-----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, Dl22sEbiQTNsuvIMfYT9zLL9/XHmc+J7jAj2uU91bQ36iQt4gISDJe3TtutM5ahj C2vwuMTgFL3U8FO5vF8fCg== 0000040779-96-000087.txt : 19961108 0000040779-96-000087.hdr.sgml : 19961108 ACCESSION NUMBER: 0000040779-96-000087 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961107 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENERAL PUBLIC UTILITIES CORP /PA/ CENTRAL INDEX KEY: 0000040779 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 135516589 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06047 FILM NUMBER: 96656133 BUSINESS ADDRESS: STREET 1: 100 INTERPACE PKWY CITY: PARSIPPANY STATE: NJ ZIP: 07054 BUSINESS PHONE: 2012636500 FILER: COMPANY DATA: COMPANY CONFORMED NAME: JERSEY CENTRAL POWER & LIGHT CO CENTRAL INDEX KEY: 0000053456 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 210485010 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03141 FILM NUMBER: 96656134 BUSINESS ADDRESS: STREET 1: 300 MADISON AVE CITY: MORRISTOWN STATE: NJ ZIP: 079621911 BUSINESS PHONE: 2014558200 FILER: COMPANY DATA: COMPANY CONFORMED NAME: METROPOLITAN EDISON CO CENTRAL INDEX KEY: 0000065350 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 230870160 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-00446 FILM NUMBER: 96656135 BUSINESS ADDRESS: STREET 1: 2800 POTTSVILLE PIKE STREET 2: MUHLENBERG TOWNSHIP CITY: BERKS COUNTY STATE: PA ZIP: 19605 BUSINESS PHONE: 2159293601 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENNSYLVANIA ELECTRIC CO CENTRAL INDEX KEY: 0000077227 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 250718085 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03522 FILM NUMBER: 96656136 BUSINESS ADDRESS: STREET 1: 2800 POTTSVILLE PIKE READING STREET 2: MUHLENBERG TOWNSHIP CITY: BERKS COUNTY STATE: PA ZIP: 19640-0001 BUSINESS PHONE: 8145338111 10-Q 1 REPORT DOCUMENT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 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) (formerly General Public Utilities Corporation) 100 Interpace Parkway Parsippany, New Jersey 07054-1149 Telephone (201) 263-6500 1-3141 Jersey Central Power & Light Company 21-0485010 (a New Jersey corporation) 2800 Pottsville Pike Reading, Pennsylvania 19605 Telephone (610) 929-3601 1-446 Metropolitan Edison Company 23-0870160 (a Pennsylvania corporation) 2800 Pottsville Pike Reading, Pennsylvania 19605 Telephone (610) 929-3601 1-3522 Pennsylvania Electric Company 25-0718085 (a Pennsylvania corporation) 2800 Pottsville Pike Reading, Pennsylvania 19605 Telephone (610) 929-3601 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares outstanding of each of the issuer's classes of voting stock, as of October 31, 1996, was as follows: Shares Registrant Title Outstanding GPU, Inc. Common Stock, $2.50 par value 120,566,356 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 September 30, 1996 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 Notes to Financial Statements 19 Management's Discussion and Analysis of Financial Condition and Results of Operations 42 PART II - Other Information 59 Signatures 60 _________________________________ 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. (formerly General Public Utilities Corporation), 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 1995 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; economic conditions; uncertainties involved with foreign operations; and the effects of inflation. 2 GPU, INC. AND SUBSIDIARY COMPANIES Consolidated Balance Sheets
In Thousands September 30, December 31, 1996 1995 (Unaudited) ASSETS Utility Plant: In service, at original cost $ 9,533,328 $9,295,630 Less, accumulated depreciation 3,642,946 3,433,240 Net utility plant in service 5,890,382 5,862,390 Construction work in progress 304,796 313,471 Other, net 176,758 193,356 Net utility plant 6,371,936 6,369,217 Other Property and Investments: Nuclear decommissioning trusts, at market 409,864 362,957 GPU International Group investments, net 838,928 288,044 Nuclear fuel disposal fund 98,256 95,393 Other, net 44,341 39,505 Total other property and investments 1,391,389 785,899 Current Assets: Cash and temporary cash investments 51,179 18,422 Special deposits 25,381 14,877 Accounts receivable: Customers, net 296,266 278,643 Other 124,731 69,773 Unbilled revenues 104,976 128,749 Materials and supplies, at average cost or less: Construction and maintenance 193,043 194,769 Fuel 25,172 39,795 Deferred income taxes 29,339 20,090 Prepayments 140,766 42,746 Total current assets 990,853 807,864 Deferred Debits and Other Assets: Regulatory assets: Three Mile Island Unit 2 deferred costs 365,949 368,712 Unamortized property losses 101,425 105,729 Income taxes recoverable through future rates 485,931 527,584 Other 595,170 437,683 Total regulatory assets 1,548,475 1,439,708 Deferred income taxes 362,833 330,186 Other 160,987 116,642 Total deferred debits and other assets 2,072,295 1,886,536 Total Assets $10,826,473 $9,849,516 The accompanying notes are an integral part of the consolidated financial statements. 3
GPU, INC. AND SUBSIDIARY COMPANIES Consolidated Balance Sheets
In Thousands September 30, December 31, 1996 1995 (Unaudited) LIABILITIES AND CAPITAL Capitalization: Common stock $ 314,458 $ 314,458 Capital surplus 749,859 746,449 Retained earnings 2,103,263 2,004,072 Total 3,167,580 3,064,979 Less, reacquired common stock, at cost 87,155 90,345 Total common stockholders' equity 3,080,425 2,974,634 Cumulative preferred stock: With mandatory redemption 114,000 134,000 Without mandatory redemption 98,116 98,116 Subsidiary-obligated mandatorily redeemable preferred securities 330,000 330,000 Long-term debt 3,024,177 2,567,898 Total capitalization 6,646,718 6,104,648 Current Liabilities: Securities due within one year 184,435 131,246 Notes payable 301,521 123,890 Obligations under capital leases 151,864 159,565 Accounts payable 354,467 318,394 Taxes accrued 36,586 46,613 Deferred energy credits/(costs) 7,365 (13,208) Interest accrued 58,215 69,456 Other 272,594 252,306 Total current liabilities 1,367,047 1,088,262 Deferred Credits and Other Liabilities: Deferred income taxes 1,498,877 1,466,060 Unamortized investment tax credits 136,848 145,375 Three Mile Island Unit 2 future costs 424,905 413,031 Regulatory liabilities 92,256 97,999 Other 659,822 534,141 Total deferred credits and other liabilities 2,812,708 2,656,606 Commitments and Contingencies (Note 1) Total Liabilities and Capital $10,826,473 $9,849,516 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 Nine Months Ended September 30, Ended September 30, 1996 1995 1996 1995 Operating Revenues $1,058,223 $1,095,082 $2,993,411 $2,873,702 Operating Expenses: Fuel 98,200 102,086 284,969 272,975 Power purchased and interchanged 270,867 280,800 761,749 754,597 Deferral of energy costs, net 9,861 4,406 19,701 9,645 Other operation and maintenance 363,848 251,288 832,201 697,421 Depreciation and amortization 102,726 101,928 297,233 281,813 Taxes, other than income taxes 99,263 98,355 274,046 262,832 Total operating expenses 944,765 838,863 2,469,899 2,279,283 Operating Income Before Income Taxes 113,458 256,219 523,512 594,419 Income taxes 20,292 71,638 134,387 149,860 Operating Income 93,166 184,581 389,125 444,559 Other Income and Deductions: Allowance for other funds used during construction (743) 1,203 1,741 3,560 Other income, net 5,720 194,342 17,300 190,172 Income taxes 1,355 (82,264) (2,590) (80,841) Total other income and deductions 6,332 113,281 16,451 112,891 Income Before Interest Charges and Preferred Dividends 99,498 297,862 405,576 557,450 Interest Charges and Preferred Dividends: Interest on long-term debt 45,708 47,680 138,316 140,159 Other interest 9,518 7,017 22,497 22,820 Allowance for borrowed funds used during construction (2,555) (2,543) (6,378) (6,615) Dividends on subsidiary-obligated mandatorily redeemable preferred securities 7,222 7,222 21,666 17,594 Preferred stock dividends of subsidiaries 3,784 4,208 11,776 12,737 Total interest charges and preferred dividends 63,677 63,584 187,877 186,695 Net Income $ 35,821 $ 234,278 $ 217,699 $ 370,755 Earnings Per Average Common Share $ .29 $ 2.02 $ 1.80 $ 3.20 Average Common Shares Outstanding 120,791 116,512 120,710 115,841 Cash Dividends Paid Per Share $ .485 $ .47 $ 1.44 $ 1.39 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 Nine Months Ended September 30, 1996 1995 Operating Activities: Net income $ 217,699 $ 370,755 Adjustments to reconcile income to cash provided: Depreciation and amortization 315,726 281,577 Amortization of property under capital leases 42,711 43,039 Three Mile Island Unit 2 costs - (170,005) Voluntary enhanced retirement programs 122,739 - Nuclear outage maintenance costs, net 3,597 8,178 Deferred income taxes and investment tax credits, net 14,664 95,500 Deferred energy costs, net 19,696 9,888 Accretion income (8,708) (9,390) Allowance for other funds used during construction (1,741) (3,560) Changes in working capital: Receivables (48,788) (19,881) Materials and supplies 16,113 10,781 Special deposits and prepayments (92,705) (37,060) Payables and accrued liabilities (16,063) (87,028) Nonutility generation contract buyout costs (90,450) (18,650) Other, net (66,541) (26,668) Net cash provided by operating activities 427,949 447,476 Investing Activities: Cash construction expenditures (261,185) (340,168) Contributions to decommissioning trusts (30,136) (24,974) GPU International Group investments (541,587) (47,184) Other, net 3,703 (3,502) Net cash required for investing activities (829,205) (415,828) Financing Activities: Issuance of long-term debt 563,762 197,206 Increase/(Decrease) in notes payable, net 177,797 (123,003) Retirement of long-term debt (71,389) (43,737) Capital lease principal payments (42,673) (42,486) Issuance of common stock - 29,645 Issuance of subsidiary-obligated mandatorily redeemable preferred securities - 121,063 Redemption of preferred stock of subsidiaries (20,000) (6,049) Dividends paid on common stock (173,484) (160,693) Net cash provided (required) by financing activities 434,013 (28,054) Net increase in cash and temporary cash investments from above activities 32,757 3,594 Cash and temporary cash investments, beginning of year 18,422 26,731 Cash and temporary cash investments, end of period $ 51,179 $ 30,325 Supplemental Disclosure: Interest and preferred dividends paid $ 219,875 $ 200,156 Income taxes paid $ 137,980 $ 168,810 New capital lease obligations incurred $ 31,415 $ 45,469 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 September 30, December 31, 1996 1995 (Unaudited) ASSETS Utility Plant: In service, at original cost $4,454,886 $4,311,458 Less, accumulated depreciation 1,770,157 1,669,893 Net utility plant in service 2,684,729 2,641,565 Construction work in progress 133,159 157,885 Other, net 114,191 111,023 Net utility plant 2,932,079 2,910,473 Other Property and Investments: Nuclear decommissioning trusts, at market 248,701 225,200 Nuclear fuel disposal fund 98,256 95,393 Other, net 7,699 7,218 Total other property and investments 354,656 327,811 Current Assets: Cash and temporary cash investments 2,925 922 Special deposits 6,934 7,358 Accounts receivable: Customers, net 165,929 150,002 Other 23,476 21,912 Unbilled revenues 54,071 66,389 Materials and supplies, at average cost or less: Construction and maintenance 94,904 95,949 Fuel 8,559 18,693 Deferred income taxes 11,897 8,842 Prepayments 76,216 20,869 Total current assets 444,911 390,936 Deferred Debits and Other Assets: Regulatory assets: Three Mile Island Unit 2 deferred costs 133,287 138,472 Unamortized property losses 95,821 100,176 Income taxes recoverable through future rates 129,080 134,787 Other 448,319 311,293 Total regulatory assets 806,507 684,728 Deferred income taxes 149,076 122,082 Other 28,054 20,359 Total deferred debits and other assets 983,637 827,169 Total Assets $4,715,283 $4,456,389 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 September 30, December 31, 1996 1995 (Unaudited) LIABILITIES AND CAPITAL Capitalization: Common stock $ 153,713 $ 153,713 Capital surplus 510,769 510,769 Retained earnings 829,256 816,770 Total common stockholder's equity 1,493,738 1,481,252 Cumulative preferred stock: With mandatory redemption 114,000 134,000 Without mandatory redemption 37,741 37,741 Company-obligated mandatorily redeemable preferred securities 125,000 125,000 Long-term debt 1,137,225 1,192,945 Total capitalization 2,907,704 2,970,938 Current Liabilities: Securities due within one year 65,884 35,710 Notes payable 102,134 800 Obligations under capital leases 99,281 90,329 Accounts payable: Affiliates 60,340 31,885 Other 117,218 111,225 Taxes accrued 4,555 10,516 Deferred energy credits/(costs) 11,060 (5,290) Interest accrued 29,672 28,718 Other 87,776 71,769 Total current liabilities 577,920 375,662 Deferred Credits and Other Liabilities: Deferred income taxes 645,847 607,188 Unamortized investment tax credits 61,971 66,874 Three Mile Island Unit 2 future costs 106,251 103,271 Nuclear fuel disposal fee 125,925 121,121 Regulatory liabilities 34,706 37,597 Other 254,959 173,738 Total deferred credits and other liabilities 1,229,659 1,109,789 Commitments and Contingencies (Note 1) Total Liabilities and Capital $4,715,283 $4,456,389 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 Nine Months Ended September 30, Ended September 30, 1996 1995 1996 1995 Operating Revenues $ 578,274 $ 625,479 $1,583,432 $1,546,594 Operating Expenses: Fuel 29,438 33,454 81,664 74,263 Power purchased and interchanged: Affiliates 8,673 9,854 21,896 13,222 Others 169,640 182,420 451,889 493,698 Deferral of energy and capacity costs, net 741 (355) 15,478 (10,746) Other operation and maintenance 187,964 114,888 425,306 341,265 Depreciation and amortization 54,939 49,150 155,177 145,111 Taxes, other than income taxes 61,539 65,421 176,899 171,298 Total operating expenses 512,934 454,832 1,328,309 1,228,111 Operating Income Before Income Taxes 65,340 170,647 255,123 318,483 Income taxes 11,888 51,190 56,560 79,965 Operating Income 53,452 119,457 198,563 238,518 Other Income and Deductions: Allowance for other funds used during construction (758) 399 1,224 856 Other income, net 2,850 3,728 4,668 10,713 Income taxes (990) (1,491) (2,225) (4,273) Total other income and deductions 1,102 2,636 3,667 7,296 Income Before Interest Charges and Dividends on Preferred Securities 54,554 122,093 202,230 245,814 Interest Charges and Dividends on Preferred Securities: Interest on long-term debt 22,204 23,461 66,921 69,421 Other interest 3,971 2,161 8,980 7,684 Allowance for borrowed funds used during construction (1,815) (1,651) (4,092) (3,698) Dividends on company-obligated mandatorily redeemable preferred securities 2,675 2,675 8,025 3,953 Total interest charges and dividends on preferred securities 27,035 26,646 79,834 77,360 Net Income 27,519 95,447 122,396 168,454 Preferred stock dividends 3,162 3,586 9,910 10,871 Earnings Available for Common Stock $ 24,357 $ 91,861 $ 112,486 $ 157,583 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 Nine Months Ended September, 30 1996 1995 Operating Activities: Net income $ 122,396 $ 168,454 Adjustments to reconcile income to cash provided: Depreciation and amortization 163,880 157,747 Amortization of property under capital leases 22,493 24,342 Voluntary enhanced retirement programs 62,909 - Nuclear outage maintenance costs, net (3,322) 12,588 Deferred income taxes and investment tax credits, net 2,475 16,733 Deferred energy and capacity costs, net 15,473 (10,814) Accretion income (8,708) (9,390) Allowance for other funds used during construction (1,224) (856) Changes in working capital: Receivables (5,173) (27,061) Materials and supplies 11,179 (1,042) Special deposits and prepayments (54,923) (39,111) Payables and accrued liabilities (36,664) (55,906) Nonutility generation contract buyout costs (65,000) (17,000) Other, net (2,767) (15,120) Net cash provided by operating activities 223,024 203,564 Investing Activities: Cash construction expenditures (124,081) (158,272) Contributions to decommissioning trusts (13,504) (13,523) Other, net (5,643) (3,153) Net cash required for investing activities (143,228) (174,948) Financing Activities: Issuance of long-term debt - 49,625 Increase/(Decrease) in notes payable, net 101,500 (73,100) Retirement of long-term debt (25,710) (9) Capital lease principal payments (23,249) (21,978) Issuance of company-obligated mandatorily redeemable preferred securities - 121,063 Redemption of preferred stock (20,000) (6,049) Dividends paid on common stock (100,000) (95,000) Contributions from parent corporation - 15,000 Dividends paid on preferred stock (10,334) (10,983) Net cash required by financing activities (77,793) (21,431) Net increase in cash and temporary cash investments from above activities 2,003 7,185 Cash and temporary cash investments, beginning of year 922 1,041 Cash and temporary cash investments, end of period $ 2,925 $ 8,226 Supplemental Disclosure: Interest paid $ 78,674 $ 78,411 Income taxes paid $ 70,267 $ 78,675 New capital lease obligations incurred $ 30,321 $ 11,377 The accompanying notes are an integral part of the consolidated financial statements. 10
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES Consolidated Balance Sheets
