UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
-------------------------------------------------
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
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
-- ---
The number of shares outstanding of each of the issuer's classes of
voting stock, as of April 30, 1999, was as follows:
Shares
Registrant Title Outstanding
- ----------------------------------- --------------------------- --------------
GPU, Inc. Common Stock, $2.50 par value 125,686,137
Jersey Central Power & Light Company Common Stock, $10 par value 15,371,270
Metropolitan Edison Company Common Stock, no par value 859,500
Pennsylvania Electric Company Common Stock, $20 par value 5,290,596
GPU, Inc. and Subsidiary Companies
Quarterly Report on Form 10-Q
March 31, 1999
Table of Contents
-----------------
Page
PART I - Financial Information
Consolidated Financial Statements:
GPU, Inc.
---------
Balance Sheets 3
Statements of Income 5
Statements of Cash Flows 6
Jersey Central Power & Light Company
------------------------------------
Balance Sheets 7
Statements of Income 9
Statements of Cash Flows 10
Metropolitan Edison Company
---------------------------
Balance Sheets 11
Statements of Income 13
Statements of Cash Flows 14
Pennsylvania Electric Company
-----------------------------
Balance Sheets 15
Statements of Income 17
Statements of Cash Flows 18
Combined Notes to Consolidated Financial Statements 19
Combined Management's Discussion and Analysis
of Financial Condition and Results of
Operations 47
PART II - Other Information 71
Signatures 72
---------------------------------
The financial statements (not examined by independent accountants) reflect
all adjustments (which consist of only normal recurring accruals) which are, in
the opinion of management, necessary for a fair statement of the results for the
interim periods presented.
This combined Quarterly Report on Form 10-Q is separately filed by GPU,
Inc., Jersey Central Power & Light Company, Metropolitan Edison Company and
Pennsylvania Electric Company. Information contained herein relating to any
individual registrant is filed by such registrant on its own behalf. None of
these registrants make any representations as to information relating to the
other registrants. This combined Form 10-Q supplements and updates the 1998
Annual Report on Form 10-K, filed by the individual registrants with the
Securities and Exchange Commission and should be read in conjunction therewith.
This Form 10-Q contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Statements made
that are not historical facts are forward-looking and, accordingly, involve
risks and uncertainties that could cause actual results or outcomes to differ
materially from those expressed in the forward-looking statements. Although such
forward-looking statements have been based on reasonable assumptions, there is
no assurance that the expected results will be achieved. Some of the factors
that could cause actual results to differ materially include, but are not
limited to: the effects of regulatory decisions; changes in law and other
governmental actions and initiatives; the impact of deregulation and increased
competition in the industry; industry restructuring; expected outcomes of legal
proceedings; the completion of generation asset divestiture; fuel prices and
availability; the effects of the Year 2000 issue; and uncertainties involved
with foreign operations including political risks and foreign currency
fluctuations.
2
GPU, INC. AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
---------------------------
In Thousands
--------------------------------
March 31, December 31,
1999 1998
------------ ------------
(Unaudited)
ASSETS
Utility Plant:
Transmission, distribution and general plant $ 7,795,600 $ 7,579,455
Generation plant 3,005,000 3,445,984
---------- ----------
Utility plant in service 10,800,600 11,025,439
Accumulated depreciation (4,373,496) (4,460,341)
---------- ----------
Net utility plant in service 6,427,104 6,565,098
Construction work in progress 139,938 94,005
Other, net 160,885 145,792
---------- ----------
Net utility plant 6,727,927 6,804,895
---------- ----------
Other Property and Investments:
Equity investments (Note 3) 717,713 682,125
Goodwill, net 828,272 545,262
Nuclear decommissioning trusts, at market (Note 1) 729,984 716,274
Nuclear fuel disposal trust, at market 119,832 116,871
Other, net 275,208 239,411
---------- ----------
Total other property and investments 2,671,009 2,299,943
---------- ----------
Current Assets:
Cash and temporary cash investments 102,501 72,755
Special deposits 674,807 62,673
Accounts receivable:
Customers, net 285,876 286,278
Other 244,116 126,088
Unbilled revenues 141,434 144,076
Materials and supplies, at average cost or less:
Construction and maintenance 161,698 155,827
Fuel 30,356 42,697
Investments held for sale 51,342 48,473
Deferred income taxes 35,916 47,521
Prepayments 101,653 76,021
---------- ----------
Total current assets 1,829,699 1,062,409
---------- ----------
Deferred Debits and Other Assets:
Regulatory assets, net: (Note 1)
Competitive transition charge 981,361 1,023,815
Other regulatory assets, net 2,242,112 2,882,413
Deferred income taxes 2,273,064 2,004,278
Other 208,850 210,356
----------- ----------
Total deferred debits and other assets 5,705,387 6,120,862
----------- ----------
Total Assets $16,934,022 $16,288,109
========== ==========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements. 3
</FN>
GPU, INC. AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
---------------------------
In Thousands
---------------------------------
March 31, December 31,
1999 1998
------------ ------------
(Unaudited)
LIABILITIES AND CAPITALIZATION
Capitalization:
Common stock $ 331,958 $ 331,958
Capital surplus 1,012,305 1,011,310
Retained earnings 2,421,140 2,230,425
Accumulated other comprehensive income/(loss) (Note 5) (32,047) (31,304)
---------- ----------
Total 3,733,356 3,542,389
Reacquired common stock, at cost (131,240) (77,741)
---------- ----------
Total common stockholders' equity 3,602,116 3,464,648
Cumulative preferred stock:
With mandatory redemption 86,500 86,500
Without mandatory redemption 37,741 66,478
Subsidiary-obligated mandatorily redeemable
preferred securities 330,000 330,000
Long-term debt 4,333,368 3,825,584
---------- ----------
Total capitalization 8,389,725 7,773,210
---------- ----------
Current Liabilities:
Securities due within one year 434,296 563,683
Notes payable 232,378 368,607
Obligations under capital leases 113,854 126,480
Accounts payable 513,211 394,815
Taxes accrued 487,210 92,339
Interest accrued 70,408 81,931
Deferred energy credits 23,040 2,411
Other 259,776 377,594
---------- ----------
Total current liabilities 2,134,173 2,007,860
---------- ----------
Deferred Credits and Other Liabilities:
Deferred income taxes 2,979,334 3,044,947
Unamortized investment tax credits 101,057 114,308
Three Mile Island Unit 2 future costs 486,743 483,515
Nonutility generation contract loss liability 1,760,758 1,803,820
Other 1,082,232 1,060,449
---------- ----------
Total deferred credits and other liabilities 6,410,124 6,507,039
---------- ----------
Commitments and Contingencies (Note 1)
Total Liabilities and Capitalization $16,934,022 $16,288,109
========== ==========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
4
GPU, INC. AND SUBSIDIARY COMPANIES
Consolidated Statements of Income
---------------------------------
(Unaudited)
In Thousands
(Except Per Share Data)
-----------------------------
Three Months
Ended March 31,
-----------------------------
1999 1998
---- ----
Operating Revenues $1,073,733 $1,043,109
--------- ---------
Operating Expenses:
Fuel 96,476 96,700
Power purchased and interchanged 246,509 265,745
Deferral of energy and capacity costs, net 20,370 (2,020)
Other operation and maintenance 245,154 238,383
Depreciation and amortization 117,244 127,148
Taxes, other than income taxes 49,347 57,519
--------- ---------
Total operating expenses 775,100 783,475
--------- ---------
Operating Income Before Income Taxes 298,633 259,634
Income taxes 73,925 66,293
--------- ---------
Operating Income 224,708 193,341
--------- ---------
Other Income and Deductions:
Allowance for other funds used during
construction 65 320
Equity in undistributed earnings
of affiliates, net (Note 3) 53,252 17,651
Other income, net 49,081 44,562
Income taxes (42,341) (19,431)
--------- ---------
Total other income and deductions 60,057 43,102
--------- ---------
Income Before Interest Charges
and Preferred Dividends 284,765 236,443
--------- ---------
Interest Charges and Preferred Dividends:
Long-term debt 76,680 84,052
Subsidiary-obligated mandatorily
redeemable preferred securities 7,222 7,222
Other interest 6,009 8,984
Allowance for borrowed funds used
during construction (608) (1,071)
Preferred stock dividends of subsidiaries, inclusive
of loss on reacquisition of $1,268 in 1999 3,920 2,975
--------- ---------
Total interest charges and
preferred dividends 93,223 102,162
--------- ---------
Minority interest net income 823 501
--------- ---------
Net Income $ 190,719 $ 133,780
========= =========
Basic - Earnings Per Avg. Common Share $ 1.49 $ 1.07
========= =========
- Avg. Common Shares Outstanding (In Thousands) 127,652 124,543
========= =========
Diluted - Earnings Per Avg. Common Share $ 1.49 $ 1.07
========= =========
- Avg. Common Shares Outstanding (In Thousands) 127,926 124,823
========= =========
Cash Dividends Paid Per Share $ .515 $ .500
========= =========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
5
GPU, INC. AND SUBSIDIARY COMPANIES
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
In Thousands
-----------------------------
Three Months
Ended March 31,
-----------------------------
1999 1998
---- ----
Operating Activities:
Net income $ 190,719 $ 133,780
Adjustments to reconcile income to cash provided:
Depreciation and amortization 128,602 138,750
Amortization of property under capital leases 12,855 13,091
Gain on sale of investments (38,252) (38,452)
Equity in undistributed earnings
of affiliates, net of distributions received (48,492) (15,775)
Nuclear outage maintenance costs, net 6,452 5,856
Deferred income taxes and investment tax
credits, net (345,848) (27,538)
Deferred energy and capacity costs, net 20,478 (1,667)
Allowance for other funds used
during construction (65) (320)
Changes in working capital:
Receivables (67,716) 25,788
Materials and supplies 2,956 (4,106)
Special deposits and prepayments (633,054) (49,614)
Payables and accrued liabilities 386,563 27,426
Nonutility generation contract buyout costs (34,750) (17,500)
Other, net 34,421 24,662
-------- --------
Net cash provided/(required)
by operating activities (385,131) 214,381
-------- --------
Investing Activities:
Capital expenditures and investments (457,526) (73,652)
Proceeds from sale of investments 894,450 146,700
Contributions to decommissioning trusts (8,710) (11,256)
Other, net 26,295 209
-------- --------
Net cash provided by investing activities 454,509 62,001
-------- --------
Financing Activities:
Issuance of long-term debt 705,136 -
Decrease in notes payable, net (197,717) (53,596)
Retirement of long-term debt (382,688) (375,878)
Capital lease principal payments (10,261) (12,071)
Reacquisition of common stock (58,138) -
Issuance of common stock - 269,448
Dividends paid on common stock (65,917) (60,414)
Redemption of preferred stock of subsidiaries (30,004) -
-------- ---------
Net cash required by financing activities (39,589) (232,511)
-------- --------
Effect of exchange rate changes on cash (43) 1,585
-------- --------
Net increase in cash and temporary
cash investments from above activities 29,746 45,456
Cash and temporary cash investments, beginning of year 72,755 85,099
-------- --------
Cash and temporary cash investments, end of period $ 102,501 $ 130,555
======== ========
Supplemental Disclosure:
Interest and preferred dividends paid $ 103,264 $ 112,471
======== ========
Income taxes paid $ 2,374 $ 4,786
======== ========
New capital lease obligations incurred $ 220 $ 5,286
======== ========
Common stock dividends declared but not paid $ - $ -
======== =========
The accompanying notes are an integral part of the consolidated financial
statements.
