UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
---------------
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------ --------------
Commission Registrant, State of Incorporation, I.R.S. Employer
File Number Address and Telephone Number Identification No.
- ----------- ----------------------------------- ------------------
1-6047 GPU, Inc. 13-5516989
(a Pennsylvania corporation)
300 Madison Avenue
Morristown, New Jersey 07962-1911
Telephone (973) 401-8200
1-3141 Jersey Central Power & Light Company 21-0485010
(a New Jersey corporation)
2800 Pottsville Pike
Reading, Pennsylvania 19640-0001
Telephone (610) 929-3601
1-446 Metropolitan Edison Company 23-0870160
(a Pennsylvania corporation)
2800 Pottsville Pike
Reading, Pennsylvania 19640-0001
Telephone (610) 929-3601
1-3522 Pennsylvania Electric Company 25-0718085
(a Pennsylvania corporation)
2800 Pottsville Pike
Reading, Pennsylvania 19640-0001
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 registrant's classes of
voting stock, as of April 30, 2001, was as follows:
Shares
Registrant Title Outstanding
- ----------------------------------- ---------------------------- -----------
GPU, Inc. Common Stock, $2.50 par value 119,495,650
Jersey Central Power & Light Company Common Stock, $10 par value 15,371,270
Metropolitan Edison Company Common Stock, no par value 859,500
Pennsylvania Electric Company Common Stock, $20 par value 5,290,596
GPU, Inc. and Subsidiary Companies
Quarterly Report on Form 10-Q
March 31, 2001
Table of Contents
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Page
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PART I - Financial Information
Combined Management's Discussion and Analysis
of Financial Condition and Results of
Operations 1
Consolidated Financial Statements:
GPU, Inc.
---------
Balance Sheets 23
Statements of Income 25
Statements of Cash Flows 26
Jersey Central Power & Light Company
------------------------------------
Balance Sheets 27
Statements of Income 29
Statements of Cash Flows 30
Metropolitan Edison Company
---------------------------
Balance Sheets 31
Statements of Income 33
Statements of Cash Flows 34
Pennsylvania Electric Company
-----------------------------
Balance Sheets 35
Statements of Income 37
Statements of Cash Flows 38
Combined Notes to Consolidated Financial Statements 39
PART II - Other Information 62
Signatures 63
The financial statements (not examined by independent accountants) reflect
all adjustments (which consist of only normal recurring accruals), which are in
the opinion of management, necessary for a fair statement of the results for the
interim periods presented.
This combined Quarterly Report on Form 10-Q is separately filed by GPU,
Inc., Jersey Central Power & Light Company, Metropolitan Edison Company and
Pennsylvania Electric Company. Information contained herein relating to any
individual registrant is filed by such registrant on its own behalf. None of
these registrants make any representations as to information relating to the
other registrants. This combined Form 10-Q supplements and updates the 2000
Annual Report on Form 10-K, filed by the individual registrants with the
Securities and Exchange Commission and should be read in conjunction therewith.
SAFE HARBOR STATEMENT UNDER
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, GPU, Inc., Jersey Central Power & Light Company,
Metropolitan Edison Company and Pennsylvania Electric Company (the GPU
registrants) are hereby filing cautionary statements identifying important
factors that could cause their actual results to differ materially from those
projected in forward-looking statements (as that term is defined in the Private
Securities Litigation Reform Act of 1995) made by or on behalf of the GPU
registrants which are made in this Form 10-Q. Any statements that express, or
involve discussions as to, expectations, beliefs, plans, objectives, assumptions
or future events or performance (often, but not always, through the use of words
or phrases such as "anticipates," "believes," "estimates," "expects," "intends,"
"plans," "projects," "will likely," "result," "will continue" or similar
expressions) are not statements of historical facts and may be forward-looking.
Forward-looking statements involve estimates, assumptions and
uncertainties and are qualified in their entirety by reference to, and are
accompanied by, the following important factors, which are difficult to predict,
contain uncertainties, are beyond the control of the GPU registrants and may
cause actual results to differ materially from those contained in those
forward-looking statements:
- the consummation of the proposed merger of GPU, Inc. with FirstEnergy
Corp.;
- the effects of regulatory decisions, including any conditions imposed
relating to the proposed merger with FirstEnergy Corp.;
- 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;
- energy prices and availability; and
- uncertainties involved with foreign operations including political risks
and foreign currency fluctuations.
Any forward-looking statement speaks only as of the date on which that
statement is made, and the GPU registrants undertake no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which that statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time and it is not possible for
management to predict all of those factors, nor can it assess the impact of each
of those factors on the business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statement.
GPU, Inc. and Subsidiary Companies
COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GPU, Inc. owns all the outstanding common stock of three domestic electric
utilities -- Jersey Central Power & Light Company (JCP&L), Metropolitan Edison
Company (Met-Ed) and Pennsylvania Electric Company (Penelec). These electric
utilities are conducting business under the name GPU Energy and considered
together are referred to as the "GPU Energy companies." GPU Capital, Inc. and
GPU Electric, Inc. and their subsidiaries own, operate and fund the acquisition
of electric distribution and gas transmission systems in foreign countries, and
are referred to as "GPU Electric." GPU Electric's foreign utility companies
include Midlands Electricity plc (conducting business as GPU Power UK); GPU
Empresa Distribuidora Electrica Regional S.A. (Emdersa); and GPU GasNet. GPU
Power, Inc. and its subsidiaries (GPU Power) develop, own and operate generation
facilities in foreign countries. Other subsidiaries of GPU, Inc. include GPU
Advanced Resources, Inc. (GPU AR), which sells electric energy at retail; GPU
Telcom Services, Inc. (GPU Telcom), which is engaged in
telecommunications-related businesses; MYR Group Inc. (MYR), which is a utility
infrastructure construction services company; GPU Service, Inc. (GPUS), which
provides legal, accounting, financial and other services to the GPU companies;
GPU Diversified Holdings LLC, which makes investments in energy-related
businesses; and GPU Nuclear, Inc. (GPUN). All of these companies considered
together are referred to as "GPU."
GPU'S RESULTS OF OPERATIONS
---------------------------
EARNINGS PER SHARE CONTRIBUTION:
- --------------------------------
(on a diluted basis) Three Months Ended
March 31,
----------------------------
2001 2000 Change
------ ------ ------
Operations:
GPU Energy companies $ 0.71 $ 0.79 $(0.08)
GPU Electric 0.10 0.29 (0.19)
GPU Power/GPUI (1) 0.02 0.03 (0.01)
GPU AR 0.01 0.01 -
GPU Telcom - - -
MYR 0.01 - 0.01
GPU, Inc. (Corporate) (0.10) (0.04) (0.06)
----- ----- -----
Total operations 0.75 1.08 (0.33)
Non-recurring items:
GPU Energy companies (0.17) - (0.17)
----- ----- -----
Total $ 0.58 $ 1.08 $(0.50)
===== ===== =====
(1) The 2000 results included GPU International, Inc. (GPUI), which was sold
in December 2000.
GPU's earnings for the first quarter 2001 before non-recurring items were
$89 million, or $0.75 per share, compared with earnings of $131 million, or
$1.08 per share, for the same period in 2000. There were no non-recurring items
in the first quarter 2000. The lower 2001 first quarter earnings on this basis
was primarily due to the Pennsylvania energy supply loss reflecting the fact
that Met-Ed and Penelec had to purchase electricity under its provider of last
resort obligation at prices above the retail rate caps
1
GPU, Inc. and Subsidiary Companies
at which they could resell it, as well as the effect of increasing numbers of
shopping customers returning from alternate generation suppliers in
Pennsylvania; and lower earnings at GPU Power UK due to the reset of electricity
delivery rates that took effect in April 2000.
After taking into account the 2001 non-recurring items, GPU recorded net
income of $68.9 million, or $0.58 per share, in the first quarter 2001. The 2001
non-recurring items included: a charge of $10.7 million after-tax, or $0.09 per
share, for costs related to Voluntary Enhanced Retirement Programs (VERP)
offered to certain bargaining unit employees in Pennsylvania; and a charge of
$9.4 million after-tax, or $0.08 per share, for costs related to the termination
of a wholesale energy contract with Allegheny Electric Cooperative (AEC).
OPERATING REVENUES:
- -------------------
Operating revenues for the first quarter 2001 increased $124 million to
$1.3 billion, as compared to the first quarter 2000. The components of the
changes are as follows:
2001 vs. 2000 (in millions)
---------------------------
Three Months Ended
March 31,
------------------
GPU Energy companies:
Kilowatt-hour (KWH) revenues $ 60.6
Energy and restructuring-related
Revenues (NJ) (1.5)
Competitive transition charge
(CTC) revenues (PA) 0.9
Other revenues 0.8
-----
Total GPU Energy companies 60.8
GPU Electric (61.1)
GPU Power/GPUI (23.5)
GPU AR (11.1)
GPU Telcom 6.1
MYR 152.8
-----
Total increase $124.0
=====
GPU Energy companies
Kilowatt-hour revenues
- ----------------------
The increase for the three months ended March 31, 2001 was primarily due
to the return of numerous shopping customers in Pennsylvania from alternate
generation suppliers during the first quarter 2001, and higher weather-related
sales due to colder winter temperatures this year compared to the previous
winter.
Energy and restructuring-related revenues (JCP&L only)
- ------------------------------------------------------
Changes in energy and restructuring-related revenues do not affect
earnings as they are offset by corresponding changes in expense.
2
GPU, Inc. and Subsidiary Companies
Competitive transition charge (CTC) revenues (Met-Ed and Penelec only)
- ----------------------------------------------------------------------
CTC revenues represent Pennsylvania stranded cost recoveries permitted by
the Pennsylvania Public Utility Commission (PaPUC) in accordance with Met-Ed and
Penelec's final Restructuring Orders effective January 1, 1999. Changes in CTC
revenues generally do not affect earnings as they are offset by corresponding
changes in expense.
GPU Electric
The decrease for the three months ended March 31, 2001 was primarily due to
the reset of electricity delivery rates at GPU Power UK that took effect in
April 2000, and the absence of revenues in 2001 at GPU PowerNet due to its sale
in June 2000.
GPU Power/GPUI
The decrease for the three months ended March 31, 2001 was primarily due
to the sale of GPUI in December 2000.
GPU AR
The decrease for the three months ended March 31, 2001 was primarily due
to lower KWH sales as a result of fewer sales contracts based on significantly
higher wholesale electricity prices, as compared to the same period last year.
GPU Telcom
The increase for the three months ended March 31, 2001 was primarily due
to more fiber optics miles constructed for private build customers in 2001, as
compared to the same period last year.
MYR
The increase for the three months ended March 31, 2001 was due to the
inclusion of revenues from MYR following its acquisition by GPU, Inc. in the
second quarter 2000.
OPERATING INCOME:
- -----------------
Operating income for the first quarter 2001 decreased $123.8 million to
$216.5 million, as compared to the first quarter 2000. The components of the
changes are as follows:
2001 vs. 2000 (in millions)
---------------------------
Three Months Ended
March 31,
------------------
GPU Energy companies $ (64.8)
GPU Electric (61.7)
GPU Power/GPUI 0.9
GPU AR (2.2)
GPU Telcom 2.0
MYR 2.4
GPU, Inc. (0.4)
------
Total decrease $(123.8)
======
3
GPU, Inc. and Subsidiary Companies
GPU Energy companies
The decrease was primarily due to increased electricity purchases by
Met-Ed and Penelec due to fewer customers shopping for their energy supply and
higher energy prices (approximately $81 million); a non-recurring charge of
$18.3 million pre-tax, for the costs of a VERP offered to and accepted by
certain bargaining unit employees in Pennsylvania; and a non-recurring charge of
$16 million pre-tax, for costs related to the termination of a wholesale energy
contract with AEC. Partially offsetting these decreases was increased KWH
revenues, as discussed above, and lower operation and maintenance (O&M) expenses
(approximately $40 million, excluding the VERP) primarily due to the sale of the
Oyster Creek Generating Station (Oyster Creek) in August 2000.
GPU Electric
The decrease for the three months ended March 31, 2001 was primarily due
to lower revenues as a result of the reset of electricity delivery rates at GPU
Power UK. Also contributing to the decrease in operating income was an increase
in O&M expenses (approximately $10 million) due primarily to higher employee
related costs. Partially offsetting these decreases was lower depreciation
expenses of approximately $6 million.
MYR
The increase for the three months ended March 31, 2001 was due to the
inclusion of MYR following its acquisition by GPU, Inc. in the second quarter
2000.
OTHER INCOME AND DEDUCTIONS:
- ----------------------------
Other income and deductions for the first quarter 2001 increased $0.2
million to $23.3 million, as compared to the first quarter 2000. The components
of the changes are as follows:
2001 vs. 2000 (in millions)
---------------------------
Three Months Ended
------------------
March 31,
GPU Energy companies $ 7.3
GPU Electric (5.2)
GPU Power/GPUI (2.5)
GPU AR -
GPU Telcom (1.4)
MYR (0.1)
GPU, Inc. 2.1
-----
Total increase $ 0.2
=====
GPU Energy companies
The increase for the three months ended March 31, 2001 was primarily due
to higher CTC interest income of approximately $5 million.
4
GPU, Inc. and Subsidiary Companies
GPU Electric
The decrease for the three months ended March 31, 2001 was due primarily
to the decrease of investment income of approximately $5 million at GPU Power
UK.
INTEREST CHARGES AND PREFERRED DIVIDENDS:
- -----------------------------------------
Interest charges and preferred dividends for the first quarter 2001
decreased $22 million to $121 million, as compared to the first quarter 2000.
The components of the changes are as follows:
2001 vs. 2000 (in millions)
---------------------------
Three Months Ended
March 31,
------------------
GPU Energy companies $ 0.9
GPU Electric (28.7)
GPU Power/GPUI (0.3)
GPU AR -
GPU Telcom -
MYR 0.3
GPU, Inc. 5.8
-----
Total decrease $(22.0)
=====
GPU Electric
The decrease for the three months ended March 31, 2001 was primarily due
to lower debt levels resulting primarily from the sale of GPU PowerNet in June
2000. Also contributing to the decrease was lower interest rates at GPU Capital,
Inc.
GPU, Inc.
The increase for the three months ended March 31, 2001 was primarily due
to the issuance of $300 million of debentures in December 2000.
JCP&L RESULTS OF OPERATIONS
---------------------------
JCP&L's earnings for the first quarter 2001 were $50 million, compared to
first quarter 2000 earnings of $43.1 million. The increase was primarily due to
higher weather-related sales due to colder winter temperatures this year
compared to the previous winter; and lower O&M expenses as a result of the sale
of Oyster Creek in August 2000.
OPERATING REVENUES:
- -------------------
Operating revenues for the first quarter 2001 increased $8.9 million to
$461.6 million, as compared to the first quarter 2000. The components of the
changes are as follows:
5
GPU, Inc. and Subsidiary Companies
2001 vs. 2000 (in millions)
---------------------------
Three Months Ended
March 31,
------------------
KWH revenues $ 8.1
Energy and restructuring-related
revenues (1.5)
Other revenues 2.3
---
Increase in revenues $ 8.9
===
The increase in KWH revenues was primarily due to higher demand for
electricity resulting from colder weather during the winter of 2001 compared to
the previous winter.
OPERATING INCOME:
- -----------------
Operating income for the first quarter 2001 increased $7.7 million to
$103.7 million, as compared to the first quarter 2000. The increase was
primarily due to increased KWH revenues, as discussed above; and lower O&M
expenses of approximately $35 million as a result of the sale of Oyster Creek in
August 2000. Partially offsetting these increases was higher deprecation and
amortization expenses of approximately $6 million, and higher energy costs due
to increase demand and the need to purchase more electricity due to the sale of
Oyster Creek.
INTEREST CHARGES AND PREFERRED DIVIDENDS:
- -----------------------------------------
Interest charges and preferred dividends for the first quarter 2001
decreased $0.5 million to $27.7 million, as compared to the first quarter 2000.
The decrease was primarily due to the redemption of $16.7 million stated value
cumulative preferred stock pursuant to mandatory and optional sinking fund
provisions in 2000.
MET-ED RESULTS OF OPERATIONS
----------------------------
Met-Ed's earnings for the first quarter 2001 were $16 million, compared to
first quarter 2000 earnings of $26.5 million. Excluding a non-recurring charge
of $5.4 million after-tax for costs related to a VERP offered to certain
bargaining unit employees, earnings for the first quarter 2001 would have been
$21.4 million. The decrease in earnings on this basis was primarily due to the
fact that Met-Ed had to purchase electricity under its provider of last resort
obligation at prices above the retail rate caps at which it could resell it, and
the effect of increasing numbers of shopping customers returning from alternate
generation suppliers.
OPERATING REVENUES:
- -------------------
Operating revenues for the first quarter 2001 increased $18 million to
$221.1 million, as compared to the first quarter 2000. The components of the
changes are as follows:
6
GPU, Inc. and Subsidiary Companies
2001 vs. 2000 (in millions)
---------------------------
Three Months Ended
March 31,
------------------
KWH revenues $ 18.5
CTC revenues 1.1
Other revenues (1.6)
-----
Increase in revenues $ 18.0
=====
The increase in KWH revenues was primarily due to the return of numerous
shopping customers from alternate generation suppliers during the first quarter
2001, partially offset by a decrease of sales to other utilities.
OPERATING INCOME:
- -----------------
Operating income for the first quarter 2001 decreased $24.5 million to
$30.8 million, as compared to the first quarter 2000. The decrease was primarily
due to increased electricity purchases and higher energy prices (approximately
$33 million); and a non-recurring charge to other O&M expenses of $9.2 million
pre-tax, for costs related to the VERP. Partially offsetting these decreases was
increased KWH revenues, as discussed above.
OTHER INCOME AND DEDUCTIONS:
- ----------------------------
Other income and deductions for the first quarter 2001 increased $5.4
million to $8.2 million, as compared to the first quarter 2000. The increase was
primarily due to higher CTC interest income of approximately $5 million.
INTEREST CHARGES:
- -----------------
Interest charges for the first quarter 2001 decreased $1 million to $13.1
million, as compared to the first quarter 2000. The decrease was primarily due
to the retirement of $50 million of first mortgage bonds in 2000.
PENELEC RESULTS OF OPERATIONS
-----------------------------
Penelec recorded a net loss of $2.1 million for the first quarter 2001,
compared to first quarter 2000 earnings of $26.9 million. Excluding a
non-recurring charge of $9.4 million after-tax for costs related to the
termination of a wholesale energy contract with AEC, and a non-recurring charge
of $5.3 million after-tax for costs related to a VERP offered to certain
bargaining unit employees, earnings for the first quarter 2001 would have been
$12.6 million. The decrease in earnings on this basis was primarily due to the
fact that Penelec had to purchase electricity under its provider of last resort
obligation at prices above the retail rate caps at which it could resell it, and
the effect of increasing numbers of shopping customers returning from alternate
generation suppliers.
7
GPU, Inc. and Subsidiary Companies
OPERATING REVENUES:
- -------------------
Operating revenues for the first quarter 2001 increased $23.7 million to
$243.8 million, compared to the first quarter 2000. The components of the
changes are as follows:
2001 vs. 2000 (in millions)
---------------------------
Three Months Ended
March 31,
------------------
KWH revenues $ 23.9
CTC revenues (0.2)
Other revenues -_
------
Increase in revenues $ 23.7
=====
The increase in KWH revenues was primarily due to the return of numerous
shopping customers from alternate generation suppliers during the first quarter
2001, partially offset by a decrease of sales to other utilities.
