,214 Obligations under capital leases 131,276 138,919 Accounts payable 415,629 413,791 Taxes accrued 150,782 48,304 Interest accrued 51,470 83,947 Deferred energy credits 23,984 25,645 Other 276,381 325,681 ---------- ---------- Total current liabilities 1,772,780 2,021,435 ---------- ---------- Deferred Credits and Other Liabilities: Deferred income taxes 1,572,001 1,566,131 Unamortized investment tax credits 120,761 123,162 Three Mile Island Unit 2 future costs 453,596 448,808 Regulatory liabilities 102,768 101,774 Other 740,663 749,518 ---------- ---------- Total deferred credits and other liabilities 2,989,789 2,989,393 ---------- ---------- Commitments and Contingencies (Note 1) Total Liabilities and Capitalization $12,834,009 $12,924,708 ========== ========== 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, ----------------------- 1998 1997 Operating Revenues $1,043,109 $1,051,012 --------- --------- Operating Expenses: Fuel 96,700 98,614 Power purchased and interchanged 263,279 250,712 Deferral of energy costs, net (2,020) 6,251 Other operation and maintenance 240,849 205,399 Depreciation and amortization 127,148 115,198 Taxes, other than income taxes 57,519 94,657 --------- --------- Total operating expenses 783,475 770,831 --------- --------- Operating Income Before Income Taxes 259,634 280,181 Income taxes 66,293 83,923 --------- --------- Operating Income 193,341 196,258 --------- --------- Other Income and Deductions: Allowance for other funds used during construction 320 348 Equity in undistributed earnings of affiliates, net 17,651 32,227 Other income, net 44,562 5,713 Income taxes (19,431) (5,443) --------- --------- Total other income and deductions 43,102 32,845 --------- --------- Income Before Interest Charges and Preferred Dividends 236,443 229,103 --------- --------- Interest Charges and Preferred Dividends: Interest on long-term debt 84,052 57,109 Other interest 8,984 7,345 Allowance for borrowed funds used during construction (1,071) (1,185) Dividends on subsidiary-obligated mandatorily redeemable preferred securities 7,222 7,222 Preferred stock dividends of subsidiaries 2,975 3,427 --------- --------- Total interest charges and preferred dividends 102,162 73,918 --------- --------- Minority interest net income 501 147 --------- --------- Net Income $ 133,780 $ 155,038 ========= ========= Basic - Earnings Per Avg. Common Share $ 1.07 $ 1.29 ========= ========= - Avg. Common Shares Outstanding (In Thousands) 124,543 120,630 ========= ========= Diluted - Earnings Per Avg. Common Share $ 1.07 $ 1.28 ========= ========= - Avg. Common Shares Outstanding (In Thousands) 124,823 120,896 ========= ========= Cash Dividends Paid Per Share $ .500 $ .485 ========= ========= 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, -------------------- 1998 1997 ---- ---- Operating Activities: Net income $ 133,780 $ 155,038 Adjustments to reconcile income to cash provided: Depreciation and amortization 138,750 120,451 Amortization of property under capital leases 13,091 14,772 Gain on sale of investments (38,452) - Equity in undistributed earnings of affiliates, net of distributions received (15,775) (26,128) Nuclear outage maintenance costs, net 5,856 6,920 Deferred income taxes and investment tax credits, net (27,538) 2,852 Deferred energy and capacity costs, net (1,667) 6,251 Accretion income (2,460) (2,690) Allowance for other funds used during construction (320) (348) Changes in working capital: Receivables 25,788 (66,360) Materials and supplies (4,106) (7,609) Special deposits and prepayments (49,614) (6,519) Payables and accrued liabilities 27,426 70,639 Nonutility generation contract buyout costs (17,500) (23,550) Other, net 27,122 (14,823) -------- -------- Net cash provided by operating activities 214,381 228,896 -------- -------- Investing Activities: Capital expenditures: GPU Energy companies (68,110) (79,994) GPUI Group (5,542) (35,045) Proceeds from sale of investments 146,700 - Contributions to decommissioning trusts (11,256) (10,255) Other, net 209 14,377 -------- -------- Net cash provided by/(used for) investing activities 62,001 (110,917) -------- -------- Financing Activities: Issuance of long-term debt - 26,698 Decrease in notes payable, net (53,596) (332) Retirement of long-term debt (375,878) (56,034) Capital lease principal payments (12,071) (12,329) Issuance of common stock 269,448 - Dividends paid on common stock (60,414) (58,493) -------- -------- Net cash required by financing activities (232,511) (100,490) -------- -------- Effect of exchange rate changes on cash 1,585 622 -------- -------- Net increase in cash and temporary cash investments from above activities 45,456 18,111 Cash and temporary cash investments, beginning of year 85,099 31,604 -------- -------- Cash and temporary cash investments, end of period $ 130,555 $ 49,715 ======== ======== Supplemental Disclosure: Interest and preferred dividends paid $ 112,471 $ 84,323 ======== ======== Income taxes paid $ 4,786 $ 4,213 ======== ======== New capital lease obligations incurred $ 5,286 $ 2,248 ======== ======== 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, 1998 1997 ------------ -------- (Unaudited) ASSETS Utility Plant: In service, at original cost $4,709,381 $4,671,568 Less, accumulated depreciation 2,067,399 2,007,427 --------- --------- Net utility plant in service 2,641,982 2,664,141 Construction work in progress 120,898 124,887 Other, net 110,613 92,654 --------- --------- Net utility plant 2,873,493 2,881,682 --------- --------- Other Property and Investments: Nuclear decommissioning trusts, at market 370,136 343,434 Nuclear fuel disposal trust, at market 110,978 108,652 Other, net 8,944 8,951 --------- --------- Total other property and investments 490,058 461,037 --------- --------- Current Assets: Cash and temporary cash investments 10,898 2,994 Special deposits 6,543 6,778 Accounts receivable: Customers, net 136,215 153,753 Other 32,157 18,225 Unbilled revenues 49,811 59,687 Materials and supplies, at average cost or less: Construction and maintenance 92,582 90,037 Fuel 15,055 14,260 Deferred income taxes 29,902 27,536 Prepayments 9,037 14,468 --------- --------- Total current assets 382,200 387,738 --------- --------- Deferred Debits and Other Assets: Regulatory assets: Income taxes recoverable through future rates 136,853 128,111 Nonutility generation contract buyout costs 137,500 140,500 Three Mile Island Unit 2 deferred costs 102,059 109,498 Unamortized property losses 91,641 94,726 Other 280,593 312,867 --------- --------- Total regulatory assets 748,646 785,702 Deferred income taxes 161,635 154,708 Other 20,525 19,909 --------- --------- Total deferred debits and other assets 930,806 960,319 --------- --------- Total Assets $4,676,557 $4,690,776 ========= ========= 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, 1998 1997 ------------ -------- (Unaudited) LIABILITIES AND CAPITALIZATION Capitalization: Common stock $ 153,713 $ 153,713 Capital surplus 510,769 510,769 Retained earnings 915,717 875,639 --------- --------- Total common stockholder's equity 1,580,199 1,540,121 Cumulative preferred stock: With mandatory redemption 91,500 91,500 Without mandatory redemption 37,741 37,741 Company-obligated mandatorily redeemable preferred securities 125,000 125,000 Long-term debt 1,173,364 1,173,304 --------- --------- Total capitalization 3,007,804 2,967,666 --------- --------- Current Liabilities: Securities due within one year 12,511 12,511 Notes payable - 115,254 Obligations under capital leases 77,616 79,419 Accounts payable: Affiliates 4,879 27,167 Other 126,912 113,822 Taxes accrued 72,080 3,966 Deferred energy credits 23,984 25,645 Interest accrued 29,496 26,021 Other 98,082 76,529 --------- --------- Total current liabilities 445,560 480,334 --------- --------- Deferred Credits and Other Liabilities: Deferred income taxes 647,751 644,562 Unamortized investment tax credits 53,375 54,675 Nuclear fuel disposal fee 136,149 134,326 Three Mile Island Unit 2 future costs 113,424 112,227 Regulatory liabilities 50,990 49,226 Other 221,504 247,760 --------- --------- Total deferred credits and other liabilities 1,223,193 1,242,776 --------- --------- Commitments and Contingencies (Note 1) Total Liabilities and Capitalization $4,676,557 $4,690,776 ========= ========= 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, 1998 1997 Operating Revenues $472,334 $510,443 ------- ------- Operating Expenses: Fuel 19,660 24,289 Power purchased and interchanged: Affiliates 3,115 4,367 Others 153,680 140,944 Deferral of energy and capacity costs, net (2,020) 6,251 Other operation and maintenance 100,730 101,805 Depreciation and amortization 62,994 61,810 Taxes, other than income taxes 23,857 59,160 ------- ------- Total operating expenses 362,016 398,626 ------- ------- Operating Income Before Income Taxes 110,318 111,817 Income taxes 32,476 29,345 ------- ------- Operating Income 77,842 82,472 ------- ------- Other Income and Deductions: Allowance for other funds used during construction 275 131 Other income, net 2,265 3,457 Income taxes (1,053) (409) ------- ------- Total other income and deductions 1,487 3,179 ------- ------- Income Before Interest Charges and Dividends on Preferred Securities 79,329 85,651 ------- ------- Interest Charges and Dividends on Preferred Securities: Interest on long-term debt 21,792 22,768 Other interest 2,529 2,491 Allowance for borrowed funds used during construction (483) (603) Dividends on company-obligated mandatorily redeemable preferred securities 2,675 2,675 ------- ------- Total interest charges and dividends on preferred securities 26,513 27,331 ------- ------- Net Income 52,816 58,320 Preferred stock dividends 2,738 3,162 ------- ------- Earnings Available for Common Stock $ 50,078 $ 55,158 ======= ======= 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, ------------------ 1998 1997 ---- ---- Operating Activities: Net income $ 52,816 $ 58,320 Adjustments to reconcile income to cash provided: Depreciation and amortization 68,725 64,153 Amortization of property under capital leases 7,065 8,364 Nuclear outage maintenance costs, net 3,549 4,866 Deferred income taxes and investment tax credits, net (17,314) (2,783) Deferred energy and capacity costs, net (1,667) 6,251 Accretion income (2,460) (2,690) Allowance for other funds used during construction (275) (131) Changes in working capital: Receivables 13,483 (20,677) Materials and supplies (3,340) (1,900) Special deposits and prepayments 5,665 13,418 Payables and accrued liabilities 54,517 54,870 Nonutility generation contract buyout costs (15,000) (15,000) Other, net 25,544 (1,944) -------- -------- Net cash provided by operating activities 191,308 165,117 -------- -------- Investing Activities: Capital expenditures (40,125) (43,134) Contributions to decommissioning trusts (6,319) (4,501) Other, net (1,469) (2,611) -------- -------- Net cash used for investing activities (47,913) (50,246) -------- -------- Financing Activities: Decrease in notes payable, net (115,254) (23,900) Retirement of long-term debt - (54,191) Capital lease principal payments (7,499) (5,798) Dividends paid on common stock (10,000) (20,000) Dividends paid on preferred stock (2,738) (3,162) -------- -------- Net cash required by financing activities (135,491) (107,051) -------- -------- Net increase in cash and temporary cash investments from above activities 7,904 7,820 Cash and temporary cash investments, beginning of year 2,994 1,321 -------- -------- Cash and temporary cash investments, end of period $ 10,898 $ 9,141 ======== ======== Supplemental Disclosure: Interest and preferred dividends paid $ 25,578 $ 28,937 ======== ======== Income taxes paid $ 96 $ 211 ======== ======== New capital lease obligations incurred $ 5,257 $ 1,112 ======== ======== 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, 1998 1997 ------------ ------------ (Unaudited) ASSETS Utility Plant: In service, at original cost $2,424,260 $2,411,810 Less, accumulated depreciation 945,023 919,771 --------- --------- Net utility plant in service 1,479,237 1,492,039 Construction work in progress 44,255 45,435 Other, net 35,416 39,056 --------- --------- Net utility plant 1,558,908 1,576,530 --------- --------- Other Property and Investments: Nuclear decommissioning trusts, at market 183,168 168,110 Other, net 11,971 11,958 --------- --------- Total other property and investments 195,139 180,068 --------- --------- Current Assets: Cash and temporary cash investments 3,462 6,116 Special deposits 1,109 1,055 Accounts receivable: Customers, net 61,564 65,156 Other 27,177 29,399 Unbilled revenues 39,157 39,747 Materials and supplies, at average cost or less: Construction and maintenance 38,824 38,597 Fuel 10,175 11,323 Deferred income taxes 2,945 2,945 Prepayments 38,438 6,762 --------- --------- Total current assets 222,851 201,100 --------- --------- Deferred Debits and Other Assets: Regulatory assets: Income taxes recoverable through future rates 182,303 178,927 Three Mile Island Unit 2 deferred costs 145,032 146,290 Nonutility generation contract buyout costs 73,868 76,368 Other 75,986 73,297 --------- --------- Total regulatory assets 477,189 474,882 Deferred income taxes 91,668 87,332 Other 16,688 14,069 --------- --------- Total deferred debits and other assets 585,545 576,283 --------- --------- Total Assets $2,562,443 $2,533,981 ========= ========= 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, 1998 1997 ----------- -------- (Unaudited) LIABILITIES AND CAPITALIZATION Capitalization: Common stock $ 66,273 $ 66,273 Capital surplus 370,200 370,200 Retained earnings 273,243 268,634 Accumulated other comprehensive income 15,034 12,487 --------- --------- Total common stockholder's equity 724,750 717,594 Cumulative preferred stock 12,056 12,056 Company-obligated mandatorily redeemable preferred securities 100,000 100,000 Long-term debt 576,925 576,924 --------- --------- Total capitalization 1,413,731 1,406,574 --------- --------- Current Liabilities: Securities due within one year 22 22 Notes payable 81,600 67,279 Obligations under capital leases 34,732 38,372 Accounts payable: Affiliates 49,158 62,873 Other 96,074 95,589 Taxes accrued 40,100 21,455 Interest accrued 10,599 15,903 Other 30,895 33,351 --------- --------- Total current liabilities 343,180 334,844 --------- --------- Deferred Credits and Other Liabilities: Deferred income taxes 420,465 412,692 Three Mile Island Unit 2 future costs 226,748 224,354 Unamortized investment tax credits 28,633 29,134 Nuclear fuel disposal fee 30,755 30,343 Regulatory liabilities 23,786 24,195 Other 75,145 71,845 --------- --------- Total deferred credits and other liabilities 805,532 792,563 --------- --------- Commitments and Contingencies (Note 1) Total Liabilities and Capitalization $2,562,443 $2,533,981 ========= ========= 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, ---------------------- 1998 1997 ---- ---- Operating Revenues $234,748 $255,260 ------- ------- Operating Expenses: Fuel 26,071 24,489 Power purchased and interchanged: Affiliates 1,853 4,347 Others 54,885 55,640 Other operation and maintenance 52,253 45,656 Depreciation and amortization 26,263 25,833 Taxes, other than income taxes 15,549 16,700 ------- ------- Total operating expenses 176,874 172,665 ------- ------- Operating Income Before Income Taxes 57,874 82,595 Income taxes 17,562 28,482 ------- ------- Operating Income 40,312 54,113 ------- ------- Other Income and Deductions: Allowance for other funds used during construction 45 179 Other income, net 284 343 Income taxes (488) (25) ------- ------- Total other income and deductions (159) 497 ------- ------- Income Before Interest Charges and Dividends on Preferred Securities 40,153 54,610 ------- ------- Interest Charges and Dividends on Preferred Securities: Interest on long-term debt 10,623 11,254 Other interest 2,753 1,668 Allowance for borrowed funds used during construction (203) (247) Dividends on company-obligated mandatorily redeemable preferred securities 2,250 2,250 ------- ------- Total interest charges and dividends on preferred securities 15,423 14,925 ------- ------- Net Income 24,730 39,685 Preferred stock dividends 121 121 ------- ------- Earnings Available for Common Stock $ 24,609 $ 39,564 ======= ======= 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, ---------------------- 1998 1997 ---- ---- Operating Activities: Net income $ 24,730 $ 39,685 Adjustments to reconcile income to cash provided: Depreciation and amortization 29,797 28,512 Amortization of property under capital leases 3,659 3,790 Nuclear outage maintenance costs, net 1,537 1,368 Deferred income taxes and investment tax credits, net (2,546) 6,156 Allowance for other funds used during construction (45) (179) Changes in working capital: Receivables 6,404 (33,207) Materials and supplies 921 (1,096) Special deposits and prepayments (31,730) (13,085) Payables and accrued liabilities (5,365) 8,507 Nonutility generation contract buyout costs (2,500) (8,550) Other, net (3,296) (8,679) -------- -------- Net cash provided by operating activities 21,566 23,222 -------- -------- Investing Activities: Capital expenditures (12,104) (17,528) Contributions to decommissioning trusts (3,621) (4,438) Other, net (12) (11) -------- -------- Net cash used for investing activities (15,737) (21,977) -------- -------- Financing Activities: Increase in notes payable, net 14,321 17,875 Capital lease principal payments (2,683) (3,872) Dividends paid on common stock (20,000) (10,000) Dividends paid on preferred stock (121) (236) -------- -------- Net cash provided/(required) by financing activities (8,483) 3,767 -------- -------- Net increase in cash and temporary cash investments from above activities (2,654) 5,012 Cash and temporary cash investments, beginning of year 6,116 1,901 -------- -------- Cash and temporary cash investments, end of period $ 3,462 $ 6,913 ======== ======== Supplemental Disclosure: Interest and preferred dividends paid $ 20,787 $ 21,652 ======== ======== Income taxes paid $ 2,250 $ 1,655 ======== ======== New capital lease obligations incurred $ 19 $ 757 ======== ======== 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, 1998 1997 ------------ -------- (Unaudited) ASSETS Utility Plant: In service, at original cost $2,829,073 $2,812,720 Less, accumulated depreciation 1,114,874 1,091,965 --------- --------- Net utility plant in service 1,714,199 1,720,755 Construction work in progress 67,157 69,089 Other, net 24,101 26,110 --------- --------- Net utility plant 1,805,457 1,815,954 --------- --------- Other Property and Investments: Nuclear decommissioning trusts, at market 73,580 68,129 Other, net 7,066 7,071 --------- --------- Total other property and investments 80,646 75,200 --------- --------- Current Assets: Cash and temporary cash investments 7,544 - Special deposits 2,647 2,449 Accounts receivable: Customers, net 75,936 71,338 Other 29,433 21,051 Unbilled revenues 42,303 47,728 Materials and supplies, at average cost or less: Construction and maintenance 48,853 47,853 Fuel 15,528 14,841 Deferred income taxes 7,589 7,589 Prepayments 52,180 29,856 --------- --------- Total current assets 282,013 242,705 --------- --------- Deferred Debits and Other Assets: Regulatory assets: Income taxes recoverable through future rates 202,624 203,642 Three Mile Island Unit 2 deferred costs 90,663 89,538 Nonutility generation contract buyout costs 28,700 28,700 Other 74,662 68,220 --------- --------- Total regulatory assets 396,649 390,100 Deferred income taxes 56,203 55,698 Other 14,276 13,118 --------- --------- Total deferred debits and other assets 467,128 458,916 --------- --------- Total Assets $2,635,244 $2,592,775 ========= ========= 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, 1998 1997 ------------ ----------- (Unaudited) LIABILITIES AND CAPITALIZATION Capitalization: Common stock $ 105,812 $ 105,812 Capital surplus 285,486 285,486 Retained earnings 420,237 393,708 Accumulated other comprehensive income 7,605 6,332 ------- ------- Total common stockholder's equity 819,140 791,338 Cumulative preferred stock 16,681 16,681 Company-obligated mandatorily redeemable preferred securities 105,000 105,000 Long-term debt 676,445 676,444 --------- --------- Total capitalization 1,617,266 1,589,463 --------- --------- Current Liabilities: Securities due within one year 11 30,011 Notes payable 116,000 77,581 Obligations under capital leases 18,087 19,939 Accounts payable: Affiliates 27,410 24,811 Other 55,916 62,483 Taxes accrued 28,464 15,966 Interest accrued 10,118 20,902 Other 25,471 19,654 --------- --------- Total current liabilities 281,477 271,347 --------- --------- Deferred Credits and Other Liabilities: Deferred income taxes 481,328 478,182 Three Mile Island Unit 2 future costs 113,424 112,227 Unamortized investment tax credits 38,753 39,353 Nuclear fuel disposal fee 15,378 15,172 Regulatory liabilities 29,424 29,785 Other 58,194 57,246 --------- --------- Total deferred credits and other liabilities 736,501 731,965 --------- --------- Commitments and Contingencies (Note 1) Total Liabilities and Capitalization $2,635,244 $2,592,775 ========= ========= 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, ---------------------- 1998 1997 ---- ---- Operating Revenues $263,655 $289,753 ------- ------- Operating Expenses: Fuel 42,434 46,223 Power purchased and interchanged: Affiliates 244 1,652 Others 54,714 54,128 Other operation and maintenance 60,033 53,888 Depreciation and amortization 25,644 25,696 Taxes, other than income taxes 17,963 18,797 ------- ------- Total operating expenses 201,032 200,384 ------- ------- Operating Income Before Income Taxes 62,623 89,369 Income taxes 19,803 30,513 ------- ------- Operating Income 42,820 58,856 ------- ------- Other Income and Deductions: Allowance for other funds used during construction - 38 Other income, net 79 145 Income taxes 14 (69) ------- ------- Total other income and deductions 93 114 ------- ------- Income Before Interest Charges and Dividends on Preferred Securities 42,913 58,970 ------- ------- Interest Charges and Dividends on Preferred Securities: Interest on long-term debt 12,112 12,115 Other interest 2,244 1,999 Allowance for borrowed funds used during construction (385) (335) Dividends on company-obligated mandatorily redeemable preferred