SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934 For the fiscal year ended December 31, 1998
OR
- --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from --------- to--------
Commission Registrant, State of Incorporation, I.R.S. Employer
File Number Address and Telephone Number Identification No.
1-6047 GPU, Inc. 13-5516989
(a Pennsylvania corporation)
300 Madison Avenue
Morristown, New Jersey 07962-1911
Telephone (973) 455-8200
1-3141 Jersey Central Power & Light Company 21-0485010
(a New Jersey corporation)
2800 Pottsville Pike
Reading, Pennsylvania 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
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Registrant Title of each class which registered
- ---------- ------------------- ----------------
GPU, Inc. Common Stock, par value
$2.50 per share New York Stock Exchange
Jersey Central Power & Cumulative Preferred
Light Company Stock, $100 stated value
4% Series New York Stock Exchange
7.88% Series E New York Stock Exchange
Name of each exchange
Registrant Title of each class which registered
- ---------- ------------------- ----------------
Jersey Central Power & First Mortgage Bonds:
Light Company (cont.) 6 3/8% Series due 2003 New York Stock Exchange
7 1/8% Series due 2004 New York Stock Exchange
7 1/2% Series due 2023 New York Stock Exchange
6 3/4% Series due 2025 New York Stock Exchange
Monthly Income Preferred
Securities, 8.56%
Series A, $25 stated
Value (a) New York Stock Exchange
Metropolitan Edison Monthly Income Preferred
Company Securities, 9% Series A,
$25 stated value (b) New York Stock Exchange
Pennsylvania Electric Cumulative Preferred
Company Stock, $100 stated value:
4.40% Series B Philadelphia Stock
Exchange
3.70% Series C Philadelphia Stock
Exchange
4.05% Series D Philadelphia Stock
Exchange
4.70% Series E Philadelphia Stock
Exchange
4.50% Series F Philadelphia Stock
Exchange
4.60% Series G Philadelphia Stock
Exchange
Monthly Income Preferred
Securities, 8 3/4%
Series A, $25 stated
value (c) New York Stock Exchange
(a) Issued by JCP&L Capital, L.P., and unconditionally guaranteed by Jersey
Central Power & Light Company.
(b) Issued by Met-Ed Capital, L.P., and unconditionally guaranteed by
Metropolitan Edison Company.
(c) Issued by Penelec Capital, L.P., and unconditionally guaranteed by
Pennsylvania Electric Company.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether each 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
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of each registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the registrants' voting stock held by
non-affiliates based on the closing price of $42.125 on February 3, 1999 was:
Registrant Amount
---------- ------
GPU, Inc. $5,383,065,371
The number of shares outstanding of each of the registrants' classes of
voting stock as of February 3, 1999 was as follows:
Shares
Registrant Title Outstanding
- ---------- ----- -----------
GPU, Inc. Common Stock, $2.50 par value 127,787,902
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
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for 1999 Annual Meeting of Stockholders of GPU, Inc.
(Part III)
- -----------------------------------------------------------------------------
This combined Form 10-K 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. Each registrant makes no
representation as to information relating to the other registrants.
TABLE OF CONTENTS
Page
Number
------
Part I
Item 1. Business 1
Item 2. Properties 46
Item 3. Legal Proceedings 49
Item 4. Submission of Matters to a Vote of Security Holders 49
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 50
Item 6. Selected Financial Data 50
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 51
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk 51
Item 8. Financial Statements and Supplementary Data 51
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 51
Part III
Item 10. Directors and Executive Officers of the Registrant 52
Item 11. Executive Compensation 56
Item 12. Security Ownership of Certain Beneficial Owners
and Management 61
Item 13. Certain Relationships and Related Transactions 62
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 62
Signatures 76
PART I
ITEM 1. BUSINESS.
GPU, Inc., a Pennsylvania corporation, is a holding company registered
under the Public Utility Holding Company Act of 1935 (1935 Act). GPU, Inc. does
not directly operate any utility properties, but owns all the outstanding common
stock of three domestic electric utilities serving customers in New Jersey --
Jersey Central Power & Light Company (JCP&L) -- and Pennsylvania -- Metropolitan
Edison Company (Met-Ed) and Pennsylvania Electric Company (Penelec). The
customer service, transmission and distribution operations of these electric
utilities are conducting business under the name GPU Energy. JCP&L, Met-Ed and
Penelec considered together are referred to as the "GPU Energy companies." The
generation operations of the GPU Energy companies are conducted by GPU
Generation, Inc. (Genco) and GPU Nuclear, Inc. (GPUN). The "GPUI Group," as
referred to in this report, develops, owns, operates and funds the acquisition
of generation, transmission and distribution facilities worldwide through GPU
International, Inc., GPU Power, Inc., GPU Capital, Inc. and GPU Electric, Inc.,
a subsidiary of GPU Capital, Inc. (Hereafter, GPU International, Inc. and GPU
Power, Inc. and their subsidiaries, which will develop, own, operate and fund
the acquisition of generation facilities worldwide, will be referred to as the
"GPUI Group" and GPU Capital, Inc. and GPU Electric, Inc. and their
subsidiaries, which will develop, own, operate and fund the acquisition of
transmission and distribution systems outside the United States, will be
referred to as "GPU Electric.") Other subsidiaries of GPU, Inc. include GPU
Advanced Resources, Inc. (GPU AR), which is involved in retail energy sales; GPU
Telcom Services, Inc. (GPU Telcom), which is engaged in
telecommunications-related businesses; and GPU Service, Inc. (GPUS), which
provides legal, accounting, financial and other services to the GPU companies.
All of these companies considered together are referred to as "GPU."
GPU is subject to regulation by the Securities and Exchange Commission
(SEC) under the 1935 Act. The GPU Energy companies' retail rates, conditions of
service, and issuance of securities are subject to regulation in the state in
which each utility operates - in New Jersey by the New Jersey Board of Public
Utilities (NJBPU) and in Pennsylvania by the Pennsylvania Public Utility
Commission (PaPUC). The Nuclear Regulatory Commission (NRC) regulates the
construction, ownership and operation of nuclear generating stations. The GPU
Energy companies are also subject to wholesale rate and other regulation by the
Federal Energy Regulatory Commission (FERC) under the Federal Power Act. In
addition, certain foreign subsidiaries and affiliates are subject to limited
rate and other regulation (see REGULATION section).
Financial information with respect to the business segments of GPU is
provided in Note 15, Segment Information, of the Combined Notes to the
Consolidated Financial Statements.
This Form 10-K contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Statements made
that are not historical facts are forward-looking and, accordingly, involve
risks and uncertainties that could cause actual results or outcomes to differ
materially from those expressed in the forward-looking statements. Although such
forward-looking statements have been based on reasonable assumptions, there is
no assurance that the expected results will be achieved.
1
Some of the factors that could cause actual results to differ materially
include, but are not limited to: the effects of regulatory decisions; changes in
law and other governmental actions and initiatives; the impact of deregulation
and increased competition in the industry; industry restructuring; expected
outcomes of legal proceedings; the completion of generation asset divestiture;
fuel prices and availability; the effects of the Year 2000 issue (see LIQUIDITY
AND CAPITAL RESOURCES section of Management's Discussion and Analysis); and
uncertainties involved with foreign operations including political risks and
foreign currency fluctuations.
SIGNIFICANT DEVELOPMENTS
The following are significant developments which have had, or will continue
to have, an impact on GPU:
Pennsylvania Restructuring
In 1996, Pennsylvania adopted comprehensive legislation (Customer Choice
Act) which provides for the restructuring of the electric utility industry. In
June 1997, Met-Ed and Penelec filed with the PaPUC their restructuring plans to
implement competition and customer choice in Pennsylvania. In October 1998, the
PaPUC adopted Restructuring Orders approving Settlement Agreements entered into
by Met-Ed, Penelec, the PaPUC and all but two of the intervenors in the
restructuring proceeding who appealed the Restructuring Orders. One of these
appeals remains pending and is scheduled to be heard in April 1999. For
additional information, see Note 5, Accounting for Extraordinary and
Non-recurring Items, of the Combined Notes to the Consolidated Financial
Statements. The major elements of the Restructuring Orders are as follows:
- A transmission and distribution tariff rate which provides adequate
funding for maintaining the reliability of Met-Ed and Penelec's
electric distribution systems;
- A rate reduction from January 1, 1999 through December 31, 1999, for
all customers, whether they choose an alternate supplier or not,
reflecting Met-Ed and Penelec's obligation to make refunds to customers
from 1998 revenues (2.5% for Met-Ed customers and 3% for Penelec
customers from December 1996 levels);
- The ability of all customers to participate in electric choice on
January 1, 1999 - two years sooner than called for in Pennsylvania's
Customer Choice Act;
- Customers will receive a "shopping credit" that will result in savings
if they buy electricity from an alternate supplier that charges less
than the shopping credit. The average shopping credit in 1999 will be
4.350 cents per KWH for Met-Ed and 4.404 cents per KWH for Penelec.
Actual prices will vary by customer rate class;
- Assurance of full recovery of the above-market costs of
government-mandated contracts to buy electricity from nonutility
generators (NUGs) (Beginning in 2005, the amount collected will be
adjusted every five years over the life of each contract);
2
- A rate cap for the cost of delivering electricity (transmission and
distribution) until 2004;
- A rate cap for electricity purchased from Met-Ed and Penelec, as
providers of last resort, until 2010;
- PaPUC approval for Met-Ed and Penelec to sell all of their generating
stations, including Three Mile Island Unit 1 (TMI-1);
- Recovery of $658 million in stranded costs for Met-Ed over 12 years and
$332 million for Penelec over 11 years, primarily for NUGs. Future NUG
operating costs for which rate recovery has been assured may be
adjusted every five years over the life of each NUG contract. (These
amounts reflect the effects of using the estimated net proceeds from
selling Met-Ed and Penelec's generating plants to reduce stranded costs
and will be adjusted based on actual net sale proceeds);
- $2.7 million and $3.4 million for assistance in 1999 to low-income
customers of Met-Ed and Penelec, respectively; increasing to $6.4
million and $6.9 million, respectively, in 2002;
- A sustainable energy fund to promote the development and use of
renewable energy and clean energy technologies with one-time payments
in 1998 of $5.7 million from Met-Ed and of $6.4 million from Penelec;
- The ability of some customers to choose another licensed supplier to
provide metering services beginning January 1, 1999, and billing
services beginning January 1, 2000;
- A phase-in of competitive bidding beginning no later than June 1, 2000,
for other suppliers to be the "provider of last resort" for customers
who do not shop; and
- The dismissal of all pending litigation regarding restructuring in
accordance with the Settlement Agreements.
New Jersey Restructuring
In January 1999, New Jersey enacted legislation to deregulate the state's
electricity market. The legislation generally provides for, among other things,
the following:
- Customer choice of electric generation supplier for all consumers
beginning no later than August 1, 1999;
- A 5% rate reduction for all customers beginning August 1, 1999, with
another 5% rate reduction to be phased in over the next three years.
The rate reduction must be maintained for one year after the end of the
three year phase-in;
- - the aggregation of electric generation service by a government or
private aggregator;
3
- the unbundling of customer bills;
- the ability to recover stranded costs; and
- the ability to securitize stranded costs.
In April 1997, the NJBPU issued its final Findings and Recommendations for
Restructuring the Electric Power Industry in New Jersey (Findings and
Recommendations), which formed the basis for the legislation enacted in 1999. As
required by the Findings and Recommendations, in July 1997 JCP&L filed with the
NJBPU a proposed restructuring plan, including stranded cost, unbundled rate and
restructuring filings. Highlights of the plan include:
- The ability of electric retail customers to choose their supplier in
accordance with the schedule initially proposed by the NJBPU in the
Findings and Recommendations.
- Unbundled rates which would apply to all distribution customers, with
the exception of a Production Charge payable by customers who do not
choose an alternative energy supplier. The proposed unbundled rate
structure would include:
-- a fixed monthly Customer Charge for the costs associated with
metering, billing and customer account administration.
-- a Delivery Charge consisting of, among other things, capital and
O&M costs associated with the transmission and distribution
system.
-- a Market Energy and Capacity Charge for electricity provided to
customers for whom JCP&L continues to act as their electric
generation supplier. JCP&L would be the supplier of last resort
for customers who cannot or do not wish to purchase energy from an
alternative supplier.
-- a Societal Benefits Charge to recover demand-side management
costs, manufactured gas plant remediation costs, and nuclear
decommissioning costs.
-- a Market Transition Charge to recover non-NUG stranded
generation costs.
-- a NUG Transition Charge (NTC) to recover ongoing above-market NUG
costs over the life of the contracts and provide a mechanism to
flow through to customers the benefits of future NUG mitigation
efforts.
- - The unbundling plan also called for an estimated 10% rate reduction,
which included certain components that are not recognized as rate
reductions by the 1999 legislation or are otherwise no longer
available. In addition to this rate reduction, JCP&L customers
would receive an additional rate reduction of approximately 6% to be
phased in over the next five years as a result of energy tax
legislation signed into law in July 1997.
4
- In addition to the sale or continued operation of the Oyster Creek
Nuclear Generating Station (Oyster Creek), JCP&L is exploring the early
retirement of the plant to mitigate costs associated with its continued
operation. A final decision on the plant's future will not be made
until the NJBPU rules on JCP&L's restructuring filing. Nevertheless,
JCP&L had proposed that the NJBPU approve an early retirement of Oyster
Creek in September 2000, for ratemaking purposes, with the following
ratemaking treatment:
-- The market value of Oyster Creek's generation output would be
recovered in the Production Charge.
-- The above-market operating costs would be recovered as a component
of the Delivery Charge through September 2000. If the plant is
operated beyond that date, these costs would not be included in
customer rates.
-- Existing Oyster Creek regulatory assets would, like other
regulatory assets, continue to be recovered.
-- Oyster Creek decommissioning costs would, like TMI-1
decommissioning costs, be recovered as a component of the Societal
Benefits Charge.
-- JCP&L's net investment in Oyster Creek would be recovered as a
levelized annuity, effective with the commencement of retail
choice through its original expected operating life in 2009.
- Stranded costs at the time originally proposed by the NJBPU for initial
customer choice, on a present value basis, were estimated at $1.6
billion, of which $1.5 billion was for above-market NUG contracts. The
$1.6 billion excludes above-market generation costs related to Oyster
Creek.
Numerous parties have intervened in this proceeding and have contested
various aspects of JCP&L's filings, including, among other things, recovery by
JCP&L of plant capital additions since its last base rate case in 1992,
projections of future electricity prices on which stranded cost recovery
calculations are based, the appropriate level of return and the appropriateness
of earning a return on stranded investment.
Consultants retained by the NJBPU Staff, the Division of Ratepayer Advocate
and other parties have proposed that JCP&L's stranded cost recoveries should be
substantially lower than the levels JCP&L is seeking. Certain of these issues
may be impacted by the 1999 legislation and the results of the sale by JCP&L of
its generating facilities (see Generation Divestiture below).
In addition, in a February 1998 order, the NJBPU substantially affirmed an
Administrative Law Judge (ALJ) ruling which required that rates be unbundled
based on the 1992 cost of service levels which were the basis for JCP&L's last
base rate case, but clarified that (1) JCP&L could update its 1992 cost of
service study to reflect adjustments consistent with the 1997 NJBPU approved
Stipulation of Final Settlement which, among other things, recognized certain
increased expense levels and reductions to base rates and
5
(2) all of the other updated post-1992 cost information that JCP&L had submitted
in the proceeding should remain in the record, which the NJBPU will utilize
after issuance of the ALJ's initial decision to establish a reasonable level of
rates going forward.
Furthermore, the NJBPU emphasized in its order that the final unbundled
rates established as a result of this proceeding will be lower than the current
bundled rates. This directive has been recognized in JCP&L's July 1997
restructuring plan which proposed annual revenue reductions totaling
approximately $185 million. The NJBPU will render final and comprehensive
decisions on the precise level of aggregate rate reductions required in order to
accomplish its primary goals of introducing retail competition and lowering
electricity costs for consumers.
If the NJBPU were to accept the positions of various parties or their
consultants, or were ultimately to deny JCP&L's request to recover post-1992
capital additions and increased expenses, it would have a material adverse
impact on JCP&L's stranded cost recovery, restructuring proceeding and future
earnings.
Hearings with respect to the stranded cost and unbundled rate filings have
been completed. In September 1998, the ALJ issued a recommended decision
containing the following major elements:
- The ALJ did not consider current cost levels as the basis for
unbundling rates, but instead used 1992 costs. With the exception of
JCP&L's investment in a new combustion turbine plant, the ALJ denied
recovery of post-1992 rate case capital additions but recommended that
the NJBPU reconsider these matters.
- The ALJ recommended that the Oyster Creek investment be recovered over
a period of between four and eleven years, but once the plant is
retired for ratemaking purposes, no return should be provided on the
unamortized investment.
- The ALJ recommended that the 2.1% rate reduction implemented in April
1997 as part of JCP&L's Stipulation of Final Settlement, as approved by
the NJBPU in 1997, should not be part of the rate reduction mandated by
the NJBPU.
- The ALJ endorsed a market line higher than that proposed by JCP&L.
- The ALJ approved recovery of actual NUG costs through a NUG Transition
Charge, over the lives of the contracts.
- The ALJ accepted JCP&L's proposal for recovery of nuclear
decommissioning costs through a Societal Benefits Charge, but
disallowed the inclusion of fossil decommissioning costs in the
calculation of stranded costs.
- - The ALJ accepted JCP&L's generation asset divestiture plan and the
position that the net proceeds be applied to reduce other stranded
costs.
6
The NJBPU has stated that it intends to issue a final order with respect to
the stranded cost and unbundled rate filings of JCP&L by April 14, 1999.
Evidentiary hearings before the NJBPU with respect to the separate
restructuring filings were held jointly with the other New Jersey utilities, and
briefing has been completed. The NJBPU has stated that it intends to issue a
generic final order with respect to the restructuring filings for all New Jersey
utilities in the second quarter of 1999.
Generation Divestiture
In October 1997, GPU announced its intention to begin a process to sell,
through a competitive bid process, up to all of the fossil-fuel and
hydroelectric generating facilities owned by the GPU Energy companies. These
facilities, comprised of 26 operating stations, support organizations and
development sites, total approximately 5,300 MW (JCP&L 1,900 MW; Met-Ed 1,300
MW; Penelec 2,100 MW) of capacity and have a net book value of approximately
$1.1 billion (JCP&L $272 million; Met-Ed $283 million; Penelec $508 million) at
December 31, 1998.
In August 1998, after the completion of an auction process, Penelec and New
York State Electric & Gas Corporation (NYSEG) entered into definitive agreements
with Edison Mission Energy (Edison) to sell the Homer City Station for a total
purchase price of approximately $1.8 billion. The Homer City Station is a 1,884
MW three unit coal-fired generation station located in Indiana County,
Pennsylvania. In March 1999, the sale of Homer City to EME Homer City
Generation, L.P., a subsidiary of Edison, was completed. Penelec and NYSEG each
owned a 50% interest in the station and shared equally in the net sale proceeds.
In November 1998, the GPU Energy companies entered into definitive
agreements with Sithe Energies and FirstEnergy Corporation to sell all their
remaining fossil-fuel and hydroelectric generating facilities other than JCP&L's
50% interest in the Yards Creek Pumped Storage Facility (Yards Creek) for a
total purchase price of approximately $1.7 billion (JCP&L $442 million; Met-Ed
$677 million; Penelec $604 million). Penelec's 20% undivided ownership interest
in the Seneca Pumped Storage Facility (Seneca) is being sold to FirstEnergy for
$43 million, which is included in this amount. The sales are expected to be
completed by mid-1999, subject to the timely receipt of the necessary regulatory
and other approvals. Sithe has agreed to assume the collective bargaining
agreements covering union employees and to fill bargaining positions on the
basis of seniority. Sithe has also agreed to use reasonable efforts to offer
positions to Genco non-bargaining employees. The GPU Energy companies have
agreed to assume up to $20 million (JCP&L $7 million; Met-Ed $9 million; Penelec
$4 million) of employee severance costs for employees not hired by Sithe.
In October 1998, the GPU Energy companies entered into definitive
agreements to sell TMI-1 to AmerGen Energy Company, LLC (AmerGen), which is a
joint venture between PECO Energy and British Energy. Terms of the purchase
agreements are summarized as follows:
- - The total cash purchase price is approximately $100 million, which
represents $23 million to be paid at closing, and $77 million for the
nuclear fuel in the reactor to be paid in five equal annual
installments beginning one year after the closing. The purchase price
and closing payment are subject to certain adjustments for capital
expenditures and other items.
7
- AmerGen will make contingent payments of up to $80 million for the
period January 1, 2002 through December 31, 2010 depending on the
actual energy market clearing prices through 2010.
- GPU will purchase the energy and capacity from TMI-1 from the closing
through December 31, 2001, at predetermined rates.
- At closing, GPU will make additional deposits into the TMI-1
decommissioning trusts to bring the trust totals up to $320 million and
AmerGen will then assume all liability and obligation for
decommissioning TMI-1.
- GPU will continue to own and hold the license for Three Mile Island
Unit 2 (TMI-2). No liability for TMI-2 or its decommissioning will be
assumed by AmerGen. AmerGen will, however, maintain TMI-2 under
contract with GPU.
- AmerGen will employ all employees located at TMI-1 at closing, and will
also have the opportunity to offer positions to GPUN's headquarters
staff. GPU will be responsible for all severance payments associated
with these employees for a one-year period following closing. AmerGen
will assume the current collective bargaining agreement covering TMI-1
union employees.
The sale is subject to various conditions, including the receipt of
satisfactory federal and state regulatory approvals. NRC approval of the TMI-1
license transfer to AmerGen, as well as certain rulings from the Internal
Revenue Service, will be necessary with respect to the maintenance or transfer
of the decommissioning trusts. There can be no assurance as to the outcome of
these matters.
The net proceeds from these generation asset sales will be used to reduce
the capitalization of the respective GPU Energy companies, repurchase GPU, Inc.
common stock, fund previously incurred liabilities in accordance with the
Pennsylvania settlement, and may also be applied to reduce short-term debt,
finance further acquisitions, and reduce acquisition debt of the GPUI Group.
In addition to the continued operation of Oyster Creek, JCP&L has been
exploring the sale or early retirement of the plant to mitigate costs associated
with its continued operation. GPU does not anticipate making a final decision on
the plant before the NJBPU rules on JCP&L's restructuring filing.
GPUI Group
In January 1998, following its acquisition of PowerNet Victoria (PowerNet)
in late 1997, GPU Electric sold its 50% share in Solaris Power (Solaris) to The
Australian Gas Light Company for A$208 million (approximately U.S. $135.2
million) and 10.36% of the outstanding common stock of Allgas Energy Limited
(Allgas, the natural gas distributor in Queensland, Australia), in order to
comply with cross-ownership restrictions in the Australian State of Victoria.
The Allgas shares had a market value of A$14.6 million (approximately U.S. $9.5
million) at the date of sale. As a result of the Solaris sale, GPU recorded an
after-tax gain of $18.3 million. In July 1998, GPU Electric sold its Allgas
shares for A$25.8 million (approximately U.S. $16 million).
8
In February 1998, GPU International sold a one-half interest in the
Mid-Georgia cogeneration project (Mid-Georgia, a 300 MW facility located in
Kathleen, Georgia) to Sonat Energy Services Company. As a result, GPU recorded
an after-tax gain on the sale of $5.8 million in the first quarter of 1998. In
June 1998, Mid-Georgia began commercial operation under a 30-year power purchase
agreement to sell capacity and energy on a dispatchable basis to Georgia Power.
In November 1998, Midlands Electricity plc (Midlands) announced the sale of
its electric supply business to National Power plc. GPU and Cinergy Corp.
jointly acquired Midlands in 1996. National Power will acquire all the assets of
Midlands' supply business and assume its liabilities, including obligations
under all Midlands' power purchase agreements, for $300 million ($150 million
for GPU's share) plus an adjustment for working capital at financial closing,
which is expected in the second quarter of 1999. Midlands will continue to own
its distribution business, as well as interests in various generation stations.
In March 1999, GPU Electric acquired Emdersa, an Argentine holding company
that owns three electric distribution companies, for $435 million. The three
companies serve approximately 335,000 customers throughout a territory of
approximately 124,300 square miles in northwest Argentina.
Common Stock Repurchase
In January 1999, the GPU, Inc. Board of Directors authorized the repurchase
of up to $350 million of GPU, Inc. common stock. The repurchases will initially
be funded with borrowings. Through March 1, 1999, GPU, Inc. has repurchased
614,300 shares of common stock at an average price of $41.62 per share.
INDUSTRY DEVELOPMENTS
Electric utility customers have traditionally been served by vertically
integrated regulated monopolies. The electric utility industry is moving away
from a traditional rate regulated environment based on cost recovery to some
combination of a competitive marketplace and modified regulation. The enactment
of the Public Utility Regulatory Policies Act of 1978 (PURPA) facilitated the
entry of competitors into the electric generation business. The Energy Policy
Act of 1992 (EPAct) furthered competition among utilities and NUGs in the
wholesale electric generation market, accelerating industry restructuring. The
FERC, in its Order 888 and related proceedings, has required utilities to
provide open access and comparable transmission service to third parties.
Pennsylvania and New Jersey have now adopted comprehensive legislation which
provides for the restructuring of the electric utility industry.
Operating in a competitive environment places pressures on utility profit
margins and credit quality. Utilities with significantly higher cost structures
than are supportable in the marketplace will experience reduced earnings as they
attempt to meet their customers' demands for lower-priced electricity.
Competitive forces continue to influence some retail pricing.
9
In light of restructuring in New Jersey and Pennsylvania, customers are pursuing
competitively priced electricity from other providers. This increasing
competition in the electric utility industry has already led the major credit
rating agencies to apply more stringent guidelines in making credit rating
determinations.
The current market price of electricity being below the cost of some
utility-owned generation and power purchase commitments, combined with the
ability of some customers to choose their energy suppliers, has created stranded
costs in the electric utility industry. These stranded costs, while generally
recoverable in a regulated environment, are at risk in a deregulated and
competitive environment. The PaPUC's Restructuring Orders issued in 1998 granted
Met-Ed and Penelec recovery of a substantial portion of their stranded costs.
New Jersey legislation passed in January 1999 also provides a mechanism for the
recovery of stranded costs. See COMPETITIVE ENVIRONMENT AND RATE MATTERS section
of Management's Discussion and Analysis.
As part of its strategy of achieving earnings growth, GPU is continuing to
investigate investment opportunities in various domestic and foreign power
projects and foreign utility systems, and intends to make additional investments
and/or acquisitions which would be financed with new debt or new equity.
GPU has identified the following strategic objectives to guide it over the
next several years: (1) reposition GPU based on changing industry risks; (2)
build upon GPU's core competency in regulated infrastructure (mainly the
transmission and distribution of electricity); (3) divest the merchant
generation business; (4) seek growth through the acquisition of domestic and
international regulated infrastructure assets (i.e. electric, natural gas,
water, telecommunications); (5) continue to develop the contract generation
business (generation for which contracts to sell power to third parties have
been executed) through the GPUI Group; and (6) continue to participate in the
retail energy and supply business to determine if a viable economic opportunity
exists through GPU AR.
GPU's strategies may include business combinations with other companies,
internal restructurings involving the complete or partial separation of its
wholesale and retail businesses and acquisitions of other businesses. No
assurances can be given as to whether any potential transactions of the type
described above may actually occur, or as to the ultimate effect thereof on the
financial condition or competitive position of GPU.
GPU expects to be in a regulated business (the transmission and
distribution of electricity). In the future, GPU's ability to seek rate
increases will be more limited than it has been in the past and, notwithstanding
increases in costs, rates may be capped for varying periods. Since GPU intends,
to a large extent, to exit the merchant generation business, it will need to
meet capacity obligations and supply energy largely from contracted purchases
and purchases in the open market. In addition, inflation may have various
effects on GPU since it will be a factor in revenue calculations in some
jurisdictions, but may cause increased operating costs with GPU having a limited
ability to pass these costs to its customers because of capped rates in other
areas. Management is in the process of identifying and addressing these market
risks, however, there can be no assurance that GPU will be able to recover
through these capped rates all of the costs of the electricity required to be
purchased for customers.
10
GPU has been active both on the federal and state levels in helping to
shape electric industry restructuring while seeking to protect the interests of
its shareholders and customers, and is attempting to assess the impact that
these competitive pressures and other changes will have on its financial
condition and results of operations.
OTHER DEVELOPMENTS
YEAR 2000 ISSUE
GPU is addressing the Year 2000 issue by undertaking a comprehensive review
of its computers, software and equipment with embedded systems such as
microcontrollers (together, "Year 2000 Components"), and of its business
relationships with third parties, including key customers, lenders, trading
partners, vendors, suppliers and service providers. Remediation plans and
corrective actions are in progress. The remediation plans include, among other
things, the modification or replacement of Year 2000 Components which are not
ready for use beyond 1999. In addition, GPU has begun to develop contingency
plans for mission-critical systems. GPU's Year 2000 project is not expected to
cause any material delay in the completion of other planned projects by
information technology services.
In January 1999, an independent consultant retained by GPU to review the
adequacy of GPU's Year 2000 plans favorably rated the GPU Energy companies in
their progress toward achieving Year 2000 readiness as measured against the
consultant's "best practices" model. The consultant also identified certain
weaknesses that GPU is currently addressing.
The PaPUC has entered an Order mandating that Pennsylvania jurisdictional
utilities have their mission-critical systems Year 2000 compliant by March 31,
1999. In November 1998, an ALJ assigned to the proceeding conducted hearings to
support recommendations demanding that the PaPUC relax its March 31, 1999
mandate in certain cases. Met-Ed and Penelec have jointly submitted testimony to
the proceeding and participated in the hearings. While there can be no assurance
as to the outcome of this matter, including if the PaPUC will modify its March
31, 1999 compliance date, GPU believes that its current Year 2000 plans are
adequate relative to its mission-critical systems. In addition to the PaPUC
mandate, inquiries concerning GPU's Year 2000 readiness have been made by the
NJBPU, the NRC, the U.S. Department of Energy (DOE), and by numerous third
parties with which GPU has business relationships.
Costs
The GPU Energy companies currently estimate that they will spend
approximately $43.3 million (JCP&L $18.6 million; Met-Ed $12 million; Penelec
$12.7 million) on the Year 2000 issue, which includes $8.1 million (JCP&L $2.7
million; Met-Ed $2.7 million; Penelec $2.7 million) that is being spent as a
part of the purchase and implementation of a new integrated information system
(Project Enterprise), as described below. The $43.3 million also includes $7.4
million (JCP&L $3.4 million; Met-Ed $1.9 million; Penelec $2.1 million)
11
that would have been spent in any event for maintenance and cyclical replacement
plans. Approximately 55% of the expected costs involve the modification or
replacement of Year 2000 Components; and 45% are for labor (including contract
labor) and other project expenses. These costs are being funded by the GPU
Energy companies from their operations.
Through December 31, 1998, the GPU Energy companies have spent a total of
approximately $20.6 million (JCP&L $8.6 million; Met-Ed $6 million; Penelec $6
million) (of the $43.3 million) in connection with the Year 2000 issue, of which
$15.9 million (JCP&L $6.5 million; Met-Ed $4.7 million; Penelec $4.7 million)
was spent in 1998.
The GPUI Group currently expects to spend approximately $9 million to
address the Year 2000 issue, primarily to replace or modify equipment at
Midlands. Through December 31, 1998, a total of approximately $2.5 million has
been spent, substantially all of which was spent in 1998.
The Project Enterprise system, referenced above, is designed to help the
GPU Energy companies manage business growth and meet the mandates of electric
utility deregulation. The system is scheduled to be substantially operational
for the GPU Energy companies and GPUS by March 1999 and fully operational for
these companies by June 1999. GPUN and Genco are not installing Project
Enterprise before the year 2000, but rather are making modifications to their
systems to achieve Year 2000 readiness. For critical systems, these
modifications are expected to be completed by March 31, 1999, and for remaining
systems by July 31, 1999.
Milestones
GPU has established Inventory, Assessment, Remediation, Testing and
Monitoring as the primary phases for its Year 2000 program. The Inventory phase
of the program has been completed. The milestones for Assessment, Remediation,
Testing and Monitoring are as follows:
Assessment Remediation Testing Monitoring
GPU Energy
and GPUS Completed 03/31/1999 03/31/1999 03/31/2000
Genco Completed 11/15/1999 11/15/1999 05/31/2000
GPUN 03/31/1999 10/31/1999 10/31/1999 03/31/2000
GPUI Group 06/30/1999 09/30/1999 09/30/1999 03/31/2000
Genco expects to complete modifications and testing of Year 2000 Components
involved in 90% of its generation capacity by May 31, 1999. Modifications and
testing of the remaining components, primarily for two generating units, will be
completed during maintenance outages scheduled in the fall of 1999. GPUN expects
to complete modifications and testing for most of its systems and components by
July 1, 1999. Modifications and testing of the remaining components at TMI-1,
which is scheduled for a refueling outage in September 1999, are not expected to
be completed until late October 1999.
12
Third Party Qualification
Due to the interdependence of computer systems and the reliance on other
organizations for supplies, materials or services, GPU is addressing the Year
2000 issue as it relates to the readiness of third parties. As part of its Year
2000 strategy, GPU is contacting key customers, lenders, trading partners,
vendors, suppliers and service providers to assess whether they are adequately
addressing the Year 2000 issue.
With respect to computer software and equipment with embedded systems, GPU
has analyzed where it is dependent upon third party data and has identified
several critical areas: (1) the Pennsylvania-New Jersey-Maryland (PJM)
Interconnection; (2) electric generation suppliers, such as cogeneration
operators and NUGs; (3) Electronic Data Interchange (EDI) with trading partners;
(4) Electronic Funds Transfer (EFT) with financial institutions; (5) vendors;
and (6) customers.
The following summarizes the actions that have taken place with critical
third parties:
- - PJM - Data link testing has been completed. Major testing of system
upgrades is scheduled for completion during the first quarter of 1999.
- - Electric generation suppliers - GPU has contacted all critical electric
generation suppliers and information concerning their readiness has been
received from approximately 81%. Those that have responded have readiness
dates that extend into September 1999.
- - EDI/EFT - GPU has sent readiness questionnaires to all critical
organizations with which it exchanges data electronically and conducts
electronic funds transfers. GPU has received responses from approximately
23% of those contacted. Testing with critical trading partners is scheduled
for completion during the first quarter of 1999.
- - Vendors - GPU has contacted all critical vendors and approximately 61% have
responded as to their readiness.
- - Customers - A customer readiness assessment was initiated during the fourth
quarter of 1998 and approximately 64% of critical customers have been
contacted. GPU has received responses from 20% of those contacted.
Scenarios and Contingencies
If GPU, or critical third parties upon whom GPU relies, are unable to
successfully address their Year 2000 issues on a timely basis, certain
computers, equipment, systems and applications may not function properly, which
could have a material adverse effect on GPU's operations and financial
condition. While GPU cannot predict what effect, if any, the Year 2000 issue
will have on its operations, one possible scenario could include, among other
things, interruptions in delivering electric service, and a temporary inability
to process transactions, provide bills or operate electric generating stations.
GPU currently has no loss estimates related to Year 2000 risks that could
potentially result from any such scenario.
While there can be no assurance as to the outcome of this matter, GPU
believes that its Year 2000 preparations will be successful relative to its
13
mission-critical Year 2000 Components. In addition, GPU is developing
contingency plans in accordance with the contingency planning schedule proposed
by the North American Electric Reliability Council. These plans, which are
currently expected to be finalized in mid- to late-1999, will include
supplementing present general emergency procedures with specific measures for
Year 2000 problems and the placing of troubleshooting teams at sites where
critical components are located.
THE GPU ENERGY COMPANIES' SUPPLY PLAN
Under traditional retail regulation, supply planning in the electric
utility industry is directly related to projected sales growth in a utility's
franchise service territory. In light of retail access legislation enacted in
Pennsylvania and New Jersey, the extent to which competition will affect the GPU
Energy companies' supply plan remains uncertain (see COMPETITIVE ENVIRONMENT AND
RATE MATTERS section of Management's Discussion and Analysis). As the GPU Energy
companies prepare to operate in a competitive environment, their supply planning
strategy will focus on providing for the needs of existing retail customers who
do not choose a competitive supplier and continue to receive energy supplied by
the GPU Energy companies and whom the GPU Energy companies continue to have an
obligation to serve.
The GPU Energy companies' capacity (in megawatts) and sources of energy (in
gigawatt-hours) for 1998 are as follows:
Capacity Sources of Energy
MW % GWH %
Coal 3,024 27 19,675 38
Nuclear 1,405 13 11,358 22
Gas, hydro & oil 2,322 21 888 2
Nonutility generation 1,687 15 10,952 21
Utility contracts 2,638 24 5,177 10
Spot market & interchange purchases - - 3,605 7
------ --- ------ ---
Total 11,076 100 51,655 100
====== === ====== ===
After the sale of the GPU Energy companies' generating facilities has been
completed, GPU will have 819 MW of capacity and related energy from Oyster Creek
and Yards Creek remaining to meet customer needs (see the Oyster Creek section
of NUCLEAR FACILITIES for a discussion of the possible sale or early retirement
of Oyster Creek). The GPU Energy companies also have contracts with NUG
facilities totaling 1,687 MW and JCP&L has agreements with other utilities to
provide for up to 629 MW of capacity and related energy (see Note 13,
Commitments and Contingencies, of the Combined Notes to the Consolidated
Financial Statements). The GPU Energy companies have agreed to purchase all of
the capacity and energy from TMI-1 through December 31, 2001. In addition, the
GPU Energy companies have the right to call the capacity of the Homer City
station (942 MW) for two years and the capacity of the generating stations sold
to Sithe (4,117 MW) for three years, from the dates of sale. The GPU Energy
companies' remaining capacity and energy needs will focus on short- to
intermediate-term commitments (one month to three years) during periods of
expected high energy price volatility and reliance on spot market purchases
during other periods. Management is in the process of identifying and addressing
the GPU Energy companies' future capacity and energy needs, and the impact of
customer shopping and changes in demand (see the Managing the Transition section
of COMPETITIVE ENVIRONMENT AND RATE MATTERS section of Management's Discussion
and Analysis).
14
Provider of Last Resort
Under the PaPUC Restructuring Orders, Met-Ed and Penelec customers may shop
for their generation supplier beginning January 1, 1999. A PaPUC approved
competitive bid process will assign provider of last resort (PLR) service for
20% of Met-Ed 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, to licensed generation
suppliers referred to as Competitive Default Service (CDS). If no qualified bids
for CDS are received at or below their generation rate caps, Met-Ed and Penelec
will continue to provide PLR service at the rate cap levels until 2010 unless
modified by the PaPUC. Any retail customers assigned to CDS may return to Met-Ed
and Penelec as the default PLR at no additional charge. 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 and Penelec's rate cap.
The restructuring legislation enacted in New Jersey requires that JCP&L be the
PLR for at least three years starting with the implementation of customer choice
on August 1, 1999. JCP&L is entitled to recover reasonable and prudently
incurred costs for PLR service. Within the three-year period, the NJBPU is to
determine whether to make PLR service available on a competitive basis.
THE GPU ENERGY COMPANIES
The electric generation and transmission facilities of the GPU Energy
companies are physically interconnected and are operated as a single integrated
and coordinated system serving a population of approximately five million in New
Jersey and Pennsylvania. For the year 1998, the GPU Energy companies' revenues
were about equally divided between Pennsylvania customers and New Jersey
customers. During 1998, sales to customers by customer class were as follows:
% Operating Revenues % KWH Sales
-------------------- -----------
Total JCP&L Met-Ed Penelec Total JCP&L Met-Ed Penelec
----- ---- ------- ------- ----- ----- ------ -------
Residential 42 45 41 35 35 41 35 27
Commercial 35 39 30 33 34 40 28 31
Industrial 21 15 28 28 29 19 36 37
Other* 2 1 1 4 2 - 1 5
--- --- --- --- --- --- --- ---
100 100 100 100 100 100 100 100
=== === === === === === === ===
* Rural electric cooperatives, municipalities, street and highway
lighting, and others.
The GPU Energy companies also make interchange and spot market sales of
electricity to other utilities. Reference is made to GPU Energy Companies'
Statistics and Company Statistics on pages F-3, F-120, F-130, and F-140, for
additional information concerning sales and revenues. Revenues of JCP&L, Met-Ed
and Penelec derived from their largest single customers accounted for less than
2%, 2% and 1%, respectively, of their electric operating revenues for the year
and their 25 largest customers, in the aggregate, accounted for approximately
9%, 12% and 12%, respectively, of such revenues.
The area served by the GPU Energy companies extends from the Atlantic Ocean
to Lake Erie, is generally comprised of small communities, rural and suburban
areas and includes a wide diversity of industrial enterprises, as
15
well as substantial farming areas. JCP&L provides retail service in northern,
western and east central New Jersey, having an estimated population of
approximately 2.6 million. Met-Ed provides retail electric service in all or
portions of 14 counties, in the eastern and south central parts of Pennsylvania,
having an estimated population of almost one million. Met-Ed also sells
electricity at wholesale to four municipalities having an estimated population
of over 11,400. Penelec provides retail and wholesale electric service within a
territory located in western, northern and south central Pennsylvania extending
from the Maryland state line northerly to the New York state line, with a
population of about 1.2 million, approximately 28% of which is concentrated in
23 cities and boroughs, all with populations over 5,000. Penelec also provides
wholesale service to six municipalities in Pennsylvania, five municipalities in
New Jersey, and the Allegheny Electric Cooperative, Inc., which serves 13 rural
electric cooperatives in Pennsylvania and one in New Jersey. Penelec, as lessee
of the property of the Waverly Electric Light & Power Company, also serves a
population of about 13,400 in Waverly, New York and vicinity.
The GPU Energy companies' transmission facilities are physically
interconnected with neighboring nonaffiliated utilities in Pennsylvania, New
Jersey, Maryland, New York and Ohio. The interconnection facilities are used for
substantial capacity and energy interchange and purchased power transactions, as
well as emergency assistance. The GPU Energy companies are members of the PJM
Power Pool and the Mid-Atlantic Area Council, an organization providing
coordinated review of the planning by utilities in the PJM area. In 1997, the
PJM Power Pool converted to a limited liability company governed by an
independent board of managers and the FERC approved the supporting PJM
companies' proposal to permit the PJM Power Pool to be recognized as an
Independent System Operator. Also in 1997, the FERC directed the GPU Energy
companies to implement a single-system transmission rate, effective April 1,
1998. The implementation of a single-system rate is not expected to affect total
transmission revenues. It would, however, increase the pricing for transmission
service in Met-Ed and Penelec's service territories and reduce the pricing for
transmission service in JCP&L's service territory.
The GPU Energy companies have requested the FERC to reconsider its ruling
requiring a single-system transmission rate. The Restructuring Orders for Met-Ed
and Penelec provide for a transmission and distribution rate cap exception to
recover the increase in the transmission rate from Met-Ed and Penelec's retail
customers in the event the FERC denies this request. The FERC's ruling will also
have the effect of reducing JCP&L's transmission rates. There can be no
assurance as to the outcome of this matter.
GPUI GROUP
The GPUI Group owns, operates, develops and invests in electric power
generation, transmission and distribution facilities throughout the world. It
has also made investments in certain advanced technologies related to the
electric power industry. The GPUI Group has ownership interests in transmission
and distribution businesses in England and Australia. It also has ownership
interests in nine operating cogeneration plants in the U.S. totaling 1,147
megawatts (MW) (of which the GPUI Group's equity interest represents 498 MW) of
capacity, and ten operating generating facilities
16
located in foreign countries totaling 3,879 MW (of which the GPUI Group's equity
interest represents 730 MW) of capacity. It also has investments in four
generating facilities under construction totaling 1,698 MW (of which the GPUI
Group's equity interest represents 301 MW) of capacity. When appropriate, the
GPUI Group also engages in the purchase or sale of interests in particular
businesses.
At December 31, 1998, GPU, Inc.'s aggregate investment in the GPUI Group
was $590 million; GPU, Inc. has also guaranteed up to an additional $761 million
of outstanding GPUI Group obligations. GPU, Inc. has 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 $2.2 billion as of December 31,
1998. At December 31, 1998, GPU, Inc. has remaining authorization to finance
approximately $979 million of additional investments in FUCOs and EWGs, of which
approximately $435 million has been committed to the purchase of Emdersa.
Management expects that the GPUI Group will provide a substantial portion
of GPU's future earnings growth and intends to make additional investments in
its business activities. The timing and amount of these investments, however,
will depend upon the availability of appropriate opportunities and financing
capabilities.
NONUTILITY AND OTHER POWER PURCHASES
Pursuant to the mandates of PURPA and state regulatory directives, the GPU
Energy companies have been required to enter into power purchase agreements with
NUGs for the purchase of energy and capacity for remaining periods of up to 22
years. The following table shows actual payments from 1996 through 1998, and
estimated payments from 1999 through 2003.
Payments Under NUG Agreements
(in millions)
Total JCP&L Met-Ed Penelec
* 1996 $730 $370 $168 $192
* 1997 759 384 172 203
* 1998 788 403 174 211
1999 798 399 170 229
2000 816 404 169 243
2001 805 413 166 226
2002 819 425 169 225
2003 827 422 173 232
* Actual.
As of December 31, 1998, NUG facilities covered by agreements having 1,687
MW (JCP&L 918 MW; Met-Ed 364 MW; Penelec 405 MW) of capacity were in service.
While a few of these NUG facilities are dispatchable, most are must-run and
generally obligate the GPU Energy companies to purchase, at the contract price,
the output up to the contract limits.
17
The emerging 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 change their supply strategy to
seek shorter-term agreements offering more flexibility. The GPU Energy
companies' future supply plan will likely focus on short- to intermediate-term
commitments (one month to three years) during periods of expected high energy
price volatility and reliance on spot market purchases during other periods. The
projected cost of energy from new generation supply sources has also decreased
due to improvements in power plant technologies and lower forecasted fuel
prices. As a result of these developments, the rates under virtually all of the
GPU Energy companies' NUG agreements are substantially in excess of current and
projected prices from alternative sources.
The 1998 PaPUC Restructuring Orders and the legislation in New Jersey
provide for full recovery of the above-market costs of NUG agreements. The GPU
Energy companies will continue efforts to reduce the above-market costs of these
agreements and will, where beneficial, attempt to renegotiate the prices of the
agreements, offer contract buyouts and attempt to convert must-run agreements to
dispatchable 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, provides for the recovery of costs associated with the buyout of
the Freehold Cogeneration project. The Stipulation of Final Settlement provides
for recovery through the levelized energy adjustment clause of: (1) buyout costs
up to $130 million, and (2) 50% of any costs from $130 million to $140 million,
over a seven-year period for the termination of the Freehold power purchase
agreement. The NJBPU approved the cost recovery on an interim basis subject to
refund, pending further review by the NJBPU. There can be no assurance as to the
outcome of this matter.
In 1998, Met-Ed and Penelec entered into definitive buyout agreements with
two NUG project developers. These agreements are contingent upon Met-Ed and
Penelec obtaining a final and non-appealable PaPUC order allowing for the full
recovery of the buyout payments through retail rates. The Restructuring Orders
established terms and conditions that would enable the buyout agreements to
proceed; however, until the pending appeal of the Restructuring Orders is
resolved, there can be no assurance as to the outcome of these matters.
The GPU Energy companies are recovering certain of their NUG costs
(including certain buyout costs) from customers. The Restructuring Orders
provide assurance of full recovery of these costs for Met-Ed and Penelec. Met-Ed
and Penelec recorded a liability of $1.8 billion for their above-market NUG
costs, which is fully offset by Regulatory assets, net on the Consolidated
Balance Sheets. The restructuring legislation in New Jersey includes provisions
for the recovery of costs under NUG agreements and NUG buyout costs. (See
COMPETITIVE ENVIRONMENT AND RATE MATTERS section of Management's Discussion and
Analysis for additional discussion.)
18
CAPITAL PROGRAMS
GPU Energy Companies
During 1998, the GPU Energy companies' capital spending was $328 million
(JCP&L $155 million; Met-Ed $75 million; Penelec $89 million; Other $9 million),
and was used primarily for new customer connections and to expand and improve
existing transmission and distribution (T&D) facilities. In 1998, expenditures
for maturing obligations were $43 million (JCP&L $13 million; Penelec $30
million). Expenditures for maturing obligations are expected to total $83
million (JCP&L $3 million; Met-Ed $30 million; Penelec $50 million) in 1999. In
1999, capital expenditures are estimated to be $397 million, primarily for
ongoing system development and to implement an integrated information system.
Management estimates that a substantial portion of the GPU Energy companies'
1999 capital outlays will be satisfied through internally generated funds. The
GPU Energy companies' principal categories of estimated capital expenditures for
1999 are as follows:
(in millions)
Total JCP&L Met-Ed Penelec Other
Generation - Nuclear $ 26 $ 10 $11 $ 5 $ -
Non-nuclear 11 2 2 7 -
--- --- -- -- --
Total Generation 37 12 13 12 -
Transmission & Distribution 271 142 66 63 -
Other 89 29 18 23 19
--- --- -- -- --
Total $397 $183 $97 $98 $19
=== === == == ==
Capital expenditures for the GPU Energy companies are estimated to be $365
million in 2000 (JCP&L $184 million; Met-Ed $81 million; Penelec $81 million;
Other $19 million). Expenditures for maturing obligations are expected to total
$131 million (JCP&L $51 million; Met-Ed $50 million; Penelec $30 million) in
2000. The GPU Energy companies estimate that a substantial portion of their
anticipated total capital needs in 2000 will be satisfied through internally
generated funds.
The GPU Energy companies' bond indentures and articles of incorporation
include provisions that limit the amount of long-term debt, preferred stock and
short-term debt the companies may issue (see LIMITATIONS ON ISSUING ADDITIONAL
SECURITIES section).
The GPU Energy companies' 1998 capital expenditures exclude nuclear fuel
additions provided under capital leases that amounted to $38 million (JCP&L $33
million; Met-Ed $3 million; Penelec $2 million). When consumed, the presently
leased material, which amounted to $126 million (JCP&L $85 million; Met-Ed $27
million; Penelec $14 million) at December 31, 1998, is expected to be replaced
by additional leased material at an annual rate of approximately $36 million
(JCP&L $9 million; Met-Ed $18 million; Penelec $9 million). In the event the
needed nuclear fuel cannot be leased, the associated capital requirements would
have to be met by other means. Upon closing of the sale of TMI-1 to AmerGen, the
GPU Energy companies will terminate the related fuel lease and pay all
outstanding amounts due under the related credit facility (see Managing the
Transition section of COMPETITIVE ENVIRONMENT AND RATE MATTERS section of
Management's Discussion and Analysis).
19
GPUI Group
The GPUI Group's capital spending was $140 million in 1998, which was used
primarily to improve PowerNet's facilities and to make additional investments in
EWGs and FUCOs. For 1999, capital expenditures are forecasted to be $39 million,
primarily for ongoing development of PowerNet's transmission system and to make
additional investments in EWGs and FUCOs. In 1998, expenditures for maturing
obligations were $538 million, and are expected to total $481 million in 1999,
and $534 million in 2000. Management estimates that the GPUI Group's 1999
capital outlays will be satisfied through both internally generated funds and
external financings.
In addition, during 1999 and 2000, GPU, Inc. may make additional capital
contributions and provide credit support (in amounts which may be substantial)
to the GPUI Group as investment opportunities arise.
FINANCING ARRANGEMENTS
GPU, Inc.
In February 1998, GPU, Inc. sold seven million shares of common stock. The
net proceeds of $269 million were used primarily to reduce indebtedness
associated with the PowerNet and Midlands acquisitions, and the balance was used
for other corporate purposes. Further significant investments by the GPUI Group,
or otherwise, may require GPU, Inc. to issue additional debt and/or common stock
(see GPUI GROUP section for a discussion of GPU, Inc.'s remaining investment
authorization).
GPU has $1.8 billion of committed credit facilities, which include various
committed lines of credit totaling $207 million, an unsecured Revolving Credit
Agreement, and three other Credit Agreements, as discussed below.
GPU Capital has entered into a $1 billion 364-day senior revolving credit
facility to support the issuance of commercial paper. GPU Capital is the largest
of three issuers ($1 billion) in a $1.45 billion commercial paper program. The
other issuers are GPU Australia Holdings, Inc. ($350 million) and GPU, Inc.
which has requested SEC authorization to issue and sell up to $100 million under
this program. GPU Capital, along with GPU Australia Holdings, will use the
proceeds from the sale of commercial paper to finance up to $1.35 billion of
investments in FUCOs and EWGs. The facility fee of .15 of 1% on the GPU Capital
credit facility is based on GPU's current senior debt ratings and is payable
annually. A separate $360 million credit facility serves as the backstop for the
GPU Australia Holdings commercial paper program.
GPU International has a separate Credit Agreement providing for borrowings
through December 1999 of up to $30 million outstanding at any time. Up to $15
million may be utilized to provide letters of credit. An annual facility fee
ranging from .085% to .4% on the total amount of the Credit Agreement and a
letter of credit fee ranging from .265% to 1.6% on the outstanding letters of
credit are payable by GPU International.
The Revolving Credit Agreement between GPU, Inc., the GPU Energy companies
and a consortium of banks is subject to various covenants. The agreement expires
May 6, 2001. A facility fee of .125 of 1% is payable
20
annually. Borrowing rates and the facility fee are based on the long-term
debt ratings of GPU, Inc. and the GPU Energy companies.
GPU, Inc. has requested SEC authorization to issue and sell up to $100
million of commercial paper through December 2003. GPU, Inc. expects that the
proceeds from the issuance of the commercial paper will be used for general
corporate purposes and to make additional investments in EWGs and FUCOs. GPU,
Inc. also has received SEC approval to issue and sell up to $300 million of
unsecured debentures through 2001.
In January 1999, the GPU, Inc. Board of Directors authorized the repurchase
of up to $350 million of GPU, Inc. common stock. The repurchases will initially
be funded with borrowings.
GPU Energy Companies
Met-Ed and Penelec have obtained regulatory approval through December 31,
2000 to issue senior notes (both secured by FMBs and unsecured) and preferred
securities in aggregate amounts of $250 million and $725 million, respectively,
of which up to $125 million for each company may consist of preferred
securities. JCP&L is seeking similar regulatory approval through December 31,
2000 to issue senior notes and preferred securities in the aggregate amount of
$300 million, of which up to $200 million may consist of preferred securities.
Current plans call for the GPU Energy companies to issue senior notes and
preferred securities during the next three years to fund the redemption of
maturing senior securities, refinance outstanding senior securities and finance
construction activities. Following the 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 notes will provide that, when the note trustee
holds 80% or more of all FMBs, the FMBs held by the note trustee will be
cancelled and all future senior notes would be issued on an unsecured basis. The
senior note indentures will prohibit the GPU Energy companies from issuing any
debt which is senior to the senior notes.
JCP&L and Penelec also have authorization to issue first mortgage bonds
(FMBs), including secured medium-term notes, and preferred stock through June
1999. Met-Ed has similar authority through December 1999. Aggregate amounts
available for issuance under the JCP&L, Met-Ed and Penelec programs are $145
million, $190 million and $70 million, respectively, of which $100 million for
JCP&L and Met-Ed and $70 million for Penelec may consist of preferred stock. The
GPU Energy companies do not, however, expect to issue any additional senior
securities under these existing authorizations, but rather expect to issue
senior notes.
The GPU Energy companies' bond indentures and/or articles of incorporation
include provisions that limit the amount of long-term debt, preferred stock and
short-term debt the companies may issue. The GPU Energy companies' interest and
preferred dividend coverage ratios are currently in excess of indenture and
charter restrictions. The amount of FMBs that the GPU Energy companies could
issue based on the bondable value of property additions is in excess of amounts
currently authorized. The GPU Energy companies have regulatory authority to
incur short-term debt, a portion of which may be through the issuance of
commercial paper.
21
In 1998, Penelec redeemed $30 million principal amount of FMBs and JCP&L
redeemed $15 million stated value of cumulative preferred stock pursuant to
mandatory and optional sinking fund provisions. In March 1999, Penelec called
for redemption $600 million of its FMBs. The redemption will be funded with
proceeds from the sale of the Homer City Station.
In January 1999, Met-Ed and Penelec called for redemption all of their
outstanding shares of cumulative preferred stock. The shares were redeemed on
February 19, 1999 at a price of $12.6 million and $17.6 million for Met-Ed and
Penelec, respectively.
The GPU Energy companies' cost of capital and ability to obtain external
financing are affected by their security ratings, which are periodically
reviewed by the credit rating agencies. The GPU Energy companies' FMBs are
currently rated at an equivalent of "BBB+" or higher by the major credit rating
agencies, while the preferred stock and mandatorily redeemable preferred
securities have been assigned an equivalent of "BBB" or higher. In addition, the
GPU Energy companies' commercial paper is rated as having good credit quality.
GPUI Group
In 1998, GPU Capital entered into a commercial paper credit facility
(guaranteed by GPU, Inc.) to finance up to $1 billion of investments in FUCOs
and EWGs. GPU expects that the proceeds from the sale of commercial paper will
be used to repay a portion of the outstanding foreign acquisition debt and to
finance future investments in FUCOs and EWGs. In January 1999, GPU Capital
issued $375 million of commercial paper which was used primarily to reduce
Midlands acquisition debt. In March 1999, GPU Capital issued an additional $375
million of commercial paper to fund a portion of the $435 million acquisition
cost for Emdersa. Also in 1998, Austran Holdings, Inc. (Austran), a wholly
owned subsidiary of GPU Electric, entered into a A$500 million (approximately
U.S. $306 million) commercial paper program. PowerNet has guaranteed Austran's
obligations under this program. As of December 31, 1998, Austran had outstanding
approximately A$458 million (approximately U.S. $280 million) under the
commercial paper program, the proceeds which will be used to refinance the
maturing portion of the senior debt credit facility used to finance the PowerNet
acquisition. The Austran borrowings are classified as noncurrent on the
Consolidated Balance Sheet since it is management's intent to reissue the
commercial paper on a long-term basis.
In 1998, GPU Electric sold its 50% stake in Solaris, the net sales proceeds
of which were used to reduce by $112 million the Solaris and PowerNet
acquisition debt. The balance of the proceeds was applied for other corporate
purposes.
In 1998, PowerNet and Midlands acquisition debt was reduced by an
additional $40 million and $189 million, respectively, from proceeds provided by
the sale of GPU, Inc. common stock. GPU may further reduce Midlands and PowerNet
acquisition debt with a portion of the proceeds from the sale of the GPU Energy
companies' generating facilities (see Managing the Transition section of
COMPETITIVE ENVIRONMENT AND RATE MATTERS section of Management's Discussion and
Analysis).
22
LIMITATIONS ON ISSUING ADDITIONAL SECURITIES
The GPU Energy companies' FMB indentures and/or charters contain provisions
which limit the total amount of securities evidencing secured indebtedness
and/or unsecured indebtedness which the GPU Energy companies may issue, the more
restrictive of which are discussed below.
The GPU Energy companies' FMB indentures require that, for a period of any
twelve consecutive months out of the fifteen calendar months immediately
preceding the issuance of additional FMBs, net earnings (before income taxes,
with other income limited to 5% of operating income before income taxes for
JCP&L and Met-Ed and 10% for Penelec) available for interest on FMBs shall have
been at least twice the annual interest requirements on all FMBs to be
outstanding immediately after such issuance. They also restrict the ratio of the
principal amount of FMBs which may be issued to not more than 60% of available
bondable value of property additions, but in general, permit the GPU Energy
companies to issue additional FMBs against a like principal amount of previously
issued and retired FMBs.
At December 31, 1998, these net earnings requirements would have permitted
JCP&L, Met-Ed and Penelec to issue $2.3 billion, $544 million and $606 million,
respectively, principal amount of additional FMBs at an assumed 6 1/2% interest
rate. However, the GPU Energy companies had bondable value of property additions
sufficient to permit JCP&L, Met-Ed and Penelec to issue only approximately $361
million, $345 million and $215 million, respectively, principal amount of
additional FMBs. In addition, JCP&L, Met-Ed and Penelec could issue
approximately $361 million, $100 million and $198 million, respectively, of FMBs
against retired FMBs.
In general, the FMB indentures permit the GPU Energy companies to direct
the trustee to utilize cash on deposit to purchase callable or maturing bonds
and to purchase bonds in the market at not more than 105% of their principal
amount, plus accrued interest. Penelec's FMB indenture, however, authorizes
Penelec to direct the trustee to redeem bonds (on a pro-rata basis for all bonds
outstanding) at par.
Among other restrictions, JCP&L's charter provides that without the consent
of the holders of two-thirds of the outstanding preferred stock, no additional
shares of preferred stock may be issued unless, for a period of any twelve
consecutive months out of the fifteen calendar months immediately preceding such
issuance, the after-tax net earnings available for the payment of interest on
indebtedness shall have been at least one and one-half times the aggregate of
(a) the annual interest charges on indebtedness and (b) the annual dividend
requirements on all shares of preferred stock to be outstanding immediately
after such issuance. At December 31, 1998, these provisions would have permitted
JCP&L to issue $1.5 billion stated value of cumulative preferred stock at an
assumed 7.25% dividend rate.
JCP&L's charter also provides that, without the consent of the holders of a
majority of the total voting power of JCP&L's outstanding preferred stock, JCP&L
may not issue or assume any securities representing short-term unsecured
indebtedness, except to refund certain outstanding unsecured securities issued
or assumed by JCP&L or to redeem all outstanding preferred stock, if immediately
thereafter the total principal amount of all outstanding unsecured debt
securities having an initial maturity of less than ten years (or within
23
three years of maturity for all unsecured indebtedness having original
maturities in excess of ten years) would exceed 10% of the aggregate of (a) the
total principal amount of all outstanding secured indebtedness issued or assumed
by JCP&L and (b) the capital and surplus of JCP&L. At December 31, 1998, these
restrictions would have permitted JCP&L to have approximately $285 million of
unsecured indebtedness outstanding.
JCP&L has obtained authorization from the SEC to incur short-term debt
(including indebtedness under the Credit Agreement and commercial paper program)
up to its charter limitation.
In February 1999, Met-Ed and Penelec redeemed all their cumulative
preferred stock. As a result, their charters no longer restrict the amount of
preferred stock or unsecured indebtedness Met-Ed and Penelec may have
outstanding. Met-Ed and Penelec have each applied to the SEC for authorization
to incur short-term debt of up to $150 million.
REGULATION
As a registered holding company, GPU, Inc. is subject to regulation by the
SEC under the 1935 Act. GPU is also subject to regulation under the 1935 Act
with respect to accounting, the issuance of securities, the acquisition and sale
of utility assets, securities or any other interest in any business, the
entering into, and performance of, service, sales and construction contracts,
and certain other matters. The SEC has determined that the electric facilities
of the GPU Energy companies constitute a single integrated public utility system
under the standards of the 1935 Act. The 1935 Act also limits the extent to
which GPU may engage in nonutility businesses or acquire additional utility
businesses. Each of the GPU Energy companies' retail rates, conditions of
service, issuance of securities and other matters are subject to regulation in
the state in which each operates in New Jersey by the NJBPU and in Pennsylvania
by the PaPUC. Additionally, Penelec, as lessee, operates the facilities serving
the village of Waverly, New York. Penelec's retail rates for New York customers,
as well as Penelec's New York operations and property, are subject to regulation
by the New York Public Service Commission. Although Penelec does not render
electric service in Maryland, the Public Service Commission of Maryland has
jurisdiction over the portion of Penelec's property located in that state.
Moreover, with respect to wholesale rates, the transmission of electric energy,
accounting, the construction and maintenance of hydroelectric projects and
certain other matters, the GPU Energy companies are subject to regulation by the
FERC under the Federal Power Act. The NRC regulates the construction, ownership
and operation of nuclear generating stations and other related matters. JCP&L is
also subject, in certain respects, to regulation by the PaPUC in connection with
its participation in the ownership and operation of certain facilities located
in Pennsylvania. See Electric Generation and Environmental Matters for
additional information.
Midlands, the GPUI Group's electric distribution affiliate in England, is
subject to regulation by the Office of Electricity Regulation. Midlands' network
charges are subject to regulatory review at intervals of up to five years as
determined by the regulator. The results of the next regulatory
24
review are expected to be effective on April 1, 2000. The supply business
franchise license currently relates only to customers having an annual maximum
demand of less than 100 KW. Customers with a higher maximum demand are able to
buy their electricity from any electricity supplier. This option is being
extended to include all customers in Midlands' franchise area by April 1999.
PowerNet, the GPUI Group's electric transmission company in Australia, is
subject to regulation by the Office of the Regulator General. PowerNet's network
and connection charges are subject to regulatory review every five or more
years, with the next review scheduled in 2002 for application in 2003.
Empresa Guaracachi S.A., the GPUI Group's electric generation company in
Bolivia, is subject to regulation under the Electricity Law of 1994. Twice each
year, the Superintendency of Electricity recalculates the prices that Empresa
Guaracachi S.A. and other electric generators may charge for capacity based upon
an estimated cost of constructing a new generating unit. In addition, energy
prices are recalculated semi-annually based upon a projected cost of generation,
including fuel and nonfuel variable operation and maintenance costs.
Emdersa, a holding company that owns three electric distribution
companies, Edesa, Edelar and Edesal, is subject to regulation by the Government
of Argentina. Rates for electricity distribution in Argentina are established
based on the cost of purchased electricity plus a distribution margin. The rate
structure allows distribution companies to retain the benefit of any operational
efficiencies they are able to achieve until tariffs are reset, generally every
five years. Edesal (San Luis distributor) received its first rate review in June
1998. It is expected that Edelar (La Rioja distributor) and Edesa (Salta
distributor) will receive their rate reviews in June 2000 and August 2001,
respectively.