OPERATING INCOME:
- -----------------
Operating income for the first quarter 2001 decreased $48.2 million to
$5.4 million, as compared to the first quarter 2000. The decrease was primarily
due to increased electricity purchases and higher energy prices (approximately
$48 million); a non-recurring charge of $16 million pre-tax, for costs related
to the termination of the AEC contract; and a non-recurring charge to other O&M
expenses of $9.1 million pre-tax, for costs related to the VERP. Partially
offsetting these decreases was increased KWH revenues, as discussed above.
INTEREST CHARGES:
- -----------------
Interest charges for the first quarter 2001 increased $2.4 million to
$11.5 million, as compared to the first quarter 2000. The increase was primarily
due to the increase of $93 million of senior notes in 2000.
PENDING MERGER OF FIRSTENERGY CORP. AND GPU
-------------------------------------------
On August 8, 2000, GPU, Inc. entered into an agreement to merge with
FirstEnergy, an Ohio corporation, headquartered in Akron, Ohio. Under the merger
agreement, FirstEnergy would acquire all of the outstanding shares of GPU's
common stock for approximately $4.5 billion in cash and FirstEnergy common
stock.
The merger has been approved by the Boards of Directors and stockholders
of GPU, Inc. and FirstEnergy and is expected to close promptly after all of the
conditions to the consummation of the merger (including the receipt of all
necessary regulatory approvals, provided that such approvals will not impose
terms and conditions that would reasonably be expected to result in a "material
adverse effect," as defined in the merger agreement, on the combined company,
and there being no "material adverse effect" on either GPU or FirstEnergy since
June 30, 2000 or March 31, 2000, respectively), are fulfilled or waived.
Relevant factors would include the nature of any order
8
GPU, Inc. and Subsidiary Companies
issued by the regulatory authorities, the financial and business conditions of
each company, and whether, and the extent by which, any developments relate to
general economic conditions. In testimony before the PaPUC, FirstEnergy stated
that FirstEnergy will carefully review the PaPUC's action with respect to GPU's
requested provider of last resort (PLR) relief on the financial condition of GPU
to determine whether the consequences would have a "material adverse effect" on
GPU or the combined company (for further information on the subject of PLR, see
Provider of Last Resort section of Competitive Environment and Rate Matters).
The receipt of all necessary regulatory approvals is expected to take
approximately twelve months from the date of the merger agreement. There can be
no assurance as to the outcome of these matters.
INVESTMENTS IN FUCOs AND EWGs
-----------------------------
GPU, Inc. has Securities and Exchange Commission (SEC) authorization to
finance investments in foreign utility companies (FUCOs) and exempt wholesale
generators (EWGs) up to an aggregate amount equal to 100% of GPU's average
consolidated retained earnings, or approximately $2.4 billion as of March 31,
2001. At March 31, 2001, GPU, Inc. has remaining authorization to finance
approximately $518 million of additional investments in FUCOs and EWGs. GPU,
Inc.'s investments in FUCOs and EWGs are made through GPU Electric and GPU
Power.
GPU ELECTRIC
------------
GPU Electric owns electric distribution and gas transmission businesses in
England, Australia and Argentina. Through its ownership of GPU Power UK, GPU
Electric also has investments in operating generating facilities located in
foreign countries totaling 4,201 megawatts (MW) (of which GPU Electric's equity
interest represents 1,119 MW) of capacity. At March 31, 2001, GPU, Inc.'s
aggregate investment in GPU Electric was $802 million. GPU, Inc. has also
guaranteed up to an additional $1 billion of outstanding GPU Electric
obligations.
GPU POWER
---------
GPU Power has ownership interests in four operating generating facilities
located in foreign countries totaling 1,229 MW (of which GPU Power's equity
interest represents 424 MW) of capacity. At March 31, 2001, GPU, Inc.'s
aggregate investment in GPU Power was $141 million. GPU, Inc. has also
guaranteed up to an additional $21 million of GPU Power obligations.
GPU TELCOM
----------
GPU Telcom is a telecommunications infrastructure development and
management company and wholesale telecommunications provider with operations
primarily in the Mid-Atlantic region of the US. Its customers consist of
telecommunications end-use service providers including: interexchange carriers;
competitive local exchange carriers; competitive access providers and multiple
system operators; commercial and industrial companies (private networks) and
governmental agencies; cable television and telephone companies; and internet
service providers. At March 31, 2001, GPU, Inc.'s aggregate investment in GPU
Telcom was $72 million. GPU, Inc. also intends
9
GPU, Inc. and Subsidiary Companies
to guarantee up to $50 million of obligations under a syndicated bank facility
of America's Fiber Network LLC, a high-speed fiber optics company in which GPU
Telcom has invested.
MYR GROUP
---------
MYR is a utility infrastructure construction services company which
provides power line and commercial/industrial electrical construction for
electric utilities, telecommunications providers, commercial and industrial
facilities and government agencies. MYR also builds cellular towers for the
wireless communications market. At March 31, 2001, GPU, Inc.'s aggregate
investment in MYR was $237 million.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The California electricity market was deregulated in 1998. In recent
months, certain aspects of that state's restructuring plan have created
instability and price volatility in the electricity market, negatively affecting
the California electric utilities. These utilities have defaulted on various
contractual and financial obligations and have experienced rapid deterioration
of their credit quality. Reaction of the financial markets has included a
careful review of overall credit exposure to the electric utility industry. As a
result of this instability, coupled with the inability to pass on increasing
wholesale power costs to its customers, Pacific Gas & Electric Company,
California's largest utility, filed for reorganization under Chapter 11 of the
US Bankruptcy Code in April 2001.
Furthermore, Met-Ed's and Penelec's energy cost exposure related to their
PLR obligation in Pennsylvania has negatively affected Met-Ed's and Penelec's
earnings. Consequently, the amount of new financing capacity available to GPU,
Inc. or its subsidiaries may be less than it had previously been. While the GPU
companies do not expect to require significant levels of new borrowings in 2001,
certain existing credit facilities are due for renewal or refinancing during
2001. At March 31, 2001, these credit facilities include: $433 million available
to GPU, Inc. and the GPU Energy companies under a $250 million revolving credit
agreement and various committed bank lines of credit; $1 billion under GPU
Capital, Inc.'s (GPU Capital) senior revolving credit agreement; $180 million
under GPU Australia Holdings, Inc.'s (GPU Australia Holdings) senior revolving
credit agreement; and $360 million under EI UK Holdings, Inc.'s two year term
loan agreement. These credit facilities expire at various times through November
2001.
Renewal or refinancing of these facilities will require GPU's acceptance
of higher pricing and/or more restrictive terms and conditions, particularly if
Met-Ed and Penelec are unable to obtain adequate regulatory relief from their
PLR obligations. If renewal or refinancing of the existing credit facilities is
limited or cannot be achieved, GPU will be required to reduce capital spending
and other discretionary cash uses, including the amount and timing of future
common stock dividends. Moreover, the failure to obtain PLR relief will likely
result in a further increase in capital costs, more restrictive terms and
conditions and reduced access to capital markets. For information relating to
the companies' petition for PLR relief, see Provider of Last Resort section of
Competitive Environment and Rate Matters.
10
GPU, Inc. and Subsidiary Companies
GPU, Inc. and the GPU Energy companies have reached an agreement in
principle with their lenders to amend and extend their revolving credit
agreement which expires on May 6, 2001. Among other things, the amendment would
provide for committed bank borrowing capacity of between $302 million and $369
million, an extension of the term to not later than October 31, 2001 and
additional commitments and other fees. This extension, together with other
bilateral credit commitments, would result in an overall reduction in such
committed bank credit of between $64 million and $131 million, which, if
necessary, GPU believes it could fund from its other committed facilities. In
the event that the majority lenders conclude that the PaPUC decision on Met-Ed's
and Penelec's pending request for PLR relief is "unsatisfactory," the amended
agreement would require the GPU Energy companies to pledge their senior notes,
secured by their first mortgage bonds, as collateral security for borrowings
under the credit agreement and would prohibit GPU, Inc. from paying common stock
dividends and limit its ability to make investments in GPU Energy and non-core
businesses. Moreover, the maturity date of the credit agreement would be
shortened. It is expected that a definitive amendment to the credit agreement
will be entered into on or about May 4, 2001.
Negotiations to extend the EI UK Holdings term loan agreement (which
expires on July 15, 2001) to not later than October 31, 2001 are also in
process.
In addition, primarily as a result of these conditions (the companies' PLR
exposure and the negative publicity surrounding the California utilities), in
early 2001 Met-Ed and Penelec began experiencing difficulty in selling their
commercial paper with maturities longer than overnight. Under normal
circumstances, they issue commercial paper having maturities of up to 30 days or
longer, if desired. As a result, Met-Ed and Penelec have temporarily withdrawn
from the commercial paper market, and instead have resorted to borrowing against
their various bank lines of credit.
There can be no assurance as to the outcome of these matters.
Capital Expenditures and Investments
- ------------------------------------
GPU Energy companies
The GPU Energy companies' capital spending for the first quarter 2001 was
$59 million (JCP&L $33 million; Met-Ed $12 million; Penelec $14 million), and
was used primarily to expand and improve existing transmission and distribution
(T&D) facilities and for new customer connections. For 2001, capital
expenditures for the GPU Energy companies are estimated to be $371 million
(JCP&L $184 million; Met-Ed $83 million; Penelec $97 million; Other $7 million),
primarily for ongoing T&D system development. Management estimates that a
substantial portion of the GPU Energy companies' 2001 capital spending will be
supplied through internally generated funds.
GPU Electric
GPU Electric's capital spending for the first quarter 2001 of $40 million
was used primarily to make improvements to Emdersa's and GPU Power UK's
distribution networks. For 2001, GPU Electric's capital expenditures are
estimated to be $200 million, and management expects that a substantial portion
of this amount will be supplied through internally generated funds.
11
GPU, Inc. and Subsidiary Companies
GPU Telcom
GPU Telcom's capital spending for the first quarter 2001 of $18 million
was used primarily to make investments in telecommunications infrastructure and
businesses. In 2001, GPU Telcom's capital expenditures are estimated to be $90
million, which management expects will be supplied by capital contributions and
internally generated funds.
Financing
- ---------
GPU, Inc.
GPU has various credit facilities in place, the most significant of which
are discussed below. These credit facilities generally provide GPU bank loans at
negotiated market rates.
GPU, Inc. and the GPU Energy companies have available $433 million of
short-term borrowing facilities, which include a $250 million revolving credit
agreement and various bank lines of credit. In addition, GPU, Inc., JCP&L,
Met-Ed and Penelec have commercial paper programs in amounts of up to $100
million, $150 million, $75 million and $100 million, respectively. From these
sources, GPU, Inc. has regulatory authority to have $250 million outstanding at
any one time. JCP&L, Met-Ed and Penelec are limited by their charters or SEC
authorization to $264 million, $150 million and $150 million, respectively, of
short-term debt outstanding at any one time. As of March 31, 2001, GPU, Inc. and
the GPU Energy companies had $61 million and $266 million (JCP&L $92 million;
Met-Ed $87 million; Penelec $87 million), respectively, of short-term debt
outstanding.
GPU Energy companies
JCP&L, Met-Ed and Penelec have regulatory approval to issue senior notes
through December 31, 2002 in the amounts of $300 million, $150 million and $157
million, respectively. JCP&L and Met-Ed intend to issue secured senior notes
(collateralized by first mortgage bonds (FMBs) issued to the senior note
trustee) until such time as more than 80% of the outstanding FMBs are held by
the senior note trustee. At that time, the FMBs will be cancelled and the
outstanding senior notes will become unsecured obligations. Penelec's senior
notes are unsecured.
Maturing long-term debt is expected to total $40 million (JCP&L) in 2001,
and $130 million (JCP&L $50 million; Met-Ed $30 million; Penelec $50 million) in
2002. Current plans call for each of the GPU Energy companies to issue senior
notes during the next three years to fund the redemption of maturing senior
securities, refinance outstanding senior securities and finance construction
activities. Following their initial issuance of senior notes, the GPU Energy
companies would not issue any additional FMBs other than as collateral for the
senior notes. The senior note indentures prohibit (subject to certain
exceptions) the GPU Energy companies from issuing any debt which is senior to
the senior notes.
JCP&L's and Met-Ed's bond indentures include provisions that limit the
amount of FMBs the companies may issue. JCP&L's and Met-Ed's interest coverage
ratios are currently in excess of indenture restrictions. In addition, JCP&L's
certificate of incorporation includes provisions that limit the amount of
preferred stock it may issue. JCP&L's preferred dividend coverage ratio is
currently in excess of this charter restriction.
In August 1999, JCP&L filed a petition with the New Jersey Board of Public
Utilities (NJBPU) requesting authorization to issue transition bonds to
securitize the recovery of
12
GPU, Inc. and Subsidiary Companies
bondable stranded costs attributable to the projected net investment in Oyster
Creek at September 1, 2000. The petition also requests that the NJBPU order
provide for the imposition and collection of a usage-based non-bypassable
transition bond charge (TBC) and for the transfer of the bondable transition
property relating to the TBC to another entity. In August 2000, Oyster Creek was
sold to AmerGen Energy Company LLC (AmerGen), a joint venture of PECO Energy and
British Energy. JCP&L currently plans to sell transition bonds in the fourth
quarter 2001.
At March 31, 2001, JCP&L, Met-Ed and Penelec had retained earnings
available to pay common stock dividends of $768 million, $68 million and $31
million, respectively, net of amounts restricted under each company's respective
FMB indentures.
GPU Electric
GPU Capital has established a $1 billion commercial paper program to fund
GPU, Inc. and GPU Electric acquisitions. At March 31, 2001, $22 million was
outstanding under this commercial paper program and included in Notes payable on
the Consolidated Balance Sheet.
To support the issuance of GPU Capital commercial paper, GPU Capital has a
$1 billion, 364-day senior revolving credit agreement expiring in November 2001,
which, in combination with the GPU Capital commercial paper program, is
guaranteed by GPU, Inc. for up to $1 billion of outstanding obligations. In
early 2001, GPU Capital refinanced the majority of its then outstanding
commercial paper through this senior revolving credit agreement. At March 31,
2001, $723 million was outstanding under the senior revolving credit agreement
and included in Notes payable on the Consolidated Balance Sheet.
GPU GasNet has a A$750 million (US $366 million) debt issuance program
jointly arranged by two banks to refinance a portion of GPU GasNet's maturing
bank debt. The various agreements under the program facilitate the issuance of
GPU GasNet commercial paper and medium term notes. At March 31, 2001, A$250
million (US $122 million) of commercial paper and A$150 million (US $73 million)
of medium term notes were outstanding under this program and included in
Long-term debt on the Consolidated Balance Sheet.
GPU GasNet has a A$250 million (US $122 million) revolving credit facility
which serves as backstop for the issuance of GPU GasNet's commercial paper. At
March 31, 2001, there were no outstanding borrowings under the revolving credit
facility.
In addition, GPU GasNet has a A$375 million (US $183 million) senior
credit facility. At March 31, 2001, A$211 million (US $103 million) of bank debt
was outstanding under this facility and included in Long-term debt on the
Consolidated Balance Sheet.
GPU Electric has a $150 million credit facility, which expires in May
2002, to accommodate short-term borrowing needs. Borrowings under this facility
are guaranteed by GPU, Inc. At March 31, 2001, there were no outstanding
borrowings under this facility.
GPU Australia Holdings has a $180 million senior revolving credit
facility, which expires in November 2001. Borrowings under this facility are
guaranteed by GPU, Inc. At March 31, 2001, $176 million was outstanding under
this facility and included in Notes payable on the Consolidated Balance Sheet.
13
GPU, Inc. and Subsidiary Companies
EI UK Holdings, Inc. has a British pounds (BP) 245 million (US $348
million) credit facility consisting of a two tranches (BP 60 million and BP 185
million). Borrowings under the BP 60 million tranche (US $85.3 million) are
guaranteed by GPU, Inc. This credit facility expires on July 15, 2001. GPU is
seeking an extension of the maturity date to not later than October 31, 2001. At
March 31, 2001, the entire amount of this facility was outstanding and included
in Securities due within one year on the Consolidated Balance Sheet.
GPU Power UK maintains separate revolving credit facilities with six banks
totaling BP 150 million (US $224 million) for working capital purposes, expiring
in July 2005. At March 31, 2001, BP 48 million (US $68 million) was outstanding
under these facilities and included in Notes payable on the Consolidated Balance
Sheet.
In addition, GPU Power UK maintains a BP 75 million (US $107 million) bank
facility for working capital purposes. Outstanding borrowings are collateralized
by portions of trade accounts receivable. At March 31, 2001, BP 75 million (US
$107 million) was outstanding under this facility and included in Notes payable
on the Consolidated Balance Sheet.
Maturing long-term debt is expected to total $912 million in 2001 and $437
million in 2002.
GPU Power
Maturing long-term debt is expected to total $7 million in each of 2001
and 2002. Management anticipates meeting these obligations through internally
generated funds.
MYR Group
MYR maintains a $50 million revolving credit facility, which expires in
November 2003, of which up to $10 million is available for the issuance of
standby letters of credit. GPU, Inc. has guaranteed MYR's borrowings under this
facility. As of March 31, 2001, $20 million was outstanding under this facility
and included in Notes payable on the Consolidated Balance Sheet.
COMPETITIVE ENVIRONMENT AND RATE MATTERS
----------------------------------------
In March 2001, 207 employees (Met-Ed 101 employees; Penelec 106 employees)
accepted Voluntary Enhanced Retirement Programs (VERP) offered to certain
bargaining unit employees in Pennsylvania. As a result, a pre-tax charge of
approximately $18 million (Met-Ed $9 million; Penelec $9 million) has been
recorded in 2001 Operating Income for the cost of pension and other
postretirement benefits.
In October 1999, GPU initiated a program to enhance shareholder value
through planned cost reductions of $100 million and through the sale of non-core
and under-performing assets. A significant portion of these planned cost
reductions were achieved in 2000, and the remaining reductions are scheduled to
be implemented during 2001.
Recent Regulatory Actions
- -------------------------
With the transition to a competitive marketplace for generation service in
New Jersey and Pennsylvania, certain generation-related costs, which generally
would be recoverable in a regulated environment, may no longer be recoverable.
These costs are generally referred to as stranded costs.
14
GPU, Inc. and Subsidiary Companies
New Jersey Restructuring
In March 2001, the NJBPU issued a Final Decision and Order (Final Order)
with respect to JCP&L's rate unbundling, stranded cost and restructuring
filings, which supersedes a Summary Order issued by the NJBPU in May 1999. The
Final Order confirms rate reductions set forth in the Summary Order, which began
in August 1999 and will remain in effect at increasing levels through July 2003,
and provides for, among other things, deregulation of the costs associated with
providing electric generation service. The Final Order confirms the
establishment of a non-bypassable societal benefits charge to recover costs
associated with, among other things, nuclear plant decommissioning and
manufactured gas plant remediation, as well as a non-bypassable market
transition charge (MTC). The Final Order provides for the ability to recover
stranded costs; however, the NJBPU deferred making a final determination of the
net proceeds and stranded costs related to the generating asset divestitures
until GPU's request for an Internal Revenue Service (IRS) ruling regarding the
treatment of associated federal income tax benefits is acted upon.