securities 2,297 2,297 ------- ------- Total interest charges and dividends on preferred securities 16,268 16,076 ------- ------- Net Income 26,645 42,894 Preferred stock dividends 116 144 ------- ------- Earnings Available for Common Stock $ 26,529 $ 42,750 ======= ======= 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, ---------------------- 1998 1997 ---- ---- Operating Activities: Net income $ 26,645 $ 42,894 Adjustments to reconcile income to cash provided: Depreciation and amortization 26,797 24,736 Amortization of property under capital leases 2,018 2,108 Nuclear outage maintenance costs, net 770 686 Deferred income taxes and investment tax credits, net 1,177 523 Allowance for other funds used during construction - (38) Changes in working capital: Receivables (7,556) (29,105) Materials and supplies (1,687) (4,613) Special deposits and prepayments (22,522) (7,007) Payables and accrued liabilities (945) 18,979 Other, net (7,501) (5,622) -------- -------- Net cash provided by operating activities 17,196 43,541 -------- -------- Investing Activities: Capital expenditures (15,041) (19,488) Contributions to decommissioning trusts (1,316) (1,316) -------- -------- Net cash used for investing activities (16,357) (20,804) -------- -------- Financing Activities: Increase in notes payable, net 38,419 192 Retirement of long-term debt (30,000) - Capital lease principal payments (1,540) (2,149) Dividends paid on common stock - (15,000) Dividends paid on preferred stock (174) (174) -------- -------- Net cash provided/(required) by financing activities 6,705 (17,131) -------- -------- Net increase in cash and temporary cash investments from above activities 7,544 5,606 Cash and temporary cash investments, beginning of year - - -------- ------ Cash and temporary cash investments, end of period $ 7,544 $ 5,606 ======== ======== Supplemental Disclosure: Interest and preferred dividends paid $ 27,018 $ 23,896 ======== ======== Income taxes paid $ 2,285 $ 2,347 ======== ======== New capital lease obligations incurred $ 10 $ 379 ======== ======== 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 the GPU Energy companies are conducted by GPU Generation, Inc. (Genco) and GPU Nuclear, Inc. (GPUN). GPU, Inc. also owns all the common stock of GPU International, Inc., GPU Power, Inc. and GPU Electric, Inc. which develop, own and operate generation, transmission and distribution facilities in the United States and in foreign countries. Collectively, these are referred to as the "GPUI Group." Other wholly-owned subsidiaries of GPU, Inc. are GPU Advanced Resources, Inc. (GPU AR), a subsidiary engaging in energy services and retail energy sales; GPU Telcom Services, Inc. (GPU Telcom), a subsidiary engaging in certain telecommunications-related businesses; and GPU Service, Inc. (GPUS), which provides certain legal, accounting, financial and other services to the GPU companies. All of these companies considered together are referred to as "GPU." These notes should be read in conjunction with the notes to consolidated financial statements included in the 1997 Annual Report on Form 10-K. The December 31, 1997 balance sheet data contained in the attached financial statements was derived from audited financial statements. For disclosures required by generally accepted accounting principles, see the 1997 Annual Report on Form 10-K. 1. COMMITMENTS AND CONTINGENCIES COMPETITION AND THE CHANGING REGULATORY ENVIRONMENT --------------------------------------------------- The Emerging Competitive Market and Stranded Costs: - --------------------------------------------------- The current market price of electricity being below the cost of some utility-owned generation and power purchase commitments, combined with the ability of some customers to choose their energy suppliers, has created the potential for stranded costs in the electric utility industry. These stranded costs, while potentially recoverable in a regulated environment, are at risk in a deregulated and competitive environment. Met-Ed and Penelec estimate that their total above-market costs related to power purchase commitments, company-owned generation, generating plant decommissioning, regulatory assets and transition expenses, on a present value basis at year-end 1998, are $1.5 billion and $1.2 billion, respectively. JCP&L estimates that its total above-market costs related to power purchase commitments and company-owned generation, on a present value basis at September 30, 1998, is $1.6 billion. The $1.6 billion excludes above-market generation costs related to the Oyster Creek Nuclear Generating Station (Oyster Creek). In July 1997, JCP&L proposed, in its restructuring plans filed with the New Jersey Board of Public 19 Utilities (NJBPU), recovery of its remaining Oyster Creek plant investment as a regulatory asset, through a nonbypassable charge to customers (see Management's Discussion and Analysis - Competitive Environment). At March 31, 1998, JCP&L's net investment in Oyster Creek was $710 million. These estimates are subject to significant uncertainties including the future market price of both electricity and other competitive energy sources, as well as the timing of when these above-market costs become stranded due to customers choosing another supplier. The restructuring legislation in Pennsylvania and the Energy Master Plan (NJEMP) in New Jersey provide mechanisms for utilities to recover, subject to regulatory approval, their above-market costs. These regulatory recovery mechanisms in Pennsylvania and New Jersey differ, but should allow for the recovery of non-mitigable above-market costs through either distribution charges or separate nonbypassable charges to customers. In June 1997, Met-Ed and Penelec filed with the Pennsylvania Public Utility Commission (PaPUC) their proposed restructuring plans to implement competition and customer choice in Pennsylvania as required by the comprehensive restructuring legislation enacted in 1996. Highlights of these plans are presented in the Competitive Environment section of Management's Discussion and Analysis. In May 1998, an Administrative Law Judge (ALJ) issued Recommended Decisions in Met-Ed and Penelec's restructuring proceedings. Met-Ed and Penelec are continuing to analyze the ALJ's recommendations, which do not contain detailed schedules recommending proposed amounts of stranded cost disallowances, cost allocations or other rate matters. Accordingly, management is unable to assess the full implications of the Decisions at this time. The major elements of the ALJ's Decisions are presented in the Competitive Environment section of Management's Discussion and Analysis. Met-Ed and Penelec intend to file exceptions to a number of the ALJ's recommendations by May 20, 1998. The PaPUC is scheduled to take nonbinding polls on June 4, 1998 on the Recommended Decisions and issue final orders on June 25, 1998. Based on preliminary review and analysis of the Recommended Decisions, management believes that if the PaPUC were to adopt the ALJ's recommendations in substantial part (in particular, the proposed reduction of T&D rates), it would have a material adverse effect on Met-Ed and Penelec's stranded cost recovery and future earnings, except to the extent offset by spending reductions. There can be no assurance as to the outcome of these proceedings. In July 1997, JCP&L filed with the NJBPU its proposed restructuring plan for a competitive electric marketplace in New Jersey as required by the NJEMP. Highlights of this plan are presented in the Competitive Environment section of Management's Discussion and Analysis. Although the NJBPU has stated that it intends to complete its review of JCP&L's plan so as to permit retail competition to begin in October 1998, this would require enacting legislation which has not yet been introduced. Management believes it is unlikely that legislation could be enacted in time for retail competition to begin in 1998. In October 1997, GPU announced its intention to begin a process to sell, through a competitive bid process, up to all of the fossil-fuel and hydroelectric generating facilities owned by the GPU Energy companies. The current schedule, which is subject to change, calls for initial non-binding bids due in June 1998, selection of a short list of bidders in July 1998 and final bid submission in October 1998. It is anticipated that definitive purchase agreements will be entered into in November 1998 and the divestiture 20 completed by mid-1999, subject to the timely receipt of the necessary regulatory and other approvals. For additional information, see Other Commitments and Contingencies. In 1996, the Federal Energy Regulatory Commission (FERC) issued Order 888, which permits electric utilities to recover their legitimate and verifiable stranded costs incurred when a wholesale customer purchases power from another supplier using the utility's transmission system. In addition, Pennsylvania adopted comprehensive legislation in 1996 which provides for the restructuring of the electric utility industry and will permit utilities the opportunity to recover their prudently incurred stranded costs through a PaPUC-approved competitive transition charge, subject to certain conditions, including that utilities attempt to mitigate these costs. In 1997, the NJBPU released Phase II of the NJEMP, which proposes that New Jersey electric utilities should have an opportunity to recover their stranded costs associated with generating capacity commitments and caused by electric retail competition, provided that they attempt to mitigate these costs. There can be no assurance as to the extent that stranded costs will be recoverable in Pennsylvania and New Jersey. (For additional information, see Management's Discussion and Analysis - Competitive Environment). The inability of the GPU Energy companies to recover their stranded costs in whole or in part could result in the recording of liabilities for above-market nonutility generation (NUG) costs and writedowns of uneconomic generation plant and regulatory assets recorded in accordance with Statement of Financial Accounting Standards No. 71 (FAS 71), "Accounting for the Effects of Certain Types of Regulation." Decommissioning costs, for which a liability may have to be recorded (see Nuclear Plant Retirement Costs), and the corresponding regulatory asset for amounts recoverable from customers, could also be subject to writedowns. The inability to recover these stranded costs would have a material adverse effect on GPU's results of operations. (See additional discussion of stranded costs in Management's Discussion and Analysis - Competitive Environment). Nonutility Generation Agreements: - --------------------------------- Pursuant to the requirements of the federal Public Utility Regulatory Policies Act (PURPA) and state regulatory directives, the GPU Energy companies have entered into power purchase agreements with NUGs for the purchase of energy and capacity for remaining periods of up to 23 years. The following table shows actual payments from 1995 through 1997, and estimated payments from 1998 through 2002. Payments Under NUG Agreements ----------------------------- (in Millions) Total JCP&L Met-Ed Penelec ----- ----- ------ ------- 1995 $670 $381 $131 $158 1996 730 370 168 192 1997 759 384 172 203 * 1998 783 393 173 217 1999 789 395 167 227 2000 860 402 208 250 2001 887 411 237 239 2002 908 423 246 239 21 * The 1998 amounts consist of actual payments through March 31, 1998 and estimated payments for the remainder of the year. As of March 31, 1998, facilities covered by agreements having 1,666 MW (JCP&L 905 MW; Met-Ed 356 MW; Penelec 405 MW) of capacity were in service. While a few of these NUG facilities are dispatchable, most are must-run and generally obligate the GPU Energy companies to purchase, at the contract price, the output up to the contract limits. Substantially all unbuilt NUG facilities for which the GPU Energy companies have executed agreements are fully dispatchable. The emerging competitive generation market has created uncertainty regarding the forecasting of the companies' energy supply needs, which has caused the GPU Energy companies to change their supply strategy to seek shorter-term agreements offering more flexibility. The GPU Energy companies' future supply plan will likely focus on short- to intermediate-term commitments and reliance on spot market purchases. The projected cost of energy from new generation supply sources has also decreased due to improvements in power plant technologies and lower forecasted fuel prices. As a result of these developments, the rates under virtually all of the GPU Energy companies' NUG agreements for facilities currently in operation are substantially in excess of current and projected prices from alternative sources. The GPU Energy companies are seeking to reduce the above-market costs of these NUG agreements by: (1) attempting to convert must-run agreements to dispatchable agreements; (2) attempting to renegotiate prices of the agreements; (3) offering contract buyouts (see Management's Discussion and Analysis - The GPU Energy Companies' Supply Plan,); and (4) initiating proceedings before federal and state agencies, and in the courts, where appropriate. In addition, the GPU Energy companies intend to avoid, to the maximum extent practicable, entering into any new NUG agreements that are not needed or not consistent with current market pricing, and are supporting legislative efforts to repeal PURPA. These efforts may result in claims against GPU for substantial damages. There can be no assurance as to the extent to which these efforts will be successful in whole or in part. In 1997, Met-Ed and Penelec issued requests for proposals (RFPs) to 24 NUG projects which currently supply a total of approximately 760 MW under power purchase agreements. The RFPs requested the NUGs to propose buyouts, buydowns and/or restructurings of current power purchase contracts in return for cash payments. In January 1998, Met-Ed and Penelec entered into definitive buyout agreements with two bidders. The PaPUC is considering Met-Ed and Penelec's requests for approval of these agreements as part of their pending restructuring proceedings. In February 1997, Met-Ed and Penelec entered into revised power purchase agreements with AES Power Corporation (AES) for 377 MW and 80 MW of capacity and related energy, respectively, related to a combined-cycle generating facility that AES plans to construct in Pennsylvania. Met-Ed and Penelec have paid $63.4 million and $5 million, respectively, to previous developers and AES to terminate the original power purchase agreements. In July 1997, the PaPUC ordered that the issue of recovery of the related buyout costs and approval of the revised power purchase agreements with AES be considered in Met-Ed and Penelec's restructuring proceedings. If the revised power purchase 22 agreements with AES are not approved by the PaPUC, Met-Ed and Penelec have agreed to pay AES up to an additional $28 million and $5 million, respectively. This discussion of "Nonutility Generation Agreements" contains estimates which are based on current knowledge and expectations of the outcome of future events. The estimates are subject to significant uncertainties, including changes in fuel prices, improvements in technology, the changing regulatory environment and the deregulation of the electric utility industry. The GPU Energy companies are recovering certain of their NUG costs (including certain buyout costs) from customers. Although the recently enacted legislation in Pennsylvania and the NJEMP in New Jersey both include provisions for the recovery of costs under NUG agreements and certain NUG buyout costs, there can be no assurance that the GPU Energy companies will continue to be able to recover similar costs which may be incurred in the future. (See Management's Discussion and Analysis - Competitive Environment for additional discussion.) Regulatory Assets and Liabilities: - ---------------------------------- Regulatory Assets and Regulatory Liabilities, as reflected in the March 31, 1998 and December 31, 1997 Consolidated Balance Sheets in accordance with the provisions of FAS 71, "Accounting for the Effects of Certain Types of Regulation", were as follows: GPU, Inc. and Subsidiary Companies Assets (in thousands) - ---------------------------------- --------------------- March 31, December 31, 1998 1997 ------------- ----------- Income taxes recoverable through future rates $ 521,780 $ 510,680 Three Mile Island Unit 2 (TMI-2) deferred costs 337,754 345,326 Nonutility generation contract buyout costs 240,068 245,568 Unamortized property losses 96,355 99,532 Other postretirement benefits 88,519 89,569 Environmental remediation 71,807 90,308 N.J. unit tax 38,204 39,797 Unamortized loss on reacquired debt 39,280 40,489 Load and demand-side management programs 18,414 23,164 N.J. low-level radwaste disposal 29,653 31,479 DOE enrichment facility decommissioning 32,377 33,472 Nuclear fuel disposal fee 20,688 21,512 Storm damage 30,215 31,097 Nonutility generation costs 32,163 24,857 Other 23,775 22,402 --------- --------- Total $1,621,052 $1,649,252 ========= ========= Liabilities (in thousands) -------------------------- March 31, December 31, 1998 1997 ---------- ---------- Income taxes refundable through future rates $ 87,568 $ 89,247 Other 15,200 12,527 --------- --------- Total $ 102,768 $ 101,774 ========= ========= 23 JCP&L Assets (in thousands) - ----- --------------------- March 31, December 31, 1998 1997 ------------ ---------- Income taxes recoverable through future rates $ 136,853 $ 128,111 TMI-2 deferred costs 102,059 109,498 Nonutility generation contract buyout costs 137,500 140,500 Unamortized property losses 91,641 94,726 Other postretirement benefits 48,977 49,807 Environmental remediation 41,683 61,324 N.J. unit tax 38,204 39,797 Unamortized loss on reacquired debt 28,029 28,729 Load and demand-side management programs 18,414 23,164 N.J. low-level radwaste disposal 29,653 31,479 DOE enrichment facility decommissioning 20,439 21,223 Nuclear fuel disposal fee 23,045 23,781 Storm damage 30,215 31,097 Other 1,934 2,466 --------- --------- Total $ 748,646 $ 785,702 ========= ========= Liabilities (in thousands) -------------------------- March 31, December 31, 1998 1997 ------------ ---------- Income taxes refundable through future rates $ 36,861 $ 37,759 Other 14,129 11,467 --------- --------- Total $ 50,990 $ 49,226 ========= ========= Met-Ed Assets (in thousands) - ------ --------------------- March 31, December 31, 1998 1997 ------------- -------- Income taxes recoverable through future rates $ 182,303 $ 178,927 TMI-2 deferred costs 145,032 146,290 Nonutility generation contract buyout costs 73,868 76,368 Unamortized property losses 2,579 2,650 Other postretirement benefits 39,542 39,762 Environmental remediation 4,121 4,121 Unamortized loss on reacquired debt 5,134 5,329 DOE enrichment facility decommissioning 7,959 8,166 Nuclear fuel disposal fee (1,540) (1,511) Nonutility generation costs 12,602 10,265 Other 5,589 4,515 --------- --------- Total $ 477,189 $ 474,882 ========= ========= Liabilities (in thousands) March 31, December 31, 1998 1997 ------------- -------- Income taxes refundable through future rates $ 21,393 $ 21,749 Other 2,393 2,446 --------- --------- Total $ 23,786 $ 24,195 ========= ========= 24 Penelec Assets (in thousands) - ------- --------------------- March 31, December 31, 1998 1997 ------------- -------- Income taxes recoverable through future rates $ 202,624 $ 203,642 TMI-2 deferred costs 90,663 89,538 Nonutility generation contract buyout costs 28,700 28,700 Unamortized property losses 2,135 2,156 Environmental remediation 26,003 24,863 Unamortized loss on reacquired debt 6,117 6,431 DOE enrichment facility decommissioning 3,979 4,083 Nuclear fuel disposal fee (817) (758) Nonutility generation costs 19,561 14,592 Other 17,684 16,853 --------- --------- Total $ 396,649 $ 390,100 ========= ========= Liabilities (in thousands) -------------------------- March 31, December 31, 1998 1997 ------------- ----------- Income taxes refundable through future rates $ 29,314 $ 29,739 Other 110 46 --------- --------- Total $ 29,424 $ 29,785 ========= ========= Income taxes recoverable/refundable through future rates: Represents amounts - ---------------------------------------------------------- deferred due to the implementation of FAS 109, "Accounting for Income Taxes," in 1993. TMI-2 deferred costs: Represents costs that are recoverable through rates for - -------------------- the GPU Energy companies' remaining investment in the plant and fuel core, radiological decommissioning and the cost of removal of nonradiological structures and materials in accordance with the 1995 site-specific study (in 1998 dollars) and JCP&L's share of long-term monitored storage costs. For additional information, see Nuclear Plant Retirement Costs. Nonutility generation contract buyout costs: Represents amounts incurred for - --------------------------------------------- terminating power purchase contracts with NUGs, for which rate recovery has been granted or is probable (see Management's Discussion and Analysis The GPU Energy Companies' Supply Plan). Unamortized property losses: Consists mainly of costs associated with JCP&L's - ----------------------------- Forked River project, which are included in rates. Other postretirement benefits: Includes costs associated with the adoption of - ------------------------------- FAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," which are deferred in accordance with Emerging Issues Task Force (EITF) Issue 92-12, "Accounting for OPEB Costs by Rate-Regulated Enterprises." Environmental remediation: Consists of amounts related to the investigation and - ------------------------- remediation of several manufactured gas plant sites formerly owned by JCP&L, as well as several other JCP&L sites; Penelec's Seward station property; and future closure costs of various ash disposal sites for the GPU Energy companies. For additional information, see Environmental Matters. 