In Thousands September 30, December 31, 1996 1995 (Unaudited) ASSETS Utility Plant: In service, at original cost $2,274,292 $2,240,951 Less, accumulated depreciation 821,183 763,921 Net utility plant in service 1,453,109 1,477,030 Construction work in progress 94,834 83,353 Other, net 34,204 45,587 Net utility plant 1,582,147 1,605,970 Other Property and Investments: Nuclear decommissioning trusts, at market 112,986 95,317 Other, net 11,245 9,899 Total other property and investments 124,231 105,216 Current Assets: Cash and temporary cash investments 4,818 1,810 Special deposits 1,188 1,256 Accounts receivable: Customers, net 63,304 60,739 Other 21,496 22,151 Unbilled revenues 23,947 31,509 Materials and supplies, at average cost or less: Construction and maintenance 41,523 39,337 Fuel 6,177 9,817 Deferred income taxes 9,569 7,868 Prepayments 22,138 6,549 Total current assets 194,160 181,036 Deferred Debits and Other Assets: Regulatory assets: Three Mile Island Unit 2 deferred costs 148,623 149,004 Income taxes recoverable through future rates 146,277 178,513 Other 129,392 112,458 Total regulatory assets 424,292 439,975 Deferred income taxes 101,354 91,356 Other 13,876 13,612 Total deferred debits and other assets 539,522 544,943 Total Assets $2,440,060 $2,437,165 The accompanying notes are an integral part of the consolidated financial statements. 11
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES Consolidated Balance Sheets
In Thousands September 30, December 31, 1996 1995 (Unaudited) LIABILITIES AND CAPITAL Capitalization: Common stock $ 66,273 $ 66,273 Capital surplus 370,200 370,200 Retained earnings 252,952 248,434 Total common stockholder's equity 689,425 684,907 Cumulative preferred stock 23,598 23,598 Company-obligated mandatorily redeemable preferred securities 100,000 100,000 Long-term debt 563,251 603,268 Total capitalization 1,376,274 1,411,773 Current Liabilities: Securities due within one year 40,020 15,019 Notes payable 52,077 22,390 Obligations under capital leases 33,060 43,600 Accounts payable: Affiliates 18,740 10,559 Other 79,371 91,538 Taxes accrued 15,575 19,615 Deferred energy credits 7,575 1,417 Interest accrued 12,718 19,359 Other 49,004 40,635 Total current liabilities 308,140 264,132 Deferred Credits and Other Liabilities: Deferred income taxes 372,304 380,135 Unamortized investment tax credits 31,825 33,387 Three Mile Island Unit 2 future costs 212,403 206,489 Nuclear fuel disposal fee 28,446 27,360 Regulatory liabilities 25,213 26,461 Other 85,455 87,428 Total deferred credits and other liabilities 755,646 761,260 Commitments and Contingencies (Note 1) Total Liabilities and Capital $2,440,060 $2,437,165 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 Nine Months Ended September 30, Ended September 30, 1996 1995 1996 1995 Operating Revenues $ 243,077 $ 241,664 $ 687,823 $ 637,755 Operating Expenses: Fuel 23,645 24,826 71,612 67,619 Power purchased and interchanged: Affiliates 4,270 8,930 16,018 22,830 Others 50,422 43,732 152,696 125,209 Deferral of energy costs, net 8,038 8,102 6,053 9,834 Other operation and maintenance 81,871 63,313 188,009 171,154 Depreciation and amortization 24,522 30,536 72,825 74,967 Taxes, other than income taxes 19,617 14,352 47,649 41,082 Total operating expenses 212,385 193,791 554,862 512,695 Operating Income Before Income Taxes 30,692 47,873 132,961 125,060 Income taxes 7,117 12,752 39,865 30,449 Operating Income 23,575 35,121 93,096 94,611 Other Income and Deductions: Allowance for other funds used during construction 314 297 401 1,156 Other income/(expense), net (105) 134,038 69 129,926 Income taxes 42 (56,950) 123 (55,321) Total other income and deductions 251 77,385 593 75,761 Income Before Interest Charges and Dividends on Preferred Securities 23,826 112,506 93,689 170,372 Interest Charges and Dividends on Preferred Securities: Interest on long-term debt 11,182 11,841 34,119 34,375 Other interest 2,101 1,291 4,132 3,864 Allowance for borrowed funds used during construction (89) (267) (537) (1,009) Dividends on company-obligated mandatorily redeemable preferred securities 2,250 2,250 6,750 6,750 Total interest charges and dividends on preferred securities 15,444 15,115 44,464 43,980 Net Income 8,382 97,391 49,225 126,392 Preferred stock dividends 236 236 708 708 Earnings Available for Common Stock $ 8,146 $ 97,155 $ 48,517 $ 125,684 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 Nine Months Ended September 30, 1996 1995 Operating Activities: Net income $ 49,225 $ 126,392 Adjustments to reconcile income to cash provided: Depreciation and amortization 77,173 64,014 Amortization of property under capital leases 11,785 9,950 Three Mile Island Unit 2 costs - (118,209) Voluntary enhanced retirement programs 26,204 - Nuclear outage maintenance costs, net 4,618 (3,003) Deferred income taxes and investment tax credits, net 8,487 58,774 Deferred energy costs, net 6,157 9,834 Allowance for other funds used during construction (401) (1,156) Changes in working capital: Receivables 5,652 (14,030) Materials and supplies 1,454 8,034 Special deposits and prepayments (15,521) (2,654) Payables and accrued liabilities (27,692) (14,032) Nonutility generation contract buyout costs (25,450) (1,650) Other, net (10,641) (20,451) Net cash provided by operating activities 111,050 101,813 Investing Activities: Cash construction expenditures (52,089) (85,958) Contributions to decommissioning trusts (12,685) (7,504) Other, net (973) 12 Net cash required for investing activities (65,747) (93,450) Financing Activities: Issuance of long-term debt - 87,911 Increase in notes payable, net 29,687 1,100 Capital lease principal payments (11,255) (11,262) Contributions from parent corporation - 10,000 Retirement of long term debt (15,019) (40,519) Dividends paid on common stock (45,000) (60,000) Dividends paid on preferred stock (708) (708) Net cash required by financing activities (42,295) (13,478) Net increase/(decrease) in cash and temporary cash investments from above activities 3,008 (5,115) Cash and temporary cash investments, beginning of year 1,810 9,246 Cash and temporary cash investments, end of period $ 4,818 $ 4,131 Supplemental Disclosure: Interest paid $ 50,840 $ 50,393 Income taxes paid $ 36,954 $ 52,353 New capital lease obligations incurred $ 725 $ 20,903 The accompanying notes are an integral part of the consolidated financial statements. 14
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES Consolidated Balance Sheets
In Thousands September 30, December 31, 1996 1995 (Unaudited) ASSETS Utility Plant: In service, at original cost $2,726,660 $2,667,842 Less, accumulated depreciation 1,024,280 974,992 Net utility plant in service 1,702,380 1,692,850 Construction work in progress 76,803 72,233 Other, net 24,730 30,876 Net utility plant 1,803,913 1,795,959 Other Property and Investments: Nuclear decommissioning trusts, at market 48,177 42,440 Other, net 6,281 6,545 Total other property and investments 54,458 48,985 Current Assets: Cash and temporary cash investments 1,750 1,367 Special deposits 2,884 2,718 Accounts receivable: Customers, net 66,621 67,454 Other 18,703 29,033 Unbilled revenues 26,958 30,851 Materials and supplies, at average cost or less: Construction and maintenance 50,521 53,237 Fuel 10,436 11,285 Deferred energy costs 11,270 9,335 Deferred income taxes 7,408 4,602 Prepayments 33,230 10,328 Total current assets 229,781 220,210 Deferred Debits and Other Assets: Regulatory assets: Three Mile Island Unit 2 deferred costs 84,039 81,236 Income taxes recoverable through future rates 210,574 214,284 Other 23,063 19,485 Total regulatory assets 317,676 315,005 Deferred income taxes 68,512 78,754 Other 15,674 14,657 Total deferred debits and other assets 401,862 408,416 Total Assets $2,490,014 $2,473,570 The accompanying notes are an integral part of the consolidated financial statements. 15
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES Consolidated Balance Sheets
In Thousands September 30, December 31, 1996 1995 (Unaudited) LIABILITIES AND CAPITAL Capitalization: Common stock $ 105,812 $ 105,812 Capital surplus 285,486 285,486 Retained earnings 352,146 327,814 Total common stockholder's equity 743,444 719,112 Cumulative preferred stock 36,777 36,777 Company-obligated mandatorily redeemable preferred securities 105,000 105,000 Long-term debt 616,462 642,487 Total capitalization 1,501,683 1,503,376 Current Liabilities: Securities due within one year 76,010 75,009 Notes payable 70,635 27,100 Obligations under capital leases 17,452 22,751 Accounts payable: Affiliates 8,682 13,806 Other 51,319 66,687 Taxes accrued 13,407 16,019 Interest accrued 11,632 19,567 Vacations accrued 6,276 9,976 Other 31,339 19,448 Total current liabilities 286,752 270,363 Deferred Credits and Other Liabilities: Deferred income taxes 454,428 462,354 Unamortized investment tax credits 43,052 45,114 Three Mile Island Unit 2 future costs 106,251 103,271 Nuclear fuel disposal fee 14,223 13,680 Regulatory liabilities 32,337 33,941 Other 51,288 41,471 Total deferred credits and other liabilities 701,579 699,831 Commitments and Contingencies (Note 1) Total Liabilities and Capital $2,490,014 $2,473,570 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 Nine Months Ended September 30, Ended September 30, 1996 1995 1996 1995 Operating Revenues $ 256,143 $ 249,234 $ 772,260 $ 741,097 Operating Expenses: Fuel 45,117 43,806 131,693 131,093 Power purchased and interchanged: Affiliates 166 973 2,245 5,243 Others 50,900 54,648 157,259 135,690 Deferral of energy costs, net 1,082 (3,341) (1,830) 10,557 Other operation and maintenance 96,989 73,717 222,804 192,642 Depreciation and amortization 23,265 22,242 69,231 61,735 Taxes, other than income taxes 18,107 18,582 49,498 50,452 Total operating expenses 235,626 210,627 630,900 587,412 Operating Income Before Income Taxes 20,517 38,607 141,360 153,685 Income taxes 1,287 7,696 37,962 39,446 Operating Income 19,230 30,911 103,398 114,239 Other Income and Deductions: Allowance for other funds used during construction (299) 507 116 1,548 Other income/(expense), net 67 58,888 (735) 55,259 Income taxes 14 (24,594) 76 (23,235) Total other income and deductions (218) 34,801 (543) 33,572 Income Before Interest Charges and Dividends on Preferred Securities 19,012 65,712 102,855 147,811 Interest Charges and Dividends on Preferred Securities: Interest on long-term debt 12,322 12,378 37,276 36,363 Other interest 2,179 1,647 5,448 5,608 Allowance for borrowed funds used during construction (651) (625) (1,749) (1,908) Dividends on company-obligated mandatorily redeemable preferred securities 2,297 2,297 6,891 6,891 Total interest charges and dividends on preferred securities 16,147 15,697 47,866 46,954 Net Income 2,865 50,015 54,989 100,857 Preferred stock dividends 386 386 1,158 1,158 Earnings Available for Common Stock $ 2,479 $ 49,629 $ 53,831 $ 99,699 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 Nine Months Ended September 30, 1996 1995 Operating Activities: Net income $ 54,989 $ 100,857 Adjustments to reconcile income to cash provided: Depreciation and amortization 66,236 56,519 Amortization of property under capital leases 6,197 5,695 Three Mile Island Unit 2 costs - (51,796) Voluntary enhanced retirement programs 33,626 - Nuclear outage maintenance costs, net 2,301 (1,407) Deferred income taxes and investment tax credits, net (1,453) 19,771 Deferred energy costs, net (1,934) 10,868 Allowance for other funds used during construction (116) (1,548) Changes in working capital: Receivables 15,056 14,802 Materials and supplies 3,565 3,789 Special deposits and prepayments (23,068) (7,859) Payables and accrued liabilities (46,698) 1,652 Other, net (1,106) 3,275 Net cash provided by operating activities 107,595 154,618 Investing Activities: Cash construction expenditures (84,119) (98,089) Contributions to decommissioning trusts (3,947) (3,947) Other, net (581) - Net cash required for investing activities (88,647) (102,036) Financing Activities: Issuance of long-term debt - 59,670 Increase/(Decrease) in notes payable, net 43,535 (61,453) Capital lease principal payments (5,933) (6,194) Contributions from parent corporation - 5,000 Retirement of long-term debt (25,009) (9) Dividends paid on common stock (30,000) (45,000) Dividends paid on preferred stock (1,158) (1,158) Net cash required by financing activities (18,565) (49,144) Net increase in cash and temporary cash investments from above activities 383 3,438 Cash and temporary cash investments, beginning of year 1,367 1,191 Cash and temporary cash investments, end of period $ 1,750 $ 4,629 Supplemental Disclosure: Interest paid $ 55,499 $ 50,846 Income taxes paid $ 42,863 $ 40,701 New capital lease obligations incurred $ 369 $ 10,451 The accompanying notes are an integral part of the consolidated financial statements. 18
GPU, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GPU, Inc. (GPU or the Company) (formerly General Public Utilities Corporation), a Pennsylvania corporation, is a holding company registered under the Public Utility Holding Company Act of 1935. The Company does not directly operate any utility properties, but owns all the outstanding common stock of three 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 business of these subsidiaries (known collectively as the GPU Energy companies) consists predominantly of the generation, transmission, distribution and sale of electricity. The Company also owns all of the common stock of GPU International, Inc. (formerly Energy Initiatives, Inc.), GPU Power, Inc. (formerly EI Power, Inc.) and GPU Electric, Inc. (formerly EI Energy, Inc.), (collectively, the GPU International Group) which develop, own and operate generation, transmission and distribution facilities and supply businesses in the United States and in foreign countries. GPU Service, Inc. (GPUS), a service company; GPU Nuclear, Inc. (GPUN), which operates and maintains the nuclear units of the GPU Energy companies; and GPU Generation, Inc. (Genco), which operates and maintains the GPU Energy companies' fossil- fueled and hydroelectric units, are also wholly-owned subsidiaries of the Company. All of these companies considered together with their subsidiaries are referred to as the "GPU Companies." These notes should be read in conjunction with the notes to consolidated financial statements included in the 1995 Annual Report on Form 10-K. The year-end condensed 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 1995 Annual Report on Form 10-K. 1. COMMITMENTS AND CONTINGENCIES NUCLEAR FACILITIES The GPU Energy companies have made investments in three major nuclear projects--Three Mile Island Unit 1 (TMI-1) and Oyster Creek, both of which are operating generation facilities, and Three Mile Island Unit 2 (TMI-2), which was damaged during a 1979 accident. TMI-1 and TMI-2 are jointly owned by JCP&L, Met-Ed and Penelec in the percentages of 25%, 50% and 25%, respectively. Oyster Creek is owned by JCP&L. At September 30, 1996 and December 31, 1995, the GPU Energy companies' net investment in TMI-1 and Oyster Creek, including nuclear fuel, was as follows: Net Investment (Millions) TMI-1 Oyster Creek September 30, 1996 JCP&L $156 $775 Met-Ed 301 - Penelec 148 - Total $605 $775 19 Net Investment (Millions) TMI-1 Oyster Creek December 31, 1995 JCP&L $166 $785 Met-Ed 318 - Penelec 156 - Total $640 $785 The GPU Energy companies' net investment in TMI-2 at September 30, 1996 was $92 million (of which JCP&L's, Met-Ed's and Penelec's shares were $82 million, $2 million and $8 million, respectively). The GPU Energy companies' net investment in TMI-2 at December 31, 1995 was $95 million (of which JCP&L's, Met-Ed's and Penelec's shares were $85 million, $2 million and $8 million, respectively). JCP&L is collecting revenues for TMI-2 on a basis which provides for the recovery of its remaining investment in the plant by 2008. Met-Ed and Penelec are collecting revenues for their remaining investments in TMI-2 from 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 now-assumed lives cannot be assured. Also, not all risks associated with the ownership or operation of nuclear facilities may be adequately insured or insurable. Consequently, the ability of electric utilities to obtain adequate and timely 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 NUCLEAR PLANT RETIREMENT COSTS). Management intends, in general, to seek recovery of any such costs through the ratemaking process, but recognizes that recovery is not assured (see COMPETITION AND THE CHANGING REGULATORY ENVIRONMENT). TMI-2: The 1979 TMI-2 accident resulted in significant damage to, and contamination of, the plant and a release of radioactivity to the environment. A cleanup program was completed in 1990, and after receiving Nuclear Regulatory Commission (NRC) approval, TMI-2 entered into long-term monitored storage in 1993. As a result of the accident and its aftermath, individual claims for alleged personal injury (including claims for punitive damages), which are material in amount, have been asserted against the Company 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. 20 At the time of the TMI-2 accident, as provided for in the Price-Anderson Act, the GPU Energy companies had (a) primary financial protection in the form of insurance policies with groups of insurance companies providing an aggregate of $140 million of primary coverage, (b) secondary financial protection in the form of private liability insurance under an industry retrospective rating plan providing for up to an aggregate of $335 million in premium charges under such plan, and (c) an indemnity agreement with the NRC for up to $85 million, bringing their total financial protection up to an aggregate of $560 million. Under the secondary level, the GPU Energy companies are subject to a retrospective premium charge of up to $5 million per reactor, or a total of $15 million (of which JCP&L's, Met-Ed's and Penelec's shares are $7.5 million, $5 million and $2.5 million, respectively). 