In addition, JCP&L is permitted to defer for future collection from
customers the amounts by which its costs of supplying basic generation service
(BGS) to non-shopping customers and costs incurred under nonutility generation
(NUG) agreements exceed amounts collected in BGS and MTC rates. The Final Order
allows for securitization of the NUG portion of JCP&L's deferred balance so long
as conditions of the New Jersey restructuring legislation are met. However,
JCP&L must seek NJBPU authorization to securitize that portion of its deferred
balance related to above-market NUG costs. There can be no assurance as to the
extent, if any, that the NJBPU will permit such securitization.
The Final Order also provides for the ability to securitize approximately
$400 million of stranded costs associated with Oyster Creek. JCP&L has filed a
petition with the NJBPU requesting authorization to issue transition bonds to
securitize the recovery of these costs.
Pennsylvania Restructuring
In 1998, the PaPUC issued amended Restructuring Orders approving
Settlement Agreements entered into by Met-Ed and Penelec which, among other
things, provide for customer choice of electric generation supplier beginning
January 1, 1999 and a one-year (1999) reduction in retail distribution rates for
all consumers. The Orders also provide for recovery of a substantial portion of
what otherwise would have become stranded costs, subject to Phase II proceedings
following the completion of Met-Ed's and Penelec's generating asset
divestitures, to make a final determination of the extent of that stranded cost
recovery. In 2000, Met-Ed and Penelec submitted Phase II Reports to the PaPUC
supporting their actual net divestiture proceeds and providing a reconciliation
of stranded costs pursuant to the 1998 Restructuring Orders.
In 2000, the PaPUC issued a Phase II Order which, among other things,
disallowed a portion of the requested additional stranded costs above those
amounts granted in the 1998 Orders. The Phase II Order also deferred a decision
on Met-Ed's requested increase in rates, beginning in 2006, for recovery of
Met-Ed's generation-related stranded costs. In addition, the Order requires
Met-Ed and Penelec to seek an IRS ruling regarding the return of certain
unamortized investment tax credits and excess deferred income tax benefits to
ratepayers. If the IRS ruling ultimately supports returning these tax benefits
to ratepayers, Met-Ed and Penelec would then reduce
15
GPU, Inc. and Subsidiary Companies
stranded costs by $40 million plus interest and record a corresponding charge to
income.
GPU Energy Supply Plan
- ----------------------
As a result of the NJBPU's and the PaPUC's Restructuring Orders, the GPU
Energy companies are required to supply electricity to customers who do not
choose an alternate supplier. In 1999 and 2000, the GPU Energy companies
completed the sales of substantially all their electric generating stations. As
a result, the GPU Energy companies now have to supply electricity to
non-shopping customers almost entirely from contracted and open market
purchases, as discussed below. (For additional information regarding the
increased risks associated with supplying that electricity, see GPU Energy
Supply Market Risk section.)
Generation Agreements
The GPU Energy companies have 285 MW of generation capacity and related
energy remaining to meet customer needs. The GPU Energy companies also have
contracts with nonutility generators totaling 1,598 MW (JCP&L 926 MW; Met-Ed 272
MW; Penelec 400 MW) and agreements with other parties to provide varying amounts
of capacity through May 31, 2004. These capacity amounts from third parties vary
from a monthly high of approximately 2,200 MW in 2001 to 500 MW in May 2004.
Based on the exercise of call options, the GPU Energy companies may take the
energy associated with up to 150 MW of this capacity through May 2003. The GPU
Energy companies have also purchased all of the capacity and energy from their
previously owned Three Mile Island Unit 1 (TMI-1) and Oyster Creek (sold by
JCP&L) nuclear generating stations through December 31, 2001 and March 31, 2003,
respectively. In addition, the GPU Energy companies have the right to the
capacity of Penelec's previously owned Homer City station (942 MW) through May
31, 2001 and the right to the capacity of several other generating stations they
sold in 1999 (3,970 MW) through May 31, 2002. GPU Energy's remaining capacity
and energy needs will be met by short- to intermediate-term commitments (one
month to three years). Any residual needs will be purchased from the short-term
market (one hour to one month). Payments pursuant to these agreements, which
include firm commitments as well as certain assumptions regarding, among other
things, call/put arrangements, are estimated to be $1.1 billion in 2001, $454
million in 2002, $74 million in 2003, and $5 million in 2004.
Pursuant to the mandates of the Public Utility Regulatory Policies Act and
state regulatory directives, the GPU Energy companies were required to enter
into long-term power purchase agreements with NUGs for the purchase of energy
and capacity, which agreements have remaining terms of up to 19 years. The NJBPU
Final Order provides JCP&L full recovery of its NUG costs (including
above-market NUG costs and certain buyout costs); and the PaPUC Restructuring
Orders provide Met-Ed and Penelec full recovery of their above-market NUG costs
and certain NUG buyout costs. The GPU Energy companies have recorded, on a
present value basis, a total liability of $2.7 billion (JCP&L $1.6 billion;
Met-Ed $0.5 billion; Penelec $0.6 billion) on the Consolidated Balance Sheets
for above-market NUG costs. These amounts are offset by corresponding regulatory
assets. The GPU Energy companies are continuing efforts to reduce the
above-market costs of these agreements; however, there can be no assurance as to
the extent to which these efforts will be successful.
In 1999, Penelec deposited a portion of the proceeds from its generation
asset sale into a NUG Trust, which has a balance at March 31, 2001 of $187
million. To the extent Penelec incurs above-market NUG costs in
16
GPU, Inc. and Subsidiary Companies
excess of the CTC revenues allocated for such costs, Penelec may withdraw
amounts from the trust.
Basic Generation Service Provider
JCP&L is required to provide basic generation service (BGS) to retail
customers who choose to remain with JCP&L as generation customers for a
three-year period ending July 31, 2002. Thereafter, BGS service will be bid out
at BGS rates, which are pre-determined through July 31, 2003. The specific
details of the BGS bidding process will be the subject of a future NJBPU
proceeding. Under its Final Order, JCP&L is permitted to defer for future
recovery the amount by which its reasonable and prudently incurred costs
associated with providing BGS to non-shopping customers exceed amounts currently
reflected in its rates for BGS.
Provider of Last Resort
Under the 1998 PaPUC Restructuring Orders, Met-Ed and Penelec customers
have been permitted to shop for their generation supplier since January 1, 1999.
The PaPUC approved a competitive bid process designed to assign PLR service to
licensed generation suppliers, referred to as Competitive Default Service (CDS),
for 20% of Met-Ed's and Penelec's retail customers on June 1, 2000, 40% on June
1, 2001, 60% on June 1, 2002 and 80% on June 1, 2003. Any retail customers
assigned to CDS may return to Met-Ed and Penelec as the default PLR. Met-Ed and
Penelec may meet any remaining PLR obligation at rates not less than the lowest
rate charged by the winning CDS provider, but no higher than Met-Ed's and
Penelec's rate cap.
In February 2000, Met-Ed and Penelec announced that they had not received
any bids in response to their offer to auction CDS service for up to 20% of
their retail customers and, as a result, would be increasing their forward
purchasing of electric power to accommodate these customers for whom they will
now continue to be the default supplier. At the PaPUC's direction, Met-Ed and
Penelec initiated a collaborative process in June 2000 with all interested
parties from the 1998 Restructuring Orders, including the PaPUC, to address the
companies' PLR risks. This process was concluded without resolution of the
issues surrounding the companies' PLR risk.
In 2000, the absence of acceptable bids required Met-Ed and Penelec to
supply 550 megawatts (MW) (Met-Ed 250 MW; Penelec 300 MW) of electric power more
than they had planned. In addition, customers requiring approximately 600 MW
(Met-Ed 240 MW; Penelec 360 MW) of power returned to Met-Ed and Penelec from
their alternate suppliers for the peak Summer months. During that same period,
market prices at which Met-Ed and Penelec were required to purchase electricity
for their retail supply customers at times substantially exceeded the amounts
Met-Ed and Penelec were allowed to charge for that electricity under their
capped rates. This situation resulted in GPU's Pennsylvania supply business
recording a loss for 2000 of approximately $28 million (Met-Ed $14 million;
Penelec $14 million) after-tax, or $0.22 per share.
Under the terms of their restructuring settlements, in 2001 Met-Ed and
Penelec again sought alternative providers through a CDS bidding process for 40%
of their customers; however, the companies did not receive any bids in response
to their request. If wholesale energy prices remain high and Met-Ed and Penelec
are not granted state regulatory relief, the companies expect substantial
earnings losses to continue, as well as a reduction of cash flow. Based on their
current projection of returning customers to whom they must
17
GPU, Inc. and Subsidiary Companies
supply electricity under their PLR obligations, Met-Ed and Penelec now estimate
approximately 1,100 MW (Met-Ed 560 MW; Penelec 540 MW) of additional load will
return to them by June 1, 2001. If this projection proves to be correct, Met-Ed
and Penelec estimate that the cost of providing energy to Pennsylvania
customers, including the returning 1,100 MW of load, could result in GPU's
Pennsylvania supply business recording a loss for 2001 of approximately $150
million (Met-Ed $70 million; Penelec $80 million) after-tax, or $1.25 per share,
based on the companies' current assessment of market energy prices. Met-Ed and
Penelec also estimate that if all their shopping customers were to return by
June 1, 2001, their supply business losses could be up to approximately $165
million (Met-Ed $77 million; Penelec $88 million) after-tax, or $1.37 per share.
On November 29, 2000, Met-Ed and Penelec filed a petition with the PaPUC
seeking permission to defer for future recovery their energy costs in excess of
amounts reflected in their capped generation rates. Various parties to the
proceeding filed motions to dismiss the petition. On January 19, 2001, Met-Ed
and Penelec made a further request that they be permitted to implement their
proposed deferral mechanism pending the PaPUC's final action on their petition.
On January 24, 2001, the PaPUC denied, without prejudice, the motions to dismiss
Met-Ed's and Penelec's petition and recommended that the companies provide
support for a rate cap exception based on the criteria in the Customer Choice
and Competition Act. In addition, the PaPUC consolidated the petition with the
GPU/FirstEnergy merger proceeding for consideration and resolution in accord
with the merger procedural schedule. In February 2001, Met-Ed and Penelec filed
a supplement to their petition and testimony supporting the granting of
exceptions to their rate caps. In addition, Met-Ed and Penelec stated that as an
alternative to the deferral mechanism they previously proposed, the
circumstances warrant an immediate increase in their present generation rate
caps coupled with a cost deferral mechanism.
On April 25, 2001, the PaPUC Administrative Law Judge (ALJ) assigned to
the combined proceeding issued his recommended decision. The ALJ recommended
generation rate cap increases totaling $316.7 million (Met-Ed $162.5 million;
Penelec $154.2 million) to address the companies' exposure to increased
wholesale energy prices under Met-Ed's and Penelec's PLR obligation. The
generation rate cap increases would be effective on about June 1, 2001, and
would be in lieu of Met-Ed's and Penelec's proposed deferral mechanism for
excess PLR costs. With respect to the GPU/FirstEnergy merger, the ALJ
recommended that the merger be approved, subject to certain conditions,
including that merger-related savings are flowed back to ratepayers through an
extension of each company's transmission and distribution rate cap until
December 2007. Parties in the proceeding have until May 7, 2001 to file
exceptions to the ALJ's recommended decision, and responses to these exceptions
must be filed by May 14, 2001. The PaPUC is tentatively scheduled to issue its
final decision in the combined proceeding on May 24, 2001.
There can be no assurance regarding the degree, if any, to which Met-Ed
and Penelec may be able to recover their costs to supply electricity in excess
of amounts currently reflected in their capped generation rates.
GPU Energy Supply Market Risk
- -----------------------------
With the divestiture of essentially all their generating plants, the GPU
Energy companies are in a net short position (load in excess of supply).
Consequently, the GPU Energy companies must manage their purchase and sale of
18
GPU, Inc. and Subsidiary Companies
installed capacity and ancillary services to minimize business risk associated
with their reliability obligation in the PJM Interconnection, LLC (PJM).
Supply/risk management transactions will be made based on the objective of
decreasing price uncertainty. The GPU Energy companies will enter into
supply/hedging market arrangements for hedging purposes only.
Electricity
The GPU Energy companies are generally at risk of rising prices for
electricity and electricity-related products and services. These risks may
differ during some months of the year. To manage these risks, the GPU Energy
companies employ a portfolio approach which primarily consists of two party
forward purchases and options, but may also include New York Mercantile Exchange
(NYMEX) PJM electricity futures and similar instruments, as they become widely
available. This portfolio includes transactions of various durations ranging
from one hour to greater than one year.
The GPU Energy companies' electricity market risks can be price-related,
volume-related or cost recovery-related as follows:
- - Price-related risk refers to the price exposure associated with having to
purchase amounts of electricity, installed capacity and ancillary services
for load requirements from the PJM interchange spot market. To the extent
the GPU Energy companies must rely on the PJM pool to satisfy load
requirements, financial exposure exists for the difference between the PJM
energy and installed capacity spot market prices and the fixed rates paid
by customers.
- - Volume-related risk refers to the uncertainty associated with the amount
of load the GPU Energy companies are required to serve. Deregulation of
the electric utility industry has resulted in the ability of customers to
purchase electricity from other electric suppliers. This customer
shopping, combined with weather changes, which affect customer energy
usage, can affect the GPU Energy companies' position.
- - Cost recovery-related risk refers to the financial risk associated with
the potential prudency audits of the NJBPU that are part of JCP&L's
deferred energy and capacity cost recovery mechanism (Market Transition
Charge). Cost recovery-related risk also refers to the prudency risk
associated with future NUG cost recovery under the Restructuring Orders
approved by the PaPUC and the NJBPU which require continued mitigation of
above-market NUG costs.
Natural Gas
GPU Energy purchases natural gas for JCP&L's Forked River generating
facility. In addition, as part of its NUG cost mitigation program, GPU Energy
also manages the natural gas requirements of certain NUGs that produce and sell
energy to JCP&L under long-term contracts. Prudently incurred costs associated
with natural gas commodity and transportation are included in JCP&L's BGS costs
to be recovered through BGS charges and the Market Transition Charge.
GPU Energy employs a portfolio approach consisting of two party forward
purchases and NYMEX natural gas futures contracts. GPU Energy is exposed to
price-related, volume-related and cost recovery-related market risks for its
natural gas purchases, similar to those electricity market risks previously
described.
19
GPU, Inc. and Subsidiary Companies
Allegheny Complaint
- -------------------
Allegheny Electric Cooperative (AEC), a wholesale customer, filed a
complaint with the Federal Energy Regulatory Commission (FERC) against Penelec
claiming, among other things, that Penelec should not be permitted to charge AEC
increased purchased power costs which Penelec has incurred following Penelec's
divestiture of its generating plants.
In 2001, Penelec and AEC entered into a settlement agreement under which
Penelec will no longer be obligated to supply energy to AEC under its existing
wheeling and power supply contract, effective March 2001. In addition, in
February 2001 Penelec paid AEC $16 million, subject to refund in the event AEC
defaults on certain of its obligations in the agreement. The $16 million payment
was charged to operations in the first quarter 2001.
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, air and water quality, global warming, electromagnetic fields, and
storage and disposal of hazardous and/or toxic wastes, GPU may be required to
incur substantial additional costs to construct new facilities; modify or
replace existing and proposed equipment; or remediate, decommission or clean up
waste disposal and other sites currently or formerly used by it, including
formerly owned manufactured gas plants (MGP), coal mine refuse piles and
generation facilities. In addition, federal and state law provide for payment by
responsible parties for damage to natural resources.
GPU records environmental liabilities (on an undiscounted basis) where it
is probable that a loss has been incurred and the amount of the loss can be
reasonably estimated, and adjusts these liabilities as required to reflect
changes in circumstances. At March 31, 2001, the GPU Energy companies have
liabilities recorded on their balance sheets for environmental remediation
totaling $64 million (JCP&L $55 million; Met-Ed $2 million; Penelec $7 million).
For more information, see the Environmental Matters section of Note 1,
Commitments and Contingencies, of the Combined Notes to Consolidated Financial
Statements.
LEGAL MATTERS - TMI-2 ACCIDENT CLAIMS
-------------------------------------
As a result of the 1979 Three Mile Island Unit 2 (TMI-2) accident,
individual claims for alleged personal injury (including claims for punitive
damages), which are material in amount, were asserted against GPU, Inc. and the
GPU Energy companies. Approximately 2,100 of such claims were filed in the US
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.
In 1996, the District Court granted a motion for summary judgment filed by
GPU, Inc. and the GPU Energy companies, and dismissed the ten initial "test
cases" which had been selected for a test case trial, as well as all of the
remaining 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 appealed the District Court's ruling to the
Court of Appeals for the Third Circuit. In November 1999, the Third Circuit
affirmed the District Court's dismissal of the ten
20
GPU, Inc. and Subsidiary Companies
"test cases," but set aside the dismissal of the additional pending claims,
remanding them to the District Court for further proceedings. In remanding these
claims, the Third Circuit held that the District Court had erred in extending
its summary judgment decision to the other plaintiffs and imposing on these
plaintiffs the District Court's finding that radiation exposures below 10 rems
were too speculative to establish a causal link to cancer. The Court of Appeals
stated that the non-test case plaintiffs should be permitted to present their
own individual evidence that exposure to radiation from the accident caused
their cancers. In June 2000, the US Supreme Court denied petitions for review
filed by GPU, Inc., the GPU Energy companies and the plaintiffs.
In September 2000, the defendants filed a Motion for Summary Judgment in
the District Court. Meanwhile, the plaintiffs have taken an interlocutory appeal
to the Third Circuit seeking review of the District Court's determination that
the remaining plaintiffs should be allowed to advance causation theories based
only on the admissible evidence of record at the close of discovery in the case.
On April 30, 2001, the Third Circuit affirmed the District Court's decision.
There can be no assurance as to the outcome of this litigation.
GPU, Inc. and the GPU Energy companies believe that any liability to which
they might be subject by reason of the TMI-2 accident will not exceed their
financial protection under the Price-Anderson Act.
ACCOUNTING MATTERS
------------------
Effective January 1, 2001, GPU adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by FAS 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133"
and FAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - An Amendment of FASB Statement No. 133" (collectively, FAS 133).
FAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities.
In general, FAS 133 requires that companies recognize all derivatives as
either assets or liabilities on the balance sheet, measured at their fair value.
FAS 133 (as amended) provides an exemption for certain contracts that qualify as
"normal purchases and sales." To qualify for this exclusion, certain criteria,
including that it must be probable that the contract will result in physical
delivery, must be met.
The GPU Energy companies use NYMEX futures and Over-the-Counter (OTC)
forward contracts and options on forward contracts to manage the risk of
fluctuations in the market price of electricity. The GPU Energy companies also
manage the natural gas requirements of certain NUG facilities that generate and
sell energy to JCP&L under long-term contracts. The majority of the forward
commodity contracts are considered "normal purchases and sales," as defined by
FAS 133, and therefore are excluded from the scope of FAS 133. However, the
Derivatives Implementation Group (DIG), a committee of the Financial Accounting
Standards Board (FASB) responsible for providing guidance on the implementation
of FAS 133, has not reached a final conclusion regarding the appropriate
accounting treatment for certain types of energy contracts under FAS 133.