25 N.J. unit tax: Represents certain state taxes, with interest, for which JCP&L - ------------- received NJBPU approval in 1993 to recover over a ten-year period. Unamortized loss on reacquired debt: Represents premiums and expenses incurred - ----------------------------------- in the early redemption of long-term debt. In accordance with FERC regulations, reacquired debt costs are amortized over the remaining original life of the retired debt. Load and demand-side management (DSM) programs: Consists of load management - -------------------------------------------------- costs and other DSM program expenditures that are currently being recovered, with interest, through JCP&L's retail base rates and demand-side factor. Also includes provisions for lost revenues between base rate cases and performance incentives. N.J. low-level radwaste disposal: Represents the estimated assessment for the - -------------------------------- siting of a disposal facility for low-level waste from Oyster Creek, less amortization, as allowed in JCP&L's rates. Department of Energy (DOE) enrichment facility decommissioning: Represents - ------------------------------------------------------------------- payments to the DOE over a 15-year period which began in 1994. Nuclear fuel disposal fee: Represents amounts recoverable through rates for - -------------------------- estimated future disposal costs for spent nuclear fuel at Oyster Creek and Three Mile Island Unit 1 (TMI-1) in accordance with the Nuclear Waste Policy Act of 1982. Storm damage: Relates to incremental noncapital costs associated with various - ------------ storms in the JCP&L service territory that are not recoverable through insurance. These amounts were deferred based upon past rate recovery precedent. An annual amortization amount is included in JCP&L's retail base rates and is charged to expense. Nonutility generation costs: Represents incremental NUG operating costs incurred - --------------------------- above amounts reflected in Met-Ed and Penelec's current rates, for which rate recovery is probable but has not yet been granted (see Management's Discussion and Analysis - Competitive Environment). Amounts related to the decommissioning of TMI-1 and Oyster Creek, which are not included in Regulatory assets on the Consolidated Balance Sheets, are separately disclosed in the Nuclear Plant Retirement Costs section. Accounting Matters: - ------------------- Historically, electric utility rates have been based on a utility's costs. As a result, the GPU Energy companies account for the economic effects of cost-based ratemaking regulation under the provisions of FAS 71. FAS 71 requires regulated entities, in certain circumstances, to defer as regulatory assets, the impact on operations of costs expected to be recovered in future rates. At March 31, 1998, GPU has recorded on the Consolidated Balance Sheets $1.6 billion in regulatory assets in accordance with FAS 71 (see Regulatory Assets and Liabilities section of Competition and the Changing Regulatory Environment). In response to the continuing deregulation of the electric utility industry, the Securities and Exchange Commission (SEC) questioned the 26 continued applicability of FAS 71 by investor-owned utilities with respect to their electric generation operations. In response to the concerns expressed by the Staff of the SEC, the Financial Accounting Standards Board's (FASB) EITF agreed to discuss the issues surrounding the continued applicability of FAS 71 to the electric utility industry. In 1997, the EITF met to discuss these issues and concluded that utilities are no longer subject to FAS 71, for the generation portion of their business, as soon as they know details of their individual transition plans. The EITF also concluded that utilities can continue to carry previously recorded regulated assets, as well as any newly established regulated assets (including those related to generation), on their balance sheets if regulators have guaranteed a regulated cash flow stream to recover the cost of these assets. While the EITF's consensus must be complied with, the SEC has the final regulatory authority for accounting by public companies. In light of retail access legislation enacted in Pennsylvania and the NJBPU's final findings and recommendations, the GPU Energy companies believe they will no longer meet the requirements for continued application of FAS 71, for the generation portion of their business, by no later than mid-1998 for Met-Ed and Penelec, and October 1998 for JCP&L, the expected approval dates of their restructuring plans filed with state regulators. Once the GPU Energy companies are able to determine that the generation portion of their operations is no longer subject to the provisions of FAS 71, the related regulatory assets, net of regulatory liabilities, would, to the extent that recovery is not provided for through their respective restructuring plans, have to be written off and charged to expense. Additional depreciation expense would have to be recorded for any differences created by the use of a regulated depreciation method that is different from that which would have been used under generally accepted accounting principles for enterprises in general. In addition, write-downs of plant assets could be required in accordance with FAS 121, "Accounting for the Impairment of Long-Lived Assets," discussed below. Additionally, the inability of the GPU Energy companies to recover their above-market costs of power purchase commitments, in whole or in part, could result in the recording of liabilities and corresponding charges to expense. The amount of charges resulting from the discontinuation of FAS 71 will depend on the final outcome of the GPU Energy companies' individual restructuring proceedings, and could have a material adverse effect on GPU's results of operations and financial position. In December 1997, the PaPUC rejected PECO Energy Company's (PECO) restructuring settlement and approved an alternate plan for PECO based on its findings in that case. PECO took a pre-tax charge to 1997 income of $3.1 billion reflecting the effects of the PaPUC order. Met-Ed and Penelec believe that the PaPUC's decision in the PECO case was based on the specific facts and circumstances of that proceeding. Met-Ed and Penelec further believe that they have demonstrated in their restructuring proceedings ample evidence to distinguish sufficiently their cases from PECO's and that the PaPUC should not, therefore, apply its findings in the PECO case to their pending restructuring plans. If, however, the PaPUC were to apply these findings, it would have a material adverse impact on Met-Ed and Penelec's stranded cost recovery, restructuring proceedings and future earnings. 27 In April 1998, PECO and other parties to PECO's restructuring proceeding, including Met-Ed and Penelec, filed a joint petition for settlement (Joint Petition) with the PaPUC. The Joint Petition represents a comprehensive settlement that resolves numerous issues on appeal by the parties to the settlement, including an agreement by Met-Ed, Penelec and PECO to withdraw from each others respective restructuring cases. Additionally, PECO has agreed not to participate when the PaPUC reviews Met-Ed and Penelec's sale of their generating facilities. The Joint Petition was tentatively approved by the PaPUC and the final vote is currently scheduled for May 14, 1998. There can be no assurance as to the outcome of this matter. Should the restructuring proceedings in New Jersey and Pennsylvania result in substantial disallowance of certain capital additions; the disallowance of certain stranded costs; reduction in cost of capital allowances on certain elements of plant and cost deferrals; and tariff rate unbundling reflecting an allocation of costs to the transmission and distribution activities lower than that proposed by the GPU Energy companies, management believes that the outcome of these proceedings would have a material adverse effect on GPU's future earnings. FAS 121 requires that regulatory assets meet the recovery criteria of FAS 71 on an ongoing basis in order to avoid a write-down. In addition, FAS 121 requires that long-lived assets, identifiable intangibles, capital leases and goodwill be reviewed for impairment whenever events occur or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. FAS 121 also requires the recognition of impairment losses when the carrying amounts of those assets are greater than the estimated cash flows expected to be generated from the use and eventual disposition of the assets. The effects of FAS 121 have not been material to GPU's results of operations. NUCLEAR FACILITIES ------------------ The GPU Energy companies have made investments in three major nuclear projects -- TMI-1 and Oyster Creek, both of which are operating generation facilities, and TMI-2, which was damaged during a 1979 accident. TMI-1 and TMI-2 are jointly owned by JCP&L, Met-Ed and Penelec in the percentages of 25%, 50% and 25%, respectively. Oyster Creek is owned by JCP&L. At March 31, 1998 and December 31, 1997, the GPU Energy companies' net investment in TMI-1 and Oyster Creek, including nuclear fuel, was as follows: Net Investment (in millions) ---------------------------- TMI-1 Oyster Creek ----- ------------ March 31, 1998 -------------- JCP&L $152 $710 Met-Ed 293 - Penelec 143 - --- --- Total $588 $710 === === Net Investment (in millions) ---------------------------- TMI-1 Oyster Creek ----- ------------ December 31, 1997 ----------------- JCP&L $155 $701 Met-Ed 300 - Penelec 147 - --- --- Total $602 $701 === === 28 The GPU Energy companies' net investment in TMI-2 at March 31, 1998 and December 31, 1997 was $82 million and $84 million, respectively (JCP&L $74 million and $76 million, respectively; Met-Ed $1 million and $1 million, respectively; Penelec $7 million and $7 million, respectively). JCP&L is collecting revenues for TMI-2 on a basis which provides for the recovery of its remaining investment in the plant by 2008. Met-Ed and Penelec are collecting revenues for TMI-2 related to their wholesale customers. Costs associated with the operation, maintenance and retirement of nuclear plants have continued to be significant and less predictable than costs associated with other sources of generation, in large part due to changing regulatory requirements, safety standards, availability of nuclear waste disposal facilities and experience gained in the construction and operation of nuclear facilities. The GPU Energy companies may also incur costs and experience reduced output at their nuclear plants because of the prevailing design criteria at the time of construction and the age of the plants' systems and equipment. In addition, for economic or other reasons, operation of these plants for the full term of their operating licenses cannot be assured. Also, not all risks associated with the ownership or operation of nuclear facilities may be adequately insured or insurable. Consequently, the recovery of costs associated with nuclear projects, including replacement power, any unamortized investment at the end of each plant's useful life (whether scheduled or premature), the carrying costs of that investment and retirement costs, is not assured. (See Competition and the Changing Regulatory Environment.) In addition to the continued operation of the Oyster Creek facility, JCP&L is exploring the sale or early retirement of the plant to mitigate costs associated with its continued operation. JCP&L is exploring these options due to the plant's high cost of generation compared to the current market price of electricity. If a decision is made to retire the plant early, retirement would likely occur in 2000. Although management believes that the current rate structure would allow for the recovery of and return on its net investment in the plant and provide for decommissioning costs, there can be no assurance that such costs will be fully recoverable. (See Management's Discussion and Analysis - - Competitive Environment). The GPU Energy companies have also entered into a confidentiality agreement with a potential purchaser of TMI-1. Unlike Oyster Creek, however, the early retirement of TMI-1 is not being considered because of its lower operating costs. In the event that TMI-1 is sold, there can be no assurance of full recovery of its remaining investment. TMI-2: - ------ The 1979 TMI-2 accident resulted in individual claims for alleged personal injury (including claims for punitive damages), which are material in amount, have been asserted against GPU, Inc. and the GPU Energy companies. Approximately 2,100 of such claims were filed in the United States District Court for the Middle District of Pennsylvania. Some of the claims also seek recovery for injuries from alleged emissions of radioactivity before and after the accident. At the time of the TMI-2 accident, as provided for in the Price-Anderson Act, the GPU Energy companies had (a) primary financial protection in the form of insurance policies with groups of insurance companies providing an 29 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, before which the matter is pending. There can be no assurance as to the outcome of this litigation. Based on the above, GPU, Inc. and the GPU Energy companies believe that any liability to which they might be subject by reason of the TMI-2 accident will not exceed their financial protection under the Price-Anderson Act. NUCLEAR PLANT RETIREMENT COSTS ------------------------------ Retirement costs for nuclear plants include decommissioning the radiological portions of the plants and the cost of removal of nonradiological structures and materials. The disposal of spent nuclear fuel is covered separately by contracts with the DOE. In 1990, the GPU Energy companies submitted a report, in compliance with NRC regulations, setting forth a funding plan (employing the external sinking fund method) for the decommissioning of their nuclear reactors. Under this plan, the GPU Energy companies intend to complete the funding for Oyster Creek and TMI-1 by the end of the plants' license terms, 2009 and 2014, respectively. The TMI-2 funding completion date is 2014, consistent with 30 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 1998 dollars) are as follows: (in millions) Oyster TMI-1 TMI-2 Creek ----- ----- ----- JCP&L $ 45 $ 72 $310 Met-Ed 91 144 - Penelec 45 72 - --- --- --- Total $181 $288 $310 === === === The funding targets, while not considered cost estimates, are reference levels designed to assure that licensees demonstrate adequate financial responsibility for decommissioning. While the NRC regulations address activities related to the removal of the radiological portions of the plants, they do not establish residual radioactivity limits nor do they address costs related to the removal of nonradiological structures and materials. In 1995, a consultant to GPUN performed site-specific studies of the TMI site, including both Units 1 and 2, and of Oyster Creek, that considered various decommissioning methods and estimated the cost of decommissioning the radiological portions and the cost of removal of the nonradiological portions of each plant, using the prompt removal/dismantlement method. GPUN management has reviewed the methodology and assumptions used in these studies, is in agreement with them, and believes the results are reasonable. The NRC may require an acceleration of the decommissioning funding for Oyster Creek if the plant is retired early. The retirement cost estimates under the site-specific studies are as follows (in 1998 dollars): (in millions) Oyster TMI-1 TMI-2 Creek ----- ----- ----- Radiological decommissioning $333 $404 $391 Nonradiological cost of removal 82 33 * 38 --- --- --- Total $415 $437 $429 === === === * Net of $11.2 million spent as of March 31, 1998. Each of the GPU Energy companies is responsible for retirement costs in proportion to its respective ownership percentage. The ultimate cost of retiring the GPU Energy companies' nuclear facilities may be different from the cost estimates contained in these site-specific studies. Such costs are subject to (a) the escalation of various cost elements (for reasons including, but not limited to, general inflation), (b) the further development of regulatory requirements governing decommissioning, (c) the technology available at the time of decommissioning, and (d) the availability of nuclear waste disposal facilities. The GPU Energy companies charge to depreciation expense and accrue retirement costs based on amounts being collected from customers. Customer 31 collections are contributed to external trust funds. These deposits, including the related earnings, are classified as Nuclear decommissioning trusts, at market on the Consolidated Balance Sheets. Accounting for retirement costs may change based upon the FASB Exposure Draft discussed below. The FASB has issued an Exposure Draft titled "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which includes nuclear plant retirement costs. If the Exposure Draft is adopted, Oyster Creek and TMI-1 future retirement costs would have to be recognized as a liability immediately, rather than the current industry practice of accruing these costs in accumulated depreciation over the life of the plants. A regulatory asset for amounts probable of recovery through rates would also be established. Any amounts not probable of recovery through rates would have to be charged to expense. (For TMI-2, a liability (in 1998 dollars) has already been recognized, based on the 1995 site-specific study because the plant is no longer operating (see TMI-2)). The effective date of this accounting change has not yet been established. TMI-1 and Oyster Creek: - ----------------------- The NJBPU has granted JCP&L annual revenues for TMI-1 and Oyster Creek retirement costs of $2.5 million and $13.5 million, respectively. These annual revenues are based on both the NRC funding targets for radiological decommissioning costs and a site-specific study which was performed in 1988 for nonradiological costs of removal. The Stipulation of Final Settlement approved by the NJBPU in 1997 allows for JCP&L's future collection of retirement costs to increase annually to $5.2 million and $22.5 million for TMI-1 and Oyster Creek, respectively, beginning in 1998, based on the 1995 site-specific study estimates. The PaPUC has granted Met-Ed annual revenues for TMI-1 retirement costs of $8.5 million based on both the NRC funding target for radiological decommissioning costs and the 1988 site-specific study for nonradiological costs of removal. The PaPUC also granted Penelec annual revenues of $4.2 million for its share of TMI-1 retirement costs, on a basis consistent with that granted Met-Ed. As part of their restructuring plans filed with the PaPUC in June 1997, Met-Ed and Penelec have requested that these amounts be increased to reflect the estimated retirement costs contained in the 1995 site-specific study for radiological decommissioning and nonradiological costs of removal. The amounts charged to depreciation expense for the first quarter of 1998 and the provisions for the future expenditure of these funds, which have been made in accumulated depreciation, are as follows: (in millions) ------------- Oyster TMI-1 Creek ----- ----- Amount expensed for the three months ended March 31, 1998: JCP&L $ 1 $ 6 Met-Ed 2 - Penelec 1 - --- --- $ 4 $ 6 === === 32 (in millions) Oyster TMI-1 Creek ----- ----- Accumulated depreciation provision at March 31, 1998: JCP&L $ 41 $235 Met-Ed 75 - Penelec 32 - --- --- $148 $235 === === Management believes that any TMI-1 and Oyster Creek retirement costs, in excess of those currently recognized for ratemaking purposes, should be recoverable from customers. TMI-2: - ------ The estimated liabilities for TMI-2 future retirement costs (reflected as Three Mile Island Unit 2 Future Costs on the Consolidated Balance Sheets) as of March 31, 1998 and December 31, 1997 are as follows: (in millions) GPU JCP&L Met-Ed Penelec --- ----- ------ ------- March 31, 1998 $453 $113 $227 $113 December 31, 1997 $449 $112 $225 $112 These amounts are based upon the 1995 site-specific study estimates (in 1998 and 1997 dollars, respectively) discussed above and an estimate for remaining incremental monitored storage costs of $16 million (JCP&L $4 million; Met-Ed $8 million; Penelec $4 million) as of March 31, 1998 and December 31, 1997, as a result of TMI-2's entering long-term monitored storage in 1993. The GPU Energy companies are incurring annual incremental monitored storage costs of approximately $1 million (JCP&L $250 thousand; Met-Ed $500 thousand; Penelec $250 thousand). Offsetting the $453 million liability at March 31, 1998 is $256 million (JCP&L $29 million; Met-Ed $144 million; Penelec $83 million) which is probable of recovery from customers and included in Three Mile Island Unit 2 deferred costs on the Consolidated Balance Sheets, and $238 million (JCP&L $94 million; Met-Ed $105 million; Penelec $39 million) in trust funds for TMI-2 and included in Nuclear decommissioning trusts, at market on the Consolidated Balance Sheets. Earnings on trust fund deposits are included in amounts shown on the Consolidated Balance Sheets under Three Mile Island Unit 2 deferred costs. TMI-2 decommissioning costs charged to depreciation expense in the first quarter of 1998 amounted to $3 million (JCP&L $573 thousand; Met-Ed $2,496 thousand; Penelec $255 thousand). The NJBPU and PaPUC have granted JCP&L and Met-Ed, respectively, TMI-2 decommissioning revenues for the NRC funding target and allowances for the cost of removal of nonradiological structures and materials. In addition, JCP&L is recovering its share of TMI-2's incremental monitored storage costs. The Stipulation of Final Settlement approved by the NJBPU in 1997 adjusts JCP&L's future revenues for retirement costs based on the 1995 site-specific study estimates, beginning in 1998. Based on Met-Ed's rate order, Penelec has 33 recorded a regulatory asset for that portion of such costs which it believes to be probable of recovery. At March 31, 1998, the accident-related portion of TMI-2 radiological decommissioning costs is considered to be $71 million (JCP&L $18 million, Met-Ed $35 million; Penelec $18 million), which is the difference between the 1995 TMI-1 and TMI-2 site-specific study estimates (in 1998 dollars). In connection with rate case resolutions at the time, JCP&L, Met-Ed and Penelec made contributions to irrevocable external trusts relating