UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
-------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the transition period from to
----------------- --------------
Commission Registrant, State of Incorporation, I.R.S. Employer
File Number Address and Telephone Number Identification No.
- ----------- ----------------------------------- ------------------
1-3141 Jersey Central Power & Light Company 21-0485010
(a New Jersey corporation)
2800 Pottsville Pike
Reading, Pennsylvania 19640-0001
Telephone (610) 929-3601
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
The number of shares outstanding of each of the registrant's classes of
voting stock, as of November 13, 2001, was as follows:
Shares
Registrant Title Outstanding
- ----------------------------------- ---------------------------- -------------
Jersey Central Power & Light Company Common Stock, $10 par value 15,371,270
Jersey Central Power & Light Company
Quarterly Report on Form 10-Q
September 30, 2001
Table of Contents
-----------------
Page
----
PART I - Financial Information
Management's Discussion and Analysis
of Financial Condition and Results of
Operations 1
Consolidated Financial Statements:
Balance Sheets 10
Statements of Income 12
Statements of Cash Flows 13
Notes to Consolidated Financial Statements 14
PART II - Other Information 26
Signature 27
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 Quarterly Report on Form 10-Q is filed by Jersey Central Power &
Light Company. This Form 10-Q supplements and updates the 2000 Annual Report on
Form 10-K, filed by the registrant with the Securities and Exchange Commission,
and should be read in conjunction therewith.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
We caution you that this Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. They are statements about future
performance or results (such as statements including, but not limited to, the
terms "potential," "estimate," "believe," "expect" and "anticipate" and similar
words) when we discuss our financial condition, results of operations and
business. Forward-looking statements involve certain risks, assumptions and
uncertainties. They are not guarantees of future performance. Factors may cause
actual results to differ materially from those expressed in these
forward-looking statements. These factors include:
- changes in national and regional economic conditions;
- changes in markets for energy services;
- changing commodity market prices;
- the availability and cost of capital;
- inability to accomplish or realize anticipated benefits of strategic
goals;
- legislative and regulatory changes (including revised environmental
requirements);
- economic or weather conditions affecting future sales and margins;
- the speed and nature of increased competition and deregulation in
the electric utility industry; and
- outcomes of legal proceedings.
We believe that the expectations reflected in our forward-looking
statements are reasonable. However, we cannot assure you that these expectations
will prove to be correct. You should consider the factors we have noted above as
you read the forward-looking statements in this Form 10-Q. We undertake no
obligation to release publicly any revisions to such forward-looking statements
to reflect events or circumstances after the date of this document or to reflect
the occurrence of unanticipated events.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Jersey Central Power & Light Company (JCP&L) is a wholly-owned electric
utility subsidiary of FirstEnergy Corp. (FirstEnergy), an Ohio corporation
headquartered in Akron, Ohio. JCP&L conducts business under the name GPU Energy
along with its affiliates Metropolitan Edison Company (Met-Ed) and Pennsylvania
Electric Company (Penelec), which are also electric utility subsidiaries of
FirstEnergy.
In August 2000, FirstEnergy entered into an agreement to merge with GPU,
Inc., under which FirstEnergy would acquire all of the outstanding shares of
GPU, Inc.'s common stock for approximately $4.5 billion in cash and FirstEnergy
common stock. The merger became effective on November 7, 2001 and is being
accounted for by the purchase method. Prior to that time, JCP&L was a
wholly-owned subsidiary of GPU, Inc.
RESULTS OF OPERATIONS
---------------------
JCP&L's earnings for the third quarter 2001 were $89.8 million, compared
to third quarter 2000 earnings of $91.4 million. Earnings for the third quarter
2000 would have been $74.9 million, excluding a non-recurring after-tax gain of
$16.5 million, which resulted from the reversal of certain deferred taxes and
realization of an investment tax credit related to the sale of the Oyster Creek
Nuclear Generating Station (Oyster Creek). The third quarter earnings increase,
excluding this non-recurring item, was primarily due to lower operation and
maintenance (O&M) expenses (net of increased purchased power expenses) as a
result of the sale of Oyster Creek in August 2000, and higher weather-related
sales during the summer of 2001. Partially offsetting these were higher
amortization expenses, and increased financing costs.
For the nine months ended September 30, 2001, JCP&L's earnings were $184.5
million, compared to $177.3 million for the same period in 2000. Excluding the
non-recurring gain discussed above, earnings for 2000 would have been $160.8
million. The same factors affecting the comparable quarterly results also
affected the year to date comparison. Also contributing to the increase for the
nine-month period was higher weather-related sales due to colder winter
temperatures in 2001 compared to the previous winter.
OPERATING REVENUES:
- ------------------
Operating revenues for the third quarter 2001 increased $67.1 million to
$672.1 million, as compared to the third quarter 2000. For the nine months ended
September 30, 2001, operating revenues increased $106.9 million to $1.7 billion,
compared to the same period last year. The components of the changes are as
follows:
1
2001 vs. 2000 (in millions)
----------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
KWH revenues $16.8 $ 23.0
Energy and restructuring-related
revenues 50.3 89.0
Other revenues - (5.1)
---- -----
Increase in revenues $67.1 $106.9
==== =====
KWH revenues
- ------------
The increase for both periods was primarily due to higher weather-related
sales in 2001 compared to the previous year.
Energy and restructuring-related revenues
- -----------------------------------------
Changes in energy and restructuring-related revenues do not affect earnings
as they are offset by corresponding changes in expense. The increase for both
periods was primarily due to the return of numerous shopping customers from
alternate generation suppliers and increased sales to other utilities.
Other revenues
- --------------
The decrease for the nine months ended September 30, 2001 was primarily
due to a decrease in building rental revenues of approximately $4 million, and
decreased transmission revenues as a result of fewer customers shopping for
their energy supply.
OPERATING INCOME:
- ----------------
Operating income for the third quarter 2001 increased $34.4 million to
$170.3 million, as compared to the third quarter 2000. For the nine months ended
September 30, 2001, operating income increased $41 million to $372.4 million,
versus the same period last year. The increase for the third quarter 2001 was
primarily due to increased KWH revenues, as discussed above; and lower O&M
expenses of approximately $37 million as a result primarily of the sale of
Oyster Creek and lower pension costs. Partially offsetting these were higher
amortization expenses of approximately $5 million primarily due to the New
Jersey Board of Public Utilities' (NJBPU) order related to the Oyster Creek
sale, and higher energy costs due to increased demand for electricity and the
need to purchase more electricity as a result of the sale of Oyster Creek. The
same factors affecting the comparable quarterly results also affected the year
to date comparison. These factors included increased KWH revenues, lower O&M
expenses of approximately $113 million, higher amortization expenses of
approximately $17 million, and higher energy costs.
OTHER INCOME AND DEDUCTIONS:
- ---------------------------
Other income and deductions for the third quarter 2001 decreased $8.2
million to $7.9 million, as compared to the third quarter 2000. In 2000, the
discounting effect on a long-term receivable due from AmerGen Energy Company LLC
related to Oyster Creek outage costs was removed, accounting for $8.8 million
(pre-tax) of the decrease in other income as compared to last year.
2
For the nine months ended September 30, 2001, other income and deductions
increased $5 million to $25.5 million, versus the same period last year. The
increase was primarily due to higher interest income of approximately $5
million.
INTEREST CHARGES AND PREFERRED DIVIDENDS:
- ----------------------------------------
Interest charges and preferred dividends for the third quarter 2001
increased $2 million to $30.1 million, as compared to the third quarter 2000.
For the nine months ended September 30, 2001, interest charges and preferred
dividends increased $5.2 million to $88.2 million, versus the same period last
year. The increase for both periods was primarily due to interest on the
issuance of $150 million of senior notes in May 2001, and higher average
short-term debt levels. Partially offsetting these was lower preferred stock
dividends due to the redemption of $8.3 million and $16.7 million stated value
cumulative preferred stock pursuant to mandatory and optional sinking fund
provisions in the second quarter of 2001 and 2000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Capital Expenditures and Investments
- ------------------------------------
Capital spending for the nine months ended September 30, 2001 was $109
million, and was used primarily to expand and improve existing transmission and
distribution facilities and for new customer connections. JCP&L's remaining
capital expenditures for 2001 are estimated to be $35 million, primarily for
ongoing transmission and distribution system development. Management estimates
that a substantial portion of the 2001 capital spending will be supplied through
internally generated funds.