Depending on the final decision of the FASB, certain commodity contracts
currently considered "normal purchases and sales"
21
GPU, Inc. and Subsidiary Companies
may no longer qualify for this exclusion, and may be required to be accounted
for under FAS 133. In this case, GPU would follow the transition provisions for
applying the guidance in FAS 133. Management believes such contracts would
qualify as cash flow hedges and be recorded at fair value on the balance sheet,
with the effective portion of the hedge recognized in accumulated other
comprehensive income.
The adoption of FAS 133 on January 1, 2001 resulted in the recognition of
derivative assets on the Consolidated Balance Sheet at January 1, 2001 in the
amount of $114.8 million, with offsetting amounts, net of tax, recorded in
Accumulated other comprehensive income, of $59.1 million, and Regulatory assets,
net, of $51.1 million. As of January 1, 2001, derivative liabilities in the
amount of $5.8 million were also recorded as a result of adopting FAS 133, with
an offsetting amount, net of tax, recorded in Accumulated other comprehensive
income, of $3.4 million. As of January 1, 2001, a cumulative effect of
accounting change was recognized as an expense in Other income, net on the
Consolidated Statement of Income, in the amount of $1 million.
For further discussion regarding GPU's use of derivative instruments to
manage the risk of fluctuations in commodity prices, interest rates and foreign
currencies, and the impact of the implementation of FAS 133, see Note 2,
Accounting for Derivative Instruments, of the Combined Notes to Consolidated
Financial Statements.
22
GPU, INC. AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
In Thousands
----------------------------------
March 31, December 31,
2001 2000
--------------- ---------------
(Unaudited)
ASSETS
Utility Plant:
Utility plant in service $ 9,953,336 $10,138,233
Accumulated depreciation (3,209,213) (3,246,175)
----------- -----------
Net utility plant in service 6,744,123 6,892,058
Construction work in progress 175,831 153,417
Other, net 16,455 16,572
----------- -----------
Net utility plant 6,936,409 7,062,047
----------- -----------
Other Property and Investments:
Goodwill, net 1,889,896 1,986,449
Nuclear decommissioning trusts, at market (Note 1) 366,740 367,805
Nuclear fuel disposal trust, at market 131,930 126,336
Other, net 937,104 765,783
----------- -----------
Total other property and investments 3,325,670 3,246,373
----------- -----------
Current Assets:
Cash and temporary cash investments 404,279 392,004
Marketable securities 11,258 17,114
Special deposits 116,132 126,149
Accounts receivable:
Customers, less provision for doubtful accounts
of $87,232 for 2001 and $92,714 for 2000 510,064 540,166
Other 230,294 162,048
Unbilled revenues 201,294 221,810
Cost and estimated earnings in excess of
billings on uncompleted contracts 35,042 29,377
Materials and supplies, at average cost or less 87,491 79,679
Deferred income taxes 50,329 33,857
Prepayments 115,010 154,775
----------- -----------
Total current assets 1,761,193 1,756,979
----------- -----------
Deferred Debits and Other Assets:
Regulatory assets, net (Note 1) 4,407,707 5,033,004
Deferred income taxes 1,780,667 1,732,537
Other 420,463 431,521
----------- -----------
Total deferred debits and other assets 6,608,837 7,197,062
----------- -----------
Total Assets $18,632,109 $19,262,461
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
23
GPU, INC. AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
In Thousands
--------------------------------
March 31, December 31,
2001 2000
----------- ------------
(Unaudited)
LIABILITIES AND CAPITALIZATION
Capitalization:
Common stock $ 331,958 $ 331,958
Capital surplus 1,014,405 1,014,326
Retained earnings 2,464,273 2,395,384
Accumulated other comprehensive income/(loss) (Note 4) (52,787) (62,624)
Total 3,757,849 3,679,044
--------- ---------
Reacquired common stock, at cost (356,762) (357,994)
--------- ---------
Total common stockholders' equity 3,401,087 3,321,050
Cumulative preferred stock:
With mandatory redemption 51,500 51,500
Without mandatory redemption 12,649 12,649
Subsidiary-obligated mandatorily redeemable
preferred securities 125,000 125,000
Subsidiary-obligated trust preferred securities (Note 5) 200,000 200,000
Long-term debt 3,745,460 3,917,069
--------- ---------
Total capitalization 7,535,696 7,627,268
--------- ---------
Current Liabilities:
Securities due within one year 1,006,393 992,090
Notes payable 1,607,653 1,480,667
Bank overdraft 236,626 276,456
Accounts payable 460,058 481,712
Billings in excess of cost and estimated
earnings on uncompleted contracts 29,882 21,315
Taxes accrued 52,213 37,604
Interest accrued 102,033 95,083
Other 343,703 447,639
--------- ---------
Total current liabilities 3,838,561 3,832,566
--------- ---------
Deferred Credits and Other Liabilities:
Deferred income taxes 3,143,408 3,093,826
Unamortized investment tax credits 42,948 44,344
Three Mile Island Unit 2 future costs (Note 1) 519,607 514,922
Power purchase contract loss liability (Note 1) 2,665,615 3,273,968
Other 886,274 875,567
--------- ---------
Total deferred credits and other liabilities 7,257,852 7,802,627
--------- ---------
Commitments and Contingencies (Note 1)
Total Liabilities and Capitalization $18,632,109 $19,262,461
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
24
GPU, INC. AND SUBSIDIARY COMPANIES
Consolidated Statements of Income
(Unaudited)
In Thousands
(Except Per Share Data)
-------------------------------
Three Months
Ended March 31,
-------------------------------
2001 2000
---- ----
Operating Revenues $1,300,439 $1,176,444
--------- ---------
Operating Expenses:
Fuel 4,517 19,483
Power purchased and interchanged 582,170 427,990
Deferred costs, net (50,737) (33,514)
Other operation and maintenance 357,919 241,029
Depreciation and amortization 133,461 129,595
Taxes, other than income taxes 56,580 51,549
--------- ---------
Total operating expenses 1,083,910 836,132
--------- ---------
Operating Income 216,529 340,312
--------- ---------
Other Income and Deductions:
Allowance for other funds used during
construction 51 245
Equity in undistributed earnings
of affiliates, net 3,414 3,652
Other income, net 19,786 19,178
--------- ---------
Total other income and deductions 23,251 23,075
--------- ---------
Income Before Interest Charges
and Preferred Dividends 239,780 363,387
--------- ---------
Interest Charges and Preferred Dividends:
Long-term debt and notes payable 112,011 132,914
Subsidiary-obligated trust preferred securities 3,673 3,673
Subsidiary-obligated mandatorily
redeemable preferred securities 2,675 2,675
Other interest 1,936 2,070
Allowance for borrowed funds used
during construction (737) (830)
Preferred stock dividends of subsidiaries 1,391 2,461
--------- ---------
Total interest charges and
preferred dividends 120,949 142,963
--------- ---------
Income Before Income Taxes and Minority Interest 118,831 220,424
Income taxes 48,774 88,949
Minority interest net income 1,162 477
--------- ---------
Net Income $ 68,895 $ 130,998
========= =========
Basic - Earnings Per Avg. Common Share $ .58 $ 1.08
========= =========
- Avg. Common Shares Outstanding 119,516 121,367
========= =========
Diluted - Earnings Per Avg. Common Share $ .58 $ 1.08
========= =========
- Avg. Common Shares Outstanding 119,627 121,426
========= =========
Cash Dividends Paid Per Share $ .545 $ .53
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
25
GPU, INC. AND SUBSIDIARY COMPANIES
Consolidated Statements of Cash Flows
(Unaudited)
In Thousands
------------------------------
Three Months
Ended March 31,
-------------------------------
2001 2000
---- ----
Operating Activities:
Net income $ 68,895 $ 130,998
Adjustments to reconcile income to cash provided:
Depreciation and amortization 149,492 138,634
Amortization of property under capital leases - 3,209
Provision for doubtful accounts (5,788) (4,661)
Regulatory assets, net (36,287) (53,478)
Voluntary enhanced retirement programs 18,266 -
Gain on sale of businesses/investments (2,212) -
Equity in undistributed earnings
of affiliates, net of distributions received (2,404) (2,266)
Deferred income taxes and investment tax
credits, net (11,374) 17,778
Deferred costs, net (50,737) (33,514)
Changes in working capital:
Receivables (10,511) (73,192)
Materials and supplies (5,262) 2,230
Special deposits and prepayments 24,084 44,665
Payables and accrued liabilities (61,799) 131,974
Nonutility generation contract buyout costs - (5,660)
Other, net 7,834 27,591
-------- ---------
Net cash provided by operating activities 82,197 324,308
-------- ---------
Investing Activities:
Capital expenditures and investments (117,322) (111,551)
Proceeds from sale of businesses/investments 5,572 -
Proceeds from nonutility generation trusts 8,465 -
Contributions to decommissioning trusts (2,677) (7,510)
Other, net (7,349) (2,052)
-------- ---------
Net cash required by investing activities (113,311) (121,113)
-------- ---------
Financing Activities:
Issuance of long-term debt - 16,142
Increase in notes payable, net 152,243 87,427
Retirement of long-term debt (28,569) (50,083)
Capital lease principal payments - (5,937)
Reacquisition of common stock - (22,383)
Dividends paid on common stock (65,100) (64,409)
-------- ---------
Net cash provided/(required)
by financing activities 58,574 (39,243)
-------- ---------
Effect of exchange rate changes on cash (15,185) 18,496
-------- ---------
Net increase in cash and temporary
cash investments from above activities 12,275 182,448
Cash and temporary cash investments, beginning of year 392,004 471,548
-------- ---------
Cash and temporary cash investments, end of period $ 404,279 $ 653,996
======== ========
Supplemental Disclosure:
Interest and preferred dividends paid $ 101,020 $ 134,376
======== ========
Income taxes paid $ 3,205 $ 7,074
======== ========
New capital lease obligations incurred $ - $ -
======== ========
Common stock dividends declared but not paid $ - $ -
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
26
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
Consolidated Balance Sheets
In Thousands
---------------------------------
March 31, December 31,
2001 2000
---------------------------------
(Unaudited)
ASSETS
Utility Plant:
Utility plant in service $3,283,382 $3,269,676
Accumulated depreciation (1,237,379) (1,212,784)
--------- ---------
Net utility plant in service 2,046,003 2,056,892
Construction work in progress 92,548 75,201
Other, net 13,311 13,311
--------- ---------
Net utility plant 2,151,862 2,145,404
--------- ---------
Other Property and Investments:
Nuclear decommissioning trusts, at market (Note 1) 114,904 115,311
Nuclear fuel disposal trust, at market 131,930 126,336
Other, net 25,496 6,342
--------- ---------
Total other property and investments 272,330 247,989
--------- ---------
Current Assets:
Cash and temporary cash investments 801 801
Special deposits 4,231 1,220
Accounts receivable:
Customers, less provision for doubtful accounts
of $18,339 for 2001 and $21,479 for 2000 139,216 156,358
Affiliates 32,080 28,853
Other 126,229 38,107
Unbilled revenues 74,309 80,864
Fuel inventory, at average cost or less 536 508
Deferred income taxes 15,643 20,669
Prepayments 5,524 96,916
--------- ---------
Total current assets 398,569 424,296
--------- ---------
Deferred Debits and Other Assets:
Regulatory assets, net (Note 1) 3,063,118 3,185,072
Deferred income taxes 185,699 187,632
Other 27,258 26,962
--------- ---------
Total deferred debits and other assets 3,276,075 3,399,666
--------- ---------
Total Assets $6,098,836 $6,217,355
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
27
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
Consolidated Balance Sheets
In Thousands
---------------------------------
March 31, December 31,
2001 2000
---------------------------------
(Unaudited)
LIABILITIES AND CAPITALIZATION
Capitalization:
Common stock $ 153,713 $ 153,713
Capital surplus 510,769 510,769
Retained earnings 769,777 794,786
Accumulated other comprehensive income/(loss) (Note 4) 2,317 (8)
--------- ---------
Total common stockholder's equity 1,436,576 1,459,260
Cumulative preferred stock:
With mandatory redemption 51,500 51,500
Without mandatory redemption 12,649 12,649
Company-obligated mandatorily redeemable
preferred securities 125,000 125,000
Long-term debt 1,044,047 1,093,987
--------- ---------
Total capitalization 2,669,772 2,742,396
--------- ---------
Current Liabilities:
Securities due within one year 100,847 50,847
Notes payable 92,300 29,200
Accounts payable:
Affiliates 23,093 98,526
Other 94,258 95,988
Taxes accrued 44,047 8,836
Interest accrued 27,553 23,625
Other 27,569 37,786
--------- ---------
Total current liabilities 409,667 344,808
--------- ---------
Deferred Credits and Other Liabilities:
Deferred income taxes 887,441 866,058
Unamortized investment tax credits 16,188 17,087
Power purchase contract loss liability (Note 1) 1,572,278 1,699,473
Nuclear fuel disposal fee 159,260 156,959
Three Mile Island Unit 2 future costs (Note 1) 129,907 128,735
Other 254,323 261,839
--------- ---------
Total deferred credits and other liabilities 3,019,397 3,130,151
--------- ---------
Commitments and Contingencies (Note 1)
Total Liabilities and Capitalization $6,098,836 $6,217,355
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
28
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
Consolidated Statements of Income
(Unaudited)
In Thousands
------------------------------
Three Months
Ended March 31,
------------------------------
2001 2000
---- ----
Operating Revenues $461,682 $452,745
------- -------
Operating Expenses:
Fuel 1,338 5,867
Power purchased and interchanged:
Affiliates 8,117 20,276
Others 258,286 194,122
Deferred costs, net (50,737) (33,514)
Other operation and maintenance 63,644 98,127
Depreciation and amortization 61,749 56,143
Taxes, other than income taxes 15,573 15,729
------- -------
Total operating expenses 357,970 356,750
------- -------
Operating Income 103,712 95,995
------- -------
Other Income and Deductions:
Allowance for other funds used during
construction 51 216
Other income, net 7,272 5,432
------- -------
Total other income and deductions 7,323 5,648
------- -------
Income Before Interest Charges 111,035 101,643
------- -------
Interest Charges:
Long-term debt and notes payable 23,178 23,262
Company-obligated mandatorily
redeemable preferred securities 2,675 2,675
Other interest 917 152
Allowance for borrowed funds used
during construction (434) (346)
------- -------
Total interest charges 26,336 25,743
------- -------
Income Before Income Taxes 84,699 75,900
Income taxes 33,317 30,330
------- -------
Net Income 51,382 45,570
Preferred stock dividends 1,391 2,461
------- -------
Earnings Available for Common Stock $ 49,991 $ 43,109
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
29
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
Consolidated Statements of Cash Flows
(Unaudited)
In Thousands
--------------------------------
Three Months
Ended March 31,
--------------------------------
2001 2000
---- ----
Operating Activities:
Net income $ 51,382 $ 45,570
Adjustments to reconcile income to cash provided:
Depreciation and amortization 70,801 64,494
Provision for doubtful accounts (1,123) 1,153
Regulatory assets, net (12,623) (7,407)
Amortization of property under capital leases - 3,209
Loss on sale of investments 48 -
Deferred income taxes and investment tax
credits, net 15,512 7,135
Deferred costs, net (50,737) (33,514)
Allowance for funds used during construction (51) (215)
Changes in working capital:
Receivables (63,301) 11,477
Materials and supplies (28) (83)
Special deposits and prepayments 88,380 14,414
Payables and accrued liabilities 33,266 28,216
Due to/from affiliates (78,659) 7,901
Other, net (4,493) 7,292
------- --------
Net cash provided by operating activities 48,374 149,642
------- --------
Investing Activities:
Capital expenditures and investments (33,113) (24,411)
Proceeds from sale of businesses/investments 40 -
Contributions to decommissioning trusts (294) (5,917)
Other, net (1,716) (4,100)
------- --------
Net cash required by investing activities (35,083) (34,428)
------- --------
Financing Activities:
Increase in notes payable, net 63,100 -
Retirement of long-term debt - (40,000)
Capital lease principal payments - (5,937)
Dividends paid on common stock (75,000) (45,000)
Dividends paid on preferred stock (1,391) (3,076)
------- --------
Net cash required by financing activities (13,291) (94,013)
------- --------
Net increase in cash and temporary
cash investments from above activities - 21,201
Cash and temporary cash investments, beginning of year 801 68,684
------- --------
Cash and temporary cash investments, end of period $ 801 $ 89,885
======= ========
Supplemental Disclosure:
Interest and preferred dividends paid $ 23,040 $ 25,024
======= ========
Income taxes paid $ - $ 190
======= ========
New capital lease obligations incurred $ - $ -
======= ========
The accompanying notes are an integral part of the consolidated financial
statements.