to their shares of the accident-related portions of the decommissioning liability. In 1990, JCP&L contributed $15 million and in 1991, Met-Ed and Penelec contributed $40 million and $20 million, respectively, to irrevocable external trusts. These contributions were not recovered from customers and have been expensed. The GPU Energy companies will not pursue recovery from customers for any of these amounts contributed in excess of the $71 million accident-related portion referred to above. JCP&L intends to seek recovery for any increases in TMI-2 retirement costs, and Met-Ed and Penelec intend to seek recovery for any increases in the nonaccident-related portion of such costs, but recognize that recovery cannot be assured. INSURANCE --------- GPU has insurance (subject to retentions and deductibles) for its operations and facilities including coverage for property damage, liability to employees and third parties, and loss of use and occupancy (primarily incremental replacement power costs). There is no assurance that GPU will maintain all existing insurance coverages. Losses or liabilities that are not completely insured, unless allowed to be recovered through ratemaking, could have a material adverse effect on the financial position of GPU. The decontamination liability, premature decommissioning and property damage insurance coverage for the TMI station and for Oyster Creek totals $2.7 billion per site. In accordance with NRC regulations, these insurance policies generally require that proceeds first be used for stabilization of the reactors and then to pay for decontamination and debris removal expenses. Any remaining amounts available under the policies may then be used for repair and restoration costs and decommissioning costs. Consequently, there can be no assurance that in the event of a nuclear incident, property damage insurance proceeds would be available for the repair and restoration of that station. The Price-Anderson Act limits GPU's liability to third parties for a nuclear incident at one of its sites to approximately $8.9 billion. Coverage for the first $200 million of such liability is provided by private insurance. The remaining coverage, or secondary financial protection, is provided by retrospective premiums payable by all nuclear reactor owners. Under secondary financial protection, a nuclear incident at any licensed nuclear power reactor in the country, including those owned by the GPU Energy companies, could result in assessments of up to $79 million per incident for each of the GPU Energy companies' two operating reactors, subject to an annual maximum payment of $10 million per incident per reactor. In addition to the retrospective premiums payable under the Price-Anderson Act, the GPU Energy companies are 34 also subject to retrospective premium assessments of up to $26.5 million (JCP&L $17.0 million; Met-Ed $6.3 million; Penelec $3.2 million) in any one year under insurance policies applicable to nuclear operations and facilities. The GPU Energy companies have insurance coverage for incremental replacement power costs resulting from an accident-related outage at their nuclear plants. Coverage commences after a 17 week waiting period at $3.5 million per week, and after 23 weeks of an outage, continues for three years beginning at $1.8 million and $2.6 million per week for the first year for Oyster Creek and TMI-1, respectively, decreasing to 80% of such amounts for years two and three. ENVIRONMENTAL MATTERS --------------------- As a result of existing and proposed legislation and regulations, and ongoing legal proceedings dealing with environmental matters, including but not limited to acid rain, water quality, ambient air quality, global warming, electromagnetic fields, and storage and disposal of hazardous and/or toxic wastes, GPU may be required to incur substantial additional costs to construct new equipment, modify or replace existing and proposed equipment, remediate, decommission or cleanup waste disposal and other sites currently or formerly used by it, including formerly owned manufactured gas plants (MGP), coal mine refuse piles and generation facilities. To comply with Titles I and IV of the federal Clean Air Act Amendments of 1990 (Clean Air Act), the GPU Energy companies expect to spend up to $248 million (JCP&L $44 million; Met-Ed $98 million; Penelec $106 million) for air pollution control equipment by the year 2000, of which approximately $242 million (JCP&L $43 million; Met-Ed $96 million; Penelec $103 million) has already been spent. In developing their least-cost plan to comply with the Clean Air Act, the GPU Energy companies will continue to evaluate major capital investments compared to participation in the sulfur dioxide (SO2) emission allowance market, the expected nitrogen oxide (NOx) emissions trading market and the use of low-sulfur fuel or retirement of facilities. In 1994, the Ozone Transport Commission (OTC), consisting of representatives of 12 northeast states (including New Jersey and Pennsylvania) and the District of Columbia, proposed reductions in NOx emissions it believes necessary to meet ambient air quality standards for ozone and the statutory deadlines set by the Clean Air Act. Effective November 1997, the Pennsylvania Environmental Quality Board adopted regulations implementing the OTC's proposed NOx reductions and in December 1997, the New Jersey Department of Environmental Protection developed a proposal with the electric utility industry on a plan to implement the OTC's proposed NOx reductions. The GPU Energy companies expect that the U.S. Environmental Protection Agency (EPA) will approve state implementation plans, including those in Pennsylvania and New Jersey, and that as a result, they will spend an estimated $6 million (JCP&L $0.2 million; Met-Ed $2.8 million; Penelec $3.0 million) (included in the above total), to meet the 1999 seasonal reductions agreed upon by the OTC. The OTC has stated that it anticipates that additional NOx reductions will be necessary to meet the Clean Air Act's 2005 National Ambient Air Quality Standard for ozone. However, the specific requirements that will have to be met at that time have not been finalized. In addition, in July 1997 the EPA adopted new, more stringent rules on ozone and particulate matter. Several groups have filed suit in the U.S. Court of Appeals to overturn these new air quality standards 35 on the grounds that, among other things, they are based on inadequate scientific evidence. Also, legislation has been introduced in the Congress that would impose a four-year moratorium on any new standards under the Clean Air Act. The GPU Energy companies are unable to determine what additional costs, if any, will be incurred if the EPA rules are upheld. GPU has been formally notified by the EPA and state environmental authorities that it is among the potentially responsible parties (PRPs) who may be jointly and severally liable to pay for the costs associated with the investigation and remediation at hazardous and/or toxic waste sites in the following number of instances (in some cases, more than one company is named for a given site): JCP&L MET-ED PENELEC GPUN GPU INC. TOTAL ----- ------ ------- ---- -------- ----- 7 4 2 1 1 12 In addition, certain of the GPU companies have been requested to participate in the remediation or supply information to the EPA and state environmental authorities on several other sites for which they have not been formally named as PRPs, although the EPA and state authorities may nevertheless consider them as PRPs. Certain of the GPU companies have also been named in lawsuits requesting damages (which are material in amount) for hazardous and/or toxic substances allegedly released into the environment. The ultimate cost of remediation will depend upon changing circumstances as site investigations continue, including (a) the existing technology required for site cleanup, (b) the remedial action plan chosen and (c) the extent of site contamination and the portion attributed to the GPU companies involved. In 1997, the EPA filed a complaint against GPU, Inc. in the United States District Court for the District of Delaware for enforcement of its unilateral order issued against GPU, Inc. to clean up the former Dover Gas Light Company (Dover) manufactured gas production site in Dover, Delaware. Dover was part of the AGECO/AGECORP group of companies from 1929 until 1942 and GPU, Inc. emerged from the AGECO/AGECORP reorganization proceedings. All of the common stock of Dover was sold in 1942 by a member of the AGECO/AGECORP group to an unaffiliated entity, and was subsequently acquired by Chesapeake Utilities Corporation. According to the complaint, the EPA is seeking up to $0.5 million in past costs, $4.2 million for work in connection with the cleanup of the Dover site and approximately $19 million in penalties. GPU, Inc. has responded to the EPA complaint stating that such claims should be dismissed because, among other things, they are barred by the operation of the Final Decree entered by the United States District Court for the Southern District of New York at the conclusion of the 1946 reorganization proceedings of AGECO/AGECORP. Chesapeake Utilities Corporation has also sued GPU, Inc. for a contribution to the cleanup of the Dover site. In December 1997, the Court refused to dismiss the complaint; GPU has requested that the Court reconsider its decision. There can be no assurance as to the outcome of these proceedings. Pursuant to federal environmental monitoring requirements, Penelec has reported to the Pennsylvania Department of Environmental Protection (PaDEP) that contaminants from coal mine refuse piles were identified in storm water run-off at Penelec's Seward station property. Penelec signed a modified Consent Order, which became effective December 1996, that establishes a 36 schedule for submitting a plan for long-term remediation, based on future operating scenarios. Penelec currently estimates that the remediation of the Seward station property will range from $12 million to $20 million and has a recorded liability of $12 million at March 31, 1998. These cost estimates are subject to uncertainties based on continuing discussions with the PaDEP as to the method of remediation, the extent of remediation required and available cleanup technologies. Penelec has requested, and expects to receive, recovery of these remediation costs in its restructuring plan filed with the PaPUC (see Management's Discussion and Analysis - Competitive Environment), and has recorded a corresponding regulatory asset of approximately $12 million at March 31, 1998. In 1997, the GPU Energy companies filed with the PaDEP applications for re-permitting seven (JCP&L - one; Met-Ed - three; Penelec - three) operating ash disposal sites, including projected site closure procedures and related cost estimates. The cost estimates for the closure of these sites range from approximately $17 million to $22 million, and a liability of $17 million (JCP&L $1 million; Met-Ed $4 million; Penelec $12 million) is reflected on the Consolidated Balance Sheets at March 31, 1998. JCP&L has requested recovery of its share of closure costs in its restructuring plan filed with the NJBPU in July 1997. Penelec and Met-Ed expect recovery through their restructuring plans filed with the PaPUC in June 1997 (see Management's Discussion and Analysis Competitive Environment). As a result, a regulatory asset of $17 million is reflected on the Consolidated Balance Sheets at March 31, 1998. JCP&L has entered into agreements with the New Jersey Department of Environmental Protection for the investigation and remediation of 17 formerly owned MGP sites. JCP&L has also entered into various cost-sharing agreements with other utilities for most of the sites. As of March 31, 1998, JCP&L has spent approximately $28 million in connection with the cleanup of these sites. In addition, JCP&L has recorded an estimated environmental liability of $46 million relating to expected future costs of these sites (as well as two other properties). This estimated liability is based upon ongoing site investigations and remediation efforts, which generally involve capping the sites and pumping and treatment of ground water. Moreover, the cost to clean up these sites could be materially in excess of $46 million due to significant uncertainties, including changes in acceptable remediation methods and technologies. In 1997, JCP&L's request to establish a Remediation Adjustment Clause for the recovery of MGP remediation costs was approved by the NJBPU as part of the Stipulation of Final Settlement. At March 31, 1998, JCP&L had recorded on its Consolidated Balance Sheet a regulatory asset of $35 million. JCP&L is continuing to pursue reimbursement from its insurance carriers for remediation costs already spent and for future estimated costs. In 1994, JCP&L filed a complaint with the Superior Court of New Jersey against several of its insurance carriers, relative to these MGP sites. Pretrial discovery is continuing. 37 OTHER COMMITMENTS AND CONTINGENCIES ----------------------------------- Year 2000 Issue: - ---------------- GPU is addressing year 2000 issues as they relate to its business, its operations and operating systems, and its relationship with customers, banks, partners, vendors, suppliers and service providers. Comprehensive reviews of all computers, equipment, systems and applications are being performed; remediation plans are being developed; and certain corrective actions have begun. GPU's remediation plans include, among other things, the upgrade or replacement of computers, equipment and computer software. GPU currently anticipates that its year 2000 remediation efforts will, in all material respects, be completed by the end of 1999. In the event corrective actions are not completed by this date, certain computers, equipment, systems and applications may not function properly, which could have a material adverse effect on GPU's operations. As part of their year 2000 solution, the GPU Energy companies have purchased and are installing an integrated information system (Project Enterprise) that will help them manage business growth and meet the mandates of electric utility deregulation. The system is scheduled to be fully operational in early 1999. As a result of the planned implementation of Project Enterprise, the GPU Energy Companies will avoid spending an estimated $8 million (JCP&L $3 million; Met-Ed $2 million; Penelec $3 million) in modifications to existing systems to make them year 2000 compliant. The GPU Energy Companies currently estimate they will spend an additional $24 million (JCP&L $11 million; Met-Ed $7 million; Penelec $6 million) on year 2000 remediation of their computers, equipment and computer software. Of this amount, approximately $7 million (JCP&L $3 million; Met-Ed $2 million; Penelec $2 million) would have been spent in any event because of maintenance and cyclical replacement plans that are already in place. The GPUI Group currently estimates it will spend approximately $7 million to become year 2000 ready, primarily to replace or modify equipment. GPUI Group: - ----------- At March 31, 1998, the GPUI Group had investments totaling approximately $2.4 billion in businesses and facilities located in foreign countries. Although management attempts to mitigate the risk of investing in certain foreign countries by securing political risk insurance, the GPUI Group faces additional risks inherent to operating in such locations, including foreign currency fluctuations (see Management's Discussion and Analysis - GPUI Group). At March 31, 1998, GPU, Inc.'s aggregate investment in the GPUI Group was $518 million; GPU, Inc. has also guaranteed up to an additional $913 million of GPUI Group obligations. Of this amount, $726 million is included in Long-term debt and Securities due within one year on GPU's Consolidated Balance Sheet at March 31, 1998; $30 million of that amount relates to a GPU International, Inc. revolving credit agreement; and $157 million relates to various other obligations of the GPUI Group. GPU International, Inc. has ownership interests in three NUG projects which have long-term power purchase agreements with Niagara Mohawk Power Corporation (NIMO) with an aggregate book value of approximately $28 million. 38 In July 1997, NIMO and 16 independent power producers (IPP), including the GPUI Group, executed a master agreement providing for the restructuring or termination of 29 power purchase agreements, pursuant to which NIMO has agreed to pay an aggregate of $3.6 billion in cash and/or debt securities, and to issue an aggregate of 46 million shares of NIMO common stock. The specific terms of restructured contracts that may be executed are being negotiated separately with each IPP. In February 1998, the New York Public Service Commission approved NIMO's restructuring agreement. Parties to the agreement must still resolve a number of important issues and final resolution will require the execution of separate agreements for each project; approval by NIMO shareholders, and other state and federal agencies; third party consents; successful financing by NIMO; and resolution of certain tax issues. While the parties are attempting to complete the transactions by mid-1998, there can be no assurance as to the outcome of this matter. NIMO has also initiated an action in federal court seeking to invalidate numerous NUG contracts, including the three GPU International, Inc. projects discussed above. GPU International, Inc. has filed motions to dismiss the complaint. This proceeding has been stayed pending the outcome of the restructuring negotiations. Other: - ------ In October 1997, GPU announced its intention to begin a process to sell, through a competitive bid process, up to all of the fossil-fuel and hydroelectric generating facilities owned by the GPU Energy companies. These facilities, comprised of 26 operating stations, support organizations and development sites, total approximately 5,300 MW (JCP&L 1,900 MW; Met-Ed 1,300 MW; Penelec 2,100 MW) of capacity and have a net book value of approximately $1.1 billion (JCP&L $288 million; Met-Ed $305 million; Penelec $546 million) at March 31, 1998. The net proceeds from the sale would be used to reduce the capitalization of the respective GPU Energy companies and may also be applied to reduce short-term debt, finance further acquisitions, and to reduce acquisition debt of the GPUI Group. In April 1998, GPU mailed Confidential Offering Memoranda to qualified buyers. One Memorandum covers 25 fossil-fueled and hydroelectric stations, support organizations and development sites and a second Memorandum is for the 1,884 MW coal-fired Homer City Station, which Penelec is selling together with its 50% joint owner, New York State Electric & Gas Corporation. The current schedule, which is subject to change, calls for initial non-binding bids due in June 1998, selection of a short list of bidders in July 1998 and final bid submission in October 1998. It is anticipated that definitive purchase agreements will be entered into in November 1998 and the divestiture completed by mid-1999, subject to the timely receipt of the necessary regulatory and other approvals. For the Homer City Station, initial, non-binding bids will be due in May, with the winning bidder expected to be announced by the end of July 1998. GPU's capital programs, for which substantial commitments have been incurred and which extend over several years, contemplate expenditures of $582 million (JCP&L $204 million; Met-Ed $92 million; Penelec $121 million; Other $165 million) during 1998. As a consequence of reliability, licensing, environmental and other requirements, additions to utility plant may be 39 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 1998 and 2007, require the purchase of either fixed or minimum amounts of the stations' coal requirements. The price of the coal under the contracts is based on adjustments of indexed cost components. The GPU Energy companies' share of the cost of coal purchased under these agreements is expected to aggregate $171 million (JCP&L $26 million; Met-Ed $55 million; Penelec $90 million) for 1998. JCP&L has entered into agreements with other utilities to purchase capacity and energy for various periods through 2004. These agreements will provide for up to 614 MW in 1998, declining to 529 MW in 1999 and 345 MW in 2000, through the expiration of the final agreement in 2004. Payments pursuant to these agreements are estimated to be $129 million in 1998, $111 million in 1999, $83 million in 2000, $92 million in 2001, and $101 million in 2002. In accordance with the Nuclear Waste Policy Act of 1982 (NWPA), the GPU Energy companies have entered into contracts with, and have been paying fees to, the DOE for the future disposal of spent nuclear fuel in a repository or interim storage facility. In December 1996, the DOE notified the GPU Energy companies and other standard contract holders that it will be unable to begin acceptance of spent nuclear fuel for disposal by 1998, as mandated by the NWPA. The DOE requested recommendations from contract holders for handling the delay. In January 1997, the GPU Energy companies, along with other electric utilities and state agencies, petitioned the U.S. Court of Appeals to, among other things, permit utilities to cease payments into the Federal Nuclear Waste Fund until the DOE complies with the NWPA. In May 1997, a joint petition was filed requesting that the Court of Appeals compel the DOE to begin disposing of spent nuclear fuel beginning not later than January 31, 1998. In November 1997, the Court declined to compel the DOE to begin disposing of spent fuel by the statutory deadline or to authorize the utilities to cease payments into the Nuclear Waste Fund. The DOE's inability to accept spent nuclear fuel by 1998 could have a material impact on GPU's results of operations, as additional costs may be incurred to build and maintain interim on-site storage at Oyster Creek. TMI-1 has sufficient on-site storage capacity to accommodate spent nuclear fuel through the end of its licensed life. In June 1997, a consortium of electric utilities, including GPUN, filed a license application with the NRC seeking permission to build an interim above-ground disposal