6
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
Consolidated Balance Sheets
---------------------------
In Thousands
------------------------------
March 31, December 31,
1999 1998
------------ ------------
(Unaudited)
ASSETS
Utility Plant:
Transmission, distribution, and general plant $3,117,649 $3,108,697
Generation plant 1,649,038 1,646,576
--------- ---------
Utility plant in service 4,766,687 4,755,273
Accumulated depreciation (2,263,890) (2,217,108)
--------- ---------
Net utility plant in service 2,502,797 2,538,165
Construction work in progress 54,052 48,126
Other, net 97,954 98,491
--------- ---------
Net utility plant 2,654,803 2,684,782
--------- ---------
Other Property and Investments:
Nuclear decommissioning trusts, at market (Note 1) 436,111 422,277
Nuclear fuel disposal trust, at market 119,832 116,871
Other, net 1,809 9,596
--------- ---------
Total other property and investments 557,752 548,744
--------- ---------
Current Assets:
Cash and temporary cash investments 12,344 1,850
Special deposits 5,738 6,047
Accounts receivable:
Customers, net 149,153 152,120
Other 43,655 32,562
Unbilled revenues 72,243 56,391
Materials and supplies, at average cost or less:
Construction and maintenance 67,111 79,863
Fuel 12,580 13,144
Deferred income taxes 9,082 20,812
Prepayments 8,134 27,648
--------- ---------
Total current assets 380,040 390,437
--------- ---------
Deferred Debits and Other Assets:
Regulatory assets, net: (Note 1) 694,758 753,885
Deferred income taxes 137,239 179,237
Other 20,372 25,037
--------- ---------
Total deferred debits and other assets 852,369 958,159
--------- ---------
Total Assets $4,444,964 $4,582,122
========= =========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
7
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
Consolidated Balance Sheets
---------------------------
In Thousands
--------------------------------
March 31, December 31,
1999 1998
------------ ------------
(Unaudited)
LIABILITIES AND CAPITALIZATION
Capitalization:
Common stock $ 153,713 $ 153,713
Capital surplus 510,769 510,769
Retained earnings 914,281 893,016
Accumulated other comprehensive income/(loss)(Note 5) (425) (425)
--------- ---------
Total common stockholder's equity 1,578,338 1,557,073
Cumulative preferred stock:
With mandatory redemption 86,500 86,500
Without mandatory redemption 37,741 37,741
Company-obligated mandatorily redeemable
preferred securities 125,000 125,000
Long-term debt 1,133,593 1,173,532
--------- ---------
Total capitalization 2,961,172 2,979,846
--------- ---------
Current Liabilities:
Securities due within one year 42,512 2,512
Notes payable 28,900 122,344
Obligations under capital leases 77,874 85,366
Accounts payable:
Affiliates 44,401 40,861
Other 63,170 80,233
Taxes accrued 48,798 5,559
Interest accrued 29,864 26,678
Deferred energy credits 23,040 2,411
Other 48,125 104,408
--------- ---------
Total current liabilities 406,684 470,372
--------- ---------
Deferred Credits and Other Liabilities:
Deferred income taxes 636,117 670,961
Unamortized investment tax credits 49,113 50,225
Nuclear fuel disposal fee 142,856 141,270
Three Mile Island Unit 2 future costs 121,694 120,904
Other 127,328 148,544
--------- ---------
Total deferred credits and other liabilities 1,077,108 1,131,904
--------- ---------
Commitments and Contingencies (Note 1)
Total Liabilities and Capitalization $4,444,964 $4,582,122
========= =========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
8
</FN>
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
Consolidated Statements of Income
---------------------------------
(Unaudited)
In Thousands
-------------------------
Three Months
Ended March 31,
-------------------------
1999 1998
---- ----
Operating Revenues $516,889 $472,334
------- -------
Operating Expenses:
Fuel 22,117 19,660
Power purchased and interchanged:
Affiliates 15,949 3,115
Others 153,450 153,680
Deferral of energy and capacity costs, net 20,370 (2,020)
Other operation and maintenance 107,846 100,730
Depreciation and amortization 62,696 62,994
Taxes, other than income taxes 21,334 23,857
------- -------
Total operating expenses 403,762 362,016
------- -------
Operating Income Before Income Taxes 113,127 110,318
Income taxes 35,256 32,476
------- -------
Operating Income 77,871 77,842
------- -------
Other Income and Deductions:
Allowance for other funds used during
construction 54 275
Other income, net 3,019 2,265
Income taxes (1,419) (1,053)
------- -------
Total other income and deductions 1,654 1,487
------- -------
Income Before Interest Charges 79,525 79,329
------- -------
Interest Charges:
Long-term debt 21,806 21,792
Company-obligated mandatorily
redeemable preferred securities 2,675 2,675
Other interest 1,579 2,529
Allowance for borrowed funds used
during construction (232) (483)
------- -------
Total interest charges 25,828 26,513
------- -------
Net Income 53,697 52,816
Preferred stock dividends 2,432 2,738
------- -------
Earnings Available for Common Stock $ 51,265 $ 50,078
======= =======
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
9
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
In Thousands
-------------------------
Three Months
Ended March 31,
-------------------------
1999 1998
Operating Activities:
Net income $ 53,697 $ 52,816
Adjustments to reconcile income to cash provided:
Depreciation and amortization 70,278 68,725
Amortization of property under capital leases 7,546 7,065
Nuclear outage maintenance costs, net 4,424 3,549
Deferred income taxes and investment tax
credits, net 9,463 (17,314)
Deferred energy and capacity costs, net 20,478 (1,667)
Allowance for other funds used
during construction (54) (275)
Changes in working capital:
Receivables (23,979) 13,483
Materials and supplies 13,309 (3,340)
Special deposits and prepayments 19,823 5,665
Payables and accrued liabilities 5,253 54,517
Nonutility generation contract buyout costs (30,000) (15,000)
Other, net 21,555 23,084
-------- --------
Net cash provided by operating activities 171,793 191,308
-------- --------
Investing Activities:
Capital expenditures and investments (27,972) (40,125)
Contributions to decommissioning trusts (7,228) (6,319)
Other, net 4,596 (1,469)
-------- --------
Net cash used for investing activities (30,604) (47,913)
-------- --------
Financing Activities:
Decrease in notes payable, net (93,444) (115,254)
Capital lease principal payments (4,819) (7,499)
Dividends paid on common stock (30,000) (10,000)
Dividends paid on preferred stock (2,432) (2,738)
-------- --------
Net cash required by financing activities (130,695) (135,491)
-------- --------
Net increase in cash and temporary
cash investments from above activities 10,494 7,904
Cash and temporary cash investments, beginning of year 1,850 2,994
-------- --------
Cash and temporary cash investments, end of period $ 12,344 $ 10,898
======== ========
Supplemental Disclosure:
Interest and preferred dividends paid $ 25,248 $ 25,578
======== ========
Income taxes paid $ (2,804) $ 96
======== ========
New capital lease obligations incurred $ 54 $ 5,257
======== ========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
10
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
---------------------------
In Thousands
-----------------------------
March 31, December 31,
1999 1998
------------ ------------
(Unaudited)
ASSETS
Utility Plant:
Transmission, distribution and general plant $1,484,712 $1,481,958
Generation plant 766,433 765,669
--------- ---------
Utility plant in service 2,251,145 2,247,627
Accumulated depreciation (1,021,473) (1,008,438)
--------- ---------
Net utility plant in service 1,229,672 1,239,189
Construction work in progress 24,081 19,380
Other, net 38,304 27,819
--------- ---------
Net utility plant 1,292,057 1,286,388
--------- ---------
Other Property and Investments:
Nuclear decommissioning trusts, at market (Note 1) 211,774 211,194
Other, net 6,131 11,742
--------- ---------
Total other property and investments 217,905 222,936
--------- ---------
Current Assets:
Cash and temporary cash investments 6,230 442
Special deposits 894 1,062
Accounts receivable:
Customers, net 56,149 60,012
Other 57,153 41,895
Unbilled revenues 36,244 43,687
Materials and supplies, at average cost or less:
Construction and maintenance 17,302 24,727
Fuel 10,137 12,218
Deferred income taxes 2,945 2,945
Prepayments 32,362 20,616
--------- ---------
Total current assets 219,416 207,604
--------- ---------
Deferred Debits and Other Assets:
Regulatory assets, net: (Note 1)
Competitive transition charge 659,439 680,213
Other regulatory assets, net 912,157 921,934
Deferred income taxes 667,260 714,202
Other 26,251 31,692
--------- ---------
Total deferred debits and other assets 2,265,107 2,348,041
--------- ---------
Total Assets $3,994,485 $4,064,969
========= =========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
11
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
---------------------------
In Thousands
-----------------------------
March 31, December 31,
1999 1998
----------- ------------
(Unaudited)
LIABILITIES AND CAPITALIZATION
Capitalization:
Common stock $ 66,273 $ 66,273
Capital surplus 385,200 370,200
Retained earnings 236,290 234,066
Accumulated other comprehensive income (Note 5) 18,166 16,520
--------- ---------
Total common stockholder's equity 705,929 687,059
Cumulative preferred stock - 12,056
Company-obligated mandatorily redeemable
preferred securities 100,000 100,000
Long-term debt 546,904 546,904
--------- ---------
Total capitalization 1,352,833 1,346,019
--------- ---------
Current Liabilities:
Securities due within one year 30,024 30,024
Notes payable 115,700 79,540
Obligations under capital leases 23,705 27,135
Accounts payable:
Affiliates 136,881 75,933
Other 57,489 102,390
Taxes accrued 21,146 19,463
Interest accrued 10,657 16,747
Other 18,028 42,598
--------- ---------
Total current liabilities 413,630 393,830
--------- ---------
Deferred Credits and Other Liabilities:
Deferred income taxes 987,719 1,010,982
Unamortized investment tax credits 26,663 27,157
Three Mile Island Unit 2 future costs 243,288 241,707
Nuclear fuel disposal fee 32,270 31,912
Nonutility generation contract loss liability 766,058 787,440
Other 172,024 225,922
--------- ---------
Total deferred credits and other liabilities 2,228,022 2,325,120
--------- ---------
Commitments and Contingencies (Note 1)
Total Liabilities and Capitalization $3,994,485 $4,064,969
========= =========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
12
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statements of Income
---------------------------------
(Unaudited)
In Thousands
-----------------------------
Three Months
Ended March 31,
-----------------------------
1999 1998
---- ----
Operating Revenues $229,157 $234,748
------- -------
Operating Expenses:
Fuel 25,629 26,071
Power purchased and interchanged:
Affiliates 2,208 1,853
Others 40,958 54,885
Other operation and maintenance 51,915 52,253
Depreciation and amortization 19,129 26,263
Taxes, other than income taxes 13,066 15,549
------- -------
Total operating expenses 152,905 176,874
------- -------
Operating Income Before Income Taxes 76,252 57,874
Income taxes 29,404 17,562
------- -------
Operating Income 46,848 40,312
------- -------
Other Income and Deductions:
Allowance for other funds used during
construction 11 45
Other income, net 1,133 284
Income taxes (576) (488)
------- -------
Total other income and deductions 568 (159)
------- -------
Income Before Interest Charges 47,416 40,153
------- -------
Interest Charges:
Long-term debt 10,623 10,623
Company-obligated mandatorily
redeemable preferred securities 2,250 2,250
Other interest 1,887 2,753
Allowance for borrowed funds used
during construction (176) (203)
------- -------
Total interest charges 14,584 15,423
------- -------
Net Income 32,832 24,730
Preferred stock dividends 66 121
Loss on preferred stock reacquisition 542 -
------- -------
Earnings Available for Common Stock $ 32,224 $ 24,609
======= =======
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
13
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
In Thousands
-----------------------------
Three Months
Ended March 31,
-----------------------------
1999 1998
---- ----
Operating Activities:
Net income $ 32,832 $ 24,730
Adjustments to reconcile income to cash provided:
Depreciation and amortization 22,223 29,797
Amortization of property under capital leases 3,540 3,659
Nuclear outage maintenance costs, net 1,355 1,537
Deferred income taxes and investment tax
credits, net 13,356 (2,546)
Allowance for other funds used
during construction (11) (45)
Changes in working capital:
Receivables (11,395) 6,404
Materials and supplies 9,506 921
Special deposits and prepayments (11,578) (31,730)
Payables and accrued liabilities (12,930) (5,365)
Nonutility generation contract buyout costs (1,250) (2,500)
Other, net (27,951) (3,296)
-------- --------
Net cash provided by operating activities 17,697 21,566
-------- --------
Investing Activities:
Capital expenditures and investments (15,294) (12,104)
Contributions to decommissioning trusts (1,482) (3,621)
Other, net (10) (12)
-------- --------
Net cash used for investing activities (16,786) (15,737)
-------- --------
Financing Activities:
Increase in notes payable, net 36,160 14,321
Capital lease principal payments (3,619) (2,683)
Redemption of preferred stock (12,598) -
Dividends paid on common stock (30,000) (20,000)
Dividends paid on preferred stock (66) (121)
Contribution from parent corporation 15,000 -
-------- --------
Net cash provided/(required)
by financing activities 4,877 (8,483)
-------- --------
Net increase/(decrease) in cash and temporary cash
investments from above activities 5,788 (2,654)
Cash and temporary cash investments, beginning of year 442 6,116
-------- --------
Cash and temporary cash investments, end of period $ 6,230 $ 3,462
======== ========
Supplemental Disclosure:
Interest and preferred dividends paid $ 20,374 $ 20,787
Income taxes
======== ========
paid $ 1,902 $ 2,250
======== =========
New capital lease obligations incurred $ 111 $ 19
======== ========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
14
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
---------------------------
In Thousands
-----------------------------
March 31, December 31,
1999 1998
------------ ------------
(Unaudited)
ASSETS
Utility Plant:
Transmission, distribution and general plant $1,767,713 $1,768,621
Generation plant 589,529 1,033,739
--------- ---------
Utility plant in service 2,357,242 2,802,360
Accumulated depreciation (1,003,277) (1,175,842)
--------- ---------