30
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
In Thousands
---------------------------------
March 31, December 31,
2001 2000
------------ ------------
(Unaudited)
ASSETS
Utility Plant:
Utility plant in service $1,570,618 $1,561,252
Accumulated depreciation (500,565) (489,607)
--------- ---------
Net utility plant in service 1,070,053 1,071,645
Construction work in progress 24,195 22,437
Other, net 596 596
--------- ---------
Net utility plant 1,094,844 1,094,678
--------- ---------
Other Property and Investments:
Nuclear decommissioning trusts, at market (Note 1) 154,397 154,068
Other, net 34,081 4,472
--------- ---------
Total other property and investments 188,478 158,540
--------- ---------
Current Assets:
Cash and temporary cash investments 3,188 3,234
Special deposits 971 205
Accounts receivable:
Customers, less provision for doubtful accounts
of 12,330 for 2001 and 13,004 for 2000 67,006 70,118
Affiliates 54,279 49,731
Other 30,395 28,525
Unbilled revenues 35,556 38,688
Deferred income taxes 1,634 1,838
Prepayments 29,630 7,556
--------- ---------
Total current assets 222,659 199,895
--------- ---------
Deferred Debits and Other Assets:
Regulatory assets, net (Note 1) 992,219 1,227,981
Deferred income taxes 429,327 447,868
Other 32,692 32,417
--------- ---------
Total deferred debits and other assets 1,454,238 1,708,266
--------- ---------
Total Assets $2,960,219 $3,161,379
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
31
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
In Thousands
---------------------------------
March 31, December 31,
2001 2000
------------- ------------
(Unaudited)
LIABILITIES AND CAPITALIZATION
Capitalization:
Common stock $ 66,273 $ 66,273
Capital surplus 400,200 400,200
Retained earnings 71,493 70,476
Accumulated other comprehensive income (Note 4) 128 64
--------- ---------
Total common stockholder's equity 538,094 537,013
Company-obligated trust preferred securities (Note 5) 100,000 100,000
Long-term debt 466,861 496,860
--------- ---------
Total capitalization 1,104,955 1,133,873
--------- ---------
Current Liabilities:
Securities due within one year 30,027 27
Notes payable 86,900 46,600
Accounts payable:
Affiliates 63,086 69,462
Other 41,492 37,399
Taxes accrued 18,290 20,768
Interest accrued 9,734 14,375
Other 11,997 13,858
--------- ---------
Total current liabilities 261,526 202,489
--------- ---------
Deferred Credits and Other Liabilities:
Deferred income taxes 715,517 728,344
Unamortized investment tax credits 13,947 14,159
Power purchase contract loss liability (Note 1) 507,444 727,503
Three Mile Island Unit 2 future costs (Note 1) 259,708 257,367
Nuclear fuel disposal fee 35,976 35,456
Other 61,146 62,188
--------- ---------
Total deferred credits and other liabilities 1,593,738 1,825,017
--------- ---------
Commitments and Contingencies (Note 1)
Total Liabilities and Capitalization $2,960,219 $3,161,379
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
32
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statements of Income
(Unaudited)
In Thousands
----------------------------
Three Months
Ended March 31,
-----------------------------
2001 2000
---- ----
Operating Revenues $221,020 $203,056
------- -------
Operating Expenses:
Power purchased and interchanged:
Affiliates 1,173 52
Others 124,054 92,498
Other operation and maintenance 36,553 28,000
Depreciation and amortization 17,794 15,804
Taxes, other than income taxes 10,632 11,383
------- --------
Total operating expenses 190,206 147,737
------- -------
Operating Income 30,814 55,319
------- -------
Other Income and Deductions:
Allowance for other funds used during
construction - 29
Other income, net 8,186 2,771
------- -------
Total other income and deductions 8,186 2,800
------- -------
Income Before Interest Charges 39,000 58,119
------- -------
Interest Charges:
Long-term debt and notes payable 10,690 11,935
Trust preferred securities 1,838 1,838
Other interest 700 526
Allowance for borrowed funds used
during construction (159) (184)
------- -------
Total interest charges 13,069 14,115
------- -------
Income Before Income Taxes 25,931 44,004
Income taxes 9,914 17,511
------- -------
Net Income $ 16,017 $ 26,493
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
33
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statements of Cash Flows
(Unaudited)
In Thousands
-----------------------------
Three Months
Ended March 31,
-----------------------------
2001 2000
---- ----
Operating Activities:
Net income $ 16,017 $ 26,493
Adjustments to reconcile income to cash provided:
Depreciation and amortization 18,030 15,883
Provision for doubtful accounts 1,594 2,030
Regulatory assets, net (11,461) (16,987)
Voluntary enhanced retirement programs 9,189 -
Deferred income taxes and investment tax
credits, net 1,159 6,211
Allowance for funds used during construction - (29)
Changes in working capital:
Receivables 2,781 (14,292)
Special deposits and prepayments (22,841) 1,407
Payables and accrued liabilities (4,888) 3,557
Due to/from affiliates (20,113) (34,607)
Nonutility generation contract buyout costs - (1,250)
Other, net 2,341 (1,967)
------ ------
Net cash required by operating activities (8,192) (13,551)
------ ------
Investing Activities:
Capital expenditures and investments (11,793) (11,556)
Contributions to decommissioning trusts (2,371) (1,583)
Other, net (2,990) -
------ ------
Net cash required by investing activities (17,154) (13,139)
------ ------
Financing Activities:
Increase in notes payable, net 40,300 26,477
Dividends paid on common stock (15,000) (10,000)
------ ------
Net cash provided by financing activities 25,300 16,477
------ ------
Net decrease in cash and temporary cash
investments from above activities (46) (10,213)
Cash and temporary cash investments, beginning of year 3,234 10,899
------ ------
Cash and temporary cash investments, end of period $ 3,188 $ 686
====== ======
Supplemental Disclosure:
Interest and preferred dividends paid $ 16,963 $ 18,448
====== ======
Income taxes paid $ 2,733 $ 3,276
====== ======
New capital lease obligations incurred $ - $ -
====== ======
The accompanying notes are an integral part of the consolidated financial
statements.
34
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
In Thousands
---------------------------------
March 31, December 31,
2001 2000
-------------- -------------
(Unaudited)
ASSETS
Utility Plant:
Utility plant in service $1,797,566 $1,791,594
Accumulated depreciation (597,488) (588,377)
--------- ---------
Net utility plant in service 1,200,078 1,203,217
Construction work in progress 30,226 25,895
Other, net 2,548 2,665
--------- ---------
Net utility plant 1,232,852 1,231,777
--------- ---------
Other Property and Investments:
Nonutility generation trusts, at market 187,105 190,710
Nuclear decommissioning trusts, at market (Note 1) 97,439 98,426
Other, net 16,252 833
--------- ---------
Total other property and investments 300,796 289,969
--------- ---------
Current Assets:
Cash and temporary cash investments 250 250
Special deposits 420 330
Accounts receivable:
Customers, less provision for doubtful accounts
of $14,817 for 2001 and $14,851 for 2000 73,607 78,001
Affiliates 24,015 25,073
Other 26,520 21,205
Unbilled revenues 36,771 39,514
Deferred income taxes 1,669 1,912
Prepayments 31,748 11,869
--------- ---------
Total current assets 195,000 178,154
--------- ---------
Deferred Debits and Other Assets:
Regulatory assets, net (Note 1) 352,370 619,951
Deferred income taxes 709,495 708,954
Other 20,423 19,314
--------- ---------
Total deferred debits and other assets 1,082,288 1,348,219
--------- ---------
Total Assets $2,810,936 $3,048,119
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
35
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
In Thousands
---------------------------------
March 31, December 31,
2001 2000
---------------------------------
(Unaudited)
LIABILITIES AND CAPITALIZATION
Capitalization:
Common stock $ 105,812 $ 105,812
Capital surplus 320,487 320,487
Retained earnings 41,410 43,515
Accumulated other comprehensive income/(loss) (Note 4) (858) 23
--------- ---------
Total common stockholder's equity 466,851 469,837
Company-obligated trust preferred securities (Note 5) 100,000 100,000
Long-term debt 517,858 517,813
--------- ---------
Total capitalization 1,084,709 1,087,650
--------- ---------
Current Liabilities:
Securities due within one year 14 14
Notes payable 86,500 55,800
Obligations under capital leases 497 485
Accounts payable:
Affiliates 26,886 29,788
Other 57,334 50,673
Taxes accrued 13,631 23,895
Interest accrued 17,300 11,582
Other 6,700 6,880
--------- ---------
Total current liabilities 208,862 179,117
--------- ---------
Deferred Credits and Other Liabilities:
Deferred income taxes 733,707 735,750
Unamortized investment tax credits 12,813 13,098
Power purchase contract loss liability (Note 1) 585,893 846,992
Three Mile Island Unit 2 future costs (Note 1) 129,992 128,820
Nuclear fuel disposal fee 17,988 17,728
Other 36,972 38,964
--------- ---------
Total deferred credits and other liabilities 1,517,365 1,781,352
--------- ---------
Commitments and Contingencies (Note 1)
Total Liabilities and Capitalization $2,810,936 $3,048,119
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
36
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statements of Income
(Unaudited)
In Thousands
------------------------------
Three Months
Ended March 31,
------------------------------
2001 2000
---- ----
Operating Revenues $243,827 $220,105
------- -------
Operating Expenses:
Power purchased and interchanged:
Affiliates 956 157
Others 168,108 105,013
Other operation and maintenance 43,083 38,806
Depreciation and amortization 14,529 11,534
Taxes, other than income taxes 11,690 10,963
------- -------
Total operating expenses 238,366 166,473
------- -------
Operating Income 5,461 53,632
------- -------
Other Income and Deductions:
Other income, net 1,185 847
------- -------
Total other income and deductions 1,185 847
------- -------
Income Before Interest Charges 6,646 54,479
------- -------
Interest Charges:
Long-term debt and notes payable 9,410 7,277
Company-obligated trust preferred securities 1,835 1,835
Other interest 406 296
Allowance for borrowed funds used
during construction (144) (300)
------- -------
Total interest charges 11,507 9,108
------- -------
Income/(Loss) Before Income Taxes (4,861) 45,371
Income tax expense/(benefit) (2,756) 18,429
------- -------
Net Income/(Loss) $ (2,105) $ 26,942
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
37
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statements of Cash Flows
(Unaudited)
In Thousands
-----------------------------
Three Months
Ended March 31,
------------------------------
2001 2000
---- ----
Operating Activities:
Net income/(loss) $ (2,105) $ 26,942
Adjustments to reconcile income to cash provided:
Depreciation and amortization 13,616 12,271
Provision for doubtful accounts 2,162 2,438
Regulatory assets, net (12,203) (29,084)
Gain on sale of investment (885) -
Voluntary enhanced retirement program 9,077 -
Deferred income taxes and investment tax
credits, net 512 8,885
Allowance for other funds used during construction (144) -
Changes in working capital:
Receivables (339) (16,385)
Special deposits and prepayments (19,969) (2,901)
Payables and accrued liabilities 1,936 11,033
Due to/from affiliates (10,920) (64,904)
Nonutility generation contract buyout costs - (4,410)
Other, net (2,349) 10,798
------- -------
Net cash required by operating activities (21,611) (45,317)
------- -------
Investing Activities:
Capital expenditures and investments (14,223) (11,494)
Proceeds from nonutility generation trusts 8,465 -
Contributions to decommissioning trusts (12) (10)
Other, net (3,319) 2,100
------- -------
Net cash required by investing activities (9,089) (9,404)
------- -------
Financing Activities:
Increase in notes payable 30,700 67,600
Dividends paid on common stock - (45,000)
------- -------
Net cash provided by financing activities 30,700 22,600
------- -------
Net decrease in cash and temporary
cash investments from above activities - (32,121)
Cash and temporary cash investments, beginning of year 250 32,250
------- -------
Cash and temporary cash investments, end of period $ 250 $ 129
======= =======
Supplemental Disclosure:
Interest and preferred dividends paid $ 3,301 $ 2,031
======= =======
Income taxes paid $ 408 $ 3,400
======= =======
New capital lease obligations incurred $ - $ -
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
38
GPU, Inc. and Subsidiary Companies
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GPU, Inc. owns all the outstanding common stock of three domestic electric
utilities -- Jersey Central Power & Light Company (JCP&L), Metropolitan Edison
Company (Met-Ed) and Pennsylvania Electric Company (Penelec). These electric
utilities are conducting business under the name GPU Energy and considered
together are referred to as the "GPU Energy companies." GPU Capital, Inc. and
GPU Electric, Inc. and their subsidiaries own, operate and fund the acquisition
of electric distribution and gas transmission systems in foreign countries, and
are referred to as "GPU Electric." GPU Electric's foreign utility companies
include Midlands Electricity plc (conducting business as GPU Power UK); GPU
Empresa Distribuidora Electrica Regional S.A. (Emdersa); and GPU GasNet. GPU
Power, Inc. and its subsidiaries (GPU Power) develop, own and operate generation
facilities in foreign countries. Other subsidiaries of GPU, Inc. include GPU
Advanced Resources, Inc. (GPU AR), which sells electric energy at retail; GPU
Telcom Services, Inc. (GPU Telcom), which is engaged in
telecommunications-related businesses; MYR Group Inc. (MYR), which is a utility
infrastructure construction services company; GPU Service, Inc. (GPUS), which
provides legal, accounting, financial and other services to the GPU companies;
GPU Diversified Holdings LLC, which makes investments in energy-related
businesses; and GPU Nuclear, Inc. (GPUN). All of these companies considered
together are referred to as "GPU."
1. COMMITMENTS AND CONTINGENCIES
PENDING MERGER OF FIRSTENERGY CORP. AND GPU
-------------------------------------------
In August 2000, GPU, Inc. entered into an agreement to merge with
FirstEnergy, an Ohio corporation, headquartered in Akron, Ohio. Under the merger
agreement, FirstEnergy would acquire all of the outstanding shares of GPU's
common stock for approximately $4.5 billion in cash and FirstEnergy common
stock.
Under the agreement, GPU stockholders would receive $36.50 for each share
of GPU common stock they own, payable in cash or the equivalent of $36.50 per
share in FirstEnergy common stock, as long as FirstEnergy's common stock price
is between $24.24 and $29.63. Each GPU stockholder would be able to elect the
form of consideration, subject to proration so that the aggregate consideration
to all GPU stockholders will be 50 percent cash and 50 percent FirstEnergy
common stock. Each GPU share converted into FirstEnergy common stock would be
exchanged for not less than 1.2318 and not more than 1.5055 shares of
FirstEnergy common stock, depending on the average closing price of FirstEnergy
stock during the 20-day trading period ending on the sixth trading date prior to
the merger closing.
The merger has been approved by the Boards of Directors and stockholders
of GPU, Inc. and FirstEnergy and is expected to close promptly after all of the
conditions to the consummation of the merger (including the receipt of all
necessary regulatory approvals, provided that such approvals will not impose
terms and conditions that would reasonably be expected to result in a "material
adverse effect," as defined in the merger agreement, on the combined company,
and there being no "material adverse effect" on either
39
GPU, Inc. and Subsidiary Companies
GPU or FirstEnergy since June 30, 2000 or March 31, 2000, respectively), are
fulfilled or waived. Relevant factors would include the nature of any order
issued by the regulatory authorities, the financial and business conditions of
each company, and whether, and the extent to which, any developments relate to
general economic conditions. In testimony before the Pennsylvania Public Utility
Commission (PaPUC), FirstEnergy stated that FirstEnergy will carefully review
the PaPUC's action with respect to GPU's requested provider of last resort (PLR)
relief (for further information, see Domestic Energy Supply section) on the
financial condition of GPU to determine whether the consequences would have a
"material adverse effect" on GPU or the combined company. The receipt of all
necessary regulatory approvals is expected to take approximately twelve months
from the date of the merger agreement. There can be no assurance as to the
outcome of these matters.
COMPETITION AND THE CHANGING REGULATORY ENVIRONMENT
---------------------------------------------------
Stranded Costs and Regulatory Restructuring Orders:
- --------------------------------------------------
With the transition to a competitive marketplace for generation service in
New Jersey and Pennsylvania, certain generation-related costs, which generally
would be recoverable in a regulated environment, may no longer be recoverable.
These costs are generally referred to as stranded costs.
In March 2001, the New Jersey Board of Public Utilities (NJBPU) issued a
Final Decision and Order (Final Order) with respect to JCP&L's rate unbundling,
stranded cost and restructuring filings, which supersedes a Summary Order issued
by the NJBPU in May 1999. The Final Order confirms rate reductions set forth in
the Summary Order, which began in August 1999 and will remain in effect at
increasing levels through July 2003, and provides for, among other things,
deregulation of the costs associated with providing electric generation service.
The Final Order confirms the establishment of a non-bypassable societal benefits
charge to recover costs associated with, among other things, nuclear plant
decommissioning and manufactured gas plant remediation, as well as a
non-bypassable market transition charge (MTC). The Final Order provides for the
ability to recover stranded costs; however, the NJBPU deferred making a final
determination of the net proceeds and stranded costs related to the generating
asset divestitures until GPU's request for an Internal Revenue Service (IRS)
ruling regarding the treatment of associated federal income tax benefits is
acted upon.
In addition, JCP&L is permitted to defer for future collection from
customers the amounts by which its costs of supplying basic generation service
(BGS) to non-shopping customers and costs incurred under NUG agreements exceed
amounts collected in BGS and MTC rates. The Final Order allows for
securitization of the NUG portion of JCP&L's deferred balance so long as
conditions of the New Jersey restructuring legislation are met. However, JCP&L
must seek NJBPU authorization to securitize that portion of its deferred balance
related to above-market NUG costs. There can be no assurance as to the extent,
if any, that the NJBPU will permit such securitization.
The Final Order also provides for the ability to securitize approximately
$400 million of stranded costs associated with Oyster Creek. JCP&L has filed a
petition with the NJBPU requesting authorization to issue transition bonds to
securitize the recovery of these costs.
40
GPU, Inc. and Subsidiary Companies
In 1998, the PaPUC issued amended Restructuring Orders approving
Settlement Agreements entered into by Met-Ed and Penelec which, among other
things, provide for customer choice of electric generation supplier beginning
January 1, 1999 and a one-year (1999) reduction in retail distribution rates for
all consumers. The Orders also provide for recovery of a substantial portion of
what otherwise would have become stranded costs, subject to Phase II proceedings
following the completion of Met-Ed's and Penelec's generating asset
divestitures, to make a final determination of the extent of that stranded cost
recovery. In 2000, Met-Ed and Penelec submitted Phase II Reports to the PaPUC
supporting their actual net divestiture proceeds and providing a reconciliation
of stranded costs pursuant to the 1998 Restructuring Orders.
In 2000, the PaPUC issued a Phase II Order which, among other things,
disallowed a portion of the requested additional stranded costs above those
amounts granted in the 1998 Orders. The Phase II Order also deferred a decision
on Met-Ed's requested increase in rates, beginning in 2006, for recovery of
Met-Ed's generation-related stranded costs. In addition, the Order requires
Met-Ed and Penelec to seek an IRS ruling regarding the return of certain
unamortized investment tax credits and excess deferred income tax benefits to
ratepayers. If the IRS ruling ultimately supports returning these tax benefits
to ratepayers, Met-Ed and Penelec would then reduce stranded costs by $40
million plus interest and record a corresponding charge to income.
Supply of Electricity:
- ---------------------
As a result of the NJBPU's and the PaPUC's Restructuring Orders, the GPU
Energy companies are required to supply electricity to customers who do not
choose an alternate supplier. Given that the GPU Energy companies have
essentially exited the generation business and will have to supply electricity
to non-shopping customers almost entirely from contracted and open market
purchases, there will be increased risks associated with supplying that
electricity. JCP&L is permitted to defer for future recovery the amount by which
its reasonable and prudently incurred costs associated with providing basic
generation service to non-shopping customers exceeds amounts currently reflected
in its rates for basic generation service. Met-Ed and Penelec, however, are
unable to recover energy costs in excess of amounts reflected in their capped
rates, which are in effect for varying periods.
During 2000, market prices at which Met-Ed and Penelec were required to
purchase electricity for their retail supply customers at times substantially
exceeded the amounts Met-Ed and Penelec were allowed to charge for that
electricity under their capped rates. This situation resulted in a substantial
loss of earnings for Met-Ed and Penelec in 2000, especially during the peak
Summer months. This condition has continued in 2001, with Met-Ed's and Penelec's
supply businesses recognizing after-tax losses of $8.4 million in the first
quarter.
On November 29, 2000, Met-Ed and Penelec filed a petition with the PaPUC
seeking permission to defer for future recovery their energy costs in excess of
amounts reflected in their capped generation rates. Various parties to the
proceeding filed motions to dismiss the petition. On January 19, 2001, Met-Ed
and Penelec made a further request that they be permitted to implement their
proposed deferral mechanism pending the PaPUC's final action on their petition.
On January 24, 2001, the PaPUC denied, without prejudice,
41
GPU, Inc. and Subsidiary Companies
the motions to dismiss Met-Ed's and Penelec's petition and recommended that the
companies provide support for a rate cap exception based on the criteria in the
Customer Choice and Competition Act. In addition, the PaPUC consolidated the
petition with the GPU/FirstEnergy merger proceeding for consideration and
resolution in accord with the merger procedural schedule. In February 2001,
Met-Ed and Penelec filed a supplement to their petition and testimony supporting
the granting of exceptions to their rate caps. In addition, Met-Ed and Penelec
stated that as an alternative to the deferral mechanism they previously
proposed, the circumstances warrant an immediate increase in their present
generation rate caps coupled with a cost deferral mechanism.
On April 25, 2001, the PaPUC Administrative Law Judge (ALJ) assigned to
the combined proceeding issued his recommended decision. The ALJ recommended
generation rate cap increases totaling $316.7 million (Met-Ed $162.5 million;
Penelec $154.2 million) to address the companies' exposure to increased
wholesale energy prices under Met-Ed's and Penelec's PLR obligation. The
generation rate cap increases would be effective on about June 1, 2001, and
would be in lieu of Met-Ed's and Penelec's proposed deferral mechanism for
excess PLR costs. With respect to the GPU/FirstEnergy merger, the ALJ
recommended that the merger be approved, subject to certain conditions,
including that merger-related savings are flowed back to ratepayers through an
extension of each company's transmission and distribution rate cap until
December 2007. Parties in the proceeding have until May 7, 2001 to file
exceptions to the ALJ's recommended decision, and responses to these exceptions
must be filed by May 14, 2001. The PaPUC is tentatively scheduled to issue its
final decision in the combined proceeding on May 24, 2001.