facility for spent nuclear fuel in northwestern Utah. There can be no assurance as to the outcome of these matters. New Jersey and Connecticut have established the Northeast Compact, to construct a low-level radioactive waste disposal facility in New Jersey, which should commence operation by the end of 2003. GPUN's total share of the cost for developing, constructing and site licensing the facility is estimated to be $58 million, which will be paid through 2002. Through March 31, 1998, $6 million has been paid. As a result, at March 31, 1998, a liability of $52 million is reflected on the Consolidated Balance Sheets. JCP&L is recovering these costs from customers, and a regulatory asset has also been recorded. (See the Regulatory Assets and Liabilities section of Competition and the 40 Changing Regulatory Environment.) In February 1998, the New Jersey Low-Level Radwaste Facility Siting Board (Siting Board) voted to suspend the siting process in New Jersey. The Siting Board is reviewing its legal and financial obligations, subject to review from the Governor. GPUN cannot determine at this time what effect, if any, this matter will have on its operations. JCP&L's two operating nuclear units are subject to the NJBPU's annual nuclear performance standard. Operation of these units at an aggregate annual generating capacity factor below 65% or above 75% would trigger a charge or credit based on replacement energy costs. At current cost levels, the maximum annual effect on net income of the performance standard charge at a 40% capacity factor would be approximately $11 million before tax. While a capacity factor below 40% would generate no specific monetary charge, it would require the issue to be brought before the NJBPU for review. The annual measurement period, which begins in March of each year, coincides with that used for the Levelized Energy Adjustment Clause. At March 31, 1998, GPU, Inc. and consolidated affiliates had 9,401 employees worldwide, of which about 9,000 employees were located in the U.S. The majority of the U.S. workforce is employed by the GPU Energy companies, of which 4,862 are represented by unions for collective bargaining purposes. JCP&L, Met-Ed and Penelec's collective bargaining agreements with the International Brotherhood of Electrical Workers expire in 1999, 2000 and 2002, respectively. Penelec's five-year contract with the Utility Workers Union of America expires on June 30, 1998, and renegotiations have begun. During the normal course of the operation of its businesses, in addition to the matters described above, GPU is from time to time involved in disputes, claims and, in some cases, as a defendant in litigation in which compensatory and punitive damages are sought by the public, customers, contractors, vendors and other suppliers of equipment and services and by employees alleging unlawful employment practices. While management does not expect that the outcome of these matters will have a material effect on GPU's financial position or results of operations, there can be no assurance that this will continue to be the case. 2. ACCOUNTING FOR DERIVATIVE INSTRUMENTS GPU's use of derivative financial and commodity instruments is principally limited to the GPUI Group. GPU does not hold or issue derivative financial or commodity instruments for trading purposes. Interest Rate Swap Agreements: - ------------------------------ The GPUI Group uses interest rate swap agreements to manage the risk of increases in variable interest rates. At March 31, 1998, these agreements covered approximately $1.4 billion of debt and are scheduled to expire on various dates through November 2007. The GPUI Group records amounts paid and received under the agreements as adjustments to the interest expense of the underlying debt since the swaps are related to specific assets, liabilities or anticipated transactions of the GPUI Group. For the three months ended March 31, 1998, fixed rate interest expense exceeded variable rate interest by approximately $4.8 million. 41 3. GPUI GROUP EQUITY INVESTMENTS The GPUI Group uses the equity method of accounting for investments in which it has the ability to exercise significant influence over the operating and financial policies of the investee (generally evidenced by a 20% to 50% ownership interest). Investments accounted for under the equity method follow: Ownership Investment Location of Operations Percentage - ---------- ---------------------- ---------- Midlands Electricity plc United Kingdom 50% Mid-Georgia Cogeneration, L.P. United States 50% Prime Energy, L.P. United States 50% Onondaga Cogen, L.P. United States 50% Pasco Cogen, Ltd. United States 50% GPU Solar, Inc. United States 50% Termobarranquilla S.A. Colombia 29% Selkirk Cogeneration Partners, L.P. United States 19% EnviroTech Investment Fund United States 10% Ballard Generation Systems, Inc. Canada 10% Project Orange Associates, L.P. United States 4% OLS Power, L.P. United States 1% Summarized financial information for the GPUI Group's equity method investments (which are not consolidated in the financial statements), including both the GPUI Group's ownership interests and the non-ownership interests, is as follows: Ownership --------- Balance Sheet Data (in thousands) GPUI Group Other Owners - ------------------ ---------- ------------ March 31, 1998 - -------------- Current Assets $ 225,502 $ 329,523 Noncurrent Assets 2,715,956 3,409,024 Current Liabilities (896,575) (953,957) Long-Term Debt (1,191,094) (1,786,352) Other Noncurrent Liabilities (273,504) (358,005) --------- --------- Equity in Net Assets $ 580,285 $ 640,233 ========= ========= December 31, 1997 - ----------------- Current Assets $ 284,033 $ 391,018 Noncurrent Assets 2,918,125 3,616,461 Current Liabilities (755,499) (814,572) Long-Term Debt (1,497,982) (2,086,257) Other Noncurrent Liabilities (307,504) (396,675) --------- --------- Equity in Net Assets $ 641,173 $ 709,975 ========= ========= 42 Ownership --------- Earnings Data (in thousands) GPUI Group Other Owners - ------------- ---------- ------------ For the three months ended March 31, 1998 - ----------------------------------------- Operating Revenues $ 357,584 $ 382,424 Depreciation and Amortization (19,905) (19,345) Operating Income 49,294 56,195 Other Income and Deductions (4,664) (1,840) Interest and Preferred Dividends (26,979) (33,500) ------- ------- Equity in Net Income $ 17,651 $ 20,855 ======= ======= For the three months ended March 31, 1997 Operating Revenues $ 411,739 $ 453,103 Depreciation and Amortization (19,366) (22,686) Operating Income 76,032 86,492 Other Income and Deductions (14,175) (13,075) Interest and Preferred Dividends (29,630) (38,233) ------- ------- Equity in Net Income $ 32,227 $ 35,184 ======= ======= For the three months ended March 31, 1998 and 1997, the GPUI Group received cash distributions totaling $1.9 million and $6.1 million, respectively. As of March 31, 1998 and December 31, 1997, GPUI Group equity investments on the Consolidated Balance Sheets included goodwill (net of accumulated amortization) of approximately $24 million and $66 million, respectively, which is amortized to expense over periods not exceeding 40 years. Amortization expense for the three months ended March 31, 1998 and 1997 amounted to $0.4 million and $0.1 million, respectively. In January 1998, as a result of the Australian State of Victoria's cross-ownership restrictions, GPU Electric sold its 50% stake in Solaris Power (Solaris) to The Australian Gas Light Company for A$208 million (approximately U.S. $135.2 million) and a 10.36% stake in Allgas Energy Limited (Allgas), the natural gas distributor in Queensland, Australia. The Allgas shares had a market value of A$14.6 million (approximately U.S. $9.5 million) at the date of the sale. As a result, GPU recorded an after-tax gain on the sale of U.S. $18.3 million in the first quarter of 1998. 43 4. SEGMENT INFORMATION In 1997, GPU adopted Statement of Financial Accounting Standards No. 131 (FAS 131), "Disclosures about Segments of an Enterprise and Related Information," which requires the reporting of certain financial information by business segment and geographic area. For the purpose of providing segment information, the GPU Energy companies consist of the three domestic electric utility companies serving customers in Pennsylvania and New Jersey, as well as Genco, GPUN, GPU Telcom and GPUS. The GPUI Group primarily develops, owns and operates generation, transmission and distribution facilities in the United States and in foreign countries. GPU AR is engaged in energy services and retail energy sales. Corporate represents the activities of GPU, Inc., a registered holding company. GPU's reportable segments are strategic business units that are managed separately due to their different operating and regulatory environments. GPU's segment information is as follows: 44 Balance Sheet Segment Data (in thousands)
Current Noncurrent Current March 31, 1998 Assets Assets Liabilities - -------------- ------- ---------- ----------- Domestic: GPU Energy companies $ 879,850 $ 9,128,474 $1,125,665 GPUI Group* 77,931 291,975 59,328 Less: GPUI Group equity investments included above (43,346) (249,906) (36,871) Add: Original equity investment and income/(loss) less dividends to date - 68,903 - GPU AR 3,001 13 658 Corporate 885 6,261 108,336 --------- ---------- --------- Subtotal 918,321 9,245,720 1,257,116 --------- ---------- --------- Foreign: (GPUI Group only) Australia* 84,880 1,855,273 503,220 United Kingdom* 178,536 2,212,451 838,488 Other* 58,850 375,994 33,660 Less: GPUI Group equity investments included above (182,156) (2,466,050) (859,704) Add: Original equity investment and income/(loss) less dividends to date - 552,190 - --------- ---------- --------- Subtotal 140,110 2,529,858 515,664 --------- ---------- --------- Consolidated Total $1,058,431 $11,775,578 $1,772,780 ========= ========== ========= Other Cash Long-Term Noncurrent Capital March 31, 1998 Debt Liabilities Expenditures - -------------- ---- ----------- ------------ Domestic: GPU Energy companies $2,448,734 $2,822,114 $ 68,110 GPUI Group* 221,583 55,425 1,123 Less: GPUI Group equity investments included above (221,583) (16,081) (774) Add: Original equity investment and income/(loss) less dividends to date - - - GPU AR - - - Corporate - 1,405 - --------- --------- --------- Subtotal 2,448,734 2,862,863 68,459 --------- --------- --------- Foreign: (GPUI Group only) Australia* 1,215,619 75,463 1,316 United Kingdom* 1,133,536 245,791 29,947 Other* 235,814 63,095 8,516 Less: GPUI Group equity investments included above (969,511) (257,423) (34,586) Add: Original equity investment and income/(loss) less dividends to date - - - --------- --------- --------- Subtotal 1,615,458 126,926 5,193 --------- --------- --------- Consolidated Total $4,064,192 $2,989,789 $ 73,652 ========= ========= =========
Includes the effect of consolidating the GPUI Group's ownership interest in investments accounted for under the equity method (pro-rata consolidation), which are not consolidated in the audited consolidated financial statements. 45 Balance Sheet Segment Data (in thousands) (continued)
Current Noncurrent Current December 31, 1997 Assets Assets Liabilities - ----------------- ------- ----------- ----------- Domestic: GPU Energy companies $ 831,269 $ 9,117,687 $1,140,492 GPUI Group* 81,027 352,139 90,097 Less: GPUI Group equity investments included above (43,777) (182,384) (21,360) Add: Original equity investment and income/(loss) less dividends to date - 79,458 - GPU AR 4,961 161 3,301 Corporate 165 6,313 155,977 --------- ---------- --------- Subtotal 873,645 9,373,374 1,368,507 --------- ---------- --------- Foreign: (GPUI Group only) Australia* 86,226 2,091,619 558,496 United Kingdom* 188,462 2,152,977 785,152 Other* 114,786 396,078 43,419 Less: GPUI Group equity investments included above (240,256) (2,735,741) (734,139) Add: Original equity investment and income/(loss) less dividends to date 106,317 517,221 - --------- ---------- --------- Subtotal 255,535 2,422,154 652,928 --------- ---------- --------- Consolidated Total $1,129,180 $11,795,528 $2,021,435 ========= ========== ========= Other Cash Long-Term Noncurrent Capital December 31, 1997 Debt Liabilities Expenditures - ----------------- ---- ----------- ------------ Domestic: GPU Energy companies $2,448,672 $2,823,301 $ 356,416 GPUI Group* 263,378 46,880 111,125 Less: GPUI Group equity investments included above (171,665) (12,321) (120) Add: Original equity investment and income/(loss) less dividends to date - - - GPU AR - - - Corporate - 1,418 - --------- --------- --------- Subtotal 2,540,385 2,859,278 467,421 --------- --------- --------- Foreign: (GPUI Group only) Australia* 1,485,639 115,390 1,811,921 United Kingdom* 1,367,471 245,105 77,706 Other* 258,794 64,803 1,213 Less: GPUI Group equity investments included above (1,326,317) (295,183) (89,624) Add: Original equity investment and income/(loss) less dividends to date - - - --------- --------- --------- Subtotal 1,785,587 130,115 1,801,216 --------- --------- --------- Consolidated Total $4,325,972 $2,989,393 $2,268,637 ========= ========= =========
Includes the effect of consolidating the GPUI Group's ownership interest in investments accounted for under the equity method (pro-rata consolidation), which are not consolidated in the audited consolidated financial statements. 46 Earnings Segment Data (in thousands)
Depreciation For the three months Operating and Operating ended March 31, 1998 Revenues Amortization Income - -------------------- -------- ------------ ------ Domestic: GPU Energy companies $ 968,888 $ 114,901 $ 161,796 GPUI Group* 46,036 2,512 7,064 Less: GPUI Group equity investments included above (29,337) (2,334) (7,861) Add: Equity in undistributed earnings of affiliates, net - - - GPU AR 1,925 - (815) Corporate - - (1,001) --------- ------- ------- Subtotal 987,512 115,079 159,183 --------- ------- ------- Foreign: (GPUI Group only) Australia* 48,243 10,496 32,126 United Kingdom* 322,735 14,198 43,493 Other* 12,866 4,946 (28) Less: GPUI Group equity investments included above (328,247) (17,571) 41,433) Add: Equity in undistributed earnings of affiliates, net - - - --------- ------- ------- Subtotal 55,597 12,069 34,158 --------- ------- ------- Consolidated Total $1,043,109 $ 127,148 $ 193,341 ========= ======= ======= Other Interest and For the three months Income and Preferred ended March 31, 1998 Deductions Dividends Net Income - -------------------- ---------- --------- ---------- Domestic: GPU Energy companies $ 1,421 $ 61,179 $ 102,038 GPUI Group* 4,413 4,850 6,627 Less: GPUI Group equity investments included above 1,224 (4,714) (1,923) Add: Equity in undistributed earnings of affiliates, net 1,923 - 1,923 GPU AR 21 - (794) Corporate 26 1,458 (2,433) ------ ------- ------- Subtotal 9,028 62,773 105,438 ------ ------- ------- Foreign: (GPUI Group only) Australia* 17,154 29,785 19,495 United Kingdom* (2,779) 30,693 10,021 Other* 531 1,176 (1,174) Less: GPUI Group equity investments included above 3,440 (22,265) (15,728) Add: Equity in undistributed earnings of affiliates, net 15,728 - 15,728 ------ ------- ------- Subtotal 34,074 39,389 28,342 ------ ------- ------- Consolidated Total $ 43,102 $ 102,162 $ 133,780 ====== ======= =======
* Includes the effect of consolidating the GPUI Group's ownership interest in investments accounted for under the equity method (pro-rata consolidation), which are not consolidated in the audited consolidated financial statements. 47 Earnings Segment Data (in thousands)(continued)
Depreciation For the three months Operating and Operating ended March 31, 1997 Revenues Amortization Income - -------------------- --------- ------------ ------- Domestic: GPU Energy companies $1,042,064 $ 113,339 $ 195,441 GPUI Group* 36,909 2,361 5,884 Less: GPUI Group equity investments included above (35,108) (2,199) (7,344) Add: Equity in undistributed earnings/ (losses) of affiliates, net - - - GPU AR - - - Corporate - - (1,282) --------- ------- ------- Subtotal 1,043,865 113,501 192,699 --------- ------- ------- Foreign: (GPUI Group only) Australia* 35,949 2,458 9,378 United Kingdom* 336,505 13,967 63,273 Other* 11,324 2,439 (404) Less: GPUI Group equity investments included above (376,631) (17,167) (68,688) Add: Equity in undistributed earnings/ of affiliates, net - - - --------- ------- ------- Subtotal 7,147 1,697 3,559 --------- ------- ------- Consolidated Total $1,051,012 $ 115,198 $ 196,258 ========= ======= ======= Other Interest and For the three months Income and Preferred ended March 31, 1997 Deductions Dividends Net Income - -------------------- ---------- ----------- ---------- Domestic: GPU Energy companies $ 3,790 $ 61,759 $ 137,472 GPUI Group* (1,657) 5,451 (1,224) Less: GPUI Group equity investments included above 2,337 (5,084) 77 Add: Equity in undistributed earnings/ (losses) of affiliates, net (77) - (77) GPU AR - - - Corporate (208) 1,187 (2,677) ------ ------ ------- Subtotal 4,185 63,313 133,571 ------ ------ ------- Foreign: (GPUI Group only) Australia* (1,585) 6,018 1,775 United Kingdom* (14,851) 27,402 21,020 Other* 954 1,731 (1,328) Less: GPUI Group equity investments included above 11,838 (24,546) (32,304) Add: Equity in undistributed earnings of affiliates, net 32,304 - 32,304 ------ ------ ------- Subtotal 28,660 10,605 21,467 ------ ------ ------- Consolidated Total $ 32,845 $ 73,918 $ 155,038 ====== ====== =======
Includes the effect of consolidating the GPUI Group's ownership interest in investments accounted for under the equity method (pro-rata consolidation), which are not consolidated in the audited consolidated financial statements. 48 5. COMPREHENSIVE INCOME For the three months ended March 31, 1998 and 1997, comprehensive income was as follows: (in thousands) Three months Ended March 31, --------------- GPU, Inc. and Subsidiary Companies 1998 1997 - ---------------------------------- ---- ---- Net income $133,780 $155,038 ------- ------- Other comprehensive income, net of tax: Net unrealized gains on investments 3,820 1,161 Foreign currency translation 10,743 (593) ------- ------- Total other comprehensive income 14,563 568 ------- ------- Comprehensive income $148,343 $155,606 ======= ======= Met-Ed - ------ Net income $ 24,730 $ 39,685 ------- ------- Other comprehensive income, net of tax: Net unrealized gains on investments 2,547 773 ------- ------- Comprehensive income $ 27,277 $ 40,458 ======= ======= Penelec - ------- Net income $ 26,645 $ 42,894 ------- ------- Other comprehensive income, net of tax: Net unrealized gains on investments 1,273 388 ------- ------- Comprehensive income $ 27,918 $ 43,282 ======= ======= 49 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 the GPU Energy companies are conducted by GPU Generation, Inc. (Genco) and GPU Nuclear, Inc. (GPUN). GPU, Inc. also owns all the common stock of GPU International, Inc., GPU Power, Inc. and GPU Electric, Inc., which develop, own and operate generation, transmission and distribution facilities in the United States and in foreign countries. Collectively, these are referred to as the "GPUI Group." Other wholly-owned subsidiaries of GPU, Inc. are GPU Advanced Resources, Inc. (GPU AR), a subsidiary engaging in energy services and retail energy sales; GPU Telcom Services, Inc. (GPU Telcom), a subsidiary engaging in certain telecommunications-related businesses; and GPU Service, Inc. (GPUS), which provides certain legal, accounting, financial and other services to the GPU companies. All of these companies considered together are referred to as "GPU." GPU RESULTS OF OPERATIONS ------------------------- GPU's earnings for the first quarter ended March 31, 1998 were $133.8 million, compared to 1997 first quarter earnings of $155.0 million. Earnings per share on a diluted basis were $1.07 in 1998, compared to $1.28 per share in 1997. The first quarter earnings decrease was due to lower income from GPU's domestic utility operations, which are conducted by GPU Energy. GPU Energy's earnings reduction versus the first quarter of last year was due to the absence in the current quarter's results of the step increase in unbilled revenue recorded by Met-Ed and Penelec as a result of including their energy cost rates (ECRs) in base rates and the cessation of deferred energy accounting, both effective January 1, 1997; lower weather-related sales due to milder winter temperatures this year compared to last; and increased expenses primarily related to the reengineering of business processes to position GPU for deregulation. Partially offsetting the earnings reduction was increased GPUI Group income due to gains on the sales of its interest in Solaris Power (Solaris), half its interest in the Mid-Georgia cogeneration project and Midlands Electricity plc (Midlands) generation development projects. These gains were partially offset by lower Midlands earnings due in part to lower weather-related sales. The business of the GPUI Group includes investment, development and operation of global businesses and, when appropriate, purchase and sale of interests in particular businesses. 50 GPU RESULTS OF OPERATIONS (continued) - ------------------------- OPERATING REVENUES: - ------------------- Operating revenues for the first quarter of 1998 decreased 0.8% to $1.04 billion, as compared to the first quarter of 1997. The components of the changes are as follows: (in millions) ------------- GPU Energy companies: Kilowatt-hour (KWH) revenues $(38.7) Energy-related revenues 1.9 GPU Telcom revenues 4.9 Other revenues (41.2) ----- Total GPU Energy companies (73.1) GPUI Group 63.3 GPU AR 1.9 ----- Total decrease in revenues $ (7.9) ===== GPU Energy Companies Kilowatt-hour revenues - ---------------------- The decrease in KWH revenues for the three month period was due primarily to the absence in the first quarter of 1998 of the step increase in unbilled revenue recorded by Met-Ed and Penelec as a result of including their ECRs in base rates. KWH revenues now include Met-Ed and Penelec's energy and tax revenues, consistent with the inclusion of their ECRs and State Tax Adjustment Surcharges (STAS) in base rates, effective January 1, 1997 (See COMPETITIVE ENVIRONMENT). Also contributing to the decrease were lower weather-related sales due to milder winter temperatures this year compared to last, and decreased usage by residential and commercial customers. Energy-related revenues (JCP&L only) - ------------------------------------ Generally, changes in energy-related revenues do not affect earnings as they reflect corresponding changes in JCP&L's levelized energy adjustment clause (LEAC) billed to customers and expensed. The increase for the three month period was due primarily to increased sales to other utilities, partially offset by lower residential, commercial and industrial customer sales and lower energy cost rates. GPU Telcom revenues - ------------------- GPU Telcom, a subsidiary engaged in certain telecommunication related businesses, was formed in 1997. Its 1998 revenues were derived from contracts for the leasing and construction of telecommunication infrastructure. Other revenues - -------------- Generally, changes in other revenues do not affect earnings as they are offset by corresponding changes in expense. 