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 June 30, 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 July 31, 1999, was as follows:
Shares
Registrant Title Outstanding
- --------------------------------- ------------------------------- -----------
GPU, Inc. Common Stock, $2.50 par value 125,451,859
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
June 30, 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 50
PART II - Other Information 75
Signatures 76
---------------------------------
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
-----------------------------
June 30, December 31,
1999 1998
------------ ------------
(Unaudited)
ASSETS
Utility Plant:
Transmission, distribution and general plant $ 8,339,977 $ 7,579,455
Generation plant 2,452,076 3,445,984
---------- ----------
Utility plant in service 10,792,053 11,025,439
Accumulated depreciation (4,462,182) (4,460,341)
---------- ----------
Net utility plant in service 6,329,871 6,565,098
Construction work in progress 275,910 94,005
Other, net 123,935 145,792
---------- ----------
Net utility plant 6,729,716 6,804,895
---------- ----------
Other Property and Investments:
Equity investments (Note 5) 691,364 667,998
Goodwill, net 1,040,615 545,262
Nuclear decommissioning trusts, at market (Note 1) 744,612 716,274
Nuclear fuel disposal trust, at market 118,861 116,871
Other, net 331,291 253,538
---------- ----------
Total other property and investments 2,926,743 2,299,943
---------- ----------
Current Assets:
Cash and temporary cash investments 298,454 72,755
Special deposits 48,343 62,673
Accounts receivable:
Customers, net 269,645 286,278
Other 190,703 126,088
Unbilled revenues 157,575 144,076
Materials and supplies, at average cost or less:
Construction and maintenance 121,052 155,827
Fuel 29,225 42,697
Investments held for sale 50,040 48,473
Deferred income taxes 25,116 47,521
Prepayments 194,739 76,021
---------- ----------
Total current assets 1,384,892 1,062,409
---------- ----------
Deferred Debits and Other Assets:
Regulatory assets, net: (Note 1)
Competitive transition charge 973,163 1,023,815
Other regulatory assets, net 4,588,498 2,882,413
Deferred income taxes 2,378,930 2,004,278
Other 220,003 210,356
---------- ----------
Total deferred debits and other assets 8,160,594 6,120,862
---------- ----------
Total Assets $19,201,945 $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
-----------------------------
June 30, December 31,
1999 1998
------------ ------------
(Unaudited)
LIABILITIES AND CAPITALIZATION
Capitalization:
Common stock $ 331,958 $ 331,958
Capital surplus 1,013,747 1,011,310
Retained earnings 2,335,325 2,230,425
Accumulated other comprehensive income/(loss) (Note 7) (27,893) (31,304)
---------- ----------
Total 3,653,137 3,542,389
Reacquired common stock, at cost (178,093) (77,741)
---------- ----------
Total common stockholders' equity 3,475,044 3,464,648
Cumulative preferred stock:
With mandatory redemption 81,500 86,500
Without mandatory redemption 37,741 66,478
Subsidiary-obligated mandatorily redeemable
preferred securities 330,000 330,000
Trust preferred securities 200,000 -
Long-term debt 4,829,230 3,825,584
---------- ----------
Total capitalization 8,953,515 7,773,210
---------- ----------
Current Liabilities:
Securities due within one year 153,272 563,683
Notes payable 472,400 368,607
Obligations under capital leases 128,986 126,480
Accounts payable 407,041 394,815
Taxes accrued 233,420 92,339
Interest accrued 74,373 81,931
Deferred energy credits 3,004 2,411
Other 367,990 377,594
---------- ----------
Total current liabilities 1,840,486 2,007,860
---------- ----------
Deferred Credits and Other Liabilities:
Deferred income taxes 3,094,439 3,044,947
Unamortized investment tax credits 98,958 114,308
Three Mile Island Unit 2 future costs 490,132 483,515
Power purchase contract loss liability 3,518,817 1,803,820
Other 1,205,598 1,060,449
---------- ----------
Total deferred credits and other liabilities 8,407,944 6,507,039
---------- ----------
<FN>
Commitments and Contingencies (Note 1)
</FN>
Total Liabilities and Capitalization $19,201,945 $16,288,109
========== ==========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
4
</FN>
GPU, INC. AND SUBSIDIARY COMPANIES
Consolidated Statements of Income
---------------------------------
(Unaudited)
In Thousands
(Except Per Share Data)
----------------------------------------------
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
Operating Revenues $ 897,729 $1,015,087 $1,971,462 $2,058,196
--------- --------- --------- ---------
Operating Expenses:
Fuel 72,443 100,353 168,919 197,053
Power purchased and interchanged 266,281 253,470 512,790 519,215
Deferral of energy and capacity
costs, net (20,226) (9,310) 144 (11,330)
Other operation and maintenance 278,256 262,845 523,410 501,228
Depreciation and amortization 125,851 134,868 243,095 262,016
Taxes, other than income taxes 43,097 57,239 92,444 114,758
--------- --------- --------- ---------
Total operating expenses 765,702 799,465 1,540,802 1,582,940
--------- --------- --------- ---------
Operating Income Before Income Taxes 132,027 215,622 430,660 475,256
Income taxes 21,175 50,316 95,071 116,609
--------- --------- --------- ---------
Operating Income 110,852 165,306 335,589 358,647
--------- --------- --------- ---------
Other Income and Deductions:
Allowance for other funds used during
construction 100 229 165 549
Equity in undistributed earnings
of affiliates, net (Note 5) 23,247 13,193 76,499 30,844
Other income/(expense), net 19,153 (3,650) 68,234 40,912
Income taxes (6,848) 711 (49,218) (18,720)
--------- --------- --------- ---------
Total other income and deductions 35,652 10,483 95,680 53,585
--------- --------- --------- ---------
Income Before Interest Charges
and Preferred Dividends 146,504 175,789 431,269 412,232
--------- --------- --------- ---------
Interest Charges and Preferred Dividends:
Long-term debt 82,159 77,882 158,839 161,934
Trust preferred securities 1,000 - 1,000 -
Subsidiary-obligated mandatorily
redeemable preferred securities 7,222 7,222 14,444 14,444
Other interest 6,002 8,859 12,011 17,843
Allowance for borrowed funds used
during construction (1,036) (1,276) (1,644) (2,347)
Preferred stock dividends of subsidiaries,
inclusive of $1,268 loss on
reacquisition (1st Qtr. 1999) 2,370 2,917 6,290 5,892
--------- --------- --------- ---------
Total interest charges and
preferred dividends 97,717 95,604 190,940 197,766
--------- --------- --------- ---------
Minority interest net income 1,525 248 2,348 749
--------- --------- --------- ---------
Income Before Extraordinary Item 47,262 79,937 237,981 213,717
Extraordinary item (net of income tax
benefit of $195,090) - (275,110) - (275,110)
--------- --------- --------- ---------
Net Income/(Loss) $ 47,262 $ (195,173) $ 237,981 $ (61,393)
========= ========= ========= =========
Basic - Earnings Per Avg. Common Share
Before Extraordinary Item $ .39 $ 0.62 $ 1.88 $ 1.69
Extraordinary Item - (2.16) - (2.16)
--------- --------- --------- ---------
Basic - Earnings Per Avg. Common Share $ .39 $ (1.54) $ 1.88 $ (0.47)
========= ========= ========= =========
Avg. Common Shares Outstanding 125,701 127,892 126,670 126,218
========= ========= ========= =========
Diluted - Earnings Per Avg. Common Share
Before Extraordinary Item $ .38 $ 0.62 $ 1.87 $ 1.69
Extraordinary Item - (2.16) - (2.16)
--------- --------- --------- ---------
Diluted - Earnings Per Avg. Common Share $ .38 $ (1.54) $ 1.87 $ (0.47)
========= ========= ========= =========
Avg. Common Shares Outstanding 125,951 128,162 126,932 126,493
========= ========= ========= =========
Cash Dividends Paid Per Share $ .530 $ .515 $ 1.045 $ 1.015
========= ========= ========= =========
<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
--------------------------
Six Months
Ended June 30,
--------------------------
1999 1998
---- ----
Operating Activities:
Net income/(loss) $ 237,981 $ (61,393)
Extraordinary item (net of income tax
benefit of $195,090) - 275,110
---------- --------
Income before extraordinary item 237,981 213,717
Adjustments to reconcile income to cash provided:
Depreciation and amortization 256,454 282,400
Amortization of property under capital leases 26,041 26,838
NJBPU restructuring rate order 115,000 -
Gain on sale of investments (38,339) (38,812)
Equity in undistributed earnings
of affiliates, net of distributions received (66,889) (26,911)
Nuclear outage maintenance costs, net 2,913 11,149
Deferred income taxes and investment tax
credits, net (343,327) (53,316)
Deferred energy and capacity costs, net 411 (10,403)
Allowance for other funds used
during construction (165) (549)
Changes in working capital:
Receivables (92,730) 17,310
Materials and supplies 3,806 8,709
Special deposits and prepayments (109,353) (127,685)
Payables and accrued liabilities 118,481 (43,264)
Nonutility generation contract buyout costs (40,250) (20,417)
Other, net 40,205 18,672
---------- --------
Net cash provided by operating activities 110,239 257,438
---------- --------
Investing Activities:
Capital expenditures and investments (1,208,712) (202,790)
Proceeds from sale of investments 894,450 146,700
Contributions to decommissioning trusts (19,302) (24,239)
Other, net 52,912 2,431
---------- --------
Net cash provided/(required) by
investing activities (280,652) (77,898)
----------- --------
Financing Activities:
Issuance of long-term debt 1,614,321 -
Issuance of trust preferred securities 193,070 -
Increase/(Decrease) in notes payable, net 348,624 133,946
Retirement of long-term debt (1,463,192) (375,496)
Capital lease principal payments (23,756) (25,426)
Reacquisition of common stock (102,582) -
Issuance of common stock - 269,448
Dividends paid on common stock (132,534) (126,274)
Redemption of preferred stock of subsidiaries (35,004) (15,000)
---------- --------
Net cash required by financing activities 398,947 (138,802)
---------- --------
Effect of exchange rate changes on cash (2,835) (3,002)
---------- --------
Net increase in cash and temporary
cash investments from above activities 225,699 37,736
Cash and temporary cash investments, beginning of year 72,755 85,099
---------- --------
Cash and temporary cash investments, end of period $ 298,454 $ 122,835
========== ========
Supplemental Disclosure:
Interest and preferred dividends paid $ 191,347 $ 188,293
========== ========
Income taxes paid $ 285,016 $ 160,974
========== ========
New capital lease obligations incurred $ 28,396 $ 28,910
========== ========
Common stock dividends declared but not paid $ 66,489 $ 65,874
========== ========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
6
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
Consolidated Balance Sheets
---------------------------
In Thousands
--------------------------
June 30, December 31,
1999 1998
------------ ----------
(Unaudited)
ASSETS
Utility Plant:
Transmission, distribution, and general plant $3,135,468 $3,108,697
Generation plant 1,096,520 1,646,576
--------- ---------
Utility plant in service 4,231,988 4,755,273
Accumulated depreciation (2,310,599) (2,217,108)
--------- ---------
Net utility plant in service 1,921,389 2,538,165
Construction work in progress 69,115 48,126
Other, net 59,710 98,491
--------- ---------
Net utility plant 2,050,214 2,684,782
--------- ---------
Other Property and Investments:
Nuclear decommissioning trusts, at market (Note 1) 452,098 422,277
Nuclear fuel disposal trust, at market 118,861 116,871
Other, net 1,803 9,596
--------- ---------
Total other property and investments 572,762 548,744
--------- ---------
Current Assets:
Cash and temporary cash investments 11,909 1,850
Special deposits 3,338 6,047
Accounts receivable:
Customers, net 145,537 152,120
Other 61,484 32,562
Unbilled revenues 102,130 56,391
Materials and supplies, at average cost or less:
Construction and maintenance 26,061 79,863
Fuel 13,908 13,144
Deferred income taxes 3,583 20,812
Prepayments 127,207 27,648
--------- ---------
Total current assets 495,157 390,437
--------- ---------
Deferred Debits and Other Assets:
Regulatory assets, net (Note 1) 3,005,897 753,885
Deferred income taxes 196,578 179,237
Other 20,538 25,037
--------- ---------
Total deferred debits and other assets 3,223,013 958,159
--------- ---------
Total Assets $6,341,146 $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
--------------------------
June 30, December 31,
1999 1998
------------ ------------
(Unaudited)
LIABILITIES AND CAPITALIZATION
Capitalization:
Common stock $ 153,713 $ 153,713
Capital surplus 510,769 510,769
Retained earnings 841,056 893,016
Accumulated other comprehensive income/(loss)(Note 7) (425) (425)
--------- ---------
Total common stockholder's equity 1,505,113 1,557,073
Cumulative preferred stock:
With mandatory redemption 81,500 86,500
Without mandatory redemption 37,741 37,741
Company-obligated mandatorily redeemable
preferred securities 125,000 125,000
Long-term debt 1,133,653 1,173,532
--------- ---------
Total capitalization 2,883,007 2,979,846
--------- ---------
Current Liabilities:
Securities due within one year 42,512 2,512
Notes payable 187,800 122,344
Obligations under capital leases 77,227 85,366
Accounts payable:
Affiliates 49,263 40,861
Other 98,223 80,233
Taxes accrued 22,043 5,559
Interest accrued 26,887 26,678
Deferred energy credits 3,004 2,411
Other 52,484 104,408
--------- ---------
Total current liabilities 559,443 470,372
--------- ---------
Deferred Credits and Other Liabilities:
Deferred income taxes 572,633 670,961
Unamortized investment tax credits 48,000 50,225
Nuclear fuel disposal fee 144,464 141,270
Three Mile Island Unit 2 future costs 122,541 120,904
Power purchase contract loss liability 1,769,275 -
Other 241,783 148,544
--------- ---------
Total deferred credits and other liabilities 2,898,696 1,131,904
--------- ---------
Commitments and Contingencies (Note 1)
Total Liabilities and Capitalization $6,341,146 $4,582,122
========= =========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
8
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
Consolidated Statements of Income
---------------------------------
(Unaudited)
In Thousands
-------------------------------------------
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
Operating Revenues $ 391,025 $ 478,894 $ 907,914 $ 951,228
-------- -------- --------- --------
Operating Expenses:
Fuel 21,598 23,084 43,715 42,744
Power purchased and interchanged:
Affiliates 41,639 11,953 57,588 15,068
Others 144,908 155,025 298,358 308,705
Deferral of energy and capacity costs, net (20,226) (9,310) 144 (11,330)
Other operation and maintenance 107,899 113,030 215,745 213,760
Depreciation and amortization 64,362 68,685 127,058 131,679
Taxes, other than income taxes 19,560 23,677 40,894 47,534
-------- -------- --------- --------
Total operating expenses 379,740 386,144 783,502 748,160
-------- -------- --------- --------
Operating Income Before Income Taxes 11,285 92,750 124,412 203,068
Income taxes (7,272) 26,875 27,984 59,351
--------- -------- --------- --------
Operating Income 18,557 65,875 96,428 143,717
-------- -------- --------- --------
Other Income and Deductions:
Allowance for other funds used during
construction 69 193 123 468
Other income, net 4,463 2,653 7,482 4,918
Income taxes (1,982) (1,289) (3,401) (2,342)
-------- -------- --------- --------