Financing
- ---------
Upon the November 7, 2001 effective date of the FirstEnergy and GPU, Inc.
merger, JCP&L's available short-term bank borrowing facilities (these included a
revolving credit agreement and various bank lines of credit) were terminated by
their terms and conditions. As a result, on this date all of JCP&L's outstanding
bank borrowings from these facilities, totaling $20 million, were repaid by
FirstEnergy. FirstEnergy is in the process of establishing a new $1.5 billion
revolving credit facility to meet the short-term liquidity requirements of the
new combined company, including those requirements of JCP&L. JCP&L is limited by
its charter or SEC authorization to $281 million of short-term debt outstanding
at any one time.
JCP&L has regulatory approval to issue senior notes through December 31,
2002 in the amount of $150 million. JCP&L's financing program is designed such
that it would issue secured senior notes (collateralized by first mortgage bonds
(FMBs) issued to the senior note trustee) until such time as more than 80% of
its outstanding FMBs are held by the senior note trustee. At that time, the FMBs
will be cancelled and the outstanding senior notes will become unsecured
obligations. JCP&L will not issue any additional FMBs other than as collateral
for the senior notes since the senior note indenture prohibits (subject to
certain exceptions) JCP&L from issuing any debt which is senior to the senior
notes.
JCP&L's bond indenture includes provisions that limits the amount of FMBs
the company may issue. JCP&L's interest coverage ratio is currently in excess of
indenture restrictions. In addition, JCP&L's certificate of incorporation
includes provisions that limit the amount of preferred stock it
3
may issue. JCP&L's preferred dividend coverage ratio is currently in excess of
this charter restriction.
JCP&L has filed a petition with the NJBPU requesting authorization to
issue $320 million of transition bonds to securitize the recovery of bondable
stranded costs attributable to the projected net investment in Oyster Creek. The
petition also requests that the NJBPU order provide for the imposition and
collection of a usage-based non-bypassable transition bond charge (TBC) and for
the transfer of the bondable transition property relating to the TBC to another
entity. JCP&L currently plans to sell transition bonds in the first quarter of
2002.
In the fourth quarter 2001 and for the year 2002, JCP&L has scheduled
long-term debt maturities totaling $40 million and $50 million, respectively.
COMPETITIVE ENVIRONMENT AND RATE MATTERS
----------------------------------------
Recent Regulatory Actions
- -------------------------
With the transition to a competitive marketplace for generation service in
New Jersey, certain generation-related costs, which generally would be
recoverable in a regulated environment, may no longer be recoverable. These
costs are generally referred to as stranded costs.
Restructuring Order
In March 2001, the NJBPU issued a Final Decision and Order (Final Order)
with respect to JCP&L's rate unbundling, stranded cost and restructuring
filings, which supersedes a Summary Order issued by the NJBPU in May 1999. The
Final Order confirms rate reductions set forth in the Summary Order, which began
in August 1999 and will remain in effect at increasing levels through July 2003,
and provides for, among other things, deregulation of the costs associated with
providing electric generation service. The Final Order confirms the
establishment of a non-bypassable societal benefits charge to recover costs
associated with, among other things, nuclear plant decommissioning and
manufactured gas plant remediation, as well as a non-bypassable market
transition charge (MTC). The Final Order provides for the ability to recover
stranded costs; however, the NJBPU deferred making a final determination of the
net proceeds and stranded costs related to the generating asset divestitures
until JCP&L's request for an Internal Revenue Service (IRS) ruling regarding the
treatment of associated federal income tax benefits is acted upon.
In addition, JCP&L is permitted to defer for future collection from
customers the amounts by which its costs of supplying basic generation service
(BGS) to non-shopping customers and costs incurred under nonutility generation
(NUG) agreements exceed amounts collected in its BGS and MTC rates. The Final
Order allows for securitization of the NUG portion of JCP&L's deferred balance
so long as conditions of the New Jersey restructuring legislation are met.
However, JCP&L must seek NJBPU authorization to securitize that portion of its
deferred balance related to above-market NUG costs. There can be no assurance as
to the extent, if any, that the NJBPU will permit such securitization.
The Final Order also provides for the ability to securitize stranded costs
associated with Oyster Creek. JCP&L has filed a petition with the NJBPU
requesting authorization to issue $320 million of transition bonds to securitize
the recovery of certain of these costs.
4
Basic Generation Service ("BGS") Provider
JCP&L is required to provide BGS to retail customers who choose to remain
with JCP&L as generation customers for a three-year period ending July 31, 2002.
Thereafter, BGS is to be bid out, with the details of the bidding process to be
the subject of a NJBPU proceeding. On June 29, 2001, the New Jersey electric
utilities, including JCP&L, filed a joint proposal seeking NJBPU approval of a
competitive bidding process to procure supply for the provision of BGS for the
period from August 1, 2002 through July 31, 2003. The NJBPU has established a
procedural schedule which provides for a decision in December 2001. Under its
Final Order, JCP&L is permitted to defer for future recovery the amount by which
its reasonable and prudently incurred costs associated with providing BGS to
non-shopping customers and costs incurred under NUG agreements exceed amounts
currently reflected in its BGS and MTC rates. As of September 30, 2001, such
deferred balance totaled $551 million.
NJBPU Approval of Merger
On September 26, 2001, the NJBPU approved the merger between FirstEnergy
and GPU, Inc., subject to the terms and conditions set forth in a Stipulation of
Settlement which had been signed by the major parties in the merger discussions.
Under this Stipulation of Settlement, FirstEnergy agreed to reduce JCP&L's
deferred balance by $300 million, in order to ensure that customers receive the
benefit of future merger savings. In accordance with the Settlement, JCP&L wrote
off $300 million of its deferred balance effective upon receipt of the final
regulatory approval for the merger, which occurred on October 29, 2001.
Supply Plan and Market Risk
- ---------------------------
As a result of the NJBPU's Restructuring Orders, JCP&L is required to
supply electricity to customers who do not choose an alternate supplier. In 1999
and 2000, JCP&L completed the sales of substantially all of its electric
generating stations. As a result, JCP&L now has to supply electricity to
non-shopping customers almost entirely from contracted and open market
purchases.
Generation Agreements
Electricity supply planning is currently performed on a combined basis for
JCP&L and its GPU Energy affiliates, with the goal of supplying all of the
energy requirements of their non-shopping customers at a reasonable cost. As of
September 30, 2001, JCP&L and its GPU Energy affiliates had only 285 megawatts
(MW) (of which JCP&L's share is 266 MW) of owned generation capacity and related
energy remaining to meet customer needs. The companies also had contracts with
nonutility generators totaling 1,595 MW (of which JCP&L's share is 926 MW) and
agreements with other parties to provide varying amounts of capacity through May
31, 2004. These capacity amounts from third parties vary from a monthly high of
approximately 4,500 MW in 2002 to 500 MW in May 2004. Based on the exercise of
call options, JCP&L and its GPU Energy affiliates may take the energy associated
with up to 150 MW of this capacity through May 2003. The companies have also
purchased all of the capacity and energy from their previously owned Three Mile
Island Unit 1 (TMI-1) and Oyster Creek nuclear generating stations through
December 31, 2001 and March 31, 2003, respectively. In addition, through May 31,
2002, the companies have the right to 3,970 MW of capacity associated with
generating stations they sold in 1999. The remaining capacity and energy needs
of JCP&L and its GPU Energy affiliates will be met by short- to
intermediate-term commitments
5
(one month to three years), and any residual needs will be purchased from the
short-term market (one hour to one month). Payments pursuant to these
agreements, which include firm commitments as well as certain assumptions
regarding, among other things, call/put arrangements, are estimated to be $282
million for the remainder of 2001, $781 million in 2002, $115 million in 2003,
and $5 million in 2004.