NUCLEAR FACILITIES
The GPU Energy companies have made investments in three major nuclear
projects -- TMI-1 and Oyster Creek, both of which are operating generation
facilities, and TMI-2, which was damaged during a 1979 accident. TMI-1 and TMI-2
are jointly owned by JCP&L, Met-Ed and Penelec in the percentages of 25%, 50%
and 25%, respectively. Oyster Creek is owned by JCP&L. At December 31, 1998, the
GPU Energy companies' net investment, including nuclear fuel, in TMI-1 was $71
million (JCP&L $18 million; Met-Ed $36 million; Penelec $17 million) and $682
million for Oyster Creek. JCP&L's net investment in TMI-2 at December 31, 1998
was $66 million. JCP&L is collecting revenues for TMI-2 on a basis which
provides for the recovery of its remaining investment in the plant by 2008. In
1998, Met-Ed and Penelec received PaPUC Restructuring Orders, discontinued the
application of Statement of Financial Accounting Standards No. 71 and adopted
the provisions of Statement of Financial Accounting Standards No. 101 and
Emerging Issues Task Force Issue 97-4 with respect to their electric generation
operations. Accordingly, Met-Ed and Penelec wrote-off their remaining investment
in TMI-2 of $1 million and $7 million, respectively.
Costs associated with the operation, maintenance and retirement of nuclear
plants have continued to be significant and less predictable than costs
associated with other sources of generation, in large part due to
25
changing regulatory requirements, safety standards, availability of nuclear
waste disposal facilities and experience gained in the construction and
operation of nuclear facilities. The GPU Energy companies may also incur costs
and experience reduced output at their nuclear plants because of the prevailing
design criteria at the time of construction and the age of the plants' systems
and equipment. In addition, for economic or other reasons, operation of these
plants for the full term of their operating licenses cannot be assured. Also,
not all risks associated with the ownership or operation of nuclear facilities
may be adequately insured or insurable. Consequently, the recovery of costs
associated with nuclear projects, including replacement power, any unamortized
investment at the end of each plant's useful life (whether scheduled or
premature), the carrying costs of that investment and retirement costs, is not
assured.
Oyster Creek
The operating license for the Oyster Creek station, a 619 MW boiling water
reactor, expires in 2009. Oyster Creek operated at a 78% capacity factor for
1998. Its next refueling outage is scheduled to begin in the fall of 2000. In
addition to the sale or continued operation of the Oyster Creek facility, JCP&L
has been exploring the sale or early retirement of the plant to mitigate costs
associated with its continued operation. GPU does not anticipate making a final
decision on the plant before the NJBPU rules on JCP&L's restructuring filing. If
a decision is made to retire the plant early, retirement would likely occur in
2000. Although management believes that the current rate structure would allow
for the recovery of and return on its net investment in the plant and provide
for decommissioning costs, there can be no assurance that such costs will be
fully recoverable.
TMI-1
The operating license for TMI-1, a 786 MW pressurized water reactor,
expires in 2014. TMI-1 operated at a capacity factor of 99% for 1998. Its next
refueling outage is scheduled to begin in the fall of 1999. GPU has entered into
definitive agreements to sell TMI-1 to AmerGen. Highlights of the agreements are
presented in the COMPETITIVE ENVIRONMENT AND RATE MATTERS section of
Management's Discussion and Analysis.
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 United States District
Court for the Middle District of Pennsylvania. Some of the claims also seek
recovery for injuries from alleged emissions of radioactivity before and after
the accident.
At the time of the TMI-2 accident, as provided for in the Price-Anderson
Act, the GPU Energy companies had (a) primary financial protection in the form
of insurance policies with groups of insurance companies providing an aggregate
of $140 million of primary coverage, (b) secondary financial protection in the
form of private liability insurance under an industry retrospective rating plan
providing for up to an aggregate of $335 million in
26
premium charges under such plan, and (c) an indemnity agreement with the NRC for
up to $85 million, bringing their total financial protection up to an aggregate
of $560 million. Under the secondary level, the GPU Energy companies are subject
to a retrospective premium charge of up to $5 million per reactor, or a total of
$15 million.
In 1995, the U.S. Court of Appeals for the Third Circuit ruled that the
Price-Anderson Act provides coverage under its primary and secondary levels for
punitive as well as compensatory damages, but that punitive damages could not be
recovered against the Federal Government under the third level of financial
protection. In so doing, the Court of Appeals referred to the "finite fund" (the
$560 million of financial protection under the Price-Anderson Act) to which
plaintiffs must resort to get compensatory as well as punitive damages.
The Court of Appeals also ruled that the standard of care owed by the
defendants to a plaintiff was determined by the specific level of radiation
which was released into the environment, as measured at the site boundary,
rather than as measured at the specific site where the plaintiff was located at
the time of the accident (as the defendants proposed). The Court of Appeals also
held that each plaintiff still must demonstrate exposure to radiation released
during the TMI-2 accident and that such exposure had resulted in injuries. In
1996, the U.S. Supreme Court denied petitions filed by GPU, Inc. and the GPU
Energy companies to review the Court of Appeals' rulings.
In 1996, the District Court granted a motion for summary judgment filed by
GPU, Inc. and the GPU Energy companies, and dismissed all of the 2,100 pending
claims. The Court ruled that there was no evidence which created a genuine issue
of material fact warranting submission of plaintiffs' claims to a jury. The
plaintiffs have appealed the District Court's ruling to the Court of Appeals for
the Third Circuit, before which the matter is pending. There can be no assurance
as to the outcome of this litigation.
Based on the above, GPU, Inc. and the GPU Energy companies believe that any
liability to which they might be subject by reason of the TMI-2 accident will
not exceed their financial protection under the Price-Anderson Act.
NUCLEAR PLANT RETIREMENT COSTS
Retirement costs for nuclear plants include decommissioning the
radiological portions of the plants and the cost of removal of nonradiological
structures and materials. The disposal of spent nuclear fuel is covered
separately by contracts with the DOE.
In 1990, the GPU Energy companies submitted a report, in compliance with
NRC regulations, setting forth a funding plan (employing the external sinking
fund method) for the decommissioning of their nuclear reactors. Under this plan,
the GPU Energy companies intend to complete the funding for Oyster Creek and
TMI-1 by the end of the plants' license terms, 2009 and 2014, respectively. The
TMI-2 funding completion date is 2014, consistent with TMI-2 remaining in
long-term storage and being decommissioned at the same time as TMI-1. Based on
NRC studies, a comparable funding target was developed for TMI-2 which took the
accident into account. Under the NRC regulations, the funding targets (in 1998
dollars) are as follows:
27
(in millions)
Oyster
TMI-1 TMI-2 Creek
JCP&L $ 67 $106 $328
Met-Ed 134 214 -
Penelec 67 106 -
--- --- ---
Total $268 $426 $328
=== === ===
The funding targets, while not considered cost estimates, are reference
levels designed to assure that licensees demonstrate adequate financial
responsibility for decommissioning. While the NRC regulations address activities
related to the removal of the radiological portions of the plants, they do not
address costs related to the removal of nonradiological structures and
materials.
A consultant to GPUN performed site-specific studies of TMI-1 (1995), TMI-2
(1995) and Oyster Creek (1995 and 1998), that considered various decommissioning
methods and estimated the cost of decommissioning the radiological portions and
the cost of removal of the nonradiological portions of each plant, using the
prompt removal/dismantlement method. GPUN management has reviewed the
methodology and assumptions used in these studies, is in agreement with them,
and believes the results are reasonable. The NRC may require an acceleration of
the decommissioning funding for Oyster Creek if the plant is retired early. The
retirement cost estimates under the 1995 site-specific studies, assuming
decommissioning at the end of the plants' license terms, are as follows (in 1998
dollars):
(in millions)
Oyster
GPU TMI-1 TMI-2 Creek
Radiological decommissioning $346 $421 $572
Nonradiological cost of removal 85 34* 31
--- --- ---
Total $431 $455 $603
=== === ===
* Net of $12.3 million spent as of December 31, 1998.
Each of the GPU Energy companies is responsible for retirement costs in
proportion to its respective ownership percentage.
The 1995 Oyster Creek site-specific study was updated in 1998 in response
to the previously announced potential early closure of the plant in the year
2000. An early shutdown would increase the retirement costs shown above to $611
million ($580 million for radiological decommissioning and $31 million for
nonradiological cost of removal). Both estimates include substantial spending
for an on-site dry storage facility for spent nuclear fuel and significant costs
for storing the fuel until the DOE complies with the Nuclear Waste Policy Act of
1982 (see OTHER COMMITMENTS AND CONTINGENCIES section of Note 13, Commitments
and Contingencies, of the Combined Notes to the Consolidated Financial
Statements).
In October 1998, GPU entered into definitive agreements to sell TMI-1 to
AmerGen. The agreements provide, among other things, that upon closing, the GPU
Energy companies will fund the TMI-1 decommissioning trusts up to $320 million
and AmerGen will assume all TMI-1 decommissioning liabilities. If all
28
the necessary regulatory approvals, as well as certain Internal Revenue Service
rulings, are obtained, the transfer of all the TMI-1 decommissioning liabilities
and expenses to AmerGen will take place at the financial closing.
The ultimate cost of retiring the GPU Energy companies' nuclear facilities
may be different from the cost estimates contained in these site-specific
studies. Such costs are subject to (a) the escalation of various cost elements
(for reasons including, but not limited to, general inflation), (b) the further
development of regulatory requirements governing decommissioning, (c) the
technology available at the time of decommissioning, and (d) the availability of
nuclear waste disposal facilities.
The GPU Energy companies charge to depreciation expense and accrue
retirement costs based on amounts being collected from customers. Customer
collections are contributed to external trust funds. These deposits, including
the related earnings, are classified as Nuclear decommissioning trusts, at
market on the Consolidated Balance Sheets.
TMI-1 and Oyster Creek:
The NJBPU has granted JCP&L annual revenues for TMI-1 and Oyster Creek
retirement costs of $5.2 million and $22.5 million, respectively. These annual
revenues are based on the 1995 site-specific study estimates.
The PaPUC has granted Met-Ed annual revenues for TMI-1 retirement costs of
$8.5 million based on both the NRC funding target for radiological
decommissioning costs and a 1988 site-specific study for nonradiological costs
of removal. The PaPUC also granted Penelec annual revenues of $4.2 million for
its share of TMI-1 retirement costs, on a basis consistent with that granted
Met-Ed. In the Restructuring Orders, the PaPUC granted recovery of an interim
level of TMI-1 decommissioning costs as part of the Competitive Transition
Charge (CTC). This amount will be adjusted in Phase II of Met-Ed and Penelec's
restructuring proceedings, once the net proceeds from the generation asset
divestiture are determined.
The amounts charged to depreciation expense in 1998 and the provisions for
the future expenditure of these funds, which have been made in accumulated
depreciation, are as follows:
(in millions)
Oyster
TMI-1 Creek
Amount expensed in 1998:
JCP&L $ 5 $ 22
Met-Ed 9 -
Penelec 4 -
--- ---
Total $ 18 $ 22
=== ===
Accumulated depreciation provision at December 31, 1998:
JCP&L $ 49 $273
Met-Ed 75 -
Penelec 34 -
--- ---
Total $158 $273
=== ===
29
Management believes that any TMI-1 and Oyster Creek retirement costs, in
excess of those currently recognized for ratemaking purposes, should be
recoverable from customers.
TMI-2:
The estimated liabilities for TMI-2 future retirement costs (reflected as
Three Mile Island Unit 2 future costs on the Consolidated Balance Sheets) as of
December 31, 1998 and 1997 are $484 million (JCP&L $121 million; Met-Ed $242
million; Penelec $121 million) and $449 million (JCP&L $112 million; Met-Ed $225
million; Penelec $112 million), respectively. These amounts are based upon the
1995 site-specific study estimates (in 1998 and 1997 dollars, respectively)
discussed above and an estimate for remaining incremental monitored storage
costs of $29 million (JCP&L $7 million; Met-Ed $15 million; Penelec $7 million)
for 1998 and $16 million (JCP&L $4 million; Met-Ed $8 million; Penelec $4
million) for 1997, as a result of TMI-2's entering long-term monitored storage
in 1993. The GPU Energy companies are incurring annual incremental monitored
storage costs of approximately $1.8 million (JCP&L $450 thousand; Met-Ed $900
thousand; Penelec $450 thousand).
Offsetting the $484 million liability at December 31, 1998 is $252 million
(JCP&L $23 million; Met-Ed $147 million; Penelec $82 million) which management
believes is probable of recovery from customers and included in Regulatory
assets, net on the Consolidated Balance Sheets, and $266 million (JCP&L $103
million; Met-Ed $120 million; Penelec $43 million) in trust funds for TMI-2 and
included in Nuclear decommissioning trusts, at market on the Consolidated
Balance Sheets. Earnings on trust fund deposits are included in amounts shown on
the Consolidated Balance Sheets under Regulatory assets, net. TMI-2
decommissioning costs charged to depreciation expense in 1998 amounted to $13
million (JCP&L $2 million; Met-Ed $10 million; Penelec $1 million).
The NJBPU has granted JCP&L revenues for TMI-2 retirement costs based on
the 1995 site-specific estimates. In addition, JCP&L is recovering 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, but also allowed Met-Ed and Penelec to defer as a regulatory asset
those amounts that are above the level provided for in the CTC.
At December 31, 1998, the accident-related portion of TMI-2 radiological
decommissioning costs is considered to be $75 million (JCP&L $19 million; Met-Ed
$37 million; Penelec $19 million), which is the difference between the 1995
TMI-1 and TMI-2 site-specific study estimates (in 1998 dollars). In connection
with rate case resolutions at the time, JCP&L, Met-Ed and Penelec have made
contributions to irrevocable external trusts relating to their shares of the
accident-related portions of the decommissioning liability in the amounts of $15
million, $40 million and $20 million, respectively. These contributions were not
recoverable from customers and have been expensed. The GPU Energy companies will
not pursue recovery from customers for any amounts contributed in excess of the
$75 million accident-related portion referred to above.
JCP&L intends to seek recovery for any increases in TMI-2 retirement costs,
and Met-Ed and Penelec intend to seek recovery for any increases in the
nonaccident-related portion of such costs, but recognize that recovery cannot be
assured.
30
INSURANCE
GPU has insurance (subject to retentions and deductibles) for its
operations and facilities including coverage for property damage, liability to
employees and third parties, and loss of use and occupancy (primarily
incremental replacement power costs). There is no assurance that GPU will
maintain all existing insurance coverages, some of which will change as certain
generating assets are sold. Losses or liabilities that are not completely
insured, unless allowed to be recovered through ratemaking, could have a
material adverse effect on the financial position of GPU.
The decontamination liability, premature decommissioning and property
damage insurance coverage for the TMI station and for Oyster Creek totals $2.7
billion per site. In accordance with NRC regulations, these insurance policies
generally require that proceeds first be used for stabilization of the reactors
and then to pay for decontamination and debris removal expenses. Any remaining
amounts available under the policies may then be used for repair and restoration
costs and decommissioning costs. Consequently, there can be no assurance that in
the event of a nuclear incident, property damage insurance proceeds would be
available for the repair and restoration of that station.
The Price-Anderson Act limits GPU's liability to third parties for a
nuclear incident at one of its sites to approximately $9.7 billion. Coverage for
the first $200 million of such liability is provided by private insurance. The
remaining coverage, or secondary financial protection, is provided by
retrospective premiums payable by all nuclear reactor owners. Under secondary
financial protection, a nuclear incident at any licensed nuclear power reactor
in the country, including those owned by the GPU Energy companies, could result
in assessments of up to $88 million per incident for each of the GPU Energy
companies' two operating reactors, subject to an annual maximum payment of $10
million per incident per reactor. In addition to the retrospective premiums
payable under the Price-Anderson Act, the GPU Energy companies are also subject
to retrospective premium assessments of up to $26.8 million in any one year
under insurance policies applicable to nuclear operations and facilities.
The GPU Energy companies have insurance coverage for incremental
replacement power costs resulting from an accident-related outage at their
nuclear plants. Coverage commences after a 17-week waiting period at $3.5
million per week, and after 23 weeks of an outage, continues for three years
beginning at $1.8 million and $2.6 million per week for the first year for
Oyster Creek and TMI-1, respectively, decreasing to 80% of such amounts for
years two and three.
ELECTRIC GENERATION AND ENVIRONMENTAL MATTERS
Fuel
The GPU Energy companies utilized fuels in the generation of electric
energy during 1998 in approximately the following percentages:
31
1998 Actuals
Total JCP&L Met-Ed Penelec
Coal 62% 25% 58% 87%
Nuclear 35% 69% 38% 13%
Gas, Oil & Hydro* 3% 6% 4% -
* Includes pumped storage (which is a net user of electricity).
Approximately 38% (JCP&L 59%; Met-Ed 31%; Penelec 29%) of the GPU Energy
companies' total energy requirements in 1998 were supplied by utility contracts,
NUG purchases, and interchange from other utilities.
For 1999, the GPU Energy companies estimate that their use of fuels in the
generation of electric energy will be in the following percentages:
1999 Estimates**
Total JCP&L Met-Ed Penelec
Coal 38% 10% 44% 71%
Nuclear 61% 90% 55% 28%
Gas, Oil & Hydro* 1% - 1% 1%
* Includes pumped storage.
** Assumes mid-1999 sale of fossil-fuel and hydroelectric generating
facilities, and year-end 1999 sale of TMI-1.
Approximately 52% (JCP&L 61%; Met-Ed 38%; Penelec 56%) of the GPU Energy
companies' 1999 energy requirements are expected to be supplied by utility
contracts, NUG purchases, and interchange from other utilities.
Fossil: The GPU Energy companies have entered into long-term contracts with
nonaffiliated mining companies for the purchase of coal for certain generating
stations in which they have ownership interests (JCP&L - 16.67% ownership
interest in Keystone; Met-Ed - 16.45% ownership interest in Conemaugh; Penelec -
50% ownership interest in Homer City). The contracts, which expire at various
dates between 1999 and 2007, require the purchase of either fixed or minimum
amounts of the stations' coal requirements. The price of the coal under the
contracts is based on adjustments of indexed cost components. The GPU Energy
companies' share of the cost of coal purchased under these agreements is
expected to aggregate $212 million (JCP&L $27 million; Met-Ed $57 million;
Penelec $128 million) for 1999. These contracts will be assumed by the
purchasers, upon the closings of the sales of the GPU Energy companies' fossil
generation facilities.
At the present time, adequate supplies of fossil fuels are readily
available to the GPU Energy companies, but this situation could change rapidly
as a result of actions over which they have no control.
Nuclear: The preparation of nuclear fuel for generating station use
involves various manufacturing stages for which GPU contracts separately.
Stage I involves the mining and milling of uranium ores to produce natural
uranium concentrates. Stage II provides for the chemical conversion of the
32
natural uranium concentrates into uranium hexafluoride. Stage III involves the
process of enrichment to produce enriched uranium hexafluoride from the natural
uranium hexafluoride. Stage IV provides for the fabrication of the enriched
uranium hexafluoride into nuclear fuel assemblies for use in the reactor core at
the nuclear generating station.
In accordance with the Nuclear Waste Policy Act of 1982 (NWPA), the GPU
Energy companies have entered into contracts with, and have been paying fees to,
the DOE for the future disposal of spent nuclear fuel in a repository or interim
storage facility. Following its purchase of TMI-1, AmerGen will assume all
liability for disposal costs related to spent fuel generated after the sale. In
1996, the DOE notified the GPU Energy companies and other standard contract
holders that it will be unable to begin acceptance of spent nuclear fuel for
disposal by 1998, as mandated by the NWPA. The DOE requested recommendations
from contract holders for handling the delay. In January 1997, the GPU Energy
companies, along with other electric utilities and state agencies, petitioned
the U.S. Court of Appeals to, among other things, permit utilities to cease
payments into the Federal Nuclear Waste Fund until the DOE complies with the
NWPA. In November 1997, the Court denied this request. The DOE's inability to
accept spent nuclear fuel could have a material impact on GPU's results of
operations, as additional costs may be incurred to build and maintain interim
on-site storage at Oyster Creek. TMI-1 has sufficient on-site storage capacity
to accommodate spent nuclear fuel through the end of its licensed life. In June
1997, a consortium of electric utilities, including GPUN, filed a license
application with the NRC seeking permission to build an interim above-ground
disposal facility for spent nuclear fuel in northwestern Utah. There can be no
assurance as to the outcome of these matters.
Environmental Matters
GPU is subject to a broad range of federal, state and local environmental
and employee health and safety legislation and regulations. In addition, the GPU
Energy companies are subject to licensing of hydroelectric projects by the FERC
and of nuclear power projects by the NRC. Such licensing and other actions by
federal agencies with respect to GPU's domestic operations are also subject to
the National Environmental Policy Act.
As a result of existing and proposed legislation and regulations, and
ongoing legal proceedings dealing with environmental matters, including but not
limited to acid rain, water quality, ambient air quality, global warming,
electromagnetic fields, and storage and disposal of hazardous and/or toxic
wastes, GPU may be required to incur substantial additional costs to construct
new equipment, modify or replace existing and proposed equipment, remediate,
decommission or cleanup waste disposal and other sites currently or formerly
used by it, including formerly owned manufactured gas plants (MGP), coal mine
refuse piles and generation facilities.
GPU records liabilities (on an undiscounted basis) where it is probable
that a loss has been incurred and the amount of the loss can be reasonably
estimated, and adjusts these liabilities as required to reflect changes in
circumstances. At December 31, 1998, the GPU Energy companies have liabilities
recorded on their balance sheets for environmental matters totaling $90 million,
as follows:
33
Company Site Description Amount (in millions)
JCP&L MGP sites $52
Penelec Seward station 12
All Ash disposal and other sites 26*
----
Total $90
====
* (JCP&L $6; Met-Ed $5; Penelec $15)
Under the agreements entered into for the purchase of the GPU Energy
companies' generating facilities, the buyers, in general, have agreed to assume
all on-site environmental liabilities other than up to $6 million of costs for
the Seward Station, which liability Penelec has retained.
In 1998, the GPU Energy companies made capital expenditures of
approximately $10 million (JCP&L $1 million; Met-Ed $5 million; Penelec $4
million) in response to environmental considerations and have budgeted
approximately $3 million (Met-Ed $2 million; Penelec $1 million) for this
purpose in 1999. The incremental annual operating and maintenance costs for such
equipment is not expected to be material. For further information, see the
Water, Residual Waste and Hazardous/Toxic Wastes sections below.
Water: The federal Water Pollution Control Act (Clean Water Act) generally
requires, with respect to existing steam electric power plants, the application
of the best conventional or practicable pollutant control technology available
and compliance with state-established water quality standards. Additionally,
water quality-based effluent limits (more stringent than "technology" limits)
may be applied to utility wastewater discharges based on receiving stream
quality. With respect to future plants, the Clean Water Act requires the
application of the "best available demonstrated control technology, processes,
operating methods or other alternatives."
The U.S. Environmental Protection Agency (EPA) has adopted regulations that
establish thermal and other limitations for effluents discharged from both
existing and new steam electric generating stations. Standards of performance
are developed, and enforcement of effluent limitations is accomplished, through
the issuance of discharge permits by the EPA, or states authorized by the EPA,
which specify limitations to be applied. Discharge permits are required for all
of the GPU Energy companies' steam generating stations and other stations that
discharge wastewater to surface water bodies.
The discharge permit for the Oyster Creek station may, among other things,
require the installation of a closed-cycle cooling system, such as a cooling
tower, to meet New Jersey state water quality-based thermal effluent
limitations. Although construction of such a system is not required in order to
meet the EPA's regulations setting effluent limitations for the Oyster Creek
station (such regulations would accept the use of the once-through cooling
system now in operation at this station), a closed-cycle cooling system may be
required in order to comply with the water quality standards imposed by the New
Jersey Department of Environmental Protection (NJDEP) for water quality
certification and incorporated in the station's discharge permit. If a cooling
tower is required, the capital costs could exceed $150 million. In October 1994,
following six years of studies, the NJDEP issued a new Discharge to Surface
Water Permit for the Oyster Creek station. The new permit grants JCP&L a
variance from the New Jersey Surface Water Quality
34
Standards. The variance allows the continued operation of the existing
once-through cooling system without modifications such as cooling towers. The
variance is effective through October 1999. If this variance is not extended,
JCP&L would retire the plant rather than construct a cooling tower. The NJDEP
could revoke the variance at any time upon failure to comply with the permit
conditions.
Pursuant to federal environmental monitoring requirements, Penelec has
reported to the Pennsylvania Department of Environmental Protection (PaDEP) that
contaminants from coal mine refuse piles were identified in storm water run-off
at Penelec's Seward station property. Penelec signed a modified Consent Order,
which became effective December 1996, and a third Amendment in December 1998,
that establish a schedule for submitting a plan for long-term remediation, based
on future operating scenarios. Penelec currently estimates that the remediation
of the Seward station property will range from $12 million to $20 million and
has a recorded liability of $12 million at December 31, 1998. These cost
estimates are subject to uncertainties based on continuing discussions with the
PaDEP as to the method of remediation, the extent of remediation required and
available cleanup technologies. Penelec expects recovery of these remediation
costs in Phase II of its restructuring proceeding and has recorded a
corresponding regulatory asset of approximately $12 million at December 31,
1998.
In 1997, York Haven Power Company, a wholly-owned subsidiary of Met-Ed,
entered into an agreement with various agencies to construct a fish passage
facility at the York Haven hydroelectric project by April 2000. This agreement
is part of the FERC license. The present estimated installed cost of the
facility is $9.0 million, for which Met-Ed has agreed to remain responsible
following the sale of the York Haven project.
The GPU Energy companies are also subject to environmental and water
diversion requirements adopted by the Delaware River Basin Commission and the
Susquehanna River Basin Commission, as administered by those commissions or the
PaDEP and the NJDEP.
Nuclear: Reference is made to the Nuclear Facilities section for
information regarding the TMI-2 accident, its aftermath and the GPU Energy
companies' other nuclear facilities.
New Jersey and Connecticut have established the Northeast Compact, to
construct a low-level radioactive waste (radwaste) disposal facility in New
Jersey, which was expected to commence operation by the end of 2003. GPUN's
total share of the cost for developing, constructing and site licensing the
facility was estimated to be $58 million. Through December 31, 1998, GPUN has
made payments of $6 million. JCP&L is recovering the costs to construct this
facility from customers, and $27 million has been collected to date. In February
1998, the New Jersey Low-Level Radwaste Facility Siting Board (Siting Board)
voted to suspend the siting process in New Jersey. The Siting Board is in the
process of determining what activities are required by law to be continued, and
the level of funding required to support these activities. The Siting Board
intended to return the unused funds to the generators, but the Governor has
overruled this decision. Legislation is pending in New Jersey, however, that
would mandate returning the unused funds to the generators, of which GPUN's
share is approximately $2.6 million. GPUN cannot determine at this time what
effect, if any, this matter will have on its operations.
35
Pennsylvania, Delaware, Maryland and West Virginia have established the
Appalachian Compact to construct a facility for the disposal of low-level
radwaste in those states, including low-level radwaste from TMI-1. To date,
pre-construction costs of $33 million, out of an estimated $88 million, have
been paid. Eleven nuclear plants have so far shared equally in the
pre-construction costs; GPUN has contributed $3 million on behalf of TMI-1.
Pennsylvania has suspended the search for a low-level radwaste disposal site in
the state. GPUN cannot determine at this time what effect, if any, this may have
on its operations.
GPUN is currently shipping low-level radwaste to the Barnwell, South
Carolina radwaste disposal site. Continuing delays in the completion of the
Appalachian Compact disposal facility, and the suspension of the siting process
in New Jersey, will require GPUN to perform an evaluation of its ability to
safely store radwaste beyond these dates.
The GPU Energy companies have provided for future contributions to the
Decontamination and Decommissioning Fund for the cleanup of uranium enrichment
plants operated by the Federal Government. GPU's total liability at December 31,
1998 amounted to $28 million (JCP&L $18 million; Met-Ed $7 million; Penelec $3
million). The remaining amount recoverable from ratepayers at December 31, 1998
is $29 million (JCP&L $18 million; Met-Ed $7 million; Penelec $4 million).
Air: With respect to air quality, the GPU-owned or operated generating
stations are subject to certain state environmental regulations of the NJDEP and
the PaDEP. The stations are also subject to certain federal environmental
regulations of the EPA. One of the major sets of regulations that governs air
quality is the Federal Clean Air Act of 1970 (CAA).
CAA Title I sets National Ambient Air Quality Standards (NAAQS) for certain
criteria pollutants. The criteria pollutants are ozone, sulfur dioxide (SO2),
nitrogen dioxide, particulate matter, carbon monoxide and lead. In particular,
this Title has established the Northeast Ozone Transport Region (OTR), which
includes 12 northeast states and the District of Columbia, to address the
transport of those pollutants leading to non-attainment of the ozone NAAQS in
the Northeast. Ozone control is facilitated by the control of pollutant
precursors, which are nitrogen oxide (NOx) and volatile organic compounds
(VOCs). Fossil fuel-fired electric generating stations are major sources of NOx
emissions. Pennsylvania and New Jersey are part of the OTR, and will be required
to control NOx emissions to a level that will provide for the attainment of the
ozone standard in the Northeast. As an initial step, major stationary sources of
NOx were required to implement Reasonably Available Control Technology (RACT) by
May 31, 1995. The PaDEP established regulations that RACT be implemented on a
case-by-case basis and thus is unique for each unit or facility. RACT proposals
were prepared and submitted to the PaDEP in 1994. GPU has opted for the
installation of low NOx burners and/or other control technology, and in some
cases, limitations on annual operations, in order to achieve the reductions
required by the PaDEP RACT regulations. The NJDEP's RACT regulations establish
maximum allowable emission rates for utility boilers based on fuel used and
boiler type, and on combustion turbines based on the type of fuel used. Existing
units are eligible for emissions averaging upon approval of an averaging plan by
the NJDEP. GPU is in compliance with RACT regulations in both New Jersey and
Pennsylvania.
36
A Memorandum of Understanding (MOU) among the members of the Ozone
Transport Commission (OTC) calls for inner and outer zones, with seasonal NOx
emission reductions from 1990 emission levels of 65% and 55%, respectively, by
May 1, 1999. JCP&L, Met-Ed and Penelec will spend an estimated $30,000, $340,000
and $200,000, respectively, to meet the 1999 reductions set by the OTC. The MOU
also calls for a 75% reduction from 1990 emission levels for the inner and outer
zones by May 2003. EPA regulations have been finalized for a 22 state region
which call for utility reductions of 85% from projected 2007 NOx emissions.
These requirements will supercede Phase III of the MOU. A market-based NOx
trading system is proposed to allow for the transfer of excess reductions
encouraging alternate compliance strategies.
Under mandatory, routine review of the ozone NAAQS, the EPA issued new
standards in July 1997 that will significantly increase the areas in the country
which are not in attainment of the NAAQS. A timeline for implementation of the
new standards calls for attainment designations by 2000; state implementation
plans (SIP) by 2001 and 2003 for attainment and non-attainment areas,
respectively; and attainment, with possible extensions, by 2011.
The area around the Warren station has been designated as non-attainment
for the SO2 NAAQS. The EPA and the PaDEP have both approved the use of a
non-guideline air quality model, which is more representative and less
conservative than the EPA guideline model, to evaluate the ambient air quality
impacts of the station. This modeling has demonstrated attainment for the area,
with no required reduction in Warren station emissions. At Shawville station,
the approved use of the same non-guideline model shows attainment of the SO2
NAAQS within current Pennsylvania default SO2 emission limits.
The vicinity of the Chestnut Ridge Energy Complex, which includes the Homer
City, Conemaugh, Keystone and Seward stations, is officially designated as being
in attainment of the SO2 NAAQS; however, both the EPA and the PaDEP have
questioned the area's attainment of this standard. The EPA and the PaDEP have
both approved the use of the same non-guideline model discussed above to
evaluate the ambient air quality impacts of these generating stations. A
proposed attainment and maintenance plan has been submitted to the PaDEP which
includes allowable emission rates which are currently being achieved by the
affected facilities.
Attainment of the SO2 NAAQS has been taken into account as part of the
design of the Conemaugh station scrubbers. In addition, Met-Ed has initiated
ambient air quality modeling studies for its Portland and Titus stations. While
the results are uncertain, these studies may result in a revised Pennsylvania
SIP with source-specific emission limitations in order to attain NAAQS for SO2.
Based on the results of the studies pursuant to compliance with NAAQS,
significant SO2 reductions may be required at one or more of these stations,
which could result in significant capital and additional operating expenditures.
Under a court ordered review of the NAAQS for particulate matter, the EPA
released new standards in July 1997, which could significantly increase the
areas in the country that are not in attainment of the standard. The particulate
matter NAAQS primarily impact NOx and SO2 emission sources. It is
37
possible that once attainment status is defined by the EPA and the reductions
required under other provisions of the CAA are realized, compliance with the
particulate matter NAAQS could require further reductions in NOx and/or SO2
emissions.
Certain other environmental regulations limit the amount of particulate
matter emitted into the environment. GPU has installed equipment at its
coal-fired generating stations and may find it necessary to either upgrade or
install additional equipment at certain of its stations to meet new particulate
emission requirements. Also, the proposed revision to the particulate matter
NAAQS could trigger reduction requirements.
Title III of the CAA deals with emissions of hazardous air pollutants
(HAPs). As part of Title III, the EPA is charged with conducting a study to
determine if fossil fuel-fired electric steam generating units pose a serious
threat to public health due to emissions of HAPs. The study will seek to
determine whether regulation of utility sources is appropriate and necessary. If
the study results prove, through risk analysis, that regulation is required, a
Maximum Achievable Control Technology standard will be developed for utility
sources. An interim study report was published in October 1996. In general, the
study did not find unacceptable health risks from utility sources, but
recommended further analysis of long-range transport of HAPs and the impact of
mercury emissions. The interim report does not include the EPA's official
recommendation as to the necessity of HAP regulation for utilities. An
information collection request under the CAA has been issued for the sampling
and analysis of mercury and chlorides in the various coal supplies. This will
provide further data to EPA to determine if mercury and/or chlorides control
will be mandated.
Title IV of the CAA requires substantial reductions in SO2 emissions to
meet a national cap beginning in the years 1995 and 2000 (Phases I and II,
respectively). As a result, it will be necessary to install and operate emission
control equipment, switch to slightly lower sulfur coal at some of their
coal-fired plants, or purchase emission allowances in order to achieve
compliance. Title IV also imposes requirements for the installation of NOx
controls. To comply with Titles I and IV of the CAA, the GPU Energy companies
expect to spend up to $243 million (JCP&L $44 million; Met-Ed $96 million;
Penelec $103 million) for air pollution control equipment by the year 2000, of
which approximately $242 million (JCP&L $44 million; Met-Ed $95 million; Penelec
$103 million) has been spent as of December 31, 1998 (these amounts include
costs to meet the 1999 reductions set by the OTC, as discussed on page 37). The
capital costs of equipment are for the installation of flue gas desulfurization
systems (scrubbers), low NOx burner technology, selective noncatalytic reduction
and particulate removal upgrades.
The Conemaugh, Portland and Shawville stations are Phase I affected units.
The second of two scrubbers was installed at the Conemaugh station during 1995,
as part of GPU's plans to comply with SO2 emission limitations. For the Portland
station, Met-Ed plans to meet its Phase I compliance obligation through the use
of SO2 emission allowances. The Shawville station will require lower sulfur coal
and/or the purchase of emission allowances to meet its Phase I requirements.
Since these coal fired units are Phase I affected, they are also subject to the
Title IV NOx requirements.
38
The Homer City, Keystone and Titus stations have been declared early
election units under federal regulations. This limits the Title IV NOx
requirement to the Phase I NOx emission rates until 2008. GPU's current strategy
for Phase II SO2 compliance is the use of fuel switching and the purchase of
emission allowances at the Keystone and the Homer City Unit 3 stations, with
periodic reviews of the cost effectiveness of the installation of scrubbers.
Switching to lower sulfur coal and/or the purchase of emission allowances is
currently planned for the Titus, Seward, Portland, Shawville and Warren stations
as well. Homer City units 1 and 2 will use existing coal cleaning technology and
the purchase of emission allowances. Additional control modifications are not
expected to be necessary for Phase II compliance at the Conemaugh and Sayreville
stations.
Title IV of the CAA also requires Phase I and Phase II affected units to
install a continuous emission monitoring system (CEMS) and provide quality
assurance for the data related to SO2, NOx, opacity and volumetric flow. In
addition, Title VIII of the CAA requires all affected sources to monitor carbon
dioxide emissions. Monitoring systems have been installed and certified on
JCP&L, Met-Ed and Penelec's Phase I and Phase II affected units as required by
EPA, NJDEP and PaDEP regulations.
The PaDEP has a CEMS enforcement policy to ensure consistent compliance
with air quality regulations under federal and state statutes. The CEMS
enforcement policy includes matters such as visible emissions, SO2 emission
standards, NOx emissions and a requirement to maintain certified CEMS equipment.
In addition, this policy provides a mechanism for the payment of certain
prescribed amounts to the Pennsylvania Clean Air Fund (Clean Air Fund) for
excess air pollutant emissions or monitoring failures. With respect to the
operation of Met-Ed and Penelec's generating stations, it is not anticipated
that payments to be made to the Clean Air Fund due to CEM penalties will be
material in amount. The CAA has also expanded the enforcement options available
to the EPA and the states and contains more stringent enforcement provisions and
penalties. Moreover, citizen suits can seek civil penalties for violations of
this Act.
CAA Title V required that comprehensive permit applications be submitted by
major stationary sources to the permitting authorities in 1995. Title V may
dramatically increase the level of effort required to track compliance and
tabulate emissions of the numerous processes regulated by the new permits once
issued. The states' Title V program also established new emission fee
structures. In 1998, the Pennsylvania stations paid $1.1 million in emissions
fees, and the New Jersey fees totaled approximately $33,000. Emission fees are
based on the level of actual emissions and are assessed on a per ton basis.
In the fall of 1993, the Clinton Administration announced its Climate
Change Action Plan (Plan), intended to reduce greenhouse gas emissions to 1990
levels by the year 2000. The Plan relies heavily on voluntary action by
industry. GPU has joined approximately 630 other electric utility companies
which have signed accords or are otherwise cooperating with the DOE under the
Climate Challenge Program, which is the electric utility's response to the Plan.
As a result of this and other programs, the CO2 emissions from GPU-owned
generating facilities have been at or below 1990 levels since 1992.
39
The 1997 Kyoto Protocol calls for the U.S. to reduce its CO2 emissions to
7% below 1990 levels by 2008 to 2012. The President has stated that he will not
ask the Senate to ratify the agreement until the developing nations also agree
to emission targets.
Electromagnetic Fields: There have been a number of studies regarding the
possibility of adverse health effects from electric and power frequency magnetic
fields that are found everywhere there is electricity. While some of the studies
have indicated some association between exposure to magnetic fields and cancer,
other studies have indicated no such association. The studies have not shown any
causal relationship between exposure to magnetic fields and cancer, or any other
adverse health effects. In 1990, the EPA issued a draft report that identifies
magnetic fields as a possible carcinogen, although it acknowledged that there is
still scientific uncertainty surrounding these fields and their possible link to
adverse health effects. On the other hand, a 1992 White House Office of Science
and Technology policy report states that "there is no convincing evidence in the
published literature to support the contention that exposures to extremely low
frequency electric and magnetic fields generated by sources such as household
appliances, video display terminals, and local power lines are demonstrable
health hazards." In 1994, results of a large-scale epidemiology study of
electric utility workers suggested a statistical relationship between brain
cancer and the class of workers who received the highest exposure. These
findings conflicted with two earlier large-scale studies that found no such
relationship. In 1996, the National Research Council of the National Academy of
Sciences released a report which concluded that, "Based on a comprehensive
evaluation of published studies relating to the effects of power-frequency
electric and magnetic fields on cells, tissues and organisms (including humans),
... the current body of evidence does not show that exposure to these fields
presents a human-health hazard. Specifically, no conclusive and consistent
evidence shows that exposure to residential electric and magnetic fields produce
cancer, adverse neurobehavioral effects, or reproductive and developmental
effects." Additional studies are presently underway.
Certain parties have alleged that exposure to electric and magnetic fields
associated with the operation of transmission and distribution facilities will
produce adverse impacts upon public health and safety and upon property values.
Furthermore, regulatory actions under consideration by the NJDEP and bills
introduced in the Pennsylvania legislature could, if enacted, establish a
framework under which the intensity of the fields produced by electric
transmission and distribution lines would be limited or otherwise regulated.
The GPU Energy companies cannot determine at this time what effect, if any,
this matter will have on their results of operations and financial position.
Residual Waste: PaDEP regulations governing ash disposal sites require,
among other things, groundwater assessments of landfills if existing groundwater
monitoring indicates the possibility of degradation. The assessments could
require the installation of additional monitoring wells and the evaluation of
one year's data. If the assessments show degradation of the groundwater, Penelec
and Met-Ed would be required to develop abatement plans, which may include the
lining of currently unlined facilities. To date, Penelec has not identified any
cases requiring abatement. In 1998, Penelec
40
reported to the PaDEP that it had exceeded the discharge limit at the Homer City
Station ash disposal site. A groundwater assessment is required to evaluate the
cause and to determine the need for abatement measures. Although Met-Ed's Titus
station ash disposal site was upgraded in 1991 and meets many of the lined
facility requirements, degradation has been identified at the site. In 1996,
Met-Ed filed an abatement plan with the PaDEP in conjunction with its
re-permitting application (see discussion below), which states that the problem
will be abated once the station is closed and projected site closure procedures
have been performed. The PaDEP has since required a more detailed groundwater
assessment to evaluate the groundwater condition at the site. Also, Met-Ed's
Portland station ash disposal site requires significant modifications, since the
permit received from the PaDEP in December 1998 requires a synthetic liner and
leachate collection and treatment system.
In 1997, the GPU Energy companies filed with the PaDEP applications for
re-permitting seven (JCP&L - one; Met-Ed - three; Penelec - three) operating ash
disposal sites, including projected site closure procedures and related cost
estimates. The cost estimates for the closure of these sites range from
approximately $17 million to $22 million, and a liability of $17 million (JCP&L
$1 million; Met-Ed $4 million; Penelec $12 million) is reflected on the
Consolidated Balance Sheets at December 31, 1998. JCP&L has requested recovery
of its share of closure costs in its restructuring plan filed with the NJBPU in
July 1997. Met-Ed and Penelec expect recovery of these costs in Phase II of
their restructuring proceedings. As a result, a regulatory asset of $17 million
(JCP&L $1 million; Met-Ed $4 million; Penelec $12 million) is reflected on the
Consolidated Balance Sheets at December 31, 1998.
Other PaDEP residual waste compliance requirements involve storage
impoundments, which also will eventually require groundwater monitoring systems
and potential assessments of the impact on groundwater. Groundwater abatement
may be necessary at locations where pollution problems are identified. The
removal of all the residual waste ("clean closure") has been done at some
impoundments to eliminate the need for future monitoring and abatement
requirements. Storage impoundments must have implemented groundwater monitoring
plans by 2002, but the PaDEP can require this at any time prior to this date or,
at its discretion, defer full compliance beyond 2002 for some storage
impoundments. A 1997 change in the PaDEP's regulations required submittal of
groundwater monitoring plans for residual waste storage impoundments by July
1997. The GPU Energy companies have submitted plans for all their relevant
stations and the PaDEP has begun to implement these plans at the Conemaugh,
Homer City and Keystone stations.
Hazardous/Toxic Wastes: Under the Toxic Substances Control Act (TSCA), the
EPA has adopted certain regulations governing the use, storage, testing,
inspection and disposal of electrical equipment that contain polychlorinated
biphenyls (PCBs). Such regulations permit the continued use and servicing of
certain electrical equipment (including transformers and capacitors) that
contain PCBs. GPU has met all requirements of the TSCA to allow the continued
use of equipment containing PCBs and has taken substantive voluntary actions to
reduce the amount of PCB-containing electrical equipment.
Prior to 1953, the GPU Energy companies owned and operated MGP sites in New
Jersey and Pennsylvania. Waste contamination associated with the operation and
dismantlement of these MGP sites is, or may be, present both on-site and
off-site. Claims have been asserted against the GPU Energy
41
companies for the cost of investigation and remediation of these sites. The
amount of such remediation costs and penalties may be significant and may not be
covered by insurance. JCP&L has entered into agreements with the NJDEP 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 December 31, 1998, JCP&L has spent approximately $32 million in
connection with the cleanup of these sites. In addition, JCP&L has recorded an
estimated environmental liability of $52 million relating to expected future
costs of these sites (as well as two other properties). This estimated liability
is based upon ongoing site investigations and remediation efforts, which
generally involve capping the sites and pumping and treatment of ground water.
Moreover, the cost to clean up these sites could be materially in excess of the
$52 million due to significant uncertainties, including changes in acceptable
remediation methods and technologies.
In 1997, JCP&L's request to establish a Remediation Adjustment Clause for
the recovery of MGP remediation costs was approved by the NJBPU. At December 31,
1998, JCP&L had recorded on its Consolidated Balance Sheet a regulatory asset of
$44 million. JCP&L is continuing to pursue reimbursement from its insurance
carriers for remediation costs already spent and for future estimated costs. In
1994, JCP&L filed a complaint with the Superior Court of New Jersey against
several of its insurance carriers, relative to these MGP sites. Settlement has
been reached with all but one of those insurance companies.
In 1997, the EPA filed a complaint against GPU, Inc. in the United States
District Court for the District of Delaware for enforcement of its unilateral
order issued against GPU, Inc. to clean up the former Dover Gas Light Company
(Dover) manufactured gas production site in Dover, Delaware. Dover was part of
the AGECO/AGECORP group of companies from 1929 until 1942 and GPU, Inc. emerged
from the AGECO/AGECORP reorganization proceedings. All of the common stock of
Dover was sold in 1942 by a member of the AGECO/AGECORP group to an unaffiliated
entity, and was subsequently acquired by Chesapeake Utilities Corporation
(Chesapeake). According to the complaint, the EPA is seeking up to $0.5 million
in past costs, $4.2 million for the cleanup of the Dover site and approximately
$19 million in penalties. GPU, Inc. has responded to the EPA complaint stating
that such claims should be dismissed because, among other things, they are
barred by the operation of the Final Decree entered by the United States
District Court for the Southern District of New York at the conclusion of the
1946 reorganization proceedings of AGECO/AGECORP. Chesapeake has also sued GPU,
Inc. for a contribution to the cleanup of the Dover site. In December 1997, the
Court refused to dismiss the complaint; GPU, Inc. has requested that the Court
reconsider its decision. The parties continue to engage in settlement
discussions. There can be no assurance as to the outcome of these proceedings.
The Federal Resource Conservation and Recovery Act of 1976, the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
(CERCLA) and the Superfund Amendment and Reauthorization Act of 1986 authorize
the EPA to issue orders compelling responsible parties to take cleanup action at
any location that is determined to present an imminent and substantial danger to
the public or to the environment because of an actual or threatened release of
one or more hazardous substances. Pennsylvania and New Jersey have enacted
legislation giving similar authority to the PaDEP and the NJDEP,
42
respectively. In addition, federal and state law provides for payment by
responsible parties for damage to natural resources. Because of the nature of
the GPU Energy companies' business, various by-products and substances are
produced and/or handled that are classified as hazardous under one or more of
these statutes. GPU generally provides for the treatment, disposal or recycling
of such substances through licensed independent contractors, but these statutory
provisions also impose potential responsibility for certain cleanup costs on the
generators of the wastes. GPU has been formally notified by the EPA and state
environmental authorities that it is among the potentially responsible parties
(PRPs) who may be jointly and severally liable to pay for the costs associated
with the investigation and remediation at hazardous and/or toxic waste sites in
the following number of instances (in some cases, more than one company is named
for a given site):
JCP&L MET-ED PENELEC GPUN GPU, INC. TOTAL
8 4 2 1 1 13
In addition, certain of the GPU companies have been requested to
participate in the remediation or supply information to the EPA and state
environmental authorities on several other sites for which they have not been
formally named as PRPs, although the EPA and state authorities may nevertheless
consider them as PRPs. Certain of the GPU companies have also been named in
lawsuits requesting damages (which are material in amount) for hazardous and/or
toxic substances allegedly released into the environment. A discussion of five
PRP sites, where it is probable that a loss has been incurred, follows:
JCP&L, Met-Ed and GPUN are among the more than 800 PRPs under CERCLA who
may be liable to pay for costs associated with the investigation and remediation
of the Maxey Flats disposal site, located in Fleming County, Kentucky. A
negotiated settlement among all parties has been finalized and cleanup efforts
have begun. The interim remediation work is estimated to cost $63 million, for
which all responsible parties will be jointly and severally liable. The GPU
Energy companies' estimated share of these costs, which is based upon a
percentage of the total volume of waste believed shipped to the site, is JCP&L
$1.1 million, Met-Ed $400 thousand and GPUN $150 thousand, which amounts are
reflected on the Consolidated Balance Sheets accordingly.
JCP&L has been named as a PRP by the NJDEP for allegedly disposing of
hazardous waste at the Global Landfill, a dump site located in New Jersey. JCP&L
signed a Consent Decree, along with about 50 other PRPs, to investigate the site
and conduct site remediation. The current estimated cost of the remediation is
$33 million. A final allocation of JCP&L's share has not yet been made. However,
JCP&L's interim estimated allocation is $500,000, for which JCP&L has recorded a
liability.
Met-Ed received a PRP notice from the PaDEP asserting that it had disposed
of hazardous waste at the Industrial Solvents & Chemical Company site, a former
solvents recycler. This site is being remediated under the Pennsylvania
Hazardous Sites Cleanup Act. Met-Ed has made immaterial payments to the PRP
group for the water line installation and the removal of tanks, drums and other
materials at the site. Met-Ed has agreed to settle this matter for the amounts
already paid. Final settlement negotiations are in progress.
43
Penelec is part of a group of 10 PRPs who have entered into a Consent
Decree with Pennsylvania and a settlement with the EPA to pay for costs
associated with the remediation of a dump site located in Mill Creek Township
near Erie, Pennsylvania. Penelec has paid approximately $114,000 in costs for
the settlement with Pennsylvania and $600,000 in costs for the settlement with
the EPA. Penelec's share of the remaining costs for the site is estimated to be
$500,000 (including costs to cap the site), for which a liability has been
recorded at December 31, 1998.
Penelec has been named as a PRP by the EPA, along with over 1,000 other
PRPs, for allegedly disposing of hazardous materials at the Jack's Creek/Sitken
site, a former metals recycling and smelting operation in Mifflin County,
Pennsylvania. Penelec has joined a PRP group, which is exploring a settlement
with the EPA, but cannot predict the ultimate outcome of the negotiations.
The ultimate cost of remediation of 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 company involved.
FRANCHISES AND CONCESSIONS
JCP&L operates pursuant to franchises in the territory served by it and has
the right to occupy and use the public streets and ways of the state with its
poles, wires and equipment upon obtaining the consent in writing of the owners
of the soil, and also to occupy the public streets and ways underground with its
conduits, cables and equipment, where necessary, for its electric operation.
JCP&L has the requisite legal franchise for the operation of its electric
business within the State of New Jersey, including in incorporated cities and
towns where designations of new streets, public ways, etc., may be obtained upon
application to such municipalities. JCP&L holds a FERC license expiring in 2013
authorizing it to operate and maintain Yards Creek in which JCP&L has a 50%
ownership interest.
Met-Ed and Penelec have the necessary franchise rights to furnish electric
service in the various respective municipalities or territories in which each
company now supplies such services. These electric franchise rights, which are
generally nonexclusive rights, consist generally of (a) charter rights and (b)
certificates of public convenience issued by the PaPUC and/or "grandfather
rights". Such electric franchise rights are free from unduly burdensome
restrictions and unlimited as to time, except in a few relatively minor cases
and except as otherwise described below. The secondary franchise granted by the
Borough of Boyertown to Met-Ed contains a provision that the Borough shall have
the right at any time to purchase the electric system in the Borough at a
valuation to be fixed by appraisers. Met-Ed holds a FERC license expiring in
2014 for the continued operation and maintenance of the York Haven hydroelectric
project. Penelec holds a license from the FERC, which expires in 2002, for the
continued operation and maintenance of the Piney hydroelectric project. In
addition, Penelec and the Cleveland Electric Illuminating Company hold a license
expiring in 2015 for Seneca in which Penelec has a 20% undivided interest. For
the same station, Penelec and the Cleveland Electric Illuminating Company hold a
Limited Power Permit issued by the Pennsylvania Water and Power Resources Board
which is unlimited as to
44
time. For purposes of the Homer City station, Penelec and New York State
Electric & Gas Corporation hold a Limited Power Permit issued by the
Pennsylvania Water and Power Resources Board which expires in 2017, but is
renewable by the permittees until they have recovered all capital invested by
them in the project. Penelec also holds a Limited Power Permit issued by the
Pennsylvania Water and Power Resources Board for its Shawville station which
expires in 2003, but is renewable by Penelec until it has recovered all capital
invested in the project.
EMPLOYEE RELATIONS
At January 29, 1999, GPU, Inc. and consolidated affiliates had 8,931
full-time employees (JCP&L 2,257; Met-Ed 2,639; Penelec 1,772; GPUI Group 461;
all other companies 1,802). The nonsupervisory production and maintenance
employees of the GPU Energy companies and certain of their nonsupervisory
clerical employees are represented for collective bargaining purposes by local
unions of the International Brotherhood of Electrical Workers (IBEW) at JCP&L,
Met-Ed and Penelec and the Utility Workers Union of America (UWUA) at Penelec.
JCP&L and Met-Ed's three-year contracts with the IBEW expire on October 31,
1999 and April 30, 2000, respectively. Penelec has renegotiated a four-year
contract with the IBEW, expiring on May 14, 2002. The IBEW membership has
ratified the new contract subject to reaching agreement on employee transition
arrangements to be implemented upon GPU's divestiture of its fossil fuel and
hydroelectric generating facilities. Penelec's three-year contract with the UWUA
expires on June 30, 2001.
45
ITEM 2. PROPERTIES.
GPU Energy Companies' Generating Stations
At December 31, 1998, the generating stations of the GPU Energy companies
had an aggregate effective capability of 6,751,000 net kilowatts (KW), as
follows:
Name of GPU Energy Year of Net KW
Station Company Installation (Summer)
------- ---------- ------------ --------
COAL-FIRED:
Homer City(a) Penelec 1969-1977 942,000
Shawville Penelec 1954-1960 597,000
Portland Met-Ed 1958-1962 401,000
Keystone(b) JCP&L 1967-1968 283,000
Conemaugh(c) Met-Ed 1970-1971 280,000
Titus Met-Ed 1951-1953 243,000
Seward Penelec 1950-1957 196,000
Warren Penelec 1948-1949 82,000
NUCLEAR:
TMI-1(d) All 1974 786,000
Oyster Creek JCP&L 1969 619,000
GAS/OIL-FIRED:
Sayreville JCP&L 1930-1958 229,000
Combustion
Turbines(e) All 1960-1997 1,444,000
Other(f) All 1968-1977 298,000
Hydroelectric(g) Met-Ed/Penelec 1905-1969 64,000
PUMPED STORAGE:(h)
Yards Creek JCP&L 1965 200,000
Seneca Penelec 1969 87,000
---------
TOTAL 6,751,000
=========
Aggregate Effective Capability of the GPU Energy Companies
Net KW
(Summer) (Winter)
JCP&L 2,729,000 3,139,000
Met-Ed 1,738,000 1,861,000
Penelec 2,284,000 2,365,000
--------- ---------
TOTAL 6,751,000 7,365,000
========= =========
(a) Represents Penelec's undivided 50% interest in the station.
(b) Represents JCP&L's undivided 16.67% interest in the station.
(c) Represents Met-Ed's undivided 16.45% interest in the station.
46
(d) Jointly owned by JCP&L, Met-Ed and Penelec in percentages of 25%, 50% and
25%, respectively.
(e) JCP&L - 912,000 KW, Met-Ed - 400,000 KW and Penelec 132,000 KW.
(f) Consists of internal combustion and combined-cycle units (JCP&L - 290,000
KW, Met-Ed - 2,000 KW and Penelec - 6,000 KW).
(g) Consists of Met-Ed's York Haven station (19,000 KW) and Penelec's Piney
(27,000 KW) and Deep Creek stations (18,000 KW).
(h) Represents the GPU Energy companies' undivided interests in these stations
which are net users rather than net producers of electric energy.
The GPU Energy companies' coal-fired, hydroelectric (other than the Deep
Creek station) and pumped storage stations (other than the Yards Creek station)
are located in Pennsylvania. The TMI-1 nuclear station is also located in
Pennsylvania. The GPU Energy companies' gas-fired and oil-fired stations (other
than some combustion turbines in Pennsylvania), the Yards Creek pumped storage
station and the Oyster Creek nuclear station are located in New Jersey. The Deep
Creek hydroelectric station is located in Maryland.
Substantially all of the GPU Energy companies' properties are subject to
the lien of their respective FMB indentures.
The all-time peak loads of the GPU Energy companies are as follows:
(In KW)
Company Date Peak Load
GPU Energy companies Jul. 15, 1997 9,555,000*
JCP&L Jul. 22, 1998 4,817,000
Met-Ed Jul. 15, 1997 2,224,000
Penelec Jan. 19, 1997 2,652,000
* System peak load.
47
GPUI Group Generating Facilities
At December 31, 1998, the GPUI Group had ownership interests in 19
operating natural gas-fired cogeneration and other nonutility power production
facilities located both domestically and internationally, with an aggregate
capability of 5,025,100 KW as follows:
Name of Year of Ownership
Facility Location Installation Total KW Interest (KW)
U.S. Facilities
Mid Georgia GA 1998 300,000 150,000
Selkirk NY 1992-94 350,000 66,900
Lake* FL 1993 110,000 109,900
Pasco* FL 1993 109,000 54,400
Onondaga* NY 1993 80,000 80,000
Syracuse* NY 1992 80,000 3,500
Marcal* NJ 1989 65,000 32,500
Camarillo* CA 1988 26,500 300
Chino* CA 1987 26,000 300
--------- ---------
Total 1,146,500 497,800
--------- ---------
Foreign Facilities
Teesside** England 1993 1,875,000 249,400
Redditch** England 1991 29,000 14,500
Hereford** England 1980 15,000 7,500
Humber** England 1997 750,000 70,500
Enersis Group** Portugal 1987-95 70,000 17,500
Micdos** Spain 1975-95 33,000 7,100
Termobarran-
quilla* Colombia 1972-96 890,000 254,600
Guaracachi* Bolivia 1975-94 165,000 82,500
Aranjuez* Bolivia 1974-94 36,900 18,500
Karachipampa* Bolivia 1982 14,700 7,400
--------- ---------
Total 3,878,600 729,500
--------- ---------
Total capability 5,025,100 1,227,300
========= =========
* The GPUI Group has operating responsibility for these facilities.
** The GPUI Group's ownership interests in these facilities are through its
investment in Midlands.
48
Transmission and Distribution System
At December 31, 1998, the GPU Energy companies owned the following
transmission and distribution facilities:
JCP&L Met-Ed Penelec Total
Transmission and Distribution
Substations 304 248 474 1,026
========== ========== ========== ==========
Aggregate Installed Transformer
Capacity of Substations
(in kilovoltamperes - KVA) 21,104,035 11,618,960 15,804,854 48,527,849
========== ========== ========== ==========
Transmission System:
Lines (In Circuit Miles):
500 KV 18 188 235 441
345 KV - - 149 149
230 KV 570 383 650 1,603
138 KV - 3 11 14
115 KV 232 385 1,330 1,947
69 KV, 46 KV and 34.5 KV 1,769 469 364 2,602
---------- ---------- ---------- ----------
Total 2,589 1,428 2,739 6,756
========== ========== ========== ==========
Distribution System:
Line Transformer Capacity (KVA) 10,348,078 6,176,550 7,031,077 23,555,705
========== ========== ========== ==========
Pole Miles of Overhead Lines 16,080 12,613 22,656 51,349
========== ========== ========== ==========
Trench Miles of Underground
Cable 7,311 2,287 2,013 11,611
========== ========== ========== ==========
In addition, PowerNet which serves all of Victoria, Australia covering an
area of approximately 87,900 square miles and a population of 4.5 million, owns
a total of 4,062 miles of overhead and underground lines. Midlands, which
provides service to 2.3 million customers in a 5,135 square mile area in
England, owns a total of 39,544 miles of overhead and underground lines.
ITEM 3. LEGAL PROCEEDINGS.
Reference is made to Significant Developments - Pennsylvania Restructuring;
New Jersey Restructuring; Nuclear Facilities - TMI-2 and Electric Generation and
Environmental Matters under Item 1 and to Note 13, Commitments and
Contingencies, of the Combined Notes to the Consolidated Financial Statements
contained in Item 8 for a description of certain pending legal proceedings
involving GPU.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
49
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
All of JCP&L, Met-Ed and Penelec's outstanding common stock is owned by
GPU, Inc. During 1998, JCP&L, Met-Ed and Penelec paid dividends on their common
stock to GPU, Inc. in the following amounts: JCP&L $195 million, Met-Ed $85
million and Penelec $65 million.
In accordance with JCP&L, Met-Ed and Penelec's FMB indentures, as
supplemented, the retained earnings at December 31, 1998 that are restricted as
to the payment of dividends on their common stock are as follows:
JCP&L - $1.7 million Met-Ed - $3.4 million Penelec - $10.1 million
Stock Trading
GPU, Inc. is listed as GPU on the New York Stock Exchange. On February
9, 1999, there were 37,537 registered holders of GPU, Inc. common stock.
Dividends
GPU, Inc. common stock dividend declaration dates are the first Thursdays
of December, April, June, and October. Dividend payment dates fall on the last
Wednesdays of February, May, August and November. Dividend declarations and
quarterly stock price ranges for 1998 and 1997 are set forth below.
Common Stock
Dividends Declared Price Ranges*
1998 1997
1998 1997 Quarter High/Low High/Low
----- ----- ------- ------------------ -----------------
April $.515 $.50 First $44 11/16 $38 11/16 $36 1/8 $32
June .515 .50 Second 44 7/16 36 1/2 36 7/16 30 3/4
October .515 .50 Third 43 5/16 35 3/16 36 9/16 32 3/4
December .515 .50 Fourth 47 3/16 41 3/8 42 3/4 35 3/8
* Based on New York Stock Exchange Composite Transactions as reported in the
Wall Street Journal.
ITEM 6. SELECTED FINANCIAL DATA.
See pages F-1 and F-2 for references to each registrant's Selected
Financial Data required by this item.
50
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
See pages F-1 and F-2 for references to each registrant's Management's
Discussion and Analysis of Financial Condition and Results of Operations
required by this item.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See page F-23 for references to GPU, Inc.'s Quantitative and Qualitative
Disclosures About Market Risk required by this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See pages F-1 and F-2 for references to each registrant's Financial
Statements and Quarterly Financial Data (unaudited) required by this item.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
51
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Identification of Directors
Information regarding GPU, Inc.'s directors is incorporated by reference
to the BOARD OF DIRECTORS section of GPU, Inc.'s Proxy Statement for the 1999
Annual Meeting of Stockholders. The current directors of JCP&L, Met-Ed and
Penelec, their ages, positions held and business experience during the past five
years are as follows:
Year First Elected
------------------
Name Age Position JCP&L Met-Ed Penelec
- ---- --- -------- ----- ------ --------
JCP&L/Met-Ed/Penelec:
F. D. Hafer (a) 58 Chairman of the Board and 1996 1978 1994
Chief Executive Officer
D. Baldassari (b) 49 President 1982 1996 1996
D. W. Myers (c) 54 Vice President - Finance 1994 1996 1996
and Rates, and
Comptroller
C. B. Snyder (d) 53 Director 1997 1997 1997
JCP&L only:
G. E. Persson (e) 67 Director 1983
S. C. Van Ness (f) 65 Director 1983
S. B. Wiley (g) 69 Director 1982
(a) Mr. Hafer is also Chairman, Chief Executive Officer, President and a
director of GPU, Inc. and GPUS; Chairman of the Board and a director of
GPUN; Chairman, Chief Executive Officer, and a director of Genco;
Chairman and a director of GPU International, Inc. (GPUI), GPU Power,
Inc. (GPU Power), GPU Capital, Inc. and its subsidiary GPU Electric,
Inc. (GPU Electric); and a director of GPU AR, GPU Telcom and Saxton
Nuclear Experimental Corporation, all subsidiaries of GPU, Inc. He is
a director of Avon Energy Partners Holdings, Midlands Electricity plc,
and GPU PowerNet PTY Ltd. Mr. Hafer also served as President of Met-Ed
from 1986 to 1996 and as President of Penelec from 1994 to 1996. Mr.
Hafer is a director of Utilities Mutual Insurance Company, a director
and past president of the Manufacturers Association of Berks County and
Chairman of the Board of the Pennsylvania Electric Association. Mr.
Hafer is also a director of Kutztown University Foundation, Leadership
Pennsylvania and the Reading Hospital and Medical Center and a trustee
of the Caron Foundation and immediate past chairman and member of the
Board of Trustees of the Foundation for a Drug-Free Pennsylvania.
(b) Mr. Baldassari was elected President of JCP&L in 1992, and President of
Met-Ed and Penelec in 1996. Mr. Baldassari is also President, Chief
Executive Officer and a director of GPU Telcom; and a director of GPUS,
GPUN, Genco, Saxton Nuclear Experimental Corporation, and First Morris
Bank of Morristown, NJ.
(c) Mr. Myers was elected Vice President - Finance and Rates, and Comptroller
of Met-Ed and Penelec in 1996, and has also served as Vice President
Finance and Rates, and Comptroller of JCP&L since 1994. Prior to that, he
served as Vice President and Treasurer of GPU, Inc., GPUS, JCP&L, Met-Ed
and Penelec since 1993.
52
(d) Mrs. Snyder was elected Executive Vice President - Corporate Affairs of
GPUS in 1998. She is also a director of GPUS, GPU AR and GPU PowerNet PTY
Ltd. Previously, she served as Senior Vice President - Corporate Affairs
of GPUS, Vice President - Public Affairs of JCP&L since 1996, and Vice
President - Public Affairs of Met-Ed and Penelec since 1994. Prior to
1994, she was Regional Director of Met-Ed since 1991.
(e) Mrs. Persson serves as liaison (Special Assistant Director) between the
N.J. Division of Consumer Affairs and various state boards. Prior to 1995,
she was owner and President of Business Dynamics Associates of Red Bank,
NJ. Mrs. Persson is a member of the United States Small Business
Administration National Advisory Board, the New Jersey Small Business
Advisory Council, the Board of Advisors of Brookdale Community College and
the Board of Advisors of Georgian Court College.