Net utility plant in service 1,353,965 1,626,518
Construction work in progress 23,847 18,862
Other, net 24,627 19,482
--------- ---------
Net utility plant 1,402,439 1,664,862
--------- ---------
Other Property and Investments:
Nuclear decommissioning trusts, at market (Note 1) 82,099 82,803
Other, net 2,290 7,705
--------- ---------
Total other property and investments 84,389 90,508
--------- ---------
Current Assets:
Cash and temporary cash investments 19,123 2,750
Special deposits 612,180 2,632
Accounts receivable:
Customers, net 66,151 69,887
Other 40,814 28,893
Unbilled revenues 32,947 43,998
Materials and supplies, at average cost or less:
Construction and maintenance 16,973 39,452
Fuel 7,418 17,107
Deferred income taxes 7,589 7,589
Prepayments 33,095 31,551
--------- ---------
Total current assets 836,290 243,859
--------- ---------
Deferred Debits and Other Assets:
Regulatory assets, net: (Note 1)
Competitive transition charge 321,922 343,602
Other regulatory assets, net 635,197 1,206,594
Deferred income taxes 1,167,038 951,471
Other 25,084 23,911
--------- ---------
Total deferred debits and other assets 2,149,241 2,525,578
--------- ---------
Total Assets $4,472,359 $4,524,807
========= =========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
15
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
---------------------------
In Thousands
--------------------------------
March 31, December 31,
1999 1998
------------ ------------
(Unaudited)
LIABILITIES AND CAPITALIZATION
Capitalization:
Common stock $ 105,812 $ 105,812
Capital surplus 285,486 285,486
Retained earnings 252,264 367,653
Accumulated other comprehensive income (Note 5) 9,106 8,353
--------- ---------
Total common stockholder's equity 652,668 767,304
Cumulative preferred stock - 16,681
Company-obligated mandatorily redeemable
preferred securities 105,000 105,000
Long-term debt 596,434 626,434
--------- ---------
Total capitalization 1,354,102 1,515,419
--------- ---------
Current Liabilities:
Securities due within one year 80,012 50,012
Notes payable - 86,023
Obligations under capital leases 12,275 13,979
Accounts payable:
Affiliates 57,998 47,164
Other 34,906 47,795
Taxes accrued 372,106 32,755
Interest accrued 10,063 19,700
Other 22,174 37,272
--------- ---------
Total current liabilities 589,534 334,700
--------- ---------
Deferred Credits and Other Liabilities:
Deferred income taxes 1,248,111 1,338,235
Unamortized investment tax credits 25,281 36,926
Three Mile Island Unit 2 future costs 121,761 120,904
Nuclear fuel disposal fee 16,254 15,956
Nonutility generation contract loss liability 994,700 1,016,380
Other 122,616 146,287
--------- ---------
Total deferred credits and other liabilities 2,528,723 2,674,688
--------- ---------
Commitments and Contingencies (Note 1)
Total Liabilities and Capitalization $4,472,359 $4,524,807
========= =========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
16
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statements of Income
---------------------------------
(Unaudited)
In Thousands
-----------------------------
Three Months
Ended March 31,
-----------------------------
1999 1998
---- ----
Operating Revenues $246,249 $263,655
------- -------
Operating Expenses:
Fuel 36,544 42,434
Power purchased and interchanged:
Affiliates 1,562 244
Others 39,031 54,714
Other operation and maintenance 59,403 60,033
Depreciation and amortization 23,053 25,644
Taxes, other than income taxes 14,014 17,963
------- -------
Total operating expenses 173,607 201,032
------- -------
Operating Income Before Income Taxes 72,642 62,623
Income taxes 7,098 19,803
------- -------
Operating Income 65,544 42,820
------- -------
Other Income and Deductions:
Other income, net 38,909 79
Income taxes (23,031) 14
------- -------
Total other income and deductions 15,878 93
------- --------
Income Before Interest Charges 81,422 42,913
------- -------
Interest Charges:
Long-term debt 11,833 12,112
Company-obligated mandatorily
redeemable preferred securities 2,297 2,297
Other interest 2,002 2,244
Allowance for borrowed funds used
during construction (200) (385)
------- -------
Total interest charges 15,932 16,268
------- -------
Net Income 65,490 26,645
Preferred stock dividends 154 116
Loss on preferred stock reacquisition 726 -
------- -------
Earnings Available for Common Stock $ 64,610 $ 26,529
======= =======
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
17
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
In Thousands
-----------------------------
Three Months
Ended March 31,
-----------------------------
1999 1998
---- ----
Operating Activities:
Net income $ 65,490 $ 26,645
Adjustments to reconcile income to cash provided:
Depreciation and amortization 22,732 26,797
Amortization of property under capital leases 1,769 2,018
Gain on sale of investment (38,252) -
Nuclear outage maintenance costs, net 673 770
Deferred income taxes and investment tax
credits, net (307,797) 1,177
Changes in working capital:
Receivables (8,184) (7,556)
Materials and supplies 32,169 (1,687)
Special deposits and prepayments (611,092) (22,522)
Payables and accrued liabilities 312,561 (945)
Nonutility generation contract buyout costs (3,500) -
Other, net (44,283) (7,501)
-------- --------
Net cash provided/(required)
by operating activities (577,714) 17,196
-------- --------
Investing Activities:
Capital expenditures and investments (15,868) (15,041)
Proceeds from sale of investment 894,450 -
Contributions to decommissioning trusts - (1,316)
Other, net 911 -
-------- ---------
Net cash provided/(used)
for investing activities 879,493 (16,357)
-------- --------
Financing Activities:
Increase/(decrease) in notes payable, net (86,023) 38,419
Retirement of long-term debt - (30,000)
Redemption of preferred stock (17,406) -
Capital lease principal payments (1,823) (1,540)
Dividends paid on common stock (180,000) -
Dividends paid on preferred stock (154) (174)
-------- --------
Net cash provided/(required)
by financing activities (285,406) 6,705
-------- ---------
Net increase in cash and temporary
cash investments from above activities 16,373 7,544
Cash and temporary cash investments, beginning of year 2,750 -
-------- ---------
Cash and temporary cash investments, end of period $ 19,123 $ 7,544
======== ========
Supplemental Disclosure:
Interest and preferred dividends paid $ 25,169 $ 27,018
======== ========
Income taxes paid $ 3,409 $ 2,285
======== ========
New capital lease obligations incurred $ 55 $ 10
======== ========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
18
GPU, Inc. and Subsidiary Companies
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GPU, Inc. owns all the outstanding common stock of three domestic electric
utilities -- Jersey Central Power & Light Company (JCP&L), Metropolitan Edison
Company (Met-Ed) and Pennsylvania Electric Company (Penelec). The customer
service, transmission and distribution operations of these electric utilities
are conducting business under the name GPU Energy. JCP&L, Met-Ed and Penelec
considered together are referred to as the "GPU Energy companies." The
generation operations of the GPU Energy companies are conducted by GPU
Generation, Inc. (Genco) and GPU Nuclear, Inc. (GPUN). GPU Capital, Inc. and GPU
Electric, Inc. and their subsidiaries, own, operate and fund the acquisition of
transmission and distribution systems in foreign countries, and are referred to
as "GPU Electric." GPU International, Inc. and GPU Power, Inc. and their
subsidiaries, develop, own and operate generation facilities in the United
States and foreign countries and are referred to as the "GPUI Group." 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."
These notes should be read in conjunction with the notes to consolidated
financial statements included in the 1998 Annual Report on Form 10-K. The
December 31, 1998 balance sheet data contained in the attached financial
statements was derived from audited financial statements. For disclosures
required by generally accepted accounting principles, see the 1998 Annual Report
on Form 10-K.
1. COMMITMENTS AND CONTINGENCIES
COMPETITION AND THE CHANGING REGULATORY ENVIRONMENT
---------------------------------------------------
The Emerging Competitive Market and Stranded Costs:
- ---------------------------------------------------
With the current market price of electricity being below the cost of some
utility-owned generation and power purchase commitments, and the ability of
customers to choose their energy suppliers, stranded costs have been created 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 Pennsylvania Public Utility Commission's (PaPUC) 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 June 1998, the PaPUC issued restructuring rate orders to Met-Ed and
Penelec which resulted in pre-tax charges to income in the second quarter of
1998 of $320 million and $150 million, respectively. In October 1998, the PaPUC
issued amended Restructuring Orders, approving the Settlement Agreements entered
into by Met-Ed and Penelec. An appeal by one intervenor in the
19
GPU, Inc. and Subsidiary Companies
restructuring proceedings is still pending before the Pennsylvania Commonwealth
Court. There can be no assurance as to the outcome of this appeal. In the third
quarter of 1998, as a result of the amended Restructuring Orders, Met-Ed and
Penelec reversed $313 million and $142 million pre-tax, respectively, of their
earlier charges and recorded additional non-recurring charges of $38 million and
$58 million pre-tax, for Met-Ed and Penelec, respectively.
In 1997, JCP&L filed with the New Jersey Board of Public Utilities (NJBPU)
its proposed restructuring plan for a competitive electric marketplace in New
Jersey as required by the New Jersey Energy Master Plan (NJEMP) released by the
NJBPU. 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 were 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 March 31, 1999, JCP&L's net investment in
Oyster Creek was $672 million.
In 1999, New Jersey enacted legislation to deregulate the state's
electricity market. The legislation generally provides for 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.
On April 14, 1999, JCP&L entered into a settlement agreement with several
parties to its stranded cost and rate unbundling proceedings pending before the
NJBPU. The settlement agreement, which is subject to NJBPU approval, provides,
among other things, for a 5% rate reduction commencing August 1, 1999, a 5% rate
refund from April 30, 1997 rates for service rendered on or after August 1,
2002, and for average customer shopping credits beginning at 4.9 cents per
kilowatt hour and increasing to 5.16 cents per kilowatt hour in 2003 for
customers who choose an alternate supplier. The settlement agreement also allows
for the application of the net proceeds from JCP&L's generation asset sales to
reduce stranded costs, the securitization of approximately $525 million of
stranded costs associated with the Oyster Creek nuclear generating station, and
adequate assurance (through a deferral and true-up mechanism) of full recovery
of above-market costs associated with JCP&L's obligations under nonutility
generation, utility and transition power purchase agreements.
If approved by the NJBPU, the settlement agreement would result in an
approximately $195 million reduction in GPU's 1999 pre-tax earnings, or about
$0.90 per share (after-tax). The NJBPU is expected to act on the settlement
agreement in May 1999. There can be no assurance as to the outcome of this
matter.
20
GPU, Inc. and Subsidiary Companies
To the extent JCP&L is not permitted to recover its stranded costs in whole
or in part, it would result in the recording of liabilities for above-market
nonutility generator (NUG) costs, decommissioning costs, and write-downs of
uneconomic generation plant and regulatory assets recorded in accordance with
Statement of Financial Accounting Standards No. 71 (FAS 71), "Accounting for the
Effects of Certain Types of Regulation," and Emerging Issues Task Force 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," (EITF Issue 97-4). The
inability to recover these stranded costs could have a material adverse effect
on GPU's results of operations.
In 1997, GPU announced its intention to begin a process to sell, through a
competitive bid process, up to all of the fossil-fuel and hydroelectric
generating facilities owned by the GPU Energy companies. The 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 GPU Electric and the GPUI Group.
In March 1999, Penelec completed the sale of its 50% interest in the Homer
City Station to EME Homer City Generation, L.P., a subsidiary of Edison Mission
Energy for a purchase price of approximately $900 million. As a result of the
sale, Penelec recorded an after-tax gain of $27.8 million in the first quarter
of 1999 for the portion of the gain related to wholesale operations and deferred
as a regulatory liability $596.7 million pending Phase II of the Pennsylvania
restructuring proceeding.
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 PSE&G's right of first
refusal to purchase JCP&L's ownership interest at its current book value under a
1964 agreement between the companies is void and unenforceable. In January 1999,
the New Jersey Superior Court held that the NJBPU had primary jurisdiction in
the matter and dismissed a PSE&G complaint requesting that the Court require
JCP&L to sell its ownership interest to PSE&G. Management believes that the fair
market value of JCP&L's ownership interest in Yards Creek is substantially in
excess of its March 31, 1999 book value of $22 million. There can be no
assurance of the outcome of this matter.
21
GPU, Inc. and Subsidiary Companies
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 March 31, 1999, and estimated payments
thereafter 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 802 404 170 228
2000 816 404 169 243
2001 805 413 166 226
2002 819 425 169 225
2003 827 422 173 232
As of March 31, 1999, NUG facilities covered by agreements having 1,681 MW
(JCP&L 928 MW; Met-Ed 348 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 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 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 (and JCP&L's settlement agreement contemplates) 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
22
GPU, Inc. and Subsidiary Companies
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.)
ACCOUNTING MATTERS
------------------
The Met-Ed and Penelec Restructuring Orders received in 1998, essentially
deregulated the electric generation portion of Met-Ed and Penelec's businesses.
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 May
1999.