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. The U.S. Supreme Court has denied petitions filed by the Company 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 the Company and the GPU Energy companies, and dismissed all of the 2,100 pending claims. The Court ruled that there was no evidence which created a genuine issue of material fact warranting submission of plaintiffs' claims to a jury. The plaintiffs have appealed the District Court's ruling to the Court of Appeals for the Third Circuit. There can be no assurance as to the outcome of this litigation. Based on the above, the Company and the GPU Energy companies believe that any liability to which they might be subject by reason of the TMI-2 accident will not exceed their financial protection under the Price-Anderson Act. NUCLEAR PLANT RETIREMENT COSTS Retirement costs for nuclear plants include decommissioning the radiological portions of the plants and the cost of removal of nonradiological structures and materials. The disposal of spent nuclear fuel is covered separately by contracts with the U.S. Department of Energy (DOE). 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, 21 respectively. The TMI-2 funding completion date is 2014, consistent with TMI-2's remaining in long-term storage and being decommissioned at the same time as TMI-1. Based on NRC studies, a comparable funding target was developed for TMI-2 which took the accident into account. The NRC funding targets (in 1996 dollars) are as follows: (Millions) Oyster TMI-1 TMI-2 Creek JCP&L $ 42 $ 67 $221 Met-Ed 86 136 - Penelec 42 67 - Total $170 $270 $221 The NRC continues to study the levels of these funding targets. Management cannot predict the effect that the results of this review will have on the funding targets. 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. They are as follows (in 1996 dollars): (Millions) Oyster GPU Energy Companies TMI-1 TMI-2 Creek Radiological decommissioning $306 $372 $360 Nonradiological cost of removal 76 36 * 34 Total $382 $408 $394 * Net of $5 million spent as of September 30, 1996. (Millions) Oyster JCP&L TMI-1 TMI-2 Creek Radiological decommissioning $ 77 $ 93 $360 Nonradiological cost of removal 19 9 * 34 Total $ 96 $102 $394 * Net of $1 million spent as of September 30, 1996. 22 (Millions) Met-Ed TMI-1 TMI-2 Radiological decommissioning $152 $186 Nonradiological cost of removal 38 18 * Total $190 $204 * Net of $3 million spent as of September 30, 1996. (Millions) Penelec TMI-1 TMI-2 Radiological decommissioning $77 $ 93 Nonradiological cost of removal 19 9 * Total $96 $102 * Net of $1 million spent as of September 30, 1996. The ultimate cost of retiring the GPU Energy companies' nuclear facilities may be different from the cost estimates contained in these site- specific studies. Such costs are subject to (a) the quarterly escalation of various cost elements (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 expense and accrue retirement costs based on amounts being collected from customers and contribute these amounts to external trust funds. In addition, JCP&L has contributed amounts it wrote off for TMI-2 nuclear plant decommissioning in 1990, and Met-Ed and Penelec have contributed amounts they wrote off for TMI-2 nuclear plant decommissioning in 1991, to TMI-2's external trust (see TMI-2 Future Costs). Amounts deposited in external trusts, including the interest earned on these funds, are classified as Nuclear Decommissioning Trusts on the Balance Sheets. Currently, the GPU Energy companies are collecting retirement costs which are less than the estimates in the 1995 site-specific studies, and will not increase their accruals until increased collections are permitted in rates. (See TMI-1 and Oyster Creek and TMI-2 Future Costs for discussion of the Stipulation of Final Settlement for JCP&L.) Accounting for retirement costs may change based upon the Financial Accounting Standards Board (FASB) Exposure Draft discussed below. The FASB has issued an Exposure Draft titled "Accounting for Certain Liabilities Related to Closure or Removal of Long-Lived Assets," which includes nuclear plant retirement costs. If the Exposure Draft is adopted, Oyster Creek and TMI-1 future retirement costs would have to be recognized as a liability immediately, rather than the current industry practice of accruing these costs in accumulated depreciation over the life of the plants. A regulatory asset for amounts probable of recovery through rates would also be established. Any amounts not probable of recovery through rates would have to be charged to expense. For TMI-2, a liability has already been recognized, based on the 1995 site-specific study (in 1996 dollars) since the plant is no longer operating (see TMI-2 Future Costs). The effective date of this accounting change could be as early as January 1, 1998. 23 This Exposure Draft also applies to fossil-fueled and hydroelectric generating plants. For these assets, a liability will have to be recognized when a legal or constructive obligation exists to perform dismantlement or removal activities. TMI-1 and Oyster Creek: The New Jersey Board of Public Utilities (NJBPU) has granted JCP&L annual revenues for TMI-1 and Oyster Creek retirement costs of $2.5 million and $13.5 million, respectively. These annual revenues are based on both the NRC funding targets for radiological decommissioning costs and a site-specific study which was performed in 1988 for nonradiological costs of removal. A Stipulation of Final Settlement (Final Settlement), pending before the NJBPU, would allow for annual increases in JCP&L's future collection of retirement costs of $2.7 million and $9 million for TMI-1 and Oyster Creek, respectively, beginning in 1998. These annual increases are based on the 1995 site-specific study estimates. (See discussion of the NJBPU's Final Settlement in RATE MATTERS, Management's Discussion and Analysis.) The Pennsylvania Public Utility Commission (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. Provision for the future expenditure of these funds has been made in accumulated depreciation, amounting to $88 million (of which JCP&L's, Met-Ed's and Penelec's shares are $26 million, $44 million and $18 million, respectively) for TMI-1 and $155 million for Oyster Creek at September 30, 1996. TMI-1 and Oyster Creek retirement costs are charged to depreciation expense over the expected service life of each nuclear plant, and amounted to $11 million (of which JCP&L's, Met-Ed's and Penelec's shares are $2 million, $6 million and $3 million, respectively) and $10 million, respectively, for the nine months ended September 30, 1996. Management believes that any TMI-1 and Oyster Creek retirement costs, in excess of those currently recognized for ratemaking purposes, should be recoverable under the current ratemaking process. TMI-2 Future Costs: The estimated liabilities for TMI-2 Future Costs (reflected as Three Mile Island Unit 2 Future Costs on the Balance Sheets) as of September 30, 1996 and December 31, 1995 are as follows: (Millions) Total JCP&L Met-Ed Penelec September 30, 1996 Radiological Decommissioning $372 $ 93 $186 $ 93 Nonradiological Cost of Removal 36* 9 18 9 Incremental Monitored Storage 17 4 9 4 Total $425 $106 $213 $106 * Net of $5 million (of which JCP&L's, Met-Ed's and Penelec's shares were $1 million, $3 million and $1 million, respectively) spent as of September 30, 1996. 24 (Millions) Total JCP&L Met-Ed Penelec December 31, 1995 Radiological Decommissioning $358 $90 $179 $89 Nonradiological Cost of Removal 37* 9 19 9 Incremental Monitored Storage 18 4 9 5 Total $413 $103 $207 $103 * Net of $3 million spent (of which JCP&L's, Met-Ed's and Penelec's shares were $.75 million, $1.5 million and $.75 million, respectively) as of December 31, 1995. Offsetting the $425 million liability at September 30, 1996 is $274 million (of which JCP&L's, Met-Ed's and Penelec's shares are $51 million, $147 million and $76 million, respectively) which is probable of recovery from customers and included in Three Mile Island Unit 2 Deferred Costs on the Balance Sheet, and $159 million (of which JCP&L's, Met-Ed's and Penelec's shares are $65 million, $66 million and $28 million, respectively) in trust funds for TMI-2 and included in Nuclear Decommissioning Trusts on the Balance Sheet. Earnings on trust fund deposits are included in amounts shown on the Balance Sheet under Three Mile Island Unit 2 Deferred Costs. TMI-2 decommissioning costs charged to depreciation expense for the nine months ended September 30, 1996 amounted to $10 million (of which JCP&L's, Met-Ed's and Penelec's shares are $2 million, $7 million and $1 million, respectively). The NJBPU and PaPUC have granted JCP&L and Met-Ed, respectively, decommissioning revenues for the remainder of the NRC funding target and allowances for the cost of removal of nonradiological structures and materials. Based on Met-Ed's rate order, Penelec has recorded a regulatory asset for that portion of such costs which it believes to be probable of recovery. The Final Settlement pending before the NJBPU would adjust JCP&L's future revenues for retirement costs based on the 1995 site-specific study estimates, beginning in 1998. At September 30, 1996 the accident-related portion of TMI-2 radiological decommissioning costs is considered to be $66 million (of which JCP&L's, Met-Ed's and Penelec's shares are $16 million, $34 million and $16 million, respectively), which is the difference between the 1995 TMI-1 and TMI-2 site- specific study estimates (in 1996 dollars) of $306 million and $372 million, respectively (of which JCP&L's, Met-Ed's and Penelec's shares are $77 million and $93 million, $152 million and $186 million, and $77 million and $93 million, respectively). 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 $66 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. 25 As a result of TMI-2's entering long-term monitored storage in 1993, the GPU Energy companies are incurring incremental storage costs of approximately $1 million (of which JCP&L's, Met-Ed's and Penelec's shares are $.25 million, $.5 million and $.25 million, respectively) annually. The GPU Energy companies estimate that the remaining storage costs will total $17 million through 2014, the expected retirement date of TMI-1. JCP&L's rates reflect its share of these costs. INSURANCE The GPU Companies have insurance (subject to retentions and deductibles) for their 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 the GPU Companies 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 the GPU Companies. 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 the GPU Companies' liability to third parties for a nuclear incident at one of their sites to approximately $8.9 billion. Coverage for the first $200 million of such liability is provided by private insurance. The remaining coverage, or secondary financial protection, is provided by retrospective premiums payable by all nuclear reactor owners. Under secondary financial protection, a nuclear incident at any licensed nuclear power reactor in the country, including those owned by the GPU Energy companies, could result in assessments of up to $79 million per incident for each of the GPU Energy companies' two operating reactors, subject to an annual maximum payment of $10 million per incident per reactor. In addition to the retrospective premiums payable under Price-Anderson, the GPU Energy companies are also subject to retrospective premium assessments of up to $68 million (of which JCP&L's, Met-Ed's and Penelec's shares are $41 million, $18 million and $9 million, respectively) in any one year under insurance policies applicable to nuclear operations and facilities. The GPU Energy companies have insurance coverage for incremental replacement power costs resulting from an accident-related outage at their nuclear plants. Coverage commences after the first 21 weeks of the outage and continues for three years beginning at $1.8 million for Oyster Creek and $2.6 million for TMI-1 per week for the first year, decreasing to 80% of such amounts for years two and three. 26 COMPETITION AND THE CHANGING REGULATORY 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 nonutility generators (NUGs) for the purchase of energy and capacity for periods of up to 25 years each for JCP&L and Penelec, and 26 years for Met-Ed. The majority of these agreements contain certain contract limitations and subject the NUGs to penalties for nonperformance. While a few of these facilities are dispatchable, most are must-run and generally obligate the GPU Energy companies to purchase, at the contract price, the output up to the contract limits. As of September 30, 1996, facilities covered by these agreements having 1,624 MW (of which JCP&L's, Met-Ed's and Penelec's shares are 892 MW, 335 MW and 397 MW, respectively) of capacity were in service. Actual payments to NUGs from 1993 through 1995, and estimated payments from 1996 through 2000, assuming that all facilities which have existing agreements, or which have obtained orders granting them agreements, enter service, are as follows: Payments Under NUG Agreements (Millions) Total JCP&L Met-Ed Penelec 1993 $ 491 $ 292 $ 95 $ 104 1994 528 304 101 123 1995 670 381 131 158 * 1996 701 362 157 182 * 1997 697 373 140 184 * 1998 714 377 145 192 * 1999 728 384 143 201 * 2000 751 395 145 211 * Estimates (1996 amounts consist of actual payments through August). The 1996 amounts are reflected in the rates currently being charged by the GPU Energy companies. From 1996 through 2000, JCP&L is forecast to purchase between 5,500 GWH and 5,800 GWH of electric generation per year at contract prices which are estimated to escalate approximately 0.7% annually on a unit cost (cents/KWH) basis during this period. From 2001 through 2008, JCP&L is forecast to purchase between 5,700 GWH and 5,800 GWH of electric generation per year at an average annual cost of $467 million. The contract prices during this period are estimated to escalate approximately 4.0% annually. After 2008, when major contracts begin to expire, purchases steadily decline to approximately 1,900 GWH in 2014. The contract unit cost is estimated to escalate approximately 1.7% annually from 2009 through 2014, with a total average annual cost of $267 million during this period. All of JCP&L's contracts will expire at the end of 2015. During this entire period, the NUG fuel mix averages approximately 95% natural gas. From 1996 through 2000, Met-Ed is forecast to purchase between 1,900 GWH and 2,100 GWH of electric generation per year at contract prices which are estimated to escalate approximately 0.7% annually on a unit cost basis during this period. From 2001 through 2008, Met-Ed is forecast to purchase between 1,500 GWH and 1,900 GWH of electric generation per year at an average annual cost of $149 million. The contract prices during this period are estimated to 27 escalate approximately 3.6% annually on a unit cost basis. From 2009 through 2012, Met-Ed is forecast to purchase between 1,300 GWH and 1,500 GWH of electric generation per year at an average annual cost of $141 million. During this period, the contract prices are estimated to escalate approximately 1.2% annually on a unit cost basis. After 2012, Met-Ed's remaining contracts expire rapidly through 2015. During this entire period, the NUG fuel mix averages approximately 60%-75% coal/waste coal. From 1996 through 2000, Penelec is forecast to purchase approximately 2,900 GWH of electric generation per year at contract prices which are estimated to escalate approximately 3.8% annually on a unit cost basis during this period. From 2001 through 2008, Penelec is forecast to purchase between 2,800 GWH and 2,900 GWH of electric generation per year at an average annual cost of $221 million. The contract prices during this period are estimated to escalate approximately 2.2% annually on a unit cost basis. After 2008, when major contracts begin to expire, purchases steadily decline to approximately 1,500 GWH in 2017. The contract unit cost is estimated to escalate approximately 3.5% annually from 2009 through 2017, with a total average annual cost of $194 million during this period. After 2017, Penelec's remaining contracts expire rapidly through 2019. During this entire period, the NUG fuel mix averages approximately 95% coal/waste coal. The estimates in the above table and related disclosures do not include amounts under purchase power agreements totaling 457 MW being negotiated by Penelec and Met-Ed with the AES Power Company (AES). AES has acquired the interests of the developers of the proposed York County, Blue Mountain and Altoona facilities. Met-Ed and Penelec have agreed to pay restructuring costs and conduct negotiations with AES for new, competitively priced power purchase agreements. If these negotiations are unsuccessful, Met-Ed has agreed to pay AES an additional $5 million for the proposed York County facility and $23 million for the proposed Blue Mountain facility, and Penelec has agreed to pay AES up to $8.3 million for the proposed 80 MW Altoona facility. In addition, the estimates do not include amounts payable under a power purchase agreement between Penelec and the developers of a proposed 80 MW coal-fired cogeneration facility in Erie, Pennsylvania, the terms of which are the subject of negotiations. The emerging competitive generation market has created uncertainty regarding the forecasting of the companies' energy supply needs which has caused the GPU Energy companies to change their supply strategy to seek shorter-term agreements offering more flexibility. The cost of near- to intermediate-term (i.e., one to four years) energy supply from generation facilities now in service is currently and is expected to continue to be priced below the costs of new supply sources, at least for some time. The projected cost of energy from new generation supply sources has also decreased due to improvements in power plant technologies and reduced forecasted fuel prices. As a result of these developments, the rates under virtually all of the GPU Energy companies' NUG agreements are substantially in excess of current and projected prices from alternative sources. The GPU Energy companies currently estimate that for 1998, when substantially all of these NUG projects are scheduled to be in service, above market payments (excluding those to the AES and Erie projects discussed above) benchmarked against the expected cost of electricity produced by a new gas- fired combined cycle facility, will range from $175 million to $260 million (of which JCP&L's, Met-Ed's and Penelec's shares are $85 million to $130 million, $40 million to $60 million, and $50 million to $70 million, respectively). The amount of these estimated above-market payments may 28 increase or decrease substantially based upon, among other things, payment escalations in the contract terms, changes in fuel prices and changes in the capital and operating cost of new generating equipment. 