(f) Mr. Van Ness is an attorney with the firm of Huberd, Van Ness, Cayri and
Goodell of Princeton, NJ since 1998. Prior to that he was affiliated with
the law firm of Pico, Mack, Kennedy, Jaffe, Perrella and Yoskin of
Trenton, NJ since 1990. He is also a director of The Prudential Insurance
Company of America.
(g) Mr. Wiley has been a partner in the law firm of Wiley, Malehorn and Sirota
of Morristown, NJ since 1973. He is also Chairman of First Morris Bank of
Morristown, NJ.
The directors of the GPU companies are elected at their respective annual
meetings of stockholders to serve until the next meeting of stockholders and
until their respective successors are duly elected and qualified. There are no
family relationships among the directors of the GPU companies.
Identification of Executive Officers
The current executive officers of GPU, Inc., JCP&L, Met-Ed and Penelec,
their ages, positions held and business experience during the past five years
are as follows:
Year First
Name Age Position Elected
- ---- --- -------- ----------
GPU, Inc.:
- ---------
F. D. Hafer (a) 58 Chairman, President and Chief 1996
Executive Officer
I. H. Jolles (b) 60 Senior Vice President and General 1990
Counsel
B. L. Levy (c) 43 Senior Vice President and Chief 1991
Financial Officer and President,
GPU Capital, Inc. and GPU Electric
P. E. Maricondo (d) 52 Vice President, Comptroller and 1998
Chief Accounting Officer
T. G. Howson (e) 50 Vice President and Treasurer 1994
M. A. Nalewako (f) 64 Secretary 1988
T. G. Broughton (g) 53 President, GPUN 1996
R. L. Wise (h) 55 President, Genco, GPUI and GPU Power 1994
D. Baldassari (i) 49 President, JCP&L, Met-Ed, Penelec 1992
C. B. Snyder (j) 53 Executive Vice President - 1997
Corporate Affairs, GPUS
53
Year First Elected
Name Age Position JCP&L Met-Ed Penelec
- ---- --- -------- ----- --------------
JCP&L/Met-Ed/Penelec:
- ---------------------
F. D. Hafer (a) 58 Chairman, and Chief 1996 1978 1994
Executive Officer
D. Baldassari (i) 49 President and Chief 1992 1996 1996
Operating Officer
I. H. Jolles (b) 60 Vice President and 1996 1996 1996
General Counsel
B. L. Levy (c) 43 Vice President and 1998 1998 1998
Chief Financial Officer
T. G. Howson (e) 50 Vice President 1994 1994 1994
and Treasurer
C. Brooks (k) 49 Vice President - Human and 1997 1997 1997
Technical Resources
D. J. Howe (l) 48 Vice President - 1996 1996 1996
Customer Services
C. A. Mascari (m) 51 Vice President - Power 1997 1997 1997
Services
D. W. Myers (n) 54 Vice President - 1994 1996 1996
Finance and Rates
and Comptroller
G. R. Repko (o) 53 Vice President - Business 1996 1994 1986
Development
R. J. Toole (p) 56 Vice President - 1990 1989 1996
Generation
R. S. Zechman (q) 55 Vice President - 1996 1990 1994
Engineering and Operations
S. L. Guibord (r) 50 Secretary 1996 1996 1996
(a) See Note (a) on page 52.
(b) Mr. Jolles is also Executive Vice President, General Counsel and a director
of GPUS, General Counsel of GPUN and Genco, and a director of GPUS, GPUI,
GPU Power, GPU Capital, Inc., GPU Electric, Midlands Electricity plc and
GPU PowerNet PTY Ltd. He is also a director of Utilities Mutual Insurance
Company.
(c) Mr. Levy was elected Senior Vice President and Chief Financial Officer of
GPU, Inc. as well as Executive Vice President of GPUS and Vice President of
JCP&L, Met-Ed and Penelec in 1998. Mr. Levy is also a director of GPUI, GPU
Power, GPU Capital, Inc., GPU Electric, Avon Energy Partners Holdings,
Midlands Electricity plc, and GPU PowerNet PTY Ltd. Mr. Levy is also
President of GPU Capital, Inc. and GPU Electric. He served as President,
Chief Executive Officer and director of GPUI since 1991.
(d) Mr. Maricondo was elected Vice President, Comptroller and Chief Accounting
Officer of GPU, Inc. and GPUS in 1998. Prior to that he served as Vice
President - Internal Auditing of GPUS since 1997 and as Vice President and
Comptroller of GPUN from 1993.
54
(e) Mr. Howson is also Vice President and Treasurer of Genco, GPUN, GPU AR,
Saxton Nuclear Experimental Corporation, and GPU Telcom.
(f) Mrs. Nalewako is also Secretary of GPUS and Genco and Assistant Secretary
of GPUN, JCP&L, Met-Ed and Penelec.
(g) Mr. Broughton is also a director of GPUN. He previously served as Executive
Vice President of GPUN since 1995. Prior to that, he served as Vice
President - TMI of GPUN since 1991.
(h) Mr. Wise is also a director of Genco, GPUI, GPU Power and GPU Electric. He
previously served as President, Fossil Generation - GPUS since 1994. Prior
to that, Mr. Wise served as President and a director of Penelec since 1986.
He is also a director of US Bancorp Trust Company, US Bancorp, Inc., U.S.
National Bank of Johnstown, PA., and Utilities Mutual Insurance Company.
(i) See Note (b) on page 52.
(j) See Note (d) on page 53.
(k) Mr. Brooks previously served as Vice President - Collect and Disburse Money
of Genco since 1996. Prior to that, he was Vice President Materials and
Services of GPUS since 1990.
(l) Mr. Howe previously served as Director of Marketing and Pricing of JCP&L
since 1994. Prior to that, he was Director of Competitive Strategies and
Initiatives of JCP&L since 1993.
(m) Mr. Mascari previously served as Vice President - System Planning of GPUS
since 1994. Prior to that, he was Vice President - Nuclear Assurance of
GPUN since 1992.
(n) See Note (c) on page 52.
(o) Mr. Repko has also served as Vice President - Customer Services of Met-Ed
and Penelec since 1994. Prior to that, he served as Vice President -
Division Operations of Penelec from 1986 to 1993.
(p) Mr. Toole is also a Vice President and a director of Genco.
(q) Mr. Zechman has also served as Vice President - Administrative Services of
Met-Ed since 1992.
(r) Mr. Guibord has also served as Corporate Compliance Auditing Director of
GPUS since 1994. Prior to that, he was a General Attorney at JCP&L. Mr.
Guibord also serves as Secretary of GPUN, GPU AR, Saxton Nuclear
Experimental Corporation, and GPU Telcom.
The executive officers of the GPU companies are elected each year by their
respective Boards of Directors at the first meeting of the Board held following
the annual meeting of stockholders. Executive officers hold office until the
next meeting of directors following the annual meeting of stockholders and until
their respective successors are duly elected and qualified. There are no family
relationships among the executive officers.
55
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item with respect to GPU, Inc. is
incorporated by reference to the EXECUTIVE COMPENSATION section of GPU, Inc.'s
Proxy Statement for the 1999 Annual Meeting of Stockholders. The following table
sets forth remuneration paid, as required by this Item, to the Chief Executive
Officer and the five other most highly compensated executive officers of JCP&L,
Met-Ed and Penelec for the year ended December 31, 1998.
The managements of JCP&L, Met-Ed and Penelec were combined in a 1996
reorganization. Accordingly, the amounts shown below represent the aggregate
remuneration paid to such executive officers by JCP&L, Met-Ed and Penelec during
1996, 1997 and 1998.
Remuneration of Executive Officers
SUMMARY COMPENSATION TABLE
--------------------------
Long-Term Compensation
-------------------------------
Annual Compensation Awards
-------------------- ---------
Payouts
Other Securities -------
Name and Annual Underlying LTIP All Other
Principal Compens- Options Payouts Compens-
Position Year Salary($) Bonus($) ation($)(1) Granted(#) ($)(2) ation($)
---- -------- ------- -------- --------- ------- -------
F. D. Hafer
Chairman of the
Board and Chief
Executive Officer (3) (3) (3) (3) (3) (3) (3)
D. Baldassari
President (4) (4) (4) (4) (4) (4) (4)
R. S. Zechman 1998 170,000 60,000 538 4,850 18,669 17,623(5)
Vice President - 1997 162,538 32,000 637 - 20,085 15,843
Engineering 1996 152,596 44,000 596 - 19,470 14,051
& Operations
D. J. Howe 1998 170,000 55,000 - 4,850 - 14,033(6)
Vice President - 1997 162,308 32,000 - - - 11,524
Customer Services 1996 134,539 42,240 - - - 6,582
C. A. Mascari 1998 170,000 50,000 - 4,850 21,002 20,762(7)
Vice President - 1997 156,228 32,000 - - 18,727 16,997
Power Services 1996 133,800 44,000 - - - 12,649
C. Brooks 1998 170,000 50,000 592 4,850 20,536 15,593(8)
Vice President - 1997 148,277 32,000 664 - 20,922 13,783
Human & Technical 1996 135,700 42,500 565 - 18,445 12,173
Resources
<FN>
(1) Consists of earnings on "Long-Term Incentive Plan" ("LTIP") compensation
paid in the year the award vests.
(2) Consists of Performance Cash Incentive Awards paid on the 1991, 1992 and
1993 restricted stock awards which have vested under the 1990 Stock Plan.
These amounts are designed to compensate recipients of restricted
stock/unit awards for the amount of federal and state income taxes that are
payable upon vesting of the restricted stock/unit awards. The restricted
units issued in 1995, 1996, 1997 and 1998 under the 1990 Stock Plan are
performance based. The 1998 awards are shown in "Long-Term
</FN>
56
Incentive Plans - Awards in Last Fiscal Year" table (the "LTIP table").
Dividend equivalents are earned on the aggregate restricted units awarded
under the 1990 Stock Plan and reinvested in additional units.
The aggregate number and value (based on the stock price per share at
December 31, 1998) of unvested and deferred vested stock-equivalent
restricted units (including reinvested dividend equivalents) includes the
amounts shown on the LTIP table, and at the end of 1998 were:
Aggregate Units Aggregate Value
F. D. Hafer see note (3) see note (3)
D. Baldassari see note (4) see note (4)
R. S. Zechman 5,281 $233,363
D. J. Howe 3,475 153,552
C. A. Mascari 6,419 283,636
C. Brooks 4,979 219,991
(3) Mr. Hafer was compensated by GPUS for his overall service on behalf of GPU
and accordingly was not compensated directly by the other subsidiary
companies for his services. Information with respect to Mr. Hafer's
compensation is included in the EXECUTIVE COMPENSATION section of GPU,
Inc.'s Proxy Statement for the 1999 Annual Meeting of Stockholders, which
is incorporated herein by reference.
(4) Information with respect to Mr. Baldassari's compensation is included in
the EXECUTIVE COMPENSATION section of GPU, Inc.'s Proxy Statement for the
1999 Annual Meeting of Stockholders, which is incorporated herein by
reference.
(5) Consists of GPU's matching contributions under the Savings Plan ($6,400),
matching contributions under the non-qualified deferred compensation plan
($1,680), above-market interest accrued on the retirement portion of
deferred compensation ($72), and earnings on LTIP compensation not paid in
the current year ($9,471).
(6) Consists of GPU's matching contributions under the Savings Plan ($6,400),
matching contributions under the non-qualified deferred compensation plan
($1,680), above-market interest accrued on the retirement portion of
deferred compensation ($84), and earnings on LTIP compensation not paid in
the current year ($5,869).
(7) Consists of GPU's matching contributions under the Savings Plan ($6,400),
matching contributions under the non-qualified deferred compensation plan
($1,680), above-market interest accrued on the retirement portion of
deferred compensation ($1,060), and earnings on LTIP compensation not paid
in the current year ($11,622).
(8) Consists of GPU's matching contributions under the Savings Plan ($6,400),
above-market interest accrued on the retirement portion of deferred
compensation ($325), and earnings on LTIP compensation not paid in the
current year ($8,868).
Option Grants In Last Fiscal Year
The following table summarizes option grants made during 1998 to the Named
Executive Officers. All of these options were granted with an exercise price
equal to the fair market value of GPU stock on the date of grant.
57
Individual Grants
Number of
Securities % of Total
Underlying Options Grant Date
Options Granted to Exercise or Present
Grant Granted(1) Employees in Base Price Expiration Value(2)
Name Date (#) Fiscal Year ($/Sh) Date ($)
----------- ----- --------- ----------- ----------- ---------- --------
F. D. Hafer (3) (3) (3) (3) (3) (3)
D. Baldassari (4) (4) (4) (4) (4) (4)
R. S. Zechman 06/04/98 4,850 1.4% $36.625 06/04/08 $21,049
D. J. Howe 06/04/98 4,850 1.4% 36.625 06/04/08 21,049
C. A. Mascari 06/04/98 4,850 1.4% 36.625 06/04/08 21,049
C. Brooks 06/04/98 4,850 1.4% 36.625 06/04/08 21,049
Aggregated Option Exercises In Last Fiscal Year And Fiscal Year-End Option Value
The following table summarizes the number and value of all unexercised
options held by the Named Executive Officers. In 1998, no options were exercised
by any Named Executive Officer.
Number of Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options
Fiscal Year-End (#) at Fiscal Year-End ($)
-------------------------- --------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
F. D. Hafer (3) (3) (3) (3)
D. Baldassari (4) (4) (4) (4)
R. S. Zechman - 4,850 - 36,678
D. J. Howe - 4,850 - 36,678
C. A. Mascari - 4,850 - 36,678
C. Brooks - 4,850 - 36,678
(1) Options become exercisable in three equal annual installments beginning on
the first anniversary of the date of the grant. These grants will fully
vest upon termination of employment resulting from death or disability.
Options may be exercised after retirement in accordance with the terms of
the 1998 Stock Option Agreement. In the event of a change in control during
the option term, all options will be canceled and the executive officer
will receive a cash payment in an amount equal to the excess of the average
current market price over the exercise price.
(2) Options are valued using a Black-Scholes option pricing model, a
mathematical formula widely used to value options. The model as applied
used the applicable grant dates and the exercise prices shown on the table,
and the fair market value of Common Stock on the respective grant dates,
which was in each case the same as the exercise price. For the June 4
grant, the model assumed (i) a risk-free rate of return of 5.78%, which
approximates the rate on 10-year U.S. Treasury zero coupon bonds on the
grant date; (ii) a stock price volatility of 17.26%, based on the average
historical volatility for the 36-month period ending on the grant date;
(iii) an average dividend yield of 5.68%, based on the average yield for a
36-month period; and (iv) the exercise of all options on the final day of
their 10-year terms. No discount from the theoretical value
58
was taken to reflect the restrictions on the transfer of the options and
the likelihood of the options being exercised in advance of the final day
of their terms.
(3) Information with respect to Mr. Hafer's options is included in the
EXECUTIVE COMPENSATION section of GPU, Inc.'s Proxy Statement for the 1999
Annual Meeting of Stockholders, which is incorporated herein by reference.
(4) Information with respect to Mr. Baldassari's options is included in the
EXECUTIVE COMPENSATION section of GPU, Inc.'s Proxy Statement for the 1999
Annual Meeting of Stockholders, which is incorporated herein by reference.
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
This table shows the LTIP awards made to the Named Executive Officers for
the performance period January 1, 1998 through December 31, 2002.
Performance Estimated future payouts
Number of or other under non-stock price-
shares, period until based plans(1)
-------------------------------
units or maturation Threshold Target Maximum
Name other rights payout (#) (#) (#)
--------- ----------- ------------ --------- ------- --------
F. D. Hafer (2) (2) (2) (2) (2)
D. Baldassari (2) (2) (2) (2) (2)
R. S. Zechman 1,060 5 year vesting 530 1,060 2,120
D. J. Howe 1,060 5 year vesting 530 1,060 2,120
C. A. Mascari 1,060 5 year vesting 530 1,060 2,120
C. Brooks 1,060 5 year vesting 530 1,060 2,120
(1) The restricted units awarded in 1998 under the 1990 Stock Plan provide for
a performance adjustment to the aggregate number of units vesting for the
recipient, including the accumulated reinvested dividend equivalents, based
on the annualized GPU Total Shareholder Return (TSR) percentile ranking
against all companies in the Standard & Poor's Electric Utility Index for
the period between the award and vesting dates. With a 55th percentile
ranking, the performance adjustment would be 100% as reflected in the
"Target" column. In the event that the percentile ranking is below the 55th
percentile, the performance adjustment would be reduced in steps reaching
0% below the 40th percentile. The minimum payout or "Threshold" begins at
the 40th percentile, which results in a payout of 50% of target. A ranking
below the 40th percentile would result in no award. Should the TSR
percentile ranking exceed the 59th percentile, then the performance
adjustment would be increased in steps reaching 200% at the 90th percentile
as reflected in the "Maximum" column. Under the 1990 Stock Plan, regular
quarterly dividends are reinvested in additional units that are subject to
the vesting restrictions of the award. Actual payouts under the Plan would
be based on the aggregate number of units awarded and the units accumulated
through dividend reinvestment at the time the restrictions lapse.
(2) Information with respect to Mr. Hafer's and Mr. Baldassari's long-term
incentive plans is included in the EXECUTIVE COMPENSATION section of GPU,
Inc.'s Proxy Statement for the 1999 Annual Meeting of Stockholders, which
is incorporated herein by reference.
59
Proposed Remuneration of Executive Officers
None of the Named Executive Officers in the Summary Compensation Table has
an employment contract. The compensation of executive officers is determined
from time to time by the Personnel & Compensation Committee of the GPU, Inc.
Board of Directors.
Retirement Plans
The GPU Companies' pension plans provide for pension benefits, payable for
life after retirement, based upon years of creditable service with the GPU
Companies and the employee's career average compensation as defined below.
Federal law limits the amount of an employee's pension benefits that may be paid
from a qualified trust established pursuant to a qualified pension plan (such as
the GPU Companies' plans). The GPU Companies also have adopted non-qualified
plans providing that the portion of a participant's pension benefits which, by
reason of such limitations, cannot be paid from such a qualified trust shall be
paid directly on an unfunded basis by the participant's employer.
The following table illustrates the amount of aggregate annual pension from
funded and unfunded sources resulting from employer contributions to the
qualified trust and direct payments payable upon retirement in 1999 (computed on
a single life annuity basis) to persons in specified compensation and years of
service classifications:
ESTIMATED ANNUAL RETIREMENT BENEFITS (2) (3) (4)
BASED UPON CAREER AVERAGE COMPENSATION
(1999 Retirement)
Career
Average
Compen- Years of Service
----------------------------------------------------------
sation(1) 15 20 25 30 35 40
--------- -------- -------- -------- -------- -------- ----------
$ 50,000 $ 13,879$ 18,506 $ 23,132$ 27,759$ 32,385 $ 36,761
100,000 28,879 38,506 48,132 57,759 67,385 76,361
150,000 43,879 58,506 73,132 87,759 102,385 115,961
200,000 58,879 78,506 98,132 117,759 137,385 155,561
250,000 73,879 98,506 123,132 147,759 172,385 195,161
300,000 88,879 118,506 148,132 177,759 207,385 234,761
350,000 103,879 138,506 173,132 207,759 242,385 274,361
400,000 118,879 158,506 198,132 237,759 277,385 313,961
450,000 133,879 178,506 223,132 267,759 312,385 353,561
500,000 148,879 198,506 248,132 297,759 347,385 393,161
550,000 163,879 218,506 273,132 327,759 382,385 432,761
600,000 178,879 238,506 298,132 357,759 417,385 472,361
650,000 193,879 258,506 323,132 387,759 452,385 511,961
700,000 208,879 278,506 348,132 417,759 487,385 551,561
750,000 223,879 298,506 373,132 447,759 522,385 591,161
800,000 238,879 318,506 398,132 477,759 557,385 630,761
(1) Career Average Compensation is the average annual compensation
received from January 1, 1984 to retirement and includes Salary and
Bonus. The career average compensation amounts for the following Named
Executive Officers differ by more than 10% from the three year average
annual
60
compensation set forth in the Summary Compensation Table and are as
follows: Messrs. Hafer - $355,761; Baldassari - $223,671; Zechman -
$129,791; Howe - $108,014; Mascari - $129,386; and Brooks - $123,784.
(2) Years of Creditable Service at December 31, 1998: Messrs. Hafer - 36 years;
Baldassari - 29 years; Zechman - 29 years; Howe - 22 years; Mascari - 25
years; and Brooks - 25 years.
(3) Based on an assumed retirement at age 65 in 1999. To reduce the above
amounts to reflect a retirement benefit assuming a continual annuity to a
surviving spouse equal to 50% of the annuity payable at retirement,
multiply the above benefits by 90%. The estimated annual benefits are not
subject to any reduction for Social Security benefits or other offset
amounts.
(4) Annual retirement benefits under the basic pension per the above table
cannot exceed 55%, as defined in the pension plan, of the average
compensation during the highest paid 36 calendar months. As of December 31,
1998, none of the Named Executive Officers exceed the 55% limit.
Remuneration of JCP&L Directors
Nonemployee directors receive an annual retainer of $15,000, a fee of
$1,000 for each Board meeting attended, and a fee of $1,000 for each Committee
meeting attended.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item for GPU, Inc. is incorporated by
reference to the SECURITY OWNERSHIP section of GPU, Inc.'s Proxy Statement for
the 1999 Annual Meeting of Stockholders.
All of the outstanding shares of JCP&L (15,371,270), Met-Ed (859,500) and
Penelec (5,290,596) common stock are owned beneficially and of record by their
parent, GPU, Inc., 300 Madison Avenue, Morristown, NJ 07962.
The following table sets forth, as of February 1, 1999, the beneficial
ownership of equity securities (and stock-equivalent units) of each of the
directors and each of the executive officers named in the Summary Compensation
Table, and of all directors and executive officers of each of the respective GPU
Energy companies as a group. The shares of Common Stock owned by all directors
and executive officers as a group constitute less than 1% of the total shares
outstanding.
61
Amount and Nature of Beneficial
Ownership
Shares(1) Stock-Equivalent
------------ ----------------
Name Title of Security Direct Indirect Units(2)
---- ----------------- ------ -------- --------
JCP&L/Met-Ed/Penelec:
F. D. Hafer GPU Common Stock 9,795 146 25,677
D. Baldassari GPU Common Stock 4,766 - 14,999
R. S. Zechman GPU Common Stock 2,147 - 5,281
D. J. Howe GPU Common Stock 481 - 3,475
C. A. Mascari GPU Common Stock - 5 6,419
C. Brooks GPU Common Stock 805 138 4,979
C. B. Snyder GPU Common Stock 344 - 5,403
JCP&L Only:
G. E. Persson GPU Common Stock None
S. C. Van Ness GPU Common Stock None
S. B. Wiley GPU Common Stock None
All Directors and
Executive Officers
as a Group GPU Common Stock 40,518 289 118,064
(1) The number of shares owned and the nature of such ownership, not being
within the knowledge of GPU, have been furnished by each individual.
(2) Restricted units, which do not have voting rights, represent rights
(subject to vesting) to receive shares of Common Stock under the 1990 Stock
Plan for Employees of GPU, Inc. and Subsidiaries (the "1990 Stock Plan").
These amounts also include restricted units which have vested under the
1990 Stock Plan, but which were deferred pursuant to that Plan by Mr.
Mascari - 1,266 units. See Summary Compensation Table above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) See pages F-1 and F-2 for references to Financial Statements and
Financial Statement Schedules required by this item.
1. Exhibits:
3-A Articles of Incorporation of GPU, as amended through March 27,
1990 - Incorporated by reference to Exhibit 3-A, 1989 Annual
Report on Form 10-K, SEC File No. 1-6047.
3-A-1 Articles of Amendment to Articles of Incorporation of GPU
dated May 5, 1995 - Incorporated by reference to Exhibit A-4,
Certificate Pursuant to Rule 24, SEC File No. 70-8569.
3-A-2 Articles of Incorporation of GPU, Inc. as amended August 1,
1996 - Incorporated by reference to Exhibit 3-A-2, 1996 Annual
Report on Form 10-K, SEC File No. 1-6047.
62
3-B By-Laws of GPU, Inc. as amended December 4, 1997 -Incorporated
by reference to Exhibit 3-B, 1997 Annual Report on Form 10-K,
SEC File No. 1-6047.
3-C Restated Certificate of Incorporation of JCP&L, as amended -
Incorporated by reference to Exhibit 3-A, 1990 Annual Report
on Form 10-K, SEC File No. 1-3141.
3-C-1 Certificate of Amendment to Restated Certificate of
Incorporation of JCP&L, dated June 19, 1992 - Incorporated by
reference to Exhibit A-2(a), Certificate Pursuant to Rule 24,
SEC File No. 70-7949.
3-C-2 Certificate of Amendment to Restated Certificate of
Incorporation of JCP&L, dated June 19, 1992 - Incorporated by
reference to Exhibit A-2(a)(i), Certificate Pursuant to Rule
24, SEC File No. 70-7949.
3-D By-Laws of JCP&L, as amended - Incorporated by reference to
Exhibit 3-B, 1993 Annual Report on Form 10-K, SEC File No.
1-3141.
3-E Restated Articles of Incorporation of Met-Ed - Incorporated by
reference to Exhibit B-18, 1991 Annual Report of GPU on Form
U5S, SEC File No. 30-126.
3-F By-Laws of Met-Ed dated July 27, 1995, as amended Incorporated
by reference to Exhibit 3-F, 1995 Annual Report on Form 10-K,
SEC File No. 1-446.
3-G Restated Articles of Incorporation of Penelec as amended
through March 10, 1992 - Incorporated by reference to Exhibit
3A, 1991 Annual Report on Form 10-K, SEC File No.
1-3522.
3-H By-Laws of Penelec dated May 22 1997, as amended Incorporated
by reference to Exhibit B-45, 1997 Annual Report of GPU on
Form U5S, SEC File No. 30-126.
4-A Indenture of JCP&L, dated March 1, 1946, between JCP&L and
United States Trust Company of New York, Successor Trustee,
as amended and supplemented by eight supplemental
indentures dated December 1, 1948 through June 1, 1960 -
Incorporated by reference to JCP&L's Instruments of
Indebtedness Nos. 1 to 7, inclusive, and 9 and 10 filed as
part of Amendment No. 1 to 1959 Annual Report of GPU on
Form U5S, SEC File Nos. 30-126 and 1-3292.
4-A-1 Ninth Supplemental Indenture of JCP&L, dated November 1, 1962
- Incorporated by reference to Exhibit 2-C, Registration No.
2-20732.
4-A-2 Tenth Supplemental Indenture of JCP&L, dated October 1, 1963 -
Incorporated by reference to Exhibit 2-C, Registration No.
2-21645.
63
4-A-3 Eleventh Supplemental Indenture of JCP&L, dated October 1,
1964 - Incorporated by reference to Exhibit 5-A-3,
Registration No. 2-59785.
4-A-4 Twelfth Supplemental Indenture of JCP&L, dated November 1,
1965 - Incorporated by reference to Exhibit 5-A-4,
Registration No. 2-59785.
4-A-5 Thirteenth Supplemental Indenture of JCP&L, dated August 1,
1966 - Incorporated by reference to Exhibit 4-C, Registration
No. 2-25124.
4-A-6 Fourteenth Supplemental Indenture of JCP&L, dated September 1,
1967 - Incorporated by reference to Exhibit 5-A-6,
Registration No. 2-59785.
4-A-7 Fifteenth Supplemental Indenture of JCP&L, dated October 1,
1968 - Incorporated by reference to Exhibit 5-A-7,
Registration No. 2-59785.
4-A-8 Sixteenth Supplemental Indenture of JCP&L, dated October 1,
1969 - Incorporated by reference to Exhibit 5-A-8,
Registration No. 2-59785.
4-A-9 Seventeenth Supplemental Indenture of JCP&L, dated June 1,
1970 - Incorporated by reference to Exhibit 5-A-9,
Registration No. 2-59785.
4-A-10 Eighteenth Supplemental Indenture of JCP&L, dated December 1,
1970 - Incorporated by reference to Exhibit 5-A-10,
Registration No. 2-59785.
4-A-11 Nineteenth Supplemental Indenture of JCP&L, dated February 1,
1971 - Incorporated by reference to Exhibit 5-A-11,
Registration No. 2-59785.
4-A-12 Twentieth Supplemental Indenture of JCP&L, dated November 1,
1971 - Incorporated by reference to Exhibit 5-A-12,
Registration No. 2-59875.
4-A-13 Twenty-first Supplemental Indenture of JCP&L, dated August 1,
1972 - Incorporated by reference to Exhibit 5-A-13,
Registration No. 2-59785.
4-A-14 Twenty-second Supplemental Indenture of JCP&L, dated August 1,
1973 - Incorporated by reference to Exhibit 5-A-14,
Registration No. 2-59785.
4-A-15 Twenty-third Supplemental Indenture of JCP&L, dated October 1,
1973 - Incorporated by reference to Exhibit 5-A-15,
Registration No. 2-59785.
4-A-16 Twenty-fourth Supplemental Indenture of JCP&L, dated December
1, 1973 - Incorporated by reference to Exhibit
5-A-16, Registration No. 2-59785.
64
4-A-17 Twenty-fifth Supplemental Indenture of JCP&L, dated November
1, 1974 - Incorporated by reference to Exhibit
5-A-17, Registration No. 2-59785.
4-A-18 Twenty-sixth Supplemental Indenture of JCP&L, dated March 1,
1975 - Incorporated by reference to Exhibit 5-A-18,
Registration No. 2-59785.
4-A-19 Twenty-seventh Supplemental Indenture of JCP&L, dated July 1,
1975 - Incorporated by reference to Exhibit 5-A-19,
Registration No. 2-59785.
4-A-20 Twenty-eighth Supplemental Indenture of JCP&L, dated October
1, 1975 - Incorporated by reference to Exhibit 5-A-20,
Registration No. 2-59785.
4-A-21 Twenty-ninth Supplemental Indenture of JCP&L, dated February
1, 1976 - Incorporated by reference to Exhibit
5-A-21, Registration No. 2-59785.
4-A-22 Supplemental Indenture No. 29A of JCP&L, dated May 31, 1976
- Incorporated by reference to Exhibit 5-A-22, Registration
No. 2-59785.
4-A-23 Thirtieth Supplemental Indenture of JCP&L, dated June 1, 1976
- Incorporated by reference to Exhibit 5-A-23, Registration
No. 2-59785.
4-A-24 Thirty-first Supplemental Indenture of JCP&L, dated May 1,
1977 - Incorporated by reference to Exhibit 5-A-24,
Registration No. 2-59785.
4-A-25 Thirty-second Supplemental Indenture of JCP&L, dated January
20, 1978 - Incorporated by reference to Exhibit
5-A-25, Registration No. 2-60438.
4-A-26 Thirty-third Supplemental Indenture of JCP&L, dated January 1,
1979 - Incorporated by reference to Exhibit A-20(b),
Certificate Pursuant to Rule 24, SEC File No. 70-6242.
4-A-27 Thirty-fourth Supplemental Indenture of JCP&L, dated June 1,
1979 - Incorporated by reference to Exhibit A-28, Certificate
Pursuant to Rule 24, SEC File No. 70-6290.
4-A-28 Thirty-sixth Supplemental Indenture of JCP&L, dated October 1,
1979 - Incorporated by reference to Exhibit A-30, Certificate
Pursuant to Rule 24, SEC File No. 70-6354.
4-A-29 Thirty-seventh Supplemental Indenture of JCP&L, dated
September 1, 1984 - Incorporated by reference to Exhibit
A-1(cc), Certificate Pursuant to Rule 24, SEC File No.
70-7001.
4-A-30 Thirty-eighth Supplemental Indenture of JCP&L, dated July 1,
1985 - Incorporated by reference to Exhibit A-1(dd),
Certificate Pursuant to Rule 24, SEC File No. 70-7109.
65
4-A-31 Thirty-ninth Supplemental Indenture of JCP&L, dated April 1,
1988 - Incorporated by reference to Exhibit A-1(a),
Certificate Pursuant to Rule 24, SEC File No. 70-7263.
4-A-32 Fortieth Supplemental Indenture of JCP&L, dated June 14, 1988
- Incorporated by reference to Exhibit A-1(ff), Certificate
Pursuant to Rule 24, SEC File No. 70-7603.
4-A-33 Forty-first Supplemental Indenture of JCP&L, dated April 1,
1989 - Incorporated by reference to Exhibit A-1(gg),
Certificate Pursuant to Rule 24, SEC File No. 70-7603.
4-A-34 Forty-second Supplemental Indenture of JCP&L, dated July 1,
1989 - Incorporated by reference to Exhibit A-1(hh),
Certificate Pursuant to Rule 24, SEC File No. 70-7603.
4-A-35 Forty-third Supplemental Indenture of JCP&L, dated March 1,
1991 - Incorporated by reference to Exhibit 4-A-35,
Registration No. 33-45314.
4-A-36 Forty-fourth Supplemental Indenture of JCP&L, dated March 1,
1992 - Incorporated by reference to Exhibit 4-A-36,
Registration No. 33-49405.
4-A-37 Forty-fifth Supplemental Indenture of JCP&L, dated October 1,
1992 - Incorporated by reference to Exhibit 4-A-37,
Registration No. 33-49405.
4-A-38 Forty-sixth Supplemental Indenture of JCP&L, dated April 1,
1993 - Incorporated by reference to Exhibit C-15, 1992 Annual
Report of GPU on Form U5S, SEC File No. 30-126.
4-A-39 Forty-seventh Supplemental Indenture of JCP&L, dated April 10,
1993 - Incorporated by reference to Exhibit C-16, 1992 Annual
Report of GPU on Form U5S, SEC File No. 30-126.
4-A-40 Forty-eighth Supplemental Indenture of JCP&L, dated April 15,
1993 - Incorporated by reference to Exhibit C-17, 1992 Annual
Report of GPU on Form U5S, SEC File No. 30-126.
4-A-41 Forty-ninth Supplemental Indenture of JCP&L, dated October 1,
1993 - Incorporated by reference to Exhibit C-18, 1993 Annual
Report of GPU on Form U5S, SEC File No. 30-126.
4-A-42 Fiftieth Supplemental Indenture of JCP&L, dated August 1, 1994
- Incorporated by reference to Exhibit C-19, 1994 Annual
Report of GPU on Form U5S, SEC File No. 30-126.
4-A-43 Fifty-first Supplemental Indenture of JCP&L, dated August 15,
1996 - Incorporated by reference to Exhibit 4-A-43, 1996
Annual Report on Form 10-K, SEC File No. 1-6047.
4-B Indenture of Met-Ed, dated November 1, 1944 with United
States Trust Company of New York, Successor Trustee, as
amended and supplemented by fourteen supplemental
indentures dated February 1, 1947 through May 1, 1960 -
Incorporated by reference to Met-Ed's Instruments of
Indebtedness Nos. 1 to 14, inclusive and 16, filed as part
of Amendment No. 1 to 1959 Annual Report of GPU on Form
U5S, SEC File Nos. 30-126 and 1-3292.
66
4-B-1 Supplemental Indenture of Met-Ed, dated December 1, 1962
Incorporated by reference to Exhibit 2-E(1), Registration No.
2-59678.
4-B-2 Supplemental Indenture of Met-Ed, dated March 20, 1964
Incorporated by reference to Exhibit 2-E(2), Registration No.
2-59678.
4-B-3 Supplemental Indenture of Met-Ed, dated July 1, 1965
Incorporated by reference to Exhibit 2-E(3), Registration No.
2-59678.
4-B-4 Supplemental Indenture of Met-Ed, dated June 1, 1966
Incorporated by reference to Exhibit 2-B-4, Registration No.
2-24883.
4-B-5 Supplemental Indenture of Met-Ed, dated March 22, 1968
Incorporated by reference to Exhibit 4-C-5, Registration No.
2-29644.
4-B-6 Supplemental Indenture of Met-Ed, dated September 1, 1968
Incorporated by reference to Exhibit 2-E(6), Registration No.
2-59678.
4-B-7 Supplemental Indenture of Met-Ed, dated August 1, 1969
Incorporated by reference to Exhibit 2-E(7), Registration No.
2-59678.
4-B-8 Supplemental Indenture of Met-Ed, dated November 1, 1971
Incorporated by reference to Exhibit 2-E(8), Registration No.
2-59678.
4-B-9 Supplemental Indenture of Met-Ed, dated May 1, 1972
Incorporated by reference to Exhibit 2-E(9), Registration No.
2-59678.
4-B-10 Supplemental Indenture of Met-Ed, dated December 1, 1973
Incorporated by reference to Exhibit 2-E(10), Registration No.
2-59678.
4-B-11 Supplemental Indenture of Met-Ed, dated October 30, 1974
Incorporated by reference to Exhibit 2-E(11), Registration No.
2-59678.
4-B-12 Supplemental Indenture of Met-Ed, dated October 31, 1974
Incorporated by reference to Exhibit 2-E(12), Registration No.
2-59678.
4-B-13 Supplemental Indenture of Met-Ed, dated March 20, 1975
Incorporated by reference to Exhibit 2-E(13), Registration No.
2-59678.
4-B-14 Supplemental Indenture of Met-Ed, dated September 25, 1975 -
Incorporated by reference to Exhibit 2-E(15), Registration No.
2-59678.
4-B-15 Supplemental Indenture of Met-Ed, dated January 12, 1976
Incorporated by reference to Exhibit 2-E(16), Registration No.
2-59678.
67
4-B-16 Supplemental Indenture of Met-Ed, dated March 1, 1976
Incorporated by reference to Exhibit 2-E(17), Registration No.
2-59678.
4-B-17 Supplemental Indenture of Met-Ed, dated September 28, 1977 -
Incorporated by reference to Exhibit 2-E(18), Registration No.
2-62212.
4-B-18 Supplemental Indenture of Met-Ed, dated January 1, 1978
Incorporated by reference to Exhibit 2-E(19), Registration No.
2-62212.
4-B-19 Supplemental Indenture of Met-Ed, dated September 1, 1978
Incorporated by reference to Exhibit 4-A(19), Registration No.
33-48937.
4-B-20 Supplemental Indenture of Met-Ed, dated June 1, 1979
Incorporated by reference to Exhibit 4-A(20), Registration No.
33-48937.
4-B-21 Supplemental Indenture of Met-Ed, dated January 1, 1980
Incorporated by reference to Exhibit 4-A(21), Registration No.
33-48937.
4-B-22 Supplemental Indenture of Met-Ed, dated September 1, 1981
Incorporated by reference to Exhibit 4-A(22), Registration No.
33-48937.
4-B-23 Supplemental Indenture of Met-Ed, dated September 10, 1981 -
Incorporated by reference to Exhibit 4-A(23), Registration No.
33-48937.
4-B-24 Supplemental Indenture of Met-Ed, dated December 1, 1982
Incorporated by reference to Exhibit 4-A(24), Registration No.
33-48937.
4-B-25 Supplemental Indenture of Met-Ed, dated September 1, 1983
Incorporated by reference to Exhibit 4-A(25), Registration No.
33-48937.
4-B-26 Supplemental Indenture of Met-Ed, dated September 1, 1984
Incorporated by reference to Exhibit 4-A(26), Registration No.
33-48937.
4-B-27 Supplemental Indenture of Met-Ed, dated March 1, 1985
Incorporated by reference to Exhibit 4-A(27), Registration No.
33-48937.
4-B-28 Supplemental Indenture of Met-Ed, dated September 1, 1985
Incorporated by reference to Exhibit 4-A(28), Registration No.
33-48937.
4-B-29 Supplemental Indenture of Met-Ed, dated June 1, 1988
Incorporated by reference to Exhibit 4-A(29), Registration No.
33-48937.
4-B-30 Supplemental Indenture of Met-Ed, dated April 1, 1990
Incorporated by reference to Exhibit 4-A(30), Registration No.
33-48937.
68
4-B-31 Amendment dated May 22, 1990 to Supplemental Indenture of
Met-Ed, dated April 1, 1990 - Incorporated by reference to
Exhibit 4-A(31), Registration No. 33-48937.
4-B-32 Supplemental Indenture of Met-Ed, dated September 1, 1992 -
Incorporated by reference to Exhibit 4-A(32)(a),
Registration No. 33-48937.
4-B-33 Supplemental Indenture of Met-Ed, dated December 1, 1993
Incorporated by reference to Exhibit C-58, 1993 Annual Report
of GPU on Form U5S, SEC File No. 30-126.
4-B-34 Supplemental Indenture of Met-Ed dated July 15, 1995
Incorporated by reference to Exhibit 4-B-35, 1995 Annual
Report on Form 10-K, SEC File No. 1-446.
4-B-35 Supplemental Indenture of Met-Ed dated August 15, 1996
Incorporated by reference to Exhibit 4-B-35, 1996 Annual
Report on Form 10-K, SEC File No. 1-446.
4-B-36 Supplemental Indenture of Met-Ed dated May 1, 1997
Incorporated by reference to Exhibit 4-B-36, 1997 Annual
Report on Form 10-K, SEC File No. 1-446.
4-C Mortgage and Deed of Trust of Penelec dated January 1, 1942
between Penelec and United States Trust Company of New
York, Successor Trustee, and indentures supplemental
thereto dated March 7, 1942 through May 1, 1960 -
Incorporated by reference to Penelec's Instruments of
Indebtedness Nos. 1-20, inclusive, filed as a part of
Amendment No. 1 to 1959 Annual Report of GPU on Form U5S,
SEC File Nos. 30-126 and 1-3292.
4-C-1 Supplemental Indentures to Mortgage and Deed of Trust of
Penelec dated May 1, 1961 through December 1, 1977
Incorporated by reference to Exhibit 2-D(1) to 2-D(19),
Registration No. 2-61502.
4-C-2 Supplemental Indenture of Penelec dated June 1, 1978
Incorporated by reference to Exhibit 4-A(2), Registration No.
33-49669.
4-C-3 Supplemental Indenture of Penelec dated June 1, 1979
Incorporated by reference to Exhibit 4-A(3), Registration No.
33-49669.
4-C-4 Supplemental Indenture of Penelec dated September 1, 1984
Incorporated by reference to Exhibit 4-A(4), Registration No.
33-49669.
4-C-5 Supplemental Indenture of Penelec dated December 1, 1985
Incorporated by reference to Exhibit 4-A(5), Registration No.
33-49669.
4-C-6 Supplemental Indenture of Penelec dated December 1, 1986
Incorporated by reference to Exhibit 4-A(6), Registration No.
33-49669.
69
4-C-7 Supplemental Indenture of Penelec dated May 1, 1989
Incorporated by reference to Exhibit 4-A(7), Registration No.
33-49669.
4-C-8 Supplemental Indenture of Penelec dated December 1,
1990-Incorporated by reference to Exhibit 4-A(8), Registration
No. 33-45312.
4-C-9 Supplemental Indenture of Penelec dated March 1, 1992
Incorporated by reference to Exhibit 4-A(9), Registration No.
33-45312.
4-C-10 Supplemental Indenture of Penelec, dated June 1, 1993
Incorporated by reference to Exhibit C-73, 1993 Annual Report
of GPU on Form U5S, SEC File No. 30-126.
4-C-11 Supplemental Indenture of Penelec dated November 1, 1995
Incorporated by reference to Exhibit 4-C-11, 1995 Annual
Report on Form 10-K, SEC File No. 1-3522.
4-C-12 Supplemental Indenture of Penelec dated August 15, 1996
Incorporated by reference to Exhibit 4-C-12, 1996 Annual
Report on Form 10-K, SEC File No. 1-3522.
4-D Subordinated Debenture Indenture of JCP&L dated May 1, 1995 -
Incorporated by reference to Exhibit A-8(a), Certificate
Pursuant to Rule 24, SEC File No. 70-8495.
4-E Subordinated Debenture Indenture of Met-Ed dated August 1,
1994 - Incorporated by reference to Exhibit A-8(a),
Certificate Pursuant to Rule 24, SEC File No. 70-8401.
4-F Subordinated Debenture Indenture of Penelec dated July 1, 1994
- Incorporated by reference to Exhibit A-8(a), Certificate
Pursuant to Rule 24, SEC File No. 70-8403.
4-G Amended and Restated Limited Partnership Agreement of JCP&L
Capital, L.P., dated May 11, 1995 - Incorporated by reference
to Exhibit A-5(a), Certificate Pursuant to Rule 24, SEC File
No. 70-8495.
4-H Action Creating Series A Preferred Securities of JCP&L
Capital, L.P., dated May 11, 1995 - Incorporated by reference
to Exhibit A-6(a), Certificate Pursuant to Rule 24, SEC File
No. 70-8495.
4-I Payment and Guarantee Agreement of JCP&L, dated May 18, 1995 -
Incorporated by reference to Exhibit B-1(a), Certificate
Pursuant to Rule 24, SEC File No. 70-8495.
4-J Amended and Restated Limited Partnership Agreement of Met-Ed
Capital, L.P., dated August 16, 1994 - Incorporated by
reference to Exhibit A-5(a), Certificate Pursuant to Rule 24,
SEC File No. 70-8401.
4-K Action Creating Series A Preferred Securities of Met-Ed
Capital, L.P., dated August 16, 1994 - Incorporated by
reference to Exhibit A-6(a), Certificate Pursuant to Rule 24,
SEC File No. 70-8401.
70
4-L Payment and Guarantee Agreement of Met-Ed, dated August 23,
1994 - Incorporated by reference to Exhibit B-1(a),
Certificate Pursuant to Rule 24, SEC File No. 70-8401.
4-M Amended and Restated Limited Partnership Agreement of Penelec
Capital, L.P., dated June 27, 1994 - Incorporated by reference
to Exhibit A-5(a), Certificate Pursuant to Rule 24, SEC File
No. 70-8403.
4-N Action Creating Series A Preferred Securities of Penelec
Capital, L.P., dated June 27, 1994 - Incorporated by reference
to Exhibit A-6(a), Certificate Pursuant to Rule 24, SEC File
No. 70-8403.
4-O Payment and Guarantee Agreement of Penelec, dated July 5, 1994
- Incorporated by reference to Exhibit B-1(a), Certificate
Pursuant to Rule 24, SEC File No. 70-8403.
4-P Form of Rights Agreement between GPU, Inc. and ChaseMellon
Shareholder Services, L.L.C. - Incorporated by reference to
Exhibit 4, June 30, 1998 Quarterly Report on Form 10-Q, SEC
File No. 1-6047.
10-A GPU System Companies Deferred Compensation Plan dated June 5,
1997 - Incorporated by reference to Exhibit 10-A, 1997 Annual
Report on Form 10-K, SEC File No. 1-6047, 1-3141, 1-446 and
1-3522.
10-B GPU System Companies Master Directors' Benefits Protection
Trust dated February 6, 1997 - Incorporated by reference to
Exhibit 10-B, 1997 Annual Report on Form 10-K, SEC File No.
1-6047 and 1-3141.
10-C GPU System Companies Master Executives' Benefits Protection
Trust dated February 6, 1997 - Incorporated by reference to
Exhibit 10-C, 1997 Annual Report on Form 10-K, SEC File No.
1-6047, 1-3141, 1-446 and 1-3522.
10-D Employee Incentive Compensation Plan of JCP&L dated April 1,
1995 - Incorporated by reference to Exhibit 10-D, 1995 Annual
Report on Form 10-K, SEC File No. 1-3141.
10-E Employee Incentive Compensation Plan of Met-Ed dated April 1,
1995 - Incorporated by reference to Exhibit 10-E, 1995 Annual
Report on Form 10-K, SEC File No. 1-446.
10-F Employee Incentive Compensation Plan of Penelec dated April 1,
1995 - Incorporated by reference to Exhibit 10-F, 1995 Annual
Report on Form 10-K, SEC File No. 1-3522.
10-G Incentive Compensation Plan for Elected Officers of JCP&L
dated February 6, 1997 - Incorporated by reference to Exhibit
10-G, 1997 Annual Report on Form 10-K, SEC File No.
1-3141.
10-H Incentive Compensation Plan for Elected Officers of Met-Ed
dated February 6, 1997 - Incorporated by reference to Exhibit
10-H, 1997 Annual Report on Form 10-K, SEC File No.
1-446.
71
10-I Incentive Compensation Plan for Elected Officers of Penelec
dated February 6, 1997 - Incorporated by reference to Exhibit
10-I, 1997 Annual Report on Form 10-K, SEC File No.
1-3522.
10-J Deferred Remuneration Plan for Outside Directors of JCP&L
dated June 5, 1997 - Incorporated by reference to Exhibit
10-J, 1997 Annual Report on Form 10-K, SEC File No. 1-3141.
10-K JCP&L Supplemental and Excess Benefits Plan dated June 5, 1997
- Incorporated by reference to Exhibit 10-K, 1997 Annual
Report on Form 10-K, SEC File No. 1-3141.
10-L Met-Ed Supplemental and Excess Benefits Plan dated June 5,
1997 - Incorporated by reference to Exhibit 10-L, 1997 Annual
Report on Form 10-K, SEC File No. 1-446.
10-M Penelec Supplemental and Excess Benefits Plan dated June 5,
1997 - Incorporated by reference to Exhibit 10-M, 1997 Annual
Report on Form 10-K, SEC File No. 1-3522.
10-N Letter agreement dated August 7, 1997 relating to terms of
employment and pension benefits for I.H. Jolles Incorporated
by reference to Exhibit 10-O, 1997 Annual Report on Form 10-K,
SEC File No. 1-6047.
10-O GPU, Inc. Restricted Stock Plan for Outside Directors dated
June 4, 1998.
10-P Retirement Plan for Outside Directors of GPU, Inc. dated June
5, 1997 - Incorporated by reference to Exhibit 10-R, 1997
Annual Report on Form 10-K, SEC File No. 1-6047.
10-Q Deferred Remuneration Plan for Outside Directors of GPU, Inc.
dated October 8, 1997 - Incorporated by reference to Exhibit
10-R, 1997 Annual Report on Form 10-S, SEC File No.
1-6047.
10-R Second Amended and Restated Nuclear Material Lease
Agreement, dated as of November 5, 1998, between Oyster
Creek Fuel Corp. and JCP&L.
10-S Second Amended and Restated Nuclear Material Lease
Agreement, dated as of November 5, 1998, between TMI-1 Fuel
Corp. and JCP&L.
10-T Letter Agreement, dated as of November 5, 1998, from JCP&L
relating to Oyster Creek Nuclear Material Lease Agreement.
10-U Letter Agreement, dated as of November 5, 1998, from JCP&L
relating to JCP&L TMI-1 Nuclear Material Lease Agreement.
72
10-V Second Amended and Restated Trust Agreement, dated as of
November 5, 1998, between United States Trust Company of New
York, as Owner Trustee, Lord Fuel Corp., as Trustor and
Beneficiary, and JCP&L, Met-Ed and Penelec.
10-W Second Amended and Restated Nuclear Material Lease
Agreement, dated as of November 5, 1998, between TMI-1 Fuel
Corp. and Met-Ed.
10-X Letter Agreement, dated as of November 5, 1998, from Met-Ed
relating to Met-Ed TMI-1 Nuclear Material Lease Agreement.
10-Y Second Amended and Restated Nuclear Material Lease
Agreement, dated as of November 5, 1998, between TMI-1 Fuel
Corp. and Penelec.
10-Z Letter Agreement, dated as of November 5, 1998, from Penelec
relating to Penelec TMI-1 Nuclear Material Lease
Agreement.
10-AA GPU, Inc. 1990 Stock Plan for Employees of GPU, Inc. and
Subsidiaries as amended and restated to reflect amendments
through March 5, 1998.
10-BB Form of 1998 Stock Option Agreement under the 1990 Stock Plan
for Employees of GPU, Inc. and Subsidiaries.
10-CC Form of 1998 Performance Units Agreement under the 1990 Stock
Plan for Employees of GPU, Inc. and Subsidiaries.
10-DD Severance Protection Agreement for Dennis P. Baldassari, dated
June 5, 1997 - Incorporated by reference to Exhibit 10, June
30, 1998 Quarterly Report on Form 10-Q, SEC File No. 1-6047.
10-EE Severance Protection Agreement for Thomas G. Broughton, dated
June 5, 1997 - Incorporated by reference to Exhibit 4, June
30, 1998 Quarterly Report on Form 10-Q, SEC File No. 1-6047.
10-FF Severance Protection Agreement for Fred D. Hafer, dated June
5, 1997 - Incorporated by reference to Exhibit 4, June 30,
1998 Quarterly Report on Form 10-Q, SEC File No. 1-6047.
10-GG Severance Protection Agreement for Ira H. Jolles, dated June
5, 1997 - Incorporated by reference to Exhibit 4, June 30,
1998 Quarterly Report on Form 10-Q, SEC File No. 1-6047.
10-HH Severance Protection Agreement for Bruce L. Levy, dated June
5, 1997 - Incorporated by reference to Exhibit 4, June 30,
1998 Quarterly Report on Form 10-Q, SEC File No. 1-6047.
10-II Severance Protection Agreement for Robert L. Wise, dated June
5, 1997 - Incorporated by reference to Exhibit 4, June 30,
1998 Quarterly Report on Form 10-Q, SEC File No.
1-6047.
73
10-JJ Purchase and Sale Agreement by and between Penelec and FE
Acquisition Corp., dated as of October 30, 1998 Incorporated
by reference to Exhibit B-1, Amendment No. 1 to Declaration on
Form U-1, SEC File 70-9457.
10-KK Homer City Electric Generating Station Asset Purchase
Agreement by and among Penelec, NGE Generation, Inc., and New
York State Electric & Gas Corporation, as sellers, and Mission
Energy Westside, Inc., as buyer, dated as of August 1, 1998.
10-LL Purchase and Sale Agreement by and between JCP&L, as seller,
and Sithe Energies, Inc., as buyer, dated as of October 29,
1998.
10-MM Purchase and Sale Agreement by and among JCP&L, Met-Ed as
sellers, GPU, Inc, and Sithe Energies, Inc., as buyer, dated
as of October 29, 1998.
10-NN Purchase and Sale Agreement by and between Met-Ed, as seller,
and Sithe Energies, Inc., as buyer, dated as of October 29,
1998.
10-OO Purchase and Sale Agreement by and between Penelec, as seller,
and Sithe Energies, Inc., as buyer, dated as of October 29,
1998.
10-PP Voluntary Enhanced Retirement Program Agreement for
Nonbargaining Employees - Robert L. Wise, dated as of
September 17, 1998.
10-QQ TMI Unit 1 Nuclear Generating Facility Asset Purchase
Agreement by and among GPUN, JCP&L, Met-Ed, and Penelec as
sellers, and AmerGen Energy Conpany, LLC, as buyer, dated as
of October 15, 1998.
12 Statements Showing Computation of Ratio of Earnings to Fixed
Charges and Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends.
A - GPU, Inc. and Subsidiary Companies
B - JCP&L
C - Met-Ed
D - Penelec
21 Subsidiaries of the Registrants
A - JCP&L
B - Met-Ed
C - Penelec
23 Consent of Independent Accountants
A - GPU, Inc. B - JCP&L C - Met-Ed D - Penelec
74
27 Financial Data Schedules
A - GPU, Inc. and Subsidiary Companies
B - JCP&L
C - Met-Ed
D - Penelec
99 Generation Divestiture-1998 Pro-Forma Financial Statements.
(b) Reports on Form 8-K:
GPU, Inc.:
Dated November 12, 1998, under Item 5 (Other Events).
Dated December 7, 1998, under Item 5 (Other Events).
Dated December 10, 1998, under Item 5 (Other Events).
Dated January 4, 1999, under Item 5 (Other Events).
Jersey Central Power & Light Company:
Dated November 12, 1998, under Item 5 (Other Events).
Metropolitan Edison Company:
Dated November 12, 1998, under Item 5 (Other Events).
Pennsylvania Electric Company:
Dated November 12, 1998, under Item 5 (Other Events).
75
GPU, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GPU, INC.
Dated: March 30, 1999 BY: /s/ F. D. Hafer
------------------------
F. D. Hafer, Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature and Title Date
/s/ F. D. Hafer March 30, 1999
- ----------------------------------------------
F. D. Hafer, Chairman (Chief Executive
Officer) and President
/s/ B. L. Levy March 30, 1999
- ----------------------------------------------
B. L. Levy, Senior Vice President
(Chief Financial Officer)
/s/ P. E. Maricondo March 30, 1999
- ----------------------------------------------
P. E. Maricondo, Vice President and
Comptroller (Chief Accounting Officer)
/s/ T. H. Black March 30, 1999
- ----------------------------------------------
T. H. Black, Director
/s/ T. B. Hagen March 30, 1999
- ----------------------------------------------
T. B. Hagen, Director
/s/ H. F. Henderson, Jr. March 30, 1999
- ----------------------------------------------
H. F. Henderson, Jr., Director
/s/ J. M. Pietruski March 30, 1999
- ----------------------------------------------
J. M. Pietruski, Director
/s/ C. A. Rein March 30, 1999
- ----------------------------------------------
C. A. Rein, Director
/s/ P. R. Roedel March 30, 1999
- ----------------------------------------------
P. R. Roedel, Director
/s/ B. S. Townsend March 30, 1999
- ----------------------------------------------
B. S. Townsend, Director
/s/ C. A. H. Trost March 30, 1999
- ----------------------------------------------
C. A. H. Trost, Director
/s/ P. K. Woolf March 30, 1999
- ----------------------------------------------
P. K. Woolf, Director
76
JERSEY CENTRAL POWER & LIGHT COMPANY
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized. The Signature of the
undersigned company shall be deemed to relate only to matters having reference
to such company and any subsidiaries thereof.
JERSEY CENTRAL POWER & LIGHT COMPANY
Dated: March 30, 1999 BY: /s/ D. Baldassari
--------------------------------
D. Baldassari, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature and Title Date
/s/ F. D. Hafer March 30, 1999
- ----------------------------------------------
F. D. Hafer, Chairman
(Principal Executive Officer) and Director
/s/ D. Baldassari March 30, 1999
- ----------------------------------------------
D. Baldassari, President
(Principal Operating Officer) and Director
/s/ B. L. Levy March 30, 1999
- ----------------------------------------------
B. L. Levy, Vice President
(Principal Financial Officer)
/s/ D. W. Myers March 30, 1999
- ----------------------------------------------
D. W. Myers, Vice President-Comptroller
(Principal Accounting Officer) and Director
/s/ C. B. Snyder March 30, 1999
- ----------------------------------------------
C. B. Snyder, Director
/s/ G. E. Persson March 30, 1999
- ----------------------------------------------
G. E. Persson, Director
/s/ S. C. Van Ness March 30, 1999
S. C. Van Ness, Director
/s/ S. B. Wiley March 30, 1999
- ----------------------------------------------
S. B. Wiley, Director
77
METROPOLITAN EDISON COMPANY
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized. The Signature of the
undersigned company shall be deemed to relate only to matters having reference
to such company and any subsidiaries thereof.
METROPOLITAN EDISON COMPANY
Dated: March 30, 1999 BY: /s/ D. Baldassari
-----------------------------
D. Baldassari, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature and Title Date
/s/ F. D. Hafer March 30, 1999
- ----------------------------------------------
F. D. Hafer, Chairman (Principal Executive
Officer) and Director
/s/ D. Baldassari March 30, 1999
- ----------------------------------------------
D. Baldassari, President (Principal
Operating Officer) and Director
/s/ B. L. Levy March 30, 1999
- ----------------------------------------------
B. L. Levy, Vice President
(Principal Financial Officer)
/s/ D. W. Myers March 30, 1999
- ----------------------------------------------
D. W. Myers, Vice President-Comptroller
(Principal Accounting Officer) and Director
/s/ C. B. Snyder March 30, 1999
- ----------------------------------------------
C. B. Snyder, Director
78
PENNSYLVANIA ELECTRIC COMPANY
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized. The Signature of the
undersigned company shall be deemed to relate only to matters having reference
to such company and any subsidiaries thereof.
PENNSYLVANIA ELECTRIC COMPANY
Dated: March 30, 1999 BY: /s/ D. Baldassari
-----------------------------
D. Baldassari, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature and Title Date
/s/ F. D. Hafer March 30, 1999
- ----------------------------------------------
F. D. Hafer, Chairman (Principal Executive
Officer) and Director
/s/ D. Baldassari March 30, 1999
- ----------------------------------------------
D. Baldassari, President (Principal
Operating Officer) and Director
/s/ B. L. Levy March 30, 1999
- ----------------------------------------------
B. L. Levy, Vice President
(Principal Financial Officer)
/s/ D. W. Myers March 30, 1999
- ----------------------------------------------
D. W. Myers, Vice President-Comptroller
(Principal Accounting Officer) and Director
/s/ C. B. Snyder March 30, 1999
- ----------------------------------------------
C. B. Snyder, Director
79
INDEX TO SUPPLEMENTARY DATA, FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
GPU, INC. Page
Supplementary Data
GPU Energy Companies' Statistics F-3
Selected Financial Data F-4
Quarterly Financial Data F-6
Combined Management's Discussion and Analysis of
Financial Condition and Results of Operations F-7
Financial Statements
Report of Independent Accountants F-44
Consolidated Balance Sheets as of December 31, 1998 and
1997 F-45
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996 F-47
Consolidated Statements of Comprehensive Income for the
Years Ended December 31, 1998, 1997 and 1996 F-48
Consolidated Statements of Retained Earnings for the
Years Ended December 31, 1998, 1997 and 1996 F-48
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1998, 1997 and 1996 F-49
Combined Notes to Consolidated Financial Statements F-50
Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts for the
Years 1996-1998 F-119
JERSEY CENTRAL POWER & LIGHT COMPANY
Supplementary Data
Company Statistics F-120
Selected Financial Data F-121
Quarterly Financial Data F-122
Financial Statements
Report of Independent Accountants F-123
Consolidated Balance Sheets as of December 31, 1998 and
1997 F-124
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996 F-126
Consolidated Statements of Comprehensive Income for the
Years Ended December 31, 1998, 1997 and 1996 F-127
Consolidated Statements of Retained Earnings for the
Years Ended December 31, 1998, 1997 and 1996 F-127
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1998, 1997 and 1996 F-128
Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts for the
Years 1996-1998 F-129
F-1
INDEX TO SUPPLEMENTARY DATA, FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
METROPOLITAN EDISON COMPANY
Supplementary Data
Company Statistics F-130
Selected Financial Data F-131
Quarterly Financial Data F-132
Financial Statements
Report of Independent Accountants F-133
Consolidated Balance Sheets as of December 31, 1998 and
1997 F-134
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996 F-136
Consolidated Statements of Comprehensive Income for the
Years Ended December 31, 1998, 1997 and 1996 F-137
Consolidated Statements of Retained Earnings for the
Years Ended December 31, 1998, 1997 and 1996 F-137
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1998, 1997 and 1996 F-138
Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts for the
Years 1996-1998 F-139
PENNSYLVANIA ELECTRIC COMPANY
Supplementary Data
Company Statistics F-140
Selected Financial Data F-141
Quarterly Financial Data F-142
Financial Statements
Report of Independent Accountants F-143
Consolidated Balance Sheets as of December 31, 1998 and
1997 F-144
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996 F-146
Consolidated Statements of Comprehensive Income for the
Years Ended December 31, 1998, 1997 and 1996 F-147
Consolidated Statements of Retained Earnings for the
Years Ended December 31, 1998, 1997 and 1996 F-147
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1998, 1997 and 1996 F-148
Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts for the
Years 1996-1998 F-149
Schedules other than those listed above have been omitted since they are not
required, are inapplicable or the required information is presented in the
Financial Statements or Notes thereto.
F-2
GPU, Inc. and Subsidiary Companies
GPU ENERGY COMPANIES' STATISTICS
For The Years Ended December 31, 1998 1997 1996 1995 1994 1993
- -------------------------------- ---- ---- ---- ---- ---- ----
Capacity at System Peak (in MW):
Company owned 6,751 6,740 6,680 6,637 6,655 6,735
Contracted 4,275 3,930 3,536 3,604 3,416 3,236
----- ----- ----- ----- ----- -----
Total capacity (a) 11,026 10,670 10,216 10,241 10,071 9,971
====== ====== ====== ====== ====== =====
Hourly Peak Load (in MW):
Summer peak 9,412 9,555 8,497 9,101 8,521 8,533
Winter peak 7,579 7,736 7,756 7,861 7,683 7,167
Reserve at system peak (%) 17.0 11.7 20.2 12.5 18.2 16.9
Load factor (%) (b) 59.4 57.6 64.2 57.5 61.7 60.9
Sources of Energy (in thousands of MWH):
Coal 19,675 19,390 18,133 17,500 16,548 16,969
Nuclear 11,358 10,992 11,439 11,582 10,216 10,614
Gas, hydro & oil 888 800 812 1,019 1,071 575
--- --- --- ----- ----- ---
Net generation 31,921 31,182 30,384 30,101 27,835 28,158
Utility purchases and interchange 8,782 9,004 8,795 10,297 10,326 11,984
Nonutility purchases 10,952 11,119 11,046 10,712 8,810 8,383
------ ------ ------ ------ ----- -----
Total sources of energy 51,655 51,305 50,225 51,110 46,971 48,525
Company use, line loss, etc (4,300) (5,437) (5,777) (5,357) (4,313) (5,166)
Total electric energy sales 47,355 45,868 44,448 45,753 42,658 43,359
====== ====== ====== ====== ====== ======
Fuel Expense (in millions):
Coal $ 263 $ 268 $ 263 $ 251 $ 260 $ 266
Nuclear 67 63 70 74 65 66
Gas & oil 32 40 38 38 39 32
-- -- -- -- -- --
Total $ 362 $ 371 $ 371 $ 363 $ 364 $ 364
======== ======== ======== ======== ======== ========
Power Purchased and Interchanged (in millions):
Utility and interchange purchases $ 311 $ 294 $ 267 $ 351 $ 367 $ 406
Nonutility purchases 788 734 730 671 528 491
Deferred nonutility costs (Pa.) (17) -- -- -- -- --
Amortization of nonutility buyout costs 30 19 9 -- -- --
-- -- -
Total $ 1,112 $ 1,047 $ 1,006 $ 1,022 $ 895 $ 897
======== ======== ======== ======== ======== ========
Electric Energy Sales (in thousands of MWH):
Residential 15,347 15,091 15,298 14,802 14,788 14,498
Commercial 14,778 14,281 14,017 13,544 13,301 12,919
Industrial 12,644 12,469 12,093 11,982 11,983 11,699
Other 996 1,110 1,105 1,143 1,245 1,221
Sales to customers 43,765 42,951 42,513 41,471 41,317 40,337
Sales to other utilities 3,590 2,917 1,935 4,282 1,341 3,022
----- ----- ----- ----- ----- -----
Total 47,355 45,868 44,448 45,753 42,658 43,359
====== ====== ====== ====== ====== ======
Operating Revenues (in millions):
Residential $ 1,579 $ 1,617 $ 1,599 $ 1,542$ 1,503 $ 1,465
Commercial 1,350 1,372 1,324 1,258 1,215 1,169
Industrial 795 833 803 780 774 755
Other 4 75 71 73 78 89
Sales to customers 3,728 3,897 3,797 3,653 3,570 3,478
Sales to other utilities 132 77 57 101 24 67
Total electric energy sales 3,860 3,974 3,854 3,754 3,594 3,545
Other revenues 93 70 64 51 56 51
-- -- -- -- -- --
Total $ 3,953 $ 4,044 $ 3,918 $ 3,805 $ 3,650 $ 3,596
======= ======= ======= ======= ======= =======
Price per KWH (in cents):
Residential 10.29 10.64 10.51 10.35 10.18 10.07
Commercial 9.14 9.54 9.47 9.25 9.12 9.04
Industrial 6.29 6.61 6.65 6.51 6.46 6.47
Total sales to customers 8.67 9.00 8.96 8.77 8.64 8.61
Total electric energy sales 8.29 8.60 8.70 8.17 8.43 8.17
Customers at Year-End (in thousands) 2,041 2,021 1,997 1,976 1,949 1,925
<FN>
(a) Summer ratings at December 31, 1998 of owned and contracted capacity
were 6,751 MW and 4,325 MW, respectively.