51 GPU RESULTS OF OPERATIONS (continued) - ------------------------------------- GPUI Group The increase in GPUI Group revenues was due mainly to the inclusion of revenues from GPU PowerNet (PowerNet), which was acquired by GPU Electric in November 1997. GPU AR GPU AR, which was formed in the second quarter of 1997, derived its revenues from energy sales to customers who chose it as their energy supplier as part of the retail access pilot programs in Pennsylvania (see COMPETITIVE ENVIRONMENT). Some of GPU AR's customers are located in the GPU Energy companies' service territories. OPERATING EXPENSES: - ------------------- Power purchased and interchanged (PP&I) - --------------------------------------- Changes in the energy component of PP&I expense do not significantly affect JCP&L's earnings since these cost variances are passed through the LEAC. However, beginning on January 1, 1997, such cost variances for Met-Ed and Penelec are not subject to deferred accounting and have a current impact on earnings, except for incremental nonutility generation (NUG) costs, which are included in Regulatory assets on the Consolidated Balance Sheets (see COMPETITIVE ENVIRONMENT). Lower reserve capacity expense (which is a component of PP&I) contributed to earnings for the first three months of 1998. Fuel and Deferral of energy and capacity costs, net - --------------------------------------------------- For JCP&L, changes in fuel and deferral of energy and capacity costs, net do not affect earnings as they are offset by corresponding changes in energy revenues. Effective January 1, 1997, Met-Ed and Penelec ceased deferred energy accounting as their ECRs were combined with base rates; therefore, cost variances have a current impact on earnings (see COMPETITIVE ENVIRONMENT). For Penelec, lower fuel costs contributed to earnings for the first three months of 1998. Other operation and maintenance (O&M) - ------------------------------------- The increase in other O&M expenses for the three month period was due to increased GPUI Group O&M expenses resulting from the inclusion of PowerNet and the effect of consolidating its investment in Lake Cogen, Ltd. beginning in June 1997. Also contributing to the increase were expenses related to the reengineering of business processes to position GPU for deregulation, and the inclusion of O&M expenses for GPU Telcom, and GPU AR. 52 GPU RESULTS OF OPERATIONS (continued) - ------------------------- Depreciation and amortization - ----------------------------- The increase in depreciation and amortization expense for the three month period was due mainly to the inclusion of PowerNet, as well as additions to GPU Energy's plant in service and higher depreciation rates. 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 (see COMPETITIVE ENVIRONMENT). This did not have a significant impact on earnings for the first three months of 1998. OTHER INCOME AND DEDUCTIONS: - ---------------------------- Equity in undistributed earnings of affiliates, net - --------------------------------------------------- The decrease in equity in undistributed earnings of affiliates, net for the three month period was due to lower Midlands earnings due in part to lower weather-related sales. Other income, net - ----------------- The increase in other income, net for the three month period was due primarily to gains realized by the GPUI Group from the sales of its interest in Solaris, half its interest in the Mid-Georgia cogeneration project and Midlands generation development projects. INTEREST CHARGES AND PREFERRED DIVIDENDS: - ----------------------------------------- Interest on long-term debt - -------------------------- The increase in interest on long-term debt for the three month period was due primarily to debt associated with the PowerNet acquisition. A portion of this debt was reduced in the first quarter of 1998 from proceeds received from GPU Electric's sale of its interest in Solaris and the sale of GPU, Inc. common stock. Other interest - -------------- The increase in other interest for the three month period was due to higher Met-Ed and Penelec short-term debt levels. 53 JCP&L RESULTS OF OPERATIONS --------------------------- JCP&L's earnings for the first quarter ended March 31, 1998 were $50.1 million, compared to 1997 first quarter earnings of $55.2 million. The decrease in earnings was due primarily to lower sales to customers due to decreased usage and lower weather-related sales. OPERATING REVENUES: - ------------------- Operating revenues for the first quarter of 1998 decreased 7.5% to $472.3 million, as compared to the first quarter of 1997. The components of the changes are as follows: (in millions) ------------- KWH revenues $ (2.2) Energy-related revenues 1.5 Other revenues (37.4) ----- Decrease in revenues $(38.1) Kilowatt-hour revenues - ---------------------- The decrease in KWH revenues for the three month period was due to lower usage by residential and commercial customers and lower weather-related sales to residential customers, partially offset by an increase in the number of commercial customers. Energy-related revenues - ----------------------- Changes in energy-related revenues do not affect earnings as they reflect corresponding changes in the LEAC billed to customers and expensed. The increase for the three month period was due primarily to increased sales to other utilities, partially offset by lower residential, commercial and industrial sales and lower energy cost rates. Other revenues - -------------- Generally, changes in other revenues do not affect earnings as they are offset by corresponding changes in expense. OPERATING EXPENSES: - ------------------- Power purchased and interchanged - -------------------------------- Changes in the energy component of PP&I expense do not significantly affect earnings since these cost variances are passed through the LEAC. However, lower reserve capacity expense resulting primarily from reduced purchases from Pennsylvania Power & Light Company contributed to earnings for the three month period. 54 JCP&L RESULTS OF OPERATIONS (continued) - --------------------------------------- Fuel and Deferral of energy and capacity costs, net - --------------------------------------------------- Changes in fuel and deferral of energy and capacity costs, net do not affect earnings as they are offset by corresponding changes in energy revenues. Other operation and maintenance - ------------------------------- The decrease in other O&M expenses for the three month period was primarily due to lower costs at the Oyster Creek facility, partially offset by higher expenses related to the reengineering of business processes to position the company for deregulation. Depreciation and amortization - ----------------------------- The increase in depreciation and amortization expense for the three month period was due primarily to additions to plant in service and slightly higher depreciation rates. 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. MET-ED RESULTS OF OPERATIONS ---------------------------- Met-Ed's earnings for the first quarter ended March 31, 1998 were $24.6 million, compared to 1997 first quarter earnings of $39.6 million. This decrease was primarily due to the absence in the first quarter of 1998 of the step increase in unbilled revenue as a result of the company including its ECR in base rates and the cessation of deferred energy accounting, both effective January 1, 1997 (See COMPETITIVE ENVIRONMENT). OPERATING REVENUES: - ------------------- Operating revenues for the first quarter of 1998 decreased 8.0% to $234.7 million as compared to the first quarter of 1997. The components of the changes are as follows: (in millions) ------------- KWH revenues $(19.5) Other revenues (1.0) ---- Decrease in revenues $(20.5) ====== Kilowatt-hour revenues - ---------------------- The decrease in KWH revenues for the three month period was due primarily to the absence in the first quarter of 1998 of the step increase in unbilled revenue as a result of the company including its ECR in base rates, amounting 55 MET-ED RESULTS OF OPERATIONS (continued) - ---------------------------------------- to $13 million. Also contributing to the decrease were lower weather-related sales and lower usage by residential and commercial customers. Other revenues - -------------- Generally, changes in other revenues do not affect earnings as they are offset by corresponding changes in expense. OPERATING EXPENSES: - ------------------- Fuel and Power purchased and interchanged - ----------------------------------------- Effective January 1, 1997, Met-Ed ceased deferred energy accounting as its ECR was combined with base rates. Thus, energy cost variances now have a current impact on earnings, except for incremental NUG costs, which are included in Regulatory assets on the Consolidated Balance Sheets (see COMPETITIVE ENVIRONMENT). Changes in fuel and power purchased and interchanged did not have a significant impact on earnings for the first three months of 1998. Other operation and maintenance - ------------------------------- The increase in other O&M expenses was due to increased expenses related to the reengineering of business processes to position the company for deregulation and for maintenance of substation equipment and overhead lines. Taxes, other than income taxes - ------------------------------ Effective January 1, 1997, Met-Ed's STAS was combined with base rates and is no longer subject to annual adjustment. (see COMPETITIVE ENVIRONMENT) The change for the three month period did not have a significant impact on earnings. INTEREST CHARGES AND DIVIDENDS ON PREFERRED SECURITIES: - ------------------------------------------------------- Other interest - -------------- The increase in other interest expense for the three month period was due to higher short-term debt levels. PENELEC RESULTS OF OPERATIONS ----------------------------- Penelec's earnings for the first quarter ended March 31, 1998 were $26.5 million, compared to 1997 first quarter earnings of $42.8 million. This decrease was primarily due to the absence in the first quarter of 1998 of the step increase in unbilled revenue as a result of the company including its ECR in base rates and the cessation of deferred energy accounting, both effective January 1, 1997 (See COMPETITIVE ENVIRONMENT). 56 PENELEC RESULTS OF OPERATIONS (continued) - ----------------------------------------- OPERATING REVENUES: - ------------------- Operating revenues for the first quarter of 1998 decreased 9.0% to $263.7 million, as compared to the first quarter of 1997. The components of the changes are as follows: (in millions) ------------- KWH revenues $(21.8) Other revenues (4.3) ---- Decrease in revenues $(26.1) ====== Kilowatt-hour revenues - ---------------------- The decrease in KWH revenues for the three month period was due to the absence in the first quarter of 1998 of the step increase in unbilled revenue as a result of the company including its ECR in base rates, amounting to $15 million. Also contributing to the decrease were lower weather-related sales to residential and commercial customers. Other revenues - -------------- Generally, changes in other revenues do not affect earnings as they are offset by corresponding changes in expense. The decrease for the three month period was partially due to lower transmission revenues. OPERATING EXPENSES: - ------------------- Fuel and Power purchased and interchanged - ----------------------------------------- Effective January 1, 1997, Penelec ceased deferred energy accounting as its ECR was combined with base rates. Thus, energy cost variances now have a current impact on earnings, except for incremental NUG costs, which are included in Regulatory assets on the Consolidated Balance Sheets (see COMPETITIVE ENVIRONMENT). Lower fuel costs and reserve capacity expense contributed to earnings for the first three months of 1998. Other operation and maintenance - ------------------------------- The increase in other O&M expenses for the three month period was due to increased expenses related to the reengineering of business processes to position the company for deregulation. Taxes, other than income taxes - ------------------------------ Effective January 1, 1997, Penelec's STAS was combined with base rates and is no longer subject to annual adjustment. (see COMPETITIVE ENVIRONMENT) The change for the three month period did not have a significant impact on earnings. 57 GPUI GROUP ---------- The GPUI Group develops, owns and operates electric generation, transmission and distribution facilities in the U.S. and foreign countries. It has also made investments in certain advanced technologies related to the electric power industry. The GPUI Group has ownership interests in transmission, distribution and supply businesses in England and Australia. It also has ownership interests in eight operating cogeneration plants in the U.S. totaling 847 megawatts (MW) (of which the GPUI Group's equity interest represents 308 MW) of capacity, and ten operating generating facilities located in foreign countries totaling 3,820 MW (of which the GPUI Group's equity interest represents 713 MW) of capacity. It also has investments in six generating facilities under construction totaling 2,131 MW (of which the GPUI Group's equity interest represents 488 MW) of capacity. The business of the GPUI Group includes investment, development and operation of these businesses and, when appropriate, purchase and sale of interests in particular businesses. At March 31, 1998, GPU, Inc.'s aggregate investment in the GPUI Group was $518 million; GPU, Inc. has also guaranteed up to an additional $913 million of GPUI Group obligations. GPU, Inc. has Securities and Exchange Commission (SEC) approval to finance investments in foreign utility companies (FUCOs) and exempt wholesale generators (EWGs) up to an aggregate amount equal to 100% of GPU's average consolidated retained earnings, or approximately $2.2 billion as of March 31, 1998. At March 31, 1998, GPU, Inc. has remaining authorization to finance approximately $904 million of additional investments in FUCOs and EWGs. To the extent the GPU Energy companies no longer meet the requirements of FAS 71 as a result of regulatory action with respect to the GPU Energy companies' restructuring plans, any resulting write-offs would reduce GPU's retained earnings. Such reductions would reduce the amount of available authorization for investments in FUCOs and EWGs. In January 1998, as a result of the Australian State of Victoria's cross-ownership restrictions, GPU Electric sold its 50% stake in Solaris to The Australian Gas Light Company for A$208 million (approximately U.S. $135.2 million) and 10.36% of the outstanding common stock of Allgas Energy Limited (Allgas), the natural gas distributor in Queensland, Australia. The Allgas shares had a market value of A$14.6 million (approximately U.S. $9.5 million) at the date of sale. As a result, GPU recorded an after-tax gain on the sale of $18.3 million in the first quarter of 1998. In February 1998, GPU International, Inc. sold half of its interest in the Mid-Georgia cogeneration project (Mid-Georgia). As a result, GPU recorded an after-tax gain on the sale of $5.8 million in the first quarter of 1998. The 300 MW Mid-Georgia cogeneration facility, located in Kathleen, Georgia, is scheduled to enter commercial operation in the second quarter of 1998 subject to obtaining waivers of certain air emission requirements. Management expects that the GPUI Group will provide a substantial portion of GPU's future earnings growth and intends on making additional investments in its business activities. The timing and amount of these investments, however, will depend upon the availability of appropriate opportunities and financing capabilities. 58 LIQUIDITY AND CAPITAL RESOURCES ------------------------------- Year 2000 Issue - --------------- GPU is addressing year 2000 issues as they relate to its business, its operations and operating systems, and its relationship with customers, banks, partners, vendors, suppliers and service providers. Comprehensive reviews of all computers, equipment, systems and applications are being performed; remediation plans are being developed; and certain corrective actions have begun. GPU's remediation plans include, among other things, the upgrade or replacement of computers, equipment and computer software. GPU currently anticipates that its year 2000 remediation efforts will, in all material respects, be completed by the end of 1999. In the event corrective actions are not completed by this date, certain computers, equipment, systems and applications may not function properly, which could have a material adverse effect on GPU's operations. As part of their year 2000 solution, the GPU Energy companies have purchased and are installing an integrated information system (Project Enterprise) that will help them manage business growth and meet the mandates of electric utility deregulation. The system is scheduled to be fully operational in early 1999. As a result of the planned implementation of Project Enterprise, the GPU Energy Companies will avoid spending an estimated $8 million (JCP&L $3 million; Met-Ed $2 million; Penelec $3 million) in modifications to existing systems to make them year 2000 compliant. The GPU Energy Companies currently estimate they will spend an additional $24 million (JCP&L $11 million; Met-Ed $7 million; Penelec $6 million) on year 2000 remediation of their computers, equipment and computer software. Of this amount, approximately $7 million (JCP&L $3 million; Met-Ed $2 million; Penelec $2 million) would have been spent in any event because of maintenance and cyclical replacement plans that are already in place. The GPUI Group currently estimates it will spend approximately $7 million to become year 2000 ready, primarily to replace or modify equipment. Capital Expenditures - -------------------- GPU Energy Companies The GPU Energy companies' capital spending for the three months ended March 31, 1998 was $68 million (JCP&L $40 million; Met-Ed $12 million; Penelec $15 million; Other $1 million), and was used primarily for new customer connections and to maintain and improve existing transmission and distribution facilities. For 1998 capital expenditures are forecasted to be $441 million (JCP&L $204 million; Met-Ed $92 million; Penelec $121 million; Other $24), mainly related to the GPU Energy companies and will be used primarily for ongoing system development and to implement Project Enterprise. Expenditures for maturing obligations will total $43 million (JCP&L $13 million; Penelec $30 million) in 1998. Management estimates that a substantial portion of the GPU Energy companies' 1998 capital outlays will be satisfied through internally generated funds. 59 GPUI Group The GPUI Group's capital spending was $6 million for the three months ended March 31, 1998. For 1998, capital expenditures are forecasted to be $141 million. Expenditures for maturing obligations will total $589 million in 1998. Management estimates that a substantial portion of the GPUI Group's 1998 capital outlays will be satisfied through external financings. Financing - --------- GPU, Inc. In February 1998, GPU, Inc. sold seven million shares of common stock. The net proceeds of $269 million were used primarily to reduce indebtedness associated with the PowerNet and Midlands acquisitions, and the balance was used for other corporate purposes. GPU, Inc. has received SEC approval to issue and sell up to $300 million of unsecured debentures through 2001. Further significant investments by the GPUI Group, or otherwise, may require GPU, Inc. to issue additional debt and/or common stock (see GPUI GROUP for a discussion of GPU, Inc.'s remaining investment authorization). GPU Energy Companies As a result of Pennsylvania legislation (see COMPETITIVE ENVIRONMENT), Met-Ed and Penelec each plan to sell securitized transition bonds through a separate trust or other special purpose entity, and would use the proceeds to reduce stranded costs resulting from customer choice, including NUG contract buyout costs (see THE GPU ENERGY COMPANIES' SUPPLY PLAN), and to reduce capitalization. The timing and amount of any sale will depend upon Pennsylvania Public Utility Commission (PaPUC) approval of restructuring plans, resolution of legal challenges, and receipt of a favorable ruling from the Internal Revenue Service, as well as market conditions. It is expected that similar legislation will be introduced in New Jersey to permit the sale of securitized transition bonds. See COMPETITIVE ENVIRONMENT for further discussion of these bonds. In February 1998, Penelec redeemed at maturity $30 million principal amount of FMBs. On May 1, 1998, JCP&L redeemed $10 million stated value of cumulative preferred stock pursuant to mandatory sinking fund provisions. JCP&L and Penelec have regulatory authority to issue and sell first mortgage bonds (FMBs), including secured medium-term notes, and preferred stock through June 1999. Met-Ed has similar authority through December 1999. Under existing authorizations, JCP&L, Met-Ed and Penelec may issue these senior securities in aggregate amounts of $145 million, $190 million and $70 million, respectively, of which up to $100 million for JCP&L and Met-Ed and $70 million for Penelec may consist of preferred stock. The GPU Energy companies also have regulatory authority to incur short-term debt, a portion of which may be through the issuance of commercial paper. 