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 while seeking to recover the costs through their energy adjustment clauses (see Managing Nonutility Generation, in Management's Discussion and Analysis) and (4) initiating proceedings before federal and state agencies, and in the courts, where appropriate. In addition, the GPU Energy companies intend to avoid, to the maximum extent practicable, entering into any new NUG agreements that are not needed or not consistent with current market pricing and are supporting legislative efforts to repeal PURPA. These efforts may result in claims against the GPU Companies for substantial damages. There can, however, be no assurance as to the extent these efforts will be successful in whole or in part. The GPU Energy companies have been granted recovery of their NUG costs (including certain buyout costs) from customers by the PaPUC and NJBPU and expect to continue to pursue such recovery. 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 OTHER COMMITMENTS AND CONTINGENCIES for discussion of the NJBPU generic proceeding addressing the recovery of NUG capacity costs.) The discussion of "Nonutility Generation Agreements" on pages 27 through 29 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. Regulatory Assets and Liabilities: In accordance with Statement of Financial Accounting Standards No. 71 (FAS 71), "Accounting for the Effects of Certain Types of Regulation," the GPU Companies' financial statements reflect assets and costs based on current cost-based ratemaking regulation. Continued accounting under FAS 71 requires that the following criteria be met: a) A utility's rates for regulated services provided to its customers are established by, or are subject to approval by, an independent third-party regulator; b) The regulated rates are designed to recover specific costs of providing the regulated services or products; and c) In view of the demand for the regulated services and the level of competition, direct and indirect, it is reasonable to assume that rates set at levels that will recover a utility's costs can be charged to and collected from customers. This criteria requires consideration of anticipated changes in levels of demand or competition during the recovery period for any capitalized costs. The GPU Energy companies' operations can cease to meet those criteria for various reasons, including deregulation, a change in the method of regulation, or a change in the competitive environment for their regulated services. 29 Regardless of the reason, should the GPU Energy companies' operations cease to meet those criteria, they should discontinue application of FAS 71 and report that discontinuation by eliminating from their Balance Sheets the effects of any actions of regulators that had been recognized as assets and liabilities pursuant to FAS 71, but which would not have been recognized as assets and liabilities by enterprises in general. In accordance with the provisions of FAS 71, the GPU Energy companies have deferred certain costs pursuant to actions of the NJBPU, PaPUC and Federal Energy Regulatory Commission (FERC) and are recovering, or expect to recover, such costs in electric rates charged to customers. Regulatory assets are reflected in the Deferred Debits and Other Assets section of the Consolidated Balance Sheets, and regulatory liabilities are reflected in the Deferred Credits and Other Liabilities section of the Consolidated Balance Sheets. Regulatory assets and liabilities, as of September 30, 1996 and December 31, 1995, were as follows: GPU and Subsidiary Companies Assets (In Thousands) September 30, December 31, 1996 1995 Income taxes recoverable through future rates $ 485,931 $ 527,584 TMI-2 deferred costs 365,949 368,712 NUG contract termination costs 223,325 84,132 Unamortized property losses 101,425 105,729 Other postretirement benefits 73,175 58,362 Manufactured gas plant remediation 53,156 29,608 N.J. unit tax 47,327 51,518 Unamortized loss on reacquired debt 46,568 50,198 Load and demand-side management programs 43,113 48,071 DOE enrichment facility decommissioning 36,126 38,519 Nuclear fuel disposal fee 23,482 21,946 N.J. low-level radwaste disposal 17,688 21,778 Storm damage 20,423 18,294 Other 10,787 15,257 Total $1,548,475 $1,439,708 Liabilities (In Thousands) September 30, December 31, 1996 1995 Income taxes refundable through future rates $ 89,899 $ 94,931 Other 2,357 3,068 Total $ 92,256 $ 97,999 30 JCP&L Assets (In Thousands) September 30, December 31, 1996 1995 Income taxes recoverable through future rates $ 129,080 $ 134,787 TMI-2 deferred costs 133,287 138,472 NUG contract termination costs 139,000 17,482 Unamortized property losses 95,821 100,176 Other postretirement benefits 41,157 32,390 Manufactured gas plant remediation 53,156 29,608 N.J. unit tax 47,327 51,518 Unamortized loss on reacquired debt 32,165 34,285 Load and demand side management programs 43,113 48,071 DOE enrichment facility decommissioning 22,998 24,503 Nuclear fuel disposal fee 25,107 23,165 N.J. low-level radwaste disposal 17,688 21,778 Storm damage 20,423 18,294 Other 6,185 10,199 Total $ 806,507 $ 684,728 Liabilities (In Thousands) September 30, December 31, 1996 1995 Income taxes refundable through future rates $ 33,880 $ 36,343 Other 826 1,254 Total $ 34,706 $ 37,597 Met-Ed Assets (In Thousands) September 30, December 31, 1996 1995 Income taxes recoverable through future rates $ 146,277 $ 178,513 TMI-2 deferred costs 148,623 149,004 NUG contract termination costs 79,325 66,650 Unamortized property losses 3,192 3,273 Other postretirement benefits 32,018 25,972 Unamortized loss on reacquired debt 6,403 6,945 DOE enrichment facility decommissioning 8,752 9,344 Nuclear fuel disposal fee (1,216) (1,025) Other 918 1,299 Total $ 424,292 $ 439,975 Liabilities (In Thousands) September 30, December 31, 1996 1995 Income taxes refundable through future rates $ 23,657 $ 24,765 Other 1,556 1,696 Total $ 25,213 $ 26,461 31 Penelec Assets (In Thousands) September 30, December 31, 1996 1995 Income taxes recoverable through future rates $ 210,574 $ 214,284 TMI-2 deferred costs 84,039 81,236 NUG contract termination costs 5,000 - Unamortized property losses 2,412 2,280 Unamortized loss on reacquired debt 8,000 8,968 DOE enrichment facility decommissioning 4,376 4,672 Nuclear fuel disposal fee (409) (194) Other 3,684 3,759 Total $ 317,676 $ 315,005 Liabilities (In Thousands) September 30, December 31, 1996 1995 Income taxes refundable through future rates $ 32,362 $ 33,823 Other (25) 118 Total $ 32,337 $ 33,941 Income taxes recoverable/refundable through future rates: Represents amounts deferred due to the implementation of FAS 109, "Accounting for Income Taxes," in 1993. TMI-2 deferred costs: Represents costs that are recoverable through rates for the GPU Energy companies' remaining investment in the plant and fuel core, radiological decommissioning and the cost of removal of nonradiological structures and materials in accordance with the 1995 site-specific study (in 1996 dollars) and JCP&L's share of long-term monitored storage costs. For additional information, see TMI-2 Future Costs. NUG contract termination costs: Represents amounts incurred for terminating power purchase contracts with NUGs, for which rate recovery has been granted or is probable (see Managing Nonutility Generation, in Management's Discussion and Analysis). Unamortized property losses: Consists mainly of costs associated with JCP&L's Forked River Project, which are included in rates. Other postretirement benefits: Includes costs associated with the adoption of FAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," which are deferred in accordance with Emerging Issues Task Force Issue 92-12, "Accounting for OPEB Costs by Rate-Regulated Enterprises." Manufactured gas plant remediation: Consists of costs which are probable of recovery, with interest, associated with the investigation and remediation of several gas manufacturing plants. For additional information, see ENVIRONMENTAL MATTERS. N.J. unit tax: Represents certain state taxes for which JCP&L received NJBPU approval in 1993 to recover, with interest, over a ten-year period. 32 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 that are currently being recovered, with interest, through JCP&L's retail base rates pursuant to a 1993 NJBPU order, and other DSM program expenditures that are recovered annually, with interest. Also includes provisions for lost revenues between base rate cases and performance incentives. DOE enrichment facility decommissioning: Represents payments to the DOE over a 15-year period beginning in 1994, which are currently being collected through the GPU Energy companies' energy adjustment clauses. Nuclear fuel disposal fee: Represents amounts recoverable through rates for estimated future disposal costs for spent nuclear fuel at Oyster Creek and TMI-1 in accordance with the Nuclear Waste Policy Act of 1982. N.J. low-level radwaste disposal: Represents the accrual of 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. Storm damage: Relates to incremental noncapital costs associated with various storms in the JCP&L service territory that are not recoverable through insurance. These amounts were deferred based upon past rate recovery precedent. An annual amortization amount is included in JCP&L's retail base rates and is charged to expense. Amounts related to the decommissioning of TMI-1 and Oyster Creek, which are not included in Regulatory Assets on the Balance Sheet, are separately disclosed in NUCLEAR PLANT RETIREMENT COSTS. The GPU Energy companies continue to be subject to cost-based ratemaking regulation. However, in the event that either all or a portion of their operations are no longer subject to these provisions, the related regulatory assets, net of regulatory liabilities, would have to be written off and charged to expense. In addition, any above market costs of purchased power commitments would have to be expensed (see Nonutility Generation Agreements), and additional depreciation expense would have to be recorded for any differences created by the use of a regulated depreciation method that is different from that which would have been used under generally accepted accounting principles for enterprises in general. Under Financial Accounting Standards No. 121 (FAS 121), "Accounting for the Impairment of Long-Lived Assets," described below, the GPU Companies would be required to recognize impairment losses for long-lived assets (including uneconomical generation plant), identifiable intangibles and capital leases if the carrying amounts of those assets are greater than estimated cash flows expected to be generated from the use and eventual disposition of the assets. The experience gained from the deregulation of the telecommunications industry indicates that substantial write-offs may result with the discontinuation of FAS 71. At this time, the Company is unable to determine when and to what extent FAS 71 will no longer be applicable. In 1995, the FASB issued FAS 121, which requires that regulatory assets meet the recovery criteria of FAS 71 on an ongoing basis in order to avoid a writedown. In addition, FAS 121 requires that long-lived assets, identifiable 33 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. The implementation of FAS 121 by the GPU Companies in 1995 did not have an impact on results of operations because management believes the carrying amounts of all assets are probable of recovery from customers. However, as the GPU Energy companies enter a more competitive environment, some assets could be subject to impairment, thereby necessitating writedowns, which could have a material adverse effect on the GPU Companies' results of operations and financial condition. ENVIRONMENTAL MATTERS As a result of existing and proposed legislation and regulations, and ongoing legal proceedings dealing with environmental matters, including but not limited to acid rain, water quality, air quality, global warming, electromagnetic fields, and storage and disposal of hazardous and/or toxic wastes, the GPU Companies 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, mine refuse piles and generating facilities, and with regard to electromagnetic fields, postpone or cancel the installation of, or replace or modify, utility plant, the costs of which could be material. To comply with the federal Clean Air Act Amendments of 1990 (Clean Air Act), the GPU Energy companies expect to spend up to $410 million (of which JCP&L's, Met-Ed's and Penelec's shares are $42 million, $163 million and $205 million, respectively) for air pollution control equipment by the year 2000, of which approximately $241 million (of which JCP&L's, Met-Ed's and Penelec's shares are $44 million, $95 million and $102 million, respectively) 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 emission allowance 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 nitrogen oxide (NOx) emissions it believes necessary to meet ambient air quality standards for ozone and the statutory deadlines set by the Clean Air Act. The GPU Energy companies expect that the U.S. Environmental Protection Agency (EPA) will approve state implementation plans consistent with the proposal, and that as a result, they will spend an estimated $60 million (of which Met-Ed's and Penelec's shares are $14 million and $46 million, respectively) (included in the Clean Air Act total), beginning in 1997, to meet the 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. The GPU Energy companies are unable to determine what additional costs, if any, will be incurred. The GPU Companies have been formally notified by the EPA and state environmental authorities that they are 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 11 hazardous and/or toxic 34 waste sites. The GPU Companies have been named PRPs as follows (in some cases, more than one GPU Company is named for a given site): JCP&L MET-ED PENELEC GPUN GPU 6 4 2 1 1 In addition, 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. The GPU Companies have also been named in lawsuits requesting damages for hazardous and/or toxic substances allegedly released into the environment. The ultimate cost of remediation will depend upon changing circumstances as site investigations continue, including (a) the existing technology required for site cleanup, (b) the remedial action plan chosen and (c) the extent of site contamination and the portion attributed to the GPU Companies. 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 Consent Order, which became effective April 21, 1995, and is negotiating with the PaDEP to determine a schedule for long-term remediation, based on future operating scenarios, including reboilering the station using fluidized bed combustion technology. This remediation approach would allow the existing refuse piles to be mixed with the ash produced by the reboilered station, at an estimated cost of approximately $2.25 million. Negotiations with the PaDEP indicate that this approach would be acceptable, and as of September 30, 1996, Penelec has recorded an estimated environmental liability of $2.25 million on its Balance Sheet. If the station is not reboilered using such technology, remediation of the site is estimated to range from $12 million to $25 million. 