Pursuant to the mandates of the Public Utility Regulatory Policies Act and
state regulatory directives, JCP&L was required to enter into long-term power
purchase agreements with NUGs for the purchase of energy and capacity, which
agreements have remaining terms of up to 15 years. The NJBPU Final Order
provides JCP&L full recovery of its NUG costs (including above-market NUG costs
and certain buyout costs). JCP&L has recorded, on a present value basis,
estimated liabilities of $1.5 billion on its Consolidated Balance Sheet for
above-market NUG costs, which is offset by corresponding regulatory assets.
JCP&L is continuing efforts to reduce the above-market costs of these
agreements; however, there can be no assurance as to the extent to which these
efforts will be successful.
Supply Market Risk
With the divestiture of all but two of its generating plants, JCP&L is in
a net short position (load in excess of supply). Consequently, JCP&L must manage
its purchase and sale of installed capacity and ancillary services to minimize
business risk associated with its reliability obligation in the PJM
Interconnection, LLC (PJM). As discussed above, JCP&L currently manages its
electricity supply planning on a combined basis with its GPU Energy affiliates.
Supply/risk management transactions will be made based on the objective of
decreasing price uncertainty. JCP&L will enter into supply/hedging market
arrangements for hedging purposes only.
JCP&L is generally at risk of rising prices for electricity and
electricity-related products and services. These risks may differ during some
months of the year. To manage these risks, JCP&L employs a portfolio approach
which primarily consists of two party forward purchases and options, but may
also include New York Mercantile Exchange (NYMEX) PJM electricity futures and
similar instruments, as they become widely available. This portfolio includes
transactions of various durations ranging from one hour to greater than one
year.
JCP&L's electricity market risks can be price-related, volume-related or
cost recovery-related as follows:
- - Price-related risk refers to the price exposure associated with having to
purchase amounts of electricity, installed capacity and ancillary services
for load requirements from the PJM interchange spot market. To the extent
that JCP&L must rely on the PJM pool to satisfy load requirements,
financial exposure exists for the difference between the PJM energy and
installed capacity spot market prices and the fixed rates paid by
customers.
- - Volume-related risk refers to the uncertainty associated with the amount
of load JCP&L is required to serve. Deregulation of the electric utility
industry has resulted in the ability of customers to purchase electricity
from other electric suppliers. This customer shopping, combined with
weather changes, which affect customer energy usage, can affect JCP&L's
position.
6
- - Cost recovery-related risk refers to the financial risk associated with the
potential prudency audits of the NJBPU that are part of JCP&L's deferred
energy and capacity cost recovery mechanism (Market Transition Charge).
Cost recovery-related risk also refers to the prudency risk associated with
future NUG cost recovery under the Restructuring Orders approved by the
NJBPU which require continued mitigation of above-market NUG costs.
JCP&L purchases natural gas for its Forked River generating facility. In
addition, as part of its NUG cost mitigation program, JCP&L manages the natural
gas requirements of certain NUGs that produce and sell energy to JCP&L under
long-term contracts. Prudently incurred costs associated with natural gas
commodity and transportation are included in JCP&L's BGS costs to be recovered
through BGS charges and the Market Transition Charge.
JCP&L employs a portfolio approach consisting of two party forward
purchases and NYMEX natural gas futures contracts. JCP&L is exposed to
price-related, volume-related and cost recovery-related market risks for its
natural gas purchases, similar to those electricity market risks previously
described.
ENVIRONMENTAL MATTERS
---------------------
As a result of existing and proposed legislation and regulations, and
ongoing legal proceedings dealing with environmental matters including, but not
limited to, air and water quality, global warming, electromagnetic fields, and
storage and disposal of hazardous and/or toxic wastes, JCP&L may be required to
incur substantial additional costs to construct new facilities; modify or
replace existing and proposed equipment; or remediate, decommission or clean up
waste disposal and other sites currently or formerly used by it, including
formerly owned manufactured gas plants, coal mine refuse piles and generation
facilities. In addition, federal and state law provide for payment by
responsible parties for damage to natural resources.
JCP&L records environmental liabilities (on an undiscounted basis) where
it is probable that a loss has been incurred and the amount of the loss can be
reasonably estimated, and adjusts these liabilities as required to reflect
changes in circumstances. At September 30, 2001, JCP&L had liabilities recorded
on its Consolidated Balance Sheet for environmental remediation of $52 million.
For more information, see the Environmental Matters section of Note 1,
Commitments and Contingencies, of the Notes to Consolidated Financial
Statements.
LEGAL MATTERS - TMI-2 ACCIDENT CLAIMS
-------------------------------------
As a result of the 1979 Three Mile Island Unit 2 (TMI-2) accident,
individual claims for alleged personal injury (including claims for punitive
damages), which are material in amount, were asserted against JCP&L, Met-Ed,
Penelec and GPU, Inc. (the defendants). Approximately 2,100 of such claims were
filed in the US District Court for the Middle District of Pennsylvania. Some of
the claims also seek recovery for injuries from alleged emissions of
radioactivity before and after the accident.
7
In 1996, the District Court granted a motion for summary judgment filed by
the defendants, and dismissed the ten initial "test cases" which had been
selected for a test case trial, as well as all of the remaining 2,100 pending
claims. The Court ruled that there was no evidence which created a genuine issue
of material fact warranting submission of plaintiffs' claims to a jury. The
plaintiffs appealed the District Court's ruling to the Court of Appeals for the
Third Circuit. In November 1999, the Third Circuit affirmed the District Court's
dismissal of the ten "test cases," but set aside the dismissal of the additional
pending claims, remanding them to the District Court for further proceedings. In
remanding these claims, the Third Circuit held that the District Court had erred
in extending its summary judgment decision to the other plaintiffs and imposing
on these plaintiffs the District Court's finding that radiation exposures below
10 rems were too speculative to establish a causal link to cancer. The Court of
Appeals stated that the non-test case plaintiffs should be permitted to present
their own individual evidence that exposure to radiation from the accident
caused their cancers. In June 2000, the US Supreme Court denied petitions for
review filed by the defendants and the plaintiffs.
In September 2000, the defendants filed a Motion for Summary Judgment in
the District Court. Meanwhile, the plaintiffs took an interlocutory appeal to
the Third Circuit seeking review of the District Court's determination that the
remaining plaintiffs should be allowed to advance causation theories based only
on the admissible evidence of record at the close of discovery in the case. On
April 30, 2001, the Third Circuit affirmed the District Court's decision. In
July 2001, the defendants renewed their motion for Summary Judgment of the
remaining 2,100 claims in the District Court.
There can be no assurance as to the outcome of this litigation.
JCP&L believes that any liability to which it might be subject by reason
of the TMI-2 accident will not exceed its financial protection under the
Price-Anderson Act.