Regulatory assets, net as reflected in the March 31, 1999 and December 31,
1998 Consolidated Balance Sheets in accordance with the provisions of FAS 71 and
EITF Issue 97-4 were as follows:
23
GPU, Inc. and Subsidiary Companies
GPU, Inc. and Subsidiary Companies (in thousands)
- ---------------------------------- --------------
-----------------------------
March 31, December 31,
------------- --------------
1999 1998
---- ----
Competitive transition charge per PaPUC Order $ 981,361 $1,023,815
========== ==========
Other regulatory assets, net:
Reserve for generation divestiture (JCP&L) $ 135,700 $ 136,804
Phase II reserve for
generation divestiture (Met-Ed and Penelec) 763,388 1,356,580
Income taxes recoverable through future rates 399,694 449,638
Income taxes refundable through future rates (51,505) (52,701)
Net investment in TMI-2 65,049 65,787
TMI-2 decommissioning costs 116,935 119,571
Nonutility generation contract buyout costs 114,959 123,208
Unamortized property losses 78,882 80,287
Other postretirement benefits 72,454 73,770
Environmental remediation 50,347 50,214
N.J. unit tax 31,528 33,244
Unamortized loss on reacquired debt 31,024 32,247
Load and demand-side management programs 6,427 12,568
DOE enrichment facility decommissioning 28,205 28,956
Nuclear fuel disposal fee 19,857 21,092
Storm damage 29,968 30,166
Deferred nonutility generation costs
not in current rates 17,337 (16,067)
Future nonutility generation costs not in CTC 369,290 369,290
Public utility realty taxes (PURTA) 7,171 8,060
Other regulatory liabilities (53,274) (50,319)
Other regulatory assets 8,676 10,018
----- ------
Total other regulatory assets, net $2,242,112 $2,882,413
========== ==========
JCP&L (in thousands)
- -------- -----------------------------
March 31, December 31,
1999 1998
-----------------------------
Other regulatory assets, net:
Reserve for generation divestiture $ 135,700 $ 136,804
Income taxes recoverable through future rates 141,060 172,752
Income taxes refundable through future rates (34,708) (35,535)
Net investment in TMI-2 65,049 65,787
TMI-2 decommissioning costs 16,106 19,192
Nonutility generation contract buyout costs 114,959 120,708
Unamortized property losses 78,882 80,287
Other postretirement benefits 45,657 46,486
Environmental remediation 50,347 50,214
N.J. unit tax 31,528 33,244
Unamortized loss on reacquired debt 25,310 25,981
Load and demand-side management programs 6,427 12,568
DOE enrichment facility decommissioning 17,615 18,049
Nuclear fuel disposal fee 19,857 21,092
Storm damage 29,968 30,166
Other regulatory liabilities (52,927) (49,840)
Other regulatory assets 3,928 5,930
----- -----
Total other regulatory assets, net $ 694,758 $ 753,885
========== ==========
24
GPU, Inc. and Subsidiary Companies
Met-Ed (in thousands)
- ------ -----------------------------
March 31, December 31,
1999 1998
------------- -------------
Competitive transition charge per PaPUC Order $ 659,439 $ 680,213
========== ==========
Other regulatory assets, net:
Phase II reserve for
generation divestiture $ 424,642 $ 421,807
Income taxes recoverable through future rates 112,425 133,585
Income taxes refundable through future rates (10,584) (10,804)
TMI-2 decommissioning costs 67,776 68,091
Nonutility generation contract buyout costs - 2,500
Other postretirement benefits 26,797 27,284
Unamortized loss on reacquired debt 2,800 3,023
DOE enrichment facility decommissioning 7,198 7,409
Deferred nonutility generation costs
not in current rates 4,241 (7,746)
Future nonutility generation costs not in CTC 271,270 271,270
Public utility realty taxes (PURTA) 3,315 3,699
Other regulatory liabilities (83) (83)
Other regulatory assets 2,360 1,899
----- -----
Total other regulatory assets, net $ 912,157 $ 921,934
========== ==========
Penelec (in thousands)
- -------- -----------------------------
March 31, December 31,
1999 1998
------------ --------------
Competitive transition charge per PaPUC Order $ 321,922 $ 343,602
========== ==========
Other regulatory assets, net:
Phase II reserve for
generation divestiture 338,746 934,773
Income taxes recoverable through future rates 146,209 143,301
Income taxes refundable through future rates (6,213) (6,362)
TMI-2 decommissioning costs 33,053 32,288
Unamortized loss on reacquired debt 2,914 3,243
DOE enrichment facility decommissioning 3,392 3,498
Deferred nonutility generation costs
not in current rates 13,096 (8,321)
Future nonutility generation costs not in CTC 98,020 98,020
Public utility realty taxes (PURTA) 3,856 4,361
Other regulatory liabilities (264) (396)
Other regulatory assets 2,388 2,189
----- -----
Total other regulatory assets, net $ 635,197 $1,206,594
========== ==========
25
GPU, Inc. and Subsidiary Companies
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," 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 proposed by JCP&L.
Management believes that a negative outcome of that proceeding could have a
material adverse effect on GPU's earnings.
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (FAS 133), "Accounting for Derivative
Instruments and Hedging Activities." FAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. FAS 133
requires that companies recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
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. FAS 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. GPU will adopt FAS 133 in the first quarter of 2000 and is
in the process of evaluating the impact of this statement.
NUCLEAR FACILITIES
------------------
The GPU Energy companies have made investments in three major nuclear
projects -- TMI-1 and Oyster Creek, both of which are operating generation
facilities, and TMI-2, which was damaged during a 1979 accident. TMI-1 and TMI-2
are jointly owned by JCP&L, Met-Ed and Penelec in the percentages of 25%, 50%
and 25%, respectively. Oyster Creek is owned by JCP&L. At March 31, 1999 and
December 31, 1998, the GPU Energy companies' net investment in TMI-1 and Oyster
Creek, including nuclear fuel, was as follows:
Net Investment (in millions)
----------------------------
TMI-1 Oyster Creek
----- ------------
March 31, 1999
--------------
JCP&L $18 $672
Met-Ed 35 -
Penelec 17 -
---- -----
Total $70 $672
=== ====
26
GPU, Inc. and Subsidiary Companies
Net Investment (in millions)
----------------------------
TMI-1 Oyster Creek
----- ------------
December 31, 1998
JCP&L $18 $682
Met-Ed 36 -
Penelec 17 -
-- -----
Total $71 $682
=== ====
JCP&L's net investment in TMI-2 at March 31, 1999 and December 31, 1998 was
$65 million and $66 million, respectively. JCP&L is collecting revenues for
TMI-2 on a basis which provides for the recovery of its remaining investment in
the plant by 2008. 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 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 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.
27
GPU, Inc. and Subsidiary Companies
TMI-2:
- ------
As a result of the 1979 TMI-2 accident, individual claims for alleged
personal injury (including claims for punitive damages), which are material in
amount, were asserted against GPU, Inc. and the GPU Energy companies.
Approximately 2,100 of such claims were filed in the United States District
Court for the Middle District of Pennsylvania. Some of the claims also seek
recovery for injuries from alleged emissions of radioactivity before and after
the accident.
At the time of the TMI-2 accident, as provided for in the Price-Anderson
Act, the GPU Energy companies had (a) primary financial protection in the form
of insurance policies with groups of insurance companies providing an aggregate
of $140 million of primary coverage, (b) secondary financial protection in the
form of private liability insurance under an industry retrospective rating plan
providing for up to an aggregate of $335 million in premium charges under such
plan, and (c) an indemnity agreement with the NRC for up to $85 million,
bringing their total financial protection up to an aggregate of $560 million.
Under the secondary level, the GPU Energy companies are subject to a
retrospective premium charge of up to $5 million per reactor, or a total of $15
million.
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.
28
GPU, Inc. and Subsidiary Companies
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 1999
dollars) are as follows:
(in millions)
Oyster
TMI-1 TMI-2 Creek
----- ----- -----
JCP&L $ 68 $107 $331
Met-Ed 135 215 -
Penelec 68 107 -
-- --- ----
Total $271 $429 $331
==== ==== ====
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.
In 1995, a consultant to GPUN performed site-specific studies of TMI-1,
TMI-2 and Oyster Creek (updated in 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 1999 dollars):
(in millions)
Oyster
TMI-1 TMI-2 Creek
----- ----- -----
Radiological decommissioning $349 $425 $577
Nonradiological cost of removal 86 34* 31
-- -- --
Total $435 $459 $608
==== ==== ====
* Net of $12.5 million spent as of March 31, 1999.
Each of the GPU Energy companies is responsible for retirement costs in
proportion to its respective ownership percentage.
29
GPU, Inc. and Subsidiary Companies
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 $616
million ($585 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 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 TMI-1 decommissioning liability and expense to
AmerGen will take place at the financial closing which is expected by the end of
1999.
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 for the first quarter of 1999
and the provisions for the future expenditure of these funds, which have been
made in accumulated depreciation, are as follows:
30
GPU, Inc. and Subsidiary Companies
(in millions)
Oyster
TMI-1 Creek
----- -----
Amount expensed for the three months ended March 31, 1999:
JCP&L $1.3 $5.6
Met-Ed 0.4 -
Penelec 0.2 -
---- -----
$1.9 $5.6
==== ====
(in millions)
Oyster
TMI-1 Creek
----- -----
Accumulated depreciation provision at March 31, 1999:
JCP&L $ 48 $284
Met-Ed 84 -
Penelec 39 -
---- ----
$171 $284
==== ====
Management believes that any TMI-1 and Oyster Creek retirement costs, in
excess of those currently recognized for ratemaking purposes, should be
recoverable from customers.
TMI-2:
The estimated liabilities for TMI-2 future retirement costs (reflected as
Three Mile Island Unit 2 Future Costs on the Consolidated Balance Sheets) as of
March 31, 1999 and December 31, 1998 are as follows:
(in millions)
GPU JCP&L Met-Ed Penelec
--- ----- ------ -------
March 31, 1999 $487 $122 $243 $122
December 31, 1998 $484 $121 $242 $121
These amounts are based upon the 1995 site-specific study estimates (in 1999 and
1998 dollars, respectively) discussed above and an estimate for remaining
incremental monitored storage costs of $28 million (JCP&L $7 million; Met-Ed $14
million; Penelec $7 million) as of March 31, 1999 and $29 million (JCP&L $7
million; Met-Ed $15 million; Penelec $7 million) as of December 31, 1998, 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 $487 million liability at March 31, 1999 is $245 million
(JCP&L $19 million; Met-Ed $143 million; Penelec $83 million) which management
believes is probable of recovery from customers and included in Regulatory
assets, net on the Consolidated Balance Sheets, and $277 million (JCP&L $107
million; Met-Ed $126 million; Penelec $44 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 the first quarter of
31
GPU, Inc. and Subsidiary Companies
1999 amounted to $1.5 million (JCP&L $573 thousand; Met-Ed $700 thousand;
Penelec $210 thousand).
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 March 31, 1999, the accident-related portion of TMI-2 radiological
decommissioning costs is considered to be $76 million (JCP&L $19 million; Met-Ed
$38 million; Penelec $19 million), which is the difference between the 1995
TMI-1 and TMI-2 site-specific study estimates (in 1999 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
$76 million accident-related portion referred to above.
JCP&L intends to seek recovery for any increases in TMI-2 retirement
costs, and Met-Ed and Penelec intend to seek recovery for any increases in the
nonaccident-related portion of such costs, but recognize that recovery cannot be
assured.
INSURANCE
---------
GPU has insurance (subject to retentions and deductibles) for its
operations and facilities including coverage for property damage, liability to
employees and third parties, and loss of use and occupancy (primarily
incremental replacement power costs). There is no assurance that GPU will
maintain all existing insurance coverages. Losses or liabilities that are not
completely insured, unless allowed to be recovered through ratemaking, could
have a material adverse effect on the financial position of GPU.
The decontamination liability, premature decommissioning and property
damage insurance coverage for the TMI station and for Oyster Creek totals $2.7
billion per site. In accordance with NRC regulations, these insurance policies
generally require that proceeds first be used for stabilization of the reactors
and then to pay for decontamination and debris removal expenses. Any remaining
amounts available under the policies may then be used for repair and restoration
costs and decommissioning costs. Consequently, there can be no assurance that in
the event of a nuclear incident, property damage insurance proceeds would be
available for the repair and restoration of that station.
The Price-Anderson Act limits GPU's liability to third parties for a
nuclear incident at one of its sites to approximately $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
32
GPU, Inc. and Subsidiary Companies
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
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
1997 and 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):
33
GPU, Inc. and Subsidiary Companies
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 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. The Court has refused
to dismiss the complaint and discovery is proceeding. 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, 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 March 31, 1999. 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 March 31, 1999.
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
34
GPU, Inc. and Subsidiary Companies
approximately $17 million to $22 million, and a liability of $17 million (JCP&L
$1 million; Met-Ed $4 million; Penelec $12 million) is reflected on the
Consolidated Balance Sheets at March 31, 1999. JCP&L has requested recovery of
its share of closure costs in its restructuring plan filed with the NJBPU in
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 March 31, 1999.
JCP&L has entered into agreements with the New Jersey Department of
Environmental Protection for the investigation and remediation of 17 formerly
owned MGP sites. JCP&L has also entered into various cost-sharing agreements
with other utilities for most of the sites. As of March 31, 1999, 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.
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 March 31,
1999, 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 commenced litigation in the New Jersey Superior Court against
several of its insurance carriers, relative to these MGP sites and has settled
with all but one of those insurance companies.
OTHER COMMITMENTS AND CONTINGENCIES
-----------------------------------
GPU Electric and the GPUI Group:
- --------------------------------
At March 31, 1999, GPU Electric and the GPUI Group had investments totaling
approximately $3.2 billion and $90 million, respectively, 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, GPU Electric and the GPUI Group face additional risks
inherent to operating in such locations, including foreign currency fluctuations
(see Management's Discussion and Analysis - GPU Electric and the GPUI Group).