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's plans to reboiler the station are contingent upon its ability to market the output through third party power sales agreements. Unsuccessful efforts to date to market the station's power have reduced the likelihood that the plant will be reboilered. Penelec is currently reviewing its available options. If the decision is not to reboiler the station using fluidized bed combustion technology, an additional liability of $9.75 million will be recorded. JCP&L has entered into agreements with the New Jersey Department of Environmental Protection (NJDEP) for the investigation and remediation of 17 formerly owned manufactured gas plant (MGP) sites. JCP&L has also entered into various cost-sharing agreements with other utilities for most of the sites. As of September 30, 1996, JCP&L has spent approximately $22 million in connection with the cleanup of these sites. In addition, JCP&L has recorded an estimated environmental liability of $50 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. JCP&L increased the estimated liability by $22 million in the third quarter of 1996 to reflect an extension of the period during which operation and maintenance expenditures relating to these sites are now considered most likely to be incurred. Moreover, the cost to clean up these sites could be 35 materially in excess of $50 million due to significant uncertainties, including changes in acceptable remediation methods and technologies. In 1994, the NJBPU approved a mechanism similar to JCP&L's Levelized Energy Adjustment Clause (LEAC) for the recovery of future MGP remediation costs. However, the NJBPU has also directed that recovery of MGP remediation costs cease until such expenditures equaled the funds already collected from customers. At September 30, 1996, JCP&L had recorded on its Balance Sheet a regulatory asset of $53 million, which included approximately $50 million related to expected future costs discussed above and $3 million for remediation expenditures in excess of collections from customers (net of interest) (see Regulatory Assets and Liabilities). JCP&L is continuing to defer these remediation expenditures and accrue interest as previously authorized by the NJBPU, and is continuing to defer estimated future remediation costs. The Final Settlement pending before the NJBPU allows JCP&L to continue this accounting treatment and establishes an adjustment clause for the recovery of remediation costs in the future. JCP&L is pursuing reimbursement from its insurance carriers for remediation costs already spent and for future estimated costs. In 1994, JCP&L filed a complaint with the Superior Court of New Jersey against several of its insurance carriers, relative to these MGP sites. Pretrial discovery has begun in this case. OTHER COMMITMENTS AND CONTINGENCIES In June and July 1996, management offered voluntary enhanced retirement programs to 745 bargaining and 399 non-bargaining employees. Of these employees, 493 bargaining and 347 non-bargaining accepted the retirement programs, resulting in an 8% reduction in GPU's total workforce and a third quarter pre-tax charge to earnings of $122.7 million (of which JCP&L's, Met-Ed's and Penelec's shares were $62.9 million, $26.2 million and $33.6 million, respectively). The charges for these programs are included in Other Operation and Maintenance on the Income Statement. The GPU Companies' construction programs, for which substantial commitments have been incurred and which extend over several years, contemplate expenditures of $471 million (of which JCP&L's, Met-Ed's, Penelec's and GPUS' shares are $242 million, $88 million, $124 million and $17 million, respectively) during 1996. As a consequence of reliability, licensing, environmental and other requirements, additions to utility plant may be required relatively late in their expected service lives. If such additions are made, current depreciation allowance methodology may not make adequate provision for the recovery of such investments during their remaining lives. Management intends to seek recovery of such costs through the ratemaking process, but recognizes that recovery is not assured. 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 1996 and 2004, require the purchase of either fixed or minimum amounts of the stations' coal requirements. The price of the coal under the contracts is based on adjustments of indexed cost components. One of Penelec's contracts for the Homer City station also includes a provision for the payment of postretirement benefit costs. The GPU Energy companies' share of the cost of coal purchased under these agreements is expected to 36 aggregate $116 million (of which JCP&L's, Met-Ed's and Penelec's shares are $22 million, $18 million and $76 million, respectively) for 1996. 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 734 MW in 1996, declining to 527 MW in 1999 and 345 MW in 2004. Payments pursuant to these agreements are estimated to be $164 million in 1996, $145 million in 1997, $128 million in 1998, $104 million in 1999 and $84 million in 2000. In October 1996, JCP&L was named as a defendant in a breach of contract lawsuit against Freehold Cogeneration Associates (Freehold) brought by Nestle Beverage Company (Nestle) in the New Jersey Superior Court. The lawsuit relates to the April 1996 agreement under which JCP&L agreed to buy out the power purchase agreement for the proposed 110 MW Freehold cogeneration project. Nestle is seeking damages of at least $75 million for Freehold's alleged breach of its steam sales agreement with Nestle and approximately $412 million in damages against JCP&L for alleged unlawful interference with that agreement. Nestle has also requested punitive damages in an unspecified amount. JCP&L believes the claims against it are without merit. Freehold had previously filed a complaint against Nestle in Baltimore County Court seeking, among other things, a declaratory judgment that Freehold had validly terminated the steam sales agreement and had no liability to Nestle thereunder. Nestle has filed a motion to dismiss that complaint. There can be no assurance of the outcome of these proceedings. Genco has constructed a 141 MW gas-fired combustion turbine at JCP&L's Gilbert generating station. This estimated $50 million project, of which $48 million has been spent, was placed in service in July 1996. In 1995, the NJDEP issued an air permit for the facility based, in part, on the NJBPU's 1994 order which found that New Jersey's Electric Facility Need Assessment Act is not applicable and that construction of this facility, without a market test, is consistent with New Jersey energy policies. An industry trade group representing NUGs appealed the NJDEP's issuance of the air permit and the NJBPU's order to the Appellate Division of the New Jersey Superior Court. In October 1996, the Appellate Division dismissed the appeal. In 1993, the NJBPU instituted a generic proceeding to address the appropriate recovery of capacity costs associated with electric utility power purchases from NUG projects. The proceeding was initiated, in part, to respond to contentions of the Division of the Ratepayer Advocate that by permitting utilities to recover such costs through the levelized energy adjustment clause (LEAC), an excess or "double" recovery may result when combined with the recovery of the utilities' embedded capacity costs through their base rates. In 1994, the NJBPU ruled that the LEAC periods prior to March 1991 were considered closed but subsequent LEAC periods remain open for further investigation. JCP&L estimates that the potential refund liability for the LEAC periods from March 1991 through February 1996, the end of the most recent LEAC period, is $55 million. The Final Settlement which is now pending before the NJBPU would resolve all remaining issues in this proceeding. (See RATE MATTERS in Management's Discussion and Analysis). There can be no assurance as to the outcome of this proceeding. 37 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 $10 million before tax. While a capacity factor below 40% would generate no specific monetary charge, it would require the issue to be brought before the NJBPU for review. The annual measurement period, which begins in March of each year, coincides with that used for the LEAC. Legislation has been proposed in New Jersey which would require the NJBPU to conduct a formal investigation whenever a nuclear plant is, or is anticipated to be, out of service for more than three months, to determine whether costs associated with the outage should be excluded from rates. As of September 30, 1996, approximately 53% of the GPU Companies' workforce was represented by unions for collective bargaining purposes. The JCP&L collective bargaining agreement, covering 44% of the GPU Energy companies' union employees, expired in October 1996. On November 6, 1996, union and management representatives reached agreement on a tentative work contract, which is subject to approval by the union membership. Niagara Mohawk Power Corporation (NIMO) has filed with the New York Public Service Commission a proposed restructuring plan that it claims may be needed to avoid seeking reorganization under Chapter XI of the Bankruptcy Code. GPU International, Inc. has ownership interests, with an aggregate book value of approximately $33 million, in three NUG projects which have long-term purchase power agreements with NIMO. In August 1996, NIMO offered to buyout or restructure 44 of its NUG power purchase agreements, including those for the three GPU International, Inc. projects. GPU International, Inc., in conjunction with the other NUG developers, is discussing the proposal with NIMO. There can be no assurance as to the outcome of this matter. NIMO has also initiated actions in federal court seeking to invalidate numerous NUG contracts, including those for the GPU International, Inc. projects. GPU International, Inc. has filed motions to dismiss the complaint and is vigorously defending these actions. There can be no assurance as to the outcome of these proceedings. At September 30, 1996, the GPU International Group had investments totaling approximately $700 million in facilities located in several foreign countries. Although management attempts to mitigate the risk of investing in certain foreign countries by securing political risk insurance, the GPU International Group faces additional risks inherent to operating in such locations, including foreign currency fluctuations (see GPU INTERNATIONAL GROUP in Management's Discussion and Analysis). During the normal course of the operation of their businesses, in addition to the matters described above, the GPU Companies are from time to time involved in disputes, claims and, in some cases, as defendants in litigation in which compensatory and punitive damages are sought by the public, customers, contractors, vendors and other suppliers of equipment and services and by employees alleging unlawful employment practices. While management does not expect that the outcome of these matters will have a material effect on the GPU Companies' financial position or results of operations, there can be no assurance that this will continue to be the case. 38 2. ACQUISITION OF MIDLANDS ELECTRICITY PLC In May 1996, GPU and Cinergy Corp. (Cinergy) formed Avon Energy Partners plc (Avon), a wholly owned subsidiary of Avon Energy Partners Holdings (Holdings). Holdings is a 50/50 joint venture formed to acquire Midlands Electricity plc (Midlands), an English regional electric company (REC). Through a cash tender offer, Avon has acquired the outstanding shares of Midlands for approximately $2.6 billion. GPU's 50% interest in Holdings is held by EI UK Holdings, Inc. (EI UK), a wholly-owned subsidiary of GPU Electric, Inc. EI UK and Cinergy have each invested approximately $500 million in Holdings. EI UK has borrowed approximately $500 million through a GPU guaranteed five-year bank term loan facility to fund its investment in Holdings. Holdings has borrowed approximately $1.6 billion through a non- recourse term loan and revolving credit facility to provide for the balance of the acquisition price. Midlands, one of 12 RECs in the United Kingdom, distributes and supplies electricity to 2.2 million customers in England in an area with a population of five million. Midlands also owns a generation business that produces electricity domestically and internationally and a gas supply company that provides natural gas to 8,000 customers in England. EI UK accounts for its 50% investment in Holdings using the equity method of accounting (see Note 3 - GPU INTERNATIONAL GROUP EQUITY INVESTMENTS). Accordingly, EI UK's investment is reported on GPU's consolidated Balance Sheets in GPU International Group investments, net, and its proportionate share of earnings from Holdings is reflected on the consolidated Income Statements in Other Income and Deductions. Avon beneficially owned approximately 28% and 100% of the outstanding common stock of Midlands at May 31, and September 30, respectively. As of September 30, 1996, Avon had purchased Midlands shares at a cost of approximately $2.6 billion. Accordingly, EI UK has recorded its proportionate share of Holdings' second and third quarter income, which is reflected in GPU's results of operations. The acquisition of Midlands by Avon is accounted for under the purchase method of accounting. The total acquisition cost will exceed the preliminary estimated value of net assets by approximately $1.7 billion. This excess amount is considered goodwill and is amortized to expense on a straight line basis over 40 years. The amount of goodwill will be revised by the end of 1996 when the final valuation of net assets is expected to be completed. 3. GPU INTERNATIONAL GROUP EQUITY INVESTMENTS The GPU International Group has investments in joint ventures and affiliates involved in power production, transmission and distribution in the United States and foreign countries. The GPU International Group uses the equity method of accounting for its investments in which it has the ability to exercise significant influence (generally evidenced by a 20% to 50% ownership interest). Brooklyn Energy, LP, in which the GPU International Group currently has a 75% ownership interest, is being accounted for under the equity method of accounting because of agreements that may reduce the GPU International Group's ownership interest to 27% based on actual plant performance. Investments accounted for under the equity method follow: 39 Ownership Investment Location of Operations Percentage Brooklyn Energy, LP Canada 75% Avon Energy Partners Holdings (Midlands) United Kingdom 50% Solaris Power Australia 50% Prime Energy, LP United States 50% Onondaga Cogen, LP United States 50% Pasco Cogen, Ltd. United States 50% Lake Cogen, Ltd. United States 42% FPB Cogeneration Partners, LP United States 30% Termobarranquilla S.A. Colombia 29% Polsky Energy Corporation United States & Canada 25% Selkirk Cogeneration Partners, LP United States 19% EnviroTech Investment Fund United States 10% Project Orange Associates, LP United States 4% Ada Cogeneration, LP * United States 1% OLS Power, LP United States 1% * Sold on November 1, 1996 Summarized financial information for the GPU International Group's equity investments, including both the GPU International Group's ownership interests and the non-ownership interests, is as follows: (In Thousands) Balance Sheet Data 9/30/96 12/31/95 Current Assets $ 637,188 $ 248,012 Noncurrent Assets 6,205,851 1,962,238 Current Liabilities (1,013,494) (220,796) Noncurrent Liabilities (4,502,301) (1,693,669) Net Assets $ 1,327,244 $ 295,785 GPU International Group's Equity in Net Assets $ 656,001 $ 25,341 (In Thousands) Nine Months Ended Earnings Data 9/30/96 9/30/95 Revenue $ 1,270,796 $ 293,979 Operating Income $ 181,168 $ 69,118 Net Income/(Loss) $ 40,418 $ (845) GPU International Group's Equity in Net Income/(Loss) $ 15,252 $ (1,516) As of September 30, 1996, the amount of investments accounted for under the equity method included goodwill in the amount of approximately $1.7 billion, which is amortized to expense over periods not exceeding 40 years. The GPU International Group also has a 50% ownership interest in Empresa Guaracachi, S.A., a Bolivian electric generating company, which was acquired in 1995 for approximately $47 million. Empresa Guaracachi is accounted for as a consolidated entity in GPU's financial statements. 40 In addition, the GPU International Group has a 100% ownership interest in Mid-Georgia Cogen, L.P., a cogeneration facility under construction, which is currently accounted for as a consolidated entity in GPU's financial statements. Management intends to form a partnership during the construction period, at which time it will begin using the equity method to account for its investment. 