8
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9
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
Consolidated Balance Sheets
---------------------------
In Thousands
--------------------------
September 30, December 31,
2001 2000
------------- ------------
(Unaudited)
ASSETS
Utility Plant:
Utility plant in service $3,351,697 $3,269,676
Accumulated depreciation (1,281,627) (1,212,784)
--------- ---------
Net utility plant in service 2,070,070 2,056,892
Construction work in progress 90,956 75,201
Other, net 13,311 13,311
--------- ---------
Net utility plant 2,174,337 2,145,404
--------- ---------
Other Property and Investments:
Nuclear decommissioning trusts, at market (Note 1) 113,076 115,311
Nuclear fuel disposal trust, at market 137,734 126,336
Other, net 19,722 6,342
--------- ---------
Total other property and investments 270,532 247,989
--------- ---------
Current Assets:
Cash and temporary cash investments 72,984 801
Special deposits 1,188 1,220
Accounts receivable:
Customers, less provision for doubtful accounts
of $13,974 for 2001 and $21,479 for 2000 194,988 156,358
Affiliates 7,642 8,520
Other 61,367 38,107
Unbilled revenues 80,369 80,864
Materials and supplies, at average cost or less 1,350 508
Deferred income taxes 16,815 20,669
Prepayments 31,201 96,916
--------- ---------
Total current assets 467,904 403,963
--------- ---------
Deferred Debits and Other Assets:
Regulatory assets, net (Note 1) 3,167,145 3,185,072
Deferred income taxes 179,958 187,632
Other 54,389 47,295
--------- ---------
Total deferred debits and other assets 3,401,492 3,419,999
-------- ---------
Total Assets $6,314,265 $6,217,355
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
10
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
Consolidated Balance Sheets
---------------------------
In Thousands
---------------------------
September 30, December 31,
2001 2000
------------- ------------
(Unaudited)
LIABILITIES AND CAPITALIZATION
Capitalization:
Common stock $ 153,713 $ 153,713
Capital surplus 510,769 510,769
Retained earnings 904,287 794,786
Accumulated other comprehensive income/(loss) (Note 3) 922 (8)
--------- ---------
Total common stockholder's equity 1,569,691 1,459,260
Cumulative preferred stock:
With mandatory redemption 40,667 51,500
Without mandatory redemption 12,649 12,649
Company-obligated mandatorily redeemable
preferred securities 125,000 125,000
Long-term debt 1,193,873 1,093,987
--------- ---------
Total capitalization 2,941,880 2,742,396
--------- ---------
Current Liabilities:
Securities due within one year 100,846 50,847
Notes payable - 29,200
Accounts payable:
Affiliates 41,020 98,526
Other 103,415 95,988
Taxes accrued 63,121 8,836
Interest accrued 31,573 23,625
Other 41,207 37,786
--------- ---------
Total current liabilities 381,182 344,808
--------- ---------
Deferred Credits and Other Liabilities:
Deferred income taxes 941,536 866,058
Unamortized investment tax credits 14,389 17,087
Power purchase contract loss liability (Note 1) 1,514,445 1,699,473
Nuclear fuel disposal fee 162,417 156,959
Three Mile Island Unit 2 future costs (Note 1) 131,841 128,735
Other 226,575 261,839
--------- ---------
Total deferred credits and other liabilities 2,991,203 3,130,151
--------- ---------
Commitments and Contingencies (Note 1)
Total Liabilities and Capitalization $6,314,265 $6,217,355
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
11
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
Consolidated Statements of Income
---------------------------------
(Unaudited)
In Thousands
-------------------------------------------
Three Months Nine Months
Ended September 30, Ended September 30,
------------------ --------------------
2001 2000 2001 2000
---- ---- ---- ----
Operating Revenues $672,131 $605,045 $1,654,867 $1,547,940
------- ------- --------- ---------
Operating Expenses:
Fuel 1,524 4,773 4,302 19,966
Power purchased and interchanged:
Affiliates 2,902 6,430 14,574 37,683
Others 546,203 417,837 1,139,698 835,112
Deferred costs, net (189,228) (131,954) (303,102) (198,950)
Other operation and maintenance 59,875 97,579 191,331 305,406
Depreciation and amortization 62,272 57,467 186,705 169,773
Taxes, other than income taxes 18,295 17,078 48,949 47,567
------- ------- --------- ---------
Total operating expenses 501,843 469,210 1,282,457 1,216,557
------- ------- --------- ---------
Operating Income 170,288 135,835 372,410 331,383
------- ------- --------- ---------
Other Income and Deductions:
Allowance for other funds used during
construction (61) 442 (117) 955
Other income, net 7,981 15,701 25,688 19,632
------- ------ --------- ---- ----
Total other income and deductions 7,920 16,143 25,571 20,587
------- ------- --------- ---------
Income Before Interest Charges 178,208 151,978 397,981 351,970
------- ------- --------- ---------
Interest Charges:
Long-term debt and notes payable 25,671 24,143 74,892 69,965
Company-obligated mandatorily
redeemable preferred securities 2,675 2,675 8,025 8,025
Other interest 332 537 1,512 897
Allowance for borrowed funds used
during construction 170 (620) (261) (1,439)
------- ------- --------- ---------
Total interest charges 28,848 26,735 84,168 77,448
------ ------- --------- ---------
Income Before Income Taxes 149,360 125,243 313,813 274,522
Income taxes 58,214 32,450 125,231 91,725
------- ------- --------- ---------
Net Income 91,146 92,793 188,582 182,797
Preferred stock dividends 1,299 1,391 4,081 5,513
------- ------- --------- ---------
Earnings Available for Common Stock $ 89,847 $ 91,402 $ 184,501 $ 177,284
======= ======= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
12
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
In Thousands
-------------------------
Nine Months
Ended September 30,
-------------------------
2001 2000
Operating Activities: ---- ----
Net income $ 188,582 $ 182,797
Adjustments to reconcile income to cash provided:
Depreciation and amortization 208,290 195,620
Provision for doubtful accounts 247 6,995
Regulatory assets, net 9,113 (111,026)
Amortization of property under capital leases - 11,472
Loss on sale of investments 80 -
Deferred income taxes and investment tax
credits, net 67,525 285,710
Deferred costs, net (303,102) (198,950)
Allowance for funds used during construction 117 (955)
Changes in working capital:
Receivables (61,642) (39,934)
Materials and supplies (842) 95
Special deposits and prepayments 65,745 (160,487)
Payables and accrued liabilities 73,079 (11,983)
Due to/from affiliates (56,627) 52,108
Other, net (35,304) 8,227
-------- --------
Net cash provided by operating activities 155,261 219,689
-------- --------
Investing Activities:
Capital expenditures and investments (109,006) (84,569)
Contributions to decommissioning trusts (902) (130,141)
Proceeds from sale of investments - 9,265
Other, net (2,852) 320
-------- --------
Net cash required by investing activities (112,760) (205,125)
-------- --------
Financing Activities:
Issuance of long-term debt 148,796 -
Increase/(decrease) in notes payable, net (29,200) 163,000
Retirement of long-term debt - (40,000)
Redemption of preferred stock (10,833) (21,667)
Capital lease principal payments - (48,516)
Dividends paid on common stock (75,000) (130,000)
Dividends paid on preferred stock (4,081) (5,674)
-------- --------
Net cash provided/(required) by financing activities 29,682 (82,857)
-------- --------
Net increase/(decrease) in cash and temporary
cash investments from above activities 72,183 (68,293)
Cash and temporary cash investments, beginning of year 801 68,684
-------- --------
Cash and temporary cash investments, end of period $ 72,984 $ 391
======== ========
Supplemental Disclosure:
Interest and preferred dividends paid $ 77,683 $ 79,007
======== ========
Income taxes paid/(refunded) $ 8,009 $ (40,634)
======== ========
New capital lease obligations incurred $ - $ 41,580
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Jersey Central Power & Light Company (JCP&L) is a wholly-owned electric
utility subsidiary of FirstEnergy Corp. (FirstEnergy), an Ohio corporation
headquartered in Akron, Ohio. JCP&L conducts business under the name GPU Energy
along with its affiliates Metropolitan Edison Company (Met-Ed) and Pennsylvania
Electric Company (Penelec), which are also electric utility subsidiaries of
FirstEnergy.
In August 2000, FirstEnergy entered into an agreement to merge with
GPU, Inc., under which FirstEnergy would acquire all of the outstanding shares
of GPU, Inc.'s common stock for approximately $4.5 billion in cash and
FirstEnergy common stock. The merger became effective on November 7, 2001 and is
being accounted for by the purchase method. Prior to that time, JCP&L was a
wholly-owned subsidiary of GPU, Inc.
1. COMMITMENTS AND CONTINGENCIES
COMPETITION AND THE CHANGING REGULATORY ENVIRONMENT
---------------------------------------------------
Stranded Costs and Regulatory Restructuring Orders:
- --------------------------------------------------
With the transition to a competitive marketplace for generation service
in New Jersey, certain generation-related costs, which generally would be
recoverable in a regulated environment, may no longer be recoverable. These
costs are generally referred to as stranded costs.