(b) The ratio of the average hourly load in kilowatts supplied during the year
to the peak load occurring during the year.
</FN>
F-3
GPU, Inc. and Subsidiary Companies
SELECTED FINANCIAL DATA
For The Years Ended December 31, 1998(1) 1997(2) 1996(3) 1995(4) 1994(5) 1993
- -------------------------------- ------- ------- ------- ------- ------- ----
Common Stock Data
Earnings per common share
before extraordinary item:
Basic $ 3.03 $ 2.78 $ 2.48 $ 3.79 $1.42 $ 2.65
Diluted $ 3.03 $ 2.77 $ 2.47 $ 3.79 $1.42 $ 2.65
Earnings per common share:
Basic $ 2.83 $ 2.78 $ 2.48 $ 3.79 $1.42 $ 2.65
Diluted $ 2.83 $ 2.77 $ 2.47 $ 3.79 $1.42 $ 2.65
Cash dividends
paid per share $ 2.045 $ 1.985 $ 1.925 $ 1.86 $1.775 $ 1.65
Book value per share $ 27.01 $ 25.59 $ 25.21 $ 24.66 $22.31 $ 22.69
Closing market price
per share $44 3/16 $ 42 1/8 $ 33 5/8 $ 34 $ 26 1/4 $ 30 7/8
Common shares outstanding
(In Thousands):
Basic average 127,093 120,722 120,513 116,063 115,077 111,732
Diluted average 127,312 121,002 120,751 116,179 115,110 111,749
At year-end 127,996 121,081 120,870 120,619 115,315 115,041
Market price to book value
at year-end 164% 165% 133% 138% 118% 136%
Price/earnings ratio 15.6 15.2 13.6 9.0 18.5 11.7
Return on average
common equity 10.7% 10.7% 9.8% 16.0% 6.3% 11.9%
Financial Data (In Millions)
Operating revenues $4,248.8 $4,143.4 $3,970.7 $3,822.5 $3,654.2 $3,599.4
Other operation and
maintenance expense 1,106.9 993.7 1,114.9 965.1 1,085.5 914.1
Income before
extraordinary item 385.9 335.1 298.4 440.1 163.7 295.7
Net income 360.1 335.1 298.4 440.1 163.7 295.7
Net utility plant
in service 6,565.1 7,100.5 5,942.4 5,862.4 5,731.0 5,512.1
Total assets 16,288.1 12,822.9 10,851.4 9,751.5 9,087.6 8,692.1
Long-term debt 3,825.6 4,326.0 3,177.0 2,567.9 2,345.4 2,320.4
Long-term obligations under
capital leases 2.6 3.3 6.6 11.7 17.0 23.3
Subsidiary-obligated mandatorily
redeemable preferred
securities 330.0 330.0 330.0 330.0 205.0 -
Cumulative preferred stock with
mandatory redemption 86.5 91.5 114.0 134.0 150.0 150.0
Capital expenditures and
investments 468.2 2,268.6 977.5 626.7 659.8 511.9
Employees (actual) 8,957 9,346 9,345 10,286 10,555 11,963
F-4
GPU, Inc. and Subsidiary Companies
(1) Results for 1998 include an extraordinary charge of $25.8 million
(after-tax), or $0.20 per share, as a result of the PaPUC's Restructuring
Orders on Met-Ed and Penelec's restructuring plans. Also in 1998, as a
result of the PaPUC Orders, GPU recorded a non-recurring charge of $40
million (after-tax), or $0.32 per share, related to the obligation to
refund 1998 revenues; and for the establishment of a sustainable energy
fund.
(2) Results for 1997 reflect a non-recurring charge of $109.3 million, or
$0.90 per share, for a windfall profits tax imposed on privatized
utilities, including Midlands Electricity plc, by the Government of the
United Kingdom.
(3) Results for 1996 reflect a non-recurring charge of $74.5 million (
after-tax), or $0.62 per share, for costs related to voluntary enhanced
retirement programs.
(4) Results for 1995 reflect the reversal of $104.9 million (after-tax), or
$0.91 per share, of certain future TMI-2 retirement costs written off in
1994. The reversal of this write-off resulted from a 1995 Pennsylvania
Supreme Court decision that overturned a 1994 lower court order, and
restored a 1993 PaPUC order allowing for the recovery of such costs.
Partially offsetting this increase was a non-recurring charge to income of
$8.4 million (after-tax), or $0.07 per share, of TMI-2 monitored storage
costs deemed not probable of recovery through ratemaking.
(5) Results for 1994 reflect a net non-recurring charge to earnings of $164.7
million (after-tax), or $1.43 per share, due to the write-off of certain
future TMI-2 retirement costs ($104.9 million, or $0.91 per share); a
charge for costs related to early retirement programs ($76.1 million, or
$0.66 per share); a write-off of Penelec's postretirement benefit costs
believed not probable of recovery in rates ($10.6 million, or $0.09 per
share); and net interest income from refunds of previously paid federal
income taxes related to the tax retirement of TMI-2 ($26.9 million, or
$0.23 per share).
F-5
GPU, Inc. and Subsidiary Companies
QUARTERLY FINANCIAL DATA (UNAUDITED)
First Quarter Second Quarter
------------- --------------
In Thousands, Except
Per Share Data 1998 1997 1998* 1997
- -------------- ---- ---- ----- ----
Operating revenues $1,043,109 $1,051,012 $1,015,087 $942,783
Operating income 193,341 196,258 165,306 132,809
Income before extraordinary item 133,780 155,038 79,937 70,249
Net income/(loss) 133,780 155,038 (195,173) 70,249
Basic earnings per share
before extraordinary item 1.07 1.29 0.62 0.58
Diluted earnings per share
before extraordinary item 1.07 1.28 0.62 0.58
Basic earnings/(loss) per share 1.07 1.29 (1.54) 0.58
Diluted earnings/(loss) per share 1.07 1.28 (1.54) 0.58
Third Quarter Fourth Quarter
------------- --------------
In Thousands, Except
Per Share Data 1998** 1997*** 1998 1997
- -------------- ------ ------- ---- ----
Operating revenues $1,168,779 $1,117,140 $1,021,817 $1,032,444
Operating income 177,630 177,286 121,561 140,765
Income before extraordinary 88,691 16,904 83,473 92,910
item
Net income 338,046 16,904 83,473 92,910
Basic earnings per share
before extraordinary item 0.69 0.14 0.65 0.77
Diluted earnings per share
before extraordinary item 0.69 0.14 0.65 0.77
Basic earnings per share 2.65 0.14 0.65 0.77
Diluted earnings per share 2.65 0.14 0.65 0.77
<FN>
* Results for the second quarter of 1998 were affected by an extraordinary
charge of $275.1 million after-tax, or $2.16 per share, as a result of
the Pennsylvania Public Utility Commission's (PaPUC) June 30, 1998
Restructuring Orders on Met-Ed and Penelec's restructuring plans.
** In the third quarter of 1998, as a result of amended PaPUC Restructuring
Orders, GPU reversed $266.3 million after-tax, or $2.09 per share, of the
extraordinary charge taken in the second quarter, primarily related to
above-market nonutility generation costs; and recorded an additional
extraordinary charge of $17 million after-tax, or $0.13 per share,
primarily related to the write-off of FERC assets. Also, in the third
quarter of 1998, as a result of the amended PaPUC Orders, GPU recorded a
non-recurring charge of $40 million after-tax, or $0.32 per share,
related to the obligation to refund 1998 revenues; and for the
establishment of a sustainable energy fund.
*** Results for the third quarter of 1997 reflect a non-recurring charge of
$109.3 million, or $0.90 per share, for a windfall profits tax imposed on
privatized utilities, including Midlands Electricity plc, by the
Government of the United Kingdom.
</FN>
F-6
GPU, Inc. and Subsidiary Companies
COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GPU, Inc. owns all the outstanding common stock of three domestic
electric utilities -- Jersey Central Power & Light Company (JCP&L), Metropolitan
Edison Company (Met-Ed) and Pennsylvania Electric Company (Penelec). The
customer service, transmission and distribution operations of these electric
utilities are conducting business under the name GPU Energy. JCP&L, Met-Ed and
Penelec considered together are referred to as the "GPU Energy companies." The
generation operations of the GPU Energy companies are conducted by GPU
Generation, Inc. (Genco) and GPU Nuclear, Inc. (GPUN). The "GPUI Group," as
referred to in this report, develops, owns, operates and funds the acquisition
of generation, transmission and distribution facilities worldwide through GPU
International, Inc., GPU Power, Inc., GPU Capital, Inc. and GPU Electric, Inc.,
a subsidiary of GPU Capital, Inc. (Effective January 1, 1999, GPU International,
Inc. and GPU Power, Inc., will develop, own, operate and fund the acquisition of
generation facilities worldwide and will be referred to as the "GPUI Group." GPU
Capital, Inc. and GPU Electric, Inc., will develop, own, operate and fund the
acquisition of transmission and distribution systems outside the United States
and will be referred to as "GPU Electric.") Other subsidiaries of GPU, Inc.
include GPU Advanced Resources, Inc. (GPU AR), which is involved in retail
energy sales; GPU Telcom Services, Inc. (GPU Telcom), which is engaged in
telecommunications-related businesses; and GPU Service, Inc. (GPUS), which
provides legal, accounting, financial and other services to the GPU companies.
All of these companies considered together are referred to as "GPU."
GPU RESULTS OF OPERATIONS
GPU's 1998 earnings were $360.1 million, compared with 1997 earnings of
$335.1 million. The earnings per share on a diluted basis for 1998 was $2.83,
compared with earnings per share of $2.77 in 1997. GPU's return on average
common equity was 10.7% in 1998, compared to 10.7% in 1997. Both periods reflect
non-recurring items.
In 1998, a non-recurring charge of $65.8 million after-tax, or $0.52
per share, was taken as a result of the Pennsylvania Public Utility Commission's
(PaPUC) restructuring rate orders (Restructuring Orders) received by Met-Ed and
Penelec. In 1997, a non-recurring charge of $109.3 million, or $0.90 per share,
was taken for a windfall profits tax assessed on privatized utilities by the
Government of the United Kingdom.
Excluding the impact of the non-recurring items, GPU's earnings for
1998 would have been $425.9 million, compared to $444.4 million in 1997, and
earnings per share on a diluted basis for 1998 would have been $3.35, compared
to $3.67 in 1997. Return on average common equity for 1998 and 1997 on this
basis would have been 12.4% and 14%, respectively. The 1998 earnings per share
decrease on this basis was due to lower income from GPU's domestic utility
operations, and increased shares outstanding due to the sale of GPU, Inc. common
stock in February 1998. The GPU Energy companies' earnings reduction for the
period was due to increased operation and maintenance expenses primarily related
to the implementation of a new company-wide computer software system and
restructuring costs related to staff reductions, partially offset by higher
electric sales. After adjusting for the related impacts of
F-7
GPU, Inc. and Subsidiary Companies
GPU RESULTS OF OPERATIONS (continued)
the windfall profits tax, the GPUI Group's income contribution increased for the
year and partially offset the GPU Energy companies' decrease.
GPU, Inc. has reported to the financial community that in its view,
GPU's 1998 earnings, on a "normalized" basis, were $3.66 per share (as compared
to "normalized" earnings of $3.27 per share in 1997). This level of earnings for
1998 reflects adjustments to the reported $2.83 earnings per share as follows:
the exclusion of the $0.52 per share charge related to the PaPUC's Restructuring
Orders, the negative weather-effect on electric sales of $0.22 per share, $0.08
per share for a charge for the NUG portion of unbilled revenue, a $0.10 per
share charge for costs related to staff reductions, and a $0.06 per share charge
to terminate a power supply contract with Middletown, PA; offset by the
exclusion of $0.15 per share of additional income for a gain on the sale of GPUI
Group's investment in Solaris Power.
GPU's 1997 earnings were $335.1 million, compared to 1996 earnings of
$298.4 million. Earnings per share on a diluted basis were $2.77 in 1997,
compared to $2.47 per share in 1996. If non-recurring items are excluded,
earnings for 1997 would have been $444.4 million, or $3.67 per share, compared
to $372.9 million, or $3.09 per share in 1996. The 1997 earnings increase on
this basis was mainly due to increased earnings from the GPUI Group (including
the result of GPU's policy of accruing U.S. income tax on its worldwide
operations, which reduced GPU's federal income tax liability); reduced operation
and maintenance expenses; increased kilowatt-hour (KWH) sales to domestic
utility customers; and a step increase in unbilled revenue recorded by Met-Ed
and Penelec as a result of including their energy cost rates (ECRs) in base
rates and the cessation of deferred energy accounting, both effective January 1,
1997. These increases were partially offset by higher depreciation and financing
expenses, increased amortizations due to a rate cap on JCP&L's earnings and the
absence in 1997 of gains associated with the 1996 reacquisition of preferred
stock.
OPERATING REVENUES:
Operating revenues increased 2.5% to $4.2 billion in 1998, after
increasing 4.3% to $4.1 billion in 1997. The components of these changes were as
follows:
(in millions)
1998 1997
---- ----
GPU Energy companies:
KWH revenues $ 30.9 $ 94.6
Energy-related revenues 49.8 23.3
Obligation to refund 1998 revenues
to customers per PaPUC Order (56.4) -
GPU Telcom revenues 16.1 -
Other revenues (130.9) 7.8
------ -----
Total GPU Energy companies (90.5) 125.7
GPUI Group 186.3 45.7
GPU AR 9.6 1.3
----- ------
Total increase in revenues $105.4 $172.7
===== =====
F-8
GPU, Inc. and Subsidiary Companies
GPU RESULTS OF OPERATIONS (continued)
GPU Energy Companies
Kilowatt-hour revenues
1998
The increase in KWH revenues was primarily due to an increase in
residential and commercial customer usage, partially offset by lower
weather-related sales to residential and commercial customers, and the absence
in 1998 of the step increase in unbilled revenue recorded by Met-Ed and Penelec
as a result of including their ECRs in base rates in 1997.
1998 KWH Customer Sales by Service Class
Residential 35%
Commercial 34%
Industrial/Other 31%
1997
The increase in KWH revenues was due primarily to the step increase in
unbilled revenue recorded by Met-Ed and Penelec from inclusion of their ECRs in
base rates; higher usage by industrial customers; and an increase in the number
of commercial and residential customers. These increases were partially offset
by lower weather-related sales to residential customers. KWH revenues include
Met-Ed and Penelec's energy and tax revenues, consistent with the inclusion of
their ECRs and State Tax Adjustment Surcharges (STAS) in base rates, effective
January 1, 1997.
Energy-related revenues (JCP&L only)
1998 and 1997
Generally, changes in energy-related revenues do not affect earnings as
they reflect corresponding changes in JCP&L's levelized energy adjustment clause
(LEAC) billed to customers and expensed. The 1998 increase was due primarily to
increased sales to other utilities and higher residential and commercial
customer sales. The 1997 increase was due primarily to higher energy cost rates
and increased industrial and commercial customer sales.
Obligation to refund 1998 revenues to customers per PaPUC Order
1998
The decrease in revenues reflects transmission and distribution (T&D)
rate reductions resulting from the PaPUC's Restructuring Orders for Met-Ed and
Penelec. These rate reductions reflect Met-Ed and Penelec's obligation to make
refunds to customers from 1998 revenues (2.5% for Met-Ed customers and 3% for
Penelec customers).
GPU Telcom revenues
1998
GPU Telcom, a subsidiary formed in 1997, derived its 1998 revenues from
contracts for the leasing and construction of telecommunication infrastructure.
F-9
GPU, Inc. and Subsidiary Companies
GPU RESULTS OF OPERATIONS (continued)
Other revenues
1998 and 1997
Generally, changes in other revenues do not affect earnings as they are
offset by corresponding changes in expense. The 1998 decrease is primarily due
to a decrease in revenue taxes as a result of New Jersey tax legislation that
eliminated the gross receipts and franchise tax on utility bills and replaced it
with a sales tax, a corporate business tax and a transitional energy facilities
assessment, effective January 1, 1998. (See COMPETITIVE ENVIRONMENT AND RATE
MATTERS.)
GPUI Group
1998
The increase in revenues was due mainly to including the full year effect
of GPUI Group's investments in GPU PowerNet Pty. Ltd. (PowerNet) and Lake Cogen,
Ltd. (Lake), and the effect of including Onondaga Cogen, L.P. (OCLP) beginning
in August 1998.
1997
The increase in revenues was due mainly to the inclusion of revenues from
PowerNet, which GPU Electric acquired in November 1997, and the effect of
including GPUI Group's investment in Lake, beginning in June 1997.
GPU Advanced Resources
1998 and 1997
GPU AR, which was formed in the second quarter of 1997, derived its
revenues from energy sales to customers who chose it as their energy supplier as
part of the retail access pilot program in Pennsylvania. Some of GPU AR's
customers are located in the GPU Energy companies' service territories.
OPERATING EXPENSES:
Power purchased and interchanged (PP&I)
1998 and 1997
Changes in the energy component of PP&I expense do not significantly
affect JCP&L's earnings since these cost variances are passed through the LEAC.
However, beginning on January 1, 1997, such cost variances for Met-Ed and
Penelec are not subject to deferred accounting and have a current impact on
earnings. In October 1998, the PaPUC approved the use of deferred accounting for
above-market nonutility generation (NUG) costs as part of the Restructuring
Orders for Met-Ed and Penelec. The 1998 increase in PP&I includes a charge by
Met-Ed and Penelec for the NUG portion of unbilled revenue. Also affecting 1998
earnings were increased power purchases by Penelec and GPU AR. Lower reserve
capacity expense contributed to earnings for 1997.
Fuel and Deferral of energy and capacity costs, net
1998 and 1997
For JCP&L, changes in fuel and deferral of energy and capacity costs, net,
do not affect earnings as they are offset by corresponding changes in energy
revenues. Effective January 1, 1997, Met-Ed and Penelec ceased deferred
F-10
GPU, Inc. and Subsidiary Companies
GPU RESULTS OF OPERATIONS (continued)
energy accounting as their ECRs were combined with base rates; therefore, cost
variances have a current impact on earnings. For Met-Ed, increases in fuel
expense had a slight impact on 1998 earnings. Also contributing to the 1998
increase in expense was the effect of including GPUI Group's investments in Lake
and OCLP.
Other operation and maintenance (O&M)
1998
The increase in other O&M expenses was due primarily to the implementation
by the GPU Energy companies of a new company-wide computer software system,
costs related to staff reductions and the full year inclusion of O&M expenses
for GPU Telcom. Also contributing to the increase was GPUI Group O&M expenses
resulting from the full year effect of including PowerNet and Lake, as well as
the effect of including OCLP beginning in August 1998.
1997
The decrease in other O&M expenses was due primarily to the absence of a
$122.7 million pre-tax charge incurred in 1996, related to voluntary enhanced
retirement programs. Also contributing to the decrease were lower production
expenses due to the 1996 retirement of JCP&L's Werner and Gilbert generating
stations, decreased emergency and storm-related activity, and reductions from
work process improvements and a decrease in the workforce. Partially offsetting
these were increased expenses related to the upgrade and modification of
computer systems.
Depreciation and amortization
1998
The increase in depreciation and amortization expense was due mainly to
the full year inclusion of PowerNet and additions to plant in service. The
increase also includes additional amortization expense related to JCP&L's Final
Settlement representing the portion of JCP&L's return on equity which exceeds
the maximum amount allowed and must be applied against JCP&L's stranded cost
pool.
1997
The increase in depreciation and amortization expense was due primarily to
additions to plant in service and higher depreciation rates.
Taxes, other than income taxes
1998 and 1997
For JCP&L, changes in taxes other than income taxes do not significantly
affect earnings as they are substantially recovered in revenues. The 1998
decrease in taxes other than income taxes was due to New Jersey tax legislation
that eliminated the gross receipts and franchise tax on utility bills and
replaced it with a sales tax, a corporate business tax and a transitional energy
facilities assessment, effective January 1, 1998. Effective January 1, 1997,
Met-Ed and Penelec's STAS were combined with base rates and are no longer
subject to annual adjustment. For 1998 and 1997, Met-Ed and Penelec's STAS did
not have a significant impact on GPU's earnings.
F-11
GPU, Inc. and Subsidiary Companies
GPU RESULTS OF OPERATIONS (continued)
OTHER INCOME AND DEDUCTIONS:
Equity in undistributed earnings/(losses) of affiliates (GPUI Group only)
1998
The increase in equity in undistributed earnings of affiliates, net was
primarily due to the absence in 1998 of a $109.3 million charge taken in 1997
for a windfall profits tax imposed on Midlands Electricity plc (Midlands) by the
Government of the United Kingdom.
1997
The decrease in equity in undistributed earnings/(losses) of affiliates
was due to the windfall profits tax charge of $109.3 million imposed on
privatized utilities, including Midlands. Partially offsetting this was the
inclusion of a full year of Midlands' 1997 income, in which a 50% interest was
acquired in May 1996.
Other income, net
1998
The increase in other income, net was due primarily to gains realized by
the GPUI Group from the sale of its interest in Solaris, the sale of Allgas
Energy stock and the sale of half its interest in the Mid-Georgia cogeneration
plant. This increase was partially offset by a charge for start-up payments for
the establishment of a sustainable energy fund by Met-Ed and Penelec per the
Restructuring Orders; and a charge by Met-Ed for the Middletown settlement.
Income taxes
1998
The increase in income taxes (on other income and deductions) was
primarily related to taxes on increased GPUI Group income.
1997
The decrease in income taxes (on other income and deductions) was
primarily related to the GPUI Group. GPU's federal income tax liability was
reduced as a result of its policy of accruing U.S. income tax on its worldwide
operations.
INTEREST CHARGES AND PREFERRED DIVIDENDS:
Interest on long-term debt
1998 and 1997
The 1998 increase in interest on long-term debt was due primarily to debt
associated with the PowerNet acquisition in November 1997. The 1997 increase was
due primarily to debt associated with the PowerNet acquisition and the May 1996
Midlands acquisition.
Preferred stock dividends of subsidiaries, net of gain on 1996 reacquisition
1998
In 1998, JCP&L redeemed $15 million stated value of cumulative preferred
stock.
F-12
GPU, Inc. and Subsidiary Companies
GPU RESULTS OF OPERATIONS (continued)
1997
The 1997 increase was due to the absence of the 1996 gain on reacquisition
of cumulative preferred stock. In 1996, Met-Ed and Penelec reacquired $11.4
million stated value and $20 million stated value, respectively, of their
cumulative preferred stock, through cash tender offers, resulting in an
aggregate gain of $9.3 million. Also in 1997, JCP&L redeemed $20 million stated
value of cumulative preferred stock.
EXTRAORDINARY ITEM:
Extraordinary item, net of income taxes
1998
The extraordinary loss was due to the impact of the PaPUC Restructuring
Orders received by Met-Ed and Penelec. Accordingly, in 1998 Met-Ed and Penelec
discontinued the application of Statement of Financial Accounting Standards No.
71 (FAS 71) and adopted the provisions of FAS 101 with respect to their electric
generation operations. For additional information, see Note 5, Accounting for
Extraordinary and Non-recurring Items.
JCP&L RESULTS OF OPERATIONS
JCP&L's 1998 earnings were $212.4 million, compared to 1997 earnings of
$200.6 million. Contributing to this earnings increase were increased
residential and commercial customer sales, partially offset by increased
operation and maintenance expenses. JCP&L's return on average common equity was
13.5% in 1998, compared to 13.1% in 1997.
Earnings in 1997 were $200.6 million, compared to 1996 earnings of $143.2
million. Contributing to this earnings increase were higher weather-related
sales, higher new customer sales and lower operation and maintenance expenses
due in part to a $39.4 million after-tax charge in 1996 for voluntary enhanced
retirement programs.
OPERATING REVENUES:
Total revenues decreased 1.2% to $2.07 billion in 1998, after increasing
1.8% to $2.09 billion in 1997. The components of these changes are as follows:
(in millions)
1998 1997
---- ----
KWH revenues $ 64.0 $ 13.0
Energy-related revenues 48.2 22.1
Other revenues (136.5) 1.0
----- -----
Increase/(decrease)in revenues $(24.3) $ 36.1
===== =====
Kilowatt-hour revenues
1998
The increase in KWH revenues was due to higher residential and commercial
customer usage and an increase in new residential and commercial customer sales
partially offset by lower weather-related sales.
F-13
GPU, Inc. and Subsidiary Companies
JCP&L RESULTS OF OPERATIONS (continued)
1998 KWH Customer Sales by Service Class
Residential 41%
Commercial 40%
Industrial/Other 19%
1997
The increase in KWH revenues was due to higher weather-related sales, an
increase in new residential and commercial customer sales, partially offset by
decreased usage.
Energy-related revenues
1998 and 1997
Changes in energy-related revenues do not affect earnings as they reflect
corresponding changes in the LEAC billed to customers and expensed. The 1998
increase was primarily due to increased sales to other utilities and higher
residential and commercial customer sales. The 1997 increase was due primarily
to higher energy cost rates and increased commercial and industrial customer
sales.
Other revenues
1998 and 1997
Generally, changes in other revenues do not affect earnings as they are
offset by corresponding changes in expense. The 1998 decrease is primarily due
to a decrease in revenue taxes as a result of New Jersey tax legislation that
eliminated the gross receipts and franchise tax on utility bills and replaced it
with a sales tax, a corporate business tax and a transitional energy facilities
assessment, effective January 1, 1998.
OPERATING EXPENSES:
Power purchased and interchanged
1998 and 1997
Changes in the energy component of PP&I expense do not significantly
affect earnings since these cost variances are passed through the LEAC. However,
lower reserve capacity expense resulting primarily from reduced purchases from
Pennsylvania Power & Light Company contributed to the 1997 earnings.
Fuel and Deferral of energy and capacity costs, net
1998 and 1997
Changes in fuel and deferral of energy and capacity costs, net do not
affect earnings as they are offset by corresponding changes in energy revenues.
Other operation and maintenance
1998
The increase in other O&M expenses was due primarily to increased costs
from the implementation of a new computer software system and for costs related
to staff reductions.
F-14
GPU, Inc. and Subsidiary Companies
JCP&L RESULTS OF OPERATIONS (continued)
1997
The decrease in other O&M expenses was due in part to the absence of a
$62.9 million pre-tax charge incurred in 1996, related to voluntary enhanced
retirement programs. Also contributing to the decrease were lower production
expenses due to the 1996 retirement of the Werner and Gilbert generating
stations, a decrease in transmission charges from associated companies and a
decrease in storm damage and emergency repairs.
Depreciation and amortization
1998
The increase in depreciation and amortization expense was due primarily to
additions to plant in service and additional amortization expense related to
JCP&L's Final Settlement representing the portion of JCP&L's return on equity
which exceeds the maximum amount allowed and must be applied against JCP&L's
stranded cost pool.
1997
The increase in depreciation and amortization expense was due primarily to
additions to plant in service, higher depreciation rates and higher regulatory
asset amortizations.
Taxes, other than income taxes
1998 and 1997
Changes in taxes other than income taxes do not significantly affect
earnings as they are substantially recovered in revenues.
OTHER INCOME AND DEDUCTIONS:
Other income, net
1998 and 1997
The 1998 increase in other income, net was due primarily to the absence of
the charges incurred in 1997 for the termination of a NUG contract and for a
loss on the sale of fuel oil from the Gilbert generating station.
INTEREST CHARGES AND DIVIDENDS ON PREFERRED SECURITIES:
Other interest
1998
The decrease in other interest expense was due to lower short-term debt
levels.
1997
The increase in other interest expense was due to higher short-term debt
levels.
Preferred stock dividends
1998 and 1997
In 1998 and 1997, JCP&L redeemed $15 million stated value and $20 million
stated value, respectively, of cumulative preferred stock.
F-15
GPU, Inc. and Subsidiary Companies
MET-ED RESULTS OF OPERATIONS
Met-Ed's 1998 earnings were $50.4 million, compared to 1997 earnings of
$93 million. Met-Ed's return on average common equity was 7.5% in 1998 compared
to 12.9% in 1997. In 1998, a non-recurring charge of $26 million after-tax was
taken as a result of the PaPUC's Restructuring Order for Met-Ed. Also
contributing to the earnings decrease was increased operation and maintenance
expenses primarily related to the implementation of a new computer software
system and restructuring costs related to staff reductions.
Earnings in 1997 were $93 million, compared to 1996 earnings of $71.8
million. This increase in earnings was primarily due to a step increase in
unbilled revenue recorded by Met-Ed as a result of including its ECR in base
rates and the cessation of deferred energy accounting, both effective January 1,
1997. Also contributing to the increase were increased customer usage, higher
new customer sales and lower other operation and maintenance expenses due to a
$15.4 million after-tax charge in 1996 for voluntary enhanced retirement
programs.
OPERATING REVENUES:
Total revenues decreased 2.5% to $919.6 million in 1998, after increasing
3.6% to $943.1 million in 1997. The components of these changes are as follows:
(in millions)
1998 1997
---- ----
KWH revenues $ (4.5) $ 28.6
Obligation to refund 1998 revenues
to customers per PaPUC Order (27.2) -
Other revenues 8.2 4.1
----- -----
Increase/(decrease)in revenues $(23.5) $ 32.7
===== =====
Kilowatt-hour revenues
1998
The decrease in KWH revenues was due to the absence in 1998 of the step
increase in unbilled revenue as a result of Met-Ed including its ECR in base
rates, amounting to $13 million, and lower weather-related sales. Partially
offsetting these decreases were increased sales to other utilities, an increase
in new commercial and residential customer sales and increased customer usage.
1998 KWH Customer Sales by Service Class
Residential 35%
Commercial 28%
Industrial/Other 37%
1997
The increase in KWH revenues was due to increased customer usage and an
increase in new commercial and residential customer sales, partially offset by
lower weather-related sales. Also contributing to the increase was the step
increase in unbilled revenue described above. KWH revenues include energy and
tax revenues, consistent with the inclusion of the ECR and STAS in base rates,
effective January 1, 1997.
F-16
GPU, Inc. and Subsidiary Companies
MET-ED RESULTS OF OPERATIONS (continued)
Obligation to refund 1998 revenues to customers per PaPUC Order
1998
The decrease in revenues reflects a T&D rate reduction of 2.5% resulting
from the PaPUC's Restructuring Order for Met-Ed. The T&D rate reduction reflects
Met-Ed's obligation to make refunds to customers from 1998 revenues.
Other revenues
1998 and 1997
Generally, changes in other revenues do not affect earnings as they are
offset by corresponding changes in expense.
OPERATING EXPENSES:
Fuel and Power purchased and interchanged
1998 and 1997
Effective January 1, 1997, Met-Ed ceased deferred energy accounting as
its ECR was combined with base rates. Thus, energy cost variances now have a
current impact on earnings. In 1998, the PaPUC approved the use of deferred
accounting for above-market NUG costs as part of the Restructuring Order for
Met-Ed. Increases in fuel expense had a slight impact on Met-Ed's 1998 earnings.
Also, PP&I includes a charge by Met-Ed for the NUG portion of unbilled revenue.
Changes in fuel and power purchased and interchanged did not have a significant
impact on earnings for 1997.
Other operation and maintenance
1998
The increase in other O&M expenses was due primarily to increased costs
from the implementation of a new computer software system and increased costs
related to staff reductions.
1997
The decrease in other O&M expenses was due to the absence of a $26.2
million pre-tax charge incurred in 1996 related to the voluntary enhanced
retirement programs.
Depreciation and amortization
1998 and 1997
The increase in depreciation and amortization was due to additions to
plant in service and higher depreciation rates.
Taxes, other than income taxes
1998 and 1997
Effective January 1, 1997, Met-Ed's STAS was combined with base rates and
is no longer subject to annual adjustment. This did not have a significant
impact on 1998 or 1997 earnings.
F-17
GPU, Inc. and Subsidiary Companies
MET-ED RESULTS OF OPERATIONS (continued)
OTHER INCOME AND DEDUCTIONS:
Other income/(expense), net
1998
The decrease in other income/(expense) net, was due primarily to a charge
for start-up payments for the establishment of a sustainable energy fund per the
PaPUC's Restructuring Order for Met-Ed and a charge for the Middletown
settlement.
1997
The increase in other income/(expense), net was due to an increase in
interest income.
INTEREST CHARGES AND DIVIDENDS ON PREFERRED SECURITIES:
Other interest
1998 and 1997
The increase in other interest expense was due to higher short-term debt
levels.
Preferred stock dividends and Gain on preferred stock reacquisition
1997
In 1996, Met-Ed reacquired $11.4 million stated value of its cumulative
preferred stock through cash tender offers, resulting in an aggregate gain of
$3.7 million.
EXTRAORDINARY ITEM:
Extraordinary item, net of income taxes
1998
The extraordinary loss was due to the impact of the PaPUC Restructuring
Order received by Met-Ed. Accordingly, in 1998 Met-Ed discontinued the
application of FAS 71 and adopted the provisions of FAS 101 with respect to
their electric generation operations. For additional information, see Note 5,
Accounting for Extraordinary and Non-recurring Items.
PENELEC RESULTS OF OPERATIONS
Penelec's 1998 earnings were $38.9 million, compared to 1997 earnings of
$94.4 million. Penelec's return on average common equity was 5% in 1998 compared
to 12.1% in 1997. In 1998, a non-recurring charge of $39.8 million after-tax was
taken as a result of the PaPUC's Restructuring Order for Penelec. Also
contributing to the earnings decrease was increased operation and maintenance
expenses primarily related to the implementation of a new computer software
system and restructuring costs related to staff reductions.
Earnings in 1997 were $94.4 million, compared to 1996 earnings of $73.9
million. This increase in earnings was primarily due to a step increase in
F-18
GPU, Inc. and Subsidiary Companies
PENELEC RESULTS OF OPERATIONS (continued)
unbilled revenue recorded by Penelec as a result of including its ECR in base
rates and the cessation of deferred energy accounting, both effective January 1,
1997. Also contributing to the increase was increased customer usage and lower
other operation and maintenance expenses due primarily to a $19.7 million
after-tax charge in 1996 for voluntary enhanced retirement programs.
OPERATING REVENUES:
Total revenues decreased 2.0% to $1.0 billion in 1998, after increasing
3.3% to $1.1 billion in 1997. The components of these changes are as follows:
(in millions)
1998 1997
---- ----
KWH revenues $ 13.9 $ 40.0
Obligation to refund 1998 revenues
to customers per PaPUC Order (29.2) -
Other revenues (5.4) (6.7)
----- -----
Increase/(decrease)in revenues $(20.7) $ 33.3
===== =====
Kilowatt-hour revenues
1998
The increase in KWH revenues was primarily due to increased sales to other
utilities and increased industrial customer usage offset by lower
weather-related sales. The revenue comparison was also affected by the absence
in 1998 of the step increase in unbilled revenue as a result of Penelec
including its ECR in base rates, amounting to $15 million.
1998 KWH Customer Sales by Service Class
Residential 27%
Commercial 31%
Industrial/Other 42%
1997
The increase in KWH revenues was due to increased industrial and
commercial customer usage offset by lower weather-related sales. Also
contributing to the increase was the step increase in unbilled revenue described
above. KWH revenues include energy and tax revenues, consistent with the
inclusion of the ECR and STAS in base rates, effective January 1, 1997.
Other revenues
1998 and 1997
Generally, changes in other revenues do not affect earnings as they are
offset by corresponding changes in expense.
F-19
GPU, Inc. and Subsidiary Companies
PENELEC RESULTS OF OPERATIONS (continued)
OPERATING EXPENSES:
Fuel and Power purchased and interchanged
1998 and 1997
Effective January 1, 1997, Penelec ceased deferred energy accounting as
its ECR was combined with base rates. Thus, energy cost variances now have a
current impact on earnings. In 1998, the PaPUC approved the use of deferred
accounting for above-market NUG costs as part of the Restructuring Order for
Penelec. The 1998 increase in PP&I includes a charge for the NUG portion of
unbilled revenue. Changes in fuel and power purchased and interchanged did not
have a significant impact on earnings for 1997.
Other operation and maintenance
1998
The increase in other O&M expenses was due primarily to increased costs
from the implementation of a new computer software system and increased costs
related to staff reductions.
1997
The decrease in other O&M expenses was due primarily to the absence of a
$33.6 million pre-tax charge incurred in 1996, related to the voluntary enhanced
retirement programs.
Depreciation and amortization
1998 and 1997
The increases in depreciation and amortization expense were due to
additions to plant in service and higher depreciation rates.
Taxes, other than income taxes
1998 and 1997
Effective January 1, 1997, Penelec's STAS was combined with base rates and
is no longer subject to annual adjustment. This did not have a significant
impact on 1998 or 1997 earnings.
OTHER INCOME AND DEDUCTIONS:
Other income/(expense), net
1998
The decrease in other income/(expense) net, was due primarily to a charge
for start-up payments for the establishment of a sustainable energy fund per the
Restructuring Order for Penelec.
1997
The increase in other income/(expense), net was due primarily to an
increase in interest income.
F-20
GPU, Inc. and Subsidiary Companies
PENELEC RESULTS OF OPERATIONS (continued)
INTEREST CHARGES AND DIVIDENDS ON PREFERRED SECURITIES:
Preferred stock dividends and Gain on preferred stock reacquisition
1997
In 1996, Penelec reacquired $20 million stated value of its cumulative
preferred stock through cash tender offers, resulting in an aggregate gain of
$5.6 million.
EXTRAORDINARY ITEM:
Extraordinary item, net of income taxes
1998
The extraordinary loss was due to the impact of the PaPUC Restructuring
Order received by Penelec.
Accordingly, in 1998 Penelec discontinued the application of FAS 71 and adopted
the provisions of FAS 101 with
respect to their electric generation operations. For additional information, see
Note 5, Accounting for Extraordinary and Non-recurring Items.
- ----------------------
The following sections of Management's Discussion and Analysis of
Financial Condition and Results of Operations contain certain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Statements made that are not historical facts are forward-looking and,
accordingly, involve risks and uncertainties that could cause actual results or
outcomes to differ materially from those expressed in the forward-looking
statements. Although such forward-looking statements have been based on
reasonable assumptions, there is no assurance that the expected results will be
achieved. Some of the factors that could cause actual results to differ
materially include, but are not limited to: the effects of regulatory decisions;
changes in law and other governmental actions and initiatives; the impact of
deregulation and increased competition in the industry; industry restructuring;
expected outcomes of legal proceedings; the completion of generation asset
divestiture; generating plant performance; fuel prices and availability; the
effects of the Year 2000 issue (see LIQUIDITY AND CAPITAL RESOURCES section in
Management's Discussion and Analysis); and uncertainties involved with foreign
operations including political risks and foreign currency fluctuations.
GPUI GROUP
The GPUI Group owns, operates, develops and invests in electric power
generation, transmission and distribution facilities throughout the world. It
has also made investments in certain advanced technologies related to the
electric power industry. The GPUI Group has ownership interests in transmission
and distribution businesses in England and Australia. It also has ownership
interests in nine operating cogeneration plants in the U.S. totaling 1,147
megawatts (MW) (of which the GPUI Group's equity interest represents 498 MW) of
capacity, and ten operating generating facilities located in foreign countries
totaling 3,879 MW (of which the GPUI Group's equity interest represents 730 MW)
of capacity. It also has investments in four generating facilities under
construction totaling 1,698 MW (of which the GPUI Group's equity interest
represents 301 MW) of capacity. When
F-21
GPU, Inc. and Subsidiary Companies
appropriate, the GPUI Group also engages in the purchase or sale of interests in
particular businesses.
At December 31, 1998, GPU, Inc.'s aggregate investment in the GPUI Group
was $590 million; GPU, Inc. has also guaranteed up to an additional $761 million
of GPUI Group obligations. 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 $2.2 billion
as of December 31, 1998. At December 31, 1998, GPU, Inc. has remaining
authorization to finance approximately $979 million of additional investments in
FUCOs and EWGs.
In 1997, GPU Electric acquired PowerNet from the Australian State of
Victoria, for A$2.6 billion (approximately U.S. $1.9 billion). PowerNet owns and
maintains the high-voltage electricity transmission system in Victoria, covering
an area of approximately 87,900 square miles and a population of approximately
4.5 million. For additional information, see Note 6 of the Notes to Consolidated
Financial Statements.
In January 1998, as a result of cross-ownership restrictions in the
Australian State of Victoria, GPU Electric sold its 50% share in Solaris Power
(Solaris) to The Australian Gas Light Company for A$208 million (approximately
U.S. $135.2 million) and 10.36% of the outstanding common stock of Allgas Energy
Limited (Allgas), the natural gas distributor in Queensland, Australia. The
Allgas shares had a market value of A$14.6 million (approximately U.S. $9.5
million) at the date of sale. As a result of the Solaris sale, GPU recorded an
after-tax gain of $18.3 million. In July 1998, GPU Electric sold its Allgas
shares for A$25.8 million (approximately U.S. $16 million).
In February 1998, GPU International sold a one-half interest in the
Mid-Georgia cogeneration project (Mid-Georgia, a 300 MW facility located in
Kathleen, Georgia) to Sonat Energy Services Company. As a result, GPU recorded
an after-tax gain on the sale of $5.8 million in the first quarter of 1998. In
June 1998, Mid-Georgia began commercial operation under a 30-year power purchase
agreement to sell capacity and energy on a dispatchable basis to Georgia Power.
In November 1998, Midlands announced the sale of its electric supply
business to National Power plc. GPU and Cinergy jointly acquired Midlands in
1996. National Power will acquire all the assets of Midlands' supply business
and assume its liabilities, including obligations under all Midlands' power
purchase agreements, for $300 million ($150 million for GPU's share) plus an
adjustment for working capital at financial closing, which is expected in the
second quarter of 1999. Midlands will continue to own its distribution business,
as well as interests in various generation stations.
In December 1998, GPU Electric agreed to acquire Emdersa, an Argentine
holding company that owns three electric distribution companies, for $435
million. The three companies serve approximately 335,000 customers throughout a
service territory of approximately 124,300 square miles in northwest Argentina.
GPU expects to complete the purchase of Emdersa in the first quarter of 1999.
Management expects that the GPUI Group will provide a substantial portion
of GPU's future earnings growth and intends to make additional investments in
F-22
GPU, Inc. and Subsidiary Companies
its business activities. The timing and amount of these investments, however,
will depend upon the availability of appropriate opportunities and financing
capabilities.
Market Risk Sensitive Instruments
The GPUI Group uses interest rate swaps to manage the risk of increases in
variable interest rates. All of the agreements effectively convert variable rate
debt, including commercial paper, to fixed rate debt. None of these swap
agreements are held for trading purposes. During 1998, PowerNet replaced
interest rate swap agreements with swaps having more favorable economic terms.
As a result, PowerNet recognized A$7.2 million (approximately U.S. $4.4 million)
of swap breakage costs. The following summarizes the principal characteristics
of swap agreements entered into as of December 31, 1998:
(in thousands)
Fixed Variable
Notional Fair Termination Pay/Receive Interest Interest Rate
Amount Value(a) Date Characteristic Rate at 12/31/98
------ -------- ---- -------------- ---- -----------
PowerNet A$ 14,000 A$ 14 10/1/99 fixed/variable 4.66% 4.87%
A$ 14,000 A$ 2 10/1/99 fixed/variable 4.69% 4.87%
A$ 14,000 A$ 10 10/1/99 fixed/variable 4.70% 4.89%
A$ 22,750 A$ (2) 10/1/99 fixed/variable 4.71% 4.85%
A$ 39,250 A$ 68 10/1/00 fixed/variable 4.75% 4.84%
A$ 26,000 A$ 28 10/1/00 fixed/variable 4.79% 4.85%
A$ 42,250 A$ 28 10/1/00 fixed/variable 4.81% 4.85%
A$ 26,000 A$ 81 10/3/00 fixed/variable 4.77% 4.87%
A$ 26,000 A$ 68 10/3/00 fixed/variable 4.80% 4.89%
A$ 212,000 A$ (5,164) 11/6/00 fixed/variable 6.14% 4.89-4.93%
A$ 481,250 A$ (24,691) 11/6/02 fixed/variable 6.56% 4.89-4.93%
A$ 385,000 A$ (29,558) 11/8/04 fixed/variable 6.82% 4.82-4.93%
A$ 288,750 A$ (34,330) 11/6/07 fixed/variable 7.14% 4.82-4.93%
A$ 288,750 A$ (34,523) 11/6/07 fixed/variable 7.15% 4.82-4.93%
--------- ---------
A$1,880,000 A$ (127,969)
<FN>
(a) Represents the amount the GPUI Group would (pay)/receive to terminate the
swap agreements prior to their scheduled termination dates.
</FN>
The amount of debt obligations covered by swap agreements and the expected
variable interest rates on such debt, for each of the next five years, are as
follows:
(in thousands)
PowerNet
--------
Expected
Average Variable
Debt Interest
Covered Rate
------- ----
1999 A$1,880,000 4.7-4.9%
2000 A$1,759,688 4.9-5.0%
2001 A$1,158,125 5.1-5.2%
2002 A$1,037,813 5.2-5.3%
2003 A$ 436,250 5.3-5.4%
F-23
GPU, Inc. and Subsidiary Companies
The expected variable interest rates included above, for the years 1999
through 2003, were provided by the financial institutions with whom the swap
agreements were executed, and were derived from their proprietary models based
upon recognized financial principles.
The swap agreements resulted in actual interest expense for covered debt
of $83.7 million in 1998, as compared to $65.4 million in interest expense, had
the GPUI Group not entered into the agreements. It is management's intent to
refinance A$721.9 million (approximately U.S. $442 million) of debt, which is
scheduled to mature in November 2002, on a long-term basis.
LIQUIDITY AND CAPITAL RESOURCES
Capital Expenditures and Investments
GPU Energy Companies
The GPU Energy companies' capital spending was $328 million (JCP&L $155
million; Met-Ed $75 million; Penelec $89 million; Other $9 million) in 1998, and
was used primarily for new customer connections and to expand and improve
existing T&D facilities. In 1999, capital expenditures for the GPU Energy
companies are estimated to be $397 million (JCP&L $183 million; Met-Ed $97
million; Penelec $98 million; Other $19 million), primarily for ongoing T&D
system development and to implement an integrated information system. In 1998,
expenditures for maturing obligations were $43 million (JCP&L $13 million;
Penelec $30 million). Expenditures for maturing obligations are expected to
total $83 million (JCP&L $3 million; Met-Ed $30 million; Penelec $50 million) in
1999, and $131 million (JCP&L $51 million; Met-Ed $50 million; Penelec $30
million) in 2000. Management estimates that a substantial portion of the GPU
Energy companies' 1999 capital outlays will be satisfied through internally
generated funds.
GPU's capital leases are primarily for nuclear fuel held by the GPU Energy
companies. Nuclear fuel capital leases at December 31, 1998 totaled $126 million
(JCP&L $85 million; Met-Ed $27 million; Penelec $14 million). When consumed,
portions of the presently leased material will be replaced by additional leased
material at an annual rate of approximately $36 million (JCP&L $9 million;
Met-Ed $18 million; Penelec $9 million). In the event the needed nuclear fuel
cannot be leased, the associated capital requirements would have to be met by
other means. Upon closing of the sale of Three Mile Island Unit 1 (TMI-1) to
AmerGen Energy Company, LLC (AmerGen), the GPU Energy companies will terminate
the related fuel lease and pay all outstanding amounts due under the related
credit facility (see Managing the Transition section of COMPETITIVE ENVIRONMENT
AND RATE MATTERS).
GPUI Group
The GPUI Group's capital spending was $140 million in 1998, which was
used primarily to improve PowerNet's facilities and to make additional
investments in EWGs and FUCOs. For 1999, capital expenditures are forecasted to
be $39 million, primarily for ongoing development of PowerNet's transmission
system and to make additional investments in EWGs and FUCOs. In 1998,
expenditures for maturing obligations were $538 million, and are expected to
total $481 million in 1999, and $534 million in 2000. Management estimates that
the GPUI Group's 1999 capital outlays will be satisfied through both internally
generated funds and external financings.
F-24
GPU, Inc. and Subsidiary Companies
Capital Expenditures and Investments*
(in millions)
-------------
1994 1995 1996 1997 1998 1999**
---- ---- ---- ---- ---- ----
GPU Energy companies $586 $462 $404 $356 $328 $397
GPUI Group $ 74 $165 $574 $1,912 $140 $ 39
* Includes consolidated operations only
** Estimate
Financing
GPU, Inc.
GPU, Inc. has received SEC approval to issue and sell up to $300 million
of unsecured debentures through 2001. In February 1998, GPU, Inc. sold seven
million shares of common stock. The net proceeds of $269 million were used
primarily to reduce indebtedness associated with the PowerNet and Midlands
acquisitions, and the balance was used for other corporate purposes. Further
significant investments by the GPUI Group, or otherwise, may require GPU, Inc.
to issue additional debt and/or common stock (see GPUI GROUP for a discussion of
GPU, Inc.'s remaining investment authorization).
GPU, Inc. has requested SEC authorization to issue and sell up to $100
million of commercial paper through December 2003. GPU, Inc. expects that the
proceeds from the issuance of the commercial paper will be used for general
corporate purposes and to make additional investments in EWGs and FUCOs.
In January 1999, the GPU, Inc. Board of Directors authorized the
repurchase of up to $350 million of GPU, Inc. common stock. The repurchases will
initially be funded with borrowings.
GPU Energy Companies
Under existing authorizations, JCP&L and Penelec may issue first mortgage
bonds (FMBs), including secured medium-term notes, and preferred stock through
June 1999. Met-Ed has similar authority through December 1999. Aggregate amounts
available for issuance under the JCP&L, Met-Ed and Penelec programs are $145
million, $190 million and $70 million, respectively, of which $100 million for
JCP&L and Met-Ed and $70 million for Penelec may consist of preferred stock. The
GPU Energy companies do not, however, expect to issue additional senior
securities under these existing authorizations.
Instead, Met-Ed and Penelec have obtained regulatory approval through
December 31, 2000 to issue senior notes and preferred securities in aggregate
amounts of $250 million and $725 million, respectively, of which up to $125
million for each company may consist of preferred securities. JCP&L is seeking
similar regulatory approval through December 31, 2000 to issue senior notes and
preferred securities in the aggregate amount of $300 million, of which up to
$200 million may consist of preferred securities.
Current plans call for the GPU Energy companies to issue secured senior
notes and preferred securities during the next three years to fund the
redemption of maturing senior securities, refinance outstanding senior
securities and finance construction activities. The secured senior notes would
become unsecured when 80% or more of the FMBs issued are collateral for senior
notes. All senior notes issued thereafter would be unsecured.
F-25
GPU, Inc. and Subsidiary Companies
The GPU Energy companies' bond indentures and articles of incorporation
include provisions that limit the amount of long-term debt, preferred stock and
short-term debt the companies may issue. The GPU Energy companies' interest and
preferred dividend coverage ratios are currently in excess of indenture and
charter restrictions. The amount of FMBs that the GPU Energy companies could
issue based on the bondable value of property additions is in excess of amounts
currently authorized. The GPU Energy companies have regulatory authority to
incur short-term debt, a portion of which may be through the issuance of
commercial paper.
In 1998, Penelec redeemed $30 million principal amount of FMBs and JCP&L
redeemed $15 million stated value of cumulative preferred stock pursuant to
mandatory and optional sinking fund provisions. In 1999, Penelec expects,
subject to market conditions, to redeem approximately $600 million of its FMBs
out of the proceeds from the sale of the generating assets.
In January 1999, Met-Ed and Penelec announced the redemption of all their
outstanding shares of cumulative preferred stock. The shares will be redeemed on
February 19, 1999 at a price of $12.6 million and $17.6 million for Met-Ed and
Penelec, respectively.
The GPU Energy companies' cost of capital and ability to obtain external
financing are affected by their security ratings, which are periodically
reviewed by the credit rating agencies. The GPU Energy companies' FMBs are
currently rated at an equivalent of "BBB+" or higher by the major credit rating
agencies, while the preferred stock and mandatorily redeemable preferred
securities have been assigned an equivalent of "BBB" or higher. In addition, the
GPU Energy companies' commercial paper is rated as having good credit quality.
GPUI Group
In 1998, GPU Capital entered into a commercial paper credit facility to
finance up to $1 billion of investments in FUCOs and EWGs. GPU expects that the
proceeds from the sale of commercial paper (guaranteed by GPU, Inc.) will be
used to repay a portion of the outstanding foreign acquisition debt and to
finance future investments in FUCOs and EWGs. In January 1999, GPU Capital
issued $375 million of commercial paper which was used primarily to reduce the
Midlands acquisition debt. Also in 1998, Austran Holdings, Inc. (Austran), a
wholly owned subsidiary of GPU Electric, entered into a A$500 million
(approximately U.S. $306 million) commercial paper program. PowerNet has
guaranteed Austran's obligations under this program. As of December 31, 1998,
Austran had outstanding approximately A$458 million (approximately U.S. $280
million) under the commercial paper program to refinance the maturing portion of
the senior debt credit facility used to finance the PowerNet acquisition. The
Austran borrowings are classified as noncurrent on the Consolidated Balance
Sheet since it is management's intent to reissue the commercial paper on a
long-term basis.
In 1998, GPU Electric sold its 50% stake in Solaris, the net sales
proceeds of which were used to reduce by $112 million the Solaris and PowerNet
acquisition debt. The balance of the proceeds was applied for other corporate
purposes.
In 1998, PowerNet and Midlands acquisition debt was reduced by an
additional $40 million and $189 million, respectively, from proceeds provided by
the sale of GPU, Inc. common stock. GPU may further reduce Midlands and PowerNet
acquisition debt with a portion of the proceeds from the sale of the
F-26
GPU, Inc. and Subsidiary Companies
GPU Energy companies' fossil-fueled and hydroelectric generating facilities,
which is expected to be completed in mid-1999 (see Managing the Transition
section of COMPETITIVE ENVIRONMENT AND RATE MATTERS).
Capitalization
Each of the GPU companies' target capitalization ratios are designed to
provide credit quality ratings that permit capital market access at reasonable
costs. The target capitalization ratios vary by subsidiary depending upon their
business and financial risk. GPU's actual capitalization ratios at December 31
for the years indicated, were as follows:
GPU, Inc. and Subsidiary Companies 1998 1997 1996
- ---------------------------------- ---- ---- ----
Common equity 40% 35% 43%
Preferred equity 6 6 7
Notes payable and long-term debt 54 59 50
--- --- ---
100% 100% 100%
=== === ===
JCP&L 1998 1997 1996
- ----- ---- ---- ----
Common equity 50% 50% 48%
Preferred equity 8 9 9
Notes payable and long-term debt 42 41 43
--- --- ---
100% 100% 100%
=== === ===
Met-Ed 1998 1997 1996
- ------ ---- ---- ----
Common equity 47% 49% 48%
Preferred equity 8 7 8
Notes payable and long-term debt 45 44 44
--- --- ---
100% 100% 100%
=== === ===
Penelec 1998 1997 1996
- ------- ---- ---- ----
Common equity 47% 47% 45%
Preferred equity 7 7 7
Notes payable and long-term debt 46 46 48
--- --- ---
100% 100% 100%
=== === ===
In 1998, the quarterly dividend on GPU, Inc.'s common stock was increased
by 3.0% to an annualized rate of $2.06 per share. GPU, Inc.'s payout rate in
1998 was 61% of earnings (excluding the non-recurring items). Management will
continue to review GPU, Inc.'s dividend policy to determine how to best serve
the long-term interests of shareholders.
Year 2000 Issue
GPU is addressing the Year 2000 issue by undertaking a comprehensive
review of its computers, software and equipment with embedded systems such as
microcontrollers (together, "Year 2000 Components"), and of its business
relationships with third parties, including key customers, lenders, trading
partners, vendors, suppliers and service providers. Remediation plans and
corrective actions are in progress. The remediation plans include, among other
things, the modification or replacement of Year 2000 Components which are not
ready for use beyond 1999. In addition, GPU has begun to develop contingency
plans for mission-critical systems. GPU's Year 2000 project is not expected to
cause any material delay in the completion of other planned projects by
information technology services.
F-27
GPU, Inc. and Subsidiary Companies
In January 1999, an independent consultant retained by GPU to review the
adequacy of GPU's Year 2000 plans favorably rated the GPU Energy companies in
their progress toward achieving Year 2000 readiness as measured against the
consultant's "best practices" model. The consultant also identified certain
weaknesses that GPU is currently addressing.
The PaPUC has entered an Order mandating that Pennsylvania jurisdictional
utilities have their mission-critical systems Year 2000 compliant by March 31,
1999. In November 1998, an Administrative Law Judge (ALJ) assigned to the
proceeding conducted hearings to support recommendations demanding that the
PaPUC relax its March 31, 1999 mandate in certain cases. Met-Ed and Penelec have
jointly submitted testimony to the proceeding and participated in the hearings.
While there can be no assurance as to the outcome of this matter, including if
the PaPUC will modify its March 31, 1999 compliance date, GPU believes that its
current Year 2000 plans are adequate relative to its mission-critical systems.
In addition to the PaPUC mandate, inquiries concerning GPU's Year 2000 readiness
have been made by the New Jersey Board of Public Utilities (NJBPU), the U.S.
Nuclear Regulatory Commission (NRC), the U.S. Department of Energy, and by
numerous third parties with which GPU has business relationships.
Costs
The GPU Energy companies currently estimate that they will spend
approximately $43.3 million (JCP&L $18.6 million; Met-Ed $12 million; Penelec
$12.7 million) on the Year 2000 issue, which includes $8.1 million (JCP&L $2.7
million; Met-Ed $2.7 million; Penelec $2.7 million) that is being spent as a
part of the purchase and implementation of a new integrated information system
(Project Enterprise), as described below. The $43.3 million also includes $7.4
million(JCP&L $3.4 million; Met-Ed $1.9 million; Penelec $2.1 million) that
would have been spent in any event for maintenance and cyclical replacement
plans. Approximately 55% of the expected costs involve the modification or
replacement of Year 2000 Components; and 45% are for labor (including contract
labor) and other project expenses. These costs are being funded by the GPU
Energy companies from their operations.
Through December 31, 1998, the GPU Energy companies have spent a total of
approximately $20.6 million (JCP&L $8.6 million; Met-Ed $6 million; Penelec $6
million) (of the $43.3 million) in connection with the Year 2000 issue, of which
$15.9 million (JCP&L $6.5 million; Met-Ed $4.7 million; Penelec $4.7 million)
was spent in 1998.
The GPUI Group currently expects to spend approximately $9 million to
address the Year 2000 issue, primarily to replace or modify equipment at
Midlands. Through December 31, 1998, a total of approximately $2.5 million has
been spent, substantially all of which was spent in 1998.
The Project Enterprise system, referenced above, is designed to help the
GPU Energy companies manage business growth and meet the mandates of electric
utility deregulation. The system is scheduled to be substantially operational
for the GPU Energy companies and GPUS by March 1999 and fully operational for
all companies by June 1999. GPUN and Genco are not installing Project Enterprise
before the year 2000, but rather are making modifications to their systems to
achieve Year 2000 readiness. For critical systems, these modifications are
expected to be completed by March 31, 1999, and for remaining systems by July
31, 1999.
F-28
GPU, Inc. and Subsidiary Companies
Milestones
GPU has established Inventory, Assessment, Remediation, Testing and
Monitoring as the primary phases for its Year 2000 program. The Inventory phase
of the program has been completed. The milestones for Assessment, Remediation,
Testing and Monitoring are as follows:
Assessment Remediation Testing Monitoring
---------- ----------- ------- ----------
GPU Energy
and GPUS 02/28/1999 03/31/1999 03/31/1999 03/31/2000
Genco 02/28/1999 11/15/1999 11/15/1999 05/31/2000
GPUN 03/31/1999 10/31/1999 10/31/1999 03/31/2000
GPUI Group 02/28/1999 09/30/1999 09/30/1999 03/31/2000
Genco expects to complete modifications and testing of Year 2000
Components involved in 90% of its generation capacity by May 31, 1999.
Modifications and testing of the remaining components, primarily for two
generating units, will be completed during maintenance outages scheduled in the
Fall of 1999. GPUN expects to complete modifications and testing for most of its
systems and components by July 1, 1999. Modifications and testing of the
remaining components at TMI-1, which is scheduled for a refueling outage in
September 1999, are not expected to be completed until late October 1999.
Third Party Qualification
Due to the interdependence of computer systems and the reliance on other
organizations for supplies, materials or services, GPU is addressing the Year
2000 issue as it relates to the readiness of third parties. As part of its Year
2000 strategy, GPU is contacting key customers, lenders, trading partners,
vendors, suppliers and service providers to assess whether they are adequately
addressing the Year 2000 issue.
With respect to computer software and equipment with embedded systems,
GPU has analyzed where it is dependent upon third party data and has identified
several critical areas: (1) the Pennsylvania-New Jersey-Maryland (PJM)
Interconnection; (2) electric generation suppliers, such as cogeneration
operators and nonutility generators (NUGs); (3) Electronic Data Interchange
(EDI) with trading partners; (4) Electronic Funds Transfer (EFT) with financial
institutions; (5) vendors; and (6) customers.
The following summarizes the actions that have taken place with critical
third parties:
- - PJM - Data link testing has been completed. Major testing of system
upgrades is scheduled for completion during the first quarter of 1999.
- - Electric generation suppliers - GPU has contacted all critical electric
generation suppliers and information concerning their readiness has been
received from approximately 81%. Those that have responded have readiness
dates that extend into September 1999.
- - EDI/EFT - GPU has sent readiness questionnaires to all critical
organizations with which it exchanges data electronically and conducts
electronic funds transfers. GPU has received responses from
approximately 23% of those contacted. Testing with critical trading
partners is scheduled for completion during the first quarter of 1999.
F-29
GPU, Inc. and Subsidiary Companies
- - Vendors - GPU has contacted all critical vendors and approximately 61%
have responded as to their readiness.
- - Customers - A customer readiness assessment was initiated during the
fourth quarter of 1998 and approximately 64% of critical customers have
been contacted. GPU has received responses from 20% of those contacted.
Scenarios and Contingencies
If GPU, or critical third parties upon whom GPU relies, are unable to
successfully address their Year 2000 issues on a timely basis, certain
computers, equipment, systems and applications may not function properly, which
could have a material adverse effect on GPU's operations and financial
condition. While GPU cannot predict what effect, if any, the Year 2000 issue
will have on its operations, one possible scenario could include, among other
things, interruptions in delivering electric service, and a temporary inability
to process transactions, provide bills or operate electric generating stations.
GPU currently has no loss estimates related to Year 2000 risks that could
potentially result from any such scenario.
While there can be no assurance as to the outcome of this matter, GPU
believes that its Year 2000 preparations will be successful relative to its
mission-critical Year 2000 Components. In addition, GPU is developing
contingency plans in accordance with the contingency planning schedule proposed
by the North American Electric Reliability Council. These plans, which are
currently expected to be finalized in mid- to late-1999, will include
supplementing present general emergency procedures with specific measures for
Year 2000 problems and the placing of troubleshooting teams at sites where
critical components are located.
COMPETITIVE ENVIRONMENT AND RATE MATTERS
Managing the Transition
Currently, and increasingly in the future, GPU will serve customers in
markets where there will essentially be capped rates. Since GPU has, to a large
extent, exited the merchant generation business, it will need to supply energy
largely from contracted purchases and purchases in the open market. Management
is in the process of identifying and addressing these market risks, however,
there can be no assurance that GPU will be able to supply electricity to
customers that it has obtained at reasonable cost.
GPU expects to be in a regulated business (the transmission and
distribution of electricity) that will be lower risk than that of a company
engaged in merchant generation, but also expects that the rate of return on
equity investment will be somewhat lower as well. In addition, inflation may
have a varying effect on GPU since it will be a factor in revenue calculations
in some jurisdictions, but may cause increased operating costs with GPU having a
limited ability to pass these costs to its customers because of capped rates in
other areas.
GPU has been active both on the federal and state levels in helping to
shape electric industry restructuring while seeking to protect the interests of
its shareholders and customers, and is attempting to assess the impact that
these competitive pressures and other changes will have on its financial
condition and results of operations.