41 GPU, Inc. and Subsidiary Companies Management's Discussion and Analysis of Financial Condition and Results of Operations GPU, Inc. (GPU or the Company) (formerly General Public Utilities Corporation) owns all the outstanding common stock of three electric utilities -- Jersey Central Power & Light Company (JCP&L), Metropolitan Edison Company (Met-Ed) and Pennsylvania Electric Company (Penelec) (known collectively as the GPU Energy companies). The Company also owns all the common stock of GPU International, Inc. (formerly Energy Initiatives, Inc.), GPU Power, Inc. (formerly EI Power, Inc.) and GPU Electric, Inc. (formerly EI Energy, Inc.) (collectively the GPU International Group); GPU Service, Inc. (GPUS); GPU Nuclear, Inc. (GPUN); and GPU Generation, Inc. (Genco). All of these companies considered together with their subsidiaries are referred to as the "GPU Companies". The GPU International Group develops, owns and operates generation, transmission and distribution facilities and supply businesses in the United States and foreign countries. The GPU International Group has 50% ownership interests in distribution and supply businesses serving 2.2 million customers in England (see Note 2 to GPU's Consolidated Financial Statements), and 230,000 customers in Australia. The GPU International Group also has ownership interests in eleven operating combined-cycle cogeneration plants located in the United States totaling 932 MW of capacity and twelve operating generating facilities located in foreign countries totaling 2,514 MW of capacity. The following is management's discussion of significant factors that affected the interim financial condition and results of operations. This should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations included in the GPU Companies' combined 1995 Annual Report on Form 10-K. GPU RESULTS OF OPERATIONS GPU's earnings for the third quarter ended September 30, 1996 were $35.8 million (unaudited), or $0.29 per share, compared to 1995 third quarter earnings of $234.3 million (unaudited), or $2.02 per share. Earnings for the three months ended September 30, 1996 would have been $110.3 million, or $0.91 per share, compared to earnings of $137.8 million, or $1.18 per share for the same period in 1995, if third quarter 1995 and 1996 nonrecurring items are excluded. This decrease in earnings was due primarily to lower weather-related sales this year compared to last year. The 1996 nonrecurring item consisted of a $74.5 million after-tax charge to income, or $0.62 per share, for costs related to voluntary enhanced retirement programs, which were accepted by 840 bargaining and non-bargaining employees, representing about 8% of GPU's total workforce. The 1995 nonrecurring items consisted of a reversal of $104.9 million after-tax of expense, or $0.91 per share, for certain future Three Mile Island Unit 2 (TMI-2) retirement costs written off by Met-Ed and Penelec in 1994. This reversal resulted from a 1995 Pennsylvania Supreme Court decision that overturned a 1994 Pennsylvania Commonwealth Court order, and restored a 1993 Pennsylvania Public Utility Commission (PaPUC) order allowing Met-Ed to 42 GPU RESULTS OF OPERATIONS (continued) recover such costs from customers. Partially offsetting this increase was a charge to income of $8.4 million after-tax, or $0.07 per share, for TMI-2 monitored storage costs deemed not probable of recovery through ratemaking. For the nine months ended September 30, 1996, earnings were $217.7 million (unaudited), or $1.80 per share, compared to earnings of $370.8 million (unaudited), or $3.20 per share, for the same period last year. The decrease in earnings for the nine months was due to the same nonrecurring items in 1996 and 1995 that affected the three month results. Excluding these nonrecurring items, earnings for the nine months ended September 30, 1996 would have been $292.2 million, or $2.42 per share, compared to earnings of $274.3 million, or $2.36 per share for the same period in 1995. Earnings for the nine months versus last year, excluding the nonrecurring items, increased due to higher new customer sales and lower reserve capacity expense. In addition, earnings benefitted from increased earnings by GPU International, which includes gains on the sales of securities. These were partially offset by higher depreciation expense due to plant additions and increased operation and maintenance expense due in part to greater storm and emergency activities. OPERATING REVENUES: Total revenues for the third quarter of 1996 decreased 3.4% to $1.06 billion, as compared to the third quarter of 1995. For the nine months ended September 30, 1996, revenues increased 4.2% to $2.99 billion, as compared to the same period last year. The components of the changes are as follows: (In Millions) Three Months Nine Months Ended Ended September 30, 1996 September 30, 1996 Kilowatt-hour (KWH) revenues (excluding energy portion) $(28.2) $ 37.8 Energy revenues (10.9) 61.4 Other revenues 2.1 20.4 Increase/(decrease) in revenues $(37.0) $119.6 Kilowatt-hour revenues The decrease in KWH revenues for the three month period was due primarily to lower weather-related sales to residential customers. The increase in KWH revenues for the nine month period was due primarily to increased new residential and commercial customer sales. Energy revenues Changes in energy revenues do not affect earnings as they reflect corresponding changes in the energy cost rates billed to customers and expensed. The decrease in energy revenues for the three month period was due primarily to lower sales to other utilities, partially offset by higher energy cost rates in effect. The increase in the nine month period was due primarily to higher energy cost rates in effect and increased residential and commercial customer sales, partially offset by lower sales to other utilities. 43 GPU RESULTS OF OPERATIONS (continued) Other revenues Generally, changes in other revenues do not affect earnings as they are offset by corresponding changes in expense, such as taxes other than income taxes. However, increased transmission revenues contributed to the three and nine months earnings. OPERATING EXPENSES: Power purchased and interchanged (PP&I) Generally, changes in the energy component of PP&I expense do not significantly affect earnings since these cost increases are substantially recovered through the GPU Energy companies' energy adjustment clauses. However, lower reserve capacity expense, which is a component of PP&I, contributed to the nine month earnings increase. Fuel and Deferral of energy costs, net Generally, changes in fuel expense and deferral of energy costs do not affect earnings as they are offset by corresponding changes in energy revenues. However, earnings for the nine month period increased due to a $6.3 million pre-tax performance award earned by JCP&L for the efficient operation of its nuclear generating stations. Other operation and maintenance (O&M) The increase in other O&M for the three and nine month periods was due primarily to a $122.7 million pre-tax charge related to the 1996 retirement programs. Partially offsetting these increases was a 1995 write-off of $14.7 million pre-tax, for TMI-2 monitored storage costs deemed not probable of recovery through ratemaking. Greater storm and emergency activities in 1996 also contributed to the nine month increase. Depreciation and amortization The increase in depreciation and amortization expense for the nine month period was due primarily to additions to plant in service and higher depreciation rates for Met-Ed and Penelec. Taxes, other than income taxes Generally, changes in taxes other than income taxes do not significantly affect earnings as they are substantially recovered in revenues. OTHER INCOME AND DEDUCTIONS: Other income, net The decrease in other income for the three and nine month periods was due primarily to the 1995 reversal of $183.9 million pre-tax of expense for TMI-2 retirement costs previously written off by Met-Ed and Penelec. Increases in GPU International Group pre-tax income partially offset the three and nine month decreases. The nine month increase for the GPU International Group 44 GPU RESULTS OF OPERATIONS (continued) included pre-tax gains in 1996 of $10 million for the sales of investment securities. INTEREST CHARGES AND PREFERRED DIVIDENDS: Other interest The increase in other interest for the three month period was due to higher short-term debt levels. Dividends on subsidiary-obligated mandatorily redeemable preferred securities The increase for the nine month period was due to JCP&L issuing in May 1995, through a special-purpose finance subsidiary, $125 million stated value of monthly income preferred securities. JCP&L RESULTS OF OPERATIONS JCP&L's earnings for the third quarter ended September 30, 1996 were $24.4 million (unaudited), compared to 1995 third quarter earnings of $91.9 million (unaudited). The decrease in third quarter earnings was due in part to a $39.4 million (includes JCP&L's share of costs allocated from Genco, GPUN and GPUS) after-tax charge in 1996 for voluntary enhanced retirement programs, which were accepted by 341 bargaining and non-bargaining employees of JCP&L, or about 11.5% of its total workforce. Excluding this nonrecurring item, earnings for the third quarter of 1996 would have been $63.8 million. The earnings decrease on this basis was due to lower weather-related sales and increased other O&M expense this year compared to last year. For the nine months ended September 30, 1996, earnings were $112.5 million (unaudited), compared to $157.6 million (unaudited) for the same period last year. The same nonrecurring item affecting the quarterly results also affected the results for the nine month period. Excluding the third quarter 1996 charge for the retirement programs, earnings for the current nine month period would have been $151.9 million. On this basis, the earnings decrease was due primarily to increased other O&M expense this year compared to last year, partially offset by increased new customer sales and a performance award for the efficient operation of JCP&L's nuclear generating stations in 1996. OPERATING REVENUES: Total revenues for the third quarter of 1996 decreased 7.5% to $578.3 million, as compared to the third quarter of 1995. For the nine months ended September 30, 1996, revenues increased 2.4% to $1.6 billion, as compared to the same period last year. The components of the changes are as follows: 45 JCP&L RESULTS OF OPERATIONS (continued) (In Millions) Three Months Nine Months Ended Ended September 30, 1996 September 30, 1996 Kilowatt-hour (KWH) revenues (excluding energy portion) $(30.7) $ 2.9 Energy revenues (12.9) 27.2 Other revenues (3.6) 6.7 Increase/(decrease) in revenues $(47.2) $ 36.8 Kilowatt-hour revenues The decrease in KWH revenues for the three month period was due to lower weather-related sales to residential customers, partially offset by increased new residential and commercial customer sales. The increase in KWH revenues for the nine month period was due primarily to increased new residential and commercial customer sales. Energy revenues Changes in energy revenues do not affect earnings as they reflect corresponding changes in the energy cost rates billed to customers and expensed. The decrease in energy revenues for the three month period was due to lower sales to other utilities and to residential customers, partially offset by higher energy cost rates in effect. The increase in energy revenues for the nine month period was due primarily to higher energy cost rates in effect and increased residential and commercial customer sales, partially offset by lower sales to other utilities. Other revenues Generally, changes in other revenues do not affect earnings as they are offset by corresponding changes in expense, such as taxes other than income taxes. OPERATING EXPENSES: Power purchased and interchanged Generally, changes in the energy component of PP&I expense do not significantly affect earnings since these cost increases are substantially recovered through JCP&L's energy adjustment clause. However, lower reserve capacity expense resulting from reduced purchases from Pennsylvania Power & Light Company contributed to the three and nine months earnings. The reduction in reserve capacity expense for the three month period was offset by increased capacity purchases from Cleveland Electric Illuminating Company. Fuel and Deferral of energy and capacity costs, net Generally, changes in fuel expense and deferral of energy and capacity costs do not affect earnings as they are offset by corresponding changes in energy revenues. However, earnings for the nine month period increased due to a $6.3 million pre-tax performance award for the efficient operation of JCP&L's nuclear generating stations. 46 JCP&L RESULTS OF OPERATIONS (continued) Other operation and maintenance The increase in other O&M expense for the three month period was due primarily to a $62.9 million pre-tax charge for the 1996 retirement programs and increased transmission charges from associated companies. The nine month period increase was due primarily to the 1996 retirement programs and greater storm and emergency activities. Depreciation and amortization The increase in depreciation and amortization expense for the three month and nine month periods was due primarily to additions to plant in service. Taxes, other than income taxes Generally, changes in taxes other than income taxes do not significantly affect earnings as they are substantially recovered in revenues. OTHER INCOME AND DEDUCTIONS: Other income, net The decrease in other income for the nine month period was due in part to the write-off of nonutility generation (NUG) buyout costs for the Crown/Vista project (see Rate Matters) deemed not recoverable through ratemaking. INTEREST CHARGES AND DIVIDENDS ON PREFERRED SECURITIES: Interest on long-term debt The decrease in interest on long-term debt for the three and nine month periods was due to lower levels of long-term debt. Other interest The increase in other interest for the three and nine month periods was due primarily to higher short-term debt levels. Dividends on company-obligated mandatorily redeemable preferred securities The increase for the nine month period was due to JCP&L issuing in May 1995, through a special-purpose finance subsidiary, $125 million stated value of monthly income preferred securities. MET-ED RESULTS OF OPERATIONS Met-Ed's earnings for the third quarter ended September 30, 1996 were $8.1 million (unaudited), compared to 1995 third quarter earnings of $97.2 million (unaudited). The decrease in earnings was due primarily to the effect of 1996 and 1995 nonrecurring items. Excluding these nonrecurring items, earnings for the third quarter would have been $23.5 million, compared to earnings of $30.1 million for the same period last year. This decrease in 47 MET-ED RESULTS OF OPERATIONS (continued) third quarter earnings was due primarily to lower weather-related sales, partially offset by increased new customer sales this year compared to last year. The 1996 nonrecurring item consisted of a charge to income of $15.4 million (includes Met-Ed's share of costs allocated from Genco, GPUN and GPUS) after-tax for voluntary enhanced retirement programs, which were accepted by 163 bargaining and non-bargaining employees of Met-Ed, or about 7.5% of its total workforce. The 1995 nonrecurring items consisted of a reversal of $72.8 million after-tax of expense, for certain future TMI-2 retirement costs written off in 1994. This reversal resulted from a 1995 Pennsylvania Supreme Court decision that overturned a 1994 Pennsylvania Commonwealth Court order, and restored a 1993 PaPUC order allowing Met-Ed to recover such costs from customers. Partially offsetting this increase was a charge to income of $5.7 million after-tax for TMI-2 monitored storage costs deemed not probable of recovery through ratemaking. For the nine months ended September 30, 1996, Met-Ed's earnings were $48.5 million (unaudited), compared to earnings of $125.7 million (unaudited) for the same period last year. Excluding the 1996 and 1995 nonrecurring items mentioned above, earnings for the nine months ended September 30, 1996 would have been $63.9 million, compared to earnings of $58.6 million for the same period in 1995. This earnings increase was due primarily to higher new customer sales and lower reserve capacity expense. OPERATING REVENUES: Total revenues for the third quarter of 1996 increased .6% to $243.1 million, as compared to the third quarter of 1995. For the nine months ended September 30, 1996, revenues increased 7.9% to $687.8 million, as compared to the same period last year. The components of the changes are as follows: (In Millions) Three Months Nine Months Ended Ended September 30, 1996 September 30, 1996 Kilowatt-hour (KWH) revenues (excluding energy portion) $ 3.8 $ 19.4 Energy revenues (0.5) 26.8 Other revenues (1.9) 3.9 Increase in revenues $ 1.4 $ 50.1 Kilowatt-hour revenues The increase in KWH revenues for the three month period was due primarily to higher commercial and industrial customer usage and increased new residential and commercial customer sales, partially offset by lower weather- related sales to residential and commercial customers. The increase in KWH revenues for the nine month period was due to higher new residential and commercial customer sales and higher weather-related sales to residential customers as compared to the same period last year. 48 MET-ED RESULTS OF OPERATIONS (continued) Energy revenues Changes in energy revenues do not affect earnings as they reflect corresponding changes in the energy cost rates billed to customers and expensed. The increase in energy revenues for the nine month period was due primarily to higher energy cost rates in effect. Also contributing to this increase was higher sales to residential and commercial customers, partially offset by lower sales to other utilities. Other revenues Generally, changes in other revenues do not affect earnings as they are offset by corresponding changes in expense, such as taxes other than income taxes. OPERATING EXPENSES: Power purchased and interchanged Generally, changes in the energy component of PP&I expense do not significantly affect earnings since these cost increases are substantially recovered through Met-Ed's energy adjustment clause. However, lower reserve capacity expense contributed to the nine month earnings. Fuel and Deferral of energy costs, net Generally, changes in fuel expense and deferral of energy costs do not affect earnings as they are offset by corresponding changes in energy revenues. Other operation and maintenance The increase in other O&M for the three and nine month periods was due to a $26.2 million pre-tax charge related to the 1996 retirement programs. Partially offsetting these increases was a 1995 write-off of $10 million pre- tax, for TMI-2 monitored storage costs deemed not probable of recovery through ratemaking. Depreciation and amortization The decrease in depreciation and amortization expense for the three and nine month periods was due to 1995 adjustments related to TMI-2 decommissioning. These adjustments more than offset 1996 increases in depreciation expense resulting from additions to plant in service and higher depreciation rates. Taxes, other than income taxes Generally, changes in taxes other than income taxes do not significantly affect earnings as they are substantially recovered in revenues. 