Total other income and deductions 2,550 1,557 4,204 3,044
-------- -------- ---------- --------
Income Before Interest Charges 21,107 67,432 100,632 146,761
-------- -------- --------- --------
Interest Charges:
Long-term debt 21,806 21,849 43,612 43,641
Company-obligated mandatorily
redeemable preferred securities 2,675 2,675 5,350 5,350
Other interest 2,935 3,058 4,514 5,587
Allowance for borrowed funds used
during construction (454) (435) (686) (918)
-------- -------- --------- --------
Total interest charges 26,962 27,147 52,790 53,660
-------- -------- --------- --------
Net Income (5,855) 40,285 47,842 93,101
Preferred stock dividends 2,370 2,565 4,802 5,303
-------- -------- --------- --------
Earnings Available for Common Stock $ (8,225) $ 37,720 $ 43,040 $ 87,798
======== ======== ========= ========
<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
-------------------------
Six Months
Ended June 30,
-------------------------
1999 1998
---- ----
Operating Activities:
Net income $ 47,842 $ 93,101
Adjustments to reconcile income to cash provided:
Depreciation and amortization 141,578 143,726
Amortization of property under capital leases 15,237 14,771
NJBPU restructuring rate order 115,000 -
Nuclear outage maintenance costs, net (1,149) 6,602
Deferred income taxes and investment tax
credits, net (40,599) (29,294)
Deferred energy and capacity costs, net 411 (10,403)
Allowance for other funds used
during construction (123) (468)
Changes in working capital:
Receivables (68,078) (10,754)
Materials and supplies 11,797 6,407
Special deposits and prepayments (96,850) (107,136)
Payables and accrued liabilities 15,460 11,051
Nonutility generation contract buyout costs (35,500) (15,000)
Other, net 34,667 13,215
-------- --------
Net cash provided by operating activities 139,693 115,818
-------- --------
Investing Activities:
Capital expenditures and investments (67,305) (84,117)
Contributions to decommissioning trusts (12,571) (13,547)
Other, net 1,860 (3,850)
-------- --------
Net cash used for investing activities (78,016) (101,514)
-------- --------
Financing Activities:
Increase in notes payable, net 65,456 51,762
Capital lease principal payments (12,366) (14,811)
Redemption of preferred stock (5,000) (15,000)
Dividends paid on common stock (95,000) (25,000)
Dividends paid on preferred stock (4,708) (5,508)
-------- --------
Net cash required by financing activities (51,618) (8,557)
-------- --------
Net increase in cash and temporary
cash investments from above activities 10,059 5,747
Cash and temporary cash investments, beginning of year 1,850 2,994
-------- --------
Cash and temporary cash investments, end of period $ 11,909 $ 8,741
======== ========
Supplemental Disclosure:
Interest and preferred dividends paid $ 57,524 $ 57,725
======== ========
Income taxes paid $ 81,027 $ 97,162
======== ========
New capital lease obligations incurred $ 7,098 $ 28,852
======== ========
<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
-----------------------------
June 30, December 31,
1999 1998
---- ----
(Unaudited)
ASSETS
Utility Plant:
Transmission, distribution and general plant $1,492,983 $1,481,958
Generation plant 766,480 765,669
--------- ---------
Utility plant in service 2,259,463 2,247,627
Accumulated depreciation (1,035,160) (1,008,438)
--------- ---------
Net utility plant in service 1,224,303 1,239,189
Construction work in progress 33,277 19,380
Other, net 39,231 27,819
--------- ---------
Net utility plant 1,296,811 1,286,388
--------- ---------
Other Property and Investments:
Nuclear decommissioning trusts, at market (Note 1) 211,077 211,194
Other, net 6,154 11,742
--------- ---------
Total other property and investments 217,231 222,936
--------- ---------
Current Assets:
Cash and temporary cash investments 7,146 442
Special deposits 89 1,062
Accounts receivable:
Customers, net 48,093 60,012
Other 58,665 41,895
Unbilled revenues 27,426 43,687
Materials and supplies, at average cost or less:
Construction and maintenance 17,968 24,727
Fuel 8,940 12,218
Deferred income taxes 1,955 2,945
Prepayments 74,546 20,616
--------- ---------
Total current assets 244,828 207,604
--------- ---------
Deferred Debits and Other Assets:
Regulatory assets, net: (Note 1)
Competitive transition charge 661,927 680,213
Other regulatory assets, net 920,505 921,934
Deferred income taxes 665,880 714,202
Other 31,036 31,692
--------- ---------
Total deferred debits and other assets 2,279,348 2,348,041
--------- ---------
Total Assets $4,038,218 $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
--------------------------
June 30, December 31,
1999 1998
----------- ------------
(Unaudited)
LIABILITIES AND CAPITALIZATION
Capitalization:
Common stock $ 66,273 $ 66,273
Capital surplus 400,200 370,200
Retained earnings 255,459 234,066
Accumulated other comprehensive income (Note 7) 19,336 16,520
--------- ---------
Total common stockholder's equity 741,268 687,059
Cumulative preferred stock - 12,056
Company-obligated mandatorily redeemable
preferred securities 100,000 100,000
Trust preferred securities 100,000 -
Long-term debt 496,906 546,904
--------- ---------
Total capitalization 1,438,174 1,346,019
--------- ---------
Current Liabilities:
Securities due within one year 80,024 30,024
Notes payable 24,900 79,540
Obligations under capital leases 34,217 27,135
Accounts payable:
Affiliates 133,645 75,933
Other 41,782 102,390
Taxes accrued 12,335 19,463
Interest accrued 17,703 16,747
Other 18,109 42,598
--------- ---------
Total current liabilities 362,715 393,830
--------- ---------
Deferred Credits and Other Liabilities:
Deferred income taxes 998,007 1,010,982
Unamortized investment tax credits 26,175 27,157
Three Mile Island Unit 2 future costs 244,981 241,707
Nuclear fuel disposal fee 32,633 31,912
Power purchase contract loss liability 765,528 787,440
Other 170,005 225,922
--------- ---------
Total deferred credits and other liabilities 2,237,329 2,325,120
--------- ---------
Commitments and Contingencies (Note 1)
Total Liabilities and Capitalization $4,038,218 $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 Six Months
Ended June 30, Ended June 30,
----------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
Operating Revenues $ 198,010 $ 226,030 $ 427,167 $ 460,778
-------- -------- --------- --------
Operating Expenses:
Fuel 23,514 26,172 49,143 52,243
Power purchased and interchanged:
Affiliates - 3,565 2,208 5,418
Others 46,039 45,598 86,997 100,483
Other operation and maintenance 54,002 55,032 105,917 107,285
Depreciation and amortization 19,191 26,455 38,320 52,718
Taxes, other than income taxes 10,641 15,504 23,707 31,053
-------- -------- --------- ---------
Total operating expenses 153,387 172,326 306,292 349,200
-------- -------- --------- ---------
Operating Income Before Income Taxes 44,623 53,704 120,875 111,578
Income taxes 12,006 15,344 41,410 32,906
-------- -------- --------- ---------
Operating Income 32,617 38,360 79,465 78,672
-------- -------- --------- ---------
Other Income and Deductions:
Allowance for other funds used during
construction 31 36 42 81
Other income/(expense), net 1,903 (9,665) 3,036 (9,381)
Income taxes (290) 4,254 (866) 3,766
-------- -------- --------- --------
Total other income and deductions 1,644 (5,375) 2,212 (5,534)
-------- -------- --------- --------
Income Before Interest Charges 34,261 32,985 81,677 73,138
-------- -------- --------- --------
Interest Charges:
Long-term debt 10,624 10,624 21,247 21,247
Trust preferred securities 694 - 694 -
Company-obligated mandatorily
redeemable preferred securities 2,250 2,250 4,500 4,500
Other interest 1,833 1,800 3,720 4,553
Allowance for borrowed funds used
during construction (282) (237) (458) (440)
-------- -------- --------- ---------
Total interest charges 15,119 14,437 29,703 29,860
-------- -------- --------- ---------
Income Before Extraordinary Item 19,142 18,548 51,974 43,278
Extraordinary item (net of income tax
benefit of $132,810) - (187,280) - (187,280)
-------- -------- --------- ----------
Net Income/(Loss) 19,142 (168,732) 51,974 (144,002)
Preferred stock dividends - 121 66 242
Loss on preferred stock reacquisition - - 542 -
-------- -------- --------- ----------
Earnings/(Loss) Available for Common Stock $ 19,142 $(168,853) $ 51,366 $ (144,244)
======== ======== ========= ==========
<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
--------------------------
Six Months
Ended June 30,
--------------------------
1999 1998
---- ----
Operating Activities:
Net income/(loss) $ 51,974 $(144,002)
Extraordinary item (net of income tax
benefit of $132,810) - 187,280
-------- --------
Income before extraordinary item 51,974 43,278
Adjustments to reconcile income to cash provided:
Depreciation and amortization 41,302 58,232
Amortization of property under capital leases 7,117 7,294
Nuclear outage maintenance costs, net 2,711 3,029
Deferred income taxes and investment tax
credits, net 18,161 (10,824)
Allowance for other funds used
during construction (42) (81)
Changes in working capital:
Receivables (4,851) 11,488
Materials and supplies 10,036 3,676
Special deposits and prepayments (52,958) (16,490)
Payables and accrued liabilities (33,557) (34,367)
Nonutility generation contract buyout costs (1,250) (5,417)
Other, net (20,171) 11,153
-------- --------
Net cash provided by operating activities 18,472 70,971
-------- --------
Investing Activities:
Capital expenditures and investments (32,321) (29,206)
Contributions to decommissioning trusts (1,485) (8,060)
Other, net (33) 56
-------- --------
Net cash used for investing activities (33,839) (37,210)
-------- --------
Financing Activities:
Issuance of trust preferred securities 96,535 -
Increase/(decrease) in notes payable, net (54,640) 9,547
Capital lease principal payments (7,160) (6,326)
Redemption of preferred stock (12,598) -
Dividends paid on common stock (30,000) (40,000)
Dividends paid on preferred stock (66) (242)
Contribution from parent corporation 30,000 -
-------- --------
Net cash provided/(required)
by financing activities 22,071 (37,021)
-------- --------
Net increase/(decrease) in cash and temporary cash
investments from above activities 6,704 (3,260)
Cash and temporary cash investments, beginning of year 442 6,116
-------- --------
Cash and temporary cash investments, end of period $ 7,146 $ 2,856
======== ========
Supplemental Disclosure:
Interest and preferred dividends paid $ 28,112 $ 28,884
======== ========
Income taxes paid $ 76,187 $ 38,428
======== ========
New capital lease obligations incurred $ 14,199 $ 39
======== ========
<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
--------------------------
June 30, December 31,
1999 1998
----------- -----------
(Unaudited)
ASSETS
Utility Plant:
Transmission, distribution and general plant $1,777,802 $1,768,621
Generation plant 589,076 1,033,739
--------- ---------
Utility plant in service 2,366,878 2,802,360
Accumulated depreciation (1,018,963) (1,175,842)
--------- ---------
Net utility plant in service 1,347,915 1,626,518
Construction work in progress 35,284 18,862
Other, net 24,994 19,482
--------- ---------
Net utility plant 1,408,193 1,664,862
--------- ---------
Other Property and Investments:
Nuclear decommissioning trusts, at market (Note 1) 81,437 82,803
Other, net 2,282 7,705
--------- ---------
Total other property and investments 83,719 90,508
--------- ---------
Current Assets:
Cash and temporary cash investments 183,924 2,750
Special deposits 76 2,632
Accounts receivable:
Customers, net 59,145 69,887
Other 32,037 28,893
Unbilled revenues 28,019 43,998
Materials and supplies, at average cost or less:
Construction and maintenance 17,210 39,452
Fuel 6,155 17,107
Deferred income taxes 7,589 7,589
Prepayments 31,239 31,551
--------- ---------
Total current assets 365,394 243,859
--------- ---------
Deferred Debits and Other Assets:
Regulatory assets, net: (Note 1)
Competitive transition charge 311,236 343,602
Other regulatory assets, net 662,096 1,206,594
Deferred income taxes 1,158,561 951,471
Other 28,959 23,911
--------- ---------
Total deferred debits and other assets 2,160,852 2,525,578
--------- ---------
Total Assets $4,018,158 $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
----------------------------
June 30, December 31,
1999 1998
------------ ------------
(Unaudited)
LIABILITIES AND CAPITALIZATION
Capitalization:
Common stock $ 105,812 $ 105,812
Capital surplus 285,486 285,486
Retained earnings 72,208 367,653
Accumulated other comprehensive income (Note 7) 9,690 8,353
--------- ---------
Total common stockholder's equity 473,196 767,304
Cumulative preferred stock - 16,681
Company-obligated mandatorily redeemable
preferred securities 105,000 105,000
Trust preferred securities 100,000 -
Long-term debt 424,561 626,434
--------- ---------
Total capitalization 1,102,757 1,515,419
--------- ---------
Current Liabilities:
Securities due within one year 12 50,012
Notes payable - 86,023
Obligations under capital leases 17,542 13,979
Accounts payable:
Affiliates 61,458 47,164
Other 14,528 47,795
Taxes accrued 263,491 32,755
Interest accrued 5,232 19,700
Other 20,330 37,272
--------- ---------
Total current liabilities 382,593 334,700
--------- ---------
Deferred Credits and Other Liabilities:
Deferred income taxes 1,262,898 1,338,235
Unamortized investment tax credits 24,783 36,926
Three Mile Island Unit 2 future costs 122,610 120,904
Nuclear fuel disposal fee 16,317 15,956
Power purchase contract loss liability 984,014 1,016,380
Other 122,186 146,287
--------- ---------
Total deferred credits and other liabilities 2,532,808 2,674,688
--------- ---------
Commitments and Contingencies (Note 1)
Total Liabilities and Capitalization $4,018,158 $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 Six Months
Ended June 30, Ended June 30,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
Operating Revenues $ 205,097 $ 250,355 $ 451,346 $ 514,010
-------- -------- --------- ---------
Operating Expenses:
Fuel 16,709 42,667 53,253 85,101
Power purchased and interchanged:
Affiliates 2,991 909 4,553 1,153
Others 54,960 50,098 93,991 104,812
Other operation and maintenance 55,215 65,080 114,618 125,113
Depreciation and amortization 18,407 27,740 41,460 53,384
Taxes, other than income taxes 11,806 18,058 25,820 36,021
-------- -------- --------- ---------
Total operating expenses 160,088 204,552 333,695 405,584
-------- -------- --------- ---------
Operating Income Before Income Taxes 45,009 45,803 117,651 108,426
Income taxes 19,580 11,217 26,678 31,020
-------- -------- --------- ---------
Operating Income 25,429 34,586 90,973 77,406
-------- -------- --------- ---------
Other Income and Deductions:
Other income, net 7,192 1,654 46,101 1,733
Income taxes (2,872) (719) (25,903) (705)
-------- -------- --------- ---------
Total other income and deductions 4,320 935 20,198 1,028
-------- -------- --------- ----------
Income Before Interest Charges 29,749 35,521 111,171 78,434
-------- -------- --------- ---------
Interest Charges:
Long-term debt 6,978 11,862 18,811 23,974
Trust preferred securities 306 - 306 -
Company-obligated mandatorily
redeemable preferred securities 2,297 2,297 4,594 4,594
Other interest 523 2,215 2,525 4,459
Allowance for borrowed funds used
during construction (300) (604) (500) (989)
-------- -------- --------- ---------
Total interest charges 9,804 15,770 25,736 32,038