F-30
GPU, Inc. and Subsidiary Companies
In October 1997, GPU announced its intention to begin a process to sell,
through a competitive bid process, up to all of the fossil-fuel and
hydroelectric generating facilities owned by the GPU Energy companies. These
facilities, comprised of 26 operating stations, support organizations and
development sites, total approximately 5,300 MW (JCP&L 1,900 MW; Met-Ed 1,300
MW; Penelec 2,100 MW)of capacity and have a net book value of approximately $1.1
billion (JCP&L $272 million; Met-Ed $283 million; Penelec $508 million) at
December 31, 1998.
In August 1998, Penelec and New York State Electric & Gas Corporation
(NYSEG) entered into definitive agreements with Edison Mission Energy to sell
the Homer City Station for a total purchase price of approximately $1.8 billion.
Penelec and NYSEG each own a 50% interest in the station, and will share equally
in the net sale proceeds. The sale, which is subject to various federal and
state regulatory approvals, is expected to be completed in the first quarter of
1999.
In November 1998, the GPU Energy companies entered into definitive
agreements with Sithe Energies and FirstEnergy Corporation to sell all their
remaining fossil-fuel and hydroelectric generating facilities other than JCP&L's
50% interest in the Yards Creek Pumped Storage Facility (Yards Creek) for a
total purchase price of approximately $1.7 billion (JCP&L $442 million; Met-Ed
$677 million; Penelec $604 million). Penelec's 20% undivided ownership interest
in the Seneca Pumped Storage Facility is being sold to FirstEnergy for $43
million, which is included in the above amount. The sales are expected to be
completed by mid-1999, subject to the timely receipt of the necessary regulatory
and other approvals. Sithe has agreed to assume the collective bargaining
agreements covering union employees and to fill bargaining positions on the
basis of seniority. Sithe has also agreed to use reasonable efforts to offer
positions to Genco non-bargaining employees. The GPU Energy companies have
agreed to assume up to $20 million (JCP&L $7 million; Met-Ed $9 million; Penelec
$4 million)of employee severance costs for employees not hired by Sithe.
In October 1998, the GPU Energy companies entered into definitive
agreements to sell TMI-1 to AmerGen, which is a joint venture between PECO
Energy and British Energy. Terms of the purchase agreements are summarized as
follows:
- - The total cash purchase price is approximately $100 million, which
represents $23 million to be paid at closing, and $77 million for the
nuclear fuel in the reactor to be paid in five equal annual installments
beginning one year after the closing. The purchase price and closing
payment are subject to certain adjustments for capital expenditures and
other items.
- - AmerGen will make contingent payments of up to $80 million for the period
January 1, 2002 through December 31, 2010 depending on the actual energy
market clearing prices through 2010.
- - GPU will purchase the energy and capacity from TMI-1 from the closing
through December 31, 2001, at predetermined rates.
- - At closing, GPU will make additional deposits into the TMI-1
decommissioning trusts to bring the trust totals up to $320 million and
AmerGen will then assume all liability and obligation for decommissioning
TMI-1.
F-31
GPU, Inc. and Subsidiary Companies
- - GPU will continue to own and hold the license for Three Mile Island Unit
2 (TMI-2). No liability for TMI-2 or its decommissioning will be assumed
by AmerGen. AmerGen will, however, maintain TMI-2 under contract with
GPU.
- - AmerGen will employ all employees located at TMI-1 at closing, and will
also have the opportunity to offer positions to GPUN's headquarters
staff. GPU will be responsible for all severance payments associated with
these employees for a one-year period following closing. AmerGen will
assume the current collective bargaining agreement covering TMI-1 union
employees.
The sale is subject to various conditions, including the receipt of
satisfactory federal and state regulatory approvals. NRC approval of the TMI-1
license transfer to AmerGen, as well as certain rulings from the Internal
Revenue Service, will be necessary with respect to the maintenance or transfer
of the decommissioning trusts. There can be no assurance as to the outcome of
these matters.
The net proceeds from the sales described above will be used to reduce
the capitalization of the respective GPU Energy companies, repurchase GPU, Inc.
common stock, fund previously incurred liabilities in accordance with the
Pennsylvania settlement, and may also be applied to reduce short-term debt,
finance further acquisitions, and to reduce acquisition debt of the GPUI Group.
In addition to the continued operation of the Oyster Creek Nuclear
Generating Station (Oyster Creek), JCP&L has been exploring the sale or early
retirement of the plant to mitigate costs associated with its continued
operation. GPU does not anticipate making a final decision on the plant before
the NJBPU rules on JCP&L's restructuring filing.
As part of its strategy of achieving earnings growth, GPU is continuing to
investigate investment opportunities in various domestic and foreign power
projects and foreign utility systems, and intends to make additional investments
and/or acquisitions which would be financed with new debt or new equity.
GPU has identified the following strategic objectives to guide it over the
next several years: (1) reposition GPU based on changing industry risks; (2)
build upon GPU's core competency in regulated infrastructure (mainly the
transmission and distribution of electricity); (3) divest the commodity/merchant
generation business; (4) seek growth through the acquisition of domestic and
international regulated infrastructure assets (i.e. electric, natural gas,
water, telecommunications); (5) continue to develop the contract generation
business (generation for which contracts to sell power to third parties have
been executed) through the GPUI Group; and (6) continue to participate in the
retail energy and supply business to determine if a viable economic opportunity
exists through GPU AR.
GPU's strategies may include business combinations with other companies,
internal restructurings involving the complete or partial separation of its
wholesale and retail businesses and acquisitions of other businesses. No
assurances can be given as to whether any potential transactions of the type
described above may actually occur, or as to the ultimate effect thereof on the
financial condition or competitive position of GPU.
F-32
GPU, Inc. and Subsidiary Companies
Recent Regulatory Actions
Pennsylvania
In 1996, Pennsylvania adopted comprehensive legislation which provides for
the restructuring of the electric utility industry. The legislation, among other
things, permits Pennsylvania retail consumers to choose their electric supplier
and requires the unbundling of rates for transmission, distribution and
generation services. Utilities have the opportunity to recover their prudently
incurred stranded costs that result from customers choosing another supplier
through a PaPUC approved competitive transition charge, subject to certain
conditions, including that they attempt to mitigate these costs. For a
discussion of stranded costs, see the Competition and the Changing Regulatory
Environment section of Note 13 of the Notes to Consolidated Financial
Statements.
In June 1997, Met-Ed and Penelec filed with the PaPUC their restructuring
plans to implement competition and customer choice in Pennsylvania. In October
1998, the PaPUC adopted Restructuring Orders approving Settlement Agreements
entered into by Met-Ed, Penelec, the PaPUC and all but two of the intervenors in
the restructuring proceeding who have appealed the Restructuring Orders. One of
these appeals remains pending and is scheduled to be heard in April 1999. For
additional information, see Note 5, Accounting for Extraordinary and
Non-recurring Items. The major elements of the Restructuring Orders are as
follows:
- - A transmission and distribution tariff rate which provides adequate
funding for maintaining the reliability of Met-Ed and Penelec's electric
distribution systems;
- - A rate reduction from January 1, 1999 through December 31, 1999, for all
customers, whether they choose an alternate supplier or not, reflecting
Met-Ed and Penelec's obligation to make refunds to customers from 1998
revenues (2.5% for Met-Ed customers and 3% for Penelec customers from
December 1996 levels);
- - The ability of all customers to participate in electric choice on
January 1, 1999 - two years sooner than called for in Pennsylvania's
Customer Choice Act;
- - Customers will receive a "shopping credit" that will result in savings if
they buy electricity from an alternate supplier that charges less than
the shopping credit. The average shopping credit in 1999 will be 4.350
cents per KWH for Met-Ed and 4.404 cents per KWH for Penelec. Actual
prices will vary by customer rate class;
- - Assurance of full recovery of the above-market costs of
government-mandated contracts to buy electricity from NUGs (Beginning in
2005, the amount collected will be adjusted every five years over the
life of each contract);
- - A rate cap for the cost of delivering electricity (transmission and
distribution) until 2004;
- - A rate cap for electricity purchased from Met-Ed and Penelec, as
providers of last resort, until 2010;
F-33
GPU, Inc. and Subsidiary Companies
- - PaPUC approval for Met-Ed and Penelec to sell all of their generating
stations, including TMI-1;
- - Recovery of $658 million in stranded costs for Met-Ed over 12 years and
$332 million for Penelec over 11 years. Future NUG operating costs for
which rate recovery has been assured may be adjusted every five years
over the life of each NUG contract. (These amounts reflect the effects of
using the estimated net proceeds from selling Met-Ed and Penelec's
generating plants to reduce stranded costs and will be adjusted based on
actual net sale proceeds);
- - $2.7 million and $3.4 million for assistance in 1999 to low-income
customers of Met-Ed and Penelec, respectively; increasing to $6.4
million and $6.9 million, respectively, in 2002;
- - A sustainable energy fund to promote the development and use of
renewable energy and clean energy technologies with one-time payments in
1998 of $5.7 million from Met-Ed and of $6.4 million from Penelec;
- - The ability of some customers to choose another licensed supplier to
provide metering services beginning January 1, 1999, and billing
services beginning January 1, 2000;
- - A phase-in of competitive bidding beginning no later than June 1, 2000,
for other suppliers to be the "provider of last resort" for customers who
do not shop; and
- - The dismissal of all pending litigation in accordance with the Settlement
Agreements.
New Jersey
In April 1997, the NJBPU issued final Findings and Recommendations for
Restructuring the Electric Power Industry in New Jersey. The NJBPU recommended,
among other things, that certain electric retail customers be permitted to
choose their supplier beginning October 1998, expanding to include all retail
customers by July 1, 2000. The NJBPU also recommended a near-term electric rate
reduction of 5-10% with the phase-in of retail competition, as well as
additional rate reductions accomplished as a result of new energy tax
legislation, as discussed below.
The NJBPU has proposed that utilities have an opportunity to recover
their stranded costs associated with generating capacity commitments provided
that they attempt to mitigate these costs. Also, NUG contracts which cannot be
mitigated would be eligible for stranded cost recovery. The determination of
stranded cost recovery by the NJBPU would be undertaken on a case-by-case basis,
with no guaranty for full recovery of these costs. A separate market transition
charge (MTC) would be established for each utility to allow utilities to recover
stranded costs over 4 to 8 years. The MTC would be capped to ensure that
customers experience the NJBPU's recommended overall rate reduction of 5-10%.
In addition, the NJBPU is proposing that utilities unbundle their rates
and allow customers to choose their electric generation supplier. Transmission
and distribution of electricity would continue as a regulated monopoly and
utilities would be responsible for connecting customers to the system and for
providing distribution service. Transmission service would be
F-34
GPU, Inc. and Subsidiary Companies
provided by an independent system operator (ISO), which would be responsible for
maintaining the reliability of the regional power grid and would be regulated by
the Federal Energy Regulatory Commission (FERC).
In July 1997, New Jersey enacted energy tax legislation which eliminated
the 13% gross receipts and franchise tax on utility bills effective January 1,
1998. As a result, utilities are now collecting from customers a 6% sales tax
and paying a corporate business tax which amounts to 1-2% of revenues. Utilities
are also paying a transitional energy facilities assessment which will phase out
over five years and result in a 5-6% rate reduction to customers.
In July 1997, JCP&L filed with the NJBPU its proposed restructuring plan.
Included in the plan were stranded cost, unbundled rate and restructuring
filings. Highlights of the plan include:
- - Some electric retail customers would be able to choose their supplier
beginning on October 1, 1998, as initially recommended by the NJBPU,
expanding to include all retail customers by July 1, 2000.
- - JCP&L would unbundle its rates and these rates would apply to all
distribution customers, with the exception of a Production Charge, which
would be charged only to customers who do not choose an alternative
energy supplier. The proposed unbundled rate structure would include:
-- A flat monthly Customer Charge for the costs associated with
metering, billing and customer account administration.
-- A Delivery Charge consisting of capital and O&M costs
associated with the transmission and distribution system; the
recovery of regulatory assets, including those associated with
generation; the cost of social programs; and certain costs
related to the proposed ratemaking treatment of Oyster Creek.
-- A Market Energy and Capacity (MEC) Charge would be established
on a monthly basis for a six-month period for electricity
provided to customers for whom JCP&L continues to act as their
electric generation supplier. JCP&L would be the supplier of
last resort for customers who cannot or do not wish to
purchase energy from an alternative supplier. The MEC would be
based upon competitively "bidding out" the discrepancy between
projected needs and projected resources. JCP&L would true-up
the MEC charges for sales differences against its actual cost
to provide that power, plus interest. The true-up would be
recovered from, or credited to, the customers who were
customers during that period, based upon their usage during
such period.
The MEC would be established every six months.
-- A Societal Benefits Charge to recover demand-side management
costs, manufactured gas plant remediation costs, and nuclear
decommissioning costs.
-- A MTC to recover non-NUG stranded generation costs (other than
Oyster Creek). This charge would include both owned generation
and utility purchase power commitments. It is expected that
the MTC would be in effect for less than a three-year period.
F-35
GPU, Inc. and Subsidiary Companies
-- A NUG Transition Charge (NTC) to recover ongoing above-market
NUG costs over the life of the contracts and provide a
mechanism to flow through to customers the benefits of future
NUG mitigation efforts. The NTC would be subject to an annual
true-up for actual cost escalations or reductions, changes in
availability or dispatch levels and other cost variations over
the life of each NUG project. The NTC would also be subject to
adjustment in the future to reflect additional NUG buyout or
restructuring costs and any related savings.
- - The unbundling plan calls for an estimated 10% rate reduction, which
would include a 2.1% reduction effective as part of JCP&L's Stipulation
of Final Settlement (Final Settlement) approved by the NJBPU in 1997.
The remaining reductions would be phased in over a two-year period
beginning after the commencement of retail choice, and would be
achieved through, among other things, the proposed early retirement of
Oyster Creek for ratemaking purposes in September 2000 and the
securitization of certain above-market costs. In addition to this rate
reduction, JCP&L customers would receive an additional rate reduction
of approximately 6% to be phased in over the next five years as a
result of energy tax legislation signed into law in July 1997.
- - In addition to the continued operation of the Oyster Creek facility,
JCP&L is exploring the early retirement of the plant to mitigate costs
associated with its continued operation. A final decision on the
plant's future will not be made until the NJBPU rules on JCP&L's
restructuring filing. Nevertheless, JCP&L has proposed that the NJBPU
approve an early retirement of Oyster Creek in September 2000, for
ratemaking purposes, with the following ratemaking treatment:
-- The market value of Oyster Creek's generation output would be
recovered in the Production Charge.
-- The above-market operating costs would be recovered as a
component of the Delivery Charge through September 2000. If
the plant is operated beyond that date, these costs would not
be included in customer rates.
-- Existing Oyster Creek regulatory assets would, like other
regulatory assets, be recovered as part of the Delivery
Charge.
-- Oyster Creek decommissioning costs would, like TMI-1
decommissioning costs, be recovered as a component of the
Societal Benefits Charge.
-- JCP&L's net investment in Oyster Creek would be recovered
through the Delivery Charge as a levelized annuity, effective
with the commencement of retail choice through its original
expected operating life, 2009.
- - Stranded costs at the time originally proposed by the NJBPU for initial
customer choice, on a present value basis, are estimated at $1.6 billion,
of which $1.5 billion is for above-market NUG contracts. The $1.6 billion
excludes above-market generation costs related to Oyster Creek.
F-36
GPU, Inc. and Subsidiary Companies
Numerous parties have intervened in this proceeding and have contested
various aspects of JCP&L's filings, including, among other things, recovery by
JCP&L of plant capital additions since its last base rate case in 1992,
projections of future electricity prices on which stranded cost recovery
calculations are based, the appropriate level of return and the appropriateness
of earning a return on stranded investment.
Consultants retained by the NJBPU Staff, the Division of Ratepayer
Advocate and other parties have proposed that JCP&L's stranded cost recoveries
should be substantially lower than the levels JCP&L is seeking.
In a February 1998 order, the NJBPU substantially affirmed an ALJ ruling
which required that rates be unbundled based on the 1992 cost of service levels
which were the basis for JCP&L's last base rate case, but clarified that (1)
JCP&L could update its 1992 cost of service study to reflect adjustments
consistent with the 1997 NJBPU approved Final Settlement which, among other
things, recognized certain increased expense levels and reductions to base rates
and (2) all of the other updated post-1992 cost information that JCP&L had
submitted in the proceeding should remain in the record, which the NJBPU will
utilize after issuance of the ALJ's initial decision to establish a reasonable
level of rates going forward.
Furthermore, the NJBPU emphasized in its order that the final unbundled
rates established as a result of this proceeding will be lower than the current
bundled rates. This directive has been recognized in JCP&L's July 1997
restructuring plan which proposed annual revenue reductions totaling
approximately $185 million. The NJBPU will render final and comprehensive
decisions on the precise level of aggregate rate reductions required in order to
accomplish its primary goals of introducing retail competition and lowering
electricity costs for consumers.
If the NJBPU were to accept the positions of various parties or their
consultants, or were ultimately to deny JCP&L's request to recover post-1992
capital additions and increased expenses, it would have a material adverse
impact on JCP&L's stranded cost recovery, restructuring proceeding and future
earnings.
Hearings with respect to the stranded cost and unbundled rate filings
have been completed. In September 1998, the ALJ issued a recommended decision
containing the following major elements:
- - The ALJ did not consider current cost levels as the basis for unbundling
rates, but instead used 1992 costs. With the exception of JCP&L's
investment in a new combustion turbine plant, the ALJ denied recovery of
post-1992 rate case capital additions but recommended that the NJBPU
reconsider these matters.
- - The ALJ recommended that the Oyster Creek investment be recovered over a
period of between four and eleven years, but once the plant is retired
for ratemaking purposes, no return should be provided on the unamortized
investment.
- - The ALJ recommended that the 2.1% rate reduction implemented in April
1997 as part of JCP&L's Final Settlement should not be part of the 5-10%
rate reduction mandated by the NJBPU's Final Report.
F-37
GPU, Inc. and Subsidiary Companies
- - The ALJ endorsed a market line higher than that proposed by JCP&L.
- - The ALJ approved recovery of actual NUG costs through a NUG Transition
Charge, over the lives of the contracts.
- - The ALJ accepted JCP&L's proposal for recovery of nuclear decommissioning
costs through a Societal Benefits Charge, but disallowed the inclusion of
fossil decommissioning costs in the calculation of stranded costs.
- - The ALJ accepted JCP&L's generation asset divestiture plan and the
position that the net proceeds be applied to reduce other stranded costs.
Evidentiary hearings before the NJBPU with respect to the separate
restructuring filing were held jointly with the other New Jersey utilities, and
briefs have been filed.
In 1999, legislation to deregulate New Jersey's electricity market was
enacted which generally provides for, among other things, the following:
- - Customer choice of electric generation supplier for all consumers
beginning no later than August 1, 1999;
- - A 5% rate reduction for all customers beginning August 1, 1999, with
another 5% rate reduction to be phased in over the next three years. The
rate reduction must be maintained for one year after the end of the three
year phase-in;
- - The aggregation of electric generation service by a government or private
aggregator;
- - The unbundling of customer bills;
- - The ability to recover stranded costs; and
- - The ability to securitize stranded costs.
The NJBPU is expected to issue final decisions on JCP&L's stranded cost,
unbundled rate and restructuring filings in the second quarter of 1999. There
can be no assurance as to the outcome of these matters.
Federal Regulation
In November 1997, the FERC issued an order to the PJM Power Pool which,
among other things, directed the GPU Energy companies to implement a
single-system transmission rate, effective April 1, 1998. The implementation of
a single-system rate is not expected to affect total transmission revenues. It
would, however, increase the pricing for transmission service in Met-Ed and
Penelec's service territories and reduce the pricing for transmission service in
JCP&L's service territory.
The GPU Energy companies have requested the FERC to reconsider its ruling
requiring a single-system transmission rate. The Restructuring Orders for Met-Ed
and Penelec provide for a transmission and distribution rate cap exception to
recover the increase in the transmission rate from Met-Ed and Penelec's retail
customers in the event the FERC denies the request for
F-38
GPU, Inc. and Subsidiary Companies
reconsideration of the single-system transmission rate. The FERC's ruling may
also have an effect on JCP&L's distribution rates. There can be no assurance as
to the outcome of this matter.
Several bills have been introduced in Congress providing for a
comprehensive restructuring of the electric utility industry. These bills
proposed, among other things, retail choice for all utility customers, the
opportunity for utilities to recover their prudently incurred stranded costs in
varying degrees, and repeal of both the Public Utility Regulatory Policies Act
(PURPA) and the Public Utility Holding Company Act of 1935 (PUHCA).
The Clinton administration has announced a Comprehensive Electricity
Competition Plan which proposes, among other things, customer choice by January
1, 2003, stranded cost recovery, reliability standards, environmental
provisions, and the repeal of both PURPA and PUHCA. The plan does, however,
allow states to opt out of the mandate if they believe consumers would be better
served by an alternative policy. The administration's plan was submitted to
Congress in June 1998 but was not acted on.
Nonutility Generation Agreements
Pursuant to the mandates of PURPA and state regulatory directives, the GPU
Energy companies have been required to enter into power purchase agreements with
NUGs for the purchase of energy and capacity for remaining periods of up to 22
years. Although a few of these facilities are dispatchable, most are must-run
and generally obligate the GPU Energy companies to purchase, at the contract
price, the output up to the contract limits. As of December 31, 1998, facilities
covered by these agreements having 1,687 MW (JCP&L 918 MW; Met-Ed 364 MW;
Penelec 405 MW)of capacity were in service.
In 1998, Met-Ed and Penelec paid developers a total of $25 million and
$6.1 million, respectively, to buyout amended power purchase agreements. These
buyout payments were approved for recovery as part of the PaPUC's Restructuring
Orders.
The 1998 PaPUC Restructuring Orders and the legislation in New Jersey
provide for full recovery of the above-market costs of NUG agreements. The GPU
Energy companies will continue efforts to reduce the above-market costs of these
agreements and will, where beneficial, attempt to renegotiate the prices of the
agreements, offer contract buyouts and attempt to convert must-run agreements to
dispatchable agreements. There can be no assurance as to the extent to which
these efforts will be successful. (See the Competition and the Changing
Regulatory Environment section of Note 13 of the Notes to Consolidated Financial
Statements.)
The GPU Energy companies intend to avoid, to the maximum extent
practicable, entering into any new NUG agreements that are not needed or not
consistent with current market pricing and continue to support legislative
efforts to repeal PURPA.
THE GPU ENERGY COMPANIES' SUPPLY PLAN
Under traditional retail regulation, supply planning in the electric
utility industry is directly related to projected sales growth in a utility's
franchise service territory. In light of retail access legislation enacted in
F-39
GPU, Inc. and Subsidiary Companies
Pennsylvania and New Jersey, the extent to which competition will affect the GPU
Energy companies' supply plan remains uncertain (see COMPETITIVE ENVIRONMENT AND
RATE MATTERS). As the GPU Energy companies prepare to operate in a competitive
environment, their supply planning strategy will focus on providing for the
needs of existing retail customers who do not choose a competitive supplier and
continue to receive energy supplied by the GPU Energy companies and whom the GPU
Energy companies continue to have an obligation to serve.
The GPU Energy companies' capacity (in megawatts) and sources of energy
(in gigawatt-hours) for 1998 are as follows:
Capacity Sources of Energy
MW % GWH %
-- - --- -
Coal 3,024 27 19,675 38
Nuclear 1,405 13 11,358 22
Gas, hydro & oil 2,322 21 888 2
Nonutility generation 1,687 15 10,952 21
Utility contracts 2,638 24 5,177 10
Spot market & interchange purchases - - 3,605 7
------ --- ------ ---
Total 11,076 100 51,655 100
====== === ====== ===
After the sale of the GPU Energy companies' generation facilities has been
completed, GPU will have 819 MW of capacity and related energy from Oyster Creek
and Yards Creek remaining to meet customer needs. The GPU Energy companies also
have contracts with NUG facilities totaling 1,687 MW (JCP&L 918 MW; Met-Ed 364
MW; Penelec 405 MW)and JCP&L has agreements with other utilities to provide for
up to 629 MW of capacity and related energy (see Note 13, COMMITMENTS AND
CONTINGENCIES). The GPU Energy companies have agreed to purchase all of the
capacity and energy from TMI-1 through December 31, 2001. In addition, the GPU
Energy companies have the right to call the capacity of the Homer City station
(942 MW) for two years and the capacity of the generating stations purchased by
Sithe (4,117 MW) for three years, from the dates of sale. The GPU Energy
companies' remaining capacity and energy needs will focus on short- to
intermediate-term commitments (one month to three years) during periods of
expected high energy price volatility and reliance on spot market purchases
during other periods. Management is in the process of identifying and addressing
the GPU Energy companies' future capacity and energy needs, and the impact of
customer shopping and changes in demand (see the Managing the Transition section
of COMPETITIVE ENVIRONMENT AND RATE MATTERS).
Provider of Last Resort
Under the PaPUC Restructuring Orders, Met-Ed and Penelec customers may
shop for their generation supplier beginning January 1, 1999. A PaPUC approved
competitive bid process will assign provider of last resort (PLR) service for
20% of Met-Ed 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, to licensed generation
suppliers referred to as Competitive Default Service (CDS). If no qualified bids
for CDS are received at or below their generation rate caps, Met-Ed and Penelec
will continue to provide PLR service at the rate cap levels until 2010 unless
modified by the PaPUC. Any retail customers assigned to CDS may return to Met-Ed
and Penelec as the default PLR at no additional charge. 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
F-40
GPU, Inc. and Subsidiary Companies
Met-Ed and Penelec's rate cap. The restructuring legislation enacted in New
Jersey requires that JCP&L be the PLR for at least three years starting with the
implementation of customer choice on August 1, 1999. JCP&L is entitled to
recover reasonable and prudently incurred costs for PLR services. Within the
three-year period, the NJBPU is to determine whether to make PLR services
available on a competitive basis.
ENVIRONMENTAL MATTERS
As a result of existing and proposed legislation and regulations, and
ongoing legal proceedings dealing with environmental matters, including but not
limited to acid rain, water quality, ambient air quality, global warming,
electromagnetic fields, and storage and disposal of hazardous and/or toxic
wastes, GPU may be required to incur substantial additional costs to construct
new equipment, modify or replace existing and proposed equipment, remediate,
decommission or cleanup waste disposal and other sites currently or formerly
used by it, including formerly owned manufactured gas plants (MGP), coal mine
refuse piles and generation facilities.
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 December 31, 1998, the GPU Energy companies have
liabilities recorded on their balance sheets for environmental remediation
totaling $90 million (JCP&L $58 million; Met-Ed $5 million; Penelec $27
million).
In 1998, the GPU Energy companies made capital expenditures of
approximately $10 million (JCP&L $1 million; Met-Ed $5 million; Penelec $4
million)related to environmental compliance and have budgeted approximately $3
million (Met-Ed $2 million; Penelec $1 million)for this purpose in 1999. The
incremental annual operating and maintenance costs for equipment related to
environmental compliance is not expected to be material. Moreover, following the
completion of the sale of their generating facilities, the GPU Energy companies
will no longer be subject to environmental requirements for the ownership,
operation or maintenance of these facilities.
For more information, see the Environmental Matters section of Note 13 of
the Notes to Consolidated Financial Statements.
LEGAL MATTERS - TMI-2 ACCIDENT CLAIMS
In 1996, a U.S. District Court granted a motion for summary judgment,
filed by GPU, Inc. and the GPU Energy companies, dismissing all of the 2,100
pending claims for alleged personal injury and punitive damages filed as a
result of the TMI-2 accident in March 1979. The Court ruled that there was no
evidence which created a genuine issue of material fact warranting submission of
plaintiffs' claims to a jury. The plaintiffs have appealed the District Court's
ruling to the Third Circuit, before which the matter is pending. There can be no
assurance as to the outcome of this litigation. For more information, see the
Nuclear Facilities section of Note 13 of the Notes to Consolidated Financial
Statements.
F-41
GPU, Inc. and Subsidiary Companies
ACCOUNTING MATTERS
Statement of Financial Accounting Standards No. 71 (FAS 71), "Accounting
for the Effects of Certain Types of Regulation," applies to regulated utilities
that have the ability to recover their costs through rates established by
regulators and charged to customers. In response to the continuing deregulation
of the electric utility industry, the SEC has questioned the continued
applicability of FAS 71 by investor-owned utilities with respect to their
electric generation operations. In response to these concerns, the Financial
Accounting Standards Board's (FASB) Emerging Issues Task Force (EITF Issue 97-4)
concluded in June 1997 that utilities are no longer subject to FAS 71, for the
relevant portion of their business, when they know details of their individual
transition plans to a competitive electric generation marketplace. The EITF also
concluded that utilities can continue to carry previously recorded regulated
assets, as well as any newly established regulated assets (including those
related to generation), on their balance sheets if regulators have guaranteed a
regulated cash flow stream to recover the cost of these assets.
In 1998, Met-Ed and Penelec received PaPUC Restructuring Orders which,
among other things, essentially remove from regulation the costs associated with
providing electric generation service to Pennsylvania consumers, effective
January 1, 1999. Accordingly, in 1998 Met-Ed and Penelec discontinued the
application of FAS 71 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 EITF Issue 97-4
with respect to their electric generation operations. The transmission and
distribution portion of Met-Ed and Penelec's operations will continue to be
subject to the provisions of FAS 71. JCP&L expects to discontinue the
application of FAS 71 and adopt FAS 101 and EITF Issue 97-4 for its electric
generation operations no later than its receipt of NJBPU approval of its
restructuring plans, which is expected in the second quarter of 1999.
In accordance with Statement of Financial Accounting Standards No. 121
(FAS 121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," impairment tests performed by the GPU
Energy companies on the December 31, 1998 net book value of their generation
facilities determined that the net investment in TMI-1 was impaired, resulting
in a write-down of $518 million (pre-tax) (JCP&L $134 million; Met-Ed $257
million; Penelec $127 million)to reflect TMI-1's fair market value. Of the
amount written down for TMI-1, $508 million (JCP&L $134 million; Met-Ed $255
million; Penelec $119 million)was re-established as a regulatory asset since
management believes it is probable of recovery in the restructuring process and
$10 million (Met-Ed $2 million; Penelec $8 million) (the FERC jurisdictional
portion) was charged to expense as an extraordinary item.
In 1998, Statement of Financial Accounting Standards No. 133 (FAS 133),
"Accounting for Derivative Instruments and Hedging Activities," was issued. FAS
133 requires that companies recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value. To
comply with this statement, GPU will be required to include its derivative
transactions on its balance sheet at fair value, and recognize the subsequent
changes in fair value as either gains or losses in earnings or report them as a
component of other comprehensive income, depending upon the intended use and
F-42
GPU, Inc. and Subsidiary Companies
designation of the derivative as a hedge. FAS 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. GPU expects to adopt FAS
133 in the first quarter of 2000 and is in the process of evaluating the impact
of this statement.
In 1998, the FASB's EITF issued guidance on accounting for energy
contracts in EITF Issue 98-10, "Accounting for Energy Trading and Risk
Management Activities," which is effective for fiscal years beginning after
December 15, 1998. EITF Issue 98-10 addresses whether certain types of contracts
for the sale and purchase of energy commodities should be marked to market or
accounted for under accrual accounting. The adoption of EITF Issue 98-10 in the
first quarter of 1999 is not expected to have a material impact on GPU's
financial position or results of operations.
In 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" (SOP 98-1), which is effective
for fiscal years beginning after December 15, 1998. The adoption of SOP 98-1 in
the first quarter of 1999 is not expected to have a material impact on GPU's
financial position or results of operations.
Also, in 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities" (SOP 98-5), which is effective for financial
statements for fiscal years beginning after December 15, 1998. SOP 98-5 requires
the expensing of the costs of start-up activities as incurred. Additionally,
previously capitalized start-up costs must be written off as a cumulative effect
of a change in accounting principle. The adoption of SOP 98-5 in the first
quarter of 1999 is not expected to have a material impact on GPU's financial
position or results of operations.
F-43
GPU, Inc. and Subsidiary Companies
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of GPU, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of GPU,
Inc. and Subsidiary Companies at December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule listed
in the accompanying index presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statement. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
February 3, 1999
F-44
GPU, Inc. and Subsidiary Companies
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31, 1998 1997
- ------------ ---- ----
ASSETS
Utility Plant:
Transmission, distribution and general plant $ 7,579,455 $7,248,612
Generation plant 3,445,984 3,902,065
--------- ---------
Utility plant in service 11,025,439 11,150,677
Accumulated depreciation (4,460,341) (4,050,165)
---------- ----------
Net utility plant in service 6,565,098 7,100,512
Construction work in progress 94,005 250,050
Other, net 145,792 159,009
------- -------
Net utility plant 6,804,895 7,509,571
--------- ---------
Other Property and Investments:
GPUI Group equity investments (Note 14) 682,125 596,679
Goodwill, net (Note 6) 545,262 581,364
Nuclear decommissioning trusts, at market (Note 13) 716,274 579,673
Nuclear fuel disposal trust, at market 116,871 108,652
Other, net 239,411 252,335
------- -------
Total other property and investments 2,299,943 2,118,703
--------- ---------
Current Assets:
Cash and temporary cash investments 72,755 85,099
Special deposits 62,673 27,093
Accounts receivable:
Customers, net 286,278 290,247
Other 126,088 104,441
Unbilled revenues 144,076 147,162
Materials and supplies, at average cost or less:
Construction and maintenance 155,827 187,799
Fuel 42,697 40,424
Investments held for sale 48,473 106,317
Deferred income taxes (Note 8) 47,521 83,962
Prepayments 76,021 55,613
Other - 1,023
-----
Total current assets 1,062,409 1,129,180
--------- ---------
Deferred Debits and Other Assets:
Regulatory assets, net: (Notes 5 & 13)
Competitive transition charge 1,023,815 -
Other regulatory assets, net 2,882,413 1,547,478
Deferred income taxes (Note 8) 2,004,278 383,169
Other 210,356 134,833
------- -------
Total deferred debits and other assets 6,120,862 2,065,480
--------- ---------
Total Assets $16,288,109 $12,822,934
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-45
GPU, Inc. and Subsidiary Companies
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31, 1998 1997
- ------------ ---- ----
LIABILITIES AND CAPITALIZATION
Capitalization:
Common stock $ 331,958 $314,458
Capital surplus 1,011,310 755,040
Retained earnings 2,230,425 2,140,712
Accumulated other comprehensive income/(loss) (31,304) (29,296)
------- -------
Total 3,542,389 3,180,914
Reacquired common stock, at cost (77,741) (80,984)
------- -------
Total common stockholders' equity (Note 4) 3,464,648 3,099,930
Cumulative preferred stock: (Note 4)
With mandatory redemption 86,500 91,500
Without mandatory redemption 66,478 66,478
Subsidiary-obligated mandatorily redeemable
preferred securities (Note 4) 330,000 330,000
Long-term debt (Note 3) 3,825,584 4,325,972
- --------- ---------
Total capitalization 7,773,210 7,913,880
--------- ---------
Current Liabilities:
Securities due within one year (Notes 3 & 4) 563,683 631,934
Notes payable (Note 2) 368,607 353,214
Obligations under capital leases (Note 12) 126,480 138,919
Accounts payable 394,815 413,791
Taxes accrued 92,339 48,304
Interest accrued 81,931 83,947
Deferred energy credits 2,411 25,645
Other 377,594 325,681
------- -------
Total current liabilities 2,007,860 2,021,435
--------- ---------
Deferred Credits and Other Liabilities:
Deferred income taxes (Note 8) 3,044,947 1,566,131
Unamortized investment tax credits 114,308 123,162
Three Mile Island Unit 2 future costs 483,515 448,808
Nonutility generation contract loss liability 1,803,820 -
Other 1,060,449 749,518
--------- -------
Total deferred credits and other liabilities 6,507,039 2,887,619
--------- ---------
<FN>
Commitments and Contingencies (Note 13)
</FN>
Total Liabilities and Capitalization $16,288,109 $12,822,934
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-46
GPU, Inc. and Subsidiary Companies
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands)
For The Years Ended December 31, 1998 1997 1996
- -------------------------------- ---- ---- ----
Operating Revenues $4,248,792 $4,143,379 $3,970,711
---------- ---------- ----------
Operating Expenses:
Fuel 407,105 400,329 389,569
Power purchased and interchanged 1,122,841 1,046,906 1,005,630
Deferral of energy and capacity costs, net (25,542) 6,043 19,788
Other operation and maintenance 1,106,913 993,739 1,114,854
Depreciation and amortization 522,094 467,714 407,672
Taxes, other than income taxes 219,302 357,913 355,283
------- ------- -------
Total operating expenses 3,352,713 3,272,644 3,292,796
--------- --------- ---------
Operating Income Before Income Taxes 896,079 870,735 677,915
Income taxes (Note 8) 238,241 223,617 159,649
Operating Income 657,838 647,118 518,266
Other Income and Deductions:
Allowance for other funds used during construction 916 75 2,249
Equity in undistributed earnings/(losses)
of affiliates (Note 6) 72,012 (27,100) 33,981
Other income, net 48,366 5,585 23,490
Income taxes (Note 8) (1,848) 30,081 (7,070)
------ ------ ------
Total other income and deductions 119,446 8,641 52,650
------- ----- ------
Income Before Interest Charges and
Preferred Dividends 777,284 655,759 570,916
------- ------- -------
Interest Charges and Preferred Dividends:
Long-term debt 318,396 246,935 213,544
Subsidiary-obligated mandatorily
redeemable preferred securities 28,888 28,888 28,888
Other interest 35,053 36,482 29,623
Allowance for borrowed funds used
during construction (4,348) (5,508) (8,423)
Preferred stock dividends of subsidiaries, net of
gain on reacquisition of $9,288 in 1996 11,243 12,524 6,231
------ ---- ------ ------ -----
Total interest charges and preferred dividends 389,232 319,321 269,863
------- ------- -------
Minority interest net income 2,171 1,337 2,701
----- ----- -----
Income Before Extraordinary Item 385,881 335,101 298,352
Extraordinary item (net of income tax
benefit of $16,300) (Note 5) (25,755) - -
------- -------- -------
Net Income $ 360,126 $ 335,101 $ 298,352
========== ========== ==========
Basic- Earnings Per Average Common Share
Before Extraordinary Item $ 3.03 $ 2.78 $ 2.48
Extraordinary Item (0.20) - -
----- ------- -------
Earnings Per Average Common Share $ 2.83 $ 2.78 $ 2.48
========== ========== ==========
Average Common Shares Outstanding (In Thousands) 127,093 120,722 120,513
------- ------- -------
Diluted-Earnings Per Average Common Share
Before Extraordinary Item $ 3.03 $ 2.77 $ 2.47
Extraordinary Item (0.20) - -
----- ------ -------
Earnings Per Average Common Share $ 2.83 $ 2.77 $ 2.47
========== ========== ==========
Average Common Shares Outstanding (In Thousands) 127,312 121,002 120,751
======= ======= =======
Cash Dividends Paid Per Share $ 2.045 $ 1.985 $ 1.925
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-47
GPU, Inc. and Subsidiary Companies
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
For The Years Ended December 31, 1998 1997 1996
- -------------------------------- ---- ---- ----
Net income $360,126 $335,101 $298,352
-------- -------- --------
Other comprehensive income/(loss), net of tax: (Note 4)
Net unrealized gain on investments 8,987 6,374 704
Foreign currency translation (9,461) (48,929) 3,054
Minimum pension liability (1,534) (1,495) (2,175)
------ ------ ------
Total other comprehensive income/(loss) (2,008) (44,050) 1,583
------ ------- -----
Comprehensive income $358,118 $291,051 $299,935
======== ======== ========
GPU, Inc. and Subsidiary Companies
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(In Thousands)
For The Years Ended December 31, 1998 1997 1996
- -------------------------------- ---- ---- ----
Balance at beginning of year $2,140,712 $2,054,222 $1,991,599
Net income 360,126 335,101 298,352
Cash dividends declared on common stock (263,561) (241,517) (235,731)
Other adjustments, net (6,852) (7,094) 2
------ ------ -
Balance at end of year $2,230,425 $2,140,712 $2,054,222
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-48
GPU, Inc. and Subsidiary Companies
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
For The Years Ended December 31, 1998 1997 1996
- -------------------------------- ---- ---- ----
Operating Activities:
Net income $ 360,126 $ 335,101 $ 298,352
Extraordinary item (net of income tax
benefit of $16,300) 25,755 - -
------ ----- ------
Income before extraordinary item 385,881 335,101 298,352
Adjustments to reconcile income to cash provided:
Depreciation and amortization 552,795 487,962 422,506
Amortization of property under capital leases 49,913 50,108 55,642
PaPUC restructuring rate orders 68,500 - -
Gain on sale of investments (43,548) - -
Equity in undistributed (earnings)/losses
of affiliates, net of distributions received (44,621) 69,862 (23,994)
Voluntary enhanced retirement programs - - 122,739
Nuclear outage maintenance costs, net 3,105 2,374 (6,078)
Deferred income taxes and investment tax
credits, net (165,860) (29,248) 57,144
Deferred energy and capacity costs, net (24,482) 8,193 19,719
Allowance for other funds used during
construction (916) (75) (2,249)
Changes in working capital:
Receivables 91,285 (76,178) 2,893
Materials and supplies 704 4,803 6,604
Special deposits and prepayments (18,514) 28,371 (36,294)
Payables and accrued liabilities (18,645) 49,025 (103,221)
Nonutility generation contract buyout costs (54,018) (56,550) (120,018)
Other, net 15,597 (29,485) (41,089)
------ ------- -------
Net cash provided by operating activities 797,176 844,263 652,656
------- ------- -------
Investing Activities:
Capital expenditures and investments:
GPU Energy companies (328,452) (356,416) (403,880)
GPUI Group (139,771) (1,912,221) (573,587)
Proceeds from sale of investments 160,244 - -
Contributions to decommissioning trusts (51,039) (40,283) (40,324)
Other, net (37,876) 34,500 (26,238)
------- ------ -------
Net cash used for investing activities (396,894) (2,274,420) (1,044,029)
-------- ---------- ----------
Financing Activities:
Issuance of long-term debt 749,724 1,893,219 743,596
Increase/(Decrease) in notes payable, net (62,292) 87,667 141,657
Retirement of long-term debt (1,036,110) (184,015) (150,763)
Capital lease principal payments (50,663) (49,560) (56,217)
Termination of interest rate swap agreements (4,310) - -
Issuance of common stock 269,448 - -
Redemption of preferred stock of subsidiaries (15,000) (20,000) (42,347)
Dividends paid on common stock (258,058) (239,597) (231,956)
-------- -------- --------
Net cash provided/(required)
by financing activities (407,261) 1,487,714 403,970
-------- --------- -------
Effect of exchange rate changes on cash (5,365) (4,062) 585
------ ------ ---
Net increase/(decrease) in cash and temporary cash
investments from above activities (12,344) 53,495 13,182
Cash and temporary cash investments, beginning of year 85,099 31,604 18,422
------ ------ ------
Cash and temporary cash investments, end of year $ 72,755 $ 85,099 $ 31,604
========== ========== ==========
Supplemental Disclosure:
Interest and preferred dividends paid $ 370,303 $ 307,064 $ 281,057
========== ========== ==========
Income taxes paid $ 333,994 $ 229,373 $ 153,599
========== ========== ==========
New capital lease obligations incurred $ 37,793 $ 41,898 $ 34,826
========== ========== ==========
Common stock dividends declared but not paid $ 65,917 $ 60,414 $ 58,493
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statement
F-49
GPU, Inc. and Subsidiary Companies
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GPU, Inc., a Pennsylvania corporation, is a holding company registered
under the Public Utility Holding Company Act of 1935. GPU, Inc. does not
directly operate any utility properties, but owns all the outstanding common
stock of three domestic electric utilities serving customers in New Jersey --
Jersey Central Power & Light Company (JCP&L) -- and Pennsylvania -- Metropolitan
Edison Company (Met-Ed) and Pennsylvania Electric Company (Penelec). The
customer service, transmission and distribution operations of these electric
utilities are conducting business under the name GPU Energy. JCP&L, Met-Ed and
Penelec considered together are referred to as the "GPU Energy companies." The
generation operations of the GPU Energy companies are conducted by GPU
Generation, Inc. (Genco) and GPU Nuclear, Inc. (GPUN). The "GPUI Group," as
referred to in this report, develops, owns, operates and funds the acquisition
of generation, transmission and distribution facilities worldwide through GPU
International, Inc., GPU Power, Inc., GPU Capital, Inc. and GPU Electric, Inc.,
a subsidiary of GPU Capital, Inc. (Effective January 1, 1999, GPU International,
Inc. and GPU Power, Inc., will develop, own, operate and fund the acquisition of
generation facilities worldwide and will be referred to as the "GPUI Group." GPU
Capital, Inc. and GPU Electric, Inc., will develop, own, operate and fund the
acquisition of transmission and distribution systems outside the United States
and will be referred to as "GPU Electric".) Other subsidiaries of GPU, Inc.
include GPU Advanced Resources, Inc. (GPU AR), which is involved in retail
energy sales; GPU Telcom Services, Inc. (GPU Telcom), which is engaged in
telecommunications-related businesses; and GPU Service, Inc. (GPUS), which
provides legal, accounting, financial and other services to the GPU companies.
All of these companies considered together are referred to as "GPU."
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and revenues and expenses during the reporting period. Actual
results could differ from those estimates.
SYSTEM OF ACCOUNTS
Certain reclassifications of prior years' data have been made to conform
with the current presentation. The GPU Energy companies' accounting records are
maintained in accordance with the Uniform System of Accounts prescribed by the
Federal Energy Regulatory Commission (FERC) and adopted by the Pennsylvania
Public Utility Commission (PaPUC) and the New Jersey Board of Public Utilities
(NJBPU). GPU's accounting records also comply with the Securities and Exchange
Commission's (SEC) rules and regulations.
F-50
GPU, Inc. and Subsidiary Companies
CONSOLIDATION
The consolidated financial statements include the accounts of all
subsidiaries. All significant intercompany transactions and accounts are
eliminated in consolidation. GPU consolidates the accounts of its wholly-owned
subsidiaries and any affiliates in which it has a controlling financial interest
(generally evidenced by a greater than 50% ownership interest). GPU also uses
the equity method of accounting for investments in affiliates in which it has
the ability to exercise significant influence. (For further information, see
Note 14, GPUI Group Equity Investments.)
REGULATORY ACCOUNTING
Statement of Financial Accounting Standards No. 71 (FAS 71), "Accounting
for the Effects of Certain Types of Regulation," applies to regulated utilities
that have the ability to recover their costs through rates established by
regulators and charged to customers. The GPU Energy companies currently account
for Met-Ed and Penelec's transmission and distribution operations as well as all
of JCP&L's operations in accordance with FAS 71. In accordance with the
provisions of FAS 71, the GPU Energy companies have deferred certain costs
pursuant to actions of the NJBPU and PaPUC, and are recovering or expect to
recover such costs in regulated rates charged to customers. Regulatory assets
and liabilities are reflected net in the Deferred Debits and Other Assets
section of the Consolidated Balance Sheets. (For further information about
regulatory assets and liabilities, see Note 13, Commitments and Contingencies.)
With the receipt of PaPUC Restructuring Orders in 1998, GPU determined
that Met-Ed and Penelec's electric generation operations no longer met the
criteria for the continued application of FAS 71, and therefore 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 FASB
Statement No. 71 "Accounting for the Effects of Certain Types of Regulation" and
No. 101 "Regulated Enterprises - Accounting for the Discontinuation of
Application of FASB Statement No. 71," for that portion of its business. JCP&L's
generation operations will continue to be accounted for under the provisions of
FAS 71 until no later than its receipt of NJBPU approval of its restructuring
plans.
CURRENCY TRANSLATION
In accordance with Statement of Financial Accounting Standards No. 52 (FAS
52), "Foreign Currency Translation," balance sheet accounts of foreign
operations are translated from foreign currencies into U.S. dollars at year-end
rates, while income statement accounts are translated at the average month-end
exchange rates for the relevant period. The resulting translation adjustments
are included in Accumulated other comprehensive income/(loss), net of deferred
taxes, on the Consolidated Balance Sheets. Gains and losses resulting from
foreign currency transactions are included in Net Income.
F-51
GPU, Inc. and Subsidiary Companies
REVENUES
GPU recognizes electric operating revenues for services rendered to the
end of the relevant accounting period. The GPU Energy companies' electric
operating revenues also include an estimate for unbilled revenues.
DEFERRED ENERGY COSTS
JCP&L recovers its energy-related costs through a Levelized Energy
Adjustment Clause (LEAC), and defers any differences between actual energy costs
and amounts recovered from customers through rates. Similarly, through December
31, 1996, Met-Ed and Penelec recovered their energy costs through an Energy Cost
Rate (ECR), and deferred any differences between actual energy costs and amounts
recovered through rates. As a result of legislative and regulatory actions,
effective January 1, 1997, Met-Ed and Penelec ceased deferred energy accounting,
except for incremental nonutility generation (NUG) costs which are included in
Competitive Transition Charge and Other regulatory assets, net on the
Consolidated Balance Sheets. For further information, see Competitive
Environment and Rate Matters section, Management's Discussion and Analysis.
UTILITY PLANT
At December 31, 1998, Met-Ed and Penelec's generation plant is valued at
the lower of cost or market. During 1998, the GPU Energy companies' investment
in Three Mile Island Unit 1 (TMI-1) was written down to its market value. All
other utility plant and additions are valued at original cost.
DEPRECIATION
GPU provides for depreciation at annual rates determined and revised
periodically, on the basis of studies, to be sufficient to depreciate the
original cost of depreciable property over estimated remaining service lives,
which are generally longer than those employed for tax purposes. These rates, on
an aggregate composite basis, were as follows:
GPU JCP&L Met-Ed Penelec
--- ----- ------ -------
1998 3.43% 3.65% 3.53% 3.25%
1997 3.34% 3.60% 3.39% 3.08%
1996 3.31% 3.58% 3.27% 2.82%
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFUDC)
The FERC Uniform System of Accounts defines AFUDC as "the net cost for the
period of construction of borrowed funds used for construction purposes and a
reasonable rate on other funds when so used." The GPU Energy companies record
AFUDC as a charge to their regulated construction work in progress, and the
equivalent credits to interest charges for the pre-tax cost of borrowed funds
and to other income for the allowance for other funds. While AFUDC results in an
increase in utility plant and represents current earnings, it is realized in
cash through depreciation or amortization allowances only when the related plant
is recognized in rates. On an aggregate composite basis, the annual rates
utilized by the GPU Energy companies were as follows:
F-52
GPU, Inc. and Subsidiary Companies
GPU JCP&L Met-Ed Penelec
--- ----- ------ -------
1998 6.74% 7.50% 6.49% 6.08%
1997 6.38% 6.48% 6.12% 6.41%
1996 6.79% 6.88% 8.11% 6.15%
In 1998, Met-Ed and Penelec ceased accruing AFUDC for their electric generation
construction work in progress, and adopted Statement of Financial Accounting
Standards No. 34 (FAS 34), "Capitalizing Interest Costs."
AMORTIZATION POLICIES
Accounting for TMI-2 and Forked River Investments:
At December 31, 1998, $66 million is included in Other regulatory assets,
net on the Consolidated Balance Sheets for JCP&L's investment in Three Mile
Island Unit 2 (TMI-2). JCP&L is collecting annual revenues for the amortization
of TMI-2 of $9.6 million. This level of revenue will be sufficient to recover
the remaining investment by 2008. Met-Ed and Penelec have collected all of their
TMI-2 investment attributable to retail customers. At December 31, 1998, $62
million is included in Other regulatory assets, net on the Consolidated Balance
Sheets for JCP&L's Forked River project. JCP&L is collecting annual revenues for
the amortization of this project of $11.2 million, which will be sufficient to
recover its remaining investment by the year 2006. Because JCP&L has not been
provided revenues for a return on the unamortized balances of the damaged TMI-2
facility and the cancelled Forked River project, these investments are being
carried at their discounted present values.
Nuclear Fuel:
The GPU Energy companies amortize nuclear fuel on a unit-of-production
basis. Rates are determined and periodically revised to amortize the cost of the
fuel over its useful life.
At December 31, 1998 and 1997, the liability of the GPU Energy companies
for future contributions to the Federal Decontamination and Decommissioning Fund
for the cleanup of uranium enrichment plants operated by the Federal Government
amounted to $28 million (JCP&L $18 million; Met-Ed $7 million; Penelec $3
million) and $31 million (JCP&L $20 million; Met-Ed $7 million; Penelec $4
million), respectively, and was primarily reflected in Deferred Credits and
Other Liabilities-Other. Annual contributions, which began in 1993, are being
made over a 15-year period and are being recovered from customers. At December
31, 1998 and 1997, $29 million (JCP&L $18 million; Met-Ed $7 million; Penelec $4
million) and $33 million (JCP&L $21 million; Met-Ed $8 million; Penelec $4
million), respectively, was recorded on the Consolidated Balance Sheets in Other
regulatory assets, net.
Intangibles:
The GPUI Group records goodwill for any amount paid over the fair value of
net tangible assets it acquires, and other intangible assets for the right to
perform management services. As of December 31, 1998 and 1997, the GPUI Group
had goodwill and other intangibles, net of accumulated amortization, of
approximately $545 million and $581 million, respectively. Goodwill and other
F-53
GPU, Inc. and Subsidiary Companies
intangibles are amortized on a straight-line basis over periods not exceeding 40
years. Amortization expense, in the aggregate, amounted to $14 million and $2.8
million for the years ended December 31, 1998 and 1997, respectively. The GPUI
Group periodically reviews undiscounted projections of future cash flows from
operations to assess any potential intangible impairment. An impairment would be
recorded based upon discounted projected cash flows.
A discussion of the goodwill related to the purchase of PowerNet Victoria
(PowerNet), and other acquisitions is included in Note 6, Acquisitions and Note
14, GPUI Group Equity Investments.
NUCLEAR OUTAGE MAINTENANCE COSTS
The GPU Energy companies accrue incremental nuclear outage maintenance
costs anticipated to be incurred during scheduled nuclear plant refueling
outages to provide a proper matching of revenues to expenses.
NUCLEAR FUEL DISPOSAL FEE
The GPU Energy companies are providing for estimated future disposal costs
for spent nuclear fuel at Oyster Creek and TMI-1 in accordance with the Nuclear
Waste Policy Act of 1982. The GPU Energy companies entered into contracts in
1983 with the U.S. Department of Energy (DOE) for the disposal of spent nuclear
fuel. The total liability under these contracts, including interest, at December
31, 1998, all of which relates to spent nuclear fuel from nuclear generation
through April 1983, amounted to $189 million (JCP&L $141 million; Met-Ed $32
million; Penelec $16 million), and is reflected in Deferred Credits and Other
Liabilities - Other. As the actual liability is substantially in excess of the
amount recovered to date from ratepayers, JCP&L has reflected such excess of $21
million at December 31, 1998 in Regulatory assets, net. The rates presently
charged to customers provide for the collection of these costs, plus interest,
over remaining periods of eight years for JCP&L and Met-Ed.
The GPU Energy companies are collecting one mill per kilowatt-hour from
their customers for spent nuclear fuel disposal costs resulting from nuclear
generation subsequent to April 1983. These amounts are remitted quarterly to the
DOE. (See Note 13, Commitments and Contingencies, for a discussion of the DOE's
current inability to begin acceptance of spent nuclear fuel from the GPU Energy
companies and other standard contract holders.)
INCOME TAXES
GPU files a consolidated federal income tax return. All participants are
jointly and severally liable for the full amount of any tax, including penalties
and interest, which may be assessed against the group.
Deferred income taxes, which result primarily from liberalized
depreciation methods, deferred energy costs, decommissioning funds and
discounted Forked River and TMI-2 investments, reflect the impact of temporary
differences between the amounts of assets and liabilities recognized for
financial reporting purposes and the amounts recognized for tax purposes.
Investment tax credits (ITC) are amortized over the estimated service lives of
the related facilities.
F-54
GPU, Inc. and Subsidiary Companies
CARRYING AMOUNTS OF FINANCIAL INSTRUMENTS
The carrying amounts of Temporary cash investments, Special deposits,
Securities due within one year and Notes payable on the Consolidated Balance
Sheets approximate fair value due to the short period to maturity. The carrying
amounts of the Nuclear decommissioning trusts and Nuclear fuel disposal trust,
whose assets are invested in cash equivalents and debt and equity securities,
also approximate fair value.
ENVIRONMENTAL LIABILITIES
GPU may be subject to loss contingencies resulting from environmental laws
and regulations, which include obligations to mitigate the effects on the
environment of the disposal or release of certain hazardous wastes and
substances at various sites. GPU records liabilities (on an undiscounted basis)
for hazardous waste sites where it is probable that a loss has been incurred and
the amount of the loss can be reasonably estimated and adjusts these liabilities
as required to reflect changes in circumstances.
STATEMENTS OF CASH FLOWS
For the purpose of the consolidated statements of cash flows, temporary
investments include all unrestricted liquid assets, such as cash deposits and
debt securities, with maturities generally of three months or less. Cash flows
are reported using the U.S. dollar equivalent of the functional currencies in
effect at the time of the cash transaction. The effect of exchange rate changes
on cash balances held in foreign currencies are reported as a separate line item
on the Consolidated Statements of Cash Flows.
F-55
GPU, Inc. and Subsidiary Companies
2. SHORT-TERM BORROWING ARRANGEMENTS
At December 31, 1998 and 1997, GPU had short-term notes outstanding as
follows:
1998 1997
---- ----
Balance Weighted Balance Weighted
Company Facility Outstanding Avg. Rate Outstanding Avg. Rate
- ------- -------- ----------- --------- ----------- ---------
(in millions) (in millions)
GPU, Inc. Bank Lines of Credit $ 69 7.0% $ 92 6.6%
JCP&L Bank Lines of Credit 53 6.3 96 6.5
Commercial Paper 69 6.2 19 6.5
Met-Ed Bank Lines of Credit 17 6.1 49 6.7
Commercial Paper 63 6.4 18 6.9
Penelec Bank Lines of Credit 32 5.9 61 6.7
Commercial Paper 54 6.1 17 6.9
GPUI Bank Lines of Credit 12 6.2 1 6.2
--- --- --- ---
Total $369 6.4% $353 6.6%
=== === === ===
GPU has $1.8 billion of committed credit facilities, which include various
committed lines of credit totaling $207 million, an unsecured $250 million
Revolving Credit Agreement, and three other Credit Agreements, discussed below,
which are guaranteed by GPU, Inc.
GPU Capital has entered into a $1 billion 364-day senior revolving credit
facility to support the issuance of commercial paper. GPU Capital is the largest
of three issuers ($1 billion) in a $1.45 billion commercial paper program. The
other issuers are GPU Australia Holdings, Inc. ($350 million) and GPU, Inc.
which has requested SEC authorization to issue and sell up to $100 million under
this program. GPU Capital, along with GPU Australia Holdings, will use the
proceeds from the sale of commercial paper to finance up to $1.35 billion of
investments in foreign utility companies (FUCOs) and exempt wholesale generating
companies (EWGs). The facility fee of .15 of 1% on the GPU Capital credit
facility is based on GPU's current senior debt ratings and is payable annually.
A separate $360 million credit facility serves as the backstop for the GPU
Australia Holdings commercial paper program. The associated annual fee is .15 of
1%.
GPU International has a separate Credit Agreement providing for borrowings
through December 1999 of up to $30 million outstanding at any time. Up to $15
million may be utilized to provide letters of credit. An annual facility fee
ranging from .085% to .4% on the total amount of the Credit Agreement and a
letter of credit fee ranging from .265% to 1.6% on the outstanding letters of
credit are payable by GPU International.
The Revolving Credit Agreement between GPU, Inc., the GPU Energy companies
and a consortium of banks is subject to various covenants. The agreement expires
May 6, 2001. A facility fee of .125 of 1% is payable annually. Borrowing rates
and the facility fee are based on the long-term debt ratings of GPU, Inc. and
the GPU Energy companies.
F-56
GPU, Inc. and Subsidiary Companies
3. LONG-TERM DEBT
At December 31, 1998 and 1997, long-term debt outstanding was as follows:
(in thousands)
GPU, Inc. and Subsidiary Companies
1998 1997
---- ----
First Mortgage Bonds (GPU Energy companies)(a) $2,417,810 $2,447,810
Amounts due within one year (80,000) (30,000)
Unamortized net discount (3,039) (3,284)
--------- ---------
Total 2,334,771 2,414,526
Other long-term debt:
GPUI Group (excludes amounts due within one year
of $481,135 for 1998 and $589,390 for 1997) 1,456,713 1,877,300
Other (excludes amounts due within one year
of $48 for 1998 and $44 for 1997) 34,100 34,146
--------- ---------
Total long-term debt $3,825,584 $4,325,972
========= =========
(in thousands)
JCP&L
First Mortgage Bonds - Series as noted (a):
1998 1997
---- ----
6.04% due 2000 $ 40,000 $ 40,000
6.45% due 2001 40,000 40,000
9% due 2002 50,000 50,000
6 3/8% due 2003 150,000 150,000
7 1/8% due 2004 160,000 160,000
6.78% due 2005 50,000 50,000
8 1/4% due 2006 50,000 50,000
6.85% due 2006 40,000 40,000
7.90% due 2007 40,000 40,000
7 1/8% due 2009 6,300 6,300
7.10% due 2015 12,200 12,200
9.20% due 2021 50,000 50,000
8.55% due 2022 30,000 30,000
8.82% due 2022 12,000 12,000
8.85% due 2022 38,000 38,000
8.32% due 2022 40,000 40,000
7.98% due 2023 40,000 40,000
7 1/2% due 2023 125,000 125,000
8.45% due 2025 50,000 50,000
6 3/4% due 2025 150,000 150,000
--------- ---------
Subtotal 1,173,500 1,173,500
Amounts due within one year - -
Unamortized net discount (2,992) (3,233)
--------- ---------
Total 1,170,508 1,170,267
Other long-term debt
(excludes amounts due within one year
of $12 for 1998 and $11 for 1997) 3,024 3,037
--------- ---------
Total long-term debt $1,173,532 $1,173,304
========= =========
F-57
GPU, Inc. and Subsidiary Companies
(in thousands)
Met-Ed
First Mortgage Bonds - Series as noted (a):
1998 1997
---- ----
7.05% due 1999 $ 30,000 $ 30,000
6.2% due 2000 30,000 30,000
9.48% due 2000 20,000 20,000
8.05% due 2002 30,000 30,000
6.6% due 2003 20,000 20,000
7.22% due 2003 40,000 40,000
9.1% due 2003 30,000 30,000
6.34% due 2004 40,000 40,000
6.77% due 2005 30,000 30,000
7.35% due 2005 20,000 20,000
6.36% due 2006 17,000 17,000
6.40% due 2006 33,000 33,000
6.00% due 2008 8,700 8,700
6.1% due 2021 28,500 28,500
8.6% due 2022 30,000 30,000
8.8% due 2022 30,000 30,000
6.97% due 2023 30,000 30,000
7.65% due 2023 30,000 30,000
8.15% due 2023 60,000 60,000
5.95% due 2027 13,690 13,690
------- --------
Subtotal 570,890 570,890
Amounts due within one year (30,000) -
Unamortized net discount (35) (39)
------- -------
Total 540,855 570,851
Other long-term debt
(excludes amounts due within one year
of $24 for 1998 and $22 for 1997) 6,049 6,073
------- -------
Total long-term debt $ 546,904 $ 576,924
======= =======
F-58
GPU, Inc. and Subsidiary Companies
(in thousands)
Penelec
First Mortgage Bonds - Series as noted (a):
1998 1997
---- ----
7 7/8% due 1998 $ - $ 30,000
5.99% due 1999 50,000 50,000
6.15% due 2000 30,000 30,000
6.8% due 2001 20,000 20,000
8.70% due 2001 30,000 30,000
7.40% due 2002 10,000 10,000
7.43% due 2002 30,000 30,000
7.92% due 2002 10,000 10,000
7.40% due 2003 10,000 10,000
6.60% due 2003 30,000 30,000
7.02% due 2003 20,000 20,000
7.48% due 2004 40,000 40,000
6.10% due 2004 30,000 30,000
6.7% due 2005 30,000 30,000
6.35% due 2006 40,000 40,000
8.05% due 2006 10,000 10,000
6 1/8% due 2007 4,110 4,110
6.55% due 2009 50,000 50,000
5.35% due 2010 12,310 12,310
5.35% due 2010 12,000 12,000
5.80% due 2020 20,000 20,000
8.33% due 2022 20,000 20,000
7.49% due 2023 30,000 30,000
8.38% due 2024 40,000 40,000
8.61% due 2025 30,000 30,000
7.53% due 2025 40,000 40,000
6.05% due 2025 25,000 25,000
------- -------
Subtotal 673,420 703,420
Amounts due within one year (50,000) (30,000)
Unamortized net discount (11) (12)
------- -------
Total 623,409 673,408
Other long-term debt
(excludes amounts due within one year
of $12 for 1998 and $11 for 1997) 3,025 3,036
------- -------
Total long-term debt $ 626,434 $ 676,444
======= =======
<FN>
(a) Substantially all of the utility plant owned by the GPU Energy companies
is subject to the lien of their respective mortgages.
</FN>
F-59
GPU, Inc. and Subsidiary Companies
For the years 1999, 2000, 2001, 2002 and 2003 GPU has long-term debt
maturities for first mortgage bonds and other long-term debt as follows:
(in millions)
Company 1999 2000 2001 2002 2003
- ------- ---- ---- ---- ---- ----
JCP&L $ - $ 40 $ 40 $ 50 $150
Met-Ed 30 50 0 30 90
Penelec 50 30 50 50 60
GPUI Group 481 535 93 535 2
GPUS - - 22 - -
--- --- --- --- ---
Total $561 $655 $205 $665 $302
=== --- === === ===
The estimated fair value of GPU's long-term debt, including amounts due
within one year, as of December 31, 1998 and 1997 was as follows:
(in thousands)
--------------
1998 1997
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
JCP&L $1,173,544 $1,245,141 $1,173,315 $1,231,766
Met-Ed 576,928 613,573 576,946 607,336
Penelec 676,447 718,405 706,455 736,031
GPUI Group 1,937,847 1,855,836 2,466,690 2,467,286
GPUS 22,000 22,000 22,000 22,000
--------- --------- --------- ---------
Total $4,386,766 $4,454,955 $4,945,406 $5,064,419
========= ========= ========= =========
The fair value of long-term debt is estimated based on the quoted market
prices for the same or similar issues or on the current rates offered to GPU for
debt of the same remaining maturities and credit qualities. At December 31,
1998, the GPUI Group had long-term debt outstanding of $1.9 billion, of which
approximately $723 million was guaranteed by GPU, Inc. The guaranteed amount
consisted of the following: $350 million under a five-year U.S. bank credit
agreement used to partially fund GPU Electric's acquisition of PowerNet (see
Note 6); and 225 million British pounds (approximately U.S. $373 million at
December 31, 1998) under a bank term loan facility used to fund GPU Electric's
investment in Midlands.