There can be no assurance regarding the degree, if any, to which Met-Ed
and Penelec may be able to recover their costs to supply electricity in excess
of amounts currently reflected in their capped generation rates.
Generation Agreements:
- ---------------------
The evolving competitive generation market has created uncertainty
regarding the forecasting of the GPU Energy companies' energy supply needs,
which has caused the GPU Energy companies to seek shorter-term agreements
offering more flexibility. The GPU Energy companies' supply plan focuses on
short- to intermediate-term commitments (one month to three years), with any
residual needs then being purchased from the short-term market (one hour to one
month).
The GPU Energy companies have entered into agreements with third party
suppliers to purchase capacity and energy through 2004. As of March 31, 2001,
payments pursuant to these agreements, which include firm commitments as well as
certain assumptions regarding, among other things, call/put arrangements, are
estimated to be $1.1 billion in 2001, $454 million in 2002, $74 million in 2003
and $5 million in 2004.
Pursuant to the mandates of the federal Public Utility Regulatory Policies
Act and state regulatory directives, the GPU Energy companies were required to
enter into long-term power purchase agreements with nonutility generators (NUGs)
for the purchase of energy and capacity, which agreements have remaining terms
of up to 19 years. The rates under virtually all of the GPU Energy companies'
NUG agreements are substantially in excess of current and projected prices from
alternative sources, except for periods when GPU
42
GPU, Inc. and Subsidiary Companies
Energy is required to meet high customer demand, typically during periods of
extremely hot weather or when power supplies are limited. The following table
shows actual payments from 1999 through March 31, 2001, and estimated payments
thereafter through 2006:
Payments Under NUG Agreements
-----------------------------
(in millions)
Total JCP&L Met-Ed Penelec
----- ----- ------ -------
1999 $774 $388 $167 $219
2000 734 364 153 217
2001 986 552 183 251
2002 851 511 149 191
2003 856 507 153 196
2004 819 460 158 201
2005 807 448 162 197
2006 817 449 167 201
The NJBPU Final Order provides JCP&L assurance of full recovery of its NUG
costs (including above-market NUG costs and certain buyout costs); and the PaPUC
Restructuring Orders provide Met-Ed and Penelec assurance of full recovery of
their above-market NUG costs and certain NUG buyout costs. At March 31, 2001,
the GPU Energy companies have recorded, on a present value basis, a total
estimated liability of $2.7 billion (JCP&L $1.6 billion; Met-Ed $0.5 billion;
Penelec $0.6 billion) on the Consolidated Balance Sheet for above-market NUG
costs which is offset by corresponding regulatory assets. The GPU Energy
companies are continuing efforts to reduce the above-market costs of these
agreements. There can be no assurance as to the extent to which these efforts
will be successful.
In 1997, the NJBPU approved a Stipulation of Final Settlement which, among
other things, provided for the recovery of costs associated with the buyout of
the Freehold Cogeneration power purchase agreement (Freehold buyout). The NJBPU
approved the cost recovery of up to $135 million, over a seven-year period, on
an interim basis subject to refund. The NJBPU's Final Order provides for the
continued recovery of the Freehold buyout in the MTC, but has not altered the
interim nature of such recovery, pending a final decision by the NJBPU. There
can be no assurance as to the outcome of this matter.
ACCOUNTING MATTERS
------------------
JCP&L, in 1999, and Met-Ed and Penelec in 1998, discontinued the
application of Statement of Financial Accounting Standards No. 71 (FAS 71),
"Accounting for the Effects of Certain Types of Regulation," and adopted the
provisions of Statement of Financial Accounting Standards No. 101 (FAS 101),
"Regulated Enterprises - Accounting for the Discontinuation of Application of
FASB Statement No. 71," and Emerging Issues Task Force (EITF) Issue 97-4,
"Deregulation of the Pricing of Electricity - Issues Related to the Application
of FAS 71 and FAS 101," with respect to their electric generation operations.
The transmission and distribution portion of the GPU Energy companies'
operations continues to be subject to the provisions of FAS 71. Regulatory
assets, net as reflected in the March 31, 2001 and December 31, 2000
Consolidated Balance Sheets in accordance with the provisions of FAS 71 and EITF
Issue 97-4 were as follows:
43
GPU, Inc. and Subsidiary Companies
(in thousands)
March 31, December 31,
GPU, Inc. and Subsidiary Companies 2001 2000
- ---------------------------------- ------------- ------------
Market transition charge (MTC) / basic
generation service $2,631,013 $2,732,926
Competitive transition charge (CTC) 990,104 1,501,911
Income taxes recoverable through future
rates, net 268,273 263,942
Costs recoverable through distribution rates 250,840 257,135
Societal benefits charge 181,265 195,011
Three Mile Island Unit 2 (TMI-2)
decommissioning costs 50,814 46,089
Other, net 35,398 35,990
--------- ---------
Total regulatory assets, net $4,407,707 $5,033,004
========= =========
JCP&L
MTC / basic generation service $2,631,013 $2,732,926
Costs recoverable through distribution rates 250,840 257,135
Societal benefits charge 181,265 195,011
--------- ---------
Total regulatory assets, net $3,063,118 $3,185,072
========= =========
Met-Ed
CTC $ 812,973 $1,056,696
Income taxes recoverable through future
rates, net 120,075 114,543
TMI-2 decommissioning costs 30,547 27,610
Other, net 28,624 29,132
--------- ---------
Total regulatory assets, net $ 992,219 $1,227,981
========= =========
Penelec
CTC $ 177,131 $ 445,215
Income taxes recoverable through future
rates, net 148,198 149,399
TMI-2 decommissioning costs 20,267 18,479
Other, net 6,774 6,858
--------- ---------
Total regulatory assets, net $ 352,370 $ 619,951
========= =========
NUCLEAR FACILITIES
------------------
Investments:
- -----------
In 1999, the GPU Energy companies sold Three Mile Island Unit 1 (TMI-1) to
AmerGen Energy Company, LLC (AmerGen) for approximately $100 million, and in
2000, JCP&L sold Oyster Creek to AmerGen for approximately $10 million. As part
of the sales, AmerGen has assumed full responsibility for decommissioning the
plants, and the GPU Energy companies have transferred $320 million and $430
million of TMI-1 and Oyster Creek decommissioning trust funds, respectively, to
AmerGen. JCP&L, Met-Ed and Penelec jointly own TMI-2, which was damaged during a
1979 accident, in the percentages of 25%, 50% and 25%, respectively. JCP&L's net
investment in TMI-2 as of March 31, 2001 and December 31, 2000 was $54 million
and $55 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's and Penelec's remaining investments in TMI-2 were written off in
1998 after receiving the PaPUC's Restructuring Orders.
44
GPU, Inc. and Subsidiary Companies
TMI-2:
- ------
As a result of the 1979 TMI-2 accident, individual claims for alleged
personal injury (including claims for punitive damages), which are material in
amount, were asserted against GPU, Inc. and the GPU Energy companies.
Approximately 2,100 of such claims were filed in the US District Court for the
Middle District of Pennsylvania. Some of the claims also seek recovery for
injuries from alleged emissions of radioactivity before and after the accident.
At the time of the TMI-2 accident, as provided for in the Price-Anderson
Act, the GPU Energy companies had (a) primary financial protection in the form
of insurance policies with groups of insurance companies providing an aggregate
of $140 million of primary coverage, (b) secondary financial protection in the
form of private liability insurance under an industry retrospective rating plan
providing for up to an aggregate of $335 million in premium charges under such
plan and (c) an indemnity agreement with the Nuclear Regulatory Commission (NRC)
for up to $85 million, bringing their total financial protection up to an
aggregate of $560 million. Under the secondary level, the GPU Energy companies
are subject to a retrospective premium charge of up to $5 million per reactor,
or a total of $15 million (JCP&L $7.5 million; Met-Ed $5 million; Penelec $2.5
million).
In 1995, the US Court of Appeals for the Third Circuit ruled that the
Price-Anderson Act provides coverage under its primary and secondary levels for
punitive as well as compensatory damages, but that punitive damages could not be
recovered against the Federal Government under the third level of financial
protection. In so doing, the Court of Appeals referred to the "finite fund" (the
$560 million of financial protection under the Price- Anderson Act) to which
plaintiffs must resort to get compensatory as well as punitive damages.
The Court of Appeals also ruled that the standard of care owed by the
defendants to a plaintiff was determined by the specific level of radiation
which was released into the environment, as measured at the site boundary,
rather than as measured at the specific site where the plaintiff was located at
the time of the accident (as the defendants proposed). The Court of Appeals also
held that each plaintiff still must demonstrate exposure to radiation released
during the TMI-2 accident and that such exposure had resulted in injuries. In
1996, the US Supreme Court denied petitions filed by GPU, Inc. and the GPU
Energy companies to review the Court of Appeals' rulings.
In 1996, the District Court granted a motion for summary judgment filed by
GPU, Inc. and the GPU Energy companies, and dismissed the ten initial "test
cases" which had been selected for a test case trial, as well as all of the
remaining 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 appealed the District Court's ruling to the
Court of Appeals for the Third Circuit. In November 1999, the Third Circuit
affirmed the District Court's dismissal of the ten "test cases," but set aside
the dismissal of the additional pending claims, remanding them to the District
Court for further proceedings. In remanding these claims, the Third Circuit held
that the District Court had erred in extending its summary judgment decision to
the other plaintiffs and imposing on these plaintiffs the District Court's
finding that radiation exposures below 10 rems were too speculative to establish
a causal link to cancer. The Court of Appeals stated that the non-test case
plaintiffs should be permitted
45
GPU, Inc. and Subsidiary Companies
to present their own individual evidence that exposure to radiation from the
accident caused their cancers. In June 2000, the US Supreme Court denied
petitions for review filed by GPU, Inc., the GPU Energy companies and the
plaintiffs.
In September 2000, the defendants filed a Motion for Summary Judgment in
the District Court. Meanwhile, the plaintiffs have taken an interlocutory appeal
to the Third Circuit seeking review of the District Court's determination that
the remaining plaintiffs should be allowed to advance causation theories based
only on the admissible evidence of record at the close of discovery in the case.
On April 30, 2001, the Third Circuit affirmed the District Court's decision.
There can be no assurance as to the outcome of this litigation
GPU, Inc. and the GPU Energy companies believe that any liability to which
they might be subject by reason of the TMI-2 accident will not exceed their
financial protection under the Price-Anderson Act.
NUCLEAR PLANT RETIREMENT COSTS
------------------------------
Retirement costs for nuclear plants include decommissioning the
radiological portions of the plants and the cost of removal of nonradiological
structures and materials. The disposal of spent nuclear fuel is covered
separately by contracts with the US Department of Energy (DOE).
In 1995, a consultant performed a site-specific study of TMI-2 that
considered various decommissioning methods and estimated the cost of
decommissioning the radiological portion and the cost of removal of the
nonradiological portion of the plant, using the prompt removal/dismantlement
method. Management has reviewed the methodology and assumptions used in this
study, is in agreement with them, and believes the results are reasonable. The
TMI-2 funding completion date is 2014, consistent with TMI-2 remaining in
long-term storage. The retirement cost estimate under the 1995 site-specific
study, assuming decommissioning of TMI-2 in 2014, is $454 million for
radiological decommissioning and $36 million for non-radiological removal costs
(net of $12.6 million spent as of March 31, 2001)(in 2001 dollars).
Each of the GPU Energy companies is responsible for retirement costs in
proportion to its respective ownership percentage. The ultimate cost of retiring
TMI-2 may be different from the cost estimate contained in this site-specific
study. Also, the cost estimate contained in this site-specific study is slightly
less than the decommissioning funding targets established by the NRC.
The estimated liability for future TMI-2 retirement costs (reflected as
Three Mile Island Unit 2 future costs on the Consolidated Balance Sheets) as of
March 31, 2001 and December 31, 2000 is $520 million (JCP&L $130 million; Met-Ed
$260 million; Penelec $130 million) and $515 million (JCP&L $129 million; Met-Ed
$257 million; Penelec $129 million), respectively. This liability is based upon
the 1995 site-specific study estimate (in 2001 and 2000 dollars, respectively)
discussed above and an estimate for remaining incremental monitored storage
costs of $30 million (JCP&L $7.5 million; Met-Ed $15 million; Penelec $7.5
million) and $29 million (JCP&L $7 million; Met-Ed $15 million; Penelec $7
million) as of March 31, 2001 and December 31, 2000, respectively, as a result
of TMI-2 entering long-term monitored storage in 1993.
46
GPU, Inc. and Subsidiary Companies
Offsetting the $520 million liability as of March 31, 2001 is $131 million
(JCP&L $16 million; Met-Ed $95 million; Penelec $20 million), which management
believes is probable of recovery from customers and included in Regulatory
assets, net on the Consolidated Balance Sheet, and $366 million (JCP&L $115
million; Met-Ed $154 million; Penelec $97 million) in trust funds for TMI-2 and
included in Nuclear decommissioning trusts, at market on the Consolidated
Balance Sheet.
The NJBPU has granted JCP&L revenues for TMI-2 retirement costs based on
the 1995 site-specific study estimate. In addition, JCP&L is recovering a
portion of its share of TMI-2 incremental monitored storage costs. The PaPUC
Restructuring Orders granted Met-Ed and Penelec recovery of TMI-2
decommissioning costs as part of the CTC; however, Penelec has recovered these
costs through the divestiture of its generating assets. The 1996 Customer Choice
Act also allows Met-Ed and Penelec to defer as a regulatory asset those amounts
that are above the level provided for in the CTC for future recovery.
As of March 31, 2001, the accident-related portion of TMI-2 radiological
decommissioning costs is estimated to be $80 million (JCP&L $20 million; Met-Ed
$40 million; Penelec $20 million), which is based on the 1995 site-specific
study (in 2001 dollars). In connection with rate case resolutions, JCP&L, Met-Ed
and Penelec made contributions to irrevocable external trusts for their
respective shares of the accident-related portion of the decommissioning
liability in amounts of $15 million, $40 million and $20 million, respectively.
These contributions were not recoverable from customers and were expensed in
1990, in the case of JCP&L, and in 1991 for Met-Ed and Penelec.
The GPU Energy companies intend to seek recovery for any increases in
TMI-2 retirement costs, but recognize that recovery cannot be assured.
The GPU Energy companies own all of the common stock of the Saxton Nuclear
Experimental Corporation, which owns a small demonstration nuclear reactor.
Decommissioning of the plant is expected to be completed in 2002. The estimated
liability for future Saxton decommissioning costs at March 31, 2001 was $14
million (JCP&L $6 million; Met-Ed $5 million; Penelec $3 million), net of $38
million spent as of March 31, 2001.
INSURANCE
---------
GPU has insurance (subject to retentions and deductibles) for its
operations and facilities including coverage for property damage, liability to
employees and third parties, and loss of use and occupancy. There is no
assurance that GPU will maintain all existing insurance coverages. Losses or
liabilities that are not completely insured, unless allowed to be recovered
through ratemaking, could have a material adverse effect on the financial
position of GPU.
GPU has purchased property and decontamination insurance coverage for
TMI-2 totaling $150 million.
The Price-Anderson Act limits an owner's liability to third parties
resulting from a nuclear incident to approximately $9.5 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.
47
GPU, Inc. and Subsidiary Companies
Although TMI-2 is exempt from retrospective premium assessments, the plant is
still covered by the provisions of the Price-Anderson Act. In addition, the GPU
Energy companies are subject to other retrospective premium assessments related
to policies applicable to TMI-1 prior to its sale to AmerGen.
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, air and water quality, global warming, electromagnetic fields, and
storage and disposal of hazardous and/or toxic wastes, GPU may be required to
incur substantial additional costs to construct new facilities; modify or
replace existing and proposed equipment; or remediate, decommission or clean up
waste disposal and other sites currently or formerly used by it, including
formerly owned manufactured gas plants (MGP), coal mine refuse piles and
generation facilities. In addition, federal and state laws provide for payment
by responsible parties for damage to natural resources.
GPU has been formally notified by the US Environmental Protection Agency
(EPA) and state environmental authorities that it is among the potentially
responsible parties (PRPs) who may be jointly and severally liable to pay for
the costs associated with the investigation and remediation at 11 hazardous
and/or toxic waste sites (in some cases, more than one company is named for a
given site).
JCP&L MET-ED PENELEC GPUN GPU,INC. TOTAL
----- ------ ------- ---- ------- -----
7 4 3 1 1 11
In addition, certain of the GPU companies have been requested to
participate in the remediation or supply information to the EPA and state
environmental authorities on several other sites for which they have not been
formally named as PRPs, although the EPA and/or state authorities may
nevertheless consider them as PRPs. Certain of the GPU companies have also been
named in lawsuits requesting damages (which are material in amount) for
hazardous and/or toxic substances allegedly released into the environment. As of
March 31, 2001, a liability of approximately $6.1 million (JCP&L $1.6 million;
Met-Ed $0.5 million; Penelec $0.2 million; other $3.8 million) was recorded for
PRP sites where it is probable that a loss has been incurred and the amount
could be reasonably estimated.
The ultimate cost of remediation of all these and other hazardous waste
sites will depend upon changing circumstances as site investigations continue,
including (a) the existing technology required for site cleanup, (b) the
remedial action plan chosen and (c) the extent of site contamination and the
portion attributed to the GPU companies involved.
In 1997, the EPA filed a complaint against GPU, Inc. in the US District
Court for the District of Delaware for enforcement of its Unilateral Order
(Order) issued against GPU, Inc. to clean up the former Dover Gas Light Company
(Dover) manufactured gas production site (Site) in Dover, Delaware. Dover was
part of the AGECO/AGECORP group of companies from 1929 until 1942; GPU, Inc.
emerged from the AGECO/AGECORP reorganization proceedings in 1946. All of
Dover's common stock, which was sold in 1942 to an unaffiliated entity, was
subsequently acquired by Chesapeake Utilities Corporation (Chesapeake), which
merged with Dover in 1960. In its complaint, the EPA sought (1) enforcement of
the Order against GPU; (2) recovery of its past response costs; (3) a
declaratory judgment that GPU is liable for any remaining cleanup costs of the
Site; and (4) statutory penalties for
48
GPU, Inc. and Subsidiary Companies
noncompliance with the Order. As of December 31, 2000, the EPA claimed past
costs of $1.1 million, and GPU, Inc.'s maximum penalty exposure for
noncompliance with the Order was approximately $44 million. Chesapeake has also
filed suit against GPU, Inc. for contribution to the cleanup of the Site. As of
December 31, 2000, Chesapeake claimed to have spent in excess of $10 million on
site cleanup costs, and was seeking recovery of at least $5 million from GPU,
Inc. through the contribution claim.
The parties have reached agreement in principle on the terms of a global
settlement, which is to be contained in a Consent Decree. Under the global
settlement terms, GPU, Inc. would perform certain work at the Site, at an
estimated cost of $0.6 million. GPU, Inc. would also pay $1.7 million for a
portion of the EPA's and Chesapeake's past costs. In addition, GPU, Inc. would
make a cash-out payment of $1.25 million for future costs and would make a
penalty payment to the EPA of $0.1 million for noncompliance with the Order. The
total estimated cost to GPU, Inc. under the global settlement terms, if
ultimately implemented, would be $3.65 million.