49 MET-ED RESULTS OF OPERATIONS (continued) OTHER INCOME AND DEDUCTIONS: Other income/(expense), net The decrease in other income for the three and nine month periods was due primarily to the 1995 reversal of $127.6 million pre-tax of expense for TMI-2 retirement costs previously written off. PENELEC RESULTS OF OPERATIONS Penelec's earnings for the third quarter ended September 30, 1996 were $2.4 million (unaudited), compared to 1995 third quarter earnings of $49.6 million (unaudited). The decrease in earnings was due to the effect of 1996 and 1995 nonrecurring items. Excluding these nonrecurring items, earnings for the third quarter would have been $22.1 million, compared to earnings of $20.2 million for the same period last year. The 1996 nonrecurring item consisted of a charge to income of $19.7 million (includes Penelec's share of costs allocated from Genco, GPUN and GPUS) after-tax for voluntary enhanced retirement programs, which were accepted by 165 bargaining and non-bargaining employees of Penelec, or about 7.5% of its total workforce. The 1995 nonrecurring items consisted of a reversal of $32.1 million after-tax of expense, for certain future TMI-2 retirement costs written off in 1994. This reversal resulted from a 1995 Pennsylvania Supreme Court decision that overturned a 1994 Pennsylvania Commonwealth Court order, and restored a 1993 PaPUC order allowing an affiliate (Met-Ed) to recover such costs from customers. Partially offsetting this increase was a charge to income of $2.7 million after-tax for TMI-2 monitored storage costs deemed not probable of recovery through ratemaking. For the nine months ended September 30, 1996, Penelec's earnings were $53.8 million (unaudited), compared to earnings of $99.7 million (unaudited) for the same period last year. Excluding the 1996 and 1995 nonrecurring items mentioned above, earnings for the nine months ended September 30, 1996 would have been $73.5 million, compared to earnings of $70.3 million for the same period in 1995. OPERATING REVENUES: Total revenues for the third quarter of 1996 increased 2.8% to $256.1 million, as compared to the third quarter of 1995. Total revenues for the nine months ended September 30, 1996 increased 4.2% to $772.3 million compared with the same period in 1995. The components of the changes are as follows: (In Millions) Three Months Nine Months Ended Ended September 30, 1996 September 30, 1996 Kilowatt-hour (KWH) revenues (excluding energy portion) $ (5.3) $ 13.0 Energy revenues 0.6 8.8 Other revenues 11.6 9.4 Increase in revenues $ 6.9 $ 31.2 50 PENELEC RESULTS OF OPERATIONS (continued) Kilowatt-hour revenues The decrease in KWH revenues for the three month period was due primarily to lower weather-related sales. The increase for the nine month period was due primarily to higher weather-related sales to residential customers and increased new commercial customer sales. Energy revenues Changes in energy revenues do not affect earnings as they reflect corresponding changes in the energy cost rates billed to customers and expensed. The increase in energy revenues for the nine month period was due primarily to higher energy cost rates in effect and increased sales to residential and commercial customers, partially offset by lower sales to other utilities. Other revenues Generally, changes in other revenues do not affect earnings as they are offset by corresponding changes in expense, such as taxes other than income taxes. However, increased transmission revenues contributed to the three and nine months earnings. OPERATING EXPENSES: Power purchased and interchanged Generally, changes in the energy component of PP&I expense do not significantly affect earnings since these cost increases are substantially recovered through Penelec's energy adjustment clause. Fuel and Deferral of energy costs, net Generally, changes in fuel expense and deferral of energy costs do not affect earnings as they are offset by corresponding changes in energy revenues. Other operation and maintenance The increase in other O&M for the three and nine month periods was due to a $33.6 million pre-tax charge related to the 1996 retirement programs. Partially offsetting these increases was a 1995 write-off of $4.7 million pre- tax, for TMI-2 monitored storage costs deemed not probable of recovery through ratemaking. Depreciation and amortization The increase in depreciation and amortization expense for the three and nine month periods was due to additions to plant in service and 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. 51 PENELEC RESULTS OF OPERATIONS (continued) OTHER INCOME AND DEDUCTIONS: Other income/(expense), net The decrease in other income for the three and nine month periods was due primarily to the 1995 reversal of $56.3 million pre-tax of expense for TMI-2 retirement costs previously written off. Partially offsetting this decrease for the nine month period was a write-off in 1995 of $2.5 million of deferred postretirement benefit (OPEB) costs related to wholesale customers which were deemed not recoverable through ratemaking. GPU INTERNATIONAL GROUP At September 30, 1996, GPU's aggregate investment in the GPU International Group was $209 million; GPU has also guaranteed an additional $813 million of GPU International Group obligations, including amounts for the acquisition of Midlands Electricity plc (Midlands), discussed below. GPU has Securities and Exchange Commission (SEC) approval to finance investments in foreign utility companies (FUCO) and exempt wholesale generators (EWG) (both domestically and internationally) up to an aggregate amount equal to 50% of GPU's average consolidated retained earnings. GPU has requested SEC approval to increase this limit to 100% of GPU's average consolidated retained earnings. At September 30, 1996, GPU had remaining authorization to finance an additional $114 million of investments in FUCOs and EWGs. In May 1996, GPU and Cinergy Corp. (Cinergy) formed Avon Energy Partners plc (Avon), a wholly owned subsidiary of Avon Energy Partners Holdings, Inc. (Holdings). Holdings is a 50/50 joint venture formed to acquire Midlands, an English regional electric company (REC). Avon purchased through a cash tender offer of approximately $2.6 billion the outstanding shares of Midlands. GPU's 50% interest in Holdings is held by EI UK Holdings, Inc., a wholly owned subsidiary of GPU Electric. For more information, see Notes 2 and 3 to GPU's Consolidated Financial Statements. In October 1996, GPU Power, through its wholly-owned subsidiary GPU Power Philippines, Inc., purchased the rights to acquire up to a 40% interest in Magellan Utilities Development Corporation (MUDC). MUDC plans to construct a 300 MW coal generating plant in the Philippines at a cost of approximately $350 million, of which GPU Power's equity contribution is expected to be approximately $40 million. The GPU International Group is continuing to pursue investment opportunities and has commitments, both domestically and internationally, in five generating facilities under construction totaling 2,866 MW of capacity, and in a 236 MW gas-fired project in Wisconsin for which a long-term power purchase agreement has been executed. The following sections of MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS are being presented for the GPU Companies on a combined basis. 52 LIQUIDITY AND CAPITAL RESOURCES Capital Needs The GPU Companies' capital needs for the nine months ended September 30, 1996 consisted of cash construction expenditures of $261 million (of which JCP&L's, Met-Ed's and Penelec's shares were $124 million, $52 million and $84 million, respectively). Construction expenditures for the year are forecasted to be $471 million (of which JCP&L's, Met-Ed's and Penelec's shares are $242 million, $88 million and $124 million, respectively). Expenditures for maturing obligations will total $131 million (of which JCP&L's, Met-Ed's and Penelec's shares are $36 million, $15 million and $75 million, respectively) in 1996. GPU and the GPU Energy companies estimate that a substantial portion of their anticipated capital needs in 1996 will be satisfied through internally generated funds. Financing The GPU Energy companies have regulatory authority to issue and sell first mortgage bonds (FMBs), which may be issued as secured medium-term notes, and preferred stock through various periods into 1997. Under existing authorizations, JCP&L, Met-Ed and Penelec may issue these senior securities in aggregate amounts of $225 million, $190 million and $120 million, respectively, of which $100 million for each company may consist of preferred stock. The GPU Energy companies have regulatory authority to incur short-term debt, a portion of which may be through the issuance of commercial paper. In October 1996, Penelec issued $20 million principal amount of 6.80% FMBs, and $20 million principal amount of 7.02% FMBs. The net proceeds from these issuances will be used by Penelec to reduce short-term debt and for other corporate purposes. On October 28, 1996, Penelec redeemed at maturity $30 million principal amount of 7.45% FMBs. The GPU Energy companies' bond indentures and articles of incorporation include provisions that limit the amount of long-term debt, preferred stock and short-term debt each company may issue. The GPU Energy companies' interest and preferred dividend coverage ratios are currently in excess of indenture and charter restrictions. GPU has received SEC approval to issue and sell up to $300 million aggregate principal amount of unsecured debentures through December 31, 2001. The net proceeds from the sale of the debentures will be used by the Company to: 1) finance or refinance acquisitions and investments by the GPU International Group, 2) make cash capital contributions to the Company's subsidiaries, which in turn will apply such funds a) to repay outstanding indebtedness, b) to redeem outstanding senior securities in open market transactions, c) for construction purposes, d) for other corporate purposes, or e) to reimburse their treasuries for funds previously expended therefrom for such purposes, 3) reimburse the Company's treasury for funds previously expended therefrom for such purposes, 4) repay outstanding indebtedness of the Company, and 5) for other Company corporate purposes. GPU has also received SEC approval to issue up to 7 million shares of additional common stock through 1998. The net proceeds from the sale of the additional common stock will be used by the Company to repay a portion of indebtedness incurred by the GPU International Group to acquire Midlands (see Note 2 to GPU's Consolidated Financial Statements). The net proceeds may also 53 be used for the same purposes as the proceeds from the sale of debentures described above. COMPETITIVE ENVIRONMENT In April 1996, the Federal Energy Regulatory Commission (FERC) issued Order 888 (the Order) adopting the rules proposed in its Notice of Proposed Rulemaking on open access nondiscriminatory transmission services by utilities. The Order provides open access to the interstate transmission network and thereby encourages a fully competitive wholesale electric power market. The Order requires electric utilities to, among other things: 1) file nondiscriminatory open access transmission tariffs which would be available to all wholesale sellers and buyers of electricity; 2) accept service under these new tariffs for their own wholesale transactions; and 3) be permitted to recover their legitimate and verifiable "stranded costs" incurred when a franchise customer purchases power from another supplier using the utility's transmission system. In addition, while the Order does not require "corporate unbundling," which the FERC defines as the disposing of ancillary services or creating separate affiliates to manage transmission services, it does call for "functional unbundling" of transmission and ancillary services. In July 1996, the GPU Energy companies filed pro forma tariffs offering both point-to-point and network service in accordance with Order 888. These tariffs became effective on July 9, 1996. In July 1996, the GPU Energy companies, along with six other electric utility members of the Pennsylvania-New Jersey-Maryland (PJM) Power Pool, filed with the FERC a transmission tariff and agreements that would create by year-end 1996, a new wholesale energy market to meet the requirements of FERC Order 888, and to increase competition in the Mid-Atlantic region. The Mid-Atlantic energy agreements include: 1) the requirements and standards under which an independent system operator (ISO) will operate the energy market and transmission system; 2) a transmission owners agreement and tariff that provides pool-wide transmission service with ten zones, each reflecting an existing PJM company's transmission costs, and an average transmission rate for service across or out of the power pool; 3) establishment of a Mid-Atlantic spot energy market; and 4) requiring the ownership of, or contracting for, sufficient transmission and generation capacity, including the sharing of generating capacity reserves, to meet reliability requirements. The proposed PJM tariff and agreements, if accepted for filing by FERC, would be effective January 1, 1997, and would supersede the tariffs filed by the GPU Energy companies in July 1996, in accordance with Order 888. PECO Energy Company (PECO), which opposes the PJM companies' proposed restructuring plan, has filed its own plan with the FERC. A number of parties, including PECO, have intervened in this proceeding. Among other things, the interveners contend that the proposal would leave excessive control of the transmission system to the PJM member utilities and that the plan's ten zone transmission pricing is anticompetitive and preserves utility market power. This proceeding is pending before the FERC. A number of bills have been introduced in Congress proposing a comprehensive restructuring of the electric utility industry, including providing retail choice to all utility customers, and repeal (under certain circumstances) of the Public Utility Regulatory Policies Act of 1978 and the 54 Public Utility Holding Company Act. It is expected that similar legislation will be introduced in the next Congress. Legislation has been introduced in the Pennsylvania legislature that would allow all consumers to choose their electric provider, with transition periods ranging from 1998 to 2002. Representatives from various stakeholder groups have been discussing draft comprehensive legislation which, if adopted, would restructure the electric utility industry in Pennsylvania including, among other things, a provision for recovery of stranded costs. In July 1996, the PaPUC issued a report recommending that 1) all retail customers be permitted to choose their electric generation provider by the year 2005; 2) electric transmission and distribution continue to be regulated; 3) utilities be permitted to recover non-mitigable stranded assets and establish a competitive transition charge for consumers who choose alternative generation suppliers; 4) flexible and performance-based rates be encouraged; and 5) public purpose programs such as energy efficiency and renewable energy be continued. As part of this transition to retail choice, the PaPUC has urged electric utilities to file voluntary retail access pilot programs for approval. These pilot programs would include all classes of customers, and utilities would be required to commit about 5% of peak load to retail access programs and unbundle their tariffs. The PaPUC may issue an order containing general guidelines for program design and is seeking to have legislation passed to make these programs mandatory. Implementation of these programs could occur as early as April 1997, when all Pennsylvania electric utilities are expected to have filed program proposals with the PaPUC. In October 1996, Met-Ed and Penelec notified the PaPUC of their plan for a proposed two-year pilot program that would offer approximately 50,000 residential, commercial and industrial customers the opportunity to choose their electric-generation supplier. Subject to New Jersey Board of Public Utilities (NJBPU) approval, JCP&L intends to establish a pilot program offering customers in Monroe Township, New Jersey a choice of their electric-generation supplier. JCP&L anticipates filing its plan with the NJBPU by December, 1996. Monroe Township has been exploring the possibility of establishing its own municipal electric system. In June and July 1996, management offered voluntary enhanced retirement programs to 745 bargaining and 399 non-bargaining employees. Of these employees, 493 bargaining and 347 non-bargaining accepted the retirement programs, resulting in an 8% reduction in GPU's total workforce and a third quarter pre-tax charge to earnings of $122.7 million (of which JCP&L's, Met-Ed's and Penelec's shares were $62.9 million, $26.2 million and $33.6 million, respectively). GPU anticipates funding the programs' related pension costs of $71 million within one year. RATE MATTERS In June 1996, the NJBPU approved a provisional settlement for a combined levelized energy adjustment clause (LEAC) and Demand Side Factor (DSF) increase of $27.9 million annually. Also in June 1996, JCP&L, the staff of the NJBPU and the Division of Ratepayer Advocate reached an agreement on a variety of pending rate-related 55 issues (Final Settlement). An Administrative Law Judge (ALJ) has issued a decision recommending approval of the Final Settlement, but the NJBPU has ordered additional evidentiary hearings on the recovery of buyout costs for the Freehold cogeneration project discussed below (see Managing Nonutility Generation). There can be no assurance as to the outcome of this proceeding. Provisions of the Final Settlement include a further annual increase of $7 million in the LEAC in addition to those noted above and an annual reduction of $9 million in base rates. Base rates would be frozen at that level until the year 2000, and the LEAC rate frozen through the year 1999. JCP&L could seek a LEAC rate increase if the deferred LEAC balance is projected to exceed $40 million, or a base rate increase