-------- -------- --------- ---------
Income Before Extraordinary Item 19,945 19,751 85,435 46,396
Extraordinary item (net of income tax
benefit of $62,280) - (87,830) - (87,830)
-------- -------- --------- ----------
Net Income/(Loss) 19,945 (68,079) 85,435 (41,434)
Preferred stock dividends - 231 154 347
Loss on preferred stock reacquisition - - 726 -
-------- -------- --------- ----------
Earnings/(Loss) Available for Common Stock $ 19,945 $ (68,310) $ 84,555 $ (41,781)
======== ======== ========= =========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
17
</FN>
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
In Thousands
-------------------------
Six Months
Ended June 30,
-------------------------
1999 1998
---- ----
Operating Activities:
Net income/(loss) $ 85,435 $ (41,434)
Extraordinary item (net of income tax
benefit of $62,280) - 87,830
-------- --------
Income before extraordinary item 85,435 46,396
Adjustments to reconcile income to cash provided:
Depreciation and amortization 40,958 53,814
Amortization of property under capital leases 3,687 4,088
Gain on sale of investment (38,252) -
Nuclear outage maintenance costs, net 1,351 1,518
Deferred income taxes and investment tax
credits, net (290,339) (969)
Changes in working capital:
Receivables 7,598 (2,709)
Materials and supplies 33,195 (1,472)
Special deposits and prepayments 2,867 (16,822)
Payables and accrued liabilities 180,354 (6,426)
Nonutility generation contract buyout costs (3,500) -
Other, net (51,581) (10,337)
-------- --------
Net cash provided/(required)
by operating activities (28,227) 67,081
-------- --------
Investing Activities:
Capital expenditures and investments (37,567) (46,735)
Proceeds from sale of investment 894,450 -
Contributions to decommissioning trusts (5,246) (2,632)
Other, net 915 -
-------- ---------
Net cash provided/(used)
for investing activities 852,552 (49,367)
-------- --------
Financing Activities:
Issuance of trust preferred securities 96,535 -
Issuance of long-term debt 348,127 -
Increase/(decrease) in notes payable, net (86,023) 31,237
Retirement of long-term debt (600,000) (30,000)
Redemption of preferred stock (17,406) -
Capital lease principal payments (4,230) (3,604)
Dividends paid on common stock (380,000) (15,000)
Dividends paid on preferred stock (154) (347)
-------- --------
Net cash required by financing activities (643,151) (17,714)
-------- -------- -
Net increase in cash and temporary
cash investments from above activities 181,174 -
Cash and temporary cash investments, beginning of year 2,750 -
-------- ---------
Cash and temporary cash investments, end of period $ 183,924 $ -
======== =========
Supplemental Disclosure:
Interest and preferred dividends paid $ 39,584 $ 33,016
======== ========
Income taxes paid $ 127,541 $ 35,859
======== ========
New capital lease obligations incurred $ 7,099 $ 19
======== ========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
18
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
electric and gas 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. On May 24, 1999, the New Jersey Board of Public
Utilities (NJBPU) issued a Summary Order (Summary Order) which, among other
things, provides for full recovery of JCP&L's 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 restructuring
proceedings is still pending before the Pennsylvania
19
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 January 1999, New Jersey enacted legislation to deregulate the state's
electricity market. In April 1999, JCP&L entered into a settlement agreement
with several parties to its stranded cost and rate unbundling proceedings which
were pending before the NJBPU. The NJBPU issued a Summary Order, which approved
the settlement with certain modifications, and provides for, among other things:
a 5% rate reduction commencing August 1, 1999; additional rate reductions of 1%
in 2000 and 2% in 2001; and an additional net 3% rate reduction in 2002
inclusive of a 5% rate refund from April 30, 1997 rates for service rendered on
or after August 1, 2002, partially offset by a 2% increase in the Market
Transition Charge (MTC). For customers who choose an alternate supplier, the
Summary Order provides average customer shopping credits beginning at 5.14 cents
per kilowatt-hour increasing to 5.40 cents per kilowatt-hour in 2003. The
Summary Order also permits JCP&L to apply the net proceeds from its generation
asset sales to reduce stranded costs, the securitization of approximately $400
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. JCP&L
expects the NJBPU to issue a Final Order in the third quarter of 1999. As a
result of the NJBPU's actions, for the quarter ended June 30, 1999, JCP&L
recorded a reduction in operating revenues of $115 million reflecting JCP&L's
obligation to make refunds to customers from 1999 revenues. For additional
information, see Note 2 Accounting for Extraordinary and Non-recurring items.
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, for approximately $100 million. Of the
$100 million, $23 million will be paid at closing and $77 million, which is for
the nuclear fuel in the reactor, will be paid in five equal annual installments
beginning one year after closing. The sale, which GPU expects to complete by the
end of 1999, is subject to various conditions, including the receipt of
satisfactory federal and state regulatory approvals. There can be no assurance
as to the outcome of these matters. Highlights of the agreements are presented
in the Competitive Environment and Rate Matters section of Management's
Discussion and Analysis.
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.
In March 1999, Penelec completed the sale of its 50% interest in the Homer
City Station to a subsidiary of Edison Mission Energy for approximately
20
$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 July 1999, Penelec completed the sale of its 20% interest in the Seneca
Pumped Storage Hydroelectric Generating Station to The Cleveland Electric
Illuminating Company for $43 million. This sale will be recorded in the third
quarter of 1999.
In November 1998, the GPU Energy companies entered into definitive
agreements with Sithe Energies (Sithe) 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
$561 million). The sales to Sithe are expected to be completed in the third
quarter of 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 June 30, 1999 book value of $22 million. There can be no assurance
of the outcome of this matter.
Nonutility Generation Agreements:
- ---------------------------------
Pursuant to the mandates of the federal Public Utility Regulatory Policies
Act and state regulatory directives, the GPU Energy companies have been required
to enter into power purchase agreements with nonutility generators (NUGs) for
the purchase of energy and capacity for remaining periods of up to 22 years. The
following table shows actual payments from 1997 through June 30, 1999, and
estimated payments thereafter through 2003.
Payments Under NUG Agreements
-----------------------------
(in millions)
Total JCP&L Met-Ed Penelec
----- ----- ------ -------
1997 759 384 172 203
1998 788 403 174 211
1999 781 384 179 218
2000 816 404 169 243
2001 805 413 166 226
2002 819 425 169 225
2003 827 422 173 232
As of June 30, 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.
21
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 NJBPU Summary Order and PaPUC Restructuring Orders provide the GPU
Energy companies assurance of full recovery of their NUG costs (including
above-market NUG costs and certain buyout costs). Accordingly, the GPU Energy
companies have recorded, on a present value basis, a liability of $3.5 billion
(JCP&L $1.7 billion; Met-Ed $0.8 billion; Penelec $1 billion) on the
Consolidated Balance Sheets which is fully offset by Regulatory assets, net. In
addition, JCP&L recorded a liability of $75 million for above-market utility
purchase power agreements with a corresponding offset to Regulatory assets, net,
since there is also assurance of full recovery of these costs. The GPU Energy
companies will continue efforts to reduce the above-market costs of these
agreements and will, where beneficial, attempt to renegotiate the prices of the
agreements, offer contract buyouts and attempt to convert must-run agreements to
dispatchable agreements. There can be no assurance as to the extent to which
these efforts will be successful.
In 1997, the NJBPU approved a Stipulation of Final Settlement which, among
other things, provides for the recovery of costs associated with the buyout of
the Freehold Cogeneration project (Freehold buyout). 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. The
NJBPU's Summary Order provides for the continued recovery of the Freehold buyout
in the MTC, but has not altered the interim nature of such recovery. 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.
22
ACCOUNTING MATTERS
- ------------------
The PaPUC Restructuring Orders and the NJBPU Summary Order essentially
deregulated the electric generation portions of the GPU Energy companies'
businesses. Accordingly, JCP&L, in the second quarter of 1999, and Met-Ed and
Penelec in 1998, discontinued the application of Statement of Financial
Accounting Standards No. 71 (FAS 71), "Accounting for the Effects of Certain
Types of Regulation," and adopted the provisions of Statement of Financial
Accounting Standards No. 101 (FAS 101), "Regulated Enterprises - Accounting for
the Discontinuation of Application of FASB Statement No. 71, and Emerging Issues
Task Force 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) with respect to their electric generation operations. The transmission and
distribution portion of the GPU Energy companies' operations continue to be
subject to the provisions of FAS 71.
Regulatory assets, net as reflected in the June 30, 1999 and December 31,
1998 Consolidated Balance Sheets in accordance with the provisions of FAS 71 and
EITF Issue 97-4 were as follows:
GPU, Inc. and Subsidiary Companies (in thousands)
- ---------------------------------- -----------------------------
June 30, December 31,
1999 1998
------------- -------------
Competitive transition charge (CTC)
per PaPUC Order $ 973,163 $1,023,815
========= =========
Other regulatory assets, net:
Reserve for generation divestiture (JCP&L) $ 134,383 $ 136,804
Oyster Creek investment 639,958 -
Phase II reserve for generation divestiture 765,322 1,356,580
Income taxes recoverable through future rates 331,685 449,638
Income taxes refundable through future rates (39,093) (52,701)
Net investment in TMI-2 63,406 65,787
TMI-2 decommissioning costs 112,886 119,571
Nonutility generation contract buyout costs 109,833 123,208
Unamortized property losses 76,553 80,287
Other postretirement benefits 71,137 73,770
Environmental remediation 48,619 50,214
N.J. unit tax 29,780 33,244
Unamortized loss on reacquired debt 31,815 32,247
Load and demand-side management programs 225 12,568
DOE enrichment facility decommissioning 27,255 28,956
Nuclear fuel disposal fee 22,347 21,092
Storm damage 31,367 30,166
Deferred nonutility generation costs
not in current rates 32,541 (16,067)
Power purchase contract loss (JCP&L) 1,769,275 -
Power purchase contract loss not in CTC 369,290 369,290
Public utility realty taxes 6,406 8,060
Other regulatory liabilities (55,190) (50,319)
Other regulatory assets 8,698 10,018
--------- ---------
Total other regulatory assets, net $4,588,498 $2,882,413
========= =========
23
JCP&L (in thousands)
- ----- -----------------------------
June 30, December 31,
1999 1998
------------- -------------
Other regulatory assets, net:
Reserve for generation divestiture $ 134,383 $ 136,804
Oyster Creek investment 639,958 -
Income taxes recoverable through future rates 54,118 172,752
Income taxes refundable through future rates (22,596) (35,535)
Net investment in TMI-2 63,406 65,787
TMI-2 decommissioning costs 13,063 19,192
Nonutility generation contract buyout costs 109,833 120,708
Unamortized property losses 76,553 80,287
Other postretirement benefits 44,828 46,486
Environmental remediation 48,619 50,214
N.J. unit tax 29,780 33,244
Unamortized loss on reacquired debt 24,658 25,981
Load and demand-side management programs 225 12,568
DOE enrichment facility decommissioning 16,981 18,049
Nuclear fuel disposal fee 22,347 21,092
Storm damage 31,367 30,166
Power purchase contract loss 1,769,275 -
Other regulatory liabilities (54,843) (49,840)
Other regulatory assets 3,942 5,930
--------- ---------
Total other regulatory assets, net $3,005,897 $ 753,885
========= =========
Met-Ed (in thousands)
- ------ -----------------------------
June 30, December 31,
1999 1998
------------- -------------
Competitive transition charge per PaPUC Order $ 661,927 $ 680,213
========= =========
Other regulatory assets, net:
Phase II reserve for
generation divestiture $ 425,119 $ 421,807
Income taxes recoverable through future rates 118,885 133,585
Income taxes refundable through future rates (10,367) (10,804)
TMI-2 decommissioning costs 66,010 68,091
Nonutility generation contract buyout costs - 2,500
Other postretirement benefits 26,309 27,284
Unamortized loss on reacquired debt 2,690 3,023
DOE enrichment facility decommissioning 6,987 7,409
Deferred nonutility generation costs
not in current rates 8,365 (7,746)
Power purchase contract loss not in CTC 271,270 271,270
Public utility realty taxes 2,952 3,699
Other regulatory liabilities (83) (83)
Other regulatory assets 2,368 1,899
--------- ---------
Total other regulatory assets, net $ 920,505 $ 921,934
========= =========
24
Penelec (in thousands)
- ------- -----------------------------
June 30, December 31,
1999 1998
------------- -------------
Competitive transition charge per PaPUC Order $ 311,236 $ 343,602
========= =========
Other regulatory assets, net:
Phase II reserve for
generation divestiture 340,203 934,773
Income taxes recoverable through future rates 158,682 143,301
Income taxes refundable through future rates (6,130) (6,362)
TMI-2 decommissioning costs 33,813 32,288
Unamortized loss on reacquired debt 4,467 3,243
DOE enrichment facility decommissioning 3,287 3,498
Deferred nonutility generation costs
not in current rates 24,176 (8,321)
Power purchase contract loss not in CTC 98,020 98,020
Public utility realty taxes 3,454 4,361
Other regulatory liabilities (264) (396)
Other regulatory assets 2,388 2,189
--------- ---------
Total other regulatory assets, net $ 662,096 $1,206,594
========= =========
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.
In accordance with FAS 121, impairment tests performed by the GPU Energy
companies on the net book values of their generation facilities determined that
the net investments in TMI-1 and Oyster Creek were impaired. This has resulted
in a write-down to reflect TMI-1 and Oyster Creek's fair market values in the
amounts of $520 million (pre-tax) and $630 million (pre-tax), respectively. The
majority of the TMI-1 write-down was recorded in 1998 while the Oyster Creek
write-down was recorded in the quarter ended June 30, 1999. Of the amount
written down for TMI-1, however, $510 million was reestablished as a regulatory
asset because management believes it is probable of recovery in the
restructuring process and $10 million (the Federal Energy Regulatory Commission
jurisdictional portion) was charged to expense as an extraordinary item in 1998.