At March 31, 1999, GPU, Inc.'s aggregate investment in GPU Electric and the
GPUI Group was $398 million and $242 million, respectively; GPU, Inc. has also
guaranteed up to an additional $1.07 billion and $33 million of GPU Electric and
GPUI Group obligations, respectively. Of this amount, $1.07 billion is included
in Long-term debt and Securities due within one year on GPU's Consolidated
Balance Sheet at March 31, 1999, and $26 million relates to various other
obligations of GPU Electric and the GPUI Group.
35
GPU, Inc. and Subsidiary Companies
Through its 50% ownership interest in Midlands, GPU Electric 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 was 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.
GPU Electric's current investment in the Uch Power Project is approximately
$36 million, and project lenders could require GPU Electric to make additional
capital contributions to the project of approximately $8 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, Inc., 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. In April 1999, the Lake
County Circuit Court issued an order finding that FPC breached the avoided cost
payment provisions of the power purchase agreement and ruled that FPC must pay
Lake firm power prices for all on-peak hours and as-available rates for all
off-peak hours. In addition, the court dismissed Lake's claim that FPC had
improperly determined its avoided fuel cost and, at the same time, dismissed
FPC's counterclaims against Lake. Management is currently unable to determine
the financial consequences of the ruling, and accordingly, Lake has filed a
Motion for Clarification and Reconsideration, which is currently pending.
Separately, the Florida Public Service Commission (FPSC) dismissed a petition
filed by FPC requesting that the FPSC assert jurisdiction over the contract
dispute. FPC has appealed the dismissal to the Florida Supreme Court. There can
be no assurance as to the outcome of this matter. GPU International, Inc.'s
total investment in Lake, including guaranteed lease payments, is approximately
$20 million.
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 (JCP&L - 16.67% ownership
interest in Keystone; and Met-Ed - 16.45% ownership interest in Conemaugh). The
contracts, which expire at various dates between 1999 and 2002, 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
36
GPU, Inc. and Subsidiary Companies
$135 million (JCP&L $27 million; Met-Ed $57 million; Penelec $51 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.
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 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.
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 $29 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.
37
GPU, Inc. and Subsidiary Companies
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. The
Electric Discount and Energy Competition Act eliminates the nuclear performance
standard, effective with the implementation of retail choice on August 1, 1999.
At March 31, 1999, GPU, Inc. and consolidated affiliates had 9,263
employees worldwide (JCP&L 2,233; Met-Ed 2,618; Penelec 1,601; GPU Electric 928;
the GPUI Group 133; all other companies 1,750), of which 8,300 employees were
located in the U.S. The majority of the U.S. workforce is employed by the GPU
Energy companies, of which approximately 4,400 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 on October 31, 1999, April 30, 2000 and May 14, 2002, respectively.
Penelec's collective bargaining agreement with the Utility Workers Union of
America expires on June 30, 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 position or results of
operations, there can be no assurance that this will continue to be the case.
38
GPU, Inc. and Subsidiary Companies
2. ACCOUNTING FOR DERIVATIVE INSTRUMENTS
GPU's use of derivative financial and commodity instruments is principally
limited to GPU Electric and the GPUI Group. GPU has not held or issued
derivative financial or commodity instruments for trading purposes.
Interest Rate Swap Agreements:
- ------------------------------
GPU Electric uses interest rate swap agreements to manage the risk of
increases in variable interest rates. At March 31, 1999, these agreements
covered approximately $1.2 billion of debt, including commercial paper, and are
scheduled to expire on various dates through November 2007. GPU Electric 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 GPU Electric. For the quarter ended
March 31, 1999, fixed rate interest expense exceeded variable rate interest by
approximately $5.1 million. (For additional information, see GPU Electric and
the 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 March 31, 1999, the
indexed swap agreement is valued at $60.5 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.
39
GPU, Inc. and Subsidiary Companies
3. EQUITY INVESTMENTS
GPU Electric and the GPUI Group use the equity method of accounting for
investments in which they have 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 March 31, 1999 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%
All of the above are GPUI Group equity investments except Midlands Electricity
plc, which is a GPU Electric equity investment.
Summarized financial information for GPU Electric and the GPUI Group's
equity method investments (which are not consolidated in the financial
statements), including both GPU Electric and the GPUI Group's ownership and
non-ownership interests, is as follows:
Balance Sheet Data (in thousands)
- -----------------
March 31, December 31,
1999 1998
----------- ------------
Current Assets $ 615,644 $ 657,396
Noncurrent Assets 5,887,354 6,113,529
Current Liabilities (1,648,144) (1,750,590)
Noncurrent Liabilities (3,252,351) (3,427,785)
---------- ----------
Net Assets $ 1,602,503 $ 1,592,550
=========== ===========
GPU Electric and GPUI Group's
Equity in Net Assets $ 728,007 $ 780,808
=========== ===========
Earnings Data (in thousands)
- -------------
Three months ended March 31,
---------------------------------
1999 1998
---------- ------------
Revenues $ 780,283 $ 740,008
Operating Income 170,331 105,489
Net Income/(Loss) 118,236 38,506
Cash Distributions Received 4,760 1,876
----- -----
GPU Electric and GPUI Group's
Equity in Net Income/(Loss) $ 53,252 $ 17,651
=========== ===========
As of March 31, 1999 and December 31, 1998, Equity investments on the
Consolidated Balance Sheets included goodwill (net of accumulated
40
GPU, Inc. and Subsidiary Companies
amortization) of approximately $12.2 million and $18.5 million, respectively,
which is amortized to expense over periods not exceeding 40 years. Amortization
expense for the three months ended March 31, 1999 and 1998 amounted to $0.3
million and $0.4 million, respectively.
4. SEGMENT INFORMATION
In 1997, GPU adopted Statement of Financial Accounting Standards No. 131
(FAS 131), "Disclosures about Segments of an Enterprise and Related
Information," which requires the reporting of certain financial information by
business segment and geographic area. For the purpose of providing segment
information, the GPU Energy companies consist of the three domestic electric
utility companies serving customers in Pennsylvania and New Jersey, as well as
Genco, GPUN, GPU Telcom and GPUS. GPU Electric owns, operates and funds the
acquisition of transmission and distribution systems in foreign countries. The
GPUI Group develops, owns and operates generation facilities in the United
States (GPU International, Inc.) and foreign countries (GPU Power, Inc.). 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:
41
GPU, Inc. and Subsidiary Companies
Balance Sheet Segment Data (in thousands)
Current Noncurrent Current
March 31, 1999 Assets Assets Liabilities
- -------------- ------- ---------- -----------
Domestic:
GPU Energy companies $1,512,252 $11,738,171 $1,548,299
GPU International, Inc.* 109,310 424,401 61,059
Less: The effect of consolidating
equity investments included above (48,560) (198,838) (16,066)
Add: Equity investments
included on the balance sheet - 77,045 -
GPU AR 17,009 46 7,465
Corporate 367 6,667 12,789
--------- ---------- ---------
Subtotal 1,590,378 12,047,492 1,613,546
--------- ---------- ---------
Foreign:
Australia (GPU Electric) 104,448 1,756,555 173,476
United Kingdom (GPU Electric)* 121,905 2,169,383 936,280
Argentina (GPU Electric) 49,875 469,877 110,138
South America (GPU Power, Inc.)* 144,283 384,773 73,351
Less: The effect of consolidating
equity investments included above (181,190) (2,364,425) (772,618)
Add: Equity investments
included on the balance sheet - 640,668 -
--------- ---------- ---------
Subtotal 239,321 3,056,831 520,627
--------- ---------- ---------
Consolidated Total $1,829,699 $15,104,323 $2,134,173
========= ========== =========
Other Cash
Long-Term Noncurrent Capital
March 31, 1999 Debt Liabilities Expenditures
- -------------- ---- ------------ ------------
Domestic:
GPU Energy companies $2,298,931 $6,018,252 $ 60,276
GPU International, Inc.* 186,655 228,122 239
Less: The effect of consolidating
equity investments included above (186,655) (18,592) -
Add: Equity investments
included on the balance sheet - - -
GPU AR - 811 14
Corporate - 2,088 -
--------- --------- ---------
Subtotal 2,298,931 6,230,681 60,529
--------- --------- ---------
Foreign:
Australia (GPU Electric) 1,466,813 68,486 -
United Kingdom(GPU Electric)* 938,254 208,325 -
Argentina (GPU Electric) 331,683 22,555 380,448
South America (GPU Power, Inc.)* 184,498 61,528 16,549
Less: The effect of consolidating
equity investments included above (886,811) (181,451) -
Add: Equity investments
included on the balance sheet - - -
--------- --------- ---------
Subtotal 2,034,437 179,443 396,997
--------- --------- ---------
Consolidated Total $4,333,368 $6,410,124 $ 457,526
========= ========= =========
<FN>
* Includes the effect of consolidating ownership interests in investments
accounted for under the equity method (pro-rata consolidation), which are not
consolidated in GPU's audited financial statements.
</FN>
42
GPU, Inc. and Subsidiary Companies
Balance Sheet Segment Data (in thousands) (continued)
Current Noncurrent Current
December 31, 1998 Assets Assets Liabilities
- ----------------- ------- ----------- -----------
Domestic:
GPU Energy companies $ 807,973 $12,475,608 $1,205,733
GPU International, Inc.* 126,321 412,953 58,343
Less: The effect of consolidating
equity investments included above (51,046) (202,985) (17,271)
Add: 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:
Australia (GPU Electric) 91,112 1,690,018 561,562
United Kingdom (GPU Electric)* 142,854 2,213,350 836,431
South America (GPU Power, Inc.)* 136,822 385,836 54,366
Less: The effect of consolidating
equity investments above (198,986) (2,437,992) (833,658)
Add: 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
December 31, 1998 Debt Liabilities Expenditures
- ----------------- ---- ----------- ------------
Domestic:
GPU Energy companies $2,368,870 $6,211,677 $ 328,418
GPU International, Inc.* 188,774 218,998 31,574
Less: The effect of consolidating
equity investments included above (188,774) (19,968) (10,199)
Add: Equity investments
included on the balance sheet - - -
GPU AR - 158 34
Corporate - 1,360 -
--------- --------- ---------
Subtotal 2,368,870 6,412,225 349,827
--------- --------- ---------
Foreign:
Australia (GPU Electric) 1,060,877 46,397 58,549
United Kingdom (GPU Electric)* 1,116,144 204,680 50,092
South America (GPU Power, Inc.)* 188,928 57,032 60,096
Less: The effect of consolidating
equity investments included above (909,235) (213,295) (50,341)
Add: 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
========= ========= =========
<FN>
* Includes the effect of consolidating ownership interests in investments
accounted for under the equity method (pro-rata consolidation), which are not
consolidated in the audited consolidated financial statements.
</FN>
43
GPU, Inc. and Subsidiary Companies
Earnings Segment Data (in thousands)
Depreciation
For the three months Operating and Operating
ended March 31, 1999 Revenues Amortization Income
- -------------------- -------- ------------ ------
Domestic:
GPU Energy companies $ 972,925 $ 104,882 $ 190,441
GPU International, Inc.* 37,528 1,490 6,282
Less: The effect of consolidating
equity investments included above (20,308) (2,023) (5,720)
Add: Equity in undistributed earnings of
affiliates, net on the income statement - - -
GPU AR 16,460 - 1,672
Corporate - - (1,478)
--------- ------- -------
Subtotal 1,006,605 104,349 191,197
--------- ------- -------
Foreign:
Australia (GPU Electric) 47,188 4,064 28,241
United Kingdom (GPU Electric)* 337,128 14,914 53,039
Argentina (GPU Electric) 10,772 7,485 2,116
South America (GPU Power, Inc.)* 19,064 3,890 7,057
Less: The effect of consolidating
equity investments included above (347,024) (17,458) (59,942)
Add: Equity in undistributed earnings of
affiliates, net on the income statement - - -
---------- ------- -------
Subtotal 67,128 12,895 33,511
--------- ------- -------
Consolidated Total $1,073,733 $ 117,244 $ 224,708
========= ======= =======
Other Interest and
For the three months Income and Preferred
ended March 31, 1999 Deductions Dividends Net Income
- -------------------- ---------- --------- ----------
Domestic:
GPU Energy companies $ 18,172 $ 60,264 $ 148,349
GPU International, Inc.* 1,019 4,618 2,683
Less: The effect of consolidating
equity investments included above 288 (4,362) (1,070)
Add: Equity in undistributed earnings of
affiliates, net on the income statement 1,070 - 1,070
GPU AR 9 - 1,681
Corporate 16 541 (2,003)
------ ------- -------
Subtotal 20,574 61,061 150,710
------ ------- -------
Foreign:
Australia (GPU Electric) (132) 24,885 3,224
United Kingdom (GPU Electric)* 6,210 25,464 33,785
Argentina (GPU Electric) 127 1,866 377
South America (GPU Power, Inc.)* 1,687 5,298 2,623
Less: The effect of consolidating
equity investments included above (20,591) (25,351) (52,182)
Add: Equity in undistributed earnings of
affiliates, net on the income statement 52,182 - 52,182
------ ------- --------
Subtotal 39,483 32,162 40,009
------ ------- --------
Consolidated Total $ 60,057 $ 93,223 $ 190,719
====== ======= =======
<FN>
* Includes the effect of consolidating ownership interests in investments
accounted for under the equity method (pro-rata consolidation), which are not
consolidated in the audited consolidated financial statements.