In March 2001, the New Jersey Board of Public Utilities (NJBPU) issued
a Final Decision and Order (Final Order) with respect to JCP&L's rate
unbundling, stranded cost and restructuring filings, which supersedes a Summary
Order issued by the NJBPU in May 1999. The Final Order confirms rate reductions
set forth in the Summary Order, which began in August 1999 and will remain in
effect at increasing levels through July 2003, and provides for, among other
things, deregulation of the costs associated with providing electric generation
service. The Final Order confirms the establishment of a non-bypassable societal
benefits charge to recover costs associated with, among other things, nuclear
plant decommissioning and manufactured gas plant remediation, as well as a
non-bypassable market transition charge (MTC). The Final Order provides for the
ability to recover stranded costs; however, the NJBPU deferred making a final
determination of the net proceeds and stranded costs related to the generating
asset divestitures until JCP&L's request for an Internal Revenue Service (IRS)
ruling regarding the treatment of associated federal income tax benefits is
acted upon.
In addition, JCP&L is permitted to defer for future collection from
customers the amounts by which its costs of supplying basic generation service
(BGS) to non-shopping customers and costs incurred under nonutility generation
(NUG) agreements exceed amounts collected in its BGS and MTC rates. The Final
Order allows for securitization of the NUG portion of JCP&L's deferred balance
so long as conditions of the New Jersey restructuring legislation are met.
However, JCP&L must seek NJBPU authorization to securitize that portion of its
deferred balance related to above-market NUG costs. There can be no assurance as
to the extent, if any, that the NJBPU will permit such securitization.
14
The Final Order also provides for the ability to securitize stranded
costs associated with Oyster Creek. JCP&L has filed a petition with the NJBPU
requesting authorization to issue $320 million of transition bonds to securitize
the recovery of certain of these costs.
Supply of Electricity:
- ---------------------
As a result of the NJBPU's Restructuring Order, JCP&L is required to
supply electricity to customers who do not choose an alternate supplier. Given
that JCP&L has essentially exited the generation business and will have to
supply electricity to non-shopping customers almost entirely from contracted and
open market purchases, there will be increased risks associated with supplying
that electricity.
JCP&L is permitted to defer for future recovery the amount by which its
reasonable and prudently incurred costs associated with providing basic
generation service to non-shopping customers and costs incurred under NUG
agreements exceed amounts currently reflected in its BGS and MTC rates. As of
September 30, 2001, such deferred balance totaled $551 million.
On September 26, 2001, the NJBPU approved the merger between
FirstEnergy and GPU, Inc., subject to the terms and conditions set forth in a
Stipulation of Settlement which had been signed by the major parties in the
merger discussions. Under this Stipulation of Settlement, FirstEnergy agreed to
reduce JCP&L's deferred balance by $300 million, in order to ensure that
customers receive the benefit of future merger savings. In accordance with the
Settlement, JCP&L wrote off $300 million of its deferred balance effective upon
receipt of the final regulatory approval for the merger, which occurred on
October 29, 2001.
Generation Agreements:
- ---------------------
The evolving competitive generation market has created uncertainty
regarding the forecasting of energy supply needs, which has caused the company
to seek shorter-term agreements offering more flexibility. JCP&L currently
manages its electricity supply planning on a combined basis with its GPU Energy
affiliates. The current supply plan generally utilizes short- to
intermediate-term commitments (one month to three years), with any residual
needs being purchased from the short-term market (one hour to one month).
JCP&L and its GPU Energy affiliates have entered into agreements with
third party suppliers to purchase capacity and energy through 2004. As of
September 30, 2001, payments pursuant to these agreements, which include firm
commitments as well as certain assumptions regarding, among other things,
call/put arrangements, are estimated to be $282 million for the remainder of
2001, $781 million in 2002, $115 million in 2003 and $5 million in 2004.
Pursuant to the mandates of the federal Public Utility Regulatory
Policies Act and state regulatory directives, JCP&L was required to enter into
long-term power purchase agreements with NUGs for the purchase of energy and
capacity, which agreements have remaining terms of up to 15 years. The rates
under virtually all of these NUG agreements are substantially in excess of
current and projected prices from alternative sources, except for periods when
JCP&L is required to meet high customer demand, typically during periods of
extremely hot weather or when power supplies are limited. The following table
shows JCP&L's actual payments from 1999 through September 30, 2001, and
estimated payments thereafter through 2006:
15
Calendar Payments Under NUG Agreements
Year (in millions)
---- -------------
1999 $388
2000 364
2001 411
2002 480
2003 480
2004 472
2005 462
2006 458
The NJBPU Final Order provides JCP&L assurance of full recovery of its
NUG costs (including above-market NUG costs and certain buyout costs). At
September 30, 2001, JCP&L had recorded, on a present value basis, an estimated
liability of $1.5 billion on its Consolidated Balance Sheet for above-market NUG
costs, which was offset by corresponding regulatory assets. JCP&L is continuing
efforts to reduce the above-market costs of these agreements; however, there can
be no assurance as to the extent to which these efforts will be successful.
In 1997, the NJBPU approved a Stipulation of Final Settlement which,
among other things, provided for the recovery of costs associated with the
buyout of the Freehold Cogeneration power purchase agreement (Freehold buyout).
The NJBPU approved the cost recovery of up to $135 million on an interim basis
subject to refund. In March 2001, the NJBPU issued a Final Order that provided
for the continued recovery of the Freehold buyout, but this order did not alter
the interim nature of such recovery, pending a final decision by the NJBPU. As
of July 2001, JCP&L had completely recovered the Freehold buyout costs. There
can be no assurance as to the outcome of this matter.
ACCOUNTING MATTERS
------------------
In 1999, JCP&L discontinued the application of Statement of Financial
Accounting Standards No. 71 (FAS 71), "Accounting for the Effects of Certain
Types of Regulation," and adopted the provisions of Statement of Financial
Accounting Standards No. 101 (FAS 101), "Regulated Enterprises - Accounting for
the Discontinuation of Application of FASB Statement No. 71," and Emerging
Issues Task Force (EITF) Issue 97-4, "Deregulation of the Pricing of Electricity
- - Issues Related to the Application of FAS 71 and FAS 101," with respect to its
electric generation operations. The transmission and distribution portion of
JCP&L's operations continues to be subject to the provisions of FAS 71.
Regulatory assets, net as reflected in the September 30, 2001 and December 31,
2000 Consolidated Balance Sheets in accordance with the provisions of FAS 71 and
EITF Issue 97-4 were as follows:
In Thousands
---------------------------------
September 30, December 31,
2001 2000
------------- -----------
MTC / basic generation service $2,640,277 $2,592,663
Costs recoverable through distribution rates 271,201 298,266
Societal benefits charge 160,479 206,555
Income taxes recoverable through future
MTC / distribution rates, net 95,188 87,588
--------- ---------
Total regulatory assets, net $3,167,145 $3,185,072
========= =========
16
As of September 30, 2001, Regulatory assets, net shown above included
$551 million of deferred energy-related costs plus interest (net of
collections). This deferred balance includes the under-recovered costs of
supplying electricity to customers who did not choose an alternate supplier, as
well as above-market NUG costs, but excludes the net generation asset
divestiture gains which were used to reduce stranded costs. As discussed in the
Competition and the Changing Regulatory Environment section, JCP&L wrote off
$300 million of its deferred balance upon consummation of the FirstEnergy/GPU,
Inc. merger.