The total impairment amount of Oyster Creek has also been reestablished as a
regulatory asset since the Summary Order provides for recovery in the
restructuring process. (For further information relating to the Oyster Creek
impairment write-down, see Note 2, Accounting for Extraordinary and
Non-recurring items.)
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
25
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. FAS 133 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 requires that
companies recognize all derivatives as either assets or liabilities on the
balance sheet and measure those instruments at fair value. 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, 2000. GPU will adopt FAS 133 in the first quarter of 2001 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. In 1998, GPU entered into
definitive agreements to sell TMI-1 to AmerGen. Highlights of the agreements are
presented in the Competitive Environment and Rate Matters section of
Management's Discussion and Analysis.
At June 30, 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
----- ------------
June 30, 1999
-------------
JCP&L $23 $100
Met-Ed 47 -
Penelec 23 -
-- ---
Total $93 $100
== ===
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 June 30, 1999 and December 31, 1998 was
$63 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.
26
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.)
JCP&L has been exploring the sale or early retirement of the Oyster Creek
facility. In May 1999, the NJBPU approved JCP&L's request to recover the costs
associated with an early retirement of Oyster Creek in 2000. 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.)
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
27
financial protection. In so doing, the Court of Appeals referred to the "finite
fund" (the $560 million of financial protection under the Price-Anderson Act) to
which plaintiffs must resort to get compensatory as well as punitive damages.
The Court of Appeals also ruled that the standard of care owed by the
defendants to a plaintiff was determined by the specific level of radiation
which was released into the environment, as measured at the site boundary,
rather than as measured at the specific site where the plaintiff was located at
the time of the accident (as the defendants proposed). The Court of Appeals also
held that each plaintiff still must demonstrate exposure to radiation released
during the TMI-2 accident and that such exposure had resulted in injuries. In
1996, the U.S. Supreme Court denied petitions filed by GPU, Inc. and the GPU
Energy companies to review the Court of Appeals' rulings.
In 1996, the District Court granted a motion for summary judgment filed by
GPU, Inc. and the GPU Energy companies, and dismissed all of the 2,100 pending
claims. The Court ruled that there was no evidence which created a genuine issue
of material fact warranting submission of plaintiffs' claims to a jury. The
plaintiffs have appealed the District Court's ruling to the Court of Appeals for
the Third Circuit, before which the matter is pending. There can be no assurance
as to the outcome of this litigation.
Based on the above, GPU, Inc. and the GPU Energy companies believe that any
liability to which they might be subject by reason of the TMI-2 accident will
not exceed their financial protection under the Price-Anderson Act.
NUCLEAR PLANT RETIREMENT COSTS
------------------------------
Retirement costs for nuclear plants include decommissioning the
radiological portions of the plants and the cost of removal of nonradiological
structures and materials. The disposal of spent nuclear fuel is covered
separately by contracts with the DOE.
In 1990, the GPU Energy companies submitted a report, in compliance with
NRC regulations, setting forth a funding plan (employing the external sinking
fund method) for the decommissioning of their nuclear reactors. Under this plan,
the GPU Energy companies intend to complete the funding for Oyster Creek and
TMI-1 by the end of the plants' license terms, 2009 and 2014, respectively. The
TMI-2 funding completion date is 2014, consistent with TMI-2 remaining in
long-term storage and being decommissioned at the same time as TMI-1. Based on
NRC studies, a comparable funding target was developed for TMI-2 which took the
accident into account. Under the NRC regulations, the funding targets (in 1999
dollars) are as follows:
28
(in millions)
Oyster
TMI-1 TMI-2 Creek
----- ----- -----
JCP&L $ 68 $108 $334
Met-Ed 136 217 -
Penelec 68 108 -
--- --- ---
Total $272 $433 $334
=== === ===
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 $358 $435 $591
Nonradiological cost of removal 88 34* 32
--- --- ---
Total $446 $469 $623
=== === ===
* Net of $12.6 million spent as of June 30, 1999.
Each of the GPU Energy companies is responsible for retirement costs in
proportion to its respective ownership percentage.
The 1995 Oyster Creek site-specific study was updated in 1998 in response
to the previously announced potential early closure of the plant in the year
2000. An early shutdown would increase the retirement costs shown above to $632
million ($600 million for radiological decommissioning and $32 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
29
AmerGen will assume all TMI-1 decommissioning liabilities. If all the necessary
regulatory approvals 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. Effective August
1, 1999, annual revenues for Oyster Creek are based on the 1998 site-specific
study estimates.
Through 1998, the PaPUC 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
through 1998 for its share of TMI-1 retirement costs, on a basis consistent with
that granted Met-Ed. In the Restructuring Orders, the PaPUC granted recovery of
an interim level of TMI-1 decommissioning costs as part of the CTC based on the
1995 site-specific study. 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 second quarter of 1999
and the provisions for the future expenditure of these funds, which have been
made in accumulated depreciation, are as follows:
(in millions)
Oyster
TMI-1 Creek
----- -----
Amount expensed for the
six months ended June 30, 1999:
JCP&L $2.6 $11.2
Met-Ed 0.4 -
Penelec 0.2 -
--- -----
$3.2 $11.2
==== =====
30
(in millions)
Oyster
TMI-1 Creek
----- -----
Accumulated depreciation
provision at June 30, 1999:
JCP&L $ 48 $297
Met-Ed 81 -
Penelec 37 -
--- ---
$166 $297
==== ====
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
June 30, 1999 and December 31, 1998 are as follows:
(in millions)
GPU JCP&L Met-Ed Penelec
--- ----- ------ -------
June 30, 1999 $490 $123 $244 $123
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 June 30, 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 $490 million liability at June 30, 1999 is $244 million
(JCP&L $17 million; Met-Ed $144 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 $281 million (JCP&L $110
million; Met-Ed $126 million; Penelec $45 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 for the six months ended
June 30, 1999 amounted to $2.6 million (JCP&L $1.1 million; Met-Ed $1.0 million;
Penelec $0.5 million).
The NJBPU has granted JCP&L revenues for TMI-2 retirement costs based on
the 1995 site-specific estimates. In addition, JCP&L is recovering its share of
TMI-2 incremental monitored storage costs. The PaPUC Restructuring Orders
granted Met-Ed and Penelec recovery of TMI-2 decommissioning costs as part of
the CTC, but also allowed Met-Ed and Penelec to defer as a regulatory asset
those amounts that are above the level provided for in the CTC.
31
At June 30, 1999, the accident-related portion of TMI-2 radiological
decommissioning costs is considered to be $77 million (JCP&L $19 million; Met-Ed
$39 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
$77 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
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.
32
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 12-week waiting period at $1.8
million and $2.6 million per week for 52 weeks for Oyster Creek and TMI-1,
respectively, decreasing to 80% of such amounts for the next 110 weeks.
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):
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
33
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 United States
District Court for the District of Delaware has refused to dismiss the
complaints 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 June 30, 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 June 30, 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
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 June 30, 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
34
(JCP&L $1 million; Met-Ed $4 million; Penelec $12 million) is reflected on the
Consolidated Balance Sheets at June 30, 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 June 30, 1999, JCP&L has spent
approximately $33 million in connection with the cleanup of these sites. In
addition, JCP&L has recorded an estimated environmental liability of $53 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 $53 million due to significant uncertainties,
including changes in acceptable remediation methods and technologies. In
addition, federal and state law provides for payment by responsible parties for
damage to natural resources.
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 June 30,
1999, JCP&L had recorded on its Consolidated Balance Sheet a regulatory asset of
$43 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, Inc. Investments and Guarantees:
- -------------------------------------
GPU, Inc. has made significant investments in foreign businesses and
facilities through its subsidiaries, GPU Electric and the GPUI Group. At June
30, 1999, GPU, Inc.'s aggregate investment in GPU Electric and the GPUI Group
was $518 million and $242 million, respectively. Although management attempts to
mitigate the risks of investing in certain foreign countries by, among other
things, securing political risk insurance, GPU faces additional risks inherent
to operating in such locations, including foreign currency fluctuations.
GPU Electric
At June 30, 1999, GPU Electric had investments located in foreign countries
totaling approximately $3.9 billion (excluding the additional 50% interest in
Midlands Electricity plc (Midlands) which GPU acquired from Cinergy in July
1999). GPU, Inc. has also guaranteed up to an additional $1.19 billion of GPU
Electric obligations. Of the $1.19 billion, $1.04 billion is included in
Long-term debt and Securities due within one year on GPU's Consolidated Balance
Sheet at June 30, 1999.
Through its ownership of Midlands, GPU Electric has an investment 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
virtually complete, but testing and commercial operation have been delayed.
35
Midlands' current investment in the Uch Power Project is approximately $75
million, and project lenders could require Midlands to make additional capital
contributions to the project of approximately $12 million under certain
conditions. On June 30, 1999, the project lenders issued a notice of default to
the project sponsors (including Midlands) for failure to obtain permanent
financing and repay the construction debt by the original loan due date. The
project sponsors have proposed a restructured financing arrangement which the
lenders and EXIM Bank are currently considering. As part of GPU's July 1999
purchase of Cinergy's 50% ownership interest in Midlands, Cinergy has agreed to
fund up to an aggregate of $20 million of additional capital contributions
and/or certain future "cash losses" which GPU could incur on the Uch Power
Project. (For further information on the Midlands' purchase, See Note 3,
Acquisitions.) There can be no assurance as to the outcome of this matter.
GPUI Group
At June 30, 1999, the GPUI Group had investments located in foreign
countries totaling approximately $80 million. As of that date, GPU, Inc. has
also guaranteed up to an additional $33.7 million of GPUI Group obligations
(including guarantees of $21.3 million related to domestic operations). Of the
$33.7 million, $7.6 million is included in Long-term debt and Securities due
within one year on GPU's Consolidated Balance Sheet at June 30, 1999, and $26.1
million relates to various other obligations of the GPUI Group.
Other:
- ------
GPU's capital programs, for which substantial commitments have been incurred
and which extend over several years, contemplate expenditures of $453 million
(JCP&L $183 million; Met-Ed $97 million; Penelec $98 million; Other $75 million)
during 1999.
In July 1999, New Jersey experienced a severe heat wave that resulted in
major power outages and temporary service interruptions in JCP&L's service
territory. As a result, the NJBPU, with the assistance of the New Jersey
Attorney General, has initiated an investigation into the reliability of JCP&L's
transmission and distribution system and JCP&L's response to the power outages.
In addition, lawsuits have been filed in New Jersey Superior Court against JCP&L
seeking class action certification for all JCP&L customers who incurred
financial losses, including both compensatory and punitive damages. There can be
no assurance as to the outcome of these matters.
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 $135 million (JCP&L $27 million;
Met-Ed $57 million; Penelec $51 million) for 1999. These contracts will be
assumed by Sithe, upon the closings of the sales of the GPU Energy companies'
fossil generation facilities.
36
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.
GPU AR has entered into sales contracts to supply electricity to retail
customers through December 31, 2000, with energy and capacity costs estimated at
$50 million. GPU AR has also entered into various agreements to purchase energy
and capacity totaling approximately $24 million, of which $11 million has been
guaranteed by GPU, Inc.
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 June 30, 1999, GPUN has made
payments of $6 million to fund construction of the radwaste disposal facility
and JCP&L has collected $30 million from customers. As a result of the NJBPU
Summary Order, effective August 1, 1999, JCP&L will no longer be collecting
monies from customers for the facility's construction. Any over-recovered
balance will be applied to reduce the MTC. 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. GPUN cannot determine at this time what
effect, if any, this matter will have on its operations.
37
Pennsylvania, Delaware, Maryland and West Virginia have established the
Appalachian Compact to construct a facility for the disposal of low-level
radwaste in those states, including low-level radwaste from TMI-1. To date,
pre-construction costs of $33 million, out of an estimated $88 million, have
been paid. Eleven nuclear plants have so far shared equally in the
pre-construction costs; GPUN has contributed $3 million on behalf of TMI-1.
Pennsylvania has suspended the search for a low-level radwaste disposal site in
the state. GPUN cannot determine at this time what effect, if any, this may have
on its operations.
JCP&L's two operating nuclear units are subject to the NJBPU's annual
nuclear performance standard. Operation of these units at an aggregate annual
generating capacity factor below 65% or above 75% would trigger a charge or
credit based on replacement energy costs. At current cost levels, the maximum
effect on 1999 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 New
Jersey restructuring legislation eliminates the nuclear performance standard,
effective with the implementation of retail choice on August 1, 1999. The
calculation in 1999 is based on a 5-month performance period from March 1, 1999
through July 31, 1999.
GPU, Inc. and consolidated affiliates have approximately 12,800 employees
worldwide of which nearly 8,200 are employed in the U.S and approximately 3,600
are employed by Midlands in the United Kingdom. The majority of the U.S.
workforce is employed by the GPU Energy companies, of which approximately 4,300
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
2. ACCOUNTING FOR EXTRAORDINARY AND NON-RECURRING ITEMS
JCP&L Restructuring Write-off
Historically, the rates an electric utility charges its customers have been
based on the utility's costs of operation. As a result, the GPU Energy companies
were required to account for the economic effects of cost-based ratemaking
regulation under the provisions of FAS 71. FAS 71 requires regulated entities,
in certain circumstances, to defer, as regulatory assets, the impact on
operations of costs expected to be recovered in future rates.
In response to the continuing deregulation of the electric utility
industry, the Securities and Exchange Commission (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 FASB's
EITF concluded in June 1997 that utilities are no longer subject to FAS 71, for
the relevant portion of their business, when they know details of their
individual transition plans. 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. Concurrent with the receipt of PaPUC Restructuring Orders
in 1998, Met-Ed and Penelec discontinued the application of FAS 71 and adopted
the provisions of FAS 101 and EITF 97-4 for their electric generation
operations.
On May 24, 1999, the NJBPU issued a Summary Order regarding JCP&L's
unbundling, stranded cost and restructuring filings. The Summary Order, among
other things, essentially removes from regulation the costs associated with
providing electric generation service to New Jersey customers, effective August
1, 1999 (see Recent Regulatory Actions section of Management's Discussion and
Analysis for further discussion of New Jersey Restructuring). Accordingly, JCP&L
has discontinued the application of FAS 71 and has adopted the provisions of FAS
101 and EITF 97-4 with respect to its electric generation operations, effective
with the second quarter of 1999. The transmission and distribution portion of
JCP&L's operations will continue to be subject to the provisions of FAS 71.
For the quarter ended June 30, 1999, JCP&L has recorded a reduction in
operating revenues of $115 million relating to the Summary Order which resulted
in an after-tax charge to earnings of $68 million, or $0.54 per share. This
reduction reflects JCP&L's obligation to refund to customers (from 1999
revenues) 5% of April 30, 1997 rates for service rendered on or after August 1,
2002.