</FN>
44
GPU, Inc. and Subsidiary Companies
Earnings Segment Data (in thousands)(continued)
Depreciation
For the three months Operating and Operating
ended March 31, 1998 Revenues Amortization Income
- -------------------- --------- ------------ ---------
Domestic:
GPU Energy companies $ 968,888 $ 114,901 $ 161,796
GPU International, Inc.* 46,036 2,512 7,064
Less: The effect of consolidating
equity investments included above (29,337) (2,334) (7,861)
Add: Equity in undistributed earnings of
affiliates, net on the income statement - - -
GPU AR 1,925 - (815)
Corporate - - (1,001)
--------- ------- -------
Subtotal 987,512 115,079 159,183
--------- ------- -------
Foreign:
Australia (GPU Electric) 48,243 10,496 32,126
United Kingdom (GPU Electric)* 322,735 14,198 43,493
South America (GPU Power, Inc.)* 12,866 4,946 (28)
Less: The effect of consolidating
equity investments included above (328,247) (17,571) (41,433)
Add: Equity in undistributed earnings of
affiliates, net on the income statement - - -
--------- ------- -------
Subtotal 55,597 12,069 34,158
--------- ------- -------
Consolidated Total $1,043,109 $ 127,148 $ 193,341
========= ======= =======
Other Interest and
For the three months Income and Preferred
ended March 31, 1998 Deductions Dividends Net Income
- -------------------- ---------- ----------- ----------
Domestic:
GPU Energy companies $ 1,421 $ 61,179 $ 102,038
GPU International, Inc.* 4,413 4,850 6,627
Less: The effect of consolidating
equity investments included above 1,224 (4,714) (1,923)
Add: Equity in undistributed earnings of
affiliates, net on the income statement 1,923 - 1,923
GPU AR 21 - (794)
Corporate 26 1,458 (2,433)
------ ------- -------
Subtotal 9,028 62,773 105,438
------ ------- -------
Foreign:
Australia (GPU Electric) 17,154 29,785 19,495
United Kingdom (GPU Electric)* (2,779) 30,693 10,021
South America (GPU Power, Inc.)* 531 1,176 (1,174)
Less: The effect of consolidating
equity investments included above 3,440 (22,265) (15,728)
Add: Equity in undistributed earnings of
affiliates, net on the income statement 15,728 - 15,728
------ ------- -------
Subtotal 34,074 39,389 28,342
------ ------- -------
Consolidated Total $ 43,102 $ 102,162 $ 133,780
====== ======= =======
<FN>
* Includes the effect of consolidating ownership interests in investments
accounted for under the equity method (pro-rata consolidation), which are not
consolidated in the audited consolidated financial statements.
</FN>
45
GPU, Inc. and Subsidiary Companies
5. COMPREHENSIVE INCOME
For the three months ended March 31, 1999 and 1998, comprehensive income
was as follows:
(in thousands)
Three months
Ended March 31,
----------------------
GPU, Inc. and Subsidiary Companies 1999 1998
---- ----
Net income $190,719 $133,780
-------- --------
Other comprehensive income, net of tax:
Net unrealized gains/(losses) on investments (2,195) 3,820
Foreign currency translation 1,452 10,743
-------- --------
Total other comprehensive income/(loss) (743) 14,563
-------- --------
Comprehensive income $189,976 $148,343
======== ========
Met-Ed
Net income $ 32,832 $ 24,730
Other comprehensive income, net of tax:
Net unrealized gains on investments 1,646 2,547
-------- --------
Comprehensive income $ 34,478 $ 27,277
======== ========
Penelec
Net income $ 65,490 $ 26,645
-------- --------
Other comprehensive income, net of tax:
Net unrealized gains on investments 752 1,273
-------- --------
Comprehensive income $ 66,242 $ 27,918
======== ========
46
COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GPU, Inc. owns all the outstanding common stock of three domestic electric
utilities -- Jersey Central Power & Light Company (JCP&L), Metropolitan Edison
Company (Met-Ed) and Pennsylvania Electric Company (Penelec). The customer
service, transmission and distribution operations of these electric utilities
are conducting business under the name GPU Energy. JCP&L, Met-Ed and Penelec
considered together are referred to as the "GPU Energy companies." The
generation operations of the GPU Energy companies are conducted by GPU
Generation, Inc. (Genco) and GPU Nuclear, Inc. (GPUN). GPU Capital, Inc. and GPU
Electric, Inc. and their subsidiaries, own, operate and fund the acquisition of
transmission and distribution systems in foreign countries, and are referred to
as "GPU Electric." GPU International, Inc. and GPU Power, Inc. and their
subsidiaries, develop, own and operate generation facilities in the United
States and foreign countries and are referred to as the "GPUI Group." 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 earnings for the first quarter ended March 31, 1999 were $190.7
million, compared to 1998 first quarter earnings of $133.8 million. Earnings per
share on a diluted basis were $1.49 in 1999, compared to $1.07 per share in
1998.
The earnings increase was due to higher earnings from both GPU's
domestic utility operations, which are conducted by GPU Energy, and its foreign
utility operations, which are conducted by GPU Electric. The increase also
included the recognition of a non-recurring gain of $27.8 million after-tax, or
$0.22 per share, by Penelec, for the portion of the gain on the sale of its
interest in the Homer City Generating Station (Homer City) related to wholesale
operations. Excluding this non-recurring gain, first quarter earnings would have
been $162.9 million, or $1.27 per share.
GPU Energy's earnings increase over the first quarter of last year was
due to higher weather-related sales and lower net energy expenses. GPU
Electric's earnings increase over the first quarter of last year was due to
increased profits from Midlands Electricity's (Midlands) supply business and a
gain on the sale of the Midlands' Enersis generating facility in Portugal. First
quarter 1998 results also included a gain on the sale of Solaris Power.
47
GPU RESULTS OF OPERATIONS (continued)
OPERATING REVENUES:
- -------------------
Operating revenues for the first quarter of 1999 increased 2.9% to $1.07
billion, as compared to the first quarter of 1998. The components of the changes
are as follows:
(in millions)
-------------
GPU Energy companies:
Kilowatt-hour (KWH) revenues $(53.0)
Energy-related revenues 31.5
CTC revenues 23.1
GPU Telcom revenues (3.0)
Other revenues 5.4
-----
Total GPU Energy companies 4.0
GPU Electric 10.0
GPUI Group 2.1
GPU AR 14.5
-----
Total increase in revenues $ 30.6
=====
GPU Energy Companies
Kilowatt-hour revenues
- ----------------------
The decrease in KWH revenues for the three month period was due primarily
to a decrease in non-utility generation (NUG) revenues for Met-Ed and Penelec
(which did not have a significant impact on earnings); lower generation-related
revenues due to some PA customers choosing another supplier; partially offset by
higher weather-related sales due to colder winter temperatures this year
compared to last and increased sales to other utilities.
Energy-related revenues (JCP&L only)
- ------------------------------------
Changes in energy-related revenues do not affect earnings as they reflect
corresponding changes in JCP&L's levelized energy adjustment clause (LEAC)
billed to customers and expensed. The increase was due primarily to a change in
the estimate for unbilled revenue.
CTC revenues
- ------------
Changes in CTC revenues do not affect earnings as they are offset by
corresponding changes in expense.
GPU Telcom revenues
- -------------------
The decrease in GPU Telcom revenues for the three month period was due to
lower revenues from contracts for the leasing and construction of
telecommunication infrastructure.
Other revenues
- --------------
The increase in other revenues for the three month period was due
primarily to increased transmission revenues at Met-Ed and Penelec as a result
of customer shopping from Pennsylvania deregulation.
48
GPU RESULTS OF OPERATIONS (continued)
GPU Electric
The increase in revenues for the three month period was due mainly to the
inclusion of revenues from Emdersa, an electric distribution business in
Argentina, which was acquired by GPU Electric in March 1999.
GPUI Group
The increase in GPUI Group revenues for the three month period was due
primarily to an increase in Empresa Guaracachi (EGSA) energy and capacity
revenues, the effect of consolidating Onondaga beginning August 1998, which was
partially offset by lower management fee revenues.
GPU AR
The increase in revenues for the three month period was due primarily to
an increase in energy sales to customers who chose GPU AR as their electric
energy supplier as part of retail customer choice in Pennsylvania.
OPERATING EXPENSES:
- -------------------
Power purchased and interchanged (PP&I)
- ---------------------------------------
Changes in the energy component of PP&I expense do not significantly
affect JCP&L's earnings since these cost variances are passed through the LEAC.
However, such cost variances for Met-Ed and Penelec are not subject to deferred
accounting, except for above-market NUG costs, which are deferred in accordance
with the PaPUC Restructuring Orders. The decrease in PP&I for the three month
period is primarily due to reduced purchases and the deferral of above-market
NUG costs by Met-Ed and Penelec, partially offset by increased purchases at GPU
AR.
Fuel and Deferral of energy and capacity costs, net
- ---------------------------------------------------
For JCP&L, changes in fuel and deferral of energy and capacity costs, net
do not affect earnings as they are offset by corresponding changes in energy
revenues. Met-Ed and Penelec ceased deferred energy accounting as their ECRs
were combined with base rates in 1997. The decrease in fuel for the three month
period was primarily due to lower fuel expenses at Penelec due to the sale of
its interest in Homer City; partially offset by increased fuel expenses at EGSA,
and the effect of consolidating Onondaga beginning August 1998.
Other operation and maintenance (O&M)
- -------------------------------------
The increase in other O&M expenses for the three month period was
primarily due to higher GPU Electric O&M expenses resulting from the acquisition
of Emdersa in March 1999.
49
GPU RESULTS OF OPERATIONS (continued)
Depreciation and amortization
- -----------------------------
The decrease in depreciation and amortization expense for the three month
period was due mainly to lower depreciation expense at GPU Energy due to the
effects of the impairment writedown of TMI-1 in 1998 and the sale of Homer City
in March 1999.
Taxes, other than income taxes
- ------------------------------
For JCP&L, changes in taxes other than income taxes do not significantly
affect earnings as they are substantially recovered in revenues. Met-Ed and
Penelec's State Tax Adjustment Surcharges were combined with base rates in 1997
and are no longer subject to annual adjustment. This did not have a significant
impact on earnings for the first three months of 1999.
OTHER INCOME AND DEDUCTIONS:
- ----------------------------
Equity in undistributed earnings of affiliates, net
- ---------------------------------------------------
The increase in equity in undistributed earnings of affiliates, net for
the three month period was due to higher GPU Electric earnings primarily due to
increased earnings from Midlands' operations and a gain on the sale of the
Enersis generation facility in Portugal.
Other income, net
- -----------------
The increase in other income, net for the three month period was due
primarily to the recognition of the gain on the sale of Penelec's interest in
Homer City relating to wholesale operations, partially offset by the gains
realized in 1998 by GPU Electric from the sale of Solaris and the GPUI Group's
sale of a 50% interest in the Mid-Georgia cogeneration project.
INTEREST CHARGES AND PREFERRED DIVIDENDS:
- -----------------------------------------
Interest on long-term debt
- --------------------------
The decrease in interest on long-term debt for the three month period was
due primarily to lower interest costs at GPU Electric.
Preferred stock dividends of subsidiaries
- -----------------------------------------
In January 1999, Met-Ed and Penelec redeemed all of their outstanding
shares of cumulative preferred stock. A reacquisition loss of $0.5 million and
$0.7 million was recorded by Met-Ed and Penelec, respectively.
50
JCP&L RESULTS OF OPERATIONS
---------------------------
JCP&L's earnings for the first quarter ended March 31, 1999 were $51.3
million, compared to 1998 first quarter earnings of $50.1 million. The increase
in earnings was due primarily to higher weather-related sales this year compared
to last year and increased usage by residential and commercial customers.
OPERATING REVENUES:
- -------------------
Operating revenues for the first quarter of 1999 increased 9.4% to $516.9
million, as compared to the first quarter of 1998. The components of the changes
are as follows:
(in millions)
-------------
KWH revenues $ 11.6
Energy-related revenues 31.5
Other revenues 1.4
----
Increase in revenues $ 44.5
====
Kilowatt-hour revenues
- ----------------------
The increase in KWH revenues for the three month period was due to higher
weather-related sales due to a colder winter this year compared to last year and
increased usage by residential and commercial customers.
Energy-related revenues
- -----------------------
Changes in energy-related revenues do not affect earnings as they reflect
corresponding changes in the LEAC billed to customers and expensed. The increase
was due primarily to a change in the estimate for unbilled revenue.