NUCLEAR FACILITIES
------------------
Investments:
- -----------
In 1999, JCP&L and its GPU Energy affiliates sold Three Mile Island
Unit 1 (TMI-1) to AmerGen Energy Company, LLC (AmerGen) for approximately $100
million, and in 2000, JCP&L sold Oyster Creek to AmerGen for approximately $10
million. As part of the sales, AmerGen has assumed full responsibility for
decommissioning the plants, and JCP&L and its GPU Energy affiliates have
transferred $320 million of TMI-1 decommissioning trust funds to AmerGen (of
which JCP&L's share was $80 million), and JCP&L has transferred $430 million of
Oyster Creek decommissioning trust funds to AmerGen. Three Mile Island Unit 2
(TMI-2), which was damaged during a 1979 accident, is jointly owned by JCP&L and
its GPU Energy affiliates, with JCP&L having a 25% ownership percentage. JCP&L's
net investment in TMI-2 as of September 30, 2001 and December 31, 2000 was $51
million and $55 million, respectively. JCP&L is collecting revenues for TMI-2 on
a basis which provides for the recovery of its remaining investment in the plant
by 2008.
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 JCP&L, Met-Ed, Penelec and GPU, Inc. (the
defendants). Approximately 2,100 of such claims were filed in the US District
Court for the Middle District of Pennsylvania. Some of the claims also seek
recovery for injuries from alleged emissions of radioactivity before and after
the accident.
At the time of the TMI-2 accident, as provided for in the
Price-Anderson Act, JCP&L, Met-Ed and Penelec had (a) primary financial
protection in the form of insurance policies with groups of insurance companies
providing an aggregate of $140 million of primary coverage, (b) secondary
financial protection in the form of private liability insurance under an
industry retrospective rating plan providing for up to an aggregate of $335
million in premium charges under such plan and (c) an indemnity agreement with
the Nuclear Regulatory Commission (NRC) for up to $85 million, bringing their
total financial protection up to an aggregate of $560 million. Under the
secondary level, JCP&L, Met-Ed and Penelec are subject to a retrospective
premium charge of up to $5 million per reactor, or a total of $15 million, of
which JCP&L's share is $7.5 million.
In 1995, the US Court of Appeals for the Third Circuit ruled that the
Price-Anderson Act provides coverage under its primary and secondary levels for
punitive as well as compensatory damages, but that punitive damages could not be
recovered against the Federal Government under the third level of financial
protection. In so doing, the Court of Appeals referred to the
17
"finite fund" (the $560 million of financial protection under the Price-
Anderson Act) to which plaintiffs must resort to get compensatory as well as
punitive damages.
The Court of Appeals also ruled that the standard of care owed by the
defendants to a plaintiff was determined by the specific level of radiation
which was released into the environment, as measured at the site boundary,
rather than as measured at the specific site where the plaintiff was located at
the time of the accident (as the defendants proposed). The Court of Appeals also
held that each plaintiff still must demonstrate exposure to radiation released
during the TMI-2 accident and that such exposure had resulted in injuries. In
1996, the US Supreme Court denied petitions filed by the defendants to review
the Court of Appeals' rulings.
In 1996, the District Court granted a motion for summary judgment filed
by the defendants, and dismissed the ten initial "test cases" which had been
selected for a test case trial, as well as all of the remaining 2,100 pending
claims. The Court ruled that there was no evidence which created a genuine issue
of material fact warranting submission of plaintiffs' claims to a jury. The
plaintiffs appealed the District Court's ruling to the Court of Appeals for the
Third Circuit. In November 1999, the Third Circuit affirmed the District Court's
dismissal of the ten "test cases," but set aside the dismissal of the additional
pending claims, remanding them to the District Court for further proceedings. In
remanding these claims, the Third Circuit held that the District Court had erred
in extending its summary judgment decision to the other plaintiffs and imposing
on these plaintiffs the District Court's finding that radiation exposures below
10 rems were too speculative to establish a causal link to cancer. The Court of
Appeals stated that the non-test case plaintiffs should be permitted to present
their own individual evidence that exposure to radiation from the accident
caused their cancers. In June 2000, the US Supreme Court denied petitions for
review filed by the defendants and the plaintiffs.
In September 2000, the defendants filed a Motion for Summary Judgment
in the District Court. Meanwhile, the plaintiffs took an interlocutory appeal to
the Third Circuit seeking review of the District Court's determination that the
remaining plaintiffs should be allowed to advance causation theories based only
on the admissible evidence of record at the close of discovery in the case. On
April 30, 2001, the Third Circuit affirmed the District Court's decision. In
July 2001, the defendants renewed their motion for Summary Judgment of the
remaining 2,100 claims in the District Court.
There can be no assurance as to the outcome of this litigation.
JCP&L believes that any liability to which it might be subject by
reason of the TMI-2 accident will not exceed its financial protection under the
Price-Anderson Act.
NUCLEAR PLANT RETIREMENT COSTS
------------------------------
Retirement costs for nuclear plants include decommissioning the
radiological portions of the plants and the cost of removal of nonradiological
structures and materials. The disposal of spent nuclear fuel is covered
separately by contracts with the US Department of Energy (DOE).
In 1995, a consultant performed a site-specific study of TMI-2 that
considered various decommissioning methods and estimated the cost of
18
decommissioning the radiological portion and the cost of removal of the
nonradiological portion of the plant, using the prompt removal/dismantlement
method. Management has reviewed the methodology and assumptions used in this
study, is in agreement with them, and believes the results are reasonable. The
TMI-2 funding completion date is 2014, consistent with TMI-2 remaining in
long-term storage. JCP&L's share of the estimated retirement costs under the
1995 site-specific study, assuming decommissioning of TMI-2 in 2014, is $115
million for radiological decommissioning and $9.8 million for non-radiological
removal costs (net of $3.2 million spent as of September 30, 2001)(in 2001
dollars).
JCP&L and its GPU Energy affiliates are each responsible for retirement
costs in proportion to its respective ownership percentage. The ultimate cost of
retiring TMI-2 may be different from the cost estimate contained in this
site-specific study. The NRC has established a decommissioning funding target
which, while not an actual cost estimate, is a reference level designed to
assure that licensees demonstrate adequate financial responsibility for
decommissioning. The current NRC funding target exceeds the site-specific study
cost estimate by $10 million.
JCP&L's estimated liability for future TMI-2 retirement costs
(reflected as Three Mile Island Unit 2 future costs on the Consolidated Balance
Sheet) as of September 30, 2001 was $132 million, and as of December 31, 2000
was $129 million. This liability is based upon the 1995 site-specific study
estimate (in 2001 and 2000 dollars, respectively) discussed above and an
estimate for remaining incremental monitored storage costs of $7 million, both
as of September 30, 2001 and December 31, 2000, as a result of TMI-2 entering
long-term monitored storage in 1993.
Offsetting the $132 million liability for future TMI-2 retirement costs
as of September 30, 2001 was $20 million which management believes is probable
of recovery from customers and included in Regulatory assets, net on the
Consolidated Balance Sheet, and $113 million in trust funds for TMI-2 and
included in Nuclear decommissioning trusts, at market on the Consolidated
Balance Sheet.
The NJBPU has granted JCP&L revenues for TMI-2 retirement costs based
on the 1995 site-specific study estimate. In addition, JCP&L is recovering a
portion of its share of TMI-2 incremental monitored storage costs.
As of September 30, 2001, the accident-related portion of TMI-2
radiological decommissioning costs was estimated to be $20 million for JCP&L,
which is based on the 1995 site-specific study (in 2001 dollars). In connection
with rate case resolutions, JCP&L made contributions to an irrevocable external
trust for its share of the accident-related portion of the decommissioning
liability in the amount of $15 million. This contribution was not recoverable
from customers and was expensed in 1990.
JCP&L intends to seek recovery for any increases in TMI-2 retirement
costs, but recognizes that recovery cannot be assured.
JCP&L and its GPU Energy affiliates own all of the common stock of the
Saxton Nuclear Experimental Corporation, which owns a small demonstration
nuclear reactor. Decommissioning of the plant is expected to be completed in
2002. JCP&L's estimated liability for future Saxton decommissioning costs at
September 30, 2001 was $7 million, net of $19 million spent by JCP&L through
September 30, 2001.
19
INSURANCE
---------
JCP&L has insurance (subject to retentions and deductibles) for its
operations and facilities including coverage for property damage, liability to
employees and third parties, and loss of use and occupancy. There is no
assurance that JCP&L 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 JCP&L.