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' 60 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. Current plans call for the GPU Energy companies to issue senior securities during the next three years to fund the redemption of maturing senior securities, refinance outstanding senior securities if economic, and finance construction activities. GPUI Group In January 1998, as a result of Victoria's cross-ownership restrictions, GPU Electric sold its 50% stake in Solaris for A$208 million (approximately U.S. $135.2 million) and a 10.36% stake in Allgas valued at A$14.6 million (approximately U.S. $9.5 million) at the date of sale. Approximately U.S. $52 million of the net sales proceeds were used to extinguish Solaris acquisition debt and approximately U.S. $60 million was used to reduce PowerNet acquisition debt. The balance of the proceeds was applied for other corporate purposes. In the first quarter of 1998, the GPUI Group reduced PowerNet and Midlands acquisition debt by $40 million and $189 million, respectively, from proceeds provided by the sale of GPU, Inc. common stock. The GPUI Group may further reduce Midlands and PowerNet acquisition debt with a portion of the proceeds from the proposed sale of the GPU Energy companies' fossil-fueled and hydroelectric generating facilities, which is expected to be completed in mid-1999. (see Managing the Transition section of COMPETITIVE ENVIRONMENT). Capitalization - -------------- On April 2, 1998, the GPU Board of Directors raised the quarterly common stock dividend by 3%. On an annualized basis, the dividend would be $2.06 per share. COMPETITIVE ENVIRONMENT ----------------------- Managing the Transition - ----------------------- As competition in the electric utility industry increases, the price of electricity and quality of customer service will be critical. GPU has been active both on the federal and state levels in helping to shape electric industry restructuring while seeking to protect the interests of its shareholders and customers, and is attempting to assess the impact that these competitive pressures and other changes will have on its financial condition and results of operations. In October 1997, GPU announced its intention to begin a process to sell, through a competitive bid process, up to all of the fossil-fuel and hydroelectric generating facilities owned by the GPU Energy companies. These facilities, comprised of 26 operating stations, support organizations and development sites, total approximately 5,300 MW (JCP&L 1,900 MW; Met-Ed 1,300 61 MW; Penelec 2,100 MW) of capacity and have a net book value of approximately $1.1 billion (JCP&L $288 million; Met-Ed $305 million; Penelec $546 million) at March 31, 1998. The net proceeds from the sale would be used to reduce the capitalization of the respective GPU Energy companies and may also be applied to reduce short-term debt, finance further acquisitions, and to reduce acquisition debt of the GPUI Group. In April 1998, GPU mailed Confidential Offering Memoranda to qualified buyers. One Memorandum covers 25 fossil-fueled and hydroelectric stations, support organizations and development sites and a second Memorandum is for the 1,884 MW coal-fired Homer City Station, which Penelec is selling together with its 50% joint owner, New York State Electric & Gas Corporation. The current schedule, which is subject to change, calls for initial non-binding bids due in June 1998, selection of a short list of bidders in July 1998 and final bid submission in October 1998. It is anticipated that definitive purchase agreements will be entered into in November 1998 and the divestiture completed by mid-1999, subject to the timely receipt of the necessary regulatory and other approvals. For the Homer City Station, initial, non-binding bids will be due in May, with the winning bidder expected to be announced by the end of July 1998. In addition to the continued operation of the Oyster Creek Nuclear Generating Station (Oyster Creek), JCP&L is exploring the sale or early retirement of the plant to mitigate costs associated with its continued operation. The GPU Energy companies have also entered into a confidentiality agreement with a potential purchaser of Three Mile Island Unit 1 (TMI-1). Unlike Oyster Creek, however, the early retirement of TMI-1 is not being considered because of its lower operating costs. In the event that TMI-1 is sold, there can be no assurance of full recovery of GPU's remaining investment. Recent Regulatory Actions - ------------------------- Pennsylvania - ------------ In 1996, Pennsylvania adopted comprehensive legislation which provides for the restructuring of the electric utility industry. The legislation, among other things, permits one-third of Pennsylvania retail consumers to choose their electric supplier beginning January 1, 1999, two-thirds to choose by January 1, 2000 and all retail consumers to do so by January 1, 2001. The legislation requires the unbundling of rates for transmission, distribution and generation services. Utilities would have the opportunity to recover their prudently incurred stranded costs that result from customers choosing another supplier through a PaPUC approved competitive transition charge, subject to certain conditions, including that they attempt to mitigate these costs. For a discussion of stranded costs, see Note 1 of the Notes to Consolidated Financial Statements Competition and the Changing Regulatory Environment. The legislation provides utilities the opportunity to reduce their stranded costs through the issuance of transition bonds with maturities of up to 10 years. The sale proceeds could be used to buy out or buy down uneconomic NUG contracts, to reduce capitalization, or both. Principal and 62 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 1999. Effective January 1, 1997, transmission and distribution rates charged to Pennsylvania retail customers are generally capped for 4 1/2 years, and generation rates are generally capped for up to nine years. Transmission and distribution of electricity will continue as a regulated monopoly. An independent system operator (ISO) will be responsible for coordinating the generation and transmission of electricity in an efficient and nondiscriminatory manner. In June 1997, Met-Ed and Penelec filed with the PaPUC their proposed restructuring plans to implement competition and customer choice in Pennsylvania. Highlights of these plans, as revised through January 1998, include: - - One-third of retail customers would be able to choose their electric suppliers beginning on January 1, 1999, two-thirds by January 1, 2000 and all retail customers by January 1, 2001. - - As required by the restructuring legislation, rates would be unbundled for generation, transmission and distribution charges. - - A competitive transition charge (CTC) would provide the opportunity to recover all of Met-Ed and Penelec's generation plant, regulatory assets and other non-NUG related transition and stranded costs within a seven-year time period beginning January 1, 1999. - - A "NUG Cost Rate" is being proposed to capture payments to NUGs in excess of amounts in current rates. This clause would provide for a full reconciliation of amounts paid to NUGs, and recovered from customers. This would ensure that customers do not overpay for these obligations, and it would also provide a vehicle for flowing through to customers the full benefits of any prospective reductions in NUG obligations that result from mitigation. At March 31, 1998, the deferred NUG balances for Met-Ed and Penelec were $12.6 million and $19.6 million, respectively, and are included in Other Regulatory Assets on the Consolidated Balance Sheets. - - Stranded costs at the time of initial customer choice (December 31, 1998), on a present value basis, are estimated at $1.5 billion for Met-Ed and $1.2 billion for Penelec. These stranded costs include above-market costs related to power purchase commitments, company-owned generation, generating plant decommissioning, regulatory assets and transition expenses. - - Ongoing stranded cost mitigation efforts include the buyout and/or renegotiation of several above-market NUG agreements; the planned 63 - - retirement of uneconomical generating units as well as the continuing evaluation of remaining generating facilities; and workforce reductions achieved primarily through voluntary retirement and severance programs. - - Met-Ed and Penelec have requested rate recovery of prudently incurred costs associated with the buyout and restructuring of NUG projects that are not currently being recovered in rates. The requested increase, based upon a three-year recovery of the buyout costs, is $44.6 million for Met-Ed and $19.1 million for Penelec. It is expected that these increases will be offset by lower interest expense related to the issuance of transition bonds. The estimated customer savings associated with these contract buyouts/restructurings is $812 million for Met-Ed and $593 million for Penelec. - - Met-Ed and Penelec will be the supplier of last resort for customers who cannot or do not wish to purchase energy from an alternative supplier. Numerous parties have intervened in these proceedings and are actively contesting various aspects of the filings, including the quantification of stranded costs and the fixing of the level of generation credits for customers who choose alternative suppliers. Evidentiary hearings have been concluded and briefs were filed in April. In May 1998, an ALJ issued Recommended Decisions in Met-Ed and Penelec's restructuring proceedings. Met-Ed and Penelec are continuing to analyze the ALJ's recommendations, which do not contain detailed schedules recommending proposed amounts of stranded cost disallowances, cost allocations or other rate matters. Accordingly, management is unable to assess the full implications of the Decisions at this time. The following, however, are the major elements of the ALJ's recommendations: - - The ALJ, while recommending no overall rate reductions, has recommended the adoption of lower unbundled transmission and distribution (T&D) rates than the companies requested, by reallocating certain T&D costs to generation. - - The ALJ rejected the proposed use of a NUG Cost Rate to recover payments to NUGs in excess of amounts in current rates. The ALJ has proposed a one-time determination of above-market NUG costs which would be recovered through a CTC over seven years (the recommended transition period), beginning January 1, 1999. - - The ALJ accepted Met-Ed and Penelec's proposed two stage ratemaking process for their fossil-fuel and hydro generation asset divestiture (See Managing the Transition) whereby the ultimate level of stranded costs and resulting CTC rates would be determined after the actual net divestiture proceeds are known. Interim CTC rates would be established based upon the level of stranded costs approved in stage one. - - The ALJ has endorsed a market line higher than that recommended by Met-Ed and Penelec. 64 - - The ALJ rejected Met-Ed and Penelec's proposal to adopt a levelized generation credit (shopping credit) for customers who choose alternative suppliers. Instead, the ALJ recommended a shopping credit that rises over time consistent with the recommended market line determination. - - The ALJ approved Met-Ed and Penelec's NUG buyout costs, but rejected their request for rate cap exceptions. - - The ALJ accepted Met-Ed and Penelec's proposed level of funding for nuclear decommissioning costs which would be recovered through T&D rates. - - Met-Ed and Penelec will remain the provider of last resort for customers who cannot or do not wish to purchase energy from an alternative supplier, but the ALJ has recommended a competitive bid process for provider of last resort customers. Met-Ed and Penelec intend to file exceptions to a number of the ALJ's recommendations by May 20, 1998. The PaPUC is scheduled to take nonbinding polls on June 4, 1998 on the Recommended Decisions and issue final orders on June 25, 1998. Based on preliminary review and analysis of the Recommended Decisions, management believes that if the PaPUC were to adopt the ALJ's recommendations in substantial part (in particular, the proposed reduction of T&D rates), it would have a material adverse effect on Met-Ed and Penelec's stranded cost recovery and future earnings, except to the extent offset by spending reductions. There can be no assurance as to the outcome of these proceedings. In December 1997, the PaPUC rejected PECO Energy Company's (PECO) restructuring settlement and approved an alternate plan for PECO based on its findings in that case. Among other things, the alternate plan accelerates the pace of retail competition in Pennsylvania and reduces the amount of PECO's recoverable stranded costs. PECO has appealed the PaPUC's decision. PECO took a pre-tax charge to 1997 income of $3.1 billion reflecting the effects of the PaPUC order. Met-Ed and Penelec believe that the PaPUC's decision in the PECO case was based on the specific facts and circumstances of that proceeding. Met-Ed and Penelec further believe that they have demonstrated in their restructuring proceedings ample evidence to distinguish sufficiently their cases from PECO's and that the PaPUC should not, therefore, apply its findings in the PECO case to their pending restructuring plans. If, however, the PaPUC were to apply these findings, it would have a material adverse impact on Met-Ed and Penelec's stranded cost recovery, restructuring proceedings and future earnings. In April 1998, PECO and other parties to PECO's restructuring proceeding, including Met-Ed and Penelec, filed a joint petition for settlement (Joint Petition) with the PaPUC. The Joint Petition represents a comprehensive settlement that resolves numerous issues on appeal by the parties to the settlement, including an agreement by Met-Ed, Penelec and PECO to withdraw from each others respective restructuring cases. Additionally, PECO has agreed not to participate when the PaPUC reviews Met-Ed and Penelec's sale of their generating facilities. The Joint Petition was tentatively approved by 65 the PaPUC and the final vote is currently scheduled for May 14, 1998. There can be no assurance as to the outcome of this matter. The PaPUC has also issued a final order that sets forth the guidelines for retail access pilot programs in Pennsylvania that give customers the ability to choose their electricity supplier. These pilot programs include residential, commercial and industrial class customers, and utilities are required to commit about 5% of load to retail access programs and unbundle their rates to allow customers to choose their electric generation supplier. The pilot program began November 1, 1997 and will run until the first phase of retail competition begins on January 1, 1999. Met-Ed and Penelec's pilot programs include approximately 5% of each company's load. New Jersey - ---------- In April 1997, the New Jersey Board of Public Utilities (NJBPU) issued final Findings and Recommendations for Restructuring the Electric Power Industry in New Jersey and submitted the plan to the Governor and the Legislature for their consideration. The NJBPU has recommended, among other things, that certain electric retail customers be permitted to choose their supplier beginning October 1998, expanding to include all retail customers by July 1, 2000. The NJBPU also recommended a near-term electric rate reduction of 5% to 10% with the phase-in of retail competition, as well as additional rate reductions accomplished as a result of new energy tax legislation, as discussed below. The NJBPU has proposed that utilities have an opportunity to recover their stranded costs associated with generating capacity commitments provided that they attempt to mitigate these costs. Also, NUG contracts which cannot be mitigated would be eligible for stranded cost recovery. The determination of stranded cost recovery by the NJBPU would be undertaken on a case-by-case basis, with no guaranty for full recovery of these costs. A separate market transition charge (MTC) would be established for each utility to allow utilities to recover stranded costs over 4 to 8 years. The MTC would be capped to ensure that customers experience the NJBPU's recommended overall rate reduction of 5-10%. New Jersey is also considering securitization as a mechanism to help mitigate stranded costs. In addition, the NJBPU is proposing that beginning October 1998, utilities unbundle their rates and allow customers to choose their electric generation supplier. Transmission and distribution of electricity would continue as a regulated monopoly and utilities would be responsible for connecting customers to the system and for providing distribution service. Transmission service would be provided by an ISO, which would be responsible for maintaining the reliability of the regional power grid and would be regulated by the Federal Energy Regulatory Commission (FERC). In July 1997, New Jersey enacted energy tax legislation which eliminates the 13% gross receipts and franchise tax on utility bills. Utilities will collect from customers a 6% sales tax and pay a corporate business tax which amounts to 1-2% of revenues. Utilities will also pay a transitional energy facilities assessment which will phase out over five years and result in a 5-6% rate reduction to customers. 66 In July 1997, JCP&L filed with the NJBPU its proposed restructuring plan for a competitive electric marketplace in New Jersey. Included in the plan were stranded cost, unbundled rate and restructuring filings. In December 1997, JCP&L submitted supplemental information with the NJBPU and parties to the restructuring proceeding regarding the proposed sale of its fossil-fuel and hydroelectric generating facilities (see Managing the Transition). Highlights of the plan include: - - Some electric retail customers would be able to choose their supplier beginning on October 1, 1998, expanding to include all retail customers by July 1, 2000. - - As required by the NJBPU's final findings and recommendations, JCP&L would unbundle its rates and these rates would apply to all distribution customers, with the exception of a Production Charge, which would be charged only to customers who do not choose an alternative energy supplier. The proposed unbundled rate structure would include: -- a flat monthly Customer Charge for the costs associated with metering, billing and customer account administration. -- a Delivery Charge consisting of capital and O&M costs associated with the transmission and distribution system; the recovery of regulatory assets, including those associated with generation; the cost of social programs; and certain costs related to the proposed ratemaking treatment of Oyster Creek. -- a Market Energy and Capacity (MEC) Charge would be established on a monthly basis for a six-month period for electricity provided to customers who elect JCP&L as their electric generation supplier. JCP&L would be the supplier of last resort for customers who cannot or do not wish to purchase energy from an alternative supplier. The MEC would be based upon competitively "bidding out" the discrepancy between projected needs and projected resources. JCP&L would true-up the MEC charges for sales differences against its actual cost to provide that power, plus interest. The true-up would be recovered from, or credited to, the customers who were customers during that period, based upon their usage during such period. The MEC would be established every six months. -- a Societal Benefits Charge to recover demand-side management costs, manufactured gas plant remediation costs, and nuclear decommissioning costs. -- a MTC to recover non-NUG stranded generation costs. This charge would include both owned generation and utility purchase power commitments. It is expected that the MTC would be in effect for less than a three-year period. -- a NUG Transition Charge (NTC) to recover ongoing above-market NUG costs over the life of the contracts and provide a mechanism to flow through to customers the benefits of future NUG mitigation efforts. The NTC would be subject to an annual true-up for actual 67 cost escalations or reductions, changes in availability or dispatch levels and other cost variations over the life of each NUG project. The NTC would also be subject to adjustment in the future to reflect additional NUG buyout or restructuring costs and any related savings. - - The unbundling plan calls for an estimated 10% rate reduction, of which 2.1% became effective as part of JCP&L's Stipulation of Final Settlement (Final Settlement) approved by the NJBPU in 1997. The remaining reductions would be phased in over a two-year period beginning October 1, 1998, and would be achieved through, among other things, the proposed early retirement of Oyster Creek for ratemaking purposes in September 2000 and, if legislation is enacted, the securitization of certain above-market costs. In addition to this rate reduction, JCP&L customers would receive an additional rate reduction of approximately 6% to be phased in over the next five years as a result of energy tax legislation signed into law in July 1997. - - In addition to the continued operation of the Oyster Creek facility, JCP&L is exploring the sale or early retirement of the plant to mitigate costs associated with its continued operation. A final decision on the plant's future has not been reached. Nevertheless, JCP&L has proposed that the NJBPU approve an early retirement of Oyster Creek in September 2000, for ratemaking purposes. The ratemaking treatment being requested for Oyster Creek is as follows: -- The market value of Oyster Creek's generation output would be recovered in the Production Charge. -- The above-market operating costs would be recovered as a component of the Delivery Charge through September 2000. If the plant is operated beyond that date, these costs would not be included in customer rates. -- Existing Oyster Creek regulatory assets would, like other regulatory assets, be recovered as part of the Delivery Charge. -- Oyster Creek decommissioning costs would, like