Other revenues
- --------------
Changes in other revenues do not affect earnings as they are offset by
corresponding changes in expense.
OPERATING EXPENSES:
- -------------------
Power purchased and interchanged
- --------------------------------
Changes in the energy component of PP&I expense do not significantly
affect earnings since these cost variances are passed through the LEAC.
Fuel and Deferral of energy and capacity costs, net
- ---------------------------------------------------
Changes in fuel and deferral of energy and capacity costs, net do not
affect earnings as they are offset by corresponding changes in energy revenues.
51
JCP&L RESULTS OF OPERATIONS (continued)
- ---------------------------------------
Other operation and maintenance
- -------------------------------
The increase in other O&M expenses for the three month period was
primarily due to higher expenses related to the reengineering of business
processes to position JCP&L for deregulation.
Depreciation and amortization
- -----------------------------
The decrease in depreciation and amortization expense for the three month
period was due mainly to the effects of the impairment writedown of TMI-1 in
1998.
Taxes, other than income taxes
- ------------------------------
Changes in taxes other than income taxes do not significantly affect
earnings as they are substantially recovered in revenues.
MET-ED RESULTS OF OPERATIONS
----------------------------
Met-Ed's earnings for the first quarter ended March 31, 1999 were $32.2
million, compared to 1998 first quarter earnings of $24.6 million. The increase
in earnings was due primarily to higher weather-related sales this year compared
to last year, lower fuel and power purchase costs and a decrease in depreciation
and amortization expense.
OPERATING REVENUES:
- -------------------
Operating revenues for the first quarter of 1999 decreased 2.4% to $229.2
million as compared to the first quarter of 1998. The components of the changes
are as follows:
(in millions)
-------------
KWH revenues $(23.4)
CTC revenues 14.4
Other revenues 3.4
-----
Decrease in revenues $ (5.6)
=====
Kilowatt-hour revenues
The decrease in KWH revenues for the three month period was due
primarily to a decrease in NUG revenues (which did not have a significant impact
on earnings); lower generation-related related revenues due to some PA customers
choosing another supplier; partially offset by higher weather-related sales due
to colder winter temperatures this year compared to last, increased usage by
residential customers and increased sales to other utilities.
52
MET-ED RESULTS OF OPERATIONS (continued)
- ----------------------------------------
CTC revenues
- ------------
Changes in CTC revenues do not affect earnings as they are offset by
corresponding changes in expense.
Other revenues
- --------------
The increase in other revenues for the three month period was due
primarily to increased transmission revenues as a result of customer shopping
from Pennsylvania deregulation.
OPERATING EXPENSES:
- -------------------
Fuel and Power purchased and interchanged
- -----------------------------------------
Met-Ed ceased deferred energy accounting as its ECR was combined with base
rates in 1997. Cost variances are not subject to deferred accounting, except for
above-market NUG costs, which are deferred in accordance with the PaPUC
Restructuring Order. The decrease for the three month period is primarily due to
lower fuel costs and decreased power purchases and the deferral of above-market
NUG costs.
Depreciation and amortization
- -----------------------------
The decrease in depreciation and amortization expense for the three month
period was due primarily to the effect of the impairment writedown of TMI-1 in
1998.
Preferred stock dividends and loss on preferred stock reacquisition
In January 1999, Met-Ed redeemed all of its outstanding shares of
cumulative preferred stock. As a result, a reacquisition loss of $0.5 million
was recorded.
PENELEC RESULTS OF OPERATIONS
-----------------------------
Penelec's earnings for the first quarter ended March 31, 1999 were $64.6
million, compared to 1998 first quarter earnings of $26.5 million. The increase
in earnings was due primarily to the recognition of a non-recurring gain of
$27.8 million after-tax, for the portion of the gain on the sale of its interest
in Homer City related to wholesale operations. Also, contributing to the
increase in earnings was higher weather-related sales compared to last year,
lower fuel and power purchase costs and a decrease in depreciation and
amortization expense.
OPERATING REVENUES:
- -------------------
Operating revenues for the first quarter of 1999 decreased 6.6% to $246.2
million, as compared to the first quarter of 1998. The components of the changes
are as follows:
53
PENELEC RESULTS OF OPERATIONS (continued)
OPERATING REVENUES:
(in millions)
-------------
KWH revenues $(26.7)
CTC revenues 8.7
Other revenues 0.6
-------
Decrease in revenues $(17.4)
======
Kilowatt-hour revenues
- ----------------------
The decrease in KWH revenues for the three month period was due primarily
to a decrease in NUG revenues (which did not have a significant impact on
earnings); lower generation-related related revenues due to some PA customers
choosing another supplier; partially offset by higher weather-related sales due
to colder winter temperatures this year compared to last, increased usage by
residential customers and increased sales to other utilities.
CTC revenues
- ------------
Changes in CTC revenues do not affect earnings as they are offset by
corresponding changes in expense.
Other revenues
- --------------
The increase in other revenues for the three month period was due
primarily to increased transmission revenues as a result of customer shopping
from Pennsylvania deregulation.
OPERATING EXPENSES:
- -------------------
Fuel and Power purchased and interchanged
- -----------------------------------------
Penelec ceased deferred energy accounting as its ECR was combined with base
rates in 1997. Cost variances are not subject to deferred accounting, except for
above-market NUG costs, which are deferred in accordance with the PaPUC
Restructuring Order. The decrease for the three month period is primarily due to
lower fuel costs and decreased power purchases and the deferral of above-market
NUG costs.
Depreciation and amortization
- -----------------------------
The decrease in depreciation and amortization expense for the three month
period was due primarily to the effect of the 1998 impairment writedown of TMI-1
and the sale of Homer City in March 1999.
OTHER INCOME AND DEDUCTIONS:
- ----------------------------
Other income, net
- -----------------
The increase in other income, net for the three month period was due
primarily to the recognition of the gain on the sale of Homer City relating to
wholesale operations.
54
PENELEC RESULTS OF OPERATIONS (continued)
- -----------------------------------------
Preferred stock dividends and loss on preferred stock reacquisition
- -------------------------------------------------------------------
In January 1999, Penelec redeemed all of its outstanding shares of
cumulative preferred stock. As a result, a reacquisition loss of $0.7 million
was recorded.
GPU ELECTRIC AND THE GPUI GROUP
-------------------------------
GPU Electric has ownership interests in transmission and distribution
businesses in England, Australia and Argentina. GPU Electric also has ownership
interests in six operating generating facilities through its investment in
Midlands Electricity plc (Midlands) located in foreign countries totaling 3,213
megawatts (MW) (of which GPU Electric's equity interest represents 397 MW) of
capacity.
In March 1999, GPU Electric acquired Empresa Distribuidora Electrica
Regional, S.A. (Emdersa) for $433 million. Emdersa owns three electric
distribution companies that serve three provinces in northwest Argentina. The
acquisition was financed through the issuance of commercial paper by GPU Capital
and a $50 million contribution from GPU, Inc. The acquisition will be accounted
for under the purchase method of accounting. The total acquisition cost exceeded
the preliminary estimated value of net assets by $268 million. This excess
amount will be amortized on a straight-line basis over 40 years and will be
revised within twelve months when the final valuation of net assets is completed
but is not expected to be materially different.
In 1998, 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.
The GPUI Group has ownership interests in nine operating cogeneration
plants in the U.S. totaling 1,147 MW (of which the GPUI Group's equity interest
represents 498 MW) of capacity and four operating generating facilities located
in foreign countries totaling 1,107 MW (of which the GPUI Group's equity
interest represents 363 MW) of capacity.
At March 31, 1999, GPU, Inc.'s aggregate investment in GPU Electric and
the GPUI Group was $398 million and $242 million, respectively. GPU, Inc. has
also guaranteed up to an additional $1.07 billion and $33 million of GPU
Electric and GPUI Group obligations, respectively. 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 March 31, 1999. At March 31, 1999, GPU, Inc.
has remaining authorization to finance approximately $622 million of additional
investments in FUCOs and EWGs. GPU's retained earnings could be reduced by
write-offs resulting from any unfavorable regulatory actions on JCP&L's
restructuring plans in New Jersey. Such reductions would
55
reduce the amount of available authorization for investments in FUCOs and EWGs.
Management expects that GPU Electric and 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.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Capital Expenditures and Investments
- ------------------------------------
GPU Energy Companies
The GPU Energy companies' capital spending for the three months ended
March 31, 1999 was $60 million (JCP&L $28 million; Met-Ed $15 million; Penelec
$16 million; Other $1 million), and was used primarily for new customer
connections and to expand and improve existing T&D facilities. For 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. Expenditures for maturing obligations are
expected to total $83 million (JCP&L $3 million; Met-Ed $30 million; Penelec $50
million) in 1999. Management estimates that a substantial portion of the GPU
Energy companies' 1999 capital outlays will be satisfied through internally
generated funds.
GPU Electric and the GPUI Group
GPU Electric and the GPUI Group's capital spending for the three months
ended March 31, 1999 was $380 million and $17 million, respectively and was used
primarily for the acquisition of Emdersa, to improve PowerNet's facilities and
construction activities at GPUI Group's South American investment. For 1999,
capital expenditures are forecasted to be $19 million for GPU Electric
(excluding the Emdersa acquisition) and $20 million for the GPUI Group.
Expenditures for maturing obligations in 1999 for GPU Electric and the GPUI
Group are expected to total $453 million and $28 million, respectively.
Management estimates that GPU Electric's and the GPUI Group's 1999 capital
outlays will be satisfied through both internally generated funds and external
financings.
Financing
- ---------
GPU, Inc.
In January 1999, the GPU, Inc. Board of Directors authorized the repurchase
of up to $350 million of GPU, Inc. common stock. Through April 30, 1999, GPU,
Inc. has repurchased 2.3 million shares of common stock at an average price of
$39.12 per share.
GPU has $1.8 billion of committed credit facilities, which include various
committed lines of credit totaling $207 million, a $250 million Revolving Credit
Agreement, and three other Credit Agreements, as discussed below.
56
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 the $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. Facility fees range from .085% to .4% depending
on GPU's senior debt rating and are payable quarterly. A separate $360 million
credit facility serves as the backstop for the GPU Australia Holdings commercial
paper program.
GPU International has a 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 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.
GPU, Inc. has requested SEC authorization to issue and sell up to $100
million of commercial paper through December 2003. The proceeds from the sale of
the commercial paper would 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. Further significant investments by GPU Electric and or the GPUI Group, or
otherwise, may require GPU, Inc. to issue additional debt and/or common stock.
GPU Energy Companies
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. Met-Ed and JCP&L will be issuing secured
senior notes (collateralized by First Mortgage Bonds issued to the senior note
trustee) until such time as more than 80% of the issued First Mortgage Bonds are
held by the senior note trustee. At that time, the outstanding senior notes will
become unsecured obligations of the respective company and it is expected that
further senior notes issued by Met-Ed and JCP&L will be unsecured. As noted
below, in April 1999, Penelec issued $350 million of unsecured senior notes. All
further senior notes issued by Penelec are expected to be on a unsecured basis.
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
57
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 (subject to certain
exceptions) the GPU Energy companies from issuing any debt which is senior to
the senior notes.
JCP&L and Penelec also have authorization to issue FMBs, including secured
medium-term notes, and preferred stock through June 1999 although, Penelec's
senior note indenture prohibits it from issuing FMB's under its existing
mortgage indenture. 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 sell any
additional senior securities under these existing authorizations, but rather
expect to issue senior notes and preferred securities.
The GPU Energy companies' bond indentures include provisions that limit
the amount of long-term debt the companies may issue. The GPU Energy companies'
interest coverage ratios are currently in excess of indenture 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.
JCP&L's certificate of incorporation includes provisions that limit the amount
of preferred stock and short-term debt it may issue. JCP&L's preferred dividend
coverage ratio is currently in excess of the charter restrictions. The GPU
Energy companies have regulatory authority to incur short-term debt, a portion
of which may be through the issuance of commercial paper.
Met-Ed and Penelec redeemed all of their outstanding shares of cumulative
preferred stock on February 19, 1999 at a price of $12.6 million and $17.6
million for Met-Ed and Penelec, respectively. As a result, a reacquisition loss
of $1.2 million was charged to GPU's net income ($0.5 million and $0.7
million for Met-Ed and Penelec, respectively).
In April 1999, Penelec redeemed $600 million of its FMBs with proceeds from
the sale of the Homer City Station. In April 1999, Penelec issued $350 million
of unsecured senior notes, the proceeds from which will be used to redeem or
repurchase other outstanding securities, reduce short-term borrowings, fund
construction and for other corporate purposes.
GPU Electric
In January 1999, GPU Capital issued commercial paper for net proceeds of
$375 million which was used primarily to refinance Midlands acquisition debt. In
March 1999, GPU Capital issued additional commercial paper for net proceeds of
$375 million to fund a portion of the $433 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 March 31, 1999, Austran had outstanding approximately A$443
million (approximately U.S. $281 million) under the commercial paper program,
the proceeds from 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
58
noncurrent on the Consolidated Balance Sheet since it is management's intent to
reissue the commercial paper on a long-term basis.