F-60
GPU, Inc. and Subsidiary Companies
4. STOCKHOLDERS' EQUITY
COMMON EQUITY
Common Stock:
GPU, Inc.
The following table presents information relating to the common stock
($2.50 par value) of GPU, Inc.:
1998 1997 1996
---- ---- ----
Authorized shares 350,000,000 350,000,000 350,000,000
Issued shares 132,783,338 125,783,338 125,783,338
Reacquired shares 4,787,657 4,950,727 5,172,201
Outstanding shares 127,995,681 120,832,611 120,611,137
Outstanding restricted units 307,773 248,883 258,705
In 1998, GPU, Inc. sold seven million shares of common stock. The net
proceeds of $269 million were used primarily to reduce indebtedness associated
with the PowerNet and Midlands acquisitions, and the balance was used for other
corporate purposes. In 1998, 1997 and 1996, capital surplus was credited $4.3
million, $3 million and $3 million, respectively, for shares issued pursuant to
GPU, Inc.'s Dividend Reinvestment Plan. Also in 1998, capital surplus was
credited $252 million, net related to the issuance of common stock.
In 1997, GPU adopted Statement of Financial Accounting Standards No. 128
(FAS 128), "Earnings Per Share," which requires a dual presentation of earnings
per share for companies that have common stock equivalents. GPU's basic and
diluted earnings per share are not materially different.
Pursuant to the 1990 Stock Plan, awards may be granted in the form of
incentive stock options, nonqualified stock options, restricted shares of common
stock and restricted units. In 1998, 1997 and 1996, GPU, Inc. issued restricted
units to officers representing rights to receive shares of common stock, on a
one-for-one basis, at the end of the restriction period. The number of shares
eventually issued will depend upon the degree that GPU's performance goals have
been met for the restriction period and could range from 0% to 200% of the
originally awarded units. In 1998, GPU, Inc. granted stock options to its
officers to purchase 305,950 and 30,000 shares at $36.625 per share and $44.25
per share, respectively. All options have an exercise price equal to the fair
market value of GPU, Inc. common stock on the grant date. Options are
exercisable in accordance with the terms set forth in the 1990 Stock Plan. In
1998, no options were exercised. In 1998 and 1997, pursuant to the Deferred
Stock Unit Plan for Outside Directors, restricted units were issued to outside
directors representing rights to receive shares of GPU, Inc. common stock, on a
one-for-one basis. All restricted units are considered common stock equivalents
and, accordingly, are reflected in the computation of diluted earnings per share
shown on the Consolidated Income Statements. The restricted units accrue
dividend equivalents on a quarterly basis, which are reinvested in additional
equivalent units. In 1998, 1997 and 1996, outside directors were awarded 53,260,
64,941 and 63,206 restricted units, respectively. In 1998, 1997 and 1996, GPU,
Inc. issued a total of 20,611, 54,491 and 37,253 shares of common stock,
respectively, from previously reacquired shares.
F-61
GPU, Inc. and Subsidiary Companies
In 1996, GPU adopted Statement of Financial Accounting Standards No. 123
(FAS 123), "Accounting for Stock-Based Compensation," which establishes a fair
value-based method of accounting for employee stock-based compensation. Under
this method, compensation cost is measured at the grant date, based on the
market price of the stock at that date, and is recognized as expense over the
restricted period. FAS 123 permits companies to continue to follow the
accounting prescribed by Accounting Principles Board Opinion No. 25 (APB No.
25), provided that pro forma disclosures of net income are made as if the fair
value-based method of accounting had been applied. GPU has elected to continue
accounting for stock-based compensation in accordance with APB No. 25, which
contains provisions for subsequent adjustments to compensation cost based on
market price fluctuations of the stock after the grant date. The pro forma
effects on net income resulting from the application of the fair value-based
method of accounting defined in FAS 123 are immaterial.
At December 31, 1998 and 1997, the following issues of common stock
were outstanding:
(in thousands)
GPU, Inc. 1998 1997
- --------- ---- ----
Common stock, par value $2.50 per share $331,958 $314,458
======= =======
JCP&L
Common stock, par value $10 per share,
16,000,000 shares authorized, 15,371,270
shares issued and outstanding $153,713 $153,713
======= =======
Met-Ed
Common stock, no par value, 900,000 shares
authorized, 859,500 shares issued
and outstanding 66,273 $ 66,273
====== ======
Penelec
Common stock, par value $20 per share,
5,400,000 shares authorized, 5,290,596
shares issued and outstanding $105,812 $105,812
======= =======
Accumulated Other Comprehensive Income/(Loss)
In 1997, GPU adopted Statement of Financial Accounting Standards No. 130
(FAS 130), "Reporting Comprehensive Income." At December 31, 1998 and 1997, GPU
had on the Consolidated Balance Sheets the following amounts in Accumulated
other comprehensive income/(loss):
GPU, Inc. and Subsidiary Companies (in thousands)
1998 1997
---- ----
Net unrealized gain on investments $ 28,345 $ 19,358
Foreign currency translation (54,377) (44,916)
Minimum pension liability (5,272) (3,738)
------ ------
Accumulated other comprehensive income/(loss) $(31,304) $(29,296)
====== ======
F-62
GPU, Inc. and Subsidiary Companies
JCP&L 1998 1997
----- ---- ----
Net unrealized gain on investments $ - $ -
Minimum pension liability (425) -
------ -------
Accumulated other comprehensive income/(loss) $ (425) $ -
====== =======
Met-Ed
Net unrealized gain on investments $ 17,054 $ 12,906
Minimum pension liability (534) (419)
------ ------
Accumulated other comprehensive income $ 16,520 $ 12,487
====== ======
Penelec
Net unrealized gain on investments $ 8,518 $ 6,454
Minimum pension liability (165) (122)
------ ------
Accumulated other comprehensive income $ 8,353 $ 6,332
====== ======
The components of other comprehensive income/(loss), and the related tax
effects, for the years 1998, 1997 and 1996 are as follows:
(in thousands)
GPU, Inc. and Subsidiary Companies Amount Income Tax Amount
Before (Expense) Net of
1998 Taxes Benefit Taxes
- ---- ------ ------- -------
Net unrealized gain on investments $ 13,235 $(4,248) $ 8,987
Foreign currency translation:
Foreign currency translation during year (23,295) 8,233 (15,062)
Realized loss in net income 8,737 (3,136) 5,601
------ ------ ------
Foreign currency translation, net (14,558) 5,097 (9,461)
Minimum pension liability (2,605) 1,071 (1,534)
------ ------ ------
Total other comprehensive income/(loss) $ (3,928) $ 1,920 $ (2,008)
===== ====== =====
1997
Net unrealized gain on investments 10,895 (4,521) 6,374
Foreign currency translation, net (73,115) 24,186 (48,929)
Minimum pension liability (2,541) 1,046 (1,495)
------ ------ ------
Total other comprehensive income/(loss) $(64,761) $ 20,711 $(44,050)
====== ====== =======
1996
Unrealized gain on investments:
Gain on investments during the year $ 10,797 $(3,922) 6,875
Realized gain in net income (9,494) 3,323 (6,171)
------ ----- -----
Net unrealized gain on investments 1,303 (599) 704
Foreign currency translation, net 3,054 - 3,054
Minimum pension liability (3,706) 1,531 (2,175)
------ ----- -----
Total other comprehensive income $ 651 $ 932 $ 1,583
====== ===== =====
F-63
GPU, Inc. and Subsidiary Companies
(in thousands)
JCP&L Amount Income Tax Amount
Before (Expense) Net of
1998 Taxes Benefit Taxes
- ---- ------ ------- -----
Net unrealized gain on investments $ - $ - $ -
Minimum pension liability (718) 293 (425)
------ ----- -----
Total other comprehensive income/(loss) $ (718) $ 293 $ (425)
===== ===== =====
Met-Ed
1998
Net unrealized gain on investments $ 6,990 $(2,842) $ 4,148
Minimum pension liability (196) 81 (115)
----- ----- -----
Total other comprehensive income/(loss) $ 6,794 $(2,761) $ 4,033
===== ===== =====
1997
Net unrealized gain on investments $ 7,263 $(3,014) $ 4,249
Minimum pension liability (267) 110 (157)
------ ----- -----
Total other comprehensive income/(loss) $ 6,996 $(2,904) $ 4,092
====== ===== =====
1996
Net unrealized gain on investments $ 6,883 $(2,856) $ 4,027
Minimum pension liability (448) 186 (262)
----- ----- -----
Total other comprehensive income/(loss) $ 6,435 $(2,670) $ 3,765
===== ===== =====
Penelec
1998
Net unrealized gain on investments $ 3,470 $(1,406) $ 2,064
Minimum pension liability (73) 30 (43)
------ ----- -----
Total other comprehensive income/(loss) $ 3,397 $(1,376) $ 2,021
===== ===== =====
1997
Net unrealized gain on investments $ 3,632 $(1,507) $ 2,125
Minimum pension liability (209) 87 (122)
----- ----- -----
Total other comprehensive income/(loss) $ 3,423 $(1,420) $ 2,003
===== ===== =====
1996
Net unrealized gain on investments 3,442 $(1,428) $ 2,014
Minimum pension liability - - -
----- ----- ------
Total other comprehensive income/(loss) 3,442 $(1,428) $ 2,014
===== ===== =====
F-64
GPU, Inc. and Subsidiary Companies
PREFERRED EQUITY
Cumulative Preferred Stock:
At December 31, 1998 and 1997, the following issues of cumulative preferred
stock were outstanding:
GPU, Inc. and Subsidiary Companies
(in thousands)
1998 1997
---- ----
Cumulative preferred stock (a):
With mandatory redemption (d) $ 89,000 $ 104,000
Amounts due within one year (e) (2,500) (12,500)
------- -------
Total cumulative preferred stock
with mandatory redemption $ 86,500 $ 91,500
======= =======
Cumulative preferred stock (a):
Without mandatory redemption (b), (f) $ 65,996 $ 65,996
Premium on cumulative preferred stock 482 482
------- -------
Total cumulative preferred stock
without mandatory redemption $ 66,478 $ 66,478
======= =======
JCP&L
Cumulative preferred stock, without par value, 15,600,000 shares authorized,
1,315,000 and 1,415,000 shares issued and outstanding in 1998 and 1997,
respectively (a):
(in thousands)
1998 1997
---- ----
Cumulative preferred stock -
without mandatory redemption (b):
4% Series, 125,000 shares,
callable at $106.50 a share $12,500 $ 12,500
7.88% Series E, 250,000 shares,
callable at $103.65 a share 25,000 25,000
------ ------
Subtotal 37,500 37,500
Premium on cumulative preferred stock 241 241
------ ------
Total cumulative preferred stock -
without mandatory redemption $ 37,741 $ 37,741
====== ======
Cumulative preferred stock -
with mandatory redemption (c), (d), (e):
8.48% Series I ,100,000 shares
in 1997 $ - $ 10,000
8.65% Series J, 500,000 shares 50,000 50,000
7.52% Series K, 440,000 shares 39,000 44,000
------- -------
Subtotal 89,000 104,000
Amounts due within one year (e) (2,500) (12,500)
------- -------
Total cumulative preferred stock -
with mandatory redemption $ 86,500 $ 91,500
======= =======
F-65
GPU, Inc. and Subsidiary Companies
Met-Ed
Cumulative preferred stock, without par value, 10,000,000 shares authorized,
119,475 shares issued and outstanding in 1998 and 1997, without mandatory
redemption (a), (b), (f):
(in thousands)
1998 1997
---- ----
3.90% Series, 64,384 shares,
callable at $105.625 a share $ 6,438 $ 6,438
4.35% Series, 22,517 shares,
callable at $104.25 a share 2,252 2,252
3.85% Series, 9,252 shares,
callable at $104.00 a share 925 925
3.80% Series, 7,982 shares
callable at $104.70 a share 798 798
4.45% Series, 15,340 shares,
callable at $104.25 a share 1,534 1,534
------ ------
Subtotal 11,947 11,947
Premium on cumulative preferred stock 109 109
------ ------
Total cumulative preferred stock $ 12,056 $ 12,056
====== ======
Penelec
Cumulative preferred stock, without par value, 11,435,000 shares authorized,
165,485 shares issued and outstanding in 1998 and 1997, without mandatory
redemption (a), (b), (f):
(in thousands)
1998 1997
---- ----
4.40% Series B, 29,678 shares,
callable at $108.25 per share $ 2,968 $ 2,968
3.70% Series C, 49,568 shares,
callable at $105.00 per share 4,957 4,957
4.05% Series D, 28,219 shares,
callable at $104.53 per share 2,822 2,822
4.70% Series E, 14,103 shares,
callable at $105.25 per share 1,410 1,410
4.50% Series F, 17,081 shares,
callable at $104.27 per share 1,708 1,708
4.60% Series G, 26,836 shares,
callable at $104.25 per share 2,684 2,684
------ ------
Subtotal 16,549 16,549
Premium on cumulative preferred stock 132 132
------ ------
Total cumulative preferred stock $ 16,681 $ 16,681
====== ======
(a) At December 31, 1998 and 1997, the GPU Energy companies were authorized
to issue 37,035,000 shares of cumulative preferred stock. If dividends on
any of the preferred stock are in arrears for four quarters, the holders
of preferred stock, voting as a class, are entitled to elect a majority
of the board of directors of that company until all dividends in arrears
have been paid. A GPU Energy company may not redeem preferred stock
unless dividends on all of its preferred stock for all past quarterly
dividend periods have been paid or declared and set aside for payment.
F-66
GPU, Inc. and Subsidiary Companies
(b) The outstanding shares of preferred stock without mandatory redemption
are callable at various prices above their stated values. At December 31,
1998, the aggregate amount at which these shares could be called by the
GPU Energy companies was $69 million (JCP&L $39 million; Met-Ed $13
million; Penelec $17 million).
(c) The 7.52% and 8.65% Series are callable at various prices above their
stated values beginning in 2002 and 2000, respectively. The 7.52% Series
is to be redeemed ratably over twenty years which began in 1998. The
8.65% Series is to be redeemed ratably over six years beginning in 2000.
(d) During 1998, JCP&L redeemed $5 million stated value of 7.52% cumulative
preferred stock and $10 million stated value of 8.48% cumulative preferred
stock pursuant to mandatory and optional sinking fund provisions. During
1997, JCP&L redeemed $20 million stated value of 8.48% cumulative
preferred stock pursuant to mandatory and optional sinking fund
provisions. JCP&L's total redemption cost for 1998 and 1997 was $15
million and $20 million, respectively.
(e) The outstanding shares with mandatory redemption have the following
redemption requirements over the next five years: $2.5 million in 1999
and $10.8 million in 2000, 2001, 2002 and 2003. The fair value of the
preferred stock with mandatory redemption, including amounts due within
one year, based on market price quotations at December 31, 1998 and 1997,
was $94.7 million and $109.9 million, respectively.
(f) During 1996, Met-Ed and Penelec reacquired, pursuant to cash tender
offers, cumulative preferred stock for a total cost of $7.7 million and
$14.4 million, respectively. A reacquisition gain of $3.7 million and
$5.6 million was recorded for Met-Ed and Penelec, respectively, which
resulted in an increase in GPU, Inc.'s 1996 diluted earnings per share of
$0.08.
(g) In January 1999, Met-Ed and Penelec announced the redemption of all
outstanding shares of cumulative preferred stock. The shares will be
redeemed on February 19, 1999 at a price of $12.6 million and $17.6
million for Met-Ed and Penelec, respectively.
Subsidiary-Obligated Mandatorily Redeemable Preferred Securities:
JCP&L Capital, L.P., Met-Ed Capital, L.P. and Penelec Capital, L.P., are
special-purpose partnerships in which a subsidiary of JCP&L, Met-Ed and Penelec,
respectively, is the sole general partner. In 1995, JCP&L Capital, L.P. issued
$125 million of mandatorily redeemable preferred securities (Preferred
Securities) and in 1994, Met-Ed Capital, L.P. and Penelec Capital, L.P. issued
$100 million and $105 million, respectively, of Preferred Securities. The
proceeds were lent to JCP&L, Met-Ed and Penelec, respectively, which, in turn,
issued their deferrable interest subordinated debentures to the partnerships.
The following issues of Preferred Securities were outstanding at December 31,
1998 and 1997:
F-67
GPU, Inc. and Subsidiary Companies
Issue Securities Total
Company Series Price Outstanding in thousands)
- ------- ------ ----- ----------- -------------
JCP&L Capital, L.P. 8.56% $25 5,000,000 $125,000
Met-Ed Capital, L.P. 9.00% $25 4,000,000 100,000
Penelec Capital, L.P. 8.75% $25 4,200,000 105,000
-------
Total $330,000
The fair value of the Preferred Securities based on market price quotations at
December 31, 1998 and 1997 was $336 million (JCP&L $128 million, Met-Ed $102
million, Penelec $106 million) and $341 million (JCP&L $128 million, Met-Ed $104
million, Penelec $109 million), respectively.
The Preferred Securities of JCP&L Capital, L.P. mature in 2044, while
those of Met-Ed Capital, L.P. and Penelec Capital, L.P. mature in 2043. Their
respective Preferred Securities are redeemable at the option of JCP&L beginning
in 2000, and at the option of Met-Ed and Penelec beginning in 1999, at 100% of
their principal amount, or earlier under certain limited circumstances,
including the loss of the federal tax deduction for interest paid on the
subordinated debentures. JCP&L, Met-Ed and Penelec have fully and
unconditionally guaranteed payment of distributions, to the extent there is
sufficient cash on hand to permit such payments and legally available funds, and
payments on liquidation or redemption of their respective Preferred Securities.
Distributions on the Preferred Securities (and interest on the subordinated
debentures) may be deferred for up to 60 months, but JCP&L, Met-Ed and Penelec
may not pay dividends on, or redeem or acquire, any of their preferred or common
stock until deferred payments on their respective subordinated debentures are
paid in full.
5. ACCOUNTING FOR EXTRAORDINARY AND NON-RECURRING ITEMS
Pennsylvania Restructuring Write-offs
Historically, the rates an electric utility charges its customers have
been based on the utility's costs of operation. As a result, the GPU Energy
companies were required to account for the economic effects of cost-based
ratemaking regulation under the provisions of FAS 71. FAS 71 requires regulated
entities, in certain circumstances, to defer, as regulatory assets, the impact
on operations of costs expected to be recovered in future rates.
In response to the continuing deregulation of the electric utility
industry, the SEC has questioned the continued applicability of FAS 71 by
investor-owned utilities with respect to their electric generation operations.
In response to these concerns, the Financial Accounting Standards Board's (FASB)
EITF concluded in June 1997 that utilities are no longer subject to FAS 71, for
the relevant portion of their business, when they know details of their
individual transition plans to a competitive electric generation marketplace.
The EITF also concluded that utilities can continue to carry previously recorded
regulated assets, as well as any newly established regulated assets (including
those related to generation), on their balance sheets if regulators have
guaranteed a regulated cash flow stream to recover the cost of these assets.
F-68
GPU, Inc. and Subsidiary Companies
In 1998, Met-Ed and Penelec received PaPUC Restructuring Orders
(Restructuring Orders) which, among other things, essentially remove from
regulation the costs associated with providing electric generation service to
Pennsylvania consumers, effective January 1, 1999. Accordingly, in 1998 Met-Ed
and Penelec discontinued the application of FAS 71 and adopted the provisions of
FAS 101 and EITF Issue 97-4 with respect to their electric generation
operations. The transmission and distribution portion of Met-Ed and Penelec's
operations continue to be subject to the provisions of FAS 71. JCP&L expects to
discontinue the application of FAS 71 and adopt FAS 101 and EITF Issue 97-4 for
its electric generation operations no later than its receipt of NJBPU approval
of its restructuring plans, which is expected in the second quarter of 1999.
Also, as a result of the Restructuring Orders, Met-Ed and Penelec recorded
non-recurring charges for customer refunds of 1998 revenues, and for the
establishment of a sustainable energy fund.
For the year ended December 31, 1998, the net effect on earnings of the
PaPUC's Restructuring Orders was as follows:
(in millions, except per share data)
Met-Ed Penelec Total
------ ------- -----
Write-off of existing Pennsylvania
generation regulatory assets $ 8.0 $ 2.8 $ 10.8
Write-off of existing FERC
generation regulatory assets 1.5 17.6 19.1
Write-off of FERC portion of TMI-1
impairment and TMI-1 decommissioning 2.0 10.2 12.2
------- ------- -------
Extraordinary loss (pre-tax)
due to FAS 101 write-off 11.5 30.6 42.1
Obligation to refund 1998 revenues 27.2 29.2 56.4
Establishment of sustainable energy fund 5.7 6.4 12.1
------- ------- -------
Total pre-tax write-off 44.4 66.2 110.6
Income tax benefit (18.4) (26.4) (44.8)
------- ------- -------
Total after-tax write-off $ 26.0 $ 39.8 $ 65.8
======= ======= =======
GPU loss per average common share
due to Pennsylvania restructuring $ 0.21 $ 0.31 $ 0.52
======= ======= =======
FAS 121 Impairment Tests on Generation Facilities
In accordance with Statement of Financial Accounting Standards No. 121
(FAS 121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", impairment tests performed by the GPU
Energy companies on the December 31, 1998 net book value of their generation
facilities determined that the net investment in TMI-1 was impaired, resulting
in a write-down of $518 million (pre-tax) to reflect TMI-1's fair market value.
Of the amount written down for TMI-1, $508 million was established as a
regulatory asset because management believes it is probable of recovery in
F-69
GPU, Inc. and Subsidiary Companies
the restructuring process and $10 million (the FERC jurisdictional portion) was
charged to expense as an extraordinary item.
6. ACQUISITIONS
POWERNET
In 1997, GPU Electric acquired the business of PowerNet from the State of
Victoria, Australia for A$2.6 billion (approximately U.S. $1.9 billion). The
fair value of the assets acquired totaled approximately U.S. $2 billion and the
amount of liabilities assumed totaled approximately U.S. $142.9 million.
PowerNet owns and operates the high-voltage electricity transmission system in
the State of Victoria serving an area of approximately 87,900 square miles and a
population of approximately 4.5 million.
The PowerNet acquisition was financed through: (1) a senior debt credit
facility of A$1.9 billion (approximately U.S. $1.4 billion), which is
non-recourse to GPU, Inc.; (2) a five-year U.S. $450 million bank credit
agreement which is guaranteed by GPU, Inc.; and (3) an equity contribution from
GPU, Inc. of U.S. $50 million.
As part of the PowerNet acquisition, the GPUI Group entered into various
interest rate swap agreements to mitigate the risk of increases in variable
interest rates on the senior debt credit facility. These swaps became effective
in November 1997, and expire on various dates through November 2007. The GPUI
Group expects to record amounts paid and received under the agreements as
adjustments to the interest expense of the underlying debt.
The acquisition of PowerNet was accounted for under the purchase method of
accounting. The total acquisition costs exceeded the estimated value of net
assets by A$877 million (approximately U.S. $537 million). This excess amount is
considered goodwill and is being amortized to expense on a straight-line basis
over 40 years.
PowerNet has been included in GPU's consolidated financial statements
since its purchase on November 6, 1997. The following unaudited pro forma
consolidated results of operations for the years 1997 and 1996 have been
prepared in accordance with Accounting Principles Board Opinion No. 16, assuming
the acquisition date was effective January 1, 1996 with debt financing. The pro
forma results are not necessarily indicative of the actual results that would
have been realized had the acquisition occurred on the assumed date of January
1, 1996, nor are they necessarily indicative of future results. The pro forma
consolidated operating results are for information purposes only and are as
follows:
(Unaudited)
1997 1996
---- ----
(in thousands except As As
per share data) Reported Pro Forma Reported Pro Forma
- --------------- -------- --------- -------- ---------
Operating revenues $4,143,379 $4,316,452 $3,970,711 $4,184,661
Net income $ 335,101 $ 326,742 $ 298,352 $ 282,494
Basic earnings per share $ 2.78 $ 2.71 $ 2.48 $ 2.34
Diluted earnings per share $ 2.77 $ 2.70 $ 2.47 $ 2.34
F-70
GPU, Inc. and Subsidiary Companies
MIDLANDS ELECTRICITY PLC
In 1996, GPU and Cinergy Corp. (Cinergy) formed Avon Energy Partners
Holdings (Holdings), a 50/50 joint venture, to acquire Midlands Electricity plc
(Midlands), an English regional electric company. A wholly-owned subsidiary of
Holdings, Avon, purchased the outstanding shares of Midlands through a cash
tender offer of 1.7 billion British pounds (approximately U.S. $2.6 billion).
GPU's 50% interest in Holdings is held by EI UK Holdings, Inc. (EI UK), a
wholly-owned subsidiary of GPU Electric.
Midlands distributes electricity to 2.3 million customers in England in an
area with a population of five million. In November 1998, Midlands announced the
sale of its electric supply business to National Power plc. The sale is subject
to approval by Great Britain's Department of Trade and Industry and the Office
of Electricity Regulation, and is expected to be completed in the second quarter
of 1999.
EI UK borrowed approximately 342 million British pounds (approximately
U.S. $586 million) through a GPU, Inc. guaranteed five-year bank term loan
facility to fund its investment in Holdings. Holdings borrowed approximately 1.1
billion British pounds (approximately U.S. $1.8 billion) through a term loan and
revolving credit facility to provide for the balance of the acquisition price.
EI UK accounts for its 50% investment in Holdings using the equity method
of accounting (see Note 14, GPUI Group Equity Investments). Accordingly, EI UK's
investment is reported on the Consolidated Balance Sheets in GPUI Group equity
investments, and its proportionate share of earnings from Holdings is reflected
in Equity in undistributed earnings/(losses) of affiliates in the Consolidated
Statements of Income.
The acquisition of Midlands by Avon was accounted for under the purchase
method of accounting. The total acquisition cost exceeded the estimated value of
net assets by 1.4 billion British pounds (approximately U.S. $2.1 billion). This
excess amount is considered goodwill and is being amortized to expense on a
straight-line basis over 40 years.
F-71
GPU, Inc. and Subsidiary Companies
7. ACCOUNTING FOR DERIVATIVE INSTRUMENTS
GPU's use of derivative financial and commodity instruments is principally
limited to the GPUI Group. GPU has not held or issued derivative financial or
commodity instruments for trading purposes.
Interest Rate Swap Agreements:
The GPUI Group uses interest rate swap agreements to manage the risk of
increases in variable interest rates. At December 31, 1998, these agreements
covered approximately $1.2 billion of debt, including commercial paper, and are
scheduled to expire on various dates through November 2007. The GPUI Group
records amounts paid and received under the agreements as adjustments to the
interest expense of the underlying debt since the swaps are related to specific
assets, liabilities or anticipated transactions of the GPUI Group. For the year
ended December 31, 1998, fixed rate interest expense exceeded variable rate
interest by approximately $18.3 million. (For additional information, see GPUI
Group section, Management's Discussion and Analysis.)
Indexed Swap Agreement:
In 1998, GPU International entered into a 10-year indexed swap agreement
with Niagara Mohawk Power Corporation (NIMO) which, among other things, provides
GPU International a fixed revenue stream (over the life of the swap agreement)
on its investment in the Onondaga Cogeneration project. At December 31, 1998,
the indexed swap agreement is valued at $62.4 million and is included in Other -
Deferred Debits and Other Assets on the Consolidated Balance Sheets. This
valuation was derived using the discounted estimated cash flows of the payments
expected to be received by GPU International from NIMO over the life of the swap
agreement.
8. INCOME TAXES
As of December 31, 1998 and 1997, Regulatory assets, net on the
Consolidated Balance Sheets reflected $450 million and $511 million,
respectively, of Income taxes recoverable through future rates (primarily
related to liberalized depreciation), and Income taxes refundable through future
rates of $53 million and $89 million, respectively (related to unamortized ITC),
substantially due to the recognition of amounts not previously recorded with the
adoption of Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes," in 1993, as follows:
(in millions)
1998 1997
---- ----
Income Taxes Recoverable Through Future Rates:
JCP&L $173 $128
Met-Ed 134 179
Penelec 143 204
--- ---
Total $450 $511
=== ===
Income Taxes Refundable Through Future Rates:
JCP&L $ 36 $ 37
Met-Ed 11 22
Penelec 6 30
--- ---
Total $ 53 $ 89
=== ===
F-72
GPU, Inc. and Subsidiary Companies
Summaries of the components of deferred taxes as of December 31, 1998 and
1997 are as follows:
GPU, Inc. and Subsidiary Companies:
(in millions)
Deferred Tax Assets Deferred Tax Liabilities
- ------------------- ------------------------
1998 1997 1998 1997
---- ---- ---- ----
Current: Current:
Unbilled revenue $ 31 $ 31 Revenue taxes $ 8 $ 10
Deferred energy - 7 Deferred energy 4 -
----- -----
Other 16 46 Total $ 12 $ 10
----- --- ===== =====
Total $ 47 $ 84
===== ===
Noncurrent: Noncurrent:
Unamortized ITC $ 70 $ 89 Liberalized
Decommissioning 151 74 depreciation:
Contributions in aid Previously flowed
of construction 26 24 through $ 202 $ 263
Cumulative translation Future revenue
adjustment 29 - requirements 155 193
----- -----
Above-market NUGs 748 -
Customer transition Subtotal 357 456
charge 534 - Liberalized
Revenue subject depreciation 719 860
to refund 23 - Customer transition
Generation revenue charge 1,684 -
requirements 44 -
Other 379 196 Other 285 250
----- --- ----- -----
Total $2,004 $383 Total $3,045 $1,566
===== === ===== =====
JCP&L:
(in millions)
Deferred Tax Assets Deferred Tax Liabilities
- ------------------- ------------------------
1998 1997 1998 1997
---- ---- ---- ----
Current: Current:
Unbilled revenue $ 21 $ 21 Revenue taxes $ 12 $ 10
=== ===
Deferred energy - 7
--- ---
Total $ 21 $ 28
=== ===
Noncurrent: Noncurrent:
Unamortized ITC $ 36 $ 38 Liberalized
Decommissioning 46 33 depreciation:
Contributions in aid Previously flowed
of construction 20 19 through $ 46 $ 52
DOE SNF interest 25 23 Future revenue
Other 52 42 requirements 49 36
--- --- --- ---
Total $179 $155
=== ===
Subtotal 95 88
Liberalized
depreciation 375 411
Forked River 5 7
TMI-1 investment/loss 60 -
Other 136 138
--- ---
Total $671 $644
=== ===
F-73
GPU, Inc. and Subsidiary Companies
Met-Ed:
(in millions)
Deferred Tax Assets Deferred Tax Liabilities
- ------------------- ------------------------
1998 1997 1998 1997
---- ---- ---- ----
Noncurrent:
Current: Liberalized
Unbilled revenue $ 3 $ 3 depreciation:
===== ===
Previously flowed
through $ 57 $ 97
Future revenue
Noncurrent: requirements 50 72
----- ---
Unamortized ITC $ 16 $ 22
Decommissioning 65 27 Subtotal 107 169
Contributions in aid Liberalized
of construction 3 2 depreciation 127 191
Customer transition Customer transition
charge 160 - charge 737 -
Above-market NUGs 327 - Other 40 53
------ ---
Revenue subject Total $1,011 $413
===== ===
to refund 11 -
Generation revenue
requirements 23 -
Other 109 36
----- ---
Total $ 714 $ 87
===== ===
Penelec:
(in millions)
Deferred Tax Assets Deferred Tax Liabilities
- ------------------- ------------------------
1998 1997 1998 1997
---- ---- ---- ----
Noncurrent:
Current: Liberalized
Unbilled revenue $ 8 $ 8 depreciation:
=== ===
Previously flowed
Noncurrent: through $ 96 $114
Unamortized ITC $ 19 $ 30 Future revenue
Decommissioning 41 14 requirements 55 85
----- ---
Contributions in aid
of construction 3 3 Subtotal 151 199
Customer transition Liberalized
charge 373 - depreciation 212 245
Above-market NUGs 421 - Customer transition
Revenue subject charge 948 -
to refund 12 - Other 27 34
----- ---
Generation revenue Total $1,338 $478
===== ===
requirements 21 -
Other 61 9
--- ---
Total $951 $ 56
=== ===
F-74
GPU, Inc. and Subsidiary Companies
The reconciliations from net income to book income subject to tax and from
the federal statutory rate to combined federal and state effective tax rates are
as follows:
GPU, Inc. and Subsidiary Companies:
(in millions)
1998 1997 1996
---- ---- ----
Net income $360 $335 $298
Preferred stock dividends 11 13 16
Gain on preferred stock reacquisition - - (9)
Income tax expense 250 234 184
--- --- ---
Book income subject to tax $621* $582* $489*
=== === ===
Federal statutory rate 35% 35% 35%
State tax, net of federal benefit 5 4 3
Other - 1 -
--- --- ---
Effective income tax rate 40% 40% 38%
=== === ===
* Includes pre-tax foreign operations income of $238 million, $34 million and
$58 million, of which $88 million, $20 million and $54 million, respectively
for 1998, 1997 and 1996, are included in Equity in undistributed
earnings/(losses) of affiliates in the Consolidated Statements of Income.
JCP&L:
(in millions)
1998 1997 1996
---- ---- ----
Net income $222 $212 $156
Income tax expense 145 112 74
--- --- ----
Book income subject to tax $367 $324 $230
=== === ====
Federal statutory rate 35% 35% 35%
State tax, net of federal benefit 5 - -
Other (1) - (3)
--- --- ---
Effective income tax rate 39% 35% 32%
=== === ===
Met-Ed:
(in millions)
1998 1997 1996
---- ---- ----
Net income $ 51 $ 93 $ 69
Income tax expense 33 66 50
--- --- ---
Book income subject to tax $ 84 $159 $119
=== === ===
Federal statutory rate 35% 35% 35%
State tax, net of federal benefit 6 6 5
Amortization of ITC (2) - (2)
Other - - 4
--- --- ---
Effective income tax rate 39% 41% 42%
=== === ===
F-75
GPU, Inc. and Subsidiary Companies
Penelec:
(in millions)
1998 1997 1996
---- ---- ----
Net income $ 40 $ 95 $ 70
Income tax expense 31 71 45
--- --- ---
Book income subject to tax $ 71 $166 $115
=== === ===
Federal statutory rate 35% 35% 35%
State tax, net of federal benefit 8 6 6
Other 1 2 (2)
--- --- ---
Effective income tax rate 44% 43% 39%
=== === ===
Federal and state income tax expense is comprised of the following:
GPU, Inc. and Subsidiary Companies:
(in millions)
1998 1997 1996
---- ---- ----
Provisions for taxes currently payable:
Domestic $290 $206 $108
Foreign 22 40 11
--- --- ----
Total provision for taxes $312 $246 $119
Deferred income taxes:
Liberalized depreciation $ (4) $ 9 $ 27
Deferral of energy costs 10 (3) (8)
Accretion income 4 4 5
Decommissioning (19) (5) (9)
PA Restructuring (FAS 71) (15) - -
Pension expense/Voluntary Enhanced
Retirement Programs (8) (10) 15
Nonutility generation contract buyout costs (11) 5 41
Provision for rate refunds (10) - -
Other - (2) 6
--- --- ---
Deferred income taxes, net (53) (2) 77
--- --- ---
Amortization of ITC, net (9) (10) (12)
--- --- ---
Income tax expense $250 $234 $184
=== === ===
The foreign taxes in the above table for 1998, 1997 and 1996 include $27
million ($10 million Current; $17 million Deferred), $41 million ($37 million
Current; $4 million Deferred) and $17 million ($10 million Current; $7 million
Deferred) in foreign tax expense which is netted in Equity in undistributed
earnings/(losses) of affiliates in the Consolidated Statements of Income.
F-76
GPU, Inc. and Subsidiary Companies
JCP&L:
(in millions)
1998 1997 1996
---- ---- ----
Provisions for taxes currently payable $187 $139 $ 70
-
Deferred income taxes:
Liberalized depreciation $(11) $ (3) $ 1
Gain/Loss on reacquired debt 3 (1) -
New Jersey revenue tax (2) (3) (3)
Deferral of energy costs 10 (2) (8)
Abandonment loss - Forked River (4) (5) (4)
Nuclear outage maintenance costs 3 (4) 5
Accretion income 4 4 5
Unbilled revenue - (3) (5)
Decommissioning (12) (3) (2)
Pension expense/VERP (2) (5) 4
Nonutility generation contract buyout costs - 6 22
Demand-side management - (3) (4)
Other postemployment benefits (5) 2 -
Global settlement (8) - -
Gas site & investigation MGP
insurance recovery (8) - -
Other (6) (2) -
--- --- ---
Deferred income taxes, net (38) (22) 11
--- --- ----
Amortization of ITC, net (4) ( 5) (7)
--- --- ---
Income tax expense $145 $112 $ 74
=== === ====
Met-Ed:
(in millions)
1998 1997 1996
---- ---- ----
Provisions for taxes currently payable $ 56 $ 63 $ 25
Deferred income taxes:
Liberalized depreciation $ 5 $ 6 $ 10
Deferral of energy costs - - 5
Unbilled revenue - 3 -
Decommissioning (5) (2) (3)
PA Restructuring (FAS 71) 15 - -
Pension expense/VERP (3) (3) 5
Nonutility generation contract buyout costs (9) (6) 14
Nuclear outage maintenance costs (3) 3 (3)
Nonutility generation contract
over collections 8 4 -
Other postemployment benefits (5) (1) 2
Provision for rate refund (11) - -
CTC NUG deferrals (5) - -
Sustainable energy fund (2) - -
Other (6) 1 (3)
--- --- ---
Deferred income taxes, net (21) 5 27
--- --- ---
Amortization of ITC, net (2) (2) (2)
--- --- ---
Income tax expense $ 33 $ 66 $ 50
=== === ===
F-77
GPU, Inc. and Subsidiary Companies
Penelec:
(in millions)
1998 1997 1996
---- ---- ----
Provisions for taxes currently payable $ 47 $ 61 $ 26
Deferred income taxes:
Liberalized depreciation $ 2 $ 6 $ 8
Deferral of energy costs - (1) -
Unbilled revenue - (7) 5
Decommissioning (2) - (1)
PA Restructuring (FAS 71) (11) - -
Pension expense/VERP (2) (2) 7
Nonutility generation contract buyout costs (1) 5 5
Nuclear outage maintenance costs (1) 1 (1)
Nonutility generation contract
over collections 6 6 -
Other postemployment benefits (2) 3 (1)
Other (3) 2 -
--- --- ---
Deferred income taxes, net (14) 13 22
--- --- ---
Amortization of ITC, net (2) (3) (3)
--- --- ---
Income tax expense $ 31 $ 71 $ 45
=== === ===
The Internal Revenue Service (IRS) has completed its examinations of GPU's
federal income tax returns through 1992. The years 1993 through 1995 are
currently being audited.
9. SUPPLEMENTARY INCOME STATEMENT INFORMATION
Maintenance expense and other taxes charged to operating expenses consisted
of the following:
(in millions)
1998 1997 1996
---- ---- ----
Maintenance:
JCP&L $ 91 $102 $120
Met-Ed 49 46 50
Penelec 62 68 65
--- --- ---
Total Maintenance $202 $216 $235
=== === ===
Other Taxes:
New Jersey Transitional Energy
Facility Assessment $ 67 $ - $ -
New Jersey Unit Tax (JCP&L) - 211 208
--- --- ---
Total $ 67 $211 $208
=== === ===
Pennsylvania State Gross Receipts:
Met-Ed $ 39 $ 39 $ 38
Penelec 40 42 40
--- --- ---
Total $ 79 $ 81 $ 78
=== === ===
F-78
GPU, Inc. and Subsidiary Companies
(in millions)
1998 1997 1996
---- ---- ----
Real Estate and Personal Property:
JCP&L $ 9 $ 9 $ 8
Met-Ed 6 8 8
Penelec 8 10 9
--- --- ---
Total $ 23 $ 27 $ 25
--- --- ---
Other:
JCP&L $ 19 $ 12 $ 13
Met-Ed 13 12 15
Penelec 16 15 16
Other 2 - -
--- --- ----
Total $ 50 $ 39 $ 44
--- --- ---
Total Other Taxes $219 $358 $355
=== === ===
The cost of services rendered to the GPU Energy companies by their
affiliates is as follows:
(in millions)
1998 1997 1996
---- ---- ----
JCP&L:
Cost of services rendered by GPUN $182 $156 $221
Cost of services rendered by GPUS 26 31 44
Cost of services rendered by Genco 51 52 85
--- --- ---
Total $259 $239 $350
=== === ===
Amount Charged to Income $239 $228 $293
=== === ===
Met-Ed:
Cost of services rendered by GPUN $ 59 $ 78 $ 67
Cost of services rendered by GPUS 40 31 29
Cost of services rendered by Genco 108 91 85
--- --- ---
Total $207 $200 $181
=== === ===
Amount Charged to Income $180 $179 $153
=== === ===
Penelec:
Cost of services rendered by GPUN $ 30 $ 40 $ 34
Cost of services rendered by GPUS 17 19 31
Cost of services rendered by Genco 163 162 159
--- --- ---
Total $210 $221 $224
=== === ===
Amount Charged to Income $170 $195 $181
=== === ===
For the years 1998, 1997 and 1996, JCP&L purchased $26 million, $24 million
and $21 million, respectively, of energy from a cogeneration project in which an
affiliate has a 50% partnership interest.
F-79
GPU, Inc. and Subsidiary Companies
10. EMPLOYEE BENEFITS
In 1998, GPU adopted Statement of Financial Accounting Standards No. 132
(FAS 132), "Employer's Disclosures about Pensions and Other Postretirement
Benefits." FAS 132 revises the disclosure requirements for pension and other
postretirement benefit plans but does not change the measurement or recognition
of these plans.
Pension Plans and Other Postretirement Benefits:
GPU maintains defined benefit pension plans covering substantially all
employees. GPU also provides certain retiree health care and life insurance
benefits for substantially all employees who reach retirement age while working
for GPU. The following tables provide a reconciliation of the changes in the
plans' benefit obligation and fair value of assets for the years ended December
31, 1998 and 1997, a statement of the funded status of the plans, the amounts
recognized in the Consolidated Balance Sheets as of December 31, 1998 and 1997
and the assumptions used in the measurement of the benefit obligation.
GPU, Inc. and Subsidiary Companies
(in millions)
Other
Postretirement
Pension Benefits Benefits
1998 1997 1998 1997
---- ---- ---- ----
Change in benefit obligation:
Benefit obligation
at January 1: $ 1,791.7 $ 1,691.4 $ 798.0 $ 706.0
Service cost 36.1 31.1 16.4 10.7
Interest cost 121.6 122.2 54.4 51.7
Plan amendments 9.6 13.3 (6.0) (8.9)
Actuarial (gain)/loss 26.2 69.3 (55.7) 65.3
Benefits paid (123.9) (135.6) (30.2) (26.8)
Curtailments 6.8 - 12.5 -
Termination benefits 28.9 - 1.1 -
-------- -------- ------- -------
Benefit obligation
at December 31: $ 1,897.0 $ 1,791.7 $ 790.5 $ 798.0
======== ======== ======= ======
Change in plan assets:
Fair value of plan assets
at January 1: $ 2,033.3 $ 1,801.8 $ 403.0 $ 303.6
Actual return on plan assets 342.9 341.4 78.9 66.9
Employer contributions 6.5 25.7 55.4 59.3
Benefits paid (123.9) (135.6) (30.2) (26.8)
-------- -------- ------- ------
Fair value of plan assets
at December 31: $ 2,258.8 $ 2,033.3 $ 507.1 $ 403.0
======== ======== ======= ======
Funded Status:
Funded status at December 31: $ 361.8 $ 241.6 $ (283.4) $(395.0)
Unrecognized net actuarial
(gain)/loss (439.5) (282.8) (37.8) 73.3
Unrecognized prior service cost 27.6 19.2 4.3 6.6
Unrecognized net transition
(asset)/obligation (1.9) (2.5) 210.7 238.0
-------- -------- ------- ------
Net amount recognized $ (52.0) $ (24.5) $ (106.2) $ (77.1)
======== ======== ======= ======
F-80
GPU, Inc. and Subsidiary Companies
(in millions)
Other
Postretirement
Pension Benefits Benefits
1998 1997 1998 1997
---- ---- ---- ----
Amounts recognized in the
Consolidated Balance Sheet
at December 31:
Prepaid benefit cost $ 42.0 $ 26.1 $ 43.8 $ 29.5
Accrued benefit liability (103.0) (57.0) (150.0) (106.6)
Accumulated other comprehensive
income 5.3 3.8 - -
Deferred income taxes 3.7 2.6 - -
-------- -------- ------- ------
Net amount recognized $ (52.0) $ (24.5) $ (106.2) $ (77.1)
======== ======== ======= ======
JCP&L
Change in benefit obligation:
Benefit obligation
at January 1: $ 496.6 $ 473.5 $ 203.8 $ 179.9
Service cost 7.2 6.1 2.9 1.5
Interest cost 33.7 34.2 13.9 13.2
Plan amendments - 6.6 - 5.3
Actuarial (gain)/loss 3.9 17.7 (16.6) 8.9
Benefits paid (34.8) (41.5) (7.3) (5.0)
Curtailments 0.6 - 1.2 -
Termination benefits 2.5 - 0.3 -
-------- -------- ------- -------
Benefit obligation
at December 31: $ 509.7 $ 496.6 $ 198.2 $ 203.8
======== ======== ======= ======
Change in plan assets:
Fair value of plan assets
at January 1: $ 577.1 $ 514.5 $ 99.0 $ 70.7
Actual return on plan assets 97.1 97.8 20.0 17.4
Employer contributions - 3.8 25.8 13.5
Benefits paid (34.8) (41.5) (7.3) 5.0
Change in allocations 0.5 2.5 (0.5) (7.6)
-------- -------- ------- ------
Fair value of plan assets
at December 31: $ 639.9 $ 577.1 $ 137.0 $ 99.0
======== ======== ======= ======
Funded Status:
Funded status at December 31: $ 130.2 $ 80.5 $ (61.2) $(104.8)
Unrecognized net actuarial
(gain)/loss (139.3) (87.7) (16.1) 15.7
Unrecognized prior service cost 8.3 9.3 0.5 0.6
Unrecognized net transition
(asset)/obligation (1.0) (1.2) 61.0 66.9
-------- -------- ------- ------
Net amount recognized $ (1.8) $ 0.9 $ (15.8) $ (21.6)
======== ======== ======= ======
F-81
GPU, Inc. and Subsidiary Companies
(in millions)
Other
Postretirement
Pension Benefits Benefits
1998 1997 1998 1997
---- ---- ---- ----
Amounts recognized in the
Consolidated Balance Sheet
at December 31:
Prepaid benefit cost $ 18.8 $ 2.6 $ 27.2 $ 11.8
Accrued benefit liability (21.3) (1.7) (43.0) (33.4)
Accumulated other comprehensive
income 0.4 - - -
Deferred income taxes 0.3 - - -
-------- -------- ------- ------
Net amount recognized $ (1.8) $ 0.9 $ (15.8) $ (21.6)
======== ======== ======= ======
Met-Ed
Change in benefit obligation:
Benefit obligation
at January 1: $ 345.9 $ 302.5 $ 152.5 $ 124.2
Service cost 6.3 4.3 2.9 1.5
Interest cost 23.4 21.8 11.2 10.0
Plan amendments 3.1 1.8 (2.2) (0.8)
Actuarial (gain)/loss 14.3 42.7 (0.1) 22.4
Benefits paid (22.8) (27.2) (5.2) (4.8)
Curtailments 0.5 - 3.4 -
Termination benefits 7.2 - 0.5 -
-------- -------- ------- -------
Benefit obligation
at December 31: $ 377.9 $ 345.9 $ 163.0 $ 152.5
======== ======== ======= ======
Change in plan assets:
Fair value of plan assets
at January 1: $ 373.2 $ 309.9 $ 49.5 $ 34.7
Actual return on plan assets 65.0 63.1 9.9 8.6
Employer contributions - 5.5 5.3 9.3
Benefits paid (22.8) (27.2) (5.2) 4.8
Change in allocations 12.9 21.9 2.9 (7.9)
-------- -------- ------- ------
Fair value of plan assets
at December 31: $ 428.3 $ 373.2 $ 62.4 $ 49.5
======== ======== ======= ======
Funded Status:
Funded status at December 31: $ 50.4 $ 27.3 $ (100.6) $(103.0)
Unrecognized net actuarial
(gain)/loss (65.2) (32.8) 20.5 34.1
Unrecognized prior service cost 7.6 5.0 0.9 1.2
Unrecognized net transition
(asset)/obligation (0.6) (0.8) 39.7 42.1
-------- -------- ------- ------
Net amount recognized $ (7.8) $ (1.3) $ (39.5) $ (25.6)
======== ======== ======= ======
F-82
GPU, Inc. and Subsidiary Companies
(in millions)
Other
Postretirement
Pension Benefits Benefits
1998 1997 1998 1997
---- ---- ---- ----
Amounts recognized in the
Consolidated Balance Sheet
at December 31:
Prepaid benefit cost $ - $ 0.5 $ - $ -
Accrued benefit liability (8.7) (2.5) (39.5) (25.6)
Accumulated other comprehensive
income 0.5 0.4 - -
Deferred income taxes 0.4 0.3 - -
-------- -------- ------- ------
Net amount recognized $ (7.8) $ (1.3) $ (39.5) $ (25.6)
======== ======== ======= ======
Penelec
Change in benefit obligation:
Benefit obligation
at January 1: $ 404.4 $ 367.0 $ 236.1 $ 204.0
Service cost 4.1 3.3 2.1 1.5
Interest cost 27.2 26.2 15.1 13.7
Plan amendments 4.3 2.7 (3.5) (2.2)
Actuarial (gain)/loss 8.9 40.9 (35.4) 26.8
Benefits paid (37.6) (35.7) (6.9) (7.7)
Curtailments 0.7 - 4.5 -
Termination benefits 7.7 - - -
-------- -------- ------- ------
Benefit obligation
at December 31: $ 419.7 $ 404.4 $ 212.0 $ 236.1
======== ======== ======= ======
Change in plan assets:
Fair value of plan assets
at January 1: $ 486.8 $ 411.8 $ 130.4 $ 95.6
Actual return on plan assets 81.9 81.1 22.9 21.5
Employer contributions 0.1 6.6 10.0 18.8
Benefits paid (37.6) (35.7) (6.9) (7.7)
Change in allocations 4.0 23.0 (12.6) 2.2
-------- -------- ------- ------
Fair value of plan assets
at December 31: $ 535.2 $ 486.8 $ 143.8 $ 130.4
======== ======== ======= ======
Funded Status:
Funded status at December 31: $ 115.5 $ 82.4 $ (68.2) $(105.7)
Unrecognized net actuarial
(gain)/loss (105.9) (69.8) (4.4) 21.0
Unrecognized prior service cost 10.3 7.5 0.3 1.8
Unrecognized net transition
obligation 1.4 1.5 60.0 77.0
-------- -------- ------- ------
Net amount recognized $ 21.3 $ 21.6 $ (12.3) $ (5.9)
======== ======== ======= ======
F-83
GPU, Inc. and Subsidiary Companies
(in millions)
Other
Postretirement
Pension Benefits Benefits
1998 1997 1998 1997
---- ---- ---- ----
Amounts recognized in the
Consolidated Balance Sheet
at December 31:
Prepaid benefit cost $ 22.5 $ 22.9 $ 16.5 $ 14.1
Accrued benefit liability (1.5) (1.5) (28.8) (20.0)
Accumulated other comprehensive
income 0.2 0.1 - -
Deferred income taxes 0.1 0.1 - -
-------- --------- ------- ------
Net amount recognized $ 21.3 $ 21.6 $ (12.3) $ (5.9)
======== ======== ======= =======
Weighted average assumptions as of December 31:
Discount rate 6.75% 7.0% 6.75% 7.0%
Expected return on plan assets 8.5% 8.5% 8.5% 8.5%
Rate of compensation increase 4.5% 5.0%
The following tables provide the components of net periodic pension and other
postretirement benefit costs:
(in millions)
Pension Plans:
GPU, Inc. and Subsidiary Companies 1998 1997 1996
- ---------------------------------- ---- ---- ----
Service cost $ 36.1 $ 31.1 $ 36.1
Interest cost 121.6 122.2 112.1
Expected return on plan assets (140.1) (131.5) (123.2)
Amortization of transition asset (0.5) (0.5) (0.7)
Other amortization 1.1 0.2 (0.4)
------ ----- -----
Net periodic pension cost $ 18.2 $ 21.5 $ 23.9
====== ===== =====
JCP&L
Service cost $ 7.2 $ 6.1 $ 8.0
Interest cost 33.7 34.2 32.1
Expected return on plan assets (39.6) (37.5) (36.3)
Amortization of transition asset (0.3) (0.3) (0.3)
Other amortization 0.6 0.1 -
------ ----- ------
Net periodic pension cost $ 1.6 $ 2.6 $ 3.5
====== ===== =====
Met-Ed
Service cost $ 6.3 $ 4.3 $ 4.5
Interest cost 23.4 21.8 19.6
Expected return on plan assets (25.4) (22.3) (21.3)
Amortization of transition asset (0.1) (0.1) (0.2)
Other amortization 0.4 0.6 0.2
------ ----- -----
Net periodic pension cost $ 4.6 $ 4.3 $ 2.8
====== ===== =====
F-84
GPU, Inc. and Subsidiary Companies
Penelec 1998 1997 1996
- ------- ---- ---- ----
Service cost $ 4.1 $ 3.3 $ 6.0
Interest cost 27.2 26.2 29.3
Expected return on plan assets (33.1) (29.7) (32.3)
Amortization of transition obligation 0.3 0.3 0.4
Other amortization 0.4 0.2 (0.1)
------ ----- -----
Net periodic pension cost $ (1.1) $ 0.3 $ 3.3
====== ===== =====
In 1998, the effect of decreasing the discount rate assumption from 7% to
6.75% was partially offset by the effect of decreasing the salary scale
assumption from 5% to 4.5% and resulted in a $35 million (JCP&L $7 million;
Met-Ed $7 million; Penelec $8 million; Other $13 million)increase in the benefit
obligation as of December 31, 1998. In 1997, the effect of decreasing the
discount rate assumption from 7.5% to 7% was partially offset by the effect of
decreasing the salary scale assumption from 5.5% to 5% and resulted in a $63
million (JCP&L $16 million; Met-Ed $10 million; Penelec $12 million; Other $25
million)increase in the benefit obligation as of December 31, 1997.
The above net periodic pension cost amount for 1998 excludes pre-tax charges
of $30 million (JCP&L $8 million; Met-Ed $11 million; Penelec $9 million; Other
$2 million), of which $22 million (JCP&L $6 million; Met-Ed $9 million; Penelec
$7 million) was deferred pending future rate recovery, resulting from early
retirement programs in 1998. The above net periodic pension cost amount for 1996
excludes pre-tax charges of $71 million (JCP&L $37 million; Met-Ed $17 million;
Penelec $17 million) resulting from early retirement programs in that year.
(in millions)
Other Postretirement Benefits:
GPU, Inc. and Subsidiary Companies 1998 1997 1996
- ---------------------------------- ---- ---- ----
Service cost $ 16.4 $ 10.7 $ 14.3
Interest cost 54.4 51.7 45.7
Expected return on plan assets (29.5) (23.7) (13.8)
Amortization of transition obligation 15.8 16.8 17.4
Other amortization 5.0 2.3 2.9
----- ----- -----
Net periodic postretirement benefit cost 62.1 57.8 66.5
Deferred for future recovery - (13.0) (18.2)
----- ----- -----
Postretirement benefit cost,
net of deferrals $ 62.1 $ 44.8 $ 48.3
===== ===== =====
JCP&L
Service cost $ 2.9 $ 1.5 $ 2.8
Interest cost 13.9 13.2 11.4
Expected return on plan assets (7.3) (5.7) (2.8)
Amortization of transition obligation 4.4 4.7 4.8
Other amortization 0.7 0.6 0.7
----- ----- -----
Net periodic postretirement benefit cost 14.6 14.3 16.9
Deferred for future recovery - (0.8) (4.4)
----- ----- -----
Postretirement benefit cost,
net of deferrals $ 14.6 $ 13.5 $ 12.5
===== ===== =====
F-85
GPU, Inc. and Subsidiary Companies
Met-Ed 1998 1997 1996
- ------ ---- ---- ----
Service cost $ 2.9 $ 1.5 $ 1.9
Interest cost 11.2 10.0 8.6
Expected return on plan assets (3.9) (3.1) (1.6)
Amortization of transition obligation 3.1 3.2 3.2
Other amortization 1.7 0.8 0.7
----- ----- -----
Net periodic postretirement benefit cost 15.0 12.4 12.8
Deferred for future recovery - (5.1) (4.1)
----- ----- -----
Postretirement benefit cost,
net of deferrals $ 15.0 $ 7.3 $ 8.7
===== ===== =====
Penelec
Service cost $ 2.0 $ 1.5 $ 2.7
Interest cost 15.1 13.7 14.1
Expected return on plan assets (8.9) (6.6) (4.6)
Amortization of transition obligation 4.8 4.8 5.4
Other amortization 1.4 0.6 0.9
----- ----- -----
Net periodic postretirement benefit cost 14.4 14.0 18.5
Deferred for future recovery - - -
----- ----- ------
Postretirement benefit cost,
net of deferrals $ 14.4 $ 14.0 $ 18.5
===== ===== =====
In 1998, the effect of decreasing the assumption relating to the long-term
medical cost of managed care plans was partially offset by the effect of
decreasing the discount rate assumption from 7% to 6.75% and resulted in a $40
million (JCP&L $12 million; Met-Ed $7 million; Penelec $5 million; Other $16
million) decrease in the benefit obligation as of December 31, 1998. In 1997,
the effect of decreasing the discount rate assumption from 7.5% to 7% was
partially offset by the effect of decreasing the ultimate long-term health care
trend rate assumption from 6% to 5.5% and resulted in a $22 million (JCP&L $5
million; Met-Ed $6 million; Penelec $6 million; Other $5 million) increase in
the benefit obligation as of December 31, 1997. The benefit obligation was
determined by application of the terms of the medical and life insurance plans,
including the effects of established maximums on covered costs, together with
relevant actuarial assumptions and health-care cost trend rates of 8% for those
not eligible for Medicare and 6% for those eligible for Medicare, then
decreasing gradually to 5.5% in 2004 and thereafter. These costs also reflect
the implementation of an annual cost-cap of 6% for individuals who retire after
December 31, 1995 and reach age 65. The effect of a 1% change in these assumed
cost trend rates would increase or decrease the benefit obligation by $54.1
million (JCP&L $13.9 million; Met-Ed $11.4 million; Penelec $14.2 million; Other
$14.6 million) or $72.6 million (JCP&L $17.8 million; Met-Ed $15.1 million;
Penelec $18.6 million; Other $21.1 million), respectively. In addition, such a
1% change would increase or decrease the aggregate service and interest cost
components of net periodic postretirement health-care cost by $4.8 million
(JCP&L $1.2 million; Met-Ed $1 million; Penelec $1.2 million; Other $1.4
million) or $7.6 million (JCP&L $1.9
F-86
GPU, Inc. and Subsidiary Companies
million; Met-Ed $1.6 million; Penelec $1.8 million; Other $2.3 million),
respectively.
The above net periodic postretirement benefit cost amount for 1998 excludes
pre-tax charges of $20 million (JCP&L $6 million; Met-Ed $6 million; Penelec $7
million; Other $1 million), of which $12 million (JCP&L $3 million; Met-Ed $5
million; Penelec $4 million; Other $1 million) was deferred pending future rate
recovery, resulting from early retirement programs in 1998. The above net
periodic postretirement benefit cost amount for 1996 excludes pre-tax charges to
earnings of $52 million (JCP&L $26 million; Met-Ed $13 million; Penelec $13
million)resulting from early retirement programs in that year.
In JCP&L's 1993 base rate proceeding, the NJBPU allowed JCP&L to collect $3
million annually for incremental postretirement benefit costs, charged to
expense, and recognized as a result of FAS 106. Based on the final order, and in
accordance with EITF Issue 92-12, "Accounting for OPEB Costs by Rate-Regulated
Enterprises," JCP&L has deferred the amounts above that level. A 1997
Stipulation of Final Settlement (Final Settlement) allows JCP&L to recover and
amortize the deferred balance at December 31, 1997 over a fifteen-year period.
In addition, the Final Settlement allows JCP&L to recover current amounts
accrued pursuant to FAS 106, including amortization of the transition
obligation. Met-Ed has deferred the incremental postretirement benefit costs
associated with the adoption of FAS 106 and in accordance with EITF Issue 92-12,
as authorized by the PaPUC in its 1993 base rate order. In accordance with EITF
Issue 92-12, effective January 1998, Met-Ed has ceased deferring these costs.
The approximately one-third generation-related portion of the deferred balance
at December 31, 1997 is to be recovered in rates over a twelve-year period
pursuant to the PaPUC's Restructuring Orders. The remaining two-thirds for the
transmission and distribution-related portion is to be amortized over a
fourteen-year period beginning January 1999, pursuant to the Restructuring
Orders. In 1994, Penelec determined that its FAS 106 costs, including costs
deferred since January 1993, were not probable of recovery and charged those
deferred costs to expense.
Savings Plans:
GPU also maintains savings plans for substantially all employees. These
plans provide for employee contributions up to specified limits and for various
levels of employer matching contributions. The matching contributions for GPU
were as follows:
(in millions)
Company 1998 1997 1996
- ------- ---- ---- ----
JCP&L $ 2.8 $ 2.4 $ 2.8
Met-Ed 3.4 3.1 3.2
Penelec 1.6 1.3 1.4
Other 5.8 5.8 6.7
----- ----- -----
Total $ 13.6 $ 12.6 $ 14.1
===== ===== =====
F-87
GPU, Inc. and Subsidiary Companies
11. JOINTLY OWNED STATIONS
Each participant in a jointly owned station finances its portion of the
investment and charges its share of operating expenses to the appropriate
expense accounts. The GPU Energy companies participated with nonaffiliated
utilities in the following jointly owned stations at December 31, 1998:
Balance (in millions)
---------------------
% Accumulated
Station Owner Ownership Investment Depreciation
- ------- ----- --------- ---------- ------------
Homer City Penelec 50 $453.1 $180.1
Conemaugh Met-Ed 16.45 143.0 52.5
Keystone JCP&L 16.67 91.0 25.4
Yards Creek JCP&L 50 28.5 6.0
Seneca Penelec 20 16.3 5.4
In 1998, Penelec and New York State Electric & Gas Corporation (NYSEG)
entered into definitive agreements with Edison Mission Energy to sell the Homer
City Station. Also in 1998, the GPU Energy companies entered into definitive
agreements with Sithe Energies and FirstEnergy Corporation to sell substantially
all their remaining fossil-fuel and hydroelectric generating facilities. For
further details, see Note 13, Commitments and Contingencies.
12. LEASES
The GPU Energy companies' capital leases consist primarily of leases for
nuclear fuel. Nuclear fuel capital leases at December 31, 1998 totaled $126
million (JCP&L $85 million; Met-Ed $27 million; Penelec $14 million), net of
amortization of $298 million (JCP&L $177 million; Met-Ed $81 million; Penelec
$40 million). Nuclear fuel capital leases at December 31, 1997 totaled $136
million (JCP&L $79 million; Met-Ed $38 million; Penelec $19 million), net of
amortization of $251 million (JCP&L $151 million; Met-Ed $67 million; Penelec
$33 million).
The GPU Energy companies have nuclear fuel lease agreements with
nonaffiliated fuel trusts. In 1998, the GPU Energy companies refinanced the
Oyster Creek and TMI-1 nuclear fuel leases to provide for aggregate borrowings
of up to $190 million ($90 million for Oyster Creek and $100 million for TMI-1)
outstanding at any one time. Reductions in nuclear fuel financing costs are
expected through the new credit facilities. It is contemplated that when
consumed, portions of the presently leased material will be replaced by
additional leased material. The GPU Energy companies are responsible for the
disposal costs of nuclear fuel leased under these agreements. These nuclear fuel
leases have initial terms of 364 days, and are renewable annually thereafter at
the lender's option. Subject to certain conditions of termination, the GPU
Energy companies are required to purchase all nuclear fuel then under lease at a
price that will allow the lessor to recover its net investment. Lease expense
consists of an amount designed to amortize the cost of the nuclear fuel as
consumed plus interest costs. For the years ended December 31, 1998, 1997 and
1996, these amounts were as follows:
F-88
GPU, Inc. and Subsidiary Companies
(in millions)
Company 1998 1997 1996
- ------- ---- ---- ----
JCP&L $ 35 $ 31 $ 32
Met-Ed 14 12 16
Penelec 6 6 8
----- ----- -----
Total $ 55 $ 49 $ 56
===== ===== =====
Upon the closing of the sale of TMI-1 to AmerGen Energy Company, LLC (AmerGen),
the GPU Energy companies will terminate the related fuel lease and pay all
outstanding amounts due under the related credit facility.
JCP&L and Met-Ed have sold and leased back substantially all of their
respective ownership interests in the Merrill Creek Reservoir project. The
minimum lease payments under these operating leases, which have remaining terms
of 35 years, average approximately $3 million annually for each company. JCP&L
and Met-Ed have agreed to sublease a portion of the Merrill Creek project to
Sithe Energies and are currently investigating the extent to which they may be
able to sublet additional interests in Merrill Creek. Management believes JCP&L
and Met-Ed's remaining liability is a recoverable stranded cost. There can be no
assurance as to the outcome of this matter.