Since JCP&L is no longer subject to FAS 71 for the generation portion of
its business, GPU performed an impairment test on Oyster Creek in accordance
with FAS 121. This test determined that JCP&L's net investment in Oyster Creek,
including plant, nuclear fuel and materials and supplies inventories, was
impaired based on the April 30, 1999 net book value. This investment was written
down by $630 million (pre-tax) to reflect its fair market value. This
impairment, which was recorded as an extraordinary deduction, was reversed and
reestablished as a regulatory asset since the Summary Order provides for rate
recovery.
39
3. ACQUISITIONS
GPU Electric
Empresa Distribuidora Electrica Regional, S.A.
----------------------------------------------
In March 1999, GPU Electric acquired Empresa Distribuidora Electrica
Regional, S.A. (Emdersa) for US $375 million. The fair value of the assets
acquired totaled approximately $253.4 million and the amount of liabilities
assumed totaled approximately $146.7 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 has been accounted
for under the purchase method of accounting. The total acquisition cost exceeded
the estimated value of net assets by $268 million. This excess amount is
considered goodwill and is being amortized on a straight-line basis over 40
years.
Transmission Pipelines Australia
--------------------------------
In June 1999, GPU Electric acquired Transmission Pipelines Australia (TPA),
a natural gas transmission business, from the State of Victoria, Australia for
A$1.025 billion (approximately US $675 million). TPA has been renamed GPU
GasNet. The fair value of the assets acquired totaled approximately US $586
million and the amount of liabilities assumed totaled approximately US $103
million. TPA was sold as part of Victoria's privatization of the natural gas
industry. The GPU GasNet system encompasses 1,105 miles of transmission
pipelines, and consists of two separate networks serving approximately 1.3
million residential customers and about 40,000 industrial and commercial
customers throughout Victoria.
The GPU GasNet acquisition was financed through an: (1) A$750 million
(approximately US $495 million) senior credit facility, which is non-recourse to
GPU, Inc.; and (2) an equity contribution from GPU Capital of A$275 million
(approximately US $180 million) provided through the issuance of commercial
paper guaranteed by GPU, Inc.
The GPU GasNet acquisition has been accounted for under the purchase method
of accounting. The total acquisition cost exceeded the estimated value of net
assets by $188.6 million. This excess is considered goodwill and is being
amortized to expense on a straight-line basis over 40 years.
Midlands Electricity plc
------------------------
In July 1999, GPU Electric acquired Cinergy Corp.'s (Cinergy) 50% ownership
interest in Avon Energy Partners Holdings (Avon), which owns Midlands, for
(pound)452.5 million (approximately US $714 million). GPU and Cinergy had
jointly formed Avon in 1996 to acquire Midlands, a regional electric company
serving 2.3 million customers in a 5,135 square mile franchise service area in
England. The fair value of the assets acquired by Avon totaled approximately US
$4.2 billion and the amount of liabilities assumed totaled approximately US $3
billion.
Accordingly, (1) GPU Electric has become the sole owner of Midlands'
electric distribution and contracting businesses as well as independent power
40
plants worldwide totaling 1,150 MW, (2) Cinergy will acquire Midlands' gas
trading operations, with Midlands retaining liability associated with existing
natural gas supply contracts based upon the current market price for gas
(adequate provisions have previously been recorded to cover the current
estimated liability), (3) Cinergy has agreed to fund up to an aggregate of $20
million of additional capital contributions and/or future "cash losses" which
could be incurred in connection with Midlands' interest in the Uch Power Project
in Pakistan, and (4) GPU Electric has agreed to transfer to Cinergy the Redditch
facility, a 29 MW combined cycle plant. (For further information relating to the
Uch Power Project, see Note 1, Commitments and Contingencies-Other.)
GPU Electric financed the acquisition through a combination of equity and
debt. The equity was funded from: (1) a US $250 million contribution from GPU,
Inc., and (2) the issuance of US $50 million of commercial paper by GPU Capital,
which is guaranteed by GPU, Inc. The debt has been provided through a two-year
(pound)245 million (approximately US $382 million) credit agreement entered into
by EI UK Holdings, of which GPU, Inc. has guaranteed approximately US $100
million.
In July 1999, GPU began accounting for Midlands as a consolidated entity,
rather than under the equity method of accounting as was previously the
practice. As a result, Goodwill, net on the Consolidated Balance Sheet is
expected to increase by approximately $1.7 billion in the third quarter of 1999.
Of this amount, $1.6 billion relates to the previous 1996 acquisition of
Midlands by GPU and Cinergy and $121 million represents goodwill as a result of
GPU's July 1999 purchase of Cinergy's 50% share of Midlands, described above.
The goodwill will be amortized to expense on a straight-line basis over 40
years.
In June 1999, Midlands sold its electric supply business to National Power
plc for approximately US $300 million. (For further information relating to the
supply business sale, see the GPU Electric section of Management's Discussion
and Analysis.)
4. 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 June 30, 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
June 30, 1999, fixed rate interest expense exceeded variable rate interest by
approximately $10.5 million. (For additional information, see GPU Electric and
the GPUI Group section, Management's Discussion and Analysis.)
41
In July 1999, Austran Holdings, the parent of GPU PowerNet, refinanced
A$230 million of acquisition debt originally due in November 2000, with medium
term notes, due November 15, 2002. Certain interest rate swap positions, which
had been in place to convert the floating-rate bank loans to a fixed rate, were
closed-out at a cost of A$11.8 million (US $7.7 million). This cost will be
reflected in GPU's third quarter 1999 earnings.
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 June 30, 1999, the
indexed swap agreement is valued at $58.7 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.
5. 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).
GPU Electric
As of June 30, 1999, GPU Electric accounted for its 50% ownership interest
in Midlands under the equity method of accounting. In July 1999, GPU Electric
acquired Cinergy's 50% ownership interest in Midlands. Therefore, effective in
the third quarter of 1999, GPU will account for Midlands as a consolidated
entity, rather than under the equity method of accounting.
Summarized financial information for GPU Electric's equity method
investment in Midlands (which is not consolidated in the financial statements),
including GPU Electric's ownership and non-ownership interest, is as follows:
42
Balance Sheet Data (in thousands)
- ------------------
June 30, December 31,
1999 1998
----------- -------------
Current Assets $ 502,310 $ 283,738
Noncurrent Assets 3,768,196 4,367,444
Current Liabilities (1,489,583) (1,638,353)
Noncurrent Liabilities (1,565,758) (1,894,874)
---------- ----------
Net Assets $ 1,215,165 $ 1,117,955
========== ==========
GPU Electric's Equity in Net Assets $ 607,583 $ 558,978
========== ==========
Earnings Data (in thousands)
Six months ended June 30,
-------------------------
1999 1998
------------ -------------
Revenues $ 1,245,192 $ 1,191,286
Operating Income 201,894 149,584
Net Income 146,983 58,010
Cash Distributions Received 672 -
GPU Electric's Equity in Net Income $ 73,491 $ 29,005
========== ==========
GPUI Group
The GPUI Group's investments accounted for under the equity method at June
30, 1999 follow:
Ownership
Investment Location of Operations Percentage
- ---------- ---------------------- ----------
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, L.P. United States 10%
Project Orange Associates, L.P. United States 4%
OLS Power, L.P. United States 1%
Summarized financial information for the GPUI Group's equity method
investments (which are not consolidated in the financial statements), including
the GPUI Group's ownership and non-ownership interests, is as follows:
43
Balance Sheet Data (in thousands)
- ------------------
June 30, December 31,
1999 1998
----------- -------------
Current Assets $ 350,695 $ 373,658
Noncurrent Assets 1,851,194 1,746,085
Current Liabilities ( 159,294) ( 112,237)
Noncurrent Liabilities (1,439,308) (1,532,911)
---------- ----------
Net Assets $ 603,287 $ 474,595
========== ==========
GPUI Group's Equity in Net Assets $ 181,827 $ 149,830
========== ==========
Earnings Data (in thousands)
- ------------
Six months ended June 30,
------------------------------
1999 1998
----------- ------------
Revenues $ 231,747 $ 186,050
Operating Income 83,458 45,369
Net Income 25,666 10,400
Cash Distributions Received 8,938 3,933
GPUI Group's Equity in Net Income $ 3,008 $ 1,839
========== ==========
As of June 30, 1999 and December 31, 1998, Equity investments on the
Consolidated Balance Sheets included goodwill (net of accumulated amortization)
relating to the GPUI Group of approximately $13.1 million and $12.5 million,
respectively, which is amortized to expense over periods not exceeding 40 years.
Amortization expense for the six months ended June 30, 1999 and 1998 amounted to
$0.6 million and $0.8 million, respectively.
6. 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 electric and gas 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:
44
Balance Sheet Segment Data (in thousands)
Current Noncurrent Current
June 30, 1999 Assets Assets Liabilities
- ------------- ------- ---------- -----------
Domestic:
GPU Energy companies $1,027,395 $13,555,635 $1,280,902
GPU International, Inc.* 112,916 431,650 59,248
Less: The effect of consolidating
equity investments included above (48,874) (186,199) (20,144)
Add: Equity investments
included on the balance sheet - 53,172 -
GPU AR 23,361 78 12,039
Corporate 272 8,134 72,453
--------- ---------- ---------
Subtotal 1,115,070 13,862,470 1,404,498
--------- ---------- ---------
Foreign:
Australia (Electric Transmission)(GPU
Electric) 83,621 1,852,706 70,608
Australia (Gas Transmission)(GPU
Electric) 48,485 756,501 32,532
United Kingdom (GPU Electric)* 257,707 1,964,218 918,353
Argentina (GPU Electric) 50,522 469,897 113,803
South America (GPU Power, Inc.)* 135,288 453,831 69,247
Less: The effect of consolidating
equity investments included above (305,801) (2,180,762) (768,555)
Add: Equity investments
included on the balance sheet - 638,192 -
--------- ---------- ----------
Subtotal 269,822 3,954,583 435,988
--------- ---------- ---------
Consolidated Total $1,384,892 $17,817,053 $1,840,486
========= ========== =========
Other Cash
Long-Term Noncurrent Capital
June 30, 1999 Debt Liabilities Expenditures
- ------------- -------- ----------- ------------
Domestic:
GPU Energy companies $2,077,120 $7,857,210 $ 138,721
GPU International, Inc.* 185,291 233,928 824
Less: The effect of consolidating
equity investments included above (185,291) (18,904) (228)
Add: Equity investments
included on the balance sheet - - -
GPU AR - 665 -
Corporate - 2,088 -
--------- --------- ----------
Subtotal 2,077,120 8,074,987 139,317
--------- --------- ---------
Foreign:
Australia (Electric Transmission) (GPU
Electric) 1,976,783 95,899 3,983
Australia (Gas Transmission)(GPU
Electric) 500,634 75,213 652,068
United Kingdom(GPU Electric)* 605,999 160,882 18,780
Argentina (GPU Electric) 327,855 27,289 383,320
South America (GPU Power, Inc.)* 203,344 64,160 26,829
Less: The effect of consolidating
equity investments included above (862,505) (90,486) (15,585)
Add: Equity investments
included on the balance sheet - - -
--------- --------- ----------
Subtotal 2,752,110 332,957 1,069,395
--------- --------- ---------
Consolidated Total $4,829,230 $8,407,944 $1,208,712
========= ========= =========
* 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.
45
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) (188,858) (17,271)
Add: Equity investments
included on the balance sheet - 66,487 -
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
========= ========= =========
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.
46
Earnings Segment Data (in thousands)
Depreciation
For the six months Operating and Operating
ended June 30, 1999 Revenues Amortization Income
- ------------------- -------- ------------ ------
Domestic:
GPU Energy companies $1,722,775 $ 206,963 $ 267,185
GPU International, Inc.* 83,579 8,499 7,041
Less: The effect of consolidating
equity investments included above (41,382) (3,850) (10,177)
Add: Equity in undistributed earnings of
affiliates, net on the income statement - - -
GPU AR 37,521 - 1,548
Corporate - - (4,114)
--------- ------- -------
Subtotal 1,802,493 211,612 261,483
--------- ------- -------
Foreign:
Australia (Electric Transmission) (GPU
Electric) 95,912 21,367 58,149
Australia (Gas Transmission)(GPU Electric) 5,721 1,227 3,450
United Kingdom (GPU Electric)* 623,199 29,555 83,222
Argentina (GPU Electric) 48,999 6,190 7,639
South America (GPU Power, Inc.)* 38,462 7,778 11,975
Less: The effect of consolidating
equity investments included above (643,324) (34,634) (90,329)
Add: Equity in undistributed earnings of
affiliates, net on the income statement - - -
--------- ------- --------
Subtotal 168,969 31,483 74,106
--------- ------- -------
Consolidated Total $1,971,462 $ 243,095 $ 335,589
========= ======= =======
Other Interest and
For the six months Income and Preferred
ended June 30, 1999 Deductions Dividends Net Income
- ------------------- ---------- --------- ----------
Domestic:
GPU Energy companies $ 26,687 $ 114,519 $ 179,353
GPU International, Inc.* 1,260 9,147 (846)
Less: The effect of consolidating
equity investments included above 230 (8,726) (1,220)
Add: Equity in undistributed earnings of
affiliates, net on the income statement 1,220 - 1,220
GPU AR 33 - 1,581
Corporate 13 1,252 (5,353)
------ ------- -------
Subtotal 29,443 116,192 174,735
------ ------- -------
Foreign:
Australia (Electric Transmission)(GPU
Electric) 638 52,526 6,372
Australia (Gas Transmission)(GPU Electric) 29 3,589 (221)
United Kingdom (GPU Electric)* 20,448 50,049 53,622
Argentina (GPU Electric) 1,003 8,008 (41)
South America (GPU Power, Inc.)* 3,012 9,797 3,514
Less: The effect of consolidating
equity investments included above (34,171) (49,221) (75,278)
Add: Equity in undistributed earnings of
affiliates, net on the income statement 75,278 - 75,278
------ ------- --------
Subtotal 66,237 74,748 63,246
------ ------- --------
Consolidated Total $ 95,680 $ 190,940 $ 237,981
====== ======= =======
* 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.