JCP&L and its GPU Energy affiliates have purchased property and
decontamination insurance coverage for TMI-2 totaling $150 million.
The Price-Anderson Act limits an owner's liability to third parties
resulting from a nuclear incident to approximately $9.5 billion. Coverage for
the first $200 million of such liability is provided by private insurance. The
remaining coverage, or secondary financial protection, is provided by
retrospective premiums payable by all nuclear reactor owners. Although TMI-2 is
exempt from retrospective premium assessments, the plant is still covered by the
provisions of the Price-Anderson Act. In addition, JCP&L and its GPU Energy
affiliates are subject to other retrospective premium assessments related to
policies applicable to TMI-1 prior to its sale to AmerGen.
ENVIRONMENTAL MATTERS
---------------------
As a result of existing and proposed legislation and regulations, and
ongoing legal proceedings dealing with environmental matters including, but not
limited to, air and water quality, global warming, electromagnetic fields, and
storage and disposal of hazardous and/or toxic wastes, JCP&L may be required to
incur substantial additional costs to construct new facilities; modify or
replace existing and proposed equipment; or remediate, decommission or clean up
waste disposal and other sites currently or formerly used by it, including
formerly owned manufactured gas plants (MGP), coal mine refuse piles and
generation facilities. In addition, federal and state laws provide for payment
by responsible parties for damage to natural resources.
At September 30, 2001, JCP&L had liabilities recorded on its
Consolidated Balance Sheet for environmental remediation of $52 million, as
discussed below.
JCP&L has been formally notified by the US Environmental Protection
Agency (EPA) and state environmental authorities that it is among the
potentially responsible parties (PRPs) who may be jointly and severally liable
to pay for the costs associated with the investigation and remediation at eight
hazardous and/or toxic waste sites.
In addition, JCP&L has been requested to participate in the remediation
or supply information to the EPA and state environmental authorities on several
other sites for which it has not been formally named as a PRP, although the EPA
and/or state authorities may nevertheless consider it a PRP. JCP&L has also been
named in lawsuits requesting damages (which are material in amount) for
hazardous and/or toxic substances allegedly released into the environment. As of
September 30, 2001, a liability of approximately $0.8 million had been recorded
for PRP sites where it is probable that a loss has been incurred and the amount
could be reasonably estimated.
20
The ultimate cost of remediation of all these and other hazardous waste
sites will depend upon changing circumstances as site investigations continue,
including (a) the existing technology required for site cleanup, (b) the
remedial action plan chosen and (c) the extent of site contamination and the
portion attributed to JCP&L.
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 September 30, 2001, JCP&L has
spent approximately $48 million in connection with the cleanup of these sites.
In addition, JCP&L has recorded an estimated environmental liability of $49.1
million relating to expected future costs of these sites (as well as two other
properties). This estimated liability is based upon ongoing site investigations
and remediation efforts, which generally involve capping the sites and pumping
and treatment of ground water. The cost to clean up these sites could be
materially in excess of the $49.1 million due to significant uncertainties,
including changes in acceptable remediation methods and technologies.
The NJBPU has granted JCP&L recovery of MGP remediation costs through
the Societal Benefits Charge. As of September 30, 2001, JCP&L had recorded on
its Consolidated Balance Sheet a regulatory asset of $41.3 million. In 1994,
JCP&L filed a complaint with the Superior Court of New Jersey against several of
its insurance carriers, relating to these MGP sites. JCP&L has settled with
those carriers and the recoveries from those settlements will be used to reduce
the amounts collected from ratepayers to remediate these sites.
OTHER COMMITMENTS AND CONTINGENCIES
-----------------------------------
Class Action Litigation:
- -----------------------
In July 1999, the Mid-Atlantic states experienced a severe heat storm
which resulted in power outages throughout the service territories of many
electric utilities, including the territory of JCP&L. Following these outages,
the NJBPU initiated an investigation into the causes of the outages and the
reliability of the transmission and distribution systems of all four New Jersey
electric utilities. This investigation was essentially completed in May 2000,
with the issuance of Phase I and Phase II reports and orders from the NJBPU.
Both the Phase I and Phase II reports and orders contain, among other things,
directions for JCP&L to undertake certain actions and report back to the NJBPU
on the results. Additionally, the NJBPU Phase II order concluded that there is
not a prima facie case demonstrating that, overall, JCP&L provided unsafe,
inadequate or improper service to its customers.
Two class action lawsuits were commenced in New Jersey Superior Court
in July 1999. These suits were subsequently consolidated into a single
proceeding, and they seek compensatory and punitive damages arising from the
service interruptions of July 1999 in the JCP&L territory. JCP&L, GPU, Inc., GPU
Service, Inc. and GPU Generation, Inc. (the defendants named in these suits)
moved to dismiss or stay the litigation pending the NJBPU's exercise of its
primary jurisdiction to investigate the causes of the outages. The trial court
denied that motion, and also certified a plaintiff class consisting of JCP&L
customers and their "dependents, tenants, employees and other intended
beneficiaries of customers who suffered damages as a result" of the service
interruptions.
21
In January 2000, the New Jersey Appellate Division granted the
defendants' motion for leave to take an interlocutory appeal of the trial
court's decision on the issue of primary jurisdiction. On June 14, 2000, the
Appellate Division affirmed the trial court but determined that the NJBPU's
findings in the exercise of its "exclusive jurisdiction" could be
"probative...but not determinative" of at least some of the issues in the
litigation, and leaving it to the trial court to "decide in the first instance
just what weight and validity to give the [NJBPU's] findings and conclusions."
In response to the defendants' demand for a statement of damages, the
plaintiffs have stated that they are seeking $700 million, subject to the
results of pretrial discovery. JCP&L has notified its insurance carriers of the
plaintiffs' allegations. The primary insurance carrier has stated that, while
the substance of the plaintiffs' allegations is covered under the policy, it is
reserving its rights concerning coverage as circumstances develop. JCP&L has
received indemnification payments from its primary insurance carrier for certain
expenses incurred by JCP&L relative to this action.
In May 2001, the court denied without prejudice the defendants' motion
seeking decertification of the class. Discovery continues in the class action,
but no trial date has been set. The judge has set a schedule under which factual
legal discovery would conclude in March 2002, and expert reports would be
exchanged by June 2002. In October 2001, the court held argument on the
plaintiffs' motion for partial summary judgment, which contends that JCP&L is
bound to several findings of the NJBPU investigation. The plaintiffs' motion is
pending. There can be no assurance as to the outcome of these matters.
Other:
- -----
JCP&L and Public Service Electric & Gas Company (PSE&G) each hold a 50%
undivided ownership interest in Yards Creek Pumped Storage Facility (Yards
Creek). In December 1998, JCP&L filed a petition with the NJBPU seeking a
declaratory order that PSE&G's right of first refusal to purchase JCP&L's
ownership interest at its current book value under a 1964 agreement between the
companies is void and unenforceable. Management believes that the fair market
value of JCP&L's ownership interest in Yards Creek is substantially in excess of
its September 30, 2001 book value of $21 million. There can be no assurance as
to the outcome of this matter.
In accordance with the Nuclear Waste Policy Act of 1982 (NWPA), JCP&L
has entered into contracts with, and paid fees to, the DOE for the future
disposal of spent nuclear fuel in a repository or interim storage facility. In
1996, the DOE notified JCP&L and other Standard Contract holders that it would
be unable to begin acceptance of spent nuclear fuel for disposal by January 31,
1998, as mandated by the NWPA. The DOE requested recommendations from contract
holders for handling the delay. In June 1997, a consortium of electric
utilities, including GPU Nuclear, Inc. (GPUN), the former operator of the
nuclear plants previously owned by JCP&L and its GPU Energy affiliates, filed a
license application with the NRC seeking permission to build an interim
above-ground storage facility for spent nuclear fuel in Utah.