A subsidiary of GPU International has sold and leased back an electric
cogeneration facility for an initial term of eleven years. For the years 1998,
1997 and 1996, the annual lease payments under this operating lease were
approximately $11.5 million, $10 million and $10 million, respectively. The
lease payments escalate annually, increasing to $16 million in year eleven.
13. COMMITMENTS AND CONTINGENCIES
COMPETITION AND THE CHANGING REGULATORY ENVIRONMENT
---------------------------------------------------
The Emerging Competitive Market and Stranded Costs:
- ---------------------------------------------------
The current market price of electricity being below the cost of some
utility-owned generation and power purchase commitments, combined with the
ability of some customers to choose their energy suppliers, has created stranded
costs in the electric utility industry. These stranded costs, while generally
recoverable in a regulated environment, are at risk in a deregulated and
competitive environment. The PaPUC's Restructuring Orders issued in 1998 granted
Met-Ed and Penelec recovery of a substantial portion of their stranded costs.
New Jersey legislation enacted in 1999, among other things, also provides for
the recovery of stranded costs. See Competitive Environment and Rate Matters
section of Management's Discussion and Analysis.
In 1997, Met-Ed and Penelec filed with the PaPUC their proposed
restructuring plans to implement competition and customer choice in
Pennsylvania. In June 1998, the PaPUC entered restructuring rate orders on the
restructuring plans. As a result of the orders, Met-Ed and Penelec wrote-off in
the second quarter of 1998, $320 million and $150 million pre-tax, respectively.
Following appeals and extended negotiations, in October 1998, the PaPUC adopted
Restructuring Orders, approving the Settlement Agreements
F-89
GPU, Inc. and Subsidiary Companies
entered into by Met-Ed, Penelec, the PaPUC and all but two of the intervenors in
the restructuring proceedings who have appealed the Restructuring Orders. One of
these appeals remains pending and is scheduled to be heard in April 1999. There
can be no assurance as to the outcome of these appeals. In the third quarter, as
a result of the Restructuring Orders, Met-Ed and Penelec reversed $313 million
and $142 million pre-tax, respectively, of the write-offs recorded in the second
quarter and recorded additional non-recurring charges of $38 million and $58
million pre-tax, for Met-Ed and Penelec, respectively. For additional
information, see Note 5, Accounting for Extraordinary and Non-recurring Items.
In 1997, the NJBPU released Phase II of the Energy Master Plan (NJEMP),
which proposes that New Jersey electric utilities should have an opportunity to
recover their stranded costs associated with generating capacity commitments and
caused by electric retail competition, provided that they attempt to mitigate
these costs.
In 1997, JCP&L filed with the NJBPU its proposed restructuring plan for a
competitive electric marketplace in New Jersey as required by the NJEMP. In this
plan, JCP&L estimated that its total above-market costs related to power
purchase commitments and company-owned generation, on a present value basis, was
$1.6 billion excluding above-market generation costs related to Oyster Creek.
These estimates are subject to significant uncertainties including the future
market price of both electricity and other competitive energy sources, as well
as the timing of when these above-market costs become stranded due to customers
choosing another supplier. JCP&L proposed recovery of its remaining Oyster Creek
plant investment as a regulatory asset, through a nonbypassable charge to
customers. At December 31, 1998, JCP&L's net investment in Oyster Creek was $682
million. Highlights of this plan are presented in the Competitive Environment
and Rate Matters section of Management's Discussion and Analysis.
In 1998, hearings on JCP&L's stranded cost and unbundled rate filings were
completed before an Administrative Law Judge (ALJ) and a recommended decision
was issued. See Competitive Environment and Rate Matters section of Management's
Discussion and Analysis for highlights of the ALJ recommended decision. In 1999,
legislation to deregulate New Jersey's electricity market was enacted which
generally provides for, among other things, customer choice of electric
generation supplier for all consumers beginning no later than August 1, 1999; a
5% rate reduction for all customers beginning August 1, 1999 with another 5%
rate reduction to be phased in over the next three years (which must be
maintained for one year after the end of the three year phase-in); the
aggregation of electric generation service by a government or private
aggregator; the unbundling of customer bills; the ability to recover stranded
costs and the ability to securitize stranded costs. The NJBPU is expected to
issue final decisions on JCP&L's stranded cost, unbundled rate and restructuring
filings in the second quarter of 1999.
The inability of JCP&L to recover its stranded costs in whole or in part
could result in the recording of liabilities for above-market NUG costs,
decommissioning costs, and write-downs of uneconomic generation plant and
regulatory assets recorded in accordance with FAS 71 and EITF Issue 97-4. The
inability to recover these stranded costs could have a material adverse effect
on GPU's results of operations.
F-90
GPU, Inc. and Subsidiary Companies
In October 1997, GPU announced its intention to begin a process to sell,
through a competitive bid process, up to all of the fossil-fuel and
hydroelectric generating facilities owned by the GPU Energy companies. These
facilities, comprised of 26 operating stations, support organizations and
development sites, total approximately 5,300 MW (JCP&L 1,900 MW; Met-Ed 1,300
MW; Penelec 2,100 MW) of capacity and have a net book value of approximately
$1.1 billion (JCP&L $272 million; Met-Ed $283 million; Penelec $508 million) at
December 31, 1998. The net proceeds from the sale will be used to reduce the
capitalization of the respective GPU Energy companies, repurchase GPU, Inc.
common stock, fund previously incurred liabilities in accordance with the
Pennsylvania settlement, and may also be applied to reduce short-term debt,
finance further acquisitions, and to reduce acquisition debt of the GPUI Group.
In August 1998, Penelec and New York State Electric & Gas Corporation
(NYSEG) entered into definitive agreements with Edison Mission Energy to sell
the Homer City Station for a total purchase price of approximately $1.8 billion.
Penelec and NYSEG each own a 50% interest in the station, and will share equally
in the net sale proceeds. The sale, which is subject to various federal and
state regulatory approvals, is expected to be completed in the first quarter of
1999.
In November 1998, the GPU Energy companies entered into definitive
agreements with Sithe Energies and FirstEnergy Corporation to sell all their
remaining fossil-fuel and hydroelectric generating facilities other than JCP&L's
50% interest in the Yards Creek Pumped Storage Facility (Yards Creek) for a
total purchase price of approximately $1.7 billion (JCP&L $442 million; Met-Ed
$677 million; Penelec $604 million). The sales are expected to be completed in
mid-1999, subject to the timely receipt of the necessary regulatory and other
approvals.
JCP&L and Public Service Electric & Gas Company (PSE&G) each hold a 50%
undivided ownership interest in Yards Creek. In December 1998, JCP&L filed a
petition with the NJBPU seeking a declaratory order that, among other things,
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 was void and
unenforceable. PSE&G subsequently commenced a lawsuit in New Jersey Superior
Court requesting, among other things, that JCP&L be directed to sell its
ownership interest to PSE&G in accordance with the 1964 agreement as well as
injunctive relief and damages. In January 1999, the Court granted motions filed
by JCP&L and the NJBPU and dismissed PSE&G's complaint on the grounds that the
NJBPU had primary jurisdiction in the matter. Management believes that the fair
market value of JCP&L's ownership interest in Yards Creek is substantially in
excess of its December 31, 1998 book value of $22 million. There can be no
assurance of the outcome of this matter.
Nonutility Generation Agreements:
Pursuant to the mandates of the federal Public Utility Regulatory Policies
Act and state regulatory directives, the GPU Energy companies have been required
to enter into power purchase agreements with NUGs for the purchase of energy and
capacity for remaining periods of up to 22 years. The following table shows
actual payments from 1996 through 1998, and estimated payments from 1999 through
2003.
F-91
GPU, Inc. and Subsidiary Companies
Payments Under NUG Agreements
-----------------------------
(in millions)
Total JCP&L Met-Ed Penelec
----- ----- ------ -------
* 1996 $730 $370 $168 $192
* 1997 759 384 172 203
* 1998 788 403 174 211
1999 798 399 170 229
2000 816 404 169 243
2001 805 413 166 226
2002 819 425 169 225
2003 827 422 173 232
* Actual.
As of December 31, 1998, NUG facilities covered by agreements having 1,687
MW (JCP&L 918 MW; Met-Ed 364 MW; Penelec 405 MW) of capacity were in service.
While a few of these NUG facilities are dispatchable, most are must-run and
generally obligate the GPU Energy companies to purchase, at the contract price,
the output up to the contract limits.
The emerging competitive generation market has created uncertainty
regarding the forecasting of the companies' energy supply needs, which has
caused the GPU Energy companies to change their supply strategy to seek
shorter-term agreements offering more flexibility. The GPU Energy companies'
future supply plan will likely focus on short- to intermediate-term commitments
(one month to three years) during periods of expected high energy price
volatility and reliance on spot market purchases during other periods. The
projected cost of energy from new generation supply sources has also decreased
due to improvements in power plant technologies and lower forecasted fuel
prices. As a result of these developments, the rates under virtually all of the
GPU Energy companies' NUG agreements for facilities currently in operation are
substantially in excess of current and projected prices from alternative
sources.
The 1998 PaPUC Restructuring Orders and the legislation in New Jersey
provide for full recovery of the above-market costs of NUG agreements. The GPU
Energy companies will continue efforts to reduce the above-market costs of these
agreements and will, where beneficial, attempt to renegotiate the prices of the
agreements, offer contract buyouts and attempt to convert must-run agreements to
dispatchable agreements. There can be no assurance as to the extent to which
these efforts will be successful.
In 1997, the NJBPU approved a Final Settlement which, among other things,
provides for the recovery of costs associated with the buyout of the Freehold
Cogeneration project. The Final Settlement provides for recovery through the
LEAC of buyout costs up to $130 million, and 50% of any costs from $130 million
to $140 million, over a seven-year period for the termination of the Freehold
power purchase agreement. The NJBPU approved the cost recovery on an interim
basis subject to refund, pending further review by the NJBPU. There can be no
assurance as to the outcome of this matter.
F-92
GPU, Inc. and Subsidiary Companies
In 1998, Met-Ed and Penelec entered into definitive buyout agreements with
two NUG project developers. These agreements are contingent upon Met-Ed and
Penelec obtaining a final and non-appealable PaPUC order allowing for the full
recovery of the buyout payments through retail rates. The Restructuring Orders
established terms and conditions that would enable the buyout agreements to
proceed; however, until appeals to the Restructuring Orders are resolved, there
can be no assurance as to the outcome of these matters.
JCP&L has contracts through 2002 to purchase between 5,250 GWH and 5,450
GWH of electric generation per year at an average annual cost of $410 million.
The prices during this period are estimated to escalate approximately 0.9%
annually on a unit cost (cents/KWH) basis. From 2003 through 2008, JCP&L has
contracts to purchase between 5,000 GWH and 5,300 GWH of electric generation per
year at an average annual cost of $429 million. The prices during this period
are estimated to escalate approximately 1.9% annually. After 2008, when major
contracts begin to expire, purchases steadily decline to approximately 1,180 GWH
in 2014. The contract unit cost is estimated to escalate approximately 2.6%
annually from 2009 through 2014, with a total average annual cost of $229
million during this period. All of JCP&L's contracts will have expired by the
end of 2020.
Met-Ed has contracts through 2008 to purchase between 2,200 GWH and 2,400
GWH of electric generation per year at an average annual cost of $173 million.
The prices during this period are estimated to escalate approximately 2.0%
annually on a unit cost basis. From 2009 through 2012, Met-Ed is forecast to
purchase between 1,800 GWH and 2,200 GWH of electric generation per year at an
average annual cost of $173 million. During this period, the prices are
estimated to decrease approximately 0.7% annually on a unit cost basis. After
2012, Met-Ed's remaining contracts expire rapidly through 2016; thereafter, they
remain constant until the expiration of the last contract in 2020.
Penelec has contracts through 2010 to purchase between 3,250 GWH and 3,500
GWH of electric generation per year at an average annual cost of $237 million.
The prices during this period are estimated to escalate approximately 1.2%
annually on a unit cost basis. From 2011 through 2018, purchases decline from
approximately 2,600 GWH to approximately 1,350 GWH in 2018. The contract unit
cost is estimated to decrease approximately 0.1% annually from 2011 through
2018, with a total average annual cost of $154 million during this period. After
2018, Penelec's remaining contracts expire rapidly through 2020.
The GPU Energy companies are recovering certain of their NUG costs
(including certain buyout costs) from customers. The Restructuring Orders
provide assurance of full recovery of these costs for Met-Ed and Penelec. Met-Ed
and Penelec recorded a liability of $1.8 billion (Met-Ed $0.8 million; Penelec
$1.0 million) for their above-market NUG costs, which is fully offset by
Regulatory assets, net on the Consolidated Balance Sheets. The restructuring
legislation in New Jersey includes provisions for the recovery of costs under
NUG agreements and NUG buyout costs. (See Competitive Environment and Rate
Matters section, Management's Discussion and Analysis for additional
discussion.)
F-93
GPU, Inc. and Subsidiary Companies
Regulatory assets, net:
- -----------------------
In 1998, Met-Ed and Penelec received PaPUC Restructuring Orders which,
among other things, essentially remove from regulation the costs associated with
providing electric generation service to Pennsylvania consumers, effective
January 1, 1999. Accordingly, in 1998 Met-Ed and Penelec discontinued the
application of FAS 71 and adopted the provisions of FAS 101 and EITF Issue 97-4
with respect to their electric generation operations. The transmission and
distribution portion of Met-Ed and Penelec's operations will continue to be
subject to the provisions of FAS 71. See Note 5, Accounting for Extraordinary
and Non-recurring Items.
JCP&L expects to discontinue the application of FAS 71 and adopt FAS 101
and EITF Issue 97-4 for its electric generation operations no later than its
receipt of NJBPU approval of its restructuring plans, which is expected in the
second quarter of 1999.
Regulatory assets, net as reflected in the December 31, 1998 and 1997
Consolidated Balance Sheets in accordance with the provisions of FAS 71 and EITF
Issue 97-4 were as follows:
GPU, Inc. and Subsidiaries (in thousands)
- -------------------------- --------------
1998 1997
---- ----
Competitive transition charge per PaPUC Order $1,023,815 $ -
========= =========
Other regulatory assets, net:
Reserve for generation divestiture (JCP&L) $ 136,804 $ -
Phase II reserve for
generation divestiture (Met-Ed and Penelec) 1,356,580 -
Income taxes recoverable through future rates 449,638 510,680
Income taxes refundable through future rates (52,701) (89,247)
Net investment in TMI-2 65,787 83,951
TMI-2 decommissioning costs 119,571 257,180
Nonutility generation contract buyout costs 123,208 245,568
Unamortized property losses 80,287 99,532
Other postretirement benefits 73,770 89,569
Environmental remediation 50,214 90,308
N.J. unit tax 33,244 39,797
Unamortized loss on reacquired debt 32,247 40,489
Load and demand-side management programs 12,568 23,164
DOE enrichment facility decommissioning 28,956 33,472
Nuclear fuel disposal fee 21,092 21,512
Storm damage 30,166 31,097
Deferred nonutility generation costs
not in current rates (16,067) 24,857
Future nonutility generation costs not in CTC 369,290 -
Public utility realty taxes (PURTA) 8,060 -
Other regulatory liabilities (50,319) (13,959)
Other regulatory assets 10,018 59,508
--------- ---------
Total other regulatory assets, net $2,882,413 $1,547,478
========= =========
F-94
GPU, Inc. and Subsidiary Companies
JCP&L
- -----
(in thousands)
--------------
1998 1997
---- ----
Other regulatory assets, net:
Reserve for generation divestiture $ 136,804 $ -
Income taxes recoverable through future rates 172,752 128,111
Income taxes refundable through future rates (35,535) (37,759)
Net investment in TMI-2 65,787 75,541
TMI-2 decommissioning costs 19,192 30,024
Nonutility generation contract buyout costs 120,708 140,500
Unamortized property losses 80,287 94,726
Other postretirement benefits 46,486 49,807
Environmental remediation 50,214 61,324
N.J. unit tax 33,244 39,797
Unamortized loss on reacquired debt 25,981 28,729
Load and demand-side management programs 12,568 23,164
DOE enrichment facility decommissioning 18,049 21,223
Nuclear fuel disposal fee 21,092 23,781
Storm damage 30,166 31,097
Other regulatory liabilities (49,840) (11,467)
Other regulatory assets 5,930 37,878
--------- ---------
Total other regulatory assets, net $ 753,885 $ 736,476
========= =========
Met-Ed
- ------
Competitive transition charge per PaPUC Order $ 680,213 $ -
========= =========
Other regulatory assets, net:
Phase II reserve for
generation divestiture $ 421,807 $ -
Income taxes recoverable through future rates 133,585 178,927
Income taxes refundable through future rates (10,804) (21,749)
Net investment in TMI-2 - 1,187
TMI-2 decommissioning costs 68,091 145,103
Nonutility generation contract buyout costs 2,500 76,368
Unamortized property losses - 2,650
Other postretirement benefits 27,284 39,762
Environmental remediation - 4,121
Unamortized loss on reacquired debt 3,023 5,329
DOE enrichment facility decommissioning 7,409 8,166
Nuclear fuel disposal fee - (1,511)
Deferred nonutility generation costs
not in current rates (7,746) 10,265
Future nonutility generation costs not in CTC 271,270 -
Public utility realty taxes (PURTA) 3,699 -
Other regulatory liabilities (83) (2,446)
Other regulatory assets 1,899 4,515
--------- ---------
Total other regulatory assets, net $ 921,934 $ 450,687
========= =========
F-95
GPU, Inc. and Subsidiary Companies
Penelec (in thousands)
- ------- --------------
1998 1997
---- ----
Competitive transition charge per PaPUC Order $ 343,602 $ -
========= =========
Other regulatory assets, net:
Phase II reserve for
generation divestiture 934,773 -
Income taxes recoverable through future rates 143,301 203,642
Income taxes refundable through future rates (6,362) (29,739)
Net investment in TMI-2 - 7,223
TMI-2 decommissioning costs 32,288 82,053
Nonutility generation contract buyout costs - 28,700
Unamortized property losses - 2,156
Environmental remediation - 24,863
Unamortized loss on reacquired debt 3,243 6,431
DOE enrichment facility decommissioning 3,498 4,083
Nuclear fuel disposal fee - (758)
Deferred nonutility generation costs
not in current rates (8,321) 14,592
Future nonutility generation costs not in CTC 98,020 -
Public utility realty taxes (PURTA) 4,361 -
Other regulatory liabilities (396) (46)
Other regulatory assets 2,189 17,115
--------- ---------
Total other regulatory assets, net $1,206,594 $ 360,315
========= =========
Competitive transition charge: Represents the stranded cost recovery amounts
allowed by the PaPUC, which are to be collected from customers of Met-Ed and
Penelec, beginning January 1, 1999, over 12-year and 11-year transition periods,
respectively, except for above-market NUG costs which will be recovered over the
lives of the related power purchase contracts. The CTC amounts will be adjusted
in a Phase II rate restructuring order, after divestiture of the generation
assets is complete. Stranded costs, as defined by the Pennsylvania Customer
Choice Act, include an electric utility's known and measurable
generation-related costs, which would have been recoverable in the former
regulated market, but are not recoverable in a competitive electric generation
market.
Reserve for generation divestiture (JCP&L): Represents generation divestiture
shortfall which is probable of recovery in future rates, inclusive of
divestiture transaction costs.
Phase II reserve for generation divestiture (Met-Ed and Penelec): Represents
generation divestiture CTC shortfall to be addressed in a Phase II rate
restructuring order, inclusive of future closure costs of various ash disposal
sites; amounts related to the remediation of Penelec's Seward station property;
costs for a voluntary enhanced retirement program offered to all or certain
Genco employees; certain income tax-related items; and divestiture transaction
costs.
Income taxes recoverable/refundable through future rates: Represents amounts
deferred due to the implementation of FAS 109, "Accounting for Income Taxes," in
1993.
F-96
GPU, Inc. and Subsidiary Companies
Net investment in TMI-2: Represents costs that are recoverable through rates for
the GPU Energy companies' remaining investment in the plant and fuel core.
TMI-2 decommissioning costs: Represents costs that are recoverable through rates
for the GPU Energy companies' radiological decommissioning and the cost of
removal of nonradiological structures and materials in accordance with the 1995
site-specific study (in 1998 dollars). For additional information, see Nuclear
Plant Retirement Costs.
Nonutility generation contract buyout costs: Represents amounts incurred for
terminating power purchase contracts with NUGs, for which rate recovery has been
granted or is probable.
Unamortized property losses: Consists mainly of costs associated with JCP&L's
Forked River project, which are included in rates.
Other postretirement benefits: Includes costs associated with the adoption of
FAS 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," which are deferred in accordance with EITF Issue 92-12, "Accounting
for OPEB Costs by Rate-Regulated Enterprises."
Environmental remediation: Consists of amounts related to the investigation and
remediation of several manufactured gas plant sites formerly owned by JCP&L, as
well as several other JCP&L sites; Penelec's Seward station property; and future
closure costs of various ash disposal sites for the GPU Energy companies. For
additional information, see Environmental Matters.
N.J. unit tax: Represents certain state taxes, with interest, for which JCP&L
received NJBPU approval in 1993 to recover over a ten-year period.
Unamortized loss on reacquired debt: Represents premiums and expenses incurred
in the early redemption of long-term debt. In accordance with FERC regulations,
reacquired debt costs are amortized over the remaining original life of the
retired debt.
Load and demand-side management (DSM) programs: Consists of load management
costs and other DSM program expenditures that are currently being recovered,
with interest, through JCP&L's retail base rates and demand-side factor. Also
includes provisions for lost revenues between base rate cases and performance
incentives.
Department of Energy (DOE) enrichment facility decommissioning: Represents
payments to the DOE over a 15-year period which began in 1994.
Nuclear fuel disposal fee: Represents amounts recoverable through rates for
estimated future disposal costs for spent nuclear fuel at Oyster Creek and TMI-1
in accordance with the Nuclear Waste Policy Act of 1982 (NWPA).
Storm damage: Relates to incremental noncapital costs associated with various
storms in the JCP&L service territory that are not recoverable through
insurance. These amounts were deferred based upon past rate recovery precedent.
An annual amortization amount is included in JCP&L's retail base rates and is
charged to expense.
F-97
GPU, Inc. and Subsidiary Companies
Deferred nonutility generation costs not in current rates: Represents NUG
operating costs which are not reflected in Met-Ed and Penelec's current rates,
for which rate recovery has been assured (see Management's Discussion and
Analysis - Competitive Environment and Rate Matters).
Future nonutility generation costs not in CTC: Represents future NUG operating
costs which are not presently included in Met-Ed and Penelec's CTC, for which
recovery has been assured. The amounts collected will be adjusted every five
years over the life of each NUG contract.
Public utility realty taxes (PURTA): Represents additional assessments under the
public utility realty tax, which are recoverable through Met-Ed and Penelec's
state tax adjustment surcharges.
ACCOUNTING MATTERS
------------------
In 1998, Statement of Financial Accounting Standards No. 133 (FAS 133),
"Accounting for Derivative Instruments and Hedging Activities," was issued. FAS
133 requires that companies recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value. To
comply with this statement, GPU will be required to include its derivative
transactions on its balance sheet at fair value, and recognize the subsequent
changes in fair value as either gains or losses in earnings or report them as a
component of other comprehensive income, depending upon the intended use and
designation of the derivative as a hedge. This statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. GPU expects to
adopt this statement in the first quarter of 2000. GPU is in the process of
evaluating the impact of FAS 133.
In 1998, the FASB's EITF issued guidance on accounting for energy
contracts with EITF Issue 98-10, "Accounting for Energy Trading and Risk
Management Activities," which is effective for fiscal years beginning after
December 15, 1998. EITF Issue 98-10 addresses whether certain types of contracts
for the sale and purchase of energy commodities should be marked to market or
accounted for under accrual accounting. GPU will adopt EITF Issue 98-10 in the
first quarter of 1999. The adoption of EITF Issue 98-10 is not expected to have
a material impact on GPU's financial position or results of operations.
FAS 121 requires that regulatory assets meet the recovery criteria of FAS
71 on an ongoing basis in order to avoid a write-down. In addition, FAS 121
requires that long-lived assets, identifiable intangibles, capital leases and
goodwill be reviewed for impairment whenever events occur or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable. FAS 121 also requires the recognition of impairment losses when the
carrying amounts of those assets are greater than the estimated cash flows
expected to be generated from the use and eventual disposition of the assets.
The restructuring proceeding in New Jersey could result in substantial
disallowance of certain capital additions; the disallowance of certain stranded
costs; reduction in cost of capital allowances on certain elements of plant and
cost deferrals; and tariff rate unbundling reflecting an allocation of costs to
the transmission and distribution activities lower than that
F-98
GPU, Inc. and Subsidiary Companies
proposed by JCP&L. Management believes that the outcome of that proceeding could
have a material adverse effect on GPU's future earnings.
NUCLEAR FACILITIES
------------------
The GPU Energy companies have made investments in three major nuclear
projects -- TMI-1 and Oyster Creek, both of which are operating generation
facilities, and TMI-2, which was damaged during a 1979 accident. TMI-1 and TMI-2
are jointly owned by JCP&L, Met-Ed and Penelec in the percentages of 25%, 50%
and 25%, respectively. Oyster Creek is owned by JCP&L. At December 31, 1998 and
1997, the GPU Energy companies' net investment in TMI-1 and Oyster Creek,
including nuclear fuel, was as follows:
Net Investment (in millions)
----------------------------
TMI-1 Oyster Creek
----- ------------
1998
----
JCP&L $ 18 $682
Met-Ed 36 -
Penelec 17 -
--- ---
Total $ 71 $682
=== ===
1997
----
JCP&L $155 $701
Met-Ed 300 -
Penelec 147 -
--- ---
Total $602 $701
=== ===
The GPU Energy companies' net investment in TMI-2 at December 31, 1998 was
$66 million for JCP&L and $84 million, (JCP&L $76 million, Met-Ed $1 million;
Penelec $7 million) at December 31, 1997. 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. In 1998, Met-Ed and Penelec received PaPUC Restructuring Orders,
discontinued the application of FAS 71 and adopted the provisions of FAS 101 and
EITF Issue 97-4 with respect to their electric generation operations.
Accordingly, Met-Ed and Penelec wrote-off their remaining investment in TMI-2 of
$1 million and $7 million, respectively.
Costs associated with the operation, maintenance and retirement of nuclear
plants have continued to be significant and less predictable than costs
associated with other sources of generation, in large part due to changing
regulatory requirements, safety standards, availability of nuclear waste
disposal facilities and experience gained in the construction and operation of
nuclear facilities. The GPU Energy companies may also incur costs and experience
reduced output at their nuclear plants because of the prevailing design criteria
at the time of construction and the age of the plants' systems and equipment. In
addition, for economic or other reasons, operation of these plants for the full
term of their operating licenses cannot be assured. Also, not all risks
associated with the ownership or operation of
F-99
GPU, Inc. and Subsidiary Companies
nuclear facilities may be adequately insured or insurable. Consequently, the
recovery of costs associated with nuclear projects, including replacement power,
any unamortized investment at the end of each plant's useful life (whether
scheduled or premature), the carrying costs of that investment and retirement
costs, is not assured. (See Competition and the Changing Regulatory
Environment.)
In addition to the continued operation of the Oyster Creek facility, JCP&L
has been exploring the sale or early retirement of the plant to mitigate costs
associated with its continued operation. GPU does not anticipate making a final
decision on the plant before the NJBPU rules on JCP&L's restructuring filing. If
a decision is made to retire the plant early, retirement would likely occur in
2000. Although management believes that the current rate structure would allow
for the recovery of and return on its net investment in the plant and provide
for decommissioning costs, there can be no assurance that such costs will be
fully recoverable. (See Management's Discussion and Analysis - Competitive
Environment and Rate Matters.)
In October 1998, GPU entered into definitive agreements to sell TMI-1 to
AmerGen, a joint venture between PECO Energy and British Energy. Highlights of
the agreements are presented in the Competitive Environment and Rate Matters
section of Management's Discussion and Analysis.
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 United States District
Court for the Middle District of Pennsylvania. Some of the claims also seek
recovery for injuries from alleged emissions of radioactivity before and after
the accident.
At the time of the TMI-2 accident, as provided for in the Price-Anderson
Act, the GPU Energy companies had (a) primary financial protection in the form
of insurance policies with groups of insurance companies providing an aggregate
of $140 million of primary coverage, (b) secondary financial protection in the
form of private liability insurance under an industry retrospective rating plan
providing for up to an aggregate of $335 million in premium charges under such
plan, and (c) an indemnity agreement with the 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 U.S. Court of Appeals for the Third Circuit ruled that the
Price-Anderson Act provides coverage under its primary and secondary levels for
punitive as well as compensatory damages, but that punitive damages could not be
recovered against the Federal Government under the third level of financial
protection. In so doing, the Court of Appeals referred to the "finite fund" (the
$560 million of financial protection under the Price-Anderson Act) to which
plaintiffs must resort to get compensatory as well as punitive damages.
F-100
GPU, Inc. and Subsidiary Companies
The Court of Appeals also ruled that the standard of care owed by the
defendants to a plaintiff was determined by the specific level of radiation
which was released into the environment, as measured at the site boundary,
rather than as measured at the specific site where the plaintiff was located at
the time of the accident (as the defendants proposed). The Court of Appeals also
held that each plaintiff still must demonstrate exposure to radiation released
during the TMI-2 accident and that such exposure had resulted in injuries. In
1996, the U.S. Supreme Court denied petitions filed by GPU, Inc. and the GPU
Energy companies to review the Court of Appeals' rulings.
In 1996, the District Court granted a motion for summary judgment filed by
GPU, Inc. and the GPU Energy companies, and dismissed all of the 2,100 pending
claims. The Court ruled that there was no evidence which created a genuine issue
of material fact warranting submission of plaintiffs' claims to a jury. The
plaintiffs have appealed the District Court's ruling to the Court of Appeals for
the Third Circuit, before which the matter is pending. There can be no assurance
as to the outcome of this litigation.
Based on the above, GPU, Inc. and the GPU Energy companies believe that any
liability to which they might be subject by reason of the TMI-2 accident will
not exceed their financial protection under the Price-Anderson Act.
NUCLEAR PLANT RETIREMENT COSTS
------------------------------
Retirement costs for nuclear plants include decommissioning the
radiological portions of the plants and the cost of removal of nonradiological
structures and materials. The disposal of spent nuclear fuel is covered
separately by contracts with the DOE.
In 1990, the GPU Energy companies submitted a report, in compliance with
NRC regulations, setting forth a funding plan (employing the external sinking
fund method) for the decommissioning of their nuclear reactors. Under this plan,
the GPU Energy companies intend to complete the funding for Oyster Creek and
TMI-1 by the end of the plants' license terms, 2009 and 2014, respectively. The
TMI-2 funding completion date is 2014, consistent with TMI-2 remaining in
long-term storage and being decommissioned at the same time as TMI-1. Based on
NRC studies, a comparable funding target was developed for TMI-2 which took the
accident into account. Under the NRC regulations, the funding targets (in 1998
dollars) for TMI-1, TMI-2, and Oyster Creek are as follows:
(in millions)
Oyster
TMI-1 TMI-2 Creek
----- ----- -----
JCP&L $ 67 $106 $328
Met-Ed 134 214 -
Penelec 67 106 -
--- --- ---
Total $268 $426 $328
=== === ===
The funding targets, while not considered cost estimates, are reference levels
designed to assure that licensees demonstrate adequate financial responsibility
for decommissioning. While the NRC regulations address
F-101
GPU, Inc. and Subsidiary Companies
activities related to the removal of the radiological portions of the plants,
they do not address costs related to the removal of nonradiological structures
and materials.
A consultant to GPUN performed site-specific studies of TMI-1 (1995), TMI-2
(1995) and Oyster Creek (1995 and 1998), that considered various decommissioning
methods and estimated the cost of decommissioning the radiological portions and
the cost of removal of the nonradiological portions of each plant, using the
prompt removal/dismantlement method. GPUN management has reviewed the
methodology and assumptions used in these studies, is in agreement with them,
and believes the results are reasonable. The NRC may require an acceleration of
the decommissioning funding for Oyster Creek if the plant is retired early. The
retirement cost estimates under the site-specific studies, assuming
decommissioning at the end of the plants' license terms, are as follows (in 1998
dollars):
(in millions)
Oyster
TMI-1 TMI-2 Creek
----- ----- -----
Radiological decommissioning $346 $421 $572
Nonradiological cost of removal 85 34 * 31
--- --- ---
Total $431 $455 $603
=== === ===
* Net of $12.3 million spent as of December 31, 1998.
Each of the GPU Energy companies is responsible for retirement costs in
proportion to its respective ownership percentage.
The 1995 Oyster Creek site-specific study was updated in response to the
previously announced potential early closure of the plant in the year 2000. An
early shutdown would increase the retirement costs shown above to $611 million
($580 million for radiological decommissioning and $31 million for
nonradiological cost of removal). Both estimates include substantial spending
for an on-site dry storage facility for spent nuclear fuel and significant costs
for storing the fuel until the DOE complies with the Nuclear Waste Policy Act of
1982 (see Other Commitments and Contingencies).
In October 1998, GPU entered into definitive agreements to sell TMI-1 to
AmerGen. The agreements provide, among other things, that upon closing, the GPU
Energy companies will fund the TMI-1 decommissioning trusts up to $320 million
and AmerGen will assume all TMI-1 decommissioning liabilities. If all the
necessary regulatory approvals, as well as certain Internal Revenue Service
rulings, are obtained, the transfer of all the TMI-1 decommissioning liabilities
and expenses to AmerGen will take place at the financial closing.
The ultimate cost of retiring the GPU Energy companies' nuclear facilities
may be different from the cost estimates contained in these site-specific
studies. Such costs are subject to (a) the escalation of various cost elements
(for reasons including, but not limited to, general inflation), (b) the further
development of regulatory requirements governing decommissioning, (c) the
technology available at the time of decommissioning, and (d) the availability of
nuclear waste disposal facilities.
The GPU Energy companies charge to depreciation expense and accrue
retirement costs based on amounts being collected from customers. Customer
F-102
GPU, Inc. and Subsidiary Companies
collections are contributed to external trust funds. These deposits, including
the related earnings, are classified as Nuclear decommissioning trusts, at
market on the Consolidated Balance Sheets.
TMI-1 and Oyster Creek:
The Final Settlement approved by the NJBPU in 1997 has granted JCP&L annual
revenues for TMI-1 and Oyster Creek retirement costs of $5.2 million and $22.5
million, respectively. These annual revenues are based on the 1995 site-specific
study estimates.
The PaPUC has granted Met-Ed annual revenues for TMI-1 retirement costs of
$8.5 million based on both the NRC funding target for radiological
decommissioning costs and the 1988 site-specific study for nonradiological costs
of removal. The PaPUC also granted Penelec annual revenues of $4.2 million for
its share of TMI-1 retirement costs, on a basis consistent with that granted
Met-Ed. In the Restructuring Orders, the PaPUC granted recovery of an interim
level of TMI-1 decommissioning costs as part of the CTC. This amount will be
adjusted in Phase II of Met-Ed and Penelec's restructuring proceedings, once the
net proceeds from the generation asset divestiture are determined.
The amounts charged to depreciation expense in 1998 and the provisions for
the future expenditure of these funds, which have been made in accumulated
depreciation, are as follows:
(in millions)
Oyster
TMI-1 Creek
----- -----
Amount expensed in 1998:
JCP&L $ 5 $ 22
Met-Ed 9 -
Penelec 4 -
--- ---
Total $ 18 $ 22
=== ===
Accumulated depreciation
provision at December 31, 1998:
JCP&L $ 49 $273
Met-Ed 74 -
Penelec 35 -
--- ---
Total $158 $273
=== ===
Management believes that any TMI-1 and Oyster Creek retirement costs, in
excess of those currently recognized for ratemaking purposes, should be
recoverable from customers.
TMI-2:
The estimated liabilities for TMI-2 future retirement costs (reflected as
Three Mile Island Unit 2 future costs on the Consolidated Balance Sheets) as of
December 31, 1998 and 1997 are as follows:
F-103
GPU, Inc. and Subsidiary Companies
(in millions)
Total JCP&L Met-Ed Penelec
----- ----- ------ -------
1998 $484 $121 $242 $121
1997 $449 $112 $225 $112
These amounts are based upon the 1995 site-specific study estimates (in 1998 and
1997 dollars, respectively) discussed above and an estimate for remaining
incremental monitored storage costs of $29 million (JCP&L $7 million; Met-Ed $15
million; Penelec $7 million ) for 1998 and $16 million (JCP&L $4 million; Met-Ed
$8 million; Penelec $4 million) for 1997, as a result of TMI-2's entering
long-term monitored storage in 1993. The GPU Energy companies are incurring
annual incremental monitored storage costs of approximately $1.8 million (JCP&L
$450 thousand; Met-Ed $900 thousand ; Penelec $450 thousand).
Offsetting the $484 million liability at December 31, 1998 is $252 million
(JCP&L $23 million; Met-Ed $147 million; Penelec $82 million) which management
believes is probable of recovery from customers and included in Regulatory
assets, net on the Consolidated Balance Sheets, and $266 million (JCP&L $103
million; Met-Ed $120 million; Penelec $43 million) in trust funds for TMI-2 and
included in Nuclear decommissioning trusts, at market on the Consolidated
Balance Sheets. Earnings on trust fund deposits are included in amounts shown on
the Consolidated Balance Sheets under Regulatory assets, net. TMI-2
decommissioning costs charged to depreciation expense in 1998 amounted to $13
million (JCP&L $2 million; Met-Ed $10 million; Penelec $1 million).
The NJBPU has granted JCP&L revenues for TMI-2 retirement costs based on
the 1995 site-specific estimates. In addition, JCP&L is recovering its share of
TMI-2's incremental monitored storage costs. The PaPUC Restructuring Orders
granted Met-Ed and Penelec recovery of TMI-2 decommissioning costs as part of
the CTC, but also allowed Met-Ed and Penelec to defer as a regulatory asset
those amounts that are above the level provided for in the CTC.
At December 31, 1998, the accident-related portion of TMI-2 radiological
decommissioning costs is considered to be $75 million (JCP&L $19 million; Met-Ed
$37 million; Penelec $19 million), which is the difference between the 1995
TMI-1 and TMI-2 site-specific study estimates (in 1998 dollars). In connection
with rate case resolutions at the time, JCP&L, Met-Ed and Penelec have made
contributions to irrevocable external trusts relating to their shares of the
accident-related portions of the decommissioning liability in the amounts of $15
million, $40 million and $20 million, respectively. These contributions were not
recoverable from customers and have been expensed. The GPU Energy companies will
not pursue recovery from customers for any amounts contributed in excess of the
$75 million accident-related portion referred to above.
JCP&L intends to seek recovery for any increases in TMI-2 retirement costs,
and Met-Ed and Penelec intend to seek recovery for any increases in the
nonaccident-related portion of such costs, but recognize that recovery cannot be
assured.
F-104
GPU, Inc. and Subsidiary Companies
INSURANCE
---------
GPU has insurance (subject to retentions and deductibles) for its
operations and facilities including coverage for property damage, liability to
employees and third parties, and loss of use and occupancy (primarily
incremental replacement power costs). There is no assurance that GPU will
maintain all existing insurance coverages, some of which will change as certain
generating assets are sold. Losses or liabilities that are not completely
insured, unless allowed to be recovered through ratemaking, could have a
material adverse effect on the financial position of GPU.
The decontamination liability, premature decommissioning and property
damage insurance coverage for the TMI station and for Oyster Creek totals $2.7
billion per site. In accordance with NRC regulations, these insurance policies
generally require that proceeds first be used for stabilization of the reactors
and then to pay for decontamination and debris removal expenses. Any remaining
amounts available under the policies may then be used for repair and restoration
costs and decommissioning costs. Consequently, there can be no assurance that in
the event of a nuclear incident, property damage insurance proceeds would be
available for the repair and restoration of that station.
The Price-Anderson Act limits GPU's liability to third parties for a
nuclear incident at one of its sites to approximately $9.8 billion. Coverage for
the first $200 million of such liability is provided by private insurance. The
remaining coverage, or secondary financial protection, is provided by
retrospective premiums payable by all nuclear reactor owners. Under secondary
financial protection, a nuclear incident at any licensed nuclear power reactor
in the country, including those owned by the GPU Energy companies, could result
in assessments of up to $88 million per incident for each of the GPU Energy
companies' two operating reactors, subject to an annual maximum payment of $10
million per incident per reactor. In addition to the retrospective premiums
payable under the Price-Anderson Act, the GPU Energy companies are also subject
to retrospective premium assessments of up to $26.8 million (JCP&L $16.9
million; Met-Ed $6.6 million; Penelec $3.3 million) in any one year under
insurance policies applicable to nuclear operations and facilities.
The GPU Energy companies have insurance coverage for incremental
replacement power costs resulting from an accident-related outage at their
nuclear plants. Coverage commences after a 17-week waiting period at $3.5
million per week, and after 23 weeks of an outage, continues for three years
beginning at $1.8 million and $2.6 million per week for the first year for
Oyster Creek and TMI-1, respectively, decreasing to 80% of such amounts for
years two and three.
ENVIRONMENTAL MATTERS
---------------------
As a result of existing and proposed legislation and regulations, and
ongoing legal proceedings dealing with environmental matters, including but not
limited to acid rain, water quality, ambient air quality, global warming,
electromagnetic fields, and storage and disposal of hazardous and/or toxic
wastes, GPU may be required to incur substantial additional costs to construct
new equipment, modify or replace existing and proposed equipment, remediate,
decommission or cleanup waste disposal and other sites currently or formerly
F-105
GPU, Inc. and Subsidiary Companies
used by it, including formerly owned manufactured gas plants (MGP), coal mine
refuse piles and generation facilities.
To comply with Titles I and IV of the federal Clean Air Act Amendments of
1990 (Clean Air Act), the GPU Energy companies have spent $242 million (JCP&L
$44 million; Met-Ed $95 million; Penelec $103 million) to date. Effective
November 1997, the Pennsylvania Environmental Quality Board adopted regulations
implementing the NOx reductions proposed by the Ozone Transport Commission
(OTC), and in December 1997, the New Jersey Department of Environmental
Protection developed a proposal with the electric utility industry on a plan to
implement the OTC's proposed NOx reductions. The GPU Energy companies expect
that the U.S. Environmental Protection Agency (EPA) will approve these state
implementation plans, and that as a result, they would expect to spend an
estimated $0.6 million (JCP&L $30 thousand; Met-Ed $340 thousand; Penelec $200
thousand) in 1999 to meet the seasonal reductions agreed upon by the OTC. In
July 1997 and October 1998 the EPA adopted new, more stringent rules on ozone
and particulate matter. Several groups have filed suit in the U.S. Court of
Appeals to overturn these new air quality standards on the grounds that, among
other things, they are based on inadequate scientific evidence. The GPU Energy
companies are unable to determine what additional costs, if any, will be
incurred if the EPA rules are upheld. Moreover, the timing and amounts of
expenditures under the Clean Air Act will be dependent upon the timing of the
sales of the related generating facilities.
GPU has been formally notified by the EPA and state environmental
authorities that it is among the potentially responsible parties (PRPs) who may
be jointly and severally liable to pay for the costs associated with the
investigation and remediation at hazardous and/or toxic waste sites (in some
cases, more than one company is named for a given site):
JCP&L MET-ED PENELEC GPUN GPU, INC. TOTAL
----- ------ ------- ---- --------- -----
8 4 2 1 1 13
In addition, certain of the GPU companies have been requested to participate in
the remediation or supply information to the EPA and state environmental
authorities on several other sites for which they have not been formally named
as PRPs, although the EPA and state authorities may nevertheless consider them
as PRPs. Certain of the GPU companies have also been named in lawsuits
requesting damages (which are material in amount) for hazardous and/or toxic
substances allegedly released into the environment. The ultimate cost of
remediation will depend upon changing circumstances as site investigations
continue, including (a) the existing technology required for site cleanup, (b)
the remedial action plan chosen and (c) the extent of site contamination and the
portion attributed to the GPU companies involved.
In 1997, the EPA filed a complaint against GPU, Inc. in the United States
District Court for the District of Delaware for enforcement of its unilateral
order issued against GPU, Inc. to clean up the former Dover Gas Light Company
(Dover) manufactured gas production site in Dover, Delaware. Dover was part of
the AGECO/AGECORP group of companies from 1929 until 1942 and GPU, Inc. emerged
from the AGECO/AGECORP reorganization proceedings. All of the common stock of
Dover was sold in 1942 by a member of the AGECO/AGECORP group to an unaffiliated
entity, and was subsequently acquired by Chesapeake Utilities Corporation
(Chesapeake). According to the complaint, the EPA is seeking up
F-106
GPU, Inc. and Subsidiary Companies
to $0.5 million in past costs, $4.2 million for work in connection with the
cleanup of the Dover site and approximately $19 million in penalties. GPU, Inc.
has responded to the EPA complaint stating that such claims should be dismissed
because, among other things, they are barred by the operation of the Final
Decree entered by the United States District Court for the Southern District of
New York at the conclusion of the 1946 reorganization proceedings of
AGECO/AGECORP. Chesapeake has also sued GPU, Inc. for a contribution to the
cleanup of the Dover site. In December 1997, the Court refused to dismiss the
complaint; GPU, Inc. has requested that the Court reconsider its decision. The
parties continue to engage in settlement discussions. There can be no assurance
as to the outcome of these proceedings.
Pursuant to federal environmental monitoring requirements, Penelec has
reported to the Pennsylvania Department of Environmental Protection (PaDEP) that
contaminants from coal mine refuse piles were identified in storm water run-off
at Penelec's Seward station property. Penelec signed a modified Consent Order,
which became effective December 1996, that establishes a schedule for submitting
a plan for long-term remediation, based on future operating scenarios. Penelec
currently estimates that the remediation of the Seward station property will
range from $12 million to $20 million and has a recorded liability of $12
million at December 31, 1998. These cost estimates are subject to uncertainties
based on continuing discussions with the PaDEP as to the method of remediation,
the extent of remediation required and available cleanup technologies. Penelec
expects recovery of these remediation costs in Phase II of its restructuring
proceeding and has recorded a corresponding regulatory asset of approximately
$12 million at December 31, 1998.
In 1997, the GPU Energy companies filed with the PaDEP applications for
re-permitting seven operating ash disposal sites, including projected site
closure procedures and related cost estimates. The cost estimates for the
closure of these sites range from approximately $17 million to $22 million, and
a liability of $17 million (JCP&L $1 million; Met-Ed $4 million; Penelec $12
million) is reflected on the Consolidated Balance Sheets at December 31, 1998.
JCP&L has requested recovery of its share of closure costs in its restructuring
plan filed with the NJBPU in July 1997. Met-Ed and Penelec expect recovery of
these costs in Phase II of their restructuring proceedings. As a result, a
regulatory asset of $17 million (JCP&L $1 million; Met-Ed $4 million; Penelec
$12 million) is reflected on the Consolidated Balance Sheets at December 31,
1998.
JCP&L has entered into agreements with the New Jersey Department of
Environmental Protection for the investigation and remediation of 17 formerly
owned MGP sites. JCP&L has also entered into various cost-sharing agreements
with other utilities for most of the sites. As of December 31, 1998, JCP&L has
spent approximately $32 million in connection with the cleanup of these sites.
In addition, JCP&L has recorded an estimated environmental liability of $52
million relating to expected future costs of these sites (as well as two other
properties). This estimated liability is based upon ongoing site investigations
and remediation efforts, which generally involve capping the sites and pumping
and treatment of ground water. Moreover, the cost to clean up these sites could
be materially in excess of $52 million due to significant uncertainties,
including changes in acceptable remediation methods and technologies.
F-107
GPU, Inc. and Subsidiary Companies
In 1997, JCP&L's request to establish a Remediation Adjustment Clause for
the recovery of MGP remediation costs was approved by the NJBPU as part of the
Final Settlement. At December 31, 1998, JCP&L had recorded on its Consolidated
Balance Sheet a regulatory asset of $44 million. JCP&L is continuing to pursue
reimbursement from its insurance carriers for remediation costs already spent
and for future estimated costs. In 1994, JCP&L filed a complaint with the
Superior Court of New Jersey against several of its insurance carriers, relative
to these MGP sites. Pretrial discovery is continuing.
OTHER COMMITMENTS AND CONTINGENCIES
-----------------------------------
GPUI Group:
- -----------
At December 31, 1998, the GPUI Group had investments totaling approximately
$1.2 billion in businesses and facilities located in foreign countries. Although
management attempts to mitigate the risk of investing in certain foreign
countries by securing political risk insurance, the GPUI Group faces additional
risks inherent to operating in such locations, including foreign currency
fluctuations (see Management's Discussion and Analysis - GPUI Group).
At December 31, 1998, GPU, Inc.'s aggregate investment in the GPUI Group was
$590 million; GPU, Inc. has also guaranteed up to an additional $761 million of
GPUI Group obligations. Of this amount, $735 million is included in Long-term
debt and Securities due within one year on GPU's Consolidated Balance Sheet at
December 31, 1998, and $26 million relates to various other obligations of the
GPUI Group.
Midlands has invested in a power project in Pakistan (Uch Power Project)
which was originally scheduled to begin commercial operation in late 1998. The
Uch Power Project is a 586 MW facility of which Midlands is a 40% owner.
Construction of the Uch Power Project is complete, but commercial operation has
been delayed pending resolution of a dispute with the Pakistani government. In
July 1998, the Pakistani government-owned utility issued a notice of intent to
terminate certain key project agreements. The notice asserted that various forms
of corruption were involved in the original granting of the agreements to the
Uch investors by the predecessor Pakistani government. The Uch investors,
including Midlands, strongly deny the allegations and are continuing to explore
remedies to the situation. GPU Electric believes that similar notices were
received by a number of other independent power projects in Pakistan. In
December 1998, the Pakistani government offered to withdraw these notices.
Through its 50% ownership in Midlands, GPU Electric's current investment in
the Uch Power Project is approximately $32 million, and project lenders could
require GPU Electric to make additional capital contributions to the project of
approximately $12 million under certain conditions. There can be no assurance as
to the outcome of this matter.
Lake Cogen, Ltd. (Lake), an independent power project owned by GPU
International, is pursuing legal proceedings against Florida Power Corporation
(FPC) to resolve an ongoing disagreement involving the pricing under the power
purchase agreement between Lake and FPC. GPU International's total investment
F-108
GPU, Inc. and Subsidiary Companies
in Lake, including guaranteed lease payments, is approximately $21 million. A
court decision is expected in February 1999. There can be no assurance as to the
outcome of this proceeding.
Other:
- ------
GPU's capital programs, for which substantial commitments have been incurred
and which extend over several years, contemplate expenditures of $436 million
(JCP&L $183 million; Met-Ed $97 million; Penelec $98 million; Other $58 million)
during 1999.
The GPU Energy companies have entered into long-term contracts with
nonaffiliated mining companies for the purchase of coal for certain generating
stations in which they have ownership interests. The contracts, which expire at
various dates between 1999 and 2007, require the purchase of either fixed or
minimum amounts of the stations' coal requirements. The price of the coal under
the contracts is based on adjustments of indexed cost components. The GPU Energy
companies' share of the cost of coal purchased under these agreements is
expected to aggregate $212 million (JCP&L $27 million; Met-Ed $57 million;
Penelec $128 million) for 1999. These contracts will be assumed by Sithe
Energies, upon the closing of its purchase of the GPU Energy companies' fossil
generation facilities.
JCP&L has entered into agreements with other utilities to purchase capacity
and energy for various periods through 2004. These agreements provide for up to
629 MW in 1999, declining to 445 MW in 2000 through 2003 and 345 MW in 2004 when
the final agreement expires. Payments pursuant to these agreements are estimated
to be $114 million in 1999, $91 million in 2000, $99 million in 2001, $109
million in 2002, $113 million in 2003 and $48 million in 2004.
In accordance with the 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. Following its
purchase of TMI-1, AmerGen will assume liabilities for disposal costs related to
spent fuel generated after the sale. In 1996, the DOE notified the GPU Energy
companies and other standard contract holders that it will be unable to begin
acceptance of spent nuclear fuel for disposal by 1998, as mandated by the NWPA.
The DOE requested recommendations from contract holders for handling the delay.
In January 1997, the GPU Energy companies, along with other electric utilities
and state agencies, petitioned the U.S. Court of Appeals to, among other things,
permit utilities to cease payments into the Federal Nuclear Waste Fund until the
DOE complies with the NWPA. In November 1997, the Court denied this request. The
DOE's inability to accept spent nuclear fuel could have a material impact on
GPU's results of operations, as additional costs may be incurred to build and
maintain interim on-site storage at Oyster Creek. TMI-1 has sufficient on-site
storage capacity to accommodate spent nuclear fuel through the end of its
licensed life. In June 1997, a consortium of electric utilities, including GPUN,
filed a license application with the NRC seeking permission to build an interim
above-ground disposal facility for spent nuclear fuel in northwestern Utah.
There can be no assurance as to the outcome of these matters.
F-109
GPU, Inc. and Subsidiary Companies
New Jersey and Connecticut have established the Northeast Compact, to
construct a low-level radioactive waste disposal facility in New Jersey, which
was expected to commence operation by the end of 2003. GPUN's total share of the
cost for developing, constructing and site licensing the facility was estimated
to be $58 million. Through December 31, 1998, GPUN has made payments of $6
million. JCP&L is recovering the costs to construct this facility from
customers, and $27 million has been collected to date. In February 1998, the New
Jersey Low-Level Radwaste Facility Siting Board (Siting Board) voted to suspend
the siting process in New Jersey. The Siting Board is in the process of
determining what activities are required by law to be continued, and the level
of funding required to support these activities. The Siting Board intended to
return the unused funds to the generators, but the Governor has overruled this
decision. Legislation is pending in New Jersey, however, that would mandate
returning the unused funds to the generators, of which GPUN's share is
approximately $2.6 million. GPUN cannot determine at this time what effect, if
any, this matter will have on its operations.
Pennsylvania, Delaware, Maryland and West Virginia have established the
Appalachian Compact to construct a facility for the disposal of low-level
radwaste in those states, including low-level radwaste from TMI-1. To date,
pre-construction costs of $33 million, out of an estimated $88 million, have
been paid. Eleven nuclear plants have so far shared equally in the
pre-construction costs; GPUN has contributed $3 million on behalf of TMI-1.
Pennsylvania has suspended the search for a low-level radwaste disposal site in
the state. GPUN cannot determine at this time what effect, if any, this may have
on its operations.
JCP&L's two operating nuclear units are subject to the NJBPU's annual
nuclear performance standard. Operation of these units at an aggregate annual
generating capacity factor below 65% or above 75% would trigger a charge or
credit based on replacement energy costs. At current cost levels, the maximum
annual effect on net income of the performance standard charge at a 40% capacity
factor would be approximately $11 million before tax. While a capacity factor
below 40% would generate no specific monetary charge, it would require the issue
to be brought before the NJBPU for review. The annual measurement period, which
begins in March of each year, coincides with that used for the LEAC.
At December 31, 1998, GPU, Inc. and consolidated affiliates had 8,957
employees worldwide (JCP&L 2,258; Met-Ed 2,654; Penelec 1,780; GPUI Group 454;
all other companies 1,811), of which 8,611 employees were located in the U.S.
The majority of the U.S. workforce is employed by the GPU Energy companies, of
which approximately 4,650 are represented by unions for collective bargaining
purposes. JCP&L, Met-Ed and Penelec's collective bargaining agreements with the
International Brotherhood of Electrical Workers expire in 1999, 2000 and 2002,
respectively. Penelec's collective bargaining agreement with the Utility Workers
Union of America expires in 2001.
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
F-110
GPU, Inc. and Subsidiary Companies
position or results of operations, there can be no assurance that this will
continue to be the case.
14. GPUI GROUP EQUITY INVESTMENTS
The GPUI Group uses the equity method of accounting for investments in
which it has the ability to exercise significant influence over the operating
and financial policies of the investee (generally evidenced by a 20% to 50%
ownership interest). Investments accounted for under the equity method at
December 31, 1998 follow:
Ownership
Investment Location of Operations Percentage
- ---------- ---------------------- ----------
Midlands Electricity plc United Kingdom 50%
Mid-Georgia Cogen, L.P. United States 50%
Prime Energy, L.P. United States 50%
Pasco Cogen, Ltd. United States 50%
GPU Solar, Inc. United States 50%
Termobarranquilla S.A. Colombia 29%
Selkirk Cogeneration Partners, L.P. United States 19%
EnviroTech Investment Fund United States 10%
Project Orange Associates, L.P. United States 4%
OLS Power, L.P. United States 1%
Summarized financial information for the GPUI Group's equity method
investments (which are not consolidated in the financial statements), including
both the GPUI Group's ownership interests and the non-ownership interests, is as
follows:
Balance Sheet Data (in thousands)
- ---------------------------------
1998 1997
----------- ------------
Current Assets $ 657,396 $ 675,051
Noncurrent Assets 6,113,529 6,534,586
Current Liabilities (1,750,590) (1,570,071)
Noncurrent Liabilities (3,427,785) (4,288,418)
---------- ----------
Net Assets $ 1,592,550 $ 1,351,148
========== ==========
GPU International Group's
Equity in Net Assets $ 708,808 $ 641,173
========== ==========
F-111
GPU, Inc. and Subsidiary Companies
Earnings Data (in thousands)
1998 1997 1996
---------------------------------
Revenues $ 2,803,702 $2,931,065 $1,869,038
Operating Income $ 443,742 $ 410,217 $ 266,337
Net Income/(Loss) $ 170,568 $ (28,480)$ 70,346
Cash Distributions Received $ 27,391 $ 42,762 $ 9,987
GPU International Group's Equity in
Net Income/(Loss) $ 72,012 $ (27,100)$ 33,981
As of December 31, 1998 and 1997, GPUI Group equity investments on the
Consolidated Balance Sheets included goodwill (net of accumulated amortization)
of approximately $18.5 million and $66 million, respectively, which is amortized
to expense over periods not exceeding 40 years. Amortization expense for the
years ended December 31, 1998, 1997 and 1996 amounted to $1.6 million, $3.6
million and $1.6 million, respectively. In January 1998, GPU Electric sold its
50% stake in Solaris Power. As a result of the sale, the GPUI Group recorded a
decrease in goodwill of $41.2 million and an after-tax gain on the sale of $18.3
million. Also in 1998, $4.7 million of goodwill related to the Lake Cogeneration
project was transferred to retained earnings since the investment in this
project is no longer accounted for under the equity method of accounting.
15. SEGMENT INFORMATION
In 1997, GPU adopted Statement of Financial Accounting Standards No. 131
(FAS 131), "Disclosures about Segments of an Enterprise and Related
Information," which requires the reporting of certain financial information by
business segment and geographic area. For the purpose of providing segment
information, the GPU Energy companies consist of the three domestic electric
utility companies serving customers in Pennsylvania and New Jersey, as well as
Genco, GPUN, GPU Telcom and GPUS. The GPUI Group develops, owns, operates, and
funds the acquisition of generation, transmission and distribution facilities
worldwide. For information related to the GPUI Group's acquisitions, see Note 6,
Acquisitions. GPU AR is involved in retail energy sales. Corporate represents
the activities of GPU, Inc., a registered holding company. GPU's reportable
segments are strategic business units that are managed separately due to their
different operating and regulatory environments. GPU's segment information is as
follows:
F-112
GPU, Inc. and Subsidiary Companies
Earnings Segment Data (in thousands)
Depreciation
Operating and Operating
1998 Revenues Amortization Income
- ---- --------- ------------ ---------
Domestic:
GPU Energy companies $3,953,254 $ 469,623 $ 549,579
GPUI Group* 178,459 13,175 27,887
Less: The effect of consolidating the
GPUI Group's equity investments
included above (108,998) (8,615) (27,961)
Add: Equity in undistributed earnings
of affiliates, net on the income
statement - - -
GPU AR 10,938 - (2,285)
Corporate - - (4,713)
--------- --------- ---------
Subtotal 4,033,653 474,183 542,507
-------- --------- ---------
Foreign: (GPUI Group only)
Australia 181,059 40,841 106,112
United Kingdom* 1,202,653 58,352 143,977
Other* 66,473 14,732 15,221
Less: The effect of consolidating the
GPUI Group's equity investments
included above (1,235,046) (66,014) (149,979)
Add: Equity in undistributed earnings
of affiliates, net on the income
statement - - -
--------- --------- ---------
Subtotal 215,139 47,911 115,331
--------- --------- ---------
Consolidated Total $4,248,792 $ 522,094 $ 657,838
======== ========= =========
Other Interest and
Income and Preferred
1998 Deductions Dividends Net Income
- ---- ---------- --------- ----------
Domestic:
GPU Energy companies $ 21,982 $ 241,886 $ 303,920
GPUI Group* 2,659 18,924 11,622
Less: The effect of consolidating the
GPUI Group's equity investments
included above 1,706 (18,732) (7,523)
Add: Equity in undistributed earnings
of affiliates, net on the income
statement 7,523 - 7,523
GPU AR 54 - (2,231)
Corporate (672) 6,433 (11,818)
--------------------- ---------
Subtotal 33,252 248,511 301,493
---------- --------- ---------
Foreign: (GPUI Group only)
Australia 21,000 108,227 18,885
United Kingdom* 9,529 116,257 37,249
Other* 2,646 13,197 2,499
Less: The effect of consolidating the
GPUI Group's equity investments
included above (11,470) (96,960) (64,489)
Add: Equity in undistributed earnings
of affiliates, net on the income
statement 64,489 - 64,489
--------- --------- ---------
Subtotal 86,194 140,721 58,633
--------- --------- ---------
Consolidated Total $ 119,446 $ 389,232 $ 360,126
========= ========= =========
* Includes the effect of consolidating the GPUI Group's ownership interest in
investments accounted for under the equity method (pro-rata consolidation),
which are not consolidated in GPU's audited financial statements.
F-113
GPU, Inc. and Subsidiary Companies
Earnings Segment Data (in thousands)(continued)
Depreciation
Operating and Operating
1997 Revenues Amortization Income
- ---- --------- ------------ ---------
Domestic:
GPU Energy companies $4,043,800 $ 451,009 $ 632,951
GPUI Group* 154,135 9,782 21,764
Less: The effect of consolidating the
GPUI Group's equity investments
included above (115,408) (9,004) (23,918)
Add: Equity in undistributed earnings
of affiliates, net on the income
statement - - -
GPU AR 1,339 - (4,785)
Corporate - - (8,493)
--------- --------- ---------
Subtotal 4,083,866 451,787 617,519
--------- --------- ---------
Foreign: (GPUI Group only)
Australia* 175,888 18,571 58,486
United Kingdom* 1,105,502 28,286 137,805
Other* 55,801 12,905 12,021
Less: The effect of consolidating the
GPUI Group's equity investments
included above (1,277,678) (43,835) (178,713)
Add: Equity in undistributed earnings
of affiliates, net on the income
statement - - -
--------- --------- ---------
Subtotal 59,513 15,927 29,599
--------- --------- ---------
Consolidated Total $4,143,379 $ 467,714 $ 647,118
========= ========= =========
Other Interest and
Income and Preferred
1997 Deductions Dividends Net Income
- ---- ---------- --------- ----------
Domestic:
GPU Energy companies $ 4,094 $ 249,015 $ 388,030
GPUI Group* (12,733) 22,393 (13,362)
Less: The effect of consolidating the
GPUI Group's equity investments
included above 7,930 (21,792) 5,804
Add: Equity in undistributed earnings
of affiliates, net on the income
statement (5,804) - (5,804)
GPU AR 3 - (4,782)
Corporate (136) 5,649 (14,278)
--------- --------- ---------
Subtotal (6,646) 255,265 355,608
--------- --------- ---------
Foreign: (GPUI Group only)
Australia* 541 46,396 12,631
United Kingdom* (51,018) 117,624 (30,837)
Other* 4,792 17,777 (2,301)
Less: The effect of consolidating the
GPUI Group's equity investments
included above 82,268 (117,741) 21,296
Add: Equity in undistributed earnings
of affiliates, net on the income
statement (21,296) - (21,296)
--------- --------- ---------
Subtotal 15,287 64,056 (20,507)
--------- --------- ---------
Consolidated Total $ 8,641 $ 319,321 $ 335,101
========= ========= =========
* Includes the effect of consolidating the GPUI Group's ownership interest in
investments accounted for under the equity method (pro-rata consolidation),
which are not consolidated in GPU's audited financial statements.
F-114
GPU, Inc. and Subsidiary Companies
Earnings Segment Data (in thousands)(continued)
Depreciation
Operating and Operating
1996 Revenues Amortization Income
- ----- --------- ------------ ----------
Domestic:
GPU Energy companies $3,918,089 $ 400,253 $ 517,915
GPUI Group* 121,721 9,229 23,652
Less: The effect of consolidating the
GPUI Group's equity investments
included above (104,890) (8,327) (21,605)
Add: Equity in undistributed earnings
of affiliates, net on the income
statement - - -
GPU AR - - -
Corporate - - (9,636)
--------- --------- ---------
Subtotal 3,934,920 401,155 510,326
--------- --------- ---------
Foreign: (GPUI Group only)
Australia* 150,044 9,048 25,639
United Kingdom* 570,042 15,628 58,474
Other* 52,572 9,156 10,233
Less: The effect of consolidating the
GPUI Group's equity investments
included above (736,867) (27,315) (86,406)
Add: Equity in undistributed earnings
of affiliates, net on the income
statement - - -
--------- --------- ---------
Subtotal 35,791 6,517 7,940
--------- --------- ---------
Consolidated Total $3,970,711 $ 407,672 $ 518,266
========= ========= =========
Other Interest and
Income and Preferred
1996 Deductions Dividends Net Income
- ---- ---------- --------- ----------
Domestic:
GPU Energy companies $ 6,099 $ 235,066 $ 288,948
GPUI Group* 2,560 18,415 7,797
Less: The effect of consolidating the
GPUI Group's equity investments
included above 4,614 (17,601) 610
Add: Equity in undistributed earnings
of affiliates, net on the income
statement (1,993) - (1,993)
GPU AR - - -
Corporate 413 5,114 (14,337)
--------- --------- ---------
Subtotal 11,693 240,994 281,025
--------- --------- ---------
Foreign: (GPUI Group only)
Australia* (930) 25,311 (602)
United Kingdom* 10,166 59,862 8,778
Other* 4,398 5,881 6,049
Less: The effect of consolidating the
GPUI Group's equity investments
included above (8,651) (62,185) (32,872)
Add: Equity in undistributed earnings
of affiliates, net on the income
statement 35,974 - 35,974
--------- --------- ---------
Subtotal 40,957 28,869 17,327
--------- --------- ---------
Consolidated Total $ 52,650 $ 269,863 $ 298,352
========= ========= =========
* Includes the effect of consolidating the GPUI Group's ownership interest in
investments accounted for under the equity method (pro-rata consolidation),
which are not consolidated in GPU's audited financial statements.