TMI-1 decommissioning costs, be recovered as a component of the Societal Benefits Charge. -- JCP&L's net investment in Oyster Creek would be recovered through the Delivery Charge as a levelized annuity, effective October 1998 through its original expected operating life, 2009. - - Stranded costs at the time of initial customer choice (September 30, 1998), on a present value basis, are estimated at $1.6 billion, of which $1.5 billion is for above-market NUG contracts. The $1.6 billion excludes above-market generation costs related to Oyster Creek. Numerous parties have intervened in this proceeding and are actively contesting various aspects of JCP&L's filings, including, among other things, recovery by JCP&L of plant capital additions since its last base rate case in 68 1992, projections of future electricity prices on which stranded cost recovery calculations are based, the appropriate level of return and the appropriateness of earning a return on stranded investment. Consultants retained by the NJBPU Staff, the Division of Ratepayer Advocate and other parties have proposed that JCP&L's stranded cost recoveries should be substantially lower than the levels JCP&L is seeking. In a February 1998 order, the NJBPU substantially affirmed an ALJ ruling which required that rates be unbundled based on the 1992 cost of service levels which were the basis for JCP&L's last base rate case, but clarified that (1) JCP&L could update its 1992 cost of service study to reflect adjustments consistent with the NJBPU approved Final Settlement which, among other things, recognized certain increased expense levels and reductions to base rates and (2) all of the other updated post-1992 cost information that JCP&L had submitted in the proceeding should remain in the record, which the NJBPU will utilize after issuance of the ALJ's initial decision to establish a reasonable level of rates going forward. Furthermore, the NJBPU emphasized in its order that the final unbundled rates established as a result of this proceeding will be lower than the current bundled rates. This directive has been recognized in JCP&L's July 1997 restructuring plan which proposed annual revenue reductions totaling approximately $185 million. The NJBPU will render final and comprehensive decisions on the precise level of aggregate rate reductions required in order to accomplish its primary goals of introducing retail competition and lowering electricity costs for consumers. If the NJBPU were to accept the positions of various parties or their consultants, or were ultimately to deny JCP&L's request to recover post-1992 capital additions and increased expenses, it would have a material adverse impact on JCP&L's stranded cost recovery, restructuring proceeding and future earnings. Hearings with respect to the stranded cost and unbundled rate filings are completed and pending before the ALJ. Discovery, evidentiary hearings and related proceedings with respect to the restructuring filing are continuing. Although, the NJBPU intends to complete its review and issue final decisions in time for retail competition to commence in October 1998, this would require enacting legislation which has not yet been introduced. Management believes it is unlikely that legislation could be enacted in time for retail competition to begin in 1998. There can be no assurance as to the outcome of these proceedings. JCP&L has received NJBPU approval for a one-year pilot program offering customers in Monroe Township, New Jersey, a choice of their electric energy supplier. The pilot program began in September 1997, and can be extended until the first phase of competition begins in October 1998. Monroe Township had been exploring the possibility of establishing its own municipal electric system. 69 Other - ----- In November 1997, the FERC issued an order to the Pennsylvania-New Jersey-Maryland (PJM) Power Pool which, among other things, directed the GPU Energy companies to implement a single-system transmission rate, effective January 1, 1998. The implementation of a single-system rate is not expected to effect total transmission revenues. It would, however, increase the pricing for transmission service in Met-Ed and Penelec's service territories and reduce the pricing for transmission service in JCP&L's service territory. The GPU Energy companies have requested the FERC to reconsider its ruling requiring a single-system transmission rate. The FERC's ruling may also have an effect on the GPU Energy companies' distribution rates since the PaPUC has ordered a rate cap effective January 1, 1997 and the NJBPU has recommended a 5-10% rate reduction effective with the implementation of customer choice. There can be no assurance as to the outcome of this matter. Also in 1997, the PJM Power Pool converted to a limited liability company governed by an independent board of managers and the FERC approved the supporting PJM companies' application to permit the PJM Interconnection to be recognized as an ISO. Several bills have been introduced in Congress providing for a comprehensive restructuring of the electric utility industry. These bills propose, among other things, retail choice for all utility customers beginning as early as January 1999, the opportunity for utilities to recover their prudently incurred stranded costs in varying degrees, and repeal of both the Public Utility Regulatory Policies Act (PURPA) and the Public Utility Holding Company Act of 1935 (PUHCA). The Clinton administration announced a Comprehensive Electricity Competition Plan which proposes, among other things, customer choice by January 1, 2003, stranded cost recovery, reliability standards, environmental provisions, and the repeal of both PURPA and PUHCA. The plan does, however, allow states to opt out of the mandate if they believe consumers would be better served by an alternative policy. The administration's plan has not yet been introduced in Congress. Nonutility Generation Agreements - -------------------------------- Pursuant to the requirements of PURPA and state regulatory directives, the GPU Energy companies have entered into power purchase agreements with NUGs for the purchase of energy and capacity for remaining periods of up to 23 years. Although a few of these facilities are dispatchable, most are must-run and generally obligate the GPU Energy companies to purchase, at the contract price, the output up to the contract limits. While the GPU Energy companies thus far have been granted recovery of their NUG costs from customers by the PaPUC and NJBPU, there can be no assurance that they will continue to be able to recover these costs throughout the terms of the related agreements. As of March 31, 1998, facilities covered by these agreements having 1,666 MW (JCP&L 905 MW; Met-Ed 356 MW; Penelec 405 MW) of capacity were in service. 70 The GPU Energy companies intend to avoid, to the maximum extent practicable, entering into any new NUG agreements that are not needed or not consistent with current market pricing and continue to support legislative efforts to repeal PURPA. They are also attempting to renegotiate, and in some cases buy out, existing high cost long-term NUG agreements (see THE GPU ENERGY COMPANIES' SUPPLY PLAN). THE GPU ENERGY COMPANIES' SUPPLY PLAN ------------------------------------- Managing Nonutility Generation - ------------------------------ The GPU Energy companies are seeking to reduce the above-market costs of NUG agreements by: (1) attempting to convert must-run agreements to dispatchable agreements; (2) attempting to renegotiate prices of the agreements; (3) offering contract buyouts; and (4) initiating proceedings before federal and state agencies, and in the courts, where appropriate. In addition, the GPU Energy companies intend to avoid, to the maximum extent practicable, entering into any new NUG agreements that are not needed or not consistent with current market pricing and are supporting legislative efforts to repeal PURPA. These efforts may result in claims against GPU for substantial damages. There can, however, be no assurance as to what extent these efforts will be successful in whole or in part. In 1997, the NJBPU approved a Stipulation of Final Settlement which, among other things, provides for the recovery of costs associated with the buyout of the Freehold Cogeneration project. The Final Settlement 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. The Freehold cost recovery was granted on an interim basis subject to refund, pending further review by the NJBPU, before which the matter is pending. In 1997, Met-Ed and Penelec issued requests for proposals (RFPs) to 24 NUG projects which currently supply a total of approximately 760 MW under power purchase agreements. The RFPs requested the NUGs to propose buyouts, buydowns and/or restructurings of current power purchase contracts in return for cash payments. In January 1998, Met-Ed and Penelec entered into definitive buyout agreements with two bidders. The PaPUC is considering Met-Ed and Penelec's requests for approval of these agreements as part of their pending restructuring proceedings. ACCOUNTING MATTERS ------------------ Statement of Financial Accounting Standards No. 71 (FAS 71), "Accounting for the Effects of Certain Types of Regulation," applies to regulated utilities that have the ability to recover their costs through rates established by regulators and charged to customers. In response to the continuing deregulation of the electric utility industry, the SEC has questioned the continued applicability of FAS 71 by investor-owned utilities with respect to their electric generation operations. In 1997, the Financial Accounting Standards Board's Emerging Issues Task Force (EITF) met to discuss 71 these issues and concluded that utilities are no longer subject to FAS 71, for the generation portion of their business, as soon as they know details of their individual transition plans. The EITF also concluded that utilities can continue to carry previously recorded regulated assets, as well as any newly established regulated assets (including those related to generation), on their balance sheets if regulators have guaranteed a regulated cash flow stream to recover the cost of these assets. In light of retail access legislation enacted in Pennsylvania and the NJBPU's final findings and recommendations, the GPU Energy companies believe they will no longer meet the requirements for continued application of FAS 71 for the generation portion of their business, by no later than mid-1998 for Met-Ed and Penelec, and October 1998 for JCP&L, the expected approval dates of their restructuring plans filed with state regulators. Once the GPU Energy companies are able to determine that the generation portion of their operations is no longer subject to the provisions of FAS 71, the related regulatory assets, net of regulatory liabilities, would, to the extent that recovery is not provided for through their respective restructuring plans, have to be written off and charged to expense. Additional depreciation expense would have to be recorded for any differences created by the use of a regulated depreciation method that is different from that which would have been used under generally accepted accounting principles for enterprises in general. In addition, writedowns of plant assets could be required in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets." Additionally, the inability of the GPU Energy companies to recover their above-market costs of power purchase commitments, in whole or in part, could result in the recording of liabilities and corresponding charges to expense. The amount of charges resulting from the discontinuation of FAS 71 will depend on the final outcome of the GPU Energy companies' individual restructuring proceedings, and could have a material adverse effect on GPU's results of operations and financial position. 72 PART II ITEM 1 - LEGAL PROCEEDINGS ----------------- Information concerning the current status of certain legal proceedings instituted against GPU, Inc. and the GPU Energy companies discussed in Part I of this report in Combined 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 A - GPU, Inc. and Subsidiary Companies B - JCP&L C - Met-Ed D - Penelec (27) Financial Data Schedules A - GPU, Inc. and Subsidiary Companies B - JCP&L C - Met-Ed D - Penelec (b) Reports on Form 8-K: None. 73 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. May 14, 1998 By: /s/ J. G. Graham ----------------- J. G. Graham, Senior Vice President (Chief Financial Officer) May 14, 1998 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 May 14, 1998 By: /s/ D. Baldassari ----------------- D. Baldassari, President May 14, 1998 By: /s/ D. W. Myers ---------------- D. W. Myers, Vice President - Finance and Rates &Comptroller (Principal Accounting Officer) 74 EX-12 2 EXHIBIT 12A 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, 1998 1997 ------------ -------- OPERATING REVENUES $1,043,109 $1,051,012 --------- --------- OPERATING EXPENSES 783,475 770,831 Interest portion of rentals (A) 6,889 5,958 Fixed charges of service company subsidiaries (B) 531 690 --------- -------- Net expense 776,055 764,183 --------- -------- OTHER INCOME AND DEDUCTIONS: Allowance for funds used during construction 1,391 1,533 Equity in undistributed earnings of affiliates, net 17,651 32,227 Other income, net 44,562 5,713 Minority interest net income (501) (147) --------- -------- Total other income and deductions 63,103 39,326 --------- -------- EARNINGS AVAILABLE FOR FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (excluding taxes based on income) $ 330,157 $ 326,155 ========= ========= FIXED CHARGES: Interest on funded indebtedness $ 84,396 $ 57,623 Other interest (C) 16,393 14,743 Preferred stock dividends of subsidiaries on a pretax basis (E) 4,840 5,360 Interest portion of rentals (A) 6,889 5,958 --------- --------- Total fixed charges $ 112,518 $ 83,684 ========= ========= RATIO OF EARNINGS TO FIXED CHARGES 2.93 3.90 ==== ==== RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (D) 2.93 3.90 ==== ==== 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) GPU 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 GPU's consolidated income statement. GPU 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) Includes dividends on subsidiary-obligated mandatorily redeemable preferred securities of $7,222 for the three month periods ended March 31, 1998 and 1997, respectively. (D) 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. (E) Calculation of preferred stock dividends of subsidiaries on a pretax basis is as follows: Three Months Ended ------------------ March 31, March 31, 1998 1997 --------- ------- Income before provision for income taxes and preferred stock dividends of subsidiaries $222,479 $247,831 Income before preferred stock dividends of subsidiaries 136,755 158,465 Pretax earnings ratio 162.7% 156.4% Preferred stock dividends of subsidiaries 2,975 3,427 Preferred stock dividends of subsidiaries on a pretax basis 4,840 5,360 EX-12 3 EXHIBIT 12B 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, 1998 1997 ----------- -------- OPERATING REVENUES $472,334 $510,443 ------- ------- OPERATING EXPENSES 362,016 398,626 Interest portion of rentals (A) 2,764 2,695 ------- ------- Net expense 359,252 395,931 ------- ------- OTHER INCOME: Allowance for funds used during construction 758 734 Other income, net 2,265 3,457 ------- ------- Total other income 3,023 4,191 ------- ------- EARNINGS AVAILABLE FOR FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (excluding taxes based on income) $116,105 $118,703 ======= ======= FIXED CHARGES: Interest on funded indebtedness $ 21,792 $ 22,768 Other interest (B) 5,204 5,166 Interest portion of rentals (A) 2,764 2,695 ------- ------- Total fixed charges $ 29,760 $ 30,629 ======= ======= RATIO OF EARNINGS TO FIXED CHARGES 3.90 3.88 ==== ==== Preferred stock dividend requirement $ 2,738 $ 3,162 Ratio of income before provision for income taxes to net income (C) 163.5% 151.0% ------- ------- Preferred stock dividend requirement on a pretax basis 4,477 4,775 Fixed charges, as above 29,760 30,629 ------- ------- Total fixed charges and preferred stock dividends $ 34,237 $ 35,404 ======= ======= RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS 3.39 3.35 ==== ==== 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) JCP&L 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 periods ended March 31, 1998 and 1997, respectively. (C) Represents income before provision for income taxes of $86,345 and $88,074 for the three month periods ended March 31, 1998 and 1997, respectively, divided by net income of $52,816 and $58,320, respectively for the same periods. EX-12 4 EXHIBIT 12C 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, 1998 1997 ---------- -------- OPERATING REVENUES $234,748 $255,260 ------- ------- OPERATING EXPENSES 176,874 172,665 Interest portion of rentals (A) 2,050 1,155 ------- ------- Net expense 174,824 171,510 ------- ------- OTHER INCOME AND DEDUCTIONS: Allowance for funds used during construction 248 426 Other income, net 284 343 ------- ------- Total other income and deductions 532 769 ------- ------- EARNINGS AVAILABLE FOR FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (excluding taxes based on income) $ 60,456 $ 84,519 ======= ======= FIXED CHARGES: Interest on funded indebtedness $ 10,623 $ 11,254 Other interest (B) 5,003 3,918 Interest portion of rentals (A) 2,050 1,155 ------- ------- Total fixed charges $ 17,676 $ 16,327 ======= ======= RATIO OF EARNINGS TO FIXED CHARGES 3.42 5.18 ==== ==== Preferred stock dividend requirement $ 121 $ 121 Ratio of income before provision for income taxes to net income (C) 173.0% 171.8% ------- ------- Preferred stock dividend requirement on a pretax basis 209 208 Fixed charges, as above 17,676 16,327 ------- ------- Total fixed charges and preferred stock dividends $ 17,885 $ 16,535 ======= ======= RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS 3.38 5.11 ==== ==== 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) Met-Ed 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, 1998 and 1997, respectively. (C) Represents income before provision for income taxes of $42,780 and $68,192 for the three month periods ended March 31, 1998 and 1997, respectively, divided by net income of $24,730 and $39,685, respectively for the same periods. EX-12 5 EXHIBIT 12D 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, 1998 1997 ----------- -------- OPERATING REVENUES $263,655 $289,753 ------- ------- OPERATING EXPENSES 201,032 200,384 Interest portion of rentals (A) 1,256 1,070 ------- ------- Net expense 199,776 199,314 ------- ------- OTHER INCOME AND DEDUCTIONS: Allowance for funds used during construction 385 373 Other income, net 79 145 ------- ------- Total other income and deductions 464 518 ------- ------- EARNINGS AVAILABLE FOR FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (excluding taxes based on income) $ 64,343 $ 90,957 ======= ======= FIXED CHARGES: Interest on funded indebtedness $ 12,112 $ 12,115 Other interest (B) 4,541 4,296 Interest portion of rentals (A) 1,256 1,070 ------- ------- Total fixed charges $ 17,909 $ 17,481 ======= ======= RATIO OF EARNINGS TO FIXED CHARGES 3.59 5.20 ==== ==== Preferred stock dividend requirement $ 116 $ 144 Ratio of income before provision for income taxes to net income (C) 174.3% 171.3% ------- ------- Preferred stock dividend requirement on a pretax basis 202 247 Fixed charges, as above 17,909 17,481 ------- ------- Total fixed charges and preferred stock dividends $ 18,111 $ 17,728 ======= ======= RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS 3.55 5.13 ==== ==== 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) Penelec 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, 1998 and 1997, respectively. (C) Represents income before provision for income taxes of $46,434 and $73,476 for the three month periods ended March 31, 1998 and 1997, respectively, divided by net income of $26,645 and $42,894, respectively for the same periods. EX-27 6 GPU FDS
UT 0000040779 GPU, INC. 1,000 US DOLLARS 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 1 PER-BOOK 7,488,943 2,083,627 1,058,431 2,203,008 0 12,834,009 331,958 1,007,885 2,259,753 3,519,270 421,500 66,478 4,064,192 299,618 0 0 411,140 12,500 3,145 131,276 3,904,890 12,834,009 1,043,109 66,293 783,475 849,768 193,341 43,102 236,443 102,162 133,780 0 133,780 60,414 274,479 214,381 1.07 1.07 INCLUDES ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS) OF ($14,733). INCLUDES REACQUIRED COMMON STOCK OF $80,326. 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 $2,975. INCLUDES MINORITY INTEREST NET (INCOME)/LOSS OF ($501).
EX-27 7 JCP&L FDS
UT 0000053456 JERSEY CENTRAL POWER & LIGHT COMPANY 1,000 US DOLLARS 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 1 PER-BOOK 2,873,493 490,058 382,200 930,806 0 4,676,557 153,713 510,769 915,717 1,580,199 216,500 37,741 1,173,364 0 0 0 11 12,500 0 77,616 1,578,626 4,676,557 472,334 32,476 362,016 394,492 77,842 1,487 79,329 26,513 52,816 2,738 50,078 10,000 88,893 191,308 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 8 MET-ED FDS
UT 0000065350 METROPOLITAN EDISON COMPANY 1,000 US DOLLARS 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 1 PER-BOOK 1,558,908 195,139 222,851 585,545 0 2,562,443 66,273 370,200 288,277 724,750 100,000 12,056 576,925 81,600 0 0 22 0 30 34,732 1,032,328 2,562,443 234,748 17,562 176,874 194,436 40,312 (159) 40,153 15,423 24,730 121 24,609 20,000 43,254 21,566 0 0 INCLUDES ACCUMULATED OTHER COMPREHENSIVE INCOME OF $15,034. 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 9 PENELEC FDS
UT 0000077227 PENNSYLVANIA ELECTRIC COMPANY 1,000 US DOLLARS 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 1 PER-BOOK 1,805,457 80,646 282,014 467,128 0 2,635,245 105,812 285,487 427,842 819,141 105,000 16,681 676,445 116,000 0 0 11 0 3,115 18,087 880,765 2,635,245 263,655 19,803 201,032 220,835 42,820 93 42,913 16,268 26,645 116 26,529 0 49,122 17,196 0 0 INCLUDES ACCUMULATED OTHER COMPREHENSIVE INCOME OF $7,605. REPRESENTS COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES. INCLUDES DIVIDENDS ON COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF $2,297.
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