under certain other conditions, such as a major change in the current regulatory environment. The Final Settlement provides for recovery in base rates beginning in 1998 of all OPEB costs recorded in accordance with Statement of Financial Accounting Standards No. 106 including amounts previously deferred and an increase in decommissioning expense to reflect the radiological decommissioning and nonradiological cost of removal costs estimated in the 1995 site specific studies performed for GPUN (see the Nuclear Plant Retirement Costs section of Note 1 to GPU's Consolidated Financial Statements). Also included in base rates would be recovery of the remaining investments in the 58 MW Werner Unit 4 and 72 MW Gilbert Unit 3 generating plants, which were retired in the third quarter of 1996. The Final Settlement also provides for recovery through the LEAC of: 1) buyout costs up to $130 million, and 50% of any costs from $130 million to $140 million, over a seven-year period for the termination of the power purchase agreement with Freehold Cogeneration Associates, and 2) $14 million of the $17 million buyout costs, over a two year period, for the termination of the agreement to purchase power from the proposed 200 MW Crown/Vista project. JCP&L wrote-off the remaining $3 million of buyout costs for the Crown/Vista project in the second quarter of 1996. In addition, the Final Settlement resolves the NJBPU's generic proceeding regarding recovery of capacity costs associated with electric power purchases from NUG projects which the Division of the Ratepayer Advocate claimed to result in a double recovery. JCP&L would not have to refund any amounts previously collected. The Final Settlement also provides that if JCP&L's return on equity exceeds 12.2%, excluding demand side management and nuclear performance incentives, the excess would be used to reduce both customer energy rates and certain regulatory assets. In accordance with the Final Settlement, $9 million is provided annually, effective January 1, 1996, for the recovery of forecasted additions to nuclear plant. THE GPU SUPPLY PLAN New Energy Supplies In January 1996, JCP&L issued an all-supply source solicitation for the supply of energy and capacity to meet its forecasted needs. In October 1996, four potential suppliers were selected to provide capacity for four years, beginning in June 1999. The offers provide for both firm and option purchases of capacity and energy from sources in New Jersey, Pennsylvania and New York. 56 Managing Nonutility Generation The GPU Energy companies have contracts and anticipated commitments with NUG suppliers under which a total of 1,624 MW (of which JCP&L's, Met-Ed's and Penelec's shares are 892 MW, 335 MW and 397 MW, respectively) of capacity are currently in service. For information on NUG costs, see the Competition and the Changing Regulatory Environment section of Note 1 to GPU's Consolidated Financial Statements. The GPU Energy companies are seeking to reduce the above market costs of NUG agreements by (1) attempting to convert must-run agreements to dispatchable agreements; (2) attempting to renegotiate prices of the agreements; (3) offering contract buyouts while seeking to recover the costs through their energy adjustment clauses 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 the GPU Companies for substantial damages. There can, however, be no assurance as to what extent these efforts will be successful in whole or in part. In April 1996, JCP&L entered into an agreement with Freehold Cogeneration Associates (Freehold), the developer of a proposed 110 MW gas-fired cogeneration project, that terminates JCP&L's long-term obligation to purchase power from the project. JCP&L expects that the buyout will save customers $1.2 billion over the term of the power purchase contract based on the projected cost of alternative sources of energy. JCP&L has agreed to pay Freehold $125 million, of which $65 million was paid in 1996 and the remainder to be paid over a three year period. Associated with this buyout are certain payments to third parties, which could be material in amount. As part of the Final Settlement (see Rate Matters), JCP&L would recover buyout costs up to $130 million, and 50% of any additional related costs up to $140 million, over a seven-year period. In October 1996, JCP&L was named as a defendant in a breach of contract lawsuit against Freehold brought by Nestle Beverage Company (Nestle) in New Jersey Superior Court. Nestle is seeking damages of at least $75 million for Freehold's alleged breach of the steam sales agreement and approximately $412 million in damages against JCP&L for alleged unlawful interference with that agreement. Nestle has also requested punitive damages in an unspecified amount. JCP&L believes the claims against it are without merit (see the Other Commitments and Contingencies section of Note 1 to GPU's Consolidated Financial Statements). In July 1996, Penelec entered into agreements with the developers of a proposed 80 MW cogeneration facility in Altoona, Pennsylvania and AES Power Corporation (AES). Under the agreements, AES purchased the interests of the developers, and Penelec and AES will attempt to negotiate a new, competitively priced power purchase agreement. If these negotiations are unsuccessful, Penelec has agreed to pay AES up to $8.3 million. In August 1996, Penelec filed a petition with the PaPUC for the recovery of $5 million in restructuring costs over one year through energy cost rates (ECR). In July 1996, Met-Ed entered into agreements with the developers of the proposed 150 MW Blue Mountain cogeneration facility and AES. Under the agreements, AES purchased the interests of the developers. Met-Ed has paid AES $18.5 million and has agreed to conduct negotiations with AES for a new power 57 purchase agreement that is competitively priced. If these negotiations are unsuccessful, Met-Ed would pay AES an additional $23 million. Met-Ed intends to seek ECR recovery for these buyout costs. In September 1995, Met-Ed and the developers of a proposed 227 MW York County coal-fired cogeneration plant entered into an agreement whereby, Met-Ed will pay the developer up to $30 million to terminate the coal-fired facility, and an additional $5 million if the agreement cannot be restructured to provide for the development of a gas-fired facility. In January 1996, Met-Ed was notified by the developers that they had assigned to AES their rights under the terms of the restructuring agreement. In August 1996, the PaPUC issued an order permitting Met-Ed to recover up to $35 million in buyout costs over three years, beginning in 1997. 58 PART II ITEM 1 - LEGAL PROCEEDINGS Information concerning the current status of certain legal proceedings instituted against the Company and the GPU Energy companies as a result of the March 28, 1979 nuclear accident at Unit 2 of the Three Mile Island nuclear generating station discussed in Part I of this report in Notes to Consolidated Financial Statements is incorporated herein by reference and made a part hereof. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (12) Statements Showing Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends Based on SEC Regulation S-K, Item 503 (27) Financial Data Schedule (b) Reports on Form 8-K: GPU, Inc.: Dated October 21, 1996, under Item 5 Jersey Central Power & Light Company: Dated October 21, 1996, under Item 5 59 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. November 6, 1996 By: /s/ J. G. Graham J. G. Graham, Senior Vice President (Chief Financial Officer) November 6, 1996 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 November 6, 1996 By: /s/ D. Baldassari D. Baldassari, President November 6, 1996 By: /s/ D. W. Myers D. W. Myers, Vice President - Finance and Rates & Comptroller (Principal Accounting Officer) 60 EX-12.A 2 EXHIBIT 12A Exhibit 12 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
Nine Months Ended September 30, September 30, 1996 1995 OPERATING REVENUES $2,993,411 $2,873,702 OPERATING EXPENSES 2,469,899 2,279,283 Interest portion of rentals (A) 19,061 17,784 Interest on funded indebtedness and other interest of service company subsidiaries (B) 2,912 2,696 Net expense 2,447,926 2,258,803 OTHER INCOME: Allowance for funds used during construction 8,119 10,175 Other income, net 17,300 190,172 Interest on funded indebtedness and other interest of GPU International Group (C) 17,799 452 Total other income 43,218 200,799 EARNINGS AVAILABLE FOR FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (excluding taxes based on income) $ 588,703 $ 815,698 FIXED CHARGES: Interest on funded indebtedness $ 157,919 $ 142,593 Other interest (D) 45,271 40,873 Interest portion of rentals (A) 19,061 17,784 Total fixed charges $ 222,251 $ 201,250 RATIO OF EARNINGS TO FIXED CHARGES 2.65 4.05 Preferred stock dividend requirement $ 11,776 $ 12,737 Ratio of income before provision for income taxes to net income (E) 159.7% 160.2% Preferred stock dividend requirement on a pretax basis 18,806 20,405 Fixed charges, as above 222,251 201,250 Total fixed charges and preferred stock dividends $ 241,057 $ 221,655 RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS 2.44 3.68 Exhibit 12 Page 2 of 2 GPU, INC. AND SUBSIDIARY COMPANIES STATEMENTS SHOWING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS BASED ON SEC REGULATION S-K, ITEM 503 (In Thousands) UNAUDITED NOTES: (A) The Company has included the equivalent of the interest portion of all rentals charged to income as fixed charges for this statement and has excluded such components from Operating Expenses. (B) Represents fixed charges of GPU Service, Inc. and GPU Nuclear, Inc., which are accounted for as Operating Expenses in the Company's consolidated income statement. (C) Represents fixed charges of the GPU International Group, which are accounted for as Other Income and Deductions in the Company's consolidated income statement. (D) Includes dividends on subsidiary-obligated mandatorily redeemable preferred securities of $21,666 and $17,594 for the nine month periods ended September 30, 1996 and 1995, respectively. (E) Represents income before provision for income taxes and preferred stock dividends of $366,452 and $614,193 for the nine month periods ended September 30, 1996 and 1995, respectively, divided by income before preferred stock dividends of $229,475 and $383,492, respectively for the same periods.
EX-12.B 3 EXHIBIT 12B Exhibit 12 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
Nine Months Ended September, September, 1996 1995 OPERATING REVENUES $1,583,432 $1,546,594 OPERATING EXPENSES 1,328,309 1,228,111 Interest portion of rentals (A) 8,299 9,385 Net expense 1,320,010 1,218,726 OTHER INCOME: Allowance for funds used during construction 5,316 4,554 Other income, net 4,668 10,713 Total other income 9,984 15,267 EARNINGS AVAILABLE FOR FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (excluding taxes based on income) $ 273,406 $ 343,135 FIXED CHARGES: Interest on funded indebtedness $ 66,921 $ 69,421 Other interest (B) 17,005 11,637 Interest portion of rentals (A) 8,299 9,385 Total fixed charges $ 92,225 $ 90,443 RATIO OF EARNINGS TO FIXED CHARGES 2.96 3.79 Preferred stock dividend requirement $ 9,910 $ 10,871 Ratio of income before provision for income taxes to net income (C) 148.0% 150.0% Preferred stock dividend requirement on a pretax basis 14,667 16,306 Fixed charges, as above 92,225 90,443 Total fixed charges and preferred stock dividends $ 106,892 $ 106,749 RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS 2.56 3.21 Exhibit 12 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 $8,025 and $3,953 for the nine month periods ended September 30, 1996 and 1995, respectively. (C) Represents income before provision for income taxes of $181,181 and $252,692 for the nine month periods ended September 30, 1996 and 1995, respectively, divided by net income of $122,396 and $168,454, respectively for the same periods.
EX-12.C 4 EXHIBIT 12C Exhibit 12 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
Nine Months Ended September 30, September 30, 1996 1995 OPERATING REVENUES $687,823 $637,755 OPERATING EXPENSES 554,862 512,695 Interest portion of rentals (A) 3,858 4,059 Net expense 551,004 508,636 OTHER INCOME: Allowance for funds used during construction 938 2,165 Other income, net 69 129,926 Total other income 1,007 132,091 EARNINGS AVAILABLE FOR FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (excluding taxes based on income) $137,826 $261,210 FIXED CHARGES: Interest on funded indebtedness $ 34,119 $ 34,375 Other interest (B) 10,882 10,614 Interest portion of rentals (A) 3,858 4,059 Total fixed charges $ 48,859 $ 49,048 RATIO OF EARNINGS TO FIXED CHARGES 2.82 5.33 Preferred stock dividend requirement $ 708 $ 708 Ratio of income before provision for income taxes to net income (C) 180.7% 167.9% Preferred stock dividend requirement on a pretax basis 1,279 1,189 Fixed charges, as above 48,859 49,048 Total fixed charges and preferred stock dividends $ 50,138 $ 50,237 RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS 2.75 5.20 Exhibit 12 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 $6,750 for the nine month periods ended September 30, 1996 and 1995, respectively. (C) Represents income before provision for income taxes of $88,967 and $212,162 for the nine months ended September 30, 1996 and 1995, respectively, divided by net income of $49,225 and $126,392, respectively for the same periods.
EX-12.D 5 EXHIBIT 12D Exhibit 12 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
Nine Months Ended September 30, September 30, 1996 1995 OPERATING REVENUES $772,260 $741,097 OPERATING EXPENSES 630,900 587,412 Interest portion of rentals (A) 3,454 1,785 Net expense 627,446 585,627 OTHER INCOME: Allowance for funds used during construction 1,865 3,456 Other income/(expense), net (735) 55,259 Total other income 1,130 58,715 EARNINGS AVAILABLE FOR FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (excluding taxes based on income) $145,944 $214,185 FIXED CHARGES: Interest on funded indebtedness $ 37,276 $ 36,363 Other interest (B) 12,339 12,499 Interest portion of rentals (A) 3,454 1,785 Total fixed charges $ 53,069 $ 50,647 RATIO OF EARNINGS TO FIXED CHARGES 2.75 4.23 Preferred stock dividend requirement $ 1,158 $ 1,158 Ratio of income before provision for income taxes to net income (C) 168.9% 162.1% Preferred stock dividend requirement on a pretax basis 1,956 1,877 Fixed charges, as above 53,069 50,647 Total fixed charges and preferred stock dividends $ 55,025 $ 52,524 RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS 2.65 4.08 Exhibit 12 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 $6,891 for the nine month periods ended September 30, 1996 and 1995, respectively. (C) Represents income before provision for income taxes of $92,875 and $163,538 for the nine month periods ended September 30, 1996 and 1995, respectively, divided by net income of $54,989 and $100,857 respectively for the same periods.
EX-27.A 6 FINANCIAL DATA SCHEDULE/GPU
UT 0000040779 GPU, INC. 1,000 US DOLLARS 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 1 PER-BOOK 6,371,936 1,391,389 990,907 2,072,295 0 10,826,527 314,458 749,859 2,103,263 3,080,425 444,000 98,116 3,024,177 168,960 0 132,561 174,435 10,000 7,736 151,864 3,534,253 10,826,527 2,993,411 134,387 2,469,899 2,604,286 389,125 16,451 405,576 187,877 217,699 0 217,699 173,482 186,478 427,947 1.80 1.80 INCLUDES REACQUIRED COMMON STOCK OF $87,155. INCLUDES SUBSIDIARY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF $330,000. INCLUDES DIVIDENDS ON SUBSIDIARY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF $21,666 AND PREFERRED STOCK DIVIDENDS OF SUBSIDIARIES OF $11,776.
EX-27.B 7 FINANCIAL DATA SCHEDULE/JCP&L
UT 0000053456 JERSEY CENTRAL POWER & LIGHT COMPANY 1,000 US DOLLARS 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 1 PER-BOOK 2,932,079 354,656 444,911 983,637 0 4,715,283 153,713 510,769 829,256 1,493,738 239,000 37,741 1,137,225 32,000 0 70,134 55,884 10,000 1,275 99,281 1,539,005 4,715,283 1,583,432 56,560 1,328,309 1,384,869 198,563 3,667 202,230 79,834 122,396 9,910 112,486 100,000 90,102 223,006 0 0 INCLUDES COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF $125,000. INCLUDES DIVIDENDS ON COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF $8,025. REPRESENTS COMMON STOCK DIVIDENDS PAID TO PARENT CORPORATION.
EX-27.C 8 FINANCIAL DATA SCHEDULE/METED
UT 0000065350 METROPOLITAN EDISON COMPANY 1,000 US DOLLARS 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 1 PER-BOOK 1,582,147 124,231 194,160 539,522 0 2,440,060 66,273 370,200 252,952 689,425 100,000 23,598 563,251 29,885 0 22,192 40,020 0 510 33,060 938,119 2,440,060 687,823 39,865 554,862 594,727 93,096 593 93,689 44,464 49,225 708 48,517 45,000 45,588 111,050 0 0 REPRESENTS COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES. INCLUDES DIVIDENDS ON COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF $6,750. REPRESENTS COMMON STOCK DIVIDENDS PAID TO PARENT CORPORATION.
EX-27.D 9 FINANCIAL DATA SCHEDULE/PENELEC
UT 0000077227 PENNSYLVANIA ELECTRIC COMPANY 1,000 US DOLLARS 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 1 PER-BOOK 1,803,913 54,458 229,781 401,862 0 2,490,014 105,812 285,486 352,146 743,444 105,000 36,777 616,462 30,400 0 40,235 76,010 0 4,389 17,452 819,845 2,490,014 772,260 37,962 630,900 668,862 103,398 (543) 102,855 47,866 54,989 1,158 53,831 30,000 50,788 107,595 0 0 REPRESENTS COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES. INCLUDES DIVIDENDS ON COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF $6,891. REPRESENTS COMMON STOCK DIVIDENDS PAID TO PARENT CORPORATION.
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