In August 2000, Rochester Gas & Electric Corporation (RG&E) filed suit
against GPU, Inc. in the US District Court for the Western District of New York
for the reimbursement of $5.2 million of costs and damages it has allegedly
incurred, and a declaratory judgement with respect to future costs and damages,
in connection with two former MGP sites and a third property where wastes from
one of those sites were allegedly deposited. All of the properties are located
in Rochester, New York. RG&E was an indirect subsidiary of AGECO from May 1929
until January 1946, and a subsidiary of GPU, Inc. from January 1946 until
October 1949, when it was divested by order of the SEC under the Public Utility
Holding Company Act. GPU, Inc. has filed a motion with the court requesting that
portions of RG&E's complaint be dismissed on various substantive grounds. RG&E
has responded and filed a motion for summary judgment on the issue of GPU,
Inc.'s alleged liability for the sites. A ruling by the court on these motions
is pending. There can be no assurance as to the outcome of this matter.
JCP&L has entered into agreements with the New Jersey Department of
Environmental Protection for the investigation and remediation of 17 formerly
owned MGP sites. JCP&L has also entered into various cost-sharing agreements
with other utilities for most of the sites. As of March 31, 2001, JCP&L has
spent approximately $47.6 million in connection with the cleanup of these sites.
In addition, JCP&L has recorded an estimated environmental liability of $50.2
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. The cost to clean up these sites could be
materially in excess of the $50.2 million due to significant uncertainties,
including changes in acceptable remediation methods and technologies.
The NJBPU has granted JCP&L recovery of MGP remediation costs through the
Societal Benefits Charge. As of March 31, 2001, JCP&L had recorded on its
Consolidated Balance Sheet a regulatory asset of $52 million. JCP&L is
continuing to pursue reimbursement from its insurance carriers for remediation
costs already spent and for future estimated costs. In 1994, JCP&L filed a
complaint with the Superior Court of New Jersey against several of its insurance
carriers, relating to these MGP sites, and has settled with all but one of those
carriers.
49
GPU, Inc. and Subsidiary Companies
OTHER COMMITMENTS AND CONTINGENCIES
-----------------------------------
Class Action Litigation:
- -----------------------
GPU Energy
In July 1999, the Mid-Atlantic states experienced a severe heat storm
which resulted in power outages throughout the service territories of many
electric utilities, including the territory of JCP&L. Following these outages,
the NJBPU initiated an investigation into the causes of the outages and the
reliability of the transmission and distribution systems of all four New Jersey
electric utilities. This investigation was essentially completed in May 2000,
with the issuance of Phase I and Phase II reports and orders from the NJBPU.
Both the Phase I and Phase II reports and orders contain, among other things,
directions for JCP&L to undertake certain actions and report back to the NJBPU
on the results. Additionally, the NJBPU Phase II order concluded that there is
not a prima facie case demonstrating that, overall, JCP&L provided unsafe,
inadequate or improper service to its customers.
Two class action lawsuits were commenced in New Jersey Superior Court in
July 1999. These suits were subsequently consolidated into a single proceeding,
and they seek compensatory and punitive damages arising from the service
interruptions of July 1999 in the JCP&L territory. The GPU defendants named in
these suits (i.e., GPU, Inc., JCP&L, GPUS and GPU Generation, Inc.) moved to
dismiss or stay the litigation pending the NJBPU's exercise of its primary
jurisdiction to investigate the causes of the outages. The trial court denied
that motion, and also certified a plaintiff class consisting of JCP&L customers
and their "dependents, tenants, employees and other intended beneficiaries of
customers who suffered damages as a result" of the service interruptions.
In January 2000, the New Jersey Appellate Division granted the GPU
defendants' motion for leave to take an interlocutory appeal of the trial
court's decision on the issue of primary jurisdiction. On June 14, 2000, the
Appellate Division affirmed the trial court but determined that the NJBPU's
findings in the exercise of its "exclusive jurisdiction" could be
"probative...but not determinative" of at least some of the issues in the
litigation, and leaving it to the trial court to "decide in the first instance
just what weight and validity to give the [NJBPU's] findings and conclusions."
In response to the GPU defendants' demand for a statement of damages, the
plaintiffs have stated that they are seeking $700 million, subject to the
results of pretrial discovery. JCP&L has notified its insurance carriers of the
plaintiffs' allegations. The primary insurance carrier has stated that, while
the substance of the plaintiffs' allegations is covered under the policy, it is
reserving its rights concerning coverage as circumstances develop. In September
2000, JCP&L received from its primary insurance carrier the initial
indemnification payment for certain expenses incurred by JCP&L relative to this
action.
Discovery continues in the class action, and no trial date has been set.
The GPU defendants filed a motion with the trial court seeking decertification
of the class, and oral argument on the decertification was held in February
2001. There can be no assurance as to the outcome of these matters.
50
GPU, Inc. and Subsidiary Companies
GPU Electric
As a result of the September 1998 fire and explosion at the Longford
natural gas plant in Victoria, Australia, Victorian gas users (plaintiffs) have
brought a class action in the Australian Federal Court against Esso Australia
Limited and its affiliate (Esso), the owner and operator of the plant, for
losses suffered due to the lack of natural gas supply and related damages. The
plaintiffs claim that Esso was, among other things, negligent in designing,
maintaining and operating the Longford plant, and also assert claims under
Australian fair trade practices law.
Esso has joined as third party defendants the State of Victoria (State)
and various State-owned entities which operated the Victorian gas industry prior
to its privatization, including Transmission Pipelines Australia (TPA) and its
affiliate Transmission Pipelines (Assets) Australia (TPAA). GPU, Inc., through
GPU GasNet, acquired the assets of TPA and the shares of TPAA from the State in
June 1999. Esso asserts that the State and the gas industry were negligent in
that, among other things, they failed to ensure that the gas system would
provide a secure supply of gas to users, and also asserts claims under the
Australian fair trade practices law. In addition, GPU GasNet and other private
entities that purchased the Victorian gas assets from the State have joined Esso
as third party defendants. Esso asserts that if the gas industry is liable as
alleged, that liability has been transferred to the Buyers as part of the
State's privatization process.
The Australian Federal Court has recently ordered that the proceeding be
transferred to the Superior Court of the State of Victoria.
Under the acquisition agreement with the State, GPU GasNet has indemnified
TPA and the State against third party claims arising out of, among other things,
the operation of TPA's business. TPA and the State have commenced proceedings
against GPU GasNet to enforce the indemnity in respect of any liability that may
flow to TPA as a result of Esso's claim.
GPU GasNet and TPAA have filed answers denying liability to Esso, the
State and TPA, which could be material. GPU GasNet and TPAA have notified their
insurance carriers of this action. The insurers have notified GPU GasNet that
they have formed the preliminary view that GPU GasNet is not entitled to
coverage under the liability policy. GPU GasNet believes that it is entitled to
coverage, and discussions with the insurers are continuing. There can be no
assurance as to the outcome of this matter.
Investments and Guarantees:
- --------------------------
GPU, Inc.
GPU, Inc. has made significant investments in foreign businesses and
facilities through its subsidiaries, GPU Electric and GPU Power. As of March 31,
2001, GPU, Inc.'s investments in GPU Electric and GPU Power were $802 million
and $141 million, respectively. As of that date, GPU, Inc. has also guaranteed
an additional $1 billion and $21 million of GPU Electric and GPU Power
outstanding obligations, respectively. Although management attempts to mitigate
the risks of investing in certain foreign countries by, among other things,
securing political risk insurance, GPU faces additional risks inherent in
operating in such locations, including foreign currency fluctuations.
51
GPU, Inc. and Subsidiary Companies
GPU Electric
GPU Power UK has a 40% equity interest in a 586 MW power project in
Pakistan (the Uch Power Project), which commenced commercial operations in
October 2000.
GPU's investment in the Uch Power Project as of March 31, 2001 was
approximately $38 million, plus a guaranty letter of credit of $3.6 million, and
its share of the projected completion costs represents an additional $3.1
million commitment. Cinergy (the former owner of 50% of Midlands Electricity
plc) agreed to fund up to an aggregate of $20 million of the required capital
contributions, for a period of one year from July 15, 1999, and "cash losses,"
which could be incurred on the Uch Power Project, for a period of up to ten
years from July 15, 1999. Cinergy has reimbursed GPU Electric for $4.9 million
of capital contributions through March 31, 2001, leaving a remaining commitment
of up to $15.1 million. There can be no assurance as to the outcome of this
matter.
GPU Power UK also owns an 18.75% interest in Humber Power Limited
(Humber). At March 31, 2001, GPU Power UK's equity in the project, which is
located in England, was approximately $22 million. A number of investors in the
project (not including GPU Power UK) also have purchase power agreements with
Humber, which provide for the servicing of the project's debt and a return on
equity. The purchasers are claiming that such contracts, which provide for
prices of power in excess of current market prices, will become unenforceable
under a new UK regulatory scheme which became effective in March 2001. Humber
and the purchasers have agreed to submit the matter to arbitration as provided
by the contracts. If the contracts cannot be satisfactorily reformed, the prices
at which Humber can sell its energy may not be sufficient to provide an equity
return to the investors or ultimately to service Humber's debt. There can be no
assurance as to the outcome of this matter.
GPU Power UK has gas contracts, extending to 2002, which require GPU Power
UK to purchase or sell gas at fixed prices. The estimated out-of-market position
of these contracts at March 31, 2001 was $23 million; however, GPU Power UK's
exposure to future price changes is reduced since these contracts include both
sales and purchases.
Emdersa's operating companies are subject to a number of government claims
related to Value-added tax liabilities and to Social Security taxes collected in
their electric rates, which aggregate approximately $29 million. The claims are
generally related to transitional issues surrounding the privatization of
Argentina's electricity industry. There can be no assurance as to the outcome of
these matters.
GPU Power
On July 9, 1999, DIAN (the Colombian national tax authority) issued a
"Special Requirement" on the Termobarranquilla S.A., Empresa de Servicios
Publicos (TEBSA) 1996 income tax return, which challenges the exclusion from
taxable income of an inflation adjustment related to the value of assets used
for power generation (EI Barranquilla, a wholly owned subsidiary of GPU Power,
ABB Barranquilla, Corporacion Electrica de la Costa Atlantica (CORELCA) and
Distral Group have a 28.7%, 28.7%, 42.5% and 0.1% interest in TEBSA,
respectively). The failure to give notice of this Special Requirement to the US
Export Import Bank (EXIM Bank) is an event of default under the loan agreement.
GPU Power also believes that other events of default exist
52
GPU, Inc. and Subsidiary Companies
under the loan agreements with project lenders including the Overseas Private
Investments Corporation (OPIC), a commercial bank syndicate. As a result,
certain required certifications have not been delivered to EXIM Bank, OPIC and
the other project lenders, which failure is, itself, an event of default under
the loan agreements. These issues are currently being discussed with EXIM Bank,
the other project lenders, and the Government of Colombia, as well as the other
partners in the TEBSA project. In addition, in January 2001 CORELCA advised GPU
Power that it was conducting its own investigation of the matter. Also, in March
2001, the DIAN initiated a review of documents relating to the project, and GPU
Power has been advised that DIAN may conduct an audit of TEBSA's tax returns for
the years 1999 and 2000 and that DIAN has requested a meeting to discuss the
results of its review. As of March 31, 2001, GPU Power has an investment of
approximately $96 million in TEBSA and is committed to make additional standby
equity contributions of $21.3 million, which GPU, Inc. has guaranteed. The total
outstanding senior debt of the TEBSA project is $358 million at March 31, 2001,
and, in addition, GPU, Inc. has guaranteed the obligations of the operators of
the TEBSA project, up to a maximum of $5 million, under the project's operations
and maintenance agreement. There can be no assurance as to the outcome of these
matters.
With regard to the "Special Requirement" issued by DIAN, DIAN asserts that
TEBSA should be liable for approximately $4.4 million consisting of $1.3 million
in additional tax and $3.1 million in penalties and interest. TEBSA has filed
both procedural and substantive objections to these assertions, the DIAN has
responded to these objections reiterating its previous position, and TEBSA, in
turn, filed an appeal with the DIAN on June 2, 2000. A response is expected by
the end of May 2001.
In July 2000, the DIAN issued a "Special Requirement" on the 1997 income
tax return of TEBSA challenging a tax exemption benefit under a Colombian income
tax statute. The DIAN requested payment of approximately $1.2 million in
additional tax, penalties and interest. On October 12, 2000, TEBSA filed a
response with the DIAN stating arguments supporting its tax exemption benefit.
There can be no assurance as to the outcome of these matters.
Other:
- -----
JCP&L and Public Service Electric & Gas Company (PSE&G) each hold a 50%
undivided ownership interest in Yards Creek Pumped Storage Facility (Yards
Creek). In December 1998, JCP&L filed a petition with the NJBPU seeking a
declaratory order that PSE&G's right of first refusal to purchase JCP&L's
ownership interest at its current book value under a 1964 agreement between the
companies is void and unenforceable. Management believes that the fair market
value of JCP&L's ownership interest in Yards Creek is substantially in excess of
its March 31, 2001 book value of $22 million. There can be no assurance as to
the outcome of this matter.
In March 1999, Penelec and New York State Electric & Gas Corporation
(NYSEG) each sold their 50% undivided ownership interests in the Homer City
Station to a subsidiary of Edison Mission Energy (EME) for a total of $1.9
billion. In connection with the sale, Penelec and NYSEG indemnified the buyer
with respect to certain contingent liabilities, including costs or expenses
which the EPA might impose for failure to comply with New Source Performance
Standards, Prevention of Significant Deterioration and New Source Review
regulations under the Clean Air Act prior to the date of the sale. In 1998, the
EPA had conducted inspections at Homer City with regard to the
53
GPU, Inc. and Subsidiary Companies
plant's compliance with these regulations. On October 30, 2000, EME notified
Penelec and NYSEG that the EPA had concluded that these regulations applied to
Homer City prior to the sale to EME and that Homer City was operating in
violation of these Clean Air Act regulations. If it is ultimately determined
that these regulations were applicable to Homer City, the EPA could assess
substantial monetary penalties and require capital modifications to the plant,
the costs of which would be material. To the extent Penelec and NYSEG are
obligated to indemnify EME for any of these costs, they would each be severally
liable for a 50% share. There can be no assurance as to the outcome of this
matter.
In July 1999, GPU began to evaluate existing restructuring plans at GPU
Power UK and formulate additional plans to reduce operating expenses and achieve
ongoing cost reductions. In total, the final cost reduction plan, which was
approved in 1999, identified 631 employees to be terminated, and, as a result, a
liability of $65 million was recorded. In early 2000, the liability for the then
remaining employees was reduced by approximately $6.9 million, due to a change
in investment return assumptions. At March 31, 2001, GPU had a remaining
severance liability of $2.7 million, included in Other current liabilities on
the Consolidated Balance Sheet, related to 32 employees. Management expects the
majority of the remaining employees to terminate by June 30, 2001.
GPU AR has entered into contracts to supply electricity to retail
customers through May 2002. In connection with meeting its supply obligations,
GPU AR has entered into purchase commitments for energy and capacity with
payment obligations totaling approximately $3.1 million as of March 31, 2001.
GPU, Inc. has guaranteed these payments, as well as certain other obligations,
up to a maximum of $19 million.
In accordance with the Nuclear Waste Policy Act of 1982 (NWPA), the GPU
Energy companies have entered into contracts with, and have been paying fees to,
the DOE for the future disposal of spent nuclear fuel in a repository or interim
storage facility. In 1996, the DOE notified the GPU Energy companies and other
standard contract holders that it would be unable to begin acceptance of spent
nuclear fuel for disposal by 1998, as mandated by the NWPA. The DOE requested
recommendations from contract holders for handling the delay. In June 1997, a
consortium of electric utilities, including GPUN, filed a license application
with the NRC seeking permission to build an interim above-ground disposal
facility for spent nuclear fuel in Utah.
At March 31, 2001, GPU has recorded a liability of $213 million owed to
the Nuclear Waste Fund, related to spent nuclear fuel generated prior to the
sales of TMI-1 and Oyster Creek to AmerGen. AmerGen has assumed all liability
for disposal costs related to spent nuclear fuel generated following its
purchase of the plants.
On July 26, 2000, GPUN filed suit in the United States Court of Claims
seeking to recover damages as a result of the DOE's failure to commence disposal
of GPUN's spent nuclear fuel on January 31, 1998, as required by the terms of
the Standard Contract between GPUN and DOE. The complaint seeks damages from the
Government in an amount to be determined at trial. GPUN has alleged that it is
entitled to damages attributable to operations at both TMI-1 and Oyster Creek.
The Government's motion to reassign GPUN's case, and all other similar cases
brought against the Government, to a single judge, after which the Government
states that it would seek consolidation of all the cases, is pending before the
Court. There can be no assurance as to the outcome of this matter.
54
GPU, Inc. and Subsidiary Companies
GPU, Inc. and consolidated affiliates have approximately 14,300 employees
worldwide, of whom 10,200 are employed in the US, 3,600 are in the United
Kingdom (UK) and the remaining 500 are in South America and Australia. The
majority of the US workforce is employed by the GPU Energy companies (4,850) and
MYR (5,040), of which approximately 2,900 and 4,300, respectively, are
represented by unions for collective bargaining purposes. In the UK,
approximately 2,400 GPU Power UK employees are represented by unions, and the
terms and conditions of various bargaining agreements are generally reviewed
annually, on April 1. The JCP&L, Met-Ed and Penelec collective bargaining
agreements with the International Brotherhood of Electrical Workers expire on
October 31, 2004, May 1, 2005 and May 14, 2004, respectively. Penelec's
collective bargaining agreement with the Utility Workers Union of America
expires on August 31, 2003.
In March 2001, 207 employees (Met-Ed 101 employees; Penelec 106 employees)
accepted Voluntary Enhanced Retirement Programs (VERP) offered to certain
bargaining unit employees in Pennsylvania. As a result, a pre-tax charge of
approximately $18 million (Met-Ed $9 million; Penelec $9 million) has been
recorded in 2001 Operating Income for the cost of pension and other
postretirement benefits.
During the normal course of the operation of its businesses, in addition
to the matters described above, GPU is from time to time involved in disputes,
claims and, in some cases, as a defendant in litigation in which compensatory
and punitive damages are sought by the public, customers, contractors, vendors
and other suppliers of equipment and services and by employees alleging unlawful
employment practices. While management does not expect that the outcome of these
matters will have a material effect on GPU's financial position or results of
operations, there can be no assurance that this will continue to be the case.
2. ACCOUNTING FOR DERIVATIVE INSTRUMENTS
GPU's use of derivative instruments is intended to manage the risk of
price, interest rate and foreign currency fluctuations. GPU does not hold or
issue derivative instruments for trading purposes.
Effective January 1, 2001, GPU adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by FAS 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133"
and FAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - An Amendment of FASB Statement No. 133" (collectively, FAS 133).
FAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities.
In general, FAS 133 requires that companies recognize all derivatives as
either assets or liabilities on the balance sheet, measured at their fair value.