F-115
GPU, Inc. and Subsidiary
Balance Sheet Segment Data (in thousands)
Current Noncurrent Current
1998 Assets Assets Liabilities
- ---- -------- ---------- -----------
Domestic:
GPU Energy companies $ 807,973 $12,475,608 $1,205,733
GPUI Group* 126,321 412,953 58,343
Less: The effect of consolidating the
GPUI Group's equity investments
included above (51,046) (202,985) (17,271)
Add: GPUI Group equity investments
included on the balance sheet - 80,614 -
GPU AR 2,358 115 2,222
Corporate 5,001 6,672 140,132
--------- ---------- ----------
Subtotal 890,607 12,772,977 1,389,159
--------- ---------- ---------
Foreign: (GPUI Group only)
Australia 91,112 1,690,018 561,562
United Kingdom* 142,854 2,213,350 836,431
Other* 136,822 385,836 54,366
Less: The effect of consolidating the
GPUI Group's equity investments
included above (198,986) (2,437,992) (833,658)
Add: GPUI Group equity investments
included on the balance sheet - 601,511 -
--------- ---------- ---------
Subtotal 171,802 2,452,723 618,701
--------- ---------- ---------
Consolidated Total $1,062,409 $15,225,700 $2,007,860
========= ========== ========
Other Cash
Long-Term Noncurrent Capital
1998 Debt Liabilities Expenditures
- ---- ---- ------------------------
Domestic:
GPU Energy companies $2,368,870 $6,211,677 $ 328,418
GPUI Group* 188,774 218,998 31,574
Less: The effect of consolidating the
GPUI Group's equity investments
included above (188,774) (19,968) (10,199)
Add: GPUI Group equity investments
included on the balance sheet - - -
GPU AR - 158 34
Corporate - 1,360 -
--------- --------- ---------
Subtotal 2,368,870 6,412,225 349,827
--------- -------- ---------
Foreign: (GPUI Group only)
Australia 1,060,877 46,397 58,549
United Kingdom* 1,116,144 204,680 50,092
Other* 188,928 57,032 60,096
Less: The effect of consolidating the
GPUI Group's equity investments
included above (909,235) (213,295) (50,341)
Add: GPUI Group equity investments
included on the balance sheet - - -
--------- --------- ---------
Subtotal 1,456,714 94,814 118,396
--------- --------- ---------
Consolidated Total $3,825,584 $6,507,039 $ 468,223
======== ========= =========
* Includes the effect of consolidating the GPUI Group's ownership interest in
investments accounted for under the equity method (pro-rata consolidation),
which are not consolidated in GPU's audited financial statements.
F-116
GPU, Inc. Subsidiary Companies
Balance Sheet Segment Data (in thousands) (continued)
Current Noncurrent Current
1997 Assets Assets Liabilities
- ---- -------- ---------- -----------
Domestic:
GPU Energy companies $ 831,269 $ 9,015,913 $1,140,492
GPUI Group* 81,027 352,139 90,097
Less: The effect of consolidating the
GPUI Group's equity investments
included above (43,777) (182,384) (21,360)
Add: GPUI Group equity investments
included on the balance sheet - 79,458 -
GPU AR 4,961 161 3,301
Corporate 165 6,313 155,977
--------- ---------- ---------
Subtotal 873,645 9,271,600 1,368,507
--------- ---------- ---------
Foreign: (GPUI Group only)
Australia* 86,226 2,091,619 558,496
United Kingdom* 188,462 2,152,977 785,152
Other* 114,786 396,078 43,419
Less: The effect of consolidating the
GPUI Group's equity investments
included above (240,256) (2,735,741) (734,139)
Add: GPUI Group equity investments
included on the balance sheet 106,317 517,221 -
--------- ---------- ---------
Subtotal 255,535 2,422,154 652,928
--------- ---------- ---------
Consolidated Total $1,129,180 $11,693,754 $2,021,435
========= ========== =========
Other Cash
Long-Term Noncurrent Capital
1997 Debt Liabilities Expenditures
- ---- ---- ----------- ------------
Domestic:
GPU Energy companies $2,448,672 $2,721,527 $ 356,416
GPUI Group* 263,378 46,880 111,125
Less: The effect of consolidating the
GPUI Group's equity investments
included above (171,665) (12,321) (120)
Add: GPUI Group equity investments
included on the balance sheet - - -
GPU AR - - -
Corporate - 1,418 -
--------- --------- ---------
Subtotal 2,540,385 2,757,504 467,421
--------- --------- ---------
Foreign: (GPUI Group only)
Australia* 1,485,639 115,390 1,811,921
United Kingdom* 1,367,471 245,105 77,706
Other* 258,794 64,803 1,213
Less: The effect of consolidating the
GPUI Group's equity investments
included above (1,326,317) (295,183) (89,624)
Add: GPUI Group equity investments
included on the balance sheet - - -
--------- --------- ---------
Subtotal 1,785,587 130,115 1,801,216
--------- --------- ---------
Consolidated Total $4,325,972 $2,887,619 $2,268,637
========= ========= =========
* Includes the effect of consolidating the GPUI Group's ownership interest in
investments accounted for under the equity method (pro-rata consolidation),
which are not consolidated in GPU's audited financial statements.
F-117
GPU, Inc. Subsidiary Companies
Balance Sheet Segment Data (in thousands) (continued)
Current Noncurrent Current
1996 Assets Assets Liabilities
- ---- -------- ---------- -----------
Domestic:
GPU Energy companies $ 807,551 $ 8,955,961 $1,174,250
GPUI Group* 97,494 274,648 41,982
Less: The effect of consolidating the
GPUI Group's equity investments
included above (48,970) (195,453) (32,910)
Add: GPUI Group equity investments
included on the balance sheet - 68,779 -
GPU AR - - -
Corporate 7,535 5,792 138,381
--------- ---------- ---------
Subtotal 863,610 9,109,727 1,321,703
--------- ---------- ---------
Foreign: (GPUI Group only)
Australia* 38,822 385,997 33,527
United Kingdom* 356,646 1,935,287 507,879
Other* 47,062 291,297 21,727
Less: The effect of consolidating the
GPUI Group's equity investments
included above (408,966) (2,493,887) (548,230)
Add: GPUI Group equity investments
included on the balance sheet - 725,809 -
--------- ---------- ---------
Subtotal 33,564 844,503 14,903
--------- ---------- ---------
Consolidated Total $ 897,174 $ 9,954,230 $1,336,606
========= ========= =========
Other Cash
Long-Term Noncurrent Capital
1996 Debt Liabilities Expenditures
- ---- ---- ----------- ------------
Domestic:
GPU Energy companies $2,427,802 $2,709,406 $ 403,880
GPUI Group* 242,038 32,494 56,180
Less: The effect of consolidating the
GPUI Group's equity investments
included above (179,738) (15,836) (301)
Add: GPUI Group equity investments
included on the balance sheet - - -
GPU AR - - -
Corporate - 1,412 -
--------- --------- ---------
Subtotal 2,490,102 2,727,476 459,759
--------- --------- ---------
Foreign: (GPUI Group only)
Australia* 336,957 4,490 9,952
United Kingdom* 1,538,342 238,207 567,407
Other* 176,475 80,849 51,714
Less: The effect of consolidating the
GPUI Group's equity investments
included above (1,364,860) (271,305) (111,365)
Add: GPUI Group equity investments
included on the balance sheet - - -
--------- --------- ---------
Subtotal 686,914 52,241 517,708
--------- --------- ---------
Consolidated Total $3,177,016 $2,779,717 $ 977,467
========= ========= =========
* Includes the effect of consolidating the GPUI Group's ownership interest in
investments accounted for under the equity method (pro-rata consolidation),
which are not consolidated in GPU's audited financial statements.
F-118
GPU, Inc. Subsidiary Companies
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
Balance (1) (2)
at Charged to Charged Balance
Beginning Costs and to Other at End
Description of Period Expenses Accounts Deductions of Period
----------- --------- -------- -------- ---------- ---------
Year ended December 31, 1998
Allowance for doubtful
accounts $8,087 $16,169 $5,564(a) $21,486(b) $8,334
Allowance for inventory
obsolescence 1,484 - (13)(f) 1,311(c) 160
Year ended December 31, 1997
Allowance for doubtful
accounts $8,660 $17,984 $6,069(a) $24,626(b) $8,087
Allowance for inventory
obsolescence 2,256 - 8(e) 780(c) 1,484
Year ended December 31, 1996
Allowance for doubtful
accounts $8,182 $17,501 $5,304(a) $22,327(b) $8,660
Allowance for inventory
obsolescence 3,373 650 2,207(d) 3,974(c) 2,256
<FN>
(a) Recovery of accounts previously written off.
(b) Accounts receivable written off.
(c) Inventory written off.
(d) Sale of inventory previously written off by Met-Ed ($4) and JCP&L ($4) and
reestablishment of zero value inventory by JCP&L ($2,199).
(e) Sale of inventory previously written off by Met-Ed ($7) and JCP&L ($1).
(f) Sale of inventory previously written off by Met-Ed ($13).
</FN>
F-119
Jersey Central Power & Light Company and Subsidiary Company
COMPANY STATISTICS
For The Years Ended December 31, 1998 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------
Capacity at System Peak (in MW):
Company owned 2,729 2,718 2,850 2,749 2,765 2,839
Contracted 2,933 2,794 2,497 2,462 2,403 2,033
------ ------ ------ ------ ------ ------
Total capacity (a) 5,662 5,512 5,347 5,211 5,168 4,872
====== ====== ====== ====== ====== ======
Hourly Peak Load (in MW):
Summer peak 4,817 4,817 4,130 4,554 4,292 4,564
Winter peak 3,175 3,168 3,173 3,260 3,242 3,129
Reserve at company peak (%) 17.3 14.4 29.5 14.4 20.4 6.7
Load factor (%) (b) 47.7 46.5 53.9 47.1 50.8 49.1
Sources of Energy (in thousands of MWH):
Coal 2,224 2,215 2,105 1,929 1,738 1,983
Nuclear 6,064 6,553 6,114 6,791 5,275 6,151
Gas, hydro & oil 487 548 535 861 757 460
------ ------ ------ ------ ------ ------
Net generation 8,775 9,316 8,754 9,581 7,770 8,594
Utility purchases and interchange 7,567 6,044 6,608 6,304 6,966 7,253
Nonutility purchases 5,271 5,342 5,439 5,850 4,920 4,820
------ ------ ------ ------ ------ ------
Total sources of energy 21,613 20,702 20,801 21,735 19,656 20,667
Company use, line loss, etc. (1,558) (1,794) (2,127) (1,749) (1,405) (2,026)
------ ------ ------ ------ ------ ------
Total electric energy sales 20,055 18,908 18,674 19,986 18,251 18,641
====== ====== ====== ====== ====== ======
Fuel Expense (in millions):
Coal $27 $ 28 $ 30 $ 26 $26 $28
Nuclear 37 39 40 44 35 42
Gas & oil 22 34 31 31 34 29
-- --- --- --- --- --
Total $86 $101 $101 $101 $95 $99
== === === === == ==
Power Purchased and Interchanged (in millions):
Utility and interchange purchases $293 $234 $246 $279 $295 $310
Nonutility purchases 403 384 370 382 304 292
Amortization of nonutility buyout costs 20 9 - - - -
--- --- --- --- --- ---
Total $716 $627 $616 $661 $599 $602
=== === === === === ===
Electric Energy Sales (in thousands of MWH):
Residential 7,551 7,256 7,266 7,112 7,094 6,983
Commercial 7,259 6,974 6,829 6,611 6,586 6,474
Industrial 3,474 3,536 3,497 3,562 3,673 3,689
Other 81 79 78 77 76 369
------ ------ ------ ------ ------ ------
Sales to customers 18,365 17,845 17,670 17,362 17,429 17,515
Sales to other utilities 1,690 1,063 1,004 2,624 822 1,126
------ ------ ------ ------ ------ ------
Total 20,055 18,908 18,674 19,986 18,251 18,641
====== ====== ====== ====== ====== ======
Operating Revenues (in millions):
Residential $ 891 $ 907 $ 895 $ 881 $ 855 $ 835
Commercial 779 797 775 742 721 699
Industrial 288 313 311 315 322 321
Other 15 21 21 21 21 40
----- ----- ----- ----- ----- -----
Sales to customers 1,973 2,038 2,002 1,959 1,919 1,895
Sales to other utilities 75 36 35 62 19 31
----- ----- ----- ----- ----- -----
Total electric energy sales 2,048 2,074 2,037 2,021 1,938 1,926
Other revenues 22 20 21 15 15 10
----- ----- ----- ----- ----- -----
Total $2,070 $2,094 $2,058 $2,036 $1,953 $1,936
===== ===== ===== ===== ====== =====
Price per KWH (in cents):
Residential 11.82 12.47 12.40 12.31 12.06 11.90
Commercial 10.74 11.42 11.38 11.20 10.92 10.78
Industrial 8.30 8.85 8.92 8.45 8.78 8.70
Total sales to customers 10.79 11.41 11.38 11.24 11.00 10.80
Total electric energy sales 10.25 10.96 10.96 10.08 10.61 10.31
Customers at Year-End (in thousands) 982 969 954 940 924 911
<FN>
(a)Summer ratings at December 31, 1998 of owned and contracted capacity were
2,729 MW and 2,577 MW, respectively.
(b)The ratio of the average hourly load in kilowatts supplied during the year
to the peak load occurring during the year.
</FN>
F-120
Jersey Central Power & Light Company and Subsidiary Company
SELECTED FINANCIAL DATA
(In Millions)
For the Years Ended December 31, 1998 1997 1996(1) 1995 1994(2) 1993
- ---------------------------------------------------------------------------------------------
Operating revenues $2,069.6 $2,094.0 $2,057.9 $2,035.9 $1,952.4 $1,935.9
Other operation and
maintenance expense 485.0 455.0 556.1 475.4 526.6 460.1
Net income 222.4 212.0 156.3 199.1 162.8 158.3
Earnings available for
common stock 212.4 200.6 143.2 184.6 148.0 141.5
Net utility plant
in service 2,538.2 2,664.1 2,717.1 2,641.6 2,620.2 2,558.2
Total assets 4,582.1 4,641.6 4,676.7 4,418.8 4,294.9 4,202.7
Long-term debt 1,173.5 1,173.3 1,173.1 1,192.9 1,168.4 1,215.7
Long-term obligations
under capital leases - - 0.1 2.4 4.4 7.0
Company-obligated
mandatorily redeemable
preferred securities 125.0 125.0 125.0 125.0 - -
Cumulative preferred stock
with mandatory redemption 86.5 91.5 114.0 134.0 150.0 150.0
Capital expenditures and
investments 154.9 172.2 199.8 217.8 243.9 197.1
Return on average
common equity 13.5% 13.1% 9.5% 13.1% 11.2% 11.1%
Employees (actual) 2,258 2,509 2,538 3,111 3,077 3,447
<FN>
(1) Results for 1996 reflect a non-recurring charge of $39.4 million
(after-tax) for costs related to voluntary enhanced retirement programs.
(2) Results for 1994 reflect a net non-recurring charge to earnings of $23.0
million (after-tax) due to a charge for costs related to early retirement
programs ($30.4 million); and net interest income from refunds of
previously paid federal income taxes related to the tax retirement of TMI-2
($7.4 million).
</FN>
F-121
Jersey Central Power & Light Company and Subsidiary Company
QUARTERLY FINANCIAL DATA (UNAUDITED)
First Quarter Second Quarter
------------- --------------
In Thousands 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------
Operating revenues $472,334 $510,443 $478,894 $478,226
Operating income 77,842 82,472 65,875 70,651
Net income 52,816 58,320 40,285 35,241
Earnings available for common stock 50,078 55,158 37,720 32,362
Third Quarter Fourth Quarter
------------- --------------
In Thousands 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------
Operating revenues $647,625 $602,900 $470,795 $502,403
Operating income 117,333 102,527 36,564 69,200
Net income 91,607 77,306 37,734 41,147
Earnings available for common stock 89,277 74,709 35,302 38,409
F-122
Jersey Central Power & Light Company and Subsidiary Company
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Jersey Central Power & Light Company
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Jersey Central Power & Light Company and Subsidiary Company at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
New York, New York
February 3, 1999
F-123
Jersey Central Power & Light Company and Subsidiary Company
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31, 1998 1997
- --------------------------------------------------------------------------------
ASSETS
Utility Plant:
Transmission, distribution, and general plant $3,108,697 $2,914,225
Generation plant 1,646,576 1,757,343
--------- ---------
Utility plant in service 4,755,273 4,671,568
Accumulated depreciation (2,217,108) (2,007,427)
--------- ---------
Net utility plant in service 2,538,165 2,664,141
Construction work in progress 48,126 124,887
Other, net 98,491 92,654
--------- ---------
Net utility plant 2,684,782 2,881,682
--------- ---------
Other Property and Investments:
Nuclear decommissioning trusts, at market (Note 13) 422,277 343,434
Nuclear fuel disposal trust, at market 116,871 108,652
Other, net 9,596 8,951
--------- ---------
Total other property and investments 548,744 461,037
--------- ---------
Current Assets:
Cash and temporary cash investments 1,850 2,994
Special deposits 6,047 6,778
Accounts receivable:
Customers, net 152,120 153,753
Other 32,562 18,225
Unbilled revenues 56,391 59,687
Materials and supplies, at average cost or less:
Construction and maintenance 79,863 90,037
Fuel 13,144 14,260
Deferred income taxes (Note 8) 20,812 27,536
Prepayments 27,648 14,468
--------- ---------
Total current assets 390,437 387,738
--------- ---------
Deferred Debits and Other Assets:
Regulatory assets, net: (Notes 5 & 13)
Other regulatory assets, net 753,885 736,476
Deferred income taxes (Note 8) 179,237 154,708
Other 25,037 19,909
--------- ---------
Total deferred debits and other assets 958,159 911,093
--------- ---------
Total Assets $4,582,122 $4,641,550
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-124
Jersey Central Power & Light Company and Subsidiary Company
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31, 1998 1997
LIABILITIES AND CAPITALIZATION
Capitalization:
Common stock $ 153,713 $153,713
Capital surplus 510,769 510,769
Retained earnings 893,016 875,639
Accumulated other comprehensive income/(loss) (425) -
--------- ---------
Total common stockholder's equity (Note 4) 1,557,073 1,540,121
Cumulative preferred stock: (Note 4)
With mandatory redemption 86,500 91,500
Without mandatory redemption 37,741 37,741
Company-obligated mandatorily redeemable
preferred securities (Note 4) 125,000 125,000
Long-term debt (Note 3) 1,173,532 1,173,304
--------- ---------
Total capitalization 2,979,846 2,967,666
--------- ---------
Current Liabilities:
Securities due within one year (Notes 3 & 4) 2,512 12,511
Notes payable (Note 2) 122,344 115,254
Obligations under capital leases (Note 12) 85,366 79,419
Accounts payable:
Affiliates 40,861 27,167
Other 80,233 113,822
Taxes accrued 5,559 3,966
Interest accrued 26,678 26,021
Deferred energy credits 2,411 25,645
Other 104,408 76,529
------- ------
Total current liabilities 470,372 480,334
------- -------
Deferred Credits and Other Liabilities:
Deferred income taxes (Note 8) 670,961 644,562
Unamortized investment tax credits 50,225 54,675
Nuclear fuel disposal fee 141,270 134,326
Three Mile Island Unit 2 future costs 120,904 112,227
Other 148,544 247,760
------- -------
Total deferred credits and other liabilities 1,131,904 1,193,550
--------- ---------
Commitments and Contingencies (Note 13)
Total Liabilities and Capitalization $4,582,122 $4,641,550
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-125
Jersey Central Power & Light Company and Subsidiary Company
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands)
For The Years Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------
Operating Revenues $2,069,648 $2,093,972 $2,057,918
Operating Expenses:
Fuel 86,431 101,030 101,357
Power purchased and interchanged:
Affiliates 57,643 15,979 27,058
Others 658,742 610,792 589,396
Deferral of energy and capacity
costs, net (25,542) 6,043 19,441
Other operation and maintenance 485,054 454,991 556,086
Depreciation and amortization 250,675 237,461 207,309
Taxes, other than income taxes 94,586 232,086 228,885
Total operating expenses 1,607,589 1,658,382 1,729,532
Operating Income Before Income Taxes 462,059 435,590 328,836
Income taxes (Note 8) 164,445 110,740 71,080
--------- --------- ---------
Operating Income 297,614 324,850 257,306
Other Income and Deductions:
Allowance for other funds used during
construction 786 - 1,536
Other income, net 13,227 1,919 7,202
Income taxes (Note 8) 19,367 (1,376) (3,357)
--------- --------- ---------
Total other income and deductions 33,380 543 5,381
Income Before Interest Charges 330,994 325,393 262,687
Interest Charges:
Long-term debt 87,261 89,869 89,648
Company-obligated mandatorily
redeemable preferred securities 10,700 10,700 10,700
Other interest 12,229 15,129 11,147
Allowance for borrowed funds used
during construction (1,638) (2,319) (5,111)
Total interest charges 108,552 113,379 106,384
Net Income 222,442 212,014 156,303
Preferred stock dividends 10,065 11,376 13,072
--------- --------- ----------
Earnings Available for Common Stock $ 212,377 $ 200,638 $ 143,231
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-126
Jersey Central Power & Light Company and Subsidiary Company
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
For The Years Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------
Net income $222,442 $212,014 $156,303
------- ------- -------
Other comprehensive income/(loss),
net of tax: (Note 4)
Minimum pension liability (425) - -
------- ------- -------
Total other comprehensive income/(loss) (425) - -
------- ------- -------
Comprehensive income $222,017 $212,014 $156,303
======= ======= =======
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(In Thousands)
For The Years Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------
Balance at beginning of year $ 875,639 $ 825,001 $ 816,770
Net income 222,442 212,014 156,303
------- ------- -------
Total 1,098,081 1,037,015 973,073
--------- --------- -------
Cash dividends on capital stock:
Cumulative preferred stock
(at the annual rates indicated below):
4% Series ($4.00 a share) (500) (500) (500)
7.88% Series E ($7.88 a share) (1,970) (1,970) (1,970)
8.48% Series I ($8.48 a share) (212) (1,272) (2,968)
8.65% Series J ($8.65 a share) (4,325) (4,325) (4,325)
7.52% Series K ($7.52 a share) (3,058) (3,309) (3,309)
Common stock (not declared on a
per share basis) (195,000) (150,000) (135,000)
-------- -------- --------
Total (205,065) (161,376) (148,072)
-------- -------- --------
Balance at end of year $ 893,016 $ 875,639 $ 825,001
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-127
Jersey Central Power & Light Company and Subsidiary Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
For The Years Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 222,442 $212,014 $ 156,303
Adjustments to reconcile income to cash provided:
Depreciation and amortization 277,950 253,278 217,225
Amortization of property under capital leases 26,739 28,703 28,339
Voluntary enhanced retirement programs - - 62,909
Nuclear outage maintenance costs, net (6,640) 11,615 (15,392)
Deferred income taxes and investment tax
credits, net (41,865) (27,449) 4,056
Deferred energy and capacity costs, net (24,482) 8,193 19,436
Allowance for other funds used during
construction (786) - (1,536)
Changes in working capital:
Receivables (9,407) (6,261) 12,897
Materials and supplies 3,863 7,721 2,624
Special deposits and prepayments (12,450) 6,844 138
Payables and accrued liabilities 1,418 (31,854) (62,157)
Nonutility generation contract buyout costs (15,000) (30,500) (65,000)
Other, net 13,091 (4,479) (17,944)
-------- -------- --------
Net cash provided by operating activities 434,873 427,825 341,898
-------- -------- --------
Investing Activities:
Capital expenditures and investments (154,918) (172,243) (199,823)
Contributions to decommissioning trusts (28,003) (18,003) (18,004)
Other, net (10,720) (10,989) (10,253)
-------- -------- --------
Net cash used for investing activities (193,641) (201,235) (228,080)
-------- -------- --------
Financing Activities:
Issuance of long-term debt - - 79,550
Increase in notes payable, net 7,090 83,454 31,000
Retirement of long-term debt (11) (100,075) (25,710)
Capital lease principal payments (29,084) (26,496) (29,763)
Redemption of preferred stock (15,000) (20,000) (20,000)
Dividends paid on preferred stock (10,371) (11,800) (13,496)
Dividends paid on common stock (195,000) (150,000) (135,000)
-------- -------- --------
Net cash required by financing activities (242,376) (224,917) (113,419)
-------- -------- --------
Net increase/(decrease) in cash and temporary cash
investments from above activities (1,144) 1,673 399
Cash and temporary cash investments, beginning of year 2,994 1,321 922
-------- -------- --------
Cash and temporary cash investments, end of year $ 1,850 $ 2,994 $ 1,321
======== ======== ========
Supplemental Disclosure:
Interest and preferred dividends paid $ 116,942 $ 126,223 $ 119,760
======== ======== ========
Income taxes paid $ 192,335 $ 133,689 $ 90,960
======== ======== ========
New capital lease obligations incurred $ 32,680 $ 11,048 $ 32,694
======== ======== ========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
F-128
Jersey Central Power & Light Company Subsidiary Company
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- --------------------------- -------- --------------------- ---------- ---------
Additions
---------------------
Balance (1) (2)
at Charged to Charged Balance
Beginning Costs and to Other at End
Description of Period Expenses Accounts Deductions of Period
- --------------------------- --------- -------- -------- ---------- ---------
Year ended December 31, 1998
Allowance for doubtful
accounts $1,414 $4,670 $1,729(a) $6,049(b) $1,764
Allowance for inventory
obsolescence (16) - - 16(c) -
Year ended December 31, 1997
Allowance for doubtful
accounts $1,670 $4,976 $1,939 $7,171(b) $1,414
Allowance for inventory
obsolescence 206 - 1(e) 223(c) (16)
Year ended December 31, 1996
Allowance for doubtful
accounts $1,958 $5,080 $1,680(a) $7,048(b) $1,670
Allowance for inventory
obsolescence 197 - 4(e) 2,194(c) 206
2,199(d)
<FN>
(a) Recovery of accounts previously written off.
(b) Accounts receivable written off.
(c) Inventory written off.
(d) Reestablishment of zero value inventory.
(e) Sale of inventory previously written off.
</FN>
F-129
Metropolitan Edison Company and Subsidiary Companies
COMPANY STATISTICS
For The Years Ended December 31, 1998 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------
Capacity at System Peak (in MW):
Company owned 1,738 1,738 1,705 1,604 1,602 1,602
Contracted 568 507 853 492 499 676
----- ------ ------ ------ ------ ------
Total capacity (a) 2,306 2,245 2,558 2,096 2,101 2,278
===== ====== ====== ====== ====== ======
Hourly Peak Load (in MW):
Summer peak 2,176 2,224 2,017 2,186 2,000 1,944
Winter peak 2,082 2,054 2,114 2,012 1,954 1,940
Reserve at company peak (%) 6.0 .9 21.0 (4.1) 5.1 17.2
Load factor (%) (b) 66.1 63.5 66.3 61.4 66.6 67.2
Sources of Energy (in thousands
of MWH):
Coal 5,363 5,203 4,760 4,334 4,547 4,283
Nuclear 3,529 2,959 3,550 3,194 3,294 2,975
Gas, hydro & oil 329 204 182 253 194 42
----- ------ ------ ------ ------ ------
Net generation 9,221 8,366 8,492 7,781 8,035 7,300
Utility purchases and interchange 1,671 2,424 2,021 3,087 2,295 3,398
Nonutility purchases 2,389 2,481 2,406 2,066 1,654 1,623
----- ------ ------ ------ ------ ------
Total sources of energy 3,281 13,271 12,919 12,934 11,984 12,321
Company use, line loss, etc. (387) (790) (718) (856) (660) (884)
----- ------ ------ ------ ------ ------
Total electric energy sales 2,894 12,481 12,201 12,078 11,324 11,437
===== ====== ====== ====== ====== ======
Fuel Expense (in millions):
Coal $71 $72 $69 $61 $71 $64
Nuclear 20 16 20 20 20 16
Gas & oil 8 4 5 6 3 2
-- -- -- -- -- --
Total $99 $92 $94 $87 $94 $82
== == == == == ==
Power Purchased and Interchanged
(in millions):
Utility and interchange purchases $ 58 $ 70 $ 54 $ 84 $ 80 $108
Nonutility purchases 174 162 168 131 101 95
Deferred nonutility costs (4) - - - - -
Amortization of nonutility buyout
costs 10 10 9 - - -
--- --- --- --- --- ---
Total $238 $242 $231 $215 $181 $203
=== === === === === ===
Electric Energy Sales (in thousands
of MWH):
Residential 4,040 4,034 4,135 3,925 3,921 3,800
Commercial 3,321 3,209 3,144 3,011 2,921 2,794
Industrial 4,174 4,098 4,033 3,957 3,861 3,664
Other 202 210 213 209 211 284
----- ------ ------ ------ ------ ------
Sales to customers 1,737 11,551 11,525 11,102 10,914 10,542
Sales to other utilities 1,157 930 676 976 410 895
----- ------ ------ ------ ------ ------
Total 2,894 12,481 12,201 12,078 11,324 11,437
===== ====== ====== ====== ====== ======
Operating Revenues (in millions):
Residential $361 $368 $365 $339 $327 $322
Commercial 260 259 247 229 215 209
Industrial 244 253 243 228 215 207
Other (13) 14 14 13 12 18
--- --- --- --- --- ---
Sales to customers 852 894 869 809 769 756
Sales to other utilities 34 24 20 26 12 27
--- --- --- --- --- ---
Total electric energy sales 886 918 889 835 781 783
Other revenues 33 25 21 20 20 18
--- --- --- --- --- ---
Total $919 $943 $910 $855 $801 $801
=== === === === === ===
Price per KWH (in cents):
Residential 8.88 9.04 8.90 8.54 8.39 8.42
Commercial 7.82 7.93 7.88 7.54 7.38 7.46
Industrial 5.84 6.07 6.04 5.74 5.55 5.68
Total sales to customers 7.46 7.63 7.58 7.23 7.07 7.16
Total electric energy sales 7.05 7.25 7.33 6.86 6.92 6.83
Customers at Year-End (in thousands) 482 477 470 465 458 451
<FN>
(a)Summer ratings at December 31, 1998 of owned and contracted capacity were
1,738 MW and 954 MW, respectively.
(b)The ratio of the average hourly load in kilowatts supplied during the year
to the peak load occurring during the year.
</FN>
F-130
Metropolitan Edison Company and Subsidiary Companies
SELECTED FINANCIAL DATA
(In Millions)
For the Years Ended December 31, 1998(1) 1997 1996(2) 1995(3) 1994(4 1993
- --------------------------------------------------------------------------------------------
Operating revenues $ 919.6 $ 943.1 $ 910.4 $ 854.7 $ 801.3 $ 801.5
Other operation
and maintenance expense 247.2 228.3 250.0 229.6 258.7 210.8
Income before
extraordinary item 57.7 93.5 69.1 148.5 1.0 77.9
Net income 50.9 93.5 69.1 148.5 1.0 77.9
Earnings/(loss) available for
common stock 50.4 93.0 71.8 147.6 (2.2) 70.9
Net utility plant
in service 1,239.2 1,492.0 1,455.7 1,477.0 1,437.3 1,361.4
Total assets 4,065.0 2,509.8 2,447.0 2,410.7 2,198.7 2,141.7
Long-term debt 546.9 576.9 563.3 603.3 529.8 546.3
Long-term obligations
under capital leases - - 0.4 1.0 2.2 3.6
Company-obligated
mandatorily redeemable
preferred securities 100.0 100.0 100.0 100.0 100.0 -
Capital expenditures and
investments 75.1 87.6 76.7 112.6 159.7 142.4
Return on average
common equity 7.5% 12.9% 10.3% 23.5% (0.4%) 12.2%
Employees (actual) 2,654 2,498 2,093 2,166 2,000 2,322
<FN>
(1) Results for 1998 include an extraordinary charge of $6.8 million
(after-tax) as a result of the PaPUC's Restructuring Order. Also in 1998,
as a result of the PaPUC Order, Met-Ed recorded a non-recurring charge of
$19 million (after-tax) related to the obligation to refund 1998 revenues;
and for the establishment of a sustainable energy fund.
(2) Results for 1996 reflect a non-recurring charge of $15.4 million
(after-tax) for costs related to voluntary enhanced retirement programs.
(3) Results for 1995 reflect the reversal of $72.8 million (after-tax) of
certain future TMI-2 retirement costs written off in 1994. The reversal of
this write-off resulted from a 1995 Pennsylvania Supreme Court decision
that overturned a 1994 lower court order, and restored a 1993 PaPUC order
allowing for the recovery of such costs. Partially offsetting this increase
was a non-recurring charge to income of $5.7 million (after-tax) of TMI-2
monitored storage costs deemed not probable of recovery through ratemaking.
(4) Results for 1994 reflect a net non-recurring charge to earnings of $79.9
million (after-tax) due to the write-off of certain future TMI-2 retirement
costs ($72.8 million); a charge for costs related to early retirement
programs ($20.1 million); and net interest income from refunds of
previously paid federal income taxes related to the tax retirement of TMI-2
($13.0 million).
</FN>
F-131
Metropolitan Edison Company and Subsidiary Companies
QUARTERLY FINANCIAL DATA (UNAUDITED)
First Quarter Second Quarter
------------- --------------
In Thousands 1998 1997 1998* 1997
- ------------------------------------------------------------------------------------------
Operating revenues $234,748 $255,260 $226,030 $208,554
Operating income 40,312 54,113 38,360 28,303
Income before extraordinary item 24,730 39,685 18,548 14,203
Net income/(loss) 24,730 39,685 (168,732) 14,203
Earnings/(loss) available for common stock 24,609 39,564 (168,853) 14,082
Third Quarter Fourth Quarter
------------- --------------
In Thousands 1998** 1997 1998 1997
- ------------------------------------------------------------------------------------------
Operating revenues $229,051 $248,161 $229,765 $231,134
Operating income 14,395 41,714 31,380 26,021
Income before extraordinary item (3,544) 27,225 17,986 12,404
Net income 176,931 27,225 17,986 12,404
Earnings available for common stock 176,811 27,105 17,865 12,283
<FN>
* Results for the second quarter of 1998 were affected by an extraordinary
charge of $187.3 million after-tax as a result of the Pennsylvania Public
Utility Commission's (PaPUC) June 30, 1998 Restructuring Order on Met-Ed's
restructuring plans.
** In the third quarter of 1998, as a result of the amended PaPUC Restructuring
Order, Met-Ed reversed $183.2 million after-tax of the extraordinary charge
taken in the second quarter, primarily related to above-market nonutility
generation costs; and recorded an additional extraordinary charge of $3
million after-tax primarily related to the write-off of FERC assets. Also,
in the third quarter of 1998, as a result of the amended PaPUC Order,
Met-ed recorded a non-recurring charge of $19 million after-tax related to
the obligation to refund 1998 revenues; and for the establishment of a
sustainable energy fund.
</FN>
F-132
Metropolitan Edison Company and Subsidiary Companies
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Metropolitan Edison Company
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Metropolitan Edison Company and Subsidiary Companies at December 31,
1998 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule listed in the accompanying index presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
February 3, 1999
F-133
Metropolitan Edison Company and Subsidiary Companies
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31, 1998 1997
- --------------------------------------------------------------------------------
ASSETS
Utility Plant:
Transmission, distribution and general plant $1,481,958 $1,413,849
Generation plant 765,669 997,961
--------- ---------
Utility plant in service 2,247,627 2,411,810
Accumulated depreciation (1,008,438) (919,771)
---------- ---------
Net utility plant in service 1,239,189 1,492,039
Construction work in progress 19,380 45,435
Other, net 27,819 39,056
--------- ---------
Net utility plant 1,286,388 1,576,530
--------- ---------
Other Property and Investments:
Nuclear decommissioning trusts, at market (Note 13) 211,194 168,110
Other, net 11,742 11,958
-------- --------
Total other property and investments 222,936 180,068
-------- --------
Current Assets:
Cash and temporary cash investments 442 6,116
Special deposits 1,062 1,055
Accounts receivable:
Customers, net 60,012 65,156
Other 41,895 29,399
Unbilled revenues 43,687 39,747
Materials and supplies, at average cost or less:
Construction and maintenance 24,727 38,597
Fuel 12,218 11,323
Deferred income taxes (Note 8) 2,945 2,945
Prepayments 20,616 6,762
------- -------
Total current assets 207,604 201,100
------- -------
Deferred Debits and Other Assets:
Regulatory assets, net: (Notes 5 & 13)
Competitive transition charge 680,213 -
Other regulatory assets, net 921,934 450,687
Deferred income taxes (Note 8) 714,202 87,332
Other 31,692 14,069
--------- -------
Total deferred debits and other assets 2,348,041 552,088
--------- -------
Total Assets 4,064,969 $2,509,786
========= ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-134
Metropolitan Edison Company and Subsidiary Companies
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31, 1998 1997
LIABILITIES AND CAPITALIZATION
Capitalization:
Common stock $ 66,273 $ 66,273
Capital surplus 370,200 370,200
Retained earnings 234,066 268,634
Accumulated other comprehensive income 16,520 12,487
------ ------
Total common stockholder's equity (Note 4) 687,059 717,594
Cumulative preferred stock (Note 4) 12,056 12,056
Company-obligated mandatorily redeemable
preferred securities (Note 4) 100,000 100,000
Long-term debt (Note 3) 546,904 576,924
- ------- -------
Total capitalization 1,346,019 1,406,574
--------- ---------
Current Liabilities:
Securities due within one year (Notes 3 & 4) 30,024 22
Notes payable (Note 2) 79,540 67,279
Obligations under capital leases (Note 12) 27,135 38,372
Accounts payable:
Affiliates 75,933 62,873
Other 102,390 95,589
Taxes accrued 19,463 21,455
Interest accrued 16,747 15,903
Other 42,598 33,351
---------- -------
Total current liabilities 393,830 334,844
---------- -------
Deferred Credits and Other Liabilities:
Deferred income taxes (Note 8) 1,010,982 412,692
Unamortized investment tax credits 27,157 29,134
Three Mile Island Unit 2 future costs 241,707 224,354
Nuclear fuel disposal fee 31,912 30,343
Nonutility generation contract loss liability 787,440 -
Other 225,922 71,845
---------- -------
Total deferred credits and other liabilities 2,325,120 768,368
---------- -------
Commitments and Contingencies (Note 13)
Total Liabilities and Capitalization $4,064,969 $2,509,786
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-135
Metropolitan Edison Company and Subsidiary Companies
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands)
For The Years Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------
Operating Revenues $919,594 $943,109 $910,408
------- ------- -------
Operating Expenses:
Fuel 99,511 92,726 93,881
Power purchased and interchanged:
Affiliates 17,766 17,936 20,724
Others 220,095 223,948 209,831
Deferral of energy costs, net - - (448)
Other operation and maintenance 247,189 228,258 249,993
Depreciation and amortization 109,148 106,437 98,364
Taxes, other than income taxes 58,459 59,339 61,319
------- ------- -------
Total operating expenses 752,168 728,644 733,664
------- ------- -------
Operating Income Before Income Taxes 167,426 214,465 176,744
Income taxes (Note 8) 42,979 64,314 49,844
------- ------- -------
Operating Income 124,447 150,151 126,900
------- ------- -------
Other Income and Deductions:
Allowance for other funds used during
construction 130 75 540
Other income/(expense), net (13,539) 3,371 1,220
Income taxes (Note 8) 5,556 (1,455) (489)
------- ------- -------
Total other income and deductions (7,853) 1,991 1,271
------- ------- ------
Income Before Interest Charges 116,594 152,142 128,171
------- ------- -------
Interest Charges:
Long-term debt 42,493 43,885 45,373
Company-obligated mandatorily
redeemable preferred securities 9,000 9,000 9,000
Other interest 8,194 6,765 5,436
Allowance for borrowed funds used during
construction (813) (1,025) (705)
------- ------- -------
Total interest charges 58,874 58,625 59,104
------- ------- -------
Income Before Extraordinary Item 57,720 93,517 69,067
Extraordinary item (net of income taxes
of $4,708) (Note 5) (6,805) - -
------- ------- --------
Net Income 50,915 93,517 69,067
Preferred stock dividends 483 483 944
Gain on preferred stock reacquisition - - 3,722
------- ------- -------
Earnings Available for Common Stock $ 50,432 $ 93,034 $ 71,845
======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-136
Metropolitan Edison Company & Subsidiary Companies
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
For The Years Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------
Net income $ 50,915 $ 93,517 $ 69,067
------- ------- --------
Other comprehensive income/(loss), net
of tax: (Note 4)
Net unrealized gain on investments 4,148 4,249 4,027
Minimum pension liability (115) (157) (262)
------- ------- ---------
Total other comprehensive income 4,033 4,092 3,765
------- ------- ---------
Comprehensive income $ 54,948 $ 97,609 $ 72,832
======= ======= =========
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(In Thousands)
For The Years Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------
Balance at beginning of year $268,634 $255,649 $243,804
Net income 50,915 93,517 69,067
------- ------- -------
Total 319,549 349,166 312,871
------- ------- -------
Cash dividends on capital stock:
Cumulative preferred stock
(at the annual rates indicated below):
3.90% Series ($3.90 a share) (251) (251) (459)
4.35% Series ($4.35 a share) (98) (98) (145)
3.85% Series ($3.85 a share) (36) (36) (112)
3.80% Series ($3.80 a share) (30) (30) (69)
4.45% Series ($4.45 a share) (68) (68) (159)
Common stock (not declared on a
per share basis) (85,000) (80,000) (60,000)
------- ------- -------
Total (85,483) (80,483) (60,944)
------- ------- -------
Gain on preferred stock reacquisition - - 3,722
Other adjustments, net - (49) -
------- ------- -------
Balance at end of year $234,066 $268,634 $255,649
======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-137
Metropolitan Edison Company and Subsidiary Companies
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
For The Years Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------
Operating Activities:
Net income $ 50,915 $93,517 $ 69,067
Extraordinary item (net of
income tax benefit of $4,708) 6,805 - -
------- ------- --------
Income before extraordinary item 57,720 93,517 69,067
Adjustments to reconcile income to
cash provided:
Depreciation and amortization 114,961 113,662 104,820
Amortization of property under
capital leases 14,666 11,637 15,704
PaPUC restructuring rate orders 32,900 - -
Voluntary enhanced retirement
programs - - 26,204
Nuclear outage maintenance
costs, net 6,494 (6,169) 6,215
Deferred income taxes and
investment tax credits, net (23,152) 3,137 25,168
Deferred energy costs, net - - (448)
Allowance for other funds
used during construction (130) (75) (540)
Changes in working capital:
Receivables (11,292) (28,393) 8,490
Materials and supplies (1,911) 845 (1,611)
Special deposits and
prepayments (13,861) 10,489 (10,501)
Payables and accrued liabilities 23,504 47,819 (17,714)
Nonutility generation contract
buyout costs (32,917) (16,050) (43,318)
Other, net 6,566 (17,942) (15,964)
---------- -------- ---------
Net cash provided by operating
activities 173,548 212,477 165,572
---------- -------- ---------
Investing Activities:
Capital expenditures and investments (75,068) (87,613) (76,660)
Contributions to decommissioning
trusts (17,766) (16,992) (17,057)
Other, net 465 (363) (1,087)
Net cash used for investing ---------- -------- ---------
activities (92,369) (104,968) (94,804)
---------- -------- ---------
Financing Activities:
Issuance of long-term debt - 13,577 -
Increase in notes payable, net 12,261 16,612 28,277
Retirement of long-term debt (22) (40,020) (15,019)
Capital lease principal payments (13,609) (12,744) (15,171)
Redemption of preferred stock - - (7,820)
Dividends paid on preferred stock (483) (719) (944)
Dividends paid on common stock (85,000) (80,000) (60,000)
Net cash required by financing ---------- -------- ---------
activities (86,853) (103,294) (70,677)
---------- -------- ---------
Net increase/(decrease) in cash and
temporary cash investments from
above activities (5,674) 4,215 91
Cash and temporary cash investments,
beginning of year 6,116 1,901 1,810
---------- -------- ---------
Cash and temporary cash investments,
end of year $ 442 $ 6,116 $ 1,901
========== ========= =========
Supplemental Disclosure:
Interest and preferred
dividends paid $ 57,891 $ 60,538 $ 60,641
========== ========= ==========
Income taxes paid $ 77,296 $ 55,375 $ 39,278
========== ========= ==========
New capital lease obligations
incurred $ 3,399 $ 19,695 $ 1,417
========== ========= ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-138
Pennsylvania Electric Company and Subsidiary Companies
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
-------- -------- -------------------------- -------- --------
Additions
Balance (1) (2)
at Charged to Charged Balance
Beginning Costs and to Other at End
Description of Period Expenses Accounts Deductions of Period
- ----------------------------- --------- ---------- -------- ---------- ---------
Year ended December 31, 1998
Allowance for doubtful
accounts $3,147 $5,673 $1,712(a) $7,197(b) $3,335
Allowance for inventory
obsolescence 1,433 - (13)(c) 1,260(d) 160
Year ended December 31, 1997
Allowance for doubtful
accounts $3,172 $6,644 $1,944(a) $8,613(b) $3,147
Allowance for inventory
obsolescence 1,864 - 7(c) 438(d) 1,433
Year ended December 31, 1996
Allowance for doubtful
accounts $3,072 $6,460 $1,651(a) $8,011(b) $3,172
Allowance for inventory
obsolescence 3,176 - 4(c) 1,316(d) 1,864
<FN>
(a) Recovery of accounts previously written off.
(b) Accounts receivable written off.
(c) Sale of inventory previously written off.
(d) Inventory written off.
</FN>
F-139
Pennsylvania Electric Company and Subsidiary Companies
COMPANY STATISTICS
For The Years Ended December 31, 1998 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------
Capacity at System Peak (in MW):
Company owned 2,284 2,365 2,365 2,365 2,369 2,369
Contracted 717 867 782 868 778 636
------ ----- ------ ------ ------ -----
Total capacity (a) 3,001 3,232 3,147 3,233 3,147 3,005
====== ====== ====== ====== ==== ======
Hourly Peak Load (in MW):
Summer peak 2,560 2,535 2,410 2,495 2,309 2,208
Winter peak 2,515 2,652 2,574 2,589 2,514 2,342
Reserve at company peak (%) 17.2 21.9 22.3 24.9 25.2 28.3
Load factor (%) (b) 72.5 69.7 71.1 67.6 69.4 70.5
Sources of Energy (in thousands of MWH):
Coal 12,088 11,972 11,268 11,237 10,263 10,703
Nuclear 1,765 1,480 1,775 1,597 1,647 1,488
Gas, hydro & oil 72 48 95 (95) 120 73
------ ----- ------ ------ ------ -----
Net generation 13,925 13,500 13,138 12,739 12,030 12,264
Utility purchases and interchange 2,439 2,297 2,268 3,071 2,468 2,219
Nonutility purchases 3,292 3,296 3,201 2,796 2,236 1,940
------ ----- ------ ------ ------ -----
Total sources of energy 19,656 19,093 18,607 18,606 16,734 16,423
Company use, line loss, etc. (2,355) (2,853) (2,932) (2,751) (2,248) (2,256)
------ ----- ------ ------ ------ -----
Total electric energy sales 17,301 16,240 15,675 15,855 14,486 14,167
====== ====== ====== ====== ======= ======
Fuel Expense (in millions):
Coal $165 $168 $164 $164 $163 $174
Nuclear 10 8 10 10 10 8
Gas & oil 2 2 2 1 2 1
------ ----- ------ ------ ------ -----
Total $177 $178 $176 $175 $175 $183
====== ===== ====== ====== ====== =====
Power Purchased and Interchanged (in millions):
Utility and interchange purchases $ 38 $ 27 $ 18 $ 43 $ 35 $ 31
Nonutility purchases 211 188 192 158 123 104
Deferred nonutility costs (13) - - - - -
------ ----- ------ ------ ------ -----
Total $236 $215 $210 $201 $158 $135
====== ===== ====== ====== ====== =====
Electric Energy Sales (in thousands of MWH):
Residential 3,756 3,801 3,897 3,765 3,773 3,715
Commercial 4,198 4,098 4,044 3,922 3,794 3,651
Industrial 4,996 4,835 4,563 4,463 4,449 4,346
Other 713 821 814 857 958 568
------ ----- ------ ------ ------ -----
Sales to customers 13,663 13,555 13,318 13,007 12,974 12,280
Sales to other utilities 3,638 2,685 2,357 2,848 1,512 1,887
------ ----- ------ ------ ------ -----
Total 17,301 16,240 15,675 15,855 14,486 14,167
====== ====== ====== ====== ====== ======
Operating Revenues (in millions):
Residential $ 327 $ 342 $ 339 $322 $321 $308
Commercial 311 316 302 287 279 261
Industrial 263 267 249 237 237 227
Other 2 40 36 39 45 31
------ ----- ------ ------ ------ -----
Sales to customers 903 965 926 885 882 827
Sales to other utilities 101 54 53 68 36 52
------ ----- ------ ------ ------ -----
Total electric energy sales 1,004 1,019 979 953 918 879
Other revenues 28 34 41 28 27 29
------ ----- ------ ------ ------ -----
Total $1,032 $1,053 $1,020 $981 $945 $908
====== ====== ====== ====== ====== ======
Price per KWH (in cents):
Residential 8.74 8.84 8.70 8.52 8.51 8.30
Commercial 7.42 7.58 7.48 7.29 7.34 7.17
Industrial 5.28 5.42 5.44 5.33 5.32 5.24
Total sales to customers 6.85 7.00 6.95 6.79 6.80 6.74
Total electric energy sales 5.99 6.18 6.24 6.00 6.34 6.21
Customers at Year-End (in thousands) 577 575 573 571 567 563
<FN>
(a) Summer ratings at December 31, 1998 of owned and contracted capacity were
2,284 MW and 794 MW, respectively.
(b) The ratio of the average hourly load in kilowatts supplied during the year
to the peak load occurring during the year.
</FN>
F-140
Pennsylvania Electric Company and Subsidiary Companies
SELECTED FINANCIAL DATA
(In Millions)
For the Years Ended December 31, 1998(1) 1997 1996(2) 1995(3) 1994(4) 1993
- ------------------------------------------------------------------------------------------------
Operating revenues $1,032.2 $1,052.9 $1,019.6 $ 981.3 $ 944.7 $ 908.3
Other operation and
maintenance expense 275.1 258.4 293.9 266.3 294.3 241.3
Income before
extraordinary item 58.6 95.0 69.8 111.0 31.8 95.7
Net income 39.6 95.0 69.8 111.0 31.8 95.7
Earnings available
for common stock 38.9 94.4 73.9 109.5 28.9 90.7
Net utility plant
in service 1,626.5 1,720.8 1,715.7 1,692.9 1,621.8 1,542.3
Total assets 4,524.8 2,563.0 2,503.4 2,439.6 2,338.2 2,261.5
Long-term debt 626.4 676.4 656.5 642.5 616.5 524.5
Long-term obligations
under capital leases 2.6 3.3 4.1 5.3 6.7 7.7
Company-obligated
mandatorily redeemable
preferred securities 105.0 105.0 105.0 105.0 105.0 -
Capital expenditures and
investments 89.6 99.1 114.7 130.5 174.5 150.3
Return on average
common equity 5.0% 12.1% 10.0% 15.8% 4.2% 13.5%
Employees (actual) 1,780 1,539 2,071 2,665 3,031 3,539
<FN>
(1) Results for 1998 include an extraordinary charge of $19 million (after-tax)
as a result of the PaPUC's Restructuring Order. Also in 1998, as a result
of the PaPUC Order, Penelec recorded a non-recurring charge of $21 million
(after-tax) related to the obligation to refund 1998 revenues; and for the
establishment of a sustainable energy fund.
(2) Results for 1996 reflect a non-recurring charge of $19.7 million
(after-tax) for costs related to voluntary enhanced retirement programs.
(3) Results for 1995 reflect the reversal of $32.1 million (after-tax) of
certain future TMI-2 retirement costs written off in 1994. The
reversal of this write-off resulted from a 1995 Pennsylvania
Supreme Court decision that overturned a 1994 lower court order,
and restored a 1993 PaPUC order allowing for the recovery of such
costs. Partially offsetting this increase was a non-recurring
charge to income of $2.7 million (after-tax) of TMI-2 monitored
storage costs deemed not probable of recovery through ratemaking.
(4) Results for 1994 reflect a net non-recurring charge to earnings of $61.8
million (after-tax) due to the write-off of certain future TMI-2 retirement
costs ($32.1 million); a charge for costs related to early retirement
programs ($25.6 million); a write-off of postretirement benefit costs
believed not probable of recovery in rates ($10.6 million); and net
interest income from refunds of previously paid federal income taxes
related to the tax retirement of TMI-2 ($6.5 million).
</FN>
F-141
Pennsylvania Electric Company and Subsidiary Companies
QUARTERLY FINANCIAL DATA (UNAUDITED)
First Quarter Second Quarter
In Thousands 1998 1997 1998* 1997
- -------------------------------------------------------------------------------------------
Operating revenues $263,655 $289,753 $250,355 $247,862
Operating income 42,820 58,856 34,586 34,255
Income before extraordinary item 26,645 42,894 19,751 18,841
Net income/(loss) 26,645 42,894 (68,079) 18,841
Earnings/(loss) available for common stock 26,529 42,750 (68,310) 18,667
Third Quarter Fourth Quarter
In Thousands 1998** 1997 1998 1997
- -------------------------------------------------------------------------------------------
Operating revenues $259,354 $257,569 $258,862 $257,752
Operating income 18,772 35,444 29,445 29,395
Income/(loss) before extraordinary item (5,860) 19,369 18,054 13,919
Net income 63,020 19,369 18,054 13,919
Earnings available for common stock 62,846 19,196 17,880 13,745
<FN>
* Results for the second quarter of 1998 were affected by an extraordinary
charge of $87.8 million after-tax as a result of the Pennsylvania Public
Utility Commission's (PaPUC) June 30, 1998 Restructuring Order on Penelec's
restructuring plans.
** In the third quarter of 1998, as a result of the amended PaPUC
Restructuring Order, Penelec reversed $83.1 million after-tax of the
extraordinary charge taken in the second quarter, primarily related to
above-market nonutility generation costs; and recorded an additional
extraordinary charge of $14 million after-tax primarily related to the
write-off of FERC assets. Also, in the third quarter of 1998, as a
result of the amended PaPUC Order, Penelec recorded a non-recurring
charge of $21 million after-tax related to the obligation to refund 1998
revenues; and for the establishment of a sustainable energy fund.
</FN>
F-142
Pennsylvania Electric Company and Subsidiary Companies
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Pennsylvania Electric Company
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Pennsylvania Electric Company and Subsidiary Companies at December
31, 1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule listed in the accompanying index presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
February 3, 1999
F-143
Pennslvania Electric Company and Subsidiary Companies
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31, 1998 1997
ASSETS
Utility Plant:
Transmission, distribution and general
plant $1,768,621 $1,665,958
Generation plant 1,033,739 1,146,762
---------- --------
Utility plant in service 2,802,360 2,812,720
Accumulated depreciation (1,175,842) (1,091,965)
---------- --------
Net utility plant in service 1,626,518 1,720,755
Construction work in progress 18,862 69,089
Other, net 19,482 26,110
---------- --------
Net utility plant 1,664,862 1,815,954
---------- --------
Other Property and Investments:
Nuclear decommissioning trusts, at
market (Note 13) 82,803 68,129
Other, net 7,705 7,071
---------- --------
Total other property and investments 90,508 75,200
---------- --------
Current Assets:
Cash and temporary cash investments 2,750 -
Special deposits 2,632 2,449
Accounts receivable:
Customers, net 69,887 71,338
Other 28,893 21,051
Unbilled revenues 43,998 47,728
Materials and supplies, at average
cost or less:
Construction and maintenance 39,452 47,853
Fuel 17,107 14,841
Deferred income taxes (Note 8) 7,589 7,589
Prepayments 31,551 29,856
---------- --------
Total current assets 243,859 242,705
---------- --------
Deferred Debits and Other Assets:
Regulatory assets, net: (Notes 5 & 13)
Competitive transition charge 343,602 -
Other regulatory assets, net 1,206,594 360,315
Deferred income taxes (Note 8) 951,471 55,698
Other 23,911 13,118
Total deferred debits and other ---------- --------
assets 2,525,578 429,131
---------- --------
Total Assets $4,524,807 $2,562,990
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-144
Pennsylvania Electric Company and Subsidiary Companies
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31, 1998 1997
LIABILITIES AND CAPITALIZATION
Capitalization:
Common stock $ 105,812 $ 105,812
Capital surplus 285,486 285,486
Retained earnings 367,653 393,708
Accumulated other comprehensive income 8,353 6,332
---------- ---------
Total common stockholder's equity (Note 4) 767,304 791,338
Cumulative preferred stock (Note 4) 16,681 16,681
Company-obligated mandatorily redeemable
preferred securities (Note 4) 105,000 105,000
Long-term debt (Note 3) 626,434 676,444
---------- ---------
Total capitalization 1,515,419 1,589,463
---------- ---------
Current Liabilities:
Securities due within one year (Notes 3 & 4) 50,012 30,011
Notes payable (Note 2) 86,023 77,581
Obligations under capital leases (Note 12) 13,979 19,939
Accounts payable:
Affiliates 47,164 24,811
Other 47,795 62,483
Taxes accrued 32,755 15,966
Interest accrued 19,700 20,902
Other 37,272 19,654
---------- ---------
Total current liabilities 334,700 271,347
---------- ---------
Deferred Credits and Other Liabilities:
Deferred income taxes (Note 8) 1,338,235 478,182
Unamortized investment tax credits 36,926 39,353
Three Mile Island Unit 2 future costs 120,904 12,227
Nuclear fuel disposal fee 15,956 15,172
Nonutility generation contract loss liability 1,016,380 -
Other 146,287 57,246
Total deferred credits and other ---------- ---------
liabilities 2,674,688 702,180
---------- ---------
Commitments and Contingencies (Note 13)
Total Liabilities and Capitalization $4,524,807 $2,562,990
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-145
Pennsylvania Electric Company and Subsidiary Companies
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands)
For The Years Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------
Operating Revenues $1,032,226 $1,052,936 $1,019,645
--------- ---------- ----------
Operating Expenses:
Fuel 176,548 177,256 176,158
Power purchased and interchanged:
Affiliates 2,729 3,252 3,529
Others 233,395 212,166 206,403
Deferral of energy costs, net - - 795
Other operation and maintenance 275,107 258,416 293,868
Depreciation and amortization 109,800 107,111 94,580
Taxes, other than income taxes 63,874 66,395 64,955
--------- ---------- ----------
Total operating expenses 861,453 824,596 840,288
--------- ---------- ----------
Operating Income Before Income Taxes 170,773 228,340 179,357
Income taxes (Note 8) 45,150 70,390 45,648
--------- ---------- ----------
Operating Income 125,623 157,950 133,709
--------- ---------- ----------
Other Income and Deductions:
Allowance for other funds used during construction - - 173
Other income/(expense), net (6,429) 2,469 (825)
Income taxes (Note 8) 2,613 (909) 99
--------- ---------- ----------
Total other income and deductions (3,816) 1,560 (553)
--------- ---------- ----------
Income Before Interest Charges 121,807 159,510 133,156
--------- ---------- ----------
Interest Charges:
Long-term debt 47,729 49,125 49,654
Company-obligated mandatorily
redeemable preferred securities 9,188 9,188 9,188
Other interest 8,197 8,338 7,112
Allowance for borrowed funds used during
construction (1,897) (2,164) (2,607)
--------- ---------- ----------
Total interest charges 63,217 64,487 63,347
--------- ---------- ----------
Income Before Extraordinary Item 58,590 95,023 69,809
Extraordinary item (net of income taxes of
$11,592) (Note 5) (18,950) - -
--------- ---------- ----------
Net Income 39,640 95,023 69,809
Preferred stock dividends 695 665 1,503
Gain on preferred stock reacquisition - - 5,566
--------- ---------- ----------
Earnings Available for Common Stock $ 38,945 $ 94,358 $ 73,872
========= ========== ==========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
F-146
Pennsylvania Electric Company and Subsidiary Companies
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
For The Years Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------
Net income $ 39,640 $ 95,023 $ 69,809
--------- ---------- ----------
Other comprehensive income/(loss), net of tax:
(Note 4)
Net unrealized gain on investments 2,064 2,125 2,014
Minimum pension liability (42) (122) -
--------- ---------- ----------
Total other comprehensive income 2,022 2,003 2,014
--------- ---------- ----------
Comprehensive income $ 41,662 $ 97,026 $ 71,823
========= ========== ==========
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(In Thousands)
For The Years Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------
Balance at beginning of year $393,708 $359,373 $325,499
Net income 39,640 95,023 69,809
--------- ---------- ----------
Total 433,348 454,396 395,308
--------- ---------- ----------
Cash dividends on capital stock:
Cumulative preferred stock (at the annual rates indicated below):
4.40% Series B ($4.40 a share) (131) (125) (244)
3.70% Series C ($3.70 a share) (183) (174) (351)
4.05% Series D ($4.05 a share) (114) (109) (251)
4.70% Series E ($4.70 a share) (66) (64) (132)
4.50% Series F ($4.50 a share) (77) (74) (188)
4.60% Series G ($4.60 a share) (124) (119) (337)
Common stock (not declared on a
per share basis) (65,000) (60,000) (40,000)
--------- ---------- ----------
Total (65,695) (60,665) (41,503)
--------- ---------- ----------
Gain on preferred stock reacquisition - - 5,566
Other adjustments, net - (23) 2
--------- ---------- ----------
Balance at end of year $367,653 $393,708 $359,373
========= ========== ==========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
F-147
Pennsylvania Electric Company and Subsidiary Companies
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
For The Years Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 39,640 $ 95,023 $ 69,809
Extraordinary item (net of income tax
benefit of $11,592) 18,950 - -
--------- ---------- ----------
Income before extraordinary item 58,590 95,023 69,809
Adjustments to reconcile income to cash provided:
Depreciation and amortization 107,239 99,688 89,021
Amortization of property under capital leases 7,319 7,954 8,733
PaPUC restructuring rate orders 35,600 - -
Voluntary enhanced retirement programs - - 33,626
Nuclear outage maintenance costs, net 3,251 (3,072) 3,099
Deferred income taxes and investment tax
credits, net (15,496) 10,193 19,208
Deferred energy costs, net - - 731
Allowance for other funds used during
construction - - (173)
Changes in working capital:
Receivables (2,661) (20,426) 7,648
Materials and supplies (1,310) (3,763) 5,591
Special deposits and prepayments (1,878) 6,973 (26,232)
Payables and accrued liabilities 39,061 19,736 (52,958)
Nonutility generation contract buyout costs (6,101) (10,000) (11,700)
Other, net (31,479) (22,963) (7,746)
--------- ---------- ----------
Net cash provided by operating activities 192,135 179,343 138,657
--------- ---------- ----------
Investing Activities:
Capital expenditures and investments (89,550) (99,074) (114,672)
Contributions to decommissioning trusts (5,270) (5,288) (5,263)
Other, net (520) 454 (684)
-------- ---------- ----------
Net cash used for investing activities (95,340) (103,908) (120,619)
-------- ---------- ----------
Financing Activities:
Issuance of long-term debt - 49,875 39,513
Increase/(Decrease) in notes payable, net 8,442 (30,099) 80,580
Retirement of long-term debt (30,011) (26,010) (75,009)
Capital lease principal payments (6,781) (8,506) (8,418)
Redemption of preferred stock - - (14,527)
Dividends paid on preferred stock (695) (695) (1,544)
Dividends paid on common stock (65,000) (60,000) (40,000)
-------- ---------- ----------
Net cash required by financing activities (94,045) (75,435) (19,405)
-------- ---------- ----------
Net increase/(decrease) in cash and temporary cash
investments from above activities 2,750 - (1,367)
Cash and temporary cash investments,
beginning of year - - 1,367
--------- ---------- ----------
Cash and temporary cash investments, end of year $ 2,750 $ - $ -
========= ======== ==========
Supplemental Disclosure:
Interest and preferred dividends paid $ 64,057 $ 62,514 $ 64,706
========= ========== ==========
Income taxes paid $ 46,732 $ 48,348 $ 43,098
========= ========== ==========
New capital lease obligations incurred $ 1,714 $ 11,155 $ 715
======== ========== ==========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
F-148
Pennsylvania Electric Company and Subsidiary Companies
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
--------------------------
Balance (1) (2)
at Charged to Charged Balance
Beginning Costs and to Other at End
Description of Period Expenses Accounts Deductions of Period
--------------------------- --------- -------- -------- ---------- ----------
Year ended December 31, 1998
Allowance for doubtful
accounts $3,526 $5,826 $2,123(a) $8,240(b) $3,235
Allowance for inventory
obsolescence 67 - - 67(c) -
Year ended December 31, 1997
Allowance for doubtful
accounts $3,818 $6,364 $2,186(a) $8,842(b) $3,526
Allowance for inventory
obsolescence 186 - - 119(c) 67
Year ended December 31, 1996
Allowance for doubtful
accounts $3,152 $5,961 $1,973(a) $7,268(b) $3,818
Allowance for inventory
obsolescence - 650 - 464(c) 186
<FN>
(a) Recovery of accounts previously written off.
(b) Accounts receivable written off.
(c) Inventory written off.
</FN>
F-149