At September 30, 2001, JCP&L had recorded a liability of $162 million
owed to the Nuclear Waste Fund, related to spent nuclear fuel generated prior to
the sales of TMI-1 and Oyster Creek to AmerGen. AmerGen has assumed all
liability for disposal costs related to spent nuclear fuel generated following
its purchase of the plants.
22
On July 26, 2000, GPUN filed suit in the United States Court of Federal
Claims seeking to recover damages as a result of the DOE's failure to commence
disposal of GPUN's spent nuclear fuel by January 31, 1998, as required by the
terms of the Standard Contracts between GPUN and DOE. The complaint seeks
damages from the Government in an amount to be determined at trial. GPUN has
alleged that it is entitled to damages attributable to operations at both TMI-1
and Oyster Creek. In an August 20, 2001 pleading, the Government acknowledged
that the DOE's inability to begin providing the services required by the
Standard Contract by January 31, 1998 constituted a partial breach of the
Standard Contract. In the same pleading, the Government stated that GPUN may
lack standing to maintain its suit because it assigned its Standard Contracts
and title to its spent nuclear fuel to the buyer of TMI-1 and Oyster Creek. By
order dated September 24, 2001, the Court stated that it would hold in abeyance
any final determination on standing until the completion of discovery, which is
currently underway. There can be no assurance as to the outcome of this matter.
During the normal course of the operation of its business, in addition
to the matters described above, JCP&L 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 JCP&L's
financial position or results of operations, there can be no assurance that this
will continue to be the case.
2. NEW ACCOUNTING STANDARDS
JCP&L's use of derivative instruments is intended to manage the risk of
price fluctuations. JCP&L does not hold or issue derivative instruments for
trading purposes.
Effective January 1, 2001, JCP&L adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by FAS 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133"
and FAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - An Amendment of FASB Statement No. 133" (collectively, FAS 133).
FAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities.
In general, FAS 133 requires that companies recognize all derivatives
as either assets or liabilities on the balance sheet, measured at their fair
value. Derivatives not designated as hedges must be adjusted to fair value with
an offset to income. If the derivative is designated as a hedge, depending on
the nature of the hedge, changes in fair value of the derivative are either
offset against the change in fair value of the asset or liability through
income, or recognized in accumulated other comprehensive income until the hedged
item is recognized in income. To the extent the hedge is determined to be
ineffective, that portion of the derivative's change in fair value is
immediately recognized in income. FAS 133 provides an exemption for certain
contracts that qualify as "normal purchases and sales." To qualify for this
exclusion, certain criteria, including that it must be probable that the
contract will result in physical delivery, must be met.
23
The adoption of FAS 133 on January 1, 2001 resulted in the recognition
of derivative assets on the Consolidated Balance Sheet at January 1, 2001 in the
amount of $21.8 million with offsetting amounts, net of tax, recorded in
Accumulated other comprehensive income, of $5.1 million and in Regulatory
assets, net, of $13 million.
JCP&L uses New York Mercantile Exchange futures and Over-the-Counter
forward contracts and options on forward contracts to manage the risk of
fluctuations in the market price of electricity. JCP&L also manages the natural
gas requirements of certain NUG facilities that generate and sell energy to
JCP&L under long-term contracts. The majority of the forward commodity contracts
are considered "normal purchases and sales," as defined by FAS 133, and
therefore are excluded from the scope of FAS 133.
The energy options, forward contracts and gas futures contracts
determined to be derivatives under FAS 133 are accounted for as cash flow hedges
and expire on various dates through June 2002. These contracts are recorded at
fair value on JCP&L's September 30, 2001 Consolidated Balance Sheet in the
amount of $1 million. The offset of the change in fair value is recorded in
Accumulated other comprehensive income, net of tax, and subsequently recognized
as a component of Power purchased and interchanged on the Consolidated Statement
of Income when the underlying power being hedged is purchased. Of the $1.6
million recorded in Accumulated other comprehensive income as of September 30,
2001, JCP&L expects a pre-tax gain of approximately $2.7 million to be
recognized in income within the next twelve months. The ineffective portion of
these commodity contracts was immaterial for the quarter ended September 30,
2001.
When JCP&L and its GPU Energy affiliates sold TMI-1 to AmerGen, the
parties entered into an agreement which calls for an adjustment to the purchase
price of TMI-1 in the event of future energy price increases. If the future
price of energy exceeds the strike price during the contract year as defined per
the agreement, JCP&L and its GPU Energy affiliates will receive payments from
AmerGen, subject to a market price cap. However, if the future price of energy
is less than the strike price during a contract year, a credit is applied
against future contract payments that would be received from AmerGen. This
agreement qualifies as a derivative as defined by FAS 133, and its value is
recorded on the Consolidated Balance Sheet based on the present value of the
contract's projected future cash flows. As of September 30, 2001, JCP&L's share
of this amount was $13.7 million and was included in Other Property and
Investments - Other, net on the Consolidated Balance Sheet. An offsetting
regulatory liability was recorded against Regulatory assets, net, representing
the obligation to treat the retail portion of payments received as stranded cost
revenues when received.
In June 2001, the Financial Accounting Standards Board (FASB) approved
Statement of Financial Accounting Standards No. 141 (FAS 141), "Business
Combinations," and Statement of Financial Accounting Standards No. 142 (FAS
142), "Goodwill and Other Intangible Assets". These new standards are effective
beginning July 1, 2001. FAS 141 requires all business combinations initiated
after June 30, 2001, to be accounted for using purchase accounting. Under FAS
142, amortization of existing goodwill will cease on January 1, 2002 and instead
goodwill will be tested for impairment at least on an annual basis. As of
September 30, 2001, JCP&L did not have any goodwill on its balance sheet,
however, as a result of the merger of FirstEnergy and GPU, Inc. which became
effective on November 7, 2001, there will be goodwill associated with this
merger applied to JCP&L. The amount of goodwill to be applied to JCP&L has not
yet been determined.
24
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 143 (FAS 143), "Accounting for Asset Retirement Obligations." FAS
143 provides the accounting requirements for retirement obligations associated
with tangible long-lived assets. FAS 143 is effective for fiscal years beginning
after June 15, 2002, with early adoption encouraged. JCP&L is currently
assessing the new standard and has not yet determined the impact on its
financial statements.
In September 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 (FAS 144), "Accounting for the Impairment or Disposal of
Long-Lived Assets." FAS 144 supersedes Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." The Statement also supersedes the
accounting and reporting provisions of Accounting Principles Board Opinion No.
30, "Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." FAS 144 is effective for fiscal years beginning after
June 15, 2001, with early adoption encouraged. JCP&L is currently assessing the
new standard and has not yet determined the impact on its financial statements.
3. COMPREHENSIVE INCOME
For the nine months ended September 30, 2001 and 2000, comprehensive
income is summarized below.
In Thousands
----------------------
Nine months
Ended September 30,
----------------------
2001 2000
---- ----
Net income $184,501 $182,797
------- -------
Other comprehensive income, net of tax:
Cumulative effect of change in accounting
for derivative instruments at 1/1/01 5,180 -
Net unrealized loss on derivative instruments (4,250) -
------- -------
Total other comprehensive income 930 -
------- -------
Comprehensive income $185,431 $182,797
======= =======
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PART II
ITEM 1 - LEGAL PROCEEDINGS
-----------------
Information concerning the current status of certain legal
proceedings instituted against JCP&L discussed in Part I of this
report in the 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
(b) Reports on Form 8-K
Dated August 28, 2001, under Item 5 (Other Events)
Dated September 4, 2001, under Item 5 (Other Events)
Dated September 28, 2001, under Item 5 (Other Events)
Dated October 30, 2001, under Item 5 (Other Events)
Dated November 9, 2001, under Item 1 (Changes in Control of
Registrant) and under Item 4 (Changes in Registrant's Certifying
Accountant)
26
Signature
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
November 14, 2001
JERSEY CENTRAL POWER & LIGHT COMPANY
------------------------------------
Registrant
/s/ Harvey L. Wagner
------------------------------------
Harvey L. Wagner
Vice President and Controller
(Principal Accounting Officer)
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