Derivatives not designated as hedges must be adjusted to fair value with an
offset to income. If the derivative is designated as a hedge, depending on the
nature of the hedge, changes in fair value of the derivative are either offset
against the change in fair value of the asset or liability through income, or
recognized in accumulated other comprehensive income until the hedged item is
recognized in income. To the extent the hedge is determined to be ineffective,
that portion of the derivative's change in fair value is immediately recognized
in income. FAS 133 provides an exemption for
55
GPU, Inc. and Subsidiary Companies
certain contracts that qualify as "normal purchases and sales." To qualify for
this exclusion, certain criteria, including that it must be probable that the
contract will result in physical delivery, must be met.
The adoption of FAS 133 on January 1, 2001 resulted in the recognition of
derivative assets on the Consolidated Balance Sheet at January 1, 2001 in the
amount of $114.8 million (JCP&L $21.8 million; Met-Ed $13 million; Penelec $26
million; GPU Electric $54 million), with offsetting amounts, net of tax,
recorded in Accumulated other comprehensive income, of $59.1 million (JCP&L $5.1
million; GPU Electric $54 million) and Regulatory assets, net, of $51.1 million
(JCP&L $13 million; Met-Ed $12.2 million; Penelec $25.9 million). As of January
1, 2001, derivative liabilities in the amount of $5.8 million (Penelec $1
million; GPU Electric $4.8 million) were also recorded as a result of adopting
FAS 133, with an offsetting amount, net of tax, recorded in Accumulated other
comprehensive income, of $3.4 million (Penelec $0.5 million; GPU Electric $2.9
million). As of January 1, 2001, a cumulative effect of accounting change was
recognized as an expense in Other income, net on the Consolidated Statement of
Income in an amount totaling $1 million (Met-Ed $.1 million; Penelec $.8
million; GPU Electric $(1.9) million).
Commodity Derivatives:
- ---------------------
The GPU Energy companies use New York Mercantile Exchange (NYMEX) futures
and Over-the-Counter (OTC) forward contracts and options on forward contracts to
manage the risk of fluctuations in the market price of electricity. The GPU
Energy companies also manage the natural gas requirements of certain NUG
facilities that generate and sell energy to JCP&L under long-term contracts. The
majority of the forward commodity contracts are considered "normal purchases and
sales," as defined by FAS 133, and therefore are excluded from the scope of FAS
133. However, the Derivatives Implementation Group (DIG), a committee of the
Financial Accounting Standards Board (FASB) responsible for providing guidance
on the implementation of FAS 133, has not reached a final conclusion regarding
the appropriate accounting treatment for certain types of energy contracts under
FAS 133. Depending on the final decision of the FASB, certain commodity
contracts currently considered "normal purchases and sales" may no longer
qualify for this exclusion, and may be required to be accounted for under FAS
133. In this case, GPU would follow the transition provisions for applying the
guidance in FAS 133. Management believes such contracts would qualify as cash
flow hedges and be recorded at fair value on the balance sheet, with the
effective portion of the hedge recognized in accumulated other comprehensive
income.
The energy options and gas futures contracts determined to be derivatives
under FAS 133 are accounted for as cash flow hedges and expire on various dates
through August 2002. These contracts are recorded at fair value on the
Consolidated Balance Sheet in the amount of $13.3 million (JCP&L $8.2 million;
Met-Ed $2.7 million; Penelec $2.4 million) as of March 31, 2001. The offset of
the change in fair value is recorded in Accumulated other comprehensive income,
net of tax, and subsequently recognized as a component of Power purchased and
interchanged on the Consolidated Statement of Income when the underlying power
being hedged is purchased. Of the $2.5 million (JCP&L $2.3 million; Met-Ed $.1
million; Penelec $.1 million) recorded in Accumulated other comprehensive income
as of March 31, 2001, GPU expects a pre-tax gain of approximately $3.7 million
(JCP&L $3.3 million; Met-Ed $.2 million; Penelec $.2 million) to be recognized
in income within the next twelve months. The ineffective portion of these
commodity contracts was immaterial for the quarter ended March 31, 2001.
56
GPU, Inc. and Subsidiary Companies
When GPU sold TMI-1 to AmerGen, the parties entered into an agreement
which calls for an adjustment to the purchase price of TMI-1 in the event of
future energy price increases. If the future price of energy exceeds the strike
price during the contract year as defined per the agreement, GPU will receive
payments from AmerGen, subject to a market price cap. However, if the future
price of energy is less than the strike price during a contract year, a credit
is applied against future contract payments that would be received from AmerGen.
This agreement qualifies as a derivative as defined by FAS 133, and its value is
recorded on the Consolidated Balance Sheet based on the present value of the
contract's projected future cash flows. As of March 31, 2001, this amount
totaled $53 million (JCP&L $13.2 million; Met-Ed $26.6 million; Penelec $13.2
million) and was included in Other Property and Investments - Other, net. An
offsetting regulatory liability in the amount of $52 million (JCP&L $13.2
million; Met-Ed $26.3 million; Penelec $12.5 million) was recorded against
Regulatory assets, net on the Consolidated Balance Sheet as of March 31, 2001,
representing the obligation to treat the retail portion of payments received as
stranded cost revenues when received. The non-retail portion is recorded on the
Consolidated Statement of Income in Other income, net. This amount was
immaterial for the quarter ended March 31, 2001.
Interest Rate Swap Agreements:
- -----------------------------
Penelec and GPU Electric (through GPU GasNet and GPU Power UK) use
interest rate swap agreements to manage the risk of increases in variable
interest rates. The interest rate swap agreements were entered into to convert
variable rate debt to fixed rate debt. The interest rate swap agreements of
Penelec and GPU GasNet are accounted for as cash flow hedges under FAS 133 and
are recorded at fair value on the Consolidated Balance Sheet in Deferred Credits
and Other Liabilities - Other in the amount of $7.9 million (Penelec $1.7
million; GPU Electric $6.2 million) as of March 31, 2001. The offset of the
change in fair value is recorded in Accumulated other comprehensive income, net
of tax, and subsequently recognized as a component of Interest expense when the
related interest payments being hedged are recognized. Of the $7.2 million
(Penelec $1 million; GPU Electric $6.2 million) recorded in Accumulated other
comprehensive income as of March 31, 2001, GPU expects a pre-tax loss of
approximately $1.3 million (Penelec) to be recognized in income within the next
twelve months. The ineffective portion of the interest rate swaps was immaterial
for the quarter ended March 31, 2001.
The interest rate swaps of GPU Power UK were not designated as hedges
because hedge effectiveness could not be demonstrated for the period in
accordance with FAS 133. As a result, these interest rate swaps are recorded at
fair value as a liability on the Consolidated Balance Sheet in the amount of
$3.3 million as of March 31, 2001. The offset of the change in fair value is
recorded in Other income, net on the Consolidated Statement of Income in the
amount of $1.4 million for the quarter ended March 31, 2001.
As of March 31, 2001, the interest rate swap agreements covered
approximately $484 million (Penelec $50 million; GPU Electric $434 million) of
debt, and were scheduled to expire on various dates through June 2006. For the
quarter ended March 31, 2001, the amount by which fixed rate interest expense
exceeded variable rate interest was immaterial.
57
GPU, Inc. and Subsidiary Companies
Currency Swap Agreements:
- ------------------------
GPU Electric uses currency swap agreements to manage currency risk caused
by fluctuations in the US dollar exchange rate related to debt issued in the US
by Avon Energy Partners Holdings. These swap agreements effectively convert
principal and interest payments on this US dollar debt to fixed sterling
principal and interest payments, and expire on the maturity dates of the bonds.
These instruments are accounted for as cash flow hedges under FAS 133 and are
recorded at fair value on the Consolidated Balance Sheet in the amount of $96.4
million as of March 31, 2001. The offset of the change in fair value is recorded
in Accumulated other comprehensive income, net of tax, and subsequently
recognized as a component of Interest expense on the Consolidated Statement of
Income when the related interest payments being hedged are recognized. Of the
$62.7 million recorded in Accumulated other comprehensive income as of March 31,
2001, GPU expects a pre-tax gain of approximately $13.2 million to be recognized
in income within the next twelve months. The ineffective portion of the currency
swaps agreements was immaterial for the quarter ended March 31, 2001.
As of March 31, 2001, these currency swap agreements covered BP 598
million (US $850 million) of debt. Interest expense would have been BP 9.8
million (US $14.1 million) as compared to BP 9.6 million (US $13.9 million) for
the quarter ended March 31, 2001 had these agreements not been in place.
3. SEGMENT INFORMATION
The following is presented in accordance with Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information."
GPU's reportable segments are strategic business units that are managed
separately due to their different operating and regulatory environments. GPU's
management evaluates the performance of its business units based upon income
before extraordinary and non-recurring items (the adjustments to income for each
of the periods presented are described below). For the purpose of providing
segment information, domestic electric utility operations (GPU Energy) is
comprised of the three electric utility operating companies serving customers in
New Jersey and Pennsylvania, as well as GPUN and GPUS. For additional
information on GPU's organizational structure and businesses, see preface to the
Combined Notes to Consolidated Financial Statements.
For the three months ended March 31, 2001, GPU's non-recurring items
totaled a net charge of $20.1 million after-tax, and consisted of the following:
a charge of $10.7 million after-tax, for costs related to Voluntary Enhanced
Retirement Programs offered to certain bargaining unit employees in
Pennsylvania; and a charge of $9.4 million after-tax, for costs related to the
termination of a wholesale energy contract with Allegheny Electric Cooperative.
There were no non-recurring items for the three months ended March 31, 2000.
58
GPU, Inc. and Subsidiary Companies
Business Segment Data (in thousands)
Income
Interest Before Extra-
Depreciation Charges and Income Tax ordinary and Capital
Operating and Preferred Expense/ Non-recurring Total Expenditures
Revenues Amortization Dividends (Benefit)(a) Items Assets(b) and Investments
--------- ------------ ---------- ---------- ------------- --------- ---------------
For the three months
ended March 31, 2001
Domestic Segments:
Electric Utility Operations
(GPU Energy) $ 910,514 $ 94,072 $ 52,303 $ 54,695 $83,951 $12,142,363 $ 59,129
Electric Retail Energy Sales
(GPU AR) 12,274 - - 252 431 17,674 -
Telecommunications
Infrastructure
(GPU Telcom) 7,923 249 - 205 259 125,552 17,971
Construction Services
(MYR) (c) 152,768 2,252 334 840 1,059 345,440 499
---------- ---------- -------- -------- --------- ----------- --------
Subtotal 1,083,479 96,573 52,637 55,992 85,700 12,631,029 77,599
---------- ---------- -------- -------- --------- ----------- --------
Foreign Segments:
Electric/Gas Utility
Operations:
(GPU Electric)
Electric Distribution -
United Kingdom 148,356 27,635 41,048 5,936 12,204( f) 4,259,069 30,517
Electric Distribution -
Argentina 49,287 4,440 7,233 1,275 2,166 665,215 8,362
Gas Transmission -
Australia 10,151 3,149 8,405 (642) (1,896) 784,872 716
Independ Power Prod -
S. America (GPU Power) 9,166 1,534 789 1,185 2,322 257,906 11
---------- ---------- -------- -------- --------- ----------- --------
Subtotal 216,960 36,758 57,475 7,754 14,796 5,967,062 39,606
---------- ---------- -------- -------- --------- ----------- --------
Corporate and Eliminations - 130 10,837 (752) (11,553) 34,018 117
---------- ---------- -------- -------- --------- ----------- --------
Consolidated Total $1,300,439 $ 133,461 $120,949 $ 62,994 $88,943 $18,632,109 $117,322
========== ========== ======== ======== ========= =========== ========
For the three months
ended March 31, 2000
Domestic Segments:
Electric Utility Operations
(GPU Energy) $ 849,721 $ 83,481 $ 51,427 $ 66,270 $96,544 $12,647,529 $ 47,808
Independ Power Prod
(GPU International) (e) 23,010 2,332 254 828 1,251 - 4,183
Electric Retail Energy Sales
(GPU AR) 23,329 - - 1,120 1,645 19,943 7
Telecommunications
Infrastructure
(GPU Telcom) 1,810 217 - (78) (112) 104,061 6,193
Construction Services
(MYR) (c) - - - - - 354,197 -
---------- ---------- -------- -------- --------- ----------- --------
Subtotal 897,870 86,030 51,681 68,140 99,328 13,125,730 58,191
---------- ---------- -------- -------- --------- ----------- --------
Foreign Segments:
Electric/Gas Utility
Operations:
(GPU Electric)
Electric Distribution -
United Kingdom 166,298 25,562 46,626 19,068 33,043(g ) 4,367,405 44,010
Electric Distribution -
Argentina 43,422 3,313 7,208 400 745 635,050 5,199
Electric Transmission -
Australia (d) 47,208 10,271 24,014 1,589 2,952 - 1,689
Gas Transmission -
Australia 11,942 2,805 10,543 (1,426) (2,004) 862,939 1,936
Independ Power Prod -
S. America (GPU Power) 9,704 1,614 1,076 1,178 2,135 255,166 26
---------- ---------- -------- -------- --------- ----------- --------
Subtotal 278,574 43,565 89,467 20,809 36,871 6,120,560 52,860
---------- ---------- -------- -------- --------- ----------- --------
Corporate and Eliminations - - 1,815 - (5,201) 16,171 500
---------- ---------- -------- -------- --------- ----------- --------
Consolidated Total $1,176,444 $ 129,595 $142,963 $ 88,949 $ 130,998 $19,262,461 $111,551
========== ========== ======== ======== ========= =========== ========
(a) Represents income taxes on income before extraordinary and non-recurring items.
(b) The comparative 2000 Total Assets is as of December 31, 2000.
(c) MYR was acquired in April 2000.
(d) Represents GPU PowerNet, which was sold in June 2000.
(e) GPU International was sold in December 2000.
(f) Includes income from GPU Power UK's investments in independent power
projects accounted for under the equity and cost methods of $2.8 million.
(g) Includes income from GPU Power UK's investments in independent power
projects accounted for under the cost method of $4.7 million.
59
GPU, Inc. and Subsidiary Companies
4. COMPREHENSIVE INCOME
For the three months ended March 31, 2001 and 2000, comprehensive
income is summarized below.
In Thousands
------------------------
Three months
Ended March 31,
------------------------
GPU, Inc. and Subsidiary Companies 2001 2000
- ---------------------------------- ---- ----
Net income $ 68,895 $130,998
------- -------
Other comprehensive income/(loss), net of tax:
Net unrealized gain/(loss) on investments (1,924) 14,089
Foreign currency translation (46,215) (39,487)
Cumulative effect of change in accounting
for derivative instruments at 1/1/01 55,730 -
Net unrealized gains on derivative instruments 2,246 -
------- -------
Total other comprehensive income/(loss) 9,837 (25,398)
------- -------
Comprehensive income $ 78,732 $105,600
======= =======
JCP&L
- -----
Net income $ 51,382 $ 45,570
------- -------
Other comprehensive income, net of tax:
Cumulative effect of change in accounting
for derivative instruments at 1/1/01 5,180 -
Net unrealized loss on derivative instruments (2,855) -
------- -------
Total other comprehensive income 2,325 -
------- -------
Comprehensive income $ 53,707 $ 45,570
======= =======
Met-Ed
- ------
Net income $ 16,017 $ 26,493
------- -------
Other comprehensive income/(loss), net of tax:
Net unrealized gain/(loss) on investments 10 (728)
Net unrealized gain on derivative instruments 54 -
------- -------
Total other comprehensive income/(loss) 64 (728)
------- -------
Comprehensive income $ 16,081 $ 25,765
======= =======
Penelec
- -------
Net income/(loss) $ (2,105) $ 26,942
------- -------
Other comprehensive income/(loss), net of tax:
Net unrealized gain/(loss) on investments 7 (366)
Cumulative effect of change in accounting
for derivative instruments at 1/1/01 (535) -
Net unrealized loss on derivative instruments (353) -
------- -------
Total other comprehensive income/(loss) (881) (366)
------- -------
Comprehensive income/(loss) $ (2,986) $ 26,576
======= =======
5. COMPANY-OBLIGATED TRUST PREFERRED SECURITIES
In 1999, Met-Ed Capital Trust, a wholly-owned subsidiary of Met-Ed,
issued $100 million of trust preferred securities (Met-Ed Trust Preferred
Securities) at 7.35%, due 2039. The sole assets of Met-Ed Capital Trust are the
7.35% Cumulative Preferred Securities of Met-Ed Capital II, L.P. (Met-Ed
60
GPU, Inc. and Subsidiary Companies
Partnership Preferred Securities) and its only revenues are the quarterly cash
distributions it receives on the Met-Ed Partnership Preferred Securities. Each
Met-Ed Trust Preferred Security represents a Met-Ed Partnership Preferred
Security. Met-Ed Capital II, L.P. is a wholly-owned subsidiary of Met-Ed and the
sponsor of Met-Ed Capital Trust. The sole assets of Met-Ed Capital II, L.P. are
Met-Ed's 7.35% Subordinated Debentures, Series A, due 2039, which have an
aggregate principal amount of $103.1 million. Met-Ed has fully and
unconditionally guaranteed the Met-Ed Partnership Preferred Securities, and,
therefore, the Met-Ed Trust Preferred Securities.
In 1999, Penelec Capital Trust, a wholly-owned subsidiary of Penelec,
issued $100 million of trust preferred securities (Penelec Trust Preferred
Securities) at 7.34%, due 2039. The sole assets of Penelec Capital Trust are the
7.34% Cumulative Preferred Securities of Penelec Capital II, L.P. (Penelec
Partnership Preferred Securities) and its only revenues are the quarterly cash
distributions it receives on the Penelec Partnership Preferred Securities. Each
Penelec Trust Preferred Security represents a Penelec Partnership Preferred
Security. Penelec Capital II, L.P. is a wholly-owned subsidiary of Penelec and
the sponsor of Penelec Capital Trust. The sole assets of Penelec Capital II,
L.P. are Penelec's 7.34% Subordinated Debentures, Series A, due 2039, which have
an aggregate principal amount of $103.1 million. Penelec has fully and
unconditionally guaranteed the Penelec Partnership Preferred Securities, and,
therefore, the Penelec Trust Preferred Securities.
61
GPU, Inc. and Subsidiary Companies
PART II
ITEM 1 - LEGAL PROCEEDINGS
-----------------
Information concerning the current status of certain legal
proceedings instituted against GPU, Inc. and the GPU Energy
companies discussed in Part I of this report in Combined Notes
to Consolidated Financial Statements is incorporated herein by
reference and made a part hereof.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
(12) Statements Showing Computation of Ratio of
Earnings to Fixed Charges and Ratio of Earnings
to Combined Fixed Charges and Preferred Stock
Dividends Based on SEC Regulation S-K, Item 503
A - GPU, Inc. and Subsidiary Companies
B - JCP&L
C - Met-Ed
D - Penelec
(b) Reports on Form 8-K
None
62
GPU, Inc. and Subsidiary Companies
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
GPU, INC.
May 3, 2001 By: /s/ B. L. Levy
---------------------------------
B. L. Levy, Senior Vice President
and Chief Financial Officer
May 3, 2001 By: /s/ P. E. Maricondo
---------------------------------
P. E. Maricondo, Vice President
and Comptroller
(principal accounting officer)
JERSEY CENTRAL POWER & LIGHT COMPANY
METROPOLITAN EDISON COMPANY
PENNSYLVANIA ELECTRIC COMPANY
May 3, 2001 By: /s/ M. J. Chesser
---------------------------------
M. J. Chesser, President and
Chief Executive Officer
May 3, 2001 By: /s/ P. E. Maricondo
---------------------------------
P. E. Maricondo, Comptroller
(principal accounting officer)
63