GPU may further reduce the outstanding commercial paper issued associated
with the refinancing of the Midlands acquisition debt in addition to PowerNet
acquisition debt with a portion of the proceeds from the sale of the GPU Energy
companies' generating facilities (see COMPETITIVE ENVIRONMENT AND RATE MATTERS
section of Management's Discussion and Analysis).
Capitalization
- --------------
On April 1, 1999, the GPU Board of Directors declared a quarterly common
stock dividend of $0.53 per share, an increase of 3%.
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 well underway. 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 made significant progress in
developing 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 has since addressed.
Regulatory Compliance for Year 2000 Readiness
In July 1998, the PaPUC entered an Order mandating that Pennsylvania
jurisdictional utilities have their mission-critical systems Year 2000 compliant
by March 31, 1999, and that utilities file with the PaPUC contingency plans for
all mission-critical systems that will not be compliant by that date. With few
exceptions, the mission-critical assets of Met-Ed and Penelec are Year 2000
ready, and contingency plans were filed with the PaPUC on March 31, 1999 for
those mission-critical assets that were not Year 2000 ready by that date. In
April 1999, the PaPUC ordered, among other things, that its Year 2000
investigation remain open (until compliance is achieved or enforcement is
warranted) for utilities that have demonstrated good cause for an extension of
time within which they will fully comply with the July 1998 Order. Met-Ed and
Penelec believe that they fall into this category and will continue to report to
the PaPUC on the progress of their Year 2000 program.
In August 1998, the New Jersey Board of Public Utilities (NJBPU) ordered
all jurisdictional utilities to submit monthly progress reports to the NJBPU
detailing the status of the utilities' compliance efforts for mission-critical
systems. Accordingly, since October 1998 monthly reports have been filed with
the NJBPU detailing the Year 2000 readiness status of JCP&L's mission-critical
59
assets. In addition, the NJBPU ordered all jurisdictional utilities to submit
Year 2000 contingency plans, which JCP&L expects to file with the NJBPU by the
end of June 1999. These contingency plans will be based on the expansive scope
of reporting as described in the guidelines of the North American Electric
Reliability Council (NERC).
In addition to the investigations of the PaPUC and NJBPU, inquiries
concerning GPU's Year 2000 readiness have been made by the U.S. Nuclear
Regulatory Commission, the U.S. Department of Energy, the Pennsylvania Senate
Consumer Protection and Professional Licensure Committee, the New York Public
Service Commission and by numerous third parties with which GPU has business
relationships.
Costs
The GPU Energy companies currently estimate that they will spend
approximately $43.1 million (JCP&L $18.5 million; Met-Ed $12.1 million; Penelec
$12.5 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 $43.1 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 48% of the expected costs involve the modification or
replacement of Year 2000 Components; and 52% are for labor (including contract
labor) and contingencies. These costs are being funded by the GPU Energy
companies from their operations.
Through March 31, 1999, the GPU Energy companies have spent a total of
approximately $27.7 million (JCP&L $11.9 million; Met-Ed $7.8 million; Penelec
$8 million) (of the $43.1 million) in connection with the Year 2000 issue, of
which $7 million (JCP&L $3.1 million; Met-Ed $1.9 million; Penelec $2 million)
has been spent in 1999.
GPU Electric and the GPUI Group currently expect to spend a total of
approximately $8.6 million (to replace or modify equipment at Midlands and
PowerNet) and $0.8 million, respectively, to address the Year 2000 issue.
Through March 31, 1999, GPU Electric and the GPUI Group have spent a total of
approximately $3.7 million and $0.5 million, respectively, in connection with
the Year 2000 issue, of which $1.5 million and $0.1 million for GPU Electric and
the GPUI Group, respectively, has been spent in 1999.
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 June 1999 and fully operational for
these companies by September 1999. GPUN and Genco are not installing Project
Enterprise before the year 2000, but rather are making modifications to their
information systems to achieve Year 2000 readiness. Genco has completed
modification of its critical information systems and GPUN plans to complete such
modification by July 1, 1999.
Milestones
GPU has established Inventory, Assessment, Remediation, Testing and
Monitoring of Year 2000 Components as the primary phases for its Year 2000
60
program. The Inventory of Year 2000 Components was completed for all companies
in 1998. The milestones for Assessment, Remediation, Testing and Monitoring are
as follows:
Assessment Remediation Testing Monitoring
---------- ----------- ------- ----------
GPU Energy and GPUS Completed 05/31/1999 05/31/1999 03/31/2000
Genco Completed 05/31/1999 05/31/1999 05/31/2000
GPUN Completed 10/31/1999 10/31/1999 03/31/2000
GPU Electric Completed 06/30/1999 06/30/1999 03/31/2000
GPUI Group Completed 05/31/1999 05/31/1999 03/31/2000
Remediation and testing of Met-Ed and Penelec's PaPUC mission-critical
Year 2000 Components is essentially complete, except as noted below. JCP&L's
mission-critical Year 2000 Components are being remediated and tested in
accordance with NERC's readiness dates. In March 1999, testing of the GPU Energy
companies' electrical infrastructure was successfully completed and, as a
result, the electrical delivery system is now considered to be Year 2000 ready.
Also, in April 1999 the GPU Energy companies (and Genco) participated in a NERC
exercise which simulated a partial loss of voice and data communications and
conducted several internal tests in conjunction with the drill. These tests were
performed with favorable results.
Genco has completed modification and testing of mission-critical Year 2000
Components associated with its generation capacity. GPUN has completed
modification and testing of approximately 95% of its mission-critical Year 2000
Components. Modification and testing of TMI-1's Digital Turbine Control System
is scheduled for completion during the plant's refueling outage in September and
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 with PJM has been completed with favorable results.
- - Electric generation suppliers - GPU has contacted and received responses
from all critical electric generation suppliers concerning their readiness.
Those responses have indicated readiness dates that extend into September
1999.
61
- - 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
90% of those contacted. Testing with GPU's primary EFT partner is scheduled
for completion by May 31, 1999.
- - Vendors - All critical vendors have responded as to their readiness through
a supply chain survey. Those vendors that have provided insufficient
information will be further evaluated to determine the potential need for
employing contingency plans.
- - Customers - A customer readiness assessment was initiated during the fourth
quarter of 1998 and all critical customers have been contacted. The
preliminary assessment process has been completed and the response rate has
exceeded the response goal. The readiness of customers providing GPU in
excess of $2 billion in annual revenue (in the aggregate) has been
assessed.
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 NERC. 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, the GPU Energy companies will
serve customers in markets where there will essentially be capped rates. Since
the GPU Energy companies expect to exit the merchant generation business in the
near future, they will need to supply energy largely from contracted purchases
and purchases in the open market. Management is in the process of identifying
and addressing market risks, however, there can be no assurance that the GPU
Energy companies 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). In the future, GPU's ability to seek rate
62
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.
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.
Generation Divestiture
- ----------------------
In 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.
In March 1999, Penelec completed the sale of its 50% interest in the Homer
City Station to EME Homer City Generation, L.P., a subsidiary of Edison Mission
Energy for a purchase price of approximately $900 million. As a result of the
sale, Penelec recorded an after-tax gain of $27.8 million in the first quarter
of 1999, for the portion of the gain related to wholesale operations and
deferred as a regulatory liability $596.7 million pending Phase II of the
Pennsylvania restructuring proceeding.
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
63
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.
- 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, as well as certain rulings
from the Internal Revenue Service which will be necessary with respect to the
maintenance or transfer of the decommissioning trusts. In April 1999, the NRC
approved the transfer of the TMI-1 license to AmerGen. GPU expects to complete
the sale by the end of 1999. 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 GPU Electric and
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.
Recent Regulatory Actions
- -------------------------
New Jersey Restructuring
On April 14, 1999, JCP&L entered into a settlement agreement with several
parties to its stranded cost and rate unbundling proceedings pending before
64
the NJBPU. The settlement agreement, which is subject to NJBPU approval,
provides, among other things, for a 5% rate reduction commencing August 1, 1999,
a 5% rate refund from April 30, 1997 rates for service rendered on or after
August 1, 2002, and for average customer shopping credits beginning at 4.9 cents
per kilowatt hour and increasing to 5.16 cents per kilowatt hour in 2003 for
customers who choose an alternate supplier. The settlement agreement also allows
for the application of the net proceeds from JCP&L's generation asset sales to
reduce stranded costs, the securitization of approximately $525 million of
stranded costs associated with the Oyster Creek nuclear generating station, and
adequate assurance (through a deferral and true-up mechanism) of full recovery
of above-market costs associated with JCP&L's obligations under nonutility
generation, utility and transition power purchase agreements.
If approved by the NJBPU, the settlement agreement would result in an
approximately $195 million reduction in GPU's 1999 pre-tax earnings, or about
$0.90 per share (after-tax). The NJBPU is expected to act on the settlement
agreement in May 1999. There can be no assurance as to the outcome of this
matter.
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
generic implementation orders with respect to the restructuring filings for all
New Jersey utilities during the second quarter of 1999.
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;
- the unbundling of customer bills;
- the ability to recover stranded costs; and
- the ability to securitize stranded costs.
Pennsylvania Restructuring
- --------------------------
In 1996, Pennsylvania adopted comprehensive legislation (Customer Choice
Act) which provides for the restructuring of the electric utility industry. In
October 1998, the PaPUC issued amended Restructuring Orders, approving
Settlement Agreements entered into by Met-Ed and Penelec. An appeal by one
intervenor in the restructuring proceedings is still pending before the
Pennsylvania Commonwealth Court. There can be no assurance as to the outcome of
this appeal. The major elements of the Restructuring Orders are as follows:
65
- 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);
- 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;
66
- 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.
The results of Met-Ed and Penelec's sale of their generating facilities
(see Generation Divestiture) will be addressed in a Phase II of the Pennsylvania
restructuring proceeding. 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
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).
In April 1999, the Clinton administration introduced the Comprehensive
Electricity Competition Act which proposes a flexible mandate for customer
choice by January 1, 2003, reliability standards, environmental provisions, and
the repeal of both PURPA and PUHCA. The flexible mandate allows states to opt
out of the mandate if they believe consumers would be better served by an
alternative policy.
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 March 31, 1999, facilities
covered by these agreements having 1,681 MW (JCP&L 928 MW; Met-Ed 348 MW;
Penelec 405 MW) of capacity were in service.
67
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 1 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
Pennsylvania and New Jersey, the extent to which competition will affect the GPU
Energy companies' supply plan remains uncertain. 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.
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 1,681 MW and JCP&L has agreements with other utilities to
provide for up to 629 MW of capacity and related energy. 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.
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,
68
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.
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.
The Met-Ed and Penelec Restructuring Orders received in 1998,
essentially deregulated the electric generation portion of Met-Ed and Penelec's
businesses. 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 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 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (FAS 133), "Accounting for Derivative
Instruments and Hedging Activities". FAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. FAS 133
requires that companies recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
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
69
comprehensive income, depending upon the intended use and designation of the
derivative as a hedge. FAS 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. GPU will adopt FAS 133 in the first quarter
of 2000 and is in the process of evaluating the impact of this statement.
70
PART II
ITEM 1 - LEGAL PROCEEDINGS
Information concerning the current status of certain legal
proceedings instituted against GPU, Inc. and the GPU Energy
companies discussed in Part I of this report in Combined Notes to
Consolidated Financial Statements is incorporated herein by
reference and made a part hereof.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
(3) Restated Articles of Incorporation
A - Met-Ed
B - Penelec
(12) Statements Showing Computation of Ratio of Earnings
to Fixed Charges and Ratio of Earnings to Combined
Fixed Charges and Preferred Stock Dividends Based on
SEC Regulation S-K, Item 503
A - GPU, Inc. and Subsidiary Companies
B - JCP&L
C - Met-Ed
D - Penelec
(27) Financial Data Schedules
A - GPU, Inc. and Subsidiary Companies
B - JCP&L
C - Met-Ed
D - Penelec
(b) Reports on Form 8-K:
GPU, Inc.:
----------
Dated April 16, 1999, under Item 5 (Other Events).
Jersey Central Power & Light Company:
-------------------------------------
Dated April 16, 1999, under Item 5 (Other Events).
Pennsylvania Electric Company:
------------------------------
Dated April 26, 1999, under Item 5 (Other Events).
71
GPU, Inc. and Subsidiary Companies
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
GPU, INC.
May 5, 1999 By: /s/ B. L. Levy
----------------------------------
B. L. Levy, Senior Vice President
(Chief Financial Officer)
May 5, 1999 By: /s/ P. E. Maricondo
---------------------------------
P. E. Maricondo, Vice President
and Comptroller
(Chief Accounting Officer)
JERSEY CENTRAL POWER & LIGHT COMPANY
METROPOLITAN EDISON COMPANY
PENNSYLVANIA ELECTRIC COMPANY
May 5, 1999 By: /s/ D. Baldassari
---------------------------------
D. Baldassari, President
Principal Operating Officer)
May 5, 1999 By: /s/ C. A. Mascari
-----------------------------------
C. A.Mascari, Vice President -
Power Services and Comptroller
(Principal Accounting Officer)
72