47
Earnings Segment Data (in thousands)(continued)
Depreciation
For the six months Operating and Operating
ended June 30, 1998 Revenues Amortization Income
- ------------------- --------- ------------ ---------
Domestic:
GPU Energy companies $1,907,021 $ 237,781 $ 300,488
GPU International, Inc.* 93,464 5,026 14,454
Less: The effect of consolidating
equity investments included above (56,371) (4,668) (15,099)
Add: Equity in undistributed earnings of
affiliates, net on the income statement - - -
GPU AR 5,217 - (1,173)
Corporate - - (2,292)
--------- ------- -------
Subtotal 1,949,331 238,139 296,378
--------- ------- -------
Foreign:
Australia (GPU Electric) 93,589 20,763 58,675
United Kingdom (GPU Electric)* 595,643 28,448 78,713
South America (GPU Power, Inc.)* 28,320 9,829 295
Less: The effect of consolidating
equity investments included above (608,687) (35,163) (75,414)
Add: Equity in undistributed earnings of
affiliates, net on the income statement - - -
--------- ------- -------
Subtotal 108,865 23,877 62,269
--------- ------- -------
Consolidated Total $2,058,196 $ 262,016 $ 358,647
========= ======= =======
Other Interest and
For the six months Income and Preferred
ended June 30, 1998 Deductions Dividends Net Income
- ------------------- ---------- ----------- ----------
Domestic:
GPU Energy companies $ (1,456)$ 121,450 $ (97,528)
GPU International, Inc.* 3,485 10,277 7,662
Less: The effect of consolidating
equity investments included above 1,127 (10,173) (3,799)
Add: Equity in undistributed earnings of
affiliates, net on the income statement 3,799 - 3,799
GPU AR 34 - (1,139)
Corporate (989) 3,244 (6,525)
------ ------- -------
Subtotal 6,000 124,798 (97,530)
------ ------- --------
Foreign:
Australia (GPU Electric) 17,622 55,940 20,357
United Kingdom (GPU Electric)* (3,389) 58,569 16,755
South America (GPU Power, Inc.)* 1,842 2,363 (975)
Less: The effect of consolidating
equity investments included above 4,465 (43,904) (27,045)
Add: Equity in undistributed earnings of
affiliates, net on the income statement 27,045 - 27,045
------ ------- -------
Subtotal 47,585 72,968 36,137
------ ------- -------
Consolidated Total $ 53,585 $ 197,766 $ (61,393)
====== ======= ========
* 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.
48
7. COMPREHENSIVE INCOME
For the six months ended June 30, 1999 and 1998, comprehensive income was
as follows:
(in thousands)
Six months
Ended June 30,
--------------
GPU, Inc. and Subsidiary Companies 1999 1998
- ---------------------------------- ---- -----
Net income/(loss) $237,981 $ (61,393)
------- -------
Other comprehensive income/(loss), net of tax:
Net unrealized gains/(losses) on investments (4,758) 2,744
Foreign currency translation 8,169 (8,823)
---------------------------- ----- -------
Total other comprehensive income/(loss) 3,411 (6,079)
------- -------
Comprehensive income/(loss) $241,392 $ (67,472)
======= =======
JCP&L
Net income $ 47,842 $ 93,101
------- -------
Other comprehensive income, net of tax - -
------- -------
Comprehensive income $ 47,842 $ 93,101
======= =======
Met-Ed
Net income/(loss) $ 51,974 $(144,002)
------- -------
Other comprehensive income, net of tax:
Net unrealized gains on investments 2,816 1,829
------- -------
Comprehensive income/(loss) $ 54,790 $(142,173)
======= =======
Penelec
Net income/(loss) $ 85,435 $ (41,434)
------- -------
Other comprehensive income, net of tax:
Net unrealized gains on investments 1,337 915
------- -------
Comprehensive income/(loss) $ 86,772 $ (40,519)
======= =======
49
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
electric and gas 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 second quarter ended June 30, 1999 were $47.3
million, compared to a second quarter 1998 loss of $195.2 million. Earnings per
share on a diluted basis were $0.38 for the second quarter of 1999, compared to
a loss of $1.54 in the second quarter of 1998. The second quarter 1999 results
included non-recurring charges of $68 million after-tax, or $0.54 per share,
resulting from a Summary Restructuring Order (Summary Order) issued to JCP&L by
the New Jersey Board of Public Utilities (NJBPU) and a gain on the sale of the
Midlands Electricity plc (Midlands) supply business of $9.7 million after-tax,
or $0.08 per share. The second quarter 1998 results included a non-recurring
charge of $275.1 million after-tax, or $2.16 per share, as a result of
restructuring orders issued to Met-Ed and Penelec by the Pennsylvania Public
Utility Commission (PaPUC). Excluding these non-recurring items, GPU's second
quarter 1999 and 1998 earnings would have been $105.6 million, or $0.84 per
share, and $79.9 million, or $0.62 per share, respectively.
The $0.22 per share earnings increase, exclusive of non-recurring items,
was due primarily to the warmer weather, increased sales to other utilities and
lower net energy expenses within the GPU Energy companies, as well as to
increased profits from operations at Midlands.
For the six months ended June 30, 1999, GPU's earnings were $238 million,
or $1.87 per share, compared with losses of $61.4 million, or $0.47 per share,
for the six months ended June 30, 1998. Excluding the non-recurring items
mentioned above, and the non-recurring gain of $27.8 million after-tax, or $0.22
per share, for the portion of the gain on the sale of Penelec's interest in the
Homer City Generating Station (Homer City) related to wholesale operations,
earnings for the six months ended June 30, 1999 and
50
GPU RESULTS OF OPERATIONS (continued)
- -------------------------
1998 would have been $268.5 million, or $2.11 per share, and $213.7 million, or
$1.69 per share, respectively.
The $0.42 per share earnings increase, exclusive of non-recurring items,
was due primarily to increased sales to other utilities, decreased depreciation
expense and increased profits from operations at Midlands. Partially offsetting
this increase was the absence of the gain on the sale of GPU Electric's interest
in Solaris Power (Solaris) in 1998.
OPERATING REVENUES:
- -------------------
Operating revenues for the second quarter of 1999 decreased 11.6% to $897.7
million, as compared to the second quarter of 1998. For the six months ended
June 30, 1999, revenues decreased 4.2% to $1.97 billion as compared to the same
period last year. The components of the changes are as follows:
(in millions)
------------------------------------
Three Months Six Months
Ended Ended
June 30, 1999 June 30, 1999
------------- -------------
GPU Energy companies:
Kilowatt-hour (KWH) revenues $(110.1) $(163.1)
Energy-related revenues 0.2 31.7
Obligation to refund revenues
to customers per NJBPU Order (115.0) (115.0)
CTC revenues 35.6 58.7
GPU Telcom revenues 1.1 (1.9)
Other revenues - 5.4
----- ------
Total GPU Energy companies (188.2) (184.2)
GPU Electric 47.6 57.6
GPUI Group 5.5 7.6
GPU AR 17.8 32.3
----- -----
Total decrease in revenues $(117.3) $( 86.7)
===== =====
GPU Energy companies
Kilowatt-hour revenues
- ----------------------
The decrease in KWH revenues for the three and six month periods was due
primarily to lower generation-related revenues as a result of some Pennsylvania
customers choosing another supplier; a decrease in nonutility generation (NUG)
revenues for Met-Ed and Penelec (which did not have a significant impact on
earnings); partially offset by the absence of an earnings cap adjustment (since
JCP&L was not in an over earnings position in 1999) which reduced JCP&L's 1998
revenues, higher weather-related sales 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 for the six month period was due
primarily to a change in the estimate for unbilled revenue.
51
GPU RESULTS OF OPERATIONS (continued)
- ------------------------
Obligation to refund revenues to customers per NJBPU Order
- ----------------------------------------------------------
The decrease resulted from the NJBPU's Summary Order for JCP&L which
obligated JCP&L to refund to customers (from 1999 revenues) 5% of April 30, 1997
rates for service rendered from August 1, 2002 through July 31, 2003.
Competitive transition charge (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 six month period was due primarily
to increased transmission revenues at Met-Ed and Penelec as a result of customer
shopping in Pennsylvania for electric generation supplier.
GPU Electric
The increase in revenues for the three and six month periods was due mainly
to the inclusion of revenues from Empresa Distribuidora Electrica Regional, S.A.
(Emdersa), an electric distribution business in Argentina, which was acquired by
GPU Electric in March 1999. Also contributing to the increase was the inclusion
of revenues from the GPU GasNet acquisition (see Note 3, Acquisitions).
GPUI Group
The increase in GPUI Group revenues for the three and six month periods was
due primarily to an increase in Empresa Guaracachi S.A. (EGSA) energy and
capacity revenues, and the effect of consolidating Onondaga Cogen, L.P.
beginning August 1998, which was partially offset by lower management fee
revenues.
GPU AR
The increase in revenues for the three and six month periods 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 increase in PP&I for the three month
period was primarily due to increased purchases at GPU AR. The decrease in PP&I
for the six 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.
52
GPU RESULTS OF OPERATIONS (continued)
- -------------------------
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 and
six month periods was primarily due to Penelec's 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 and six month periods was
primarily due to the inclusion of Emdersa and GPU GasNet as a result of the
acquisition by GPU Electric. This increase was partially offset by decreased O&M
expenses at Penelec due to the sale of its interest in Homer City.
Depreciation and amortization
- -----------------------------
The decrease in depreciation and amortization expense for the three and six
month periods 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
Penelec's interest in Homer City. This decrease was partially offset by the
inclusion of Emdersa and GPU GasNet as a result of their acquisition by GPU
Electric.
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 for rate increases. This did not
have a significant impact on earnings for the first six 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 and six month periods was due to higher GPU Electric earnings because
of the gain on the sale of the Midlands supply business and the increased
earnings from Midlands' operations. Also contributing to the increase for the
six month period was the gain on the sale of the Enersis generation facility in
Portugal.
Other income, net
- -----------------
The increase in other income, net for the three and six months 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.
53
GPU RESULTS OF OPERATIONS (continued)
- ------------------------
INTEREST CHARGES AND PREFERRED DIVIDENDS:
- -----------------------------------------
Interest on long-term debt
- --------------------------
The increase in interest on long-term debt for the three month period was
due primarily to higher interest expense at GPU Electric due to the Emdersa and
GPU GasNet acquisitions; and the issuance of senior notes by Penelec, offset by
Penelec's redemption of first mortgage bonds (FMBs).
Preferred stock dividends of subsidiaries
- -----------------------------------------
The decrease in preferred stock dividends of subsidiaries for the three and
six month periods was primarily due to the redemption, by Met-Ed and Penelec, of
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.
JCP&L RESULTS OF OPERATIONS
---------------------------
JCP&L incurred a loss for the second quarter ended June 30, 1999 of $8.2
million, compared to 1998 second quarter earnings of $37.7 million. The decrease
was due to a non-recurring charge of $68 million, as a result of the NJBPU's
Summary Order on JCP&L. Excluding the non-recurring charge, earnings for the
second quarter of 1999 would have been $59.8 million. The increase in earnings
on this basis was primarily due to higher weather-related sales and a decrease
in depreciation and amortization expense.
For the six months ended June 30, 1999, earnings were $43 million compared
to $87.8 million for the same period last year. Excluding the non-recurring
charge mentioned above, earnings would have been $111.1 million. This increase
was due primarily to higher weather-related sales and increased usage by
residential and commercial customers.
OPERATING REVENUES:
- -------------------
Operating revenues for the second quarter of 1999 decreased 18.3% to $391
million, as compared to the second quarter of 1998. For the six months ended
June 30, 1999, revenues decreased 4.6% to $907.9 million as compared to the same
period last year. The components of the changes are as follows:
(in millions)
-----------------------------------
Three Months Six Months
Ended Ended
June 30, 1999 June 30, 1999
------------- -------------
KWH revenues $ 26.5 $ 38.1
Energy-related revenues 0.2 31.7
Obligation to refund revenues
to customers per NJBPU Order (115.0) (115.0)
Other revenues 0.5 1.9
------ ------
Decrease in revenues $ (87.8) $ (43.3)
====== ======
54
JCP&L RESULTS OF OPERATIONS (continued)
- ---------------------------
Kilowatt-hour revenues
- ----------------------
The increase in KWH revenues for the three and six month periods was due to
the absence of an earnings cap adjustment (since JCP&L was not in an over
earnings position in 1999) which reduced 1998 revenues, higher weather-related
sales and increased usage by residential and commercial customers during the
first quarter 1999.
Energy-related revenues
- -----------------------
Changes in energy-related revenues do not affect earnings as they reflect
corresponding changes in the LEAC billed to customers and expensed. The increase
for the six month period was due primarily to a change in the estimate for
unbilled revenue.
Obligation to refund revenues to customers per NJBPU Order
- ----------------------------------------------------------
The decrease resulted from the NJBPU's Summary Order for JCP&L which
obligated JCP&L to refund to customers (from 1999 revenues) 5% of April 30, 1997
rates for service rendered from August 1, 2002 through July 31, 2003.
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.
Depreciation and amortization
- -----------------------------
The decrease in depreciation and amortization expense for the three and six
month periods was due mainly to the effect 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.
55
MET-ED RESULTS OF OPERATIONS
----------------------------
Met-Ed's earnings for the second quarter ended June 30, 1999 were $19.1
million, compared to 1998 second quarter losses of $168.9 million. The increase
in earnings was primarily due to the absence of an extraordinary charge of
$187.3 million taken in 1998 as a result of the PaPUC's Restructuring Order on
Met-Ed. Excluding the extraordinary charge, earnings for the second quarter 1998
would have been $18.4 million.
For the six months ended June 30, 1999, earnings were $51.4 million
compared to losses of $144.2 million for the same period last year. Excluding
the extraordinary charge mentioned above, earnings for the second quarter 1998
would have been $43.1 million. This increase in earnings was due primarily to
lower fuel and power purchase costs and a decrease in depreciation and
amortization expense.
OPERATING REVENUES:
- -------------------
Operating revenues for the second quarter of 1999 decreased 12.4% to $198
million, as compared to the second quarter of 1998. For the six months ended
June 30, 1999, revenues decreased 7.3% to $427.2 million as compared to the same
period last year. The components of the changes are as follows:
(in millions)
------------------------------------
Three Months Six Months
Ended Ended
June 30, 1999 June 30, 1999
------------- -------------
KWH revenues $(49.1) $(72.5)
CTC revenues 21.7 36.1
Other revenues (0.6) 2.8
---- -----
Decrease in revenues $(28.0) $(33.6)
==== =====
Kilowatt-hour revenues
- ----------------------
The decrease in KWH revenues for the three and six month periods was due
primarily to lower generation-related revenues as a result of some Pennsylvania
customers choosing another supplier; a decrease in NUG revenues (which did not
have a significant impact on earnings); partially offset by higher
weather-related sales, 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.
OPERATING EXPENSES:
- -------------------
Fuel and Power purchased and interchanged
- -----------------------------------------
Changes in fuel and power purchased and interchanged 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 and
six month periods was primarily due to lower fuel costs and power purchases and
the deferral of above-market NUG costs.
56
MET-ED RESULTS OF OPERATIONS (continued)
- ----------------------------------------
Depreciation and amortization
- -----------------------------
The decrease in depreciation and amortization expense for the three and six
month periods was due primarily to the effect of the impairment writedown of
TMI-1 in 1998.
Trust preferred securities
- --------------------------
In June 1999, Met-Ed issued $100 million of Trust preferred securities.
Preferred stock dividends and loss on preferred stock reacquisition
- -------------------------------------------------------------------
The decrease in preferred stock dividends for the six month period was
primarily due to the redemption of all of Met-Ed's outstanding shares of
cumulative preferred stock. As a result, a reacquisition loss of $0.5 million
was recorded in the first quarter of 1999.
PENELEC RESULTS OF OPERATIONS
-----------------------------
Penelec's earnings for the second quarter ended June 30, 1999 were $19.9
million, compared to 1998 second quarter losses of $68.3 million. The increase
in earnings was primarily due to the absence of an extraordinary charge of $87.8
million taken in 1998 as a result of the PaPUC's Restructuring Order on Penelec.
Excluding the extraordinary charge, earnings for the second quarter 1998 would
have been $19.5 million.
For the six months ended June 30, 1999, earnings were $84.6 million,
compared to losses of $41.8 million for the same period last year. Excluding the
non-recurring gain of $27.8 million after-tax, for the portion of the gain on
the sale of Penelec's interest in Homer City, earnings for the six months ended
June 30, 1999 would have been $56.8 million. Excluding the extraordinary charge
mentioned above, earnings for the six months ended June 30, 1998 would have been
$46.0 million. This increase in earnings was due primarily to higher
weather-related sales, lower fuel costs and a decrease in depreciation and
amortization expense.
OPERATING REVENUES:
- -------------------
Operating revenues for the second quarter of 1999 decreased 18.1% to $205.1
million, as compared to the second quarter of 1998. For the six months ended
June 30, 1999, revenues decreased 12.2% to $451.3 million as compared to the
same period last year. The components of the changes are as follows:
(in millions)
---------------------------------
Three Months Six Months
Ended Ended
June 30, 1999 June 30, 1999
------------- -------------
KWH revenues $(59.3) $(86.0)
CTC revenues 13.9 22.6
Other revenues 0.1 0.7
----- -----
Decrease in revenues $(45.3) $(62.7)
===== =====
57
PENELEC RESULTS OF OPERATIONS (continued)
- -----------------------------
Kilowatt-hour revenues
- ----------------------
The decrease in KWH revenues for the three and six month periods was due
primarily to lower generation-related revenues as a result of some Pennsylvania
customers choosing another supplier; a decrease in NUG revenues (which did not
have a significant impact on earnings); partially offset by higher
weather-related sales, 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.
OPERATING EXPENSES:
- -------------------
Fuel and Power purchased and interchanged
- -----------------------------------------
Changes in fuel and power purchased and interchanged 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 and
six month periods was primarily due to lower fuel costs, partially offset by
increased power purchases.
Depreciation and amortization
- -----------------------------
The decrease in depreciation and amortization expense for the three and six
month periods was due primarily to the effect of the 1998 impairment writedown
of TMI-1 and the sale of Penelec's interest in Homer City in March 1999.
OTHER INCOME AND DEDUCTIONS:
- ----------------------------
Other income, net
- -----------------
The increase in other income, net for the three and six month periods was
due primarily to the recognition of the gain on the sale of Homer City relating
to wholesale operations.
Interest on long-term debt
- --------------------------
In April, Penelec redeemed a total of $600 million of FMBs; partially
offset by the issuance of $350 million of senior notes.
Trust preferred securities
- --------------------------
In May 1999, Penelec issued $100 million of Trust preferred securities.
Preferred stock dividends and loss on preferred stock reacquisition
- -------------------------------------------------------------------
The decrease in preferred stock dividends for the three and six month
periods was primarily due to the redemption of all of Penelec's outstanding
shares of cumulative preferred stock. As a result, a reacquisition loss of $0.7
million was recorded in the first quarter of 1999.
58
INVESTMENTS IN FUCOs AND EWGs
-----------------------------
GPU, Inc. has Securities and Exchange Commission (SEC) authorization to
finance investments in foreign utility companies (FUCOs) and exempt wholesale
generators (EWGs) up to an aggregate amount equal to 100% of GPU's average
consolidated retained earnings, or approximately $2.3 billion as of June 30,
1999. GPU, Inc. has remaining authorization to finance approximately $345
million of additional investments in FUCOs and EWGs (including the effect of the
Midlands acquisition). GPU, Inc.'s investments in FUCOs and EWGs are made
through GPU Electric and the GPUI Group.
GPU ELECTRIC
------------
GPU Electric has ownership interests in electric and gas transmission and
distribution businesses in England, Australia and Argentina. Through its
investment in Midlands, GPU Electric also has ownership interests in operating
generating facilities located in foreign countries totaling 4,278 megawatts (MW)
(of which GPU Electric's equity interest represents 588 MW) of capacity. At June
30, 1999, GPU, Inc.'s aggregate investment in GPU Electric was $518 million.
GPU, Inc. has also guaranteed up to an additional $1.19 billion of GPU Electric
obligations.
In July 1999, GPU Electric acquired Cinergy Corp.'s (Cinergy) 50% ownership
interest in Avon Energy Partners Holdings (Avon), which owns Midlands, for
(pound)452.5 million (approximately US $714 million). GPU and Cinergy had
jointly formed Avon in 1996 to acquire Midlands, an English regional electric
company serving 2.3 million customers. GPU's purchase from Cinergy was financed
through a combination of equity and debt. The equity was funded from a US $250
million contribution from GPU, Inc.; and from the issuance of US $50 million of
commercial paper by GPU Capital, which is guaranteed by GPU, Inc. The debt has
been provided through a two-year (pound)245 million (approximately US $382
million) credit agreement entered into by EI UK Holdings of which GPU, Inc. has
guaranteed approximately US $100 million.
In June 1999, GPU Electric acquired the business of Transmission Pipelines
Australia (TPA), a natural gas transmission business, from the State of
Victoria, Australia for A$1.025 billion (approximately US $675 million). TPA
(which has since been renamed GPU GasNet) was sold as part of Victoria's
privatization of the natural gas industry. The GPU GasNet system encompasses
1,105 miles of transmission pipelines, and consists of two separate networks
serving approximately 1.3 million residential customers and about 40,000
industrial and commercial customers throughout Victoria. The GPU GasNet
acquisition was financed through an: (1) A$750 million (approximately US $495
million) senior credit facility, which is non-recourse to GPU, Inc.; and (2) an
equity contribution from GPU Capital of A$275 million (approximately US $180
million) provided through the issuance of commercial paper, which is guaranteed
by GPU, Inc.
In March 1999, GPU Electric acquired Emdersa for $375 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, which is guaranteed by GPU, Inc. and a $50 million contribution
from GPU, Inc.
In June 1999, National Power plc acquired all the assets and liabilities of
Midlands' supply business, including obligations under Midlands' power purchase
agreements, for $300 million ($150 million for GPU's share) plus an adjustment
for working capital. As a result, in the second quarter of 1999 GPU recorded an
after-tax gain on the sale of $10 million, or $0.08 per share.
59
Management expects that GPU Electric 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.
GPUI GROUP
----------
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 501 MW) of capacity and four operating generating facilities located
in foreign countries totaling 1,229 MW (of which the GPUI Group's equity
interest represents 424 MW) of capacity. At June 30, 1999, GPU, Inc.'s aggregate
investment in the GPUI Group was $242 million. GPU, Inc. has also guaranteed up
to an additional $33.7 million of GPUI Group obligations.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Capital Expenditures and Investments
- ------------------------------------
GPU Energy Companies
The GPU Energy companies' capital spending for the six months ended June
30, 1999 was $139 million (JCP&L $67 million; Met-Ed $32 million; Penelec $38
million; Other $2 million), and was used primarily to expand and improve
existing T&D facilities , for new customer connections and to implement an
integrated information system. 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
GPU Electric's capital spending for the six months ended June 30, 1999 was
$1.04 billion and was used primarily for the acquisition of Emdersa and GPU
GasNet, and to improve PowerNet's facilities. For 1999, capital expenditures are
forecasted to be $19 million (excluding the acquisitions) and expenditures for
maturing obligations are expected to total $453 million. Capital outlays for
1999 will be satisfied through both internally generated funds and external
financings.
GPUI Group
The GPUI Group's capital spending for the six months ended June 30, 1999
was $31 million was used primarily for construction activities at the GPUI
Group's South American investment. For 1999, capital expenditures are forecasted
to be $37 million and expenditures for maturing obligations are expected to
total $28 million. Capital outlays for 1999 will be satisfied through both
internally generated funds and external financings.
60
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 June 30, 1999, GPU,
Inc. has repurchased 2.6 million shares of common stock at an average price of
$39.21 per share. Following the acquisition of the remaining 50% interest in
Midlands in July 1999, GPU, Inc. has temporarily suspended the common stock
repurchase program.
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 other Credit Agreements, as discussed below.
GPU Capital has entered into a $1 billion 364-day senior revolving credit
facility in support of the issuance of commercial paper to fund the GPU Electric
acquisitions. 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. ($100 million). GPU Capital, along
with GPU Australia Holdings, will use the proceeds from the sale of commercial
paper to finance 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 $250 million 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 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 has regulatory approval
through December 31, 2000 to issue senior notes in the amount of $300 million,
and is seeking regulatory approval to issue up to $200 million of such amount as
preferred securities. Met-Ed and JCP&L will be issuing secured senior notes
(collateralized by FMBs issued to the senior note trustee) until such time as
more than 80% of the issued FMBs are held by the senior note trustee. At that
time, the outstanding senior notes will become unsecured obligations of the
respective company and 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 will also be
unsecured.
61
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 note indentures will prohibit (subject to
certain exceptions) the GPU Energy companies from issuing any debt which is
senior to the senior notes.
The GPU Energy companies' bond indentures include provisions that limit the
amount of FMBs 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.
In June 1999, JCP&L redeemed $5 million stated value of cumulative
preferred stock pursuant to mandatory and optional sinking fund provisions.
In April 1999, Penelec redeemed $600 million of FMBs with proceeds from the
sale of its interest in Homer City. 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 activities and for other corporate purposes.
During the second quarter of 1999, Met-Ed and Penelec each issued $100
million of Trust preferred securities, at 7.35% and 7.34% distribution rates,
respectively. In July 1999, Penelec redeemed all of its outstanding shares of
Company-obligated mandatorily redeemable preferred securities for $105.4
million.
GPU Electric
In July 1999, Austran Holdings, the parent of GPU PowerNet, refinanced
A$230 million of acquisition debt originally due in November 2000, with medium
term notes, due November 15, 2002. Certain interest rate swap positions, which
had been in place to convert the floating-rate bank loans to a fixed rate, were
closed-out at a cost of A$11.8 million (US $7.7 million). This cost will be
reflected in GPU's third quarter 1999 earnings.
In April 1999, GPU Australia Holdings refinanced $350 million of
outstanding long-term debt associated with the GPU PowerNet acquisition, with
$345 million of commercial paper under its $350 million commercial paper
program.
Austran Holdings, Inc. (Austran), a wholly owned subsidiary of GPU
Electric, has established a A$500 million (approximately U.S. $306 million)
commercial paper program. GPU PowerNet has guaranteed Austran's obligations
under this program. As of June 30, 1999, Austran had outstanding approximately
A$427 million (approximately U.S. $285 million) under the commercial paper
program, the proceeds from which were used to refinance the maturing portion of
the senior debt credit facility used to finance the GPU
62
PowerNet acquisition. The Austran borrowings are classified as noncurrent on the
Consolidated Balance Sheet since it is management's intent to reissue the
commercial paper on a long-term basis.
For information relating to the financing of GPU Electric's acquisition of
Midlands and GPU GasNet, see Note 3, Acquisitions.
GPU may further reduce the outstanding commercial paper issued associated
with the refinancing of the Midlands acquisition debt in addition to the GPU
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).
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, the GPU Energy companies and the GPUI
Group have completed development of contingency plans for mission-critical
systems. GPU Electric and GPU AR are scheduled to have contingency plans
completed by September 1999. GPU's Year 2000 project is not expected to cause
any material delay in GPU information technology services performing other
planned projects.
In January and May 1999, an independent consultant retained by GPU to
review the adequacy of GPU's Year 2000 plans and state of readiness 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 areas for additional focus, which 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 contingency plans with the PaPUC 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 appropriate
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 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 assets. In addition, the NJBPU
63
ordered all jurisdictional utilities to submit Year 2000 contingency plans,
which JCP&L filed with the NJBPU in July 1999. These contingency plans are 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 by 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 expect to spend a total of approximately
$42.9 million (JCP&L $18.6 million; Met-Ed $12 million; Penelec $12.3 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 $42.9 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 45% of the expected costs involve the modification or replacement
of Year 2000 Components; and 55% are for labor (including contract labor) and
contingencies. The GPU Energy companies are funding these costs from their
operations.
Through June 30, 1999, the GPU Energy companies have spent a total of
approximately $33 million (JCP&L $14.5 million; Met-Ed $9.2 million; Penelec
$9.3 million) (of the $42.9 million) on the Year 2000 issue, of which $13.2
million (JCP&L $6.1 million; Met-Ed $3.5 million; Penelec $3.6 million) has been
spent in 1999.
GPU Electric currently expects to spend a total of approximately $16
million (to replace or modify equipment at Midlands, GPU PowerNet, GPU GasNet
and Emdersa) on the Year 2000 issue. Through June 30, 1999, GPU Electric has
spent a total of approximately $9.8 million on the Year 2000 issue.
The total cost associated with the GPUI Group and GPU AR's achieving Year
2000 readiness is not expected to be material to GPU's operations or financial
position.
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 became substantially operational for the GPU
Energy companies and GPUS in June 1999 and is expected to be fully operational
for these companies by September 1999. GPUN and Genco are not installing Project
Enterprise before 2000, but rather are making modifications to their existing
legacy information systems to achieve Year 2000 readiness. Genco has completed
the remediation and testing of its mission-critical information systems and GPUN
plans to complete such remediation and testing by September 1999.
Milestones
GPU has established Inventory, Assessment, Remediation, Testing and
Monitoring of its mission-critical Year 2000 Components as the primary phases
64
for its Year 2000 program. The Inventory and Assessment phases of
mission-critical Year 2000 Components are complete. The remaining milestones for
Remediation, Testing and Monitoring are as follows:
Remediation Testing Monitoring
----------- ------- ----------
GPU Energy and GPUS 09/30/1999 09/30/1999 03/31/2000
Genco Completed Completed 05/31/2000
GPUN 10/31/1999 10/31/1999 03/31/2000
GPU Electric 09/30/1999 09/30/1999 03/31/2000
GPUI Group 08/31/1999 08/31/1999 03/31/2000
GPU Advanced Resources Completed Completed 03/31/2000
Remediation and testing of the GPU Energy companies' mission-critical Year
2000 Components are essentially complete, with limited exceptions, which have
been reported to State regulators and to NERC. 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 participated in a NERC exercise
that 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. Year 2000 readiness testing for the GPU Energy
companies' Customer Care System is scheduled to be completed in September 1999.
Genco has completed modification and testing of mission-critical Year 2000
Components associated with its generation capacity. In June 1999, the PaPUC
witnessed Year 2000 testing at the Titus Generating Station and, as a result,
requested various documents, which have been supplied. Also in June 1999, the
PaPUC observed the NRC Year 2000 assessment of TMI-1 and requested various
documents, which have been supplied. In a July 1999 response to the NRC's
Generic Letter 98-01 Supplement, GPUN confirmed its Year 2000 readiness, with
the following exceptions: The TMI Unit 1 Digital Turbine Control System, and two
software applications used by GPUN in connection with employee training,
radiation exposure and access to radiation work areas. These exceptions are
expected to be resolved by October 31, 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 critical third parties. As part of
its Year 2000 strategy, GPU is contacting key customers, lenders, trading
partners, vendors, suppliers and service providers to assess whether they are
adequately addressing the Year 2000 issue.
With respect to computer software and equipment with embedded systems, GPU
has analyzed where it is dependent upon third party data and has identified
several critical areas: (1) the Pennsylvania-New Jersey-Maryland (PJM)
Interconnection; (2) electric generation suppliers, such as cogeneration
operators and NUGs; (3) Electronic Data Interchange (EDI) with trading partners;
(4) Electronic Funds Transfer (EFT) with financial institutions; (5) vendors;
and (6) customers.
The following summarizes the actions that have been taken by the GPU Energy
companies with critical third parties:
65
- - PJM - Data link testing with PJM and all PJM member companies has been
successfully completed. Phase III data link testing is scheduled to be
conducted simultaneously, with all member companies, during the third
quarter of 1999.
- - Electric generation suppliers - The GPU Energy companies have received
preliminary readiness information from all critical electric generation
suppliers. Based on the information provided, it is anticipated that these
suppliers will achieve Year 2000 readiness prior to year-end 1999.
- - EDI/EFT - The GPU Energy companies have contacted all critical organizations
with which it exchanges data electronically and conducts electronic funds
transfers. Testing has been successfully completed with 60% of those
contacted. Testing with the remaining critical partners is expected to occur
in the third quarter of 1999.
The testing of the GPU Energy companies' Electronic Funds Transfer System
(EFT) encountered Year 2000 date-related issues that have been reported to
the software vendor. Corrections from the vendor are expected to be received
in the third quarter of 1999. Upon receipt and installation of the software
corrections, the appropriate Year 2000 tests for the system will be
performed. In addition, the GPU Energy companies have developed contingency
plans for EFT.
- - Vendors - The GPU Energy companies have completed a preliminary readiness
assessment of its critical vendors and financial partners. Based on the
information obtained, it is anticipated that all critical vendors will
achieve Year 2000 readiness prior to year-end 1999.
- - 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 in excess
of $2 billion in annual revenue (in the aggregate) has been assessed.
GPU AR expects to complete its review of third party readiness by September
1999.
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 is in the process of evaluating whether mission-critical components that
have not as yet been tested, would have a material adverse effect on GPU's
operations or financial condition if they did not function properly.
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 June 1999, the GPU Energy companies
filed with the NERC a report containing an overview of their contingency
66
planning strategies, as well as details about certain contingency plans. hese
plans, which will be refined throughout 1999, include procedures for
supplementing present general emergency plans with specific measures for Year
2000 problems and the placement 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. 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 to the respective companies, which could have an adverse
effect on GPU's results of operations.
GPU expects to be in a regulated business (the transmission and
distribution of electricity). In the future, GPU's ability to seek rate
increases will be more limited than it has been in the past and, notwithstanding
increases in costs, rates may be capped for varying periods. Since GPU intends,
to a large extent, to exit the merchant generation business, it will need to
meet capacity obligations and supply energy largely from contracted purchases
and purchases in the open market. In addition, inflation may have various
effects on GPU since it will be a factor in revenue calculations in some
jurisdictions, but may cause increased operating costs with GPU having a limited
ability to pass these costs to its customers because of capped rates in other
areas. Management is in the process of identifying and addressing these market
risks, however, there can be no assurance that GPU will be able to recover
through these capped rates all of the costs of the electricity required to be
purchased for customers.
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 Homer City
to a subsidiary of Edison Mission Energy for 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 (Sithe) and The Cleveland Electric Illuminating
Company (CEI) Corporation to sell all their remaining fossil-fuel and
67
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). In July 1999, Penelec's 20% undivided ownership interest in the
Seneca Pumped Storage Facility was sold to CEI for $43 million, which is
included in this amount. The sales to Sithe are expected to be completed in the
third quarter 1999, subject to the timely receipt of the necessary regulatory
and other approvals. Sithe has agreed to assume the collective bargaining
agreements covering union employees and to fill bargaining positions on the
basis of seniority. Sithe has also agreed to use reasonable efforts to offer
positions to Genco non-bargaining employees. The GPU Energy companies have
agreed to assume up to $20 million (JCP&L $7 million; Met-Ed $9 million; Penelec
$4 million) of employee severance costs for employees not hired by Sithe.
In October 1998, the GPU Energy companies entered into definitive
agreements to sell TMI-1 to AmerGen Energy Company, LLC (AmerGen), which is a
joint venture between PECO Energy and British Energy. Terms of the purchase
agreements are summarized as follows:
- The total cash purchase price is approximately $100 million, which
represents $23 million to be paid at closing, and $77 million for the
nuclear fuel in the reactor to be paid in five equal annual
installments beginning one year after the closing. The purchase price
and closing payment are subject to certain adjustments for capital
expenditures and other items.
- 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. 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.
68
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, reduce JCP&L's company-owned generation related
stranded costs and may also be applied to reduce short-term debt, finance
further acquisitions, and reduce acquisition debt of GPU Electric.
JCP&L has been exploring the sale or early retirement of the Oyster Creek
facility. In May 1999, the NJBPU approved JCP&L's request to recover the costs
associated with an early retirement of Oyster Creek in 2000.
Recent Regulatory Actions
- -------------------------
New Jersey Restructuring
On May 24, 1999, the NJBPU issued a Summary Order with respect to JCP&L's
rate unbundling, stranded cost and restructuring filings. This Summary Order
provides for, among other things, the following:
- customer choice of electric generation supplier for all consumers
beginning August 1, 1999. On October 25, 1999, utilities are to begin
accepting customer selection of suppliers;
- a 5% rate reduction commencing August 1, 1999; additional reductions of
1% in 2000 and 2% in 2001; and an additional net 3% reduction in 2002
inclusive of a 5% rate refund from April 30, 1997 rates for service
rendered on or after August 1, 2002, partially offset by a 2% increase
in the Market Transition Charge (MTC). The total rate reduction of 11%
will remain in effect through July 2003;
- the removal from regulation of the costs associated with providing
electric generation service. JCP&L must provide basic generation
service (BGS)to retail customers who do not choose an alternative
generation supplier during the three-year period ending July 31, 2002.
BGS after this period will be bid out;
- the average shopping credits will range from 5.14 cents per KWH in
1999 to 5.40 cents in 2003;
- an average distribution rate of 3.35 cents per KWH;
- the ability to recover stranded costs;
- the ability to securitize approximately $400 million of stranded costs
associated with Oyster Creek;
- effective August 1, 1999, JCP&L is no longer subject to an earnings
cap;
- the establishment of a non-bypassable societal benefits clause to
recover costs associated with nuclear plant decommissioning,
demand-side management, manufactured gas plant remediation, universal
service fund, and consumer education; and
- the NJBPU will conduct an annual review and assessment of the
reasonableness and prudency of costs incurred by JCP&L in the
procurement of energy and capacity needed to serve BGS load as well as
of NUG and utility power purchase agreement stranded costs.
69
In addition, JCP&L will implement a non-bypassable MTC through which JCP&L
will collect:
- above-market costs associated with long-term NUG and utility power
purchase agreements;
- any under-recovered deferred costs as of August 1, 1999 resulting from
JCP&L's current levelized energy adjustment clause;
- the recovery, over 11-years, of $130 million in early retirement and
severance-related costs should Oyster Creek be retired from service in
2000; and
- the amortization of Oyster Creek sunk costs, pending securitization.
A final Restructuring Order containing a full discussion of the issues, is
expected to be received in the third quarter of 1999.
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 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
the single-system rate has not affected total transmission revenues, however, it
has increased the pricing for transmission service in Met-Ed and Penelec's
service territories and reduced 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).
70
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 June 30, 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.
The NJBPU Summary Order and PaPUC Restructuring Orders provide the GPU
Energy companies assurance of full recovery of their NUG costs (including
above-market NUG costs and certain buyout costs). Accordingly, the GPU Energy
companies have recorded a liability of $3.5 billion (JCP&L $1.7 billion; Met-Ed
$0.8 billion; Penelec $1 billion) on the Consolidated Balance Sheets for
above-market NUG costs which is fully offset by Regulatory assets, net. In
addition, JCP&L recorded a liability of $75 million for above-market utility
purchase power agreements with a corresponding offset to Regulatory assets, net
since there is assurance of full recovery. 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 pending sales of the GPU Energy companies' generating facilities
have been completed, GPU will have 819 MW of capacity and related
71
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.
As a result of the NJBPU and the PaPUC's restructuring orders, the GPU
Energy companies are required to provide generation service to customers who do
not choose an alternate supplier (For additional information, see the Provider
of Last Resort and Basic Generation Service sections below.) Given that the GPU
Energy companies are divesting their generation business, there will be
increased market risks associated with providing generation service since the
GPU Energy companies will have to supply energy to non-shopping customers
entirely from contracted and open market purchases. GPU Energy may not be able
to recover the cost of the energy purchased through rates which may be capped
for varying periods. However, as part of the Summary Order, JCP&L is permitted
to recover reasonable and prudently incurred costs associated with providing
basic generation service. Management is in the process of identifying and
addressing these market risks, however, there can be no assurance that the GPU
Energy companies will be able to supply electricity to customers who do not
choose an alternate supplier at a reasonable cost to the respective companies,
which would have an adverse effect on GPU's results of operations.
Provider of Last Resort
- -----------------------
Under the PaPUC Restructuring Orders, Met-Ed and Penelec customers may shop
for their generation supplier beginning January 1, 1999. A PaPUC approved
competitive bid process will assign provider of last resort (PLR) service for
20% of Met-Ed and Penelec's retail customers on June 1, 2000, 40% on June 1,
2001, 60% on June 1, 2002, and 80% on June 1, 2003, to licensed generation
suppliers referred to as Competitive Default Service (CDS). If no qualified bids
for CDS are received at or below their generation rate caps, Met-Ed and Penelec
will continue to provide PLR service at the rate cap levels until 2010 unless
modified by the PaPUC. Any retail customers assigned to CDS may return to Met-Ed
and Penelec as the default PLR at no additional charge. Met-Ed and Penelec may
meet any remaining PLR obligation at rates not less than the lowest rate charged
by the winning CDS provider, but no higher than Met-Ed and Penelec's rate cap.
Basic Generation Service Provider
- ---------------------------------
The NJBPU Summary Order states that JCP&L must provide BGS to those retail
customers who choose to remain with JCP&L as generation customers for a
three-year period ending July 31, 2002. JCP&L's BGS rates will be pre-determined
for the period through July 31, 2003.
The responsibility for BGS
72
after July 31, 2002 will be bid out. Bidders will bid for the right to provide
BGS during the year commencing August 1, 2002 at the pre-established shopping
credits. Any payment received or required by JCP&L resulting from the bidding
process will be included in the deferred balance for future refund or recovery.
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.
On May 24, 1999, the NJBPU issued a Summary Order regarding JCP&L's
unbundling, stranded cost and restructuring filings which essentially
deregulated the electric generation portion of JCP&L's business. Accordingly, in
the second quarter of 1999, JCP&L 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 its
electric generation operations. In 1998, Met-Ed and Penelec, in conjunction with
receiving their Restructuring Orders, discontinued the application of FAS 71 and
adopted the provisions of FAS 101 and EITF 97-4 for their generation operation.
The transmission and distribution portion of the GPU Energy companies'
operations continue to be subject to the provisions of FAS 71.
In accordance with FAS 121, impairment tests performed by the GPU Energy
companies on the net book values of their generation facilities determined that
the net investments in TMI-1 and Oyster Creek were impaired. This has resulted
in a write-down to reflect TMI-1 and Oyster Creek's fair market values in the
amounts of $520 million (pre-tax) and $630 million (pre-tax), respectively. The
majority of the TMI-1 write-down was recorded in 1998 while the Oyster Creek
write-down was recorded in the quarter ended June 30, 1999. Of the amount
written down for TMI-1, $510 million was reestablished as a regulatory asset
because management believes it is probable of recovery in the restructuring
process and $10 million (the FERC jurisdictional portion) was charged to expense
as an extraordinary item in 1998. The total impairment amount of Oyster Creek
was reversed and reestablished as a regulatory asset since the Summary Order
provides for rate recovery. (For further information relating to the Oyster
Creek impairment write-down, see Note 2, Accounting for Extraordinary and
Non-recurring items.)
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
73
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, 2000. GPU will adopt FAS 133 in the first quarter of 2001 and is
in the process of evaluating the impact of this statement.
74
PART II
ITEM 1 - LEGAL PROCEEDINGS
------------------
Information concerning the current status of certain legal
proceedings instituted against GPU, Inc. and the GPU Energy
companies discussed in Part I of this report in Combined Notes to
Consolidated Financial Statements is incorporated herein by
reference and made a part hereof.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
(12) Statements Showing Computation of Ratio of Earnings to
Fixed Charges and Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends Based on SEC
Regulation S-K, Item 503
A - GPU, Inc. and Subsidiary Companies
B - JCP&L
C - Met-Ed
D - Penelec
(27)..Financial Data Schedules
A - GPU, Inc. and Subsidiary Companies
B - JCP&L
C - Met-Ed
D - Penelec
(b) Reports on Form 8-K:
GPU, Inc.:
----------
Dated May 12, 1999, under Item 5 (Other Events).
Dated May 26, 1999, under Item 5 (Other Events).
Dated July 6, 1999, under Item 5 (Other Events).
Dated July 20, 1999, under Item 5 (Other Events).
Jersey Central Power & Light Company:
-------------------------------------
Dated May 26, 1999, under Item 5 (Other Events).
Dated August 5, 1999 under Item 5 (Other Events).
Metropolitan Edison Company:
----------------------------
Dated May 28, 1999, under Item 5 (Other Events).
Pennsylvania Electric Company:
------------------------------
Dated June 17, 1999, under Item 5 (Other Events).
Dated August 5, 1999 under Item 5 (Other Events).
75
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.
August 10, 1999 By: /s/ B. L. Levy
----------------------------------
B. L. Levy, Senior Vice President
(Chief Financial Officer)
August 10, 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
August 10, 1999 By: /s/ D. Baldassari
----------------------------------
D. Baldassari, President
(Principal Operating Officer)
August 10, 1999 By: /s/ C. A. Mascari
----------------------------------
C. A. Mascari,
Vice President - Power Services
and Comptroller
(Principal Accounting Officer)
76